EXHIBIT 13
Selected Financial
INFORMATION
The following table sets forth financial information for the Company
which is derived from the Consolidated Financial Statements of the Company
(Dollars in thousands, except per share data):
Years Ended December 31,
-----------------------------------------------------------------------
2001 2000 1999 1998 (2) 1997
- ------------------------------------------------------------------------------------------------------------------------------------
STATEMENT OF INCOME DATA:
Total revenues $ 194,538 $ 195,338 $ 187,257 $ 92,429 $ 59,796
Interest expense $ 38,110 $ 42,995 $ 38,603 $ 13,057 $ 7,969
Net income $ 79,887 $ 79,801 $ 86,027 $ 40,479 $ 31,212
Net income per common share - Basic $ 1.84 $ 1.85 $ 2.02 $ 1.66 $ 1.71
Net income per common share - Diluted $ 1.81 $ 1.82 $ 1.99 $ 1.63 $ 1.68
Weighted average common shares outstanding
- Basic 39,840,285 39,544,400 39,326,594 24,043,942 18,222,243
Weighted average common shares outstanding
- Diluted 40,463,158 40,301,409 39,810,306 24,524,600 18,572,492
BALANCE SHEET DATA (AS OF THE END OF THE PERIOD):
Real estate properties, net $ 1,349,664 $ 1,358,826 $ 1,315,150 $ 1,337,439 $ 466,273
Total assets $ 1,555,910 $ 1,587,076 $ 1,607,964 $ 1,612,423 $ 488,514
Notes and bonds payable $ 505,222 $ 536,781 $ 563,884 $ 559,924 $ 101,300
Total stockholders' equity $ 1,012,087 $ 1,008,037 $ 1,017,903 $ 1,017,704 $ 376,472
OTHER DATA:
Funds from operations - Basic (1) $ 106,922 $ 105,378 $ 105,727 $ 59,667 $ 42,337
Funds from operations - Diluted (1) $ 106,922 $ 105,653 $ 105,727 $ 59,731 $ 42,337
Funds from operations per common share
- Basic (1) $ 2.68 $ 2.66 $ 2.69 $ 2.48 $ 2.32
Funds from operations per common share
- Diluted (1) $ 2.64 $ 2.62 $ 2.66 $ 2.44 $ 2.28
Dividends declared and paid per common
share $ 2.31 $ 2.23 $ 2.15 $ 2.07 $ 1.99
- ------------------------------------------------------------------------------------------------------------------------------------
(1) See Note 10 to Consolidated Financial Statements.
(2) In October 1998, the Company acquired Capstone Capital Corporation.
1
Management's Discussion and Analysis of Financial Condition
AND RESULTS OF OPERATIONS
OVERVIEW
Healthcare Realty Trust Incorporated (the "Company") operates under the
Internal Revenue Code of 1986, as amended (the "Code"), as an indefinite life
real estate investment trust ("REIT"). The Company, a self-managed and
self-administered REIT, follows a general growth strategy that integrates
owning, managing, and developing income-producing real estate properties and
mortgages associated with the delivery of healthcare services throughout the
United States. Management believes that by providing related real estate
services, it can differentiate the Company's competitive market position, expand
its asset base and increase revenue.
Substantially all of the Company's revenues are derived from rentals on
its healthcare real estate property facilities, interest earned on mortgage
loans and from the temporary investment of funds in short-term instruments, and
from management and development services. Leases and other financial support
arrangements with respect to the Company's healthcare real estate facilities
reduce exposure to increased costs and expenses incurred with respect to the
operation of the facilities which are borne by tenants and healthcare providers
related to the facilities. The Company incurs operating and administrative
expenses, principally compensation expense, office rental and related occupancy
costs and various expenses incurred in the process of managing its existing
portfolio and acquiring additional properties.
RESULTS OF OPERATIONS
2001 Compared to 2000
For the year ended December 31, 2001, net income was $79.9 million, or
$1.84 per basic common share ($1.81 per diluted common share), on total revenues
of $194.5 million compared to net income of $79.8 million, or $1.85 per basic
common share ($1.82 per diluted common share), on total revenues of $195.3
million, for the year ended December 31, 2000. Funds from operations ("FFO") was
$106.9 million, or $2.68 per basic common share ($2.64 per diluted common
share), for the year ended December 31, 2001 compared to $105.4 million, basic
($105.7 million, diluted), or $2.66 per basic common share ($2.62 per diluted
common share), in 2000.
(Dollars in thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
REVENUES
Master lease rental income $ 99,962 $ 97,238
Property operating income 67,750 62,400
Straight line rent 5,749 7,827
--------------------------
Total rental income 173,461 167,465
Mortgage interest income 17,254 22,755
Management fees 1,533 2,785
Interest and other income 2,290 2,333
--------------------------
194,538 195,338
--------------------------
EXPENSES
General and administrative 10,110 8,739
Property operating expenses 26,515 22,628
Interest 38,110 42,995
Depreciation 40,823 38,994
Amortization 303 513
Provision for loss on investment 0 1,000
--------------------------
115,861 114,869
--------------------------
Net income before net gain (loss) on sale of real estate properties 78,677 80,469
Net gain (loss) on sale of real estate properties 1,210 (668)
--------------------------
Net income $ 79,887 $ 79,801
==========================
Total revenues for the year ended December 31, 2001 compared to the
year ended December 31, 2000 decreased $0.8 million or 0.4% as discussed below:
2
- Master lease rent and property operating income increased $8.1
million or 5.1% due mainly to the acquisition of 15
revenue-producing properties, the disposal of nine properties
and the completion of five properties under construction that
began operations.
- Straight line rent income decreased $2.1 million or 26.6%.
This decrease is due mainly to the identification during 2000
of additional leases acquired in 1998 for which straight line
rent should be recognized. The amount of straight line rent
income that was recorded in 2000 that related to prior years
totaled approximately $1.2 million or $0.03 per basic and
diluted common share.
- Mortgage interest income decreased $5.5 million or 24.2% for
2001 compared to 2000 due mainly to the repayment of 42
mortgages during 2000 and 2001.
- Management fees decreased $1.3 million or 45.0% from 2000 to
2001 due mainly to the loss of property and asset management
contracts related to 3.7 million square feet.
Total expenses for the year ended December 31, 2001 compared to the
year ended December 31, 2000 increased $1.0 million or 0.9% as discussed below:
- General and administrative expenses increased $1.4 million or
15.7% for 2001 compared to 2000 due mainly to certain
debt-related charges in the third quarter of 2001 and an
increase in the number of employees and related compensation
for portfolio management, development and other service-based
activities.
- Property operating expenses and depreciation expense for 2001
compared to 2000 increased $3.9 million or 17.2% and $1.8
million or 4.7%, respectively due mainly to the acquisition of
15 revenue-producing properties, the disposal of nine
properties, and the completion of five properties under
construction that began operations.
- Interest expense for 2001 compared to 2000 decreased $4.9
million or 11.4% due mainly to the continuing decrease in
interest rates along with a reduction in total debt
outstanding from 2000 to 2001. (see Note 4 to Consolidated
Financial Statements)
- In 2000, the Company fully reserved for its $1.0 million
investment in the preferred stock of a private assisted living
company which was acquired in 1998 in its merger with Capstone
Capital Corporation.
2000 Compared to 1999
For the year ended December 31, 2000, net income was $79.8 million, or
$1.85 per basic common share ($1.82 per diluted common share), on total revenues
of $195.3 million compared to net income of $86.0 million, or $2.02 per basic
common share ($1.99 per diluted common share), on total revenues of $187.3
million, for the year ended December 31, 1999. FFO was $105.4 million, basic
($105.7 million, diluted), or $2.66 per basic common share ($2.62 per diluted
common share), for the year ended December 31, 2000 compared to $105.7 million,
or $2.69 per basic common share ($2.66 per diluted common share), in 1999.
3
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------
REVENUES
Master lease rental income $ 97,238 $ 92,070
Property operating income 62,400 57,778
Straight line rent 7,827 6,885
---------------------------
Total rental income 167,465 156,733
Mortgage interest income 22,755 25,940
Management fees 2,785 2,727
Interest and other income 2,333 1,857
---------------------------
195,338 187,257
---------------------------
EXPENSES
General and administrative 8,739 7,287
Property operating expenses 22,628 21,077
Interest 42,995 38,603
Depreciation 38,994 38,566
Amortization 513 473
Provision for loss on investment 1,000 0
---------------------------
114,869 106,006
---------------------------
Net income before net gain (loss) on sale of real estate properties 80,469 81,251
Net gain (loss) on sale of real estate properties (668) 4,776
---------------------------
Net income $ 79,801 $ 86,027
===========================
Total revenues for the year ended December 31, 2000 compared to the
year ended December 31, 1999 increased $8.1 million or 4.3% as discussed below:
- Master lease rent and property operating income increased $9.8
million or 6.5% due mainly to the acquisition of 19
revenue-producing properties, the disposal of 12 properties,
and the completion of 13 properties under construction that
began operations.
- Straight line rent income increased $0.9 million or 13.7%.
This increase is due mainly to the identification during 2000
of additional leases acquired in 1998 for which straight line
rent should be recognized. The amount of straight line rent
income recorded in 2000 that related to prior years totaled
approximately $1.2 million or $0.03 per basic and diluted
common share.
- Mortgage interest income decreased $3.2 million or 12.3% for
2000 compared to 1999 due mainly to the repayment of 31
mortgages during 1999 and 2000.
- Interest and other income increased $0.5 million or 25.6% due
mainly to the recognition of income of approximately $1.0
million in loan prepayment penalties and exit fees resulting
from the repayment of 14 mortgage notes receivable. Further,
in 2000, the Company sold a participating interest in one of
its notes receivable decreasing the Company's interest income
on the note by approximately $0.4 million.
Total expenses for the year ended December 31, 2000 compared to the
year ended December 31, 1999 increased $8.9 million or 8.4% as discussed below:
- General and administrative expenses increased $1.5 million or
19.9% for 2000 compared to 1999. The primary reason for the
increase is due mainly to increased state tax expense recorded
in 2000 related to 1998 through 2000 resulting from the
Capstone merger impact on corporate structure coupled with
changes in state tax laws. The Company also incurred expenses
during 2000 pursuing profit-enhancing initiatives.
- Property operating expenses and depreciation expense for 2000
compared to 1999 increased $1.6 million or 7.4% and $0.4
million or 1.1%, respectively due mainly to the acquisition of
19 revenue-producing properties, the disposal of 12
properties, and the completion of 13 properties under
construction that and began operations.
- Interest expense for 2000 compared to 1999 increased $4.4
million or 11.4% due mainly to the following factors. During
2000, the Company privately placed $70.0 million of unsecured
senior notes due 2006 resulting in additional interest expense
of approximately $4.9 million in 2000. Interest expense on the
unsecured credit facility and term loan facility increased
approximately
4
$1.5 million from 1999 to 2000 due to an increase in the
combined weighted average interest rate of approximately 1.4%
while the combined weighted average balance outstanding
decreased approximately $57.5 million. Interest expense on the
$90.0 million of unsecured senior notes due 2002 decreased
approximately $1.3 million due to annual principal payments of
$18.0 million. Further, one mortgage note payable assumed in
1998 was defeased by the Company at maturity in June 2000
which resulted in a decrease of approximately $0.8 million in
interest expense from 1999 to 2000.
- In 2000, the Company fully reserved for its $1.0 million
investment in the preferred stock of a private assisted living
company which was acquired in 1998 in its merger with Capstone
Capital Corporation.
5
LIQUIDITY AND CAPITAL RESOURCES
As discussed in more detail in Note 4 to the Consolidated Financial
Statements, the Company, for 2001 and thereafter, has been or is committed to
pay interest and outstanding principal balances on its notes and bonds payable
as follows (dollars in millions):
CONTRACTUAL
BALANCE AT BALANCE AT INTEREST
DECEMBER DECEMBER MATURITY RATE AT INTEREST
31, 2001 31, 2000 DATE 12/31/01 PAYMENTS PRINCIPAL PAYMENTS
- ------------------------------------ ---------- ---------- --------- ------------- ----------- ---------------------------
Unsecured credit facility $ 0 $ 265.0 10/01 LIBOR + 1.05% Quarterly At maturity
due 2001
Unsecured credit facility 38.0 0 7/04 LIBOR +1.15% Quarterly At maturity
due 2004(1)
Term loan facility 0 25.0 3/01 LIBOR + 2.50% Quarterly At maturity
Senior notes due 2002 18.0 36.0 9/02 7.41% Semi-Annual $18 million annually
Senior notes due 2006 70.0 70.0 4/06 9.49% Semi-Annual $20.3 million in 2004, 2005
and $29.4 million in 2006
Senior notes due 2011, net 298.9 0 5/11 8.125% Semi-Annual At maturity
6.55% Convertible subordinated 0 74.5 3/02 6.55% Semi-Annual At maturity
debentures, net
10.5% Convertible subordinated 0 3.4 4/02 10.5% Semi-Annual At maturity
debentures, net
Mortgage notes payable 75.6 57.1 9/04-7/26 7.22%-8.50% Monthly Monthly or at maturity
Other note payable 4.7 5.8 7/05 7.53% Semi-Annual Semi-Annual
--------- ---------
$ 505.2 $ 536.8
========= =========
(1) The Company pays a quarterly facility fee of 0.2% on the commitment.
During 2001, the Company focused on reorganizing its debt structure and
repaying or replacing debt instruments having shorter maturities with debt
instruments having longer maturities, effectively strengthening its balance
sheet (see Note 4 for more detail):
- During 2001, the Company sold a 70,494 square foot ancillary
hospital facility, a 10,855 square foot ambulatory surgery center, a 25,660
square foot physician clinic and two assisted living facilities with an
aggregate square footage of 114,701 for net proceeds totaling $24.9 million.
Further, the Company received net proceeds totaling $51.8 million from the
repayment of eighteen mortgages during 2001. These proceeds were used to
partially repay the Term Loan Facility due in 2001, the Unsecured Credit
Facility due 2001, the Unsecured Credit Facility due 2004, as well as for
general corporate purposes.
- In April 2001, the Company entered into six mortgage notes due
2011 totaling $35.0 million. The net proceeds from this transaction were used to
fully repay the Term Loan Facility due 2001 and partially repay the Unsecured
Credit Facility due 2001.
- In May 2001, the Company publicly issued $300.0 million of
Senior Notes due 2011 and used a portion of the net proceeds to fully repay the
Unsecured Credit Facility due 2001. The balance was used as a portion of the
funds for the redemption of the 6.55% Debentures and 10.5% Debentures, both due
in 2002.
- In July 2001, the Company replaced its $300.0 million
Unsecured Credit Facility due 2001 with a $150.0 million Unsecured Credit
Facility due 2004. The Unsecured Credit Facility due 2004 bears interest at
6
LIBOR rates plus 1.15%, payable quarterly, and matures in July 2004. In
addition, the Company pays a facility fee of 0.2% on the commitment. Also, the
Company redeemed its 6.55% Debentures and 10.5% Debentures from proceeds
remaining from the Senior Notes due 2011 and from the Unsecured Credit Facility
due 2004.
- In August 2001, the Company repaid four variable rate mortgage
notes due in December 2003 totaling $14.2 million with proceeds from the
Unsecured Credit Facility due 2004.
- In December 2001, the Company sold 525,000 shares of common
stock, par value $.01 per share, in an underwritten public offering. The net
proceeds of $14.0 million were used to repay outstanding indebtedness under the
Unsecured Credit Facility due 2004, to fund development commitments and for
general corporate purposes.
- During 2001, the Company funded approximately $38.9 million in
development commitments, tenant improvements and other facility improvements and
acquired a 97,487 square foot ancillary hospital facility for $14.1 million.
These commitments were funded from internally generated cash flows, from the
Company's unsecured credit facilities, or from capital market financing.
In 2001, the Company lengthened its debt maturities so that
approximately 68% of its December 31, 2001 debt balance is due after 2006. At
January 31, 2002, the Company had additional borrowing capacity of $104.0
million under the Unsecured Credit Facility due 2004.
Upon repayment of the Term Loan Facility in April 2001 and the
repayment of the Unsecured Credit Facility in May 2001, the Company's
outstanding debt was primarily fixed rate. The Company's practice and objective
has been to protect itself against changes in fair value due to changes in
market interest rates by maintaining a mix of variable and fixed rate debt. In
order to accomplish this objective, in June 2001, the Company entered into
interest rate swap agreements with two lending institutions for notional amounts
totaling $125.0 million which are expected to offset changes in the fair value
of $125.0 million of the Senior Notes due 2011. In both interest rate swaps, the
Company receives an 8.125% fixed rate and pays a variable rate of LIBOR plus
1.99%, set in arrears, with semi-annual settlement dates each May 1 and November
1. The swaps are not callable for the first five years. After five years, the
swaps are callable, at fair value, by either party if, and only if, the other
party is downgraded below investment grade by two or more credit rating
agencies. These derivative instruments meet all requirements of a fair value
hedge and are accounted for using the "shortcut method" as set forth in FAS 133.
As such, changes in fair value will have no impact on the income statement. At
December 31, 2001, the fair value of the hedge is reported in other assets with
an offsetting increase to the Senior Notes due 2011 included in notes and bonds
payable on the Company's balance sheet.
As of December 31, 2001, the Company can issue an aggregate of
approximately $171.6 million of securities remaining under its currently
effective registration statement. Should the market permit, the Company may
issue securities under its registration statements. The Company may, under
certain circumstances, borrow additional amounts in connection with the
renovation or expansion of its properties, the acquisition or development of
additional properties or, as necessary, to meet distribution requirements for
REITs under the Code. The Company may raise additional capital or make
investments by issuing, in public or private transactions, its equity and debt
securities, but the availability and terms of any such issuance will depend upon
market and other conditions.
The Company generated net cash from operations in 2001 of $91.3
million, a decrease of $29.8 million from 2000 and $0.4 million from 1999. The
decrease from 2000 resulted primarily from changes in other assets, other
liabilities, accounts payable and accrued expenses. The decrease from 1999
resulted primarily from a decrease in net income and an increase in other
assets. Other significant sources and uses of cash for investing and financing
activities are set forth in the Statement of Cash Flows in the Consolidated
Financial Statements.
As of December 31, 2001, the Company had a net investment of
approximately $18.3 million in four build-to-suit developments in progress which
have a total remaining funding commitment of approximately $13.3 million. The
Company intends to fund these commitments with internally generated cash flow,
proceeds from the Unsecured Credit Facility due 2004, proceeds from the sale of
additional assets, proceeds from additional repayments of mortgage notes
receivable, or additional capital market financing.
At December 31, 2001, the Company had stockholders' equity of $1.0
billion. The debt-to-total capitalization ratio, on a book basis, was
approximately .333 to 1 at December 31, 2001.
On January 22, 2002, the Company declared an increase in its quarterly
common stock dividend from $.585 per share ($2.34 annualized) to $.59 per share
($2.36 annualized) payable to stockholders of record as of February 15, 2002.
This dividend was paid on March 6, 2002. While the Company has no present plans
to
7
change its quarterly common stock dividend policy, the dividend policy is
reviewed each quarter by its board of directors.
During 2002, the Company will pay quarterly dividends on its 8 7/8%
Series A 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 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
leases or financial support agreements, or in the event the financial
obligations required by the agreement are not met, the Company anticipates that
any expenditures it might become responsible for in maintaining the properties
will be funded by occupancy tenants, by cash from operations and, in the case of
major expenditures, possibly by borrowings. To the extent that unanticipated
expenditures or significant borrowings are required, the Company's cash
available for distribution and liquidity may be adversely affected.
The Company plans to continue to meet its liquidity needs, including
funding additional investments in 2002, paying its quarterly dividends and
funding its debt service from its cash flows, proceeds from the Unsecured Credit
Facility due 2004, proceeds of mortgage notes receivable repayments, sales of
real estate investments, or additional capital market financing. The Company
believes that its liquidity and sources of capital are adequate to satisfy its
cash requirements. The Company, 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.
The Unsecured Credit Facility due 2004, the Senior Notes due 2002, and
the Senior Notes due 2006 contain certain financial covenants customary in such
loan agreements. The Company was in compliance with these covenants at December
31, 2001.
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 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
twenty years, further reducing the risk of any adverse effects of inflation to
the Company. The Unsecured Credit Facility due 2004 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. Generally, changes in inflation and interest rates tend
to move in the same direction. During periods where interest rate increases
outpace inflation, the Company's operating results should be negatively
impacted. Likewise, when increases in inflation outpace increases in interest
rates, the Company's operating results should be positively impacted.
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.
In 2001, the Company entered into interest rate swap agreements with
two lending institutions which are expected to offset changes in the fair value
of $125 million of the Senior Notes due 2011. At December 31, 2001, the fair
value of the hedge is reported in other assets with an offsetting increase to
the Senior Notes due 2011 included in notes and bonds payable on the Company's
balance sheet. (see Note 4 for further details)
At December 31, 2001 and 2000, the fair value of the Company's variable
rate debt approximated its carrying value of $162.8 million and $304.2 million,
respectively. Because the interest rate is variable with market interest rates,
the carrying amount of variable rate debt will always approximate its fair
value. Assuming the December 31, 2001 and 2000 carrying value of $162.8 million
and $304.2 million, respectively, is held constant, the hypothetical increase in
interest expense resulting from a one percentage point increase in
8
interest rates, would be $1.6 million and $3.0 million, respectively. The
interest rate on variable rate debt is based on and variable with the London
interbank offered rate ("LIBOR").
At December 31, 2001 and 2000, the carrying value of the Company's
fixed rate debt was $342.5 million and $232.6 million, respectively, and the
fair value of the Company's fixed rate debt was approximately $356.9 million and
$218.8 million, respectively. The fair value is based on the present value of
future cash flows discounted at the market rate of interest. Market risk,
expressed as the hypothetical decrease in fair value resulting from a one
percentage point increase in interest rates is $18.3 million and $3.8 million,
respectively, for aggregate fixed rate debt.
At December 31, 2001 and 2000, the carrying value of the Company's
fixed rate mortgage notes receivable was $122.1 million and $171.0 million,
respectively, and the fair value was approximately $124.2 million and $168.7
million, respectively. The fair value is based on the present value of future
cash flows discounted at an assumed market rate of interest. Because no market
rates of interest are published for these assets, the market rate of interest is
assumed to be the same spread to U.S. Treasury yields for comparable maturities
that existed when the mortgage notes receivable were acquired in a 1998
acquisition, adjusted to published U.S. Treasury yields. Market risk, expressed
as the hypothetical decrease in fair value resulting from a one percentage point
increase in interest rates, is $7.7 million and $4.1 million for December 31,
2001 and 2000, respectively, on the aggregate portfolio of fixed rate mortgage
notes receivable.
Cautionary Language Regarding Forward Looking Statements
This Annual Report to Shareholders and other materials the Company has
filed or may file with the Securities and Exchange Commission, as well as
information included in oral statements or other written statements made, or to
be made, by senior management of the Company, contain, or will contain,
disclosures which are "forward-looking statements." Forward-looking statements
include all statements that do not relate solely to historical or current facts
and can be identified by the use of words such as "may," "will," "expect,"
"believe," "intend," "plan," "estimate," "project," "continue," "should" and
other comparable terms. These forward-looking statements are based on the
current plans and expectations of management and are subject to a number of
risks and uncertainties that could significantly affect the Company's current
plans and expectations and future financial condition and results. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Shareholders and investors are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in the
Company's filings and reports. For a detailed discussion of the risk factors
associated with the Company, please refer to the Company's filings with the
Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2001.
9
Report of
INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS AND STOCKHOLDERS
HEALTHCARE REALTY TRUST INCORPORATED
We have audited the accompanying consolidated balance sheets of
Healthcare Realty Trust Incorporated as of December 31, 2001 and 2000, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Healthcare Realty Trust Incorporated at December 31, 2001 and 2000, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
January 24, 2002
10
Consolidated
BALANCE SHEETS
December 31,
----------------------------
(Dollars in thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------------
ASSETS
Real estate properties:
Land $ 149,522 $ 152,254
Buildings and improvements 1,332,948 1,290,395
Personal property 7,815 5,785
Construction in progress 18,255 30,914
----------------------------
1,508,540 1,479,348
Less accumulated depreciation (158,876) (120,522)
----------------------------
Total real estate properties, net 1,349,664 1,358,826
Cash and cash equivalents 2,930 1,788
Restricted cash -- 577
Mortgage notes receivable 122,074 171,006
Other assets, net 81,242 54,879
----------------------------
Total assets $ 1,555,910 $ 1,587,076
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable $ 505,222 $ 536,781
Accounts payable and accrued liabilities 18,894 22,020
Other liabilities 19,707 20,238
----------------------------
Total liabilities 543,823 579,039
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized; issued and
outstanding 2001 and 2000 - 3,000,000; $75,000 liquidation preference 30 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding 2001 - 41,465,919; 2000 - 40,314,399 414 403
Additional paid-in capital 1,089,127 1,061,190
Deferred compensation (12,852) (9,730)
Cumulative net income 375,061 295,174
Cumulative dividends (439,693) (339,030)
----------------------------
Total stockholders' equity 1,012,087 1,008,037
----------------------------
Total liabilities and stockholders' equity $ 1,555,910 $ 1,587,076
============================
See accompanying notes.
11
Consolidated
STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------
REVENUES
Master lease rental income $ 99,962 $ 97,238 $ 92,070
Property operating income 67,750 62,400 57,778
Straight line rent 5,749 7,827 6,885
Mortgage interest income 17,254 22,755 25,940
Management fees 1,533 2,785 2,727
Interest and other income 2,290 2,333 1,857
-----------------------------------------------
194,538 195,338 187,257
-----------------------------------------------
EXPENSES
General and administrative 10,110 8,739 7,287
Property operating expenses 26,515 22,628 21,077
Interest 38,110 42,995 38,603
Depreciation 40,823 38,994 38,566
Amortization 303 513 473
Provision for loss on investment 0 1,000 0
-----------------------------------------------
115,861 114,869 106,006
-----------------------------------------------
Net income before net gain (loss) on
sale of real estate properties 78,677 80,469 81,251
Net gain (loss) on sale of real estate properties 1,210 (668) 4,776
-----------------------------------------------
Net income $ 79,887 $ 79,801 $ 86,027
===============================================
Net income per common share - Basic $ 1.84 $ 1.85 $ 2.02
===============================================
Net income per common share - Diluted $ 1.81 $ 1.82 $ 1.99
===============================================
Weighted average common shares outstanding - Basic 39,840,285 39,544,400 39,326,594
===============================================
Weighted average common shares outstanding - Diluted 40,463,158 40,301,409 39,810,306
===============================================
Dividend declared, per common share,
during the period $ 2.31 $ 2.23 $ 2.15
===============================================
See accompanying notes.
12
Consolidated
STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Cumulative Total
(Dollars in thousands, Preferred Common Paid-In Deferred Net Cumulative Stockholders'
except per share data) Stock Stock Capital Compensation Income Dividends Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 30 $ 398 $ 1,049,039 $ (10,662) $ 129,346 $ (150,447) $ 1,017,704
Issuance of common stock -- 2 5,345 -- -- -- 5,347
Shares awarded as deferred
stock compensation -- -- 21 (21) -- -- 0
Deferred stock compensation
amortization -- -- -- 1,174 -- -- 1,174
Net income -- -- -- -- 86,027 -- 86,027
Dividends - common
($2.15 per share) -- -- -- -- -- (85,693) (85,693)
Dividends - preferred
($2.22 per share) -- -- -- -- -- (6,656) (6,656)
--------------------------------------------------------------------------------------------------
Balance at December 31, 1999 30 400 1,054,405 (9,509) 215,373 (242,796) 1,017,903
Issuance of stock -- 2 5,171 -- -- -- 5,173
Shares awarded as deferred
stock compensation -- 1 1,614 (1,606) -- -- 9
Deferred stock compensation
amortization -- -- -- 1,385 -- -- 1,385
Net income -- -- -- -- 79,801 -- 79,801
Dividends - common
($2.23 per share) -- -- -- -- -- (89,577) (89,577)
Dividends - preferred
($2.22 per share) -- -- -- -- -- (6,657) (6,657)
--------------------------------------------------------------------------------------------------
Balance at December 31, 2000 30 403 1,061,190 (9,730) 295,174 (339,030) 1,008,037
Issuance of stock -- 9 22,932 -- -- -- 22,941
Shares awarded as deferred
stock compensation -- 2 5,005 (5,007) -- -- 0
Deferred stock compensation
amortization -- -- -- 1,885 -- -- 1,885
Net income -- -- -- -- 79,887 -- 79,887
Dividends - common
($2.31 per share) -- -- -- -- -- (94,007) (94,007)
Dividends - preferred
($2.22 per share) -- -- -- -- -- (6,656) (6,656)
--------------------------------------------------------------------------------------------------
Balance at December 31, 2001 $ 30 $ 414 $ 1,089,127 $ (12,852) $ 375,061 $ (439,693) $ 1,012,087
=================================================================================================
See accompanying notes.
13
Consolidated
STATEMENTS OF
CASH FLOWS
Year Ended December 31,
-----------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 79,887 $ 79,801 $ 86,027
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 43,244 41,553 41,225
Deferred compensation amortization 1,885 1,385 1,153
Increase (decrease) in other liabilities 165 11,438 (1,973)
Increase in other assets (23,904) (10,924) (17,288)
Increase (decrease) in accounts payable and
accrued liabilities (3,121) 5,056 (5,781)
Increase in straight line rent (5,604) (7,827) (6,885)
(Gain) loss on sales of real estate (1,210) 668 (4,776)
-----------------------------------------
Net cash provided by operating activities 91,342 121,150 91,702
INVESTING ACTIVITIES
Acquisition and development of real estate properties (53,971) (97,750) (55,664)
Funding of mortgages (2,962) (7,955) (27,475)
Proceeds from mortgage payments/sales 51,811 86,610 18,749
Proceeds from sale of real estate 24,858 15,048 46,929
-----------------------------------------
Net cash provided by (used in) investing activities 19,736 (4,047) (17,461)
FINANCING ACTIVITIES
Borrowings on notes and bonds payable 520,652 151,760 125,200
Repayments on notes and bonds payable (552,866) (179,419) (121,608)
Dividends paid (100,663) (96,234) (92,349)
Proceeds from issuance of common stock 22,941 5,182 5,202
-----------------------------------------
Net cash used in financing activities (109,936) (118,711) (83,555)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 1,142 (1,608) (9,314)
Cash and cash equivalents, beginning of year 1,788 3,396 12,710
-----------------------------------------
Cash and cash equivalents, end of year $ 2,930 $ 1,788 $ 3,396
=========================================
See accompanying notes.
14
Notes to
CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Healthcare Realty Trust Incorporated (the "Company") invests in
healthcare-related properties and mortgages located throughout the United
States, including ancillary hospital facilities, skilled nursing facilities,
physician clinics, comprehensive ambulatory care centers, medical office
buildings, inpatient rehabilitation facilities, assisted living facilities,
other inpatient facilities and other outpatient facilities. 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. These activities constitute a single business segment as defined by
the Financial Accounting Standards Board Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." As of December 31, 2001, the
Company had invested in 245 properties and mortgages located in 29 states,
affiliated with 65 healthcare-related entities.
Basis of Presentation
The financial statements include the accounts of the Company, its
wholly owned subsidiaries and certain other affiliated corporations with respect
to which the Company controls the operating activities and receives
substantially all economic benefits. Significant intercompany accounts and
transactions have been eliminated.
Use of Estimates in Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
Real Estate Properties
Real estate properties are recorded at cost. Transaction fees and
acquisition costs are included with the purchase price as appropriate. The cost
of real properties acquired is allocated between land, buildings, and personal
property based upon estimated market values at the time of acquisition.
Depreciation is provided for on a straight-line basis over the following
estimated useful lives:
Buildings and improvements 31.5 or 39.0 years
Personal property 3.0 to 7.0 years
Restricted Cash
Restricted cash includes security deposits and other funds set aside
for capital expenditures on certain investments of the Company. The Company had
no restricted cash at December 31, 2001.
Mortgage Notes Receivable
Mortgage notes receivable, substantially all of which were acquired in
a 1998 acquisition, were recorded at their fair value at the date of
acquisition. As of December 31, 2001, the mortgage portfolio had a weighted
average maturity of approximately 4.8 years. Interest rates ranged from 8.34% to
14.04% and are generally adjustable each year to reflect actual increases in the
Consumer Price Index subject to various minimum increases. Substantially all of
the mortgages are subject to a prepayment penalty.
Cash and Cash Equivalents
Short-term investments with maturities of three months or less at date
of purchase are classified as cash equivalents.
15
Federal Income Taxes
No provision has been made for federal income taxes. The Company
intends at all times to qualify as a real estate investment trust under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended. The Company
must distribute at least 90% per annum (95% for years prior to 2001) of its real
estate investment trust taxable income to its stockholders and meet other
requirements to continue to qualify as a real estate investment trust.
Other Assets
Other assets consist primarily of receivables, deferred costs and
intangible assets. Deferred financing costs are amortized over the term of the
related credit facility using the interest method. Intangible assets are
amortized straight-line over the applicable lives of the assets, which range
from three to forty years. Accumulated amortization was $2.9 million and $2.8
million at December 31, 2001 and 2000, respectively.
Revenue Recognition
Rental income related to noncancelable operating leases is recognized
as earned over the life of the lease agreements on a straight-line basis. Any
additional rent, as defined in each lease agreement, is recognized as earned.
The Company had two customers in each of the years ended 2001, 2000 and 1999 who
accounted for more than 10% of the Company's revenues. Healthsouth and HCA Inc.
accounted for 13% and 11%, respectively, of revenues for each of the three years
2001, 2000 and 1999.
Stock Issued to Employees
The Company has elected to follow Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its stock issued to employees.
Net Income Per Share
Basic earnings per share is calculated using weighted average shares
outstanding less issued and outstanding but unvested restricted shares of Common
Stock.
Diluted earnings per share is calculated using weighted average shares
outstanding plus the dilutive effect of convertible debt and restricted shares
of Common Stock and outstanding stock options, using the treasury stock method
and the average stock price during the period.
Reclassification
Certain reclassifications have been made in the financial statements
for the years ended 2000 and 1999 to conform to the 2001 presentation. These
reclassifications had no effect on the results of operations as previously
reported.
2. REAL ESTATE PROPERTY LEASES
The Company's properties are generally leased or supported pursuant to
noncancelable, fixed-term operating leases and other financial support
arrangements with expiration dates from 2002 to 2023. Some leases and financial
arrangements provide for fixed rent renewal terms of five years, or multiples
thereof, in addition to market rent renewal terms. The leases generally provide
the lessee, during the term of the lease and for a short period thereafter, with
an option and a right of first refusal to purchase the leased property. Each
lease generally requires the lessee to pay minimum rent, additional rent based
upon increases in the Consumer Price Index or increases in net patient revenues
(as defined in the lease agreements), and all taxes (including property tax),
insurance, maintenance and other operating costs associated with the leased
property.
16
Future minimum lease and guaranty payments under the noncancelable
operating leases and financial support arrangements as of December 31, 2001 are
as follows (in thousands):
2002 $ 155,429
2003 159,372
2004 146,769
2005 138,491
2006 134,824
2007 and thereafter 589,892
-----------
$ 1,324,777
===========
17
3. REAL ESTATE PROPERTIES
The following table summarizes the Company's real estate properties by
type of facility and by state as of December 31, 2001 (dollars in thousands).
NUMBER OF BUILDINGS AND
FACILITIES IMPROVEMENTS PERSONAL ACCUMULATED
(1) LAND AND CIP PROPERTY TOTAL DEPRECIATION
- --------------------------------------------------------------------------------------------------------------------------------
ANCILLARY HOSPITAL FACILITIES:
California 9 $ 18,380 $ 62,428 $ 68 $ 80,876 $ 9,811
Florida 10 4,015 65,712 117 69,844 10,311
Nevada 2 2,293 48,274 25 50,592 4,782
Texas 9 8,182 55,561 281 64,024 11,072
Virginia 9 13,693 67,967 89 81,749 9,155
Other states 20 13,457 152,366 70 165,893 12,156
-------------------------------------------------------------------------------------
59 60,020 452,308 650 512,978 57,287
SKILLED NURSING FACILITIES:
Colorado 3 2,525 18,916 0 21,441 2,416
Oklahoma 5 120 12,931 0 13,051 680
Pennsylvania 3 479 20,138 0 20,617 2,031
Texas 2 1,796 17,670 0 19,466 2,246
Virginia 6 1,452 34,958 0 36,410 2,405
Other states 14 7,327 72,548 215 80,090 12,815
-------------------------------------------------------------------------------------
33 13,699 177,161 215 191,075 22,593
PHYSICIAN CLINICS:
Florida 9 11,620 43,222 51 54,893 6,445
Illinois 1 207 11,473 0 11,680 1,150
Massachusetts 4 3,137 23,686 0 26,823 2,379
Tennessee 5 2,942 8,337 0 11,279 802
Texas 1 5,134 11,804 0 16,938 1,184
Other states 11 4,920 26,728 1 31,649 2,998
-------------------------------------------------------------------------------------
31 27,960 125,250 52 153,262 14,958
COMPREHENSIVE AMBULATORY CARE CENTERS:
Arizona 1 2,095 10,160 6 12,261 717
California 1 3,375 25,623 2 29,000 2,972
Florida 6 2,008 54,831 12 56,851 5,009
Missouri 3 3,726 23,370 4 27,100 2,189
Texas 2 1,644 20,241 75 21,960 4,520
-------------------------------------------------------------------------------------
13 12,848 134,225 99 147,172 15,407
MEDICAL OFFICE BUILDINGS:
Florida 2 2,026 7,558 1 9,585 726
Tennessee 1 1,734 9,015 5 10,754 903
Texas 2 1,161 9,099 444 10,704 2,272
Virginia 4 1,927 12,332 129 14,388 2,001
Other States 1 0 3,549 0 3,549 0
-------------------------------------------------------------------------------------
10 6,848 41,553 579 48,980 5,902
INPATIENT REHABILITATION FACILITIES:
Alabama 1 0 17,722 0 17,722 1,471
Florida 1 0 11,703 0 11,703 972
Pennsylvania 6 4,719 107,529 0 112,248 10,158
Texas 1 1,116 11,800 0 12,916 1,185
-------------------------------------------------------------------------------------
9 5,835 148,754 0 154,589 13,786
ASSISTED LIVING FACILITIES:
Florida 3 2,016 21,143 0 23,159 1,335
New Jersey 2 1,809 16,825 0 18,634 1,546
Pennsylvania 7 1,425 28,971 0 30,396 2,830
Texas 8 0 70,988 12 71,000 7,113
Virginia 3 889 16,130 0 17,019 1,602
Other states 16 3,736 65,387 0 69,123 4,716
-------------------------------------------------------------------------------------
39 9,875 219,444 12 229,331 19,142
OTHER INPATIENT FACILITIES:
Michigan 1 4,405 9,153 0 13,558 923
Pennsylvania 1 0 2,901 0 2,901 0
Texas 1 506 5,386 0 5,892 570
-------------------------------------------------------------------------------------
3 4,911 17,440 0 22,351 1,493
OTHER OUTPATIENT FACILITIES:
Alabama 2 817 10,604 8 11,429 2,542
Florida 2 3,111 6,370 0 9,481 468
Missouri 1 849 3,621 0 4,470 362
Mississippi 1 538 3,723 30 4,291 812
Nevada 1 940 2,861 0 3,801 547
Other states 5 1,271 7,889 8 9,168 1,004
-------------------------------------------------------------------------------------
12 7,526 35,068 46 42,640 5,735
Corporate Property 0 0 6,162 6,162 2,573
Total Property 209 $ 149,522 $1,351,203 $ 7,815 $1,508,540 $ 158,876
(1) Includes four lessee developments.
18
4. NOTES AND BONDS PAYABLE
Notes and bonds payable at December 31, 2001 and 2000 consisted of the
following (in thousands):
December 31,
---------------------
2001 2000
- -----------------------------------------------------------------------------
Unsecured credit facility due 2001 $ 0 $265,000
Unsecured credit facility due 2004 38,000 0
Term loan facility 0 25,000
Senior notes due 2002 18,000 36,000
Senior notes due 2006 70,000 70,000
Senior Notes due 2011, net 298,906 0
6.55% Convertible subordinated debentures, net 0 74,501
10.50% Convertible subordinated debentures, net 0 3,351
Mortgage notes payable 75,649 57,096
Other note payable 4,667 5,833
---------------------
$505,222 $536,781
=====================
Unsecured Credit Facilities
In July 2001, the Company entered into a $150 million credit facility
(the "Unsecured Credit facility due 2004"). This credit facility replaced the
$300 million credit facility (the "Unsecured Credit Facility due 2001") which
was fully retired and terminated in May 2001 with proceeds from the sale of $300
million Senior Notes due 2011. The Unsecured Credit Facility due 2004 bears
interest at LIBOR rates plus 1.15%, payable quarterly, and matures in July 2004.
In addition, the Company pays a facility fee of 0.2% on the commitment. The
Unsecured Credit Facility due 2004 contains certain representations, warranties,
and financial and other covenants customary in such loan agreements. At December
31, 2001, the Company had available borrowing capacity of $112.0 million under
the Unsecured Credit Facility due 2004.
Term Loan Facility
In 1998, the Company entered into a $200.0 million term loan facility
(the "Term Loan Facility"). The Term Loan Facility was fully repaid in April
2001.
Senior Notes due 2002
On September 18, 1995, the Company privately placed $90.0 million of
unsecured senior notes (the "Senior Notes due 2002") with 16 institutions. The
Senior Notes due 2002 bear interest at 7.41%, payable semi-annually, and mature
on September 1, 2002.The remaining balance of $18.0 million is due September 1,
2002. The note agreements pursuant to 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 due 2006 bear
interest at 9.49%, payable semi-annually, and mature on April 1, 2006. On April
1, 2004 and 2005, the Company must repay $20.3 million of the principal with the
remaining principal balance of $29.4 million payable upon maturity. The note
agreements pursuant to which the Senior Notes due 2006 were purchased contain
certain representations, warranties and financial and other covenants customary
in such loan agreements.
19
Senior Notes due 2011
In May 2001, the Company publicly issued $300.0 million unsecured
senior notes due 2011 (the "Senior Notes due 2011"). The Senior Notes due 2011
bear interest at 8.125%, payable semi-annually on May 1 and November 1,
beginning November 1, 2001, and are due on May 1, 2011, unless redeemed earlier
by the Company. The notes were issued at a discount of approximately $1.5
million, yielding a 8.202% interest rate per annum. A portion of the net
proceeds from the issuance of the Senior Notes due 2011 were used to fully
retire in May 2001 the Unsecured Credit Facility due 2001. The balance was used
as a portion of the funds for the redemption of the 6.55% and 10.5% Convertible
Subordinated Debentures in July 2001.
Upon repayment of the Term Loan Facility in April 2001 and the
repayment of the Unsecured Credit Facility due 2001 in May 2001, the Company's
outstanding debt was primarily fixed rate. The Company's practice and objective
has been to protect itself against changes in fair value due to changes in
market interest rates by maintaining a mix of variable and fixed rate debt. In
order to accomplish this objective, in June 2001, the Company entered into
interest rate swap agreements with two lending institutions for notional amounts
totaling $125.0 million which are expected to offset changes in the fair value
of $125.0 million of the Senior Notes due 2011. In both interest rate swaps, the
Company receives an 8.125% fixed rate and pays a variable rate of LIBOR plus
1.99%, set in arrears, with semi-annual settlement dates each May 1 and November
1. The swaps are not callable for the first five years. After five years, the
swaps are callable, at fair value, by either party if, and only if, the other
party is downgraded below investment grade by two or more credit rating
agencies. These derivative instruments meet all requirements of a fair value
hedge and are accounted for using the "shortcut method" as set forth in FAS 133.
As such, changes in fair value will have no impact on the income statement. At
December 31, 2001, the fair value of the hedge is reported in other assets with
an offsetting increase to the Senior Notes due 2011 included in notes and bonds
payable on the Company's balance sheet.
Convertible Subordinated Debentures
In 1998, the Company assumed in an acquisition and recorded at fair
value $74.7 million aggregate face value amount of 6.55% Convertible
Subordinated Debentures (the "6.55% Debentures") and $3.8 million aggregate face
value amount of 10.5% Subordinated Debentures (the "10.5% Debentures"). During
the second quarter of 2001, the Company notified the holders of the 6.55%
Debentures and 10.5% Debentures that it was exercising its call option. During
the call period, holders converted $3.3 million principal amount of these
debentures into 169,686 shares of the Company's common stock. On July 11, 2001,
the Company redeemed the 6.55% Debentures for a total redemption price,
including unpaid interest, of $1,015 per $1,000 principal amount and redeemed
the 10.5% Debentures for a total redemption price, including unpaid interest, of
$1,044 per $1,000 principal amount.
These redemptions of the 6.55% Debentures and 10.5% Debentures, which
totaled approximately $74.7 million, were funded from proceeds of the Senior
Notes due 2011 and the Unsecured Credit Facility due 2004.
20
Mortgage Notes Payable
At December 31, 2001, the Company had outstanding 13 non-recourse
mortgage notes payable, with the related collateral, as follows (dollars in
millions):
Contractual
Effective Collateral at Balance at
Original Interest Maturity December 31, December 31,
Mortgagor Balance Rate Date Collateral 2001 2001
--------- ------- ---- ---- ---------- ---- ----
Life Insurance Co. $ 23.3 7.765% 7/26 Ancillary hospital facility $ 43.7 $ 22.1
Life Insurance Co. 4.7 7.765% 1/17 Ancillary hospital facility 10.8 4.1
Life Insurance Co. 17.1 7.765% 4/04 Two ambulatory surgery 37.5 16.0
centers & one ancillary
hospital facility
Commercial Bank 35.0 7.220% 5/11 Nine ancillary hospital 78.1 33.4
facilities & one physician
clinic ------- -------
$ 170.1 $ 75.6
======= =======
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 eight notes totaling $35.0 million
and the related collateral are held by special purpose entities whose sole
members are wholly owned subsidiaries of the Company. These eight fully
amortizing notes are payable in monthly installments of principal and interest
and mature in May 2011. The contractual interest rates for the 13 outstanding
mortgage notes range from 7.22% to 8.50%. In the third quarter of 2001, the
Company repaid four mortgage notes payable due 2003 totaling $14.2 million.
Other Note Payable
On July 31, 1999, the Company entered into a $7.0 million note with a
commercial bank. The note bears interest at 7.53%, is payable in equal
semi-annual installments of principal and interest and fully amortizes in July
2005.
Other Long-Term Debt Information
Future maturities of long-term debt are as follows (in thousands):
2002 $ 22,006
2003 4,616
2004 78,202
2005 25,069
2006 33,290
2007 and thereafter 342,039
-----------
$ 505,222
===========
During the years ended December 31, 2001, 2000 and 1999, interest paid
totaled $37.8 million, $43.1 million and $41.5 million, and capitalized interest
totaled $2.0 million, $1.8 million and $1.9 million, respectively.
21
5. STOCKHOLDERS' EQUITY
The Company had common and preferred shares outstanding for each of the
three years ended December 31, as follows:
Year Ended December 31,
----------------------------------------
2001 2000 1999
---- ---- ----
Common Shares
Balance, beginning of period 40,314,399 40,004,579 39,792,775
Issuance of stock 919,656 206,603 210,754
Shares awarded as deferred stock compensation 231,864 103,217 1,050
----------------------------------------
Balance, end of period 41,465,919 40,314,399 40,004,579
========================================
Preferred Shares
Balance, beginning of period 3,000,000 3,000,000 3,000,000
Issuance of stock -- -- --
----------------------------------------
Balance, end of period 3,000,000 3,000,000 3,000,000
========================================
The Company's 8 7/8% Series A Voting Cumulative Preferred Stock (the
"Preferred Stock"), par value $.01 per share, is senior to the Company's common
stock with respect to dividend rights and rights upon dissolution of the
Company. Holders of the Preferred Stock are entitled to receive cumulative
preferential cash dividends of 8 7/8 % per annum of the liquidation preference
of $25.00 per share payable quarterly, in arrears. On or after September 30,
2002, the Company, at its option, may redeem the Preferred Stock, in whole or in
part, at any time or from time to time, at the redemption price of $25.00 per
share. The holder of each share of the Preferred Stock has one vote, together
with the holders of common stock, on all matters on which stockholders may vote.
In December 2001, the Company sold 525,000 shares of common stock, par
value $.01 per share, in an underwritten public offering. The net proceeds of
$14.0 million were used to repay outstanding indebtedness under the Unsecured
Credit Facility due 2004, to fund development commitments and for general
corporate purposes.
Comprehensive income is the same as net income for the Company.
6. BENEFIT PLANS
Executive Retirement Plan
The Company has an Executive Retirement Plan, under which an executive
designated by the Compensation Committee of the Board of Directors may receive
upon normal retirement (defined to be when the executive reaches age 65 and has
completed five years of service with the Company) 60% of the executive's final
average earnings (defined as the average of the executive's highest three years'
earnings) plus 6% of final average earnings times years of service after age 60
(but not more than five years), less 100% of certain other retirement benefits
received by the executive.
Retirement Plan for Outside Directors
The Company has a retirement plan for outside directors which upon
retirement will pay annually, for a period not to exceed 15 years, an amount
equal to the director's pay immediately preceding retirement from the Board.
22
Retirement Plan Information
Net expense for both the Executive Retirement Plan and the Retirement
Plan for Outside Directors (the "Plans") for the two years in the period ended
December 31, 2001 is comprised of the following (in thousands):
2001 2000
- --------------------------------------------------------------------------------
Service cost $ 392 $ 304
Interest cost 243 192
Other 14 0
-----------------------
$ 649 $ 496
=======================
The Plans are unfunded and benefits will be paid from earnings of the
Company. The following table sets forth the benefit obligations at December 31,
2001 and 2000 (in thousands).
2001 2000
- --------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 2,950 $ 2,324
Service cost 392 304
Interest cost 243 192
Other 14 0
Actuarial gain (loss) 535 130
--------------------
Benefit obligation at end of year 4,134 2,950
Unrecognized net actuarial (gain) loss (452) 84
--------------------
Net pension liability in accrued liabilities $ 3,682 $ 3,034
====================
Accounting for the Executive Retirement Plan for the years ended
December 31, 2001 and 2000 assumes discount rates of 7.40% and 7.73%,
respectively, and a compensation increase rate of 2.7%. Accounting for the
Retirement Plan for Outside Directors assumes discount rates of 7.40% and 7.73%,
respectively.
23
7. STOCK PLANS
1993 Employees Stock Incentive Plan
The Company is authorized to issue stock representing up to 7.5% of its
outstanding shares of common stock (the "Employee Plan Shares") under the 1993
Employees Stock Incentive Plan (the "Employee Plan"). As of December 31, 2001
and 2000, the Company had a total of 2,256,346 and 2,401,396 Employee Plan
Shares authorized, respectively, that had not been issued. Unless terminated
earlier, the Employee Plan will terminate on January 1, 2003. As of December 31,
2001 and 2000, the Company had issued a total of 853,598 and 622,184, and had
specifically reserved, but not issued, a total of 333,750 and 445,000 Employee
Plan Shares (the "Reserved Stock"), respectively, for performance-based awards
to employees under the Employee Plan. The Employee Plan Shares are subject to
fixed vesting periods varying from three to twelve years beginning on the date
of issue. If an employee voluntarily terminates employment with the Company
before the end of the vesting period, the shares are forfeited, at no cost to
the Company. Once the Employee Plan Shares have been issued, the employee has
the right to receive dividends and the right to vote the shares. For 2001 and
2000, compensation expense resulting from the amortization of the value of these
shares was $1.9 million and $1.4 million, respectively.
Non-Employee Directors' Stock Plan
Pursuant to the 1995 Restricted Stock Plan for Non-Employee Directors
(the "1995 Directors' Plan"), the directors' stock vests in each director upon
the date three years from the date of issue and is subject to forfeiture prior
to such date upon termination of the director's service, at no cost to the
Company. As of December 31, 2001 and 2000, the Company had a total of 83,977 and
84,427 authorized shares under the 1995 Directors' Plan, respectively, that had
not been issued. As of December 31, 2001 and 2000, the Company had issued a
total of 16,023 and 15,573 shares, respectively, pursuant to the 1995 Directors'
Plan. For 2001 and 2000, compensation expense resulting from the amortization of
the value of these shares was $12,637 and $24,516, respectively.
Dividend Reinvestment Plan
The Company is authorized to issue 1,000,000 shares of common stock
under the Dividend Reinvestment Plan. As of December 31, 2001 and 2000, the
Company had a total of 789,582 and 820,337 shares authorized, respectively, that
had not been issued.
Employee Stock Purchase Plan
Effective January 2000, the Company adopted the 2000 Employee Stock
Purchase Plan (the "2000 Employee Purchase Plan") pursuant to which the Company
is authorized to issue shares of common stock. The 2000 Employee Purchase Plan
effectively replaces a 1995 Employee Purchase Plan (the "1995 Employee Purchase
Plan"), although options issued under the 1995 Employee Purchase Plan prior to
2000 remain exercisable until their scheduled expiration date. As of December
31, 2001 and 2000, the Company had a total of 628,211 and 662,525 shares
authorized collectively under the 2000 and 1995 Employee Purchase Plans,
respectively, which had not been issued or optioned. Under the 2000 Employee
Purchase Plan, each eligible employee as of January 2000 and each subsequent
January 1 has been granted an option to purchase up to $25,000 of common stock
at the lesser of 85% of the market price on the date of grant or 85% of the
market price on the date of exercise of such option (the "Exercise Date"). The
number of shares subject to each year's option becomes fixed on the date of
grant. Options granted under both the 2000 and 1995 Employee Purchase Plans
expire if not exercised 27 months after each such option's date of grant.
24
A summary of the Employee Purchase Plans' collective activity and
related information for the years ended December 31 is as follows:
All Options
---------------------------------------------
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 266,007 158,605 85,716
Granted 204,624 289,272 144,886
Exercised (39,359) (2,892) (5,524)
Forfeited (90,678) (136,003) (37,775)
Expired (79,632) (42,975) (28,698)
--------------------------------------------
Outstanding and exercisable at end of year 260,962 266,007 158,605
Weighted-average fair value of options granted during the year
(calculated as of the grant date) $ 2.41 $ 1.68 $ 0.76
Weighted-average exercise price of options exercised during
the year $ 15.57 $ 14.84 $ 18.00
Weighted-average exercise price of options outstanding
(calculated as of December 31) $ 16.72 $ 17.72 $ 22.57
Range of exercise prices of options outstanding (calculated as of
December 31) $14.98-$23.75 $14.98-$23.76 $19.52-$23.76
Weighted-average contractual life of outstanding options (calculated
as of December 31, in years) 0.8 0.9 1.0
The fair value for these options was estimated at the date of grant
using a Black-Scholes options pricing model with the following assumptions for
2001, 2000 and 1999: risk-free interest rates of 2.47%, 5.36% and 6.24%;
dividend yields of 8.50%, 13.05% and 9.87%; volatility factors of the expected
market price of the Company's common stock of .185, .187 and .178; and an
expected life of each option of 1.13 years, respectively.
The Company recognized no compensation expense related to the 2000
Employee Purchase Plan. If compensation expense had been recognized, the
pro-forma effect on net income and earnings per share for the three years in the
period ended December 31, 2001, calculated in accordance with Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," would have been as follows (dollars in thousands, except for per
share data):
2001 2000 1999
- --------------------------------------------------------------------------------
Pro-forma net income $ 79,394 $ 79,315 $ 85,917
Pro-forma earnings per share
Basic $ 1.83 $ 1.84 $ 2.02
Assuming dilution $ 1.80 $ 1.81 $ 1.99
25
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 years in
the period ended December 31, 2001 (dollars in thousands, except per share
data).
Year Ended December 31,
------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------
BASIC EPS
Average Shares Outstanding 40,678,069 40,151,220 39,857,587
Actual Restricted Stock Shares (837,784) (606,820) (530,993)
------------------------------------------------
Denominator - Basic 39,840,285 39,544,400 39,326,594
================================================
Net income $ 79,887 $ 79,801 $ 86,027
Preferred Stock Dividend (6,656) (6,657) (6,656)
------------------------------------------------
Numerator - Basic $ 73,231 $ 73,144 $ 79,371
================================================
Per share amount $ 1.84 $ 1.85 $ 2.02
================================================
DILUTED EPS
Average Shares Outstanding 40,678,069 40,151,220 39,857,587
Actual Restricted Stock Shares (837,784) (606,820) (530,993)
Dilution for Convertible Debentures 0 181,136 0
Restricted Shares - Treasury 508,737 533,955 482,496
Dilution For Employee Stock Purchase Plan 114,136 41,918 1,216
------------------------------------------------
Denominator - Diluted 40,463,158 40,301,409 39,810,306
================================================
Numerator - Basic $ 73,231 $ 73,144 $ 79,371
Convertible Subordinated Debenture Interest 0 275 0
------------------------------------------------
Numerator - Diluted $ 73,231 $ 73,419 $ 79,371
================================================
Per share amount $ 1.81 $ 1.82 $ 1.99
================================================
9. COMMITMENTS AND CONTINGENCIES
As of December 31, 2001, the Company had a net investment of
approximately $18.3 million in four build-to-suit developments in progress,
which have a total remaining funding commitment of approximately $13.3 million.
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 which the Company believes will
protect and enhance the value of the real estate properties acquired from
Capstone. These agreements provide for the issuance of 150,000 shares per year
of common stock of the Company to the individuals on October 15 of the years
1999, 2000, 2001, and 2002, provided all terms of the agreements are met. The
Company issued 150,000 shares during 2001, 2000 and 1999 pursuant to these
agreements.
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 sought damages in excess of four million dollars for a
variety of claims 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. 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. On December 12, 2001, the parties settled the case
which was dismissed with prejudice on January 8, 2002. The settlement has no
material financial effect on the Company.
26
10. OTHER DATA
Funds From Operations (Unaudited)
Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, Inc. ("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 funds from operations requires the inclusion of
straight-line rental revenue in funds from operations. In 2001, the Company also
excluded certain debt-related charges in computing FFO, and in 2000 excluded its
provision for loss on investment in computing FFO although NAREIT's definition
of funds from operations requires its inclusion. 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 accounting principles generally accepted in the United States,
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, whichever the case may
be, related internal costs.
Year Ended December 31,
------------------------------------------------
(Dollars in thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
Income before net gain (loss) on sale of real estate properties (2) $ 78,677 $ 80,469 $ 81,251
Non-recurring debt-related charges (1) 607 0 0
Elimination of rental revenues recognized
on a straight line basis (1) (5,748) (7,827) (6,885)
Preferred stock dividend (6,656) (6,657) (6,656)
Real estate depreciation 40,042 38,393 38,017
Provision for loss on investment (1) 0 1,000 0
------------------------------------------------
Total Adjustments 28,245 24,909 24,476
------------------------------------------------
Funds From Operations - Basic $ 106,922 $ 105,378 $ 105,727
Convertible Subordinated Debenture Interest 0 275 0
------------------------------------------------
Funds From Operations - Diluted $ 106,922 $ 105,653 $ 105,727
================================================
Weighted average common shares outstanding - Basic 39,840,285 39,544,400 39,326,594
================================================
Weighted average common shares outstanding - Diluted 40,463,158 40,301,409 39,810,306
================================================
Funds From Operations Per Common Share - Basic $ 2.68 $ 2.66 $ 2.69
================================================
Funds From Operations Per Common Share - Diluted $ 2.64 $ 2.62 $ 2.66
================================================
(1) The Company calculates its FFO using a modified version of NAREIT's
October 1999 definition of funds from operations. The Company eliminates
straight-line rental revenue in computing FFO although NAREIT's definition of
funds from operations requires the inclusion of straight-line rental revenue.
Likewise, in 2001 the Company excluded certain debt-related charges in computing
FFO, and in 2000 excluded its provision for loss on investment in computing FFO
although NAREIT's definition of funds from operations requires its inclusion. If
the Company had followed NAREIT's definition of funds from operations, as other
healthcare REIT's do, FFO on a diluted basis would have been $2.77, $2.79, and
$2.83 per common share for the twelve months ended December 31, 2001, December
31, 2000, and December 31, 1999, respectively.
(2) 2001, 2000, and 1999 amounts include $1.9 million, $1.4 million and
$1.2 million, respectively, of stock-based, long-term, incentive compensation
expense, a non-cash expense.
27
Taxable Income
The Company has elected to be taxed as a real estate investment trust
("REIT"), as defined under the Internal Revenue Code of 1986, as amended. To
qualify as a REIT, the Company must meet a number of organizational and
operational requirements, including a requirement that it currently distribute
at least 90% (95% for years prior to 2001) of its taxable income to its
stockholders.
As a REIT, the Company generally will not be subject to federal income
tax on taxable income it distributes currently to its stockholders. Accordingly,
no provision for federal income taxes has been made in the accompanying
consolidated financial statements. If the Company fails to qualify as a REIT,
for any taxable year, then it will be subject to federal income taxes at regular
corporate rates, including any applicable alternative minimum tax, and may not
be able to qualify as a REIT for four subsequent taxable years. Even if the
Company qualifies as a REIT, it may be subject to certain state and local taxes
on its income and property and to federal income and excise tax on its
undistributed taxable income.
Earnings and profits, the current and accumulated amounts of which
determine the taxability of distributions to stockholders, varies from net
income because of different depreciation recovery periods and methods, and other
items.
The following table reconciles the Company's consolidated net income to
taxable income for the three years ended December 31, 2001 (dollars in
thousands).
2001 2000 1999
------------------------------------
Net income $ 79,887 $ 79,801 $ 86,027
Depreciation and amortization (1) 41,126 39,507 39,039
Depreciation and amortization (2) (33,625) (30,996) (29,873)
Gain or loss on disposition of depreciable assets 767 (343) (1,837)
Straight line rent (5,749) (7,827) (6,885)
Other 802 1,148 (3,379)
------------------------------------
3,321 1,489 (2,935)
------------------------------------
Taxable income (3) $ 83,208 $ 81,290 $ 83,092
====================================
(1) Per Statements of Income
(2) Tax basis
(3) Before REIT dividend paid deduction
Return of Capital
Distributions in excess of earnings and profits generally constitute a
return of capital. For the years ended December 31, 2001, 2000 and 1999,
dividends paid per share of common stock were $2.31, $2.23 and $2.15,
respectively, which consisted of ordinary income per share of $1.95, $1.90 and
$2.00 and return of capital per share of $0.36, $0.33 and $0.15 respectively.
For the years ended December 31, 2001, 2000 and 1999, dividends paid per share
of preferred stock were $2.22 for each year, all of which was ordinary income.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, receivables and
payables are a reasonable estimate of their fair value at December 31, 2001 and
2000 due to their short term nature. The fair value of notes and bonds payable
is estimated using cash flow analyses at December 31, 2001 and 2000, based on
the Company's current interest rates for similar types of borrowing
arrangements. The carrying amount of the Company's notes and bonds payable at
December 31, 2001 and 2000 was approximately $14.4 million less than fair value
and $13.8 million greater than the fair value, respectively. The carrying amount
of the Company's mortgage notes receivable at December 31, 2001 and 2000 was
approximately $2.6 million less than the fair value and $2.2 million greater
than the fair value, respectively.
28
12. SUBSEQUENT EVENTS
On January 22, 2002, the Company declared an increase in its quarterly
common stock dividend from $.585 per share ($2.34 annualized) to $.59 per share
($2.36 annualized) payable on March 6, 2002 to shareholders of record on
February 15, 2002. The Company also announced its quarterly preferred stock
dividend of $.55469 per share ($2.22 annualized) payable on February 28, 2002 to
shareholders of record on February 15, 2002.
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended December 31, 2001
and 2000 is summarized below:
Quarter Ended
----------------------------------------------------------------
(In thousands, except per share data) March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------
2001
Total revenue $ 48,229 $ 49,495 $ 47,818 $ 48,996
----------------------------------------------------------------
Net income $ 20,644 $ 19,373 $ 19,723 $ 20,147
----------------------------------------------------------------
Funds from operations - Basic $ 26,566 $ 26,291 $ 26,968 $ 27,097
----------------------------------------------------------------
Funds from operations - Diluted $ 26,637 $ 26,295 $ 26,968 $ 27,097
----------------------------------------------------------------
Net income per common share - Basic $ 0.48 $ 0.45 $ 0.45 $ 0.46
----------------------------------------------------------------
Net income per common share - Diluted $ 0.47 $ 0.44 $ 0.45 $ 0.45
----------------------------------------------------------------
Funds from operations per common share
- Basic $ 0.67 $ 0.66 $ 0.68 $ 0.68
----------------------------------------------------------------
Funds from operations per common share
- Diluted $ 0.66 $ 0.65 $ 0.67 $ 0.67
----------------------------------------------------------------
2000
Total revenue $ 48,259 $ 49,850 $ 49,588 $ 47,641
----------------------------------------------------------------
Net income $ 20,453 $ 21,187 $ 20,191 $ 17,970
----------------------------------------------------------------
Funds from operations - Basic $ 26,723 $ 26,336 $ 26,296 $ 26,023
----------------------------------------------------------------
Funds from operations - Diluted $ 26,723 $ 26,336 $ 26,421 $ 26,094
----------------------------------------------------------------
Net income per common share - Basic $ 0.48 $ 0.49 $ 0.47 $ 0.41
----------------------------------------------------------------
Net income per common share - Diluted $ 0.47 $ 0.49 $ 0.46 $ 0.41
----------------------------------------------------------------
Funds from operations per common share
- Basic $ 0.68 $ 0.67 $ 0.67 $ 0.66
----------------------------------------------------------------
Funds from operations per common share
- Diluted $ 0.67 $ 0.66 $ 0.66 $ 0.65
----------------------------------------------------------------
29