Business Context and Reporting Period
Company: Grubb & Ellis Healthcare REIT, Inc. (to be renamed Healthcare Trust of America, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: The Company is a non-traded REIT investing primarily in medical office buildings and healthcare-related facilities. As of June 30, 2009, the portfolio consisted of 43 geographically diverse properties totaling 5,487,000 square feet of gross leasable area (GLA). The Company is in the midst of a best-efforts initial public offering (IPO) and has transitioned to a self-management model, terminating its advisory agreement with Grubb & Ellis Healthcare REIT Advisor, LLC effective September 20, 2009.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Total Revenues | $60,294,000 | $29,390,000 |
| Net Loss (GAAP) | $(10,335,000) | $(6,175,000) |
| Funds from Operations (FFO) | $15,335,000 | $7,305,000 |
| Net Operating Income (NOI) | $37,933,000 | $19,478,000 |
| Cash Flow from Operations | $14,250,000 | $7,041,000 |
| Cash and Cash Equivalents (Ending) | $390,479,000 | $11,759,000 |
| Total Debt (Mortgage Payables, Net) | $452,955,000 | $460,762,000 |
| Weighted Average Interest Rate | 3.63% | N/A |
| Occupancy Rate | 89.3% | 91.2% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 105% year-over-year, driven by the acquisition of seven additional properties and one real estate-related asset during the period. Rental income rose from $29.4 million to $59.0 million.
- Net Loss Expansion: Net loss attributable to controlling interest increased to $(10.5 million) from $(6.3 million). This was primarily due to increased interest expense ($14.9 million vs. $7.8 million) and higher general and administrative expenses ($10.9 million vs. $4.0 million), partially offset by a non-cash gain on derivative financial instruments of $3.3 million.
- Accounting Changes: The adoption of SFAS No. 141(R) resulted in the expensing of acquisition-related costs ($3.2 million) rather than capitalizing them, impacting net income and FFO calculations.
- Liquidity Position: Cash and cash equivalents surged to $390.5 million from $128.3 million at year-end 2008, reflecting significant proceeds from the IPO ($398.9 million raised in the six months) and a reduction in property acquisition spending compared to the prior year.
- Debt Structure: Total mortgage debt decreased slightly. The portfolio is 70.9% variable rate debt, largely hedged via interest rate swaps to fix effective rates.
Guidance, Outlook, and Risks
- Self-Management Transition: The Company has completed its transition to self-management to reduce fees and eliminate conflicts of interest. The advisory agreement terminates September 20, 2009. Property management contracts with affiliates are being terminated effective September 1, 2009, with third-party managers engaged.
- Offering Status: The IPO is ongoing with a target of $2.2 billion. As of June 30, 2009, subscriptions totaled $1.14 billion. A follow-on offering registration was filed but not yet effective; the Company intends to extend the initial offering if necessary to avoid a gap.
- Distribution Policy: The Company pays monthly distributions at 7.25% per annum ($0.725 per share). For the six months ended June 30, 2009, distributions ($32.3 million) exceeded FFO ($15.3 million) and operating cash flow ($14.3 million). The shortfall was funded by IPO proceeds.
- Risk Factors:
- Liquidity Risk: Continued reliance on IPO proceeds to fund distributions if operating cash flow is insufficient.
- Interest Rate Risk: Exposure to variable rates on 70.9% of debt, though largely hedged. A 0.50% increase in LIBOR would increase annual interest expense by approximately $8,000.
- Market Risk: Geographic concentration in Texas (16.7% of rental income) and Indiana (14.2% of rental income).
- Subsequent Events: On July 15, 2009, the Company entered into an agreement to acquire a 16-building portfolio in Greenville, SC, for approximately $161.6 million.
Investor Verification Checklist
- Distribution Sustainability: Verify the Company's ability to maintain the 7.25% distribution rate given that FFO and operating cash flow currently cover only ~45-50% of distribution obligations, with the remainder funded by equity raises.
- Self-Management Costs: Monitor actual cost savings post-transition compared to the projected reductions in acquisition and asset management fees.
- Debt Covenants: Confirm compliance with debt covenants, noting that $27.2 million of debt required a $6.4 million restricted cash deposit to maintain compliance as of June 30, 2009.
- Derivative Valuation: Review the fair value of interest rate swaps (liability of $10.9 million) and the impact of non-cash mark-to-market adjustments on reported net income.
- Offering Progress: Track the pace of the IPO and the effectiveness of the follow-on offering registration to ensure capital availability for the $161.6 million Greenville acquisition and future growth.