Tuesday, March 29, 2011

HTA's 10-K
Healthcare Trust of America filed its 10-K annual report sometime on Friday.  It is nearly 200 pages long, and there is a substantial amount of data to read and analyze.  I recommend reading it carefully if you have an interest in the REIT.  It is going to take me several days to get through it and write coherent posts on the items I feel are important.   I could not get past the section in the 10-K that discussed the credit agreement (Note 9 of the 10-K, starting on page 138) HTA entered into in November 2010 with JP Morgan and other banks.  This section appears very important to me, especially as it pertains to HTA's ability to maintain its current distribution rate.

Before you read the 10-K, I recommend you read the 8-K HTA filed on November 23, 2010.   This 8-K announced a $275 million line of credit with JP Morgan and others, and talks about basic terms of the line such as term, interest rate calculations and fees. The 8-K did not disclose the credit line's restrictive covenants, which include the language below: 
Pursuant to the credit agreement, beginning with the quarter ending September 30, 2011, our operating partnership may not make distribution payments to us in excess of the greater of: (i) 100% of its normalized adjusted FFO (as defined in the credit agreement) for the period of four quarters ending September 30, 2011 and December 31, 2011, (ii) 95% of normalized adjusted FFO for the period of four quarters ending March 31, 2012 and (iii) 90% of normalized adjusted FFO for the period of four quarters ending June 30, 2012 and thereafter.
This language was in the credit line agreement that was an exhibit to the 8-K, so I guess the restriction was technically disclosed.  The way I read the credit agreement, the restrictive covenants are effective on HTA whether or not the credit line is drawn.  At year-end the credit line had $7 million outstanding and in a subsequent event (after December 31), HTA repaid the $7 million.

As stated in the 10-K, in 2010 HTA generated $69.4 million in FFO and paid out $116.8 in distributions, or stated another way, distributions were 168% of FFO.  This is well above the 100% covenant listed above.  In 2010's fourth quarter, HTA generated $13.5 million of FFO and paid $33.3 million in distributions, or 246% of FFO.  HTA, as disclosed in the 10-K, has maintained its current distribution rate of 7.25% through April.  My understanding of the dividend covenant above, leads me to believe that at some point before the end of September 2011, HTA is going to have to cut its distribution so that for the four quarters ending September 30, 2011, the combined distributions will not have exceed 100% of FFO.  The only way to avoid a distribution cut is for HTA's FFO to substantially to exceed its current distribution rate for the next two quarters, or if the credit line is canceled.

This restriction on distributions should have been disclosed to investors and broker / dealers in the November 23, 2010 8-K, rather than been buried in the actual credit agreement.  HTA's shareholders are mostly small investors looking for income, not institutions with staff and attorneys to review each document. 

There are other issues in the 10-K that I will address, including the possible elimination of the share repurchase plan, which was sharply restricted last fall, compensation to HTA's executives and directors, including discuss of HTA's CEO Scott Peters taking partial stock awards in cash, rather than shares, at $10 per share (while limiting investor share redemptions), along with presenting financial data.  If you see any gems in the document, post them in the comment section.


Anonymous said...

The negative covenants related to the credit facility sound restrictive indeed.

I wonder what the loan documents' definition of "normalized adjusted FFO is? They report MFFO of $89.2 million which puts the payout ratio closer to 130%.

The recent buzz around the "non-internalization" fee as you have called it has left me dumbfounded.
The hypocrisy of RCS is becoming clear to me. They are pitching transparency because it's popular and acting quite differently wherever possible. Another great example of this is their recent decision to provide capital and resources to ARC Insight, a previously independent due diligence firm, to further the cause of transparency in the industry. Really, RCS?! Controlling the due diligence firms?!?!

Rational Realist said...

Thanks for the comment. The covenants are not uncommon for a line of credit. I was just surprised that because the REIT had not covered its FFF or MFFO previously, that HTA did not disclose the new restriction.

I am not familiar with ARC Insight and the RCS transaction.

Anonymous said...


I agree with your comment. I too think it may be necessary to cut the existing 7.5% dividend unless things change...

Anonymous said...

If the covenant is "total distributions less proceeds from DRIP", does this provide some room for not covering?

Hypothetical Ex. Distributions = 100mm, FFO = 75mm, 50% of investors participate in DRIP, proceeds = 50mm.

In this case 100mm less 50mm = 50mm.

This is less than FFO of $75mm, so they would be in the clear.

Did I misunderstand or does this seem correct?


Rational Realist said...

The credit agreement's definition of normalized FFO does not take the DRIP into consideration. It does read like FFO. Here is the definition:

Normalized Adjusted FFO” means for any fiscal period, “funds from operations” as defined in accordance with resolutions adopted by the Board of Governors of the National Association of Real Estate Investment Trusts as in effect from time to time; provided that Normalized Adjusted FFO shall (i) be based on net income after payment of distributions to holders of preferred partnership units in the Borrower and distributions necessary to pay holders of preferred stock of the Company, and (ii) at all times exclude (a) charges for impairment losses from property sales, (b) stock-based compensation, (c) write-offs or reserves of straight-line rent related to sold assets, (d) amortization of debt costs, and (e) non-recurring charges, including without limitation acquisition expenses and one-time charges related to the transition to self-management.

So looking at MFFO is a better guide for gauging what may happen with the distribution.