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HTA > SEC Filings for HTA > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for HEALTHCARE TRUST OF AMERICA, INC.

Form 10-Q for HEALTHCARE TRUST OF AMERICA, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's 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 condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q, as well as with the audited consolidated financial statements, accompanying notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our 2011 Annual Report on Form 10-K as filed with the SEC on March 27, 2012. Such condensed consolidated financial statements and information have been prepared to reflect our financial position as of September 30, 2012 and December 31, 2011, together with our results of operations for the three and nine months ended September 30, 2012 and 2011, and cash flows for the nine months ended September 30, 2012 and 2011.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, the Exchange Act). Such statements include, in particular, statements about our plans, strategies and prospects and estimates regarding future medical office building market performance. Such statements are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially and in adverse ways from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Forward-looking statements are generally identifiable by use of the terms such as "expect," "project," "may," "will," "should," "could," "would," "intend," "plan," "anticipate," "estimate," "believe," "continue," "opinion," "predict," "potential," "pro forma" or the negative of such terms and other comparable terminology. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We cannot guarantee the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Any such forward-looking statements reflect our current views about future events, are subject to unknown risks, uncertainties, and other factors, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide dividends to stockholders, and maintain the value of our real estate properties, may be significantly hindered. Factors that might impair our ability to meet such forward-looking statements include without limitations, those discussed in Part I, Item 1A, "Risk Factors" of our Form 10-K for the period ending December 31, 2011, and Part II, Item 1A, "Risk Factors" of our Forms 10-Q for the periods ending March 31, 2012 and June 30, 2012, which are incorporated by reference.
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, our stockholders are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date made. In addition, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.
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 SEC.


Table of Contents

Overview
We are a fully integrated, self-administered and internally managed real estate investment trust, or REIT, primarily focused on acquiring, owning and operating high-quality medical office buildings that are predominantly located on or aligned with campuses of nationally or regionally recognized healthcare systems. We are one of the largest public REITs focused on medical office buildings in the United States based on gross leasable area, or GLA. We have strong industry relationships, a stable and diversified tenant mix and an extensive and active acquisition network. Our primary objective is to maximize stockholder value with disciplined growth through strategic investments and to provide an attractive risk-adjusted return for our stockholders by consistently increasing our cash flow. In pursuing this objective, we target mid-sized acquisitions of high-quality medical office buildings in markets with dominant healthcare systems, attractive demographics and that complement our existing portfolio, actively manage our balance sheet to maintain flexibility with conservative leverage, and seek internal growth through proactive asset management, leasing and property management oversight.
We invest primarily in high-quality medical office buildings in our target markets. We have invested $2.6 billion in high-quality medical office buildings and other facilities that serve the healthcare industry through September 30, 2012. As of September 30, 2012, our portfolio consisted of 246 medical office buildings and 19 other facilities that serve the healthcare industry, as well as a portfolio of mortgage loans receivable secured by medical office buildings. Our portfolio is comprised of approximately 12.5 million square feet of GLA, with an occupancy of approximately 91.1%, including leases we have executed, but which have not yet commenced. Approximately 95.7% of our portfolio, based on GLA, is located on or aligned with campuses of nationally or regionally recognized healthcare systems. Our portfolio is diversified geographically across 27 states, with no state having more than 11.0% of the total portfolio GLA as of September 30, 2012. We are concentrated in locations that we have determined to be strategic based on demographic trends and projected demand for medical office buildings and we expect to continue to invest in these markets. We have concentrations in the following key markets: Phoenix, Arizona; Greenville, South Carolina; Indianapolis, Indiana; Albany, New York; Houston, Texas; Atlanta, Georgia; Pittsburgh, Pennsylvania; Dallas, Texas; Boston, Massachusetts; Raleigh, North Carolina; and Oklahoma City, Oklahoma. On June 6, 2012, we listed our Class A common stock on the NYSE under the symbol "HTA," or the Listing. In accordance with an amendment to our charter approved by our stockholders on December 20, 2010, all of our common stock was converted into Class A, Class B-1, Class B-2 and Class B-3 common stock. The Class B-1, Class B-2 and Class B-3 shares are collectively referred to as our Class B common stock, while our Class A and Class B common stock are collectively referred to as our common stock. The Class B common stock is identical to the Class A common stock except that our Class B common stock is not currently listed on a national exchange and the shares of our Class B common stock will convert into shares of our Class A common stock at specified times. The shares of our Class B-1, Class B-2 and Class B-3 common stock will convert automatically into shares of our Class A common stock, six months following the Listing, 12 months following the Listing and 18 months following the Listing, respectively. On the 18 month anniversary of the Listing, all shares of our Class B common stock will have converted into our Class A common stock. Our Board of Directors has the discretion to convert all of our Class B common stock to our Class A common stock on the six month anniversary of the Listing. Each share of our Class A and Class B common stock participate in distributions equally.
On June 6, 2012, we commenced a modified "Dutch Auction" cash tender offer, or the Tender Offer, to purchase up to $150.0 million in value of our Class A common stock. As a result of the Tender Offer, on July 25, 2012, we purchased 14,850,964 shares of our Class A common stock at a purchase price of $10.10 per share, for an aggregate cost of approximately $150.0 million, excluding fees and expenses.
Company Highlights
Portfolio Operating Performance
For the three months ended September 30, 2012, we had a net loss of $2.9 million compared to net income of $0.2 million for the same period in 2011. For the nine months ended September 30, 2012, we had a net loss of $22.6 million compared to net income of $3.6 million for the nine months ended September 30, 2011. The losses in 2012 were primarily due to one-time expenses associated with the Listing and related activities.

Normalized funds from operations, or Normalized FFO, was $0.16 per share or $35.4 million and $0.12 per share or$28.6 million for the three months ended September 30, 2012 and 2011, respectively. This was an increase of $0.04 per share or 33.3%, compared to the same period in 2011. Normalized FFO was $0.45 per share or $101.1 million and $0.38 per share or $86.0 million for the nine months ended September 30, 2012 and 2011, respectively. This was an increase of $0.07 per share, or 18.4%, compared to the same period in 2011. The increases were driven by acquisitions, positive leasing activity, continued focus on reducing operating expenses and the completion of the Tender Offer. Normalized FFO is a non-GAAP financial measure. For a reconciliation of Normalized FFO to net income or loss, see "Funds from Operations and Normalized Funds from Operations" below.


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For the three months ended September 30, 2012, rental income increased 12.8%, or $8.7 million, to $77.0 million as compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, rental income increased 8.8%, or $18.0 million, to $221.9 million as compared to the nine months ended September 30, 2011.

For the three months ended September 30, 2012, net operating income, or NOI, increased 11.1%, or $5.2 million, to $52.3 million as compared to the three months ended September 30, 2011. For the nine months ended September 30, 2012, NOI increased 8.5%, or $11.9 million, to $152.3 million as compared to the nine months ended September 30, 2011. NOI is a non-GAAP financial measure. For a reconciliation of NOI to net income or loss, see "Net Operating Income" below.

Internal Growth through Proactive Asset Management, Leasing and Property Management
The occupancy rate on our portfolio of properties, including leases that have been executed, but which have not yet commenced, was approximately 91.1% as of September 30, 2012. Tenant retention for the portfolio was approximately 86.8% for the quarter and 86.5% for the year-to-date, indicative of our commitment to maintaining high-quality buildings in desirable locations and fostering strong tenant relationships. Tenant retention is calculated by taking the sum of the total GLA of tenants that renew an expiring lease divided by the total GLA of expiring leases.

Our portfolio of 12.5 million square feet of GLA is focused on strategically located on-campus medical office buildings in locations with high barriers to entry. As of September 30, 2012, approximately 95.7% of our portfolio, based on GLA, was located on or adjacent to, or anchored by the campuses of nationally and regionally recognized healthcare systems.

Investment grade rated tenants as a percent of annualized base rent was approximately 40.1% at September 30, 2012. We continue to focus on building relationships with strong tenants and health systems that are leaders in their markets. As of September 30, 2012, approximately 56.7% of our annualized base rent was derived from tenants that have (or whose parent companies have) a credit rating from a nationally recognized rating agency.

During the three and nine months ended September 30, 2012, we transitioned approximately 2.6 million and 4.7 million square feet of GLA, respectively, to our in-house property management platform. In the past year, we have focused on internalizing the property management in our largest markets, including Indiana, Arizona, South Carolina and Georgia. We continue to focus on transitioning property management, leasing and construction management of our portfolio from third party teams to our internal teams to establish more direct relationships and in an effort to reduce fees paid to third parties. We expect to continue to transition our property management function during 2012 to our in-house property management platform and anticipate having approximately 70.0% of our current portfolio's GLA managed internally by the end of the year.

Financial Strategy and Balance Sheet Flexibility
As of September 30, 2012, we had a flexible balance sheet with total assets of $2.4 billion, cash and cash equivalents of $8.3 million, and a leverage ratio of total debt to total capitalization of 32.3%.

As of September 30, 2012, $562.0 million was available on our $575.0 million unsecured revolving credit facility, which has approximately 3.5 years remaining until the initial maturity, with a one-year extension option, subject to certain conditions. We believe our borrowing capacity under our unsecured revolving credit facility as well as our access to other sources of debt and equity capital, while remaining within our low leverage range, should allow us to capitalize on favorable transactions that increase stockholder value.

During the first nine months of 2012, we entered into over $1.0 billion of new credit facilities which have been used to refinance our previous credit facility, repay $100.3 million of existing mortgages, and to fund acquisitions and other initiatives, including the Tender Offer. The net impact from these transactions has been to lower our average borrowing rate and extend the maturities of our debt. The weighted average borrowing cost, inclusive of our interest rate swaps and cap, has decreased to 4.02% per annum, a decrease from 5.25% per annum as of December 31, 2011. Additionally, the weighted average remaining term of our debt portfolio increased from 4.1 years to 4.4 years.

During July 2012, Standard & Poor's re-affirmed our investment grade credit rating with a stable outlook.

During July 2012, we repurchased 14.9 million of our Class A common shares as part of the Tender Offer, which reduced our total outstanding shares as of September 30, 2012 to 214.4 million.


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Relationship-Focused Growth Strategy
On January 13, 2012, we completed the acquisition of St. John Providence MOB, an approximately 203,000 square foot on-campus medical office building located in Novi, Michigan, for $51.3 million. The St. John Providence MOB, which was 99% leased as of the date of acquisition, is connected directly to the Providence Park Hospital via an enclosed walkway. Providence Park Hospital is part of Ascension Health Systems (Moody's Investors Services rated Aa1).

On January 31, 2012, we completed the acquisition of an additional medical office building on the Camp Creek campus in Atlanta, Georgia, for $8.9 million. This building is approximately 30,000 square feet of GLA and is our third building in our Camp Creek portfolio; the other two buildings comprising this portfolio were purchased by us in the second quarter of 2010.

On March 1, 2012, we completed the acquisition of Penn Avenue Place in Pittsburgh, Pennsylvania, for a purchase price of $54.0 million. Penn Avenue Place is an eight story, approximately 558,000 square foot, healthcare integrated building which was completely renovated in 1997. The building was approximately 99.6% occupied as of the date of our acquisition and is anchored by Highmark, Inc. (Standard & Poor's Rating Service rated A) which renewed its lease for an additional 10-year term beginning on January 1, 2012. Highmark, Inc., which leases and occupies 92.4% of the building, is one of the largest Blue Cross affiliates in the nation.

On March 29, 2012, we completed the acquisition of the Steward Portfolio located in Boston, Massachusetts, for a purchase price of $100.0 million. This portfolio consists of 13 medical office buildings located on the campuses of Steward Care Network. This portfolio is 100% master leased on a triple net basis by Steward Health Care System LLC until 2024 and totals approximately 372,000 square foot. Steward Health Care System is the largest fully integrated community care organization in New England and is the third largest employer in Massachusetts.

On August 14, 2012, we completed the acquisition of the Rush MOB located in Oak Park, Illinois for $54.0 million. The Rush MOB is a 135,000 square foot, on-campus medical office building that is 100% master leased under a triple-net lease through 2019 to Rush University Medical Center. Rush University Medical Center (Moody's rated A2) is a not-for-profit academic medical center comprising Rush University Medical Center, Rush University, Rush Oak Park Hospital and Rush Health. The building is connected with an enclosed walkway to Rush Oak Park Hospital, which is considered one of the dominant hospitals in the market.

Corporate Strategies
Maximize Internal Growth through Proactive Asset Management, Leasing and Property Management Oversight
Our asset management strategy focuses on achieving internal growth through initiatives to lease vacant space and increase rental rates while maximizing operating efficiencies at our properties. Specific components of our overall strategy include:
migrating our properties toward our in-house property management platform in geographic areas where we have significant portfolio concentrations and can achieve the necessary scale (in particular, we are targeting approximately 70.0% of our existing portfolio to be managed internally by December 31, 2012);

leveraging and proactively partnering with recognized property management and leasing companies in markets where our in-house property management platform is not currently active;

increasing our average rental rates, maintaining or increasing renewal rates and actively leasing our vacant space;

improving the quality of service provided to our tenants by being attentive to their needs, managing expenses, and strategically investing capital;

maintaining the high quality of our properties and building our reputation as a desirable recognized landlord;

maintaining regional offices in markets where we have a significant presence, which enables us to create closer relationships with national and regional healthcare systems and other tenants and better respond to their needs; and

using market knowledge and economies of scale to continually reduce our operating costs.

We believe that we are well positioned for future rental growth in our medical office buildings. We believe that we will be able to generate cash flow growth through the leasing of vacant space in our medical office buildings as well as rent increases, particularly due to the limited supply of medical office space, the recovering economy and the general reluctance of medical office building tenants to move or relocate because of the desire to remain close to nationally or regionally affiliated healthcare systems. As of September 30, 2012, our buildings were approximately 91.1% leased, including leases that we have executed, but which have not yet commenced.


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Actively Maintain Strong, Flexible Capital Structure and Balance Sheet We seek to actively manage our balance sheet to maintain conservative leverage and financing flexibility with carefully staged debt maturities, thereby positioning us to take advantage of strategic investment opportunities. We believe our borrowing capacity under our unsecured revolving credit facility, as well as our access to other sources of debt and equity capital, while remaining within our targeted leverage range, should allow us to capitalize on favorable acquisition opportunities that arise. While we believe our unsecured revolving credit facility will enable us to take advantage of acquisition opportunities on a short-term basis, we intend to take advantage of multiple sources of capital that we can use to effectively manage our long-term leverage strategy, repay our secured debt maturities, or finance future acquisition opportunities. These other sources of capital include unsecured public debt financing, additional equity issuances, unsecured bank loans, and secured property-level debt. Over the long-term, we intend to continue to focus on migrating our capital structure toward a higher volume of unsecured debt. We also will seek to maintain our investment grade credit ratings, which we first received in July 2011 and was re-affirmed in July 2012. We believe this is important to preserving our access to these capital sources on favorable terms. In addition, we may also pursue dispositions of properties that we believe no longer align with our strategic objectives in order to redeploy capital. Achieve Growth through Targeted Acquisitions We plan to continue to focus primarily on mid-sized acquisitions, in the $25 million to $75 million range, of high-quality medical office buildings in our target markets as discussed above. We also have completed larger acquisitions from time to time and expect to continue to do so when attractive opportunities emerge. In particular, we seek to acquire properties that have the following attributes:
high occupancy and located on or aligned with campuses of leading healthcare systems, which we believe provide for better tenant retention rates and rental rate growth as compared to facilities not affiliated with a healthcare system;

affiliated with top national and regional healthcare systems which are dominant in their respective markets, which we believe attract top physicians seeking healthcare systems, with significant market share and high credit quality;

located in markets with attractive demographics and favorable regulatory environments in business friendly states or those with high barriers to entry;

a strategic mix of high-credit quality single-tenant buildings with long-term, triple-net leases and fixed rental increases and multi-tenant buildings with short-term leases; and

provide accretive returns based on our cost of capital.

Leverage and Expand Our Strategic Relationships to Generate New Opportunities In order to access acquisition opportunities for our future growth, we plan to continue to emphasize building long-term relationships, cultivated by our senior management team, with key industry participants, which have traditionally provided us with valuable sources of potential investment opportunities. We have significant relationships with large and nationally recognized healthcare systems such as Aurora Health, Banner Health, Catholic Healthcare Partners, Greenville Hospital System and Indiana University Health, among others. Through these relationships, we believe that we have developed a reputation of reliability, trustworthiness and high tenant satisfaction. In this regard, approximately 68.3% of our acquisitions since January 1, 2009, based on purchase price, were sourced directly from hospitals and developers. We intend to continue building upon our existing relationships with healthcare systems to establish long-term lease arrangements, and to develop other strategic alignments with new healthcare systems.
Factors Which May Influence Results of Operations We are not aware of any material trends or uncertainties, other than national economic conditions affecting healthcare and real estate generally, and those listed in Part II, Item 1A of this report and those Risk Factors previously disclosed in Part I, Item 1A in our 2011 Annual Report on Form 10-K, as filed with the SEC on March 27, 2012, 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. Rental Income
The amount of rental income generated by our operating properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that has become 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.


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Acquisitions
During the nine months ended September 30, 2012, we completed four new portfolio acquisitions and expanded one of our existing portfolios through the purchase of an additional medical office building. The aggregate purchase price of these acquisitions was $268.2 million.
Results of Operations
Comparison of the Three and Nine Months Ended September 30, 2012 and 2011 Our operating results are primarily comprised of income derived from our portfolio of properties. As of September 30, 2012, we owned and operated 246 medical office buildings and 19 other facilities that serve the healthcare industry, comprised of 12.5 million square feet of GLA. As of September 30, 2011, we owned and operated 227 medical office buildings and 19 other facilities that serve the healthcare industry, comprised of 11.1 million square feet of GLA.
Rental Income
For the three months ended September 30, 2012 and 2011, rental income attributable to our properties was $77.0 million and $68.3 million, respectively. For the three months ended September 30, 2012, rental income was comprised of contractual rental income of $74.5 million, straight-line rent of $2.3 million and other operating revenue of $0.2 million. For the three months ended September 30, 2011, rental income was comprised of contractual rental income of $64.9 million and straight-line rent of $3.4 million. The increase in rental income was primarily due to the addition of 19 medical office buildings to our portfolio since the third quarter of 2011.
For the nine months ended September 30, 2012 and 2011, rental income attributable to our properties was $221.9 million and $204.0 million, respectively. For the nine months ended September 30, 2012, rental income was comprised of contractual rental income of $213.4 million, straight-line rent of $7.7 million and other operating revenue of $0.8 million. For the nine months ended September 30, 2011, rental income was comprised of contractual rental income of $192.5 million, straight-line rent of $9.8 million and other operating . . .

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