e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period to
Commission File Number: 1-11852
HEALTHCARE REALTY TRUST INCORPORATED
(Exact name of Registrant as specified in its charter)
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Maryland
(State or other jurisdiction of
Incorporation or organization)
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62-1507028
(I.R.S. Employer
Identification No.) |
3310 West End Avenue
Suite 700
Nashville, Tennessee 37203
(Address of principal executive offices)
(615) 269-8175
(Registrants telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered |
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Common stock, $.01 par value per share
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New York Stock Exchange |
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes o No þ
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 the 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 has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ
The aggregate market value of the shares of common stock (based upon the closing price of
these shares on the New York Stock Exchange, Inc. on June 30, 2009) of the Registrant held by
non-affiliates on June 30, 2009 was approximately $973,457,298.
As of January 31, 2010, 61,390,762 shares of the Registrants common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement relating to the Annual Meeting of
Stockholders to be held on May 18, 2010 are incorporated by reference into Part III of this Report.
PART I
Overview
Healthcare Realty Trust Incorporated (Healthcare Realty or the Company) was incorporated
in Maryland in 1993 and is a self-managed and self-administered real estate investment trust
(REIT) that owns, acquires, manages, finances and develops income-producing real estate
properties associated primarily with the delivery of outpatient healthcare services throughout the
United States.
The Company operates so as to qualify as a REIT for federal income tax purposes. As a REIT,
the Company is not subject to corporate federal income tax with respect to net income distributed
to its stockholders. See Federal Income Tax Information in Item 1 of this report.
As of December 31, 2009, the Companys real estate property investments, excluding assets held
for sale and including an investment in one unconsolidated joint venture, are shown in the table
below:
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Number of |
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Gross Investment |
Square Feet |
(Dollars and Square Feet in thousands) |
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Investments |
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Amount |
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% |
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Footage |
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% |
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Owned properties: |
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Master leases |
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Medical office |
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17 |
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$ |
160,880 |
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7.1 |
% |
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834 |
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6.7 |
% |
Physician clinics |
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16 |
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123,611 |
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5.4 |
% |
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688 |
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5.6 |
% |
Ambulatory care/surgery |
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5 |
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33,351 |
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1.4 |
% |
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133 |
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1.1 |
% |
Specialty outpatient |
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3 |
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8,265 |
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0.4 |
% |
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37 |
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0.3 |
% |
Specialty inpatient |
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13 |
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234,624 |
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10.4 |
% |
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916 |
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7.4 |
% |
Other |
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10 |
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45,390 |
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2.0 |
% |
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498 |
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4.0 |
% |
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64 |
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606,121 |
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26.7 |
% |
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3,106 |
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25.1 |
% |
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Property operating agreements |
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Medical office |
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8 |
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83,893 |
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3.7 |
% |
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621 |
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5.0 |
% |
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8 |
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83,893 |
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3.7 |
% |
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621 |
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5.0 |
% |
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Multi-tenanted with occupancy leases |
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Medical office |
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105 |
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1,380,176 |
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61.2 |
% |
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7,965 |
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64.5 |
% |
Physician clinics |
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15 |
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50,691 |
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2.3 |
% |
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331 |
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2.7 |
% |
Ambulatory care/surgery |
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5 |
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67,293 |
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3.0 |
% |
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303 |
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2.5 |
% |
Specialty outpatient |
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2 |
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5,221 |
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0.2 |
% |
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22 |
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0.2 |
% |
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127 |
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1,503,381 |
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66.7 |
% |
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8,621 |
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69.9 |
% |
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Land Held for Development |
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17,301 |
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0.8 |
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Corporate property |
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14,631 |
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0.6 |
% |
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31,932 |
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1.4 |
% |
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Total owned properties |
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199 |
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2,225,327 |
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98.5 |
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12,348 |
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100.0 |
% |
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Mortgage loans: |
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Medical office |
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2 |
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14,190 |
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0.6 |
% |
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Physician clinics |
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2 |
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16,818 |
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0.8 |
% |
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4 |
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31,008 |
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1.4 |
% |
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Unconsolidated joint venture: |
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Other |
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1 |
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1,266 |
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0.1 |
% |
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1 |
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1,266 |
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0.1 |
% |
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Total real estate investments |
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204 |
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$ |
2,257,601 |
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100.0 |
% |
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12,348 |
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100.0 |
% |
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The Company provided property management services for 140 healthcare-related properties
nationwide, totaling approximately 9.3 million square feet at December 31, 2009. The Companys
portfolio of properties is focused predominantly on outpatient services and medical office segments
of the healthcare industry and is diversified by tenant, geographic location and facility type.
1
The following table details occupancy of the Companys owned properties by facility type
as of December 31, 2009 and 2008.
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Percentage of |
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Occupancy (1) |
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Square Feet |
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2009 |
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2008 |
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Medical office buildings |
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76.2 |
% |
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88 |
% |
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89 |
% |
Physician clinics |
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8.3 |
% |
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92 |
% |
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97 |
% |
Ambulatory care/surgery centers |
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3.6 |
% |
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87 |
% |
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89 |
% |
Specialty outpatient |
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0.5 |
% |
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63 |
% |
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89 |
% |
Specialty inpatient |
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7.4 |
% |
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100 |
% |
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100 |
% |
Other |
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4.0 |
% |
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94 |
% |
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93 |
% |
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Total |
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100.0 |
% |
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90 |
% |
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91 |
% |
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(1) |
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Occupancy represents the percentage of total rentable square feet leased (including
month-to-month and holdover leases) as of December 31, 2009 and 2008, excluding six properties in
discontinued operations and 10 properties in lease-up. Properties under financial support or
master lease agreements are included at 100% occupancy. Upon expiration of these agreements,
occupancy reflects underlying tenant leases in the building. |
As of December 31, 2009, the weighted average remaining years to maturity pursuant to the
Companys long-term master leases, financial support agreements, and multi-tenanted occupancy
leases was approximately 5.0 years, with expirations through 2029.
Below is the Companys 10-year lease maturity schedule, excluding the six properties
classified as held for sale, as of December 31, 2009:
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Annualized |
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Average |
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Expiration |
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Minimum |
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Number of |
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Percentage |
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Square Feet |
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Year |
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Rents (1) |
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Leases |
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of Revenues |
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Per Lease |
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2010 |
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$ |
29,016 |
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338 |
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13.5 |
% |
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3,692 |
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2011 |
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26,946 |
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278 |
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12.6 |
% |
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3,928 |
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2012 |
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25,554 |
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236 |
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11.9 |
% |
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4,492 |
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2013 |
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31,022 |
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189 |
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14.5 |
% |
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6,599 |
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2014 |
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33,001 |
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245 |
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15.4 |
% |
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5,140 |
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2015 |
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8,393 |
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56 |
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3.9 |
% |
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7,107 |
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2016 |
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10,325 |
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44 |
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4.8 |
% |
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8,841 |
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2017 |
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13,532 |
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35 |
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6.3 |
% |
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20,855 |
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2018 |
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9,593 |
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59 |
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4.5 |
% |
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8,654 |
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2019 |
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9,998 |
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18 |
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4.7 |
% |
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8,370 |
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Thereafter |
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17,146 |
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54 |
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7.9 |
% |
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14,021 |
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(1) |
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Represents the annualized minimum rents on leases in-place as of December 31, 2009,
excluding the impact of potential lease renewals, future step-ups in rent, sponsor support
payments under financial support agreements and straight-line rent. |
Business Strategy
Healthcare Realtys strategy is to own and operate quality medical office and other
outpatient-related facilities that produce stable and growing rental income. Consistent with this
strategy, the Company selectively seeks acquisition and development opportunities located on or
near the campuses of large, stable healthcare systems. Additionally, the Company provides a broad
spectrum of services needed to own, develop, lease, finance and manage its portfolio of healthcare
properties.
The Companys portfolio focuses on medical office and other outpatient-related facilities
associated with large acute care hospitals and leading health systems because it views these
facilities as stable, low-risk real estate investments. The nations healthcare spending in 2008
was $2.3 trillion. Healthcare spending is currently 16.2% of the nations gross national product
and is projected to increase to an estimated 19.3% by 2019. Historically, more than half of the
nations healthcare spending has been received by hospitals and outpatient-related facility
tenants. In addition, management believes that the diversity of tenants in the Companys medical
office and other outpatient-related facilities, which includes physicians of nearly two-dozen
specialties, as well as surgery, imaging, and diagnostic centers, lowers the Companys financial
and operational risk.
2
The Company plans to continue to meet its liquidity needs, including funding additional
investments in 2010, paying dividends and funding debt service, with cash flows from operations,
borrowings under the $550.0 million unsecured credit facility due 2012 (the Unsecured Credit
Facility), proceeds from mortgage notes receivable repayments, proceeds from sales of real estate
investments, proceeds from secured debt borrowings, and additional capital market financings. See
Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources in Item 7
and Risk Factors in Item 1A of this report for more discussion concerning the Companys liquidity
and capital resources.
Acquisitions and Dispositions
Acquisition Activity
During 2009, the Company acquired approximately $106.4 million in real estate assets and
funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately
$43.9 million, were acquired by a joint venture in which the Company has an 80% controlling
interest. These acquisitions were funded with borrowings on the Companys unsecured credit
facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and
proceeds from various capital market financings. See Note 4 to the Consolidated Financial
Statements for more information on these acquisitions.
Dispositions
During 2009, the Company disposed of seven real estate properties for approximately $85.7
million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million
was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit
Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial
Statements for more information on these dispositions.
2010 Disposition
In January 2010, pursuant to a purchase option with an operator, the Company disposed of five
properties in Virginia. The Companys aggregate net investment in the buildings was approximately
$16.0 million at December 31, 2009. The Company received approximately $19.2 million in net
proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on
sale of approximately $2.7 million, including the write-off of approximately $0.5 million of
straight-line rent receivables.
Purchase Options
Excluding the five properties located in Virginia that were classified as held for sale, the
Company had approximately $111.1 million in real estate properties at December 31, 2009 that were
subject to exercisable purchase options held by the respective operators and lessees that had not
been exercised. On a probability-weighted basis, the Company currently estimates that
approximately $32.0 million of these options might be exercised in the future. During 2010, an
additional purchase option becomes exercisable on a property in which the Company had a gross
investment of approximately $3.1 million at December 31, 2009. The Company does not believe it is
likely that the operator will exercise the purchase option in the near future. Other properties
may have purchase options exercisable in 2011 and beyond, but the Company does not believe it can
reasonably estimate the probability of exercise of these purchase options.
Construction in Progress and Other Commitments
As of December 31, 2009, the Company had two medical office buildings under construction with
budgets totaling $178.2 million and estimated completion dates in the second quarter of 2010 and
the third quarter of 2011. At December 31, 2009, the Company had $95.1 million invested in
construction in progress, including two parcels of land totaling $17.3 million in land held for
future development, and expects to fund $57.0 million, $31.4 million, and $5.2 million in 2010,
2011 and 2012, respectively, on the two projects currently under construction. See Note 14 to the
Consolidated Financial Statements for more details on the Companys construction in progress at
December 31, 2009.
The Company also had various remaining first-generation tenant improvement obligations
budgeted as of December 31, 2009 totaling approximately $31.3 million related to properties that
were developed by the Company.
In addition to the projects currently under construction, the Company is financing the
development of a six-facility outpatient campus with a budget totaling approximately $72 million.
The Company has funded $56.4 million towards the construction of four of the buildings. The
Companys consolidated joint venture acquired three of the buildings and the fourth building was
sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to
the Consolidated Financial Statements. Construction of the remaining two buildings has not yet
begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The
3
Companys consolidated joint venture will have an option to purchase the two remaining buildings at
a market price upon completion and full occupancy.
Contractual Obligations
As of December 31, 2009, the Company had long-term contractual obligations of approximately
$1.8 billion, consisting primarily of $1.4 billion of long-term debt obligations. For a more
detailed description of these contractual obligations, see Managements Discussion and Analysis of
Financial Condition and Results of Operations Liquidity and Capital Resources Contractual
Obligations, in Item 7 of this report.
Competition
The Company competes for the acquisition and development of real estate properties with
private investors, healthcare providers, other healthcare-related REITs, real estate partnerships
and financial institutions, among others. The business of acquiring and constructing new
healthcare facilities is highly competitive and is subject to price, construction and operating
costs, and other competitive pressures.
The financial performance of all of the Companys properties is subject to competition from
similar properties. The extent to which the Companys properties are utilized depends upon several
factors, including the number of physicians using the healthcare facilities or referring patients
there, healthcare employment, competitive systems of healthcare delivery, and the areas
population, size and composition. Private, federal and state payment programs and other laws and
regulations may also have an effect on the utilization of the properties. Virtually all of the
Companys properties operate in a competitive environment, and patients and referral sources,
including physicians, may change their preferences for a healthcare facility from time to time.
Government Regulation
The healthcare industry continues to face rising costs in the delivery of healthcare services,
increased competition for patients, an economy struggling with high unemployment and a growing
population of uninsured patients, higher bad debt expense, changes in reimbursement by private and
governmental payors, regulatory scrutiny by federal and state administrative authorities, and
pressure on government payment rates from high federal and state budget deficits, thus presenting
the industry and its individual participants with uncertainty. These varied changes can affect the
economic performance of some or all of the Companys tenants and clients. The Company cannot
predict the degree to which these changes may affect the economic performance of the Company,
positively or negatively.
The facilities owned by the Company and the manner in which they are operated are affected by
changes in the reimbursement, licensing and certification policies of federal, state and local
governments. Facilities may also be affected by changes in accreditation standards or procedures
of accrediting agencies that are recognized by governments in the certification process. In
addition, expansion (including the addition of new beds or services or acquisition of medical
equipment) and occasionally the discontinuation of services of healthcare facilities are, in some
states, subjected to state regulatory approval through certificate of need laws and regulations.
Loss by a facility of its ability to participate in government-sponsored programs because of
licensing, certification or accreditation deficiencies or because of program exclusion resulting
from violations of law would have a material adverse effect on facility revenues.
Although the Company is not a healthcare provider or in a position to refer patients or order
services reimbursable by the federal government, to the extent that a healthcare provider leases
space from the Company and, in turn, subleases space to physicians or other referral sources at
less than a fair market value rental rate, or otherwise arranges for remuneration to such a
referral source, the Anti-Kickback Statute (a provision of the Social Security Act addressing
illegal remuneration) and, depending on the type of provider the lessee is, the Stark Law (the
federal physician self-referral law) could be implicated. The Companys leases require the lessees
to agree to comply with all applicable laws.
A significant portion of the revenue of healthcare providers is derived from government
reimbursement programs, such as the federal Medicare program and the joint federal and state
Medicaid program. Although lease payments to the Company are not directly affected by government
reimbursement, changes in these programs could adversely affect healthcare providers and tenants
ability to make payments to the Company.
The Medicare and Medicaid programs are highly regulated and subject to frequent evaluation and
change. Government healthcare spending has increased over time; however, changes from year to year
in reimbursement methodology, rates and other regulatory requirements have resulted in a
challenging operating environment for healthcare providers. Spending on government reimbursement
programs is expected to continue to rise significantly over the next 20 years, particularly as the
government seeks to expand public insurance programs for the uninsured. While government proposals
for achieving universal healthcare coverage and other
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costly initiatives could benefit healthcare
providers by decreasing the level of uninsured patients and bad debt expense, Congress could decide
to slow the growth in healthcare spending by limiting Medicare and Medicaid reimbursement rates to
healthcare providers, possibly even several years prior to the implementation of expanded health
insurance coverage. Reductions in the growth of Medicare and Medicaid payments could have an
adverse impact on healthcare providers financial condition, in addition to the approximate 30
million patients with low-profit margin public insurance that could crowd out providers current
levels of private-pay patients. These governmental health insurance reforms could adversely affect
the ability of providers to make rental payments. However, the Company expects healthcare
providers to continue to adjust to new operating challenges, as they have in the past, by
increasing operating efficiency and modifying their strategies for profitable operations and
growth. Furthermore, under comprehensive healthcare reform, the Company could benefit from higher
demand for medical office space as the newly insured population would require additional healthcare
providers and facilities.
The Company believes its strategic focus on the medical office and outpatient sector of the
healthcare industry mitigates risk from changes in public healthcare spending and reimbursement
because physician practices generally derive a large portion of their revenue from private
insurance and out-of-pocket patient expense. The diversity of the Companys multi-tenant medical
office facilities also provides lower reimbursement risk as payor mix varies from physician to
physician, depending on location, specialty, patients, and physician preferences.
Legislative Developments
Each year, legislative proposals for health policy are introduced in Congress and state
legislatures, and regulatory changes are enacted by government agencies. These proposals,
individually or in the aggregate, could significantly change the delivery of healthcare services,
either nationally or at the state level, if implemented. Among the matters under consideration or
recently implemented are:
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comprehensive healthcare reform legislation, currently under consideration in Congress,
seeks to provide universal health insurance coverage through tax subsidies, expanded
federal health insurance programs, individual and employer mandates for coverage, and
health insurance exchanges; to be paid for by cuts to Medicare and Medicaid and increased
taxes; also, to include heightened regulations on insurers and pharmaceutical companies and
various cost containment initiatives; |
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cost containment, quality control and payment system refinements for Medicaid, Medicare
and other public funding, such as expansion of pay-for-performance criteria and value-based
purchasing programs, bundled provider payments, accountable care organizations, geographic
payment variations, comparative effectiveness research, and lower payments for hospital
readmissions; |
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reform of the Medicare physician fee-for-service reimbursement formula that dictates
annual updates in payment rates for physician services; |
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prohibitions on additional types of contractual relationships between physicians and the
healthcare facilities and providers to which they refer, and related information-collection
activities; |
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efforts to increase transparency with respect to pricing and financial relationships
among healthcare providers and drug/device manufacturers; |
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heightened health information technology standards for healthcare providers; |
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increased scrutiny of medical errors and conditions acquired inside health facilities; |
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patient and drug safety initiatives; |
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re-importation of pharmaceuticals; |
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pharmaceutical drug pricing and compliance activities under Medicare part D; |
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tax law changes affecting non-profit providers; |
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immigration reform and related healthcare mandates; |
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modifications to increase requirements for facility accessibility by persons with
disabilities; and |
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facility requirements related to earthquakes and other disasters, including structural
retrofitting. |
The Company cannot predict whether any proposals will be adopted or what effect, whether
positive or negative, such proposals would have on the Companys business.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, an
owner of real property (such as the Company) may be liable for the costs of removal or remediation
of certain hazardous or toxic substances at, under or disposed of in connection with such property,
as well as certain other potential costs relating to hazardous or toxic substances (including
government fines and injuries to persons and adjacent property). Most, if not all, of these laws,
ordinances and regulations contain stringent enforcement provisions including, but not limited to,
the authority to impose substantial administrative, civil and criminal fines and penalties upon
violators. Such laws often impose liability, without regard to whether the owner knew of, or was
responsible for, the presence or disposal of such substances and may be imposed on the owner in
connection with the activities of an operator of the property.
5
The cost of any required
remediation, removal, fines or personal or property damages and the owners liability therefore
could exceed the value of the property and/or the aggregate assets of the owner. In addition, the
presence of such substances, or the failure to properly dispose of or remediate such substances,
may adversely affect the owners ability to sell or lease such property or to borrow using such
property as collateral. A property can also be negatively impacted either through physical
contamination or by virtue of an adverse effect on value, from contamination that has or may have
emanated from other properties.
Operations of the properties owned, developed or managed by the Company are and will continue
to be subject to numerous federal, state, and local environmental laws, ordinances and regulations,
including those relating to the following: the generation, segregation, handling, packaging and
disposal of medical wastes; air quality requirements related to operations of generators,
incineration devices, or sterilization equipment; facility siting and construction; disposal of
non-medical wastes and ash from incinerators; and underground storage tanks. Certain properties
owned, developed or managed by the Company contain, and others may contain or at one time may have
contained, underground storage tanks that are or were used to store waste oils, petroleum products
or other hazardous substances. Such underground storage tanks can be the source of releases of
hazardous or toxic materials. Operations of nuclear medicine departments at some properties also
involve the use and handling, and subsequent disposal of, radioactive isotopes and similar
materials, activities which are closely regulated by the Nuclear Regulatory Commission and state
regulatory agencies. In addition, several of the properties were built during the period that
asbestos was commonly used in building construction and other such facilities may be acquired by
the Company in the future. The presence of such materials could result in significant costs in the
event that any asbestos-containing materials requiring immediate removal and/or encapsulation are
located in or on any facilities or in the event of any future renovation activities.
The Company has had environmental site assessments conducted on substantially all of the
properties currently owned. These site assessments are limited in scope and provide only an
evaluation of potential environmental conditions associated with the property, not compliance
assessments of ongoing operations. While it is the Companys policy to seek indemnification
relating to environmental liabilities or conditions, even where leases and sale and purchase
agreements do contain such provisions, there can be no assurances that the tenant or seller will be
able to fulfill its indemnification obligations. In addition, the terms of the Companys leases or
financial support agreements do not give the Company control over the operational activities of its
lessees or healthcare operators, nor will the Company monitor the lessees or healthcare operators
with respect to environmental matters.
Insurance
The Company generally requires its tenants to maintain comprehensive liability and property
insurance that covers the Company as well as the tenants. The Company also carries comprehensive
liability insurance and property insurance covering its owned and managed properties, including
those held under long-term ground leases. In addition, tenants under long-term net master leases
are required to carry property insurance covering the Companys interest in the buildings. The
Company has also obtained title insurance with respect to each of the properties it owns, insuring
that the Company holds title to each of the properties free and clear of all liens and encumbrances
except those approved by the Company.
Employees
As of December 31, 2009, the Company employed 229 people. The employees are not members of
any labor union, and the Company considers its relations with its employees to be excellent.
Federal Income Tax Information
The Company is and intends to remain qualified as a REIT under the Internal Revenue Code of
1986, as amended (the Code). As a REIT, the Companys net income attributable to common
stockholders will be exempt from federal taxation to the extent that it is distributed as dividends
to stockholders. Distributions to the Companys stockholders generally will be includable in their
income; however, dividends distributed that are in excess of current and/or accumulated earnings
and profits will be treated for tax purposes as a return of capital to the extent of a
stockholders basis and will reduce the basis of the stockholders shares.
Introduction
The Company is qualified and intends to remain qualified as a REIT for federal income tax
purposes under Sections 856 through 860 of the Code. The following discussion addresses the
material federal tax considerations relevant to the taxation of the Company and summarizes certain
federal income tax consequences that may be relevant to certain stockholders. However, the actual
tax consequences of holding particular securities issued by the Company may vary in light of a
securities holders particular facts and circumstances. Certain holders, such as tax-exempt
entities, insurance companies and financial institutions, are generally subject to special rules.
In addition, the following discussion does not address issues under any foreign, state or local tax
laws. The tax treatment of a holder of any of the securities issued by the Company will vary
depending upon the terms of the specific securities acquired by such holder, as well as the
holders particular situation, and this discussion does not attempt to address aspects of federal
income taxation relating to holders of
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particular securities of the Company. This summary is
qualified in its entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof. The Code, rules, regulations,
and administrative and judicial interpretations are all subject to change at any time (possibly on
a retroactive basis).
The Company is organized and is operating in conformity with the requirements for
qualification and taxation as a REIT and intends to continue operating so as to enable it to
continue to meet the requirements for qualification and taxation as a REIT under the Code. The
Companys qualification and taxation as a REIT depends upon its ability to meet, through actual
annual operating results, the various income, asset, distribution, stock ownership and other tests
discussed below. Accordingly, the Company cannot guarantee that the actual results of operations
for any one taxable year will satisfy such requirements.
If the Company were to cease to qualify as a REIT, and the statutory relief provisions were
found not to apply, the Companys income that it distributed to stockholders would be subject to
the double taxation on earnings (once at the corporate level and again at the stockholder level)
that generally results from an investment in the equity securities of a corporation. The
distributions would then qualify for the reduced dividend rates created by the Jobs and Growth Tax
Relief Reconciliation Act of 2003. However, the reduced dividend rates are scheduled to expire for
taxable years beginning after December 31, 2010. Failure to maintain qualification as a REIT would
force the Company to significantly reduce its distributions and possibly incur substantial
indebtedness or liquidate substantial investments in order to pay the resulting corporate taxes.
In addition, the Company, once having obtained REIT status and having thereafter lost such status,
would not be eligible to re-elect REIT status for the four subsequent taxable years, unless its
failure to maintain its qualification was due to reasonable cause and not willful neglect and
certain other requirements were satisfied. In order to elect again to be taxed as a REIT, just as
with its original election, the Company would be required to distribute all of its earnings and
profits accumulated in any non-REIT taxable year.
Taxation of the Company
As long as the Company remains qualified to be taxed as a REIT, it generally will not be
subject to federal income taxes on that portion of its ordinary income or capital gain that is
currently distributed to stockholders.
However, the Company will be subject to federal income tax as follows:
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The Company will be taxed at regular corporate rates on any undistributed real
estate investment trust taxable income, including undistributed net capital gains. |
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Under certain circumstances, the Company may be subject to the alternative minimum
tax on its items of tax preference, if any. |
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If the Company has (i) net income from the sale or other disposition of foreclosure
property that is held primarily for sale to customers in the ordinary course of
business, or (ii) other non-qualifying income from foreclosure property, it will be
subject to tax on such income at the highest regular corporate rate. |
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Any net income that the Company has from prohibited transactions (which are, in
general, certain sales or other dispositions of property, other than foreclosure
property, held primarily for sale to customers in the ordinary course of business) will
be subject to a 100% tax. |
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If the Company should fail to satisfy either the 75% or 95% gross income test (as
discussed below), and has nonetheless maintained its qualification as a REIT because
certain other requirements have been met, it will be subject to a percentage tax
calculated by the ratio of REIT taxable income to gross income with certain adjustments
multiplied by the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test. |
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If the Company fails to distribute during each year at least the sum of (i) 85% of
its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from preceding periods, then the
Company will be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. |
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In the event of a more than de minimis failure of any of the asset tests, as
described below under Asset Tests, as long as the failure was due to reasonable cause
and not to willful neglect, the Company files a description of each asset that caused
such failure with the Internal Revenue Services (IRS), and disposes of the assets or
otherwise complies with the asset tests within six months after the last day of the
quarter in which the Company identifies such failure, the Company will pay a tax equal
to the greater of $50,000 or 35% of the net income from the nonqualifying assets during
the period in which the Company failed to satisfy the asset tests. |
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In the event the Company fails to satisfy one or more requirements for REIT
qualification, other than the gross income tests and the asset tests, and such failure
is due to reasonable cause and not to willful neglect, the Company will be required to
pay a penalty of $50,000 for each such failure. |
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To the extent that the Company recognizes gain from the disposition of an asset with
respect to which there existed built-in gain upon its acquisition by the Company from
a Subchapter C corporation in a carry-over basis transaction and such disposition occurs
within a maximum ten-year recognition period beginning on the date on which it was
acquired by the |
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Company, the Company will be subject to federal income tax at the
highest regular corporate rate on the amount of its net recognized built-in gain. |
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To the extent that the Company has net income from a taxable REIT subsidiary (TRS),
the TRS will be subject to federal corporate income tax in much the same manner as other
non-REIT Subchapter C corporations, with the exceptions that the deductions for interest
expense on debt and rental payments made by the TRS to the Company will be limited and a
100% excise tax may be imposed on transactions between the TRS and the Company or the
Companys tenants that are not conducted on an arms length basis. A TRS is a
corporation in which a REIT owns stock, directly or indirectly, and for which both the
REIT and the corporation have made TRS elections. |
Requirements for Qualification as a REIT
To qualify as a REIT for a taxable year, the Company must have no earnings and profits
accumulated in any non-REIT year. The Company also must elect or have in effect an election to be
taxed as a REIT and must meet other requirements, some of which are summarized below, including
percentage tests relating to the sources of its gross income, the nature of the Companys assets
and the distribution of its income to stockholders. Such election, if properly made and assuming
continuing compliance with the qualification tests described herein, will continue in effect for
subsequent years.
Organizational Requirements and Share Ownership Tests
Section 856(a) of the Code defines a REIT as a corporation, trust or association:
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that is managed by one or more trustees or directors; |
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the beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest; |
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that would be taxable, but for Sections 856 through 860 of the Code, as a
domestic corporation; |
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that is neither a financial institution nor an insurance company subject to
certain provisions of the Code; |
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the beneficial ownership of which is held by 100 or more persons,
determined without reference to any rules of attribution (the share ownership
test); |
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that during the last half of each taxable year not more than 50% in value
of the outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include certain entities) (the five or fewer
test); and |
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that meets certain other tests, described below, regarding the nature of
its income and assets. |
Section 856(b) of the Code provides that conditions (1) through (4), inclusive, must be met
during the entire taxable year and that condition (5) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of fewer than 12
months. The five or fewer test and the share ownership test do not apply to the first taxable year
for which an election is made to be treated as a REIT.
The Company is also required to request annually (within 30 days after the close of its
taxable year) from record holders of specified percentages of its shares written information
regarding the ownership of such shares. A list of stockholders failing to fully comply with the
demand for the written statements is required to be maintained as part of the Companys records
required under the Code. Rather than responding to the Company, the Code allows the stockholder to
submit such statement to the IRS with the stockholders tax return.
The Company has issued shares to a sufficient number of people to allow it to satisfy the
share ownership test and the five or fewer test. In addition, to assist in complying with the five
or fewer test, the Companys Articles of Incorporation contain provisions restricting share
transfers where the transferee (other than specified individuals involved in the formation of the
Company, members of their families and certain affiliates, and certain other exceptions) would,
after such transfer, own (a) more than 9.9% either in number or value of the outstanding common
stock of the Company or (b) more than 9.9% either in number or value of any outstanding preferred
stock of the Company. Pension plans and certain other tax-exempt entities have different
restrictions on ownership. If, despite this prohibition, stock is acquired increasing a
transferees ownership to over 9.9% in value of either the outstanding common stock or any
preferred stock of the Company, the stock in excess of this 9.9% in value is deemed to be held in
trust for transfer at a price that does not
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exceed what the purported transferee paid for the
stock, and, while held in trust, the stock is not entitled to receive dividends or to vote. In
addition, under these circumstances, the Company has the right to redeem such stock.
For purposes of determining whether the five or fewer test (but not the share ownership test)
is met, any stock held by a qualified trust (generally, pension plans, profit-sharing plans and
other employee retirement trusts) is, generally, treated as held directly by the trusts
beneficiaries in proportion to their actuarial interests in the trust and not as held by the trust.
Income Tests
In order to maintain qualification as a REIT, two gross income requirements must be satisfied
annually.
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First, at least 75% of the Companys gross income (excluding gross income from
certain sales of property held as inventory or primarily for sale in the ordinary course
of business) must be derived from rents from real property; interest on obligations
secured by mortgages on real property or on interests in real property; gain (excluding
gross income from certain sales of property held as inventory or primarily for sale in
the ordinary course of business) from the sale or other disposition of, and certain
other gross income related to, real property (including interests in real property and
in mortgages on real property); and income received or accrued within one year of the
Companys receipt of, and attributable to the temporary investment of, new capital
(any amount received in exchange for stock other than through a dividend reinvestment
plan or in a public offering of debt obligations having maturities of at least five
years). |
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Second, at least 95% of the Companys gross income (excluding gross income from
certain sales of property held as inventory or primarily for sale in the ordinary course
of business) must be derived from dividends; interest; rents from real property; gain
(excluding gross income from certain sales of property held as inventory or primarily
for sale in the ordinary course of business) from the sale or other disposition of, and
certain other gross income related to, real property (including interests in real
property and in mortgages on real property); and gain from the sale or other disposition
of stock and securities. |
The Company may temporarily invest its working capital in short-term investments. Although
the Company will use its best efforts to ensure that income generated by these investments will be
of a type that satisfies the 75% and 95% gross income tests, there can be no assurance in this
regard (see the discussion above of the new capital rule under the 75% gross income test).
For an amount received or accrued to qualify for purposes of an applicable gross income test
as rents from real property or interest on obligations secured by mortgages on real property or
on interests in real property, the determination of such amount must not depend in whole or in
part on the income or profits derived by any person from such property (except that such amount may
be based on a fixed percentage or percentages of receipts or sales). In addition, for an amount
received or accrued to qualify as rents from real property, such amount may not be received or
accrued directly or indirectly from a person in which the Company owns directly or indirectly 10%
or more of, in the case of a corporation, the total voting power of all voting stock or the total
value of all stock, and, in the case of an unincorporated entity, the assets or net profits of such
entity (except for certain amounts received or accrued from a TRS in connection with property
substantially rented to persons other than a TRS of the Company and other 10%-or-more owned persons
or with respect to certain healthcare facilities, if certain conditions are met). The Company
leases and intends to lease property only under circumstances such that substantially all, if not
all, rents from such property qualify as rents from real property. Although it is possible that
a tenant could sublease space to a sublessee in whom the Company is deemed to own directly or
indirectly 10% or more of the tenant, the Company believes that as a result of the provisions of
the Companys Articles of Incorporation that limit ownership to 9.9%, such occurrence would be
unlikely. Application of the 10% ownership rule is, however, dependent upon complex attribution
rules provided in the Code and circumstances beyond the control of the Company. Ownership,
directly or by attribution, by an unaffiliated third party of more than 10% of the Companys stock
and more than 10% of the stock of any tenant or subtenant would result in a violation of the rule.
In addition, the Company must not manage its properties or furnish or render services to the
tenants of its properties, except through an independent contractor from whom the Company derives
no income or through a TRS unless (i) the Company is performing services that are usually or
customarily furnished or rendered in connection with the rental of space for occupancy only and the
services are of the sort that a tax-exempt organization could perform without being considered in
receipt of unrelated business taxable income or (ii) the income earned by the Company for other
services furnished or rendered by the Company to tenants of a property or for the management or
operation of the property does not exceed a de minimis threshold generally equal to 1% of the
income from such property. The Company self-manages some of its properties, but does not believe
it provides services to tenants that are outside the exception.
If rent attributable to personal property leased in connection with a lease of real property
is greater than 15% of the total rent received under the lease, then the portion of rent
attributable to such personal property will not qualify as rents from real property. Generally,
this 15% test is applied separately to each lease. The portion of rental income treated as
attributable to personal property is
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determined according to the ratio of the fair market value of
the personal property to the total fair market value of the property that is rented. The
determination of what fixtures and other property constitute personal property for federal tax
purposes is difficult and imprecise. The Company does not have 15% by value of any of its
properties classified as personal property. If, however, rent payments
do not qualify, for reasons discussed above, as rents from real property for purposes of Section
856 of the Code, it will be more difficult for the Company to meet the 95% and 75% gross income
tests and continue to qualify as a REIT.
The Company is and expects to continue performing third-party management and development
services. If the gross income to the Company from this or any other activity producing
disqualified income for purposes of the 95% or 75% gross income tests approaches a level that could
potentially cause the Company to fail to satisfy these tests, the Company intends to take such
corrective action as may be necessary to avoid failing to satisfy the 95% or 75% gross income
tests.
The Company may enter into hedging transactions with respect to one or more of its assets or
liabilities. The Companys hedging activities may include entering into interest rate swaps, caps
and floors, options to purchase such items, and futures and forward contracts. Income and gain
from hedging transactions will be excluded from gross income for purposes of the 95% and 75%
gross income tests. A hedging transaction includes any transaction entered into in the normal
course of the Companys trade or business primarily to manage the risk of interest rate, price
changes or currency fluctuations with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets. The Company will
be required to clearly identify any such hedging transaction before the close of the day on which
it was acquired, originated or entered into. The Company intends to structure any hedging or
similar transactions so as not to jeopardize its status as a REIT.
If the Company were to fail to satisfy one or both of the 75% or 95% gross income tests for
any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief
under certain provisions of the Code. These relief provisions would generally be available if (i)
the Companys failure to meet such test or tests was due to reasonable cause and not to willful
neglect and (ii) following its identification of its failure to meet these tests, the Company files
a description of each item of income that fails to meet these tests in a schedule in accordance
with Treasury Regulations. It is not possible, however, to know whether the Company would be
entitled to the benefit of these relief provisions since the application of the relief provisions
is dependent on future facts and circumstances. If these provisions were to apply, the Company
would be subjected to tax equal to a percentage tax calculated by the ratio of REIT taxable income
to gross income with certain adjustments multiplied by the gross income attributable to the greater
of the amount by which the Company failed either of the 75% or the 95% gross income tests.
Asset Tests
At the close of each quarter of its taxable year, the Company must also satisfy four tests
relating to the nature of its assets.
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At least 75% of the value of the Companys total assets must consist of real estate
assets (including interests in real property and interests in mortgages on real property
as well as its allocable share of real estate assets held by joint ventures or
partnerships in which the Company participates), cash, cash items and government
securities. |
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Not more than 25% of the Companys total assets may be represented by securities
other than those includable in the 75% asset class. |
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Not more than 25% of the Companys total assets may be represented by securities of
one or more TRS. |
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Of the investments included in the 25% asset class, except for TRS, (i) the value of
any one issuers securities owned by the Company may not exceed 5% of the value of the
Companys total assets, (ii) the Company may not own more than 10% of any one issuers
outstanding voting securities and (iii) the Company may not hold securities having a
value of more than 10% of the total value of the outstanding securities of any one
issuer. Securities issued by affiliated qualified REIT subsidiaries (QRS), which are
corporations wholly owned by the Company, either directly or indirectly, that are not
TRS, are not subject to the 25% of total assets limit, the 5% of total assets limit or
the 10% of a single issuers voting securities limit or the 10% of a single issuers
value limit. Additionally, straight debt and certain other exceptions are not
securities for purposes of the 10% of a single issuers value test. The existence of
QRS are ignored, and the assets, income, gain, loss and other attributes of the QRS are
treated as being owned or generated by the Company, for federal income tax purposes.
The Company currently has 61 subsidiaries and other affiliates that it employs in the
conduct of its business. |
If the Company meets the asset tests described above at the close of any quarter, it will not
lose its status as a REIT because of a change in value of its assets unless the discrepancy exists
immediately after the acquisition of any security or other property that is wholly or partly the
result of an acquisition during such quarter. Where a failure to satisfy the asset tests results
from an acquisition of securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close of such quarter.
The Company maintains adequate records of the value of its assets to maintain compliance with the
asset tests and to
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take such action as may be required to cure any failure to satisfy the test
within 30 days after the close of any quarter. Nevertheless, if the Company were unable to cure
within the 30-day cure period, the Company may cure a violation of the 5% asset test or the 10%
asset test so long as the value of the asset causing such violation does not exceed the lesser of
1% of the Companys assets at the end of the relevant
quarter or $10 million and the Company disposes of the asset causing the failure or otherwise
complies with the asset tests within six months after the last day of the quarter in which the
failure to satisfy the asset test is discovered. For violations due to reasonable cause and not
due to willful neglect that are larger than this amount, the Company is permitted to avoid
disqualification as a REIT after the 30-day cure period by (i) disposing of an amount of assets
sufficient to meet the asset tests, (ii) paying a tax equal to the greater of $50,000 or the
highest corporate tax rate times the taxable income generated by the non-qualifying asset and (iii)
disclosing certain information to the IRS.
Distribution Requirement
In order to qualify as a REIT, the Company is required to distribute dividends (other than
capital gain dividends) to its stockholders in an amount equal to or greater than the excess of (a)
the sum of (i) 90% of the Companys real estate investment trust taxable income (computed without
regard to the dividends paid deduction and the Companys net capital gain) and (ii) 90% of the net
income (after tax on such income), if any, from foreclosure property, over (b) the sum of certain
non-cash income (from certain imputed rental income and income from transactions inadvertently
failing to qualify as like-kind exchanges). These requirements may be waived by the IRS if the
Company establishes that it failed to meet them by reason of distributions previously made to meet
the requirements of the 4% excise tax described below. To the extent that the Company does not
distribute all of its net long-term capital gain and all of its real estate investment trust
taxable income, it will be subject to tax thereon. In addition, the Company will be subject to a
4% excise tax to the extent it fails within a calendar year to make required distributions to its
stockholders of 85% of its ordinary income and 95% of its capital gain net income plus the excess,
if any, of the grossed up required distribution for the preceding calendar year over the amount
treated as distributed for such preceding calendar year. For this purpose, the term grossed up
required distribution for any calendar year is the sum of the taxable income of the Company for
the taxable year (without regard to the deduction for dividends paid) and all amounts from earlier
years that are not treated as having been distributed under the provision. Dividends declared in
the last quarter of the year and paid during the following January will be treated as having been
paid and received on December 31 of such earlier year. The Companys distributions for 2009 were
adequate to satisfy its distribution requirement.
It is possible that the Company, from time to time, may have insufficient cash or other liquid
assets to meet the 90% distribution requirement due to timing differences between the actual
receipt of income and the actual payment of deductible expenses or dividends on the one hand and
the inclusion of such income and deduction of such expenses or dividends in arriving at real
estate investment trust taxable income on the other hand. The problem of not having adequate cash
to make required distributions could also occur as a result of the repayment in cash of principal
amounts due on the Companys outstanding debt, particularly in the case of balloon repayments or
as a result of capital losses on short-term investments of working capital. Therefore, the Company
might find it necessary to arrange for short-term, or possibly long-term, borrowing or new equity
financing. If the Company were unable to arrange such borrowing or financing as might be necessary
to provide funds for required distributions, its REIT status could be jeopardized.
Under certain circumstances, the Company may be able to rectify a failure to meet the
distribution requirement for a year by paying deficiency dividends to stockholders in a later
year, which may be included in the Companys deduction for dividends paid for the earlier year.
The Company may be able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company might in certain circumstances remain liable for the 4% excise tax described
above.
Federal Income Tax Treatment of Leases
The availability to the Company of, among other things, depreciation deductions with respect
to the facilities owned and leased by the Company depends upon the treatment of the Company as the
owner of the facilities and the classification of the leases of the facilities as true leases,
rather than as sales or financing arrangements, for federal income tax purposes. The Company has
not requested nor has it received an opinion that it will be treated as the owner of the portion of
the facilities constituting real property and that the leases will be treated as true leases of
such real property for federal income tax purposes.
Other Issues
With respect to property acquired from and leased back to the same or an affiliated party, the
IRS could assert that the Company realized prepaid rental income in the year of purchase to the
extent that the value of the leased property exceeds the purchase price paid by the Company for
that property. In litigated cases involving sale-leasebacks which have considered this issue,
courts have concluded that buyers have realized prepaid rent where both parties acknowledged that
the purported purchase price for the property was substantially less than fair market value and the
purported rents were substantially less than the fair market rentals. Because of the lack of clear
precedent and the inherently factual nature of the inquiry, the Company cannot give complete
assurance that the IRS could not successfully assert the existence of prepaid rental income in such
circumstances. The value of property and the fair market rent for properties involved in
sale-leasebacks are inherently factual matters and always subject to challenge.
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Additionally, it should be noted that Section 467 of the Code (concerning leases with
increasing rents) may apply to those leases of the Company that provide for rents that increase
from one period to the next. Section 467 provides that in the case of a so-called
disqualified leaseback agreement, rental income must be accrued at a constant rate. If such
constant rent accrual is required, the Company would recognize rental income in excess of cash
rents and, as a result, may fail to have adequate funds available to meet the 90% dividend
distribution requirement. Disqualified leaseback agreements include leaseback transactions where
a principal purpose of providing increasing rent under the agreement is the avoidance of federal
income tax. Since the Section 467 regulations provide that rents will not be treated as increasing
for tax avoidance purposes where the increases are based upon a fixed percentage of lessee
receipts, additional rent provisions of leases containing such clauses should not result in these
leases being disqualified leaseback agreements. In addition, the Section 467 regulations provide
that leases providing for fluctuations in rents by no more than a reasonable percentage, which is
15% for long-term real property leases, from the average rent payable over the term of the lease
will be deemed to not be motivated by tax avoidance. The Company does not believe it has rent
subject to the disqualified leaseback provisions of Section 467.
Subject to a safe harbor exception for annual sales of up to seven properties (or properties
with a basis of up to 10% of the REITs assets) that have been held for at least four years, gain
from sales of property held for sale to customers in the ordinary course of business is subject to
a 100% tax. The simultaneous exercise of options to acquire leased property that may be granted to
certain tenants or other events could result in sales of properties by the Company that exceed this
safe harbor. However, the Company believes that in such event, it will not have held such
properties for sale to customers in the ordinary course of business.
Depreciation of Properties
For federal income tax purposes, the Companys real property is being depreciated over 31.5,
39 or 40 years, using the straight-line method of depreciation and its personal property over
various periods utilizing accelerated and straight-line methods of depreciation.
Failure to Qualify as a REIT
If the Company was to fail to qualify for federal income tax purposes as a REIT in any taxable
year, and the relief provisions were found not to apply, the Company would be subject to tax on its
taxable income at regular corporate rates (plus any applicable alternative minimum tax).
Distributions to stockholders in any year in which the Company failed to qualify would not be
deductible by the Company nor would they be required to be made. In such event, to the extent of
current and/or accumulated earnings and profits, all distributions to stockholders would be taxable
as qualified dividend income, including, presumably, subject to the 15% maximum rate on dividends
created by the Jobs and Growth Tax Relief Reconciliation Act of 2003, and, subject to certain
limitations in the Code, eligible for the 70% dividends received deduction for corporations that
are REIT stockholders. However, this reduced rate for dividend income is set to expire for taxable
years beginning after December 31, 2010. Unless entitled to relief under specific statutory
provisions, the Company would also be disqualified from taxation as a REIT for the following four
taxable years. It is not possible to state whether in all circumstances the Company would be
entitled to statutory relief from such disqualification. Failure to qualify for even one year
could result in the Companys incurring substantial indebtedness (to the extent borrowings were
feasible) or liquidating substantial investments in order to pay the resulting taxes.
Taxation of Tax-Exempt Stockholders
The IRS has issued a revenue ruling in which it held that amounts distributed by a REIT to a
tax-exempt employees pension trust do not constitute unrelated business taxable income, even
though the REIT may have financed certain of its activities with acquisition indebtedness.
Although revenue rulings are interpretive in nature and are subject to revocation or modification
by the IRS, based upon the revenue ruling and the analysis therein, distributions made by the
Company to a U.S. stockholder that is a tax-exempt entity (such as an individual retirement account
(IRA) or a 401(k) plan) should not constitute unrelated business taxable income unless such
tax-exempt U.S. stockholder has financed the acquisition of its shares with acquisition
indebtedness within the meaning of the Code, or the shares are otherwise used in an unrelated
trade or business conducted by such U.S. stockholder.
Special rules apply to certain tax-exempt pension funds (including 401(k) plans but excluding
IRAs or government pension plans) that own more than 10% (measured by value) of a pension-held
REIT. Such a pension fund may be required to treat a certain percentage of all dividends received
from the REIT during the year as unrelated business taxable income. The percentage is equal to the
ratio of the REITs gross income (less direct expenses related thereto) derived from the conduct of
unrelated trades or businesses determined as if the REIT were a tax-exempt pension fund (including
income from activities financed with acquisition indebtedness), to the REITs gross income (less
direct expenses related thereto) from all sources. The special rules will not require a pension
fund to recharacterize a portion of its dividends as unrelated business taxable income unless the
percentage computed is at least 5%.
A REIT will be treated as a pension-held REIT if the REIT is predominantly held by
tax-exempt pension funds and if the REIT would otherwise fail to satisfy the five or fewer test
discussed above. A REIT is predominantly held by tax-exempt pension funds if at least one
tax-exempt pension fund holds more than 25% (measured by value) of the REITs stock or beneficial
interests, or if one or
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more tax-exempt pension funds (each of which owns more than 10% (measured
by value) of the REITs stock or beneficial interests) own in the aggregate more than 50% (measured
by value) of the REITs stock or beneficial interests. The Company believes that it will not be
treated as a pension-held REIT. However, because the shares of the Company will be publicly
traded, no assurance can be given that the Company is not or will not become a pension-held REIT.
Taxation of Non-U.S. Stockholders
The rules governing United States federal income taxation of any person other than (i) a
citizen or resident of the United States, (ii) a corporation or partnership created in the United
States or under the laws of the United States or of any state thereof, (iii) an estate whose income
is includable in income for U.S. federal income tax purposes regardless of its source or (iv) a
trust if a court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust (Non-U.S. Stockholders) are highly complex, and the
following discussion is intended only as a summary of such rules. Prospective Non-U.S.
Stockholders should consult with their own tax advisors to determine the impact of United States
federal, state, and local income tax laws on an investment in stock of the Company, including any
reporting requirements.
In general, Non-U.S. Stockholders are subject to regular United States income tax with respect
to their investment in stock of the Company in the same manner as a U.S. stockholder if such
investment is effectively connected with the Non-U.S. Stockholders conduct of a trade or
business in the United States. A corporate Non-U.S. Stockholder that receives income with respect
to its investment in stock of the Company that is (or is treated as) effectively connected with the
conduct of a trade or business in the United States also may be subject to the 30% branch profits
tax imposed by the Code, which is payable in addition to regular United States corporate income
tax. The following discussion addresses only the United States taxation of Non-U.S. Stockholders
whose investment in stock of the Company is not effectively connected with the conduct of a trade
or business in the United States.
Ordinary Dividends
Distributions made by the Company that are not attributable to gain from the sale or exchange
by the Company of United States real property interests (USRPI) and that are not designated by
the Company as capital gain dividends will be treated as ordinary income dividends to the extent
made out of current or accumulated earnings and profits of the Company. Generally, such ordinary
income dividends will be subject to United States withholding tax at the rate of 30% on the gross
amount of the dividend paid unless reduced or eliminated by an applicable United States income tax
treaty. The Company expects to withhold United States income tax at the rate of 30% on the gross
amount of any such dividends paid to a Non-U.S. Stockholder unless a lower treaty rate applies and
the Non-U.S. Stockholder has filed an IRS Form W-8BEN with the Company, certifying the Non-U.S.
Stockholders entitlement to treaty benefits.
Non-Dividend Distributions
Distributions made by the Company in excess of its current and accumulated earnings and
profits to a Non-U.S. Stockholder who holds 5% or less of the stock of the Company (after
application of certain ownership rules) will not be subject to U.S. income or withholding tax. If
it cannot be determined at the time a distribution is made whether or not such distribution will be
in excess of the Companys current and accumulated earnings and profits, the distribution will be
subject to withholding at the rate applicable to a dividend distribution. However, the Non-U.S.
Stockholder may seek a refund from the IRS of any amount withheld if it is subsequently determined
that such distribution was, in fact, in excess of the Companys then current and accumulated
earnings and profits.
Capital Gain Dividends
As long as the Company continues to qualify as a REIT, distributions made by the Company after
December 31, 2005, that are attributable to gain from the sale or exchange by the Company of any
USRPI will not be treated as effectively connected with the conduct of a trade or business in the
United States. Instead, such distributions will be treated as REIT dividends that are not capital
gains and will not be subject to the branch profits tax as long as the Non-U.S. Stockholder does
not hold greater than 5% of the stock of the Company at any time during the one-year period ending
on the date of the distribution. Non-U.S. Stockholders who hold more than 5% of the stock of the
Company will be treated as if such gains were effectively connected with the conduct of a trade or
business in the United States and generally subject to the same capital gains rates applicable to
U.S. stockholders. In addition, corporate Non-U.S. Stockholders may also be subject to the 30%
branch profits tax and to withholding at the rate of 35% of the gross distribution.
Disposition of Stock of the Company
Generally, gain recognized by a Non-U.S. Stockholder upon the sale or exchange of stock of the
Company will not be subject to United States taxation unless such stock constitutes a USRPI within
the meaning of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). The stock of
the Company will not constitute a USRPI so long as the Company is a domestically controlled REIT.
A domestically controlled REIT is a REIT in which at all times during a specified testing period
less than 50% in value of its stock or
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beneficial interests are held directly or indirectly by
Non-U.S. Stockholders. The Company believes that it will be a domestically controlled REIT, and
therefore that the sale of stock of the Company will generally not be subject to taxation under
FIRPTA. However,
because the stock of the Company is publicly traded, no assurance can be given that the Company is
or will continue to be a domestically controlled REIT.
Under recently enacted wash sale rules applicable to certain dispositions of interests in
domestically controlled REITs, a Non-U.S. Stockholder could be subject to taxation under FIRPTA
on the disposition of stock of the Company if certain conditions are met. If the Company is a
domestically controlled REIT, a Non-U.S. Stockholder will be treated as having disposed of USRPI,
if such Non-U.S. Stockholder disposes of an interest in the Company in an applicable wash sale
transaction. An applicable wash sale transaction is any transaction in which a Non-U.S.
Stockholder avoids receiving a distribution from a REIT by (i) disposing of an interest in a
domestically controlled REIT during the 30-day period preceding a distribution, any portion of
which distribution would have been treated as gain from the sale of a USRPI if it had been received
by the Non-U.S. Stockholder and (ii) acquiring, or entering into a contract or option to acquire, a
substantially identical interest in the REIT during the 61-day period beginning the first day of
the 30-day period preceding the distribution. The wash sale rule does not apply to a Non-U.S.
Stockholder who actually receives the distribution from the Company or, so long as the Company is
publicly traded, to any Non-U.S. Stockholder holding greater than 5% of the outstanding stock of
the Company at any time during the one-year period ending on the date of the distribution.
If the Company did not constitute a domestically controlled REIT, gain arising from the sale
or exchange by a Non-U.S. Stockholder of stock of the Company would be subject to United States
taxation under FIRPTA as a sale of a USRPI unless (i) the stock of the Company is regularly
traded (as defined in the applicable Treasury regulations) and (ii) the selling Non-U.S.
Stockholders interest (after application of certain constructive ownership rules) in the Company
is 5% or less at all times during the five years preceding the sale or exchange. If gain on the
sale or exchange of the stock of the Company were subject to taxation under FIRPTA, the Non-U.S.
Stockholder would be subject to regular United States income tax with respect to such gain in the
same manner as a U.S. stockholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the possible application
of the 30% branch profits tax in the case of foreign corporations), and the purchaser of the stock
of the Company (including the Company) would be required to withhold and remit to the IRS 10% of
the purchase price. Additionally, in such case, distributions on the stock of the Company to the
extent they represent a return of capital or capital gain from the sale of the stock of the
Company, rather than dividends, would be subject to a 10% withholding tax.
Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a
Non-U.S. Stockholder in two cases:
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if the Non-U.S. Stockholders investment in the stock of the Company is effectively
connected with a U.S. trade or business conducted by such Non-U.S. Stockholder, the
Non-U.S. Stockholder will be subject to the same treatment as a U.S. stockholder with
respect to such gain; or |
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if the Non-U.S. Stockholder is a nonresident alien individual who was present in the
United States for 183 days or more during the taxable year and has a tax home in the
United States, the nonresident alien individual will be subject to a 30% tax on the
individuals capital gain. |
Information Reporting Requirements and Backup Withholding Tax
The Company will report to its U.S. stockholders and to the IRS the amount of dividends paid
during each calendar year and the amount of tax withheld, if any, with respect thereto. Under the
backup withholding rules, a U.S. stockholder may be subject to backup withholding, currently at a
rate of 28% on dividends paid unless such U.S. stockholder:
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is a corporation or falls within certain other exempt categories and, when required,
can demonstrate this fact; or |
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provides a taxpayer identification number, certifies as to no loss of exemption from
backup withholding, and otherwise complies with applicable requirements of the backup
withholding rules. |
A U.S. stockholder who does not provide the Company with his correct taxpayer identification
number also may be subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the U.S. stockholders federal income tax liability. In addition, the
Company may be required to withhold a portion of any capital gain distributions made to U.S.
stockholders who fail to certify their non-foreign status to the Company.
Additional issues may arise pertaining to information reporting and backup withholding with
respect to Non-U.S. Stockholders, and Non-U.S. Stockholders should consult their tax advisors with
respect to any such information reporting and backup withholding requirements.
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State and Local Taxes
The Company and its stockholders may be subject to state or local taxation in various state or
local jurisdictions, including those in which it or they transact business or reside. The state
and local tax treatment of the Company and its stockholders may not conform to the federal income
tax consequences discussed above. Consequently, prospective holders should consult their own tax
advisors regarding the effect of state and local tax laws on an investment in the stock of the
Company.
Real Estate Investment Trust Tax Proposals
Investors must recognize that the present federal income tax treatment of the Company may be
modified by future legislative, judicial or administrative actions or decisions at any time, which
may be retroactive in effect, and, as a result, any such action or decision may affect investments
and commitments previously made. The rules dealing with federal income taxation are constantly
under review by persons involved in the legislative process and by the IRS and the Treasury
Department, resulting in statutory changes as well as promulgation of new, or revisions to
existing, regulations and revised interpretations of established concepts. No prediction can be
made as to the likelihood of the passage of any new tax legislation or other provisions either
directly or indirectly affecting the Company or its stockholders.
Other Legislation
The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the maximum individual tax
rate for long-term capital gains generally from 20% to 15% (for sales occurring after May 6, 2003
through December 31, 2008) and for dividends generally from 38.6% to 15% (for tax years from 2003
through 2008). These provisions have been extended through the 2010 tax year. Without future
congressional action, the maximum tax rate on long-term capital gains will return to 20% in 2011,
and the maximum rate on dividends will move to 39.6% in 2011. Because a REIT is not generally
subject to federal income tax on the portion of its REIT taxable income or capital gains
distributed to its stockholders, distributions of dividends by a REIT are generally not eligible
for the new 15% tax rate on dividends. As a result, the Companys ordinary REIT dividends will
continue to be taxed at the higher tax rates (currently, a maximum of 35%) applicable to ordinary
income.
ERISA Considerations
The following is a summary of material considerations arising under ERISA and the prohibited
transaction provisions of Section 4975 of the Code that may be relevant to a holder of stock of the
Company. This discussion does not propose to deal with all aspects of ERISA or Section 4975 of the
Code or, to the extent not preempted, state law that may be relevant to particular employee benefit
plan stockholders (including plans subject to Title I of ERISA, other employee benefit plans and
IRAs subject to the prohibited transaction provisions of Section 4975 of the Code, and governmental
plans and church plans that are exempt from ERISA and Section 4975 of the Code but that may be
subject to state law requirements) in light of their particular circumstances.
A fiduciary making the decision to invest in stock of the Company on behalf of a prospective
purchaser which is an ERISA plan, a tax-qualified retirement plan, an IRA or other employee benefit
plan is advised to consult its own legal advisor regarding the specific considerations arising
under ERISA, Section 4975 of the Code, and (to the extent not preempted) state law with respect to
the purchase, ownership or sale of stock by such plan or IRA.
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an ERISA Plan)
should carefully consider whether an investment in stock of the Company is consistent with its
fiduciary responsibilities under ERISA. In particular, the fiduciary requirements of Part 4 of
Title I of ERISA require (i) an ERISA Plans investments to be prudent and in the best interests of
the ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plans investments to be
diversified in order to reduce the risk of large losses, unless it is clearly prudent not to do so,
(iii) an ERISA Plans investments to be authorized under ERISA and the terms of the governing
documents of the ERISA Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into
transactions prohibited under Section 406 of ERISA. In determining whether an investment in stock
of the Company is prudent for purposes of ERISA, the appropriate fiduciary of an ERISA Plan should
consider all of the facts and circumstances, including whether the investment is reasonably
designed, as a part of the ERISA Plans portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the ERISA Plan, taking into consideration the risk of
loss and opportunity for gain (or other return) from the investment, the diversification, cash flow
and funding requirements of the ERISA Plan and the liquidity and current return of the ERISA Plans
portfolio. A fiduciary should also take into account the nature of the Companys business, the
length of the Companys operating history and other matters described below under Risk Factors.
The fiduciary of an IRA or of an employee benefit plan not subject to Title I of ERISA because
it is a governmental or church plan or because it does not cover common law employees (a Non-ERISA
Plan) should consider that such an IRA or Non-ERISA Plan
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may only make investments that are authorized by the appropriate governing documents, not
prohibited under Section 4975 of the Code and permitted under applicable state law.
Status of the Company under ERISA
A prohibited transaction may occur if the assets of the Company are deemed to be assets of the
investing Plans and parties in interest or disqualified persons as defined in ERISA and Section
4975 of the Code, respectively, deal with such assets. In certain circumstances where a Plan holds
an interest in an entity, the assets of the entity are deemed to be Plan assets (the look-through
rule). Under such circumstances, any person that exercises authority or control with respect to
the management or disposition of such assets is a Plan fiduciary. Plan assets are not defined in
ERISA or the Code, but the United States Department of Labor issued regulations in 1987 (the
Regulations) that outline the circumstances under which a Plans interest in an entity will be
subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an equity interest in an entity,
such as common stock or common shares of beneficial interest of a REIT. However, the Regulations
provide an exception to the look-through rule for equity interests that are publicly-offered
securities.
Under the Regulations, a publicly-offered security is a security that is (i) freely
transferable, (ii) part of a class of securities that is widely held and (iii) either (a) part of a
class of securities that is registered under section 12(b) or 12(g) of the Securities Exchange Act
of 1934, as amended (the Exchange Act), or (b) sold to a Plan as part of an offering of
securities to the public pursuant to an effective registration statement under the Securities
Act of 1933, as amended (the Securities Act) and the class of securities of which such security is
a part of is registered under
the Securities Act within 120 days (or such longer period allowed by the Securities and
Exchange Commission (SEC)) after the end of the fiscal year of the issuer during which the
offering of such securities to the public occurred. Whether a security is considered freely
transferable depends on the facts and circumstances of each case. Generally, if the security is
part of an offering in which the minimum investment is $10,000 or less, any restriction on or
prohibition against any transfer or assignment of such security for the purposes of preventing a
termination or reclassification of the entity for federal or state tax purposes will not of itself
prevent the security from being considered freely transferable. A class of securities is
considered widely held if it is a class of securities that is owned by 100 or more investors
independent of the issuer and of one another.
Management believes that the stock of the Company will meet the criteria of the publicly
offered securities exception to the look-through rule in that the stock of the Company is freely
transferable, the minimum investment is less than $10,000 and the only restrictions upon its
transfer are those required under federal income tax laws to maintain the Companys status as a
REIT. Second, stock of the Company is held by 100 or more investors and at least 100 or more of
these investors are independent of the Company and of one another. Third, the stock of the Company
has been and will be part of offerings of securities to the public pursuant to an effective
registration statement under the Securities Exchange Act and will be registered under the Securities
Act within 120 days after the end of the fiscal year of the Company during which an
offering of such securities to the public occurs. Accordingly, management believes that if a Plan
purchases stock of the Company, the Companys assets should not be deemed to be Plan assets and,
therefore, that any person who exercises authority or control with respect to the Companys assets
should not be treated as a Plan fiduciary for purposes of the prohibited transaction rules of ERISA
and Section 4975 to the Code.
Available Information
The Company makes available to the public free of charge through its internet website the
Companys Proxy Statement, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act, as soon as reasonably practicable
after the Company electronically files such reports with, or furnishes such reports to, the SEC.
The Companys Internet website address is
www.healthcarerealty.com.
The public may read and copy any materials that the Company files with the SEC at the SECs
Public Reference Room located at 100 F Street, NE, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains electronic versions of the Companys
reports on its website at www.sec.gov.
Corporate Governance Principles
The Company has adopted Corporate Governance Principles relating to the conduct and operations
of the Board of Directors. The Corporate Governance Principles are posted on the Companys website
(www.healthcarerealty.com) and are available in print to any stockholder who requests a
copy.
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Committee Charters
The Board of Directors has an Audit Committee, Compensation Committee, Corporate Governance
Committee and Executive Committee. The Board of Directors has adopted written charters for each
committee except for the Executive Committee, which are posted on the Companys website
(www.healthcarerealty.com) and are available in print to any stockholder who requests a
copy.
Executive Officers
Information regarding the executive officers of the Company is set forth in Part III, Item 10
of this report and is incorporated herein by reference.
The following are some of the risks and uncertainties that could negatively affect the
Companys financial condition, results of operations, business and prospects. These risks, as well
as the risks described in Item 1 under the headings Competition, Government Regulation,
Environmental Matters, and Federal Income Tax Information and in Item 7 under the heading
Disclosure Regarding Forward-Looking Statements should be carefully considered before making an
investment decision regarding the Company. The risks and uncertainties described below are not the
only ones facing the Company, and there may be additional risks that the Company does not presently
know of or that the Company currently considers not likely to have a significant impact. If any of
the events underlying the following risks actually occurred, the Companys business, financial
condition and operating results could suffer, and the trading price of its common stock could
decline.
The unavailability of equity and debt capital, volatility in the credit markets, increases in
interest rates, or changes in the Companys debt ratings could have an adverse effect on the
Companys ability to meet its debt payments, make dividend payments to stockholders or engage in
acquisition and development activity.
A REIT is required by IRS regulations to make dividend distributions, thereby retaining less
of its capital for growth. As a result, a REIT typically grows through steady investments of new
capital in real estate assets. Presently, the Company has sufficient capital availability.
However, there may be times when the Company will have limited access to capital from the equity
and/or debt markets. Changes in the Companys debt ratings could have a material adverse effect on
its interest costs and financing sources. The Companys debt rating can be materially influenced
by a number of factors including, but not limited to, acquisitions, investment decisions, and
capital management activities. The capital and credit markets have recently experienced volatility
and limited the availability of funds. The Companys ability to access the capital and credit
markets may be limited by these or other factors, which could have an impact on its ability to
refinance maturing debt, including its unsecured senior notes due 2011 (the Senior Notes due
2011), fund dividend payments and operations, acquire healthcare properties and complete
construction projects. If the Company is unable to refinance or extend principal payments due at
maturity of its various debt instruments, its cash flow may not be sufficient to repay maturing
debt and, consequently, make dividend payments to stockholders. If the Company defaults in paying
any of its debts or honoring its debt covenants, it could experience cross-defaults among debt
instruments, the debts could be accelerated and the Company could be forced to liquidate assets for
less than the values it would otherwise receive.
The Company is exposed to increases in interest rates, which could reduce its profitability and
adversely impact its ability to refinance existing debt, sell assets or engage in acquisition
and development activity.
The Company receives a significant portion of its revenues by leasing its assets under
long-term leases in which the rental rate is generally fixed, subject to annual rent escalators. A
significant portion of the Companys debt will be from time to time subject to floating rates,
based on LIBOR or other indices. The generally fixed nature of revenues and the variable rate of
certain debt obligations create interest rate risk for the Company. Such increased costs could have
the effect of reducing the Companys profitability and could make the financing of any acquisition
or investment activity more costly. Rising interest rates could limit the Companys ability to
refinance existing debt when it matures, such as the Senior Notes due 2011, or cause the Company to
pay higher rates upon refinancing. An increase in interest rates also could have the effect of
reducing the amounts that third parties might be willing to pay for real estate assets, which could
limit the Companys ability to sell assets at times when it might be advantageous to do so in
response to changes in economic conditions.
Covenants in the Companys debt instruments limit its operational flexibility, and a breach of
these covenants could materially affect the Companys financial condition and results of
operations.
The terms of the Unsecured Credit Facility, the indentures governing the Companys outstanding
senior notes and other debt instruments that the Company may enter into in the future are subject
to customary financial and operational covenants. The Companys continued ability to incur debt and
operate its business is subject to compliance with these covenants, which limit operational
flexibility. Breaches of these covenants could result in defaults under applicable debt
instruments, even if payment obligations are satisfied.
17
Financial and other covenants that limit the Companys operational flexibility, as well as defaults
resulting from a breach of any of these covenants in its debt instruments, could have a material
adverse effect on the Companys financial condition and results of operations.
The Companys revenues depend on the ability of its tenants and sponsors under its leases and
financial support agreements to generate sufficient income from their operations to make loan,
rent and support payments to the Company.
The Companys revenues are subject to the financial strength of its tenants and sponsors. The
Company has no operational control over the business of these tenants and sponsors who face a wide
range of economic, competitive, government reimbursement and regulatory pressures and constraints.
The slowdown in the economy, decline in the availability of financing from the capital markets, and
widened credit spreads have affected, or may in the future adversely affect, the businesses of the
Companys tenants and sponsors to varying degrees. Such conditions may further impact such tenants
and sponsors abilities to meet their obligations to the Company and, in certain cases, could lead
to restructurings, disruptions, or bankruptcies of such tenants and sponsors. In turn, these
conditions could adversely affect the Companys revenues and could increase allowances for losses
and result in impairment charges, which could decrease net income attributable to common
stockholders and equity, and reduce cash flows from operations.
If a healthcare tenant loses its licensure or certification, becomes unable to provide
healthcare services, cannot meet its financial obligations to the Company or otherwise vacates a
facility, the Company would have to obtain another tenant for the affected facility.
If the Company loses a tenant or sponsor and is unable to attract another healthcare provider
on a timely basis and on acceptable terms, the Companys cash flows and results of operations could
suffer. In addition, many of the Companys properties are special purpose healthcare facilities
that may not be easily adaptable to other uses. Transfers of operations of healthcare facilities
are often subject to regulatory approvals not required for transfers of other types of commercial
operations and real estate.
If lenders under the Unsecured Credit Facility fail to meet their funding commitments, the
Companys financial position would be negatively impacted.
Access to external capital on favorable terms is critical to the Companys success in growing
and maintaining its portfolio. If financial institutions within the Unsecured Credit Facility were
unwilling or unable to meet their respective funding commitments to the Company, any such failure
would have a negative impact on the Companys operations, financial condition and ability to meet
its obligations, including the payment of dividends to stockholders.
Many of the Companys medical office properties are held under long-term ground leases. These
ground leases contain provisions that may limit the Companys ability to lease, sell, or finance
these properties.
The Companys ground lease agreements with hospitals and health systems typically contain
restrictions that limit building occupancy to physicians on the medical staff of an affiliated
hospital and prohibit physician tenants from providing services that compete with the services
provided by the affiliated hospital. Ground leases may also contain consent requirements or other
restrictions on sale or assignment of the Companys leasehold interest. These ground lease
provisions may limit the Companys ability to lease, sell, or obtain mortgage financing secured by
such properties which, in turn, could adversely affect the income from operations or the proceeds
received from a sale. As a ground lessee, the Company is also exposed to the risk of reversion of
the property upon expiration of the ground lease term, or an earlier breach by the Company of the
ground lease, which may have a material adverse effect on the Companys business, financial
condition and results of operations, the Companys ability to make distributions to the Companys
stockholders and the trading price of the Companys common stock.
If the Company is unable to promptly re-let its properties, if the rates upon such re-letting
are significantly lower than expected or if the Company is required to undertake significant
capital expenditures to attract new tenants, then the Companys business and results of
operations would be adversely affected.
A significant portion of the Companys leases will mature over the course of any year.
The Company may not be able to re-let space on terms that are favorable to the Company or at all.
Further, the Company may be required to make significant capital expenditures to renovate or
reconfigure space to attract new tenants. If it is unable to promptly re-let its properties, if the
rates upon such re-letting are significantly lower than expected, or if the Company is required to
undertake significant capital expenditures in connection with re-letting units, the Companys
business, financial condition and results of operations, the Companys ability to make
distributions to the Companys stockholders and the trading price of the Companys common stock may
be materially and adversely affected.
18
The Company may incur impairment charges on its real estate properties or other assets.
The Company performs an annual impairment review on its real estate properties
in the third quarter of every fiscal year. In addition, the Company assesses the potential for
impairment of identifiable intangible assets and long-lived assets, including real estate
properties, whenever events occur or a change in circumstances indicates that the recorded value
might not be fully recoverable. At some future date, the Company may determine that an impairment
has occurred in the value of one or more of its real estate properties or other assets. In such an
event, the Company may be required to recognize an impairment loss which could have a material
adverse affect on the Companys financial condition and results of operations.
The Company may be required to sell certain properties to tenants or sponsors whose leases or
financial support agreements provide for options to purchase. The Company may not be able to
reinvest the proceeds from sale at rates of return equal to the return received on the
properties sold. The Company may recognize asset impairment charges as a result of the exercise
of a purchase option.
At December 31, 2009, the Company had approximately $111.1 million in real estate properties
that are subject to exercisable purchase options held by lessees or financial support agreement
sponsors that had not been exercised. Other properties have purchase options that become
exercisable in 2010 and beyond. The exercise of these purchase options exposes the Company to
reinvestment risk. In certain cases, the option purchase price may not be as great as the Companys
capital investment in the property, causing an asset impairment charge. If the Company is unable
to reinvest the proceeds of sale at rates of return equal to the return received on the properties
that are sold, it may experience a decline in lease revenues and a corresponding material adverse
effect on the Companys business and financial condition, the Companys ability to make
distributions to its stockholders, and the market price of its common stock.
Certain of the Companys properties are special purpose healthcare facilities and may not be
easily adaptable to other uses.
Some of the Companys properties are specialized medical facilities. If the
Company or the Companys tenants terminate the leases for these properties or the Companys tenants
lose their regulatory authority to operate such properties, the Company may not be able to locate
suitable replacement tenants to lease the properties for their specialized uses. Alternatively, the
Company may be required to spend substantial amounts to adapt the properties to other uses. Any
loss of revenues and/or additional capital expenditures occurring as a result may have a material
adverse effect on the Companys business, financial condition and results of operations, the
Companys ability to make distributions to its stockholders, and the market price of the Companys
common stock.
The Company is subject to risks associated with the development of properties.
The Company is subject to certain risks associated with the development of properties
including the following:
|
|
|
The construction of properties generally requires various government and other
approvals which may not be received when expected, or at all, which could delay or
preclude commencement of construction; |
|
|
|
|
Unsuccessful development opportunities could result in the recognition of direct
expenses which could impact the Companys results of operations; |
|
|
|
|
Construction costs could exceed original estimates, which would impact the buildings
profitability to the Company; |
|
|
|
|
Operating expenses could be higher than forecasted; |
|
|
|
|
Time required to initiate and complete the construction of a property and lease up a
completed development property may be greater than originally anticipated, thereby
adversely affecting the Companys cash flow and liquidity; |
|
|
|
|
Occupancy rates and rents of a completed development property may not be sufficient
to make the property profitable to the Company; and |
|
|
|
|
Favorable capital sources to fund the Companys development activities may not be
available when needed. |
The Company may be unsuccessful in operating new and existing real estate properties.
The Companys acquired, developed and existing real estate properties may not perform in
accordance with managements expectations because of many factors including the following:
|
|
|
The Companys purchase price for acquired facilities may be based upon a series of
market judgments which may be incorrect;
|
19
|
|
|
The costs of any improvements required to bring an acquired facility up to standards
necessary to establish the market position intended for that facility might exceed
budgeted costs; |
|
|
|
|
The Company may incur unexpected costs in the acquisition, construction or
maintenance of real estate assets that could impact its expected returns on such assets;
and |
|
|
|
|
Leasing of real estate properties may not occur within expected timeframes or at
expected rental rates. |
Further, the Company can give no assurance that acquisition and development opportunities that
will meet managements investment criteria will be available when needed or anticipated.
The Companys long-term master leases and financial support agreements may expire and not be
extended.
Long-term master leases and financial support agreements that are expiring may not be
extended. To the extent these properties have vacancies or subleases at lower rates upon
expiration, income may decline if the Company is not able to re-let the properties at rental rates
that are as high as the former rates.
The market price of the Companys stock may be affected adversely by changes in the Companys
dividend policy.
The ability of the Company to pay dividends is dependent upon its ability to maintain funds
from operations and cash flow, to make accretive new investments and to access capital. A failure
to maintain dividend payments at current levels could result in a reduction of the market price of
the Companys stock.
Adverse trends in the healthcare service industry may negatively affect the Companys lease
revenues and the values of its investments.
The healthcare service industry is currently experiencing:
|
|
|
Regulatory and government reimbursement uncertainty resulting from comprehensive
healthcare reform efforts; |
|
|
|
|
Changing trends in the method of delivery of healthcare services; |
|
|
|
|
Increased expense for uninsured patients and uncompensated care; |
|
|
|
|
Increased competition among healthcare providers; |
|
|
|
|
Continuing pressure by private and governmental payors to contain costs and
reimbursements while increasing patients access to healthcare services; |
|
|
|
|
Lower pricing, admissions growth and operating profit margins in an uncertain
economy; |
|
|
|
|
Investment losses; |
|
|
|
|
Constrained availability of capital; |
|
|
|
|
Credit downgrades; |
|
|
|
|
Increased liability insurance expense; and |
|
|
|
|
Increased scrutiny and formal investigations by federal and state authorities. |
These changes, among others, can adversely affect the economic performance of some or all of
the tenants and sponsors who provide financial support to the Companys investments and, in turn,
negatively affect the lease revenues and the value of the Companys property investments.
20
The Company is exposed to risks associated with entering new geographic markets.
The Companys acquisition and development activities may involve entering geographic markets
where the Company has not previously had a presence. The construction and/or acquisition of
properties in new geographic areas involves risks, including the risk
that the property will not perform as anticipated and the risk that any actual costs for site
development and improvements identified in the pre-construction or pre-acquisition due diligence
process will exceed estimates. There is, and it is expected that there will continue to be,
significant competition for investment opportunities that meet managements investment criteria, as
well as risks associated with obtaining financing for acquisition activities, if necessary.
The Company may experience uninsured or underinsured losses related to casualty or liability.
The Company generally requires its tenants to maintain comprehensive liability and property
insurance that covers the Company as well as the tenants. The Company also carries comprehensive
liability insurance and property insurance covering its owned and managed properties. In addition,
tenants under long-term master leases are required to carry property insurance covering the
Companys interest in the buildings. Some types of losses, however, either may be uninsurable or
too expensive to insure against. Should an uninsured loss or a loss in excess of insured limits
occur, the Company could lose all or a portion of the capital it has invested in a property, as
well as the anticipated future revenue from the property. In such an event, the Company might
remain obligated for any mortgage debt or other financial obligation related to the property. The
Company cannot give assurance that material losses in excess of insurance proceeds will not occur
in the future.
The Company owns facilities that are occupied by tenants that may experience regulatory and
legal problems.
The Companys tenants and sponsors are subject to a complex system of federal and state
regulations relating to the delivery of healthcare services. If a tenant or sponsor experiences
regulatory or legal problems, the Company could be at risk for amounts owed to it by the tenant
under leases or financial support agreements.
Failure to maintain its status as a REIT, even in one taxable year, could cause the Company to
reduce its dividends dramatically.
The Company intends to qualify at all times as a REIT under the Code. If in any taxable year
the Company does not qualify as a REIT, it would be taxed as a corporation. As a result, the
Company could not deduct its distributions to the stockholders in computing its taxable income.
Depending upon the circumstances, a REIT that loses its qualification in one year may not be
eligible to re-qualify during the four succeeding years. Further, certain transactions or other
events could lead to the Company being taxed at rates ranging from four to 100 percent on certain
income or gains. For more information about the Companys status as a REIT, see Federal Income
Tax Information in Item 1 of this Annual Report on Form 10-K.
None.
In addition to the properties described under Item 1, Business, in Note 9 to the
Consolidated Financial Statements, and in Schedule III of Item 15 of this Annual Report on Form
10-K, the Company leases office space for its headquarters. The Companys headquarters, located in
offices at 3310 West End Avenue in Nashville, Tennessee, are leased from an unrelated third party.
The Companys current lease agreement, which commenced on November 1, 2003, covers approximately
30,934 square feet of rented space and expires on October 31, 2010, with two five-year renewal
options. Annual base rent was approximately $656,883 in 2009 with increases of approximately 3.25%
annually.
The Company is, from time to time, involved in litigation arising in the ordinary course of
business and which is expected to be covered by insurance. The Company is not aware of any pending
or threatened litigation that, if resolved against the Company, would have a material adverse
effect on the Companys consolidated financial condition or results of operations.
No matter was submitted to a vote of stockholders during the fourth quarter of 2009.
21
PART II
Shares of the Companys common stock are traded on the New York Stock Exchange under the
symbol HR. As of December 31, 2009, there were approximately 1,322 stockholders of record. The
following table sets forth the high and low sales prices per share of common stock and the dividend
declared and paid per share of common stock related to the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends Declared |
|
|
|
High |
|
|
Low |
|
|
and Paid per Share |
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
23.59 |
|
|
$ |
12.06 |
|
|
$ |
0.385 |
|
Second Quarter |
|
|
18.35 |
|
|
|
13.93 |
|
|
|
0.385 |
|
Third Quarter |
|
|
23.26 |
|
|
|
15.78 |
|
|
|
0.385 |
|
Fourth Quarter (Payable on March 4, 2010) |
|
|
22.77 |
|
|
|
19.75 |
|
|
|
0.300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter |
|
$ |
27.07 |
|
|
$ |
22.02 |
|
|
$ |
0.385 |
|
Second Quarter |
|
|
29.89 |
|
|
|
23.55 |
|
|
|
0.385 |
|
Third Quarter |
|
|
32.00 |
|
|
|
23.45 |
|
|
|
0.385 |
|
Fourth Quarter |
|
|
29.75 |
|
|
|
14.29 |
|
|
|
0.385 |
|
Future dividends will be declared and paid at the discretion of the Board of Directors.
The Companys ability to pay dividends is dependent upon its ability to generate funds from
operations, cash flows, and to make accretive new investments.
Equity Compensation Plan Information
The following table provides information as of December 31, 2009 about the Companys common
stock that may be issued upon grants of restricted stock and the exercise of options, warrants and
rights under all of the Companys existing compensation plans, including the 2007 Employees Stock
Incentive Plan and the 2000 Employee Stock Purchase Plan.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
|
|
|
Securities |
|
|
|
|
|
|
|
|
|
|
|
Remaining Available |
|
|
|
Number of |
|
|
|
|
|
|
for Future Issuance |
|
|
|
Securities to be |
|
|
|
|
|
|
Under Equity |
|
|
|
Issued upon |
|
|
Weighted Average |
|
|
Compensation Plans |
|
|
|
Exercise of |
|
|
Exercise Price of |
|
|
(Excluding |
|
|
|
Outstanding |
|
|
Outstanding |
|
|
Securities |
|
|
|
Options, Warrants |
|
|
Options, Warrants |
|
|
Reflected in the |
|
Plan Category |
|
and Rights (1) |
|
|
and Rights (1) |
|
|
First Column) |
|
Equity compensation plans approved by security holders |
|
|
335,608 |
|
|
|
|
|
|
|
1,882,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
335,608 |
|
|
|
|
|
|
|
1,882,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The Company is unable to ascertain with specificity the number of securities to be used upon
exercise of outstanding rights under the 2000 Employee Stock Purchase Plan or the weighted
average exercise price of outstanding rights under that plan. The 2000 Employee Stock
Purchase Plan provides that shares of common stock may be purchased at a per share price equal
to 85% of the fair market value of the common stock at the beginning of the offering period or
a purchase date applicable to such offering period, whichever is lower. |
22
The following table sets forth financial information for the Company, which is derived from
the Consolidated Financial Statements of the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(Dollars in thousands except per share data) |
|
2009 |
|
|
2008 (1) (2) |
|
|
2007 (1) (2) (3) |
|
|
2006 (1) (2) |
|
|
2005 (1) (2) |
|
Statement of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
253,304 |
|
|
$ |
213,931 |
|
|
$ |
197,081 |
|
|
$ |
197,899 |
|
|
$ |
191,901 |
|
Total expenses |
|
$ |
185,877 |
|
|
$ |
160,148 |
|
|
$ |
139,190 |
|
|
$ |
137,214 |
|
|
$ |
133,144 |
|
Other income (expense) |
|
$ |
(39,206 |
) |
|
$ |
(35,585 |
) |
|
$ |
(46,848 |
) |
|
$ |
(49,747 |
) |
|
$ |
(44,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
28,221 |
|
|
$ |
18,198 |
|
|
$ |
11,043 |
|
|
$ |
10,938 |
|
|
$ |
13,850 |
|
Discontinued operations |
|
$ |
22,927 |
|
|
$ |
23,562 |
|
|
$ |
49,037 |
|
|
$ |
28,858 |
|
|
$ |
38,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,148 |
|
|
$ |
41,760 |
|
|
$ |
60,080 |
|
|
$ |
39,796 |
|
|
$ |
52,750 |
|
Less: Net income attributable
to noncontrolling interests |
|
$ |
(57 |
) |
|
$ |
(68 |
) |
|
$ |
(18 |
) |
|
$ |
(77 |
) |
|
$ |
(82 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
51,091 |
|
|
$ |
41,692 |
|
|
$ |
60,062 |
|
|
$ |
39,719 |
|
|
$ |
52,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.48 |
|
|
$ |
0.35 |
|
|
$ |
0.23 |
|
|
$ |
0.24 |
|
|
$ |
0.30 |
|
Discontinued operations |
|
$ |
0.40 |
|
|
$ |
0.46 |
|
|
$ |
1.03 |
|
|
$ |
0.61 |
|
|
$ |
0.83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.88 |
|
|
$ |
0.81 |
|
|
$ |
1.26 |
|
|
$ |
0.85 |
|
|
$ |
1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.48 |
|
|
$ |
0.35 |
|
|
$ |
0.23 |
|
|
$ |
0.23 |
|
|
$ |
0.29 |
|
Discontinued operations |
|
$ |
0.39 |
|
|
$ |
0.44 |
|
|
$ |
1.01 |
|
|
$ |
0.61 |
|
|
$ |
0.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.87 |
|
|
$ |
0.79 |
|
|
$ |
1.24 |
|
|
$ |
0.84 |
|
|
$ |
1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding Basic |
|
|
58,199,592 |
|
|
|
51,547,279 |
|
|
|
47,536,133 |
|
|
|
46,527,857 |
|
|
|
46,465,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding Diluted |
|
|
59,047,314 |
|
|
|
52,564,944 |
|
|
|
48,291,330 |
|
|
|
47,498,937 |
|
|
|
47,406,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (as of the end of the period): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate properties, net |
|
$ |
1,791,693 |
|
|
$ |
1,634,364 |
|
|
$ |
1,351,173 |
|
|
$ |
1,554,620 |
|
|
$ |
1,513,247 |
|
Mortgage notes receivable |
|
$ |
31,008 |
|
|
$ |
59,001 |
|
|
$ |
30,117 |
|
|
$ |
73,856 |
|
|
$ |
105,795 |
|
Assets held for sale and discontinued
operations, net |
|
$ |
17,745 |
|
|
$ |
90,233 |
|
|
$ |
15,639 |
|
|
$ |
|
|
|
$ |
21,415 |
|
Total assets |
|
$ |
1,935,764 |
|
|
$ |
1,864,780 |
|
|
$ |
1,495,492 |
|
|
$ |
1,736,603 |
|
|
$ |
1,747,652 |
|
Notes and bonds payable |
|
$ |
1,046,422 |
|
|
$ |
940,186 |
|
|
$ |
785,289 |
|
|
$ |
849,982 |
|
|
$ |
778,446 |
|
Total stockholders equity |
|
$ |
786,766 |
|
|
$ |
794,820 |
|
|
$ |
631,995 |
|
|
$ |
825,672 |
|
|
$ |
912,468 |
|
Noncontrolling interests |
|
$ |
3,382 |
|
|
$ |
1,427 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Total equity |
|
$ |
790,148 |
|
|
$ |
796,247 |
|
|
$ |
631,995 |
|
|
$ |
825,672 |
|
|
$ |
912,468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations Basic and
Diluted (4) |
|
$ |
97,882 |
|
|
$ |
85,437 |
|
|
$ |
73,156 |
|
|
$ |
101,106 |
|
|
$ |
107,943 |
|
Funds from
operations per common share Basic (4) |
|
$ |
1.68 |
|
|
$ |
1.66 |
|
|
$ |
1.54 |
|
|
$ |
2.17 |
|
|
$ |
2.32 |
|
Funds from
operations per common share
Diluted (4) |
|
$ |
1.66 |
|
|
$ |
1.63 |
|
|
$ |
1.51 |
|
|
$ |
2.13 |
|
|
$ |
2.28 |
|
Quarterly dividends declared and paid per
common share |
|
$ |
1.54 |
|
|
$ |
1.54 |
|
|
$ |
2.09 |
|
|
$ |
2.64 |
|
|
$ |
2.63 |
|
Special dividend declared and paid per
common share |
|
$ |
|
|
|
$ |
|
|
|
$ |
4.75 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
(1) |
|
The years ended December 31, 2008, 2007, 2006 and 2005 are restated to conform to the
discontinued operations presentation for 2009. See Note 5 to the Consolidated Financial
Statements for more information on the Companys discontinued operations at December 31,
2009. |
|
(2) |
|
The years ended December 31, 2008, 2007, 2006 and 2005 are restated to retroactively
apply the provisions of FAS ASC No. 810 (previously SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements.) See Note 1 to the Consolidated Financial
Statements. |
|
(3) |
|
The Company completed the sale of its senior living assets in 2007 and paid a $4.75 per
share special dividend with a portion of the proceeds. |
|
(4) |
|
See Managements Discussion and Analysis of Financial Condition and Results of
Operations for a discussion of funds from operations (FFO), including why the Company
presents FFO and a reconciliation of net income attributable to common stockholders to FFO. |
23
Disclosure Regarding Forward-Looking Statements
This report and other materials Healthcare Realty 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, should, could and other comparable terms. These
forward-looking statements are based on the current plans and expectations of management and are
subject to a number of risks and uncertainties that could
significantly affect the Companys current plans and expectations and future financial condition
and results.
Such risks and uncertainties include, among other things, the following:
|
|
|
The unavailability of equity and debt capital, volatility in the credit markets,
increases in interest rates, or changes in the Companys debt ratings; |
|
|
|
|
The financial health of the Companys tenants and sponsors and their ability to make
loan and rent payments to the Company; |
|
|
|
|
The ability and willingness of the Companys lenders to make their funding
commitments to the Company; |
|
|
|
|
The Companys long-term master leases and financial support agreements may expire and
not be extended; |
|
|
|
|
Restrictions under ground leases through which the Company holds many of its medical
office properties could limit the Companys ability to lease, sell or finance these
properties; |
|
|
|
|
The ability of the Company to re-let properties on favorable terms as leases expire; |
|
|
|
|
The Company may incur impairment charges on its assets; |
|
|
|
|
The Company may be required to sell certain assets through purchase options held by
tenants or sponsors and may not be able to reinvest the proceeds from such sales at
equal rates of return; |
|
|
|
|
The construction of properties generally requires various government and other
approvals which may not be received; |
|
|
|
|
Unsuccessful development opportunities could result in the recognition of direct
expenses which could impact the Companys results of operations; |
|
|
|
|
Construction costs of a development property may exceed original estimates, which
could impact its profitability to the Company; |
|
|
|
|
Time required to lease up a completed development property may be greater than
originally anticipated, thereby adversely affecting the Companys cash flow and
liquidity; |
|
|
|
|
Occupancy rates and rents of a completed development property may not be sufficient
to make the property profitable to the Company; and |
|
|
|
|
Changes in the Companys dividend policy. |
Other risks, uncertainties and factors that could cause actual results to differ materially
from those projected are detailed in Item 1A Risk Factors of this report and in other reports
filed by the Company with the SEC from time to time.
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. Stockholders and
investors are cautioned not to unduly rely on such forward-looking statements when evaluating the
information presented in the Companys filings and reports.
24
Overview
Business Overview
The Company is a self-managed and self-administered REIT that owns, acquires, manages,
finances, and develops income-producing real estate properties 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.
The Companys revenues are mostly derived from rentals on its healthcare real estate
properties. The Company incurs operating and administrative expenses, including compensation,
office rent and other related occupancy costs, as well as various expenses incurred in connection
with managing its existing portfolio 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.
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.
Executive Overview
During 2009, the Company acquired approximately $106.4 million in real estate assets and
funded a $9.9 million mortgage note receivable. On the development front, the Company began
construction of a 206,000 square foot medical office building in Washington with a budget of
approximately $92.2 million, completed the construction of three medical office buildings, located
in Texas and Illinois, totaling 342,153 square feet with aggregate budgets of approximately $88.0
million, and continued construction of a 133,000 square foot medical office building in Hawaii with
a budget of approximately $86.0 million. The Company believes that its construction projects will
provide solid, long-term investment returns and high quality buildings. See Notes 4 and 14 to the
Consolidated Financial Statements for more details of the Companys acquisition and development
activities during 2009.
Management also focused on financing activities during 2009, successfully completing the
refinancing of the unsecured credit facility, as well as issuing $300.0 million of unsecured senior
notes due 2017 (the Senior Notes due 2017) and $80.0 million of mortgage debt. With the completion of
these financing transactions, the Company was able to replenish its capacity on its unsecured
credit facility, as well as provide additional capacity by increasing its unsecured credit facility
from $400.0 million to $550.0 million.
At December 31, 2009, the Companys leverage ratio [debt divided by (debt plus stockholders
equity less intangible assets plus accumulated depreciation)] was approximately 46.5%, with 72.4%
of its debt portfolio maturing after 2011. The Company had borrowings outstanding under its
unsecured credit facility due 2012 (the Unsecured Credit Facility) totaling $50.0 million at
December 31, 2009, with a remaining borrowing capacity of $500.0 million.
Trends and Matters Impacting Operating Results
Management monitors factors and trends important to the Company and REIT industry in order to
gauge the potential impact on the operations of the Company. Discussed below are some of the
factors and trends that management believes may impact future operations of the Company.
As of December 31, 2009, approximately 30.4% of the Companys real estate investments
consisted of properties leased to unaffiliated lessees pursuant to long-term net lease agreements
or subject to financial support agreements; approximately 66.7% were multi-tenanted properties with
shorter-term occupancy leases; and the remaining 2.9% of investments were related to land held for
development, corporate property, mortgage notes receivable and one investment in an unconsolidated
joint venture which is invested in real estate properties. The Companys long-term net leases and
financial support agreements are generally designed to ensure the continuity of revenues and
coverage of costs and expenses relating to the properties by the tenants and the sponsoring
healthcare operators. There is no assurance that the Companys leases and financial support
agreements will be extended past their expiration dates, which could impact the Companys operating
results as described in more detail below in Expiring Leases.
Cost of Capital
During 2009, the Company refinanced its unsecured credit facility due 2010 and subsequently
repaid most of the outstanding balance on the facility with
$300.0 million of the Senior Notes due 2017 and
$80.0 million of mortgage debt issued during the fourth quarter of 2009. The cost of the Companys
short-term borrowings increased upon refinancing the unsecured credit facility on September 30,
2009. The rate of the facility increased from 0.90% over LIBOR with a 0.20% facility fee to 2.80%
over LIBOR with a 0.40% facility fee. Also, the Senior Notes due 2017, issued on December 4,
2009, bear interest at a fixed rate of 6.50% per annum, and the mortgage debt
25
due 2016, entered into on November 25, 2009, bears interest at a fixed rate of 7.25%. The
additional interest expense that the Company will incur related to the new debt will have a
negative impact on its future net income attributable to common stockholders, funds from
operations, and cash flows.
Acquisition Activity
During 2009, the Company acquired approximately $106.4 million in real estate assets and
funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately
$43.9 million, were acquired by a joint venture in which the Company has an 80% controlling
interest. These acquisitions were funded with borrowings on the Companys unsecured credit
facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and
proceeds from various capital market financings. See Note 4 to the Consolidated Financial
Statements for more information on these acquisitions.
Development Activity
During 2009, three medical office buildings that were previously under construction with
aggregate budgets of approximately $88.0 million commenced operations, and construction began on
one medical office building with a budget of approximately $92.2 million, resulting in two medical
office buildings remaining in construction in progress at December 31, 2009 with budgets totaling
approximately $178.2 million. The Company expects completion of the core and shell of one project
with a budget of approximately $86.0 million during the second quarter of 2010 and expects
completion of the core and shell of the second project with a budget of approximately $92.2 million
during the third quarter of 2011. The three medical office buildings that commenced operations
during 2009 are currently in lease-up, which generally takes two to three years before reaching
stabilization.
In addition to the projects currently under construction, the Company is financing the
development of a six-facility outpatient campus with a budget totaling approximately $72 million.
The Company has funded $56.4 million towards the construction of four of the buildings. The
Companys consolidated joint venture acquired three of the buildings and the fourth building was
sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to
the Consolidated Financial Statements. Construction of the remaining two buildings has not yet
begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The
Companys consolidated joint venture will have an option to purchase the two remaining buildings at
a market price upon completion and full occupancy.
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 projections or
estimates of completion dates and leasing may not reflect actual results. See Note 14 to the
Consolidated Financial Statements for more information on the Companys development activities.
Dispositions
During 2009, the Company disposed of seven real estate properties for approximately $85.7
million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million
was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit
Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial
Statements for more information on these dispositions.
2010 Disposition
In January 2010, pursuant to a purchase option with an operator, the Company disposed of five
properties in Virginia. The Companys aggregate net investment in the buildings was approximately
$16.0 million at December 31, 2009. The Company received approximately $19.2 million in net
proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on
sale of approximately $2.7 million, including the write-off of approximately $0.5 million of
straight-line rent receivables.
Purchase Options
As discussed in Liquidity and Capital Resources, certain of the Companys leases include
purchase option provisions, which if exercised, could require the Company to sell a property to a
lessee or operator, which could have a negative impact on the Companys future results of
operations and cash flows.
26
Expiring Leases
Master leases on seven of the Companys properties will expire during 2010. The Company
expects to extend the master lease on one of the properties. For the remaining six properties, the
Company expects that it will not renew the master leases but will assume any tenant leases in the
buildings and will manage the operations of those buildings.
The Company also has 331 leases in its multi-tenanted buildings that will expire during 2010,
with each of the tenants occupying an average of approximately 3,088 square feet. Approximately
78% of these leases, with each tenant occupying on average approximately 2,535 square feet, are
related to leases located in on-campus buildings, which traditionally have a high probability of
renewal. The 2010 expirations are widely distributed throughout the portfolio and are not
concentrated with one tenant, health system or location.
With the expirations discussed above, the Company expects there could be a short-term negative
impact to its results of operations, but anticipates that over time it will be able to re-lease the
properties or increase tenant rents to offset any short-term decline in revenue.
Discontinued Operations
As discussed in more detail in Note 1 to the Consolidated Financial Statements, a company must
present the results of operations of real estate assets disposed of or held for sale as
discontinued operations. Therefore, the results of operations from such assets are classified as
discontinued operations for the current period, and all prior periods presented are restated to
conform to the current period presentation. Readers of the Companys Consolidated Financial
Statements should be aware that each future disposal will result in a change to the presentation of
the Companys operations in the historical Consolidated Statements of Income as previously filed.
Such reclassifications to the Consolidated Statements of Income will have no impact on previously
reported net income attributable to common stockholders.
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 GAAP), 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 attributable to common
stockholders in calculating FFO, which have the effect of decreasing FFO in the period recorded.
The comparability of FFO for the three years ended December 31, 2009 was affected by the
various acquisitions and dispositions of the Companys real estate portfolio and the results of
operations of the portfolio from period to period, as well as from the commencement of operations
of properties that were previously under construction. The comparability of FFO was also impacted
by certain unusual items. FFO for 2009 was favorably impacted by a re-measurement gain totaling
$2.7 million, or $0.05 per diluted common share, recognized in connection with the acquisition of
the remaining interests in a joint venture. FFO for 2008 was favorably impacted by the recognition
of a net gain from certain repurchases of its Senior Notes due 2011
and its unsecured senior notes due 2014
(the Senior Notes due 2014) totaling approximately $4.1 million, or $0.08 per diluted common
share. FFO for 2008 and 2007 was reduced by impairment charges recorded totaling $2.5 million and
$7.1 million, or $0.05 and $0.15, respectively, which reduced FFO for each of those years.
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. Historical cost accounting for real estate assets in accordance with
generally accepted accounting principles (GAAP) assumes that the value of real estate assets
diminishes predictably over time. However, real estate values instead have historically risen or
fallen with market conditions. The Company believes that by excluding the effect of depreciation,
amortization and gains from sales of real estate, all of which are based on historical costs and
which may be of limited relevance in evaluating current performance, FFO and FFO per share can
facilitate comparisons of operating performance between periods. 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 GAAP and is not necessarily indicative of cash available to fund cash
needs. FFO should not be considered as an alternative to net income attributable to common
27
stockholders 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 net income attributable to common stockholders to FFO for the three
years ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net income attributable to common stockholders |
|
$ |
51,091 |
|
|
$ |
41,692 |
|
|
$ |
60,062 |
|
|
Gain on sales of real estate properties |
|
|
(20,136 |
) |
|
|
(10,227 |
) |
|
|
(40,405 |
) |
Real estate depreciation and amortization |
|
|
66,927 |
|
|
|
53,972 |
|
|
|
53,499 |
|
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
46,791 |
|
|
|
43,745 |
|
|
|
13,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations Basic and Diluted |
|
$ |
97,882 |
|
|
$ |
85,437 |
|
|
$ |
73,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per Common Share Basic |
|
$ |
1.68 |
|
|
$ |
1.66 |
|
|
$ |
1.54 |
|
|
|
|
|
|
|
|
|
|
|
Funds from Operations per Common Share Diluted |
|
$ |
1.66 |
|
|
$ |
1.63 |
|
|
$ |
1.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Basic |
|
|
58,199,592 |
|
|
|
51,547,279 |
|
|
|
47,536,133 |
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Common Shares Outstanding Diluted |
|
|
59,047,314 |
|
|
|
52,564,944 |
|
|
|
48,291,330 |
|
|
|
|
|
|
|
|
|
|
|
28
Results of Operations
2009 Compared to 2008
The Companys income from continuing operations and net income attributable to common
stockholders for 2009 compared to 2008 was significantly impacted by the Companys acquisitions of
real estate properties in the latter half of 2008 of approximately $337.1 million and in 2009 of
approximately $106.4 million. The acquisition of the real estate properties were initially funded
at a relatively low interest rate on the Companys unsecured credit facility until the Company
completed its capital financing transactions in the latter part of 2009, which were previously at
higher interest rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
$ |
|
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
57,648 |
|
|
$ |
58,073 |
|
|
$ |
(425 |
) |
|
|
(0.7 |
)% |
Property operating |
|
|
180,024 |
|
|
|
136,745 |
|
|
|
43,279 |
|
|
|
31.6 |
% |
Straight-line rent |
|
|
2,027 |
|
|
|
651 |
|
|
|
1,376 |
|
|
|
211.4 |
% |
Mortgage interest |
|
|
2,646 |
|
|
|
2,207 |
|
|
|
439 |
|
|
|
19.9 |
% |
Other operating |
|
|
10,959 |
|
|
|
16,255 |
|
|
|
(5,296 |
) |
|
|
(32.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,304 |
|
|
|
213,931 |
|
|
|
39,373 |
|
|
|
18.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
22,493 |
|
|
|
23,514 |
|
|
|
(1,021 |
) |
|
|
(4.3 |
)% |
Property operating |
|
|
95,141 |
|
|
|
82,223 |
|
|
|
12,918 |
|
|
|
15.7 |
% |
Impairment |
|
|
|
|
|
|
1,600 |
|
|
|
(1,600 |
) |
|
|
|
|
Bad debts, net of recoveries |
|
|
537 |
|
|
|
1,833 |
|
|
|
(1,296 |
) |
|
|
(70.7 |
)% |
Depreciation |
|
|
62,447 |
|
|
|
48,129 |
|
|
|
14,318 |
|
|
|
29.7 |
% |
Amortization |
|
|
5,259 |
|
|
|
2,849 |
|
|
|
2,410 |
|
|
|
84.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,877 |
|
|
|
160,148 |
|
|
|
25,729 |
|
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt, net |
|
|
|
|
|
|
4,102 |
|
|
|
(4,102 |
) |
|
|
|
|
Re-measurement gain of equity interest upon acquisition |
|
|
2,701 |
|
|
|
|
|
|
|
2,701 |
|
|
|
|
|
Interest expense |
|
|
(43,080 |
) |
|
|
(42,126 |
) |
|
|
(954 |
) |
|
|
2.3 |
% |
Interest and other income, net |
|
|
1,173 |
|
|
|
2,439 |
|
|
|
(1,266 |
) |
|
|
(51.9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,206 |
) |
|
|
(35,585 |
) |
|
|
(3,621 |
) |
|
|
10.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
28,221 |
|
|
|
18,198 |
|
|
|
10,023 |
|
|
|
55.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
2,813 |
|
|
|
14,605 |
|
|
|
(11,792 |
) |
|
|
(80.7 |
)% |
Impairments |
|
|
(22 |
) |
|
|
(886 |
) |
|
|
864 |
|
|
|
(97.5 |
)% |
Gain on sales of real estate properties |
|
|
20,136 |
|
|
|
9,843 |
|
|
|
10,293 |
|
|
|
104.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
22,927 |
|
|
|
23,562 |
|
|
|
(635 |
) |
|
|
(2.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
51,148 |
|
|
|
41,760 |
|
|
|
9,388 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
(57 |
) |
|
|
(68 |
) |
|
|
11 |
|
|
|
(16.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS |
|
$ |
51,091 |
|
|
$ |
41,692 |
|
|
$ |
9,399 |
|
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Basic |
|
$ |
0.88 |
|
|
$ |
0.81 |
|
|
$ |
0.07 |
|
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Diluted |
|
$ |
0.87 |
|
|
$ |
0.79 |
|
|
$ |
0.08 |
|
|
|
10.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from continuing operations for the year ended December 31, 2009 increased
$39.4 million, or 18.4%, compared to 2008 mainly for the reasons discussed below:
29
|
|
|
Master lease rental income decreased $0.4 million, or 0.7%, from 2008 to 2009.
Master lease income decreased approximately $4.5 million due to properties whose master
leases have expired and the Company began recognizing the underlying tenant rents in
property operating income. Partially offsetting this decrease, the Company recognized
approximately $2.7 million of additional master lease rental income in 2009 related to
its 2009 acquisitions, with the remaining $1.4 million increase related mainly to annual
contractual rent increases. |
|
|
|
|
Property operating income increased $43.3 million, or 31.6%, from 2008 to 2009. The
Companys acquisitions of real estate properties during 2009 and 2008 resulted in
additional property operating income in 2009 compared to 2008 of approximately $36.4
million. Also, properties previously under construction that commenced operations
during 2008 and 2009 resulted in approximately $1.4 million in additional property
operating income from 2008 to 2009, and for properties whose master leases had expired,
the Company began recognizing the underlying tenant rents totaling approximately $3.2
million. The remaining increase of approximately $2.3 million was mainly related to
annual contractual rent increases, rental increases related to lease renewals and new
leases executed with various tenants. |
|
|
|
|
Straight-line rent increased $1.4 million from 2008 to 2009. Additional
straight-line rent recognized on leases subject to straight-lining from properties
acquired in 2008 and 2009 was approximately $2.6 million, partially offset by reductions
in straight-line rent on leases with contractual rent increases of approximately $1.2
million. |
|
|
|
|
Mortgage interest income increased $0.4 million, or 19.9%, from 2008 to 2009 due
mainly to additional fundings on construction mortgage notes. |
|
|
|
|
Other operating income decreased $5.3 million, or 32.6%, from 2008 to 2009. The
decrease is due primarily to the expirations in 2008 and 2009 of five property operating
agreements totaling approximately $3.7 million with one operator and the expiration of
replacement rent received from an operator of approximately $1.2 million. |
Total expenses for the year ended December 31, 2009 compared to the year ended December 31,
2008 increased $25.7 million, or 16.1%, mainly for the reasons discussed below:
|
|
|
General and administrative expenses decreased $1.0 million, or 4.3%, from 2008 to
2009. This decrease was mainly attributable to lower pension costs in 2009 of
approximately $1.5 million, net of additional pension expense recorded in 2009 related
to the partial settlement of an officers pension benefit, and a decrease in acquisition
and development costs of approximately $0.7 million. These amounts were partially
offset by an increase in other compensation related items of approximately $1.3 million.
See Note 11 to the Consolidated Financial Statements for more details on the Companys
pension plans. |
|
|
|
|
Property operating expenses increased $12.9 million, or 15.7%, from 2008 to 2009.
The Companys real estate acquisitions during 2008 and 2009 resulted in additional
property operating expense in 2009 of approximately $13.7 million. Also, the Company
recognized additional expense in 2009 of approximately $2.1 million related to
properties that were previously under construction and commenced operations during 2008
and 2009 and approximately $1.6 million related to properties whose master leases have
expired and the Company began incurring the underlying operating expenses. Partially
offsetting these increases were reductions in legal expenses of approximately $3.5
million in 2009 compared to 2008 and in real estate taxes of approximately $0.8 million. |
|
|
|
|
An impairment charge totaling $1.6 million was recognized in 2008 on patient accounts
receivable assigned to the Company as part of a lease termination and debt restructuring
in late 2005 related to a physician clinic owned by the Company. |
|
|
|
|
Bad debt expense decreased $1.3 million from 2008 to 2009 mainly due to a reserve
recorded by the Company in 2008 related to additional rental income due from an operator
on four properties. |
|
|
|
|
Depreciation expense increased $14.3 million, or 29.7%, from 2008 to 2009 mainly due
to increases of approximately $9.8 million related to the Companys real estate
acquisitions, approximately $1.6 million related to the commencement of operations
during 2008 and 2009 of buildings that were previously under construction, as well as
approximately $2.9 million related to additional building and tenant improvement
expenditures during 2008 and 2009. |
|
|
|
|
Amortization expense increased $2.4 million, or 84.6% from 2008 to 2009, mainly due
to the amortization of lease intangibles associated with properties acquired during 2008
and 2009, partially offset by a decrease in amortization of lease intangibles becoming
fully amortized on properties acquired during 2003 and 2004. |
30
Other income (expense) for the year ended December 31, 2009 compared to the year ended
December 31, 2008 changed unfavorably by $3.6 million, or 10.2%, mainly for the reasons discussed
below:
|
|
|
The Company recognized a net gain on extinguishment of debt in 2008 of approximately
$4.1 million related to repurchases of the Senior Notes due 2011 and 2014, which is
discussed in more detail in Note 9 to the Consolidated Financial Statements. |
|
|
|
|
The Company recognized a $2.7 million gain in 2009 related to the valuation and
re-measurement of the Companys equity interest in a joint venture in connection with
the Companys acquisition of the remaining equity interests in the joint venture. |
|
|
|
|
Interest expense increased $1.0 million, or 2.3%, from 2008 to 2009. The increase
was mainly attributable to additional interest expense of approximately $3.8 million
related to mortgage notes payable assumed in the 2008 and 2009 real estate acquisitions,
a higher average outstanding balance on the unsecured credit facility of approximately
$0.4 million, as well as interest incurred on the Senior Notes due 2017 of approximately
$1.5 million and interest on the mortgage debt entered into during 2009 of approximately
$0.6 million. These amounts are partially offset by interest savings of approximately
$1.9 million related to the repurchases of the Senior Notes due 2011 and 2014 in 2008,
as well as an increase in capitalized interest of approximately $3.4 million on
development projects during 2009. |
|
|
|
|
Interest and other income decreased $1.3 million, or 51.9%, from 2008 to 2009. The
decrease is primarily a result of additional equity income recognized in 2008 of
approximately $1.0 million related to a joint venture investment that the Company
accounted for under the equity method until it acquired the remaining interests in the
joint venture in 2009, at which time the Company began to consolidate the accounts of
the joint venture. |
Income from discontinued operations totaled $22.9 million and $23.6 million for the years
ended December 31, 2009 and 2008, respectively, which includes the results of operations, net gains
and impairments related to property disposals and properties classified as held for sale. The
Company disposed of seven properties in 2009 and seven properties and two parcels of land in 2008.
Six properties were classified as held for sale at December 31, 2009. Income from discontinued
operations for 2008 also included a $7.2 million fee received from an operator to terminate its
financial support agreement with the Company in connection with the disposition of the property.
31
2008 Compared to 2007
The Companys net income attributable to common stockholders and net income attributable to
common stockholders per share for 2008 compared to 2007 was impacted by senior living asset
dispositions in 2007 and the resulting gain on sale. Included in the sale were 56 real estate
properties in which the Company had investments totaling approximately $328.4 million ($259.9
million, net), 16 mortgage notes and notes receivable totaling approximately $63.2 million, and
certain other assets and liabilities related to the assets. The Company received cash proceeds
from the sale totaling approximately $369.4 million, recorded a deferred gain of approximately $5.7
million and recognized a net gain of approximately $40.2 million. The sale also included the 21
properties associated with all of the Companys variable interest entities (VIEs), including the
six VIEs that the Company consolidated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
(Dollars in thousands) |
|
2008 |
|
|
2007 |
|
|
$ |
|
|
% |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
58,073 |
|
|
$ |
56,086 |
|
|
$ |
1,987 |
|
|
|
3.5 |
% |
Property operating |
|
|
136,745 |
|
|
|
121,644 |
|
|
|
15,101 |
|
|
|
12.4 |
% |
Straight-line rent |
|
|
651 |
|
|
|
959 |
|
|
|
(308 |
) |
|
|
(32.1 |
)% |
Mortgage interest |
|
|
2,207 |
|
|
|
1,752 |
|
|
|
455 |
|
|
|
26.0 |
% |
Other operating |
|
|
16,255 |
|
|
|
16,640 |
|
|
|
(385 |
) |
|
|
(2.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213,931 |
|
|
|
197,081 |
|
|
|
16,850 |
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
23,514 |
|
|
|
20,619 |
|
|
|
2,895 |
|
|
|
14.0 |
% |
Property operating |
|
|
82,223 |
|
|
|
71,680 |
|
|
|
10,543 |
|
|
|
14.7 |
% |
Impairment |
|
|
1,600 |
|
|
|
|
|
|
|
1,600 |
|
|
|
|
|
Bad debts, net of recoveries |
|
|
1,833 |
|
|
|
222 |
|
|
|
1,611 |
|
|
|
725.7 |
% |
Depreciation |
|
|
48,129 |
|
|
|
42,141 |
|
|
|
5,988 |
|
|
|
14.2 |
% |
Amortization |
|
|
2,849 |
|
|
|
4,528 |
|
|
|
(1,679 |
) |
|
|
(37.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160,148 |
|
|
|
139,190 |
|
|
|
20,958 |
|
|
|
15.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt, net |
|
|
4,102 |
|
|
|
|
|
|
|
4,102 |
|
|
|
|
|
Interest expense |
|
|
(42,126 |
) |
|
|
(48,307 |
) |
|
|
6,181 |
|
|
|
(12.8 |
)% |
Interest and other income, net |
|
|
2,439 |
|
|
|
1,459 |
|
|
|
980 |
|
|
|
67.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,585 |
) |
|
|
(46,848 |
) |
|
|
11,263 |
|
|
|
(24.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
18,198 |
|
|
|
11,043 |
|
|
|
7,155 |
|
|
|
64.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
14,605 |
|
|
|
15,721 |
|
|
|
(1,116 |
) |
|
|
(7.1 |
)% |
Impairments |
|
|
(886 |
) |
|
|
(7,089 |
) |
|
|
6,203 |
|
|
|
(87.5 |
)% |
Gain on sales of real estate properties |
|
|
9,843 |
|
|
|
40,405 |
|
|
|
(30,562 |
) |
|
|
(75.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
23,562 |
|
|
|
49,037 |
|
|
|
(25,475 |
) |
|
|
(52.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
41,760 |
|
|
|
60,080 |
|
|
|
(18,320 |
) |
|
|
(30.5 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
(68 |
) |
|
|
(18 |
) |
|
|
(50 |
) |
|
|
277.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS |
|
$ |
41,692 |
|
|
$ |
60,062 |
|
|
$ |
(18,370 |
) |
|
|
(30.6 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Basic |
|
$ |
0.81 |
|
|
$ |
1.26 |
|
|
$ |
(0.45 |
) |
|
|
(35.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders Diluted |
|
$ |
0.79 |
|
|
$ |
1.24 |
|
|
$ |
(0.45 |
) |
|
|
(36.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues from continuing operations for the year ended December 31, 2008 increased
$16.9 million, or 8.5%, compared to 2007, mainly for the reasons discussed below:
|
|
|
Master lease rental income increased $2.0 million, or 3.5%, from 2007 to 2008. The
majority of the increase was due to annual contractual rent increases from 2007 to 2008
of approximately $1.3 million. During 2008, the Company also
|
32
|
|
|
recognized additional master lease rental income totaling approximately $0.2 million related to its 2008
acquisitions and a $0.8 million lease termination fee, offset partially by prior year
rental income of the property of approximately $0.3 million.
|
|
|
|
|
Property operating income increased $15.1 million, or 12.4%, from 2007 to 2008. The
Companys acquisitions of real estate properties during 2008 and 2007 resulted in
additional property operating income in 2008 compared to 2007 of approximately $6.7
million. Also, properties previously under construction that commenced operations
during 2007 and 2008 resulted in approximately $2.9 million in additional property
operating income from 2007 to 2008. The remaining increase of approximately $5.5
million was related generally to annual contractual rent increases, rental increases
related to lease renewals and new leases executed with various tenants. |
|
|
|
|
Mortgage interest income increased $0.5 million, or 26.0%, from 2007 to 2008 due
mainly to additional fundings on construction mortgage notes. |
Total expenses for the year ended December 31, 2008 compared to the year ended December 31,
2007 increased $21.0 million, or 15.1%, mainly for the reasons discussed below:
|
|
|
General and administrative expenses increased $2.9 million, or 14.0%, from 2007 to
2008. This increase was attributable mainly to higher compensation-related expenses in
2008 of approximately $1.8 million related to annual salary increases and amortization
of restricted shares, an increase in pension expense recorded of approximately $0.7
million and expenses recognized related to acquisition and development efforts of
approximately $1.8 million. Also, the Company recorded a charge in 2007 of
approximately $1.5 million related to the retirement of an officer and the termination
of five employees. |
|
|
|
|
Property operating expenses increased $10.5 million, or 14.7%, from 2007 to 2008.
The Company recognized expense of approximately $2.7 million related to properties that
were previously under construction and commenced operations during 2007 and 2008. Also,
the Companys acquisitions of real estate properties during 2008 and 2007 resulted in
additional property operating expense in 2008 compared to 2007 of approximately $2.7
million. In addition, legal expense increased approximately $3.5 million in 2008
compared to 2007 mainly due to legal fee reimbursements received in 2007 and a
litigation settlement of $1.0 million in 2008. Also, utility and real estate tax rate
increases in 2008 resulted in additional expenses of approximately $1.3 million and $0.6
million, respectively. |
|
|
|
|
An impairment charge totaling $1.6 million was recognized in 2008 on patient accounts
receivable assigned to the Company as part of a lease termination and debt restructuring
in late 2005 related to a physician clinic owned by the Company. See Note 6 to the
Consolidated Financial Statements. |
|
|
|
|
Bad debt expense increased $1.6 million from 2007 to 2008 mainly due to a reserve
recorded by the Company in 2008 related to additional rental income due from an operator
on four properties. |
|
|
|
|
Depreciation expense increased $6.0 million, or 14.2%, from 2007 to 2008 mainly due
to increases related to the acquisitions of real estate properties of approximately $1.4
million, the commencement of operations of buildings during 2007 and 2008 that were
previously under construction of approximately $1.0 million, as well as approximately
$3.6 million related to additional building and tenant improvement expenditures during
2007 and 2008. |
|
|
|
|
Amortization expense decreased $1.7 million, or 37.1% from 2007 to 2008, mainly due
to a decrease in amortization of lease intangibles associated with properties acquired
during 2003 and 2004 becoming fully amortized, offset partially by amortization of lease
intangibles related to properties acquired during 2007 and 2008. |
Other income (expense) for the year ended December 31, 2008 compared to the year ended
December 31, 2007 improved $11.3 million, or 24.0%, mainly for the reasons discussed below:
|
|
|
The Company recognized a net gain on extinguishment of debt in 2008 of approximately
$4.1 million related to repurchases of the Companys Senior Notes due 2011 and 2014
which is discussed in more detail in Note 9 to the Consolidated Financial Statements. |
|
|
|
|
Interest expense decreased $6.2 million, or 12.8%, from 2007 to 2008. The decrease
was mainly attributable to an increase in the capitalization of interest of
approximately $2.7 million related to the Companys construction projects, interest
savings of approximately $1.0 million related to repurchases of the Senior Notes due
2011 and 2014 and a reduction of interest expense of approximately $3.1 million related
mainly to a decrease in interest rates in 2008 compared to 2007 on the unsecured credit
facility. |
33
|
|
|
Interest and other income increased $1.0 million, or 67.2%, from 2007 to 2008. In
connection with the Companys acquisition of the remaining interest in a joint venture
in which it previously had an equity interest and the related transition of accounting
from the joint venture to the Company, the joint venture recorded an adjustment to
straight-line rent on the properties. As such, the Company recognized its portion of
the adjustment through equity income on the joint venture of approximately $1.1 million
(of which $0.8 million was related to prior years). Also, the Company recorded a gain
on the sale of a land parcel of approximately $0.4 million. These amounts are partially offset
by a reduction in income recognized on one joint venture of approximately $0.4 million due
to the partial repurchase of the Companys preferred equity investment. |
Income from discontinued operations totaled $23.6 million and $49.0 million for the years
ended December 31, 2008 and 2007, respectively, which includes the results of operations, net gains
and impairments related to property disposals and properties classified as held for sale. The
Company disposed of seven properties and two parcels of land in 2008 and 59 properties in 2007, and
had six properties classified as held for sale at December 31, 2009. Income from discontinued
operations for 2008 also included a $7.2 million fee received from an operator to terminate its
financial support agreement with the Company in connection with the disposition of the property.
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 the Unsecured Credit Facility, secured debt borrowings, or from other private debt
or equity offerings. For the year ended December 31, 2009, the Company generated approximately
$103.2 million in cash from operations and used $101.5 million in total cash for investing and
financing activities, including dividend payments, as detailed in the Companys Consolidated
Statements of Cash Flows.
Cost of Capital
On September 30, 2009, the Company refinanced its Unsecured Credit Facility and repaid most of
the outstanding balance on the Unsecured Credit Facility with the $300.0 million of Senior Notes
due 2017 and the $80.0 million of mortgage debt entered into during the fourth quarter of 2009.
The cost of the Companys short-term borrowings increased upon refinancing the Unsecured Credit
Facility. The rate of the facility increased from 0.90% over LIBOR with a 0.20% facility fee to
2.80% over LIBOR with a 0.40% facility fee. Also, the unsecured notes due 2017, issued on December
4, 2009, bear interest at a fixed rate of 6.50% per annum and the mortgage debt due 2016, entered
into on November 25, 2009, bears interest at a fixed rate of 7.25%.
The additional interest expense that the Company will incur related to the new debt will have
a negative impact on its future consolidated net income attributable to common stockholders, funds
from operations, and cash flows.
Key Indicators
The Company monitors its liquidity and capital resources and relies on several key indicators
in its assessment of capital markets for financing acquisitions and other operating activities as
needed, including the following:
|
|
|
Debt metrics; |
|
|
|
|
Dividend payout percentage; and |
|
|
|
|
Interest rates, underlying treasury rates, debt market spreads and equity markets. |
The Company uses these indicators and others to compare its operations to its peers and to
help identify areas in which the Company may need to focus its attention.
34
Contractual Obligations
The Company monitors its contractual obligations to ensure funds are available to meet
obligations when due. The following table represents the Companys long-term contractual
obligations for which the Company was making payments at December 31, 2009, including interest
payments due where applicable. At December 31, 2009, the Company had no long-term capital lease or
purchase obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Less than |
|
|
1 -3 |
|
|
3 - 5 |
|
|
More than 5 |
|
(Dollars in thousands) |
|
Total |
|
|
1 Year |
|
|
Years |
|
|
Years |
|
|
Years |
|
Long-term debt obligations,
including interest (1) |
|
$ |
1,438,767 |
|
|
$ |
61,427 |
|
|
$ |
438,995 |
|
|
$ |
349,017 |
|
|
$ |
589,328 |
|
Operating lease commitments (2) |
|
|
269,104 |
|
|
|
4,107 |
|
|
|
7,183 |
|
|
|
7,235 |
|
|
|
250,579 |
|
Construction in progress (3) |
|
|
100,442 |
|
|
|
57,036 |
|
|
|
36,577 |
|
|
|
6,829 |
|
|
|
|
|
Tenant improvements (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension obligations (5) |
|
|
2,581 |
|
|
|
2,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
1,810,894 |
|
|
$ |
125,151 |
|
|
$ |
482,755 |
|
|
$ |
363,081 |
|
|
$ |
839,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The amounts shown include estimated interest on total debt other than the Unsecured
Credit Facility. Excluded from the table above are the premium on the Senior Notes due
2011 of $0.4 million, the discount on the Senior Notes due 2014 of $0.6 million, and the
discount on the Senior Notes due 2017 of $2.0 million which are included in notes and bonds
payable on the Companys Consolidated Balance Sheet as of December 31, 2009. Also excluded
from the table above are discounts on five mortgage notes payable, totaling approximately
$7.7 million. The Companys long-term debt principal obligations are presented in more
detail in the table below. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Balance at |
|
|
|
|
Contractual Interest |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
|
|
|
Rates at December |
|
Principal |
|
Interest |
(In thousands) |
|
2009 |
|
|
2008 |
|
|
Maturity Date |
|
31, 2009 |
|
Payments |
|
Payments |
Unsecured Credit Facility due 2010 (a) |
|
$ |
|
|
|
$ |
329.0 |
|
|
1/10 |
|
LIBOR + 0.90% |
|
At maturity |
|
Quarterly |
Unsecured Credit Facility due 2012 (a) |
|
|
50.0 |
|
|
|
|
|
|
9/12 |
|
LIBOR + 2.80% |
|
At maturity |
|
Quarterly |
Senior Notes due 2011 |
|
|
286.3 |
|
|
|
286.3 |
|
|
5/11 |
|
8.125% |
|
At maturity |
|
Semi-Annual |
Senior Notes due 2014 |
|
|
264.7 |
|
|
|
264.7 |
|
|
4/14 |
|
5.125% |
|
At maturity |
|
Semi-Annual |
Senior Notes due 2017 |
|
|
300.0 |
|
|
|
|
|
|
1/17 |
|
6.500% |
|
At maturity |
|
Semi-Annual |
Mortgage Notes Payable |
|
|
155.4 |
|
|
|
67.7 |
|
|
5/15-10/30 |
|
5.000%-7.765% |
|
Monthly |
|
Monthly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,056.4 |
|
|
$ |
947.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
In September 2009, the Company entered into a $550.0 million amended and restated
Unsecured Credit Facility due in 2012 and incurred an annual facility fee of 0.40%. The
new credit facility replaced the Companys $400.0 million Unsecured Credit Facility due
2010 in which it incurred an annual facility fee of 0.20%. |
|
|
|
(2) |
|
Includes primarily the corporate office and ground leases, with expiration dates
through 2101, related to various real estate investments for which the Company is currently
making payments. |
|
(3) |
|
Includes cash flow projections related to the construction of two buildings, a portion
of which relates to tenant improvements that will generally be funded after the core and
shell of the building is substantially completed. |
|
(4) |
|
The Company has various first-generation tenant improvements budgeted as of December
31, 2009 totaling approximately $31.3 million related to properties that were developed by
the Company that the Company may fund for tenant improvements as leases are signed. The
Company has not included these budgeted amounts in the table above. |
|
(5) |
|
At December 31, 2009, one employee, the Companys chief executive officer, was eligible
to retire under the Executive Retirement Plan. If the chief executive officer retired and
received full retirement benefits based upon the terms of the plan, the future benefits to
be paid are estimated to be approximately $29.9 million as of December 31, 2009. In 2008,
the Company froze the maximum annual benefit payable under the Executive Retirement Plan at
$896,000, which resulted in a reduction of benefits payable to the Companys chief
executive officer. In consideration of the curtailment and as a partial settlement of the
plan, the Company made a one-time cash payment of $2.3 million to its chief executive
officer in early 2009. Because the Company does not know when its chief executive officer
will retire, it has not projected when the retirement benefits would be paid in this table.
At December 31, 2009, the Company had recorded a $16.1 million liability, included
in other liabilities, related to its pension plan obligations. Also, in November 2009, the
Company terminated its Retirement Plan for Outside
Directors. As a result, lump sum payments
totaling approximately $2.6 million will be paid in November 2010, or earlier upon
retirement, to the outside directors that participated in the plan, which are included in the
table above. |
35
The Company has a $550.0 million Unsecured Credit Facility with a syndicate of 16
lenders. Loans outstanding under the Unsecured Credit Facility will bear interest at a rate equal
to (x) LIBOR or the base rate (defined as the highest of (i) the Federal Funds Rate plus 0.5%; (ii)
the Bank of America prime rate and (iii) LIBOR) plus (y) a margin ranging from 2.15% to 3.20%
(currently 2.80%) for LIBOR-based loans and 0.90% to 1.95% for base rate loans (currently 1.55%),
based upon the Companys unsecured debt ratings. In addition, the Company pays a facility fee per
annum on the aggregate amount of commitments. The facility fee is 0.40% per annum, unless the
Companys credit rating falls below a BBB-/Baa3, at which point the facility fee would be 0.50%.
As of December 31, 2009, the Company had $50.0 million outstanding on the Unsecured Credit Facility
with a remaining borrowing capacity of $500.0 million. At December 31, 2009, 72.4% of the
Companys debt balances were due after 2011, and the Unsecured Credit Facility, the Companys only
variable rate debt, was approximately 4.8% of total outstanding debt. The Unsecured Credit Facility
contains certain representations, warranties, and financial and other covenants customary in such
loan agreements.
Moodys Investors Service, Standard and Poors, and Fitch Ratings rate the Companys senior
debt Baa3, BBB-, and BBB, respectively. For the year ended December 31, 2009, the Companys
earnings from continuing operations covered fixed charges at a ratio of 1.33 to 1.00; the Companys
stockholders equity totaled approximately $786.8 million; and the Companys leverage ratio [debt
divided by (debt plus stockholders equity less intangible assets plus accumulated depreciation)]
was approximately 46.5%.
As of December 31, 2009, the Company was in compliance with its financial covenant provisions
under its various debt instruments.
At-The-Market Equity Offering Program
On December 31, 2008, the Company entered into a sales agreement with Cantor Fitzgerald & Co.
to sell up to 2,600,000 shares of its common stock through an at-the-market equity offering program
under which Cantor Fitzgerald acts as agent and/or principal. During 2009, the Company sold
1,201,600 shares of common stock, at prices ranging from $21.62 per share to $22.50 per share,
generating approximately $25.7 million in net proceeds. In January 2010, the Company sold an
additional 698,700 shares of common stock under the plan for net proceeds totaling approximately
$14.9 million. On February 22, 2010, the Company entered into a new sales agreement with Cantor
Fitzgerald to sell up to 5,000,000 shares of its common stock through the at-the-market equity
offering program. The 5,000,000 shares include 699,700 shares that
remained unsold under the prior sales agreement and 4,300,300 new
shares. This agreement supersedes the prior sales agreement.
Security Deposits and Letters of Credit
As of December 31, 2009, the Company held approximately $6.2 million in letters of credit,
security deposits, and capital replacement reserves for the benefit of the Company in the event the
obligated lessee or borrower fails to perform under the terms of its 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.
Acquisition Activity
During 2009, the Company acquired approximately $106.4 million in real estate assets and
funded a $9.9 million mortgage note receivable. Four of the properties, aggregating approximately
$43.9 million, were acquired by a joint venture in which the Company has an 80% controlling
interest. These acquisitions were funded with borrowings on the Companys unsecured credit
facilities, the assumption of existing mortgage debt, proceeds from real estate dispositions, and
proceeds from various capital market financings. See Note 4 to the Consolidated Financial
Statements for more information on these acquisitions.
Dispositions
During 2009, the Company disposed of seven real estate properties for approximately $85.7
million in net proceeds. Also, one mortgage note receivable totaling approximately $12.6 million
was repaid. Proceeds from these dispositions were used to repay amounts under the Unsecured Credit
Facility and to fund additional real estate investments. See Note 4 to the Consolidated Financial
Statements for more information on these dispositions.
2010 Disposition
In January 2010, pursuant to a purchase option with an operator, the Company disposed of five
properties in Virginia. The Companys aggregate net investment in the buildings was approximately
$16.0 million at December 31, 2009. The Company received
approximately $19.2 million in net proceeds and $0.8 million in lease termination fees. The
Company expects to recognize a gain on sale of approximately $2.7 million, including the write-off
of approximately $0.5 million of straight-line rent receivables.
36
Purchase Options
Excluding the five properties located in Virginia that were classified as held for sale, the
Company had approximately $111.1 million in real estate properties at December 31, 2009 that were
subject to exercisable purchase options held by the respective operators and lessees that had not
been exercised. On a probability-weighted basis, the Company currently estimates that
approximately $32.0 million of these options might be exercised in the future. During 2010, an
additional purchase option becomes exercisable on a property in which the Company had a gross
investment of approximately $3.1 million at December 31, 2009. The Company does not believe it is
likely that the operator will exercise the purchase option in the near future. Other properties
may have purchase options exercisable in 2011 and beyond, but the Company does not believe it can
reasonably estimate the probability of exercise of these purchase options.
Construction in Progress and Other Commitments
As of December 31, 2009, the Company had two medical office buildings under construction with
budgets totaling $178.2 million and estimated completion dates in the second quarter of 2010 and
the third quarter of 2011. At December 31, 2009, the Company had $95.1 million invested in
construction in progress, including two parcels of land totaling $17.3 million in land held for
future development, and expects to fund $57.0 million, $31.4 million, and $5.2 million in 2010,
2011 and 2012, respectively, on the two projects currently under construction. See Note 14 to the
Consolidated Financial Statements for more details on the Companys construction in progress at
December 31, 2009.
The Company also had various remaining first-generation tenant improvement obligations
budgeted as of December 31, 2009 totaling approximately $31.3 million related to properties that
were developed by the Company.
In addition to the projects currently under construction, the Company is financing the
development of a six-facility outpatient campus with a budget totaling approximately $72 million.
The Company has funded $56.4 million towards the construction of four of the buildings. The
Companys consolidated joint venture acquired three of the buildings and the fourth building was
sold to a third party during 2009. These acquisitions are discussed in more detail in Note 4 to
the Consolidated Financial Statements. Construction of the remaining two buildings has not yet
begun, but the Company expects to fund the remaining $15.6 million during 2010 and 2011. The
Companys consolidated joint venture will have an option to purchase the two remaining buildings at
a market price upon completion and full occupancy.
The Company intends to fund these commitments with internally generated cash flows, proceeds
from the Unsecured Credit Facility, proceeds from the sale of real estate properties, proceeds from
repayments of mortgage notes receivable, proceeds from secured debt, capital market financings, or
private debt or equity offerings.
Operating Leases
As of December 31, 2009, the Company was obligated under operating lease agreements consisting
primarily of the Companys corporate office lease and ground leases related to 42 real estate
investments, excluding leases the Company has prepaid. These operating leases have expiration
dates through 2101. Rental expense relating to the operating leases for the years ended December
31, 2009, 2008 and 2007 was $3.8 million, $3.3 million, and $3.0 million, respectively.
Dividends
The Company is required to pay dividends to its stockholders at least equal to 90% of its
taxable income in order to maintain its qualification as a real estate investment trust. Common
stock cash dividends paid during 2009 or related to 2009 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly |
|
|
|
|
|
|
Quarter |
|
Dividend |
|
Date of Declaration |
|
Date of Record |
|
Date Paid/*Payable |
4th Quarter 2008 |
|
$ |
0.385 |
|
|
February 3, 2009 |
|
February 20, 2009 |
|
March 5, 2009 |
1st Quarter 2009 |
|
$ |
0.385 |
|
|
May 11, 2009 |
|
May 22, 2009 |
|
June 5, 2009 |
2nd Quarter 2009 |
|
$ |
0.385 |
|
|
August 10, 2009 |
|
August 21, 2009 |
|
September 4, 2009 |
3rd Quarter 2009 |
|
$ |
0.385 |
|
|
November 9, 2009 |
|
November 20, 2009 |
|
December 4, 2009 |
4th Quarter 2009 |
|
$ |
0.300 |
|
|
February 2, 2010 |
|
February 18, 2010 |
|
*March 4, 2010 |
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.
37
Liquidity
Net cash provided by operating activities was $103.2 million, $105.3 million and $90.9 million
for 2009, 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 2010, paying dividends, and funding debt service, with cash flows from operations,
borrowings under the Unsecured Credit Facility, proceeds of mortgage notes receivable repayments,
proceeds from sales of real estate investments, proceeds from secured debt borrowings, or
additional capital market financings. The Company also had unencumbered real estate assets of
approximately $1.9 billion at December 31, 2009, which could serve as collateral for secured
mortgage 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 Company 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 lease rates that generally increase on an
annual basis at fixed rates or based 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 to the adverse effects of inflation. In addition,
inflation has 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 to any adverse effects
of inflation. Interest payable under the Unsecured Credit Facility is calculated at a variable
rate; therefore, the amount of interest payable under the Unsecured Credit Facility is influenced
by changes in short-term rates, which tend to be sensitive to inflation. 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.
New Accounting Pronouncements
Note 1 to the Consolidated Financial Statements provides a discussion of new accounting
standards. The Company does not believe these new standards will have a significant impact on the
Companys Consolidated Financial Statements or results of operations.
Market Risk
The Company is exposed to market risk in the form of changing interest rates on its debt and
mortgage notes receivable. Management uses regular monitoring of market conditions and analysis
techniques to manage this risk.
At December 31, 2009, approximately $996.4 million, or 95.2%, of the Companys total debt,
bore interest at fixed rates. Additionally, $30.0 million of the Companys mortgage notes and
other notes receivable bore interest at fixed rates.
The following table provides information regarding the sensitivity of certain of the Companys
financial instruments, as described above, to market conditions and changes resulting from changes
in interest rates. For purposes of this analysis, sensitivity is demonstrated based on
hypothetical 10% changes in the underlying market interest rates.
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on Earnings and Cash Flows |
|
|
|
Outstanding |
|
|
|
|
|
|
Assuming 10% |
|
|
Assuming 10% |
|
|
|
Principal Balance |
|
|
Calculated Annual |
|
|
Increase in Market |
|
|
Decrease in Market |
|
(Dollars in thousands) |
|
As of 12/31/09 |
|
|
Interest Expense (1) |
|
|
Interest Rates |
|
|
Interest Rates |
|
Variable Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured Credit Facility |
|
$ |
50,000 |
|
|
$ |
1,515 |
|
|
$ |
(12 |
) |
|
$ |
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes Receivable |
|
$ |
4,290 |
|
|
$ |
267 |
|
|
$ |
1 |
|
|
$ |
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
|
|
|
|
|
|
|
|
|
Assuming 10% |
|
|
Assuming 10% |
|
|
|
|
|
|
Carrying Value |
|
|
|
|
|
|
Increase in |
|
|
Decrease in |
|
|
|
|
|
|
at December 31, |
|
|
December 31, |
|
|
Market Interest |
|
|
Market Interest |
|
|
December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2009 |
|
|
Rates |
|
|
Rates |
|
|
2008 (2) |
|
Fixed Rate Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes
due 2011, including premium |
|
$ |
286,655 |
|
|
$ |
307,568 |
|
|
$ |
307,231 |
|
|
$ |
307,883 |
|
|
$ |
320,269 |
|
Senior Notes
due 2014, net of discount |
|
|
264,090 |
|
|
|
282,883 |
|
|
|
280,328 |
|
|
|
285,497 |
|
|
|
298,025 |
|
Senior Notes due 2017,
net of discount |
|
|
297,988 |
|
|
|
297,988 |
|
|
|
292,779 |
|
|
|
304,680 |
|
|
|
|
|
Mortgage Notes Payable |
|
|
147,689 |
|
|
|
150,115 |
|
|
|
146,151 |
|
|
|
154,352 |
|
|
|
94,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
996,422 |
|
|
$ |
1,038,554 |
|
|
$ |
1,026,489 |
|
|
$ |
1,052,412 |
|
|
$ |
712,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate Receivables: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes Receivable |
|
$ |
26,718 |
|
|
$ |
26,485 |
|
|
$ |
25,547 |
|
|
$ |
27,463 |
|
|
$ |
16,597 |
|
Other Notes Receivable |
|
|
3,276 |
|
|
|
3,276 |
|
|
|
3,225 |
|
|
|
3,328 |
|
|
|
487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,994 |
|
|
$ |
29,761 |
|
|
$ |
28,772 |
|
|
$ |
30,791 |
|
|
$ |
17,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Annual interest expense on the variable rate debt and variable rate receivables was
calculated using a constant principal balance and the December 31, 2009 market rates of 3.03%
and 6.23%, respectively. The increase or decrease in market interest rate is based on the
variable LIBOR portion of the interest rate which is 0.23% as of December 31, 2009. |
|
(2) |
|
Fair values as of December 31, 2008 represent fair values of obligations or receivables
that were outstanding as of that date, and do not reflect the effect of any subsequent changes
in principal balances and/or additions or extinguishments of instruments. Mortgage notes
payable for 2008 include four mortgage notes classified as held for sale with an aggregate
fair value at December 31, 2008 of approximately $28.7 million. |
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 its financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources.
Application of Critical Accounting Policies to Accounting Estimates
The Companys Consolidated Financial Statements are prepared in accordance with GAAP and the
rules and regulations of the Securities and Exchange Commission. In preparing the Consolidated
Financial Statements, management is required to exercise judgment and make assumptions that impact
the carrying amount of assets and liabilities and the reported amounts of revenues and expenses
reflected in the Consolidated Financial Statements.
Management routinely evaluates the estimates and assumptions used in the preparation of its
Consolidated Financial Statements. These regular evaluations consider historical experience and
other reasonable factors and use the seasoned judgment of management personnel. Management has
reviewed the Companys critical accounting policies with the Audit Committee of the Board of
Directors.
Management believes the following paragraphs in this section describe the application of
critical accounting policies by management to arrive at the critical accounting estimates reflected
in the Consolidated Financial Statements. The Companys accounting policies are more fully
discussed in Note 1 to the Consolidated Financial Statements.
39
Valuation of Long-Lived and Intangible Assets and Goodwill
The Company assesses the potential for impairment of identifiable intangible assets and
long-lived assets, including real estate properties, whenever events occur or a change in
circumstances indicates that the recorded value might not be fully recoverable. Important factors
that could cause management to review for impairment include significant underperformance of an
asset relative to historical or expected operating results; significant changes in the Companys
use of assets or the strategy for its overall business; plans to sell an asset before its
depreciable life has ended; or significant negative economic trends or negative industry trends for
the Company or its operators. In addition, the Company reviews for possible impairment those
assets subject to purchase options and those impacted by casualties, such as hurricanes. If
management determines that the carrying value of the Companys assets may not be fully recoverable
based on the existence of any of the factors above, or others, management would measure and record
an impairment charge based on the estimated fair value of the property. The Company recorded
impairments of $0.02 million, $2.5 million, and $7.1 million, respectively, for the years ended
December 31, 2009, 2008 and 2007 related to real estate properties and other long-lived assets.
The impairment charge in 2009 was recorded in connection with the sale of a property in Washington.
The impairment charges in 2008 included $1.6 million related to a long-lived asset, $0.1 million
related to two properties sold in 2008, and $0.8 million related to two properties classified as
held for sale in 2008, reducing the Companys carrying values on the properties to the estimated
fair values of the properties less costs to sell. The impairment charges in 2007 included $4.1
million recorded in connection with the sale of a property in Texas and $3.0 million related to six
properties classified as held for sale as of December 31, 2007, reducing the Companys carrying
values on the properties to the estimated fair values of the properties less costs to sell.
The Company also performs an annual goodwill impairment review. The Companys reviews are
performed as of December 31 of each year. The Companys 2009 and 2008 reviews indicated that no
impairment had occurred with the respect to the Companys $3.5 million goodwill asset.
Capitalization of Costs
GAAP generally allows for the capitalization of various types of costs. The rules and
regulations on capitalizing costs and the subsequent depreciation or amortization of those costs
versus expensing them in the period incurred vary depending on the type of costs and the reason for
capitalizing the costs.
Direct costs of a development project generally include construction costs, professional
services such as architectural and legal costs, travel expenses, land acquisition costs as well as
other types of fees and expenses. These costs are capitalized as part of the basis of an asset to
which such costs relate. Indirect costs include capitalized interest and overhead costs. The
Companys overhead costs are based on overhead load factors that are charged to a project based on
direct time incurred. The Company computes the overhead load factors annually for its acquisition
and development departments, which have employees who are involved in the projects. The overhead
load factors are computed to absorb that portion of indirect employee costs (payroll and benefits,
training, occupancy and similar costs) that are attributable to the productive time the employee
incurs working directly on projects. The employees in the Companys acquisitions and development
departments who work on these projects maintain and report their hours daily, by project. Employee
costs that are administrative, such as vacation time, sick time, or general and administrative
time, are expensed in the period incurred.
Acquisition-related costs of an existing building include finders fees, advisory, legal,
accounting, valuation, other professional or consulting fees, and certain general and
administrative costs. These costs are also expensed in the period incurred.
Managements judgment is also exercised in determining whether costs that have been previously
capitalized to a project should be reserved for or written off if or when the project is abandoned
or circumstances otherwise change that would call the projects viability into question. The
Company follows a standard and consistently applied policy of classifying pursuit activity as well
as reserving for these types of costs based on their classification.
The Company classifies its pursuit projects into four categories, of which three relate to
development and one relates to acquisitions. The first category includes pursuits of developments
that have a remote chance of producing new business. Costs for these projects are expensed in the
period incurred. The second category includes pursuits of developments that might reasonably be
expected to produce new business opportunities although there can be no assurance that they will
result in a new project or contract. Costs for these projects are capitalized but, due to the
uncertainty of projects in this category, these costs are reserved at 50%, which means that 50% of
the costs are expensed in the period incurred. The third category includes those pursuits of
developments that are either highly probable to result in a project or contract or already have
resulted in a project or contract in which the contract requires the operator to reimburse the
Companys costs. Many times, these are pursuits involving operators with which the Company is
already doing business. Since the Company believes it is probable that these pursuits will result
in a project or contract, it capitalizes these costs in full and records no reserve. The fourth
category includes pursuits that involve the acquisition of existing buildings. As discussed above,
costs related to acquisitions of existing buildings are expensed in the period incurred.
40
Each quarter, all capitalized pursuit costs are again reviewed carefully for viability or a
change in classification, and a management decision is made as to whether any additional reserve is
deemed necessary. If necessary and considered appropriate, management would record an additional
reserve at that time. Capitalized pursuit costs, net of the reserve, are carried in other assets
in the Companys Consolidated Balance Sheets, and any reserve recorded is charged to general and
administrative expenses on the Consolidated Statements of Income. All pursuit costs will
ultimately be written off to expense or capitalized as part of the constructed real estate asset.
As of December 31, 2009 and 2008, the Company had capitalized pursuit costs totaling $2.2
million and $2.5 million, respectively, and had provided reserves against its capitalized pursuit
costs of $2.1 million and $0.6 million, respectively.
Depreciation of Real Estate Assets and Amortization of Related Intangible Assets
As of December 31, 2009, the Company had investments of approximately $2.3 billion in
depreciable real estate assets and related intangible assets. When real estate assets and related
intangible assets are acquired or placed in service, they must be depreciated or amortized.
Managements judgment involves determining which depreciation method to use, estimating the
economic life of the building and improvement components of real estate assets, and estimating the
value of intangible assets acquired when real estate assets are purchased that have in-place
leases.
As described in more detail in Note 1 to the Consolidated Financial Statements, when the
Company acquires real estate properties with in-place leases, the cost of the acquisition must be
allocated between the acquired tangible real estate assets as if vacant and any acquired
intangible assets. Such intangible assets could include above- (or below-) market in-place leases
and at-market in-place leases, which could include the opportunity costs associated with absorption
period rentals, direct costs associated with obtaining new leases such as tenant improvements, and
customer relationship assets. Any remaining excess purchase price is then allocated to goodwill.
The identifiable tangible and intangible assets are then subject to depreciation and amortization.
Goodwill is evaluated for impairment on an annual basis unless circumstances suggest that a more
frequent evaluation is warranted.
If assumptions used to estimate the as if vacant value of the building or the intangible
asset values prove to be inaccurate, the pro-ration of the purchase price between building and
intangibles and resulting depreciation and amortization could be incorrect. The amortization
period for the intangible assets is the average remaining term of the actual in-place leases as of
the acquisition date. To help prevent errors in its estimates from occurring, management applies
consistent assumptions with regard to the elements of estimating the as if vacant values of the
building and the intangible assets, including the absorption period, occupancy increases during the
absorption period, and tenant improvement amounts. The Company uses the same absorption period and
occupancy assumptions for similar building types, adding the future cash flows expected to occur
over the next 10 years as a fully occupied building. The net present value of these future cash
flows, discounted using a market rate of return, becomes the estimated as if vacant value of the
building.
With respect to the building components, there are several depreciation methods available
under GAAP. Some methods record relatively more depreciation expense on an asset in the early
years of the assets economic life, and relatively less depreciation expense on the asset in the
later years of its economic life. The straight-line method of depreciating real estate assets is
the method the Company follows because, in the opinion of management, it is the method that most
accurately and consistently allocates the cost of the asset over its estimated life. The Company
assigns a useful life to its owned buildings based on many factors, including the age of the
property when acquired.
Allowance for Doubtful Accounts and Credit Losses
Many of the Companys investments are subject to long-term leases or other financial support
arrangements with hospital systems and healthcare providers affiliated with the properties. Due to
the nature of the Companys agreements, the Companys accounts receivable, notes receivable and
interest receivables result mainly from monthly billings of contractual tenant rents, lease
guaranty amounts, principal and interest payments due on notes and mortgage notes receivable, late
fees and additional rent.
Accounts Receivable
Payments on the Companys accounts receivable are normally collected within 30 days of
billing. When receivables remain uncollected, management must decide whether it believes the
receivable is collectible and whether to provide an allowance for all or a portion of these
receivables. Unlike a financial institution with a large volume of homogeneous retail receivables
such as credit card loans or automobile loans that have a predictable loss pattern over time, the
Companys receivable losses have historically been infrequent and are tied to a unique or specific
event. The Companys allowance for doubtful accounts is generally based on specific identification
and is recorded for a specific receivable amount once determined that such an allowance is needed.
41
Management monitors the age and collectibility of receivables on an ongoing basis. At least
monthly, a report is produced whereby all receivables are aged or placed into groups based on the
number of days that have elapsed since the receivable was billed. Management reviews the aging
report for evidence of deterioration in the timeliness of payments from tenants, sponsors or
borrowers. Whenever deterioration is noted, management investigates and determines the reason(s)
for the delay, which may include discussions with the delinquent tenant, sponsor or borrower.
Considering all information gathered, managements judgment must be exercised in determining
whether a receivable is potentially uncollectible and, if so, how much or what percentage may be
uncollectible. Among the factors management considers in determining uncollectibility are the
following:
|
|
|
type of contractual arrangement under which the receivable was recorded, e.g., a
mortgage note, a triple net lease, a gross lease, a sponsor guaranty agreement or some
other type of agreement; |
|
|
|
|
tenants or debtors reason for slow payment; |
|
|
|
|
industry influences and healthcare segment under which the tenant or debtor operates; |
|
|
|
|
evidence of willingness and ability of the tenant or debtor to pay the receivable; |
|
|
|
|
credit-worthiness of the tenant or debtor; |
|
|
|
|
collateral, security deposit, letters of credit or other monies held as security; |
|
|
|
|
tenants or debtors historical payment pattern; |
|
|
|
|
other contractual agreements between the tenant or debtor and the Company; |
|
|
|
|
relationship between the tenant or debtor and the Company; |
|
|
|
|
state in which the tenant or debtor operates; and |
|
|
|
|
existence of a guarantor and the willingness and ability of the guarantor to pay the
receivable. |
Considering these factors and others, management must conclude whether all or some of the aged
receivable balance is likely uncollectible. If management determines that some portion of a
receivable is likely uncollectible, the Company records a provision for bad debt expense for the
amount expected to be uncollectible. There is a risk that managements estimate is over- or
under-stated; however, management believes that this risk is mitigated by the fact that it
re-evaluates the allowance at least once each quarter and bases its estimates on the most current
information available. As such, any over- or under-stated estimates in the allowance should be
adjusted for as soon as new and better information becomes available.
Mortgage Notes and Notes Receivable
The Company also evaluates collectibility of its mortgage notes and notes receivable. A loan
is impaired when it is probable that a creditor will be unable to collect all amounts due according
to the contractual terms of the loan as scheduled, including both contractual interest and
principal payments. The Company did not record any provisions for doubtful accounts on its
mortgage notes or notes receivable during 2009 or 2008. However, in connection with the sale of
the senior living assets in 2007, the Company forgave approximately $2.6 million in notes
receivable which was reflected in the gain on sale in 2007.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Market Risk in Managements Discussion and Analysis of Financial Condition and Results
of Operations, incorporated herein by reference to Item 7 of this Annual Report on Form 10-K.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Healthcare Realty Trust Incorporated
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of Healthcare Realty Trust
Incorporated as of December 31, 2009 and 2008 and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three years in the period ended December 31,
2009. In connection with our audits of the financial statements, we have also audited the
financial statement schedules listed in the accompanying index. These financial statements and
schedules are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial
statements and schedules. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Healthcare Realty Trust Incorporated at December 31,
2009 and 2008, and the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2009, in conformity with accounting principles generally accepted in
the United States of America.
Also, in our opinion, the financial statement schedules, when considered in relation to the
basic consolidated financial statements as a whole, present fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the Consolidated Financial Statements, effective January 1, 2009,
the Company adopted Statement of Financial Accounting Standards No. 160, Noncontrolling Interests
in Consolidated Financial Statements (which was later codified in ASC No. 810-10-45).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Healthcare Realty Trust Incorporateds internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 22, 2010 expressed an unqualified opinion thereon.
Nashville, Tennessee
February 22, 2010
43
Consolidated
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars in thousands, except per share amounts) |
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate properties: |
|
|
|
|
|
|
|
|
Land |
|
$ |
135,495 |
|
|
$ |
107,555 |
|
Buildings, improvements and lease intangibles |
|
|
1,977,264 |
|
|
|
1,792,402 |
|
Personal property |
|
|
17,509 |
|
|
|
16,985 |
|
Construction in progress |
|
|
95,059 |
|
|
|
84,782 |
|
|
|
|
|
|
|
|
|
|
|
2,225,327 |
|
|
|
2,001,724 |
|
Less accumulated depreciation |
|
|
(433,634 |
) |
|
|
(367,360 |
) |
|
|
|
|
|
|
|
Total real estate properties, net |
|
|
1,791,693 |
|
|
|
1,634,364 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
5,851 |
|
|
|
4,138 |
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable |
|
|
31,008 |
|
|
|
59,001 |
|
|
|
|
|
|
|
|
|
|
Assets held for sale and discontinued operations, net |
|
|
17,745 |
|
|
|
90,233 |
|
|
|
|
|
|
|
|
|
|
Other assets, net |
|
|
89,467 |
|
|
|
77,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,935,764 |
|
|
$ |
1,864,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
$ |
1,046,422 |
|
|
$ |
940,186 |
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
55,043 |
|
|
|
45,937 |
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale and discontinued operations |
|
|
251 |
|
|
|
32,821 |
|
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
43,900 |
|
|
|
49,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,145,616 |
|
|
|
1,068,533 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 50,000,000 shares authorized;
none issued and outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 150,000,000 shares authorized; 60,614,931
and 59,264,284 shares issued and outstanding at
December 31, 2009 and December 31, 2008, respectively |
|
|
606 |
|
|
|
592 |
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
1,520,893 |
|
|
|
1,490,535 |
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
(4,593 |
) |
|
|
(6,461 |
) |
|
|
|
|
|
|
|
|
|
Cumulative net income attributable to common stockholders |
|
|
787,965 |
|
|
|
736,874 |
|
|
|
|
|
|
|
|
|
|
Cumulative dividends |
|
|
(1,518,105 |
) |
|
|
(1,426,720 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
786,766 |
|
|
|
794,820 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
3,382 |
|
|
|
1,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity |
|
|
790,148 |
|
|
|
796,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
1,935,764 |
|
|
$ |
1,864,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
44
Consolidated
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
REVENUES |
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
57,648 |
|
|
$ |
58,073 |
|
|
$ |
56,086 |
|
Property operating |
|
|
180,024 |
|
|
|
136,745 |
|
|
|
121,644 |
|
Straight-line rent |
|
|
2,027 |
|
|
|
651 |
|
|
|
959 |
|
Mortgage interest |
|
|
2,646 |
|
|
|
2,207 |
|
|
|
1,752 |
|
Other operating |
|
|
10,959 |
|
|
|
16,255 |
|
|
|
16,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,304 |
|
|
|
213,931 |
|
|
|
197,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
22,493 |
|
|
|
23,514 |
|
|
|
20,619 |
|
Property operating |
|
|
95,141 |
|
|
|
82,223 |
|
|
|
71,680 |
|
Impairment |
|
|
|
|
|
|
1,600 |
|
|
|
|
|
Bad debts, net of recoveries |
|
|
537 |
|
|
|
1,833 |
|
|
|
222 |
|
Depreciation |
|
|
62,447 |
|
|
|
48,129 |
|
|
|
42,141 |
|
Amortization |
|
|
5,259 |
|
|
|
2,849 |
|
|
|
4,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
185,877 |
|
|
|
160,148 |
|
|
|
139,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
Gain on extinguishment of debt, net |
|
|
|
|
|
|
4,102 |
|
|
|
|
|
Re-measurement gain of equity interest upon acquisition |
|
|
2,701 |
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(43,080 |
) |
|
|
(42,126 |
) |
|
|
(48,307 |
) |
Interest and other income, net |
|
|
1,173 |
|
|
|
2,439 |
|
|
|
1,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,206 |
) |
|
|
(35,585 |
) |
|
|
(46,848 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS |
|
|
28,221 |
|
|
|
18,198 |
|
|
|
11,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
2,813 |
|
|
|
14,605 |
|
|
|
15,721 |
|
Impairments |
|
|
(22 |
) |
|
|
(886 |
) |
|
|
(7,089 |
) |
Gain on sales of real estate properties |
|
|
20,136 |
|
|
|
9,843 |
|
|
|
40,405 |
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS |
|
|
22,927 |
|
|
|
23,562 |
|
|
|
49,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME |
|
|
51,148 |
|
|
|
41,760 |
|
|
|
60,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to noncontrolling interests |
|
|
(57 |
) |
|
|
(68 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS |
|
$ |
51,091 |
|
|
$ |
41,692 |
|
|
$ |
60,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.48 |
|
|
$ |
0.35 |
|
|
$ |
0.23 |
|
Discontinued operations |
|
|
0.40 |
|
|
|
0.46 |
|
|
|
1.03 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.88 |
|
|
$ |
0.81 |
|
|
$ |
1.26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.48 |
|
|
$ |
0.35 |
|
|
$ |
0.23 |
|
Discontinued operations |
|
|
0.39 |
|
|
|
0.44 |
|
|
|
1.01 |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
|
$ |
0.87 |
|
|
$ |
0.79 |
|
|
$ |
1.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING BASIC |
|
|
58,199,592 |
|
|
|
51,547,279 |
|
|
|
47,536,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING DILUTED |
|
|
59,047,314 |
|
|
|
52,564,944 |
|
|
|
48,291,330 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
45
Consolidated
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
Cumulative |
|
|
|
|
|
|
Total |
|
|
Non- |
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Net |
|
|
Cumulative |
|
|
Stockholders |
|
|
controlling |
|
|
Total |
|
(Dollars in thousands, except per share data) |
|
Stock |
|
|
Stock |
|
|
Capital |
|
|
Loss |
|
|
Income |
|
|
Dividends |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
Balance at December 31, 2006 |
|
$ |
|
|
|
$ |
478 |
|
|
$ |
1,211,234 |
|
|
$ |
(4,035 |
) |
|
$ |
635,120 |
|
|
$ |
(1,017,125 |
) |
|
$ |
825,672 |
|
|
$ |
|
|
|
$ |
825,672 |
|
Issuance of stock, net of costs |
|
|
|
|
|
|
29 |
|
|
|
70,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,574 |
|
|
|
|
|
|
|
70,574 |
|
Common stock redemption |
|
|
|
|
|
|
|
|
|
|
(386 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(386 |
) |
|
|
|
|
|
|
(386 |
) |
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
4,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,678 |
|
|
|
|
|
|
|
4,678 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,062 |
|
|
|
|
|
|
|
60,062 |
|
|
|
18 |
|
|
|
60,080 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
(311 |
) |
|
|
|
|
|
|
(311 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,769 |
|
Special dividend to common stockholders ($4.75 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(227,157 |
) |
|
|
(227,157 |
) |
|
|
|
|
|
|
(227,157 |
) |
Dividends to common stockholders ($2.09 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,137 |
) |
|
|
(101,137 |
) |
|
|
|
|
|
|
(101,137 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
|
|
|
|
507 |
|
|
|
1,286,071 |
|
|
|
(4,346 |
) |
|
|
695,182 |
|
|
|
(1,345,419 |
) |
|
|
631,995 |
|
|
|
|
|
|
|
631,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock, net of costs |
|
|
|
|
|
|
83 |
|
|
|
201,966 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202,049 |
|
|
|
|
|
|
|
202,049 |
|
Common stock redemption |
|
|
|
|
|
|
|
|
|
|
(282 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282 |
) |
|
|
|
|
|
|
(282 |
) |
Stock-based compensation |
|
|
|
|
|
|
2 |
|
|
|
2,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,782 |
|
|
|
|
|
|
|
2,782 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,692 |
|
|
|
|
|
|
|
41,692 |
|
|
|
68 |
|
|
|
41,760 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,115 |
) |
|
|
|
|
|
|
|
|
|
|
(2,115 |
) |
|
|
|
|
|
|
(2,115 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,645 |
|
Dividends to common stockholders ($1.54 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,301 |
) |
|
|
(81,301 |
) |
|
|
|
|
|
|
(81,301 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110 |
) |
|
|
(110 |
) |
Proceeds from noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,469 |
|
|
|
1,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
|
|
|
|
592 |
|
|
|
1,490,535 |
|
|
|
(6,461 |
) |
|
|
736,874 |
|
|
|
(1,426,720 |
) |
|
|
794,820 |
|
|
|
1,427 |
|
|
|
796,247 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock, net of costs |
|
|
|
|
|
|
13 |
|
|
|
26,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,668 |
|
|
|
|
|
|
|
26,668 |
|
Common stock redemption |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
Stock-based compensation |
|
|
|
|
|
|
1 |
|
|
|
3,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,712 |
|
|
|
|
|
|
|
3,712 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,091 |
|
|
|
|
|
|
|
51,091 |
|
|
|
57 |
|
|
|
51,148 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,868 |
|
|
|
|
|
|
|
|
|
|
|
1,868 |
|
|
|
|
|
|
|
1,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,016 |
|
Dividends to common stockholders ($1.54 per
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(91,385 |
) |
|
|
(91,385 |
) |
|
|
|
|
|
|
(91,385 |
) |
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(330 |
) |
|
|
(330 |
) |
Proceeds from noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,228 |
|
|
|
2,228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
|
|
|
$ |
606 |
|
|
$ |
1,520,893 |
|
|
$ |
(4,593 |
) |
|
$ |
787,965 |
|
|
$ |
(1,518,105 |
) |
|
$ |
786,766 |
|
|
$ |
3,382 |
|
|
$ |
790,148 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
46
Consolidated
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
51,148 |
|
|
$ |
41,760 |
|
|
$ |
60,080 |
|
Adjustments to reconcile net income to cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
70,921 |
|
|
|
54,748 |
|
|
|
53,924 |
|
Stock-based compensation |
|
|
3,711 |
|
|
|
2,780 |
|
|
|
4,678 |
|
Straight-line rent receivable |
|
|
(1,925 |
) |
|
|
(643 |
) |
|
|
(1,043 |
) |
Straight-line rent liability |
|
|
444 |
|
|
|
423 |
|
|
|
954 |
|
Gain on sales of real estate properties |
|
|
(20,136 |
) |
|
|
(9,843 |
) |
|
|
(40,405 |
) |
Gain on sales of land |
|
|
|
|
|
|
(384 |
) |
|
|
|
|
Gain on extinguishment of debt |
|
|
|
|
|
|
(4,102 |
) |
|
|
|
|
Re-measurement gain of equity interest upon acquisition |
|
|
(2,701 |
) |
|
|
|
|
|
|
|
|
Impairments |
|
|
22 |
|
|
|
2,486 |
|
|
|
7,089 |
|
Equity in (income) losses from unconsolidated joint ventures |
|
|
2 |
|
|
|
(1,021 |
) |
|
|
309 |
|
Provision for bad debts, net of recoveries |
|
|
517 |
|
|
|
1,904 |
|
|
|
198 |
|
State income taxes paid, net of refunds |
|
|
(674 |
) |
|
|
(612 |
) |
|
|
(137 |
) |
Payment of partial pension settlement |
|
|
(2,300 |
) |
|
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
(1,017 |
) |
|
|
6,794 |
|
|
|
(94 |
) |
Accounts payable and accrued liabilities |
|
|
5,127 |
|
|
|
3,097 |
|
|
|
(2,065 |
) |
Other liabilities |
|
|
75 |
|
|
|
7,864 |
|
|
|
7,450 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
103,214 |
|
|
|
105,251 |
|
|
|
90,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition and development of real estate properties |
|
|
(170,520 |
) |
|
|
(383,702 |
) |
|
|
(130,799 |
) |
Funding of mortgages and notes receivable |
|
|
(23,391 |
) |
|
|
(36,970 |
) |
|
|
(14,759 |
) |
Investments in unconsolidated joint venture |
|
|
(184 |
) |
|
|
|
|
|
|
|
|
Distributions from unconsolidated joint ventures |
|
|
|
|
|
|
882 |
|
|
|
1,414 |
|
Partial redemption of preferred equity investment in an unconsolidated joint venture |
|
|
|
|
|
|
5,546 |
|
|
|
|
|
Proceeds from sales of real estate |
|
|
83,441 |
|
|
|
37,133 |
|
|
|
311,927 |
|
Proceeds from mortgages and notes receivable repayments |
|
|
12,893 |
|
|
|
8,236 |
|
|
|
65,572 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(97,761 |
) |
|
|
(368,875 |
) |
|
|
233,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) on unsecured credit facilities |
|
|
(279,000 |
) |
|
|
193,000 |
|
|
|
(54,000 |
) |
Borrowings on notes and bonds payable |
|
|
377,969 |
|
|
|
|
|
|
|
1,840 |
|
Repayments on notes and bonds payable |
|
|
(28,433 |
) |
|
|
(3,813 |
) |
|
|
(7,440 |
) |
Repurchase of notes payable |
|
|
|
|
|
|
(45,460 |
) |
|
|
|
|
Special dividend paid |
|
|
|
|
|
|
|
|
|
|
(227,157 |
) |
Quarterly dividends paid |
|
|
(91,385 |
) |
|
|
(81,301 |
) |
|
|
(101,137 |
) |
Proceeds from issuance of common stock |
|
|
26,467 |
|
|
|
197,255 |
|
|
|
70,780 |
|
Common stock redemptions |
|
|
(8 |
) |
|
|
(282 |
) |
|
|
(386 |
) |
Capital contributions received from noncontrolling interests |
|
|
2,228 |
|
|
|
1,469 |
|
|
|
|
|
Distributions to noncontrolling interest holders |
|
|
(282 |
) |
|
|
(110 |
) |
|
|
(18 |
) |
Credit facility amendment and extension fees |
|
|
|
|
|
|
(1,126 |
) |
|
|
|
|
Equity issuance costs |
|
|
(3 |
) |
|
|
(389 |
) |
|
|
(206 |
) |
Debt issuance costs |
|
|
(11,293 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(3,740 |
) |
|
|
259,243 |
|
|
|
(317,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,713 |
|
|
|
(4,381 |
) |
|
|
6,569 |
|
Cash and cash equivalents, beginning of year |
|
|
4,138 |
|
|
|
8,519 |
|
|
|
1,950 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
5,851 |
|
|
$ |
4,138 |
|
|
$ |
8,519 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
50,052 |
|
|
$ |
49,997 |
|
|
$ |
53,233 |
|
Capitalized interest |
|
$ |
10,087 |
|
|
$ |
6,679 |
|
|
$ |
4,022 |
|
Capital expenditures included in accounts payable and accrued liabilities |
|
$ |
16,266 |
|
|
$ |
12,500 |
|
|
$ |
6,699 |
|
Mortgage notes payable assumed upon acquisition of a joint venture interest (adjusted to fair value) |
|
$ |
11,716 |
|
|
$ |
50,825 |
|
|
$ |
|
|
Mortgage note payable disposed of upon sale of joint venture interest |
|
$ |
5,425 |
|
|
$ |
|
|
|
$ |
|
|
Forgiveness of notes receivable upon sale of certain senior living assets |
|
$ |
|
|
|
$ |
|
|
|
$ |
2,640 |
|
See accompanying notes.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business Overview
Healthcare Realty Trust Incorporated is a real estate investment trust that owns, acquires,
manages, finances, and develops income-producing real estate properties associated primarily with
the delivery of outpatient healthcare services throughout the United States. As of December 31,
2009, excluding assets classified as held for sale and including an investment in one
unconsolidated joint venture, the Company had investments of approximately $2.3 billion in 204 real
estate properties and mortgages. The Companys 199 owned real estate properties, excluding assets
classified as held for sale, are located in 28 states, totaling approximately 12.3 million square
feet. In addition, the Company provided property management services to approximately 9.3 million
square feet nationwide. Square footage disclosures in this Annual Report on Form 10-K are
unaudited.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company, its wholly-owned
subsidiaries, joint ventures and partnerships where the Company controls the operating activities.
The Companys Consolidated Statement of Income for 2007 also includes the results of operations of
six VIEs of which the Company had concluded it was the primary beneficiary. The real estate
properties associated with these VIEs were sold in 2007.
The Companys investments in its unconsolidated joint ventures are included in other assets
and the related equity income is recognized in other income (expense) on the Companys Consolidated
Financial Statements. The Company also consolidates one joint venture in which it has an 80%
controlling interest. Included in the Companys Consolidated Financial Statements related to this
consolidated joint venture was approximately $91.4 million in real estate investments, including
mortgage notes receivable, at December 31, 2009. The Company reports noncontrolling (minority)
interests in subsidiaries as equity and the related net income attributable to the noncontrolling
interests as part of consolidated net income in its financial statements.
All significant intercompany accounts, transactions and balances have been eliminated in the
Consolidated Financial Statements. The Company evaluated subsequent events for recognition or
disclosure through February 22, 2010, which is the date the Consolidated Financial Statements were
issued.
Use of Estimates in the Consolidated Financial Statements
Preparation of the 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 Consolidated Financial Statements and accompanying
notes. Actual results may differ from those estimates.
Segment Reporting
The Company owns, acquires, manages, finances and develops outpatient 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, the Company discloses
its operating results in a single segment.
Reclassifications
Certain reclassifications have been made in the Consolidated Financial Statements for the
years ended December 31, 2008 and 2007 to conform to the 2009 presentation.
Discontinued Operations
Certain amounts in the Companys Consolidated Financial Statements for prior periods have been
reclassified to conform to the current period presentation. Assets sold or held for sale, and
related liabilities, have been reclassified on the Companys Consolidated Balance Sheets, and the
operating results of those assets have been reclassified from continuing to discontinued operations
for all periods presented.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Noncontrolling interests
Upon adoption of Statement of Financial Accounting Standard (SFAS) No. 160, Noncontrolling
Interests in Consolidated Financial Statements, on January 1, 2009, codified in Accounting
Standards Codification (ASC) No. 805, all prior period noncontrolling interests on the Companys
Consolidated Balance Sheets have been reclassified from liabilities to equity, and all prior period
noncontrolling interests net income on the Companys Consolidated Statements of Income have been
reclassified to specifically identify net income or loss attributable to the noncontrolling
interests. The components of noncontrolling interests for prior years have also been reclassified
on the Companys Consolidated Statements of Cash Flows.
Real Estate Properties
Real estate properties are recorded at fair value at the acquisition date. The fair value of
real estate properties acquired is allocated between land, buildings, tenant improvements, lease
and other intangibles, and personal property based upon estimated fair values at the time of
acquisition. The Companys gross real estate assets, on a book-basis, including at-market in-place
lease intangibles and assets held for sale, totaled approximately $2.3 billion and $2.1 billion,
respectively, as of December 31, 2009 and 2008.
Depreciation and amortization of real estate assets and liabilities in place as of December
31, 2009, is provided for on a straight-line basis over the assets estimated useful life:
|
|
|
|
|
Land improvements |
|
|
9.5 to 15 years |
|
Buildings and improvements |
|
|
3.0 to 39 years |
|
Lease intangibles (including ground lease intangibles) |
|
|
1.3 to 93 years |
|
Personal property |
|
|
3 to 15 years |
|
Land Held for Development
Included in construction in progress on the Companys Consolidated Balance Sheets are two
parcels of land held for future development. As of December 31, 2009 and 2008, the Companys
investment in land held for development totaled approximately $17.3 million.
Accounting for Acquisitions of Real Estate Properties with In-Place Leases
When a building is acquired with in-place leases, the cost of the acquisition must be
allocated between the tangible real estate assets and the intangible real estate assets related to
in-place leases based on their fair values. Where appropriate, the intangible assets recorded
could include goodwill or customer relationship assets. The values related to above- or
below-market in-place lease intangibles are amortized to rental income where the Company is the
lessor, are amortized to property operating expense where the Company is the lessee, and are
amortized over the average remaining term of the leases upon acquisition. The values of at-market
in-place leases and other intangible assets, such as customer relationship assets, are amortized
and reflected in amortization expense in the Companys Consolidated Statements of Income.
The Companys approach to estimating the value of in-place leases is a multi-step process.
|
|
|
First, the Company considers whether any of the in-place lease rental rates are
above- or below-market. An asset (if the actual rental rate is above-market) or a
liability (if the actual rental rate is below-market) is calculated and recorded in an
amount equal to the present value of the future cash flows that represent the difference
between the actual lease rate and the average market rate. |
|
|
|
|
Second, the Company estimates an absorption period assuming the building is vacant
and must be leased up to the actual level of occupancy when acquired. During that
absorption period the owner would incur direct costs, such as tenant improvements, and
would suffer lost rental income. Likewise, the owner would have acquired a measurable
asset in that, assuming the building was vacant, certain fixed costs would be avoided
because the actual in-place lessees would reimburse a certain portion of fixed costs
through expense reimbursements during the absorption period. All of these assets
(tenant improvement costs avoided, rental income lost, and fixed costs recovered through
in-place lessee reimbursements) are estimated and recorded in amounts equal to the
present value of future cash flows. |
|
|
|
|
Third, the Company estimates the value of the building as if vacant. The Company
uses the same absorption period and occupancy assumptions used in step two, adding to
those the future cash flows expected in a fully occupied building. The net present
value of these future cash flows, discounted at a market rate of return, becomes the
estimated as if vacant value of the building. |
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
Fourth, the actual purchase price is allocated based on the various asset fair values
described above. The building and tenant improvement components of the purchase price
are depreciated over the useful life of the building or the average remaining term of
the in-places leases. The above- or below-market rental rate assets or
liabilities are amortized to rental income or property operating expense over the
remaining term of the leases. The at-market, in-place leases are amortized to
amortization expense over the average remaining term of the leases, customer
relationship assets are amortized to amortization expense over terms applicable to each
acquisition, and any goodwill recorded would be reviewed for impairment at least
annually. |
See Note 8 for more details on the Companys intangible assets as of December 31, 2009 and
2008.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants. In calculating fair
value, a company must maximize the use of observable market inputs, minimize the use of
unobservable market inputs and disclose in the form of an outlined hierarchy the details of such
fair value measurements.
A hierarchy of valuation techniques is defined to determine whether the inputs to a fair value
measurement are considered to be observable or unobservable in a marketplace. Observable inputs
reflect market data obtained from independent sources, while unobservable inputs reflect the
Companys market assumptions. This hierarchy requires the use of observable market data when
available. These inputs have created the following fair value hierarchy:
|
|
|
Level 1 quoted prices for identical instruments in active markets; |
|
|
|
|
Level 2 quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which significant inputs and significant value drivers are observable in
active markets; and |
|
|
|
|
Level 3 fair value measurements derived from valuation techniques in which one or
more significant inputs or significant value drivers are unobservable. |
In connection with its acquisition of real estate assets during 2009, the Company assumed
mortgage notes payable. The valuation of the mortgage notes payable was determined using level two
inputs.
Cash and Cash Equivalents
Cash and cash equivalents includes short-term investments with original maturities of three
months or less when purchased.
Allowance for Doubtful Accounts and Credit Losses
Accounts Receivable
Management monitors the aging and collectibility of its accounts receivable balances on an
ongoing basis. At least monthly, a report is produced whereby all receivables are aged or placed
into groups based on the number of days that have elapsed since the receivable was billed.
Management reviews the aging report for evidence of deterioration in the timeliness of payment from
a tenant or sponsor. Whenever deterioration is noted, management investigates and determines the
reason(s) for the delay, which may include discussions with the delinquent tenant or sponsor.
Considering all information gathered, managements judgment is exercised in determining whether a
receivable is potentially uncollectible and, if so, how much or what percentage may be
uncollectible. Among the factors management considers in determining collectibility are the type
of contractual arrangement under which the receivable was recorded, e.g., a triple net lease, a
gross lease, a sponsor guaranty agreement, or some other type of agreement; the tenants reason for
slow payment; industry influences under which the tenant operates; evidence of willingness and
ability of the tenant to pay the receivable; credit-worthiness of the tenant; collateral, security
deposit, letters of credit or other monies held as security; tenants historical payment pattern;
other contractual agreements between the tenant and the Company; relationship between the tenant
and the Company; the state in which the tenant operates; and the existence of a guarantor and the
willingness and ability of the guarantor to pay the receivable.
Considering these factors and others, management concludes whether all or some of the aged
receivable balance is likely uncollectible. Upon determining that some portion of the receivable
is likely uncollectible, the Company records a provision for bad
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
debts for the amount it expects will be uncollectible. When efforts to collect a receivable are
exhausted, the receivable amount is charged off against the allowance. The Company does not hold
any accounts receivable for sale.
Mortgage Notes and Notes Receivable
The Company also evaluates collectibility of its mortgage notes and notes receivable and
records allowances on the notes as necessary. A loan is impaired when it is probable that a
creditor will be unable to collect all amounts due according to the contractual terms of the loan
as scheduled, including both contractual interest and principal payments. If a mortgage loan or
note receivable becomes past due, the Company will review the specific circumstances and may
discontinue the accrual of interest on the loan. The loan is not returned to accrual status until
the debtor has demonstrated the ability to continue debt service in accordance with the contractual
terms. As of December 31, 2009 and 2008, there were no recorded investments in mortgage notes or
notes receivable that were either on non-accrual status or were past due more than ninety days and
continued to accrue interest.
The Companys notes receivable balances were approximately $3.3 million and $0.5 million,
respectively, as of December 31, 2009 and 2008. Interest rates on the notes are fixed and ranged
from 8.0% to 11.6% with maturity dates ranging from 2011 through 2016 as of December 31, 2009. The
Company did not record allowances or reserves related to its mortgage notes or notes receivable
during 2009 or 2008.
The Company had four mortgage notes receivable outstanding as of December 31, 2009 and 2008
with aggregate balances totaling $31.0 million and $59.0 million, respectively. The weighted
average maturities of the notes were approximately 4.7 years and 2.7 years, respectively, with
interest rates ranging from 6.2% to 8.5% and 1.5% to 8.5%, respectively, as of December 31, 2009
and 2008.
As of December 31, 2009, the Company did not hold any of its mortgage notes or notes
receivable available for sale. Also, management believes that its mortgage notes and notes
receivable outstanding as of December 31, 2009 and 2008 are collectible.
Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite lives are not amortized, but are tested at
least annually for impairment. Intangible assets with finite lives are amortized over their
respective lives to their estimated residual values and are reviewed for impairment only when
impairment indicators are present.
Identifiable intangible assets of the Company are comprised of enterprise goodwill, in-place
lease intangible assets, customer relationship intangible assets, and deferred financing costs.
In-place lease and customer relationship intangible assets are amortized on a straight-line basis
over the applicable lives of the assets. Deferred financing costs are amortized over the term of
the related credit facility under the straight-line method, which approximates amortization under
the effective interest method. Goodwill is not amortized but is evaluated annually on December 31
for impairment. The 2009 and 2008 impairment evaluations each indicated that no impairment had
occurred with respect to the $3.5 million goodwill asset. See Note 8 for more detail on the
Companys intangible assets.
Contingent Liabilities
From time to time, the Company may be subject to loss contingencies arising from legal
proceedings, which are discussed in Note 14. Additionally, while the Company maintains
comprehensive liability and property insurance with respect to each of its properties, the Company
may be exposed to unforeseen losses related to uninsured or underinsured damages.
The Company continually monitors any matters that may present a contingent liability, and, on
a quarterly basis, management reviews the Companys reserves and accruals in relation to each of
them, adjusting provisions as necessary in view of changes in available information. Contingent
liabilities are recorded when a loss is determined to be both probable and can be reasonably
estimated. Changes in estimates regarding the exposure to a contingent loss are reflected as
adjustments to the related liability in the periods when they occur.
Because of uncertainties inherent in the estimation of contingent liabilities, it is possible
that managements provision for contingent losses could change materially in the near term. To the
extent that any losses, in addition to amounts recognized, are at least reasonably possible, such
amounts will be disclosed in the notes to the Consolidated Financial Statements.
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accounting for Defined Benefit Pension Plans
The Company has pension plans under which the Companys Board of Directors and certain
designated officers may receive retirement benefits upon retirement and the completion of five
years of service with the Company. The plans are unfunded and benefits will be paid from earnings
of the Company. The Company recognizes pension expense on an accrual basis over an estimated
service period. The Company calculates pension expense and the corresponding liability annually on
the measurement date (December 31) which requires certain assumptions, such as a discount rate and
the recognition of actuarial gains and losses. In November 2009, the Company terminated the
Outside Director Plan. As a result, lump sum payments totaling approximately $2.6 million will be
paid in November 2010, or earlier upon retirement, to the eight outside directors who participated
in the plan. See Note 11.
Incentive Plans
The Company has issued and outstanding various employee stock-based awards. These awards
include stock issued to employees pursuant to the 2007 Employees Stock Incentive Plan and its
predecessor plan (the Incentive Plan), the Optional Deferral Plan and the 2000 Employee Stock
Purchase Plan (Employee Stock Purchase Plan). See Note 12 for details on the Companys
stock-based awards. The Employee Stock Purchase Plan features a look-back provision which
enables the employee to purchase a fixed number of shares 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, with optional purchase
dates occurring once each quarter for 27 months.
The Company accounts for awards to its employees based on fair value, using the Black-Scholes
model, and generally recognizes expense over the awards vesting period, net of estimated
forfeitures. Since the options granted under the Employee Stock Purchase Plan immediately vest,
the Company records compensation expense for those options in the first quarter of each year, when
granted. In each of the first quarters of 2009, 2008 and 2007, the Company recognized in general
and administrative expenses approximately $0.3 million, $0.2 million and $0.2 million of
compensation expense, respectively, related to each years grants of options to purchase shares
under the Employee Stock Purchase Plan.
Accumulated Other Comprehensive Loss
Certain items must be included in comprehensive income (loss), including items such as foreign
currency translation adjustments, minimum pension liability adjustments, and unrealized gains or
losses on available-for-sale securities. The Companys accumulated other comprehensive loss
includes the cumulative pension liability adjustments, which are generally recognized in the fourth
quarter of each year.
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. There are four
criteria that must all be met before a Company may recognize revenue, including persuasive evidence
of an arrangement exists, delivery has occurred or services have been rendered (i.e., the tenant
has taken possession of and controls the physical use of the leased asset), the price has been
fixed or is determinable, and collectibility is reasonably assured.
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 income,
property operating income, or mortgage interest income on the Companys Consolidated Statements of
Income, based on the type of contractual agreement.
Income received but not yet earned is deferred until such time it is earned. Deferred
revenue, included in other liabilities on the Consolidated Balance Sheets, was $18.8 million and
$19.4 million, respectively, at December 31, 2009 and 2008.
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. Included in
income from continuing operations, the Company recognized additional rental income, net of
reserves, of approximately $2.5 million, $1.7 million and $1.7 million, respectively,
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the years ended December 31, 2009, 2008 and 2007. During the fourth quarter of 2008, the
Company recorded a $1.4 million allowance related to additional rent due from an operator. Rental
income from properties under a master lease arrangement with the tenant is included in master lease
rental income and rental income from properties under various tenant lease arrangements, including
operating expense recoveries, is included in property operating income on the Companys
Consolidated Statements of Income. Operating expense recoveries recognized in income from continuing operations for the
years ended December 31, 2009, 2008 and 2007 were approximately $20.8 million, $10.3 million and $6.2 million, respectively.
Mortgage Interest Income
Interest income on the Companys mortgage notes receivable is recognized based on the interest
rates, maturity dates and amortization periods in accordance with each note agreement. Interest
rates on three of its mortgage notes receivable outstanding as of December 31, 2009 were fixed and
one was variable.
Other Operating Income
Other operating income on the Companys Consolidated Statements of Income generally includes
shortfall income recognized under its property operating agreements, interest income on notes
receivable, replacement rent from an operator, management fee income, and prepayment penalty
income.
Property operating agreements, between the Company and sponsoring health systems, applicable
to eight of the Companys 199 owned real estate properties as of December 31, 2009, contractually
obligate the sponsoring health system to provide to the Company, for a short term, a minimum return
on the Companys investment in the property in exchange 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 Company will calculate and accrue any shortfalls as
income that the sponsor is responsible to pay to the Company under the terms of the property
operating agreement.
The Company provides property management services for both third-party and owned real estate
properties. Management fees are generally calculated, accrued and billed monthly based on a
percentage of cash collections of tenant receivables for the month.
Other operating income for the years ended December 31, 2009, 2008 and 2007 is detailed in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
(Dollars in millions) |
|
2009 |
|
2008 |
|
2007 |
|
Property lease guaranty revenue |
|
$ |
8.2 |
|
|
$ |
12.8 |
|
|
$ |
13.2 |
|
Interest income on notes receivable |
|
|
0.6 |
|
|
|
0.6 |
|
|
|
0.3 |
|
Management fee income |
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.3 |
|
Replacement rent |
|
|
1.3 |
|
|
|
2.5 |
|
|
|
2.5 |
|
Other |
|
|
0.7 |
|
|
|
0.2 |
|
|
|
0.3 |
|
|
|
|
|
|
$ |
11.0 |
|
|
$ |
16.3 |
|
|
$ |
16.6 |
|
|
|
|
Federal Income Taxes
No provision has been made for federal income taxes. The Company intends at all times to
qualify as a real estate investment trust under Sections 856 through 860 of the Internal Revenue
Code of 1986 (the Code), 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. See Note 15 for further discussion.
The Company classifies interest and penalties related to uncertain tax positions, if any, in
the Consolidated Financial Statements as a component of general and administrative expense. No
such amounts were recognized during the three years ended December 31, 2009.
Federal tax returns for the years 2006, 2007 and 2008 are currently still subject to
examination by taxing authorities.
State Income Taxes
The Company must pay certain state income taxes which are generally included in general and
administrative expense on the Companys Consolidated Statements of Income. See Note 15 for further
discussion.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales and Use Taxes
The Company must pay sales and use taxes to certain state tax authorities based on rents
collected from tenants in properties located in those states. The Company is generally reimbursed
for these taxes by the tenant. The Company accounts for the payments to the taxing authority and
subsequent reimbursement from the tenant on a net basis in the Companys Consolidated Statements of
Income.
Discontinued Operations
The Company sells properties from time to time due to a variety of factors, such as market
conditions or 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
Consolidated Statements of Income. 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 held for sale are reported at the lower of their carrying amount or their fair
value less cost to sell. Further, depreciation of these assets ceases at the time the assets are
classified as discontinued operations. Losses resulting from the sale of such properties are
characterized as impairment losses relating to discontinued operations in the Consolidated
Statements of Income.
In the Companys Consolidated Statements of Income for the years ended December 31, 2009, 2008
and 2007, income related to properties sold or to be sold as of December 31, 2009 was included in
discontinued operations for each of the three years totaling approximately $22.9 million, $23.6
million, and $49.0 million, respectively.
Assets held for sale at December 31, 2009 and 2008 included six and 12 properties,
respectively.
Earnings per Share
Basic earnings per share is calculated using weighted average shares outstanding less issued
and outstanding but unvested restricted shares of common stock. Diluted earnings per share is
calculated using weighted average shares outstanding plus the dilutive effect of the outstanding
stock options from the Employee Stock Purchase Plan and restricted shares of common stock, using
the treasury stock method and the average stock price during the period. See Note 13 for the
calculations of earnings per share.
New Pronouncements
Business Combinations and Noncontrolling Interests in Consolidated Financial Statements
SFAS No. 141 (R), Business Combinations (SFAS No. 141 (R)) codified in ASC No. 805 and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, (SFAS No. 160)
codified in ASC No. 810 became effective for the Company on January 1, 2009. 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
acquiring entity 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 existed in
accounting for transactions between an entity and noncontrolling interests by requiring they be
treated as equity transactions. The adoption of SFAS No. 141 (R) and SFAS No. 160 did not have a
material impact on the Companys Consolidated Financial Statements, except that, upon adoption, the
Company was required to retroactively restate its Consolidated Balance Sheets to reflect the
reclassification of its noncontrolling interests from other liabilities to equity and restate its
Consolidated Statements of Income to specifically identify net income or loss attributable to the
noncontrolling interests.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
Financial Accounting Standards Boards (FASB) Staff Position (FSP) EITF Issue No. 03-6,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities, (FSP EITF 03-6-1) codified in ASC No. 260 became effective for the Company on
January 1, 2009. FSP EITF 03-6-1 addresses whether instruments granted in share-based payment
transactions are participating securities prior to vesting and, therefore, need to be included in
the earnings allocation in computing
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
earnings per share under the two-class method. Under the guidance in FSP EITF 03-6-1, unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of
earnings per share pursuant to the two-class method. The adoption of FSP EITF 03-6-1 did not have
a material impact on the Companys calculation of earnings per share.
The Codification
Beginning with interim or annual periods ending after September 15, 2009, the FASB Accounting
Standards Codification (the Codification) became the single source of authoritative
nongovernmental GAAP. Previously existing accounting standard documents, such as FASB, American
Institute of Certified Public Accountants, Emerging Issues Task Force and other related literature,
excluding guidance from the Securities and Exchange Commission (SEC), were superseded by the
Codification. As such, all references to authoritative accounting literature are referenced in
accordance with the Codification. The Codification was not designed to change GAAP, but instead to
introduce a new structure that combines all authoritative standards into a comprehensive, topically
organized online database. The Codification has not changed the content of the Companys financial
statements or other disclosures.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Real Estate and Mortgage Notes Receivable Investments
The Company invests in healthcare-related properties and mortgages located throughout the
United States. The Company provides management, leasing and development services, and capital for
the construction of new facilities, as well as for the acquisition of existing properties. The
Company had investments of approximately $2.3 billion in 204 real estate properties and mortgage
notes receivable as of December 31, 2009, excluding assets classified as held for sale and
including an investment in one unconsolidated joint venture. The following table summarizes the
Companys investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Improvements, |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Lease Intangibles |
|
|
Personal |
|
|
|
|
|
|
Accumulated |
|
(Dollars in thousands) |
|
Facilities (1) |
|
|
Land |
|
|
and CIP |
|
|
Property |
|
|
Total |
|
|
Depreciation |
|
Medical Office: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arizona |
|
|
8 |
|
|
$ |
3,320 |
|
|
$ |
66,295 |
|
|
$ |
54 |
|
|
$ |
69,669 |
|
|
$ |
(10,567 |
) |
Florida |
|
|
14 |
|
|
|
8,671 |
|
|
|
125,789 |
|
|
|
157 |
|
|
|
134,617 |
|
|
|
(44,806 |
) |
Hawaii |
|
|
3 |
|
|
|
|
|
|
|
91,581 |
|
|
|
5 |
|
|
|
91,586 |
|
|
|
(5,994 |
) |
North Carolina |
|
|
14 |
|
|
|
|
|
|
|
141,414 |
|
|
|
66 |
|
|
|
141,480 |
|
|
|
(6,308 |
) |
Tennessee |
|
|
15 |
|
|
|
6,782 |
|
|
|
160,497 |
|
|
|
157 |
|
|
|
167,436 |
|
|
|
(41,201 |
) |
Texas |
|
|
30 |
|
|
|
27,522 |
|
|
|
447,529 |
|
|
|
1,061 |
|
|
|
476,112 |
|
|
|
(77,178 |
) |
Washington |
|
|
5 |
|
|
|
2,200 |
|
|
|
67,822 |
|
|
|
1 |
|
|
|
70,023 |
|
|
|
(2,311 |
) |
Other states |
|
|
41 |
|
|
|
39,995 |
|
|
|
433,785 |
|
|
|
246 |
|
|
|
474,026 |
|
|
|
(77,703 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130 |
|
|
|
88,490 |
|
|
|
1,534,712 |
|
|
|
1,747 |
|
|
|
1,624,949 |
|
|
|
(266,068 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Physician Clinics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
8 |
|
|
|
10,639 |
|
|
|
44,668 |
|
|
|
|
|
|
|
55,307 |
|
|
|
(14,794 |
) |
Virginia |
|
|
3 |
|
|
|
1,623 |
|
|
|
29,169 |
|
|
|
127 |
|
|
|
30,919 |
|
|
|
(10,060 |
) |
Other states |
|
|
20 |
|
|
|
5,812 |
|
|
|
82,000 |
|
|
|
264 |
|
|
|
88,076 |
|
|
|
(21,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 |
|
|
|
18,074 |
|
|
|
155,837 |
|
|
|
391 |
|
|
|
174,302 |
|
|
|
(46,521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ambulatory care/surgery: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
California |
|
|
2 |
|
|
|
4,898 |
|
|
|
33,530 |
|
|
|
23 |
|
|
|
38,451 |
|
|
|
(12,439 |
) |
Texas |
|
|
3 |
|
|
|
6,882 |
|
|
|
35,392 |
|
|
|
81 |
|
|
|
42,355 |
|
|
|
(14,490 |
) |
Other states |
|
|
5 |
|
|
|
5,897 |
|
|
|
13,941 |
|
|
|
|
|
|
|
19,838 |
|
|
|
(5,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
17,677 |
|
|
|
82,863 |
|
|
|
104 |
|
|
|
100,644 |
|
|
|
(32,237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty outpatient: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arkansas |
|
|
1 |
|
|
|
647 |
|
|
|
2,408 |
|
|
|
|
|
|
|
3,055 |
|
|
|
(979 |
) |
Florida |
|
|
1 |
|
|
|
911 |
|
|
|
2,500 |
|
|
|
|
|
|
|
3,411 |
|
|
|
(943 |
) |
Other states |
|
|
3 |
|
|
|
246 |
|
|
|
6,774 |
|
|
|
|
|
|
|
7,020 |
|
|
|
(1,844 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
1,804 |
|
|
|
11,682 |
|
|
|
|
|
|
|
13,486 |
|
|
|
(3,766 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty inpatient: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indiana |
|
|
1 |
|
|
|
1,071 |
|
|
|
42,335 |
|
|
|
|
|
|
|
43,406 |
|
|
|
(3,799 |
) |
Pennsylvania |
|
|
6 |
|
|
|
1,214 |
|
|
|
112,653 |
|
|
|
|
|
|
|
113,867 |
|
|
|
(37,315 |
) |
Other states |
|
|
6 |
|
|
|
5,265 |
|
|
|
72,086 |
|
|
|
|
|
|
|
77,351 |
|
|
|
(19,894 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
7,550 |
|
|
|
227,074 |
|
|
|
|
|
|
|
234,624 |
|
|
|
(61,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michigan |
|
|
5 |
|
|
|
193 |
|
|
|
12,728 |
|
|
|
183 |
|
|
|
13,104 |
|
|
|
(6,395 |
) |
Virginia |
|
|
2 |
|
|
|
1,178 |
|
|
|
10,084 |
|
|
|
5 |
|
|
|
11,267 |
|
|
|
(3,479 |
) |
Other states |
|
|
3 |
|
|
|
529 |
|
|
|
20,042 |
|
|
|
448 |
|
|
|
21,019 |
|
|
|
(7,492 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
|
|
|
1,900 |
|
|
|
42,854 |
|
|
|
636 |
|
|
|
45,390 |
|
|
|
(17,366 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land held for development |
|
|
|
|
|
|
|
|
|
|
17,301 |
|
|
|
|
|
|
|
17,301 |
|
|
|
|
|
Corporate Property |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,631 |
|
|
|
14,631 |
|
|
|
(6,668 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total owned properties |
|
|
199 |
|
|
|
135,495 |
|
|
|
2,072,323 |
|
|
|
17,509 |
|
|
|
2,225,327 |
|
|
|
(433,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage notes receivable |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,008 |
|
|
|
|
|
Unconsolidated joint venture
investment |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate investments |
|
|
204 |
|
|
$ |
135,495 |
|
|
$ |
2,072,323 |
|
|
$ |
17,509 |
|
|
$ |
2,257,601 |
|
|
$ |
(433,634 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes two properties under construction. |
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Real Estate Property Leases
The Companys properties are generally leased pursuant to non-cancelable, fixed-term operating
leases or are supported through other financial support arrangements with expiration dates through
2029. Some leases and financial arrangements provide for fixed rent renewal terms of five years,
or multiples thereof, in addition to market rent renewal terms. Some leases provide the lessee,
during the term of the lease and for a short period thereafter, with an option or a right of first
refusal to purchase the leased property. The Companys portfolio of master leases generally
requires the lessee to pay minimum rent, additional rent based upon fixed percentage increases or
increases in the Consumer Price Index and all taxes (including property tax), insurance,
maintenance and other operating costs associated with the leased property.
Future minimum lease payments under the non-cancelable operating leases and guaranteed amounts
due to the Company under property operating agreements as of December 31, 2009 are as follows (in
thousands):
|
|
|
|
|
2010 |
|
$ |
196,525 |
|
2011 |
|
|
172,414 |
|
2012 |
|
|
146,003 |
|
2013 |
|
|
119,808 |
|
2014 |
|
|
90,272 |
|
2015 and thereafter |
|
|
289,742 |
|
|
|
|
|
|
|
$ |
1,014,764 |
|
|
|
|
|
Customer Concentrations
The Companys real estate portfolio is leased to a diverse tenant base. The Company did not
have any customers that accounted for 10% or more of the Companys revenues, including revenues
from discontinued operations, for the year ended December 31, 2009 and had only one customer that
accounted for 10% or more of the Companys revenues for the years ended December 31, 2008 and 2007,
HealthSouth at 11%.
Purchase Option Provisions
Certain of the Companys leases include purchase option provisions. The provisions vary from
lease to lease but generally allow the lessee to purchase the property covered by the lease at the
greater of fair market value or an amount equal to the Companys gross investment. As of December
31, 2009, the Company had a gross investment of approximately $111.1 million in real estate
properties that were subject to outstanding, exercisable contractual options to purchase, with
various conditions and terms, by the respective operators and lessees that had not been exercised.
4. Acquisitions and Dispositions and Mortgage Repayments
2009 Real Estate Acquisitions
During 2009, the Company acquired the following properties:
|
|
|
the remaining 50% equity interest in a joint venture (Unico 2006 MOB), which owns a
62,246 square foot on-campus medical office building in Oregon, for approximately $4.4
million in cash consideration. The building was approximately 97% occupied with lease
maturities through 2025. In connection with the acquisition, the Company assumed an
outstanding mortgage note payable held by the joint venture totaling $12.8 million
($11.7 million including a $1.1 fair value adjustment) which bears an effective interest
rate of 6.43% and matures in 2021. Prior to the acquisition, the Company had a 50%
equity investment in the joint venture totaling approximately $1.7 million which it
accounted for under the equity method. In connection with the acquisition, the Company
re-measured its previously held equity interest at the acquisition-date fair value and
recognized a gain on the re-measurement of approximately $2.7 million which was
recognized as income; |
|
|
|
|
a 51,903 square foot specialty inpatient facility in Arizona for a purchase price of
approximately $15.5 million. The building was 100% occupied by one tenant whose lease
expires in 2024; |
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
a medical office building with 146,097 square feet in Indiana for a purchase price of
approximately $25.8 million. The building was 100% occupied with lease expiration dates
ranging from 2011 to 2021; |
|
|
|
|
four medical office buildings in Iowa, aggregating 155,189 square feet, were
acquired by a joint venture (HR Ladco Holdings, LLC), in which the Company has an 80%
controlling interest, for a total purchase price of approximately $44.6 million.
All four buildings were 100% leased upon acquisition with lease expirations ranging from
2010 through 2029. Three of the buildings were constructed by the Companys joint
venture partner, and the construction was funded by the Company through a construction
loan. Upon acquisition of the buildings by the joint venture, $30.8 million of the
Companys construction loan was converted to a permanent mortgage note payable to the
Company, which is eliminated in consolidation, with the remaining balance of the
construction loan of $5.0 million added to the Companys equity investment in the joint
venture; and |
|
|
|
|
a mortgage note receivable was originated for $9.9 million in connection with a
medical office building in Iowa. |
A summary of the Companys 2009 acquisitions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
|
Dates |
|
|
Cash |
|
|
Real |
|
|
Note |
|
|
Notes Payable |
|
|
|
|
|
|
Square |
|
(Dollars in millions) |
|
|
Acquired |
|
|
Consideration |
|
|
Estate |
|
|
Financing |
|
|
Assumed |
|
|
Other |
|
|
Footage |
|
|
|
|
Real estate acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oregon (1) |
|
|
01/16/09 |
|
|
$ |
4.4 |
|
|
$ |
20.5 |
|
|
$ |
|
|
|
$ |
(11.7 |
) |
|
$ |
(4.4 |
) |
|
|
62,246 |
|
Arizona |
|
|
10/20/09 |
|
|
|
16.0 |
|
|
|
16.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,903 |
|
Indiana |
|
|
12/18/09 |
|
|
|
28.2 |
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
2.2 |
|
|
|
146,097 |
|
Iowa |
|
|
2/23/09, 7/16/09 |
|
|
|
6.8 |
|
|
|
43.9 |
|
|
|
(35.7 |
) |
|
|
|
|
|
|
(1.4 |
) |
|
|
155,189 |
|
|
|
|
7/23/09, 12/08/09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55.4 |
|
|
|
106.4 |
|
|
|
(35.7 |
) |
|
|
(11.7 |
) |
|
|
(3.6 |
) |
|
|
415,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage note financings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa |
|
|
12/30/2009 |
|
|
|
9.9 |
|
|
|
|
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 Acquisitions |
|
|
|
|
|
$ |
65.3 |
|
|
$ |
106.4 |
|
|
$ |
(25.8 |
) |
|
$ |
(11.7 |
) |
|
$ |
(3.6 |
) |
|
|
415,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage note payable assumed in the Oregon acquisition reflects a fair value
adjustment of $1.1 million recorded by the Company upon acquisition. |
The Company assigned $8.2 million to real estate lease intangible assets, net of ground
lease intangible liabilities, related to its 2009 acquisitions with amortization periods ranging
from 7.3 years to 75 years.
2008 Real Estate Acquisitions
During 2008, the Company acquired the following properties:
|
|
|
two fully-leased, six-story office buildings each containing approximately 146,000
square feet, and a six-level parking structure, containing 977 parking spaces, in
Dallas, Texas for purchase price of approximately $59.2 million; |
|
|
|
|
a medical office building and surgery center with 102,566 square feet in Indiana for
a purchase price of approximately $28.2 million. The building is 100% occupied by three
tenants with lease expiration dates ranging from 2017 to 2024; |
|
|
|
|
a portfolio of 15 medical office buildings from The Charlotte-Mecklenburg Hospital
Authority and certain of its affiliates (collectively, CHS) for a purchase price of
approximately $162.1 million, including ground lease prepayments of $8.3 million. The
portfolio includes 764,092 square feet of on- and off-campus properties which are
located in or around Charlotte, North Carolina and are approximately 90% occupied. CHS
leases approximately 71% of the total square feet of the portfolio with lease terms
averaging approximately 10 years. CHS is the third largest public health system in the
United States and owns, leases and manages 23 hospitals, and operates approximately
5,000 patient beds. The weighted average |
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
remaining lease terms for the non-CHS portion of leased space is five years. The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed as of the acquisition date:
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
Estimated |
|
|
|
Fair Value |
|
|
Useful Life |
|
|
|
(In millions) |
|
|
(In years) |
|
Buildings |
|
$ |
140.4 |
|
|
|
20.0-39.0 |
|
Prepaid ground lease |
|
|
8.3 |
|
|
|
75.0 |
|
Intangibles: |
|
|
|
|
|
|
|
|
At-market lease intangibles |
|
|
11.1 |
|
|
|
0.9-15.0 |
|
Below-market lease intangibles |
|
|
(0.1 |
) |
|
|
3.4 |
|
Above-market ground lease intangibles |
|
|
(0.1 |
) |
|
|
75.0 |
|
Below-market ground lease intangibles |
|
|
2.5 |
|
|
|
75.0 |
|
|
|
|
|
|
|
|
Total intangibles |
|
|
13.4 |
|
|
|
22.5 |
|
|
|
|
|
|
|
|
|
|
$ |
162.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the remaining equity membership interest in a joint venture, which owns five
on-campus medical office buildings in Washington, for a purchase price of approximately
$14.5 million plus the assumption of outstanding debt of approximately $42.2 million,
net of fair value adjustments. At the time of the acquisition, the Company had a $9.2
million net equity investment in the joint venture which it accounted for under the
equity method. The debt assumed has a weighted average interest rate of 5.8% with
maturities beginning in 2015. In connection with the Companys acquisition and related
transition of accounting from the joint venture to the Company, the joint venture
recorded an adjustment to straight-line rent on the properties. As such, the Company
recognized its portion of the adjustment through equity income of the joint venture of
approximately $1.1 million (of which $0.8 million, or $0.02 per diluted share, is
related to prior years); |
|
|
|
|
an 80% interest in a joint venture that concurrently acquired two medical office
buildings, a specialty outpatient facility and a physician clinic in Iowa for cash
consideration of approximately $25.8 million, plus the assumption of outstanding debt of
approximately $1.2 million, net of a fair value adjustment. The debt assumed has an
interest rate of 5.8% which matures in 2016. The accounts of the joint venture are
included in the Companys Consolidated Financial Statements; and |
|
|
|
|
a mortgage note receivable was originated for $8.0 million in connection with the
construction of an ambulatory care/surgery center in Iowa. |
A summary of the Companys 2008 acquisitions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
|
Date |
|
|
Cash |
|
|
Real |
|
|
Note |
|
|
Notes Payable |
|
|
|
|
|
|
Square |
|
(Dollars in millions) |
|
Acquired |
|
|
Consideration |
|
|
Estate |
|
|
Financing |
|
|
Assumed |
|
|
Other |
|
|
Footgage |
|
Real estate acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas |
|
|
7/25/08 |
|
|
$ |
56.0 |
|
|
$ |
57.9 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(1.9 |
) |
|
|
291,389 |
|
Indiana |
|
|
12/19/08 |
|
|
|
28.1 |
|
|
|
27.7 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
102,566 |
|
North and South
Carolina |
|
|
12/29/08 |
|
|
|
162.1 |
|
|
|
151.5 |
|
|
|
|
|
|
|
|
|
|
|
10.6 |
|
|
|
764,092 |
|
Washington (1) |
|
|
11/26/08 |
|
|
|
14.5 |
|
|
|
69.7 |
|
|
|
|
|
|
|
(42.2 |
) |
|
|
(13.0 |
) |
|
|
319,561 |
|
Iowa (1) |
|
|
9/30/08, 10/31/08 |
|
|
|
25.8 |
|
|
|
28.8 |
|
|
|
|
|
|
|
(1.2 |
) |
|
|
(1.8 |
) |
|
|
145,457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
286.5 |
|
|
|
335.6 |
|
|
|
|
|
|
|
(43.4 |
) |
|
|
(5.7 |
) |
|
|
1,623,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage note financings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iowa |
|
|
10/30/08 |
|
|
|
8.0 |
|
|
|
|
|
|
|
8.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2008 Acquisitions |
|
|
|
|
|
$ |
294.5 |
|
|
$ |
335.6 |
|
|
$ |
8.0 |
|
|
$ |
(43.4 |
) |
|
$ |
(5.7 |
) |
|
|
1,623,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The mortgage notes payable assumed in the Washington and Iowa acquisitions reflect fair value
adjustments of $7.2 million and $0.2 million, respectively, recorded by the Company upon
acquisition. |
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company assigned $23.7 million to intangible assets net of intangible liabilities, related
to the 2008 acquisitions as shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
Intangibles |
|
|
Amortization |
|
|
|
Assigned |
|
|
Periods |
|
|
|
(In thousands) |
|
|
(In years) |
|
Above-market lease intangibles |
|
$ |
1,297 |
|
|
|
2.0-16.5 |
|
Below-market lease intangibles |
|
|
(6,615 |
) |
|
|
4.3-12.3 |
|
At-market lease intangibles |
|
|
25,277 |
|
|
|
2.0-16.5 |
|
Above-market ground lease intangibles |
|
|
(128 |
) |
|
|
75 |
|
Below-market ground lease intangibles |
|
|
3,850 |
|
|
|
56.5-93.1 |
|
|
|
|
|
|
|
|
|
|
$ |
23,681 |
|
|
|
17.7 |
|
|
|
|
|
|
|
|
2009 Real Estate Dispositions
During 2009, the Company disposed of the following properties:
|
|
|
an 11,538 square foot medical office building in Florida in which the Company had a
total gross investment of approximately $1.4 million ($1.0 million, net) was sold for
approximately $1.4 million in net proceeds, and the Company recognized a $0.4 million
net gain on the sale; |
|
|
|
|
a 139,647 square foot medical office building in Wyoming to the sponsor for $21.4
million. During 2008, the Company received a $2.4 million deposit from the sponsor on
the sale and received a $7.2 million termination fee from the sponsor in accordance with
its financial support agreement with the Company. In 2009, the Company received the
remaining consideration of approximately $19.0 million (plus $0.2 million of interest).
The Company had an aggregate investment of approximately $20.0 million ($15.8 million,
net) in the medical office building and recognized a gain on sale of approximately $5.6
million; |
|
|
|
|
the Companys membership interests in an entity which owns an 86,942 square foot
medical office building in Washington. The Company acquired the entity in December 2008
and had an aggregate and net investment of approximately $10.7 million. The Company
received approximately $5.3 million in net proceeds, and the purchaser assumed the
mortgage note secured by the property of approximately $5.4 million. The Company
recognized an insignificant impairment charge on the disposition related to closing
costs; |
|
|
|
|
a 198,064 square foot medical office building in Nevada in which the Company had a
gross investment of approximately $46.8 million ($32.7 million, net) was sold for
approximately $38.0 million in net proceeds, and the Company concurrently paid off a
$19.5 million mortgage note secured by the property. The Company recognized a gain on
sale of approximately $6.5 million, net of liabilities of $1.2 million; |
|
|
|
|
a 113,555 square foot specialty inpatient facility in Michigan in which the Company
had a gross investment of approximately $13.9 million ($10.8 million, net) was sold for
approximately $18.5 million in net proceeds, and the Company recognized a gain on sale
of approximately $7.5 million, net of liabilities of $0.2 million; |
|
|
|
|
a 10,255 square foot ambulatory surgery center in Florida in which the Company had a
gross investment of approximately $3.4 million ($2.0 million, net) was sold for
approximately $0.5 million in net cash proceeds and title to a land parcel adjoining
another medical office building owned by the Company valued at $1.5 million. The
Company recognized no gain on the transaction; and |
|
|
|
|
an 8,243 square foot physician clinic in Virginia in which the Company had a gross
investment of approximately $0.7 million ($0.5 million, net) was sold for approximately
$0.6 million in net proceeds, and the Company recognized a gain on sale of approximately
$0.1 million. |
2009 Mortgage Note Repayment
During 2009, one mortgage note receivable totaling approximately $12.6 million was repaid.
This mortgage note, which provided financing for the construction of a building in Iowa, was repaid
upon acquisition of the building by a third party.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the Companys 2009 dispositions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Real |
|
|
Other |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Net |
|
|
Estate |
|
|
(Including |
|
|
Note |
|
|
Gain/ |
|
|
Square |
|
(Dollars in millions) |
|
Proceeds |
|
|
Investment |
|
|
Receivables) |
|
|
Receivable |
|
|
(Loss) |
|
|
Footage |
|
Real estate dispositions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
$ |
1.4 |
|
|
$ |
1.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.4 |
|
|
|
11,538 |
|
Wyoming (1) |
|
|
21.4 |
|
|
|
15.8 |
|
|
|
|
|
|
|
|
|
|
|
5.6 |
|
|
|
139,647 |
|
Washington |
|
|
5.3 |
|
|
|
10.7 |
|
|
|
(5.4 |
) |
|
|
|
|
|
|
0.0 |
|
|
|
86,942 |
|
Nevada |
|
|
38.0 |
|
|
|
32.7 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
6.5 |
|
|
|
198,064 |
|
Michigan |
|
|
18.5 |
|
|
|
10.8 |
|
|
|
0.2 |
|
|
|
|
|
|
|
7.5 |
|
|
|
113,555 |
|
Florida |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,255 |
|
Virginia |
|
|
0.6 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
8,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85.7 |
|
|
|
72.0 |
|
|
|
(6.4 |
) |
|
|
|
|
|
|
20.1 |
|
|
|
568,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage note repayments |
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
12.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2009 Dispositions |
|
$ |
98.3 |
|
|
$ |
72.0 |
|
|
$ |
(6.4 |
) |
|
$ |
12.6 |
|
|
$ |
20.1 |
|
|
|
568,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net proceeds include $2.4 million in proceeds received in 2008 as a deposit for the Wyoming
property sale. |
2008 Real Estate Dispositions
During 2008, the Company disposed of the following properties:
|
|
|
a 10,818 square foot physician clinic in Texas in which the Company had a gross
investment of approximately $1.5 million ($1.3 million, net) was sold for $1.6 million
in net proceeds, and the Company recognized a $0.3 million net gain from the sale; |
|
|
|
|
a 4,913 square foot ambulatory surgery center in California in which the Company had
a gross investment of approximately $1.0 million ($0.6 million, net) was sold for $1.0
million in net proceeds, and the Company recognized a $0.4 million net gain from the
sale; |
|
|
|
|
a 36,951 square foot building in Mississippi in which the Company had a gross
investment of approximately $2.9 million ($1.6 million, net) was sold for $1.9 million
in net proceeds, and the Company recognized a $0.3 million net gain from the sale; |
|
|
|
|
a 7,500 square foot physician clinic in Texas in which the Company had a total gross
investment of approximately $0.5 million ($0.4 million, net) was sold for $0.5 million
in net proceeds, and the Company recognized a $0.1 million net gain from the sale; |
|
|
|
|
pursuant to a purchase option exercised by a tenant in the third quarter of 2008, a
25,456 square foot physician clinic in Tennessee in which the Company had a gross
investment of approximately $3.3 million ($2.3 million, net) was sold for $3.0 million
in net proceeds, and the Company recognized a $0.7 million net gain from the sale; |
|
|
|
|
a parcel of land in Pennsylvania was sold for approximately $0.8 million in net
proceeds, which approximated the Companys net book value; |
|
|
|
|
pursuant to a purchase option exercised by a tenant in 2007, an 83,718 square foot
medical office building in Texas in which the Company had a gross investment of
approximately $18.5 million ($10.4 million, net) was sold for net proceeds of $18.7
million. The Company recognized an $8.0 million net gain from the sale, net of
receivables of $0.3 million; |
|
|
|
|
a parcel of land held for development in Illinois was sold for $9.0 million in net
proceeds. The Companys investment in the land was $8.6 million and it recognized $0.4
million net gain from the sale, which is recorded in other income (expense) on the
Companys Consolidated Statement of Income; and |
|
|
|
|
a 7,093 square foot building in Virginia in which the Company had a gross investment
of approximately $1.0 million ($0.5 million, net) was sold for $0.4 million in net
proceeds, resulting in a $0.1 million impairment. |
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2008 Mortgage Note Repayment
During 2008, one mortgage note receivable totaling approximately $2.5 million was repaid.
2008 Joint Venture Equity Interest Disposition
During 2008, a portion of the Companys preferred equity investment in a joint venture, in
which it owned a 10% equity ownership interest, was redeemed for $5.5 million.
A summary of the Companys 2008 dispositions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Real |
|
|
Other |
|
|
Mortgage |
|
|
|
|
|
|
|
|
|
Net |
|
|
Estate |
|
|
(Including |
|
|
Note |
|
|
Gain/ |
|
|
Square |
|
(Dollars in millions) |
|
Proceeds |
|
|
Investment |
|
|
Receivables) |
|
|
Receivable |
|
|
(Loss) |
|
|
Footage |
|
Real estate dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas |
|
$ |
1.6 |
|
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.3 |
|
|
|
10,818 |
|
California |
|
|
1.0 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
4,913 |
|
Mississippi |
|
|
1.9 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
36,951 |
|
Texas |
|
|
0.5 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
7,500 |
|
Tennessee |
|
|
3.0 |
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
25,456 |
|
Pennsylvania (land) |
|
|
0.8 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Texas |
|
|
18.7 |
|
|
|
10.4 |
|
|
|
0.3 |
|
|
|
|
|
|
|
8.0 |
|
|
|
83,718 |
|
Illinois (land held for development) (1) |
|
|
9.0 |
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
Virginia |
|
|
0.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
7,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.9 |
|
|
|
26.5 |
|
|
|
0.3 |
|
|
|
|
|
|
|
10.1 |
|
|
|
176,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage note repayments |
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint venture preferred equity interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utah |
|
|
5.5 |
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total 2008 Dispositions |
|
$ |
44.9 |
|
|
$ |
26.5 |
|
|
$ |
5.8 |
|
|
$ |
2.5 |
|
|
$ |
10.1 |
|
|
|
176,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The gain related to the sale of this land parcel is recognized in other income (expense) on the
Companys Consolidated Statement of Income. |
2010 Disposition
In January 2010, pursuant to a purchase option with an operator, the Company disposed of five
properties in Virginia. The Companys aggregate net investment in the buildings was approximately
$16.0 million at December 31, 2009. The Company received approximately $19.2 million in net
proceeds and $0.8 million in lease termination fees. The Company expects to recognize a gain on
sale of approximately $2.7 million, including the write-off of approximately $0.5 million of
straight-line rent receivables.
5. Discontinued Operations
The major categories of assets and liabilities of properties sold or to be sold are classified
as held for sale, to the extent not sold, on the Companys Consolidated Balance Sheets, and the
results of operations of such properties are included in discontinued operations on the Companys
Consolidated Statements of Income for all periods. Properties classified as held for sale at
December 31, 2009 include the properties discussed in 2010 Disposition in Note 4, as well as one
other property that the Company decided to sell in 2007.
The tables below reflect the assets and liabilities of the properties classified as held for
sale and discontinued operations as of December 31, 2009 and the results of operations of the
properties included in discontinued operations on the Companys Consolidated Statements of Income
for the periods ended December 31, 2009, 2008 and 2007.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Balance Sheet data (as of the period ended): |
|
|
|
|
|
|
|
|
Land |
|
$ |
3,374 |
|
|
$ |
9,503 |
|
Buildings, improvements and lease intangibles |
|
|
22,178 |
|
|
|
109,596 |
|
Personal property |
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
25,552 |
|
|
|
119,129 |
|
Accumulated depreciation |
|
|
(8,697 |
) |
|
|
(29,905 |
) |
|
|
|
|
|
|
|
Assets held for sale, net |
|
|
16,855 |
|
|
|
89,224 |
|
|
|
|
|
|
|
|
|
|
Other assets, net (including receivables) |
|
|
890 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
Assets of discontinued operations, net |
|
|
890 |
|
|
|
1,009 |
|
|
|
|
|
|
|
|
|
|
Assets held for sale and discontinued operations, net |
|
$ |
17,745 |
|
|
$ |
90,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
$ |
|
|
|
$ |
5,452 |
|
|
|
|
|
|
|
|
Liabilities held for sale |
|
|
|
|
|
|
5,452 |
|
|
|
|
|
|
|
|
|
|
Notes and bonds payable |
|
|
|
|
|
|
23,281 |
|
Accounts payable and accrued liabilities |
|
|
|
|
|
|
409 |
|
Other liabilities |
|
|
251 |
|
|
|
3,679 |
|
|
|
|
|
|
|
|
Liabilities of discontinued operations |
|
|
251 |
|
|
|
27,369 |
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale and discontinued operations |
|
$ |
251 |
|
|
$ |
32,821 |
|
|
|
|
|
|
|
|
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Statements of Income data (for the period ended): |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (1) |
|
|
|
|
|
|
|
|
|
|
|
|
Master lease rent |
|
$ |
4,242 |
|
|
$ |
6,887 |
|
|
$ |
15,691 |
|
Property operating |
|
|
828 |
|
|
|
7,999 |
|
|
|
8,125 |
|
Straight-line rent |
|
|
(102 |
) |
|
|
(9 |
) |
|
|
84 |
|
Mortgage interest |
|
|
|
|
|
|
|
|
|
|
1,841 |
|
Other operating |
|
|
216 |
|
|
|
8,014 |
|
|
|
18,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,184 |
|
|
|
22,891 |
|
|
|
44,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses (2) |
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative |
|
|
|
|
|
|
(26 |
) |
|
|
|
|
Property operating |
|
|
969 |
|
|
|
3,902 |
|
|
|
4,134 |
|
Other operating |
|
|
|
|
|
|
|
|
|
|
16,688 |
|
Bad debts, net of recoveries |
|
|
(20 |
) |
|
|
71 |
|
|
|
(24 |
) |
Depreciation |
|
|
1,039 |
|
|
|
2,331 |
|
|
|
5,897 |
|
Amortization |
|
|
|
|
|
|
25 |
|
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,988 |
|
|
|
6,303 |
|
|
|
26,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense) (3) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(667 |
) |
|
|
(2,008 |
) |
|
|
(2,378 |
) |
Interest and other income, net |
|
|
284 |
|
|
|
25 |
|
|
|
278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(383 |
) |
|
|
(1,983 |
) |
|
|
(2,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations |
|
|
2,813 |
|
|
|
14,605 |
|
|
|
15,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairments (4) |
|
|
(22 |
) |
|
|
(886 |
) |
|
|
(7,089 |
) |
Gain on sales of real estate properties (5) |
|
|
20,136 |
|
|
|
9,843 |
|
|
|
40,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
$ |
22,927 |
|
|
$ |
23,562 |
|
|
$ |
49,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per common share basic |
|
$ |
0.40 |
|
|
$ |
0.46 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Discontinued Operations per common share diluted |
|
$ |
0.39 |
|
|
$ |
0.44 |
|
|
$ |
1.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total revenues for the years ended December 31, 2009, 2008 and 2007 include $0, $0 and $27.4
million, respectively, related to the sale of the senior living assets; $1.9 million, $19.6
million (including a $7.2 million fee received from an operator to terminate its financial
support agreement with the Company) and $13.9 million, respectively, related to other
properties sold; and $3.3 million, $3.3 million and $3.3 million, respectively, related to
six properties held for sale at December 31, 2009. |
|
(2) |
|
Total expenses for the years ended December 31, 2009, 2008 and 2007 include $0, $0 and $19.0
million, respectively, related to the sale of the senior living assets; $0.9 million, $6.0
million and $7.1 million, respectively, related to other properties sold; and $1.1 million,
$0.3 million and $0.6 million, respectively, related to six properties held for sale at
December 31, 2009. |
|
(3) |
|
Other income (expense) for the years ended December 31, 2009, 2008 and 2007 include ($0.2)
million, ($0.3) million and ($0.4) million related to properties held for sale; ($0.5)
million, ($1.7) million and ($1.7) million related to other properties sold; and December 31,
2009 also includes $0.3 million related to the sale of the senior living assets. |
|
(4) |
|
Impairments for the year ended December 31, 2009 includes $0.02 million related to one
property sold; December 31, 2008 includes approximately $0.6 million related to one property
held for sale and $0.3 million related to three properties sold; December 31, 2007 includes
$6.6 million related to four properties sold and $0.5 million related to one property held for
sale. |
|
(5) |
|
Gain on sales of real estate properties for the year ended December 31, 2009 includes $20.1
million related to six properties sold; December 31, 2008 includes $9.8 million related to six
properties sold; December 31, 2007 includes $40.2 million related to the sale of senior living
assets during 2007 and $0.2 million related to the sale of a property pursuant to a purchase
option exercised by the operator. |
6. Impairment Charges
A Company must assess the potential for impairment of its long-lived assets, including real
estate properties, whenever events occur or there is a change in circumstances, such as the sale of
a property or the decision to sell a property, that indicates that the recorded
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
value might not be fully recoverable. An asset is impaired when undiscounted cash flows expected
to be generated by the asset are less than the carrying value of the asset.
The Company recorded impairment charges, which are included in continuing operations, for the
year ended December 31, 2008 totaling $1.6 million related to changes in managements estimate of
fair value and collectibility of patient receivables assigned to the Company in late 2005 resulting
from a lease termination and debt restructuring of a physician clinic owned by the Company. No
such impairment charges resulted from the Companys assessments for the years ending December 31,
2009 or 2007.
The Company also recorded impairment charges, which are included in discontinued operations,
for the years ended December 31, 2009, 2008 and 2007 totaling $0.02 million, $0.9 million and $7.1
million, respectively, relating to properties that were sold or classified as held for sale.
7. Other Assets
Other assets consist primarily of straight-line rent receivables, prepaids, intangible assets,
and receivables. Items included in other assets on the Companys Consolidated Balance Sheets as of
December 31, 2009 and 2008 are detailed in the table below.
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
Straight-line rent receivables |
|
$ |
25.2 |
|
|
$ |
23.2 |
|
Prepaid assets |
|
|
24.7 |
|
|
|
21.0 |
|
Deferred financing costs, net |
|
|
12.1 |
|
|
|
3.1 |
|
Above-market intangible assets, net |
|
|
12.0 |
|
|
|
11.7 |
|
Accounts receivable |
|
|
9.0 |
|
|
|
10.3 |
|
Goodwill |
|
|
3.5 |
|
|
|
3.5 |
|
Notes receivable |
|
|
3.3 |
|
|
|
0.5 |
|
Equity investments in joint ventures |
|
|
1.3 |
|
|
|
2.8 |
|
Customer relationship intangible assets, net |
|
|
1.2 |
|
|
|
1.2 |
|
Allowance for uncollectible accounts |
|
|
(3.7 |
) |
|
|
(3.3 |
) |
Other |
|
|
0.9 |
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
$ |
89.5 |
|
|
$ |
77.0 |
|
|
|
|
|
|
|
|
Equity Investments in Joint Ventures
At December 31, 2009 and 2008, the Company had investments in one and two unconsolidated joint
ventures, respectively, which had investments in real estate properties. In January 2009, the
Company acquired the remaining membership interest in one of its joint ventures previously
accounted for under the equity method. The Company accounts for its remaining joint venture
investment under the cost method. The Companys net investments in the joint ventures are included
in other assets on the Companys Consolidated Balance Sheets, and the related income or loss is
included in interest and other income, net on the Companys Consolidated Statements of Income.
The Company recognized income related to the joint venture accounted for under the cost method
of approximately $0.3 million, $0.7 million and $1.1 million, respectively, for the years ended
December 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Net joint venture investments, beginning of year |
|
$ |
2,784 |
|
|
$ |
18,356 |
|
|
$ |
20,079 |
|
Equity in income (losses) recognized during the year |
|
|
(2 |
) |
|
|
1,021 |
|
|
|
(309 |
) |
Acquisition of remaining equity interest in a joint venture |
|
|
(1,700 |
) |
|
|
(10,165 |
) |
|
|
|
|
Partial redemption of preferred equity investment in an
unconsolidated joint venture |
|
|
|
|
|
|
(5,546 |
) |
|
|
|
|
Additional investment in a joint venture |
|
|
184 |
|
|
|
|
|
|
|
|
|
Distributions received during the year |
|
|
|
|
|
|
(882 |
) |
|
|
(1,414 |
) |
|
|
|
|
|
|
|
|
|
|
Net joint venture investments, end of year |
|
$ |
1,266 |
|
|
$ |
2,784 |
|
|
$ |
18,356 |
|
|
|
|
|
|
|
|
|
|
|
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Intangible Assets and Liabilities
The Company has several types of intangible assets and liabilities included in its
Consolidated Balance Sheets, including goodwill, deferred financing costs, above-, below-, and
at-market lease intangibles, and customer relationship intangibles. The Companys intangible
assets and liabilities as of December 31, 2009 and 2008 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Amortization |
|
|
Weighted |
|
|
|
|
|
|
December 31, |
|
|
at December 31, |
|
|
Avg. Life |
|
|
Balance Sheet |
|
(Dollars in millions) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
|
(Years) |
|
|
Classification |
|
Goodwill |
|
$ |
3.5 |
|
|
$ |
3.5 |
|
|
$ |
|
|
|
$ |
|
|
|
|
N/A |
|
|
Other assets |
Deferred financing costs |
|
|
17.1 |
|
|
|
11.4 |
|
|
|
5.0 |
|
|
|
8.3 |
|
|
|
4.1 |
|
|
Other assets |
Above-market lease intangibles |
|
|
12.8 |
|
|
|
12.2 |
|
|
|
0.8 |
|
|
|
0.5 |
|
|
|
49.1 |
|
|
Other assets |
Customer relationship intangibles |
|
|
1.4 |
|
|
|
1.4 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
33.6 |
|
|
Other assets |
Below-market lease intangibles |
|
|
(7.2 |
) |
|
|
(7.2 |
) |
|
|
(1.8 |
) |
|
|
(0.7 |
) |
|
|
9.8 |
|
|
Other liabilities |
At-market lease intangibles |
|
|
72.9 |
|
|
|
65.3 |
|
|
|
43.7 |
|
|
|
38.5 |
|
|
|
9.4 |
|
|
Real estate properties |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100.5 |
|
|
$ |
86.6 |
|
|
$ |
47.9 |
|
|
$ |
46.8 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of the Companys intangible assets and liabilities, in place as of December
31, 2009, is expected to be approximately $7.7 million, $7.1 million, $6.2 million, $3.6 million,
and $3.2 million, respectively, for the years ended December 31, 2010 through 2014.
9. Notes and Bonds Payable
The table below details the Companys notes and bonds payable. At December 31, 2008, the
Company had classified four mortgage notes payable totaling $28.7 million as liabilities held for
sale and discontinued operations on the Companys Consolidated Balance Sheet that were subsequently
repaid. As such, those mortgage notes are not reflected in the December 31, 2008 balances in the
following table:
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Unsecured Credit Facility due 2012 |
|
$ |
50,000 |
|
|
$ |
|
|
Unsecured Credit Facility due 2010 |
|
|
|
|
|
|
329,000 |
|
Senior Notes due 2011, including premium |
|
|
286,655 |
|
|
|
286,898 |
|
Senior Notes due 2014, net of discount |
|
|
264,090 |
|
|
|
263,961 |
|
Senior Notes due 2017, net of discount |
|
|
297,988 |
|
|
|
|
|
Mortgage notes payable, net of discount |
|
|
147,689 |
|
|
|
60,327 |
|
|
|
|
|
|
|
|
|
|
$ |
1,046,422 |
|
|
$ |
940,186 |
|
|
|
|
|
|
|
|
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
(as defined in the agreement) and impose certain limits on the Companys ability to incur
indebtedness and create liens or encumbrances. At December 31, 2009, the Company was in compliance
with its financial covenant provisions under its various debt instruments.
Unsecured Credit Facility due 2012
On September 30, 2009, the Company entered into an amended and restated $550.0 million
unsecured credit facility (the Unsecured Credit Facility) with a syndicate of 16 lenders that
matures on September 30, 2012. Amounts outstanding under the Unsecured Credit Facility will bear
interest at a rate equal to (x) LIBOR or the base rate (defined as the highest of (i) the Federal
Funds Rate plus 0.5%; (ii) the Bank of America prime rate and (iii) LIBOR) plus (y) a margin
ranging from 2.15% to 3.20% (currently 2.80%) for LIBOR-based loans and 0.90% to 1.95% for base
rate loans (currently 1.55%), based upon the Companys unsecured debt ratings. In addition, the
Company pays a facility fee per annum on the aggregate amount of commitments. The facility fee is
0.40% per annum, unless the Companys credit rating falls below a BBB-/Baa3, at which point the
facility fee would be 0.50%. At December 31, 2009, the
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company had $50.0 million outstanding under the facility with a weighted average interest rate of
approximately 3.03% and had borrowing capacity remaining, under its financial covenants, of
approximately $500.0 million.
Unsecured Credit Facility due 2010
The Companys $400.0 million unsecured credit facility due 2010 was repaid on September 30,
2009 with proceeds from the Unsecured Credit Facility. The $400.0 million unsecured credit facility
bore 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% (0.90% at September 30, 2009), based upon the Companys unsecured debt ratings.
Additionally, the Company paid a facility fee per annum on the aggregate amount of commitments, ranging
from 0.15% to 0.30% per annum (0.20% at September 30, 2009), based on the Companys unsecured debt
ratings. Upon repayment of the $400.0 million unsecured credit facility on September 30, 2009, the
Company had $368.0 million outstanding on the facility with a weighted average interest rate of
approximately 1.27%.
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.
During 2008, the Company repurchased $13.7 million of the Senior Notes due 2011. 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 original discount is combined with the premium resulting from
the termination of interest rate swaps in 2006 that were entered into to offset changes in the fair
value of $125.0 million of the notes. The net premium is combined with the principal balance of
the Senior Notes due 2011 on the Companys 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%. For each of the years ended December 31, 2009, 2008 and 2007, the Company
amortized approximately $0.2 million of the net premium which is included in interest expense on
the Companys Consolidated Statements of Income. The following table reconciles the balance of the
Senior Notes due 2011 on the Companys Consolidated Balance Sheets as of December 31, 2009 and
2008.
|
|
|
|
|
|
|
|
|
|
|
December
31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Senior Notes due 2011 face value |
|
$ |
286,300 |
|
|
$ |
286,300 |
|
Unamortized net gain (net of
discount) |
|
|
355 |
|
|
|
598 |
|
|
|
|
|
|
|
|
Senior Notes due 2011 carrying amount |
|
$ |
286,655 |
|
|
$ |
286,898 |
|
|
|
|
|
|
|
|
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.
During 2008, the Company repurchased approximately $35.3 million of the Senior Notes due 2014. The
notes were issued at a discount of approximately $1.5 million, which yielded a 5.19% interest rate
per annum upon issuance. For each of the years ended December 31, 2009, 2008 and 2007, the Company
amortized approximately $0.1 million of the discount which is included in interest expense on the
Companys Consolidated Statements of Income. The following table reconciles the balance of the
Senior Notes due 2014 on the Companys Consolidated Balance Sheets as of December 31, 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
Senior Notes due 2014 face value |
|
$ |
264,737 |
|
|
$ |
264,737 |
|
Unaccreted discount |
|
|
(647 |
) |
|
|
(776 |
) |
|
|
|
|
|
|
|
Senior Notes due 2014 carrying amount |
|
$ |
264,090 |
|
|
$ |
263,961 |
|
|
|
|
|
|
|
|
Senior Notes due 2017
On December 4, 2009, the Company publicly issued $300.0 million of unsecured senior notes due
2017 (the Senior Notes due 2017). The Senior Notes due 2017 bear interest at 6.50%, payable
semi-annually on January 17 and July 17, and are due on January 17, 2017, unless redeemed earlier
by the Company. The notes were issued at a discount of approximately $2.0 million, which yielded a
6.618% interest rate per annum upon issuance. For the year ended December 31, 2009, the Company
amortized approximately $0.02
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
million of the discount which is included in interest expense on the Companys Consolidated
Statement of Income. The following table reconciles the balance of the Senior Notes due 2017 on
the Companys Consolidated Balance Sheet as of December 31, 2009:
|
|
|
|
|
|
|
December 31, |
|
(Dollars in thousands) |
|
2009 |
|
|
|
|
|
Senior Notes due 2017 face value |
|
$ |
300,000 |
|
Unaccreted discount |
|
|
(2,012 |
) |
|
|
|
|
Senior Notes due 2017 carrying amount |
|
$ |
297,988 |
|
|
|
|
|
Senior Note Repurchases
During 2008, the Company repurchased $13.7 million of the Senior Notes due 2011 and $35.3
million of the Senior Notes due 2014, amortized a pro-rata portion of the premium or discount
related to the notes and recognized a net gain of $4.1 million. The Company may elect, from time
to time, to repurchase and retire its notes when market conditions are appropriate.
Mortgage Notes Payable
The following table details the Companys mortgage notes payable, with related collateral. At
December 31, 2008, the Company had classified four mortgage notes payable totaling $28.7 million to
liabilities held for sale and discontinued operations on the Companys Consolidated Balance Sheet.
As such, the four mortgages are not shown in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
|
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Collateral at |
|
|
Balance at |
|
|
|
Original |
|
|
Interest |
|
|
Maturity |
|
|
of Notes |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
(Dollars in millions) |
|
Balance |
|
|
Rate (11) |
|
|
Date |
|
|
Payable (12) |
|
|
Collateral (13) |
|
|
2009 |
|
|
2009 |
|
|
2008 |
|
|
Life Insurance Co.
(1) |
|
$ |
4.7 |
|
|
|
7.765 |
% |
|
|
1/17 |
|
|
|
1 |
|
|
MOB |
|
$ |
11.4 |
|
|
$ |
2.5 |
|
|
$ |
2.7 |
|
Commercial Bank (2) |
|
|
11.7 |
|
|
|
7.220 |
% |
|
|
5/11 |
|
|
|
|
|
|
2 MOBs/1 ASC |
|
|
|
|
|
|
|
|
|
|
3.7 |
|
Commercial Bank (3) |
|
|
1.8 |
|
|
|
5.550 |
% |
|
|
10/30 |
|
|
|
1 |
|
|
OTH |
|
|
7.7 |
|
|
|
1.7 |
|
|
|
1.8 |
|
Life Insurance Co.
(4) |
|
|
15.1 |
|
|
|
5.490 |
% |
|
|
1/16 |
|
|
|
1 |
|
|
ASC |
|
|
32.5 |
|
|
|
13.9 |
|
|
|
14.2 |
|
Commercial Bank (5) |
|
|
17.4 |
|
|
|
6.480 |
% |
|
|
5/15 |
|
|
|
1 |
|
|
MOB |
|
|
19.9 |
|
|
|
14.4 |
|
|
|
14.3 |
|
Commercial Bank (6) |
|
|
12.0 |
|
|
|
6.110 |
% |
|
|
7/15 |
|
|
|
1 |
|
|
2 MOBs |
|
|
19.5 |
|
|
|
9.7 |
|
|
|
9.6 |
|
Commercial Bank (7) |
|
|
15.2 |
|
|
|
7.650 |
% |
|
|
7/20 |
|
|
|
1 |
|
|
MOB |
|
|
20.2 |
|
|
|
12.8 |
|
|
|
12.8 |
|
Life Insurance Co.
(8) |
|
|
1.5 |
|
|
|
6.810 |
% |
|
|
7/16 |
|
|
|
1 |
|
|
SOP |
|
|
2.2 |
|
|
|
1.2 |
|
|
|
1.2 |
|
Commercial Bank (9) |
|
|
12.8 |
|
|
|
6.430 |
% |
|
|
2/21 |
|
|
|
1 |
|
|
MOB |
|
|
20.5 |
|
|
|
11.6 |
|
|
|
|
|
Investment Fund (10) |
|
|
80.0 |
|
|
|
7.250 |
% |
|
|
12/16 |
|
|
|
1 |
|
|
15 MOBs |
|
|
152.4 |
|
|
|
79.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
$ |
286.3 |
|
|
$ |
147.7 |
|
|
$ |
60.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Payable in monthly installments of principal and interest based on a 20-year amortization
with the final payment due at maturity. |
|
(2) |
|
Three mortgage notes totaling $3.7 million at December 31, 2008 were defeased and repaid in
full in December 2009. |
|
(3) |
|
Payable in monthly installments of principal and interest based on a 27-year amortization
with the final payment due at maturity. |
|
(4) |
|
Payable in monthly installments of principal and interest based on a 10-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. The Company acquired this mortgage note in an
acquisition during 2008 and recorded the note at its fair value, resulting in a $2.7 million
discount which is included in the balance above. |
|
(6) |
|
Payable in monthly installments of principal and interest based on a 10-year amortization
with the final payment due at maturity. The Company acquired this mortgage note in an
acquisition during 2008 and recorded the note at its fair value, resulting in a $2.1 million
discount which is included in the balance above. |
|
(7) |
|
Payable in monthly installments of interest only for 24 months and then installments of
principal and interest based on an 11-year amortization with the final payment due at
maturity. The Company acquired this mortgage note in an acquisition during 2008 and recorded
the note at its fair value, resulting in a $2.4 million discount which is included in the
balance above. |
|
(8) |
|
Payable in monthly installments of principal and interest based on a 9-year amortization with
the final payment due at maturity. The Company acquired this mortgage note in an acquisition
during 2008 and recorded the note at its fair value, resulting in a $0.2 million discount
which is included in the balance above. |
|
(9) |
|
Payable in monthly installments of principal and interest based on a 12-year amortization
with the final payment due at maturity. The Company acquired this mortgage note in an
acquisition during 2009 and recorded the note at its fair value, resulting in a $1.0 million
discount which is included in the balance above. |
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) |
|
Payable in monthly installments of principal and interest based on a 30-year
amortization with a 7-year initial term (maturity 12/01/16) and the option to extend the
initial term for two, one-year floating rate extension terms. |
|
(11) |
|
The contractual interest rates for the nine outstanding mortgage notes ranged from 5.00% to
7.625% at December 31, 2009. |
|
(12) |
|
Number of mortgage notes payable outstanding at December 31, 2009. |
|
(13) |
|
MOB-Medical office building; ASC-Ambulatory care/surgery;
SOP-Specialty outpatient;
OTH-Other. |
The following mortgage notes payable were classified to liabilities held for sale and
discontinued operations on the Companys Consolidated Balance Sheet at December 31, 2008. During
2009, three of the mortgage notes totaling approximately $9.2 million were repaid and one mortgage
note totaling $19.5 million was assumed by the buyer upon sale of the related real estate property.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in |
|
|
Contractual |
|
|
|
|
|
|
|
Effective |
|
|
|
|
|
|
Number |
|
|
|
|
|
|
Collateral at |
|
|
Balance at |
|
|
|
Original |
|
|
Interest |
|
|
Maturity |
|
|
of Notes |
|
|
|
|
|
|
December 31, |
|
|
December 31, |
|
(Dollars in millions) |
|
Balance |
|
|
Rate (4) |
|
|
Date |
|
|
Payable |
|
|
Collateral (5) |
|
|
2008 |
|
|
2008 |
|
Life Insurance Co.
(1) |
|
$ |
23.3 |
|
|
|
7.765 |
% |
|
|
7/26 |
|
|
|
1 |
|
|
MOB |
|
$ |
46.8 |
|
|
$ |
19.5 |
|
Commercial Bank (2) |
|
|
11.7 |
|
|
|
7.220 |
% |
|
|
5/11 |
|
|
|
2 |
|
|
3 MOBs |
|
|
23.0 |
|
|
|
3.7 |
|
Commercial Bank (3) |
|
|
5.5 |
|
|
|
6.500 |
% |
|
|
1/27 |
|
|
|
1 |
|
|
MOB |
|
|
10.7 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
$ |
80.5 |
|
|
$ |
28.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Payable in monthly installments of principal and interest based on a 30-year amortization
with the final payment due at maturity. The mortgage note was assumed by the buyer upon sale
of the property in March 2009. |
|
(2) |
|
Payable in fully amortizing monthly installments of principal and interest due at maturity.
Defeased and repaid in full in December 2009. |
|
(3) |
|
Payable in fully amortizing monthly installments of principal and interest due at maturity.
The mortgage note was assumed by the buyer upon sale of the property in February 2009. |
|
(4) |
|
The contractual interest rates for the four outstanding mortgage notes included in
liabilities held for sale and discontinued operations ranged from 6.5% to 8.5% at December 31,
2008. |
|
(5) |
|
MOB-Medical office building |
Other Long-Term Debt Information
Future maturities of the Companys notes and bonds payable as of December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount/ |
|
|
Total |
|
|
|
|
|
|
Principal |
|
|
Premium |
|
|
Notes and |
|
|
|
|
(Dollars in thousands) |
|
Maturities |
|
|
Amortization (2) |
|
|
Bonds Payable |
|
|
% |
|
2010 |
|
$ |
2,386 |
|
|
$ |
(1,013 |
) |
|
$ |
1,373 |
|
|
|
0.1 |
% |
2011 |
|
|
288,843 |
|
|
|
(1,260 |
) |
|
|
287,583 |
|
|
|
27.5 |
% |
2012 (1) |
|
|
52,707 |
|
|
|
(1,434 |
) |
|
|
51,273 |
|
|
|
4.9 |
% |
2013 |
|
|
2,889 |
|
|
|
(1,520 |
) |
|
|
1,369 |
|
|
|
0.1 |
% |
2014 |
|
|
267,818 |
|
|
|
(1,499 |
) |
|
|
266,319 |
|
|
|
25.5 |
% |
2015 and thereafter |
|
|
441,748 |
|
|
|
(3,243 |
) |
|
|
438,505 |
|
|
|
41.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,056,391 |
|
|
$ |
(9,969 |
) |
|
$ |
1,046,422 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $50.0 million outstanding on the Unsecured Credit Facility. |
|
(2) |
|
Includes discount and premium amortization related to the Companys Senior Notes due 2011,
Senior Notes due 2014, and Senior Notes due 2017 and discount amortization related to five
mortgage notes payable. |
10. Stockholders Equity
Common Stock
The Company had no preferred shares outstanding and had common shares outstanding for the
three years ended December 31, 2009 as follows:
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Balance, beginning of year |
|
|
59,246,284 |
|
|
|
50,691,331 |
|
|
|
47,805,448 |
|
Issuance of stock |
|
|
1,244,914 |
|
|
|
8,373,014 |
|
|
|
2,833,434 |
|
Restricted stock-based awards, net of forfeitures |
|
|
123,733 |
|
|
|
181,939 |
|
|
|
52,449 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
|
60,614,931 |
|
|
|
59,246,284 |
|
|
|
50,691,331 |
|
|
|
|
|
|
|
|
|
|
|
At-The-Market Equity Offering Program
On December 31, 2008, the Company entered into a sales agreement with Cantor Fitzgerald & Co.
to sell up to 2,600,000 shares of its common stock through an at-the-market equity offering program
under which Cantor Fitzgerald acts as agent and/or principal. During 2009, the Company sold
1,201,600 shares of common stock, at prices ranging from $21.62 per share to $22.50 per share,
generating approximately $25.7 million in net proceeds. In January 2010, the Company sold an
additional 698,700 shares of common stock under the plan for net proceeds totaling approximately
$14.9 million. On February 22, 2010, the Company entered into a new sales agreement with Cantor
Fitzgerald to sell up to 5,000,000 shares of its common stock through the at-the-market equity
offering program. The 5,000,000 shares include 699,700 shares that
remain unsold under the prior sales agreement and 4,300,300 new
shares. This agreement supersedes the prior sales agreement.
Equity Offerings
On September 29, 2008, the Company sold 8,050,000 shares of common stock, par value $0.01 per
share, at $25.50 per share in an underwritten public offering pursuant to the Companys existing
effective registration statement. The net proceeds of the offering, after underwriting discounts
and commissions and estimated offering expenses, were approximately $196.0 million.
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 pursuant to the Companys existing effective
registration statement. The transaction generated approximately $68.4 million in net proceeds to
the Company.
Dividends Declared
During 2009, the Company declared and paid quarterly common stock dividends in the amounts of
$0.385 per share.
On February 2, 2010, the Company declared a quarterly common stock dividend in the amount of
$0.30 per share payable on March 4, 2010 to stockholders of record on February 18, 2010.
Authorization to Repurchase Common Stock
In 2006, the Companys Board of Directors authorized management to repurchase up to 3,000,000
shares of the Companys common stock. As of December 31, 2009, the Company had not repurchased any
shares under this authorization. The Company may elect, from time to time, to repurchase shares
either when market conditions are appropriate or as a means to reinvest excess cash flows. Such
purchases, if any, may be made either in the open market or through privately negotiated
transactions.
Accumulated Other Comprehensive Loss
During the year ended December 31, 2009, the Company recorded a $1.9 million reduction to
future benefit obligations related to its pension plans, resulting in a decrease to other
liabilities, with an offset to accumulated other comprehensive loss which is included in
stockholders equity on the Companys Consolidated Balance Sheet. The reduction to the benefit
obligation is primarily due to the one-time cash payment of $2.3 million in January 2009 to its
chief executive officer resulting from the curtailment and partial settlement of his future pension
benefit. For the year ended December 31, 2008, the Company recorded $2.1 million in additional
benefit obligations related to its pension plans, resulting in an increase to other liabilities,
with an offset to accumulated other comprehensive loss, included in stockholders equity, on the
Companys Consolidated Balance Sheet.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Benefit Plans
Executive Retirement Plan
The Company has an Executive Retirement Plan, under which certain officers designated by the
Compensation Committee of the Board of Directors may receive upon normal retirement (defined to be
when the officer reaches age 65 and has completed five years of service with the Company) an amount
equal to 60% of the officers final average earnings (defined as the average of the executives
highest three years earnings) plus 6% of final average earnings times years of service after age
60 (but not more than five years), less
100% of certain other retirement benefits received by the officer to be paid either in lump sum or
in monthly installments over a period not to exceed the greater of the life of the retired officer
or his surviving spouse.
In December 2008, the Company froze the maximum annual benefits payable under the plan at
$896,000 as a cost savings measure. This revision resulted in a curtailment of benefits under the
retirement plan for the Companys chief executive officer. In consideration of the curtailment and
as partial settlement of benefits under the retirement plan, the Company paid a one-time cash
payment of $2.3 million to its chief executive officer in January 2009. Also, in connection with
the partial settlement, the chief executive officer agreed to receive his remaining retirement
benefits under the plan in installment payments upon retirement, rather than in a lump sum. Of the
two remaining officers in the plan, one has elected to receive their benefits in monthly
installments and one has elected a lump sum payment upon retirement.
At December 31, 2009, only the Companys chief executive officer was eligible to retire under
the plan. Assuming he retired and received full retirement benefits based upon the terms of the
plan, the future benefits to be paid are estimated to be approximately $29.9 million which would be
paid in annual installments of approximately $0.9 million, increasing annually based on CPI. The
Company also has one other officer to whom it is currently making benefit payments of approximately
$84,000 per year that retired under the plan.
In November 2008, an officer and participant in the Executive Retirement Plan voluntarily
resigned from employment. The officer was eligible to receive a lump-sum distribution of earned
benefits under this plan of approximately $4.5 million. The Company granted the officer an
equivalent number of shares of common stock in satisfaction of this pension benefit, resulting in a
curtailment and partial settlement of the plan. The Company also recognized $1.1 million in
additional compensation expense, a component of general and administrative expense, related to the
settlement of the officers pension benefit. See Note 12.
Retirement Plan for Outside Directors
The Company had a retirement plan for outside directors under which a director may receive
upon normal retirement (defined to be when the director reaches age 65 and has completed at least
five years of service or when the director reaches age 60 and has completed at least 15 years of
service) payment annually, for a period equal to the number of years of service as a
director but not to exceed 15 years, an amount equal to the directors annual retainer and meeting
fee compensation (for 2009 this amount ranged from $32,000 to $44,000) immediately preceding
retirement from the Board. In November 2009, the Company terminated the Outside Director Plan. As
a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or
earlier upon retirement, to the eight directors currently participating in the plan.
Retirement Plan Information
Net periodic benefit cost for both the Executive Retirement Plan and the Retirement Plan for
Outside Directors (the Plans) for the three years in the period ended December 31, 2009 is
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
286 |
|
|
$ |
1,288 |
|
|
$ |
1,022 |
|
Interest cost |
|
|
926 |
|
|
|
1,190 |
|
|
|
943 |
|
Effect of settlement |
|
|
1,005 |
|
|
|
1,143 |
|
|
|
|
|
Amortization of net gain/loss |
|
|
669 |
|
|
|
758 |
|
|
|
442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,886 |
|
|
$ |
4,379 |
|
|
$ |
2,407 |
|
Net loss (gain) recognized in other comprehensive income |
|
|
(1,868 |
) |
|
|
2,115 |
|
|
|
311 |
|
|
|
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and accumulated other comprehensive loss |
|
$ |
1,018 |
|
|
$ |
6,494 |
|
|
$ |
2,718 |
|
|
|
|
|
|
|
|
|
|
|
The Company estimates that approximately $0.7 million of the net loss recognized in
accumulated other comprehensive loss will be amortized to expense in 2010.
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Plans are unfunded, and benefits will be paid from earnings of the Company. The following
table sets forth the benefit obligations as of December 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Benefit obligation at beginning of year |
|
$ |
17,488 |
|
|
$ |
15,642 |
|
Service cost |
|
|
286 |
|
|
|
1,288 |
|
Interest cost |
|
|
926 |
|
|
|
1,190 |
|
Benefits paid |
|
|
(2,384 |
) |
|
|
(4,648 |
) |
Curtailment gain |
|
|
(14 |
) |
|
|
(342 |
) |
Settlement loss |
|
|
1,005 |
|
|
|
1,461 |
|
Actuarial gain/loss, net |
|
|
(1,185 |
) |
|
|
2,897 |
|
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
16,122 |
|
|
$ |
17,488 |
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheets are as follows:
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
2009 |
|
|
2008 |
|
Net liabilities included in accrued liabilities |
|
$ |
(11,529 |
) |
|
$ |
(11,027 |
) |
Amounts recognized in accumulated other comprehensive loss |
|
|
(4,593 |
) |
|
|
(6,461 |
) |
The Company assumed a 6.0% discount rate related to the Executive Retirement Plan and the
Retirement Plan for Outside Directors and assumed a 2.7% compensation increase related to the
Executive Retirement Plan as of and for each of the three years ended December 31, 2009 to measure
the year-end benefit obligations and the earnings effects for the subsequent year related to the
retirement plans.
At December 31, 2009, one employee was eligible to retire
under the Executive Retirement Plan. If this
individual retired at normal retirement age and received full retirement benefits based upon the
terms of the Executive Retirement Plan, future benefits payable are estimated to be approximately $29.9
million as of December 31, 2009. In November 2009, the Company terminated the Retirement Plan for outside Directors.
As a result, lump sum payments totaling approximately $2.6 million will be paid in November 2010, or earlier upon retirement,
to the non-employee directors that participated in the plan.
12. Stock and Other Incentive Plans
2007 Employees Stock Incentive Plan
The 2007 Employees Stock Incentive Plan (the Incentive Plan) authorizes the Company to issue
2,390,272 shares of common stock to its employees and directors. The Incentive Plan will continue
until terminated by the Companys Board of Directors. As of December 31, 2009, 2008 and 2007, the
Company had issued, net of forfeitures, a total of 921,612, 822,706 and 29,332 shares,
respectively, under the Incentive Plan for compensation-related awards to employees and directors,
with a total of 1,468,660, 1,567,566 and 2,360,940 authorized shares, respectively, remaining which
had not been issued. Under the Incentive Plans predecessor plans, the Company issued 7,151 shares
in 2007 and 329,404 shares were forfeited during 2008. Restricted shares issued under the
Incentive Plan are generally subject to fixed vesting periods varying from three to 10 years
beginning on the date of issue. If an employee voluntarily terminates employment with the Company
before the end of the vesting period, the shares are forfeited, at no cost to the Company. Once
the shares have been issued, the employee has the right to receive dividends and the right to vote
the shares. Compensation expense recognized during the years ended December 31, 2009, 2008 and
2007 from the amortization of the value of restricted shares issued to employees was $2.9 million,
$3.7 million and $4.1 million, respectively.
In the fourth quarters of 2009 and 2008, the Company released performance-based awards to 30
and 31, respectively, of its officers under the Incentive Plan totaling approximately $0.9 million
and $3.3 million, respectively, which were granted in the form of restricted shares totaling
approximately 39,500 shares and 130,400 shares, respectively. The shares have vesting periods
ranging from three to eight years with a weighted average vesting period in 2009 and 2008 of
approximately six years. The Company expects the issuance of the 39,500 restricted shares in 2009
will increase amortization expense in 2010 by approximately $0.1 million.
In November 2008, an officer of the Company voluntarily resigned from employment. As a result
of his resignation, the officer forfeited 329,404 in unvested restricted shares, resulting in the
reversal of $1.7 million (net) in compensation expense previously recognized pertaining to these
unvested shares. The officer was also a participant in the Executive Retirement Plan and was
eligible to receive a lump-sum distribution of earned benefits under this plan of approximately
$4.5 million. The Company granted the officer 616,500 in unrestricted common shares under the
Incentive Plan, which were valued at $15.90 per share on the date of grant, in satisfaction of the
lump-sum pension benefit earned under the Executive Retirement Plan of approximately $4.5 million
and an additional award.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Incentive Plan also authorizes the Companys Compensation Committee of its Board of Directors
to grant restricted stock units or other performance units to eligible employees. Such awards, if
issued, will also be subject to restrictions and other conditions as determined appropriate by the
Compensation Committee. Grantees of restricted stock units will not have stockholder voting rights
and will not receive dividend payments. The award of performance units does not create any
stockholder rights. Upon satisfaction of certain performance targets as determined by the
Compensation Committee, payment of the performance units may be made in cash, shares of common
stock, or a combination of cash and common stock, at the option of the Compensation Committee. As
of December 31, 2009, the Company had not granted any restricted stock units or other performance
awards under the Incentive Plan.
Non-Employee Directors Stock Plan
The 1995 Restricted Stock Plan for Non-Employee Directors (the 1995 Directors Plan)
authorizes the Company to issue 100,000 shares to its directors. The directors stock issued
generally has a three-year vesting period and is subject to forfeiture prior to such date upon
termination of the directors service, at no cost to the Company. As of December 31, 2009, the
Company had issued all shares authorized under the plan and had issued 75,173 and 59,173 shares,
respectively as of December 31, 2008 and 2007, pursuant to the 1995 Directors Plan. As of
December 31, 2008 and 2007, a total of 24,827 and 40,827 authorized shares, respectively, had not
been issued. Upon issuance of all authorized Shares under the 1995 Directors Plan, a portion of the directors 2009 restricted stock
grant was issued under the Incentive Plan, Beginning in 2010, all
shares granted to the directors will be issued under the Incentive Plan. For 2009, 2008 and 2007, compensation expense resulting from the amortization of the value of
these shares was $0.5 million, $0.5 million, and $0.4 million, respectively.
A summary of the activity under the Incentive Plan, and its predecessor plan, and the 1995
Directors Plan and related information for the three years in the period ended December 31, 2009
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Stock-based awards, beginning of year |
|
|
1,111,728 |
|
|
|
1,289,646 |
|
|
|
1,261,613 |
|
Granted |
|
|
124,587 |
|
|
|
812,654 |
|
|
|
65,706 |
|
Vested |
|
|
(11,536 |
) |
|
|
(657,888 |
) |
|
|
(35,974 |
) |
Forfeited |
|
|
|
|
|
|
(332,684 |
) |
|
|
(1,699 |
) |
|
|
|
|
|
|
|
|
|
|
Stock-based awards, end of year |
|
|
1,224,779 |
|
|
|
1,111,728 |
|
|
|
1,289,646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average grant date fair value of: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based awards, beginning of year |
|
$ |
25.71 |
|
|
$ |
25.12 |
|
|
$ |
24.85 |
|
Stock-based awards granted during the year |
|
$ |
21.01 |
|
|
$ |
18.18 |
|
|
$ |
34.99 |
|
Stock-based awards vested during the year |
|
$ |
32.80 |
|
|
$ |
16.54 |
|
|
$ |
33.17 |
|
Stock-based awards forfeited during the year |
|
$ |
|
|
|
$ |
24.06 |
|
|
$ |
34.89 |
|
Stock-based awards, end of year |
|
$ |
25.16 |
|
|
$ |
25.71 |
|
|
$ |
25.12 |
|
Grant date fair value of shares granted during the year |
|
$ |
2,617,678 |
|
|
$ |
14,773,448 |
|
|
$ |
2,298,787 |
|
The vesting periods for the restricted shares granted during 2009 ranged from three to
eight years with a weighted-average amortization period remaining at December 31, 2009 of
approximately 5.8 years.
During 2009, 2008 and 2007, the Company withheld 854, 10,935 and 9,413 shares, respectively,
of common stock from its officers to pay estimated withholding taxes related to restricted stock
that vested. During 2007, the Company also purchased 1,445 shares of common stock for cash from
two officers whose shares vested. The shares were immediately retired.
401(k) Plan
The Company maintains a 401(k) plan that allows eligible employees to defer salary, subject to
certain limitations imposed by the Code. The Company provides a matching contribution of up to 3%
of each eligible employees salary, subject to certain limitations. The Companys matching
contributions were approximately $0.3 million for each of the three years ended December 31, 2009.
Dividend Reinvestment Plan
The Company is authorized to issue 1,000,000 shares of common stock to stockholders under the
Dividend Reinvestment Plan. As of December 31, 2009, the Company had 448,253 shares issued under
the plan of which 33,511 shares were issued in 2009, 24,970 shares were issued in 2008 and 63,600
were issued in 2007.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Employee Stock Purchase Plan
In January 2000, the Company adopted the Employee Stock Purchase Plan, pursuant to which the
Company is authorized to issue shares of common stock. As of December 31, 2009, 2008 and 2007, the
Company had a total of 413,414, 507,958 and 590,171 shares authorized under the Employee Stock
Purchase Plan, respectively, which had not been issued or optioned. Under the Employee Stock
Purchase Plan, each eligible employee in January of each year is able to purchase up to $25,000 of
common stock at the lesser of 85% of the market price on the date of grant or 85% of the market
price on the date of exercise of such option (the Exercise Date). The number of shares subject
to each years option becomes fixed on the date of grant. Options granted under the Employee Stock
Purchase Plan expire if not exercised 27 months after each such options date of grant. Cash
received from employees upon exercising options under the Employee Stock Purchase Plan for the
years ended December 31, 2009, 2008 and 2007 was $0.2 million, $0.2 million and $0.3 million,
respectively.
A summary of the Employee Stock Purchase Plan activity and related information for the three
years in the period ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Outstanding, beginning of year |
|
|
250,868 |
|
|
|
179,603 |
|
|
|
171,481 |
|
Granted |
|
|
219,184 |
|
|
|
194,832 |
|
|
|
128,928 |
|
Exercised |
|
|
(9,803 |
) |
|
|
(10,948 |
) |
|
|
(9,947 |
) |
Forfeited |
|
|
(42,032 |
) |
|
|
(38,325 |
) |
|
|
(43,948 |
) |
Expired |
|
|
(82,609 |
) |
|
|
(74,294 |
) |
|
|
(66,911 |
) |
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable, end of year |
|
|
335,608 |
|
|
|
250,868 |
|
|
|
179,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price of: |
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, beginning of year |
|
$ |
19.96 |
|
|
$ |
21.58 |
|
|
$ |
30.55 |
|
Options granted during the year |
|
$ |
19.96 |
|
|
$ |
21.58 |
|
|
$ |
33.61 |
|
Options exercised during the year |
|
$ |
15.43 |
|
|
$ |
21.24 |
|
|
$ |
26.11 |
|
Options forfeited during the year |
|
$ |
16.87 |
|
|
$ |
21.02 |
|
|
$ |
26.38 |
|
Options expired during the year |
|
$ |
12.74 |
|
|
$ |
20.20 |
|
|
$ |
23.61 |
|
Options outstanding, end of year |
|
$ |
18.24 |
|
|
$ |
19.96 |
|
|
$ |
21.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of options granted during the year
(calculated as of the grant date) |
|
$ |
7.75 |
|
|
$ |
5.82 |
|
|
$ |
8.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised during the year |
|
$ |
31,566 |
|
|
$ |
38,537 |
|
|
$ |
37,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic value of options outstanding and exercisable
(calculated as of December 31) |
|
$ |
1,080,658 |
|
|
$ |
883,055 |
|
|
$ |
684,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise prices of options outstanding
(calculated as of December 31) |
|
$ |
18.24 |
|
|
$ |
19.96 |
|
|
$ |
21.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average contractual life of outstanding options
(calculated as of December 31, in years) |
|
|
0.8 |
|
|
|
0.9 |
|
|
|
0.8 |
|
The fair values for these options were estimated at the date of grant using a
Black-Scholes options pricing model with the weighted-average assumptions for the options granted
during the period noted in the following table. The risk-free interest rate was based on the U.S.
Treasury constant maturity-nominal two-year rate whose maturity is nearest to the date of the
expiration of the latest option outstanding and exercisable; the expected life of each option was
estimated using the historical exercise behavior of employees; expected volatility was based on
historical volatility of the Companys stock; and expected forfeitures were based on historical
forfeiture rates within the look-back period.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Risk-free interest rates |
|
|
0.76 |
% |
|
|
3.05 |
% |
|
|
4.82 |
% |
Expected dividend yields |
|
|
6.05 |
% |
|
|
5.92 |
% |
|
|
4.50 |
% |
Expected life (in years) |
|
|
1.50 |
|
|
|
1.43 |
|
|
|
1.59 |
|
Expected volatility |
|
|
58.2 |
% |
|
|
26.2 |
% |
|
|
22.3 |
% |
Expected forfeiture rates |
|
|
84 |
% |
|
|
82 |
% |
|
|
79 |
% |
13. Earnings Per Share
The table below sets forth the computation of basic and diluted earnings per Common share for
the three years in the period ended December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Weighted average Common Shares |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Shares outstanding |
|
|
59,385,018 |
|
|
|
52,846,988 |
|
|
|
48,595,003 |
|
Unvested restricted stock |
|
|
(1,185,426 |
) |
|
|
(1,299,709 |
) |
|
|
(1,058,870 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average Common Shares Basic |
|
|
58,199,592 |
|
|
|
51,547,279 |
|
|
|
47,536,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Shares Basic |
|
|
58,199,592 |
|
|
|
51,547,279 |
|
|
|
47,536,133 |
|
Dilutive effect of restricted stock |
|
|
790,291 |
|
|
|
973,353 |
|
|
|
723,195 |
|
Dilutive effect of employee stock purchase plan |
|
|
57,431 |
|
|
|
44,312 |
|
|
|
32,002 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average Common Shares Diluted |
|
|
59,047,314 |
|
|
|
52,564,944 |
|
|
|
48,291,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
28,221 |
|
|
$ |
18,198 |
|
|
$ |
11,043 |
|
Noncontrolling interests share in earnings |
|
|
(57 |
) |
|
|
(68 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations attributable to common stockholders |
|
|
28,164 |
|
|
|
18,130 |
|
|
|
11,025 |
|
Discontinued operations |
|
|
22,927 |
|
|
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