Healthcare Realty Trust 10Q 2003 Q1 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: March 31, 2003

		OR

o		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 o

As of May 1, 2003, 42,023,529 shares of the Registrant’s Common Stock were outstanding.

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 6. Exhibit and Reports on Form 8-K
SIGNATURE
Quarterly Certification
Quarterly Certification
Exhibit Index
EX-99.1 CERTIFICATION/EMERY AND HOLMES

HEALTHCARE REALTY TRUST
INCORPORATED

FORM 10-Q

March 31, 2003

TABLE OF CONTENTS


			Page

Part I — Financial Information

	Item 1.	Financial Statements
		Consolidated Balance Sheets		1
		Consolidated Statements of Income		2
		Consolidated Statements of Cash Flows		3
		Notes to Consolidated Financial Statements		4

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		10

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		18

	Item 4.	Controls and Procedures		19

Part II — Other Information

	Item 6.	Exhibit and Reports on Form 8-K		20

Signature				21

Certifications				22

Part I. FINANCIAL INFORMATION

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


			(Unaudited)
			March 31,			December 31,
			2003			2002

ASSETS
Real estate properties:
	Land		$	138,160		$	135,791
	Buildings and improvements			1,355,249			1,332,872
	Personal property			5,865			5,730
	Construction in progress			11,315			10,546

				1,510,589			1,484,939
	Less accumulated depreciation			(202,386	)		(192,293	)

		Total real estate properties, net		1,308,203			1,292,646
Cash and cash equivalents				9,063			402
Mortgage notes receivable				90,425			102,792
Other assets, net				76,296			93,706

Total assets			$	1,483,987		$	1,489,546

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Notes and bonds payable		$	547,713		$	545,063
	Accounts payable and accrued liabilities			19,683			24,960
	Other liabilities			14,293			11,324

Total liabilities				581,689			581,347

Commitments				0			0
Stockholders’ equity:
	Preferred stock, $.01 par value; 50,000,000 shares authorized; issued and outstanding, none			0			0
	Common stock, $.01 par value; 150,000,000 shares authorized; issued and outstanding, 2003 — 42,023,529; 2002 — 41,823,564			420			418
	Additional paid-in capital			1,029,767			1,024,467
	Deferred compensation			(20,400	)		(16,251	)
	Cumulative net income			463,720			445,152
	Cumulative dividends			(571,209	)		(545,587	)

Total stockholders’ equity				902,298			908,199

Total liabilities and stockholders’ equity			$	1,483,987		$	1,489,546

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, 2002, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated
Consolidated Statements of Income
For The Three Months Ended March 31, 2003 and 2002
(Dollars in thousands, except per share data)


		(Unaudited)		(Unaudited)
		2003		2002

REVENUES:
	Master lease rental income	$	22,905	$	24,896
	Property operating income		19,809		19,092
	Straight-line rent		665		1,181
	Mortgage interest income		2,681		3,784
	Management fees		272		314
	Interest and other income		1,308		386

			47,640		49,653
EXPENSES:
	General and administrative		2,669		2,508
	Property operating expenses		7,664		7,463
	Interest		8,446		8,939
	Depreciation		10,280		10,523
	Amortization		13		43

			29,072		29,476

NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			18,568		20,177

NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			0		(329	)

NET INCOME		$	18,568	$	19,848

NET INCOME PER COMMON SHARE — BASIC		$	0.45	$	0.45

NET INCOME PER COMMON SHARE — DILUTED		$	0.45	$	0.44

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — BASIC			40,819,618		40,486,486

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING — DILUTED			41,615,403		41,434,098

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	0.61	$	0.59

Healthcare Realty Trust Incorporated
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2003 and 2002
(Dollars in thousands)


			(Unaudited)			(Unaudited)
			2003			2002

Cash flows from operating activities:
	Net income		$	18,568		$	19,848
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization		10,671			11,052
		Deferred compensation amortization		692			680
		Increase (decrease) in other liabilities		364			(490	)
		Increase in other assets		(1,364	)		(9,565	)
		Increase in accounts payable and accrued liabilities		5,625			7,230
		Increase in straight line rent		(665	)		(1,181	)
		Net gain on sales of real estate		0			329

	Net cash provided by operating activities			33,891			27,903

Cash flows from investing activities:
	Acquisition and development of real estate properties			(13,870	)		(6,515	)
	Funding of mortgages			(60	)		(3,810	)
	Proceeds from sale of real estate			0			8,074
	Proceeds from mortgage payments/sales			2,810			6,841

	Net cash provided by (used in) investing activities			(11,120	)		4,590

Cash flows from financing activities:
	Borrowings on notes and bonds payable			43,000			41,500
	Repayments on notes and bonds payable			(39,458	)		(41,723	)
	Dividends paid			(25,622	)		(26,367	)
	Termination of interest rate swap			18,411			0
	Common stock redemption			(10,902	)		0
	Proceeds from issuance of common stock			461			621

	Net cash used in financing activities			(14,110	)		(25,969	)

Increase in cash and cash equivalents				8,661			6,524
Cash and cash equivalents, beginning of period				402			2,930

Cash and cash equivalents, end of period			$	9,063		$	9,454

Healthcare Realty Trust
Incorporated

Notes to Consolidated Financial Statements

March 31, 2003

(Unaudited)

Note 1. Significant Accounting Policies

The accompanying unaudited consolidated financial statements and notes of Healthcare Realty Trust Incorporated (the “Company”) 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 the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2002. Management believes, however, that all adjustments 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, 2003 due to many reasons including, but not limited to, acquisitions, dispositions and changes in interest rates.

This interim financial information should be read in conjunction with the audited financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2002.

Stock Issued to Employees

The Company has elected to follow Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for its equity-based awards to employees.

The following table represents the effect on net income and earnings per share for the three months ended March 31, 2003 and 2002 as if the Company had applied the fair value-based method and recognition provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation:”


		Three Months Ended March 31,

(in thousands, except per share data)		2003			2002

Net income, as reported		$	18,568		$	19,848
Compensation expense for equity-based awards to employees under the fair value method			(222	)		(117	)

Pro-forma net income		$	18,346		$	19,731
Earnings per share, as reported
	Basic	$	0.45		$	0.45
	Assuming dilution	$	0.45		$	0.44
Pro-forma earnings per share
	Basic	$	0.45		$	0.45
	Assuming dilution	$	0.44		$	0.44

Note 2. Properties

The Company invests in healthcare-related properties and mortgages located throughout the United States. The Company provides management, leasing and build-to-suit development services, and capital for the construction of new facilities as well as 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 March 31, 2003, the Company had investments in 219 properties and mortgages, located in 29 states, and affiliated with 60 healthcare-related entities as follows:


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

Ancillary hospital facilities		54	$	487,382		30.5	%
Assisted living facilities		46		268,334		16.8	%
Skilled nursing facilities		36		192,034		12.0	%
Inpatient rehabilitation facilities		9		156,495		9.8	%
Physician clinics		29		156,876		9.8	%
Comprehensive ambulatory care centers		13		155,325		9.7	%
Medical office buildings		14		77,219		4.8	%
Other inpatient facilities		6		60,157		3.7	%
Other outpatient facilities		12		43,067		2.7	%
Corporate property		—		4,125		0.2	%

		219	$	1,601,014		100.0	%

Asset Acquisitions

During the first quarter of 2003, the Company acquired two ancillary hospital facilities in Louisiana for $10.7 million.

Asset Dispositions

During the first quarter of 2003, the Company received approximately $3.5 million in net proceeds from an operator for the repayment of four mortgage notes receivable.

Note 3. Notes and Bonds Payable

Notes and bonds payable at March 31, 2003 consisted of the following (in thousands):


Unsecured Credit Facility due 2004	$	89,000
Senior Notes due 2002		0
Senior Notes due 2006		70,000
Senior Notes due 2011, net		314,334
Mortgage notes payable		71,462
Other note payable		2,917

	$	547,713

Unsecured Credit Facility due 2004

In 2001, the Company entered into a $150.0 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, the Company pays 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 March 31, 2003, the Company had borrowing capacity remaining of $47.7 million under this facility.

Senior Notes due 2002

In 1995, the Company privately placed $90.0 million of unsecured senior notes (the “Senior Notes due 2002”). These notes were fully repaid upon maturity on September 1, 2002.

Senior Notes due 2006

In 2000, the Company 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, the Company 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 2001, the Company publicly issued $300.0 million of 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 the Company redeems the notes earlier. The notes were issued at a discount of approximately $1.5 million, yielding an 8.202% interest rate per annum. In 2001, the Company entered into interest rate swap agreements for notional amounts totaling $125 million to offset changes in the fair value of $125 million of the notes. The Company paid interest at the equivalent rate of 1.99% over six month LIBOR. At December 31, 2002, the aggregate fair value of the hedge totaling $16.6 million was

reported in other assets with an offsetting increase to the Senior Notes due 2011 included in notes and bonds payable on the Company’s balance sheet. In March 2003, the Company terminated these interest rate swap agreements and entered into new swaps under terms identical to those of the 2001 swap agreements except that the equivalent rate is now 4.12% over six month LIBOR. The Company received cash equal to the fair value of the terminated swaps of $18.4 million. The fair value of the terminated swaps is combined with the principal balance of the senior notes on the Company’s balance sheet. The fair value gain of $18.4 million will be amortized against interest expense over the remaining term of the notes offsetting the increase in the spread over LIBOR. The derivative instruments meet all requirements of a fair value hedge and have been accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value have had no impact on the income statement. At March 31, 2003, the aggregate fair value of the current hedge totaling $2.6 million is also combined with the principal balance of the senior notes with an offsetting increase to other liabilities on the Company’s balance sheet.

Mortgage Notes Payable

At March 31, 2003, the Company had outstanding 13 non-recourse mortgage notes payable, with the related collateral, as follows (dollars in millions):


											Investment in		Contractual
			Effective					Number			Collateral at		Balance at
	Original		Interest			Maturity		of Notes			March 31,		March 31,
	Balance		Rate			Date		Payable		Collateral	2003		2003

Life Insurance Co.	$	23.3		7.765	%		7/26		1	Ancillary hospital facility	$	44.0	$	21.8
Life Insurance Co.		4.7		7.765	%		1/17		1	Ancillary hospital facility		10.8		3.9
Life Insurance Co.		17.1		7.765	%		4/04		3	Two ambulatory surgery centers & one ancillary hospital facility		37.7		15.6
Commercial Bank		35.0		7.220	%		5/11		8	Nine ancillary hospital facilities & one physician clinic		78.2		30.2

									13		$	170.7	$	71.5

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 are secured by properties owned by special purpose entities whose sole members are wholly owned subsidiaries of the Company. 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, the Company 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 4. Commitments and Contingencies

As of March 31, 2003, the Company had a net investment of approximately $11.3 million in build-to-suit developments in progress that have a total remaining funding commitment of approximately $10.1 million.

Note 5. Net Income Per Share

The table below sets forth the computation of basic and diluted earnings per share as required by FASB Statement No. 128 “Earnings Per Share” for the three months ended March 31, 2003 and 2002 (dollars in thousands, except per share data).


					Three Months Ended
					March 31,

					2003			2002

Basic EPS
	Weighted Average Common Shares Outstanding					41,941,672			41,728,649
			Actual restricted stock shares			(1,122,054	)		(1,242,163	)

		Denominator – Basic				40,819,618			40,486,486

		Net income			$	18,568		$	19,848
				Preferred stock dividend		0			(1,664	)

		Numerator – Basic			$	18,568		$	18,184

		Per Share Amount			$	0.45		$	0.45

Diluted EPS
			Weighted Average Common Shares Outstanding			41,941,672			41,728,649
			Actual restricted stock shares			(1,122,054	)		(1,242,163	)
			Restricted shares – Treasury			732,226			814,875
			Dilution for employee stock purchase plan			63,559			132,737

			Denominator – Diluted			41,615,403			41,434,098

			Numerator – Diluted		$	18,568		$	18,184

			Per Share Amount		$	0.45		$	0.44

Note 6. Redemptions of Common and Preferred Stock

On September 30, 2002, the Company redeemed all of its 8 7/8% Series A Voting Cumulative Preferred Stock 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 was $75,566,881.

Effective December 31, 2002, the Company repurchased 418,959 shares from the former Chief Financial Officer pursuant to the terms of a retirement agreement. Payment for this repurchase was made on January 8, 2003. Such shares were retired upon repurchase. The Company’s financial statements reflect the repurchase as if it occurred on December 31, 2002.

Note 7. Subsequent Events

Common Stock Dividend

On April 22, 2003, the Company’s Board of Directors declared an increase in its quarterly common stock dividend from $0.610 per share ($2.44 annualized) to $0.615 per share ($2.46 annualized) payable on June 5, 2003 to shareholders of record on May 15, 2003.

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

Overview

Healthcare Realty Trust Incorporated (the “Company”) operates under the Internal Revenue Code of 1986, as amended, as an indefinite life real estate investment trust (“REIT”). The Company, a self-managed, self-administered REIT, integrates owning, managing, and developing income-producing real estate properties and mortgages associated with the delivery of healthcare services throughout the United States. The Company believes that by providing related real estate services, it can differentiate its competitive market position and expand its asset base and increase revenues.

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

Funds From Operations and Funds Available For Distribution

Funds from operations (“FFO”) and FFO per share are operating performance measures adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). Beginning with the first quarter of 2003, the Company calculated and reported FFO and FFO per share in accordance with NAREIT’s April 2002 White Paper. NAREIT defines FFO as “the most commonly accepted and reported measure of REIT operating performance equal to a REIT’s net income, excluding gains or losses from sales of property and adding back real estate depreciation.”

Funds available for distribution (“FAD”) and FAD per share are also operating performance standards adopted by NAREIT that measure a REIT’s ability to generate cash and distribute dividends to its shareholders. NAREIT defines FAD as “in addition to subtracting from FFO normalized recurring real estate expenditures and other non-cash items, FAD is usually derived by also subtracting nonrecurring expenditures.”

The Company considers FFO and FAD to be informative measures of REIT performance commonly used in the REIT industry. However, neither FFO nor FAD represents cash generated from operating activities determined in accordance with accounting principles generally accepted in the United States (“GAAP”) and are not necessarily indicative of cash available to fund cash needs. FFO and FAD should not be considered as alternatives to net

income as an indicator of the Company’s operating performance or as alternatives to cash flow as a measure of liquidity.

The table below sets forth computations of FFO and FAD for the three months ended March 31, 2003 and 2002 and reconciles FFO and FAD to net income (dollars in thousands, except per share data).


		Three Months Ended March 31,

		2003			2002

Funds From Operations
Net income		$	18,568		$	19,848
	Net (gain) loss on sales of real estate properties		0			329
	Preferred stock dividend		0			(1,664	)
	Real estate depreciation		9,979			10,244

	Total adjustments		9,979			8,909

Funds From Operations — Basic and Diluted		$	28,547		$	28,757

Funds From Operations Per Common Share — Basic		$	0.70		$	0.71

Funds From Operations Per Common Share — Diluted		$	0.69		$	0.69

Funds Available for Distribution
Funds From Operations — Diluted		$	28,547		$	28,757
	Elimination of the recognition of rental revenues on a straight line basis		(665	)		(1,181	)
	Deferred compensation amortization		692			680
	Depreciation of non-real estate assets		301			279
	Amortization of non-real estate assets		13			43

	Total adjustments		341			(179	)

Funds Available for Distribution		$	28,888		$	28,578

Funds Available for Distribution Per Common Share — Basic		$	0.71		$	0.71

Funds Available for Distribution Per Common Share — Diluted		$	0.69		$	0.69

Weighted Average Common Shares Outstanding — Basic			40,819,618			40,486,486

Weighted Average Common Shares Outstanding — Diluted			41,615,403			41,434,098

Operating Results

First Quarter 2003 Compared to First Quarter 2002

Net income for the quarter ended March 31, 2003 totaled $18.6 million, or $0.45 per basic and diluted common share, on total revenues of $47.6 million. This compares with net income of $19.8 million, or $0.45 per basic common share ($0.44 per diluted common share), on total revenues of $49.7 million for the quarter ended March 31, 2002. Included in net income for the quarter ended March 31, 2002 was a net loss on the sale of real estate properties of $0.3 million, or $0.01 per basic and diluted common share. There were no sales of real estate properties in the first quarter of 2003.

Total revenues for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002, decreased $2.0 million or 4.1% mainly for the reasons discussed below:

• Master lease rental income decreased $2.0 million or 8.0% due mainly to the disposal of nine master leased properties during 2002.

• Property operating income increased $0.7 million or 3.8% due mainly to the acquisition during 2002 and 2003 of four revenue-producing properties and the commencement of operations during 2002 of two properties that were previously under construction, offset partially by the disposal of four revenue-producing properties during 2002.

• Straight-line rental income decreased $0.5 million or 43.7%. This decrease was due mainly to asset sales and normal annual decreases in the straight line rent calculation on the leases.

• Mortgage interest income decreased $1.1 million or 29.1% due mainly to the repayment of 18 mortgage loans during 2002 and 2003.

• Interest and other income increased $0.9 million or 238.9% due mainly to fees earned upon the repayment of mortgage notes receivable during 2003.

Total expenses for the quarter ended March 31, 2003 compared to the quarter ended March 31, 2002 decreased $0.4 million or 1.4% mainly for the reasons discussed below:

• General and administrative expenses increased $0.2 million or 6.4% due mainly to an increase in employee compensation and health insurance premiums.

• Property operating expenses increased $0.2 million or 2.7% due mainly to the acquisition during 2002 and 2003 of four revenue-producing properties and the commencement of operations during 2002 of two properties that were previously under construction, offset partially by the disposal of four revenue-producing properties during 2002.

• Interest expense decreased $0.5 million or 5.5% mainly due to the continuing decrease in market interest rates as well as the full repayment of the 7.41% Senior Notes due 2002 in September 2002.

• Depreciation expense decreased $0.2 million or 2.3% due mainly to the disposal of 13 revenue-producing properties during 2002, offset partially by the acquisition of four revenue-producing properties during 2002 and 2003 and the commencement of operations during 2002 of two properties that were previously under construction.

Liquidity and Capital Resources

Debt Obligations

As discussed in more detail in Note 3 to the Consolidated Financial Statements, the Company has been or is committed to pay interest and outstanding principal balances on its notes and bonds payable as follows (dollars in thousands):

Balance at

Contractual

March 31,

Maturity

Interest

2003

Date

Rate at 3/31/03

Payments

Principal Payments

Unsecured Credit Facility due 2004(1)

89,000

7/04

LIBOR +1.15%

Quarterly

At maturity

Senior Notes due 2006

70,000

4/06

9.49%

Semi-Annual

$20.3 million in 2004, 2005
and $29.4 million in 2006

Senior Notes due 2011, net

314,334

5/11

8.125%

Semi-Annual

At maturity

Mortgage notes payable

71,462

9/04-7/26

7.22%-8.50%

Monthly

Monthly or at maturity

Other note payable

2,917

7/05

7.53%

Semi-Annual

547,713

(1)

The Company pays a quarterly facility fee of 0.2% on the commitment.

In 2001, the Company focused on reorganizing its 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 March 31, 2003, substantially all of the Company’s outstanding principal debt balances are due after 2003 (with 63% due after 2007). Further, at March 31, 2003, the Company had borrowing capacity remaining of $47.7 million under the Unsecured Credit Facility due 2004.

The Company’s senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s Investor Service, and Fitch Ratings, respectively. For the three months ended March 31, 2003, the Company’s earnings covered fixed charges at a ratio of 3.14 to 1.00. At March 31, 2003, the Company’s shareholders’ equity totaled approximately $900.0 million and its debt to total capitalization ratio, on a book basis, was approximately 0.38 to 1.

At March 31, 2003, the Company was in compliance with the covenant requirements under its various debt instruments.

In 2001, the Company entered into interest rate swap agreements for notional amounts totaling $125 million to offset changes in the fair value of $125 million of the Senior Notes due 2011. The Company paid interest at the equivalent rate of 1.99% over six month LIBOR. At December 31, 2002, the aggregate fair value of the hedge totaling $16.6 million was reported in other assets with an offsetting increase to the Senior Notes due 2011 included in notes and bonds payable on the Company’s balance sheet. In March 2003, the Company terminated these interest rate swap agreements and entered into new swaps under terms identical to those of the 2001 swap agreements except that the equivalent rate is now 4.12% over six month LIBOR. The Company received cash equal to the fair value of the terminated swaps of $18.4 million that was used to partially repay the Unsecured Credit Facility due 2004 and for general corporate purposes. The fair value of the terminated swaps is combined with the principal balance of the senior notes on the Company’s balance sheet. The fair value gain of $18.4 million will be amortized against interest expense over the remaining term of the notes offsetting the increase in the spread over LIBOR. The derivative instruments meet all requirements of a fair value hedge and have been accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value have had no impact on the income statement. At March 31, 2003, the aggregate fair value of the current hedge totaling $2.6 million is also combined with the principal balance of the senior notes with an offsetting increase to other liabilities on the Company’s balance sheet.

Shelf Registration

As of March 31, 2003, the Company can issue an aggregate of approximately $167.1 million of securities remaining under its currently effective registration statement. Should the market permit, the Company may issue securities under this registration statement. The Company may, under certain circumstances, borrow additional amounts in connection with the renovation or expansion of its properties, the acquisition or development of additional properties or, as necessary, to meet distribution requirements for REITs under the Internal Revenue Code. The Company may raise additional capital or make investments by issuing, in public or private transactions, its 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 March 31, 2003, the Company held approximately $5.7 million in letters of credit, security deposits, debt service reserves or capital replacement reserves. Generally, the Company may, at its discretion and upon notification to the operator, draw upon these instruments if there are any defaults under the leases or mortgage notes.

Asset Acquisitions

During the first quarter of 2003, the Company acquired two ancillary hospital facilities in Louisiana for $10.7 million.

Asset Dispositions

During the first quarter of 2003, the Company received approximately $3.5 million in net proceeds from an operator for the repayment of four mortgage notes receivable.

Investment Trends

The low interest rate environment continues to create intense competition from highly leveraged financial intermediary property buyers. While the Company continues to see prospects for large portfolios being brought to the market, as long as the low interest rate environment exists, the Company’s ability to make large-scale investments may continue to be impacted for some time as it remains disciplined in its investment approach.

The Company believes that competition from such buyers will eventually subside as interest rates moderate to historical levels. However, as growth in the Company’s top line revenues and growth in FFO and FAD is a direct reflection of the Company’s ability to make accretive new investments that outpace disposals and mortgage maturities and prepayments, the Company anticipates that growth in its FFO and FAD may be modest which may impact its ability to increase its quarterly common stock dividend.

HealthSouth Corporation

The United States Department of Justice and Securities and Exchange Commission have accused HealthSouth Corporation (“HealthSouth”) and several of its officers, including its former Chief Executive Officer, of overstating earnings and assets included in HealthSouth’s financial statements. The case is still under investigation.

The Company owns 27 facilities that are operated by HealthSouth, of which 25 are master leased and two are multi-tenanted facilities in which HealthSouth is a tenant providing surgery, diagnostic and related services. The Company’s total investment in these facilities was

$276.6 million at March 31, 2003, and approximately 13% of the Company’s 2002 revenues were related to these properties. Since the public announcement of the case against HealthSouth in March 2003, the Company has received all material monthly installments due from HealthSouth.

In the event HealthSouth institutes bankruptcy proceedings, it would have the ability to reject its leases with the Company. However, with two exceptions, all of the Company’s master leases with HealthSouth contain cross-default provisions that would provide some legal protection against selective rejection of leases that are cross-defaulted. However, any decision related to that would be at the discretion of the bankruptcy court. If HealthSouth rejected its leases with the Company, the Company would undertake to lease the properties to other operators. The Company does not know under what lease terms or how quickly it would be able to re-lease the properties. At this time, given the operating nature of the properties, management believes the risk of total or substantial losses in the Company’s rental revenue from the portfolio to be unlikely.

Construction in Progress

Dividends

On January 28, 2003, the Company’s board of directors declared an increase in its quarterly common stock dividend from $0.605 per share ($2.42 annualized) to $0.61 per share ($2.44 annualized) payable to stockholders of record on February 14, 2003. This dividend was paid on March 6, 2003. On April 22, 2003, the Company’s Board of Directors declared another increase in the quarterly common stock dividend to $0.615 per share ($2.46 annualized) payable to stockholders of record on May 15, 2003. This dividend is payable on June 5, 2003 and relates to the period January 1, 2003 through March 31, 2003. While the Company has no present plans to change its quarterly common stock dividend policy, the dividend policy is reviewed each quarter by the board of directors.

Redemption of Common Stock

Liquidity

Under the terms of the leases and other financial support agreements the Company has relating to most of the properties, the tenants or healthcare providers are generally responsible for paying the operating expenses and taxes relating to the properties. As a result of these arrangements, with limited exceptions not material to the Company’s overall performance, the Company does not believe any increases in property operating expenses or taxes would significantly impact the Company’s operating results during the respective terms of the agreements. The Company anticipates entering into similar arrangements with respect to any

additional properties it acquires or develops. After the term of the leases or financial support agreements, or in the event the financial obligations required by the agreement are not met, the Company anticipates that any expenditures it 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, the Company’s cash available for distribution and liquidity may be adversely affected.

The Company plans to continue to meet its liquidity needs, including funding additional investments in 2003, paying quarterly dividends and funding debt service from its 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. 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 or in sufficient amounts to meet its liquidity needs. See the Company’s Consolidated Statements of Cash Flows for further detail of the Company’s cash flows for the three months ended March 31, 2003.

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 risk of any adverse effects of inflation to the Company. In addition, inflation will have the effect of increasing gross revenue the Company is 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 20 years, further reducing the risk of any adverse effects of inflation to the Company. Interest payable under the interest rate swaps and the Unsecured Credit Facility due 2004 is calculated 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 when 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.

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.

Cautionary Language Regarding Forward Looking Statements

This Form 10-Q 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 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 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. Shareholders 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. 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 to Shareholders on Form 10-K for the year ended December 31, 2002.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

During the three months ended March 31, 2003, 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, 2002.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

There have been no significant changes in the Company’s internal and disclosure controls and procedures or in other factors that could significantly affect its internal and disclosure controls subsequent to the date of its most recent evaluation. However, the Company continues its process of assessing, improving and formalizing its system of internal and disclosure controls.

PART II — OTHER INFORMATION

Item 6. Exhibit and Reports on Form 8-K

(a)		Exhibit

		Exhibit 99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b)		Reports on Form 8-K

During the first quarter of 2003, the Company furnished the following reports on Form 8-K.


Date of Earliest
Event Reported	Date Furnished	Items Reported

January 30, 2003	January 31, 2003	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure
January 21, 2003	January 21, 2003	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/ Scott W. Holmes

				Scott W. Holmes
				Senior Vice President
				and Chief Financial Officer

Date: May 15, 2003

Healthcare Realty Trust Incorporated
Quarterly Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David R. Emery, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;


	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and


	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 15, 2003		/s/ David R. Emery

		David R. Emery
		Chairman of the Board and Chief
		Executive Officer

Healthcare Realty Trust Incorporated
Quarterly Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Scott W. Holmes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;


	a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;


	b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and


	c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and


	b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date: May 15, 2003		/s/ Scott W. Holmes

		Scott W. Holmes
		Senior Vice President and Chief Financial
		Officer

Exhibit Index


Exhibit		Description

99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Healthcare Realty Trust 10-Q2003 Q1 Quarterly report

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