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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
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(Mark One)
|
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended: | June 30, 2023 |
OR |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to
|
Commission File Number: 001-35568 (Healthcare Realty Trust Incorporated)
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
| | | | | | | | |
Maryland | | 20-4738467 |
| | |
(State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification No.) |
3310 West End Avenue, Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
| | |
www.healthcarerealty.com |
(Internet address) |
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbol | | Name of Each Exchange on Which Registered |
Class A Common Stock, $0.01 par value per share | | HR | | New York Stock Exchange |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| ☒ | Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer |
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| ☐ | Smaller reporting company | ☐ | Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
As of August 4, 2023, the Registrant had 380,857,532 shares of Common Stock outstanding.
Explanatory Note
On July 20, 2022, pursuant to that certain Agreement and Plan of Merger dated as of February 28, 2022 (the “Merger Agreement”), by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR”), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), Healthcare Trust of America Holdings, LP, a Delaware limited partnership (now known as Healthcare Realty Holdings, L.P.) (the “OP”), and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”), Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”). Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to “HRTI, LLC” and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by means of a contribution and assignment agreement to the OP, and Legacy HR became a wholly-owned subsidiary of the OP. As a result, Legacy HR became a part of an umbrella partnership REIT (“UPREIT”) structure, which is intended to align the corporate structure of the combined company after giving effect to the Merger and the UPREIT reorganization and to provide a platform for the combined company to more efficiently acquire properties in a tax-deferred manner. The combined company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange under the ticker symbol “HR”.
For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HR was considered the accounting acquirer. As a result, the historical financial statements of the accounting acquirer, Legacy HR, became the historical financial statements of the Company, as defined below. Periodic reports for periods ending following the Merger reflect financial and other information of the Company. The acquisition was accounted for using the acquisition method of accounting in accordance with Accounting Standards Codification 805, Business Combinations (“ASC 805”), which requires, among other things, the assets acquired and the liabilities assumed to be recognized at their acquisition date fair value.
For purposes of this Quarterly Report on Form 10-Q, references to the “Company” are to Legacy HR for periods prior to the closing of the Merger and thereafter to the combined company after giving effect to the Merger.
In addition, the OP has issued unsecured notes described in Note 5 to the Company's Condensed Consolidated Financial Statements included in this report. All unsecured notes are fully and unconditionally guaranteed by the Company, and the OP is 98.8% owned by the Company. Effective January 4, 2021, the Securities and Exchange Commission (the “SEC”) adopted amendments to the financial disclosure requirements which permit subsidiary issuers of obligations guaranteed by the parent to omit separate financial statements if the consolidated financial statements of the parent company have been filed, the subsidiary obligor is a consolidated subsidiary of the parent company, the guaranteed security is debt or debt-like, and the security is guaranteed fully and unconditionally by the parent. Accordingly, separate consolidated financial statements of the OP have not been presented.
Additionally, as permitted under Rule 13-01(a)(4)(vi) of Regulation S-X, the Company has excluded the summarized financial information for the OP because the assets, liabilities, and results of operations of the OP are not materially different than the corresponding amounts in the Company's consolidated financial statements and management believes such summarized financial information would be repetitive and would not provide incremental value to investors.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
June 30, 2023
Table of Contents
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PART I - FINANCIAL INFORMATION | |
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PART II - OTHER INFORMATION | |
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Item 5 | Other Information | |
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SIGNATURE | | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
Amounts in thousands, except per share data
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ASSETS | | |
| Unaudited JUNE 30, 2023 | DECEMBER 31, 2022 |
Real estate properties | | |
Land | $ | 1,424,453 | | $ | 1,439,798 | |
Buildings and improvements | 11,188,821 | | 11,332,037 | |
Lease intangibles | 922,029 | | 959,998 | |
Personal property | 12,615 | | 11,907 | |
Investment in financing receivable, net | 121,315 | | 120,236 | |
Financing lease right-of-use assets | 83,016 | | 83,824 | |
Construction in progress | 53,311 | | 35,560 | |
Land held for development | 78,411 | | 74,265 | |
Total real estate properties | 13,883,971 | | 14,057,625 | |
Less accumulated depreciation and amortization | (1,983,944) | | (1,645,271) | |
Total real estate properties, net | 11,900,027 | | 12,412,354 | |
Cash and cash equivalents | 35,904 | | 60,961 | |
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Assets held for sale, net | 151 | | 18,893 | |
Operating lease right-of-use assets | 333,224 | | 336,983 | |
Investments in unconsolidated joint ventures | 327,245 | | 327,248 | |
Goodwill | 250,530 | | 223,202 | |
Other assets, net | 547,266 | | 469,990 | |
Total assets | $ | 13,394,347 | | $ | 13,849,631 | |
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LIABILITIES AND STOCKHOLDERS' EQUITY | | |
Liabilities | | |
Notes and bonds payable | $ | 5,340,272 | | $ | 5,351,827 | |
Accounts payable and accrued liabilities | 196,147 | | 244,033 | |
Liabilities of assets held for sale | 222 | | 437 | |
Operating lease liabilities | 278,479 | | 279,895 | |
Financing lease liabilities | 73,629 | | 72,939 | |
Other liabilities | 219,694 | | 218,668 | |
Total liabilities | 6,108,443 | | 6,167,799 | |
Commitments and contingencies | | |
Redeemable non-controlling interests | 2,487 | | 2,014 | |
Stockholders' equity | | |
Preferred stock, $.01 par value per share; 200,000 shares authorized; none issued and outstanding | — | | — | |
Class A Common stock, $.01 par value per share; 1,000,000 shares authorized; 380,858 and 380,590 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively | 3,808 | | 3,806 | |
Additional paid-in capital | 9,595,033 | | 9,587,637 | |
Accumulated other comprehensive (loss) income | 9,328 | | 2,140 | |
Cumulative net income attributable to common stockholders | 1,137,171 | | 1,307,055 | |
Cumulative dividends | (3,565,941) | | (3,329,562) | |
Total stockholders' equity | 7,179,399 | | 7,571,076 | |
Non-controlling interest | 104,018 | | 108,742 | |
Total equity | 7,283,417 | | 7,679,818 | |
Total liabilities and equity | $ | 13,394,347 | | $ | 13,849,631 | |
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, 2022, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2023 and 2022
Amounts in thousands, except per share data
Unaudited
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| THREE MONTHS ENDED June 30, | SIX MONTHS ENDED June 30, |
| 2023 | 2022 | 2023 | 2022 |
Revenues | | | | |
Rental income | $ | 329,680 | | $ | 140,632 | | $ | 653,773 | | $ | 279,121 | |
Interest income | 4,233 | | 1,957 | | 8,448 | | 3,887 | |
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Other operating | 4,230 | | 2,738 | | 8,847 | | 5,213 | |
| 338,143 | | 145,327 | | 671,068 | | 288,221 | |
Expenses | | | | |
Property operating | 125,395 | | 57,010 | | 247,436 | | 114,474 | |
General and administrative | 15,464 | | 10,540 | | 30,399 | | 21,576 | |
Acquisition and pursuit costs | 669 | | 1,352 | | 956 | | 2,655 | |
Merger-related costs | (15,670) | | 7,085 | | (10,815) | | 13,201 | |
Depreciation and amortization | 183,193 | | 55,731 | | 367,671 | | 109,772 | |
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| 309,051 | | 131,718 | | 635,647 | | 261,678 | |
Other income (expense) | | | | |
Gain on sales of real estate properties | 7,156 | | 8,496 | | 8,162 | | 53,280 | |
Interest expense | (65,334) | | (15,543) | | (129,092) | | (29,204) | |
Loss on extinguishment of debt | — | | — | | — | | (1,429) | |
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Impairment of real estate properties and credit loss reserves | (55,215) | | — | | (86,637) | | 25 | |
Equity loss from unconsolidated joint ventures | (17) | | (307) | | (797) | | (652) | |
Interest and other income (expense), net | 592 | | (125) | | 1,139 | | (206) | |
| (112,818) | | (7,479) | | (207,225) | | 21,814 | |
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Net (loss) income | $ | (83,726) | | $ | 6,130 | | $ | (171,804) | | $ | 48,357 | |
Net loss attributable to non-controlling interests | 967 | | — | | 1,920 | | — | |
Net (loss) income attributable to common stockholders | $ | (82,759) | | $ | 6,130 | | $ | (169,884) | | $ | 48,357 | |
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Basic earnings per common share | $ | (0.22) | | $ | 0.04 | | $ | (0.45) | | $ | 0.32 | |
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Diluted earnings per common share | $ | (0.22) | | $ | 0.04 | | $ | (0.45) | | $ | 0.32 | |
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Weighted average common shares outstanding - basic | 378,897 | | 149,676 | | 378,861 | | 149,321 | |
Weighted average common shares outstanding - diluted | 378,897 | | 149,739 | | 378,861 | | 149,397 | |
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, 2022, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income
For the Three and Six Months Ended June 30, 2023 and 2022
Amounts in thousands
Unaudited
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| THREE MONTHS ENDED June 30, | SIX MONTHS ENDED June 30, |
| 2023 | 2022 | 2023 | 2022 |
Net (loss) income | $ | (83,726) | | $ | 6,130 | | $ | (171,804) | | $ | 48,357 | |
Other comprehensive income | | | | |
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Interest rate swaps | | | | |
Reclassification adjustments for (gains) losses included in net income (interest expense) | (3,419) | | 823 | | (5,703) | | 1,909 | |
Gains arising during the period on interest rate swaps | 21,523 | | 1,663 | | 12,981 | | 6,822 | |
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| 18,104 | | 2,486 | | 7,278 | | 8,731 | |
Comprehensive (loss) income | (65,622) | | 8,616 | | (164,526) | | 57,088 | |
Less: comprehensive loss attributable to non-controlling interests | 745 | | — | | 1,830 | | — | |
Comprehensive (loss) income attributable to common stockholders | $ | (64,877) | | $ | 8,616 | | $ | (162,696) | | $ | 57,088 | |
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, 2022, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Three Months Ended June 30, 2023 and 2022
Amounts in thousands, except per share data
Unaudited
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| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests |
Balance at March 31, 2023 | $ | 3,808 | | $ | 9,591,194 | | $ | (8,554) | | $ | 1,219,930 | | $ | (3,447,750) | | $ | 7,358,628 | | $ | 106,211 | | $ | 7,464,839 | | $ | 2,000 | |
Issuance of common stock, net of issuance costs | — | | 27 | | — | | — | | — | | 27 | | — | | 27 | | — | |
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Common stock redemptions | — | | (112) | | — | | — | | — | | (112) | | — | | (112) | | — | |
Share-based compensation | — | | 3,924 | | — | | — | | — | | 3,924 | | — | | 3,924 | | — | |
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Net loss | — | | — | | — | | (82,759) | | — | | (82,759) | | (967) | | (83,726) | | — | |
Reclassification adjustments for gains included in net income (interest expense)
| — | | — | | (3,377) | | — | | — | | (3,377) | | (42) | | (3,419) | | — | |
Gains arising during the period on interest rate swaps
| — | | — | | 21,259 | | — | | — | | 21,259 | | 264 | | 21,523 | | — | |
Contributions from non-controlling interests | — | | — | | — | | — | | — | | — | | — | | — | | 487 | |
Dividends to common stockholders and distributions to non-controlling interest holders ($0.31 per share) | — | | — | | — | | — | | (118,191) | | (118,191) | | (1,448) | | (119,639) | | — | |
Balance at June 30, 2023 | $ | 3,808 | | $ | 9,595,033 | | $ | 9,328 | | $ | 1,137,171 | | $ | (3,565,941) | | $ | 7,179,399 | | $ | 104,018 | | $ | 7,283,417 | | $ | 2,487 | |
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| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests |
Balance at March 31, 2022 | $ | 1,516 | | $ | 3,999,060 | | $ | (3,736) | | $ | 1,308,385 | | $ | (3,092,343) | | $ | 2,212,882 | | $ | — | | $ | 2,212,882 | | $ | — | |
Issuance of common stock, net of issuance costs | — | | 110 | | — | | — | | — | | 110 | | — | | 110 | | — | |
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Share-based compensation | — | | 3,356 | | — | | — | | — | | 3,356 | | — | | 3,356 | | — | |
Net income | — | | — | | — | | 6,130 | | — | | 6,130 | | — | | 6,130 | | — | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 823 | | — | | — | | 823 | | — | | 823 | | — | |
Gains arising during the period on interest rate swaps
| — | | — | | 1,663 | | — | | — | | 1,663 | | — | | 1,663 | | — | |
Dividends to common stockholders ($0.31 per share) | — | | — | | — | | — | | (47,097) | | (47,097) | | — | | (47,097) | | — | |
Balance at June 30, 2022 | $ | 1,516 | | $ | 4,002,526 | | $ | (1,250) | | $ | 1,314,515 | | $ | (3,139,440) | | $ | 2,177,867 | | $ | — | | $ | 2,177,867 | | $ | — | |
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, 2022, are an integral part of these financial statements.
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Equity
For the Six Months Ended June 30, 2023 and 2022
Amounts in thousands, except per share data
Unaudited
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| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests |
Balance at December 31, 2022 | $ | 3,806 | | $ | 9,587,637 | | $ | 2,140 | | $ | 1,307,055 | | $ | (3,329,562) | | $ | 7,571,076 | | $ | 108,742 | | $ | 7,679,818 | | $ | 2,014 | |
Issuance of common stock, net of issuance costs | — | | 78 | | — | | — | | — | | 78 | | — | | 78 | | — | |
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Common stock redemptions | (1) | | (1,595) | | — | | — | | — | | (1,596) | | — | | (1,596) | | — | |
Share-based compensation | 3 | | 8,913 | | — | | — | | — | | 8,916 | | — | | 8,916 | | — | |
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Net loss | — | | — | | — | | (169,884) | | — | | (169,884) | | (1,920) | | (171,804) | | — | |
Reclassification adjustments for gains included in net income (interest expense)
| — | | — | | (5,635) | | — | | — | | (5,635) | | (68) | | (5,703) | | — | |
Gains arising during the period on interest rate swaps
| — | | — | | 12,823 | | — | | — | | 12,823 | | 158 | | 12,981 | | — | |
Contributions from non-controlling interests | — | | — | | — | | — | | — | | — | | — | | — | | 473 | |
Dividends to common stockholders and distributions to non-controlling interest holders ($0.62 per share) | — | | — | | — | | — | | (236,379) | | (236,379) | | (2,894) | | (239,273) | | — | |
Balance at June 30, 2023 | $ | 3,808 | | $ | 9,595,033 | | $ | 9,328 | | $ | 1,137,171 | | $ | (3,565,941) | | $ | 7,179,399 | | $ | 104,018 | | $ | 7,283,417 | | $ | 2,487 | |
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| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Income (Loss) | Cumulative Net Income | Cumulative Dividends | Total Stockholders’ Equity | Non-controlling Interests | Total Equity | Redeemable Non-controlling Interests |
Balance at December 31, 2021 | $ | 1,505 | | $ | 3,972,917 | | $ | (9,981) | | $ | 1,266,158 | | $ | (3,045,483) | | $ | 2,185,116 | | $ | — | | $ | 2,185,116 | | $ | — | |
Issuance of common stock, net of issuance costs | 7 | | 22,764 | | — | | — | | — | | 22,771 | | — | | 22,771 | | — | |
Common stock redemptions | — | | (206) | | — | | — | | — | | (206) | | — | | (206) | | — | |
Share-based compensation | 4 | | 7,051 | | — | | — | | — | | 7,055 | | — | | 7,055 | | — | |
Net income | — | | — | | — | | 48,357 | | — | | 48,357 | | — | | 48,357 | | — | |
Reclassification adjustments for losses included in net income (interest expense)
| — | | — | | 1,909 | | — | | — | | 1,909 | | — | | 1,909 | | — | |
Gains arising during the period on interest rate swaps
| — | | — | | 6,822 | | — | | — | | 6,822 | | — | | 6,822 | | — | |
Dividends to common stockholders ($0.62 per share) | — | | — | | — | | — | | (93,957) | | (93,957) | | — | | (93,957) | | — | |
Balance at June 30, 2022 | $ | 1,516 | | $ | 4,002,526 | | $ | (1,250) | | $ | 1,314,515 | | $ | (3,139,440) | | $ | 2,177,867 | | $ | — | | $ | 2,177,867 | | $ | — | |
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, 2022, are an integral part of these financial statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2023 and 2022
Amounts in thousands
Unaudited
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OPERATING ACTIVITIES | | |
| SIX MONTHS ENDED June 30, |
| 2023 | 2022 |
Net (loss) income | $ | (171,804) | | $ | 48,357 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Depreciation and amortization | 367,671 | | 109,772 | |
Other amortization | 23,405 | | 2,680 | |
Share-based compensation | 8,916 | | 7,055 | |
Amortization of straight-line rent receivable (lessor) | (19,313) | | (3,292) | |
Amortization of straight-line rent on operating leases (lessee) | 3,062 | | 756 | |
Gain on sales of real estate properties | (8,162) | | (53,280) | |
Loss on extinguishment of debt | — | | 1,429 | |
Impairment of real estate properties and credit loss reserves | 86,637 | | (25) | |
Equity loss from unconsolidated joint ventures | 797 | | 652 | |
Distributions from unconsolidated joint ventures | 3,031 | | 108 | |
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Non-cash interest from financing and notes receivable | (488) | | (388) | |
Changes in operating assets and liabilities: | | |
Other assets, including right-of-use-assets | (17,502) | | 540 | |
Accounts payable and accrued liabilities | (38,601) | | (3,166) | |
Other liabilities | 16,673 | | 2,923 | |
Net cash provided by operating activities | 254,322 | | 114,121 | |
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INVESTING ACTIVITIES | | |
Acquisitions of real estate | (39,301) | | (287,004) | |
Development of real estate | (17,594) | | (7,475) | |
Additional long-lived assets | (94,013) | | (45,631) | |
Funding of mortgages and notes receivable | (11,503) | | — | |
Investments in unconsolidated joint ventures | (3,824) | | (49,599) | |
Investment in financing receivable | (780) | | 498 | |
Proceeds from sales of real estate properties and additional long-lived assets | 160,870 | | 108,044 | |
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Net cash used in investing activities | (6,145) | | (281,167) | |
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FINANCING ACTIVITIES | | |
Net (repayments) borrowings on unsecured credit facility | (31,000) | | 280,500 | |
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Repayments of notes and bonds payable | (1,340) | | (18,224) | |
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Redemption of notes and bonds payable | — | | (2,184) | |
Dividends paid | (236,105) | | (93,774) | |
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Net proceeds from issuance of common stock | 77 | | 22,768 | |
Common stock redemptions | (1,842) | | (852) | |
Distributions to non-controlling interest holders | (2,546) | | — | |
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Debt issuance and assumption costs | (438) | | — | |
Payments made on finance leases | (40) | | (51) | |
Net cash (used in) provided by financing activities | (273,234) | | 188,183 | |
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(Decrease) increase in cash and cash equivalents | (25,057) | | 21,137 | |
Cash and cash equivalents at beginning of period | 60,961 | | 13,175 | |
Cash and cash equivalents at end of period | $ | 35,904 | | $ | 34,312 | |
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Supplemental Cash Flow Information | | |
Interest paid | $ | 106,985 | | $ | 26,641 | |
Mortgage note receivable taken in connection with sale of real estate | $ | 45,000 | | $ | — | |
Invoices accrued for construction, tenant improvements and other capitalized costs | $ | 30,956 | | $ | 18,874 | |
Capitalized interest | $ | 1,282 | | $ | 145 | |
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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, 2022, 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 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 June 30, 2023, the Company had gross investments of approximately $13.9 billion in 680 wholly-owned real estate properties, construction in progress, redevelopments, financing receivables, financing lease right-of-use assets, land held for development and corporate property. The Company's 680 real estate properties are located in 35 states and total approximately 39.8 million square feet. The Company provided leasing and property management services to approximately 39.3 million square feet nationwide.
In addition, as of June 30, 2023, the Company had a weighted average ownership interest of approximately 44% in 34 real estate properties held in joint ventures. See Note 3 below for more details regarding the Company's unconsolidated joint ventures.
Any references to square footage or occupancy percentage, and any amounts derived from these values in these notes to the Company's Condensed Consolidated Financial Statements, are outside the scope of our independent registered public accounting firm’s review.
Basis of Presentation
For purposes of this Quarterly Report on Form 10-Q, references to the “Company” are to Legacy HR for periods prior to the closing of the Merger and thereafter to Legacy HR and Legacy HTA as the combined company after giving effect to the Merger. The Merger is described in more detail in Note 2 to these Condensed Consolidated Financial Statements. 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 and specific disclosures included as a result of the Merger, management believes there has been no material change in the information disclosed in the Notes to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. All material intercompany transactions and balances have been eliminated in consolidation.
This interim financial information should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. 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, 2023 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.
Principles of Consolidation
The Company’s Condensed Consolidated Financial Statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures and partnerships where the Company controls the operating activities. GAAP requires us to identify entities for which control is achieved through means other than voting rights and to determine which business enterprise is the primary beneficiary of variable interest entities (“VIEs”). Accounting Standards Codification (“ASC”) Topic 810, Consolidation broadly defines a VIE as an entity in which either (i) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of such entity that most significantly impact such entity’s economic performance or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company identifies the primary beneficiary of a VIE as the enterprise that has both of the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses or receive benefits of the VIE that could potentially be significant to the entity. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary, with any minority interests reflected as non-controlling interests or redeemable non-controlling interests in the accompanying Condensed Consolidated Financial Statements.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk, the disposition of all or a portion of an interest held by the primary beneficiary, or changes in facts and circumstances that impact the power to direct activities of the VIE that most significantly impacts economic performance. The Company performs this analysis on an ongoing basis.
For property holding entities not determined to be VIEs, the Company consolidates such entities in which it owns 100% of the equity or has a controlling financial interest evidenced by ownership of a majority voting interest. All intercompany balances and transactions are eliminated in consolidation. For entities in which the Company owns less than 100% of the equity interest, the Company consolidates the entity if it has the direct or indirect ability to control the entities’ activities based upon the terms of the respective entities’ ownership agreements.
Healthcare Realty Holdings, L.P., a Delaware limited partnership (the "OP"), is 98.8% owned by the Company. Holders of operating partnership units (“OP Units”) are considered to be non-controlling interest holders in the OP and their ownership interests are reflected as equity on the accompanying Condensed Consolidated Balance Sheets. Further, a portion of the earnings and losses of the OP are allocated to non-controlling interest holders based on their respective ownership percentages. Upon conversion of OP Units to common stock, any difference between the fair value of the common stock issued and the carrying value of the OP Units converted to common stock is recorded as a component of equity. As of June 30, 2023, there were approximately 4.7 million OP Units, or 1.2% of OP units issued and outstanding, held by non-controlling interest holders. Additionally, the Company is the primary beneficiary of this VIE. Accordingly, the Company consolidates the interests in the OP.
As of June 30, 2023, the Company had four consolidated VIEs in addition to the OP where it is the primary beneficiary of the VIE based on the combination of operational control and the rights to receive residual returns or the obligation to absorb losses arising from the joint ventures. Accordingly, such joint ventures have been consolidated, and the table below summarizes the balance sheets of consolidated VIEs, excluding the OP, in the aggregate:
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(dollars in thousands) | JUNE 30, 2023 |
Assets: | |
Net real estate investments | $ | 61,980 | |
Cash and cash equivalents | 2,107 | |
Receivables and other assets | 2,015 | |
Total assets | $ | 66,102 | |
Liabilities: | |
Accrued expenses and other liabilities | $ | 14,058 | |
Total equity | 52,044 | |
Total liabilities and equity | $ | 66,102 | |
As of June 30, 2023, the Company had three unconsolidated VIEs consisting of two notes receivables and one joint venture. The Company does not have the power or economic interests to direct the activities of the VIEs on a stand-alone basis, and therefore it was determined that the Company was not the primary beneficiary. As a result, the Company accounts for the two notes receivables as amortized cost and a joint venture arrangement under the equity method. See below for additional information regarding the Company's unconsolidated VIEs.
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(dollars in thousands) ORIGINATION DATE | LOCATION | SOURCE | CARRYING AMOUNT | MAXIMUM EXPOSURE TO LOSS |
2021 | Houston, TX 1 | Note receivable | $ | 30,445 | | $ | 31,150 | |
2021 | Charlotte, NC 1 | Note receivable | 5,691 | | 6,000 | |
2022 | Texas 2 | Joint venture | 64,758 | | 64,758 | |
1Assumed mortgage note receivable in connection with the Merger.
2Includes investments in seven properties.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
As of June 30, 2023, the Company's unconsolidated joint venture arrangements were accounted for using the equity method of accounting as the Company exercised significant influence over but did not control these entities. See Note 3 below for more details regarding the Company's unconsolidated joint ventures.
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.
Reclassifications
Certain reclassifications have been made on the Company's prior year Condensed Consolidated Balance Sheet to conform to current year presentation. Previously, the Company's Lease intangibles were included in Building, improvements and lease intangibles and Goodwill was included with Other assets, net. These amounts are now classified as separate line items on the Company's Condensed Consolidated Balance Sheets.
Redeemable Non-Controlling Interests
The Company accounts for redeemable equity securities in accordance with ASC Topic 480: Accounting for Redeemable Equity Instruments, which requires that equity securities redeemable at the option of the holder, not solely within our control, be classified outside permanent stockholders’ equity. The Company classifies redeemable equity securities as redeemable non-controlling interests in the accompanying Condensed Consolidated Balance Sheets. Accordingly, the Company records the carrying amount at the greater of the initial carrying amount (increased or decreased for the non-controlling interest’s share of net income or loss and distributions) or the redemption value. We measure the redemption value and record an adjustment to the carrying value of the equity securities as a component of redeemable non-controlling interest. As of June 30, 2023, the Company had redeemable non-controlling interests of $2.5 million.
Asset Impairment
The Company assesses the potential for impairment of identifiable, definite-lived, intangible assets and long-lived assets, including real estate properties, whenever the occurrence of an event or a change in circumstances indicates that the carrying value might not be fully recoverable. Indicators of impairment may include significant underperformance of an asset relative to historical or expected operating results; significant changes in the Company’s use of assets or the strategy for its overall business; plans to sell an asset before its depreciable life has ended; the expiration of a significant portion of leases in a property; or significant negative economic trends or negative industry trends for the Company or its tenants. During the three and six months ended June 30, 2023, the Company recognized real estate impairments totaling $55.2 million and $81.4 million, respectively, as a result of completed or planned disposition activity.
Investments in Leases - Financing Receivables, Net
In accordance with ASC Topic 842: Leases, for transactions in which the Company enters into a contract to acquire an asset and leases it back to the seller (i.e., a sale leaseback transaction), control of the asset is not considered to have transferred when the seller-lessee has a purchase option. As a result, the Company does not recognize the underlying real estate asset but instead recognizes a financial asset in accordance with ASC Topic 310: Receivables. See below for additional information regarding the Company's financing receivables.
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(dollars in thousands) ORIGINATION DATE | LOCATION | INTEREST RATE | CARRYING VALUE as of JUNE 30, 2023 |
May 2021 | Poway, CA | 5.73% | $ | 113,967 | |
November 2021 | Columbus, OH | 6.48% | 7,348 | |
| | | $ | 121,315 | |
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Real Estate Notes Receivable
Real estate notes receivable consists of mezzanine and other real estate loans, which are generally collateralized by a pledge of the borrower’s ownership interest in the respective real estate owner, a mortgage or deed of trust, and/or corporate guarantees. Real estate notes receivable are intended to be held-to-maturity and are recorded at amortized cost, net of unamortized loan origination costs and fees and allowance for credit losses. As of June 30, 2023, real estate notes receivable, net, which are included in Other assets on the Company's Condensed Consolidated Balance Sheets, totaled $151.5 million.
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(dollars in thousands) | ORIGINATION | MATURITY | STATED INTEREST RATE | MAXIMUM LOAN COMMITMENT | OUTSTANDING as of JUNE 30, 2023 | ALLOWANCE FOR CREDIT LOSSES | FAIR VALUE DISCOUNT AND FEES | CARRYING VALUE as of JUNE 30, 2023 |
Mezzanine loans | | | | | | | | |
Texas | 6/24/2021 | 6/24/2024 | 8.00 | % | $ | 54,119 | | $ | 54,119 | | $ | (5,196) | | $ | (3,067) | | $ | 45,856 | |
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Mortgage loans | | | | | | | | |
Texas | 6/30/2021 | 12/31/2023 | 7.00 | % | 31,150 | | 31,150 | | — | | (705) | | 30,445 | |
North Carolina | 12/22/2021 | 12/22/2024 | 8.00 | % | 6,000 | | 6,000 | | — | | (309) | | 5,691 | |
Florida | 5/17/2022 | 2/27/2026 | 6.00 | % | 65,000 | | 24,556 | | — | | (55) | | 24,501 | |
California | 3/30/2023 | 3/29/2026 | 6.00 | % | 45,000 | | 45,000 | | — | | — | | 45,000 | |
| | | | 147,150 | | 106,706 | | — | | (1,069) | | 105,637 | |
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| | | | $ | 201,269 | | $ | 160,825 | | $ | (5,196) | | $ | (4,136) | | $ | 151,493 | |
Allowance for Credit Losses
Pursuant to ASC Topic 326, Financial Instruments - Credit Losses, the Company adopted a policy to evaluate current expected credit losses at the inception of loans qualifying for treatment under ASC Topic 326. The Company utilizes a probability of default method approach for estimating current expected credit losses and evaluates the liquidity and creditworthiness of its borrowers on a quarterly basis to determine whether any updates to the future expected losses recognized upon inception are necessary. The Company’s evaluation considers industry and economic conditions, credit enhancements, liquidity, and other factors.
In its assessment of current expected credit losses for real estate notes receivable, the Company utilizes past payment history of its borrowers, current economic conditions, and forecasted economic conditions through the maturity date of each note to estimate a probability of default and a resulting loss for each real estate note receivable. During the six months ended June 30, 2023, the Company determined that the risk of credit loss on its mezzanine loans was no longer remote. Consequently, the Company recorded a credit loss reserve of $5.2 million for the six months ended June 30, 2023.
The following table summarizes the Company's allowance for credit losses on real estate notes receivable:
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Dollars in thousands | June 30, 2023 | December 31, 2022 | | | |
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Allowance for credit losses, beginning of period | $ | — | | $ | — | | | | |
Credit loss reserves | 5,196 | | — | | | | |
Allowance for credit losses, end of period | $ | 5,196 | | $ | — | | | | |
Interest Income
Income from Lease Financing Receivables
The Company recognized the related income from two financing receivables totaling $2.1 million and $4.2 million, respectively, for the three and six months ended June 30, 2023, and $2.0 million and $3.9 million, respectively for the three and six months ended June 30, 2022, based on an imputed interest rate over the terms of the applicable lease. As a result, the interest recognized from the financing receivable in any particular period will not equal the cash payments from the lease agreement in that period.
Acquisition costs incurred in connection with entering into the financing receivable are treated as loan origination fees. These costs are classified with the financing receivable and are included in the balance of the net investment.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Amortization of these amounts will be recognized as a reduction to Income from financing receivable, net over the life of the lease.
Income from Real Estate Notes Receivable
During the three and six months ended June 30, 2023, the Company recognized interest income of $2.2 million and $4.3 million, respectively, related to real estate notes receivable. The Company recognizes interest income on an accrual basis unless the Company has determined that collectability of contractual amounts is not reasonably assured, at which point the note is placed on non-accrual status and interest income is recognized on a cash basis. As of June 30, 2023, the Company placed two of its real estate notes receivable with principal balances of $48.9 million on non-accrual status and accordingly did not recognize any interest income for the three and six month periods ended June 30, 2023.
Revenue from Contracts with Customers (ASC Topic 606)
The Company recognizes certain revenue under the core principle of Topic 606. This topic 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.
Revenue that is accounted for under Topic 606 is segregated on the Company’s Condensed Consolidated Statements of Operations in the Other operating line item. This line item includes parking income, management fee income and other miscellaneous income. Below is a detail of the amounts by category:
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| THREE MONTHS ENDED June 30, | SIX MONTHS ENDED June 30, |
in thousands | 2023 | 2022 | 2023 | 2022 |
Type of Revenue | | | | |
Parking income | $ | 2,370 | | $ | 1,919 | | $ | 4,761 | | $ | 3,672 | |
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Management fee income 1 | 1,597 | | 783 | | 3,570 | | 1,438 | |
Miscellaneous | 263 | | 36 | | 516 | | 103 | |
| $ | 4,230 | | $ | 2,738 | | $ | 8,847 | | $ | 5,213 | |
1 Includes the recovery of certain expenses under the financing receivable as outlined in the management agreement.
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.
Note 2. Merger with HTA
On July 20, 2022 (the “Closing Date”), pursuant to the Agreement and Plan of Merger dated as of February 28, 2022 (the “Merger Agreement”), by and among Healthcare Realty Trust Incorporated, a Maryland corporation (now known as HRTI, LLC, a Maryland limited liability company) (“Legacy HR”), Healthcare Trust of America, Inc., a Maryland corporation (now known as Healthcare Realty Trust Incorporated) (“Legacy HTA”), the OP, and HR Acquisition 2, LLC, a Maryland limited liability company (“Merger Sub”), Merger Sub merged with and into Legacy HR, with Legacy HR continuing as the surviving entity and a wholly-owned subsidiary of Legacy HTA (the “Merger”).
On the Closing Date, each outstanding share of Legacy HR common stock, $0.01 par value per share (the “Legacy HR Common Stock”), was cancelled and converted into the right to receive one share of Legacy HTA class A common stock at a fixed ratio of 1.00 to 1.00. Per the terms of the Merger Agreement, Legacy HTA declared a special dividend of $4.82 (the “Special Dividend”) for each outstanding share of Legacy HTA class A common stock, $0.01 par value per share ( the “Legacy HTA Common Stock”), and the OP declared a corresponding distribution to the holders of its partnership units, payable to Legacy HTA stockholders and OP unitholders of record on July 19, 2022.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Immediately following the Merger, Legacy HR converted to a Maryland limited liability company and changed its name to HRTI, LLC and Legacy HTA changed its name to “Healthcare Realty Trust Incorporated”. In addition, the equity interests of Legacy HR were contributed by Legacy HTA by means of a contribution and assignment agreement to the OP, and Legacy HR became a wholly-owned subsidiary of the OP. The Company operates under the name “Healthcare Realty Trust Incorporated” and its shares of class A common stock, $0.01 par value per share, trade on the New York Stock Exchange under the ticker symbol “HR”.
For accounting purposes, the Merger was treated as a “reverse acquisition” in which Legacy HTA was considered the legal acquirer and Legacy HR was considered the accounting acquirer based on various factors, including, but not limited to: (i) the composition of the board of directors of the combined company following the Merger, (ii) the composition of senior management of the combined company following the Merger, and (iii) the premium transferred to the Legacy HTA stockholders. As a result, the historical financial statements of the accounting acquirer, Legacy HR, became the historical financial statements of the Company.
The acquisition was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires, among other things, the assets acquired and the liabilities assumed and non-controlling interests, if any, to be recognized at their acquisition date fair value.
The implied consideration transferred on the Closing Date is as follows:
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Dollars in thousands, except for per share data | |
Shares of Legacy HTA Common Stock outstanding as of July 20, 2022 as adjusted(a) | 228,520,990 | |
Exchange ratio | 1.00 | |
Implied shares of Legacy HR Common Stock issued | 228,520,990 | |
Adjusted closing price of Legacy HR Common Stock on July 20, 2022(b) | $ | 24.37 | |
Value of implied Legacy HR Common Stock issued | $ | 5,569,057 | |
Fair value of Legacy HTA restricted stock awards attributable to pre-Merger services(c) | 7,406 | |
Consideration transferred | $ | 5,576,463 | |
(a) The number of shares of Legacy HTA Common Stock presented above was based on 228,857,717 total shares of Legacy HTA Common Stock outstanding as of the Closing Date, less 192 Legacy HTA fractional shares that were cancelled in lieu of cash and less 336,535 shares of Legacy HTA restricted stock (net of 215,764 shares of Legacy HTA restricted stock withheld). For accounting purposes, these shares were converted to Legacy HR Common Stock, at an exchange ratio of 1.00 share of Legacy HR Common Stock per share of Legacy HTA Common Stock.
(b) For accounting purposes, the fair value of Legacy HR Common Stock issued to former holders of Legacy HTA Common Stock was based on the per share closing price of Legacy HR Common Stock on July 20, 2022.
(c) Represents the fair value of Legacy HTA restricted shares which fully vested prior to the closing of the Merger or became fully vested as a result of the closing of the Merger and which are attributable to pre-combination services.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Preliminary Purchase Price Allocation
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the Closing Date:
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Dollars in thousands | PRELIMINARY AMOUNTS RECOGNIZED ON THE CLOSING DATE | CUMULATIVE MEASUREMENT PERIOD ADJUSTMENTS | PRELIMINARY AMOUNTS RECOGNIZED ON THE CLOSING DATE (as adjusted) |
ASSETS | | | |
Real estate investments | | | |
Land | $ | 985,926 | | $ | 18,359 | | $ | 1,004,285 | |
Buildings and improvements | 6,960,418 | | (119,135) | | 6,841,283 | |
Lease intangible assets(a) | 831,920 | | 1,839 | | 833,759 | |
Financing lease right-of-use assets | 9,874 | | 3,146 | | 13,020 | |
Construction in progress | 10,071 | | (6,744) | | 3,327 | |
Land held for development | 46,538 | | — | | 46,538 | |
Total real estate investments | $ | 8,844,747 | | $ | (102,535) | | $ | 8,742,212 | |
Assets held for sale, net | 707,442 | | (7,946) | | 699,496 | |
Investments in unconsolidated joint ventures | 67,892 | | — | | 67,892 | |
Cash and cash equivalents | 26,034 | | 11,403 | | 37,437 | |
Restricted cash | 1,123,647 | | (1,247) | | 1,122,400 | |
Operating lease right-of-use assets | 198,261 | | 16,370 | | 214,631 | |
Other assets, net (b) (c) | 209,163 | | (3,840) | | 205,323 | |
Total assets acquired | $ | 11,177,186 | | $ | (87,795) | | $ | 11,089,391 | |
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LIABILITIES | | | |
Notes and bonds payable | $ | 3,991,300 | | $ | — | | $ | 3,991,300 | |
Accounts payable and accrued liabilities | 1,227,570 | | 17,374 | | 1,244,944 | |
Liabilities of assets held for sale | 28,677 | | (3,939) | | 24,738 | |
Operating lease liabilities | 173,948 | | 10,173 | | 184,121 | |
Financing lease liabilities | 10,720 | | (855) | | 9,865 | |
Other liabilities | 203,210 | | (8,909) | | 194,301 | |
Total liabilities assumed | $ | 5,635,425 | | $ | 13,844 | | $ | 5,649,269 | |
Net identifiable assets acquired | $ | 5,541,761 | | $ | (101,639) | | $ | 5,440,122 | |
Non-controlling interest | $ | 110,702 | | $ | — | | $ | 110,702 | |
Goodwill | $ | 145,404 | | $ | 101,639 | | $ | 247,043 | |
(a) The weighted average amortization period for the acquired lease intangible assets is approximately 6 years. |
(b) Includes $15.9 million of contractual accounts receivable, which approximates fair value. |
(c) Includes $78.7 million of gross contractual real estate notes receivable, the fair value of which was $74.8 million, and the Company preliminarily expects to collect substantially all of the real estate notes receivable proceeds as of the Closing Date. |
The cumulative measurement period adjustments recorded through June 30, 2023 primarily resulted from updated valuations related to the Company’s real estate assets and liabilities and additional information obtained by the Company related to the properties acquired in the Merger and their respective tenants, and resulted in an increase to goodwill of $101.6 million.
As of June 30, 2023, the Company had not finalized the determination of fair value of certain tangible and intangible assets acquired and liabilities assumed, including, but not limited to real estate assets and liabilities, notes receivables and goodwill. As such, the assessment of fair value of assets acquired and liabilities assumed is preliminary and was based on information that was available at the time the Condensed Consolidated Financial Statements were prepared. The finalization of the purchase accounting assessment could result in material changes to the Company’s determination of the fair value of assets acquired and liabilities assumed, which will be recorded as measurement period adjustments in the period in which they are identified, up to one year from the Closing Date.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
A preliminary estimate of approximately $247.0 million has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. The recognized goodwill is attributable to expected synergies and benefits arising from the Merger, including anticipated general and administrative cost savings and potential economies of scale benefits in both tenant and vendor relationships following the closing of the Merger. None of the goodwill recognized is expected to be deductible for tax purposes.
Merger-related Costs
The Company incurred Merger-related costs of $(15.7) million and $(10.8) million, respectively, during the three and six months ended June 30, 2023, which were included within Merger-related costs in results of operations. The Merger-related costs primarily consist of legal, consulting, severance, and banking services and included a refund of $17.8 million for transfer taxes paid during the year ended December 31, 2022.
Subsequent Activity
As of the date of these financial statements, the purchase price allocation of fair value was finalized with no additional adjustments. The Company determined the final fair value of net assets acquired based on information available during the measurement period.
Note 3. Real Estate Investments
2023 Acquisition Activity
The following table details the Company's real estate acquisition activity for the six months ended June 30, 2023:
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Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | | | CASH CONSIDERATION 1 | REAL ESTATE | OTHER 2 | SQUARE FOOTAGE |
Tampa, FL | 3/10/23 | $ | 31,500 | | | | $ | 30,499 | | $ | 30,596 | | $ | (97) | | 115,867 | |
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1Cash consideration excludes prorations of revenue and expense due to/from seller at the time of the acquisition.
2Includes other assets acquired, liabilities assumed, and intangibles recognized at acquisition.
In the second quarter of 2023, the Company entered into a joint venture agreement for the development of a medical office building in Scottsdale, Arizona. The Company holds a 90% interest in the joint venture and determined the arrangement meets the criteria to be consolidated. The joint venture acquired an $8.8 million land parcel to be developed with the Company contributing cash of $8.3 million.
Subsequent to June 30, 2023, the Company acquired the following property:
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Dollars in thousands | DATE ACQUIRED | PURCHASE PRICE | SQUARE FOOTAGE |
Colorado Springs, CO | 7/28/23 | $ | 11,450 | | 42,770 | |
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Unconsolidated Joint Ventures
The Company's investment in and loss recognized for the three and six months ended June 30, 2023 and 2022 related to its unconsolidated joint ventures accounted for under the equity method are shown in the table below:
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
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| THREE MONTHS ENDED June 30, | SIX MONTHS ENDED June 30, |
Dollars in thousands | 2023 | 2022 | 2023 | 2022 |
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Investments in unconsolidated joint ventures, beginning of period | $ | 327,746 | | $ | 211,195 | | $ | 327,248 | | $ | 161,942 | |
New investment during the period 1 | — | | — | | 3,824 | | 49,599 | |
Equity loss recognized during the period | (17) | | (307) | | (797) | | (652) | |
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Owner distributions | (484) | | (107) | | (3,030) | | (108) | |
Investments in unconsolidated joint ventures, end of period | $ | 327,245 | | $ | 210,781 | | $ | 327,245 | | $ | 210,781 | |
1In 2023, this was an additional investment in an existing joint venture in which the Company owns a 40% ownership interest. The investment consisted of a sale of a property in Dallas, Texas to the joint venture. See 2023 Real Estate Asset Dispositions below for additional information.
2023 Real Estate Asset Dispositions
The following table details the Company's dispositions for the six months ended June 30, 2023:
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Dollars in thousands | DATE DISPOSED | SALE PRICE | CLOSING ADJUSTMENTS | COMPANY-FINANCED MORTGAGE NOTES | NET PROCEEDS | NET REAL ESTATE INVESTMENT | OTHER (INCLUDING RECEIVABLES) 1 | GAIN/(IMPAIRMENT) | SQUARE FOOTAGE |
Tampa, FL & Miami, FL2 | 1/12/23 | $ | 93,250 | | $ | (5,875) | | $ | — | | $ | 87,375 | | $ | 87,302 | | $ | (888) | | $ | 961 | | 224,037 | |
Dallas, TX 3 | 1/30/23 | 19,210 | | (141) | | — | | 19,069 | | 18,986 | | 43 | | 40 | | 36,691 | |
St. Louis, MO | 2/10/23 | 350 | | (18) | | — | | 332 | | 398 | | — | | (66) | | 6,500 | |
Los Angeles, CA | 3/23/23 | 21,000 | | (526) | | — | | 20,474 | | 20,610 | | 52 | | (188) | | 37,165 | |
Los Angeles, CA 4 | 3/30/23 | 75,000 | | (8,079) | | (45,000) | | 21,921 | | 88,624 | | (803) | | (20,900) | | 147,078 | |
Los Angeles, CA 5 | 5/12/23 | 3,300 | | (334) | | — | | 2,966 | | 3,268 | | — | | (302) | | — | |
Albany, NY | 6/30/23 | 10,000 | | (1,229) | | — | | 8,771 | | 2,613 | | (1,040) | | 7,198 | | 40,870 | |
| | | | | | | | | |
Total dispositions | | $ | 222,110 | | $ | (16,202) | | $ | (45,000) | | $ | 160,908 | | $ | 221,801 | | $ | (2,636) | | $ | (13,257) | | 492,341 | |
1Includes straight-line rent receivables, leasing commissions and lease inducements.
2Includes two properties, sold in two separate transactions to the same buyer on the same date.
3The Company sold this property to a joint venture in which it retained a 40% interest. Sales price and square footage reflect the total sales price paid by the joint venture and total square footage of the property.
4The Company entered into a mortgage note agreement with the buyer for $45 million.
5The Company sold a land parcel totaling 0.34 acres.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Subsequent to June 30, 2023, the Company disposed of the following property:
| | | | | | | | | | | |
Dollars in thousands | DATE DISPOSED | SALES PRICE | SQUARE FOOTAGE |
Houston, TX | 8/2/23 | $ | 8,320 | | 57,170 | |
| | | |
| | | |
Assets Held for Sale
The Company had three properties classified as assets held for sale as of June 30, 2023. The net real estate assets held for sale includes $3.6 million of impairment charges for the six months ended June 30, 2023. The Company had one property classified as assets held for sale as of December 31, 2022, which was sold in the first quarter of 2023. The table below reflects the assets and liabilities classified as held for sale as of June 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
Dollars in thousands | | June 30, 2023 | | December 31, 2022 |
Balance Sheet data: | | | | |
Land | | $ | 205 | | | $ | 1,700 | |
Building and improvements | | 1,736 | | | 15,164 | |
Lease intangibles | | 2,242 | | | 1,986 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | 4,183 | | | 18,850 | |
Accumulated depreciation | | (4,183) | | | — | |
Real estate assets held for sale, net | | — | | | 18,850 | |
| | | | |
Other assets, net | | 151 | | | 43 | |
Assets held for sale, net | | $ | 151 | | | $ | 18,893 | |
| | | | |
Accounts payable and accrued liabilities | | $ | 222 | | | $ | 282 | |
| | | | |
| | | | |
Other liabilities | | — | | | 155 | |
Liabilities of assets held for sale | | $ | 222 | | | $ | 437 | |
Note 4. Leases
Lessor Accounting
The Company’s properties generally were leased pursuant to non-cancelable, fixed-term operating leases with expiration dates through 2052. Some leases provide tenants with fixed rent renewal terms while others have 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 single-tenant net leases generally require 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 the consumer price index ("CPI"). 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 six months ended June 30, 2023 was $329.7 million and $653.8 million, respectively. Lease income for the Company's operating leases recognized for the three and six months ended June 30, 2022 was $140.6 million and $279.1 million, respectively.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Future lease payments under the non-cancelable operating leases, excluding any reimbursements and the sale-type lease, as of June 30, 2023 were as follows:
| | | | | | | | |
Dollars in thousands | OPERATING | |
2023 | $ | 467,393 | | |
2024 | 861,323 | | |
2025 | 751,369 | | |
2026 | 648,352 | | |
2027 | 536,874 | | |
2028 and thereafter | 1,950,019 | | |
| $ | 5,215,330 | | |
Lessee Accounting
As of June 30, 2023, the Company was obligated, as the lessee, under operating lease agreements consisting primarily of the Company’s ground leases. As of June 30, 2023, the Company had 241 properties totaling 17.5 million square feet that were held under ground leases. Some of the ground lease renewal terms are based on fixed rent renewal terms and others have market rent renewal terms. These ground leases typically have initial terms of 40 to 99 years with expiration dates through 2119. Any rental increases related to the Company’s ground leases are generally either stated or based on CPI. The Company had 75 prepaid ground leases as of June 30, 2023. The amortization of the prepaid rent, included in the operating lease right-of-use asset, represented approximately $0.3 million and $0.1 million of the Company’s rental expense for the three months ended June 30, 2023 and 2022, respectively, and $0.7 million and $0.3 million for the six months ended June 30, 2023 and 2022, respectively.
The Company’s future lease payments (primarily for its 166 non-prepaid ground leases) as of June 30, 2023 were as follows:
| | | | | | | | |
Dollars in thousands | OPERATING | FINANCING |
2023 | $ | 7,315 | | $ | 992 | |
2024 | 15,011 | | 2,182 | |
2025 | 14,597 | | 2,218 | |
2026 | 14,631 | | 2,255 | |
2027 | 14,701 | | 2,294 | |
2028 and thereafter | 929,853 | | 396,398 | |
Total undiscounted lease payments | 996,108 | | 406,339 | |
Discount | (717,629) | | (332,710) | |
Lease liabilities | $ | 278,479 | | $ | 73,629 | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
The following table provides details of the Company's total lease expense for the three and six months ended June 30, 2023 and 2022:
| | | | | | | | | | | | | | |
| THREE MONTHS ENDED June 30, | SIX MONTHS ENDED June 30, |
Dollars in thousands | 2023 | 2022 | 2023 | 2022 |
Operating lease cost | | | | |
Operating lease expense | $ | 5,329 | | $ | 1,194 | | $ | 10,436 | | $ | 2,409 | |
Variable lease expense | 2,235 | | 1,038 | | 4,371 | | 2,062 | |
| | | | |
Finance lease cost | | | | |
Amortization of right-of-use assets | 387 | | 331 | | 774 | | 503 | |
Interest on lease liabilities | 923 | | 765 | | 1,841 | | 1,052 | |
Total lease expense | $ | 8,874 | | $ | 3,328 | | $ | 17,422 | | $ | 6,026 | |
| | | | |
Other information | | | | |
Operating cash flows outflows related to operating leases | $ | 5,230 | | $ | 1,799 | | $ | 11,190 | | $ | 4,596 | |
Operating cash flows outflows related to financing leases | $ | 541 | | $ | 509 | | $ | 1,094 | | $ | 767 | |
Financing cash flows outflows related to financing leases | $ | 6 | | $ | — | | $ | 17 | | $ | 51 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | — | | $ | — | | $ | — | | $ | 40,589 | |
| | | | |
| | | | |
Weighted-average years remaining lease term (excluding renewal options) - operating leases | 47.3 | 47.4 | | |
Weighted-average years remaining lease term (excluding renewal options) - finance leases | 58.4 | 61.7 | | |
Weighted-average discount rate - operating leases | 5.8 | % | 5.6 | % | | |
Weighted-average discount rate - finance leases | 5.0 | % | 5.0 | % | | |
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
Note 5. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of June 30, 2023 and December 31, 2022.
| | | | | | | | | | | | | | |
| MATURITY DATES | BALANCE 1 AS OF | EFFECTIVE INTEREST RATE as of 6/30/2023 |
Dollars in thousands | 6/30/2023 | 12/31/2022 |
$1.5 billion Unsecured Credit Facility | 10/25 | $ | 354,000 | | $ | 385,000 | | 6.05 | % |
| | | | |
| | | | |
$350 million Unsecured Term Loan 2 | 7/24 | 349,499 | | 349,114 | | 6.21 | % |
$200 million Unsecured Term Loan | 5/24 | 199,786 | | 199,670 | | 6.21 | % |
$300 million Unsecured Term Loan | 10/25 | 299,947 | | 299,936 | | 6.21 | % |
$150 million Unsecured Term Loan | 6/26 | 149,569 | | 149,495 | | 6.21 | % |
$200 million Unsecured Term Loan | 7/27 | 199,432 | | 199,362 | | 6.21 | % |
$300 million Unsecured Term Loan | 1/28 | 298,079 | | 297,869 | | 6.21 | % |
Senior Notes due 2025 | 5/25 | 249,298 | | 249,115 | | 4.12 | % |
Senior Notes due 2026 | 8/26 | 575,256 | | 571,587 | | 4.94 | % |
Senior Notes due 2027 | 7/27 | 481,615 | | 479,553 | | 4.76 | % |
Senior Notes due 2028 | 1/28 | 297,138 | | 296,852 | | 3.85 | % |
Senior Notes due 2030 | 2/30 | 570,356 | | 565,402 | | 5.30 | % |
Senior Notes due 2030 | 3/30 | 296,579 | | 296,385 | | 2.72 | % |
Senior Notes due 2031 | 3/31 | 295,795 | | 295,547 | | 2.25 | % |
Senior Notes due 2031 | 3/31 | 640,999 | | 632,693 | | 5.13 | % |
Mortgage notes payable | 8/23-12/26 | 82,924 | | 84,247 | | 3.57%-4.84% |
| | $ | 5,340,272 | | $ | 5,351,827 | | |
.1Balance is presented net of discounts and issuance costs and inclusive of premiums, where applicable.
2On April 26, 2023, the Company exercised its option to extend the maturity date for one year for a fee of approximately $0.4 million.
Subsequent Changes in Debt Structure
On August 1, 2023, the Company repaid in full at maturity a mortgage note payable bearing interest at a rate of 3.31% per annum with an outstanding principal of $9.8 million. The mortgage note encumbered a 66,984 square foot property in Georgia.
Note 6. Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
Table of Contents
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, cont.
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.
As of June 30, 2023, the Company had 14 outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | |
EXPIRATION DATE | AMOUNT | WEIGHTED AVERAGE RATE |
January 15, 2024 | $ | 200,000 | | 1.21 | % |
May 1, 2026 | 100,000 | | 2.15 | % |
June 1, 2026 | 150,000 | | 3.83 | % |
December 1, 2026 | 150,000 | | 3.84 | % |
June 1, 2027 | 150,000 | | 4.13 | % |
December 1, 2027 | 250,000 | | 3.79 | % |
| $ | 1,000,000 | | 3.17 | % |
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 June 30, 2023.
| | | | | | | | |
| BALANCE AT JUNE 30, 2023 |
In thousands | BALANCE SHEET LOCATION | FAIR VALUE |
Derivatives designated as hedging instruments | | |
Interest rate swaps | Other liabilities | $ | (1,248) | |
Interest rate swaps | Other assets | $ | 16,046 | |
Total derivatives designated as hedging instruments | | $ | 14,798 | |
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 six months ended June 30, 2023 and 2022 related to the Company's outstanding interest rate swaps.
| | | | | | | | | | | | | | | | | |
| (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE three months ended June 30, | | (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME three months ended June 30, |
In thousands | 2023 | 2022 | 2023 | 2022 |
Interest rate swaps | $ | (21,523) | | $ | (1,663) | | Interest expense | $ | (3,568) | | $ | 674 | |
Settled treasury hedges | — | | — | | Interest expense | 107 | | 107 | |
Settled interest rate swaps | — | | — | | Interest expense | 42 | | 42 | |
| $ | (21,523) | | $ | (1,663) | | Total interest expense | $ | (3,419) | | $ | 823 | |
| | | | | | | | | | | | | | | | | |
| (GAIN)/LOSS RECOGNIZED IN AOCI ON DERIVATIVE six months ended June 30, | | (GAIN)/LOSS RECLASSIFIED FROM AOCI INTO INCOME six months ended June 30, |
In thousands | 2023 | 2022 | 2023 | 2022 |
Interest rate swaps | $ | |