HEALTHCARE REALTY TRUST Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with theSecurities and Exchange Commission , as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, disclosures that are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "target," "intend," "plan," "estimate," "project," "continue," "should," "could," "budget" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates for the Company's properties, actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting the Company's properties and the operations of the Company and its tenants; the effects of health and safety measures adopted by the Company and its tenants related to the COVID-19 pandemic; the impact of the COVID-19 pandemic on the operations, business and financial condition of the Company and its tenants; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; and the risks described in this report and the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , that could significantly affect the Company's current plans and expectations and future financial condition and results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company's filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing. For a detailed discussion of the Company's risk factors, please refer to the Company's filings with theSecurities and Exchange Commission , including this report and its Annual Report on Form 10-K for the year endedDecember 31, 2020 . Liquidity and Capital Resources Sources and Uses of Cash The Company's primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, borrowings under the Company's Amended and Restated Credit Agreement, dated as ofMay 31, 2019 , as amended (the "Unsecured Credit Facility") and the Amended and Restated Term Loan Agreement, dated as ofMay 31, 2019 , as amended (the "Term Loan Agreement"), proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. As ofSeptember 30, 2021 , the Company had$609.5 million available to be drawn on its Unsecured Credit Facility and$16.0 million in cash. In addition, the Company has entered into forward equity agreements that have expected gross proceeds of up to approximately$115.9 million , depending on the timing of settlement. The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and liquidity sources described above. The Company had unencumbered real estate assets with a gross book value of approximately$4.6 billion atSeptember 30, 2021 , of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs. Investing Activities Cash flows used in investing activities for the nine months endedSeptember 30, 2021 were approximately$364.7 million . Below is a summary of significant investing activities. 20
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2021 Company Acquisitions The following table details the Company's acquisitions for the nine months endedSeptember 30, 2021 : Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS San Diego, CA 2 Scripps Health/UCSD 1/7/21$ 17,150 22,461 0.02 Dallas, TX 3 Baylor Scott & White Health 2/1/21 22,515 121,709 0.00 Atlanta, GA 3 Wellstar Health System 2/17/21 9,800 44,567 0.19 Washington, D.C. Sentara Healthcare 3/3/21 12,750 26,496 0.09 Houston, TX Houston Methodist 5/14/21 13,500 45,393 0.03 San Diego, CA 4 Palomar Health 5/28/21 102,650 160,394 0.00 Greensboro, NC Cone Health 6/28/21 9,390 25,168 0.60 Baltimore, MD None 6/29/21 14,600 33,316 1.50 Denver, CO 5 Centura Health (AdventHealth) 7/16/21 70,426 259,555 0.00 Greensboro, NC 2 Cone Health 7/19/21 6,400 18,119 0.18 Colorado Springs, CO Centura Health (CommonSpirit) 7/27/21 33,400 69,526 0.00 Birmingham, AL Community Health Systems 8/19/21 9,250 29,942 0.24 Raleigh, NC WakeMed Health 9/20/21 5,780 18,280 0.70 Denver, CO Centura Health (AdventHealth) 9/22/21 20,250 83,604 0.00 Raleigh, NC WakeMed Health 9/30/21 10,000 29,178 0.22 Total real estate acquisitions$ 357,861 987,708 1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus. 2Represents a single-tenant property. 3Includes 2 properties. 4The Company accounted for this transaction as a financing receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more information. 5Includes three properties. 2021 TIAA Joint Venture Acquisitions The following table details the TIAA Joint Venture's acquisitions for the nine months endedSeptember 30, 2021 : ASSOCIATED HEALTH SYSTEM/TENANCY COMPANY OWNERSHIP Dollars in thousands 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS % Denver, CO HCA 3/30/21$ 14,375 59,359 0.60 50 % Colorado Springs, CO None 4/1/21 7,200 27,510 4.70 50 % Los Angeles, CA MemorialCare Health 4/8/21 31,335 57,573 0.00 50 % San Antonio, TX CHRISTUS Health/Baptist Health 4/30/21 13,600 45,000 0.90 50 % Los Angeles, CA MemorialCare Health 5/10/21 24,600 73,078 0.00 50 % Colorado Springs, CO 2 Centura Health (CommonSpirit) 7/27/21 9,133 23,956 1.90 50 % Total TIAA Joint Venture real estate acquisitions
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus. 2Includes purchase of an adjoining 3.0 acre land parcel.
Subsequent toSeptember 30, 2021 , the TIAA Joint Venture acquired the following property: ASSOCIATED HEALTH SYSTEM/TENANCY PURCHASE Dollars in thousands 1 DATE ACQUIRED PRICE SQUARE FOOTAGE MILES TO CAMPUS COMPANY OWNERSHIP % Denver, CO None 10/21/21$ 23,000 57,257 3.10 50 %
1Includes buildings located on-campus, adjacent and off-campus that are anchored by healthcare systems or located within two miles of a hospital campus.
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2021 Dispositions The Company disposed of 11 properties during the nine months endedSeptember 30, 2021 for a total sales price of$114.6 million , including cash proceeds of$112.0 million . The following table details these dispositions for the nine months endedSeptember 30, 2021 : Dollars in thousands Date Disposed Sales Price Square Footage Los Angeles, CA 1,2 3/11/21$ 26,000 73,906 Atlanta, GA 2 4/12/21 8,050 19,732 Richmond, VA 2,5 5/18/21 52,000 142,856 Gadsden, AL 2,3 5/19/21 5,500 120,192 Dallas, TX 2,4 7/9/21 23,000 190,160 Total dispositions$ 114,550 546,846 1Includes two properties sold to a single purchaser in two transactions which occurred onMarch 5 andMarch 11, 2021 . 2Previously classified as held for sale. 3Includes three properties. 4Includes four properties and an associated land parcel sold to a single purchaser in two transactions. 5 The Company deferred the tax gain through a 1031 exchange and reinvested the proceeds. Subsequent Disposition OnOctober 28, 2021 , the Company disposed of a 95,436 square foot medical office building located inChicago, Illinois . The sales price was$13.3 million , and the Company's net investment in the building as ofSeptember 30, 2021 was approximately$12.5 million and was included in assets held for sale. During the third quarter of 2021, an impairment charge of$10.7 million was recorded based on the contractual sales price less estimated costs to sell. Capital Funding During the nine months endedSeptember 30, 2021 , the Company funded the following: •$21.6 million toward the following development and redevelopment of properties: •Memphis,Tennessee redevelopment totaled$9.4 million ; •Dallas,Texas redevelopment totaled$1.7 million ; •Tacoma,Washington redevelopment totaled$1.7 million ; •reposition properties capital and tenant improvements totaled$1.5 million ; and •tenant improvement funding for previously completed projects totaled$7.3 million . •$14.5 million toward first generation tenant improvements and planned capital expenditures for acquisitions; •$16.2 million toward second generation tenant improvements; and •$13.5 million toward capital expenditures. Financing Activities Cash flows provided by financing activities for the nine months endedSeptember 30, 2021 were approximately$195.1 million . Inflows from equity proceeds related to the Company's common stock issuances and net borrowings totaled$328.1 million , net of issuance costs incurred. Aggregate cash outflows totaled approximately$133.0 million primarily associated with dividends paid to common stockholders. See Notes 4 and 7 to the Condensed Consolidated Financial Statements accompanying this report for more information about capital markets and financing activities. Common Stock Issuances At-The-Market Equity Offering Program OnAugust 6, 2021 , the Company entered into equity distribution agreements with eleven investment banks to allow for issuance and sale under its at-the-market equity offering program of up to an aggregate of$750.0 million of common stock. The Company's previous at-the-market equity program to sell up to an aggregate of$500.0 million ended inAugust 2021 . The following table details the Company's forward at-the-market activity:
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WEIGHTED
AVERAGE SALE
PRICE SHARES REMAINING TO BE NET PROCEEDS
per share FORWARD SHARE CONTRACTS SHARES SETTLED SETTLED in millions
Balance at December 31, 2020 $ - - - 1,823,259 $ -
1Q 2021 $ 30.09 215,532 2,038,791 - $ 62.7
2Q 2021 $ 30.99 5,835,400 3,827,971 2,007,429 $ 116.1
3Q 2021 $ 31.06 1,670,186 2,007,429 1,670,186 $ 61.3
October 2021 1 $ 31.34 2,042,562 - 3,712,748 $ -
1Includes forward share activity from August to October 2021 for trade
confirmations dated in October 2021 .
The 3.7 million shares remaining to be settled in forward equity arrangements
are expected to be settled by October 2022 for expected gross proceeds of
$115.9 million , depending on the timing of settlement. Expected net proceeds are
calculated by reducing the initial price by adjustments provided in the forward
equity arrangements. After accounting for these settlements, the Company has
approximately $686.0 million remaining available to be sold under the current
equity distribution agreements at the date of this filing.
Debt Activity
The Company has outstanding interest rate derivatives totaling $175.0 million to
hedge one-month LIBOR. The following details the amount and rate of each swap
(dollars in thousands):
WEIGHTED
EFFECTIVE DATE AMOUNT AVERAGE RATE EXPIRATION DATE
December 18, 2017 $ 25,000 2.18 % December 16, 2022
February 1, 2018 50,000 2.46 % December 16, 2022
May 1, 2019 50,000 2.33 % May 1, 2026
June 3, 2019 50,000 2.13 % May 1, 2026
$ 175,000 2.29 %
On June 1, 2021 , the Company entered into a second amendment to the Term Loan
Agreement that reduced the current interest rate on the $150 million portion of
the loan due 2026 from LIBOR plus a margin rate ranging from 1.45% to 2.40%
(previously 1.60%) to LIBOR plus a margin rate ranging from 0.80% to 1.60%
(0.95% as of September 30, 2021 ). With the amendment, the Company paid up front
fees of approximately $0.5 million , of which $0.2 million was paid to lenders,
capitalized and amortized over the remainder of the term of the loan, and
$0.3 million was paid to lenders as administration fees and was expensed in the
second quarter of 2021. In addition, the amendment added a sustainability metric
incentive tied to increasing the Company's properties with green building
certifications.
Subsequent Changes in Debt Structure
On November 1, 2021 , the Company repaid in full a mortgage note payable bearing
interest at a rate of 4.69% per annum with an outstanding principal of
$11.1 million . The mortgage note encumbered a 62,379 square foot property in
Maryland .
Operating Activities
Cash flows provided by operating activities decreased from $411.6 million for
the nine months ended September 30, 2020 to $170.3 million for the nine months
ended September 30, 2021 . The nine months ended September 30, 2020 includes
proceeds from the disposition of sales-type lease properties totaling $244.5
million . Items impacting cash flows from operations include, but are not limited
to, cash generated from property operations, interest payments and the timing
related to the payment of invoices and other expenses.
The Company may, from time to time, sell properties and redeploy cash from
property sales into new investments. To the extent revenues related to the
properties being sold exceed income from these new investments, the Company's
results of operations and cash flows could be adversely affected.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to
have a current or future material effect on the Company's financial condition,
revenues or expenses, results of operations, liquidity, capital
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expenditures or capital resources. 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 endedDecember 31, 2020 , 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 15% to 20% of the leases will expire each year in the ordinary course of business. There are 193 leases totaling 0.6 million square feet that will expire during the remainder of 2021. Approximately 91% of the leases expiring in 2021 are in buildings located on or adjacent to hospital campuses, are distributed throughout the portfolio, and are not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of tenants upon expiration, and the retention ratio for the first nine months of the year was within this range. Operating Expenses The Company historically has experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company historically has incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As ofSeptember 30, 2021 , leases for 90% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with 32% having modified gross lease structures and 58% having net lease structures. Purchase Options Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands): NUMBER OF PROPERTIES GROSS
REAL ESTATE INVESTMENT AS OF
FAIR MARKET NON FAIR MARKET
YEAR EXERCISABLE MOB INPATIENT VALUE METHOD 1 VALUE METHOD 2 TOTAL
Current 3 2 1 $ 54,543 $ - $ 54,543
2022 1 - - 14,984 14,984
2023 - - - - -
2024 - - - - -
2025 4 - 48,241 19,459 67,700
2026 1 - 18,164 - 18,164
2027 - - - - -
2028 1 - 41,082 - 41,082
2029 1 - 26,501 - 26,501
2030 - - - - -
2031 and thereafter 4 9 - 298,260 - 298,260
Total 19 1 $ 486,791 $ 34,443 $ 521,234
1The purchase option price includes a fair market value component that is
determined by an appraisal process.
2Includes properties with stated purchase prices or prices based on fixed
capitalization rates.
3These purchase options have been exercisable for an average of 14.1 years.
4Includes the medical office building that is recorded in the line item
Investment in financing receivable, net on the Company's Condensed Consolidated
Balance Sheet.
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Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance
indicators to be useful supplemental measures of the Company's operating
performance. A non-GAAP financial measure is generally defined as one that
purports to measure financial performance, financial position or cash flows, but
excludes or includes amounts that would not be so adjusted in the most
comparable measure determined in accordance with GAAP. Set forth below are
descriptions of the non-GAAP financial measures management considers relevant to
the Company's business and useful to investors, as well as reconciliations of
these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and key performance indicators presented herein
are not necessarily identical to those presented by other real estate companies
due to the fact that not all real estate companies use the same definitions.
These measures should not be considered as alternatives to net income, as
indicators of the Company's financial performance, or as alternatives to cash
flow from operating activities as measures of the Company's liquidity, nor are
these measures necessarily indicative of sufficient cash flow to fund all of the
Company's needs. Management believes that in order to facilitate a clear
understanding of the Company's historical consolidated operating results, these
measures should be examined in conjunction with net income and cash flows from
operations as presented in the Condensed Consolidated Financial Statements and
other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations ("FFO"), Normalized FFO and Funds Available for
Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National
Association of Real Estate Investment Trusts ("NAREIT"). NAREIT defines FFO as
the most commonly accepted and reported measure of a REIT's operating
performance equal to "net income (computed in accordance with GAAP), excluding
gains (or losses) from sales of property, plus depreciation and amortization,
impairment, and after adjustments for unconsolidated partnerships and joint
ventures."
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO
is presented by adding to FFO acquisition-related costs, acceleration of debt
issuance costs, debt extinguishment costs and other Company-defined normalizing
items to evaluate operating performance. FAD is presented by adding to
Normalized FFO non-real estate depreciation and amortization, non-cash financing
receivable amortization, loan origination cost amortization, deferred financing
fees amortization, stock-based compensation expense and provision for bad debts,
net; and subtracting maintenance capital expenditures, including second
generation tenant improvements and leasing commissions paid and straight-line
rent income, net of expense. The Company's definition of these terms may not be
comparable to that of other real estate companies as they may have different
methodologies for computing these amounts. FFO, Normalized FFO and FAD should
not be considered as an alternative to net income as an indicator of the
Company's financial performance or to cash flow from operating activities as an
indicator of the Company's liquidity. FFO, Normalized FFO and FAD should be
reviewed in connection with GAAP financial measures.
Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share
and FAD ("Non-GAAP Measures") provide an understanding of the operating
performance of the Company's properties without giving effect to certain
significant non-cash items, primarily depreciation and amortization expense.
Historical cost accounting for real estate assets in accordance with GAAP
assumes that the value of real estate assets diminishes predictably over time.
However, real estate values instead have historically risen or fallen with
market conditions. The Company believes that by excluding the effect of
depreciation, amortization, impairments and gains or losses from sales of real
estate, all of which are based on historical costs and which may be of limited
relevance in evaluating current performance, Non-GAAP Measures can facilitate
comparisons of operating performance between periods. The Company reports
Non-GAAP Measures because these measures are observed by management to also be
the predominant measures used by the REIT industry and by industry analysts to
evaluate REITs. For these reasons, management deems it appropriate to disclose
and discuss these Non-GAAP Measures. However, none of these measures represent
cash generated from operating activities determined in accordance with GAAP and
are not necessarily indicative of cash available to fund cash needs. Further,
these measures should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash
flow from operating activities as a measure of liquidity. The table below
reconciles net income to FFO, Normalized FFO
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and FAD for the three and nine months ended
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
Amounts in thousands, except per share data 2021 2020 2021 2020
Net income (loss) $ (2,066) $ 8,230 $ 45,052 $ 88,058
Gain on sales of real estate properties (1,186) (2,177) (41,046) (70,395)
Impairment of real estate properties 10,669 - 16,581 -
Real estate depreciation and amortization 52,390 48,215 154,899 145,324
Proportionate share of unconsolidated joint 1,558 80 3,726 240
ventures
FFO attributable to common stockholders $ 61,365
974 440 2,388 1,621
Lease intangible amortization 48 (35) (30) 694
Forfeited earnest money received - - (500) -
Debt financing costs - - 283 -
Unconsolidated JV normalizing items 2 54 - 136 -
Normalized FFO attributable to common $ 62,441 $ 54,753 $ 181,489 $ 165,542
stockholders
Non-real estate depreciation and amortization 586 785 1,900 2,430
Non-cash interest amortization 3 720 934 2,511 2,715
Provision for bad debt, net 25 (144) 3 718
Straight-line rent, net (1,171) (543) (3,459) (1,600)
Stock-based compensation 2,538 2,445 8,183 7,449
Unconsolidated JV non-cash items 4 (341) 8 (1,051) 23
Normalized FFO adjusted for non-cash items $ 64,798 $ 58,238 $ 189,576 $ 177,277
2nd generation TI (6,219) (5,323) (16,156) (17,368)
Leasing commissions paid (4,531) (1,999) (9,528) (7,081)
Capital additions (5,443) (4,580) (13,539) (12,827)
FAD $ 48,605 $ 46,336 $ 150,353 $ 140,001
FFO per common share - diluted $ 0.42 $ 0.40 $ 1.26 $ 1.21
Normalized FFO per common share - diluted $ 0.43 $ 0.41 $ 1.27 $ 1.23
FFO weighted average common shares outstanding 144,807 135,159 142,488 134,537
- diluted 5
1Acquisition and pursuit costs include third-party and travel costs related to the pursuit of acquisitions and developments. 2Includes the Company's proportionate share of acquisition and pursuit costs related to unconsolidated joint ventures. 3Includes the amortization of deferred financing costs, discounts and premiums, and non-cash financing receivable amortization. 4Includes the Company's proportionate share of straight-line rent, net related to unconsolidated joint ventures. 5The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 911,594 and 874,189, respectively for the three and nine months endedSeptember 30, 2021 . Cash Net Operating Income ("NOI") and Same Store Cash NOI Cash NOI and Same Store Cash NOI are key performance indicators. Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results. The Company defines Cash NOI as rental income, interest from financing receivables and property lease guaranty income less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, financing receivable amortization, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results. Same Store Cash NOI compares Cash NOI for stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented and include redevelopment projects. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, reposition properties and newly developed properties. The Company utilizes the reposition classification for properties experiencing a shift in strategic direction. Such a shift can occur for a variety of reasons, including a substantial change in the use of the asset, a change in strategy or closure of a 26
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neighboring hospital, or significant property damage. Such properties may require enhanced management, leasing, capital needs or a disposition strategy that differs from the rest of the portfolio. To identify properties exhibiting these reposition characteristics, the Company applies the following Company-defined criteria: •Properties having less than 60% occupancy that is expected to last at least two quarters; •Properties that experience a loss of occupancy over 30% in a single quarter; or •Properties with negative NOI that is expected to last at least two quarters. Any recently acquired property will be included in the same store pool once the Company has owned the property for eight full quarters. Newly developed properties will be included in the same store pool eight full quarters after substantial completion. Any additional square footage created by redevelopment projects at a same store property is included in the same store pool immediately upon completion. Any property included in the reposition property group will be included in the same store analysis once occupancy has increased to 60% or greater with positive NOI and has remained at that level for eight full quarters. During the third quarter of 2021, the Company's reposition pool decreased by one property to a total of six properties as a result of the property being reclassified from reposition to same store. The following table reflects the Company's same store cash NOI for the three months endedSeptember 30, 2021 and 2020. SAME STORE CASH NOI for the GROSS INVESTMENT three months ended September 30, Dollars in thousands NUMBER OF PROPERTIES at September 30, 2021 2021 2020 Same store properties 178 $ 3,786,406$ 68,062 $ 66,874 The following tables reconcile net income to same store NOI and the same store property metrics to the total owned real estate portfolio for the three months endedSeptember 30, 2021 and 2020:
Reconciliation of Same Store Cash NOI
THREE MONTHS ENDED SEPTEMBER 30,
Dollars in thousands 2021 2020
Net income (loss) $ (2,066) $ 8,230
Other income (expense) 23,000 11,969
General and administrative expense 8,207 7,299
Depreciation and amortization expense 50,999 47,143 Other expenses 1 3,193 2,364 Straight-line rent revenue (1,170) (542) Joint venture properties 1,210 19 Other revenue 2 (2,043) (1,609) Cash NOI 81,330 74,873 Cash NOI not included in same store (13,268) (7,999) Same store cash NOI 68,062 66,874 Reposition NOI 691 954 Same store and reposition cash NOI $ 68,753
1Includes acquisition and pursuit costs, bad debt, above and below market ground
lease intangible amortization, leasing commission amortization and ground lease
straight-line rent expense.
2Includes management fee income, interest, above and below market lease
intangible amortization, lease inducement amortization, lease terminations and
tenant improvement overage amortization.
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Reconciliation of
AS OF SEPTEMBER 30, 2021
SQUARE
Dollars in thousands PROPERTY COUNT GROSS INVESTMENT FEET OCCUPANCY
Same store properties 178 $ 3,786,406 13,426,252 88.4 %
Acquisitions 49 895,660 2,396,693 89.8 %
Development completions 2 83,452 261,914 72.3 %
Reposition 6 101,672 668,889 54.8 %
Total owned real estate properties 235 $ 4,867,190 16,753,748 87.0 %
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended
September 30, 2020
The Company's results of operations for the three months ended September 30,
2021 compared to the same period in 2020 were impacted by acquisitions,
developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $8.4 million , or 6.8%, for the three months ended
September 30, 2021 compared to the prior year period. This increase is comprised
of the following:
•Acquisitions in 2020 and 2021 contributed $10.0 million .
•Leasing activity, including contractual rent increases, contributed $2.6
million .
•Dispositions in 2020 and 2021 resulted in a decrease of $4.2 million .
Interest from a financing receivable, net totaled $1.9 million for the three
months ended September 30, 2021 . The Company acquired a property in the second
quarter of 2021 under a sale leaseback transaction. The sale leaseback did not
qualify for sale accounting as a result of a purchase option included in the
tenant lease. Therefore, the Company accounted for the transaction as a
financing receivable. See Note 1 to the Condensed Consolidated Financial
Statements accompanying this report for more information.
Other operating income increased $1.1 million , or 58.9%, from the prior year
period primarily as a result of variable parking and asset management fees.
Expenses
Property operating expenses increased $5.3 million , or 10.7%, for the three
months ended September 30, 2021 compared to the prior year period primarily as a
result of the following activity:
•Acquisitions in 2020 and 2021 resulted in an increase of $4.9 million .
•Increases in portfolio operating expenses as follows:
•Maintenance and repair expense of $0.6 million ;
•Utilities expense of $0.5 million ;
•Compensation expense of $0.2 million ;
•Administrative and other legal expense of $0.2 million ;
•Janitorial expense of $0.1 million ;
•Property tax expense increase of $0.1 million ;
•Insurance expense of $0.1 million .
•Dispositions in 2020 and 2021 resulted in a decrease of $1.4 million .
General and administrative expenses increased approximately $0.9 million , or
12.4%, for the three months ended September 30, 2021 compared to the prior year
period primarily as a result of the following activity:
•Travel expense increases of $0.2 million .
•Incentive-based awards increases of $0.5 million .
•Compensation expense increases of $0.7 million , including $0.1 million of
non-cash expense.
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•Net decreases, including professional fees and other administrative costs, of$0.5 million . Depreciation and amortization expense increased$3.9 million , or 8.2%, for the three months endedSeptember 30, 2021 compared to the prior year period primarily as a result of the following activity: •Acquisitions in 2020 and 2021 resulted in an increase of$5.4 million . •Various building and tenant improvement expenditures resulted in an increase of$2.4 million . •Dispositions in 2020 and 2021 resulted in a decrease of$1.2 million . •Assets that became fully depreciated resulted in a decrease of$2.7 million . Other Income (Expense) Gains on sale of real estate properties In the third quarter of 2021, the Company recognized gains of approximately$1.2 million on the sale of four properties and a land parcel sold under a single purchase agreement. In the third quarter of 2020, the Company recognized gains of approximately$2.2 million primarily related to the sale of one property. Interest expense Interest expense decreased$0.8 million , or 5.8%, for the three months endedSeptember 30, 2021 compared to the prior year period. The components of interest expense are as follows: THREE MONTHS ENDED SEPTEMBER 30, CHANGE Dollars in thousands 2021 2020 $ % Contractual interest $ 12,201$ 13,182 $ (981) (7.4) % Net discount/premium accretion 50 102 (52) (51.0) % Deferred financing costs amortization 713 683 30 4.4 % Interest rate swap amortization 42 42 - - % Treasury hedge amortization 107 107 - - % Interest cost capitalization (34) (207) 173 (83.6) % Right-of-use assets financing amortization 255 245 10 4.1 % Total interest expense $ 13,334$ 14,154 $ (820) (5.8) % Contractual interest expense decreased$1.0 million , or 7.4%, primarily as a result of the following activity: •The unsecured senior notes due 2031 accounted for an increase of approximately$1.5 million . •The redemption of the unsecured senior notes due 2023 accounted for a decrease of$2.3 million . •The Company's unsecured term loan due 2024 and unsecured term loan due 2026, net of swaps, accounted for a decrease of approximately$0.3 million . •The Unsecured Credit Facility accounted for an increase of approximately$0.2 million . •Mortgage note repayments, net of assumptions, accounted for a decrease of approximately$0.1 million . Impairment ofReal Estate Properties Impairment of real estate properties totaling approximately$10.7 million was recorded based on the contractual sales price of a property that was reclassified to held for sale during the third quarter of 2021. Equity loss from unconsolidated joint ventures The Company recognized its proportionate share of losses from the TIAA Joint Venture and its parking garage joint ventures during the third quarter of 2021. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 The Company's results of operations for the nine months endedSeptember 30, 2021 compared to the same period in 2020 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
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Revenues
Rental income increased$20.2 million , or 5.5%, for the nine months endedSeptember 30, 2021 compared to the prior year period. This increase is comprised of the following: •Acquisitions in 2020 and 2021 contributed$27.8 million . •A development completed in 2020 contributed$1.0 million . •Leasing activity, including contractual rent increases, contributed$7.0 million . •Dispositions in 2020 and 2021 resulted in a decrease of$15.6 million . Interest from financing receivable, net of$2.4 million resulted from the 2021 acquisition of a property classified as an investment in financing receivable. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report. Other operating income increased$2.0 million , or 37.0%, from the prior year period primarily resulting from variable parking and asset management fees. Expenses Property operating expenses increased$12.9 million , or 8.8%, for the nine months endedSeptember 30, 2021 compared to the prior year period primarily as a result of the following activity: •Acquisitions in 2020 and 2021 resulted in an increase of$11.4 million . •A development completed in 2020 resulted in an increase of$0.4 million . •Increases in portfolio operating expenses as follows: •Maintenance and repair expense of$2.2 million ; •Property tax expense of$0.7 million ; •Utilities expense of$0.9 million ; •Compensation expense of$0.5 million ; and •Insurance expense of$0.3 million . •Intangible amortization write-off in the first quarter of 2020 resulted from the acquisition of previously ground leased land resulted in a decrease of$0.7 million . •Dispositions in 2020 and 2021 resulted in a decrease of$2.8 million . General and administrative expenses increased approximately$1.8 million , or 7.5%, for the nine months endedSeptember 30, 2021 compared to the prior year period primarily as a result of the following activity: •Increase in incentive-based awards of approximately$0.7 million . •Compensation expense increases of$1.8 million , including$0.6 million of non-cash expense. •Net decreases, including professional fees and other administrative costs, of$0.7 million . Depreciation and amortization expense increased$8.6 million , or 6.0%, for the nine months endedSeptember 30, 2021 compared to the prior year period primarily as a result of the following activity: •Acquisitions in 2020 and 2021 and a development in 2020 resulted in an increase of$15.1 million . •Various building and tenant improvement expenditures resulted in an increase of$7.1 million . •Dispositions in 2020 and 2021 resulted in a decrease of$5.3 million . •Assets that became fully depreciated resulted in a decrease of$8.3 million . 30
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Other Income (Expense) Gains on sale of real estate properties Gains on sale of real estate properties in 2021 totaling approximately$41.0 million are associated with eight real estate properties. Gains on sale of real estate properties in 2020 totaling$70.4 million are associated with three real estate properties. Interest expense Interest expense decreased$2.7 million , or 6.3%, for the nine months endedSeptember 30, 2021 compared to the prior year period. The components of interest expense are as follows: NINE MONTHS ENDED SEPTEMBER 30, CHANGE Dollars in thousands 2021 2020 $ % Contractual interest $ 36,590$ 40,031 $ (3,441) (8.6) % Net discount/premium accretion 146 358 (212) (59.2) % Deferred financing costs amortization 2,114 2,003 111 5.5 % Interest rate swap amortization 126 126 - - % Treasury hedge amortization 320 229 91 39.7 % Interest cost capitalization (187) (913) 726 (79.5) % Right-of-use assets financing amortization 748 722 26 3.6 % Total interest expense $ 39,857$ 42,556 $ (2,699) (6.3) % Contractual interest expense decreased$3.4 million , or 8.6%, primarily as a result of the following activity: •The unsecured senior notes due 2031 and the Senior Notes due 2030 accounted for an increase of approximately$6.1 million . •The redemption of the unsecured senior notes due 2023 accounted for a decrease of$7.0 million . •The Company's unsecured term loan due 2024 and the unsecured term loan due 2026, net of swaps, accounted for an increase of approximately$0.5 million . •The Unsecured Credit Facility accounted for a decrease of approximately$2.0 million . •Mortgage note repayments, net of assumptions, accounted for a decrease of approximately$1.0 million . Impairment ofReal Estate Properties Impairment of real estate properties totaling approximately$16.6 million was associated with the disposal of one property totaling$0.8 million and the reclassification of a property to held for sale resulting in an impairment of$10.7 million based on the contractual sales price. In addition, the Company recorded impairment charges totaling$5.1 million which includes a property associated with a redevelopment project inNashville, Tennessee . See Note 6 to the Condensed Consolidated Financial Statements accompany this report for further discussion of this project. Equity loss from unconsolidated joint ventures The Company recognized its proportionate share of losses from the TIAA Joint Venture and its parking garage joint ventures. These losses are primarily attributable to non-cash depreciation expense. See Note 2 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures. Interest and other income (expense), net In 2021, the Company recorded approximately$0.5 million from a forfeited earnest money deposit and expensed approximately$0.3 million of debt issuance costs as a result of the amendment to the Term Loan Agreement.
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