The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, are an integral part of these financial statements.
HealthcareRealty Trust Incorporated
Condensed Consolidated Statements of Cash FlowsEquity
For the ThreeNine Months Ended March 31,September 30, 2020 and 2019
Amounts in thousands, except per share data
Unaudited
|
| | | | | | |
OPERATING ACTIVITIES | | |
| THREE MONTHS ENDED March 31, |
| 2020 |
| 2019 |
|
Net income | $ | 4,315 |
| $ | 4,891 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 47,497 |
| 42,662 |
|
Other amortization | 1,491 |
| 727 |
|
Share-based compensation | 2,599 |
| 2,639 |
|
Amortization of straight-line rent receivable (lessor) | (1,043 | ) | (668 | ) |
Amortization of straight-line rent on operating leases (lessee) | 375 |
| 390 |
|
(Gain) loss on sales of real estate assets | 49 |
| (15 | ) |
Loss from unconsolidated joint ventures | 11 |
| 10 |
|
Distributions from unconsolidated joint ventures | 118 |
| 88 |
|
Changes in operating assets and liabilities: | | |
Other assets, including right-of-use-assets | (4,032 | ) | (4,971 | ) |
Accounts payable and accrued liabilities | (10,005 | ) | (10,276 | ) |
Other liabilities | (2,931 | ) | (673 | ) |
Net cash provided by operating activities | 38,444 |
| 34,804 |
|
| | |
INVESTING ACTIVITIES | | |
Acquisitions of real estate | (83,580 | ) | (91,787 | ) |
Development of real estate | (2,451 | ) | (5,712 | ) |
Additional long-lived assets | (22,164 | ) | (11,741 | ) |
Net cash used in investing activities | (108,195 | ) | (109,240 | ) |
| | |
FINANCING ACTIVITIES | | |
Net repayments on unsecured credit facility | (78,000 | ) | (2,000 | ) |
Borrowings of notes and bonds payable | 298,995 |
| — |
|
Repayments of notes and bonds payable | (7,202 | ) | (1,193 | ) |
Dividends paid | (40,416 | ) | (37,614 | ) |
Net proceeds from issuance of common stock | 7,213 |
| 120,617 |
|
Common stock redemptions | (892 | ) | (2,442 | ) |
Settlement of treasury rate locks | (4,267 | ) | — |
|
Debt issuance and assumption costs | (2,646 | ) | — |
|
Payments made on finance leases | (321 | ) | — |
|
Net cash provided by financing activities | $ | 172,464 |
| $ | 77,368 |
|
| | |
Increase in cash and cash equivalents | 102,713 |
| 2,932 |
|
Cash and cash equivalents at beginning of period | 657 |
| 8,381 |
|
Cash and cash equivalents at end of period | $ | 103,370 |
| $ | 11,313 |
|
| | |
Supplemental Cash Flow Information | | |
Interest paid | $ | 11,428 |
| $ | 11,071 |
|
Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 12,830 |
| $ | 13,509 |
|
Mortgage notes payable assumed upon acquisition (adjusted to fair value) | $ | 19,269 |
| $ | — |
|
Capitalized interest | $ | 421 |
| $ | 307 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | |
Balance at December 31, 2019 | $ | 1,347 | | $ | 3,485,003 | | $ | (6,175) | | $ | 1,127,304 | | $ | (2,707,470) | | $ | 1,900,009 | | | |
Issuance of common stock, net of issuance costs | 13 | | 40,477 | | — | | — | | — | | 40,490 | | | |
Common stock redemptions | — | | (798) | | — | | — | | — | | (798) | | | |
Share-based compensation | 1 | | 7,448 | | — | | — | | — | | 7,449 | | | |
Net income | — | | — | | — | | 88,058 | | — | | 88,058 | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 2,367 | | — | | — | | 2,367 | | | |
Losses arising during the period on interest rate swaps
| — | | — | | (15,459) | | — | | — | | (15,459) | | | |
Dividends to common stockholders ($0.90 per share) | — | | — | | — | | — | | (121,741) | | (121,741) | | | |
Balance at September 30, 2020 | $ | 1,361 | | $ | 3,532,130 | | $ | (19,267) | | $ | 1,215,362 | | $ | (2,829,211) | | $ | 1,900,375 | | | |
| | | | | | | | |
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | | |
Balance at December 31, 2018 | $ | 1,253 | | $ | 3,180,284 | | $ | (902) | | $ | 1,088,119 | | $ | (2,552,112) | | $ | 1,716,642 | | | |
Issuance of common stock, net of issuance costs | 61 | | 192,414 | | — | | — | | — | | 192,475 | | | |
Common stock redemptions | (1) | | (3,266) | | — | | — | | — | | (3,267) | | | |
Share-based compensation | 1 | | 10,140 | | — | | — | | — | | 10,141 | | | |
Net income | — | | — | | — | | 11,975 | | — | | 11,975 | | | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 74 | | — | | — | | 74 | | | |
Losses arising during the period on interest rate swaps
| — | | — | | (7,642) | | — | | — | | (7,642) | | | |
Dividends to common stockholders ($0.90 per share) | — | | — | | — | | — | | (115,237) | | (115,237) | | | |
Balance at September 30, 2019 | $ | 1,314 | | $ | 3,379,572 | | $ | (8,470) | | $ | 1,100,094 | | $ | (2,667,349) | | $ | 1,805,161 | | | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, are an integral part of these financial statements.
HealthcareRealty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2020 and 2019
Amounts in thousands
Unaudited
| | | | | | | | |
OPERATING ACTIVITIES | | |
| NINE MONTHS ENDED September 30, |
| 2020 | 2019 |
Net income | $ | 88,058 | | $ | 11,975 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 142,331 | | 131,725 | |
Other amortization | 3,409 | | 2,279 | |
Share-based compensation | 7,449 | | 10,141 | |
Amortization of straight-line rent receivable (lessor) | (2,722) | | (1,833) | |
Amortization of straight-line rent on operating leases (lessee) | 1,122 | | 1,159 | |
Gain on sales of real estate assets | (70,395) | | (5,065) | |
| | |
Impairment of real estate assets | — | | 5,610 | |
Loss from unconsolidated joint ventures | 194 | | 16 | |
Distributions from unconsolidated joint ventures | 193 | | 277 | |
Proceeds from disposition of sales-type lease properties | 244,454 | | 0 | |
Changes in operating assets and liabilities: | | |
| | |
Other assets, including right-of-use-assets | (965) | | (6,740) | |
Accounts payable and accrued liabilities | 5,098 | | 3,220 | |
Other liabilities | (6,662) | | 5,709 | |
Net cash provided by operating activities | 411,564 | | 158,473 | |
| | |
INVESTING ACTIVITIES | | |
Acquisitions of real estate | (199,162) | | (271,575) | |
Development of real estate | (2,941) | | (19,152) | |
Additional long-lived assets | (62,707) | | (45,902) | |
Proceeds from sales of real estate assets | 4,905 | | 14,151 | |
| | |
Net cash used in investing activities | (259,905) | | (322,478) | |
| | |
FINANCING ACTIVITIES | | |
Net (repayments) borrowings on unsecured credit facility | (293,000) | | 60,000 | |
Borrowings on term loan | 150,000 | | 50,000 | |
| | |
Borrowings of notes and bonds payable | 298,995 | | — | |
Repayments of notes and bonds payable | (32,704) | | (12,663) | |
| | |
| | |
Dividends paid | (121,741) | | (115,237) | |
Net proceeds from issuance of common stock | 40,296 | | 192,514 | |
Common stock redemptions | (892) | | (2,343) | |
| | |
| | |
Settlement of treasury rate locks | (4,267) | | — | |
Debt issuance and assumption costs | (3,057) | | (4,589) | |
Payments made on finance leases | (3,310) | | (249) | |
Net cash provided by financing activities | 30,320 | | 167,433 | |
| | |
Increase in cash, cash equivalents and restricted cash | 181,979 | | 3,428 | |
Cash and cash equivalents at beginning of period | 657 | | 8,381 | |
Cash, cash equivalents and restricted cash at end of period | $ | 182,636 | | $ | 11,809 | |
| | |
Supplemental Cash Flow Information | | |
Interest paid | $ | 39,165 | | $ | 37,946 | |
Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 12,709 | | $ | 10,702 | |
Mortgage notes payable assumed upon acquisition (adjusted to fair value) | $ | 19,269 | | $ | — | |
Capitalized interest | $ | 913 | | $ | 999 | |
| | |
| | |
| | |
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, are an integral part of these financial statements.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 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. As of March 31,September 30, 2020, the Company had gross investments of approximately $4.4$4.3 billion in 212211 real estate properties located in 2524 states totaling approximately 15.815.5 million square feet. The Company provided leasing and property management services to approximately 12.011.9 million square feet nationwide. Square footage and property count disclosures in these Notes to the Company's Condensed Consolidated Financial Statements are unaudited.
Basis of Presentation
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete financial statements. However, except as disclosed herein, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2019. All material intercompany transactions and balances have been eliminated in consolidation.
The Company considered the impact of COVID-19 on these assumptions and estimates used and determined that there were no material adverse impacts on the Company's results of operations and financial position at March 31, 2020. A prolonged outbreak could have a material adverse impact on the financial results and business operations of the Company.
This interim financial information should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. Management believes that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. In addition, the interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2020 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks and uncertainties, such as the impact of the COVID-19 pandemic.
Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results may differ from those estimates.
The Company considered the impact of COVID-19 on these assumptions and estimates used and determined that there were no material adverse impacts on the Company's results of operations and financial position at September 30, 2020. There can be no assurance that COVID-19 will not have a future material adverse impact on the financial results and business operations of the Company.
COVID-19 Update
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
In response to the COVID-19 pandemic, 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 restrictions have been lifted, but could be reimposed. In response to these disruptions, the Company provided some of its tenants with deferred rent arrangements. Such arrangements were made primarily in the second quarter of 2020, and less than $0.1 million of deferred rent arrangements originated in the third quarter. Through November 2, 2020, the Company has collected more than 99% of second and third quarter 2020 aggregate tenant billings. The Company has collected 96% of total scheduled deferral payments due in the third quarter of 2020. In addition, the Company has remaining various forms of rent deferrals outstanding representing
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
approximately $1.2 million, or less than 1% of second and third quarter 2020 aggregate tenant billings. The tenant deferral agreements generally require the deferred amounts to be repaid by the fourth quarter of 2020.
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 pre-concession 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.
If tenants are unable to timely repay deferred rent, or repay at all, request additional rent deferrals or abatements, decide not to renew leases, or renew leases at lower cash leasing spreads, the impact on the Company’s results of operations and financial condition could be material. In the second quarter of 2020, the Company recognized approximately $0.7 million general reserve against the deferred rent balance. Following positive collection trends in the third quarter of 2020, the Company released approximately $0.3 million of the general reserve. As of September 30, 2020, the Company had a remaining general reserve of $0.4 million against an approximate $1.7 million deferred rent balance.
Given the daily evolution of the COVID-19 pandemic and the global response to curb its spread, the Company is not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the fiscal year 2020. The Company continues to evaluate the impact of various forms of governmental assistance that may be or become available to the Company or its tenants.
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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Income in the Other operating line item. This line item includes parking income, rental lease guaranty income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:
|
| | | | | | |
| THREE MONTHS ENDED March 31, |
in thousands | 2020 |
| 2019 |
|
Type of Revenue | | |
Parking income | $ | 2,051 |
| $ | 1,734 |
|
Rental lease guaranty | — |
| 128 |
|
Management fee income | 78 |
| 69 |
|
Miscellaneous | 34 |
| 30 |
|
| $ | 2,163 |
| $ | 1,961 |
|
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
in thousands | 2020 | 2019 | 2020 | 2019 |
Type of Revenue | | | | |
Parking income | $ | 1,764 | | $ | 1,935 | | $ | 5,042 | | $ | 5,538 | |
Rental lease guaranty | 0 | | 0 | | 0 | | 128 | |
Management fee income | 62 | | 69 | | 209 | | 201 | |
Miscellaneous | 42 | | 55 | | 113 | | 120 | |
| $ | 1,868 | | $ | 2,059 | | $ | 5,364 | | $ | 5,987 | |
The Company’s 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.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
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 from the sale of a property in Oklahoma. These proceeds have been or will be disbursed as the Company acquires real estate investments in like-kind exchanges under Section 1031 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Company's Condensed Consolidated Balance Sheets to the combined amounts shown on the Company's Condensed Consolidated Statements of Cash Flows:
| | | | | | | | |
In thousands | September 30, 2020 | December 31, 2019 |
Cash and cash equivalents | $ | 121,992 | | $ | 657 | |
Restricted cash | 60,644 | | 0 | |
Total cash, cash equivalents and restricted cash | $ | 182,636 | | $ | 657 | |
New Accounting Pronouncements
Accounting Standards Update No. 2016-13
In June 2016, the Financial Accounting Standards Board (the "FASB")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 Condensed Consolidated Financial Statements resulting 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 Condensed Consolidated Financial Statements resulting 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.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 2. Real Estate Investments
2020 Acquisitions
The following table details the Company's acquisitions for the threenine months ended March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | TYPE 1 | DATE ACQUIRED | PURCHASE PRICE | MORTGAGE NOTES PAYABLE | | CASH CONSIDERATION 2 | REAL ESTATE | OTHER 3 | SQUARE FOOTAGE |
Los Angeles, CA | MOB | 1/3/20 | $ | 42.0 | | $ | (19.3) | | | $ | 22.8 | | $ | 42.4 | | $ | (0.3) | | 86,986 |
Atlanta, GA | MOB | 2/13/20 | 12.0 | | 0 | | | 11.8 | | 12.1 | | (0.3) | | 64,624 | |
Raleigh, NC | MOB | 2/25/20 | 6.3 | | 0 | | | 6.5 | | 6.5 | | 0 | | 15,964 | |
Colorado Springs, CO | MOB | 3/9/20 | 8.2 | | 0 | | | 8.3 | | 8.6 | | (0.3) | | 34,210 | |
Denver, CO 4 | MOB | 3/13/20 | 33.5 | | 0 | | | 33.2 | | 34.0 | | (0.8) | | 136,994 | |
San Diego, CA | MOB | 7/1/20 | 16.7 | | 0 | | | 16.7 | | 16.9 | | (0.2) | | 46,083 | |
Los Angeles, CA | MOB | 7/17/20 | 35.0 | | 0 | | | 37.7 | | 37.7 | | 0 | | 49,785 | |
Seattle, WA | MOB | 7/23/20 | 11.0 | | 0 | | | 10.9 | | 11.3 | | (0.4) | | 21,309 | |
Atlanta, GA | MOB | 7/31/20 | 20.5 | | 0 | | | 21.6 | | 21.3 | | 0.3 | | 48,145 | |
Houston, TX | MOB | 9/24/20 | 11.0 | | 0 | | | 10.9 | | 11.0 | | (0.1) | | 40,235 | |
Los Angeles, CA | MOB | 9/28/20 | 14.0 | | 0 | | | 14.0 | | 13.9 | | 0.1 | | 24,252 | |
| | | | | | | | | |
Total real estate acquisitions | | $ | 210.2 | | $ | (19.3) | | | $ | 194.4 | | $ | 215.7 | | $ | (2.0) | | 568,587 | |
Land acquisition 5 | | | 1.6 | | 0 | | | 1.7 | | 1.7 | | 0 | | 0 | |
Land acquisition 6 | | | 1.0 | | 0 | | | 1.1 | | 1.1 | | 0 | | 0 | |
| | | $ | 212.8 | | $ | (19.3) | | | $ | 197.2 | | $ | 218.5 | | $ | (2.0) | | 568,587 | |
|
| | | | | | | | | | | | | | | | | | | |
Dollars in millions | TYPE 1 | DATE ACQUIRED | PURCHASE PRICE |
| MORTGAGE NOTES PAYABLE |
| CASH CONSIDERATION 2 |
| REAL ESTATE |
| OTHER 3 |
| SQUARE FOOTAGE |
|
Los Angeles, CA | MOB | 1/3/20 | $ | 42.0 |
| $ | (19.3 | ) | $ | 22.8 |
| $ | 42.4 |
| $ | (0.3 | ) | 86,986 |
|
Atlanta, GA | MOB | 2/13/20 | 12.0 |
| — |
| 11.8 |
| 12.1 |
| (0.3 | ) | 64,624 |
|
Raleigh, NC | MOB | 2/25/20 | 6.3 |
| — |
| 6.5 |
| 6.5 |
| — |
| 15,964 |
|
Colorado Springs, CO | MOB | 3/9/20 | 8.2 |
| — |
| 8.3 |
| 8.6 |
| (0.3 | ) | 34,210 |
|
Denver, CO 4 | MOB | 3/13/20 | 33.5 |
| — |
| 33.2 |
| 34.0 |
| (0.8 | ) | 136,994 |
|
Total real estate acquisitions | | $ | 102.0 |
| $ | (19.3 | ) | $ | 82.6 |
| $ | 103.6 |
| $ | (1.7 | ) | 338,778 |
|
Land acquisition 5 | | | 1.6 |
| — |
| 1.7 |
| 1.7 |
| — |
| — |
|
| | | $ | 103.6 |
| $ | (19.3 | ) | $ | 84.3 |
| $ | 105.3 |
| $ | (1.7 | ) | 338,778 |
|
1MOB = medical office building. | |
1 | MOB = medical office building. |
| |
2 | Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition. |
| |
3 | Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition. |
| |
4 | Includes three properties. |
| |
5 | The Company acquired land parcels under four existing buildings (previously ground leased from the hospital system). |
2Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
3Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
4Includes 3 properties.
5The Company acquired land parcels under 4 existing buildings (previously ground leased).
6The Company acquired a land parcel under an existing building (previously ground leased). The building and land were sold on September 30, 2020.
Subsequent Acquisition
On October 7, 2020 the Company acquired a 36,720 square foot medical office building in Colorado Springs, CO for a purchase price of $8.9 million.
2020 Real Estate Asset Dispositions
The following table details the Company's dispositions for the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | TYPE 1 | Date Disposed | Sale Price | Closing Adjustments | Net Proceeds | Net Real Estate Investment | Other (including receivables)2 | Gain/(Impairment) | Square Footage (Unaudited) |
Springfield, MO 3 | SF | 7/30/20 | $ | 138.0 | | $ | 0 | | $ | 138.0 | | $ | 92.4 | | $ | 3.9 | | $ | 41.7 | | 186,000 |
Oklahoma City, OK 3 | MOB | 7/30/20 | 106.5 | | 0 | | 106.5 | | 76.8 | | 3.1 | | 26.6 | | 200,000 | |
Miami, FL | MOB | 9/30/20 | 5.0 | | (0.2) | | 4.8 | | 2.6 | | 0.1 | | 2.1 | | 26,000 | |
| | | | | | | | | |
Total dispositions | | $ | 249.5 | | $ | (0.2) | | $ | 249.3 | | $ | 171.8 | | $ | 7.1 | | $ | 70.4 | | 412,000 | |
1.MOB = medical office building; SF = surgical facility
2.Includes straight-line rent receivables, leasing commissions and lease inducements.
3.In the second quarter of 2020, the Company entered into agreements to sell 2 single-tenant net leased properties, resulting in a lease modification and classification change from operating to sales-type.
Assets Held for Sale
AsIn September 2020, the Company reclassified 4 medical office buildings and a land parcel to assets held for sale upon acceptance of March 31,an offer from a third party to purchase the properties under a single sales agreement. The contractual sales price of $23.0 million is greater than the current net investment of approximately $18.1 million. As
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
of September 30, 2020 and December 31, 2019, the Company had 4 and 0 properties, respectively, classified as assets held for sale.
The table below reflects the assets and liabilities of the properties classified as held for sale.sale as of September 30, 2020 and December 31, 2019:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Balance Sheet data: | | | | |
Land | | $ | 1,664 | | | $ | 0 | |
Building, improvements and lease intangibles | | 26,871 | | | 0 | |
Personal property | | 39 | | | 0 | |
| | 28,574 | | | 0 | |
Accumulated depreciation | | (10,443) | | | 0 | |
Real estate assets held for sale, net | | 18,131 | | | 0 | |
Other assets, net | | 1,920 | | | 37 | |
Assets held for sale, net | | $ | 20,051 | | | $ | 37 | |
| | | | |
Accounts payable and accrued liabilities | | $ | 437 | | | $ | 37 | |
Other liabilities | | 111 | | | 108 | |
Liabilities of assets held for sale | | $ | 548 | | | $ | 145 | |
Note 3. Leases
Lessor Accounting
The Company’s properties generally are leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2035. 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 net leases generally requiresrequire 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'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 three and nine months ended March 31,September 30, 2020 was $122.6$123.4 million and $368.4 million, respectively.
In May 2020, the Company and Mercy Health negotiated the sale of 2 single-tenant net 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.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Tabular Disclosure of the Components of Sales-Type Leases
The table below presents the components of sale-type leases for the three and nine months ended September 30, 2020:
| | | | | | | | | | | |
| SALES-TYPE LEASES | |
In thousands | three months ended September 30, 2020 | nine months ended September 30, 2020 |
Profit recognized at commencement date | $ | 0 | | $ | 68,267 | | Gain on sales of real estate assets |
Interest income | 1,454 | | 3,007 | | Rental income |
Future lease payments under the non-cancelable operating leases, excluding any reimbursements, as of March 31,September 30, 2020 were as follows:
| | | | | | | | |
In thousands | Operating | |
2020 | $ | 93,722 | | |
2021 | 352,341 | | |
2022 | 307,166 | | |
2023 | 261,187 | | |
2024 | 200,578 | | |
2025 and thereafter | 555,264 | | |
| $ | 1,770,258 | | |
|
| | | |
In thousands | |
2020 | $ | 280,413 |
|
2021 | 335,188 |
|
2022 | 294,771 |
|
2023 | 250,284 |
|
2024 | 193,772 |
|
2025 and thereafter | 514,144 |
|
| $ | 1,868,572 |
|
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Lessee Accounting
As of March 31,September 30, 2020, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of March 31,September 30, 2020, the Company had 104103 properties totaling 8.7 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 2117.2119. Any rental increases related to the Company’s ground leases are generally either stated or based on the CPI. The Company had 42 prepaid ground leases as of March 31,September 30, 2020. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.2 million and $0.1 million of the Company’s rental expense for the three months ended March 31,September 30, 2020 and March 31,2019, respectively and $0.5 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.
The Company’s future lease payments (primarily for its 6261 non-prepaid ground leases) as of March 31,September 30, 2020 were as follows:
| | | | | | | | |
In thousands | OPERATING | FINANCING |
2020 | $ | 1,008 | | $ | 143 | |
2021 | 4,844 | | 930 | |
2022 | 4,875 | | 783 | |
2023 | 4,913 | | 793 | |
2024 | 4,969 | | 815 | |
2025 and thereafter | 307,665 | | 88,808 | |
Total undiscounted lease payments | 328,274 | | 92,272 | |
Discount | (236,808) | | (73,575) | |
Lease liabilities | $ | 91,466 | | $ | 18,697 | |
|
| | | | | | |
In thousands | OPERATING |
| FINANCING |
|
2020 | $ | 3,113 |
| $ | 429 |
|
2021 | 4,844 |
| 754 |
|
2022 | 4,875 |
| 763 |
|
2023 | 4,913 |
| 774 |
|
2024 | 4,969 |
| 795 |
|
2025 and thereafter | 307,665 |
| 83,404 |
|
Total undiscounted lease payments | 330,379 |
| 86,919 |
|
Discount | (239,286 | ) | (68,966 | ) |
Lease liabilities | $ | 91,093 |
| $ | 17,953 |
|
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table provides details of the Company's total lease expense for the three and nine months ended March 31,September 30, 2020 and 2019:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED September 30, | NINE MONTHS ENDED September 30, |
In thousands | 2020 | 2019 | 2020 | 2019 |
Operating lease cost | | | | |
Operating lease expense | $ | 1,180 | | $ | 1,169 | | $ | 3,534 | | $ | 3,448 | |
Variable lease expense | 1,066 | | 845 | | 2,664 | | 2,380 | |
| | | | |
Finance lease cost | | | | |
Amortization of right-of-use assets | 88 | | 51 | | 236 | | 101 | |
Interest on lease liabilities | 245 | | 196 | | 722 | | 392 | |
Total lease expense | $ | 2,579 | | $ | 2,261 | | $ | 7,156 | | $ | 6,321 | |
| | | | |
Other information | | | | |
Operating cash flows outflows related to operating leases | $ | 1,440 | | $ | 1,313 | | $ | 5,412 | | $ | 5,461 | |
Financing cash flows outflows related to financing leases | $ | 143 | | $ | 107 | | $ | 3,310 | | $ | 249 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 0 | | $ | 0 | | $ | 7,212 | | $ | 14,294 | |
| | | | |
Weighted-average remaining lease term (excluding renewal options) - operating leases | 48.9 | 49.7 | | |
Weighted-average remaining lease term (excluding renewal options) -finance leases | 64.7 | 70.1 | | |
Weighted-average discount rate - operating leases | 5.7 | % | 5.7 | % | | |
Weighted-average discount rate - finance leases | 5.4 | % | 5.5 | % | | |
|
| | | | | | |
| THREE MONTHS ENDED MARCH 31, |
In thousands | 2020 |
| 2019 |
|
Operating lease cost | | |
Operating lease expense | $ | 1,174 |
| $ | 1,116 |
|
Variable lease expense | 800 |
| 740 |
|
| | |
Finance lease cost | | |
Amortization of right-of-use assets | 70 |
| — |
|
Interest on lease liabilities | 237 |
| — |
|
Total lease expense | $ | 2,281 |
| $ | 1,856 |
|
| | |
Other information | | |
Operating cash flows outflows related to operating leases | $ | 2,550 |
| $ | 2,771 |
|
Financing cash flows outflows related to financing leases | $ | 321 |
| $ | — |
|
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | — |
| $ | — |
|
| | |
Weighted-average remaining lease term (excluding renewal options) - operating leases | 49.4 |
| 54.0 |
|
Weighted-average remaining lease term (excluding renewal options) -finance leases | 64.9 |
| — |
|
Weighted-average discount rate - operating leases | 5.7 | % | 5.5 | % |
Weighted-average discount rate - finance leases | 5.4 | % | — | % |
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable.
| | | | | | | | | | | | | | |
| MATURITY DATES | BALANCE AS OF | EFFECTIVE INTEREST RATE as of 9/30/2020 |
Dollars in thousands | 9/30/2020 | 12/31/2019 |
$700 million Unsecured Credit Facility | 5/23 | $ | 0 | | $ | 293,000 | | N/A |
$200 million Unsecured Term Loan Facility, net of issuance costs 1 | 5/24 | 199,180 | | 199,013 | | 1.99 | % |
$150 million Unsecured Term Loan due 2026 2 | 6/26 | 149,455 | | 0 | | 3.14 | % |
Senior Notes due 2023, net of discount and issuance costs | 4/23 | 248,863 | | 248,540 | | 3.95 | % |
Senior Notes due 2025, net of discount and issuance costs 3 | 5/25 | 248,711 | | 248,522 | | 4.08 | % |
Senior Notes due 2028, net of discount and issuance costs | 1/28 | 296,003 | | 295,651 | | 3.84 | % |
Senior Notes due 2030, net of discount and issuance costs 4 | 3/30 | 296,384 | | 0 | | 2.71 | % |
Mortgage notes payable, net of discounts and issuance costs and including premiums | 1/21-4/27 | 115,799 | | 129,343 | | 4.38 | % |
| | $ | 1,554,395 | | $ | 1,414,069 | | |
|
| | | | | | | | | |
| MATURITY DATES | BALANCE AS OF | EFFECTIVE INTEREST RATE as of 3/31/2020 |
|
Dollars in thousands | 3/31/2020 |
| 12/31/2019 |
|
$700 million Unsecured Credit Facility | 5/23 | $ | 215,000 |
| $ | 293,000 |
| 1.89 | % |
$200 million Unsecured Term Loan Facility, net of issuance costs 1 | 5/24 | 199,069 |
| 199,013 |
| 3.20 | % |
$150 million Unsecured Term Loan due 2026 2 | 6/26 | — |
| — |
| N/A |
|
Senior Notes due 2023, net of discount and issuance costs | 4/23 | 248,647 |
| 248,540 |
| 3.95 | % |
Senior Notes due 2025, net of discount and issuance costs 3 | 5/25 | 248,584 |
| 248,522 |
| 4.08 | % |
Senior Notes due 2028, net of discount and issuance costs | 1/28 | 295,768 |
| 295,651 |
| 3.84 | % |
Senior Notes due 2030, net of discount and issuance costs 4 | 3/30 | 296,211 |
| — |
| 2.71 | % |
Mortgage notes payable, net of discounts and issuance costs and including premiums | 7/20-5/40 | 141,175 |
| 129,343 |
| 4.70 | % |
| | $ | 1,644,454 |
| $ | 1,414,069 |
| |
1The effective interest rate includes the impact of interest rate swaps on $75.0 million at a weighted average rate of 2.37% (plus the applicable margin rate, currently 100 basis points).2The effective interest rate includes the impact of interest rate swaps on $100.0 million at a weighted average rate of 2.23% (plus the applicable margin rate, currently 160 basis points).
3The effective interest rate includes the impact of the $1.7 million settlement of a forward-starting interest rate swap that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
4The effective interest rate includes the impact of the $4.3 million settlement of forward interest rate hedges that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
| |
1 | The effective interest rate includes the impact of interest rate swaps on $175.0 million at a weighted average rate of 2.29% (plus the applicable margin rate, currently 100 basis points).
|
| |
2 | As of March 31, 2020, there were 0 outstanding loans under the $150.0 million unsecured term loan due June 2026. This term loan has a delayed draw feature that allows the Company until May 29, 2020 to draw against the commitments.
|
| |
3 | The effective interest rate includes the impact of the $1.7 million settlement of a forward-starting interest rate swap that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
|
| |
4 | The effective interest rate includes the impact of the $4.3 million settlement of a forward-starting interest rate swap that is included in Accumulated other comprehensive loss on the Company's Condensed Consolidated Balance Sheets.
|
Changes in Debt Structure
On February 3, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.10% per annum with an outstanding principal of $5.9 million. The mortgage note encumbered a 68,860 square foot property in Oklahoma.
On March 4, 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 2 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 4, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.74% per annum with an outstanding principal of $0.3 million. The mortgage note encumbered an 83,318 square foot property in Iowa. On May 29, 2020, the Company borrowed $150.0 million pursuant to its unsecured term loan due 2026.
On June 2, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.44% per annum with an outstanding principal of $12.6 million. The mortgage note encumbered a 67,510 square foot property in Washington.
On June 25, 2020, the Company repaid in full 3 mortgage notes bearing interest at rates of 5.63%, 6.63% and 6.88% per annum with outstanding principal of $0.5 million, $2.8 million, and $7.0 million, respectively. The mortgage notes encumbered a 60,476 square foot property in Minnesota.
Subsequent Changes in Debt Structure
On October 1, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.47% per annum with an outstanding principal of $4.2 million. The mortgage note encumbered a 40,171 square foot property in Georgia.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
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.
On October 19, 2020, the Company redeemed its unsecured 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. In October 2020, the Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to this redemption.
Note 5. 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.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
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. 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) ("AOCI") and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt.
On February 24 and 25, 2020, the Company entered into 2 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 on March 4, 2020 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.
As of March 31,September 30, 2020, the Company had 8 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | |
DERIVATIVE INSTRUMENT | NUMBER OF INSTRUMENTS | NOTIONAL AMOUNT in millions |
Interest rate swaps | 8 | | $175.0 |
Table of Contents
NOTES TO THE CONDENSED 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 Condensed Consolidated Balance Sheet as of March 31,September 30, 2020.
| | | | | | | | |
| BALANCE AT SEPTEMBER 30, 2020 |
In thousands | BALANCE SHEET LOCATION | FAIR VALUE |
Derivatives designated as hedging instruments | | |
Interest rate swaps | Other liabilities | $ | 14,460 | |
Total derivatives designated as hedging instruments | | $ | 14,460 | |
|
| | | | |
| BALANCE AT MARCH 31, 2020 |
In thousands | BALANCE SHEET LOCATION | FAIR VALUE |
|
Derivatives designated as hedging instruments | | |
Interest rate swaps | Other liabilities | $ | 14,672 |
|
Total derivatives designated as hedging instruments | | $ | 14,672 |
|
Tabular Disclosure of the Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss)
The table below presents the effect of cash flow hedge accounting on AOCI during the three and nine months ended March 31,September 30, 2020 and 2019 related to the Company's outstanding interest rate swaps.
| | | | | | | | | | | | | | | | | |
| LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended September 30, | | (GAIN) LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended September 30, |
In thousands | 2020 | 2019 | 2020 | 2019 |
Interest rate swaps | $ | 74 | | $ | 2,341 | | Interest expense | $ | 952 | | $ | 18 | |
Settled treasury hedges | 0 | | 0 | | Interest expense | 107 | | 0 | |
Settled interest rate swaps | 0 | | 0 | | Interest expense | 42 | | 42 | |
| $ | 74 | | $ | 2,341 | | Total interest expense | $ | 1,101 | | $ | 60 | |
| | | LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended March 31, | | (GAIN) LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended March 31, | | LOSS RECOGNIZED IN AOCI ON DERIVATIVE nine months ended September 30, | | (GAIN) LOSS RECLASSIFIED FROM AOCI INTO INCOME nine months ended September 30, |
In thousands | 2020 |
| 2019 |
| 2020 |
| 2019 |
| In thousands | 2020 | 2019 | 2020 | 2019 |
Interest rate swaps | $ | 9,663 |
| $ | 724 |
| Interest expense | $ | 271 |
| $ | (27 | ) | Interest rate swaps | $ | 11,192 | | $ | 7,642 | | Interest expense | $ | 2,012 | | $ | (52) | |
Settled treasury hedges | 4,267 |
| — |
| Interest expense | 15 |
| — |
| Settled treasury hedges | 4,267 | | 0 | | Interest expense | 229 | | 0 | |
Settled interest rate swaps | — |
| — |
| Interest expense | 42 |
| 42 |
| Settled interest rate swaps | 0 | | 0 | | Interest expense | 126 | | 126 | |
| $ | 13,930 |
| $ | 724 |
| Total interest expense | $ | 328 |
| $ | 15 |
| | $ | 15,459 | | $ | 7,642 | | Total interest expense | $ | 2,367 | | $ | 74 | |
The Company estimates that $4.0$4.4 million will be reclassified from AOCI to interest expense over the next 12 months.
Credit-risk-related Contingent Features
The Company's agreements with each of its derivative counterparties contain a cross-default provision under which the Company could be declared in default of its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
As of March 31,September 30, 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 $15.2$15.1 million. As of March 31,September 30, 2020, the Company has not posted any collateral related to these agreements and was not in breach of any agreement.
Note 6. Commitments and Contingencies
Legal Proceedings
The Company is, from time to time, involved in litigation arising in the ordinary course of business. 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.
Redevelopment Activity
The Company initiated the redevelopment of a 110,883 square foot medical office building in Memphis, Tennessee ("Memphis Redevelopment") in December 2019. TheAs of September 30, 2020, the Company funded approximately $1.5$5.7 million in project costs, excluding the purchase price of $8.7 million for the land and building. The building will continue to operate with in-place leases during construction. The core and shell portion of the Memphis Redevelopment is expected to be completed in the first quarter of 2021, with construction of tenant spaces to be completed throughout the remainder of 2021.
Development Activity
TheIn the first quarter of 2020, the Company completed the developmentconstruction of the core and shell of a 151,031 square foot medical office building in Seattle, Washington. As of March 31,September 30, 2020, the Company had funded approximately $54.1$59.1 million towards the development.development and additional tenant improvements. The Company expects to fund an additional amount of approximately $10.0$5.0 million for additional tenant improvements associated with this project. The first tenant took occupancycommenced rent payment in the first quarter of 2020.
Note 7. Stockholders' Equity
Common Stock
The following table provides a reconciliation of the beginning and ending shares of common stock outstanding for the threenine months ended March 31,September 30, 2020 and the year ended December 31, 2019:
| | | | | | | | |
| SEPTEMBER 30, 2020 | DECEMBER 31, 2019 |
Balance, beginning of period | 134,706,154 | | 125,279,455 | |
Issuance of common stock | 1,292,324 | | 9,251,440 | |
Nonvested share-based awards, net of withheld shares | 55,462 | | 175,259 | |
Balance, end of period | 136,053,940 | | 134,706,154 | |
|
| | | | |
| MARCH 31, 2020 |
| DECEMBER 31, 2019 |
|
Balance, beginning of period | 134,706,154 |
| 125,279,455 |
|
Issuance of common stock | 210,271 |
| 9,251,440 |
|
Nonvested share-based awards, net of withheld shares | 15,781 |
| 175,259 |
|
Balance, end of period | 134,932,206 |
| 134,706,154 |
|
At-The-Market Equity Offering Program
On February 14, 2020, the Company entered into sales agreements with six6 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 Company sold 1,268,237 shares under the Company's at-the market equity offering program during the nine months ended September 30, 2020. The sales generated $39.9 million in net proceeds at prices to the public ranging from $30.50 to $36.15 per share (weighted average of $31.86 per share). The sales occurred during the following time periods:
•During the first quarter of 2020, the Company sold 196,250 shares under the Company's at-the-market equity offering program generating approximately $7.0 million in net proceeds at prices to the public ranging from $33.00$33.00 to $36.15 per share (weighted average of $36.09 per share). NaN
•During the second quarter of 2020, the Company sold 1,071,987 shares were soldgenerating approximately $32.9 million in net proceeds at prices to the public ranging from March 18,$30.50 to $31.29 per share (weighted average of $31.08 per share).
In addition, the Company has entered into 3 forward equity agreements totaling 3.6 million shares at a weighted average price of $31.30 per share:
•In the second quarter of 2020, through the dateCompany entered into a forward equity agreement for a total of this filing. The1,579,371 shares at a weighted average price of $31.66 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in June 2021.
•In the third quarter of 2020, the Company had $492.9entered into a forward equity agreement for a total of 764,472 shares at a weighted average price of $31.84 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in July 2021.
•In the fourth quarter of 2020, the Company entered into a forward equity agreement for a total of 1,235,129 shares at a weighted average price of $30.52 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in October 2021.
After taking into account the forward equity contracts discussed above, the Company has approximately $347.6 million remaining available to be sold under the current sales agreements at the date of this filing.
Common Stock Dividends
During the threenine months ended March 31,September 30, 2020, the Company declared and paid common stock dividends totaling $0.30$0.90 per share. On May 5,November 3, 2020, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on May 29,December 1, 2020 to stockholders of record on May 15,November 16, 2020.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Earnings Per Common 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 nine months ended September 30, 2020, the Company entered into forward sale agreements to sell approximately 2.3 million 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 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 three and nine months ended September 30, 2020 included the effect from the assumed issuance of 2.3 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 $72.7 million, adjusted for costs to borrow. For the three and nine months ended September 30, 2020, 137,757 and 51,133 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 following table sets forth the computation of basic and diluted earnings per common share for the three and nine months ended March 31,September 30, 2020 and 2019.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
Dollars in thousands, except per share data | 2020 | 2019 | 2020 | 2019 |
Weighted average common shares outstanding | | | | |
Weighted average common shares outstanding | 136,048,781 | | 129,865,985 | | 135,393,798 | | 128,348,638 | |
Non-vested shares | (1,739,364) | | (1,775,911) | | (1,731,658) | | (1,777,743) | |
Weighted average common shares outstanding - basic | 134,309,417 | | 128,090,074 | | 133,662,140 | | 126,570,895 | |
| | | | |
Weighted average common shares outstanding - basic | 134,309,417 | | 128,090,074 | | 133,662,140 | | 126,570,895 | |
Dilutive effect of forward equity shares | 0 | | 0 | | 0 | | 0 | |
Dilutive effect of employee stock purchase plan | 47,810 | | 78,610 | | 74,029 | | 85,690 | |
Weighted average common shares outstanding - diluted | 134,357,227 | | 128,168,684 | | 133,736,169 | | 126,656,585 | |
| | | | |
Net Income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | |
Dividends paid on nonvested share-based awards | (522) | | (534) | | (1,561) | | (1,603) | |
Net income applicable to common stockholders | $ | 7,708 | | $ | 2,067 | | $ | 86,497 | | $ | 10,372 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Basic earnings per common share - net income | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | |
| | | | |
| | | | |
Diluted earnings per common share - net income | $ | 0.06 | | $ | 0.02 | | $ | 0.65 | | $ | 0.08 | |
|
| | | | | | |
| THREE MONTHS ENDED MARCH 31, |
Dollars in thousands, except per share data | 2020 |
| 2019 |
|
Weighted average common shares outstanding | | |
Weighted average common shares outstanding | 134,758,335 |
| 125,908,335 |
|
Non-vested shares | (1,722,090 | ) | (1,778,700 | ) |
Weighted average common shares outstanding - basic | 133,036,245 |
| 124,129,635 |
|
| | |
Weighted average common shares outstanding - basic | 133,036,245 |
| 124,129,635 |
|
Dilutive effect of employee stock purchase plan | 113,321 |
| 102,132 |
|
Weighted average common shares outstanding - diluted | 133,149,566 |
| 124,231,767 |
|
| | |
Net Income | $ | 4,315 |
| $ | 4,891 |
|
Dividends paid on nonvested share-based awards | (517 | ) | (536 | ) |
Net income applicable to common stockholders | $ | 3,798 |
| $ | 4,355 |
|
| | |
Basic earnings per common share - net income | $ | 0.03 |
| $ | 0.04 |
|
Diluted earnings per common share - net income | $ | 0.03 |
| $ | 0.04 |
|
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Incentive Plans
A summary of the activity under the Company's share-based incentive plans for the three and nine months ended March 31,September 30, 2020 and 2019 is included in the table below.
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| 2020 | 2019 | 2020 | 2019 |
Share-based awards, beginning of period | 1,739,258 | | 1,778,134 | | 1,754,066 | | 1,769,863 | |
Granted | 188 | | 0 | | 79,025 | | 89,767 | |
Vested 1 | 0 | | (204,548) | | (93,645) | | (286,044) | |
| | | | |
Share-based awards, end of period | 1,739,446 | | 1,573,586 | | 1,739,446 | | 1,573,586 | |
|
| | | | |
| THREE MONTHS ENDED MARCH 31, |
| 2020 |
| 2019 |
|
Share-based awards, beginning of period | 1,754,066 |
| 1,769,863 |
|
Granted | 39,344 |
| 64,771 |
|
Vested | (68,649 | ) | (50,507 | ) |
Share-based awards, end of period | 1,724,761 |
| 1,784,127 |
|
1The Company's former Executive Chairman, David R. Emery, died on September 30, 2019 resulting in the accelerated vesting of 204,548 outstanding nonvested share-based awards.During the threenine months ended March 31,September 30, 2020 and 2019, the Company withheld 23,563 and 19,546100,036 shares of common stock, respectively, from participants to pay estimated withholding taxes related to shares that vested.
In addition to the share-based incentive plans, the Company maintains the 2000 Employee Stock Purchase Plan (the "Purchase Plan"). A summary of the activity under the Purchase Plan for the three and nine months ended March 31,September 30, 2020 and 2019 is included in the table below.
|
| | | | |
| THREE MONTHS ENDED MARCH 31, |
| 2020 |
| 2019 |
|
Outstanding and exercisable, beginning of period | 332,659 |
| 328,533 |
|
Granted | 212,716 |
| 235,572 |
|
Exercised | (11,904 | ) | (14,630 | ) |
Forfeited | (22,981 | ) | (16,625 | ) |
Expired | (139,794 | ) | (142,074 | ) |
Outstanding and exercisable, end of period | 370,696 |
| 390,776 |
|
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
| 2020 | 2019 | 2020 | 2019 |
Outstanding and exercisable, beginning of period | 361,719 | | 363,218 | | 332,659 | | 328,533 | |
Granted | 0 | | 0 | | 212,716 | | 235,572 | |
Exercised | (3,504) | | (9,927) | | (17,871) | | (28,943) | |
Forfeited | (6,659) | | (11,762) | | (36,154) | | (51,559) | |
Expired | 0 | | 0 | | (139,794) | | (142,074) | |
Outstanding and exercisable, end of period | 351,556 | | 341,529 | | 351,556 | | 341,529 | |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 8. 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 and cash equivalents - The carrying amount approximates fair value due to the short term maturity of these investments. •Borrowings under the Unsecured Credit Facility and the Term Loans Due 2024 and 2026 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates. •Senior Notes and Mortgage 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. • - The carrying amount approximates fair value due to the short term maturity of these investments. |
| |
• | Borrowings under the Unsecured Credit Facility and the Term Loan Due 2024 - The carrying amount approximates fair value because the borrowings are based on variable market interest rates.
|
| |
• | Senior Notes and Mortgage 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.
|
| |
• | 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 values and carrying values for notes and bonds payable at March 31,September 30, 2020 and December 31, 2019.
| | | | | | | | | | | | | | |
| September 30, 2020 | December 31, 2019 |
Dollars in millions | CARRYING VALUE | FAIR VALUE | CARRYING VALUE | FAIR VALUE |
Notes and bonds payable 1 | $ | 1,554.4 | | $ | 1,621.7 | | $ | 1,414.1 | | $ | 1,425.8 | |
| | | | |
| | | | |
|
| | | | | | | | | | | | |
| MARCH 31, 2020 | DECEMBER 31, 2019 |
Dollars in millions | CARRYING VALUE |
| FAIR VALUE |
| CARRYING VALUE |
| FAIR VALUE |
|
Notes and bonds payable 1 | $ | 1,644.5 |
| $ | 1,706.7 |
| $ | 1,414.1 |
| $ | 1,425.8 |
|
1Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets.
| |
1 | Level 2 – model-derived valuations in which significant inputs and significant value drivers are observable in active markets. |
15
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 9. Subsequent Events
COVID-19 Update
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
All of the states and cities in which the Company owns properties, manages properties, and/or has development or redevelopment projects have 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 have temporarily closed their offices or clinical space or have operated on a reduced basis in response to government requirements or recommendations. Through May 5, 2020, the Company has collected 89% of April 2020 aggregate tenant billings and has agreed to various forms of rent deferrals representing approximately 7% of April 2020 aggregate tenant billings. The tenant deferral agreements require the deferred amounts to be repaid in the third and fourth quarters of 2020. However, if tenants are unable to timely repay, or repay at all, deferred rent, if they request additional rent deferrals or abatements, decide not to renew leases, or renew leases at lower cash leasing spreads, the impact on the Company’s results of operations and financial condition could be material. Given the daily evolution of the COVID-19 pandemic and the global responses to curb its spread, the Company is not able to estimate the effects of the COVID-19 pandemic on its results of operations, financial condition, or liquidity for the fiscal year 2020. The Company continues to evaluate the impact of various forms of governmental assistance that may be or become available to the Company or its tenants, including the Coronavirus Aid, Relief, and Economic Security Act or the “CARES Act".
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could," "budget" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the duration and scope of the COVID-19 pandemic; the impact of the COVID-19 pandemic on occupancy rates for the Company's properties, actions governments take in response to the COVID-19 pandemic, including the introduction of public health measures and other regulations affecting the Company’s properties and the operations of the Company and its tenants; the effects of health and safety measures adopted by the Company and its tenants related to the COVID-19 pandemic; the impact of the COVID-19 pandemic on the operations, business and financial condition of the Company and its tenants; general economic uncertainty in key markets as a result of the COVID-19 pandemic and a worsening of global economic conditions or low levels of economic growth; the status of capital markets, including availability and cost of capital; and the risks described in this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, that could significantly affect the Company’s current plans and expectations and future financial condition and results.
The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company’s filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.
For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including this report, and its Annual Report on Form 10-K for the year ended December 31, 2019.2019, and the Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
COVID-19 Update
Since being reported in December 2019, COVID-19 has spread globally, including to every state in the United States. On March 11, 2020, the World Health Organization declared COVID-19 a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19.
AllIn response to the COVID-19 pandemic, all of the states and cities in which the Company owns properties, manages properties, and/or has development or redevelopment projects have 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 have temporarily closed their offices or clinical space or have operated on a reduced basis in response to government requirements or recommendations. Many of these restrictions have been lifted, but could be reimposed. In response to these disruptions, the Company provided some of its tenants with deferred rent arrangements. Through May 5,November 2, 2020, the Company has collected 89%more than 99% of Aprilsecond and third quarter 2020 aggregate tenant billings andbillings. The Company has agreed tocollected 96% of total scheduled deferral payments in the third quarter of 2020. In addition, the Company has remaining various forms of rent deferrals outstanding representing approximately 7%$1.2 million, or less than 1% of Aprilsecond and third quarter 2020 aggregate tenant billings. The tenant deferral agreements generally require the deferred amounts to be repaid inby the third and fourth quartersquarter of 2020. The tenant deferral agreements require the amounts to be repaid in the third and fourth quarters of 2020. Many of these tenants have requested, and the Company management expects more will likely seek, rent deferral or abatement for May 2020 and subsequent months, though it cannot predict how many.
Management believes that many of its tenants who have experienced disruption to their businesses as a result of the COVID-19 pandemic will qualify for various forms of government financial assistance including pursuant to the CARES Act, which was signed into law on March 27, 2020. Accordingly, the Company has undertaken efforts to promote awareness of the availability of these initiatives to its tenants. At this time, the Company expects to collect the deferred rent prior to the end of 2020. However, ifIf tenants are unable to timely repay, or repay at all, deferred rent, if they request additional rent deferrals or abatements, decide not to renew leases, or renew leases at lower cash leasing spreads (See “Expiring Leases” below), the impact on the Company’s results of operations and financial condition could be material. As a result,In the second quarter of 2020, the Company cannot estimate at this timerecognized an approximately $0.7 million general reserve against the overall effect thatdeferred rent balance. Following positive collection trends in the COVID-19 pandemic might have on its business.third quarter of 2020, the Company released approximately $0.3 million of the general reserve. As of September 30, 2020, the Company had a remaining general reserve of $0.4 million against an approximate $1.7 million deferred rent balance.
At March 31,September 30, 2020, the Company had available $738.4$882.6 million in liquidity (See “Sources and Uses of Cash” and “Financing Activities” below) and no significant debt maturities prior to 2023. In addition, the Company has entered into forward equity agreements that have expected proceeds of up to approximately $112.0 million, before the costs of borrowing, that can be settled at the Company's election anytime through October 2021. The COVID-19 pandemic has affected the availability and cost of capital and may continue to do so for some time. Management believes that the Company currently has adequate liquidity to operate its business without significant disruption. However, if the pandemic continues to have an impact on the availability and cost of capital, the Company’s business could be materially affected.
Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent receipts from its real estate portfolio based on contractual arrangements with its tenants, borrowings under the Company's Unsecured Credit Facility and Term Loan, proceeds from the sales of real estate properties and proceeds from public or private debt or equity offerings. As of March 31,September 30, 2020, the Company had $485.0$700.0 million available to be drawn on its Unsecured Credit Facility $103.4and $182.6 million in cash and restricted cash. In addition, the Company has entered into forward equity agreements that have expected proceeds of up to approximately $112.0 million, before the ability to draw $150.0 million on its unsecured term loan due 2026.costs of borrowing, that can be settled at the Company's election anytime through October 2021.
The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service, through cash flows from operations and the cash flow sources described above. The Company had unencumbered real estate assets with a gross book value of approximately $4.1 billion at March 31,September 30, 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.
Dividends paid by the Company for the three months ended March 31, 2020 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends paid at the rate per quarter of $0.30 per common share. The Company expects that additional cash flows from existing properties, acquisitions and developments will generate sufficient cash flows from operations such that dividends for the full year 2020 can be funded by cash flows from operations or other sources of liquidity described above.
Investing Activities
Cash flows used in investing activities for the threenine months ended March 31,September 30, 2020 were approximately $108.2$259.9 million. Below is a summary of significant investing activities.
2020 Acquisitions
The following table details the Company's acquisitions for the threenine months ended March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | |
Dollars in millions | HEALTH SYSTEM AFFILIATION | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE | CAP RATE | MILES TO CAMPUS |
Los Angeles, CA | MemorialCare Health | 1/3/20 | $ | 42.0 | | 86,986 | 5.3 | % | 0.14 |
Atlanta, GA | Wellstar Health System | 2/13/20 | 12.0 | | 64,624 | | 5.6 | % | 0.10 | |
Raleigh, NC | WakeMed Health | 2/25/20 | 6.3 | | 15,964 | | 6.7 | % | 0.04 | |
Colorado Springs, CO | None | 3/9/20 | 8.2 | | 34,210 | | 6.5 | % | 1.60 | |
Denver, CO 1 | UCHealth | 3/13/20 | 33.5 | | 136,994 | | 6.1 | % | 0.24 | |
San Diego, CA | Palomar Health | 7/1/20 | 16.7 | | 46,083 | | 5.9 | % | 0.04 | |
Los Angeles, CA | Cedars-Sinai/Huntington | 7/17/20 | 35.0 | | 49,785 | | 5.4 | % | 0.11 | |
Seattle, WA | MultiCare Health System | 7/23/20 | 11.0 | | 21,309 | | 5.6 | % | 0.06 | |
Atlanta, GA | Wellstar Health System | 7/31/20 | 20.5 | | 48,145 | | 6.2 | % | 0.13 | |
Houston, TX | Memorial Hermann Health | 9/24/20 | 11.0 | | 40,235 | | 5.6 | % | 0.03 | |
Los Angeles, CA | Providence St. Joseph Health | 9/28/20 | 14.0 | | 24,252 | | 5.6 | % | 0.03 | |
| | | | | | |
Total real estate acquisitions | | $ | 210.2 | | 568,587 | | 5.7 | % | |
Land acquisition 2 | | | 1.6 | | — | | | |
Land acquisition 3 | | | 1.0 | | — | | | |
| | | $ | 212.8 | | 568,587 | | | |
1Includes three properties.
2The Company acquired land parcels under four existing buildings (previously ground leased with the hospital system).
3The Company acquired a land parcel under an existing building (previously ground leased). The building and land were disposed September 30, 2020.
|
| | | | | | | | | | | |
Dollars in millions | HEALTH SYSTEM AFFILIATION | DATE ACQUIRED | PURCHASE PRICE |
| SQUARE FOOTAGE |
| CAP RATE |
| MILES TO CAMPUS |
|
Los Angeles, CA | MemorialCare Health | 1/3/20 | $ | 42.0 |
| 86,986 |
| 5.3 | % | 0.14 |
|
Atlanta, GA | Wellstar Health System | 2/13/20 | 12.0 |
| 64,624 |
| 5.6 | % | 0.10 |
|
Raleigh, NC | WakeMed Health | 2/25/20 | 6.3 |
| 15,964 |
| 6.7 | % | 0.04 |
|
Colorado Springs, CO | None | 3/9/20 | 8.2 |
| 34,210 |
| 6.5 | % | 1.60 |
|
Denver, CO 1 | UCHealth | 3/13/20 | 33.5 |
| 136,994 |
| 6.1 | % | 0.24 |
|
Total real estate acquisitions | | | $ | 102.0 |
| 338,778 |
| 5.8 | % | |
Land acquisition 2 | | | 1.6 |
| — |
| | |
| | | $ | 103.6 |
| 338,778 |
| | |
| |
1 | Includes three properties. |
| |
2 | The Company acquired land parcels under four existing buildings (previously ground leased with the hospital system). |
Subsequent Acquisition
On October 7, 2020 the Company acquired a 36,720 square foot medical office building in Colorado Springs, CO for a purchase price of $8.9 million.
2020Dispositions
The Company disposed of three properties during the nine months ended September 30, 2020 for a total sales price of $249.5 million, including cash proceeds of $249.3 million and $0.2 million of closing costs and related adjustments. The following table details these dispositions for the nine months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
Dollars in millions | | Date Disposed | Sales Price | Square Footage | 3Q 2020 NOI | Disposition Cap Rate | Property Type |
Springfield, MO | | 7/30/20 | $ | 138.0 | | 186,000 | $ | 0.8 | | 7.5 | % | SF |
Oklahoma City, OK | | 7/30/20 | 106.5 | | 200,000 | | 0.6 | | 7.5 | % | MOB |
Miami, FL | | 9/30/20 | 5.0 | | 26,000 | | — | | 3.9 | % | MOB |
Total dispositions | | $ | 249.5 | | 412,000 | | $ | 1.4 | | 7.4 | % | |
1MOB = Medical office building; SF = Surgical facility
Capital Funding
During the threenine months ended March 31,September 30, 2020, the Company funded the following:
•$6.917.3 million toward development and redevelopment of properties;
•$2.714.2 million toward first generation tenant improvements and planned capital expenditures for acquisitions;
•$6.017.4 million toward second generation tenant improvements; and
•$3.512.8 million toward capital expenditures.
Financing Activities
Cash flows provided by financing activities for the threenine months ended March 31,September 30, 2020 were approximately $172.5$30.3 million. Inflows from equity related to the Company's common stock issuances and net borrowings totaled $306.2$160.5 million, net of issuance costs incurred. Aggregate cash outflows totaled approximately $133.7$130.2 million primarily associated with dividends paid to common stockholders and repayments on the Credit Facility.stockholders. See Notes 4 and 7 to the Condensed Consolidated Financial Statements for more information about capital markets and 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 Company sold 1,268,237 shares under the Company's at-the market equity offering program during the nine months ended September 30, 2020. The sales generated $39.9 million in net proceeds at prices to the public ranging from $30.50 to $36.15 per share (weighted average of $31.86 per share). The sales occurred during the following time periods:
•During the first quarter of 2020, the Company sold 196,250 shares under the Company's at-the-market equity offering program generating approximately $7.0 million in net proceeds at prices to the public ranging from $33.00 to $36.15 per share (weighted average of $36.09 per share). No
•During the second quarter of 2020, the Company sold 1,071,987 shares were soldgenerating approximately $32.9 million in net proceeds at prices to the public ranging from March 18,$30.50 to $31.29 per share (weighted average of $31.08 per share).
In addition, the Company has entered into three forward equity agreements totaling 3.6 million shares at a weighted average price of $31.30 per share:
•In the second quarter of 2020, through the dateCompany entered into a forward equity agreement for a total of this filing. The1,579,371 shares at a weighted average price of $31.66 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in June 2021.
•In the third quarter of 2020, the Company had $492.9entered into a forward equity agreement for a total of 764,472 shares at a weighted average price of $31.84 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in July 2021.
•In the fourth quarter of 2020, the Company entered into a forward equity agreement for a total of 1,235,129 shares at a weighted average price of $30.52 per share, subject to adjustments as provided in the forward equity agreements. This agreement matures in October 2021.
After taking into account the forward equity contracts discussed above, the Company has approximately $347.6 million remaining available to be sold under the current sales agreements at the date of this filing.
Debt Activity
On February 3, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.10% per annum with an outstanding principal of $5.9 million. The mortgage note encumbered a 68,860 square foot property in Oklahoma.
On March 4, 2020, the Company issued $300.0 million of 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 4, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.74% per annum with an outstanding principal of $0.3 million. The mortgage note encumbered a 83,318 square foot property in Iowa.
On May 29, 2020, the Company borrowed $150.0 million from its unsecured term loan due 2026.
On June 2, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 6.44% per annum with an outstanding principal of $12.6 million. The mortgage note encumbered a 67,510 square foot property in Washington.
On June 25, 2020, the Company repaid in full three mortgage notes bearing interest at rates of 5.63%, 6.63% and 6.88% per annum with outstanding principal of $0.5 million, $2.8 million, and $7.0 million, respectively. The mortgage notes encumbered a 60,476 square foot property in Minnesota.
The Company has outstanding interest rate swapsderivatives totaling $175.0 million to hedge one-month LIBOR. The following details the amount and rate of each swap (dollars in thousands):
| | | | | | | | | | | |
EFFECTIVE DATE | AMOUNT | WEIGHTED AVERAGE RATE | EXPIRATION DATE |
December 18, 2017 | $ | 25,000 | | 2.18 | % | December 16, 2022 |
February 1, 2018 | 50,000 | | 2.46 | % | December 16, 2022 |
May 1, 2019 | 50,000 | | 2.33 | % | May 1, 2026 |
June 3, 2019 | 50,000 | | 2.13 | % | May 1, 2026 |
| $ | 175,000 | | 2.29 | % | |
Subsequent Debt Activity
On October 1, 2020, the Company repaid in full a mortgage note payable bearing interest at a rate of 5.47% per annum with an outstanding principal of $4.2 million. The mortgage note encumbered a 40,171 square foot property in Georgia.
|
| | | | | | |
EFFECTIVE DATE | AMOUNT |
| WEIGHTED AVERAGE RATE |
| EXPIRATION DATE |
December 18, 2017 | $ | 25,000 |
| 2.18 | % | December 16, 2022 |
February 1, 2018 | 50,000 |
| 2.46 | % | December 16, 2022 |
May 1, 2019 | 50,000 |
| 2.33 | % | May 1, 2026 |
June 3, 2019 | 50,000 |
| 2.13 | % | May 1, 2026 |
| $ | 175,000 |
| 2.29 | % | |
On October 2, 2020, the Company issued $300.0 million of 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.
On October 19, 2020, the Company redeemed its 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. In October 2020, the Company recognized a loss on early extinguishment of debt of approximately $21.5 million related to this redemption.
Operating Activities
Cash flows provided by operating activities increased from $34.8$158.5 million for the threenine months ended March 31,September 30, 2019 to $38.4$411.6 million for the threenine months ended March 31,September 30, 2020. Items impacting cash flows from operations include, but are not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses. Also included in operating cash flows was approximately $244.4 million of proceeds from the dispositions of sale-type lease properties.
The Company may, from time to time, sell properties and redeploy cash from property sales into new investments. To the extent revenues related to the properties being sold exceed income from these new investments, the Company's results of operations and cash flows could be adversely affected.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
New Accounting Pronouncements
See Note 1 to the Company's Condensed Consolidated Financial Statements accompanying this report for information on new accounting standards.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, below are some of the factors and trends that management believes may impact future operations of the Company.
COVID-19 Pandemic
For information on the ways that the COVID-19 pandemic is impacting the Company and its tenants, see "COVID-19 Update" above and in Part II, Item 1A.above.
Expiring Leases
The Company expects that approximately 15% to 20% of the leases in its multi-tenanted portfolio will expire each year in the ordinary course of business. There are 583211 leases totaling 2.10.8 million square feet in the Company's multi-tenant portfolio that will expire during the remainder of 2020. Approximately 85% of the leases expiring in 2020 are in buildings located on or adjacent to hospital campuses, are distributed throughout the portfolio, and are not concentrated with any one tenant, health system or market area. The Company typically expects to retain 75% to 90% of multi-tenant property tenants upon expiration, and the retention ratio for the first threenine months of the year has been within this range.
IncludedPreviously included in the 2020 lease expirations iswas 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. TheA new operator, Cowboys Fit, executed an approximately 14-year lease expired on March 31, 2020,for a reconfigured 52,000 square foot fitness center.
Baylor has executed a temporary lease 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 tenant is currently under a month-to-month lease arrangement asexterior of the Company finalizes a new lease with an independent fitness center operator for approximately half the space. The Company expects to redevelop the remaining space for clinical use.building.
AlsoPreviously included in the 2020 lease expirations iswas the July 31 expiration of a 62,000 square foot office lease. A telecommunication company occupiesoccupied three floors of a 145,000 square foot office building and is expectedvacated upon expiration of the lease. The Company recognized revenue of approximately $0.1 million related to vacate.this lease in the third quarter of 2020. The Company intends to reposition the property, converting the vacated space from full floor to multi-tenant configurations. The Company has begun marketing the space and anticipates that releasing efforts will include subdividing the space for multiple users. The Company recognized revenue of approximately $0.4 million related to this lease in the first quarter of 2020.has executed a 10,000 square foot lease.
The Company has onehad an 83,000 square foot, single-tenant net leased, on-campus medical office building with a lease term scheduled to expirethat expired in the second quarter of 2020. The Company has been in discussions about a long-term lease renewal, but given the COVID-19 pandemic, plans to provideexecuted a 6-month extension through December 31, 2020 to allow more time to finalize a long-term lease agreement.
Operating Expenses
The Company has historically experienced increases in property taxes throughout its portfolio as a result of increasing assessments and tax rates levied across the country. The Company continues its efforts to appeal property tax increases and manage the impact of the increases. In addition, the Company has historically incurred variability in portfolio utilities expense based on seasonality, with the first and third quarters usually reflecting greater amounts. The effects of these operating expense increases are mitigated in leases that have provisions for operating expense reimbursement. As of March 31,September 30, 2020, leases for 89% of the Company's multi-tenant leased square footage allow for some recovery of operating expenses, with 31% having modified gross lease structures and 58% having net lease structures.
Purchase Options
Information about the Company's unexercised purchase options and the amount and basis for determination of the purchase price is detailed in the table below (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF SEPTEMBER 30, 2020 |
YEAR EXERCISABLE | MOB | INPATIENT | FAIR MARKET VALUE METHOD 1 | NON FAIR MARKET VALUE METHOD 2 | TOTAL |
Current 3 | 3 | | 1 | | $ | 96,865 | | $ | — | | $ | 96,865 | |
2021 | 1 | | — | | — | | 14,984 | | 14,984 | |
2022 | — | | — | | — | | — | | — | |
2023 | — | | — | | — | | — | | — | |
2024 | — | | — | | — | | — | | — | |
2025 | 4 | | — | | 48,165 | | 19,459 | | 67,624 | |
2026 | — | | — | | — | | — | | — | |
2027 | — | | — | | — | | — | | — | |
2028 | 1 | | — | | 43,961 | | — | | 43,961 | |
2029 | 1 | | — | | 26,494 | | — | | 26,494 | |
2030 and thereafter | 4 | | — | | 101,118 | | — | | 101,118 | |
Total | 14 | | 1 | | $ | 316,603 | | $ | 34,443 | | $ | 351,046 | |
1The purchase option price includes a fair market value component that is determined by an appraisal process.
2Includes properties with stated purchase prices or prices based on fixed capitalization rates.
3These purchase options have been exercisable for an average of 12.1 years.
|
| | | | | | | | | | | | | |
| NUMBER OF PROPERTIES | GROSS REAL ESTATE INVESTMENT AS OF MARCH 31, 2020 |
YEAR EXERCISABLE | MOB |
| INPATIENT |
| FAIR MARKET VALUE METHOD 1 |
| NON FAIR MARKET VALUE METHOD 2 |
| TOTAL |
|
Current 3 | 3 |
| 1 |
| $ | 96,233 |
| $ | — |
| $ | 96,233 |
|
2021 | 1 |
| — |
| — |
| 14,984 |
| 14,984 |
|
2022 | — |
| — |
| — |
| — |
| — |
|
2023 | — |
| — |
| — |
| — |
| — |
|
2024 | — |
| — |
| — |
| — |
| — |
|
2025 | 5 |
| 1 |
| 48,165 |
| 221,929 |
| 270,094 |
|
2026 | — |
| — |
| — |
| — |
| — |
|
2027 | — |
| — |
| — |
| — |
| — |
|
2028 | 1 |
| — |
| 43,943 |
| — |
| 43,943 |
|
2029 | 1 |
| — |
| 26,494 |
| — |
| 26,494 |
|
2030 and thereafter | 4 |
| — |
| 100,151 |
| — |
| 100,151 |
|
Total | 15 |
| 2 |
| $ | 314,986 |
| $ | 236,913 |
| $ | 551,899 |
|
| |
1 | The purchase option price includes a fair market value component that is determined by an appraisal process. |
| |
2 | Includes properties with stated purchase prices or prices based on fixed capitalization rates. These properties have purchase prices that are on average 17% greater than the Company's current gross investment. |
| |
3 | These purchase options have been exercisable for an average of 11.6 years. |
Non-GAAP Financial Measures and Key Performance Indicators
Management considers certain non-GAAP financial measures and key performance indicators to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable measure determined in accordance with GAAP. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.
The non-GAAP financial measures and key performance indicators presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income, as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's historical consolidated operating results, these measures should be examined in conjunction with net income and cash flows from operations as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.
Funds from Operations ("FFO"), Normalized FFO and Funds Available for Distribution ("FAD")
FFO and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, impairment, and after adjustments for unconsolidated partnerships and joint ventures.”
In addition to FFO, the Company presents Normalized FFO and FAD. Normalized FFO is presented by adding to FFO acquisition-related costs, acceleration of debt issuance costs, debt extinguishment costs and other Company-
definedCompany-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, stock-based compensation expense and provision for bad debts, net; and subtracting maintenance capital expenditures, including second generation tenant improvements and leasing commissions paid and straight-line rent income, net of expense. The Company's definition of these terms may not be comparable to that of other real estate companies as they may have different methodologies for computing these amounts. 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. Normalized FFO and FAD should be reviewed in connection with GAAP financial measures.
Management believes FFO, Normalized FFO, FFO per share, Normalized FFO per share and FAD ("Non-GAAP Measures") provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with GAAP assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization, impairments and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, Non-GAAP Measures can facilitate comparisons of operating performance between periods. The Company reports Non-GAAP Measures because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs. For these reasons, management deems it appropriate to disclose and discuss these Non-GAAP Measures. However, none of these measures represent cash generated from operating activities determined in accordance with GAAP and are not necessarily indicative of cash available to fund cash needs. Further, these measures should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity. The table below reconciles net income to FFO, Normalized FFO and FAD for the three and nine months ended March 31,September 30, 2020 and 2019. |
| | | | | | |
| THREE MONTHS ENDED MARCH 31, |
Amounts in thousands, except per share data | 2020 |
| 2019 |
|
Net income | $ | 4,315 |
| $ | 4,891 |
|
(Gain) loss on sales of real estate assets | 49 |
| (15 | ) |
Real estate depreciation and amortization | 48,611 |
| 43,383 |
|
FFO attributable to common stockholders | $ | 52,975 |
| $ | 48,259 |
|
Acquisition and pursuit costs 1 | 750 |
| 305 |
|
Lease intangible amortization | 745 |
| 84 |
|
Normalized FFO attributable to common stockholders | $ | 54,470 |
| $ | 48,648 |
|
Non-real estate depreciation and amortization | 823 |
| 763 |
|
Non-cash interest expense amortization 2 | 746 |
| 702 |
|
Provision for bad debt, net | (83 | ) | (75 | ) |
Straight-line rent, net | (660 | ) | (270 | ) |
Stock-based compensation | 2,599 |
| 2,639 |
|
Normalized FFO adjusted for non-cash items | $ | 57,895 |
| $ | 52,407 |
|
2nd generation TI | (6,040 | ) | (4,326 | ) |
Leasing commissions paid | (2,824 | ) | (1,347 | ) |
Capital additions | (3,470 | ) | (3,462 | ) |
FAD | $ | 45,561 |
| $ | 43,272 |
|
FFO per common share - diluted | $ | 0.40 |
| $ | 0.39 |
|
Normalized FFO per common share - diluted | $ | 0.41 |
| $ | 0.39 |
|
FFO weighted average common shares outstanding - diluted 3 | 133,980 |
| 124,928 |
|
| |
1 | Acquisition and pursuit costs include third party and travel costs related to the pursuit of acquisitions and developments. |
| |
2 | Includes the amortization of deferred financing costs, discounts and premiums. |
| |
3 | The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 830,024 and 696,432, respectively, for the three months ended March 31, 2020 and 2019. |
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, | NINE MONTHS ENDED SEPTEMBER 30, |
Amounts in thousands, except per share data | 2020 | 2019 | 2020 | 2019 |
Net income | $ | 8,230 | | $ | 2,601 | | $ | 88,058 | | $ | 11,975 | |
(Gain) on sales of real estate assets | (2,177) | | (200) | | (70,395) | | (5,065) | |
Impairment of real estate assets | — | | — | | — | | 5,610 | |
Real estate depreciation and amortization | 48,295 | | 45,926 | | 145,564 | | 133,993 | |
FFO attributable to common stockholders | $ | 54,348 | | $ | 48,327 | | $ | 163,227 | | $ | 146,513 | |
Acquisition and pursuit costs 1 | 440 | | 501 | | 1,621 | | 1,227 | |
Lease intangible amortization | (35) | | 5 | | 694 | | 143 | |
Accelerated Stock Awards | — | | 2,854 | | — | | 2,854 | |
Debt financing costs | — | | — | | — | | 760 | |
Normalized FFO attributable to common stockholders | $ | 54,753 | | $ | 51,687 | | $ | 165,542 | | $ | 151,497 | |
Non-real estate depreciation and amortization | 785 | | 838 | | 2,430 | | 2,430 | |
Non-cash interest expense amortization 2 | 934 | | 727 | | 2,715 | | 2,136 | |
Provision for bad debt, net | (144) | | (32) | | 718 | | 43 | |
Straight-line rent, net | (535) | | (379) | | (1,577) | | (650) | |
Stock-based compensation 3 | 2,445 | | 2,375 | | 7,449 | | 7,386 | |
Normalized FFO adjusted for non-cash items | $ | 58,238 | | $ | 55,216 | | $ | 177,277 | | $ | 162,842 | |
2nd generation TI | (5,323) | | (6,114) | | (17,368) | | (16,564) | |
Leasing commissions paid | (1,999) | | (2,697) | | (7,081) | | (6,359) | |
Capital additions | (4,580) | | (3,543) | | (12,827) | | (11,998) | |
FAD | $ | 46,336 | | $ | 42,862 | | $ | 140,001 | | $ | 127,921 | |
FFO per common share - diluted | $ | 0.40 | | $ | 0.37 | | $ | 1.21 | | $ | 1.15 | |
Normalized FFO per common share - diluted | $ | 0.41 | | $ | 0.40 | | $ | 1.23 | | $ | 1.19 | |
FFO weighted average common shares outstanding - diluted 4 | 135,159 | | 129,015 | | 134,537 | | 127,424 | |
1Acquisition and pursuit costs include third party and travel costs related to the pursuit of acquisitions and developments.
2Includes the amortization of deferred financing costs, discounts and premiums.
3The 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.
4The Company utilizes the treasury stock method which includes the dilutive effect of nonvested share-based awards outstanding of 801,382 and 800,370, respectively for the three and nine months ended September 30, 2020.
Cash NOI and Same Store Cash NOI
Cash NOI and Same Store Cash NOI are key performance indicators. Management considers these to be supplemental measures that allow investors, analysts and Company management to measure unlevered property-level operating results. The Company defines Cash NOI as rental income and property lease guaranty income less property operating expenses. Cash NOI excludes non-cash items such as above and below market lease intangibles, straight-line rent, lease inducements, tenant improvement amortization and leasing commission amortization. The Company also excludes cash lease termination fees. Cash NOI is historical and not necessarily indicative of future results.
Same Store Cash NOI compares Cash NOI for stabilized properties. Stabilized properties are properties that have been included in operations for the duration of the year-over-year comparison period presented and include redevelopment projects. Accordingly, stabilized properties exclude properties that were recently acquired or disposed of, properties classified as held for sale, reposition properties and newly developed properties. The Company utilizes the reposition classification for properties experiencing a shift in strategic direction. Such a shift can occur for a variety of reasons, including a substantial change in the use of the asset, a change in strategy or closure of a 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 will be included in the same store pool eight full quarters after substantial completion. Any additional square footage created by redevelopment projects at a same store property is included in the same store pool immediately upon completion. Any property included in the reposition property group will be included in the same store analysis once occupancy has increased to 60% or greater with positive net operating income and has remained at that level for eight full quarters.
During the third quarter of 2020, the Company's reposition pool increased by one property to a total of 11 properties. Two properties were reclassified from reposition to held for sale, two 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 three months ended
March 31,September 30, 2020 and 2019.
| | | NUMBER OF PROPERTIES |
| GROSS INVESTMENT at March 31, 2020 |
| SAME STORE CASH NOI for the three months ended March 31, | | NUMBER OF PROPERTIES | GROSS INVESTMENT at September 30, 2020 | SAME STORE CASH NOI for the three months ended September 30, |
Dollars in thousands | 2020 |
| 2019 |
| Dollars in thousands | 2020 | 2019 |
Multi-tenant properties | 157 |
| $ | 3,248,042 |
| $ | 57,981 |
| $ | 56,751 |
| Multi-tenant properties | 156 | | $ | 3,237,143 | | $ | 57,663 | | $ | 56,317 | |
Single-tenant net lease properties | 14 |
| 460,433 |
| 10,449 |
| 10,271 |
| Single-tenant net lease properties | 12 | | 257,229 | | 6,033 | | 5,870 | |
Total | 171 |
| $ | 3,708,475 |
| $ | 68,430 |
| $ | 67,022 |
| Total | 168 | | $ | 3,494,372 | | $ | 63,696 | | $ | 62,187 | |
The following tables reconcile net income to same store NOI and the same store property metrics to the total owned real estate portfolio for the three months ended March 31,September 30, 2020 and 2019:
Reconciliation of Same Store Cash NOI
| | | | | | | | |
| THREE MONTHS ENDED SEPTEMBER 30, |
Dollars in thousands | 2020 | 2019 |
Net income | $ | 8,230 | | $ | 2,601 | |
| | |
| | |
Other income (expense) | 11,969 | | 13,981 | |
General and administrative expense | 7,299 | | 10,802 | |
Depreciation and amortization expense | 47,143 | | 45,137 | |
Other expenses 1 | 2,737 | | 2,462 | |
Straight-line rent revenue | (915) | | (770) | |
Other revenue 2 | (3,062) | | (1,726) | |
Cash NOI | 73,401 | | 72,487 | |
Cash NOI not included in same store | (9,705) | | (10,300) | |
Same store cash NOI | 63,696 | | 62,187 | |
Reposition NOI | 1,358 | | 1,660 | |
Same store and reposition cash NOI | $ | 65,054 | | $ | 63,847 | |
1Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense.
2Includes management fee income, interest, above and below market lease intangible amortization, lease inducement amortization, lease terminations and tenant improvement overage amortization.
|
| | | | | | |
| THREE MONTHS ENDED MARCH 31, |
Dollars in thousands | 2020 |
| 2019 |
|
Net income | $ | 4,315 |
| $ | 4,891 |
|
Other income (expense) | 13,927 |
| 13,564 |
|
General and administrative expense | 8,766 |
| 8,510 |
|
Depreciation and amortization expense | 47,497 |
| 42,662 |
|
Other expenses 1 | 3,365 |
| 1,768 |
|
Straight-line rent revenue | (668 | ) | (277 | ) |
Other revenue 2 | (2,004 | ) | (1,468 | ) |
Cash NOI | 75,198 |
| 69,650 |
|
Cash NOI not included in same store | (6,529 | ) | (2,361 | ) |
Same store cash NOI | 68,669 |
| 67,289 |
|
Reposition NOI | (239 | ) | (267 | ) |
Same store and reposition cash NOI | $ | 68,430 |
| $ | 67,022 |
|
| |
1 | Includes acquisition and pursuit costs, bad debt, above and below market ground lease intangible amortization, leasing commission amortization and ground lease straight-line rent expense. |
| |
2 | 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 Properties
| | | | | | | | | | | | | | |
| AS OF SEPTEMBER 30, 2020 |
| PROPERTY COUNT | GROSS INVESTMENT | SQUARE FEET | OCCUPANCY |
Same store properties | 168 | | $ | 3,494,372 | | 12,795,403 | | 88.4 | % |
Acquisitions | 31 | | 647,974 | | 1,667,990 | | 91.4 | % |
Development completions | 1 | | 51,889 | | 151,031 | | 60.5 | % |
Reposition | 11 | | 142,381 | | 859,004 | | 62.1 | % |
Total owned real estate properties | 211 | | $ | 4,336,616 | | 15,473,428 | | 87.0 | % |
|
| | | | | | | | | |
| AS OF MARCH 31, 2020 |
| PROPERTY COUNT |
| GROSS INVESTMENT |
| SQUARE FEET |
| OCCUPANCY |
|
Same store properties | 171 |
| $ | 3,708,475 |
| 13,439,999 |
| 89.0 | % |
Acquisitions | 31 |
| 606,061 |
| 1,826,029 |
| 86.9 | % |
Development completions | 1 |
| 53,669 |
| 151,031 |
| 20.2 | % |
Reposition | 9 |
| 72,782 |
| 429,167 |
| 41.9 | % |
Total owned real estate properties | 212 |
| $ | 4,440,987 |
| 15,846,226 |
| 86.8 | % |
Results of Operations
Three Months Ended March 31,September 30, 2020 Compared to Three Months Ended March 31,September 30, 2019
The Company’s results of operations for the three months ended March 31,September 30, 2020 compared to the same period in 2019 were impacted by acquisitions, developments, dispositions, gains on sale, and capital markets transactions.
Revenues
Total revenues increased $12.2$5.5 million, or 10.8%4.6%, to approximately $124.8$125.3 million for the three months ended March 31,September 30, 2020 compared to $112.7$119.8 million in the prior year period. This increase is comprised of the following:
| | | THREE MONTHS ENDED MARCH 31, | CHANGE | | THREE MONTHS ENDED SEPTEMBER 30, | CHANGE |
Dollars in thousands | 2020 |
| 2019 |
| $ |
| % |
| Dollars in thousands | 2020 | 2019 | $ | % |
Property operating | $ | 111,148 |
| $ | 98,982 |
| $ | 12,166 |
| 12.3 | % | Property operating | $ | 114,921 | | $ | 105,805 | | $ | 9,116 | | 8.6 | % |
Single-tenant net lease | 10,453 |
| 11,046 |
| (593 | ) | (5.4 | )% | Single-tenant net lease | 7,548 | | 11,165 | | (3,617) | | (32.4) | % |
Straight-line rent | 1,043 |
| 668 |
| 375 |
| 56.1 | % | Straight-line rent | 915 | | 770 | | 145 | | 18.8 | % |
Rental income | 122,644 |
| 110,696 |
| 11,948 |
| 10.8 | % | Rental income | 123,384 | | 117,740 | | 5,644 | | 4.8 | % |
Other operating | 2,163 |
| 1,961 |
| 202 |
| 10.3 | % | Other operating | 1,868 | | 2,059 | | (191) | | (9.3) | % |
Total revenues | $ | 124,807 |
| $ | 112,657 |
| $ | 12,150 |
| 10.8 | % | Total revenues | $ | 125,252 | | $ | 119,799 | | $ | 5,453 | | 4.6 | % |