Business Context and Reporting Period
Company: Grubb & Ellis Healthcare REIT, Inc. (to be renamed Healthcare Trust of America, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: The Company is a non-listed Real Estate Investment Trust (REIT) focused on acquiring medical office buildings and healthcare-related facilities. As of December 31, 2008, the Company owned 41 properties totaling 5,156,000 square feet of gross leasable area (GLA) across 17 states, with an aggregate purchase price of approximately $966.4 million. The portfolio is 91.3% occupied.
Management Transition: The Company is in the process of transitioning from external management by Grubb & Ellis Healthcare REIT Advisor, LLC to a self-management structure. This transition aims to reduce acquisition and asset management fees and eliminate internalization fees. The Advisory Agreement is set to expire on September 20, 2009.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $80,418,000 | $17,626,000 |
| Net Loss (GAAP) | $(28,448,000) | $(7,666,000) |
| Funds From Operations (FFO) | $8,745,000 | $2,124,000 |
| Net Operating Income (NOI) | $52,244,000 | $11,589,000 |
| Cash Flow from Operations | $20,677,000 | $7,005,000 |
| Total Assets | $1,113,923,000 | $431,612,000 |
| Total Liabilities | $512,652,000 | $252,931,000 |
| Stockholders' Equity | $599,320,000 | $175,590,000 |
| Mortgage Loan Payables (Net) | $460,762,000 | $185,801,000 |
| Cash and Cash Equivalents | $128,331,000 | $5,467,000 |
Liquidity: As of December 31, 2008, the Company held over $128 million in cash and cash equivalents. Aggregate borrowings represented 47.9% of the combined fair market value of properties and other assets, well below the 60% policy limit.
Material Changes vs. Prior Period
- Portfolio Expansion: The Company acquired 21 properties in 2008, increasing the portfolio from 20 properties in 2007 to 41 properties. This drove a significant increase in rental income from $17.6 million to $80.4 million.
- Debt Levels: Mortgage loan payables increased by approximately $275 million to $460.8 million to finance acquisitions. Interest expense rose from $6.4 million to $34.2 million.
- Non-Cash Losses: The reported Net Loss of $(28.4) million was significantly impacted by a non-cash mark-to-market loss of $12.8 million on interest rate swaps. Excluding this non-cash item, FFO would have been $21.6 million.
- Equity Raised: Proceeds from the initial public offering increased significantly, with $528.8 million raised from investors in 2008 compared to $210.9 million in 2007.
Guidance, Outlook, and Risks
Outlook and Strategy: Management anticipates that the transition to self-management will substantially reduce the cost structure of the Company. The Company intends to continue acquiring medical office buildings and healthcare facilities, leveraging its cash position to take advantage of market dislocations. The Company expects to effect a liquidity event (such as a listing on a national securities exchange) by September 20, 2013, though this is not guaranteed.
Distributions: The Company paid distributions of $28.0 million in 2008. Approximately 79% of these distributions were classified as a return of capital for tax purposes. Distributions exceeded cash flows from operations and FFO, with the excess funded by offering proceeds.
Risks and Contingencies:
- Liquidity Risk: There is no established public market for the Company's common stock. Shares are illiquid, and stockholders may only be able to sell them at a substantial discount through the limited share repurchase plan.
- Market Risk: The Company is exposed to interest rate risk, though it utilizes interest rate swaps to fix rates on variable debt. The mark-to-market accounting for these swaps caused significant volatility in reported net income.
- Concentration Risk: Geographic concentration exists in Texas (17.1% of rental income) and Indiana (15.5% of rental income).
- Advisor Conflict: The Company competes with other Grubb & Ellis programs for investment opportunities, creating potential conflicts of interest.
Key Facts for Investor Verification
- Illiquidity: Verify the terms of the share repurchase plan, as there is no public trading market for the stock.
- Return of Capital: Confirm the tax characterization of distributions, as a significant portion (79% in 2008) was a return of capital rather than taxable income.
- Non-Cash Adjustments: Review the reconciliation of Net Loss to FFO to understand the impact of the $12.8 million non-cash loss on interest rate swaps.
- Self-Management Transition: Monitor the progress of the transition to self-management and the associated reduction in advisory fees, which is critical to future profitability.
- Offering Status: Verify the remaining capacity of the "best efforts" offering, which is scheduled to terminate on September 20, 2009.