HR-2012.9.30-10Q
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: September 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 October 31, 2012, 87,230,950 shares of the Registrant’s Common Stock were outstanding.
 

Table of Contents

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

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

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
 
(Unaudited)
 
 
 
September 30,
2012
 
December 31,
2011
ASSETS
 
 
 
Real estate properties:
 
 
 
Land
$
156,427

 
$
162,843

Buildings, improvements and lease intangibles
2,544,935

 
2,521,226

Personal property
18,860

 
18,221

Construction in progress
—

 
61,152

Land held for development
25,171

 
25,176

 
2,745,393

 
2,788,618

Less accumulated depreciation
(557,951
)
 
(516,747
)
Total real estate properties, net
2,187,442

 
2,271,871

Cash and cash equivalents
8,781

 
4,738

Mortgage notes receivable
141,107

 
97,381

Assets held for sale and discontinued operations, net
11,550

 
28,650

Other assets, net
121,896

 
118,382

Total assets
$
2,470,776

 
$
2,521,022

LIABILITIES AND EQUITY
 
 
 
Liabilities:
 
 
 
Notes and bonds payable
$
1,212,615

 
$
1,393,537

Accounts payable and accrued liabilities
51,264

 
72,217

Liabilities of discontinued operations
162

 
518

Other liabilities
55,668

 
49,944

Total liabilities
1,319,709

 
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; 87,230,936 and 77,843,883 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
872

 
779

Additional paid-in capital
2,099,101

 
1,894,604

Accumulated other comprehensive loss
(3,332
)
 
(3,332
)
Cumulative net income attributable to common stockholders
807,808

 
795,951

Cumulative dividends
(1,753,382
)
 
(1,683,196
)
Total stockholders’ equity
1,151,067

 
1,004,806

Total liabilities and equity
$
2,470,776

 
$
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.


1
Table of Contents

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
REVENUES
 
 
 
 
 
 
 
Rental income
$
75,305

 
$
70,004

 
$
222,479

 
$
203,446

Mortgage interest
2,244

 
1,776

 
6,575

 
5,250

Other operating
1,523

 
2,061

 
4,664

 
6,400

 
79,072

 
73,841

 
233,718

 
215,096

EXPENSES
 
 
 
 
 
 
 
Property operating
30,115

 
30,070

 
87,970

 
85,108

General and administrative
4,732

 
5,530

 
14,514

 
16,467

Depreciation
21,172

 
19,150

 
63,098

 
55,496

Amortization
2,554

 
2,222

 
7,631

 
5,777

Bad debt, net
40

 
(353
)
 
149

 
(82
)
 
58,613

 
56,619

 
173,362

 
162,766

OTHER INCOME (EXPENSE)
 
 
 
 
 
 
 
Loss on extinguishment of debt
—

 
—

 
—

 
(1,986
)
Interest expense
(18,905
)
 
(17,928
)
 
(55,814
)
 
(57,546
)
Interest and other income, net
204

 
199

 
711

 
618

 
(18,701
)
 
(17,729
)
 
(55,103
)
 
(58,914
)
INCOME (LOSS) FROM CONTINUING OPERATIONS
1,758

 
(507
)
 
5,253

 
(6,584
)
DISCONTINUED OPERATIONS
 
 
 
 
 
 
 
Income from discontinued operations
672

 
1,352

 
4,145

 
3,789

Impairments
(2,860
)
 
(1,551
)
 
(7,197
)
 
(1,698
)
Gain on sales of real estate properties
6,265

 
1,357

 
9,696

 
1,393

INCOME FROM DISCONTINUED OPERATIONS
4,077

 
1,158

 
6,644

 
3,484

NET INCOME (LOSS)
5,835

 
651

 
11,897

 
(3,100
)
Less: Net income attributable to noncontrolling interests
(20
)
 
(4
)
 
(40
)
 
(31
)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
5,815

 
$
647

 
$
11,857

 
$
(3,131
)
BASIC EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.01
)
 
$
0.07

 
$
(0.09
)
Discontinued operations
0.06

 
0.02

 
0.08

 
0.05

Net income (loss) attributable to common stockholders
$
0.08

 
$
0.01

 
$
0.15

 
$
(0.04
)
DILUTED EARNINGS (LOSS) PER COMMON SHARE:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.02

 
$
(0.01
)
 
$
0.07

 
$
(0.09
)
Discontinued operations
0.05

 
0.02

 
0.08

 
0.05

Net income (loss) attributable to common stockholders
$
0.07

 
$
0.01

 
$
0.15

 
$
(0.04
)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—BASIC
76,712,594

 
76,139,055

 
76,534,508

 
71,478,463

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING—DILUTED
78,020,971

 
76,139,055

 
77,799,291

 
71,478,463

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

 
$
0.30

 
$
0.90

 
$
0.90

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 Three and Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
COMPREHENSIVE INCOME (LOSS)
$
5,835

 
$
651

 
$
11,897

 
$
(3,100
)
Less: Comprehensive income attributable to noncontrolling interests
(20
)
 
(4
)
 
(40
)
 
(31
)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
5,815


$
647

 
$
11,857

 
$
(3,131
)























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.

3
Table of Contents

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
11,897

 
$
(3,100
)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
 
 
 
Depreciation and amortization
74,688

 
67,384

Stock-based compensation
2,588

 
2,272

Straight-line rent receivable
(4,926
)
 
(3,493
)
Straight-line rent liability
312

 
369

Gain on sales of real estate properties
(9,696
)
 
(1,393
)
Loss on extinguishment of debt
—

 
1,986

Impairments
7,197

 
1,698

Provision for bad debt, net
147

 
(65
)
Changes in operating assets and liabilities:
 
 
 
Other assets
(3,051
)
 
(4,532
)
Accounts payable and accrued liabilities
(13,228
)
 
(1,380
)
Other liabilities
6,344

 
7,500

Net cash provided by operating activities
72,272

 
67,246

INVESTING ACTIVITIES
 
 
 
Acquisition and development of real estate properties
(76,134
)
 
(179,851
)
Funding of mortgages and notes receivable
(54,264
)
 
(91,978
)
Proceeds from sales of real estate
64,866

 
4,993

Proceeds from mortgage repayment by previously consolidated VIE
35,057

 
—

Proceeds from mortgages and notes receivable repayments
11,931

 
14,988

Net cash used in investing activities
(18,544
)
 
(251,848
)
FINANCING ACTIVITIES
 
 
 
Net borrowings (repayments) on unsecured credit facility
(178,000
)
 
175,000

Repayments on notes and bonds payable
(3,678
)
 
(2,537
)
Repurchase of notes payable
—

 
(280,201
)
Dividends paid
(70,186
)
 
(65,918
)
Net proceeds from issuance of common stock
202,247

 
251,836

Common stock redemptions
(45
)
 
(51
)
Distributions to noncontrolling interest holders
(20
)
 
(281
)
Purchase of noncontrolling interests
—

 
(1,591
)
Debt issuance and assumption costs
(3
)
 
(922
)
Net cash provided by (used in) financing activities
(49,685
)
 
75,335

Increase (decrease) in cash and cash equivalents
4,043

 
(109,267
)
Cash and cash equivalents, beginning of period
4,738

 
113,321

Cash and cash equivalents, end of period
$
8,781

 
$
4,054

 
 
 
 

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Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2012 and 2011
(Dollars in thousands)
(Unaudited)
 
2012
 
2011
Supplemental Cash Flow Information:
 
 
 
Interest paid
$
64,773

 
$
61,253

Capitalized interest
$
4,782

 
$
6,402

Company-financed real estate property sales
$
11,200

 
$
2,700

Invoices accrued for construction, tenant improvement and other capitalized costs
$
2,717

 
$
17,075

Construction liabilities transferred upon deconsolidation of VIE
$
3,450

 
$
—

Estimated equity issuance costs accrued but not yet paid
$
218

 
$
—

Mortgage notes payable assumed upon acquisition (adjusted to fair value)
$
—

 
$
46,832

Elimination of mortgage note upon consolidation of VIE
$
—

 
$
21,939































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.


5
Table of Contents
Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
September 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 201 real estate properties and mortgages as of September 30, 2012. The Company’s 195 owned real estate properties are located in 28 states and total approximately 13.3 million square feet. The Company provided property management services to approximately 10.2 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 other affiliates, as well as certain variable interest entities (“VIEs”) in prior periods where the Company controlled the operating activities of the VIE.

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 in the first quarter of 2012, 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 $94.4 million at September 30, 2012 in which management concluded that the Company was not currently the primary beneficiary. See Note 2 for more information on these mortgage notes.

The Company had an investment in one unconsolidated joint venture of approximately $1.3 million at September 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.


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Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued

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 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. Also, land held for development has been reclassified from construction in progress to its own line item on the Company's Condensed Consolidated Balance Sheets for all periods presented.

In addition, the Company has combined revenues previously disclosed separately as property operating income, single-tenant net leases, and straight-line rent into one line item, rental income, in the Company's Condensed Consolidated Statements of Operations for all periods presented. The components of rental income are detailed in the Company's revenue recognition policy disclosure below.

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 rentals 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 rental 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 and rental income from properties with multi-tenant office lease arrangements are included in rental income in the Company’s Condensed Consolidated Statements of Operations.


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Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued

The components of rental income are as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(In thousands)
2012
2011
 
2012
2011
 
 
 
 
 
 
Property operating income
$
60,982

$
56,265

 
$
180,323

$
160,854

Single-tenant net lease
12,862

12,653

 
37,903

39,150

Straight-line rent
1,461

1,086

 
4,253

3,442

 
$
75,305

$
70,004

 
$
222,479

$
203,446


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 September 30, 2012, the Company had six real estate properties with an aggregate gross investment of approximately $73.7 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 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 nine months ended September 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.


8
Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued

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.

Land Held for Development
Land held for development 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 properties in the third quarter of 2012, the Company recorded impairment charges totaling approximately $2.9 million based on the contractual sales prices, a Level 1 input.


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Table of Contents
Notes to Condensed Consolidated Financial Statements - Continued

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 among 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 mortgage 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 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.



10
Table of Contents

Note 2. Real Estate and Mortgage Notes Receivable Investments
The Company had investments of approximately $2.9 billion in 201 real estate properties and mortgages as of September 30, 2012. The Company’s 195 owned real estate properties are located in 28 states and total approximately 13.3 million total square feet. The table below details the Company’s investments.
 
Number of
 
Gross Investment
 
Square Feet
(Dollars and Square Feet in thousands)
Investments
 
Amount
 
%
 
Footage
 
%
Owned properties:
 
 
 
 
 
 
 
 
 
Multi-tenant leases
 
 
 
 
 
 
 
 
 
Medical office/outpatient
147

 
$
1,772,130

 
61.4
%
 
9,703

 
72.8
%
Medical office—stabilization in progress
12

 
395,494

 
13.7
%
 
1,283

 
9.6
%
Other
2

 
19,842

 
0.7
%
 
256

 
1.9
%
 
161

 
2,187,466

 
75.8
%
 
11,242

 
84.3
%
Single-tenant net leases
 
 
 
 
 
 
 
 
 
Medical office/outpatient
18

 
170,910

 
5.9
%
 
888

 
6.7
%
Inpatient
14

 
337,456

 
11.7
%
 
1,103

 
8.3
%
Other
2

 
9,545

 
0.3
%
 
91

 
0.7
%
 
34

 
517,911

 
17.9
%
 
2,082

 
15.7
%

 
 
 
 
 
 
 
 
 
Construction in progress
—

 
—

 
—

 
—

 
—

Land held for development
—

 
25,171

 
0.9
%
 
—

 
—

Corporate property
—

 
14,845

 
0.5
%
 
—

 
—

 
—

 
40,016

 
1.4
%
 
—

 
—

 
 
 
 
 
 
 
 
 
 
Total owned properties
195

 
2,745,393

 
95.1
%
 
13,324

 
100.0
%
Mortgage notes receivable:
 
 
 
 
 
 
 
 
 
Medical office/outpatient
3

 
52,885

 
1.8
%
 
—

 
—

Inpatient
1

 
48,222

 
1.7
%
 
—

 
—

Other
1

 
40,000

 
1.4
%
 
—

 
—

 
5

 
141,107

 
4.9
%
 
—

 
—

Unconsolidated joint venture:
 
 
 
 
 
 
 
 
 
Other
1

 
1,266

 
—

 
—

 
—


1

 
1,266

 
—

 
—

 
—

Total real estate investments
201

 
$
2,887,766

 
100.0
%
 
13,324

 
100.0
%














11
Table of Contents

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:
 
 
 
 
 
 
 
Balance at

State

Property Type (1)
 
Original Face Amount
 
Interest Rate
 
Maturity Date
 
September 30,
2012
 
December 31,
2011
(Dollars in thousands)
 
 
 
 
 
 
 
 
 

Construction mortgage notes:
 
 
 
 
 
 
 
 

Iowa

MOB
 
$
2,136


11.00
%

—


$
—


$
1,469


Texas

MOB
 
12,444


8.10
%

—


—


9,547


Oklahoma

MOB
 
91,179


6.75
%

12/31/13


46,185


19,896


Missouri

Inpatient
 
111,400


6.75
%

12/31/13


48,222


20,559


Total Construction mortgage notes
 
 
 
 
 
$
94,407

 
$
51,471





 
 
 
 
 
 
 
 
 
 

Other mortgage notes:
 
 
 
 
 
 
 
 

Iowa

MOB
 
$
3,700

 
8.00
%
 
—

 
$
—

 
$
3,230


Iowa

Other
 
40,000

 
7.70
%
 
01/10/14

 
40,000

 
40,000


Florida

MOB
 
2,700

 
7.00
%
 
—

 
—

 
2,680


Texas

MOB
 
2,950

 
7.25
%
 
01/11/14

 
2,950

 
—


Florida

MOB
 
3,750

 
7.50
%
 
04/10/15

 
3,750

 
—


Total Other mortgage notes
 
 
 
 
 
$
46,700

 
$
45,910

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Mortgage notes receivable
 
 
 
 
$
141,107

 
$
97,381

         
(1) MOB-Medical office building.

As of September 30, 2012, the Company's outstanding construction mortgage notes totaling approximately $94.4 million, or 66.9%, of the Company’s mortgage notes receivable were due from affiliates of the United Trust Fund, which is developing two build-to-suit facilities in Oklahoma and Missouri that are fully leased to Mercy Health. Also, approximately $40.0 million, or 28.4%, of the Company’s mortgage notes receivable, secured by an office building in Iowa, were due from LB Properties X, LLC.

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 a purchase price and cash consideration of approximately $15.0 million. The property is 100% leased under a single-tenant net lease with an affiliate of “AA-” rated Sanford Health, with a parent guarantee, and the lease expires in 2022. The property is connected to a 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 a purchase price and 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”) which occupied 93% of the building as of the acquisition. The property is adjacent to a CHS hospital campus in which the Company owns six additional 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 a purchase price and cash consideration of approximately $1.1 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 cash consideration paid by the Company of approximately

12
Table of Contents

$0.8 million. The building was 100% leased at the time of the acquisition.

The following table details the Company’s real estate acquisitions for the nine months ended September 30, 2012:
(Dollars in millions)
Date
Acquired
 
Purchase Price
 
Mortgage
Note
Financing
 
Cash
Consideration
 
Real
Estate
 
Other
 
Square
Footage
Real estate acquisitions
 
 
 
 
 
 
 
 
 
 
 
 
South Dakota
1/20/12
 
$
15.0

 
$
—

 
$
15.0

 
$
14.9

 
$
0.1

 
58,285

North Carolina
2/10/12
 
6.4

 
—

 
6.4

 
6.4

 
—

 
23,312

Pennsylvania
3/16/12
 
1.1

 
—

 
1.1

 
1.1

 
—

 
—

Texas
5/23/12
 
10.7

 
(9.9
)
 
0.8

 
10.7

 
—

 
76,484

 
 
 
$
33.2

 
$
(9.9
)
 
$
23.3

 
$
33.1

 
$
0.1

 
158,081


Subsequent Acquisitions
During the fourth quarter of 2012, the Company acquired a 39,345 square foot medical office building in Tennessee for a purchase price of $11.0 million. The building was 100% leased at the time of the acquisition.

Also, during the fourth quarter of 2012, the Company acquired a 47,225 square foot medical office building in the state of Washington for a purchase price of $9.4 million. The building was 89% leased at the time of the acquisition.

Asset Dispositions
During the first quarter of 2012, the Company disposed of the following properties and mortgage notes:
•
a 14,748 square foot on-campus medical office building and an 18,978 square foot off-campus medical office building, both in Texas, in which the Company had an aggregate net investment of approximately $2.5 million. The sales price for the two properties was approximately $3.5 million, which included $0.4 million in net cash proceeds, the origination of a $3.0 million seller-financed mortgage note receivable as discussed below in “Seller-Financed Mortgage Notes," and closing costs of approximately $0.1 million. The Company recognized a $0.9 million net gain on the disposal;
•
a 35,752 square foot on-campus medical office building in Florida, in which the Company had a net investment of approximately $3.0 million. The sales price for the building was approximately $7.2 million, which included $5.7 million in net cash proceeds and a lease termination fee of $1.5 million, included in income from discontinued operations. The Company recognized a $2.5 million net gain on the disposal;
•
a 33,895 square foot off-campus medical office building in Florida in which the Company had a net investment of approximately $0.5 million. The sales price and net cash proceeds received from the sale were approximately $0.5 million;
•
an 82,664 square foot off-campus medical office building in Texas, in which the Company had a net investment of approximately $4.8 million. The sales price for the building was approximately $4.7 million, which included the origination of a $4.5 million seller-financed mortgage note receivable as discussed below in “Seller-Financed Mortgage Notes," and closing costs of approximately $0.2 million. The Company recognized a $0.4 million impairment on the disposal, including the write-off of straight-line rent receivables;
•
two mortgage notes receivable totaling $1.5 million and $3.2 million were repaid in full; 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:
•
an 18,476 square foot off-campus medical office building in Tennessee, in which the Company had a net investment of approximately $0.8 million. The sales price for the building was approximately $0.9 million, which included net cash proceeds of approximately $0.8 million and closing costs of approximately $0.1 million;
•
four off-campus medical office buildings and one on-campus medical office building totaling 272,571 square feet, located in Florida, in which the Company had a net aggregate investment of approximately $31.2 million, were sold to a single buyer. The sales price for the buildings was approximately $33.3 million, which included net cash proceeds of $28.6 million, the origination of a $3.8 million seller-financed mortgage note, a $0.6 million contingent liability, and closing costs of approximately $0.3 million. The Company recognized a $0.2 million impairment on the disposal, including the write-off of straight-line rent receivables. These properties were not previously classified as held for sale;

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Table of Contents

•
a mortgage note receivable of $4.5 million was repaid in full; and
•
a mortgage note receivable of 9.9 million was repaid in full in conjunction with the acquisition of a medical office building in Texas as discussed in “Real Estate Acquisitions” above.

During the third quarter of 2012, the Company disposed of the following properties and mortgage notes:
•
a 16,578 square foot on-campus medical office building in Texas, in which the Company had an aggregate net investment of approximately $0.5 million. The sales price for the building was approximately $0.6 million, which included net cash proceeds of approximately $0.5 million and closing costs of approximately $0.1 million;

•
an 8,990 square foot off-campus medical office building in Florida, in which the Company had an aggregate net investment of approximately $0.9 million. The sales price and net cash proceeds for the building was approximately $0.5 million. The Company recognized a $0.4 million impairment on the disposal;

•
an 80,740 square foot off-campus medical office building in Texas, in which the Company had an aggregate net investment of approximately $12.0 million. The sales price for the building was approximately $21.4 million, which included net cash proceeds of approximately $19.0 million, amounts escrowed for tenant improvements of approximately $2.0 million, and closing costs of approximately $0.4 million. The Company recognized a $6.3 million gain on the disposal, net of straight-line rent receivables written off. This property was not previously classified as held for sale;

•
a 61,763 square foot off-campus medical office building and a 9,582 square foot off-campus medical office building, both in Florida in a single transaction, in which the Company had an aggregate net investment of approximately $10.8 million. The sales price for the buildings was approximately $8.8 million, which included net cash proceeds of approximately $8.7 million and closing costs and other adjustments of approximately $0.1 million. The Company recognized a $2.5 million impairment on the disposals, net of straight-line rent receivables and other assets written off. These properties were not previously classified as held for sale; and

•
a mortgage note receivable of $2.6 million was repaid.




14
Table of Contents

The following table details the Company’s dispositions and mortgage note repayments for the nine months ended September 30, 2012:
(Dollars in millions)
Date
Disposed
 
Sales Price
 
Closing Adjustments
 
Seller-Financed Mortgage
Notes
 
Net
Proceeds
 
Net Real
Estate
Investment
 
Other
(including
receivables)
 
Gain/
(Impairment)
 
Square
Footage
Real estate dispositions
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas (1) (2)
1/10/12
 
$
3.5

 
$
(0.1
)
 
$
(3.0
)
 
$
0.4

 
$
2.5

 
$
—

 
$
0.9

 
33,726

Florida (1)
1/19/12
 
7.2

 
(1.5
)
 
—

 
5.7

 
3.0

 
0.2

 
2.5

 
35,752

Florida (1)
3/2/12
 
0.5

 
—

 
—

 
0.5

 
0.5

 
—

 
—

 
33,895

Texas (1) (3)
3/16/12
 
4.7

 
(0.2
)
 
(4.5
)
 
—

 
4.8

 
0.1

 
(0.4
)
 
82,664

Tennessee (1)
4/13/12
 
0.9

 
(0.1
)
 
—

 
0.8

 
0.8

 
—

 
—

 
18,476

Florida (4)
4/18/12
 
33.3

 
(0.9
)
 
(3.8
)
 
28.6

 
31.2

 
1.4

 
(0.2
)
 
272,571

Texas (1)
7/20/12
 
0.6

 
(0.1
)
 
—

 
0.5

 
0.5

 
—

 
—

 
16,578

Florida (1)
8/22/12
 
0.5

 
—

 
—

 
0.5

 
0.9

 
—

 
(0.4
)
 
8,990

Texas
8/27/12
 
21.4

 
(2.4
)
 
—

 
19.0

 
12.0

 
0.7

 
6.3

 
80,740

Florida (5)
9/14/12
 
8.8

 
(0.1
)
 
—

 
8.7

 
10.8

 
0.4

 
(2.5
)
 
71,345

 
 
 
81.4

 
(5.4
)
 
(11.3
)
 
64.7

 
67.0

 
2.8

 
6.2

 
654,737

Mortgage note repayments
 
—

 
—

 
21.7

 
21.7

 
—

 
—

 
—

 
—

Deconsolidation of VIE (6)
 
—

 
—

 
—

 
35.1

 
38.2

 
(3.4
)
 
0.3

 
113,602

Total dispositions and repayments
 
$
81.4

 
$
(5.4
)
 
$
10.4

 
$
121.5

 
$
105.2

 
$
(0.6
)
 
$
6.5

 
768,339

________________
(1) Previously included in assets held for sale.
(2) Includes two properties.
(3) Mortgage note was repaid in April 2012.
(4) Includes five properties.
(5) Includes two properties.
(6) “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.

Seller-Financed Mortgage Notes
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” above. 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” above. 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" above. The note has a stated fixed interest rate of 7.5% and matures in April 2015.

Potential Disposition
On November 6, 2012, the Company entered into an agreement to sell a medical office building located in Brevard County, Florida for approximately $2.1 million. If this transaction proceeds to closing, an impairment charge of approximately $7.8 million would be recognized. This property was originally acquired in 1998 as part of the Company's acquisition of Capstone Capital Corporation and was occupied by a single tenant that vacated the premises in July 2010. The property operated at a loss for the nine months ended September 30, 2012. The Company expects the sale to occur during the fourth quarter of 2012.

15
Table of Contents


Discontinued Operations and Assets Held for Sale
At September 30, 2012 and December 31, 2011, the Company had 7 and 15 properties, respectively, classified as held for sale. Of the 15 properties classified as held for sale at December 31, 2011, four properties in Texas, three properties in Florida, and one property in Tennessee were sold during the first nine months of 2012. As a result of the disposal of these eight properties, the Company recorded net gains on sale of approximately $3.4 million and impairments of approximately $0.8 million. These dispositions are discussed in more detail in "Asset Dispositions" above.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.

(Dollars in thousands)
September 30,
2012
 
December 31,
2011
Balance Sheet data (as of the period ended):
 
 
 
Land
$
4,124

 
$
8,078

Buildings, improvements and lease intangibles
21,956

 
44,299

Personal property
427

 
458


26,507

 
52,835

Accumulated depreciation
(15,025
)
 
(24,557
)
Assets held for sale, net
11,482

 
28,278

Other assets, net (including receivables)
68

 
372

Assets of discontinued operations, net
68

 
372

Assets held for sale and discontinued operations, net
$
11,550

 
$
28,650

 
 
 
 
Accounts payable and accrued liabilities
$
81

 
$
404

Other liabilities
81

 
114

Liabilities of discontinued operations
$
162

 
$
518



16
Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Statements of Operations data (for the period ended):
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Rental income
$
1,232

 
$
3,189

 
$
6,812

 
$
9,507

Other operating
1

 
6

 
14

 
26

 
1,233

 
3,195

 
6,826

 
9,533

Expenses
 
 
 
 
 
 
 
Property operating
426

 
1,030

 
1,721

 
3,269

General and administrative
1

 
1

 
5

 
6

Depreciation
137

 
825

 
1,031

 
2,493

Amortization
—

 
(8
)
 
—

 
(23
)
Bad debt, net
(1
)
 
1

 
(2
)
 
17

 
563

 
1,849

 
2,755

 
5,762

Other Income (Expense)
 
 
 
 
 
 
 
Interest and other income, net
2

 
6

 
74

 
18

 
2

 
6

 
74

 
18

Discontinued Operations
 
 
 
 
 
 
 
Income from discontinued operations
672

 
1,352

 
4,145

 
3,789

Impairments
(2,860
)
 
(1,551
)
 
(7,197
)
 
(1,698
)
Gain on sales of real estate properties
6,265

 
1,357

 
9,696

 
1,393

Income from Discontinued Operations
$
4,077

 
$
1,158

 
$
6,644

 
$
3,484

Income from Discontinued Operations per Common Share—Basic
$
0.06

 
$
0.02

 
$
0.08

 
$
0.05

Income from Discontinued Operations per Common Share—Diluted
$
0.05

 
$
0.02

 
$
0.08

 
$
0.05



Note 4. Notes and Bonds Payable
The table below details the Company’s notes and bonds payable as of September 30, 2012 and December 31, 2011.
(Dollars in thousands)
September 30, 2012
 
December 31, 2011
 
Maturity
Dates
 
Contractual
Interest Rates
 
Principal
Payments
 
Interest
Payments
Unsecured Credit Facility
$
34,000

 
$
212,000

 
10/1/2015
 
LIBOR + 1.50%
 
At maturity
 
Quarterly
Senior Notes due 2014, net of discount
264,484

 
264,371

 
04/14
 
5.125%
 
At maturity
 
Semi-Annual
Senior Notes due 2017, net of discount
298,660

 
298,465

 
01/17
 
6.500%
 
At maturity
 
Semi-Annual
Senior Notes due 2021, net of discount
397,242

 
397,052

 
01/21
 
5.750%
 
At maturity
 
Semi-Annual
Mortgage notes payable, net of discount and including premiums
218,229

 
221,649

 
4/13-10/30
 
5.000%-7.625%
 
Monthly
 
Monthly
 
$
1,212,615

 
$
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 September 30, 2012, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.


17
Table of Contents

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 September 30, 2012, the Company had $34.0 million outstanding under the Unsecured Credit Facility with a weighted average interest rate of approximately 1.73% and a remaining borrowing capacity of approximately $666.0 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)
September 30,
2012
 
December 31,
2011
Senior Notes due 2014 face value
$
264,737

 
$
264,737

Unaccreted discount
(253
)
 
(366
)
Senior Notes due 2014 carrying amount
$
264,484

 
$
264,371


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)
September 30,
2012
 
December 31,
2011
Senior Notes due 2017 face value
$
300,000

 
$
300,000

Unaccreted discount
(1,340
)
 
(1,535
)
Senior Notes due 2017 carrying amount
$
298,660

 
$
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)
September 30,
2012
 
December 31,
2011
Senior Notes due 2021 face value
$
400,000

 
$
400,000

Unaccreted discount
(2,758
)
 
(2,948
)
Senior Notes due 2021 carrying amount
$
397,242

 
$
397,052



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Table of Contents

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)
September 30,
2012
 
December 31,
2011
Mortgage notes payable principal balance
$
221,699

 
$
225,377

Unaccreted discount, net of premium
(3,470
)
 
(3,728
)
Mortgage notes payable carrying amount
$
218,229

 
$
221,649


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

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

 
$
1.7

 
$
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

 
12.8

 
13.1

Commercial Bank (1)
17.4

 
6.480
%
 
5/15
 
MOB
 
Monthly/10-yr amort.
 
19.8

 
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.
 
2.2

 
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)
 
155.1

 
77.7

 
78.4

Life Insurance Co.
7.0

 
5.530
%
 
1/18
 
MOB
 
Monthly/15-yr amort.
 
14.6

 
3.2

 
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

 
12.0

 
12.4

Life Insurance Co. (8)
21.5

 
4.700
%
 
8/15
 
MOB
 
Monthly/25-yr amort.
 
43.9

 
18.3

 
18.8

Insurance Co. (9)
7.3

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

 
7.3

 
7.5

Commercial Bank (10)
8.1

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

 
7.5

 
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

 
2.6

 
2.8

 
 
 
 
 
 
 
 
 
 
 
$
452.8

 
$
218.2

 
$
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%.

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Table of Contents

(18) The contractual interest rates for the 19 outstanding mortgage notes ranged from 5.00% to 7.625% at September 30, 2012.
(19) MOB-Medical office building; OTH-Other.

Long-Term Debt Maturities
Future contractual maturities of the Company’s notes and bonds payable as of September 30, 2012 were:
(Dollars in thousands)
Principal
Maturities
 
Net Accretion/
Amortization (1)
 
Notes and
Bonds Payable
 
%
2012 (remaining)
$
1,270

 
$
(263
)
 
$
1,007

 
0.1
%
2013
19,781

 
(1,263
)
 
18,518

 
1.5
%
2014
276,349

 
(1,404
)
 
274,945

 
22.7
%
2015
83,775

 
(1,215
)
 
82,560

 
6.8
%
2016
106,376

 
(907
)
 
105,469

 
8.7
%
2017 and thereafter
732,885

 
(2,769
)
 
730,116

 
60.2
%
 
$
1,220,436

 
$
(7,821
)
 
$
1,212,615

 
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)
September 30,
2012
 
December 31,
2011
Prepaid assets
$
49,202

 
$
45,054

Straight-line rent receivables
33,663

 
30,374

Above-market intangible assets, net
12,854

 
13,263

Deferred financing costs, net
11,410

 
13,783

Accounts receivable, net
5,429

 
8,181

Goodwill
3,487

 
3,487

Customer relationship intangible assets, net
2,053

 
2,103

Equity investments in joint venture—cost method
1,266

 
1,266

Notes receivable, net
128

 
283

Allowance for uncollectible accounts
(651
)
 
(583
)
Other
3,055

 
1,171

 
$
121,896

 
$
118,382




20
Table of Contents

Note 6. Commitments and Contingencies
Development Activity
The Company had several development projects ongoing at September 30, 2012, including two construction mortgage notes and twelve 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
September 30, 2012
 
Total Amount
Funded Through
September 30, 
2012
 
Estimated
Remaining
Budget
 
Estimated
Total
Budget
 
Approximate
Square
Feet
Construction mortgage notes
2
 
$
25,713

 
$
94,407

 
$
108,207

 
$
202,614

 
386,000

Stabilization in progress (1)
12
 
6,991

 
395,494

 
14,491

 
409,985

 
1,282,716

Construction in progress
0
 
—

 
—

 
—

 
—

 
—

Total
14
 
$
32,704

 
$
489,901

 
$
122,698

 
$
612,599

 
1,668,716

___________________________ 
(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 no construction projects ongoing at September 30, 2012. In July 2012, a construction project, consisting of a 96,853 square foot, on-campus medical office building in Texas, was placed into service. The project, now part of the stabilization in progress portfolio as of September 30, 2012, 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 placed into service during the second quarter of 2012.

Construction Mortgage Notes
The Company had two construction mortgage notes totaling $94.4 million at September 30, 2012 due from affiliates of the United Trust Fund, which is developing two build-to-suit facilities in Oklahoma and Missouri that are fully leased to Mercy Health. The Company expects that the remaining funding commitments totaling $108.2 million on these notes will be funded during the remainder of 2012 and 2013.

Stabilization in Progress
At September 30, 2012, the Company had 12 properties that it had previously developed that were in the process of stabilization. In the aggregate, the properties were approximately 54% leased and 37% occupied at September 30, 2012, with tenant improvement build-out occurring in suites that are leased but not yet occupied by the tenants. The Company’s estimated remaining budget on these properties at September 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

21
Table of Contents

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 scheduled in March 2013.

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.

Note 7. Stockholders’ Equity
The following table provides a reconciliation of total stockholders' equity for the nine months ended September 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