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HR > SEC Filings for HR > Form 10-Q on 30-Oct-2013All Recent SEC Filings

Show all filings for HEALTHCARE REALTY TRUST INC

Form 10-Q for HEALTHCARE REALTY TRUST INC


30-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Disclosure Regarding Forward-Looking Statements This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are "forward-looking statements." Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "will," "expect," "believe," "anticipate," "target," "intend," "plan," "estimate," "project," "continue," "should," "could" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risks, as described in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 that could significantly affect the Company's current plans and expectations and future financial condition and results.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in the Company's filings and reports, including, without limitation, estimates and projections regarding the performance of development projects the Company is pursuing.

For a detailed discussion of the Company's risk factors, please refer to the Company's filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2012.

The purpose of this Management Discussion and Analysis (MD&A) is to provide an understanding of the Company's consolidated financial condition, results of operations and cash flows by focusing on the changes in certain key measures from year to year. MD&A is provided as a supplement to, and should be read in conjunction with, the Company's Consolidated Financial Statements and accompanying notes. MD&A is organized in the following sections:

Overview

Liquidity and Capital Resources

Trends and Matters Impacting Operating Results

Results of Operations

Overview
The Company's business is to own and operate medical office and other medical-related facilities that produce stable and growing rental income. Additionally, the Company provides a broad spectrum of services needed to own, develop, lease, finance and manage its portfolio of healthcare properties. The Company focuses on outpatient-related facilities located on or near the campuses of large acute care hospitals and associated with leading health systems because management views these facilities as stable, lower-risk real estate investments. In addition to consistent growth in demand for outpatient services, management believes that the Company's diversity of tenants, which includes over 30 physician specialties, as well as surgery, imaging and diagnostic centers, lowers the Company's overall financial and operational risk. Substantially all of the Company's revenues are derived from operating leases on its real estate properties and interest earned on outstanding notes receivable.

Liquidity and Capital Resources
Sources and Uses of Cash
The Company's primary sources of cash include rent and interest receipts from its real estate and mortgage portfolio based on contractual arrangements with its tenants, sponsors, and borrowers, borrowings under its unsecured credit facility due 2017 (the "Unsecured Credit Facility"), proceeds from the sales of real estate properties, the repayments of mortgage notes receivable, proceeds from public or private debt or equity offerings.

The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service through cash on hand, cash flows from operations, and the cash flow sources addressed above. The Company also had unencumbered real estate assets with a book value of approximately $2.6 billion at September 30, 2013, of which a portion could serve as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

Dividends paid by the Company for the nine months ended September 30, 2013 were funded from cash flows from operations and the Unsecured Credit Facility, as cash flows from operations were not adequate to fully fund dividends paid at the rate per quarter of $0.30 per share. The Company expects that additional cash flows from acquisitions and continued lease-up of properties in the process of stabilization, as well as lower expenditures for interest on indebtedness, will generate sufficient


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cash flows from operations such that dividends for the full year 2013 can be funded by cash flows from operations. The Company may use the Unsecured Credit Facility to supplement its cash flows from operations to fund the dividend should they be insufficient.

Investing Activities
Cash flows used in investing activities for the nine months ended September 30, 2013 were approximately $137.9 million. Below is a summary of the significant investing activity. See Note 2 to the Condensed Consolidated Financial Statements for more detailed information on these activities.

The Company acquired an inpatient rehabilitation facility, three medical office buildings, and an orthopedic facility (referred to below in the discussion related to Mercy Health projects) for an aggregate purchase price of $212.6 million and cash consideration of approximately $103.4 million.

The Company disposed of 15.1 acres of land in Texas in which the Company had an aggregate net investment of approximately $8.1 million for approximately $5.0 million, which included $1.1 million in net cash proceeds and the origination of a $3.7 million Company-financed mortgage note receivable.

The Company disposed of five medical office buildings and four inpatient rehabilitation facilities with an aggregate sales price of approximately $76.6 million, generating net cash proceeds of $74.7 million and the origination of a $0.6 million Company-financed mortgage receivable. In connection with the sales, the Company repaid a mortgage note payable of $1.1 million and incurred debt extinguishment costs of $0.3 million. The Company recognized gains of approximately $22.0 million related to these transactions.

During the third quarter of 2013, the Company had two development projects affiliated with Mercy Health ("AA-" rated) based in Saint Louis, Missouri:

            On September 27, 2013, the Company acquired an orthopedic facility
             in Missouri for $102.6 million, including the elimination of the
             construction mortgage note receivable totaling $97.2 million and
             cash consideration of approximately $5.4 million. The facility is
             100% leased to Mercy Health. The Company provided $35.6 million in
             fundings toward the facility under a construction mortgage for the
             nine months ended September 30, 2013. During the third quarter of
             2013, the Company recognized mortgage interest income of
             approximately $1.7 million and single-tenant net lease rental income
             of approximately $0.1 million. The Company expects to collect
             single-tenant net lease rental income of approximately $2.3 million
             in the fourth quarter. Subsequent to the acquisition, the Company
             funded an additional $2.8 million during the third quarter of 2013
             and anticipates funding approximately $6.0 million to complete the
             development during the fourth quarter of 2013.


            At September 30, 2013, the Company had one remaining construction
             mortgage on the medical office building under construction in
             Oklahoma affiliated with Mercy Health. The Company provided $22.2
             million in fundings during the nine months ended September 30, 2013,
             bringing cumulative fundings to date to $79.0 million. This project,
             which was originally scheduled to be completed in July 2013,
             sustained tornado damage in late May 2013. The tornado damage caused
             a delay in the completion date, and while subject to change, is now
             expected to be completed by June 2014. Builder's risk insurance is
             expected to fund the total scope of necessary repairs. The Company
             will continue to recognize mortgage interest income through the
             delayed completion and expects to receive interest payments in cash
             from insurance proceeds. The interest rate on this construction
             mortgage note increased effective October 1, 2013 from 6.75% to
             7.72%. Approximately $12.2 million remains available under the loan.


      For the nine months ended September 30, 2013, the Company funded
       approximately $17.6 million on 12 properties in the process of
       stabilization subsequent to construction and the Company anticipates
       funding approximately $7.2 million during the fourth quarter of 2013.

Beyond the current commitments, the Company is in the early planning stages with several health systems and developers regarding new development opportunities, one or more of which could lead to a development start in the near future. The Company will consider these projects in light of existing obligations, the acquisition environment, capital availability, leasing activity, and cost, among other factors.


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Subsequent Acquisitions
In October 2013, the Company acquired the following properties:

an 81,717 square foot medical office building located in the state of Washington for a purchase price of $34.9 million. The property is 100% leased with lease expirations through 2019 and is adjacent to two hospital campuses and affiliated with Providence Health and Services ("AA" rated). The Company assumed a mortgage note payable of $16.6 million on the property that bears interest at a rate of 6.01% and matures in 2036.

a 70,138 square foot medical office building in Colorado for a purchase price of $21.6 million. The property is on the same campus as the 80,153 square foot medical office building the Company purchased in September 2013. The building was 83% leased to three tenants at the time of acquisition with lease expirations through 2026. The property is connected to and affiliated with the University of Colorado Health ("A+" rated) system.

a 90,633 square foot medical office building in North Carolina for a purchase price of $20.3 million. The property is 100% leased with expirations through 2021 and is affiliated with CaroMont Health ("A+" rated). The Company assumed a mortgage note payable of $11.2 million on the property that bears interest at a rate of 5.86% and matures in 2016.

Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2013 were approximately $66.4 million. Inflows from accessing the public debt and equity markets totaled $544.7 million, net of costs incurred. Aggregate cash outflows totaled approximately $478.4 million associated with repayments of indebtedness and dividends paid to common stockholders. Below is a summary of the significant financing activity. See Notes 3 and 5 to the Condensed Consolidated Financial Statements for more information on the capital markets and financing activities.

Changes in Debt Structure
In February 2013, the Company amended the Unsecured Credit Facility, extending the maturity date to April 14, 2017, while providing the Company two six-month options to extend the maturity date to April 14, 2018. The amendment also reduced the applicable margin rate range to 0.95% to 1.75% (currently 1.4% based on the Company's credit rating) over LIBOR for purposes of determining interest and the annual facility fee to a range of 0.15% to 0.35% (currently at 0.30%). The Company paid up-front fees to the lenders of approximately $2.7 million, which will be amortized over the term of the facility, and wrote-off $0.3 million in certain unamortized deferred financing costs associated with the original facility in connection with the amendment. The Company had $185.0 million outstanding under the Unsecured Credit Facility and had a remaining borrowing capacity of approximately $515.0 million as of September 30, 2013. No significant changes were made to the covenant provisions.

In March 2013, the Company issued $250.0 million of unsecured senior notes due 2023 (the "Senior Notes due 2023"), bearing interest at 3.75%, payable semi-annually in arrears on April 15 and October 15, commencing October 15, 2013, and maturing on April 15, 2023 unless redeemed earlier by the Company. Proceeds received were net of a discount of approximately $2.1 million, yielding a 3.85% interest rate per annum upon issuance. The Senior Notes due 2023 contain various financial covenant provisions that are required to be met on a quarterly and annual basis and are consistent with the Company's other outstanding senior notes.

The Company redeemed its 5.125% unsecured senior notes due 2014 (the "Senior Notes due 2014") in April 2013, at a price of $277.3 million consisting of the following:

outstanding principal of $264.7 million,

accrued interest as of the redemption date of $0.7 million; and

            a "make-whole" amount of approximately $11.9 million, resulting in a
             loss on extinguishment of debt totaling approximately $12.3 million,
             including the write-off of unaccreted discount and unamortized
             costs.


      In June 2013, the Company prepaid in full a secured loan from Teachers
       Insurance and Annuity Association of America ("TIAA") bearing an interest
       rate of 7.25% at an amount equal to $94.3 million consisting of the

following:

outstanding principal of $77.0 million

accrued interest as of the redemption date of $0.5 million; and

            a prepayment penalty of approximately $16.8 million, resulting in a
             loss on extinguishment of debt totaling $17.4 million, including the
             write-off of unamortized costs.


      In September 2013, the Company assumed a mortgage note payable of
       approximately $12.0 million and recorded a fair value adjustment which
       resulted in a premium of approximately $0.7 million. The mortgage note
       payable assumed by the Company is subject to a contractual interest rate
       of 6.17% (effective rate of 5.25%) and matures in 2027.


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The Company believes the refinancing activities described above were warranted, including the costs incurred to execute the transactions, given the opportunities to refinance at lower interest rates that lower future costs of capital, improve the Company's debt and credit metrics and extend its debt maturities. As a result of these transactions, the Company experienced a net interest expense reduction for the three months ended September 30, 2013 of approximately $2.2 million as compared to the preceding quarter.

As of September 30, 2013, the Company's leverage ratio [debt divided by (debt plus stockholders' equity less intangible assets plus accumulated depreciation)] was approximately 40.6%.

The Company's various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company's ability to incur indebtedness and create liens or encumbrances. At September 30, 2013, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Common Stock Issuances
On July 19, 2013, the Company issued 3,000,000 shares of common stock, par value $0.01 per share, at $26.13 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering were $78.3 million.

The following summarizes the Company shares of common stock sold under its at-the-market equity program:

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