UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
Form 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period to
OR
Commission File Number: 001-11852
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of
Incorporation or organization)
62-1507028
(I.R.S. Employer
Identification No.)
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class
Common stock, $0.01 par value per share
Trading Symbol
HR
Name of Each Exchange on Which Registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Securities Registered Pursuant to Section 12(g) of the Act: None
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large
accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b -2 of the Exchange Act.:
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the
Sarbanes-Oxley Act (15- U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
The aggregate market value of the shares of common stock of the Registrant (based upon the closing price of these shares on the New York Stock Exchange on June 30, 2020) held by non-affiliates on June 30,
2020 was $3,924,386,705.
As of February 5, 2021, there were 139,746,677 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 11, 2021 are incorporated by reference into Part III of this Report.
Table of Contents
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-K
December 31, 2020
Table of Contents
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
PART II
Item 5
Item 7
Item 7A
Item 8
Item 9
Item 9A
PART III
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
SIGNATURES AND SCHEDULES
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7
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48
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Table of Contents
PART I
Item 1. Business
Healthcare Realty Trust Incorporated (“Healthcare Realty,” the “Company,” "we," "us," and "our") is a self-managed and self-administered real estate investment trust (“REIT”)
that owns, leases, manages, acquires, finances, develops and redevelops income-producing real estate properties associated primarily with the delivery of outpatient healthcare
services throughout the United States. The Company was incorporated in Maryland in 1992 and listed on the New York Stock Exchange in 1993.
The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT, the Company is not subject to corporate federal income tax with respect to taxable
income distributed to its stockholders. See “Risk Factors” in Item 1A for a discussion of risks associated with qualifying as a REIT.
Real Estate Properties
The Company had gross investments of approximately $4.6 billion in 223 real estate properties, construction in progress, redevelopments, land held for development and
corporate property as of December 31, 2020. In addition, the Company formed an unconsolidated joint venture in 2020 with Teachers Insurance and Annuity Association
("TIAA"), described in more detail below (the "TIAA Joint Venture"). The Company is the managing member of the unconsolidated joint venture that owns four buildings. The
Company provided property management services for 172 properties nationwide, totaling approximately 12.6 million square feet as of December 31, 2020. The Company’s real
estate property investments by geographic area are detailed in Note 2 to the Consolidated Financial Statements. The following table details the Company's owned properties by
facility type as of December 31, 2020:
Dollars and square feet in thousands
Medical office/outpatient
Inpatient
Office
Land held for development
Redevelopment properties
Corporate property
Total real estate properties
Unconsolidated joint ventures
2
Total investments
GROSS
INVESTMENT
SQUARE FEET
NUMBER OF
PROPERTIES
December 31, 2020
$
4,312,866
111,148
143,019
4,567,033
27,226
21,650
5,504
4,621,413
73,137
$
4,694,550
15,330
219
558
16,107
325
16,432
216
2
5
223
4
227
OCCUPANCY
1
86.8 %
100.0 %
82.6 %
86.8 %
72.4 %
86.6 %
1
2
The occupancy column represents the percentage of total rentable square feet leased (including month-to-month and holdover leases), excluding four properties classified as held for sale as of December 31, 2020.
Gross investment includes the Company's pro rata share of unconsolidated joint ventures. Square feet has not been adjusted by the Company's ownership percentage.
Financial Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. For the year ended December 31, 2020, the Company did not have any tenants that accounted for 10% or
more of the Company’s consolidated revenues. See Note 2 to the Consolidated Financial Statements for additional information regarding the Company's gross investments by
geographic market.
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Expiring Leases
As of December 31, 2020, the weighted average remaining years to expiration pursuant to the Company’s leases was approximately 3.8 years, with expirations through 2040.
The table below details the Company’s lease expirations as of December 31, 2020, excluding four properties classified as held for sale and unconsolidated joint ventures.
EXPIRATION YEAR
NUMBER OF
LEASES
LEASED
SQUARE FEET
(1)
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Thereafter
739
542
470
436
378
143
120
118
112
105
77
3,240
2,566,752
1,896,000
1,850,456
2,109,274
1,820,640
552,861
731,521
729,123
938,850
429,243
363,894
13,988,614
PERCENTAGE
OF LEASED
SQUARE FEET
18.3 %
13.6 %
13.2 %
15.1 %
13.0 %
4.0 %
5.2 %
5.2 %
6.7 %
3.1 %
2.6 %
100.0 %
1
Includes 64 leases totaling 225,054 square feet that expired prior to December 31, 2020 and were on month-to-month terms.
See "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II,
Item 7 of this report for additional information regarding the Company's leases and leasing efforts.
Liquidity
The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company expects to meet its liquidity needs through cash on
hand, cash flows from operations, property dispositions, equity and debt issuances in the public or private markets and borrowings under commercial credit facilities.
Business Strategy
The Company owns and operates properties that facilitate the delivery of healthcare services in primarily outpatient settings. To execute its strategy, the Company engages in a
broad spectrum of integrated services including leasing, management, acquisition, development and redevelopment of such properties. The Company seeks to generate stable,
growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities primarily located on or near the campuses of acute care hospitals
associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in high-growth markets with a broad tenant mix that
includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.
2020 Investment Activity
During 2020, the Company acquired 25 medical office buildings for purchase prices totaling $421.0 million. The weighted average capitalization rate for these investments was
5.6%. The Company calculates the capitalization rate for an acquisition as the forecasted first year cash net operating income divided by the purchase price. The Company also
acquired three land parcels for purchase prices totaling $5.1 million.
During 2020, the Company entered into the TIAA Joint Venture to invest in a broad range of medical office buildings. The Company has a 50% ownership in the TIAA Joint
Venture and is the managing member. The TIAA Joint Venture is not consolidated for purposes of the Company's Consolidated Financial Statements. As of December 31, 2020,
the TIAA Joint Venture had acquired four medical office buildings for purchase prices totaling $125.9 million. The weighted average capitalization rate for these investments
was 5.3%.
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The Company disposed of three properties during 2020 for sales prices totaling $249.5 million. The weighted average capitalization rate for these properties was 7.4%. The
Company calculates the capitalization rate for dispositions as the in-place cash net operating income divided by the sales price.
In 2020, the Company funded $26.5 million toward development and redevelopment of six properties.
See the Company's discussion regarding the 2020 acquisitions, joint venture and dispositions activity in Note 4 to the Consolidated Financial Statements and development
activity in Note 14 to the Consolidated Financial Statements. Also, please refer to the Company's discussion in "Trends and Matters Impacting Operating Results" as part of
Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
Competition
The Company competes for the acquisition and development of real estate properties with private investors, healthcare providers, other REITs, real estate partnerships and
financial institutions, among others. The business of acquiring and developing new healthcare facilities is highly competitive and is subject to price, construction and operating
costs, and other competitive pressures. Some of the Company's competitors may have lower costs of capital.
The financial performance of all of the Company’s properties is subject to competition from similar properties. The extent to which the Company’s properties are utilized
depends upon several factors, including the number of physicians using or referring patients to an associated healthcare facility, healthcare employment, competitive systems of
healthcare delivery, and the area’s population, size and composition. Private, federal and state health insurance programs and other laws and regulations may also have an effect
on the utilization of the properties. The Company’s properties operate in a competitive environment, and patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time.
Government Regulation
The facilities owned by the Company are utilized by medical tenants which are required to comply with extensive regulation and legislation at the federal, state and local levels,
including, but not limited to, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care
Act"), the Bipartisan Budget Act of 2015, the Medicare Access and CHIP Modernization Act of 2015, and laws intended to combat fraud and waste such as the Anti-Kickback
Statute, Stark Law, False Claims Act and Health Insurance Portability and Accountability Act of 1996. These laws and regulations establish, among other things, requirements
for state licensure and criteria for medical tenants to participate in government-sponsored reimbursement programs, including the Medicare and Medicaid programs. The
Company's leases generally require the tenant to comply with all applicable laws relating to the tenant's use and occupation of the leased premises. Although lease payments to
the Company are not directly affected by these laws and regulations, changes in these programs or the loss by a tenant of its license or ability to participate in government-
sponsored reimbursement programs could have a material adverse effect on the tenant's ability to make lease payments to the Company.
The negative financial impact on healthcare providers from COVID-19 in 2020 was substantial, offset, in part, by government relief funding, which included provider payroll
and rent subsidies, higher Medicare reimbursement rates, and Medicare payment advancement loans under the Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) of 2020. Elective procedures for the Company’s tenants were limited at various times during 2020, especially in March and April. While the majority of the Company’s
tenants are returning to normal business operations, the ongoing impact from COVID-19 could adversely affect tenants’ ability to make lease payments to the Company.
Government healthcare programs have increased over time as a significant percentage of the U.S. population’s health insurance coverage. The Medicare and Medicaid programs
are highly regulated and subject to frequent evaluation and change. Changes from year to year in reimbursement methodology, rates and other regulatory requirements may cause
the profitability of providing care to Medicare and Medicaid patients to decline, which could adversely affect tenants' ability to make lease payments to the Company.
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The Centers for Medicare and Medicaid Services ("CMS") continued to adjust Medicare payment rates in 2020 to implement site-neutral payment policies. These changes have
lowered Medicare payments for services delivered in off-campus hospital outpatient departments in an effort to lessen reimbursement disparity in off-campus medical office and
outpatient facilities. The Company’s medical office buildings that are located on hospital campuses could become more valuable as hospital tenants will keep their higher
Medicare rates for on-campus outpatient services. However, the Company has not seen a measurable impact from site-neutral Medicare payment policy, positively or negatively.
The Company cannot predict the amount of benefit from these measures or if other federal health policy will ultimately require cuts to reimbursement rates for services provided
in other settings. The Company cannot predict the degree to which these changes, or changes to federal healthcare programs in general, may affect the economic performance of
some or all of the Company's tenants, positively or negatively.
Since 2018, physicians have been required to report patient data on quality and performance measures that began to affect their Medicare payments in 2020. Implementation of
the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), and the ongoing debate over the most effective payment system to use to promote value-based
reimbursement, present the industry and its individual participants with uncertainty and financial risk. The Company cannot predict the degree to which any such changes may
affect the economic performance of the Company's tenants or, indirectly, the Company.
Legislative Developments
Taxation of Dividends
The Tax Cuts and Jobs Act of 2017 generally allows a deduction for individuals equal to 20% of certain income from pass-through entities, including ordinary dividends
distributed by a REIT (excluding capital gain dividends and qualified dividend income). In addition, the deduction for ordinary REIT dividends is not subject to the wage and tax
basis limitations applicable to the deduction for other qualifying pass-through income. The Tax Cuts and Jobs Act of 2017 was a far-reaching and complex revision to the
existing U.S. federal income tax laws and will require subsequent rulemaking and interpretation in a number of areas. As a result, the long-term impact of the Tax Reform
Legislation cannot be reliably predicted. Further, many of the provisions of this act will expire in 2025, unless extended by legislative action.
Healthcare
Each year, legislative proposals for health policy are introduced in Congress and state legislatures, and regulatory changes are proposed and enacted by government agencies.
These proposals, individually or in the aggregate, could significantly change the delivery of healthcare services, either nationally or at the state level, if implemented. Examples
of significant legislation or regulatory action recently proposed, enacted, or in the process of implementation include:
•
•
•
•
the CARES Act, along with subsequent stimulus and COVID-19 relief bills, provided federal relief funding and financial aid to businesses, individuals, and healthcare
providers impacted by COVID-19, including higher Medicare reimbursement rates, forgiveness of small business loans to providers for payroll and rent, and additional
resources for testing, vaccine development and distribution;
the Tax Cuts and Jobs Act of 2017, affects healthcare providers and health systems in a variety of ways, positively and negatively, including by limiting their ability to
deduct interest on debt, denying deductions for and imposing an excise tax on the compensation in excess of $1 million of the five most highly-compensated employees of
health systems, and eliminating the tax penalty for the Affordable Care Act’s individual health insurance mandate;
the expansion of Medicaid benefits and health insurance exchanges established by the Affordable Care Act, whether run by the state or by the federal government, whereby
individuals and small businesses purchase health insurance, many assisted by federal subsidies that are subject to ongoing legal challenges and consideration for legislative
action;
various state legislature proposals for state-funded single-payer health insurance and a limit on allowable rates of reimbursement to healthcare providers;
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•
the implementation of quality control, cost containment, and value-based payment system reforms for Medicaid and Medicare, such as expansion of pay-for-performance
criteria, bundled provider payments, accountable care organizations, comparative effectiveness research, and lower payments for hospital readmissions;
• MACRA, which requires quality reporting and a transition toward value-based reimbursement models for Medicare payments to physicians;
•
•
•
•
•
•
•
•
•
annual regulatory updates to Medicare policy for healthcare providers that can broadly change reimbursement methodology under budget-neutral guidelines, with the effect
of lowering payments for some services and increasing payments for others, having a varying impact, positively or negatively, on providers;
equalization of Medicare payment rates across different facility-type settings, according to Section 603 of the Bipartisan Budget Act of 2015, which lowered Medicare
payment rates, effective January 1, 2017, for services provided in off-campus, provider-based outpatient departments to the same level of rates for physician office settings;
the CMS rule for hospital outpatient department Medicare payments in 2020 expanded site-neutral payments to clinic visits in previously-grandfathered off-campus
facilities;
the continued adoption by providers of federal standards for the meaningful-use of electronic health records;
reforms to the physician self-referral laws, commonly referred to as the Stark Law, were adjusted in 2020 in order to promote the transition toward value-based, coordinated
care among providers, although clear intent to boost referrals could still yield provider penalties;
consideration of broad reforms to Medicare and Medicaid, including a significant expansion of Medicare coverage to the greater U.S. population;
regulations requiring the publication of hospital prices for certain services, as well as hospitals’ negotiated rates with insurers for these services;
limits on price increases in pharmaceutical drugs and the cost to Medicare beneficiaries, including the potential for setting prices according to an international standard; and
the prohibition of “surprise billing,” or high payment rates charged to consumers for out-of-network physician services.
The Company cannot predict whether any proposals, rulings, or legislation will be fully implemented, adopted, repealed, or amended, or what effect, whether positive or
negative, such developments might have on the Company's business.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property (such as the Company) may be liable for the costs of removal or
remediation of certain hazardous or toxic substances at, under, or disposed of in connection with such property, as well as certain other potential costs (including government
fines and injuries to persons and adjacent property) relating to hazardous or toxic substances. Most, if not all, of these laws, ordinances and regulations contain stringent
enforcement provisions including, but not limited to, the authority to impose substantial administrative, civil, and criminal fines and penalties upon violators. Such laws often
impose liability without regard to whether the owner knew of, or was responsible for, the presence or disposal of such substances, and liability may be imposed on the owner in
connection with the activities of a tenant or operator of the property. The cost of any required remediation, removal, fines or personal or property damages and the owner’s
liability therefore could exceed the value of the property and/or the aggregate assets of the owner. In addition, the presence of such substances, or the failure to properly dispose
of or remediate such substances, may adversely affect the owner’s ability to sell or lease such property or to borrow using such property as collateral. A property can also be
negatively impacted either through physical contamination, or by virtue of an adverse effect on value, from contamination that has or may have emanated from other properties.
Operations of the properties owned, developed or managed by the Company are and will continue to be subject to numerous federal, state, and local environmental laws,
ordinances and regulations, including those relating to the
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following: the generation, segregation, handling, packaging and disposal of medical wastes; air quality requirements related to operations of generators, incineration devices, or
sterilization equipment; facility siting and construction; disposal of non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties owned,
developed or managed by the Company contain, and others may contain or at one time may have contained, underground storage tanks that are or were used to store waste oils,
petroleum products or other hazardous substances. Such underground storage tanks can be the source of releases of hazardous or toxic materials. Operations of nuclear medicine
departments at some properties also involve the use and handling, and subsequent disposal of, radioactive isotopes and similar materials, activities which are closely regulated by
the Nuclear Regulatory Commission and state regulatory agencies. In addition, several of the Company's properties were built during the period that asbestos was commonly
used in building construction and other such facilities may be acquired by the Company in the future. The presence of such materials could result in significant costs in the event
that any asbestos-containing materials requiring immediate removal and/or encapsulation are located in or on any facilities or in the event of any future renovation activities.
The Company has had environmental site assessments conducted on substantially all of the properties that it currently owns. These site assessments are limited in scope and
provide only an evaluation of potential environmental conditions associated with the property, not compliance assessments of ongoing operations. While it is the Company’s
policy to seek indemnification from tenants relating to environmental liabilities or conditions, even where leases do contain such provisions, there can be no assurance that the
tenant will be able to fulfill its indemnification obligations. In addition, the terms of the Company’s leases do not give the Company control over the operational activities of its
tenants or healthcare operators, nor will the Company monitor the tenants or healthcare operators with respect to environmental matters.
Human Capital Resources
We believe our employees are a critical component to achievement of our business objectives and recognition as a trusted owner and operator of medical office properties. At
December 31, 2020, the Company employed 308 people. Our employees are comprised of accountants, maintenance engineers, property managers, leasing personnel, architects,
administrative staff, an investments team, and the corporate management team. By supporting, recognizing, and investing in our employees, we believe that we are able to attract
and retain the highest quality talent. To measure employee retention, the Company set voluntary turnover goals of less than 5% for officers and less than 11% for employees,
based on a three year average, and the Company is achieving these goals. We are committed to fostering, cultivating, and preserving a culture of diversity and inclusion. We
embrace employee differences in race, color, religion, sex, sexual orientation, national origin, age, disability, veteran status, and other characteristics that make our employees
unique.
To retain talented employees that contribute to the Company’s strategic objectives, we offer an attractive set of employee benefits, including:
• Health benefits and 401(k) starting on the first day of employment;
• Auto-enrollment of new employees in our 401(k) plan at 3%;
• Dollar-for-dollar match on 401(k) contributions up to $2,800, encouraging higher employee savings;
•
•
•
100% of long-term disability and life insurance premiums paid;
Employee stock purchase plan providing a 15% discount for all employees; and
Tuition reimbursement up to $3,000 annually for any employee pursuing higher education.
In addition, we are committed to supporting the performance and career development of all employees, from encouraging staff accountants to sit for the CPA exam to supporting
our maintenance engineers in earning various certifications. As owners and operators of medical real estate, we recognize the value of health and wellbeing among our own
employees by providing opportunities for engagement and balance. As we have for many years, Healthcare Realty provides corporate employees with gym membership
discounts to encourage fitness. In addition, we offer resources and informational sessions that provide our employees with tools to enhance their wellbeing. Additional
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information regarding employee and community engagement is available in the 2020 Corporate Responsibility Report, which is posted on the Company's website
(www.healthcarerealty.com).
Available Information
The Company makes available to the public free of charge through its website the Company’s Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as
soon as reasonably practicable after the Company electronically files such reports with, or furnishes such reports to, the Securities and Exchange Commission ("SEC"). The
Company’s website address is www.healthcarerealty.com.
Corporate Governance Principles
The Company has adopted Corporate Governance Principles relating to the conduct and operations of the Board of Directors. The Corporate Governance Principles are posted on
the Company’s website (www.healthcarerealty.com) and are available in print to any stockholder who requests a copy.
Committee Charters
The Board of Directors has an Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Executive Committee. The Board of
Directors has adopted written charters for each committee, except for the Executive Committee, which are posted on the Company’s website (www.healthcarerealty.com) and are
available in print to any stockholder who requests a copy.
Executive Officers
Information regarding the executive officers of the Company is set forth in Part III, Item 10 of this report and is incorporated herein by reference.
Sustainability Reporting
Information regarding the Company's sustainability principles and policies and the 2020 Corporate Responsibility Report are posted on the Company's website
(www.healthcarerealty.com).
Item 1A. Risk Factors
The following are some of the risks and uncertainties that could negatively affect the Company’s consolidated financial condition, results of operations, business and prospects.
These risk factors are grouped into three categories: risks relating to the Company’s business and operations; risks relating to the Company’s capital structure and financings; and
risks relating to government regulations.
These risks, as well as the risks described in Item 1 under the headings “Competition,” “Government Regulation,” “Legislative Developments,” and “Environmental Matters,”
and in Item 7 under the heading “Disclosure Regarding Forward-Looking Statements,” should be carefully considered before making an investment decision regarding the
Company. The risks and uncertainties described below are not the only ones facing the Company, and there may be additional risks that the Company does not presently know of
or that the Company currently considers not likely to have a material impact. If any of the events underlying the following risks actually occurred, the Company’s business,
consolidated financial condition, operating results and cash flows, including distributions to the Company's stockholders, could suffer, and the trading price of its common stock
could decline.
Risk relating to our business and operations
The Company's expected results may not be achieved.
The Company's expected results may not be achieved, and actual results may differ materially from expectations. This may be the result of various factors, including, but not
limited to: changes in the economy; the availability and cost of capital at favorable rates; increases in property taxes, utilities and other operating expenses; changes to facility-
related healthcare regulations; changes in interest rates; competition for quality assets; negative
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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 re-lease space at similar rates as vacancies occur; the Company's ability to timely reinvest proceeds from the sale of
assets at similar yields; 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; and other legal and operational matters.
The Company may from time to time decide to sell properties and may be required under purchase options to sell certain properties. The Company may not be able to reinvest
the proceeds from sales at rates of return equal to the return received on the properties sold. Uncertain market conditions could result in the Company selling properties at
unfavorable prices or at losses in the future.
The Company had approximately $96.9 million, or 2.1% of the Company’s real estate property investments, that were subject to purchase options held by lessees that were
exercisable as of December 31, 2020. Other properties have purchase options that will become exercisable after 2020. Properties with purchase options exercisable in 2020
produced aggregate net operating income of approximately $7.9 million in 2020. The exercise of these purchase options exposes the Company to reinvestment risk and a
reduction in investment return. Certain properties subject to purchase options may be purchased at rates of return above the rates of return the Company expects to achieve with
new investments. If the Company is unable to reinvest the sale proceeds at rates of return equal to the return received on the properties that are sold, it may experience a decline
in lease revenues and profitability and a corresponding material adverse effect on the Company’s consolidated financial condition and results of operations.
For more specific information concerning the Company’s purchase options, see “Purchase Options” in the “Trends and Matters Impacting Operating Results” as a part of
Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of this report.
The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company.
The Company’s revenues are subject to the financial strength of its tenants and associated health systems. The Company has no operational control over the business of these
tenants and associated health systems who face a wide range of economic, competitive, government reimbursement and regulatory pressures and constraints. Any slowdown in
the economy, decline in the availability of financing from the capital markets, and changes in healthcare regulations may adversely affect the businesses of the Company’s
tenants to varying degrees. Such conditions may further impact such tenants’ abilities to meet their obligations to the Company and, in certain cases, could lead to restructurings,
disruptions, or bankruptcies of such tenants. In turn, these conditions could adversely affect the Company’s revenues and could increase allowances for losses and result in
impairment charges, which could decrease net income attributable to common stockholders and equity, and reduce cash flows from operations.
The ongoing COVID-19 pandemic and other pandemics that may occur in the future and any measures intended to prevent their spread or mitigate their severity could have a
material adverse effect on the Company's business, results of operations, cash flows and financial condition.
The COVID-19 pandemic has had, and another pandemic in the future could have, repercussions across regional and global economies and financial markets. The outbreak of
COVID-19 has significantly adversely impacted global economic activity and has contributed to significant volatility and negative pressure in financial markets. The global
impact of the outbreak has been rapidly evolving and many countries, including the United States, have reacted by instituting quarantines, mandating business and school
closures, and restricting travel.
During 2020, all of the states and cities in which the Company owns properties, manages properties, and/or has development or redevelopment projects instituted quarantines,
restrictions on travel, “shelter in place” rules, restrictions on types of businesses that may continue to operate, and/or restrictions on the types of construction projects that may
continue. As a result, a number of the Company's tenants temporarily closed their offices or clinical space or operated on a reduced basis in response to government requirements
or recommendations. Many of these
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restrictions were lifted during 2020, but some restrictions are continuing into 2021 and more expansive restrictions could be reimposed at any time.
The COVID-19 pandemic has also caused, and is likely to continue to cause, severe economic, market and other disruptions worldwide. There can be no assurance that the
Company's access to capital and other sources of funding will not become constrained, which could adversely affect the availability and terms of future borrowings, renewals or
refinancings. In addition, the deterioration of economic conditions as a result of the pandemic may ultimately decrease occupancy levels and average rent per square foot across
the Company's portfolio as tenants reduce or defer their spending.
The extent of the COVID-19 pandemic’s effect on the Company's operational and financial performance will depend on future developments, including the duration, spread and
intensity of the outbreak, and the availability and effectiveness of vaccines, all of which are uncertain and difficult to predict.
Owning real estate and indirect interests in real estate is subject to inherent risks.
The Company’s operating performance and the value of its real estate assets are subject to the risk that if its properties do not generate revenues sufficient to meet its operating
expenses, including debt service, the Company’s cash flow and ability to pay dividends to stockholders will be adversely affected.
The Company may incur impairment charges on its real estate properties or other assets.
The Company performs an impairment review on its real estate properties every year. In addition, the Company assesses the potential for impairment of identifiable intangible
assets and long-lived assets, including real estate properties, whenever events occur or a change in circumstances indicates that the recorded value might not be fully recoverable.
The decision to sell a property also requires the Company to assess the potential for impairment. At some future date, the Company may determine that an impairment has
occurred in the value of one or more of its real estate properties or other assets. In such an event, the Company may be required to recognize an impairment which could have a
material adverse effect on the Company’s consolidated financial condition and results of operations.
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to undertake
significant expenditures or make significant leasing concessions to attract new tenants, then the Company’s business, consolidated financial condition and results of operations
would be adversely affected.
A portion of the Company’s leases will expire over the course of any year. For more specific information concerning the Company’s expiring leases, see "Multi-Tenant Leases"
and "Single-Tenant Leases" in the "Trends and Matters Impacting Operating Results" as part of Management's Discussion and Analysis of Financial Condition and Results of
Operations included in Part II, Item 7 of this report. The Company may not be able to re-let space on terms that are favorable to the Company or at all. Further, the Company
may be required to make significant capital expenditures to renovate or reconfigure space or make significant leasing concessions to attract new tenants.
Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses.
Some of the Company’s properties are specialized medical facilities. If the Company or the Company’s tenants terminate the leases for these properties or the Company’s tenants
lose their regulatory authority to operate such properties, the Company may not be able to locate suitable replacement tenants to lease the properties for their specialized uses.
Alternatively, the Company may be required to spend substantial amounts to adapt the properties to other uses. Any loss of revenues and/or additional capital expenditures
occurring as a result may have a material adverse effect on the Company’s consolidated financial condition and results of operations.
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The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real estate
taxes, utilities, insurance, and maintenance expense.
The Company receives a significant portion of its revenues by leasing assets subject to fixed rent escalations. Ninety-six percent of leases have increases that are based upon
fixed percentages, three percent of leases have increases based on the Consumer Price Index and one percent have no increase. If the fixed percentage increases begin to lag
behind inflation and operating expense growth, the Company's performance, growth, and profitability would be negatively impacted.
The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition.
Because real estate investments are relatively illiquid, the Company’s ability to adjust its portfolio promptly in response to economic or other conditions is limited. Certain
significant expenditures generally do not change in response to economic or other conditions, including debt service (if any), real estate taxes, and operating and maintenance
costs. This combination of variable revenue and relatively fixed expenditures may result in reduced earnings and could have an adverse effect on the Company’s financial
condition. In addition, the Company may not be able to sell properties targeted for disposition, including properties held for sale, due to adverse market conditions. This may
negatively affect, among other things, the Company’s ability to sell properties on favorable terms, execute its operating strategy, repay debt, or pay dividends.
The Company is subject to risks associated with the development and redevelopment of properties.
The Company expects development and redevelopment of properties will continue to be a key component of its growth plans. The Company is subject to certain risks associated
with the development and redevelopment of properties including the following:
•
The construction of properties generally requires various government and other approvals that may not be received when expected, or at all, which could delay or preclude
commencement of construction;
• Opportunities that the Company pursued but later abandoned could result in the expensing of pursuit costs, which could impact the Company’s consolidated results of
operations;
• Construction costs could exceed original estimates, which could impact the building’s profitability to the Company;
• Operating expenses could be higher than forecasted;
•
Time required to initiate and complete the construction of a property and to lease up a completed property may be greater than originally anticipated, thereby adversely
affecting the Company’s cash flow and liquidity;
• Occupancy rates and rents of a completed development property may not be sufficient to make the property profitable to the Company; and
•
Favorable capital sources to fund the Company’s development and redevelopment activities may not be available when needed.
The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform in
accordance with management’s expectations.
The Company regularly pursues potential transactions to acquire, develop or redevelop real estate assets. Future acquisitions could require the Company to issue equity
securities, incur debt or other contingent liabilities or amortize expenses related to other intangible assets, any of which could adversely impact the Company’s consolidated
financial condition or results of operations. In addition, equity or debt financing required for such acquisitions may not be available at favorable times or rates.
The Company’s acquired, developed, redeveloped and existing real estate properties may not perform in accordance with management’s expectations because of many factors
including the following:
•
The Company’s purchase price for acquired facilities may be based upon a series of market or building-specific judgments which may be incorrect;
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•
•
•
The costs of any maintenance or improvements for properties might exceed estimated costs;
The Company may incur unexpected costs in the acquisition, construction or maintenance of real estate assets that could impact its expected returns on such assets; and
Leasing may not occur at all, within expected time frames or at expected rental rates.
Further, the Company can give no assurance that acquisition, development and redevelopment opportunities that meet management’s investment criteria will be available when
needed or anticipated.
The Company is exposed to risks associated with geographic concentration.
As of December 31, 2020, the Company had investment concentrations of greater than 5% of its total investments in the Seattle, Washington (14.3%), Dallas, Texas (10.7%),
Los Angeles, California (7.5%), and Atlanta, Georgia (6.5%) markets. These concentrations increase the exposure to adverse conditions that might affect these markets,
including natural disasters, local economic conditions, local real estate market conditions, increased competition, state and local regulation (including property taxes) and other
localized events or conditions.
Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks related
to the financial condition of the associated health systems.
The Company’s revenue concentrations with tenants are diversified, with the largest revenue concentration relating to Baylor Scott & White Health and its affiliates, which
accounted for 8.1% of the Company's consolidated revenues in 2020.
Most of the Company’s properties on or adjacent to hospital campuses are largely dependent on the viability of the health system’s campus where they are located, whether or
not the hospital or health system is a tenant in such properties. The viability of these health systems depends on factors such as the quality and mix of healthcare services
provided, competition, demographic trends in the surrounding community, market position and growth potential. If one of these hospitals is unable to meet its financial
obligations, is unable to compete successfully, or is forced to close or relocate, the Company’s properties on or near such hospital campus could be adversely impacted.
Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these
properties.
As of December 31, 2020, the Company had 105 properties that were held under ground leases, representing an aggregate gross investment of approximately $2.2 billion. The
weighted average remaining term of the Company's ground leases is approximately 70.3 years, including renewal options. The Company’s ground lease agreements with
hospitals and health systems typically contain restrictions that limit building occupancy to physicians on the medical staff of an affiliated hospital and prohibit tenants from
providing services that compete with the services provided by the affiliated hospital. Ground leases may also contain consent requirements or other restrictions on sale or
assignment of the Company’s leasehold interest, including rights of first offer and first refusal in favor of the lessor. These ground lease provisions may limit the Company’s
ability to lease, sell, or obtain mortgage financing secured by such properties which, in turn, could adversely affect the income from operations or the proceeds received from a
sale. As a ground lessee, the Company is also exposed to the risk of reversion of the property upon expiration of the ground lease term, or an earlier breach by the Company of
the ground lease, which may have a material adverse effect on the Company’s consolidated financial condition and results of operations.
The Company may experience uninsured or underinsured losses.
The Company carries comprehensive liability insurance and property insurance covering its owned and managed properties. In addition, tenants under single-tenant leases are
required to carry property insurance covering the Company’s interest in the buildings. Some types of losses may be uninsurable or too expensive to insure against. Insurance
companies limit or exclude coverage against certain types of losses, such as losses due to named windstorms, terrorist acts, earthquakes, and toxic mold. Accordingly, the
Company may not have sufficient insurance coverage against certain types of losses and may experience decreases in the insurance coverage available. Should an uninsured loss
or a loss in excess of insured limits occur, the Company could lose all or a portion of the capital it has invested in a property, as well as the anticipated future revenue from the
property. In such an event, the Company
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might remain obligated for any mortgage debt or other financial obligation related to the property. Further, if any of the Company's insurance carriers were to become insolvent,
the Company would be forced to replace the existing coverage with another suitable carrier, and any outstanding claims would be at risk for collection. In such an event, the
Company cannot be certain that the Company would be able to replace the coverage at similar or otherwise favorable terms.
The Company has obtained title insurance policies for each of its properties, typically in an amount equal to its original price. However, these policies may be for amounts less
than the current or future values of our properties. In such an event, if there is a title defect relating to any of the Company's properties, it could lose some of the capital invested
in and anticipated profits from such property. The Company cannot give assurance that material losses in excess of insurance proceeds will not occur in the future.
Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise, could result in losses to the Company.
Many of our properties are located in areas susceptible to revenue loss, cost increase, or damage caused by severe weather conditions or natural disasters such as wildfires,
hurricanes, earthquakes, tornadoes and floods. The Company could experience losses to the extent that such damages exceed insurance coverage, cause an increase in insurance
premiums, and/or a decrease in demand for properties located in such areas. In the event that climate change causes such catastrophic weather or other natural events to increase
broadly or in localized areas, such costs and damages could increase above historic expectations. In addition, changes in federal and state legislation and regulation on climate
change could result in increased capital expenditures to improve energy efficiency of our existing properties and could require the Company to spend more on development and
redevelopment properties without a corresponding increase in revenue.
The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information
technology networks and related systems.
The Company faces risks associated with security breaches, whether through cyber attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to
emails, persons inside the Company, or persons with access to systems inside the Company, and other significant disruptions of the Company's information technology ("IT")
networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion, including by computer hackers, foreign
governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions from around the world have increased.
The Company's IT networks and related systems are essential to the operation of its business and its ability to perform day-to-day operations (including managing building
systems) and, in some cases, may be critical to the operations of certain of our tenants. Although the Company makes efforts to maintain the security and integrity of these types
of IT networks and related systems, and we have implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that these
security measures will be effective or that attempted security breaches or disruptions would not be successful or damaging. Even the most well protected information, networks,
systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched
against a target, and in some cases are designed not to be detected and may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement
adequate security barriers or other preventive measures, and it is therefore impossible to entirely mitigate the risk.
A security breach or other significant disruption involving the Company's IT network and related systems could:
•
•
•
•
disrupt the proper functioning of the Company's networks and systems and therefore the Company's operations and/or those of certain tenants;
result in misstated financial reports, violations of loan covenants, missed reporting deadlines, and/or missed permitting deadlines;
result in the Company's inability to properly monitor its compliance with the rules and regulations regarding the Company's qualification as a REIT;
result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary,
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confidential, sensitive, or otherwise valuable information of the Company or others, which others could use to compete against the Company or which could expose it to
damage claims by third-parties for disruption, destructive, or otherwise harmful purposes or outcomes;
•
•
•
•
result in the Company's inability to maintain the building systems relied upon by the its tenants for the efficient use of their leased space;
require significant management attention and resources to remedy any damages that result;
subject the Company to claims for breach of contract, damages, credits, penalties, or termination of leases or other agreements; or
damage the Company's reputation among its tenants and investors generally.
Although the Company carries cyber risk insurance, losses could exceed insurance coverage available and any or all of the foregoing could have a material adverse effect on the
Company's consolidated financial condition and results of operations.
Government tenants may not receive annual budget appropriations, which could adversely affect their ability to pay the Company.
The Company may lease to federal, state, and/or local government tenants from time to time. Such tenants may be subject to annual budget appropriations. If
a government tenant fails to receive its annual budget appropriation, it might not be able to make its lease payments to the Company. In addition, defaults under leases with
federal government tenants are governed by federal statute and not by state eviction or rent deficiency laws. Leases with government tenants typically provide that
the government tenant may terminate the lease under certain circumstances.
Risks relating to our capital structure and financings
The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future.
As of December 31, 2020, the Company had approximately $1.6 billion of outstanding indebtedness excluding discounts, premiums and debt issuance costs. Covenants under the
Amended and Restated Credit Agreement dated as of May 31, 2019, among the Company and Wells Fargo Bank, National Association, as Administrative Agent, and the other
lenders that are party thereto, as amended ("Unsecured Credit Facility"), the Amended and Restated Term Loan Agreement, dated as of May 31, 2019, among the Company,
Wells Fargo Bank, National Association, as Administrative Agent, and the other lenders that are party thereto, as amended (the "Unsecured Term Loan due 2024" and
"Unsecured Term Loan due 2026") and the indentures governing the Company's senior notes permit the Company to incur substantial, additional debt, and the Company may
borrow additional funds, which may include secured borrowings. A high level of indebtedness would require the Company to dedicate a substantial portion of its cash flows from
operations to service debt, thereby reducing the funds available to implement the Company's business strategy and to make distributions to stockholders. A high level of
indebtedness could also:
•
•
•
•
limit the Company’s ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare
industries;
limit the Company's ability to adjust rapidly to changing market conditions in the event of a downturn in general economic conditions or in the real estate and/or healthcare
industries;
impair the Company’s ability to obtain additional debt financing or require potentially dilutive equity to fund obligations and carry out its business strategy; and
result in a downgrade of the rating of the Company’s debt securities by one or more rating agencies, which would increase the costs of borrowing under the Unsecured Credit
Facility and the cost of issuance of new debt securities, among other things.
In addition, from time to time, the Company secures mortgage financing or assumes mortgages to partially fund its investments. If the Company is unable to meet its mortgage
payments, then the encumbered properties could be foreclosed upon or transferred to the mortgagee with a consequent loss of income and asset value. A foreclosure on
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one or more of the Company's properties could have a material adverse effect on the Company’s consolidated financial condition and results of operations.
The Company generally does not intend to reserve funds to retire existing debt upon maturity. The Company may not be able to repay, refinance, or extend any or all of our debt
at maturity or upon any acceleration. If any refinancing is done at higher interest rates, the increased interest expense could adversely affect the Company's financial condition
and results of operations. Any such refinancing could also impose tighter financial ratios and other covenants that restrict the Company's ability to take actions that could
otherwise be in its best interest, such as funding new development activity, making opportunistic acquisitions, or paying dividends.
Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial
condition and results of operations.
The terms of the Unsecured Credit Facility, the Unsecured Term Loan due 2024 and the Unsecured Term Loan due 2026, the indentures governing the Company’s outstanding
senior notes and other debt instruments that the Company may enter into in the future are subject to customary financial and operational covenants. These provisions include,
among other things: a limitation on the incurrence of additional indebtedness; limitations on mergers, investments, acquisitions, redemptions of capital stock, and transactions
with affiliates; and maintenance of specified financial ratios. The Company’s continued ability to incur debt and operate its business is subject to compliance with these
covenants, which limit operational flexibility. Breaches of these covenants could result in defaults under applicable debt instruments, even if payment obligations are satisfied.
Financial and other covenants that limit the Company’s operational flexibility, as well as defaults resulting from a breach of any of these covenants in its debt instruments, could
have a material adverse effect on the Company’s consolidated financial condition and results of operations.
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively impacted.
Access to external capital on favorable terms is critical to the Company’s success in growing and maintaining its portfolio. If financial institutions within the Unsecured Credit
Facility were unwilling or unable to meet their respective funding commitments to the Company, any such failure would have a negative impact on the Company’s operations,
consolidated financial condition and ability to meet its obligations, including the payment of dividends to stockholders.
The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse effect on
the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity.
A REIT is required by the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), to make dividend distributions, thereby retaining less of its capital for
growth. As a result, a REIT typically requires new capital to invest in real estate assets. However, there may be times when the Company will have limited access to capital from
the equity and/or debt markets. Changes in the Company’s debt ratings could have a material adverse effect on its interest costs and financing sources. The Company’s debt
rating can be materially influenced by a number of factors including, but not limited to, acquisitions, investment decisions, and capital management activities. In recent years, the
capital and credit markets have experienced volatility and at times have limited the availability of funds. The Company’s ability to access the capital and credit markets may be
limited by these or other factors, which could have an impact on its ability to refinance maturing debt, fund dividend payments and operations, acquire healthcare properties and
complete development and redevelopment projects. If the Company is unable to refinance or extend principal payments due at maturity of its various debt instruments, its cash
flow may not be sufficient to repay maturing debt or make dividend payments to stockholders. If the Company defaults in paying any of its debts or satisfying its debt covenants,
it could experience cross-defaults among debt instruments, the debts could be accelerated and the Company could be forced to liquidate assets for less than the values it would
otherwise receive.
Further, the Company obtains credit ratings from various credit-rating agencies based on their evaluation of the Company's credit. These agencies' ratings are based on a number
of factors, some of which are not within the Company's control. In addition to factors specific to the Company's financial strength and performance, the rating agencies also
consider conditions affecting REITs generally. The Company's credit ratings could be downgraded. If
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the Company's credit ratings are downgraded or other negative action is taken, the Company could be required, among other things, to pay additional interest and fees on
borrowings under the Unsecured Credit Facility, Unsecured Term Loan due 2024 and the Unsecured Term Loan due 2026.
The Company is exposed to increases in interest rates, changes to the method that LIBOR rates are determined, and the potential phasing out of LIBOR. Such changes could
adversely impact the Company's ability to refinance existing debt, sell assets or engage in acquisition and development activity.
A significant portion of the Company’s debt is subject to floating rates, based on LIBOR or other indices. LIBOR and other interest benchmarks may be subject to regulatory
reform that could cause fluctuations in interest rates under the Company's debt agreements that are unanticipated. The United Kingdom's Financial Conduct Authority, which
regulates LIBOR, has announced that it intends to stop encouraging or requiring banks to submit rates for the calculation of LIBOR rates after 2021. Recently, the administrator
of LIBOR announced extensions of certain USD LIBOR rates to June 2023. It is unclear whether LIBOR will cease to exist or if new methods of calculating it will develop. The
Company's existing and future debt agreements that are based on LIBOR could be adversely affected by such changes. The Unsecured Credit Facility, the Unsecured Term Loan
due 2024, and the Unsecured Term Loan due 2026 contain provisions addressing the transition away from LIBOR that are intended to provide a mechanism for determining an
alternate benchmark rate in the event that LIBOR becomes unavailable during the term of these loans. However, as there is yet to be a widely accepted alternate benchmark,
these transitional provisions provide that the alternate benchmark will be selected by the parties in the future, subject to a determinative framework. There can be no certainty as
of the date of this report as to the specific alternate benchmark that would be used.
In addition, the generally fixed nature of revenues and the variable rate of certain debt obligations create interest rate risk for the Company. Increases in interest rates could make
the financing of any acquisition or investment activity more costly. Rising interest rates would increase the cost of borrowing under the Unsecured Credit Facility, the Unsecured
Term Loan due 2024, and the Unsecured Term Loan due 2026, could limit the Company’s ability to refinance existing debt when it matures or cause the Company to pay higher
rates upon refinancing. An increase in interest rates also could have the effect of reducing the amounts that third parties might be willing to pay for real estate assets, which could
limit the Company’s ability to sell assets at times when it might be advantageous to do so.
The Company's swap agreements may not effectively reduce its exposure to changes in interest rates.
The Company enters into swap agreements from time to time to manage some of its exposure to interest rate volatility. These swap agreements involve risks, such as the risk that
counterparties may fail to honor their obligations under these arrangements. In addition, these arrangements may not be effective in reducing the Company’s exposure to changes
in interest rates. When the Company uses forward-starting interest rate swaps, there is a risk that it will not complete the long-term borrowing against which the swap is intended
to hedge. If such events occur, the Company’s consolidated financial condition and results of operations may be adversely affected. See Note 10 to the Consolidated Financial
Statements for additional information on the Company's interest rate swaps.
The Company has entered into joint venture agreements that limit its flexibility with respect to jointly owned properties and expects to enter into additional such agreements in the
future.
As of December 31, 2020, the Company had investments of $73.1 million in unconsolidated joint ventures with unrelated third parties comprised of four properties and two
parking garages. The Company may acquire, develop, or redevelop additional properties in joint ventures with unrelated third parties. In such investments, the Company is
subject to risks that may not be present in its other forms of ownership, including:
•
•
•
•
joint venture partners could have financing and investment goals or strategies that are different than those of the Company, including terms and strategies for such
investment and what levels of debt place on the venture;
the parties to a joint venture could reach an impasse on certain decisions, which could result in unexpected costs, including costs associated with litigation or arbitration;
joint venture partners could have investments that are competitive with the Company's properties in certain markets;
interests in joint ventures are often illiquid and the Company may have difficulty exiting such an investment, or may have to exit at less than fair market value;
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•
•
joint venture partners may be structured differently than the Company for tax purposes and there could be conflicts relating to the Company's REIT status; and
joint venture partners could become insolvent, fail to fund capital contributions, or otherwise fail to fulfill their obligations as a partner, which could require the Company to
invest more capital into such ventures than anticipated.
Settlement provisions contained in a forward equity agreement could result in substantial dilution to the Company's earnings per share and return on equity or result in substantial
cash payment obligations.
The Company has outstanding forward equity agreements and may enter into additional forward equity agreements in the future. Forward equity agreements typically provide
that the relevant forward purchaser will have the right to accelerate that particular forward equity agreement (with respect to all or any portion of the transaction under that
particular forward equity agreement that the relevant forward purchaser determines is affected by such event) and require us to settle on a date specified by the relevant forward
purchaser if:
• the relevant forward purchaser is unable to establish, maintain or unwind its hedge position with respect to that particular forward equity agreement;
• a termination event occurs as a result of us declaring a dividend or distribution on our common stock with a cash value in excess of a specified amount per calendar quarter, or
with an ex-dividend date prior to the anticipated ex-dividend date for such cash dividend;
• an extraordinary event (as such term is defined in that particular forward equity agreement and which includes certain mergers and tender offers and the delisting of our
common stock) occurs or our board of directors votes to approve or there is a public announcement of, in either case, any action that, if consummated, would constitute such
an extraordinary event; or
• certain other events of default, termination events, or other specified events occur, including, among other things, any material misrepresentation made by us in connection with
entering into that particular forward equity agreement, or a nationalization, a bankruptcy termination event or a change in law (as such terms are defined in that particular
forward equity agreement).
A forward purchaser’s decision to exercise its right to accelerate the settlement of a particular forward equity agreement will be made irrespective of the Company's need for
capital. In such cases, we could be required to issue and deliver shares of common stock under the physical settlement provisions of that particular forward equity agreement or,
if we so elect and the forward purchaser so permits our election, net share settlement provisions of that particular forward equity agreement irrespective of our capital needs,
which would result in dilution to our earnings per share and return on equity.
We expect that settlement of any forward equity agreement will generally occur no later than the date specified in the particular forward equity agreement, which will generally
be no later than twelve months following the trade date of that forward equity agreement. However, any forward equity agreement may be settled earlier than that specified date
in whole or in part at our option. We expect that each forward equity agreement will be physically settled by delivery of shares of common stock unless we elect to cash settle or
net share settle a particular forward equity agreement. Upon physical settlement or, if we so elect, net share settlement of a particular forward equity agreement, delivery of
shares of common stock in connection with such physical settlement or net share settlement will result in dilution to our earnings per share and return on equity. If we elect cash
settlement or net share settlement with respect to all or a portion of the shares of common stock underlying a particular forward equity agreement, we expect that the relevant
forward purchaser (or an affiliate thereof) will purchase a number of shares of common stock necessary to satisfy its or its affiliate’s obligation to return the shares of common
stock borrowed from third parties in connection with sales of shares of common stock under that forward equity agreement, adjusted in the case of net share settlement by any
shares deliverable by or to us under the forward equity agreement. In addition, the purchase of shares of common stock in connection with the relevant forward purchaser or its
affiliate unwinding its hedge positions could cause the price of shares of common stock to increase over such time (or prevent a decrease over such time), thereby increasing the
amount of cash we would owe to the relevant forward purchaser (or decreasing the amount of cash that the relevant forward purchaser would owe us) upon a cash settlement of
the relevant forward equity agreement or, in the event of net share settlement, increasing the number of shares of common stock we would
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deliver to the relevant forward purchaser (or decreasing the number of shares of common stock that the relevant forward purchaser would deliver to us).
The forward equity price that we expect to receive upon physical settlement of a particular forward equity agreement will be subject to adjustment on a daily basis based on a
floating interest rate factor equal to a specified daily rate less a spread and will be decreased based on amounts related to expected dividends on shares of common stock during
the term of the particular forward equity agreement. If the specified daily rate is less than the spread on any day, the interest factor will result in a daily reduction of the
applicable forward equity price. If the market value of shares of common stock, determined in accordance with the terms of the relevant forward equity agreement, during the
relevant valuation period under the particular forward equity agreement is above the applicable forward equity price, in the case of cash settlement, we would pay the relevant
forward purchaser under that particular forward equity agreement an amount in cash equal to the difference or, in the case of net share settlement, we would deliver to the
relevant forward purchaser a number of shares of common stock having a value, determined in accordance with the terms of the relevant forward equity agreement, equal to the
difference. Thus, we could be responsible for a potentially substantial cash payment in the case of cash settlement of a particular forward equity agreement. If the market value of
the Company’s common stock, determined in accordance with the terms of the relevant forward equity agreement, during the relevant valuation period under that particular
forward equity agreement is below the applicable forward equity price, in the case of cash settlement, we would be paid the difference in cash by the relevant forward purchaser
under that particular forward equity agreement or, in the case of net share settlement, we would receive from the relevant forward purchaser a number of shares of common stock
having a value equal to the difference.
The U.S. federal income tax treatment of the cash that we might receive from cash settlement of a forward equity agreement is unclear and could jeopardize the Company's ability
to meet the REIT qualification requirements.
In the event that we elect to settle any forward equity agreement for cash and the settlement price is below the applicable forward equity price, we would be entitled to receive a
cash payment from the relevant forward purchaser. Under Section 1032 of the Internal Revenue Code, generally, no gains and losses are recognized by a corporation in dealing
in its own shares, including pursuant to a "securities futures contract" (as defined in the Internal Revenue Code, by reference to the Securities Exchange Act of 1934, as
amended). Although we believe that any amount received by us in exchange for our stock would qualify for the exemption under Section 1032 of the Internal Revenue Code,
because it is not entirely clear whether a forward equity agreement qualifies as a "securities futures contract," the U.S. federal income tax treatment of any cash settlement
payment we receive is uncertain. In the event that we recognize a significant gain from the cash settlement of a forward equity agreement, we might be unable to satisfy the gross
income requirements applicable to REITs under the Internal Revenue Code. In that case, we may be able to rely upon the relief provisions under the Internal Revenue Code in
order to avoid the loss of our REIT status. Even if the relief provisions apply, we will be subject to a 100% tax on the greater of (i) the excess of 75% of our gross income
(excluding gross income from prohibited transactions) over the amount of such income attributable to sources that qualify under the 75% test or (ii) the excess of 95% of our
gross income (excluding gross income from prohibited transactions) over the amount of such gross income attributable to sources that qualify under the 95% test, multiplied in
either case by a fraction intended to reflect our profitability. In the event that these relief provisions were not available, we could lose our REIT status under the Internal Revenue
Code.
In case of our bankruptcy or insolvency, any forward equity agreements will automatically terminate, and we would not receive the expected proceeds from any forward sale of
shares of the Company’s common stock.
If we file for or consent to a proceeding seeking a judgment in bankruptcy or insolvency or any other relief under any bankruptcy or insolvency law or other similar law affecting
creditors’ rights, or we or a regulatory authority with jurisdiction over us presents a petition for our winding-up or liquidation, and we consent to such a petition, any forward
equity agreements that are then in effect will automatically terminate. If any such forward equity agreement so terminates under these circumstances, we would not be obligated
to deliver to the relevant forward purchaser any shares of common stock not previously delivered, and the relevant forward purchaser would be discharged from its obligation to
pay the applicable forward equity price per share in respect of any shares of common stock not previously settled under the applicable forward equity agreement. Therefore, to
the extent that there are any shares of common stock with respect to which any forward equity agreement has not been settled at the time of the
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commencement of any such bankruptcy or insolvency proceedings, we would not receive the relevant forward equity price per share in respect of those shares of common stock.
Risks relating to government regulations
The Company's property taxes could increase due to reassessment or property tax rate changes.
Real property taxes on the Company's properties may increase as its properties are reassessed by taxing authorities or as property tax rates change. For example, a current
California law commonly referred to as Proposition 13 generally limits annual real estate tax increases on California properties to 2% of assessed value. Accordingly, the
assessed value and resulting property tax the Company pays is less than it would be if the properties were assessed at current values. The Company owns 22 properties in
California, representing 9.6% of its total revenue. From time to time, proposals have been made to reduce the beneficial impact of Proposition 13, particularly with respect to
commercial property, which would include medical office buildings. Most recently, an initiative qualified for California’s November 2020 statewide ballot that would generally
limit Proposition 13’s protections to residential real estate. If this initiative had passed, it would have ended the beneficial effect of Proposition 13 for the Company's properties,
and property tax expense could have increase substantially, adversely affecting the Company's cash flow from operations and net income. While this initiative did not pass, the
Company cannot predict whether other changes to Proposition 13 may be proposed or adopted in the future.
If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates
a facility, the Company would have to obtain another tenant for the affected facility.
If a tenant loses its license or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a facility,
and the Company is unable to attract another healthcare provider on a timely basis and on acceptable terms, the Company’s cash flows and results of operations could suffer.
Transfers of operations of healthcare facilities are often subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.
Trends in the healthcare service industry may negatively affect the demand for the Company’s properties, lease revenues and the values of its investments.
The healthcare service industry may be affected by the following:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
disruption in patient volume and revenue from the impact of COVID-19;
trends in the method of delivery of healthcare services, such as telehealth;
transition to value-based care and reimbursement of providers;
competition among healthcare providers;
consolidation among healthcare providers, health insurers, hospitals and health systems;
a rise in government-funded health insurance coverage;
pressure on providers' operating profit margins from lower reimbursement rates, lower admissions growth, and higher expense growth;
availability of capital;
credit downgrades;
liability insurance expense;
rising pharmaceutical drug expense;
regulatory and government reimbursement uncertainty related to the Medicare and Medicaid programs;
a trend toward government regulation of pharmaceutical pricing;
government regulation of hospitals' and health insurers' pricing transparency;
federal court decisions on cases challenging the legality of the Affordable Care Act, in whole or in part;
site-neutral rate-setting for Medicare services across different care settings;
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•
•
heightened health information technology security standards and the meaningful use of electronic health records by healthcare providers; and
potential tax law changes affecting providers.
These trends, among others, can adversely affect the economic performance of some or all of the tenants and, in turn, negatively affect the lease revenues and the value of the
Company’s property investments.
The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations.
All real property and the operations conducted on real property are subject to federal, state, and local laws and regulations relating to environmental protection and human health
and safety. Some of these laws and regulations may impose joint and several liability on tenants, owners, or operators for the costs to investigate or remediate contaminated
properties, regardless of fault or whether the acts causing the contamination were legal. In addition, the presence of hazardous substances, or the failure to properly remediate
these substances, may hinder the Company's ability to sell, rent, or pledge such property as collateral for future borrowings.
Compliance with new laws or regulations or stricter interpretation of existing laws may require the Company to incur significant expenditures. For example, proposed legislation
to address climate change could increase utility and other costs of operating the Company's properties. Future laws or regulations may impose significant environmental liability.
Additionally, tenant or other operations in the vicinity of the Company's properties, such as the presence of underground storage tanks, or activities of unrelated third parties may
affect the Company's properties. There are various local, state, and federal fire, health, life-safety, and similar regulations with which the Company may be required to comply
and that may subject us to liability in the form of fines or damages for noncompliance. Any expenditures, fines, or damages that the Company must pay would adversely affect
its results of operations.
Discovery of previously undetected environmentally hazardous conditions may adversely affect the Company's financial condition and results of operations. Under various
federal, state, and local environmental laws and regulations, a current or previous property owner or operator may be liable for the cost to remove or remediate hazardous or toxic
substances on such property. These costs could be significant. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated,
and these restrictions may require significant expenditures or prevent the Company from entering into leases with prospective tenants that may be impacted by such laws.
Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials. Third parties may seek recovery from
real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of
liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could adversely affect the
Company's financial condition and results of operations.
If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common stock.
The Company intends to operate in a manner that will allow it to continue to qualify as a REIT for federal income tax purposes. Although the Company believes that it qualifies
as a REIT, it cannot provide any assurance that it will continue to qualify as a REIT for federal income tax purposes. The Company’s continued qualification as a REIT will
depend on the satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. The Company’s ability to
satisfy the asset tests depends upon the characterization and fair market values of its assets. The Company’s compliance with the REIT income and quarterly asset requirements
also depends upon the Company’s ability to successfully manage the composition of the Company’s income and assets on an ongoing basis. Accordingly, there can be no
assurance that the Internal Revenue Service (“IRS”) will not contend that the Company has operated in a manner that violates any of the REIT requirements.
If the Company were to fail to qualify as a REIT in any taxable year, the Company would be subject to federal income tax on its taxable income at regular corporate rates and
possibly increased state and local taxes (and the Company
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might need to borrow money or sell assets in order to pay any such tax). Further, dividends paid to the Company’s stockholders would not be deductible by the Company in
computing its taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to the Company’s
stockholders, which in turn could have an adverse impact on the value of, and trading prices for, the Company’s common stock. In addition, in such event the Company would
no longer be required to pay dividends to maintain REIT status, which could adversely affect the value of the Company’s common stock. Unless the Company were entitled to
relief under certain provisions of the Internal Revenue Code, the Company also would continue to be disqualified from taxation as a REIT for the four taxable years following
the year in which the Company failed to qualify as a REIT.
Even if the Company remains qualified for taxation as a REIT, the Company is subject to certain federal, state and local taxes on its income and assets, including taxes on any
undistributed taxable income, and state or local income, franchise, property and transfer taxes. These tax liabilities would reduce the Company’s cash flow and could adversely
affect the value of the Company’s common stock. For more specific information on state income taxes paid, see Note 15 to the Consolidated Financial Statements.
The Company’s Articles of Incorporation, as well as provisions of Maryland general corporation law, contain limits and restrictions on transferability of the Company’s common
stock which may have adverse effects on the value of the Company’s common stock.
In order to qualify as a REIT, no more than 50% of the value of the Company’s outstanding shares may be owned, directly or indirectly, by five or fewer individuals (as defined
in the Internal Revenue Code to include certain entities) during the last half of a taxable year. To assist in complying with this REIT requirement, the Company’s Articles of
Incorporation contain provisions restricting share transfers where the transferee would, after such transfer, own more than 9.9% either in number or value of the outstanding
stock of the Company. If, despite this prohibition, stock is acquired increasing a transferee’s ownership to over 9.9% in value of the outstanding stock, the stock in excess of this
9.9% in value is deemed to be held in trust for transfer at a price that does not exceed what the purported transferee paid for the stock, and, while held in trust, the stock is not
entitled to receive dividends or to vote. In addition, under these circumstances, the Company has the right to redeem such stock.
In addition, provisions of Maryland's general corporation law may have anti-takeover effects that delay, defer or prevent a takeover attempt. These provisions include the
following:
•
•
Preferred Stock. The Company's charter authorizes the board of directors to issue preferred stock in one or more classes and establish the preferences and rights of any class
of preferred stock issued. These actions can be taken without stockholder approval. The issuance of preferred stock could have the effect of delaying or preventing someone
from taking control of the Company.
Business combinations. Pursuant to Maryland law, the Company cannot merge into or consolidate with another corporation or enter into a statutory share exchange
transaction in which the Company is not the surviving entity or sell all or substantially all of its assets unless the board of directors adopts a resolution declaring the
proposed transaction advisable and two-thirds of the stockholders voting together as a single class approve the transaction. Maryland law prohibits stockholders from taking
action by written consent unless all stockholders consent in writing. The practical effect of this limitation is that any action required or permitted to be taken by the
Company's stockholders may only be taken if it is properly brought before an annual or special meeting of stockholders. The Company's bylaws further provide that in order
for a stockholder to properly bring any matter before a meeting, the stockholder must comply with requirements regarding advance notice. The foregoing provisions could
have the effect of delaying until the next annual meeting stockholder actions that the holders of a majority of the Company's outstanding voting securities favor. These
provisions may also discourage another person from making a tender offer for the Company's common stock, because such person or entity, even if it acquired a majority of
the Company's outstanding voting securities, would likely be able to take action as a stockholder, such as electing new directors or approving a merger, only at a duly called
stockholders meeting. Maryland law also establishes special requirements with respect to business combinations between Maryland corporations and interested stockholders
unless exemptions apply. Among other things, the law prohibits for five years following the most recent date on which the interested stockholder became an interested
stockholder, a
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•
•
merger and other similar transactions between a corporation and an interested stockholder and requires a supermajority vote for such transactions after the end of the five-
year period.
Control share acquisitions. Maryland general corporation law also provides that control shares of a Maryland corporation acquired in a control share acquisition have no
voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares owned by the acquirer or by officers or
employee directors. The control share acquisition statute does not apply to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the corporation's charter or bylaws.
Maryland unsolicited takeover statute. Under Maryland law, the Company's board of directors could adopt various anti-takeover provisions without the consent of
stockholders. The adoption of such measures could discourage offers for the Company or make an acquisition of the Company more difficult. On February 12, 2019, the
Company opted out of the provision of this statute that permits the board to classify without shareholder vote. As such, the Company's board could not classify into multiple
classes without stockholders' approval.
These restrictions on transfer of the Company’s shares could have adverse effects on the value of the Company’s common stock.
Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities.
To qualify as a REIT for federal income tax purposes, the Company must continually satisfy tests concerning, among other things, the sources of its income, the nature of its
assets, the amounts it distributes to its stockholders and the ownership of its stock. The Company may be unable to pursue investments that would be otherwise advantageous to
the Company in order to satisfy the source-of-income or distribution requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder the
Company’s ability to make certain attractive investments.
The prohibited transactions tax may limit the Company's ability to sell properties.
A REIT's net gain from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business. The Company may be subject to the prohibited transaction tax equal to 100% of net gain upon a disposition of real property.
Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, there can be no assurance that the Company can
comply in all cases with the safe harbor or that it will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business.
Consequently, the Company may choose not to engage in certain sales of its properties or may conduct such sales through a taxable REIT subsidiary, which would be subject to
federal and state income taxation.
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.
Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative
authorities exist. Even a technical or inadvertent violation could jeopardize the Company’s REIT qualification. The Company’s continued qualification as a REIT will depend on
the Company’s satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, the Company’s
ability to satisfy the requirements to qualify as a REIT depends in part on the actions of third parties over which the Company has no control or only limited influence, including
in cases where the Company owns an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
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New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to qualify as a
REIT.
The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could
affect the federal income tax treatment of an investment in the Company. The federal income tax rules that affect REITs are constantly under review by persons involved in the
legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in
federal tax laws and interpretations thereof could cause the Company to change its investments and commitments and affect the tax considerations of an investment in the
Company. There can be no assurance that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws significantly with respect to
the Company’s qualification as a REIT or with respect to the federal income tax consequences of qualification.
Changes to the Hawaii tax code could result in increased state-level taxation of REITs doing business in Hawaii or mandated state-level withholding of taxes on REIT dividends.
The Company owns three properties in Hawaii, representing 3.1% of its total revenue. The Hawaii State legislature has repeatedly considered, and could consider in the future,
legislation that would repeal the REIT dividends paid deduction for Hawaii State income tax purposes related to income generated in Hawaii for a number of years or
permanently. Such a repeal could result in double taxation of REIT income in Hawaii under the Hawaii tax code, reduce returns to shareholders and make the Company's stock
less attractive to investors. The Hawaii State legislature also has considered, and could consider in the future, mandating withholding of Hawaii State income tax on dividends
paid to out-of-state shareholders. Such shareholders may not be able to receive a credit of these taxes from their home state, thereby resulting in double taxation of such
dividends. This could reduce returns to shareholders and make the Company's stock less attractive to investors.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
In addition to the properties described in Item 1. “Business,” in Note 2 to the Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form
10-K, the Company leases office space from unrelated third parties from time to time. The Company owns its corporate headquarters located at 3310 West End Avenue in
Nashville, Tennessee.
Item 3. Legal Proceedings
The Company is not aware of any pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company's consolidated
financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Shares of the Company’s common stock are traded on the New York Stock Exchange under the symbol “HR.” At December 31, 2020, there were 938 stockholders of record.
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Future dividends will be declared and paid at the discretion of the Board of Directors. The Company’s ability to pay dividends is dependent upon its ability to generate funds
from operations and cash flows, and to make accretive new investments.
Equity Compensation Plan Information
The following table provides information as of December 31, 2020 about the Company’s common stock that may be issued as restricted stock and upon the exercise of options,
warrants and rights under all of the Company’s existing compensation plans, including the 2015 Stock Incentive Plan and the 2000 Employee Stock Purchase Plan.
PLAN CATEGORY
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
Total
NUMBER OF SECURITIES
TO BE ISSUED
upon exercise of outstanding options,
warrants, and rights
1
WEIGHTED AVERAGE EXERCISE
PRICE
of outstanding options, warrants, and
rights
1
NUMBER OF SECURITIES REMAINING AVAILABLE
for future issuance under equity
compensation plans (excluding
securities reflected in the first column)
341,647
—
341,647
—
—
—
1,313,922
—
1,313,922
1
The outstanding options relate only to the 2000 Employee Stock Purchase Plan. The Company is unable to ascertain with specificity the number of securities to be issued upon exercise of outstanding rights under the 2000 Employee
Stock Purchase Plan or the weighted average exercise price of outstanding rights under that plan. The 2000 Employee Stock Purchase Plan provides that shares of common stock may be purchased at a per share price equal to 85% of
the fair market value of the common stock at the beginning of the offering period or a purchase date applicable to such offering period, whichever is lower.
Issuer Purchases of Equity Securities
During the year ended December 31, 2020, the Company withheld and canceled shares of Company common stock to satisfy employee tax withholding obligations payable upon
the vesting of non-vested shares, as follows:
PERIOD
January 1 - January 31
February 1 - February 29
March 1 - March 31
April 1 - April 30
May 1 - May 31
June 1 - June 30
July 1 - July 31
August 1 - August 31
September 1 - September 30
October 1 - October 31
November 1 - November 30
December 1 - December 31
Total
TOTAL NUMBER OF SHARES
PURCHASED
AVERAGE PRICE PAID
per share
TOTAL NUMBER OF SHARES purchased as part of
publicly announced plans or programs
MAXIMUM NUMBER OF SHARES
that may yet be purchased
under the plans or programs
18,753 $
4,810
—
—
—
—
—
—
—
—
—
30,660
54,223
33.20
36.46
—
—
—
—
—
—
—
—
—
29.58
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Authorization to Repurchase Common Stock
On May 5, 2020, the Company’s Board of Directors authorized the repurchase of up to $50 million of outstanding shares of the Company’s common stock either in the open
market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated under
this authorization to repurchase any specific number of shares. This authorization supersedes all previous stock repurchase authorizations. As of the date of this report, the
Company has not repurchased any shares of its common stock under this authorization.
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Item 7. Management's Discussions and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials Healthcare Realty 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
senior 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” 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
that could materially affect the Company’s current plans and expectations and future financial condition and results.
Such risks and uncertainties as more fully discussed in Item 1A “Risk Factors” of this report and in other reports filed by the Company with the SEC from time to time include,
among other things, the following:
Risk relating to our business and operations
•
The Company's expected results may not be achieved;
•
•
The Company’s revenues depend on the ability of its tenants under its leases to generate sufficient income from their operations to make rental payments to the Company;
The ongoing COVID-19 pandemic and other pandemics that may occur in the future and any measures intended to prevent their spread or mitigate their severity could have a
material adverse effect on the Company's business, results of operations, cash flows and financial condition;
• Owning real estate and indirect interests in real estate is subject to inherent risks;
The Company may incur impairment charges on its real estate properties or other assets;
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting are significantly lower than the previous rates or if the Company is required to
undertake significant expenditures or make significant leasing concessions to attract new tenants, then the Company’s business, consolidated financial condition and results
of operations would be adversely affected;
Certain of the Company’s properties are special purpose healthcare facilities and may not be easily adaptable to other uses;
The Company has, and in the future may have more, exposure to fixed rent escalators, which could lag behind inflation and the growth in operating expenses such as real
estate taxes, utilities, insurance, and maintenance expense;
The Company’s real estate investments are illiquid and the Company may not be able to sell properties strategically targeted for disposition;
The Company is subject to risks associated with the development and redevelopment of properties;
The Company may make material acquisitions and undertake developments and redevelopments that may involve the expenditure of significant funds and may not perform
in accordance with management’s expectations;
The Company is exposed to risks associated with geographic concentration;
•
• Many of the Company’s leases are dependent on the viability of associated health systems. Revenue concentrations relating to these leases expose the Company to risks
related to the financial condition of the associated health systems;
• Many of the Company’s properties are held under ground leases. These ground leases contain provisions that may limit the Company’s ability to lease, sell, or finance these
properties;
The Company may experience uninsured or underinsured losses;
Damage from catastrophic weather and other natural events, whether caused by climate change or otherwise, could result in losses to the Company;
The Company faces risks associated with security breaches through cyber attacks, cyber intrusions, or otherwise, as well as other significant disruptions of its information
technology networks and related systems; and
Government tenants may not receive annual budget appropriations, which could adversely affect their ability to pay the Company.
•
•
•
•
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•
•
•
•
•
•
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Risks relating to our capital structure and financings
•
The Company has incurred significant debt obligations and may incur additional debt and increase leverage in the future;
• Covenants in the Company’s debt instruments limit its operational flexibility, and a breach of these covenants could materially affect the Company’s consolidated financial
condition and results of operations;
•
•
•
•
•
•
•
•
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the Company’s operations and consolidated financial position would be negatively
impacted;
The unavailability of equity and debt capital, volatility in the credit markets, increases in interest rates, or changes in the Company’s debt ratings could have an adverse
effect on the Company’s ability to meet its debt payments, make dividend payments to stockholders or engage in acquisition and development activity;
The Company is exposed to increases in interest rates, changes to the method that LIBOR rates are determined, and the potential phasing out of LIBOR. Such changes could
adversely impact the Company's ability to refinance existing debt, sell assets or engage in acquisition and development activity;
The Company's swap agreements may not effectively reduce its exposure to changes in interest rates;
The Company has entered into joint venture agreements that limit its flexibility with respect to jointly owned properties and expects to enter into additional such agreements
in the future;
Settlement provisions contained in a forward equity agreement could result in substantial dilution to the Company's earnings per share and return on equity or result in
substantial cash payment obligations;
The U.S. federal income tax treatment of the cash that we might receive from cash settlement of a forward equity agreement is unclear and could jeopardize the Company's
ability to meet the REIT qualification requirements; and
In case of our bankruptcy or insolvency, any forward equity agreements will automatically terminate, and we would not receive the expected proceeds from any forward sale
of shares of the Company’s common stock.
Risks relating to government regulations
•
The Company's property taxes could increase due to reassessment or property tax rate changes;
•
•
•
•
•
•
•
•
•
•
If a healthcare tenant loses its licensure or certification, becomes unable to provide healthcare services, cannot meet its financial obligations to the Company or otherwise
vacates a facility, the Company would have to obtain another tenant for the affected facility;
Trends in the healthcare service industry may negatively affect the demand for the Company’s properties, lease revenues and the values of its investments;
The costs of complying with governmental laws and regulations may adversely affect the Company's results of operations;
If the Company fails to remain qualified as a REIT, the Company will be subject to significant adverse consequences, including adversely affecting the value of its common
stock;
The Company’s Articles of Incorporation, as well as provisions of Maryland general corporation law, contain limits and restrictions on transferability of the Company’s
common stock which may have adverse effects on the value of the Company’s common stock;
Complying with the REIT requirements may cause the Company to forego otherwise attractive opportunities;
The prohibited transactions tax may limit the Company's ability to sell properties;
Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code;
New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for the Company to
qualify as a REIT; and
Changes to the Hawaii tax code could result in increased state-level taxation of REITs doing business in Hawaii or mandated state-level withholding of taxes on REIT
dividends.
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.
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Overview
The Company owns and operates properties that facilitate the delivery of healthcare services in primarily outpatient settings. To execute its strategy, the Company engages in a
broad spectrum of integrated services including leasing, management, acquisition, financing, development and redevelopment of such properties. The Company seeks to generate
stable, growing income and lower the long-term risk profile of its portfolio of properties by focusing on facilities located on or near the campuses of acute care hospitals
associated with leading health systems. The Company seeks to reduce financial and operational risk by owning properties in high-growth markets with a broad tenant mix that
includes over 30 physician specialties, as well as surgery, imaging, cancer, and diagnostic centers.
This section is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes. This section is
organized in the following sections:
•
•
Liquidity and Capital Resources
Trends and Matters Impacting Operating Results
• Results of Operations
• Non-GAAP Financial Measures and Key Performance Indicators
• Application of Critical Accounting Policies to Accounting Estimates
COVID-19 Rent Deferral
In response to COVID-19, the Company provided some of its tenants with deferred rent arrangements in the second and third quarters of 2020. Through February 10, 2021, the
Company collected more than 99.5% of 2020 aggregate tenant billings. Also, through February 10, 2021, the Company has collected 99% of total scheduled deferral payments,
leaving approximately $0.1 million to be collected.
Liquidity and Capital Resources
The Company monitors its liquidity and capital resources and considers several indicators in its assessment of capital markets for financing acquisitions and other operating
activities. The Company considers, among other factors, its leverage ratios and lending covenants, dividend payout percentages, interest rates, underlying treasury rate, debt
market spreads and cost of equity capital to compare its operations to its peers and to help identify areas in which the Company may need to focus its attention.
Sources and Uses of Cash
The Company's revenues are derived from its real estate property portfolio based on contractual arrangements with its tenants. These sources of revenue represent the Company's
primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs, capital expenditures and other
expenses incurred in connection with managing its existing portfolio and investing in additional properties. To the extent additional investments are not funded by these sources,
the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, property dispositions or through proceeds from
the Unsecured Credit Facility.
The Company expects to continue to meet its liquidity needs, including capital for additional investments, tenant improvement allowances, operating and finance lease payments,
paying dividends, and funding debt service, through cash flows from operations and the cash flow sources addressed above. See Note 3 to the Consolidated Financial Statements
for additional discussion of operating and financing lease payment obligations. See "Trends and Matters Impacting Operating Results" for additional information regarding the
Company's sources and uses of cash.
The Company also had unencumbered real estate assets with a gross book value of approximately $4.3 billion at December 31, 2020, 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.
The Company has exposure to variable interest rates and its common stock price is impacted by the volatility in the stock markets. However, the Company’s leases, which
provide its main source of income and cash flow, have terms of
26
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approximately one to 20 years and have lease rates that generally increase on an annual basis at fixed rates or based on consumer price indices.
Operating Activities
Cash flows provided by operating activities for the two years ended December 31, 2020 and 2019 were $470.1 million and $213.1 million, respectively. Several items impact
cash flows from operating activities including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices
and other expenses and receipt of tenant rent.
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 consolidated results of operations and cash flows could be adversely affected.
See "Trends and Matters Impacting Operating Results" for additional information regarding the Company's operating activities.
Investing Activities
A summary of the significant transactions impacting investing activities for the year ended December 31, 2020 is listed below. See Note 4 to the Consolidated Financial
Statements for more detail on these activities.
Outflows
The following table details the acquisitions for the year ended December 31, 2020:
Dollars in millions
ASSOCIATED HEALTH SYSTEM/TENANCY
DATE ACQUIRED PURCHASE PRICE
SQUARE FOOTAGE
3
2
Los Angeles, CA
Atlanta, GA
Raleigh, NC
Colorado Springs, CO
Denver, CO
San Diego, CA
Los Angeles, CA
Seattle, WA
Atlanta, GA
Houston, TX
Los Angeles, CA
Colorado Springs, CO
Greensboro, NC
Memphis, TN
Memphis, TN
Nashville, TN
Greensboro, NC
San Diego, CA
Atlanta, GA
Greensboro, NC
2
4
Total acquisitions
Land acquisition
Land acquisition
Land acquisition
6
5
7
MemorialCare Health
Wellstar Health System
WakeMed Health
CommonSpirit Health
UCHealth
Palomar Health
Cedars-Sinai-Huntington
MultiCare Health System
Wellstar Health System
Memorial Hermann
Providence St. Joseph Health
CommonSpirit Health
Cone Health-Sentara
UT Health/Methodist/BMG
Baptist Memorial (BMG)
Ascension Health
Cone Health-Sentara
None
NGHS/Northside
Cone Health-Sentara
1/3/20 $
2/13/20
2/25/20
3/9/20
3/13/20
7/1/20
7/17/20
7/23/20
7/31/20
9/24/20
9/28/20
10/7/2020
11/9/2020
11/9/2020
11/18/2020
12/1/2020
12/17/2020
12/22/2020
12/29/2020
12/30/2020
1/14/20
9/4/20
10/22/20
$
42.0
12.0
6.3
8.2
33.5
16.7
35.0
11.0
20.5
11.0
14.0
8.9
45.1
26.3
7.0
14.0
10.5
37.4
50.0
11.6
421.0
1.6
1.0
2.5
426.1
86,986
64,624
15,964
34,210
136,994
46,083
49,785
21,309
48,145
40,235
24,252
36,720
149,400
135,270
40,192
38,736
27,599
45,157
125,404
35,373
1,202,438
—
—
—
1,202,438
1
2
3
4
The cap rate represents the forecasted annual net operating income ("NOI") derived from in-place leases divided by purchase price.
Includes three properties.
Represents a single-tenant property.
Includes two properties.
CAP
RATE
1
5.3 %
5.6 %
6.7 %
6.5 %
6.1 %
5.9 %
5.4 %
5.6 %
6.2 %
5.6 %
5.6 %
6.5 %
5.5 %
5.7 %
6.5 %
5.2 %
5.4 %
5.2 %
5.2 %
6.0 %
5.6 %
MILES TO
CAMPUS
0.14
0.10
0.04
1.60
0.24
0.04
0.11
0.06
0.13
0.03
0.03
1.60
0.02
0.90
0.00
0.10
0.25
4.40
0.22
0.00
27
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5
6
7
The Company acquired land parcels under four existing buildings (previously ground leased with the hospital system).
The Company acquired a land parcel under an existing building (previously ground leased). The building and land were disposed on September 30, 2020.
The Company acquired a land parcel adjacent to an existing building, and the land parcel will be held for development.
During 2020, the Company entered into the TIAA Joint Venture to invest in a broad range of medical office buildings. The Company accounted for its 50% ownership in the
TIAA Joint Venture as an equity method investment. As of December 31, 2020, the Company's investments totaled $65.7 million, inclusive of capital acquisition funding. The
Company serves as the managing member of this joint venture. The following table provides details of the joint venture transactions.
Dollars in millions
Minneapolis, MN
Minneapolis, MN
Los Angeles, CA
Los Angeles, CA
Total acquisitions
ASSOCIATED HEALTH SYSTEM/TENANCY
DATE ACQUIRED
PURCHASE PRICE
SQUARE FOOTAGE
Allina Health
Summit Orthopedics
MemorialCare Health
MemorialCare Health
11/12/20 $
12/7/2020
12/8/2020
12/29/2020
$
16.6
15.5
80.6
13.2
125.9
92,139
48,594
135,904
48,759
325,396
CAP
RATE
1
5.1 %
6.8 %
4.9 %
6.0 %
5.3 %
MILES TO
CAMPUS
0.00
2.50
0.00
1.60
1
The cap rate represents the forecasted annual net operating income ("NOI") derived from in-place leases divided by purchase price.
In 2020, the Company funded the following tenant improvements and capital expenditures:
•
•
•
•
$26.5 million toward development and redevelopment of properties;
$20.5 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
$26.2 million toward second generation tenant improvements; and
$21.8 million toward capital expenditures. See the "Trends and Matters Impacting Operating Results - Capital Expenditures" for more detail.
Subsequent Acquisitions
On January 7, 2021, the Company acquired a 22,461 square foot medical office building in San Diego, California for a purchase price of $17.2 million.
On February 1, 2021, the Company acquired two medical office buildings totaling 121,709 square feet in Dallas, Texas for a total purchase price of $22.5 million.
Inflows
The following table details the dispositions for the year ended December 31, 2020:
Dollars in millions
Springfield, MO
Oklahoma City, OK
Miami, FL
Total dispositions
DATE
DISPOSED
7/30/20 $
7/30/20
9/30/20
$
SALES PRICE SQUARE FOOTAGE
DISPOSITION CAP RATE
1
PROPERTY TYPE
2
138.0
106.5
5.0
249.5
186,000
200,000
26,000
412,000
7.5 %
7.5 %
3.9 %
7.4 %
SF
MOB
MOB
1
2
Cap rate represents the in-place cash NOI divided by sales price.
MOB = medical office building; SF = surgical facility
Financing Activities
Common Stock Issuances
On February 14, 2020, the Company entered into sales agreements with six investment banks to allow sales under its at-the-market equity offering program of up to an aggregate
of $500.0 million of common stock. The following table details the Company's at-the-market activity, including forward transactions that occurred during the year and
subsequent to year-end.
28
Table of Contents
WEIGHTED
AVERAGE SALE
PRICE
per share
SHARES PRICED
SHARES SETTLED
SHARES REMAINING
TO BE SETTLED
NET PROCEEDS
in millions
2020
January 2021
$
$
31.50
30.53
6,430,572
215,532
4,607,313
239,896
1,823,259 $
1,798,895 $
141.5
7.2
Of the 1.8 million shares remaining to be settled, all of which are expected to be settled by January 2022, the Company expects net proceeds ranging from $53.9 million to $55.8
million depending on the timing of settlement. After accounting for these settlements, the Company has approximately $291.0 million remaining available to be sold under the
current sales agreements at the date of this filing.
Debt Activity
Below is a summary of the significant debt financing activity for the year ended December 31, 2020. See Note 9 to the Consolidated Financial Statements for additional
information on financing activities.
•
The following table details the mortgage note payable activity for the year ended December 31, 2020:
(in millions)
Debt assumptions:
Los Angeles, CA
San Diego, CA
Repayments in full:
Oklahoma City, OK
Des Moines, IA
Seattle, WA
Minneapolis, MN
(1)
Atlanta, GA
Seattle, WA
TRANSACTION DATE
BORROWING
(REPAYMENT)
ENCUMBERED SQUARE
FEET
CONTRACTUAL INTEREST
RATE
1/3/2020 $
12/22/2020
$
2/3/2020 $
5/4/2020
6/2/2020
6/25/2020
10/1/2020
11/10/2020
$
19.3
16.5
35.8
(5.9)
(0.3)
(12.6)
(10.3)
(4.2)
(10.0)
(43.3)
86,986
45,157
132,143
68,860
83,318
67,510
60,476
40,171
87,462
407,797
3.90 %
4.25 %
4.06 %
6.10 %
5.74 %
6.44 %
6.75 %
5.47 %
5.91 %
6.25 %
1.
Consisting of three series municipal bonds encumbering one property.
• On March 18, 2020, the Company issued $300.0 million of unsecured senior notes due 2030 (the "Senior Notes due 2030") in a registered public offering. The Senior
Notes due 2030 bear interest at 2.40%, payable semi-annually on March 15 and September 15, beginning September 15, 2020, and are due on March 15, 2030, unless
redeemed earlier by the Company. The notes were issued at a discount of approximately $1.0 million and the Company incurred approximately $2.8 million in debt
issuance costs. Concurrent with this transaction, the Company settled two treasury rate locks for $4.3 million. Inclusive of the discount, debt issuance costs and
settlement of the treasury rate locks, the effective interest rate was 2.71%. The Senior Notes due 2030 have various financial covenants that are required to be met on a
quarterly and annual basis.
• On May 29, 2020, the Company borrowed $150.0 million from its Unsecured Term Loan due 2026.
• On October 2, 2020, the Company issued $300.0 million of unsecured senior notes due 2031 (the "Senior Notes due 2031") in a registered public offering. The Senior
Notes due 2031 bear interest at 2.05%, payable semi-annually on March 15 and September 15, beginning March 15, 2021, and are due on March 15, 2031, unless
redeemed earlier by the Company. The notes were issued at a discount of approximately $2.4 million and the Company incurred approximately $2.8 million in debt
issuance costs. Inclusive of the discount and debt issuance costs, the effective interest rate was 2.24%. The Senior Notes due 2031 have various financial covenants that
are required to be met on a quarterly and annual basis.
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Table of Contents
• On October 19, 2020, the Company redeemed its unsecured senior notes due 2023 (the "Senior Notes due 2023") bearing interest at 3.75%. The aggregate redemption
price of $270.5 million consisted of outstanding principal of $250.0 million, accrued interest of $0.1 million, and a "make-whole" amount of approximately $20.4
million for the early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.1 million was written off upon redemption. In
October 2020, the Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to this redemption.
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):
EFFECTIVE DATE
December 18, 2017
February 1, 2018
May 1, 2019
June 3, 2019
AMOUNT
25,000
50,000
50,000
50,000
175,000
$
$
WEIGHTED
AVERAGE RATE
EXPIRATION DATE
2.18 % December 16, 2022
2.46 % December 16, 2022
2.33 % May 1, 2026
2.13 % May 1, 2026
2.29 %
The following table details the Company's debt balances as of December 31, 2020:
PRINCIPAL
BALANCE
CARRYING BALANCE
1
WEIGHTED YEARS TO
MATURITY
CONTRACTUAL RATE
EFFECTIVE RATE
Senior Notes due 2025
Senior Notes due 2028
Senior Notes due 2030
Senior Notes due 2031
2
3
Total Senior Notes Outstanding
$700 million unsecured credit facility due 2023
$200 million unsecured term loan due 2024
$150 million unsecured term loan due 2026
Mortgage notes payable
6
5
4
$
250,000 $
300,000
300,000
300,000
1,150,000
—
200,000
150,000
117,221
Total Outstanding Notes and Bonds Payable
$
1,617,221 $
248,776
296,123
296,468
294,924
1,136,291
—
199,236
149,479
117,763
1,602,769
4.3
7.0
9.3
10.3
7.8
2.4
3.4
5.4
3.7
6.8
3.88 %
3.63 %
2.40 %
2.05 %
2.95 %
LIBOR+0.90%
LIBOR+1.00%
LIBOR+1.60%
4.20 %
2.94 %
4.08 %
3.84 %
2.71 %
2.24 %
3.18 %
1.04 %
1.99 %
3.14 %
4.07 %
3.09 %
1
2
3
4
5
6
Balances are reflected net of discounts and debt issuance costs and include premiums.
The effective interest rate includes the impact of the $1.7 million settlement of four forward-starting interest rate swaps that is included in accumulated other comprehensive income on the Company's Consolidated Balance Sheets.
The effective interest rate includes the impact of the $4.3 million settlement of two forward-stating treasury locks that is included in accumulated other comprehensive income on the Company's Consolidated Balance Sheets.
As of December 31, 2020, the Company had no loans outstanding under the Unsecured Credit Facility with a remaining borrowing capacity of a $700.0 million.
The effective interest rate includes the impact of interest rate swaps totaling $75.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2024 at a weighted average interest rate of
2.37% (plus the applicable margin rate, currently 1.00%).
The effective interest rate includes the impact of interest rate swaps totaling $100.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2026 at a weighted average interest rate of
2.23% (plus the applicable margin rate, currently 1.60%).
Debt Covenant Information
The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things,
these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or
encumbrances. As of December 31, 2020, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.
As of December 31, 2020, 99.8% of the Company’s principal balances were due after 2021. Also, as of December 31, 2020, the Company's incurrence of total debt as defined in
the senior notes due 2025 and 2028 [debt divided by (total assets less intangibles and accounts receivable)] was approximately 35.1% (cannot be greater than 60%) and debt
service coverage [interest expense divided by (net income plus interest expense, taxes, depreciation and amortization,
30
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gains and impairments)] was approximately 5.0 times (cannot be less than 1.5x). The covenants for the Senior Notes due 2030 and 2031 are less restrictive.
The Company plans to manage its capital structure to maintain compliance with its debt covenants consistent with its current profile. Downgrades in ratings by the rating
agencies could have a material adverse impact on the Company’s cost and availability of capital, which could in turn have a material adverse impact on consolidated results of
operations, liquidity and/or financial condition.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry in order to gauge their potential impact on the operations of the Company. Discussed
below are some of the factors and trends that management believes may impact future operations of the Company.
Acquisitions and Dispositions
During 2020, the Company acquired 25 medical office buildings for purchase prices totaling $421.0 million, resulting in cash consideration paid of $390.1 million. The weighted
average capitalization rate for these investments was 5.6%. The Company also acquired three land parcels for purchase prices totaling $5.1 million, resulting in cash
consideration paid of $5.4 million.
In addition to the acquisitions described in the prior paragraph, during 2020, the Company entered into a joint venture agreement with TIAA to invest in a broad range of medical
office buildings. The TIAA Joint Venture acquired four medical office buildings for purchase prices totaling $125.9 million, resulting in cash consideration paid of $123.3
million. The weighted average capitalization rate for these investments was 5.3%.
The Company disposed of three properties in 2020 for sales prices totaling $249.5 million, yielding net cash proceeds of $249.3 million net of $0.2 million of closing costs and
related adjustments. The weighted average capitalization rate for these investments was 7.4%.
A component of the Company's strategy is to continually monitor its portfolio for opportunities to improve the overall quality. Properties that no longer meet the Company's
investment criteria may be sold for higher capitalization rates than properties acquired to replace them. Properties that meet the Company's investment criteria may be purchased
for lower capitalization rates because of their lower-risk profile and higher internal growth potential. In addition, the volume and timing of such acquisitions and dispositions
could have a material impact on operating results.
See the Company's discussion of the 2020 acquisitions and dispositions activity in Note 4 to the Consolidated Financial Statements.
Development and Redevelopment Activity
In 2020, the Company funded $26.5 million toward development and redevelopment of properties, including the following:
•
•
•
•
The Company completed the core and shell of a 151,031 square foot medical office building in Seattle, Washington. The Company funded $10.5 million during the year
ended December 31, 2020. The first tenant took occupancy during the first quarter of 2020.
The Company continued the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee. The Company funded approximately $12.6 million
during the year ended December 31, 2020.
The Company funded an additional $1.1 million on a previously completed redevelopment in Nashville, Tennessee, $1.1 million on a previously completed development
project in Denver, Colorado, and $0.7 million on a previously completed redevelopment in Charlotte, North Carolina.
The Company began the redevelopment of a 217,000 square foot medical office building in Dallas, Texas. The Company funded approximately $0.4 million during the year
ended December 31, 2020. The building continues to operate with in-place leases during construction. The redevelopment is expected to take approximately a year to
complete.
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Table of Contents
The table below details the Company’s development activity as of December 31, 2020. The information included in the table below represents management’s estimates and
expectations at December 31, 2020, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual
results.
Dollars in thousands
Recently Completed
Seattle, WA
Redevelopment Activity
Memphis, TN
Dallas, TX
Total
1
NUMBER OF
PROPERTIES
INITIAL OCCUPANCY
CONSTRUCTION IN
PROGRESS BALANCE
TOTAL FUNDED
during the year
December 31, 2020
TOTAL
AMOUNT
FUNDED
ESTIMATED
REMAINING
FUNDINGS
unaudited
ESTIMATED TOTAL
INVESTMENT
unaudited
APPROXIMATE SQUARE
FEET unaudited
1
1
1
Q1 2020
Q1 2021
Q4 2020
$
$
— $
10,520 $
59,552 $
4,568 $
64,120
151,031
—
—
— $
12,618
423
23,561 $
21,650
423
81,625 $
8,550
16,477
29,595 $
30,200
16,900
111,220
110,883
217,000
478,914
1
The project includes the acquisition of a 110,883 square foot medical office building for $8.7 million and redevelopment costs related to the property. Initial occupancy represents the quarter in which the redevelopment is expected to be
completed. The building will continue to operate with in-place leases during construction.
The Company is in the planning stages with several health systems and developers regarding new development and redevelopment opportunities and expects one or more to
begin in 2021. Total costs to develop or redevelop a typical medical office building can vary depending on the scope of the project, market rental terms, parking configuration,
building amenities, asset type and geographic location.
The Company’s disclosures regarding projections or estimates of completion dates and leasing may not be indicative of actual results. See Note 14 to the Consolidated Financial
Statements for more information on the Company’s development and redevelopment activities.
Security Deposits and Letters of Credit
As of December 31, 2020, the Company held approximately $11.4 million in letters of credit and security deposits for the benefit of the Company in the event the obligated
tenant fails to perform under the terms of its respective lease. Generally, the Company may, at its discretion and upon notification to the tenant, draw upon these instruments if
there are any defaults under the leases.
Multi-Tenant Leases
The Company expects that approximately 20% of the leases in its multi-tenant portfolio will expire each year. In-place multi-tenant leases have a weighted average lease term of
7.0 years and a weighted average remaining lease term of 3.6 years. Demand for well-located real estate with complementary practice types and services remains consistent, and
the Company's 2020 quarterly tenant retention statistics ranged from 81% to 85%. In 2021, the Company has 738 leases totaling 2.5 million square feet in its multi-tenant
portfolio that are scheduled to expire. Of those leases, 89% are in on-campus buildings, which, in our experience, tend to have high tenant retention rates between 75% to 90%.
Included in the 2021 lease expirations is a 111,000 square foot fitness center leased by Baylor Scott & White Health. The fitness center is located in a 217,000 square foot on-
campus medical office building. A new operator, Cowboys Fit, executed an approximately 14-year lease for a reconfigured 52,000 square foot fitness center, and the existing
tenant will remain in place until the new lease commences. The Company expects to convert the remaining space for clinical use.
The Company continues to emphasize its multi-tenant contractual rent increases for in-place leases. As of December 31, 2020 and 2019, the Company's contractual rental rate
growth averaged 2.88% and 2.89%, respectively, for in-place leases. In addition, the Company continued to see strong quarterly weighted average rental rate growth for
renewing leases ("cash leasing spread") and expects the majority of its renewals to increase between 3.0% and 4.0%. In 2020, cash leasing spreads averaged 4.1%.
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In a further effort to maximize revenue growth and reduce its exposure to key expenses such as taxes and utilities, the Company carefully manages its balance of lease types.
Gross leases, wherein the Company has full exposure to all operating expenses, comprise 11% of its lease portfolio. Modified gross or base year leases, in which the Company
and tenant both pay a share of operating expenses, comprise 32% of the Company's leased portfolio. Net leases, in which tenants pay all allowable operating expenses, total 57%
of the leased portfolio.
Capital Expenditures
Capital expenditures are long-term investments made to maintain and improve the physical and aesthetic attributes of the Company's owned properties. Examples of such
improvements include, but are not limited to, material changes to, or the full replacement of, major building systems (exterior facade, building structure, roofs, elevators,
mechanical systems, electrical systems, energy management systems, upgrades to existing systems for improved efficiency) and common area improvements (furniture,
signage and artwork, bathroom fixtures and finishes, exterior landscaping, parking lots or garages). These additions are capitalized into the gross investment of a property and
then depreciated over their estimated useful lives, typically ranging from 7 to 20 years. Capital expenditures specifically do not include recurring maintenance expenses, whether
direct or indirect, related to the upkeep and maintenance of major building systems or common area improvements. Capital expenditures also do not include improvements
related to a specific tenant suite, unless the improvement is part of a major building system or common area improvement.
The Company invested $21.8 million, or $1.33 per square foot, in capital expenditures in 2020 and $17.2 million, or $1.12 per square foot, in capital expenditures in 2019. As a
percentage of cash net operating income, 2020 and 2019 capital expenditures were 7.3% and 5.9%, respectively. For a reconciliation of cash net operating income, see "Same
Store Cash NOI" in the "Non-GAAP Financial Measures and Key Performance Indicators" section as part of Management's Discussion and Analysis of Financial Condition and
Results of Operations included in Part II, Item 7 of this report.
Tenant Improvements
The Company may invest in tenant improvements for the purpose of refurbishing or renovating tenant space. The Company categorizes these expenditures into first and second
generation tenant improvements. As of December 31, 2020, the Company had commitments of approximately $53.8 million that are expected to be spent on tenant
improvements throughout the portfolio, excluding development properties currently under construction.
First Generation Tenant Improvements & Planned Capital Expenditures for Acquisitions
First generation tenant improvements and planned capital expenditures for acquisition spending totaled $20.5 million and $19.8 million for the years ended December 31, 2020
and 2019, respectively. First generation tenant improvements include build out costs related to suite space in shell condition. Planned capital expenditures for acquisitions
include expected near-term fundings that were contemplated as part of the acquisition.
Second Generation Tenant Improvements
Second generation tenant improvements spending totaled $26.2 million in 2020, or 8.8% of total cash net operating income. In 2019, this spending totaled $28.7 million, or 9.9%
of total cash net operating income.
If the cost of a tenant improvement project exceeds a tenant improvement allowance, the Company generally offers the tenant the option to finance the excess over the lease term
with interest or to reimburse the overage to the Company in a lump sum. In either case, such overages are amortized by the Company as rental income over the term of the lease.
Interest earned on tenant overages is included in other operating income in the Company's Consolidated Statements of Income and totaled approximately $0.3 million in 2020,
$0.2 million in 2019, and $0.3 million in 2018. The first and second generation tenant overage amount amortized to rent totaled approximately $6.3 million in 2020, $5.7 million
in 2019, and $4.8 million in 2018.
Second generation, multi-tenant tenant improvement commitments in 2020 for renewals averaged $1.58 per square foot per lease year, ranging quarterly from $1.48 to $1.78. In
2019, these commitments averaged $2.26 per square foot per lease year, ranging quarterly from $1.75 to $3.15. In 2018, these commitments averaged $1.94 per square foot per
lease year, ranging quarterly from $1.50 to $2.48.
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Table of Contents
Second generation, multi-tenant tenant improvement commitments in 2020 for new leases averaged $5.52 per square foot per lease year, ranging quarterly from $4.07 to $6.40.
In 2019, these commitments averaged $5.02 per square foot per lease year, ranging quarterly from $4.79 to $5.18. In 2018, these commitments averaged $4.82 per square foot
per lease year, ranging quarterly from $4.04 to $5.42.
Leasing Commissions
In certain markets, the Company may pay leasing commissions to real estate brokers who represent either the Company or prospective tenants, with commissions generally
equating to 4% to 6% of the gross lease value for new leases and 2% to 4% of the gross lease value for renewal leases. In addition, the Company may pay internal employees
commissions when leases are executed and meet certain leasing thresholds. External leasing commissions are amortized to property operating expense, and internal leasing costs
are amortized to general and administrative expense in the Company's Consolidated Statements of Income. In 2020, the Company paid leasing commissions of approximately
$10.4 million, or $0.64 per square foot. In 2019, the Company paid leasing commissions of approximately $11.3 million, or $0.74 per square foot. As a percentage of total cash
net operating income, leasing commissions paid for 2020 and 2019 were 2.9% and 3.9%, respectively. The amount of leasing commissions amortized over the term of the
applicable leases totaled $7.4 million, $6.1 million and $5.2 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Rent Abatements
Rent abatements, which generally take the form of deferred rent, are sometimes used to help induce a potential tenant to lease space in the Company's properties. Such
abatements, when made, are amortized by the Company on a straight-line basis against rental income over the lease term. Rent abatements for 2020 totaled approximately $2.8
million, or $0.18 per square foot. Rent abatements for 2019 totaled approximately $2.1 million, or $0.13 per square foot. Rent abatements for 2018 totaled approximately $3.1
million, or $0.21 per square foot.
Single-Tenant Leases
As of December 31, 2020, the Company had a total of 13 single-tenant leases, with a weighted average lease term of 11.9 years and a weighted average remaining lease term of
6.1 years.
Included in the 2021 lease expirations is one single-tenant leased, on-campus medical office building with a lease expiration of December 31, 2020. The Company and the tenant
have agreed in principle on renewal terms, and the Company expects to complete the renewal agreement in the first quarter of 2021.
Operating Leases
As of December 31, 2020, the Company was obligated to make rental payments under operating lease agreements consisting primarily of ground leases related to 62 real estate
investments, excluding those ground leases the Company has prepaid. At December 31, 2020, the Company had 105 properties totaling 8.8 million square feet that were held
under ground leases with a remaining weighted average term of 70.3 years, including renewal options. These ground leases typically have initial terms of 50 to 75 years with one
or more renewal options extending the terms to 75 to 100 years, with expiration dates through 2119.
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Purchase Options
The Company had approximately $96.9 million in real estate properties as of December 31, 2020 that were subject to exercisable purchase options. The Company has
approximately $254.8 million in real estate properties that are subject to purchase options that will become exercisable after 2020. Additional information about the amount and
basis for determination of the purchase price is detailed in the table below (dollars in thousands):
YEAR EXERCISABLE
3, 4
Current
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031 and thereafter
Total
NUMBER OF PROPERTIES
GROSS REAL ESTATE INVESTMENT AS OF DECEMBER 31, 2020
MOB
INPATIENT
FAIR MARKET
VALUE METHOD
1
NON FAIR MARKET
VALUE METHOD
2
3
—
1
—
—
4
—
—
1
1
—
4
14
1 $
—
—
—
—
—
—
—
—
—
—
—
1 $
96,934 $
—
—
—
—
48,171
—
—
43,961
26,494
—
101,647
317,207 $
— $
—
14,984
—
—
19,459
—
—
—
—
—
—
34,443 $
TOTAL
96,934
—
14,984
—
—
67,630
—
—
43,961
26,494
—
101,647
351,650
1
2
3
4
The purchase option price includes a fair market value component that is determined by an appraisal process.
Includes properties with stated purchase prices or prices based on fixed capitalization rates.
These purchase options have been exercisable for an average of 12.4 years.
The Company has received notice from a hospital system ground lessor to begin the process to explore the valuation of one medical office building.
Debt Management
The Company maintains a conservative and flexible capital structure that allows it to fund new investments and operate its existing portfolio. The Company has approximately
$117.2 million of mortgage notes payable, most of which were assumed when the Company acquired properties. In 2021, the Company has approximately $21.1 million of
mortgage notes payable that will mature or are able to be repaid without penalty. The Company will repay mortgage notes with cash on hand or borrowings under the Unsecured
Credit Facility.
Impact of Inflation
The Company is subject to the risk of inflation as most of its revenues are derived from long-term leases. Most of the Company's leases provide for fixed increases in base rents
or increases based on the Consumer Price Index, and require the tenant to pay all or some portion of increases in operating expenses. The Company believes that these provisions
mitigate the impact of inflation. However, there can be no assurance that the Company's ability to increase rents or recover operating expenses will always keep pace with
inflation. The Company's leases have a weighted average lease term remaining of approximately 3.8 years. The following table shows the percentage of the Company's leases
that provide for fixed or CPI-based rent increases by type as of December 31, 2020:
Annual increase
CPI
Fixed
Non-annual increase
CPI
Fixed
No increase
Term > 1 year
% INCREASE
% OF BASE RENT
2.0 %
3.0 %
0.8 %
2.1 %
— %
2.5 %
91.3 %
0.5 %
4.5 %
1.2 %
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Table of Contents
New Accounting Pronouncements
See Note 1 to the Consolidated Financial Statements for information on new accounting standards including both standards that the Company adopted during the year and those
that have not yet been adopted. The Company continues to evaluate the impact of the new standards that have not yet been adopted.
Other Items Impacting Operations
General and administrative expenses will fluctuate quarter-to-quarter. In the first quarter of each year, general and administrative expense includes increases for certain expenses
such as payroll taxes, non-cash Employee Stock Purchase Plan expense and healthcare savings account fundings. The Company expects these customary expenses to increase by
approximately $0.8 million in the first quarter of 2021. Approximately $0.6 million is not expected to recur in subsequent quarters in 2021.
Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The Company’s consolidated results of operations for 2020 compared to 2019 were significantly impacted by acquisitions, dispositions, gain on sales and impairment charges
recorded on real estate properties.
Revenues
Rental income increased $30.0 million, or 6.5%, to approximately $492.3 million compared to $462.2 million in the prior year and is comprised of the following:
Dollars in thousands
Property operating
Single-tenant
Straight-line rent
Total rental income
2020
2019
CHANGE
$
$
$
453,699 $
34,828
3,735
492,262 $
415,142 $
44,083
3,000
462,225 $
38,557
(9,255)
735
30,037
%
9.3 %
(21.0)%
24.5 %
6.5 %
Property operating rental income increased $38.6 million, or 9.3%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2019 and 2020 contributed $31.9 million.
• A development completed in 2020 contributed $2.5 million.
•
Leasing activity, including contractual rent increases, contributed $6.9 million.
• Dispositions in 2019 and 2020 resulted in a decrease of $2.7 million.
Single-tenant lease income decreased $9.3 million, or 21.0%, from the prior year primarily as a result of the following activity:
• Dispositions in 2019 and 2020 resulted in a decrease of $10.0 million.
• An acquisition in 2020 contributed $0.3 million.
•
Leasing activity, including contractual rent increases, contributed $0.4 million.
Straight-line rent income increased $0.7 million, or 24.5%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2019 and 2020 resulted in an increase of $1.4 million.
• A development completed in 2020 contributed $0.1 million.
• Dispositions in 2019 and 2020 resulted in a decrease of $0.4 million.
• Reduced rent abatements along with net leasing activity and contractual rent increases resulted in a decrease of $0.4 million.
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Other operating income decreased $0.7 million or 8.7% from the prior year primarily due to a reduction in variable parking revenue.
Expenses
Property operating expenses increased $16.5 million, or 9.2%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2019 and 2020 resulted in an increase of $14.8 million.
• A development completed in 2020 resulted in an increase of $0.6 million.
•
Increases in portfolio operating expenses as follows:
◦
◦
◦
◦
◦
◦
◦
Property tax expense of $2.7 million;
Leasing commission amortization of $1.2 million;
Intangible amortization write-off due the acquisition of previously ground leased land totaling $0.7 million;
Insurance expense of $0.6 million;
Security expense of $0.2 million;
Compensation increase of $0.2 million; and
Janitorial expense of $0.2 million.
• Decreases in portfolio operating expenses as follows:
◦
Utilities expense of $1.0 million;
◦ Maintenance and repair expense of $1.0 million; and
◦
Legal fees and other administration costs of $0.7 million.
• Dispositions in 2019 and 2020 resulted in a decrease of $2.0 million.
General and administrative expenses decreased approximately $4.1 million, or 11.8%, from the prior year primarily as a result of the following activity:
•
The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the nine months ended September 30, 2019
because of the acceleration of his outstanding nonvested share-based awards and associated taxes.
• Decrease in incentive-based awards of approximately $0.7 million.
• Decrease in travel expense of $0.9 million.
• Compensation expense increased $1.0 million, including $0.5 million of non-cash expense.
• Other net decreases, including professional fees and other administrative costs, of $0.6 million.
Depreciation and amortization expense increased $12.6 million, or 7.1%, from the prior year primarily as a result of the following activity:
• Acquisitions in 2019 and 2020 and a development in 2020 resulted in increases of $20.1 million.
• Various building and tenant improvement expenditures caused increases of $9.9 million.
• Dispositions in 2019 and 2020 resulted in decreases of $5.6 million.
• Assets that became fully depreciated resulted in decreases of $11.8 million.
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Other Income (Expense)
Other income (expense), a net expense, decreased $29.4 million, or 80.2%, from the prior year mainly due to the following activity:
Gain on Sales of Real Estate Properties
Gain on sales of real estate properties totaling approximately $70.4 million and $25.1 million are associated with the sales of three and eleven real estate properties during 2020
and 2019, respectively.
Interest Expense
Interest expense increased $0.7 million for the year ended December 31, 2020 compared to the prior year. The components of interest expense are as follows:
Dollars in thousands
Contractual interest
Net discount/premium accretion
Debt issuance costs amortization
Amortization of interest rate swap settlement
Amortization of treasury hedge settlement
Interest cost capitalization
Interest on lease liabilities
Total interest expense
2020
52,656 $
483
2,704
168
336
(1,142)
969
56,174 $
$
$
2019
53,364 $
250
2,448
168
—
(1,411)
616
55,435 $
CHANGE
$
(708)
233
256
—
336
269
353
739
%
(1.3)%
93.2 %
10.5 %
— %
— %
(19.1)%
— %
1.3 %
Contractual interest decreased $0.7 million, or 1.3%, primarily as a result of the following activity:
•
•
•
•
•
The Unsecured Credit Facility accounted for a net decrease of $6.6 million.
The Unsecured Term Loan due 2024 accounted for a net decrease of $0.7 million.
The Unsecured Term Loan due 2026 accounted for an increase of $2.2 million.
The issuance of Senior Notes due 2030 and the Senior Notes due 2031 accounted for an increase of $7.2 million.
The redemption of Senior Notes due 2023 accounted for a decrease of $1.9 million.
• Mortgage notes repayments accounted for a decrease of $0.9 million.
Loss on extinguishment of debt
The Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to the redemption of the Senior Notes due 2023.
Impairment of Real Estate Assets
Impairment of real estate assets totaling approximately $5.6 million is associated with the sales of two real estate properties during 2019.
Equity income (loss) from unconsolidated joint ventures
During 2020, the TIAA Joint Venture acquired four medical office buildings and the Company recognized its pro-rata share of the loss.
Interest and other income (expense), net
The Company expensed approximately $0.8 million of debt issuance costs as a result of the Term Loan modification in 2019.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The Company's discussion regarding the comparison of the year ended December 31, 2019 compared to the year ended December 31, 2018 was previously disclosed beginning
on page 33 in the Company's 2019 Form 10-K filed on February 12, 2020.
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
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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 Consolidated Financial Statements and other financial data
included elsewhere in this Annual Report on Form 10-K.
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, deferred financing fees amortization, share-based compensation expense and provision for bad debts, net; and subtracting straight-line rent
income, net of expense, and maintenance capital expenditures, including second generation tenant improvements, capital expenditures and leasing commissions paid. 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.
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The table below reconciles net income attributable to common stockholders to FFO, Normalized FFO and FAD for the years ended December 31, 2020, 2019, and 2018.
YEAR ENDED DECEMBER 31,
Amounts in thousands, except per share data
Net income
Gain on sales of real estate assets
Impairments
Real estate depreciation and amortization
Proportionate share of unconsolidated joint ventures
FFO
Acquisition and pursuit costs
Lease intangible amortization
Accelerated stock awards
Forfeited earnest money received
Debt financing costs
Proportionate share of unconsolidated joint ventures
2
1
4
3
Normalized FFO
Non-real estate depreciation and amortization
Non-cash interest expense amortization
Provision for bad debt, net
Straight-line rent income, net
Stock-based compensation
Proportionate share of unconsolidated joint ventures
5
Normalized FFO adjusted for non-cash items
2nd Generation tenant improvements
Leasing commissions paid
Capital expenditures
Maintenance cap ex
FAD
FFO per common share - diluted
Normalized FFO per common share - diluted
Weighted average common shares outstanding - diluted
6
$
$
$
$
2020
72,195 $
(70,361)
—
194,574
564
196,972
2,561
690
—
—
21,920
16
222,159
3,154
3,691
207
(2,245)
9,922
27
236,915
(26,209)
(10,369)
(21,758)
(58,336)
178,579 $
1.46 $
1.65 $
134,835
2019
39,185 $
(25,101)
5,617
180,715
321
200,737
1,742
147
2,854
—
760
—
206,240
3,269
2,866
167
(1,463)
9,519
32
220,630
(28,690)
(11,329)
(17,158)
(57,177)
163,453 $
1.56 $
1.60 $
128,863
2018
69,771
(41,665)
—
166,534
320
194,960
738
—
70
(466)
—
—
195,302
3,284
2,608
60
(2,762)
10,621
34
209,147
(30,939)
(7,119)
(20,347)
(58,405)
150,742
1.57
1.57
124,104
1
2
3
4
5
6
Acquisition and pursuit costs include third party and travel costs related to the pursuit of acquisitions and developments.
The Company adopted the 2018 NAREIT FFO White Paper Restatement during the first quarter of 2019. This amended definition specifically includes the impact of acquisition related market lease intangible amortization in the
calculation of NAREIT FFO. The Company historically included this amortization in the real estate depreciation and amortization line item which is added back in the calculation of NAREIT FFO. Prior periods were not restated for the
adoption.
The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in a $2.9 million charge for the acceleration of his outstanding nonvested share-based awards and associated taxes.
2020 includes the loss on extinguishment of debt on the extinguishment of the Senior Notes due 2023 of $21.5 million and double interest incurred on the timing of issuance of the Senior Notes due 2031 and the redemption of the Senior
Notes due 2023 of $0.4 million.
Includes the amortization of deferred financing costs, discounts and premiums.
The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 828,506, 779,081 and 753,121 for the twelve months ended December 31, 2020, 2019, and 2018,
respectively.
Same Store Cash NOI
Cash NOI and same store cash NOI are key performance indicators. Management considers same store cash NOI a supplemental measure because it allows investors, analysts
and Company management to measure unlevered property-level operating results. Cash NOI excludes general and administrative expenses, interest expense, depreciation and
amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. Cash NOI also
excludes non-cash items such as straight-line rent, above and below market lease intangibles, leasing commission amortization, lease inducements, and tenant improvement
amortization. The Company also excludes cash lease termination fees. Same store NOI is historical and not necessarily indicative of future results.
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Table of Contents
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 of existing same store properties. 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 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 net operating income 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 and
properties acquired as a redevelopment project will be included in the same store pool eight full quarters after substantial completion or eight full quarters after initial occupancy,
if different. 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 above 60% with positive NOI for eight full quarters.
During the year ended December 31, 2020, the Company's reposition pool increased by one property to a total of 10 properties. Three properties were reclassified from
reposition. Two of these properties were reclassified from reposition to held for sale and one property was reclassified from reposition into the same store pool. Four properties
were reclassified into reposition during the year. Three of these properties were reclassified into reposition pursuant to the Company-defined criteria outlined above, and one
property that is undergoing a shift in strategic direction as a significant portion of the building is being repurposed from fitness space to clinical space was reclassified from same
store to reposition. This 217,000 square foot on-campus medical office building included a 111,000 square foot fitness center previously leased by Baylor Scott & White Health.
A new operator, Cowboys Fit, executed an approximately 14-year lease for a reconfigured 52,000 square foot fitness center. Baylor has executed a temporary lease for the
remaining 59,000 square feet at a reduced rental rate to continue to operate the existing fitness center until the construction of the new center is complete. Once the Baylor lease
expires, the remaining 59,000 square feet is expected to be redeveloped into clinical space. In addition, the Company plans to upgrade the common areas, bathrooms, and the
exterior of the building.
The following table reflects the Company's same store cash NOI for the years ended December 31, 2020 and 2019.
Dollars in thousands
Multi-tenant properties
Single-tenant properties
Total
SAME STORE CASH NOI
for the year ended December 31,
NUMBER OF
1
PROPERTIES
GROSS INVESTMENT
at December 31, 2020
158 $
12
170 $
3,306,852 $
257,727
3,564,579 $
2020
232,393 $
23,992
256,385 $
2019
PERCENTAGE GROWTH
227,849
23,472
251,321
2.0 %
2.2 %
2.0 %
1
Properties are based on the same store definition included above and exclude assets classified as held for sale, if any.
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Table of Contents
The following tables reconcile same store cash NOI to the respective line items in the Consolidated Statements of Income and the same store property count to the total owned
real estate portfolio:
Reconciliation of Same Store Cash NOI
Dollars in thousands
Net income
Other income (expense)
General and administrative expense
Depreciation and amortization expense
Other expenses
Straight-line rent revenue
Joint venture properties
Other revenue
1
2
Cash NOI
Cash NOI not included in same store
Same store and reposition cash NOI
Reposition NOI
Same store cash NOI
YEAR ENDED DECEMBER 31,
$
$
2020
72,195 $
7,220
30,704
190,435
12,325
(3,735)
233
(7,417)
301,960
(40,303)
261,657
(5,272)
256,385 $
2019
PERCENTAGE GROWTH
39,185
36,681
34,826
177,859
9,551
(3,000)
334
(6,070)
289,366
(31,578)
257,788
(6,467)
251,321
4.4 %
1.5 %
(18.5) %
2.0 %
1
2
Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent.
Includes 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 Property Count
Same store properties
Acquisitions
Development completions
Reposition
Total owned real estate properties
AS OF DECEMBER 31, 2020
PROPERTY COUNT
GROSS INVESTMENT
170
42
1
10
223
3,564,579
821,762
52,295
128,396
4,567,032
SQUARE
FEET
12,978
2,178
151
800
16,107
OCCUPANCY
88.4 %
89.2 %
60.5 %
61.0 %
86.8 %
Application of Critical Accounting Policies to Accounting Estimates
The Company’s Consolidated Financial Statements are prepared in accordance with GAAP and the rules and regulations of the SEC. In preparing the Consolidated Financial
Statements, management is required to exercise judgment and make assumptions that impact the carrying amount of assets and liabilities and the reported amounts of revenues
and expenses reflected in the Consolidated Financial Statements.
Management routinely evaluates the estimates and assumptions used in the preparation of its Consolidated Financial Statements. These regular evaluations consider historical
experience and other reasonable factors and use the seasoned judgment of management personnel. Management has reviewed the Company’s critical accounting policies with the
Audit Committee of the Board of Directors.
Management believes the following paragraphs in this section describe the application of critical accounting policies by management to arrive at the critical accounting estimates
reflected in the Consolidated Financial Statements. The Company’s accounting policies are more fully discussed in Note 1 to the Consolidated Financial Statements.
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Table of Contents
Principles of Consolidation
The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, joint ventures, and partnerships where the Company
controls the operating activities. All material intercompany accounts and transactions have been eliminated.
Capitalization of Costs
GAAP generally allows for the capitalization of various types of costs. The rules and regulations on capitalizing costs and the subsequent depreciation or amortization of those
costs versus expensing them in the period incurred vary depending on the type of costs and the reason for capitalizing the costs.
Direct costs of a development project generally include construction costs, professional services such as architectural and legal costs, travel expenses, and land acquisition costs
as well as other types of fees and expenses. These costs are capitalized as part of the basis of an asset to which such costs relate. Indirect costs include capitalized interest and
overhead costs. Indirect costs are capitalized during construction and on the unoccupied space in a property for up to one year after the property is ready for its intended use.
Capitalized interest is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The
Company’s overhead costs are based on overhead load factors that are charged to a project based on direct time incurred. The Company computes the overhead load factors
annually for its acquisition and development departments, which have employees who are involved in the projects. The overhead load factors are computed to absorb that portion
of indirect employee costs (payroll and benefits, training, and similar costs) that are attributable to the productive time the employee incurs working directly on projects. The
employees in the Company’s development departments who work on these projects maintain and report their hours daily, by project. Employee costs that are administrative, such
as vacation time, sick time, or general and administrative time, are expensed in the period incurred.
Acquisition-related costs include finder’s fees, advisory, legal, accounting, valuation, other professional or consulting fees, and certain general and administrative costs are
expensed in the period incurred for acquisitions accounted for as a business combination under Accounting Standards Codification Topic 805, Business Combinations. These
costs associated with asset acquisitions are capitalized in accordance with GAAP.
Management’s judgment is also exercised in determining whether costs that have been previously capitalized to a project should be reserved for or written off if or when the
project is abandoned or circumstances otherwise change that would call the project’s viability into question. The Company follows a standard and consistently applied policy of
classifying pursuit activity as well as reserving for these types of costs based on their classification.
The Company classifies its pursuit projects into two categories relating to development. The first category includes pursuits of developments that have a remote chance of
producing new business. Costs for these projects are expensed in the period incurred. The second category includes those pursuits of developments that are either probable or
highly probable to result in a project or contract. Since the Company believes it is probable that these pursuits will result in a project or contract, it capitalizes these costs in full
and records no reserve.
Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a change in classification, and a management decision is made as to whether any additional
reserve is deemed necessary. If necessary and considered appropriate, management would record an additional reserve at that time. Capitalized pursuit costs, net of the reserve,
are carried in other assets in the Company’s Consolidated Balance Sheets, and any reserve recorded is charged to acquisition and pursuit costs on the Consolidated Statements of
Income. All pursuit costs will ultimately be written off to expense or capitalized as part of the constructed real estate asset.
As of December 31, 2020 and 2019, the Company's Consolidated Balance Sheets include capitalized pursuit costs relating to potential developments totaling $6.8 million and
$4.6 million respectively. The Company expensed costs related to the pursuit of acquisitions totaling $1.0 million, $1.0 million and $0.6 million for the years ended December
31, 2020, 2019 and 2018, respectively. In addition, the Company expensed costs related to the pursuit of developments totaling $1.6 million, $0.7 million and $0.1 million for the
years ended December 31, 2020, 2019 and 2018, respectively.
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Valuation of Long-Lived, Unconsolidated Joint Ventures, Intangible Assets and Goodwill
Long-Lived Assets Held and Used
The Company assesses the potential for impairment of identifiable intangible assets and long-lived assets, primarily real estate properties, whenever events occur or a change in
circumstances indicates that the carrying value might not be recoverable. Important factors that could cause management to review for impairment include significant
underperformance of an asset relative to historical or expected operating results; significant changes in the Company's use of assets or the strategy for its overall business; plans
to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry
trends for the Company or its operators. In addition, the Company reviews for possible impairment of those assets subject to purchase options and those impacted by casualties,
such as tornadoes and hurricanes.
In addition, at least annually, the Company assesses whether there were indicators, including property operating performance, changes in anticipated holding period and general
market conditions, that the value of the Company’s investments, including unconsolidated joint ventures, may have been impaired. The investment’s value would have been
impaired only if management’s estimate of the fair value of the Company’s investment was less than its carrying value and such difference was deemed to be other-than-
temporary. To the extent impairment had occurred, a loss would have been recognized for the excess of its carrying amount over its fair value.
The Company may, from time to time, be approached by a third party with interest in purchasing one or more of the Company's operating real estate properties that was
otherwise not for sale. Alternatively, the Company may explore disposing of an operating real estate property but without specific intent to sell the property and without the
property meeting the criteria to be classified as held for sale (see discussion below). In such cases, the Company and a potential buyer typically negotiate a letter of intent
followed by a purchase and sale agreement that includes a due diligence time line for completion of customary due diligence procedures. Anytime throughout this period the
transaction could be terminated by the parties. The Company views the execution of a purchase and sale agreement as a circumstance that warrants an impairment assessment
and must include its best estimates of the impact of a potential sale in the recoverability test discussed in more detail below.
A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property is less than
the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a direct result of
the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be affected by
any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the current and
projected cash flows.
When the Company executes a purchase and sale agreement for a held and used property, the Company performs the cash flow estimation described above. This assessment
gives consideration to all available information, including an assessment of the likelihood the potential transaction will be consummated under the terms and conditions set forth
in the purchase and sale agreement. Management will re-evaluate the recoverability of the property if and when significant changes occur as the transaction proceeds toward
closing. Normally sale transactions will close within 15 to 30 days after the due diligence period expires. Upon expiration of the due diligence period, management will again re-
evaluate the recoverability of the property, updating its assessment based on the status of the potential sale.
Whenever management determines that the carrying value of an asset that has been tested may not be recoverable, then an impairment charge would be recognized to the extent
the current carrying value exceeds the current fair value of the asset. Significant judgment is also involved in making a determination of the estimated fair value of the asset.
The Company also performs an annual goodwill impairment review. The Company's reviews are performed as of December 31 of each year. The Company's 2020 and 2019
reviews indicated that no impairment had occurred with respect to the Company's $3.5 million goodwill asset.
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Table of Contents
Long-Lived Assets to be Disposed of by Planned Sale
From time to time management affirmatively decides to sell certain real estate properties under a plan of sale. The Company reclassifies the property or disposal group as held
for sale when all the following criteria for a qualifying plan of sale are met:
• Management, having the authority to approve the action, commits to a plan to sell the property or disposal group;
•
The property or disposal group is available for immediate sale (i.e., a seller currently has the intent and ability to transfer the property or disposal group to a buyer) in its
present condition, subject only to conditions that are usual and customary for sales of such properties or disposal groups;
• An active program to locate a buyer and other actions required to complete the plan to sell have been initiated;
•
•
The sale of the property or disposal group is probable (i.e., likely to occur) and the transfer is expected to qualify for recognition as a completed sale within one year, with
certain exceptions;
The property or disposal group is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
• Actions necessary to complete the plan indicate that it is unlikely significant changes to the plan will be made or that the plan will be withdrawn.
A property or disposal group classified as held for sale is initially measured at the lower of its carrying amount or fair value less estimated costs to sell. An impairment charge is
recognized for any initial adjustment of the property's or disposal group's carrying amount to its fair value less estimated costs to sell in the period the held for sale criteria are
met. The fair value less estimated costs to sell the property (disposal group) should be assessed each reporting period it remains classified as held for sale. Depreciation ceases as
long as a property is classified as held for sale.
If circumstances arise that were previously considered unlikely and a subsequent decision not to sell a property classified as held for sale were to occur, the property is
reclassified as held and used. The property is measured at the time of reclassification at the lower of its (a) carrying amount before it was classified as held for sale, adjusted for
any depreciation expense or impairment losses that would have been recognized had the property been continuously classified as held and used or (b) fair value at the date of the
subsequent decision not to sell. The effect of any required adjustment is reflected in income from continuing operations at the date of the decision not to sell.
The Company recorded impairment charges totaling $5.6 million for the year ended December 31, 2019 related to real estate properties and other long-lived assets. The
impairment charges related to two properties sold in 2019. The Company did not record any impairment charges in 2020.
Depreciation of Real Estate Assets and Amortization of Related Intangible Assets
As of December 31, 2020, the Company had gross investments of approximately $4.3 billion in depreciable real estate assets and related intangible assets. When real estate assets
and related intangible assets are acquired or placed in service, they must be depreciated or amortized. Management’s judgment involves determining which depreciation method
to use, estimating the economic life of the building and improvement components of real estate assets, and estimating the value of intangible assets acquired when real estate
assets are purchased that have in-place leases.
As described in more detail in Note 1 to the Consolidated Financial Statements, when the Company acquires real estate properties with in-place leases, the cost of the acquisition
must be allocated between the acquired tangible real estate assets “as if vacant” and any acquired intangible assets. Such intangible assets could include above- (or below-)
market in-place leases and at-market in-place leases, which could include the opportunity costs associated with absorption period rentals, direct costs associated with obtaining
new leases such as tenant improvements, leasing commissions and customer relationship assets. With regard to the elements of estimating the “as if vacant” values of the
property and the intangible assets, including the absorption period, occupancy increases during the absorption period, tenant improvement amounts, and leasing commission
percentages, the Company uses the same absorption period and occupancy assumptions for similar property types. Any remaining excess purchase price is then allocated to the
tangible and intangible assets based on their relative fair values. The identifiable tangible and intangible assets are then subject to depreciation and amortization.
45
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With respect to the building components, there are several depreciation methods available under GAAP. Some methods record relatively more depreciation expense on an asset
in the early years of the asset’s economic life, and relatively less depreciation expense on the asset in the later years of its economic life. The straight-line method of depreciating
real estate assets is the method the Company follows because, in the opinion of management, it is the method that most accurately and consistently allocates the cost of the asset
over its estimated life. The Company assigns a useful life to its owned properties based on many factors, including the age and condition of the property when acquired.
Revenue Recognition
The Company's primary source of revenue is derived by non-cancelable leases. When a lease is executed, the terms and conditions of the lease are assessed to determine the
appropriate accounting classification. As of December 31, 2020, all of the Company's leases are classified as operating leases. Operating leases are recognized on the straight-
line basis over the term of the related lease, including periods where a tenant is provided a rent concession. Operating expense recoveries, which includes reimbursements for
building specific operating expenses, are recognized as revenue in the period in which the related expenses are incurred. The Company generally expects that collectibility is
probable at lease commencement. If the assessment of collectibility changes after the lease commencement date and Rental income is not considered probable, Rental income is
recognized on a cash basis and all previously recognized uncollectible Rental income is reversed in the period in which it is determined not to be probable of collection. In
addition to the lease-specific collectibility assessment performed under Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to
Rental income, for its portfolio of operating lease receivables.
The Company also recognizes certain revenue based on the guidance in Topic 606 and is based on the five-step model to account for revenue arising from contracts with
customers. The Company's primary source of revenue associated with Topic 606 relates to parking revenue and management fee income.
Derivative Instruments
Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the derivative instrument with the recognition of the changes in the fair-value
of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transaction in a cash flow hedge. The
accounting for a derivative requires that the Company make judgments in determining the nature of the derivatives and their effectiveness, including ones regarding the
likelihood that a forecasted transaction will take place. These judgments could materially affect our consolidated financial statements.
The Company may enter into a derivative instrument to manage interest rate risk from time to time. When a derivative instrument is initiated, the Company will assess its
intended use of the derivative instrument and may elect a hedging relationship and apply hedge accounting. As required by the accounting literature, the Company will formally
document the hedging relationship for all derivative instruments prior to or contemporaneous with entering into the derivative instrument.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt. Management uses regular monitoring of market conditions and analysis techniques to
manage this risk.
As of December 31, 2020, $1.4 billion of the Company’s $1.6 billion of outstanding debt bore interest at fixed rates, excluding the Company’s interest rate swaps which convert
portions of the Unsecured Term Loan due 2024 and the Unsecured Term Loan due 2026 from variable interest to fixed interest rates.
The following table provides information regarding the sensitivity of certain of the Company’s financial instruments, as described above, to market conditions and changes
resulting from changes in interest rates. For purposes of this analysis, sensitivity is demonstrated based on hypothetical 10% changes in the underlying market interest rates.
Dollars in thousands
Variable Rate Debt
Unsecured Credit Facility
Unsecured Term Loan due 2024
Unsecured Term Loan due 2026
1
2
OUTSTANDING
PRINCIPAL BALANCE
as of Dec. 31, 2020
CALCULATED
ANNUAL INTEREST
IMPACT ON EARNINGS AND CASH FLOW
ASSUMING 10%
INCREASE
in market interest rates
ASSUMING 10%
DECREASE
in market interest rates
$
$
— $
200,000
150,000
350,000 $
— $
3,968
4,709
8,677 $
— $
(397)
(471)
(868) $
—
397
471
868
1
2
As of December 31, 2020 the Company had interest rate swaps that fix the interest rate of $75.0 million of the Unsecured Term Loan due 2024.
As of December 31, 2020, the Company had interest rate swaps that fix the interest rate of $100.0 million of the Unsecured Term Loan due 2026.
Dollars in thousands
Fixed Rate Debt
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Senior Notes due 2030
Senior Notes due 2031
Mortgage Notes Payable
CARRYING VALUE
as of Dec. 31, 2020
2
DEC. 31, 2020
ASSUMING 10%
INCREASE
in market interest rates
ASSUMING 10%
DECREASE
in market interest rates
DEC. 31, 2019
1
FAIR VALUE
$
$
— $
— $
248,776
296,123
296,468
294,924
117,763
259,156
325,150
302,239
288,789
121,347
— $
256,213
320,912
296,936
282,830
120,281
— $
262,127
329,613
307,517
294,939
122,430
1,254,054 $
1,296,681 $
1,277,172 $
1,316,626 $
247,105
248,981
306,783
—
—
130,895
933,764
1
2
Fair values as of December 31, 2020 represent fair values of obligations that were outstanding as of that date, and do not reflect the effect of any subsequent changes in principal balances and/or additions or extinguishments of
instruments.
Balances are presented net of discounts and debt issuance costs and including premiums. The fair value presented is based on Level 2 inputs defined as model-derived valuations in which significant inputs and significant value drivers
are observable in active markets.
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Table of Contents
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust Incorporated (the "Company") as of December 31, 2020 and 2019, the
related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2020, and
the related notes and financial statement schedules listed in the accompanying index (collectively referred to as the "consolidated financial statements"). In our
opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally
accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal
control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 10, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or
required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2)
involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical
audit matters or on the accounts or disclosures to which they relate.
Initial Accounting Assessment of Joint Venture - Equity Method Investment
As described in Notes 1 and 4 to the Company's consolidated financial statements, the Company entered into a joint venture (“JV”) agreement, with an unrelated
third party. As of December 31, 2020, the Company owned fifty percent of the equity in the JV, and the JV owns four properties. For entities in which the
Company owns less than 100% of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the significant activities
based upon the terms of the respective ownership agreements. While the Company is the managing member, the Company does not have the direct or
48
Table of Contents
indirect ability to control the significant activities of the JV. As such, the Company accounts for its investment in the JV under the equity method of accounting.
We identified the initial accounting assessment of the unconsolidated JV as a critical audit matter due to the judgment required in evaluating management’s
assessment of whether it should consolidate the JV. Increased effort was required to evaluate management’s assessment of which activities most significantly
impact the JV’s economic performance based on the purpose and design of the JV over the duration of its expected life and assessing which party has the rights to
direct those activities.
The primary procedures we performed to address this critical audit matter included:
•
•
Examining the JV operating agreement and applying relevant guidance in evaluating the relevant provisions of the agreement to assess the appropriateness
of the Company’s conclusion that the Company and the unrelated third-party exercise joint control of the JV through their equity investments, and that
both parties have substantive participating rights in significant financial and operating decisions of the JV that are made in the ordinary course of business.
Involved professionals with specialized knowledge and experience to assist in reviewing and considering the various factors impacting consolidation
assessments.
Asset Impairment - Identification of Triggering Events for Real Estate Properties
The Company recorded total real estate properties, net of approximately $3.4 billion as of December 31, 2020. As described in Notes 1 and 6 to the Company's
consolidated financial statements, the Company assesses the potential for impairment of long-lived assets, including real estate properties, whenever events occur,
or a change in circumstances indicates, that the carrying value might not be fully recoverable ("triggering events"). If management determines that the carrying
value of the Company’s assets may not be fully recoverable based on the existence of any triggering events, management would measure and record an impairment
charge based on the estimated fair value of the property or the estimated fair value less costs to sell the property.
We identified management’s assessment of qualitative indicators of potential impairment triggering events for real estate properties as a critical audit matter.
Qualitative indicators of impairment may include changes in the Company’s use of properties or the strategy for its overall business, plans to sell a property before
its depreciable life has ended, or negative economic or industry trends for the Company or its operators. Auditing these elements involved especially challenging
auditor judgment due to the nature and extent of audit effort required to address these matters.
The primary procedures we performed to address this critical audit matter included:
•
•
•
Testing the design and operating effectiveness of controls over management’s identification of changes in circumstances that could indicate the carrying
amounts of real estate properties may not be recoverable.
Assessing the reasonableness of management’s key assumptions and inputs, including certain qualitative factors such as potential sales of properties based
on offers received, changes in the use of the Company’s properties, and general industry and market considerations, used to determine that no triggering
events had occurred.
Reviewing internal documentation to assess whether additional triggering factors were present.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2005.
Nashville, Tennessee
February 10, 2021
49
Table of Contents
Healthcare Realty Trust Incorporated
Consolidated Balance Sheets
Amounts in thousands, except per share data
ASSETS
Real estate properties
Land
Buildings, improvements and lease intangibles
Personal property
Construction in progress
Land held for development
Total real estate properties
Less accumulated depreciation
Total real estate properties, net
Cash and cash equivalents
Assets held for sale, net
Operating lease right-of-use assets
Financing lease right-of-use assets
Investments in unconsolidated joint ventures
Other assets, net
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Notes and bonds payable
Accounts payable and accrued liabilities
Liabilities of properties held for sale
Operating lease liabilities
Financing lease liabilities
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders' equity
Preferred stock, $.01 par value; 50,000 shares authorized; none issued and outstanding
Common stock, $.01 par value; 300,000 shares authorized; 139,487 and 134,706 shares
issued and outstanding at December 31, 2020 and 2019, respectively.
Additional paid-in capital
Accumulated other comprehensive loss
Cumulative net income attributable to common stockholders
Cumulative dividends
Total stockholders’ equity
Total liabilities and stockholders' equity
See accompanying notes.
DECEMBER 31,
2020
2019
$
362,695 $
4,220,297
11,195
—
27,226
4,621,413
(1,239,224)
3,382,189
15,303
20,646
125,198
19,667
73,137
176,120
$
3,812,260 $
289,751
3,986,326
10,538
48,731
24,647
4,359,993
(1,121,102)
3,238,891
657
37
126,177
12,667
8,130
177,296
3,563,855
$
DECEMBER 31,
2020
2019
1,602,769 $
81,174
1,216
92,273
18,837
67,615
1,863,884
1,414,069
78,517
145
91,574
18,037
61,504
1,663,846
—
—
1,395
3,635,341
(17,832)
1,199,499
(2,870,027)
1,948,376
$
3,812,260 $
1,347
3,485,003
(6,175)
1,127,304
(2,707,470)
1,900,009
3,563,855
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Table of Contents
Healthcare Realty Trust Incorporated
Consolidated Statements of Income
Amounts in thousands, except per share data
Revenues
Rental income
Other operating
Expenses
Property operating
General and administrative
Acquisition and pursuit costs
Depreciation and amortization
Bad debt, net of recoveries
Other income (expense)
Gain on sales of real estate assets
Interest expense
Loss on extinguishment of debt
Impairment of real estate assets
Equity (loss) income from unconsolidated joint ventures
Interest and other income (expense), net
Net income
Basic earnings per common share
Diluted earnings per common share
Weighted average common shares
outstanding - basic
Weighted average common shares
outstanding - diluted
See accompanying notes.
$
$
$
$
YEAR ENDED DECEMBER 31,
2020
2019
2018
492,262 $
7,367
499,629
462,225 $
8,073
470,298
196,514
30,704
2,561
190,435
—
420,214
70,361
(56,174)
(21,503)
—
(463)
559
180,005
34,826
1,742
177,859
—
394,432
25,101
(55,435)
—
(5,617)
(19)
(711)
(7,220)
72,195 $
(36,681)
39,185 $
0.52 $
0.52 $
0.29 $
0.29 $
442,397
7,992
450,389
170,506
34,511
738
164,201
60
370,016
41,665
(52,804)
—
—
4
533
(10,602)
69,771
0.55
0.55
133,930
128,000
123,292
134,007
128,084
123,351
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Healthcare Realty Trust Incorporated
Consolidated Statements of Comprehensive Income
Amounts in thousands
Net income
Other comprehensive income (loss)
Interest rate swaps
Reclassification adjustment for losses included in net income (interest expense)
Losses arising during the period on interest rate swaps
Losses on settlement of treasury rate locks arising during the period
Comprehensive income
See accompanying notes.
YEAR ENDED DECEMBER 31,
2020
2019
$
72,195 $
39,185 $
3,472
(10,862)
(4,267)
(11,657)
60,538 $
319
(5,592)
—
(5,273)
33,912 $
$
2018
69,771
424
(27)
—
397
70,168
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Healthcare Realty Trust Incorporated
Consolidated Statements of Equity
Amounts in thousands, except per share data
Balance at December 31, 2017
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Gain on interest rate swaps
Dividends to common stockholders
($1.20 per share)
Balance at December 31, 2018
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Loss on interest rate swaps
Dividends to common stockholders
($1.20 per share)
Balance at December 31, 2019
Issuance of stock, net of costs
Common stock redemption
Share-based compensation
Net income
Loss on interest rate swaps and treasury locks
Dividends to common stockholders
($1.20 per share)
$
Preferred
Stock
Common
Stock
— $
—
—
—
—
—
1,251 $
—
(1)
3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,253
92
(1)
3
—
—
—
1,347
47
(1)
2
—
—
—
Additional
Paid-In
Capital
3,173,429 $
616
(4,449)
10,688
—
—
—
3,180,284
295,764
(3,317)
12,272
—
—
—
3,485,003
142,123
(1,705)
9,920
—
—
—
Accumulated
Other
Comprehensive
Income (Loss)
(1,299) $
—
—
—
—
397
—
(902)
—
—
—
—
(5,273)
—
(6,175)
—
—
—
—
(11,657)
—
Cumulative
Net Income
Cumulative
Dividends
1,018,348 $
(2,401,846) $
—
—
—
69,771
—
—
—
—
—
—
Total
Stockholders’
Equity
1,789,883
616
(4,450)
10,691
69,771
397
—
(150,266)
(150,266)
1,088,119
—
—
—
39,185
—
(2,552,112)
—
—
—
—
—
1,716,642
295,856
(3,318)
12,275
39,185
(5,273)
—
(155,358)
(155,358)
1,127,304
—
—
—
72,195
—
(2,707,470)
—
—
—
—
—
1,900,009
142,170
(1,706)
9,922
72,195
(11,657)
—
(162,557)
(162,557)
Balance at December 31, 2020
$
— $
1,395 $
3,635,341 $
(17,832) $
1,199,499 $
(2,870,027) $
1,948,376
See accompanying notes.
53
Table of Contents
Healthcare Realty Trust Incorporated
Consolidated Statements of Cash Flows
Amounts in thousands
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Other amortization
Share-based compensation
Amortization of straight-line rent receivable (lessor)
Amortization of straight-line rent on operating leases (lessee)
Gain on sales of real estate assets
Loss on extinguishment of debt
Impairment of real estate assets
Equity loss (income) from unconsolidated joint ventures
Distributions from unconsolidated joint ventures
Proceeds from disposition of sales-type lease properties
Changes in operating assets and liabilities:
Other assets, including right-of-use-assets
Accounts payable and accrued liabilities
Other liabilities
Net cash provided by operating activities
INVESTING ACTIVITIES
Acquisitions of real estate
Development of real estate
Additional long-lived assets
Investment in unconsolidated joint ventures
Proceeds from sales of real estate assets
Proceeds from notes receivable repayments
Net cash used in investing activities
FINANCING ACTIVITIES
Net (repayments) borrowings on unsecured credit facility
Borrowings on term loan
Borrowings of notes and bonds payable
Repayments of notes and bonds payable
Redemption of notes and bonds payable
Dividends paid
Net proceeds from issuance of common stock
Common stock redemptions
Settlement of treasury rate locks
Debt issuance and assumption costs
Payments made on finance leases
Net cash provided by (used in) financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents cash at beginning of period
Cash and cash equivalents at end of period
Supplemental Cash Flow Information
Interest paid
Mortgage notes payable assumed upon acquisition (adjusted to fair value)
Invoices accrued for construction, tenant improvements and other capitalized costs
Capitalized interest
See accompanying notes.
YEAR ENDED DECEMBER 31,
2020
2019
$
72,195 $
39,185 $
190,435
4,381
9,922
(3,735)
1,490
(70,361)
21,503
—
463
193
244,454
(727)
4,555
(4,679)
177,859
3,013
12,275
(3,000)
1,537
(25,101)
—
5,617
19
381
—
(8,573)
2,752
7,174
470,089
213,138
(397,349)
(3,089)
(93,963)
(65,663)
4,898
—
(555,166)
(293,000)
150,000
596,562
(47,845)
(270,386)
(162,557)
142,000
(1,436)
(4,267)
(5,931)
(3,417)
99,723
14,646
657
15,303 $
52,787 $
36,536 $
14,935 $
1,142 $
(380,274)
(25,985)
(64,670)
—
52,401
—
(418,528)
31,000
50,000
—
(13,857)
—
(155,358)
295,946
(5,097)
—
(4,589)
(379)
197,666
(7,724)
8,381
657 $
53,978 $
— $
17,294 $
1,411 $
$
$
$
$
$
2018
69,771
164,201
3,000
10,691
(4,281)
1,519
(41,665)
—
—
(4)
182
—
(3,938)
4,731
4,148
208,355
(104,312)
(26,728)
(70,807)
—
96,812
8
(105,027)
73,000
—
—
(19,850)
—
(150,266)
611
(4,532)
—
(125)
—
(101,162)
2,166
6,215
8,381
45,752
7,995
12,682
951
54
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust ("REIT") that owns, leases, manages, acquires, finances, develops and redevelops income-
producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States of America. The Company had gross
investments of approximately $4.6 billion in 223 real estate properties, redevelopments, land held for development and corporate property as of December 31, 2020. The
Company’s 223 owned real estate properties are located in 24 states and total approximately 16.1 million square feet. In addition, the Company formed an unconsolidated joint
venture in 2020 with Teachers Insurance and Annuity Association ("TIAA") that owns four buildings (the "TIAA Joint Venture"). Square footage and property count disclosures
in these Notes to the Company's Consolidated Financial Statements are unaudited.
Principles of Consolidation
The Company’s Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company
controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business
enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification 810 broadly defines a VIE as an entity in which either (i) the equity
investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic
performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the
primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the
entity’s economic performance; and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates
its investment in a VIE when it determines that it is the VIE’s primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as
the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an
interest held by the primary beneficiary. The Company performs this analysis on an ongoing basis.
For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100% of the equity or has a controlling financial interest
evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less
than 100% of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective
entities’ ownership agreements.
As of December 31, 2020, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised
significant influence over but did not control these entities. See Note 4 for more details regarding the Company's unconsolidated joint ventures.
Use of Estimates in the Consolidated Financial Statements
Preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
Segment Reporting
The Company owns, leases, acquires, manages, finances, develops and redevelops outpatient and other healthcare-related properties. The Company is managed as one reporting
unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single
reportable segment.
COVID-19 Rent Deferral
In response to COVID-19, the Company provided some of its tenants with deferred rent arrangements in the second and third quarters. As of February 10, 2021, the Company
has collected 99% of total scheduled deferral payments, leaving approximately $0.1 million to be collected.
55
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
For accounting purposes, in accordance with ASC 842: Leases, normally a company would be required to assess a lease modification to determine if the modification should be
treated as a separate lease and if not, modification accounting would be applied which would require a company to reassess the classification of the lease. However, in light of
the COVID-19 pandemic in which many leases are being modified, the Financial Accounting Standards Board (the "FASB") and U.S. Securities and Exchange Commission (the
"SEC") have provided relief that will allow companies to make a policy election as to whether they treat COVID-19 related lease amendments as a provision included in the
preconcession arrangement, and therefore, not a lease modification, or to treat the lease amendment as a modification. The Company has elected to use this relief where
applicable and therefore will have no change in the current classification of its leases in connection with many of the leases impacted by negotiations with its tenants. In order to
be considered COVID-19 related, cash flows must be substantially the same or less than those prior to the concession. If the cash flows are substantially the same or less, there
are two methods to potentially account for such rent deferrals under the relief. The first would be as if no changes to the lease contract were made. Under that accounting, a lessor
would increase its lease receivable and a lessee would increase its accounts payable as receivables/payments accrue. In its income statement, a lessor would continue to recognize
revenue during the deferral period. The second method would be to treat the deferred payments as variable lease payments (i.e., revenue recognized when cash received). The
Company has elected the first method described above, which results in the revenue being recognized on an accrual basis.
Real Estate Properties
Real estate properties are recorded at cost or at fair value if acquired in a transaction that is a business combination under Accounting Standards Codification Topic 805, Business
Combinations. Cost or fair value at the time of acquisition is allocated among land, buildings, tenant improvements, lease and other intangibles, and personal property as
applicable. The Company’s gross real estate assets, on a financial reporting basis, totaled approximately $4.6 billion as of December 31, 2020 and $4.4 billion as of
December 31, 2019.
During 2020 and 2019, the Company eliminated against accumulated depreciation approximately $21.2 million and $17.2 million, respectively, of fully amortized real estate
intangibles that were initially recorded as a component of certain real estate acquisitions. Also during 2019, approximately $1.3 million of fully depreciated tenant and capital
improvements that were no longer in service were eliminated against accumulated depreciation.
Depreciation expense of real estate properties for the three years ended December 31, 2020, 2019 and 2018 was $162.4 million, $152.6 million and $143.8 million, respectively.
Depreciation and amortization of real estate assets in place as of December 31, 2020, is provided for on a straight-line basis over the asset’s estimated useful life:
Land improvements
Buildings and improvements
Lease intangibles (including ground lease intangibles)
Personal property
3.0 to 39.0 years
3.3 to 43.0 years
1.3 to 99.0 years
2.9 to 20.0 years
The Company capitalizes direct costs, including costs such as construction costs and professional services, and indirect costs, including capitalized interest and overhead costs,
associated with the development and construction of real estate assets while substantive activities are ongoing to prepare the assets for their intended use. Capitalized interest cost
is calculated using the weighted average interest rate of the Company's unsecured debt or the interest rate on project specific debt, if applicable. The Company continues to
capitalize interest on the unoccupied portion of the properties in stabilization for up to one year after the buildings have been placed into service, at which time the capitalization
of interest must cease.
Land Held for Development
Land held for development includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. The
Company's land held for development included eight parcels as of December 31, 2020 and seven parcels as of December 31, 2019. The Company’s investment in land held for
development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa, Tennessee, Georgia and Colorado totaled approximately $27.2
million as of December 31, 2020 and $24.6 million as of December 31, 2019.
56
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Asset Impairment
The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever events occur
or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset
relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its
depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or
its operators. In addition, the Company reviews for possible impairment, those assets subject to purchase options and those impacted by casualties, such as tornadoes and
hurricanes. A property value is considered impaired only if management's estimate of current and projected (undiscounted and unleveraged) operating cash flows of the property
is less than the net carrying value of the property. These estimates of future cash flows include only those that are directly associated with and that are expected to arise as a
direct result of the use and eventual disposition of the property based on its estimated remaining useful life. These estimates, including the useful life determination which can be
affected by any potential sale of the property, are based on management's assumptions about its use of the property. Therefore, significant judgment is involved in estimating the
current and projected cash flows. If management determines that the carrying value of the Company’s assets may not be fully recoverable based on the existence of any of the
factors above, or others, management would measure and record an impairment charge based on the estimated fair value of the property or the estimated fair value less costs to
sell the property.
Acquisitions of Real Estate Properties with In-Place Leases
The Company's acquisitions of real estate properties typically do not meet the definition of a business and are accounted for as asset acquisitions. Acquisitions of real estate
properties with in-place leases are accounted for at relative fair value. When a building with in-place leases is acquired, the cost of the acquisition must be allocated between the
tangible real estate assets "as-if-vacant" and the intangible real estate assets related to in-place leases based on their estimated fair values. Land fair value is estimated by using an
assessment of comparable transactions and other relevant data.
The Company considers whether any of the in-place lease rental rates are above- or below-market. An asset (if the actual rental rate is above-market) or a liability (if the actual
rental rate is below-market) is calculated and recorded in an amount equal to the present value of the future cash flows that represent the difference between the actual lease rate
and the estimated market rate. If an in-place lease is identified as a below-market rental rate, the Company would also evaluate any renewal options associated with that lease to
determine if the intangible should include those periods. The values related to above- or below-market in-place lease intangibles are amortized over the remaining term of the
leases upon acquisition to rental income where the Company is the lessor and to property operating expense where the Company is the lessee.
The Company also estimates an absorption period, which can vary by property, assuming the building is vacant and must be leased up to the actual level of occupancy when
acquired. During that absorption period, the owner would incur direct costs, such as tenant improvements, and would suffer lost rental income. Likewise, the owner would have
acquired a measurable asset in that, assuming the building was vacant, certain fixed costs would be avoided because the actual in-place lessees would reimburse a certain portion
of fixed costs through expense reimbursements during the absorption period.
All of these intangible assets (above- or below-market lease, tenant improvement costs avoided, leasing costs avoided, rental income lost, and expenses recovered through in-
place lessee reimbursements) are estimated and recorded in amounts equal to the present value of estimated future cash flows. The actual purchase price is allocated based on the
various asset fair values described above.
The building and tenant improvement components of the purchase price are depreciated over the estimated useful life of the building or the weighted average remaining term of
the in-places leases. The at-market, in-place lease intangibles are amortized to depreciation and amortization expense over the weighted average remaining term of the leases,
customer relationship assets are amortized to depreciation amortization expense over terms applicable to each
57
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
acquisition. Any goodwill recorded through a business combination would be reviewed for impairment at least annually and is not amortized.
See Note 8 for more details on the Company’s intangible assets.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair
value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the
details of such fair value measurements.
A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use
of observable market data when available. These inputs have created the following fair value hierarchy:
•
•
•
Level 1 – quoted prices for identical instruments in active markets;
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived
valuations in which significant inputs and significant value drivers are observable in active markets; and
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Executed purchase and sale agreements, that are binding agreements, are categorized as level one inputs. Brokerage estimates, letters of intent, or unexecuted purchase and sale
agreements are considered to be level three as they are nonbinding in nature.
Fair Value of Derivative Financial Instruments
Derivative financial instruments are recorded at fair value on the Company's Consolidated Balance Sheets as other assets or other liabilities. The valuation of derivative
instruments requires the Company to make estimates and judgments that affect the fair value of the instruments. Fair values of derivatives are estimated by pricing models that
consider the forward yield curves and discount rates. The fair value of the Company's forward starting interest rate swap contracts are estimated by pricing models that consider
foreign trade rates and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future. For derivatives
designated in qualifying cash flow hedging relationships, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive
income (loss). Gains and losses are reclassified from accumulated other comprehensive income (loss) into earnings once the underlying hedged transaction is recognized in
earnings. As of December 31, 2020 and 2019, the Company had $17.8 million and $6.2 million, respectively, recorded in accumulated other comprehensive loss related to
forward starting interest rate swaps entered into and settled during 2015 and 2020 and a hedge of the Company's variable rate debt. See Note 10 for additional information.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased. Restricted cash includes cash held in escrow in
connection with proceeds from the sales of certain real estate properties. The Company had restricted cash during the year ended December 31, 2020, however it was reinvested
for real estate acquisitions prior to the ending balance sheet date. The Company did not have any restricted cash for the year ended December 31, 2019.
Cash and cash equivalents are held in bank accounts and overnight investments. The Company maintains its bank deposits with large financial institutions in amounts that often
exceed federally-insured limits. The Company has not experienced any losses in such accounts.
58
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but are tested at least annually for impairment. Intangible assets with finite lives are amortized over their
respective lives to their estimated residual values and are reviewed for impairment only when impairment indicators are present.
Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place lease intangible assets, customer relationship intangible assets, and debt issuance
costs. In-place lease and customer relationship intangible assets are amortized on a straight-line basis over the applicable lives of the assets. Debt issuance costs are amortized
over the term of the debt instrument on the effective interest method or the straight-line method when the effective interest method is not applicable. Goodwill is not amortized
but is evaluated annually as of December 31 for impairment. Both the 2020 and 2019 impairment evaluations indicated that no impairment had occurred with respect to the $3.5
million goodwill asset. See Note 8 for more detail on the Company’s intangible assets.
Contingent Liabilities
From time to time, the Company may be subject to loss contingencies arising from legal proceedings and similar matters. Additionally, while the Company maintains
comprehensive liability and property insurance with respect to each of its properties, the Company may be exposed to unforeseen losses related to uninsured or underinsured
damages.
The Company continually monitors any matters that may present a contingent liability, and, on a quarterly basis, management reviews the Company’s reserves and accruals in
relation to each of them, adjusting provisions as necessary in view of changes in available information. Liabilities for contingencies are first recorded when a loss is determined
to be both probable and can be reasonably estimated. Changes in estimates regarding the exposure to a contingent loss are reflected as adjustments to the related liability in the
periods when they occur.
Because of uncertainties inherent in the estimation of contingent liabilities, it is possible that the Company’s provision for contingent losses could change materially in the near
term. To the extent that any significant losses, in addition to amounts recognized, are at least reasonably possible, such amounts will be disclosed in the notes to the Consolidated
Financial Statements.
Share-Based Compensation
The Company has various employee and director share-based awards outstanding. These awards include non-vested common stock and options to purchase common stock
granted to employees pursuant to the 2015 Stock Incentive Plan and its predecessor plans (the “2015 Incentive Plan”) and the 2000 Employee Stock Purchase Plan (the
“Employee Stock Purchase Plan”). The Company recognizes share-based payments to employees and directors in the Consolidated Statements of Income on a straight-line basis
over the requisite service period based on the fair value of the award on the measurement date. See Note 12 for details on the Company’s share-based awards.
Accumulated Other Comprehensive Income (Loss)
Certain items must be included in comprehensive income, including items such as foreign currency translation adjustments, minimum pension liability adjustments, derivative
instruments and unrealized gains or losses on available-for-sale securities. As of December 31, 2020, the Company’s accumulated other comprehensive income (loss) consists of
the loss for changes in the fair value of active derivatives designated as cash flow hedges and the loss on the unamortized settlement of forward starting swaps and treasury
hedges. See Note 10 for more details on the Company's derivative financial instruments.
Revenue from Contracts with Customers (Topic 606)
The Company recognizes certain revenue under the core principle of Topic 606. This requires an entity to recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease revenue is not within the scope
of Topic 606. To achieve the core principle, the Company applies the five step model specified in the guidance.
59
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Consolidated Statements of Income in the Other operating line item. This line item includes
parking income, property lease guaranty income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:
In thousands
Type of Revenue
Parking income
Property lease guaranty income
Management fee income
Miscellaneous
YEAR ENDED DECEMBER 31,
2020
2019
2018
$
$
6,720 $
—
343
304
7,367 $
7,520 $
128
270
155
8,073 $
6,930
675
273
114
7,992
The Company’s three major types of revenue that are accounted for under Topic 606 that are listed above are all accounted for as the performance obligation is satisfied. The
performance obligations that are identified for each of these items are satisfied over time and the Company recognizes revenue monthly based on this principle.
One of the Company’s owned real estate properties as of December 31, 2019 and 2018 respectively, was covered under a property operating agreement between the Company
and a sponsoring health system, which contractually obligated the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the
property in exchange for the right to be involved in the operating decisions of the property, including tenancy. The agreement expired February 28, 2019. If the minimum return
was not achieved through normal operations of the property, the Company calculated and accrued to property lease guaranty revenue, each quarter, any shortfalls due from the
sponsoring health systems under the terms of the property operating agreement.
Management fee income includes property management services provided to third parties and certain of the properties in the Company's unconsolidated joint ventures are
generally calculated, accrued and billed monthly based on a percentage of cash collections of tenant receivables for the month or a stated amount per square foot. Management
fee income also includes amounts paid to the Company for its asset management services for its TIAA unconsolidated joint venture. Internal management fee income, where the
Company manages its owned properties, is eliminated in consolidation.
Rental Income
Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company's lease agreements
generally include provisions for stated annual increases or increases based on a Consumer Price Index ("CPI"). Rental income from properties under multi-tenant office lease
arrangements and rental income from properties with single-tenant lease arrangements are included in rental income on the Company's Consolidated Statements of Income. The
components of rental income are as follows:
(Dollars in thousands)
Property operating income
Single-tenant
Straight-line rent
Rental income
YEAR ENDED DECEMBER 31,
2020
2019
$
$
453,699 $
34,828
3,735
492,262 $
415,142 $
44,083
3,000
462,225 $
2018
390,256
47,860
4,281
442,397
Federal Income Taxes
No provision has been made for federal income taxes. The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code. The
Company must distribute at least 90% per annum of its real estate investment trust taxable income to its stockholders and meet other requirements to continue to qualify as a real
estate investment trust. See Note 15 for further discussion.
The Company classifies interest and penalties related to uncertain tax positions, if any, in the Consolidated Financial Statements as a component of general and administrative
expenses. No such amounts were recognized during the three years ended December 31, 2020.
60
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Federal tax returns for the years 2017, 2018, 2019 and 2020 are currently subject to examination by taxing authorities.
State Income Taxes
The Company must pay certain state income taxes and the provisions for such taxes are generally included in general and administrative expense on the Company’s Consolidated
Statements of Income. See Note 15 for further discussion.
Sales and Use Taxes
The Company must pay sales and use taxes to certain state tax authorities based on rents collected from tenants in properties located in those states. The Company is generally
reimbursed for these taxes by the tenant. The Company accounts for the payments to the taxing authority and subsequent reimbursement from the tenant on a net basis in rental
income in the Company’s Consolidated Statements of Income.
Assets Held for Sale
Long-lived assets held for sale are reported at the lower of their carrying amount or their fair value less estimated cost to sell. Further, depreciation of these assets ceases at the
time the assets are classified as held for sale. Losses resulting from the sale of such properties are characterized as impairment losses in the Consolidated Statements of Income.
See Note 5 for more detail on assets held for sale.
Earnings per Share
The Company uses the two-class method of computing net earnings per common share. Earnings per common share is calculated by considering share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents as participating securities. Undistributed earnings (excess net income over dividend payments) are
allocated on a pro rata basis to common shareholders and restricted shareholders. Undistributed losses (dividends in excess of net income) do not get allocated to restricted
stockholders as they do not have the contractual obligation to share in losses. The amount of undistributed losses that applies to the restricted stockholders is allocated to the
common stockholders.
Basic earnings per common share is calculated using weighted average shares outstanding less issued and outstanding non-vested shares of common stock. Diluted earnings per
common share is calculated using weighted average shares outstanding plus the dilutive effect of the outstanding stock options from the Employee Stock Purchase Plan using the
treasury stock method and the average stock price during the period. See Note 13 for the calculations of earnings per share.
Reclassifications
Certain reclassifications have been made on the Company's Consolidated Balance Sheet and Statements of Income with the acquisition of an additional unconsolidated joint
venture in 2020. Previously, the Company's investments in its unconsolidated joint ventures were included in other assets on the Company's Consolidated Balance Sheet and the
related equity income was recognized within interest and other income (expense), net on the Company's Consolidated Statements of Income. These amounts are now classified
separately on the Company's Consolidated Balance Sheet and Statements of Income.
In thousands
Total assets
Investments in unconsolidated joint ventures
Other assets
YEAR ENDED DECEMBER 31, 2019
As Previously Reported
As Reclassified
$
$
— $
185,246
185,246 $
8,130
177,296
185,426
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
In thousands
Other income (expense)
Equity income (loss) from unconsolidated joint ventures
Interest and other income (expense), net
New Accounting Pronouncements
YEAR ENDED DECEMBER 31, 2019
YEAR ENDED DECEMBER 31, 2018
As Previously Reported
As Reclassified As Previously Reported
As Reclassified
$
$
— $
(730)
(730) $
(19) $
(711)
(730) $
— $
537
537 $
4
533
537
Accounting Standards Update No. 2016-13
In June 2016, the FASB issued ASU 2016-13, "Measurement of Credit Losses on Financial Instruments." This update is intended to improve financial reporting by requiring
timelier recognition of credit losses on loans and other financial instruments that are not accounted for at fair value through net income, including loans held for investment, held-
to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This update requires that financial statement assets measured at an
amortized cost and certain other financial instruments be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the
amortized cost basis. This standard is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted. Operating lease receivables,
representing the majority of the Company's receivables, are not within the scope of the new standard. The Company adopted this standard as of January 1, 2020. There was not a
material impact to the Consolidated Financial Statements from the adoption of this standard.
Accounting Standards Update No. 2017-04
In January 2017, the FASB issued ASU 2017-04, "Simplifying the Test for Goodwill Impairment." This update eliminates Step 2 of the goodwill impairment test. As such, an
entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a
goodwill impairment charge for the amount by which the reporting unit's carrying amount exceeds its fair value. This standard is effective for the Company for annual and
interim periods beginning after December 15, 2019. The Company adopted this standard as of January 1, 2020. There was not a material impact to the Consolidated Financial
Statements from the adoption of this standard.
Accounting Standards Update No. 2020-04
On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). ASU 2020-04 contains practical expedients for reference rate reform related activities
that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The
Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that
the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of
derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in
the market occur.
62
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
2. Property Investments
The Company invests in healthcare-related properties located throughout the United States. The Company provides management, leasing, development and redevelopment
services, and capital for the construction of new facilities as well as for the acquisition of existing properties. The following table summarizes the Company’s consolidated
investments at December 31, 2020.
BUILDINGS, IMPROVEMENTS, AND
LEASE INTANGIBLES PERSONAL PROPERTY
Dollars in thousands
Seattle, WA
Dallas, TX
Los Angeles, CA
Atlanta, GA
Nashville, TN
Denver, CO
Charlotte, NC
Houston, TX
Washington, D.C.
Richmond, VA
Honolulu, HI
Des Moines, IA
Memphis, TN
San Francisco, CA
Indianapolis, IN
Austin, TX
San Antonio, TX
Chicago, IL
Greensboro, NC
Colorado Springs, CO
Minneapolis, MN
Other (16 markets)
Land held for development
Memphis Redevelopment
Corporate property
Total real estate investments
3. Leases
NUMBER OF
PROPERTIES
27 $
21
17
13
7
12
16
10
6
7
3
7
9
3
4
5
6
3
6
5
4
32
LAND
60,017 $
19,194
65,841
13,364
27,998
23,505
4,200
19,256
—
—
8,327
12,665
8,121
14,054
3,299
14,236
6,487
5,859
8,596
5,649
2,090
34,715
598,783 $
475,825
281,111
287,886
195,433
166,835
178,507
143,108
152,739
151,277
136,690
126,098
126,488
107,418
117,174
94,436
89,817
87,900
75,660
68,836
61,364
480,484
567 $
441
401
84
1,251
535
105
95
34
114
159
99
203
43
14
123
398
213
—
15
—
797
5,691
—
—
5,504
TOTAL
659,367 $
495,460
347,353
301,334
224,682
190,875
182,812
162,459
152,773
151,391
145,176
138,862
134,812
121,515
120,487
108,795
96,702
93,972
84,256
74,500
63,454
515,996
ACCUMULATED
DEPRECIATION
(113,270)
(187,050)
(106,244)
(31,696)
(75,927)
(34,458)
(74,687)
(49,953)
(32,135)
(50,005)
(43,530)
(40,023)
(42,107)
(23,350)
(29,102)
(27,521)
(43,753)
(27,829)
(2,567)
(17,048)
(12,064)
(168,213)
4,567,033
(1,232,532)
27,226
21,650
5,504
(953)
(841)
(4,898)
223
357,473
4,203,869
—
—
—
27,226
5,222
—
—
16,428
—
223 $
389,921 $
4,220,297 $
11,195 $
4,621,413 $
(1,239,224)
Lessor Accounting Under ASC 842
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2040. Some leases provide for fixed rent
renewal terms in addition to market rent renewal terms. Some leases provide the lessee, during the term of the lease, with an option or right of first refusal to purchase the leased
property. The Company’s portfolio of single-tenant leases generally requires the lessee to pay minimum rent and all taxes (including property tax), insurance, maintenance and
other operating costs associated with the leased property. The Company records these expenses on a net basis, with the exception of property taxes. Property taxes are recorded
on a gross basis as a lessor cost in which the tenant reimburses the Company. The Company generally expects that collectibility is probable at lease commencement. If the
assessment of collectibility changes after the lease commencement date and Rental income is not considered probable, Rental income is recognized on a cash basis and all
previously recognized uncollectible Rental income is reversed in the period in which the it is determined not to be probable of collection. In addition to the lease-specific
collectibility assessment performed under
63
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Topic 842, the Company may also apply a general reserve ("provision for bad debt"), as a reduction to Rental income, for its portfolio of operating lease receivables.
The Company's leases typically have escalators that are either based on a stated percentage or an index such as CPI (consumer price index). In addition, most of the Company's
leases include nonlease components such as reimbursement of operating expenses as additional rent or include the reimbursement of expected operating expenses as part of the
lease payment. The Company adopted an accounting policy to combine lease and nonlease components. Rent escalators based on indices and reimbursements of operating
expenses that are not included in the lease rate are considered variable lease payments. Variable payments are recognized in the period earned. Lease income for the Company's
operating leases recognized for the twelve months ended December 31, 2020 was $492.3 million.
In May 2020, the Company and Mercy Health negotiated the sale of two single-tenant leased properties, a medical office building in Oklahoma and an orthopedic specialty
hospital in Missouri, for $244.5 million. The sale was structured through amendments to the leases to allow for the early exercise of existing purchase options. The amendments
resulted in the application of lease modification accounting under ASC Topic 842, which resulted in lease classification changes from operating to sales-type. During the second
quarter, the Company derecognized the real estate assets on the Condensed Consolidated Balance Sheets and recognized the net investment in sales-type leases, resulting in a
gain of $68.3 million. The Company disposed of these properties on July 30, 2020.
Tabular Disclosure of the Components of Sales-Type Leases
The table below represents the components of sales-type leases for the year ended December 31, 2020:
Dollars in thousands
Profit recognized at commencement date
Interest income
SALES-TYPE LEASES
2020
$
68,282 Gain on sales of real estate assets
3,007 Rental income
Future minimum lease payments under the non-cancelable operating leases, excluding any reimbursements, as of December 31, 2020 are as follows:
In thousands
2021
2022
2023
2024
2025
2026 and thereafter
$
373,344
329,022
281,643
219,196
171,844
437,945
$
1,812,994
Revenue Concentrations
The Company’s real estate portfolio is leased to a diverse tenant base. The Company did not have any customers that account for 10% or more of the Company's revenues for the
years ended December 31, 2020, 2019 and 2018.
Purchase Option Provisions
Certain of the Company’s leases include purchase option provisions. The provisions vary by agreement but generally allow the lessee to purchase the property covered by the
agreement at fair market value or an amount equal to the Company’s gross investment. The Company expects that the purchase price from its purchase options will be greater
than its net investment in the properties at the time of potential exercise by the lessee. The Company had investments of approximately $96.9 million in four real estate properties
as of December 31, 2020 that were subject to purchase options that were exercisable.
64
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Lessee Accounting Under ASC 842
As of December 31, 2020, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of December 31,
2020, the Company had 105 properties totaling 8.8 million square feet that were held under ground leases. Some of the ground leases renewal terms are based on fixed rent
renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental
increases related to the Company’s ground leases are generally either stated or based on the Consumer Price Index. The Company had 43 prepaid ground leases as of
December 31, 2020. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.6 million for the twelve months ended
December 31, 2020, 2019 and 2018 respectively.
The Company’s future lease payments (primarily for its 62 non-prepaid ground leases) as of December 31, 2020 were as follows:
In thousands
OPERATING
FINANCING
2021
2022
2023
2024
2025
2026 and thereafter
Total undiscounted lease payments
Discount
Lease liabilities
$
$
4,865 $
4,895
4,933
4,990
5,041
303,574
328,298
(236,025)
92,273 $
930
783
793
815
826
87,982
92,129
(73,292)
18,837
The following table provides details of the Company's total lease expense for the year ended December 31, 2020:
In thousands
Operating lease cost
Operating lease expense
Variable lease expense
Finance lease cost
Amortization of right-of-use assets
Interest on lease liabilities
Total lease expense
Other information
Operating cash flows outflows related to operating leases
Financing cash flows outflows related to financing leases
Right-of-use assets obtained in exchange for new finance lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term (excluding renewal options) - operating leases
Weighted-average remaining lease term (excluding renewal options) -finance leases
Weighted-average discount rate - operating leases
Weighted-average discount rate - finance leases
$
$
$
$
$
$
YEAR ENDED
Dec. 31, 2020
YEAR ENDED
Dec. 31, 2019
4,715 $
3,551
324
969
9,559 $
6,912 $
3,417 $
7,212 $
1,976 $
48.6
64.5
5.7 %
5.4 %
4,623
3,161
165
616
8,565
6,972
379
17,800
1,725
49.5
65.2
5.7 %
5.4 %
65
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
4. Acquisitions, Dispositions and Mortgage Repayments
2020 Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2020:
TYPE
1
DATE ACQUIRED
PURCHASE
PRICE
MORTGAGES
ASSUMED
2
CASH
CONSIDERATION
3
1/3/20 $
42.0 $
(19.3) $
22.8 $
Dollars in millions
Los Angeles, CA
Atlanta, GA
Raleigh, NC
Colorado Springs, CO
Denver, CO
5
San Diego, CA
Los Angeles, CA
Seattle, WA
6
Atlanta, GA
Houston, TX
Los Angeles, CA
Colorado Springs, CO
Greensboro, NC
5
Memphis, TN
Memphis, TN
7
Nashville, TN
Greensboro, NC
San Diego, CA
Atlanta, GA
8
Greensboro, NC
9
Land Acquisition
10
Land Acquisition
11
Land Acquisition
12
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
12.0
6.3
8.2
33.5
16.7
35.0
11.0
20.5
11.0
14.0
8.9
45.1
26.3
7.0
14.0
10.5
37.4
50.0
11.6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(16.5)
—
—
11.8
6.5
8.3
33.2
16.7
37.7
10.9
21.6
10.9
14.0
8.9
45.4
26.5
7.1
13.9
10.8
21.4
50.4
11.3
2/13/20
2/25/20
3/9/20
3/13/20
7/1/20
7/17/20
7/23/20
7/31/20
9/24/20
9/28/20
10/7/20
11/9/20
11/9/20
11/18/20
12/1/20
12/17/20
12/22/20
12/29/20
12/30/20
1/14/20
9/4/20
10/22/20
$
$
REAL
ESTATE
42.4 $
12.1
6.5
8.6
34.0
16.9
37.7
11.3
21.3
11.0
13.9
9.0
44.9
26.2
6.1
13.9
10.7
38.5
50.6
11.3
OTHER
4
SQUARE FOOTAGE
unaudited
(0.3)
(0.3)
—
(0.3)
(0.8)
(0.2)
—
(0.4)
0.3
(0.1)
0.1
(0.1)
0.5
0.3
1.0
—
0.1
(0.6)
(0.2)
—
(1.0)
—
—
—
86,986
64,624
15,964
34,210
136,994
46,083
49,785
21,309
48,145
40,235
24,252
36,720
149,400
135,270
40,192
38,736
27,599
45,157
125,404
35,373
1,202,438
—
—
—
421.0 $
(35.8) $
390.1 $
426.9 $
1.6
1.0
2.5
—
—
—
1.7
1.1
2.6
1.7
1.1
2.6
426.1 $
(35.8) $
395.5 $
432.3 $
(1.0)
1,202,438
1
2
3
4
5
6
7
8
9
10
11
12
MOB = medical office building.
The mortgages assumed in the acquisitions do not reflect the fair value adjustments totaling $0.7 million in aggregate recorded by the Company upon acquisition (included in Other).
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
Includes three properties.
Represents a single-tenant property.
The Company assumed a prepaid ground lease totaling $0.4 million and recorded a below-market lease intangible totaling $0.8 million in connection with this acquisition that is classified as an operating lease that is included in Other.
Includes two properties.
The Company assumed a ground lease and recorded a below-market lease intangible totaling $0.2 million in connection with this acquisition that is classified as an operating lease. The present value of future lease payments totaling
$0.6 million was recorded on the Company's Consolidated Balance Sheets under the caption Operating lease liabilities.
The Company acquired land parcels under four existing buildings (previously ground leased with the hospital system).
The Company acquired a land parcel under an existing building (previously ground leased). The building and land were disposed on September 30, 2020.
The Company acquired a land parcel adjacent to an existing building, and the land parcel will be held for development.
66
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate acquisitions for 2020 as of the acquisition date:
Building
Land
Land Improvements
$
Intangibles
At-market lease intangibles
Above-market lease intangibles (lessor)
Below-market lease intangibles (lessor)
Below-market lease intangibles (lessee)
Mortgage notes payable assumed, including fair value
adjustments
Other assets acquired
Accounts payable, accrued liabilities and other liabilities
assumed
Total cash paid
$
ESTIMATED
FAIR VALUE
in millions
292.9
74.4
11.6
53.4
2.0
(2.2)
1.0
(36.5)
1.8
(2.9)
395.5
ESTIMATED
USEFUL LIFE
in years
19.0 - 43.0
—
6.0 - 14.0
3.2 - 12.0
1.7 - 11.0
2.3 - 9.9
55
Subsequent Acquisitions
On January 7, 2021, the Company acquired a 22,461 square foot medical office building in San Diego, California for a purchase price of $17.2 million.
On February 1, 2021, the Company acquired two medical office buildings totaling 121,709 square feet in Dallas, Texas for a total purchase price of $22.5 million.
Unconsolidated Joint Ventures
During the year ended December 31, 2020, the Company entered into the TIAA Joint Venture to invest in a broad range of medical office buildings. The Company has a 50%
ownership in the TIAA Joint Venture, and is the managing member. The TIAA Joint Venture is not consolidated for purposes of the Company's Consolidated Financial
Statements. The following table provides details of the TIAA Joint Venture transactions.
Dollars in millions
Minneapolis, MN
Minneapolis, MN
Los Angeles, CA
Los Angeles, CA
TYPE
1
MOB
MOB
MOB
MOB
DATE ACQUIRED PURCHASE PRICE
CASH
CONSIDERATION
2
REAL
ESTATE
OTHER
3
SQUARE FOOTAGE
unaudited
11/12/20 $
16.6 $
14.2 $
13.8 $
12/7/20
12/8/20
12/29/20
15.5
80.6
13.2
15.4
80.5
13.2
15.5
79.2
13.1
$
125.9 $
123.3 $
121.6 $
0.4
(0.1)
1.3
0.1
1.7
92,139
48,594
135,904
48,759
325,396
1
2
3
MOB = medical office building.
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
The Company also has a 55% and 27% ownership interest in two limited liability companies, or LLCs, that own two parking garages in Atlanta, Georgia which is included in
investments in unconsolidated joint ventures on the Company's Consolidated Balance Sheets. The parking garage interests were purchased along with three buildings in the
fourth quarter of 2017.
67
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The Company's investment in and income (loss) recognized for the years ended December 31, 2020 and 2019 related to its joint ventures accounted for under the equity method
are shown in the table below:
Dollars in millions
Net LLC investments, beginning of period
New investments during the period
Equity income (loss) recognized during the period
Owner distributions
Net LLC investments, end of period
DECEMBER 31,
2020
8.1 $
65.7
(0.5)
(0.2)
73.1 $
2019
8.5
—
—
(0.4)
8.1
$
$
2019 Acquisitions
The following table details the Company's acquisitions for the year ended December 31, 2019:
Dollars in millions
Washington, D.C.
4
Indianapolis, IN
5
Atlanta, GA
Dallas, TX
Seattle, WA
Seattle, WA
Seattle, WA
Houston, TX
Oklahoma City, OK
Los Angeles, CA
6
Raleigh, NC
Dallas, TX
7
Seattle, WA
Seattle, WA
Memphis, TN
Seattle, WA
TYPE
1
DATE ACQUIRED
PURCHASE PRICE
CONSIDERATION
CASH
2
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
MOB
3/28/19 $
3/28/19
4/2/19
6/10/19
6/11/19
6/14/19
6/28/19
8/1/19
9/26/19
9/30/19
10/31/19
10/31/19
11/18/19
12/10/19
12/13/19
12/18/19
46.0 $
45.9 $
47.0
28.0
17.0
7.7
19.0
30.5
13.5
4.1
61.1
21.6
20.1
22.8
24.2
8.7
10.0
44.8
28.0
16.7
7.8
19.1
30.4
13.5
4.1
60.9
22.0
19.5
23.1
24.5
8.9
9.3
REAL
ESTATE
50.2 $
43.7
28.0
17.0
7.8
19.5
30.6
13.5
4.1
61.8
21.7
20.2
23.2
24.6
8.9
9.9
MOB = medical office building.
Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
$
381.3 $
378.5 $
384.7 $
OTHER
3
SQUARE FOOTAGE
unaudited
(4.3)
1.1
—
(0.3)
—
(0.4)
(0.2)
—
—
(0.9)
0.3
(0.7)
(0.1)
(0.1)
—
(0.6)
(6.2)
158,338
143,499
47,963
89,990
29,870
47,255
78,288
29,903
28,542
115,634
57,730
48,192
36,350
44,166
110,883
20,109
1,086,712
1
2
3
4
5
6
7
Includes two properties. The Company assumed two ground leases in connection with this acquisition that are classified as financing leases. The present value of future lease payments totaling $14.3 million was recorded on the
Company's Consolidated Balance Sheets under the caption Finance lease liabilities. In addition, the right-of-use assets were partially offset by $5.2 million of above-market lease intangibles included in Other.
The Company assumed a prepaid ground lease totaling $0.8 million and recorded a below-market lease intangible totaling $0.9 million in connection with this acquisition that is classified as an operating lease that is included in Other.
Includes two properties.
The Company assumed a ground lease in connection with this acquisition that is classified as a financing lease. The present value of future lease payments totaling $3.6 million was recorded on the Company's Consolidated Balance
Sheets under the caption Finance lease liabilities.
68
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table summarizes the estimated relative fair values of the assets acquired and liabilities assumed in the real estate acquisitions for 2019 as of the acquisition date:
Building
Land
Land Improvements
Intangibles
At-market lease intangibles
Above-market lease intangibles (lessor)
Below-market lease intangibles (lessor)
Above-market lease intangibles (lessee)
Below-market lease intangibles (lessee)
Other assets acquired
Accounts payable, accrued liabilities and other liabilities
assumed
Total cash paid
$
ESTIMATED
USEFUL LIFE
in years
8.0 - 37.0
—
3.0 - 12.0
3.3 - 9.2
2.4 - 9.9
1.2 - 8.6
69.1 - 72.3
65.1
ESTIMATED
FAIR VALUE
in millions
270.7
59.1
4.2
50.7
0.7
(0.7)
(5.1)
0.9
2.3
(4.3)
378.5
2020 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2020:
Dollars in millions
3
Springfield, MO
Oklahoma City, OK
Miami, FL
3
TYPE
1
DATE DISPOSED
SF
MOB
MOB
7/30/20 $
7/30/20
9/30/20
SALES
PRICE
138.0 $
106.5
5.0
$
249.5 $
CLOSING
ADJUSTMENTS NET PROCEEDS
NET REAL ESTATE
INVESTMENT
— $
—
(0.2)
(0.2) $
138.0 $
106.5
4.8
249.3 $
92.4 $
76.8
2.6
171.8 $
OTHER
including
receivables
2
3.9 $
3.1
0.1
7.1 $
GAIN/
(IMPAIRMENT)
SQUARE FOOTAGE
unaudited
41.7
26.6
2.1
70.4
186,000
200,000
26,000
412,000
1
2
3
MOB = medical office building; SF = surgical facility
Includes straight-line rent receivables, leasing commissions and lease inducements.
In the second quarter of 2020, the Company entered into agreements to sell two single-tenant net leased properties, resulting in a lease modification and classification change from operating to sales-type.
2019 Real Estate Asset Dispositions
The following table details the Company's dispositions for the year ended December 31, 2019:
Dollars in millions
TYPE
1
DATE DISPOSED
SALES
PRICE
CLOSING
ADJUSTMENTS
NET PROCEEDS
NET REAL ESTATE
INVESTMENT
OTHER
including
2
receivables
GAIN/
(IMPAIRMENT)
SQUARE FOOTAGE
unaudited
3
Tucson, AZ
Virginia Beach, VA
4
San Antonio, TX
Erie, PA
New Orleans, LA
Kingsport, TN
Pittsburgh, PA
6
Dallas, TX
5
5
MOB
MOB
MOB
IRF
MOB
SNF
IRF
MOB
4/9/19 $
8/1/19
8/28/19
10/25/19
11/25/19
11/27/19
12/18/19
12/30/19
$
13.0 $
1.3
0.9
14.0
3.7
9.5
3.8
8.7
54.9 $
(0.9) $
(0.1)
(0.1)
—
(0.2)
(0.3)
(0.3)
(0.6)
(2.5) $
12.1 $
1.2
0.8
14.0
3.5
9.2
3.5
8.1
52.4 $
6.9 $
1.2
0.6
1.3
1.2
5.0
3.5
6.1
25.8 $
0.4 $
—
—
—
0.2
1.3
—
(0.4)
1.5 $
4.8
—
0.2
12.7
2.1
2.9
—
2.4
25.1
67,345
10,000
10,138
90,123
136,155
75,000
78,731
69,558
537,050
1
2
3
4
5
MOB = medical office building; IRF = inpatient rehabilitation facility; SNF = skilled nursing facility
Includes straight-line rent receivables, leasing commissions and lease inducements.
Includes four properties sold to a single purchaser.
The Company reclassified this property to held for sale during the second quarter of 2019 and recorded an impairment charge of $0.4 million based on the sales price less estimated costs to sell.
Includes two properties.
69
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
6
The Company reclassified this property to held for sale during the first quarter of 2017 and subsequently in the second quarter of 2019, the Company accepted an offer to purchase and recorded an impairment charge of $5.2 million.
5. Held for Sale
Assets and liabilities of properties sold or classified as held for sale are separately identified on the Company’s Consolidated Balance Sheets. As of December 31, 2020 the
Company had four properties classified as held for sale, and as of December 31, 2019, the Company had no properties classified as held for sale.
The table below reflects the assets and liabilities of the properties classified as held for sale as of December 31, 2020 and 2019.
Dollars in thousands
Balance Sheet data
Land
Buildings, improvements and lease intangibles
Personal property
Accumulated depreciation
Real estate assets held for sale, net
Other assets, net
Assets held for sale, net
Accounts payable and accrued liabilities
Other liabilities
Liabilities of properties held for sale
DECEMBER 31,
2020
2019
$
$
$
$
1,664 $
27,443
39
29,146
(10,455)
18,691
1,955
20,646 $
533 $
683
1,216 $
—
—
—
—
—
—
37
37
37
108
145
6. Impairment Charges
An asset is impaired when undiscounted cash flows expected to be generated by the asset are less than the carrying value of the asset. The Company must assess the potential for
impairment of its long-lived assets, including real estate properties, whenever events occur or there is a change in circumstances, such as the sale of a property or the decision to
sell a property, that indicate that the recorded value might not be fully recoverable.
The Company recorded impairment charges on properties sold or classified as held for sale for the year ended December 31, 2019 totaling $5.6 million. The Company did not
record any impairment charges in 2020. Both level 1 and level 3 fair value techniques were used to derive these impairment charges.
7. Other Assets
Other assets consist primarily of straight-line rent receivables, additional long-lived assets, prepaids, intangible assets, debt issuance costs and accounts receivable. Items
included in "Other assets, net" on the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019 are detailed in the table below:
Dollars in millions
Straight-line rent receivables
Prepaid assets
Additional long-lived assets, net
Accounts receivable, net
Ground lease modification, net
Project costs
Goodwill
Debt issuance costs, net
Above-market intangible assets, net
Customer relationship intangible assets, net
Other
1
$
DECEMBER 31,
2020
67.0 $
49.9
21.3
11.2
9.0
6.8
3.5
3.1
2.6
1.2
0.5
2019
70.5
44.3
22.7
13.0
9.4
4.6
3.5
5.0
1.2
2.5
0.6
$
176.1 $
177.3
70
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
1
2020 and 2019 includes debt issuance costs related to the Company's Unsecured Credit Facility and 2019 includes the debt issuance costs related to the Unsecured Term Loan due 2026 that had not yet been funded.
8. Intangible Assets and Liabilities
The Company has several types of intangible assets and liabilities included in its Consolidated Balance Sheets, including goodwill, debt issuance costs, above-, below-, and at-
market lease intangibles, and customer relationship intangibles. The Company’s intangible assets and liabilities, including assets held for sale, as of December 31, 2020 and 2019
consisted of the following:
Dollars in millions
Goodwill
Credit facility debt issuance costs
Above-market lease intangibles (lessor)
Customer relationship intangibles (lessor)
Below-market lease intangibles
Debt issuance costs
1
At-market lease intangibles
Above-market lease intangibles (lessee)
Below-market lease intangibles (lessee)
GROSS BALANCE
at December 31,
$
2020
3.5 $
5.1
2019
3.5 $
5.8
4.2
4.1
(9.0)
13.6
174.4
(7.2)
18.8
4.0
4.1
(7.3)
9.2
147.9
(7.2)
18.8
ACCUMULATED
AMORTIZATION
at December 31,
2020
— $
2.0
1.6
1.7
(4.4)
3.2
63.7
(0.3)
2.5
$
207.5 $
178.8 $
70.0 $
2019
—
0.8
2.8
1.6
(4.0)
3.5
59.8
(0.2)
2.5
66.8
WEIGHTED AVG.
REMAINING LIFE
in years
BALANCE SHEET CLASSIFICATION
Other assets, net
Other assets, net
Other assets, net
Other assets, net
Other liabilities
Notes and bonds payable
Real estate properties
Right-of-use asset
Right-of-use asset
N/A
2.4
5.0
22.6
6.0
6.3
5.1
74.6
62.2
13.3
1
Includes debt issuance costs related to the Company's Unsecured Senior Notes payable, Unsecured Term Loan due 2024, Unsecured Term Loan due 2026, and mortgage notes payable.
For the years ended December 31, 2020 and 2019, the Company recognized approximately $31.0 million and $28.0 million of intangible amortization expense, respectively.
The following table represents expected amortization over the next five years of the Company’s intangible assets and liabilities in place as of December 31, 2020:
Dollars in millions
FUTURE AMORTIZATION OF
INTANGIBLES, NET
$
2021
2022
2023
2024
2025
27.9
24.6
19.6
14.0
9.7
71
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
9. Notes and Bonds Payable
Dollars in thousands
Unsecured Credit Facility
Unsecured Term Loan due 2024
Unsecured Term Loan due 2026
Senior Notes due 2023
Senior Notes due 2025
Senior Notes due 2028
Senior Notes due 2030
Senior Notes due 2031
Mortgage notes payable
1
1
1
1
2
1
1
1
DECEMBER 31,
2020
— $
$
199,236
149,479
—
248,776
296,123
296,468
294,924
117,763
2019
MATURITY DATES CONTRACTUAL INTEREST RATES
PRINCIPAL PAYMENTS
INTEREST PAYMENTS
293,000
199,013
—
248,540
248,522
295,651
—
—
129,343
5/23
5/24
6/26
4/23
5/25
1/28
3/30
3/31
11/22-4/27
LIBOR + 0.90% At maturity
LIBOR + 1.00% At maturity
LIBOR + 1.60% At maturity
3.75 % At maturity
3.88 % At maturity
3.63 % At maturity
2.40 % At maturity
2.05 % At maturity
3.31%-6.17% Monthly
Monthly
Monthly
Monthly
Semi-Annual
Semi-Annual
Semi-Annual
Semi-Annual
Semi-Annual
Monthly
1
Balances are shown net of discounts and unamortized issuance costs.
2 Balances are shown net of discounts and unamortized issuance costs and include premiums.
$
1,602,769 $
1,414,069
The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan agreements. Among other things,
these provisions require the Company to maintain certain financial ratios and impose certain limits on the Company’s ability to incur indebtedness and create liens or
encumbrances. As of December 31, 2020, the Company was in compliance with its financial covenant provisions under its various debt instruments.
Unsecured Credit Facility
On October 14, 2011, the Company entered into a $700.0 million unsecured credit facility with a syndicate of lenders (the "Unsecured Credit Facility"). On May 31, 2019, the
Company entered into an amended and restated Unsecured Credit Facility to extend the maturity date to May 2023. The credit facility agreement provides the Company with two
six-month extension options that could extend the maturity date to May 2024. Each option is subject to an extension fee of 0.0625% of the aggregate commitments. Amounts
outstanding under the Unsecured Credit Facility bear interest at LIBOR plus an applicable margin rate. The margin rate, which depends on the Company's credit ratings, ranges
from 0.775% to 1.45% (0.90% as of December 31, 2020). In addition, the Company pays a facility fee per annum on the aggregate amount of commitments ranging from
0.125% to 0.30% (0.20% as of December 31, 2020). In connection with the amendment, the Company paid up-front fees to the lenders of approximately $3.5 million, which will
be amortized over the term of the facility. As of December 31, 2020, the Company had no loans outstanding under the Unsecured Credit Facility.
Unsecured Term Loan due 2024
In February 2014, the Company entered into a $200.0 million unsecured term loan with a syndicate of nine lenders (the "Unsecured Term Loan due 2024"). On July 5, 2016, the
Company repaid $50.0 million of the outstanding principal. On May 31, 2019, the Company entered into an amended and restated unsecured term loan due 2022 with a syndicate
of nine lenders to extend the maturity date to May 2024, to increase the loan amount from $150.0 million to $200 million, and to add the unsecured term loan due 2026
(discussed below). The Unsecured Term Loan due 2024 bears interest at a rate equal to (x) LIBOR plus (y) a margin ranging from 0.85% to 1.65% (1.00% as of December 31,
2020) based upon the Company's unsecured debt ratings. Payments under the Unsecured Term Loan due 2024 are interest only, with the full amount of the principal due at
maturity. The Unsecured Term Loan due 2024 may be prepaid at any time, without penalty. The Unsecured Term Loan due 2024 has various financial covenant provisions that
are required to be met on a quarterly and annual basis that are equivalent to those of the Unsecured Credit Facility. As of December 31, 2020, the Company had interest rate
swaps totaling $75.0 million to hedge the 1-month LIBOR portion of the cost of borrowing under the Unsecured Term Loan due 2024 at a weighted average rate of 2.37%. The
outstanding balance on the Unsecured Term Loan due 2024 was $200.0 million as of December 31, 2020 with an effective interest rate of approximately 1.99% including the
impact of the interest rate swaps. In connection with the amendment and restatement, the Company paid up-front fees to the lenders of approximately $0.7 million, of which $0.4
million was capitalized and will be amortized over the term of the loan, and $0.3 million was expensed
72
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
during the second quarter of 2019. For each of the years ended December 31, 2020, 2019, and 2018 the Company amortized approximately $0.2 million of the debt issuance
costs which is included in interest expense on the Company's Consolidated Statements of Income. The following table reconciles the balance of the Unsecured Term Loan due
2024 on the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019:
Dollars in thousands
Unsecured Term Loan due 2024 principal balance
Debt issuance costs
Unsecured Term Loan due 2024 carrying amount
DECEMBER 31,
2020
200,000 $
(764)
199,236 $
2019
200,000
(987)
199,013
$
$
Unsecured Term Loan due 2026
On May 31, 2019, the Company amended and restated its term loan agreement with a syndicate of lenders (the "Unsecured Term Loan due 2026"). The Unsecured Term Loan
due 2026 has a delayed draw feature that allowed the Company up to nine months to draw against the $150.0 million commitments. The Company completed its initial draw of
$150.0 million on the Unsecured Term Loan due 2026 on May 29, 2020. The Unsecured Term Loan due 2026 bears interest at a rate equal to LIBOR plus a margin ranging from
1.45% to 2.40% (1.60% at December 31, 2020). As of December 31, 2020, the Company had interest rate swaps totaling $100.0 million to hedge the 1-month LIBOR portion of
the cost of borrowing under the Unsecured Term Loan due 2026 at a weighted average rate of 2.23%. The outstanding balance on the Unsecured Term Loan due 2026 was
$150.0 million as of December 31, 2020 with an effective interest rate of approximately 3.14% including the impact of the interest rate swaps. In connection with the
amendment, the Company paid up-front fees to the lenders of approximately $1.1 million, of which $0.7 million was capitalized and will be amortized over the term of the loan,
and $0.4 million was expensed during the second quarter of 2019. For the year ended December 31, 2020, the Company amortized approximately $0.1 million of the debt
issuance costs which is included in interest expense on the Company's Consolidated Statements of Income. The following table reconciles the balance of the Unsecured Term
Loan due 2026 on the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019:
Dollars in thousands
Unsecured Term Loan due 2026 principal balance
Debt issuance costs
Unsecured Term Loan due 2026 carrying amount
DECEMBER 31,
2020
150,000 $
(521)
149,479 $
2019
—
—
—
$
$
Senior Notes due 2023 Redemption
On October 19, 2020, the Company redeemed the $250.0 million outstanding principal of its senior notes due 2023 (the "Senior Notes due 2023"). The aggregate redemption
price of $270.5 million consisted of outstanding principal of $250.0 million, accrued interest of $0.1 million, and a "make-whole" amount of approximately $20.4 million for the
early extinguishment of debt. The unaccreted discount and unamortized costs on these notes of $1.1 million was written off upon redemption. The Company recognized a loss on
early extinguishment of debt of approximately $21.5 million related to this redemption. The following table reconciles the balance of the Senior Notes due 2023 on the
Company's Consolidated Balance Sheets as of December 31, 2020 and 2019:
Dollars in thousands
Senior Notes due 2023 face value
Unaccreted discount
Debt issuance costs
Senior Notes due 2023 carrying amount
DECEMBER 31,
2020
— $
—
—
— $
2019
250,000
(761)
(699)
248,540
$
$
Senior Notes due 2025
On April 24, 2015, the Company issued $250.0 million of unsecured senior notes due 2025 (the "Senior Notes due 2025") in a registered public offering. The Senior Notes due
2025 bear interest at 3.875%, payable semi-annually on
73
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
May 1 and November 1, beginning November 1, 2015, and are due on May 1, 2025, unless redeemed earlier by the Company. The notes were issued at a discount of
approximately $0.2 million and the Company incurred approximately $2.3 million in debt issuance costs which yielded a 4.08% interest rate per annum upon issuance. For each
of the years ended December 31, 2020, 2019, and 2018 the Company amortized approximately $0.2 million of the debt issuance costs which is included in interest expense on
the Company's Consolidated Statements of Income. Concurrent with this transaction, the Company settled four forward starting swap agreements for $1.7 million. The Senior
Notes due 2025 have various financial covenants that are required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due
2025 on the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019:
Dollars in thousands
Senior Notes due 2025 face value
Unaccreted discount
Debt issuance costs
Senior Notes due 2025 carrying amount
DECEMBER 31,
2020
250,000 $
(100)
(1,124)
248,776 $
2019
250,000
(121)
(1,357)
248,522
$
$
Senior Notes due 2028
On December 11, 2017, the Company issued $300.0 million of unsecured Senior Notes due 2028 (the "Senior Notes due 2028") in a registered public offering. The Senior Notes
due 2028 bear interest at 3.625%, payable semi-annually on January 15 and July 15, beginning July 15, 2018, and are due on January 15, 2028, unless redeemed earlier by the
Company. The notes were issued at a discount of approximately $2.5 million and the Company incurred approximately $2.7 million in debt issuance costs which yielded a 3.84%
interest rate per annum upon issuance. For the year ended December 31, 2020, the Company amortized approximately $0.2 million of the discount and $0.2 million of the debt
issuance costs which are included in interest expense on the Company's Consolidated Statements of Income. The Senior Notes due 2028 have various financial covenants that are
required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2028 on the Company’s Consolidated Balance Sheets as of
December 31, 2020 and 2019:
Dollars in thousands
Senior Notes due 2028 face value
Unaccreted discount
Debt issuance costs
Senior Notes due 2028 carrying amount
DECEMBER 31,
2020
300,000 $
(1,872)
(2,005)
296,123 $
2019
300,000
(2,100)
(2,249)
295,651
$
$
Senior Notes due 2030
On March 18, 2020, the Company issued $300.0 million of unsecured Senior Notes due 2030 (the "Senior Notes due 2030") in a registered public offering. The Senior Notes due
2030 bear interest at 2.40%, payable semi-annually on March 15 and September 15, beginning September 15, 2020, and are due on March 15, 2030, unless redeemed earlier by
the Company. The notes were issued at a discount of approximately $1.0 million and the Company incurred approximately $2.8 million in debt issuance costs which yielded a
2.71% interest rate per annum upon issuance. Concurrent with this transaction, the Company settled two forward starting swap agreements for $4.3 million. For the year ended
December 31, 2020, the Company amortized approximately $0.1 million of the discount and $0.2 million of the debt issuance costs which are included in interest expense on the
Company's Consolidated Statements of Income. The Senior Notes due 2030 have various financial covenants that are required to be met on a
74
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2030 on the Company’s Consolidated Balance Sheets as of December 31, 2020:
Dollars in thousands
Senior Notes due 2030 face value
Unaccreted discount
Debt issuance costs
Senior Notes due 2030 carrying amount
DECEMBER 31,
2020
300,000
(935)
(2,597)
296,468
$
$
Senior Notes due 2031
On October 2, 2020, the Company issued $300.0 million of unsecured Senior Notes due 2031 (the "Senior Notes due 2031") in a registered public offering. The Senior Notes due
2031 bear interest at 2.05%, payable semi-annually on March 15 and September 15, beginning March 15, 2021, and are due on March 15, 2031, unless redeemed earlier by the
Company. The notes were issued at a discount of approximately $2.4 million and the Company incurred approximately $2.8 million in debt issuance costs which yielded a 2.24%
interest rate per annum upon issuance. For the year ended December 31, 2020, the Company amortized approximately $0.1 million of the discount and $0.1 million of the debt
issuance costs which are included in interest expense on the Company's Consolidated Statements of Income. The Senior Notes due 2031 have various financial covenants that are
required to be met on a quarterly and annual basis. The following table reconciles the balance of the Senior Notes due 2031 on the Company’s Consolidated Balance Sheets as of
December 31, 2020:
Dollars in thousands
Senior Notes due 2028 face value
Unaccreted discount
Debt issuance costs
Senior Notes due 2028 carrying amount
DECEMBER 31,
2020
300,000
(2,382)
(2,694)
294,924
$
$
Mortgage Notes Payable
The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019.
For the years ended December 31, 2020, 2019 and 2018, the Company amortized approximately $0.4 million, $0.6 million and $0.4 million of the discount and $0.4 million,
$0.4 million, and $0.8 million of the premium. For the years ended December 31, 2020, 2019 and 2018, the Company also amortized approximately $0.2 million, $0.2 million,
and $0.1 million of the debt issuance costs, respectively, on the mortgage notes payable which is included in interest expense on the Company’s Consolidated Statements of
Income.
Dollars in thousands
Mortgage notes payable principal balance
Unamortized premium
Unaccreted discount
Debt issuance costs
Mortgage notes payable carrying amount
DECEMBER 31,
2020
117,221 $
1,450
(150)
(758)
117,763 $
2019
129,258
1,162
(528)
(549)
129,343
$
$
75
Table of Contents
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table details the Company’s mortgage notes payable, with related collateral.
Dollars in millions
ORIGINAL
BALANCE
EFFECTIVE INTEREST
19
RATE
MATURITY
DATE COLLATERAL
20
PRINCIPAL AND
INTEREST PAYMENTS
18
9
8
3
1
4
2
Commercial Bank
Commercial Bank
Life Insurance Co.
Life Insurance Co.
Commercial Bank
5
Municipal Government
Life Insurance Co.
Life Insurance Co.
Financial Services
Life Insurance Co.
Life Insurance Co.
Life Insurance Co.
Financial Services
Life Insurance Co.
Commercial Bank
Life Insurance Co.
Commercial Bank
14
13
15
11
10
16
12
$
6
15.2
7.9
7.3
5.6
12.9
11.0
11.0
12.3
12.4
9.0
13.3
6.8
9.7
16.5
11.5
19.2
15.0
7.65 %
4.00 %
5.25 %
4.30 %
6.43 %
4.79 %
3.87 %
3.86 %
4.27 %
4.84 %
4.13 %
3.96 %
4.32 %
3.43 %
3.71 %
4.08 %
5.25 %
7/20 MOB
8/20 MOB
8/20 MOB
1/21 MOB
2/21 MOB
MOB
11/22 MOB
8/23 MOB
10/23 MOB
12/23 MOB,OFC
7
1/24 MOB
2/24 MOB
9/24 MOB
1/25 MOB,OFC
1/26 MOB
12/26 MOB
4/27 MOB
7
(17)
Monthly/15-yr amort.
Monthly/27-yr amort.
Monthly/10-yr amort.
Monthly/12-yr amort.
Semi-Annual
Monthly/7-yr amort.
Monthly/7-yr amort.
Monthly/10-yr amort.
Monthly/10-yr amort.
Monthly/10-yr amort.
Monthly/7-yr amort.
Monthly/10-yr amort.
Monthly/7-yr amort.
Monthly/10-yr amort.
Monthly/10-yr amort.
Monthly/20-yr amort.
$
INVESTMENT IN
COLLATERAL
at December 31,
BALANCE
at December 31,
2020
2020
2019
— $
—
—
—
—
—
22.0
25.5
23.1
27.9
21.0
14.6
15.9
38.5
39.3
43.2
33.6
— $
—
—
—
—
—
9.8
10.6
11.4
7.3
12.4
6.2
8.1
17.1
9.2
18.7
7.0
12.5
0.5
6.0
4.5
10.1
10.6
10.0
10.9
11.7
7.6
12.7
6.4
8.3
—
9.6
—
7.9
$
304.6 $
117.8 $
129.3
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
The Company repaid this mortgage note in June 2020. The Company's unencumbered gross investment was $18.7 million at December 31, 2020.
The Company repaid this mortgage note in May 2020. The Company's unencumbered gross investment was $19.5 million at December 31, 2020.
The Company repaid this mortgage note in February 2020. The Company's unencumbered gross investment was $18.1 million at December 31, 2020.
The Company repaid this mortgage note in October 2020. The Company's unencumbered gross investment was $15.8 million at December 31, 2020..
The Company repaid this mortgage note in November 2020. The Company's unencumbered gross investment was $55.2 million at December 31, 2020..
The Company repaid this mortgage note in June 2020. The Company's unencumbered gross investment was $21.0 million at December 31, 2020
These three mortgage notes payable are series municipal bonds with maturity dates ranging from from May 2022 to May 2040. One of the four original notes payable was repaid upon maturity in May 2017. The remaining three required
interest only payments and were repaid in June 2020.
The unaccreted portion of the $0.1 million discount recorded on this note upon acquisition is included in the balance above.
The unaccreted portion of the $0.2 million discount recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.4 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.1 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.8 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.2 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.1 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.7 million premium recorded on this note upon acquisition is included in the balance above.
The unamortized portion of the $0.7 million premium recorded on this note upon acquisition is included in the balance above.
Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment made in June 2020.
Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted).
The contractual interest rates for the 11 outstanding mortgage notes ranged from 3.3% to 6.2% as of December 31, 2020.
20 MOB-Medical office building. OFC-Office
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Other Long-Term Debt Information
Future maturities of the Company’s notes and bonds payable as of December 31, 2020 were as follows:
Dollars in thousands
2021
2022
2023
2024
2025
2026 and thereafter
PRINCIPAL
MATURITIES
NET ACCRETION/
AMORTIZATION
1
DEBT
ISSUANCE COSTS
2
NOTES AND
BONDS PAYABLE
$
3,913 $
13,434
30,701
226,449
267,415
1,075,309
$
1,617,221 $
(198) $
(226)
(251)
(412)
(580)
(2,322)
(3,989) $
(1,523) $
(1,547)
(1,541)
(1,368)
(1,068)
(3,416)
(10,463) $
2,192
11,661
28,909
224,669
265,767
1,069,571
1,602,769
%
0.1 %
0.7 %
1.8 %
14.0 %
16.6 %
66.8 %
100.0 %
1
2
Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2025, Senior Notes due 2028, Senior Notes due 2030, Senior Notes due 2031 and 9 mortgage notes payable.
Excludes approximately $3.1 million in debt issuance costs related to the Company's Unsecured Credit Facility included in other assets, net.
10. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of
business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk,
primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into
derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the
value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the
Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this
objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the
receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying
notional amount. During 2020, 2019 and 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated other comprehensive income
(loss) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other
comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
During 2020, the Company entered into two treasury rate locks totaling $75.0 million and $40.0 million, respectively. The treasury rate locks were settled for an aggregate
amount of $4.3 million concurrent with the Company's issuance of its Senior Notes due 2030. The settlement will be amortized over the 10-year term of the notes.
The Company had eight outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
INTEREST RATE DERIVATIVE
Interest rate swaps - 2017
Interest rate swaps - 2018
Interest rate swaps - 2019
Total interest rate swaps
NUMBER OF
INSTRUMENTS
NOTIONAL
in millions
2 $
2
4
8 $
25.0
50.0
100.0
175.0
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Tabular Disclosure of Fair Values of Derivative Instruments on the Balance Sheet
The table below presents the fair value of the Company's derivative financial instruments, as well as, their classification on the Consolidated Balance Sheets as of December 31,
2020 and 2019.
Dollars in thousands
Derivatives designated as hedging instruments
Interest rate swaps 2017
Interest rate swaps 2018
Interest rate swaps 2019
Total derivatives designated as hedging instruments
AS OF DECEMBER 31, 2020
AS OF DECEMBER 31, 2019
BALANCE SHEET LOCATION
FAIR
VALUE
BALANCE SHEET LOCATION
Other liabilities
Other liabilities
Other liabilities
$
$
(1,008) Other liabilities
(2,291) Other liabilities
(9,875) Other liabilities
(13,174)
FAIR
VALUE
(467)
(1,335)
(3,478)
(5,280)
$
$
Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on Accumulated Other Comprehensive
Income (Loss)
The table below presents the effect of cash flow hedge accounting on Accumulated other comprehensive income (loss) as of December 31, 2020 related to the Company's
outstanding interest rate swaps.
Dollars in thousands
Interest rate swaps 2017
Interest rate swaps 2018
Interest rate swaps 2019
Settled treasury hedges
Settled interest rate swaps
AMOUNT OF (LOSS) RECOGNIZED IN
OCI
on derivatives
AMOUNT OF (GAIN)/LOSS RECLASSIFIED
FROM OCI INTO INCOME
for the twelve months ended December 31,
$
$
2020
(939)
(1,890)
(8,033)
(4,267)
—
Interest expense
Interest expense
Interest expense
Interest expense
Interest expense
(15,129)
Total interest expense
$
$
2020
397 $
934
1,637
336
168
3,472 $
2019
(22)
99
74
—
168
319
The Company estimates that an additional $4.4 million will be reclassified from accumulated other comprehensive loss as an increase to interest expense over the next 12
months.
Tabular Disclosure Offsetting Derivatives
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of December 31, 2020. The net amounts of
derivative liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative liabilities are presented on
the Company's Consolidated Balance Sheets.
Offsetting of Derivative Liabilities
GROSS AMOUNTS
of recognized liabilities
GROSS AMOUNTS OFFSET
in the Consolidated
Balance Sheets
NET AMOUNTS OF LIABILITIES
presented in the Consolidated Balance Sheets
FINANCIAL
INSTRUMENTS
CASH
COLLATERAL
GROSS AMOUNTS NOT OFFSET
in the Consolidated Balance Sheets
Derivatives
$
(13,174) $
— $
(13,174) $
13,174 $
— $
NET
AMOUNT
—
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations
if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. The Company has agreements with each of its
derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company
could also be declared in default on its derivative obligations.
As of December 31, 2020, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these
agreements was $13.6 million. As of December 31, 2020, the Company has not posted any collateral related to these agreements and was not in breach of any agreement
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value of
$13.6 million.
11. Stockholders’ Equity
Common Stock
The Company had no preferred shares outstanding and had common shares outstanding for the three years ended December 31, 2020, 2019, and 2018 as follows:
Balance, beginning of year
Issuance of common stock
Non-vested share-based awards, net of withheld shares and forfeitures
Balance, end of year
2020
134,706,154
4,637,445
143,776
139,487,375
YEAR ENDED DECEMBER 31,
2019
125,279,455
9,251,440
175,259
134,706,154
2018
125,131,593
26,203
121,659
125,279,455
At-The-Market Equity Offering Program
The Company has in place an at-the-market equity offering program to sell shares of the Company’s common stock from time to time in at-the-market sales transactions. On
February 14, 2020, the Company entered into sales agreements with six investment banks to allow sales under its at-the-market equity offering program of up to an aggregate of
$500.0 million of common stock. The following table details the Company's at-the-market activity, including forward transactions:
WEIGHTED
AVERAGE SALE
PRICE
per share
$
$
$
33.22
31.50
30.53
2019
2020
January 2021
SHARES PRICED
SHARES SETTLED
SHARES REMAINING
TO BE SETTLED
NET PROCEEDS
in millions
5,470,673
6,430,572
215,532
5,470,673
4,607,313
239,896
— $
1,823,259 $
1,798,895 $
179.1
141.5
7.2
Of the 1.8 million shares remaining to be settled, all of which are expected to be settled by January 2022, the Company expects net proceeds ranging from $53.9 million to
$55.8 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 $291.0 million remaining available to be sold under the current sales agreements at the
date of this filing.
Dividends Declared
During 2020, the Company declared and paid common stock dividends aggregating $1.20 per share ($0.30 per share per quarter).
On February 9, 2021, the Company declared a quarterly common stock dividend in the amount of $0.3025 per share payable on March 9, 2021 to stockholders of record on
February 22, 2021.
Authorization to Repurchase Common Stock
On May 5, 2020, the Company’s Board of Directors authorized the repurchase of up to $50 million of outstanding shares of the Company’s common stock either in the open
market or through privately negotiated transactions, subject to market conditions, regulatory constraints, and other customary conditions. The Company is not obligated under
this authorization to repurchase any specific number of shares. This authorization supersedes all previous stock repurchase authorizations. As of the date of these Consolidated
Financial Statements, the Company has not repurchased any shares of its common stock under this authorization.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Accumulated Other Comprehensive Loss
During each of the two years ended December 31, 2020 and 2019, the Company entered into interest rate swaps to hedge the variable cash flows associated with existing
variable-rate debt. The Company entered into two treasury rate locks that were settled in 2020 for an aggregate amount of $4.3 million concurrent with the Company’s issuance
of its Senior Notes due 2030. This amount will be reclassified out of accumulated other comprehensive over the 10-year term of the notes. The Company continues to amortize
the 2015 settlement of forward-starting interest rate swaps. This amount will be reclassified out of accumulated other comprehensive loss impacting net income over the 10-year
term of the associated senior note issuance. See Note 10 for more information regarding the Company's derivative instruments.
The following table represents the changes in accumulated other comprehensive loss during the years ended December 31, 2020 and 2019:
Dollars in thousands
Beginning balance
Other comprehensive loss before reclassifications
Amounts reclassified from accumulated other comprehensive income (loss)
Losses on settlement of treasury rate locks arising during the period
Net current-period other comprehensive (loss)
Ending balance
INTEREST RATE SWAPS
as of December 31,
$
$
2020
(6,175) $
3,472
(10,862)
(4,267)
(11,657)
(17,832) $
2019
(902)
319
(5,592)
—
(5,273)
(6,175)
The following table represents the details regarding the reclassifications from Accumulated other comprehensive income (loss) during the year ended December 31, 2020 (dollars
in thousands):
DETAILS ABOUT ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS) COMPONENTS
Amounts reclassified from accumulated other comprehensive income (loss) related to settled interest rate
swaps
Amounts reclassified from accumulated other comprehensive income (loss) related to current interest rate
swaps
AMOUNT RECLASSIFIED
from accumulated other comprehensive
income (loss)
AFFECTED LINE ITEM
in the statement where net
income is presented
$
$
504
Interest Expense
2,968
Interest Expense
3,472
12. Stock and Other Incentive Plans
Stock Incentive Plan
In May 2015, the Company's stockholders approved the 2015 Stock Incentive Plan (the "2015 Incentive Plan") which authorizes the Company to issue 3,500,000 shares of
common stock to its employees and directors. The 2015 Incentive Plan, which superseded the 2007 Employee Stock Incentive Plan (the "Predecessor Plan"), will continue until
the shares are depleted or terminated by the Company’s Board of Directors. As of December 31, 2020 and 2019, the Company had issued a total of 2,186,078 and 1,988,079
restricted shares, respectively, under the 2015 Incentive Plan for compensation-related awards to employees and directors, with a total of 1,313,922 and 1,511,921, respectively,
remaining unissued under the plan. Under the Predecessor Plan for compensation-related awards to employees and directors, the Company had issued, net of forfeitures, a total
of 1,878,637 restricted shares for the year ended December 31, 2015. Non-vested shares issued under the 2015 Incentive Plan are generally subject to fixed vesting periods
varying from three to eight years beginning on the date of issue. If a recipient voluntarily terminates his or her relationship with the Company or is terminated for cause before
the end of the vesting period, the shares are forfeited, at no cost to the Company. The Company recognizes the impact of forfeitures as they occur. Once the shares have been
issued, the recipient has the right to receive dividends and the right to vote the shares. Compensation expense, included in general and administrative expense, recognized during
the years ended December 31, 2020, 2019 and 2018 from the amortization of the value of shares over the vesting period issued to employees and directors was $9.7 million,
$12.0 million and $10.4 million, respectively. The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in $2.9 million of expenses
associated with the acceleration of his
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
outstanding nonvested share-based awards. This charge is included in the 2019 compensation expense. In connection with the vesting, 80,490 shares were withheld to pay
employee federal income taxes. The following table represents expected amortization of the Company's non-vested shares issued:
Dollars in millions
2021
2022
2023
2024
2025
2026 and thereafter
Total
$
$
FUTURE AMORTIZATION
of non-vested shares
8.8
6.9
4.6
3.3
1.9
0.9
26.4
Executive Incentive Plan
On July 31, 2012, the Company adopted an Executive Incentive Plan, which was amended and restated on February 16, 2016 ("Executive Incentive Plan"), to provide specific
award criteria with respect to incentive awards made under the 2015 Incentive Plan subject to the discretion of the Compensation Committee. No new shares of common stock
were authorized in connection with the Executive Incentive Plan. Under the terms of the Executive Incentive Plan, the Company's named executive officers, and certain other
members of senior management, may earn incentive awards in the form of cash and non-vested stock. For 2020, 2019 and 2018, compensation expense, included in general and
administrative expense, resulting from the amortization of non-vested share grants to officers was approximately $5.9 million, $5.7 million, and $5.7 million, respectively.
Details of the awards that have been earned from this plan are as follows:
• On December 14, 2020, the Company granted non-vested stock awards to its four named executive officers, five senior vice presidents, and five first vice presidents with a
grant date fair value totaling $3.4 million, which were granted in the form of 117,122 non-vested shares, with a five-year vesting period, which will result in annual
compensation expense of $0.7 million for each of 2021, 2022, 2023, 2024 and 2025, respectively.
• On December 12, 2019, the Company granted non-vested stock awards to its four named executive officers, five senior vice presidents, and five first vice presidents with a
grant date fair value totaling $6.1 million, which were granted in the form of 187,072 non-vested shares, with a five-year vesting period, which will result in annual
compensation expense of $1.2 million for each of 2021, 2022, and 2023, and $1.1 million for 2024, respectively.
• On December 12, 2018, the Company granted non-vested stock awards to its four named executive officers and five senior vice presidents with a grant date fair value
totaling $5.0 million, which were granted in the form of 165,261 non-vested shares, with a five-year vesting period, which will result in annual compensation expense of
$1.0 million for each of 2021 and 2022, and $0.9 million for 2023, respectively.
Long-Term Incentive Program
In the first quarter of 2020, the Company granted a performance-based award to officers, excluding the four named executive officers, five senior vice presidents, and five first
vice presidents, under the Long-term Incentive Program adopted under the 2015 Incentive Plan (the "LTIP") totaling approximately $0.8 million, which was granted in the form
of 21,774 non-vested shares, respectively. In the first quarter of 2019, the Company granted a performance-based award to officers, excluding the four named executive officers
and five senior vice presidents, under the LTIP totaling approximately $1.0 million, which was granted in the form of 31,262 non-vested shares, respectively. The shares have
vesting periods ranging from three to eight years with a weighted average vesting period of approximately six years.
For 2020, 2019 and 2018, compensation expense resulting from the amortization of non-vested share grants to officers was approximately $1.1 million, $1.1 million, and $1.2
million, respectively.
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Salary Deferral Plan
The Company's salary deferral plan allows certain of its officers to elect to defer up to 50% of their base salary in the form of non-vested shares issued under the 2015 Incentive
Plan subject to long-term vesting. The number of shares will be increased through a Company match depending on the length of the vesting period selected by the officer. The
officer's vesting period choices are: three years for a 30% match; five years for a 50% match; and eight years for a 100% match. During 2020, 2019 and 2018, the Company
issued 17,570 shares, 33,509 shares and 33,348 shares, respectively, to its officers through the salary deferral plan. For 2020, 2019 and 2018, compensation expense resulting
from the amortization of non-vested share grants to officers was approximately $0.9 million, $0.9 million, and $1.0 million, respectively.
Non-employee Directors Incentive Plan
The Company issues non-vested shares to its non-employee directors under the 2015 Incentive Plan. The directors’ shares have a one-year vesting period and are subject to
forfeiture prior to such date upon termination of the director’s service, at no cost to the Company. During 2020, 2019 and 2018, the Company issued 39,681 shares, 24,996
shares, and 30,989 shares, respectively, to its non-employee directors through the 2015 Incentive Plan. For each of the years 2020, 2019 and 2018, compensation expense
resulting from the amortization of non-vested share grants to directors was approximately $1.0 million, $0.8 million, and $0.8 million, respectively.
Other Grants
The Company issued three one-time non-vested share grants related to executive management transition in 2016. For 2020, 2019 and 2018 compensation expense resulting from
the amortization of these non-vested share grants to officers was approximately $0.8 million, $3.5 million, and $1.7 million, respectively.
A summary of the activity under the 2015 Incentive Plan and related information for the three years in the period ended December 31, 2020 follows:
Dollars in thousands, except per share data
Share-based awards, beginning of year
Granted
Vested
Share-based awards, end of year
Weighted-average grant date fair value of
Share-based awards, beginning of year
Share-based awards granted during the year
Share-based awards vested during the year
Share-based awards, end of year
Grant date fair value of shares granted during the year
YEAR ENDED DECEMBER 31,
2020
2019
2018
1,754,066
197,999
(186,004)
1,766,061
1,769,863
276,839
(292,636)
1,754,066
1,907,645
273,012
(410,794)
1,769,863
$
$
$
$
$
29.82 $
30.33 $
23.82 $
30.51 $
29.36 $
31.75 $
28.84 $
29.82 $
28.44
29.72
25.32
29.36
6,006 $
8,791 $
8,114
The vesting periods for the non-vested shares granted during 2020 ranged from one to eight years with a weighted-average amortization period remaining as of December 31,
2020 of approximately 4.0 years.
During 2020, 2019 and 2018, the Company withheld 54,223 shares, 101,580 shares and 151,353 shares, respectively, of common stock from its officers to pay estimated
withholding taxes related to the vesting of shares.
401(k) Plan
The Company maintains a 401(k) plan that allows eligible employees to defer salary, subject to certain limitations imposed by the Internal Revenue Code. The Company
provides a matching contribution of up to 3% of each eligible employee’s salary, subject to certain limitations. The Company’s matching contributions were approximately $0.6
million for the year ended December 31, 2020 and $0.5 million for 2019 and $0.4 million for 2018.
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Dividend Reinvestment Plan
The Company is authorized to issue 1,000,000 shares of common stock to stockholders under the Dividend Reinvestment Plan. As of December 31, 2020, the Company had
issued 607,523 shares under the plan of which 8,419 shares were issued in 2020, 7,990 shares were issued in 2019 and 9,487 shares were issued in 2018.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan, pursuant to which the Company is authorized to issue shares of common stock. Under the Employee Stock Purchase Plan,
each eligible employee in January of each year is able to purchase up to $25,000 of common stock at the lesser of 85% of the market price on the date of grant or 85% of the
market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee
Stock Purchase Plan expire if not exercised 27 months after each such option’s date of grant. The Company accounts for these awards based on fair value, using the Black-
Scholes model, and generally recognizes expense over the award’s vesting period, net of forfeitures. Since the options granted under the Employee Stock Purchase Plan
immediately vest, the Company records compensation expense for those options when they are granted in the first quarter of each year and then may record additional
compensation expense in subsequent quarters as warranted.
During the years ended December 31, 2020, 2019 and 2018, the Company recognized in general and administrative expenses approximately $0.3 million, $0.2 million, and $0.3
million, respectively, of compensation expense related to the annual grant of options to its employees to purchase shares under the Employee Stock Purchase Plan.
Cash received from employees upon exercising options under the Employee Stock Purchase Plan was approximately $0.7 million for the year ended December 31, 2020, $1.0
million for the year ended December 31, 2019, and $0.4 million for the year ended December 31, 2018.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
A summary of the Employee Stock Purchase Plan activity and related information for the three years in the period ended December 31, 2020 is as follows:
Dollars in thousands, except per share data
Options outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Options outstanding and exercisable, end of year
Weighted-average exercise price of
Options outstanding, beginning of year
Options granted during the year
Options exercised during the year
Options forfeited during the year
Options expired during the year
Options outstanding, end of year
Weighted-average fair value of options granted during the year (calculated as of the grant
date)
Intrinsic value of options exercised during the year
Intrinsic value of options outstanding and exercisable
(calculated as of December 31)
Exercise prices of options outstanding
(calculated as of December 31)
Weighted-average contractual life of outstanding options (calculated as of December 31, in
years)
YEAR ENDED DECEMBER 31,
2020
2019
2018
332,659
212,716
(21,713)
(42,221)
(139,794)
341,647
328,533
235,572
(35,277)
(54,095)
(142,074)
332,659
318,100
203,836
(16,716)
(40,897)
(135,790)
328,533
25.59 $
28.36 $
24.10 $
25.29 $
23.74 $
24.70 $
8.06 $
101 $
24.17 $
24.17 $
25.01 $
25.26 $
25.77 $
25.59 $
7.02 $
269 $
1,673 $
2,589 $
24.70 $
25.59 $
0.8
0.8
25.00
27.30
24.01
24.06
23.55
24.17
7.81
71
1,402
24.17
0.8
$
$
$
$
$
$
$
$
$
$
The fair values for these options were estimated at the date of grant using a Black-Scholes options pricing model with the weighted-average assumptions for the options granted
during the period noted in the following table. The risk-free interest rate was based on the U.S. Treasury constant maturity-nominal two-year rate whose maturity is nearest to the
date of the expiration of the latest option outstanding and exercisable; the expected dividend yield was based on the expected dividends of the current year as a percentage of the
average stock price of the prior year; the expected life of each option was estimated using the historical exercise behavior of employees; expected volatility was based on
historical volatility of the Company’s common stock; and expected forfeitures were based on historical forfeiture rates within the look-back period.
Risk-free interest rates
Expected dividend yields
Expected life (in years)
Expected volatility
Expected forfeiture rates
2020
1.58 %
3.69 %
1.43
28.6 %
85 %
2019
2.48 %
4.19 %
1.45
29.8 %
85 %
2018
1.89 %
3.66 %
1.45
28.4 %
85 %
13. Earnings Per Share
The Company uses the two-class method of computing net earnings per common shares. The Company's nonvested share-based awards are considered participating securities
pursuant to the two-class method.
During the twelve months ended December 31, 2020, the Company entered into forward sale agreements to sell shares of common stock through the Company's at-the-market
equity offering program. The Company considered the accounting guidance governing financial instruments and derivatives to account for these agreements and concluded that it
was not a liability as it did not embody obligations to repurchase our shares of common stock nor did it embody
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
obligations to issue a variable number of shares for which the monetary value was predominately fixed, varying with something other than the fair value of the shares, or varying
inversely in relation to the shares. In addition, the Company evaluated whether the agreements met the derivative and hedging guidance scope exception to be accounted for as an
equity instrument and concluded that the agreements can be classified as equity.
The Company used the treasury method to determine the dilution from the forward equity agreements during the period of time prior to settlement. The number of weighted-
average shares outstanding used in the computation of earnings per common share for the twelve months ended months ended December 31, 2020 included the effect from the
assumed issuance of 1.8 million shares of common stock pursuant to the settlement of the forward equity agreements at the contractual price, less the assumed repurchase of the
common stock at the average market price using the proceeds of approximately $56.5 million, adjusted for costs to borrow. For the twelve months ended December 31, 2020,
24,742 weighted-average incremental shares of common stock were excluded from the computation of weighted-average common shares outstanding - diluted, as the impact was
anti-dilutive.
The table below sets forth the computation of basic and diluted earnings per common share for the three years in the period ended December 31, 2020.
Dollars in thousands, except per share data
Weighted average common shares
Weighted average common shares outstanding
Non-vested shares
Weighted average common shares - basic
Weighted average common shares - basic
Dilutive effect of forward equity
Dilutive effect of employee stock purchase plan
Weighted average common shares - diluted
Net income
Dividends paid on nonvested share-based awards
Net income applicable to common stockholders
Basic earnings per common share
Diluted earnings per common share
14. Commitments and Contingencies
YEAR ENDED DECEMBER 31,
2020
2019
2018
135,666,503
(1,736,358)
133,930,145
133,930,145
6,283
70,512
134,006,940
72,195 $
(2,083)
70,112 $
0.52 $
0.52 $
129,735,723
(1,736,022)
127,999,701
127,999,701
—
84,283
128,083,984
39,185 $
(2,075)
37,110 $
0.29 $
0.29 $
125,219,773
(1,927,648)
123,292,125
123,292,125
—
58,808
123,350,933
69,771
(2,320)
67,451
0.55
0.55
$
$
$
$
Redevelopment Activity
The Company continued the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee. The Company funded approximately $12.6 million during
the year ended December 31, 2020. The building continues to operate with in-place leases during construction. The Memphis Redevelopment is expected to be completed in the
first quarter of 2021.
The Company began the redevelopment of a 217,000 square foot medical office building in Dallas, Texas. The Company funded approximately $0.4 million during the year
ended December 31, 2020. The building continues to operate with in-place leases during construction. The redevelopment is expected to take approximately a year to complete.
The Company funded approximately $1.1 million of primarily tenant improvements in connection with its previously completed redevelopment of a medical office building in
Nashville, Tennessee.
The Company funded approximately $0.7 million of primarily tenant improvements in connection with its previously completed redevelopment of a medical office building in
Charlotte, North Carolina.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Development Activity
The Company completed the development of a 151,031 square foot medical office building in Seattle, Washington. The Company spent approximately $10.5 million on the
development during the year ended December 31, 2020. The first tenant took occupancy in the first quarter of 2020.
The Company also funded approximately $1.1 million of primarily tenant improvements as the Company continues to lease up its previously completed development of a
medical office building in Denver, Colorado.
The table below details the Company’s development activity as of December 31, 2020. The information included in the table below represents management’s estimates and
expectations at December 31, 2020, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual
results.
Dollars in thousands
Recently Completed
Seattle, WA
Redevelopment Activity
Memphis, TN
Dallas, TX
1
Total
NUMBER OF
PROPERTIES
INITIAL OCCUPANCY
CONSTRUCTION IN
PROGRESS BALANCE
TOTAL FUNDED
during the year
TOTAL
AMOUNT
FUNDED
December 31, 2020
1
1
1
Q1 2020
Q1 2021
Q4 2020
$
$
— $
10,520 $
59,552
—
—
— $
12,618
423
23,561 $
21,650
423
81,625
1
The project includes the acquisition of a 110,883 square foot medical office building for $8.7 million and redevelopment costs related to the property. Initial occupancy represents the quarter in which the redevelopment is expected to be
completed. The building will continue to operate with in-place leases during construction.
Tenant Improvements
The Company may provide a tenant improvement allowance in new or renewal leases for the purpose of refurbishing or renovating tenant space. As of December 31, 2020, the
Company had commitments of approximately $53.8 million that are expected to be spent on tenant improvements throughout the portfolio, excluding development properties
currently under construction.
Land Held for Development
Land held for development includes parcels of land owned by the Company, upon which the Company intends to develop and own outpatient healthcare facilities. The
Company's land held for development included eight parcels as of December 31, 2020 and seven parcels as of December 31, 2019. The Company’s investment in land held for
development located adjacent to certain of the Company's existing medical office buildings in Texas, Iowa, Tennessee, Georgia and Colorado totaled approximately $27.2
million as of December 31, 2020 and $24.6 million as of December 31, 2019.
15. Other Data
Taxable Income (unaudited)
The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and
operational requirements, including a requirement that it currently distribute at least 90% of its taxable income to its stockholders.
As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal
income taxes has been made in the accompanying Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to
federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years.
Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed
taxable income.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Earnings and profits (as defined under the Internal Revenue Code), the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary
from net income attributable to common stockholders and taxable income because of different depreciation recovery periods, depreciation methods, and other items.
On a tax-basis, the Company’s gross real estate assets totaled approximately $4.7 billion, $4.4 billion, and $4.0 billion as of December 31, 2020, 2019 and 2018, respectively.
The following table reconciles the Company’s consolidated net income attributable to common stockholders to taxable income for the three years ended December 31, 2020:
Dollars in thousands
Net income
Reconciling items to taxable income
Depreciation and amortization
Gain or loss on disposition of depreciable assets
Straight-line rent
Receivable allowances
Share-based compensation
Other
Taxable income
1
Dividends paid
1
Before REIT dividend paid deduction.
YEAR ENDED DECEMBER 31,
2020
2019
$
72,195 $
39,185 $
80,624
(23,898)
7,485
2,494
5,387
(2,182)
69,910
142,105 $
162,557 $
67,953
(15,689)
(11,535)
1,942
2,628
12,631
57,930
97,115 $
155,358 $
$
$
2018
69,771
64,775
(27,581)
(3,049)
2,470
(1,699)
842
35,758
105,529
150,266
Characterization of Distributions (unaudited)
Distributions in excess of earnings and profits generally constitute a return of capital. The following table gives the characterization of the distributions on the Company’s
common stock for the three years ended December 31, 2020.
For the three years ended December 31, 2020, there were no preferred shares outstanding. As such, no dividends were distributed related to preferred shares for those periods.
Common stock
Ordinary income
Return of capital
Unrecaptured section 1250 gain
1
Common stock distributions
2020
2019
2018
PER SHARE
%
PER SHARE
%
PER SHARE
%
$
$
0.77
0.11
0.32
1.20
64.5 % $
9.0 %
26.5 %
100.0 % $
0.79
0.40
0.01
1.20
65.7 % $
33.9 %
0.4 %
100.0 % $
0.75
0.33
0.12
1.20
62.2 %
27.8 %
10.0 %
100.0 %
1
Reporting year ordinary income is also Code Section 199A eligible per the The Tax Cut and Jobs Act of 2017.
State Income Taxes
The Company must pay certain state income taxes, which are typically included in general and administrative expense on the Company’s Consolidated Statements of Income.
The State of Texas gross margins tax on gross receipts from operations is disclosed in the table below as an income tax because it is considered such by the Securities and
Exchange Commission.
State income tax expense and state income tax payments for the three years ended December 31, 2020 are detailed in the table below:
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Dollars in thousands
State income tax expense
Texas gross margins tax
Other
Total state income tax expense
State income tax payments, net of refunds and collections
YEAR ENDED DECEMBER 31,
2020
2019
2018
$
$
$
546 $
8
554 $
557 $
550 $
6
556 $
549 $
586
5
591
642
16. Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practical to estimate that value.
•
•
•
•
•
Cash, cash equivalents and restricted cash - The carrying amount approximates fair value.
Borrowings under the Unsecured Credit Facility, Unsecured Term Loan due 2024 and Unsecured Term Loan due 2026 - The carrying amount approximates fair value because
the borrowings are based on variable market interest rates.
Senior unsecured notes payable - The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar
types of borrowing arrangements.
Mortgage notes payable - The fair value is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements.
Interest rate swap agreements - Interest rate swap agreements are recorded in other liabilities on the Company's Consolidated Balance Sheets at fair value. Fair value is
estimated by utilizing pricing models that consider forward yield curves and discount rates.
The table below details the fair value and carrying values for notes and bonds payable as of December 31, 2020 and 2019.
Dollars in millions
CARRYING VALUE
FAIR VALUE
CARRYING VALUE
FAIR VALUE
Notes and bonds payable
1
$
1,602.8 $
1,645.4 $
1,414.1 $
1,425.8
December 31, 2020
December 31, 2019
1
Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
17. Related-Party Transactions
In the ordinary course of conducting its business, the Company enters into agreements with affiliates in relation to the management and leasing of its real estate assets, including
real estate assets owned through joint ventures.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange
Act of 1934, as amended (the “Securities Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. These
disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that the information required to be disclosed is accumulated and
communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow for timely decisions regarding required disclosure.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of the end of the period covered by this
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Annual Report on Form 10-K. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period,
the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by
the Company in the reports that it files or submits under the Securities Exchange Act.
Changes in the Company’s Internal Control over Financial Reporting
There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Securities Exchange Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s
internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 using the principles and other criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013). Based on that assessment, management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2020. The Company’s independent registered public accounting firm,
BDO USA, LLP, has also issued an attestation report on the effectiveness of the Company’s internal control over financial reporting included herein.
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Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee
Report of
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion on Internal Control over Financial Reporting
We have audited Healthcare Realty Trust Incorporated’s (the “Company’s”) internal control over financial reporting as of December 31, 2020, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO
criteria”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on
the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance
sheets of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each
of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules and our report dated February 10, 2021 expressed
an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Item 9A, Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Nashville, Tennessee
February 10, 2021
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Directors
Information with respect to the Company’s directors, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 11, 2021
under the caption “Election of Directors,” is incorporated herein by reference.
Executive Officers
The executive officers of the Company are:
NAME
AGE
POSITION
Todd J. Meredith
J. Christopher Douglas
John M. Bryant, Jr.
Robert E. Hull
46
45
54
48
President & Chief Executive Officer
Executive Vice President & Chief Financial Officer
Executive Vice President & General Counsel
Executive Vice President - Investments
Mr. Meredith was appointed President and Chief Executive Officer effective December 30, 2016. He served as the Company's Executive Vice President - Investments from
February 2011 until December 30, 2016 and was responsible for overseeing the Company’s investment activities, including the acquisition, financing and development of
medical office and other primarily outpatient medical facilities. Prior to February 2011, he led the Company’s development activities as a Senior Vice President. Before joining
the Company in 2001, Mr. Meredith worked in investment banking.
Mr. Douglas was appointed Chief Financial Officer effective March 1, 2016 and has been employed by the Company since 2003. He served as the Company’s Senior Vice
President, Acquisitions and Dispositions managing the Company’s acquisition and disposition team from 2011 until March 1, 2016. Prior to that, Mr. Douglas served as Senior
Vice President, Asset Administration, administering the Company’s master lease portfolio and led a major disposition strategy in 2007. Mr. Douglas has a background in
commercial and investment banking.
Mr. Bryant became the Company’s General Counsel in November 2003. From April 2002 until November 2003, Mr. Bryant was Vice President and Assistant General Counsel.
Prior to joining the Company, Mr. Bryant was a shareholder with the law firm of Baker Donelson Bearman & Caldwell in Nashville, Tennessee.
Mr. Hull was appointed Executive Vice President - Investments effective January 1, 2017 and has been employed by the Company since 2004. He served as Senior Vice
President - Investments from March 2011 until January 2017, managing the Company's development and acquisition activity. Prior to that, Mr. Hull served in various capacities
on the Company's investments team. Before joining the Company, Mr. Hull worked in the senior living and commercial banking industries.
Code of Ethics
The Company has adopted a Code of Business Conduct and Ethics (the “Code of Ethics”) that applies to its principal executive officer, principal financial officer, principal
accounting officer and controller, or persons performing similar functions, as well as all directors, officers and employees of the Company. The Code of Ethics is posted on the
Company’s website (www.healthcarerealty.com) and is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request
for a printed copy of the Code of Ethics to: Investor Relations, Healthcare Realty Trust Incorporated, 3310 West End Avenue, Suite 700, Nashville, Tennessee 37203. The
Company intends to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for the Company’s principal executive
officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions by posting such information on the Company’s website.
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Table of Contents
Section 16(a) Compliance
Information with respect to compliance with Section 16(a) of the Securities Exchange Act set forth in the Company’s Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 11, 2021 under the caption “Security Ownership of Certain Beneficial Owners and Management – Delinquent Section 16(a) Reports,” is
incorporated herein by reference.
Stockholder Recommendation of Director Candidates
There have been no material changes with respect to the Company’s policy relating to stockholder recommendations of director candidates. Such information is set forth in the
Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 11, 2021 under the caption “Shareholder Recommendation or Nomination of
Director Candidates,” and is incorporated herein by reference.
Audit Committee
Information relating to the Company’s Audit Committee, its members and the Audit Committee’s financial experts, set forth in the Company’s Proxy Statement relating to the
Annual Meeting of Stockholders to be held on May 11, 2021 under the caption “Committee Membership,” is incorporated herein by reference.
Item 11. Executive Compensation
Information relating to executive compensation, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on May 11, 2021 under
the captions “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee
Report” and “Director Compensation,” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Information relating to the security ownership of management and certain beneficial owners, set forth in the Company’s Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 11, 2021 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein by reference.
Information relating to securities authorized for issuance under the Company’s equity compensation plans, set forth in Item 5 of this report under the caption “Equity
Compensation Plan Information,” is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information relating to certain relationships and related transactions, and director independence, set forth in the Company’s Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 11, 2021 under the captions “Certain Relationships and Related Transactions” and “Corporate Governance – Independence of Directors,” is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
Information relating to the fees paid to the Company’s accountants, set forth in the Company’s Proxy Statement relating to the Annual Meeting of Stockholders to be held on
May 11, 2021 under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm,” is incorporated herein by reference.
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Table of Contents
Item 15. Exhibits and Financial Statement Schedules
Index to Historical Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements
The following financial statements of Healthcare Realty Trust Incorporated are included in Item 8 of this Annual Report on Form 10-K.
• Consolidated Balance Sheets – December 31, 2020 and December 31, 2019.
• Consolidated Statements of Income for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
• Consolidated Statements of Equity for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
• Consolidated Statements of Cash Flows for the years ended December 31, 2020, December 31, 2019 and December 31, 2018.
• Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Schedule II
Schedule III
— Valuation and Qualifying Accounts for the years ended December 31, 2019, 2018, and 2017
— Real Estate and Accumulated Depreciation as of December 31, 2019
97
98
All other schedules are omitted because they are either not applicable, not required or because the information is included in the consolidated financial statements or notes
thereto.
3. Exhibits
EXHIBIT NUMBER
DESCRIPTION OF EXHIBITS
3.1 — Second Articles of Amendment and Restatement of the Company, as amended.
1
3.2 — Amended and Restated Bylaws of the Company, as amended.
1
4.1 — Specimen stock certificate.
2
4.2 — Description of Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934.
3
4.3 —
Indenture, dated as of May 15, 2001 by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee (as successor to the
trustee named therein).
4
4.4 —
Fifth Supplemental Indenture, dated March 26, 2013, by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee (as
successor to the trustee named therein).
5
4.5 — Form of 3.75% Senior Note due 2023 (set forth in Exhibit B to the Fifth Supplemental Indenture filed as Exhibit (4.8) hereto).
5
4.6 —
Sixth Supplemental Indenture, dated April 24, 2015, by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee (as
successor to the trustee named therein).
6
4.7 — Form of 3.875% Senior Notes due 2025 (set forth in Exhibit B to the Sixth Supplemental Indenture filed as Exhibit 4.9 hereto).
6
4.8 — Seventh Supplemental Indenture, dated December 11, 2017, by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee.
7
4.9 — Form of 3.625% Senior Note due 2028 (set forth in Exhibit B to the Seventh Supplemental Indenture filed as Exhibit 4.11 hereto).
7
4.10 — Eight Supplemental Indenture, dated March 18, 2020, by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee.
8
4.11 — Form of 2.40% Senior Note due 2030 (set forth in Exhibit B to the Eighth Supplemental Indenture filed as Exhibit 4.10 hereto.)
8
4.12 — Ninth Supplement Indenture, dated October 2, 2020, by and between the Company and Truist Bank, formally known as Banking and Trust Company, as Trustee.
9
4.13 — Form of 2.050% Senior Note due 2031 (set forth in Exhibit B to the Ninth Supplemental Indenture filed as Exhibit 4.12 hereto).
9
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Table of Contents
10.1 — 2000 Employee Stock Purchase Plan.
10
10.2 — Amendment No. 1 to 2000 Employee Stock Purchase Plan, dated February 13, 2018.
11
10.3 — Dividend Reinvestment Plan, as Amended.
12
10.4 — Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J. Meredith and the Company.
13
10.5 — Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between Todd J. Meredith and the Company.
14
10.6 — Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M. Bryant, Jr. and the Company.
15
10.7 — Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between John M. Bryant, Jr. and the Company.
14
10.8 — Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the Company.
15
10.9 — Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between Robert E. Hull and the Company.
14
10.10 — Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas and the Company.
16
10.11 — Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between J. Christopher Douglas and the Company.
14
10.12 — Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan.
13
10.13 — 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010.
17
10.14 — Amendment No. 1 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated December 11, 2013.
18
10.15 — Amendment No. 2 to 2010 Restricted Stock Implementation for Non-Employee Directors, dated August 4, 2015.
19
10.16 — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors.
20
10.17 — Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers.
20
10.18 — Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan.
21
10.19 — Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan.
19
10.20 —
Amended and Restated Credit Agreement, dated as of May 31, 2019, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the
other lenders that are party thereto.
22
10.21 —
Amended and Restated Term Loan, dated as of May 31, 2019, among the Company, Wells Fargo Bank, National Association, as Administrative Agent, and the other
lenders that are party thereto.
22
10.22 —
First Amendment to Amended and Restated Term Loan Agreement, dated as of March 4, 2020, among the Company, Well Fargo Bank, National Association, as
Administrative Agent, and the other lenders that are party thereto.
23
21 — Subsidiaries of the Registrant. (filed herewith)
23 — Consent of BDO USA, LLP, independent registered public accounting firm. (filed herewith)
31.1 —
Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
31.2
Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
—
32 — Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
101.INS — This instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH — XBRL Taxonomy Extension Schema Document. (filed herewith)
101.CAL — XBRL Taxonomy Extension Calculation Linkbase Document. (filed herewith)
101.LAB — XBRL Taxonomy Extension Labels Linkbase Document. (filed herewith)
101.DEF — XBRL Taxonomy Extension Definition Linkbase Document. (filed herewith)
101.PRE — XBRL Taxonomy Extension Presentation Linkbase Document. (filed herewith)
1
2
3
4
5
6
Filed as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed on February 13, 2019 and hereby incorporated by reference.
Filed as an exhibit to the Company's Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2019 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed May 17, 2001 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed March 26, 2013 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 8-K filed April 24, 2015 and hereby incorporated by reference.
7
8
9
Filed as an exhibit to the Company’s Form 8-K filed December 11, 2017 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed March 18, 2020 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed October 2, 2020 and hereby incorporated by reference.
10
Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 1999 and hereby incorporated by reference.
94
Table of Contents
11
12
13
14
15
16
17
18
19
20
21
22
23
Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 2018 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Registration Statement on Form S-3 (Registration No. 33-79452) previously filed on September 26, 2003 pursuant to the Securities Act of 1933 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2015 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2019 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-K for the year ended December 31, 2016 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed February 3, 2016 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 2010 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 10-K for the year ended December 31, 2013 and hereby incorporated by reference.
Filed as an exhibit to the Company’s Form 10-Q for the quarter ended June 30, 2015 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 2012 and hereby incorporated by reference.
Filed as an exhibit to the Company's proxy statement filed March 30, 2015 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 8-K filed May 31, 2019 and hereby incorporated by reference.
Filed as an exhibit to the Company's Form 10-Q for the quarter ended March 31, 2020 and hereby incorporated by reference.
Executive Compensation Plans and Arrangements
The following is a list of all executive compensation plans and arrangements filed as exhibits to this Annual Report on Form 10-K:
1.
2000 Employee Stock Purchase Plan (filed as Exhibit 10.1)
2. Amendment No. 1 to 2000 Employee Stock Purchase Plan (filed as Exhibit 10.2)
3. Third Amended and Restated Employment Agreement, dated February 16, 2016, between Todd J. Meredith and the Company (filed as Exhibit 10.4)
4. Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between Todd J. Meredith and the Company (filed as Exhibit 10.5)
5. Third Amended and Restated Employment Agreement, dated February 15, 2017, between John M. Bryant, Jr. and the Company (filed as Exhibit 10.6)
6. Amendment No. 1 to Third Amended and Restated Employment Agreement, dated February 12, 2020, between John M. Bryant, Jr. and the Company (filed as Exhibit 10.7)
7. Amended and Restated Employment Agreement, dated January 1, 2017, between Robert E. Hull and the Company (filed as Exhibit 10.8)
8. Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between Robert E. Hull and the Company (filed as Exhibit 10.9)
9. Amended and Restated Employment Agreement, dated February 2, 2016, between J. Christopher Douglas and the Company (filed as Exhibit 10.10)
10. Amendment No. 1 to Amended and Restated Employment Agreement, dated February 12, 2020, between J. Christopher Douglas and the Company (filed as Exhibit 10.11)
11. Healthcare Realty Trust Incorporated Amended and Restated Executive Incentive Plan (filed as Exhibit 10.12)
12. 2010 Restricted Stock Implementation for Non-Employee Directors, dated May 4, 2010 (filed as Exhibit 10.13)
13. Amendment No. 1 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.14)
14. Amendment No. 2 to Restricted Stock Implementation for Non-Employee Directors (filed as Exhibit 10.15)
15. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors (filed as Exhibit 10.16)
16. Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers (filed as Exhibit 10.17)
17. Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.18)
18. Amendment No. 1 to Healthcare Realty Trust Incorporated 2015 Stock Incentive Plan (filed as Exhibit 10.19)
Item 16. Form 10-K Summary
None.
95
Table of Contents
SIGNATURES AND SCHEDULES
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By:
/s/ TODD J. MEREDITH
Todd J. Meredith
President and Chief Executive Officer
February 10, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE
/s/ Todd J. Meredith
Todd J. Meredith
/s/ J. Christopher Douglas
J. Christopher Douglas
/s/ Amanda L. Callaway
Amanda L. Callaway
/s/ John V. Abbott
John V. Abbott
/s/ Nancy H. Agee
Nancy H. Agee
/s/ Edward H. Braman
Edward H. Braman
/s/ James J. Kilroy
James J. Kilroy
/s/ Peter F. Lyle
Peter F. Lyle
/s/ John Knox Singleton
John Knox Singleton
/s/ Bruce D. Sullivan
Bruce D. Sullivan
/s/ Christann M. Vasquez
Christann M. Vasquez
TITLE
DATE
President and Chief Executive Officer
(Principal Executive Officer)
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
Director
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
February 10, 2021
96
Table of Contents
Schedule II – Valuation and Qualifying Accounts for the years ended December 31, 2020, 2019 and
2018
Dollars in thousands
DESCRIPTION
BALANCE
AT BEGINNING OF PERIOD
CHARGED/(CREDITED) TO COSTS AND
EXPENSES
ADDITIONS AND DEDUCTIONS
2020
2019
2018
Accounts receivable allowance
Accounts receivable allowance
Accounts receivable allowance
$
$
$
418 $
251 $
256 $
207 $
167 $
60 $
CHARGED
TO OTHER
ACCOUNTS
— $
— $
— $
UNCOLLECTIBLE ACCOUNTS
WRITTEN-OFF
BALANCE
AT END OF PERIOD
21 $
— $
65 $
604
418
251
97
Table of Contents
Schedule III – Real Estate and Accumulated Depreciation as of December 31, 2020
Dollars in thousands
MARKET
Seattle, WA
Dallas, TX
Los Angeles, CA
Atlanta, GA
Nashville, TN
Denver, CO
Charlotte, NC
Houston, TX
Washington, DC
Richmond, VA
Honolulu, HI
Des Moines, IA
Memphis, TN
San Francisco, CA
Indianapolis, IN
Austin, TX
San Antonio, TX
Chicago, IL
Greensboro, NC
Colorado Springs, CO
Minneapolis, MN
Other (16 markets)
Total real estate
Land held for develop.
Memphis redevelopment
Corporate property
Total properties
LAND
1
BUILDINGS, IMPROVEMENTS,
1
LEASE INTANGIBLES AND CIP
NUMBER OF
PROP.
INITIAL
INVESTMENT
COST CAPITALIZED
subsequent to
acquisition
INITIAL
INVESTMENT
COST CAPITALIZED
subsequent to
acquisition
TOTAL
TOTAL
PERSONAL
PROPERTY
2, 3, 5
TOTAL
PROPERTY
1, 3 ACCUMULATED
DEPRECIATION
4 ENCUMBRANCES
DATE ACQUIRED
DATE CONST.
27 $
55,630 $
4,387 $
60,017 $
547,516 $
51,267 $
598,783 $
567 $
659,367 $
113,270 $
25
17
13
7
12
16
10
6
7
3
7
9
3
4
5
6
3
6
5
4
32
227
—
—
—
20,128
63,462
10,518
27,787
19,456
4,163
18,196
—
—
8,314
12,584
7,397
14,054
3,299
14,233
6,456
5,859
6,777
4,830
2,090
32,059
337,292
27,226
5,222
—
730
2,379
2,846
211
4,049
37
1,060
—
—
13
81
724
—
—
3
31
—
1,819
819
—
20,858
65,841
13,364
27,998
23,505
4,200
19,256
—
—
8,327
12,665
8,121
14,054
3,299
14,236
6,487
5,859
8,596
5,649
2,090
368,924
231,261
283,792
121,122
133,203
159,388
115,927
141,467
139,636
93,839
113,335
96,360
91,163
110,325
70,874
62,161
69,993
74,668
51,687
59,908
2,656
34,715
402,294
134,344
49,850
4,094
74,311
33,632
19,119
27,181
11,272
11,641
42,851
12,763
30,128
16,255
6,849
23,562
27,656
17,907
992
17,149
1,456
78,190
503,268
281,111
287,886
195,433
166,835
178,507
143,108
152,739
151,277
136,690
126,098
126,488
107,418
117,174
94,436
89,817
87,900
75,660
68,836
61,364
480,484
21,845
359,137
3,538,843
692,469
4,231,312
—
—
—
27,226
5,222
—
—
16,428
—
—
—
—
—
16,428
—
480
401
84
1,251
535
105
95
34
114
159
99
203
43
14
123
398
213
—
15
—
524,606
347,353
301,334
224,682
190,875
182,812
162,459
152,773
151,391
145,176
138,862
134,812
121,515
120,487
108,795
96,702
93,972
84,256
74,500
63,454
797
5,730
—
—
5,504
515,996
4,596,179
27,226
21,650
5,504
197,505
106,244
31,696
75,927
34,458
74,687
49,953
32,135
50,005
43,530
40,023
42,107
23,350
29,102
27,521
43,753
27,829
2,567
17,048
12,064
168,213
1,242,987
953
841
4,898
—
—
40,257
26,595
—
7,329
—
—
11,423
—
—
—
—
—
—
—
—
—
—
—
8,075
24,084
117,763
—
—
—
227 $
369,740 $
21,845 $
391,585 $
3,555,271 $
692,469 $
4,247,740 $
11,234 $
4,650,559 $
1,249,679 $
117,763
2008-2020
2003-2020
1993-2020
2017-2020
2004-2020
2010-2020
2008-2013
1993-2020
2004-2019
2011
2003-2004
2008-2014
1999-2020
2015-2017
2008-2019
2007-2015
1996-2010
2004-2018
2014-2020
2006-2020
2014-2017
1993-2020
1957-2018
1974-2018
1964-2006
1974-2014
1960-2015
1977-2015
1961-2008
1984-2012
1967-2005
1992-2005
1975-2010
2002-2009
1982-2007
1975-2014
1992-2008
1972-2015
1978-2011
1993-2009
1989-2011
2003-2008
1974-2010
1906-2009
1
2
3
4
5
The Company had 4 assets held for sale as of December 31, 2020 of approximately $29.1 million (gross) and accumulated depreciation of $10.5 million.
Total properties as of December 31, 2020 have an estimated aggregate total cost of $4.7 billion for federal income tax purposes.
Depreciation is provided for on a straight-line basis on buildings and improvements over 3.3 to 43.0 years, lease intangibles over 1.3 to 99.0 years, personal property over 2.9 to 20.0 years, and land improvements over 3.0 to 39.0 years.
Includes unamortized premium of $1.5 million and unaccreted discount of $0.2 million and issuance costs of $0.8 million as of December 31, 2020.
Rollforward of Total Property and Accumulated Depreciation, including assets held for sale, for the year ended December 31, 2020, 2019 and 2018 follows:
Dollars in thousands
Beginning Balance
Additions during the period
Real Estate acquired
Other improvements
Land held for development
Construction in Progress
Retirement/dispositions
Real Estate
Ending Balance
YEAR ENDED DEC. 31, 2020
YEAR ENDED DEC. 31, 2019
YEAR ENDED DEC. 31, 2018
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
TOTAL
PROPERTY
ACCUMULATED
DEPRECIATION
$
4,359,993 $
1,121,102 $
3,993,427 $
1,025,831 $
3,907,010 $
933,220
430,205
80,462
2,579
—
8,313
178,636
282
384,762
71,666
—
15,625
9,285
165,367
278
—
112,591
74,317
4,525
27,649
4,175
157,385
153
—
(222,680)
(58,654)
(105,487)
(79,659)
(132,665)
(69,102)
$
4,650,559 $
1,249,679 $
4,359,993 $
1,121,102 $
3,993,427 $
1,025,831
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not
required under the related instructions or are not applicable, or because the required information is shown in the consolidated financial statements or notes thereto.
98
Subsidiaries of the Registrant
Subsidiary
3310 West End, LLC
4765 Carmel Mountain Road, LLC
5901 Westown Parkway MOB, LLC
593HR, LLC
630 S Raymond, LLC
Allenmore C, LLC
Ankeny North MOB, LLC
Clive Wellness Campus Building Five, LLC
Clive Wellness Campus Building One, LLC
Clive Wellness Campus Building Two, LLC
Cotton Pasadena, LLC
DOB III, LLC
DPCI 6002 Professional, LLC
DPCII 6001 Professional, LLC
Grandview Alamance MOB, LLC
Greensboro Medical Center, LLC
Healthcare Acquisition of Texas, Inc.
Healthcare Realty Services Incorporated
Healthcare Realty Trust Incorporated
HR 3705 Medical Parkway, LLC
HR 601 Broadway Unit A, LLC
HR 9191 Pinecroft SPE, LLC
HR Acquisition I Corporation
HR Acquisition of Alabama, Inc.
HR Acquisition of Pennsylvania, Inc.
HR Acquisition of San Antonio, Ltd.
HR Assets, LLC
HR Bell Air, LLC
HR Briargate, LLC
HR Dakota, LLC
HR Fair Oaks 3650, LLC
HR Fair Oaks 3700, LLC
HR First Hill Medical Building SPE, LLC
HR Forest Glen, LLC
HR Fridley, LLC
HR HMP Unit 1 SPE, LLC
HR Interests, Inc.
HR Lowry Medical Center SPE, LLC
HR MAC II, LLC
Exhibit 21
State of Incorporation
TN
TN
DE
TN
TN
DE
DE
DE
DE
DE
TN
TN
GA
GA
TN
TN
AL
TN
MD
DE
TN
DE
MD
AL
PA
AL
DE
MD
DE
DE
TN
TN
DE
TN
MN
DE
TX
DE
DE
HR MPC II, LLC
HR McNaughten SPE, LLC
HR MRMC MOB II SPE, LLC
HR MRMC MOB III SPE, LLC
HR North Carolina, LLC
HR of California, Inc.
HR of Carolinas, LLC
HR of Indiana, LLC
HR of Iowa, LLC
HR of Los Angeles, Inc.
HR of Los Angeles, Ltd.
HR of Sarasota, LLC
HR Richmond Community SPE, LLC
HR Santa Rosa, LLC
HR Springfield MO, LLC
HR St. Francis MOB I SPE, LLC
HR St. Mary’s MOB NW SPE, LLC
HR St. Mary’s MOB South SPE, LLC
HR St. Mary’s MOB West SPE, LLC
HR Summit Crossing SPE, LLC
HR Three Tree, LLC
HR Unity, LLC
HR Valley North, LLC
HR West Des Moines SPE, LLC
HR West Hills Manager SPE, LLC
HR West Hills MOB SPE, LLC
HRP MAC III, LLC
HRP MAC IV, LLC
HR-Pima, LLC
HRT of Alabama, Inc.
HRT of Delaware, Inc.
HRT of Illinois, Inc.
HRT of Louisiana, Inc.
HRT of Mississippi, Inc.
HRT of Roanoke, Inc.
HRT of Tennessee, LLC
HRT of Virginia, Inc.
HRT Properties of Texas, Ltd.
KCC 340 Kennestone, LLC
KPCI 55 Whitcher, LLC
KPCII 61 Whitcher, LLC
La Plata Street Co., Inc.
Lakewood MOB, LLC
Maplewood MOB, LLC
Oat Properties, LLC
TN
DE
DE
DE
DE
AL
DE
DE
DE
AL
AL
AL
DE
TN
DE
DE
DE
DE
DE
DE
DE
TN
DE
DE
TN
TN
DE
DE
DE
AL
DE
DE
LA
DE
VA
TN
VA
TX
GA
GA
GA
CA
DE
DE
TN
Pasadena Medical Plaza SSJ Ltd.
Plano Medical Pavilion, LLC
POP 144 Bill Carruth, LLC
PPC 148 Bill Carruth, LLC
Ridgeline Medical, LLC
Southwest General Medical Building (TX) SPE, LLC
Stevens Pavilion LLC
Torrey Hills Member SPE, Inc.
TM Medical Center, LLC
Union Plaza Holdings, LLC
West Norman SPE, LLC
Yakima Valley Subsidiary LLC
FL
TN
GA
GA
TN
DE
DE
TN
TN
TN
TN
DE
Consent of Independent Registered Public Accounting Firm
Exhibit 23
Healthcare Realty Trust Incorporated
Nashville, Tennessee
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 033-79452 and No. 333-236396) and Form S-8 (No. 333-
206174 and No. 033-97240) of Healthcare Realty Trust Incorporated of our reports dated February 10, 2021, relating to the consolidated financial statements and
financial statement schedules, and the effectiveness of Healthcare Realty Trust Incorporated’s internal control over financial reporting, which appear in this Form
10-K.
/s/ BDO USA, LLP
Nashville, Tennessee
February 10, 2021
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
Healthcare Realty Trust Incorporated
Quarterly Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.1
I, Todd J. Meredith, certify that:
1.
I have reviewed this annual report on Form 10-K of Healthcare Realty Trust Incorporated;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
4.
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
February 10, 2021
/s/ TODD J. MEREDITH
Todd J. Meredith
President and Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
Exhibit 31.2
I, J. Christopher Douglas, certify that:
1.
I have reviewed this annual report on Form 10-K of Healthcare Realty Trust Incorporated;
Healthcare Realty Trust Incorporated
Quarterly Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
4.
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date:
February 10, 2021
/s/ J. CHRISTOPHER DOUGLAS
J. Christopher Douglas
Executive Vice President and Chief Financial Officer
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350 SECTION 906
Exhibit 32
Healthcare Realty Trust Incorporated
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Healthcare Realty Trust Incorporated (the “Company”) on Form 10-K for the year ended December 31, 2020, as filed with the
Securities and Exchange Commission on the date hereof (the “Report”), I, Todd J. Meredith, President and Chief Executive Officer of the Company, and I, J. Christopher
Douglas, Executive Vice President and Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date:
February 10, 2021
/s/ TODD J. MEREDITH
Todd J. Meredith
President and Chief Executive Officer
/s/ J. CHRISTOPHER DOUGLAS
J. Christopher Douglas
Executive Vice President and Chief Financial Officer