UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
| | | | | | | | |
(Mark One)
|
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended: | September 30, 20202021 |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period to
For the transition periodfrom to
|
Commission File Number: 001-11852
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
| | | | | |
Maryland | 62-1507028 |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
3310 West End Avenue, Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Common stock, $0.01 par value per share | | HR | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 30, 2020,29, 2021, the Registrant had 136,054,024 shares 147,541,832 shares of Common Stock outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
September 30, 20202021
Table of Contents
| | | | | | | | |
PART I - FINANCIAL INFORMATION | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
PART II - OTHER INFORMATION | |
| | |
| | |
| | |
| | |
| | |
| | |
SIGNATURE | | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
Amounts in thousands, except per share data
| ASSETS | ASSETS | | ASSETS | |
| | Unaudited SEPTEMBER 30, 2020 | DECEMBER 31, 2019 | | Unaudited SEPTEMBER 30, 2021 | DECEMBER 31, 2020 |
Real estate properties | Real estate properties | | Real estate properties | |
Land | Land | $ | 330,840 | | $ | 289,751 | | Land | $ | 375,342 | | $ | 362,695 | |
Buildings, improvements and lease intangibles | Buildings, improvements and lease intangibles | 4,014,740 | | 3,986,326 | | Buildings, improvements and lease intangibles | 4,383,314 | | 4,220,297 | |
Personal property | Personal property | 10,962 | | 10,538 | | Personal property | 11,555 | | 11,195 | |
Investment in financing receivable, net | | Investment in financing receivable, net | 104,806 | | — | |
Construction in progress | Construction in progress | 0 | | 48,731 | | Construction in progress | 1,546 | | — | |
Land held for development | Land held for development | 24,647 | | 24,647 | | Land held for development | 27,232 | | 27,226 | |
Total real estate properties | Total real estate properties | 4,381,189 | | 4,359,993 | | Total real estate properties | 4,903,795 | | 4,621,413 | |
Less accumulated depreciation and amortization | Less accumulated depreciation and amortization | (1,198,444) | | (1,121,102) | | Less accumulated depreciation and amortization | (1,322,577) | | (1,239,224) | |
Total real estate properties, net | Total real estate properties, net | 3,182,745 | | 3,238,891 | | Total real estate properties, net | 3,581,218 | | 3,382,189 | |
Cash and cash equivalents | Cash and cash equivalents | 121,992 | | 657 | | Cash and cash equivalents | 16,000 | | 15,303 | |
Restricted cash | 60,644 | | 0 | | |
| | Assets held for sale, net | Assets held for sale, net | 20,051 | | 37 | | Assets held for sale, net | 13,603 | | 20,646 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | 123,807 | | 126,177 | | Operating lease right-of-use assets | 128,945 | | 125,198 | |
Financing lease right-of-use assets | Financing lease right-of-use assets | 19,776 | | 12,667 | | Financing lease right-of-use assets | 20,760 | | 19,667 | |
| Investments in unconsolidated joint ventures | | Investments in unconsolidated joint ventures | 122,345 | | 73,137 | |
Other assets, net | Other assets, net | 182,436 | | 185,426 | | Other assets, net | 186,328 | | 176,120 | |
Total assets | Total assets | $ | 3,711,451 | | $ | 3,563,855 | | Total assets | $ | 4,069,199 | | $ | 3,812,260 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | LIABILITIES AND STOCKHOLDERS' EQUITY | | LIABILITIES AND STOCKHOLDERS' EQUITY | |
Liabilities | Liabilities | | Liabilities | |
Notes and bonds payable | Notes and bonds payable | $ | 1,554,395 | | $ | 1,414,069 | | Notes and bonds payable | $ | 1,691,433 | | $ | 1,602,769 | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 79,528 | | 78,517 | | Accounts payable and accrued liabilities | 79,381 | | 81,174 | |
Liabilities of assets held for sale | Liabilities of assets held for sale | 548 | | 145 | | Liabilities of assets held for sale | 766 | | 1,216 | |
Operating lease liabilities | Operating lease liabilities | 91,466 | | 91,574 | | Operating lease liabilities | 95,913 | | 92,273 | |
Financing lease liabilities | Financing lease liabilities | 18,697 | | 18,037 | | Financing lease liabilities | 20,460 | | 18,837 | |
Other liabilities | Other liabilities | 66,442 | | 61,504 | | Other liabilities | 65,913 | | 67,615 | |
Total liabilities | Total liabilities | 1,811,076 | | 1,663,846 | | Total liabilities | 1,953,866 | | 1,863,884 | |
Commitments and contingencies | Commitments and contingencies | | Commitments and contingencies | 0 |
Stockholders' equity | Stockholders' equity | | Stockholders' equity | |
Preferred stock, $.01 par value per share; 50,000 shares authorized; NaN issued and outstanding | 0 | | 0 | | |
Common stock, $.01 par value per share; 300,000 shares authorized; 136,054 and 134,706 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | 1,361 | | 1,347 | | |
Preferred stock, $.01 par value per share; 50,000 shares authorized; none issued and outstanding | | Preferred stock, $.01 par value per share; 50,000 shares authorized; none issued and outstanding | — | | — | |
Common stock, $.01 par value per share; 300,000 shares authorized; 147,542 and 139,487 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | | Common stock, $.01 par value per share; 300,000 shares authorized; 147,542 and 139,487 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively | 1,475 | | 1,395 | |
Additional paid-in capital | Additional paid-in capital | 3,532,130 | | 3,485,003 | | Additional paid-in capital | 3,882,572 | | 3,635,341 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (19,267) | | (6,175) | | Accumulated other comprehensive loss | (12,413) | | (17,832) | |
Cumulative net income attributable to common stockholders | Cumulative net income attributable to common stockholders | 1,215,362 | | 1,127,304 | | Cumulative net income attributable to common stockholders | 1,244,551 | | 1,199,499 | |
Cumulative dividends | Cumulative dividends | (2,829,211) | | (2,707,470) | | Cumulative dividends | (3,000,852) | | (2,870,027) | |
Total stockholders' equity | Total stockholders' equity | 1,900,375 | | 1,900,009 | | Total stockholders' equity | 2,115,333 | | 1,948,376 | |
| Total liabilities and stockholders' equity | Total liabilities and stockholders' equity | $ | 3,711,451 | | $ | 3,563,855 | | Total liabilities and stockholders' equity | $ | 4,069,199 | | $ | 3,812,260 | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 20202021 and 20192020
Amounts in thousands, except per share data
Unaudited
| | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
| | 2020 | 2019 | 2020 | 2019 | | 2021 | 2020 | 2021 | 2020 |
Revenues | Revenues | | Revenues | |
Rental income | Rental income | $ | 123,384 | | $ | 117,740 | | $ | 368,385 | | $ | 342,787 | | Rental income | $ | 131,746 | | $ | 123,384 | | $ | 388,620 | | $ | 368,385 | |
Interest from financing receivable, net | | Interest from financing receivable, net | 1,917 | | — | | 2,426 | | — | |
| Other operating | Other operating | 1,868 | | 2,059 | | 5,364 | | 5,987 | | Other operating | 2,969 | | 1,868 | | 7,347 | | 5,364 | |
| | 125,252 | | 119,799 | | 373,749 | | 348,774 | | | 136,632 | | 125,252 | | 398,393 | | 373,749 | |
Expenses | Expenses | | Expenses | |
Property operating | Property operating | 50,171 | | 46,777 | | 146,305 | | 133,790 | | Property operating | 55,518 | | 50,171 | | 159,241 | | 146,305 | |
General and administrative | General and administrative | 7,299 | | 10,802 | | 23,498 | | 27,157 | | General and administrative | 8,207 | | 7,299 | | 25,251 | | 23,498 | |
Acquisition and pursuit costs | Acquisition and pursuit costs | 440 | | 501 | | 1,621 | | 1,227 | | Acquisition and pursuit costs | 974 | | 440 | | 2,388 | | 1,621 | |
Depreciation and amortization | Depreciation and amortization | 47,143 | | 45,137 | | 142,331 | | 131,725 | | Depreciation and amortization | 50,999 | | 47,143 | | 150,904 | | 142,331 | |
| | | 105,053 | | 103,217 | | 313,755 | | 293,899 | | | 115,698 | | 105,053 | | 337,784 | | 313,755 | |
Other Income (Expense) | | |
Gain on sales of real estate assets | 2,177 | | 200 | | 70,395 | | 5,065 | | |
Other income (expense) | | Other income (expense) | |
Gain on sales of real estate properties | | Gain on sales of real estate properties | 1,186 | | 2,177 | | 41,046 | | 70,395 | |
Interest expense | Interest expense | (14,154) | | (14,181) | | (42,556) | | (41,619) | | Interest expense | (13,334) | | (14,154) | | (39,857) | | (42,556) | |
| Impairment of real estate assets | — | | — | | — | | (5,610) | | |
| Impairment of real estate properties | | Impairment of real estate properties | (10,669) | | — | | (16,581) | | — | |
Equity loss from unconsolidated joint ventures | | Equity loss from unconsolidated joint ventures | (183) | | (66) | | (404) | | (194) | |
Interest and other income (expense), net | Interest and other income (expense), net | 8 | | — | | 225 | | (736) | | Interest and other income (expense), net | — | | 74 | | 239 | | 419 | |
| | (11,969) | | (13,981) | | 28,064 | | (42,900) | | | (23,000) | | (11,969) | | (15,557) | | 28,064 | |
| Net Income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | | |
Net (loss) income | | Net (loss) income | $ | (2,066) | | $ | 8,230 | | $ | 45,052 | | $ | 88,058 | |
| | Basic earnings per common share | Basic earnings per common share | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | | Basic earnings per common share | $ | (0.02) | | $ | 0.06 | | $ | 0.31 | | $ | 0.65 | |
| Diluted earnings per common share | Diluted earnings per common share | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | | Diluted earnings per common share | $ | (0.02) | | $ | 0.06 | | $ | 0.31 | | $ | 0.65 | |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 134,309 | | 128,090 | | 133,662 | | 126,571 | | Weighted average common shares outstanding - basic | 143,818 | | 134,309 | | 141,521 | | 133,662 | |
Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 134,357 | | 128,169 | | 133,736 | | 126,657 | | Weighted average common shares outstanding - diluted | 143,818 | | 134,357 | | 141,613 | | 133,736 | |
Dividends declared, per common share, during the period | $ | 0.30 | | $ | 0.30 | | $ | 0.90 | | $ | 0.90 | | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Three and Nine Months Ended September 30, 20202021 and 20192020
Amounts in thousands
Unaudited
| | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
| | 2020 | 2019 | 2020 | 2019 | | 2021 | 2020 | 2021 | 2020 |
Net income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | | |
Net (loss) income | | Net (loss) income | $ | (2,066) | | $ | 8,230 | | $ | 45,052 | | $ | 88,058 | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | Other comprehensive income (loss) | |
| Interest rate swaps | Interest rate swaps | | Interest rate swaps | |
Reclassification adjustments for losses included in net income (interest expense) | Reclassification adjustments for losses included in net income (interest expense) | 1,101 | | 60 | | 2,367 | | 74 | | Reclassification adjustments for losses included in net income (interest expense) | 1,131 | | 1,101 | | 3,340 | | 2,367 | |
Losses arising during the period on interest rate swaps | (74) | | (2,341) | | (11,192) | | (7,642) | | |
Gains (losses) arising during the period on interest rate swaps | | Gains (losses) arising during the period on interest rate swaps | 36 | | (74) | | 2,079 | | (11,192) | |
Losses on settlement of treasury rate locks arising during the period | Losses on settlement of treasury rate locks arising during the period | 0 | | 0 | | (4,267) | | 0 | | Losses on settlement of treasury rate locks arising during the period | — | | — | | — | | (4,267) | |
| | 1,027 | | (2,281) | | (13,092) | | (7,568) | | | 1,167 | | 1,027 | | 5,419 | | (13,092) | |
| Comprehensive income | $ | 9,257 | | $ | 320 | | $ | 74,966 | | $ | 4,407 | | |
Comprehensive (loss) income | | Comprehensive (loss) income | $ | (899) | | $ | 9,257 | | $ | 50,471 | | $ | 74,966 | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Three Months Ended September 30, 20202021 and 20192020
Amounts in thousands, except per share data
Unaudited
| | | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | |
Balance at June 30, 2021 | | Balance at June 30, 2021 | $ | 1,455 | | $ | 3,818,592 | | $ | (13,580) | | $ | 1,246,617 | | $ | (2,956,830) | | $ | 2,096,254 | | |
Issuance of common stock, net of issuance costs | | Issuance of common stock, net of issuance costs | 20 | | 61,442 | | — | | — | | — | | 61,462 | | |
| Share-based compensation | | Share-based compensation | — | | 2,538 | | — | | — | | — | | 2,538 | | |
Net loss | | Net loss | — | | — | | — | | (2,066) | | — | | (2,066) | | |
Reclassification adjustments for losses included in net income (interest expense)
| | Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 1,131 | | — | | — | | 1,131 | | |
Gains arising during the period on interest rate swaps | | Gains arising during the period on interest rate swaps | — | | — | | 36 | | — | | — | | 36 | | |
Dividends to common stockholders ($0.3025 per share) | | Dividends to common stockholders ($0.3025 per share) | — | | — | | — | | — | | (44,022) | | (44,022) | | |
Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 1,475 | | $ | 3,882,572 | | $ | (12,413) | | $ | 1,244,551 | | $ | (3,000,852) | | $ | 2,115,333 | | |
| | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | |
Balance at June 30, 2020 | Balance at June 30, 2020 | $ | 1,360 | | $ | 3,529,559 | | $ | (20,294) | | $ | 1,207,132 | | $ | (2,788,396) | | $ | 1,929,361 | | | Balance at June 30, 2020 | $ | 1,360 | | $ | 3,529,559 | | $ | (20,294) | | $ | 1,207,132 | | $ | (2,788,396) | | $ | 1,929,361 | | |
Issuance of common stock, net of issuance costs | Issuance of common stock, net of issuance costs | 1 | | 126 | | — | | — | | — | | 127 | | | Issuance of common stock, net of issuance costs | 1 | | 126 | | — | | — | | — | | 127 | | |
| Share-based compensation | Share-based compensation | — | | 2,445 | | — | | — | | — | | 2,445 | | | Share-based compensation | — | | 2,445 | | — | | — | | — | | 2,445 | | |
Net income | Net income | — | | — | | — | | 8,230 | | — | | 8,230 | | | Net income | — | | — | | — | | 8,230 | | — | | 8,230 | | |
Reclassification adjustments for losses included in net income (interest expense)
| Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 1,101 | | — | | — | | 1,101 | | | Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 1,101 | | — | | — | | 1,101 | | |
Losses arising during the period on interest rate swaps and treasury rate locks
| — | | — | | (74) | | — | | — | | (74) | | | |
Dividends to common stockholders ($0.30 per share) | — | | — | | — | | — | | (40,815) | | (40,815) | | | |
Losses arising during the period on interest rate swaps
| | Losses arising during the period on interest rate swaps
| — | | — | | (74) | | — | | — | | (74) | | |
Dividends to common stockholders ($0.3000 per share) | | Dividends to common stockholders ($0.3000 per share) | — | | — | | — | | — | | (40,815) | | (40,815) | | |
Balance at September 30, 2020 | Balance at September 30, 2020 | $ | 1,361 | | $ | 3,532,130 | | $ | (19,267) | | $ | 1,215,362 | | $ | (2,829,211) | | $ | 1,900,375 | | | Balance at September 30, 2020 | $ | 1,361 | | $ | 3,532,130 | | $ | (19,267) | | $ | 1,215,362 | | $ | (2,829,211) | | $ | 1,900,375 | | |
| | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | |
Balance at June 30, 2019 | $ | 1,292 | | $ | 3,305,344 | | $ | (6,189) | | $ | 1,097,493 | | $ | (2,628,497) | | $ | 1,769,443 | | | |
Issuance of common stock, net of issuance costs | 22 | | 71,792 | | — | | — | | — | | 71,814 | | | |
Common stock redemptions | — | | (2,695) | | — | | — | | — | | (2,695) | | | |
Share-based compensation | — | | 5,131 | | — | | — | | — | | 5,131 | | | |
Net income | — | | — | | — | | 2,601 | | — | | 2,601 | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 60 | | — | | — | | 60 | | | |
Losses arising during the period on interest rate swaps
| — | | — | | (2,341) | | — | | — | | (2,341) | | | |
Dividends to common stockholders ($0.30 per share) | — | | — | | — | | — | | (38,852) | | (38,852) | | | |
Balance at September 30, 2019 | $ | 1,314 | | $ | 3,379,572 | | $ | (8,470) | | $ | 1,100,094 | | $ | (2,667,349) | | $ | 1,805,161 | | | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Nine Months Ended September 30, 20202021 and 20192020
Amounts in thousands, except per share data
Unaudited
| | | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | |
Balance at December 31, 2020 | | Balance at December 31, 2020 | $ | 1,395 | | $ | 3,635,341 | | $ | (17,832) | | $ | 1,199,499 | | $ | (2,870,027) | | $ | 1,948,376 | | |
Issuance of common stock, net of issuance costs | | Issuance of common stock, net of issuance costs | 78 | | 240,660 | | — | | — | | — | | 240,738 | | |
Common stock redemptions | | Common stock redemptions | — | | (1,610) | | — | | — | | — | | (1,610) | | |
Share-based compensation | | Share-based compensation | 2 | | 8,181 | | — | | — | | — | | 8,183 | | |
Net income | | Net income | — | | — | | — | | 45,052 | | — | | 45,052 | | |
Reclassification adjustments for losses included in net income (interest expense)
| | Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 3,340 | | — | | — | | 3,340 | | |
Gains arising during the period on interest rate swaps
| | Gains arising during the period on interest rate swaps
| — | | — | | 2,079 | | — | | — | | 2,079 | | |
Dividends to common stockholders ($0.9075 per share) | | Dividends to common stockholders ($0.9075 per share) | — | | — | | — | | — | | (130,825) | | (130,825) | | |
Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 1,475 | | $ | 3,882,572 | | $ | (12,413) | | $ | 1,244,551 | | $ | (3,000,852) | | $ | 2,115,333 | | |
| | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | |
Balance at December 31, 2019 | Balance at December 31, 2019 | $ | 1,347 | | $ | 3,485,003 | | $ | (6,175) | | $ | 1,127,304 | | $ | (2,707,470) | | $ | 1,900,009 | | | Balance at December 31, 2019 | $ | 1,347 | | $ | 3,485,003 | | $ | (6,175) | | $ | 1,127,304 | | $ | (2,707,470) | | $ | 1,900,009 | | |
Issuance of common stock, net of issuance costs | Issuance of common stock, net of issuance costs | 13 | | 40,477 | | — | | — | | — | | 40,490 | | | Issuance of common stock, net of issuance costs | 13 | | 40,477 | | — | | — | | — | | 40,490 | | |
Common stock redemptions | Common stock redemptions | — | | (798) | | — | | — | | — | | (798) | | | Common stock redemptions | — | | (798) | | — | | — | | — | | (798) | | |
Share-based compensation | Share-based compensation | 1 | | 7,448 | | — | | — | | — | | 7,449 | | | Share-based compensation | 1 | | 7,448 | | — | | — | | — | | 7,449 | | |
Net income | Net income | — | | — | | — | | 88,058 | | — | | 88,058 | | | Net income | — | | — | | — | | 88,058 | | — | | 88,058 | | |
Reclassification adjustments for losses included in net income (interest expense)
| Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 2,367 | | — | | — | | 2,367 | | | Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 2,367 | | — | | — | | 2,367 | | |
Losses arising during the period on interest rate swaps
| Losses arising during the period on interest rate swaps
| — | | — | | (15,459) | | — | | — | | (15,459) | | | Losses arising during the period on interest rate swaps
| — | | — | | (15,459) | | — | | — | | (15,459) | | |
Dividends to common stockholders ($0.90 per share) | — | | — | | — | | — | | (121,741) | | (121,741) | | | |
Dividends to common stockholders ($0.9000 per share) | | Dividends to common stockholders ($0.9000 per share) | — | | — | | — | | — | | (121,741) | | (121,741) | | |
Balance at September 30, 2020 | Balance at September 30, 2020 | $ | 1,361 | | $ | 3,532,130 | | $ | (19,267) | | $ | 1,215,362 | | $ | (2,829,211) | | $ | 1,900,375 | | | Balance at September 30, 2020 | $ | 1,361 | | $ | 3,532,130 | | $ | (19,267) | | $ | 1,215,362 | | $ | (2,829,211) | | $ | 1,900,375 | | |
| | Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | |
Balance at December 31, 2018 | $ | 1,253 | | $ | 3,180,284 | | $ | (902) | | $ | 1,088,119 | | $ | (2,552,112) | | $ | 1,716,642 | | | |
Issuance of common stock, net of issuance costs | 61 | | 192,414 | | — | | — | | — | | 192,475 | | | |
Common stock redemptions | (1) | | (3,266) | | — | | — | | — | | (3,267) | | | |
Share-based compensation | 1 | | 10,140 | | — | | — | | — | | 10,141 | | | |
Net income | — | | — | | — | | 11,975 | | — | | 11,975 | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 74 | | — | | — | | 74 | | | |
Losses arising during the period on interest rate swaps
| — | | — | | (7,642) | | — | | — | | (7,642) | | | |
Dividends to common stockholders ($0.90 per share) | — | | — | | — | | — | | (115,237) | | (115,237) | | | |
Balance at September 30, 2019 | $ | 1,314 | | $ | 3,379,572 | | $ | (8,470) | | $ | 1,100,094 | | $ | (2,667,349) | | $ | 1,805,161 | | | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 20202021 and 20192020
Amounts in thousands
Unaudited
| OPERATING ACTIVITIES | OPERATING ACTIVITIES | | | OPERATING ACTIVITIES | | |
| | NINE MONTHS ENDED September 30, | | NINE MONTHS ENDED September 30, |
| | 2020 | 2019 | | 2021 | 2020 |
Net income | Net income | $ | 88,058 | | $ | 11,975 | | Net income | $ | 45,052 | | $ | 88,058 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | Depreciation and amortization | 142,331 | | 131,725 | | Depreciation and amortization | 150,904 | | 142,331 | |
Other amortization | Other amortization | 3,409 | | 2,279 | | Other amortization | 2,721 | | 3,409 | |
Share-based compensation | Share-based compensation | 7,449 | | 10,141 | | Share-based compensation | 8,183 | | 7,449 | |
Amortization of straight-line rent receivable (lessor) | Amortization of straight-line rent receivable (lessor) | (2,722) | | (1,833) | | Amortization of straight-line rent receivable (lessor) | (4,574) | | (2,722) | |
Amortization of straight-line rent on operating leases (lessee) | Amortization of straight-line rent on operating leases (lessee) | 1,122 | | 1,159 | | Amortization of straight-line rent on operating leases (lessee) | 1,115 | | 1,122 | |
Gain on sales of real estate assets | (70,395) | | (5,065) | | |
Gain on sales of real estate properties | | Gain on sales of real estate properties | (41,046) | | (70,395) | |
| Impairment of real estate assets | — | | 5,610 | | |
Loss from unconsolidated joint ventures | 194 | | 16 | | |
Impairment of real estate properties | | Impairment of real estate properties | 16,581 | | — | |
Equity loss from unconsolidated joint ventures | | Equity loss from unconsolidated joint ventures | 404 | | 194 | |
Distributions from unconsolidated joint ventures | Distributions from unconsolidated joint ventures | 193 | | 277 | | Distributions from unconsolidated joint ventures | — | | 193 | |
Proceeds from disposition of sales-type lease properties | Proceeds from disposition of sales-type lease properties | 244,454 | | 0 | | Proceeds from disposition of sales-type lease properties | — | | 244,454 | |
Non-cash interest from financing receivable | | Non-cash interest from financing receivable | (196) | | — | |
Changes in operating assets and liabilities: | Changes in operating assets and liabilities: | | Changes in operating assets and liabilities: | |
| Other assets, including right-of-use-assets | Other assets, including right-of-use-assets | (965) | | (6,740) | | Other assets, including right-of-use-assets | (9,947) | | (965) | |
Accounts payable and accrued liabilities | Accounts payable and accrued liabilities | 5,098 | | 3,220 | | Accounts payable and accrued liabilities | 215 | | 5,098 | |
Other liabilities | Other liabilities | (6,662) | | 5,709 | | Other liabilities | 843 | | (6,662) | |
Net cash provided by operating activities | Net cash provided by operating activities | 411,564 | | 158,473 | | Net cash provided by operating activities | 170,255 | | 411,564 | |
| INVESTING ACTIVITIES | INVESTING ACTIVITIES | | INVESTING ACTIVITIES | |
Acquisitions of real estate | Acquisitions of real estate | (199,162) | | (271,575) | | Acquisitions of real estate | (250,766) | | (199,162) | |
Development of real estate | Development of real estate | (2,941) | | (19,152) | | Development of real estate | (2,020) | | (2,941) | |
Additional long-lived assets | Additional long-lived assets | (62,707) | | (45,902) | | Additional long-lived assets | (69,647) | | (62,707) | |
Proceeds from sales of real estate assets | 4,905 | | 14,151 | | |
Investments in unconsolidated joint ventures | | Investments in unconsolidated joint ventures | (49,612) | | — | |
Investment in financing receivable | | Investment in financing receivable | (104,654) | | — | |
Proceeds from sales of real estate properties | | Proceeds from sales of real estate properties | 112,029 | | 4,905 | |
| Net cash used in investing activities | Net cash used in investing activities | (259,905) | | (322,478) | | Net cash used in investing activities | (364,670) | | (259,905) | |
| FINANCING ACTIVITIES | FINANCING ACTIVITIES | | FINANCING ACTIVITIES | |
Net (repayments) borrowings on unsecured credit facility | (293,000) | | 60,000 | | |
Net borrowings (repayments) on unsecured credit facility | | Net borrowings (repayments) on unsecured credit facility | 90,500 | | (293,000) | |
Borrowings on term loan | Borrowings on term loan | 150,000 | | 50,000 | | Borrowings on term loan | — | | 150,000 | |
| Borrowings of notes and bonds payable | Borrowings of notes and bonds payable | 298,995 | | — | | Borrowings of notes and bonds payable | — | | 298,995 | |
Repayments of notes and bonds payable | Repayments of notes and bonds payable | (32,704) | | (12,663) | | Repayments of notes and bonds payable | (2,914) | | (32,704) | |
| Dividends paid | Dividends paid | (121,741) | | (115,237) | | Dividends paid | (130,825) | | (121,741) | |
Net proceeds from issuance of common stock | Net proceeds from issuance of common stock | 40,296 | | 192,514 | | Net proceeds from issuance of common stock | 240,779 | | 40,296 | |
Common stock redemptions | Common stock redemptions | (892) | | (2,343) | | Common stock redemptions | (2,014) | | (892) | |
| Settlement of treasury rate locks | Settlement of treasury rate locks | (4,267) | | — | | Settlement of treasury rate locks | — | | (4,267) | |
Debt issuance and assumption costs | Debt issuance and assumption costs | (3,057) | | (4,589) | | Debt issuance and assumption costs | (252) | | (3,057) | |
Payments made on finance leases | Payments made on finance leases | (3,310) | | (249) | | Payments made on finance leases | (162) | | (3,310) | |
Net cash provided by financing activities | Net cash provided by financing activities | 30,320 | | 167,433 | | Net cash provided by financing activities | 195,112 | | 30,320 | |
| Increase in cash, cash equivalents and restricted cash | 181,979 | | 3,428 | | |
Increase in cash and cash equivalents | | Increase in cash and cash equivalents | 697 | | 181,979 | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | 657 | | 8,381 | | Cash and cash equivalents at beginning of period | 15,303 | | 657 | |
Cash, cash equivalents and restricted cash at end of period | $ | 182,636 | | $ | 11,809 | | |
Cash and cash equivalents at end of period | | Cash and cash equivalents at end of period | $ | 16,000 | | $ | 182,636 | |
| Supplemental Cash Flow Information | Supplemental Cash Flow Information | | Supplemental Cash Flow Information | |
Interest paid | Interest paid | $ | 39,165 | | $ | 37,946 | | Interest paid | $ | 40,653 | | $ | 39,165 | |
Invoices accrued for construction, tenant improvements and other capitalized costs | Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 12,709 | | $ | 10,702 | | Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 11,663 | | $ | 12,709 | |
Mortgage notes payable assumed upon acquisition (adjusted to fair value) | Mortgage notes payable assumed upon acquisition (adjusted to fair value) | $ | 19,269 | | $ | — | | Mortgage notes payable assumed upon acquisition (adjusted to fair value) | $ | — | | $ | 19,269 | |
Capitalized interest | Capitalized interest | $ | 913 | | $ | 999 | | Capitalized interest | $ | 187 | | $ | 913 | |
|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, are an integral part of these financial statements.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the "Company") is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. As of September 30, 2020,2021, the Company had gross investments of approximately $4.3$4.9 billion in 211235 real estate properties located in 24 states totaling approximately 15.516.8 million square feet. The Company provided leasing and property management services to approximately 11.913.8 million square feet nationwide. Square footageThe Company owns 50% of an unconsolidated joint venture with Teachers Insurance and property count disclosures in these Notes toAnnuity Association (the "TIAA Joint Venture") and earns certain fees as the managing member. As of September 30, 2021, the TIAA Joint Venture owned 10 real estate properties. See Note 2 for more details regarding the Company's Condensed Consolidated Financial Statements are unaudited.
unconsolidated joint ventures.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019.2020. All material intercompany transactions and balances have been eliminated in consolidation.
This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 20202021 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties,uncertainties.
Principles of Consolidation
The Company’s Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification 810 broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the impactmodification of contractual arrangements that affect the characteristics or adequacy of the COVID-19 pandemic.entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis.
For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less than 100% of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements.
As of September 30, 2021, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised significant influence over but did not control these entities. See Note 2 for more details regarding the Company's unconsolidated joint ventures.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
The Company considered the impact of COVID-19 on these assumptions and estimates used and determined that there were no material adverse impacts on the Company's results of operations and financial position at September 30, 2020.2021. There can be no assurance that COVID-19 will not have a future material adverse impact on the financial results and business operations of the Company.
COVID-19 Update
Since being reportedInvestments in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.Leases - Financing Receivables, Net
In response to the COVID-19 pandemic, all of the states and citiesaccordance with Accounting Standards Codification ("ASC") 842, for transactions in which the Company owns properties, manages properties, and/orenters into a contract to acquire an asset and leases it back to the seller (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred when the seller-lessee has development or redevelopment projects instituted quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of businesses that may continue to operate, and/or restrictions on the types of construction projects that may continue.a purchase option. As a result, a number of the Company's tenants temporarily closed their offices or clinical space or operated on a reduced basis in response to government requirements or recommendations. Many of these restrictions have been lifted, but could be reimposed. In response to these disruptions, the Company provided some of its tenants with deferred rent arrangements. Such arrangements were made primarily indoes not recognize the second quarter of 2020, and less than $0.1 million of deferred rent arrangements originated in the third quarter. Through November 2, 2020, the Company has collected more than 99% of second and third quarter 2020 aggregate tenant billings. The Company has collected 96% of total scheduled deferral payments due in the third quarter of 2020. In addition, the Company has remaining various forms of rent deferrals outstanding representing
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
approximately $1.2 million, or less than 1% of second and third quarter 2020 aggregate tenant billings. The tenant deferral agreements generally require the deferred amounts to be repaid by the fourth quarter of 2020.
For accounting purposes,underlying real estate asset but instead recognizes a financial asset in accordance with ASC 842: Leases, normally a company would be required to assess a lease modification to determine if the modification should be treated as a separate lease and if not, modification accounting would be applied which would require a company to reassess the classification of the lease. However, in light of the COVID-19 pandemic in which many leases are being modified, the Financial Accounting Standards Board (the "FASB") and U.S. Securities and Exchange Commission (the "SEC") have provided relief that will allow companies to make a policy election as to whether they treat COVID-19 related lease amendments as a provision included in the pre-concession arrangement, and therefore, not a lease modification, or to treat the lease amendment as a modification. The Company has elected to use this relief where applicable and therefore will have no change in the current classification of its leases in connection with many of the leases impacted by negotiations with its tenants. In order to be considered COVID-19 related, cash flows must be substantially the same or less than those prior to the concession. If the cash flows are substantially the same or less, there are two methods to potentially account for such rent deferrals under the relief. The first would be as if no changes to the lease contract were made. Under that accounting, a lessor would increase its lease receivable and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize revenue during the deferral period. The second method would be to treat the deferred payments as variable lease payments (i.e., revenue recognized when cash received)310 “Receivables”. The Company has elected the first method described above, which results in the revenue being recognized on an accrual basis.
If tenants are unable to timely repay deferred rent, or repay at all, request additional rent deferrals or abatements, decide not to renew leases, or renew leases at lower cash leasing spreads, the impact on the Company’s results of operations and financial condition could be material. In the second quarter of 2020,2021, the Company recognized approximately $0.7 million general reserve againstacquired a building in San Diego, California in a sale leaseback transaction in which the deferred rent balance. Following positive collection trendsseller-lessee had a purchase option. Therefore, control was not considered to be transferred under GAAP. Accordingly, this transaction was accounted for as a financing receivable and recorded on the Condensed Consolidated Balance Sheet in the third quarter of 2020, the Company released approximately $0.3 million of the general reserve. As of September 30, 2020, the Company had a remaining general reserve of $0.4 million against an approximate $1.7 million deferred rent balance.
Given the daily evolution of the COVID-19 pandemic and the global response to curb its spread, the Company is not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the fiscal year 2020.line item Investment in financing receivable, net. The Company continues to evaluateevaluated the impact of various forms of governmental assistance that may be or become availableASC 326, "Credit Losses" to the financing receivable, and the amount calculated was determined to be immaterial and therefore not recorded.
Income from Lease Financing Receivables
The Company or its tenants.recognizes the related income from the financing receivable based on an imputed interest rate over the terms of the applicable lease. As a result, the interest recognized from the financing receivable will not equal the cash payments from the lease agreement.
Acquisition costs incurred in connection with entering into the financing receivable are treated as loan origination fees. These costs are classified with the financing receivable and are included in the balance of the net investment. Amortization of these amounts will be recognized as a reduction to Income from financing receivable, net over the life of the lease.
Revenue from Contracts with Customers (Topic 606)
The Company recognizes certain revenue under the core principle of Topic 606. This topic requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope of Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Income in the Other operating line item. This line item includes parking income, rental lease guaranty income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:
| | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
in thousands | in thousands | 2020 | 2019 | 2020 | 2019 | in thousands | 2021 | 2020 | 2021 | 2020 |
Type of Revenue | Type of Revenue | | | | | Type of Revenue | | | | |
Parking income | Parking income | $ | 1,764 | | $ | 1,935 | | $ | 5,042 | | $ | 5,538 | | Parking income | $ | 2,187 | | $ | 1,764 | | $ | 5,725 | | $ | 5,042 | |
Rental lease guaranty | 0 | | 0 | | 0 | | 128 | | |
Management fee income | 62 | | 69 | | 209 | | 201 | | |
| Management fee income 1 | | Management fee income 1 | 723 | | 62 | | 1,381 | | 209 | |
Miscellaneous | Miscellaneous | 42 | | 55 | | 113 | | 120 | | Miscellaneous | 59 | | 42 | | 241 | | 113 | |
| | $ | 1,868 | | $ | 2,059 | | $ | 5,364 | | $ | 5,987 | | | $ | 2,969 | | $ | 1,868 | | $ | 7,347 | | $ | 5,364 | |
1 Includes the recovery of certain expenses under the financing receivable as outlined in the management agreement.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The Company’s major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The performance obligations that are identified for each of these items are satisfied over time, and the Company recognizes revenue monthly based on this principle.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased. Restricted cash includes cash held in escrow from the sale of a property in Oklahoma. These proceeds have been or will be disbursed as the Company acquires real estate investments in like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company's Condensed Consolidated Balance Sheets to the combined amounts shown on the Company's Condensed Consolidated Statements of Cash Flows:
| | | | | | | | |
In thousands | September 30, 2020 | December 31, 2019 |
Cash and cash equivalents | $ | 121,992 | | $ | 657 | |
Restricted cash | 60,644 | | 0 | |
Total cash, cash equivalents and restricted cash | $ | 182,636 | | $ | 657 | |
New Accounting Pronouncements
Accounting Standards Update No. 2016-13
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an amortized cost and certain other financial instruments be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. Operating lease receivables, representing the majority of the Company's receivables, are not within the scope of the new standard. The Company adopted this standard as of January 1, 2020. There was not a material impact to the Condensed Consolidated Financial Statements resulting from the adoption of this standard.
Accounting Standards Update No. 2017-04
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This update eliminates Step 2 of the goodwill impairment test. As such, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. This standard is effective for the Company for annual and interim periods beginning after December 15, 2019. The Company adopted this standard as of January 1, 2020. There was not a material impact to the Condensed Consolidated Financial Statements resulting from the adoption of this standard.
Accounting Standards Update No. 2020-04
On March 12, 2020, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 2. Real Estate Investments
20202021 Company Acquisitions
The following table details the Company's acquisitions for the nine months ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | TYPE 1 | DATE ACQUIRED | PURCHASE PRICE | MORTGAGE NOTES PAYABLE | | CASH CONSIDERATION 2 | REAL ESTATE | OTHER 3 | SQUARE FOOTAGE |
Los Angeles, CA | MOB | 1/3/20 | $ | 42.0 | | $ | (19.3) | | | $ | 22.8 | | $ | 42.4 | | $ | (0.3) | | 86,986 |
Atlanta, GA | MOB | 2/13/20 | 12.0 | | 0 | | | 11.8 | | 12.1 | | (0.3) | | 64,624 | |
Raleigh, NC | MOB | 2/25/20 | 6.3 | | 0 | | | 6.5 | | 6.5 | | 0 | | 15,964 | |
Colorado Springs, CO | MOB | 3/9/20 | 8.2 | | 0 | | | 8.3 | | 8.6 | | (0.3) | | 34,210 | |
Denver, CO 4 | MOB | 3/13/20 | 33.5 | | 0 | | | 33.2 | | 34.0 | | (0.8) | | 136,994 | |
San Diego, CA | MOB | 7/1/20 | 16.7 | | 0 | | | 16.7 | | 16.9 | | (0.2) | | 46,083 | |
Los Angeles, CA | MOB | 7/17/20 | 35.0 | | 0 | | | 37.7 | | 37.7 | | 0 | | 49,785 | |
Seattle, WA | MOB | 7/23/20 | 11.0 | | 0 | | | 10.9 | | 11.3 | | (0.4) | | 21,309 | |
Atlanta, GA | MOB | 7/31/20 | 20.5 | | 0 | | | 21.6 | | 21.3 | | 0.3 | | 48,145 | |
Houston, TX | MOB | 9/24/20 | 11.0 | | 0 | | | 10.9 | | 11.0 | | (0.1) | | 40,235 | |
Los Angeles, CA | MOB | 9/28/20 | 14.0 | | 0 | | | 14.0 | | 13.9 | | 0.1 | | 24,252 | |
| | | | | | | | | |
Total real estate acquisitions | | $ | 210.2 | | $ | (19.3) | | | $ | 194.4 | | $ | 215.7 | | $ | (2.0) | | 568,587 | |
Land acquisition 5 | | | 1.6 | | 0 | | | 1.7 | | 1.7 | | 0 | | 0 | |
Land acquisition 6 | | | 1.0 | | 0 | | | 1.1 | | 1.1 | | 0 | | 0 | |
| | | $ | 212.8 | | $ | (19.3) | | | $ | 197.2 | | $ | 218.5 | | $ | (2.0) | | 568,587 | |
| | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | CASH CONSIDERATION 1 | REAL ESTATE | OTHER 2 | SQUARE FOOTAGE |
San Diego, CA 3 | 1/7/21 | $ | 17,150 | | | | $ | 17,182 | | $ | 17,182 | | $ | — | | 22,461 | |
Dallas, TX 4 | 2/1/21 | 22,515 | | | | 22,299 | | 22,641 | | (342) | | 121,709 | |
Atlanta, GA 4 | 2/17/21 | 9,800 | | | | 10,027 | | 10,073 | | (46) | | 44,567 | |
Washington, D.C. | 3/3/21 | 12,750 | | | | 12,709 | | 12,658 | | 51 | | 26,496 | |
Houston, TX | 5/14/21 | 13,500 | | | | 12,986 | | 13,379 | | (393) | | 45,393 | |
San Diego, CA 5 | 5/28/21 | 102,650 | | | | 103,984 | | 104,629 | | (645) | | 160,394 | |
Greensboro, NC | 6/28/21 | 9,390 | | | | 9,475 | | 10,047 | | (572) | | 25,168 | |
Baltimore, MD | 6/29/21 | 14,600 | | | | 14,357 | | 14,437 | | (80) | | 33,316 | |
Denver, CO 6 | 7/16/21 | 70,426 | | | | 69,151 | | 65,100 | | 4,051 | | 259,555 | |
Greensboro, NC 3 | 7/19/21 | 6,400 | | | | 6,374 | | 6,514 | | (140) | | 18,119 | |
Colorado Springs, CO | 7/27/21 | 33,400 | | | | 32,738 | | 33,241 | | (503) | | 69,526 | |
Birmingham, AL | 8/19/21 | 9,250 | | | | 9,355 | | 9,388 | | (33) | | 29,942 | |
Raleigh, NC | 9/20/21 | 5,780 | | | | 5,821 | | 5,810 | | 11 | | 18,280 | |
Denver, CO | 9/22/21 | 20,250 | | | | 19,630 | | 19,405 | | 225 | | 83,604 | |
Raleigh, NC | 9/30/21 | 10,000 | | | | 9,921 | | 9,874 | | 47 | | 29,178 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total real estate acquisitions | | $ | 357,861 | | | | $ | 356,009 | | $ | 354,378 | | $ | 1,631 | | 987,708 | |
1MOB = medical office building.
2Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
32Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
3Represents a single-tenant property.
4Includes 32 properties.
5The Company acquired land parcels under 4 existing buildings (previously ground leased).accounted for this transaction as a financing receivable.
6The Company acquired a land parcel under an existing building (previously ground leased). The building and land were sold on September 30, 2020.Includes 3 properties.
Subsequent Acquisition
On October 7, 2020
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
2021 TIAA Joint Venture Acquisitions
The TIAA Joint Venture is not consolidated for purposes of the Company acquired a 36,720 square foot medical office building in Colorado Springs, CO for a purchase price of $8.9 million.
2020 Real Estate Asset Dispositions
Company's Condensed Consolidated Financial Statements. The following table details the Company's dispositionsTIAA Joint Venture acquisitions for the nine months ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | TYPE 1 | Date Disposed | Sale Price | Closing Adjustments | Net Proceeds | Net Real Estate Investment | Other (including receivables)2 | Gain/(Impairment) | Square Footage (Unaudited) |
Springfield, MO 3 | SF | 7/30/20 | $ | 138.0 | | $ | 0 | | $ | 138.0 | | $ | 92.4 | | $ | 3.9 | | $ | 41.7 | | 186,000 |
Oklahoma City, OK 3 | MOB | 7/30/20 | 106.5 | | 0 | | 106.5 | | 76.8 | | 3.1 | | 26.6 | | 200,000 | |
Miami, FL | MOB | 9/30/20 | 5.0 | | (0.2) | | 4.8 | | 2.6 | | 0.1 | | 2.1 | | 26,000 | |
| | | | | | | | | |
Total dispositions | | $ | 249.5 | | $ | (0.2) | | $ | 249.3 | | $ | 171.8 | | $ | 7.1 | | $ | 70.4 | | 412,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | CASH CONSIDERATION 1 | REAL ESTATE | OTHER 2 | SQUARE FOOTAGE | COMPANY OWNERSHIP % |
Denver, CO | 3/30/21 | $ | 14,375 | | | | $ | 14,056 | | $ | 14,550 | | $ | (494) | | 59,359 | 50 | % |
Colorado Springs, CO | 4/1/21 | 7,200 | | | | 7,288 | | 7,347 | | (59) | | 27,510 | | 50 | % |
Los Angeles, CA | 4/8/21 | 31,335 | | | | 30,179 | | 30,642 | | (463) | | 57,573 | | 50 | % |
San Antonio, TX | 4/30/21 | 13,600 | | | | 13,412 | | 13,656 | | (244) | | 45,000 | | 50 | % |
Los Angeles, CA | 5/10/21 | 24,600 | | | | 24,259 | | 24,147 | | 112 | | 73,078 | | 50 | % |
Colorado Springs, CO 3 | 7/27/21 | 9,133 | | | | 9,137 | | 9,135 | | 2 | | 23,956 | | 50 | % |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Total real estate acquisitions | | $ | 100,243 | | | | $ | 98,331 | | $ | 99,477 | | $ | (1,146) | | 286,476 | | |
1.1MOB = medical office building; SF = surgical facilityCash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
2.2Includes straight-line rent receivables, leasing commissionsother assets acquired, liabilities assumed, and lease inducements.intangibles recognized at acquisition.
3.3In the second quarterIncludes purchase of 2020, the Company entered into agreements to sell 2 single-tenant net leased properties, resulting in a lease modification and classification change from operating to sales-type.adjoining 3.0 acre land parcel.
Assets HeldSubsequent to September 30, 2021, the TIAA Joint Venture acquired the following property:
| | | | | | | | | | | | | | | | |
Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | SQUARE FOOTAGE | COMPANY OWNERSHIP % |
Denver, CO | 10/21/21 | $ | 23,000 | | | | 57,257 | | 50 | % |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Unconsolidated Joint Ventures
The Company's investment in and loss recognized for Salethe three and nine months ended September 30, 2021 and 2020 related to its joint ventures accounted for under the equity method are shown in the table below:
| | | | | | | | | | | | | | | |
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | |
Dollars in thousands | 2021 | 2020 | 2021 | 2020 | |
| | | | | |
Investments in unconsolidated joint ventures, beginning of period 1 | $ | 117,935 | | $ | 7,818 | | $ | 73,137 | | $ | 8,130 | | |
New investments during the period | 4,593 | | — | | 49,612 | | — | | |
Equity loss recognized during the period 1 | (183) | | (66) | | (404) | | (194) | | |
Owner distributions | — | | (9) | | — | | (193) | | |
Investments in unconsolidated joint ventures, end of period 1 | $ | 122,345 | | $ | 7,743 | | $ | 122,345 | | $ | 7,743 | | |
1In September 2020,addition to the TIAA Joint Venture, the Company reclassified 4 medical office buildingsalso has a 55% and 27% ownership interest, respectively, in 2 limited liability companies that each own a land parcel to assets held for sale upon acceptance of an offer from a third party to purchase the properties under a single sales agreement. The contractual sales price of $23.0 million is greater than the current net investment of approximately $18.1 million. Asparking garage in Atlanta, Georgia.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
2021 Real Estate Asset Dispositions
The following table details the Company's dispositions for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | DATE DISPOSED | SALE PRICE | CLOSING ADJUSTMENTS | NET PROCEEDS | NET REAL ESTATE INVESTMENT | OTHER (INCLUDING RECEIVABLES) 1 | GAIN/(IMPAIRMENT) | SQUARE FOOTAGE |
Los Angeles, CA 2 | 3/11/21 | $ | 26,000 | | $ | (555) | | $ | 25,445 | | $ | 6,046 | | $ | 509 | | $ | 18,890 | | 73,906 | |
Atlanta, GA 3 | 4/12/21 | 8,050 | | (272) | | 7,778 | | 5,675 | | 151 | | 1,952 | | 19,732 | |
Richmond, VA 3 | 5/18/21 | 52,000 | | (314) | | 51,686 | | 29,414 | | 3,270 | | 19,002 | | 142,856 | |
Gadsden, AL 3,4 | 5/19/21 | 5,500 | | (280) | | 5,220 | | 5,914 | | 175 | | (869) | | 120,192 | |
Dallas, TX 3,5 | 7/9/21 | 23,000 | | (1,117) | | 21,883 | | 18,733 | | 1,966 | | 1,184 | | 190,160 | |
| | | | | | | | |
Total dispositions | | $ | 114,550 | | $ | (2,538) | | $ | 112,012 | | $ | 65,782 | | $ | 6,071 | | $ | 40,159 | | 546,846 | |
1Includes straight-line rent receivables, leasing commissions and lease inducements.
2Includes 2 properties sold to a single purchaser in 2 transactions which occurred on March 5 and March 11, 2021.
3Previously classified as held for sale.
4Includes 3 properties.
5Includes 4 properties and a land parcel sold under a single purchase agreement.
Assets Held for Sale
As of September 30, 20202021 and December 31, 2019,2020, the Company had 41 and 04 properties, respectively, classified as assets held for sale. During the third quarter of 2021, the Company reclassified to held for sale a medical office building in Chicago, Illinois with a contractual sales price of $13.3 million and recorded an impairment charge of $10.7 million based on the contractual sales price less estimated costs to sell. The Company disposed of this property on October 28, 2021.
The table below reflects the assets and liabilities of the properties classified as held for sale as of September 30, 20202021 and December 31, 2019:2020:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Balance Sheet data: | | | | |
Land | | $ | 1,664 | | | $ | 0 | |
Building, improvements and lease intangibles | | 26,871 | | | 0 | |
Personal property | | 39 | | | 0 | |
| | 28,574 | | | 0 | |
Accumulated depreciation | | (10,443) | | | 0 | |
Real estate assets held for sale, net | | 18,131 | | | 0 | |
Other assets, net | | 1,920 | | | 37 | |
Assets held for sale, net | | $ | 20,051 | | | $ | 37 | |
| | | | |
Accounts payable and accrued liabilities | | $ | 437 | | | $ | 37 | |
Other liabilities | | 111 | | | 108 | |
Liabilities of assets held for sale | | $ | 548 | | | $ | 145 | |
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2021 | | December 31, 2020 |
Balance Sheet data: | | | | |
Land | | $ | 5,859 | | | $ | 1,664 | |
Building, improvements and lease intangibles | | 13,710 | | | 27,443 | |
Personal property | | 133 | | | 39 | |
| | 19,702 | | | 29,146 | |
Accumulated depreciation | | (7,158) | | | (10,455) | |
Real estate assets held for sale, net | | 12,544 | | | 18,691 | |
| | | | |
Other assets, net | | 1,059 | | | 1,955 | |
Assets held for sale, net | | $ | 13,603 | | | $ | 20,646 | |
| | | | |
Accounts payable and accrued liabilities | | $ | 467 | | | $ | 533 | |
Other liabilities | | 299 | | | 683 | |
Liabilities of assets held for sale | | $ | 766 | | | $ | 1,216 | |
Note 3. Leases
Lessor Accounting
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2035.2040. Some leases provide for fixed rent renewal terms in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased property. The Company’s single-tenant net leases generally require the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and other operating costs associated with the leased property.
The Company's leases typically have escalators that are either based on a stated percentage or an index such as CPI (consumerthe consumer price index)index ("CPI"). In addition, most of the Company's leases include nonlease components, such as
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
reimbursement of operating expenses as additional rent, or include the reimbursement of expected operating expenses as part of the lease payment. The Company adopted an accounting policy to combine lease and nonlease components. Rent escalators based on indices and reimbursements of operating expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's operating leases recognized for the three and nine months ended September 30, 20202021 was $123.4$131.7 million and $368.4$388.6 million, respectively.
In May 2020, the Company and Mercy Health negotiated the sale of 2 single-tenant net leased properties, a medical office building in Oklahoma and an orthopedic specialty hospital in Missouri, for $244.5 million. The sale was structured through amendments to the leases to allow for the early exercise of existing purchase options. The amendments resulted in the application of lease modification accounting under ASC Topic 842, which resulted in lease classification changes from operating to sales-type. During the second quarter, the Company derecognized the real estate assets on the Condensed Consolidated Balance Sheets and recognized the net investment in sales-type leases, resulting in a gain of $68.3 million. The Company disposed of these properties on July 30, 2020.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Tabular Disclosure of the Components of Sales-Type Leases
The table below presents the components of sale-type leases for the three and nine months ended September 30, 2020:
| | | | | | | | | | | |
| SALES-TYPE LEASES | |
In thousands | three months ended September 30, 2020 | nine months ended September 30, 2020 |
Profit recognized at commencement date | $ | 0 | | $ | 68,267 | | Gain on sales of real estate assets |
Interest income | 1,454 | | 3,007 | | Rental income |
Future lease payments under the non-cancelable operating leases, excluding any reimbursements, as of September 30, 20202021 were as follows:
| | | | | | | | |
In thousands | Operating | |
2020 | $ | 93,722 | | |
2021 | 352,341 | | |
2022 | 307,166 | | |
2023 | 261,187 | | |
2024 | 200,578 | | |
2025 and thereafter | 555,264 | | |
| $ | 1,770,258 | | |
| | | | | | | | |
In thousands | OPERATING | |
2021 | $ | 102,435 | | |
2022 | 385,734 | | |
2023 | 336,473 | | |
2024 | 266,722 | | |
2025 | 215,350 | | |
2026 and thereafter | 598,757 | | |
| $ | 1,905,471 | | |
Lessee Accounting
As of September 30, 2020,2021, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of September 30, 2020,2021, the Company had 103110 properties totaling 8.79.2 million square feet that were held under ground leases. Some of the ground leases'lease renewal terms are based on fixed rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally either stated or based on the CPI. The Company had 4243 prepaid ground leases as of September 30, 2020.2021. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.2$0.1 million and $0.1 million of the Company’s rental expense for the three months ended September 30, 20202021 and 2019,2020, respectively, and $0.5$0.4 million and $0.4$0.5 million for the nine months ended September 30, 20202021 and 2019,2020, respectively.
The Company’s future lease payments (primarily for its 6167 non-prepaid ground leases) as of September 30, 20202021 were as follows:
| In thousands | In thousands | OPERATING | FINANCING | In thousands | OPERATING | FINANCING |
2020 | $ | 1,008 | | $ | 143 | | |
2021 | 2021 | 4,844 | | 930 | | 2021 | $ | 1,051 | | $ | 180 | |
2022 | 2022 | 4,875 | | 783 | | 2022 | 5,030 | | 838 | |
2023 | 2023 | 4,913 | | 793 | | 2023 | 5,071 | | 848 | |
2024 | 2024 | 4,969 | | 815 | | 2024 | 5,130 | | 871 | |
2025 and thereafter | 307,665 | | 88,808 | | |
2025 | | 2025 | 5,174 | | 886 | |
2026 and thereafter | | 2026 and thereafter | 312,163 | | 92,689 | |
Total undiscounted lease payments | Total undiscounted lease payments | 328,274 | | 92,272 | | Total undiscounted lease payments | 333,619 | | 96,312 | |
Discount | Discount | (236,808) | | (73,575) | | Discount | (237,706) | | (75,852) | |
Lease liabilities | Lease liabilities | $ | 91,466 | | $ | 18,697 | | Lease liabilities | $ | 95,913 | | $ | 20,460 | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table provides details of the Company's total lease expense for the three and nine months ended September 30, 20202021 and 2019:2020:
| | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, | | THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
In thousands | In thousands | 2020 | 2019 | 2020 | 2019 | In thousands | 2021 | 2020 | 2021 | 2020 |
Operating lease cost | Operating lease cost | | | | | Operating lease cost | | | | |
Operating lease expense | Operating lease expense | $ | 1,180 | | $ | 1,169 | | $ | 3,534 | | $ | 3,448 | | Operating lease expense | $ | 1,196 | | $ | 1,180 | | $ | 3,555 | | $ | 3,529 | |
Variable lease expense | Variable lease expense | 1,066 | | 845 | | 2,664 | | 2,380 | | Variable lease expense | 1,016 | | 1,066 | | 2,883 | | 2,669 | |
| Finance lease cost | Finance lease cost | | | | | Finance lease cost | | | | |
Amortization of right-of-use assets | Amortization of right-of-use assets | 88 | | 51 | | 236 | | 101 | | Amortization of right-of-use assets | 90 | | 88 | | 267 | | 236 | |
Interest on lease liabilities | Interest on lease liabilities | 245 | | 196 | | 722 | | 392 | | Interest on lease liabilities | 255 | | 245 | | 748 | | 722 | |
Total lease expense | Total lease expense | $ | 2,579 | | $ | 2,261 | | $ | 7,156 | | $ | 6,321 | | Total lease expense | $ | 2,557 | | $ | 2,579 | | $ | 7,453 | | $ | 7,156 | |
| Other information | Other information | | | | | Other information | | | | |
Operating cash flows outflows related to operating leases | Operating cash flows outflows related to operating leases | $ | 1,440 | | $ | 1,313 | | $ | 5,412 | | $ | 5,461 | | Operating cash flows outflows related to operating leases | $ | 1,424 | $ | 1,440 | | $ | 5,855 | | $ | 5,412 | |
Operating cash flows outflows related to financing leases | | Operating cash flows outflows related to financing leases | $ | 151 | $ | 151 | | $ | 678 | | $ | 616 | |
Financing cash flows outflows related to financing leases | Financing cash flows outflows related to financing leases | $ | 143 | | $ | 107 | | $ | 3,310 | | $ | 249 | | Financing cash flows outflows related to financing leases | $ | 6 | $ | 143 | | $ | 162 | | $ | 3,310 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 0 | | $ | 0 | | $ | 7,212 | | $ | 14,294 | | Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 1,420 | $ | — | | $ | 1,420 | | $ | 7,212 | |
Right-of-use assets obtained in exchange for new operating lease liabilities | | Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 8,298 | $ | — | | $ | 8,298 | | $ | — | |
| Weighted-average remaining lease term (excluding renewal options) - operating leases | Weighted-average remaining lease term (excluding renewal options) - operating leases | 48.9 | 49.7 | | | Weighted-average remaining lease term (excluding renewal options) - operating leases | 47.8 | 48.9 | | |
Weighted-average remaining lease term (excluding renewal options) -finance leases | 64.7 | 70.1 | | | |
Weighted-average remaining lease term (excluding renewal options) - finance leases | | Weighted-average remaining lease term (excluding renewal options) - finance leases | 63.2 | 64.7 | | |
Weighted-average discount rate - operating leases | Weighted-average discount rate - operating leases | 5.7 | % | 5.7 | % | | | Weighted-average discount rate - operating leases | 5.6 | % | 5.7 | % | | |
Weighted-average discount rate - finance leases | Weighted-average discount rate - finance leases | 5.4 | % | 5.5 | % | | | Weighted-average discount rate - finance leases | 5.4 | % | 5.4 | % | | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable.
| | | MATURITY DATES | BALANCE AS OF | EFFECTIVE INTEREST RATE as of 9/30/2020 | | MATURITY DATES | BALANCE AS OF | EFFECTIVE INTEREST RATE as of 9/30/2021 |
Dollars in thousands | Dollars in thousands | 9/30/2020 | 12/31/2019 | Dollars in thousands | 9/30/2021 | 12/31/2020 |
$700 million Unsecured Credit Facility | $700 million Unsecured Credit Facility | 5/23 | $ | 0 | | $ | 293,000 | | N/A | $700 million Unsecured Credit Facility | 5/23 | $ | 90,500 | | $ | — | | 0.98 | % |
$200 million Unsecured Term Loan Facility, net of issuance costs 1 | 5/24 | 199,180 | | 199,013 | | 1.99 | % | |
$150 million Unsecured Term Loan due 2026 2 | 6/26 | 149,455 | | 0 | | 3.14 | % | |
Senior Notes due 2023, net of discount and issuance costs | 4/23 | 248,863 | | 248,540 | | 3.95 | % | |
$200 million Unsecured Term Loan due 2024, net of issuance costs 1 | | $200 million Unsecured Term Loan due 2024, net of issuance costs 1 | 5/24 | 199,404 | | 199,236 | | 1.94 | % |
$150 million Unsecured Term Loan due 2026, net of issuance costs 2 | | $150 million Unsecured Term Loan due 2026, net of issuance costs 2 | 6/26 | 149,341 | | 149,479 | | 2.47 | % |
Senior Notes due 2025, net of discount and issuance costs 3 | Senior Notes due 2025, net of discount and issuance costs 3 | 5/25 | 248,711 | | 248,522 | | 4.08 | % | Senior Notes due 2025, net of discount and issuance costs 3 | 5/25 | 248,973 | | 248,776 | | 4.08 | % |
Senior Notes due 2028, net of discount and issuance costs | Senior Notes due 2028, net of discount and issuance costs | 1/28 | 296,003 | | 295,651 | | 3.84 | % | Senior Notes due 2028, net of discount and issuance costs | 1/28 | 296,488 | | 296,123 | | 3.84 | % |
Senior Notes due 2030, net of discount and issuance costs 4 | Senior Notes due 2030, net of discount and issuance costs 4 | 3/30 | 296,384 | | 0 | | 2.71 | % | Senior Notes due 2030, net of discount and issuance costs 4 | 3/30 | 296,726 | | 296,468 | | 2.71 | % |
Senior Notes due 2031, net of discount and issuance costs | | Senior Notes due 2031, net of discount and issuance costs | 3/31 | 295,261 | | 294,924 | | 2.24 | % |
Mortgage notes payable, net of discounts and issuance costs and including premiums | Mortgage notes payable, net of discounts and issuance costs and including premiums | 1/21-4/27 | 115,799 | | 129,343 | | 4.38 | % | Mortgage notes payable, net of discounts and issuance costs and including premiums | 11/22-4/27 | 114,740 | | 117,763 | | 4.06 | % |
| | $ | 1,554,395 | | $ | 1,414,069 | | | | $ | 1,691,433 | | $ | 1,602,769 | | |
1The effective interest rate includes the impact of interest rate swaps on $75.0 million at a weighted average rate of 2.37% (plus the applicable margin rate, currently 100 basis points).
2The effective interest rate includes the impact of interest rate swaps on $100.0 million at a weighted average rate of 2.23% (plus the applicable margin rate, currently 16095 basis points).
3The effective interest rate includes the impact of the $1.7 million settlement of a forward-starting interest rate swapswaps that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
4The effective interest rate includes the impact of the $4.3 million settlement of forward interest rate hedges that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
Changes in Debt Structure
On February 3, 2020,June 1, 2021, the Company entered into a second amendment to the Amended and Restated Term Loan, dated May 31, 2019, that reduced the current interest rate on the $150 million portion of the loan due 2026 from LIBOR plus a margin rate ranging from 1.45% to 2.40% (previously 1.60%) to LIBOR plus a margin rate ranging from 0.80% to 1.60% (0.95% as of September 30, 2021). With the amendment, the Company paid up front fees of approximately $0.5 million, of which $0.2 million was paid to lenders, capitalized and amortized over the remainder of the term of the loan, and $0.3 million was paid to lenders as administration fees and was expensed in the second quarter of 2021. In addition, the amendment added a sustainability metric incentive tied to increasing the Company's properties with green building certifications.
Subsequent Changes in Debt Structure
On November 1, 2021, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.10%4.69% per annum with an outstanding principal of $5.9$11.1 million. The mortgage note encumbered a 68,86062,379 square foot property in Oklahoma.
On March 4, 2020, the Company issued $300.0 million of unsecured senior notes due 2030 (the "Senior Notes due 2030") in a registered public offering. The Senior Notes due 2030 bear interest at 2.40%, payable semi-annually on March 15 and September 15, beginning September 15, 2020, and are due on March 15, 2030, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.0 million and the Company incurred approximately $2.8 million in debt issuance costs. Concurrent with this transaction, the Company settled 2 treasury rate locks for $4.3 million. Inclusive of the discount, debt issuance costs and settlement of the treasury rate locks, the effective interest rate was 2.71%. The Senior Notes due 2030 have various financial covenants that are required to be met on a quarterly and annual basis.
On May 4, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.74% per annum with an outstanding principal of $0.3 million. The mortgage note encumbered an 83,318 square foot property in Iowa.
On May 29, 2020, the Company borrowed $150.0 million pursuant to its unsecured term loan due 2026.
On June 2, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.44% per annum with an outstanding principal of $12.6 million. The mortgage note encumbered a 67,510 square foot property in Washington.
On June 25, 2020, the Company repaid in full 3 mortgage notes bearing interest at rates of 5.63%, 6.63% and 6.88% per annum with outstanding principal of $0.5 million, $2.8 million, and $7.0 million, respectively. The mortgage notes encumbered a 60,476 square foot property in Minnesota.
Subsequent Changes in Debt Structure
On October 1, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.47% per annum with an outstanding principal of $4.2 million. The mortgage note encumbered a 40,171 square foot property in Georgia.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
On October 2, 2020, the Company issued $300.0 million of unsecured senior notes due 2031 (the "Senior Notes due 2031") in a registered public offering. The Senior Notes due 2031 bear interest at 2.05%, payable semi-annually on March 15 and September 15, beginning March 15, 2021, and are due on March 15, 2031, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.4 million and the Company incurred approximately $2.8 million in debt issuance costs. Inclusive of the discount and debt issuance costs, the effective interest rate was 2.24%. The Senior Notes due 2031 have various financial covenants that are required to be met on a quarterly and annual basis.
On October 19, 2020, the Company redeemed its unsecured senior notes due 2023 (the "Senior Notes due 2023"). The aggregate redemption price of $270.5 million consisted of outstanding principal of $250.0 million, accrued interest of $0.1 million, and a "make-whole" amount of approximately $20.4 million for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.1 million was written off upon redemption. In October 2020, the Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to this redemption.Maryland.
Note 5. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
On February 24 and 25, 2020, the Company entered into 2 treasury rate locks totaling $75.0 million and $40.0 million, respectively. The treasury rate locks were settled for an aggregate amount of $4.3 million on March 4, 2020 concurrent with the Company's issuance of its Senior Notes due 2030. The settlement will be amortized over the 10-year term of the notes.
As of September 30, 2020,2021, the Company had 8 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | |
DERIVATIVE INSTRUMENT | NUMBER OF INSTRUMENTS | NOTIONAL AMOUNT in millions |
Interest rate swaps | 8 | | $175.0 |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments, as well as their classification on the Condensed Consolidated Balance Sheet as of September 30, 2020.2021.
| | | | | | | | |
| BALANCE AT SEPTEMBER 30, 20202021 |
In thousands | BALANCE SHEET LOCATION | FAIR VALUE |
Derivatives designated as hedging instruments | | |
Interest rate swaps | Other liabilities | $ | 14,4608,201 | |
Total derivatives designated as hedging instruments | | $ | 14,4608,201 | |
Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on AOCI during the three and nine months ended September 30, 20202021 and 20192020 related to the Company's outstanding interest rate swaps.
| | | LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended September 30, | | (GAIN) LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended September 30, | | (GAIN) LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended September 30, | | LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended September 30, |
In thousands | In thousands | 2020 | 2019 | 2020 | 2019 | In thousands | 2021 | 2020 | 2021 | 2020 |
Interest rate swaps | Interest rate swaps | $ | 74 | | $ | 2,341 | | Interest expense | $ | 952 | | $ | 18 | | Interest rate swaps | $ | (36) | | $ | 74 | | Interest expense | $ | 982 | | $ | 952 | |
Settled treasury hedges | Settled treasury hedges | 0 | | 0 | | Interest expense | 107 | | 0 | | Settled treasury hedges | — | | — | | Interest expense | 107 | | 107 | |
Settled interest rate swaps | Settled interest rate swaps | 0 | | 0 | | Interest expense | 42 | | 42 | | Settled interest rate swaps | — | | — | | Interest expense | 42 | | 42 | |
| | $ | 74 | | $ | 2,341 | | Total interest expense | $ | 1,101 | | $ | 60 | | | $ | (36) | | $ | 74 | | Total interest expense | $ | 1,131 | | $ | 1,101 | |
| | | LOSS RECOGNIZED IN AOCI ON DERIVATIVE nine months ended September 30, | | (GAIN) LOSS RECLASSIFIED FROM AOCI INTO INCOME nine months ended September 30, | | (GAIN) LOSS RECOGNIZED IN AOCI ON DERIVATIVE nine months ended September 30, | | LOSS RECLASSIFIED FROM AOCI INTO INCOME nine months ended September 30, |
In thousands | In thousands | 2020 | 2019 | 2020 | 2019 | In thousands | 2021 | 2020 | 2021 | 2020 |
Interest rate swaps | Interest rate swaps | $ | 11,192 | | $ | 7,642 | | Interest expense | $ | 2,012 | | $ | (52) | | Interest rate swaps | $ | (2,079) | | $ | 11,192 | | Interest expense | $ | 2,894 | | $ | 2,012 | |
Settled treasury hedges | Settled treasury hedges | 4,267 | | 0 | | Interest expense | 229 | | 0 | | Settled treasury hedges | — | | 4,267 | | Interest expense | 320 | | 229 | |
Settled interest rate swaps | Settled interest rate swaps | 0 | | 0 | | Interest expense | 126 | | 126 | | Settled interest rate swaps | — | | — | | Interest expense | 126 | | 126 | |
| | $ | 15,459 | | $ | 7,642 | | Total interest expense | $ | 2,367 | | $ | 74 | | | $ | (2,079) | | $ | 15,459 | | Total interest expense | $ | 3,340 | | $ | 2,367 | |
The Company estimates that $4.4 million will be reclassified from AOCI to interest expense over the next 12 months.
Credit-risk-related Contingent Features
The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
As of September 30, 2020,2021, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $15.1$8.6 million. As of September 30, 2020,
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
2021, the Company has not posted any collateral related to these agreements and was not in breach of any agreement.
Note 6. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Redevelopment Activity
During the third quarter of 2021, the Company continued the redevelopment of 110,860 square feet of a 217,114 square foot medical office building in Dallas, Texas. As of September 30, 2021, the Company had funded approximately $2.1 million in project costs. The building continues to operate with in-place leases during construction. The first new tenant lease of the redevelopment is expected to commence in the first quarter of 2022.
During the third quarter of 2021, the Company initiatedcontinued the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee ("Memphis Redevelopment") in December 2019.Tennessee. As of September 30, 2020,2021, the Company had funded approximately $5.7$31.1 million in project costs, excluding the purchase price of $8.7 million for the land and building. The building will continue to operate with in-place leases during construction.costs. The core and shell portion of this redevelopment was completed and the Memphis Redevelopment is expected to be completedfirst new tenant took occupancy in the first quarter of 2021, with the construction of tenant spaces to be completed throughout the remainder of 2021.
Development Activityin early 2022.
In April 2021, the firstCompany began the redevelopment of a medical office building in Tacoma, Washington. As of September 30, 2021, the Company had funded approximately $1.7 million in project costs. The redevelopment includes interior and exterior improvements to the existing building, plus the addition of 23,000 square feet. The Company expects the 23,000 square foot tenant lease for the expansion space to commence in the second quarter of 2020,2022.
In July 2021, the Company completedbegan the construction of the core and shellredevelopment of a 151,031medical office building in Nashville, Tennessee. The Company expects to construct a new 106,194 square foot medical office building with the initial tenant lease expected to commence in Seattle, Washington.the second quarter of 2023. As of September 30, 2020,2021, the Company had funded approximately $59.1$0.8 million towardsin project costs. The redevelopment includes the development and additional tenant improvements. Thedemolition of an existing 81,000 square foot medical office building. In the second quarter of 2021, the Company expects to fundrecognized an additional amountimpairment charge of approximately $5.0 million for additional tenant improvements associated with this project. The first tenant commenced rent payment inrelated to the first quarter of 2020.existing building.
Note 7. Stockholders' Equity
Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the nine months ended September 30, 20202021 and the year ended December 31, 2019:2020:
| | | | | | | | |
| SEPTEMBER 30, 2020 | DECEMBER 31, 2019 |
Balance, beginning of period | 134,706,154 | | 125,279,455 | |
Issuance of common stock | 1,292,324 | | 9,251,440 | |
Nonvested share-based awards, net of withheld shares | 55,462 | | 175,259 | |
Balance, end of period | 136,053,940 | | 134,706,154 | |
At-The-Market Equity Offering Program
On February 14, 2020, the Company entered into sales agreements with 6 investment banks to allow sales under its at-the-market equity offering program of up to an aggregate of $500.0 million of common stock. The Company sold 1,268,237 shares under the Company's at-the market equity offering program during the nine months ended September 30, 2020. The sales generated $39.9 million in net proceeds at prices to the public ranging from $30.50 to $36.15 per share (weighted average of $31.86 per share). The sales occurred during the following time periods:
•During the first quarter of 2020, the Company sold 196,250 shares generating approximately $7.0 million in net proceeds at prices to the public ranging from $33.00 to $36.15 per share (weighted average of $36.09 per share).
•During the second quarter of 2020, the Company sold 1,071,987 shares generating approximately $32.9 million in net proceeds at prices to the public ranging from $30.50 to $31.29 per share (weighted average of $31.08 per share).
In addition, the Company has entered into 3 forward equity agreements totaling 3.6 million shares at a weighted average price of $31.30 per share:
•In the second quarter of 2020, the Company entered into a forward equity agreement for a total of 1,579,371 shares at a weighted average price of $31.66 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in June 2021.
•In the third quarter of 2020, the Company entered into a forward equity agreement for a total of 764,472 shares at a weighted average price of $31.84 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in July 2021.
•In the fourth quarter of 2020, the Company entered into a forward equity agreement for a total of 1,235,129 shares at a weighted average price of $30.52 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in October 2021.
After taking into account the forward equity contracts discussed above, the Company has approximately $347.6 million remaining available to be sold under the current sales agreements at the date of this filing.
Common Stock Dividends
During the nine months ended September 30, 2020, the Company declared and paid common stock dividends totaling $0.90 per share. On November 3, 2020, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on December 1, 2020 to stockholders of record onNovember 16, 2020. | | | | | | | | |
| NINE MONTHS ENDED | TWELVE MONTHS ENDED |
| SEPTEMBER 30, 2021 | DECEMBER 31, 2020 |
Balance, beginning of period | 139,487,375 | | 134,706,154 | |
Issuance of common stock | 7,905,570 | | 4,637,445 | |
Nonvested share-based awards, net of withheld shares | 148,772 | | 143,776 | |
Balance, end of period | 147,541,717 | | 139,487,375 | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
At-The-Market Equity Offering Program
On August 6, 2021, the Company entered into equity distribution agreements with 11 investment banks to allow for issuance and sale under its at-the-market equity offering program of up to an aggregate of $750.0 million of common stock. The Company's previous at-the-market equity program to sell up to an aggregate of $500.0 million of common stock ended in August 2021. The following table details the Company's forward at-the-market activity:
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE SALE PRICE per share | FORWARD SHARE CONTRACTS | SHARES SETTLED | SHARES REMAINING TO BE SETTLED | NET PROCEEDS in millions |
Balance at December 31, 2020 | $ | — | | — | | — | | 1,823,259 | | $ | — | |
1Q 2021 | $ | 30.09 | | 215,532 | | 2,038,791 | | — | | $ | 62.7 | |
2Q 2021 | $ | 30.99 | | 5,835,400 | | 3,827,971 | | 2,007,429 | | $ | 116.1 | |
3Q 2021 | $ | 31.06 | | 1,670,186 | | 2,007,429 | | 1,670,186 | | $ | 61.3 | |
October 2021 1 | $ | 31.34 | | 2,042,562 | | — | | 3,712,748 | | $ | — | |
| | | | | |
1Includes forward share activity from August to October 2021 for trade confirmations dated in October 2021.
The 3.7 million shares remaining to be settled in forward equity arrangements are expected to be settled by October 2022 for expected gross proceeds of $115.9 million, depending on the timing of settlement. Expected net proceeds are calculated by reducing the initial price by adjustments provided in the forward equity arrangements. After accounting for these settlements, the Company has approximately $686.0 million remaining available to be sold under the current equity distribution agreements at the date of this filing.
Common Stock Dividends
During the nine months ended September 30, 2021, the Company declared and paid common stock dividends totaling $0.9075 per share. On November 2, 2021, the Company declared a quarterly common stock dividend in the amount of $0.3025 per share payable on November 30, 2021 to stockholders of record onNovember 15, 2021.
Earnings Per Common Share
The Company uses the two-class method of computing net earnings per common shares. The Company's nonvestednon-vested share-based awards are considered participating securities pursuant to the two-class method.
During the ninethree months ended September 30, 2020,2021, the Company entered into forward sale agreements to sell approximately 2.31.7 million shares of common stock through the Company's at-the-market equity offering program. The Company considered the accounting guidance governing financial instruments and derivatives to account for these agreements and concluded that it was not a liability as it did not embody obligations to repurchase our shares of common stock nor did it embody obligations to issue a variable number of shares for which the monetary value was predominately fixed, varying with something other than the fair value of the shares, or varying inversely in relation to the shares. In addition, the Company evaluated whether the agreements met the derivative and hedging guidance scope exception to be accounted for as an equity instrument and concluded that the agreements can be classified as equity.
The Company used the treasury method to determine the dilution from the forward equity agreements during the period of time prior to settlement. The number of weighted-average shares outstanding used in the computation of earnings per common share for the three and nine months ended September 30, 20202021 included the effect from the assumed issuance of 2.31.7 million shares of common stock pursuant to the settlement of the forward equity agreements at the contractual price, less the assumed repurchase of the common stock at the average market price using the proceeds, of approximately $72.7 million, adjusted for costs to borrow. For the three and nine months ended September 30, 2020, 137,757 and 51,133 weighted-average incremental shares
Table of common stock were excluded from the computation of weighted-average common shares outstanding - diluted, as the impact was anti-dilutive.Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended September 30, 20202021 and 2019.2020.
| | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
Dollars in thousands, except per share data | Dollars in thousands, except per share data | 2020 | 2019 | 2020 | 2019 | Dollars in thousands, except per share data | 2021 | 2020 | 2021 | 2020 |
Weighted average common shares outstanding | Weighted average common shares outstanding | | | | | Weighted average common shares outstanding | | | | |
Weighted average common shares outstanding | Weighted average common shares outstanding | 136,048,781 | | 129,865,985 | | 135,393,798 | | 128,348,638 | | Weighted average common shares outstanding | 145,594,127 | | 136,048,781 | | 143,305,737 | | 135,393,798 | |
Non-vested shares | Non-vested shares | (1,739,364) | | (1,775,911) | | (1,731,658) | | (1,777,743) | | Non-vested shares | (1,776,508) | | (1,739,364) | | (1,784,544) | | (1,731,658) | |
Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 134,309,417 | | 128,090,074 | | 133,662,140 | | 126,570,895 | | Weighted average common shares outstanding - basic | 143,817,619 | | 134,309,417 | | 141,521,193 | | 133,662,140 | |
| Weighted average common shares outstanding - basic | Weighted average common shares outstanding - basic | 134,309,417 | | 128,090,074 | | 133,662,140 | | 126,570,895 | | Weighted average common shares outstanding - basic | 143,817,619 | | 134,309,417 | | 141,521,193 | | 133,662,140 | |
Dilutive effect of forward equity shares | Dilutive effect of forward equity shares | 0 | | 0 | | 0 | | 0 | | Dilutive effect of forward equity shares | — | | — | | 14,036 | | — | |
Dilutive effect of employee stock purchase plan | Dilutive effect of employee stock purchase plan | 47,810 | | 78,610 | | 74,029 | | 85,690 | | Dilutive effect of employee stock purchase plan | — | | 47,810 | | 78,200 | | 74,029 | |
Weighted average common shares outstanding - diluted | Weighted average common shares outstanding - diluted | 134,357,227 | | 128,168,684 | | 133,736,169 | | 126,656,585 | | Weighted average common shares outstanding - diluted | 143,817,619 | | 134,357,227 | | 141,613,429 | | 133,736,169 | |
| Net Income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | | |
Net Income (loss) | | Net Income (loss) | $ | (2,066) | | $ | 8,230 | | $ | 45,052 | | $ | 88,058 | |
Dividends paid on nonvested share-based awards | Dividends paid on nonvested share-based awards | (522) | | (534) | | (1,561) | | (1,603) | | Dividends paid on nonvested share-based awards | (537) | | (522) | | (1,617) | | (1,561) | |
Net income applicable to common stockholders | $ | 7,708 | | $ | 2,067 | | $ | 86,497 | | $ | 10,372 | | |
Net income (loss) applicable to common stockholders | | Net income (loss) applicable to common stockholders | $ | (2,603) | | $ | 7,708 | | $ | 43,435 | | $ | 86,497 | |
| | Basic earnings per common share - net income | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | | |
Basic earnings per common share - net income (loss) | | Basic earnings per common share - net income (loss) | $ | (0.02) | | $ | 0.06 | | $ | 0.31 | | $ | 0.65 | |
| Diluted earnings per common share - net income | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | | |
Diluted earnings per common share - net income (loss) | | Diluted earnings per common share - net income (loss) | $ | (0.02) | | $ | 0.06 | | $ | 0.31 | | $ | 0.65 | |
The effect of non-vested stock awards totaling 911,594 shares, options under the the Company's Employee Stock Purchase Plan (the "Purchase Plan")to purchase the Company's stock totaling 63,383 shares, and the dilutive impact of forward-equity contracts outstanding of 14,734 shares of common stock for the three months ended September 30, 2021 were excluded from the calculation of diluted loss per common share because the effect was anti-dilutive due to the loss from continuing operations incurred during that period.
Incentive Plans
During the nine months ended September 30, 2021, the Company made the following stock awards:
•On January 1, 2021, the Company granted non-vested stock awards to certain officers with a grant date fair value of $0.6 million, which consisted of an aggregate 21,396 non-vested shares through its salary deferral program.
•On February 10, 2021, the Company granted non-vested stock awards to its 4 named executive officers, 5 senior vice presidents, and 5 first vice presidents with a grant date fair value totaling $3.8 million, which consisted of an aggregate 124,648 non-vested shares, with a five-year vesting period.
•Also, on February 10, 2021, the Company granted a performance-based award to its officers, excluding the 4 named executive officers, 5 senior vice presidents, and 5 first vice presidents totaling $0.6 million, which consisted of an aggregate 19,679 non-vested shares.
•On May 11, 2021, the Company granted non-vested stock awards to its 8 directors with a grant date fair value totaling $1.2 million, which consisted of an aggregate 36,682 non-vested shares, with a one-year vesting period.
•On June 21, 2021, the Company granted a non-vested stock award to an employee, which consisted of 1,296 non-vested shares as a discretionary grant.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Incentive Plans
A summary of the activity under the Company's share-based incentive plans for the three and nine months ended September 30, 20202021 and 20192020 is included in the table below.
| | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| | 2020 | 2019 | 2020 | 2019 | | 2021 | 2020 | 2021 | 2020 |
Share-based awards, beginning of period | Share-based awards, beginning of period | 1,739,258 | | 1,778,134 | | 1,754,066 | | 1,769,863 | | Share-based awards, beginning of period | 1,778,308 | | 1,739,258 | | 1,766,061 | | 1,754,066 | |
Granted | Granted | 188 | | 0 | | 79,025 | | 89,767 | | Granted | — | | 188 | | 203,701 | | 79,025 | |
Vested 1 | 0 | | (204,548) | | (93,645) | | (286,044) | | |
| Vested | | Vested | — | | — | | (191,454) | | (93,645) | |
Forfeited | | Forfeited | (2,957) | | — | | (2,957) | | — | |
Share-based awards, end of period | Share-based awards, end of period | 1,739,446 | | 1,573,586 | | 1,739,446 | | 1,573,586 | | Share-based awards, end of period | 1,775,351 | | 1,739,446 | | 1,775,351 | | 1,739,446 | |
1The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in the accelerated vesting of 204,548 outstanding nonvested share-based awards.
During the nine months ended September 30, 20202021 and 2019,2020, the Company withheld 23,56351,972 and 100,03623,563 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.
In addition to the share-based incentive plans, the Company maintains the 2000 Employee Stock Purchase Plan (the "Purchase Plan").Plan. A summary of the activity under the Purchase Plan for the three and nine months ended September 30, 20202021 and 20192020 is included in the table below.
| | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, | | THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| | 2020 | 2019 | 2020 | 2019 | | 2021 | 2020 | 2021 | 2020 |
Outstanding and exercisable, beginning of period | Outstanding and exercisable, beginning of period | 361,719 | | 363,218 | | 332,659 | | 328,533 | | Outstanding and exercisable, beginning of period | 389,414 | | 361,719 | | 341,647 | | 332,659 | |
Granted | Granted | 0 | | 0 | | 212,716 | | 235,572 | | Granted | — | | — | | 253,200 | | 212,716 | |
Exercised | Exercised | (3,504) | | (9,927) | | (17,871) | | (28,943) | | Exercised | (5,323) | | (3,504) | | (24,300) | | (17,871) | |
Forfeited | Forfeited | (6,659) | | (11,762) | | (36,154) | | (51,559) | | Forfeited | (18,961) | | (6,659) | | (60,995) | | (36,154) | |
Expired | Expired | 0 | | 0 | | (139,794) | | (142,074) | | Expired | — | | — | | (144,422) | | (139,794) | |
Outstanding and exercisable, end of period | Outstanding and exercisable, end of period | 351,556 | | 341,529 | | 351,556 | | 341,529 | | Outstanding and exercisable, end of period | 365,130 | | 351,556 | | 365,130 | | 351,556 | |
Note 8. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.
•Cash and cash equivalents - The carrying amount approximates fair value due to the short term maturity of these investments.
•Borrowings under the Unsecured Credit Facility and the Term Loans Due 2024 and 2026 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates.
•Senior Notes and Mortgage Notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.
•Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets at fair value. Fair value is estimated by utilizing pricing models that consider forward yield curves and discount rates.
The table below details the fair values and carrying values for notes and bonds payable at September 30, 20202021 and December 31, 2019.2020.
| | | September 30, 2020 | December 31, 2019 | | September 30, 2021 | December 31, 2020 |
Dollars in millions | Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE | Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE |
Notes and bonds payable 1 | Notes and bonds payable 1 | $ | 1,554.4 | | $ | 1,621.7 | | $ | 1,414.1 | | $ | 1,425.8 | | Notes and bonds payable 1 | $ | 1,691.4 | | $ | 1,678.6 | | $ | 1,602.8 | | $ | 1,645.4 | |
|
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could," "budget" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates for the Company's properties, actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting the Company’s properties and the operations of the Company and its tenants; the effects of health and safety measures adopted by the Company and its tenants related to the COVID-19 pandemic; the impact of the COVID-19 pandemic on the operations, business and financial condition of the Company and its tenants; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; and the risks described in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, that could significantly affect the Company’s current plans and expectations and future financial condition and results.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including this report and its Annual Report on Form 10-K for the year ended December 31, 2019, and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
COVID-19 Update
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
In response to the COVID-19 pandemic, all of the states and cities in which the Company owns properties, manages properties, and/or has development or redevelopment projects instituted quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of businesses that may continue to operate, and/or restrictions on the types of construction projects that may continue. As a result, a number of the Company's tenants temporarily closed their offices or clinical space or operated on a reduced basis in response to government requirements or recommendations. Many of these restrictions have been lifted, but could be reimposed. In response to these disruptions, the Company provided some of its tenants with deferred rent arrangements. Through November 2, 2020, the Company has collected more than 99% of second and third quarter 2020 aggregate tenant billings. The Company has collected 96% of total scheduled deferral payments in the third quarter of 2020. In addition, the Company has remaining various forms of rent deferrals outstanding representing approximately $1.2 million, or less than 1% of second and third quarter 2020 aggregate tenant billings. The tenant deferral agreements generally require the deferred amounts to be repaid by the fourth quarter of 2020.
If tenants are unable to timely repay, or repay at all, deferred rent, if they request additional rent deferrals or abatements, decide not to renew leases, or renew leases at lower cash leasing spreads (See “Expiring Leases” below), the impact on the Company’s results of operations and financial condition could be material. In the second quarter of 2020, the Company recognized an approximately $0.7 million general reserve against the deferred rent balance. Following positive collection trends in the third quarter of 2020, the Company released approximately $0.3 million of the general reserve. As of September 30, 2020, the Company had a remaining general reserve of $0.4 million against an approximate $1.7 million deferred rent balance.
At September 30, 2020, the Company had available $882.6 million in liquidity (See “Sources and Uses of Cash” and “Financing Activities” below) and no significant debt maturities prior to 2023. In addition, the Company has entered into forward equity agreements that have expected proceeds of up to approximately $112.0 million, before the costs of borrowing, that can be settled at the Company's election anytime through October 2021. The COVID-19 pandemic has affected the availability and cost of capital and may continue to do so for some time. Management believes that the Company currently has adequate liquidity to operate its business without significant disruption. However, if the pandemic continues to have an impact on the availability and cost of capital, the Company’s business could be materially affected.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, borrowings under the Company's UnsecuredAmended and Restated Credit FacilityAgreement, dated as of May 31, 2019, as amended (the "Unsecured Credit Facility") and the Amended and Restated Term Loan Agreement, dated as of May 31, 2019, as amended (the "Term Loan Agreement"), proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. As of September 30, 2020,2021, the Company had $700.0$609.5 million available to be drawn on its Unsecured Credit Facility and $182.6$16.0 million in cash and restricted cash. In addition, the Company has entered into forward equity agreements that have expected gross proceeds of up to approximately $112.0$115.9 million, beforedepending on the coststiming of borrowing, that can be settled at the Company's election anytime through October 2021.settlement.
The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and the cash flowliquidity sources described above. The Company had unencumbered real estate assets with a gross book value of approximately $4.1$4.6 billion at September 30, 2020,2021, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.
Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 20202021 were approximately $259.9$364.7 million. Below is a summary of significant investing activities.
2021 Company Acquisitions
The following table details the Company's acquisitions for the nine months ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | |
Dollars in millions | HEALTH SYSTEM AFFILIATION | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | CAP RATE | MILES TO CAMPUS |
Los Angeles, CA | MemorialCare Health | 1/3/20 | $ | 42.0 | | 86,986 | 5.3 | % | 0.14 |
Atlanta, GA | Wellstar Health System | 2/13/20 | 12.0 | | 64,624 | | 5.6 | % | 0.10 | |
Raleigh, NC | WakeMed Health | 2/25/20 | 6.3 | | 15,964 | | 6.7 | % | 0.04 | |
Colorado Springs, CO | None | 3/9/20 | 8.2 | | 34,210 | | 6.5 | % | 1.60 | |
Denver, CO 1 | UCHealth | 3/13/20 | 33.5 | | 136,994 | | 6.1 | % | 0.24 | |
San Diego, CA | Palomar Health | 7/1/20 | 16.7 | | 46,083 | | 5.9 | % | 0.04 | |
Los Angeles, CA | Cedars-Sinai/Huntington | 7/17/20 | 35.0 | | 49,785 | | 5.4 | % | 0.11 | |
Seattle, WA | MultiCare Health System | 7/23/20 | 11.0 | | 21,309 | | 5.6 | % | 0.06 | |
Atlanta, GA | Wellstar Health System | 7/31/20 | 20.5 | | 48,145 | | 6.2 | % | 0.13 | |
Houston, TX | Memorial Hermann Health | 9/24/20 | 11.0 | | 40,235 | | 5.6 | % | 0.03 | |
Los Angeles, CA | Providence St. Joseph Health | 9/28/20 | 14.0 | | 24,252 | | 5.6 | % | 0.03 | |
| | | | | | |
Total real estate acquisitions | | $ | 210.2 | | 568,587 | | 5.7 | % | |
Land acquisition 2 | | | 1.6 | | — | | | |
Land acquisition 3 | | | 1.0 | | — | | | |
| | | $ | 212.8 | | 568,587 | | | |
| | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS |
San Diego, CA 2 | Scripps Health/UCSD | 1/7/21 | $ | 17,150 | | 22,461 | 0.02 |
Dallas, TX 3 | Baylor Scott & White Health | 2/1/21 | 22,515 | | 121,709 | | 0.00 |
Atlanta, GA 3 | Wellstar Health System | 2/17/21 | 9,800 | | 44,567 | | 0.19 |
Washington, D.C. | Sentara Healthcare | 3/3/21 | 12,750 | | 26,496 | | 0.09 |
Houston, TX | Houston Methodist | 5/14/21 | 13,500 | | 45,393 | | 0.03 |
San Diego, CA 4 | Palomar Health | 5/28/21 | 102,650 | | 160,394 | | 0.00 |
Greensboro, NC | Cone Health | 6/28/21 | 9,390 | | 25,168 | | 0.60 |
Baltimore, MD | None | 6/29/21 | 14,600 | | 33,316 | | 1.50 |
Denver, CO 5 | Centura Health (AdventHealth) | 7/16/21 | 70,426 | | 259,555 | | 0.00 |
Greensboro, NC 2 | Cone Health | 7/19/21 | 6,400 | | 18,119 | | 0.18 |
Colorado Springs, CO | Centura Health (CommonSpirit) | 7/27/21 | 33,400 | | 69,526 | | 0.00 |
Birmingham, AL | Community Health Systems | 8/19/21 | 9,250 | | 29,942 | | 0.24 |
Raleigh, NC | WakeMed Health | 9/20/21 | 5,780 | | 18,280 | | 0.70 |
Denver, CO | Centura Health (AdventHealth) | 9/22/21 | 20,250 | | 83,604 | | 0.00 |
Raleigh, NC | WakeMed Health | 9/30/21 | 10,000 | | 29,178 | | 0.22 |
| | | | | |
| | | | | |
| | | | | |
Total real estate acquisitions | | $ | 357,861 | | 987,708 | | |
| | | | | |
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus.
2Represents a single-tenant property.
3Includes 2 properties.
4The Company accounted for this transaction as a financing receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more information.
5Includes three properties.
2
2021 TIAA Joint Venture Acquisitions
The following table details the TIAA Joint Venture's acquisitions for the nine months ended September 30, 2021:
| | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | | MILES TO CAMPUS | COMPANY OWNERSHIP % |
Denver, CO | HCA | 3/30/21 | $ | 14,375 | | 59,359 | | 0.60 | 50 | % |
Colorado Springs, CO | None | 4/1/21 | 7,200 | | 27,510 | | | 4.70 | 50 | % |
Los Angeles, CA | MemorialCare Health | 4/8/21 | 31,335 | | 57,573 | | | 0.00 | 50 | % |
San Antonio, TX | CHRISTUS Health/Baptist Health | 4/30/21 | 13,600 | | 45,000 | | | 0.90 | 50 | % |
Los Angeles, CA | MemorialCare Health | 5/10/21 | 24,600 | | 73,078 | | | 0.00 | 50 | % |
Colorado Springs, CO 2 | Centura Health (CommonSpirit) | 7/27/21 | 9,133 | | 23,956 | | | 1.90 | 50 | % |
| | | | | | | |
| | | | | | | |
Total TIAA Joint Venture real estate acquisitions | | $ | 100,243 | | 286,476 | | | | |
1The Company acquired land parcels under four existingIncludes buildings (previously ground leased with thelocated on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital system).campus.
32The Company acquired aIncludes purchase of an adjoining 3.0 acre land parcel under an existing building (previously ground leased). The building and land were disposedparcel.
Subsequent to September 30, 2020.2021, the TIAA Joint Venture acquired the following property:
| | | | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | | | SQUARE FOOTAGE | MILES TO CAMPUS | COMPANY OWNERSHIP % |
Denver, CO | None | 10/21/21 | $ | 23,000 | | | | 57,257 | | 3.10 | 50 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus.
Subsequent Acquisition
On October 7, 2020 the Company acquired a 36,720 square foot medical office building in Colorado Springs, CO for a purchase price of $8.9 million.
20202021 Dispositions
The Company disposed of three11 properties during the nine months ended September 30, 20202021 for a total sales price of $249.5$114.6 million, including cash proceeds of $249.3 million and $0.2 million of closing costs and related adjustments.$112.0 million. The following table details these dispositions for the nine months ended September 30, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | | Date Disposed | Sales Price | Square Footage | 3Q 2020 NOI | Disposition Cap Rate | Property Type |
Springfield, MO | | 7/30/20 | $ | 138.0 | | 186,000 | $ | 0.8 | | 7.5 | % | SF |
Oklahoma City, OK | | 7/30/20 | 106.5 | | 200,000 | | 0.6 | | 7.5 | % | MOB |
Miami, FL | | 9/30/20 | 5.0 | | 26,000 | | — | | 3.9 | % | MOB |
Total dispositions | | $ | 249.5 | | 412,000 | | $ | 1.4 | | 7.4 | % | |
| | | | | | | | | | | | | | | | |
Dollars in thousands | | Date Disposed | Sales Price | Square Footage | | |
Los Angeles, CA 1,2 | | 3/11/21 | $ | 26,000 | | 73,906 | | |
Atlanta, GA 2 | | 4/12/21 | 8,050 | | 19,732 | | |
Richmond, VA 2,5 | | 5/18/21 | 52,000 | | 142,856 | | |
Gadsden, AL 2,3 | | 5/19/21 | 5,500 | | 120,192 | | |
Dallas, TX 2,4 | | 7/9/21 | 23,000 | | 190,160 | | |
| | | | | | |
| | | | | | |
Total dispositions | | $ | 114,550 | | 546,846 | | | |
1MOB = Medical office building; SF = Surgical facilityIncludes two properties sold to a single purchaser in two transactions which occurred on March 5 and March 11, 2021.
2Previously classified as held for sale.
3Includes three properties.
4Includes four properties and an associated land parcel sold to a single purchaser in two transactions.
5 The Company deferred the tax gain through a 1031 exchange and reinvested the proceeds.
Subsequent Disposition
On October 28, 2021, the Company disposed of a 95,436 square foot medical office building located in Chicago, Illinois. The sales price was $13.3 million, and the Company's net investment in the building as of September 30, 2021 was approximately $12.5 million and was included in assets held for sale. During the third quarter of 2021, an impairment charge of $10.7 million was recorded based on the contractual sales price less estimated costs to sell.
Capital Funding
During the nine months ended September 30, 2020,2021, the Company funded the following:
•$17.321.6 million toward the following development and redevelopment of properties;properties:
◦Memphis, Tennessee redevelopment totaled $9.4 million;
◦Dallas, Texas redevelopment totaled $1.7 million;
◦Tacoma, Washington redevelopment totaled $1.7 million;
◦reposition properties capital and tenant improvements totaled $1.5 million; and
◦tenant improvement funding for previously completed projects totaled $7.3 million.
•$14.214.5 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$17.416.2 million toward second generation tenant improvements; and
•$12.813.5 million toward capital expenditures.
Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 20202021 were approximately $30.3$195.1 million. Inflows from equity proceeds related to the Company's common stock issuances and net borrowings totaled $160.5$328.1 million, net of issuance costs incurred. Aggregate cash outflows totaled approximately $130.2$133.0 million primarily associated with dividends paid to common stockholders. See Notes 4 and 7 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities.
Common Stock Issuances
At-The-Market Equity Offering Program
On February 14, 2020,August 6, 2021, the Company entered into salesequity distribution agreements with six investmenteleven investment banks to allow salesfor issuance and sale under its at-the-market equity offering program of up to an aggregate of $500.0$750.0 million of common stock. The Company sold 1,268,237 shares underCompany's previous at-the-market equity program to sell up to an aggregate of $500.0 million ended in August 2021. The following table details the Company's at-the market equity offering program during the nine months ended September 30, 2020. The sales generated $39.9 million in net proceeds at prices to the public ranging from $30.50 to $36.15 per share (weighted average of $31.86 per share). The sales occurred during the following time periods:
•During the first quarter of 2020, the Company sold 196,250 shares generating approximately $7.0 million in net proceeds at prices to the public ranging from $33.00 to $36.15 per share (weighted average of $36.09 per share).
•During the second quarter of 2020, the Company sold 1,071,987 shares generating approximately $32.9 million in net proceeds at prices to the public ranging from $30.50 to $31.29 per share (weighted average of $31.08 per share).
In addition, the Company has entered into three forward equity agreements totaling 3.6 million shares at a weighted average price of $31.30 per share:at-the-market activity:
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE SALE PRICE per share | FORWARD SHARE CONTRACTS | SHARES SETTLED | SHARES REMAINING TO BE SETTLED | NET PROCEEDS in millions |
Balance at December 31, 2020 | $ | — | | — | | — | | 1,823,259 | | $ | — | |
1Q 2021 | $ | 30.09 | | 215,532 | | 2,038,791 | | — | | $ | 62.7 | |
2Q 2021 | $ | 30.99 | | 5,835,400 | | 3,827,971 | | 2,007,429 | | $ | 116.1 | |
3Q 2021 | $ | 31.06 | | 1,670,186 | | 2,007,429 | | 1,670,186 | | $ | 61.3 | |
October 2021 1 | $ | 31.34 | | 2,042,562 | | — | | 3,712,748 | | $ | — | |
| | | | | |
•1In the second quarter of 2020, the Company entered into aIncludes forward share activity from August to October 2021 for trade confirmations dated in October 2021.
The 3.7 million shares remaining to be settled in forward equity agreementarrangements are expected to be settled by October 2022 for a totalexpected gross proceeds of 1,579,371 shares at a weighted average$115.9 million, depending on the timing of settlement. Expected net proceeds are calculated by reducing the initial price of $31.66 per share, subject to by adjustments as provided in the forward equity agreements. This agreement matures in June 2021.
•In the third quarter of 2020, the Company entered into a forward equity agreementarrangements. After accounting for a total of 764,472 shares at a weighted average price of $31.84 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in July 2021.
•In the fourth quarter of 2020, the Company entered into a forward equity agreement for a total of 1,235,129 shares at a weighted average price of $30.52 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in October 2021.
After taking into account the forward equity contracts discussed above,these settlements, the Company has approximately $347.6$686.0 million remaining available to be sold under the current salesequity distribution agreements at the date of this filing.
Debt Activity
On February 3, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.10% per annum with an outstanding principal of $5.9 million. The mortgage note encumbered a 68,860 square foot property in Oklahoma.
On March 4, 2020, the Company issued $300.0 million of Senior Notes due 2030 in a registered public offering. The Senior Notes due 2030 bear interest at 2.40%, payable semi-annually on March 15 and September 15, beginning September 15, 2020, and are due on March 15, 2030, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.0 million and the Company incurred approximately $2.8 million in debt issuance costs. Concurrent with this transaction, the Company settled two treasury rate locks for $4.3 million. Inclusive of the discount, debt issuance costs and settlement of the treasury rate locks, the effective interest rate was 2.71%. The Senior Notes due 2030 have various financial covenants that are required to be met on a quarterly and annual basis.
On May 4, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.74% per annum with an outstanding principal of $0.3 million. The mortgage note encumbered a 83,318 square foot property in Iowa.
On May 29, 2020, the Company borrowed $150.0 million from its unsecured term loan due 2026.
On June 2, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.44% per annum with an outstanding principal of $12.6 million. The mortgage note encumbered a 67,510 square foot property in Washington.
On June 25, 2020, the Company repaid in full three mortgage notes bearing interest at rates of 5.63%, 6.63% and 6.88% per annum with outstanding principal of $0.5 million, $2.8 million, and $7.0 million, respectively. The mortgage notes encumbered a 60,476 square foot property in Minnesota.
The Company has outstanding interest rate derivatives totaling $175.0 million to hedge one-month LIBOR. The following details the amount and rate of each swap (dollars in thousands):
| | | | | | | | | | | |
EFFECTIVE DATE | AMOUNT | WEIGHTED AVERAGE RATE | EXPIRATION DATE |
December 18, 2017 | $ | 25,000 | | 2.18 | % | December 16, 2022 |
February 1, 2018 | 50,000 | | 2.46 | % | December 16, 2022 |
May 1, 2019 | 50,000 | | 2.33 | % | May 1, 2026 |
June 3, 2019 | 50,000 | | 2.13 | % | May 1, 2026 |
| $ | 175,000 | | 2.29 | % | |
On June 1, 2021, the Company entered into a second amendment to the Term Loan Agreement that reduced the current interest rate on the $150 million portion of the loan due 2026 from LIBOR plus a margin rate ranging from 1.45% to 2.40% (previously 1.60%) to LIBOR plus a margin rate ranging from 0.80% to 1.60% (0.95% as of September 30, 2021). With the amendment, the Company paid up front fees of approximately $0.5 million, of which $0.2 million was paid to lenders, capitalized and amortized over the remainder of the term of the loan, and $0.3 million was paid to lenders as administration fees and was expensed in the second quarter of 2021. In addition, the amendment added a sustainability metric incentive tied to increasing the Company's properties with green building certifications.
Subsequent Changes in Debt ActivityStructure
On OctoberNovember 1, 2020,2021, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.47%4.69% per annum with an outstanding principal of $4.2$11.1 million. The mortgage note encumbered a 40,17162,379 square foot property in Georgia.
On October 2, 2020, the Company issued $300.0 million of Senior Notes due 2031 in a registered public offering. The Senior Notes due 2031 bear interest at 2.05%, payable semi-annually on March 15 and September 15, beginning March 15, 2021, and are due on March 15, 2031, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.4 million and the Company incurred approximately $2.8 million in debt issuance costs. Inclusive of the discount and debt issuance costs, the effective interest rate was 2.24%. The Senior Notes due 2031 have various financial covenants that are required to be met on a quarterly and annual basis.
On October 19, 2020, the Company redeemed its Senior Notes due 2023. The aggregate redemption price of $270.5 million consisted of outstanding principal of $250.0 million, accrued interest of $0.1 million, and a "make-whole" amount of approximately $20.4 million for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.1 million was written off upon redemption. In October 2020, the Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to this redemption.Maryland.
Operating Activities
Cash flows provided by operating activities increaseddecreased from $158.5 million for the nine months ended September 30, 2019 to $411.6 million for the nine months ended September 30, 2020.2020 to $170.3 million for the nine months ended September 30, 2021. The nine months ended September 30, 2020 includes proceeds from the disposition of sales-type lease properties totaling $244.5 million. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses. Also included in operating cash flows was approximately $244.4 million of proceeds from the dispositions of sale-type lease properties.
The Company may, from time to time, sell properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
New Accounting Pronouncements
See Note 1 to the Company's Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,2020, below are some of the factors and trends that management believes may impact future operations of the Company.
COVID-19 Pandemic
For information on the ways that the COVID-19 pandemic is impacting the Company and its tenants, see "COVID-19 Update" above.
Expiring Leases
The Company expects that approximately 15% to 20% of the leases in its multi-tenanted portfolio will expire each year in the ordinary course of business. There are 211193 leases totaling 0.80.6 million square feet in the Company's multi-tenant portfolio that will expire during the remainder of 2020.2021. Approximately 85%91% of the leases expiring in 20202021 are in buildings located on or adjacent to hospital campuses, are distributed throughout the portfolio, and are not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of multi-tenant property tenants upon expiration, and the retention ratio for the first nine months of the year has beenwas within this range.
Previously included in the 2020 lease expirations was a 111,000 square foot fitness center leased by Baylor Scott & White Health. The fitness center is located in a 217,000 square foot on-campus medical office building. A new operator, Cowboys Fit, executed an approximately 14-year lease for a reconfigured 52,000 square foot fitness center.
Baylor has executed a temporary lease at a reduced rental rate to continue to operate the existing fitness center until the construction of the new center is complete. Once the Baylor lease expires, the remaining 59,000 square feet is expected to be redeveloped into clinical space. In addition, the Company plans to upgrade the common areas, bathrooms, and the exterior of the building.
Previously included in the 2020 lease expirations was the July 31 expiration of a 62,000 square foot office lease. A telecommunication company occupied three floors of a 145,000 square foot office building and vacated upon expiration of the lease. The Company recognized revenue of approximately $0.1 million related to this lease in the third quarter of 2020. The Company intends to reposition the property, converting the vacated space from full floor to multi-tenant configurations. The Company has begun marketing the space and has executed a 10,000 square foot lease.
The Company had an 83,000 square foot, single-tenant net leased, on-campus medical office building with a lease term that expired in the second quarter of 2020. The Company has been in discussions about a long-term lease renewal, but given the COVID-19 pandemic, executed a 6-month extension through December 31, 2020 to allow more time to finalize a long-term lease agreement.
Operating Expenses
The Company historically has historically experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company historically has historically incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of September 30, 2020,2021, leases for 89%90% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with 31%32% having modified gross lease structures and 58% having net lease structures.
Purchase Options
Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):
| | | NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF SEPTEMBER 30, 2020 | | NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF SEPTEMBER 30, 2021 |
YEAR EXERCISABLE | YEAR EXERCISABLE | MOB | INPATIENT | FAIR MARKET VALUE METHOD 1 | NON FAIR MARKET VALUE METHOD 2 | TOTAL | YEAR EXERCISABLE | MOB | INPATIENT | FAIR MARKET VALUE METHOD 1 | NON FAIR MARKET VALUE METHOD 2 | TOTAL |
Current 3 | Current 3 | 3 | | 1 | | $ | 96,865 | | $ | — | | $ | 96,865 | | Current 3 | 2 | | 1 | | $ | 54,543 | | $ | — | | $ | 54,543 | |
2021 | 1 | | — | | — | | 14,984 | | 14,984 | | |
2022 | 2022 | — | | — | | — | | — | | — | | 2022 | 1 | | — | | — | | 14,984 | | 14,984 | |
2023 | 2023 | — | | — | | — | | — | | — | | 2023 | — | | — | | — | | — | | — | |
2024 | 2024 | — | | — | | — | | — | | — | | 2024 | — | | — | | — | | — | | — | |
2025 | 2025 | 4 | | — | | 48,165 | | 19,459 | | 67,624 | | 2025 | 4 | | — | | 48,241 | | 19,459 | | 67,700 | |
2026 | 2026 | — | | — | | — | | — | | — | | 2026 | 1 | | — | | 18,164 | | — | | 18,164 | |
2027 | 2027 | — | | — | | — | | — | | — | | 2027 | — | | — | | — | | — | | — | |
2028 | 2028 | 1 | | — | | 43,961 | | — | | 43,961 | | 2028 | 1 | | — | | 41,082 | | — | | 41,082 | |
2029 | 2029 | 1 | | — | | 26,494 | | — | | 26,494 | | 2029 | 1 | | — | | 26,501 | | — | | 26,501 | |
2030 and thereafter | 4 | | — | | 101,118 | | — | | 101,118 | | |
2030 | | 2030 | — | | — | | — | | — | | — | |
2031 and thereafter 4 | | 2031 and thereafter 4 | 9 | | — | | 298,260 | | — | | 298,260 | |
Total | Total | 14 | | 1 | | $ | 316,603 | | $ | 34,443 | | $ | 351,046 | | Total | 19 | | 1 | | $ | 486,791 | | $ | 34,443 | | $ | 521,234 | |
1The purchase option price includes a fair market value component that is determined by an appraisal process.
2Includes properties with stated purchase prices or prices based on fixed capitalization rates.
3These purchase options have been exercisable for an average of 12.114.1 years.
4Includes the medical office building that is recorded in the line item Investment in financing receivable, net on the Company's Condensed Consolidated Balance Sheet.
Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.”
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-defined normalizing items to evaluate operating performance. FAD is presented by adding to Normalized FFO non-real estate depreciation and amortization, non-cash financing receivable amortization, loan origination cost amortization, deferred financing fees amortization, stock-based compensation expense and provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. FFO, Normalized FFO and FAD should not be considered as an alternative to net income as an indicator of the Company's financial performance or to cash flow from operating activities as an indicator of the Company's liquidity. FFO, Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.
Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. The table below reconciles net income to FFO, Normalized FFO and FAD for the three and nine months ended September 30, 2020 and 2019.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
Amounts in thousands, except per share data | 2020 | 2019 | 2020 | 2019 |
Net income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | |
(Gain) on sales of real estate assets | (2,177) | | (200) | | (70,395) | | (5,065) | |
Impairment of real estate assets | — | | — | | — | | 5,610 | |
Real estate depreciation and amortization | 48,295 | | 45,926 | | 145,564 | | 133,993 | |
FFO attributable to common stockholders | $ | 54,348 | | $ | 48,327 | | $ | 163,227 | | $ | 146,513 | |
Acquisition and pursuit costs 1 | 440 | | 501 | | 1,621 | | 1,227 | |
Lease intangible amortization | (35) | | 5 | | 694 | | 143 | |
Accelerated Stock Awards | — | | 2,854 | | — | | 2,854 | |
Debt financing costs | — | | — | | — | | 760 | |
Normalized FFO attributable to common stockholders | $ | 54,753 | | $ | 51,687 | | $ | 165,542 | | $ | 151,497 | |
Non-real estate depreciation and amortization | 785 | | 838 | | 2,430 | | 2,430 | |
Non-cash interest expense amortization 2 | 934 | | 727 | | 2,715 | | 2,136 | |
Provision for bad debt, net | (144) | | (32) | | 718 | | 43 | |
Straight-line rent, net | (535) | | (379) | | (1,577) | | (650) | |
Stock-based compensation 3 | 2,445 | | 2,375 | | 7,449 | | 7,386 | |
Normalized FFO adjusted for non-cash items | $ | 58,238 | | $ | 55,216 | | $ | 177,277 | | $ | 162,842 | |
2nd generation TI | (5,323) | | (6,114) | | (17,368) | | (16,564) | |
Leasing commissions paid | (1,999) | | (2,697) | | (7,081) | | (6,359) | |
Capital additions | (4,580) | | (3,543) | | (12,827) | | (11,998) | |
FAD | $ | 46,336 | | $ | 42,862 | | $ | 140,001 | | $ | 127,921 | |
FFO per common share - diluted | $ | 0.40 | | $ | 0.37 | | $ | 1.21 | | $ | 1.15 | |
Normalized FFO per common share - diluted | $ | 0.41 | | $ | 0.40 | | $ | 1.23 | | $ | 1.19 | |
FFO weighted average common shares outstanding - diluted 4 | 135,159 | | 129,015 | | 134,537 | | 127,424 | |
and FAD for the three and nine months ended September 30, 2021 and 2020. | | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
Amounts in thousands, except per share data | 2021 | 2020 | 2021 | 2020 |
Net income (loss) | $ | (2,066) | | $ | 8,230 | | $ | 45,052 | | $ | 88,058 | |
Gain on sales of real estate properties | (1,186) | | (2,177) | | (41,046) | | (70,395) | |
Impairment of real estate properties | 10,669 | | — | | 16,581 | | — | |
Real estate depreciation and amortization | 52,390 | | 48,215 | | 154,899 | | 145,324 | |
Proportionate share of unconsolidated joint ventures | 1,558 | | 80 | | 3,726 | | 240 | |
FFO attributable to common stockholders | $ | 61,365 | | $ | 54,348 | | $ | 179,212 | | $ | 163,227 | |
Acquisition and pursuit costs 1 | 974 | | 440 | | 2,388 | | 1,621 | |
Lease intangible amortization | 48 | | (35) | | (30) | | 694 | |
Forfeited earnest money received | — | | — | | (500) | | — | |
Debt financing costs | — | | — | | 283 | | — | |
Unconsolidated JV normalizing items 2 | 54 | | — | | 136 | | — | |
Normalized FFO attributable to common stockholders | $ | 62,441 | | $ | 54,753 | | $ | 181,489 | | $ | 165,542 | |
Non-real estate depreciation and amortization | 586 | | 785 | | 1,900 | | 2,430 | |
Non-cash interest amortization 3 | 720 | | 934 | | 2,511 | | 2,715 | |
Provision for bad debt, net | 25 | | (144) | | 3 | | 718 | |
Straight-line rent, net | (1,171) | | (543) | | (3,459) | | (1,600) | |
Stock-based compensation | 2,538 | | 2,445 | | 8,183 | | 7,449 | |
Unconsolidated JV non-cash items 4 | (341) | | 8 | | (1,051) | | 23 | |
Normalized FFO adjusted for non-cash items | $ | 64,798 | | $ | 58,238 | | $ | 189,576 | | $ | 177,277 | |
2nd generation TI | (6,219) | | (5,323) | | (16,156) | | (17,368) | |
Leasing commissions paid | (4,531) | | (1,999) | | (9,528) | | (7,081) | |
Capital additions | (5,443) | | (4,580) | | (13,539) | | (12,827) | |
FAD | $ | 48,605 | | $ | 46,336 | | $ | 150,353 | | $ | 140,001 | |
FFO per common share - diluted | $ | 0.42 | | $ | 0.40 | | $ | 1.26 | | $ | 1.21 | |
Normalized FFO per common share - diluted | $ | 0.43 | | $ | 0.41 | | $ | 1.27 | | $ | 1.23 | |
FFO weighted average common shares outstanding - diluted 5 | 144,807 | | 135,159 | | 142,488 | | 134,537 | |
1Acquisition and pursuit costs include third partythird-party and travel costs related to the pursuit of acquisitions and developments.
2Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures.
3Includes the amortization of deferred financing costs, discounts and premiums.
3The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the acceleration of his outstanding nonvested share-based awardspremiums, and associated taxes.non-cash financing receivable amortization.
4Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.
5The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 801,382911,594 and 800,370,874,189, respectively for the three and nine months ended September 30, 2020.2021.
Cash NOINet Operating Income ("NOI") and Same Store Cash NOI
Cash NOI and Same Store Cash NOI are key performance indicators. Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results. The Company defines Cash NOI as rental income, interest from financing receivables and property lease guaranty income less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, financing receivable amortization, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results.
Same Store Cash NOI compares Cash NOI for stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented and include redevelopment projects. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, reposition properties and newly developed properties. The Company utilizes the reposition classification for properties experiencing a shift in strategic direction. Such a shift can occur for a variety of reasons, including a substantial change in the use of the asset, a change in strategy or closure of a
neighboring hospital, or significant property damage. Such properties may require enhanced management, leasing, capital needs or a disposition strategy that differs from the rest of the portfolio. To identify properties exhibiting these reposition characteristics, the Company applies the following Company-defined criteria:
•Properties having less than 60% occupancy that is expected to last at least two quarters;
•Properties that experience a loss of occupancy over 30% in a single quarter; or
•Properties with negative net operating incomeNOI that is expected to last at least two quarters.
Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Newly developed properties will be included in the same store pool eight full quarters after substantial completion. Any additional square footage created by redevelopment projects at a same store property is included in the same store pool immediately upon completion. Any property included in the reposition property group will be included in the same store analysis once occupancy has increased to 60% or greater with positive net operating incomeNOI and has remained at that level for eight full quarters.
During the third quarter of 2020,2021, the Company's reposition pool increaseddecreased by one property to a total of 11 properties. Twosix properties wereas a result of the property being reclassified from reposition to held for sale, two properties were reclassified into reposition pursuant to the Company-defined criteria outlined above and one property that is undergoing a shift in strategic direction as a significant portion of the building is being repurposed from fitness space to clinical space was reclassified from same store to reposition . This 217,000 square foot on-campus medical office building included a 111,000 square foot fitness center previously leased by Baylor Scott & White Health. A new operator, Cowboys Fit, executed an approximately 14-year lease for a reconfigured 52,000 square foot fitness center. Baylor has executed a temporary lease for the remaining 59,000 square feet at a reduced rental rate to continue to operate the existing fitness center until the construction of the new center is complete. Once the Baylor lease expires, the remaining 59,000 square feet is expected to be redeveloped into clinical space. In addition, the Company plans to upgrade the common areas, bathrooms, and the exterior of the building.store.
The following table reflects the Company's same store cash NOI for the three months ended September 30, 20202021 and 2019.2020.
| | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS INVESTMENT at September 30, 2020 | SAME STORE CASH NOI for the three months ended September 30, |
Dollars in thousands | 2020 | 2019 |
Multi-tenant properties | 156 | | $ | 3,237,143 | | $ | 57,663 | | $ | 56,317 | |
Single-tenant net lease properties | 12 | | 257,229 | | 6,033 | | 5,870 | |
Total | 168 | | $ | 3,494,372 | | $ | 63,696 | | $ | 62,187 | |
| | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS INVESTMENT at September 30, 2021 | SAME STORE CASH NOI for the three months ended September 30, |
Dollars in thousands | 2021 | 2020 |
Same store properties | 178 | | $ | 3,786,406 | | $ | 68,062 | | $ | 66,874 | |
| | | | |
| | | | |
The following tables reconcile net income to same store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended September 30, 20202021 and 2019:2020:
Reconciliation of Same Store Cash NOI
| | | THREE MONTHS ENDED SEPTEMBER 30, | | THREE MONTHS ENDED SEPTEMBER 30, |
Dollars in thousands | Dollars in thousands | 2020 | 2019 | Dollars in thousands | 2021 | 2020 |
Net income | $ | 8,230 | | $ | 2,601 | | |
Net income (loss) | | Net income (loss) | $ | (2,066) | | $ | 8,230 | |
| Other income (expense) | Other income (expense) | 11,969 | | 13,981 | | Other income (expense) | 23,000 | | 11,969 | |
General and administrative expense | General and administrative expense | 7,299 | | 10,802 | | General and administrative expense | 8,207 | | 7,299 | |
Depreciation and amortization expense | Depreciation and amortization expense | 47,143 | | 45,137 | | Depreciation and amortization expense | 50,999 | | 47,143 | |
Other expenses 1 | Other expenses 1 | 2,737 | | 2,462 | | Other expenses 1 | 3,193 | | 2,364 | |
Straight-line rent revenue | Straight-line rent revenue | (915) | | (770) | | Straight-line rent revenue | (1,170) | | (542) | |
Joint venture properties | | Joint venture properties | 1,210 | | 19 | |
Other revenue 2 | Other revenue 2 | (3,062) | | (1,726) | | Other revenue 2 | (2,043) | | (1,609) | |
Cash NOI | Cash NOI | 73,401 | | 72,487 | | Cash NOI | 81,330 | | 74,873 | |
Cash NOI not included in same store | Cash NOI not included in same store | (9,705) | | (10,300) | | Cash NOI not included in same store | (13,268) | | (7,999) | |
Same store cash NOI | Same store cash NOI | 63,696 | | 62,187 | | Same store cash NOI | 68,062 | | 66,874 | |
Reposition NOI | Reposition NOI | 1,358 | | 1,660 | | Reposition NOI | 691 | | 954 | |
Same store and reposition cash NOI | Same store and reposition cash NOI | $ | 65,054 | | $ | 63,847 | | Same store and reposition cash NOI | $ | 68,753 | | $ | 67,828 | |
1Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.
2Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.
Reconciliation of Same Store Properties
| | | AS OF SEPTEMBER 30, 2020 | | AS OF SEPTEMBER 30, 2021 |
| PROPERTY COUNT | GROSS INVESTMENT | SQUARE FEET | OCCUPANCY | |
Dollars in thousands | | Dollars in thousands | PROPERTY COUNT | GROSS INVESTMENT | SQUARE FEET | OCCUPANCY |
Same store properties | Same store properties | 168 | | $ | 3,494,372 | | 12,795,403 | | 88.4 | % | Same store properties | 178 | | $ | 3,786,406 | | 13,426,252 | | 88.4 | % |
Acquisitions | Acquisitions | 31 | | 647,974 | | 1,667,990 | | 91.4 | % | Acquisitions | 49 | | 895,660 | | 2,396,693 | | 89.8 | % |
Development completions | Development completions | 1 | | 51,889 | | 151,031 | | 60.5 | % | Development completions | 2 | | 83,452 | | 261,914 | | 72.3 | % |
Reposition | Reposition | 11 | | 142,381 | | 859,004 | | 62.1 | % | Reposition | 6 | | 101,672 | | 668,889 | | 54.8 | % |
Total owned real estate properties | Total owned real estate properties | 211 | | $ | 4,336,616 | | 15,473,428 | | 87.0 | % | Total owned real estate properties | 235 | | $ | 4,867,190 | | 16,753,748 | | 87.0 | % |
Results of Operations
Three Months Ended September 30, 20202021 Compared to Three Months Ended September 30, 20192020
The Company’s results of operations for the three months ended September 30, 20202021 compared to the same period in 20192020 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Total revenuesRental income increased $5.5$8.4 million, or 4.6%6.8%, to approximately $125.3 million for the three months ended September 30, 20202021 compared to $119.8 million in the prior year period. This increase is comprised of the following:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | 2020 | 2019 | $ | % |
Property operating | $ | 114,921 | | $ | 105,805 | | $ | 9,116 | | 8.6 | % |
Single-tenant net lease | 7,548 | | 11,165 | | (3,617) | | (32.4) | % |
Straight-line rent | 915 | | 770 | | 145 | | 18.8 | % |
Rental income | 123,384 | | 117,740 | | 5,644 | | 4.8 | % |
Other operating | 1,868 | | 2,059 | | (191) | | (9.3) | % |
Total revenues | $ | 125,252 | | $ | 119,799 | | $ | 5,453 | | 4.6 | % |
•Acquisitions in 2020 and 2021 contributed $10.0 million.•Leasing activity, including contractual rent increases, contributed $2.6 million.
•Dispositions in 2020 and 2021 resulted in a decrease of $4.2 million.
Interest from a financing receivable, net totaled $1.9 million for the three months ended September 30, 2021. The Company acquired a property in the second quarter of 2021 under a sale leaseback transaction. The sale leaseback did not qualify for sale accounting as a result of a purchase option included in the tenant lease. Therefore, the Company accounted for the transaction as a financing receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more information.
Other operating income increased $1.1 million, or 58.9%, from the prior year period primarily as a result of variable parking and asset management fees.
Expenses
Property operating revenueexpenses increased $9.1$5.3 million, or 8.6%10.7%, fromfor the three months ended September 30, 2021 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 20192020 and 2020 contributed $7.42021 resulted in an increase of $4.9 million.
•A development completedIncreases in 2020 contributed $0.8 million.portfolio operating expenses as follows:
•◦Leasing activity, including contractual rent increases, contributed $1.4Maintenance and repair expense of $0.6 million;
◦Utilities expense of $0.5 million;
◦Compensation expense of $0.2 million;
◦Administrative and other legal expense of $0.2 million;
◦Janitorial expense of $0.1 million;
◦Property tax expense increase of $0.1 million;
◦Insurance expense of $0.1 million.
•Dispositions in 20192020 and 20202021 resulted in a decrease of $0.5$1.4 million.
Single-tenant net lease revenue decreased $3.6General and administrative expenses increased approximately $0.9 million, or 32.4%12.4%, fromfor the three months ended September 30, 2021 compared to the prior year period primarily as a result of the following activity:
•Travel expense increases of $0.2 million.
•Incentive-based awards increases of $0.5 million.
•Compensation expense increases of $0.7 million, including $0.1 million of non-cash expense.
•Net decreases, including professional fees and other administrative costs, of $0.5 million.
Depreciation and amortization expense increased $3.9 million, or 8.2%, for the three months ended September 30, 2021 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2020 and 2021 resulted in an increase of $5.4 million.
•Various building and tenant improvement expenditures resulted in an increase of $2.4 million.
•Dispositions in 20192020 and 20202021 resulted in a decrease of $3.8$1.2 million.
•An acquisitionAssets that became fully depreciated resulted in a decrease of $2.7 million.
Other Income (Expense)
Gains on sale of real estate properties
In the third quarter of 2021, the Company recognized gains of approximately $1.2 million on the sale of four properties and a land parcel sold under a single purchase agreement.
In the third quarter of 2020, contributedthe Company recognized gains of approximately $2.2 million primarily related to the sale of one property.
Interest expense
Interest expense decreased $0.8 million, or 5.8%, for the three months ended September 30, 2021 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | 2021 | 2020 | $ | % |
Contractual interest | $ | 12,201 | | $ | 13,182 | | $ | (981) | | (7.4) | % |
Net discount/premium accretion | 50 | | 102 | | (52) | | (51.0) | % |
Deferred financing costs amortization | 713 | | 683 | | 30 | | 4.4 | % |
Interest rate swap amortization | 42 | | 42 | | — | | — | % |
Treasury hedge amortization | 107 | | 107 | | — | | — | % |
Interest cost capitalization | (34) | | (207) | | 173 | | (83.6) | % |
Right-of-use assets financing amortization | 255 | | 245 | | 10 | | 4.1 | % |
Total interest expense | $ | 13,334 | | $ | 14,154 | | $ | (820) | | (5.8) | % |
Contractual interest expense decreased $1.0 million, or 7.4%, primarily as a result of the following activity:
•The unsecured senior notes due 2031 accounted for an increase of approximately $1.5 million.
•The redemption of the unsecured senior notes due 2023 accounted for a decrease of $2.3 million.
•The Company's unsecured term loan due 2024 and unsecured term loan due 2026, net of swaps, accounted for a decrease of approximately $0.3 million.
•The Unsecured Credit Facility accounted for an increase of approximately $0.2 million.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.1 million.
•
Leasing activity contributed $0.1 million.
Impairment of Real Estate Properties
Impairment of real estate properties totaling approximately $10.7 million was recorded based on the contractual sales price of a property that was reclassified to held for sale during the third quarter of 2021.
Equity loss from unconsolidated joint ventures
The Company recognized its proportionate share of losses from the TIAA Joint Venture and its parking garage joint ventures during the third quarter of 2021. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
The Company’s results of operations for the nine months ended September 30, 2021 compared to the same period in 2020 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Straight-line rent revenueRevenues
Rental income increased $0.1$20.2 million, or 18.8% from5.5%, for the nine months ended September 30, 2021 compared to the prior year period primarily as a resultperiod. This increase is comprised of the following activity:following:
•Acquisitions in 20192020 and 20202021 contributed $0.4$27.8 million.
•A development completed in 2020 contributed $0.1$1.0 million.
•Leasing activity, including contractual rent increases, resulted in a decrease of $0.3contributed $7.0 million.
•Dispositions in 20192020 and 20202021 resulted in a decrease of $0.1$15.6 million.
Interest from financing receivable, net of $2.4 million resulted from the 2021 acquisition of a property classified as an investment in financing receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report.
Other operating income decreased $0.2increased $2.0 million, or 9.3%37.0%, from the prior year period primarily due to a reduction inresulting from variable parking revenue.
and asset management fees.
Expenses
Property operating expenses increased $3.4$12.9 million, or 7.3%8.8%, for the threenine months ended September 30, 20202021 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 20192020 and 20202021 resulted in an increase of $3.1 million.
•A development completed in 2020 resulted in an increase of $0.2 million.
•Increases in portfolio operating expenses as follows:
•Portfolio property tax expense of $0.6 million;
•Janitorial expenses of $0.2 million; and
•Portfolio insurance expense of $0.1 million.
•Maintenance and repair expense decreased $0.3 million.
•Utilities expense decreased $0.1 million.
•Dispositions in 2019 and 2020 resulted in a decrease of $0.4 million.
General and administrative expenses decreased approximately $3.5 million, or 32.4%, for the three months ended September 30, 2020 compared to the prior year period primarily as a result of the following activity:
•The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the three months ended September 30, 2019 because of the acceleration of his outstanding nonvested share-based awards and associated taxes.
•Decrease in performance-based awards of approximately $0.2 million.
•Decrease in travel expense of $0.4 million.
Depreciation and amortization expense increased $2.0 million, or 4.4%, for the three months ended September 30, 2020 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2019 and 2020 and a development in 2020 resulted in an increase of $4.2 million.
•Various building and tenant improvement expenditures resulted in an increase of $2.8 million.
•Dispositions in 2019 and 2020 resulted in a decrease of $1.6 million.
•Assets that became fully depreciated resulted in a decrease of $3.4 million.
Other income (Expense)
Gains on sale of real estate properties
In the third quarter of 2020, the Company recognized a gain of approximately $2.2 million on the sale of one property.
In the third quarter of 2019, the Company recognized gains of approximately $0.2 million on the sale of two properties.
Interest expense
Interest expense did not change significantly for the three months ended September 30, 2020 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | 2020 | 2019 | $ | % |
Contractual interest | $ | 13,182 | | $ | 13,605 | | $ | (423) | | (3.1) | % |
Net discount/premium accretion | 102 | | 72 | | 30 | | 41.7 | % |
Deferred financing costs amortization | 683 | | 613 | | 70 | | 11.4 | % |
Interest rate swap amortization | 42 | | 42 | | — | | — | % |
Treasury hedge amortization | 107 | | — | | 107 | | — | % |
Interest cost capitalization | (207) | | (347) | | 140 | | (40.3) | % |
Right-of-use assets financing amortization | 245 | | 196 | | 49 | | 25.0 | % |
Total interest expense | $ | 14,154 | | $ | 14,181 | | $ | (27) | | (0.2) | % |
Contractual interest expense decreased $0.4 million, or 3.1%, primarily due to the following activity:
•The Senior Notes due 2030 accounted for an increase of $1.8 million.
•The Term Loan due 2024 and the initial funding of the Term Loan due 2026, net of swaps, accounted for an increase of approximately $0.4 million.
•The Unsecured Credit Facility principal and rate decreases accounted for a decrease of approximately $2.3 million.
•Mortgage note assumptions and repayments accounted for a net decrease of $0.3 million.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The Company’s results of operations for the nine months ended September 30, 2020 compared to the same period in 2019 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Total revenues increased $25.0 million, or 7.2%, to approximately $373.7 million for the nine months ended September 30, 2020 compared to $348.8 million in the prior year period. This increase is comprised of the following:
| | | | | | | | | | | | | | |
| NINE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | 2020 | 2019 | $ | % |
Property operating | $ | 337,144 | | $ | 307,606 | | $ | 29,538 | | 9.6 | % |
Single-tenant net lease | 28,519 | | 33,348 | | (4,829) | | (14.5) | % |
Straight-line rent | 2,722 | | 1,833 | | 889 | | 48.5 | % |
Rental income | 368,385 | | 342,787 | | 25,598 | | 7.5 | % |
Other operating | 5,364 | | 5,987 | | (623) | | (10.4) | % |
Total revenues | $ | 373,749 | | $ | 348,774 | | $ | 24,975 | | 7.2 | % |
Property operating revenue increased $29.5 million, or 9.6%, from the prior year period primarily as a result of the following activity:
•Acquisitions in 2019 and 2020 contributed $24.5 million.
•A development completed in 2020 contributed $1.6 million.
•Leasing activity, including contractual rent increases, contributed $5.6 million.
•Dispositions in 2019 and 2020 resulted in a decrease of $2.2 million.
Single-tenant net lease revenue decreased $4.8 million, or 14.5%, from the prior year period primarily as a result of the following activity:
•Dispositions in 2019 and 2020 resulted in a decrease of $5.2 million.
•Leasing activity, including contractual increases, contributed $0.4 million.
Straight-line rent revenue increased $0.9 million or 48.5% from the prior year period primarily due to acquisitions in 2019 and 2020 and a development in 2020 totaling $1.2 million, partially offset by 2019 and 2020 dispositions totaling $0.3 million.
Other operating income decreased $0.6 million or 10.4% from the prior year period primarily due to a reduction in variable parking revenue.
Expenses
Property operating expenses increased $12.5 million, or 9.4%, for the nine months ended September 30, 2020 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2019 and 2020 resulted in an increase of $10.8$11.4 million.
•A development completed in 2020 resulted in an increase of $0.4 million.
•Increases in portfolio operating expenses as follows:
•Portfolio property tax expense of $1.9 million;
•Compensation related expenses of $0.3 million;
•Administration and legal fees of $0.3 million;
•Portfolio insurance expense of $0.5 million;
•Portfolio security expense of $0.3 million; and
•Portfolio janitorial expense of $0.2 million.
•Utilities expense resulted in a decrease of $0.6 million.
•◦Maintenance and repair expense of $2.2 million;
◦Property tax expense of $0.7 million;
◦Utilities expense of $0.9 million;
◦Compensation expense of $0.5 million; and
◦Insurance expense of $0.3 million.
•Intangible amortization write-off in the first quarter of 2020 resulted from the acquisition of previously ground leased land resulted in a decrease of $0.6 million.
•Increase in intangible amortization expense totaling $0.7 million.
•Dispositions in 20192020 and 20202021 resulted in a decrease of $1.7$2.8 million.
General and administrative expenses decreasedincreased approximately $3.7$1.8 million, or 13.5%7.5%, for the nine months ended September 30, 20202021 compared to the prior year period primarily due to travel expense.as a result of the following activity:
•The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the nine months ended September 30, 2019 because of the acceleration of his outstanding nonvested share-based awards and associated taxes.
•DecreaseIncrease in incentive-based awards of approximately $0.6$0.7 million.
•Decrease in travelCompensation expense increases of $1.8 million, including $0.6 million.million of non-cash expense.
•Increase in compensation expenseNet decreases, including professional fees and other administrative costs, of approximately $0.4$0.7 million.
Depreciation and amortization expense increased $10.6$8.6 million, or 8.1%6.0%, for the nine months ended September 30, 20202021 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 20192020 and 20202021 and a development in 2020 resulted in an increase of $15.3$15.1 million.
•Various building and tenant improvement expenditures resulted in an increase of $7.8$7.1 million.
•Dispositions in 20192020 and 20202021 resulted in a decrease of $3.7$5.3 million.
•Assets that became fully depreciated resulted in a decrease of $8.8$8.3 million.
Other income (expense)
Gains on sale of real estate properties
Gains on sale of real estate properties totaling approximately $70.4 million and $5.1 million are associated with the three and six real estate properties during 2020 and 2019, respectively.
Interest expense
Other Income (Expense)
Gains on sale of real estate properties
Gains on sale of real estate properties in 2021 totaling approximately $41.0 million are associated with eight real estate properties.
Gains on sale of real estate properties in 2020 totaling $70.4 million are associated with three real estate properties.
Interest expense
Interest expense increased $0.9decreased $2.7 million, or 2.3%6.3%, for the nine months ended September 30, 20202021 compared to the prior year period. The components of interest expense are as follows:
| | | NINE MONTHS ENDED SEPTEMBER 30, | CHANGE | | NINE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | Dollars in thousands | 2020 | 2019 | $ | % | Dollars in thousands | 2021 | 2020 | $ | % |
Contractual interest | Contractual interest | $ | 40,031 | | $ | 40,091 | | $ | (60) | | (0.1) | % | Contractual interest | $ | 36,590 | | $ | 40,031 | | $ | (3,441) | | (8.6) | % |
Net discount/premium accretion | Net discount/premium accretion | 358 | | 174 | | 184 | | 105.7 | % | Net discount/premium accretion | 146 | | 358 | | (212) | | (59.2) | % |
Deferred financing costs amortization | Deferred financing costs amortization | 2,003 | | 1,835 | | 168 | | 9.2 | % | Deferred financing costs amortization | 2,114 | | 2,003 | | 111 | | 5.5 | % |
Interest rate swap amortization | Interest rate swap amortization | 126 | | 126 | | — | | — | % | Interest rate swap amortization | 126 | | 126 | | — | | — | % |
Treasury hedge amortization | Treasury hedge amortization | 229 | | — | | 229 | | — | % | Treasury hedge amortization | 320 | | 229 | | 91 | | 39.7 | % |
Interest cost capitalization | Interest cost capitalization | (913) | | (999) | | 86 | | (8.6) | % | Interest cost capitalization | (187) | | (913) | | 726 | | (79.5) | % |
Right-of-use assets financing amortization | Right-of-use assets financing amortization | 722 | | 392 | | 330 | | 84.2 | % | Right-of-use assets financing amortization | 748 | | 722 | | 26 | | 3.6 | % |
Total interest expense | Total interest expense | $ | 42,556 | | $ | 41,619 | | $ | 937 | | 2.3 | % | Total interest expense | $ | 39,857 | | $ | 42,556 | | $ | (2,699) | | (6.3) | % |
Contractual interest expense decreased $0.1$3.4 million, or 0.1%8.6%, primarily due toas a result of the following activity:
•The unsecured senior notes due 2031 and the Senior Notes due 2030 accounted for an increase of approximately $3.9$6.1 million.
•The Term Loanredemption of the unsecured senior notes due 2023 accounted for a decrease of $7.0 million.
•The Company's unsecured term loan due 2024 and the initial funding of the Term Loanunsecured term loan due 2026, net of swaps, accounted for an increase of approximately $1.2$0.5 million.
•The Unsecured Credit Facility principal and rate decrease accounted for a decrease of approximately $4.7$2.0 million.
•Mortgage note repayments, net of assumptions, and repayments accounted for a net decrease of $0.5approximately $1.0 million.
Impairment of Real Estate Properties
Impairment of real estate assets
Impairment of real estate assetsproperties totaling approximately $5.6$16.6 million iswas associated with the disposal of one property totaling $0.8 million and the reclassification of a property to held for sale resulting in an impairment of $10.7 million based on the contractual sales price. In addition, the Company recorded impairment charges totaling $5.1 million which includes a property associated with a redevelopment project in Nashville, Tennessee. See Note 6 to the Condensed Consolidated Financial Statements accompany this report for further discussion of two real estate properties during 2019.this project.
Equity loss from unconsolidated joint ventures
The Company recognized its proportionate share of losses from the TIAA Joint Venture and its parking garage joint ventures. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
Interest and other income (expense), net
In 2019,2021, the Company recorded approximately $0.5 million from a forfeited earnest money deposit and expensed approximately $0.8$0.3 million of debt issuance costs as a result of the amendment to the Term Loan modification.Agreement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the nine months ended September 30, 2020,2021, there were no material changes in the quantitative and qualitative
disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.2020.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.
Changes in Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business. The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
Item 1A. Risk Factors
In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the Company's quarterly reports on the Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, and the Company's quarterly reports on the Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020, are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition, operating results or cash flows.
The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on the Company's business, results of operations, cash flows and financial condition.
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of COVID-19 in many countries has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school closures and restricting travel.
All of the states and cities in which the Company owns properties, manages properties, and/or has development or redevelopment projects instituted quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of businesses that may continue to operate, and/or restrictions on the types of construction projects that may continue. As a result, a number of the Company's tenants temporarily closed their offices or clinical space or operated on a reduced basis in response to government requirements or recommendations. Many of these restrictions were lifted during the second quarter of 2020, but could be reimposed.
Through November 2, 2020, the Company has collected more than 99% of second and third quarter 2020 aggregate tenant billings. The Company has collected 96% of total scheduled deferral payments in the third quarter of 2020. In addition, the Company has remaining various forms of rent deferrals outstanding representing approximately $1.2 million, or less than 1% of second and third quarter 2020 aggregate tenant billings.
The COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. There can be no assurance that conditions in the bank lending, capital and other financial markets will not continue to deteriorate as a result of the pandemic, or that the Company's access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or refinancings. In addition, the deterioration of economic conditions as a result of the pandemic may ultimately decrease occupancy levels and average rent per square foot across the Company's portfolio as tenants reduce or defer their spending.
The extent of the COVID-19 pandemic’s effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and intensity of the outbreak, all of which are uncertain and difficult to predict. Due to the speed with which the situation is developing, the Company is not able at this time to estimate the effect of these factors on its business, but the adverse impact on the business, results of operations,
financial condition and cash flows could be material. Moreover, many risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 should be interpreted as heightened risks as a result of the impact of the COVID-19 pandemic.
Settlement provisions contained in a forward equity agreement could result in substantial dilution to the Company's earnings per share and return on equity or result in substantial cash payment obligations.
The Company has outstanding forward equity agreements and may enter into additional forward equity agreements in the future. Forward equity agreements typically provide that the relevant forward purchaser will have the right to accelerate that particular forward equity agreement (with respect to all or any portion of the transaction under that particular forward equity agreement that the relevant forward purchaser determines is affected by such event) and require us to settle on a date specified by the relevant forward purchaser if:
•the relevant forward purchaser is unable to establish, maintain or unwind its hedge position with respect to that particular forward equity agreement;
•a termination event occurs as a result of us declaring a dividend or distribution on our common stock with a cash value in excess of a specified amount per calendar quarter, or with an ex-dividend date prior to the anticipated ex-dividend date for such cash dividend;
•an extraordinary event (as such term is defined in that particular forward equity agreement and which includes certain mergers and tender offers and the delisting of our common stock) occurs or our board of directors votes to approve or there is a public announcement of, in either case, any action that, if consummated, would constitute such an extraordinary event; or
•certain other events of default, termination events, or other specified events occur, including, among other things, any material misrepresentation made by us in connection with entering into that particular forward equity agreement, or a nationalization, a bankruptcy termination event or a change in law (as such terms are defined in that particular forward equity agreement).
A forward purchaser’s decision to exercise its right to accelerate the settlement of a particular forward equity agreement will be made irrespective of the Company's need for capital. In such cases, we could be required to issue and deliver shares of common stock under the physical settlement provisions of that particular forward equity agreement or, if we so elect and the forward purchaser so permits our election, net share settlement provisions of that particular forward equity agreement irrespective of our capital needs, which would result in dilution to our earnings per share and return on equity.
We expect that settlement of any forward equity agreement will generally occur no later than the date specified in the particular forward equity agreement, which will generally be no later than twelve months following the trade date of that forward equity agreement. However, any forward equity agreement may be settled earlier than that specified date in whole or in part at our option. We expect that each forward equity agreement will be physically settled by delivery of shares of common stock unless we elect to cash settle or net share settle a particular forward equity agreement. Upon physical settlement or, if we so elect, net share settlement of a particular forward equity agreement, delivery of shares of common stock in connection with such physical settlement or net share settlement will result in dilution to our earnings per share and return on equity. If we elect cash settlement or net share settlement with respect to all or a portion of the shares of common stock underlying a particular forward equity agreement, we expect that the relevant forward purchaser (or an affiliate thereof) will purchase a number of shares of common stock necessary to satisfy its or its affiliate’s obligation to return the shares of common stock borrowed from third parties in connection with sales of shares of common stock under that forward equity agreement, adjusted in the case of net share settlement by any shares deliverable by or to us under the forward equity agreement. In addition, the purchase of shares of common stock in connection with the relevant forward purchaser or its affiliate unwinding its hedge positions could cause the price of shares of common stock to increase over such time (or prevent a decrease over such time), thereby increasing the amount of cash we would owe to the relevant forward purchaser (or decreasing the amount of cash that the relevant forward purchaser would owe us) upon a cash settlement of the relevant forward equity agreement or, in the event of net share settlement, increasing the number of shares of common stock we would deliver to the relevant forward purchaser (or decreasing the number of shares of common stock that the relevant forward purchaser would deliver to us).
The forward equity price that we expect to receive upon physical settlement of a particular forward equity agreement will be subject to adjustment on a daily basis based on a floating interest rate factor equal to a specified daily rate less a spread and will be decreased based on amounts related to expected dividends on shares of common stock during the term of the particular forward equity agreement. If the specified daily rate is less than the spread on any day, the interest factor will result in a daily reduction of the applicable forward equity price. If the market value of shares of common stock, determined in accordance with the terms of the relevant forward equity agreement, during the relevant valuation period under the particular forward equity agreement is above the applicable forward equity price, in the case of cash settlement, we would pay the relevant forward purchaser under that particular forward equity agreement an amount in cash equal to the difference or, in the case of net share settlement, we would deliver to the relevant forward purchaser a number of shares of common stock having a value, determined in accordance with the terms of the relevant forward equity agreement, equal to the difference. Thus, we could be responsible for a potentially substantial cash payment in the case of cash settlement of a particular forward equity agreement. If the market value of the Company’s common stock, determined in accordance with the terms of the relevant forward equity agreement, during the relevant valuation period under that particular forward equity agreement is below the applicable forward equity price, in the case of cash settlement, we would be paid the difference in cash by the relevant forward purchaser under that particular forward equity agreement or, in the case of net share settlement, we would receive from the relevant forward purchaser a number of shares of common stock having a value equal to the difference.
The U.S. federal income tax treatment of the cash that we might receive from cash settlement of a forward equity agreement is unclear and could jeopardize the Company's ability to meet the REIT qualification requirements.
In the event that we elect to settle any forward equity agreement for cash and the settlement price is below the applicable forward equity price, we would be entitled to receive a cash payment from the relevant forward purchaser. Under Section 1032 of the Internal Revenue Code of 1986, as amended (the "Code"), generally, no gains and losses are recognized by a corporation in dealing in its own shares, including pursuant to a "securities futures contract" (as defined in the Code, by reference to the Securities Exchange Act of 1934, as amended). Although we believe that any amount received by us in exchange for our stock would qualify for the exemption under Section 1032 of the Code, because it is not entirely clear whether a forward equity agreement qualifies as a "securities futures contract," the U.S. federal income tax treatment of any cash settlement payment we receive is uncertain. In the event that we recognize a significant gain from the cash settlement of a forward equity agreement, we might be unable to satisfy the gross income requirements applicable to REITs under the Code. In that case, we may be able to rely upon the relief provisions under the Code in order to avoid the loss of our REIT status. Even if the relief provisions apply, we will be subject to a 100% tax on the greater of (i) the excess of 75% of our gross income (excluding gross income from prohibited transactions) over the amount of such income attributable to sources that qualify under the 75% test or (ii) the excess of 95% of our gross income (excluding gross income from prohibited transactions) over the amount of such gross income attributable to sources that qualify under the 95% test, multiplied in either case by a fraction intended to reflect our profitability. In the event that these relief provisions were not available, we could lose our REIT status under the Code.
In case of our bankruptcy or insolvency, any forward equity agreements will automatically terminate, and we would not receive the expected proceeds from any forward sale of shares of the Company’s common stock.
If we file for or consent to a proceeding seeking a judgment in bankruptcy or insolvency or any other relief under any bankruptcy or insolvency law or other similar law affecting creditors’ rights, or we or a regulatory authority with jurisdiction over us presents a petition for our winding-up or liquidation, and we consent to such a petition, any forward equity agreements that are then in effect will automatically terminate. If any such forward equity agreement so terminates under these circumstances, we would not be obligated to deliver to the relevant forward purchaser any shares of common stock not previously delivered, and the relevant forward purchaser would be discharged from its obligation to pay the applicable forward equity price per share in respect of any shares of common stock not previously settled under the applicable forward equity agreement. Therefore, to the extent that there are any shares of common stock with respect to which any forward equity agreement has not been settled at the time of the commencement of any such bankruptcy or insolvency proceedings, we would not receive the relevant forward equity price per share in respect of those shares of common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Authorized Repurchases of Equity Securities by the Issuer
On May 5, 2020,4, 2021, the Company’s Board of Directors authorized the repurchase of up to $50$50.0 million of outstanding shares of the Company’s common stock either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated under this authorization to repurchase any specific number of shares. This authorization supersedes all previous stock repurchase authorizations. As of the date of this report, the Company has not repurchased any shares of its common stock under this authorization.
Item 5. Other Information
On November 2, 2021, the Compensation Committee of the Company's Board of Directors adopted the 2021 Executive Incentive Program under the Company's 2015 Stock Incentive Plan. The 2021 Executive Incentive Program supersedes the Company's Amended and Restated Executive Incentive Plan that was originally adopted in 2015. Copies of the 2021 Executive Incentive Program and the related Form of Restricted Stock Unit Agreement are filed as Exhibits 10.2 and 10.3, respectively, to this report and are incorporated herein by reference.
Item 6. Exhibits
| | | | | |
EXHIBIT | DESCRIPTION |
| |
| |
Exhibit 4.1 | Specimen Stock Certificate 2 |
| |
| |
| |
| |
| |
| |
| |
Exhibit 4.9 | |
Exhibit 4.10 | |
Exhibit 4.11 | |
Exhibit 4.12 | |
| |
| |
| |
| |
| |
| |
Exhibit 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document. |
Exhibit 101.SCH | XBRL Taxonomy Extension Schema Document (furnished electronically herewith) |
Exhibit 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document (furnished electronically herewith) |
Exhibit 101.LAB | XBRL Taxonomy Extension Labels Linkbase Document (furnished electronically herewith) |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document (furnished electronically herewith) |
Exhibit 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document (furnished electronically herewith) |
1Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 filed February 13, 2019 and hereby incorporated by reference.
2Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) filed April 2, 1993 and hereby incorporated by reference.
3Filed as an exhibit to the Company's Current Report on Form 8-K filed May 17, 2001 and hereby incorporated by reference.
4Filed as an exhibit to the Company's Current Report on Form 8-K filed March 26, 2013 and hereby incorporated by reference.
5Filed as an exhibit to the Company's Current Report on Form 8-K filed April 24, 2015 and hereby incorporated by reference.
6Filed as an exhibit to the Company’s Current Report on Form 8-K filed December 11, 2017 and hereby incorporated by reference.
7Filed as an exhibit to the Company's Current Report on Form 8-K filed March 18, 2020 and hereby incorporated by reference.
8Filed as an exhibit to the Company's Current Report on Form 8-K filed October 2, 2020 and hereby incorporated by reference.
9Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and hereby incorporated by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | | | | |
| HEALTHCARE REALTY TRUST INCORPORATED |
| | |
| By: | /s/ J. CHRISTOPHER DOUGLAS |
| | J. Christopher Douglas |
| | Executive Vice President and Chief Financial Officer |
November 3, 2021 | | November 4, 2020 |