Healthcare Realty Trust Inc. (Healthcare Trust of America, Inc.) - 10-Q Summary
Business Context and Reporting Period
Company: Healthcare Trust of America, Inc. (formerly NNN Healthcare/Office REIT, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Business Overview: A self-managed, self-advised Real Estate Investment Trust (REIT) focused on medical office buildings and healthcare-related facilities. As of September 30, 2010, the portfolio consisted of 70 acquisitions (208 buildings) totaling approximately 8.94 million square feet with an average occupancy of 91%. The company completed its transition to self-management in 2009, eliminating external advisor fees.
Key Financial Metrics (Nine Months Ended Sept 30, 2010)
| Metric | 2010 (9 Months) | 2009 (9 Months) |
|---|---|---|
| Total Revenues | $145,577,000 | $92,042,000 |
| Net Income (Loss) | $771,000 | $(20,409,000) |
| Net Income Attributable to Controlling Interest | $831,000 | $(20,650,000) |
| Funds from Operations (FFO) | $55,931,000 | $18,504,000 |
| Modified FFO (MFFO) | $63,782,000 | $31,322,000 |
| Net Operating Income (NOI) | $97,990,000 | $59,188,000 |
| Cash Flow from Operating Activities | $49,623,000 | $15,968,000 |
| Cash and Cash Equivalents (End of Period) | $221,186,000 | $321,791,000 |
| Total Assets | $1,996,907,000 | $1,673,535,000 |
| Total Liabilities | $655,953,000 | $598,669,000 |
| Mortgage Loans Payable | $594,428,000 | $540,028,000 |
| Stockholders' Equity | $1,336,905,000 | $1,071,317,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 58% year-over-year, driven by a 55% increase in rental income due to significant portfolio expansion (17 new acquisitions and 3 add-on buildings in the first nine months of 2010).
- Profitability Turnaround: The company moved from a net loss of $20.4 million in the prior year to a net income of $0.8 million. This improvement is largely attributed to the elimination of asset management and acquisition fees paid to the former advisor (Grubb & Ellis) following the transition to self-management.
- Expense Reduction: Acquisition-related expenses decreased from $9.1 million to $6.8 million, and asset management fees dropped to zero. However, General and Administrative (G&A) expenses increased by 41% ($9.1M to $12.8M) due to higher salaries and benefits associated with building the internal self-management team.
- Debt Profile: Mortgage loans payable increased by $54.4 million to fund acquisitions. The weighted average interest rate on outstanding debt was 4.50%.
- Derivative Gains: The company recorded a net gain on derivative financial instruments of $4.6 million (vs. $3.4 million in 2009), primarily due to mark-to-market adjustments on interest rate swaps.
Guidance, Outlook, and Risks
- Offering Status: The company is in the midst of a follow-on public offering (commenced March 2010) to raise up to $2.2 billion. As of September 30, 2010, $282.6 million had been raised in this offering. Management intends to close the offering early (by April 30, 2011) subject to market conditions.
- Financing: Subsequent to the period end, the company secured a $200 million unsecured credit facility (Oct 2010) and a commitment for a $135 million secured term loan (Nov 2010) to refinance maturing debt.
- Acquisition Pipeline: Management has a pipeline of pending acquisitions totaling approximately $392 million, expected to close in Q4 2010, which would bring the total asset portfolio over $2 billion.
- Risks:
- Liquidity: Distributions paid ($83.4M) exceeded cash flow from operations ($49.6M) for the nine months ended Sept 30, 2010. The shortfall was funded by debt financing and offering proceeds.
- Interest Rate Risk: Approximately 44.5% of mortgage debt is variable rate, though the company utilizes interest rate swaps to mitigate exposure.
- Concentration: Geographic concentration exists in Texas (16.7% of rental income), South Carolina (15.5%), Indiana (11.8%), and Arizona (11.3%).
- Subsequent Events: On October 18, 2010, the company entered into a Redemption Agreement with its former advisor, paying $8 million to purchase the limited partner interest and resolve all claims, finalizing the self-management transition.
Investor Verification Checklist
- Distribution Coverage: Verify the sustainability of the $0.725 per share annual distribution given that cash flow from operations did not fully cover distributions in the period.
- Offering Proceeds: Monitor the pace of the follow-on offering and the company's ability to deploy capital into the pending $392 million acquisition pipeline.
- Debt Maturities: Review the schedule of debt maturities, specifically the $17.2 million maturing in 2010 and $82 million in 2011, and the status of the refinancing commitments obtained in November 2010.
- Self-Management Costs: Track the stabilization of G&A expenses as the internal team reaches full capacity and one-time transition costs are fully absorbed.
- Occupancy Rates: Confirm that the 91% average occupancy rate is maintained as new acquisitions are integrated and leases expire (8.15% of GLA expiring in the next 12 months).