UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
---
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
----
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number: 1-11852
________________________
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
Maryland 62 - 1507028
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ----
As of November 1, 1997, 19,277,917 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
September 30, 1997
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Part II - Other Information
Item 5. Other Information
Cautionary Statements 17
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands)
(Unaudited) (1)
ASSETS Sept. 30, 1997 Dec. 31, 1996
- ------ -------------- -------------
<S> <C> <C>
Real estate properties:
Land $55,196 $53,028
Buildings and improvements 420,949 369,188
Personal property 4,200 3,099
Construction in progress 10,754 13,863
------ ------
491,099 439,178
Less accumulated depreciation (31,511) (23,144)
------- -------
Total real estate properties, net 459,588 416,034
Cash and cash equivalents 5,662 1,354
Short-term investments 18,000 0
Other assets, net 13,329 10,117
------ ------
Total assets $496,579 $427,505
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable $109,000 $168,619
Security deposits payable 3,662 4,172
Accounts payable and accrued liabilities 5,577 8,197
Deferred income 910 553
Commitments and contingencies 0 0
- -
Total liabilities 119,149 181,541
------- -------
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares
authorized; none outstanding 0 0
Common stock, $.01 par value; 150,000,000 shares
authorized; 19,277,917 issued and outstanding at
Sept. 30, 1997 and 13,898,777 at Dec. 31, 1996 193 139
Additional paid-in capital 402,403 264,614
Deferred compensation (7,886) (4,702)
Cumulative net income 80,491 57,655
Cumulative dividends (97,771) (71,742)
------- -------
Total stockholders' equity 377,430 245,964
------- -------
Total liabilities and stockholders' equity $496,579 $427,505
======== ========
</TABLE>
(1) The balance sheet at Dec. 31, 1996 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
(The accompanying notes, together with the Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, are an integral part of these financial
statements.)
1
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Three Months Ended September 30, 1997 and 1996
(Unaudited)
(Dollars in thousands, except per share data)
1997 1996
<S> <C> <C>
---- ----
REVENUES:
Master lease rental income $9,536 $8,764
Property operating income 5,116 0
Management fees 382 281
Interest and other income 831 464
--- ---
15,865 9,509
------ -----
EXPENSES:
General and administrative 922 526
Property operating expenses 1,726 0
Interest 1,939 1,876
Depreciation 2,874 2,113
Amortization 76 80
-- --
7,537 4,595
----- -----
NET INCOME $8,328 $4,914
====== ======
NET INCOME PER SHARE $0.43 $0.37
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 19,266,066 13,198,553
========== ==========
</TABLE>
(The accompanying notes, together with the Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, are an integral part of these financial
statements.)
2
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(Dollars in thousands, except per share data)
1997 1996
---- ----
<S> <C> <C>
REVENUES:
Master lease rental income $30,164 $26,020
Property operating income 9,495 0
Management fees 1,004 882
Interest and other income 2,309 725
----- ---
42,972 27,627
------ ------
EXPENSES:
General and administrative 2,396 1,566
Property operating expenses 3,005 0
Interest 6,106 4,947
Depreciation 8,372 6,239
Amortization 257 251
--- ---
20,136 13,003
------ ------
NET INCOME $22,836 $14,624
======= =======
NET INCOME PER SHARE $1.24 $1.11
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 18,378,343 13,155,689
========== ==========
</TABLE>
(The accompanying notes, together with the Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, are an integral part of these financial
statements.)
3
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
(Dollars in thousands)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $22,836 $14,624
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation and amortization 8,832 6,522
Deferred compensation 501 365
Increase in deferred income 357 107
Increase in short-term investments (18,000) 0
Increase in other assets (3,467) (1,135)
Decrease in accounts payable and accrued
liabilities (2,610) (959)
------ ----
Net cash provided by operating activities 8,449 19,524
----- ------
Cash flows from investing activities:
Acquisition of real estate properties (51,755) (44,574)
Disbursement of security deposits (510) (390)
---- ----
Net cash used in investing activities (52,265) (44,964)
------- -------
Cash flows from financing activities:
Borrowings on long-term notes payable 19,000 66,299
Repayments on long-term notes payable (78,618) (30,115)
Deferred financing and organization costs paid (31) (31)
Decrease in restricted cash 0 (44)
Dividends paid (26,029) (18,566)
Proceeds from issuance of common stock 133,802 194
------- ---
Net cash provided by financing activities 48,124 17,737
------ ------
Increase (decrease) in cash and cash equivalents 4,308 (7,703)
Cash and cash equivalents, beginning of period 1,354 9,143
----- -----
Cash and cash equivalents, end of period $5,662 $1,440
====== ======
</TABLE>
(The accompanying notes, together with the Notes to the Consolidated
Financial Statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, are an integral part of these financial
statements.)
4
<PAGE>
Healthcare Realty Trust
Incorporated
Notes to Condensed Consolidated Financial Statements
September 30, 1997
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Healthcare Realty Trust Incorporated (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements which are included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. These financial statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
The results of operations for the three-month and nine-month periods ending
September 30, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
Certain reclassifications have been made for the period July 1, 1996
through September 30, 1996 and for the period January 1, 1996 through September
30, 1996 to conform to the 1997 presentation. These reclassifications had no
effect on the results of operations as previously reported.
Note 2. Organization
The Company was organized to invest in healthcare-related properties
located throughout the United States. In addition to acquisitions of existing
facilities, the Company provides capital for the construction of new facilities
and provides property management, leasing and build-to-suit development
services. The Company commenced operations on June 3, 1993 following the
completion of an initial public offering. As of September 30, 1997, the Company
had purchased, developed or had under development, 86 properties (the
5
<PAGE>
"Properties") for an aggregate investment of $491.1 million located in 43
markets in 14 states, which are supported by 17 healthcare-related entities. The
Properties include:
<TABLE>
<CAPTION>
Number of (in thousands)
Properties Investment
---------- ----------
<S> <C> <C>
Ancillary hospital facilities 41 $272,886
Medical office buildings 5 15,804
Physician clinics 13 39,080
Long-term care facilities 18 99,902
Comprehensive ambulatory care centers 4 40,080
Clinical laboratories 2 13,075
Ambulatory surgery centers 3 6,886
Corporate and third party developments 3,386
- -----
86 $491,099
== ========
</TABLE>
Note 3.
Funds From Operations
Funds from operations ("FFO"), as defined by the National Association of
Real Estate Investment Trusts, Inc. ("NAREIT") 1995 White Paper, means net
income (computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation from real estate assets.
The Company considers FFO to be an informative measure of the performance
of an equity REIT and consistent with measures used by analysts to evaluate
equity REITs. FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs, and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or as an alternative to cash flow as a measure of liquidity. FFO for
the three months ended September 30, 1997 and 1996, was $11.1 million ($0.58 per
share) and $6.9 million ($0.53 per share), respectively. FFO for the nine months
ended September 30, 1997 and 1996, was $31.1 million ($1.69 per share) and $20.6
million ($1.57 per share), respectively.
NAREIT encourages REITs to make reporting changes consistent with the 1995
NAREIT White Paper on FFO no later than fiscal year 1996. Beginning with first
quarter 1996 operations, the Company's policy has been to report FFO calculated
on the NAREIT 1995 White Paper while providing supplemental information based
upon previous methodology.
6
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Three Months Ended Three Months Ended
------------------ ------------------
September 30, 1997 September 30, 1996
------------------ ------------------
NAREIT NAREIT
White Paper Previous White Paper Previous
As Reported Methodology As Reported Methodology
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (1) $8,328 $8,328 $4,914 $4,914
Non-recurring items 0 0 0 0
Gain or loss on dispositions 0 0 0 0
Straight line rents 0 0 0 0
ADD:
Depreciation
Real estate 2,794 2,794 2,023 2,023
Office F,F&E 0 62 0 44
Leasehold improvements 0 4 0 36
Other non-revenue producing
assets 0 14 0 10
- -- - --
2,794 2,874 2,023 2,113
----- ----- ----- -----
Amortization
Acquired property contracts (2) 0 48 0 64
Other non-revenue producing
assets 0 27 0 14
Organization costs 0 2 0 2
- - - -
0 77 0 80
- -- - --
Deferred financing costs (3) 0 67 0 92
- -- - --
Total Adjustments 2,794 3,018 2,023 2,285
----- ----- ----- -----
Funds From Operations $ 11,122 $ 11,346 $ 6,937 $ 7,199
=========== ========== =========== ===========
Weighted Average Shares
Outstanding 19,266,066 19,266,066 13,198,553 13,198,553
========== ========== ========== ==========
Funds From Operations Per Share $ 0.58 $ 0.59 $ 0.53 $ 0.55
=========== =========== =========== ===========
</TABLE>
(1) Net income includes $168,657 in 1997 and $138,078 in 1996 of stock
based, long-term incentive compensation expense. This expense never requires the
disbursement of cash.
(2) Amortization of the acquisition cost of revenue producing property
management contracts.
(3) Amortization of deferred financing costs is reported as part of
interest expense on the income statements.
7
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Nine Months Ended Nine Months Ended
----------------- -----------------
September 30, 1997 September 30, 1996
------------------ ------------------
NAREIT NAREIT
White Paper Previous White Paper Previous
As Reported Methodology As Reported Methodology
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Income (1) $22,836 $22,836 $14,624 $14,624
Non-recurring items (2) 112 112 0 0
Gain or loss on dispositions 0 0 0 0
Straight line rents 0 0 0 0
ADD:
Depreciation
Real estate 8,103 8,103 5,979 5,978
Office F,F&E 0 156 0 125
Leasehold improvements 0 71 0 105
Other non-revenue producing
assets 0 42 0 31
- -- - --
8,103 8,372 5,979 6,239
----- ----- ----- -----
Amortization
Acquired property contracts (3) 0 148 0 200
Other non-revenue producing
assets 0 104 0 46
Organization costs 0 5 0 5
- - - -
0 257 0 251
- --- - ---
Deferred financing costs (4) 0 135 0 276
- --- - ---
Total Adjustments 8,215 8,876 5,979 6,766
----- ----- ----- -----
Funds From Operations $ 31,051 $ 31,712 $ 20,603 $ 21,390
========== =========== =========== ===========
Weighted Average Shares
Outstanding 18,378,343 18,378,343 13,155,689 13,155,689
========== ========== ========== ==========
Funds From Operations Per Share $ 1.69 $ 1.73 $ 1.57 $ 1.63
=========== =========== =========== ===========
</TABLE>
(1) Net income includes $502,141 in 1997 and $365,368 in 1996 of stock
based, long-term, incentive compensation expense. This expense never requires
the disbursement of cash.
(2) Represents a loss from a debt restructuring.
(3) Amortization of the acquisition cost of revenue producing property
management contracts.
(4) Amortization of deferred financing costs is reported as part of
interest expense on the income statements.
8
<PAGE>
Note 4. Notes and Bonds Payable
Notes and Bonds payable at September 30, 1997 consisted of the following
(in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
Unsecured notes $90,000
Unsecured credit facility 19,000
------
$109,000
========
</TABLE>
Unsecured Notes
On September 18, 1995, the Company privately placed $90.0 million of
unsecured notes (the "Unsecured Notes") with sixteen credit institutions. The
Unsecured Notes bear interest at 7.41%, payable semi-annually, and mature on
September 1, 2002. Beginning on September 1, 1998 and on each September 1
through 2002, the Company must repay $18.0 million of principal. The note
agreements pursuant to which the Unsecured Notes were purchased contain certain
representations, warranties and financial and other covenants customary in such
loan agreements.
Unsecured Credit Facility
On December 26, 1996, the Company's $75.0 million unsecured credit facility
(the "Unsecured Credit Facility") with four commercial banks was increased to
$100.0 million and extended to December 30, 1999. At the option of the Company,
borrowings bear interest at either the banks' base rate or LIBOR plus 1.125%
(previously 1.250%). In addition, the Company pays a commitment fee of .225
(previously .250) of 1% per annum on the unused portion of funds available for
borrowings under the Unsecured Credit Facility. The Unsecured Credit Facility
contains certain representations, warranties and financial and other covenants
customary in such loan agreements.
At September 30, 1997, the Company had borrowed $19.0 million under the
Unsecured Credit Facility which resulted in available borrowing capacity of
$81.0 million.
Serial and Term Bonds Payable
In conjunction with the acquisition of certain facilities, the Company
assumed an obligation for a $2.5 million bond issue of the Industrial
Development Authority of the City of Salem, Virginia. The obligation was secured
by a deed of trust on the related facilities. This obligation was repaid during
the first quarter of 1997.
9
<PAGE>
In conjunction with the acquisition of certain facilities, the Company
assumed an obligation for a $1.6 million bond issue of the Industrial
Development Authority of the City of Roanoke, Virginia. The obligation was
secured by a deed of trust on the related facilities. This obligation was repaid
during the first quarter of 1997.
In conjunction with the acquisition of certain facilities in 1994, the
Company assumed an obligation for $1.1 million of Serial Bonds and $2.0 million
of Term Bonds. The obligation was secured by a deed of trust on the related
facilities. The obligation was defeased during the first quarter of 1997. The
resulting loss was not significant.
Other Long-Term Debt Information
During the first quarter of 1997, the Company repaid $78.6 million of
indebtedness from proceeds of a secondary offering (see Note 8).
Note 5. Acquisitions of Real Estate
During the quarter ended September 30, 1997, the Company provided the
initial funding for a 108,813 square foot long-term care lessee development in
Columbia, Tennessee which has a total funding commitment of $12.4 million. The
Company also acquired controlling interest in a partnership, including a 40,686
square foot ancillary hospital facility in Dallas, Texas, in which the Company
previously acquired a mortgage note. Substantially all of the economic interest
in the property is considered to be the property of the Company and is,
therefore, included in the Company's portfolio.
Note 6. Deferred Compensation
Effective January 31, 1997, 141,666 restricted shares, bringing the total
to 283,332, of the Company's common stock previously reserved were released to
certain officers of the Company upon the achievement of the Company's
performance based criteria in accordance with the terms of the First
Implementation of the Company's 1993 Employees Stock Incentive Plan. These
restricted shares require continued employment, generally for 12 years from the
date of release, prior to vesting.
Note 7. Commitments
As of September 30, 1997, the Company had a net investment of approximately
$10.8 million in two build-to-suit developments in progress and one expansion of
an existing facility, which have a total remaining funding commitment of
approximately $18.4 million.
10
<PAGE>
Note 8. Stockholders' Equity
On February 14, 1997, the Company sold 5,175,000 shares of its common stock
in a secondary offering (the "Secondary Offering") under its currently effective
registration statement. The Company received $133.0 million in net proceeds. The
proceeds were used to repay or defease outstanding debt, finance additional
property acquisitions, build-to-suit developments and for general corporate
purposes.
Note 9. Changes in Accounting Principles
In February 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 128 "Earnings per Share," which is required to be adopted
on December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Statement No. 128 is not expected to have a significant impact on the
Company's computation of primary or fully diluted earnings per share.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial statements.
Statement 130 is effective for interim and annual periods beginning after
December 15, 1997. Comprehensive income encompasses all changes in shareholders'
equity (except those arising from transactions with owners) and includes net
income, net unrealized capital gains or losses on available for sale securities
and foreign currency translation adjustments. Management of the Company does not
expect the adoption of Statement No. 130 to have an impact on the Company's
financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises are to report information about
operating segments in annual financial statements and requires those enterprises
to report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
Statement No. 131 is effective for periods beginning after December 15, 1997.
Management of the Company is currently evaluating the applicability of Statement
No. 131, which may result in expanded segment disclosures.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Results
Third Quarter 1997 Compared to Third Quarter 1996
Net income for the quarter ended September 30, 1997 increased to $8.3
million ($0.43 per share) from $4.9 million ($0.37 per share) for the same
period in 1996, a 69% increase in net income (16% per share). Total revenues for
the quarter ended September 30, 1997 were $15.9 million compared to $9.5 million
for the quarter ended September 30, 1996, which is an increase of $6.4 million
or 67%. The increase is primarily due to master lease rental income and property
operating income derived from approximately $138.1 million of property
acquisitions and properties reclassified from construction in progress
subsequent to September 30, 1996. While the number of managed properties rose
from 52 properties at September 30, 1996 to 109 properties at September 30,
1997, management fees do not increase proportionately due to the elimination in
consolidation of Company owned managed properties. Management fees increased
$101,000 for the quarter ending September 30, 1997, compared to the same period
in 1996, substantially due to the addition of third party management contracts
in Florida and Virginia. Interest and other income for the quarter ended
September 30, 1997 was $831,000 compared to $464,000 for the quarter ended
September 30, 1996. The Company maintained an average cash and short-term
investment balance of approximately $25.5 million during the quarter ended
September 30, 1997. In comparison, the Company maintained an average cash and
short-term investment balance of approximately $1.8 million during the quarter
ended September 30, 1996 which resulted in significantly higher interest income.
Additionally, in 1996, the Company benefited, approximately $420,000, from a
short-term arbitrage situation created by the refinancing of approximately $30.8
million of mortgage notes for a current healthcare tenant.
Total expenses for the quarter ended September 30, 1997 were $7.5 million
compared to $4.6 million for the quarter ended September 30, 1996, which is an
increase of $2.9 million or 64%. Depreciation expense increased $761,000 due to
the acquisition of additional properties and the completion of properties under
construction, discussed in the preceding paragraph. General and administrative
expenses increased $396,000 or 75%, primarily due to an increase in
non-reimbursed employees associated with the increase in management contracts.
Interest expense remained constant at $1.9 million for the quarters ended
September 30, 1996 and 1997. During the quarter ended September 30, 1997, the
Company had an average outstanding debt balance of approximately $104.5 million
compared to an average outstanding debt balance of $125.4 million for the
quarter ended September 30, 1996. However, there was approximately $29.9 million
less in construction in progress throughout the quarter during 1997 compared to
1996 which resulted in substantially less capitalized interest in 1997. There
was no significant variation in amortization expense.
12
<PAGE>
Nine Months ended September 30, 1997 Compared to Nine Months ended September 30,
1996
Net income for the nine months ended September 30, 1997 increased to $22.8
million ($1.24 per share) from $14.6 million ($1.11 per share) for the same
period in 1996, a 56% increase in net income (12% per share). Total revenues for
the nine months ended September 30, 1997 were $43.0 million compared to $27.6
million for the nine months ended September 30, 1996, which is an increase of
$15.3 million, or 56%. The increase is primarily due to master lease rental
income and property operating income derived from approximately $138.1 million
of property acquisitions and properties reclassified from construction in
progress subsequent to September 30, 1996. For the nine months ended September
30, 1997 compared to the nine months ended September 30, 1996, there was a
$122,000 increase in property management fees substantially due to the addition
of third party management contracts in Florida and Virginia. At September 30,
1997, the Company managed 109 properties compared to 52 properties at September
30, 1996. While the number of managed properties increased significantly,
management fees do not increase proportionately due to the elimination in
consolidation of Company owned managed properties. Interest and other income for
the nine months ended September 30, 1997 was $2.3 million compared to $725,000
for the nine months ended September 30, 1996. During the first quarter of 1997,
the Company completed the Secondary Offering and maintained an average cash and
short-term investment balance of $30.5 million during the nine months ending
September 30, 1997 compared to $2.5 million during the nine months ending
September 30, 1996. Additionally, in 1996, the Company benefited, approximately
$420,000, from a short-term arbitrage situation created by refinancing of
approximately $30.8 million of mortgage notes for a current healthcare tenant.
Also, the nine months ended September 30, 1996 includes $106,000 in third party
development fees.
Total expenses for the nine months ended September 30, 1997 were $20.1
million compared to $13.0 million for the nine months ended September 30, 1996,
which is an increase of $7.1 million, or 55%. Depreciation expense increased
$2.1 million due to the acquisition of additional properties and the completion
of properties under construction, discussed in the preceding paragraph. General
and administrative expenses increased $830,000, or 53%, primarily due to an
increase in non-reimbursed employees associated with the increase in management
contracts. Interest expense increased from $4.9 million to $6.1 million for the
nine months ended September 30, 1996 and 1997, respectively. During the nine
months ended September 30, 1997, the Company had an average outstanding debt
balance of approximately $112.5 million compared to an average outstanding debt
balance of $109.1 million for the nine months ended September 30, 1996. In
addition, there was approximately $19.2 million less in construction in progress
throughout the nine months ending September 30, 1997 compared to 1996 which
resulted in substantially less capitalized interest in 1997. There was no
significant variation in amortization expense.
13
<PAGE>
Liquidity and Capital Resources
As of September 30, 1997, the Company had purchased, developed or had under
development, 86 properties (the "Properties") for an aggregate investment of
$491.1 million located in 43 markets in 14 states, which are supported by 17
healthcare-related entities. The Company has financed its acquisitions to date
through the sale or exchange of common stock, long-term indebtedness, borrowings
under its credit facilities, and the assumption of bonds.
Effective February 14, 1997, the Company received $133.0 million in net
proceeds from the Secondary Offering. Promptly thereafter, the net proceeds were
used, in part, to extinguish all $71.9 of indebtedness outstanding under the
Unsecured Credit Facility which resulted in a borrowing capacity of $100.0
million, and repayment or defeasance of secured indebtedness in the total amount
of $6.7 million. The remaining proceeds of the Secondary Offering have been used
to finance additional acquisitions build-to-suit developments, short-term
investments and for general corporate purposes. Funds From Operations can be
negatively affected by delay in the acquisition of, or investment in, healthcare
properties.
At September 30, 1997, the Company had borrowing capacity available of
$81.0 million under the Unsecured Credit Facility. In addition, the Company had
cash and short-term investments of approximately $23.7 million. During November,
the Company's $18.0 million short-term investment matured; increasing the
company's cash position by $18.0 million.
At September 30, 1997, the Company had stockholders' equity of $377.0
million. The debt to total capitalization ratio was approximately 0.22 to 1.00
at September 30, 1997.
During the quarter ended September 30, 1997, the Company provided the
initial funding for a 108,813 square foot long-term care lessee development in
Columbia, Tennessee which has a total funding commitment of $12.4 million. The
Company also acquired controlling interest in a partnership, including a 40,686
square foot ancillary hospital facility in Dallas, Texas, in which the Company
previously acquired a mortgage note. Substantially all of the economic interest
in the property is considered to be the property of the Company and is,
therefore, included in the Company's portfolio. These acquisitions were financed
by Company operations and proceeds borrowed under its Unsecured Credit Facility.
During the quarter ended September 30, 1997, the Company funded a net $6.4
million for construction in progress and capital additions. The sources of these
funds were cash provided by Company operations and proceeds borrowed under its
Unsecured Credit Facility.
On August 15, 1997, the Company paid a dividend of $0.50 per share to the
holders of its common stock as of the close of business on August 4, 1997. This
dividend related to the period from April 1, 1997 through June 30, 1997. In
October 1997, the Company announced payment of a dividend of $0.505 per share to
the holders of common shares on November 4, 1997. The dividend will be paid on
November 17, 1997. The dividend relates to the period July 1, 1997 through
September 30, 1997.4, 1997. The dividend will be paid on November 17, 1997. The
dividend relates to the period July 1, 1997 through September 30, 1997.
14
<PAGE>
As of September 30, 1997, the Company had a net investment of $10.8 million
in two build-to-suit developments in progress and one expansion of an existing
facility, which have a total remaining funding commitment of $18.4 million.
These commitments will be funded from Company operations and proceeds borrowed
under the Unsecured Credit Facility.
FFO increased to $11.1 million ($0.58 per share) for the quarter ended
September 30, 1997 compared to $6.9 million ($0.53 per share) for the same
period in 1996. For the nine month period ending September 30, 1997, FFO
increased to $31.1 million ($1.69 per share) from $20.6 million ($1.57 per
share) for the nine months ending September 30, 1996. Although FFO is not based
upon generally accepted accounting principles, the Company considers it to be an
informative measure of the performance of an equity REIT and consistent with
measures used by analysts to evaluate equity REITs.
The Company can issue an aggregate of approximately $143.0 million of
securities remaining under currently effective registration statements. The
Company intends to offer securities under such registration statements from time
to time to finance future acquisitions and build-to-suit developments as they
occur. The Company may, under certain circumstances, borrow additional amounts
in connection with the renovation or expansion of its properties, the
acquisition or development of additional properties or, as necessary, to meet
distribution requirements for REITs under the Code. The Company may raise
additional capital or make investments by issuing, in public or private
transactions, its equity and debt securities, but the availability and terms of
any such issuance will depend upon market and other conditions.
Under the terms of the leases and other financial support agreements
relating to the properties, tenants or healthcare providers are generally
responsible for operating expenses and taxes relating to the properties. After
the term of the lease or financial support agreement, or in the event the
financial obligations required by the agreement are not met, the Company
anticipates that any expenditures it might become responsible for in maintaining
the properties will be funded by cash from operations and, in the case of major
expenditures, possibly by borrowings.
Management believes that inflation should not have a materially adverse
effect on the Company. The majority of the leases contain some provision for
additional rent payments based on increases in various economic measures.
The Company plans to continue to make additional investments in 1997, pay
its quarterly dividends, with increases consistent with its current practices,
and meet all other liquidity needs. The Company provides no assurance, however,
that it will be able to obtain additional financing or capital on terms
acceptable to the Company in sufficient amounts to meet its liquidity needs.
15
<PAGE>
This September 30, 1997 Form 10-Q of the Company includes forward-looking
statements which reflect the Company's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties which would cause actual results to differ
materially from historical results or those anticipated. For a more detailed
discussion of these factors, see Item 1 of the Company's Form 10-K for the
fiscal year ended December 31, 1996.
16
<PAGE>
PART II - OTHER INFORMATION
Item 5. Other Information
Cautionary Statements
From time to time the Company may make forward-looking statements which
affect its current view with respect to future events and financial performance.
The Company wishes to caution readers that the following important factors,
among others, could affect the Company's actual results, and could cause those
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. Many of those factors have
been discussed in the Company's prior filings with the Securities and Exchange
Commission.
All references to the Company within these cautionary statements include
entities with the Company, including the Company's property management
subsidiary, Healthcare Realty Management, Incorporated.
General Growth Strategy
The Company follows a general growth strategy of providing integrated real
estate services to the healthcare industry, including asset management and
strategic planning for real estate, property administration, management and
leasing services, build-to-suit development, the acquisition of existing
healthcare properties and equity co-investment in healthcare provider
acquisition transactions. By providing these services, the Company believes it
can differentiate its market position, acquire needed capital, expand its asset
base and increase revenue; however, there are various risks inherent in this
growth strategy. The following factors, among others, could affect the Company's
ability to experience growth and investors should consider the following
factors.
a) Access to Capital
Capital Markets. The Company requires capital for the purchase of, or
investment in, healthcare real estate. Currently, the Company has already
invested all of its equity in the acquisition of healthcare real properties;
however, it retains a significant amount of its available debt commitments.
There is no assurance that the Company will be able to obtain additional equity
or debt capital at the time it requires additional capital; nor that the Company
can obtain such capital on terms that will permit the Company to acquire
healthcare properties on a basis that is competitive with other real estate
investors.
17
<PAGE>
Risks of Leverage and Debt. The Company has incurred and may continue to
incur indebtedness and may mortgage its properties in furtherance of its
activities. The Company may be required to borrow money and mortgage its
properties to fund any shortfall of cash necessary to meet cash distribution
requirements necessary to maintain its REIT status.
Maintenance of the Company's Dividend Policy. The Company has raised its
quarterly dividend each consecutive quarter since the Company's formation.
Failure of the Company to maintain or increase its dividend could make it
difficult for the Company to raise additional equity capital on favorable terms,
if at all. The ability to maintain or raise its dividend is dependent, to a
large part, on growth of funds from operations, which in turn depends upon
increased revenues from investments in the form of additional investment, rental
increases and income from administrative and management services. Impacting the
Company's ability to continue to increase its dividends also include the terms
described below.
Under the terms of its current debt arrangements, the Company is prohibited
from declaring or paying dividends at any time that the Company fails to make
any payment of principal, interest fees or other amounts when due, and is
further prohibited from declaring or paying dividends (other than as the Company
determines necessary to maintain its status as a REIT for federal income tax
purposes) if, at the time of such action, any other event of default exists.
Repayment of any borrowings, as well as the resulting interest expense and debt
amortization, could negatively affect the Company's cash available for
distribution. If the Company defaults on any loan secured by mortgages on any of
its properties, the lenders may foreclose on such property, and the Company
would lose its investment herein.
Reduction in Dividends from Failure to Qualify as a REIT; REIT Taxes. The
Company intends at all times to operate so as to qualify as a REIT under the
Code. If in any taxable year the Company does not qualify as a REIT, it would be
taxed as a corporation and distributions to the shareholders would not be
deductible by the Company in computing its taxable income. Depending upon the
circumstances, a REIT that loses is qualification in one year may not be
eligible to requalify during the four succeeding years. Failure to so qualify,
even in one taxable year, could cause the Company to dramatically reduce its
dividends. Further, certain transactions or other events could lead to the
Company being taxed at rates ranging from 4 to 100 percent on certain income or
gains.
b) Revenue Growth
The Company's general growth strategy implies continuing growth in the
Company's funds from operations. The Company's funds from operations can be
negatively affected by, among other items, the following factors.
18
<PAGE>
Delays in Acquiring Properties. The purchase of one or more properties may
not be consummated or may be delayed for various reasons. Acquisition delays
will negatively impact revenues and may have the potential to adversely effect
the Company's ability to increase its distributions to shareholders.
Operating Risks. Real property investments are subject to varying degrees
of risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred. To offset
the threat of insufficient revenue to meet operating expenses, debt service,
capital expenditures and dividend payments, the Company requires net master
leases or similar credit support with primary terms.
Ability to Reinvest Proceeds from Dispositions. From time to time, the
Company may be required to dispose of properties pursuant to the terms of master
leases or similar credit support arrangements. The terms of such arrangements
include, among other items, a disposition of properties in the event of a
default on the part of the healthcare provider, and a disposition upon the
exercise of an option of the healthcare provider to repurchase subject
properties at specified times during the term or the arrangement. The healthcare
provider may, generally, repurchase the property for a price equal to the
greater of the fair market value purchase price or the cost incurred by the
Company in acquiring the property. No assurances can be given that the Company
could negotiate with the healthcare provider, should it wish to repurchase the
property; or, that the Company could invest the proceeds of the disposition with
another healthcare provider on a timely basis or on acceptable terms. A failure
of the Company to reinvest the proceeds of such a disposition could have an
adverse effect on the Company's future revenues.
Dependence on Healthcare Providers and Potential Reduction in Revenues. The
success of the Company's investment in a particular property will be dependent
upon the success of the business of the healthcare provider and, to the extent
that a provider's performance under the lease or credit arrangement has been
guaranteed, on the guarantor under such arrangement. There is no assurance that
the Company will be able to retain its provider upon the expiration of the
leases or that unfavorable economic, demographic or competitive conditions or
industry reform will not adversely affect the financial condition of providers
and/or guarantors and, consequently, lease revenues and the value of the
Company's investments in the property.
Concentration on Few Healthcare Providers. Currently 24 percent of the
Company's portfolio is leased to Columbia/HCA Healthcare Corporation and 22
percent is leased to Tenet Healthcare Corporation.
Impact of Reduced Occupancy Rates. Most of the hospitals adjacent to or
associated with the Company's properties owned or to be acquired are
substantially less than fully occupied on an inpatient basis. Despite such
occupancy rates, however, the operating cash flow produced by such hospitals
available for the related payments to the Company adequately covers such
payments. If the inpatient occupancy rate at such a hospital were to deteriorate
to a level at which operating cash flows would be insufficient to cover the
payments to the Company on a particular ancillary hospital facility, the Company
would have to rely upon the general credit of the provider or the related
guarantor, if any.
19
<PAGE>
Potential Provider Loss of Licensure or Certification. Healthcare providers
are subject to federal and state laws and regulations which govern financial and
other arrangements between healthcare operators. A provider's loss of licensure
or certification would result in the Company having to obtain another provider
for the affected facility. No assurances can be given that the Company could
attract another healthcare provider on a timely basis or on acceptable terms.
Failure to do so would have an adverse effect on the Company's revenues.
Failure to Successfully Market Property Management Services. The Company
employees its wholly owned subsidiary Healthcare Realty Management (HRM), in the
day-to-day management and leasing of multi-tenanted healthcare properties and in
the supervision of the development of new healthcare properties. There can be no
assurance that the Company will be able to successfully market or cross-sell
HRM's services. Current revenues from HRM's management agreements may not
significantly affect the Company's 1997 funds from operations. Additionally, HRM
employs 119 individuals nationwide, providing the Company with expanded overhead
expenses and labor liability not previously experienced.
Change in Accounting Treatment for Internal Costs Relating to Acquisitions.
The Financial Accounting Standards Board Emerging Issues Task Force is
considering the issue of capitalization of costs incurred in identifying,
acquiring and developing real estate properties. It may be determined that
generally accepted accounting principles will require that some portion, or all,
of such costs capitalized as a property is acquired or developed by the Company
and depreciated over the life of the acquired properties will be required to be
expensed as incurred. Expensing of such costs would accelerate the recognition
of such costs, negatively impacting reported earnings and funds from operations
of the Company.
c) Asset Growth
Inability to Complete Acquisitions. The Company's asset growth strategy
would be negatively impacted if it is unable to find suitable properties and to
purchase those properties on terms which meet the Company's investment
parameters.
Provider Development Arrangements. The Company has entered into development
funding arrangements with respect to three properties that are currently in
progress. The Company believes that development funding is an effective method
to acquire new healthcare facilities that providers have determined are
strategic to their business. The development funding arrangements require the
Company to provide the funding to enable healthcare operators to build
facilities on property owned or leased by the Company. Risks of development
20
<PAGE>
funding are greater than those risks associated with the purchase and lease-back
of operating properties because of the potential for greater Company involvement
within the development process. There can be no assurance that the current
portfolio of development funding will be completed in 1997 in accordance with
the terms of the agreements; however, the Company believes that it has the
requisite access to capital and development and construction experience to
complete a development.
Limitations on Transfers and Alternative Uses of Facilities. Transfers of
operations of healthcare facilities are subject to regulatory approvals not
required for transfers of other types of commercial operations and other types
of real estate. In addition, many of the Properties are special-purpose
facilities that may not be easily adaptable to uses unrelated to healthcare.
d) Market Competition
The Company competes for property management, development and acquisitions
with, among others, investors, healthcare providers, other healthcare related
real estate investment trusts, real estate partnerships and financial
institutions. The Company's properties will be also subject to competition from
the properties of other healthcare providers. Certain of these operators may
have greater capital resources than the provider leasing the Company's
facilities. All of the properties operating in a competitive environment and
patients and referral sources, including physicians, may change their
preferences for a healthcare facility from time to time.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement re: Computation of Per-Share Earnings
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/Timothy G. Wallace
---------------------
Timothy G. Wallace
Executive Vice President, Finance
and Chief Financial Officer
Date: November 17, 1997
23
<PAGE>
Exhibit Index
Exhibit
Number Description of Exhibits
- ------ -----------------------
11.1 Statement re: Computation of Per-Share Earnings
24
<PAGE>
EXHIBIT 11.1 - Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Weighted Average
- -----------------------
Average Shares Outstanding 19,266,066 13,198,553 18,378,343 13,155,689
========== ========== ========== ==========
Net income $8,327,817 $4,913,700 $22,835,776 $14,624,351
========== ========== =========== ===========
Per share amount $0.43 $0.37 $1.24 $1.11
===== ===== ===== =====
Primary (1)
- -----------------------
Average Shares Outstanding 19,266,066 13,198,553 18,378,343 13,155,689
Net effect of dilutive stock options--
based on treasury stock method 50,580 26,674 48,856 24,337
------ ------ ------ ------
Total 19,316,646 13,225,227 18,427,199 13,180,026
========== ========== ========== ==========
Net income $8,327,817 $4,913,700 $22,835,776 $14,624,351
========== ========== =========== ===========
Per share amount $0.43 $0.37 $1.24 $1.11
===== ===== ===== =====
Fully Diluted (1)
- -----------------------
Average Shares Outstanding 19,266,066 13,198,553 18,378,343 13,155,689
Net effect of dilutive stock options--
based on treasury stock method 51,138 32,983 49,314 29,626
------ ------ ------ ------
Total 19,317,204 13,231,536 18,427,657 13,185,315
========== ========== ========== ==========
Net income $8,327,817 $4,913,700 $22,835,776 $14,624,351
========== ========== =========== ===========
Per share amount $0.43 $0.37 $1.24 $1.11
===== ===== ===== =====
</TABLE>
(1) In accordance with footnote 2 of paragraph 15 of APB Opinion No. 15,
"Earnings Per Share", because the reduction is less than 3%, the weighted
average shares outstanding were used in the computation of per share earnings.
25
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jul-01-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<CASH> 5,662
<SECURITIES> 0
<RECEIVABLES> 4,397
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,059
<PP&E> 491,099
<DEPRECIATION> 31,511
<TOTAL-ASSETS> 496,579
<CURRENT-LIABILITIES> 6,487
<BONDS> 112,662
0
0
<COMMON> 193
<OTHER-SE> 377,237
<TOTAL-LIABILITY-AND-EQUITY> 496,579
<SALES> 15,034
<TOTAL-REVENUES> 15,865
<CGS> 5,598
<TOTAL-COSTS> 7,537
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,939
<INCOME-PRETAX> 8,328
<INCOME-TAX> 0
<INCOME-CONTINUING> 8,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,328
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.43
</TABLE>
