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.


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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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Table of Contents

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.

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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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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
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.


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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.


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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.



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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

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$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



18

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%.

19

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

 
$
(3,332
)
 
$
795,951

 
$
(1,683,196
)
 
$
1,004,806

Issuance of common stock
92

 
201,956

 

 

 

 
202,048

Common stock redemptions

 
(45
)
 

 

 

 
(45
)
Stock-based compensation
1

 
2,586

 

 

 

 
2,587

Net income attributable to common stockholders

 

 

 
11,857

 

 
11,857

Dividends to common stockholders ($0.90 per share)

 

 

 

 
(70,186
)
 
(70,186
)
Balance at Sept. 30, 2012
$
872

 
$
2,099,101

 
$
(3,332
)
 
$
807,808

 
$
(1,753,382
)
 
$
1,151,067


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

 
66,071,424

Issuance of common stock
9,258,381

 
11,681,392

Restricted stock-based awards, net of forfeitures
128,672

 
91,067

Balance, end of period
87,230,936

 
77,843,883


Equity Offering
On September 28, 2012, the Company sold 9,200,000 shares of common stock, par value $0.01 per share, at $22.85 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $201.1 million.


22

Table of Contents

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

Common Stock Dividends
During the first nine months of 2012, the Company declared and paid common stock dividends totaling $0.90 per share.

On October 30, 2012, the Company declared a quarterly common stock dividend in the amount of $0.30 per share payable on November 30, 2012 to stockholders of record on November 15, 2012.

Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings (loss) per common share for the three and nine months ended September 30, 2012 and 2011.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Weighted average Common Shares outstanding
 
 
 
 
 
 
 
Weighted average Common Shares outstanding
78,204,382

 
77,570,090

 
78,042,979

 
72,915,791

Unvested restricted stock
(1,491,788
)
 
(1,431,035
)
 
(1,508,471
)
 
(1,437,328
)
Weighted average Common Shares outstanding—Basic
76,712,594

 
76,139,055

 
76,534,508

 
71,478,463

Weighted average Common Shares—Basic
76,712,594

 
76,139,055

 
76,534,508

 
71,478,463

Dilutive effect of restricted stock
1,157,948

 

 
1,127,211

 

Dilutive effect of employee stock purchase plan
150,429

 

 
137,572

 

Weighted average Common Shares outstanding—Diluted
78,020,971

 
76,139,055

 
77,799,291

 
71,478,463

Net income (loss)
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
1,758

 
$
(507
)
 
$
5,253

 
$
(6,584
)
Noncontrolling interests’ share in net income
(20
)
 
(4
)
 
(40
)
 
(31
)
Income (loss) from continuing operations attributable to common shareholders
1,738

 
(511
)
 
5,213

 
(6,615
)
Discontinued operations
4,077

 
1,158

 
6,644

 
3,484

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
)

The dilutive effect of 971,887 and 1,015,470 shares of restricted common stock, respectively, and options to purchase 66,172 and 76,622 shares of the Company's common stock, respectively, under the Company's Employee Stock Purchase Plan were excluded from the calculation of diluted loss per common share for the three and nine months ended September 30, 2011, because the effect was anti-dilutive due to the loss from continuing operations incurred during those periods.

Incentive Plans
The Company has various stock-based incentive plans for its employees and directors. Awards under these plans include restricted stock issued to employees and the Company’s directors and options granted to employees pursuant to its Employee

23

Table of Contents

Stock Purchase Plan. In May 2012 and 2011, annual restricted stock grants were made to each non-employee director equal to a market value of approximately $76,000, or 27,864 shares and 27,400 shares of restricted common stock, respectively. During the nine months ended September 30, 2012 and 2011, the Company issued 103,225 and 79,169 shares of restricted common stock, respectively, to its employees under its stock-based incentive plans and withheld 2,417 shares and 2,568 shares of common stock, respectively, from its officers to pay estimated withholding taxes related to restricted stock that vested, respectively.

A summary of the activity under the restricted stock incentive plans for the three and nine months ended September 30, 2012 and 2011 is included in the table below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Stock-based awards, beginning of period
1,508,274

 
1,448,211

 
1,430,675

 
1,379,243

Granted

 

 
131,089

 
106,569

Vested
(282
)
 
(2,200
)
 
(53,772
)
 
(28,875
)
Forfeited

 

 

 
(10,926
)
Stock-based awards, end of period
1,507,992

 
1,446,011

 
1,507,992

 
1,446,011


Under the Company’s Employee Stock Purchase Plan, in January of each year, each eligible employee is granted an option to purchase up to $25,000 of Common Stock at the lesser of 85% of the market price on the date of grant or 85% of the market price on the date of exercise of such option. The number of shares subject to each year’s option becomes fixed on the date of grant. Options granted under the Employee Stock Purchase Plan expire if not exercised within 27 months after each such option’s date of grant. The Company recorded approximately $0.2 million in general and administrative expenses during the first quarter of 2012 relating to the annual grant of options to its employees under the Employee Stock Purchase Plan and recorded an additional $0.2 million in the third quarter of 2012 based on the Company's estimate of option exercises.

A summary of the activity under the Employee Stock Purchase Plan for the three and nine months ended September 30, 2012 and 2011 is included in the table below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2012
 
2011
 
2012
 
2011
Outstanding and exercisable, beginning of period
497,736

 
448,243

 
425,196

 
392,517

Granted

 

 
327,936

 
261,960

Exercised
(24,381
)
 
(5,230
)
 
(45,749
)
 
(12,475
)
Forfeited
(17,781
)
 
(11,703
)
 
(69,494
)
 
(44,485
)
Expired

 

 
(182,315
)
 
(166,207
)
Outstanding and exercisable, end of period
455,574

 
431,310

 
455,574

 
431,310


Note 8. Defined Benefit Pension Plans
The Company’s Executive Retirement Plan provides benefits upon retirement for three of the Company’s founding officers. The plan is unfunded and benefits will be paid from 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. As of September 30, 2012, only the Company’s Chief Executive Officer was eligible to retire under the Executive Retirement Plan.

On October 30, 2012, the Company amended its Executive Retirement Plan to provide for an annual cost-of-living increase to the maximum annual retirement benefit, beginning upon the earlier of retirement or January 1, 2016. A copy of the amendment is filed as Exhibit 10.11 to the Form 10-Q and is incorporated by reference herein.


24

Table of Contents

Net periodic benefit cost recorded related to the Company’s pension plans for the three and nine months ended September 30, 2012 and 2011 is detailed in the following table.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Service costs
$
19

 
$
17

 
$
57

 
$
51

Interest costs
181

 
218

 
544

 
644

Amortization of net gain/loss
248

 
232

 
744

 
696

Amortization of prior service cost
(181
)
 

 
(543
)
 

Total recognized in net periodic benefit cost
$
267

 
$
467

 
$
802

 
$
1,391


Note 9. Other Operating Income
Other operating income on the Company’s Condensed Consolidated Statements of Operations generally includes lease guaranty revenue recognized under its property operating agreements, interest income on notes receivable, and other items as detailed in the table below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Rental lease guaranty income
$
1,286

 
$
1,841

 
$
3,714

 
$
5,640

Interest income on notes receivable
99

 
133

 
334

 
498

Management fee income
40

 
38

 
119

 
115

Other
98

 
49

 
497

 
147

 
$
1,523

 
$
2,061

 
$
4,664

 
$
6,400


Note 10. Taxable Income
Taxable Income
The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its annual taxable income to its stockholders.

As a REIT, the Company generally will not be subject to federal income tax on taxable income it distributes currently to its stockholders. Accordingly, no provision for federal income taxes has been made in the accompanying Condensed Consolidated Financial Statements. If the Company fails to qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular corporate rates, including any applicable alternative minimum tax, and may not be able to qualify as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be subject to certain state and local taxes on its income and property and to federal income and excise tax on its undistributed taxable income.

Earnings and profits, the current and accumulated amounts of which determine the taxability of distributions to stockholders, vary from net income (loss) attributable to common stockholders and taxable income because of different depreciation recovery periods and methods, and other items.

The following table reconciles the Company’s consolidated net income (loss) attributable to common stockholders to taxable income for the three and nine months ended September 30, 2012 and 2011.

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Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
Net income (loss) attributable to common stockholders
$
5,815

 
$
647

 
$
11,857

 
$
(3,131
)
Reconciling items to taxable income:

 

 

 

Depreciation and amortization
6,675

 
6,187

 
20,175

 
15,706

Gain or loss on disposition of depreciable assets
516

 
(562
)
 
(3,841
)
 
(2,660
)
Straight-line rent
(1,370
)
 
(975
)
 
(4,614
)
 
(3,124
)
Receivable allowances
136

 
(465
)
 
(235
)
 
255

Stock-based compensation
1,365

 
1,727

 
3,997

 
4,411

Other
1,395

 
(1,968
)
 
8,900

 
5,076

Taxable income (1)
$
14,532

 
$
4,591

 
$
36,239

 
$
16,533

Dividends paid
$
23,401

 
$
23,348

 
$
70,186

 
$
65,918

___________________________ 
(1) Before REIT dividends paid deduction.

State Income Taxes
State income tax expense and payments for the three and nine months ended September 30, 2012 and 2011 are detailed in the table below.
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands)
2012
 
2011
 
2012
 
2011
State income tax expense:
 
 
 
 
 
 
 
Texas gross margins tax
$
178

 
$
116

 
$
438

 
$
342

Other
15

 
54

 
(26
)
 
(28
)
Total state income tax expense
$
193

 
$
170

 
$
412

 
$
314

State income tax payments, net
$
34

 
$
25

 
$
582

 
$
528


The Texas gross margins tax is a tax on gross receipts from operations in Texas. The Company understands that the Securities and Exchange Commission views this tax as an income tax. As such, the Company has disclosed the Texas gross margin tax in the table above.



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Note 11. Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables and payables are reasonable estimates of their fair value as of September 30, 2012 and December 31, 2011 due to their short-term nature. The fair value of notes and bonds payable is estimated using cash flow analyses, based on the Company’s current interest rates for similar types of borrowing arrangements. The fair value of mortgage notes and notes receivable is estimated based either on cash flow analyses at an assumed market rate of interest or at a rate consistent with the rates on mortgage notes acquired by the Company recently or notes receivable entered into by the Company recently. The table below details the fair value and carrying values for notes and bonds payable, mortgage notes receivable and notes receivable at September 30, 2012 and December 31, 2011.
 
September 30, 2012
 
December 31, 2011
 
Carrying
 
Fair
 
Carrying
 
Fair
(Dollars in millions)
value
 
value
 
value
 
value
Notes and bonds payable (1)
$
1,212.6


$
1,356.2


$
1,393.5


$
1,534.3

Mortgage notes receivable (2)
$
141.1


$
140.8


$
97.4


$
95.5

Notes receivable, net of allowances (2)
$
0.1


$
0.1


$
0.3


$
0.3

______
(1) Level 3 - Fair value derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
(2) Level 2 - Fair value based on 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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Disclosure Regarding Forward-Looking Statements
This report and other materials the Company has filed or may file with the Securities and Exchange Commission, as well as information included in oral statements or other written statements made, or to be made, by senior management of the Company, contain, or will contain, disclosures that are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “target,” “intend,” “plan,” “estimate,” “project,” “continue,” “should,” “could” and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including the risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 that could significantly affect the Company’s current plans and expectations and future financial condition and results.

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

For a detailed discussion of the Company’s risk factors, please refer to the Company’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2011.

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

Substantially all of the Company’s revenues are derived from operating leases on its real estate properties and interest earned on outstanding notes receivable. These sources of revenue represent the Company’s primary source of liquidity to fund its dividends and its operating expenses, including interest incurred on debt, general and administrative costs such as compensation and office rent, as well as other expenses incurred in connection with managing its existing portfolio and acquiring additional properties. To the extent additional investments are not funded by these sources, the Company will fund its investment activity generally through equity or debt issuances either in the public or private markets, proceeds from asset dispositions or through proceeds from its unsecured credit facility due 2015 (the “Unsecured Credit Facility”).

Executive Overview
The Company remains focused on leasing its development properties and expects leasing momentum on these properties to continue based on increased activity in recent periods. During the third quarter of 2012, the Company funded $7.0 million related to the leasing of its development portfolio, which included 12 properties in stabilization at September 30, 2012. The Company completed the construction of a medical office building in Texas during the third quarter of 2012, transferring the building into its stabilization portfolio.

During the third quarter of 2012, the Company funded $25.7 million in two construction mortgage loans related to two development projects totaling $202.6 million for Mercy Health. As of September 30, 2012, the Company has funded $94.4 million in construction mortgage loans for these projects, with $108.2 million remaining to be funded through completion in the third and fourth quarter of 2013. The Company will assume ownership of both properties upon substantial completion of construction in exchange for the repayment of the outstanding loan balances.

The acquisition environment for on-campus, multi-tenanted medical office buildings has improved since early 2012. The Company is under contract and in various stages of negotiations for assets meeting its investment criteria, and expects to fund up to $50 million during the fourth quarter of 2012 for the acquisition of healthcare facilities subject to customary due diligence, the

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execution of definitive purchase agreements and other customary conditions.

The Company also sold five real estate properties during the third quarter in which the Company had a $24.2 million net investment, generating cash proceeds of approximately $28.7 million.

On September 28, 2012, the Company sold 9,200,000 shares of common stock, par value $0.01 per share, at $22.85 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $201.1 million. The proceeds from the offering are being used to fund the two build-to-suit healthcare facilities for Mercy Health described above, the acquisition of healthcare facilities, and other general corporate purposes, including the repayment of debt. In the interim, the Company has applied the proceeds from the offering to reduce the outstanding balance on its Unsecured Credit Facility.

At September 30, 2012, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was reduced to approximately 41.7%, and its borrowings outstanding under the Unsecured Credit Facility totaled $34.0 million, with a capacity remaining under its financial covenants of approximately $666.0 million.

Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the REIT industry in order to gauge the potential impact on the operations of the Company. In addition to the matters discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, below are some of the factors and trends that management believes may impact future operations of the Company.

Acquisitions
During the first nine months of 2012, the Company acquired approximately $33.1 million in real estate assets. These acquisitions were funded with borrowings on the Unsecured Credit Facility and proceeds from real estate dispositions. See Note 3 to the Condensed Consolidated Financial Statements for more information on these acquisitions.

Subsequent Acquisitions
In October 2012, the Company acquired two MOBs located in Tennessee and Washington for an aggregate purchase price of $20.4 million. The buildings aggregate approximately 86,570 square feet and are approximately 94% leased on average.

Development Activity
The Company had several development projects ongoing at September 30, 2012, including two construction mortgage notes and 12 properties in the process of stabilization subsequent to construction. See Note 6 to the Condensed Consolidated Financial Statements for more detail on these projects.

The Company’s ability to complete and stabilize these facilities in a given period of time will impact the Company’s results of operations and cash flows. More favorable completion dates, stabilization periods and rental rates will result in improved results of operations and cash flows, while lagging completion dates, stabilization dates, and rental rates will result in less favorable results of operations and cash flows.

Beyond the current commitments, the Company has no new developments planned. However, the Company is regularly in discussions with health systems, developers and others that could lead to attractive development opportunities. The Company will consider these projects in light of existing obligations, the acquisition environment, capital availability and cost, among other factors.

Dispositions
During the first nine months of 2012, the Company disposed of 16 medical office buildings for an aggregate sales price of $81.4 million. The Company's aggregate net investment in these properties was approximately $67.0 million. The Company recognized impairments of approximately $3.4 million and realized gains on sale of approximately $9.7 million. The average sales price per square foot was approximately $125. Also, during the first nine months of 2012, $21.7 million of mortgage notes receivable were repaid. Net cash proceeds from these dispositions and repayments were used to repay amounts due under the Unsecured

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Table of Contents

Credit Facility, to fund additional real estate investments, and for general corporate purposes. See Note 3 to the Condensed Consolidated Financial Statements for more information on these dispositions.

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.

Expiring Leases
Traditionally, approximately 15%-20% of the leases in the multi-tenanted portfolio expire each year. There were 369 leases scheduled to expire during 2012. Approximately 85% of the leases expiring in 2012 are located in buildings on hospital campuses, are distributed throughout the portfolio and are not concentrated with any one tenant, health system or location. Of the 298 leases that had expired during the first nine months of 2012, approximately 86% of the tenants had renewed, had expressed an intention to renew, or continued to occupy their leased space in a holdover lease arrangement.

Leases on three single tenant net lease properties were scheduled to expire during 2012. During the first quarter of 2012, a lease was signed on one of the properties, a 12,000 square foot property, extending the expiration of the lease for an additional eighteen months to August 2013 at the same lease rate. Leases on the other two properties expired in July 2012. A lease was signed on one of the properties, a 110,000 square foot building, which extended the maturity until July 2013 with an increase in the rental rate. The tenant vacated the other building, a 13,500 square foot property, in July 2012.

Leases on six single tenant net lease properties are scheduled to expire during 2013. Two of the properties are outpatient medical office buildings that the Company anticipates will be vacated by the existing tenants. One of the outpatient medical office buildings is located on a hospital campus and is 12,000 square feet, the other is located off campus and is 110,000 square feet. These properties generated approximately $0.4 million in net operating income during the quarter ended September 30, 2012. At the expiration of the current lease term the properties will be converted to the multi-tenant portfolio and the Company is currently working to lease the properties. The remaining four properties are inpatient rehabilitation hospitals and the Company expects the operator will continue to occupy the facilities.

Other Items Impacting Operations
Several other events that occurred in the third quarter of 2012 or are expected to occur in the fourth quarter of 2012 that may impact the Company’s operations and financial results are as follows:

Upon completion of the construction of a building, the Company continues to capitalize interest for a twelve-month period on the unoccupied percentage of the building. The Company completed construction of two buildings during the fourth quarter of 2011 and will cease capitalizing interest on the buildings during the fourth quarter of 2012.  As a result of not capitalizing interest on the two buildings and the increase in occupancy on buildings in which interest is still being capitalized, the Company expects an increase to interest expense in the fourth quarter of 2012 of approximately $1.1 million compared to the third quarter of 2012;

The Company completed an equity offering and issued 9,200,000 shares of common stock on September 28, 2012. As a result of having 9,200,000 additional shares of common stock, assuming the Company generated the same level of FFO in the fourth quarter of 2012, FFO per share for the fourth quarter would be a reduction of $0.02 to $0.03 per share; and

During the third quarter of 2012, the Company disposed of five properties in which the Company had a net aggregate investment of approximately $24.2 million. The sale of these properties will reduce rental income, net of expenses, by approximately $0.3 million in the fourth quarter of 2012.


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Non-GAAP Measures
Management believes that net income, as defined by GAAP, is the most appropriate earnings measurement. However, management considers certain non-GAAP financial measures to be useful supplemental measures of the Company's operating performance. A non-GAAP financial measure is generally defined as one that purports to measure historical or future financial performance, financial position or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Set forth below are descriptions of the non-GAAP financial measures management considers relevant to the Company's business and useful to investors, as well as reconciliations of these measures to the most directly comparable GAAP financial measures.
        The non-GAAP financial measures presented herein are not necessarily identical to those presented by other real estate companies due to the fact that not all real estate companies use the same definitions. These measures should not be considered as alternatives to net income (determined in accordance with GAAP), as indicators of the Company's financial performance, or as alternatives to cash flow from operating activities (determined in accordance with GAAP) as measures of the Company's liquidity, nor are these measures necessarily indicative of sufficient cash flow to fund all of the Company's needs. Management believes that in order to facilitate a clear understanding of the Company's consolidated historical operating results, these measures should be examined in conjunction with net income as presented in the Condensed Consolidated Financial Statements and other financial data included elsewhere in this Quarterly Report on Form 10-Q.

Same Store Net Operating Income
Net operating income ("NOI") and same store NOI are non-GAAP financial measures of performance. Management considers same store NOI an important supplemental measure because it allows investors, analysts and Company management to measure unlevered property-level operating results and to compare those results to other real estate companies and between periods on a consistent basis. The Company defines NOI as operating revenues (property operating revenue, single-tenant net lease revenue, and rental lease guaranty income) less property operating expenses related specifically to the property portfolio. NOI excludes straight-line rent, general and administrative expenses, interest expense, depreciation and amortization, gains and losses from property sales, property management fees and other revenues and expenses not specifically related to the property portfolio. NOI may also be adjusted for certain expenses that are related to prior periods or are not considered to be part of the operations of the properties. Properties included in the same store analysis are stabilized properties that have been included in operations and were consistently reported as leased and stabilized properties for the duration of the year-over-year comparison period presented. Accordingly, properties that were recently acquired or disposed of, properties classified as held for sale, and properties in stabilization or conversion are excluded from the same store analysis.

The following table reflects the Company's same store NOI for the three months ended September 30, 2012 and 2011.

 
 
 
Same Store NOI for the
 
 
 
Three Months Ended September 30,
(Dollars in thousands)
Number of Properties (1)
Investment at September 30, 2012
2012 (2)
2011 (2)
Multi-tenant Properties
121

$
1,463,149

$
27,883

$
26,550

Single-tenant Net Lease Properties
33

502,927

12,586

12,278

   Total
154

$
1,966,076

$
40,469

$
38,828

___________
(1) Mortgage notes receivable, construction in progress, an investment in one unconsolidated joint venture, corporate property and assets classified as held for sale are excluded.
(2) Reconciliation of Same Store NOI:    

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Three Months Ended September 30,
(Dollars in thousands)
2012
 
2011
Rental income
$
75,305

 
$
70,004

Rental lease guaranty income (a)
1,286

 
1,841

Property operating expense
(30,115
)
 
(30,070
)
Exclude Straight-line rent revenue
(1,461
)
 
(1,086
)
NOI
45,015

 
40,689

NOI not included in same store
(4,546
)
 
(1,861
)
   Same store NOI
$
40,469

 
$
38,828

 
 
 
 
   (a) Other operating income reconciliation:
 
 
 
            Rental lease guaranty income
$
1,286

 
$
1,841

            Interest income
99

 
133

            Management fee income
40

 
38

            Other
98

 
49

 
$
1,523

 
$
2,061


Funds from Operations
Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO as the most commonly accepted and reported measure of a REIT’s operating performance equal to “net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.” The SEC indicated in 2003 that impairment charges (losses) could not be added back to net income attributable to common stockholders in calculating FFO. However, in late October 2011, NAREIT issued an alert indicating that the SEC staff recently advised NAREIT that it currently takes no position on the matter of whether impairment charges should be added back to net income to compute FFO, and NAREIT affirmed its original definition of FFO. The Company follows the NAREIT definition to exclude impairment charges and all prior periods have been restated to agree with the current presentation.

Management believes FFO and FFO per share to be supplemental measures of a REIT’s performance because they provide an understanding of the operating performance of the Company’s properties without giving effect to certain significant non-cash items, primarily depreciation and amortization expense. Historical cost accounting for real estate assets in accordance with generally accepted accounting principles (“GAAP”) assumes that the value of real estate assets diminishes predictably over time. However, real estate values instead have historically risen or fallen with market conditions. The Company believes that by excluding the effect of depreciation, amortization and gains or losses from sales of real estate, all of which are based on historical costs and which may be of limited relevance in evaluating current performance, FFO and FFO per share can facilitate comparisons of operating performance between periods. The Company reports FFO and FFO per share because these measures are observed by management to also be the predominant measures used by the REIT industry and by industry analysts to evaluate REITs and because FFO per share is consistently reported, discussed, and compared by research analysts in their notes and publications about REITs. For these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share. However, FFO does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. FFO should not be considered as an alternative to net income attributable to common stockholders as an indicator of the Company’s operating performance or as an alternative to cash flow from operating activities as a measure of liquidity.

The comparability of FFO for the three and nine months ended September 30, 2012 compared to 2011 was primarily impacted by the various acquisitions and dispositions of the Company’s real estate portfolio and the results of operations of the portfolio from period to period. Other items that impacted the comparability of FFO are discussed below:
interest expense increased for the three months ended September 30, 2012 compared to the same period in 2011 by approximately $1.0 million, or $0.01 per diluted common share, due mainly to mortgage notes assumed in acquisitions during 2012; while interest expense decreased for the nine months ended September 30, 2012 compared to the same period in 2011 by approximately $1.7 million, or $0.02 per diluted common share, due primarily to the redemption of the senior notes due 2011 (the “Senior Notes due 2011”) in the first quarter of 2011. See Results of Operations for further details on items impacting interest expense;

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a loss on the extinguishment of debt of approximately $2.0 million, or $0.03 per diluted common share, was recognized during the first quarter of 2011, related to the redemption of the Senior Notes due 2011;
a lease termination fee was received in the first quarter of 2012 totaling $1.5 million, or $0.02 per diluted common share, in connection with a property disposition; and
general and administrative expenses decreased by approximately $0.8 million and $2.0 million, respectively, for the three and nine months ended September 30, 2012 compared to the same periods in 2011 mainly due to decreases in compensation and benefit costs and pursuit costs.

The table below reconciles FFO to net income (loss) attributable to common stockholders for the three and nine months ended September 30, 2012 and 2011:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(Dollars in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net Income (Loss) Attributable to Common Stockholders
$
5,815

 
$
647

 
$
11,857

 
$
(3,131
)
Gain on sales of real estate properties
(6,265
)
 
(1,357
)
 
(9,696
)
 
(1,393
)
Impairments
2,860

 
1,551

 
7,197

 
1,698

Real estate depreciation and amortization
23,336

 
21,709

 
70,231

 
62,173

Total adjustments
19,931

 
21,903

 
67,732

 
62,478

Funds from Operations
$
25,746

 
$
22,550

 
$
79,589

 
$
59,347

Funds from Operations per Common Share—Basic
$
0.34

 
$
0.30

 
$
1.04

 
$
0.83

Funds from Operations per Common Share—Diluted
$
0.33

 
$
0.29

 
$
1.02

 
$
0.82

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

 
77,177,114

 
77,799,291

 
72,570,555



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Table of Contents

Results of Operations
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
The Company’s results of operations for the three months ended September 30, 2012 compared to the same period in 2011 were significantly impacted by acquisitions, dispositions, gains on sale and impairments of properties.
 
Three Months Ended
 
 
 
September 30,
 
Change
(Dollars in thousands, except per share data)
2012
 
2011
 
$
 
%
REVENUES
 
 
 
 
 
 
 
Rental income
$
75,305


$
70,004

 
$
5,301

 
7.6
 %
Mortgage interest
2,244

 
1,776

 
468

 
26.4
 %
Other operating
1,523

 
2,061

 
(538
)
 
(26.1
)%

79,072

 
73,841

 
5,231

 
7.1
 %
EXPENSES

 

 
 
 
 
Property operating
30,115

 
30,070

 
45

 
0.1
 %
General and administrative
4,732

 
5,530

 
(798
)
 
(14.4
)%
Depreciation
21,172

 
19,150

 
2,022

 
10.6
 %
Amortization
2,554

 
2,222

 
332

 
14.9
 %
Bad debt, net
40

 
(353
)
 
393

 
(111.3
)%

58,613

 
56,619

 
1,994

 
3.5
 %
OTHER INCOME (EXPENSE)

 

 
 
 
 
Interest expense
(18,905
)
 
(17,928
)
 
(977
)
 
5.4
 %
Interest and other income, net
204

 
199

 
5

 
2.5
 %

(18,701
)
 
(17,729
)
 
(972
)
 
5.5
 %
INCOME (LOSS) FROM CONTINUING OPERATIONS
1,758

 
(507
)
 
2,265

 
446.7
 %
DISCONTINUED OPERATIONS

 

 
 
 
 
Income from discontinued operations
672

 
1,352

 
(680
)
 
(50.3
)%
Impairments
(2,860
)
 
(1,551
)
 
(1,309
)
 
84.4
 %
Gain on sales of real estate properties
6,265

 
1,357

 
4,908

 
361.7
 %
INCOME FROM DISCONTINUED OPERATIONS
4,077

 
1,158

 
2,919

 
252.1
 %
NET INCOME
5,835

 
651

 
5,184

 
796.3
 %
Less: Net income attributable to noncontrolling interests
(20
)
 
(4
)
 
(16
)
 
400.0
 %
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
5,815

 
$
647

 
$
5,168

 
798.8
 %
EARNINGS PER COMMON SHARE
 
 
 
 
 
 

Net income attributable to common stockholders - Basic
$
0.08

 
$
0.01

 
$
0.07

 
700.0
 %
Net income attributable to common stockholders - Diluted
$
0.07

 
$
0.01

 
$
0.06

 
600.0
 %


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Total revenues from continuing operations for the three months ended September 30, 2012 increased $5.2 million, or 7.1%, compared to the same period in 2011, as discussed below:

Rental income is comprised of the following:
 
Three Months Ended
 
 
 
September 30,
 
Change
(Dollars in thousands, except per share data)
2012
 
2011
 
$
 
%
Property operating
$
60,982

 
$
56,265

 
$
4,717

 
8.4
%
Single-tenant net lease
12,862

 
12,653

 
209

 
1.7
%
Straight-line rent
1,461

 
1,086

 
375

 
34.5
%
Total Rental income
$
75,305

 
$
70,004

 
$
5,301

 
7.6
%

Property operating income increased mainly due to the recognition of additional revenue of approximately $2.4 million from the Company’s 2011 and 2012 real estate acquisitions, approximately $1.2 million from properties that were previously under construction that commenced operations during 2011 and 2012, and approximately $0.8 million from new leasing activity and annual rent increases. Also, the Company began recognizing the underlying tenant rental income on properties whose single-tenant net leases had expired, resulting in approximately $0.3 million in additional income in 2012 compared to 2011.
Single-tenant net lease revenues increased approximately $0.3 million from the Company's 2012 real estate acquisitions and approximately $0.2 million of additional revenue related to leasing activity and annual rent increases. These increases are partially offset by a reduction in revenue due to the expiration of a single-tenant net lease in 2011 of approximately $0.3 million.
Straight-line rent increased mainly due to new leases subject to straight-lining on properties acquired in 2011 and 2012, as well as lease renewals.
Mortgage interest increased mainly due to approximately $0.9 million in interest earned from additional fundings on existing construction mortgage notes and approximately $0.1 million from new mortgage notes. These amounts are offset by a reduction of approximately $0.5 million from the repayment of mortgage notes.
Other operating income decreased mainly due to the expiration of lease guaranty support payments in the third quarter of 2011 related to two properties in New Orleans which totaled approximately $0.5 million per quarter.

Total expenses for the three months ended September 30, 2012 increased $2.0 million, or 3.5%, compared to the same period in 2011, as discussed below:
Property operating expense increased mainly due to the recognition of additional expenses totaling approximately $0.8 million from the Company’s 2011 and 2012 real estate acquisitions and $0.9 million from properties that were previously under construction that commenced operations during 2011 and 2012. Also, the Company began recognizing the underlying tenant rental expense on properties whose single-tenant leases had expired, resulting in approximately $0.1 million in additional expense in 2012 compared to 2011. These increases were partially offset by overall decreases in real estate tax expenses of approximately $1.9 million.
General and administrative expense decreased mainly due to decreases in compensation and benefit costs of approximately $0.2 million and project costs of approximately $0.6 million.
Depreciation expense increased approximately $0.7 million related to the Company’s 2011 and 2012 real estate acquisitions and $0.8 million related to properties previously under construction that commenced operations during 2011. The remaining $0.5 million increase related to various building and tenant improvement expenditures.
Amortization expense increased as a result of lease intangibles recognized on properties acquired in 2011 and 2012.

Other income (expense) for the three months ended September 30, 2012 changed unfavorably by $1.0 million, or 5.5%, compared to the same period in 2011 due mainly to a decrease in capitalized interest of approximately $0.9 million, as well as interest recognized on mortgage notes payable assumed by the Company as part of the 2011 real estate acquisitions of approximately $0.4 million, offset partially by a decrease in interest expense of approximately $0.2 million on the Unsecured Credit Facility due to a lower weighted average balance outstanding in 2012 as compared to 2011.


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Income from discontinued operations for the three months ended September 30, 2012 totaled $4.1 million compared to $1.2 million for the three months ended September 30, 2011. These amounts include the results of operations, impairments and gains on sale related to assets classified as held for sale or disposed of as of September 30, 2012. See Note 3 to the Condensed Consolidated Financial Statements for more detail.

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
The Company’s results of operations for the nine months ended September 30, 2012 compared to the same period in 2011 were significantly impacted by acquisitions, dispositions and impairments of properties, as well as lower interest expense.
 
Nine Months Ended
 
 
 
September 30,
 
Change
(Dollars in thousands, except per share data)
2012
 
2011
 
$
 
%
REVENUES

 

 
 
 
 
Rental income
$
222,479

 
$
203,446

 
$
19,033

 
9.4
 %
Mortgage interest
6,575

 
5,250

 
1,325

 
25.2
 %
Other operating
4,664

 
6,400

 
(1,736
)
 
(27.1
)%

233,718

 
215,096

 
18,622

 
8.7
 %
EXPENSES

 

 
 
 
 
Property operating
87,970

 
85,108

 
2,862

 
3.4
 %
General and administrative
14,514

 
16,467

 
(1,953
)
 
(11.9
)%
Depreciation
63,098

 
55,496

 
7,602

 
13.7
 %
Amortization
7,631

 
5,777

 
1,854

 
32.1
 %
Bad debt, net
149

 
(82
)
 
231

 
(281.7
)%

173,362

 
162,766

 
10,596

 
6.5
 %
OTHER INCOME (EXPENSE)

 

 
 
 
 
Loss on extinguishment of debt

 
(1,986
)
 
1,986

 
(100.0
)%
Interest expense
(55,814
)
 
(57,546
)
 
1,732

 
(3.0
)%
Interest and other income, net
711

 
618

 
93

 
15.0
 %

(55,103
)
 
(58,914
)
 
3,811

 
(6.5
)%
INCOME (LOSS) FROM CONTINUING OPERATIONS
5,253

 
(6,584
)
 
11,837

 
179.8
 %
DISCONTINUED OPERATIONS

 

 
 
 
 
Income from discontinued operations
4,145

 
3,789

 
356

 
9.4
 %
Impairments
(7,197
)
 
(1,698
)
 
(5,499
)
 
323.9
 %
Gain on sales of real estate properties
9,696

 
1,393

 
8,303

 
596.1
 %
INCOME FROM DISCONTINUED OPERATIONS
6,644

 
3,484

 
3,160

 
90.7
 %
NET INCOME (LOSS)
11,897

 
(3,100
)
 
14,997

 
(483.8
)%
Less: Net income attributable to noncontrolling interests
(40
)
 
(31
)
 
(9
)
 
29.0
 %
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
$
11,857

 
$
(3,131
)
 
$
14,988

 
(478.7
)%
EARNINGS (LOSS) PER COMMON SHARE
 
 
 
 
 
 
 
Net income (loss) attributable to common stockholders - Basic
$
0.15

 
$
(0.04
)
 
$
0.19

 
(475.0
)%
Net income (loss) attributable to common stockholders - Diluted
$
0.15

 
$
(0.04
)
 
$
0.19

 
(475.0
)%

Total revenues from continuing operations for the nine months ended September 30, 2012 increased $18.6 million, or 8.7%, compared to the same period in 2011, as discussed below:


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Rental income is comprised of the following:

 
Nine Months Ended
 
 
 
September 30,
 
Change
(Dollars in thousands, except per share data)
2012
 
2011
 
$
 
%
Property operating
$
180,323

 
$
160,854

 
$
19,469

 
12.1
 %
Single-tenant net lease
37,903

 
39,150

 
(1,247
)
 
(3.2
)%
Straight-line rent
4,253

 
3,442

 
811

 
23.6
 %
Total Rental income
$
222,479

 
$
203,446

 
$
19,033

 
9.4
 %

Property operating income increased mainly due to the recognition of additional revenue of approximately $10.9 million from the Company’s 2011 and 2012 real estate acquisitions, approximately $3.1 million from properties that were previously under construction that commenced operations during 2011 and 2012, and approximately $4.3 million from new leasing activity and annual rent increases. Also, the Company began recognizing the underlying tenant rental income on properties whose single-tenant net leases had expired, resulting in approximately $1.2 million in additional income in 2012 compared to 2011.
Single-tenant net lease revenues decreased approximately $0.6 million due to the expiration in 2011 of an agreement with one operator which provided the Company replacement rent and approximately $2.4 million relating to the expiration of seven single-tenant net leases in 2011. These decreases are partially offset by the recognition of additional revenue of approximately $0.7 million from the Company’s 2012 real estate acquisitions, as well as annual contractual rent increases and new lease activity of approximately $1.1 million.
Straight-line rent increased mainly due to new leases subject to straight-lining on properties acquired in 2011 and 2012, as well as lease renewals.
Mortgage interest increased mainly due to approximately $2.8 million in interest earned from additional fundings on existing construction mortgage notes, offset partially by a reduction of approximately $1.5 million from the repayment of mortgage notes.
Other operating income decreased mainly due to the expiration of lease guaranty support payments in the third quarter of 2011 related to two properties in New Orleans which totaled approximately $1.5 million.

Total expenses for the nine months ended September 30, 2012 increased $10.6 million, or 6.5%, compared to the same period in 2011, as discussed below:
Property operating expense increased mainly due to the recognition of additional expenses totaling approximately $3.6 million from the Company’s 2011 and 2012 real estate acquisitions and $2.9 million from properties that were previously under construction that commenced operations during 2011 and 2012. Also, the Company began recognizing the underlying tenant rental expense on properties whose single-tenant leases had expired, resulting in approximately $0.6 million in additional expense in 2012 compared to 2011. These increases were partially offset by overall decreases in real estate tax expenses of approximately $3.2 million, utilities of approximately $0.5 million and general maintenance and repair expenses of approximately $0.5 million.
General and administrative expenses decreased mainly due to decreases in compensation and benefit costs of approximately $0.8 million and project costs of approximately $1.0 million.
Depreciation expense increased mainly due to approximately $3.3 million in additional depreciation recognized related to the Company’s 2011 and 2012 real estate acquisitions and $2.4 million related to properties previously under construction that commenced operations during 2011. The remaining $1.9 million increase was due mainly to additional depreciation expense recognized related to various building and tenant improvement expenditures.
Amortization expense increased mainly due to an increase in lease intangibles from properties acquired in 2011 and 2012.

Other income (expense) for the nine months ended September 30, 2012 changed favorably by $3.8 million, or 6.5%, compared to the same period in 2011 due mainly to a decrease in interest expense of approximately $5.5 million and an extinguishment of debt charge of approximately $2.0 million relating the redemption of the Senior Notes due 2011 in the first quarter of 2011, partially offset by additional interest recognized in 2012 of approximately $1.7 million on new mortgage notes and approximately $0.5 million on the Unsecured Credit Facility due to a higher weighted average principal balance outstanding in 2012 compared to 2011, as well as a decrease in capitalized interest of approximately $1.6 million.

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Income from discontinued operations for the nine months ended September 30, 2012 totaled $6.6 million compared to $3.5 million for the nine months ended September 30, 2011. These amounts include the results of operations, a lease termination fee of $1.5 million recognized in 2012, impairments and gains on sale related to assets classified as held for sale or disposed of as of September 30, 2012. See Note 3 to the Condensed Consolidated Financial Statements for more detail.

Liquidity and Capital Resources
Sources and Uses of Cash
The Company’s primary sources of cash include rent and interest receipts from its real estate and mortgage portfolio based on contractual arrangements with its tenants, sponsors, and borrowers, borrowings under its Unsecured Credit Facility, proceeds from the sales of real estate properties or the repayments of mortgage notes receivable or proceeds from public or private debt or equity offerings. At September 30, 2012, the Company had $34.0 million outstanding under its Unsecured Credit Facility with a weighted average interest rate of approximately 1.73% and a remaining borrowing capacity of approximately $666.0 million. The Company’s primary uses of cash include dividend distributions, debt service payments (including principal and interest), real estate investments (including acquisitions and construction advances), as well as property operating and general and administrative expenses. Sources and uses of cash are detailed in the table below, as well as in the Company’s Condensed Consolidated Statements of Cash Flows.  
 
Nine Months Ended
 
 
 
September 30,
 
Change
(Dollars in thousands)
2012
 
2011
 
$
 
%
Cash and cash equivalents, beginning of period
$
4,738

 
$
113,321

 
$
(108,583
)
 
(95.8
)%
Net cash provided by operating activities
72,272

 
67,246

 
5,026

 
7.5
 %
Net cash used in investing activities
(18,544
)
 
(251,848
)
 
233,304

 
(92.6
)%
Net cash provided by (used in) financing activities
(49,685
)
 
75,335

 
(125,020
)
 
(166.0
)%
Cash and cash equivalents, beginning of period
$
8,781

 
$
4,054

 
$
4,727

 
116.6
 %

Operating Activities
Cash flows provided by operating activities improved for the nine months ended September 30, 2012 compared to the same period in 2011 increasing from $67.2 million in 2011 to $72.3 million in 2012. Several items impact cash flows from operations including, but not limited to, cash generated from property operations, interest payments and the timing related to the payment of invoices and other expenses.

Investing Activities
Cash flows used in investing activities decreased during the nine months ended September 30, 2012 compared to the same period in 2011 primarily due to an overall reduction in acquisitions and mortgage note financings during 2012 compared to 2011 and from proceeds received in 2012 from dispositions and mortgage note repayments.

Financing Activities
Cash flows used in financing activities for the nine months ended September 30, 2012 were approximately $49.7 million resulting mainly from the payment of the Company's quarterly dividends. During 2012, the Company also generated cash flows from the issuance of 9,200,000 shares of common stock. Net proceeds from the equity offering reduced the outstanding balance on the Unsecured Credit Facility. Cash flows provided by financing activities for the nine months ended September 30, 2011 were approximately $75.3 million. In 2011, the Company redeemed its Senior Notes due 2011 totaling approximately $280.2 million and paid quarterly dividends totaling approximately $65.9 million. These amounts were funded generally from cash on hand, cash generated from operations, borrowings on the Unsecured Credit Facility and proceeds from the issuance of common stock of $251.8 million.

Contractual Obligations
The Company monitors its contractual obligations to manage the availability of funds necessary to meet obligations when due. The following table represents the Company’s long-term contractual obligations for which the Company was making payments at September 30, 2012, including interest payments due where applicable. The Company is also required to pay dividends to its stockholders at least equal to 90% of its taxable income in order to maintain its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as amended. The Company’s material contractual obligations for the remainder of 2012 through

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Table of Contents

2013 are included in the table below. At September 30, 2012, the Company had no purchase or long-term capital lease obligations.
(Dollars in thousands)
Remainder
of
2012
 
2013
 
Total
Long-term debt obligations, including interest (1)
$
11,559

 
$
89,049

 
$
100,608

Operating lease commitments (2)
790

 
3,894

 
4,684

Tenant improvements (3)

 

 

Construction mortgage note obligations (4)
22,769

 
85,438

 
108,207

Pension obligations (5)

 

 

Total contractual obligations
$
35,118

 
$
178,381

 
$
213,499

 ______________
(1) Includes estimated interest due on total debt other than on the Unsecured Credit Facility. Note 4 to the Company’s Condensed Consolidated Financial Statements provides more detail on the Company’s notes and bonds payable.
(2) Includes primarily the corporate office lease and ground leases related to various properties for which the Company is currently making payments.
(3) The Company has various first-generation tenant improvement budgeted amounts remaining as of September 30, 2012 of approximately $33.2 million related to properties developed by the Company that the Company may fund for tenant improvements as leases are signed. The Company cannot predict when or if these amounts will be expended and, therefore, has not included estimated fundings in the table above.
(4) Represents the Company’s remaining funding commitment as of September 30, 2012 on two construction mortgage notes.
(5) At December 31, 2011, the last measurement date, one employee, the Company’s chief executive officer, was eligible to retire under the Executive Retirement Plan. If the chief executive officer retired and received full retirement benefits based upon the terms of the plan, the future benefits to be paid are estimated to be approximately $29.0 million as of December 31, 2011. However, because the Company’s chief executive officer has no present intention to retire, the Company has not projected when the retirement benefits would be paid to the officer in this table. At September 30, 2012, the Company had recorded a $16.2 million liability, included in other liabilities, related to its pension plan obligations.

As of September 30, 2012, the Company’s leverage ratio [debt divided by (debt plus stockholders’ equity less intangible assets plus accumulated depreciation)] was approximately 41.7%. The Company’s fixed charge ratio, calculated in accordance with Item 503 of Regulation S-K, includes only income from continuing operations which is reduced by depreciation and amortization and the operating results of properties currently classified as held for sale, as well as other income from discontinued operations. In accordance with this definition, the Company’s earnings from continuing operations for the nine months ended September 30, 2012 covered its fixed charges with a ratio of 1.01 to 1.00. The Company’s earnings calculated in accordance with its fixed charge covenant ratio under its Unsecured Credit Facility, which is based on a rolling four quarter calculation, covered its fixed charges by 2.3 times.

The Company’s various debt agreements contain certain representations, warranties, and financial and other covenants customary in such debt agreements. Among other things, these provisions require the Company to maintain certain financial ratios and minimum tangible net worth and impose certain limits on the Company’s ability to incur indebtedness and create liens or encumbrances. At September 30, 2012, the Company was in compliance with the financial covenant provisions under all of its various debt instruments.

Security Deposits and Letters of Credit
As of September 30, 2012, the Company had approximately $6.6 million in letters of credit, security deposits, or capital replacement reserves for the benefit of the Company in the event the obligated lessee or operator fails to make payments under the terms of their respective lease. Generally, the Company may, at its discretion and upon notification to the operator or tenant, draw upon these instruments if there are any defaults under the leases.

Subsequent Acquisitions
In October 2012, the Company acquired two MOBs located in Tennessee and Washington for an aggregate purchase price of $20.4 million. The buildings aggregate approximately 86,570 square feet and are approximately 94% leased on average.

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.

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Development Activity
The Company had several development projects ongoing at September 30, 2012, including two construction mortgage notes and 12 properties in the process of stabilization subsequent to construction. See Note 6 to the Condensed Consolidated Financial Statements for more detail on these projects. A summary of these development projects is 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 property includes estimated tenant improvement allowances but does not include any estimate of excess tenant improvement cost financing by the Company. To the extent actual amounts funded for the development property reflect excess tenant improvement costs financed by the Company, the estimated remaining fundings could be greater than the amount shown.

The Company intends to fund the commitments described above with available cash on hand, cash flows from operations, proceeds from the Unsecured Credit Facility, proceeds from the sale of real estate properties, or proceeds from repayments of mortgage notes receivable.

Equity Offering
On September 28, 2012, the Company sold 9,200,000 shares of common stock, par value $0.01 per share, at $22.85 per share in an underwritten public offering pursuant to the Company's existing effective registration statement. The net proceeds of the offering, after underwriting discounts and commissions and estimated offering expenses, were approximately $201.1 million. The proceeds from the offering are being used for the funding of two build-to-suit healthcare facilities, the acquisition of healthcare facilities, and other general corporate purposes, including the repayment of debt. Pending such uses, the proceeds were applied to the Unsecured Credit Facility.

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

Dividends
The Company paid aggregate dividends during the first nine months of 2012 of $0.90 per share. On October 30, 2012, the Company’s Board of Directors declared a common stock cash dividend for the three months ended September 30, 2012 of $0.30 per share, payable on November 30, 2012 to shareholders of record on November 15, 2012. As described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under the heading “Risk Factors,” the ability of the Company to pay dividends is dependent upon its ability to generate funds from operations and cash flows and to make accretive new investments.

Liquidity
Net cash provided by operating activities was $72.3 million and $67.2 million for the nine months ended September 30, 2012 and 2011, respectively. The Company’s cash flows are dependent upon rental rates on leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity during the year, and the level of operating expenses, among other factors.

The Company expects to continue to meet its liquidity needs, including funding additional investments, paying dividends, and funding debt service through cash on hand, cash flows from operations, borrowings under the Unsecured Credit Facility, proceeds from sales of real estate investments, proceeds from mortgage note repayments, or additional capital market financings, including the Company’s at-the-market equity offering program, or other debt or equity offerings. The Company also had unencumbered real estate assets with a cost of approximately $2.3 billion at September 30, 2012, of which a portion could serve

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Table of Contents

as collateral for secured mortgage financing. The Company believes that its liquidity and sources of capital are adequate to satisfy its cash requirements. The Company cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to the Company in sufficient amounts to meet its liquidity needs.

Impact of Inflation
Inflation has not significantly affected the Company’s earnings due to the moderate inflation rate in recent years and the fact that most of the Company’s leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing the Company’s risk of the adverse effects of inflation. In addition, inflation has the effect of increasing gross revenue the Company is to receive under the terms of certain leases and financial support arrangements. Leases and financial support arrangements vary in the remaining terms of obligations, further reducing the Company’s risk of any adverse effects of inflation. Interest payable under the Unsecured Credit Facility is calculated at a variable rate; therefore, the amount of interest payable under the Unsecured Credit Facility is influenced by changes in short-term rates, which tend to be sensitive to inflation. During periods where interest rate increases outpace inflation, the Company’s operating results should be negatively impacted. Conversely, when increases in inflation outpace increases in interest rates, the Company’s operating results should be positively impacted.

Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current or future material effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

New Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for the impact of new accounting standards. The adoption of these new standards are not expected to have a material impact on the Company’s results of operations or financial position.


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Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company is exposed to market risk in the form of changing interest rates on its debt and mortgage notes and other notes receivable. Management uses regular monitoring of market conditions and analysis techniques to manage this risk. During the three months ended September 30, 2012, there were no material changes in the quantitative and qualitative disclosures about market risks presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4. Controls and Procedures.
Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports it files or submits under the Exchange Act.

Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Table of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.
Two affiliates of the Company, HR Acquisition of Virginia Limited Partnership and HRT Holdings, Inc., are defendants in a lawsuit brought by Fork Union Medical Investors Limited Partnership, Goochland Medical Investors Limited Partnership, and Life Care Centers of America, Inc., as plaintiffs. The plaintiffs alleged that they overpaid rent between 1991 and 2003 under leases for two skilled nursing facilities in Virginia and sought a refund of such overpayments. Plaintiffs were seeking up to $2.0 million, plus pre- and post-judgment interest and attorneys’ fees. The two leases were terminated by agreement in 2003. The Company denied that it was liable to the plaintiffs and filed a motion for summary judgment seeking dismissal of the case. The Circuit Court of Davidson County, Tennessee granted the Company’s motion for summary judgment and the case was dismissed with prejudice by order entered on July 20, 2011. On August 11, 2011, the plaintiffs filed a notice of appeal with the Tennessee Court of Appeals. Briefs have been filed by all parties and oral arguments were heard before the Court of Appeals on May 23, 2012. The Company believes the trial court’s dismissal of the case should be affirmed but can provide no assurance as to the outcome of the appeal.

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

Item 1A. Risk Factors.
In addition to the other information set forth in this report, an investor should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect the Company’s business, financial condition or future results. The risks, as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, are not the only risks facing the Company. Additional risks and uncertainties not currently known to management or that management currently deems immaterial also may materially, adversely affect the Company’s business, financial condition, operating results or cash flows.


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Table of Contents

Item 6. Exhibits.
 
Exhibit
 
Description
Exhibit 3.1
 
Second Articles of Amendment and Restatement of the Company(1)
 
 
 
Exhibit 3.2
 
Amended and Restated Bylaws of the Company, as amended(2)
 
 
 
Exhibit 4.1
 
Specimen Stock Certificate(1)
 
 
 
Exhibit 4.2
 
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly Wachovia Bank, National Association, as Trustee)(3)
 
 
 
Exhibit 4.3
 
Form of 5.125% Senior Note Due 2014(3)
 
 
 
Exhibit 4.4
 
Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee(4)
 
 
 
Exhibit 4.5
 
Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.2 thereto)(4)
 
 
 
Exhibit 4.6
 
Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee(5)
 
 
 
Exhibit 4.7
 
Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.2 thereto)(5)
 
 
 
Exhibit 10.1
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and David R. Emery(6)
 
 
 
Exhibit 10.2
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and Scott W. Holmes(6)
 
 
 
Exhibit 10.3
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and John M. Bryant, Jr.(6)
 
 
 
Exhibit 10.4
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and Todd J. Meredith(6)
Exhibit 10.5
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and B. Douglas Whitman, II(6)
 
 
 
Exhibit 10.6
 
Healthcare Realty Trust Incorporated Executive Incentive Program(6)
 
 
 
Exhibit 10.7
 
Third Amendment to Long-Term Incentive Program, dated July 31, 2012(6)
 
 
 
Exhibit 10.8
 
Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors(6)
 
 
 
Exhibit 10.9
 
Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers(6)
 
 
 
Exhibit 10.10
 
Underwriting Agreement dated September 25, 2012 by and among the Company and Barclays Capital Inc. and J.P. Morgan Securities LLC(7)
 
 
 
Exhibit 10.11
 
Amendment to Second Amended and Restated Executive Retirement Plan, dated as of October 30, 2012 (filed herewith)
 
 
 
Exhibit 11
 
Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
 
 
 
Exhibit 31.1
 
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
Exhibit 31.2
 
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
Exhibit 32
 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
 
 
Exhibit 101.INS
 
XBRL Instance Document (filed herewith)
 
 
 

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Table of Contents

Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (filed herewith)
 
 
 
Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
________________
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 2012 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company’s Form 8-K filed September 25, 2012 and hereby incorporated by reference.


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Table of Contents

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
HEALTHCARE REALTY TRUST INCORPORATED
 
 
 
 
 
 
By:
/s/ SCOTT W. HOLMES
 
 
 
Scott W. Holmes
Executive Vice President and Chief Financial Officer
 
 
 
 
Date:
November 7, 2012
 
 



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Table of Contents

Exhibit Index
 
Exhibit
 
Description
Exhibit 3.1
 
Second Articles of Amendment and Restatement of the Company(1)
 
 
 
Exhibit 3.2
 
Amended and Restated Bylaws of the Company, as amended(2)
 
 
 
Exhibit 4.1
 
Specimen Stock Certificate(1)
 
 
 
Exhibit 4.2
 
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly Wachovia Bank, National Association, as Trustee)(3)
 
 
 
Exhibit 4.3
 
Form of 5.125% Senior Note Due 2014(3)
 
 
 
Exhibit 4.4
 
Third Supplemental Indenture, dated December 4, 2009, by and between the Company and Regions Bank, as Trustee(4)
 
 
 
Exhibit 4.5
 
Form of 6.50% Senior Notes due 2017 (set forth in Exhibit B to the Third Supplemental Indenture filed as Exhibit 4.2 thereto)(4)
 
 
 
Exhibit 4.6
 
Fourth Supplemental Indenture, dated December 13, 2010, by and between the Company and Regions Bank, as Trustee(5)
 
 
 
Exhibit 4.7
 
Form of 5.750% Senior Notes due 2021 (set forth in Exhibit B to the Fourth Supplemental Indenture filed as Exhibit 4.2 thereto)(5)
 
 
 
Exhibit 10.1
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and David R. Emery(6)
 
 
 
Exhibit 10.2
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and Scott W. Holmes(6)
 
 
 
Exhibit 10.3
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and John M. Bryant, Jr.(6)
 
 
 
Exhibit 10.4
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and Todd J. Meredith(6)
 
 
 
Exhibit 10.5
 
Second Amended and Restated Employment Agreement, dated July 31, 2012, between Healthcare Realty Trust Incorporated and B. Douglas Whitman, II(6)
 
 
 
Exhibit 10.6
 
Healthcare Realty Trust Incorporated Executive Incentive Program(6)
 
 
 
Exhibit 10.7
 
Third Amendment to Long-Term Incentive Program, dated July 31, 2012(6)
 
 
 
Exhibit 10.8
 
Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Non-Employee Directors(6)
 
 
 
Exhibit 10.9
 
Healthcare Realty Trust Incorporated Form of Restricted Stock Agreement for Officers(6)
 
 
 
Exhibit 10.10
 
Underwriting Agreement dated September 25, 2012 by and among the Company and Barclays Capital Inc. and J.P. Morgan Securities LLC(7)
 
 
 
Exhibit 10.11
 
Amendment to Second Amended and Restated Executive Retirement Plan, dated as of October 30, 2012 (filed herewith)
 
 
 
Exhibit 11
 
Statement re: Computation of per share earnings (filed herewith in Note 7 to the Condensed Consolidated Financial Statements)
 
 
 
Exhibit 31.1
 
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
Exhibit 31.2
 
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
 
 
 
Exhibit 32
 
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
 
 
 
Exhibit 101.INS
 
XBRL Instance Document (filed herewith)
 
 
 
Exhibit 101.SCH
 
XBRL Taxonomy Extension Schema Document (filed herewith)
 
 
 

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Exhibit 101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
 
 
 
Exhibit 101.LAB
 
XBRL Taxonomy Extension Labels Linkbase Document (filed herewith)
 
 
 
Exhibit 101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
 
 
 
Exhibit 101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
________________
(1) Filed as an exhibit to the Company’s Registration Statement on Form S-11 (Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby incorporated by reference.
(2) Filed as an exhibit to the Company’s Form 10-Q for the quarter ended September 30, 2007 and hereby incorporated by reference.
(3) Filed as an exhibit to the Company’s Form 8-K filed March 29, 2004 and hereby incorporated by reference.
(4) Filed as an exhibit to the Company’s Form 8-K filed December 4, 2009 and hereby incorporated by reference.
(5) Filed as an exhibit to the Company’s Form 8-K filed December 13, 2010 and hereby incorporated by reference.
(6) Filed as an exhibit to the Company's Form 10-Q for the quarter ended June 30, 2012 and hereby incorporated by reference.
(7) Filed as an exhibit to the Company’s Form 8-K filed September 25, 2012 and hereby incorporated by reference.


48