1
================================================================================
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, 2000
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, 2000, 40,123,071 shares of the Registrant's Common Stock and
3,000,000 shares of the Registrant's Series A Voting Cumulative Preferred Stock
were outstanding.
2
HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
MARCH 31, 2000
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
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 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
3
ITEM 1.
HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in thousands)
(Unaudited) (1)
MARCH 31, 2000 DEC. 31, 1999
-------------- --------------
ASSETS
Real estate properties:
Land $ 150,516 $ 150,591
Buildings and improvements 1,235,891 1,223,387
Personal property 5,365 5,165
Construction in progress 13,642 20,003
-------------- --------------
1,405,414 1,399,146
Less accumulated depreciation (93,374) (83,996)
-------------- --------------
Total real estate properties, net 1,312,040 1,315,150
Cash and cash equivalents 4,183 3,396
Restricted cash 1,005 990
Mortgage notes receivable 254,176 253,459
Other assets, net 37,833 34,969
-------------- --------------
Total assets $ 1,609,237 $ 1,607,964
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable 570,319 563,884
Accounts payable and accrued liabilities 14,750 17,658
Other liabilities 8,984 8,519
-------------- --------------
Total liabilities 594,053 590,061
-------------- --------------
Commitments 0 0
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding, 2000 and 1999 - 3,000,000 30 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding, 2000 - 40,123,071;
1999 - 40,004,579 401 400
Additional paid-in capital 1,056,253 1,054,405
Deferred compensation (10,807) (9,509)
Cumulative net income 235,826 215,373
Cumulative dividends (266,519) (242,796)
-------------- --------------
Total stockholders' equity 1,015,184 1,017,903
-------------- --------------
Total liabilities and stockholders' equity $ 1,609,237 $ 1,607,964
============== ==============
(1) The balance sheet at Dec. 31, 1999 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, 1999, are an integral part of these financial statements.)
1
4
HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
(Dollars in thousands, except per share data)
2000 1999
----------- -----------
REVENUES:
Master lease rental income $ 24,017 $ 23,097
Property operating income 15,178 13,505
Straight line rent 1,470 1,568
Mortgage interest income 6,353 6,112
Management fees 732 629
Interest and other income 509 237
----------- -----------
48,259 45,148
----------- -----------
EXPENSES:
General and administrative 2,154 1,826
Property operating expenses 5,464 4,873
Interest 10,526 9,239
Depreciation 9,545 10,096
Amortization 117 121
----------- -----------
27,806 26,155
----------- -----------
NET INCOME BEFORE NET GAIN ON SALE OF REAL ESTATE PROPERTIES $ 20,453 $ 18,993
NET GAIN ON SALE OF REAL ESTATE PROPERTIES 0 1,749
----------- -----------
NET INCOME $ 20,453 $ 20,742
=========== ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.48 $ 0.49
=========== ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.47 $ 0.48
=========== ===========
COMMON SHARES OUTSTANDING - BASIC 39,439,719 39,270,747
=========== ===========
COMMON SHARES OUTSTANDING - DILUTED 40,114,946 39,777,543
=========== ===========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD $ 0.550 $ 0.530
=========== ===========
(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, 1999, are an integral part of these financial statements.)
2
5
HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(Unaudited)
(Dollars in thousands)
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 20,453 $ 20,742
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 9,928 10,941
Deferred compensation 308 296
Increase (decrease) in other liabilities 450 (1,984)
Increase in other assets (1,828) (7,995)
Decrease in accounts payable and accrued liabilities (2,908) (4,835)
Increase in straight line rent (1,471) (1,568)
Gain on sale of real estate (0) (1,749)
-------- --------
Net cash provided by operating activities 24,932 13,848
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and development of real estate properties (7,303) (12,737)
Acquisition and development of mortgages (717) (6,527)
Proceeds from sale of real estate 1,035 8,090
-------- --------
Net cash used in investing activities (6,985) (11,174)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes and bonds payable 15,500 27,000
Repayments on notes and bonds payable (9,180) (8,372)
Dividends paid (23,723) (22,752)
Proceeds from issuance of common stock 243 295
-------- --------
Net cash used in financing activities (17,160) (3,829)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 787 (1,155)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,396 12,710
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,183 $ 11,555
======== ========
(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, 1999, are an integral part of these financial statements.)
3
6
HEALTHCARE REALTY TRUST
INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(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, 1999. 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, 1999.
The results of operations for the three-month period ending March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
Certain reclassifications have been made for the period January 1, 1999
through March 31, 1999 to conform to the 2000 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, 2000, the Company had invested or committed to invest in 286 properties (the
"Properties") located in 34 states, which are supported by 70 healthcare-related
entities. The Properties include:
4
7
NUMBER OF (IN THOUSANDS)
PROPERTIES INVESTMENT
---------- --------------
Ancillary hospital facilities 64 $ 503,147
Physician clinics 37 176,798
Skilled nursing facilities 57 269,784
Comprehensive ambulatory care centers 13 125,217
Assisted living facilities 83 318,097
Inpatient rehabilitation facilities 9 154,588
Other outpatient facilities 18 59,499
Other inpatient facilities 5 52,460
--- -------------
286 $ 1,659,590
=== =============
NOTE 3. FUNDS FROM OPERATIONS (UNAUDITED)
The National Association of Real Estate Investment Trusts, Inc.
("NAREIT") adopted, effective January 1, 2000, a new definition of funds from
operations as described in the NAREIT White Paper issued October 1999. Funds
from operations as defined by the NAREIT 1999 White Paper, means net income
before net gains on sales of real estate properties (computed in accordance with
generally accepted accounting principles) plus depreciation from real estate
assets. The Company calculates its funds from operations ("FFO") using a
modified version of the NAREIT's October 1999 definition of funds from
operations. The Company eliminates straight-line rental revenue in computing FFO
although NAREIT's definition of FFO requires the inclusion of straight-line
rental revenue in FFO.
The Company considers FFO to be an informative measure of the
performance of an equity real estate investment trust ("REIT") and consistent
with measures used by analysts to evaluate equity REITs. FFO does not represent
cash generated from operating activities in accordance with 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, 2000
and 1999, was $26.7 million, basic and diluted, or $0.68 per basic common share
($0.67 per diluted common share) and $25.7 million, or $0.66 per basic common
share ($0.65 per diluted common share), respectively.
5
8
FUNDS FROM OPERATIONS (1)
(Dollars in thousands, except per share data)
Three Months Ended March 31,
-------------------------------
2000 1999
------------ ------------
Income before gain on sale of real estate properties $ 20,453 $ 18,993
Elimination of rental revenues
recognized on a straight-line basis(2) (1,470) (1,568)
Preferred Stock Dividend (1,664) (1,662)
Real Estate Depreciation 9,404 9,967
------------ ------------
Total Adjustments 6,270 6,737
------------ ------------
Funds From Operations-Basic $ 26,723 $ 25,730
============ ============
Convertible Subordinated Deb. Interest(3) 0 0
------------ ------------
Funds From Operations - Diluted $ 26,723 $ 25,730
============ ============
Funds From Operations Per Common Share - Basic $ 0.68 $ 0.66
============ ============
Funds From Operations Per Common Share - Diluted $ 0.67 $ 0.65
============ ============
Common Shares Outstanding - Basic 39,439,719 39,270,747
============ ============
Common Shares Outstanding - Diluted 40,114,946 39,777,543
============ ============
(1) Funds From Operations ("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.
Management believes the Company's FFO is not directly comparable to
other Healthcare REIT's, which own a portfolio of triple net leased
properties or mortgages, as the Company develops projects through a
development and lease-up phase before they reach their targeted cash
flow returns. Furthermore, the Company eliminates, in consolidation,
fee income for developing, leasing and managing owned properties and
expenses or capitalizes, as the case may be, related internal costs.
(2) The Company calculates its FFO using a modified version of the National
Association of Real Estate Investment Trust's ("NAREIT") October 1999
definition of FFO. The Company eliminates straight-line rental revenue
in computing FFO although NAREIT's definition of FFO requires the
inclusion of straight-line rental revenue in FFO. If the Company had
followed the NAREIT definition of FFO, as other Healthcare REIT's do,
FFO on a diluted basis would have been $0.70 per common share for the
quarter.
(3) The Convertible Subordinated Debentures were antidilutive and,
therefore, were excluded from the diluted FFO calculation.
6
9
NOTE 4. NOTES AND BONDS PAYABLE
Notes and bonds payable at March 31, 2000 consisted of the following
(dollars in thousands):
Unsecured credit facility $260,000
Term loan facility 112,800
Unsecured notes 54,000
6.55% Convertible subordinated debentures, net 73,998
10.5% Convertible subordinated debentures, net 3,527
Mortgage notes payable 59,577
Other notes payable 6,417
--------
$570,319
========
Unsecured Credit Facility
In 1998, the Company 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 pays,
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, 2000, the Company had an available borrowing
capacity of $5.0 million under the Unsecured Credit Facility.
Term Loan Facility
In 1998, the Company entered into a $200.0 million unsecured term loan
(the "Term Loan Facility") with Bank of America (formerly NationsBank).
Effective April 13, 2000, the Company amended its Term Loan Facility agreement
with Bank of America. The Term Loan Facility, as amended, bears interest at
LIBOR plus 2.50%, payable quarterly, and matures on May 30, 2000. 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,
2000, the Company had no additional available borrowing capacity under the Term
Loan Facility. On April 7, 2000, $69.6 million of the Term Loan Facility was
repaid, leaving a balance of $43.0 million, with proceeds received from the
issuance of $70.0 million of senior notes maturing in 2006 (See Note 9).
Unsecured Notes
In 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. Each September
1, beginning in 1998, the Company must repay $18.0 million of the principal. The
note agreements pursuant to which
7
10
the Unsecured Notes were purchased contain certain representations, warranties
and financial and other covenants customary in such loan agreements.
On April 7, 2000, the Company privately placed $70.0 million of senior
notes with multiple purchasers affiliated with two lending institutions. The
senior notes bear interest at 9.49%, payable semi-annually, and mature on April
1, 2006. Each April 1, beginning in 2004, the Company must repay one-third, or
approximately $23.3 million, of the principal. The note agreements pursuant to
which the senior notes were purchased contain certain representations,
warranties and financial and other covenants customary in such loan agreements.
Convertible Subordinated Debentures
In 1998, the Company assumed in an acquisition and recorded at fair
value $74.7 million aggregate face amount of 6.55% Convertible Subordinated
Debentures (the "6.55% Debentures"). At March 31, 2000, the Company had
approximately $74.0 million aggregate principal amount of 6.55% Debentures
outstanding with a face amount of $74.7 million and unaccreted discount of $0.7
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
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.
In 1998, the Company assumed in an acquisition and recorded at fair
value $3.75 million aggregate face amount of 10.5% Convertible Subordinated
Debentures (the "10.5% Debentures"). At March 31, 2000, the Company had
approximately $3.5 million aggregate principal amount of 10.5% Debentures
outstanding with a face amount of $3.4 million and unamortized premium of $0.1
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
In 1998, the Company assumed in an acquisition nonrecourse mortgage
notes payable, and the related collateral, as follows (dollars in millions):
8
11
Book Value Balance at
Original Interest Of Collateral at March 31,
Mortgagor Balance Rate Collateral March 31, 2000 2000
- ------------------ --------- -------- -------------------------------- ---------------- ----------
Life Insurance Co. $ 23.3 8.500% Ancillary hospital facility $ 42.8 $ 22.6
Life Insurance Co. 4.7 7.625% Ancillary hospital facility 10.7 4.3
Life Insurance Co. 17.1 8.125% Two ambulatory surgery centers 37.1 16.5
& one ancillary hospital
facility
Bank 17.0 9.250% Six skilled nursing facilities 29.8 16.2
--------- ---------------- ----------
$ 62.1 $ 120.4 $ 59.6
========= ================ ==========
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.
NOTE 5. COMMITMENTS
As of March 31, 2000, the Company had a net investment of approximately
$13.6 million in four build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $32.1 million. The Company also has 2 mortgages under development
at March 31, 2000, which have a total remaining funding commitment of
approximately $0.2 million. Further, the Company has commitments to purchase or
provide funding for the construction of other properties totalling $12.4 million
at March 31, 2000.
As part of the merger with Capstone Capital Corporation ("Capstone") in
1998, agreements were entered into with three individuals affiliated with
Capstone that restrict competitive practices and that 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 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. Upon issuance,
these shares are valued at $28.0714 per share. The Company issued 150,000 shares
during 1999 pursuant to these agreements.
NOTE 6. ASSET DISPOSITION
During the first quarter of 2000 the Company sold two parcels of land,
adjacent to owned and operating properties in Missouri and Florida, for net
proceeds totaling $1.0 million. These proceeds were applied to the partial
repayment of the Term Loan Facility.
9
12
NOTE 7. CONTINGENCIES
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of two million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation. Attempts at mediation
have not resulted in a settlement of the disputes. The Company's prosecution of
its claims and defense of the counterclaims will be vigorous. While the Company
cannot predict the range of possible loss or outcome, the Company believes that,
even though the asserted cross claims seek substantial monetary damages, the
allegations made by Medistar and Medix are not factually or legally meritorious,
are subject to sustainable defenses and are, to a significant extent, covered by
liability insurance.
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, 2000 and 1999.
THREE MONTHS ENDED MARCH 31,
-------------------------------
2000 1999
------------ ------------
BASIC EPS
Average Shares Outstanding 40,047,184 39,800,690
Actual Restricted
Stock Shares (607,465) (529,943)
------------ ------------
Denominator - Basic 39,439,719 39,270,747
============ ============
Net Income $ 20,452,874 $ 20,742,237
Preferred Stock Dividend (1,664,070) (1,661,818)
------------ ------------
Numerator - Basic $ 18,788,804 $ 19,080,419
============ ============
Per Share Amount $ 0.48 $ 0.49
============ ============
DILUTED EPS
Average Shares Outstanding 40,047,184 39,800,690
Actual Restricted
Stock Shares (607,465) (529,943)
Restricted Shares - Treasury 644,366 498,822
Dilution for Convertible
Debentures(1) 0 0
Dilution for Employee Stock
Purchase Plan 30,861 7,974
Denominator - Diluted 40,114,946 39,777,543
============ ============
Numerator - Basic $ 18,788,804 $ 19,080,419
Convertible Subordinated
Debenture Interest(1) 0 0
------------ ------------
Numerator - Diluted $ 18,788,804 $ 19,080,419
============ ============
Per Share Amount $ 0.47 $ 0.48
============ ============
(1) The Convertible Subordinated Debenture were anti-dilutive and were,
therefore, excluded from the diluted calculation.
10
13
NOTE 9. SUBSEQUENT EVENTS
On April 7, 2000, the Company privately placed $70.0 million of senior
notes with multiple purchasers affiliated with two lending institutions. The
senior notes bear interest at 9.49%, payable semi-annually, and mature on April
1, 2006. Each April 1, beginning in 2004, the Company must repay one-third, or
approximately $23.3 million, of the principal. The note agreements pursuant to
which the senior notes were purchased contain certain representations,
warranties and financial and other covenants customary in such loan agreements.
(see Exhibit 10.1)
On April 13, 2000, the Company amended its Term Loan Credit Agreement
to extend its maturity date to May 30, 2000. (See Exhibit 10.2)
11
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
First Quarter 2000 Compared to First Quarter 1999
For the three months ended March 31, 2000, net income was $20.5
million, or $0.48 per basic common share ($0.47 per diluted common share), on
total revenues of $48.3 million compared to net income of $20.7 million, or
$0.49 per basic common share ($0.48 per diluted common share), on total revenues
of $45.1 million, for the three months ended March 31, 1999. Funds from
operations ("FFO") was $26.7 million, or $0.68 per basic common share ($0.67 per
diluted common share), for the three months ended March 31, 2000 compared to
$25.7 million, or $0.66 per basic common share ($0.65 per diluted common share),
in 1999.
(Unaudited)
THREE MONTHS ENDED MARCH 31,
------------------------------
2000 1999
--------- ---------
(in thousands)
REVENUES:
Master lease rental income $ 24,017 $ 23,097
Property operating income 15,178 13,505
Straight line rent 1,470 1,568
Mortgage interest income 6,353 6,112
Management fees 732 629
Interest and other income 509 237
--------- ---------
48,259 45,148
--------- ---------
EXPENSES:
General and administrative 2,154 1,826
Property operating expenses 5,464 4,873
Interest 10,526 9,239
Depreciation 9,545 10,096
Amortization 117 121
--------- ---------
27,806 26,155
--------- ---------
NET INCOME BEFORE NET GAIN ON SALE OF REAL ESTATE PROPERTIES $ 20,453 $ 18,993
NET GAIN ON SALE OF REAL ESTATE PROPERTIES 0 1,749
--------- ---------
NET INCOME $ 20,453 $ 20,742
========= =========
12
15
Total revenues for the three months ended March 31, 2000 compared to
the three months ended March 31, 1999, increased $3.1 million or 6.9%.
Master lease rent and property operating income increased $2.6 million
or 7.1%. During 1999 through the three months ending March 31, 2000, the Company
acquired two revenue producing properties, and 12 properties under construction
were completed and began operations.
Mortgage interest income increased $0.2 million or 3.9% for 2000
compared to 1999 due to commitments assumed in the Capstone merger, partially
offset by decreases due to the repayment of 7 mortgages in 1999.
Third party management fees for the three months ended March 31, 2000
compared to 1999 increased $0.1 million or 16.4% due mainly to an increase in
the number of properties managed for third parties and an increase in the square
footage in asset managed properties in Florida.
Interest and other income increased $0.3 million or 114.8% from the
three months ended March 31, 1999 to the same period in 2000 due mainly to
inspection fees on many of the properties and mortgages.
Total expenses for the three months ended March 31, 2000 were $27.8
million compared to $26.2 million for the same period in 1999, an increase of
$1.7 million or 6.3%.
General and administrative expenses increased $0.3 million or 18.0% for
the three months ended March 31, 2000 compared to 1999 due mainly to an increase
in the number of employees for property management, development, and other
service-based activities as well as merit increases that occurred in March of
the first quarter of each year.
Property operating expenses for the three months ended March 31, 2000
compared to 1999 increased for the same reasons property operating income
increased, as discussed above.
Interest expense for the three months ended March 31, 2000, compared to
the three months ended March 31, 1999, increased $1.3 million or 13.9% due
primarily to an increase in interest expense on the unsecured credit facility
and term loan facility of approximately $1.4 million. The combined weighted
average balances and interest rates of these credit facilities increased
approximately $16.4 million and 1.4%, respectively, for the quarter ended March
31, 2000 compared to the same period in 1999. The Company also recognized $0.1
million in interest expense during the three months ended March 31, 2000 related
to a note payable obligation originating in the third quarter of 1999, and
capitalized interest decreased $0.2 million due to less in construction in
progress in 2000 compared to 1999.
13
16
LIQUIDITY AND CAPITAL RESOURCES
In 1998, at the time of the Company's merger with Capstone Capital
Corporation ("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 plus
1.05%, payable quarterly, and matures on October 15, 2001. In addition, the
Company pays, quarterly, a commitment fee of 0.225 of 1% on the unused portion
of funds available for borrowings. At May 8, 2000, the Company had available
borrowing capacity of $20.0 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 Bank of America
(formerly NationsBank). The Term Loan Facility, as amended in April 2000, bears
interest at LIBOR plus 2.50%, payable quarterly, and matures on May 30, 2000.
Since the Capstone merger, the Company has received net proceeds from the sale
of assets, from mortgage repayments and from a $70.0 million senior note due
2006 entered into with multiple purchasers affiliated with two lending
institutions (as described below) reducing the unpaid balance of the Term Loan
Facility from $200.0 million to $43.0 million. The Term Loan Facility maturity
date has been extended from April 14, 2000 to May 30, 2000. If the Term Loan
Facility is not repaid by May 30, 2000, the Company may be required to extend
the maturity date or refinance any unpaid balance which may result in higher
interest costs.
In 1995, the Company privately placed $90.0 million of unsecured notes
(the "Unsecured Notes") bearing interest at 7.41%, payable semi-annually ($3.6
million will be paid during 2000), and mature on September 1, 2002. The Company
must repay $18.0 million of principal annually. At March 31, 2000, $54.0 million
was outstanding under the Unsecured Notes.
On April 7, 2000, the Company privately placed $70.0 million of senior
notes with multiple purchasers affiliated with two lending institutions. The
senior notes bear interest at 9.49%, payable semi-annually, and mature on April
1, 2006. Each April 1, beginning in 2004, the Company must repay one-third, or
approximately $23.3 million, of the principal.
The Company assumed in the Capstone merger 10.5% Convertible
Subordinated Debentures and 6.55% Convertible Subordinated Debentures having an
aggregate principal balance of $78.1 million. In 2000, the Company will incur
approximately $5.3 million of interest on these subordinated debentures.
The Company assumed in the Capstone merger six mortgage notes payable
having an aggregate principal balance of $59.6 million at March 31, 2000. One
mortgage note payable with a March 31, 2000 balance of $16.2 million will mature
in June 2000.
As of March 31, 2000, the Company can issue an aggregate of $100.0
million of securities remaining under currently effective registration
statement. Due to the current market price of the Company's stock, the Company
does not presently plan to offer stock under its registration statement. The
Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of its properties, the acquisition
or development
14
17
of additional properties or, as necessary, to meet distribution requirements for
REITs under the Internal Revenue Code. The Company may raise additional capital
or make investments by issuing, in public or private transactions, debt
securities, but the availability and terms of any such issuance will depend upon
market and other conditions.
During the first quarter of 2000, the Company sold two non-operating
parcels of land adjacent to operating properties owned by the Company for net
proceeds totaling $1.0 million. The proceeds were applied to the partial
repayment of the Term Loan Facility.
As of March 31, 2000, the Company had an investment of approximately
$13.6 million in four build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $32.1 million. The Company also had 2 mortgages under development
at March 31, 2000, which have a total remaining funding commitment of
approximately $0.2 million. Further, the Company has commitments to purchase or
provide funding for the construction of other properties totalling $12.4 million
at March 31, 2000. The Company intends to fund these commitments with funds
available from operations and proceeds from the Unsecured Credit Facility.
At March 31, 2000, the Company had stockholders' equity in excess of
$1.0 billion. The debt to total capitalization ratio was approximately .360 to 1
at March 31, 2000.
On January 25, 2000, the Company declared an increase in its quarterly
common stock dividend from $0.545 per share ($2.18 annualized) to $0.550 per
share ($2.20 annualized) payable to stockholders of record on February 4, 2000.
This dividend was paid on February 16, 2000. In April 2000, the Company
announced payment of a common stock dividend of $0.555 per share ($2.22
annualized) to holders of record of common shares on May 5, 2000. This dividend
is payable on May 17, 2000 and relates to the period January 1, 2000 through
March 31, 2000. The Company presently plans to continue 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 dividend beyond 2000.
During 2000, the Company expects to 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
any increases in the property operating expenses or taxes would significantly
impact the operating results of the Company 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.
15
18
The Company plans to continue to meet its liquidity needs, including
funding additional investments in 2000, 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, mortgage notes payable, the Unsecured Credit Facility,
and the Term Loan Facility, and the Unsecured Notes from its cash flows, the
proceeds of mortgage loan repayments, sales of real estate investments, and
mortgage notes receivable, and capital market financings. The Company continues
negotiations for additional capital market financings, the proceeds of which
would be used to repay the Term Loan Facility, the Unsecured Credit Facility and
to fund other general corporate purposes. 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
one to 23 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.
Year 2000 Issue
During 1999, the Company completed its remediation and testing of
systems in connection with the Year 2000 issue. As a result of these efforts,
the Company experienced no disruptions or malfunctions at any of its properties.
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, 1999. For a more detailed discussion, see page 16
of Exhibit 13 "Annual Report to Shareholders" of the Company's Form 10-K for the
fiscal year ended December 31, 1999.
16
19
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 Reform 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, 1999.
17
20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 22, 1999, HR Acquisitions I Corporation, formerly known as
Capstone Capital Corporation ("HRT"), a wholly-owned subsidiary of the Company,
filed suit against Medistar Corporation and its affiliate, Medix Construction
Company in United States District Court for the Northern District of Alabama,
Southern Division. HRT is seeking damages in excess of two million dollars
arising out of the development and construction of four real estate projects
located in different parts of the United States. Medistar and Medix served as
the developer and contractor, respectively, for the projects. HRT has asserted
claims for damages relating to, among others, alleged breaches of the
development and contracting obligations, failure to perform in accordance with
contract terms and specifications, and other deficiencies in performance by
Medistar and Medix. On June 10, 1999, Medistar and Medix filed its answer and
counterclaim asserting a variety of alleged legal theories, claims for damages
for alleged deficiencies by HRT and the Company in the performance of alleged
obligations, and for damage to their business reputation. Attempts at mediation
have not resulted in a settlement of the disputes. The Company's prosecution of
its claims and defense of the counterclaims will be vigorous. While the Company
cannot predict the range of possible loss or outcome, the Company believes that,
even though the asserted cross claims seek substantial monetary damages, the
allegations made by Medistar and Medix are not factually or legally meritorious,
are subject to sustainable defenses and are, to a significant extent, covered by
liability insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(i) Exhibit 10.1. Note Purchase Agreement dated as of March 1,
2000 between the Company and the purchasers of $70 million
Senior Notes due April 1, 2006
(ii) Exhibit 10.2. Amendment No. 3 Term Loan Credit Agreement among
the Company, Capstone Capital Corporation (now HR Acquisition
I, Inc.) and Bank of America N.A. (formerly NationsBank)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended March 31, 2000.
18
21
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 12, 2000
19