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,
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2002 2001 2000 1999 1998(2)
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STATEMENT OF INCOME DATA:
Total revenues $ 194,527 $ 194,538 $ 195,338 $ 187,257 $ 92,429
Interest expense $ 34,195 $ 38,110 $ 42,995 $ 38,603 $ 13,057
Net income $ 70,091 $ 79,887 $ 79,801 $ 86,027 $ 40,479
Net income per common share - Basic $ 1.57 $ 1.84 $ 1.85 $ 2.02 $ 1.66
Net income per common share - Diluted $ 1.55 $ 1.81 $ 1.82 $ 1.99 $ 1.63
Weighted average common shares outstanding
- Basic 40,974,532 39,840,285 39,544,400 39,326,594 24,043,942
Weighted average common shares outstanding
- Diluted 41,606,068 40,463,158 40,301,409 39,810,306 24,524,600
BALANCE SHEET DATA (AS OF THE END OF THE PERIOD):
Real estate properties, net $ 1,292,646 $ 1,361,224 $ 1,368,487 $ 1,321,447 $ 1,340,267
Total assets $ 1,489,546 $ 1,555,481 $ 1,587,076 $ 1,607,964 $ 1,612,423
Notes and bonds payable $ 545,063 $ 505,222 $ 536,781 $ 563,884 $ 559,924
Total stockholders' equity $ 908,199 $ 1,012,087 $ 1,008,037 $ 1,017,903 $ 1,017,704
OTHER DATA:
Funds from operations - Basic (1) $ 110,709 $ 106,922 $ 105,378 $ 105,727 $ 59,667
Funds from operations - Diluted (1) $ 110,709 $ 106,922 $ 105,653 $ 105,727 $ 59,731
Funds from operations per common share
- Basic (1) $ 2.70 $ 2.68 $ 2.66 $ 2.69 $ 2.48
Funds from operations per common share
- Diluted (1) $ 2.66 $ 2.64 $ 2.62 $ 2.66 $ 2.44
Dividends declared and paid per common
share $ 2.39 $ 2.31 $ 2.23 $ 2.15 $ 2.07
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(1) See Note 11 to Consolidated Financial Statements.
(2) In October 1998, the Company acquired Capstone Capital Corporation.
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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. We, the management of Healthcare Realty Trust, believe that by
providing related real estate services, we can differentiate our competitive
market position, expand our asset base and increase revenues.
Substantially all of the Company's revenues are derived from rentals
on our healthcare real estate properties and from interest earned on mortgage
loans. Leases and other financial support arrangements with respect to our
healthcare real estate properties are designed to reduce the Company's exposure
to increased costs and expenses incurred from the operation of our healthcare
properties. Under these leases and financial support arrangements, the risks or
increased costs and expenses are typically borne by the tenants and healthcare
providers related to the properties. The Company typically incurs operating and
administrative expenses, principally compensation expense, office rental and
related occupancy costs and various expenses incurred in the process of
managing our existing portfolio and acquiring additional properties. The
Company also incurs interest expense on its various debt instruments and
depreciation expense on its real estate portfolio.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States and the rules and
regulations of the Securities and Exchange Commission. In preparing the
financial statements, management is required to exercise judgments and make
assumptions that impact the carrying amount of assets and liabilities and the
reported amounts of revenues and expenses reflected in the financial
statements.
Management routinely evaluates the estimates and assumptions used in
the preparation of financial statements. These regular evaluations consider
historical experience and other reasonable factors and use the seasoned
judgment of management personnel. Management has reviewed the Company's
critical accounting policies with the audit committee of the Board of
Directors.
Management believes the following, which are impacted by management
estimates and assumptions, collectively represent the Company's critical
accounting policies.
Allowance for Uncollectible Accounts
Healthcare Realty Trust is a real estate investment trust that owns,
manages and develops income-producing real estate properties and mortgages
throughout the United States. As of December 31, 2002, the Company had
investments of approximately $1.6 billion in 221 real estate properties and
mortgages. The Company's portfolio was comprised of nine major facility types,
located in 28 states, and operated pursuant to contractual agreements with 60
healthcare providers. Most of the Company's investments are subject to
long-term leases, mortgages or other financial support arrangements with its
operators. Only two of the operators individually accounted for more than 10%
of the Company's revenues during the year ended December 31, 2002. Due to the
nature of the Company's agreements, the Company's accounts and interest
receivables result mainly from monthly billings of tenant rents, lease guaranty
amounts, mortgage interest, late fees, and additional rent and interest.
Payments on receivables are normally collected within 30 days of
billing. When receivables remain uncollected management must decide whether to
reserve a portion of these receivables as uncollectible. Historically, when
circumstances arise that cause accounts receivable to become uncollectible,
those circumstances have proven to be unusual or unique considering the
underlying lease or financial support agreement. Unlike a financial institution
with a large volume of homogeneous retail receivables such as credit card loans
or automobile loans that have a predictable loss pattern over time, the
Company's receivable losses have historically been infrequent, are tied to a
unique or specific event, and have historically been immaterial in amount. The
Company's allowance for doubtful accounts is based on specific identification
and is recorded for a specific receivable amount once we have determined that
such an allowance is needed. The Company does not carry a "general" allowance
for uncollectible or doubtful receivables.
Management monitors the aging and collectibility of receivables on an
ongoing basis. Every two weeks a report is produced whereby all receivables are
"aged" or placed into groups based on the number of days that have elapsed
since the receivable was billed. Management reviews the aging report for
evidence of deterioration in the
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timeliness of payment from a tenant or sponsor. Whenever deterioration is
noted, management investigates and determines the reason(s) for the delay,
which may include discussions with the delinquent tenant or sponsor.
Considering all information gathered, management's judgment must be exercised
in determining whether a receivable is potentially uncollectible and, if so,
how much or what percentage may be uncollectible. Among the factors management
considers in determining uncollectibility are the:
- Type of contractual arrangement under which the receivable
was recorded, e.g., a mortgage note, a triple net lease, a
gross lease, a sponsor guaranty agreement or some other type
of agreement;
- Tenant's or debtor's reason for slow payment;
- Industry influences under which the tenant or debtor
operates;
- Evidence of willingness and ability of the tenant or debtor
to pay the receivable;
- Credit worthiness of the tenant or debtor;
- Collateral, security deposit, letters of credit or other
monies held as security;
- Tenant or debtor's historical payment pattern;
- State in which the tenant or debtor operates; and
- Existence of a guarantor and the willingness and ability of
the guarantor to pay the receivable.
Considering these factors and others, management must conclude whether
all or some of the aged receivable balance is likely uncollectible. Upon
determining that some portion of the receivable is likely uncollectible, the
Company records a provision for bad debt expense for the amount it expects will
be uncollectible. For example, if management estimates that a receivable is 75%
collectible, then a 25% provision would be recorded for the estimated
uncollectible portion. This provision is recorded in the income statement and
is charged to the line item in which the revenue was originally recorded. For
example, if the receivable due is pursuant to a master lease agreement, then
the original revenue would have been recorded to master lease rental income and
the corresponding provision would be charged against master lease rental
income. Likewise, mortgage interest receivable provisions would be recorded
against mortgage interest income. The corresponding allowance is recorded in
the balance sheet. There is a risk that management's estimate is over or
under-stated; however, the Company believes that this risk is mitigated by the
fact that management re-evaluates the allowance at least once a quarter and
base their estimates on the most current information available. As such, any
over- or under-statements in the allowance should be adjusted for as soon as
new and better information becomes available.
At December 31, 2002 and 2001, the Company's receivable balances were
approximately $46.2 million and $34.6 million, respectively, with allowances
for uncollectible accounts of approximately $6.8 million and $4.4 million,
respectively. The Company's receivables and related allowances are included in
other assets on the Company's Consolidated Balance Sheets. If management had
used different estimates, or its methodology for determining and recording the
allowance had been different, then the amount of bad debt expense included in
the Company's financial statements may have been different.
Currently, the Company has no collectibility issues with its two
largest customers. However, should a collectibility problem arise with respect
to these large customers, the allowance for doubtful accounts would be
increased which could have a material impact on the Company's financial
statements in future periods.
Depreciation of Real Estate Assets
At December 31, 2002, the Company had invested approximately $1.5
billion in depreciable real estate assets. When these real estate assets are
acquired or placed in service, they must be depreciated. Management's judgment
involves determining which depreciation method to use and estimating the
economic life of the real estate asset.
There are several depreciation methods available under accounting
principles generally accepted in the United States. Some methods record
relatively more depreciation expense on an asset in the early years of the
asset's economic life, and relatively less depreciation expense on the asset in
the later years of its economic life. The "straight line" method of
depreciating real estate assets is the method we follow because that method
spreads the depreciation expense evenly over the useful life of the asset and,
in the opinion of management, is the method that most accurately and
consistently matches depreciation cost to each accounting period.
Several useful life scenarios are permissible under accounting
principles generally accepted in the United States. Consistent with the
depreciation useful life guidelines of the Internal Revenue Service ("IRS"),
the Company has elected to assign a useful life of either 39 or 31.5 years
depending on the age of the property when acquired as well as other factors.
The average useful life of the Company's real estate assets at December 31,
2002 was 34.5 years. Many companies depreciate new non-residential real estate
assets over longer useful lives. The Company uses a shorter, more conservative,
economic life because it has the effect of recognizing the depreciation expense
more quickly and because it is consistent with IRS guidelines.
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Had the Company elected to assign a useful life of 40 years, rather
than 39 or 31.5 years, depreciation on real estate assets for 2002 would have
been approximately $34 million in 2002 rather than the reported $40 million.
Capitalization of Costs
Accounting principles generally accepted in the United States allow
for capitalization of various types of costs. The rules and regulations on
capitalizing costs and the subsequent depreciation or amortization of those
costs versus expensing them in the period vary depending on the type of costs
and the reason for capitalizing the costs. Under these rules, both direct and
indirect costs may be capitalized.
Direct costs generally include construction costs, professional
services such as architectural and legal costs, travel expenses, land
acquisition costs as well as other types of fees and expenses. These costs that
are directly attributable to a project or asset are capitalized as part of the
basis of that asset. The Company also capitalizes direct costs related to debt
and equity issuance. Debt issuance costs are then amortized to interest expense
and equity issuance costs are netted against the proceeds of the offering.
Indirect costs include capitalized interest and overhead costs. The
Company's overhead costs are based on overhead load factors that are charged to
a project based on direct time incurred. The Company computes the overhead load
factors annually for its acquisitions, development and Information Technology
departments, which have employees who are involved in the projects. The overhead
load factors are computed to absorb that portion of indirect employee costs
(payroll and benefits, training, occupancy and similar costs) that are
attributable to the productive time the employee incurs working directly on
projects. The employees in the Company's acquisitions, development, and
Information Technology departments who work on these projects maintain and track
their hours daily, by project. Employee costs that are administrative, such as
vacation time, sick time, or general and administrative time, are expensed in
the period incurred. The Company's employees incur time in the search for
acquisitions and development business opportunities as well as, but to a much
lesser degree, in development of internally developed software applications. The
Company capitalizes overhead based on direct hours worked on each project.
Therefore, each acquired or constructed asset, pursuit project and internally
developed software asset will have both direct and indirect costs capitalized to
it as part of the overall costs.
Management's judgment is also exercised in determining whether costs
that have been previously capitalized in pursuit of an acquisition or
development project should be reserved for or written off if the project is
abandoned or should circumstances otherwise change that cause the project's
viability to become questionable. The Company follows a standard and
consistently applied policy of classifying pursuit activity as well as
reserving for those types of costs based on their classification.
The Company classifies its pursuit projects into three categories. The
first category of pursuits is essentially "cold calls" that have a remote
chance of producing new business. Costs for these projects are expensed in the
period incurred. The second category includes those that might reasonably be
expected to produce new business opportunities although there can be no
assurance that they will result in a new project or contract. Costs for these
projects are capitalized but, due to the uncertainty of projects in this
category, these costs are reserved at 50% which means that 50% of the costs are
expensed in the period incurred. The third category, and least frequent, are
those pursuits that are either highly probable to result in a project or
contract or already have resulted in a project or contract. Many times, these
are pursuits involving operators with which the Company is already doing
business. Since the Company believes it is probable that these pursuits will
result in a project or contract, it capitalizes these costs in full and records
no reserve. Each quarter, all capitalized pursuit costs are again reviewed
carefully for viability and a management decision is made as to whether any
additional reserve is deemed necessary. If necessary and considered
appropriate, management would record an additional reserve at that time.
Capitalized pursuit costs, net of the reserve, are carried in other
assets in the balance sheet and any reserve recorded is charged to general and
administrative expenses on the income statement. These pursuit costs will
ultimately be written off to expense or will be capitalized as part of the real
estate asset upon acquisition or construction of an asset.
At December 31, 2002 and 2001, respectively, the Company had
capitalized pursuit costs totaling $0.7 million and $0.3 million, respectively.
The reserve against these capitalized pursuit costs was $0.5 million and $0,
respectively.
Valuation of Long-Lived and Intangible Assets and Goodwill
The Company assesses the potential for impairment of identifiable
intangible assets, long-lived assets including real estate properties, and
goodwill whenever events occur or a change in circumstances indicate that the
recorded value might not be fully recoverable. Important factors that could
cause management to review for impairment include significant underperformance
of an asset relative to historical or expected operating results; significant
changes in the Company's use of assets or the strategy for its overall
business; or significant negative
4
economic trends or negative industry trends for the Company or its operators.
As required by Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," if management determined
that the carrying value of the Company's assets may not be fully recoverable
based on the existence of any of the factors above or others, management would
measure and record impairment using a projected discounted cash flow method
using a discount rate that is consistent with the risk inherent in the
Company's business.
At December 31, 2002, management noted no impairment issues and
recorded no impairment loss.
As required by Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," the Company ceased amortizing goodwill
in 2002. In each of the years 2001 and 2000 the Company recorded approximately
$106,000 of goodwill amortization. In lieu of continued amortization, the
Company will perform an annual goodwill impairment review. The 2002 review
indicated no impairment in the $4.2 million goodwill asset.
At December 31, 2002, net intangible assets totaled $5.9 million,
long-lived or real estate assets totaled $1.5 billion and goodwill totaled $4.2
million.
RESULTS OF OPERATIONS
2002 Compared to 2001
Net income for 2002 includes a charge (the "charge") recorded in the
fourth quarter of $11.8 million, which is comprised of the accelerated vesting
of deferred compensation relating to the retirement of an executive officer as
well as severance-related, project and other costs associated with the
elimination of other officer and employee positions.
For the year ended December 31, 2002, net income after the charge was
$70.1 million, or $1.57 per basic common share ($1.55 per diluted common
share), on total revenues of $194.5 million compared to net income of $79.9
million, or $1.84 per basic common share ($1.81 per diluted common share), on
total revenues of $194.5 million for the year ended December 31, 2001. Before
the charge, net income would have been $81.9 million, or $1.88 per basic common
share ($1.84 per diluted common share). Included in net income for the year
ended December 31, 2002 is a net gain on sales of real estate properties of
$3.4 million, or $0.08 per basic and diluted common share, compared to a net
gain on sales of real estate properties of $1.2 million, or $0.03 per basic and
diluted common share, for the same period in 2001. Funds from operations
("FFO") was $110.7 million, or $2.70 per basic common share ($2.66 per diluted
common share), for the year ended December 31, 2002 compared to $106.9 million,
or $2.68 per basic common share ($2.64 per diluted common share), in 2001.
(Dollars in thousands) 2002 2001
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REVENUES
Master lease rental income $ 98,067 $ 99,962
Property operating income 76,590 67,750
Straight line rent 3,143 5,749
Mortgage interest income 13,308 17,254
Management fees 1,090 1,533
Interest and other income 2,329 2,290
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194,527 194,538
EXPENSES
General and administrative 22,228 10,110
Property operating expenses 29,803 26,515
Interest 34,195 38,110
Depreciation 41,467 40,823
Amortization 131 303
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127,824 115,861
--------------------------
Net income before net gain on sale of real estate properties 66,703 78,677
Net gain on sale of real estate properties 3,388 1,210
--------------------------
Net income $ 70,091 $ 79,887
==========================
Total revenues for the year ended December 31, 2002 and 2001 remained
steady at $194.5 million though the individual line items within revenue
fluctuated as discussed below:
- Master lease rental income decreased $1.9 million or 1.9% due
mainly to the disposal of 14 properties during 2001 and 2002,
offset partially by rent growth from contractual leases and
the receipt of a lease termination fee in 2002.
5
- Property operating income increased $8.8 million or 13.0% due
mainly to the acquisition of two revenue-producing
properties, the commencement of operations during 2002 and
2001 of five properties that were previously under
construction, the increased occupancy in other multi-tenanted
properties, offset partially by the disposal of four
properties during 2002 and 2001.
- Straight line rent income decreased $2.6 million or 45.3%.
This decrease was due mainly to asset sales, normal annual
decreases in the straight line rent calculation on our
leases, as well as the effect of reversing the historical
straight line rent receivable due to restructuring rent
increases on four leases during 2002 that eliminated the
straight line rent requirement.
- Mortgage interest income decreased $3.9 million or 22.9% for
2002 compared to 2001 due mainly to the repayment of 31
mortgages during 2002 and 2001, offset partially by interest
income earned on a first mortgage acquired in 2002 on a
property where the Company previously owned the second
mortgage.
- Management fees decreased $0.4 million or 28.9% from 2002 to
2001 due mainly to the loss of property management contracts.
Total expenses for the year ended December 31, 2002 compared to the
year ended December 31, 2001 increased $12.0 million or 10.3% as discussed
below:
- General and administrative expenses increased $12.1 million
or 119.9% for 2002 compared to 2001 due mainly to an $11.8
million charge recorded in the fourth quarter of 2002 that
was discussed previously.
- Property operating expenses increased $3.3 million or 12.4%
due mainly to the acquisition of two revenue-producing
properties, the disposal of four properties and the
commencement of operations during 2001 and 2002 of five
properties that were previously under construction.
- Interest expense for 2002 compared to 2001 decreased $3.9
million or 10.3% due mainly to the continuing decrease in
market interest rates, offset partially by an increase in our
outstanding debt balance.
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
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REVENUES
Master lease rental income $ 99,962 $ 97,238
Property operating income 67,750 62,400
Straight line rent 5,749 7,827
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
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115,861 114,869
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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:
6
- 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 commencement of operations
during 2001 and 2000 of five properties that were previously
under construction, offset partially by the disposal of nine
properties during 2001 and 2000.
- 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 commencement of
operations during 2001 and 2000 of five properties that were
previously under construction, offset partially by the
disposal of nine properties during 2001 and 2000.
- 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.
- In 2000, the Company fully reserved for its $1.0 million
investment in the preferred stock of a private assisted
living company that was acquired in 1998 in its merger with
Capstone Capital Corporation.
LIQUIDITY AND CAPITAL RESOURCES
Debt Obligations
As discussed in more detail in Note 4 to the Consolidated Financial
Statements, for 2002 and thereafter, the Company 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 31, DECEMBER MATURITY RATES AT INTEREST
2002 31, 2001 DATE 12/31/02 PAYMENTS PRINCIPAL PAYMENTS
- -----------------------------------------------------------------------------------------------------------------------------------
Unsecured credit facility due 2004(1) $ 84.0 $ 38.0 7/04 LIBOR +1.15% Quarterly At maturity
Senior notes due 2002 0 18.0 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 315.2 298.9 5/11 8.125% Semi-Annual At maturity
Mortgage notes payable 72.4 75.6 9/04-7/26 7.22%-8.50% Monthly Monthly or at maturity
Other note payable 3.5 4.7 7/05 7.53% Semi-Annual Semi-annually
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$545.1 $505.2
====== ======
(1) The Company pays a quarterly facility fee of 0.2% on the commitment.
In 2001, the Company focused on reorganizing its debt structure and
repaying or replacing debt instruments having shorter maturities with debt
instruments having longer maturities. As a result of these efforts, at December
31, 2002, substantially all of the Company's outstanding principal debt
balances are due after 2003 (with 65% due after 2007). Further, at December 31,
2002, the Company had borrowing capacity remaining of $54.0 million under the
Unsecured Credit Facility due 2004.
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Moody's Investors Service, Standard and Poor's, and Fitch Ratings rate
our senior debt Baa3, BBB-, and BBB, respectively. For the year ended December
31, 2002, the Company's earnings covered fixed charges at a ratio of 2.93 to
1.00, the Company's stockholders' equity totaled approximately $908.0 million
and its debt to total capitalization ratio, on a book basis, was approximately
0.375 to 1.
At December 31, 2002, the Company was in compliance with the debt
covenant requirements under its various debt instruments.
Following the reorganization of the Company's debt structure in 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%. 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 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 Financial Accounting Standards Board Statement No. 133. As such,
changes in fair value will have no impact on the income statement. At December
31, 2002, the aggregate fair value of the hedge totaling $16.6 million 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.
Shelf Registration
As of December 31, 2002, the Company can issue an aggregate of
approximately $167.1 million of securities remaining under its currently
effective registration statement. Should the market permit, the Company may
issue securities under this registration statement. The Company may, under
certain circumstances, borrow additional amounts in connection with the
renovation or expansion of its properties, the acquisition or development 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.
Security Deposits and Letters of Credit
Generally, the Company may, at its discretion and upon notification to
the operator, draw upon security deposits and letters of credit if an operator
is in default under its lease or mortgage loan. As of December 31, 2002, the
Company held approximately $5.9 million in letters of credit, security
deposits, debt service reserves and capital replacement reserves.
Acquisitions and Dispositions during the Fourth Quarter of 2002
During the fourth quarter of 2002, the Company acquired a 135,000
square foot medical office building in Houston, TX for approximately $19.1
million.
During the fourth quarter of 2002, the Company sold a 144,000 square
foot ancillary hospital facility in Atlanta, Georgia, a 14,000 square foot
assisted living facility in St. Petersburg, Florida, and a 17,000 square foot
medical office building in Cheyenne, Wyoming that is associated with another
facility that the Company continues to own for approximately $13.7 million in
net proceeds. Also, mortgage notes receivable on two assisted living
facilities, a 43,000 square foot facility in Albuquerque, New Mexico and a
62,000 square foot facility in Newhall, California were repaid totaling
approximately $4.8 million in net proceeds. The proceeds were used to partially
repay the Unsecured Credit Facility due 2004 and for general corporate
purposes.
Cash Flows
The Company generated net cash from operations in 2002 of $109.0
million, an increase of $13.5 million from 2001 and a decrease of $16.3 million
from 2000. These fluctuations from year to year resulted primarily from changes
in other assets, other liabilities, and accounts payable and accrued expenses.
Other significant sources and uses of cash for investing and financing
activities are set forth in the Statements of Cash Flows in the Consolidated
Financial Statements.
Construction in Progress
As of December 31, 2002, the Company had a net investment of
approximately $10.5 million in three build-to-suit developments in progress
that have a total remaining funding commitment of approximately $10.8 million.
The Company intends to fund these commitments with internally generated cash
flow, proceeds from the Unsecured
8
Credit Facility due 2004, proceeds from the sale of additional assets, proceeds
from additional repayments of mortgage notes receivable, or additional capital
market financing.
Dividends
On January 28, 2003, the Company declared an increase in its quarterly
common stock dividend from $0.605 per share ($2.42 annualized) to $0.61 per
share ($2.44 annualized) payable on March 6, 2003 to shareholders of record on
February 14, 2003. While the Company has no present plans to change its
quarterly common stock dividend policy, the dividend policy is reviewed each
quarter by the board of directors.
During 2002, the Company paid quarterly dividends on its 8 7/8% Series
A Voting Cumulative Preferred Stock totaling $1.85 per share.
Preferred Stock Redemption
On September 30, 2002, the Company redeemed all of its 8 7/8% Series A
Voting Cumulative Preferred Stock at a redemption price of $25.00 per share,
plus accrued dividends of $0.18896 per share from August 30, 2002 to the
redemption date, for a total redemption price of $25.18896 per share. The
aggregate cost of the redemption was $75,566,881.
Common Stock Repurchase
On October 24, 2002, the Company announced that its Board of Directors
authorized management to repurchase up to one million shares of the Company's
common stock at such times and upon such terms as management may determine.
Liquidity
Under the terms of the leases and other financial support agreements
the Company has relating to most properties, the tenants or healthcare
providers are generally responsible for paying the operating expenses and taxes
relating to the properties. As a result of these arrangements, with limited
exceptions not material to the Company's overall performance, the Company does
not believe any increases in property operating expenses or taxes would
significantly impact the Company's operating results 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, our 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 2003, paying quarterly dividends and funding
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 cannot, however, be certain that these sources
of funds will be available at a time and upon terms acceptable to us in
sufficient amounts to meet its liquidity needs.
Impact of Inflation
Inflation has not significantly affected the Company's earnings due to
the moderate inflation rate in recent years 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 Company's risk of the adverse effects of inflation. In
addition, inflation will have the effect of increasing gross revenues 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 Company's risk of any adverse effects of
inflation. Interest payable under the interest rate swaps and the Unsecured
Credit Facility due 2004 is calculated at a variable rate; therefore, the
amount of interest payable under the swaps and 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.
9
Market Risk
The Company is exposed to market risk, in the form of changing
interest rates, on its debt and mortgage notes receivable. Management uses
daily monitoring of market conditions and analytical techniques to manage this
risk. The Company has no market risk with respect to foreign currency
fluctuations.
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, 2002 and 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 sheets. (See Note 4 for further details)
At December 31, 2002 and 2001, the fair value of the Company's
variable rate debt approximated its carrying value of $225.0 million and $162.8
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, 2002 and 2001 carrying
value of $225.0 million and $162.8 million, respectively, is held constant, the
hypothetical increase in interest expense resulting from a one percentage point
increase in interest rates, would be $2.25 million and $1.6 million,
respectively. The interest rate on variable rate debt is based on and variable
with the London interbank offered rate ("LIBOR").
At December 31, 2002 and 2001, the carrying value of the Company's
fixed rate debt was $320.1 million and $342.4 million, respectively, and the
fair value of the Company's fixed rate debt was approximately $362.8 million
and $356.9 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 $14.8 million and $18.3 million,
respectively, for aggregate fixed rate debt.
At December 31, 2002 and 2001, the carrying value of the Company's
fixed rate mortgage notes receivable was $102.4 million and $122.1 million,
respectively, and the fair value was approximately $115.8 million and $124.2
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 $12.5 million and $7.7 million
for December 31, 2002 and 2001, respectively, on the aggregate portfolio of
fixed rate mortgage notes receivable.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably
likely to have a current or future material effect on our financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources.
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, 2002.
10
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, 2002 and 2001, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2002. 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, 2002 and 2001, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Nashville, Tennessee
January 29, 2003
11
Consolidated
BALANCE SHEETS
December 31,
---------------------------------
(Dollars in thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------------
ASSETS
Real estate properties:
Land $ 135,791 $ 149,522
Buildings and improvements 1,332,872 1,348,031
Personal property 5,730 5,405
Construction in progress 10,546 18,255
---------------------------------
1,484,939 1,521,213
Less accumulated depreciation (192,293) (159,989)
---------------------------------
Total real estate properties, net 1,292,646 1,361,224
Cash and cash equivalents 402 2,930
Mortgage notes receivable 102,792 122,074
Other assets, net 93,706 69,253
---------------------------------
Total assets $ 1,489,546 $ 1,555,481
=================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable $ 545,063 $ 505,222
Accounts payable and accrued liabilities 24,960 12,203
Other liabilities 11,324 25,969
---------------------------------
Total liabilities 581,347 543,394
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding 2002 - none; and 2001 - 3,000,000 0 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding 2002 - 41,823,564; 2001 - 41,465,919 418 414
Additional paid-in capital 1,024,467 1,089,127
Deferred compensation (16,251) (12,852)
Cumulative net income 445,152 375,061
Cumulative dividends (545,587) (439,693)
---------------------------------
Total stockholders' equity 908,199 1,012,087
---------------------------------
Total liabilities and stockholders' equity $ 1,489,546 $ 1,555,481
=================================
See accompanying notes.
12
Consolidated
STATEMENTS OF INCOME
Year Ended December 31,
------------------------------------------------
(Dollars in thousands, except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------------------
REVENUES
Master lease rental income $ 98,067 $ 99,962 $ 97,238
Property operating income 76,590 67,750 62,400
Straight line rent 3,143 5,749 7,827
Mortgage interest income 13,308 17,254 22,755
Management fees 1,090 1,533 2,785
Interest and other income 2,329 2,290 2,333
------------------------------------------------
194,527 194,538 195,338
EXPENSES
General and administrative 22,228 10,110 8,739
Property operating expenses 29,803 26,515 22,628
Interest 34,195 38,110 42,995
Depreciation 41,467 40,823 38,994
Amortization 131 303 513
Provision for loss on investment 0 0 1,000
------------------------------------------------
127,824 115,861 114,869
------------------------------------------------
Net income before net gain (loss) on sale of real estate properties 66,703 78,677 80,469
Net gain (loss) on sale of real estate properties 3,388 1,210 (668)
------------------------------------------------
Net income $ 70,091 $ 79,887 $ 79,801
================================================
Net income per common share - Basic $ 1.57 $ 1.84 $ 1.85
================================================
Net income per common share - Diluted $ 1.55 $ 1.81 $ 1.82
================================================
Weighted average common shares outstanding - Basic 40,974,532 39,840,285 39,544,400
================================================
Weighted average common shares outstanding - Diluted 41,606,068 40,463,158 40,301,409
================================================
Dividend declared, per common share, during the period $ 2.39 $ 2.31 $ 2.23
================================================
See accompanying notes.
13
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, 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
Issuance of stock -- 3 6,068 -- -- -- 6,071
Preferred stock redemption (30) -- (74,970) -- -- -- (75,000)
Common stock redemption -- (4) (10,898) -- -- -- (10,902)
Shares awarded as deferred
stock compensation -- 5 15,140 (15,145) -- -- 0
Accelerated vesting of
deferred compensation -- -- -- 8,674 -- -- 8,674
Deferred stock compensation
amortization -- -- -- 3,072 -- -- 3,072
Net income -- -- -- -- 70,091 -- 70,091
Dividends - common
($2.39 per share) -- -- -- -- -- (100,335) (100,335)
Dividends - preferred
($1.85 per share) -- -- -- -- -- (5,559) (5,559)
----------------------------------------------------------------------------------------
Balance at December 31, 2002 $ 0 $ 418 $ 1,024,467 $(16,251) $445,152 $(545,587) $ 908,199
========================================================================================
See accompanying notes.
14
Consolidated
STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------------
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 70,091 $ 79,887 $ 79,801
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 43,486 43,244 41,553
Deferred compensation amortization 3,072 1,885 1,385
Increase (decrease) in other liabilities (2,818) 165 11,438
Increase in other assets (8,803) (19,694) (6,714)
Accelerated vesting of deferred compensation 8,674 0 0
Increase (decrease) in accounts payable and
accrued liabilities 1,855 (3,121) 5,056
Increase in straight line rent (3,143) (5,604) (7,827)
Net (gain) loss on sales of real estate (3,388) (1,210) 668
---------------------------------------------
Net cash provided by operating activities 109,026 95,552 125,360
INVESTING ACTIVITIES
Acquisition and development of real estate properties (43,741) (53,971) (97,750)
Funding of mortgages (3,978) (2,962) (7,955)
Proceeds from mortgage payments/sales 22,624 51,811 86,610
Proceeds from sale of real estate 81,267 24,858 15,048
---------------------------------------------
Net cash provided by (used in) investing activities 56,172 19,736 (4,047)
FINANCING ACTIVITIES
Borrowings on notes and bonds payable 218,500 520,652 151,760
Repayments on notes and bonds payable (207,193) (552,866) (179,419)
Dividends paid (105,894) (100,663) (96,234)
Preferred stock redemption (75,000) 0 0
Proceeds from issuance of common stock 1,861 18,731 972
---------------------------------------------
Net cash used in financing activities (167,726) (114,146) (122,921)
---------------------------------------------
Increase (decrease) in cash and cash equivalents (2,528) 1,142 (1,608)
Cash and cash equivalents, beginning of year 2,930 1,788 3,396
---------------------------------------------
Cash and cash equivalents, end of year $ 402 $ 2,930 $ 1,788
=============================================
See accompanying notes.
15
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, 2002,
the Company had invested in 221 properties and mortgages located in 28 states,
affiliated with 60 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 inter-company 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. A discussion of our critical accounting policies involving
management's estimates and assumptions is included in Management's Discussion
and Analysis of Financial Condition.
Real Estate Properties
Real estate properties are recorded at cost, which includes both
direct and indirect costs. Direct costs generally include construction costs,
professional services such as architectural and legal costs, travel expenses,
and other acquisition costs. Indirect costs include capitalized interest and
overhead costs. 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:
Land improvements 15 years
Buildings and improvements 31.5 or 39.0 years
Personal property 5.0 to 7.0 years
As required by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," we must access
the potential for impairment of our long-lived assets, including real estate
properties whenever events occur or a change in circumstances indicate that the
recorded value might not be fully recoverable. At December 31, 2002, we noted no
impairment issues and recorded no impairment loss.
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, 2002, the mortgage portfolio had a weighted
average maturity of approximately 4.2 years. Interest rates ranged from 8.51%
to 16.60% 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.
16
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 and goodwill. 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 $5.3
million and $3.8 million at December 31, 2002 and 2001, respectively. At
December 31, 2002 and 2001 the Company's receivable balances were approximately
$46.2 million and $34.6 million, respectively, with allowances for
uncollectible accounts of approximately $6.8 million and $4.4 million,
respectively. As required by Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets," the Company ceased amortizing
goodwill effective January 1, 2002. In lieu of continued amortization,
management performs an annual goodwill impairment review. The 2002 review
indicated no impairment of goodwill. Goodwill amortization expense for the year
ended December 31, 2001 was approximately $106,000.
Revenue Recognition
Rental income related to non-cancelable 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 2002, 2001 and 2000
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 2002, 2001 and 2000.
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 equity-based awards to employees.
The following table represents the effect on net income and earnings
per share for the three years in the period ended December 31, 2002 as if the
Company had applied the fair value-based method and recognition provisions of
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation," (dollars in thousands, except for per share data):
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Net income, as reported $70,091 $79,887 $79,801
Compensation expense for equity-based awards to employees
under the fair value method (460) (493) (486)
-----------------------------
Pro-forma net income $69,631 $79,394 $79,315
Earnings per share, as reported
Basic $ 1.57 $ 1.84 $ 1.85
Assuming dilution $ 1.55 $ 1.81 $ 1.82
Pro-forma earnings per share
Basic $ 1.56 $ 1.83 $ 1.84
Assuming dilution $ 1.54 $ 1.80 $ 1.81
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 2001 and 2000 to conform to the 2002 presentation. These
reclassifications had no effect on the results of operations as previously
reported.
17
New Pronouncements
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 142, "Accounting for Goodwill and Intangible Assets" ("FAS
142"). FAS 142 became effective for us January 1, 2002. FAS 142, which
supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets",
requires companies to no longer amortize goodwill and other indefinite lived
intangible assets but review the assets at least annually for impairment.
Intangible assets with definite lives will continue to be amortized. The
adoption of FAS 142 had no material impact on the financials for the Company
for the year ended December 31, 2002; and our 2002 review indicated no
impairment in our $4.2 million goodwill asset.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 supersedes
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" ("FAS 121"), and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions" ("APB 30"), for the disposal of a segment of a business as
previously defined in that Opinion. FAS 144 retains the fundamental provisions
of FAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with FAS 121. Unlike FAS
121, however, an impairment assessment under FAS 144 will never result in a
write-down of goodwill. Rather, goodwill is evaluated for impairment under FAS
142 as discussed in the previous paragraph. FAS 144 also broadens the scope of
defining discontinued operations. The provisions of FAS 144 are effective for
financial statements issued for fiscal years beginning after December 15, 2001.
Under the provisions of FAS 144, the identification and classification of a
property as held for sale, or the termination of any of the Company's
management contracts for a managed-only property, by expiration or otherwise,
would result in the classification of the operating results of such property,
net of taxes, as a discontinued operation, so long as the financial results can
be clearly identified and the Company does not have any significant continuing
involvement in the operations of the property after the disposal or
termination. The Company adopted FAS 144 on January 1, 2002.
In April 2002, the FASB issued Statement No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections" ("FAS 145"). FAS 145 rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt", which requires all gains and
losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of the related income tax effect. As a
result, the criteria in APB 30 will now be used to classify those gains and
losses. FAS 145 amends FASB Statement No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback transactions
be accounted for in the same manner as sale-leaseback transactions. FAS 145
also makes technical corrections to existing pronouncements. While those
corrections are not substantive in nature, they may change accounting practices
in some instances. The provisions of FAS 145 are effective for financial
statements issued for fiscal years beginning after May 15, 2002.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("FAS 146"). FAS 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)" ("Issue
94-3"). FAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost as generally defined in Issue 94-3 was
recognized at the date of an entity's commitment to an exit plan. The
provisions of FAS 146 are effective for exit or disposal activities that are
initiated after December 31, 2002, with early application encouraged. Adoption
of FAS 146 is not expected to have a material impact on the Company's financial
statements.
In December 2002, the Financial Accounting Standards Board issued SFAS
No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure." SFAS No. 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of transition to SFAS
No. 123's fair value method of accounting for stock-based employee
compensation. Statement 148 also amends the disclosure provisions of SFAS No.
123 and APB Opinion No. 28, "Interim Financial Reporting", to require
disclosure in the summary of significant accounting policies of the effects of
an entity's accounting policy with respect to stock-based employee compensation
on reported net income and earnings per share in annual and interim financial
statements. While SFAS No. 148 does not amend SFAS No. 123 to require companies
to account for employee stock options using the fair value method, the
disclosure provisions of SFAS No. 148 are applicable to all companies with
stock-based employee compensation, regardless of whether they account for that
compensation using the fair value method of SFAS No. 123 or the intrinsic value
method of APB Opinion No. 25. As allowed by SFAS No. 123, the Company has
elected to continue to utilize the accounting method prescribed by APB Opinion
No. 25 and has adopted the disclosure requirements of SFAS No. 123 as of
December 31, 2002.
18
2. REAL ESTATE PROPERTY LEASES
The Company's properties are generally leased or supported pursuant to
non-cancelable, fixed-term operating leases and other financial support
arrangements with expiration dates through 2022. Some leases and financial
arrangements provide for fixed rent renewal terms of five years, or multiples
thereof, in addition to market rent renewal terms. Some leases 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
fixed percentage increases or increases in the Consumer Price Index and all
taxes (including property tax), insurance, maintenance and other operating
costs associated with the leased property.
Future minimum lease and guaranty payments under the non-cancelable
operating leases and financial support arrangements as of December 31, 2002 are
as follows (in thousands):
2003 $ 158,532
2004 151,637
2005 139,491
2006 131,874
2007 123,960
2008 and thereafter 475,905
----------
$1,181,399
==========
19
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, 2002 (dollars in thousands).
BUILDINGS
NUMBER OF AND
FACILITIES IMPROVEMENTS PERSONAL ACCUMULATED
(1) LAND AND CIP PROPERTY TOTAL DEPRECIATION
- ---------------------------------------------------------------------------------------------------------------------
ANCILLARY HOSPITAL FACILITIES:
California 8 $ 17,037 $ 59,982 $ 74 $ 77,093 $ 10,947
Florida 10 4,015 66,461 117 70,593 12,265
Tennessee 5 3,648 54,595 99 58,342 2,755
Texas 9 8,182 56,261 281 64,724 12,887
Virginia 6 4,156 47,873 74 52,103 8,747
Other states 16 10,612 147,700 82 158,394 18,285
----------------------------------------------------------------------------
54 47,651 432,872 727 481,250 65,886
SKILLED NURSING FACILITIES:
Colorado 3 2,886 23,522 0 26,408 3,471
Oklahoma 5 120 13,221 0 13,341 1,129
Pennsylvania 3 479 20,595 0 21,074 2,735
Texas 2 1,795 17,671 0 19,466 2,699
Virginia 6 1,452 35,766 0 37,218 4,731
Other states 12 5,188 51,098 215 56,501 10,033
----------------------------------------------------------------------------
31 11,920 161,873 215 174,008 24,798
PHYSICIAN CLINICS:
Florida 9 12,089 44,029 51 56,169 7,878
Illinois 1 207 11,732 0 11,939 1,549
Massachusetts 3 2,658 17,181 0 19,839 2,271
Tennessee 5 2,943 8,395 0 11,338 1,064
Texas 1 5,134 12,180 0 17,314 1,608
Other states 8 2,557 20,139 0 22,696 2,904
----------------------------------------------------------------------------
27 25,588 113,656 51 139,295 17,274
COMPREHENSIVE AMBULATORY CARE
CENTERS:
Arizona 1 2,095 11,382 5 13,482 1,085
California 1 3,375 29,037 0 32,412 3,946
Florida 6 2,009 56,418 12 58,439 6,634
Missouri 3 3,726 24,722 3 28,451 3,069
Texas 2 1,669 20,480 73 22,222 5,106
----------------------------------------------------------------------------
13 12,874 142,039 93 155,006 19,840
MEDICAL OFFICE BUILDINGS:
Florida 2 2,027 7,896 1 9,924 994
Pennsylvania 1 0 9,427 13 9,440 96
Tennessee 2 1,734 9,808 5 11,547 1,221
Texas 3 3,459 25,947 430 29,836 2,542
Virginia 4 1,926 12,358 130 14,414 2,349
----------------------------------------------------------------------------
12 9,146 65,436 579 75,161 7,202
INPATIENT REHABILITATION FACILITIES:
Alabama 1 0 17,722 0 17,722 1,926
Florida 1 0 11,702 0 11,702 1,272
Pennsylvania 6 4,718 109,149 0 113,867 13,561
Texas 1 1,117 12,086 0 13,203 1,598
----------------------------------------------------------------------------
9 5,835 150,659 0 156,494 18,356
ASSISTED LIVING FACILITIES:
Florida 2 1,735 20,134 0 21,869 1,872
New Jersey 2 1,809 17,238 0 19,047 2,136
Pennsylvania 7 1,425 29,645 0 31,070 3,840
Texas 8 0 72,563 12 72,575 9,571
Virginia 3 889 16,506 0 17,395 2,164
Other states 14 3,120 56,117 0 59,237 6,033
----------------------------------------------------------------------------
36 8,978 212,203 12 221,193 25,616
OTHER INPATIENT FACILITIES:
California 1 1,362 11,326 0 12,688 2,432
Michigan 1 4,405 9,454 0 13,859 1,254
Pennsylvania 1 0 2,904 0 2,904 0
Texas 1 506 5,516 0 6,022 773
----------------------------------------------------------------------------
4 6,273 29,200 0 35,473 4,459
OTHER OUTPATIENT FACILITIES:
Alabama 2 817 10,663 8 11,488 2,886
Florida 2 3,111 6,444 0 9,555 663
Missouri 1 849 3,720 0 4,579 490
Mississippi 1 538 3,723 30 4,291 908
Nevada 1 940 2,861 0 3,801 620
Other states 5 1,271 8,069 8 9,348 1,316
----------------------------------------------------------------------------
12 7,526 35,480 46 43,052 6,883
Corporate Property 0 0 4,007 4,007 1,979
----------------------------------------------------------------------------
Total Property 198 $135,791 $1,343,418 $5,730 $1,484,939 $192,293
============================================================================
(1) Includes three lessee developments.
20
4. NOTES AND BONDS PAYABLE
Notes and bonds payable at December 31, 2002 and 2001 consisted of the
following (in thousands):
December 31,
----------------------
2002 2001
- ---------------------------------------------------------------
Unsecured credit facility due 2004 $ 84,000 $ 38,000
Senior notes due 2002 0 18,000
Senior notes due 2006 70,000 70,000
Senior notes due 2011, net 315,225 298,906
Mortgage notes payable 72,338 75,649
Other note payable 3,500 4,667
----------------------
$545,063 $505,222
======================
Unsecured Credit Facility due 2004
In July 2001, the Company entered into a $150 million credit facility
(the "Unsecured Credit facility due 2004") that 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, 2002,
the Company had borrowing capacity remaining of $54.0 million under the
Unsecured Credit Facility due 2004.
Senior Notes due 2002
In September 1995, the Company privately placed $90.0 million of
unsecured senior notes (the "Senior Notes due 2002") with 16 institutions.
These notes were fully repaid upon maturity on September 1, 2002.
Senior Notes due 2006
In April 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.
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, and are
due on May 1, 2011, unless the Company redeems the notes earlier. The notes
were issued at a discount of approximately $1.5 million, yielding an 8.202%
interest rate per annum.
Interest Rate Swaps
Following the reorganization of the Company's debt structure in 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%. 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 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 Financial Accounting Standards Board Statement No. 133. As such,
changes in fair value will have no impact on the income statement. At December
31, 2002, the aggregate fair value of the hedge totaling $16.6 million 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.
21
Mortgage Notes Payable
At December 31, 2002, the Company had outstanding 13 non-recourse
mortgage notes payable, with the related collateral, as follows (dollars in
millions):
Investment in Contractual
Effective Number Collateral at Balance at
Original Interest Maturity of Notes December 31, December 31,
Balance Rate Date Payable Collateral 2002 2002
-------- --------- -------- -------- --------------------------- -------------- ------------
Life Insurance Co. $23.3 7.765% 7/26 1 Ancillary hospital facility $43.9 $21.8
Life Insurance Co. 4.7 7.765% 1/17 1 Ancillary hospital facility 10.8 4.0
Life Insurance Co. 17.1 7.765% 4/04 3 Two ambulatory surgery
centers & one ancillary 37.7 15.7
hospital facility
Commercial Bank 35.0 7.220% 5/11 8 Nine ancillary hospital
-- facilities & one physician
clinic 78.2 30.8
------ -----
13 $170.6 $72.3
== ====== =====
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. 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%.
Other Note Payable
In July, 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):
2003 $ 4,596
2004 124,166
2005 25,071
2006 33,295
2007 4,206
2008 and thereafter 353,729
--------
$545,063
========
During the years ended December 31, 2002, 2001 and 2000, interest paid
totaled $34.7 million, $37.8 million and $43.1 million, and capitalized
interest totaled $1.4 million, $2.0 million and $1.8 million, respectively.
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,
-----------------------------------------------
2002 2001 2000
-----------------------------------------------
Common Shares
Balance, beginning of period 41,465,919 40,314,399 40,004,579
Issuance of stock 242,004 919,656 206,603
Common stock redemption (418,959) -- --
Shares awarded as deferred stock compensation 534,600 231,864 103,217
-----------------------------------------------
Balance, end of period 41,823,564 41,465,919 40,314,399
===============================================
Preferred Shares
Balance, beginning of period 3,000,000 3,000,000 3,000,000
Preferred stock redemption (3,000,000) -- --
-----------------------------------------------
Balance, end of period 0 3,000,000 3,000,000
===============================================
On September 30, 2002, the Company redeemed all of its 8 7/8% Series A
Voting Cumulative Preferred Stock at a redemption price of $25.00 per share,
plus accrued dividends of $0.18896 per share from August 30, 2002
22
to the redemption date, for a total redemption price of $25.18896 per share.
The aggregate cost of the redemption was $75,566,881.
Effective December 31, 2002, the Company repurchased 418,959 shares
from the former Chief Financial Officer pursuant to the terms of a retirement
agreement. Payment for this repurchase was made January 8, 2003. Such shares
were retired upon repurchase. The Company's 2002 financial statements reflect
the repurchase as if the common stock redemption occurred on December 31, 2002.
In December 2001, the Company sold 525,000 shares of common stock, par
value $.01 per share, in an underwritten public offering for net proceeds of
$14.0 million.
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.
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, 2002 is comprised of the following (in thousands):
2002 2001
- ---------------------------------------------------------------------------------
Service cost $321 $392
Interest cost 207 243
Other 21 14
------------------
$549 $649
==================
The Plans are un-funded and benefits will be paid from earnings of the
Company. The following table sets forth the benefit obligations at December 31,
2002 and 2001 (in thousands).
2002 2001
- ------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 4,134 $ 2,950
Service cost 321 392
Interest cost 207 243
Other 21 14
Actuarial gain (loss) (74) 535
---------------------------
Benefit obligation at end of year 4,609 4,134
Unrecognized net actuarial (gain) loss (377) (452)
---------------------------
Net pension liability in accrued liabilities $ 4,232 $ 3,682
===========================
Accounting for the Executive Retirement Plan for the years ended
December 31, 2002 and 2001 assumes a discount rate of 7.40% and a compensation
increase rate of 2.7%. Accounting for the Retirement Plan for Outside Directors
assumes a discount rate of 7.40%.
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,
2002 and 2001, the Company had a total of 2,170,730 and 2,256,346 Employee Plan
Shares authorized, respectively, which had not been issued. Effective January
1, 2003, the 1993 Employees Stock Incentive Plan expired
23
and was replaced with the 2003 Employees Restricted Stock Incentive Plan. The
terms of the 2003 Employees Stock Incentive Plan are substantially the same as
the 1993 Employees Stock Incentive Plan. As of December 31, 2002 and 2001, the
Company had issued a total of 966,037 and 853,598, and had specifically
reserved, but not issued, a total of 335,000 and 333,750 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 2002 and 2001,
compensation expense resulting from the amortization of the value of these
shares was $2.9 million and $1.9 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, 2002 and 2001, the Company had a total of 82,927
and 83,977 authorized shares under the 1995 Directors' Plan, respectively, that
had not been issued. As of December 31, 2002 and 2001, the Company had issued a
total of 17,073 and 16,023 shares, respectively, pursuant to the 1995
Directors' Plan. For 2002 and 2001, compensation expense resulting from the
amortization of the value of these shares was $21,318 and $12,637,
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, 2002 and 2001, the
Company had a total of 760,832 and 789,582 shares authorized, respectively,
which 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"). All options issued under the 1995 Employee Purchase Plan (the "1995
Employee Purchase Plan") expired in April 2002. As of December 31, 2002 and
2001, the Company had a total of 705,254 and 628,211 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.
A summary of the Employee Purchase Plans' collective activity and
related information for the years ended December 31 is as follows:
All Options
-------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 260,962 266,007 158,605
Granted 156,992 204,624 289,272
Exercised (65,406) (39,359) (2,892)
Forfeited (87,553) (90,678) (136,003)
Expired (77,906) (79,632) (42,975)
-------------------------------------------
Outstanding and exercisable at end of year 187,089 260,962 266,007
Weighted-average fair value of options granted during the year
(calculated as of the grant date) $ 2.93 $ 2.41 $ 1.68
Weighted-average exercise price of options exercised during
the year $ 18.02 $ 15.57 $ 14.84
Weighted-average exercise price of options outstanding
(calculated as of December 31) $ 21.43 $ 16.72 $ 17.72
Range of exercise prices of options outstanding (calculated as of
December 31) $14.98-$23.80 $14.98-$23.75 $14.98-$23.76
Weighted-average contractual life of outstanding options (calculated
as of December 31, in years) 0.8 0.8 0.9
24
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
2002, 2001 and 2000: risk-free interest rates of 1.70%, 2.47% and 5.36%;
dividend yields of 8.79%, 8.50% and 13.05%; volatility factors of the expected
market price of the Company's common stock of .179, .185 and .187; and an
expected life of each option of 1.13 years, respectively.
8. ACCELERATED VESTING OF DEFERRED COMPENSATION AND RELATED CHARGES
During the fourth quarter of 2002, the Company recorded an $11.8
million charge, which was comprised of the accelerated vesting of deferred
compensation relating to the retirement of an executive officer as well as
severance-related, project and other costs associated with the elimination of
other officer and employee positions. This charge is included in general and
administrative expenses.
9. NET INCOME PER SHARE
The table below sets forth the computation of basic and diluted
earnings per share as required by FASB Statement No. 128 for the three years in
the period ended December 31, 2002 (dollars in thousands, except per share
data).
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
- ----------------------------------------------------------------------------------------------------------
BASIC EPS
Average Shares Outstanding 41,919,834 40,678,069 40,151,220
Actual Restricted Stock Shares (945,302) (837,784) (606,820)
--------------------------------------------------
Denominator - Basic 40,974,532 39,840,285 39,544,400
==================================================
Net income $ 70,091 $ 79,887 $ 79,801
Preferred Stock Dividend (5,559) (6,656) (6,657)
--------------------------------------------------
Numerator - Basic $ 64,532 $ 73,231 $ 73,144
==================================================
Per share amount $ 1.57 $ 1.84 $ 1.85
==================================================
DILUTED EPS
Average Shares Outstanding 41,919,834 40,678,069 40,151,220
Actual Restricted Stock Shares (945,302) (837,784) (606,820)
Dilution for Convertible Debentures 0 0 181,136
Restricted Shares - Treasury 539,516 508,737 533,955
Dilution For Employee Stock Purchase Plan 92,020 114,136 41,918
--------------------------------------------------
Denominator - Diluted 41,606,068 40,463,158 40,301,409
==================================================
Numerator - Basic $ 64,532 $ 73,231 $ 73,144
Convertible Subordinated Debenture Interest 0 0 275
--------------------------------------------------
Numerator - Diluted $ 64,532 $ 73,231 $ 73,419
==================================================
Per share amount $ 1.55 $ 1.81 $ 1.82
==================================================
10. COMMITMENTS AND CONTINGENCIES
As of December 31, 2002, the Company had a net investment of
approximately $10.5 million in three build-to-suit developments in progress,
which have a total remaining funding commitment of approximately $10.8 million.
As part of the merger with Capstone Capital Corporation ("Capstone")
in 1998, agreements were entered into with three individuals affiliated with
Capstone that restricted competitive practices and which the Company believed
enhanced the value of the real estate properties acquired from Capstone. These
agreements provided 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 were met. The Company fulfilled
its commitment in 2002 upon issuance of the final 150,000 shares of common
stock in October 2002.
11. OTHER DATA (UNAUDITED)
Funds From Operations
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 (or losses) from sales of real estate properties (computed in
accordance with accounting principles generally accepted in the United States)
plus depreciation from real estate assets. The Company calculates 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
25
in computing FFO although NAREIT's definition of funds from operations requires
the inclusion of straight-line rental revenue in funds from operations. In
2002, since the Company redeemed its preferred stock on September 30, 2002,
only nine months of preferred stock dividends were included in FFO although an
additional amount was paid upon redemption. Also, in 2002, the Company excluded
a charge recorded in the fourth quarter of $11.8 million which was comprised of
the accelerated vesting of deferred compensation relating to the retirement of
an executive officer as well as severance-related, project and other costs
associated with the elimination of other officer and employee positions. In
2001, the Company excluded certain debt-related charges in computing FFO; and
in 2000 excluded a 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) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------------
Income before net gain (loss) on sale of real estate properties (1) $ 66,703 $ 78,677 $ 80,469
Certain debt-related charges 0 607 0
Accelerated vesting of deferred compensation and related charges 11,824 0 0
Elimination of rental revenues recognized
on a straight line basis (3,143) (5,749) (7,827)
Preferred stock dividend (4,992) (6,656) (6,657)
Real estate depreciation 40,317 40,043 38,393
Provision for loss on investment 0 0 1,000
--------------------------------------------------
Total Adjustments 44,006 28,245 24,909
--------------------------------------------------
Funds From Operations - Basic $ 110,709 $ 106,922 $ 105,378
Convertible Subordinated Debenture Interest 0 0 275
--------------------------------------------------
Funds From Operations - Diluted $ 110,709 $ 106,922 $ 105,653
==================================================
Weighted average common shares outstanding - Basic 40,974,532 39,840,285 39,544,400
==================================================
Weighted average common shares outstanding - Diluted 41,606,068 40,463,158 40,301,409
==================================================
Funds From Operations Per Common Share - Basic $ 2.70 $ 2.68 $ 2.66
==================================================
Funds From Operations Per Common Share - Diluted $ 2.66 $ 2.64 $ 2.62
==================================================
(1) 2002, 2001, and 2000 amounts include $3.1 million, $1.9 million and
$1.4 million, respectively, of stock-based, long-term, incentive
compensation expense, a non-cash expense.
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.
26
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, 2002 (dollars in
thousands).
2002 2001 2000
--------------------------------------
Net income $ 70,091 $ 79,887 $ 79,801
Depreciation and amortization (1) 41,598 41,126 39,507
Depreciation and amortization (2) (33,796) (33,625) (30,996)
Gain or loss on disposition of depreciable assets 13,394 767 (343)
Straight line rent (3,143) (5,749) (7,827)
Other 11,551 802 1,148
--------------------------------------
29,604 3,321 1,489
--------------------------------------
Taxable income (3) $ 99,695 $ 83,208 $ 81,290
======================================
(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, 2002, 2001 and 2000,
dividends paid per share of common stock were $2.39, $2.31 and $2.23,
respectively, which consisted of ordinary income per share of $2.00, $1.95 and
$1.90, return of capital per share of $0.05, $0.36 and $0.33 respectively, and
capital gain per share of $0.34, $0.00, and $0.00, respectively. For the years
ended December 31, 2002, 2001 and 2000, dividends paid per share of preferred
stock were $1.85, $2.22 and $2.22, respectively, which consisted of ordinary
income per share of $1.60, $2.22 and $2.22 and capital gain per share of $0.25,
$0.00 and $0.00, respectively.
12. 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, 2002 and
2001 due to their short-term nature. The fair value of notes and bonds payable
is estimated using cash flow analyses at December 31, 2002 and 2001, 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, 2002 and 2001 was approximately $42.8 million and $14.4 million
less than the fair value, respectively. The carrying amount of the Company's
mortgage notes receivable at December 31, 2002 and 2001 was approximately $13.4
million and $2.6 million less than the fair value, respectively.
13. SUBSEQUENT EVENTS
On January 28, 2003, the Company declared an increase in its quarterly
common stock dividend from $0.605 per share ($2.42 annualized) to $0.61 per
share ($2.44 annualized) payable on March 6, 2003 to shareholders of record on
February 14, 2003.
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14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended December 31, 2002
and 2001 is summarized below:
Quarter Ended
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(In thousands, except per share data) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------------------------
2002
Total revenue $ 49,653 $ 48,310 $ 49,818 $ 46,746
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Net income $ 19,848 $ 22,255 $ 20,490 $ 7,498
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Funds from operations - Basic $ 27,576 $ 27,654 $ 27,661 $ 27,818
----------------------------------------------------------------------
Funds from operations - Diluted $ 27,576 $ 27,654 $ 27,661 $ 27,818
----------------------------------------------------------------------
Net income per common share - Basic $ 0.45 $ 0.51 $ 0.45 $ 0.18
----------------------------------------------------------------------
Net income per common share - Diluted $ 0.44 $ 0.50 $ 0.44 $ 0.18
----------------------------------------------------------------------
Funds from operations per common share
- Basic $ 0.68 $ 0.68 $ 0.68 $ 0.68
----------------------------------------------------------------------
Funds from operations per common share
- Diluted $ 0.67 $ 0.67 $ 0.67 $ 0.67
----------------------------------------------------------------------
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
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