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, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
== ----
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 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, 1998, 20,856,601 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
June 30, 1998
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 13
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
1
Item 1.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited) (1)
ASSETS June 30, 1998 Dec.31, 1997
- ------ ------------- ------------
Real estate properties:
Land $62,046 $58,424
Buildings and improvements 441,109 423,618
Personal property 4,335 4,492
Construction in progress 9,877 19,165
----- ------
517,367 505,699
Less accumulated depreciation (40,556) (34,718)
------- -------
Total real estate properties, net 476,811 470,981
Cash and cash equivalents 1,150 5,325
Other assets, net 32,008 12,208
------ ------
Total assets $509,969 $488,514
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $90,000 $101,300
Accounts payable and accrued liabilities 6,828 6,879
Other liabilities 3,515 3,863
----- -----
Total liabilities 100,343 112,042
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares
authorized; none outstanding 0 0
Common stock, $.01 par value; 150,000,000 shares authorized; 20,728,452
issued and outstanding at June 30, 1998 and 19,285,927 at
Dec. 31, 1997 207 193
Additional paid-in capital 441,891 402,607
Deferred compensation (11,238) (7,689)
Cumulative net income 106,854 88,867
Cumulative dividends (128,088) (107,506)
-------- --------
Total stockholders' equity 409,626 376,472
------- -------
Total liabilities and stockholders' equity $509,969 $488,514
======== ========
(1) The balance sheet at Dec. 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
(The accompanying notes, together with the Notes to the Consolidated
Financial Statemments included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, are an integral part of these financial
statements.)
2
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Three Months Ended June 30, 1998 and 1997
(Unaudited)
(Dollars in thousands, except per share data)
1998 1997
---- ----
REVENUES:
Master lease rental income $8,502 $10,619
Property operating income 8,148 2,202
Management fees 474 319
Interest and other income 606 1,125
--- -----
17,730 14,265
------ ------
EXPENSES:
General and administrative 1,174 761
Property operating expenses 2,339 672
Interest 1,672 1,783
Depreciation 3,079 2,795
Amortization 85 84
-- --
8,349 6,095
----- -----
NET INCOME $9,381 $8,170
====== ======
NET INCOME PER SHARE - BASIC $0.46 $0.43
===== =====
NET INCOME PER SHARE - DILUTED $0.45 $0.42
===== =====
SHARES OUTSTANDING - BASIC 20,190,956 18,861,744
========== ==========
SHARES OUTSTANDING - DILUTED 20,649,802 19,237,001
========== ==========
(The accompanying notes, together with the Notes to the Consolidated
Financial Statemments included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, are an integral part of these financial
statements.)
3
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(Dollars in thousands, except per share data)
1998 1997
---- ----
REVENUES:
Master lease rental income $18,255 $20,628
Property operating income 14,969 4,378
Management fees 933 622
Interest and other income 906 1,478
--- -----
35,063 27,106
------ ------
EXPENSES:
General and administrative 2,499 1,474
Property operating expenses 4,733 1,279
Interest 3,455 4,168
Depreciation 6,220 5,496
Amortization 169 181
--- ---
17,076 12,598
------ ------
NET INCOME $17,987 $14,508
======= =======
NET INCOME PER SHARE - BASIC $0.91 $0.83
===== =====
NET INCOME PER SHARE - DILUTED $0.89 $0.81
===== =====
SHARES OUTSTANDING - BASIC 19,769,329 17,545,512
========== ==========
SHARES OUTSTANDING - DILUTED 20,232,182 17,920,397
========== ==========
(The accompanying notes, together with the Notes to the Consolidated
Financial Statemments included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, are an integral part of these financial
statements.)
4
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 1998 and 1997
(Unaudited)
(Dollars in thousands)
1998 1997
---- ----
Cash flows from operating activities:
Net income $17,987 $14,508
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 6,536 5,813
Deferred compensation 625 333
Increase (decrease) in other liabilities (349) 187
Increase in short-term investments 0 (18,000)
Increase in other assets (12,521) (1,024)
Decrease in accounts payable and accrued liabilities (51) (489)
--- ----
Net cash provided by operating activities 12,227 1,328
------ -----
Cash flows from investing activities:
Acquisition of real estate properties (19,623) (42,677)
------- -------
Cash flows from financing activities:
Borrowings on long-term notes payable 8,500 13,000
Repayments on long-term notes payable (19,800) (78,618)
Deferred financing and organization costs paid 0 (31)
Dividends paid (20,582) (16,394)
Proceeds from issuance of common stock 35,103 133,335
------ -------
Net cash provided by financing activities 3,221 51,292
----- ------
Increase (decrease) in cash and cash equivalents (4,175) 9,944
Cash and cash equivalents, beginning of period 5,325 1,354
----- -----
Cash and cash equivalents, end of period $1,150 $11,298
====== =======
(The accompanying notes, together with the Notes to the Consolidated
Financial Statemments included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, are an integral part of these financial
statements.)
5
Healthcare Realty Trust
Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 1998
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements 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 generally accepted accounting principles for complete financial
statements which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1997. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
The results of operations for the three-month and six-month periods ending
June 30, 1998 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998.
Certain reclassifications have been made for the period April 1, 1997
through June 30, 1997 and for the period January 1, 1997 through June 30, 1997
to conform to the 1998 presentation. These reclassifications had no
effect on the results of operations as previously reported.
Note 2. Organization
The Company invests in healthcare-related properties located throughout the
United States. The Company provides management, leasing and build-to-suit
development, and capital for the construction of new facilities as well as for
the acquisition of existing properties. As of June 30, 1998, the Company had
invested or committed to invest in 91 properties (the "Properties") located in
44 markets in 14 states, which are supported by 18 healthcare-related entities.
The Properties include:
6
Number of (in thousands)
Properties Investment
---------- ----------
Ancillary hospital facilities 42 $284,004
Medical office buildings 5 15,804
Physician clinics 17 46,838
Long-term care facilities 18 103,966
Comprehensive ambulatory care centers 4 43,175
Clinical laboratories 2 13,075
Ambulatory surgery centers 3 6,886
Corporate and third party developments 0 3,619
- -----
91 $517,367
== ========
Note 3. Funds From Operations
Funds from operations ("FFO"), as defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT") 1995 White Paper, means net
income (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation from real estate assets.
The Company considers FFO to be an informative measure of the performance
of an equity REIT and consistent with measures used by analysts to evaluate
equity REITs. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, 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 the Company's operating
performance or as an alternative to cash flow as a measure of liquidity. FFO for
the three months ended June 30, 1998 and 1997, was $12.3 million, or $0.61 per
basic share ($0.60 per diluted share) and $10.9 million, or $0.58 per basic
share ($0.57 per diluted share), respectively. FFO for the six months ended June
30, 1998 and 1997, was $23.9 million, or $1.21 per basic share ($1.18 per
diluted share) and $19.9 million, or $1.14 per basic share ($1.11 per diluted
share), respectively.
7
Funds from Operations
(Dollars in thousands, except per share data)
Three Months Ended June 30,
---------------------------
1998 1997
---- ----
Net Income (1) $9,381 $8,170
Non-recurring items 0 0
Gain or loss on dispositions 0 0
Straight line rents 0 0
ADD:
Depreciation
Real estate 2,935 2,703
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
2,935 2,703
----- -----
Amortization
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 2,935 2,703
----- -----
Funds From Operations $12,316 $10,873
======= =======
Shares Outstanding - Basic 20,190,956 18,861,744
========== ==========
Shares Outstanding - Diluted 20,649,802 19,237,001
========== ==========
Funds From Operations Per Share - Basic $0.61 $0.58
===== =====
Funds From Operations Per Share - Diluted $0.60 $0.57
===== =====
(1) Net income includes $313,370 in 1998 and $167,125 in 1997 of stock
based, long-term incentive compensation expense. This expense never
requires the disbursement of cash.
8
Funds from Operations
(Dollars in thousands, except per share data)
Six Months Ended June 30,
-------------------------
1998 1997
---- ----
Net Income (1) $17,987 $14,508
Non-recurring items (2) 0 112
Gain or loss on dispositions 0 0
Straight line rents 0 0
ADD:
Depreciation
Real estate 5,933 5,309
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
5,933 5,309
----- -----
Amortization
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 5,933 5,421
----- -----
Funds From Operations $23,920 $19,929
======= =======
Shares Outstanding - Basic 19,769,329 17,545,512
========== ==========
Shares Outstanding - Diluted 20,232,182 17,920,397
========== ==========
Funds From Operations Per Share - Basic $1.21 $1.14
===== =====
Funds From Operations Per Share - Diluted $1.18 $1.11
===== =====
(1) Net income includes $625,088 in 1998 and $333,484 in 1997 of stock
based, long-term incentive compensation expense. This expense never
requires the disbursement of cash.
(2) Represents a loss from a debt restructuring.
9
Note 4. Notes Payable
Notes payable at June 30, 1998 consisted of $90.0 million of unsecured
notes.
Unsecured Notes
On September 18, 1995, the Company privately placed $90.0 million of
unsecured notes (the "Unsecured Notes") with sixteen credit institutions. The
Unsecured Notes bear interest at 7.41%, payable semi-annually, and mature on
September 1, 2002. Beginning on September 1, 1998 and on each September 1
through 2002, the Company must repay $18.0 million of principal. The note
agreements pursuant to which the Unsecured Notes were purchased contain certain
representations, warranties and financial and other covenants customary in such
loan agreements.
Unsecured Credit Facility
On December 26, 1996, the Company's $75.0 million unsecured credit facility
(the "Unsecured Credit Facility") with four commercial banks was increased to
$100.0 million and extended to December 30, 1999. At the option of the Company,
borrowings bear interest at one of the banks' base rate or LIBOR plus 1.125%. In
addition, the Company pays a commitment fee of .225 of 1% per annum on the
unused portion of funds available for borrowings under the Unsecured Credit
Facility. The Unsecured Credit Facility contains certain representations,
warranties and financial and other covenants customary in such loan agreements.
At June 30, 1998, the Company had the maximum available borrowing capacity under
the Unsecured Credit Facility.
Serial and Term Bonds Payable
In conjunction with the acquisition of certain facilities in 1994 and 1996,
the Company assumed serial and term bonds payable, totaling $7.2 million. These
bonds payable were repaid or defeased during 1996 and 1997. The Company placed
funds in an irrevocable trust to defease $2.9 million of serial and term bonds,
which paid interest semi-annually at interest rates ranging from 6.9% to 8.1%.
The resulting loss from the defeasance was not material.
Note 5. Deferred Compensation
Effective January 27, 1998, 141,668 restricted shares, bringing the total
to 514,378, of the Company's common stock previously reserved were released to
certain officers of the Company upon the achievement of the Company's
performance based criteria in accordance with the terms of the First
Implementation of the Company's 1993 Employees Stock Incentive Plan. These
restricted shares require continued employment, generally for 12 years from the
date of release, prior to vesting.
10
Note 6. Commitments
As of June 30, 1998, the Company had a net investment of approximately
$20.5 million in two build-to-suit developments in progress and one expansion of
an existing facility, which have a total remaining funding commitment of
approximately $10.4 million.
As of June 30, 1998, the Company, in the normal course of business, had
entered into definitive contracts to acquire 16 acres of land and a medical
office building, both in Pennsylvania, totaling approximately $5.7 million.
Note 7. Merger
On June 8, 1998, the Company announced a definitive agreement to acquire
Capstone Capital Corporation ("Capstone"). Pursuant to this agreement, the
Company will acquire Capstone in a stock-for-stock merger in which the
stockholders of Capstone will receive a fixed ratio of .8518 share of the
Company's common stock and the holders of Capstone preferred stock will receive
one share of the Company's voting preferred stock in exchange for each share of
Capstone preferred stock. The completion of the merger depends on a number of
conditions being met including stockholder approval by Capstone and the Company
and the receipt of all consents, orders and approvals legally required for
consummation of the merger. Upon closing, the Company will own, or be committed
to acquire, 273 properties in 68 markets, leased to 64 healthcare providers.
Note 8. Stockholders' Equity
In February, 1998, the Company participated in two unit investment trust
offerings and sold a aggregate of 1,224,026 shares of its common stock. The
Company received an aggregate of $33.3 million in net proceeds from these
transactions. The proceeds were used to fully repay the outstanding borrowings
under the Unsecured Credit Facility, acquisitions, developments and for general
corporate purposes.
During April and May, 1998, the Company sold an aggregate of 49,953 shares
of common stock to a single institutional investor. The Company received an
aggregate of $1.4 million in net proceeds from these transactions. The proceeds
were used to repay outstanding borrowings under the Unsecured Credit Facility,
development and for general corporate purposes.
11
On July 1, 1998, warrants for 128,149 shares of common stock were
exercised. The company received $2.4 million in proceeds from the exercise. The
Company has no other warrants outstanding. The proceeds were used to fund
developments and for general corporate purposes.
Note 9. 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 for the three and six months
ended June 30, 1998 and 1997.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
Basic EPS
Average Shares Outstanding 20,717,337 19,243,357 20,295,710 17,927,125
Actual Restricted Stock Shares (526,381) (381,613) (526,381) (381,613)
-------- -------- -------- --------
Denominator 20,190,956 18,861,744 19,769,329 17,545,512
========== ========== ========== ==========
Numerator $9,380,711 $8,169,605 $17,986,583 $14,507,959
========== ========== =========== ===========
Per Share Amount $0.46 $0.43 $0.91 $0.83
===== ===== ===== =====
Diluted EPS
Denominator for Basic EPS 20,190,956 18,861,744 19,769,329 17,545,512
Restricted Shares-Treasury 402,743 308,359 397,887 300,699
Dilution for Employee Stock
Purchase Plan 10,235 24,828 17,210 29,192
Dilution for Warrants 45,868 42,070 47,756 44,994
------ ------ ------ ------
Denominator 20,649,802 19,237,001 20,232,182 17,920,397
========== ========== ========== ==========
Numerator $9,380,711 $8,169,605 $17,986,583 $14,507,959
========== ========== =========== ===========
Per Share Amount $0.45 $0.42 $0.89 $0.81
===== ===== ===== =====
Note 10. Changes in Accounting Principles
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
Statement 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in shareholders'
12
equity (except those arising from transactions with owners) and includes net
income, net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. Comprehensive income is the same
as net income for the Company.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement No. 131 is effective for annual periods beginning after December 15,
1997. Management of the Company is currently evaluating the applicability of
Statement No. 131, which may result in expanded segment disclosures.
The Emerging Issues Task Force ("EITF") has been considering the accounting
for internal acquisition costs for real estate properties. In the past, the
Company has capitalized certain internal costs incurred in identifying,
acquiring and developing real estate properties and has depreciated the
capitalized costs over the life of the related property. At its March 19, 1998
meeting, the EITF reached a consensus on Issue No. 97-11, "Accounting for
Internal Costs Relating to Real Estate Property Acquisition," that internal
preacquisition costs relating to the purchase of an operating property should be
expensed as incurred. At a previous meeting, the Task Force concluded that
internal preacquisition costs related to the purchase of nonoperating property
could be capitalized in specified circumstances. Expensing internal
preacquisition costs related to the purchase of operating properties will
accelerate the recognition of these costs, negatively impacting reported
earnings and funds from operations of the Company. The adoption of this EITF is
not expected to be material to the Company's financial position or its results
of operations.
13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operating Results
Second Quarter 1998 Compared to Second Quarter 1997
Net income for the quarter ended June 30, 1998 increased to $9.4 million,
or $0.46 per basic share ($0.45 per diluted share) from $8.2 million, or $0.43
per basic share ($0.42 per diluted share) for the same period in 1997, a 14.8%
increase in net income or 7.0% per basic share (7.1% per diluted share). Total
revenues for the quarter ended June 30, 1998 were $17.7 million compared to
$14.3 million for the quarter ended June 30, 1997, which is an increase of $3.5
million or 24.3%. The increase is primarily due to master lease rental income
and property operating income derived from approximately $57.1 million of
property acquisitions and properties reclassified from construction in progress
subsequent to June 30, 1997. While the number of managed properties rose from 87
properties at June 30, 1997 to 187 properties at June 30, 1998, management fees
do not increase proportionately due to the elimination in consolidation of
Company owned managed properties. Management fees increased $155,000 for the
quarter ending June 30, 1998, compared to the same period in 1997 substantially
due to the addition of third party management contracts in Florida and Texas.
Interest and other income for the quarter ended June 30, 1998 was $606,000
compared to $1.1 million for the quarter ended June 30, 1997. The Company
maintained an average cash balance of approximately $8.1 million during the
quarter ended June 30, 1998. In comparison, the Company completed a secondary
offering during the first quarter of 1997 and maintained an average cash and
short-term investment balance of approximately $42.0 million during the quarter
ended June 30, 1997 which resulted in significantly higher interest income.
Additionally, in 1998, the Company earned interest of $188,000 from a mortgage
note related to a development project and earned $115,000 from a note
receivable.
Total expenses for the quarter ended June 30, 1998 were $8.3 million
compared to $6.1 million for the quarter ended June 30, 1997, which is an
increase of $2.3 million or 37.0%. Depreciation expense increased $284,000 due
to the acquisition of additional properties and the completion of properties
under construction, discussed in the preceding paragraph. General and
administrative expenses increased $413,000 or 54.3% primarily due to an increase
in non-reimbursed employees associated with the increase in management
contracts. Property operating expenses increased $1.7 million for the quarter
ended June 30, 1998 compared to 1997 due to the conversion from master leased or
acquisition of 18 Company owned/controlled and managed properties subsequent to
June 30, 1997. Interest expense decreased $111,000 for the quarters ended June
30, 1998 and 1997 due to the repayment of a $730,000 security deposit during the
third quarter of 1997. Additionally, there was approximately $12.2 million more
in construction in progress throughout the quarter during 1998 compared to 1997
which resulted in more capitalized interest in 1998. There was no significant
variation in amortization expense.
14
Six Months ended June 30, 1998 Compared to Six Months ended June 30, 1997
Net income for the six months ended June 30, 1998 increased to $18.0
million or $0.91 per basic share ($0.89 per diluted share) from $14.5 million or
$0.83 per basic share ($0.81 per diluted share) for the same period in 1997, a
24.0% increase in net income or 9.6% per basic share (9.9% per diluted share).
Total revenues for the six months ended June 30, 1998 were $35.1 million
compared to $27.1 million for the six months ended June 30, 1997, which is an
increase of $8.0 million, or 29.4%. The increase is primarily due to master
lease rental income and property acquisitions and property operating income
derived from approximately $57.1 million of property acquisitions and properties
reclassified from construction in progress subsequent to June 30, 1997. For the
six months ended June 30, 1998 compared to the six months ended June 30, 1997
there was a $311,000 increase in property management fees substantially due to
the addition of third party management contracts in Florida and Texas. At June
30, 1998, the Company managed 187 properties compared to 87 properties at June
30, 1997. While the number of managed properties increased significantly,
management fees do not increase proportionately due to the elimination in
consolidation of Company owned managed properties. Interest and other income for
the six months ended June 30, 1998 was $906,000 compared to $1.5 million for the
six months ended June 30, 1997. During the first quarter of 1997, the Company
completed a secondary offering and maintained an average cash and short-term
investment balance of $33.2 million during the six months ending June 30, 1997
compared to $8.5 million during the six months ending June 30, 1998.
Additionally, in 1998, the Company earned interest of $305,000 from a mortgage
note related to a development project and earned $115,000 from a note
receivable.
Total expenses for the six months ended June 30, 1998 were $17.1 million
compared to $12.6 million for the six months ended June 30, 1997, which is an
increase of $4.5 million, or 35.5%. Depreciation expense increased $724,000 due
to the acquisition of additional properties and the completion of properties
under construction, discussed in the preceding paragraph. General and
administrative expenses increased $1.0 million, or 69.5%, primarily due to an
increase in non-reimbursed employees associated with the increase in management
contracts. Property operating expenses increased $3.5 million for the six months
ended June 30, 1998 compared to 1997 due to the conversion from master leased or
acquisition of 18 Company owned/controlled and managed properties subsequent to
June 30, 1997. Interest expense decreased from $4.2 million to $3.5 million for
the six months ended June 30, 1997 and 1998, respectively. During the six months
ended June 30, 1998, the Company had an average outstanding debt balance of
approximately $3.8 million under the Unsecured Credit Facility compared to an
average outstanding debt balance of $21.6 million for the six months ended June
30, 1997. In addition, bonds payable totaling $6.7 million were repaid or
defeased during the first quarter of 1997 and a $730,000 security deposit was
repaid during the third quarter of 1997. There was no significant variation in
amortization expense.
15
Liquidity and Capital Resources
As of June 30, 1998, the Company had invested, or committed to invest in,
91 properties (the "Properties") for an aggregate investment of $517.4 million
located in 44 markets in 14 states, which are supported by 18 healthcare-related
entities. The Company has financed its acquisitions to date through the sale or
exchange of common stock, long-term indebtedness, borrowings under its credit
facilities, and the assumption of bonds.
In February, 1998, the Company participated in two unit investment trust
offerings and sold a aggregate of 1,224,026 shares of its common stock. The
Company received an aggregate of $33.3 million in net proceeds from these
transactions. The proceeds were used to fully repay the outstanding borrowings
under the Unsecured Credit Facility, acquisitions, developments and for general
corporate purposes.
During April and May, 1998, the Company sold an aggregate of 49,953 shares
of its common stock to a single institutional investor. The Company received an
aggregate of $1.4 million in net proceeds from these transactions. The proceeds
were used to repay outstanding borrowings under the Unsecured Credit Facility,
fund developments and for general corporate purposes.
The Unsecured Notes bear interest at 7.41%, payable semiannually, and
mature on September 1, 2002. Beginning on September 1, 1998 and on each
September 1 through 2002, the Company must repay $18.0 million of principal
under the Unsecured Notes. The Company intends to repay the first installment
due September 1 from cash provided by Company operations and from proceeds
borrowed under its Unsecured Credit Facility.
At June 30, 1998, the Company had the maximum borrowing capacity available
under the Unsecured Credit Facility.
At June 30, 1998, the Company had stockholders' equity of $409.6 million.
The debt to total capitalization ratio was approximately 0.18 to 1.00 at June
30, 1998.
During May, 1998, the Company loaned $6.8 million to a healthcare real
estate entity secured by a pledge of all of the equity interests of The Atrium
of San Jose, LLC, the owner of an independent living facility in San Jose,
California. The cash to fund the note was provided by Company operations and
proceeds from the issuance of stock.
During the quarter ended June 30, 1998, the Company funded a net of
approximately $5.5 million for construction in progress and capital additions.
The sources of these funds were cash provided by Company operations or proceeds
borrowed under its Unsecured Credit Facility.
On May 18, 1998, the Company paid a dividend of $0.515 per share to the
holders of its common stock as of the close of business on May 6, 1998. This
dividend related to the period from January 31, 1998 through March 31, 1998. In
July 1998, the Company announced payment of a dividend of $0.52 per share to the
holders of common shares on August 6, 1998. The dividend will be payable on
August 17, 1998. The dividend relates to the period April 1, 1998 through June
30, 1998.
16
As of June 30, 1998, the Company had a net investment of $20.5 million in
two build-to-suit developments in progress and one expansion of an existing
facility, which have a total remaining funding commitment of $10.4 million. As
of June 30, 1998, the Company, in the normal course of business, had entered
into definitive contracts to acquire 16 acres of land and a medical office
building, both in Pennsylvania, totaling approximately $5.7 million. These
commitments will be funded from the sale or exchange of common stock, Company
operations or proceeds borrowed under the Unsecured Credit Facility.
On July 1, 1998, warrants for 128,149 shares of common stock were
exercised. The Company received $2.4 million in proceeds from the exercise. The
Company has no other warrants outstanding. The proceeds were used to fund
development and for general corporate purposes.
FFO increased to $12.3 million, or $0.61 per basic share ($0.60 per diluted
share) for the quarter ended June 30, 1998 compared to $10.9 million, or $0.58
per basic share ($0.57 per diluted share) for the same period in 1997. Although
FFO is not based upon generally accepted accounting principles, the Company
considers it to be an informative measure of the performance of an equity REIT
and consistent with measures used by analysts to evaluate equity REITs.
As part of the merger (see Note 7, the Merger), the Company will assume
approximately $3.8 million aggregate principal amount of 10.50% Convertible
Subordinated Debentures of Capstone. The 10.50% Debentures mature on April 1,
2002, unless redeemed earlier by the Company or converted by the holders.
Payments of interest to the holders of the Debentures are required each April 1
and October 1, commencing October 1, 1995. The Debentures will be convertible
into shares of common stock of the Company at the option of the holder at any
time prior to redemption or stated maturity, at a conversion prices of $16.125
per share. The 10.50% Debentures will be subordinated to all existing and future
senior indebtedness of the Company and subordinated to all existing and future
liabilities and obligations of subsidiaries and partnerships of the Company. The
10.50% Debentures will be redeemable, at the Company's option, in whole or from
time to time in part, at any time from April 5, 2000, through March 31, 2002, at
redemption prices ranging from 101.5% to 103.0%, plus accrued and unpaid
interest to and including the redemption date.
In addition, as part of the merger (see Note 7, the Merger), the Company
will assume approximately $74.7 million aggregate principal amount of 6.55%
Convertible Subordinated Debentures of Capstone. The 6.55% Debentures are due on
March 14, 2002 and were issued at a issued at a price of $903 per $1,000
principal amount at maturity, which represents an original issue discount of
9.7% from the principal amount thereof which is payable at maturity.
17
Interest on the 6.55% Debentures is payable March 14 and September 14 in
each year, and commenced on September 14, 1997. Such rate of interest and
accrual of original issue discount represents a yield to maturity of 9.00% per
annum (computed on a semiannual bond equivalent basis). The 6.55% Debentures
will be convertible into common stock of the Company at any time before maturity
at an initial conversion ratio of 39.4754 shares of common stock for each $1,000
principal amount of 6.55% Debentures, subject to adjustment in certain events.
As of December 31, 1997 there had been no conversions of the 6.55% Debentures.
Both the Company and Capstone (see Note 7, the Merger) have outstanding
credit facilities from commercial banks led by NationsBank. As of June 30, 1998,
Capstone had approximately $174.6 million outstanding under its unsecured credit
facility while the Company had no outstanding balance under its unsecured credit
facility. As part of the merger, the Company will assume the outstanding
principal amount of Capstone's unsecured credit facility. The Company
anticipates combining both credit facilities into one new credit facility.
NationsBank has indicated an interest in discussing the transaction and the
Company has supplied NationsBank with certain requested information. No terms
have been agreed to. However, while the Company can give no assurances, it
believes it will obtain a combined credit facility on economically reasonable
terms.
The Company will fund the debt service on the 10.50% Convertible
Subordinated Debentures, the 6.55% Convertible Subordinated Debentures and on
the combined credit facilities from the Company's revenue from operations, which
will include additional revenues attributable to the operations of Capstone
following the merger.
As of June 30, 1998 the Company can issue an aggregate of approximately
$108.0 million of securities remaining under currently effective registration
statements. The Company intends to offer securities under such registration
statements from time to time to finance future acquisitions and build-to-suit
developments as they occur. 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 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.
Under the terms of the leases and other financial support agreements
relating to the properties, tenants or healthcare providers are generally
responsible for operating expenses and taxes relating to the properties. As a
result of these arrangements, the Company does not believe that it will be
responsible for any material increase in expenses in connection with the
properties during the respective terms of the agreements. The Company
anticipates entering into similar arrangements with respect to additional
properties it acquires or develops. After the term of the lease or financial
support agreement, 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 cash from
operations and, in the case of major expenditures, possibly by borrowings.
18
To the extent that unanticipated expenditures or significant borrowings are
required, the Company's cash available for distribution and liquidity may be
adversely affected.
Management believes that inflation should not have a materially adverse
effect on the Company. The majority of the leases contain some provision for
additional rent payments based on increases in various economic measures.
There has been a recent reduction in the market capitalization of REIT
stocks generally. The Company's market valuation has been, in part, affected by
this general trend; however, management believes that the quality of its
investments in healthcare real estate, its ability to provide third party
services to the healthcare industry and its conservative investment criteria
differentiate it from the majority of REITs. The Company believes that the
capital markets should recognize those differences. Nonetheless, it is possible
that this trend will have a negative impact on the Company's access to capital
and the amount of funds that the Company will have available for investment.
While the Company anticipates that it will be able to access debt and equity
markets on a basis that will enable it to make quality real estate investments,
there is no assurance that it will be able to do so. Inability to access capital
markets would limit the Company's ability to achieve growth in its asset base
and its financial return
The Company plans to continue to make additional investments in 1998, pay
its quarterly dividends, with increases consistent with its current practices,
and meet all other liquidity needs. The Company provides no assurance, however,
that it will be able to obtain additional financing or capital on terms
acceptable to the Company in sufficient amounts to meet its liquidity needs.
This June 30, 1998 Form 10-Q of the Company includes forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties which would cause actual results to differ
materially from historical results or those anticipated. For a more detailed
discussion of these factors, see Item 1 of the Company's Form 10-K for the
fiscal year ended December 31, 1997.
Some of the Company's older computer programs were written using two digits
rather that four digits to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculation causing disruptions of operations, including, among other things,
a temporary inability to process transactions, send invoices, or engage in
similar normal business activities. The Company has completed an assessment and
will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The bulk of the software employed by the Company is commercially
developed applications which are year 2000 compliant. Replacement software
represents upgrades that would have been undertaken by the Company in the
ordinary course of events; and, all of the Company's software is expected to be
year 2000 compliant not later than December 31, 1998. The cost of becoming year
2000 compliant is not expected to be material to the Company.
19
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with year 2000
issues that the Company does not control. There can be no assurance that the
fiscal intermediaries with which the Company transacts business and which are
responsible for payment to the Company, as well as other payors, will not
experience significant problems with year 2000 compliance. The failure of third
parties to remedy year 2000 problems could have an adverse effect on the
Company's business, financial condition and results of operations.
20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on May 11, 1998. At
this meeting, the following matters were voted upon by the Company's
shareholders:
(a) Election of Class 2 Directors
-----------------------------
Marliese E. Mooney, Edwin B. Morris, III and John Knox Singleton were
elected to serve as Class 2 directors of the Company until the annual meeting of
shareholders in 2001 or until their respective successors are elected and
qualified. The vote was a follows:
Votes Cast Votes Cast Against Abstentions/
In Favor or Withheld Non Votes
-------- ----------- ---------
Marliese E. Mooney 17,477,313 503,743 0
Edwin B. Morris, III 17,479,898 501,157 0
John Knox Singleton 17,486,521 494,534 0
The following directors continued in office following the meeting:
Name Term Expires
---- ------------
David R. Emery 1999
Thompson S. Dent 1999
Batey M. Gresham, Jr. 1999
Charles Raymond Fernandez, M.D. 2000
Errol L. Biggs, Ph.D. 2000
(b) Selection of Auditors
---------------------
The shareholders of the Company ratified the appointment of Ernst & Young,
LLP as the Company's independent auditors for the fiscal year ended December 31,
1998, by the following vote:
Votes Cast Votes Cast Against Abstentions/
In Favor or Withheld Non Votes
-------- ----------- ---------
17,887,743 40,757 52,556
21
Item 6. Reports on Form 8-K
(a) Reports on Form 8-K
-------------------
The Company filed the following reports on Form 8-K during the second
quarter of 1998.
Date of Earliest
Event Reported Date Filed Items Reported
-------------- ---------- --------------
June 8, 1998 June 10, 1998 5. Other Events
7. Financial Statements
and Exhibits
22
SIGNATURES
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, Finance
and Chief Financial Officer
Date: August 14, 1998