Business Context and Reporting Period
Company: Grubb & Ellis Healthcare REIT, Inc. (to be renamed Healthcare Trust of America, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
Business Overview: The Company is a non-traded REIT focused on investing in medical office buildings and healthcare-related facilities. As of March 31, 2009, it owned 43 properties totaling approximately 5.36 million square feet. The Company is in the process of transitioning from external management to a self-management structure, expected to be completed by September 20, 2009. It is currently conducting a best-efforts initial public offering (IPO) with a target of up to $2.2 billion.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $29,816,000 | $13,117,000 |
| Net Loss | $(6,800,000) | $(6,689,000) |
| Net Loss Attributable to Controlling Interest | $(6,870,000) | $(6,610,000) |
| Funds from Operations (FFO) | $6,378,000 | $(409,000) |
| Net Operating Income (NOI) | $18,015,000 | $8,649,000 |
| Cash Flow from Operating Activities | $5,895,000 | $2,586,000 |
| Cash Flow from Financing Activities | $159,764,000 | $109,092,000 |
| Cash and Cash Equivalents (End of Period) | $255,068,000 | $9,415,000 |
| Total Assets | $1,267,910,000 | $1,113,923,000 |
| Total Liabilities | $508,331,000 | $512,652,000 |
| Mortgage Loan Payables (Net) | $453,606,000 | $460,762,000 |
| Stockholders' Equity | $757,457,000 | $599,320,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 127% to $29.8 million, driven by the acquisition of additional properties (43 properties in 2009 vs. 27 in 2008). Rental income rose to $29.2 million from $13.1 million.
- Expense Increases: Total expenses increased to $30.2 million from $12.6 million. Rental expenses rose to $11.8 million, and General and Administrative (G&A) expenses increased to $5.1 million. The G&A increase includes $1.5 million in acquisition-related costs expensed under new accounting standards (SFAS No. 141(R)) and higher professional fees related to the self-management transition.
- Derivative Gains: The Company recorded a non-cash gain of $930,000 on derivative financial instruments (interest rate swaps) in Q1 2009, compared to a loss of $3.5 million in Q1 2008. This significantly reduced reported interest expense.
- Liquidity Position: Cash and cash equivalents more than doubled to $255.1 million, primarily due to $193.6 million in proceeds from the issuance of common stock during the quarter.
- Acquisitions: The Company acquired one property and two office condominiums for an aggregate purchase price of $36.4 million during the quarter.
Guidance, Outlook, and Risks
- Self-Management Transition: Management expects to complete the transition to self-management by September 20, 2009. This is expected to reduce costs by eliminating internalization fees and reducing advisor fees, though it has incurred one-time transition costs.
- Offering Status: As of March 31, 2009, the Company had raised $931.4 million in subscriptions. A follow-on offering registration was filed in April 2009 for up to an additional $2.2 billion.
- Distribution Policy: The Company pays monthly distributions. For Q1 2009, distributions totaled $14.2 million ($7.3 million cash + $6.9 million DRIP), exceeding cash flow from operations ($5.9 million). The excess was funded by offering proceeds.
- Key Risks:
- Liquidity Risk: Distributions may need to be funded by offering proceeds or debt if operating cash flow is insufficient.
- Interest Rate Risk: Approximately 71% of debt is variable rate, though the Company uses interest rate swaps to fix rates on most of this debt.
- Market Risk: Sensitivity analysis indicates a 0.50% increase in LIBOR would increase annual interest expense by approximately $8,000.
Investor Verification Checklist
- Offering Proceeds Usage: Verify the rate at which raised capital is being deployed into income-producing assets versus held as cash.
- Distribution Coverage: Monitor the ratio of Funds from Operations (FFO) to distributions paid to assess sustainability without relying on new capital raises.
- Self-Management Costs: Track the realization of cost savings from the transition to self-management against the one-time transition expenses incurred.
- Derivative Valuation: Review the fair value adjustments on interest rate swaps, as these create significant non-cash volatility in net income.
- Debt Maturities: Note that significant debt maturities are scheduled for 2010 and 2011; verify extension options and refinancing plans.