Healthcare Realty Trust Incorporated
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x |
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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, 2008
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: 001-11852
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
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(I.R.S. Employer |
incorporation or organization)
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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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller
reporting company)
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
July 31, 2008, 50,758,481 shares of the Registrants Common Stock were outstanding.
HEALTHCARE REALTY TRUST INCORPORATED
FORM 10-Q
June 30, 2008
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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2008 |
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2007 |
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ASSETS |
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Real estate properties: |
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Land |
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$ |
99,386 |
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$ |
102,321 |
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Buildings, improvements and lease intangibles |
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1,492,638 |
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1,483,547 |
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Personal property |
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16,543 |
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16,305 |
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Construction in progress |
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101,345 |
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94,457 |
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1,709,912 |
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1,696,630 |
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Less accumulated depreciation |
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(363,566 |
) |
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(345,457 |
) |
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Total real estate properties, net |
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1,346,346 |
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1,351,173 |
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Cash and cash equivalents |
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4,882 |
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8,519 |
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Mortgage notes receivable |
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37,285 |
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30,117 |
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Assets held for sale and discontinued operations, net |
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20,229 |
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15,639 |
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Other assets, net |
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81,358 |
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90,044 |
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Total assets |
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$ |
1,490,100 |
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$ |
1,495,492 |
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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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$ |
795,652 |
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$ |
785,289 |
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Accounts payable and accrued liabilities |
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34,014 |
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37,376 |
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Liabilities of discontinued operations |
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4,511 |
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34 |
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Other liabilities |
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39,947 |
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40,798 |
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Total liabilities |
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874,124 |
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863,497 |
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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, $.01 par value; 150,000,000 shares authorized; 50,757,916
and 50,691,331 shares issued and outstanding at
June 30, 2008 and December 31, 2007, respectively |
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508 |
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507 |
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Additional paid-in capital |
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1,288,552 |
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1,286,071 |
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Accumulated other comprehensive loss |
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(4,346 |
) |
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(4,346 |
) |
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Cumulative net income |
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715,748 |
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695,182 |
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Cumulative dividends |
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(1,384,486 |
) |
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(1,345,419 |
) |
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Total stockholders equity |
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615,976 |
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631,995 |
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Total liabilities and stockholders equity |
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$ |
1,490,100 |
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$ |
1,495,492 |
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The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, 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, 2008 and 2007
(Dollars in thousands, except per share data)
(Unaudited)
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2008 |
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2007 |
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REVENUES |
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Master lease rent |
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$ |
14,787 |
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$ |
14,456 |
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Property operating |
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34,886 |
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31,803 |
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Straight-line rent |
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(137 |
) |
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9 |
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Mortgage interest |
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542 |
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460 |
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Other operating |
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4,990 |
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4,786 |
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55,068 |
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51,514 |
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EXPENSES |
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General and administrative |
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5,863 |
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5,220 |
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Property operating |
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20,112 |
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18,179 |
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Bad debts, net of recoveries |
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115 |
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77 |
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Interest |
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11,209 |
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12,153 |
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Depreciation |
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12,385 |
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10,883 |
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Amortization |
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575 |
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1,204 |
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50,259 |
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47,716 |
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INCOME FROM CONTINUING OPERATIONS |
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4,809 |
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3,798 |
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DISCONTINUED OPERATIONS |
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Income from discontinued operations |
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1,242 |
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2,363 |
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Gain on sales of real estate properties |
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7,715 |
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7,482 |
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INCOME FROM DISCONTINUED OPERATIONS |
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8,957 |
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9,845 |
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NET INCOME |
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$ |
13,766 |
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$ |
13,643 |
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Basic Earnings Per Common Share |
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Income from continuing operations per common share |
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$ |
0.10 |
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$ |
0.08 |
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Discontinued operations per common share |
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0.18 |
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0.21 |
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Net income per common share |
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$ |
0.28 |
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$ |
0.29 |
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Diluted Earnings Per Common Share |
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Income from continuing operations per common share |
|
$ |
0.10 |
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|
$ |
0.08 |
|
Discontinued operations per common share |
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|
0.17 |
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|
0.21 |
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Net income per common share |
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$ |
0.27 |
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$ |
0.29 |
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Weighted Average Common Shares Outstanding Basic |
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49,431,724 |
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46,603,643 |
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Weighted Average Common Shares Outstanding Diluted |
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50,474,762 |
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47,577,334 |
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Dividends Declared, per Common Share, During the Period |
|
$ |
0.385 |
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$ |
0.660 |
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The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, 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, 2008 and 2007
(Dollars in thousands, except per share data)
(Unaudited)
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2008 |
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2007 |
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REVENUES |
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Master lease rent |
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$ |
30,238 |
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$ |
29,354 |
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Property operating |
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|
68,911 |
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|
63,343 |
|
Straight-line rent |
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|
(204 |
) |
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|
43 |
|
Mortgage interest |
|
|
1,067 |
|
|
|
812 |
|
Other operating |
|
|
9,226 |
|
|
|
9,782 |
|
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|
|
|
|
|
|
|
|
|
109,238 |
|
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|
103,334 |
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EXPENSES |
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|
|
|
|
|
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General and administrative |
|
|
11,908 |
|
|
|
11,395 |
|
Property operating |
|
|
39,135 |
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|
|
36,163 |
|
Bad debts, net of recoveries |
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|
333 |
|
|
|
82 |
|
Interest |
|
|
22,407 |
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|
|
25,558 |
|
Depreciation |
|
|
24,430 |
|
|
|
21,567 |
|
Amortization |
|
|
1,169 |
|
|
|
2,620 |
|
|
|
|
|
|
|
|
|
|
|
99,382 |
|
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|
97,385 |
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INCOME FROM CONTINUING OPERATIONS |
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|
9,856 |
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|
5,949 |
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DISCONTINUED OPERATIONS |
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|
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Income from discontinued operations |
|
|
2,387 |
|
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|
8,959 |
|
Impairments |
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|
(29 |
) |
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|
(2,792 |
) |
Gain on sales of real estate properties |
|
|
8,352 |
|
|
|
37,871 |
|
|
|
|
|
|
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|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
10,710 |
|
|
|
44,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
NET INCOME |
|
$ |
20,566 |
|
|
$ |
49,987 |
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|
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|
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|
Basic Earnings Per Common Share |
|
|
|
|
|
|
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|
Income from continuing operations per common share |
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Discontinued operations per common share |
|
|
0.22 |
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|
|
0.94 |
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Net income per common share |
|
$ |
0.42 |
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|
$ |
1.07 |
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|
Diluted Earnings Per Common Share |
|
|
|
|
|
|
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|
Income from continuing operations per common share |
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Discontinued operations per common share |
|
|
0.21 |
|
|
|
0.92 |
|
|
|
|
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|
Net income per common share |
|
$ |
0.41 |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Basic |
|
|
49,422,391 |
|
|
|
46,575,554 |
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|
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|
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|
Weighted Average Common Shares Outstanding Diluted |
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|
50,442,808 |
|
|
|
47,587,624 |
|
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|
|
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|
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|
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|
Dividends Declared, per Common Share, During the Period |
|
$ |
0.77 |
|
|
$ |
6.07 |
|
|
|
|
|
|
|
|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, 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, 2008 and 2007
(Dollars in thousands)
(Unaudited)
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|
2008 |
|
|
2007 |
|
Operating Activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
20,566 |
|
|
$ |
49,987 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
26,480 |
|
|
|
27,396 |
|
Stock-based compensation |
|
|
2,403 |
|
|
|
2,666 |
|
Straight-line rent receivable |
|
|
199 |
|
|
|
(95 |
) |
Straight-line rent liability |
|
|
86 |
|
|
|
1,095 |
|
Gain on sales of real estate properties |
|
|
(8,352 |
) |
|
|
(37,871 |
) |
Gain on repurchase of notes payable |
|
|
(9 |
) |
|
|
|
|
Impairments |
|
|
29 |
|
|
|
2,792 |
|
Equity in losses from unconsolidated LLCs |
|
|
148 |
|
|
|
252 |
|
Provision for bad debts, net of recoveries |
|
|
331 |
|
|
|
82 |
|
State income taxes paid, net of refunds |
|
|
(621 |
) |
|
|
(41 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Other assets |
|
|
5,866 |
|
|
|
(2,001 |
) |
Accounts payable and accrued liabilities |
|
|
(3,686 |
) |
|
|
(6,777 |
) |
Other liabilities |
|
|
(717 |
) |
|
|
4,906 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
42,723 |
|
|
|
42,391 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Acquisition and development of real estate properties |
|
|
(37,694 |
) |
|
|
(37,963 |
) |
Funding of mortgages and notes receivable |
|
|
(7,181 |
) |
|
|
(4,071 |
) |
Distributions received from unconsolidated LLCs |
|
|
867 |
|
|
|
524 |
|
Proceeds from sales of real estate |
|
|
22,040 |
|
|
|
281,699 |
|
Proceeds from mortgages and notes receivable repayments |
|
|
79 |
|
|
|
65,519 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(21,889 |
) |
|
|
305,708 |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Borrowings on notes and bonds payable |
|
|
90,000 |
|
|
|
304,839 |
|
Repayments on notes and bonds payable |
|
|
(69,825 |
) |
|
|
(365,661 |
) |
Repurchase of notes payable |
|
|
(5,332 |
) |
|
|
|
|
Special dividend paid |
|
|
|
|
|
|
(227,157 |
) |
Quarterly dividends paid |
|
|
(39,067 |
) |
|
|
(63,165 |
) |
Proceeds from issuance of common stock |
|
|
361 |
|
|
|
1,767 |
|
Common stock redemption |
|
|
(282 |
) |
|
|
(30 |
) |
Credit facility amendment fee |
|
|
(326 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(24,471 |
) |
|
|
(349,407 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents |
|
|
(3,637 |
) |
|
|
(1,308 |
) |
Cash and cash equivalents, beginning of period |
|
|
8,519 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
4,882 |
|
|
$ |
642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
25,201 |
|
|
$ |
27,008 |
|
Capitalized interest |
|
|
3,110 |
|
|
|
1,552 |
|
Capital expenditures accrued |
|
|
7,370 |
|
|
|
2,130 |
|
Mortgage note payable assumed |
|
|
|
|
|
|
1,840 |
|
The accompanying notes, together with the Notes to the Consolidated Financial Statements included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2007, are an integral part of these financial statements.
4
Healthcare Realty Trust Incorporated
Notes to Condensed Consolidated Financial Statements
June 30, 2008
(Unaudited)
Note 1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated (the Company) is a real estate investment trust
(REIT) that integrates owning, developing, financing and managing income-producing real estate
properties associated primarily with the delivery of outpatient healthcare services throughout the
United States. The Company had investments of approximately $1.8 billion in 181 real estate
properties and mortgages as of June 30, 2008, excluding assets classified as held for sale and
including investments in three unconsolidated joint venture limited liability companies (LLCs).
The Companys 174 owned real estate properties, excluding assets classified as held for sale, are
comprised of six facility types, located in 24 states, totaling approximately 10.8 million square
feet. As of June 30, 2008, the Company provided property management services to approximately 7.2
million square feet nationwide.
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 controlled or controls the
operating activities and receives substantially all of the economic benefits. The Company did not
consolidate any variable interest entities during 2008 as the real estate properties related to its
variable interest entities were sold during 2007 with the sale of the senior living assets.
The Company accounts for its joint venture investments in accordance with the American
Institute of Certified Public Accountants Statement of Position 78-9, Accounting for Investments
in Real Estate Ventures, which provides guidance on whether an entity should consolidate an
investment or account for it under the equity or cost methods.
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, 2007.
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, 2007. This interim financial information does not necessarily represent or indicate what the
operating results will be for the year ending December 31, 2008 due to many reasons including, but
not limited to, acquisitions, dispositions, capital financing transactions, changes in interest
rates and the effects of trends.
5
Variable Interest Entities
In accordance with Financial Accounting Standards Board (FASB) Financial Interpretation No.
46R, Consolidation of Variable Interest Entities an Interpretation of Accounting Research Bulletin
No. 51 (FIN No. 46R), a company must evaluate whether certain relationships it has with other
entities constitute a variable interest in a variable interest entity (VIE). Prior to the sale
of the Companys senior living assets in 2007, the Company had concluded it had a variable interest
in 21 VIEs and had also concluded that it was the primary beneficiary in six of the 21 VIEs.
Therefore, in accordance with FIN No. 46R, the Company had consolidated the six entities into its
Consolidated Financial Statements. As such, the Companys Condensed Consolidated Income Statement
for the three and six months ended June 30, 2007 includes, as part of discontinued operations, the
operations of the six VIEs through their respective disposition dates. As of June 30, 2008, the
Company concluded that it does not have any relationships with other entities constituting a
variable interest in any VIEs.
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.
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 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.
Reclassifications
Certain reclassifications have been made in the Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2007 to conform to the June 30, 2008 presentation.
Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB No. 104). SAB No. 104 includes four
criteria that must be met before revenue is realized or realizable and earned. The Company begins
recognizing revenue when all four criteria have been met, such as collectibility is reasonably
assured and the tenant has taken possession of or controls the physical use of the leased asset.
The Company derives most of its revenues from its real estate property and mortgage notes
receivable 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 rent, 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 master lease
6
arrangements with tenants is included in master lease rent and rental income from properties with
multiple tenant lease arrangements is included in property operating income on the Companys
Condensed Consolidated Statements of Income.
Interest Income
Mortgage interest income and notes receivable interest income are recognized based on the
interest rates and maturity date or amortized period specific to each note.
Property operating income
As of June 30, 2008, the Company had property operating agreements, between the
Company and a sponsoring health system, relating to 14 of the Companys 174 owned real estate
properties. The property operating agreements obligate the sponsoring health system to provide to
the Company a minimum return on the Companys investment in the property in return for the right to
be involved in the operating decisions of the property, including tenancy. If the minimum return
is not achieved through normal operations of the property, the sponsor is responsible to pay to the
Company the shortfall under the terms of these agreements. The Company recognizes the shortfall
income in other operating income on the Companys Condensed Consolidated Statements of Income.
Accumulated Other Comprehensive Loss
SFAS No. 130, Reporting Comprehensive Income, requires that foreign currency translation
adjustments, minimum pension liability adjustments, unrealized gains or losses on
available-for-sale securities, as well as other items, be included in comprehensive income (loss).
The Company includes in accumulated other comprehensive loss its cumulative adjustment related to
the adoption and subsequent application 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), which is
generally recognized in the fourth quarter of each year.
Total comprehensive income for the three and six months ended June 30, 2008 and 2007 is
detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
20,566 |
|
|
$ |
49,987 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
20,566 |
|
|
$ |
50,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
The Company must pay certain state income taxes which are generally included in general and
administrative expense on the Companys Condensed Consolidated Statements of Income.
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.
Incentive Plans
The Company follows the provisions of SFAS No. 123(R), Share-Based Payment, for accounting
for its stock-based awards. As of June 30, 2008, the Company had issued and outstanding various
employee and non-employee stock-based awards. These awards included restricted stock issued to
employees pursuant to the Companys employee stock incentive plans, restricted stock issued to its
Board
7
of Directors under its non-employee director incentive plan, and options issued to employees
pursuant to its employee stock purchase plan.
Accounting for Defined Benefit Pension Plans
The Company accounts for its pension plans in accordance with SFAS No. 158. 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.
Operating Leases
As described in more detail in the Companys Annual Report on Form 10-K for the year ended
December 31, 2007, 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 and Assets Held for Sale
The Company periodically sells properties based on market conditions and the exercise of
purchase options by tenants. 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 on the
Companys Condensed Consolidated Balance Sheet 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. As of June 30, 2008, the Company had classified eight
real estate properties as held for sale.
Land Held for Development
Land held for development, which is included in construction in progress on the Companys
Condensed Consolidated Balance Sheet, includes parcels of land owned by the Company, upon which the
Company intends to develop and own medical office and outpatient healthcare properties. See Note 6
for a detail of the Companys land held for development.
New Pronouncements
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, (SFAS No. 157),
which is effective for fiscal years beginning after November 15, 2007. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value, and expands disclosures about fair value
measurements. The statement applies to other current pronouncements that require or permit fair
value measurements but does not require any new fair value measurements. In February 2008, the
FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157, which
delayed the effective date of SFAS No. 157 for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), until fiscal years beginning after November 15, 2008. The Company
adopted SFAS No. 157 on January 1, 2008 for its financial assets and liabilities. The Company
does not anticipate that the full adoption of SFAS No. 157 will have a significant impact on the
Companys financial position or its results of operations.
8
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, which became effective for the Company
on January 1, 2008, 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. The Company has elected not to report any of its
financial assets or liabilities at fair value. As such, SFAS No. 159 has not had an impact on the
Companys Condensed Consolidated Financial Statements.
Business Combinations and Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS No.
141(R)) and SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, (SFAS
No. 160). These standards were designed to improve, simplify and converge internationally the
accounting for business combinations and the reporting of noncontrolling interests in consolidated
financial statements. SFAS No. 141(R) requires an acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and other users all of
the information needed to evaluate and understand the nature and financial effect of the business
combination. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. SFAS No. 160 also eliminates the
diversity that currently exists in accounting for transactions between an entity and noncontrolling
interests by requiring they be treated as equity transactions. SFAS No. 141(R) and SFAS No. 160
will be effective for fiscal years beginning after December 15, 2008. The Company does not expect
the adoption of these new standards to impact its Consolidated Financial Statements.
Note 2. Real Estate and Mortgage Notes Receivable Investments
The Company had investments of approximately $1.8 billion in 181 real estate properties and
mortgage notes receivable as of June 30, 2008, excluding assets classified as held for sale and
including investments in three unconsolidated limited liability companies. The Companys 174 owned
real estate properties, excluding assets classified as held for sale, are located in 24 states with
approximately 10.8 million total square feet. The table below details the Companys investments.
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
Square |
|
(Dollars and Square Feet in thousands) |
|
Investments |
|
|
Amount |
|
|
% |
|
|
Feet |
|
Owned properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
9 |
|
|
$ |
67,729 |
|
|
|
3.7 |
% |
|
|
494 |
|
Physician clinics |
|
|
20 |
|
|
|
137,673 |
|
|
|
7.8 |
% |
|
|
803 |
|
Ambulatory care/surgery |
|
|
7 |
|
|
|
39,963 |
|
|
|
2.3 |
% |
|
|
160 |
|
Specialty outpatient |
|
|
6 |
|
|
|
27,700 |
|
|
|
1.6 |
% |
|
|
118 |
|
Specialty inpatient |
|
|
13 |
|
|
|
232,469 |
|
|
|
13.2 |
% |
|
|
977 |
|
Other |
|
|
10 |
|
|
|
43,751 |
|
|
|
2.5 |
% |
|
|
498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65 |
|
|
|
549,285 |
|
|
|
31.1 |
% |
|
|
3,050 |
|
Financial support agreements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
14 |
|
|
|
150,398 |
|
|
|
8.5 |
% |
|
|
1,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
150,398 |
|
|
|
8.5 |
% |
|
|
1,048 |
|
Multi-tenanted with occupancy leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
79 |
|
|
|
871,983 |
|
|
|
49.5 |
% |
|
|
6,215 |
|
Physician clinics |
|
|
12 |
|
|
|
38,626 |
|
|
|
2.2 |
% |
|
|
244 |
|
Ambulatory care/surgery |
|
|
4 |
|
|
|
58,938 |
|
|
|
3.3 |
% |
|
|
268 |
|
Other |
|
|
|
|
|
|
10,047 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95 |
|
|
|
979,594 |
|
|
|
55.6 |
% |
|
|
6,727 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land held for development |
|
|
|
|
|
|
16,379 |
|
|
|
0.9 |
% |
|
|
|
|
Corporate property |
|
|
|
|
|
|
14,256 |
|
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,635 |
|
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned properties |
|
|
174 |
|
|
|
1,709,912 |
|
|
|
96.9 |
% |
|
|
10,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
2 |
|
|
|
20,424 |
|
|
|
1.1 |
% |
|
|
|
|
Physician clinics |
|
|
2 |
|
|
|
16,861 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
37,285 |
|
|
|
2.1 |
% |
|
|
|
|
Unconsolidated LLC investments, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office |
|
|
2 |
|
|
|
10,714 |
|
|
|
0.6 |
% |
|
|
|
|
Other |
|
|
1 |
|
|
|
6,627 |
|
|
|
0.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
17,341 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate investments |
|
|
181 |
|
|
$ |
1,764,538 |
|
|
|
100.0 |
% |
|
|
10,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Acquisitions
The Company did not complete any acquisitions during the first six months of 2008 but
continued construction on its properties under development.
On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each
containing 146,000 square feet, and a six-level parking structure, containing 977 parking spaces,
in Dallas, Texas for $59.2 million. The Company funded the transaction with proceeds from its
unsecured credit facility.
10
Asset Dispositions
During the second quarter of 2008, pursuant to a purchase option exercised by a tenant, the
Company disposed of an 83,718 square foot building in Texas in which it had a total gross
investment of approximately $18.5 million ($10.4 million, net). The sales price was $18.5 million,
and the Company recognized an $8.0 million net gain from the sale, net of closing costs of $0.1
million. The Company also recorded expense of approximately $0.3 million to the gain on sale of
real estate properties related to state tax adjustments on the sale of the senior living assets in
2007.
During the first quarter of 2008, the Company disposed of a 36,951 square foot building in
Mississippi in which it had a total gross investment of approximately $2.9 million ($1.6 million,
net). The sales price was $2.0 million, and the Company recognized a $0.3 million net gain from
the sale, net of closing costs of $0.1 million. Also, the Company sold a 7,500 square foot
physician clinic in Texas in which it had a total gross investment of approximately $0.5 million
($0.4 million, net). The sales price was $0.5 million, and the Company recognized a $0.1 million
net gain from the sale. Finally, the Company disposed of a parcel of land in Pennsylvania for
approximately $0.8 million, which approximated the Companys net book value. During the first
quarter of 2008, the Company also recorded a $0.2 million gain due to the collection of certain
receivables by the Company relating to senior living properties sold during 2007.
Purchase Options Exercised
In April 2008, the Company received notice from a tenant of its intent to purchase five
properties from the Company pursuant to purchase options contained in its leases with the Company.
The Companys aggregate investment in the buildings was approximately $23.9 million ($16.8 million,
net) at June 30, 2008. The Company expects to sell these properties to the tenant in the first
quarter of 2009 for approximately $23.1 million in net proceeds, including $0.8 million in lease
termination fees, which should result in a gain on sale of approximately $4.6 million. In
accordance with SFAS No. 144, the five properties are classified as held for sale and are included
in discontinued operations as of and for the three and six months ended June 30, 2008.
During 2007, the Company received notice from a tenant of its intent to purchase two buildings
from the Company pursuant to purchase options. The Company sold one of the buildings to the tenant
during the second quarter of 2008 as discussed in Asset Dispositions above. The parties were in
dispute as to the enforceability of the purchase option on the second property and, therefore, the
Company was uncertain as to when the transaction would close, if at all. As a result, the second
property was not reclassified to assets held for sale and its results of operations were not
reclassified to discontinued operations on the Companys Condensed Consolidated Financial
Statements. During July 2008, the Company resolved the dispute with the tenant and agreed to sell
the property to the tenant for $38.0 million. The Companys gross investment in the second
building was approximately $46.8 million ($32.8 million, net) and the Company carried a mortgage
note payable on the building with a principal balance of $19.8 million at June 30, 2008. The
transaction is expected to close during the third quarter of 2008, and the Company expects to
recognize a gain on sale of approximately $2.5 million.
Note 3.
Discontinued Operations
The tables below detail the assets, liabilities, and results of operations included in
discontinued operations on the Companys Condensed Consolidated Statements of Income and included
in assets and liabilities held for sale and discontinued operations on the Companys Condensed
Consolidated Balance Sheets.
11
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
Balance Sheet data (as of the period ended): |
|
|
|
|
|
|
|
|
Land |
|
$ |
3,585 |
|
|
$ |
3,055 |
|
Buildings, improvements and lease intangibles |
|
|
24,513 |
|
|
|
22,736 |
|
Personal property |
|
|
8 |
|
|
|
70 |
|
|
|
|
|
|
|
|
|
|
|
28,106 |
|
|
|
25,861 |
|
Accumulated depreciation |
|
|
(8,452 |
) |
|
|
(10,462 |
) |
|
|
|
|
|
|
|
Assets held for sale, net |
|
|
19,654 |
|
|
|
15,399 |
|
|
|
|
|
|
|
|
|
|
Other assets, net (including receivables) |
|
|
575 |
|
|
|
240 |
|
|
|
|
|
|
|
|
Assets included in discontinued operations, net |
|
|
575 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets held for sale and discontinued operations, net |
|
$ |
20,229 |
|
|
$ |
15,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
$ |
4,405 |
|
|
$ |
|
|
Accounts payable and accrued liabilities |
|
|
42 |
|
|
|
|
|
Other liabilities |
|
|
64 |
|
|
|
34 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
$ |
4,511 |
|
|
$ |
34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Statements of Income data (for the period ended): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
1,387 |
|
|
$ |
2,870 |
|
|
$ |
2,866 |
|
|
$ |
9,846 |
|
Property operating |
|
|
14 |
|
|
|
(113 |
) |
|
|
29 |
|
|
|
198 |
|
Straight-line rent |
|
|
3 |
|
|
|
26 |
|
|
|
6 |
|
|
|
52 |
|
Mortgage interest |
|
|
|
|
|
|
331 |
|
|
|
|
|
|
|
1,841 |
|
Other operating |
|
|
|
|
|
|
4,492 |
|
|
|
|
|
|
|
9,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,404 |
|
|
|
7,606 |
|
|
|
2,901 |
|
|
|
21,214 |
|
Expenses (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
(25 |
) |
|
|
9 |
|
|
|
(25 |
) |
|
|
9 |
|
Property operating |
|
|
105 |
|
|
|
451 |
|
|
|
223 |
|
|
|
847 |
|
Other operating |
|
|
|
|
|
|
4,151 |
|
|
|
|
|
|
|
8,364 |
|
Bad debt expense, net |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
Interest |
|
|
82 |
|
|
|
228 |
|
|
|
171 |
|
|
|
487 |
|
Depreciation |
|
|
|
|
|
|
404 |
|
|
|
147 |
|
|
|
2,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
162 |
|
|
|
5,243 |
|
|
|
514 |
|
|
|
12,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
|
1,242 |
|
|
|
2,363 |
|
|
|
2,387 |
|
|
|
8,959 |
|
Impairments |
|
|
|
|
|
|
|
|
|
|
(29 |
) |
|
|
(2,792 |
) |
Gain on sales of real estate properties, net (3) |
|
|
7,715 |
|
|
|
7,482 |
|
|
|
8,352 |
|
|
|
37,871 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
$ |
8,957 |
|
|
$ |
9,845 |
|
|
$ |
10,710 |
|
|
$ |
44,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per basic common share |
|
$ |
0.18 |
|
|
$ |
0.21 |
|
|
$ |
0.22 |
|
|
$ |
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per diluted common
share |
|
$ |
0.17 |
|
|
$ |
0.21 |
|
|
$ |
0.21 |
|
|
$ |
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Total revenues for the three months ended June 30, 2007 include $6.2 million from the senior living assets
which were disposed of during 2007. Total revenues for the three months ended June 30, 2008 and 2007 also include
$0.5 million and $0.5 million, respectively, related to properties sold other than the senior living assets, and
$0.9 million and $0.9 million, respectively, related to properties classified as held for sale. Total revenues for
the six months ended June 30, 2007 include $18.0 million from the senior living assets which were disposed of during
2007. Total revenues for the six months ended June 30, 2008 and 2007 include $1.8 million and $1.7 million,
respectively, related to properties classified as held for sale, and $1.1 million and $1.5 million, respectively,
related to properties sold other than the senior living assets.
(2) Total expenses for the three months ended June 30, 2007 include $4.5 million from the senior living assets
which were disposed of during 2007 and $0.5 million related other properties sold in 2007. Total expenses for the
three months ended June 30, 2008 and 2007 include $0.2 million and $0.2 million, respectively, related to properties
classified as held for sale. Total expenses for the six months ended June 30, 2008 and 2007 include $0.1 million
and $10.8 million, respectively, from the senior living assets which were disposed of during 2007, and $0.4 million
and $0.6 million, respectively, related to properties classified as held for sale. The six months ended June 30,
2007 also includes $0.9 million related to properties sold other than the senior living assets.
12
(3) The gain for the three months ended June 30, 2008 and June 30, 2007
includes the gain on the disposal of senior living assets, less certain
expenses, of ($0.3) million and $7.3 million, respectively, and $8.0 million
and $0.2 million, respectively, less certain expenses from other properties
sold. The gain for the six months ended June 30, 2007 includes $37.7 million
from the senior living assets which were disposed of during 2007. The gain for
the six months ended June 30, 2008 and 2007 includes a gain of $8.4 million and
$0.2 million related to other properties sold.
Note 4. Notes and Bonds Payable
The table below details the Companys notes and bonds payable. At June 30, 2008, the Company
had classified 2 mortgage notes payable totaling $4.4 million as held for sale on the Companys
Condensed Consolidated Balance Sheet. As such, those mortgage notes are not reflected in the June
30, 2008 balances in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
Dec. 31, |
|
|
Maturity |
|
|
Contractual |
|
|
Principal |
|
|
Interest |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
Dates |
|
|
Interest Rates |
|
|
Payments |
|
|
Payments |
|
Unsecured Credit Facility due 2009 |
|
$ |
158,000 |
|
|
$ |
136,000 |
|
|
|
1/09 |
|
|
LIBOR + 0.90% |
|
At maturity |
|
Quarterly |
Senior Notes due 2011, including premium |
|
|
297,219 |
|
|
|
300,864 |
|
|
|
5/11 |
|
|
|
8.125% |
|
|
At maturity |
|
Semi-Annual |
Senior Notes due 2014, net of discount |
|
|
297,214 |
|
|
|
298,976 |
|
|
|
4/14 |
|
|
|
5.125% |
|
|
At maturity |
|
Semi-Annual |
Mortgage notes payable |
|
|
43,219 |
|
|
|
49,449 |
|
|
|
5/11-10/32 |
|
|
|
5.49%-8.50% |
|
|
Monthly |
|
Monthly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
795,652 |
|
|
$ |
785,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys various debt agreements contain certain representations, warranties, and
financial and other covenants customary in such loan agreements. Among other things, these
provisions require the Company to maintain certain financial ratios and minimum tangible net worth
and impose certain limits on the Companys ability to incur indebtedness and create liens or
encumbrances. At June 30, 2008, the Company was in compliance with its financial covenant
provisions under its various debt instruments.
Unsecured Credit Facility due 2009
The Company has a $400.0 million credit facility (the Unsecured Credit Facility due 2009)
with a syndicate of 10 banks that it entered into in January 2006. The Unsecured Credit Facility
due 2009 matures in January 2009, but the term may be extended one additional year at the option of
the Company. Loans outstanding under the Unsecured Credit Facility due 2009 bear interest at a
rate equal to (x) LIBOR or the base rate (defined as the higher of the Bank of America prime rate
or 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. As of June 30, 2008, the weighted average
rate on borrowings outstanding on the facility was approximately 3.36%. 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. On
April 17, 2008, the Company entered into an amendment to its credit facility which modified certain
financial covenants and had the effect of providing the Company full borrowing capacity under its
credit facility. At June 30, 2008, the Company had $158.0 million outstanding under the facility
and had borrowing capacity remaining of $242.0 million.
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 per annum upon issuance. The Company entered into interest rate swap agreements
between 2001 and 2006 for notional amounts totaling $125.0 million to offset changes in the fair
value of $125.0 million of the notes. The Company terminated the interest rate swaps in 2006. The
net premium resulting from 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 is being amortized against interest expense over the remaining term of the notes
yielding an effective interest rate on the notes of 7.896%.
13
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) |
|
2008 |
|
|
2007 |
|
Senior Notes due 2011 face value |
|
$ |
296,480 |
|
|
$ |
300,000 |
|
Unamortized net gain (net of discount) |
|
|
739 |
|
|
|
864 |
|
|
|
|
|
|
|
|
Senior Notes due 2011 carrying amount |
|
$ |
297,219 |
|
|
$ |
300,864 |
|
|
|
|
|
|
|
|
Senior Notes due 2014
In 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) |
|
2008 |
|
|
2007 |
|
Senior Notes due 2014 face value |
|
$ |
298,160 |
|
|
$ |
300,000 |
|
Unaccreted discount |
|
|
(946 |
) |
|
|
(1,024 |
) |
|
|
|
|
|
|
|
Senior Notes due 2014 carrying amount |
|
$ |
297,214 |
|
|
$ |
298,976 |
|
|
|
|
|
|
|
|
Mortgage Notes Payable
The following table details the Companys mortgage notes payable, with related collateral, at
June 30, 2008. At June 30, 2008, the Company had classified two mortgage notes payable totaling
$4.4 million to liabilities of discontinued operations on the Companys Condensed Consolidated
Balance Sheet. As such, those mortgage notes are not reflected in the June 30, 2008 balances in
the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
Contractual Balance at |
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
|
|
|
Original |
|
|
Interest |
|
|
Maturity |
|
|
of Notes |
|
|
|
|
|
|
at June 30, |
|
|
June 30, |
|
|
Dec. 31, |
|
(Dollars in millions) |
|
Balance |
|
|
Rate |
|
|
Date |
|
|
Payable |
|
|
Collateral (6) |
|
|
2008 |
|
|
2008 |
|
|
2007 (7) |
|
Life Insurance Co. (1) |
|
$ |
23.3 |
|
|
|
7.765 |
% |
|
|
7/26 |
|
|
|
1 |
|
|
MOB |
|
$ |
46.8 |
|
|
$ |
19.8 |
|
|
$ |
20.0 |
|
Life Insurance Co. (2) |
|
|
4.7 |
|
|
|
7.765 |
% |
|
|
1/17 |
|
|
|
1 |
|
|
MOB |
|
|
11.2 |
|
|
|
2.9 |
|
|
|
3.0 |
|
Commercial Bank (3) |
|
|
23.4 |
|
|
|
7.220 |
% |
|
|
5/11 |
|
|
|
3 |
|
|
3 MOBs |
|
|
31.3 |
|
|
|
4.4 |
|
|
|
5.1 |
|
Commercial Bank (4) |
|
|
1.8 |
|
|
|
5.550 |
% |
|
|
10/32 |
|
|
|
1 |
|
|
OTH |
|
|
7.3 |
|
|
|
1.8 |
|
|
|
1.8 |
|
Life Insurance Co. (5) |
|
|
15.1 |
|
|
|
5.490 |
% |
|
|
1/16 |
|
|
|
1 |
|
|
ASC |
|
|
32.5 |
|
|
|
14.3 |
|
|
|
14.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
$ |
129.1 |
|
|
$ |
43.2 |
|
|
$ |
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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) |
|
MOB-Medical office building; ASC-Ambulatory care/Surgery; OTH-Other. |
|
(7) |
|
The contractual balance at December 31, 2007 excludes two mortgage notes payable
totaling $5.1 million that were classified as liabilities of discontinued operations on the
Companys Condensed Consolidated Balance Sheet at June 30, 2008. |
The contractual interest rates for the seven outstanding mortgages ranged from 5.49% to
8.50% at June 30, 2008.
14
Other Long-Term Debt Information
Long-Term Debt Maturities
Future maturities of the Companys notes and bonds payable as of June 30, 2008 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount/ |
|
|
Total |
|
|
|
|
|
|
Principal |
|
|
Premium |
|
|
Notes and |
|
|
|
|
(Dollars in thousands) |
|
Maturities |
|
|
Amortization |
|
|
Bonds Payable |
|
|
% |
|
2008 |
|
$ |
1,214 |
|
|
$ |
44 |
|
|
$ |
1,258 |
|
|
|
0.2 |
% |
2009(1) |
|
|
160,574 |
|
|
|
102 |
|
|
|
160,676 |
|
|
|
20.2 |
% |
2010 |
|
|
2,768 |
|
|
|
115 |
|
|
|
2,883 |
|
|
|
0.4 |
% |
2011 |
|
|
298,601 |
|
|
|
(73 |
) |
|
|
298,528 |
|
|
|
37.5 |
% |
2012 |
|
|
1,436 |
|
|
|
(177 |
) |
|
|
1,259 |
|
|
|
0.1 |
% |
2013 and thereafter |
|
|
331,267 |
|
|
|
(219 |
) |
|
|
331,048 |
|
|
|
41.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
795,860 |
|
|
$ |
(208 |
) |
|
$ |
795,652 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Includes $158.0 million outstanding on the Unsecured Credit Facility due
2009 which may be extended one additional year at the Companys option.
Senior Note Repurchases
In April 2008, the Companys Board of Directors authorized the Company to repurchase in the
open market up to $20.0 million of its Senior Notes due 2011 and $30.0 million of its Senior Notes
due 2014. As of June 30, 2008, the Company had repurchased $3.5 million of its Senior Notes due
2011 and $1.8 million of its Senior Notes due 2014. In conjunction with the repurchases, the
Company amortized a pro-rata portion of the premium or discount related to the notes and recognized
a $9,000 aggregate net gain. Subsequent to June 30, 2008, the Company repurchased an additional
$9.5 million of its Senior Notes due 2014. The Company may elect, from time to time, to repurchase
and retire its notes either when market conditions are appropriate or as a means to reinvest
available cash.
Note 5. Other Assets
Other assets consist primarily of receivables, straight-line rent receivables, and intangible
assets. Items included in other assets on the Companys Condensed Consolidated Balance Sheets are
detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
Straight-line rent receivables |
|
$ |
22,463 |
|
|
$ |
23,222 |
|
Investments in unconsolidated LLCs |
|
|
17,341 |
|
|
|
18,356 |
|
Prepaid assets |
|
|
11,572 |
|
|
|
12,868 |
|
Accounts receivable, net |
|
|
9,669 |
|
|
|
15,417 |
|
Above-market intangible assets, net |
|
|
6,609 |
|
|
|
6,660 |
|
Deferred financing costs, net |
|
|
3,576 |
|
|
|
4,067 |
|
Goodwill |
|
|
3,487 |
|
|
|
3,487 |
|
Acquired patient accounts receivable, net |
|
|
1,803 |
|
|
|
1,912 |
|
Customer relationship intangible assets, net |
|
|
1,292 |
|
|
|
1,311 |
|
Notes receivable, net |
|
|
552 |
|
|
|
624 |
|
Other |
|
|
2,994 |
|
|
|
2,120 |
|
|
|
|
|
|
|
|
|
|
$ |
81,358 |
|
|
$ |
90,044 |
|
|
|
|
|
|
|
|
Unconsolidated Limited Liability Companies
At June 30, 2008, the Company had investments in three joint venture LLCs that had investments
in healthcare-related real estate properties. The Company accounts for two of the investments under
the equity method and one of the investments under the cost method. The Companys net investments
in the three 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. The Company recognized income of approximately $271,000
and $268,000, respectively, for the three months ended June 30, 2008 and 2007 and $539,000 and
$526,000, respectively, for the six months ended June 30, 2008 and 2007, related to the LLC
accounted for under the cost method. The Companys income (loss) recognized and distributions
received for each period related to its LLCs
15
accounted for under the equity method are shown in the table below. The equity in losses for
the six months ended June 30, 2008 includes $0.3 million relating to a depreciation adjustment
recorded by the joint venture for the prior year recognized during the first quarter of 2008 by the
Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net LLC investments, beginning of period |
|
$ |
17,669 |
|
|
$ |
19,720 |
|
|
$ |
18,356 |
|
|
$ |
20,079 |
|
Equity in income (losses) recognized during the period |
|
|
116 |
|
|
|
(155 |
) |
|
|
(148 |
) |
|
|
(252 |
) |
Distributions received during the period |
|
|
(444 |
) |
|
|
(262 |
) |
|
|
(867 |
) |
|
|
(524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net LLC investments, end of period |
|
$ |
17,341 |
|
|
$ |
19,303 |
|
|
$ |
17,341 |
|
|
$ |
19,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6. Commitments and Contingencies
Construction in Progress
As of June 30, 2008, the Company had nine medical office/outpatient buildings under
development with estimated completion dates ranging from the third quarter of 2008 through the
fourth quarter of 2010. The Company also had land held for development at June 30, 2008 of
approximately $16.4 million on which the Company expects to develop and own medical office
buildings and outpatient healthcare facilities. The table below details the Companys construction
in progress and land held for development as of June 30, 2008. The information included in the
table below represents managements estimates and expectations at June 30, 2008 which are subject
to change. The Companys disclosures regarding certain projections or estimates of completion
dates and leasing may not reflect actual results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Property |
|
|
|
|
|
|
|
|
|
|
CIP at |
|
|
Estimated |
|
|
Estimated |
|
|
|
Completion |
|
|
Type |
|
|
|
|
|
|
Approximate |
|
|
June 30, |
|
|
Remaining |
|
|
Total |
|
State |
|
Date |
|
|
(1) |
|
|
Properties |
|
|
Square Feet |
|
|
2008 |
|
|
Fundings |
|
|
Investment |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado |
|
|
3Q 2008 |
|
|
MOB |
|
|
2 |
|
|
|
169,000 |
|
|
$ |
18,883 |
|
|
$ |
8,517 |
|
|
$ |
27,400 |
|
Arizona |
|
|
4Q 2008 |
|
|
MOB |
|
|
2 |
|
|
|
188,000 |
|
|
|
19,578 |
|
|
|
11,422 |
|
|
|
31,000 |
|
Texas |
|
|
3Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
135,000 |
|
|
|
7,387 |
|
|
|
25,613 |
|
|
|
33,000 |
|
Illinois |
|
|
3Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
100,000 |
|
|
|
7,073 |
|
|
|
19,327 |
|
|
|
26,400 |
|
Texas |
|
|
4Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
120,000 |
|
|
|
6,646 |
|
|
|
21,954 |
|
|
|
28,600 |
|
Hawaii |
|
|
1Q 2010 |
|
|
MOB |
|
|
1 |
|
|
|
133,000 |
|
|
|
16,472 |
|
|
|
69,528 |
|
|
|
86,000 |
|
Texas |
|
|
4Q 2010 |
|
|
MOB |
|
|
1 |
|
|
|
90,000 |
|
|
|
8,927 |
|
|
|
17,373 |
|
|
|
26,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land held for
development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,962 |
|
|
|
|
|
|
|
|
|
Illinois |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
935,000 |
|
|
$ |
101,345 |
|
|
$ |
173,734 |
|
|
$ |
258,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
MOB-Medical office building |
Other Construction
The Company also had various remaining first-generation tenant improvements budgeted as of
June 30, 2008 totaling approximately $13.0 million related to properties that were developed by the
Company, as well as a tenant improvement obligation totaling approximately $0.8 million related to
a project developed by a joint venture which the Company accounts for under the equity method.
16
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
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 connection with the shareholder derivative suit discussed above, Capstone filed a claim
with its directors and officers liability insurance carrier, Twin City Fire Insurance Company
(Twin City), an affiliate of the Hartford family of insurance companies, for indemnity against
legal and other expenses incurred by Capstone related to the suit and any judgment rendered. Twin
City asserted that the Companys claim was not covered under the D&O policy and refused to
reimburse Capstones defense expenses. In September 2005, Capstone filed suit against Twin City for
coverage and performance under its insurance policy. In the fourth quarter of 2007, the federal
district judge in Birmingham, Alabama entered partial summary judgment on Capstones claim for
advancement of defense costs under the policy. Capstone and Twin City have agreed to an interim
plan for Twin Citys payment of defense costs, fees and expenses, subject to Twin Citys appeal of
the partial summary judgment ruling. As of June 30, 2008, the Company had received $1.6 million
from Twin City and had recorded approximately $1.2 million in additional receivables due from Twin
City for incurred but unreimbursed expenses related to the suit. The Company will continue to bill
amounts to Twin City for its expenses incurred in defense of the underlying HealthSouth shareholder
derivative litigation. The Company is recording these amounts as an offset to property operating
expense on the Companys Condensed Consolidated Statements of Income. The Company does not believe
an appellate reversal of the partial summary judgment ruling is probable. However, if the ruling
were to be reversed, the Company would be required to repay all monies received from Twin City.
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 but do allow for a reduction in the Foundations obligation for any insurance
proceeds received by the Company for business interruption related to a casualty event. During the
first quarter of 2008, the Company settled with its insurance carrier and received insurance
proceeds totaling approximately $3.8 million, of which approximately $2.5 million was applied to
its business interruption claim, offsetting a portion of the Companys receivable from the
Foundation, and $1.3 million applied to its property casualty claim, offsetting a property casualty
receivable, which partially reimbursed the Company for costs it incurred related to rebuilding and
reopening its medical office buildings which were damaged from Hurricane Katrina. The Company
continues to record revenue under its financial support agreements with the Foundation with
approximately $0.9 million recognized as revenue in 2008. At June 30, 2008, the Company had a
receivable recorded from the Foundation totaling approximately $2.5 million. If the Foundation is
relieved of its obligations to pay the remaining outstanding amounts to the Company, the Companys
cash flows and
17
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.
Note 7. 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, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted Average Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding |
|
|
50,745,354 |
|
|
|
47,870,653 |
|
|
|
50,738,733 |
|
|
|
47,846,837 |
|
Unvested Restricted Stock Shares |
|
|
(1,313,630 |
) |
|
|
(1,267,010 |
) |
|
|
(1,316,342 |
) |
|
|
(1,271,283 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Basic |
|
|
49,431,724 |
|
|
|
46,603,643 |
|
|
|
49,422,391 |
|
|
|
46,575,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Basic |
|
|
49,431,724 |
|
|
|
46,603,643 |
|
|
|
49,422,391 |
|
|
|
46,575,554 |
|
Dilutive effect of Restricted Stock Shares |
|
|
1,000,560 |
|
|
|
943,539 |
|
|
|
971,782 |
|
|
|
970,680 |
|
Dilutive effect of Employee Stock Purchase Plan |
|
|
42,478 |
|
|
|
30,152 |
|
|
|
48,635 |
|
|
|
41,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Diluted |
|
|
50,474,762 |
|
|
|
47,577,334 |
|
|
|
50,442,808 |
|
|
|
47,587,624 |
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations |
|
$ |
4,809 |
|
|
$ |
3,798 |
|
|
$ |
9,856 |
|
|
$ |
5,949 |
|
Discontinued Operations |
|
|
8,957 |
|
|
|
9,845 |
|
|
|
10,710 |
|
|
|
44,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
20,566 |
|
|
$ |
49,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations per common share |
|
$ |
0.10 |
|
|
$ |
0.08 |
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Discontinued Operations per common share |
|
|
0.18 |
|
|
|
0.21 |
|
|
|
0.22 |
|
|
|
0.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share |
|
$ |
0.28 |
|
|
$ |
0.29 |
|
|
$ |
0.42 |
|
|
$ |
1.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Common Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Continuing Operations per common share |
|
$ |
0.10 |
|
|
$ |
0.08 |
|
|
$ |
0.20 |
|
|
$ |
0.13 |
|
Discontinued Operations per common share |
|
|
0.17 |
|
|
|
0.21 |
|
|
|
0.21 |
|
|
|
0.92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income per common share |
|
$ |
0.27 |
|
|
$ |
0.29 |
|
|
$ |
0.41 |
|
|
$ |
1.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Dividends
During 2008, 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 2007 |
|
$ |
0.385 |
|
|
January 29, 2008 |
|
February 15, 2008 |
|
March 3, 2008 |
1st Quarter 2008 |
|
$ |
0.385 |
|
|
April 29, 2008 |
|
May 15, 2008 |
|
June 3, 2008 |
2nd Quarter 2008 |
|
$ |
0.385 |
|
|
July 29, 2008 |
|
August 15, 2008 |
|
* September 3, 2008 |
18
Equity Offering
On September 28, 2007, the Company sold 2,760,000 shares of common stock, par value $0.01 per
share, at $24.85 per share to an investment bank. The transaction generated approximately $68.4
million in net proceeds to the Company. The proceeds were used to fund acquisitions under contract
and construction underway of medical office and outpatient facilities and for other general
purposes; and were used to temporarily repay a portion of amounts outstanding under the Companys
Unsecured Credit Facility due 2009.
Authorization to Repurchase Common Stock
The Companys Board of Directors has authorized the repurchase of up to 3,000,000 shares of
the Companys common stock. Such purchases, if any, may be made either in the open market or
through privately negotiated transactions. As of June 30, 2008, the Company had not repurchased
any shares under this authorization.
Incentive Plans
The Company has issued and outstanding various employee and non-employee stock-based awards.
These awards include restricted stock issued to employees pursuant to the Companys employee stock
incentive plans, restricted stock issued to its Board of Directors under its non-employee director
incentive plan, and options issued to employees pursuant to its employee stock purchase plan.
A summary of the activity under the restricted stock incentive plans for the three and six
months ended June 30, 2008 and 2007 is included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Nonvested shares, beginning of period |
|
|
1,302,682 |
|
|
|
1,253,376 |
|
|
|
1,289,646 |
|
|
|
1,261,613 |
|
Granted |
|
|
16,096 |
|
|
|
45,332 |
|
|
|
65,800 |
|
|
|
65,706 |
|
Vested |
|
|
(8,000 |
) |
|
|
(1,050 |
) |
|
|
(41,388 |
) |
|
|
(27,410 |
) |
Forfeited |
|
|
|
|
|
|
|
|
|
|
(3,280 |
) |
|
|
(2,251 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares, end of period |
|
|
1,310,778 |
|
|
|
1,297,658 |
|
|
|
1,310,778 |
|
|
|
1,297,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under the Companys employee stock purchase plan, in January of each year each eligible
employee 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 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. In accordance with SFAS No. 123(R), the Company recorded approximately $216,000 to general
and administrative expenses during the first quarter of 2008 relating to the annual grant of
options to its employees under the employee stock purchase plan.
A summary of the activity under the employee stock purchase plan for the three and six months
ended June 30, 2008 and 2007 is included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Outstanding, beginning of period |
|
|
360,564 |
|
|
|
275,875 |
|
|
|
179,603 |
|
|
|
171,481 |
|
Granted |
|
|
|
|
|
|
|
|
|
|
194,832 |
|
|
|
128,928 |
|
Exercised |
|
|
(846 |
) |
|
|
(2,866 |
) |
|
|
(2,950 |
) |
|
|
(7,186 |
) |
Forfeited |
|
|
(9,064 |
) |
|
|
(10,641 |
) |
|
|
(20,831 |
) |
|
|
(30,855 |
) |
Expired |
|
|
(74,294 |
) |
|
|
(66,911 |
) |
|
|
(74,294 |
) |
|
|
(66,911 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, end of period |
|
|
276,360 |
|
|
|
195,457 |
|
|
|
276,360 |
|
|
|
195,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Note 8. Defined Benefit Pension Plans
The Company has pension plans under which the Companys Board of Directors and certain
designated employees may receive certain 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. Net periodic benefit cost recorded related to the Companys pension plans
for the three and six months ended June 30, 2008 and 2007 is detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Service costs |
|
$ |
287 |
|
|
$ |
263 |
|
|
$ |
605 |
|
|
$ |
526 |
|
Interest costs |
|
|
311 |
|
|
|
208 |
|
|
|
615 |
|
|
|
416 |
|
Amortization of net gain/loss |
|
|
228 |
|
|
|
63 |
|
|
|
450 |
|
|
|
129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
826 |
|
|
|
534 |
|
|
|
1,670 |
|
|
|
1,071 |
|
Net loss recognized in other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other
comprehensive loss |
|
$ |
826 |
|
|
$ |
534 |
|
|
$ |
1,670 |
|
|
$ |
951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9. Other Operating Income
Other operating income on the Companys Condensed Consolidated Statements of Income generally
includes shortfall income recognized under its property operating agreements, interest income on
notes receivable, and other items as detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Property lease guaranty revenue |
|
$ |
3,707 |
|
|
$ |
3,594 |
|
|
$ |
7,015 |
|
|
$ |
7,268 |
|
Interest income |
|
|
67 |
|
|
|
60 |
|
|
|
139 |
|
|
|
219 |
|
Management fee income |
|
|
44 |
|
|
|
75 |
|
|
|
89 |
|
|
|
143 |
|
Replacement rent |
|
|
621 |
|
|
|
619 |
|
|
|
1,238 |
|
|
|
1,238 |
|
Income from unconsolidated joint ventures |
|
|
387 |
|
|
|
113 |
|
|
|
391 |
|
|
|
274 |
|
Other |
|
|
164 |
|
|
|
325 |
|
|
|
354 |
|
|
|
640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,990 |
|
|
$ |
4,786 |
|
|
$ |
9,226 |
|
|
$ |
9,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 10. Retirement and Termination Benefits in 2007
During the first quarter of 2007, the Company recorded a $1.5 million charge, included in
general and administrative expenses on the Companys Condensed Consolidated Income Statement, and
established a severance and payroll tax liability 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. This charge is discussed in more detail in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.
Note 11. Taxable Income
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
20
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.
The following table reconciles the Companys consolidated net income to taxable income for the
three and six months ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
20,566 |
|
|
$ |
49,987 |
|
Items to Reconcile Net Income to Taxable Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,077 |
|
|
|
872 |
|
|
|
5,955 |
|
|
|
4,935 |
|
Gain or loss on disposition of depreciable assets |
|
|
301 |
|
|
|
15,376 |
|
|
|
(3,407 |
) |
|
|
27,053 |
|
Straight-line rent |
|
|
177 |
|
|
|
251 |
|
|
|
284 |
|
|
|
1,000 |
|
VIE consolidation |
|
|
|
|
|
|
188 |
|
|
|
|
|
|
|
394 |
|
Receivable allowances |
|
|
385 |
|
|
|
(9,685 |
) |
|
|
739 |
|
|
|
(5,543 |
) |
Stock-based compensation |
|
|
2,079 |
|
|
|
5,614 |
|
|
|
3,681 |
|
|
|
7,506 |
|
Other |
|
|
(396 |
) |
|
|
(3,506 |
) |
|
|
(840 |
) |
|
|
(3,840 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income (1) |
|
$ |
19,389 |
|
|
$ |
22,753 |
|
|
$ |
26,978 |
|
|
$ |
81,492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid (2) |
|
$ |
19,534 |
|
|
$ |
258,759 |
|
|
$ |
39,067 |
|
|
$ |
290,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Before REIT dividend paid deduction. |
|
(2) |
|
The three and six months ended June 30, 2007 includes the payment of a special
dividend of $227.2 million which was paid in May 2007. |
State Income Taxes
State income tax expense and state income tax payments for the three and six months ended June
30, 2008 and 2007 are detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(In thousands) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
State income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas gross margins tax |
|
$ |
95 |
|
|
$ |
98 |
|
|
$ |
193 |
|
|
$ |
195 |
|
Other (1) |
|
|
259 |
|
|
|
20 |
|
|
|
293 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total state income tax expense |
|
$ |
354 |
|
|
$ |
118 |
|
|
$ |
486 |
|
|
$ |
235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State income tax payments, net of refunds |
|
$ |
621 |
|
|
$ |
25 |
|
|
$ |
621 |
|
|
$ |
41 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The three and six months ended
June 30, 2008 includes $225 in state
income taxes accrued and paid during the second quarter of 2008 related to the sale of certain of the
senior living assets in 2007. The Company recorded the $225 to the gain on sale from the senior living
assets which is included in discontinued operations on the Companys Condensed Consolidated Statements
of Income. |
21
|
|
|
Item 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Disclosure Regarding Forward-Looking Statements
This report and other material Healthcare Realty Trust Incorporated (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 that 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, anticipate,
target, intend, plan, estimate, project, continue, could, should and other
comparable terms. These forward-looking statements are based on the current plans and expectations
of management and are subject to a number of risks and uncertainties, including the risk, as
described in the Companys Annual Report on Form 10-K, and in this report 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, including, without limitation,
estimates and projections regarding the performance of development projects the Company is
pursuing.
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, 2007 and in Item 1A of Part II of this quarterly report on Form 10-Q.
Business Overview
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 primarily with the delivery of outpatient 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. 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
The Company continues to pursue opportunities to develop outpatient medical facilities. As of
June 30, 2008, the Company had nine development projects underway with budgets totaling
approximately $259 million. The Company expects completion of the core and shell of four of the
nine projects with budgets totaling approximately $58 million during 2008 and expects the core and
shell of the remaining five projects with budgets totaling approximately $201 million to be
completed during 2009 and 2010. Beyond the projects currently under construction, the Company is
pursuing several other projects that, if completed, would have project budgets totaling
approximately $210 million.
Management continues to pursue acquisitions of existing outpatient medical office facilities.
On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each
containing 146,000
22
square feet, and a six-level parking structure, containing 977 parking spaces, in Dallas,
Texas for $59.2 million.
The Companys real estate portfolio, diversified by facility type, geography, tenant and payor
mix, helps mitigate its exposure to fluctuating economic conditions, tenant and sponsor credit
risks, and changes in clinical practice patterns. As discussed in Liquidity and Capital Resources
- Liquidity below, management believes it is well-positioned from a capital structure and
liquidity viewpoint to fund its investment activity. At June 30, 2008, the Companys leverage
ratio (debt divided by debt plus undepreciated equity) was approximately 44.9%. Approximately
79.3% of its existing debt portfolio had maturity dates after 2010. On April 17, 2008, the Company
entered into an amendment to its credit facility which modified certain financial covenants and had
the effect of providing the Company full borrowing capacity under its credit facility. As such,
with $158.0 million outstanding under the unsecured credit facility, the Company had remaining
borrowing capacity of $242.0 million at June 30, 2008.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and the 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, 2007 are some of the factors
and trends that management believes may impact future operations of the Company.
Development Activity
The Company continues to focus on developing medical office and outpatient facilities. The
development investments that the Company pursues are either relationship-based, with a particular
operator or hospital system, or they are market-driven, where the underlying fundamentals in a
particular market make the development of medical office and outpatient facilities, without an
existing healthcare system relationship, compelling. The Companys market-driven development
opportunities are generally on sites that are most often near acute-care hospitals and in markets
with strong population growth and are advantageous because of fewer use and leasing restrictions,
shorter development timelines, and the prospect for higher investment returns. The Companys
ability to complete, lease-up and operate these facilities in a given period of time will impact
the Companys results of operations and cash flows. More favorable completion dates, lease-up
periods and rental rates will result in improved results of operations and cash flows, while
lagging completion dates, lease-up periods and rental rates will likely result in less favorable
results of operations and cash flows. The Companys disclosures regarding certain projections or
estimates of completion dates and leasing may not reflect actual results. See Note 6 to the
Condensed Consolidated Financial Statements for more information on the Companys development
activities.
Purchase Option Provisions
Certain of the Companys leases include purchase option provisions. These provisions vary from
lease to lease. See Liquidity and Capital Resources Purchase Options below and Note 2 to the
Condensed Consolidated Financial Statements.
Expiring Leases and Financial Support Agreements
Master leases on two of the Companys properties and financial support arrangements related to
four of the Companys properties will expire in 2008. If the Company is unable to negotiate
renewals of these agreements at favorable rates or the underlying tenant rents do not support the
current rental rates or returns, then the Companys results of operations and cash flows could be
negatively impacted.
In the multi-tenanted properties, leases are generally short-term in nature, resulting in a
steady level of lease expirations each year in the normal course of business. During 2008, over
400 leases in these properties expire, but the Company has renewed or anticipates that it will
renew the majority of these leases at favorable rates.
23
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. Impairment charges may not be added back to net
income in calculating FFO, which has the effect of decreasing FFO in the period recorded. During
the first quarter of 2007, based on managements decision to sell certain properties, the Company
recorded impairment charges totaling $2.8 million, which reduced FFO per diluted share by
approximately $0.06 for the six months ended June 30, 2007. FFO for the three and six months ended
June 30, 2008 as compared to 2007 was impacted by the disposition of the senior living assets
during 2007, because of the elimination of the operations of the divested assets. FFO and FFO per
share generated by the senior living assets disposed of during 2007 totaled approximately $1.8
million and $9.0 million, respectively, or $0.04 and $0.19, respectively, per diluted share, for
the three and six months ended June 30, 2007.
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 and because FFO per share is consistently reported, discussed,
and compared by research analysts in their notes and publications about REITs. 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. The table below
reconciles FFO to net income for the three and six months ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands, except per share data) |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
20,566 |
|
|
$ |
49,987 |
|
Gain on sales of real estate properties |
|
|
(7,715 |
) |
|
|
(7,482 |
) |
|
|
(8,352 |
) |
|
|
(37,871 |
) |
Real estate depreciation and amortization |
|
|
13,150 |
|
|
|
12,699 |
|
|
|
26,423 |
|
|
|
27,070 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
5,435 |
|
|
|
5,217 |
|
|
|
18,071 |
|
|
|
(10,801 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations Basic and Diluted |
|
$ |
19,201 |
|
|
$ |
18,860 |
|
|
$ |
38,637 |
|
|
$ |
39,186 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per Common Share Basic |
|
$ |
0.39 |
|
|
$ |
0.40 |
|
|
$ |
0.78 |
|
|
$ |
0.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per Common Share Diluted |
|
$ |
0.38 |
|
|
$ |
0.40 |
|
|
$ |
0.77 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Basic |
|
|
49,431,724 |
|
|
|
46,603,643 |
|
|
|
49,422,391 |
|
|
|
46,575,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Diluted |
|
|
50,474,762 |
|
|
|
47,577,334 |
|
|
|
50,442,808 |
|
|
|
47,587,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Results of Operations
Second Quarter 2008 Compared to Second Quarter 2007
Income from continuing operations increased $1.0 million, or 26.6%, for the three months ended
June 30, 2008 compared to the same period in 2007 due mainly to the acquisition of a building in
the third quarter of 2007, commencement of operations of three buildings developed by the Company,
as well as leasing activities and annual rent increases on leases related to the Companys other
real estate properties. Net income for the second quarter of 2008, however, remained relatively
level at $13.8 million, or $0.28 per basic common share ($0.27 per diluted common share), versus
$13.6 million, or $0.29 per basic and diluted common share, for the second quarter of 2007. Net
income for the three months ended June 30, 2008 is affected by the disposition of senior living
assets and resulting gain in 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
14,787 |
|
|
$ |
14,456 |
|
|
$ |
331 |
|
|
|
2.3 |
% |
Property operating |
|
|
34,886 |
|
|
|
31,803 |
|
|
|
3,083 |
|
|
|
9.7 |
% |
Straight-line rent |
|
|
(137 |
) |
|
|
9 |
|
|
|
(146 |
) |
|
|
-1622.2 |
% |
Mortgage interest |
|
|
542 |
|
|
|
460 |
|
|
|
82 |
|
|
|
17.8 |
% |
Other operating |
|
|
4,990 |
|
|
|
4,786 |
|
|
|
204 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,068 |
|
|
|
51,514 |
|
|
|
3,554 |
|
|
|
6.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
5,863 |
|
|
|
5,220 |
|
|
|
643 |
|
|
|
12.3 |
% |
Property operating |
|
|
20,112 |
|
|
|
18,179 |
|
|
|
1,933 |
|
|
|
10.6 |
% |
Bad debts, net of recoveries |
|
|
115 |
|
|
|
77 |
|
|
|
38 |
|
|
|
49.4 |
% |
Interest |
|
|
11,209 |
|
|
|
12,153 |
|
|
|
(944 |
) |
|
|
-7.8 |
% |
Depreciation |
|
|
12,385 |
|
|
|
10,883 |
|
|
|
1,502 |
|
|
|
13.8 |
% |
Amortization |
|
|
575 |
|
|
|
1,204 |
|
|
|
(629 |
) |
|
|
-52.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,259 |
|
|
|
47,716 |
|
|
|
2,543 |
|
|
|
5.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
4,809 |
|
|
|
3,798 |
|
|
|
1,011 |
|
|
|
26.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
1,242 |
|
|
|
2,363 |
|
|
|
(1,121 |
) |
|
|
-47.4 |
% |
Gain on sales of real estate properties |
|
|
7,715 |
|
|
|
7,482 |
|
|
|
233 |
|
|
|
3.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
8,957 |
|
|
|
9,845 |
|
|
|
(888 |
) |
|
|
-9.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
13,766 |
|
|
$ |
13,643 |
|
|
$ |
123 |
|
|
|
0.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from continuing operations for the quarter ended June 30, 2008 increased
$3.6 million, or 6.9%, compared to the same period in 2007, mainly for the reasons discussed below:
Master lease income increased $0.3 million, or 2.3%, due mainly to additional revenues
from annual rent increases.
Property operating income increased $3.1 million, or 9.7%, due mainly to additional
revenues from the commencement of operations of three medical office buildings previously under
construction totaling approximately $0.8 million, additional revenues resulting from the
acquisition of a medical office building in the third quarter of 2007 of approximately $0.8
million, and additional revenues from new tenant lease agreements and stated annual rental
increases totaling approximately $1.3 million.
25
Total expenses for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007
increased $2.5 million, or 5.3%, mainly for the reasons discussed below:
General and administrative expenses increased $0.6 million, or 12.3%, due mainly
to additional expense recognized relating to the amortization of deferred compensation amounts for
the Companys executive officers and directors, which totaled approximately $0.3 million, as well
as increases in other compensation-related costs totaling approximately $0.4 million.
Property operating expense increased $1.9 million, or 10.6%, as compared to the same
period in 2007 due mainly to additional expenses recognized related to the commencement of
operations of three medical office buildings previously under construction totaling approximately
$0.7 million, as well as additional expenses recognized related to a newly acquired medical office
building in the third quarter of 2007 totaling approximately $0.2 million. Property operating
expenses were also impacted by increases in utilities of approximately $0.4 million, legal fees of
approximately $0.4 million and real estate taxes of approximately $0.5 million for 2008 as compared
to 2007. These increases in expenses were offset partially by the recognition of prior period
straight-line rent expense in the first quarter of 2007 totaling approximately $0.2 million
relating to ground leases where the Company is the lessee.
Interest expense decreased $0.9 million, or 7.8%, due mainly to an increase
in capitalized interest of approximately $0.6 million related to the Companys development
activities, as well as a decrease in expense of approximately $0.2 million from a lower average
interest rate on the unsecured credit facility in the first quarter of 2008 compared to 2007.
Depreciation expense increased $1.5 million, or 13.8%, due mainly to the
acquisition of one real estate property during 2007 and the commencement of operations of three
medical office buildings that were previously under construction, as well as various building and
tenant improvements expenditures.
Amortization expense decreased $0.6 million, or 52.2%, due mainly to a
decrease in amortization expense recognized on lease intangibles that have fully amortized.
Income from discontinued operations totaled $9.0 million and $9.8 million, respectively, for
the three months ended June 30, 2008 and 2007, which includes the results of operations, gains on
sale, and impairment charges related to assets classified as held for sale or disposed of during
2008 and 2007.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007
Income from continuing operations increased $3.9 million, or 65.7%, for the six months ended
June 30, 2008 compared to the same period in 2007 due mainly to the acquisition of a building in
the third quarter of 2007, commencement of operations of three buildings developed by the Company,
leasing activities and annual rent increases on leases related to the Companys other real estate
properties, a lease termination fee received in 2008, as well as a reduction in interest expense
related mainly to a decrease in interest rates and an increase in capitalized interest on
properties under construction. Net income for the six months ended June 30, 2008 compared to 2007
decreased by $29.4 million, or 58.9%. Net income for the six months ended June 30, 2008 is
affected by the disposition of senior living assets and resulting gain in 2007. Net income for the
six months ended June 30, 2008 totaled $20.6 million, or $0.42 per basic common share ($0.41 per
diluted common share), compared with net income of $50.0 million, or $1.07 per basic common share
($1.05 per diluted common share) for the same period in 2007.
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
|
|
June 30, |
|
|
Change |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
30,238 |
|
|
$ |
29,354 |
|
|
$ |
884 |
|
|
|
3.0 |
% |
Property operating |
|
|
68,911 |
|
|
|
63,343 |
|
|
|
5,568 |
|
|
|
8.8 |
% |
Straight-line rent |
|
|
(204 |
) |
|
|
43 |
|
|
|
(247 |
) |
|
|
-574.4 |
% |
Mortgage interest |
|
|
1,067 |
|
|
|
812 |
|
|
|
255 |
|
|
|
31.4 |
% |
Other operating |
|
|
9,226 |
|
|
|
9,782 |
|
|
|
(556 |
) |
|
|
-5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,238 |
|
|
|
103,334 |
|
|
|
5,904 |
|
|
|
5.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
11,908 |
|
|
|
11,395 |
|
|
|
513 |
|
|
|
4.5 |
% |
Property operating |
|
|
39,135 |
|
|
|
36,163 |
|
|
|
2,972 |
|
|
|
8.2 |
% |
Bad debts, net of recoveries |
|
|
333 |
|
|
|
82 |
|
|
|
251 |
|
|
|
306.1 |
% |
Interest |
|
|
22,407 |
|
|
|
25,558 |
|
|
|
(3,151 |
) |
|
|
-12.3 |
% |
Depreciation |
|
|
24,430 |
|
|
|
21,567 |
|
|
|
2,863 |
|
|
|
13.3 |
% |
Amortization |
|
|
1,169 |
|
|
|
2,620 |
|
|
|
(1,451 |
) |
|
|
-55.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,382 |
|
|
|
97,385 |
|
|
|
1,997 |
|
|
|
2.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
9,856 |
|
|
|
5,949 |
|
|
|
3,907 |
|
|
|
65.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
2,387 |
|
|
|
8,959 |
|
|
|
(6,572 |
) |
|
|
-73.4 |
% |
Impairments |
|
|
(29 |
) |
|
|
(2,792 |
) |
|
|
2,763 |
|
|
|
-99.0 |
% |
Gain on sales of real estate properties |
|
|
8,352 |
|
|
|
37,871 |
|
|
|
(29,519 |
) |
|
|
-77.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
10,710 |
|
|
|
44,038 |
|
|
|
(33,328 |
) |
|
|
-75.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
$ |
20,566 |
|
|
$ |
49,987 |
|
|
$ |
(29,421 |
) |
|
|
-58.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from continuing operations for the six months ended June 30, 2008
increased $5.9 million, or 5.7%, compared to the same period in 2007, mainly for the reasons
discussed below:
Master lease income increased $0.9 million, or 3.0%, due mainly to a lease termination
fee totaling $0.8 million received by the Company from one tenant in the first quarter of 2008.
Property operating income increased $5.6 million, or 8.8%, due mainly to additional
revenues totaling approximately $1.4 million from the commencement of operations of three medical
office buildings previously under construction, additional revenues of approximately $1.3 million
resulting from the acquisition of a medical office building in the third quarter of 2007, with the
remaining $3.5 million generally related to additional revenues from new tenant lease agreements
and stated annual rental increases. These amounts were offset by a lease termination fee received
in the first quarter of 2007 totaling $0.6 million received by the Company from one tenant.
Other operating income decreased $0.6 million, or 5.7%, due mainly to the expiration
of a property operating agreement during 2007, resulting in a decrease in lease guaranty revenue of
approximately $0.6 million.
Total expenses for the six months ended June 30, 2008 compared to the six months ended June
30, 2007 increased $2.0 million, or 2.1%, mainly for the reasons discussed below:
General and administrative expenses increased $0.5 million, or 4.5%, due mainly
to additional expense recognized relating to the amortization of deferred compensation amounts for
the Companys
27
executive officers and directors, which totaled approximately $0.4 million, as well as other
compensation- related costs totaling approximately $1.2 million. Also, during 2008, the Company
recognized additional costs incurred relating to the Companys development efforts of approximately
$0.5 million. Further, in the first quarter of 2007, the Company recorded a $1.5 million charge
relating to the retirement of one officer and the termination of several other employees.
Property operating expense increased $3.0 million, or 8.2%, as compared to the same
period in 2007 mainly due to additional expenses of approximately $1.2 million recognized from the
commencement of operations of three medical office buildings previously under construction and
approximately $0.5 million in additional expenses recognized related to the acquisition of a
medical office building in the third quarter of 2007. Property operating expenses were also
impacted by increases in utilities of approximately $0.6 million, legal fees of approximately $0.4
million, real estate taxes of approximately $0.5 million and compensation-related costs of
approximately $0.3 million for 2008 as compared to 2007. These amounts were partially offset by
the recognition of straight-line rent expense during 2007 for prior periods totaling approximately
$0.7 million related to ground leases where the Company is the lessee.
Interest expense decreased $3.2 million, or 12.3%, due mainly to a decrease
in interest of approximately $1.4 million from lower average interest rates on the unsecured credit
facility in 2008 as compared to 2007 and an increase in capitalized interest of approximately $1.6
million related to the Companys development activities.
Depreciation expense increased $2.9 million, or 13.3%, due mainly to the
acquisition of one real estate property during the third quarter of 2007, the commencement of
operations of three medical office buildings that were previously under construction, as well as
various building and tenant improvements.
Amortization expense decreased $1.5 million, or 55.4%, mainly due to a
decrease in amortization expense recognized on lease intangibles that have fully amortized.
Income from discontinued operations totaled $10.7 million and $44.0 million, respectively, for
the six months ended June 30, 2008 and 2007, which includes the results of operations, gains on
sale, and impairment charges related to assets classified as held for sale or disposed of during
2008 and 2007.
Liquidity and Capital Resources
The Company derives most of its revenues from its real estate property portfolio
based on contractual arrangements with its tenants and sponsors. 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, secured debt borrowings, or from other
private debt or equity offerings. For the six months ended June 30, 2008, the Company generated
approximately $42.7 million in cash from operations and used approximately $46.4 million in total
cash from investing and financing activities, as detailed in the Companys Condensed Consolidated
Cash Flow Statement.
Contractual Obligations
The Company had certain contractual obligations as of June 30, 2008 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 2008 through 2009 are
included in the table below.
28
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
2008 |
|
|
2009 |
|
|
Total |
|
Long-term debt obligations, including interest (1) |
|
$ |
22,433 |
|
|
$ |
202,870 |
|
|
$ |
225,303 |
|
Operating lease commitments (2) |
|
|
1,540 |
|
|
|
3,184 |
|
|
|
4,724 |
|
Construction in progress (3) |
|
|
19,939 |
|
|
|
66,895 |
|
|
|
86,834 |
|
Tenant improvements (4) |
|
|
13,820 |
|
|
|
|
|
|
|
13,820 |
|
Deferred gain (5) |
|
|
1,253 |
|
|
|
2,115 |
|
|
|
3,368 |
|
Pension obligations (6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,985 |
|
|
$ |
275,064 |
|
|
$ |
334,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 cash flow projections for the remainder of 2008 and 2009 related to the
construction of nine buildings. A portion of the remaining commitments is designated for tenant
improvements that will generally be funded after the core and shell of the building is substantially
completed. |
|
(4) |
|
Includes tenant improvement allowance obligations remaining on nine properties
previously constructed by the Company and one property developed by a joint venture which the Company
accounts for under the equity method. For purposes of this table, the Company has assumed that these
obligations will be funded in 2008. |
|
(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 Companys payments are
based upon the tenants performance under its lease through July 31, 2011. As of June 30, 2008, the
Company had paid $2.3 million to the buyer which reduced the Companys deferred gain. The payment or
timing of future payments is unknown. For purposes of the table, the Company has included for 2008 the
maximum amount that they would be required to pay for the remainder of 2008, based on the lease, with
the remainder of the deferred gain included in 2009. |
|
(6) |
|
At June 30, 2008, three employees and five non-employee directors were eligible to
retire under the Executive Retirement Plan and the Retirement Plan for Outside Directors. If these
individuals retired at normal retirement age and received full retirement benefits based upon the terms
of each applicable plan, the future benefits to be paid are estimated to be approximately $34.5 million,
of which approximately $84,000 is currently being paid annually to one employee who is retired. Because
the Company does not know when these individuals will retire, it has not projected when these amounts
would be paid in this table. |
As of June 30, 2008, approximately 79.3% of the Companys outstanding debt balances were
due after 2010, with the majority of the debt balances that were due prior to 2010 relating to the
unsecured credit facility due 2009. The Companys leverage ratio (debt divided by debt plus
undepreciated equity) was approximately 44.9% at June 30, 2008 and its earnings (from continuing
operations) covered fixed charges at a ratio of 1.26 to 1.0 for the six months ended June 30, 2008.
On April 17, 2008, the Company entered into an amendment to its credit facility which modified
certain financial covenants and had the effect of providing the Company full borrowing capacity
under its credit facility. As such, at June 30, 2008, the Company had $158.0 million outstanding
under the facility and had borrowing capacity remaining of
$242.0 million. The Companys unsecured credit facility
expires in January 2009. The Company has the option of extending the
facility for one additional year, which it would need to exercise by
November 2008, or it could renew the facility. Based on current
market conditions, the Company expects that it will extend the
facility for one additional year, but may renew the facility if
market conditions improve.
The Companys various debt agreements contain certain representations, warranties, and
financial and other covenants customary in such loan agreements. Among other things, these
provisions require the Company to maintain certain financial ratios and minimum tangible net worth
and impose certain limits on the Companys ability to incur indebtedness and create liens or
encumbrances. At June 30, 2008, the Company was in compliance with its financial covenant
provisions under its various debt instruments.
In April 2008, the Companys Board of Directors authorized the Company to repurchase in the
open market up to $20.0 million of its Senior Notes due 2011 and $30.0 million of its Senior Notes
due 2014. As of June 30, 2008, the Company had repurchased $3.5 million of its Senior Notes due
2011 and $1.8 million of its Senior Notes due 2014. In conjunction with the repurchases, the
Company amortized a pro-rata portion of the premium or discount related to the notes and recognized
an immaterial aggregate net gain. Subsequent to June 30, 2008, the Company repurchased an
additional $9.5 million of its Senior Notes due 2014. The Company may elect, from time to time, to
repurchase and retire its notes either when market conditions are appropriate or as a means to
reinvest available cash.
The Companys senior debt is rated Baa3, BBB-, and BBB by Moodys Investors Service, Standard
and Poors, and Fitch Ratings, respectively.
29
Capital Markets
The Company may from time to time raise additional capital by issuing equity and debt
securities under its currently effective shelf registration statement or by private offerings.
Access to capital markets impacts the Companys ability to refinance existing indebtedness as it
matures and fund future acquisitions and development through the issuance of additional securities.
The Companys ability to access capital on favorable terms is dependent on various factors,
including general market conditions, interest rates, credit ratings on its securities, perception
of its potential future earnings and cash distributions, and the market price of its capital stock.
Security Deposits and Letters of Credit
As of June 30, 2008, the Company had approximately $4.7 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.
Asset Acquisitions
The Company did not complete any acquisitions during the first six months of 2008 but
continued construction on its properties under development.
On July 25, 2008, the Company purchased two fully-leased, six-story office buildings, each
containing 146,000 square feet, and a six-level parking structure, containing 977 parking spaces,
in Dallas, Texas for $59.2 million. The Company funded the transaction with proceeds from its
unsecured credit facility.
Asset Dispositions
During the second quarter of 2008, pursuant to a purchase option exercised by a tenant, the
Company disposed of an 83,718 square foot building in Texas in which it had a total gross
investment of approximately $18.5 million ($10.4 million, net). The sales price was $18.5 million,
and the Company recognized an $8.0 million net gain from the sale, net of closing costs of $0.1
million. The Company also recorded expenses of approximately $0.3 million to the gain on sale of
real estate properties related to state tax adjustments on the sale of the senior living assets in
2007.
During the first quarter of 2008, the Company disposed of a 36,951 square foot building in
Mississippi in which it had a total gross investment of approximately $2.9 million ($1.6 million,
net). The sales price was $2.0 million, and the Company recognized a $0.3 million net gain from
the sale, net of closing costs of $0.1 million. Also, the Company sold a 7,500 square foot
physician clinic in Texas in which it had a total gross investment of approximately $0.5 million
($0.4 million, net). The sales price was $0.5 million, and the Company recognized a $0.1 million
net gain from the sale. Finally, the Company disposed of a parcel of land in Pennsylvania for
approximately $0.8 million, which approximated the Companys net book value. During the first
quarter of 2008, the Company also recorded a $0.2 million gain due to the collection of certain
receivables by the Company relating to senior living properties sold during 2007.
Purchase Options
Certain of the Companys leases include purchase option provisions. The provisions vary from
lease to lease. In April 2008, the Company received notice from a tenant of its intent to purchase
five properties from the Company pursuant to purchase options contained in its leases with the
Company. The Companys aggregate investment in the buildings was approximately $23.9 million
($16.8 million, net) at June 30, 2008. The Company expects to sell these properties to the tenant
in the first quarter of 2009 for approximately $23.1 million in net proceeds, including $0.8
million in lease termination fees, which should result in a gain on sale of approximately $4.6
million. In accordance with SFAS No. 144, the five properties are classified as held for sale and
are included in discontinued operations as of and for the three and six months ended June 30, 2008.
30
During 2007, the Company received notice from a tenant of its intent to purchase two buildings
from the Company pursuant to purchase options contained in each of the building leases. The Company
sold one of the buildings to the tenant during the second quarter of 2008 as discussed in Asset
Dispositions above. The parties were in dispute as to the enforceability of the purchase option on
the second property and, therefore, the Company was uncertain as to when the transaction would
close, if at all. As a result, the second property was not reclassified to assets held for sale
and its results of operations were not reclassified to discontinued operations on the Companys
Condensed Consolidated Financial Statements. During July 2008, the Company resolved the dispute
with the tenant and agreed to sell the property to the tenant for $38.0 million. The Companys
gross investment in the second building was approximately $46.8 million ($32.8 million, net) and
the Company carried a mortgage note payable on the building with a principal balance of $19.8
million at June 30, 2008. The transaction is expected to close during the third quarter of 2008,
and the Company expects to recognize a gain on sale of approximately $2.5 million.
Construction in Progress
As of June 30, 2008, the Company had nine medical office/outpatient buildings under
development with estimated completion dates ranging from the third quarter of 2008 through the
fourth quarter of 2010. The Company also had land held for development at June 30, 2008 of
approximately $16.4 million on which the Company expects to develop and own medical office
buildings and outpatient healthcare facilities. The table below details the Companys construction
in progress and land held for development as of June 30, 2008. The information included in the
table below represents managements estimates and expectations at June 30, 2008 which are subject
to change. The Companys disclosures regarding certain projections or estimates of completion
dates and leasing may not reflect actual results.
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Property |
|
|
|
|
|
|
|
|
|
|
CIP at |
|
|
Estimated |
|
|
Estimated |
|
|
|
Completion |
|
|
Type |
|
|
|
|
|
|
Approximate |
|
|
June 30, |
|
|
Remaining |
|
|
Total |
|
State |
|
Date |
|
|
(1) |
|
|
Properties |
|
|
Square Feet |
|
|
2008 |
|
|
Fundings |
|
|
Investment |
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under construction: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Colorado |
|
|
3Q 2008 |
|
|
MOB |
|
|
2 |
|
|
|
169,000 |
|
|
$ |
18,883 |
|
|
$ |
8,517 |
|
|
$ |
27,400 |
|
Arizona |
|
|
4Q 2008 |
|
|
MOB |
|
|
2 |
|
|
|
188,000 |
|
|
|
19,578 |
|
|
|
11,422 |
|
|
|
31,000 |
|
Texas |
|
|
3Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
135,000 |
|
|
|
7,387 |
|
|
|
25,613 |
|
|
|
33,000 |
|
Illinois |
|
|
3Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
100,000 |
|
|
|
7,073 |
|
|
|
19,327 |
|
|
|
26,400 |
|
Texas |
|
|
4Q 2009 |
|
|
MOB |
|
|
1 |
|
|
|
120,000 |
|
|
|
6,646 |
|
|
|
21,954 |
|
|
|
28,600 |
|
Hawaii |
|
|
1Q 2010 |
|
|
MOB |
|
|
1 |
|
|
|
133,000 |
|
|
|
16,472 |
|
|
|
69,528 |
|
|
|
86,000 |
|
Texas |
|
|
4Q 2010 |
|
|
MOB |
|
|
1 |
|
|
|
90,000 |
|
|
|
8,927 |
|
|
|
17,373 |
|
|
|
26,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land held for
development: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,962 |
|
|
|
|
|
|
|
|
|
Illinois |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
935,000 |
|
|
$ |
101,345 |
|
|
$ |
173,734 |
|
|
$ |
258,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
MOB-Medical office building |
Other Construction
The Company also had various remaining first-generation tenant improvements budgeted as of
June 30, 2008 totaling approximately $13.0 million related to properties that were developed by the
Company, as well as a tenant improvement obligation totaling approximately $0.8 million related to
a project developed by a joint venture which the Company accounts for under the equity method.
31
Dividends
During 2008, the Companys Board of Directors has declared common stock cash dividends as
shown in the table below:
|
|
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|
|
|
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|
|
|
|
|
|
|
|
Per Share |
|
|
Date of |
|
|
|
|
|
|
Date Paid |
|
Dividend |
|
Amount |
|
|
Declaration |
|
|
Date of Record |
|
|
(* Payable) |
|
4th Quarter 2007 |
|
$ |
0.385 |
|
|
January 29, 2008 |
|
February 15, 2008 |
|
March 3, 2008 |
1st Quarter 2008 |
|
$ |
0.385 |
|
|
April 29, 2008 |
|
May 15, 2008 |
|
June 3, 2008 |
2nd Quarter 2008 |
|
$ |
0.385 |
|
|
July 29, 2008 |
|
August 15, 2008 |
|
* September 3, 2008 |
As described in the Companys Annual Report on Form 10-K for the year ended December 31, 2007
under the heading Risk Factors, the ability of the Company to pay dividends is dependent upon its
ability to generate funds from operations and cash flows, and to make accretive new investments.
Liquidity
Net cash provided by operating activities was $42.7 million and $42.4 million for the six
months ended June 30, 2008 and 2007, respectively. 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 plans to continue to meet its liquidity needs, including funding additional
investments in 2008 and 2009, 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, proceeds from sales of real estate investments, proceeds from secured debt
borrowings, 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.
The
recent turmoil in the credit markets has not significantly affected
the Company, though it may influence the Companys decision to
extend or renew its unsecured credit facility due 2009, which is
discussed in more detail above. The Company also has some exposure to variable interest rates and its stock price has been
impacted by the volatility in the stock markets. However, the Companys leases, which provide its main
source of income and cash flow, are generally fixed in nature, have terms of approximately one to
15 years and have annual rate increases based generally on consumer price indices.
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.
The Company has seen significant inflation in construction costs in recent years, which may
negatively affect the profitability or suitability of new medical office and outpatient
developments.
32
New Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements for the impact of new accounting
standards.
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.
33
|
|
|
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. During the three and six months ended June 30, 2008,
there were no material changes in the quantitative and qualitative disclosures about market risks
presented in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
|
|
|
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. 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.
34
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
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 connection with the shareholder derivative suit discussed above, Capstone filed a claim
with its directors and officers liability insurance carrier, Twin City Fire Insurance Company
(Twin City), an affiliate of the Hartford family of insurance companies, for indemnity against
legal and other expenses incurred by Capstone related to the suit and any judgment rendered. Twin
City asserted that the Companys claim was not covered under the D&O policy and refused to
reimburse Capstones defense expenses. In September 2005, Capstone filed suit against Twin City for
coverage and performance under its insurance policy. In the fourth quarter of 2007, the federal
district judge in Birmingham, Alabama entered partial summary judgment on Capstones claim for
advancement of defense costs under the policy. Capstone and Twin City have agreed to an interim
plan for Twin Citys payment of defense costs, fees and expenses, subject to Twin Citys appeal of
the partial summary judgment ruling. As of June 30, 2008, the Company had received $1.6 million
from Twin City and had recorded approximately $1.2 million in additional receivables due from Twin
City for incurred but unreimbursed expenses related to the suit. The Company will continue to bill
amounts to Twin City for its expenses incurred in defense of the underlying HealthSouth shareholder
derivative litigation. The Company is recording these amounts as an offset to property operating
expense on the Companys Condensed Consolidated Statements of Income. The Company does not believe
an appellate reversal of the partial summary judgment ruling is probable. However, if the ruling
were to be reversed, the Company would be required to repay all monies received from Twin City.
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 but do allow for a reduction in the Foundations obligation for any insurance
proceeds received by the Company for business interruption related to a casualty event. During the
first quarter of 2008, the Company settled with its insurance carrier and received insurance
proceeds totaling approximately $3.8 million, of which approximately $2.5 million was applied to
its business interruption claim, offsetting a portion of the Companys receivable from the
Foundation, and $1.3 million applied to its property casualty claim, offsetting a property casualty
receivable, which partially reimbursed the Company for costs it incurred related to rebuilding and
reopening its medical office buildings which were damaged from Hurricane Katrina. The Company
continues to record revenue under its financial support agreements with the Foundation with
35
approximately $0.9 million recognized as revenue in 2008. At June 30, 2008, the Company had a
receivable recorded from the Foundation totaling approximately $2.5 million. If the Foundation is
relieved of its obligations to pay the remaining outstanding amounts to the 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, 2007, 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.
|
|
|
Item 4. |
|
Submission of Matters to a Vote of Security Holders |
The Companys annual meeting of shareholders was held on May 13, 2008, and its shareholders
voted on the following matters.
(a) David R. Emery, Batey M. Gresham, Jr., and Dan S. Wilford 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 |
|
David R. Emery |
|
|
3 |
|
|
|
2011 |
|
|
|
46,273,962 |
|
|
|
792,777 |
|
|
|
3,665,903 |
|
Batey M. Gresham, Jr. |
|
|
3 |
|
|
|
2011 |
|
|
|
42,432,119 |
|
|
|
4,634,620 |
|
|
|
3,665,903 |
|
Dan S. Wilford |
|
|
3 |
|
|
|
2011 |
|
|
|
42,602,142 |
|
|
|
4,464,597 |
|
|
|
3,665,903 |
|
The following Class 1 and Class 2 Directors continued in office following the meeting:
|
|
|
|
|
|
|
Term Expires |
Charles Raymond Fernandez, M.D. |
|
|
2009 |
|
Errol L. Biggs, Ph. D. |
|
|
2009 |
|
Bruce D. Sullivan |
|
|
2009 |
|
Marliese E. Mooney |
|
|
2010 |
|
Edwin B. Morris III |
|
|
2010 |
|
John Knox Singleton |
|
|
2010 |
|
(b) The shareholders ratified the appointment of BDO Seidman, LLP as the Companys
independent auditors for the fiscal year ended December 31, 2008, by the following vote:
|
|
|
|
|
|
|
|
|
|
|
Votes Cast |
|
|
Abstentions/Non |
|
Votes Cast in Favor |
|
Against |
|
|
Votes |
|
46,583,932 |
|
|
359,106 |
|
|
|
3,789,604 |
|
36
|
|
|
Exhibit 3.1
|
|
Second Articles of Amendment and Restatement of the Company (1) |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws of the Company, as amended (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
|
|
Amendment No. 2, dated as of April 17, 2008, to that certain Credit Agreement,
dated as of January 25, 2008, by and among the Company, Bank of America, N.A., as
Administrative Agent, and the other lenders named herein (6) |
|
|
|
Exhibit 11
|
|
Statement re: Computation of per share earnings (filed herewith in Note 7 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, 2007 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 April 21, 2008 and hereby
incorporated by reference. |
37
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 |
|
|
|
Executive Vice President and Chief Financial Officer |
|
|
Date: August 4, 2008
38
Exhibit Index
|
|
|
Exhibit |
|
Description |
Exhibit 3.1
|
|
Second Articles of Amendment and Restatement of the Company (1) |
|
|
|
Exhibit 3.2
|
|
Amended and Restated Bylaws of the Company, as amended (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
|
|
Amendment No. 2, dated as of April 17, 2008, to that certain Credit Agreement, dated as of January 25, 2008, by
and among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders named herein (6) |
|
|
|
Exhibit 11
|
|
Statement re: Computation of per share earnings (filed herewith in Note 7 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, 2007
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 April 21, 2008 and hereby
incorporated by reference. |
39