UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
- -
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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 June 30, 1999, 39,829,507 shares of the Registrant's Common Stock and
3,000,000 shares of the Registrant's Preferred Stock, $.01 par value, were
outstanding.
<PAGE>
<TABLE>
<CAPTION>
HEALTHCARE REALTY TRUST
INCORPORATED
FORM 10-Q
June 30, 1999
TABLE OF CONTENTS
<S> <C>
Part I - Financial Information
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Reports on Form 8-K 26
Signature 27
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Item 1.
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheet
(Dollars in thousands)
(Unaudited) (1)
June 30, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
ASSETS
Real estate properties:
Land $ 143,622 $ 140,617
Buildings and improvements 1,210,168 1,169,941
Personal property 5,176 4,825
Construction in progress 25,253 72,172
------ ------
1,384,219 1,387,555
Less accumulated depreciation (67,564) (50,116)
------- -------
Total real estate properties, net 1,316,655 1,337,439
Cash and cash equivalents 6,044 14,411
Mortgage notes receivable 249,187 228,542
Other assets, net 40,463 35,031
------ ------
Total assets $ 1,612,349 $ 1,615,423
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and bonds payable 567,616 559,924
Accounts payable and accrued liabilities 22,078 25,824
Other liabilities 8,063 11,971
----- ------
Total liabilities 597,757 597,719
------- -------
Commitments 0 0
Stockholders' equity:
Preferred stock, $.01 par value; 50,000,000 shares authorized;
issued and outstanding, 1999 and 1998 - 3,000,000 30 30
Common stock, $.01 par value; 150,000,000 shares authorized;
issued and outstanding, 1999 - 39,829,507; 1998 - 39,792,775 398 398
Additional paid-in capital 1,049,719 1,049,039
Deferred compensation (10,073) (10,662)
Cumulative net income 170,680 129,346
Cumulative dividends (196,162) (150,447)
-------- --------
Total stockholders' equity 1,014,592 1,017,704
--------- ---------
Total liabilities and stockholders' equity $ 1,612,349 $ 1,615,423
=========== ===========
</TABLE>
(1) The balance sheet at Dec. 31, 1998 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, 1998, are an integral part of these financial statements.)
-1-
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statement of Income
For The Three Months Ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Master lease rental income $ 23,397 $ 8,502
Property operating income 13,853 8,148
Straight line rent 1,490 0
Mortgage interest income 6,268 188
Management fees 694 474
Interest and other income 891 418
--- ---
46,593 17,730
------ ------
EXPENSES:
General and administrative 1,971 1,174
Property operating expenses 5,008 2,339
Interest 9,403 1,672
Depreciation 9,501 3,079
Amortization 118 85
--- --
26,001 8,349
------ -----
NET INCOME $ 20,592 $ 9,381
======== =======
NET INCOME PER SHARE - BASIC $ 0.48 $ 0.46
====== ======
NET INCOME PER SHARE - DILUTED $ 0.48 $ 0.45
====== ======
SHARES OUTSTANDING - BASIC 39,287,496 20,190,956
========== ==========
SHARES OUTSTANDING - DILUTED 39,956,471 20,649,802
========== ==========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD $ 0.535 $ 0.510
======= =======
</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, 1998, are an integral part of these financial statements.)
-2-
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statement of Income
For The Six Months Ended June 30, 1999 and 1998
(Unaudited)
(Dollars in thousands, except per share data)
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Master lease rental income $ 46,494 $ 18,255
Property operating income 27,357 14,969
Straight line rent 3,058 0
Mortgage interest income 12,103 305
Management fees 1,324 933
Interest and other income 3,154 601
----- ---
93,490 35,063
------ ------
EXPENSES:
General and administrative 3,796 2,499
Property operating expenses 9,881 4,733
Interest 18,643 3,455
Depreciation 19,597 6,220
Amortization 239 169
--- ---
52,156 17,076
------ ------
NET INCOME $ 41,334 $ 17,987
======== ========
NET INCOME PER SHARE - BASIC $ 0.97 $ 0.91
====== ======
NET INCOME PER SHARE - DILUTED $ 0.95 $ 0.89
====== ======
SHARES OUTSTANDING - BASIC 39,278,622 19,769,329
========== ==========
SHARES OUTSTANDING - DILUTED 39,952,642 20,232,182
========== ==========
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD $ 1.065 $ 1.025
======= =======
</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, 1998, are an integral part of these financial statements.)
-3-
<PAGE>
<TABLE>
<CAPTION>
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 31, 1999 and 1998
(Unaudited)
(Dollars in thousands)
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 41,334 $ 17,987
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 20,915 6,536
Deferred compensation 589 625
Decrease in other liabilities (3,907) (349)
Increase in other assets (3,917) (12,521)
Decrease in accounts payable and accrued liabilities (3,829) (51)
Increase in straight line rent (3,058) 0
Gain on sale of real estate (2,182) 0
------ -
Net cash provided by operating activities 45,945 12,227
------ ------
Cash flows from investing activities:
Acquisition and development of real estate properties (20,394) (19,623)
Acquisition and development of mortgages (24,122) 0
Proceeds from sale of mortgages 3,075 0
Proceeds from sale of real estate 24,726 0
------ -
Net cash used in investing activities (16,715) (19,623)
------- -------
Cash flows from financing activities:
Borrowings on notes and bonds payable 53,000 8,500
Repayments on notes and bonds payable (45,396) (19,800)
Dividends paid (45,715) (20,582)
Proceeds from issuance of common stock 514 35,103
--- ------
Net cash provided (used) by financing activities (37,597) 3,221
------- -----
Increase (decrease) in cash and cash equivalents (8,367) (4,175)
Cash and cash equivalents, beginning of period 14,411 5,325
------ -----
Cash and cash equivalents, end of period $ 6,044 $ 1,150
======== =========
</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, 1998, are an integral part of these financial statements.)
-4-
<PAGE>
Healthcare Realty Trust
Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 1999
(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, 1998. 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, 1998.
The results of operations for the three-month and six-month periods ending
June 30, 1999 are not necessarily indicative of the results that may be expected
for the year ending December 31, 1999.
Certain reclassifications have been made for the period April 1, 1998
through June 30, 1998 and for the period January 1, 1998 through June 30, 1998
to conform to the 1999 presentation. These reclassifications had no effect on
the results of operations as previously reported.
Note 2. Organization
The Company invests in healthcare-related properties and mortgages located
throughout the United States. The Company provides management, leasing and
build-to-suit development, and capital for the construction of new facilities as
well as for the acquisition of existing properties. As of June 30, 1999, the
Company had invested or committed to invest in 282 properties (the "Properties")
located in 34 states, which are supported by 64 healthcare-related entities. The
Properties include:
-5-
<PAGE>
<TABLE>
<CAPTION>
(Dollars in
Number of thousands)
Properties Investment
---------- ----------
<S> <C> <C>
Ancillary hospital facilities 61 $497,630
Medical office buildings 7 24,979
Physician clinics 34 153,701
Skilled nursing facilities 55 247,846
Comprehensive ambulatory care centers 15 38,190
Assisted living facilities 85 302,694
Ambulatory surgery centers 9 41,452
Inpatient rehabilitation facilities 10 154,619
Other 6 168,696
Corporate property 0 3,599
- -----
282 $ 1,633,406
=== ===========
</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 June 30, 1999 and 1998, was $26.4 million, or $0.67 per
basic share ($0.66 per diluted share) and $12.3 million, or $0.61 per basic
share ($0.60 per diluted share), respectively. FFO for the six months ended June
30, 1999 and 1998, was $52.1 million, basic, ($52.2 million, diluted), or $1.33
per basic share ($1.31 per diluted share) and $23.9 million, or $1.21 per basic
share ($1.18 per diluted share), respectively.
-6-
<PAGE>
<TABLE>
<CAPTION>
Funds from Operations
(Dollars in thousands, except per share data)
Three Months Ended June 30,
-----------------------
1999 1998
---- ----
<S> <C> <C>
Net Income (1) $20,592 $9,381
Non-recurring items 0 0
Gain or loss on dispositions (2) (433) 0
Straight line rents (1,490) 0
Preferred stock dividend (1,664) 0
ADD:
Depreciation
Real estate 9,357 2,935
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
9,357 2,935
----- -----
Amortization
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 5,770 2,935
----- -----
Funds From Operations - Basic $ 26,362 $ 12,316
Convertible Subordinated Debenture Interest 58 0
-- -
Funds from Operations - Diluted $ 26,420 $ 12,316
========= =========
Shares Outstanding - Basic 39,287,496 20,190,956
========== ==========
Shares Outstanding - Diluted 39,956,471 20,649,802
========== ==========
Funds From Operations Per Share - Basic $ 0.67 $ 0.61
======== ========
Funds From Operations Per Share - Diluted $ 0.66 $ 0.60
======== ========
</TABLE>
(1) Net income includes $292,488 in 1999 and $313,370 in 1998 of stock based,
long-term incentive compensation expense. This expense never requires the
disbursement of cash.
(2) Represents a gain from the sale of a comprehensive ambulatory care center in
Miami, Florida and a loss from the sale of a partnership interest.
-7-
<PAGE>
<TABLE>
<CAPTION>
Funds from Operations
(Dollars in thousands, except per share data)
Six Months Ended June 30,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Net Income (1) $ 41,334 $ 17,987
Non-recurring items 0 0
Gain or loss on dispositions (2) (2,182) 0
Straight line rents (3,059) 0
Preferred stock dividend (3,326) 0
ADD:
Depreciation
Real estate 19,325 5,933
Office F,F&E 0 0
Leasehold improvements 0 0
Other non-revenue producing assets 0 0
- -
19,325 5,933
Amortization ------ -----
Acquired property contracts 0 0
Other non-revenue producing assets 0 0
Organization costs 0 0
- -
0 0
- -
Deferred financing costs 0 0
- -
Total Adjustments 10,758 5,933
------ -----
Funds From Operations - Basic $ 52,092 $ 23,920
Convertible Subordinated Debenture Interest 133 0
--- -
Funds from Operations - Diluted $ 52,225 $ 23,920
=========== ===========
Shares Outstanding - Basic 39,278,622 19,769,329
========== ==========
Shares Outstanding - Diluted 39,952,642 20,232,182
========== ==========
Funds From Operations Per Share - Basic $ 1.33 $ 1.21
=========== ===========
Funds From Operations Per Share - Diluted $ 1.31 $ 1.18
=========== ===========
</TABLE>
(1) Net income includes $588,684 in 1999 and $625,088 in 1998 of stock based,
long-term incentive compensation expense. This expense never requires the
disbursement of cash.
(2) Represents a gain from the sale of an ancillary hospital facility in
Savannah, Georgia, the sale of a comprehensive ambulatory care center in Miami,
Florida and a loss from the sale of a partnership interest.
-8-
<PAGE>
Note 4. Capstone Merger
On October 15, 1998, the Company completed its merger with Capstone Capital
Corporation ("Capstone"). Pursuant to the merger agreement, the Company acquired
Capstone in a stock-for-stock merger in which the stockholders of Capstone
received a fixed ratio of .8518 shares of the Company's common stock and the
holders of Capstone preferred stock received one share of the Company's voting
preferred stock in exchange for each share of Capstone preferred stock. The
Company issued 18,906,909 shares of common stock and 3,000,000 shares of
preferred stock. The transaction was accounted for as a purchase and resulted in
no goodwill.
<TABLE>
<CAPTION>
The purchase price is summarized as follows (dollars in thousands):
<S> <C>
Common stock $ 532,554
Preferred stock 72,052
Cash and cash equivalents 8,330
Liabilities assumed 424,897
-------
Total Purchase Price $ 1,037,833
===========
</TABLE>
<TABLE>
<CAPTION>
The assets acquired in the Capstone merger are summarized as follows
(dollars in thousands):
<S> <C>
Real estate properties $ 804,178
Mortgage notes receivable 211,590
Cash and cash equivalents 13,767
Other assets 8,298
-----
Total Assets Acquired $ 1,037,833
===========
</TABLE>
Note 5. Notes and Bonds Payable
<TABLE>
<CAPTION>
Notes and bonds payable at June 30, 1999 consisted of the following
(dollars in thousands):
<S> <C>
Unsecured credit facility $ 200,000
Term loan facility 151,300
Unsecured notes 72,000
6.55% Convertible subordinated debentures, net 73,522
10.5% Convertible subordinated debentures, net 3,608
Mortgage notes and other notes 67,186
------
$ 567,616
===========
</TABLE>
-9-
<PAGE>
Unsecured Credit Facility
On October 15, 1998, concurrent with its merger with Capstone, the Company
repaid the outstanding balances under both Capstone's and the Company's own
unsecured credit facilities and entered into a $265.0 million unsecured credit
facility (the "Unsecured Credit Facility") with ten commercial banks. The
Unsecured Credit Facility bears interest at LIBOR rates plus 1.05%, payable
quarterly, and matures on October 15, 2001. In addition, the Company will pay,
quarterly, a commitment fee of 0.225 of 1% on the unused portion of funds
available for borrowings. The Unsecured Credit Facility contains certain
representations, warranties, and financial and other covenants customary in such
loan agreements. At June 30, 1999, the Company had available borrowing capacity
of $65.0 million under the Unsecured Credit Facility.
Term Loan Facility
On October 15, 1998, concurrent with the Capstone merger, the Company
entered into a $200.0 million unsecured term loan (the "Term Loan Facility")
with NationsBank. The Term Loan Facility bears interest at LIBOR plus 1.05%,
payable quarterly, and matures on October 16, 1999. The Term Loan Facility
contains certain representations, warranties and financial and other covenants
customary in such loan agreements, as well as restrictions on dividend payments
if minimum tangible capital requirements are not met. At June 30, 1999, the
Company had no additional available borrowing capacity under the Term Loan
facility.
Unsecured Notes
On September 18, 1995 the Company privately placed $90.0 million of
unsecured notes (the "Unsecured Notes") with 16 institutions. The Unsecured
Notes bear interest at 7.41%, payable semi-annually, and mature on September 1,
2002. Beginning on September 1, 1998 and on each September 1 through 2002, the
Company must repay $18.0 million of the 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.
Convertible Subordinated Debentures
As part of the Capstone merger, the Company assumed and recorded at fair
value $74.7 million aggregate face amount of 6.55% Convertible Subordinated
Debentures (the "6.55% Debentures") of Capstone. At June 30, 1999, the Company
had approximately $73.5 million aggregate principal amount of 6.55% Debentures
outstanding with a face amount of $74.7 million and unaccreted discount of $1.2
million. Such rate of interest and accretion of discount represents a yield to
maturity of 7.5% per annum (computed on a semiannual bond equivalent basis). The
6.55% Debentures are due on March 14, 2002, unless redeemed earlier by the
Company or converted by the holder, and are callable on March 16, 2000. Interest
on the 6.55% Debentures is payable on March 14 and September 14 in each year.
The 6.55% Debentures are convertible into
-10-
<PAGE>
shares of common stock of the Company at the option of the holder at any time
prior to redemption or stated maturity, at a conversion rate of 33.6251 shares
per $1 thousand bond.
As part of the Capstone merger, the Company assumed and recorded at fair
value $3.75 million aggregate face amount of 10.5% Convertible Subordinated
Debentures (the "10.5% Debentures") of Capstone. At June 30, 1999, the Company
had approximately $3.6 million aggregate principal amount of 10.5% Debentures
outstanding with a face amount of $3.4 million and unamortized premium of $0.2
million. Such rate of interest and amortization of premium represents a yield to
maturity of 7.5% per annum (computed on a semiannual bond equivalent basis). The
10.5% Debentures are due on April 1, 2002, unless redeemed earlier by the
Company or converted by the holder, and are callable on April 5, 2000. Interest
on the 10.5% Debentures is payable on April 1 and October 1 in each year. The
10.5% Debentures are convertible into shares of common stock of the Company at
the option of the holder at any time prior to redemption or stated maturity, at
a conversion rate of 52.8248 shares per $1 thousand bond.
Mortgage Notes
As part of the Capstone merger, the Company assumed non-recourse mortgage
notes payable, and the related collateral, as follows (Dollars in millions):
<TABLE>
<CAPTION>
Book Value
Of Collateral at Balance at
Original Interest June 30, June 30,
Mortgagor Balance Rate Collateral 1999 1999
--------- ------- ---- ---------- ---- ----
<S> <C> <C> <C> <C> <C>
Life Insurance Co. $ 23.3 8.500% Ancillary hospital facility $ 40.8 $ 22.7
Life Insurance Co. 4.7 7.625% Ancillary hospital facility 10.2 4.5
Life Insurance Co. 17.1 8.125% Two ambulatory surgery centers 35.2 16.7
& one ancillary hospital
Bank 17.0 8.500% Six skilled nursing facilities 29.8 16.3
---- ---- ----
$ 62.1 $ 116.0 $ 60.2
====== ========== ========
</TABLE>
The $23.3 million note is payable in monthly installments of principal and
interest based on a 30 year amortization with the final payment due in July
2026. The $4.7 million note is payable in monthly installments of principal and
interest based on a 20 year amortization with the final payment due in January
2017. The three notes totaling $17.1 million are payable in monthly installments
of principal and interest based on a 25 year amortization with a balloon payment
of the unpaid balance in September 2004. The $17.0 million note bears interest
at 50 basis points in excess of the prime rate, and is payable in monthly
installments of principal and interest based on a 25 year amortization with a
balloon payment of the unpaid balance in June 2000.
-11-
<PAGE>
Note 6. Commitments
As of June 30, 1999, the Company had a net investment of approximately
$25.3 million in four build-to-suit developments in progress and one expansion
of an existing facility, which have a total remaining funding commitment of
approximately $20.0 million. The Company also has 18 mortgages under
development, at June 30, 1999, which have a total remaining funding commitment
of approximately $11.8 million. Also, as part of the Capstone merger, the
Company assumed funding obligations of future commitments. The remaining balance
of these commitments at June 30, 1999 was approximately $48.1 million.
As part of the Capstone merger, agreements were entered into with three
individuals affiliated with Capstone that restrict competitive practices and
which the Company believes will protect and enhance the value of the real estate
properties acquired from Capstone. These agreements provide for the issuance of
150,000 shares per year of common stock of the Company to the individuals on
October 15 of the years 1999, 2000, 2001 and 2002, provided all terms of the
agreements are met.
Note 7. Asset Disposition
During the first quarter of 1999, the Company sold a 90,000 square foot
ancillary hospital facility in Savannah, Georgia for $8.1 million in net
proceeds. These proceeds were applied to the partial repayment of the Term Loan
Facility.
During the second quarter of 1999, the Company sold a 56,900 square foot
comprehensive ambulatory care center in Miami, Florida for $11.3 million in net
proceeds, sold a 51% interest in a partnership for $5.4 million in net proceeds
and received $3.1 million in net proceeds from the repayment of two mortgage
notes receivable. These proceeds were applied to the partial repayment of the
Term Loan Facility.
-12-
<PAGE>
Note 8. Net Income Per Share
<TABLE>
<CAPTION>
The table below sets forth the computation of basic and diluted earnings per share as
required by FASB Statement No. 128 for the three and six months ended June 30, 1999 and 1998.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic EPS
Average Shares
Outstanding 39,818,489 20,717,337 39,809,615 20,295,710
Actual Restricted
Stock Shares (530,993) (526,381) (530,993) (526,381)
-------- -------- -------- --------
Denominator - Basic 39,287,496 20,190,956 39,278,622 19,769,329
========== ========== ========== ==========
Net Income $ 20,591,501 $ 9,380,711 $ 41,333,738 $ 17,986,583
Preferred Stock
Dividend (1,664,070) 0 (3,325,888) 0
---------- - ---------- -
Numerator - Basic $ 18,927,431 $ 9,380,711 $ 38,007,850 $ 17,986,583
============== ============= ============== ==============
Per Share Amount $ 0.48 $ 0.46 $ 0.97 $ 0.91
============== ============= ============== ==============
Diluted EPS
Average Shares
Outstanding 39,818,489 20,717,337 39,809,615 20,295,710
Actual Restricted
Stock Shares (530,993) (526,381) (530,993) (526,381)
Restricted Shares
- Treasury 483,832 402,743 488,224 397,887
Dilution for
Convertible Debentures 181,136 0 181,136 0
Dilution for Employee
Stock Purchase Plan 4,007 10,235 4,660 17,210
Dilution for Warrants 0 45,868 0 47,756
- ------ - ------
Denominator - Diluted 39,956,471 20,649,802 39,952,642 20,232,182
========== ========== ========== ==========
Numerator - Basic $ 18,927,431 $ 9,380,711 $ 38,007,850 $ 17,986,583
Convertible Subordinated
Debenture Interest 58,431 0 133,033 0
------ - ------- -
Numerator - Diluted $ 18,985,862 $ 9,380,711 $ 38,140,883 $ 17,986,583
============== ============= ============== ==============
Per Share Amount $ 0.48 $ 0.45 $ 0.95 $ 0.89
============== ============= ============== ==============
</TABLE>
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Operating Results
Second Quarter 1999 Compared to Second Quarter 1998
The results of operations of the Company were significantly impacted by the
Capstone merger. For the three months ended June 30, 1999, net income increased
$12.3 million due to the Capstone merger. As a result of the Capstone
transaction, the Company acquired 111 properties and 75 mortgages for a fair
value of $804.2 million and $211.6 million, respectively. These investments
resulted in additional master lease rental income, straight line rental income,
property operating income net of operating expenses, and mortgage interest
income for the three months ended June 30, 1999 of $24.6 million, as well as
additional interest and other income of $0.3 million, additional interest
expense of $4.2 million under the unsecured credit facility and term loan
facility and depreciation and amortization expense of $6.0 million. The Company
also assumed Capstone's 6.55% and 10.5% convertible subordinated debentures and
notes payable, with interest rates ranging from 7.625% to 8.50% at June 30,
1999, which resulted in interest expense of $2.4 million for the three months
ended June 30, 1999.
Net income for the quarter ended June 30, 1999 was $20.6 million, ($0.48
per basic and diluted share), on total revenues of $46.6 million compared to net
income of $9.4 million, ($0.46 per basic share of common stock and $0.45 per
diluted share) on total revenues of $17.7 million, for the same period in 1998.
Funds from operations ("FFO") was $26.4 million, or $0.67 per basic share ($0.66
per diluted share), for the quarter ended June 30, 1999 compared to $12.3
million, or $0.61 per basic share ($0.60 per diluted share), in 1998.
Total revenues for the three months ended June 30, 1999, compared to the
three months ended June 30, 1998, increased $28.9 million, or 162.8%. Excluding
the impact of the Capstone merger, which is discussed above, total revenues for
the quarter ended June 30, 1999, compared to the same period in 1998, increased
$2.3 million, or 12.7%. This increase is primarily due to increases in master
lease rental income and property operating income. Excluding the effect of the
Capstone merger, master lease rental income increased $0.5 million, or 6.3%, and
property operating income increased $1.2 million, or 14.3%. Since the second
quarter of 1998, the Company has sold five buildings and three previously-owned
buildings were brought under the Company's property management services. The
Company acquired one additional building, also under property management, one
property under construction was completed and began operations, and four
buildings were acquired under master lease arrangements. Certain leases acquired
from Capstone contain escalating rental rates over the life of the leases;
however, rental income is recognized as earned on a straight-line basis over the
life of the lease. Therefore, $1.5 million of accrued straight-line rental
income is included in net income for the three months ended June 30, 1999.
Mortgage interest income increased
-14-
<PAGE>
$6.1 million for the three months ended June 30, 1999 compared to 1998 due
mainly to the acquisition of 75 mortgages in the Capstone merger.
Total expenses for the three months ended June 30, 1999 were $26.0 million
compared to $8.3 million for the three months ended June 30, 1998, an increase
of $17.7 million, or 211.4%. Excluding the effect of the Capstone merger, total
expenses increased $3.3 million, or 35.2%, for the three months ended June 30,
1999, compared to 1998. Interest expense increased $7.7 million, or 462.4%, for
the second quarter ended June 30, 1999 compared to 1998. Excluding the effect of
the Capstone merger, interest expense increased $1.1 million, or 65.9%, for the
three months ended June 30, 1999 compared to 1998. During the quarter ended June
30, 1999, the Company had an average outstanding debt balance of approximately
$84.6 million under the unsecured credit facility (excluding the effect of the
Capstone merger) compared to $0.4 million in 1998 and the balance outstanding
under the unsecured notes was $18.0 million lower during the three months ended
June 30, 1999 compared to 1998. Additionally, there was approximately $4.4
million less in construction in progress throughout the second quarter of 1999
compared to 1998 which resulted in less capitalized interest in 1999. General
and administrative expenses increased $0.8 million, or 67.9%, for the quarter
ended June 30, 1999, compared to the same period in 1998. This increase is
primarily due to the increased number of employees for property management,
development, and other service-based activities. Property operating expenses
increased $2.7 million, or 114.1%, in 1999 compared to 1998. Excluding the
properties acquired with the Capstone merger, property operating expenses
increased $0.9 million, or 40.4%, for the same reasons property operating income
increased, as discussed above. Depreciation expense increased $6.4 million, or
208.6%, for the three months ended June 30, 1999 compared to 1998. Excluding the
effect of the Capstone merger, depreciation expense increased $0.5 million, or
15.4%, due to the acquisition of five properties, the completion of one property
under construction, and the sale of five properties since the second quarter of
1998.
Six Months Ended June 30, 1999 Compared To Six Months Ended June 30, 1998
The results of operations of the Company for the six months ended June 30,
1999 were significantly impacted by the Capstone merger. For the six months
ended June 30, 1999, net income increased $22.9 million due to the Capstone
merger. As described in the operating results for the second quarter, the
Company acquired 111 properties and 75 mortgages as a result of the Capstone
merger. These investments resulted in additional master lease rental income,
straight line rental income, property operating income net of operating
expenses, and mortgage interest income for the six months ended June 30, 1999 of
$47.9 million, as well as additional interest and other income of $0.5 million,
additional interest expense of $8.4 million under the unsecured credit facility
and term loan facility, and depreciation and amortization expense of $12.5
million. The Company also assumed Capstone's 6.55% and 10.5% convertible
subordinated debentures and notes payable, with interest rates ranging from
7.625% to 8.50% at June 30, 1999, which resulted in interest expense of $4.6
million for the six months ended June 30, 1999.
-15-
<PAGE>
Net income for the six months ended June 30, 1999 was $41.3 million, ($0.97
per basic share of common stock and $0.95 per diluted share), on total revenues
of $93.5 million compared to net income of $18.0 million ($0.91 per basic share
of common stock and $.89 per diluted share), on total revenues of $35.1 million,
for the same period in 1998. FFO, basic, was $52.1 million ($1.33 per basic
share) and FFO, diluted, was $52.2 million ($1.31 per diluted share) compared to
$23.9 million, or $1.21 per basic share ($1.18 per diluted share), in 1998.
Total revenues for the six months ended June 30, 1999, compared to the same
period in 1998, increased $58.4 million, or 166.6%. Excluding the impact of the
Capstone merger, total revenues for the six months ended June 30, 1999, compared
to 1998, increased $6.5 million, or 18.5%. This increase is primarily due to
increases in master lease rental income, property operating income and interest
and other income. Excluding the effect of the Capstone merger, master lease
rental income and property operating income increased $3.7 million, or 11.3%.
Since the second quarter of 1998, three previously-owned buildings were brought
under the Company's property management services. The Company acquired one
additional building, also under property management, one property under
construction was completed and began operations, and four buildings were
acquired under master lease arrangements. Interest and other income, excluding
the effect of the Capstone merger, increased $2.0 million, or 331.0%, during the
six months ended June 30, 1999 compared to the same period in 1998. During the
six months ended June 30, 1999, the Company sold an ancillary hospital facility,
a comprehensive ambulatory care center, and a 51% interest in a partnership for
net proceeds totalling $24.8 million, resulting in a $2.2 million net gain,
reflected in interest and other income. Certain leases acquired from Capstone
contain escalating rental rates over the life of the leases, however, rental
income is recognized as earned on a straight-line basis over the life of the
lease. Therefore, $3.1 million of accrued straight-line rental income is
included in net income for the six months ended June 30, 1999. Mortgage interest
income increased $11.8 million for the six months ended June 30, 1999 compared
to 1998, due mainly to the acquisition of 75 mortgages in the Capstone merger.
Total expenses for the six months ended June 30, 1999 were $52.2 million
compared to $17.1 million for the six months ended June 30, 1998, an increase of
$35.1 million, or 205.4%. Excluding the effect of the Capstone merger, total
expenses increased $6.1 million, or 35.4%, for the six months ended June 30,
1999, compared to 1998. Excluding the effect of the Capstone merger, interest
expense increased $2.1 million, or 61.9%, for the six months ended June 30,
1999, compared to 1998. During the six months ended June 30, 1999, the Company
had an average outstanding debt balance of $84.6 million under the unsecured
credit facility, excluding the effect of the Capstone merger, compared to $3.8
million in 1998. The balance outstanding under the unsecured notes was $18.0
million lower during the six months ended June 30, 1999, compared to 1998.
Additionally, there was approximately $6.3 million less in construction in
progress throughout the six months ended 1999 compared to 1998, resulting in
less capitalized interest in 1999. General and administrative expenses increased
$1.3 million, or 51.9%, for the six months ended June 30, 1999, compared to the
same period in 1998. This increase is primarily due to the increased number of
employees for property
-16-
<PAGE>
management, development, and other service-based activities. Property operating
expenses increased $5.1 million, or 108.8%, in 1999 compared to 1998. Excluding
the properties acquired with the Capstone merger, property operating expenses
increased $1.7 million, or 35.6%, for the same reasons property operating income
increased, as discussed above. Depreciation expense increased $13.4 million, or
215.1%, for the six months ended June 30, 1999 compared to 1998. Excluding the
effect of the Capstone merger, depreciation expense increased $0.9 million, or
15.1%, due to the acquisition of five properties, the completion of one property
under construction, and the sale of five properties since the second quarter of
1998.
-17-
<PAGE>
Liquidity and Capital Resources
On October 15, 1998, at the time of the Capstone merger, the Company repaid
the outstanding balances under both Capstone's and the Company's own unsecured
credit facilities and entered into a $265.0 million unsecured credit facility
(the "Unsecured Credit Facility") with ten commercial banks. The Unsecured
Credit Facility bears interest at LIBOR plus 1.05%, payable quarterly, and
matures on October 15, 2001. In addition, the Company will pay, quarterly, a
commitment fee of 0.225 of 1% on the unused portion of funds available for
borrowings. At June 30, 1999, the Company had available borrowing capacity of
$65.0 million under the Unsecured Credit Facility.
At the time of the Capstone merger, the Company entered into a $200.0
million unsecured term loan (the "Term Loan Facility") with NationsBank. The
Term Loan Facility bears interest at LIBOR plus 1.05%, payable quarterly, and
matures on October 16, 1999. Since the Capstone merger, the Company has received
net proceeds from the sale of assets and from mortgage prepayments of
approximately $52.3 million and reduced the unpaid balance of the Term Loan
Facility as of July 31, 1999 to $147.7 million. The Company expects that the
Term Loan Facility will be repaid by internally generated cash flow, proceeds
from the sale of additional assets, and proceeds from additional prepayments of
mortgage notes receivable. If such sources of funds are insufficient to repay
the Term Loan Facility in full, any unpaid balance is expected to be refinanced.
In 1995, the Company privately placed $90.0 million of unsecured notes (the
"Unsecured Notes") bearing interest at 7.41%, payable semi-annually ($5.0
million for 1999), and mature on September 1, 2002. The Company must repay $18.0
million of principle annually. At June 30, 1999, $72.0 million was outstanding
under the Unsecured Notes.
The Company assumed in the Capstone merger 10.5% Convertible Subordinated
Debentures and 6.55% Convertible Subordinated Debentures having an aggregate
principal balance of $78.3 million. In 1999 the Company will pay $5.3 million of
interest on these subordinated debentures.
As of June 30, 1999 the Company can issue an aggregate of approximately
$106.4 million of securities remaining under currently effective registration
statements. Due to the current market price of the Company's stock, the Company
does not presently plan to offer securities under such registration statements.
The Company may, under certain circumstances, borrow additional amounts in
connection with the renovation or expansion of its properties, the acquisition
or development of additional properties or, as necessary, to meet distribution
requirements for REITs under the 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.
-18-
<PAGE>
During the first quarter of 1999, the Company sold an ancillary hospital
facility in Savannah, Georgia for net proceeds of $8.1 million. The proceeds
were applied to the partial payment of the Term Loan Facility.
During the second quarter of 1999, the Company sold a comprehensive
ambulatory care center in Miami, Florida for $11.3 million in net proceeds, a
51% partnership interest for $5.4 million in net proceeds, two mortgage notes
receivable were repaid for $3.1 million in net proceeds, and received $0.6
million from the purchase of a bank's participating interest in six mortgage
notes receivable. These proceeds were applied to the partial payment of the Term
Loan Facility.
In July 1999, the Company sold an integrated delivery system facility in
Mesquite, Nevada for $3.0 million in net proceeds. The gain or loss resulting
from this transaction will be recognized in the third quarter of 1999. These
proceeds were applied to the partial payment of the Term Loan Facility.
As of June 30, 1999, the Company had an investment of approximately $25.3
million in four build-to-suit developments in progress and one expansion of an
existing facility, which have a total remaining funding commitment of
approximately $20.0 million. The Company also had 18 mortgages under development
at June 30, 1999, which have a total remaining funding commitment of
approximately $11.8 million. Also, as part of the Capstone merger, the Company
assumed funding obligations of future commitments. The remaining balance of
these commitments at June 30, 1999 is approximately $48.1 million. The Company
intends to fund these commitments with funds available from operations and
proceeds from the Unsecured Credit Facility.
At June 30, 1999, the Company had stockholders' equity in excess of $1.0
billion. The debt to total capitalization ratio was approximately .359 to 1 at
June 30, 1999.
On April 27, 1999, the Company declared an increase in its quarterly common
stock dividend from $0.53 per share ($2.12 annualized) to $0.535 per share
($2.14 annualized) payable to stockholders of record on May 6, 1999. This
dividend was paid on May 17, 1999. In July 1999, the Company announced payment
of a common stock dividend of $0.54 per share ($2.16 annualized) to holders of
record of common shares on August 6, 1999. This dividend is payable on August
16, 1999 and relates to the period April 1, 1999 through June 30, 1999. The
Company presently plans to continue to pay its quarterly common stock dividends,
with increases consistent with its current practice. In the event that the
Company cannot make additional investments in 1999 because of an inability to
obtain new capital by issuing equity and debt securities, the Company will
continue to be able to pay its common stock dividends in a manner consistent
with its current practice. Should access to new capital not be available, the
Company is uncertain of its ability to increase its quarterly common stock
dividends.
During 1999, the Company will pay quarterly dividends on its 8 7/8% Series
A Voting Cumulative Preferred Stock in the annualized amount of $2.22 per share.
-19-
<PAGE>
Under the terms of the leases and other financial support agreements
relating to most of the properties, tenants or healthcare providers are
generally responsible for operating expenses and taxes relating to the
properties. As a result of these arrangements, with limited exceptions not
material to the performance of the Company, the Company does not believe that it
will be responsible for any major expenses in connection with the properties
during the respective terms of the agreements. The Company anticipates entering
into similar arrangements with respect to additional properties it acquires or
develops. After the term of the lease or financial support agreement, or in the
event the financial obligations required by the agreement are not met, the
Company anticipates that any expenditures it might become responsible for in
maintaining the properties will be funded by cash from operations and, in the
case of major expenditures, possibly by borrowings. To the extent that
unanticipated expenditures or significant borrowings are required, the Company's
cash available for distribution and liquidity may be adversely affected.
The Company plans to continue to meet its liquidity needs, including
funding additional investments in 1999, paying its quarterly dividends (with
increases consistent with its current practices) and funding the debt service on
the 10.50% Convertible Subordinated Debentures, the 6.55% Convertible
Subordinated Debentures, the Unsecured Credit Facility, the Term Loan Facility,
and the Unsecured Notes from its operating revenues, the proceeds of mortgage
loan repayments, sales of real estate investments, and debt market financings.
The Company believes that its liquidity and sources of capital are adequate to
satisfy its cash requirements. The Company, however, cannot be certain that
these sources of funds will be available at a time and upon terms acceptable to
the Company in sufficient amounts to meet its liquidity needs.
Impact of Inflation
Inflation has not significantly affected the earnings of the Company
because of the moderate inflation rate and the fact that most of the Company's
leases and financial support arrangements require tenants and sponsors to pay
all or some portion of the increases in operating expenses, thereby reducing the
risk of any adverse effects of inflation to the Company. In addition, inflation
will have the effect of increasing the gross revenue the Company is to receive
under the terms of the leases and financial support arrangements. Leases and
financial support arrangements vary in the remaining terms of obligations from
two to twenty years, further reducing the risk of any adverse effects of
inflation to the Company. The Unsecured Credit Facility bears interest at a
variable rate; therefore, the amount of interest payable under the Unsecured
Credit Facility will be influenced by changes in short-term rates, which tend to
be sensitive to inflation.
Real Estate Investment Trust Tax Proposals
The Clinton Administration's Fiscal Year 2000 Budget proposal includes
three provisions of interest to REITs in general, two of which potentially
affect the Company. These provisions (i) modify the structure of businesses
which are indirectly conducted
-20-
<PAGE>
by the Company and could limit or negatively affect the Company's future ability
to engage indirectly in certain business activities that cannot be conducted
directly by the Company; and (ii) repeal tax-free conversion of large C
corporations to S corporations, which would effectively tax the built-in gains
of C corporations prospectively electing tax-free reorganizations, thus
affecting an acquisition format employed by the Company in the past. The
President's Budget proposal includes numerous other revenue provisions, none of
which would materially impact the Company in the event of their adoption. Debate
regarding the broader implications of the President's Year 2000 Budget
proposals, as well as other matters of federal fiscal policy, is ongoing, so
there is no way to predict the outcome of these proposals or the eventual
economic effect of these proposals on the Company if these proposals are
enacted.
Congress has before it tax legislation that substantially incorporates the
Real Estate Investment Trust Modernization Bill of 1999, which has as its
central feature a provision allowing a REIT to own 100% of the stock of a
taxable REIT subsidiary, similar to the initiative contained in the
Administration's Fiscal Year 2000 Budget proposal mentioned previously. Many of
the provisions in this legislation are similar to the Budget proposal's
provisions to modify the structure of businesses and could have a similar,
undetermined impact on the Company's future business activities as has already
been noted. Other provisions in this legislation would affect (i) foreclosures
for Health Care REITs and (ii) the 95% distribution requirement. As with the
President's Year 2000 Budget proposal, there is no way to predict the outcome of
these proposals or the eventual economic effect of these proposals on the
Company if these proposals are enacted.
Year 2000 Issue
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits rather than four digits to define the applicable year.
Computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities. The Y2K issue
relating to the Company's corporate information technology systems, including
applications employed with respect to the real estate investments of the
Company, could have a material impact on the operations of the Company if
compliance is not completed in a timely manner. The Company's plan to resolve
the Y2K issue involves four phases: assessment, remediation, testing, and
implementation.
Status of Y2K Issue Relating to the Company's Information Technology Systems
Based on the completed assessment of its own software and hardware relating
to it's corporate information technology systems, the Company determined that it
was necessary to modify or replace certain portions of its software and hardware
so that those systems would properly utilize dates beyond December 31, 1999. The
Company
-21-
<PAGE>
has modified and replaced existing software and certain hardware considered
necessary based on its assessment. The Company's costs to complete these
modifications and replacements was less than $50,000.
In the ordinary course of events, the Company has purchased new file
servers and replaced many older desktop microcomputers with new equipment, all
of which are certified to be Y2K compliant by the manufacturers. Additionally,
"patches" available from the manufacturers were obtained to bring certain
equipment into compliance, and were installed in desktop systems as necessary.
The Company's assessment of computer operating systems and software
indicated that the Company's significant information systems programs should not
require remediation. Accordingly, the Company does not believe that the Y2K
issue presents a material exposure as it relates to the Company's services. The
Company requested, and has subsequently received, certification from all of its
significant software and operating systems vendors that the versions of their
products currently installed are fully Y2K compliant.
The Company has tested 100% of its currently used systems and has found
them to be Y2K compliant in the testing environment.
Y2K Issue Compliance of Vendors and Clients
The Company has questioned its significant suppliers and clients as to
their respective responses to the Y2K issue. To date, the Company is not aware
of any suppliers or clients with a Y2K issue that would materially impact the
Company's results of operations, liquidity, or capital resources; however, the
Company has no means of ensuring that those parties will in fact be Y2K
compliant. The Company has received responses from approximately 71% of all of
its inquiries and has renewed its solicitation for written disclosures in
compliance with the Year 2000 Information and Readiness Disclosure Act. 100% of
the written responses received have certified that they are or will be Y2K
compliant by the end of 1999. The inability of suppliers and clients to complete
their Y2K resolution process in a timely fashion could materially impact the
Company. The Company cannot presently determine the effect of non-compliance by
the Company's suppliers and clients.
While the Company does have ongoing relationships with third-party payors,
suppliers, vendors, and others, it has no systems that interface directly with
third party vendors other than its accounts with financial institutions and the
Company's payroll system interfaces directly with a vendor. The Company has
installed Y2K compliant software upgrades that have been certified by its
primary financial institution and has received notification from its payroll
vendor that its systems and software with which the Company interfaces are
compliant.
The Company will also have Y2K issue exposure in non-information technology
applications with respect to its real estate investments. Computer technology
employed
-22-
<PAGE>
in elevators, security systems, electrical systems and similar applications
involved in the operations of real estate properties may cause interruptions of
services with respect to those properties on and after January 1, 2000. The
terms of agreements in place with respect to the bulk of the real estate
investments held by the Company impose the economic cost of compliance upon
third party lessees and mortgagees; consequently, the costs to the Company for
Y2K remediation should not be material. The Company is in the process of
inquiring and assessing responses of those third parties as to their respective
Y2K issue readiness and will require that those third parties undertake the
necessary actions to ensure Y2K compliance of the properties.
Finally, the Y2K issue may affect the greater business environment in which
the Company operates. Due to the general uncertainty surrounding the Y2K
readiness of third parties, including federal and state governments, the effect
of the Y2K issue on the Company's lessees and mortgagees, as well as the Company
itself cannot be gauged. For example, the General Accounting Office has reported
that the systems employed in managing Medicare reimbursements is not likely to
be Y2K compliant in time to ensure the delivery of uninterrupted benefits and
services. Delay in reimbursements could negatively affect the Company's lessees
and mortgagees, resulting in a delay in receipt of payments owed to the
Company's clients, with the further possibility of delay in payments due by
those clients to the Company. Similar consequences could result from the failure
of other parties having such an indirect relationship with the Company.
Management of the Company believes it has an effective program in place to
resolve the Y2K issue in a timely manner. Disruptions in the economy generally
resulting from Y2K issues could materially adversely affect the Company. The
Company could be subject to litigation for computer systems failure, for
example, equipment shutdown or failure to properly date business records. The
Company cannot reasonably estimate the amount of potential liability and lost
revenue at this time. The most reasonable likely worst case Y2K scenario is that
business disruption could occur with respect to third-party payors, suppliers or
vendors who fail to become Y2K compliant, and disruptions in the economy
generally resulting from Y2K issues could adversely impact the Company.
The Company has contingency plans for certain critical applications and is
working on such plans for other non-critical applications. These contingency
plans involve, among other actions, manual workarounds, and adjusting staffing
strategies. The Company plans to maintain an ongoing evaluation of its Y2K
compliance readiness and contingent plans throughout 1999.
-23-
<PAGE>
Market Risk
The Company is exposed to market risk, in the form of changing interest
rates, on its debt and mortgage notes receivable. The Company has no market risk
with respect to derivatives and foreign currency fluctuations. Management uses
daily monitoring of market conditions and analytical techniques to manage this
risk. The Company does not believe there have been significant changes in its
market risk since December 31, 1998. For a more detailed discussion, see pages
16 through 17 of Exhibit 13 "Annual Report to Shareholders" of the Company's
Form 10-K for the fiscal year ended December 31, 1998.
Cautionary Language Regarding Forward Looking Statements
Statements in this Form 10-Q that are not historical factual statements are
"forward looking statements" within the meaning of the Private Securities
Litigation Reforms Act of 1995. The statements include, among other things,
statements regarding the intent, belief or expectations of the Company, and its
officers and can be identified by the use of terminology such as "may", "will",
"expect", "believe", "intend", "plan", "estimate", "should" and other comparable
terms. In addition, the Company, through its senior management, from time to
time makes forward looking oral and written public statements concerning the
Company's expected future operations and other developments. Shareholders and
investors are cautioned that, while forward looking statements reflect the
Company's good faith beliefs and best judgment based upon current information,
they are not guarantees of future performance and are subject to known and
unknown risks and uncertainties. Actual results may differ materially from the
expectations contained in the forward looking statements as a result of various
factors. For a more detailed discussion of these, and other factors, see pages
25 through 29 of Item 1 of the Company's Form 10-K for the fiscal year ended
December 31, 1998.
-24-
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on May 11, 1999. At
this meeting, the following matters were voted upon by the Company's
shareholders.
(a) Election of Class 3 Directors
-----------------------------
David R. Emery, Thompson S. Dent, and Batey M. Gresham, Jr. were elected to
serve as Class 3 directors of the Company until the annual meeting of
shareholders in 2002 or until their respective successors are elected and
qualified. The vote was as follows:
<TABLE>
<CAPTION>
Votes Cast Votes Cast Against Abstentions/
In Favor or Withheld Non Votes
-------- ----------- ---------
Common Preferred Common Preferred Common Preferred
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
David R. Emery 32,598,722 2,890,174 381,858 30,370 6,825,452 79,456
Thompson S. Dent 32,591,522 2,891,474 389,058 29,070 6,825,452 79,456
Batey M. Gresham, Jr. 32,579,959 2,891,124 400,621 29,420 6,825,452 79,456
</TABLE>
<TABLE>
<CAPTION>
The following directors continued in office following the meeting:
Name Term Expires
---- ------------
<S> <C> <C>
Charles Raymond Fernandez, M.D. 2000
Errol L. Biggs, Ph.D. 2000
Marliese E. Mooney 2001
Edwin B. Morris, III 2001
John Knox Singleton 2001
</TABLE>
(a) Selection of Auditors
---------------------
The shareholders of the Company ratified the appointment of Ernst & Young,
LLP as the Company's independent auditors for the fiscal year ended December 31,
1999, by the following vote:
<TABLE>
<CAPTION>
Votes Cast Votes Cast Against Abstentions/
In Favor or Withheld Non Votes
-------- ----------- ---------
Common Preferred Common Preferred Common Preferred
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
32,781,998 2,887,473 68,405 16,512 6,955,629 96,015
</TABLE>
-25-
<PAGE>
Item 6. Reports on Form 8-K
(a) Reports on Form 8-K
- --- -------------------
No reports on Form 8-K were filed by the Company during the three months
ended June 30, 1999.
-26-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE REALTY TRUST INCORPORATED
By: /s/ Timothy G. Wallace
----------------------
Timothy G. Wallace
Executive Vice President, Finance
and Chief Financial Officer
Date: August 13, 1999
-27-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Apr-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 6,044
<SECURITIES> 0
<RECEIVABLES> 16,734
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 22,778
<PP&E> 1,384,219
<DEPRECIATION> 67,564
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0
30
<COMMON> 398
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<EPS-BASIC> 0.48
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</TABLE>
