Healthcare Realty Trust rporated(HR) - 2023 Q4 - Annual Report

Part I Business Healthcare Realty Trust is a self-managed REIT specializing in owning, leasing, and developing outpatient healthcare properties, holding gross investments of approximately $13.4 billion in 655 consolidated properties - The Company is a self-managed REIT focused on owning, leasing, and developing income-producing real estate properties primarily for outpatient healthcare services throughout the U.S.[13] Owned Properties by Facility Type (as of Dec 31, 2023) | Facility Type | Gross Investment ($ thousands) | Square Feet (thousands) | Number of Properties | Occupancy % | | :--- | :--- | :--- | :--- | :--- | | Medical office/outpatient | $12,160,240 | 35,677 | 630 | 87.1% | | Inpatient | $439,464 | 934 | 15 | 89.9% | | Office | $467,182 | 1,631 | 8 | 96.2% | | Total Real Estate Investments | $13,399,067 | 38,474 | 655 | 87.6% | - For the year ended December 31, 2023, no single tenant accounted for 10% or more of the Company's consolidated revenues, indicating a diverse tenant base[20] Lease Expirations by Year (as of Dec 31, 2023) | Expiration Year | Number of Leases | Leased Square Feet | Percentage of Leased Square Feet | | :--- | :--- | :--- | :--- | | 2024 | 1,610 | 6,081,500 | 18.2% | | 2025 | 1,096 | 4,567,388 | 13.6% | | 2026 | 1,061 | 4,086,806 | 12.2% | | 2027 | 856 | 4,216,127 | 12.6% | | 2028 | 835 | 3,732,888 | 11.1% | | Thereafter | 1,422 | 10,794,856 | 32.0% | - In 2023, the Company acquired two medical office buildings for $43.0 million, disposed of 39 properties for $787.0 million, and funded $112.2 million toward development and redevelopment[26][27][28] - As of December 31, 2023, the company employed 584 people, emphasizing talent retention through comprehensive benefits[44][49] - The Company's unsecured credit facility includes a sustainability-linked provision that reduced borrowing costs by one basis point for 2024 due to meeting green building certification metrics in 2023[49][51] Risk Factors The company faces diverse risks including tenant financial health, potential real estate impairment charges of $149.7 million in 2023, geographic concentration, significant debt of approximately $5.3 billion, interest rate volatility, and regulatory changes impacting REIT status - The Company's revenues are highly dependent on the financial strength of its tenants and their ability to make rental payments, which can be affected by economic slowdowns and regulatory changes[63] - The Company incurred impairment charges of $149.7 million in 2023 associated with completed or planned property dispositions[65] - As of December 31, 2023, the Company had significant investment concentrations in Dallas, TX (8.7%), Houston, TX (5.6%), and Seattle, WA (5.3%), increasing exposure to local market risks[76] - As of December 31, 2023, the Company had approximately $5.3 billion of outstanding indebtedness, which could limit operational flexibility and reduce funds for business strategy and dividends[95] - Failure to maintain REIT qualification would subject the Company to corporate income tax, reduce cash available for dividends, and could adversely impact common stock value[116] - Recent increases in real estate transfer tax rates in cities like Los Angeles and Seattle can impose significant transaction costs on property sales and may reduce property values[125] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[126] Cybersecurity The company integrates cybersecurity risk management into its overall risk processes, with Audit Committee oversight, a dedicated department, semi-annual employee training, and an incident response plan, with no material incidents to date - The Audit Committee of the Board of Directors oversees cybersecurity risk management, receiving regular briefings from the Chief Technology Officer and other management[128] - The Company has a dedicated technology services department led by the Chief Technology Officer and requires all employees to complete cybersecurity training semi-annually[129] - A cybersecurity incident response plan is in place, including procedures for reporting incidents to senior management and the legal department for analysis and potential disclosure[133] - To date, the Company has not experienced a cybersecurity incident that has materially affected its business, operations, or financial condition[135] Properties This section refers to property information detailed in Item 1 (Business), Note 3, and Schedule III, and confirms the company owns its corporate headquarters in Nashville, Tennessee - The Company owns its corporate headquarters located at 3310 West End Avenue in Nashville, Tennessee[136] Legal Proceedings The company is not aware of any pending or threatened litigation that would materially adversely affect its financial position, results of operations, or cash flows - The Company is not aware of any pending or threatened litigation that would have a material adverse effect on its financial position or results[137] Mine Safety Disclosures This item is not applicable to the company - Not applicable[138] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under "HR", with 2,167 stockholders of record and 8,102,861 securities available for future issuance under equity compensation plans, and a $500 million share repurchase program authorized in May 2023 has seen no repurchases - The Company's common stock is traded on the New York Stock Exchange under the symbol "HR"[139] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Number of Securities to be Issued upon Exercise | Weighted Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 155,613 | — | 8,102,861 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 155,613 | — | 8,102,861 | - On May 31, 2023, the Board of Directors authorized a repurchase program for up to $500 million of its common stock, with no shares repurchased under this authorization as of the report date[144] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition and results, detailing liquidity, capital resources, operational trends, the impact of the 2022 HTA merger on revenue and expenses, non-GAAP measures, and critical accounting policies involving significant estimates Liquidity and Capital Resources The company expects to meet liquidity needs via cash, operations, dispositions, and debt/equity, with $499.8 million in 2023 operating cash flow, $43.0 million in acquisitions, $787.0 million in dispositions, and $5.3 billion in total debt, while maintaining compliance with all covenants - The Company expects to meet its liquidity needs through cash on hand, cash flows from operations, property dispositions, and borrowings under its credit facilities and other debt/equity issuances[24][157] - Cash flows from operating activities were $499.8 million for the year ended December 31, 2023, compared to $272.7 million in 2022[162] - In 2023, the Company acquired two properties for a total purchase price of $42.95 million and disposed of 39 properties for total sales prices of $787.0 million[164][167] - Total capital expenditures in 2023 were $262.1 million, including $112.2 million for development/redevelopment and $63.5 million for second-generation tenant improvements[166] Debt Balances as of December 31, 2023 (in thousands) | Debt Type | Principal Balance | Carrying Balance | Weighted Years to Maturity | Effective Rate | | :--- | :--- | :--- | :--- | :--- | | Senior Notes Outstanding | $3,699,285 | $3,427,233 | 4.9 | 4.43% | | Unsecured Term Loans | $1,500,000 | $1,497,092 | - | 6.39% | | Mortgage notes payable | $70,752 | $70,534 | 2.0 | 4.15% | | Total Outstanding | $5,270,037 | $4,994,859 | 4.0 | 5.02% | - As of December 31, 2023, the Company was in compliance with its debt covenants, with total debt at 37.5% of total assets (covenant limit of 60%) and debt service coverage at 3.2 times (covenant minimum of 1.5 times)[183] Trends and Matters Impacting Operating Results Management identifies rising interest rates and capital market volatility as key trends, while actively managing its portfolio through development, strong leasing with 74-79% tenant retention and 2.6% average cash leasing spreads, and $47.7 million in capital expenditures in 2023 - The company is at risk for future goodwill impairment due to stock price volatility and downward pressure on market capitalization, although no impairment was recorded as of December 31, 2023[187] Active Development & Redevelopment Projects (as of Dec 31, 2023) | Activity Type | Total Funded During Year ($ thousands) | Total Estimated Investment ($ thousands) | Approximate Square Feet | | :--- | :--- | :--- | :--- | | Development | $69,125 | $215,600 | 484,454 | | Redevelopment | $20,513 | $79,978 | 800,609 | - In 2023, quarterly tenant retention ranged from 74% to 79%, with 15% to 20% of portfolio leases expected to expire each year[196] - In 2023, cash leasing spreads for renewing leases averaged 2.6%, and contractual rental rate growth for in-place leases averaged 2.82%[197] - Capital expenditures for property maintenance and improvement were $47.7 million in 2023, with second-generation tenant improvement spending at $63.5 million[200][203] - As of December 31, 2023, the company had 232 properties held under ground leases with a weighted average remaining term of 64.9 years[211] Results of Operations The 2023 operating results were significantly influenced by the July 2022 HTA merger, with rental income rising 44.3% to $1.3 billion, property operating expenses increasing 45.5%, a net credit of $(2.0) million for merger costs, a $149.7 million impairment charge, and interest expense growing 76.3% to $258.6 million - Rental income increased by $401.7 million (44.3%) to $1.3 billion in 2023, primarily driven by a $377.0 million contribution from the 2022 Merger[219] - Property operating expenses increased by $156.4 million (45.5%) in 2023, with the Merger accounting for a $130.9 million increase[221] - Merger-related costs were a net credit of $(2.0) million in 2023, compared to an expense of $103.4 million in 2022, including a $17.8 million refund for transfer taxes paid in 2022[221][377] - Depreciation and amortization expense increased by $277.6 million (61.3%) in 2023, with the Merger's impact contributing $251.2 million to the increase[222] Interest Expense Components (2023 vs 2022) | Component | 2023 ($ thousands) | 2022 ($ thousands) | Change ($ thousands) | Change % | | :--- | :--- | :--- | :--- | :--- | | Contractual interest | $208,305 | $118,085 | $90,220 | 76.4% | | Net discount/premium accretion | $38,941 | $18,227 | $20,714 | 113.6% | | Total interest expense | $258,584 | $146,691 | $111,893 | 76.3% | - The Company recorded impairment charges of $149.7 million on real estate assets in 2023, related to completed or planned dispositions[224] Non-GAAP Financial Measures and Key Performance Indicators This section details non-GAAP metrics, with 2023 Normalized FFO at $601.5 million or $1.57 per diluted share, and Merger Combined Same Store Cash NOI growing to $726.6 million from $707.4 million in 2022 Reconciliation of Net Income to FFO and FAD (Year ended Dec 31, 2023) | Metric (in thousands) | Amount | | :--- | :--- | | Net loss attributable to common stockholders | $(278,261) | | Adjustments (Depreciation, Impairments, etc.) | $825,387 | | FFO attributable to common stockholders | $547,126 | | Normalizing adjustments (Merger costs, etc.) | $54,365 | | Normalized FFO attributable to common stockholders | $601,491 | | Non-cash adjustments & maintenance capital expenditures | $(160,953) | | FAD | $440,538 | Normalized FFO per Diluted Share | Year | Normalized FFO per Share | | :--- | :--- | | 2023 | $1.57 | | 2022 | $1.69 | | 2021 | $1.71 | - The company presents a 'Merger Combined Same Store Cash NOI' metric, including properties from the legacy HTA portfolio to better reflect combined entity performance, representing approximately 85% of the combined portfolio[237] Merger Combined Same Store Cash NOI (in thousands) | Year | Merger Combined Same Store Cash NOI | | :--- | :--- | | 2023 | $726,574 | | 2022 | $707,385 | Application of Critical Accounting Policies to Accounting Estimates Management outlines critical accounting policies requiring significant judgment, including capitalization of development costs, valuation and impairment assessment of long-lived assets, allocation of purchase prices in acquisitions, depreciation methods, revenue recognition for leases, and accounting for derivative instruments - The Company capitalizes direct and indirect costs for development projects, with pursuit costs for probable projects capitalized and reviewed quarterly, totaling $6.2 million as of December 31, 2023[252][256][258] - The Company assesses long-lived assets for impairment whenever events indicate the carrying value may not be recoverable, using undiscounted operating cash flow estimates, which involves significant management judgment[259][263] - Goodwill is tested for impairment annually, with the 2023 review indicating no impairment to the $250.5 million goodwill asset[266][332] - For real estate acquisitions, the purchase price is allocated to tangible and intangible assets based on their relative fair values, a process requiring significant estimation[271] - Rental income from operating leases is recognized on a straight-line basis, or on a cash basis if collectability is not probable[274] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk on its debt, with $3.5 billion of its $5.0 billion debt at fixed rates and $1.3 billion in interest rate swaps outstanding, and a 10% decrease in rates would increase annual earnings and cash flow by approximately $9.6 million - As of December 31, 2023, $3.5 billion of the Company's $5.0 billion of outstanding debt carried fixed interest rates[278] - The Company utilizes interest rate swaps to mitigate risk on its variable rate debt, with $1.3 billion of interest rate swaps outstanding at a weighted average rate of 3.49% as of December 31, 2023[280] Interest Rate Sensitivity on Variable Rate Debt (as of Dec 31, 2023) | Description | Outstanding Principal Balance ($ thousands) | Impact on Earnings/Cash Flow from 10% Rate Increase ($ thousands) | Impact on Earnings/Cash Flow from 10% Rate Decrease ($ thousands) | | :--- | :--- | :--- | :--- | | Variable Rate Debt | $1,500,000 | $(9,588) | $9,588 | Fair Value of Fixed Rate Debt (as of Dec 31, 2023) | Description | Carrying Value ($ thousands) | Fair Value ($ thousands) | | :--- | :--- | :--- | | Total Fixed Rate Debt | $3,497,767 | $3,372,704 | Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for the three years ended December 31, 2023, with an unqualified auditor's opinion from BDO USA, P.C. on both financial statements and internal controls, and a critical audit matter identified regarding real estate asset impairment assessment - The independent auditor, BDO USA, P.C., issued an unqualified opinion on the consolidated financial statements, stating they are presented fairly in all material respects in conformity with U.S. GAAP[283] - The auditor also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2023[284][507] - A critical audit matter was identified related to management's assessment of qualitative indicators for potential impairment of real estate properties, which involved challenging auditor judgment[288][290] Note 2. Merger with HTA This note details the July 20, 2022 merger with Legacy HTA, treated as a reverse acquisition, with a final purchase price allocation resulting in $5.58 billion total consideration, $5.44 billion net identifiable assets, and $247.0 million recognized goodwill attributed to expected synergies - On July 20, 2022, the merger with Legacy HTA was completed, treated as a "reverse acquisition" with Legacy HR as the accounting acquirer for accounting purposes[367][370] Final Purchase Price Allocation (in thousands) | Component | Amount Recognized | | :--- | :--- | | Total assets acquired | $11,089,391 | | Total liabilities assumed | $5,649,269 | | Net identifiable assets acquired | $5,440,122 | | Non-controlling interest | $110,702 | | Goodwill | $247,043 | | Consideration transferred | $5,576,463 | - The recognized goodwill of $247.0 million is attributed to expected synergies, general and administrative cost savings, and economies of scale, with none expected to be tax-deductible[376] Note 4. Leases This note covers lessor and lessee accounting, with future minimum lease payments receivable totaling $5.03 billion as a lessor, and as a lessee, obligations mainly under ground leases for 157 non-prepaid properties, with total undiscounted future lease payments of $761.6 million for operating leases and $405.3 million for financing leases Future Minimum Lease Payments Receivable (as of Dec 31, 2023) | Year | Amount (in thousands) | | :--- | :--- | | 2024 | $894,442 | | 2025 | $801,973 | | 2026 | $701,615 | | 2027 | $582,028 | | 2028 | $469,549 | | 2029 and thereafter | $1,579,010 | | Total | $5,028,617 | - As of December 31, 2023, the Company had 232 properties held under ground leases, with 157 being non-prepaid[386][387] Future Lease Payments Payable (as of Dec 31, 2023) | Lease Type | Total Undiscounted Lease Payments (in thousands) | Lease Liabilities (in thousands) | | :--- | :--- | :--- | | Operating | $761,637 | $229,714 | | Financing | $405,346 | $74,503 | Note 5. Acquisitions, Dispositions and Mortgage Repayments In 2023, the company acquired two properties for $43.0 million and disposed of 39 properties for $787.0 million, resulting in a net gain of $33.7 million, with some dispositions involving company-financed notes to buyers 2023 Acquisition Activity | Location | Purchase Price ($ thousands) | Square Footage | | :--- | :--- | :--- | | Tampa, FL | $31,500 | 115,867 | | Colorado Springs, CO | $11,450 | 42,770 | | Total | $42,950 | 158,637 | 2023 Disposition Activity Summary | Metric | Amount ($ thousands) | | :--- | :--- | | Total Sale Price | $787,042 | | Net Proceeds | $691,482 | | Company-Financed Notes | $(58,700) | | Net Gain/(Impairment) | $33,658 | Note 10. Notes and Bonds Payable This note details the company's debt structure, with total notes and bonds payable at a carrying amount of $5.0 billion as of December 31, 2023, including senior notes, unsecured term loans, and mortgage notes, with $532.0 million due in 2024, and the company in compliance with all financial covenants Notes and Bonds Payable Summary (as of Dec 31, 2023) | Debt Instrument | Carrying Value ($ thousands) | Maturity Dates | | :--- | :--- | :--- | | Unsecured Credit Facility | $0 | Oct 2025 | | Unsecured Term Loans | $1,497,092 | 2024 - 2028 | | Senior Notes | $3,427,233 | 2025 - 2031 | | Mortgage notes payable | $70,534 | 2024 - 2026 | | Total | $4,994,859 | | - As of December 31, 2023, the Company was in compliance with all financial covenant provisions under its various debt instruments[417] Future Debt Maturities (Carrying Value) | Year | Amount ($ thousands) | | :--- | :--- | | 2024 | $531,985 | | 2025 | $521,296 | | 2026 | $735,417 | | 2027 | $662,289 | | 2028 | $564,114 | | 2029 and thereafter | $1,979,758 | Note 11. Derivative Financial Instruments The company uses interest rate swaps as cash flow hedges to manage variable-rate debt exposure, with $1.275 billion in notional value outstanding at a weighted average fixed rate of 3.49% and a net liability fair value of $7.8 million as of December 31, 2023 - The Company uses interest rate swaps designated as cash flow hedges to add stability to interest expense and manage exposure to interest rate movements on its variable-rate debt[435] Outstanding Interest Rate Swaps (as of Dec 31, 2023) | Expiration | Notional Value ($ thousands) | Weighted Average Rate | | :--- | :--- | :--- | | Jan 2024 | $200,000 | 1.21% | | May 2026 | $275,000 | 3.74% | | June 2026 | $150,000 | 3.83% | | Dec 2026 | $150,000 | 3.84% | | June 2027 | $200,000 | 4.27% | | Dec 2027 | $300,000 | 3.93% | | Total | $1,275,000 | 3.49% | - The fair value of derivatives in a net liability position was $11.0 million as of December 31, 2023, with no collateral posted related to these agreements[450] Note 13. Stock and Other Incentive Plans This note describes the company's stock and incentive plans, with $14.6 million in compensation expense in 2023, $22.2 million in new awards granted, and the Legacy HR Employee Stock Purchase Plan terminated in 2022 with remaining options expiring in March 2024 - Compensation expense for share-based awards to employees and directors was $14.6 million in 2023, $13.9 million in 2022, and $10.4 million in 2021[457] - In January 2023, the company granted LTIP-C units to named executive officers with a grant date fair value of $7.1 million, subject to a five-year vesting period and three-year performance targets[461] Non-Vested Share-Based Awards Activity (2023) | Activity | Number of Awards | Weighted-Average Grant Date Fair Value | | :--- | :--- | :--- | | Beginning of year | 2,090,060 | $30.35 | | Granted | 1,164,359 | $18.70 | | Vested | (403,266) | $28.38 | | Change in performance assessment | (205,668) | $29.05 | | Forfeited | (29,923) | $31.16 | | End of year | 2,615,562 | $25.56 | - The Legacy HR Employee Stock Purchase Plan was terminated in November 2022, with no new options issued and existing options expiring in March 2024[471] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles, practices, or financial statement disclosure - None[498] Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes during the year, and the independent auditor also issued an unqualified opinion on internal control effectiveness - The Company's CEO and CFO concluded that as of December 31, 2023, the disclosure controls and procedures were effective[500] - There were no changes in the Company's internal control over financial reporting during the year ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, these controls[501] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2023, using the COSO framework (2013) and concluded that it was effective[505] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading agreement during the year ended December 31, 2023 - No director or officer of the Company adopted or terminated a "Rule 10b5-1 trading agreement" or "non-Rule 10b5-1 trading agreement" during the year ended December 31, 2023[514] Part III Directors, Executive Officers and Corporate Governance This section provides information on the company's executive officers, and incorporates by reference details on the Board of Directors, Audit Committee, and director recommendations from the Proxy Statement, noting the adoption of a Code of Business Conduct and Ethics Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Todd J. Meredith | 49 | President and Chief Executive Officer | | J. Christopher Douglas | 48 | Executive Vice President and Chief Financial Officer | | John M. Bryant, Jr. | 57 | Executive Vice President and General Counsel | | Robert E. Hull | 51 | Executive Vice President - Investments | | Julie F. Wilson | 52 | Executive Vice President - Operations | - Information regarding the Company's directors is incorporated by reference from the Proxy Statement for the Annual Meeting on May 21, 2024[516] - The Company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers, and employees, available on its website[522] Executive Compensation This section incorporates by reference detailed information regarding executive and director compensation from the company's Proxy Statement for the upcoming Annual Meeting of Shareholders - Information relating to executive compensation is incorporated by reference from the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2024[527] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information from the Proxy Statement regarding security ownership of management and certain beneficial owners, and references the 'Equity Compensation Plan Information' table in Item 5 - Information on security ownership of management and certain beneficial owners is incorporated by reference from the Company's Proxy Statement[528] - Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference from Item 5 of this report[529] Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the Proxy Statement for the Annual Meeting of Shareholders to be held on May 21, 2024 - Information on certain relationships, related transactions, and director independence is incorporated by reference from the Company's Proxy Statement[530] Principal Accountant Fees and Services The company's independent registered public accounting firm is BDO USA, P.C., and information regarding fees paid to the accountant is incorporated by reference from the Proxy Statement - The Company's independent registered public accounting firm is BDO USA, P.C., located in Nashville, TN[531] - Information relating to fees paid to the accountants is incorporated by reference from the Company's Proxy Statement[531] Exhibits and Financial Statement Schedules Financial Statement Schedules This section includes supplementary financial schedules: Schedule II details accounts receivable allowance increasing to $8.4 million in 2023, Schedule III provides real estate asset breakdown, and Schedule IV lists mortgage loans totaling $173.6 million in carrying value, with one $54.1 million loan on non-accrual status Schedule II – Valuation and Qualifying Accounts (Accounts Receivable Allowance) | Year | Balance at Beginning of Period ($ thousands) | Additions Charged to Costs ($ thousands) | Balance at End of Period ($ thousands) | | :--- | :--- | :--- | :--- | | 2023 | $3,954 | $5,119 | $8,404 | | 2022 | $654 | $3,306 | $3,954 | | 2021 | $604 | $72 | $654 | - Schedule III provides a detailed property-by-property listing of real estate investments, showing initial cost, capitalized subsequent costs, total cost, and accumulated depreciation for each market[548] Schedule IV – Mortgage Loans on Real Estate Assets (as of Dec 31, 2023) | Loan Type | Face Amount ($ thousands) | Carrying Amount ($ thousands) | Principal Subject to Delinquent Interest ($ thousands) | | :--- | :--- | :--- | :--- | | Mortgage Loans | $122,006 | $121,758 | $0 | | Mezzanine Loans | $60,119 | $51,856 | $54,119 | | Total | $182,125 | $173,614 | $54,119 |