HEALTHCARE REALTY TRUST INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)
Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with the SEC, 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 Company's current plans, objectives, estimates, expectations and intentions and inherently involve significant risks and uncertainties. Such risks and uncertainties include, among other things, the following: failure to realize the expected benefits of the Merger; the risk that the Company's and HTA's respective businesses will not be integrated successfully or that such integration may be more difficult, time-consuming or costly than expected; risks related to future opportunities and plans for the Company, including the uncertainty of expected future financial performance and results of the Company; the possibility that, if the 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 the Company's common stock could decline; pandemics or other health crises, such as COVID-19; increases in interest rates; the availability and cost of capital at expected rates; competition for quality assets; negative developments in the operating results or financial condition of the Company's tenants, including, but not limited to, their ability to pay rent; the Company's ability to reposition or sell facilities with profitable results; the Company's ability to release space at similar rates as vacancies occur; the Company's ability to renew expiring leases; government regulations affecting tenants' Medicare and Medicaid reimbursement rates and operational requirements; unanticipated difficulties and/or expenditures relating to future acquisitions and developments; changes in rules or practices governing the Company's financial reporting; the Company may be required under purchase options to sell properties and may not be able to reinvest the proceeds from such sales at rates of return equal to the return received on the properties sold; uninsured or underinsured losses related to casualty or liability; the incurrence of impairment charges on its real estate properties or other assets; other legal and operational matters; and other risks and uncertainties affecting the Company, including those described from time to time under the caption "Risk Factors" and elsewhere in the Company's filings and reports with the SEC, including the Company's Annual Report on Form 10-K for the year ended December 31, 2022. Moreover, other risks and uncertainties of which the Company is not currently aware may also affect the 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 the Company on its website or otherwise. The Company undertakes no 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.
Stockholders and investors are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in the
Company’s filings and reports, including, without limitation, estimates and
projections regarding the performance of development projects the Company is
pursuing.
For a detailed discussion of the Company's risk factors, please refer to the Company's filings with the SEC, including this report and Item 1A. Risk Factors herein and the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
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 intended to align the corporate
structure of the combined company after giving effect to the Merger and the
UPREIT reorganization and to provide a platform for the combined company to more
efficiently acquire properties in a tax-deferred manner. The 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". For additional information on the
Merger, see Note 2 to the Condensed Consolidated Financial Statements.
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Because Legacy HR was the accounting acquirer under GAAP in the transaction, its historical financial statements became the historical financial statements of the Company. For additional information, please refer to the Explanatory Note in this report.
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, proceeds from the sales of real estate properties, joint ventures, and proceeds from public or private debt or equity offerings. After the refinancing of its bank facilities in connection with the Merger, as of March 31, 2023, the Company had $1.1 billion available to be drawn on its Unsecured Credit Facility and $49.9 million in cash. 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, including the Unsecured Credit Facility. Management believes that the Company's 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. Dividends paid by the Company for the three months ended March 31, 2023 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends, primarily as a result of the timing of interest payments. The Company expects that cash flows from property operations will generate sufficient cash flows such that dividends for the full year 2023 can be funded by cash flows from operations or other sources of liquidity described above. Investing Activities Cash flows provided by investing activities for the three months ended March 31, 2023 were approximately $41.6 million. Below is a summary of significant investing activities.
Acquisitions
The following table details the Company’s sole acquisition for the three months
ended March 31, 2023:
Dollars in thousands ASSOCIATED HEALTH SYSTEM/TENANCY 1 DATE ACQUIRED PURCHASE PRICE SQUARE FOOTAGE MILES TO CAMPUS Tampa, FL BayCare Health 3/10/23 $ 31,500 115,867 0.06
1Includes buildings located on-campus, adjacent and off-campus that are anchored
by healthcare systems or located within two miles of a hospital campus.
Dispositions
The Company disposed of six properties during the three months ended March 31, 2023 for a total sales price of $208.8 million, including cash proceeds of $149.2 million. The following table details these dispositions for the three months ended March 31, 2023: Dollars in thousands Date Disposed Sales Price Square Footage Tampa, FL & Miami, FL 1 1/12/23 $ 93,250 224,037 Dallas, TX 2 1/30/23 19,210 36,691 St. Louis, MO 2/10/23 350 6,500 Los Angeles, CA 3/23/23 21,000 37,165 Los Angeles, CA3 3/30/23 75,000 147,078 Total dispositions $ 208,810 451,471
1Includes two properties, sold in two separate transactions to the same buyer on
the same date.
2The Company sold this property to a joint venture in which it retained a 40%
interest. Sales price and square footage reflect the total sales price paid by
the joint venture and total square footage of the property.
3The Company entered into a mortgage note agreement with the buyer for
$45 million.
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Capital Funding During the three months ended March 31, 2023, the Company funded $45.9 million toward the following capital expenditures:
•$16.9 million toward the development and redevelopment of properties;
•$11.2 million toward first generation tenant improvements and planned capital
expenditures for acquisitions;
•$8.9 million toward second generation tenant improvements; and
•$8.9 million toward capital expenditures.
Financing Activities
Cash flows used in financing activities for the three months ended March 31,
2023 were approximately $121.8 million. See Notes 6 and 9 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
The Company has equity distribution agreements with various sales agents with
respect to our ATM offering program of common stock with an aggregate sales
amount of up to $750.0 million. As of March 31, 2023, $750.0 million remained
available for issuance under our current ATM offering program.
Debt Activity
As of March 31, 2023, the Company had outstanding interest rate derivatives
totaling $1.0 billion to hedge one-month Term SOFR. The following details the
amount and rate of each swap (dollars in thousands):
WEIGHTED
EXPIRATION DATE AMOUNT AVERAGE RATE
January 15, 2024 $ 200,000 1.21 %
May 1, 2026 100,000 2.15 %
June 1, 2026 150,000 3.83 %
December 1, 2026 150,000 3.84 %
June 1, 2027 150,000 4.13 %
December 1, 2027 250,000 3.79 %
$ 1,000,000 3.17 %
Operating Activities
Cash flows provided by operating activities increased from $43.8 million for the
three months ended March 31, 2022 to $69.2 million for the three months ended
March 31, 2023. 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.
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, 2022, below are some of the factors and trends that management believes may impact future operations of the Company.
Economic and Market Conditions
Rising interest rates and increased volatility in the capital markets have
increased the Company’s cost and availability of debt and equity capital.
Limited availability and increases in the cost of capital could adversely impact
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the Company's ability to finance operations and acquire and develop properties.
To the extent the Company's tenants experience increased costs or financing
difficulties due to the economic and market conditions, they may be unable or
unwilling to make payments or perform their obligations when due. Additionally,
increased interest rates may also result in less liquid property markets,
limiting the Company's ability to sell existing assets or obtain joint venture
capital.
Expiring Leases
The Company expects that approximately 15% of its leases will expire each year
in the ordinary course of business. There are 1,169 leases totaling 3.3 million
square feet that will expire during the remainder of 2023. Approximately 74% of
the leases expiring during the remainder of 2023 are for space 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 three 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 of March 31, 2023, leases for
approximately 92% of the Company's total leased square footage allow for some
recovery of operating expenses, with approximately 28% having modified gross
lease structures and approximately 64% 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):
YEAR EXERCISABLE NUMBER OF PROPERTIES GROSS REAL ESTATE INVESTMENT AS OF
MARCH 31, 2023 1
Current 2 6 $ 112,313
2024 - -
2025 7 133,068
2026 6 180,186
2027 4 110,129
2028 5 133,803
2029 3 81,784
2030 - -
2031 4 108,767
2032 2 24,613
2033 and thereafter 3 10 335,885
Total 47 $ 1,220,548
1Includes three properties totaling $44.6 million with stated purchase prices or
prices based on fixed capitalization rates.
2These purchase options have been exercisable for an average of 13.2 years.
3Includes two medical office buildings that are 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 rent reserves, 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 common share, Normalized FFO
per share and FAD ("Non-GAAP Measures") provide an understanding of the
operating performance of the Company's properties without giving effect to
certain significant non-cash items, primarily depreciation and amortization
expense. Historical cost accounting for real estate assets in accordance with
GAAP assumes that the value of real estate assets diminishes predictably over
time. However, real estate values instead have historically risen or fallen with
market conditions. The Company believes that by excluding the effect of
depreciation, amortization, impairments and gains or losses from sales of real
estate, all of which are based on historical costs and which may be of limited
relevance in evaluating current performance, Non-GAAP Measures can facilitate
comparisons of operating performance between periods. The Company reports
Non-GAAP Measures because these measures are observed by management to also be
the predominant measures used by the REIT industry and by industry analysts to
evaluate REITs. For these reasons, management deems it appropriate to disclose
and discuss these Non-GAAP Measures. However, none of these measures represent
cash generated from operating activities determined in accordance with GAAP and
are not necessarily indicative of cash available to fund cash needs. Further,
these measures should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash
flow from operating activities as a measure of liquidity.
The table below reconciles net income to FFO, Normalized FFO and FAD for the
three months ended March 31, 2023
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and 2022.
THREE MONTHS ENDED MARCH 31,
Amounts in thousands, except per share data 2023 2022
Net (loss) income attributable to common stockholders $ (87,125) $ 42,227
Net (loss) income attributable to common stockholders per share 1 $
(0.23) $ 0.28
Gain on sales of real estate properties (1,007) (44,784) Impairment of real estate properties 26,227 (25) Real estate depreciation and amortization 186,109 55,658 Non-controlling income from operating partnership units (1,067) - Proportionate share of unconsolidated joint ventures 4,841 2,369 FFO adjustments $ 215,103 $ 13,218 FFO adjustments per common share - diluted 7 $
0.56 $ 0.09
FFO attributable to common stockholders $ 127,978 $ 55,445 FFO attributable to common stockholders per common share - diluted $ 0.33 $ 0.37 7 Acquisition and pursuit costs 2 287 1,303 Merger-related costs 3 4,855 6,116 Merger-related fair value adjustment 10,864 - Lease intangible amortization 146 309 Non-routine legal costs/forfeited earnest money received - 91 Allowance for credit losses 4 8,599 - Debt financing costs - 1,429 Unconsolidated JV normalizing items 5 117 95 Normalized FFO adjustments $ 24,868 $ 9,343 Normalized FFO adjustments per common share - diluted 8 $
0.06 $ 0.06
Normalized FFO attributable to common stockholders $ 152,846 $ 64,788 Normalized FFO attributable to common stockholders per common share $ 0.40 $ 0.43 - diluted 8 Non-real estate depreciation and amortization 604 460 Non-cash interest amortization 6 682 711 Rent reserves, net 1,371 143 Straight-line rent, net (8,246) (1,209) Stock-based compensation 3,745 3,699 Unconsolidated JV non-cash items 7 (227) (271) Normalized FFO adjusted for non-cash items $ 150,775 $ 68,321 2nd generation TI (8,882) (4,899) Leasing commissions paid (7,013) (3,767) Capital additions (8,946) (2,620) FAD $ 125,934 $ 57,035 FFO weighted average common shares outstanding - diluted 8
383,335 149,856
1Potential common shares are not included in the computation of diluted earnings per share when a loss exists as the effect would be an antidilutive per share amount.
2Acquisition and pursuit costs include third-party and travel costs related to
the pursuit of acquisitions and developments.
3Includes costs incurred related to the Merger.
4Includes a $5.2 million credit allowance for a mezzanine loan included in
“Impairment of real estate and credit loss reserves” on the Statement of
Operations and $3.4 million reserve included in “Rental Income” on the Statement
of Operations for previously deferred rent and straight line rent for three
skilled nursing facilities.
5Includes the Company’s proportionate share of acquisition and pursuit costs
related to unconsolidated joint ventures.
6Includes the amortization of deferred financing costs, discounts and premiums,
and non-cash financing receivable amortization.
7Includes the Company’s proportionate share of straight-line rent, net related
to unconsolidated joint ventures.
8The Company utilizes the treasury stock method which includes the dilutive
effect of nonvested share-based awards outstanding of 401,937 and 804,415,
respectively, for the three months ended March 31, 2023 and 2022, and the
diluted impact of 4,042,993 OP units outstanding for the three months ended
March 31, 2023.
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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
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. Accordingly, stabilized
properties exclude properties that were recently acquired or disposed of,
properties classified as held for sale or intended for sale, properties
undergoing redevelopment, and newly redeveloped or developed properties. Legacy
HTA properties that met the same store criteria are included in both periods
shown as if they were owned by the Company for the full analysis period.
The Company utilizes the redevelopment classification for properties where
management has approved a change in strategic direction for such properties
through the application of additional resources including an amount of capital
expenditures significantly above routine maintenance and capital improvement
expenditures. These properties are described in additional detail in Note 6 to
the Condensed Consolidated Financial Statements included elsewhere in this
report.
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 or
redeveloped properties will be included in the same store pool eight full
quarters after substantial completion.
The following table reflects the Company’s same store cash NOI for the three
months ended March 31, 2023 and 2022.
SAME STORE CASH NOI for the
GROSS INVESTMENT three months ended March 31,
Dollars in thousands NUMBER OF PROPERTIES at March 31, 2023 2023 2022
Same store properties 588 $
11,688,867 $ 178,560 $ 173,649
The following tables reconcile net income to same store NOI and the same store
property metrics to the total owned real estate portfolio for the three months
ended March 31, 2023 and 2022:
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Reconciliation of Same Store Cash NOI
THREE MONTHS ENDED MARCH 31,
Dollars in thousands 2023 2022
Net (loss) income $ (87,125) $ 42,227
Other income (expense) 94,407 (29,293)
General and administrative expense 14,935
11,036
Depreciation and amortization expense 184,479
54,041
Other expenses 1 7,940
9,929
Straight-line rent revenue, net (8,245) (1,209)
Joint venture properties 4,769 2,052
Other revenue 2 (1,686) (2,044)
209,474 86,739
Pre-Merger Legacy HTA NOI - 127,363
Cash NOI 209,474 214,102
Cash NOI not included in same store (30,914) (40,453)
Same store cash NOI $ 178,560 $ 173,649
1Includes acquisition and pursuit costs, Merger-related costs, rent reserves,
above and below market ground lease intangible amortization, leasing commission
amortization and ground lease straight-line rent expense.
2Includes management fee income, interest, above and below market lease
intangible amortization, lease inducement amortization, lease terminations and
tenant improvement overage amortization.
Reconciliation of Same Store Properties
AS
OF MARCH 31, 2023
GROSS INVESTMENT SQUARE
Dollars and square feet in thousands PROPERTY COUNT 1 FEET OCCUPANCY
Same store properties 588 $ 11,688,867 34,471 89.0 %
Acquisitions 67 1,253,422 3,183 88.1 %
Development completions 6 189,871 355 84.2 %
Redevelopments 12 330,957 1,204 59.4 %
Planned Dispositions 8 165,243 642 58.9 %
Total owned real estate properties 681 $ 13,628,360 39,855 87.5 %
1Excludes assets held for sale, construction in progress, land held for
development, corporate property and financing lease right-of-use assets
unrelated to an imputed lease arrangement as a result of a sale leaseback
transaction.
Results of Operations
Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 The Company's results of operations for the three months ended March 31, 2023 compared to the same period in 2022 were impacted by the Merger, acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Rental income increased $185.6 million, or 134.0%, for the three months ended March 31, 2023 compared to the prior year period. This increase is comprised of the following:
•Acquisitions in 2022 and 2023 contributed $9.0 million.
•Leasing activity, including contractual rent increases, contributed $4.5
million.
•Dispositions in 2022 and 2023 resulted in a decrease of $8.1 million.
•Impact from the Merger contributed $180.2 million.
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Interest income increased $2.3 million, or 118.3%, for the three months ended
March 31, 2023 compared to the prior year period primarily as a result of
interest from notes receivables assumed in the Merger.
Other operating income increased $2.1 million, or 86.6%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of variable parking and asset management fees assumed in the Merger.
Expenses
Property operating expenses increased $64.6 million, or 112.4%, for the three months ended March 31, 2023 compared to the prior year period primarily as a result of the following activity:
•Acquisitions in 2022 and 2023 resulted in an increase of $3.1 million.
•Increases in portfolio operating expenses as follows:
•Utilities expense of $0.3 million;
•Maintenance and repair of $0.4 million;
•Administrative, leasing commissions, and other legal expense of $0.6 million;
•Janitorial expense of $0.6 million; and
•Insurance expense of $0.4 million.
•Property taxes decreased $0.7 million.
•Compensation expense decreased $0.5 million.
•Dispositions in 2022 and 2023 resulted in a decrease of $3.8 million.
•Impact from the Merger resulted in an increase of $64.2 million.
General and administrative expenses increased approximately $3.9 million, or
35.3%, for the three months ended March 31, 2023 compared to the prior year
period primarily as a result of the following activity:
•Compensation expense increases of $0.7 million.
•Travel and related expenses increased $0.8 million.
•Net increases, including professional fees, audit services, insurance and other
administrative costs, of $1.6 million.
•Impact from the Merger resulted in an increase of $0.8 million.
Merger-related costs decreased $1.3 million, or 20.6%, for the three months
ended March 31, 2023 compared to the prior year period. These costs consisted
primarily of legal and consulting services in connection with the Merger.
Depreciation and amortization expense increased $130.4 million, or 241.4%, for
the three months ended March 31, 2023 compared to the prior year period
primarily as a result of the following activity:
•Acquisitions in 2022 and 2023 resulted in an increase of $4.4 million.
•Various building and tenant improvement expenditures resulted in an increase of
$3.0 million.
•Dispositions in 2022 and 2023 resulted in a decrease of $2.0 million.
•Assets that became fully depreciated resulted in a decrease of $3.0 million.
•Impact from the Merger resulted in an increase of $128.0 million.
Other Income (Expense)
Gains on sale of real estate properties
In the first quarter of 2023, the Company recognized gains of approximately $1.0
million. In the first quarter of 2022, the Company recognized gains of
approximately $44.8 million.
Interest expense
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Interest expense increased $50.1 million, or 366.7%, for the three months ended
March 31, 2023 compared to the prior year period. The components of interest
expense are as follows:
THREE MONTHS ENDED MARCH 31, CHANGE
Dollars in thousands 2023 2022 $ %
Contractual interest $ 50,766 $ 12,502 $ 38,264 306.1 %
Net discount/premium accretion 9,591 50 9,541 19,082.0 %
Debt issuance costs amortization 1,476 711 765 107.6 %
Amortization of interest rate swap settlement 42 42 - - %
Amortization of treasury hedge settlement 107 107 - - %
Fair value derivative 1,429 - 1,429 - %
Interest cost capitalization (570) (38) (532) 1,400.0 %
Interest on lease liabilities 918 287 631 219.9 %
Total interest expense $ 63,759 $ 13,661 $ 50,098 366.7 %
Contractual interest expense increased $38.3 million, or 306.1%, for the three
months ended March 31, 2023 compared to the prior year period primarily as a
result of the following activity:
•Senior notes and unsecured term loans assumed in the Merger accounted for an
increase of approximately $26.0 million.
•New unsecured term loans executed with the amended credit facility accounted
for an increase of approximately $9.0 million.
•The Company’s Unsecured Term Loan due 2024 and 2026 accounted for an increase
of approximately $3.9 million.
•The Unsecured Credit Facility accounted for an increase of approximately $4.4 million due to an increased weighted average balance outstanding and an increase in the weighted average interest rate.
•Active interest rate derivatives accounted for a decrease of $4.8 million.
•Mortgage note repayments, net of assumptions, accounted for a decrease of
approximately $0.2 million.
Impairment of Real Estate Properties In the first quarter of 2023, the Company recognized impairments totaling $26.2 million due to four properties that were sold and three properties and one land parcel reclassified to held for sale. In addition, the Company recorded $5.2 million in credit loss reserves related to notes receivables. See Note 1 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's notes receivables and credit loss reserves. Equity loss from unconsolidated joint ventures The Company recognized its proportionate share of losses from its unconsolidated joint ventures. These losses are primarily attributable to non-cash depreciation expense. See Note 3 to the Condensed Consolidated Financial Statements accompanying this report for more details regarding the Company's unconsolidated joint ventures.
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