e10vq

10-Q 1 g79151e10vq.htm HEALTHCARE REALTY TRUST, INC. e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q


(Mark One)

[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the quarterly period ended: September 30, 2002

		OR

[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number: 1-11852

HEALTHCARE REALTY TRUST INCORPORATED

(Exact name of Registrant as specified in its charter)


Maryland (State or other jurisdiction of incorporation or organization)		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
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

As of November 1, 2002, 42,118,351 shares of the Registrant’s Common Stock were outstanding.

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
		Consolidated Balance Sheets
		Consolidated Statements of Income
		Consolidated Statements of Cash Flows
		Notes to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 4. Controls and Procedures
PART II — OTHER INFORMATION
	Item 6. Reports on Form 8-K
SIGNATURE
Certifications

HEALTHCARE REALTY TRUST
INCORPORATED

FORM 10-Q

September 30, 2002

TABLE OF CONTENTS

Page

Part I - Financial Information

Item 1.

Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Item 2.

Management's Discussion and Analysis of Financial Condition

and Results of Operations

Item 4.

Controls and Procedures

Part II - Other Information

Item 6.

Reports on Form 8-K

Signature

Certifications

Part I. FINANCIAL INFORMATION

Healthcare Realty Trust Incorporated

Consolidated Balance Sheets

(Dollars in thousands)


			(Unaudited)
			September 30,			December 31,
			2002			2001

ASSETS
Real estate properties:
	Land		$	135,240		$	149,522
	Buildings and improvements			1,321,558			1,348,031
	Personal property			8,486			7,815
	Construction in progress			9,911			18,255

				1,475,195			1,523,623
	Less accumulated depreciation			(185,999	)		(160,886	)

		Total real estate properties, net		1,289,196			1,362,737
Cash and cash equivalents				2,743			2,930
Mortgage notes receivable				107,940			122,074
Other assets, net				91,291			67,740

Total assets			$	1,491,170		$	1,555,481

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
	Notes and bonds payable		$	534,849		$	505,222
	Accounts payable and accrued liabilities			19,966			12,203
	Other liabilities			13,223			25,969

Total liabilities				568,038			543,394

Commitments				0			0
Stockholders’ equity:
	Preferred stock, $.01 par value; 50,000,000 shares authorized; issued and outstanding, 2002 - none; 2001 - 3,000,000			0			30
	Common stock, $.01 par value; 150,000,000 shares authorized; issued and outstanding, 2002 – 41,968,351; 2001 – 41,465,919			419			414
	Additional paid-in capital			1,027,670			1,089,127
	Deferred compensation			(22,505	)		(12,852	)
	Cumulative net income			437,654			375,061
	Cumulative dividends			(520,106	)		(439,693	)

Total stockholders’ equity				923,132			1,012,087

Total liabilities and stockholders’ equity			$	1,491,170		$	1,555,481

The accompanying notes, together with the Notes to the Consolidated Financial
Statements included in our Annual Report on Form 10-K for the year ended
December 31, 2001, are an integral part of these financial statements.

Healthcare Realty Trust Incorporated

Consolidated Statements of Income

For The Three Months Ended September 30, 2002 and 2001
(Dollars in thousands, except per share data)


		(Unaudited)		(Unaudited)
		2002		2001

REVENUES:
	Master lease rental income	$	25,276	$	24,941
	Property operating income		19,626		15,783
	Straight-line rental income		1,017		1,289
	Mortgage interest income		3,292		4,669
	Management fee income		257		396
	Interest and other income		350		740

			49,818		47,818
EXPENSES:
	General and administrative expense		3,140		2,772
	Property operating expense		7,486		6,288
	Interest expense		8,529		9,161
	Depreciation expense		10,386		10,216
	Amortization expense		29		74

			29,570		28,511

NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			20,248		19,307
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			242		416

NET INCOME		$	20,490	$	19,723

NET INCOME PER COMMON SHARE – BASIC		$	0.45	$	0.45

NET INCOME PER COMMON SHARE – DILUTED		$	0.44	$	0.45

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC			40,682,210		39,891,254

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED			41,487,797		40,512,989

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	0.600	$	0.580

Healthcare Realty Trust Incorporated
Consolidated Statements of Income
For The Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands, except per share data)


		(Unaudited)		(Unaudited)
		2002		2001

REVENUES:
	Master lease rental income	$	74,855	$	75,053
	Property operating income		57,627		49,822
	Straight-line rental income		2,248		4,480
	Mortgage interest income		10,614		13,714
	Management fee income		850		1,120
	Interest and other income		1,587		1,353

			147,781		145,542
EXPENSES:
	General and administrative expense		8,374		7,565
	Property operating expense		22,348		19,151
	Interest expense		25,966		29,360
	Depreciation expense		31,267		30,496
	Amortization expense		105		229

			88,060		86,801

NET INCOME BEFORE NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			59,721		58,741
NET GAIN (LOSS) ON SALE OF REAL ESTATE PROPERTIES			2,872		999

NET INCOME		$	62,593	$	59,740

NET INCOME PER COMMON SHARE – BASIC		$	1.40	$	1.38

NET INCOME PER COMMON SHARE – DILUTED		$	1.38	$	1.36

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC			40,601,065		39,748,243

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – DILUTED			41,450,671		40,404,491

DIVIDENDS DECLARED, PER COMMON SHARE, DURING THE PERIOD		$	1.785	$	1.725

Healthcare Realty Trust Incorporated

Consolidated Statements of Cash Flows

For The Nine Months Ended September 30, 2002 and 2001
(Dollars in thousands)


			(Unaudited)			(Unaudited)
			2002			2001

Cash flows from operating activities:
	Net income		$	62,593		$	59,740
	Adjustments to reconcile net income to cash provided by operating activities:
		Depreciation and amortization		32,816			32,285
		Deferred compensation amortization		2,301			1,395
		Decrease in other liabilities		(919	)		(225	)
		Increase in other assets		(7,281	)		(18,999	)
		Increase in accounts payable and accrued liabilities		7,758			2,600
		Increase in straight line rent		(2,248	)		(4,335	)
		Net gain on sales of real estate		(2,872	)		(999	)

	Net cash provided by operating activities			92,148			71,462
Cash flows from investing activities:
	Acquisition and development of real estate properties			(21,176	)		(42,088	)
	Funding of mortgages			(3,921	)		(2,911	)
	Proceeds from sale of real estate			67,485			19,515
	Proceeds from mortgage payments/sales			17,578			42,766

	Net cash provided by investing activities			59,966			17,282
Cash flows from financing activities:
	Borrowings on notes and bonds payable			166,500			470,652
	Repayments on notes and bonds payable			(164,957	)		(488,083	)
	Dividends paid			(80,413	)		(75,062	)
	Preferred stock redemption			(75,000	)		0
	Proceeds from issuance of common stock			1,569			4,272

	Net cash used in financing activities			(152,301	)		(88,221	)

Increase (decrease) in cash and cash equivalents				(187	)		523
Cash and cash equivalents, beginning of period				2,930			1,788

Cash and cash equivalents, end of period			$	2,743		$	2,311

Healthcare Realty Trust
Incorporated

Notes to Consolidated Financial Statements

September 30, 2002

(Unaudited)

Note 1. Significant Accounting Policies

The accompanying unaudited consolidated financial statements and notes have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements that are included in our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2001. We, the management of Healthcare Realty Trust, believe however that all adjustments considered necessary for a fair presentation have been included. This interim financial information does not necessarily represent or indicate what the operating results will be for the year ending December 31, 2002 due to many reasons including, but not limited to, acquisitions, dispositions and changes in interest rates.

References to “the Company”, “we”, “our” and “us” include Healthcare Realty Trust Incorporated and its consolidated subsidiaries and partnerships unless otherwise stated.

We recommend and presume that users of this interim financial information have access to and have read or will read in conjunction with this interim information our audited financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2001.

Reclassifications

We have made certain reclassifications in the financial statements for 2001 to conform to the 2002 presentation. These reclassifications did not change the results of operations as previously reported.

New pronouncements

In July 2001, the Financial Accounting Standards Board issued Statement No. 142, “Accounting for Goodwill and Intangible Assets” (“FAS 142”). FAS 142 became effective for us as of January 1, 2002. FAS 142 requires that we no longer amortize goodwill and other indefinite lived intangible assets but that we review these assets annually for impairment. Intangible assets with definite lives will continue to be amortized. The adoption of FAS 142 had no material impact on our financial statements as of September 30, 2002 or for the three and nine month periods then ended.

Note 2. Properties

We invest in healthcare-related properties and mortgages located throughout the United States. We provide management, leasing and build-to-suit development services, and capital for the construction of new facilities and the acquisition of existing properties. These activities constitute a single business segment as defined by the Financial Accounting Standards Board Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information.” As of September 30, 2002, we had investments in 223 properties and mortgages, located in 29 states, and affiliated with 62 healthcare-related operators as follows:


	Number of		(in thousands)
	Properties		Investment		Percent

Ancillary hospital facilities		56	$	492,757		31.1	%
Assisted living facilities		53		276,778		17.5	%
Skilled nursing facilities		37		204,452		12.9	%
Inpatient rehabilitation facilities		9		156,053		9.9	%
Physician clinics		29		153,684		9.7	%
Comprehensive ambulatory care centers		13		151,332		9.6	%
Medical office buildings		9		48,096		3.0	%
Other inpatient facilities		5		47,555		3.0	%
Other outpatient facilities		12		42,957		2.7	%
Corporate property		—		9,471		0.6	%

		223	$	1,583,135		100.0	%

Dispositions

During the third quarter of 2002, we sold three ancillary hospital facilities totaling 201,600 square feet in Richmond, Virginia; a 21,120 square foot assisted living facility in West Columbia, South Carolina; a 44,300 square foot physician clinic in Methuen, Massachusetts; and a 41,880 square foot physician clinic in Birmingham, Alabama for aggregate net proceeds totaling approximately $46.4 million resulting in a net gain of approximately $242,000. Further, we received approximately $5.7 million in net proceeds from the repayment of four mortgage notes.

Note 3. Funds From Operations

Funds from operations, as defined by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”) 1999 White Paper, means net income before net gains (or losses) from sales of real estate properties (computed in accordance with accounting principles generally accepted in the United States) plus depreciation from real estate assets. We calculate funds from operations (“FFO”) using a modified version of the NAREIT’s October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although

NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue in funds from operation.

We consider FFO to be an informative measure of the performance of an equity real estate investment trust (“REIT”) and consistent with measures used by analysts to evaluate equity REITs. FFO does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States, is not necessarily indicative of cash available to fund cash needs, and should not be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow as a measure of liquidity. We believe that our FFO is not directly comparable to other healthcare REITs, which own a portfolio of triple net leased properties or mortgages, as we develop projects through a development and lease-up phase before they reach their targeted cash flow returns. Furthermore, we eliminate, in consolidation, fee income for developing, leasing and managing owned properties and expenses or capitalizes, as the case may be, related internal costs. Our FFO calculations for the three and nine month periods ended September 30, 2002 and 2001 are shown in the following two tables.

Funds From Operations

(Dollars in thousands, except per share data)


		Three Months Ended September 30,

		2002			2001

Net income before net gain (loss) on sale of real estate properties		$	20,248		$	19,307
	Certain debt-related charges (1)		0			607
	Elimination of rental revenues recognized on a straight-line basis (1)		(1,017	)		(1,289	)
	Preferred stock dividend (1)		(1,664	)		(1,664	)
	Real estate depreciation		10,094			10,007

	Total adjustments		7,413			7,661

Funds From Operations-Basic and Diluted		$	27,661		$	26,968

Funds From Operations Per Common Share – Basic		$	0.68		$	0.68

Funds From Operations Per Common Share – Diluted		$	0.67		$	0.67

Weighted Average Common Shares Outstanding – Basic			40,682,210			39,891,254

Weighted Average Common Shares Outstanding – Diluted			41,487,797			40,512,989

(1)		We calculate our FFO using a modified version of National Association of Real Estate Investment Trust’s (“NAREIT”) October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue. Also, in 2002, we included only three months of preferred stock dividends in computing FFO although an additional amount was paid upon redemption of the preferred stock on September 30, 2002. In 2001, we also excluded certain debt-related charges in computing FFO. If we had followed the NAREIT definition of funds from operations, as other healthcare REITs do, FFO on a diluted basis would have been $0.68 per common share for the three months ended September 30, 2002.

		7

Funds From Operations

(Dollars in thousands, except per share data)


		Nine Months Ended September 30,

		2002			2001

Net income before net gain (loss) on sale of real estate properties		$	59,721		$	58,741
	Certain debt-related charges (1)		0			607
	Elimination of rental revenues recognized on a straight-line basis (1)		(2,248	)		(4,480	)
	Preferred stock dividend (1)		(4,992	)		(4,992	)
	Real estate depreciation		30,411			29,949

	Total adjustments		23,171			21,084

Funds From Operations-Basic and Diluted		$	82,892		$	79,825

Funds From Operations Per Common Share – Basic		$	2.04		$	2.01

Funds From Operations Per Common Share – Diluted		$	2.00		$	1.98

Weighted Average Common Shares Outstanding – Basic			40,601,065			39,748,243

Weighted Average Common Shares Outstanding – Diluted			41,450,671			40,404,491

(1)

We calculate our FFO using a modified version of National Association of Real Estate Investment Trust’s (“NAREIT”) October 1999 definition of funds from operations. We eliminate straight-line rental revenue in computing FFO although NAREIT’s definition of funds from operations requires the inclusion of straight-line rental revenue. Also, in 2002, we included only nine months of preferred stock dividends in computing FFO although an additional amount was paid upon redemption of the preferred stock on September 30, 2002. In 2001, we also excluded certain debt-related charges in computing FFO. If we had followed the NAREIT definition of funds from operations, as other healthcare REITs do, FFO on a diluted basis would have been $2.04 per common share for the nine months ended September 30, 2002.

Note 4. Notes and Bonds Payable

Notes and bonds payable at September 30, 2002 consisted of the following (in thousands):


Unsecured Credit Facility due 2004	$	73,000
Senior Notes due 2002		0
Senior Notes due 2006		70,000
Senior Notes due 2011, net		315,163
Mortgage notes payable		73,186
Other note payable		3,500

	$	534,849

Unsecured Credit Facility due 2004

In July 2001, we entered into a $150.0 million credit facility (the “Unsecured Credit Facility due 2004”) that bears interest at LIBOR rates plus 1.15%, payable quarterly, and matures in July 2004. In addition, we pay a facility fee of 0.2% on the commitment. The Unsecured Credit Facility due 2004 contains certain representations, warranties, and financial and other covenants customary in such loan agreements. At October 31, 2002, we had borrowing capacity remaining of $84.0 million under this facility.

Senior Notes due 2002

In 1995, we privately placed $90.0 million of unsecured senior notes (the “Senior Notes due 2002”). These notes were fully repaid upon maturity on September 1, 2002.

Senior Notes due 2006

In 2000, we privately placed $70.0 million of unsecured senior notes (the “Senior Notes due 2006”) with multiple purchasers affiliated with two institutions. The Senior Notes due 2006 bear interest at 9.49%, payable semi-annually, and mature on April 1, 2006. On April 1, 2004 and 2005, we must repay $20.3 million of the principal with the remaining principal balance of $29.4 million payable upon maturity. The note agreements pertaining to the Senior Notes due 2006 contain certain representations, warranties and financial and other covenants customary in such loan agreements.

Senior Notes due 2011

In May 2001, we publicly issued $300.0 million 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 we redeem them earlier. The notes were issued at a discount of approximately $1.5 million, yielding an 8.202% interest rate per annum.

Interest Rate Swaps

Following the reorganization of our debt structure in 2001, our outstanding debt was primarily fixed rate. Our practice and objective has been to protect ourselves against changes in the fair value of our debt that result from changes in market interest rates by maintaining a mix of variable and fixed rate debt. In order to accomplish this objective, in June 2001, we entered into interest rate swap agreements with two lending institutions for notional amounts totaling $125.0 million which are expected to offset changes in the fair value of $125.0 million of the Senior Notes due 2011. In both interest rate swaps, we receive a 8.125% fixed rate and pay a variable rate of LIBOR plus 1.99%. The swaps are not callable for the first five years. After five years, the swaps are callable, at fair value, by either party if, and only if, the other party is downgraded below investment grade by two or more rating agencies. These derivative instruments meet all requirements of a fair value hedge and are accounted for using the “shortcut method” as set forth in Financial Accounting Standards Board Statement No. 133. As such, changes in fair value will have no impact on the income statement. At September 30, 2002, the aggregate fair value totaling $16.6 million of our hedge is reported in other assets with an offsetting increase to the Senior Notes due 2011 included in notes and bonds payable on our balance sheet.

Mortgage Notes Payable

At September 30, 2002, we had 13 non-recourse mortgage notes payable outstanding, with related collateral, as follows (dollars in millions):


									Investment in		Contractual
			Effective			Maturity			Collateral at		Balance at
Mortgagor	Original Balance		Interest Rate			Date		Collateral	Sept. 30, 2002		Sept. 30, 2002

Life Insurance Co.	$	23.3		7.765	%		7/26	Ancillary hospital	$	43.8	$	21.9
								facility
Life Insurance Co.		4.7		7.765	%		1/17	Ancillary hospital		10.8		4.0
								facility
Life Insurance Co.		17.1		7.765	%		4/04	Two ambulatory surgery		37.7		15.8
								centers & one ancillary
								hospital facility
Commercial Bank		35.0		7.220	%		5/11	Nine ancillary hospital		78.2		31.5
								facilities & one
								physician clinic

									$	170.5	$	73.2

The $23.3 million note is payable in monthly installments of principal and interest based on a 30-year amortization with the final payment due in July 2026. The $4.7 million note is payable in monthly installments of principal and interest based on a 20-year amortization with the final payment due in January 2017. The three notes totaling $17.1 million are payable in monthly installments of principal and interest based on a 25-year amortization with a balloon payment of the unpaid balance due in September 2004. The eight notes totaling $35.0 million and the related collateral are held by special purpose entities whose sole members are wholly owned subsidiaries. These eight fully amortizing notes are payable in monthly installments of principal and interest and mature in May 2011. The contractual interest rates for the 13 outstanding mortgage notes range from 7.22% to 8.50%.

Other Note Payable

In 1999, we entered into a $7.0 million note with a commercial bank. This note bears interest at 7.53%, is payable in equal semi-annual installments of principal and interest, and fully amortizes in July 2005.

Note 5. Commitments and Contingencies

At September 30, 2002, we had a net investment of approximately $9.9 million in build-to-suit developments in progress that have a total remaining funding commitment of approximately $0.5 million.

As part of the merger with Capstone Capital Corporation (“Capstone”) in 1998, agreements were entered into with three individuals affiliated with Capstone that restrict competitive practices and which the Company believed would protect and enhance the value of the real estate properties acquired from Capstone. These agreements provide for the issuance of 150,000 shares per year of common stock to these individuals on October 15 of the years 1999, 2000, 2001 and 2002, provided all terms of the agreements are met. We issued 150,000 in each of the four years with the final issuance in October 2002.

Note 6. Earnings Per Common Share

We compute earnings per share in accordance with FASB Statement No. 128 “Earnings Per Share.” The table below sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2002 (dollars in thousands, except per share data).


					Three Months Ended						Nine Months Ended
					September 30,						September 30,

					2002			2001			2002			2001

Basic EPS
	Weighted Average Common Shares Outstanding					41,942,781			40,729,439			41,861,636			40,586,428
			Actual restricted stock shares			(1,260,571	)		(838,185	)		(1,260,571	)		(838,185	)

		Denominator – Basic				40,682,210			39,891,254			40,601,065			39,748,243

		Net income			$	20,490		$	19,723		$	62,593		$	59,740
				Preferred stock dividend		(2,231	)		(1,664	)		(5,559	)		(4,992	)

		Numerator – Basic			$	18,259		$	18,059		$	57,034		$	54,748

		Per Share Amount			$	0.45		$	0.45		$	1.40		$	1.38

Diluted EPS
		Weighted Average Common Shares Outstanding				41,942,781			40,729,439			41,861,636			40,586,428
			Actual restricted stock shares			(1,260,571	)		(838,185	)		(1,260,571	)		(838,185	)
			Restricted shares – Treasury			730,923			506,341			748,176			544,116
			Dilution for employee stock purchase plan			74,664			115,394			101,430			112,132

			Denominator – Diluted			41,487,797			40,512,989			41,450,671			40,404,491

			Numerator – Basic and Diluted		$	18,259		$	18,059		$	57,034		$	54,748

			Per Share Amount		$	0.44		$	0.45		$	1.38		$	1.36

Note 7. Redemption of Preferred Stock

On September 30, 2002, we redeemed all of our 8 7/8% Series A Voting Cumulative Preferred Stock at a redemption price of $25.00 per share, plus accrued dividends of $0.18896 per share from August 30, 2002 to the redemption date, for a total redemption price of $25.18896 per share. The aggregate cost of the redemption was $75,566,881.

Note 8. Subsequent Events

Common Stock Dividend

On October 22, 2002, our Board of Directors declared a quarterly dividend of $0.605 per common share payable on December 5, 2002 to stockholders of record on November 15, 2002.

Item 2. Management’s Discussion and Analysis of
Financial Condition and Results of Operations

Overview

Healthcare Realty Trust operates under the Internal Revenue Code of 1986, as amended, as an indefinite life real estate investment trust (“REIT”). We are a self-managed, self-administered REIT following a general growth strategy that integrates owning, managing, and developing income-producing real estate properties and mortgages associated with the delivery of healthcare services throughout the United States. We, the management of Healthcare Realty Trust, believe that by providing related real estate services, we can differentiate our competitive market position and expand our asset base and increase revenues.

Substantially all of our revenues are derived from rentals on our healthcare properties, from interest earned on mortgage loans and from management services. Leases and other financial support arrangements with operators are designed to reduce our exposure to increased costs and expenses incurred from the operation of our healthcare properties which are typically borne by the tenants and healthcare providers related to the properties. We typically incur operating and administrative expenses, principally compensation expense, office rental and related occupancy costs and various expenses incurred in the process of managing our existing portfolio and acquiring additional properties. We also incur interest expense on our various debt instruments and depreciation expense on our real estate portfolio.

Operating Results

Third Quarter 2002 Compared to Third Quarter 2001

Net income for the quarter ended September 30, 2002 totaled $20.5 million, or $0.45 per basic common share ($0.44 per diluted common share), on total revenues of $49.8 million. This compares with net income of $19.7 million, or $0.45 per basic and diluted common share, on total revenues of $47.8 million for the quarter ended September 30, 2001. Included in net income for the quarter ended September 30, 2002 is a net gain on sales of real estate properties of $0.2 million, or $0.01 per basic and diluted common share, compared with a net gain on sales of real estate properties during the third quarter of 2001 of $0.4 million, or $0.01 per basic and diluted common share.

Total revenues for the quarter ended September 30, 2002 compared to the quarter ended September 30, 2001, increased $2.0 million or 4.2% mainly for the reasons discussed below:

• Master lease rental income increased $0.3 million or 1.3% due mainly to rent growth from contractual increases and receipt of a lease termination fee, offset partially by the disposition of 11 revenue-producing properties since June 30, 2001.

• Property operating income increased $3.8 million or 24.4% due mainly to the acquisition of one revenue-producing property and the commencement of operations during 2001 and 2002 of five properties that were previously under construction and the increased

occupancy in other multi-tenanted properties, offset partially by the disposal of three properties since June 30, 2001.

• Straight-line rental income decreased $0.3 million or 21.1%. This decrease was due mainly to normal annual decreases in the straight line rent calculation on our leases as well as restructuring the rent increases in the second quarter of 2002 on four leases at the request of a new operator that eliminated the straight line rent requirement.

• Mortgage interest income decreased $1.4 million or 29.5% due mainly to the repayment of 21 mortgage loans since June 30, 2001. This decrease in revenue was offset partially by income earned on a first mortgage acquired in 2002 by the Company on a property where we previously owned the second mortgage.

• Management fee income decreased $0.1 million or 35.1% due mainly to a reduction in our property and asset management portfolio by 1.2 million square feet since June 30, 2001.

• Interest and other income decreased $0.4 million or 52.7% due mainly to fees earned on mortgage notes receivable repayments during the third quarter of 2001 offset slightly by participating interest paid on a note during 2001 that was repurchased by the Company in January 2002.

Total expenses for the quarter ended September 30, 2002 compared to the quarter ended September 30, 2001 increased $1.1 million or 3.7% mainly for the reasons discussed below:

• General and administrative expenses increased $0.4 million or 13.3% due mainly to an increase in the number of employees and related compensation for portfolio management and other service based activities, an increase in insurance premiums as well as slightly higher state income and franchise tax expense recognized in 2002 while in 2001, we recognized certain debt-related charges.

• Property operating expenses increased $1.2 million or 19.1% due mainly to the acquisition of one revenue-producing property and the commencement of operations during 2001 and 2002 of five properties that were previously under construction and the increased occupancy in other multi-tenanted properties, offset partially by the disposal of three properties since June 30, 2001.

• Interest expense decreased $0.6 million or 6.9% mainly due to the continuing decrease in market interest rates along with a reduction in total debt outstanding from 2001 to 2002.

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Net income for the nine months ended September 30, 2002 totaled $62.6 million, or $1.40 per basic common share ($1.38 per diluted common share), on total revenues of $147.8 million. This compares with net income of $59.7 million, or $1.38 per basic common share ($1.36 per diluted common share), on total revenues of $145.5 million for the nine months ended September 30, 2001. Included in net income for the nine months ended September 30, 2002 is a

net gain on sales of real estate properties of $2.9 million, or $.07 per basic and diluted common share, compared with a net gain on sales of real estate properties during the same period in 2001 of $1.0 million, or $0.03 per basic common share ($0.02 per diluted common share).

Total revenues for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001, increased $2.2 million or 1.5% mainly for the reasons discussed below:

• Master lease rental income decreased $0.2 million or 0.3% due mainly to the disposition of 13 revenue-producing properties during 2001 and 2002, offset partially by rent growth from contractual increases, receipt of a lease termination fee and from more assertively billing and collecting late fees in 2002.

• Property operating income increased $7.8 million or 15.7% due mainly to the acquisition of one revenue-producing property, the commencement of operations during 2001 and 2002 of five properties that were previously under construction and the increased occupancy in other multi-tenanted properties, offset partially by the disposal of three properties during 2001 and 2002.

• Straight-line rental income decreased $2.2 million or 49.8%. This decrease was due mainly to a change in the operator on four assisted living facilities and restructuring the rent increases on these four leases at the request of the new operator during the second quarter of 2002 which resulted in a reversal of the historical straight line rent receivable on those four leases as well as normal annual decreases in the straight line rent calculation on our other leases.

• Mortgage interest income decreased $3.1 million or 22.6% due mainly to the repayment of 29 mortgage loans during 2001 and 2002. This decrease in revenue was offset partially by income earned on a first mortgage acquired in 2002 by the Company on a property where we previously owned the second mortgage, from additional interest, and from assertively billing and collecting late fees in 2002.

• Management fee income decreased $0.3 million or 24.1% due mainly to a reduction in our property and asset management portfolio by 5.0 million square feet since December 31, 2000.

• Interest and other income increased $0.2 million or 17.3%. The major components of interest and other income for the first nine months of 2002 were a fee received related to the assignment of four assisted living facility leases to a new operator, fees earned due to the maturity or repayment of mortgage loans, and interest income on notes receivable. The major components of interest and other income for the first nine months of 2001 were interest income earned on excess cash remaining from the May 2001 sale of the Senior Notes due 2011, fees earned from consulting engagements, interest income on notes receivable, and fees earned from the repayment of mortgage loans, offset partially by participating interest paid on a note that was repurchased by the Company in January 2002.

Total expenses for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001 increased $1.3 million or 1.5% mainly for the reasons discussed below:

• General and administrative expenses increased $0.8 million or 10.7% due mainly to an increase in the number of employees and related compensation for portfolio management and other service-based activities, an increase in insurance premiums, as well as higher state income and franchise tax expense recognized in 2002 while in 2001, we recognized certain debt-related charges.

• Property operating expenses increased $3.2 million or 16.7% due mainly to the acquisition of one revenue-producing property and the commencement of operations during 2001 and 2002 of five properties that were previously under construction and the increased occupancy in other multi-tenanted properties, offset partially by the disposal of three properties during 2001 and 2002.

• Interest expense decreased $3.4 million or 11.6% due mainly to the continuing decrease in market interest rates along with a reduction in total debt outstanding from 2001 to 2002.

• Depreciation expense increased $0.8 million or 2.5% due mainly to the acquisition of one revenue-producing property, the commencement of operations during 2001 and 2002 of five properties that were previously under construction, a change in the depreciable life of certain land improvements from 15 years to 20 years resulting in a $134,000 one time adjustment that had no material impact on net income or earnings per share, offset partially by the disposal of 16 properties during 2001 and 2002.

• Amortization expense decreased $0.1 million or 54.2% due mainly to the adoption of FAS 142 effective January 1, 2002 that required we discontinue amortization of our goodwill (See Note 1 for further details).

Liquidity and Capital Resources

Debt Obligations

As discussed in more detail in Note 4, we have commitments to pay interest and outstanding principal balances on our notes and bonds payable as follows (dollars in thousands):

Contractual

Balance at

Interest

September 30, 2002

Maturity Date

Rate at 6/30/02

Payments

Principal Payments

Unsecured Credit Facility due 2004

73,000

7/04

LIBOR +1.15%

Quarterly

At maturity

Senior Notes due 2006

70,000

4/06

9.49%

Semi-Annual

$20.3 million in

2004, 2005 and $29.4

million in 2006

Senior Notes due 2011

315,163

5/11

8.125%

Semi-Annual

At maturity

Mortgage notes payable

73,186

9/04-7/26

7.22%-8.50%

Monthly

Monthly or at maturity

Other note payable

3,500

7/05

7.53%

Semi-Annual

534,849

In 2001, we focused on reorganizing our debt structure and repaying or replacing debt instruments that have shorter maturities with debt instruments having longer maturities. As a result of these efforts, at September 30, 2002, substantially all of our outstanding principal debt balances are due after 2003. Further, at October 31, 2002, we had borrowing capacity remaining of $84.0 million under our Unsecured Credit Facility due 2004.

Our senior debt is rated Baa3, BBB-, and BBB by Moody’s Investors Service, Standard and Poor’s Investor Service, and Fitch Ratings, respectively. For the nine months ended September 30, 2002, our earnings covered fixed charges at a ratio of 3.30 to 1.00. At September 30, 2002, our stockholders’ equity totaled approximately $900.0 million and our debt to total capitalization ratio, on a book basis, was approximately 0.367 to 1.

At September 30, 2002, we were in compliance with the debt covenant requirements under our various debt instruments.

Shelf Registration

As of September 30, 2002, we could issue an aggregate of approximately $171.6 million of securities remaining under our currently effective registration statement. Should the market permit, we may issue securities under this registration statement. We may, under certain circumstances, borrow additional amounts in connection with the renovation or expansion of our properties, the acquisition or development of additional properties or, as necessary, to meet distribution requirements for REITs under the Internal Revenue Code. We may raise additional capital or make investments by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of any such issuance will depend upon market and other conditions.

Security Deposits and Letters of Credit

As of September 30, 2002, we held approximately $6.8 million in letters of credit, security deposits, debt service reserves or capital replacement reserves. Generally, we may, at our discretion and upon notification to the operator, draw upon these instruments if there are any defaults under the leases or mortgage notes with our operators.

Dispositions

Construction in Progress

As of September 30, 2002, we had a net investment of approximately $9.9 million in build-to-suit developments in progress that have a total remaining funding commitment of approximately $0.5 million. We intend to fund these commitments with internally generated cash flows, proceeds from the Unsecured Credit Facility due 2004, proceeds from the sale of additional assets, proceeds from additional repayments of mortgage notes receivable, or additional capital market financing.

Dividends

On July 23, 2002, our Board of Directors declared an increase in the quarterly common stock dividend from $0.595 per share ($2.38 annualized) to $0.60 per share ($2.40 annualized) payable to stockholders of record on August 15, 2002. This dividend was paid on September 5, 2002. On October 22, 2002, our Board of Directors declared another increase in the quarterly common stock dividend to $0.605 per share ($2.42 annualized) payable to stockholders of record on November 15, 2002. This dividend is payable on December 5, 2002 and relates to the period July 1, 2002 through September 30, 2002. While we have no present plans to change our quarterly common stock dividend policy, the dividend policy is reviewed each quarter by our board of directors.

Redemption of Preferred Stock

Common Stock Repurchase Program

On October 24, 2002, we announced that our Board of Directors authorized management to repurchase up to one million shares of the Company’s common stock at such times and upon such terms as management may determine.

Liquidity

Under the terms of the leases and other financial support agreements we have relating to most of the properties, the tenants or healthcare providers are generally responsible to pay for operating expenses and taxes relating to our properties. As a result of these arrangements, with limited exceptions not material to our overall performance, we do not believe any increases in the property operating expenses or taxes would significantly impact our operating results during the respective terms of the agreements. We anticipate entering into similar arrangements with respect to any additional properties we acquire or develop. After the term

of the leases or financial support agreements, or in the event the financial obligations required by the agreement are not met, we anticipate that any expenditures we might become responsible for in maintaining the properties will be funded by occupancy tenants, by cash from operations and, in the case of major expenditures, possibly by borrowings. To the extent that unanticipated expenditures or significant borrowings are required, our cash available for distribution and liquidity may be adversely affected.

We plan to continue to meet our liquidity needs, including funding additional investments in 2002, paying quarterly dividends and funding debt service from our cash flows, proceeds from the Unsecured Credit Facility due 2004, proceeds from additional repayments of mortgage notes receivable, proceeds from the sale of real estate investments, or additional capital market financing. We believe that our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts to meet our liquidity needs.

Impact of Inflation

Inflation has not significantly affected our earnings due to the moderate inflation rate in recent years and the fact that most of our leases and financial support arrangements require tenants and sponsors to pay all or some portion of the increases in operating expenses, thereby reducing our risk of the adverse effects of inflation. In addition, inflation will have the effect of increasing gross revenue we are to receive under the terms of our leases and financial support arrangements. Leases and financial support arrangements vary in the remaining terms of obligations from one to 22 years, further reducing our risk of any adverse effects of inflation. Interest payable under the interest rate swaps and the Unsecured Credit Facility due 2004 is calculated at a variable rate; therefore, the amount of interest payable under the swaps and this debt will be influenced by changes in short-term rates, which tend to be sensitive to inflation. Generally, changes in inflation and interest rates tend to move in the same direction. During periods where interest rate increases outpace inflation, our operating results should be negatively impacted. Likewise, when increases in inflation outpace increases in interest rates, our operating results should be positively impacted.

Market Risk

We are exposed to market risks, in the form of changing interest rates, on our debt and mortgage notes receivable. We have no market risk with respect to foreign currency fluctuations. Management uses daily monitoring of market conditions and analytical techniques to manage this risk. During 2001, we significantly changed our debt structure. See Liquidity and Capital Resources in this Form 10-Q for further discussion. Also, see pages 8 and 9 of Exhibit 13 “Annual Report to Shareholders” of the Company’s Form 10-K for the fiscal year ended December 31, 2001.

Cautionary Language Regarding Forward Looking Statements

This Form 10-Q and other materials we have 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, contain, or will contain, disclosures which are “forward-looking statements.” Forward-looking statements include all statements

that do not relate solely to historical or current facts and can be identified by the use of words such as “may,” “will,” “expect,” “believe,” “intend,” “plan,” “estimate,” “project,” “continue,” “should” 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 our current plans and expectations and future financial condition and results. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Shareholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports. For a detailed discussion of our risk factors, please refer to our filings with the Securities and Exchange Commission, including our Annual Report to Shareholders on Form 10-K for the year ended December 31, 2001.

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic SEC filings.

During the quarter ended September 30, 2002, the Company initiated two internal control improvements. We hired a Certified Internal Auditor as the Company’s internal risk manager. The internal risk manager will evaluate risks and perform tests of the Company’s systems of internal controls and report findings to management and the audit committee. The internal risk manager’s initial tasks are focused on establishing an internal audit department framework, completing internal risk assessment of functional areas, and developing audit plans of the Company’s systems. The internal risk manager met with the audit committee of the board of directors in October 2002 to present and discuss a proposed audit plan for 2002 and 2003.

In addition, the Company began review and improvement of the internal control process to be employed in the Company’s new development projects. The purpose of this review was to evaluate the current processes and integrate proposed improvements to the processes. The improvements are intended to enhance understanding of the responsibilities and accountabilities of each party to the construction process, improve communication among the parties throughout the process, manage the risks inherent in the development process and enhance the effectiveness and timeliness of information about assets under development. These plans were also discussed with the audit committee of the board of directors in October 2002.

PART II — OTHER INFORMATION

Item 6. Reports on Form 8-K

During the third quarter of 2002, we furnished the following reports on Form 8-K/8-Ka in accordance with Regulation FD.


Date of Earliest
Event Reported	Date Furnished	Items Reported

July 25, 2002	July 25, 2002	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure

August 12, 2002	August 12, 2002	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure

August 14, 2002	August 14, 2002	Item 7. Financial Statements and Exhibits
		Item 9. Regulation FD Disclosure

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		HEALTHCARE REALTY TRUST INCORPORATED



		By:		/s/ Timothy G. Wallace Timothy G. Wallace Executive Vice President and Chief Financial Officer

Date: November 14, 2002

Healthcare Realty Trust Incorporated

Quarterly Certification

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David R. Emery, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date:		November 14, 2002		/s/ David R. Emery David R. Emery Chairman of the Board and Chief Executive Officer

Healthcare Realty Trust Incorporated
Quarterly Certification
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Timothy G. Wallace, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Healthcare Realty Trust Incorporated;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and


Date:	November 14, 2002

		/s/ Timothy G. Wallace Timothy G. Wallace Executive Vice President and Chief Financial Officer

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