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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
----- EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 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 July 1, 2000, 40,139,429 shares of the Registrant's Common Stock and
3,000,000 shares of the Registrant's Series A Voting Cumulative Preferred
Stock were outstanding.
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HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
JUNE 30, 2000
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signature 22
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ITEM 1.
HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
JUNE 30, 2000 DEC. 31, 1999
------------- -------------
ASSETS
Real estate properties:
Land $ 152,035 $ 150,591
Buildings and improvements 1,264,141 1,223,387
Personal property 5,648 5,165
Construction in progress 18,029 20,003
----------- -----------
1,439,853 1,399,146
Less accumulated depreciation (102,653) (83,996)
----------- -----------
Total real estate properties, net 1,337,200 1,315,150
Cash and cash equivalents 1,923 3,396
Restricted cash 577 990
Mortgage notes receivable 218,698 253,459
Other assets, net 41,838 34,969
----------- -----------
Total assets $ 1,600,236 $ 1,607,964
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable 557,136 563,884
Accounts payable and accrued liabilities 19,536 17,658
Other liabilities 10,508 8,519
----------- -----------
Total liabilities 587,180 590,061
----------- -----------
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 -
40,138,081; 1999 - 40,004,579 401 400
Additional paid-in capital 1,056,510 1,054,405
Deferred compensation (10,446) (9,509)
Cumulative net income 257,013 215,373
Cumulative dividends (290,452) (242,796)
----------- -----------
Total stockholders' equity 1,013,056 1,017,903
----------- -----------
Total liabilities and stockholders' equity $ 1,600,236 $ 1,607,964
=========== ===========
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.
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HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
(Dollars in thousands, except per share data)
2000 1999
------------ -----------
REVENUES:
Master lease rental income $ 24,091 $ 23,397
Property operating income 15,626 13,853
Straight line rent 2,998 1,490
Mortgage interest income 6,139 6,547
Management fees 738 694
Interest and other income 258 179
------------ -----------
49,850 46,160
------------ -----------
EXPENSES:
General and administrative 1,845 1,971
Property operating expenses 5,759 5,008
Interest 10,983 9,403
Depreciation 9,649 9,501
Amortization 116 118
------------ -----------
28,352 26,001
------------ -----------
NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF
REAL ESTATE PROPERTIES 21,498 20,159
NET GAIN (LOSS) ON SALE OF REAL ESTATE
PROPERTIES (311) 433
------------ -----------
NET INCOME $ 21,187 $ 20,592
============ ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.49 $ 0.48
============ ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.49 $ 0.48
============ ===========
COMMON SHARES OUTSTANDING - BASIC 39,526,317 39,287,496
============ ===========
COMMON SHARES OUTSTANDING - DILUTED 40,168,158 39,956,471
============ ===========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING
THE PERIOD $ 0.555 $ 0.535
============ ===========
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.
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HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
(Dollars in thousands, except per share data)
2000 1999
------------ -----------
REVENUES:
Master lease rental income $ 48,108 $ 46,494
Property operating income 30,804 27,357
Straight line rent 4,468 3,058
Mortgage interest income 12,492 12,659
Management fees 1,470 1,324
Interest and other income 767 416
------------ -----------
98,109 91,308
------------ -----------
EXPENSES:
General and administrative 3,999 3,796
Property operating expenses 11,223 9,881
Interest 21,509 18,643
Depreciation 19,194 19,597
Amortization 233 239
------------ -----------
56,158 52,156
------------ -----------
NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF
REAL ESTATE PROPERTIES 41,951 39,152
NET GAIN (LOSS) ON SALE OF REAL ESTATE
PROPERTIES (311) 2,182
------------ -----------
NET INCOME $ 41,640 $ 41,334
============ ===========
NET INCOME PER COMMON SHARE - BASIC $ 0.97 $ 0.97
============ ===========
NET INCOME PER COMMON SHARE - DILUTED $ 0.95 $ 0.95
============ ===========
COMMON SHARES OUTSTANDING - BASIC 39,484,644 39,278,622
============ ===========
COMMON SHARES OUTSTANDING - DILUTED 40,132,228 39,952,642
============ ===========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING
THE PERIOD $ 1.105 $ 1.065
============ ===========
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.
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HEALTHCARE REALTY TRUST INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(Unaudited)
(Dollars in thousands)
2000 1999
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 41,640 $ 41,334
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 20,449 20,915
Deferred compensation 669 589
Increase (decrease) in other liabilities 2,477 (3,154)
Increase in other assets (4,745) (3,917)
Increase (decrease) in accounts payable and
accrued liabilities 1,878 (3,829)
Increase in straight line rent (2,998) (3,058)
(Gain) loss on sale of real estate 311 (2,182)
--------- --------
Net cash provided by operating activities 59,681 46,698
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition and development of real estate
properties (46,492) (20,394)
Funding of mortgages (7,677) (24,122)
Proceeds from sale of real estate 5,187 24,726
Proceeds from mortgage payments/sales 41,966 3,075
--------- --------
Net cash used in investing activities (7,016) (16,715)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on notes and bonds payable 111,500 53,000
Repayments on notes and bonds payable (118,482) (45,396)
Dividends paid (47,656) (45,715)
Proceeds from issuance of common stock 500 514
--------- --------
Net cash used in by financing activities (54,138) (37,597)
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,473) (7,614)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,396 12,710
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,923 $ 5,096
========= ========
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.
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HEALTHCARE REALTY TRUST
INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and six-month periods
ending June 30, 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 April 1, 1999
through June 30, 1999 and for the period January 1, 1999 through June 30, 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 June 30,
2000, the Company had invested or committed to invest in 284 properties (the
"Properties") located in 34 states, which are supported by 68 healthcare-related
entities. The Properties include:
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NUMBER OF (IN THOUSANDS)
PROPERTIES INVESTMENT
---------- ----------
Ancillary hospital facilities 60 $ 455,151
Physician clinics 34 183,271
Skilled nursing facilities 53 265,383
Comprehensive ambulatory care centers 14 146,529
Assisted living facilities 86 318,382
Inpatient rehabilitation facilities 9 154,589
Medical office buildings 9 35,929
Other outpatient facilities 13 44,680
Other inpatient facilities 6 54,637
---- ----------
284 $1,658,551
==== ==========
NOTE 3. FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts, Inc.
("NAREIT") adopted a new definition of Funds from operations ("FFO") as
described in the NAREIT White Paper issued October 1999. The adoption of this
new definition of FFO became effective January 1, 2000. FFO, 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 June 30, 2000 and
1999, was $26.3 million, basic and diluted, or $0.67 per basic common share
($0.66 per diluted common share) and $26.4 million, or $0.67 per basic common
share ($0.66 per diluted common share), respectively. FFO for the six months
ended June 30, 2000 and 1999, was $53.1 million, basic and diluted, or $1.34 per
basic common share ($1.32 per diluted common share) and $52.1 million, basic,
($52.2 million, diluted), or $1.33 per basic common share ($1.31 per diluted
common share), respectively.
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FUNDS FROM OPERATIONS (1)
(Dollars in thousands, except per share data)
Three Months Ended June 30,
-------------------------------
2000 1999
------------ ------------
Income before net gain (loss) on sale of real
estate properties $ 21,498 $ 20,159
Elimination of rental revenues
recognized on a straight line basis (2) (2,998) (1,490)
Preferred Stock Dividend (1,664) (1,664)
Real Estate Depreciation 9,500 9,357
------------ ------------
Total Adjustments 4,838 6,203
------------ ------------
Funds From Operations - Basic $ 26,336 $ 26,362
============ ============
Convertible Subordinated Debenture
Interest (3) 0 58
------------ ------------
Funds From Operations - Diluted $ 26,336 $ 26,420
============ ============
Funds From Operations Per Common Share - Basic $ 0.67 $ 0.67
============ ============
Funds From Operations Per Common Share - Diluted $ 0.66 $ 0.66
============ ============
Common Shares Outstanding - Basic 39,526,317 39,287,496
============ ============
Common Shares Outstanding - Diluted 40,168,158 39,956,471
============ ============
(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 $0.73 per common share for the quarter.
(3) The Convertible Subordinated Debentures were antidilutive for the three
months ending June 30, 2000, and, therefore, were excluded from the
diluted FFO calculation.
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FUNDS FROM OPERATIONS (1)
(Dollars in thousands, except per share data)
Six Months Ended June 30,
--------------------------------
2000 1999
------------ -------------
Income before net gain (loss) on sale of real
estate properties $ 41,951 $ 39,152
Elimination of rental revenues
recognized on a straight line basis (2) (4,468) (3,059)
Preferred Stock Dividend (3,328) (3,326)
Real Estate Depreciation 18,905 19,325
------------ ------------
Total Adjustments 11,109 12,940
------------ ------------
Funds From Operations - Basic $ 53,060 $ 52,092
============ ============
Convertible Subordinated Debenture
Interest (3) 0 133
------------ ------------
Funds From Operations - Diluted $ 53,060 $ 52,225
============ ============
Funds From Operations Per Common Share - Basic $ 1.34 $ 1.33
============ ============
Funds From Operations Per Common Share - Diluted $ 1.32 $ 1.31
============ ============
Common Shares Outstanding - Basic 39,484,644 39,278,622
============ ============
Common Shares Outstanding - Diluted 40,132,228 39,952,642
============ ============
(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 $1.43 per common share for the
quarter.
(3) The Convertible Subordinated Debentures were antidilutive for the six
months ending June 30, 2000, and, therefore, were excluded from the
diluted FFO calculation.
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NOTE 4. NOTES AND BONDS PAYABLE
Notes and bonds payable at June 30, 2000 consisted of the following (in
thousands):
Unsecured credit facility $264,000
Term loan facility 42,400
Senior notes due 2002 54,000
Senior notes due 2006 70,000
6.55% Convertible subordinated debentures, net 74,162
10.5% Convertible subordinated debentures, net 3,481
Mortgage notes payable 43,260
Other notes payable 5,833
--------
$557,136
========
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 June 30, 2000, the Company had an available borrowing
capacity of $1.0 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 May 30, 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 November 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 June
30, 2000, the Company had no additional available borrowing capacity under the
Term Loan Facility. In April 2000, $69.6 million of the Term Loan Facility was
repaid with proceeds received from the issuance of $70.0 million of unsecured
senior notes due 2006.
Senior Notes due 2002
In 1995, the Company privately placed $90.0 million of unsecured senior
notes (the "Senior Notes due 2002") 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
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which the Senior Notes due 2002 were purchased contain certain representations,
warranties and financial and other covenants customary in such loan agreements.
Senior Notes due 2006
On April 7, 2000, the Company privately placed $70.0 million of
unsecured senior notes (the "Senior Notes due 2006") 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 due 2006 were purchased contain certain representations, warranties and
financial and other covenants customary in such loan agreements. The proceeds
from the issuance of these notes were applied to the partial repayment of the
Term Loan Facility.
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 June 30, 2000, the Company had
approximately $74.2 million aggregate principal amount of 6.55% Debentures
outstanding with a face amount of $74.7 million and unaccreted discount of $0.5
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 June 30, 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):
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Book Value
Original Interest Of Collateral at Balance at
Mortgagor Balance Rate Collateral June 30, 2000 June 30, 2000
- -------------------------------------------------------------------------------------------------------------------
Life Insurance Co. $ 23.3 8.500% Ancillary hospital facility $ 42.8 $ 22.5
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 16.4
& one ancillary hospital facility
------- ----------------------------
$ 45.1 $ 90.6 $ 43.2
======= ============================
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. In June 2000, the Company repaid at
maturity $16.1 million, the balance outstanding, on a $17.0 million note assumed
in the 1998 acquisition.
Other Notes
In July 1999, the Company entered into a $7.0 million note with a
commercial institution. The note bears interest at 7.53%, is payable in equal
semi-annual installments of principal and interest and fully amortizes in July
2005.
NOTE 5. COMMITMENTS
As of June 30, 2000, the Company had a net investment of approximately
$18.0 million in five build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $38.9 million. Also, the Company has commitments to purchase or
provide funding for the construction of other properties totaling $16.9 million
at June 30, 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 ACQUISITIONS/DISPOSITIONS
During the first quarter of 2000, the Company sold two parcels of land,
adjacent to owned, operating properties in Missouri and Florida, for $1.0
million in net proceeds. These proceeds were applied to the partial repayment of
the Term Loan Facility.
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14
During the second quarter of 2000, the Company sold a 4,642 square foot
physician clinic in West Palm Beach, Florida for $0.7 million in net proceeds;
sold a 19,000 square foot comprehensive ambulatory care center in Soddy Daisy,
Tennessee for $2.7 million in net proceeds; and sold a 35,512 square foot
assisted living facility in Lawton, Oklahoma for $0.6 million in net proceeds.
These three sales resulted in a net loss of $0.3 million. The proceeds from
these sales were applied to the partial repayment of the Term Loan Facility.
During the second quarter of 2000, a commercial bank acquired, from the
Company, a net 52% interest in a mortgage note receivable, at par (approximately
$6.4 million). Further, the Company purchased ten properties from two separate
operators for a total purchase price of approximately $31.9 million and the
operators concurrently repaid mortgage notes receivable held by the Company. The
Company recognized no gain or loss on these transactions.
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.
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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 and six
months ended June 30, 2000 and 1999.
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
---- ---- ---- ----
BASIC EPS
Average Shares Outstanding 40,130,531 39,818,489 40,088,858 39,809,615
Actual Restricted Stock Shares (604,214) (530,993) (604,214) (530,993)
------------ ------------ ------------ ------------
Denominator - Basic 39,526,317 39,287,496 39,484,644 39,278,622
============ ============ ============ ============
Net Income $ 21,187,244 $ 20,591,501 $ 41,640,118 $ 41,333,738
Preferred Stock Dividend (1,664,070) (1,664,070) (3,328,140) (3,325,888)
------------ ------------ ------------ ------------
Numerator - Basic $ 19,523,174 $ 18,927,431 $ 38,311,978 $ 38,007,850
============ ============ ============ ============
Per Share Amount $ 0.49 $ 0.48 $ 0.97 $ 0.97
============ ============ ============ ============
DILUTED EPS
Average Shares Outstanding 40,130,531 39,818,489 40,088,858 39,809,615
Actual Restricted Stock Shares (604,214) (530,993) (604,214) (530,993)
Restricted Shares - Treasury 601,914 483,832 612,190 488,224
Dilution for Convertible
Debentures (1) 0 181,136 0 181,136
Dilution for Employee Stock
Purchase Plan 39,927 4,007 35,394 4,660
------------ ------------ ------------ ------------
Denominator - Diluted 40,168,158 39,956,471 40,132,228 39,952,642
============ ============ ============ ============
Numerator - Basic $ 19,523,174 $ 18,927,431 $ 38,311,978 $ 38,007,850
Convertible Subordinated
Debenture Interest (1) 0 58,431 0 133,033
------------ ------------ ------------ ------------
Numerator - Diluted $ 19,523,174 $ 18,985,862 $ 38,311,978 $ 38,140,883
============ ============ ============ ============
Per Share Amount $ 0.49 $ 0.48 $ 0.95 $ 0.95
============ ============ ============ ============
(1) The Convertible Subordinated Debentures were anti-dilutive for the three
and six months ended June 30, 2000 and were, therefore, excluded from the
diluted calculation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS
Second Quarter 2000 Compared to Second Quarter 1999
For the three months ended June 30, 2000, net income was $21.2 million,
or $0.49 per basic and diluted common share, on total revenues of $49.9 million
compared to net income of $20.6 million, or $ 0.48 per basic and diluted common
share, on total revenues of $46.2 million, for the three months ended June 30,
1999. Funds from operations ("FFO") was $26.3 million, or $0.67 per basic common
share ($0.66 per diluted common share), for the three months ended June 30, 2000
compared to $26.4 million, or $0.67 per basic common share ($0.66 per diluted
common share), in 1999.
THREE MONTHS ENDED JUNE 30,
2000 1999
-------- -------
(in thousands)
REVENUES:
Master lease rental income $ 24,091 $23,397
Property operating income 15,626 13,853
Straight line rent 2,998 1,490
Mortgage interest income 6,139 6,547
Management fees 738 694
Interest and other income 258 179
-------- -------
49,850 46,160
-------- -------
EXPENSES:
General and administrative 1,845 1,971
Property operating expenses 5,759 5,008
Interest 10,983 9,403
Depreciation 9,649 9,501
Amortization 116 118
-------- -------
28,352 26,001
-------- -------
NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL
ESTATE PROPERTIES 21,498 20,159
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES (311) 433
-------- -------
NET INCOME $ 21,187 $20,592
======== =======
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Total revenues for the three months ended June 30, 2000 compared to the
three months ended June 30, 1999, increased $3.7 million or 8.0%.
Master lease rent and property operating income increased $2.5 million
or 6.6%. Since 1998, the Company has acquired thirteen revenue producing
properties, and 12 properties under construction were completed and began
operations.
Straight line rent income increased $1.5 million or 101.2% for the
three months ended June 30, 2000 compared to the same period in 1999. This
increase is primarily attributable to the identification of additional leases
acquired in 1998 for which straight line rent should be recognized. The amount
of straight line rent income that relates to the first quarter totaled
approximately $0.2 million, or $0.005 per basic and diluted common share. The
amount of straight line rent income that relates to prior years totaled
approximately $1.2 million, or $0.03 per basic and diluted common share.
Mortgage interest income decreased $0.4 million or 6.2% for 2000
compared to 1999 due to repayment of 17 mortgages since 1998.
Total expenses for the three months ended June 30, 2000 were $28.4
million compared to $26.0 million for the same period in 1999, an increase of
$2.4 million or 9.0%.
Property operating expenses for the three months ended June 30, 2000
compared to 1999 increased for the same reasons property operating income
increased, as discussed above.
Interest expense for the three months ended June 30, 2000, compared to
the three months ended June 30, 1999, increased $1.6 million or 16.8% due
primarily to $1.6 million in interest expense for the three months ended June
30, 2000 on the Senior Notes due 2006. Interest expense on the Unsecured Credit
Facility and Term Loan Facility increased $0.4 million from 1999 to 2000 due to
an increase in the combined weighted average interest rate of approximately 2.2%
while the combined weighted average balance outstanding decreased $31.2 million.
Interest expense on the Senior Notes due 2002 decreased $0.3 million for the
three months ended June 30, 2000 compared to the same period in 1999 due to
annual principal payments of $18.0 million.
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
For the six months ended June 30, 2000, net income was $41.6 million,
or $0.97 per basic common share ($0.95 per diluted common share), on total
revenues of $98.1 million compared to net income of $41.3 million, or $0.97 per
basic common share ($0.95 per diluted common share), on total revenues of $91.3
million, for the six months ended June 30, 1999. Funds from operations ("FFO")
was $53.1 million, or $1.34 per basic common share ($1.32 per diluted common
share), for the six months ended June 30, 2000 compared to $52.1 million, basic
($52.2 million, diluted) or $1.33 per basic common share ($1.31 per diluted
common share), in 1999.
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SIX MONTHS ENDED JUNE 30,
2000 1999
-------- --------
(in thousands)
REVENUES:
Master lease rental income $ 48,108 $46,494
Property operating income 30,804 27,357
Straight line rent 4,468 3,058
Mortgage interest income 12,492 12,659
Management fees 1,470 1,324
Interest and other income 767 416
-------- -------
98,109 91,308
-------- -------
EXPENSES:
General and administrative 3,999 3,796
Property operating expenses 11,223 9,881
Interest 21,509 18,643
Depreciation 19,194 19,597
Amortization 233 239
-------- -------
56,158 52,156
-------- -------
NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF
REAL ESTATE PROPERTIES 41,951 39,152
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES (311) 2,182
-------- -------
NET INCOME $ 41,640 $41,334
======== =======
Total revenues for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999, increased $6.8 million or 7.5%.
Master lease rent and property operating income increased $5.1 million
or 6.9%. Since 1998, the Company has acquired thirteen revenue producing
properties, and 12 properties under construction were completed and began
operations.
Straight line rent income increased $1.4 million or 46.1% for the six
months ended June 30, 2000 compared to the same period in 1999. This increase is
primarily attributable to the identification of additional leases acquired in
1998 for which straight line rent should be recognized. The amount of straight
line rent income that relates to prior years totaled approximately $1.2 million,
or $0.03 per basic and diluted common share.
Interest and other income increased $0.4 million or 84.4% from the six
months ended June 30, 1999 to the same period in 2000 due mainly to inspection
fees on many of the properties and mortgages.
Total expenses for the six months ended June 30, 2000 were $56.2
million compared to $52.2 million for the same period in 1999, an increase of
$4.0 million or 7.7%.
Property operating expenses for the six months ended June 30, 2000
compared to 1999 increased for the same reasons property operating income
increased, as discussed above.
Interest expense for the six months ended June 30, 2000, compared to
the six months ended June 30, 1999, increased $2.9 million or 15.4%. Interest
expense on the Unsecured Credit Facility and Term Loan Facility increased $1.7
million for the six months ended June 30, 2000 compared to the same period in
1999 due to an increase in the combined weighted average
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outstanding balance of $6.0 million and an increase in the combined weighted
average interest rate of approximately 1.1%. Also, interest expense of $1.6
million on the Senior Notes due 2006 is reflected in the six months ended June
30, 2000, while interest expense on the Senior Notes due 2002 decreased $0.7
million due to annual principal payments of $18.0 million.
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 August 4, 2000, the Company had available
borrowing capacity of $7.0 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 May 2000, bears
interest at LIBOR plus 2.50%, payable quarterly, and matures on November 30,
2000. Since the Capstone merger, the Company has received net proceeds from the
sale of assets, from mortgage repayments and from the issuance of a $70.0
million unsecured senior note due 2006 (see Note 4) reducing the unpaid balance
of the Term Loan Facility from $200.0 million to $42.4 million. The Term Loan
Facility maturity date has been extended from May 30, 2000 to November 30, 2000.
If the Term Loan Facility is not repaid by November 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 senior
notes (the "Senior Notes due 2002") 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 June 30,
2000, $54.0 million was outstanding under the Senior Notes due 2002.
On April 7, 2000, the Company privately placed $70.0 million of
unsecured senior notes (the "Senior Notes due 2006") with multiple purchasers
affiliated with two lending institutions. The Senior Notes due 2006 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 $43.2 million at June 30, 2000. The
Company repaid the
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outstanding balance of $16.1 million of one of these mortgage notes payable upon
maturity in June 2000.
As of June 30, 2000, the Company can issue an aggregate of $100.0
million of securities remaining under its currently effective registration
statement. Due to capital market conditions and 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 Internal
Revenue Code. The Company may raise additional capital or make investments by
issuing, in public or private transactions, its equity and debt securities, but
the availability and terms of any such issuance will depend upon market and
other conditions.
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 of $1.0 million. The proceeds were applied to the partial repayment of
the Term Loan Facility.
During the second quarter of 2000, the Company sold a 4,642 square foot
physician clinic in West Palm Beach, Florida for $0.7 million in net proceeds;
sold a 19,000 square foot comprehensive ambulatory care center in Soddy Daisy,
Tennessee for $2.7 million in net proceeds; and sold a 35,512 square foot
assisted living facility in Lawton, Oklahoma for $0.6 million in net proceeds.
Also, a commercial bank acquired from the Company a net 52% interest in a
mortgage note receivable, at par (approximately $6.4 million). The proceeds from
these transactions were applied to the partial repayment of the Term Loan
Facility.
As of June 30, 2000, the Company had an investment of approximately
$18.0 million in five build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $38.9 million. Also, the Company has commitments to purchase or
provide funding for the construction of other properties totaling $16.9 million
at June 30, 2000. The Company intends to fund these commitments with funds
available from operations, proceeds from the Unsecured Credit Facility, sales of
real estate investments, payments of mortgage notes receivable, and capital
market financings.
At June 30, 2000, the Company had stockholders' equity in excess of
$1.0 billion. The debt to total capitalization ratio was approximately .355 to 1
at June 30, 2000.
On April 25, 2000, the Company declared an increase in its quarterly
common stock dividend from $0.550 per share ($2.20 annualized) to $0.555 per
share ($2.22 annualized) payable to stockholders of record on May 5, 2000. This
dividend was paid on May 17, 2000. In June 2000, the Company announced payment
of a common stock dividend of $0.560 per share ($2.24 annualized) to holders of
record of common shares on August 4, 2000. This dividend is payable on August
16, 2000 and relates to the period April 1, 2000 through June 30, 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 in the future.
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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.
The Company plans to continue to meet its liquidity needs, including
funding additional investments in 2000, paying its quarterly dividends and
funding its debt service from its cash flows, the proceeds of mortgage loan
repayments, sales of real estate investments, payments of 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 for 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.
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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.
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.
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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
Exhibit 10.1. Amendment No. 4 Term Loan Credit Agreement among the
Company, Capstone Capital Corporation (now HR Acquisition I, Inc.) and
Bank of America, N.A. (formerly NationsBank, N.A.)
Exhibit 27 Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three
months ended June 30, 2000.
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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: August 14, 2000
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