Real Estate Investments

2013 Acquisitions

Third Quarter

In August 2013, the Company purchased a 205,573 square foot medical office building and garage in Indiana for a purchase price and cash consideration of $44.3 million. The property is 87% leased with expirations through 2029. The property is connected to and is 48% leased by St. Joseph's Medical Center, which is part of the CHE Trinity ("AA" rated) system, that opened in December 2009.

In September 2013, the Company purchased an 80,153 square foot medical office building in Colorado for a purchase price of approximately $33.2 million, including cash consideration of $21.2 million and the assumption of debt of $12.0 million (excluding a $0.7 million fair value adjustment premium recorded upon acquisition). The mortgage note payable assumed by the Company bears a contractual interest rate of 6.17% and matures in 2027. The building is 100% leased with lease expirations through 2028. The property is connected to and is 71% leased by Poudre Valley Health System, which is part of the University of Colorado Health ("A+" rated) system.

Also in September 2013, the Company purchased an 186,000 square foot orthopedic facility in Missouri for a purchase price of approximately $102.6 million. The Company funded the development of the facility through a construction mortgage loan of approximately $97.2 million that upon acquisition was eliminated in the Company's Condensed Consolidated Financial Statements. At the closing of the purchase, the outstanding loan balance was credited to the purchase price and the Company paid an additional $5.4 million in cash consideration. Subsequent to the acquisition, the Company funded an additional $2.8 million and anticipates funding approximately $6.0 million to complete the development during the fourth quarter of 2013. The building is 100% leased to Mercy Health ("AA-" rated) through 2027.

Second Quarter

In April 2013, the Company purchased a 42,627 square foot inpatient rehabilitation facility in Texas for a purchase price and cash consideration of $16.3 million. The property is 100% leased to one tenant.

First Quarter

In January 2013, the Company purchased a 52,225 square foot medical office building in Tennessee for a purchase price and cash consideration of $16.2 million. The property is 100% leased to four tenants and is adjacent to a 39,345 square foot medical office building the Company purchased in October 2012.

The following table details the Company's acquisitions for the nine months ended September 30, 2013:



(Dollars in millions)	Date Acquired	Purchase Price		Elimination of Construction Mortgage Note Receivable			Mortgage Notes Payable Assumed			Cash Consideration		Real Estate		Other		Square Footage
Real estate acquisitions
Tennessee	1/29/13	$	16.2	$	—		$	—		$	16.2	$	15.7	$	0.5	52,225
Texas	4/8/13	16.3		—			—			16.3		16.3		—		42,627
Indiana	8/8/13	44.3		—			—			44.3		43.3		1.0		205,573
Colorado (1)	9/27/13	33.2		—			(12.0		)	21.2		32.9		0.3		80,153
Missouri	9/27/13	102.6		(97.2		)	—			5.4		102.6		—		186,000
		$	212.6	$	(97.2	)	$	(12.0	)	$	103.4	$	210.8	$	1.8	566,578

______

(1) The mortgage note payable assumed in the acquisition does not reflect the fair value adjustment of $0.7 million recorded by the Company upon acquisition (included in Other).

Subsequent Acquisitions

In October 2013, the Company acquired the following properties:

•

an 81,717 square foot medical office building located in the state of Washington for a purchase price of $34.9 million. The property is 100% leased with lease expirations through 2019 and is adjacent to two hospital campuses and affiliated with Providence Health and Services ("AA" rated). The Company assumed a mortgage note payable of $16.6 million on the property that bears interest at a rate of 6.01% and matures in 2036.

•

a 70,138 square foot medical office building in Colorado for a purchase price of $21.6 million. The property is on the same campus as the 80,153 square foot medical office building the Company purchased in September 2013. The building was 83% leased to three tenants at the time of acquisition with lease expirations through 2026. The property is connected to and affiliated with the University of Colorado Health ("A+" rated) system.


•	a 90,633 square foot medical office building in North Carolina for a purchase price of $20.3 million. The property is 100% leased with expirations through 2021 and is affiliated with CaroMont Health ("A+" rated). The Company assumed a mortgage note payable of $11.2 million on the property that bears interest at a rate of 5.86% and matures in 2016.

2013 Dispositions

Third Quarter

In July 2013, the Company disposed of a 62,782 square foot inpatient rehabilitation facility in Florida pursuant to a purchase option exercise and in which the Company had an aggregate net investment of $7.4 million. The sales price was approximately $11.9 million comprised of $11.7 million in net cash proceeds and closing costs of $0.2 million. The Company recognized a $4.3 million gain on the disposal of this property that was previously classified as held for sale.

Also in July 2013, the Company disposed of an 82,000 square foot inpatient rehabilitation facility in Alabama pursuant to a purchase option exercise and in which the Company had an aggregate net investment of $11.2 million. The sales price was approximately $17.5 million comprised of $17.4 million in net cash proceeds and closing costs of $0.1 million. The Company recognized a $6.2 million gain on the disposal of this property that was previously classified as held for sale.

In September 2013, the Company disposed of two inpatient rehabilitation facilities totaling 155,884 square feet located in Pennsylvania pursuant to two purchase option exercises in which the Company had an aggregate net investment of $24.8 million. The sales price was approximately $35.2 million comprised of $34.5 million in net cash proceeds and closing costs of $0.7 million. The Company recognized a $9.7 million gain on the disposal of these properties. These properties were not previously classified as held for sale.

Second Quarter

In April 2013, the Company disposed of a 17,696 square foot medical office building in Tennessee, in which the Company had an aggregate net investment of $0.4 million. The sales price of $0.6 million was funded by the Company under a mortgage note receivable that matures on April 30, 2018 and bears interest at 7.5% per annum. The approximate $0.2 million gain has been deferred and will be recognized as payments on the mortgage note are made under the installment method. The property was previously classified as held for sale.

In May 2013, the Company disposed of an 8,000 square foot medical office building in Texas, in which the Company had an aggregate net investment of $0.9 million. The sales price was approximately $1.3 million comprised of $1.2 million in net cash proceeds and closing costs of $0.1 million. The Company recognized a $0.3 million gain on the disposal. The property was not previously classified as held for sale.

In May 2013, the Company disposed of a 100,920 square foot medical office building in Texas. The Company had an aggregate net investment of $3.0 million in this property including the effects of a $0.3 million impairment charge recorded in the first quarter of 2013 based on the execution of the sales agreement, a level 2 input. The sales price was approximately $3.2 million comprised of $3.0 million in net cash proceeds and closing costs of $0.2 million. The Company recognized an immaterial gain on the disposal of this property that was previously classified as held for sale.

In June 2013, the Company disposed of a 9,153 square foot medical office building and a 22,572 square foot medical office building, both in Iowa, in which the Company had an aggregate net investment of approximately $5.3 million. The total sales price and cash consideration for the two properties were $6.9 million. In connection with the sales, the Company repaid a mortgage note payable of $1.1 million and incurred debt extinguishment costs of $0.3 million. The Company recognized a $1.5 million aggregate gain on the disposal of the two properties, including the write-off of a straight-line rent receivable of $0.1 million. The properties were not previously classified as held for sale.

First Quarter

In March 2013, the Company disposed of 15.1 acres of land in Texas in which the Company had an aggregate net investment of approximately $8.1 million. The sales price was approximately $5.0 million, which included $1.1 million in net cash proceeds, the origination of a $3.7 million Company-financed mortgage note receivable and closing costs of $0.2 million. The Company-financed mortgage note receivable bears interest of 5.0% in the first year and 6.0% in the second year and matures in March 2015. The Company recognized a $3.3 million impairment on the disposal based on the contractual sales price, a level 1 input. The land parcel was not previously classified as held for sale.

The following table details the Company's dispositions for the nine months ended September 30, 2013:



(Dollars in millions)	Date Disposed	Sales Price		Closing Adjustments			Company-Financed Mortgage Notes			Net Proceeds		Net Real Estate Investment		Other (including receivables)		Gain/ (Impairment)			Square Footage
Real estate dispositions
Texas (land)	3/25/2013	$	5.0	$	(0.2	)	$	(3.7	)	$	1.1	$	8.1	$	—	$	(3.3	)	—
Tennessee (1)	4/30/2013	0.6		—			(0.6		)	—		0.4		—		—			17,696
Texas	5/15/2013	1.3		(0.1		)	—			1.2		0.9		—		0.3			8,000
Texas (1)	5/24/2013	3.2		(0.2		)	—			3.0		3.0		—		—			100,920
Iowa (2) (3)	6/3/2013	6.9		—			—			6.9		5.3		0.1		1.5			31,725
Florida (1)	7/15/2013	11.9		(0.2		)	—			11.7		7.4		—		4.3			62,782
Alabama (1)	7/31/2013	17.5		(0.1		)	—			17.4		11.2		—		6.2			82,000
Pennsylvania	9/30/2013	17.6		(0.3		)	—			17.3		12.2		—		5.1			76,324
Pennsylvania	9/30/2013	17.6		(0.4		)	—			17.2		12.6		—		4.6			79,560
Total dispositions		$	81.6	(1.5		)	(4.3		)	75.8		61.1		0.1		18.7			459,007

______


(1)	Previously included in assets held for sale.


(2)	Includes two properties.


(3)	Repaid a mortgage note payable of $1.1 million upon sale and incurred debt extinguishment costs of $0.3 million.

Mortgage Notes Receivable

Construction Mortgage Note Fundings

During the nine months ended September 30, 2013, the Company funded $57.8 million on two outstanding construction mortgage notes for build-to-suit facilities leased to Mercy Health ("AA-" rated) based in Saint Louis, Missouri. Details on the two projects are as follows:

•

On September 27, 2013, the Company acquired an orthopedic facility in Missouri for $102.6 million, including the elimination of the construction mortgage note receivable totaling $97.2 million and cash consideration of approximately $5.4 million. The facility is 100% leased to Mercy Health. The Company provided $35.6 million in fundings toward the facility under a construction mortgage for the nine months ended September 30, 2013. During the third quarter of 2013, the Company recognized mortgage interest income of approximately $1.7 million and single-tenant net lease rental income of approximately $0.1 million. The Company expects to collect single-tenant net lease rental income of approximately $2.3 million in the fourth quarter.

•

At September 30, 2013, the Company had one remaining construction mortgage on the medical office building under construction in Oklahoma affiliated with Mercy Health. The Company provided $22.2 million in fundings during the nine months ended September 30, 2013, bringing cumulative fundings to date to $79.0 million. This project, which was originally scheduled to be completed in July 2013, sustained tornado damage in late May 2013. The tornado damage caused a delay in the completion date, and while subject to change, is now expected to be completed by June 2014. Builder's risk insurance is expected to fund the total scope of necessary repairs. The Company will continue to recognize mortgage interest income through the delayed completion and expects to receive interest payments in cash from insurance proceeds. Approximately $12.2 million remained available under the loan at September 30, 2013.

Company-Financed Mortgage Notes

During 2013, the Company originated the following Company-financed mortgage notes receivable:


•	$3.7 million with the purchaser of the land parcel located in Texas that was sold by the Company as discussed in "2013 Dispositions" above. Approximately $0.6 million in principal was received on this note in the third quarter of 2013.


•	$0.6 million with the purchaser of a medical office building located in Tennessee that was sold by the Company as discussed in "2013 Dispositions" above. This note was repaid in full in October 2013, and the Company expects to recognize the deferred gain of $0.2 million in the fourth quarter of 2013.

Mortgage Note Receivable Maturity

The Company holds a $40.0 million loan that is secured by a first position mortgage on a multi-tenant office building in Iowa that is 93% leased. The mortgage loan requires interest only payments through maturity in January 2014 at a fixed interest rate of 7.7%. The operating cash flows from the property are sufficient to satisfy the borrower's interest obligations to the Company. The property is also encumbered by a junior mortgage loan payable to another lender having an original principal balance of approximately $3.6 million. Because of the additional junior mortgage indebtedness and the borrower's limited equity resources, management suspects that the borrower may not be able to repay the full principal balance of the Company's mortgage loan at the maturity date. If the borrower fails to pay the full principal balance at maturity, the Company intends to exercise remedies under the security documents, which could include foreclosure proceedings. Management believes the fair value of the property that secures the mortgage loan exceeds the carrying value of the mortgage note receivable and expects that cash flows from operations will continue to provide a return to the Company at a rate greater than the current loan rate of 7.7%.

Noncontrolling Interest

In January 2013, the Company received a $1.4 million initial capital contribution from a 40% noncontrolling interest holder in a partnership that owns a medical office building and parking garage in Texas included as a property in stabilization. The partnership owner (HRP MAC III, LLC), in which the Company holds a 60% majority controlling interest, is the borrower under a term loan from the Company of approximately $10.3 million. These buildings were constructed by the Company and were previously subject to a construction mortgage note totaling $13.7 million. The Company's equity in and loan to the partnership are eliminated in consolidation.

Discontinued Operations and Assets Held for Sale

During the third quarter of 2013, the Company reclassified five properties located in four states to held for sale. The Company's gross investment in the five properties was approximately $22.3 million ($9.0 million, net) at September 30, 2013 with an aggregate square footage of approximately 199,523 feet. In conjunction with management's decision to sell these properties, the Company recorded impairment charges on four of the properties totaling $6.3 million, or $0.07 per basic and diluted common share. A company must record an impairment charge on a property held for sale if its carrying value exceeds its estimate of fair value less costs to sell. Fair value amounts used to calculate impairment were based on sales prices in executed purchase and sale agreements on three properties, which is a level 2 input, and supported by a broker estimate of fair value on one property, which is a level 3 input.

At September 30, 2013 and December 31, 2012, the Company had five and one properties, respectively, classified as held for sale.



(Dollars in thousands)	September 30, 2013			December 31, 2012
Balance Sheet data:
Land	$	1,579		$	3,835
Buildings, improvements and lease intangibles	20,744			5,566
Personal property	—			207
	22,323			9,608
Accumulated depreciation	(13,350		)	(6,303		)
Assets held for sale, net	8,973			3,305
Other assets, net (including receivables)	111			32
Assets of discontinued operations, net	111			32
Assets held for sale and discontinued operations, net	$	9,084		$	3,337

Accounts payable and accrued liabilities	$	1,001		$	99
Other liabilities	23			32
Liabilities of discontinued operations	$	1,024		$	131



	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2013			2012			2013			2012
Statements of Operations data:
Revenues
Rental income	$	1,513		$	3,364		$	6,544		$	13,354
Other operating	—			4			—			19
	1,513			3,368			6,544			13,373
Expenses
Property operating	317			804			1,052			2,754
General and administrative	—			3			1			9
Depreciation	285			961			1,294			3,503
Amortization	—			26			18			77
Bad debt, net of recoveries	1			(1		)	1			(2		)
	603			1,793			2,366			6,341
Other Income (Expense)
Loss on extinguishment of debt	—			—			(270		)	—
Interest expense	—			(24		)	(40		)	(73		)
Interest and other income, net	4			3			11			168
	4			(21		)	(299		)	95
Discontinued Operations
Income from discontinued operations	914			1,554			3,879			7,127
Impairments	(6,259		)	(2,860		)	(9,889		)	(7,197		)
Gain on sales of real estate properties	20,187			6,265			21,970			9,696
Income from Discontinued Operations	$	14,842		$	4,959		$	15,960		$	9,626