Business Context and Reporting Period
Company: NNN Healthcare/Office REIT, Inc. (Healthcare Realty Trust Inc)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: The Company is an externally advised REIT focused on acquiring medical office buildings, healthcare-related facilities, and commercial office properties. As of the reporting date, the Company was in the active stage of its initial public offering (IPO) and had acquired 14 properties totaling approximately 1,547,000 square feet of gross leasable area. The Company intends to qualify as a REIT for federal income tax purposes for the taxable year ending December 31, 2007.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Rental Income | $4,787,000 | $8,711,000 |
| Total Expenses | $5,545,000 | $10,274,000 |
| Net Loss | $(1,933,000) | $(3,669,000) |
| Net Loss Per Share (Basic & Diluted) | $(0.15) | $(0.53) |
| Funds From Operations (FFO) | $1,115,000 | $1,583,000 |
| Net Cash Provided by Operating Activities | N/A | $2,963,000 |
| Total Assets | $303,085,000 | N/A |
| Total Liabilities | $168,573,000 | N/A |
| Stockholders' Equity | $134,312,000 | N/A |
| Debt (Mortgage & Line of Credit) | $159,031,000 (Net) | N/A |
| Cash and Cash Equivalents | $4,512,000 | N/A |
Material Changes vs. Prior Period
The Company reported a net loss of $(1,933,000) for the three months ended September 30, 2007, compared to a net loss of $(50,000) for the same period in 2006. This increase in loss is primarily attributable to the commencement of real estate operations and the acquisition of 14 properties during 2007, which generated significant depreciation, amortization, and interest expenses.
- Revenue: Rental income increased from $0 in the prior year to $4,787,000 (Q3) and $8,711,000 (YTD) due to the acquisition of properties throughout 2007.
- Expenses: Total expenses rose significantly to $5,545,000 (Q3) and $10,274,000 (YTD) driven by rental expenses, general and administrative costs, and substantial depreciation and amortization ($3,048,000 Q3; $5,252,000 YTD).
- Balance Sheet: Total assets grew from $385,000 at December 31, 2006, to $303,085,000 at September 30, 2007, reflecting the capitalization of real estate investments and intangible assets.
Guidance, Outlook, and Risks
Outlook and Acquisitions: The Company is actively pursuing its acquisition strategy. As of October 31, 2007, the Company had received subscriptions for approximately $180.4 million in its IPO. Management has approved additional acquisitions (St. Rita's Medical Center, Tucson Medical Center, and Northmeadow Medical Center) expected to close in the fourth quarter of 2007, to be financed via the LaSalle Line of Credit.
Financing and Liquidity: The Company maintains a $50 million secured revolving line of credit with LaSalle Bank. As of September 30, 2007, $35.7 million was outstanding. The Company has executed interest rate swaps to fix rates on variable debt to mitigate interest rate risk.
Risks and Contingencies:
- Related Party Transactions: The Company is externally advised by NNN Healthcare/Office REIT Advisor, LLC, an affiliate of the Sponsor. Significant fees are paid to affiliates for acquisition, asset management, and property management services.
- Offering Expenses: Expenses incurred by the Advisor in excess of 11.5% of gross offering proceeds ($990,000 as of Sept 30, 2007) are not currently recorded as liabilities but may become so if additional proceeds are raised.
- REIT Qualification: Failure to qualify as a REIT would subject the Company to federal income taxes at regular corporate rates.
- Concentration Risk: Three tenants accounted for over 30% of aggregate annual rental revenue as of September 30, 2007.
Key Facts for Investor Verification
- Acquisition Volume: Verify the completion and financing terms of the 14 properties acquired in 2007, totaling approximately $283 million in purchase price.
- Debt Structure: Confirm the weighted-average interest rate of 6.77% on total debt and the status of the $50 million LaSalle Line of Credit.
- Related Party Fees: Review the Advisory Agreement and the specific fees paid to affiliates (acquisition fees of 3.0%, asset management fees of 1.0% of invested assets, property management fees of 4.0% of gross receipts).
- FFO vs. Net Loss: Note the divergence between GAAP Net Loss (negative) and Funds From Operations (positive $1.58 million YTD) due to non-cash depreciation and amortization.
- Offering Status: Monitor the progress of the IPO, which had raised approximately $180 million as of late October 2007, against the maximum offering size of $2.2 billion.