e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
Or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number: 000-53206
HEALTHCARE TRUST OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
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Maryland
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20-4738467 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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16427 N. Scottsdale Road, Suite 440, Scottsdale, Arizona
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85254 |
(Address of principal executive offices)
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(Zip Code) |
(480) 998-3478
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of November 13, 2009, there were 131,833,342 shares of common stock of Healthcare Trust of
America, Inc. outstanding.
Healthcare Trust of America, Inc.
(A Maryland Corporation)
TABLE OF CONTENTS
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Healthcare Trust of America, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2009 and December 31, 2008
(Unaudited)
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September 30, 2009 |
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December 31, 2008 |
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ASSETS |
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Real estate investments: |
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Operating properties, net |
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$ |
995,349,000 |
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$ |
810,920,000 |
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Real estate notes receivable, net |
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16,599,000 |
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15,360,000 |
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Cash and cash equivalents |
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321,791,000 |
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128,331,000 |
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Accounts and other receivables, net |
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8,098,000 |
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5,428,000 |
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Restricted cash |
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15,314,000 |
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7,747,000 |
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Identified intangible assets, net |
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154,487,000 |
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134,623,000 |
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Other assets, net |
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16,777,000 |
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11,514,000 |
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Total assets |
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$ |
1,528,415,000 |
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$ |
1,113,923,000 |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Mortgage loans payable, net |
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$ |
452,041,000 |
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$ |
460,762,000 |
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Accounts payable and accrued liabilities |
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33,052,000 |
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21,919,000 |
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Accounts payable due to former affiliates, net |
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1,421,000 |
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3,063,000 |
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Derivative financial instruments |
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10,791,000 |
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14,198,000 |
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Security deposits, prepaid rent and other liabilities |
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4,975,000 |
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4,582,000 |
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Identified intangible liabilities, net |
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6,772,000 |
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8,128,000 |
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Total liabilities |
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509,052,000 |
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512,652,000 |
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Commitments and contingencies (Note 11) |
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Redeemable noncontrolling interest of limited partners (Note 13) |
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2,467,000 |
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1,951,000 |
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Equity: |
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Stockholders equity: |
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Preferred stock, $0.01 par value; 200,000,000 shares
authorized; none issued and outstanding |
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Common stock, $0.01 par value; 1,000,000,000 shares
authorized; 130,857,487 and 75,465,437 shares issued and
outstanding as of September 30, 2009 and December 31, 2008,
respectively |
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1,308,000 |
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755,000 |
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Additional paid-in capital |
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1,168,515,000 |
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673,351,000 |
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Accumulated deficit |
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(152,927,000 |
) |
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(74,786,000 |
) |
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Total stockholders equity |
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1,016,896,000 |
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599,320,000 |
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Total liabilities and equity |
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$ |
1,528,415,000 |
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$ |
1,113,923,000 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Healthcare Trust of America, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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Revenues: |
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Rental income |
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$ |
30,886,000 |
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$ |
23,920,000 |
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$ |
89,914,000 |
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$ |
53,310,000 |
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Interest income from real estate notes receivable, net |
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862,000 |
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2,128,000 |
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Total revenues |
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31,748,000 |
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23,920,000 |
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92,042,000 |
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53,310,000 |
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Expenses: |
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Rental expenses |
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10,494,000 |
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8,700,000 |
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32,854,000 |
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18,612,000 |
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General and administrative (Note 3) |
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11,095,000 |
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2,758,000 |
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21,955,000 |
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6,801,000 |
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Depreciation and amortization |
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13,287,000 |
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11,213,000 |
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39,231,000 |
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24,905,000 |
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Total expenses |
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34,876,000 |
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22,671,000 |
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94,040,000 |
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50,318,000 |
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Income before other income (expense) |
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(3,128,000 |
) |
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1,249,000 |
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(1,998,000 |
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2,992,000 |
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Other income (expense): |
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Interest expense (including amortization of deferred
financing costs and debt discount): |
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Interest expense related to note payable to affiliate |
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(1,000 |
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(2,000 |
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Interest expense related to mortgage loans payable
and line of credit |
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(7,072,000 |
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(6,628,000 |
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(22,001,000 |
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(14,472,000 |
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Gain (loss) on derivative financial instruments |
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66,000 |
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(310,000 |
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3,357,000 |
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(414,000 |
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Interest and dividend income |
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60,000 |
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52,000 |
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233,000 |
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83,000 |
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Net loss |
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(10,074,000 |
) |
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(5,638,000 |
) |
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(20,409,000 |
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(11,813,000 |
) |
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Less: Net income attributable to noncontrolling interest
of limited partners |
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(70,000 |
) |
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(47,000 |
) |
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(241,000 |
) |
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(156,000 |
) |
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Net loss attributable to controlling interest |
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$ |
(10,144,000 |
) |
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$ |
(5,685,000 |
) |
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$ |
(20,650,000 |
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$ |
(11,969,000 |
) |
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Net loss per share attributable to controlling interest
basic and diluted |
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$ |
(0.08 |
) |
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$ |
(0.12 |
) |
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$ |
(0.20 |
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$ |
(0.34 |
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Weighted average number of shares outstanding |
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Basic |
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124,336,078 |
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47,735,536 |
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105,257,482 |
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35,100,807 |
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Diluted |
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124,336,078 |
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47,735,536 |
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105,257,482 |
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35,100,807 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Healthcare Trust of America, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
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Stockholders Equity |
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Common Stock |
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Number of |
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Additional |
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Accumulated |
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Total |
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Shares |
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Amount |
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Paid-In Capital |
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Deficit |
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Equity |
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BALANCE December 31, 2007 |
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21,449,451 |
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$ |
214,000 |
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$ |
190,534,000 |
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$ |
(15,158,000 |
) |
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$ |
175,590,000 |
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Issuance of common stock |
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34,050,254 |
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341,000 |
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339,767,000 |
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340,108,000 |
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Issuance of vested and nonvested restricted common stock |
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12,500 |
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25,000 |
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25,000 |
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Offering costs |
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(36,364,000 |
) |
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(36,364,000 |
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Amortization of nonvested common stock compensation |
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63,000 |
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63,000 |
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Issuance of common stock under
the DRIP |
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832,339 |
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8,000 |
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7,899,000 |
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7,907,000 |
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Repurchase of common stock |
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(63,426 |
) |
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(1,000 |
) |
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(633,000 |
) |
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(634,000 |
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Distributions |
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(19,175,000 |
) |
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(19,175,000 |
) |
Net loss attributable to
controlling interest |
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(11,969,000 |
) |
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(11,969,000 |
) |
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BALANCE September 30, 2008 |
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56,281,118 |
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$ |
562,000 |
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$ |
501,291,000 |
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$ |
(46,302,000 |
) |
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$ |
455,551,000 |
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BALANCE December 31, 2008 |
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75,465,437 |
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$ |
755,000 |
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$ |
673,351,000 |
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$ |
(74,786,000 |
) |
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$ |
599,320,000 |
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Issuance of common stock |
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53,276,134 |
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533,000 |
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530,485,000 |
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531,018,000 |
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Offering costs |
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(54,533,000 |
) |
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(54,533,000 |
) |
Issuance of nonvested restricted
common stock |
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57,500 |
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Issuance of vested restricted
common stock, net, and related compensation |
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42,500 |
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425,000 |
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425,000 |
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Amortization of nonvested share based compensation |
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235,000 |
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235,000 |
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Issuance of common stock under
the DRIP |
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2,807,028 |
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28,000 |
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26,638,000 |
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26,666,000 |
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Repurchase of common stock |
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(791,112 |
) |
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(8,000 |
) |
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(7,520,000 |
) |
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(7,528,000 |
) |
Distributions |
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(57,491,000 |
) |
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(57,491,000 |
) |
Adjustment to redeemable
noncontrolling interests |
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(566,000 |
) |
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|
(566,000 |
) |
Net loss attributable to
controlling interest |
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(20,650,000 |
) |
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(20,650,000 |
) |
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BALANCE September 30, 2009 |
|
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130,857,487 |
|
|
$ |
1,308,000 |
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|
$ |
1,168,515,000 |
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|
$ |
(152,927,000 |
) |
|
$ |
1,016,896,000 |
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Healthcare Trust of America, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
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Nine Months Ended September 30, |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net loss |
|
$ |
(20,409,000 |
) |
|
$ |
(11,813,000 |
) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation and amortization (including deferred financing costs,
above/below market leases, debt discount, leasehold interests, deferred
rent receivable, note receivable closing costs and discount and lease
inducements) |
|
|
36,088,000 |
|
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|
23,607,000 |
|
Stock based compensation, net of forfeitures |
|
|
660,000 |
|
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|
88,000 |
|
Loss on property insurance settlements |
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6,000 |
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|
89,000 |
|
Bad debt expense |
|
|
1,097,000 |
|
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|
362,000 |
|
Change in fair value of derivative financial instruments |
|
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(3,357,000 |
) |
|
|
414,000 |
|
Changes in operating assets and liabilities: |
|
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|
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Accounts and other receivables, net |
|
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(2,806,000 |
) |
|
|
(4,364,000 |
) |
Other assets |
|
|
(3,202,000 |
) |
|
|
(572,000 |
) |
Accounts payable and accrued liabilities |
|
|
8,837,000 |
|
|
|
7,231,000 |
|
Accounts payable due to former affiliates, net |
|
|
207,000 |
|
|
|
336,000 |
|
Security deposits, prepaid rent and other liabilities |
|
|
(1,153,000 |
) |
|
|
255,000 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
15,968,000 |
|
|
|
15,633,000 |
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
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|
|
|
|
|
|
Acquisition of real estate operating properties |
|
|
(241,668,000 |
) |
|
|
(448,852,000 |
) |
Capital expenditures |
|
|
(6,320,000 |
) |
|
|
(2,799,000 |
) |
Restricted cash |
|
|
(7,567,000 |
) |
|
|
(3,920,000 |
) |
Proceeds from insurance settlement |
|
|
299,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(255,256,000 |
) |
|
|
(455,571,000 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Borrowings on mortgage loans payable |
|
|
1,696,000 |
|
|
|
227,695,000 |
|
Borrowings on unsecured notes payable to affiliate |
|
|
|
|
|
|
6,000,000 |
|
Borrowings under the line of credit, net |
|
|
|
|
|
|
(51,801,000 |
) |
Payments on mortgage loans payable |
|
|
(10,624,000 |
) |
|
|
(1,217,000 |
) |
Payments on unsecured notes payable to affiliate |
|
|
|
|
|
|
(6,000,000 |
) |
Proceeds from issuance of common stock |
|
|
533,303,000 |
|
|
|
341,755,000 |
|
Deferred financing costs |
|
|
(60,000 |
) |
|
|
(3,497,000 |
) |
Security deposits |
|
|
126,000 |
|
|
|
120,000 |
|
Repurchase of common stock |
|
|
(7,528,000 |
) |
|
|
(634,000 |
) |
Payment of offering costs |
|
|
(56,382,000 |
) |
|
|
(34,153,000 |
) |
Distributions |
|
|
(27,493,000 |
) |
|
|
(9,274,000 |
) |
Distributions to noncontrolling interest limited partner |
|
|
(290,000 |
) |
|
|
(235,000 |
) |
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
432,748,000 |
|
|
|
468,759,000 |
|
|
|
|
|
|
|
|
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
|
193,460,000 |
|
|
|
28,821,000 |
|
CASH AND CASH EQUIVALENTS Beginning of period |
|
|
128,331,000 |
|
|
|
5,467,000 |
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS End of period |
|
$ |
321,791,000 |
|
|
$ |
34,288,000 |
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
19,893,000 |
|
|
$ |
13,058,000 |
|
Income taxes |
|
$ |
74,000 |
|
|
$ |
62,000 |
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: |
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
|
Accrued capital expenditures |
|
$ |
1,243,000 |
|
|
$ |
1,979,000 |
|
The following represents the increase in certain assets and liabilities in
connection with our acquisitions of operating properties : |
|
|
|
|
|
|
|
|
Other assets, net |
|
$ |
83,000 |
|
|
$ |
318,000 |
|
Mortgage loans payable, net |
|
$ |
|
|
|
$ |
42,157,000 |
|
Accounts payable and accrued liabilities |
|
$ |
70,000 |
|
|
$ |
3,420,000 |
|
Accounts payable due to affiliates, net |
|
$ |
|
|
|
$ |
68,000 |
|
Security deposits, prepaid rent and other liabilities |
|
$ |
574,000 |
|
|
$ |
1,978,000 |
|
Financing Activities: |
|
|
|
|
|
|
|
|
Issuance of common stock under the DRIP |
|
$ |
26,666,000 |
|
|
$ |
7,907,000 |
|
Distributions declared but not paid |
|
$ |
7,814,000 |
|
|
$ |
3,248,000 |
|
Accrued offering costs |
|
$ |
68,000 |
|
|
$ |
3,323,000 |
|
Accrued deferred financing costs |
|
$ |
14,000 |
|
|
$ |
1,537,000 |
|
Adjustment to redeemable noncontrolling interests |
|
$ |
566,000 |
|
|
$ |
40,000 |
|
Security Deposits Required |
|
$ |
652,000 |
|
|
$ |
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Healthcare Trust of America, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended September 30, 2009 and 2008
The use of the words we, us or our refers to Healthcare Trust of America, Inc. and its
subsidiaries, including Healthcare Trust of America Holdings, LP except where the context otherwise
requires.
1. Organization and Description of Business
Healthcare Trust of America, Inc., formerly known as Grubb & Ellis Healthcare REIT, Inc., a
Maryland corporation, was incorporated on April 20, 2006. We were initially capitalized on April
28, 2006 and therefore we consider that our date of inception. We provide stockholders the
potential for income and growth through investment in a diversified portfolio of real estate
properties, focusing primarily on medical office buildings and healthcare-related facilities. We
have also invested to a limited extent in commercial office properties and other real estate
related assets. However, we do not presently intend to invest more than 15.0% of our total assets
in other real estate related assets. We focus primarily on investments that produce recurring
income. We have qualified and elected to be taxed as a real estate investment trust, or REIT, for
federal income tax purposes and we intend to continue to be taxed as a REIT.
We are conducting a best efforts initial public offering, or our initial offering, in which we
are offering up to 200,000,000 shares of our common stock for $10.00 per share and up to 21,052,632
shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, at $9.50
per share, aggregating up to $2,200,000,000. The initial offering is currently scheduled to expire
upon the earlier of March 19, 2010, or the date on which the maximum offering has been sold. As of
September 30, 2009, we had received and accepted subscriptions in our initial offering for
127,100,943 shares of our common stock, or $1,268,416,000, excluding shares of our common stock
issued under the DRIP.
On April 6, 2009, we filed a Registration Statement on Form S-11 with the United States
Securities and Exchange Commission, or the SEC, with respect to a proposed follow-on public
offering, or our follow-on offering, of up to 221,052,632 shares of our common stock. Our follow-on
offering would include up to 200,000,000 shares of our common stock to be offered for sale at
$10.00 per share and up to 21,052,632 shares of our common stock to be offered for sale pursuant to
the DRIP at $9.50 per share. We have not issued any shares under this registration statement as it
has not been declared effective by the SEC.
We conduct substantially all of our operations through Healthcare Trust of America Holdings,
LP, or our operating partnership. Our internal management team manages our day-to-day operations
and oversees and supervises our employees and outside service providers. We were formerly advised
by Grubb & Ellis Healthcare REIT Advisor, LLC, or our former advisor, under the terms of the
advisory agreement, effective as of October 24, 2008, and as amended and restated on November 14,
2008 and, or the Advisory Agreement, between us, our former advisor and Grubb & Ellis Realty
Investors, LLC, or Grubb & Ellis Realty Investors, who is the managing member of our former
advisor. The Advisory Agreement expired on September 20, 2009.
Our former advisor engaged affiliated entities, including but not limited to Triple Net
Properties Realty, Inc., or Realty, and Grubb & Ellis Management Services, Inc., to provide various
services to us, including but not limited to property management and leasing services. On July 28,
2009, we entered into property management and leasing agreements with the following companies, each
to manage a specific geographic region: CB Richard Ellis, PM Realty Group, Hokanson Companies, The
Plaza Companies, and Nath Companies. On August 31, 2009, each of our subsidiaries terminated its
management agreement with Realty.
Upon the effectiveness of our initial offering, we entered into a dealer manager agreement
with Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities, or our former dealer manager. On
May 21, 2009, we provided notice to Grubb & Ellis Securities pursuant to the dealer manager
agreement that we would proceed with a dealer manager transition pursuant to which Grubb & Ellis
Securities would cease to serve as our dealer manager for our initial offering at the end of the
day on August 28, 2009. Commencing August 29, 2009, Realty Capital Securities, LLC, or RCS, assumed
the role of dealer manager for the remainder of the offering period pursuant to a new dealer
manager agreement. We entered into a services agreement on April 3, 2009 with American Realty
Capital II, LLC, an affiliate of RCS, relating to the provision of certain consulting services to
us, as well as making available to us certain backup support services. This services agreement was
amended on August 17, 2009 to delay its effective date until December 1, 2009.
Our main objectives in amending the Advisory Agreement were to reduce acquisition and asset
management fees, eliminate internalization fees, discussed below, and to set the framework for our
transition to self-management. We started our transition to self-management in the fourth quarter
of 2008. This transition is complete and we consider ourselves to be self-managed. We are
conducting an ongoing review of advisory services and dealer manager services previously provided
by our former advisor and former dealer manager, to ensure that such services have been performed
consistent with applicable agreements and standards.
7
Self-management is a corporate model based on internal management rather than external
management. In general, non-traded REITs are externally managed. With external management, a REIT
is dependent upon an external advisor. An externally-managed REIT typically pays acquisition fees,
disposition fees, asset management fees, property management fees and other fees to its external
advisor for services provided. In contrast, under self-management, we are internally managed by our
management team led by Scott D. Peters, our Chief Executive Officer, President and Chairman of the
board of directors, under the direction of our Board of Directors. With a self-managed REIT, fees
paid to third parties are expected to be substantially reduced.
We anticipate that the various costs of self-management will also be mitigated by the
substantial reduction of the acquisition fees and the asset management fees payable to our former
advisor under the Advisory Agreement.
As of September 30, 2009, we had made 45 geographically diverse acquisitions comprising
6,341,000 square feet of gross leasable area, or GLA, for an
aggregate purchase price of $1,206,740,000 which includes 154 buildings and one real estate related asset. As of September 30, 2009, the aggregate occupancy at
these properties was 90.4%.
Our principal executive offices are located at 16427 N. Scottsdale Road, Suite 440,
Scottsdale, Arizona, 85254 and the telephone number is (480) 998-3478. For investor services,
please contact DST Systems, Inc, by telephone at (888) 801-0107.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim consolidated financial statements. Such interim consolidated financial
statements and the accompanying notes thereto are the representations of our management, who are
responsible for their integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America, or GAAP, in all material respects,
and have been consistently applied in preparing our accompanying interim consolidated financial
statements.
Basis of Presentation
Our accompanying interim consolidated financial statements include our accounts and those of
our operating partnership, the wholly-owned subsidiaries of our operating partnership and any
variable interest entities, as defined in the Financial Accounting Standards Board (FASB)
Accounting Standard Codification (ASC) 810, Consolidation (ASC 810). All significant
intercompany balances and transactions have been eliminated in the consolidated financial
statements. We operate in an umbrella partnership REIT structure in which wholly-owned
subsidiaries of our operating partnership own all of the properties acquired on our behalf. We are
the sole general partner of our operating partnership and as of September 30, 2009 and December 31,
2008, we owned greater than a 99.99% general partnership interest in our operating partnership. Our
former advisor is a limited partner of our operating partnership and as of September 30, 2009 and
December 31, 2008, owned less than a 0.01% limited partnership interest in our operating
partnership. Our former advisor may be entitled to certain subordinated distribution rights under
the partnership agreement for our operating partnership, subject to a number of conditions. Because
we are the sole general partner of our operating partnership and have unilateral control over its
management and major operating decisions (even if additional limited partners are admitted to our
operating partnership), the accounts of our operating partnership are consolidated in our
consolidated financial statements. All intercompany accounts and transactions are eliminated in
consolidation.
The
condensed consolidated financial statements and notes have been prepared consistently with the 2008 Form 10-K and Form 10-Q for the period ended September 30, 2008 with the exception of the reclassification of certain prior-year amounts on our Condensed Consolidated Balance Sheets, Condensed Consolidated Statement of Operations, and Condensed Consolidated Statement of Cash Flows in accordance
with SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB 51, codified primarily in ASC 810.
Interim Unaudited Financial Data
Our accompanying interim consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, our accompanying interim consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. Our accompanying interim consolidated financial statements reflect all
adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such results may be less favorable. Our accompanying interim consolidated
financial statements should be read in conjunction with our audited consolidated financial
statements and the notes thereto included in our 2008 Annual Report on Form 10-K, as filed with the
SEC on March 27, 2009.
8
Cash and Cash Equivalents
Cash and cash equivalents consist of all highly liquid investments with a maturity of three
months or less when purchased. Cash and cash equivalents of $321,791,000 and $128,331,000, includes
approximately $201,998,000 and $0 in short-term U.S. Treasury bills as of September 30, 2009 and
December 31, 2008, respectively. We account for short-term investments in accordance with ASC 320,
Investments Debt and Equity Securities (ASC 320). We determine the appropriate classification
of all short-term investments as held-to-maturity, available-for-sale, or trading at the time of
purchase and re-evaluate such classification as of each balance sheet date. The U.S. Treasury bills
are considered trading as of September 30, 2009 and matured in October 2009.
Segment Disclosure
ASC 280, Segment Reporting (ASC 280) establishes standards for reporting financial and
descriptive information about an enterprises reportable segment. We have determined that we have
one reportable segment, with activities related to investing in medical office buildings,
healthcare-related facilities, commercial office properties and other real estate related assets.
Our investments in real estate and other real estate related assets are geographically diversified
and our chief operating decision maker evaluates operating performance on an individual asset
level. As each of our assets has similar economic characteristics, tenants, and products and
services, our assets have been aggregated into one reportable segment.
Recently Issued Accounting Pronouncements
In December 2007, the FASB issued Financial Accounting Standards (SFAS) No. 141 (revised
2007), Business Combinations , codified primarily in ASC 805, Business Combinations (ASC 805).
ASC 805 clarifies and amends the accounting guidance for how an acquirer in a business combination
recognizes and measures the assets acquired, liabilities assumed, and any noncontrolling interest
in the acquiree. The provisions of ASC 805 became effective for us for any business combinations
occurring on or after January 1, 2009. The adoption of ASC 805 has a material impact on our results
of operations when we acquire real estate properties. We anticipate that the new provisions will
have an impact on the cost allocation of future acquisitions and will require that we expense
acquisition costs for future property acquisitions.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements an Amendment of ARB 51, codified primarily in ASC 810. This statement
amends ARB 51 and revises accounting and reporting requirements for noncontrolling interest
(formerly minority interest) in a subsidiary and for the deconsolidation of a subsidiary. ASC 810
was effective for us on January 1, 2009, except for the presentation and disclosure requirements
which were applied retrospectively for all periods presented. The adoption of SFAS No. 160 had an
impact on the presentation and disclosure of noncontrolling (minority) interests in our condensed
consolidated financial statements. As a result of the retrospective presentation and disclosure
requirements of SFAS No. 160, we are required to reflect the change in presentation and disclosure
for all periods presented. The principal effect on the consolidated balance sheet as of December
31, 2008 related to the adoption of SFAS No. 160 was the change in presentation of the mezzanine
section of the minority interest of limited partner in operating partnership of $1,000 and the
minority interest of limited partner of $1,950,000, as previously reported, to redeemable
noncontrolling interest of limited partners of $1,951,000, as reported herein. Additionally, the
adoption of SFAS No. 160 had the effect of reclassifying (income) loss attributable to
noncontrolling interest in the consolidated statements of operations from minority interest to
separate line items. SFAS No. 160 also requires that net income (loss) be adjusted to include the
net income attributable to the noncontrolling interest, and a new line item for net income
attributable to controlling interest be presented in the condensed consolidated statements of
operations. Thus, after adoption of SFAS No. 160 net loss for the three months ended September 30,
2008 of $5,685,000, as previously reported, changed to net loss of $5,638,000, as reported herein,
and net income attributable to controlling interest is equal to net income as previously reported
prior to the adoption of SFAS No. 160. Net loss for the nine months ended September 30, 2008 of
$11,969,000, as previously reported, changed to net loss of $11,813,000, as reported herein, and
net loss attributable to controlling interest is equal to net loss as previously reported prior to
the adoption of SFAS No. 160.
In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment to FASB Statement No. 133, codified primarily in ASC 815. ASC
815 is intended to improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their effects on an
entitys financial position, financial performance and cash flows. ASC 815 achieves these
improvements by requiring disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. SFAS No. 161 also provides more information about an entitys
liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, ASC
815 requires cross-referencing within footnotes to enable financial statement users to locate
important information about derivative instruments. ASC 815 is effective for quarterly interim
periods beginning after November 15, 2008, and fiscal years that include those
9
quarterly interim periods, with early application encouraged. We adopted ASC 815 on a
prospective basis on January 1, 2009. The adoption of ASC 815 did not have a material impact on our
consolidated financial statements.
In June 2008, the FASB issued FSP Emerging Issues Task Force, or EITF, Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, or FSP EITF No. 03-6-1, codified primarily in ASC 260, Earning per Share (ASC 260).
FSP EITF No. 03-6-1 addresses whether instruments granted by an entity in share-based payment
transactions should be considered as participating securities prior to vesting and, therefore,
should be included in the earnings allocation in computing earnings per share under the two-class
method described in paragraphs 60 and 61 of FASB Statement No. 128, Earnings per Share. FSP EITF
No. 03-6-1 clarifies that instruments granted in share-based payment transactions can be
participating securities prior to vesting (that is, awards for which the requisite service had not
yet been rendered). Unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share pursuant to the two-class method. FSP EITF No.
03-6-1 requires us to retrospectively adjust our earnings per share data (including any amounts
related to interim periods, summaries of earnings and selected financial data) to conform to the
provisions of FSP EITF No. 03-6-1. We adopted FSP EITF No. 03-6-1 on January 1, 2009. The adoption
of FSP EITF No. 03-6-1 did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position (FSP) No. SFAS 157-4, Determining Fair
Value when the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions that are not Orderly (FSP No. SFAS 157-4), codified primarily in ASC
820, Fair Value Measurements and Disclosures (ASC 820), which provides guidance on determining
fair value when market activity has decreased. We elected to early adopt ASC 820 as it relates to
FSP No. SFAS 157-4 beginning January 1, 2009. Its adoption has not had a material impact on the
Companys condensed consolidated unaudited financial statements.
In April 2009, the FASB issued FSP FAS No. 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments, or FSP FAS No. 107-1 and APB Opinion No. 28-1, codified primarily
in ASC 825, Financial Instruments (ASC 825). FSP FAS No. 107-1 and APB Opinion No. 28-1 relates
to fair value disclosures for any financial instruments that are not currently reflected on the
balance sheet at fair value. Prior to issuing this FSP, fair values for these assets and
liabilities were only disclosed once a year. The FSP now requires these disclosures on a quarterly
basis, providing qualitative and quantitative information about fair value estimates for all those
financial instruments not measured on the balance sheet at fair value. The Company early adopted
FSP FAS No. 107-1 and APB Opinion No. 28-1 on a prospective basis on January 1, 2009, which did not
have a material impact on our consolidated financial statements. We have provided these disclosures
in Note 16, Fair Value of Financial Instruments.
In April 2009, the FASB issued FSP FAS No. 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP FAS No.
141(R)-1, codified primarily in ASC 805. FSP FAS No. 141 (R)-1 amends and clarifies FASB Statement
No. 141 (revised 2007), Business Combinations, to address application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and measurement, subsequent
measurement and accounting, and disclosure of assets and liabilities arising from contingencies in
a business combination. We adopted FSP FAS No. 141(R)-1 on a prospective basis on January 1, 2009.
The adoption of FSP FAS No. 141 (R)-1 did not have a material impact on our consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, codified primarily in ASC 855,
Subsequent Events (ASC 855), which provides guidance to establish general standards of accounting
for and disclosures of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. ASC 855 also requires entities to disclose
the date through which subsequent events were evaluated as well as the rationale for why that date
was selected. ASC 855 was effective for us on April 1, 2009. The additional disclosures required
by this pronouncement are included in Note 20, Subsequent Events. The adoption of ASC 855 has not
had a material impact on our condensed consolidated unaudited financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (SFAS
No. 167), which modifies how a company determines when an entity that is a VIE should be
consolidated. SFAS No. 167 clarifies that the determination of whether a company is required to
consolidate an entity is based on, among other things, an entitys purpose and design and a
companys ability to direct the activities of the entity that most significantly impact the
entitys economic performance. SFAS No. 167 requires an ongoing reassessment of whether a company
is the primary beneficiary of a VIE. SFAS No. 167 also requires additional disclosures about a
companys involvement in VIEs and any significant changes in risk exposure due to that involvement.
SFAS No. 167 is effective for us on January 1, 2010. We have not determined what impact, if any,
the adoption of SFAS No. 167 will have on our consolidated financial statements and related
disclosures. This pronouncement has not been incorporated into the FASB ASC as of September 30,
2009.
10
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles. The FASB Accounting Standards
Codification (the Codification) will become the source of authoritative GAAP. Rules and
interpretive releases of the SEC under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants. The Codification became effective on July 1, 2009 and
superseded all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification is
nonauthoritative. We adopted the Codification beginning on July 1, 2009. Because the Codification
is not intended to change GAAP, it did not have a material impact on our condensed consolidated
unaudited financial statements.
In August 2009, the FASB issued Accounting Standard Update 2009-05, Fair Value Measurements
and Disclosures (ASU 2009-05), which provides alternatives to measuring the fair value of
liabilities when a quoted price for an identical liability traded in an active market does not
exist. The alternatives include using either (1) a valuation technique that uses quoted prices for
identical or similar liabilities or (2) another valuation technique, such as a present value
technique or a technique that is based on the amount paid or received by the reporting entity to
transfer an identical liability. The amended guidance will be effective for us beginning October
1, 2009. We do not expect the adoption of ASU 2009-05 to have a material impact on our condensed
consolidated unaudited financial statements.
3. Real Estate Investments
Our investments in our consolidated properties consisted of the following as of September 30,
2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Land |
|
$ |
114,896,000 |
|
|
$ |
107,389,000 |
|
Building and improvements |
|
|
928,094,000 |
|
|
|
728,171,000 |
|
Furniture and equipment |
|
|
10,000 |
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
1,043,000,000 |
|
|
|
835,570,000 |
|
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
(47,651,000 |
) |
|
|
(24,650,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
995,349,000 |
|
|
$ |
810,920,000 |
|
|
|
|
|
|
|
|
Depreciation expense for the three months ended September 30, 2009 and 2008 was $8,186,000 and
$6,139,000, respectively, and depreciation expense for the nine months ended September 30, 2009 and
2008 was $23,407,000 and $13,566,000, respectively.
Acquisitions in 2009
During the nine months ended September 30, 2009, we completed the acquisition of three
properties and three office condominiums related to existing properties in our portfolio. The
aggregate purchase price of these properties was $240,324,000. These properties were purchased with
funds raised from our initial offering. We paid $6,008,000 in acquisition fees to our former
advisor and its affiliates in connection with these acquisitions. The fees were expensed and
included in general and administrative in our accompanying condensed consolidated statements of
operations in accordance with new accounting provisions adopted in the current year which require
the immediate expensing of such items. Acquisitions completed during the nine months ended
September 30, 2009 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Fee to our |
|
|
|
|
|
Date |
|
Ownership |
|
|
Purchase |
|
|
Loan |
|
|
Former Advisor |
|
Property |
|
Property Location |
|
Acquired |
|
Percentage |
|
|
Price |
|
|
Payables(1) |
|
|
and Affiliate(2) |
|
Lima Medical Office Portfolio(3) |
|
Lima, OH |
|
01/16/09 |
|
|
100 |
% |
|
$ |
385,000 |
|
|
$ |
|
|
|
$ |
9,000 |
|
Wisconsin Medical Office Buildings Portfolio |
|
Menomonee Falls, Mequon, Milwaukee and Richfield, WI |
|
02/27/09 |
|
|
100 |
% |
|
|
33,719,000 |
|
|
|
|
|
|
|
843,000 |
|
Mountain Empire Portfolio(3) |
|
Rogersville, TN |
|
03/27/09 |
|
|
100 |
% |
|
|
2,275,000 |
|
|
|
1,696,000 |
|
|
|
57,000 |
|
Lima Medical Office Portfolio(3) |
|
Lima, OH |
|
04/21/09 |
|
|
100 |
% |
|
|
425,000 |
|
|
|
|
|
|
|
11,000 |
|
Wisconsin Medical Office Buildings Portfolio 2 |
|
Mequon and Franklin, WI |
|
05/27/09 |
|
|
100 |
% |
|
|
40,700,000 |
|
|
|
|
|
|
|
1,017,000 |
|
Greenville Hospital Systems |
|
Greenville, SC |
|
09/18/09 |
|
|
100 |
% |
|
|
162,820,000 |
|
|
|
|
|
|
|
4,071,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
$ |
240,324,000 |
|
|
$ |
1,696,000 |
|
|
$ |
6,008,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the amount of the mortgage loan payable newly placed on the property in connection
with the acquisition or secured by the property subsequent to acquisition. |
|
(2) |
|
Our former advisor or its affiliates received, as compensation for services rendered in
connection with the investigation, selection and acquisition of our properties, an acquisition
fee of up to 2.5% of the contract purchase price for each property acquired. |
|
(3) |
|
This acquisition was an office condominium/building related to an existing property in our
portfolio. |
Also see Note 17, Business Combinations, for additional disclosures related to our
acquisitions.
11
4. Real Estate Notes Receivable, Net
Real estate notes receivable, net consisted of the following as of September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Maturity |
|
|
|
|
|
|
|
Property Name and Location |
|
Property Type |
|
Rate |
|
|
Date |
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
MacNeal Hospital Medical Office Building
Berwyn, Illinois |
|
Medical Office Building |
|
|
5.95 |
% |
|
|
11/01/11 |
|
|
$ |
7,500,000 |
|
|
$ |
7,500,000 |
|
MacNeal Hospital Medical Office Building Berwyn,
Illinois |
|
Medical Office Building |
|
|
5.95 |
% |
|
|
11/01/11 |
|
|
|
7,500,000 |
|
|
|
7,500,000 |
|
St. Lukes Medical Office Building Phoenix, Arizona
|
|
Medical Office Building |
|
|
5.85 |
% |
|
|
11/01/11 |
|
|
|
3,750,000 |
|
|
|
3,750,000 |
|
St. Lukes Medical Office Building Phoenix, Arizona
|
|
Medical Office Building |
|
|
5.85 |
% |
|
|
11/01/11 |
|
|
|
1,250,000 |
|
|
|
1,250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000,000 |
|
|
|
20,000,000 |
|
Add: closing costs, net |
|
|
|
|
|
|
|
|
|
|
|
|
276,000 |
|
|
|
360,000 |
|
Less: discount, net |
|
|
|
|
|
|
|
|
|
|
|
|
(3,677,000 |
) |
|
|
(5,000,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate notes receivable, net |
|
|
|
|
|
|
|
|
|
|
|
$ |
16,599,000 |
|
|
$ |
15,360,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The discount is amortized on a straight-line basis over the life of the note.
5. Identified Intangible Assets, Net
Identified intangible assets consisted of the following as of September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
In place leases,
net of accumulated
amortization of
$21,988,000 and
$13,350,000 as of
September 30, 2009 and
December 31, 2008,
respectively (with a
weighted average
remaining life of 9.3
years and 7.6 years as
of September 30, 2009
and December 31, 2008,
respectively) |
|
$ |
67,012,000 |
|
|
$ |
55,144,000 |
|
Above market leases,
net of accumulated
amortization of
$2,788,000 and
$1,513,000 as of
September 30, 2009 and
December 31, 2008,
respectively (with a
weighted average
remaining life of 8.0
years and 8.3 years as
of September 30, 2009
and December 31, 2008,
respectively) |
|
|
9,681,000 |
|
|
|
10,482,000 |
|
Tenant relationships,
net of accumulated
amortization of
$11,676,000 and
$6,479,000 as of
September 30, 2009 and
December 31, 2008,
respectively (with a
weighted average
remaining life of 12.7
years and 11.7 years as
of September 30, 2009
and December 31, 2008,
respectively) |
|
|
73,612,000 |
|
|
|
64,881,000 |
|
Leasehold interests,
net of accumulated
amortization of $87,000
and $45,000 as of
September
30, 2009 and
December 31, 2008,
respectively (with a
weighted average
remaining life of 79.7
years and 81.8 years as
of September 30, 2009
and December 31, 2008,
respectively) |
|
|
4,168,000 |
|
|
|
3,998,000 |
|
Master lease, net of
accumulated
amortization of
$335,000 and $231,000
as of September 30,
2009 and December 31,
2008, respectively
(with a weighted
average remaining life
of 2 months and 8
months as of September
30, 2009 and December
31, 2008, respectively) |
|
|
14,000 |
|
|
|
118,000 |
|
|
|
|
|
|
|
|
|
|
$ |
154,487,000 |
|
|
$ |
134,623,000 |
|
|
|
|
|
|
|
|
Amortization expense recorded on the identified intangible assets for the three months ended
September 30, 2009 and 2008 was $5,477,000 and $5,498,000, respectively, which included $497,000
and $443,000, respectively, of amortization recorded against rental income for above market leases
and $15,000 and $12,000, respectively, of amortization recorded against rental expenses for
leasehold interests in our accompanying condensed consolidated statements of operations.
Amortization expense recorded on the identified intangible assets for the nine months ended
September 30, 2009 and 2008 was $17,080,000 and $12,148,000, respectively, which included
$1,459,000 and $839,000, respectively, of amortization recorded against rental income for above
market leases and $43,000 and $29,000, respectively, of amortization recorded against rental
expenses for leasehold interests in our accompanying condensed consolidated statements of
operations.
12
6. Other Assets, Net
Other assets, net, consisted of the following as of September 30, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Deferred financing costs, net
of accumulated amortization of
$2,881,000 and $1,461,000 as of
September 30, 2009 and December 31,
2008, respectively |
|
$ |
3,360,000 |
|
|
$ |
4,751,000 |
|
Lease commissions, net of
accumulated amortization of
$334,000 and $99,000 as of
September
30, 2009 and December 31,
2008, respectively |
|
|
2,359,000 |
|
|
|
1,009,000 |
|
Lease inducements, net of
accumulated amortization of
$191,000 and $107,000 as of
September 30, 2009 and December 31,
2008, respectively |
|
|
832,000 |
|
|
|
753,000 |
|
Deferred rent receivable |
|
|
7,585,000 |
|
|
|
3,928,000 |
|
Prepaid expenses, deposits and other |
|
|
2,641,000 |
|
|
|
1,073,000 |
|
|
|
|
|
|
|
|
|
|
$ |
16,777,000 |
|
|
$ |
11,514,000 |
|
|
|
|
|
|
|
|
Amortization and depreciation expense recorded on deferred financing costs, lease commissions,
lease inducements and other assets for the three months ended September 30, 2009 and 2008 was
$642,000 and $456,000, respectively, of which $469,000 and $403,000, respectively, of amortization
was recorded against interest expense for deferred financing costs and $36,000 and $22,000,
respectively, of amortization was recorded against rental income for lease inducements in our
accompanying condensed consolidated statements of operations. Amortization and depreciation expense
recorded on deferred financing costs, lease commissions, lease inducements and other assets for the
nine months ended September 30, 2009 and 2008 was $1,733,000 and $953,000, respectively, of which
$1,402,000 and $831,000, respectively, of amortization was recorded against interest expense for
deferred financing costs and $85,000 and $63,000, respectively, of amortization was recorded
against rental income for lease inducements in our accompanying condensed consolidated statements
of operations.
13
7. Mortgage Loans Payable, Net
Mortgage Loans Payable
Mortgage loans payable were $453,614,000 ($452,041,000, net of discount) and $462,542,000
($460,762,000, net of discount) as of September 30, 2009 and December 31, 2008, respectively. As of
September 30, 2009, we had fixed and variable rate mortgage loans with effective interest rates
ranging from 1.60% to 12.75% per annum and a weighted average effective interest rate of 3.59% per
annum. As of September 30, 2009, we had $131,941,000 ($130,368,000, net of discount) of fixed rate
debt, or 29.1% of mortgage loans payable, at a weighted average interest rate of 5.76% per annum,
and $321,673,000 of variable rate debt, or 70.9% of mortgage loans payable, at a weighted average
interest rate of 2.70% per annum. As of December 31, 2008, we had fixed and variable rate mortgage
loans with effective interest rates ranging from 1.90% to 12.75% per annum and a weighted average
effective interest rate of 4.07% per annum. As of December 31, 2008, we had $141,058,000
($139,278,000 net of discount) of fixed rate debt, or 30.5% of mortgage loans payable, at a
weighted average interest rate of 5.76% per annum, and $321,484,000 of variable rate debt, or 69.5%
of mortgage loans payable, at a weighted average interest rate of 3.33% per annum. We are required
by the terms of the applicable loan documents to meet certain financial covenants, such as debt
service coverage ratios, rent coverage ratios and reporting requirements. As December 31, 2008, we
were in compliance with all such covenants and requirements. As of September 30, 2009, we believe
that we were in compliance with all such covenants and requirements on $426,414,000 of our mortgage
loans payable and are making appropriate adjustments to comply with such covenants on $27,200,000
of our mortgage loans payable by depositing $6,357,000 into a restricted collateral account.
Mortgage loans payable consisted of the following as of September 30, 2009 and December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
Maturity |
|
|
|
|
|
|
|
Property |
|
Rate |
|
|
Date |
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Fixed Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southpointe Office Parke and Epler Parke I |
|
|
6.11 |
% |
|
|
09/01/16 |
|
|
$ |
9,146,000 |
|
|
$ |
9,146,000 |
|
Crawfordsville Medical Office Park and
Athens Surgery Center |
|
|
6.12 |
% |
|
|
10/01/16 |
|
|
|
4,264,000 |
|
|
|
4,264,000 |
|
The Gallery Professional Building |
|
|
5.76 |
% |
|
|
03/01/17 |
|
|
|
6,000,000 |
|
|
|
6,000,000 |
|
Lenox Office Park, Building G |
|
|
5.88 |
% |
|
|
02/01/17 |
|
|
|
12,000,000 |
|
|
|
12,000,000 |
|
Commons V Medical Office Building |
|
|
5.54 |
% |
|
|
06/11/17 |
|
|
|
9,843,000 |
|
|
|
9,939,000 |
|
Yorktown Medical Center and Shakerag
Medical Center |
|
|
5.52 |
% |
|
|
05/11/17 |
|
|
|
13,530,000 |
|
|
|
13,530,000 |
|
Thunderbird Medical Plaza |
|
|
5.67 |
% |
|
|
06/11/17 |
|
|
|
13,960,000 |
|
|
|
14,000,000 |
|
Gwinnett Professional Center |
|
|
5.88 |
% |
|
|
01/01/14 |
|
|
|
5,541,000 |
|
|
|
5,604,000 |
|
St. Mary Physicians Center |
|
|
5.80 |
% |
|
|
09/04/09 |
|
|
|
|
|
|
|
8,280,000 |
|
Northmeadow Medical Center |
|
|
5.99 |
% |
|
|
12/01/14 |
|
|
|
7,745,000 |
|
|
|
7,866,000 |
|
Medical Portfolio 2 |
|
|
5.91 |
% |
|
|
07/01/13 |
|
|
|
14,270,000 |
|
|
|
14,408,000 |
|
Renaissance Medical Centre |
|
|
5.38 |
% |
|
|
09/01/15 |
|
|
|
18,871,000 |
|
|
|
19,078,000 |
|
Renaissance Medical Centre |
|
|
12.75 |
% |
|
|
09/01/15 |
|
|
|
1,243,000 |
|
|
|
1,245,000 |
|
Medical Portfolio 4 |
|
|
5.50 |
% |
|
|
06/01/19 |
|
|
|
6,633,000 |
|
|
|
6,771,000 |
|
Medical Portfolio 4 |
|
|
6.18 |
% |
|
|
06/01/19 |
|
|
|
1,695,000 |
|
|
|
1,727,000 |
|
Marietta Health Park |
|
|
5.11 |
% |
|
|
11/01/15 |
|
|
|
7,200,000 |
|
|
|
7,200,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
131,941,000 |
|
|
|
141,058,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Care Portfolio 1 |
|
|
4.75 |
%(a) |
|
|
03/31/10 |
|
|
|
24,800,000 |
(b) |
|
|
24,800,000 |
(c) |
1 and 4 Market Exchange |
|
|
1.60 |
%(a) |
|
|
09/30/10 |
|
|
|
14,500,000 |
(b) |
|
|
14,500,000 |
(c) |
East Florida Senior Care Portfolio |
|
|
1.65 |
%(a) |
|
|
10/01/10 |
|
|
|
29,568,000 |
(b) |
|
|
29,917,000 |
(c) |
Kokomo Medical Office Park |
|
|
1.65 |
%(a) |
|
|
11/30/10 |
|
|
|
8,300,000 |
(b) |
|
|
8,300,000 |
(c) |
Chesterfield Rehabilitation Center |
|
|
1.90 |
%(a) |
|
|
12/30/10 |
|
|
|
22,000,000 |
(b) |
|
|
22,000,000 |
(c) |
Park Place Office Park |
|
|
1.80 |
%(a) |
|
|
12/31/10 |
|
|
|
10,943,000 |
(b) |
|
|
10,943,000 |
(c) |
Highlands Ranch Medical Plaza |
|
|
1.80 |
%(a) |
|
|
12/31/10 |
|
|
|
8,853,000 |
(b) |
|
|
8,853,000 |
(c) |
Medical Portfolio 1 |
|
|
1.93 |
%(a) |
|
|
02/28/11 |
|
|
|
20,607,000 |
(b) |
|
|
21,340,000 |
(c) |
Fort Road Medical Building |
|
|
1.90 |
%(a) |
|
|
03/06/11 |
|
|
|
5,800,000 |
(b) |
|
|
5,800,000 |
(c) |
Medical Portfolio 3 |
|
|
2.50 |
%(a) |
|
|
06/26/11 |
|
|
|
58,000,000 |
(b) |
|
|
58,000,000 |
(c) |
SouthCrest Medical Plaza |
|
|
2.45 |
%(a) |
|
|
06/30/11 |
|
|
|
12,870,000 |
(b) |
|
|
12,870,000 |
(c) |
Wachovia Pool Loans(d) |
|
|
4.65 |
%(a) |
|
|
06/30/11 |
|
|
|
49,969,000 |
(b) |
|
|
50,322,000 |
(c) |
Cypress Station Medical Office Building |
|
|
2.00 |
%(a) |
|
|
09/01/11 |
|
|
|
7,163,000 |
(b) |
|
|
7,235,000 |
(c) |
Medical Portfolio 4 |
|
|
2.40 |
%(a) |
|
|
09/24/11 |
|
|
|
21,400,000 |
(b) |
|
|
21,400,000 |
(c) |
Decatur Medical Plaza |
|
|
2.25 |
%(a) |
|
|
09/26/11 |
|
|
|
7,900,000 |
(b) |
|
|
7,900,000 |
(c) |
Mountain Empire Portfolio |
|
|
2.40 |
%(a) |
|
|
09/28/11 |
|
|
|
19,000,000 |
(b) |
|
|
17,304,000 |
(c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
321,673,000 |
|
|
|
321,484,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed and variable debt |
|
|
|
|
|
|
|
|
|
|
453,614,000 |
|
|
|
462,542,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: discount |
|
|
|
|
|
|
|
|
|
|
(1,573,000 |
) |
|
|
(1,780,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans payable, net |
|
|
|
|
|
|
|
|
|
$ |
452,041,000 |
|
|
$ |
460,762,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
(a) |
|
Represents the interest rate in effect as of September 30, 2009. |
|
(b) |
|
As of September 30, 2009, we had $321,673,000 in variable rate mortgage loans with effective
interest rates ranging from 1.60% to 4.75% per annum and a weighted average effective interest
rate of 2.70% per annum. However, as of September 30, 2009, we had $321,673,000 in fixed rate
interest rate swaps, ranging from 4.51% to 6.02%, on our variable rate mortgage loans payable,
thereby effectively fixing our interest rate on those mortgage loans payable. See Note 8,
Derivative Financial Instruments, to our accompanying condensed consolidated financial
statements. |
|
(c) |
|
As of December 31, 2008, we had $321,484,000 in variable rate mortgage loans with effective
interest rates ranging from 1.90% to 4.75% per annum and a weighted average effective interest
rate of 3.33% per annum. However, as of December 31, 2008, we had $321,484,000 in fixed rate
interest rate swaps, ranging from 4.51% to 6.02%, on our variable rate mortgage loans payable,
thereby effectively fixing our interest rate on those mortgage loans payable. See Note 8,
Derivative Financial Instruments, to our accompanying condensed consolidated financial
statements. |
|
(d) |
|
We have a mortgage loan in the principal amount of $49,969,000 secured by Epler Parke
Building B, 5995 Plaza Drive, Nutfield Professional Center, Medical Portfolio 2 and Academy
Medical Center. |
The principal payments due on our mortgage loans payable as of September 30, 2009 for the
three months ending December 31, 2009 and for each of the next four years ending December 31 and
thereafter, is as follows:
|
|
|
|
|
Year |
|
Amount |
2009 |
|
$ |
1,020,000 |
|
2010 |
|
$ |
122,731,000 |
|
2011 |
|
$ |
201,690,000 |
|
2012 |
|
$ |
2,056,000 |
|
2013 |
|
$ |
15,521,000 |
|
Thereafter |
|
$ |
110,596,000 |
|
The table above does not reflect all available extension options. Of the amounts maturing in
2010, $64,596,000 have two one-year extensions available and $53,940,000 have a one-year extension
available. Of the amounts maturing in 2011, $179,985,000 have two one-year extensions available.
8. Derivative Financial Instruments
We utilize derivatives such as fixed rate interest rate swaps to manage our exposure to
interest rate movements. Consistent with ASC 815, we record derivative financial instruments on our
accompanying condensed consolidated balance sheets as either an asset or a liability measured at
fair value. ASC 815 permits special hedge accounting if certain requirements are met. Hedge
accounting allows for gains and losses on derivatives designated as hedges to be offset by the
change in value of the hedged item(s) or to be deferred in other comprehensive income. As of
September 30, 2009 and December 31, 2008, no derivatives were designated as fair value hedges or
cash flow hedges. Derivatives not designated as hedges are not speculative and are used to manage
our exposure to interest rate movements, but do not meet the strict hedge accounting requirements
of ASC 815. Changes in the fair value of derivative financial instruments are recorded in gain
(loss) on derivative financial instruments in our accompanying condensed consolidated statements of
operations.
15
The following table lists derivative financial instruments held by us as of September 30,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Index |
|
Rate |
|
Fair Value |
|
Instrument |
|
Maturity |
$ |
14,500,000 |
|
|
LIBOR |
|
|
5.97 |
% |
|
$ |
(639,000 |
) |
|
Swap |
|
|
09/28/10 |
|
$ |
8,300,000 |
|
|
LIBOR |
|
|
5.86 |
% |
|
$ |
(396,000 |
) |
|
Swap |
|
|
11/30/10 |
|
$ |
8,853,000 |
|
|
LIBOR |
|
|
5.52 |
% |
|
$ |
(387,000 |
) |
|
Swap |
|
|
12/31/10 |
|
$ |
10,943,000 |
|
|
LIBOR |
|
|
5.52 |
% |
|
$ |
(479,000 |
) |
|
Swap |
|
|
12/31/10 |
|
$ |
22,000,000 |
|
|
LIBOR |
|
|
5.59 |
% |
|
$ |
(906,000 |
) |
|
Swap |
|
|
12/30/10 |
|
$ |
29,568,000 |
|
|
LIBOR |
|
|
6.02 |
% |
|
$ |
(1,270,000 |
) |
|
Swap |
|
|
10/01/10 |
|
$ |
20,607,000 |
|
|
LIBOR |
|
|
5.23 |
% |
|
$ |
(807,000 |
) |
|
Swap |
|
|
01/31/11 |
|
$ |
5,800,000 |
|
|
LIBOR |
|
|
4.70 |
% |
|
$ |
(197,000 |
) |
|
Swap |
|
|
03/06/11 |
|
$ |
7,163,000 |
|
|
LIBOR |
|
|
4.51 |
% |
|
$ |
(116,000 |
) |
|
Swap |
|
|
05/03/10 |
|
$ |
24,800,000 |
|
|
LIBOR |
|
|
4.85 |
% |
|
$ |
(354,000 |
) |
|
Swap |
|
|
03/31/10 |
|
$ |
49,969,000 |
|
|
LIBOR |
|
|
5.60 |
% |
|
$ |
(1,279,000 |
) |
|
Swap |
|
|
06/30/10 |
|
$ |
12,870,000 |
|
|
LIBOR |
|
|
5.65 |
% |
|
$ |
(327,000 |
) |
|
Swap |
|
|
06/30/10 |
|
$ |
58,000,000 |
|
|
LIBOR |
|
|
5.59 |
% |
|
$ |
(1,413,000 |
) |
|
Swap |
|
|
06/26/10 |
|
$ |
21,400,000 |
|
|
LIBOR |
|
|
5.27 |
% |
|
$ |
(857,000 |
) |
|
Swap |
|
|
09/23/11 |
|
$ |
7,900,000 |
|
|
LIBOR |
|
|
5.16 |
% |
|
$ |
(324,000 |
) |
|
Swap |
|
|
09/26/11 |
|
$ |
19,000,000 |
|
|
LIBOR |
|
|
5.87 |
% |
|
$ |
(1,040,000 |
) |
|
Swap |
|
|
09/28/13 |
|
The following table lists derivative financial instruments held by us as of December 31,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional Amount |
|
Index |
|
Rate |
|
Fair Value |
|
Instrument |
|
Maturity |
$ |
14,500,000 |
|
|
LIBOR |
|
|
5.97 |
% |
|
$ |
(870,000 |
) |
|
Swap |
|
|
09/28/10 |
|
$ |
8,300,000 |
|
|
LIBOR |
|
|
5.86 |
% |
|
$ |
(512,000 |
) |
|
Swap |
|
|
11/30/10 |
|
$ |
8,853,000 |
|
|
LIBOR |
|
|
5.52 |
% |
|
$ |
(480,000 |
) |
|
Swap |
|
|
12/31/10 |
|
$ |
10,943,000 |
|
|
LIBOR |
|
|
5.52 |
% |
|
$ |
(593,000 |
) |
|
Swap |
|
|
12/31/10 |
|
$ |
22,000,000 |
|
|
LIBOR |
|
|
5.59 |
% |
|
$ |
(1,167,000 |
) |
|
Swap |
|
|
12/30/10 |
|
$ |
29,917,000 |
|
|
LIBOR |
|
|
6.02 |
% |
|
$ |
(1,776,000 |
) |
|
Swap |
|
|
10/01/10 |
|
$ |
21,340,000 |
|
|
LIBOR |
|
|
5.23 |
% |
|
$ |
(976,000 |
) |
|
Swap |
|
|
01/31/11 |
|
$ |
5,800,000 |
|
|
LIBOR |
|
|
4.70 |
% |
|
$ |
(221,000 |
) |
|
Swap |
|
|
03/06/11 |
|
$ |
7,235,000 |
|
|
LIBOR |
|
|
4.51 |
% |
|
$ |
(168,000 |
) |
|
Swap |
|
|
05/03/10 |
|
$ |
24,800,000 |
|
|
LIBOR |
|
|
4.85 |
% |
|
$ |
(554,000 |
) |
|
Swap |
|
|
03/31/10 |
|
$ |
50,322,000 |
|
|
LIBOR |
|
|
5.60 |
% |
|
$ |
(1,797,000 |
) |
|
Swap |
|
|
06/30/10 |
|
$ |
12,870,000 |
|
|
LIBOR |
|
|
5.65 |
% |
|
$ |
(460,000 |
) |
|
Swap |
|
|
06/30/10 |
|
$ |
58,000,000 |
|
|
LIBOR |
|
|
5.59 |
% |
|
$ |
(1,972,000 |
) |
|
Swap |
|
|
06/26/10 |
|
$ |
21,400,000 |
|
|
LIBOR |
|
|
5.27 |
% |
|
$ |
(936,000 |
) |
|
Swap |
|
|
09/23/11 |
|
$ |
7,900,000 |
|
|
LIBOR |
|
|
5.16 |
% |
|
$ |
(355,000 |
) |
|
Swap |
|
|
09/26/11 |
|
$ |
17,304,000 |
|
|
LIBOR |
|
|
5.87 |
% |
|
$ |
(1,361,000 |
) |
|
Swap |
|
|
09/28/13 |
|
As of September 30, 2009 and December 31, 2008, the fair value of our derivative financial
instruments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
September 30, 2009 |
|
December 31, 2008 |
|
September 30, 2009 |
|
December 31, 2008 |
Derivatives not designated as |
|
Balance Sheet |
|
|
|
Balance Sheet |
|
|
|
Balance Sheet |
|
|
|
|
|
Balance Sheet |
|
|
hedging instruments |
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
|
Location |
|
Fair Value |
Interest Rate Swaps
|
|
Derivative
Financial
Instruments
|
|
$
|
|
Derivative
Financial
Instruments
|
|
$
|
|
Derivative
Financial
Instruments
|
|
$ |
10,791,000 |
|
|
Derivative
Financial
Instruments
|
|
$ |
14,198,000 |
|
For the three and nine months ended September 30, 2009 and 2008, our derivative financial
instruments had the following effect on our condensed consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized |
|
Amount of Gain (Loss) Recognized |
Derivatives not designated as hedging |
|
Location of Gain (Loss) |
|
Three Months Ended |
|
Nine Months Ended |
instruments: |
|
Recognized |
|
September 30, 2009 |
|
September 30, 2008 |
|
September 30, 2009 |
|
September 30, 2008 |
Interest Rate Swaps
|
|
Interest Expense
|
|
$ |
66,000 |
|
|
$ |
(310,000 |
) |
|
$ |
3,357,000 |
|
|
$ |
(414,000 |
) |
For the three months ended September 30, 2009 and 2008, we recorded a decrease in
interest expense of $66,000 and an increase in interest expense of $310,000, respectively, related
to the change in the fair value of our derivative financial instruments and for the nine months
ended September 30, 2009 and 2008, we recorded a decrease in interest expense of $3,357,000 and a
increase in interest expense of $414,000, respectively, related to the change in the fair value of
our derivative financial instruments.
16
The Company has agreements with each of its derivative counterparties that contain a
provision whereby if the Company defaults on certain of its unsecured indebtedness, then the
Company could also be declared in default on its derivative obligations resulting in an
acceleration of payment. In addition, the Company is exposed to credit risk in the event of
non-performance by its derivative counterparties. The Company believes it mitigates its credit
risk by entering into agreements with credit-worthy counterparties. The Company records
counterparty credit risk valuation adjustments on its interest rate swap derivative asset in order
to properly reflect the credit quality of the counterparty. In addition, the Companys fair value
of interest rate swap derivative liabilities is adjusted to reflect the impact of the Companys
credit quality. As of September 30, 2009 and December 31, 2008, there have been no termination
events or events of default related to the interest rate swaps.
9. Line of Credit
We have a loan agreement with LaSalle Bank National Association, or LaSalle, and KeyBank
National Association, or KeyBank, in which we obtained our secured revolving line of credit with
LaSalle and KeyBank in an aggregate maximum principal amount up to $80,000,000, or the Loan
Agreement. The actual amount of credit available under the Loan Agreement is a function of certain
loan to cost, loan to value and debt service coverage ratios contained in the Loan Agreement. As of
September 30, 2009 and December 31, 2008, the amount of credit available under the Loan Agreement
is $78,172,000. The maximum principal amount of the Loan Agreement may be increased up to
$120,000,000 subject to the terms of the Loan Agreement. Also, additional financial institutions
may become lenders under the Loan Agreement. The initial maturity date of the Loan Agreement is
September 10, 2010 which may be extended by one 12-month period subject to satisfaction of certain
conditions, including the payment of an extension fee equal to 0.20% of the principal balance of
loans then outstanding.
At our option, loans under the Loan Agreement bear interest at per annum rates equal to (a)
the London Interbank Offered Rate, or LIBOR, plus a margin of 1.50%, (b) the greater of LaSalles
prime rate or the Federal Funds Rate (as defined in the Loan Agreement) plus 0.50%, or (c) a
combination of these rates.
The Loan Agreement contains various affirmative and negative covenants that are customary for
facilities and transactions of this type, including limitations on the incurrence of debt by us and
our subsidiaries that own properties that serve as collateral for the Loan Agreement, limitations
on the nature of our business and limitations on our subsidiaries that own properties that serve as
collateral for the Loan Agreement. The Loan Agreement also imposes the following financial
covenants on us and our operating partnership, as applicable: (i) a minimum ratio of operating cash
flow to interest expense, (ii) a minimum ratio of operating cash flow to fixed charges, (iii) a
maximum ratio of liabilities to asset value, (iv) a maximum distribution covenant and (v) a minimum
net worth covenant, all of which are defined in the Loan Agreement. In addition, the Loan Agreement
includes events of default that are customary for facilities and transactions of this type. As of
December 31, 2008 and September 30, 2009, we were in compliance with all such covenants and
requirements.
As of September 30, 2009 and December 31, 2008, we did not have any borrowings under the Loan
Agreement.
10. Identified Intangible Liabilities, Net
Identified intangible liabilities consisted of the following as of September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Below market leases,
net of accumulated
amortization of $2,640,000
and $1,400,000 as of
September 30, 2009 and
December 31, 2008,
respectively (with a
weighted average remaining
life of 9.5 years and 9.4
years as of September 30,
2009 and December 31, 2008,
respectively) |
|
$ |
6,772,000 |
|
|
$ |
8,128,000 |
|
|
|
|
|
|
|
|
|
|
$ |
6,772,000 |
|
|
$ |
8,128,000 |
|
|
|
|
|
|
|
|
Amortization recorded on the identified intangible liabilities for the three months ended
September 30, 2009 and 2008 was $437,000 and $428,000, respectively, which is recorded to rental
income in our accompanying condensed consolidated statements of operations. Amortization recorded
on the identified intangible liabilities for the nine months ended September 30, 2009 and 2008 was
$1,380,000 and $831,000, respectively, which is recorded to rental income in our accompanying
condensed consolidated statements of operations.
17
11. Commitments and Contingencies
Litigation
We are not presently subject to any material litigation nor, to our knowledge, is any material
litigation threatened against us, which if determined unfavorably to us, would have a material
adverse effect on our consolidated financial statements.
Environmental Matters
We follow the policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist
at our properties, we are not currently aware of any environmental liability with respect to our
properties that would have a material effect on our consolidated financial position, results of
operations or cash flows. Further, we are not aware of any environmental liability or any
unasserted claim or assessment with respect to an environmental liability that we believe would
require additional disclosure or the recording of a loss contingency.
Other Organizational and Offering Expenses
Our former advisor previously was entitled to receive up to 1.5% of the aggregate gross
offering proceeds from the sale of shares of our common stock in the primary offering for
reimbursement of cumulative organizational and offering expenses pursuant to the terms of the
expired Advisory Agreement. As a self-managed company, we will be responsible for all of our future
organizational and offering expenses. These other organization and offering expenses include all
expenses (other than selling commissions and the marketing support fees which generally represents
7.0% and 2.5% of our gross offering proceeds, respectively) to be paid by us in connection with our
initial offering. As of September 30, 2009 and December 31, 2008, neither we nor our former advisor
and its affiliates have incurred additional other organizational and offering expenses in excess of
1.5% of the gross proceeds of our initial offering. See Note 12, Related Party Transactions-
Offering Stage, for a further discussion of other organizational and offering expenses.
Chesterfield Rehabilitation Center
The operating agreement with BD St. Louis Development, LLC, or BD St. Louis, for G&E
Healthcare REIT/Duke Chesterfield Rehab, LLC, or the JV Company, which owns Chesterfield
Rehabilitation Center, provides that from January 1, 2010 to March 31, 2010, our operating
partnership has the right and option to purchase the 20.0% membership interest in the JV Company
held by BD St. Louis at a fixed price of $3,900,000. We anticipate exercising our right to purchase
the 20.0% membership interest. If we do not exercise that right, subject to cumulative returns, the
distributions will no longer be paid proportionate to the ownership percentages and BD St. Louis
will receive a higher proportionate distribution. Also, if we do not exercise that right, the
operating agreement provides that from January 1, 2011 to March 31, 2011, BD St. Louis has the
right and option to sell all, but not less than all, of its 20.0% membership interest in the JV
Company to our operating partnership at a price equal to the greater of $10.00 or the fair market
value as determined in accordance with the operating agreement. As of September 30, 2009 and
December 31, 2008, the estimated redemption value at the
earliest date of redemption is $2,905,000 and $3,133,000, respectively.
See Note 13, Redeemable Noncontrolling Interests of Limited Partners, to our accompanying condensed
consolidated financial statements.
Future Development Agreement
In connection with the closing of the acquisition of the Greenville Hospital System Portfolio,
HTA LLC and Greenville Hospital System, or GHS, entered into a Future
Development Agreement, or the Future Development Agreement. Pursuant to the Future Development Agreement, GHS may elect for HTA LLC to
provide funding for development costs associated with certain potential GHS development properties and/or the acquisition of the properties upon
completion of development, subject to the satisfaction of certain conditions and approvals by HTA LLC, as provided in the Future Development Agreement, including a lease back to GHS of 100% of the space.
The maximum funding commitment from HTA LLC may not exceed $5,500,000 in the aggregate.
Other
Our other commitments and contingencies include the usual obligations of real estate owners
and operators in the normal course of business. In our opinion, these matters are not expected to
have a material adverse effect on our consolidated financial position, results of operations or
cash flows.
12. Related Party Transactions
Fees and Expenses Paid to Former Affiliates
Two of our former executive officers were also executive officers and employees and/or holders
of a direct or indirect interest in our former advisor, and our former sponsor, Grubb & Ellis
Realty Investors, or other affiliated entities. These executive officers resigned on June 30, 2009
and July 10, 2009, respectively. Upon the effectiveness of our initial offering, we entered into an
Advisory Agreement with our former advisor and a dealer manager agreement with our former dealer
manager. These agreements entitled our former advisor, our former dealer manager and their
affiliates to specified compensation for certain services as well as reimbursement
18
of certain expenses. The Advisory Agreement was effective as of October 24, 2008, amended and
restated on November 14, 2008 and expired on September 20, 2009. On May 21, 2009, we provided
notice to Grubb & Ellis Securities that we would proceed with a dealer manager transition pursuant
to which Grubb & Ellis Securities ceased to serve as our dealer manager for our initial offering at
the end of the day on August 28, 2009. Commencing August 29, 2009, RCS assumed the role of dealer
manager for the remainder of the offering period. In the aggregate, for the three months ended
September 30, 2009 and 2008, we incurred fees to our former advisor and its affiliates of
$17,531,000 and $23,768,000, respectively, and for the nine months ended September 30, 2009 and
2008, we incurred fees to our former advisor and its affiliates of $66,011,000 and $58,965,000,
respectively, as detailed below.
Offering Stage
Selling Commissions
Prior to the transition of the dealer manager function to RCS, our former dealer manager
received selling commissions of up to 7.0% of the gross offering proceeds from the sale of shares
of our common stock in our initial offering other than shares of our common stock sold pursuant to
the DRIP. Our former dealer manager re-allowed all or a portion of these fees to participating
broker-dealers. For the three months ended September 30, 2009 and 2008, we incurred $7,644,000 and
$11,373,000, respectively, and for the nine months ended September 30, 2009 and 2008, we incurred
$35,337,000 and $23,454,000, respectively, in selling commissions to our former dealer manager.
Such selling commissions are charged to stockholders equity as such amounts were reimbursed to our
former dealer manager from the gross proceeds of our initial offering.
Marketing Support Fees and Due Diligence Expense Reimbursements
Our former dealer manager received non-accountable marketing support fees of up to 2.5% of the
gross offering proceeds from the sale of shares of our common stock in our initial offering other
than shares of our common stock sold pursuant to the DRIP. Our former dealer manager re-allowed a
portion up to 1.5% of the gross offering proceeds for non-accountable marketing fees to
participating broker-dealers. In addition, we reimbursed our former dealer manager or its
affiliates an additional 0.5% of the gross offering proceeds to participating broker-dealers for
accountable bona fide due diligence expenses. For the three months ended September 30, 2009 and
2008, we incurred $2,757,000 and $4,128,000, respectively, and for the nine months ended September
30, 2009 and 2008, we incurred $12,786,000 and $8,533,000, respectively, in marketing support fees
and due diligence expense reimbursements to our former dealer manager. Such fees and reimbursements
are charged to stockholders equity as such amounts are reimbursed to our former dealer manager or
its affiliates from the gross proceeds of our initial offering.
Other Organizational and Offering Expenses
Our other organizational and offering expenses have been paid by our former advisor or Grubb &
Ellis Realty Investors on our behalf. Our former advisor was reimbursed for actual expenses
incurred up to 1.5% of the gross offering proceeds from the sale of shares of our common stock in
our initial offering other than shares of our common stock sold pursuant to the DRIP. For the three
months ended September 30, 2009 and 2008, we incurred $290,000 and $1,749,000, respectively, and
for the nine months ended September 30, 2009 and 2008, we incurred $2,557,000 and $4,377,000,
respectively, in offering expenses to our former advisor and its affiliates. Other organizational
expenses are expensed as incurred, and offering expenses are charged to stockholders equity as
such amounts are reimbursed to our former advisor or its affiliates from the gross proceeds of our
initial offering.
Acquisition and Development Stage
Acquisition Fee
For the period from September 20, 2006 through October 24, 2008, our former advisor or its
affiliates received, as compensation for services rendered in connection with the investigation,
selection and acquisition of properties, an acquisition fee of up to 3.0% of the contract purchase
price for each property acquired or up to 4.0% of the total development cost of any development
property acquired, as applicable.
In connection with the Advisory Agreement, the acquisition fee payable to our former advisor
or its affiliate for services rendered in connection with the investigation, selection and
acquisition of our properties was reduced from up to 3.0% to an amount determined as follows:
19
|
|
|
for the first $375,000,000 in aggregate contract purchase price for properties acquired
directly or indirectly by us after October 24, 2008, 2.5% of the contract purchase price of
each such property; |
|
|
|
for the second $375,000,000 in aggregate contract purchase price for properties acquired
directly or indirectly by us after October 24, 2008, 2.0% of the contract purchase price of
each such property, which amount is subject to downward adjustment, but not below 1.5%,
based on reasonable projections regarding the anticipated amount of net proceeds to be
received in our initial offering; and |
|
|
|
for above $750,000,000 in aggregate contract purchase price for properties acquired
directly or indirectly by us after October 24, 2008, 2.25% of the contract purchase price of
each such property. |
The Advisory Agreement also provides that we will pay an acquisition fee in connection with
the acquisition of real estate related assets in an amount equal to 1.5% of the amount funded to
acquire or originate each such real estate related asset.
Our former advisor or its affiliate may be entitled to receive these acquisition fees for
properties and other real estate related assets acquired with funds raised in our initial offering,
including acquisitions completed after the termination of the Advisory Agreement, as compensation
for services rendered, subject to certain conditions.
For the three months ended September 30, 2009 and 2008, we incurred $4,071,000 and $3,083,000,
respectively, and for the nine months ended September 30, 2009 and 2008, we incurred $6,008,000 and
$14,543,000, respectively, in acquisition fees to our former advisor and its affiliates.
Acquisition fees are included in general and administrative expenses for the three and nine months
ended September 30, 2009. Acquisition fees are capitalized as part of the purchase price
allocations for the three and nine months ended September 30, 2008.
Reimbursement of Acquisition Expenses
Our former advisor or its affiliates are reimbursed for acquisition expenses related to
selecting, evaluating, acquiring and investing in properties. Acquisition expenses, excluding
amounts paid to third parties, will not exceed 0.5% of the purchase price of the properties. The
reimbursement of acquisition fees and expenses, including real estate commissions paid to
unaffiliated parties, will not exceed, in the aggregate, 6.0% of the purchase price or total
development costs, unless fees in excess of such limits are approved by a majority of our
disinterested independent directors. For the three months ended September 30, 2009 and 2008, we
incurred $0 and $3,000, respectively, and for the nine months ended September 30, 2009 and 2008, we
incurred $0 and $11,000, respectively, for such expenses to our former advisor and its affiliates,
excluding amounts our former advisor and its affiliates paid directly to third parties. Acquisition
expenses are included in general and administrative expenses for the three and nine months ended
September 30, 2009. Acquisition expenses are capitalized as part of the purchase price allocations
for the three and nine months ended September 30, 2008.
Operational Stage
Asset Management Fee
For the period from September 20, 2006 through October 24, 2008, our former advisor or its
affiliates were paid a monthly fee for services rendered in connection with the management of our
assets in an amount equal to one-twelfth of 1.0% of the average invested assets calculated as of
the close of business on the last day of each month, subject to our stockholders receiving
annualized distributions in an amount equal to at least 5.0% per annum on average invested capital.
The asset management fee was calculated and payable monthly in cash or shares of our common stock
at the option of our former advisor or one of its affiliates.
In connection with the Advisory Agreement, the monthly asset management fee we pay to our
former advisor in connection with the management of our assets was reduced from one-twelfth of 1.0%
of our average invested assets to one-twelfth of 0.5% of our average invested assets. For the three
months ended September 30, 2009 and 2008, we incurred $1,196,000 through September 20, 2009 and $2,090,000, respectively, and
for the nine months ended September 30, 2009 and 2008, we incurred $3,783,000 through September 20, 2009 and $4,712,000,
respectively, in asset management fees to our former advisor and its affiliates, which is included
in general and administrative in our accompanying condensed consolidated statements of operations.
20
Property Management Fee
Our former advisor or its affiliates were paid a monthly property management fee equal to 4.0%
of the gross cash receipts through August 31, 2009 from each property managed. For properties managed by other third
parties besides our former advisor or its affiliates, our former advisor or its affiliates were
paid up to 1.0% of the gross cash receipts from the property for a monthly oversight fee. For the
three months ended September 30, 2009 and 2008, we incurred $507,000 and $758,000, respectively,
and for the nine months ended September 30, 2009 and 2008, we incurred $2,289,000 and $1,597,000,
respectively, in property management fees and oversight fees to our former advisor and its
affiliates, which is included in rental expenses in our accompanying condensed consolidated
statements of operations.
Lease Fee
Our former advisor or its affiliates, as the property manager, has received a separate fee for
leasing activities in an amount not to exceed the fee customarily charged in arms length
transactions by others rendering similar services in the same geographic area for similar
properties, as determined by a survey of brokers and agents in such area ranging between 3.0% and
8.0% of gross revenues generated from the initial term of the lease. For the three months ended
September 30, 2009 and 2008, we incurred $496,000 and $247,000, respectively, and for the nine
months ended September 30, 2009 and 2008, we incurred $1,173,000 and $823,000, respectively, to
Realty and its affiliates in lease fees which is capitalized and included in other assets, net, in
our accompanying condensed consolidated balance sheets.
On July 2, 2009, we provided notice, on behalf of each of our subsidiaries to Realty,
pursuant to each management agreement that each of our subsidiaries elected to terminate its
management agreement with Realty and proceed with a property management transition program under
which Realty would cease to serve as the property manager effective as of September 1, 2009. We
also provided notice to Realty of the election by our subsidiaries to have Realty terminate all
sub-management agreements effective as of September 1, 2009, except for certain agreements to be
assigned to the applicable subsidiaries, with such terminations being done under our direction.
On-site Personnel and Engineering Payroll
For the three months ended September 30, 2009 and 2008, Grubb & Ellis Realty Investors
incurred payroll for on-site personnel and engineering on our behalf of $509,000 and $250,000,
respectively, and for the nine months ended September 30, 2009 and 2008, Grubb & Ellis Realty
Investors incurred $1,865,000 and $587,000, respectively, which is included in rental expenses in
our accompanying condensed consolidated statements of operations.
Operating Expenses
We reimbursed our former advisor or its affiliates for operating expenses incurred in
rendering its services to us, subject to certain limitations on our operating expenses. We cannot
reimburse our former advisor or affiliates for operating expenses that exceed the greater of: (1)
2.0% of our average invested assets, as defined in the Advisory Agreement, or (2) 25.0% of our net
income, as defined in the Advisory Agreement, unless a majority of our independent directors
determines that such excess expenses were justified based on unusual and non-recurring factors. For
the 12 months ended September 30, 2009, our operating expenses did not exceed this limitation. Our
operating expenses as a percentage of average invested assets and as a percentage of net income
were 1.6% and 96.1%, respectively, for the 12 months ended September 30, 2009.
For the three months ended September 30, 2009 and 2008, Grubb & Ellis Realty Investors
incurred on our behalf $4,000 and $48,000, respectively, and for the nine months ended September
30, 2009 and 2008, Grubb & Ellis Realty Investors incurred on our behalf $35,000 and $230,000,
respectively, in operating expenses which is included in general and administrative in our
accompanying condensed consolidated statements of operations
Related Party Services Agreement
We entered into a services agreement, effective January 1, 2008, with Grubb & Ellis Realty
Investors for subscription agreement processing and investor services. The services agreement had
an initial one year term and was subject to successive one year renewals. Since Grubb & Ellis
Realty Investors is the managing member of our former advisor, the terms of this agreement were
approved and determined by a majority of our directors, including a majority of our independent
directors, as fair and reasonable to us and at fees charged to us in an amount no greater than the
cost to Grubb & Ellis Realty Investors for providing such services to us, which amount shall be no
greater than that which would be paid to an unaffiliated third party for similar services. On March
17, 2009, Grubb & Ellis
21
Realty Investors provided notice of its termination of the services agreement. The termination
was to be effective September 20, 2009; however as part of our transition to self-management, we
have worked with DST Systems, Inc. to serve as our transfer agent and to provide subscription
processing and investor relations services which became effective on August 10, 2009. Accordingly,
the services agreement with Grubb & Ellis Realty Investors terminated on August 9, 2009.
For the three months ended September 30, 2009 and 2008, we incurred $57,000 and $31,000,
respectively, and for the nine months ended September 30, 2009 and 2008, we incurred $177,000 and
$89,000, respectively, for investor services that Grubb & Ellis Realty Investors provided to us,
which is included in general and administrative in our accompanying condensed consolidated
statements of operations.
For the three months ended September 30, 2009 and 2008, our former advisor and its affiliates
incurred $23,000 and $52,000, respectively, and for the nine months ended September 30, 2009 and
2008, our former advisor and its affiliates incurred $173,000 and $111,000, respectively, in
subscription agreement processing that Grubb & Ellis Realty Investors provided to us. As an other
organizational and offering expense, these subscription agreement processing expenses will only
become our liability to the extent other organizational and offering expenses do not exceed 1.5% of
the gross proceeds of our initial offering.
Compensation for Additional Services
Our former advisor or its affiliates were paid for services performed for us other than those
required to be rendered by our former advisor or its affiliates under the Advisory Agreement. The
rate of compensation for these services must be approved by a majority of our board of directors,
including a majority of our independent directors, and cannot exceed an amount that would be paid
to unaffiliated third parties for similar services. For the three months ended September 30, 2009
and 2008 we incurred $0 and $7,000, respectively, and for the nine months ended September 30, 2009
and 2008, we incurred $0 and $7,000, respectively, for tax services an affiliate provided to us.
Liquidity Stage
Disposition Fee
Upon the expiration of our Advisory Agreement on September 20, 2009, we did not pay a
disposition fee to our former advisor or its affiliates.
Subordinated Participation Interest
Subordinated Distribution upon Termination
Upon termination or expiration of the Advisory Agreement, other than a termination by us for
cause, our former advisor may be entitled to receive a distribution from our operating partnership,
subject to a number of conditions, in an amount equal to 15.0% of the amount, if any, by which (1)
the fair market value of all of the assets of our operating partnership as of the date of the
termination (determined by appraisal), less any indebtedness secured by such assets, plus the
cumulative distributions made to us by our operating partnership from our inception through the
termination date, exceeds (2) the sum of the total amount of capital raised from stockholders (less
amounts paid to redeem shares pursuant to our share repurchase plan) plus an annual 8.0%
cumulative, non-compounded return on average invested capital through the termination date. As of
the expiration of our Advisory Agreement on September 20, 2009, no amounts were due based on the
aforementioned formula.
On November 14, 2008, we entered into an amendment to the partnership agreement for
our operating partnership, or the Partnership Agreement Amendment. Pursuant to the
terms of the Partnership Agreement Amendment, our former advisor may elect to defer
its right, if applicable, to receive a subordinated distribution from our operating
partnership after the termination or expiration of the Advisory Agreement. Our former
advisor has provided us with evidence of its notice to us of its election to defer its right to
a subordinated distribution. Our former advisors right to receive any deferred
subordinated distribution is subject to a number of ongoing conditions. These conditions
include, without limitation, that our former advisor fully and reasonably cooperate with
us and our self management program during the course of our transition to self
management. Various issues have arisen with respect to whether our former advisor and
its affiliates have fully and reasonably cooperated with us and with our transition to self
management. We have communicated our positions to our former advisor regarding these
issues, which have not yet been resolved.
The Partnership Agreement Amendment provided that after the termination or expiration of the
Advisory Agreement, if there is a listing of our shares on a national securities exchange or a
merger with a company that has shares listed on a national securities exchange, our former advisor
may be entitled to receive a distribution from our operating partnership, subject to a
number of conditions, in an amount equal to 15.0% of the amount, if any, by which (1) the fair
market value of the assets of our operating partnership (determined by appraisal as of the listing
date or merger date, as applicable) owned as of the termination of the Advisory
22
Agreement, plus any assets acquired after such termination for which our former advisor was
entitled to receive an acquisition fee (as described above under Advisory Agreement Acquisition
Fee), or the Included Assets, less any indebtedness secured by the Included Assets, plus the
cumulative distributions made by our operating partnership to us and the limited partners who
received partnership units in connection with the acquisition of the Included Assets, from our
inception through the listing date or merger date, as applicable, exceeds (2) the sum of the total
amount of capital raised from stockholders and the capital value of partnership units issued in
connection with the acquisition of the Included Assets through the listing date or merger date, as
applicable (excluding any capital raised after the completion of our initial offering) (less
amounts paid to redeem shares pursuant to our share repurchase plan), plus an annual 8.0%
cumulative, non-compounded return on such invested capital and the capital value of such
partnership units measured for the period from inception through the listing date or merger date,
as applicable.
In addition, the Partnership Agreement Amendment provided that after the termination or
expiration of our Advisory Agreement, in the event of a liquidation or sale of all or
substantially all of the assets of the operating partnership, our former advisor may be
entitled to receive, subject to a number of conditions, a distribution in an amount equal to 15.0%
of the net proceeds from the sale of the Included Assets, after subtracting distributions to our
stockholders and the limited partners who received partnership units in connection with the
acquisition of the Included Assets of (1) their initial invested capital and the capital value of
such partnership units (less amounts paid to repurchase shares pursuant to our share repurchase
program) through the date of the other liquidity event plus (2) an annual 8.0% cumulative,
non-compounded return on such invested capital and the capital value of such partnership units
measured for the period from inception through the other liquidity event date.
Accounts Payable Due to Former Affiliates, Net
The following amounts were outstanding to former affiliates as of September 30, 2009 and
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
Entity |
|
Fee |
|
September 30, 2009 |
|
|
December 31, 2008 |
|
Grubb & Ellis Realty Investors |
|
Operating Expenses |
|
$ |
|
|
|
$ |
33,000 |
|
Grubb & Ellis Realty Investors |
|
Offering Costs |
|
|
63,000 |
|
|
|
797,000 |
|
Grubb & Ellis Realty Investors |
|
Due Diligence |
|
|
|
|
|
|
|
|
Grubb & Ellis Realty Investors |
|
On-site Payroll and Engineering |
|
|
|
|
|
|
207,000 |
|
Grubb & Ellis Realty Investors |
|
Acquisition Related Expenses |
|
|
|
|
|
|
103,000 |
|
Grubb & Ellis Securities |
|
Selling Commissions and Marketing Support Fees |
|
|
|
|
|
|
1,120,000 |
|
Realty |
|
Asset and Property Management Fees |
|
|
973,000 |
|
|
|
726,000 |
|
Realty |
|
Lease Commissions |
|
|
385,000 |
|
|
|
77,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,421,000 |
|
|
$ |
3,063,000 |
|
|
|
|
|
|
|
|
|
|
13. Redeemable Noncontrolling Interest of Limited Partners
As of September 30, 2009 and December 31, 2008, we owned greater than a 99.99% general
partnership interest in our operating partnership. Our former advisor is a limited partner of our
operating partnership and as of September 30, 2009 and December 31, 2008, owned less than a 0.01%
limited partnership interest in our operating partnership. As such, less than 0.01% of the earnings
of our operating partnership are allocated to redeemable noncontrolling interest of limited
partners.
As of September 30, 2009 and December 31, 2008, we owned an 80.0% interest in the JV Company
that owns Chesterfield Rehabilitation Center, which was purchased on December 20, 2007. As of
September 30, 2009 and December 31, 2008, the balance was comprised of the noncontrolling
interests initial contribution, 20.0% of the earnings at Chesterfield Rehabilitation Center, and
accretion of the change in the redemption value over the period from the purchase date to January
1, 2011, the earliest redemption date.
Redeemable noncontrolling interests are accounted for in accordance with ASC 480,
Distinguishing Liabilities From Equity (ASC 480) at the greater of their carrying amount or
redemption value at the end of each reporting period. Changes in the redemption value from the
purchase date to the earliest redemption date are accreted using the straight-line method. The
redemption value as of September 30, 2009 and December 31, 2008 was $2,905,000. As of September 30,
2009 and December 31, 2008, redeemable noncontrolling interest of limited partners was $2,468,000
and $1,951,000, respectively. Below is a table reflecting the activity of the redeemable
noncontrolling interests.
23
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
3,091,000 |
|
Net income attributable to noncontrolling interest of limited partners |
|
|
157,000 |
|
Distributions |
|
|
(235,000 |
) |
Purchase price allocation adjustment |
|
|
(883,000 |
) |
|
|
|
|
Balance as of September 30, 2008 |
|
$ |
2,130,000 |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
1,951,000 |
|
Net income attributable to noncontrolling interest of limited partners |
|
|
241,000 |
|
Distributions |
|
|
(290,000 |
) |
Adjustment to noncontrolling interests |
|
|
566,000 |
|
|
|
|
|
Balance as of September 30, 2009 |
|
$ |
2,468,000 |
|
|
|
|
|
14. Stockholders Equity
Common Stock
In April 2006, our former advisor purchased 200 shares of our common stock for total cash
consideration of $2,000 and was admitted as our initial stockholder. Through September 30, 2009, we
granted an aggregate of 255,000 shares of restricted common stock to our independent directors,
Chief Executive Officer, Chief Accounting Officer and Executive VP Acquisitions pursuant to the
terms and conditions of our 2006 Incentive Plan and Employment Agreements described below. Through
September 30, 2009, we issued 127,100,943 shares of our common stock in connection with our initial
offering and 4,467,204 shares of our common stock under the DRIP, and repurchased 900,860 shares of
our common stock under our share repurchase plan. As of September 30, 2009 and December 31, 2008,
we had 130,857,487 and 75,465,437 shares of our common stock outstanding, respectively.
Pursuant to our initial offering, we are offering and selling to the public up to 200,000,000
shares of our $0.01 par value common stock for $10.00 per share and up to 21,052,632 shares of our
$0.01 par value common stock to be issued pursuant to the DRIP at $9.50 per share. Our charter
authorizes us to issue 1,000,000,000 shares of our common stock.
Preferred Stock
Our charter authorizes us to issue 200,000,000 shares of our $0.01 par value preferred stock.
As of September 30, 2009 and December 31, 2008, no shares of preferred stock were issued and
outstanding.
Distribution Reinvestment Plan
We adopted the DRIP, which allows stockholders to purchase additional shares of our common
stock through the reinvestment of distributions, subject to certain conditions. We registered and
reserved 21,052,632 shares of our common stock for sale pursuant to the DRIP in our initial
offering. For the three months ended September 30, 2009 and 2008, $10,884,000 and $3,573,000,
respectively, in distributions were reinvested and 1,145,699 and 376,084 shares of our common
stock, respectively, were issued under the DRIP. For the nine months ended September 30, 2009 and
2008, $26,666,000 and $7,907,000, respectively, in distributions were reinvested and 2,807,028 and
832,339 shares of our common stock, respectively, were issued under the DRIP. As of September 30,
2009 and December 31, 2008, a total of $42,438,000 and $15,772,000, respectively, in distributions
were reinvested and 4,467,204 and 1,660,176 shares of our common stock, respectively, were issued
under the DRIP.
Share Repurchase Plan
Our board of directors has approved a share repurchase plan. On August 24, 2006, we received
SEC exemptive relief from rules restricting issuer purchases during distributions. The share
repurchase plan allows for share repurchases by us upon request by stockholders when certain
criteria are met by the requesting stockholders. Share repurchases will be made at the sole
discretion of our board of directors. Funds for the repurchase of shares will come exclusively from
the proceeds we receive from the sale of shares under the DRIP.
Our board of directors adopted and approved certain amendments to our share repurchase plan
which became effective August 25, 2008. The primary purpose of the amendments was to provide
stockholders with the opportunity to have their shares of our common stock redeemed, at the sole
discretion of our board of directors, during the period we are engaged in a public offering at
increasing prices based upon the period of time the shares of common stock have been continuously
held. Under the amended share repurchase
plan, redemption prices range from $9.25 per share, or 92.5% of the price paid per share,
following a one year holding period to an
24
amount equal to not less than 100% of the price paid per
share following a four year holding period. Under the previous share repurchase plan, stockholders
could only request to have their shares of our common stock redeemed at $9.00 per share during the
period we are engaged in a public offering.
For the three months ended September 30, 2009 and 2008, we repurchased 384,727 shares of our
common stock, for an aggregate amount of $3,676,000, and 31,156 shares of our common stock, for
$311,000, respectively. For the nine months ended September 30, 2009 and 2008, we repurchased
791,112 shares of our common stock, for an aggregate amount of $7,528,000 and 63,426 shares of our
common stock, for an aggregate amount of $634,000, respectively. As of September 30, 2009 and
December 31, 2008, we had repurchased 900,860 shares of our common stock, for an aggregate amount
of $8,605,000, and 109,748 shares of our common stock, for an aggregate amount of $1,077,000,
respectively.
2006 Incentive Plan, Employment Agreements and Independent Directors Compensation Plan
Under the terms of the NNN Healthcare/Office REIT, Inc. 2006 Incentive Plan, or the 2006
Incentive Plan, the aggregate number of shares of our common stock subject to options, shares of
restricted common stock, restricted stock units, stock purchase rights, stock appreciation rights
or other awards, including those issuable under its sub-plan, the 2006 Independent Directors
Compensation Plan, will be no more than 2,000,000 shares. On December 30, 2008, we amended the 2006
Independent Directors Compensation Plan as follows, which amendments became effective on January 1,
2009:
|
|
|
Annual Retainer. The annual retainer for independent directors was increased to
$50,000. |
|
|
|
Annual Retainer, Committee Chairman. The chairman of each committee of the board of
directors (including the audit committee, the compensation committee, the risk
management committee, the nominating and corporate governance committee and the
investment committee) will receive an additional annual retainer of $7,500. |
|
|
|
Meeting Fees. The meeting fee for each board of directors meeting attended in person
or by telephone was increased from $1,000 to $1,500 and the meeting fee for each
committee meeting attended in person or by telephone was increased from $500 to $1,000. |
|
|
|
Equity Compensation. Each independent director will receive a grant of 5,000 shares
of restricted common stock upon each re-election to the board of directors, rather than
2,500 shares. |
Effective July 1, 2009, we entered into employment agreements with Scott D. Peters, the
Companys Chairman, Chief Executive Officer and President, Mark Engstrom, Executive Vice
President-Acquisitions, and Kellie Pruitt, Chief Accounting Officer. The employment agreement with
Mr. Peters replaces his 2008 employment agreement.
In 2006, 2007 and 2008, we granted an aggregate of 20,000, 17,500 and 12,500 shares,
respectively to our independent directors. In the third quarter of 2009 we also granted an
aggregate of 25,000 shares to our independent directors. Each of these restricted stock awards
vested 20.0% on the grant date and 20.0% will vest on each of the first four anniversaries of the
date of grant.
On November 14, 2008, we granted Mr. Peters 40,000 shares of restricted common stock under,
and pursuant to the terms and conditions of our 2006 Incentive Plan. The shares of restricted
common stock will vest and become non-forfeitable in equal annual installments of 33.3% each, on
the first, second and third anniversaries of the grant date. On July 1, 2009, we granted Mr. Peters
50,000 shares of fully vested stock under, and pursuant to the terms and conditions of our 2006
Incentive plan and revised employment agreement. On July 1, 2009, we also granted Mr. Peters
four annual awards of 100,000 shares of restricted common stock under, and pursuant to the terms and conditions of our
2006 Incentive plan and revised employment agreement. The shares awards will vest and become
non-forfeitable over approximately three years. The terms of the employment agreement allows Mr.
Peters to receive cash in lieu of stock for up to 50% of the grants awarded in 2009 at the time of
issuance at the common stock fair value on the grant date, which was exercised.
In the third quarter of 2009, we granted an aggregate of 65,000 shares of restricted common
stock units under, and pursuant to the terms and conditions of our 2006 Incentive plan and the
employment agreement of certain key employees. The shares of restricted common stock units will
vest and convert on a one-to-one basis into common stock shares in equal annual installments of
33.3% which will vest on each of the first three anniversaries of the date of grant.
The fair value of each share of restricted common stock and restricted common stock unit was
estimated at the date of grant at $10.00 per share, the per share price of shares in our initial
offering, and is amortized on a straight-line basis over the vesting period. Shares of restricted
common stock and restricted common stock units may not be sold, transferred, exchanged, assigned,
pledged,
hypothecated or otherwise encumbered. Such restrictions expire upon vesting. For the three
months ended September 30, 2009 and 2008, we recognized compensation expense of $544,000 and
$25,000, respectively, and for the nine months ended September 30, 2009 and
25
2008, we recognized
compensation expense of $660,000 and $88,000, respectively, related to the restricted common stock,
restricted common stock units. Such compensation expense is included in general and administrative
in our accompanying condensed consolidated statements of operations. Shares of restricted common
stock have full voting rights and rights to dividends. Shares of restricted common stock units do
not have voting rights or rights to dividends.
A portion of the Companys awards may be paid in cash in lieu of stock in accordance with the
respective employment agreement and vesting schedule of such awards. These awards are revalued
every reporting period end with the cash redemption liability reflected on our consolidated balance
sheets, if material. For the nine months ended September 30, 2009, approximately 37,500 shares were
settled in cash for approximately $375,000.
As of September 30, 2009 and December 31, 2008, there was approximately $5,131,000 and
$623,000, respectively, of total unrecognized compensation expense, related to nonvested shares of
restricted common stock and nonvested shares of restricted common stock units. This expense is
expected to be recognized over a remaining weighted average period of 2.7 years. As of September
30, 2009 and December 31, 2008, there was approximately $375,000 and $0, respectively, of total
unrecognized compensation expense, related to nonvested cash awards. This expense is expected to be
recognized over a remaining weighted average period of 2.7 years.
As of September 30, 2009 and December 31, 2008, the fair value of the nonvested shares of
restricted common stock and restricted common stock units was $4,820,000 and $685,000,
respectively. A summary of the status of the nonvested shares of restricted common stock and
restricted common stock units as of September 30, 2009 and December 31, 2008, and the changes for
the nine months ended September 30, 2009, is presented below:
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Weighted |
|
|
|
Common |
|
|
Average Grant |
|
|
|
Stock/Units |
|
|
Date Fair Value |
|
Balance December 31, 2008 |
|
|
68,500 |
|
|
$ |
10.00 |
|
Granted, net |
|
|
465,000 |
|
|
|
|
|
Vested |
|
|
(51,500 |
) |
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2009 |
|
|
482,000 |
|
|
$ |
10.00 |
|
|
|
|
|
|
|
|
Expected to vest September 30, 2009 |
|
|
482,000 |
|
|
$ |
10.00 |
|
|
|
|
|
|
|
|
15. Subordinated Participation Interest
On November 14, 2008, we entered into an amendment to the partnership agreement for
our operating partnership, or the Partnership Agreement Amendment. Pursuant to the
terms of the Partnership Agreement Amendment, our former advisor may elect to defer
its right, if applicable, to receive a subordinated distribution from our operating
partnership after the termination or expiration of the Advisory Agreement. Our former
advisor has provided us with evidence of its notice to us of its election to defer its right to
a subordinated distribution. Our former advisors right to receive any deferred
subordinated distribution is subject to a number of ongoing conditions. These conditions
include, without limitation, that our former advisor fully and reasonably cooperate with
us and our self management program during the course of our transition to self
management. Various issues have arisen with respect to whether our former advisor and
its affiliates have fully and reasonably cooperated with us and with our transition to self
management. We have communicated our positions to our former advisor regarding these
issues, which have not yet been resolved.
Upon termination or expiration of the Advisory Agreement, other than a termination by us for
cause, our former advisor may be entitled to receive a distribution from our operating partnership,
subject to a number of conditions, in an amount equal to 15.0% of the amount, if any, by which (1)
the fair market value of all of the assets of our operating partnership as of the date of the
termination (determined by appraisal), less any indebtedness secured by such assets, plus the
cumulative distributions made to us by our operating partnership from our inception through the
termination date, exceeds (2) the sum of the total amount of capital raised from stockholders (less
amounts paid to redeem shares pursuant to our share repurchase plan) plus an annual 8.0%
cumulative, non-compounded return on average invested capital through the termination date. As of
the expiration of our Advisory Agreement on September 20, 2009, no amounts were due based on the
aforementioned formula.
The Partnership Agreement provided that after the termination or expiration of the Advisory
Agreement, if there is a listing of our shares on a national securities exchange or a merger in
which our stockholders received in exchange for shares of our common stock shares of a company that
are tracked on a national securities exchange, our former advisor may be entitled to
receive a distribution from our operating partnership in an amount equal to 15.0% of the amount, if
any, by which (1) the fair market value of all of the assets of our operating partnership
(determined by appraisal as of the listing date or merger date, as applicable) owned as of the
termination or expiration of the Advisory Agreement, plus any assets acquired after such
termination or expiration for which our former advisor was entitled to receive an acquisition fee
(as described above under Note 12, Related Party Transactions), or the
26
Included Assets, less any indebtedness secured by the Included Assets, plus the
cumulative distributions made to us by our operating partnership to us and the limited partners who
received partnership units in connection with the acquisition of the Included Assets, from our
inception through the listing date or merger date, as applicable, exceeds (2) the sum of the total
amount of capital raised from stockholders and the capital value of partnership units issued in
connection with the acquisition of the Included Assets through the listing date or merger date, as
applicable, (excluding any capital raised after the completion of our initial offering less amounts
paid to redeem shares of our common stock pursuant to our share repurchase plan) plus an annual
8.0% cumulative, non-compounded return on average invested capital and the capital value of such
partnership units measured for the period from inception through the listing date or merger date,
as applicable.
In addition, the Partnership Agreement Amendment provided that after the termination or
expiration of the Advisory Agreement in the event of a liquidation or sale of all or substantially
all of the assets of the operating partnership, or another liquidity event, then our former advisor
may be entitled to receive a distribution from our operating partnership in an amount
equal to 15.0% of the net proceeds from the sale of the Included Assets, after subtracting
distributions to our stockholders and the limited partners who received partnership units in
connection with the acquisition of the Included Assets of: (1) their initial invested capital and
the capital value of such partnership units (less amounts paid to repurchase shares pursuant to our
share repurchase program) through the date of the other liquidity event plus (2) an annual 8.0%
cumulative, non-compounded return on such invested capital and the capital value of such
partnership units measured for the period from inception through the other liquidity event date. For the three months ended September 30, 2009 and 2008,
and for the nine months ended September 30, 2009 and 2008, we have not recorded any charges to
earnings related to the subordinated distribution.
16. Fair Value of Financial Instruments
ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is a
market-based measurement, as opposed to a transaction-specific measurement and most of the
provisions were effective for our consolidated financial statements beginning January 1, 2008.
Fair value is defined by ASC 820 as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement
date. Depending on the nature of the asset or liability, various techniques and assumptions can be
used to estimate the fair value. Financial assets and liabilities are measured using inputs from
three levels of the fair value hierarchy, as follows:
Level 1 Inputs are quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access at the measurement date. An active market is defined
as a market in which transactions for the assets or liabilities occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
Level 2 Inputs include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets or liabilities in markets that are not active
(markets with few transactions), inputs other than quoted prices that are observable for the asset
or liability (i.e., interest rates, yield curves, etc.), and inputs that derived principally from
or corroborated by observable market data correlation or other means (market corroborated inputs).
Level 3 Unobservable inputs, only used to the extent that observable inputs are not
available, reflect our assumptions about the pricing of an asset or liability.
ASC 825 requires disclosure of fair value of financial instruments in interim financial
statements as well as in annual financial statements.
We use fair value measurements to record fair value of certain assets and to estimate fair
value of financial instruments not recorded at fair value but required to be disclosed at fair
value.
27
Financial Instruments Reported at Fair Value
Cash and Cash Equivalents
We invest in money market funds which are classified within Level 1 of the fair value
hierarchy because they are valued using unadjusted quoted market prices in active markets for
identical securities. We also invest in short term maturity U.S. Treasury bills which are
classified within Level 1 of the fair value hierarchy because they are valued using unadjusted
quoted market prices in active markets for identical securities.
Derivative Financial Instruments
Currently, we use interest rate swaps to manage interest rate risk associated with floating
rate debt. The valuation of these instruments is determined using widely accepted valuation
techniques including discounted cash flow analysis on the expected cash flows of each derivative.
This analysis reflects the contractual terms of the derivatives, including the period to maturity,
and uses observable market-based inputs, including interest rate curves, foreign exchange rates,
and implied volatilities. The fair values of interest rate swaps are determined using the market
standard methodology of netting the discounted future fixed cash payments and the discounted
expected variable cash receipts. The variable cash receipts are based on an expectation of future
interest rates (forward curves) derived from observable market interest rate curves.
To comply with ASC 820, we incorporate credit valuation adjustments to appropriately reflect
both our own nonperformance risk and the respective counterpartys nonperformance risk in the fair
value measurements. In adjusting the fair value of our derivative contracts for the effect of
nonperformance risk, we have considered the impact of netting and any applicable credit
enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall
within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our
derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by us and our counterparties. However, as of September 30, 2009, we have
assessed the significance of the impact of the credit valuation adjustments on the overall
valuation of our derivative positions and have determined that the credit valuation adjustments are
not significant to the overall valuation of our derivatives. As a result, we have determined that
our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Assets and Liabilities at Fair Value
The table below presents our assets and liabilities measured at fair value on a recurring
basis as of September 30, 2009, aggregated by the level in the fair value hierarchy within which
those measurements fall.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for |
|
|
|
|
|
|
|
|
|
|
|
|
Identical Assets |
|
|
Significant Other |
|
|
Significant |
|
|
|
|
|
|
and Liabilities |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
|
$ |
43,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
43,000 |
|
U.S. Treasury Bills |
|
|
201,998,000 |
|
|
|
|
|
|
|
|
|
|
|
201,998,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value |
|
$ |
202,041,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
202,041,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments |
|
$ |
|
|
|
$ |
(10,791,000 |
) |
|
$ |
|
|
|
$ |
(10,791,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities at fair value |
|
$ |
|
|
|
$ |
(10,791,000 |
) |
|
$ |
|
|
|
$ |
(10,791,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments Disclosed at Fair Value
ASC 825 requires disclosure of the fair value of financial instruments, whether or not
recognized on the face of the balance sheet. Fair value is defined under ASC 820.
Our accompanying consolidated balance sheets include the following financial instruments: real
estate notes receivable, net, cash and cash equivalents, restricted cash, accounts and other
receivables, net, accounts payable and accrued liabilities, accounts payable due to affiliates,
net, mortgage loans payable, net and borrowings under the line of credit.
We consider the carrying values of cash and cash equivalents, restricted cash, accounts and
other receivables, net, and accounts payable and accrued liabilities to approximate fair value for
these financial instruments because of the short period of time between origination of the
instruments and their expected realization. The fair value of accounts payable due to affiliates,
net, is not determinable due to the related party nature.
28
The fair value of the mortgage loan payable is estimated using borrowing rates available to us
for mortgage loans payable with similar terms and maturities. As of September 30, 2009, the fair
value of the mortgage loans payable was $446,209,000, compared to the gross value of
$453,614,000. As of December 31, 2008, the fair value of the mortgage loans payable was
$456,606,000, compared to the gross value of $462,542,000.
The fair value of our notes receivable, net is estimated based on expected interest rates for
notes to similar borrowers with similar terms and remaining maturities rates. As of September 30,
2009, the fair value of the note receivable was $20,022,000, compared to the carrying value of
$20,000,000. As of December 31, 2008, the fair value of our notes receivable, net reasonably
approximated fair value
17. Business Combinations
For the nine months ended September 30, 2009, we completed the acquisition of three properties
and three office condominiums related to an existing property in our portfolio, adding a total of
approximately 1,191,000 square feet of GLA to our property portfolio. The aggregate purchase price
was $240,324,000 plus closing costs of $8,560,000. See Note 3, Real Estate Investments, for a
listing of the properties acquired and the dates of acquisition. Revenues and net income (loss) for
the property acquisitions for the periods subsequent to the acquisition dates were $2,507,000 and
$(3,134,000), respectively, for the three months ended September 30, 2009. Revenues and net income
(loss) for the property acquisitions for the periods subsequent to the acquisition date were
$3,896,000 and $(4,342,000), respectively, for the nine months ended September 30, 2009. Results of
operations are reflected in our condensed consolidated statements of operations.
In accordance with ASC 805, we allocated the purchase price to the fair value of the assets
acquired and the liabilities assumed including allocating to the intangibles associated with the in
place leases, considering the following factors: lease origination costs and tenant relationships.
Certain allocations as of September 30, 2009 are subject to change based on information received
within one year of the purchase date related to one or more events at the time of purchase which
confirm the value of an asset acquired or a liability assumed in an acquisition of a property. As
of September 30, 2009, the aggregate purchase price was allocated in the amount of $7,508,000 to
land, $179,273,000 to building and improvements, $16,657,000 to tenant improvements, $21,817,000 to
lease commissions, $14,220,000 to tenant relationships, $212,000 to leasehold interest in land,
$662,000 to above market leases and $(25,000) to below market leases.
Assuming the property acquisitions discussed above had occurred on January 1, 2009, for the
three months ended September 30, 2009, pro forma revenues, net income (loss) and net income (loss)
per basic and diluted share would have been $33,754,000, $(8,280,000)
and $(0.07), respectively,
and for the nine months ended September 30, 2009, pro forma revenues, net income (loss) and net
income (loss) per basic and diluted share would have been
$102,179,000, $(12,798,000) and $(0.12),
respectively.
Assuming the property acquisitions discussed above had occurred on January 1, 2008, for the
three months ended September 30, 2008, pro forma revenues, net income (loss) and net income (loss)
per basic and diluted share would have been $30,015,000, $(2,379,000)
and $(0.05), respectively,
and for the nine months ended September 30, 2008, pro forma revenues, net income (loss) and net
income (loss) per basic and diluted share would have been
$68,719,000, $(5,134,000) and $(0.15) ,
respectively.
The pro forma results are not necessarily indicative of the operating results that would have
been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
18. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash and cash equivalents, restricted cash and accounts receivable from tenants. As of
September 30, 2009 and December 31, 2008, we had cash and cash equivalent and restricted cash
accounts in excess of Federal Deposit Insurance Corporation, or FDIC, insured limits. We believe
this risk is not significant. Concentration of credit risk with respect to accounts receivable from
tenants is limited. We perform credit evaluations of prospective tenants, and security deposits are
obtained upon lease execution. In addition, we evaluate tenants in connection with the acquisition
of a property.
For the nine months ended September 30, 2009, we had interests in seven consolidated
properties located in Texas, which accounted for 16.3% of our total rental income and interests in
five consolidated properties located in Indiana, which accounted for
29
13.9% of our total rental income. This rental income is based on contractual base rent from
leases in effect as of September 30, 2009. Accordingly, there is a geographic concentration of risk
subject to fluctuations in each states economy.
For the nine months ended September 30, 2008, we had interests in five consolidated properties
located in Indiana which accounted for 16.9% of our total rental income and interests in six
consolidated properties located in Texas which accounted for 13.3% of our total rental income.
Medical Portfolio 3, located in Indiana, accounted for 12.4% of our total rental income. This
rental income is based on contractual base rent from leases in effect as of September 30, 2008.
Accordingly, there is a geographic concentration of risk subject to fluctuations in each states
economy.
For the nine months ended September 30, 2009 and 2008, respectively, none of our tenants at
our consolidated properties accounted for 10.0% or more of our aggregate annual rental income.
19. Per Share Data
We report earnings (loss) per share pursuant to ASC 260. In January 2009, we adopted the provisions
of FSP EITF No. 03-6-1, primarily codified into ASC 260 on a prospective basis, which requires us
to include unvested share-based payment awards that contain non-forfeitable rights to dividends or
dividend equivalents as participating securities in the computation of basic and diluted income
per share pursuant to the two-class method as described in ASC 260.
Basic earnings (loss) per share attributable for all periods presented are computed by
dividing net income (loss) by the weighted average number of shares of our common stock outstanding
during the period. Diluted earnings (loss) per share are computed based on the weighted average
number of shares of our common stock and all potentially dilutive securities, if any. As of
September 30, 2009 and 2008, we did not have any securities that give rise to potentially dilutive
shares of our common stock.
20. Subsequent Events
We evaluated subsequent events through the time of filing this quarterly Report on Form 10-Q
on November 16, 2009. The significant events that occurred subsequent to the balance sheet date but
prior to the filing of this report that would have a material impact on the consolidated financial
statements are summarized below.
On October 23, 2009, we entered into a Purchase and Sale Agreement with Roskamp Management
Company, LLC for the purchase of a 17 property portfolio in Sun City and Sun City West, Arizona.
The acquisition is subject to a number of conditions. The portfolio consists of approximately
641,000 rentable square feet in the aggregate. The purchase price for the portfolio is
$107,000,000.
On
October 27, 2009, we entered into a letter of intent with the owner of the Rush Medical
Avenue Building located at Rush Oak Park Hospital in Oak Park, Illinois. The parties
are negotiating a series of agreements, consistent with the letter of intent.
On November 6, 2009, we entered into a Purchase and Sale Agreement with Rocky Mountain MOB,
LLC for the purchase of a medical office building located in Englewood, Colorado. The acquisition
is subject to a number of conditions. The medical office building consists of approximately 66,339
rentable square feet. The purchase price for the medical office building is approximately
$18,600,000.
On November 11, 2009, we entered into a Purchase and Sale Agreement with Spartanburg Investors
Limited Partnership for the purchase of a medical office building located in Spartanburg, South
Carolina. The closing of the acquisition is subject to a number of conditions. The medical office
building consists of approximately 108,500 rentable square feet. The purchase price for the medical
office building is approximately $16,250,000.
On November 12, 2009, we entered into a Purchase and Sale Agreement with GS Associates LLLP
for the purchase of a medical office building located in Baltimore, Maryland. The closing of
the acquisition is subject to a number of conditions. The professional office building consists of
approximately 62,000 rentable square feet. The purchase price for the medical office building is
approximately $11,250,000.
In
November 2009, we entered into agreements with three life insurance
companies to secure long-term mortgage notes payable for a total of
$72,000,000. The mortgage notes payable have an average interest rate
of 6.25% for an average term of 7.4 years and will be secured by
certain assets in the Greenville Hospital System portfolio.
Status of our Initial Offering
As of November 16, 2009, we had received and accepted subscriptions in our initial offering
for approximately 119,800,000 shares of our common stock, or approximately $1,195,500,000,
excluding shares of our common stock issued under the DRIP.
30
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us or our refers to Healthcare Trust of America, Inc. and its
subsidiaries, including Healthcare Trust of America Holdings, LP except where the context otherwise
requires.
The following discussion should be read in conjunction with our accompanying interim
consolidated financial statements and notes appearing elsewhere in this Quarterly Report on Form
10-Q. Such interim consolidated financial statements and information have been prepared to reflect
our financial position as of September 30, 2009 and December 31, 2008, together with our results of
operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the
nine months ended September 30, 2009 and 2008.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ
materially from those included in the forward-looking statements. We intend those forward-looking
statements to be covered by the safe-harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes
of complying with those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on our operations and future prospects on a consolidated basis include, but are not limited
to: changes in economic conditions generally and the real estate market specifically; legislative
and regulatory changes, including changes to healthcare laws and laws governing the taxation of
real estate investment trusts, or REITs; the availability of capital; changes in interest rates;
competition in the real estate industry; the supply and demand for operating properties in our
proposed market areas; changes in accounting principles generally accepted in the United States of
America, or GAAP; policies and guidelines applicable to REITs; the availability of properties to
acquire; and the availability of financing. These risks and uncertainties should be considered in
evaluating forward-looking statements and undue reliance should not be placed on such statements.
Additional information concerning us and our business, including additional factors that could
materially affect our financial results, is included herein and in our other filings with the
United States Securities and Exchange Commission, or the SEC.
Overview and Background
Healthcare Trust of America, Inc., a Maryland corporation, was incorporated on April 20, 2006.
We were initially capitalized on April 28, 2006, and therefore, we consider that our date of
inception. We provide stockholders the potential for income and growth through investment in a
diversified portfolio of real estate properties, focusing primarily on medical office buildings and
healthcare related facilities. We have also invested to a limited extent in quality commercial
office properties and other real estate related assets. However, we do not intend to invest more
than 15.0% of our total assets in other real estate related assets. We focus primarily on
investments that produce current income. We qualified and elected to be taxed as a REIT for federal
income tax purposes and we intend to continue to be taxed as a REIT.
We are conducting a best efforts initial public offering, or our initial offering, in which we
are offering up to 200,000,000 shares of our common stock for $10.00 per share and up to 21,052,632
shares of our common stock pursuant to our distribution reinvestment plan, or the DRIP, at $9.50
per share, aggregating up to $2,200,000,000. The initial offering is currently scheduled to expire
upon the earlier of March 19, 2010, or the date on which the maximum offering has been sold. As of
September 30, 2009, we had received and accepted subscriptions in our initial offering for
127,100,943 shares of our common stock, or $1,268,416,000, excluding shares of our common stock
issued under the DRIP.
On April 6, 2009, we filed a Registration Statement on Form S-11 with the SEC with respect to
a proposed follow-on public offering, or our follow-on offering, of up to 221,052,632 shares of our
common stock. Our follow-on offering would include up to 200,000,000 shares of our common stock to
be offered for sale at $10.00 per share and up to 21,052,632 shares of our common stock to be
offered for sale pursuant to the DRIP at $9.50 per share. We have not issued any shares under this
registration statement as it has not been declared effective by the SEC.
31
As of October 31, 2009, we had received and accepted subscriptions in our initial offering for
129,993,535 shares of our common stock, or $1,297,082,000, excluding shares of our common stock
issued under the DRIP.
We conduct substantially all of our operations through Healthcare Trust of America Holdings,
LP, or our operating partnership. Our internal management team manages our day-to-day operations
and oversees and supervises our employees and outside service providers. We were formerly advised
by Grubb & Ellis Healthcare REIT Advisor, LLC, or our former advisor, under the terms of an
advisory agreement, effective as of October 24, 2008 and as amended and restated on November 13,
2008, or the Advisory Agreement, between us, our former advisor and Grubb & Ellis Realty Investors,
LLC, or Realty, who is the managing member of our former advisor. The Advisory Agreement expired
on September 20, 2009.
Our former advisor engaged affiliated entities, including, but not limited to Triple Net
Properties Realty, Inc., or Realty, and Grubb & Ellis Management Services, Inc., that provided
various services to us, including, but not limited to, property management and leasing services. On
July 28, 2009, we entered into property management and leasing agreements with the following
companies, each to manage a specific geographic region: CB Richard Ellis, PM Realty Group, Hokanson
Companies, The Plaza Companies, and Nath Companies. On August 31, 2009, each of our subsidiaries
terminated its management agreement with Realty.
Upon the effectiveness of our initial offering, we entered into a dealer manager agreement
with Grubb & Ellis Securities, Inc., or Grubb & Ellis Securities, pursuant to the dealer manager
agreement that we would proceed with a dealer manager transition pursuant to which Grubb & Ellis
Securities would cease to service as our dealer manager for our initial offering at the end of the
day on August 28, 2009. Commencing August 29, 2009, Realty Capital Securities, LLC, or RCS,
assumed the role of dealer manager for the remainder of the offering period pursuant to the terms
of a dealer manager agreement. We entered into a services agreement on April 3, 2009 with American
Realty Capital II, LLC, an affiliate of RCS, relating to the provision of certain consulting
services to us as well as making available to us certain backup support services. This services
agreement was amended on August 17, 2009 to delay its effective date until December 1, 2009.
As of November 16, 2009, we had made 45 geographically diverse acquisitions
for a total purchase price of $1,206,740,000 which includes 154 buildings and other real
estate related assets.
Transition to Self-Management
Our main objectives in amending the Advisory Agreement were to reduce acquisition and asset
management fees, eliminate internalization fees and to set the framework for our transition to
self-management. We started our transition to self-management in the fourth quarter of 2008. This
transition is complete and we consider ourselves to be self-managed. We conducted a review of
advisory services and dealer manager services previously provided by our former advisor and former
dealer manager, to ensure that such services are consistent with applicable agreements and
standards. In addition, we are actively monitoring, and are engaged in ongoing discussions with,
both the former advisor and former dealer manager to resolve any issues as they arise and to ensure
compliance with their transition-related obligations under applicable agreements. The Advisory
Agreement expired on September 20, 2009.
Management Team. In July 2008, Scott D. Peters assumed the positions of President and Chief
Executive officer of our company on a full-time and exclusive basis. This was the first major step
toward self-management. We began our transition to complete self-management in November of 2008
when we amended and restated our Advisory Agreement on November 14, 2008. We have assembled a
highly qualified and experienced management team which is focused on efficiency and performance to
increase stockholder value. Our internal management team includes (1) Mr. Peters, our President and
Chief Executive Officer, (2) Kellie S. Pruitt, our Chief Accounting Officer, Treasurer and
Secretary, (3) Mark Engstrom, our Executive Vice President Acquisitions, (4) Christopher Balish,
our Senior Vice President Asset Management and (5) Kelly Hogan, our Controller and Assistant
Secretary. We believe that our management team has the experience and expertise to efficiently and
effectively operate our company.
We have 25 employees, including 12 in our corporate and property accounting team, five in our
asset management team and three on our acquisition team. We have engaged nationally recognized
property management groups to perform property management services at the direction of our asset
management team. In addition and where cost beneficial, we have outsourced certain
administrative-related services to third party service providers. Our internal management team
manages our day-to-day operations,
oversees our employees and closely supervises the services provided to us by our third party
service providers, who are retained on an as needed basis. All key personnel report directly to Mr.
Peters.
32
Governance. An integral part of our self-management program is our experienced board of
directors. Our board of directors provides effective ongoing governance for our company and has
spent a substantial amount of time overseeing our transition to self-management. Our governance and
management framework is one of our key strengths.
Significantly Reduced Cost. From inception through September 30, 2009, we incurred to our
former advisor and its affiliates approximately $34,487,000 in acquisition fees; approximately
$11,550,000 in asset management fees; approximately $5,252,000 in property management fees; and
approximately $2,145,000 in leasing fees. We expect third party expenses associated with property management and
third party acquisition expenses, including legal fees, due diligence fees and closing costs, to
remain approximately the same as under external management. We believe that the total cost of
self-management will be substantially less than the cost of external management. While our board of
directors, including a majority of our independent directors, previously determined that the fees
to our former advisor were fair, competitive and commercially reasonable to us and on terms and
conditions not less favorable to us than those available from unaffiliated third parties based on
circumstances at that time, we now believe that by having our own employees manage our operations and retain third party providers, we will significantly reduce
our cost structure.
No Internalization Fees. Unlike many other non-listed REITs that internalize or pay to acquire
various management functions and personnel, such as advisory and asset management services, from
their sponsor or advisor prior to listing on a national securities exchange for substantial fees,
we will not be required to pay such fees under self-management. We believe that by not paying such
fees, as well as operating more cost-effectively under self-management, we will save a substantial
amount of money. To the extent that our management and board of directors determine that utilizing
third party service providers for certain services is more cost-effective than conducting such
services internally, we will pay for these services based on negotiated terms and conditions
consistent with the current marketplace for such services on an as-needed basis.
Funding of Self-Management. We believe that the cost of self-management will be substantially
less than the cost of external management. Therefore, although we incurred additional costs in 2009
related to our implementation of our self-management program, we expect the cost of self-management
to be more than funded by future cost savings. Pursuant to the November 14, 2008 amendment to the
Advisory Agreement, we reduced acquisition fees and asset management fees payable to our former
advisor, which resulted in substantial cost savings. In addition, we anticipate that we
will achieve further cost savings in the future as a result of reduced and/or eliminated
acquisition fees, liquidation fees, asset management fees, internalization fees and other outside
fees.
Dedicated Management and Increased Accountability. Under self-management, our officers and
employees work only for our company and are not be associated with any outside advisor or other
third party service provider. Our management team, led by Mr. Peters, has direct oversight of
employees, independent consultants and third party service providers on an ongoing basis. We
believe that these direct reporting relationships along with our performance-based compensation
programs and ongoing oversight by our management team create an environment for and will achieve
increased accountability and efficiency.
Conflicts of Interest. We believe that self-management works to remove inherent conflicts of
interest that necessarily exist between an externally advised REIT and its advisor. The elimination
or reduction of these inherent conflicts of interest is one of the major reasons that we elected to
proceed with the self-management program.
Our principal executive offices are located at 16427 N. Scottsdale Road, Suite 440,
Scottsdale, Arizona, 85254 and the telephone number is (480) 998-3478. For investor services,
please contact DST Systems, Inc. by telephone at (888) 801-0107.
33
Recent Developments
On September 18, 2009, we completed our acquisition of 16 medical office buildings from
Greenville Hospital System and certain of its affiliates, or GHS, in the Greenville, South Carolina
area. The portfolio consists of approximately 856,000 rentable square feet, of which approximately
84.0% is leased by GHS. The purchase price for the portfolio was approximately $162,820,000.
On October 23, 2009, we entered into a Purchase and Sale Agreement with Roskamp Management
Company, LLC for the purchase of a 17 property portfolio in Sun City and Sun City West, Arizona.
The acquisition is subject to a number of conditions. The portfolio consists of approximately
641,000 rentable square feet in the aggregate. The purchase price for the portfolio is
$107,000,000.
On
October 27, 2009, we entered into a letter of intent with the owner of the Rush Medical
Avenue Building located at Rush Oak Park Hospital in Oak Park, Illinois. The parties
are negotiating a series of agreements, consistent with the letter of intent.
On November 6, 2009, we entered into a Purchase and Sale Agreement with Rocky Mountain MOB,
LLC for the purchase of a medical office building located in Englewood, Colorado. The acquisition
is subject to a number of conditions. The medical office building consists of approximately 66,339
rentable square feet. The purchase price for the medical office building is approximately
$18,600,000.
On November 11, 2009, we entered into a Purchase and Sale Agreement with Spartanburg Investors
Limited Partnership for the purchase of a medical office building located in Spartanburg, South
Carolina. The closing of the acquisition is subject to a number of conditions. The medical office
building consists of approximately 108,500 rentable square feet. The purchase price for the medical
office building is approximately $16,250,000.
On November 12, 2009, we entered into a Purchase and Sale Agreement with GS Associates LLLP
for the purchase of a medical office building located in Baltimore, Maryland. The closing of
the acquisition is subject to a number of conditions. The professional office building consists of
approximately 62,000 rentable square feet. The purchase price for the medical office building is
approximately $11,250,000.
In
November 2009, we entered into agreements with three life insurance
companies to secure long-term mortgage notes payable for a total of
$72,000,000. The mortgage notes payable have an average interest rate
of 6.25% for an average term of 7.4 years and will be secured by
certain assets in the Greenville Hospital System portfolio.
As of November 16, 2009, we had made 45 geographically diverse acquisitions comprising
6,341,000 square feet of gross leasable area, or GLA, which includes 154 buildings and one real estate related asset, for an
aggregate purchase price of $1,206,740,000.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2008
Annual Report on Form 10-K, as filed with the SEC on March 27, 2009, and there have been no
material changes to our Critical Accounting Policies as disclosed therein.
Interim Unaudited Financial Data
Our accompanying interim consolidated financial statements have been prepared by us in
accordance with GAAP in conjunction with the rules and regulations of the SEC. Certain information
and footnote disclosures required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, our accompanying interim consolidated financial
statements do not include all of the information and footnotes required by GAAP for complete
financial statements. Our accompanying interim consolidated financial statements reflect all
adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair
presentation of our financial position, results of operations and cash flows for the interim
period. Interim results of operations are not necessarily indicative of the results to be expected
for the full year; such results may be less favorable. Our accompanying interim consolidated
financial statements should be read in conjunction with our audited consolidated financial
statements and the notes thereto included in our 2008 Annual Report on Form 10-K, as filed with the
SEC on March 27, 2009.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies Recently Issued Accounting
Pronouncements, to our accompanying condensed consolidated financial statements, for a discussion
of recently issued accounting pronouncements.
Acquisitions in 2009
See Note 3, Real Estate Investments Acquisitions in 2009, to our accompanying condensed
consolidated financial statements, for a listing of the properties acquired and the dates of
acquisition.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, that may reasonably be expected to have a material
impact, favorable or unfavorable, on revenues or income from the acquisition, management and
operation of properties other than those listed in Part II, Item 1A of this report and those Risk
Factors previously disclosed in our 2008 Annual Report on Form 10-K, as filed with the SEC on March
27, 2009.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space and to lease currently available space and
space available from unscheduled lease terminations at the existing rental rates. Negative trends
in one or more of these factors could adversely affect our rental income in future periods.
Offering Proceeds
If we fail to continue to raise proceeds under our initial offering, we will be limited in our
ability to invest in a diversified real estate portfolio which could result in increased exposure
to local and regional economic downturns and the poor performance of one or more of our properties
and, therefore, expose our stockholders to increased risk. In addition, some of our general and
administrative expenses are fixed regardless of the size of our real estate portfolio. Therefore,
depending on the amount of initial offering proceeds
we raise, we would expend a larger portion of our income on operating expenses. This would
reduce our profitability and, in turn, the amount of net income available for distribution to our
stockholders.
34
Scheduled Lease Expirations
As of September 30, 2009, our consolidated properties were 90.4% occupied. Over the next 12
months, for the period ending September 30, 2010 8.3% of the occupied GLA will expire. Our leasing
strategy for 2009 focuses on negotiating renewals for leases scheduled to expire during the
remainder of the year. If we are unable to negotiate such renewals, we will try to identify new
tenants or collaborate with existing tenants who are seeking additional space to occupy. Of the
leases expiring in 2009, we anticipate, but cannot assure, that a majority of the tenants will
renew their leases for another term.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and related laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies, have increased the costs of compliance with corporate governance, reporting
and disclosure practices. These costs may have a material adverse effect on our results of
operations and could impact our ability to continue to pay distributions at current rates to our
stockholders. Furthermore, we expect that these costs will increase in the future due to our
continuing implementation of compliance programs mandated by these requirements. Any increased
costs may affect our ability to distribute funds to our stockholders. As part of our compliance
with the Sarbanes-Oxley Act, we provided managements assessment of our internal control over
financial reporting as of December 31, 2008 and continue to comply with such regulations.
The SEC has delayed the timing of when publicly reporting companies will begin complying with
the final portion of a key provision of a 2002 corporate governance law that requires companies to
report to the public about the effectiveness of their internal control over financial reporting.
This extension of time will expire beginning with the annual reports of companies with fiscal years
ending on or after June 15, 2010. This expiration date previously had been for fiscal years ending
on or after December 15, 2009. As a result, we will be required to obtain auditor attestation in
our fiscal year ending December 31, 2010.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in the event of
non-compliance, thereby increasing the risks of liability and potential sanctions against us. We
expect that our efforts to comply with these laws and regulations will continue to involve
significant and potentially increasing costs, and that our failure to comply with these laws could
result in fees, fines, penalties or administrative remedies against us.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
Our operating results are primarily comprised of income derived from our portfolio of
properties.
Except where otherwise noted, the change in our results of operations is due to owning 154
geographically diverse builidings and one real estate related asset as of September 30, 2009, as
compared to owning 129 geographically diverse builidngs and no real estate related assets as of
September 30, 2008.
Rental Income
For the three months ended September 30, 2009, rental income was $30,886,000 as compared to
$23,920,000 for the three months ended September 30, 2008. For the three months ended September 30,
2009, rental income was primarily comprised of base rent of $24,167,000 and expense recoveries of
$6,720,000. For the three months ended September 30, 2008, rental income was primarily comprised of
base rent of $18,316,000 and expense recoveries of $4,605,000.
For the nine months ended September 30, 2009, rental income was $89,914,000 as compared to
$53,310,000 for the nine months ended September 30, 2008. For the nine months ended September 30,
2009, rental income was primarily comprised of base rent of $68,842,000 and expense recoveries of
$21,072,000. For the nine months ended September 30, 2008, rental income was primarily comprised of
base rent of $21,894,000 and expense recoveries of $5,783,000.
35
Rental Expenses
For the three months ended September 30, 2009 and 2008, rental expenses were $10,494,000 and
$8,700,000, respectively. For the nine months ended September 30, 2009 and 2008, rental expenses
were $32,854,000 and $18,612,000, respectively. Rental expenses consisted of the following for the
periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Real estate taxes |
|
$ |
3,701,000 |
|
|
$ |
2,776,000 |
|
|
$ |
11,241,000 |
|
|
$ |
6,572,000 |
|
Building maintenance |
|
|
2,090,000 |
|
|
|
1,790,000 |
|
|
|
6,647,000 |
|
|
|
3,414,000 |
|
Utilities |
|
|
2,204,000 |
|
|
|
2,005,000 |
|
|
|
6,445,000 |
|
|
|
3,806,000 |
|
Property management fees |
|
|
734,000 |
|
|
|
758,000 |
|
|
|
2,506,000 |
|
|
|
1,597,000 |
|
Administration |
|
|
776,000 |
|
|
|
486,000 |
|
|
|
2,402,000 |
|
|
|
1,314,000 |
|
Grounds maintenance |
|
|
383,000 |
|
|
|
362,000 |
|
|
|
1,501,000 |
|
|
|
824,000 |
|
Non-recoverable operating expenses |
|
|
345,000 |
|
|
|
306,000 |
|
|
|
1,210,000 |
|
|
|
506,000 |
|
Insurance |
|
|
227,000 |
|
|
|
190,000 |
|
|
|
729,000 |
|
|
|
469,000 |
|
Other |
|
|
34,000 |
|
|
|
27,000 |
|
|
|
173,000 |
|
|
|
110,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rental expenses |
|
$ |
10,494,000 |
|
|
$ |
8,700,000 |
|
|
$ |
32,854,000 |
|
|
$ |
18,612,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and Administrative
For the three months ended September 30, 2009 and 2008, general and administrative was
$11,095,000 and $2,758,000, respectively, and for the nine months ended September 30, 2009 and
2008, general and administrative was $21,955,000 and $6,801,000, respectively. General and
administrative consisted of the following for the periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Acquisition-related costs |
|
$ |
5,920,000 |
(a) |
|
$ |
|
(a) |
|
$ |
9,100,000 |
(a) |
|
$ |
|
(a) |
Asset management fees |
|
|
1,196,000 |
(b) |
|
|
2,090,000 |
(b) |
|
|
3,783,000 |
(b) |
|
|
4,712,000 |
(b) |
Professional and legal fees |
|
|
712,000 |
(c) |
|
|
243,000 |
(c) |
|
|
2,410,000 |
(c) |
|
|
757,000 |
(c) |
Bad debt expense |
|
|
169,000 |
(d) |
|
|
129,000 |
(d) |
|
|
1,097,000 |
(d) |
|
|
359,000 |
(d) |
Salaries and benefits |
|
|
1,193,000 |
(e) |
|
|
|
(e) |
|
|
1,994,000 |
(e) |
|
|
|
(e) |
Directors fees |
|
|
134,000 |
(f) |
|
|
63,000 |
(f) |
|
|
436,000 |
(f) |
|
|
186,000 |
(f) |
Directors and officers insurance
premiums |
|
|
124,000 |
(g) |
|
|
58,000 |
(g) |
|
|
371,000 |
(g) |
|
|
174,000 |
(g) |
Bank charges |
|
|
64,000 |
|
|
|
30,000 |
|
|
|
201,000 |
|
|
|
53,000 |
|
Restricted stock compensation |
|
|
544,000 |
|
|
|
25,000 |
|
|
|
660,000 |
|
|
|
88,000 |
|
Investor services |
|
|
650,000 |
(h) |
|
|
31,000 |
(h) |
|
|
771,000 |
(h) |
|
|
88,000 |
(h) |
Postage |
|
|
79,000 |
|
|
|
22,000 |
|
|
|
194,000 |
|
|
|
129,000 |
|
Other |
|
|
310,000 |
|
|
|
67,000 |
|
|
|
938,000 |
|
|
|
255,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,095,000 |
|
|
$ |
2,758,000 |
|
|
$ |
21,955,000 |
|
|
$ |
6,801,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative of $8,337,000 and $15,154,000, respectively, for
the three and nine months ended September 30, 2009, as compared to the three and nine months ended
September 30, 2008, was due to the following:
|
(a) |
|
Acquisition-related costs of $5,920,000 and $9,100,000, respectively, were expensed as
incurred for acquisitions for the three and nine months ended September 30, 2009 in
accordance with ASC 805. Acquisition-related costs for the three and nine months ended
September 30, 2008 were capitalized and recorded as part of the purchase price allocations. |
36
|
(b) |
|
The decrease in the asset management fees for the three months ended September 30, 2009
as compared to the three months ended September 30, 2008 was due to a decrease of
approximately $1,346,000 resulting from the November 2008 amendment to the Advisory
Agreement and the termination of such agreement on September 20, 2009. This decrease is
offset by an increase of $452,000 resulting from the increase in the number of properties
and other real estate related assets discussed above. The decrease in the asset management
fees for the nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008 was due to a decrease of approximately $3,933,000 resulting from the
amendment to the Advisory Agreement offset by an increase of $3,004,000 resulting from the
increase in the number of properties and other real estate related assets discussed above.
Asset management fees are one-time, non-recurring costs for the three and nine months ended
September 30, 2009, which we were required to pay our former advisor through September 20,
2009. |
|
|
(c) |
|
The increase in professional and legal fees for the three and nine months ended
September 30, 2009 of $469,000 and $1,653,000, respectively, as compared to the three and
nine months ended September 30, 2008 was due to increased fees in connection with outside
consulting and legal costs, the majority of which are one-time, non-recurring costs for
among other things, our self-management program. |
|
|
(d) |
|
The increase in bad debt expense for the three and nine months ended September 30, 2009
as compared to the three and nine months ended September 30, 2008 was due to increased
tenant defaults during the three and nine months ended September 30, 2009 as a result of
operating more properties than during the three and nine months ended September 30, 2008. |
|
|
(e) |
|
The increase in salaries and benefits for the three and nine months ended September 30,
2009 of $1,193,000 and $1,994,000, respectively, as compared to the three and nine months
ended September 30, 2008 was due to an increase in the number of employees being hired for
the transition to self-management during the three and nine months ended September 30,
2009. We did not have any employees during the three and nine months ended September 30,
2008. |
|
|
(f) |
|
The increase in directors fees for the three and nine months ended September 30, 2009
of $71,000 and $250,000, respectively, as compared to the three and nine months ended
September 30, 2008 was due to an increased number of meetings and increased fees for these
meetings as a result of amending the 2006 Independent Directors Compensation Plan on
December 30, 2008 which became effective as of January 1, 2009. These amendments increased
the annual retainer for each director from $36,000 to $50,000, added an additional retainer
for each committee chairman of $7,500, increased the meeting fee from $1,000 to $1,500, and
increased the committee meeting fee from $500 to $1,000. |
|
|
(g) |
|
The increase in directors and officers insurance premiums for the three and nine
months ended September 30, 2009 of $66,000 and $197,000, respectively, as compared to the
three and nine months ended September 30, 2008 was due to increased premiums due to an
increase in coverage. |
|
|
(h) |
|
The increase in investor services for the three and nine months ended September 30,
2009 of $619,000 and $683,000, respectively, as compared to the three and nine months ended
September 30, 2008 was due to the increase in the number of stockholders as well as
one-time costs associated with the transition to DST Systems, Inc. as our transfer agent. |
Depreciation and Amortization
For the three months ended September 30, 2009 and 2008, depreciation and amortization was
$13,287,000 and $11,213,000, respectively, and for the nine months ended September 30, 2009 and
2008, depreciation and amortization was $39,231,000 and $24,905,000, respectively. Depreciation and
amortization consisted of the following for the periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Depreciation of properties |
|
$ |
8,178,000 |
|
|
$ |
6,139,000 |
|
|
$ |
23,390,000 |
|
|
$ |
13,566,000 |
|
Amortization of identified intangible assets |
|
|
4,964,000 |
|
|
|
5,043,000 |
|
|
|
15,578,000 |
|
|
|
11,280,000 |
|
Amortization of lease commissions |
|
|
136,000 |
|
|
|
31,000 |
|
|
|
247,000 |
|
|
|
59,000 |
|
Other assets |
|
|
9,000 |
|
|
|
|
|
|
|
16,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
13,287,000 |
|
|
$ |
11,213,000 |
|
|
$ |
39,231,000 |
|
|
$ |
24,905,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Interest Expense
For the three months ended September 30, 2009 and 2008, interest expense was $7,006,000 and
$6,939,000, respectively, and for the nine months ended September 30, 2009 and 2008, interest
expense was $18,644,000 and $14,888,000, respectively. Interest expense consisted of the following
for the periods then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Interest expense on our mortgage loans payable |
|
$ |
6,493,000 |
|
|
$ |
6,147,000 |
|
|
$ |
20,269,000 |
|
|
$ |
13,522,000 |
|
Interest expense on our unsecured note payable to affiliate |
|
|
|
|
|
|
1,000 |
|
|
|
|
|
|
|
2,000 |
|
(Gain) loss on derivative financial instruments |
|
|
(66,000 |
) |
|
|
310,000 |
|
|
|
(3,357,000 |
) |
|
|
414,000 |
|
Amortization of deferred financing fees associated with
our mortgage loans payable |
|
|
374,000 |
|
|
|
307,000 |
|
|
|
1,117,000 |
|
|
|
550,000 |
|
Amortization of deferred financing fees associated with
our line of credit |
|
|
95,000 |
|
|
|
96,000 |
|
|
|
286,000 |
|
|
|
281,000 |
|
Amortization of debt discount |
|
|
69,000 |
|
|
|
46,000 |
|
|
|
207,000 |
|
|
|
54,000 |
|
Unused line of credit fees |
|
|
41,000 |
|
|
|
32,000 |
|
|
|
122,000 |
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense |
|
$ |
7,006,000 |
|
|
$ |
6,939,000 |
|
|
$ |
18,644,000 |
|
|
$ |
14,888,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense for the three months ended September 30, 2009 as compared to
the three months ended September 30, 2008 was primarily due to an increase in our interest expense
on our mortgage loans payable due to an increase in average outstanding mortgage loans payable as
of September 30, 2009 compared to September 30, 2008. This increase was offset by a gain on
derivative financial instruments due to a non-cash mark to market adjustment we made on our
interest rate swaps of $(66,000) during the three months ended September 30, 2009 as compared to a
loss on derivative financial instruments of $310,000 during the three months ended September 30,
2008.
The increase in interest expense for the nine months ended September 30, 2009 as compared to
the nine months ended September 30, 2008 was primarily due to an increase in our interest expense
on our mortgage loans payable due to an increase in average outstanding mortgage loans payable as
of September 30, 2009 compared to September 30, 2008. This increase was offset by a gain on
derivative financial instruments due to a non-cash mark to market adjustment we made on our
interest rate swaps of $(3,357,000) during the nine months ended September 30, 2009 as compared to
a loss on derivative financial instruments of $414,000, during the nine months ended September 30,
2008.
We use interest rate swaps in order to minimize the impact to us of fluctuations in interest
rates. To achieve our objectives, we borrow at fixed rates and variable rates. We also enter into
derivative financial instruments such as interest rate swaps in order to mitigate our interest rate
risk on a related financial instrument. We do not enter into derivative or interest rate
transactions for speculative purposes. Derivatives not designated as hedges are not speculative and
are used to manage our exposure to interest rate movements.
Interest and Dividend Income
For the three months ended September 30, 2009, interest and dividend income was $60,000 as
compared to $52,000 for the three months ended September 30, 2008, and for the nine months ended
September 30, 2009, interest and dividend income was $233,000 as compared to $83,000 for the nine
months ended September 30, 2008. For the three and nine months ended September 30, 2009 and
2008, interest and dividend income was related primarily to interest earned on our money market
accounts and U.S. Treasury bills. The increase in interest and dividend income was due to
significantly higher cash balances for the three and nine months ended September 30, 2009 as
compared to the three and nine months ended September 30, 2008.
Liquidity and Capital Resources
We are dependent upon the net proceeds from our initial offering and operating cash flows from
properties to conduct our activities. Our ability to raise funds through our initial offering is
dependent on general economic conditions, general market conditions for REITs and our operating
performance. The capital required to purchase real estate and other real estate related assets is
obtained from our initial offering and from any indebtedness that we may incur.
Our principal demands for funds continue to be for acquisitions of real estate and other real
estate related assets, to pay operating expenses and interest on our outstanding indebtedness and
to make distributions to our stockholders.
38
Generally, cash needs for items other than acquisitions of real estate and other real estate
related assets continue to be met from operations borrowing, and the net proceeds of our initial
offering. We believe that these cash resources will be sufficient to satisfy our cash requirements
for the foreseeable future, and we do not anticipate a need to raise funds from other than these
sources within the next 12 months.
We evaluate potential additional investments and engage in negotiations with real estate
sellers, developers, brokers, investment managers, lenders and others. Until we invest the majority
of the proceeds of our initial offering in properties and other real estate related assets, we may
invest in short-term, highly liquid or other authorized investments. Such short-term investments
will not earn significant returns, and we cannot predict how long it will take to fully invest the
proceeds in real estate and other real estate related assets. The number of properties we may
acquire and other investments we will make will depend upon the number of our shares of our common
stock sold in our initial offering and the resulting amount of the net proceeds available for
investment. However, there may be a delay between the sale of shares of our common stock and our
investments in real estate and real estate related assets, which could result in a delay in the
benefits to our stockholders, if any, of returns generated from our investments operations.
When we acquire a property, we prepare a capital plan that contemplates the estimated capital
needs of that investment. In addition to operating expenses, capital needs may also include costs
of refurbishment, tenant improvements or other major capital expenditures. The capital plan also
sets forth the anticipated sources of the necessary capital, which may include a line of credit or
other loan established with respect to the investment, operating cash generated by the investment,
additional equity investments from us or joint venture partners or, when necessary, capital
reserves. Any capital reserve would be established from the gross proceeds of our initial offering,
proceeds from sales of other investments, operating cash generated by other investments or other
cash on hand. In some cases, a lender may require us to establish capital reserves for a particular
investment. The capital plan for each investment will be adjusted through ongoing, regular reviews
of our portfolio or as necessary to respond to unanticipated additional capital needs.
Other Liquidity Needs
In the event that there is a shortfall in net cash available due to various factors,
including, without limitation, the timing of distributions or the timing of the collections of
receivables, we may seek to obtain capital to pay distributions by means of secured or unsecured
debt financing through one or more third parties. We may also pay distributions from cash from
capital transactions, including, without limitation, the sale of one or more of our properties.
As of September 30, 2009, we estimate that our expenditures for capital improvements will
require up to approximately $870,000 for the remaining three months of 2009. As of September 30,
2009, we had $5,539,000 of restricted cash in loan impounds and reserve accounts for such capital
expenditures. We
cannot provide assurance, however, that we will not exceed these estimated expenditure and
distribution levels or be able to obtain additional sources of financing on commercially favorable
terms or at all.
If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of
asset sales, or increased capital expenditures and leasing costs compared to historical levels due
to competitive market conditions for new and renewal leases, the effect would be a reduction of net
cash provided by operating activities. If such a reduction of net cash provided by operating
activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net
cash available is based on various assumptions which are difficult to predict, including the levels
of leasing activity and related leasing costs. Any changes in these assumptions could impact our
financial results and our ability to fund working capital and unanticipated cash needs.
Cash Flows
Cash flows provided by operating activities for the nine months ended September 30, 2009 and
2008, were $15,968,000 and $15,633,000, respectively. For the nine months ended September 30, 2009,
cash flows provided by operating activities related primarily to operations from our 44
geographically diverse and one real estate related asset. For the nine months ended September 30,
2008, cash flows provided by operating activities related primarily to operations from our 39
geographically diverse properties. We anticipate cash flows from operating activities to continue
to increase as we purchase more properties.
Cash flows used in investing activities for the nine months ended September 30, 2009 and 2008,
were $255,256,000 and $455,571,000, respectively. For the nine months ended September 30, 2009,
cash flows used in investing activities related primarily to the acquisition of real estate
operating properties in the amount of $241,668,000. For the nine months ended September 30, 2008,
cash flows used in investing activities related primarily to the acquisition of real estate
operating properties in the amount of $448,852,000. We anticipate cash flows used in investing
activities to increase as we purchase more properties.
39
Cash flows provided by financing activities for the nine months ended September 30, 2009 and
2008, were $432,748,000 and $468,759,000, respectively. For the nine months ended September 30,
2009, cash flows provided by financing activities related primarily to funds raised from investors
in the amount of $533,303,000 and borrowings on mortgage loans payable of $1,696,000, the payment
of offering costs of $56,382,000 for our initial offering, distributions of $27,493,000 and
principal repayments of $10,624,000 on mortgage loans payable. Additional cash outflows related to
deferred financing costs of $60,000 in connection with the debt financing for our acquisitions. For
the nine months ended September 30, 2008, cash flows provided by financing activities related
primarily to funds raised from investors in the amount of $341,755,000 and borrowings on mortgage
loans payable of $227,695,000, partially offset by net payments under our secured revolving line of
credit with LaSalle and KeyBank of $51,801,000, the payment of offering costs of $34,153,000,
distributions of $9,274,000 and principal repayments of $1,217,000 on mortgage loans payable.
Additional cash outflows related to deferred financing costs of $3,497,000 in connection with the
debt financing for our acquisitions.
We anticipate cash flows from financing activities to increase in the future as we raise
additional funds from investors and incur additional debt to purchase properties.
Distributions
The amount of the distributions we pay to our stockholders is determined by our board of
directors and is dependent on a number of factors, including funds available for payment of
distributions, our financial condition, capital expenditure requirements and annual distribution
requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as
amended.
Our board of directors approved a 6.50% per annum, or $0.65 per common share, distribution to
be paid to our stockholders beginning on January 8, 2007, the date we reached our minimum offering
of $2,000,000. The first distribution was paid on February 15, 2007 for the period ended January
31, 2007.
The board of directors has declared distributions since February 2007 in the amount of 7.25%
per annum, or $0.725 per common share. Distributions are paid to our stockholders on a monthly
basis.
If distributions are in excess of our taxable income, such distributions will result in a
return of capital to our stockholders. Our distributions of amounts in excess of our taxable income
have resulted in a return of capital to our stockholders.
For the nine months ended September 30, 2009, we paid distributions of $54,159,000
($27,493,000 in cash and $26,666,000 in shares of our common stock pursuant to the DRIP), as
compared to cash flow from operations of $15,968,000. The distributions paid in excess of our cash
flow from operations were paid using proceeds from our initial offering.
For the three months ended September 30, 2009 and 2008, our funds from operations, or FFO,
were $3,092,000 and $5,477,000, respectively. As more fully described below under Funds From
Operations and Modified Funds From Operations, FFO was reduced by $8,731,000 and $2,657,000 for the
three months ended September 30, 2009 and 2008 for certain one-time, non-recurring charges, former
advisor fees, adjustments to fair market value of interest rate swaps, and acquisition-related
expenses. Acquisition costs were previously capitalized as part of the purchase price allocations
and have historically been added back to FFO over time through depreciation. For the three months
ended September 30, 2009 and 2008 we paid distributions of $21,908,000 and $7,716,000 respectively.
Such amounts were covered by FFO of $3,092,000 and $5,477,000, respectively, which is net of the
one-time, non-recurring charges, former advisor fees, acquisition-related expenses and noncash
adjustments to fair market value of interest rate swaps. The distributions paid in excess of our
FFO were paid using proceeds from our initial offering. Excluding one-time charges,
acquisition-related costs and adjustments to fair market value of interest rate swaps, FFO would
have been $11,823,000 and $8,134,000, respectively.
For the nine months ended September 30, 2009 and 2008, our FFO, was $18,504,000 and
$12,782,000, respectively. As more fully described below under Funds From Operations and Modified
Funds From Operations, FFO was reduced by $13,393,000 and $5,906,000 for the nine months ended
September 30, 2009 and 2008 for certain one-time, non-recurring charges, former advisor fees,
acquisition-related expenses and adjustments to fair market value of interest rate swaps.
Acquisition costs were previously capitalized as part of the purchase price allocations and have
historically been added back to FFO over time through depreciation. For the nine months ended
September 30, 2009 and 2008 we paid distributions of $54,159,000 and $17,181,000 respectively. Such
amounts were covered by FFO of $18,504,000 and $12,782,000, respectively, which is net of the
one-time, non recurring charges, former advisor fees, acquisition-related costs and adjustments to
fair market value of interest rate swaps. The distributions paid in excess of our FFO were paid
using proceeds from our initial offering. Excluding such one-time charges, former advisor fees,
acquisition-related costs and adjustments to fair market value of interest rate swaps, FFO would
have been $31,897,000 and $18,688,000, respectively. See our disclosure regarding Funds From
Operations and Modified Funds From Operations below.
40
Capital Resources
Financing
We anticipate that our aggregate borrowings, both secured and unsecured, will not exceed 60.0%
of all of our properties and other real estate related assets combined fair market values, as
determined at the end of each calendar year. For these purposes, the fair market value of each
asset will be equal to the purchase price paid for the asset or, if the asset was appraised
subsequent to the date of purchase, then the fair market value will be equal to the value reported
in the most recent independent appraisal of the asset. Our policies do not limit the amount we may
borrow with respect to any individual investment. As of September 30, 2009, our aggregate
borrowings were 39.0% of all of our properties and other real estate related assets combined fair
market values. Of the $122,731,000 of mortgage notes payable maturing in 2010, $64,596,000 have two
one-year extensions available and $53,940,000 have a one-year extension available. Of the
$201,690,000 of mortgage notes payable maturing in 2011, $179,985,000 have two one-year extensions
available. We anticipate utilizing the extensions available to us.
Our charter precludes us from borrowing in excess of 300% of the value of our net assets,
unless approved by a majority of our independent directors and the justification for such excess
borrowing is disclosed to our stockholders in our next quarterly report. For purposes of this
determination, net assets are our total assets, other than intangibles, calculated at cost before
deducting depreciation, bad debt and other similar non-cash reserves, less total liabilities and
computed at least quarterly on a consistently-applied basis. Generally, the preceding calculation
is expected to approximate 75.0% of the sum of the aggregate cost of our real estate and real
estate related assets before depreciation, amortization, bad debt and other similar non-cash
reserves. As of September 30, 2009, our leverage did not exceed 300% of the value of our net
assets.
Mortgage Loans Payable, Net
See Note 7, Mortgage Loans Payable, Net, to our accompanying condensed consolidated financial
statements, for a further discussion of our mortgage loans payable, net.
Line of Credit
See Note 9, Line of Credit, to our accompanying condensed consolidated financial statements,
for a further discussion of our line of credit.
REIT Requirements
In order to remain qualified as a REIT for federal income tax purposes, we are required to
make distributions to our stockholders of at least 90.0% of REIT taxable income. In the event that
there is a shortfall in net cash available due to factors including, without limitation, the timing
of such distributions or the timing of the collections of receivables, we may seek to obtain
capital to pay distributions by means of secured debt financing through one or more third parties.
We may also pay distributions from cash from capital transactions including, without limitation,
the sale of one or more of our properties.
Commitments and Contingencies
See Note 11, Commitments and Contingencies, to our accompanying condensed consolidated
financial statements, for a further discussion of our commitments and contingencies.
41
Debt Service Requirements
One of our principal liquidity needs is the payment of principal and interest on outstanding
indebtedness. As of September 30, 2009, we had fixed and variable rate mortgage loans payable in
the principal amount of $453,614,000 ($452,041,000, net of discount) outstanding secured by our
properties and there were no amounts outstanding under our secured revolving line of credit with
LaSalle and KeyBank. We are required by the terms of the applicable loan documents to meet certain
financial covenants, such as minimum net worth and liquidity amounts, and reporting requirements.
As of September 30, 2009, we believe that we were in compliance with all such covenants and
requirements on $426,414,000 of our mortgage loans payable and are making appropriate adjustments
to comply with such covenants on $27,200,000 of our mortgage loans payable by depositing $6,357,000
into a restricted collateral account.
As of September 30, 2009, the weighted average interest rate on our outstanding debt was 3.59%
per annum.
Contractual Obligations
The following table provides information with respect to the maturities and scheduled
principal repayments of our secured mortgage loans payable as of September 30, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
|
|
|
|
|
1 Year |
|
|
1-3 Years |
|
|
4-5 Years |
|
|
5 Years |
|
|
|
|
|
|
(2009) |
|
|
(2010-2011) |
|
|
(2012-2013) |
|
|
(After 2013) |
|
|
Total |
|
Principal payments fixed rate debt |
|
$ |
373,000 |
|
|
$ |
3,395,000 |
|
|
$ |
17,577,000 |
|
|
$ |
110,596,000 |
|
|
$ |
131,941,000 |
|
Interest payments fixed rate debt |
|
|
2,111,000 |
|
|
|
15,169,000 |
|
|
|
14,358,000 |
|
|
|
17,130,000 |
|
|
|
48,768,000 |
|
Principal payments variable rate debt |
|
|
647,000 |
|
|
|
321,026,000 |
|
|
|
|
|
|
|
|
|
|
|
321,673,000 |
|
Interest payments variable rate debt
(based on rates in effect as of
September 30, 2009) |
|
|
2,373,000 |
|
|
|
12,830,000 |
|
|
|
|
|
|
|
|
|
|
|
15,203,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,504,000 |
|
|
$ |
352,420,000 |
|
|
$ |
31,935,000 |
|
|
$ |
127,726,000 |
|
|
$ |
517,585,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above does not reflect all available extension options. Of the amounts maturing in
2010 and 2011, $244,581,000 have two one-year extensions available and $53,940,000 have a one-year
extension available.
Off-Balance Sheet Arrangements
As of September 30, 2009, we had no off-balance sheet transactions, nor do we currently have
any such arrangements or obligations.
Inflation
We are exposed to inflation risk as income from future long-term leases is the primary source
of our cash flows from operations. There are provisions in the majority of our tenant leases that
protect us from the impact of inflation. These provisions include rent steps, reimbursement
billings for operating expense pass-through charges, real estate tax and insurance reimbursements
on a per square foot allowance. However, due to the long-term nature of the leases, among other
factors, the leases may not re-set frequently enough to cover inflation.
Funds from Operations and Modified Funds from Operations
Due to certain unique operating characteristics of real estate companies, the National
Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a
measure known as Funds from Operations, or FFO, which it believes more accurately reflects the
operating performance of a REIT such as us. FFO is not equivalent to our net income or loss as
determined under GAAP.
We define FFO, a non-GAAP measure, consistent with the standards established by the White
Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004, or the
White Paper. The White Paper defines FFO as net income or loss computed in accordance with GAAP,
excluding gains or losses from sales of property but including asset impairment write downs, plus
depreciation and amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect
FFO.
42
The historical accounting convention used for real estate assets requires straight-line
depreciation of buildings and improvements, which implies that the value of real estate assets
diminishes predictably over time. Since real estate values historically rise and fall with market
conditions, presentations of operating results for a REIT, using historical accounting for
depreciation, could be less informative. The use of FFO is recommended by the REIT industry as a
supplemental performance measure.
Presentation of this information is intended to assist the reader in comparing the operating
performance of different REITs, although it should be noted that not all REITs calculate FFO the
same way, so comparisons with other REITs may not be meaningful. Factors that impact FFO include
non cash GAAP income and expenses, one-time non recurring costs, timing of acquisitions, yields on
cash held in accounts, income from portfolio properties and other portfolio assets, interest rates
on acquisition financing and operating expenses. Furthermore, FFO is not necessarily indicative of
cash flow available to fund cash needs and should not be considered as an alternative to net
income, as an indication of our liquidity, nor is it indicative of funds available to fund our cash
needs, including our ability to make distributions and should be reviewed in connection with other
measurements as an indication of our performance. Our FFO reporting complies with NAREITs policy
described above.
Changes in the accounting and reporting rules under GAAP have prompted a significant increase
in the amount of non-cash and non-operating items included in FFO, as defined. Therefore, we use
modified funds from operations, or MFFO, which excludes from FFO one-time, non recurring charges,
acquisition expenses, and adjustments to fair value for derivatives, to further evaluate our
operating performance. We believe that MFFO with these adjustments, like those already included in
FFO, are helpful as a measure of operating performance because it excludes costs that management
considers more reflective of investing activities or non-operating changes. We believe that MFFO
reflects the overall operating performance of our real estate portfolio, which is not immediately
apparent from reported net loss. As such, we believe MFFO, in addition to net loss and cash flows
from operating activities, each as defined by GAAP, is a meaningful supplemental performance
measure and is useful in understanding how our management evaluates our ongoing operating
performance. Management considers the following items in the calculation of MFFO:
Acquisition costs: Prior to 2009, acquisition costs were capitalized and have historically
been added back to FFO over time through depreciation; however, beginning in 2009, acquisition
costs related to business combinations are expensed. These acquisition costs have been and will
continue to be funded from the proceeds of our offering and not from operations. We believe by
excluding expensed acquisition costs, MFFO provides useful supplemental information that is
comparable for our real estate investments.
One-time, non recurring charges: FFO includes one-time charges related to the cost of our
transition to self-management. These items include, but are not limited to, additional legal
expenses, system conversion costs, non-recurring employment costs, and transitional property
management costs. Because MFFO excludes one-time costs, management believes MFFO provides useful
supplemental information by focusing on the changes in our fundamental operations that will be
comparable rather than on one-time, non-recurring costs.
Former Advisor Fees: FFO includes fees paid to our former advisor for asset management fees
and above market property management fees. These costs are duplicative to the costs of self
management. Due to our transition to self management, these costs will not be incurred after
September 20, 2009. Accordingly, management believes that MFFO should exclude such costs in order
to provide useful supplemental information to compare our fundamental operations to previous
periods as well as all future periods.
Adjustments to fair value for derivatives: In order to manage interest rate risk, we enter
into interest rate swaps to fix interest rates, which are derivative financial instruments. These
interest rate swaps are required to be recorded at fair market value, even if we have no intention
of terminating these instruments prior to their respective maturity dates. All interest rate swaps
are marked-to-market with changes in value included in net income (loss) each period until the
instrument matures. We have no intentions of terminating these instruments prior to their
respective maturity dates. The value of our interest rate swaps will fluctuate until the instrument
matures and will be zero upon maturity of the instruments. Therefore, any gains or losses on
derivative financial instruments will ultimately be reversed. See Note 8, Derivative Financial
Instruments, to our accompanying condensed consolidated financial statements, for a further
discussion of our derivative financial instruments. Management believes that MFFO provides
information on the realized costs of financing our assets independent of short-term interest rate
fluctuations.
43
The following is the calculation of FFO and MFFO for the three and nine months ended September
30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(10,074,000 |
) |
|
$ |
(5,638,000 |
) |
|
$ |
(20,409,000 |
) |
|
$ |
(11,813,000 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization consolidated properties |
|
|
13,287,000 |
|
|
|
11,213,000 |
|
|
|
39,231,000 |
|
|
|
24,905,000 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) loss attributable to noncontrolling
interest of limited partners |
|
|
(70,000 |
) |
|
|
(47,000 |
) |
|
|
(241,000 |
) |
|
|
(156,000 |
) |
Depreciation and amortization related to noncontrolling
interests |
|
|
(51,000 |
) |
|
|
(51,000 |
) |
|
|
(77,000 |
) |
|
|
(154,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO |
|
|
3,092,000 |
|
|
|
5,477,000 |
|
|
|
18,504,000 |
|
|
|
12,782,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition expenses |
|
|
5,920,000 |
|
|
|
|
|
|
|
9,100,000 |
|
|
|
|
|
One time charges |
|
|
1,112,000 |
|
|
|
|
|
|
|
1,973,000 |
|
|
|
|
|
Former Advisor fees |
|
|
1,765,000 |
|
|
|
2,657,000 |
|
|
|
5,677,000 |
|
|
|
5,906,000 |
|
(Gain) loss on interest rate swaps |
|
|
(66,000 |
) |
|
|
|
|
|
|
(3,357,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFFO |
|
$ |
11,823,000 |
|
|
$ |
8,134,000 |
|
|
$ |
31,897,000 |
|
|
$ |
18,688,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MFFO per share basic and diluted |
|
$ |
0.10 |
|
|
$ |
0.11 |
|
|
$ |
0.30 |
|
|
$ |
0.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding Basic |
|
|
124,336,078 |
|
|
|
47,735,536 |
|
|
|
105,257,482 |
|
|
|
35,100,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
124,336,078 |
|
|
|
47,735,536 |
|
|
|
105,257,482 |
|
|
|
35,100,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and nine months ended September 30, 2009, MFFO per share has been impacted by
the increase in net proceeds realized from our existing offering of shares. For the three months
ended September 30, 2009, we sold 13,282,000 shares of our common stock, increasing our outstanding
shares by 12%. For the nine months ended September 30, 2009, we sold 53,276,000 shares of our
common stock, increasing our outstanding shares by 72%. The proceeds from this issuance were
temporarily invested in short-term cash equivalents until they could be invested in medical office
buildings and other healthcare-related facilities at favorable pricing. Due to lower interest rates
on cash equivalent investments, interest earnings were minimal. We expect to invest these proceeds
in higher-earning medical office buildings or other healthcare related facility investments
consistent with our investment policy to identify high quality investments. We believe this will
add value to our stockholders over our longer-term investment horizon, even if this results in less
current period earnings. We acquired the Greenville Hospital portfolio on September 18, 2009. If
this acquisition had closed on July 1, 2009, our MFFO would have been $14,373,000 and $34,447,000
for the three and nine months ended September 30, 2009. As of November 16, we have signed purchase
and sale agreements to acquire $153,100,000 of medical office buildings. See Note 20 Subsequent
Events, to our accompanying condensed consolidated financial statements, for a further discussion
of our potential future acquisitions.
Net Operating Income
Net operating income is a non-GAAP financial measure that is defined as net income (loss),
computed in accordance with GAAP, generated from properties before interest expense, general and
administrative expenses, depreciation, amortization and interest and dividend income. We believe
that net operating income provides an accurate measure of the operating performance of our
operating assets because net operating income excludes certain items that are not associated with
management of the properties. Additionally, we believe that net operating income is a widely
accepted measure of comparative operating performance in the real estate community. However, our
use of the term net operating income may not be comparable to that of other real estate companies
as they may have different methodologies for computing this amount.
To facilitate understanding of this financial measure, a reconciliation of net income (loss)
to net operating income has been provided for the three and nine months ended September 30, 2009
and 2008:
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(10,074,000 |
) |
|
$ |
(5,638,000 |
) |
|
$ |
(20,409,000 |
) |
|
$ |
(11,813,000 |
) |
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
11,095,000 |
|
|
|
2,758,000 |
|
|
|
21,955,000 |
|
|
|
6,801,000 |
|
Depreciation and amortization |
|
|
13,287,000 |
|
|
|
11,213,000 |
|
|
|
39,231,000 |
|
|
|
24,905,000 |
|
Interest Expense |
|
|
7,006,000 |
|
|
|
6,939,000 |
|
|
|
18,644,000 |
|
|
|
14,888,000 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
(60,000 |
) |
|
|
(52,000 |
) |
|
|
(233,000 |
) |
|
|
(83,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
21,254,000 |
|
|
$ |
15,220,000 |
|
|
$ |
59,188,000 |
|
|
$ |
34,698,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent Events
See Note 20, Subsequent Events, to our accompanying condensed consolidated financial
statements, for a further discussion of our subsequent events.
|
|
|
Item 3. |
|
Quantitative and Qualitative Disclosures About Market Risk. |
There were no material changes in the information regarding market risk that was provided in
our 2008 Annual Report on Form 10-K, as filed with the SEC on March 27, 2009, other than those
listed in Part II, Item 1A, Risk Factors.
The table below presents, as of September 30, 2009, the principal amounts and weighted average
interest rates by year of expected maturity to evaluate the expected cash flows and sensitivity to
interest rate changes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date |
|
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
Thereafter |
|
Total |
|
Fair Value |
Fixed rate debt principal payments |
|
$ |
373,000 |
|
|
$ |
1,473,000 |
|
|
$ |
1,922,000 |
|
|
$ |
2,056,000 |
|
|
$ |
15,521,000 |
|
|
$ |
110,597,000 |
|
|
$ |
131,941,000 |
|
|
$ |
123,048,000 |
|
Weighted average interest rate on maturing debt |
|
|
4.88 |
% |
|
|
5.68 |
% |
|
|
5.72 |
% |
|
|
5.72 |
% |
|
|
5.88 |
% |
|
|
5.76 |
% |
|
|
5.76 |
% |
|
|
|
|
Variable rate debt principal payments |
|
$ |
641,000 |
|
|
$ |
121,258,000 |
|
|
$ |
199,774,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
321,673,000 |
|
|
$ |
321,673,000 |
|
Weighted average interest rate on maturing
debt (based on rates in effect as of September
30, 2009) |
|
|
3.31 |
% |
|
|
2.38 |
% |
|
|
2.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.70 |
% |
|
|
|
|
Mortgage loans payable were $453,614,000 ($452,041,000, net of discount) as of September
30, 2009. As of September 30, 2009, we had fixed and variable rate mortgage loans with effective
interest rates ranging from 1.60% to 12.75% per annum and a weighted average effective interest
rate of 3.59% per annum. We had $131,941,000 ($130,368,000, net of discount) of fixed rate debt, or
29.1% of mortgage loans payable, at a weighted average interest rate of 5.76% per annum and
$321,673,000 of variable rate debt, or 70.9% of mortgage loans payable, at a weighted average
interest rate of 2.70% per annum.
As of September 30, 2009, there were no amounts outstanding under our secured revolving line
of credit with LaSalle and KeyBank. Also, as of September 30, 2009, there were no amounts
outstanding under our unsecured note payable to affiliate.
An increase in the variable interest rate on our variable rate mortgage loans without fixed
rate interest rate swaps and our secured revolving line of credit with LaSalle and KeyBank
constitutes a market risk. As of September 30, 2009, a 0.50% increase in the London Interbank
Offered Rate, or LIBOR, would have increased our overall annual interest expense, exclusive of
gains (losses) on derivative financial instruments, by $8,000, or 0.03%.
In addition to changes in interest rates, the value of our future properties is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
|
|
|
Item 4. |
|
Controls and Procedures. |
Not applicable.
45
|
|
|
Item 4T. |
|
Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and communicated
to us, including our Chief Executive Officer and Chief Accounting Officer, who serves as our
principal financial officer and principal accounting officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, we recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, as
ours are designed to do, and we necessarily were required to apply our judgment in evaluating
whether the benefits of the controls and procedures that we adopt outweigh their costs.
As of September 30, 2009, an evaluation was conducted under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Accounting
Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive
Officer and our Chief Accounting Officer concluded that our disclosure controls and procedures were
effective.
(b) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended September 30, 2009
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
46
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
Legal Proceedings. |
None.
There are no other material changes from the risk factors previously disclosed in our 2008
Annual Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or
the SEC, on March 27, 2009, except as noted below.
Some or all of the following factors may affect the returns we receive from our investments,
our results of operations, our ability to pay distributions to our stockholders, availability to
make additional investments or our ability to dispose of our investments.
We may not have sufficient cash available from operations to pay distributions, and, therefore,
distributions may be paid with offering proceeds or borrowed funds.
The amount of the distributions to our stockholders is determined by our board of directors
and is dependent on a number of factors, including funds available for payment of distributions,
our financial condition, capital expenditure requirements and annual distribution requirements
needed to maintain our status as a REIT. The board of directors has declared distributions since
February 2007 in the amount of 7.25% per annum, or $0.725 per common share.
For the nine months ended September 30, 2009, we paid distributions of $54,159,000
($27,493,000 in cash and $26,666,000 in shares of our common stock pursuant to our distribution
reinvestment plan, or the DRIP, as compared to cash flow from operations of $15,968,000. The
distributions paid in excess of our cash flow from operations were paid using proceeds from our
initial offering.
For the three months ended September 30, 2009, our FFO was $3,092,000. We paid distributions
of $21,906,000, of which $3,092,000 was paid from FFO and the remainder from proceeds from our
initial offering. For the nine months ended September 30, 2009, our FFO was $18,504,000. We paid
distributions of $54,159,000, of which $18,504,000 was paid from FFO and the remainder from
proceeds from our initial offering. For more information about FFO, see Part I, Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations, Liquidity
and Capital Resources Distributions.
Hedging activity may expose us to risks.
To the extent that we use derivative financial instruments to hedge against interest rate
fluctuations, we will be exposed to credit risk and legal enforceability risks. In this context,
credit risk is the failure of the counterparty to perform under the terms of the derivative
contract. If the fair value of a derivative contract is positive, the counterparty owes us, which
creates credit risk for us. Legal enforceability risks encompass general contractual risks,
including the risk that the counterparty will breach the terms of, or fail to perform its
obligations under, the derivative contract. If we are unable to manage these risks effectively, our
results of operations, financial condition and ability to pay distributions to you will be
adversely affected.
Our success depends to a significant degree upon the continued contributions of certain key
personnel, each of whom would be difficult to replace. If we were to lose the benefit of the
experience, efforts and abilities of one or more of these individuals, our operating results could
suffer.
As a self-managed company, our ability to achieve our investment objectives and to pay
distributions is dependent upon the continued performance of our board of directors, Scott D.
Peters, our Chief Executive Officer, President and Chairman of the Board of Directors, Kellie S.
Pruitt as our Chief Accounting Officer, Treasurer and Secretary, Mark Engstrom as our Executive
Vice President Acquisitions, Christopher Balish as our Senior Vice President Asset Management
and Kelly Hogan as our Controller and Assistant Secretary and our other employees, in the
identification and acquisition of investments, the determination of any financing arrangements, the
asset management of our investments and operation of our day-to-day activities. Investors will
have no opportunity to evaluate the terms of transactions or other economic or financial data
concerning our investments that are not described in our periodic filings with the SEC. We rely
primarily on the management ability of our Chief Executive Officer and other executive officers and
the governance of our board of directors, each of whom would be difficult to replace. We do not
have any key man life insurance on Messrs. Peters and Engstrom or Ms. Pruitt. We have entered into
employment agreements with each of Messrs. Peters
47
and Engstrom and Ms. Pruitt; however, the employment agreements contain various termination rights.
If we were to lose the benefit of their experience, efforts and abilities, our operating results
could suffer. In addition, if any member of our board of directors were to resign, we would lose
the benefit of such directors governance and experience. As a result of the foregoing, we may be
unable to achieve our investment objectives or to pay distributions to our stockholders.
|
|
|
Item 2. |
|
Unregistered Sales of Equity Securities and Use of Proceeds. |
Use of Public Offering Proceeds
On September 20, 2006, we commenced our initial public offering, in which we are offering a
minimum of 200,000 shares of our common stock aggregating at least $2,000,000, and a maximum of
200,000,000 shares of our common stock for $10.00 per share and up to 21,052,632 shares of our
common stock pursuant to our distribution reinvestment plan, or the DRIP, for $9.50 per share,
aggregating up to $2,200,000,000. The shares offered have been registered with the SEC on a
Registration Statement on Form S-11 (File No. 333-133652) under the Securities Act of 1933, as
amended, which was declared effective by the SEC on September 20, 2006. Our initial offering has
been extended pursuant to Rule 415 under the Securities Act of 1933, as amended, and will expire no
later than the earlier of March 19, 2010, or the date on which the maximum offering has been sold.
As of September 30, 2009, we had received and accepted subscriptions for 127,100,943 shares of
our common stock, or $1,268,416,000. As of September 30, 2009, a total of $42,438,000 in
distributions was reinvested and 4,467,204 shares of our common stock were issued under the DRIP.
As of September 30, 2009, we have incurred marketing support fees of $31,381,000, selling
commissions of $87,874,000 and due diligence expense reimbursements of $694,000. We have also
incurred organizational and offering expenses of $12,848,000. Such fees and reimbursements are
charged to stockholders equity as such amounts are reimbursed from the gross proceeds of our
initial offering. The cost of raising funds in our initial offering as a percentage of funds raised
will not exceed 11.5%.
As of September 30, 2009, we have used $775,352,000 in offering proceeds to purchase our 44
properties and one other real estate related asset and repay debt incurred in connection with such
acquisitions.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Our share repurchase plan allows for share repurchases by us when certain criteria are met by
our stockholders. Share repurchases will be made at the sole discretion of our board of directors.
Funds for the repurchase of shares of our common stock will come exclusively from the proceeds we
receive from the sale of shares under the DRIP.
During the three months ended September 30, 2009, we repurchased shares of our common stock as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) |
|
|
|
|
|
|
|
|
|
|
(c) |
|
Maximum Approximate |
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
Dollar Value |
|
|
|
|
|
|
|
|
|
|
Purchased as Part of |
|
of Shares that May |
|
|
(a) |
|
(b) |
|
Publicly |
|
Yet be Purchased |
|
|
Total Number of |
|
Average Price |
|
Announced |
|
Under the |
Period |
|
Shares Purchased |
|
Paid per Share |
|
Plan or Program(1) |
|
Plans or Programs |
July 1, 2009 to July 31, 2009 |
|
|
384,724 |
|
|
$ |
9.56 |
|
|
|
384,724 |
|
|
$ |
(2 |
) |
August 1, 2009 to August 31, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
September 1, 2009 to September 30, 2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
|
|
(1) |
|
Our board of directors adopted a share repurchase plan effective September 20, 2006. Our
board of directors adopted, and we publicly announced, an amended share repurchase plan
effective August 25, 2008. Through September 30, 2009, we had repurchased 516,133 shares of
our common stock pursuant to our share repurchase plan. Our share repurchase plan does not
have an expiration date but may be terminated at our board of directors discretion. |
|
(2) |
|
Subject to funds being available, we will limit the number of shares repurchased during any
calendar year to 5.0% of the weighted average number of our shares outstanding during the
prior calendar year. |
48
|
|
|
Item 3. |
|
Defaults Upon Senior Securities. |
None.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders. |
On August 31, 2008, we held our Annual Meeting of Stockholders. At the meeting, the
stockholders voted to: (i) elect each of the individuals below as directors for one year terms and
until his successor has been elected and qualified and (ii) to ratify the appointment of Deloitte &
Touche LLP as our independent registered public accounting firm for fiscal 2008. The numbers of
votes for, against, abstaining and withheld are as follows:
|
|
|
|
|
|
|
|
|
Election of Directors |
|
For |
|
Withheld |
Scott D. Peters |
|
|
62,305,379 |
|
|
|
1,420,210 |
|
W. Bradley Blair II |
|
|
62,397,055 |
|
|
|
1,328,535 |
|
Maurice J. DeWald |
|
|
62,409,577 |
|
|
|
1,316,013 |
|
Warren D. Fix |
|
|
62,384,468 |
|
|
|
1,341,122 |
|
Larry L. Mathis |
|
|
62,402,330 |
|
|
|
1,323,260 |
|
Gary T. Wescombe |
|
|
62,408,061 |
|
|
|
1,317,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratification of |
|
For |
|
Against |
|
Abstain |
Deloitte & Touche LLP |
|
|
61,960,969 |
|
|
|
654,729 |
|
|
|
1,109,891 |
|
|
|
|
Item 5. |
|
Other Information. |
In January 2009, we adopted the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements an Amendment of ARB 51, codified primarily in ASC 810. The
adoption of ASC 810 did not have a material impact on our financial condition, results of
operations or cash flows. However, it had an impact on the presentation and disclosure of
noncontrolling (minority) interests in our condensed consolidated financial statements. As a result
of the retrospective presentation and disclosure requirements of this new guidance, we are required
to reflect the change in presentation and disclosure for all periods presented.
The principal effect on the consolidated balance sheet as of December 31, 2008 related to the
adoption of this guidance was the change in presentation of the mezzanine section of the minority
interest of limited partner in operating partnership of $1,000 and the minority interest of limited
partner of $1,950,000, as previously reported as of December 31, 2008, and the minority interest of
limited partner of $3,091,000, as previously reported as of December 31, 2007, to redeemable
noncontrolling interest of limited partners of $1,951,000 and $3,091,000, respectively.
Additionally, the adoption of ASC 810 had the effect of reclassifying (income) loss
attributable to noncontrolling interest in the consolidated statements of operations from minority
interest to separate line items. The adoption of this guidance modified our financial statement
presentation, but did not have an impact on our financial statement results.
Thus, after adoption net loss of $(28,448,000) and $(7,666,000), for the years ended December
31, 2008 and 2007, as previously reported, respectively, will change to net loss of $(28,409,000)
and $(7,674,000), respectively, and net loss attributable to controlling interest will be equal to
net loss as previously reported prior to the adoption of ASC 810. There was no effect on the
consolidated statements of operations for the period from April 28, 2006 through December 31, 2006.
The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly
Report on Form 10-Q) are included, or incorporated by reference, in this Quarterly Report on Form
10-Q.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
Healthcare Trust of America, Inc.
(Registrant)
|
|
November 16, 2009 |
By: |
/s/ Scott D. Peters
|
|
Date |
|
Scott D. Peters |
|
|
|
Chief Executive Officer and President
(Principal executive officer) |
|
|
|
|
|
November 16, 2009 |
By: |
/s/ Kellie S. Pruitt
|
|
Date |
|
Kellie S. Pruitt |
|
|
|
Chief Accounting Officer
(Principal accounting officer and
Principal financial officer) |
|
50
EXHIBIT INDEX
Following the consummation of the merger of NNN Realty Advisors, Inc., which previously served
as our sponsor, with and into a wholly owned subsidiary of Grubb & Ellis Company on December 7,
2007, NNN Healthcare/Office REIT, Inc., NNN Healthcare/Office REIT Holdings, L.P., NNN
Healthcare/Office REIT Advisor, LLC, NNN Healthcare/Office Management, LLC, Triple Net Properties,
LLC and NNN Capital Corp. changed their names to Grubb & Ellis Healthcare REIT, Inc., Grubb & Ellis
Healthcare REIT Holdings, LP Grubb & Ellis Healthcare REIT Advisor, LLC, Grubb & Ellis Healthcare
Management, LLC, Grubb & Ellis Realty Investors, LLC, and Grubb & Ellis Securities, Inc.
respectively. The following Exhibit List refers to the entity names used prior to the name changes
in order to accurately reflect the names of the parties on the documents listed.
Following our transition to self-management on August 24, 2009, Grubb & Ellis Healthcare REIT,
Inc. and Grubb & Ellis Healthcare REIT Holdings, LP changed their names to Healthcare Trust of
America, Inc. and Healthcare Trust of America Holdings, LP, respectively.
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
|
|
|
1.1
|
|
Dealer Manager Agreement, date as of May 21, 2009, by and between Realty Capital Securities
and Healthcare Trust of America, Inc. (included as Exhibit 1.1 to our Current Report on Form
8-K filed May 27, 2009 and incorporated herein by reference) |
|
|
|
3.1
|
|
Third Articles of Amendment and Restatement of NNN Healthcare/Office REIT, Inc. (included as
Exhibit 3.1 to our Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated herein by reference) |
|
|
|
3.2
|
|
Bylaws of NNN Healthcare/Office REIT, Inc. (included as Exhibit 3.2 to our Registration
Statement on Form S-11 (File No. 333-133652) filed on April 28, 2006 and incorporated herein
by reference) |
|
|
|
3.4
|
|
Amendment to the Bylaws of Grubb & Ellis Healthcare REIT, Inc., effective April 21, 2009
(included as Exhibit 3.4 to Post-Effective Amendment No. 11 to our Registration Statement on
Form S-11 (File No. 333-133652) filed on April 21, 2009 and incorporated herein by reference) |
|
|
|
3.5
|
|
Articles of Amendment of Grubb & Ellis Healthcare REIT, Inc., effective August 24, 2009
(included as Exhibit 3.1 to our Current Report on Form 8-K filed August 27, 2009 and
incorporated herein by reference) |
|
|
|
3.6
|
|
Amendment to the Bylaws of Grubb & Ellis Healthcare REIT, Inc., effective August 24, 2009
(included as Exhibit 3.2 to our Current Report on Form 8-K filed August 27, 2009 and
incorporated herein by reference) |
|
|
|
10.1
|
|
Amendment No. 1 to the Services Agreement by and between American Realty Capital II, LLC and
Healthcare Trust of America, Inc. dated August 17, 2009 (included as Exhibit 10.2 to our
Current Report on Form 8-K filed August 20, 2009 and incorporated herein by reference) |
|
|
|
10.2
|
|
Employment Agreement between Grubb & Ellis Healthcare REIT, Inc. and Scott D. Peters,
effective as of July 1, 2009 (included as Exhibit 10.1 to our Current Report on Form 8-K filed
July 8, 2009 and incorporated herein by reference) |
|
|
|
10.3
|
|
Employment Agreement between Grubb & Ellis Healthcare REIT, Inc. and Mark Engstrom, effective
as of July 1, 2009 (included as Exhibit 10.2 to our Current Report on Form 8-K filed July 8,
2009 and incorporated herein by reference) |
|
|
|
10.4
|
|
Employment Agreement between Grubb & Ellis Healthcare REIT, Inc. and Kellie S. Pruitt,
effective as of July 1, 2009 (included as Exhibit 10.3 to our Current Report on Form 8-K filed
July 8, 2009 and incorporated herein by reference) |
|
|
|
10.5
|
|
Agreement of Sale and Purchase, dated July 15, 2009, by and between Greenville Hospital
System and HTA Greenville, LLC (included as Exhibit 10.1 to our Current Report on Form 8-K
filed July 15, 2009 and incorporated herein by reference) |
51
|
|
|
10.6
|
|
First Amendment to Agreement of Sale and Purchase, dated August 14, 2009 (included as Exhibit
10.1 to our Current Report on Form 8-K filed August 20, 2009 and incorporated herein by
reference) |
|
|
|
10.7
|
|
Amendment No. 2 to Agreement of Limited Partnership of Grubb & Ellis Healthcare REIT
Holdings, LP by Healthcare Trust of America, Inc. (formerly known as Grubb & Ellis Healthcare
REIT, Inc.), dated as of August 24, 2009 (included as Exhibit 10.1 to our Current Report on
Form 8-K filed August 27, 2009 and incorporated herein by reference) |
|
|
|
10.8
|
|
Second Amendment to Agreement of Sale and Purchase, dated August 21, 2009 (included as
Exhibit 10.2 to our Current Report on Form 8-K filed August 27, 2009 and incorporated herein
by reference) |
|
|
|
10.9
|
|
Third Amendment to Agreement of Sale and Purchase, dated August 26, 2009 (included as Exhibit
10.3 to our Current Report on Form 8-K filed August 27, 2009 and incorporated herein by
reference) |
|
|
|
10.10
|
|
Fourth Amendment to Agreement of Sale and Purchase, dated September 4, 2009 (included as
Exhibit 10.1 to our Current Report on Form 8-K filed September 11, 2009 and incorporated
herein by reference) |
|
|
|
10.11
|
|
Future Development Agreement, dated September 9, 2009, by and between HTA Greenville, LLC
and Greenville Hospital System (included as Exhibit 10.1 to our Current Report on Form 8-K
filed September 22, 2009 and incorporated herein by reference) |
|
|
|
10.12
|
|
Right of First Opportunity, dated September 9, 2009, by and between HTA Greenville, LLC
and Greenville Hospital System included as Exhibit 10.2 to our Current Report on Form 8-K
filed September 22, 2009 and incorporated herein by reference) |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2*
|
|
Certification of Chief Accounting Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1**
|
|
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2**
|
|
Certification of Chief Accounting Officer, pursuant to 18 U.S.C. Section 1350, as created by
Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
* |
|
Filed herewith. |
|
** |
|
Furnished herewith. |
52