HEALTHCARE REALTY TRUST INCORPORATED - FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended: June 30, 2007
OR
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o |
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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)
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Maryland
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62 1507028 |
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or
a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule
12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of August 1, 2007, 47,915,399 shares of the Registrants Common Stock were outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
June 30, 2007
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Healthcare Realty Trust Incorporated
Condensed Consolidated Balance Sheets
(Dollars in thousands, except per share data)
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(Unaudited) |
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June 30, |
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December 31, |
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2007 |
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2006 |
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ASSETS |
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Real estate properties: |
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|
|
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|
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Land |
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$ |
109,884 |
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$ |
129,658 |
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Buildings, improvements and lease intangibles |
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1,456,880 |
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1,737,126 |
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Personal property |
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15,794 |
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22,707 |
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Construction in progress |
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28,515 |
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38,835 |
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|
|
|
|
|
|
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1,611,073 |
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1,928,326 |
|
Less accumulated depreciation |
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(324,131 |
) |
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(373,706 |
) |
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Total real estate properties, net |
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1,286,942 |
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|
1,554,620 |
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Cash and cash equivalents |
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642 |
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1,950 |
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|
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Mortgage notes receivable |
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16,886 |
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73,856 |
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Assets held for sale and discontinued operations, net |
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47,145 |
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Other assets, net |
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93,440 |
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|
106,177 |
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Total assets |
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$ |
1,445,055 |
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$ |
1,736,603 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Notes and bonds payable |
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$ |
784,084 |
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$ |
849,982 |
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Accounts payable and accrued liabilities |
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26,514 |
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32,448 |
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Liabilities held for sale and discontinued operations |
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7,796 |
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Other liabilities |
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37,160 |
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28,501 |
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Total liabilities |
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855,554 |
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910,931 |
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Commitments and contingencies |
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Stockholders equity: |
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Preferred stock, $.01 par value; 50,000,000 shares authorized;
none issued and outstanding |
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Common stock, $.01 par value; 150,000,000 shares authorized; 47,913,458
and 47,805,448 shares issued and outstanding at June 30, 2007
and December 31, 2006, respectively |
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479 |
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|
478 |
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Additional paid-in capital |
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1,215,277 |
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1,211,234 |
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Accumulated other comprehensive loss |
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(3,915 |
) |
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(4,035 |
) |
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Cumulative net income |
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685,107 |
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635,120 |
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Cumulative dividends |
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(1,307,447 |
) |
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(1,017,125 |
) |
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Total stockholders equity |
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589,501 |
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825,672 |
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Total liabilities and stockholders equity |
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$ |
1,445,055 |
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$ |
1,736,603 |
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The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form
10-K for the year ended December 31, 2006, are an integral part of these financial statements.
1
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Three Months Ended June 30, 2007 and 2006
(Dollars in thousands, except per share data)
(Unaudited)
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2007 |
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2006 |
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REVENUES |
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Master lease rent |
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$ |
15,277 |
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$ |
13,878 |
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Property operating |
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|
31,690 |
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|
31,372 |
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Straight-line rent |
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35 |
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1,360 |
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Mortgage interest |
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|
352 |
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|
1,657 |
|
Other operating |
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4,894 |
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|
6,396 |
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|
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52,248 |
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54,663 |
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EXPENSES |
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General and administrative |
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5,220 |
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4,365 |
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Property operating |
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18,365 |
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17,315 |
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Other operating |
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171 |
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Bad debt |
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77 |
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|
313 |
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Interest |
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|
12,258 |
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12,404 |
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Depreciation |
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|
11,248 |
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|
10,580 |
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Amortization |
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|
1,205 |
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2,693 |
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|
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|
|
|
|
|
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48,373 |
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47,841 |
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INCOME FROM CONTINUING OPERATIONS |
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3,875 |
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|
|
6,822 |
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DISCONTINUED OPERATIONS |
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Income from discontinued operations |
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|
2,286 |
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|
4,674 |
|
Impairments |
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Gain on sales of real estate properties, net |
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|
7,482 |
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10 |
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INCOME FROM DISCONTINUED OPERATIONS |
|
|
9,768 |
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|
|
4,684 |
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|
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|
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NET INCOME |
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$ |
13,643 |
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$ |
11,506 |
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BASIC EARNINGS PER COMMON SHARE |
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Income from continuing operations per common share |
|
$ |
0.08 |
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$ |
0.15 |
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Discontinued operations per common share |
|
$ |
0.21 |
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|
$ |
0.10 |
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Net income per common share |
|
$ |
0.29 |
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$ |
0.25 |
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DILUTED EARNINGS PER COMMON SHARE |
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Income from continuing operations per common share |
|
$ |
0.08 |
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|
$ |
0.14 |
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|
|
|
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|
Discontinued operations per common share |
|
$ |
0.21 |
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|
$ |
0.10 |
|
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|
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Net income per common share |
|
$ |
0.29 |
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$ |
0.24 |
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC |
|
|
46,603,643 |
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|
46,531,031 |
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|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED |
|
|
47,577,334 |
|
|
|
47,459,976 |
|
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|
|
|
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|
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|
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|
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD |
|
$ |
0.66 |
|
|
$ |
0.66 |
|
|
|
|
|
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|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2006, are an integral part of these financial statements.
2
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Income
For The Six Months Ended June 30, 2007 and 2006
(Dollars in thousands, except per share data)
(Unaudited)
|
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2007 |
|
|
2006 |
|
REVENUES |
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
30,995 |
|
|
$ |
27,660 |
|
Property operating |
|
|
63,540 |
|
|
|
63,164 |
|
Straight-line rent |
|
|
96 |
|
|
|
1,742 |
|
Mortgage interest |
|
|
704 |
|
|
|
3,336 |
|
Other operating |
|
|
9,891 |
|
|
|
10,563 |
|
|
|
|
|
|
|
|
|
|
|
105,226 |
|
|
|
106,465 |
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
General and administrative |
|
|
11,395 |
|
|
|
8,760 |
|
Property operating |
|
|
36,513 |
|
|
|
35,343 |
|
Other operating |
|
|
|
|
|
|
171 |
|
Bad debt |
|
|
82 |
|
|
|
768 |
|
Interest |
|
|
25,773 |
|
|
|
25,316 |
|
Depreciation |
|
|
22,209 |
|
|
|
20,443 |
|
Amortization |
|
|
2,620 |
|
|
|
5,560 |
|
|
|
|
|
|
|
|
|
|
|
98,592 |
|
|
|
96,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
6,634 |
|
|
|
10,104 |
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
8,274 |
|
|
|
10,622 |
|
Impairments |
|
|
(2,792 |
) |
|
|
|
|
Gain on sales of real estate properties, net |
|
|
37,871 |
|
|
|
3,275 |
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
43,353 |
|
|
|
13,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
49,987 |
|
|
$ |
24,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
Income from continuing operations per common share |
|
$ |
0.14 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
Discontinued operations per common share |
|
$ |
0.93 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
1.07 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
Income from continuing operations per common share |
|
$ |
0.14 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
Discontinued operations per common share |
|
$ |
0.91 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
|
Net income per common share |
|
$ |
1.05 |
|
|
$ |
0.50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC |
|
|
46,575,554 |
|
|
|
46,511,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED |
|
|
47,587,624 |
|
|
|
47,464,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD |
|
$ |
6.07 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2006, are an integral part of these financial statements.
3
Healthcare Realty Trust Incorporated
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended June 30, 2007 and 2006
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
2006 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
49,987 |
|
|
$ |
24,001 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
27,396 |
|
|
|
31,832 |
|
Stock-based compensation |
|
|
2,666 |
|
|
|
2,117 |
|
Increase in straight-line rent receivable |
|
|
(95 |
) |
|
|
(1,165 |
) |
Increase in straight-line rent liability |
|
|
1,095 |
|
|
|
|
|
Gain on sales of real estate, net |
|
|
(37,871 |
) |
|
|
(3,275 |
) |
Impairments |
|
|
2,792 |
|
|
|
|
|
Equity in losses from unconsolidated LLCs |
|
|
252 |
|
|
|
74 |
|
Provision for bad debt, net of recoveries |
|
|
82 |
|
|
|
1,067 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Increase in other assets |
|
|
(2,001 |
) |
|
|
(1,214 |
) |
Decrease in accounts payable and accrued liabilities |
|
|
(6,818 |
) |
|
|
(4,947 |
) |
Increase in other liabilities |
|
|
4,906 |
|
|
|
2,552 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
42,391 |
|
|
|
51,042 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Acquisition and development of real estate properties |
|
|
(37,963 |
) |
|
|
(80,379 |
) |
Funding of mortgages and notes receivable |
|
|
(4,071 |
) |
|
|
(20,571 |
) |
Investments in unconsolidated LLCs |
|
|
|
|
|
|
(9,873 |
) |
Distributions from unconsolidated LLCs |
|
|
524 |
|
|
|
424 |
|
Proceeds from sales of real estate |
|
|
281,699 |
|
|
|
29,144 |
|
Proceeds from mortgages and notes receivable repayments |
|
|
65,519 |
|
|
|
40,357 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
305,708 |
|
|
|
(40,898 |
) |
|
Financing Activities |
|
|
|
|
|
|
|
|
Borrowings on notes and bonds payable |
|
|
304,839 |
|
|
|
247,000 |
|
Repayments on notes and bonds payable |
|
|
(365,661 |
) |
|
|
(185,362 |
) |
Dividends paid |
|
|
(290,322 |
) |
|
|
(63,092 |
) |
Proceeds from issuance of common stock |
|
|
1,767 |
|
|
|
293 |
|
Interest rate swap termination |
|
|
|
|
|
|
(10,127 |
) |
Common stock redemption |
|
|
(30 |
) |
|
|
(481 |
) |
Debt issuance costs |
|
|
|
|
|
|
(1,333 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(349,407 |
) |
|
|
(13,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(1,308 |
) |
|
|
(2,958 |
) |
Cash and cash equivalents, beginning of period |
|
|
1,950 |
|
|
|
7,037 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
642 |
|
|
$ |
4,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid (including interest on interest rate swaps) |
|
$ |
27,008 |
|
|
$ |
27,391 |
|
Capitalized interest |
|
|
1,552 |
|
|
|
676 |
|
Capital expenditures accrued |
|
|
2,130 |
|
|
|
2,117 |
|
Mortgage note payable assumed |
|
|
1,840 |
|
|
|
|
|
Company-financed real estate property sales |
|
|
|
|
|
|
14,920 |
|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K
for the year ended December 31, 2006, are an integral part of these financial statements.
4
Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the Company) is a real estate investment trust that
integrates owning, developing, financing and managing income-producing real estate properties
associated with the delivery of healthcare services throughout the United States. The Company had
investments of approximately $1.6 billion in 178 real estate properties and mortgages as of June
30, 2007, excluding assets classified as held for sale and including investments in three
unconsolidated joint venture limited liability companies (LLCs). The Companys 173 owned real
estate properties, excluding assets classified as held for sale, are comprised of six facility
types, located in 24 states, totaling approximately 10.6 million square feet. In addition, the
Company provided property management services to approximately 7.3 million square feet nationwide.
See Note 2 for more details on the assets classified as held for sale at June 30, 2007.
Principles of Consolidation
The accompanying Condensed Consolidated Financial Statements include the accounts of the
Company, its wholly owned subsidiaries, consolidated variable interest entities (VIEs) and
certain other affiliated entities with respect to which the Company controls the operating
activities and receives substantially all of the economic benefits. Investments in entities that
the Company does not consolidate but for which the Company has the ability to exercise significant
influence over operating and financial policies are reported under the equity method. Under the
equity method of accounting, the Companys share of the investees earnings or loss is included in
the Companys operating results.
The Condensed Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America 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 accounting principles
generally accepted in the United States for complete financial statements that are included in the
Companys Annual Report to Shareholders on Form 10-K for the year ended December 31, 2006.
Management believes, however, that all adjustments of a normal, recurring nature considered
necessary for a fair presentation have been included. All significant inter-company accounts and
transactions have been eliminated in the Condensed Consolidated Financial Statements.
This interim financial information should be read in conjunction with the financial statements
and Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
included in the Companys Annual Report to Shareholders on Form 10-K for the year ended December
31, 2006. This interim financial information does not necessarily represent or indicate what the
operating results will be for the year ending December 31, 2007 due to many reasons including, but
not limited to, acquisitions, dispositions, capital financing transactions, changes in interest
rates and the effect of trends as discussed in MD&A.
Unconsolidated Limited Liability Companies
At June 30, 2007, the Company had investments in three joint venture LLCs which had
investments in healthcare-related real estate properties. The Company accounts for two of the
5
investments under the equity method and one of the investments under the cost method. The Company
recognized approximately $268,000 and $526,000, respectively, in income for the three and six
months ended June 30, 2007 and $259,000 and $380,000, respectively, in income for the three and six
months ended June 30, 2006 related to the LLC accounted for under the cost method. The Companys
net investments in the LLCs are included in Other assets on the Companys Condensed Consolidated
Balance Sheet and the related income or loss is included in Other operating income on the
Companys Condensed Consolidated Income Statement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Net LLC investments, beginning of period |
|
$ |
19,720 |
|
|
$ |
19,859 |
|
|
$ |
20,079 |
|
|
$ |
10,720 |
|
New investments during the period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,045 |
|
Additional investments during the period |
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
828 |
|
Equity losses recognized during the
period |
|
|
(155 |
) |
|
|
(59 |
) |
|
|
(252 |
) |
|
|
(74 |
) |
Distributions received during the period |
|
|
(262 |
) |
|
|
(212 |
) |
|
|
(524 |
) |
|
|
(424 |
) |
|
|
|
Net LLC investments, end of period |
|
$ |
19,303 |
|
|
$ |
20,095 |
|
|
$ |
19,303 |
|
|
$ |
20,095 |
|
|
|
|
Segment Reporting
The Company is in the business of owning, developing, managing, and financing
healthcare-related properties. The Company is managed as one reporting unit, rather than multiple
reporting units, for internal reporting purposes and for internal decision making. Therefore, in
accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures About Segments of an Enterprise and Related Information,
the Company discloses its operating results in a single segment.
Accumulated Other Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires, among other things, foreign currency
translation adjustments, minimum pension liability adjustments and unrealized gains or losses on
available-for-sale securities to be included in comprehensive income (loss). The Company has
included in accumulated other comprehensive loss its cumulative adjustment related to the adoption
of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans,
an amendment of SFAS No. 87, 88, 106 and 132(R), (SFAS No. 158).
Total comprehensive income for the three and six months ended June 30, 2007 and 2006 is
detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Net income |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
49,987 |
|
|
$ |
24,001 |
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
50,107 |
|
|
$ |
24,001 |
|
|
|
|
Federal Income Taxes
No provision has been made for federal income taxes. The Company intends at all times to
qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended. The Company must distribute at least 90% per annum of its real estate
investment trust taxable income to its stockholders and meet other requirements to continue to
qualify as a real estate investment trust.
State Income Taxes
The Company recorded state income tax expense which is included in General and administrative
expenses on the Companys Condensed Consolidated Statements of Income and made certain payments
for state income taxes during the three and six months ended June 30, 2007 and 2006 as
6
shown in the
table below. Further, the State of Texas implemented a new gross margins tax which was effective
January 1, 2007 that taxes gross receipts from operations in Texas at 1%, less a 30% deduction for
expenses. The payment of the Texas gross margins tax for 2007 is not due until May 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
State income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas gross margins tax |
|
$ |
98 |
|
|
$ |
|
|
|
$ |
195 |
|
|
$ |
|
|
Other |
|
|
20 |
|
|
|
19 |
|
|
|
40 |
|
|
|
38 |
|
|
|
|
|
|
$ |
118 |
|
|
$ |
19 |
|
|
$ |
235 |
|
|
$ |
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax payments |
|
$ |
25 |
|
|
$ |
|
|
|
$ |
41 |
|
|
$ |
|
|
|
|
|
Use of
Estimates in the Condensed Consolidated Financial Statements
Preparation of the Condensed Consolidated Financial Statements in accordance with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect amounts reported in the Condensed Consolidated Financial Statements and
accompanying notes. Actual results may differ from those estimates.
Reclassifications
Certain reclassifications have been made in the Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2006 and year ended December 31, 2006 to conform to the
June 30, 2007 presentation.
Incentive Plans
The Company follows the provisions of SFAS No. 123(R), Share-Based Payment, for accounting
for its stock-based awards. During 2007 and 2006, the Company issued and had outstanding various
employee and non-employee stock-based awards. These awards included restricted stock issued to
employees pursuant to the 2007 Employees Stock Incentive Plan (the 2007 Incentive Plan) and its
predecessor plans, restricted stock issued to its Board of Directors under the 1995 Restricted
Stock Plan for Non-Employee Directors, and options issued to employees pursuant to the 2000
Employee Stock Purchase Plan (Employee Stock Purchase Plan) and its predecessor plan.
The 2007 Incentive Plan was approved by the Companys shareholders at the 2007 Annual
Shareholders Meeting held in May 2007. The 2007 Incentive Plan permits grants of restricted
stock, restricted stock units and performance awards, supersedes its predecessor plan and will
remain in effect until terminated by the Companys Board of Directors. The 2007 Incentive Plan,
which is administered by the Compensation Committee of the Companys Board of Directors, provides
that 2,390,272 shares of Common Stock, in the aggregate, will be available for grant.
A summary of the activity and related information under the 2007 Incentive Plan (and its
predecessor plans) and the 1995 Restricted Stock Plan for Non-Employee Directors for the three and
six months ended June 30, 2007 and 2006 is included in the table below.
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Nonvested shares, beginning of period |
|
|
1,253,376 |
|
|
|
1,300,335 |
|
|
|
1,261,613 |
|
|
|
1,271,548 |
|
Granted |
|
|
45,332 |
|
|
|
16,000 |
|
|
|
65,706 |
|
|
|
46,058 |
|
Vested (1) |
|
|
(1,050 |
) |
|
|
(36,050 |
) |
|
|
(27,410 |
) |
|
|
(36,574 |
) |
Forfeited |
|
|
0 |
|
|
|
0 |
|
|
|
(2,251 |
) |
|
|
(747 |
) |
|
|
|
Nonvested shares, end of period |
|
|
1,297,658 |
|
|
|
1,280,285 |
|
|
|
1,297,658 |
|
|
|
1,280,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of nonvested shares, beginning of period |
|
$ |
24.88 |
|
|
$ |
24.57 |
|
|
$ |
24.85 |
|
|
$ |
24.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of shares granted during the period |
|
$ |
32.65 |
|
|
$ |
34.63 |
|
|
$ |
34.99 |
|
|
$ |
33.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of shares vested during the period |
|
$ |
33.91 |
|
|
$ |
19.90 |
|
|
$ |
34.19 |
|
|
$ |
19.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of shares forfeited during the period |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
39.54 |
|
|
$ |
34.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of nonvested shares, end of period |
|
$ |
25.14 |
|
|
$ |
24.82 |
|
|
$ |
25.14 |
|
|
$ |
24.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant date fair value of shares granted during the period |
|
$ |
1,480,090 |
|
|
$ |
554,080 |
|
|
$ |
2,298,787 |
|
|
$ |
1,554,060 |
|
|
|
|
(1) |
|
The six months ended June 30, 2007 includes the accelerated vesting of 25,875 shares of stock related to the retirement or termination of two
officers during the first quarter of 2007. The three and six months ended June 30, 2006 includes the vesting of 25,000 shares of stock related to
one officer. |
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, each eligible employee in January of each year is able
to purchase up to $25,000 of Common Stock at the lesser of 85% of the market price on the date of
grant or 85% of the market price on the date of exercise of such option (the Exercise Date). The
number of shares subject to each years option becomes fixed on the date of grant. Options granted
under the Employee Stock Purchase Plan expire if not exercised 27 months after each such options
date of grant.
A summary of the Employee Stock Purchase Plan activity and related information for the three
and six months ended June 30, 2007 and 2006 is included in the table below.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Six Months |
|
|
Ended June 30, |
|
Ended June 30, |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
Outstanding, beginning of period |
|
|
275,875 |
|
|
|
266,662 |
|
|
|
171,481 |
|
|
|
158,026 |
|
Granted |
|
|
0 |
|
|
|
0 |
|
|
|
128,928 |
|
|
|
148,698 |
|
Exercised |
|
|
(2,866 |
) |
|
|
(1,244 |
) |
|
|
(7,186 |
) |
|
|
(10,823 |
) |
Forfeited |
|
|
(10,641 |
) |
|
|
(14,683 |
) |
|
|
(30,855 |
) |
|
|
(45,166 |
) |
Expired |
|
|
(66,911 |
) |
|
|
(55,150 |
) |
|
|
(66,911 |
) |
|
|
(55,150 |
) |
|
|
|
Outstanding and exercisable at end of period |
|
|
195,457 |
|
|
|
195,585 |
|
|
|
195,457 |
|
|
|
195,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options outstanding, beginning of period |
|
$ |
30.60 |
|
|
$ |
29.82 |
|
|
$ |
30.55 |
|
|
$ |
28.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options granted during the period |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
33.61 |
|
|
$ |
28.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options exercised during the period |
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
$ |
26.52 |
|
|
$ |
27.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options forfeited during the period |
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
$ |
26.86 |
|
|
$ |
29.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options expired during the period |
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of options outstanding, end of period |
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
$ |
23.61 |
|
|
$ |
27.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the period
(calculated as of the grant date) |
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
6.67 |
|
|
$ |
6.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised during the period |
|
$ |
11,951 |
|
|
$ |
5,946 |
|
|
$ |
42,075 |
|
|
$ |
90,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options outstanding and exercisable (calculated as of
June 30) |
|
$ |
815,056 |
|
|
$ |
934,896 |
|
|
$ |
815,056 |
|
|
$ |
934,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of exercise prices of options outstanding (calculated as of June 30) |
|
$ |
23.61-$33.61 |
|
|
$ |
27.07-$34.60 |
|
|
$ |
23.61-$33.61 |
|
|
$ |
27.07-$34.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average contractual life of outstanding options (calculated as of
June 30, in years) |
|
|
1.32 |
|
|
|
1.34 |
|
|
|
1.32 |
|
|
|
1.34 |
|
The fair values of these options were estimated using the Black-Scholes options pricing
model with the weighted-average assumptions for the options granted during the period noted in the
following table. The risk-free interest rate was based on the U.S. Treasury constant
maturity-nominal two-year rate whose maturity is nearest to the date of the expiration of the
latest option outstanding and exercisable; the expected life of each option was estimated using the
historical exercise behavior of employees; expected volatility was based on historical volatility
of the Companys stock; and expected forfeitures were based on historical forfeiture rates within
the look-back period.
9
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
2006 |
|
|
|
Risk-free interest rates |
|
|
4.82 |
% |
|
|
4.82 |
% |
Expected dividend yields |
|
|
4.50 |
% |
|
|
7.24 |
% |
Expected life (in years) |
|
|
1.59 |
|
|
|
1.46 |
|
Expected volatility |
|
|
22.3 |
% |
|
|
19.9 |
% |
Expected forfeiture rates |
|
|
79 |
% |
|
|
76 |
% |
Accounting for Defined Benefit Pension Plans
The Company has pension plans under which the Companys Board of Directors and certain
designated employees may receive retirement benefits upon retirement and the completion of five
years of service with the Company. The plans are unfunded and benefits will be paid from earnings
of the Company. The pension plans are accounted for in accordance with SFAS No. 158. The pension
plans are described in more detail in the Companys Annual Report on Form 10-K for the year ended
December 31, 2006.
Net periodic benefit cost recorded related to the Companys pension plans for the three and
six months ended June 30, 2007 and 2006 is detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Service costs |
|
$ |
263 |
|
|
$ |
249 |
|
|
$ |
526 |
|
|
$ |
498 |
|
Interest costs |
|
|
208 |
|
|
|
186 |
|
|
|
416 |
|
|
|
372 |
|
Amortization of net gain/loss |
|
|
63 |
|
|
|
103 |
|
|
|
129 |
|
|
|
206 |
|
|
|
|
|
|
|
534 |
|
|
|
538 |
|
|
|
1,071 |
|
|
|
1,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income recognized in accumulated other
comprehensive loss |
|
|
0 |
|
|
|
0 |
|
|
|
(120 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and
accumulated other comprehensive loss |
|
$ |
534 |
|
|
$ |
538 |
|
|
$ |
951 |
|
|
$ |
1,076 |
|
|
|
|
Revenue Recognition
The Company recognizes revenue when collectibility is reasonably assured, in accordance with
the Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition
(SAB No. 104). In the event the Company determines that collectibility is not reasonably
assured, it will discontinue recognizing amounts contractually owed or will establish an allowance
for estimated losses.
The Company derives most of its revenues from its real estate property and mortgage note
receivables portfolio. The Companys rental and mortgage interest income is recognized based on
contractual arrangements with its tenants, sponsors or borrowers. These contractual arrangements
fall into three categories: leases, mortgage notes receivable, and property operating agreements as
described in the following paragraphs. The Company may accrue late fees based on the contractual
terms of a lease or note. Such fees, if accrued, are included in master lease income, property
operating income, or mortgage interest income on the Companys Condensed Consolidated Statements of
Income, based on the type of contractual agreement.
Rental Income
Rental income related to non-cancelable operating leases is recognized as earned over the life
of the lease agreements on a straight-line basis. Additional rent, generally defined in most lease
agreements as the cumulative increase in a Consumer Price Index (CPI) from the lease start date
to the CPI as of the end of the previous year, is calculated as of the beginning of each year, and
is then billed and recognized as income during the year as provided for in the lease. Rental
income from properties under a master lease arrangement with the tenant is included in master lease
rental income and rental income from
10
properties with multiple tenant lease arrangements is included in property operating income on
the Companys Condensed Consolidated Statements of Income.
Mortgage Interest Income
Mortgage interest income and notes receivable interest income are recognized based on the
interest rates, maturity date or amortized period specific to each note.
Other Operating Income
Other operating income on the Companys Condensed Consolidated Statements of Income generally
includes shortfall income recognized under its property operating agreements, management fee
income, annual inspection fee income, loan exit fee income and prepayment penalty income, if any,
and interest income on notes receivable.
Operating Leases
As described in more detail in the Companys Annual Report on Form 10-K for the year ended
December 31, 2006, the Company is obligated under operating lease agreements consisting primarily
of the corporate office lease and various ground leases related to the Companys real estate
investments where the Company is the lessee.
Discontinued Operations
The operating results of properties that have been sold or are held for sale are reported as
discontinued operations in the Companys Condensed Consolidated Statements of Income in accordance
with the criteria established in SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, (SFAS No. 144). Pursuant to SFAS No. 144, a company must report discontinued
operations when a component of an entity has either been disposed of or is deemed to be held for
sale if (i) both the operations and cash flows of the component have been or will be eliminated
from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have
any significant continuing involvement in the operations of the component after the disposal
transaction. Long-lived assets classified as held for sale are reported at the lower of their
carrying amount or their fair value less cost to sell. Further, depreciation of these assets
ceases at the time the assets are classified as discontinued operations. Losses resulting from the
sale of such properties are characterized as impairment losses relating to discontinued operations
in the Condensed Consolidated Statements of Income.
Variable Interest Entities
In accordance with FASB Financial Interpretation No. 46R, Consolidation of Variable Interest
Entities an Interpretation of Accounting Research Bulletin No. 51, the Company has included in its
Condensed Consolidated Financial Statements VIEs in which the Company has concluded that it is the
primary beneficiary. The properties related to these VIEs have been or will be sold as part of the
Companys disposal of its senior living assets. As such, the assets and liabilities for those
entities that have not yet been sold are classified as held for sale
on the Companys Condensed Consolidated
Balance Sheet as of June 30, 2007 and the operations of the Companys properties and related
variable interest entities that have been sold or are classified as held for sale are included in
discontinued operations in the Companys Condensed Consolidated Statements of Income for the three
and six months ended June 30, 2007. The Companys VIEs are discussed in more detail in the
Companys Annual Report on Form 10-K for the year ended December 31, 2006.
New Pronouncements
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157).
SFAS No. 157 establishes a framework for measuring fair value and expands disclosures about fair
value, which should increase the consistency and comparability of fair value measurements and
disclosures. This statement applies to other current pronouncements that require or permit fair
value measurements but does not itself require any new fair value measurements. SFAS No. 157 will be
effective for the Company beginning January 1, 2008, but early adoption is allowed. The Company does
11
not believe
that SFAS No. 157 will have a material impact on its consolidated financial statements.
The Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities, (SFAS No. 159). SFAS No. 159 provides companies with an option to
report selected financial assets and liabilities at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies that choose different
fair value measurement attributes for similar types of assets and liabilities. SFAS No. 159 will
be effective for the Company beginning January 1, 2008, but early adoption is allowed. The Company
does not believe that SFAS No. 159 will have a material impact on its consolidated financial
statements.
Accounting for Uncertainty in Income Taxes
In June 2006, the FASB issued Interpretation No. 48 Accounting for Uncertainty in Income
Taxes, (FIN No. 48). FIN No. 48 prescribes how the Company should recognize, measure and
present in the financial statements uncertain tax positions that have been taken or are expected to
be taken in a tax return. Pursuant to FIN No. 48, the Company can recognize a tax benefit only if
it is more likely than not that a particular tax position will be sustained upon examination or
audit. To the extent the more likely than not standard has been satisfied, the benefit
associated with a tax position is measured as the largest amount that is greater than 50% likely of
being realized upon settlement.
The Company is subject to U.S. federal income tax as well as income tax of multiple state and
local jurisdictions but, as a REIT, generally is not subject to income tax on taxable net income
distributed as dividends to shareholders. The Company adopted FIN No. 48, as required, effective
January 1, 2007 and has concluded that the adoption has had no material impact on the Companys
consolidated financial statements. Accordingly, the Company did not record a cumulative effect
adjustment related to the adoption of FIN No. 48.
The Company classifies interest and penalties related to uncertain tax positions, if any, in
the consolidated financial statements as a component of general and administrative expense. No
such amounts were recognized in the three or six months ended June 30, 2007 and 2006.
Tax returns filed for the 2003 through 2006 tax years are currently still subject to
examination by taxing authorities.
Note 2. Discontinued Operations
Disposition of the Portfolio of Senior Living Assets
The Company announced on February 26, 2007 its plan to dispose of its portfolio of senior
living assets. The portfolio included 62 real estate properties and 16 mortgage notes and notes
receivable, including properties related to all of the Companys 21 VIEs, six of which were
consolidated by the Company. During the first quarter of 2007, 16 real estate properties in which
the Company had a $99.6 million gross investment ($73.9 million, net) and two mortgage notes and
notes receivable in which the Company had an $11.4 million investment were disposed of for
aggregate cash proceeds totaling approximately $121.6 million. During the second quarter of 2007,
35 real estate properties in which the Company had a $197.2 million gross investment ($159.3
million, net) and all remaining mortgage notes and notes receivable in which the Company had a
$52.4 million investment were disposed of for aggregate cash proceeds totaling approximately $222.0
million. As of June 30, 2007, the Company had recognized a $37.6 million net gain and deferred a
$5.7 million gain related to the disposition of the senior living portfolio. The $5.7 million
deferred gain is included in Other liabilities on the
Companys Condensed Consolidated Balance Sheet and
relates to tenant performance under a lease assigned to a buyer in the disposition. The remaining
11 properties are expected to be disposed of during the remainder of 2007.
12
Sale of Other Real Estate Assets
During the first quarter of 2007, the Company decided to sell six other real estate property
investments in which the Company had an $8.0 million gross investment ($5.5 million, net), after
$2.8 million in impairment charges were recorded during the first quarter of 2007. The impairment
charges were recorded to lower the properties carrying values to their estimated fair values less
costs to sell in accordance with SFAS No. 144. See Note 3 for more details on the impairment
charges. The impairment charges are reflected in discontinued operations on the Companys
Condensed Consolidated Statement of Income for the six months ended June 30, 2007 and the assets remain in
assets held for sale on the June 30, 2007 Condensed Consolidated Balance Sheet.
Discontinued Operations
In accordance with SFAS No. 144, the major categories of the assets and related liabilities
discussed in the preceding two paragraphs are classified as held for sale on the Companys
Condensed Consolidated Balance Sheet to the extent not sold as of June 30, 2007, and the results of
operations are included in discontinued operations for all periods on the Companys Condensed
Consolidated Income Statements as detailed in the following tables.
|
|
|
|
|
(Dollars in thousands) |
|
June 30, 2007 |
|
|
Balance Sheet data (as of the period ended): |
|
|
|
|
Land |
|
$ |
5,308 |
|
Buildings, improvements and lease intangibles |
|
|
46,249 |
|
Personal property |
|
|
2,641 |
|
|
|
|
|
|
|
|
54,198 |
|
|
|
|
|
|
Accumulated depreciation |
|
|
(11,963 |
) |
|
|
|
|
Assets held for sale, net |
|
|
42,235 |
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,813 |
|
Other assets, net |
|
|
3,097 |
|
|
|
|
|
Assets included in discontinued operations, net (1) |
|
|
4,910 |
|
|
|
|
|
|
|
|
|
|
Assets held for sale and discontinued operations, net (2) |
|
$ |
47,145 |
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
$ |
5,037 |
|
|
|
|
|
Liabilities held for sale |
|
|
5,037 |
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
2,648 |
|
Other liabilities |
|
|
111 |
|
|
|
|
|
Liabilities included in discontinued operations (3) |
|
|
2,759 |
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale and discontinued operations (4) |
|
$ |
7,796 |
|
|
|
|
|
|
|
|
(1) |
|
Includes cash and patient receivables related to the Companys consolidated VIEs that the Company will no longer consolidate upon disposition,
and tenant receivables due to the Company that will be collected prior to or upon disposition of the properties. |
|
(2) |
|
Includes $41.6 million related to the disposal of the senior living assets and $5.5 million related to the sale of the six other properties. |
|
(3) |
|
Generally relates to liabilities of the consolidated VIEs that the Company will no longer consolidate upon disposition. |
|
(4) |
|
Relates to the senior living assets. |
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands, except per share data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Statements of Income data (for the period ended): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
2,049 |
|
|
$ |
6,102 |
|
|
$ |
8,205 |
|
|
$ |
13,588 |
|
Property operating |
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
192 |
|
Straight-line rent |
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
(17 |
) |
Mortgage interest |
|
|
331 |
|
|
|
1,426 |
|
|
|
1,841 |
|
|
|
2,803 |
|
Other operating |
|
|
4,492 |
|
|
|
4,575 |
|
|
|
9,276 |
|
|
|
9,511 |
|
|
|
|
|
|
|
6,872 |
|
|
|
12,148 |
|
|
|
19,322 |
|
|
|
26,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
9 |
|
|
|
2 |
|
|
|
9 |
|
|
|
23 |
|
Property operating |
|
|
264 |
|
|
|
235 |
|
|
|
497 |
|
|
|
415 |
|
Other operating |
|
|
4,151 |
|
|
|
4,362 |
|
|
|
8,364 |
|
|
|
8,667 |
|
Bad debt expense, net |
|
|
|
|
|
|
17 |
|
|
|
|
|
|
|
299 |
|
Interest |
|
|
122 |
|
|
|
151 |
|
|
|
272 |
|
|
|
432 |
|
Depreciation |
|
|
40 |
|
|
|
2,697 |
|
|
|
1,906 |
|
|
|
5,589 |
|
Amortization |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
4,586 |
|
|
|
7,474 |
|
|
|
11,048 |
|
|
|
15,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
|
2,286 |
|
|
|
4,674 |
|
|
|
8,274 |
|
|
|
10,622 |
|
Impairments |
|
|
|
|
|
|
|
|
|
|
(2,792 |
) |
|
|
|
|
Gain on sales of real estate properties, net (3) |
|
|
7,482 |
|
|
|
10 |
|
|
|
37,871 |
|
|
|
3,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
$ |
9,768 |
|
|
$ |
4,684 |
|
|
$ |
43,353 |
|
|
$ |
13,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per basic common share |
|
$ |
0.21 |
|
|
$ |
0.10 |
|
|
$ |
0.93 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per diluted common
share |
|
$ |
0.21 |
|
|
$ |
0.10 |
|
|
$ |
0.91 |
|
|
$ |
0.29 |
|
|
|
|
|
|
|
(1) |
|
Total revenues for the three months ended June 30, 2007 and 2006 include $6.8 million and $12.3 million,
respectively, related to the disposal of the senior living assets and 2006 also includes ($0.2) million related to
other properties sold. Total revenues for the six months ended June 30, 2007 and 2006 include $19.2 million and
$24.4 million, respectively, related to the disposal of the senior living assets and $0.1 million and $1.7 million,
respectively, related to other properties sold. |
|
(2) |
|
Total expenses for the three months ended June 30, 2007 and 2006 include $4.5 million and $7.3 million,
respectively, related to the disposal of the senior living assets and $0.1 million and $0.1 million, respectively,
related to the sale of other properties. Total expenses for the six months ended June 30, 2007 and 2006 include
$10.8 million and $14.8 million, respectively, related to the disposal of the senior living assets and $0.2 million
and $0.7 million, respectively, related to other properties sold. |
|
(3) |
|
The net gain for the three and six months ended June 30, 2007 is related to the disposal of senior living
assets during 2007, less certain expenses, of $7.2 million and $37.6 million, respectively, and a net gain of $0.2
million from the sale of one other property during the second quarter of 2007 pursuant to a purchase option
exercised by the operator. The net gain in the three and six months ended June 30, 2006 is related to the sale of
assets during 2006. |
Note 3. Real Estate and Mortgage Notes Receivable Investments
The Company invests in healthcare-related properties and mortgages located throughout the
United States. The Company provides management, leasing and development services, and capital for
the construction of new facilities as well as for the acquisition of existing properties. The
Company had investments of approximately $1.6 billion in 178 real estate properties and mortgage
notes receivable as of June 30, 2007, excluding assets classified as held for sale and including
investments in three unconsolidated limited liability companies. The Companys 173 owned real
estate properties, excluding assets classified as held for sale, are located in 24 states with
approximately 10.6 million total square feet. The table below details the Companys investments.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
(Dollars and Square Feet in thousands) |
|
Investments |
|
Investment |
|
Square Feet |
|
Owned properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
16 |
|
|
$ |
118,805 |
|
|
|
7.2 |
% |
|
|
806 |
|
Physician clinics |
|
|
20 |
|
|
|
137,370 |
|
|
|
8.3 |
% |
|
|
803 |
|
Ambulatory care/surgery |
|
|
8 |
|
|
|
63,075 |
|
|
|
3.8 |
% |
|
|
165 |
|
Specialty outpatient |
|
|
6 |
|
|
|
27,700 |
|
|
|
1.7 |
% |
|
|
118 |
|
Specialty inpatient |
|
|
13 |
|
|
|
232,470 |
|
|
|
14.1 |
% |
|
|
977 |
|
Other |
|
|
4 |
|
|
|
25,942 |
|
|
|
1.6 |
% |
|
|
347 |
|
|
|
|
|
|
|
67 |
|
|
|
605,362 |
|
|
|
36.7 |
% |
|
|
3,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial support agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
15 |
|
|
|
165,244 |
|
|
|
10.0 |
% |
|
|
1,123 |
|
|
|
|
|
|
|
15 |
|
|
|
165,244 |
|
|
|
10.0 |
% |
|
|
1,123 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-tenanted with occupancy leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
75 |
|
|
|
741,304 |
|
|
|
45.1 |
% |
|
|
5,755 |
|
Physician clinics |
|
|
12 |
|
|
|
37,192 |
|
|
|
2.3 |
% |
|
|
243 |
|
Ambulatory care/surgery |
|
|
4 |
|
|
|
38,202 |
|
|
|
2.3 |
% |
|
|
283 |
|
Other |
|
|
|
|
|
|
10,045 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
826,743 |
|
|
|
50.3 |
% |
|
|
6,281 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate property |
|
|
|
|
|
|
13,724 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,724 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
Total owned properties |
|
|
173 |
|
|
|
1,611,073 |
|
|
|
97.8 |
% |
|
|
10,620 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
2 |
|
|
|
16,886 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
16,886 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated LLC investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
2 |
|
|
|
12,676 |
|
|
|
0.8 |
% |
|
|
|
|
Other |
|
|
1 |
|
|
|
6,627 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
19,303 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total real estate investments |
|
|
178 |
|
|
$ |
1,647,262 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Asset Acquisitions
During the second quarter of 2007, the Company acquired for $0.9 million the real estate
assets of three partnerships, which owned three adjoining medical office buildings in Virginia.
During the first quarter of 2007, the Company acquired a 75,000 square foot building in
Tennessee for a total investment of $7.3 million, including $5.4 million in cash consideration and
the assumption of a mortgage note of $1.9 million.
Asset Dispositions
Senior Living Asset disposition
During the second quarter of 2007, the Company disposed of 35 properties, in which it had a
total gross investment of $197.2 million ($159.3 million, net). The Company received $222.0
million in cash proceeds from the disposal which included the repayment of 14 mortgage notes
receivable and notes receivable totaling $52.6 million.
15
During the first quarter of 2007, the Company disposed of 16 properties in which it had a
total gross investment of $99.6 million ($73.9 million, net). The Company received $121.6 million
in cash proceeds from the disposition which included the repayment of a mortgage note receivable
and a note receivable totaling $11.4 million.
As of June 30, 2007, the Company had recognized a net gain of approximately $37.6 million
relating to the disposition of the senior living assets. The proceeds received to date have been
used to pay the special dividend of $4.75 per share and to repay outstanding amounts on the
Unsecured Credit Facility due 2009. Cash proceeds from the dispositions to be completed will be
used to repay outstanding amounts on the Unsecured Credit Facility due 2009.
Other Dispositions
During the second quarter of 2007, the Company sold a property in Tennessee in which it had a
total gross investment of $2.2 million ($1.9 million, net) pursuant to a purchase option exercised
by an operator. The Company received $2.1 million in cash proceeds and recognized a $0.2 million
net gain from the sale.
Impairments
In accordance with SFAS No. 144, long-lived assets (e.g., properties) must be evaluated for
possible impairment whenever facts or circumstances indicate that the carrying value might not be
fully recoverable. No such impairment charges were recorded during the second quarter of 2007.
During the first quarter of 2007, management identified six real estate properties, other than its
senior living assets, that it intends to sell. In accordance with the provisions of SFAS No. 144,
management analyzed these properties for potential impairment. Based on the Companys decision to
sell these assets, management concluded that the estimated future cash flows of certain of these
properties were not expected to recover the carrying values of such properties. The Companys
aggregate net investment in the properties, before impairment, was approximately $8.3 million.
During the first quarter of 2007, the Company recorded impairment losses totaling approximately
$2.8 million, included in discontinued operations, which lowered the aggregate carrying values of
the properties to their estimated fair value less costs to sell of approximately $5.5 million.
These impairment charges are included in discontinued operations on the Companys Condensed
Consolidated Statements of Income for the six months ended June 30, 2007.
Future Minimum Lease Payments
Excluding leases related to those properties sold during 2007 or classified as held for sale
at June 30, 2007, the Companys future minimum lease payments to be collected under its
non-cancelable operating leases and financial support arrangements as of June 30, 2007 for the
years 2007 and after are as follows (in thousands):
|
|
|
|
|
2007 |
|
$ |
171,139 |
|
2008 |
|
|
154,539 |
|
2009 |
|
|
123,986 |
|
2010 |
|
|
98,047 |
|
2011 |
|
|
81,797 |
|
2012 and thereafter |
|
|
265,933 |
|
|
|
|
|
|
|
$ |
895,441 |
|
|
|
|
|
16
Purchase Options Exercised
In April 2007, the Company sold a property in Tennessee for $2.1 million pursuant to a
purchase option exercised by a tenant. See Asset Dispositions above for further details on the
sale.
In March 2007, an operator gave notice to the Company of its intent to purchase a building
from the Company pursuant to a purchase option. The Companys gross investment in the building was
approximately $46.4 million ($34.0 million, net) at June 30, 2007. The Company also had a mortgage
note payable on the building with a principal balance of $20.2 million at June 30, 2007 that the
Company would repay upon sale of the building. The parties have yet to agree on the terms of the
transaction and, accordingly, the Company is uncertain as to when the transaction might close, if
at all. As such, no reclassification to discontinued operations has been made as of June 30, 2007.
Note 4. Notes and Bonds Payable
The table below details the Companys notes and bonds payable as of June 30, 2007 and
December 31, 2006. At June 30, 2007, the Company had classified one mortgage note payable totaling
$5.0 million as held for sale on the Companys Condensed Consolidated Balance Sheet. As such, the
note is not reflected in the June 30, 2007 balances in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Balance at |
|
|
|
|
|
|
|
|
|
|
June 30, |
|
Dec. 31, |
|
Maturity |
|
Contractual |
|
Principal |
|
Interest |
(In thousands) |
|
2007 |
|
2006 |
|
Dates |
|
Interest Rates |
|
Payments |
|
Payments |
|
Unsecured Credit Facility due 2009 |
|
$ |
133,000 |
|
|
$ |
190,000 |
|
|
|
1/09 |
|
|
LIBOR + 0.90% |
|
At maturity |
|
Quarterly |
Senior Notes due 2011, including
premium |
|
|
300,975 |
|
|
|
301,083 |
|
|
|
5/11 |
|
|
|
8.125% |
|
|
At maturity |
|
Semi-Annual |
Senior Notes due 2014, net of discount |
|
|
298,906 |
|
|
|
298,838 |
|
|
|
4/14 |
|
|
|
5.125% |
|
|
At maturity |
|
Semi-Annual |
Mortgage notes payable |
|
|
51,203 |
|
|
|
60,061 |
|
|
|
5/11-10/32 |
|
|
|
5.49%-8.50 |
% |
|
Monthly |
|
Monthly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
784,084 |
|
|
$ |
849,982 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2007, the Company was in compliance with the covenant requirements under its
various debt instruments.
Unsecured Credit Facility due 2009
In January 2006, the Company entered into a $400.0 million credit facility (the Unsecured
Credit Facility due 2009) with a syndicate of 12 banks. The facility may be increased to $650.0
million during the first two years at the Companys option, subject to it obtaining additional
capital commitments from the banks. The credit facility matures in January 2009, but the term may
be extended one additional year.
Loans outstanding under the Unsecured Credit Facility due 2009 (other than swing line loans and
competitive bid advances) will bear interest at a rate equal to (x) LIBOR or the base rate (defined
as the higher of the Bank of America prime rate and the Federal Funds rate plus 0.50%) plus (y) a
margin ranging from 0.60% to 1.20% (currently 0.90%), based upon the Companys unsecured debt
ratings. The weighted-average rate on the borrowings outstanding as of June 30, 2007 was 6.22%.
Additionally, the Company pays a facility fee per annum on the aggregate amount of commitments.
The facility fee may range from 0.15% to 0.30% per annum (currently 0.20%), based on the Companys
unsecured debt ratings. The Unsecured Credit Facility due 2009 contains certain representations,
warranties, and financial and other covenants customary in such loan agreements. The Company had
borrowing capacity remaining, under its financial covenants, of $82.5 million under the facility as
of June 30, 2007.
Senior Notes due 2011
In 2001, the Company publicly issued $300.0 million of unsecured senior notes due 2011 (the
Senior Notes due 2011). The Senior Notes due 2011 bear interest at 8.125%, payable semi-annually
on May 1 and November 1, and are due on May 1, 2011, unless redeemed earlier by the Company. The
notes
were originally issued at a discount of approximately $1.5 million, which yielded an 8.202%
interest rate
17
per annum upon issuance. In 2001, the Company entered into interest rate swap
agreements for notional amounts totaling $125.0 million to offset changes in the fair value of
$125.0 million of the notes. In 2003, the Company terminated these interest rate swap agreements,
received cash equal to the fair value of the terminated swaps of $18.4 million, and then entered
into new swap agreements. The swap agreements entered into in 2003 were then terminated in June
2006 and the Company paid cash equal to the fair value of the terminated swaps of $10.1 million.
The net premium resulting from the terminations of the interest rate swaps, net of the original
discount, is combined with the principal balance of the Senior Notes due 2011 on the Companys
Condensed Consolidated Balance Sheets and will be amortized against interest expense over the
remaining term of the notes yielding an effective interest rate on the notes of 7.896%.
The following table reconciles the balance of the Senior Notes due 2011 on the Companys
Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2007 |
|
2006 |
|
Senior Notes due 2011 face value |
|
$ |
300,000 |
|
|
$ |
300,000 |
|
Unamortized net premium |
|
|
975 |
|
|
|
1,083 |
|
|
|
|
Senior Notes due 2011 carrying amount |
|
$ |
300,975 |
|
|
$ |
301,083 |
|
|
|
|
Senior Notes due 2014
On March 30, 2004, the Company publicly issued $300.0 million of unsecured senior notes due
2014 (the Senior Notes due 2014). The Senior Notes due 2014 bear interest at 5.125%, payable
semi-annually on April 1 and October 1, and are due on April 1, 2014, unless redeemed earlier by
the Company. The notes were issued at a discount of approximately $1.5 million, yielding an
effective interest rate of 5.19% per annum.
The following table reconciles the balance of the Senior Notes due 2014 on the Companys
Condensed Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
December 31, |
(In thousands) |
|
2007 |
|
2006 |
|
Senior Notes due 2014 face value |
|
$ |
300,000 |
|
|
$ |
300,000 |
|
Unamortized discount |
|
|
(1,094 |
) |
|
|
(1,162 |
) |
|
|
|
Senior Notes due 2014 carrying amount |
|
$ |
298,906 |
|
|
$ |
298,838 |
|
|
|
|
Mortgage Notes Payable
The following table details the Companys mortgage notes payable, with related collateral, at
June 30, 2007. At June 30, 2007, the Company had classified one mortgage note payable totaling
$5.0 million as held for sale on the Companys Condensed Consolidated Balance Sheet. As such, the
note is not reflected in the June 30, 2007 balances in the table below.
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
Number |
|
|
|
|
|
Collateral at |
|
Contractual Balance at |
|
|
Original |
|
Interest |
|
Maturity |
|
of Notes |
|
Collateral |
|
June 30, |
|
June 30, |
|
Dec. 31, |
(Dollars in millions) |
|
Balance |
|
Rate (6) |
|
Date |
|
Payable |
|
(8) |
|
2007 |
|
2007 |
|
2006 (7) |
|
Life Insurance Co. (1) |
|
$ |
23.3 |
|
|
|
7.765 |
% |
|
|
7/26 |
|
|
|
1 |
|
|
MOB |
|
$ |
46.4 |
|
|
$ |
20.2 |
|
|
$ |
20.5 |
|
Life Insurance Co. (2) |
|
|
4.7 |
|
|
|
7.765 |
% |
|
|
1/17 |
|
|
|
1 |
|
|
MOB |
|
|
11.1 |
|
|
|
3.1 |
|
|
|
3.2 |
|
Commercial Bank (3) |
|
|
23.4 |
|
|
|
7.220 |
% |
|
|
5/11 |
|
|
|
5 |
|
|
7 MOBs |
|
|
53.8 |
|
|
|
11.4 |
|
|
|
12.6 |
|
Commercial Bank (4) |
|
|
1.8 |
|
|
|
5.550 |
% |
|
|
10/32 |
|
|
|
1 |
|
|
OTH |
|
|
7.3 |
|
|
|
1.8 |
|
|
|
|
|
Life Insurance Co. (5) |
|
|
15.1 |
|
|
|
5.490 |
% |
|
|
1/16 |
|
|
|
1 |
|
|
MOB |
|
|
32.5 |
|
|
|
14.7 |
|
|
|
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
$ |
151.1 |
|
|
$ |
51.2 |
|
|
$ |
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Payable in monthly installments of principal and interest based on a 30-year
amortization with the final payment due at maturity. |
|
(2) |
|
Payable in monthly installments of principal and interest based on a 20-year
amortization with the final payment due at maturity. |
|
(3) |
|
Payable in fully amortizing monthly installments of principal and interest due at
maturity. |
|
(4) |
|
Payable in monthly installments of principal and interest based on a 27-year
amortization with the final payment due at maturity. |
|
(5) |
|
Payable in monthly installments of principal and interest based on a 10-year
amortization with the final payment due at maturity. |
|
(6) |
|
The contractual interest rates at June 30, 2007 ranged from 5.49% to 8.50%. |
|
(7) |
|
The contractual balance at December 31, 2006 excludes two mortgage notes payable
totaling $9.0 million that were classified as held for sale and discontinued operations on
the Companys Condensed Consolidated Balance Sheet subsequent to December 31, 2006. |
|
(8) |
|
MOB-Medical office building; OTH-Other. |
Other Long-Term Debt Information
Future maturities of the Companys notes and bonds payable as of June 30, 2007, excluding
mortgage notes payable classified as held for sale, were as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
2007 |
|
$ |
1,795 |
|
|
|
0.2 |
% |
2008 |
|
|
3,802 |
|
|
|
0.5 |
% |
2009 (1) |
|
|
137,096 |
|
|
|
17.5 |
% |
2010 |
|
|
4,411 |
|
|
|
0.6 |
% |
2011 |
|
|
302,029 |
|
|
|
38.5 |
% |
2012 and thereafter |
|
|
334,951 |
|
|
|
42.7 |
% |
|
|
|
|
|
$ |
784,084 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
(1) |
|
Includes $133,000 outstanding on the Unsecured Credit Facility due 2009. |
In its 1998 acquisition of Capstone Capital Corporation (Capstone), the Company
acquired four interest rate swaps previously entered into by Capstone. In order to set the
liabilities assumed by the Company, the Company, concurrently with the acquisition, acquired
offsetting swaps. The remaining liability as of June 30, 2007 and 2006 was approximately $127,000
and $311,000, respectively.
Note 5. Commitments and Contingencies
Construction in Progress
As of June 30, 2007, the Company had seven medical office buildings under development with
estimated completion dates ranging from the fourth quarter of 2007 through the fourth quarter of
2009 as shown in the table below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Completion Dates |
|
|
CIP Balance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
at June 30, |
|
Remaining |
|
|
|
|
|
|
|
|
|
|
|
|
Properties |
|
2007 |
|
Commitment |
|
Total |
|
4Q 2007 |
|
3Q 2008 |
|
4Q 2008 |
|
2Q 2009 |
|
4Q 2009 |
|
7 |
|
$ |
28,515 |
|
|
$ |
158,802 |
|
|
$ |
187,317 |
|
|
$ |
24,914 |
|
|
$ |
27,172 |
|
|
$ |
31,043 |
|
|
$ |
30,610 |
|
|
$ |
73,578 |
|
19
Other Construction Commitments
Construction continues on a 61,000 square foot, $20.1 million medical office building in the
state of Washington. The project is being developed by a joint venture in which the Company holds
a 75% non-controlling equity interest. Construction of the building is being funded by mortgage
debt of approximately $15.0 million and by partnership capital of approximately $5.1 million, of
which the Company will contribute $3.8 million. As of June 30, 2007, the Company had funded
approximately $3.3 million of its capital contribution. Completion of the building is expected in
the third quarter of 2007.
The Company also had various remaining first-generation tenant improvement obligations
totaling approximately $14.0 million as of June 30, 2007 related to properties that were developed
by the Company.
Legal Proceedings
On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation,
Capstone), a wholly owned affiliate of the Company, was served with the Third Amended Verified
Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the
Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit
alleges that certain officers and directors of HealthSouth, who were also officers and directors of
Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties
back to HealthSouth at artificially high values, in violation of their fiduciary obligations to
HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the
Capstone officers and directors remained in their positions following the Companys acquisition of
Capstone. The complaint seeks unspecified compensatory and punitive damages. Following the recent
settlement of a number of claims unrelated to the claims against Capstone, the court lifted a
lengthy stay on discovery in April 2007 and discovery is now proceeding. The Company will defend
itself vigorously and believes that the claims brought by the plaintiff are not meritorious.
In May 2006, Methodist Health System Foundation, Inc. (the Foundation) filed suit against a
wholly owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana.
The Foundation is the sponsor under financial support agreements which support two of the Companys
medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation
received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an
affiliate of Universal Health Services, Inc. in 2003. The Foundations assets and income are not
primarily dependent upon the operations of Methodist Hospital, which has remained closed since
Hurricane Katrina struck in August 2005. The Foundations suit alleges that Hurricane Katrina and
its aftermath should relieve the Foundation of its obligations under the financial support
agreements. The agreements do not contain any express provision allowing for termination upon a
casualty event. As such, the Company has continued to accrue revenue under its financial support
agreements with the Foundation, totaling approximately $3.3 million (net) as of June 30, 2007,
which remain unpaid by the Foundation. If the Foundation is relieved of its obligations to pay
such amounts to the Company or the Company is unable to collect certain of these amounts from its
insurance carriers, the Companys cash flows and results of operations could be negatively
impacted. The Company also has a $1.2 million receivable balance as of June 30, 2007, due from the
Companys insurance company, to partially reimburse the Company for costs incurred related to
rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina.
If this receivable is not collected from the Companys insurance company, the Companys cash flows
and results of operations could be negatively impacted. The Company believes the Foundations
claims are not meritorious and will vigorously defend the enforceability of the financial support
agreements.
The Company is not aware of any other pending or threatened litigation that, if resolved
against the Company, would have a material adverse effect on the Companys financial condition or
results of operations.
20
Note 6. Stockholders Equity
Earnings per share
The table below sets forth the computation of basic and diluted earnings per share as required
by SFAS No. 128, Earnings Per Share for the three and six months ended June 30, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands, except per share data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Weighted Average Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
47,870,653 |
|
|
|
47,807,916 |
|
|
|
47,846,837 |
|
|
|
47,796,243 |
|
Unvested Restricted Stock Shares |
|
|
(1,267,010 |
) |
|
|
(1,276,885 |
) |
|
|
(1,271,283 |
) |
|
|
(1,284,662 |
) |
|
|
|
Weighted Average Shares Basic |
|
|
46,603,643 |
|
|
|
46,531,031 |
|
|
|
46,575,554 |
|
|
|
46,511,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Basic |
|
|
46,603,643 |
|
|
|
46,531,031 |
|
|
|
46,575,554 |
|
|
|
46,511,581 |
|
Dilutive effect of Restricted Stock Shares |
|
|
943,539 |
|
|
|
894,951 |
|
|
|
970,680 |
|
|
|
910,134 |
|
Dilutive effect of Employee Stock Purchase Plan |
|
|
30,152 |
|
|
|
33,994 |
|
|
|
41,390 |
|
|
|
42,662 |
|
|
|
|
Weighted Average Shares Diluted |
|
|
47,577,334 |
|
|
|
47,459,976 |
|
|
|
47,587,624 |
|
|
|
47,464,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
3,875 |
|
|
$ |
6,822 |
|
|
$ |
6,634 |
|
|
$ |
10,104 |
|
Discontinued Operations |
|
|
9,768 |
|
|
|
4,684 |
|
|
|
43,353 |
|
|
|
13,897 |
|
|
|
|
Net income |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
49,987 |
|
|
$ |
24,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations per common
share |
|
$ |
0.08 |
|
|
$ |
0.15 |
|
|
$ |
0.14 |
|
|
$ |
0.21 |
|
Discontinued Operations per common share |
|
|
0.21 |
|
|
|
0.10 |
|
|
|
0.93 |
|
|
|
0.30 |
|
|
|
|
Net income per common share |
|
$ |
0.29 |
|
|
$ |
0.25 |
|
|
$ |
1.07 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations per common
share |
|
$ |
0.08 |
|
|
$ |
0.14 |
|
|
$ |
0.14 |
|
|
$ |
0.21 |
|
Discontinued Operations per common share |
|
|
0.21 |
|
|
|
0.10 |
|
|
|
0.91 |
|
|
|
0.29 |
|
|
|
|
Net income per common share |
|
$ |
0.29 |
|
|
$ |
0.24 |
|
|
$ |
1.05 |
|
|
$ |
0.50 |
|
|
|
|
Common Stock Dividend Declarations
On April 24, 2007, the Companys Board of Directors declared a quarterly common stock cash
dividend in the amount of $0.660 per share payable to shareholders of record on May 15, 2007. This
dividend was paid on June 1, 2007.
On March 26, 2007, the Companys Board of Directors declared a one-time special common stock
cash dividend in the amount of $4.75 per share payable to shareholders of record on April 16, 2007.
This dividend was paid on May 2, 2007.
On January 23, 2007, the Companys Board of Directors declared a quarterly common stock cash
dividend in the amount of $0.660 per share payable to shareholders of record on February 15, 2007.
This dividend was paid on March 2, 2007.
21
Authorization to Repurchase Common Stock
On July 25, 2006, the Companys Board of Directors authorized the repurchase of up to
3,000,000 shares of the Companys common stock. As of June 30, 2007, the Company had not
repurchased any shares.
Note 7. Retirement and Termination Benefits
During the first quarter of 2007, the Company recorded a $1.5 million charge, included in
General and administrative expenses in the Companys Condensed Consolidated Income Statement, and
established a $1.5 million severance and payroll tax liability, included in Accounts payable and
accrued liabilities on the Companys Condensed Consolidated Balance Sheet, relating to the
retirement of the Companys Chief Operating Officer and elimination of five other officer and
employee positions in the Companys corporate and regional offices. The officer retirement and
position eliminations were effective during the first quarter of 2007. The liability remaining at
June 30, 2007 represents severance payments remaining that will be paid through the third quarter
of 2008 in the amount of approximately $135,500 per quarter. The following table represents items
included in the charge and liability as well as payments made related to the liability through June
30, 2007.
|
|
|
|
|
|
|
|
|
(In thousands) |
|
Expense |
|
|
Liability |
|
|
Severance, payroll taxes and related charges |
|
$ |
1,078 |
|
|
$ |
1,513 |
|
Accelerated vesting of deferred compensation |
|
|
443 |
|
|
|
|
|
|
|
|
Total Expense and Liability recorded during 1st of quarter 2007 |
|
$ |
1,521 |
|
|
$ |
1,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments: |
|
|
|
|
|
|
|
|
1st quarter of 2007 |
|
|
|
|
|
|
(425 |
) |
2nd quarter of 2007 |
|
|
|
|
|
|
(546 |
) |
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
|
|
|
|
$ |
542 |
|
|
|
|
|
|
|
|
|
Note 8. Taxable Income
The Company has elected to be taxed as a REIT, as defined under the Internal Revenue Code of
1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and
operational requirements, including a requirement that it currently distribute at least 90% of its
taxable income to its stockholders.
As a REIT, the Company generally will not be subject to federal income tax on taxable income
it distributes currently to its stockholders. Accordingly, no provision for federal income taxes
has been made in the accompanying Condensed Consolidated Financial Statements. If the Company fails to
qualify as a REIT for any taxable year, then it will be subject to federal income taxes at regular
corporate rates, including any applicable alternative minimum tax, and may not be able to qualify
as a REIT for four subsequent taxable years. Even if the Company qualifies as a REIT, it may be
subject to certain state and local taxes on its income and property and to federal income and
excise tax on its undistributed taxable income.
Earnings and profits, the current and accumulated amounts of which determine the taxability of
distributions to stockholders, vary from net income because of different depreciation recovery
periods and methods, and other items.
22
The following table reconciles the Companys consolidated net income to taxable income for the
three and six months ended June 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(In thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Net income |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
49,987 |
|
|
$ |
24,001 |
|
Items to Reconcile Net Income to Taxable Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
872 |
|
|
|
5,209 |
|
|
|
4,935 |
|
|
|
8,975 |
|
Gain or loss on disposition of depreciable assets |
|
|
15,376 |
|
|
|
5,410 |
|
|
|
27,054 |
|
|
|
4,987 |
|
Straight-line rent |
|
|
251 |
|
|
|
(823 |
) |
|
|
1,000 |
|
|
|
(1,184 |
) |
VIE Consolidation |
|
|
188 |
|
|
|
433 |
|
|
|
394 |
|
|
|
860 |
|
Receivable allowances |
|
|
(9,685 |
) |
|
|
3,160 |
|
|
|
(5,543 |
) |
|
|
(1,329 |
) |
Stock-based compensation |
|
|
5,614 |
|
|
|
1,750 |
|
|
|
7,549 |
|
|
|
3,270 |
|
Other |
|
|
(3,506 |
) |
|
|
4,989 |
|
|
|
(3,883 |
) |
|
|
2,399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income (1) |
|
$ |
22,753 |
|
|
$ |
31,634 |
|
|
$ |
81,493 |
|
|
$ |
41,979 |
|
|
|
|
|
|
|
(1) |
|
Before REIT dividend paid deduction. |
Note 9. Subsequent Events
Common Stock Dividend
On July 24, 2007, the Companys Board of Directors declared a quarterly common stock cash
dividend in the amount of $0.385 per share payable on September 4, 2007 to shareholders of record
on August 15, 2007.
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Healthcare Realty Trust Incorporated (the Company) operates under the Internal Revenue Code
of 1986, as amended, as an indefinite life real estate investment trust (REIT). The Company, a
self-managed and self-administered REIT, integrates owning, managing and developing
income-producing real estate properties and mortgages associated with the delivery of healthcare
services throughout the United States. Management believes that by providing a complete spectrum of
real estate services, the Company can differentiate its competitive market position, expand its
asset base and increase revenues over time.
Substantially all of the Companys revenues are derived from rentals on its healthcare real
estate properties and from interest earned on mortgage loans. The Company typically incurs
operating and administrative expenses, including compensation, office rental and other related
occupancy costs, as well as various expenses incurred in connection with managing its existing
portfolio, developing properties and acquiring additional properties. The Company also incurs
interest expense on its various debt instruments and depreciation and amortization expense on its
real estate portfolio.
Executive Overview
Since its inception, the Company has been selective about the properties it acquires and
develops. Management believes that by investing in properties associated with or adjacent to
leading healthcare providers and in markets with a strong demand for outpatient healthcare
facilities, the Company will enhance its prospects for long-term stability and growth. The Company
believes that its portfolio, diversified by facility type, geography, and tenant mix, helps
mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit risks, and
changes in clinical practice patterns.
Management continues to see high valuations in the medical office sector based on market
transactions. Despite the highly competitive market for these assets, the Company continues to
pursue existing property investments and is focused on improving operations in its portfolio of
managed, multi-tenanted properties.
The Company also continues to pursue opportunities to develop outpatient medical facilities.
The Company has eight development projects underway with budgets totaling approximately $207.4
million, including a $20.1 million project by a joint venture in which the Company holds a 75%
non-controlling equity interest. The Company expects completion of approximately $45.0 million
during the remainder of 2007, $58.2 million in 2008, and $104.2 million in 2009. Beyond the
projects currently under construction, the Company is in advanced discussions on several other
projects that the Company anticipates will have total project budgets of approximately $292.0
million with anticipated completion dates in late 2008 and in 2009.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and REIT industry in order to
gauge the potential impact on the operations of the Company. Discussed below and in the Companys
Annual Report on Form 10-K for the year ended December 31, 2006 are some of the factors and trends
that management believes may impact future operations of the Company.
Sale of Senior Living and Certain Other Real Estate Assets
In February 2007, the Company announced it plans to dispose of its portfolio of senior living
assets, consisting of 62 properties and 16 mortgage notes and notes receivable. The Companys
investment in the real estate properties and mortgage notes receivable included in this portfolio
was
24
approximately $398.0 million ($326.0 million, net) at December 31, 2006 which produced
approximately $50.0 million in revenues and $20.0 million in net income for the year ended December
31, 2006. The Company expects to receive approximately $399.6 million in total consideration for
the portfolio. As of June 30, 2007, the Company had disposed of, in a series of closings, a total
of 51 properties and all of the mortgage notes and notes receivable for consideration totaling
$347.8 million and anticipates that the remaining properties will be disposed of during the
remainder of 2007 for estimated aggregate consideration of $51.8 million. Cash proceeds from the
dispositions to date have been used to pay a special dividend of $227.2 million, or $4.75 per
share, pay transaction costs and to repay debt. Commensurate with the smaller asset base from the
disposal of the portfolio of the senior living assets, the Company
reset its dividend beginning with the
second quarter of 2007 to $1.54 per share, per annum. The cash proceeds from the remaining
dispositions will be used to repay debt. See Notes 2, 3 and 9 to the Condensed Consolidated
Financial Statements for further details regarding the disposition of the portfolio.
In the first quarter of 2007, the Company also decided to sell six other properties. See Note
3 to the Condensed Consolidated Financial Statements for further details.
Funds from Operations
Funds from Operations (FFO) and FFO per share are operating performance measures adopted by
the National Association of Real Estate Investment Trusts, Inc. (NAREIT). NAREIT defines FFO as
the most commonly accepted and reported measure of a REITs operating performance equal to net
income (computed in accordance with generally accepted accounting principles), excluding gains (or
losses) from sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. In 2003, the Securities and Exchange Commission
issued a statement that impairment charges could not be added back to net income in calculating
FFO. As such, the impairments discussed below negatively impacted FFO. Impairment charges will be
recognized from time to time and will negatively impact FFO. In the first quarter of 2007, the
Company recorded impairment charges totaling $2.8 million, or $0.06 FFO per basic and diluted
common share, based on managements decision to sell certain properties.
Management believes FFO and FFO per share to be supplemental measures of a REITs performance
because they provide an understanding of the operating performance of the Companys properties
without giving effect to certain significant non-cash items, primarily depreciation and
amortization expense. Management uses FFO and FFO per share to compare and evaluate its own
operating results from period to period, and to monitor the operating results of the Companys
peers in the REIT industry. The Company reports FFO and FFO per share because these measures are
observed by management to also be the predominant measures used by the REIT industry and by
industry analysts to evaluate REITs; because FFO per share is consistently reported, discussed, and
compared by research analysts in their notes and publications about REITs; and finally, because
research analysts publish their earnings estimates and consensus estimates for healthcare REITs
only in terms of fully diluted FFO per share and in terms of net income or earnings per share. For
these reasons, management has deemed it appropriate to disclose and discuss FFO and FFO per share.
However, FFO does not represent cash generated from operating activities determined in
accordance with accounting principles generally accepted in the United States of America and is not
necessarily indicative of cash available to fund cash needs. FFO should not be considered as an
alternative to net income as an indicator of the Companys operating performance or as an
alternative to cash flow from operating activities as a measure of liquidity.
25
The table below reconciles FFO to net income for the three and six months ended June 30, 2007
and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30, |
|
June 30, |
(Dollars in thousands, except per share data) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Net income |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
49,987 |
|
|
$ |
24,001 |
|
Gain on sales of real estate properties, net |
|
|
(7,482 |
) |
|
|
(10 |
) |
|
|
(37,871 |
) |
|
|
(3,275 |
) |
Real estate depreciation and amortization |
|
|
12,699 |
|
|
|
16,052 |
|
|
|
27,070 |
|
|
|
31,747 |
|
|
|
|
Total adjustments |
|
|
5,217 |
|
|
|
16,042 |
|
|
|
(10,801 |
) |
|
|
28,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations Basic and Diluted |
|
$ |
18,860 |
|
|
$ |
27,548 |
|
|
$ |
39,186 |
|
|
$ |
52,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per Common Share Basic |
|
$ |
0.40 |
|
|
$ |
0.59 |
|
|
$ |
0.84 |
|
|
$ |
1.13 |
|
|
|
|
Funds from Operations per Common Share Diluted |
|
$ |
0.40 |
|
|
$ |
0.58 |
|
|
$ |
0.82 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Basic |
|
|
46,603,643 |
|
|
|
46,531,031 |
|
|
|
46,575,554 |
|
|
|
46,511,581 |
|
|
|
|
Weighted Average Common Shares Outstanding
Diluted |
|
|
47,577,334 |
|
|
|
47,459,976 |
|
|
|
47,587,624 |
|
|
|
47,464,377 |
|
|
|
|
Results of Operations
Second Quarter 2007 Compared to Second Quarter 2006
Net income for the quarter ended June 30, 2007 totaled $13.6 million, or $0.29 per basic
common share ($0.29 per diluted common share), on total revenues from continuing operations of
$52.2 million. This compares with net income of $11.5 million, or $0.25 per basic common share
($0.24 per diluted common share), on total revenues from continuing operations of $54.7 million for
the quarter ended June 30, 2006. Included in net income for the three months ended June 30, 2007
is a net gain largely related to the disposal of the senior living properties totaling $7.5
million, or $0.16 per basic and diluted common share. FFO was $18.9 million, or $0.40 per diluted
common share for the three months ended June 30, 2007 compared to $27.5 million, or $0.58 per
diluted common share for the same period in 2006. FFO and FFO per diluted common share decreased
in 2007 compared to 2006 due mainly to the reduction in revenues from the disposal of the senior
living properties and mortgage notes of approximately $5.2 million, straight-line rent decreased
$1.3 million due mainly to adjustments resulting from lease amendments to extend lease terms,
prepayment penalties totaling $1.1 million related to the prepayment of two mortgage notes and an
increase in general and administrative expenses of $0.9 million due to increases in
compensation-related expenses, taxes and shareholder communication expenses.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
15,277 |
|
|
$ |
13,878 |
|
|
$ |
1,399 |
|
|
|
10.1 |
% |
Property operating |
|
|
31,690 |
|
|
|
31,372 |
|
|
|
318 |
|
|
|
1.0 |
% |
Straight-line rent |
|
|
35 |
|
|
|
1,360 |
|
|
|
(1,325 |
) |
|
|
(97.4 |
%) |
Mortgage interest |
|
|
352 |
|
|
|
1,657 |
|
|
|
(1,305 |
) |
|
|
(78.8 |
%) |
Other operating |
|
|
4,894 |
|
|
|
6,396 |
|
|
|
(1,502 |
) |
|
|
(23.5 |
%) |
|
|
|
|
|
|
52,248 |
|
|
|
54,663 |
|
|
|
(2,415 |
) |
|
|
(4.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
5,220 |
|
|
|
4,365 |
|
|
|
855 |
|
|
|
19.6 |
% |
Property operating |
|
|
18,365 |
|
|
|
17,315 |
|
|
|
1,050 |
|
|
|
6.1 |
% |
Other operating |
|
|
|
|
|
|
171 |
|
|
|
(171 |
) |
|
|
(100 |
%) |
Bad debt |
|
|
77 |
|
|
|
313 |
|
|
|
(236 |
) |
|
|
(75.4 |
%) |
Interest |
|
|
12,258 |
|
|
|
12,404 |
|
|
|
(146 |
) |
|
|
(1.2 |
%) |
Depreciation |
|
|
11,248 |
|
|
|
10,580 |
|
|
|
668 |
|
|
|
6.3 |
% |
Amortization |
|
|
1,205 |
|
|
|
2,693 |
|
|
|
(1,488 |
) |
|
|
(55.3 |
%) |
|
|
|
|
|
|
48,373 |
|
|
|
47,841 |
|
|
|
532 |
|
|
|
1.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
3,875 |
|
|
|
6,822 |
|
|
|
(2,947 |
) |
|
|
(43.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
2,286 |
|
|
|
4,674 |
|
|
|
(2,388 |
) |
|
|
(51.1 |
%) |
Impairments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales of real estate properties, net |
|
|
7,482 |
|
|
|
10 |
|
|
|
7,472 |
|
|
|
74,720.0 |
% |
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
9,768 |
|
|
|
4,684 |
|
|
|
5,084 |
|
|
|
108.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
13,643 |
|
|
$ |
11,506 |
|
|
$ |
2,137 |
|
|
|
18.6 |
% |
|
|
|
Total revenues from continuing operations for the quarter ended June 30, 2007 decreased
$2.4 million, or 4.4%, compared to the same period in 2006, mainly for the reasons discussed below:
Master lease rental income increased $1.4 million, or 10.1%, due mainly to additional
revenues of $1.2 million in the second quarter of 2007 resulting from the acquisition of a medical
office building and an adjoining orthopaedic hospital during 2006.
Straight-line rental income decreased $1.3 million, or 97.4%, due mainly to amendments
to current leases which extended the lease terms.
Mortgage interest income decreased $1.3 million, or 78.8%, due mainly to the repayment
of seven mortgage notes in 2006, resulting in a reduction of interest income of approximately $1.2
million.
Other operating income decreased $1.5 million, or 23.5%, due mainly to the receipt of
prepayment penalties in 2006 totaling approximately $1.1 million related to the prepayment of two
mortgage notes.
Total expenses for the quarter ended June 30, 2007 compared to the quarter ended June 30, 2006
increased $0.5 million, or 1.1%, mainly for the reasons discussed below:
General and administrative expenses increased $0.9 million, or 19.6%, due mainly to
compensation related expenses of $0.3 million, increases in franchise and state taxes of $0.2
million, and increases in shareholder communication expenses of $0.3 million.
27
Property operating expense increased $1.0 million, or 6.1%, as compared to the same
period in 2006. The increase is mainly due to straight-line rent expense of $0.3 million on ground
leases where the Company is the lessee, repairs and maintenance of $0.1 million, additional
expenses from the commencement of operations related to properties previously under development of
$0.2 million and expenses related to properties that were previously master leased of $0.2 million.
Depreciation expense increased $0.7 million, or 6.3%, due mainly to the
acquisition of $73.0 million of depreciable real estate properties since the first quarter of 2006,
as well as various building and tenant improvements.
Amortization expense decreased $1.5 million, or 55.3%, mainly due to a
decrease in total amortization expense related to the lease intangibles which have been fully
amortized.
Income from discontinued operations totaled $9.8 million and $4.7 million, respectively, for
the three months ended June 30, 2007 and 2006, which includes the results of operations and gains
or impairments related to property disposals during 2007 and 2006, as well as the results of
operations related to assets classified as held for sale at June 30, 2007. See Notes 2 and 9 to
the Condensed Consolidated Financial Statements for more information about discontinued operations
and the assets classified as held for sale at June 30, 2007.
Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
Net income for the six months ended June 30, 2007 totaled $50.0 million, or $1.07 per basic
common share ($1.05 per diluted common share), on total revenues from continuing operations of
$105.2 million. This compares with net income of $24.0 million, or $0.51 per basic common share
($0.50 per diluted common share), on total revenues from continuing operations of $106.5 million
for the six months ended June 30, 2006. Included in net income for the six months ended June 30,
2007 is (1) a net gain largely related to the disposal of the senior living properties totaling
$37.9 million, or $0.81 per basic common share ($0.80 per diluted common share); (2) impairment
charges related to four other properties classified as held for sale totaling $2.8 million, or
$0.06 per basic and diluted common share; and (3) charges related to the retirement of one officer
and the termination of several other employees totaling $1.5 million, or $0.03 per basic and
diluted common share. FFO was $39.2 million, or $0.82 per diluted common share for the six months
ended June 30, 2007 compared to $52.5 million, or $1.11 per diluted common share for the same
period in 2006. FFO and FFO per diluted common share decreased in 2007 compared to 2006 due mainly
to impairment charges totaling $2.8 million recorded in the first quarter of 2007, expenses
totaling $1.5 million related to the retirement and termination of several employees recorded in
the first quarter of 2007, the reduction of revenues due to the disposal of the senior living
properties and mortgage notes of approximately $4.7 million, and $1.1 million in prepayment penalty
fees received in 2006 related to the prepayment of mortgage notes.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30, |
|
Change |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
$ |
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
30,995 |
|
|
$ |
27,660 |
|
|
$ |
3,335 |
|
|
|
12.1 |
% |
Property operating |
|
|
63,540 |
|
|
|
63,164 |
|
|
|
376 |
|
|
|
0.6 |
% |
Straight-line rent |
|
|
96 |
|
|
|
1,742 |
|
|
|
(1,646 |
) |
|
|
(94.5 |
%) |
Mortgage interest |
|
|
704 |
|
|
|
3,336 |
|
|
|
(2,632 |
) |
|
|
(78.9 |
%) |
Other operating |
|
|
9,891 |
|
|
|
10,563 |
|
|
|
(672 |
) |
|
|
(6.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,226 |
|
|
|
106,465 |
|
|
|
(1,239 |
) |
|
|
(1.2 |
%) |
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
11,395 |
|
|
|
8,760 |
|
|
|
2,635 |
|
|
|
30.1 |
% |
Property operating |
|
|
36,513 |
|
|
|
35,343 |
|
|
|
1,170 |
|
|
|
3.3 |
% |
Other operating |
|
|
|
|
|
|
171 |
|
|
|
(171 |
) |
|
|
(100.0 |
%) |
Bad debt |
|
|
82 |
|
|
|
768 |
|
|
|
(686 |
) |
|
|
(89.3 |
%) |
Interest |
|
|
25,773 |
|
|
|
25,316 |
|
|
|
457 |
|
|
|
1.8 |
% |
Depreciation |
|
|
22,209 |
|
|
|
20,443 |
|
|
|
1,766 |
|
|
|
8.6 |
% |
Amortization |
|
|
2,620 |
|
|
|
5,560 |
|
|
|
(2,940 |
) |
|
|
(52.9 |
%) |
|
|
|
|
|
|
98,592 |
|
|
|
96,361 |
|
|
|
2,231 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
6,634 |
|
|
|
10,104 |
|
|
|
(3,470 |
) |
|
|
(34.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
8,274 |
|
|
|
10,622 |
|
|
|
(2,348 |
) |
|
|
(22.1 |
%) |
Impairments |
|
|
(2,792 |
) |
|
|
|
|
|
|
(2,792 |
) |
|
|
|
|
Gain on sales of real estate properties, net |
|
|
37,871 |
|
|
|
3,275 |
|
|
|
34,596 |
|
|
|
1,056.4 |
% |
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
43,353 |
|
|
|
13,897 |
|
|
|
29,456 |
|
|
|
212.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
49,987 |
|
|
$ |
24,001 |
|
|
$ |
25,986 |
|
|
|
108.3 |
% |
|
|
|
Total revenues from continuing operations for the six months ended June 30, 2007
decreased $1.2 million, or 1.2%, compared to the same period in 2006, mainly for the reasons
discussed below:
Master lease rental income increased $3.3 million, or 12.1%, due mainly to additional
revenues of $2.4 million in the first six months of 2007 resulting from the acquisition of a
medical office building and an adjoining orthopaedic hospital during 2006, the receipt of a lease
termination fee of $0.4 million in the first quarter of 2007 and annual rent increases of $0.6
million.
Straight-line rent income decreased $1.6 million due mainly to amendments to current
leases which extended the lease terms.
Mortgage interest income decreased $2.6 million, or 78.9%, due mainly to the repayment
of seven mortgage notes in 2006, resulting in a reduction of interest income of approximately $2.9
million, offset partially by additional revenues of $0.3 million from the addition of two new
mortgages in 2006.
Other operating income decreased $0.7 million, or 6.4%, due mainly to prepayment
penalties associated with the repayment of two mortgages during 2006 of $1.1 million, partially
offset by a property substitution deferral fee totaling $0.6 million received from one operator
during the first six months of 2007.
29
Total expenses for the six months ended June 30, 2007 compared to the quarter ended June 30,
2006 increased $2.2 million, or 2.3%, mainly for the reasons discussed below:
General and administrative expenses increased $2.6 million, or 30.1%, due mainly to
charges related to the retirement of two officers and the termination of several other employees
totaling $1.5 million recorded in the first quarter of 2007, compensation-related expenses of $0.7
million and increases in franchise and state taxes of $0.2 million.
Property operating expenses increased $1.2 million, or 3.3%, due mainly to the
recognition of straight-line rent expenses totaling approximately $1.0 million associated with
ground leases where the Company is the lessee.
Bad debt expense decreased $0.7 million, or 89.3%, due to net increases in the
allowance for doubtful accounts on various receivables during the six months ended June 30, 2006.
Interest expense increased $0.5 million, or 1.8%, as compared to the same period in
2006. The increase is mainly due to a $2.3 million increase in interest expense on the unsecured
credit facility due to higher interest rates and a higher average outstanding balance on the credit
facility in 2007 than in 2006, offset partially by a decrease in interest expense of approximately
$0.7 million from the repayment of the senior notes due 2006 and a decrease to interest expense
resulting from an increase in capitalized interest of $0.9 million on projects under construction
during 2007.
Depreciation expense increased $1.8 million, or 8.6%, due mainly to the
acquisition of $73.0 million of depreciable real estate properties since the first quarter of 2006,
as well as various building and tenant improvements.
Amortization expense decreased $2.9 million, or 52.9%, mainly due to a
decrease in total amortization expense related to the lease intangibles which have been fully
amortized.
Income from discontinued operations totaled $43.4 million and $13.9 million, respectively, for
the six months ended June 30, 2007 and 2006, which includes the results of operations and gains or
impairments related to property disposals during 2007 and 2006, as well as the results of
operations related to assets classified as held for sale at June 30, 2007. See Notes 2 and 9 to
the Condensed Consolidated Financial Statements for more information about discontinued operations
and the assets classified as held for sale at June 30, 2007.
Liquidity and Capital Resources
The Company derives most of its revenues from its real estate property and mortgage note
receivables portfolio based on contractual arrangements with its tenants, sponsors or borrowers.
The Company may, from time to time, also generate funds from capital market financings, sales of
real estate properties or mortgages, borrowings under its unsecured credit facility, or from other
private debt or equity offerings. For the six months ended June 30, 2007, the Company generated
$42.4 million in cash from operations and used $43.7 million in total cash from investing and
financing activities as detailed in the Companys Condensed Consolidated Cash Flow Statement.
The Company had certain contractual obligations as of June 30, 2007 and is also required to
pay dividends to its shareholders at least equal to 90% of its taxable income in order to maintain
its qualification as a real estate investment trust under the Internal Revenue Code of 1986, as
amended. The Companys material contractual obligations for the remainder of 2007 through 2008 are
detailed in the table below.
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2007 |
|
2008 |
|
Total |
|
|
|
Long-term debt obligations, including interest (1)
|
|
$ |
23,484 |
|
|
$ |
46,888 |
|
|
$ |
70,372 |
|
|
|
Operating lease commitments (2)
|
|
|
1,616 |
|
|
|
3,302 |
|
|
|
4,918 |
|
|
|
Construction in progress (3)
|
|
|
30,024 |
|
|
|
74,772 |
|
|
|
104,796 |
|
|
|
Tenant improvements (4)
|
|
|
14,044 |
|
|
|
|
|
|
|
14,044 |
|
|
|
Deferred gain (5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension obligations (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
69,168 |
|
|
$ |
124,962 |
|
|
$ |
194,130 |
|
|
|
|
|
|
|
|
|
(1) |
|
Includes estimated cash interest due on total debt other than the unsecured credit
facility. See Note 4 to the Condensed Consolidated Financial Statements. |
|
(2) |
|
Includes primarily two office leases and ground leases related to various properties
for which the Company is currently making payments. |
|
(3) |
|
Includes remaining commitments on the construction of seven buildings. The timing of
the obligations is based on estimated cash funding projections of each project. |
|
(4) |
|
Includes tenant improvement allowance obligations remaining on seven properties
constructed by the Company. The Company has assumed they will all be funded during 2007. |
|
(5) |
|
As part of the sale of the senior living portfolio, the Company recorded a $5.7
million deferred gain related to one tenant under a lease assigned to one buyer. The amounts the
Company will pay, if any, will be based upon the tenants performance under its lease through July
31, 2011. Payments made by the Company to the buyer will reduce the deferred gain recorded by the
Company. |
|
(6) |
|
The Company has three employees and three non-employee directors eligible to retire.
If these individuals retired at normal retirement age and received full retirement benefits, the
future benefits to be paid are estimated to be approximately $32 million |
As of June 30, 2007, approximately 81.2% of the Companys outstanding debt balances were
due after 2010, with the majority of the debt balances due prior to 2010 relating to the Unsecured
Credit Facility due 2009. The Companys stockholders equity at June 30, 2007 totaled
approximately $589.5 million, and its debt-to-total capitalization ratio, on a book basis, was
approximately 57.1%. For the six months ended June 30, 2007, the Companys earnings covered fixed
charges at a ratio of 1.30 to 1.0. At June 30, 2007, the Company had borrowing capacity remaining,
under its financial covenants, of $82.5 million under the Unsecured Credit Facility due 2009 and
was in compliance with the covenant requirements under its various debt instruments.
The Companys senior debt is rated Baa3, BBB-, and BBB by Moodys Investors Service, Standard
and Poors, and Fitch Ratings, respectively.
Shelf Registration
The Company may from time to time raise additional capital or make investments by issuing, in
public or private transactions, equity and debt securities. The availability and terms of any such
issuance will depend upon market and other conditions. As of June 30, 2007, the Company can issue
an aggregate of approximately $504.1 million of securities remaining under its currently effective
shelf registration statements.
Security Deposits and Letters of Credit
As of June 30, 2007, the Company had approximately $4.6 million in letters of credit, security
deposits, debt service reserves or capital replacement reserves for the benefit of the Company in
the event the obligated lessee or operator fails to make payments under the terms of their
respective lease or mortgage. Generally, the Company may, at its discretion and upon notification
to the operator or tenant, draw upon these instruments if there are any defaults under the leases
or mortgage notes.
Acquisitions and Dispositions in 2007
Asset Acquisitions
During the second quarter of 2007, the Company acquired for $0.9 million the real estate
assets of three partnerships, which owned three adjoining medical office buildings in Virginia.
31
During the first quarter of 2007, the Company acquired a 75,000 square foot building in
Tennessee for a total investment of $7.3 million, including $5.4 million in cash consideration and
the assumption of a mortgage note of $1.9 million.
Asset Dispositions
Senior Living Asset disposition
During the second quarter of 2007, the Company disposed of 35 properties, in which it had a
total gross investment of $197.2 million ($159.3 million, net). The Company received $222.0
million in cash proceeds from the disposal which included the repayment of 14 mortgage notes
receivable and notes receivable totaling $52.6 million.
During the first quarter of 2007, the Company disposed of 16 properties in which it had a
total gross investment of $99.6 million ($73.9 million, net). The Company received $121.6 million
in cash proceeds from the disposition which included the repayment of a mortgage note receivable
and a note receivable totaling $11.4 million.
As of June 30, 2007, the Company had recognized a net gain of approximately $37.6 million
relating to the disposition of the senior living assets. The proceeds received to date have been
used to pay the special dividend of $4.75 per share and to repay outstanding amounts on the
Unsecured Credit Facility due 2009. Cash proceeds from the dispositions remaining to be completed
will be used to repay outstanding amounts on the Unsecured Credit Facility due 2009.
Other Dispositions
During the second quarter of 2007, the Company sold a property in Tennessee in which it had a
total gross investment of $2.2 million ($1.9 million, net) pursuant to a purchase option exercised
by an operator. The Company received $2.1 million in cash proceeds and recognized a $0.2 million
net gain from the sale.
The Company made the decision to sell six other property investments in which the Company had
an $8.0 million gross investment ($5.5 million, net) at June 30, 2007. These six properties have
not been sold and remain in held for sale at June 30, 2007.
Purchase Options Exercised
In April 2007, pursuant to a purchase option exercised by an operator, the Company sold a
property in Tennessee for $2.1 million in cash. The Companys gross investment in the building was
approximately $2.2 million ($1.9 million, net).
In March 2007, an operator gave notice to the Company of its intent to purchase a building
from the Company pursuant to a purchase option. The Companys gross investment in the building was
approximately $46.4 million ($34.0 million, net) at June 30, 2007. The Company also had a mortgage
note payable on the building with a principal balance of $20.2 million at June 30, 2007 that the
Company would repay upon sale of the building. The parties have yet to agree on the terms of the
transaction and, accordingly, the Company is uncertain as to when the transaction might close, if
at all.
Construction in Progress
As of June 30, 2007, the Company had seven medical office buildings under development with
estimated completion dates ranging from the fourth quarter of 2007 through the fourth quarter of
2009 as shown in the table below (dollars in thousands).
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CIP Balance |
|
|
|
|
|
|
|
Estimated Completion Dates |
Number of |
|
at June 30, |
|
Remaining |
|
|
|
|
|
|
Properties |
|
2007 |
|
Commitment |
|
Total |
|
4Q 2007 |
|
3Q 2008 |
|
4Q 2008 |
|
2Q 2009 |
|
4Q 2009 |
|
7 |
|
$ |
28,515 |
|
|
$ |
158,802 |
|
|
$ |
187,317 |
|
|
$ |
24,914 |
|
|
$ |
27,172 |
|
|
$ |
31,043 |
|
|
$ |
30,610 |
|
|
$ |
73,578 |
|
Other Construction Commitments
Construction continues on a 61,000 square foot, $20.1 million medical office building in the
state of Washington. The project is being developed by a joint venture in which the Company holds a
75% non-controlling equity interest. Construction of the building is being funded by mortgage debt
of approximately $15.0 million and by partnership capital of approximately $5.1 million, of which
the Company will contribute $3.8 million. As of June 30, 2007, the Company had funded approximately
$3.3 million of its capital contribution. Completion of the building is expected in the third
quarter of 2007.
The Company also had various remaining first-generation tenant improvement obligations
totaling approximately $14.0 million as of June 30, 2007 related to properties that were developed
by the Company.
Dividends
During 2007, the Companys Board of Directors has declared common stock cash dividends as
shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share |
|
Date of |
|
|
|
Date Paid |
Dividend |
|
Amount |
|
Declaration |
|
Date of Record |
|
(* Payable) |
|
4th Quarter 2006 |
|
$ |
0.660 |
|
|
January 23, 2007 |
|
February 15, 2007 |
|
March 2, 2007 |
Special Dividend |
|
$ |
4.750 |
|
|
March 26, 2007 |
|
April 16, 2007 |
|
May 2, 2007 |
1st Quarter 2007 |
|
$ |
0.660 |
|
|
April 24, 2007 |
|
May 15, 2007 |
|
June 1, 2007 |
2nd Quarter 2007 |
|
$ |
0.385 |
|
|
July 24, 2007 |
|
August 15, 2007 |
|
* September 4, 2007 |
As described in the Companys Annual Report on Form 10-K for the year ended December 31, 2006
under the heading Risk Factors, the ability of the Company to pay dividends is dependent upon its
ability to generate funds from operations, cash flows, and to make accretive new investments. The
special dividend of $4.75 per share declared on March 26, 2007 was paid with proceeds from the
disposition of the senior living assets.
Cash dividends paid by the Company during 2007, excluding the special dividend which was paid
with proceeds from the sale of assets, have exceeded its cash flows from operations. The dividends
paid in excess of cash flows from operations were funded by the Companys Unsecured Credit Facility
due 2009. Commensurate with the smaller asset base from the disposal of the portfolio of the
senior living assets, the Company reset its dividend for the second quarter of 2007 to $1.54 per
share, per annum.
Liquidity
Net cash provided by operating activities was $42.4 million and $51.0 million for the six
months ended June 30, 2007 and 2006, respectively. Cash flow from operations for 2007 reflects a
reduction in revenues from the disposition of the senior living portfolio as well as fluctuations
in receivables, payables and accruals. The Companys cash flows are dependent upon rental rates on
leases, occupancy levels of the multi-tenanted buildings, acquisition and disposition activity
during the year, and the level of operating expenses, among other factors.
The Company is in the process of disposing of its portfolio of senior living assets which has
and will continue to impact the Companys cash flows from operations for 2007. The Company has
used the
33
proceeds received from the disposal to fund repayments on its Unsecured Credit Facility due
2009 and the payment of a one-time special dividend. The proceeds from the remaining disposals
will be used to fund repayments on the Unsecured Credit Facility due 2009. Beginning with the
second quarter of 2007, the Company reset its dividend to an amount commensurate with the smaller
asset base resulting from the disposition.
The Company plans to continue to meet its liquidity needs, including funding additional
investments in 2007, paying dividends, and funding debt service, with cash flows from operations,
proceeds from the Unsecured Credit Facility due 2009, proceeds of mortgage notes receivable
repayments, and proceeds from sales of real estate investments or additional capital market
financing. The Company believes that its liquidity and sources of capital are adequate to satisfy
its cash requirements. The Company cannot, however, be certain that these sources of funds will be
available at a time and upon terms acceptable to the Company in sufficient amounts to meet its
liquidity needs.
Impact of Inflation
Inflation has not significantly affected the Companys earnings due to the moderate inflation
rate in recent years and the fact that most of the Companys leases and financial support
arrangements require tenants and sponsors to pay all or some portion of the increases in operating
expenses, thereby reducing the Companys risk of the adverse effects of inflation. In addition,
inflation will have the effect of increasing gross revenue the Company is to receive under the
terms of certain leases and financial support arrangements. Leases and financial support
arrangements vary in the remaining terms of obligations, further reducing the Companys risk of any
adverse effects of inflation. Interest payable under the Unsecured Credit Facility due 2009 is
calculated at a variable rate; therefore, the amount of interest payable under the unsecured credit
facility will be influenced by changes in short-term rates, which tend to be sensitive to
inflation. Generally, changes in inflation and interest rates tend to move in the same direction.
During periods where interest rate increases outpace inflation, the Companys operating results
should be negatively impacted. Conversely, when increases in inflation outpace increases in
interest rates, the Companys operating results should be positively impacted.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a current
or future material effect on the Companys financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Cautionary Language Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q and other materials the Company has filed or may file with
the Securities and Exchange Commission, as well as information included in oral statements or other
written statements made, or to be made, by senior management of the Company, contain, or will
contain, disclosures which are forward-looking statements. Forward-looking statements include
all statements that do not relate solely to historical or current facts and can be identified by
the use of words such as may, will, expect, believe, intend, plan, estimate,
project, continue, should, anticipate and other comparable terms. These forward-looking
statements are based on the current plans and expectations of management and are subject to a
number of risks and uncertainties that could significantly affect the Companys current plans and
expectations and future financial condition and results. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Shareholders and investors are cautioned not to unduly rely on such
forward-looking statements when evaluating the information presented in the Companys filings and
reports. For a detailed discussion of the Companys risk factors, please refer to the Companys
filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K for
the year ended December 31, 2006.
34
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt and
mortgage notes and other notes receivable. Management uses regular monitoring of market conditions
and analysis techniques to manage this risk. Additionally, from time to time, the Company may
utilize interest rate swaps to either (i) convert fixed rates to variable rates in order to hedge
the exposure related to changes in the fair value of obligations, or (ii) convert variable rates to
fixed rates in order to hedge risks associated with future cash flows.
At June 30, 2007, approximately $651.1 million, or 83.0%, of the Companys total debt bore
interest at fixed rates. Additionally, the Companys mortgage and other notes receivable
portfolio, totaling $17.4 million, bore interest at fixed rates.
The following table provides information regarding the sensitivity of certain of the Companys
financial instruments, as described above, to market conditions and changes resulting from changes
in interest rates. For purposes of this analysis, sensitivity is demonstrated based on
hypothetical 10% changes in the underlying market rates (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Earnings and Cash Flows |
|
|
Outstanding |
|
Calculated |
|
|
|
|
Principal Balance |
|
Annual Interest |
|
Assuming 10% |
|
Assuming 10% |
|
|
as of |
|
Expense |
|
Increase in Market |
|
Decrease in Market |
|
|
June 30, 2007 |
|
(1) |
|
Interest Rates |
|
Interest Rates |
|
|
|
Variable Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Credit
Facility due 2009 ($400
Million) |
|
$ |
133,000 |
|
|
$ |
8,273 |
|
|
$ |
(708 |
) |
|
$ |
708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
Carrying Value |
|
|
|
|
|
Assuming 10% |
|
Assuming 10% |
|
|
|
|
at |
|
|
|
|
|
Increase in Market |
|
Decrease in Market |
|
December 31, |
|
|
June 30, 2007 |
|
June 30, 2007 |
|
Interest Rates |
|
Interest Rates |
|
2006 (2) |
|
|
|
Fixed Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes due 2011,
including premium |
|
$ |
300,975 |
|
|
$ |
308,527 |
|
|
$ |
303,481 |
|
|
$ |
313,687 |
|
|
$ |
312,777 |
|
Senior Notes due 2014,
net of discount |
|
|
298,906 |
|
|
|
283,615 |
|
|
|
275,684 |
|
|
|
291,906 |
|
|
|
288,434 |
|
Mortgage Notes Payable |
|
|
51,203 |
|
|
|
52,191 |
|
|
|
50,636 |
|
|
|
53,639 |
|
|
|
61,688 |
|
|
|
|
|
|
$ |
651,084 |
|
|
$ |
644,333 |
|
|
$ |
629,801 |
|
|
$ |
659,232 |
|
|
$ |
662,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes Receivable |
|
$ |
16,886 |
|
|
$ |
16,748 |
|
|
$ |
15,859 |
|
|
$ |
17,705 |
|
|
$ |
70,389 |
|
Other Notes Receivable |
|
|
513 |
|
|
|
504 |
|
|
|
478 |
|
|
|
532 |
|
|
|
9,233 |
|
|
|
|
|
|
$ |
17,399 |
|
|
$ |
17,252 |
|
|
$ |
16,337 |
|
|
$ |
18,237 |
|
|
$ |
79,622 |
|
|
|
|
|
|
|
(1) |
|
Annual interest expense is calculated using the market rate as of June 30, 2007, or 6.22%, and assumes a constant principal balance. |
|
(2) |
|
Fair values as of December 31, 2006 represent fair values of obligations or receivables that were outstanding as of that date, and do not reflect the effect of any
subsequent changes in principal balances and/or additions or extinguishments of instruments. |
35
Item 4. Controls and Procedures
Disclosure Controls and Procedures. The Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Companys disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the
end of the period covered by this report. Management has excluded from its evaluation the
effectiveness of the disclosure controls of the variable interest entities (VIEs) consolidated by
the Company since it does not have the contractual right, authority or ability, in practice, to
assess the VIEs disclosure controls and does not have the ability to dictate or modify those
controls. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Companys disclosure controls and
procedures were effective in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports it files or submits under the
Exchange Act.
Changes in Internal Control over Financial Reporting. There have not been any changes in the
Companys internal control over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the Companys internal control
over financial reporting.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
On October 9, 2003, HR Acquisition I Corporation (f/k/a Capstone Capital Corporation,
Capstone), a wholly owned affiliate of the Company, was served with the Third Amended Verified
Complaint in a shareholder derivative suit which was originally filed on August 28, 2002 in the
Jefferson County, Alabama Circuit Court by a shareholder of HealthSouth Corporation. The suit
alleges that certain officers and directors of HealthSouth, who were also officers and directors of
Capstone, sold real estate properties from HealthSouth to Capstone and then leased the properties
back to HealthSouth at artificially high values, in violation of their fiduciary obligations to
HealthSouth. The Company acquired Capstone in a merger transaction in October, 1998. None of the
Capstone officers and directors remained in their positions following the Companys acquisition of
Capstone. The complaint seeks unspecified compensatory and punitive damages. Following the recent
settlement of a number of claims unrelated to the claims against Capstone, the court lifted a
lengthy stay on discovery in April 2007 and discovery is now proceeding. The Company will defend
itself vigorously and believes that the claims brought by the plaintiff are not meritorious.
In May 2006, Methodist Health System Foundation, Inc. (the Foundation) filed suit against a
wholly owned affiliate of the Company in the Civil District Court for Orleans Parish, Louisiana.
The Foundation is the sponsor under financial support agreements which support two of the Companys
medical office buildings adjoining the Methodist Hospital in east New Orleans. The Foundation
received substantial cash proceeds from the sale of the Pendleton Memorial Methodist Hospital to an
affiliate of Universal Health Services, Inc. in 2003. The Foundations assets and income are not
primarily dependent upon the operations of Methodist Hospital, which has remained closed since
Hurricane Katrina struck in August 2005. The Foundations suit alleges that Hurricane Katrina and
its aftermath should relieve the Foundation of its obligations under the financial support
agreements. The agreements do not contain any express provision allowing for termination upon a
casualty event. As such, the Company has continued to accrue revenue under its financial support
agreements with the Foundation, totaling approximately $3.3 million (net) as of June 30, 2007,
which remain unpaid by the Foundation. If the Foundation is relieved of its obligations to pay
such amounts to the Company or the Company is unable to collect certain of these amounts from its
insurance carriers, the Companys cash flows and results of operations could be negatively
impacted. The Company also has a $1.2 million receivable balance as of June 30, 2007, due from the
Companys insurance company, to partially reimburse the Company for costs incurred related to
rebuilding and reopening its medical office buildings which were damaged from Hurricane Katrina.
If this receivable is not collected from the Companys insurance company, the Companys cash flows
and results of operations could be negatively impacted. The Company believes the Foundations
claims are not meritorious and will vigorously defend the enforceability of the financial support
agreements.
The Company is not aware of any other pending or threatened litigation that, if resolved
against the Company, would have a material adverse effect on the Companys financial condition or
results of operations.
Item 1A. Risk Factors
In addition to the other information set forth in this report, an investor should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006, which could materially affect the Companys
business, financial condition or future results. The risks as described in the Companys Annual
Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties
not currently known to management or that management currently deems immaterial also may
materially, adversely affect the Companys business, financial condition or operating results.
37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 15, 2007, the Company granted a total of 29,332 shares of restricted stock to its
executive officers. The grants were made pursuant to the 2007 Incentive Plan and were valued at
$32.65 per share, which was the closing price of the Companys common stock on that day. All of
the shares are subject to an eight-year vesting period, during which they are subject to
restrictions on transfer and forfeiture conditions. The grants were made pursuant to an exemption
from registration contained in section 4(2) of the Securities Act of 1933, as amended.
Item 4. Submission of Matters to a Vote of Security Holders
The Companys annual meeting of shareholders was held on May 15, 2007, and its shareholders
voted on the following matters.
(a) Marliese E. Mooney, Edwin B. Morris III and John Knox Singleton were elected to serve as
Directors. The vote was as follows:
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Cast |
|
|
|
|
Director |
|
Term |
|
Votes Cast |
|
Against or |
|
|
|
|
Class |
|
Expires |
|
in Favor |
|
Withheld |
|
Non Votes |
Marliese E. Mooney |
|
|
2 |
|
|
|
2010 |
|
|
|
42,121,257 |
|
|
|
612,517 |
|
|
|
5,086,443 |
|
Edwin B. Morris III |
|
|
2 |
|
|
|
2010 |
|
|
|
42,117,326 |
|
|
|
616,448 |
|
|
|
5,086,443 |
|
John Knox Singleton |
|
|
2 |
|
|
|
2010 |
|
|
|
42,122,955 |
|
|
|
610,819 |
|
|
|
5,086,443 |
|
The following Class 1 and Class 3 Directors continued in office following the meeting:
|
|
|
|
|
|
|
Term Expires |
David R. Emery |
|
|
2008 |
|
Batey M. Gresham |
|
|
2008 |
|
Dan S. Wilford |
|
|
2008 |
|
Charles Raymond Fernandez, M.D. |
|
|
2009 |
|
Errol L. Biggs, Ph. D. |
|
|
2009 |
|
Bruce D. Sullivan |
|
|
2009 |
|
(b) The shareholders voted for the approval of the Healthcare Realty Trust Incorporated
2007 Employees Stock Incentive Plan. An affirmative vote of a majority of the votes cast
was required for approval of this plan, provided that the number of votes cast represented
at least 50% of the shares entitled to vote. The vote was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Cast in |
|
|
|
Votes Cast |
|
Abstentions/Non |
Favor |
|
|
|
Against |
|
Votes |
|
23,013,033 |
|
|
|
|
|
8,280,237 |
|
|
|
16,526,947 |
|
(c) The shareholders ratified the appointment of BDO Seidman, LLP as the Companys
independent auditors for the fiscal year ended December 31, 2007, by the following vote:
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes Cast in |
|
|
|
Votes Cast |
|
Abstentions/Non |
Favor |
|
|
|
Against |
|
Votes |
|
42,461,579 |
|
|
|
|
|
147,959 |
|
|
|
5,210,679 |
|
38
Item 6. Exhibits
|
|
|
Exhibit 2.1
|
|
Agreement of Sale and Purchase dated as of April 25, 2007 between the Company and Nationwide Health Properties,
Inc. (filed herewith) |
|
|
|
Exhibit 3.1
|
|
Second Articles of Amendment and Restatement of the Registrant (1) |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws of the Registrant (2) |
|
|
|
Exhibit 4.1
|
|
Specimen Stock Certificate (1) |
|
|
|
Exhibit 4.2
|
|
Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly
First Union National Bank, as Trustee) (3) |
|
|
|
Exhibit 4.3
|
|
First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as
Trustee, (formerly First Union National Bank, as Trustee) (3) |
|
|
|
Exhibit 4.4
|
|
Form of 8.125% Senior Note Due 2011 (3) |
|
|
|
Exhibit 4.5
|
|
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association,
as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4) |
|
|
|
Exhibit 4.6
|
|
Form of 5.125% Senior Note Due 2014 (4) |
|
|
|
Exhibit 10.1
|
|
Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative
Agent, and the other lenders named herein (5) |
|
|
|
Exhibit 10.2
|
|
Healthcare Realty Trust Incorporated 2007 Employees Stock Incentive Plan (6) |
|
|
|
Exhibit 11
|
|
Statement re: Computation of per share earnings (filed herewith in Note 6 to the Condensed Consolidated Financial
Statements) |
|
|
|
Exhibit 31.1
|
|
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith) |
|
|
|
Exhibit 31.2
|
|
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith) |
|
|
|
Exhibit 32
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith) |
|
|
|
(1) |
|
Filed as an exhibit to the Companys Registration Statement on Form S-11
(Registration No. 33-60506) previously filed pursuant to the Securities Act of 1933 and
hereby incorporated by reference. |
|
(2) |
|
Filed as an exhibit to the Companys Form 10-Q for the quarter ended September
30, 1999 and hereby incorporated by reference. |
|
(3) |
|
Filed as an exhibit to the Companys Form 8-K filed May 17, 2001 and hereby
incorporated by reference. |
|
(4) |
|
Filed as an exhibit to the Companys Form 8-K filed March 29, 2004 and hereby
incorporated by reference. |
|
(5) |
|
Filed as an exhibit to the Companys Form 8-K filed January 26, 2006 and hereby
incorporated by reference. |
|
(6) |
|
Filed as an exhibit to the Companys Form 8-K filed May 21, 2007 and hereby
incorporated by reference. |
39
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/ SCOTT W. HOLMES
|
|
|
|
Scott W. Holmes |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
Date:
August 9, 2007
40
Exhibit Index
|
|
|
Exhibit |
|
Description |
Exhibit 2.1
|
|
Agreement of Sale and Purchase dated as of April 25, 2007 between the Company and Nationwide Health Properties,
Inc. (filed herewith) |
|
|
|
Exhibit 3.1
|
|
Second Articles of Amendment and Restatement of the Registrant (1) |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws of the Registrant (2) |
|
|
|
Exhibit 4.1
|
|
Specimen Stock Certificate (1) |
|
|
|
Exhibit 4.2
|
|
Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as Trustee, (formerly
First Union National Bank, as Trustee) (3) |
|
|
|
Exhibit 4.3
|
|
First Supplemental Indenture, dated as of May 15, 2001, by the Company to HSBC Bank USA, National Association, as
Trustee, (formerly First Union National Bank, as Trustee) (3) |
|
|
|
Exhibit 4.4
|
|
Form of 8.125% Senior Note Due 2011 (3) |
|
|
|
Exhibit 4.5
|
|
Second Supplemental Indenture, dated as of March 30, 2004, by the Company to HSBC Bank USA, National Association,
as Trustee (formerly Wachovia Bank, National Association, as Trustee) (4) |
|
|
|
Exhibit 4.6
|
|
Form of 5.125% Senior Note Due 2014 (4) |
|
|
|
Exhibit 10.1
|
|
Credit Agreement, dated as of January 25, 2006, by and among the Company, Bank of America, N.A., as Administrative
Agent, and the other lenders named herein (5) |
|
|
|
Exhibit 10.2
|
|
Healthcare Realty Trust Incorporated 2007 Employees Stock Incentive Plan (6) |
|
|
|
Exhibit 11
|
|
Statement re: Computation of per share earnings (filed herewith in Note 6 to the Condensed Consolidated Financial
Statements) |
|
|
|
Exhibit 31.1
|
|
Certification of the Chief Executive Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith) |
|
|
|
Exhibit 31.2
|
|
Certification of the Chief Financial Officer of Healthcare Realty Trust Incorporated pursuant to Rule 13a-14 of
the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith) |
|
|
|
Exhibit 32
|
|
Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (furnished herewith) |
|
|
|
(1) |
|
Filed as an exhibit to the Companys Registration Statement on Form S-11 (Registration
No. 33-60506) previously filed pursuant to the Securities Act of 1933 and hereby
incorporated by reference. |
|
(2) |
|
Filed as an exhibit to the Companys Form 10-Q for the quarter ended September 30, 1999
and hereby incorporated by reference. |
|
(3) |
|
Filed as an exhibit to the Companys Form 8-K filed May 17, 2001 and hereby
incorporated by reference. |
|
(4) |
|
Filed as an exhibit to the Companys Form 8-K filed March 29, 2004 and hereby
incorporated by reference. |
|
(5) |
|
Filed as an exhibit to the Companys Form 8-K filed January 26, 2006 and hereby
incorporated by reference. |
|
(6) |
|
Filed as an exhibit to the Companys Form 8-K filed May 21, 2007 and hereby
incorporated by reference. |
41