Healthcare Realty Trust 10Q 2002 Q2 Quarterly report

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: June 30, 2002


		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: 1-11852

HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)


Maryland		62 – 1507028
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 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

As of August 1, 2002, 41,942,798 shares of the Registrant’s Common Stock and 3,000,000 shares of the
Registrant’s Series A Voting Cumulative Preferred Stock were outstanding.

TABLE OF CONTENTS


Item 1. FINANCIAL INFORMATION
	Condensed Consolidated Balance Sheets
	Condensed Consolidated Statements of Income
	Condensed Consolidated Statements of Cash Flows
	Notes to Condensed Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II — OTHER INFORMATION
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Reports on Form 8-K
SIGNATURE

HEALTHCARE REALTY TRUST
INCORPORATED

FORM 10-Q

June 30, 2002

TABLE OF CONTENTS


Part I — Financial Information

	Item 1. Financial Statements		Page
		Condensed Consolidated Balance Sheets		1
		Condensed Consolidated Statements of Income		2
		Condensed Consolidated Statements of Cash Flows		4
		Notes to Condensed Consolidated Financial Statements		5

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12

Part II — Other Information

	Item 4. Submission of Matters to a Vote of Security Holders			20

	Item 6. Reports on Form 8-K			21

Signature				22

Item 1. FINANCIAL INFORMATION

Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands)


			(Unaudited)
			June 30,			December 31,
			2002			2001

ASSETS
Real estate properties:
	Land		$	147,152		$	149,522
	Buildings and improvements			1,330,296			1,332,948
	Personal property			8,605			7,815
	Construction in progress			18,064			18,255

				1,504,117			1,508,540
	Less accumulated depreciation			(177,782	)		(158,876	)

		Total real estate properties, net		1,326,335			1,349,664

Cash and cash equivalents				1,070			2,930

Mortgage notes receivable				114,027			122,074

Other assets, net				90,999			80,813

Total assets			$	1,532,431		$	1,555,481

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Notes and bonds payable		$	502,365		$	505,222

	Accounts payable and accrued liabilities			13,887			12,203

	Other liabilities			13,025			25,969

Total liabilities				529,277			543,394

Commitments				0			0

Stockholders’ equity:

	Preferred stock, $.01 par value; 50,000,000 shares authorized; issued and outstanding, 2002 and 2001 – 3,000,000			30			30

	Common stock, $.01 par value; 150,000,000 shares authorized; issued and outstanding, 2002 – 41,941,158; 2001 – 41,465,919			419			414

	Additional paid-in capital			1,102,039			1,089,127

	Deferred compensation			(23,234	)		(12,852	)

	Cumulative net income			417,164			375,061

	Cumulative dividends			(493,264	)		(439,693	)

Total stockholders’ equity				1,003,154			1,012,087

Total liabilities and stockholders’ equity			$	1,532,431		$	1,555,481

The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2001, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Three Months Ended June 30, 2002 and 2001
(Dollars in thousands, except per share data)


		(Unaudited)		(Unaudited)
		2002		2001

REVENUES:
	Master lease rental income	$	24,683	$	25,025
	Property operating income		18,909		17,590
	Straight-line rental income		50		1,443
	Mortgage interest income		3,538		4,507
	Management fee income		278		381
	Interest and other income		852		549

			48,310		49,495

EXPENSES:
	General and administrative expenses		2,726		2,758
	Property operating expenses		7,399		6,672
	Interest expense		8,499		10,414
	Depreciation expense		10,357		10,168
	Amortization expense		33		74

			29,014		30,086

NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			19,296		19,409
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			2,959		(36	)

NET INCOME		$	22,255	$	19,373

NET INCOME PER COMMON SHARE – BASIC		$	0.51	$	0.45

NET INCOME PER COMMON SHARE – DILUTED		$	0.50	$	0.44

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC			40,652,146		39,721,416

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED			41,512,283		40,566,400

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	0.595	$	0.575

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Six Months Ended June 30, 2002 and 2001
(Dollars in thousands, except per share data)


		(Unaudited)		(Unaudited)
		2002		2001

REVENUES:
	Master lease rental income	$	49,579	$	50,112
	Property operating income		38,001		34,040
	Straight-line rental income		1,231		3,191
	Mortgage interest income		7,322		9,046
	Management fee income		593		723
	Interest and other income		1,237		612

			97,963		97,724

EXPENSES:
	General and administrative expenses		5,234		4,793
	Property operating expenses		14,862		12,863
	Interest expense		17,438		20,199
	Depreciation expense		20,880		20,280
	Amortization expense		76		154

			58,490		58,289

NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			39,473		39,435
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			2,630		582

NET INCOME		$	42,103	$	40,017

NET INCOME PER COMMON SHARE – BASIC		$	0.96	$	0.92

NET INCOME PER COMMON SHARE – DILUTED		$	0.94	$	0.91

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC			40,561,412		39,675,562

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED			41,456,693		40,543,038

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	1.185	$	1.145

Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2002 and 2001
(Dollars in thousands)


			(Unaudited)			(Unaudited)
			2002			2001

Cash flows from operating activities:
	Net income		$	42,103		$	40,017
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization		21,930			21,407
		Deferred compensation amortization		1,522			905
		Increase (decrease) in other liabilities		(1,117	)		370
		Increase in other assets		(5,527	)		(12,713	)
		Increase (decrease) in accounts payable and accrued liabilities		1,129			(2,732	)
		Increase in straight line rent		(1,231	)		(3,191	)
		Net gain on sale of real estate		(2,630	)		(582	)

	Net cash provided by operating activities			56,179			43,481

Cash flows from investing activities:
	Acquisition and development of real estate properties			(15,297	)		(20,426	)
	Funding of mortgages			(3,864	)		0
	Proceeds from sale of real estate			21,077			6,058
	Proceeds from mortgage payments/sales			11,593			17,084

	Net cash provided by investing activities			13,509			2,716

Cash flows from financing activities:
	Borrowings on notes and bonds payable			73,000			358,452
	Repayments on notes and bonds payable			(92,545	)		(316,315	)
	Dividends paid			(53,016	)		(49,765	)
	Proceeds from issuance of common stock			1,013			980

	Net cash used in financing activities			(71,548	)		(6,648	)

Increase (decrease) in cash and cash equivalents				(1,860	)		39,549
Cash and cash equivalents, beginning of period				2,930			1,788

Cash and cash equivalents, end of period			$	1,070		$	41,337

Healthcare Realty Trust
Incorporated

Notes to Condensed Consolidated Financial Statements

June 30, 2002

(Unaudited)

Note 1. Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles 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 accounting principles generally accepted in the United States for complete financial statements that are included in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2001. We, the management of Healthcare Realty Trust, believe however that all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2002 due to many reasons including, but not limited to, acquisitions, dispositions and changes in interest rates.

We recommend and presume that users of this interim financial information have access to and have read or will read in conjunction with this interim information our audited financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the preceding year ended December 31, 2001.

References to “the Company”, “we”, “our” and “us” include Healthcare Realty Trust Incorporated and its consolidated subsidiaries and partnerships unless stated otherwise.

Reclassifications

We have made certain reclassifications in the financial statements for 2001 to conform to the 2002 presentation. These reclassifications did not change the results of operations as previously reported.

New pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement No. 142, “Accounting for Goodwill and Intangible Assets” (“FAS 142”). FAS 142 became effective for us as of January 1, 2002. FAS 142 requires that we no longer amortize goodwill and other indefinite lived intangible assets but that we review these assets annually for impairment. Intangible assets with definite lives will continue to be amortized. The adoption of FAS 142 had no material impact on our financial statements as of June 30, 2002 or for the three and six month periods then ended.

Note 2. Properties

We invest in healthcare-related properties and mortgages located throughout the United States. We provide management, leasing and build-to-suit development, and capital for the construction of new facilities and for the acquisition of existing properties. These activities constitute a single business segment as defined by the Financial Accounting Standards Board Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As of June 30, 2002, we have investments in 233 properties and mortgages, located in 29 states, and affiliated with 62 healthcare-related operators as follows:


			*(in thousands)*
	*Number of Properties*		*Investment*		*Percent*

Ancillary hospital facilities		58	$	514,957		31.8	%
Assisted living facilities		57		279,820		17.3	%
Skilled nursing facilities		38		205,283		12.7	%
Physician clinics		31		167,704		10.4	%
Inpatient rehabilitation facilities		9		154,589		9.6	%
Comprehensive ambulatory care centers		13		148,556		9.2	%
Medical office buildings		10		47,734		3.0	%
Other inpatient facilities		5		47,327		2.9	%
Other outpatient facilities		12		42,640		2.6	%
Corporate property		—		9,534		0.5	%

		233	$	1,618,144		100.0	%

Dispositions

During the second quarter of 2002, we sold a 29,580 square foot ancillary hospital facility in Pasadena, California, a 36,600 square foot skilled nursing facility in Garner, North Carolina and a 4,396 square foot physician clinic in New Castle, Virginia for aggregate net proceeds totaling approximately $12.8 million resulting in a net gain of approximately $3.0 million. Further, we received approximately $4.6 million in net proceeds from the repayment of two mortgage notes.

Note 3. Funds From Operations

Funds from operations, as defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) 1999 White Paper, means net income before net gains on sales of real estate properties (computed in accordance with accounting principles generally accepted in the United States) plus depreciation from real estate assets. We calculate funds from operations (“FFO”) using a modified version of the NAREIT’s October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue in funds from operation.

We consider FFO to be an informative measure of the performance of an equity real estate investment trust (“REIT”) and consistent with measures used by analysts to evaluate equity REITs. FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States, is not necessarily indicative of cash available to fund cash needs, and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. Our FFO calculations for the three and six month periods ended June 30, 2002 are shown in the following two tables.

Funds From Operations (1)

(Dollars in thousands, except per share data)


		Three Months Ended June 30,

		2002			2001

Net income before net gain (loss) on sale of real estate properties		$	19,296		$	19,409
	Elimination of rental revenues recognized on a straight-line basis (2)		(50	)		(1,443	)
	Preferred stock dividend		(1,664	)		(1,664	)
	Real estate depreciation		10,072			9,989

	Total adjustments		8,358			6,882

Funds From Operations-Basic		$	27,654		$	26,291

	Convertible subordinated debenture interest		0			4

Funds From Operations – Diluted		$	27,654		$	26,295

Funds From Operations Per Common Share – Basic		$	0.68		$	0.66

Funds From Operations Per Common Share – Diluted		$	0.67		$	0.65

Weighted Average Common Shares Outstanding – Basic			40,652,146			39,721,416

Weighted Average Common Shares Outstanding – Diluted			41,512,283			40,566,400

(1)		FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator our operating performance or as an alternative to cash flow as a measure of liquidity.

		We believe that our FFO is not directly comparable to other healthcare REIT’s, which own a portfolio of triple net leased properties or mortgages, as we develop projects through a development and lease-up phase before they reach their targeted cash flow returns. Furthermore, we eliminate, in consolidation, fee income for developing, leasing and managing owned properties and expenses or capitalizes, as the case may be, related internal costs.

(2)		We calculate our FFO using a modified version of National Association of Real Estate Investment Trust’s (“NAREIT”) October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue. If we had followed the NAREIT definition of funds from operations, as other healthcare REITs do, FFO on a diluted basis would have remained $0.67 per common share for the three months ended June 30, 2002.

Funds From Operations (1)

(Dollars in thousands, except per share data)


		Six Months Ended June 30,

		2002			2001

Net income before net gain (loss) on sale of real estate properties		$	39,473		$	39,435
	Elimination of rental revenues recognized on a straight-line basis (2)		(1,231	)		(3,191	)
	Preferred stock dividend		(3,328	)		(3,328	)
	Real estate depreciation		20,317			19,941

	Total adjustments		15,758			13,422

Funds From Operations-Basic		$	55,231		$	52,857

	Convertible subordinated debenture interest		0			74

Funds From Operations – Diluted		$	55,231		$	52,931

Funds From Operations Per Common Share – Basic		$	1.36		$	1.33

Funds From Operations Per Common Share – Diluted		$	1.33		$	1.31

Weighted Average Common Shares Outstanding – Basic			40,561,412			39,675,562

Weighted Average Common Shares Outstanding – Diluted			41,456,693			40,543,038

(1)		FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income as an indicator our operating performance or as an alternative to cash flow as a measure of liquidity.

		We believe that our FFO is not directly comparable to other healthcare REIT’s, which own a portfolio of triple net leased properties or mortgages, as we develop projects through a development and lease-up phase before they reach their targeted cash flow returns. Furthermore, we eliminate, in consolidation, fee income for developing, leasing and managing owned properties and expenses or capitalizes, as the case may be, related internal costs.

(2)		We calculate our FFO using a modified version of National Association of Real Estate Investment Trust’s (“NAREIT”) October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue. If we had followed the NAREIT definition of funds from operations, as other healthcare REITs do, FFO on a diluted basis would have been $1.36 per common share for the six months ended June 30, 2002.

Note 4. Notes and Bonds Payable

Notes and bonds payable at June 30, 2002 consisted of the following (in thousands):


Unsecured Credit Facility due 2004	$	32,500
Senior Notes due 2002		18,000
Senior Notes due 2006		70,000
Senior Notes due 2011, net		303,767
Mortgage notes payable		74,015
Other note payable		4,083

	$	502,365

Unsecured Credit Facility due 2004

In July 2001, we entered into a $150 million credit facility (the “Unsecured Credit Facility due 2004”) that bears interest at LIBOR rates plus 1.15%, payable quarterly, and matures in July 2004. In addition, we pay a facility fee of 0.2% on the commitment. The Unsecured Credit Facility due 2004 contains certain representations, warranties, and financial and other covenants customary in such loan agreements. At July 31, 2002, we had borrowing capacity remaining of $133.0 million under this facility.

Senior Notes due 2002

In 1995, we privately placed $90.0 million of unsecured senior notes (the “Senior Notes due 2002”), of which $18.0 million are outstanding, with 16 institutions. The Senior Notes due 2002 bear interest at 7.41%, payable semi-annually, and mature on September 1, 2002. The note agreements pertaining to the Senior Notes due 2002 contain certain representations, warranties and financial and other covenants customary in such loan agreements.

Senior Notes due 2006

In 2000, we privately placed $70.0 million of unsecured senior notes (the “Senior Notes due 2006”) with multiple purchasers affiliated with two institutions. The Senior Notes due 2006 bear interest at 9.49%, payable semi-annually, and mature on April 1, 2006. On April 1, 2004 and 2005, we must repay $20.3 million of the principal with the remaining principal balance of $29.4 million payable upon maturity. The note agreements pertaining to the Senior Notes due 2006 contain certain representations, warranties and financial and other covenants customary in such loan agreements.

Senior Notes due 2011

In May 2001, we publicly issued $300.0 million unsecured senior notes due 2011 (the “Senior Notes due 2011”). The Senior Notes due 2011 bear interest at 8.125%, payable semi-annually on May 1 and November 1, and are due on May 1, 2011, unless we redeem them earlier. The notes were issued at a discount of approximately $1.5 million, yielding an 8.202% interest rate per annum.

Interest Rate Swaps

Following the reorganization of our debt structure in 2001, our outstanding debt was primarily fixed rate. Our practice and objective has been to protect ourselves against changes in the fair value of our debt that result from changes in market interest rates by maintaining a mix of variable and fixed rate debt. In order to accomplish this objective, in June 2001, we entered into interest rate swap agreements with two lending institutions for notional amounts totaling $125.0 million which are expected to offset changes in the fair value of $125.0 million of the Senior Notes due 2011. In both interest rate swaps, we receive a 8.125% fixed rate and pay a variable rate of LIBOR plus 1.99%. The swaps are not callable for the first five years. After five years, the swaps are callable, at fair value, by either party if, and only if, the other party is downgraded below investment grade by two or more rating agencies. These derivative instruments meet all requirements of a fair value hedge and are accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value will have no impact on the income statement. At June 30, 2002, the aggregate fair value totaling $5.2 million of our hedge is reported in other assets with an offsetting increase to the Senior Notes due 2011 included in notes and bonds payable on our balance sheet.

Mortgage Notes Payable

At June 30, 2002, we had 13 non-recourse mortgage notes payable outstanding, with related collateral, as follows(dollars in millions):


							Investment in		Contractual
			Effective		Maturity		Collateral at		Balance at
Mortgagor	Original Balance		Interest Rate		Date	Collateral	June 30, 2002		June 30, 2002

Life Insurance Co.		$23.3		7.765%	7/26	Ancillary hospital facility	$	43.8	$	22.0

Life Insurance Co.		4.7		7.765%	1/17	Ancillary hospital facility		10.8		4.0

Life Insurance Co.		17.1		7.765%	4/04	Two ambulatory surgery centers & one ancillary hospital facility		37.5		15.9

Commercial Bank		35.0		7.220%	5/11	Nine ancillary hospital facilities & one physician clinic		78.1		32.1

								$170.2		$74.0

The $23.3 million note is payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due in July 2026. The $4.7 million note is payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due in January 2017. The three notes totaling $17.1 million are payable in monthly installments of principal and interest based on a 25-year amortization with a balloon payment of the unpaid balance due in September 2004. The eight notes totaling $35.0 million and the related collateral are held by special purpose entities whose sole members are wholly owned subsidiaries. These eight fully amortizing notes are payable in monthly installments of principal and interest and mature in May 2011. The contractual interest rates for the 13 outstanding mortgage notes range from 7.22% to 8.50%.

Other Note Payable

In 1999, we entered into a $7.0 million note with a commercial bank. This note bears interest at 7.53%, is payable in equal semi-annual installments of principal and interest, and fully amortizes in July 2005.

Note 5. Commitments and Contingencies

At June 30, 2002, we had a net investment of approximately $18.1 million in three build-to-suit developments in progress that have a total remaining funding commitment of approximately $5.4 million.

As part of the merger with Capstone Capital Corporation (“Capstone”) in 1998, agreements were entered into with three individuals affiliated with Capstone that restrict competitive practices and which the Company believed would protect and enhance the value of the real estate properties acquired from Capstone. These agreements provide for the issuance of 150,000 shares per year of common stock to these individuals on October 15 of the years 1999, 2000, 2001 and 2002, provided all terms of the agreements are met. We have issued 150,000 shares each year through 2001 pursuant to these agreements.

Note 6. Earnings Per Common Share

We compute earnings per share in accordance with FASB Statement No. 128 “Earnings Per Share.” The table below sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30, 2002 (dollars in thousands, except per share data).


				Three Months Ended						Six Months Ended

				June 30,						June 30,

				2002			2001			2002			2001

Basic EPS Weighted Average Common Shares Outstanding					41,911,126			40,559,591			41,820,392			40,513,737
		Actual restricted stock shares			(1,258,980	)		(838,175	)		(1,258,980	)		(838,175	)

	Denominator – Basic				40,652,146			39,721,416			40,561,412			39,675,562

	Net income			$	22,255		$	19,373		$	42,103		$	40,017
			Preferred stock dividend		(1,664	)		(1,664	)		(3,328	)		(3,328	)

	Numerator – Basic			$	20,591		$	17,709		$	38,775		$	36,689

	Per Share Amount			$	0.51		$	0.45		$	0.96		$	0.92

Diluted EPS Weighted Average Common Shares Outstanding					41,911,126			40,559,591			41,820,392			40,513,737
		Actual restricted stock shares			(1,258,980	)		(838,175	)		(1,258,980	)		(838,175	)
		Restricted shares – Treasury			765,027			555,268			782,022			584,591
		Dilution for convertible debentures			0			173,688			0			175,167
		Dilution for employee stock purchase plan			95,110			116,028			113,259			107,718

		Denominator – Diluted			41,512,283			40,566,400			41,456,693			40,543,038

		Numerator – Basic		$	20,591		$	17,709		$	38,775		$	36,689
		Convertible subordinated debenture interest			0			4			0			74

		Numerator – Diluted		$	20,591		$	17,713		$	38,775		$	36,763

		Per Share Amount		$	0.50		$	0.44		$	0.94		$	0.91

Note 7. Subsequent Events

Common Stock Dividend

On July 23, 2002, our Board of Directors declared a quarterly dividend of $0.60 per common share payable on September 5, 2002 to stockholders of record on August 15, 2002.

Preferred Stock Dividend

On July 23, 2002, our Board of Directors declared a cash dividend of $0.55469 per share on our 8 7/8% Series A Voting Cumulative Preferred Stock. This dividend is payable on August 30, 2002 to stockholders of record on August 15, 2002.

Redemption of Preferred Stock

On August 13, 2002, we announced that we will redeem all of our 8 7/8% Series A Voting Cumulative Preferred Stock on September 30, 2002 at a redemption price of $25.00 per share, plus accrued dividends of $0.18896 per share from August 30, 2002 to the redemption date, for a total redemption price of $25.18896 per share. The aggregate cost of the redemption will be $75,566,881.
Financial Condition and Results of Operations" -->

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

Overview

Healthcare Realty Trust operates under the Internal Revenue Code of 1986, as amended, as an indefinite life real estate investment trust (“REIT”). We are a self-managed, self-administered REIT following a general growth strategy that integrates owning, managing, and developing income-producing real estate properties and mortgages associated with the delivery of healthcare services throughout the United States. We, the management of Healthcare Realty Trust, believe that by providing related real estate services, we can differentiate our competitive market position and expand our asset base and increase revenues.

Substantially all of our revenues are derived from rentals on our healthcare properties, interest earned on mortgage loans and from management services. Leases and other financial support arrangements with operators are designed to reduce our exposure to increased costs and expenses incurred from the operation of our healthcare properties which are typically borne by the tenants and healthcare providers related to the properties. We typically incur operating and administrative expenses, principally compensation expense, office rental and related occupancy costs and various expenses incurred in the process of managing our existing portfolio and acquiring additional properties. We also incur interest expense on our various debt instruments and depreciation expense on our real estate portfolio.

Operating Results

Second Quarter 2002 Compared to Second Quarter 2001

Net income for the quarter ended June 30, 2002 totaled $22.3 million, or $0.51 per basic common share ($0.50 per diluted common share), on total revenues of $48.3 million. This compares with net income of $19.4 million, or $0.45 per basic common share ($0.44 per diluted common share), on total revenues of $49.5 million for the quarter ended June 30, 2001. Included in net income for the quarter ended June 30, 2002 is a net gain on the sale of real estate properties of $3.0 million, or $.07 per basic and diluted common share compared with a net loss on the sale of real estate properties during the second quarter of 2001 of $36,000.

Total revenues for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001, decreased $1.2 million or 2.4% mainly for the reasons discussed below:

• Master lease rental income decreased $0.3 million or 1.4% due mainly to the disposition of seven revenue-producing properties during 2001 and 2002. This decrease in

revenue was offset partially by positive rent growth from annual rent increases and from assertively billing and collecting late fees in 2002.

• Property operating income increased $1.3 million or 7.5% due mainly to the acquisition of one revenue-producing property and the commencement of operations for four properties that were previously under construction, offset partially by the disposal of three properties during 2001 and 2002.

• Straight-line rental income decreased $1.4 million or 96.5%. This decrease was due mainly to a change in the operator on four assisted living facilities and restructuring the rent increases on these four leases at the request of the new operator. We restructured the rent increases from a lower fixed increase to a higher contingent increase. No other changes were made to the leases. Because the fixed increase was eliminated in this restructuring and these leases no longer required straight-line rent adjustments, we reversed in this quarter the historical straight-line receivable related to these facilities.

• Mortgage interest income decreased $1.0 million or 21.5% due mainly to the repayment of 25 mortgage loans during 2001 and 2002. This decrease in revenue was offset partially by income earned on a first mortgage acquired in 2002 by the Company on a property where we previously owned the second mortgage and from assertively billing and collecting late fees in 2002.

• Management fee income decreased $0.1 million or 27.0% due mainly to a reduction in our property and asset management portfolio of 1.3 million square feet since June 30, 2001.

• Interest and other income increased $0.3 million or 55.2%. The major components of interest and other income for the second quarter of 2002 were a fee received related to the assignment of four assisted living facility leases to a new operator, fees earned due to the maturity or repayment of mortgage loans, and interest income on notes receivable. The major components of interest and other income for the second quarter of 2001 were interest income earned on excess cash remaining from the May 2001 sale of the Senior Notes due 2011, fees earned from consulting engagements, interest income on notes receivable, and fees earned from the repayment of mortgage loans, offset slightly by participating interest paid on a note that was repurchased by the Company in January 2002.

Total expenses for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001 decreased $1.1 million or 3.6% mainly for the reasons discussed below:

• Property operating expenses increased $0.7 million or 10.9% due mainly to the acquisition of one revenue-producing property and the commencement of operations for four properties that were previously under construction, offset partially by the disposal of three properties during 2001 and 2002.

• Interest expense decreased $1.9 million or 18.4% mainly due to the continuing decrease in market interest rates along with a reduction in total debt outstanding from 2001 to 2002.

Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001

Net income for the six months ended June 30, 2002 totaled $42.1 million, or $0.96 per basic common share ($0.94 per diluted common share), on total revenues of $98.0 million. This compares with net income of $40.0 million, or $0.92 per basic common share ($0.91 per diluted common share), on total revenues of $97.7 million for the six months ended June 30, 2001. Included in net income for the six months ended June 30, 2002 is a net gain on the sale of real estate properties of $2.6 million, or $.06 per basic and diluted common share compared with a net gain on the sale of real estate properties during the same period in 2001 of $0.5 million, or $.01 per basic and diluted common share.

Total revenues for the six months ended June 30, 2002 compared to the six months ended June 30, 2001, increased $0.2 million or 0.2% mainly for the reasons discussed below:

• Master lease rental income decreased $0.5 million or 1.1% due mainly to the disposition of seven revenue-producing properties during 2001 and 2002. This decrease in revenue was offset partially by positive rent growth from annual rent increases and from assertively billing and collecting late fees in 2002.

• Property operating income increased $4.0 million or 11.6% due mainly to the acquisition of one revenue-producing property and the commencement of operations for four properties that were previously under construction, offset partially by the disposal of three properties during 2001 and 2002.

• Straight-line rental income decreased $2.0 million or 61.4%. This decrease was due mainly to a change in the operator on four assisted living facilities and restructuring the rent increases on these four leases at the request of the new operator. We restructured the rent increases from a lower fixed increase to a higher contingent increase. No other changes were made to the leases. Because the fixed increase was eliminated in this restructuring and the leases no longer required straight line rent adjustments, we reversed in this quarter the historical straight-line receivable related to these facilities.

• Mortgage interest income decreased $1.7 million or 19.1% due mainly to the repayment of 25 mortgage loans during 2001 and 2002. This decrease in revenue was offset partially by income earned on a first mortgage acquired in 2002 by the Company on a property where we previously owned the second mortgage, from additional interest, and from assertively billing and collecting late fees in 2002.

• Management fee income decreased $0.1 million or 18.0% due mainly to a reduction in our property and asset management portfolio of 1.3 million square feet since June 30, 2001.

• Interest and other income increased $0.6 million or 102.1%. The major components of interest and other income for the first six months of 2002 were a fee received related to the assignment of four assisted living facility leases to a new operator, fees earned due to the maturity or repayment of mortgage loans, and interest income on notes receivable. The major components of interest and other income for the first six months of 2001 were interest income earned on excess cash remaining from the May 2001 sale of the Senior Notes due 2011, fees earned from consulting engagements, interest income on notes receivable, and fees earned from

the repayment of mortgage loans, offset partially by participating interest paid on a note that was repurchased by the Company in January 2002.

Total expenses for the six months ended June 30, 2002 compared to the six months ended June 30, 2001 increased $0.2 million or 0.3% mainly for the reasons discussed below:

• General and administrative expenses increased $0.4 million or 9.2% due mainly to an increase in the number of employees and related compensation for portfolio management, development and other service-based activities, an increase in insurance premiums, as well as slightly higher income and franchise tax expense recognized in 2002.

• Property operating expenses increased $2.0 million or 15.5% due mainly to the acquisition of one revenue-producing property and the commencement of operations for four properties that were previously under construction, offset partially by the disposal of three properties during 2001 and 2002.

• Interest expense decreased $2.8 million, or 13.7% mainly due to the continuing decrease in market interest rates along with a reduction in total debt outstanding from 2001 to 2002.

• Depreciation expense increased $0.6 million, or 3.0% due mainly to the acquisition of one revenue-producing property, the commencement of operations for four properties that were previously under construction, a change in the depreciable life of certain land improvements from 15 years to 20 years resulting in a $134,000 one time adjustment that had no material impact on net income or earnings per share, offset partially by the disposal of ten properties during 2001 and 2002.

Liquidity and Capital Resources

Debt Obligations

As discussed in more detail in Note 4, we have commitments to pay interest and outstanding principal balances on our notes and bonds payable as follows (dollars in thousands):

Principal

Contractual

Balance at

Interest

June 30, 2002

Maturity Date

Rate at 6/30/02

Payments

Principal Payments

Unsecured Credit Facility due 2004

32,500

7/04

LIBOR +1.15%

Quarterly

At maturity

Senior Notes due 2002

18,000

9/02

7.41%

Semi-Annual

At maturity

$20.3 million in 2004, 2005 and

Senior Notes due 2006

70,000

4/06

9.49%

Semi-Annual

$29.4 million in 2006

Senior Notes due 2011

303,767

5/11

8.125%

Semi-Annual

At maturity

Mortgage notes payable

74,015

9/04-7/26

7.22%-8.50%

Monthly

Monthly or at maturity

Other note payable

4,083

7/05

7.53%

Semi-Annual

502,365

In 2001, we focused on reorganizing our debt structure and repaying or replacing debt instruments that have shorter maturities with debt instruments having longer maturities. As a

result of these efforts, at June 30, 2002, approximately 95% of our outstanding principal debt balances are due after 2003. Further, at July 31, 2002, we had borrowing capacity remaining of $133.0 million under our Unsecured Credit Facility due 2004.

Our senior debt is rated Baa3, BBB-, and BBB and our preferred stock is rated Ba2, BB+, and BBB- by Moody’s Investors Service, Standard and Poor’s Investor Service, and Fitch Ratings, respectively. For the six months ended June 30, 2002, our earnings covered fixed charges at a ratio of 3.29 to 1.00. At June 30, 2002, our stockholders’ equity totaled approximately $1.0 billion and our debt to total capitalization ratio, on a book basis, was approximately 0.334 to 1.

At June 30, 2002, we were in compliance with the debt covenant requirements under our various debt instruments.

Shelf Registration

As of June 30, 2002, we could issue an aggregate of approximately $171.6 million of securities remaining under our currently effective registration statement. Should the market permit, we may issue securities under this registration statement. We may, under certain circumstances, borrow additional amounts in connection with the renovation or expansion of our properties, the acquisition or development of additional properties or, as necessary, to meet distribution requirements for REITs under the Internal Revenue Code. We may raise additional capital or make investments by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of any such issuance will depend upon market and other conditions.

Security Deposits and Letters of Credit

As of June 30, 2002, we held approximately $7.4 million in letters of credit, security deposits, debt service reserves or capital replacement reserves. Generally, we may, at our discretion and upon notification to the operator, draw upon these instruments if there are any defaults under the leases or mortgage notes with our operators.

Dispositions

Construction in Progress

As of June 30, 2002, we had a net investment of approximately $18.1 million in build-to-suit developments in progress that have a total remaining funding commitment of approximately $5.4 million. We intend to fund these commitments with internally generated cash flows, proceeds from the Unsecured Credit Facility due 2004, proceeds from the sale of additional assets, proceeds from additional repayments of mortgage notes receivable, or additional capital market financing.

Dividends

On April 24, 2002, our Board of Directors declared an increase in the quarterly common stock dividend from $0.590 per share ($2.36 annualized) to $0.595 per share ($2.38 annualized) payable to stockholders of record on May 15, 2002. This dividend was paid on June 6, 2002. On July 23, 2002, our Board of Directors declared another increase in the quarterly common stock dividend to $0.600 per share ($2.40 annualized) payable to stockholders of record on August 15, 2002. This dividend is payable on September 5, 2002 and relates to the period April 1, 2002 through June 30, 2002. While we have no present plans to change our quarterly common stock dividend policy, the dividend policy is reviewed each quarter by our board of directors.

Redemption of Preferred Stock

Under the terms of the leases and other financial support agreements we have relating to most of the properties, the tenants or healthcare providers are generally responsible to pay for operating expenses and taxes relating to our properties. As a result of these arrangements, with limited exceptions not material to our overall performance, we do not believe any increases in the property operating expenses or taxes would significantly impact our operating results during the respective terms of the agreements. We anticipate entering into similar arrangements with respect to any additional properties we acquire or develop. After the term of the leases or financial support agreements, or in the event the financial obligations required by the agreement are not met, we anticipate that any expenditures we might become responsible for in maintaining the properties will be funded by occupancy tenants, by cash from operations and, in the case of major expenditures, possibly by borrowings. To the extent that

unanticipated expenditures or significant borrowings are required, our cash available for distribution and liquidity may be adversely affected.

We plan to continue to meet our liquidity needs, including funding additional investments in 2002, paying quarterly dividends and funding debt service from our cash flows, proceeds from the Unsecured Credit Facility due 2004, proceeds from additional repayments of mortgage notes receivable, proceeds from the sale of real estate investments, or additional capital market financing. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts to meet our liquidity needs.

Impact of Inflation

Inflation has not significantly affected our earnings of the moderate inflation rate in recent years and the fact that most of our leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing our risk of the adverse effects of inflation. In addition, inflation will have the effect of increasing gross revenue we are to receive under the terms of our leases and financial support arrangements. Leases and financial support arrangements vary in the remaining terms of obligations from one to 22 years, further reducing our risk of any adverse effects of inflation. Interest payable under the interest rate swaps and the Unsecured Credit Facility due 2004 bears interest at a variable rate; therefore, the amount of interest payable under the swaps and this debt will be influenced by changes in short-term rates, which tend to be sensitive to inflation. Generally, changes in inflation and interest rates tend to move in the same direction. During periods where interest rate increases outpace inflation, our operating results should be negatively impacted. Likewise, when increases in inflation outpace increases in interest rates, our operating results should be positively impacted.

Market Risk

We are exposed to market risks, in the form of changing interest rates, on our debt and mortgage notes receivable. We have no market risk with respect to foreign currency fluctuations. Management uses daily monitoring of market conditions and analytical techniques to manage this risk. During 2001, we significantly changed our debt structure. See Liquidity and Capital Resources in this Form 10-Q for further discussion. Also, see pages 8 and 9 of Exhibit 13 “Annual Report to Shareholders” of the Company’s Form 10-K for the fiscal year ended December 31, 2001.

Cautionary Language Regarding Forward Looking Statements

This Form 10-Q and other materials we have 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, contain, or will contain, disclosures which 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,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” 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 that could significantly affect our current plans and expectations and future financial condition and results. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports. For a detailed discussion of our risk factors, please refer to our filings with the Securities and Exchange Commission, including our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2001.

PART II — OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

Our annual meeting of shareholders was held on May 14, 2002 and our shareholders voted on the following matters.

(a) Election of Class 3 Directors

David R. Emery, Batey M. Gresham, Jr., and Dan S. Wilford were elected to serve as our Class 3 directors until the annual meeting of shareholders in 2005 or until their respective successors are elected and qualified. The vote was as follows:


	Votes Cast				Votes Cast Against				Abstentions/
	In Favor				or Withheld				Non Votes

	Common		Preferred		Common		Preferred		Common		Preferred

David R. Emery		33,321,155		2,658,012		4,164,283		54,825		4,392,236		287,163
Batey M. Gresham, Jr.		37,242,443		2,701,343		242,995		11,494		4,392,236		287,163
Dan S. Wilford		37,244,086		2,701,137		241,352		11,700		4,392,236		287,163

The following directors continued in office following the meeting:


Name	Term Expires

Charles Raymond Fernandez, M.D.		2003
Errol L. Biggs, Ph.D.		2003
Marliese E. Mooney		2004
Edwin B. Morris, III		2004
John Knox Singleton		2004

(b) Selection of Auditors

The shareholders ratified the appointment of Ernst & Young, LLP as our independent auditors for the fiscal year ended December 31, 2002, by the following vote:

Votes Cast

Votes Cast Against

Abstentions/

In Favor

or Withheld

Non Votes

Common

Preferred

Common

Preferred

Common

Preferred

36,764,895

2,688,934

421,959

12,528

4,690,820

298,538

Item 6. Reports on Form 8-K

During the second quarter of 2002, we furnished the following reports on Form 8-K in accordance with Regulation FD.


Date of Earliest Event Reported	Date Furnished	Items Reported

April 25, 2002	April 26, 2002	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure

June 6, 2002	June 6, 2002	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure

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/ Timothy G. Wallace Timothy G. Wallace Executive Vice President and Chief Financial Officer

Date: August 14, 2002

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Healthcare Realty Trust 10-Q2002 Q2 Quarterly report

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