Healthcare Realty Trust rporated(US:HR)2023-02-28 16:00PART I Business Healthcare Realty Trust, a self-managed REIT, expanded its portfolio to $14.1 billion across 688 properties after its 2022 merger, focusing on outpatient healthcare facilities - The company completed a reverse acquisition merger with Legacy HTA on July 20, 2022, operating as Healthcare Realty Trust Incorporated (HR)14 - In 2022, the company acquired 33 medical office buildings for $504.6 million and disposed of 44 properties for $1.2 billion2526 - As of December 31, 2022, the company employed 583 people and integrated ESG principles into operations and executive incentive programs4449 Owned Properties by Facility Type as of December 31, 2022 | Dollars and square feet in thousands | Gross Investment ($ thousands) | Square Feet (thousands) | Number of Properties | Occupancy (%) | | :--- | :--- | :--- | :--- | :--- | | Medical office/outpatient | $12,570,933 | 36,800 | 656 | 87.2% | | Inpatient | $653,648 | 1,528 | 20 | 91.2% | | Office | $508,741 | 1,789 | 10 | 96.2% | | Subtotal | $13,733,322 | 40,117 | 686 | 87.7% | | Construction in progress | $35,560 | | | | | Land held for development | $74,265 | | | | | Investments in financing receivables, net | $120,236 | 187 | 1 | 100.0% | | Financing lease right-of-use assets | $83,824 | 45 | 1 | 77.8% | | Corporate property | $10,418 | | | | | Total real estate investments | $14,057,625 | 40,349 | 688 | 87.8% | | Unconsolidated joint ventures | $350,305 | 1,913 | 33 | 85.4% | | Total investments | $14,407,930 | 42,262 | 721 | 87.7% | Lease Expirations as of December 31, 2022 | Expiration Year | Number of Leases | Leased Square Feet | Percentage of Leased Square Feet (%) | | :--- | :--- | :--- | :--- | | 2023 | 1,459 | 5,004,436 | 14.2% | | 2024 | 1,171 | 5,150,146 | 14.6% | | 2025 | 1,020 | 4,442,560 | 12.6% | | 2026 | 814 | 3,610,265 | 10.2% | | 2027 | 807 | 4,420,368 | 12.5% | | Thereafter | 1,547 | 12,598,757 | 35.9% | | Total | 7,058 | 35,230,532 | 100.0% | Risk Factors The company faces significant risks including merger integration challenges, tenant financial health dependency, substantial debt, and complex REIT compliance - Substantial expenses and integration difficulties from the Legacy HTA merger could disrupt operations and hinder anticipated cost savings5960 - Revenue highly depends on tenant rental payments, vulnerable to economic slowdowns, healthcare regulation changes, and pandemics6971 - As of December 31, 2022, the company had approximately $5.7 billion in outstanding indebtedness, potentially limiting funds for strategy and distributions99 - Failure to maintain REIT qualification, due to complex IRS provisions, would result in federal income tax, significantly reducing distributable cash and stock value116117118 Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - No unresolved staff comments are reported129 Properties The company owns its corporate headquarters in Nashville, Tennessee, and a corporate office in Charleston, South Carolina - The company owns its corporate headquarters in Nashville, Tennessee, and a corporate office in Charleston, South Carolina130 Legal Proceedings The company is not aware of any material pending or threatened litigation - No pending or threatened litigation is expected to have a material adverse effect on the company's financial position or results131 Mine Safety Disclosures This item is not applicable to the company - This disclosure item is not applicable132 PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NYSE (HR), with a $500 million stock repurchase program authorized in August 2022, under which no shares have been repurchased - On August 2, 2022, the Board authorized a $500 million stock repurchase program, with no shares repurchased to date137 Issuer Purchases of Equity Securities in 2022 | Period | Total Number of Shares Purchased | Average Price Paid per Share ($) | | :--- | :--- | :--- | | February 1 - February 28 | 6,727 | $30.67 | | September 1 - September 30 | 2,018 | $24.14 | | December 1 - December 31 | 129,147 | $19.37 | | Total | 137,892 | | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operations, highlighting the merger's impact on liquidity, capital resources, investing, financing, and a 74.4% increase in rental income Liquidity and Capital Resources The company maintains liquidity through operations and dispositions, with 2022 cash flow from operations at $272.7 million and total outstanding debt of $5.7 billion - Cash flows from operating activities increased to $272.7 million in 2022 from $232.6 million in 2021156 - Dividends in 2022 were partially funded by the Unsecured Credit Facility due to merger costs, but 2023 dividends are expected to be covered by operating cash flows153 Total Outstanding Debt as of December 31, 2022 | Debt Category | Principal Balance ($ thousands) | Carrying Balance ($ thousands) | Weighted Years to Maturity | Effective Rate (%) | | :--- | :--- | :--- | :--- | :--- | | Total Senior Notes Outstanding | 3,699,500 | 3,387,134 | 5.9 | 4.43% | | $1.5 billion unsecured credit facility | 385,000 | 385,000 | 4.8 | 5.27% | | Unsecured Term Loans (Total) | 1,500,000 | 1,495,446 | - | 5.17% | | Mortgage notes payable | 84,122 | 84,247 | 2.0 | 3.97% | | Total Outstanding Notes and Bonds Payable | $5,668,622 | $5,351,827 | 5.0 | 4.69% | Trends and Matters Impacting Operating Results In 2022, the company acquired $504.6 million in properties and disposed of $1.2 billion, with ongoing development, strong tenant retention, and inflation-mitigating lease terms - In 2022, the company acquired 33 medical office buildings for $504.6 million and disposed of 44 properties for $1.2 billion, using proceeds to repay debt187188 - Tenant retention in 2022 ranged from 72% to 86%, with cash leasing spreads for renewing leases averaging 3.3%196197 - Capital expenditures in 2022 totaled $48.9 million, or $1.21 per square foot, representing 8.5% of cash net operating income200 - As of December 31, 2022, $100.4 million in properties were subject to exercisable purchase options, with an additional $1.1 billion becoming exercisable after 2022211 Results of Operations The 2022 results were significantly impacted by the merger, with total revenues increasing 74.4% to $932.6 million, but net income decreasing to $40.9 million due to higher expenses and merger costs Comparison of Results of Operations (2022 vs. 2021) | (in thousands) | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Rental Income ($ thousands) | $907,451 | $520,334 | 74.4% | | Total Revenues ($ thousands) | $932,637 | $534,817 | 74.4% | | Property Operating Expenses ($ thousands) | $344,038 | $212,273 | 62.1% | | Merger-Related Costs ($ thousands) | $103,380 | $0 | N/A | | Depreciation and Amortization ($ thousands) | $453,082 | $202,714 | 123.5% | | Total Expenses ($ thousands) | $956,463 | $453,069 | 111.1% | | Gain on Sales of Real Estate ($ thousands) | $270,271 | $55,940 | 383.2% | | Interest Expense ($ thousands) | ($146,691) | ($53,124) | 176.1% | | Impairment of Real Estate ($ thousands) | ($54,427) | ($17,101) | 218.3% | | Net Income Attributable to Common Stockholders ($ thousands) | $40,897 | $66,659 | (38.6)% | Non-GAAP Financial Measures and Key Performance Indicators The company uses non-GAAP measures, reporting 2022 Normalized FFO of $1.69 per diluted share and Same Store Cash NOI growth of 2.5% to $722.6 million - Same Store Cash NOI for 593 stabilized properties grew 2.5% year-over-year, reaching $722.6 million in 2022239241 Reconciliation of Net Income to FFO and Normalized FFO (Attributable to Common Stockholders) | (in thousands, except per share data) | 2022 | 2021 | | :--- | :--- | :--- | | Net Income Attributable to Common Stockholders ($ thousands) | $40,897 | $66,659 | | Adjustments ($ thousands) | $256,084 | $174,857 | | FFO Attributable to Common Stockholders ($ thousands) | $296,981 | $241,516 | | Normalizing Items ($ thousands) | $133,131 | $4,565 | | Normalized FFO Attributable to Common Stockholders ($ thousands) | $430,112 | $246,081 | | FFO per Common Share - Diluted ($) | $1.17 | $1.68 | | Normalized FFO per Common Share - Diluted ($) | $1.69 | $1.71 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its $5.4 billion debt, mitigated by fixed-rate debt and $1.2 billion in interest rate swaps - As of December 31, 2022, $3.5 billion of the company's $5.4 billion outstanding debt was at fixed rates, with the remainder exposed to variable interest rate risk276 - A hypothetical 10% increase in market interest rates would negatively impact annual earnings and cash flow by an estimated $9.8 million278 - The company uses interest rate swaps to mitigate risk, holding $1.2 billion in swaps at a weighted average rate of 2.63% as of year-end278 Financial Statements and Supplementary Data This section presents consolidated financial statements and the independent auditor's unqualified opinion, with key balance sheet data showing $13.8 billion in total assets and $40.9 million in 2022 net income - BDO USA, LLP issued an unqualified opinion on the consolidated financial statements and internal control effectiveness as of December 31, 2022281282 - Critical audit matters identified include asset impairment triggering events, accounting acquirer determination in the merger, and fair value measurements for acquired real estate properties287289291 Consolidated Balance Sheet Summary (as of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total Real Estate Investments, Net ($ thousands) | $12,412,354 | $3,766,199 | | Total Assets ($ thousands) | $13,849,631 | $4,258,919 | | Notes and Bonds Payable ($ thousands) | $5,351,827 | $1,801,325 | | Total Liabilities ($ thousands) | $6,167,799 | $2,073,803 | | Total Stockholders' Equity ($ thousands) | $7,571,076 | $2,185,116 | Consolidated Statement of Income Summary (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Rental Income ($ thousands) | $907,451 | $520,334 | $492,262 | | Total Revenues ($ thousands) | $932,637 | $534,817 | $499,629 | | Total Expenses ($ thousands) | $956,463 | $453,069 | $420,214 | | Net Income Attributable to Common Stockholders ($ thousands) | $40,897 | $66,659 | $72,195 | | Diluted Earnings per Common Share ($) | $0.15 | $0.45 | $0.52 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - No changes in or disagreements with accountants on accounting and financial disclosure are reported505 Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2022, excluding Legacy HTA operations from internal control assessment due to the merger - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2022507 - Due to the July 20, 2022 merger, Legacy HTA operations (65% of total assets, 38% of total revenue) were excluded from the 2022 internal control assessment508517 - Excluding the Legacy HTA acquisition, management concluded internal control over financial reporting was effective as of December 31, 2022511 Other Information The company reports no other information under this item - No other information is reported under this item520 PART III Directors, Executive Officers and Corporate Governance This section details executive officers and incorporates by reference information on directors, audit committee, and corporate governance from the upcoming Proxy Statement - Information on directors, audit committee, and Section 16(a) compliance is incorporated by reference from the Proxy Statement522530532 Executive Officers | Name | Age | Position | | :--- | :--- | :--- | | Todd J. Meredith | 48 | President and Chief Executive Officer | | J. Christopher Douglas | 47 | Executive Vice President and Chief Financial Officer | | John M. Bryant, Jr. | 56 | Executive Vice President and General Counsel | | Robert E. Hull | 50 | Executive Vice President - Investments | | Julie F. Wilson | 51 | Executive Vice President - Operations | Executive Compensation Executive and director compensation information is incorporated by reference from the company's definitive Proxy Statement - Executive compensation details are incorporated by reference from the company's definitive Proxy Statement533 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership by management and beneficial owners, and equity compensation plan details, are incorporated by reference from the Proxy Statement and Item 5 - Security ownership and equity compensation plan information is incorporated by reference from the Proxy Statement and Item 5 of this Form 10-K534535 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the Proxy Statement - Details on certain relationships, related transactions, and director independence are incorporated by reference from the company's definitive Proxy Statement536 Principal Accountant Fees and Services BDO USA, LLP is the independent auditor; information on their fees and services is incorporated by reference from the Proxy Statement - BDO USA, LLP is the independent registered public accounting firm; accountant fees and services information is incorporated by reference from the Proxy Statement537 Exhibits and Financial Statement Schedules This section provides an index of all financial statements, schedules, and exhibits included with the Form 10-K filing, cross-referencing Item 8 for financial statements - This item provides an index of all financial statements, schedules, and exhibits included with the Form 10-K filing538 Form 10-K Summary No summary is provided under this item - No summary is provided under this item546