HR-2012.6.30-10Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-Q
____________________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2012
OR
¨
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: 001-11852
____________________________________________________________
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter) 
____________________________________________________________
Maryland
 
62 – 1507028
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
3310 West End Avenue
 
 
Suite 700
 
 
Nashville, Tennessee 37203
 
 
(Address of principal executive offices)
 
 
 
 
 
(615) 269-8175
 
 
(Registrant’s telephone number, including area code)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    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).    Yes  x    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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
 
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
 
As of July 25, 2012, 78,003,422 shares of the Registrant’s Common Stock were outstanding.
 

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HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
June 30, 2012

TABLE OF CONTENTS
 
 
Page
 
Item 1.   
 
 
 
 
 
 
Item 2.   
Item 3.   
Item 4.   
 
 
 
Item 1.   
 
 
 
 

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Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
(Unaudited)
 
 
 
June 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Real estate properties:
 
 
 
Land
$
163,211

 
$
162,843

Buildings, improvements and lease intangibles
2,552,106

 
2,521,226

Personal property
18,776

 
18,221

Construction in progress
34,180

 
86,328

 
2,768,273

 
2,788,618

Less accumulated depreciation
(545,677
)
 
(516,747
)
Total real estate properties, net
2,222,596

 
2,271,871

Cash and cash equivalents
3,103

 
4,738

Mortgage notes receivable
118,059

 
97,381

Assets held for sale and discontinued operations, net
12,921

 
28,650

Other assets, net
115,645

 
118,382

Total assets
$
2,472,324

 
$
2,521,022

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Notes and bonds payable
$
1,395,600

 
$
1,393,537

Accounts payable and accrued liabilities
57,785

 
72,217

Liabilities of discontinued operations
174

 
518

Other liabilities
52,570

 
49,944

Total liabilities
1,506,129

 
1,516,216

Commitments and contingencies

 

Equity:
 
 
 
Preferred stock, $.01 par value; 50,000,000 shares authorized; none issued and outstanding
—

 
—

Common stock, $.01 par value; 150,000,000 shares authorized; 78,002,812 and 77,843,883 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively
780

 
779

Additional paid-in capital
1,896,735

 
1,894,604

Accumulated other comprehensive loss
(3,332
)
 
(3,332
)
Cumulative net income attributable to common stockholders
801,993

 
795,951

Cumulative dividends
(1,729,981
)
 
(1,683,196
)
Total stockholders’ equity
966,195

 
1,004,806

Total liabilities and equity
$
2,472,324

 
$
2,521,022


The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.


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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three Months Ended June 30, 2012 and 2011
(Dollars in thousands, except per share data)
(Unaudited)
 
2012
 
2011
REVENUES
 
 
 
Property operating
$
60,948

 
$
53,320

Single-tenant net lease
12,833

 
13,459

Straight-line rent
1,542

 
1,076

Mortgage interest
2,039

 
1,825

Other operating
1,374

 
2,047

 
78,736

 
71,727

EXPENSES
 
 
 
Property operating
29,457

 
27,773

General and administrative
4,519

 
5,157

Depreciation
21,311

 
18,487

Amortization
2,540

 
1,778

Bad debt, net
149

 
93

 
57,976

 
53,288

OTHER INCOME (EXPENSE)
 
 
 
Interest expense
(18,530
)
 
(17,343
)
Interest and other income, net
203

 
196

 
(18,327
)
 
(17,147
)
INCOME FROM CONTINUING OPERATIONS
2,433

 
1,292

DISCONTINUED OPERATIONS
 
 
 
Income from discontinued operations
659

 
719

Impairments
(167
)
 
—

Gain on sales of real estate properties
3

 
—

INCOME FROM DISCONTINUED OPERATIONS
495

 
719

NET INCOME
2,928

 
2,011

Less: Net income attributable to noncontrolling interests
(20
)
 
—

NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
2,908

 
$
2,011

BASIC EARNINGS PER COMMON SHARE:
 
 
 
Income from continuing operations
$
0.03

 
$
0.02

Discontinued operations
0.01

 
0.01

Net income attributable to common stockholders
$
0.04

 
$
0.03

DILUTED EARNINGS PER COMMON SHARE:
 
 
 
Income from continuing operations
$
0.03

 
$
0.02

Discontinued operations
0.01

 
0.01

Net income attributable to common stockholders
$
0.04

 
$
0.03

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC
76,462,266

 
72,035,154

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED
77,712,493

 
73,149,232

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD
$
0.30

 
$
0.30


The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Six Months Ended June 30, 2012 and 2011
(Dollars in thousands, except per share data)
(Unaudited)
 
2012
 
2011
REVENUES
 
 
 
Property operating
$
119,913

 
$
105,141

Single-tenant net lease
25,092

 
27,503

Straight-line rent
3,449

 
2,364

Mortgage interest
4,331

 
3,474

Other operating
3,146

 
4,345


155,931

 
142,827

EXPENSES
 
 
 
Property operating
58,039

 
55,210

General and administrative
9,782

 
10,938

Depreciation
42,333

 
36,756

Amortization
5,077

 
3,555

Bad debt, net
109

 
271


115,340

 
106,730

OTHER INCOME (EXPENSE)
 
 
 
Loss on extinguishment of debt
—

 
(1,986
)
Interest expense
(36,909
)
 
(39,617
)
Interest and other income, net
508

 
418


(36,401
)
 
(41,185
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
4,190

 
(5,088
)
DISCONTINUED OPERATIONS
 
 
 
Income from discontinued operations
2,777

 
1,448

Impairments
(4,336
)
 
(147
)
Gain on sales of real estate properties
3,431

 
36

INCOME FROM DISCONTINUED OPERATIONS
1,872

 
1,337

NET INCOME (LOSS)
6,062

 
(3,751
)
Less: Net income attributable to noncontrolling interests
(20
)
 
(27
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
6,042

 
$
(3,778
)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
Income (loss) from continuing operations
$
0.05

 
$
(0.07
)
Discontinued operations
0.03

 
0.02

Net income (loss) attributable to common stockholders
$
0.08

 
$
(0.05
)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:


 


Income (loss) from continuing operations
$
0.05

 
$
(0.07
)
Discontinued operations
0.03

 
0.02

Net income (loss) attributable to common stockholders
$
0.08

 
$
(0.05
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC
76,444,487

 
69,109,543

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED
77,678,362

 
69,109,543

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD
$
0.60

 
$
0.60

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.


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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income
For the Three Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
COMPREHENSIVE INCOME
$
2,928

 
$
2,011

Less: Comprehensive income attributable to noncontrolling interests
(20
)
 
—

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
2,908

 
$
2,011

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.





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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Comprehensive Income (Loss)
For the Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
COMPREHENSIVE INCOME (LOSS)
$
6,062

 
$
(3,751
)
Less: Comprehensive income attributable to noncontrolling interests
(20
)
 
(27
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
6,042

 
$
(3,778
)
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.


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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
6,062

 
$
(3,751
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
49,762

 
43,919

Stock-based compensation
1,653

 
1,602

Straight-line rent receivable
(3,445
)
 
(2,395
)
Straight-line rent liability
202

 
246

Gain on sales of real estate properties
(3,431
)
 
(36
)
Loss on extinguishment of debt
—

 
1,986

Impairments
4,336

 
147

Provision for bad debt, net
108

 
287

Changes in operating assets and liabilities:
 
 
 
Other assets
4,050

 
(5,376
)
Accounts payable and accrued liabilities
(9,573
)
 
2,649

Other liabilities
3,073

 
7,217

Net cash provided by operating activities
52,797

 
46,495

INVESTING ACTIVITIES
 
 
 
Acquisition and development of real estate properties
(61,522
)
 
(83,111
)
Funding of mortgages and notes receivable
(28,550
)
 
(83,141
)
Proceeds from sales of real estate
36,109

 
3,775

Proceeds from mortgage repayment by consolidated variable interest entity
35,057

 
—

Proceeds from mortgages and notes receivable repayments
9,232

 
58

Net cash used in investing activities
(9,674
)
 
(162,419
)
FINANCING ACTIVITIES
 
 
 
Net borrowings on unsecured credit facility
4,000

 
123,000

Repayments on notes and bonds payable
(2,436
)
 
(1,616
)
Repurchase of notes payable
—

 
(280,201
)
Dividends paid
(46,785
)
 
(42,570
)
Proceeds from issuance of common stock
511

 
224,045

Common stock redemptions
(45
)
 
(51
)
Distributions to noncontrolling interest holders
—

 
(281
)
Purchase of noncontrolling interests
—

 
(1,591
)
Debt issuance costs
(3
)
 
(356
)
Net cash provided by (used in) financing activities
(44,758
)
 
20,379

Decrease in cash and cash equivalents
(1,635
)
 
(95,545
)
Cash and cash equivalents, beginning of period
4,738

 
113,321

Cash and cash equivalents, end of period
$
3,103

 
$
17,776

 
 
 
 

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
Supplemental Cash Flow Information:
 
 
 
Interest paid
$
38,307

 
$
33,437

Capitalized interest
$
3,469

 
$
4,194

Company-financed real estate property sales
$
11,200

 
$
2,700

Invoices accrued for construction, tenant improvement and other capitalized costs
$
5,931

 
$
15,001

Construction liabilities transferred upon deconsolidation of variable interest entity
$
3,450

 
$
—


The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are an integral part of these financial statements.


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Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(Unaudited)


Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the “Company”) is a real estate investment trust (“REIT”) that integrates owning, managing, financing and developing income-producing real estate properties associated primarily with the delivery of outpatient healthcare services throughout the United States. The Company had investments of approximately $2.9 billion in 205 real estate properties and mortgages as of June 30, 2012. The Company’s 198 owned real estate properties are located in 28 states and total approximately 13.5 million square feet. The Company provided property management services to approximately 10.3 million square feet nationwide.

Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company, its wholly-owned subsidiaries, joint ventures, partnerships and certain variable interest entities (“VIEs”) where the Company controls the operating activities.

The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements that are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Management believes, however, that all adjustments of a normal, recurring nature considered necessary for a fair presentation have been included. All material intercompany transactions and balances have been eliminated in consolidation.

This interim financial information should be read in conjunction with the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2012 for many reasons including, but not limited to, acquisitions, dispositions, capital financing transactions, changes in interest rates and the effects of other trends, risks, and uncertainties.

In January 2012, a construction mortgage note receivable totaling approximately $35.1 million was repaid in full. The construction mortgage note was funding the ongoing development of an inpatient facility in South Dakota that was leased by Sanford Health. In the third quarter of 2011, the Company began consolidating the construction project upon its conclusion that it was the primary beneficiary of the VIE that was constructing the facility. As a result of the consolidation of the VIE, the Company also eliminated the construction mortgage note and related interest on its Condensed Consolidated Financial Statements. Upon repayment of the mortgage note, the Company deconsolidated the VIE and recognized net mortgage interest income of $0.4 million and overhead expense of $0.1 million, resulting in a net gain to the Company of $0.3 million.

The Company also had a variable interest in two unconsolidated VIEs consisting of construction mortgage notes aggregating approximately $68.7 million at June 30, 2012 in which management concluded that the Company was not currently the primary beneficiary.

The Company had an investment in one unconsolidated joint venture of approximately $1.3 million at June 30, 2012 which the Company accounts for under the cost method since the Company does not exert significant influence over the joint venture's operations. The joint venture, which invests in real estate properties, is included in other assets on the Company’s Condensed Consolidated Balance Sheets, and the related distributions received are included in interest and other income, net on the Company’s Condensed Consolidated Statements of Operations.

Use of Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and accompanying

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Notes to Condensed Consolidated Financial Statements - Continued

notes. Actual results may differ from those estimates.

Segment Reporting
The Company owns, acquires, manages, finances, and develops outpatient and other healthcare-related properties. The Company is managed as one reporting unit, rather than multiple reporting units, for internal reporting purposes and for internal decision-making. Therefore, the Company discloses its operating results in a single reportable segment.

Reclassifications
Certain amounts in the Company’s Condensed Consolidated Financial Statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale, and related liabilities, have been reclassified in the Company’s Condensed Consolidated Balance Sheets, and the operating results of those assets have been reclassified from continuing to discontinued operations for all periods presented.

Revenue Recognition
General
The Company recognizes revenue when it is realized or realizable and earned. There are four criteria that must be met before a company may recognize revenue, including: persuasive evidence that an arrangement exists; delivery has occurred or services have been rendered (i.e., the tenant has taken possession of and controls the physical use of the leased asset); the price has been fixed or is determinable; and collectability is reasonably assured. Income received but not yet earned is deferred until such time it is earned. Deferred revenue is included in other liabilities in the Company’s Condensed Consolidated Balance Sheets.

The Company derives most of its revenues from its real estate and mortgage notes receivable portfolio. The Company’s rental and mortgage interest income is recognized based on contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements generally fall into three categories: leases, mortgage notes receivable, and property operating agreements as described in the following paragraphs. The Company may accrue late fees based on the contractual terms of a lease or note. Such fees, if accrued, are included in single-tenant net lease revenue, property operating income, or mortgage interest income in the Company’s Condensed Consolidated Statements of Operations, based on the type of contractual agreement.

Rental Income
Rental income related to non-cancelable operating leases is recognized as earned over the life of the lease agreements on a straight-line basis. The Company’s lease agreements generally include provisions for stated annual increases or increases based on a Consumer Price Index. The Company’s multi-tenant office lease arrangements also generally allow for operating expense recoveries which the Company calculates and bills to its tenants. Rental income from properties under single-tenant net lease arrangements (formerly named master leases) is included in single-tenant net lease revenue and rental income from properties with multi-tenant office lease arrangements is included in property operating income in the Company’s Condensed Consolidated Statements of Operations. The Company’s leases, formerly named as master leases, have over time changed from single tenant leases with underlying sub-tenants occupying the majority of the buildings to buildings that are leased and occupied by a single tenant. As such, the Company has renamed the revenues from these types of agreements to “single-tenant net leases” to describe more fully the nature of these leases.

Interest Income
Mortgage interest income and notes receivable interest income are recognized based on the interest rates and maturity date or amortization period specific to each note. Loan origination fees received are deferred and are recognized in mortgage interest income over the estimated life of the loan.

Property Operating Agreements
At June 30, 2012, the Company had six real estate properties with an aggregate gross investment of approximately $73.6 million subject to property operating agreements that obligate the sponsoring health system to provide to the Company a minimum return on the Company’s investment in the property in exchange for the right to be involved in the operating decisions of the property, including tenancy. If the minimum return is not achieved through normal operations of the property, the sponsor is responsible to the Company for the shortfall under the terms of these agreements. The Company recognizes any shortfall income in other operating income in the Company’s Condensed Consolidated Statements of Operations. Property operating agreement payments totaling approximately $0.5 million per quarter on two of the Company’s properties in New Orleans expired on

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Notes to Condensed Consolidated Financial Statements - Continued

September 30, 2011. No other property operating agreements are scheduled to expire until 2016.

Accumulated Other Comprehensive Loss
Certain items must be included in comprehensive income (loss), including items such as foreign currency translation adjustments, minimum pension liability adjustments, and unrealized gains or losses on available-for-sale securities. The Company’s accumulated other comprehensive loss includes the cumulative pension liability adjustments, which are generally recognized in the fourth quarter of each year.

Income Taxes
No provision has been made for federal income taxes. The Company intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. The Company must distribute at least 90% of its REIT taxable income each year to its stockholders and meet other requirements to continue to qualify as a REIT.

The Company must pay certain state income taxes and the provisions are generally included in general and administrative expense on the Company’s Condensed Consolidated Statements of Operations.

The Company classifies interest and penalties related to uncertain tax positions, if any, in its Condensed Consolidated Financial Statements as a component of general and administrative expense. No such amounts were recognized during the six months ended June 30, 2012 or 2011.

Incentive Plans
The Company has various employee and non-employee stock-based awards outstanding, including restricted stock issued under its incentive plans, and options granted to employees pursuant to its employee stock purchase plan (the “Employee Stock Purchase Plan”). The Company generally recognizes compensation expense for awards issued under its incentive plans based on the grant date fair value of the awards ratably over the requisite service period. Compensation expense for awards issued under the Employee Stock Purchase Plan is based on fair value, net of estimated forfeitures, using the Black-Scholes model, and is generally recognized when the awards are granted in the first quarter of each year since they immediately vest when granted.

Defined Benefit Pension Plan
The Company has a pension plan (the “Executive Retirement Plan”) under which three of the Company’s founding officers may receive certain retirement benefits upon retirement. The plan is unfunded and benefits will be paid from future cash flows of the Company. The maximum annual benefits payable to each individual under the Executive Retirement Plan is $896,000, subject to cost-of-living adjustments. The Company calculates pension expense and the corresponding liability annually on the measurement date (December 31) which requires certain assumptions, such as a discount rate and the recognition of actuarial gains and losses. Pension expense is recognized on an accrual basis over an estimated service period.

Operating Leases
As described in more detail in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, the Company is obligated under operating lease agreements consisting primarily of its corporate office lease and various ground leases related to the Company’s real estate investments where the Company is the lessee.

Discontinued Operations and Assets Held for Sale
The Company sells properties from time to time due to a variety of factors, including among other things, market conditions or the exercise of purchase options by tenants. The operating results of properties that have been sold or are held for sale are reported as discontinued operations in the Company’s Condensed Consolidated Statements of Operations. A company must report discontinued operations when a component of an entity has either been disposed of or is deemed to be held for sale if (i) both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. Long-lived assets classified as held for sale in the Company’s Condensed Consolidated Balance Sheets are reported at the lower of their carrying amount or their estimated fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Losses resulting from the sale or anticipated sale of such properties are characterized as impairment losses relating to discontinued operations in the Company’s Condensed Consolidated Statements of Operations. See Note 3 for a detail of the Company’s assets held for sale and discontinued operations.

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Notes to Condensed Consolidated Financial Statements - Continued


Land Held for Development
Land held for development, which is included in construction in progress in the Company’s Condensed Consolidated Balance Sheets, includes parcels of land owned by the Company upon which the Company intends to develop and own outpatient healthcare facilities.

Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements.

A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

•
Level 1 – quoted prices for identical instruments in active markets;
•
Level 2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and
•
Level 3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

In connection with the sale of five medical office buildings in the second quarter of 2012, the Company recorded impairment charges totaling approximately $0.2 million based on the contractual sales prices, a Level 1 input.

Real Estate Properties
Real estate properties are recorded at cost or fair value, if acquired. Cost or fair value at the time of acquisition is allocated between land, buildings, tenant improvements, lease and other intangibles, and personal property.

The Company also capitalizes direct construction and development costs, including interest, to all consolidated real estate properties that are under construction and substantive activities are ongoing to prepare the asset for its intended use. The Company considers a building as substantially complete and held available for occupancy upon the completion of tenant improvements, but may extend that in some cases to a time no later than one year from cessation of major construction activity. Development costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred.

Mortgage Notes
Mortgage notes receivable may be classified as held-for-investment or held-for-sale based on a lender’s intent and ability to hold the loans. Notes held-for-investment are carried at amortized cost and are reduced by valuation allowances for estimated credit losses as necessary. Notes held-for-sale are carried at the lower of cost or fair value. All of the Company’s notes receivable are classified as held-for-investment.

Allowance for Doubtful Accounts and Credit Losses
Management monitors the aging and collectibility of its accounts receivable balances on an ongoing basis. Whenever there is deterioration in the timeliness of payment from a tenant or sponsor, management investigates and determines the reason(s) for the delay. Considering all information gathered, management’s judgment is exercised in determining whether a receivable is potentially uncollectible and, if so, how much or what percentage may be uncollectible. Among the factors management considers in determining collectibility are: the type of contractual arrangement under which the receivable was recorded (e.g., a triple net lease, a gross lease, a sponsor guaranty agreement, or some other type of agreement); the tenant’s reason for slow payment; industry influences under which the tenant operates; evidence of willingness and ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security deposit, letters of credit or other monies held as security; tenant’s historical payment pattern; other contractual agreements between the tenant and the Company; relationship between the tenant and the Company; the state

11
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued

in which the tenant operates; and the existence of a guarantor and the willingness and ability of the guarantor to pay the receivable. Considering these factors and others, management concludes whether all or some of the aged receivable balance is likely uncollectible. Upon determining that some portion of the receivable is likely uncollectible, the Company records a provision for bad debts for the amount it expects will be uncollectible. When efforts to collect a receivable are exhausted, the receivable amount is charged off against the allowance.

The Company also evaluates collectibility of its mortgage notes and notes receivable and records an allowance on the notes as necessary. A loan is impaired when it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan as scheduled, including both contractual interest and principal payments. If a mortgage loan or note receivable becomes past due, the Company will review the specific circumstances and may discontinue the accrual of interest on the loan. The loan is not returned to accrual status until the debtor has demonstrated the ability to continue debt service in accordance with the contractual terms. Loans placed on non-accrual status will be accounted for either on a cash basis, in which income is recognized only upon receipt of cash, or on a cost-recovery basis, in which all cash receipts reduce the carrying value of the loan, based on the Company’s expectation of future collectibility.

New Pronouncements
On January 1, 2012, the Company adopted the Financial Accounting Standard Board’s Accounting Standards Update (“ASU”) 2011-08, “Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment.” The standard simplifies the process a company must go through to test goodwill for impairment. Companies have an option to first assess qualitative factors of a reporting unit being tested before having to assess quantitative factors. If a company believes no impairment exists based on qualitative factors, then it will no longer be required to perform the two-step quantitative impairment test. The Company tests its $3.5 million of goodwill for impairment as of December 31 of each year. The adoption of this new standard did not have a material impact on the Company’s financial statements.

Note 2. Real Estate and Mortgage Notes Receivable Investments
The Company had investments of approximately $2.9 billion in 205 real estate properties and mortgages as of June 30, 2012. The Company’s 198 owned real estate properties are located in 28 states and total approximately 13.5 million total square feet. The table below details the Company’s investments.

12
Table of Contents

 
Number of
 
Gross Investment
 
Square Feet
(Dollars and Square Feet in thousands)
Investments
 
Amount
 
%
 
Footage
 
%
Owned properties:
 
 
 
 
 
 
 
 
 
Multi-tenant leases
 
 
 
 
 
 
 
 
 
Medical office/outpatient
148

 
$
1,782,088

 
61.8
%
 
9,764

 
72.4
%
Medical office—stabilization in progress
11

 
379,494

 
13.1
%
 
1,186

 
8.8
%
Other
2

 
19,767

 
0.7
%
 
256

 
1.9
%
 
161

 
2,181,349

 
75.6
%
 
11,206

 
83.1
%
Single-tenant net leases
 
 
 
 
 
 
 
 
 
Medical office/outpatient
20

 
190,903

 
6.6
%
 
982

 
7.3
%
Inpatient
14

 
337,492

 
11.7
%
 
1,103

 
8.2
%
Other
2

 
9,545

 
0.3
%
 
91

 
0.7
%
 
36

 
537,940

 
18.6
%
 
2,176

 
16.2
%
Construction in progress
 
 
 
 
 
 
 
 
 
Medical office/outpatient
1

 
9,009

 
0.3
%
 
96

 
0.7
%
Land held for development
—

 
25,171

 
0.9
%
 
—

 
—

 
1

 
34,180

 
1.2
%
 
96

 
0.7
%
Corporate property
—

 
14,804

 
0.5
%
 
—

 
—

 
—

 
14,804

 
0.5
%
 
—

 
—

Total owned properties
198

 
2,768,273

 
95.9
%
 
13,478

 
100.0
%
Mortgage notes receivable:
 
 
 
 
 
 
 
 
 
Medical office/outpatient
4

 
41,801

 
1.4
%
 
—

 
—

Inpatient
1

 
36,258

 
1.3
%
 
—

 
—

Other
1

 
40,000

 
1.4
%
 
—

 
—

 
6

 
118,059

 
4.1
%
 
—

 
—

Unconsolidated joint venture:
 
 
 
 
 
 
 
 
 
Other
1

 
1,266

 
—

 
—

 
—


1

 
1,266

 
—

 
—

 
—

Total real estate investments
205

 
$
2,887,598

 
100.0
%
 
13,478

 
100.0
%

Mortgage Notes Receivable
All of the Company’s mortgage notes receivable are classified as held-for-investment based on management’s intent and ability to hold the loans until maturity. As such, the loans are carried at amortized cost. A summary of the Company’s mortgage notes receivable is shown in the table below:
(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Construction mortgage notes
$
68,694

 
$
51,471

Other mortgage loans
49,365

 
45,910

 
$
118,059

 
$
97,381


As of June 30, 2012, approximately $68.7 million, or 58.2%, of the Company’s mortgage notes receivable were due from affiliates of the United Trust Fund, which is developing two build-to-suit facilities that are fully leased to Mercy Health. Also, approximately $40.0 million, or 33.9%, of the Company’s mortgage notes receivable were due from LB Properties X, LLC.



13
Table of Contents


Note 3. Acquisitions and Dispositions
Real Estate Acquisitions
In January 2012, the Company purchased a 58,285 square foot medical office building in South Dakota for cash consideration of approximately $15.0 million. The property is 100% leased under a single-tenant net lease, which expires in 2022, with an affiliate of “AA-” rated Sanford Health, with a parent guarantee. The property is connected to a new Sanford Health acute care hospital that opened in June 2012.

In February 2012, the Company purchased a 23,312 square foot medical office building in North Carolina for cash consideration of approximately $6.4 million. The building is 100% occupied by two tenants with an affiliate of “AA-” rated Carolinas Healthcare System (“CHS”) occupying 93% of the building. The property is adjacent to a CHS hospital campus where the Company currently owns six medical office buildings totaling approximately 187,000 square feet.

In March 2012, the Company acquired the fee simple interest in 9.14 acres of land in Pennsylvania for cash consideration of approximately $1.2 million. The Company previously held a ground lease interest in this property.

In May 2012, the Company purchased a 76,484 square foot medical office building in Texas for a purchase price of approximately $10.7 million. Concurrent with the acquisition, the Company's construction mortgage note receivable totaling $9.9 million, which was secured by the building, was repaid, resulting in a total of an additional $1.2 million in cash consideration from the Company. The building was 100% leased at the time of the acquisition with lease expirations through 2021.

Mortgage Note Financings
In January 2012, the Company originated a $3.0 million seller-financed mortgage note receivable with the purchaser of two medical office buildings located in Texas that were sold by the Company as discussed in “Asset Dispositions” below. The note has a stated fixed interest rate of 7.25% and matures in January 2014.

In March 2012, the Company originated a $4.5 million seller-financed mortgage note receivable with the purchaser of a medical office building located in Texas that was sold by the Company as discussed in “Asset Dispositions” below. This note was repaid in April 2012.

In April 2012, the Company originated a $3.8 million seller-financed mortgage note receivable with the purchaser of two medical office buildings located in Florida that were sold by the Company as part of a larger disposition as discussed in "Asset Dispositions" below. The note has a stated fixed interest rate of 7.5% and matures in April 2015.

The following table details the Company’s acquisitions and mortgage note financings for the six months ended June 30, 2012:
(Dollars in millions)
Date
Acquired
 
Cash
Consideration
 
Real
Estate
 
Mortgage
Note
Financing
 
Other
 
Square
Footage
Real estate acquisitions
 
 
 
 
 
 
 
 
 
 
South Dakota
1/20/12
 
$
15.0

 
$
14.9

 
$
—

 
$
0.1

 
58,285

North Carolina
2/10/12
 
6.4

 
6.4

 
—

 
—

 
23,312

Pennsylvania
3/16/12
 
1.2

 
1.1

 
—

 
0.1

 
—

Texas
5/23/12
 
1.2

 
10.7

 
(9.9
)
 
0.4

 
76,484



 
23.8

 
33.1

 
(9.9
)
 
0.6

 
158,081

Mortgage note financings

 
 
 
 
 
 
 
 
 
 
Texas
1/10/12
 
3.0

 
—

 
3.0

 
—

 
—

Texas
3/16/12
 
4.5

 
—

 
4.5

 
—

 
—

Florida
4/18/12
 
3.8

 
—

 
3.8

 
—

 
—

 
 
 
11.3

 
—

 
11.3

 
—

 
—

 
 
 
$
35.1

 
$
33.1

 
$
1.4

 
$
0.6

 
158,081


14
Table of Contents


Asset Dispositions
During the first quarter of 2012, the Company disposed of the following properties and mortgage notes:
•
a 14,748 square foot medical office building and an 18,978 square foot medical office building, both in Texas, in which the Company had an aggregate net investment of approximately $2.5 million, for total consideration of approximately $3.4 million. The Company received approximately $0.4 million in net cash proceeds, including prepaid interest, originated a $3.0 million seller-financed mortgage note receivable as discussed above in “Mortgage Note Financings,” and recognized a $0.9 million net gain on the disposal;
•
a 35,752 square foot medical office building in Florida, in which the Company had a net investment of approximately $3.0 million, for total consideration of approximately $5.7 million. The Company received approximately $5.7 million in net cash proceeds and a lease termination fee of $1.5 million which is recorded in income from discontinued operations. The Company also recognized a $2.5 million net gain on the disposal;
•
a 33,895 square foot medical office building in Florida in which the Company had a net investment of approximately $0.5 million for total consideration of approximately $0.5 million;
•
an 82,664 square foot medical office building in Texas, in which the Company had a net investment of approximately $4.8 million, for a purchase price of approximately $4.7 million. The Company originated a $4.5 million seller-financed mortgage note receivable as discussed above in “Mortgage Note Financings” and recognized a $0.4 million impairment on the disposal, including the write-off of straight-line rent receivables and closing costs;
•
two mortgage notes receivable of $1.5 million and $3.2 million for total consideration of approximately $4.7 million; and
•
a construction mortgage note receivable totaling approximately $35.1 million which was repaid in full relating to the ongoing development of an inpatient facility in South Dakota. See Note 1 for more details on this repayment.

During the second quarter of 2012, the Company disposed of the following properties and mortgage notes:

•
a medical office building in Tennessee in which the Company had a net investment of approximately $0.8 million. The Company received approximately $0.8 million in net cash proceeds;
•
five medical office buildings located in Florida were sold to a single buyer for a purchase price of $33.3 million in which the Company had a net aggregate investment of approximately $31.8 million, including $0.6 million of straight-line rent receivables. The Company received approximately $32.4 million in consideration from the sale, including the origination of a $3.8 million seller-financed mortgage note and a $0.6 million contingent liability. The Company recognized a $0.2 million impairment on the disposal, including the write-off of straight-line rent receivables and closing costs. These properties were not previously classified as held for sale;
•
a mortgage note receivable of $4.5 million was repaid; and
•
a mortgage note receivable of $9.9 million was repaid in conjunction with the acquisition of a medical office building in Texas as discussed in “Real Estate Acquisitions” above.


15
Table of Contents

The following table details the Company’s dispositions and mortgage note repayments for the six months ended June 30, 2012:
(Dollars in millions)
Date
Disposed
 
Net
Proceeds
 
Net Real
Estate
Investment
 
Other
(including
receivables)
 
Mortgage
Note
Receivable
 
Gain/
(Impairment)
 
Square
Footage
Real estate dispositions
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas (two properties) (1)
1/10/2012
 
$
0.4

 
$
2.5

 
$
—

 
$
(3.0
)
 
$
0.9

 
33,726

Florida (1)
1/19/2012
 
5.7

 
3.0

 
0.2

 
—

 
2.5

 
35,752

Florida (1)
3/2/2012
 
0.5

 
0.5

 
—

 
—

 
—

 
33,895

Texas (1)
3/16/2012
 
—

 
4.8

 
0.1

 
(4.5
)
 
(0.4
)
 
82,664

Tennessee (1)
4/13/2012
 
0.8

 
0.8

 
—

 
—

 
—

 
18,476

Florida (five properties)
4/18/2012
 
28.6

 
31.2

 
1.4

 
(3.8
)
 
(0.2
)
 
272,571

 
 
 
36.0

 
42.8

 
1.7

 
(11.3
)
 
2.8

 
477,084

Mortgage note repayments
 
 
19.1

 
—

 
—

 
19.1

 
—

 
—

Deconsolidation of VIE (2)
 
 
35.1

 
38.2

 
(3.4
)
 
—

 
0.3

 
113,602

Total dispositions and repayments
 
 
$
90.2

 
$
81.0

 
$
(1.7
)
 
$
7.8

 
$
3.1

 
590,686

________________
(1) Previously included in assets held for sale.
(2) “Other” includes construction liabilities transferred upon deconsolidation. “Gain” includes $0.4 million of net mortgage interest income recognized, partially offset by $0.1 million of general and administrative overhead expense that had been capitalized into the project that was reversed upon deconsolidation.

Discontinued Operations and Assets Held for Sale
During the first quarter of 2012, the Company recorded a $1.5 million lease termination fee related to the sale of a medical office building in Florida which is included in single-tenant net lease revenue in discontinued operations, recorded $3.4 million in gains on property sales, recorded a $0.4 million impairment charge on a property sold, and recorded a $3.8 million impairment charge on a building that was classified as held for sale.

During the second quarter of 2012, the Company sold five properties that were not previously classified as held for sale and recognized a $0.2 million impairment on the disposal.

The following tables detail the assets, liabilities, and results of operations included in discontinued operations on the Company’s Condensed Consolidated Statements of Operations and in assets and liabilities of discontinued operations on the Company’s Condensed Consolidated Balance Sheets. At June 30, 2012 and December 31, 2011, the Company had 9 and 15 properties, respectively, classified as held for sale. Of the 15 properties classified as held for sale at December 31, 2011, three properties in Texas and two properties in Florida were sold during the first quarter of 2012, and one property in Tennessee was sold during the second quarter of 2012.

16
Table of Contents

(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Balance Sheet data (as of the period ended):
 
 
 
Land
$
5,107

 
$
8,078

Buildings, improvements and lease intangibles
23,992

 
44,299

Personal property
440

 
458


29,539

 
52,835

Accumulated depreciation
(16,675
)
 
(24,557
)
Assets held for sale, net
12,864

 
28,278

Other assets, net (including receivables)
57

 
372

Assets of discontinued operations, net
57

 
372

Assets held for sale and discontinued operations, net
$
12,921

 
$
28,650

Accounts payable and accrued liabilities
$
100

 
$
404

Other liabilities
74

 
114

Liabilities of discontinued operations
$
174

 
$
518


 
Three Months Ended
 
Six Months Ended
(Dollars in thousands, except per share data)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Statements of Operations data (for the period ended):
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Property operating
$
269

 
$
665

 
$
910

 
$
1,436

Single-tenant net lease
766

 
1,643

 
3,391

 
3,287

Straight-line rent
3

 
33

 
(4
)
 
31

Other operating
2

 
6

 
9

 
13

 
1,040

 
2,347

 
4,306

 
4,767

Expenses
 
 
 
 
 
 
 
Property operating
305

 
1,006

 
1,111

 
2,067

General and administrative
1

 
3

 
4

 
5

Depreciation
121

 
633

 
487

 
1,259

Amortization
—

 
(8
)
 
—

 
(16
)
Bad debt, net
1

 
—

 
(1
)
 
16

 
428

 
1,634

 
1,601

 
3,331

Other Income (Expense)
 
 
 
 
 
 
 
Interest and other income, net
47

 
6

 
72

 
12

 
47

 
6

 
72

 
12

Discontinued Operations
 
 
 
 
 
 
 
Income from discontinued operations
659

 
719

 
2,777

 
1,448

Impairments
(167
)
 
—

 
(4,336
)
 
(147
)
Gain on sales of real estate properties
3

 
—

 
3,431

 
36

Income from Discontinued Operations
$
495

 
$
719

 
$
1,872

 
$
1,337

Income from Discontinued Operations per Common Share—Basic
$
0.01

 
$
0.01

 
$
0.03

 
$
0.02

Income from Discontinued Operations per Common Share—Diluted
$
0.01

 
$
0.01

 
$
0.03

 
$
0.02




17
Table of Contents


Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of June 30, 2012 and December 31, 2011.
(Dollars in thousands)
June 30, 2012
 
December 31, 2011
 
Maturity
Dates
 
Contractual
Interest Rates
 
Principal
Payments
 
Interest
Payments
Unsecured Credit Facility
$
216,000

 
$
212,000

 
10/15
 
LIBOR + 1.50%
 
At maturity
 
Quarterly
Senior Notes due 2014, net of discount
264,445

 
264,371

 
4/14
 
5.125%
 
At maturity
 
Semi-Annual
Senior Notes due 2017, net of discount
298,594

 
298,465

 
1/17
 
6.500%
 
At maturity
 
Semi-Annual
Senior Notes due 2021, net of discount
397,178

 
397,052

 
1/21
 
5.750%
 
At maturity
 
Semi-Annual
Mortgage notes payable, net of discount and including premiums
219,383

 
221,649

 
4/13-10/30
 
5.000%-7.625%
 
Monthly
 
Monthly
 
$
1,395,600

 
$
1,393,537

 
 
 
 
 
 
 
 

The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such loan 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 June 30, 2012, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Unsecured Credit Facility
On October 14, 2011, the Company entered into a $700.0 million unsecured credit facility due 2015 (the “Unsecured Credit Facility”) with a syndicate of 17 lenders that matures on October 14, 2015 with an option to extend the facility for one additional year for an extension fee of 0.20% of the aggregate commitments. Amounts outstanding under the Unsecured Credit Facility bear interest at LIBOR plus the applicable margin rate (defined as a range of 1.075% to 1.900% depending on the Company’s unsecured debt ratings, currently 1.5%). In addition, the Company pays a 0.35% facility fee per annum on the aggregate amount of commitments. The facility fee ranges from 0.175% per annum to 0.45% per annum, based on the Company’s unsecured debt ratings. At June 30, 2012, the Company had $216.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.75% and a remaining borrowing capacity of approximately $484.0 million.

Senior Notes due 2014
On March 30, 2004, the Company issued $300.0 million of unsecured senior notes due 2014 (the “Senior Notes due 2014”). The Senior Notes due 2014 bear interest at 5.125% per annum, payable semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $1.5 million, which yielded a 5.19% interest rate per annum upon issuance. In previous years, the Company repurchased approximately $35.3 million of the Senior Notes due 2014 and accreted a pro-rata portion of the discount upon the repurchases. The following table reconciles the balance of the Senior Notes due 2014 on the Company’s Condensed Consolidated Balance Sheets.
(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Senior Notes due 2014 face value
$
264,737

 
$
264,737

Unaccreted discount
(292
)
 
(366
)
Senior Notes due 2014 carrying amount
$
264,445

 
$
264,371



18
Table of Contents

Senior Notes due 2017
On December 4, 2009, the Company issued $300.0 million of unsecured senior notes due 2017 (the “Senior Notes due 2017”). The Senior Notes due 2017 bear interest at 6.50% per annum, payable semi-annually on January 17 and July 17, and are due on January 17, 2017, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $2.0 million, which yielded a 6.618% interest rate per annum upon issuance. The following table reconciles the balance of the Senior Notes due 2017 on the Company’s Condensed Consolidated Balance Sheets.

(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Senior Notes due 2017 face value
$
300,000

 
$
300,000

Unaccreted discount
(1,406
)
 
(1,535
)
Senior Notes due 2017 carrying amount
$
298,594

 
$
298,465


Senior Notes due 2021
On December 13, 2010, the Company issued $400.0 million of unsecured senior notes due 2021 (the “Senior Notes due 2021”). The Senior Notes due 2021 bear interest at 5.75% per annum, payable semi-annually on January 15 and July 15, beginning January 15, 2011, and are due on January 15, 2021, unless redeemed earlier by the Company. The notes were issued at a discount of approximately $3.2 million, which yielded a 5.855% interest rate per annum upon issuance. The following table reconciles the balance of the Senior Notes due 2021 on the Company’s Condensed Consolidated Balance Sheets.
(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Senior Notes due 2021 face value
$
400,000

 
$
400,000

Unaccreted discount
(2,822
)
 
(2,948
)
Senior Notes due 2021 carrying amount
$
397,178

 
$
397,052


Mortgage Notes Payable
The following table reconciles the Company’s aggregate mortgage notes principal balance with the Company’s Condensed Consolidated Balance Sheets.
(Dollars in thousands)
June 30,
2012
 
December 31,
2011
Mortgage notes payable principal balance
$
222,941

 
$
225,377

Unaccreted discount, net of premium
(3,558
)
 
(3,728
)
Mortgage notes payable carrying amount
$
219,383

 
$
221,649



19
Table of Contents

The following table further details the Company’s mortgage notes payable, with related collateral, at June 30, 2012.
 
 
 
Effective
 
 
 
 
 
 
 
Investment in
Collateral at
 
Balance at
(Dollars in millions)
Original
Balance
 
Interest
Rate (18)
 
Maturity
Date
 
Collateral(19)
 
Payments (14)
 
June 30, 2012
 
June 30, 2012
 
December 31, 2011
Life Insurance Co.
$
4.7

 
7.765
%
 
1/17
 
MOB
 
Monthly/20-yr amort.
 
$
11.7

 
$
1.8

 
$
1.9

Commercial Bank
1.8

 
5.550
%
 
10/30
 
OTH
 
Monthly/27-yr amort.
 
7.9

 
1.6

 
1.6

Life Insurance Co.
15.1

 
5.490
%
 
1/16
 
MOB
 
Monthly/10-yr amort.
 
32.7

 
12.9

 
13.1

Commercial Bank (1)
17.4

 
6.480
%
 
5/15
 
MOB
 
Monthly/10-yr amort.
 
19.9

 
14.6

 
14.5

Commercial Bank (2)
12.0

 
6.110
%
 
7/15
 
2 MOBs
 
Monthly/10-yr amort.
 
19.5

 
9.8

 
9.8

Commercial Bank (3)
15.2

 
7.650
%
 
7/20
 
MOB
 
(15)
 
20.2

 
12.8

 
12.8

Life Insurance Co. (4)
1.5

 
6.810
%
 
7/16
 
MOB
 
Monthly/9-yr amort.
 
2.1

 
1.1

 
1.1

Commercial Bank (5)
12.9

 
6.430
%
 
2/21
 
MOB
 
Monthly/12-yr amort.
 
20.6

 
11.3

 
11.4

Investment Fund
80.0

 
7.250
%
 
12/16
 
15 MOBs
 
Monthly/30-yr amort.(16)
 
155.0

 
78.0

 
78.4

Life Insurance Co.
7.0

 
5.530
%
 
1/18
 
MOB
 
Monthly/15-yr amort.
 
14.5

 
3.3

 
3.5

Investment Co. (6)
15.9

 
6.550
%
 
4/13
 
MOB
 
Monthly/30-yr amort.(17)
 
23.3

 
15.0

 
15.2

Investment Co.
4.6

 
5.250
%
 
9/15
 
MOB
 
Monthly/10-yr amort.
 
6.9

 
4.3

 
4.3

Life Insurance Co. (7)
13.9

 
4.700
%
 
1/16
 
MOB
 
Monthly/25-yr amort.
 
26.4

 
12.1

 
12.4

Life Insurance Co. (8)
21.5

 
4.700
%
 
8/15
 
MOB
 
Monthly/25-yr amort.
 
43.8

 
18.5

 
18.8

Insurance Co. (9)
7.3

 
5.100
%
 
12/18
 
MOB
 
Monthly/25-yr amort.
 
14.6

 
7.4

 
7.5

Commercial Bank (10)
8.1

 
4.540
%
 
8/16
 
MOB
 
Monthly/10-yr amort.
 
15.1

 
7.6

 
7.7

Life Insurance Co. (11) (12)
5.3

 
4.060
%
 
11/14
 
MOB
 
Monthly/25-yr amort.
 
11.6

 
4.6

 
4.8

Life Insurance Co. (13)
3.1

 
4.060
%
 
11/14
 
MOB
 
Monthly/25-yr amort.
 
6.7

 
2.7

 
2.8

 
 
 
 
 
 
 
 
 
 
 
$
452.5

 
$
219.4

 
$
221.6

_______________
(1) The unaccreted portion of a $2.7 million discount recorded on this note upon acquisition is included in the balance above.
(2) The unaccreted portion of a $2.1 million discount recorded on this note upon acquisition is included in the balance above.
(3) The unaccreted portion of a $2.4 million discount recorded on this note upon acquisition is included in the balance above.
(4) The unaccreted portion of a $0.2 million discount recorded on this note upon acquisition is included in the balance above.
(5) The unaccreted portion of a $1.0 million discount recorded on this note upon acquisition is included in the balance above.
(6) The unamortized portion of a $0.5 million premium recorded on this note upon acquisition is included in the balance above.
(7) The unamortized portion of a $0.3 million premium recorded on this note upon acquisition is included in the balance above.
(8) The unamortized portion of a $0.4 million premium recorded on this note upon acquisition is included in the balance above.
(9) The unamortized portion of a $0.6 million premium recorded on this note upon acquisition is included in the balance above.
(10) The unamortized portion of a $0.2 million premium recorded on this note upon acquisition is included in the balance above.
(11) The balance consists of two notes secured by the same building.
(12) The unamortized portions of a $0.3 million premium recorded on these notes upon acquisition are included in the balance above.
(13) The unamortized portion of a $0.2 million premium recorded on this note upon acquisition is included in the balance above.
(14) Payable in monthly installments of principal and interest with the final payment due at maturity (unless otherwise noted).
(15) Payable in monthly installments of interest only for 24 months and then installments of principal and interest based on an 11-year amortization with the final payment due at maturity.
(16) The Company has the option to extend the maturity for two, one-year floating rate extension terms.
(17) The Company has the option to extend the maturity for three years at a fixed rate of 6.75%.
(18) The contractual interest rates for the 19 outstanding mortgage notes ranged from 5.00% to 7.625% at June 30, 2012.
(19) MOB-Medical office building; OTH-Other.


20
Table of Contents

Long-Term Debt Maturities
Future contractual maturities of the Company’s notes and bonds payable as of June 30, 2012 were:
(Dollars in thousands)
Principal
Maturities
 
Net Accretion/
Amortization (1)
 
Notes and
Bonds Payable
 
%
2012 (remaining)
$
2,512

 
$
(520
)
 
$
1,992

 
0.1
%
2013
19,781

 
(1,263
)
 
18,518

 
1.3
%
2014
276,349

 
(1,404
)
 
274,945

 
19.7
%
2015
265,775

 
(1,215
)
 
264,560

 
19.0
%
2016
106,376

 
(907
)
 
105,469

 
7.6
%
2017 and thereafter
732,885

 
(2,769
)
 
730,116

 
52.3
%
 
$
1,403,678

 
$
(8,078
)
 
$
1,395,600

 
100.0
%
_______________
(1) Includes discount accretion and premium amortization related to the Company’s Senior Notes due 2014, Senior Notes due 2017, Senior Notes due 2021 and 13 mortgage notes payable.

Note 5. Other Assets
Other assets consist primarily of prepaid assets, straight-line rent receivables, intangible assets and receivables. Items included in other assets on the Company’s Condensed Consolidated Balance Sheets are detailed in the table below.
(In thousands)
June 30,
2012
 
December 31,
2011
Prepaid assets
$
44,548

 
$
45,054

Straight-line rent receivables
33,177

 
30,374

Above-market intangible assets, net
13,010

 
13,263

Deferred financing costs, net
12,202

 
13,783

Accounts receivable, net
5,035

 
8,181

Goodwill
3,487

 
3,487

Customer relationship intangible assets, net
2,070

 
2,103

Equity investments in joint venture—cost method
1,266

 
1,266

Notes receivable, net
244

 
283

Allowance for uncollectible accounts
(625
)
 
(583
)
Other
1,231

 
1,171

 
$
115,645

 
$
118,382




21
Table of Contents


Note 6. Commitments and Contingencies
Development Activity
The Company had several development projects ongoing at June 30, 2012, including one construction project, two construction mortgage notes and eleven properties in the process of stabilization subsequent to construction as detailed in the following table.
(Dollars in thousands)
Number
of
Properties
 
Funded
During Three
Months Ended
June 30, 2012
 
Total Amount
Funded
Through
June 30, 2012
 
Estimated
Remaining
Budget
 
Estimated
Total
Budget
 
Approximate
Square
Feet
Construction in progress (1)
1
 
$
2,169

 
$
9,009

 
$
4,950

 
$
13,959

 
96,433

Construction mortgage notes
2
 
15,597

 
68,694

 
133,920

 
202,614

 
386,000

Stabilization in progress (1)
11
 
6,979

 
379,494

 
16,532

 
396,026

 
1,185,863

Land held for development
—
 
—

 
25,171

 
—

 
—

 
—

Total
14
 
$
24,745

 
$
482,368

 
$
155,402

 
$
612,599

 
1,668,296

         
(1) The estimated total budget for the development properties reflects the original budget including estimated tenant improvement allowances but does not include any estimate of excess tenant improvement cost financing by the Company. To the extent actual amounts funded for the development properties reflect excess tenant improvement costs financed by the Company, the estimated remaining fundings could be greater than the amount budgeted.

Construction in Progress
The Company had one construction project ongoing at June 30, 2012 with an estimated completion date during the third quarter of 2012. The project commenced in July 2011 and consists of a 96,433 square foot, on-campus medical office building in Texas with significant pre-leasing. The project has an estimated total budget of approximately $14.0 million and is adjacent to a medical office building that the Company acquired in late 2010. A $4.1 million parking structure associated with this project was completed and was placed into service in the second quarter of 2012.

The table below details the Company’s construction in progress and land held for development as of June 30, 2012. The information included in the table represents management’s estimates and expectations at June 30, 2012, which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.
State
 
Estimated
Completion
Date
 
Property
Type (2)
 
Properties
 
Approximate
Square Feet
 
CIP at
June 30,
2012
 
Estimated
Remaining
Budget
 
Estimated
Total
Budget
(Dollars in thousands)
 
 
 
 
 
 
 

 
 
 
 
 
 
Under construction: (1)
 

 

 

 

 

 

 

Texas
 
3Q 2012
 
MOB
 
1
 
96,433
 
$
9,009

 
$
4,950

 
$
13,959

Land held for development:
 

 

 

 

 

 

 

Iowa
 

 

 
—
 

 
4,399

 

 

Texas
 

 

 
—
 

 
20,772

 

 

 
 
 
 
 
 
1
 
96,433
 
$
34,180

 
$
4,950

 
$
13,959

         
(1) The estimated total budget for the development property reflects the original budget including estimated tenant improvement allowances but does not include any estimate of excess tenant improvement cost financing by the Company. To the extent actual amounts funded for the development property reflect excess tenant improvement costs financed by the Company, the estimated remaining fundings could be greater than the amount budgeted.
(2) MOB-Medical office building.

Construction Mortgage Notes
The Company had two construction mortgage notes totaling $68.7 million at June 30, 2012 due from affiliates of the United Trust Fund, which is developing two build-to-suit facilities that are fully leased to Mercy Health. The Company expects that the remaining funding commitments totaling $133.9 million on these notes will be funded during the remainder of 2012 and 2013.


22
Table of Contents

Stabilization in Progress
At June 30, 2012, the Company had 11 properties that it had previously developed that were in the process of stabilization. In the aggregate, the properties were approximately 51% leased and 33% occupied at June 30, 2012, with tenant improvement build-out occurring in suites that are leased but not yet occupied by the tenants. The Company’s remaining funding commitments on these properties at June 30, 2012 relates to tenant improvements.

Legal Proceedings
Two affiliates of the Company, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., are defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs. The plaintiffs alleged that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and sought a refund of such overpayments. Plaintiffs were seeking up to $2.0 million, plus pre- and post-judgment interest and attorneys’ fees. The two leases were terminated by agreement in 2003. The Company denied that it was liable to the plaintiffs and filed a motion for summary judgment seeking dismissal of the case. The Circuit Court of Davidson County, Tennessee granted the Company’s motion for summary judgment and the case was dismissed with prejudice by order entered on July 20, 2011. On August 11, 2011, the plaintiffs filed a notice of appeal with the Tennessee Court of Appeals. Briefs have been filed by all parties and oral arguments were heard before the Court of Appeals on May 23, 2012. The Company believes the trial court’s dismissal of the case should be affirmed but can provide no assurance as to the outcome of the appeal.

The Company is a co-defendant in a lawsuit initially filed June 28, 2011 in the District Court of Collin County, Texas captioned James P. Murphy, JPM Realty Property Management, Inc., and Rainier Medical Investments LLC v. LandPlan Development Corp., LandPlan Medical, L.P., Frisco Surgery Center Limited, Frisco POB I Limited, Frisco POB II Limited, Medland L.P., Texas Land Management, L.L.C., Jim Williams, Jr., Reed Williams, and Healthcare Realty Trust, Inc. The original plaintiffs, James P. Murphy and JPM Realty Property Management, Inc. (the “Murphy Plaintiffs”) allege they are due a real estate commission arising out of the sale of certain real property in Frisco, Texas (“the Frisco Property”). Certain affiliates of the Company purchased the Frisco Property in December 2010 from Frisco Surgery Center Limited, Frisco POB I Limited, Frisco POB II Limited, and Medland L.P. (collectively, the “Sellers”). The Murphy Plaintiffs assert breach of contract and common law business tort theories in pursuit of their claim for a commission in the amount of $1.34 million, as well as unspecified punitive damages. The Company denies any liability to the Murphy Plaintiffs and filed a motion for summary judgment with the court as to their claims. The Company’s motion for summary judgment was partially granted as to the Murphy Plaintiffs’ breach of contract claims and third party beneficiary claims on April 19, 2012. The Murphy Plaintiffs' remaining claims against the Company were dismissed on summary judgment on July 22, 2012. The Company was served with an amended complaint in the case on or about February 28, 2012 in which Rainier Medical Investments LLC (“Rainier”) joined as a plaintiff. Rainier alleges breach of contract, unfair competition, breach of fiduciary duty, and various common law business tort and equitable claims against the Company arising out of the Company’s alleged exclusion of Rainier from participation as an investor in the Frisco Property acquisition. Rainier seeks compensatory and punitive damages in excess of $10 million. The Company denies any liability to Rainier and will defend the claims vigorously. Discovery is ongoing and a trial date is expected in late 2012.

The Company is, from time to time, involved in litigation arising out of the ordinary course of business or which is expected to be covered by insurance. The Company is not aware of any other pending or threatened litigation that, if resolved against the Company, would have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.



23
Table of Contents


Note 7. Stockholders’ Equity
The following table provides a reconciliation of total stockholders' equity for the six months ended June 30, 2012:
(Dollars in thousands, except per share data)
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Cumulative
Net
Income
 
Cumulative
Dividends
 
Total
Stockholders’
Equity
Balance at Dec. 31, 2011
$
779

 
$
1,894,604

 
$
(3,332
)
 
$
795,951

 
$
(1,683,196
)
 
$
1,004,806

Issuance of common stock
1

 
523

 
—

 
—

 
—

 
524

Common stock redemption
—

 
(45
)
 
—

 
—

 
—

 
(45
)
Stock-based compensation
—

 
1,653

 
—

 
—

 
—

 
1,653

Net income attributable to common stockholders
—

 
—

 
—

 
6,042

 
—

 
6,042

Dividends to common stockholders ($0.60 per share)
—

 
—

 
—

 
—

 
(46,785
)
 
(46,785
)
Balance at June 30, 2012
$
780

 
$
1,896,735

 
$
(3,332
)
 
$
801,993

 
$
(1,729,981
)
 
$
966,195


Common Stock
The following table provides a reconciliation of the beginning and ending common stock outstanding for the six months ended June 30, 2012 and the year ended December 31, 2011:
 
Six Months Ended
 
Year Ended
 
June 30,
2012
 
December 31,
2011
Balance, beginning of period
77,843,883

 
66,071,424

Issuance of common stock
30,182

 
11,681,392

Restricted stock-based awards, net of forfeitures
128,747

 
91,067

Balance, end of period
78,002,812

 
77,843,883


At-The-Market Equity Offering Program
Since December 2008, the Company has had in place an at-the-market equity offering program to sell shares of its common stock from time to time in at-the-market sales transactions. The Company has not sold any shares under this program since July 2011 and had 2,791,300 authorized shares remaining to be sold under the current sales agreement at June 30, 2012.

Common Stock Dividends
During the first six months of 2012, the Company declared and paid common stock dividends totaling $0.60 per share.

On July 31, 2012, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on August 31, 2012 to stockholders of record on August 16, 2012.

Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three and six months ended June 30, 2012 and 2011.

24
Table of Contents

 
Three Months Ended
 
Six Months Ended
(Dollars in thousands, except per share data)
June 30,
2012
 
June 30,
2011
 
June 30,
2012
 
June 30,
2011
Weighted average Common Shares outstanding
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
77,977,278

 
73,476,473

 
77,961,391

 
70,550,070

Unvested restricted stock
(1,515,012
)
 
(1,441,319
)
 
(1,516,904
)
 
(1,440,527
)
Weighted average Common Shares Outstanding—Basic
76,462,266

 
72,035,154

 
76,444,487

 
69,109,543

Weighted average Common Shares—Basic
76,462,266

 
72,035,154

 
76,444,487

 
69,109,543

Dilutive effect of restricted stock
1,127,522

 
1,045,698

 
1,108,456

 
—

Dilutive effect of employee stock purchase plan
122,705

 
68,380

 
125,419

 
—

Weighted average Common Shares Outstanding—Diluted
77,712,493

 
73,149,232

 
77,678,362

 
69,109,543

Net income (loss)
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
2,433

 
$
1,292

 
$
4,190

 
$
(5,088
)
Noncontrolling interests’ share in net income
(20
)
 
—