Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The use of the words “we,” “us” or “our” refers to HTA and
HTALP
, collectively.
The following discussion should be read in conjunction with our condensed consolidated financial statements and notes appearing elsewhere in this Quarterly Report, as well as with the audited consolidated financial statements, accompanying notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our
2017
Annual Report on Form 10-K. Such condensed consolidated financial statements and information have been prepared to reflect HTA’s and
HTALP
’s financial position as of
September 30, 2018
and
December 31, 2017
, together with results of operations and cash flows for
three and nine months ended September 30, 2018
and
2017
.
The information set forth below is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations.
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•
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Forward-Looking Statements;
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•
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Critical Accounting Policies;
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•
|
Recently Issued or Adopted Accounting Pronouncements;
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•
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Factors Which May Influence Results of Operations;
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•
|
Non-GAAP Financial Measures;
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•
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Liquidity and Capital Resources;
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•
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Commitments and Contingencies;
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•
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Debt Service Requirements;
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•
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Off-Balance Sheet Arrangements; and
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Forward-Looking Statements
Certain statements contained in this Quarterly Report constitute forward-looking statements within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”)). Such statements include, in particular, statements about our plans, strategies, prospects and estimates regarding future MOB market performance. Additionally, such statements are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially and in adverse ways from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Forward-looking statements are generally identifiable by the use of such terms as “expect,” “project,” “may,” “should,” “could,” “would,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “continue,” “opinion,” “predict,” “potential,” “pro forma” or the negative of such terms and other comparable terminology. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Quarterly Report is filed with the SEC. We cannot guarantee the accuracy of any such forward-looking statements contained in this Quarterly Report, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
Any such forward-looking statements reflect our current views about future events, are subject to unknown risks, uncertainties, and other factors, and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide dividends to stockholders and maintain the value of our real estate properties, may be significantly hindered. Factors that might impair our ability to meet such forward-looking statements include, without limitation, those discussed in Part I, Item 1A - Risk Factors in our
2017
Annual Report on Form 10-K, which is incorporated herein.
Forward-looking statements express expectations of future events. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties that could cause actual events or results to differ materially from those projected. Due to these inherent uncertainties, our stockholders are urged not to place undue reliance on forward-looking statements. Forward-looking statements speak only as of the date made. In addition, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to projections over time, except as required by law.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC.
Executive Summary
We are the largest publicly-traded REIT focused on MOBs in the U.S. as measured by the GLA of our MOBs. We conduct substantially all of our operations through HTALP. We invest in MOBs that we believe will serve the future of healthcare delivery and MOBs that are primarily located on health system campuses, near university medical centers, or in core community outpatient locations. We also focus on our key markets that have certain demographic and macro-economic trends and where we can utilize our institutional full-service property management, leasing and development services platform to generate strong tenant and health system relationships and operating cost efficiencies. Our primary objective is to maximize stockholder value with disciplined growth through strategic investments that provide an attractive risk-adjusted return for our stockholders by consistently increasing our cash flow. In pursuing this objective, we: (i) seek internal growth through proactive asset management, leasing, building services and property management oversight; (ii) target accretive acquisitions and developments of MOBs in markets with attractive demographics that complement our existing portfolio; and (iii) actively manage our balance sheet to maintain flexibility with conservative leverage. Additionally, from time to time we consider, on an opportunistic basis, significant portfolio acquisitions that we believe fit our core business and could enhance our existing portfolio.
Since 2006, we have invested
$6.8 billion
to create a portfolio of MOBs, development projects and other healthcare assets consisting of approximately
23.2 million
square feet of GLA throughout the U.S. Approximately
68%
of our portfolio was located on the campuses of, or adjacent to, nationally and regionally recognized healthcare systems. Our portfolio is diversified geographically across
32
states, with no state having more than
20%
of our total GLA as of
September 30, 2018
. We are concentrated in 20 to 25 key markets that are experiencing higher economic and demographic trends than other markets, on average, that we expect will drive demand for MOBs. As of
September 30, 2018
, we had approximately 1 million square feet of GLA in nine of our top ten markets and approximately
93%
of our portfolio, based on GLA, is located in the top 75 MSAs, with Dallas, Houston, Boston, Tampa and Atlanta being our largest markets by investment.
Company Highlights
Portfolio Operating Performance
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•
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For the
three months ended September 30, 2018
, total revenue
decreased
(0.5)%
, or
$(0.9) million
, to
$175.1 million
, compared to the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, total revenue
increased
19.1%
, or
$83.9 million
, to
$524.1 million
, compared to the
nine months ended September 30, 2017
.
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•
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For the
three months ended September 30, 2018
, net income was
$176.3 million
, compared to
$14.0 million
, for the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, net income was
$202.0 million
, compared to
$22.1 million
, for the
nine months ended September 30, 2017
.
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•
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For the
three months ended September 30, 2018
, net income attributable to common stockholders was
$0.82
per diluted share, or
$173.0 million
, compared to
$0.07
per diluted share, or
$13.8 million
, for the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, net income attributable to common stockholders was
$0.94
per diluted share, or
$198.1 million
, compared to
$0.12
per diluted share, or
$21.4 million
, for the
nine months ended September 30, 2017
.
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•
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For the
three months ended September 30, 2018
, HTA’s FFO, as defined by NAREIT, was
$81.4 million
, or
$0.38
per diluted share, compared to
$0.41
per diluted share, or
$84.2 million
, for the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, HTA’s FFO was
$250.4 million
, or
$1.19
per diluted share, compared to
$1.12
per diluted share, or
$198.7 million
, for the
nine months ended September 30, 2017
.
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For the
three months ended September 30, 2018
, HTALP’s FFO was
$84.7 million
, or
$0.40
per diluted OP Unit, compared to
$0.41
per diluted OP Unit, or
$84.4 million
, for the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, HTALP’s FFO was
$254.2 million
, or
$1.21
per diluted OP Unit, compared to
$1.12
per diluted OP Unit, or
$199.3 million
, for the
nine months ended September 30, 2017
.
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•
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For the
three months ended September 30, 2018
, HTA’s and HTALP’s Normalized FFO was
$0.41
per diluted share and OP Unit, or
$86.1 million
, compared to the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, HTA’s and HTALP’s Normalized FFO was
$1.22
per diluted share and OP Unit, or
$256.2 million
, compared to the
nine months ended September 30, 2017
.
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•
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For additional information on FFO and Normalized FFO, see “FFO and Normalized FFO” below, which includes a reconciliation to net income attributable to common stockholders/unitholders and an explanation of why we present this non-GAAP financial measure.
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•
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For the
three months ended September 30, 2018
, NOI
decreased
(0.3)%
, or
$(0.3) million
, to
$119.3 million
, compared to the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, NOI
increased
19.1%
, or
$57.4 million
, to
$358.8 million
, compared to the
nine months ended September 30, 2017
.
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•
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For the
three months ended September 30, 2018
, Same-property Cash NOI
increased
2.5%
, or
$2.7 million
, to
$108.8 million
, compared to the
three months ended September 30, 2017
. For the
nine months ended September 30, 2018
, Same-Property Cash NOI
increased
2.4%
, or
$5.6 million
, to
$233.2 million
, compared to the
nine months ended September 30, 2017
. Excluding the MOBs located on our Forest Park Dallas campus, Same-Property Cash NOI growth was
2.7%
for the
nine months ended September 30, 2018
.
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•
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For additional information on NOI and Same-Property Cash NOI, see “NOI, Cash NOI and Same-Property Cash NOI” below, which includes a reconciliation from net income and an explanation of why we present these non-GAAP financial measures.
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Key Market Focused Strategy and Investments
We believe we have been one of the most active investors in the medical office sector over the last decade. This has enabled us to create a high quality portfolio focused on MOBs serving the future of healthcare with scale and significance in 20 to 25 key markets.
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Our investment strategy includes alignment with key healthcare systems, hospitals, and leading academic medical universities. We are the largest owner of on-campus or adjacent MOBs in the country, with approximately
16 million
square feet of GLA, or
68%
, of our portfolio located in these locations. The remaining
32%
of our portfolio is located in core community outpatient locations where healthcare is increasingly being delivered.
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•
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Over the last several years, our investments have been focused in our 20 to 25 key markets which we believe will outperform the broader U.S. from an economic and demographic perspective. As of
September 30, 2018
, approximately
93%
of our portfolio’s GLA is located in the top 75 MSAs. Our key markets represent top MSAs with strong growth metrics in jobs, household income and population, as well as low unemployment and mature healthcare infrastructures. Many of our key markets are also supported by strong university systems.
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•
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Our key market focus has enabled us to establish scale and effectively utilize our internal property management and leasing platform to deliver consistent same store growth and additional yield on investments, and also cost effective service to tenants. As of
September 30, 2018
, we had approximately 1 million square feet of GLA in nine of our top ten markets and approximately 500,000 square feet in each of our top 15 markets. We expect to establish this scale across 20 to 25 key markets as our portfolio expands.
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•
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During the
three months ended September 30, 2018
, HTA completed the disposition of 19 MOBs, primarily located in Greenville, South Carolina for an aggregate gross sales price of $305.9 million totaling approximately 1.1 million square feet of GLA, generating gains of approximately
$166.4 million
.
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•
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During the
nine months ended September 30, 2018
, we announced a new development in our key gateway market of Miami, Florida and commenced two redevelopments, including an agreement to build a new on-campus MOB in Raleigh, North Carolina. These projects will have total expected construction costs of approximately $70.6 million and are approximately 78% pre-leased to major health systems.
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•
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During the
nine months ended September 30, 2018
, we invested $13.9 million to acquire three MOBs of approximately 60,000 square feet of GLA in the key market of Raleigh, North Carolina. In addition, we invested $3.9 million to consolidate our ownership interests in several other MOBs.
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Internal Growth through Proactive In-House Property Management and Leasing
We believe we have the largest full-service operating platform in the medical office space that consists of our in-house property management and leasing which allows us to better manage and service our existing portfolio. In each of these markets, we have established a strong in-house property management and leasing platform that has allowed us to develop valuable relationships with health systems, physician practices, universities, and regional development firms that have led to investment and leasing opportunities. Our full-service operational platforms have also enabled us to focus on generating cost efficiencies as we gain scale across individual markets and regions.
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•
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As of
September 30, 2018
, our in-house property management and leasing platform operated approximately
21.7 million
square feet of GLA, or
93%
, of our total portfolio.
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•
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As of
September 30, 2018
, our leased rate (which includes leases which have been executed, but which have not yet commenced) was
92.1%
by GLA and our occupancy rate was
90.9%
by GLA.
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•
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We entered into new and renewal leases on approximately
532,000
and
2.2 million
square feet of GLA, or
2.3%
and
9.5%
, respectively, of our portfolio during the
three and nine months ended September 30, 2018
.
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•
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Tenant retention for the Same-Property portfolio was
82%
and
83%
, which included approximately
381,000
and
1.7 million
square feet of GLA of expiring leases, for the quarter and year-to-date, respectively, which we believe is indicative of our commitment to maintaining buildings in desirable locations and fostering strong tenant relationships. Tenant retention is defined as the sum of the total leased GLA of tenants that renewed a lease during the period over the total GLA of leases that renewed or expired during the period.
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Financial Strategy and Balance Sheet Flexibility
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•
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As of
September 30, 2018
, we had total leverage, measured by debt less cash and cash equivalents to total capitalization, of
29.7%
. Total liquidity was
$1.2 billion
, including cash and cash equivalents of
$225.5 million
and
$994.5 million
available on our unsecured revolving credit facility (which includes the impact of
$5.5 million
of outstanding letters of credit) as of
September 30, 2018
.
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•
|
As of
September 30, 2018
, the weighted average remaining term of our debt portfolio was
5.2
years.
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•
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In August 2018, we prepaid approximately $72.6 million of our fixed and variable rate mortgages, including the settlement of three cash flow hedges, utilizing net proceeds from the Greenville Disposition to do so. Additionally, in August 2018,
HTALP
entered into a modification of our
$200.0 million
unsecured term loan previously due in 2023. The modification decreased pricing at our current credit rating by
65 basis points
. The maturity date was also extended by five months to January 2024. The other material terms of the unsecured term loan prior to the modification remained substantially unchanged.
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•
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In August 2018, our Board of Directors approved a stock repurchase plan authorizing us to purchase up to
$300 million
of our common stock from time to time prior to the expiration thereof on
June 7, 2020
. During the
nine months ended September 30, 2018
, we repurchased
628,002
shares of our common stock, at an average price of
$26.25
per share, for an aggregate amount of approximately
$16.5 million
, pursuant to this stock repurchase plan.
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•
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In June 2018, we settled a forward sale arrangement pursuant to a forward equity agreement that was entered into in October 2017, which included approximately
2.6 million
shares of our common stock for net proceeds of approximately
$73.8 million
, adjusted for costs to borrow equating to a net price to us of
$28.94
per share of common stock.
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|
•
|
On
October 25, 2018
, our Board of Directors announced a quarterly dividend of
$0.310
per share of common stock and per OP Unit.
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Critical Accounting Policies
The complete list of our critical accounting policies was disclosed in our
2017
Annual Report on Form 10-K. There have been no material changes to our critical accounting policies as disclosed herein. For further information on significant accounting policies that impact us, see
Note 2 - Summary of Significant Accounting Policies
in the accompanying condensed consolidated financial statements.
Recently Issued or Adopted Accounting Pronouncements
See
Note 2 - Summary of Significant Accounting Policies
in the accompanying condensed consolidated financial statements for a discussion of recently issued or adopted accounting pronouncements.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic conditions affecting real estate generally and the risk factors previously listed in Part I, Item 1A - Risk Factors, in our
2017
Annual Report on Form 10-K that may reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income from the investment, management and operation of our properties.
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space that will become available from unscheduled lease terminations at the then applicable rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Investment Activity
During the
nine months ended September 30, 2018
, we had investments with an aggregate purchase price of
$17.8 million
and dispositions with an aggregate gross sales price of
$305.9 million
. Including the Duke acquisition, during the
nine months ended September 30, 2017
, we had investments with an aggregate gross purchase price of
$2.7 billion
, which included a 50% ownership in an unconsolidated joint venture and a disposition with a gross sales price of
$5.0 million
.
Results of Operations
Comparison of the Three and Nine Months Ended
September 30, 2018
and
2017
As of
September 30, 2018
and
2017
, we owned and operated approximately
23.2 million
and
24.2 million
square feet of GLA, respectively, with a leased rate of
92.1%
and
91.7%
, respectively (which includes leases which have been executed, but which have not yet commenced), and an occupancy rate of
90.9%
, and
90.6%
, respectively. All explanations are applicable to both HTA and
HTALP
unless otherwise noted.
Comparison of the
three months ended September 30, 2018
and
2017
, respectively, is set forth below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
Rental income
|
$
|
175,038
|
|
|
$
|
175,431
|
|
|
$
|
(393
|
)
|
|
(0.2
|
)%
|
Interest and other operating income
|
97
|
|
|
563
|
|
|
(466
|
)
|
|
(82.8
|
)
|
Total revenues
|
175,135
|
|
|
175,994
|
|
|
(859
|
)
|
|
(0.5
|
)
|
Expenses:
|
|
|
|
|
|
|
|
Rental
|
55,789
|
|
|
56,331
|
|
|
(542
|
)
|
|
(1.0
|
)
|
General and administrative
|
8,770
|
|
|
8,283
|
|
|
487
|
|
|
5.9
|
|
Transaction
|
346
|
|
|
261
|
|
|
85
|
|
|
32.6
|
|
Depreciation and amortization
|
70,568
|
|
|
70,491
|
|
|
77
|
|
|
0.1
|
|
Impairment
|
4,281
|
|
|
—
|
|
|
4,281
|
|
|
NM
|
|
Total expenses
|
139,754
|
|
|
135,366
|
|
|
4,388
|
|
|
3.2
|
|
Income before other income (expense)
|
35,381
|
|
|
40,628
|
|
|
(5,247
|
)
|
|
(12.9
|
)
|
Interest income (expense):
|
|
|
|
|
|
|
|
Interest related to derivative financial instruments
|
169
|
|
|
(264
|
)
|
|
433
|
|
|
NM
|
|
Interest related to debt
|
(25,003
|
)
|
|
(25,924
|
)
|
|
921
|
|
|
3.6
|
|
Gain on sale of real estate, net
|
166,372
|
|
|
—
|
|
|
166,372
|
|
|
NM
|
|
Loss on extinguishment of debt, net
|
(1,092
|
)
|
|
(774
|
)
|
|
(318
|
)
|
|
(41.1
|
)
|
Income from unconsolidated joint venture
|
432
|
|
|
318
|
|
|
114
|
|
|
35.8
|
|
Other income (expense)
|
89
|
|
|
(27
|
)
|
|
116
|
|
|
NM
|
|
Net income
|
$
|
176,348
|
|
|
$
|
13,957
|
|
|
$
|
162,391
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
NOI
|
$
|
119,346
|
|
|
$
|
119,663
|
|
|
$
|
(317
|
)
|
|
(0.3
|
)%
|
Same-Property Cash NOI
|
$
|
108,823
|
|
|
$
|
106,160
|
|
|
$
|
2,663
|
|
|
2.5
|
%
|
Comparison of the
nine months ended September 30, 2018
and
2017
, respectively, is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
Rental income
|
$
|
523,826
|
|
|
$
|
438,949
|
|
|
$
|
84,877
|
|
|
19.3
|
%
|
Interest and other operating income
|
302
|
|
|
1,271
|
|
|
(969
|
)
|
|
(76.2
|
)
|
Total revenues
|
524,128
|
|
|
440,220
|
|
|
83,908
|
|
|
19.1
|
|
Expenses:
|
|
|
|
|
|
|
|
Rental
|
165,364
|
|
|
138,874
|
|
|
26,490
|
|
|
19.1
|
|
General and administrative
|
26,281
|
|
|
25,178
|
|
|
1,103
|
|
|
4.4
|
|
Transaction
|
933
|
|
|
5,618
|
|
|
(4,685
|
)
|
|
(83.4
|
)
|
Depreciation and amortization
|
210,064
|
|
|
172,900
|
|
|
37,164
|
|
|
21.5
|
|
Impairment
|
8,887
|
|
|
5,093
|
|
|
3,794
|
|
|
74.5
|
|
Total expenses
|
411,529
|
|
|
347,663
|
|
|
63,866
|
|
|
18.4
|
|
Income before other income (expense)
|
112,599
|
|
|
92,557
|
|
|
20,042
|
|
|
21.7
|
|
Interest income (expense):
|
|
|
|
|
|
|
|
Interest related to derivative financial instruments
|
297
|
|
|
(827
|
)
|
|
1,124
|
|
|
NM
|
|
Gain on change in fair value of derivative financial instruments, net
|
—
|
|
|
884
|
|
|
(884
|
)
|
|
NM
|
|
Total interest related to derivative financial instruments, including net change in fair value of derivative financial instruments
|
297
|
|
|
57
|
|
|
240
|
|
|
NM
|
|
Interest related to debt
|
(77,689
|
)
|
|
(59,688
|
)
|
|
(18,001
|
)
|
|
(30.2
|
)
|
Gain on sale of real estate, net
|
166,372
|
|
|
3
|
|
|
166,369
|
|
|
NM
|
|
Loss on extinguishment of debt, net
|
(1,092
|
)
|
|
(11,192
|
)
|
|
10,100
|
|
|
90.2
|
|
Income from unconsolidated joint venture
|
1,405
|
|
|
381
|
|
|
1,024
|
|
|
NM
|
|
Other income (expense)
|
129
|
|
|
(13
|
)
|
|
142
|
|
|
NM
|
|
Net income
|
$
|
202,021
|
|
|
$
|
22,105
|
|
|
$
|
179,916
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
NOI
|
$
|
358,764
|
|
|
$
|
301,346
|
|
|
$
|
57,418
|
|
|
19.1
|
%
|
Same-Property Cash NOI
|
$
|
233,152
|
|
|
$
|
227,595
|
|
|
$
|
5,557
|
|
|
2.4
|
%
|
Rental Income
For the
three and nine months ended September 30, 2018
and
2017
, respectively, rental income was comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
Contractual rental income
|
$
|
168,169
|
|
|
$
|
169,099
|
|
|
$
|
(930
|
)
|
|
(0.5
|
)%
|
Straight-line rent and amortization of above and (below) market leases
|
4,252
|
|
|
4,269
|
|
|
(17
|
)
|
|
(0.4
|
)
|
Other rental revenue
|
2,617
|
|
|
2,063
|
|
|
554
|
|
|
26.9
|
|
Total rental income
|
$
|
175,038
|
|
|
$
|
175,431
|
|
|
$
|
(393
|
)
|
|
(0.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
|
% Change
|
Contractual rental income
|
$
|
502,984
|
|
|
$
|
423,696
|
|
|
$
|
79,288
|
|
|
18.7
|
%
|
Straight-line rent and amortization of above and (below) market leases
|
12,727
|
|
|
9,475
|
|
|
3,252
|
|
|
34.3
|
|
Other rental revenue
|
8,115
|
|
|
5,778
|
|
|
2,337
|
|
|
40.4
|
|
Total rental income
|
$
|
523,826
|
|
|
$
|
438,949
|
|
|
$
|
84,877
|
|
|
19.3
|
%
|
Contractual rental income, which includes expense reimbursements,
decreased
$(0.9) million
and
increased
$79.3 million
for the
three and nine months ended September 30, 2018
, respectively, compared to the
three and nine months ended September 30, 2017
. The decrease and increase were primarily due to
$3.5 million
and
$88.1 million
of additional contractual rental income from our
2017
and
2018
acquisitions, and contractual rent increases for the
three and nine months ended September 30, 2018
, respectively, partially offset by a decrease in contractual rent as a result of buildings we sold during
2017
and
2018
.
Average starting and expiring base rents for new and renewal leases consisted of the following for the
three and nine months ended September 30, 2018
and
2017
, respectively (in thousands, except in average base rents per square foot of GLA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
New an
d renewal leases:
|
|
|
|
|
|
|
|
Average starting base rents
|
$
|
22.10
|
|
|
$
|
22.34
|
|
|
$
|
23.07
|
|
|
$
|
22.46
|
|
Average expiring base rents
|
21.32
|
|
|
21.94
|
|
|
22.59
|
|
|
22.47
|
|
|
|
|
|
|
|
|
|
Square feet of GLA
|
532
|
|
|
745
|
|
|
2,204
|
|
|
2,040
|
|
Lease rates can vary across markets, and lease rates that are considered above or below current market rent may change over time. Leases that expired in
2018
had rents that we believed were at market rates. In general, leasing concessions vary depending on lease type and term.
Tenant improvements, leasing commissions and tenant concessions for new and renewal leases consisted of the following for the
three and nine months ended September 30, 2018
and
2017
, respectively (in per square foot of GLA):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
New leases:
|
|
|
|
|
|
|
|
Tenant improvements
|
$
|
17.93
|
|
|
$
|
17.18
|
|
|
$
|
22.91
|
|
|
$
|
18.18
|
|
Leasing commissions
|
2.26
|
|
|
1.92
|
|
|
1.95
|
|
|
2.01
|
|
Tenant concessions
|
0.02
|
|
|
1.93
|
|
|
1.85
|
|
|
2.68
|
|
Renewal leases:
|
|
|
|
|
|
|
|
Tenant improvements
|
$
|
6.51
|
|
|
$
|
8.58
|
|
|
$
|
7.73
|
|
|
$
|
7.50
|
|
Leasing commissions
|
0.68
|
|
|
1.02
|
|
|
1.30
|
|
|
1.09
|
|
Tenant concessions
|
0.02
|
|
|
0.80
|
|
|
0.76
|
|
|
1.45
|
|
The average term for new and renewal leases executed consisted of the following for the
three and nine months ended September 30, 2018
and
2017
, respectively (in years):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
New leases
|
7.6
|
|
6.2
|
|
7.3
|
|
5.8
|
Renewal leases
|
4.2
|
|
5.5
|
|
5.2
|
|
5.0
|
Rental Expenses
For the
three months ended September 30, 2018
and
2017
, rental expenses attributable to our properties were
$55.8 million
and
$56.3 million
, respectively. For the
nine months ended September 30, 2018
and
2017
, rental expenses attributable to our properties were
$165.4 million
and
$138.9 million
, respectively. The decrease and increase in rental expenses were primarily due to
$0.5 million
and
$34.0 million
of additional rental expenses associated with our
2017
and
2018
acquisitions for the
three and nine months ended September 30, 2018
, respectively, partially offset by improved operating efficiencies and a decrease in rental expense as a result of the buildings we sold during
2017
and
2018
.
General and Administrative Expenses
For the
three months ended September 30, 2018
and
2017
, general and administrative expenses were
$8.8 million
and
$8.3 million
, respectively. For the
nine months ended September 30, 2018
and
2017
, general and administrative expenses were
$26.3 million
and
$25.2 million
, respectively. These increases were primarily due to an increase in non-cash compensation expense and an overall increase in head count due to the continued growth of the company. General and administrative expenses include such costs as salaries, corporate overhead and professional fees, among other items.
Transaction Expenses
For the
three months ended September 30, 2018
and
2017
, transaction expenses were
$0.3 million
. For the
nine months ended September 30, 2018
and
2017
, transaction expenses were
$0.9 million
and
$5.6 million
, respectively. Transaction expenses increased in 2017 due to $4.6 million of non-incremental costs related to the Duke acquisition.
Depreciation and Amortization Expense
For the
three months ended September 30, 2018
and
2017
, depreciation and amortization expense was
$70.6 million
and
$70.5 million
, respectively. For the
nine months ended September 30, 2018
and
2017
, depreciation and amortization expense was
$210.1 million
and
$172.9 million
, respectively. These increases were associated with our
2017
and
2018
acquisitions, partially offset by buildings we sold during
2017
and
2018
.
Impairment
During the
three and nine months ended September 30, 2018
, we recorded impairment charges of
$4.3 million
and
$8.9 million
, respectively, which related to six MOBs located in Tennessee, Texas and South Carolina. During the
nine months ended September 30, 2017
, we recorded impairment charges of
$5.1 million
that related to an MOB in our portfolio located in Massachusetts.
Interest Expense and Net Change in Fair Value of Derivative Financial Instruments
Interest expense, excluding the impact of the net change in fair value of derivative financial instruments, decreased by
$1.4 million
and increased
$16.9 million
, during the
three and nine months ended September 30, 2018
, respectively, compared to the
three and nine months ended September 30, 2017
. The decrease in interest expense during the quarter was primarily due to early payoffs of fixed and variable rate mortgages, including the settlement of three cash flow hedges in connection with the Greenville Disposition. For the
nine months ended September 30, 2018
, the increase was primarily the result of higher average debt outstanding, as a result of the use of debt to partially fund our investments over the last 12 months with debt and a change in the composition of our debt, driven by an increase in long-term senior unsecured notes, including the $400.0 million and $500.0 million 5-year and 10-year senior unsecured notes issued in June 2017 at a coupon rate of 2.95% per annum and 3.75% per annum, respectively.
To achieve our objectives, we borrow at both fixed and variable rates. From time to time, we also enter into derivative financial instruments, such as interest rate swaps, in order to mitigate our interest rate risk on a related financial instrument. We do not enter into derivative or interest rate transactions for speculative purposes. Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements.
Gain on Sale of Real Estate
For the
three and nine months ended September 30, 2018
, we realized a net gain on sale of real estate of
$166.4 million
. For the
nine months ended September 30, 2017
, we realized a net gain on sale of real estate of
$3,000
. These increases were primarily the result of the Greenville Disposition. See
Note 4 - Impairment and Dispositions
for more detail on the Greenville Disposition.
Gain or Loss on Extinguishment of Debt
For the
three and nine months ended September 30, 2018
, we realized a net loss on extinguishment of debt of
$1.1 million
primarily due to prepayment fees we incurred in connection with the early payoffs of fixed and variable rate mortgages, including the settlement of three cash flow hedges in connection with the Greenville Disposition. For the
three and nine months ended September 30, 2017
, we realized a net loss on extinguishment of debt of
$0.8 million
and
$11.2 million
, respectively, due to fees we incurred in connection with the execution and our termination of a bridge loan facility we entered into as part of the Duke acquisition.
Net Income or Loss
Net income
increased
$162.4 million
to
$176.3 million
for the
three months ended September 30, 2018
, compared to the
three months ended September 30, 2017
. Net income
increased
$179.9 million
to
$202.0 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
. These increases were primarily the result of continued growth in our operations and improved operating efficiencies.
NOI and Same-Property Cash NOI
NOI
decreased
$(0.3) million
to
$119.3 million
for the
three months ended September 30, 2018
, compared to the
three months ended September 30, 2017
. NOI
increased
$57.4 million
to
$358.8 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
. The decrease and increase were primarily due to
$2.8 million
and
$58.7 million
of additional NOI from our
2017
and
2018
acquisitions for the
three and nine months ended September 30, 2018
, respectively, partially offset by a decrease in NOI as a result of the buildings we sold during
2017
and
2018
and a reduction in straight-line rent from properties we owned more than a year.
Same-Property Cash NOI
increased
$2.7 million
to
$108.8 million
for the
three months ended September 30, 2018
compared to the
three months ended September 30, 2017
. Same-Property Cash NOI
increased
$5.6 million
to
$233.2 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
. These increases were primarily the result of rent escalations, an increase in average occupancy, and improved operating efficiencies.
Non-GAAP Financial Measures
FFO and Normalized FFO
We compute FFO in accordance with the current standards established by NAREIT. NAREIT defines FFO as net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP), excluding gains or losses from sales of real estate property and impairment write-downs of depreciable assets, plus depreciation and amortization related to investments in real estate, and after adjustments for unconsolidated partnerships and joint ventures. We present this non-GAAP financial measure because we consider it an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. Historical cost accounting assumes that the value of real estate assets diminishes ratably over time. Since real estate values have historically risen or fallen based on market conditions, many industry investors have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by themselves. Because FFO excludes depreciation and amortization unique to real estate, among other items, it provides a perspective not immediately apparent from net income or loss attributable to common stockholders/unitholders.
We also compute Normalized FFO, which excludes from FFO: (i) transaction expenses; (ii) gain or loss on change in fair value of derivative financial instruments; (iii) gain or loss on extinguishment of debt; (iv) noncontrolling income or loss from OP Units included in diluted shares (only applicable to the Company); and (v) other normalizing items, which include items that are unusual and infrequent in nature. We present this non-GAAP financial measure because it allows for the comparison of our operating performance to other REITs and between periods on a consistent basis. Our methodology for calculating Normalized FFO may be different from the methods utilized by other REITs and, accordingly, may not be comparable to other REITs. Normalized FFO should not be considered as an alternative to net income or loss attributable to common stockholders/unitholders (computed in accordance with GAAP) as an indicator of our financial performance, nor is it indicative of cash available to fund cash needs. Normalized FFO should be reviewed in connection with other GAAP measurements.
The amounts included in the calculation of FFO and Normalized FFO are generally the same for
HTALP
and HTA, except for net income or loss attributable to common stockholders/unitholders, noncontrolling income or loss from OP Units included in diluted shares (only applicable to the Company) and the weighted average shares of our common stock or
HTALP
OP Units outstanding.
The following is the reconciliation of HTA’s FFO and Normalized FFO to net income attributable to common stockholders for the
three and nine months ended September 30, 2018
and
2017
, respectively (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income attributable to common stockholders
|
$
|
172,986
|
|
|
$
|
13,763
|
|
|
$
|
198,134
|
|
|
$
|
21,390
|
|
Depreciation and amortization expense related to investments in real estate
|
70,004
|
|
|
70,021
|
|
|
208,445
|
|
|
171,678
|
|
Gain on sale of real estate, net
|
(166,372
|
)
|
|
—
|
|
|
(166,372
|
)
|
|
(3
|
)
|
Impairment
|
4,281
|
|
|
—
|
|
|
8,887
|
|
|
5,093
|
|
Proportionate share of joint venture depreciation and amortization
|
463
|
|
|
464
|
|
|
1,277
|
|
|
506
|
|
FFO attributable to common stockholders
|
$
|
81,362
|
|
|
$
|
84,248
|
|
|
$
|
250,371
|
|
|
$
|
198,664
|
|
Transaction expenses
|
346
|
|
|
261
|
|
|
789
|
|
|
975
|
|
Gain on change in fair value of derivative financial instruments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(884
|
)
|
Loss on extinguishment of debt, net
|
1,092
|
|
|
774
|
|
|
1,092
|
|
|
11,192
|
|
Noncontrolling income from partnership units included in diluted shares
|
3,344
|
|
|
166
|
|
|
3,822
|
|
|
635
|
|
Other normalizing items, net
(1)
|
—
|
|
|
—
|
|
|
144
|
|
|
4,643
|
|
Normalized FFO attributable to common stockholders
|
$
|
86,144
|
|
|
$
|
85,449
|
|
|
$
|
256,218
|
|
|
$
|
215,225
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders per diluted share
|
$
|
0.82
|
|
|
$
|
0.07
|
|
|
$
|
0.94
|
|
|
$
|
0.12
|
|
FFO adjustments per diluted share, net
|
(0.44
|
)
|
|
0.34
|
|
|
0.25
|
|
|
1.00
|
|
FFO attributable to common stockholders per diluted share
|
$
|
0.38
|
|
|
$
|
0.41
|
|
|
$
|
1.19
|
|
|
$
|
1.12
|
|
Normalized FFO adjustments per diluted share, net
|
0.03
|
|
|
0.01
|
|
|
0.03
|
|
|
0.09
|
|
Normalized FFO attributable to common stockholders per diluted share
|
$
|
0.41
|
|
|
$
|
0.42
|
|
|
$
|
1.22
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
211,444
|
|
|
204,795
|
|
|
209,968
|
|
|
177,410
|
|
|
|
|
|
|
|
|
|
(1) For the nine months ended September 30, 2017, other normalizing items included $4.6 million of non-incremental costs related to the Duke acquisition that were included in transaction expenses on our condensed consolidated statements of operations.
|
The following is the reconciliation of
HTALP
’s FFO and Normalized FFO to net income attributable to common unitholders for the
three and nine months ended September 30, 2018
and
2017
, respectively (in thousands, except per unit data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income attributable to common unitholders
|
$
|
176,330
|
|
|
$
|
13,929
|
|
|
$
|
201,956
|
|
|
$
|
22,025
|
|
Depreciation and amortization expense related to investments in real estate
|
70,004
|
|
|
70,021
|
|
|
208,445
|
|
|
171,678
|
|
Gain on sale of real estate, net
|
(166,372
|
)
|
|
—
|
|
|
(166,372
|
)
|
|
(3
|
)
|
Impairment
|
4,281
|
|
|
—
|
|
|
8,887
|
|
|
5,093
|
|
Proportionate share of joint venture depreciation and amortization
|
463
|
|
|
464
|
|
|
1,277
|
|
|
506
|
|
FFO attributable to common unitholders
|
$
|
84,706
|
|
|
$
|
84,414
|
|
|
$
|
254,193
|
|
|
$
|
199,299
|
|
Transaction expenses
|
346
|
|
|
261
|
|
|
789
|
|
|
975
|
|
Gain on change in fair value of derivative financial instruments, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(884
|
)
|
Loss on extinguishment of debt, net
|
1,092
|
|
|
774
|
|
|
1,092
|
|
|
11,192
|
|
Other normalizing items, net
(1)
|
—
|
|
|
—
|
|
|
144
|
|
|
4,643
|
|
Normalized FFO attributable to common unitholders
|
$
|
86,144
|
|
|
$
|
85,449
|
|
|
$
|
256,218
|
|
|
$
|
215,225
|
|
|
|
|
|
|
|
|
|
Net income attributable to common unitholders per diluted unit
|
$
|
0.83
|
|
|
$
|
0.07
|
|
|
$
|
0.96
|
|
|
$
|
0.12
|
|
FFO adjustments per diluted unit, net
|
(0.43
|
)
|
|
0.34
|
|
|
0.25
|
|
|
1.00
|
|
FFO attributable to common unitholders per diluted unit
|
$
|
0.40
|
|
|
$
|
0.41
|
|
|
$
|
1.21
|
|
|
$
|
1.12
|
|
Normalized FFO adjustments per diluted unit, net
|
0.01
|
|
|
0.01
|
|
|
0.01
|
|
|
0.09
|
|
Normalized FFO attributable to common unitholders per diluted unit
|
$
|
0.41
|
|
|
$
|
0.42
|
|
|
$
|
1.22
|
|
|
$
|
1.21
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common units outstanding
|
211,444
|
|
|
204,795
|
|
|
209,968
|
|
|
177,410
|
|
|
|
|
|
|
|
|
|
(1) For the nine months ended September 30, 2017, other normalizing items included $4.6 million of non-incremental costs related to the Duke acquisition that were included in transaction expenses on our condensed consolidated statements of operations.
|
NOI, Cash NOI and Same-Property Cash NOI
NOI is a non-GAAP financial measure that is defined as net income or loss (computed in accordance with GAAP) before: (i) general and administrative expenses; (ii) transaction expenses; (iii) depreciation and amortization expense; (iv) impairment; (v) interest expense and net change in fair value of derivative financial instruments; (vi) gain or loss on sales of real estate; (vii) gain or loss on extinguishment of debt; (viii) income or loss from unconsolidated joint venture; and (ix) other income or expense. We believe that NOI provides an accurate measure of the operating performance of our operating assets because NOI excludes certain items that are not associated with the management of our properties. Additionally, we believe that NOI is a widely accepted measure of comparative operating performance of REITs. However, our use of the term NOI may not be comparable to that of other REITs as they may have different methodologies for computing this amount. NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. NOI should be reviewed in connection with other GAAP measurements.
Cash NOI is a non-GAAP financial measure which excludes from NO
I: (i) straight-line rent adjustments; (ii) amortization of below and above market leases/leasehold interests; (iii) notes receivable interest inc
ome; and (iv) other GAAP adjustments. Contractual base rent, contractual rent increases, contractual rent concessions and changes in occupancy or lease rates upon commencement and expiration of leases are a primary driver of our revenue performance. We believe that Cash NOI, which removes the impact of straight-line rent adjustments, provides another measurement of the operating performance of our
operating assets. Additionally, we believe that Cash NOI is a widely accepted measure of comparative operating performance of REITs. However, our use of the term Cash NOI may not be comparable to that of other REITs as they may have different methodologies for computing
this amount. Cash NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Cash NOI should be reviewed in connection with other GAAP measurements.
To facilitate the comparison of Cash NOI between periods, we calculate comparable amounts for a subset of our owned and operational properties referred to as “Same-Property”. Same-Property Cash NOI excludes (i) properties which have not been owned and operated by us during the entire span of all periods presented and disposed properties, (ii) our share of unconsolidated joint ventures, (iii) development, redevelopment and land parcels, (iv) properties intended for disposition in the near term which have (a) been approved by the Board of Directors, (b) is actively marketed for sale, and (c) an offer has been received at prices we would transact and the sales process is ongoing, and (v) certain non-routine items. Same-Property Cash NOI should not be considered as an alternative to net income or loss (computed in accordance with GAAP) as an indicator of our financial performance. Same-Property Cash NOI should be reviewed in connection with other GAAP measurements.
The following is the reconciliation of HTA’s and
HTALP
’s NOI, Cash NOI and Same-Property Cash NOI to net income for the
three and nine months ended September 30, 2018
and
2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
176,348
|
|
|
$
|
13,957
|
|
|
$
|
202,021
|
|
|
$
|
22,105
|
|
General and administrative expenses
|
8,770
|
|
|
8,283
|
|
|
26,281
|
|
|
25,178
|
|
Transaction expenses
(1)
|
346
|
|
|
261
|
|
|
933
|
|
|
5,618
|
|
Depreciation and amortization expense
|
70,568
|
|
|
70,491
|
|
|
210,064
|
|
|
172,900
|
|
Impairment
|
4,281
|
|
|
—
|
|
|
8,887
|
|
|
5,093
|
|
Interest expense and net change in fair value of derivative financial instruments
|
24,834
|
|
|
26,188
|
|
|
77,392
|
|
|
59,631
|
|
Gain on sale of real estate, net
|
(166,372
|
)
|
|
—
|
|
|
(166,372
|
)
|
|
(3
|
)
|
Loss on extinguishment of debt, net
|
1,092
|
|
|
774
|
|
|
1,092
|
|
|
11,192
|
|
Income from unconsolidated joint venture
|
(432
|
)
|
|
(318
|
)
|
|
(1,405
|
)
|
|
(381
|
)
|
Other (income) expense
|
(89
|
)
|
|
27
|
|
|
(129
|
)
|
|
13
|
|
NOI
|
$
|
119,346
|
|
|
$
|
119,663
|
|
|
$
|
358,764
|
|
|
$
|
301,346
|
|
Straight-line rent adjustments, net
|
(2,746
|
)
|
|
(3,009
|
)
|
|
(8,289
|
)
|
|
(5,834
|
)
|
Amortization of (below) and above market leases/leasehold interests, net
|
(65
|
)
|
|
214
|
|
|
190
|
|
|
246
|
|
Notes receivable interest income and other GAAP adjustments
|
(33
|
)
|
|
(588
|
)
|
|
(218
|
)
|
|
(1,163
|
)
|
Cash NOI
|
$
|
116,502
|
|
|
$
|
116,280
|
|
|
$
|
350,447
|
|
|
$
|
294,595
|
|
Acquisitions not owned/operated for all periods presented and disposed properties Cash NOI
|
(6,065
|
)
|
|
(7,337
|
)
|
|
(112,557
|
)
|
|
(59,865
|
)
|
Redevelopment Cash NOI
|
(607
|
)
|
|
(1,540
|
)
|
|
(1,923
|
)
|
|
(4,072
|
)
|
Intended for sale Cash NOI
|
(1,007
|
)
|
|
(1,243
|
)
|
|
(2,815
|
)
|
|
(3,063
|
)
|
Same-Property Cash NOI
(2)
|
$
|
108,823
|
|
|
$
|
106,160
|
|
|
$
|
233,152
|
|
|
$
|
227,595
|
|
|
|
|
|
|
|
|
|
(1) For the nine months ended September 30, 2017, transaction costs included $4.6 million of non-incremental costs related to the Duke acquisition.
|
(2) Same-Property includes 403 and 317 buildings for the three and nine months ended September 30, 2018 and 2017, respectively.
|
Liquidity and Capital Resources
Our primary sources of cash include: (i) cash flow from operations; (ii) borrowings under our unsecured revolving credit facility; (iii) net proceeds from the issuances of debt and equity securities; and (iv) proceeds from our dispositions. During the next 12 months our primary uses of cash are expected to include: (a) the funding of acquisitions of MOBs, development properties and other facilities that serve the healthcare industry; (b) capital expenditures; (c) the payment of operating expenses; (d) debt service payments, including principal payments; and (e) the payment of dividends to our stockholders. We anticipate cash flow from operations, restricted cash and reserve accounts and our unsecured revolving credit facility, if needed, will be sufficient to fund our operating expenses, capital expenditures and dividends to stockholders. Investments and maturing indebtedness may require funds from the issuance of debt and/or equity securities or proceeds from sales of real estate.
As of
September 30, 2018
, we had liquidity of
$1.2 billion
, including
$994.5 million
available under our unsecured revolving credit facility (which includes the impact of
$5.5 million
of outstanding letters of credit) and
$225.5 million
of cash and cash equivalents.
In addition, we had unencumbered assets with a gross book value of
$6.4 billion
. The unencumbered properties may be used as collateral to secure additional financings in future periods or refinance our current debt as it becomes due. Our ability to raise funds from future debt and equity issuances is dependent on our investment grade credit ratings, general economic and market conditions and our operating performance.
When we acquire a property, we prepare a capital plan that contemplates the estimated capital needs of that investment. In addition to operating expenses, capital needs may also include costs of refurbishment, tenant improvements or other major capital expenditures. The capital plan for each investment will be adjusted through ongoing, regular reviews of our portfolio or as necessary to respond to unanticipated additional capital needs. As of
September 30, 2018
, we estimate that our expenditures for capital improvements for the remainder of
2018
will range from
$20.0 million
to
$25.0 million
depending on leasing activity. As of
September 30, 2018
, we had
$4.1 million
of restricted cash and reserve accounts for such capital expenditures, in addition to the availability under our unsecured revolving credit facility and on hand cash and cash equivalents. We cannot provide assurance, however, that we will not exceed these estimated expenditure levels.
If we experience lower occupancy levels, reduced rental rates, reduced revenues as a result of asset sales, or increased capital expenditures and leasing costs compared to historical levels due to competitive market conditions for new and renewal leases, the effect would be a reduction of net cash provided by operating activities. If such a reduction of net cash provided by operating activities is realized, we may have a cash flow deficit in subsequent periods. Our estimate of net cash available is based on various assumptions which are difficult to predict, including the levels of our leasing activity and related leasing costs. Any changes in these assumptions could impact our financial results and our ability to fund working capital and unanticipated cash needs.
Cash Flows
The following is a summary of our cash flows for the
nine months ended September 30, 2018
and
2017
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Change
|
Cash, cash equivalents and restricted cash - beginning of period
(1)
|
$
|
118,560
|
|
|
$
|
25,045
|
|
|
$
|
93,515
|
|
Net cash provided by operating activities
|
240,751
|
|
|
228,542
|
|
|
12,209
|
|
Net cash provided by (used in) investing activities
(1)
|
194,846
|
|
|
(2,483,816
|
)
|
|
2,678,662
|
|
Net cash (used in) provided by financing activities
|
(314,000
|
)
|
|
2,257,108
|
|
|
(2,571,108
|
)
|
Cash, cash equivalents and restricted cash - end of period
(1)
|
$
|
240,157
|
|
|
$
|
26,879
|
|
|
$
|
213,278
|
|
|
|
|
|
|
|
(1) The amounts for 2017 differ from amounts previously reported in our Quarterly Report for the nine months ended September 30, 2017, as a result of the retrospective presentation of the early adoption of ASU 2016-18 in our 2017 Annual Report on Form 10-K as of January 1, 2017. Additionally, the presentation of beginning of period and end of period cash now includes restricted cash as a result of the adoption of ASU 2016-18.
|
Net cash provided by operating activities increased in
2018
primarily due to the impact of our
2017
and
2018
acquisitions, contractual rent increases and improved operating efficiencies, partially offset by our
2017
and
2018
dispositions. We anticipate cash flows from operating activities to
increase
as a result of the above items and continued leasing activity in our existing portfolio.
For the
nine months ended September 30, 2018
, net cash provided by investing activities primarily related to proceeds from the sale of real estate of
$302.4 million
, which was partially offset by capital expenditures of
$61.1 million
, development of real estate of
$29.6 million
, and investments in real estate of
$17.4 million
. For the
nine months ended September 30, 2017
, net cash used in investing activities primarily related to the investment in real estate of
$2.4 billion
, investment in unconsolidated joint venture of
$68.8 million
, and capital expenditures of
$43.0 million
, which was partially offset by proceeds from the sale of real estate of
$4.7 million
.
For the
nine months ended September 30, 2018
, net cash used in financing activities primarily related to dividends paid to holders of our common stock of
$188.4 million
and payments on our secured mortgage loans of
$173.2 million
, which was partially offset by net proceeds of shares of common stock issued of
$72.8 million
. For the
nine months ended September 30, 2017
, net cash provided by financing activities primarily related to the net proceeds of shares of common stock issued of
$1.6 billion
and net proceeds on the issuance of senior notes of
$900.0 million
, partially offset by dividends paid to holders of our common stock of
$145.9 million
, and payments on our secured mortgage loans of
$75.4 million
.
Dividends
The amount of dividends we pay to our stockholders is determined by our Board of Directors, in their sole discretion, and is dependent on a number of factors, including funds available, our financial condition, capital expenditure requirements and annual dividend distribution requirements needed to maintain our status as a REIT under the Internal Revenue Code of 1986, as amended. We have paid monthly or quarterly dividends since February
2007
, and if our investments produce sufficient cash flow, we expect to continue to pay dividends to our stockholders. Because our cash available for dividend distributions in any year may be less than
90%
of our taxable income for the year, we may obtain the necessary funds through borrowings, issuing new securities or selling assets to pay out enough of our taxable income to satisfy our dividend distribution requirement. Our organizational documents do not establish a limit on dividends that may constitute a return of capital for federal income tax purposes. The dividend we pay to our stockholders is equal to the distributions received from
HTALP
in accordance with the terms of
HTALP
’s partnership agreement. It is our intention to continue to pay dividends. However, our Board of Directors may reduce our dividend rate and we cannot guarantee the timing and amount of dividends that we may pay in the future, if any.
For the
nine months ended September 30, 2018
, we paid cash dividends of
$188.4 million
on our common stock. In October
2018
, we paid cash dividends on our common stock of
$64.2 million
for the quarter ended
September 30, 2018
. On
October 25, 2018
, our Board of Directors announced a quarterly dividend of
$0.310
per share of common stock and per OP Unit to be paid on
January 9, 2019
to stockholders of record of our common stock and holders of our OP Units on
January 2, 2019
.
Financing
We have historically maintained a low leveraged balance sheet and intend to continue to maintain this structure in the long term. However, our total leverage may fluctuate on a short-term basis as we execute our business strategy. As of
September 30, 2018
, our leverage ratio, measured by debt less cash and cash equivalents to total capitalization, was
29.7%
.
As of
September 30, 2018
, we had debt outstanding of
$2.6 billion
and the weighted average interest rate therein was
3.49%
per annum, inclusive of the impact of our interest rate swaps. The following is a summary of our unsecured and secured debt. See
Note 7 - Debt
in the accompanying condensed consolidated financial statements for a further discussion of our debt.
Unsecured Revolving Credit Facility
In 2017,
HTALP
entered into an amended and restated
$1.3 billion
Unsecured Credit Agreement which increased the amount available under the unsecured revolving credit facility to
$1.0 billion
. As of
September 30, 2018
,
$994.5 million
was available on our
$1.0 billion
unsecured revolving credit facility. Our unsecured revolving credit facility matures in
June 2022
.
Unsecured Term Loans
As of
September 30, 2018
, we had
$500.0 million
of unsecured term loans outstanding, comprised of
$300.0 million
under our Unsecured Credit Agreement maturing in 2023, and
$200.0 million
under our unsecured term loan maturing in 2024.
Unsecured Senior Notes
As of
September 30, 2018
, we had $
1.85 billion
of unsecured senior notes outstanding, comprised of
$300.0 million
maturing in
2021
,
$400.0 million
maturing in 2022,
$300.0 million
maturing in
2023
,
$350.0 million
maturing in
2026
, and
$500.0 million
maturing in 2027.
Fixed and Variable Rate Mortgages
During the
nine months ended September 30, 2018
, we made payments on our fixed and variable rate mortgages of
$173.2 million
and have
$1.1 million
of principal payments due during the remainder of
2018
.
Commitments and Contingencies
There have been no material changes from the commitments and contingencies previously disclosed in our
2017
Annual Report on Form 10-K.
Debt Service Requirements
We are required by the terms of our applicable loan agreements to meet certain financial covenants, such as minimum net worth and liquidity, and reporting requirements, among others. As of
September 30, 2018
, we believe that we were in compliance with all such covenants and we are not aware of any covenants that it is reasonably likely that we would not be able to meet in accordance with our loan agreements.
Off-Balance Sheet Arrangements
As of and during the
nine months ended September 30, 2018
, we had no material off-balance sheet arrangements that have had or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation
We are exposed to inflation risk as income from future long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that protect us from the impact of normal inflation. These provisions include rent escalations, reimbursement billings for operating expense pass-through charges and real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of our leases, among other factors, the leases may not reset frequently enough to cover inflation.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the quantitative and qualitative disclosures about market risk previously disclosed in our
2017
Annual Report on Form 10-K.
Item 4. Controls and Procedures
Healthcare Trust of America, Inc.
HTA’s management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including HTA’s Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial officer and principal accounting officer), to allow timely decisions regarding required disclosures.
As of
September 30, 2018
, an evaluation was conducted by HTA under the supervision and with the participation of its management, including HTA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, HTA’s Chief Executive Officer and Chief Financial Officer each concluded that HTA’s disclosure controls and procedures were effective as of
September 30, 2018
.
There were no changes in our internal control over financial reporting that occurred during the quarter ended
September 30, 2018
that have materially affected, or are reasonably believed to be likely to materially affect, our internal control over financial reporting.
October 26, 2018
Healthcare Trust of America Holdings, LP
HTALP
’s management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including HTA’s Chief Executive Officer (as the principal executive officer) and Chief Financial Officer (as the principal financial officer and principal accounting officer), to allow timely decisions regarding required disclosures.
As of
September 30, 2018
, an evaluation was conducted by
HTALP
under the supervision and with the participation of its management, including HTA’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, HTA’s Chief Executive Officer and Chief Financial Officer, on behalf of HTA in its capacity as general partner of
HTALP
, each concluded that
HTALP
’s disclosure controls and procedures were effective as of
September 30, 2018
.
There were no changes in
HTALP
’s internal control over financial reporting that occurred during the quarter ended
September 30, 2018
that have materially affected, or are reasonably believed to be likely to materially affect,
HTALP
’s internal control over financial reporting.
October 26, 2018