Business Context and Reporting Period
Company: Healthcare Trust of America, Inc. (HTA) and Healthcare Trust of America Holdings, LP.
Filing Type: Form 8-K (Current Report)
Date of Report: May 1, 2017 (Earliest event reported: April 25, 2017)
Context: HTA entered into definitive agreements to acquire the medical office building (MOB) business of Duke Realty Limited Partnership and a separate portfolio from Southwest Health System. These transactions aim to create the largest dedicated owner and operator of medical office buildings in the United States.
Key Financial Metrics and Transaction Details
Acquisition Agreements
- Duke Acquisition:
- Assets: 78 properties (71 in service, 5 in development, 2 expansions, 2 JV interests, 2 land parcels).
- Gross Leasable Area (GLA): Approximately 6.6 million sq. ft. (in service) + 470,000 sq. ft. (development/expansion).
- Leasing Status: ~95% leased (in service); 86% pre-leased (development).
- Consideration: Approximately $2.75 billion (net of a $50 million credit for development completion).
- Earnest Money: $150 million deposited in escrow.
- Southwest Health System Acquisition:
- Assets: 11 MOBs located in Phoenix, AZ, and Southern California.
- GLA: Approximately 592,000 sq. ft.
- Leasing Status: 86% leased.
- Consideration: $150 million.
Financing Structure
- Bridge Loan Facility: Commitment for up to $2.32 billion from Wells Fargo (subject to capital raises). Matures 364 days from closing.
- Seller Financing: $330 million non-recourse, senior secured first lien loan from Duke at 4% annual interest. Principal payable in three equal installments starting one year after closing.
Pro Forma Financial Outlook
- Stabilized NOI: Estimated at $150 million to $155 million annually for the combined acquisitions.
- Portfolio Scale: Combined portfolio expected to reach 25 million sq. ft. of GLA.
- FFO Impact: Transaction expected to be accretive to normalized Funds From Operations (FFO) in 2018.
Historical Financials of Duke Assets (Audited/Unaudited)
| Metric | Three Months Ended Mar 31, 2017 (Unaudited) | Year Ended Dec 31, 2016 (Audited) |
|---|---|---|
| Rental Revenues (incl. recoveries) | $43,298,156 | $161,838,278 |
| Operating Expenses | $7,453,309 | $29,587,761 |
| Real Estate Taxes | $5,741,754 | $19,130,821 |
| Revenues in Excess of Certain Expenses | $30,103,093 | $113,119,696 |
Note: Historical figures exclude depreciation, amortization, and property management fees.
Material Changes and Conditions
- Closing Structure: The Duke Acquisition may close in up to four closings (Initial + Serial Closings) no later than April 29, 2018, with an expected close in Q2/Q3 2017. The Initial Closing requires at least $1.4 billion of assets.
- Rights of First Offer/Refusal (ROFO/ROFR): 31 properties in the Duke portfolio and 8 in the Southwest portfolio are subject to tenant ROFOs/ROFRs. If exercised, these assets (valued at approx. $1.4 billion) could be removed from the deal.
- Specific Asset Conditions:
- College Station MOB: Acquisition contingent on completion of repairs by Duke. If not complete within 18 months, the obligation terminates.
- Ground Lease Put Right: Duke holds a put right for certain ground leases exercisable within 18 months. Failure to honor this could result in $30 million in liquidated damages to HTA.
Guidance, Risks, and Management Commentary
Management Rationale
Management believes the acquisitions will create a dominant platform with significant scale in 17 key gateway markets. The combination leverages HTA's property management and Duke's development capabilities to capture growth in the outpatient medical office sector.
Risks and Contingencies
- Transaction Completion: No assurance that closing conditions will be satisfied or that the acquisitions will be completed on current terms.
- Financing: While no closing condition exists for financing, the bridge loan funding is subject to customary conditions, including successful capital raises.
- Forward-Looking Estimates: The $150-$155 million stabilized NOI estimate is non-GAAP and relies on assumptions regarding occupancy, rental rates, and the non-exercise of tenant ROFOs/ROFRs. Actual results may differ materially.
- Market Risks: Exposure to changes in healthcare reimbursement rates, property taxes, interest rates, and the financial stability of healthcare tenants.
Investor Verification Checklist
- Verify the status of tenant ROFO/ROFR exercises for the 39 affected properties (valued at ~$1.4 billion).
- Confirm the timeline and completion status of repairs for the Baylor Scott & White Rock Prairie MOB in College Station, TX.
- Monitor the execution of the $2.32 billion bridge loan facility and associated capital raises (debt/equity).
- Review the final closing schedule to ensure compliance with the $1.4 billion minimum Initial Closing requirement.
- Assess the impact of the $330 million seller financing on the company's leverage ratios and cash flow obligations.