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, 1999
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 April 30, 1999, 39,811,138 shares of the Registrant's Common Stock
and 3,000,000 shares of the Registrant's Preferred Stock, $.01 par value, were
outstanding.
HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
March 31, 1999
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 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Part II - Other Information
Item 6. Reports on Form 8-K 21
Signature 22
Item 1.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited) (1)
Mar. 31, 1999 Dec. 31, 1998
------------- -------------
ASSETS
Real estate properties:
Land $ 143,965 $ 140,617
Buildings and improvements 1,203,890 1,169,941
Personal property 5,003 4,825
Construction in progress 40,045 72,172
------ ------
1,392,903 1,387,555
Less accumulated depreciation (59,164) (50,116)
------- -------
Total real estate properties, net 1,333,739 1,337,439
Cash and cash equivalents 14,298 14,411
Mortgage notes receivable 239,592 228,542
Other assets, net 39,351 35,031
------ ------
Total assets $ 1,626,980 $ 1,615,423
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable 578,656 559,924
Accounts payable and accrued liabilities 20,989 25,824
Other liabilities 11,029 11,971
------ ------
Total liabilities 610,674 597,719
------- -------
Commitments 0 0
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding, 1999 and 1998 - 3,000,000 30 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding, 1999 - 39,809,818; 1998 - 39,792,775 398 398
Additional paid-in capital 1,049,355 1,049,039
Deferred compensation (10,366) (10,662)
Cumulative net income 150,088 129,346
Cumulative dividends (173,199) (150,447)
-------- --------
Total stockholders' equity 1,016,306 1,017,704
--------- ---------
Total liabilities and stockholders' equity $ 1,626,980 $ 1,615,423
=========== ===========
(1) The balance sheet at Dec. 31, 1998 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
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-1-
Healthcare Realty Trust Incorporated
Condensed Consolidated Statement of Income
For The Three Months Ended March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
1999 1998
---- ----
REVENUES:
Master lease rental income $ 23,097 $ 9,755
Property operating income 13,505 6,820
Straight line rent 1,568 0
Mortgage interest income 5,835 117
Management fees 629 458
Interest and other income 2,263 183
----- ---
46,897 17,333
EXPENSES:
General and administrative 1,826 1,325
Property operating expenses 4,873 2,394
Interest 9,239 1,783
Depreciation 10,096 3,142
Amortization 121 83
--- --
26,155 8,727
------ -----
NET INCOME $ 20,742 $ 8,606
======== =======
NET INCOME PER SHARE - BASIC $ 0.49 $ 0.44
====== ======
NET INCOME PER SHARE - DILUTED $ 0.48 $ 0.43
====== ======
SHARES OUTSTANDING - BASIC 39,270,747 19,344,067
========== ==========
SHARES OUTSTANDING - DILUTED 39,777,543 19,821,162
========== ==========
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-2-
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 1999 and 1998
(Unaudited)
(Dollars in thousands)
1999 1998
---- ----
Cash flows from operating activities:
Net income $ 20,742 $ 8,606
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 10,941 3,303
Deferred compensation 296 312
Decrease in other liabilities (942) (428)
Increase in other assets (3,237) (896)
Decrease in accounts payable and accrued liabilities (4,835) (1,466)
Increase in straight line rent (1,568) 0
Gain on sale of real estate (1,749) 0
------ -
Net cash provided by operating activities 19,648 9,431
------ -----
Cash flows from investing activities:
Acquisition and development of real estate properties (12,737) (14,089)
Acquisition and development of mortgages (11,285) 0
Proceeds from sale of real estate 8,090 0
----- -
Net cash used in investing activities (15,932) (14,089)
------- -------
Cash flows from financing activities:
Borrowings on notes and bonds payable 27,000 8,500
Repayments on notes and bonds payable (8,372) (19,800)
Dividends paid (22,752) (9,910)
Proceeds from issuance of common stock 295 33,564
--- ------
Net cash provided (used) by financing activities (3,829) 12,354
------ ------
Increase (decrease) in cash and cash equivalents (113) 7,696
Cash and cash equivalents, beginning of period 14,411 5,325
------ -----
Cash and cash equivalents, end of period $ 14,298 $ 13,021
======== ========
(The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, are an integral part of these financial statements.)
-3-
Healthcare Realty Trust
Incorporated
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(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, 1998. 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, 1998.
The results of operations for the three-month period ending March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
Certain reclassifications have been made for the period January 1, 1998
through March 31, 1998 to conform to the 1999 presentation. These
reclassifications had no effect on the results of operations as previously
reported.
Note 2. Organization
The Company invests in healthcare-related properties and mortgages 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 March 31, 1999, the
Company had invested or committed to invest in 286 properties (the "Properties")
located in 35 states, which are supported by 69 healthcare-related entities. The
Properties include:
-4-
Number of (in thousands)
Properties Investment
---------- ----------
Ancillary hospital facilities 62 $501,713
Medical office buildings 6 30,230
Physician clinics 35 155,735
Skilled Nursing Facilities 55 243,077
Comprehensive ambulatory care centers 16 43,506
Assisted Living Facilities 85 295,303
Ambulatory surgery centers 9 41,452
Inpatient rehabilitation facilities 10 154,619
Other 8 163,423
Corporate property 0 3,437
- -----
286 $1,632,495
=== ==========
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 March 31, 1999 and 1998, was $25.7 million, or $0.66 per
basic share ($0.65 per diluted share) and $11.6 million, or $0.60 per basic
share ($0.59 per diluted share), respectively.
-5-
Funds from Operations
(Dollars in thousands, except per share data)
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
Net Income (1) $20,742 $8,606
Non-recurring items 0 0
Gain or loss on dispositions (2) (1,749) 0
Straight line rents (1,568) 0
Preferred stock dividend (1,662) 0
ADD:
Depreciation
Real estate 9,967 2,998
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
9,967 2,998
----- -----
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 4,988 2,998
----- -----
Funds From Operations - Basic $ 25,730 $ 11,604
Convertible Subordinated Debenture Interest 0 0
- -
Funds from Operations - Diluted $ 25,730 $ 11,604
========= =========
Shares Outstanding - Basic 39,270,747 19,344,067
========== ==========
Shares Outstanding - Diluted 39,777,543 19,821,162
========== ==========
Funds From Operations Per Share - Basic $ 0.66 $ 0.60
======== ========
Funds From Operations Per Share - Diluted $ 0.65 $ 0.59
======== ========
(1) Net income includes $296,196 in 1999 and $311,718 in 1998 of stock
based, long-term incentive compensation expense. This expense
never requires the disbursement of cash.
(2) Represents a gain from the sale of an ancillary hospital facility
in Savannah, Georgia.
-6-
Note 4. Capstone Merger
On June 8, 1998, the Company announced a definitive agreement to acquire
Capstone Capital Corporation ("Capstone"). The merger was consummated on October
15, 1998. Pursuant to the merger agreement, the Company acquired Capstone in a
stock-for-stock merger in which the stockholders of Capstone received a fixed
ratio of .8518 shares of the Company's common stock and the holders of Capstone
preferred stock received one share of the Company's voting preferred stock in
exchange for each share of Capstone preferred stock. The Company issued
18,906,909 shares of common stock and 3,000,000 shares of preferred stock. The
transaction was accounted for as a purchase and resulted in no goodwill.
The purchase price is summarized as follows (in thousands):
Common stock $ 532,554
Preferred stock 72,052
Cash and cash equivalents 8,330
Liabilities assumed 424,897
-------
Total Purchase Price $1,037,833
==========
The assets acquired in the Capstone merger are summarized as follows
(in thousands):
Real estate properties $ 804,178
Mortgage notes receivable 211,590
Cash and cash equivalents 13,767
Other assets 8,298
-----
Total Assets Acquired $1,037,833
==========
Note 5. Notes and Bonds Payable
Notes and bonds payable at March 31, 1999 consisted of the following
(in thousands):
Unsecured credit facility $198,00
Term loan facility 171,100
Unsecured notes 72,000
6.55% Convertible subordinated debentures, net 73,369
10.5% Convertible subordinated debentures, net 3,777
Mortgage Notes 60,410
------
$578,656
========
-7-
Unsecured Credit Facility
On October 15, 1998, concurrent with its merger with Capstone, the Company
repaid the outstanding balances under both Capstone's and the Company's own
unsecured credit facilities and entered into a $265.0 million unsecured credit
facility (the "Unsecured Credit Facility") with ten commercial banks. The
Unsecured Credit Facility bears interest at LIBOR rates plus 1.05%, payable
quarterly, and matures on October 15, 2001. In addition, the Company will pay,
quarterly, a commitment fee of 0.225 of 1% on the unused portion of funds
available for borrowings. The Unsecured Credit Facility contains certain
representations, warranties, and financial and other covenants customary in such
loan agreements. At March 31, 1999, the Company had available borrowing capacity
of $67.0 million under the Unsecured Credit Facility.
Term Loan Facility
On October 15, 1998, concurrent with the Capstone merger, the Company
entered into a $200.0 million unsecured term loan (the "Term Loan Facility")
with NationsBank. The Term Loan Facility bears interest at LIBOR plus 1.05%,
payable quarterly, and matures on October 16, 1999. The Term Loan Facility
contains certain representations, warranties and financial and other covenants
customary in such loan agreements, as well as restrictions on dividend payments
if minimum tangible capital requirements are not met. At March 31, 1999, the
Company had no additional available borrowing capacity under the Term Loan
facility.
Unsecured Notes
On September 18, 1995 the Company privately placed $90.0 million of
unsecured notes (the "Unsecured Notes") with 16 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 the 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.
Convertible Subordinated Debentures
As part of the Capstone merger, the Company assumed and recorded at fair
value $74.7 million aggregate face amount of 6.55% Convertible Subordinated
Debentures (the "6.55% Debentures") of Capstone. At March 31, 1999, the Company
had approximately $73.4 million aggregate principal amount of 6.55% Debentures
outstanding with a face amount of $74.7 million and unaccreted discount of $1.3
million. Such rate of interest and accretion of discount represents a yield to
maturity of 7.5% per annum (computed on a semiannual bond equivalent basis). The
6.55% Debentures are due on March 14, 2002, unless redeemed earlier by the
Company or converted by the holder, and are callable on March 16, 2000. Interest
on the 6.55% Debentures is payable on March 14 and September 14 in each year.
The 6.55% Debentures are convertible into shares of common stock of the Company
-8-
at the option of the holder at any time prior to redemption or stated maturity,
at a conversion rate of 33.6251 shares per $1 thousand bond.
As part of the Capstone merger, the Company assumed and recorded at fair
value $3.75 million aggregate face amount of 10.5% Convertible Subordinated
Debentures (the "10.5% Debentures") of Capstone. At March 31, 1999, the Company
had approximately $3.8 million aggregate principal amount of 10.5% Debentures
outstanding with a face amount of $3.6 million and unamortized premium of $0.2
million. Such rate of interest and amortization of premium represents a yield to
maturity of 7.5% per annum (computed on a semiannual bond equivalent basis). The
10.5% Debentures are due on April 1, 2002, unless redeemed earlier by the
Company or converted by the holder, and are callable on April 5, 2000. Interest
on the 10.5% Debentures is payable on April 1 and October 1 in each year. The
10.5% Debentures are 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 rate of 52.8248 shares per $1 thousand bond.
Mortgage Notes
As part of the Capstone merger, the Company assumed non-recourse mortgage
notes payable, and the related collateral, as follows (Dollars in millions):
Book Value
Of Collateral at Balance at
Original Interest March 31, March 31,
Mortgagor Balance Rate Collateral 1999 1999
--------- ------- ---- ---------- ---- ----
Life Insurance Co. $ 23.3 8.500% Ancillary hospital facility $ 40.3 $ 22.8
Life Insurance Co. 4.7 7.625% Ancillary hospital facility 10.1 4.5
Life Insurance Co. 17.1 8.125% Two ambulatory surgery centers 34.8 16.7
& one ancillary hospital facility
Bank 17.0 8.250% Six skilled nursing facilities 29.4 16.4
---- ----- ---- ----
$ 62.1 $ 114.6 $ 60.4
====== ========== ========
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 in September 2004. The $17.0 million note bears interest
at 50 basis points in excess of the prime rate, and is payable in monthly
installments of principal and interest based on a 25 year amortization with a
balloon payment of the unpaid balance in June 2000.
-9-
Note 6. Commitments
As of March 31, 1999, the Company had a net investment of approximately
$40.0 million in six build-to-suit developments in progress and one expansion of
an existing facility, which have a total remaining funding commitment of
approximately $22.4 million. The Company also has 19 mortgages under development
at March 31, 1999, which have a total remaining funding commitment of
approximately $19.4 million. Also, as part of the Capstone merger, the Company
assumed funding obligations of future commitments. The remaining balance of
these commitments at March 31, 1999 was approximately $46.7 million.
As part of the Capstone merger, agreements were entered into with three
individuals affiliated with Capstone that restrict competitive practices and
which the Company believes will protect and enhance the value of the real estate
properties acquired from Capstone. These agreements provide for the issuance of
150,000 shares per year of common stock of the Company to the individuals on
October 15 of the years 1999, 2000, 2001 and 2002, provided all terms of the
agreements are met.
Note 7. Asset Disposition
During the first quarter of 1999, the Company sold a 90,000 square foot
ancillary hospital facility in Savannah, Georgia for $8.1 million in net
proceeds. These proceeds were applied to the partial repayment of the Term Loan
Facility.
-10-
Note 8. 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 months ended March
31, 1999 and 1998.
Three Months Ended March 31,
1999 1998
---- ----
Basic EPS
Average Shares Outstanding 39,800,690 19,869,398
Actual Restricted Stock Shares (529,943) (525,331)
-------- --------
Denominator - Basic 39,270,747 19,344,067
========== ==========
Net Income $20,742,237 $ 8,605,872
Preferred Stock Dividend (1,661,818) 0
---------- -
Numerator - Basic $19,080,419 $ 8,605,872
=========== ===========
Per Share Amount $ 0.49 $ 0.44
================ ===============
Diluted EPS
Average Shares Outstanding 39,800,690 19,869,398
Actual Restricted Stock Shares (529,943) (525,331)
Restricted Shares - Treasury 498,822 402,843
Dilution for Convertible Debentures 0 0
Dilution for Employee Stock Purchase Plan 7,974 24,556
Dilution for Warrants 0 49,696
- ------
Denominator - Diluted 39,777,543 19,821,162
========== ==========
Numerator - Basic $19,080,419 $8,605,872
Convertible Subordinated Debenture Interest 0 0
- -
Numerator - Diluted $19,080,419 $8,605,872
=========== ==========
Per Share Amount $ 0.48 $ 0.43
================ ==============
-11-
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operating Results
First Quarter 1999 Compared to First Quarter 1998
The results of operations of the Company were significantly impacted by the
Capstone merger. For the three months ended March 31, 1999, net income increased
$10.6 million due to the Capstone merger. As a result of the Capstone
transaction, the Company acquired 111 properties and 75 mortgages for a fair
value of $804.2 million and $211.6 million, respectively. These investments
resulted in additional master lease, straight line rent and property operating
income, net of operating expenses, and mortgage interest income for the three
months ended March 31, 1999 of $23.3 million, as well as additional interest and
other income of $0.3 million, additional interest expense of $4.3 million under
the unsecured credit facility and term loan facility and depreciation and
amortization expense of $6.5 million. The Company also assumed Capstone's 6.55%
and 10.5% convertible subordinated debentures and notes payable, with interest
rates ranging from 7.625% to 8.50% at March 31, 1999, which resulted in interest
expense of $2.2 million for the three months ended March 31, 1999.
Net income for the quarter ended March 31, 1999 was $20.7 million, ($0.49
per basic share of common stock and $0.48 per diluted share), on total revenues
of $46.9 million compared to net income of $8.6 million, ($0.44 per basic share
of common stock and $0.43 per diluted share) on total revenues of $17.3 million,
for the same period in 1998. Funds from operations ("FFO") was $25.7 million, or
$0.66 per basic share ($0.65 per diluted share), for the quarter ended March 31,
1999 compared to $11.6 million, or $0.60 per basic share ($0.59 per diluted
share), in 1998.
Total revenues for the three months ended March 31, 1999, compared to the
three months ended March 31, 1998, increased $29.6 million, or 170.6%. Excluding
the impact of the Capstone merger, which is discussed above, total revenues for
the quarter ended March 31, 1999, compared to the same period in 1998, increased
$4.2 million, or 24.4%. This increase is primarily due to increases in property
operating income and interest and other income. Excluding the effect of the
Capstone merger, property operating income increased $2.3 million, or 34.2%.
Since the first quarter of 1998, five previously-owned buildings were brought
under the Company's property management services. The Company acquired one
additional building, also under property management, one property under
construction was completed and began operations, and four buildings were
acquired under master lease arrangements. In February 1999, the Company sold an
ancillary hospital facility in Savannah, Georgia for net proceeds of $8.1
million, resulting in a $1.7 million gain, reflected in interest and other
income. Certain leases acquired from Capstone contain escalating rental rates
over the life of the leases, however, rental income is recognized as earned on a
straight-line basis over the life of the lease. Therefore, $1.6 million of
-12-
accrued straight-line rental income is included in net income. Mortgage interest
income increased $5.8 million for the three months ended March 31, 1999 compared
to 1998 due mainly to the acquisition of 75 mortgages in the Capstone merger.
Total expenses for the three months ended March 31, 1999 were $26.2 million
compared to $8.7 million for the three months ended March 31, 1998, an increase
of $17.4 million, or 199.7%. Excluding the effect of the Capstone merger, total
expenses increased $2.7 million, or 30.7% for the three months ended March 31,
1999, compared to 1998. Interest expenses increased $7.5 million, or 418.2% for
the first quarter ended 1999 compared to 1998. Excluding the effect of the
Capstone merger, interest expense increased $1.0 million, or 54% for the three
months ended March 31, 1999 compared to 1998. During the quarter ended March 31,
1999, the Company had an average outstanding debt balance of approximately $84.6
million under the unsecured credit facility (excluding the effect of the
Capstone merger) compared to $5.7 million in 1998. Additionally, there was
approximately $8.1 million less in construction in progress throughout the
quarter during 1999 compared to 1998 which resulted in less capitalized interest
in 1999. General and administrative expenses increased $1.8 million, or 37.8%
for the quarter ended March 31, 1999, compared to the same period in 1998. This
increase is primarily due to the increased number of employees for property
management, development, and other service-based activities. Property operating
expenses increased $2.5 million, or 103.6% in 1999 compared to 1998. Excluding
the properties acquired with the Capstone merger, property-operating expenses
increased $0.7 million, or 30.9% for the same reasons property operating income
increased, as discussed above. Depreciation expense increased $7.0 million, or
221.3% for the three months ended March 31, 1999 compared to 1998. Excluding the
effect of the Capstone merger, depreciation expense increased $0.5 million, or
14.9% due to the acquisition of five properties and the completion of one
property under construction since the first quarter of 1998.
-13-
Liquidity and Capital Resources
On October 15, 1998, at the time of the Capstone merger, the Company repaid
the outstanding balances under both Capstone's and the Company's own unsecured
credit facilities and entered into a $265.0 million unsecured credit facility
(the "Unsecured Credit Facility") with ten commercial banks. The Unsecured
Credit Facility bears interest at LIBOR plus 1.05%, payable quarterly, and
matures on October 15, 2001. In addition, the Company will pay, quarterly, a
commitment fee of 0.225 of 1% on the unused portion of funds available for
borrowings. At March 31, 1999, the Company had available borrowing capacity of
$67.0 million under the Unsecured Credit Facility.
At the time of the Capstone merger, the Company entered into a $200.0
million unsecured term loan (the "Term Loan Facility") with NationsBank. The
Term Loan Facility bears interest at LIBOR plus 1.05%, payable quarterly, and
matures on October 16, 1999. Since the Capstone merger, the Company has received
net proceeds from the sale of assets and from mortgage prepayments of
approximately $42.5 million and reduced the unpaid balance of the Term Loan
Facility as of April 30, 1999 to $157.5 million. The Company expects that the
Term Loan Facility will be repaid by internally generated cash flow, proceeds
from the sale of additional assets, and proceeds from additional prepayments of
mortgage notes receivable. If such sources of funds are insufficient to repay
the Term Loan Facility in full, any unpaid balance is expected to be refinanced.
In 1995, the Company privately placed $90.0 million of unsecured notes (the
"Unsecured Notes") bearing interest at 7.41%, payable semi-annually ($5.0
million for 1999), and mature on September 1, 2002. The Company must repay $18.0
million of principle annually. At March 31, 1999, $72.0 million was outstanding
under the Unsecured Notes.
The Company assumed in the Capstone merger 10.5% Convertible Subordinated
Debentures and 6.55% Convertible Subordinated Debentures having an aggregate
principal balance of $78.3 million. In 1999 the Company will pay $5.3 million of
interest on these subordinated debentures.
As of March 31, 1999 the Company can issue an aggregate of approximately
$106.4 million of securities remaining under currently effective registration
statements. Due to the current market price of the Company's stock, the Company
does not presently plan to offer securities under such registration statements.
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.
-14-
In February 1999, the Company sold an ancillary hospital facility in
Savannah, Georgia for net proceeds of $8.1 million. The proceeds were applied to
the partial payment of the Term Loan Facility.
In April 1999, the Company sold a comprehensive ambulatory care center in
Miami, Florida for $11.3 million in net proceeds and one mortgage note
receivable was repaid for $2.3 million in net proceeds. The gain resulting from
this sale will be recognized in the second quarter of 1999. These proceeds were
applied to the partial payment of the Term Loan Facility.
As of March 31, 1999, the Company had an investment of approximately $40.0
million in six build-to-suit developments in progress and one expansion of an
existing facility, which have a total remaining funding commitment of
approximately $22.4 million. The Company also had 19 mortgages under development
at March 31, 1999, which have a total remaining funding commitment of
approximately $19.4 million. Also, as part of the Capstone merger, the Company
assumed funding obligations of future commitments. The remaining balance of
these commitments at March 31, 1999 is approximately $46.7 million. The Company
intends to fund these commitments with funds available from operations and
proceeds from the Unsecured Credit Facility.
At March 31, 1999, the Company had stockholders' equity in excess of $1.0
billion. The debt to total capitalization ratio was approximately .363 to 1 at
March 31, 1999.
On January 26, 1999, the Company declared an increase in its quarterly
common stock dividend from $0.525 per share ($2.10 annualized) to $0.53 per
share ($2.12 annualized) payable to stockholders of record on February 5, 1999.
This dividend was paid on February 16, 1999. In April 1999, the Company
announced payment of a common stock dividend of $0.535 per share to holders of
record of common shares on May 6, 1999. This dividend will be payable on May 17,
1999 and relates to the period January 1, 1999 through March 31, 1999. The
Company presently plans to continue to pay its quarterly common stock dividends,
with increases consistent with its current practice. In the event that the
Company cannot make additional investments in 1999 because of an inability to
obtain new capital by issuing equity and debt securities, the Company will
continue to be able to pay its common stock dividends in a manner consistent
with its current practice. Should access to new capital not be available, the
Company is uncertain of its ability to increase its quarterly common stock
dividends.
During 1999, the Company will pay quarterly dividends on its 8 7/8% Series
A Voting Cumulative Preferred Stock in the annualized amount of $2.22 per share.
Under the terms of the leases and other financial support agreements
relating to most of the properties, tenants or healthcare providers are
generally responsible for operating expenses and taxes relating to the
properties. As a result of these arrangements, with limited exceptions not
material to the performance of the Company, the Company does not believe that it
will be responsible for any major expenses in connection with the properties
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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. 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 1999, paying its quarterly dividends (with
increases consistent with its current practices) and funding the debt service on
the 10.50% Convertible Subordinated Debentures, the 6.55% Convertible
Subordinated Debentures, the Unsecured Credit Facility, the Term Loan Facility,
and the Unsecured Notes from its operating revenues, the proceeds of mortgage
loan repayments, sales of real estate investments and mortgage notes receivable,
and debt market financings. The Company believes that its liquidity and sources
of capital are adequate to satisfy its cash requirements. The Company, however,
cannot be certain that these sources of funds will be available at a time and
upon terms acceptable to the Company in sufficient amounts to meet its liquidity
needs.
Impact of Inflation
Inflation has not significantly affected the earnings of the Company
because of the moderate inflation rate 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 the gross revenue the Company is to receive
under the terms of the leases and financial support arrangements. Leases and
financial support arrangements vary in the remaining terms of obligations from
three to 20 years, further reducing the risk of any adverse effects of inflation
to the Company. The Unsecured Credit Facility bears interest at a variable rate;
therefore, the amount of interest payable under the Unsecured Credit Facility
will be influenced by changes in short-term rates, which tend to be sensitive to
inflation.
Real Estate Investment Trust Tax Proposals
The Clinton Administration's Fiscal Year 2000 Budget proposal includes
three provisions of interest to REITs in general, two of which potentially
affect the Company. These provisions (i) modify the structure of businesses
which are indirectly conducted by the Company and could limit or negatively
affect the Company's future ability to engage indirectly in certain business
activities that cannot be conducted directly by the Company; and (ii) repeal
tax-free conversion of large C corporations to S corporations, which would
effectively tax the built-in gains of C corporations prospectively electing
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tax-free reorganizations, thus affecting an acquisition format employed by the
Company in the past. The President's Budget proposal includes numerous other
revenue provisions, none of which would materially impact the Company in the
event of their adoption. The last action on the President's Year 2000 Budget
proposal was the release by the Joint Committee on Taxation's "Description of
Revenue Provisions Contained in the President's Fiscal Year 2000 Budget
Proposal" on February 22, 1999. Congress has yet to debate the broader
implications of the President's Year 2000 Budget proposals, so there is no way
to predict the outcome of these proposals or the eventual economic effect of
these proposals on the Company if these proposals are enacted.
An alternative proposal, H.R. 1616, the Real Estate Investment Trust
Modernization Act of 1999 (the "RMA") has as its central feature a provision
allowing a REIT to own 100% of the stock of a taxable REIT subsidiary, similar
to the initiative contained in the Administration's Fiscal Year 2000 Budget
proposal mentioned previously. Many of the provisions in the RMA are similar to
the Budget proposal's provisions to modify the structure of businesses and could
have a similar, undetermined impact on the Company's future business activities
as has already been noted. Other provisions in the RMA would affect (i)
foreclosures for Health Care REITs and (ii) the 95% distribution requirement. As
with the President's Year 2000 Budget proposal, there is no way to predict the
outcome of these proposals or the eventual economic effect of these proposals on
the Company if the RMA is enacted.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities. The Y2K issue
relating to the Company's corporate information technology systems, including
applications employed with respect to the real estate investments of the
Company, could have a material impact on the operations of the Company if
compliance is not completed in a timely manner. The Company's plan to resolve
the Y2K issue involves four phases: assessment, remediation, testing, and
implementation.
Status of Y2K Issue Relating to the Company's Information Technology Systems
Based on the Company's completed assessment of its own software and
hardware relating to the Company's corporate information technology systems, the
Company determined that it was necessary to modify or replace certain portions
of its software and hardware so that those systems would properly utilize dates
beyond December 31, 1999. The Company has modified and replaced existing
software and certain hardware considered necessary based on its assessment. The
Company's costs to complete these modifications and replacements was less than
$50,000.
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In the ordinary course of events, the Company has purchased new file
servers and replaced many older desktop microcomputers with new equipment, all
of which are certified to be Y2K compliant by the manufacturers. Additionally,
"patches" available from the manufacturers were purchased to bring certain
equipment into compliance, and were installed in desktop systems as necessary.
The Company's assessment of computer operating systems and software
indicated that the Company's significant information systems programs should not
require remediation. Accordingly, the Company does not believe that the Y2K
presents a material exposure as it relates to the Company's services. The
Company requested, and has subsequently received, certification from all of its
significant software and operating systems vendors that the versions of their
products currently installed are fully Y2K compliant.
100% of the Company's systems, except for the accounting information
system, have been tested for compliance. The accounting information system has
been certified as compliant by the vendor. The Company expects to complete
testing its accounting information system by the end of the second quarter of
1999 and expects to certify it as compliant during the third quarter of 1999.
While the Company does not anticipate that testing will disprove its vendor's
certification of compliance, remediation of any systems or software that signal
potential Y2K problems will begin immediately upon discovery.
Y2K Issue Compliance of Vendors and Clients
The Company has questioned its significant suppliers and clients as to
their respective responses to the Y2K issue. To date, the Company is not aware
of any suppliers or clients with a Y2K issue that would materially impact the
Company's results of operations, liquidity, or capital resources; however, the
Company has no means of ensuring that those parties will in fact be Y2K
compliant. The Company has received responses from approximately 33% of all of
its inquiries and has renewed its solicitation for written disclosures in
compliance with the Year 2000 Information and Readiness Disclosure Act. 100% of
the written responses received have certified that they are or will be Y2K
compliant by the end of 1999. The inability of suppliers and clients to complete
their Y2K resolution process in a timely fashion could materially impact the
Company. The Company cannot presently determine the effect of non-compliance by
the Company's suppliers and clients.
While the Company does have ongoing relationships with third-party payors,
suppliers, vendors, and others, it has no systems that interface directly with
third party vendors other than its accounts with financial institutions and the
Company's payroll system interfaces directly with a vendor. The Company has
installed Y2K compliant software upgrades that have been certified by its
primary financial institution and has received notification from its payroll
vendor that its systems and software with which the Company interfaces are
compliant.
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The Company will also have Y2K issue exposure in non-information technology
applications with respect to its real estate investments. Computer technology
employed in elevators, security systems, electrical systems and similar
applications involved in the operations of real estate properties may cause
interruptions of services with respect to those properties on and after January
1, 2000. The terms of agreements in place with respect to the bulk of the real
estate investments held by the Company impose the economic cost of compliance
upon third party lessees and mortgagees; consequently, the costs to the Company
for Y2K remediation should not be material. The Company is in the process of
inquiring and assessing responses of those third parties as to their respective
Y2K issue readiness and will require that those third parties undertake the
necessary actions to ensure Y2K compliance of the properties.
Finally, the Y2K issue may affect the greater business environment in which
the Company operates. Due to the general uncertainty surrounding the Y2K
readiness of third parties, including federal and state governments, the effect
of the Y2K issue on the Company's lessees and mortgagees, as well as the Company
itself cannot be gauged. For example, the General Accounting Office has reported
that the systems employed in managing Medicare reimbursements is not likely to
be Y2K compliant in time to ensure the delivery of uninterrupted benefits and
services. Delay in reimbursements could negatively affect the Company's lessees
and mortgagees, resulting in a delay in receipt of payments owed to the
Company's clients, with the further possibility of delay in payments due by
those clients to the Company. Similar consequences could result from the failure
of other parties having such an indirect relationship with the Company.
Management of the Company believes it has an effective program in place to
resolve the Y2K issue in a timely manner. As noted above, the Company has not
yet completed all necessary phases of the Y2K program. In the event that the
Company does not complete any additional phases, the Company may be unable to
collect receipts in a timely manner. In addition, disruptions in the economy
generally resulting from Y2K issues could also materially adversely affect the
Company. The Company could be subject to litigation for computer systems
failure, for example, equipment shutdown or failure to properly date business
records. The Company cannot reasonably estimate the amount of potential
liability and lost revenue at this time. The most reasonable likely worst case
Y2K scenario is that business disruption could occur with respect to third-party
payors, suppliers or vendors who fail to become Y2K compliant, and disruptions
in the economy generally resulting from Y2K issues could adversely impact the
Company.
The Company has contingency plans for certain critical applications and is
working on such plans for other non-critical applications. These contingency
plans involve, among other actions, manual workarounds, increasing inventories,
and adjusting staffing strategies. The company plans to maintain an ongoing
evaluation of its Y2K compliance readiness and contingent plans throughout 1999.
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Market Risk
The Company is exposed to market risk, in the form of changing interest
rates, on its debt and mortgage notes receivable. The Company has no market risk
with respect to derivatives and foreign currency fluctuations. Management uses
daily monitoring of market conditions and analytical techniques to manage this
risk. The Company does not believe there have been significant changes in its
market risk since December 31, 1998. For a more detailed discussion, see pages
16 through 17 of Exhibit 13 "Annual Report to Shareholders" of the Company's
Form 10-K for the fiscal year ended December 31, 1998.
Cautionary Language Regarding Forward Looking Statements
Statements in this Form 10-Q that are not historical factual statements are
"forward looking statements" within the meaning of the Private Securities
Litigation Reforms Act of 1995. The statements include, among other things,
statements regarding the intent, belief or expectations of the Company, and its
officers and can be identified by the use of terminology such as "may", "will",
"expect", "believe", "intend", "plan", "estimate", "should" and other comparable
terms. In addition, the Company, through its senior management, from time to
time makes forward looking oral and written public statements concerning the
Company's expected future operations and other developments. Shareholders and
investors are cautioned that, while forward looking statements reflect the
Company's good faith beliefs and best judgment based upon current information,
they are not guarantees of future performance and are subject to known and
unknown risks and uncertainties. Actual results may differ materially from the
expectations contained in the forward looking statements as a result of various
factors. For a more detailed discussion of these, and other factors, see pages
25 through 29 of Item 1 of the Company's Form 10-K for the fiscal year ended
December 31, 1998.
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PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
(a) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended March 31, 1999.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ Timothy G. Wallace
Timothy G. Wallace
Executive Vice President, Finance
and Chief Financial Officer
Date: May 14, 1999
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