4. Dispositions and Impairment
Dispositions
During the three months ended March 31, 2022, we closed the sale of a tenant purchase option on 1 of our MOBs located in Georgia for a gross sales price of $26.8 million, resulting in a net loss to us of approximately $4 thousand. During the three months ended March 31, 2021, we had no dispositions.
Impairment
During the three months ended March 31, 2022, and 2021, we recorded no impairment charges.
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 as of June 30, 2022 and 2021.
| | | | | | | | | | | | | | |
| MATURITY DATES | BALANCE AS OF | EFFECTIVE INTEREST RATE as of 6/30/2022 |
Dollars in thousands | 6/30/2022 | 12/31/2021 |
$700 million Unsecured Credit Facility | 5/23 | $ | 490,500 | | $ | 210,000 | | 2.69 | % |
$200 million Unsecured Term Loan due 2024, net of issuance costs 1 | 5/24 | 199,572 | | 199,460 | | 2.55 | % |
$150 million Unsecured Term Loan due 2026, net of issuance costs 2 | 6/26 | 149,447 | | 149,376 | | 2.79 | % |
Senior Notes due 2025, net of discount and issuance costs 3 | 5/25 | 249,176 | | 249,040 | | 4.08 | % |
Senior Notes due 2028, net of discount and issuance costs | 1/28 | 296,864 | | 296,612 | | 3.84 | % |
Senior Notes due 2030, net of discount and issuance costs 4 | 3/30 | 296,989 | | 296,813 | | 2.71 | % |
Senior Notes due 2031, net of discount and issuance costs | 3/31 | 295,601 | | 295,374 | | 2.24 | % |
Mortgage notes payable, net of discounts and issuance costs and including premiums | 8/23-12/26 | 85,606 | | 104,650 | | 3.97 | % |
| | $ | 2,063,755 | | $ | 1,801,325 | | |
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 95 basis points).
3The effective interest rate includes the impact of the $1.7 million settlement of forward-starting interest rate swaps 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.
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Changes in Debt Structure5. Intangible Assets and LiabilitiesMortgage payoffs
Intangible assets and liabilities consisted ofOn February 18, 2022, the following as of March 31, 2022 and December 31, 2021, respectively (in thousands, except with respect to the weighted average remaining amortization terms): | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Balance | | Weighted Average Remaining Amortization in Years | | Balance | | Weighted Average Remaining Amortization in Years |
Assets: | | | | | | | |
In place leases | $ | 341,978 | | | 9.3 | | $ | 349,863 | | | 9.3 |
Tenant relationships | 51,778 | | | 10.9 | | 54,851 | | | 10.8 |
Above market leases | 20,824 | | | 6.8 | | 21,537 | | | 6.9 |
| 414,580 | | | | | 426,251 | | | |
Accumulated amortization | (211,034) | | | | | (213,801) | | | |
Total | $ | 203,546 | | | 9.3 | | $ | 212,450 | | | 9.3 |
| | | | | | | |
Liabilities: | | | | | | | |
Below market leases | $ | 54,040 | | | 14.5 | | $ | 55,073 | | | 14.3 |
Accumulated amortization | (24,039) | | | | | (23,742) | | | |
Total | $ | 30,001 | | | 14.5 | | $ | 31,331 | | | 14.3 |
| | | | | | | |
The following isCompany repaid in full a summary of the net intangible amortization for the three months ended March 31, 2022 and 2021, respectively (in thousands): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Amortization recorded against rental income related to above and (below) market leases | $ | (649) | | | $ | (591) | |
Amortization expense related to in place leases and tenant relationships | 10,315 | | | 11,886 | |
| | | |
6. Receivables and Other Assets
Receivables and other assets consisted of the following as of March 31, 2022 and December 31, 2021, respectively (in thousands): | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Tenant receivables, net | $ | 3,009 | | | $ | 10,477 | |
Other receivables, net | 7,402 | | | 6,098 | |
Deferred financing costs, net | 11,057 | | | 7,055 | |
Deferred leasing costs, net | 47,612 | | | 45,008 | |
Straight-line rent receivables, net | 146,378 | | | 142,604 | |
Prepaid expenses, deposits, equipment and other, net | 42,734 | | | 38,301 | |
Derivative financial instruments - interest rate swaps | 3,692 | | | — | |
Real estate notes receivable, net | 72,701 | | | 69,114 | |
Finance ROU asset, net | 16,196 | | | 16,284 | |
| | | |
| | | |
Total | $ | 350,781 | | | $ | 334,941 | |
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following is a summary of the amortization of deferred leasing costs and financing costs for the three months ended March 31, 2022 and 2021, respectively (in thousands): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Amortization expense related to deferred leasing costs | $ | 2,227 | | | $ | 2,223 | |
Interest expense related to deferred financing costs | 1,353 | | | 431 | |
7. Leases
For the three months ended March 31, 2022, we added 1 new office lease that commences in April 2022.
Lessee - Maturity of Lease Liabilities
The following table summarizes the future minimum lease obligations of our operating and finance leases as of March 31, 2022 (in thousands): | | | | | | | | | | | | | | |
Year | | Operating Leases | | Finance Leases |
2022 | | $ | 8,028 | | | $ | 473 | |
2023 | | 10,846 | | | 635 | |
2024 | | 10,370 | | | 640 | |
2025 | | 9,857 | | | 645 | |
2026 | | 9,860 | | | 656 | |
2027 | | 9,845 | | | 668 | |
Thereafter | | 590,018 | | | 36,856 | |
Total undiscounted lease payments | | $ | 648,824 | | | $ | 40,573 | |
Less: Interest | | (452,598) | | | (23,665) | |
Present value of lease liabilities | | $ | 196,226 | | | $ | 16,908 | |
Lessor - Lease Revenues and Maturity of Future Minimum Rents
For the three months ended March 31, 2022 and 2021, we recognized $199.3 million and $190.4 million, respectively, of rental and other lease-related income related to our operating leases, of which $48.1 million and $45.1 million, respectively, were variable lease payments.
The following table summarizes the future minimum rent contractually due under operating leases, excluding tenant reimbursements of certain costs, as of March 31, 2022 (in thousands): | | | | | | | | |
Year | | Amount |
2022 | | $ | 432,329 | |
2023 | | 537,159 | |
2024 | | 479,252 | |
2025 | | 418,300 | |
2026 | | 369,927 | |
2027 | | 301,521 | |
Thereafter | | 1,044,334 | |
Total | | $ | 3,582,822 | |
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
8. Debt
Debt consisted of the following as of March 31, 2022 and December 31, 2021, respectively (in thousands): | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Unsecured revolving credit facility | $ | 25,000 | | | $ | — | |
Unsecured term loans | 500,000 | | | 500,000 | |
Unsecured senior notes | 2,550,000 | | | 2,550,000 | |
Fixed rate mortgages | — | | | — | |
| $ | 3,075,000 | | | $ | 3,050,000 | |
Deferred financing costs, net | (17,199) | | | (17,975) | |
Discount, net | (3,917) | | | (3,903) | |
Total | $ | 3,053,884 | | | $ | 3,028,122 | |
Unsecured Credit Agreement
Unsecured Revolving Credit Facility due 2025
On October 6, 2021, we entered into a third amended and restated revolving credit and term loan agreement (the “Credit Agreement”), which includes an unsecured revolving credit facility in an aggregate maximum principal amount of $1.0 billion (the “Revolver”) and a term loan facility in an aggregate maximum principal amount of $300.0 million (the “Term Loan”). The Credit Agreement extended the maturities of the unsecured revolving credit facility and the unsecured term loan to October 31, 2025. The maximum principal amount of the Unsecured Credit Agreement may be increased by up to $750.0 million, subject to certain conditions, for a total principal amount of $2.05 billion. Borrowings under the Revolver bear interest at a per annum rate equal to LIBOR plus a margin ranging from 0.725% to 1.40% based on our credit rating. We are also required to pay a facility fee on the aggregate commitments under the Revolver at a per annum rate ranging from 0.125% to 0.30% based on our credit rating. We incurred financing costs of $6.2 million in relation to the credit facility, which are being amortized through the maturity date. As of March 31, 2022, we had $25.0 million outstanding under this unsecured revolving credit facility.The margin associated with our borrowings was 0.85% per annum and the facility fee was 0.20% per annum.
Unsecured Term Loan due 2025
Under the Unsecured Credit Agreement as noted above, we have a $300.0 million unsecured term loan, guaranteed by HTA, with a maturity date of October 31, 2025. Borrowings under this unsecured term loan bear interest at a per annum rate equal to LIBOR, plus a margin ranging from 0.80% to 1.60% per annum based on our credit rating. The margin associated with our borrowings as of March 31, 2022 was 0.95% per annum. We incurred financing costs of $1.8 million in relation to the unsecured term loan, which are being amortized through the maturity date. We have interest rate swaps hedging the floating interest rate, which resulted in a fixed rate of 2.37% per annum, based on our current credit rating. The current hedging arrangement matures on February 1, 2023. As of March 31, 2022, we had $300.0 million under this unsecured term loan outstanding.
$200.0 Million Unsecured Term Loan due 2024
In 2018, HTALP entered into a modification of our $200.0 million unsecured term loan previously due in 2023. The modification decreased pricing at our current credit rating by 65 basis points and extended the maturity date to January 15, 2024. The other material terms of the unsecured term loan prior to the modification remained substantially unchanged. Borrowings under the unsecured term loan accruemortgage note payable bearing interest at a rate equal to LIBOR, plusof 4.70% that encumbered a margin ranging from 0.75% to 1.65% per annum based56,762 square foot property in California. The aggregate payoff price of $12.6 million consisted of outstanding principal of $11.0 million and a "make-whole" amount of approximately $1.6 million. The unamortized premium of $0.8 million and the unamortized cost on our credit rating. The margin associated with our borrowings asthis note of March 31,$0.1 million were written off upon payoff.
On February 24, 2022, was 1.00% per annum. HTALP hadthe Company repaid in full a mortgage note payable bearing interest at a rate swaps on the balance, which resultedof 6.17% that encumbered a 80,153 square foot property in a fixed interest rate at 2.32% per annum. As of March 31, 2022, we had $200.0 million under this unsecured term loan outstanding.
$600.0 Million Unsecured Senior Notes due 2026
In September 2019,Colorado, in connectionconjunction with the $650.0disposition of the property. The aggregate payoff price of $6.4 million unsecured senior notes due 2030 referenced below, HTALP issued $250.0 million as additional unsecured senior notes to the $350.0 million aggregateconsisted of outstanding principal of senior notes issued on July 12, 2016, all$5.8 million and a "make-whole" amount of which are guaranteed by HTA. These unsecured senior notes are registered under the Securities Act, and bear interest at 3.50% per annum which is payable semi-annually. Additionally, these unsecured senior notes were offered at 103.66% and 99.72%, respectively,approximately $0.6 million. The unamortized premium of the principal amount thereof, with an effective yield to maturity of 2.89% and 3.53% per annum, respectively. As of March 31, 2022, we had $600.0 million of these unsecured senior notes outstanding that mature on August 1, 2026.
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
$500.0 Million Unsecured Senior Notes due 2027
In 2017, HTALP issued $500.0 million of unsecured senior notes that are guaranteed by HTA. These unsecured senior notes are registered under the Securities Act, and bear interest at 3.75% per annum which is payable semi-annually. Additionally, these unsecured senior notes were offered at 99.49% of the principal amount thereof, with an effective yield to maturity of 3.81% per annum. As of March 31, 2022, we had $500.0 million of these unsecured senior notes outstanding that mature on July 1, 2027.
$650.0 million Unsecured Senior Notes due 2030
In September 2019, in connection with the $250.0 million additional unsecured senior notes due 2026 referenced above, HTALP issued $650.0 million of unsecured senior notes that are guaranteed by HTA. These unsecured senior notes are registered under the Securities Act, and bear interest at 3.10% per annum which is payable semi-annually. Additionally, these unsecured senior notes were offered at 99.66% of the principal amount thereof, with an effective yield to maturity of 3.14% per annum. Proceeds from the issuance of $900.0 million of these notes were used, in part, to redeem a total of $700.0 million of unsecured senior notes. During the year ended December 31, 2019, the make-whole fees required per the terms of the indenture agreements upon our calling the notes totaling $18.3$0.1 million was recorded in loss on extinguishment of debt in the accompanying consolidated statements of operations. As of March 31, 2022, HTALP had $650.0 million of these unsecured senior notes outstanding that mature on February 15, 2030.
$800.0 million Unsecured Senior Notes due 2031
In September 2020, HTALP issued $800.0 million of unsecured senior notes that are guaranteed by HTA. These unsecured senior notes are registered under the Securities Act, and bear interest at 2.00% per annum which is payable semi-annually. Additionally, these unsecured senior notes were offered at 99.20% of the principal amount thereof, with an effective yield to maturity of 2.09% per annum. We incurred financing costs of $6.8 million in relation to this transaction, which are being amortized through the maturity date. Proceeds from the issuance of these unsecured notes were used, in part, to redeem $300.0 million of unsecured senior notes. During the year ended December 31, 2020, the make-whole fee that was required per the terms of the indenture agreementwritten off upon our calling the notes of $24.7 million was recorded in loss on extinguishment of debt in the accompanying consolidated statements of operations. As of March 31, 2022, we had $800.0 million of these unsecured senior notes outstanding that mature on March 15, 2031.
Future Debt Maturities
The following table summarizes the debt maturities and scheduled principal repayments of our indebtedness as of March 31, 2022 (in thousands): | | | | | | | | |
Year | | Amount |
2022 | | $ | — | |
2023 | | — | |
2024 | | 200,000 | |
2025 | | 325,000 | |
2026 | | 600,000 | |
Thereafter | | 1,950,000 | |
Total | | $ | 3,075,000 | |
Deferred Financing Costs
As part of the $1.7 billion bridge financing commitment secured in connection with the pending Merger with HR as further described in Note 1 - Organization and Description of Business, we incurred commitment fees of approximately $5.4 million, which are being amortized through the commitment expiration date of September 2, 2022.
As of March 31, 2022, the future amortization of our deferred financing costs is as follows (in thousands): | | | | | | | | |
Year | | Amount |
2022 | | $ | 2,330 | |
2023 | | 3,106 | |
2024 | | 2,724 | |
2025 | | 2,603 | |
2026 | | 1,839 | |
Thereafter | | 4,597 | |
Total | | $ | 17,199 | |
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Debt Covenants
We are required by the terms of our applicable loan agreements to meet various affirmative and negative covenants that we believe are customary for these types of facilities, such as limitations on the incurrence of debt by us and our subsidiaries that own unencumbered assets, limitations on the nature of HTALP’s business, and limitations on distributions by HTALP and its subsidiaries that own unencumbered assets. Our loan agreements also impose various financial covenants on us, such as a maximum ratio of total indebtedness to total asset value, a minimum ratio of EBITDA to fixed charges, a minimum tangible net worth covenant, a maximum ratio of unsecured indebtedness to unencumbered asset value, rent coverage ratios and a minimum ratio of unencumbered Net Operating Income to unsecured interest expense. As of March 31, 2022, we believe that we were in compliance with all such financial covenants and reporting requirements. In addition, certain of our loan agreements include events of default provisions that we believe are customary for these types of facilities, including restricting us from making dividend distributions to our stockholders in the event we are in default thereunder, except to the extent necessary for us to maintain our REIT status. We have also concluded as of March 31, 2022, that we were not aware of non-compliance with any of our financial or non-financial covenants in light of the ongoing COVID-19 pandemic.payoff.
9.Note 5. Derivative Financial Instruments and Hedging Activities
Risk Management Objective of Using Derivative Financial InstrumentsDerivatives
We may use derivative financial instruments,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, swaps, caps, options, floorsliquidity, and other interest rate derivative contracts, to hedge all or a portioncredit risk, primarily by managing the amount, sources, and duration of the interest rate risk associated with our borrowings. The principal objective of such arrangements is to minimize the risks and/or costs associated with our operatingits assets and financial structure as well as to hedge specific anticipated transactions. We do not intend to utilize derivatives for speculative or other purposes other than interest rate risk management. Theliabilities and the use of derivative financial instruments carries certain risks, includinginstruments. Specifically, the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enterCompany enters into derivative financial instruments with counterparties with high credit ratingsto manage exposures that arise from business activities that result in the receipt or payment of future known and with major financial institutions withuncertain cash amounts, the value of which we and our affiliates may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations. We record counterparty credit risk valuation adjustments onare determined by interest rate swap derivative assets in order to properly reflect the credit quality of the counterparty. In addition, the fair value ofrates. The Company’s derivative financial instruments designated asare used to manage differences in the amount, timing, and duration of the Company’s known or expected cash flow hedges are adjustedreceipts and its known or expected cash payments principally related to reflect the impact of our credit quality.Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
OurThe Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage ourits exposure to interest rate movements. To accomplish this objective, wethe Company primarily useuses interest rate swaps and treasury locks as part of ourits interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for usthe Company making fixed ratefixed-rate payments over the life of the agreements without an exchange of the underlying notional amount. A treasury lockSuch derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
For derivatives designated, and that qualify, as cash flow hedges of interest rate risk, the gain or loss on the derivative is a synthetic forward sale of a U.S. treasury note,recorded in Accumulated Other Comprehensive Income (Loss) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which is settled in cash based upon the difference between an agreed upon treasury rate and the prevailing treasury rate at settlement. Such treasury locks are entered into to effectively fix the treasury component of an upcoming debt issuance.
hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income in the accompanying condensed consolidated balance sheetsAOCI related to derivatives will be reclassified to interest expense as interest payments are made on our variable ratethe Company’s variable-rate debt. During the next twelve months, we estimate that an additional $1.2 million will be reclassified from other comprehensive income in the accompanying condensed consolidated balance sheets as an increase to interest related to derivative financial instruments in the accompanying condensed consolidated statements of operations.
As of March 31,June 30, 2022, wethe Company had the following8 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (in thousands, except numberrisk:
| | | | | | | | |
DERIVATIVE INSTRUMENT | NUMBER OF INSTRUMENTS | NOTIONAL AMOUNT in millions |
Interest rate swaps | 8 | | $175.0 |
Tabular Disclosure of instruments):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 June 30, 2022.
| | | | | | | | |
Interest Rate Swaps | | March 31,BALANCE AT JUNE 30, 2022 |
Number ofIn thousands | BALANCE SHEET LOCATION | FAIR VALUE |
Derivatives designated as hedging instruments | | 7 |
| | |
Notional amountInterest rate swaps 2017, 2018, and 2019 | Other assets | $ | 500,0002,516 | |
| | |
23Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The table below presents the fair valueeffect of our derivative financial instruments designated as cash flow hedges as well as the classification in the accompanying condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021, respectively (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Asset Derivatives | | Liability Derivatives |
| | | | Fair Value at: | | | | Fair Value at: |
Derivatives Designated as Hedging Instruments: | | Balance Sheet Location | | March 31, 2022 | | December 31, 2021 | | Balance Sheet Location | | March 31, 2022 | | December 31, 2021 |
Interest rate swaps | | Receivables and other assets | | $ | 3,692 | | | $ | — | | | Derivative financial instruments | | $ | — | | | $ | 5,069 | |
The table below presents the gain or loss recognizedhedge accounting on our derivative financial instruments designated as cash flow hedges as well as the classification in the accompanying condensed consolidated statements of operations forAOCI during the three and six months ended March 31,June 30, 2022 and 2021 respectively (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
Effect of Derivative Instruments | | Location in Statement of Operations and Comprehensive Income (Loss) | | 2022 | | 2021 |
Gain (loss) recognized in OCI | | Change in unrealized losses on cash flow hedges | | $ | 7,218 | | | $ | 1,163 | |
Gain (loss) reclassified from accumulated OCI into income | | Interest expense | | (1,599) | | | (1,629) | |
related to the Company's outstanding interest rate swaps. | | | | | | | | | | | | | | | | | |
| (GAIN) LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended June 30, | | LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended June 30, |
In thousands | 2022 | 2021 | 2022 | 2021 |
Interest rate swaps | $ | (1,663) | | $ | 807 | | Interest expense | $ | 674 | | $ | 965 | |
Settled treasury hedges | — | | — | | Interest expense | 107 | | 107 | |
Settled interest rate swaps | — | | — | | Interest expense | 42 | | 42 | |
| $ | (1,663) | | $ | 807 | | Total interest expense | $ | 823 | | $ | 1,114 | |
Credit Risk Related | | | | | | | | | | | | | | | | | |
| GAIN RECOGNIZED IN AOCI ON DERIVATIVE six months ended June 30, | | LOSS RECLASSIFIED FROM AOCI INTO INCOME six months ended June 30, |
In thousands | 2022 | 2021 | 2022 | 2021 |
Interest rate swaps | $ | (6,822) | | $ | (2,043) | | Interest expense | $ | 1,612 | | $ | 1,912 | |
Settled treasury hedges | — | | — | | Interest expense | 213 | | 213 | |
Settled interest rate swaps | — | | — | | Interest expense | 84 | | 84 | |
| $ | (6,822) | | $ | (2,043) | | Total interest expense | $ | 1,909 | | $ | 2,209 | |
The Company estimates that $1.0 million related to active interest rate swaps will be reclassified from AOCI as a decrease to interest expense over the next 12 months, and that $0.6 million related to settled interest rate swaps will be amortized from AOCI as an increase to interest expense over the next 12 months.
Credit-risk-related Contingent Features
We haveThe Company's agreements with each of ourits derivative counterparties that contain a cross-default provision thatunder which the Company could be declared in default of its derivative obligations if we default on any of our indebtedness, including a default where repayment of the underlying indebtedness has not beenis accelerated by the lender then we could also be declared indue to the Company's default on our derivative obligations.
We also have agreements with each of our derivative counterparties that incorporate provisions from our indebtedness with a lender affiliate of the derivative counterparty requiring it to maintain certain minimum financial covenant ratios on our indebtedness. Failure to comply with the covenant provisions would result in us being in default on any derivative instrument obligations covered by these agreements.
As of March 31,June 30, 2022, the fair value of derivatives in a net asset position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $3.6$2.4 million. As of March 31,June 30, 2022, we havethe Company has not posted any collateral related to these agreements and we werewas not in breach of any of the provisions of these agreements. If we had breached any of the provisions of these agreements, we could have been required to settle our obligations, if any, under these agreements.agreement.
10. Commitments and Contingencies
Litigation
On May 6, 2022, a purported stockholder of the Company filed a lawsuit in the United States District Court for the Southern District of New York against us and 7 of our current directors, captioned Shiva Stein v. Healthcare Trust of America, Inc., et al., Case No. 1:22-cv-03703 (the “Complaint”).
The Complaint alleges that the preliminary proxy statement issued in connection with the Merger omits material information or contains misleading disclosures and that, as a result, (i) all of the defendants violated Section 14(a) of the Securities Exchange Act of 1934 (the Exchange Act) and (ii) our directors violated section 20(a) of the Exchange Act. The Complaint seeks, among other things, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement; (ii) rescission or rescissory damages to the extent the transactions contemplated by the Merger Agreement have been implemented; (iii) dissemination of a proxy statement that does not omit material information or contain any misleading disclosures; (iv) an accounting to plaintiff for all damages suffered as a result of the alleged wrongdoing; and (v) an award of plaintiff’s expenses, including attorneys’ and experts’ fees. We believe the claims asserted in the Complaint are without merit.
Additional lawsuits may be filed against us, our Board of Directors, and/or other parties to the Merger in connection with the transactions contemplated by the Merger Agreement.
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITEDTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, – (Continued)cont.
In addition, we are,Note 6. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, also subject to claims andinvolved in litigation arising in the ordinary course of business with respect to tenant litigation and threatened or asserted labor matters.
We do not believe liability from any reasonably foreseeable disposition of the aforementioned claims and litigation, individually or in the aggregate, would have a material effect on our consolidated financial position, results of operations or cash flows.
Environmental Matters
We routinely monitor our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at our properties, we are not currently aware of any environmental liability with respect to our properties that would have a material effect on our condensed consolidated financial position, results of operations or cash flows. Further, we arebusiness. The Company is not aware of any material environmental liabilitypending or any unasserted claim or assessment with respect to an environmental liability at our propertiesthreatened litigation that, we believeif resolved against the Company, would require additional disclosure or the recording of a loss contingency.
Other
Our other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In our opinion, these matters are not expected to have a material adverse effect on our condensedthe Company’s consolidated financial position, results of operations or cash flows.
Redevelopment Activity
11. Stockholders’ EquityDuring the second quarter of 2022, the Company continued the redevelopment of a 217,114 square foot medical office building in Dallas, Texas. As of June 30, 2022, the Company had funded approximately $10.2 million in project costs. The building continues to operate with in-place leases during construction. The first new tenant lease of the redevelopment commenced in the first quarter of 2022.
During the second quarter of 2022, the Company continued the redevelopment of a medical office building in Tacoma, Washington. As of June 30, 2022, the Company had funded approximately $9.5 million in project costs. The redevelopment includes interior and Partners’ Capital
HTALP’s operating partnership agreement provides that it will distribute cash flow from operations and net sale proceeds to its partners in accordance with their overall ownership interests at such times and in such amounts as the general partner thereof determines. Dividend distributions are made such that a holder of 1 OP Unit in HTALP will receive distributions from HTALP in an amount equalexterior improvements to the dividend distributions paidexisting 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 fourth quarter of 2022.
During the second quarter of 2022, the Company continued the development of a medical office building in Nashville, Tennessee. The Company began construction of a 106,194 square foot medical office building with the initial tenant lease expected to commence in the third quarter of 2023. As of June 30, 2022, the Company had funded approximately $7.4 million in project costs. The redevelopment includes the demolition of an existing 81,000 square foot medical office building. The Company recognized an impairment charge of $5.0 million related to the holderexisting building in 2021.
During the second quarter of one share2022, the Company continued redevelopment projects related to the following:
•NaN medical office buildings totaling 158,338 square feet in Washington, DC. The Company has approved a leasing plan with a capital outlay that is expected to be completed in the first quarter of our common stock. In addition, for each share2024. As of June 30, 2022, the Company has funded $0.1 million in project costs.
•A medical office building totaling 145,365 square feet in Dallas, Texas. The Company has approved a capital and leasing plan that is expected to be completed in the first quarter of 2024. As of June 30, 2022, the Company has funded $0.6 million in project costs.
•A medical office building totaling 93,992 square feet in Denver, Colorado that is expected to be a part of a larger redevelopment plan that was initiated in the first quarter of 2022.
Note 7. Stockholders' Equity
Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock issued or redeemed by HTA, HTALP issues or redeems a corresponding numberoutstanding for the six months ended June 30, 2022 and the twelve months ended December 31, 2021:
| | | | | | | | |
| SIX MONTHS ENDED JUNE 30, 2022 | TWELVE MONTHS ENDED DECEMBER 31, 2021 |
Balance, beginning of period | 150,457,433 | | 139,487,375 | |
Issuance of common stock | 745,483 | | 10,899,301 | |
Non-vested share-based awards, net of withheld shares | 434,001 | | 70,757 | |
Balance, end of period | 151,636,917 | | 150,457,433 | |
Table of OP Units.Contents
Common Stock OfferingsNOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
In March
At-The-Market Equity Offering Program
On August 6, 2021 weand November 5, 2021, the Company entered into equity distribution agreements with various sales agents with respect12 investment banks to ourallow for issuance and sale under its at-the-market (“ATM”)equity offering program of common stock withup to an aggregate sales amount of up to $750.0 million which replaced our prior ATM offering program that expired in February 2021. As of March 31, 2022, $750.0 million remained available for issuance by us under our current ATM.
Stock Repurchase Plan
In September 2020, our Board of Directors approved the reactivation of a stock repurchase plan authorizing us to purchase up to $300.0 million of our common stock from time to time prior to the expiration thereof on September 22, 2023. As of March 31, 2022, the remaining amount of common stock available for repurchase under our stock repurchase plan was $300.0 million.stock. These agreements are no longer in effect following the closing of the Merger on July 20, 2022. 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, 2021 | $ | — | | — | | — | | 727,400 | | $ | — | |
1Q 2022 | $ | 31.73 | | — | | 727,400 | | — | | $ | 22.3 | |
2Q 2022 | $ | — | | — | | — | | — | | $ | — | |
| | | | | |
Common Stock Dividends
See our accompanying condensed consolidated statementsDuring the six months ended June 30, 2022, the Company declared and paid common stock dividends totaling $0.62 per share. On July 1, 2022, the Company declared a prorated quarterly common stock dividend in the amount of equity$0.2010 per share payable on July 19, 2022 to stockholders of record onJuly 14, 2022. The remaining quarterly common stock dividend portion of $0.1090 per share was declared August 2, 2022 and condensed statementsis payable on August 30, 2022 to stockholders of changes in partners’ capital forrecord on August 15, 2022.
Earnings Per Common Share
The Company uses the dividends declared duringtwo-class method of computing net earnings per common shares. The Company's non-vested share-based awards are considered participating securities pursuant to the two-class method.
During the three and six months ended March 31,June 30, 2022, and 2021. As of March 31, 2022, declared, but unpaid, dividends totaling $75.8 million were included in accounts payable and accrued liabilities. On May 5, 2022, our Board of Directors announced a quarterly cash dividend of $0.325 per sharethe Company did not enter into any forward sale agreements to sell shares of common stock through the Company's at-the market equity offering program.
The following table sets forth the computation of basic and diluted earnings per OP Unit to be paid on July 15,common share for the three and six months ended June 30, 2022 to stockholders and unitholders of record on July 6, 2022.2021.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | SIX MONTHS ENDED JUNE 30, |
Dollars in thousands, except per share data | 2022 | 2021 | 2022 | 2021 |
Weighted average common shares outstanding | | | | |
Weighted average common shares outstanding | 151,620,897 | | 143,700,491 | | 151,230,064 | | 142,142,577 | |
Non-vested shares | (1,945,042) | | (1,783,278) | | (1,908,652) | | (1,788,410) | |
Weighted average common shares outstanding - basic | 149,675,855 | | 141,917,213 | | 149,321,412 | | 140,354,167 | |
| | | | |
Weighted average common shares outstanding - basic | 149,675,855 | | 141,917,213 | | 149,321,412 | | 140,354,167 | |
Dilutive effect of forward equity shares | — | | 61,064 | | — | | 27,896 | |
Dilutive effect of employee stock purchase plan | 62,694 | | 70,711 | | 75,394 | | 85,714 | |
Weighted average common shares outstanding - diluted | 149,738,549 | | 142,048,988 | | 149,396,806 | | 140,467,777 | |
| | | | |
Net Income | $ | 6,130 | | $ | 23,096 | | $ | 48,357 | | $ | 47,118 | |
Dividends paid on nonvested share-based awards | (601) | | (539) | | (1,207) | | (1,080) | |
Net income applicable to common stockholders | $ | 5,529 | | $ | 22,557 | | $ | 47,150 | | $ | 46,038 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Basic earnings per common share - net income | $ | 0.04 | | $ | 0.16 | | $ | 0.32 | | $ | 0.33 | |
| | | | |
| | | | |
Diluted earnings per common share - net income | $ | 0.04 | | $ | 0.16 | | $ | 0.32 | | $ | 0.33 | |
Incentive Plan
Our Incentive Plan permits the grant of incentive awards to our employees, officers, non-employee directors and consultants as selected by our Board of Directors. This Plan authorizes us to grant awards in any of the following forms: options; stock appreciation rights; restricted stock; restricted or deferred stock units; performance awards; dividend equivalents; other stock-based awards, including units in HTALP; and cash-based awards. Subject to adjustment as provided in the Plan, the aggregate number of awards reserved and available for issuance under the Plan is 10,000,000 shares. As of March 31, 2022, there were 9,646,504 awards available for grant under the Plan.Plans
Restricted Common StockShares
During the six months ended June 30, 2022, the Company made the following stock awards:
We recognized compensation expense, equal•During the first quarter of 2022, the Company granted non-vested stock awards to the fair market valueits named executive officers and other members of HTA’s stock on thesenior management and employees with a grant date over the service period which is generally three to four years. For the three months ended March 31, 2022 and 2021 we recognized compensation expensefair value of $2.0 million and $3.3 million, respectively. Substantially all compensation expense was recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.
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HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITEDTHE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, – (Continued)cont.
As$13.0 million, which consisted of March 31,an aggregate of 415,184 non-vested shares with vesting periods ranging from three to eight years.
•During the second quarter of 2022, we had $7.9the Company granted non-vested stock awards to its 8 directors with a grant date fair value of $0.8 million, which consisted of unrecognized compensation expense, netan aggregate of estimated forfeitures, which we will recognize over26,840 non-vested shares, with a remaining weighted average period of 1.9 years.one-year vesting period.
The following is aA summary of our restricted common stockthe activity as of March 31,under the Company's share-based incentive plans for the three and six months ended June 30, 2022 and 2021 respectively: | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | March 31, 2021 |
| Restricted Common Stock | | Weighted Average Grant Date Fair Value | | Restricted Common Stock | | Weighted Average Grant Date Fair Value |
Beginning balance | 529,862 | | | $ | 28.83 | | | 436,399 | | | $ | 28.27 | |
Granted | 158,543 | | | 30.81 | | | 354,288 | | | 26.20 | |
Vested | (123,958) | | | 27.37 | | | (258,000) | | | 27.50 | |
Forfeited | (4,437) | | | 29.60 | | | (333) | | | 30.07 | |
Ending balance | 560,010 | | | $ | 29.71 | | | 532,354 | | | $ | 27.45 | |
is included in the table below. | | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | SIX MONTHS ENDED JUNE 30, |
| 2022 | 2021 | 2022 | 2021 |
Share-based awards, beginning of period | 1,951,551 | | 1,786,371 | | 1,562,028 | | 1,766,061 | |
Granted | 26,840 | | 37,978 | | 442,024 | | 203,701 | |
Vested | (36,682) | | (46,041) | | (61,047) | | (191,454) | |
Forfeited | — | | — | | (1,296) | | — | |
Share-based awards, end of period | 1,941,709 | | 1,778,308 | | 1,941,709 | | 1,778,308 | |
12. Fair Value of Financial Instruments
Financial Instruments Reported at Fair Value - Recurring
The table below presentsDuring the carrying amounts and fair values of our financial instruments on a recurring basis as of March 31,six months ended June 30, 2022 and December 31, 2021, the Company withheld 6,727 and 51,972 shares of common stock, respectively, (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Level 2 - Assets: | | | | | | | | |
Real estate notes receivable, net | | $ | 72,701 | | | $ | 70,135 | | | $ | 69,114 | | | $ | 68,476 | |
Derivative financial instruments | | 3,692 | | | 3,692 | | | — | | | — | |
Level 2 - Liabilities: | | | | | | | | |
Derivative financial instruments | | $ | — | | | $ | — | | | $ | 5,069 | | | $ | 5,069 | |
Debt | | 3,053,884 | | | 2,944,166 | | | 3,028,122 | | | 3,117,602 | |
from participants to pay estimated withholding taxes related to shares that vested.The carrying amountsRestricted Stock Units
Prior to 2022, the Company granted long-term incentive awards, comprised of cash and cash equivalents, tenant and other receivables, restricted cash, accounts payable, and accrued liabilities approximate fair value. There have been no transfers of assets or liabilities between levels. We will record any such transfersstock, based on backward-looking performance measured at the end of the reporting period in whichcalendar year. The Company adopted a changenew incentive compensation structure effective January 2022, comprised of event occurs that results in a transfer. Although we have determined thatrestricted stock and restricted stock units ("RSUs"). The RSUs are granted at the majoritybeginning of the inputs usedyear with three-year forward-looking performance targets.
On January 3, 2022, the Company granted restricted stock units to its named executive officers and certain other members of senior management and officers, with a grant date fair value our cash flow hedges fall within Level 2of $9.7 million, which consisted of an aggregate 294,932 RSUs with a five-year vesting period.
Approximately 43% of the fair value hierarchy, the credit valuation adjustments associated with these instruments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our cash flow hedge positions and have determined that the credit valuation adjustments are not significant to their overall valuation. As a result, we have determined that our cash flow hedge valuations in their entirety are classified in Level 2 of the fair value hierarchy.For further discussion of the assumptions considered, refer to Note 2 - Summary of Significant Accounting Policies.
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Financial Instruments Reported at Fair Value - Non-Recurring
We also have assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. This category generally includes assets subject to impairment. We estimate fair value relating to impairment assessments based upon discounted cash flow and direct capitalization models that include all projected cash inflows and outflows over a specific holding period, or the contractual sales price, if applicable. Such projected cash flows are comprised of contractual rental revenues and forecasted rental revenues and expensesRSUs vest based on two market performance conditions. Relative and absolute total shareholder return ("TSR") awards containing these market performance conditions were valued using independent specialists. The Company utilized a Monte Carlo simulation to calculate the weighted average grant date fair values of $30.56 for the absolute TSR component and expectations$41.30 for growth. Capitalization rates and discount rates utilized in these models are based on a reasonable range of current market ratesthe relative TSR component for each property analyzed. Based on these inputs, we determined that our valuation of propertiesthe January 2022 grant using a discounted cash flow or a direct capitalization model were classified within Level 3 of the fair value hierarchy. For assets for which the estimated fair value was based on contractual sales prices, we determined that our valuation was classified within Level 2 of the fair value hierarchy. As of March 31, 2022 we had no assets subject to impairment.following assumptions:
The table below presents our assets measured at fair value on a non-recurring basis as of March 31, 2022 and December 31, 2021 (in thousands): | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED MARCH 31, | |
March 31, 2022Volatility | | | 30.0 | December 31, 2021% |
| Dividend assumption | | | Fair ValueAccrued |
Expected term in years | | | | Fair Value3 years |
Level 2 - Assets:Risk-free rate | | | 1.02 | | | | | % |
Real estate investmentStock price (per share) | | | | $31.68 | — | | | | | $ | 26,768 | |
Level 3 - Assets: | | | | | | | | |
Real estate investments | | | | $ | — | | | | | $ | 4,970 | |
| | | | | | | | |
The remaining 57% of the restricted stock units vest upon certain operating performance conditions. With respect to the operating performance conditions of the January grant, the grant date fair value was $31.68 based on the Company's share price on the date of grant. The combined weighted average grant date fair value of the January restricted stock units was $33.04 per share.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following is a summary of the RSU activity during the three and six months ended June 30, 2022:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | SIX MONTHS ENDED JUNE 30, |
| Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Stock Units | Weighted Average Grant Date Fair Value |
Non-vested, beginning of period | 294,932 | | — | | — | | — | |
Granted | — | | — | | 294,932 | | $ | 33.04 | |
Vested | — | | — | | — | | — | |
Non-vested as of June 30, 2022 | 294,932 | | — | | 294,932 | | |
Employee Stock Purchase Plan
In addition to the share-based incentive plans, the Company maintains the Employee Stock Purchase Plan. A summary of the activity under the Purchase Plan for the three and six months ended June 30, 2022 and 2021 is included in the table below.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | SIX MONTHS ENDED JUNE 30, |
| 2022 | 2021 | 2022 | 2021 |
Outstanding and exercisable, beginning of period | 427,802 | | 415,299 | | 348,514 | | 341,647 | |
Granted | — | | — | | 255,960 | | 253,200 | |
Exercised | (1,965) | | (3,012) | | (12,518) | | (18,977) | |
Forfeited | (20,303) | | (22,873) | | (45,789) | | (42,034) | |
Expired | — | | — | | (140,633) | | (144,422) | |
Outstanding and exercisable, end of period | 405,534 | | 389,414 | | 405,534 | | 389,414 | |
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 June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | |
| June 30, 2022 | December 31, 2021 |
Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE |
Notes and bonds payable 1 | $ | 2,063.8 | | $ | 1,955.6 | | $ | 1,801.3 | | $ | 1,797.4 | |
| | | | |
| | | | |
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
Note 9. Subsequent Events
On July 20, 2022, pursuant to that certain Agreement and Plan of Merger, dated as of February 28, 2022 (the “Merger Agreement”), by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR” or the "Company"), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), Healthcare Trust of America Holdings, LP, a Delaware limited partnership (now known as Healthcare Realty Holdings, L.P.) (the “OP”), and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”). Pursuant to the Merger Agreement, on the Closing Date, Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”). Immediately following the Merger,
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization (the “Combined Company”) and to provide a platform for the Combined Company to more efficiently acquire properties in a tax-deferred manner. The Combined Company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange (the “NYSE”) under the ticker symbol “HR”.
Executive Officers and Directors
The executive officers of the Company immediately preceding the Merger serve as the executive officers of the Combined Company. The board of directors of the Combined Company is comprised of all 9 directors from the Company's board and 4 directors from HTA’s board.
Exchange Offer
In connection with the Merger, the OP offered to exchange all validly tendered and accepted notes of each series previously issued by Legacy HR (the “Old HR Notes”) for (i) up to $250,000,000 of 3.875% Senior Notes due 2025 (the “2025 Notes”), (ii) up to $300,000,000 of 3.625% Senior Notes due 2028 (the “2028 Notes”), (iii) up to $300,000,000 of 2.400% Senior Notes due 2030 (the “2030 Notes”) and (iv) up to $300,000,000 of 2.050% Senior Notes due 2031 to be issued by the OP (the “2031 Notes” and, collectively, the “New HR Notes”) and solicited consents from holders of the Old HR Notes to amend the indenture governing the Old HR Notes to eliminate substantially all of the restrictive covenants in such indenture (the “Exchange Offers”). The New HR Notes were issued pursuant to an indenture dated July 22, 2022, among the OP, Legacy HTA and U.S. Bank Trust Company, National Association, as trustee, as supplemented by the first supplemental indenture, dated as of July 22, 2022, the second supplemental indenture, dated as of July 22, 2022, the third supplemental indenture, dated as of July 22, 2022 and the fourth supplemental indenture, dated as of July 22, 2022. Legacy HTA guaranteed the New HR Notes pursuant to (i) a guarantee of the 2025 Notes, (ii) a guarantee of the 2028 Notes, (iii) a guarantee of the 2030 Notes, and (iv) a guarantee of the 2031 Notes, each dated July 22, 2022. Legacy HTA and the OP filed a registration statement on Form S-4 (File No. 333-265593) relating to the issuance of the New HR Notes with the Securities and Exchange Commission (the “SEC”) on June 14, 2022, which was declared effective by the SEC on June 28, 2022. The following sets forth the results of the Exchange Offers:
| | | | | | | | | | | |
Series of Old HR Notes | Tenders and Consents Received as of the Expiration Date | Percentage of Total Outstanding Principal Amount of Such Series of Old HR Notes |
3.875 | % | Senior Notes due 2025 | $235,016,000 | 94.01 | % |
3.625 | % | Senior Notes due 2028 | $290,246,000 | 96.75 | % |
2.400 | % | Senior Notes due 2030 | $297,507,000 | 99.17 | % |
2.050 | % | Senior Notes due 2031 | $298,858,000 | 99.62 | % |
Credit Facilities
In connection with the effectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Fourth Amended and Restated Credit and Term Loan Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association, as Administrative Agent; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., and Citibank, N.A., as Joint Book Runners; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., The Bank of Nova Scotia, Capital One, National Association, U.S. Bank National Association, and PNC Capital Markets LLC, as Joint Lead Arrangers; and the other lenders named therein. The Credit Facility restructures the parties’ existing bank facilities and adds additional borrowing capacities for the Combined Company following the Merger. The OP is the borrower under the Credit Facility (in such capacity, the “Borrower”).
•Legacy HR’s existing $700.0 million revolving credit facility under the Amended and Restated Credit Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
from time to time prior to July 20, 2022, the “Existing HR Revolving Credit Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and Wells Fargo Bank, National Association, as the administrative agent (the “WF Administrative Agent”), was terminated, all outstanding obligations in respect thereof were deemed paid in full and all commitments thereunder were permanently reduced to zero and terminated.
•Legacy HR’s existing $200.0 million term loan facility and existing $150.0 million term loan facility under the Amended and Restated Term Loan Agreement, dated as of May 31, 2019 (as amended, restated, replaced, supplemented, or otherwise modified from time to time prior to July 20, 2022, the “Existing HR Term Loan Agreement”), by and among Legacy HR, the lenders party thereto from time to time and their assignees, as lenders, and the WF Administrative Agent, in each, case, were deemed continued and assumed by the Borrower under the Credit Facility, and the Existing HR Term Loan Agreement was terminated.
◦The existing $200.0 million term loan facility was amended to: (a) conform to the terms of the Borrower’s other term loan facilities under the Credit Facility; (b) include 2 one-year extension options, resulting in a latest final maturity in May 2026; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Credit Facility; and
◦The existing $150.0 million term loan facility was amended to conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the existing maturity in June 2026 remains unchanged under the Credit Facility.
•Legacy HTA’s and the OP’s existing $1.0 billion revolving credit facility was upsized to $1.5 billion (the “Revolver”) pursuant to the Credit Facility. The Revolver currently matures in October 2025, and the Credit Facility adds an additional one-year extension option for the Revolver, for a total of 2 one-year extension options.
•Legacy HTA’s and the OP’s existing $300.0 million term loan facility was deemed continued pursuant to the Credit Facility and was amended to conform to the terms of the Borrower’s other term loan facilities under the Credit Facility. The existing maturity in October 2025 remains unchanged under the Credit Facility.
•Legacy HTA’s and the OP’s existing $200.0 million term loan facility was deemed continued pursuant to the Credit Facility and was amended to (a) conform to the terms of the Borrower’s other term loan facilities under the Credit Facility; (b) extend the maturity from January 2024 to July 20, 2027; and (c) reprice to align with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
•The Credit Facility provides for a new $350.0 million delayed-draw term loan facility that is available to be drawn for 12 months after July 20, 2022 and has an initial maturity date of July 20, 2023, with 2 one-year extension options. The terms of any delayed draw term loans funded thereunder conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the pricing for such delayed draw term loans aligns with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
•The Credit Facility provides for a new $300.0 million term loan facility that was funded on July 20, 2022 and has a maturity of January 20, 2028, with no extension options. The terms of such term loan facility conform to the terms of the Borrower’s other term loan facilities under the Credit Facility, and the pricing for such term loan facility aligns with the pricing for the Borrower’s other term loan facilities under the Credit Facility.
Special Dividend
On May 13, 2022, Legacy HTA entered into a new $1.125 billion term loan agreement to fund the special dividend pursuant to the terms of the Merger Agreement. Prior to the Merger, Legacy HTA drew against the term loan to fund the special dividend of $4.82 that was declared on July 6, 2022 for shareholders of record on July 19, 2022. The special dividend was paid to all Legacy HTA shareholders on July 27, 2022. The Company plans to repay the term loan with proceeds from asset sales and joint ventures. As of the date of this report, the Company has closed on $433 million in joint ventures and asset sales. The remainder is expected to close in the third quarter of 2022.
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
13. Per Share Data of HTA
For the three months ended March 31, 2022 and 2021, all of our earnings were distributed and the calculated earnings per share amount would be the same for all classes.
The following is the reconciliation of the numerator and denominator used in basic and diluted earnings per share of HTA for the three months ended March 31, 2022 and 2021, respectively (in thousands, except per share data): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Numerator: | | | |
Net income | $ | 18,666 | | | $ | 22,393 | |
Net income attributable to non-controlling interests | (351) | | | (363) | |
Net income attributable to common stockholders | $ | 18,315 | | | $ | 22,030 | |
Denominator: | | | |
Weighted average shares outstanding - basic | 228,978 | | | 218,753 | |
Dilutive shares - OP Units convertible into common stock | 4,068 | | | 3,515 | |
| | | |
Adjusted weighted average shares outstanding - diluted | 233,046 | | | 222,268 | |
Earnings per common share - basic | | | |
Net income attributable to common stockholders | $ | 0.08 | | | $ | 0.10 | |
Earnings per common share - diluted | | | |
Net income attributable to common stockholders | $ | 0.08 | | | $ | 0.10 | |
14. Per Unit Data of HTALP
The following is the reconciliation of the numerator and denominator used in basic and diluted earnings per unit of HTALP for the three months ended March 31, 2022 and 2021, respectively (in thousands, except per unit data): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Numerator: | | | |
Net income | $ | 18,666 | | | $ | 22,393 | |
Net income attributable to non-controlling interests | — | | | — | |
Net income attributable to common unitholders | $ | 18,666 | | | $ | 22,393 | |
Denominator: | | | |
Weighted average OP Units outstanding - basic | 233,046 | | | 222,268 | |
Dilutive units - OP Units convertible into common units | — | | | — | |
| | | |
Adjusted weighted average units outstanding - diluted | 233,046 | | | 222,268 | |
Earnings per common unit - basic: | | | |
Net income attributable to common unitholders | $ | 0.08 | | | $ | 0.10 | |
Earnings per common unit - diluted: | | | |
Net income attributable to common unitholders | $ | 0.08 | | | $ | 0.10 | |
HEALTHCARE TRUST OF AMERICA, INC. AND HEALTHCARE TRUST OF AMERICA HOLDINGS, LP NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
15. Supplemental Cash Flow Information
The following is the supplemental cash flow information for the three months ended March 31, 2022 and 2021, respectively (in thousands): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Supplemental Disclosure of Cash Flow Information: | | | |
Interest paid, net of capitalized interest | $ | 39,025 | | | $ | 38,605 | |
Cash paid for operating leases | 4,335 | | | 4,554 | |
| | | |
Supplemental Disclosure of Noncash Investing and Financing Activities: | | | |
Accrued capital expenditures | $ | 7,620 | | | $ | 19,013 | |
Dividend distributions declared, but not paid | 75,766 | | | 71,146 | |
| | | |
| | | |
Redemption of non-controlling interest | 2,065 | | | 255 | |
| | | |
ROU assets obtained in exchange for lease obligations | — | | | 3,995 | |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The use of
Disclosure Regarding Forward-Looking Statements
This report and other materials the words “we,” “us,”Company has filed or “our” refers to HTAmay file with the Securities and HTALP, collectively.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report,Exchange Commission (the "SEC"), as well as with the audited consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operationsinformation included in our 2021 Annual Report on Form 10-K.
The information set forth below is intendedoral statements or other written statements made, or to provide readers with an understanding of our financial condition, changes in financial condition and results of operations.
•Forward-Looking Statements;
•Executive Summary;
•Company Highlights;
•Critical Accounting Policies;
•Recently Issued or Adopted Accounting Pronouncements;
•Factors Which May Influence Results of Operations;
•Results of Operations;
•Non-GAAP Financial Measures;
•Liquidity and Capital Resources;
•Commitments and Contingencies;
•Debt Service Requirements;
•Off-Balance Sheet Arrangements; and
•Inflation.
Forward-Looking Statements
Certain statements contained in this Quarterly Report constitute forward-looking statements within the meaningbe made, by management of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”)). SuchCompany, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include in particular,all statements about our plans, strategies, prospectsthat do not relate solely to historical or current facts and estimates regarding future MOB market performance. Additionally, such statements are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially and in adverse ways from those projected or anticipated. Therefore, such statements are not intended tocan be a guarantee of our performance in future periods. Forward-looking statements are generally identifiableidentified by the use of words such terms as “may,” “will,” “expect,” “project,“believe,” “may,“anticipate,” “should,” “could,” “would,“target,” “intend,” “plan,” “anticipate,” “estimate,” “believe,“project,” “continue,” “opinion,“should,” “predict,” “potential,” “pro forma” or the negative of such terms“could," "budget" and other comparable terminology. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report is filed with the SEC. We cannot guarantee the accuracy of any such forward-looking statements contained in this Quarterly Report,terms, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Forward-looking statements regarding HR and HTA, include, but are not limited to, statements related to the Merger, including the anticipated timing, financing benefits and financial and operational impact thereof; HR’s expected financing forof the transaction; other statements of management’s belief, intentions or goals; and other statements that are not historical facts.Merger. These forward-looking statements are based on each of the companies’Company's, and with respect to the Merger, include HTA's, current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation, risks and uncertainties associated with: HR’s and HTA’s ability to complete the Merger on the proposed terms or on the anticipated timeline, or at all, including risks and uncertainties related to securing the necessary shareholder approvals and satisfaction of other closing conditions to consummate the Merger; the occurrence of any event, change or other circumstance that could give rise to the termination of the definitive transaction agreement relating to the Merger; risks related to diverting the attention of HR and HTAthe Company's management from ongoing business operations; failure to realize the expected benefits of the Merger; significant transaction costs and/or unknown or inestimable liabilities;liabilities of the Merger; the risk of shareholder litigation in connection with the Merger, including resulting expense or delay; the risk that the Company’s and HTA’s businessrespective businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; the ability to obtain the expected financing to consummate the Merger; risks related to future opportunities and plans for the Combined Company, including the
uncertainty of expected future financial performance and results of the Combined Company following completion of the Merger; effects relating to the announcement of the Merger or any further announcements or the consummation of the Merger on the market price of HR’s or HTA’s common stock;transaction; the possibility that, if HRthe Combined Company does not achieve the perceived benefits of the Merger as rapidly or to the extent anticipated by financial analysts or investors, the market price of HR’sthe Combined Company’s common stock could decline; general adverse economic and local real estate conditions; the inability of significant tenants to continue paying their rent obligations due to bankruptcy, insolvency or a general downturn in their business; increases in interest rates; increases in operating expenses and real estate taxes; changes in the dividend policy for HR’sthe Combined Company’s common stock or its ability to pay dividends; impairment charges; pandemics or other health crises, such as COVID-19; and other risks and uncertainties affecting HR and HTA,the Combined Company, including those described from time to time under the caption “Risk Factors” and elsewhere in HR’s and HTA’s SECthe Combined Company’s filings and reports with the SEC, including HR’sthe Company’s Annual Report on Form 10-K for the year ended December 31, 2021, HTA’s Annual Report on Form 10-K for the year ended December 31, 2021, and other filings and reports by either company.2021. Moreover, other risks and uncertainties of which HR or HTA arethe Combined Company is not currently aware may also affect each of the companies’Combined Company's forward-looking statements and may cause actual results and the timing of events to differ materially from those anticipated. The forward-looking statements made in this communication are made only as of the date hereof or as of the dates indicated in the forward-looking statements, even if they are subsequently made available by HR or HTAthe Combined Company on their respective websitesits website or otherwise. Neither HR nor HTAThe Combined Company undertakes anyno obligation to update or supplement any forward-looking statements to reflect actual results, new information, future events, changes in its expectations or other circumstances that exist after the date as of which the forward-looking statements were made, except as required by law.
AnyStockholders and investors are cautioned not to unduly rely on such forward-looking statements reflect our current views about future events, are subject to unknown risks, uncertainties,when evaluating the information presented in the Combined Company’s filings and other factors, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements,reports, including, our ability to generate positive cash flow from operations, provide dividends to stockholders and maintain the value of our real estate properties, may be significantly hindered. Factors that might impair our ability to meet such forward-looking statements include, without limitation, those discussed in Part I,estimates and projections regarding the performance of development projects the Combined Company is pursuing.
For a detailed discussion of the Combined Company’s risk factors, please refer to Legacy HR's and Legacy HTA's filings with the SEC, including this report and Item 1A -1A. Risk Factors in our 2021herein and Legacy HR's and Legacy HTA's Annual Report on Form 10-K for the year ended December 31, 2021.
Merger with Healthcare Trust of America
Completed Merger
On July 20, 2022, Legacy HR, Legacy HTA, the OP and Merger Sub completed the Merger in accordance with the terms of the Merger Agreement. Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP such that Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is incorporated hereinintended to align the corporate structure of the combined company after giving effect to the Merger and those discussedthe UPREIT reorganization (the “Combined Company”) and to provide a platform for the Combined Company to more efficiently acquire properties in Part II,a tax-deferred manner. The Combined Company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange (the “NYSE”) under the ticker symbol “HR”.
Unless expressly stated otherwise, the discussion in this Item 1A. Risk Factors2 refers to Legacy HR's financial condition and results of operations on a stand-alone basis prior to giving effect to the Merger. Because Legacy HR was the accounting acquirer under GAAP in the transaction, its historical financial statements become the historical financial statements for the Company. For additional information, please refer to the Explanatory Note in this Quarterly Report on Form 10-Q.
Forward-looking statements express expectationsLiquidity and Capital Resources
Sources and Uses of future events. All forward-looking statements are inherently uncertain as they areCash
The Company’s primary sources of cash include rent receipts from its real estate portfolio based on various expectationscontractual arrangements with its tenants, proceeds from the sales of real estate properties, joint ventures, and assumptions concerning future events and they are subjectproceeds from public or private debt or equity offerings. Prior to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, our stockholders are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak onlythe refinancing of its bank facilities in connection with the Merger, as of June 30, 2022, the date made. In addition, we undertake no obligationCompany had $209.5 million available to update or revise forward-looking statementsbe drawn on its unsecured credit facility under the Amended and Restated Credit Agreement, dated as of May 31, 2019 (the "Unsecured Credit Facility") and $34.3 million in cash.
The Combined Company expects to reflect changed assumptions,continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and liquidity sources described in Note 9 to the occurrenceCondensed Consolidated Financial Statements included in this report. The Combined Company believes that its liquidity and sources of unanticipated events or changescapital are adequate to projections oversatisfy its cash requirements. The Combined Company cannot, however, be certain that these sources of funds will be available at a time except as required by law.and upon terms acceptable to the Combined Company in sufficient amounts to meet its liquidity needs.
These risks and uncertainties should be consideredFinancings in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filingsConnection with the SEC.Merger
Executive SummaryCredit Facilities
We areIn connection with the largest publicly-traded REIT focused on MOBseffectiveness of the Merger, Legacy HR (in a limited capacity), Legacy HTA and the OP entered into the Fourth Amended and Restated Credit and Term Loan Agreement (the “Credit Facility”) with Wells Fargo Bank, National Association, as Administrative Agent; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., and Citibank, N.A., as Joint Book Runners; Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., U.S. Bank National Association, Citibank, N.A., The Bank of Nova Scotia, Capital One, National Association, U.S. Bank National Association, and PNC Capital Markets LLC, as Joint Lead Arrangers; and the other lenders named therein. The Credit Facility restructures the parties’ existing bank facilities and adds additional borrowing capacities for the Combined Company following the Merger. See Note 9 to the Condensed Consolidated Financial Statements for additional information.
Investing Activities
Cash flows used in investing activities for the U.S. as measured bysix months ended June 30, 2022 were approximately $281.2 million. Below is a summary of significant investing activities.
Company Acquisitions
The following table details the gross leasable area ("GLA") of our MOBs. We conduct substantially all of our operations through HTALP. We invest in MOBs that we believe will serveCompany's acquisitions for the future of healthcare deliverysix months ended June 30, 2022:
| | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS |
Dallas, TX | Texas Health Resources | 2/11/22 | $ | 8,175 | | 18,000 | 0.19 |
San Francisco, CA 2 | Kaiser/Sutter Health | 3/7/22 | 114,000 | | 166,396 | | 0.90 to 3.30 |
Atlanta, GA | Wellstar Health | 4/7/22 | 6,912 | | 21,535 | | 0.00 |
Denver, CO | Centura Health | 4/13/22 | 6,320 | | 12,207 | | 2.40 |
Colorado Springs, CO 3 | Centura Health | 4/13/22 | 13,680 | | 25,800 | | 0.80 to 1.70 |
Seattle, WA | UW Medicine | 4/28/22 | 8,350 | | 13,256 | | 0.05 |
Houston, TX | CommonSpirit | 4/28/22 | 36,250 | | 76,781 | | 1.70 |
Los Angeles, CA | Cedars-Sinai Health Systems | 4/29/22 | 35,000 | | 34,282 | | 0.11 |
Oklahoma City, OK | Mercy Health | 4/29/22 | 11,100 | | 34,944 | | 0.18 |
Raleigh, NC 2 | WakeMed/None | 5/31/22 | 27,500 | | 85,113 | | 0.25 to 12.30 |
Tampa, FL 3 | BayCare Health | 6/9/22 | 18,650 | | 55,788 | | 0.23 |
| | | | | |
| | | | | |
| | | | | |
Total real estate acquisitions | | $ | 285,937 | | 544,102 | | |
| | | | | |
1Includes buildings located on-campus, adjacent and MOBsoff-campus that are primarilyanchored by healthcare systems or located on health system campuses, near university medical centers,within two miles of a hospital campus.
2Includes three properties.
3Includes two properties.
Subsequent to June 30, 2022 and unrelated to the Merger, the Company acquired the following property:
| | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS |
Seattle, WA | EvergreenHealth | 8/1/22 | $ | 4,850 | | 10,593 | 0.24 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | |
TIAA Joint Venture Acquisitions
The following table details the TIAA Joint Venture's acquisitions for the six months ended June 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
Dollars in thousands | ASSOCIATED HEALTH SYSTEM/TENANCY 1 | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | MILES TO CAMPUS | COMPANY OWNERSHIP % |
San Francisco, CA 2 | MarinHealth/Kaiser | 3/7/22 | $ | 67,175 | | 110,865 | 0.00 to 3.30 | 50 | % |
Los Angeles, CA 3 | Valley Presbyterian Health | 3/7/22 | 33,800 | | 103,259 | | 1.30 | 50 | % |
| | | | | | |
| | | | | | |
Total TIAA Joint Venture acquisitions | | $ | 100,975 | | 214,124 | | | |
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or in core community outpatient locations. We also focus on key markets that have certain demographic and macro-economic trends and where we can utilize our institutional full-service operating platform to generate strong tenant and health system relationships and operating cost efficiencies. Our primary objective is to maximize stockholder value with disciplined growth through strategic investments that provide an attractive risk-adjusted returnlocated within two miles of a hospital campus.
2Includes three properties.
3Includes two properties.
Dispositions
The Company disposed of four properties during the six months ended June 30, 2022 for our stockholders by consistently increasing oura total sales price of $110.5 million, including cash flow. In pursuing this objective, we: (i) seek internal growth through proactive asset management, leasing, building services and property management oversight; (ii) target accretive acquisitions and developmentsproceeds of MOBs in markets with attractive demographics that complement our existing portfolio; and (iii) actively manage our balance sheet to maintain flexibility with conservative leverage. Additionally, from time to time we consider, on an opportunistic basis, significant portfolio acquisitions that we believe fit our core business and could enhance our existing portfolio.$108.1 million. The following table details these dispositions for the six months ended June 30, 2022:
| | | | | | | | | | | | | | |
Dollars in thousands | | Date Disposed | Sales Price | Square Footage |
Loveland, CO 1 | | 2/24/22 | $ | 84,950 | | 150,291 |
San Antonio, TX 1 | | 4/15/22 | 25,500 | | 201,523 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Total dispositions | | $ | 110,450 | | 351,814 | |
1Includes two properties.
Capital Funding
During the six months ended June 30, 2022, capital funding included the following:
•$17.2 million toward the following development and redevelopment of properties:
◦Memphis, Tennessee redevelopment totaled $2.1 million;
◦Dallas, Texas redevelopments totaled $3.3 million;
◦Tacoma, Washington redevelopment totaled $5.4 million;
◦Nashville, Tennessee development totaled $5.6 million;
◦reposition properties capital and tenant improvements totaled $0.1 million; and
◦tenant improvement funding for previously completed projects totaled $0.7 million.
•$14.6 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$9.9 million toward second generation tenant improvements; and
•$7.2 million toward capital expenditures.
Financing Activities
Cash flows provided by financing activities for the six months ended June 30, 2022 were approximately $188.2 million. Inflows from equity proceeds related to the Company's common stock issuances totaled $22.8 million, net of issuance costs incurred, and net borrowing totaled $262.3 million. Aggregate cash outflows totaled approximately $96.9 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 August 6, 2021 and November 5, 2021, the Company entered into equity distribution agreements with 12 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. These agreements are no longer in effect following the closing of the Merger on July 20, 2022. 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, 2021 | $ | — | | — | | — | | 727,400 | | $ | — | |
1Q 2022 | $ | 31.73 | | — | | 727,400 | | — | | $ | 22.3 | |
2Q 2022 | $ | — | | — | | — | | — | | $ | — | |
| | | | | |
Debt Activity
On February 18, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 4.70% that encumbered a 56,762 square foot property in California. The aggregate payoff price of $12.6 million consisted of outstanding principal of $11.0 million and a "make-whole" amount of approximately $1.6 million. The unamortized premium of $0.8 million and the unamortized cost on this note of $0.1 million were written off upon payoff.
On February 24, 2022, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.17% that encumbered a 80,153 square foot property in Colorado, in conjunction with the disposition of the property. The aggregate payoff price of $6.4 million consisted of outstanding principal of $5.8 million and a "make-whole" amount of approximately $0.6 million. The unamortized premium of $0.1 million was written off upon payoff.
Since 2006, we have invested $7.8 billion primarilyAs of June 30, 2022, the Company has outstanding interest rate derivatives from Legacy HR totaling $175.0 million to hedge one-month LIBOR. The following details the amount and rate of each swap (dollars in MOBs, development projects, landthousands):
| | | | | | | | | | | |
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 | % | |
Operating Activities
Cash flows provided by operating activities increased from $105.6 million for the six months ended June 30, 2021 to $114.1 million for the six months ended June 30, 2022. 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 healthcare real estate assets consistingexpenses.
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.
New Accounting Pronouncements
See Note 1 to the 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, 2021, below are some of the factors and trends that management believes may impact future operations of the Company.
Expiring Leases
The Company expects that approximately 26.015% to 20% of the leases will expire each year in the ordinary course of business. There are 540 leases totaling 1.9 million square feet that will expire during the remainder of GLA throughout2022. Approximately 87% of the U.S. Approximately 67% of our portfolio isleases expiring in 2022 are in buildings located on the campuses of, or adjacent to nationallyhospital campuses, are distributed throughout the portfolio, and regionally recognized healthcare systems. Ourare not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of tenants upon expiration, and the retention ratio for the first six months of the year was within this range.
Operating Expenses
The Company historically has experienced increases in property taxes throughout its portfolio is diversified geographicallyas a result of increasing assessments and tax rates levied across 32 states,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 incurred variability in portfolio utilities expense based on seasonality, with no state having more than 21%the first and third quarters usually reflecting greater amounts. The effects of our total GLA as of March 31, 2022. Wethese operating expense increases are concentratedmitigated in 20 to 25 key marketsleases that are generally experiencing higher economic and demographic trends than other markets that we expect will drive demandhave provisions for MOBs.operating expense reimbursement. As of March 31,June 30, 2022, we had approximately 1 millionleases for 90% of the Company's multi-tenant leased square feetfootage allow for some recovery of GLA in ten of our top 20 marketsoperating expenses, with 30% having modified gross lease structures and approximately 95% of our portfolio, based on GLA, is located in the top 75 Metropolitan Statistical Area ("MSAs"), with Dallas, Houston, Boston, Miami60% having net lease structures.
General and Indianapolis being our largest markets by annualized base rent.Administrative Expense
Merger with Healthcare Realty Trust Incorporated
On February 28,Prior to 2022, the Company granted long-term incentive awards, comprised of restricted stock, based on backward-looking performance measured at the end of the calendar year. The Company OP and Merger Sub entered intoadopted a Merger Agreementnew incentive compensation structure, effective January 2022, comprised of RSUs. RSUs are granted at the beginning of the year with HR whereby Merger Sub will merge with and into HR, with HR continuing as the surviving corporation. Pursuant to the terms and subject to the conditions set forththree-year forward-looking performance targets. With this change in the Merger Agreement, each outstanding sharetiming and structure of Common Stock, $0.01 par value per share, of HR Common Stockincentive awards, the expense associated with the 2021 backward-looking awards will be converted intooverlap the right to receive 1.0 share of Class A Common Stock, $0.01 par value per share, ofexpense associated with the Company Common Stock.January 2022 forward-looking awards. The Merger Agreement contains customary representations, warranties and covenants by each party. The Merger is subject to certain conditions which are set forth in the Merger Agreement, including the approval of both companies’ stockholders. The boards of directors of the Company and HR have unanimously approved the Merger Agreement. The Mergernew plan is expected to close during the third quarter ofincrease total general and administrative expense by $3.5 million in 2022.
Additionally, on May 2, 2022, HTA and HR filed a Form S-4 Registration Statement with the SEC in connection with the contemplated Merger. Please review this Form S-4 for more information about the contemplated Merger.
Company Highlights
Portfolio Operating Performance
•For the three months ended March 31, 2022, our total revenue was $202.0 million, compared to $191.5 million for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, our net income was $18.7 million, compared to $22.4 million, for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, our net income attributable to common stockholders was $0.08 per diluted share, or $18.3 million, compared to $0.10 per diluted share, or $22.0 million, for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, HTA’s FFO, as defined by NAREIT, was $93.6 million, or $0.40 per diluted share, compared to $0.44 per diluted share, or $97.8 million, for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, HTALP’s FFO was $94.0 million, or $0.40 per diluted OP Unit, compared to $0.44 per diluted OP Unit, or $98.2 million, for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, HTA’s and HTALP’s Normalized FFO was $0.44 per diluted share and OP Unit, or $101.5 million, compared to $0.44 per diluted share and OP Unit, or $98.3 million for the three months ended March 31, 2021.
•For additional information on FFO and Normalized FFO, see “FFO and Normalized FFO” below, which includes a reconciliation to net income attributable to common stockholders/unitholders and an explanation of why we present this non-GAAP financial measure.
•For the three months ended March 31, 2022, our Net Operating Income (“NOI”) was $136.1 million, compared to $131.9 million for the three months ended March 31, 2021.
•For the three months ended March 31, 2022, our Same-Property Cash NOI increased 0.8%, or $0.9 million, to $117.4 million, compared to $116.5 million for the three months ended March 31, 2021.
•For additional information on our NOI and Same-Property Cash NOI, see “NOI, Cash NOI and Same-Property Cash NOI” below, which includes a reconciliation from net income and an explanation of why we present these non-GAAP financial measures.
Key Market Focused Strategy and Investments
Over the last decade, we have been an active investor in the medical office sector. This has enabled us to create a high quality portfolio focused on MOBs serving the future of healthcare with scale and significance in 20 to 25 key markets.
•Our investment strategy includes alignment with key healthcare systems, hospitals,Purchase Options
Information about the Company's unexercised purchase options and leading academic medical universities. We are the largest owneramount and basis for determination of on-campus or adjacent MOBsthe purchase price is detailed in the country, with approximately 17.4 million square feet of GLA, or 67%, of our portfolio locatedtable below (dollars in these locations. thousands):
| | | | | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF JUNE 30, 2022 |
YEAR EXERCISABLE | MOB | INPATIENT | FAIR MARKET VALUE METHOD 1 | NON FAIR MARKET VALUE METHOD 2 | TOTAL |
Current 3 | 2 | | 1 | | $ | 55,146 | | $ | — | | $ | 55,146 | |
2023 | — | | — | | — | | — | | — | |
2024 | — | | — | | — | | — | | — | |
2025 | 4 | | — | | 48,298 | | 19,459 | | 67,757 | |
2026 | 1 | | — | | 21,109 | | — | | 21,109 | |
2027 | — | | — | | — | | — | | — | |
2028 | 1 | | — | | 41,101 | | — | | 41,101 | |
2029 | 2 | | — | | 51,437 | | — | | 51,437 | |
2030 | — | | — | | — | | — | | — | |
2031 | 3 | | — | | 84,570 | | — | | 84,570 | |
2032 and thereafter 4 | 7 | | — | | 255,071 | | — | | 255,071 | |
Total | 20 | | 1 | | $ | 556,732 | | $ | 19,459 | | $ | 576,191 | |
1The remaining 33% of our portfoliopurchase option price includes a fair market value component that is located in core community outpatient locations where healthcare is increasingly being delivered.determined by an appraisal process.
•2Over the past decade, our investmentsIncludes properties with stated purchase prices or prices based on fixed capitalization rates.
3These purchase options have been focused in our 20 to 25 key markets which we believe will outperformexercisable for an average of 14.9 years.
4Includes the broader U.S. markets from an economic and demographic perspective. As of March 31, 2022, approximately 95% of our portfolio’s GLAmedical office building that is locatedrecorded in the top 75 MSAs. Ourline 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 markets represent top MSAsperformance 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 strong growth metrics in jobs, household incomeGAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and population,useful to investors, as well as low unemploymentreconciliations of these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and mature healthcare infrastructures. Many of our key marketsperformance indicators presented herein are also supportednot necessarily identical to those presented by strong university systems.
•Our key market focus has enabled us to establish scale across 20 to 25 key markets and effectively utilize our asset management and leasing platform to deliver consistent same store growth and additional yield on investments, as well as cost effective service to tenants. As of March 31, 2022, we had approximately 1 million square feet of GLA in ten of our top 20 markets and approximately 0.5 million square feet of GLA in 17 of our top 20 markets.
•During the three months ended March 31, 2022, we closed on $19.0 million worth of medical office building investments totaling approximately 44,000 square feet of GLA. In addition, we funded $2.3 million of investments inother real estate notes receivable.
Internal Growth through Proactive In-House Property Management and Leasing
We believe we have onecompanies 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 largest full-serviceCompany's financial performance, or as alternatives to cash flow from operating platformsactivities 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 medical office sector that consists of our in-house asset managementCondensed Consolidated Financial Statements and leasing platform which allows us to better manage and service our existing portfolio. In each of these markets, we have established a strong in-house asset management and leasing platform that has allowed us to develop valuable relationships with health systems, physician practices, universities, and regional development firms that have led to investment and leasing opportunities for us. Our full-service operating platform has also enabled us to focus on generating cost efficiencies as we gain scale across individual markets and regions.
•As of March 31, 2022, our in-house asset management and leasing platform operated approximately 25.0 million square feet of GLA, or 96% of our total portfolio.
•As of March 31, 2022, our leased rate (which includes leases which have been executed, but which have not yet commenced) was 89.3% by GLA and our occupancy rate was 87.3% by GLA.
•We entered into new and renewal leases on approximately 0.7 million square feet of GLA, or approximately 2.7% of the GLA of our total portfolio, during the three months ended March 31, 2022.
•During the three months ended March 31, 2022, tenant retention for the Same-Property portfolio was 69%. Tenant retention is defined as the sum of the total leased GLA of tenants that renewed a lease during the period over the total GLA of leases that renewed or expired during the period.
Financial Strategy and Balance Sheet Flexibility
•As of March 31, 2022, we had total leverage, measured by debt less cash and cash equivalents to total capitalization, of 29.4%. Total liquidity was approximately $1.0 billion, inclusive of $975.0 million available on our unsecured revolving credit facility and cash and cash equivalents of $10.9 million as of March 31, 2022.
•As of March 31, 2022, the weighted average remaining term of our debt portfolio was 6.2 years.
Critical Accounting Policies
The complete list of our critical accounting policies was disclosedother financial data included elsewhere in our 2021 Annual Report on Form 10-K. Additionally, in light of the COVID-19 pandemic, we believe we have included all relevant information when determining our management estimates and that these estimates are in line with our established policies. For further information on other significant accounting policies that impact us, see Note 2 - Summary of Significant Accounting Policies in the accompanying condensed consolidated financial statements.
Recently Issued or Adopted Accounting Pronouncements
For detail on recently issued accounting pronouncements see Note 2 - Summary of Significant Accounting Policies in the accompanying condensed consolidated financial statements.
Factors Which May Influence Results of Operations
We are not aware of material trends or uncertainties other than the risk factors previously discussed in Part I, Item 1A - Risk Factors, in our 2021 Annual Report on Form 10-K, and this Quarterly Report on Form 10-Q under Item 1A. Risk Factors below, that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income10-Q.
Funds from the investment, managementOperations ("FFO"), Normalized FFO and operation of our properties.Funds Available for Distribution ("FAD")
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased spaceFFO and to lease currently available space and space that will become available from unscheduled lease terminations at the then applicable rental rates. Negative trends in one or more of these factors, including the ultimate collections of such rents, could adversely affect our rental income in future periods.
Investment Activity
During the three months ended March 31, 2022, we had investments with an aggregate gross purchase price of $19.1 million. During the three months ended March 31, 2021, we had investments with an aggregate gross purchase price of $32.9 million. The amount of any future acquisitions or dispositions could have a significant impact on our results of operations in future periods.
Results of Operations
Comparison of the Three Months Ended March 31, 2022 and 2021
As of March 31, 2022 and 2021, we owned and operated approximately 26.0 million and 25.6 million square feet of GLA, respectively, with a leased rate of 89.3% and 89.2%, respectively (including leases which have been executed, but which have not yet commenced), and an occupancy rate of 87.3% and 87.9%, respectively. All explanationsFFO per share are applicable to both HTA and HTALP unless otherwise noted.
Comparison of the three months ended March 31, 2022 and 2021, respectively, is set forth below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change | | % Change |
Revenues: | | | | | | | |
Rental income | $ | 200,243 | | | $ | 191,350 | | | $ | 8,893 | | | 4.6 | % |
Interest and other operating income | 1,759 | | | 143 | | | 1,616 | | | NM |
Total revenues | 202,002 | | | 191,493 | | | 10,509 | | | 5.5 | |
Expenses: | | | | | | | |
Rental | 65,884 | | | 59,579 | | | 6,305 | | | 10.6 | |
General and administrative | 12,448 | | | 10,560 | | | 1,888 | | | 17.9 | |
Merger-related costs | 6,018 | | | — | | | 6,018 | | | NM |
Transaction | 144 | | | 96 | | | 48 | | | 50.0 | |
Depreciation and amortization | 75,386 | | | 76,274 | | | (888) | | | (1.2) | |
Interest expense | 23,940 | | | 22,986 | | | 954 | | | 4.2 | |
| | | | | | | |
Total expenses | 183,820 | | | 169,495 | | | 14,325 | | | 8.5 | |
Loss on sale of real estate, net | (4) | | | — | | | (4) | | | NM |
| | | | | | | |
Income from unconsolidated joint venture | 400 | | | 392 | | | 8 | | | 2.0 | |
Other income | 88 | | | 3 | | | 85 | | | NM |
Net income | $ | 18,666 | | | $ | 22,393 | | | $ | (3,727) | | | (16.6) | % |
| | | | | | | |
NOI | $ | 136,118 | | | $ | 131,914 | | | $ | 4,204 | | | 3.2 | % |
Same-Property Cash NOI | $ | 117,430 | | | $ | 116,549 | | | $ | 881 | | | 0.8 | % |
*NM- not meaningful.
Rental Income
For the three months ended March 31, 2022 and 2021, respectively, rental income was comprised of the following (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change | | % Change |
Contractual rental income | $ | 191,165 | | | $ | 182,512 | | | $ | 8,653 | | | 4.7 | % |
Straight-line rent and amortization of above and (below) market leases | 4,244 | | | 5,247 | | | (1,003) | | | (19.1) | |
Other rental revenue | 4,834 | | | 3,591 | | | 1,243 | | | 34.6 | |
Total rental income | $ | 200,243 | | | $ | 191,350 | | | $ | 8,893 | | | 4.6 | % |
Contractual rental income, which includes expense reimbursements, increased $8.7 million for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The increase was primarily due to additional contractual rental income of $8.2 million from our 2021 and 2022 acquisitions, and contractual rent increases for the three months ended March 31, 2022, partially offset by $2.8 million of reduced contractual rental income as a result of the buildings we sold during 2021 and 2022 for the three months ended March 31, 2022, respectively.
Average starting and expiring base rents for new and renewal leases consisted of the following for the three months ended March 31, 2022 and 2021, respectively (in thousands, except in average base rents per square foot of GLA): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
New and renewal leases: | | | |
Average starting base rents | $ | 28.92 | | | $ | 24.75 | |
Average expiring base rents | 25.99 | | | 22.99 | |
| | | |
Square feet of GLA | 713 | | | 705 | |
Lease rates can vary across markets, and lease rates that are considered above or below current market rent may change over time. Leases that expired in 2022 had rents that we believed were at market rates. In general, leasing concessions vary depending on lease type, term, geography, and supply/demand dynamics.
Tenant improvements, leasing commissions and tenant concessions for new and renewal leases consisted of the following for the three months ended March 31, 2022 and 2021, respectively (in per square foot of GLA): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
New leases: | | | |
Tenant improvements | $ | 35.09 | | | $ | 22.34 | |
Leasing commissions | 5.11 | | | 3.63 | |
Tenant concessions | 0.41 | | | 7.14 | |
Renewal leases: | | | |
Tenant improvements | $ | 7.01 | | | $ | 5.03 | |
Leasing commissions | 4.12 | | | 2.21 | |
Tenant concessions | 0.00 | | | 0.16 | |
The average term for new and renewal leases executed consisted of the following for the three months ended March 31, 2022 and 2021, respectively (in years): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
New leases | 6.5 | | 4.4 |
Renewal leases | 4.3 | | 4.2 |
Rental Expenses
For the three months ended March 31, 2022 and 2021, rental expenses attributable to our properties were $65.9 million and $59.6 million, respectively. The increase in rental expenses was primarily due to $3.8 million of additional rental expenses associated with our 2021 and 2022 acquisitions for the three months ended March 31, 2022, respectively.
General and Administrative Expenses
For the three months ended March 31, 2022 and 2021, general and administrative expenses were $12.4 million and $10.6 million, respectively. The increase was driven primarilyoperating performance measures adopted by the following: (i) increased board expenses of $0.4 million, which includes additional board meeting fees of $0.2 million incurred primarily as a result of the Merger Agreement and the process related thereto, and $0.2 million of board member retainer fees for the board chairman and new board members; (ii) increased legal and professional fees of $0.4 million, primarily driven by costs incurred as a result of the previously disclosed whistleblower investigation, employee retention and strategic review matters; and (iii) increased costs for general corporate matters.
Merger-related costs
For the three months ended March 31, 2022, merger-related costs as a result of the contemplated Merger with HR were $6.0 million and included the following: (i) financial advisor fees of $3.8 million; (ii) legal fees of $1.8 million; (iii) merger and integration consulting fees of $0.3 million; and (iv) travel costs of $0.1 million. No such costs were incurred for the three months ended March 31, 2021.
Depreciation and Amortization Expense
For the three months ended March 31, 2022 and 2021, depreciation and amortization expense was $75.4 million and $76.3 million, respectively. The slight decrease in expense was associated with our buildings we disposed of during 2021 and 2022, offset by 2021 and 2022 acquisitions.
Interest Expense
For the three months ended March 31, 2022 and 2021, interest expense was $23.9 million and $23.0 million, respectively. The increase in interest expense is primarily related to amortization of commitment fees on the $1.7 billion bridge loan financing commitment secured in connection with the contemplated Merger with HR.
To achieve our objectives, we borrow at both fixed and variable rates. From time to time, we also enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes.
Loss on SaleNational Association of Real Estate net
ForInvestment Trusts (“NAREIT”). NAREIT defines FFO as the three months ended March 31, 2022, we realized a net loss of approximately $4 thousand, as a result of the salemost commonly accepted and reported measure of a tenant purchase option on 1 of our MOBs located in Georgia. For the three months ended March 31, 2021, we had no property dispositions.
Net Income
For the three months ended March 31, 2022 and 2021, netREIT’s operating performance equal to “net income was $18.7 million and $22.4 million, respectively. The decrease is primarily the result of the merger-related costs incurred as a result of the contemplated Merger with HR.
NOI and Same-Property Cash NOI
For the three months ended March 31, 2022 and 2021, NOI was $136.1 million and $131.9 million, respectively. The increases in NOI was primarily due to additional NOI from our 2021 and 2022 acquisitions of $5.6 million for the three months ended March 31, 2022, respectively, partially offset by $1.6 million of reduced NOI as a result of the buildings we sold during 2021 and 2022 for the three months ended March 31, 2022, respectively, and a reduction in straight-line rent from properties we owned for more than a year.
Same-Property Cash NOI increased 0.8% to $117.4 million for the three months ended March 31, 2022 compared to the three months ended March 31, 2021. The increase was primarily the result of rent escalations, offset by a slight decrease in average occupancy.
Non-GAAP Financial Measures
FFO and Normalized FFO
We compute FFO in accordance with the current standards established by NAREIT. FFO is defined as net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP), excluding gains or losses(or losses) from sales of real estate property, and impairment write-downs of depreciable assets, plus depreciation and amortization, related to investments in real estate,impairment, and after adjustments for unconsolidated partnerships and joint ventures. Additionally, with respect”
In addition to gainsFFO, the Company presents Normalized FFO and losses on the saleFAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of assets incidentaldebt issuance costs, debt extinguishment costs and other Company-defined normalizing items to the main business of a REIT, the REIT has the optionevaluate operating performance. FAD is presented by adding to include or exclude such gains and losses in the calculation of FFO. SinceNormalized FFO excludes depreciation and amortization unique to real estate, among other items, it provides a perspective not immediately apparent from net income or loss attributable to common stockholders/unitholders.non-
We also compute Normalized FFO, which excludes from FFO: (i) transaction expenses; (ii) gain or loss on extinguishment of debt; (iii) non-controlling income or loss from OP Units included in diluted shares (only applicable to the Company); and (iv) other normalizing adjustments, which include items that are unusual and infrequent in nature. Our methodology for calculating Normalized FFO may be different from the methods utilized by other REITs and, accordingly, may not be comparable to other REITs.
We present FFO and Normalized FFO because we consider them important supplemental measures of our operating performance and believe they are frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. Historical cost accounting assumes that the value of real estate assets diminishes ratably over time. Since real estate values have historically risen or fallen based on market conditions, many industry investors have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. FFO and Normalized FFO should not be considered as alternatives to net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP) as indicators of our financial performance, nor are they indicative of cash available to fund cash needs. FFO and Normalized FFO should be reviewed in connection with other GAAP measurements.
In addition, the amounts included in the calculation of FFO and Normalized FFO are generally the same for HTALP and HTA, except for net income or loss attributable to common stockholders/unitholders, non-controlling income or loss from OP Units included in diluted shares (only applicable to the Company) and the weighted average shares of our common stock or HTALP OP Units outstanding.
The following is the reconciliation of HTA’s FFO and Normalized FFO to net income attributable to common stockholders for the three months ended March 31, 2022 and 2021, respectively (in thousands, except per share data): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Net income attributable to common stockholders | $ | 18,315 | | | $ | 22,030 | |
Depreciation and amortization expense related to investments in real estate | 74,799 | | | 75,331 | |
Loss on sale of real estate, net | 4 | | | — | |
| | | |
Proportionate share of joint venture depreciation and amortization | 488 | | | 488 | |
FFO attributable to common stockholders | $ | 93,606 | | | $ | 97,849 | |
Transaction expenses | 144 | | | 96 | |
Merger-related costs (1) | 6,018 | | | — | |
Commitment fee amortization (2) | 892 | | | — | |
| | | |
Non-controlling income from OP Units included in diluted shares | 351 | | | 363 | |
Other normalizing adjustments (3) | 514 | | | — | |
Normalized FFO attributable to common stockholders | $ | 101,525 | | | $ | 98,308 | |
| | | |
Net income attributable to common stockholders per diluted share | $ | 0.08 | | | $ | 0.10 | |
FFO adjustments per diluted share, net | 0.32 | | | 0.34 | |
FFO attributable to common stockholders per diluted share | $ | 0.40 | | | $ | 0.44 | |
Normalized FFO adjustments per diluted share, net | 0.04 | | | 0.00 | |
Normalized FFO attributable to common stockholders per diluted share | $ | 0.44 | | | $ | 0.44 | |
| | | |
Weighted average diluted common shares outstanding | 233,046 | | | 222,268 | |
(1) For the three months ended March 31, 2022, merger-related costs include the following: (i) financial advisor fees of $3.8 million; (ii) legal fees of $1.8 million; (iii) merger and integration consulting fees of $0.3 million; and (iv) travel costs of $0.1 million.
(2) For the three months ended March 31, 2022, commitment fee amortization relates to commitment fees on the $1.7 billion bridge loan financing commitment secured in connection with the pending transaction with HR.
(3) For the three months ended March 31, 2022, other normalizing adjustments include the following: (i) additional board meeting fees of $159,000; (ii) legal and professional fees related to the whistleblower investigation of $143,000; (iii) legal fees related to employee retention matters of $131,000; and (iv) professional fees related to strategic review matters of $81,000.
The following is the reconciliation of HTALP’s FFO and Normalized FFO to net income attributable to common unitholders for the three months ended March 31, 2022 and 2021, respectively (in thousands, except per unit data): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Net income attributable to common unitholders | $ | 18,666 | | | $ | 22,393 | |
Depreciation and amortization expense related to investments in real estate | 74,799 | | | 75,331 | |
Loss on sale of real estate, net | 4 | | | — | |
| | | |
Proportionate share of joint venture depreciation and amortization | 488 | | | 488 | |
FFO attributable to common unitholders | $ | 93,957 | | | $ | 98,212 | |
Transaction expenses | 144 | | | 96 | |
Merger-related costs (1) | 6,018 | | | — | |
Commitment fee amortization (2) | 892 | | | — | |
| | | |
Other normalizing adjustments (3) | 514 | | | — | |
Normalized FFO attributable to common unitholders | $ | 101,525 | | | $ | 98,308 | |
| | | |
Net income attributable to common unitholders per diluted share | $ | 0.08 | | | $ | 0.10 | |
FFO adjustments per diluted OP Unit, net | 0.32 | | | 0.34 | |
FFO attributable to common unitholders per diluted OP Unit | $ | 0.40 | | | $ | 0.44 | |
Normalized FFO adjustments per diluted OP Unit, net | 0.04 | | | 0.00 | |
Normalized FFO attributable to common unitholders per diluted OP Unit | $ | 0.44 | | | $ | 0.44 | |
| | | |
Weighted average diluted common OP Units outstanding | 233,046 | | | 222,268 | |
(1) For the three months ended March 31, 2022, merger-related costs include the following: (i) financial advisor fees of $3.8 million; (ii) legal fees of $1.8 million; (iii) merger and integration consulting fees of $0.3 million; and (iv) travel costs of $0.1 million.
(2) For the three months ended March 31, 2022, commitment fee amortization relates to commitment fees on the $1.7 billion bridge loan financing commitment secured in connection with the pending transaction with HR.
(3) For the three months ended March 31, 2022, other normalizing adjustments include the following: (i) additional board meeting fees of $159,000; (ii) legal and professional fees related to the whistleblower investigation of $143,000; (iii) legal fees related to employee retention matters of $131,000; and (iv) professional fees related to strategic review matters of $81,000.
NOI, Cash NOI and Same-Property Cash NOI
NOI is a non-GAAP financial measure that is defined as net income or loss (computed in accordance with GAAP) before: (i) general and administrative expenses; (ii) transaction expenses; (iii)real estate depreciation and amortization, expense; (iv) impairment; (v) interest expense; (vi) gain or loss on salesnon-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 real estate and corporate assets; (vii) gain or loss on extinguishmentexpense. The Company's definition of debt; (viii) income or loss from unconsolidated joint venture; and (ix) other income or expense. We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with the management of our properties. Additionally, we believe that NOI is a widely accepted measure of comparative operating performance of REITs. However, our use of the term NOIthese terms may not be comparable to that of other REITsreal estate companies as they may have different methodologies for computing this amount. NOIthese amounts. FFO, Normalized FFO and FAD should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of ourthe Company's financial performance. NOIperformance 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 other GAAP measurements.financial measures.
Cash NOI is a non-GAAP financial measure which excludes from NOI: (i) straight-line rent adjustments; (ii) amortization of belowManagement believes FFO, Normalized FFO, FFO per common share, Normalized FFO per share and above market leases/leasehold interests and other GAAP adjustments; (iii) notes receivable interest income; and (iv) other normalizing adjustments. Contractual base rent, contractual rent increases, contractual rent concessions and changes in occupancy or lease rates upon commencement and expiration of leases are a primary driver of our revenue performance. We believe that Cash NOI, which removes the impact of straight-line rent adjustments, provides another measurementFAD ("Non-GAAP Measures") provide an understanding of the operating performance of our operating assets. Additionally, we believethe 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 Cash NOI is a widely accepted measurethe value of comparativereal 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 REITs. However, our usethese measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of the term Cash NOI may not be comparablecash available to that of other REITs as they may have different methodologies for computing this amount. Cash NOIfund cash needs. Further, these measures should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Cash NOI should be reviewed in connection with other GAAP measurements.
To facilitate the comparisonCompany’s operating performance or as an alternative to cash flow from operating activities as a measure of Cash NOI between periods, we calculate comparable amountsliquidity. The table below reconciles net income to FFO, Normalized FFO and FAD for a subset of our ownedthe three and operational properties referred to as “Same-Property”. Same-Property Cash NOI excludes (i) properties which have not been ownedsix months ended June 30, 2022 and operated by us during the entire span of all periods presented and disposed properties, (ii) our share of unconsolidated joint ventures, (iii) development, redevelopment and land parcels, (iv) properties intended for disposition in the near term which have (a) been approved by the Board of Directors, (b) is actively marketed for sale, and (c) an offer has been2021.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | SIX MONTHS ENDED JUNE 30, |
Amounts in thousands, except per share data | 2022 | 2021 | 2022 | 2021 |
Net income | $ | 6,130 | | $ | 23,096 | | $ | 48,357 | | $ | 47,118 | |
Gain on sales of real estate properties | (8,496) | | (20,970) | | (53,280) | | (39,860) | |
Impairment of real estate properties | — | | 5,078 | | (25) | | 5,912 | |
Real estate depreciation and amortization | 57,334 | | 51,199 | | 112,991 | | 102,510 | |
Proportionate share of unconsolidated joint ventures | 2,807 | | 1,354 | | 5,176 | | 2,168 | |
FFO attributable to common stockholders | $ | 57,775 | | $ | 59,757 | | $ | 113,219 | | $ | 117,848 | |
Acquisition and pursuit costs 1 | 1,352 | | 670 | | 2,655 | | 1,414 | |
Merger-related costs 2 | 7,085 | | — | | 13,201 | | — | |
Lease intangible amortization | 584 | | (6) | | 893 | | (78) | |
Non-routine legal costs/forfeited earnest money received 3 | 140 | | — | | 231 | | (500) | |
Debt financing costs | — | | 283 | | 1,429 | | 283 | |
Unconsolidated JV normalizing items 4 | 83 | | 55 | | 178 | | 82 | |
Normalized FFO attributable to common stockholders | $ | 67,019 | | $ | 60,759 | | $ | 131,806 | | $ | 119,049 | |
Non-real estate depreciation and amortization | 556 | | 641 | | 1,016 | | 1,314 | |
Non-cash interest amortization 5 | 747 | | 897 | | 1,458 | | 1,791 | |
Provision for bad debt, net | 16 | | 57 | | 159 | | (22) | |
Straight-line rent, net | (1,327) | | (1,194) | | (2,536) | | (2,289) | |
Stock-based compensation | 3,356 | | 2,627 | | 7,055 | | 5,647 | |
Unconsolidated JV non-cash items 6 | (242) | | (354) | | (513) | | (711) | |
Normalized FFO adjusted for non-cash items | $ | 70,125 | | $ | 63,433 | | $ | 138,445 | | $ | 124,779 | |
2nd generation TI | (5,051) | | (4,748) | | (9,950) | | (9,937) | |
Leasing commissions paid | (3,475) | | (3,804) | | (7,242) | | (4,997) | |
Capital additions | (4,557) | | (6,077) | | (7,177) | | (8,096) | |
FAD | $ | 57,042 | | $ | 48,804 | | $ | 114,076 | | $ | 101,749 | |
FFO per common share - diluted | $ | 0.38 | | $ | 0.42 | | $ | 0.75 | | $ | 0.83 | |
Normalized FFO per common share - diluted | $ | 0.45 | | $ | 0.43 | | $ | 0.88 | | $ | 0.84 | |
FFO weighted average common shares outstanding - diluted 7 | 150,545 | | 142,914 | | 150,203 | | 141,323 | |
1Acquisition and pursuit costs include third-party and travel costs related to the pursuit of acquisitions and developments.
2Includes costs incurred related to the Merger.
3Non-routine legal costs include expenses related to two separate disputes; one with a contractor on a $59 million completed construction project and another with a tenant on a violation of use restrictions. Forfeited earnest money received at prices we would transactrelated to a disposition that did not materialize.
4Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures.
5Includes the sales process is ongoing,amortization of deferred financing costs, discounts and (v) certain non-routine items. Same-Propertypremiums, and non-cash financing receivable amortization.
6Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures.
7The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 806,310 and 806,487, respectively for the three and six months ended June 30, 2022.
Cash Net Operating Income ("NOI") and Same Store Cash NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Same-Property Cash NOI should be reviewed in connection with other GAAP measurements.
The following is the reconciliation of HTA’s and HTALP’s NOI, Cash NOI and Same-PropertySame Store Cash NOI are key performance indicators. Management considers these to netbe 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
three months ended March 31, 2022duration of the year-over-year comparison period presented. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, properties undergoing redevelopment, and
2021, respectively (in thousands): | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
Net income | $ | 18,666 | | | $ | 22,393 | |
General and administrative expenses | 12,448 | | | 10,560 | |
Merger-related costs | 6,018 | | | — | |
Transaction expenses | 144 | | | 96 | |
Depreciation and amortization expense | 75,386 | | | 76,274 | |
| | | |
Interest expense | 23,940 | | | 22,986 | |
Loss on sale of real estate, net | 4 | | | — | |
| | | |
Income from unconsolidated joint venture | (400) | | | (392) | |
Other income | (88) | | | (3) | |
NOI | $ | 136,118 | | | $ | 131,914 | |
Straight-line rent adjustments, net | (2,828) | | | (3,774) | |
Amortization of (below) and above market leases/leasehold interests, net and other GAAP adjustments | (407) | | | (475) | |
Notes receivable interest income | (1,660) | | | (6) | |
| | | |
Cash NOI | $ | 131,223 | | | $ | 127,659 | |
Acquisitions not owned/operated for all periods presented and disposed properties Cash NOI | (6,280) | | | (2,180) | |
Redevelopment Cash NOI | (2,105) | | | (2,650) | |
Intended for sale Cash NOI | (5,408) | | | (6,280) | |
Same-Property Cash NOI (1) | $ | 117,430 | | | $ | 116,549 | |
| | | |
(1) Same-Property includes 424 buildings for the three months ended March 31, 2022 and 2021, respectively.
Liquidity and Capital Resources
Our primary sources of cash include: (i) cash flow from operations; (ii) borrowings under our unsecured revolving credit facility; (iii) net proceeds from the issuances of debt and equity securities; and (iv) proceeds from our dispositions. During the next 12 months our primary uses of cash are expected to include: (a) the funding of acquisitions of MOBs, development properties and other facilities that serve the healthcare industry; (b) capital expenditures; (c) the payment of operating expenses; (d) debt service payments, including principal payments; and (e) the payment of dividends to our stockholders. We anticipate cash flow from operations, restricted cash and reserve accounts and our unsecured revolving credit facility, if needed, will be sufficient to fund our operating expenses, capital expenditures and dividends to stockholders. Investments and maturing indebtedness may require funds from borrowings under our unsecured revolving credit facility, the issuance of debt and/newly redeveloped or equity securities or proceeds from sales of real estate.
As of March 31, 2022, we had total liquidity of $1.0 billion, inclusive of $975.0 million available on our unsecured revolving credit facility and cash and cash equivalents of $10.9 million.
As of March 31, 2022, we had unencumbered assets with a gross book value of $7.9 billion. The unencumbered properties may be used as collateral to secure additional financings in future periods or refinance our current debt as it becomes due. Our ability to raise funds from future debt and equity issuances is dependent on our investment grade credit ratings, general economic and market conditions, and our operating performance.developed properties.
When we acquireThe Company utilizes the redevelopment classification for properties where management has approved a property, we prepare achange in strategic direction for such properties through the application of additional resources including an amount of capital plan that contemplatesexpenditures significantly above routine maintenance and capital improvement expenditures. These properties are described in additional detail in Note 6 to the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan for each investmentCondensed Consolidated Financial Statements included elsewhere in this report.
Any recently acquired property will be adjusted through ongoing, regular reviews of our portfolioincluded in the same store pool once the Company has owned the property for eight full quarters. Newly developed or as necessary to respond to unanticipated additional capital needs. As of March 31, 2022, we estimate that our expenditures for capital improvements including lease commissions forredeveloped properties will be included in the remainder of the year will range from approximately $75 million to $100 million depending on leasing activity. In addition, we have approximately $150 million inclusive of costs to complete active development projects and incremental tenant improvements as part of our recently completed development projects. Although we cannot provide assurance that we will not exceed these estimated expenditure levels, we believe our liquidity of $1.0 billion allows us the flexibility to fund such capital expenditures.same store pool eight full quarters after substantial completion.
If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewal leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of our leasing activity and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs.
Cash Flows
The following is a summary of ourtable reflects the Company's same store cash flowsNOI for the three months ended March 31,June 30, 2022 and 2021, respectively (in thousands): | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 | | Change |
Cash, cash equivalents and restricted cash - beginning of period | $ | 57,069 | | | $ | 118,765 | | | $ | (61,696) | |
Net cash provided by operating activities | 49,308 | | | 65,353 | | | (16,045) | |
Net cash used in investing activities | (33,180) | | | (76,299) | | | 43,119 | |
Net cash used in financing activities | (57,775) | | | (74,733) | | | 16,958 | |
Cash, cash equivalents and restricted cash - end of period | $ | 15,422 | | | $ | 33,086 | | | $ | (17,664) | |
2021. Net cash provided by operating activities decreased in 2022 primarily due | | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS INVESTMENT at June 30, 2022 | SAME STORE CASH NOI for the three months ended June 30, |
Dollars in thousands | 2022 | 2021 |
Same store properties | 181 | | $ | 3,891,809 | | $ | 70,808 | | $ | 68,574 | |
| | | | |
| | | | |
The following tables reconcile net income to same store NOI and the same store property metrics to the impacttotal owned real estate portfolio for the three months ended June 30, 2022 and 2021:
Reconciliation of our 2021Same Store Cash NOI
| | | | | | | | |
| THREE MONTHS ENDED JUNE 30, |
Dollars in thousands | 2022 | 2021 |
Net income | $ | 6,130 | | $ | 23,096 | |
| | |
| | |
Other income (expense) | 7,479 | | (2,223) | |
General and administrative expense | 10,540 | | 8,545 | |
Depreciation and amortization expense | 55,731 | | 49,826 | |
Other expenses 1 | 11,034 | | 2,840 | |
Straight-line rent revenue | (1,327) | | (1,194) | |
Joint venture properties | 2,551 | | 1,035 | |
Other revenue 2 | (1,961) | | (2,075) | |
Cash NOI | 90,177 | | 79,850 | |
Cash NOI not included in same store | (19,369) | | (11,276) | |
Same store cash NOI | $ | 70,808 | | $ | 68,574 | |
1Includes acquisition and 2022 dispositions, partially offset by our 2021pursuit costs, merger-related costs, bad debt, above and 2022 acquisitionsbelow market ground lease intangible amortization, leasing commission amortization and contractualground lease straight-line rent increases. We anticipate cash flows from operating activitiesexpense.
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 JUNE 30, 2022 |
Dollars in thousands | PROPERTY COUNT | GROSS INVESTMENT 1 | SQUARE FEET | OCCUPANCY |
Same store properties | 181 | | $ | 3,891,809 | | 13,506,008 | | 89.3 | % |
Acquisitions | 67 | | 1,188,042 | | 2,947,903 | | 91.1 | % |
Development completions | 1 | | 37,360 | | 110,883 | | 98.9 | % |
Redevelopments | 6 | | 145,676 | | 647,978 | | 64.6 | % |
Total owned real estate properties | 255 | | $ | 5,262,887 | | 17,212,772 | | 88.7 | % |
1Excludes construction in progress, land held for development, corporate property and financing lease right-of-use assets unrelated to increasean imputed lease arrangement as a result of the growth in our portfolio through new acquisitions and continued leasing activity in our existing portfolio.
For the three months ended March 31, 2022, net cash used in investing activities primarily related to capital expenditures of $28.6 million, investments in real estate of $19.1 million, development of real estate of $10.4 million, and advances on real estate notes receivable of $2.3 million, partially offset by proceeds from thea sale of real estate of $26.8 million. For the three months ended March 31, 2021, net cash used in investing activities primarily related to investments in real estate of $30.5 million, capital expenditures of $28.9 million and development of real estate of $17.1 million.
For the three months ended March 31, 2022, net cash used in financing activities primarily related to dividends paid to holders of our common stock of $74.4 million, and deferred financing costs of $5.4 million, partially offset by net borrowings under our revolving credit facility of $25.0 million. For the three months ended March 31, 2021, net cash used in financing activities primarily related to dividends paid to holders of our common stock of $70.0 million, and the repurchase and cancellation of common stock of $3.2 million.
Dividends
The amount of dividends we pay to our stockholders is determined by our Board of Directors, in their sole discretion, and is dependent on a number of factors, including funds available, our financial condition, capital expenditure requirements and annual dividend distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. We have paid monthly or quarterly dividends since February 2007, and if our investments produce sufficient cash flow, we expect to continue to pay dividends to our stockholders. Because our cash available for dividend distributions in any year may be less than 90% of our taxable income for the year, we may obtain the necessary funds through borrowings, issuing new securities or selling assets to pay out enough of our taxable income to satisfy our dividend distribution requirement. Our organizational documents do not establish a limit on dividends that may constitute a return of capital for federal income tax purposes. The dividend we pay to our stockholders is equal to the distributions received from HTALP in accordance with the terms of the HTALP partnership agreement. It is our intention to continue to pay dividends. However, our Board of Directors may reduce our dividend rate and we cannot guarantee the timing and amount of dividends that we may pay in the future, if any.leaseback transaction.
For the three months ended March 31, 2022, we paid cash dividends of $74.4 million on our common stock. In April 2022 for the quarter ended March 31, 2022, we paid cash dividends on our common stock of $74.4 million.
Financing
We have historically maintained a low leveraged balance sheet and intend to continue to maintain this structure in the long term. However, our total leverage may fluctuate on a short-term basis as we execute our business strategy. As of March 31, 2022, our leverage ratio, measured by debt less cash and cash equivalents to total capitalization, was 29.4%.
As of March 31, 2022, we had debt outstanding of $3.1 billion and the weighted average interest rate therein was 2.86% per annum, inclusive of the impact of our cash flow hedges. The following is a summary of our unsecured and secured debt. See Note 8 - Debt in the accompanying condensed consolidated financial statements for a further discussion of our debt.
Unsecured Revolving Credit Facility
As of March 31, 2022, $975.0 million was available on our $1.0 billion unsecured revolving credit facility maturing in October 2025.
Unsecured Term Loans
As of March 31, 2022, we had $500.0 million of unsecured term loans outstanding, comprised of $300.0 million under our Unsecured Credit Agreement maturing in 2025, and $200.0 million under our unsecured term loan maturing in 2024.
Unsecured Senior Notes
As of March 31, 2022, we had $2.55 billion of unsecured senior notes outstanding, comprised of $600.0 million of senior notes maturing in 2026, $500.0 million of senior notes maturing in 2027, $650.0 million of senior notes maturing in 2030 and $800.0 million of senior notes maturing in 2031.
Debt Service Requirements
We are required by the terms of our applicable loan agreements to meet certain financial covenants, such as minimum net worth and liquidity, and reporting requirements, among others. As of March 31, 2022, we believe that we were in compliance with all such covenants and we are not aware of any covenants that it is reasonably likely that we would not be able to meet in accordance with our loan agreements.
Off-Balance Sheet Arrangements
As of and during the three months ended March 31, 2022, we had no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation
We are exposed to inflation risk as income from future long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that protect us from the impact of normal inflation. These provisions include rent escalations, reimbursement billings for operating expense pass-through charges and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to cover inflation.
Results of Operations
Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021
The Company’s results of operations for the three months ended June 30, 2022 compared to the same period in 2021 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $12.1 million, or 9.5%, for the three months ended June 30, 2022 compared to the prior year period. This increase is comprised of the following:
•Acquisitions in 2021 and 2022 contributed $13.8 million.
•Leasing activity, including contractual rent increases, contributed $3.1 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $4.8 million.
Interest from financing receivables, net increased $1.4 million, or 283.7%, from the prior year period as a result of two financing receivables acquired during 2021.
Other operating income increased $0.3 million, or 12.8%, from the prior year period primarily as a result of variable parking and asset management fees.
Expenses
Property operating expenses increased $5.5 million, or 10.7%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $5.7 million.
•Increases in portfolio operating expenses as follows:
◦Utilities expense of $0.7 million;
◦Administrative, leasing commissions, and other legal expense of $0.5 million;
◦Janitorial expense of $0.3 million;
◦Compensation expense of $0.3 million;
◦Security expense of $0.1 million; and
◦Insurance expense of $0.1 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $2.2 million.
General and administrative expenses increased approximately $2.0 million, or 23.3%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Incentive-based awards increases of $0.7 million.
•Compensation expense increases of $1.2 million, including $0.7 million of non-cash expense.
•Net increases, including professional fees and other administrative costs, of $0.1 million.
Merger-related costs totaled $7.1 million for the three months ended June 30, 2022. These costs, consisting primarily of legal, consulting, and banking services, were incurred in connection with the Merger with HTA.
Depreciation and amortization expense increased $5.9 million, or 11.9%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $7.1 million.
•Various building and tenant improvement expenditures resulted in an increase of $2.7 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $1.5 million.
•Assets that became fully depreciated resulted in a decrease of $2.4 million.
Other Income (Expense)
Gains on sale of real estate properties
In the second quarter of 2022, the Company recognized gains of approximately $8.5 million on the sale of two properties.
In the second quarter of 2021, the Company recognized gains of approximately $21.0 million primarily related to the sale of two properties.
Interest expense
Interest expense increased $2.3 million, or 17.2%, for the three months ended June 30, 2022 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED JUNE 30, | CHANGE |
Dollars in thousands | 2022 | 2021 | $ | % |
Contractual interest | $ | 13,950 | | $ | 12,148 | | $ | 1,802 | | 14.8 | % |
Net discount/premium accretion | 79 | | 49 | | 30 | | 61.2 | % |
Deferred financing costs amortization | 708 | | 704 | | 4 | | 0.6 | % |
Interest rate swap amortization | 42 | | 42 | | — | | — | % |
Treasury hedge amortization | 107 | | 107 | | — | | — | % |
Interest cost capitalization | (108) | | (36) | | (72) | | 200.0 | % |
Right-of-use assets financing amortization | 765 | | 247 | | 518 | | 209.7 | % |
Total interest expense | $ | 15,543 | | $ | 13,261 | | $ | 2,282 | | 17.2 | % |
Contractual interest expense increased $1.8 million, or 14.8%, for the three months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•The Company's Unsecured Term Loan due 2026, net of swaps, accounted for a decrease of approximately $0.1 million.
•The Company's Unsecured Term Loan due 2024, net of swaps, accounted for an increase of approximately $0.2 million.
•The Unsecured Credit Facility accounted for an increase of approximately $2.0 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.3 million.
Impairment of Real Estate Properties
Impairment of real estate properties in 2021 totaling approximately $5.1 million was associated with a redevelopment project in Nashville, Tennessee.
Equity loss from unconsolidated joint ventures
The Company recognized its proportionate share of losses from its unconsolidated joint ventures, including the TIAA Joint Venture during the second quarter of 2022. 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.
Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021
The Company’s results of operations for the six months ended June 30, 2022 compared to the same period in 2021 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $22.2 million, or 8.7%, for the six months ended June 30, 2022 compared to the prior year period. This increase is comprised of the following:
•Acquisitions in 2021 and 2022 contributed $24.1 million.
•Leasing activity, including contractual rent increases, contributed $7.4 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $9.3 million.
Interest from financing receivables, net increased $3.4 million, or 662.2%, from the prior year period as the result of two financing receivables acquired during 2021.
Other operating income increased $0.8 million, or 19.1%, from the prior year period primarily as a result of variable parking and asset management fees.
Expenses
Property operating expenses increased $10.8 million, or 10.4%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $10.3 million.
•Increases in portfolio operating expenses as follows:
◦Utilities expense of $1.6 million;
◦Administrative, leasing commissions, and other legal expense of $1.1 million;
◦Janitorial expense of $0.6 million;
◦Property tax expense increase of $0.5 million;
◦Compensation expense of $0.4 million;
◦Maintenance and repair expense of $0.3 million;
◦Security expense of $0.3 million; and
◦Insurance expense of $0.2 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $4.5 million.
General and administrative expenses increased approximately $4.5 million, or 26.6%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Incentive-based awards increases of $1.5 million.
•Compensation expense increases of $2.6 million, including $1.4 million of non-cash expense.
•Net increases, including professional fees and other administrative costs, of $0.4 million.
Merger-related costs totaled $13.2 million for the six months ended June 30, 2022. These costs consisted primarily of legal, consulting, and banking services incurred in connection with the Merger with HTA.
Depreciation and amortization expense increased $9.9 million, or 9.9%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2021 and 2022 resulted in an increase of $12.6 million.
•Various building and tenant improvement expenditures resulted in an increase of $5.5 million.
•Dispositions in 2021 and 2022 resulted in a decrease of $3.2 million.
•Assets that became fully depreciated resulted in a decrease of $5.0 million.
Other Income (Expense)
Gains on sale of real estate properties
Gains on the sale of real estate properties in 2022 totaling approximately $53.3 million primarily related to the sale of four real estate properties.
Gains on the sale of real estate properties in 2021 totaling approximately $39.9 million primarily related to the sale of four real estate properties.
Interest expense
Interest expense increased $2.7 million, or 10.1%, for the six months ended June 30, 2022 compared to the prior year period. The components of interest expense are as follows:
| | | | | | | | | | | | | | |
| SIX MONTHS ENDED JUNE 30, | CHANGE |
Dollars in thousands | 2022 | 2021 | $ | % |
Contractual interest | $ | 26,452 | | $ | 24,389 | | $ | 2,063 | | 8.5 | % |
Net discount/premium accretion | 129 | | 96 | | 33 | | 34.4 | % |
Deferred financing costs amortization | 1,419 | | 1,402 | | 17 | | 1.2 | % |
Interest rate swap amortization | 84 | | 84 | | — | | — | % |
Treasury hedge amortization | 213 | | 213 | | — | | — | % |
Interest cost capitalization | (145) | | (154) | | 9 | | (5.8) | % |
Right-of-use assets financing amortization | 1,052 | | 493 | | 559 | | 113.4 | % |
Total interest expense | $ | 29,204 | | $ | 26,523 | | $ | 2,681 | | 10.1 | % |
Contractual interest expense increased $2.1 million, or 8.5%, for the six months ended June 30, 2022 compared to the prior year period primarily as a result of the following activity:
•The Company's Unsecured Term Loan due 2026, net of swaps, accounted for a decrease of approximately $0.3 million.
•The Company's Unsecured Term Loan due 2024, net of swaps, accounted for an increase of approximately $0.2 million.
•The Unsecured Credit Facility accounted for an increase of approximately $2.7 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.
•Mortgage note repayments, net of assumptions, accounted for a decrease of approximately $0.5 million.
Impairment of Real Estate Properties
Impairment of real estate properties in 2021 totaling approximately $5.9 million was associated with the disposal of one property totaling $0.8 million and $5.1 million associated with a redevelopment project in Nashville, Tennessee.
Equity loss from unconsolidated joint ventures
The Company recognized its proportionate share of losses from its unconsolidated joint ventures, including the TIAA Joint Venture during the first quarter of 2022. 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 the first quarter of 2021, the Company recorded approximately $0.5 million from a forfeited earnest money deposit.
Item 3. Quantitative and Qualitative Disclosures Aboutabout Market Risk
There have beenThe 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 six months ended June 30, 2022, there were no material changes fromin the quantitative and qualitative disclosures about market risk previously disclosedrisks presented in our 2021the Company’s Annual Report on Form 10-K.10-K for the year ended December 31, 2021.
Item 4. Controls and Procedures
Healthcare Trust of America, Inc.Disclosure Controls and Procedures
HTA’sThe Company’s management, is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including HTA’s Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial officer and principal accounting officer), to allow timely decisions regarding required disclosures.
As of March 31, 2022, an evaluation was conducted by HTA under the supervision and with the participation of its management, including HTA’sthe Company’s Chief Executive Officer and Chief Financial Officer, ofhas evaluated the effectiveness of itsthe 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).Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, HTA’sthe Company’s Chief Executive Officer and Chief Financial Officer eachhave concluded that, HTA’sas of the end of such period, the Company’s disclosure controls and procedures were effective as of March 31, 2022.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 were nohave not been any changes in ourthe Company’s internal control over financial reporting that occurred(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended March 31, 2022to which this report relates that have materially affected, or are reasonably believed to be likely to materially affect, ourthe Company’s internal control over financial reporting. This determination was reached after careful evaluation of the effects COVID-19 has had on our operations.
May 6, 2022
Healthcare Trust of America Holdings, LP
HTALP’s management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including HTA’s Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial officer and principal accounting officer), to allow timely decisions regarding required disclosures.
As of March 31, 2022, an evaluation was conducted by HTALP under the supervision and with the participation of its management, including HTA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, HTA’s Chief Executive Officer and Chief Financial Officer, on behalf of HTA in its capacity as general partner of HTALP, each concluded that HTALP’s disclosure controls and procedures were effective as of March 31, 2022.
There were no changes in HTALP’s internal control over financial reporting that occurred during the quarter ended March 31, 2022 that have materially affected, or are reasonably believed to be likely to materially affect, HTALP’s internal control over financial reporting. This determination was reached after careful evaluation of the effects COVID-19 has had on our operations.
May 6, 2022
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On May 6, 2022, a purported stockholder of theThe Combined Company filed a lawsuit in the United States District Court for the Southern District of New York against us and seven of our current directors, captioned Shiva Stein v. Healthcare Trust of America, Inc., et al., Case No. 1:22-cv-03703 (the “Complaint”).
The Complaint alleges that the preliminary proxy statement issued in connection with the Merger omits material information or contains misleading disclosures and that, as a result, (i) all of the defendants violated Section 14(a) of the Securities Exchange Act of 1934 (the Exchange Act) and (ii) our directors violated section 20(a) of the Exchange Act. The Complaint seeks, among other things, (i) injunctive relief preventing the consummation of the transactions contemplated by the Merger Agreement; (ii) rescission or rescissory damages to the extent the transactions contemplated by the Merger Agreement have been implemented; (iii) dissemination of a proxy statement that does not omit material information or contain any misleading disclosures; (iv) an accounting to plaintiff for all damages suffered as a result of the alleged wrongdoing; and (v) an award of plaintiff’s expenses, including attorneys’ and experts’ fees. We believe the claims asserted in the Complaint are without merit. Additional lawsuits may be filed against us, our Board of Directors, and/or other parties to the Merger in connection with the transactions contemplated by the Merger Agreement.
In addition, we are,is, from time to time, also subject to claims andinvolved in litigation arising in the ordinary course of business with respect to tenantbusiness. The Combined Company is not aware of any pending or threatened litigation and threatened or asserted labor matters.
We do not believe liability from any reasonably foreseeable disposition ofthat, if resolved against the aforementioned claims and litigation, individually or in the aggregate,Combined Company, would have a material adverse effect on our accompanying condensedthe Combined Company’s consolidated financial statements.position, results of operations or cash flows.
Item 1A. Risk Factors
There have been no material changes fromIn addition to the other information set forth in this report and the risk factors previously discloseddiscussed below, an investor should carefully consider the factors discussed below and those discussed in Part I, “Item 1A. Risk Factors” in the Company’s 2021 Annual Report on Form 10-K filedfor the year ended December 31, 2021 and Legacy HTA's Annual Report on Form 10-K for the year ended December 31, 2021, which could materially affect the Combined Company’s business, financial condition or future results. The risks, as described below and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and Legacy HTA's Annual Report on Form 10-K for the year ended December 31, 2021, are not the only risks facing the Combined Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Combined Company’s business, financial condition, operating results or cash flows.
Risk Factors Relating to the Combined Company
Operational Risks
The Combined Company has incurred substantial expenses related to the Merger.
The Combined Company has incurred substantial expenses in connection with completing the Merger and and expects to incur substantial expenses integrating the business, operations, networks, systems, technologies, policies and procedures of the two companies, including severance costs. In addition, there are a large number of systems that must be integrated, including billing, management information, asset management, accounting and finance, payroll and benefits, lease administration and regulatory compliance. Although the Combined Company has assumed that a certain level of transaction and integration expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their integration expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and integration expenses associated with the SECMerger could, particularly in the near term, exceed the savings that the Combined Company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the integration of the businesses. As a result, the Legacy HR incurred expenses against its earnings before the completion of the Merger, and the Combined Company expects to incur additional expenses and charges following the Merger.
The Combined Company may be unable to integrate the businesses of Legacy HR and Legacy HTA successfully and realize the anticipated synergies and related benefits of the Merger or do so within the anticipated timeframe.
The Merger involves the combination of two companies that operated as independent public companies. The Combined Company will be required to devote significant management attention and resources to integrating the business practices and operations of Legacy HR and Legacy HTA. Potential difficulties the Combined Company may encounter in the integration process include the following:
1.the inability to successfully combine the businesses of Legacy HR and Legacy HTA in a manner that permits the Combined Company to achieve the cost savings anticipated to result from the Merger, which would result in the anticipated benefits of the Merger not being realized in the timeframe currently anticipated or at all;
2.the complexities associated with managing the combined businesses out of different locations and integrating personnel from the two companies;
3.the additional complexities of combining two companies with different histories, cultures, markets and tenant bases;
4.the failure to retain key employees of the Combined Company;
5.potential unknown liabilities and unforeseen increased expenses, delays or regulatory conditions associated with the Merger; and
6.performance shortfalls at one or both of the two companies as a result of the diversion of management's attention caused by completing the Merger and integrating the companies' operations.
For all these reasons, you should be aware that it is possible that the integration process could result in the distraction of the Combined Company's management, the disruption of the Combined Company's ongoing business or inconsistencies in the Combined Company's services, standards, controls, procedures and policies, any of which could adversely affect the ability of the Combined Company to maintain relationships with customers, vendors and employees or to achieve the anticipated benefits of the Merger, or could otherwise adversely affect the business and financial results of the Combined Company.
The Combined Company may be unable to retain key employees.
The success of the Combined Company after the Merger will depend in part upon its ability to retain key employees. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the Combined Company following the Merger. Accordingly, no assurance can be given that the Combined Company will be able to retain key employees.
The future results of the Combined Company will suffer if the Combined Company does not effectively manage its expanded operations following the Merger.
Following the Merger, the Combined Company may continue to expand its operations through additional acquisitions and other strategic transactions, some of which involve complex challenges. The future success of the Combined Company will depend, in part, upon the ability of the Combined Company to manage its expansion opportunities, which pose substantial challenges for the Combined Company to integrate new operations into its existing business in an efficient and timely manner, and upon its ability to successfully monitor its operations, costs, regulatory compliance and service quality, and to maintain other necessary internal controls. The Combined Company cannot assure you that its expansion or acquisition opportunities will be successful, or that the Combined Company will realize its expected operating efficiencies, cost savings, revenue enhancements, synergies or other benefits.
The trading price of shares of common stock of the Combined Company may be affected by factors different from those that affected the price of shares of Legacy HR's common stock or Legacy HTA’s common stock before the Merger.
The results of operations of the Combined Company, as well as the trading price of the shares of common stock of the Combined Company after the Merger, may be affected by factors different from those that affected Legacy HR's or Legacy HTA's results of operations and the trading prices of their respective shares of common stock. These factors include:
1.a greater number of shares of common stock of the Combined Company outstanding;
2.different stockholders;
3.different businesses; and
4.different assets and capitalizations.
In addition, the Combined Company may take actions in the future—such as a share split, reverse share split, stock repurchases, or reclassification—that could affect the trading price of its shares of common stock.
Accordingly, the historical trading prices and financial results of Legacy HR and Legacy HTA may not be indicative of these matters for the Combined Company after the Merger.
The Combined Company cannot assure you that it will be able to continue paying dividends at or above the rates paid by Legacy HR and Legacy HTA.
The stockholders of the Combined Company may not receive dividends at the same rate they received dividends as stockholders of the Combined Company and stockholders of HTA following the Merger for various reasons, including the following:
1.the Combined Company may not have enough cash to pay such dividends due to changes in the Combined Company's cash requirements, capital spending plans, cash flow or financial position;
2.decisions on March 1, 2022.whether, when and in which amounts to make any future distributions will remain at all times entirely at the discretion of the board of directors of the Combined Company, which reserves the right to change the Combined Company's current dividend practices at any time and for any reason;
3.the Combined Company may desire to retain cash to maintain or improve its credit ratings; and
4.the amount of dividends that the Combined Company's subsidiaries may distribute to the Combined Company may be subject to restrictions imposed by state law, restrictions that may be imposed by state regulators, and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur.
Stockholders of the Combined Company will have no contractual or other legal right to dividends that have not been authorized by the board of directors of the Combined Company.
Regulatory and Legal Risks
Counterparties to certain agreements with Legacy HR or Legacy HTA may exercise contractual rights under such agreements in connection with the Merger.
Legacy HR and Legacy HTA are each party to certain agreements that give the counterparties certain rights in connection with a qualifying change in control, including in some cases the right to terminate the agreement. The Merger may constitute a change in control under some of these agreements, and therefore the counterparties could exercise any rights they may have regarding termination, repurchase, recourse against the Combined Company for obligations of its subsidiaries, acceleration of payment obligations or otherwise. In addition, counterparties may seek modifications of the terms of agreements as a condition to granting a waiver or consent. If such counterparties exercise any such contractual rights, this may adversely impact the Combined Company.
Joint venture investments, including those resulting from the anticipated contribution of certain of Legacy HTA properties into one or more joint ventures, could be adversely affected by the Combined Company's lack of sole decision-making authority, its reliance on its joint venture partners' financial condition or disputes between any joint venture partner and the Combined Company.
The Combined Company has joint venture investments that constitute a portion of the Combined Company’s assets. In addition, it is anticipated that certain assets of Legacy HTA will be contributed to one or more joint ventures to be formed in the near future. The Combined Company is expected to continue to have such arrangements, and may enter into additional joint ventures, following the completion of the Merger. The Combined Company will not be in a position to exercise sole decision-making authority regarding the partnership, joint venture or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve risks not present were a third-party not involved. For example, joint venture partners may have economic or other business interests or goals that are inconsistent with the business interests or goals of the Combined Company, they could be in a position to take actions contrary to the policies or objectives of the Combined Company, and they may have competing interests that could create conflict of interest issues. Such investments may also have the potential risk of impasses on decisions, because neither the Combined Company nor the joint venture partner would have full control over the partnership or joint venture. In addition, joint venture partners of the Combined Company may have consent
rights, rights to buy or sell joint venture interests, or other rights under certain agreements, which may have been implicated as a result of the Merger. Disputes between the Combined Company and joint venture partners may result in litigation or arbitration. In addition, if joint venture partners fail to fund their share of required capital contributions due to insolvency or for other reasons, the joint venture investments, including properties owned by the joint ventures, could be subject to additional risk.
REIT Risks
The Combined Company succeeds to, and may incur, adverse tax consequences if Legacy HR or Legacy HTA failed to qualify as a REIT.
Each of Legacy HR and Legacy HTA believes that it has been organized and has operated in a manner that enabled it to qualify as a REIT through the closing date of the Merger, and in the case of the Combined Company, following the closing date of the Merger. The Combined Company has not requested, and has no plans to request, a ruling from the Internal Revenue Service that it qualifies as a REIT. If the Combined Company has failed or fails to qualify as a REIT, it may incur significant tax liabilities.
Other Risks
The Combined Company has a substantial amount of indebtedness and may need to incur more in the future.
The Combined Company has substantial indebtedness, and in connection with executing the Combined Company's business strategies following the Merger, the Combined Company expects to continue to evaluate the possibility of acquiring additional properties and making strategic investments, and the Combined Company may elect to finance these endeavors by incurring additional indebtedness. Its substantial indebtedness could have material adverse consequences for the Combined Company, including (a) reducing the Combined Company's credit ratings and thereby raising its borrowing costs, (b) hindering the Combined Company's ability to adjust to changing market, industry or economic conditions, (c) limiting the Combined Company's ability to access the capital markets to refinance maturing debt or to fund acquisitions or emerging businesses, (d) limiting the amount of free cash flow available for future operations, acquisitions, dividends, stock repurchases or other uses, (e) making the Combined Company more vulnerable to economic or industry downturns, including interest rate increases, and (f) placing the Combined Company at a competitive disadvantage compared to less leveraged competitors.
Additionally, the agreements that govern the terms of its indebtedness contain a number of restrictive covenants (including, without limitation, financial maintenance covenants) that impose significant operating and financial restrictions on the Combined Company and may limit its ability to engage in acts that may be in its long-term best interest. Moreover, the Combined Company's ability to satisfy any financial maintenance covenants may be affected by events beyond its control and, as a result, it cannot provide assurance that it will be able to satisfy any such covenants.
A breach of the covenants under the agreements that govern the terms of any of the Combined Company's indebtedness could result in an event of default under the applicable indebtedness. Such a default may allow the applicable creditors to accelerate the related debt and/or terminate any related commitments to extend further credit and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In the event debtholders accelerate the repayment of the Combined Company's indebtedness, the Combined Company may not have sufficient resources to repay such indebtedness.
Moreover, to respond to competitive challenges, the Combined Company may be required to raise substantial additional capital to execute its business strategy. The Combined Company's ability to arrange additional financing will depend on, among other factors, the Combined Company's financial position and performance, as well as prevailing market conditions and other factors beyond the Combined Company's control. If the Combined Company is able to obtain additional financing, the Combined Company's credit ratings could be further adversely affected, which could further raise the Combined Company's borrowing costs and further limit its future access to capital and its ability to satisfy its obligations under its indebtedness.
Pandemics and other health concerns, including the ongoing COVID-19 pandemic, and the measures intended to prevent their spread, could have a material adverse effect on the Combined Company’s business, results of operations, cash flows and financial condition.
Pandemics, including the ongoing COVID-19 pandemic and those caused by possible new strains or mutations of the SARS-CoV-2 virus, as well as both future widespread and localized outbreaks of infectious diseases and other health
concerns, and the measures taken to prevent the spread or lessen the impact, could cause a material disruption to the Combined Company’s industry or deteriorate the economy as a whole. The impacts of such events could be severe and far-reaching, and may impact the Combined Company’s operations in several ways. Such operational impacts include, but are not limited to, the following: (a) tenants could experience deteriorating financial conditions and be unable or unwilling to pay rent on time and in full; (b) the Combined Company may have to restructure tenants' obligations and may not be able to do so on terms that are favorable to it; (c) inquiries and tours at the Combined Company’s properties could decrease; (d) move-ins and new tenanting efforts, and re-letting efforts could slow or stop altogether; (e) move-outs and potential early termination of leases thereunder could increase; (f) operating expenses, including the costs of certain essential services or supplies, including payments to third-party contractors, service providers, and employees essential to ensure continuity in the Combined Company’s building operations may increase; and (g) costs of development, including expenditures for materials utilized in construction and labor essential to complete existing developments in progress may increase substantially.
Further, disruption in the real estate markets may restrict the Combined Company’s ability to deploy capital for new investments, or limit its ability to make new investments on terms that are favorable to the Combined Company.
Additionally, these types of events could cause severe economic, market and other disruptions worldwide which could stretch to bank lending, capital and other financial markets. If these markets are affected, future access to capital and other sources of funding could be constrained which could adversely affect the availability and terms of the Combined Company’s future borrowings, its ability to refinance existing debt, its ability to draw on its revolving credit facility, and its ability to raise equity financing on terms that are favorable to the Combined Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
PurchasesAuthorized Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
DuringOn August 2, 2022, the three months ended March 31, 2022, we repurchasedCombined Company’s Board of Directors authorized the repurchase of up to $500.0 million of outstanding shares of ourthe Combined Company’s common stock as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased (1) (2) | | Average Price Paid per Share (1) (2) | | Total Number of Shares Purchased as Part of Publicly Announced Plan or Program | | Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs |
January 1, 2022 to January 31, 2022 | | 42,834 | | | $ | 33.55 | | | — | | | — | |
February 1, 2022 to February 28, 2022 | | 672 | | | 30.33 | | | — | | | — | |
March 1, 2022 to March 31, 2022 | | 6,041 | | | 30.40 | | | — | | | — | |
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(1) Purchases represent shares of common stock withheld by us to satisfy withholding obligations on the vesting of restricted shares. The price paid per share was the then closing price of our common stock on the NYSE. |
(2) For each share of common stock redeemed by HTA, HTALP redeems a corresponding number of OP Units in the HTALP operating partnership. Therefore, the OP Units in the HTALP operating partnership repurchased by HTALP are the same as the shares of common stock repurchased by HTA as shown above. |
either in the open market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. The Combined 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 Combined Company has not repurchased any shares of its common stock under this authorization.Item 6. Exhibits
The exhibits listed on the Exhibit Index are included, and incorporated by reference, in this Quarterly Report.
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report for the quarter ended March 31, 2022 (and are numbered in accordance with Item 601 of Regulation S-K). | | | | | |
EXHIBIT | DESCRIPTION |
| Agreement and Plan of Merger, dated as of February 28, 2022, by and among Healthcare Realty Trust Incorporated (now known as HRTI, LLC), Healthcare Trust of America, Inc. (now known as Healthcare Realty Trust Incorporated), Healthcare Trust of America Holdings, L.P. (now known as Healthcare Realty Holdings, L.P.), and HR Acquisition 2, LLC.1 |
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| Term Loan Agreement, dated as of May 13, 2022, among Healthcare Trust of American, Inc. (now known as Healthcare Realty Trust Incorporated), Healthcare Trust of America Holdings, LP (now known as Healthcare Realty Holdings, L.P.), the lenders named therein, and HR Acquisition 2, LLC (includedJ.P. Morgan Chase Bank, N.A., as Exhibit 2.1 to our Current Report on Form 8-K filed on March 1, 2022 and incorporated herein by reference)administrative agent for such lenders.7 |
| First Amendment to theFourth Amended and Restated EmploymentRevolving Credit and Term Loan Agreement, betweendated as of July 20, 2022, by and among Healthcare Trust of America Holdings, LP (now known as Healthcare Realty Holdings, L.P.), Healthcare Trust of America, Inc. (now known as Healthcare Realty Trust Incorporated), the lenders named therein, and Robert A. Milligan (included as Exhibit 99.1 to our Current Report on Form 8-K filed on March 15, 2022 and incorporated herein by reference)Wells Fargo Bank, National Association.2 |
10.2† | |
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31.1* | |
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32.1** | |
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101.INS*Exhibit 101.INS | The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL Instance Document.document. |
101.SCH*Exhibit 101.SCH | Inline XBRL Taxonomy Extension Schema Document.Document (furnished electronically herewith) |
101.CAL*Exhibit 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document.Document (furnished electronically herewith) |
101.DEF*Exhibit 101.LAB | Inline XBRL Taxonomy Extension Labels Linkbase Document (furnished electronically herewith) |
Exhibit 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document.Document (furnished electronically herewith) |
101.LAB*Exhibit 101.PRE | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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* | Filed herewith. |
** | Furnished herewith. |
† | Compensatory plan or arrangement.Document (furnished electronically herewith) |
1Filed as an exhibit to the Company's Current Report on Form 8-K filed February 28, 2022 and hereby incorporated by reference.
2Filed as an exhibit to the Company's Current Report on Form 8-K filed July 26, 2022 and hereby incorporated by reference.
3Filed as an exhibit to the Company's Current Report on Form 8-K filed March 11, 2014 and hereby incorporated by reference.
4Filed as an exhibit to the Company's Current Report on Form 8-K filed December 16, 2014 and hereby incorporated by reference.
5Filed as an exhibit to the Company's Current Report on Form 8-K filed April 29, 2020 and hereby incorporated by reference.
6Filed as an exhibit to the Company's Current Report on Form 8-K filed May 16, 2022 and hereby incorporated by reference.
SIGNATURESSIGNATURE
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.
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| Healthcare Trust of America, Inc.HEALTHCARE REALTY TRUST INCORPORATED |
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By: | /s/ Peter N. Foss | | Interim President and Chief Executive Officer |
| Peter N. Foss | | (Principal Executive Officer) |
Date: | May 6, 2022 | | |
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By: | /s/ Robert A. Milligan | | Chief Financial Officer |
| Robert A. Milligan | | (Principal Financial Officer and Principal Accounting Officer) |
Date: | May 6, 2022 | | |
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| Healthcare Trust of America Holdings, LPBy: | /s/ J. CHRISTOPHER DOUGLAS |
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By:J. Christopher Douglas | Healthcare Trust of America, Inc., | | |
| its General Partner | | |
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By: | /s/ Peter N. Foss | | InterimExecutive Vice President and Chief Executive Officer |
| Peter N. Foss | | (Principal Executive Officer) |
Date: | May 6, 2022 | | |
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By: | /s/ Robert A. Milligan | | Chief Financial Officer |
| Robert A. Milligan | | (Principal Financial Officer and Principal Accounting Officer) |
Date: | May 6,August 9, 2022 | | |