Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period endedMarch 31, 2009
or
o | 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 1-8923
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
Delaware | 34-1096634 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One SeaGate, Suite 1500, Toledo, Ohio | 43604 | |
(Address of principal executive office) | (Zip Code) |
(419) 247-2800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required 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 the filing requirements for at least the past 90 days. Yesþ Noo
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). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerþ | Accelerated filero | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
As of April 30, 2009, the registrant had 111,129,026 shares of common stock outstanding.
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
HEALTH CARE REIT, INC. AND SUBSIDIARIES
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | (Note) | |||||||
(In thousands) | ||||||||
Assets | ||||||||
Real estate investments: | ||||||||
Real property owned: | ||||||||
Land and land improvements | $ | 504,145 | $ | 504,907 | ||||
Buildings and improvements | 4,652,920 | 4,653,871 | ||||||
Acquired lease intangibles | 133,457 | 133,324 | ||||||
Real property held for sale, net of accumulated depreciation | 35,520 | 48,054 | ||||||
Construction in progress | 763,982 | 639,419 | ||||||
Gross real property owned | 6,090,024 | 5,979,575 | ||||||
Less accumulated depreciation and amortization | (627,898 | ) | (600,781 | ) | ||||
Net real property owned | 5,462,126 | 5,378,794 | ||||||
Real estate loans receivable: | ||||||||
Real estate loans receivable | 480,719 | 482,885 | ||||||
Less allowance for losses on loans receivable | (7,640 | ) | (7,500 | ) | ||||
Net real estate loans receivable | 473,079 | 475,385 | ||||||
Net real estate investments | 5,935,205 | 5,854,179 | ||||||
Other assets: | ||||||||
Equity investments | 836 | 1,030 | ||||||
Deferred loan expenses | 25,097 | 23,579 | ||||||
Cash and cash equivalents | 19,180 | 23,370 | ||||||
Restricted cash | 16,358 | 154,070 | ||||||
Receivables and other assets | 146,405 | 136,890 | ||||||
Total other assets | 207,876 | 338,939 | ||||||
Total assets | $ | 6,143,081 | $ | 6,193,118 | ||||
Liabilities and equity | ||||||||
Liabilities: | ||||||||
Borrowings under unsecured lines of credit arrangements | $ | 335,000 | $ | 570,000 | ||||
Senior unsecured notes | 1,810,537 | 1,831,151 | ||||||
Secured debt | 444,336 | 446,525 | ||||||
Accrued expenses and other liabilities | 102,601 | 107,157 | ||||||
Total liabilities | 2,692,474 | 2,954,833 | ||||||
Equity: | ||||||||
Preferred stock, $1.00 par value: | 288,728 | 289,929 | ||||||
Authorized — 50,000,000 shares | ||||||||
Issued and outstanding — 11,475,702 shares at March 31, 2009 and 11,516,302 shares at December 31, 2008 | ||||||||
Common stock, $1.00 par value: | 110,945 | 104,635 | ||||||
Authorized — 225,000,000 shares | ||||||||
Issued — 111,209,971 shares at March 31, 2009 and 104,835,626 shares at December 31, 2008 | ||||||||
Outstanding — 111,013,261 shares at March 31, 2009 and 104,703,702 shares at December 31, 2008 | ||||||||
Capital in excess of par value | 3,428,472 | 3,204,690 | ||||||
Treasury stock | (7,577 | ) | (5,145 | ) | ||||
Cumulative net income | 1,421,043 | 1,354,400 | ||||||
Cumulative dividends | (1,805,329 | ) | (1,723,819 | ) | ||||
Accumulated other comprehensive income | (1,348 | ) | (1,113 | ) | ||||
Other equity | 5,187 | 4,105 | ||||||
Total Health Care REIT, Inc. stockholders’ equity | 3,440,121 | 3,227,682 | ||||||
Noncontrolling interests | 10,486 | 10,603 | ||||||
Total equity | 3,450,607 | 3,238,285 | ||||||
Total liabilities and equity | $ | 6,143,081 | $ | 6,193,118 | ||||
NOTE: | The consolidated balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. |
See notes to unaudited consolidated financial statements
3
Table of Contents
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
(In thousands, except per share data) | ||||||||
Revenues: | ||||||||
Rental income | $ | 132,891 | $ | 115,825 | ||||
Interest income | 9,953 | 9,092 | ||||||
Other income | 1,484 | 1,716 | ||||||
Total revenues | 144,328 | 126,633 | ||||||
Expenses: | ||||||||
Interest expense | 27,695 | 35,102 | ||||||
Property operating expenses | 11,419 | 10,712 | ||||||
Depreciation and amortization | 40,811 | 36,346 | ||||||
General and administrative | 17,361 | 12,328 | ||||||
Gain on extinguishment of debt | (1,678 | ) | (1,326 | ) | ||||
Provision for loan losses | 140 | 0 | ||||||
Total expenses | 95,748 | 93,162 | ||||||
Income from continuing operations before income taxes | 48,580 | 33,471 | ||||||
Income tax (expense) benefit | (50 | ) | (1,279 | ) | ||||
Income from continuing operations | 48,530 | 32,192 | ||||||
Discontinued operations: | ||||||||
Net gain on sales of properties | 17,036 | 26 | ||||||
Income from discontinued operations, net | 1,079 | 3,240 | ||||||
Discontinued operations, net | 18,115 | 3,266 | ||||||
Net income | 66,645 | 35,458 | ||||||
Less: Preferred stock dividends | 5,524 | 6,147 | ||||||
Net income attributable to noncontrolling interests | 2 | 62 | ||||||
Net income attributable to common stockholders | $ | 61,119 | $ | 29,249 | ||||
Average number of common shares outstanding: | ||||||||
Basic | 108,214 | 86,100 | ||||||
Diluted | 108,624 | 86,610 | ||||||
Earnings per share: | ||||||||
Basic: | ||||||||
Income from continuing operations attributable to common stockholders | $ | 0.40 | $ | 0.30 | ||||
Discontinued operations, net | 0.17 | 0.04 | ||||||
Net income attributable to common stockholders* | $ | 0.56 | $ | 0.34 | ||||
Diluted: | ||||||||
Income from continuing operations attributable to common stockholders | $ | 0.40 | $ | 0.30 | ||||
Discontinued operations, net | 0.17 | 0.04 | ||||||
Net income attributable to common stockholders* | $ | 0.56 | $ | 0.34 | ||||
Dividends declared and paid per common share | $ | 0.68 | $ | 0.66 |
* | Amounts may not sum due to rounding |
See notes to unaudited consolidated financial statements
4
Table of Contents
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
(in thousands)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
(in thousands)
Three Months Ended March 31, 2009 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Capital in | Other | |||||||||||||||||||||||||||||||||||||||
Preferred | Common | Excess of | Treasury | Cumulative | Cumulative | Comprehensive | Other | Noncontrolling | ||||||||||||||||||||||||||||||||
Stock | Stock | Par Value | Stock | Net Income | Dividends | Income | Equity | Interests | Total | |||||||||||||||||||||||||||||||
Balances at beginning of period | $ | 289,929 | $ | 104,635 | $ | 3,204,690 | $ | (5,145 | ) | $ | 1,354,400 | $ | (1,723,819 | ) | $ | (1,113 | ) | $ | 4,105 | $ | 10,603 | $ | 3,238,285 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net income | 66,643 | 2 | 66,645 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on equity investments | (195 | ) | (195 | ) | ||||||||||||||||||||||||||||||||||||
Cash flow hedge activity | (40 | ) | (40 | ) | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | 66,410 | |||||||||||||||||||||||||||||||||||||||
Contributions by noncontrolling interests | 857 | 857 | ||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | (976 | ) | (976 | ) | ||||||||||||||||||||||||||||||||||||
Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures | 464 | 17,516 | (2,432 | ) | 15,548 | |||||||||||||||||||||||||||||||||||
Net proceeds from sale of common stock | 5,817 | 205,094 | 210,911 | |||||||||||||||||||||||||||||||||||||
Conversion of preferred stock | (1,201 | ) | 29 | 1,172 | 0 | |||||||||||||||||||||||||||||||||||
Option compensation expense | 1,082 | 1,082 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||||||||
Common stock-$0.68 per share | (75,986 | ) | (75,986 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series D-$0.4922 per share | (1,969 | ) | (1,969 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series E-$0.3750 per share | (28 | ) | (28 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series F-$0.4766 per share | (3,336 | ) | (3,336 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series G-$0.4688 per share | (191 | ) | (191 | ) | ||||||||||||||||||||||||||||||||||||
Balances at end of period | $ | 288,728 | $ | 110,945 | $ | 3,428,472 | $ | (7,577 | ) | $ | 1,421,043 | $ | (1,805,329 | ) | $ | (1,348 | ) | $ | 5,187 | $ | 10,486 | $ | 3,450,607 | |||||||||||||||||
Three Months Ended March 31, 2008 | ||||||||||||||||||||||||||||||||||||||||
Accumulated | ||||||||||||||||||||||||||||||||||||||||
Capital in | Other | |||||||||||||||||||||||||||||||||||||||
Preferred | Common | Excess of | Treasury | Cumulative | Cumulative | Comprehensive | Other | Noncontrolling | ||||||||||||||||||||||||||||||||
Stock | Stock | Par Value | Stock | Net Income | Dividends | Income | Equity | Interests | Total | |||||||||||||||||||||||||||||||
Balances at beginning of period | $ | 330,243 | $ | 85,412 | $ | 2,394,099 | $ | (3,952 | ) | $ | 1,071,101 | $ | (1,446,959 | ) | $ | (7,381 | ) | $ | 2,701 | $ | 9,687 | $ | 2,434,951 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Net income | 35,396 | 62 | 35,458 | |||||||||||||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Unrealized gain (loss) on equity investments | (240 | ) | (240 | ) | ||||||||||||||||||||||||||||||||||||
Cash flow hedge activity | (10,853 | ) | (10,853 | ) | ||||||||||||||||||||||||||||||||||||
Total comprehensive income | 24,365 | |||||||||||||||||||||||||||||||||||||||
Contributions by noncontrolling interests | 92 | 92 | ||||||||||||||||||||||||||||||||||||||
Distributions to noncontrolling interests | (144 | ) | (144 | ) | ||||||||||||||||||||||||||||||||||||
Amounts related to issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures | 523 | 22,379 | (34 | ) | (38 | ) | 22,830 | |||||||||||||||||||||||||||||||||
Proceeds from issuance of common shares | 3,000 | 115,555 | 118,555 | |||||||||||||||||||||||||||||||||||||
Conversion of preferred stock | (2,346 | ) | 57 | 2,289 | 0 | |||||||||||||||||||||||||||||||||||
Option compensation expense | 697 | 697 | ||||||||||||||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||||||||
Common stock-$0.66 per share | (57,190 | ) | (57,190 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series D-$0.4922 per share | (1,969 | ) | (1,969 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series E-$0.3750 per share | (28 | ) | (28 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series F-$0.4766 per share | (3,336 | ) | (3,336 | ) | ||||||||||||||||||||||||||||||||||||
Preferred stock, Series G-$0.4688 per share | (814 | ) | (814 | ) | ||||||||||||||||||||||||||||||||||||
Balances at end of period | $ | 327,897 | $ | 88,992 | $ | 2,534,322 | $ | (3,986 | ) | $ | 1,106,497 | $ | (1,510,296 | ) | $ | (18,474 | ) | $ | 3,360 | $ | 9,697 | $ | 2,538,009 | |||||||||||||||||
See notes to unaudited consolidated financial statements
5
Table of Contents
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Operating activities | ||||||||
Net income | $ | 66,645 | $ | 35,458 | ||||
Adjustments to reconcile net income to net cash provided from (used in) operating activities: | ||||||||
Depreciation and amortization | 41,326 | 39,574 | ||||||
Other amortization expenses | 3,578 | 3,526 | ||||||
Capitalized interest | (9,865 | ) | (5,167 | ) | ||||
Provision for loan losses | 140 | 0 | ||||||
Stock-based compensation expense | 6,579 | 3,848 | ||||||
Loss (gain) on extinguishment of debt, net | (1,678 | ) | (1,326 | ) | ||||
Rental income less than (in excess of) cash received | 2,859 | (2,361 | ) | |||||
Amortization related to above (below) market leases, net | (356 | ) | (263 | ) | ||||
(Gain) loss on sales of properties | (17,036 | ) | (26 | ) | ||||
Increase (decrease) in accrued expenses and other liabilities | (3,564 | ) | 4,452 | |||||
Decrease (increase) in receivables and other assets | (4,071 | ) | (2,043 | ) | ||||
Net cash provided from (used in) operating activities | 84,557 | 75,672 | ||||||
Investing activities | ||||||||
Investment in real property | (159,696 | ) | (168,414 | ) | ||||
Investment in real estate loans receivable | (6,234 | ) | (7,751 | ) | ||||
Other investments, net of payments | 121 | (26,819 | ) | |||||
Principal collected on real estate loans receivable | 8,402 | 2,081 | ||||||
Decrease (increase) in restricted cash | 137,712 | 1,779 | ||||||
Proceeds from sales of real property | 61,304 | 99 | ||||||
Other | (11,664 | ) | (4,872 | ) | ||||
Net cash provided from (used in) investing activities | 29,945 | (203,897 | ) | |||||
Financing activities | ||||||||
Net increase (decrease) under unsecured lines of credit arrangements | (235,000 | ) | 125,500 | |||||
Principal payments on senior unsecured notes | (19,796 | ) | (42,330 | ) | ||||
Principal payments on secured debt | (2,206 | ) | (27,776 | ) | ||||
Net proceeds from the issuance of common stock | 223,393 | 138,254 | ||||||
Decrease (increase) in deferred loan expenses | (3,454 | ) | (21 | ) | ||||
Contributions by noncontrolling interests | 857 | 92 | ||||||
Distributions to noncontrolling interests | (976 | ) | (144 | ) | ||||
Cash distributions to stockholders | (81,510 | ) | (63,337 | ) | ||||
Net cash provided from (used in) financing activities | (118,692 | ) | 130,238 | |||||
Increase (decrease) in cash and cash equivalents | (4,190 | ) | 2,013 | |||||
Cash and cash equivalents at beginning of period | 23,370 | 30,269 | ||||||
Cash and cash equivalents at end of period | $ | 19,180 | $ | 32,282 | ||||
See notes to unaudited consolidated financial statements
6
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Health Care REIT, Inc., an S&P 500 company with headquarters in Toledo, Ohio, is an equity real estate investment trust (“REIT”) that invests in senior housing and health care real estate. Our full service platform also offers property management and development services to our customers. As of March 31, 2009, our broadly diversified portfolio consisted of 632 properties in 39 states. Founded in 1970, we were the first real estate investment trust to invest exclusively in health care facilities. More information is available on the Internet at www.hcreit.com.
2. Accounting Policies and Related Matters
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2009 are not necessarily an indication of the results that may be expected for the year ending December 31, 2009. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.
New Accounting Standards
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”) and Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS 160”). SFAS 141(R) changed how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 changed the accounting and reporting for minority interests, which re-characterized them as non-controlling interests and classified them as a component of equity. The provisions of SFAS 141(R) and SFAS 160 were effective on January 1, 2009 and are to be applied prospectively; however, the disclosure provisions of SFAS 160 were applied retrospectively. In accordance with SFAS 141(R), we elected to expense all development costs for projects in progress when it was determined they would not be completed prior to the adoption of SFAS 141(R). See Note 19 for additional information regarding the application of SFAS 160.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures About Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”). SFAS 161 expands quarterly disclosure requirements in SFAS 133 concerning an entity’s derivative instruments and hedging activities. The provisions of SFAS 161 were effective on January 1, 2009. The adoption of SFAS 161 did not have a material impact on us as there were no derivatives instruments outstanding at March 31, 2009.
In May 2008, the FASB issued FASB Staff Position APB 14-1 (“FSP 14-1”), which provides guidance on accounting for debt that may be settled in cash upon conversion. FSP 14-1 requires bifurcation of the convertible debt instrument into a debt component and an equity component. The value of the debt component is based upon the estimated fair value of a similar debt instrument without the conversion feature. The difference between the contractual principal on the debt and the value allocated to the debt is recorded as an equity component and represents the conversion feature of the instrument. The excess of the contractual principal amount of the debt over its estimated fair value is amortized to interest expense using the effective interest method over the period used to estimate the fair value. FSP 14-1 was effective on January 1, 2009. Retrospective application was required for all periods presented in the financial statements for instruments that were outstanding during any periods presented in the financial statements. See Note 19 for additional information.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1”). FSP 107-1 amends SFAS No. 107 to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies in addition to the annual financial statements. FSP 107-1 also amends APB No. 28 to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 is effective for interim periods ending after June 15, 2009. Prior period presentation is not required for comparative purposes at initial adoption. We do not expect the adoption of FSP 107-1 to have a material impact on our consolidated balance sheet or consolidated statement of income although additional disclosures will be necessary.
7
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
3. Real Property Acquisitions and Development
The following is a summary of our real property investment activity for the periods presented (in thousands):
Three Months Ended | ||||||||||||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||||||||||
Investment | Medical Office | Investment | Medical Office | |||||||||||||||||||||
Properties | Buildings | Totals | Properties | Buildings | Totals | |||||||||||||||||||
Real property acquisitions: | ||||||||||||||||||||||||
Independent living/CCRCs | $ | 0 | $ | 0 | $ | 11,800 | $ | 11,800 | ||||||||||||||||
Assisted living facilities | 0 | 4,600 | 4,600 | |||||||||||||||||||||
Specialty care facilities | 0 | 35,200 | 35,200 | |||||||||||||||||||||
Medical office buildings | $ | 0 | 0 | $ | 41,628 | 41,628 | ||||||||||||||||||
Total acquisitions | 0 | 0 | 0 | 51,600 | 41,628 | 93,228 | ||||||||||||||||||
Less: Assumed debt | 0 | 0 | 0 | |||||||||||||||||||||
Assumed other assets (liabilities), net | 0 | (887 | ) | (887 | ) | |||||||||||||||||||
Cash disbursed for acquisitions | 0 | 0 | 0 | 51,600 | 40,741 | 92,341 | ||||||||||||||||||
Construction in progress additions: | ||||||||||||||||||||||||
Independent living/CCRCs | 52,311 | 52,311 | 48,895 | 48,895 | ||||||||||||||||||||
Assisted living facilities | 51,853 | 51,853 | 16,190 | 16,190 | ||||||||||||||||||||
Skilled nursing facilities | 9,313 | 9,313 | 3,682 | 3,682 | ||||||||||||||||||||
Specialty care facilities | 22,210 | 22,210 | 4,587 | 4,587 | ||||||||||||||||||||
Medical office buildings | 26,305 | 26,305 | 3,954 | 3,954 | ||||||||||||||||||||
Total construction in progress additions | 135,687 | 26,305 | 161,992 | 73,354 | 3,954 | 77,308 | ||||||||||||||||||
Less: Capitalized interest | (8,378 | ) | (1,487 | ) | (9,865 | ) | (5,025 | ) | (142 | ) | (5,167 | ) | ||||||||||||
Cash disbursed for construction in progress | 127,309 | 24,818 | 152,127 | 68,329 | 3,812 | 72,141 | ||||||||||||||||||
Capital improvements to existing properties | 5,538 | 2,031 | 7,569 | 2,998 | 934 | 3,932 | ||||||||||||||||||
Total cash invested in real property | $ | 132,847 | $ | 26,849 | $ | 159,696 | $ | 122,927 | $ | 45,487 | $ | 168,414 | ||||||||||||
The following is a summary of the development projects that were placed into service and began generating revenues during the periods presented:
Three Months Ended | ||||||||||||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||||||||||
Investment | Medical Office | Investment | Medical Office | |||||||||||||||||||||
Properties | Buildings | Totals | Properties | Buildings | Totals | |||||||||||||||||||
Construction in progress conversions: | ||||||||||||||||||||||||
Development projects: | ||||||||||||||||||||||||
Independent living/CCRCs | $ | 0 | $ | 19,889 | $ | 19,889 | ||||||||||||||||||
Assisted living facilities | $ | 37,072 | 37,072 | 0 | ||||||||||||||||||||
Medical office buildings | $ | 0 | 0 | $ | 0 | 0 | ||||||||||||||||||
Total development projects | 37,072 | 0 | 37,072 | 19,889 | 0 | 19,889 | ||||||||||||||||||
Expansion projects | 357 | 357 | 1,546 | 1,546 | ||||||||||||||||||||
Total construction in progress conversions | $ | 37,429 | $ | 0 | $ | 37,429 | $ | 21,435 | $ | 0 | $ | 21,435 | ||||||||||||
4. Real Estate Intangibles
The following is a summary of our real estate intangibles as of the dates indicated (dollars in thousands):
8
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
March 31, 2009 | December 31, 2008 | |||||||
Assets: | ||||||||
In place lease intangibles | $ | 81,500 | $ | 81,500 | ||||
Above market tenant leases | 9,658 | 9,658 | ||||||
Below market ground leases | 39,806 | 39,806 | ||||||
Lease commissions | 2,493 | 2,360 | ||||||
Gross historical cost | 133,457 | 133,324 | ||||||
Accumulated amortization | (34,580 | ) | (31,452 | ) | ||||
Net book value | $ | 98,877 | $ | 101,872 | ||||
Weighted-average amortization period in years | 29.3 | 28.9 | ||||||
Liabilities: | ||||||||
Below market tenant leases | $ | 25,265 | $ | 25,265 | ||||
Above market ground leases | 3,419 | 3,419 | ||||||
Gross historical cost | 28,684 | 28,684 | ||||||
Accumulated amortization | (9,676 | ) | (8,671 | ) | ||||
Net book value | $ | 19,008 | $ | 20,013 | ||||
Weighted-average amortization period in years | 9.1 | 8.9 |
5. Dispositions, Assets Held for Sale and Discontinued Operations
At March 31, 2009, we had five assisted living facilities and 14 medical office buildings that satisfied the requirements of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, for held for sale treatment. We did not recognize any impairment loss on these properties in 2009 as the fair value less estimated costs to sell exceeded our carrying values. During the year ended December 31, 2008, an impairment charge of $32,648,000 was recorded to reduce the carrying value of the 14 medical office buildings to their estimated fair value less costs to sell. In determining the fair value of the medical office buildings, we used a combination of third party appraisals based on market comparable transactions, other market listings and asset quality as well as management calculations based on projected operating income and published capitalization rates. The following is a summary of our real property disposition activity for the periods presented (in thousands):
Three Months Ended | ||||||||||||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||||||||||
Investment | Medical Office | Investment | Medical Office | |||||||||||||||||||||
Properties | Buildings | Totals | Properties | Buildings | Totals | |||||||||||||||||||
Real property dispositions: | ||||||||||||||||||||||||
Assisted living facilities | $ | 3,427 | $ | 3,427 | $ | 0 | ||||||||||||||||||
Medical office buildings | $ | 0 | 0 | $ | 0 | 0 | ||||||||||||||||||
Specialty care facilities | 40,841 | 40,841 | 0 | |||||||||||||||||||||
Land parcels | 0 | $ | 73 | 73 | ||||||||||||||||||||
Total dispositions | 44,268 | 0 | 44,268 | 73 | 0 | 73 | ||||||||||||||||||
Less: Gain/(loss) on sales of real property | 17,036 | 17,036 | 26 | 26 | ||||||||||||||||||||
Proceeds from real property sales | $ | 61,304 | $ | 0 | $ | 61,304 | $ | 99 | $ | 0 | $ | 99 | ||||||||||||
In accordance with Statement No. 144, we have reclassified the income and expenses attributable to all properties sold and attributable to properties held for sale at March 31, 2009 to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying properties as discontinued operations for the periods presented (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Rental income | $ | 2,474 | $ | 9,341 | ||||
Expenses: | ||||||||
Interest expense | 316 | 2,218 | ||||||
Property operating expenses | 564 | 655 | ||||||
Provision for depreciation | 515 | 3,228 | ||||||
Income (loss) from discontinued operations, net | $ | 1,079 | $ | 3,240 | ||||
9
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
6. Real Estate Loans Receivable
All real estate loans receivable are in our investment property segment. The following is a summary of our real estate loan activity for the periods presented (in thousands):
Three Months Ended | ||||||||
March 31, 2009 | March 31, 2008 | |||||||
Advances on real estate loans receivable: | ||||||||
Investments in new loans | $ | 296 | $ | 391 | ||||
Draws on existing loans | 5,938 | 7,360 | ||||||
Total gross investments in real estate loans | 6,234 | 7,751 | ||||||
Receipts on real estate loans receivable: | ||||||||
Loan payoffs | 0 | 0 | ||||||
Principal payments on loans | 8,402 | 2,081 | ||||||
Total principal receipts on real estate loans | 8,402 | 2,081 | ||||||
Net cash advances (receipts) on real estate loans receivable | $ | (2,168 | ) | $ | 5,670 | |||
7. Customer Concentration
At March 31, 2009, we had 67 investment property operators and over 800 medical office building tenants. The following table summarizes certain information about our customer concentration as of March 31, 2009 (dollars in thousands):
Number of | Total | Percent of | ||||||||||
Properties | Investment | Investment (2) | ||||||||||
Concentration by investment (1): | ||||||||||||
Senior Living Communities, LLC | 10 | $ | 367,092 | 6 | % | |||||||
Signature Healthcare LLC | 34 | 314,049 | 5 | % | ||||||||
Brookdale Senior Living, Inc | 86 | 302,626 | 5 | % | ||||||||
Life Care Centers of America, Inc | 25 | 264,865 | 5 | % | ||||||||
Emeritus Corporation | 21 | 244,253 | 4 | % | ||||||||
Remaining portfolio | 456 | 4,449,960 | 75 | % | ||||||||
Totals | 632 | $ | 5,942,845 | 100 | % | |||||||
Number of | Total | Percent of | ||||||||||
Properties | Revenue (3) | Revenue (4) | ||||||||||
Concentration by revenue (1): | ||||||||||||
Signature Healthcare LLC | 34 | $ | 10,058 | 7 | % | |||||||
Brookdale Senior Living, Inc | 86 | 9,899 | 7 | % | ||||||||
Life Care Centers of America, Inc | 25 | 8,133 | 6 | % | ||||||||
Emeritus Corporation | 21 | 7,710 | 5 | % | ||||||||
Senior Living Communities, LLC | 10 | 5,511 | 4 | % | ||||||||
Remaining portfolio | 456 | 104,007 | 70 | % | ||||||||
Other income | n/a | 1,484 | 1 | % | ||||||||
Totals | 632 | $ | 146,802 | 100 | % | |||||||
(1) | All of our top five customers are in our investment properties segment. | |
(2) | Investments with our top five customers comprised 25% of total investments at December 31, 2008. | |
(3) | Revenues include gross revenues and revenues from discontinued operations for the three months ended March 31, 2009. | |
(4) | Revenues from our top five customers were 31% of total revenues for the three months ended March 31, 2008. |
10
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
8. Borrowings Under Line of Credit Arrangement and Related Items
At March 31, 2009, we had an unsecured line of credit arrangement with a consortium of sixteen banks in the amount of $1,150,000,000, which is scheduled to expire on August 5, 2011 (with the ability to extend for one year at our discretion if we are in compliance with all covenants). Borrowings under the agreement are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or the applicable margin over LIBOR interest rate, at our option (1.12% at March 31, 2009). The applicable margin is based on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.6% at March 31, 2009. In addition, we pay a facility fee annually to each bank based on the bank’s commitment amount. The facility fee depends on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.15% at March 31, 2009. We also pay an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement.
The following information relates to aggregate borrowings under the unsecured line of credit arrangement for the periods presented (dollars in thousands):
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Balance outstanding at quarter end | $ | 335,000 | $ | 432,500 | ||||
Maximum amount outstanding at any month end | $ | 559,000 | $ | 491,500 | ||||
Average amount outstanding (total of daily principal balances divided by days in period) | $ | 417,000 | $ | 406,687 | ||||
Weighted average interest rate (actual interest expense divided by average borrowings outstanding) | 1.62 | % | 4.75 | % |
9. Senior Unsecured Notes and Secured Debt
We have $1,810,537,000 of senior unsecured notes with annual interest rates ranging from 4.75% to 8.00%. The carrying amounts of the senior unsecured notes represent the par value of $1,823,277,000 adjusted for any unamortized premiums or discounts and other basis adjustments related to hedging the debt with derivative instruments. See Note 10 for further discussion regarding derivative instruments. During the three months ended March 31, 2009, we extinguished $21,723,000 of senior unsecured notes principal for $19,796,000 and recognized debt extinguishment gains of $1,678,000.
We have secured debt totaling $444,336,000, collateralized by owned properties, with annual interest rates ranging from 4.89% to 8.08%. The carrying amounts of the secured debt represent the par value of $446,172,000 adjusted for any unamortized fair value adjustments. The carrying values of the properties securing the debt totaled $767,076,000 at March 31, 2009.
Our debt agreements contain various covenants, restrictions and events of default. Among other things, these provisions require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of March 31, 2009, we were in compliance with all of the covenants under our debt agreements.
At March 31, 2009, the annual principal payments due on these debt obligations are as follows (in thousands):
Senior | Secured | |||||||||||
Unsecured Notes (1) | Debt (1) | Totals | ||||||||||
2009 | $ | 0 | $ | 37,451 | $ | 37,451 | ||||||
2010 | 0 | 15,120 | 15,120 | |||||||||
2011 | 0 | 52,314 | 52,314 | |||||||||
2012 | 238,277 | 13,710 | 251,987 | |||||||||
2013 | 300,000 | 62,198 | 362,198 | |||||||||
Thereafter | 1,285,000 | 265,379 | 1,550,379 | |||||||||
Totals | $ | 1,823,277 | $ | 446,172 | $ | 2,269,449 | ||||||
(1) | Amounts above represent principal amounts due and do not include unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. |
11
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
10. Derivative Instruments
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. Derivatives are recorded at fair market value on the balance sheet as assets or liabilities.
On May 6, 2004, we entered into two interest rate swap agreements (the “2004 Swaps”) for a total notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The 2004 Swaps were treated as fair-value hedges for accounting purposes and we utilized the short-cut method to assess effectiveness. The 2004 Swaps were with highly rated counterparties in which we received a fixed rate of 6.0% and paid a variable rate based on six-month LIBOR plus a spread. On September 12, 2007, we terminated the 2004 Swaps and we received a $2,125,000 cash settlement. The unamortized amount of this settlement at March 31, 2009 was $1,549,000 ($1,634,000 at December 31, 2008) and is recorded as an adjustment to the hedged item. This amount will be amortized to interest expense over the life of the hedged debt using the effective interest method. For the three months ended March 31, 2009 and 2008, $85,000 and $85,000 of amortization was recognized as a reduction to senior unsecured notes interest expense.
On July 2, 2007, we entered into two forward-starting interest rate swaps (the “July 2007 Swaps”), with an aggregate notional amount of $200,000,000 that were designated as cash flow hedges of the variability in forecasted interest payments attributable to changes in the LIBOR swap rate, on long-term fixed rate debt forecasted to be issued in 2007. The July 2007 Swaps had the economic effect of fixing $200,000,000 of our debt at 4.913% for five years. The July 2007 Swaps were settled on July 17, 2007, which was the date that the forecasted debt was priced. The cash settlement value of these contracts at July 17, 2007 was $733,000. This amount represented the effective portion of the hedges as there was no hedge ineffectiveness. Therefore, the $733,000 settlement value was deferred in accumulated other comprehensive income (“AOCI”) and will be amortized to interest expense using the effective interest method. The unamortized amount of AOCI related to these contracts at March 31, 2009 is $484,000 ($521,000 at December 31, 2008). For the three months ended March 31, 2009 and 2008, we reclassified $37,000 and $37,000, respectively, out of AOCI as a reduction of interest expense.
On September 12, 2007, we entered into two forward-starting interest rate swaps (the “September 2007 Swaps”) for a total notional amount of $250,000,000 to hedge 10 years of interest payments associated with a long-term borrowing that was expected to occur in 2008. The September 2007 Swaps each had an effective date of September 12, 2008 and a maturity date of September 12, 2018. We expected to settle the 2007 Swaps when the debt was to be priced. The September 2007 Swaps were to have the economic effect of fixing $250,000,000 of our future debt at 4.469% plus a credit spread for 10 years. The September 2007 Swaps had been designated as cash flow hedges and we originally expected the 2007 Swaps to be highly effective at offsetting changes in cash flows of interest payments on $250,000,000 of our future debt due to changes in the LIBOR swap rate. Therefore, effective changes in the fair value of the September 2007 Swaps were recorded in AOCI and were to be reclassified to interest expense when the hedged forecasted transactions affected earnings (as interest payments would have been made on the expected debt issuance). The ineffective portion of the changes in fair value was to be recorded directly in earnings. However, during the year ended December 31, 2008, as a result of the severe dislocation in the credit markets, we terminated plans to issue debt and also terminated the September 2007 Swaps for $23,393,000. Amounts previously recorded in AOCI were reclassified to realized loss on derivatives resulting in $23,393,000 of expense as the forecasted transaction was no longer probable to occur.
The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by a third party consultant, which utilizes pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates that may change in the future.
11. Commitments and Contingencies
We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide workers’ compensation insurance to one of our tenants. Our obligation to provide the letter of credit terminates in 2009. At March 31, 2009, our obligation under the letter of credit was $2,450,000.
12
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
We have an outstanding letter of credit issued for the benefit of certain insurance companies that provide liability and property insurance to one of our tenants. Our obligation to provide the letter of credit terminates in 2013. At March 31, 2009, our obligation under the letter of credit was $1,000,000.
We have an outstanding letter of credit issued for the benefit of a village in Illinois that secures the completion and installation of certain public improvements by one of our tenants in connection with the development of a property. Our obligation to provide the letter of credit terminates in 2010. At March 31, 2009, our obligation under the letter of credit was $679,320.
We have an outstanding letter of credit issued for the benefit of a municipality in Pennsylvania in connection with the completion and installation of certain property improvements by one of our subsidiaries. The improvements are expected to be completed in 2009. At March 31, 2009, our obligation under the letter of credit was $485,810.
We have an outstanding letter of credit issued for the benefit of a lender as additional credit support for a secured loan of a medical office building. Our obligation to provide the letter of credit terminates when the building’s occupancy thresholds are met with qualified leases. At March 31, 2009, our obligation under the letter of credit was $475,000.
At March 31, 2009, we had outstanding construction financings of $763,982,000 for leased properties and were committed to providing additional financing of approximately $592,515,000 to complete construction. At March 31, 2009, we had contingent purchase obligations totaling $6,051,000. These contingent purchase obligations primarily relate to deferred acquisition fundings and capital improvements. Deferred acquisition fundings are contingent upon an operator satisfying certain conditions such as payment coverage and value tests. Rents due from the tenant are increased to reflect the additional investment in the property.
At March 31, 2009, we had operating lease obligations of $163,014,000 relating to certain ground leases and company office space. We incurred rental expense relating to our company office space of $297,000 and $277,000 for the three months ended March 31, 2009 and 2008, respectively. Regarding the ground leases, we have sublease agreements with certain of our operators that require the operators to reimburse us for our monthly operating lease obligations. At March 31, 2009, aggregate future minimum rentals to be received under these noncancelable subleases totaled $30,713,000.
At March 31, 2009, future minimum lease payments due under operating leases are as follows (in thousands):
2009 | $ | 3,163 | ||
2010 | 4,129 | |||
2011 | 4,235 | |||
2012 | 3,916 | |||
2013 | 3,927 | |||
Thereafter | 143,644 | |||
Totals | $ | 163,014 | ||
12. Stockholders’ Equity
Preferred Stock. During the three months ended March 31, 2009, certain holders of our Series G Cumulative Convertible Preferred Stock converted 40,600 shares into 29,056 shares of our common stock, leaving 400,713 of such shares outstanding at March 31, 2009.
Common Stock. The following is a summary of our common stock issuances during the three months ended March 31, 2009 and 2008 (dollars in thousands, except per share amounts):
Shares Issued | Average Price | Gross Proceeds | Net Proceeds | |||||||||||||
March 2008 public issuance | 3,000,000 | $ | 41.44 | $ | 124,320 | $ | 118,555 | |||||||||
2008 Dividend reinvestment plan issuances | 452,440 | 40.88 | 18,496 | 18,496 | ||||||||||||
2008 Option exercises | 48,722 | 24.69 | 1,203 | 1,203 | ||||||||||||
2008 Totals | 3,501,162 | $ | 144,019 | $ | 138,254 | |||||||||||
February 2009 public issuance | 5,816,870 | $ | 36.85 | $ | 214,352 | $ | 210,911 | |||||||||
2009 Dividend reinvestment plan issuances | 375,813 | 33.21 | 12,482 | 12,482 | ||||||||||||
2008 Totals | 6,192,683 | $ | 226,834 | $ | 223,393 | |||||||||||
13
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
On February 20, 2009, we paid a dividend of $0.68 per share to stockholders of record on January 31, 2009. These dividends related to the period from October 1, 2008 through December 31, 2008.
Comprehensive Income
The following is a summary of accumulated other comprehensive income as of the dates indicated (in thousands):
March 31, 2009 | December 31, 2008 | |||||||
Fair value of cash flow hedges | $ | 595 | $ | 635 | ||||
Unrecognized gains (losses) on equity investments | (1,233 | ) | (1,038 | ) | ||||
Unrecognized actuarial gains (losses) | (710 | ) | (710 | ) | ||||
Totals | $ | (1,348 | ) | $ | (1,113 | ) | ||
The following is a summary of comprehensive income for the periods indicated (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Cash flow hedge activity | $ | (40 | ) | $ | (10,853 | ) | ||
Unrecognized losses on equity investments | (195 | ) | (240 | ) | ||||
Unrecognized actuarial gains/(losses) | 0 | 0 | ||||||
Total other comprehensive income | (235 | ) | (11,093 | ) | ||||
Net income attributable to controlling interests | 66,643 | 35,396 | ||||||
Comprehensive income attributable to controlling interests | 66,408 | 24,303 | ||||||
Net and comprehensive income attributable to noncontrolling interests | 2 | 62 | ||||||
Total comprehensive income | $ | 66,410 | $ | 24,365 | ||||
Other Equity
Other equity consists of accumulated option compensation expense which represents the amount of amortized compensation costs related to stock options awarded to employees and directors subsequent to January 1, 2003. Expense, which is recognized as the options vest based on the market value at the date of the award, totaled $1,082,000 and $697,000 for the three months ended March 31, 2009 and 2008, respectively.
13. Stock Incentive Plans
Our 2005 Long-Term Incentive Plan authorizes up to 2,200,000 shares of common stock to be issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee Directors. The options granted to officers and key employees under the 1995 Plan continue to vest through 2010 and expire ten years from the date of grant. Our non-employee directors, officers and key employees are eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance of, among other things, stock options, restricted stock, deferred stock units and dividend equivalent rights. Vesting periods for options, deferred stock units and restricted shares generally range from three years for non-employee directors to five years for officers and key employees. Options expire ten years from the date of grant.
Valuation Assumptions
The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
14
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
Three Months Ended | Three Months Ended | |||||||
March 31, 2009 | March 31, 2008 | |||||||
Dividend yield (1) | 7.35 | % | 6.47 | % | ||||
Expected volatility | 29.36 | % | 20.52 | % | ||||
Risk-free interest rate | 2.33 | % | 3.42 | % | ||||
Expected life (in years) | 7.0 | 6.5 | ||||||
Weighted-average fair value (1) | $ | 4.38 | $ | 6.25 |
(1) | Certain options granted to employees in 2008 include dividend equivalent rights (“DERs”). The fair value of options with DERs also includes the net present value of projected future dividend payments over the expected life of the option discounted at the dividend yield rate. |
The dividend yield represented the dividend yield of our common stock on the dates of grant. Our computation of expected volatility was based on historical volatility. The risk-free interest rates used were the 7-year U.S. Treasury Notes yield on the date of grant. The expected life was based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations regarding future employee behavior.
Option Award Activity
The following table summarizes information about stock option activity for the three months ended March 31, 2009:
Number | ||||||||||||||||
of | Weighted | Weighted Average | Aggregate | |||||||||||||
Shares | Average | Remaining | Intrinsic | |||||||||||||
Stock Options | (000’s) | Exercise Price | Contract Life (years) | Value ($000’s) | ||||||||||||
Options at beginning of year | 817 | $ | 38.29 | 8.2 | ||||||||||||
Options granted | 366 | 37.00 | ||||||||||||||
Options terminated | (4 | ) | 40.83 | |||||||||||||
Options at end of period | 1,179 | $ | 37.88 | 7.2 | $ | 442 | ||||||||||
Options exercisable at end of period | 503 | $ | 36.68 | 6.5 | $ | 442 | ||||||||||
Weighted average fair value of options granted during the period | $ | 4.38 |
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying options and the quoted price of our common stock for the options that were in-the-money at March 31, 2009. There were no option exercises during the three months ended March 31, 2009. During the three months ended March 31, 2008, the aggregate intrinsic value of options exercised under our stock incentive plans was $838,000 (determined as of the date of option exercise). Cash received from option exercises under our stock incentive plans for the three months ended March 31, 2008 was $1,203,000.
As of March 31, 2009, there was approximately $2,425,000 of total unrecognized compensation cost related to unvested stock options granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of four years. As of March 31, 2009, there was approximately $9,173,000 of total unrecognized compensation cost related to unvested restricted stock granted under our stock incentive plans. That cost is expected to be recognized over a weighted average period of three years.
The following table summarizes information about non-vested stock incentive awards as of March 31, 2009 and changes for the three months ended March 31, 2009:
Stock Options | Restricted Stock | |||||||||||||||
Number of | Weighted Average | Number of | Weighted Average | |||||||||||||
Shares | Grant Date | Shares | Grant Date | |||||||||||||
(000’s) | Fair Value | (000’s) | Fair Value | |||||||||||||
Non-vested at December 31, 2008 | 534 | $ | 6.98 | 443 | $ | 41.95 | ||||||||||
Vested | (220 | ) | 7.41 | (191 | ) | 41.47 | ||||||||||
Granted | 366 | 4.38 | 160 | 37.07 | ||||||||||||
Terminated | (4 | ) | 1.56 | (2 | ) | 40.83 | ||||||||||
Non-vested at March 31, 2009 | 676 | $ | 5.47 | 410 | $ | 40.29 | ||||||||||
15
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Numerator for basic and diluted earnings per share — net income attributable to common stockholders | $ | 61,119 | $ | 29,249 | ||||
Denominator for basic earnings per share — weighted average shares | 108,214 | 86,100 | ||||||
Effect of dilutive securities: | ||||||||
Employee stock options | 0 | 54 | ||||||
Non-vested restricted shares | 410 | 456 | ||||||
Dilutive potential common shares | 410 | 510 | ||||||
Denominator for diluted earnings per share — adjusted weighted average shares | 108,624 | 86,610 | ||||||
Basic earnings per share | $ | 0.56 | $ | 0.34 | ||||
Diluted earnings per share | $ | 0.56 | $ | 0.34 | ||||
The diluted earnings per share calculation excludes the dilutive effect of 1,098,000 stock options for the three months ended March 31, 2009 because the exercise prices were greater than the average market price. The diluted earnings per share calculation excludes the dilutive effect of 123,000 stock options for the three months ended March 31, 2008 because the exercise prices were greater than the average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock, the Series G Cumulative Convertible Preferred Stock, the $340,000,000 senior unsecured convertible notes due December 2026 and the $395,000,000 senior unsecured convertible notes due July 2027 were not included in these calculations as the effect of the conversions into common stock was anti-dilutive for the relevant periods presented.
We adopted FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“EITF 03-6-1”), effective January 1, 2009, which required retrospective application. EITF 03-6-1 clarifies that instruments granted in share-based payment transactions that are considered to be participating securities prior to vesting should be included in the earnings allocation under the two-class method of calculating earnings per share. We determined that our restricted shares granted under our long-term incentive plans are participating securities because the restricted shares participate in non-forfeitable dividends prior to vesting. Applying EITF 03-6-1 did not have an impact on previously reported amounts on either period presented.
15. Fair Value Disclosure
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal years beginning after November 15, 2007, and was adopted as the standard for those assets and liabilities as of January 1, 2008. The impact of adoption was not significant. SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Interest rate swap agreements are valued using models that assume a hypothetical transaction to sell the asset or transfer the liability in the principal market for the asset or liability based on market data derived
16
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
from interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment timing, loss severities, credit risks and default rates.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The market approach is utilized to measure fair value for our financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
Fair Value Measurements as of March 31, 2009 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Equity investments (1) | $ | 367 | $ | 367 | $ | 0 | $ | 0 | ||||||||
Totals | $ | 367 | $ | 367 | $ | 0 | $ | 0 | ||||||||
(1) | Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date. |
16. Segment Reporting
We invest in senior housing and health care real estate. We evaluate our business and make resource allocations on our two business segments — investment properties and medical office buildings. Under the investment property segment, we invest in senior housing and health care real estate through acquisition and financing of primarily single tenant properties. Properties acquired are primarily leased under triple-net leases and we are not involved in the management of the property. Our primary investment property types include skilled nursing facilities, assisted living facilities, independent living/continuing care retirement communities and specialty care facilities. Under the medical office building segment, our properties are typically leased to multiple tenants and generally require a certain level of property management. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 1 to our Annual Report on Form 10-K for the year ended December 31, 2008). There are no intersegment sales or transfers. We evaluate performance based upon net operating income of the combined properties in each segment. Non-segment revenue consists mainly of interest income on non-real estate investments and other income. Non-segment assets consist of corporate assets including cash, deferred loan expenses and corporate office equipment among others. Non-property specific revenues and expenses are not allocated to individual segments in determining net operating income. Summary information for the reportable segments during the three months ended March 31, 2009 and 2008 is as follows (in thousands):
Property | Net | Real Estate | ||||||||||||||||||||||||||||||||||
Rental | Interest | Other | Total | Operating | Operating | Depreciation/ | Interest | Total | ||||||||||||||||||||||||||||
Income (1) | Income | Income | Revenues (1) | Expenses (1) | Income (2) | Amortization (1) | Expense (1) | Assets | ||||||||||||||||||||||||||||
Three months ended March 31, 2009: | ||||||||||||||||||||||||||||||||||||
Investment Properties | $ | 102,112 | $ | 9,953 | $ | 895 | $ | 112,960 | $ | 112,960 | $ | 29,284 | $ | 1,644 | $ | 4,645,875 | ||||||||||||||||||||
Medical Office Buildings | 33,253 | 213 | 33,466 | $ | 11,983 | 21,483 | 12,042 | 5,213 | 1,427,243 | |||||||||||||||||||||||||||
Non-segment/Corporate | 376 | 376 | 376 | 21,154 | 69,963 | |||||||||||||||||||||||||||||||
$ | 135,365 | $ | 9,953 | $ | 1,484 | $ | 146,802 | $ | 11,983 | $ | 134,819 | $ | 41,326 | $ | 28,011 | $ | 6,143,081 | |||||||||||||||||||
Three months ended March 31, 2008: | ||||||||||||||||||||||||||||||||||||
Investment Properties | $ | 91,933 | $ | 9,092 | $ | 1,296 | $ | 102,321 | $ | 102,321 | $ | 26,410 | $ | 1,973 | $ | 3,993,615 | ||||||||||||||||||||
Medical Office Buildings | 33,233 | 210 | 33,443 | $ | 11,367 | 22,076 | 13,164 | 5,662 | 1,309,109 | |||||||||||||||||||||||||||
Non-segment/Corporate | 210 | 210 | 210 | 29,685 | 84,732 | |||||||||||||||||||||||||||||||
$ | 125,166 | $ | 9,092 | $ | 1,716 | $ | 135,974 | $ | 11,367 | $ | 124,607 | $ | 39,574 | $ | 37,320 | $ | 5,387,456 | |||||||||||||||||||
(1) | Includes amounts from discontinued operations. | |
(2) | Net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties. |
17
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
17. Supplemental Cash Flow Information
March 31, | ||||||||
2009 | 2008 | |||||||
(In thousands) | ||||||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 28,152 | $ | 23,781 | ||||
Income taxes paid | 211 | 1,549 | ||||||
Supplemental schedule of non-cash activites: | ||||||||
Assets and liabilities assumed from real property acquisitions: | ||||||||
Secured debt | $ | 0 | $ | 0 | ||||
Other liabilities | 0 | 887 | ||||||
Other assets | 0 | 0 |
18. Subsequent Events
Secured Debt. On April 7, 2009, we closed a $133,000,000 first mortgage loan secured by 12 senior housing properties with multiple levels of service. The 10-year debt has a fixed interest rate of 6.10%. KeyBank Capital Markets, Inc. originated the loan and intends to sell it to Freddie Mac.
19. Retrospective Application of New Accounting Standards
We adopted FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”) and FASB Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) (“FSP 14-1”), effective January 1, 2009, each of which required retrospective application. SFAS 160 changed the accounting and reporting for minority interests, which have been re-characterized as non-controlling interests and classified as a component of equity. FSP 14-1 provides guidance on accounting for convertible debt that may be settled in cash upon conversion. It requires bifurcation of the convertible debt instrument into a debt component and an equity component. The value of the debt component is based upon the estimated fair value of a similar debt instrument without the conversion feature. The difference between the contractual principal on the debt and the value allocated to the debt is recorded as an equity component and represents the conversion feature of the instrument. The excess of the contractual principal amount of the debt over its estimated fair value is amortized to interest expense using the effective interest method over the period used to estimate the fair value. The following tables illustrate the retrospective restatement of our previously reported consolidated balance sheet amounts to reflect the application of SFAS 160 and FSP 14-1 for the periods indicated (in thousands):
As of December 31, 2008 | ||||||||||||||||
As Previously | FSP 14-1 | SFAS 160 | As | |||||||||||||
Reported | Adjustment | Adjustment | Adjusted | |||||||||||||
Liabilities: | ||||||||||||||||
Borrowings under unsecured lines of credit arrangements | $ | 570,000 | $ | 570,000 | ||||||||||||
Senior unsecured notes | 1,847,247 | $ | (16,096 | ) | 1,831,151 | |||||||||||
Secured debt | 446,525 | 446,525 | ||||||||||||||
Accrued expenses and other liabilities | 107,157 | 107,157 | ||||||||||||||
Total liabilities | 2,970,929 | (16,096 | ) | $ | 0 | 2,954,833 | ||||||||||
Minority interests | 10,603 | (10,603 | ) | 0 | ||||||||||||
Equity: | ||||||||||||||||
Preferred stock, $1.00 par value | 289,929 | 289,929 | ||||||||||||||
Common stock, $1.00 par value | 104,635 | 104,635 | ||||||||||||||
Capital in excess of par value | 3,180,628 | 24,062 | 3,204,690 | |||||||||||||
Treasury stock | (5,145 | ) | (5,145 | ) | ||||||||||||
Cumulative net income | 1,362,366 | (7,966 | ) | 1,354,400 | ||||||||||||
Cumulative dividends | (1,723,819 | ) | (1,723,819 | ) | ||||||||||||
Accumulated other comprehensive income | (1,113 | ) | (1,113 | ) | ||||||||||||
Other equity | 4,105 | 4,105 | ||||||||||||||
Total Health Care REIT, Inc. stockholders’ equity | 3,211,586 | 16,096 | 0 | 3,227,682 | ||||||||||||
Noncontrolling interests | 0 | 10,603 | 10,603 | |||||||||||||
Total equity | 3,211,586 | 16,096 | 10,603 | 3,238,285 | ||||||||||||
Total liabilities and equity | $ | 6,193,118 | $ | 0 | $ | 0 | $ | 6,193,118 | ||||||||
18
Table of Contents
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
The following tables illustrate the retrospective restatement of our previously reported consolidated statements of income amounts to reflect the application of SFAS 160 and FSP 14-1 as well as the SFAS 144 discontinued operation reclassifications for the periods indicated (amounts in thousands, except per share amounts):
Three Months Ended March 31, 2008 | ||||||||||||||||||||
As Previously | FSP 14-1 | SFAS 160 | SFAS 144 | As | ||||||||||||||||
Reported | Adjustment | Adjustment | Adjustment | Adjusted | ||||||||||||||||
Revenues: | ||||||||||||||||||||
Rental income | $ | 125,044 | $ | 0 | $ | 0 | $ | (9,219 | ) | $ | 115,825 | |||||||||
Interest income | 9,092 | 9,092 | ||||||||||||||||||
Other income | 1,716 | 1,716 | ||||||||||||||||||
135,852 | 0 | 0 | (9,219 | ) | 126,633 | |||||||||||||||
Expenses: | ||||||||||||||||||||
Interest and loan expenses | 36,101 | 1,203 | (2,202 | ) | 35,102 | |||||||||||||||
Property operating expenses | 11,367 | (655 | ) | 10,712 | ||||||||||||||||
Depreciation and amortization | 39,555 | (3,209 | ) | 36,346 | ||||||||||||||||
General and administrative | 12,328 | 12,328 | ||||||||||||||||||
Loss (gain) on extinguishment of debt | (1,326 | ) | (1,326 | ) | ||||||||||||||||
98,025 | �� | 1,203 | 0 | (6,066 | ) | 93,162 | ||||||||||||||
Income from continuing operations before income taxes and minority interests | 37,827 | (1,203 | ) | 0 | (3,153 | ) | 33,471 | |||||||||||||
Income tax (expense) benefit | (1,279 | ) | (1,279 | ) | ||||||||||||||||
Income before minority interests | 36,548 | (1,203 | ) | 0 | (3,153 | ) | 32,192 | |||||||||||||
Minority interests | (62 | ) | 62 | 0 | ||||||||||||||||
Income from continuing operations | 36,486 | (1,203 | ) | 62 | (3,153 | ) | 32,192 | |||||||||||||
Discontinued operations: | ||||||||||||||||||||
Gain (loss) on sales of properties | 26 | 26 | ||||||||||||||||||
Income from discontinued operations, net | 87 | 3,153 | 3,240 | |||||||||||||||||
113 | 0 | 0 | 3,153 | 3,266 | ||||||||||||||||
Net income | 36,599 | (1,203 | ) | 62 | 0 | 35,458 | ||||||||||||||
Less: Preferred stock dividends | 6,147 | 6,147 | ||||||||||||||||||
Net income attributable to noncontrolling interests | 0 | 62 | 62 | |||||||||||||||||
Net income attributable to common stockholders | $ | 30,452 | $ | (1,203 | ) | $ | 0 | $ | 0 | $ | 29,249 | |||||||||
Average number of common shares outstanding: | ||||||||||||||||||||
Basic | 86,100 | 86,100 | 86,100 | 86,100 | 86,100 | |||||||||||||||
Diluted | 86,610 | 86,610 | 86,610 | 86,610 | 86,610 | |||||||||||||||
Earnings per share: | ||||||||||||||||||||
Basic: | ||||||||||||||||||||
Income from continuing operations attributable to common stockholders | $ | 0.35 | $ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | 0.30 | ||||||||
Discontinued operations, net | 0.00 | 0.00 | 0.00 | 0.04 | 0.04 | |||||||||||||||
Net income attributable to common stockholders | $ | 0.35 | $ | (0.01 | ) | $ | 0.00 | $ | 0.00 | $ | 0.34 | |||||||||
Diluted: | ||||||||||||||||||||
Income from continuing operations attributable to common stockholders | $ | 0.35 | $ | (0.01 | ) | $ | 0.00 | $ | (0.04 | ) | $ | 0.30 | ||||||||
Discontinued operations, net | 0.00 | 0.00 | 0.00 | 0.04 | 0.04 | |||||||||||||||
Net income attributable to common stockholders | $ | 0.35 | $ | (0.01 | ) | $ | 0.00 | $ | 0.00 | $ | 0.34 | |||||||||
19
Table of Contents
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the consolidated financial statements of Health Care REIT, Inc. for the periods presented and should be read together with the notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2008, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Executive Summary
Company Overview
Health Care REIT, Inc. is an equity real estate investment trust (“REIT”) that invests in senior housing and health care real estate. Founded in 1970, we were the first REIT to invest exclusively in health care facilities. The following table summarizes our portfolio as of March 31, 2009:
Investments | Percentage of | Number of | # Beds/Units | Investment per | ||||||||||||||||||||||||||||
Type of Property | (in thousands) | Investments | Properties | or Sq. Ft. | metric (1) | States | ||||||||||||||||||||||||||
Independent living/CCRCs | $ | 1,143,074 | 19.3 | % | 62 | 7,410 | units | $ | 172,012 | per unit | 20 | |||||||||||||||||||||
Assisted living facilities | 1,225,632 | 20.6 | % | 187 | 11,466 | units | 115,765 | per unit | 30 | |||||||||||||||||||||||
Skilled nursing facilities | 1,595,342 | 26.8 | % | 226 | 30,702 | beds | 52,460 | per bed | 27 | |||||||||||||||||||||||
Specialty care facilities | 583,616 | 9.8 | % | 28 | 1,629 | beds | 507,430 | per bed | 13 | |||||||||||||||||||||||
Medical office buildings | 1,395,181 | 23.5 | % | 129 | 5,667,516 | sq. ft. | 264 | per sq. ft. | 23 | |||||||||||||||||||||||
Totals | $ | 5,942,845 | 100.0 | % | 632 | |||||||||||||||||||||||||||
(1) | Investment per metric was computed by using the total committed investment amount of $6,535,360,000, which includes net real estate investments and unfunded construction commitments for which initial funding has commenced which amounted to $5,942,845,000 and $592,515,000, respectively. |
Health Care Industry
The demand for health care services, and consequently health care properties, is projected to reach unprecedented levels in the near future. The Centers for Medicare and Medicaid Services projects that national health expenditures will rise to $3.8 trillion in 2015 or 18.8% of gross domestic product (“GDP”). This is up from $2 trillion or 15.9% of GDP in 2005. Health expenditures per capita are projected to rise 5.8% per year from 2005 to 2015. While demographics are the primary driver of demand, economic conditions and availability of services contribute to health care service utilization rates. We believe the health care property market is less susceptible to fluctuations and economic downturns relative to other property sectors. Investor interest in the market remains strong, especially in specific sectors such as medical office buildings, regardless of the current stringent lending environment. As a REIT, we believe we are situated to benefit from any turbulence in the capital markets due to our access to capital.
The total U.S. population is projected to increase by 19% through 2030. The elderly are an important component of health care utilization, especially independent living services, assisted living services, skilled nursing services, inpatient and outpatient hospital services and physician ambulatory care. The elderly population aged 65 and over is projected to increase by 81% through 2030. Most health care services are provided within a health care facility such as a hospital, a physician’s office or a senior housing facility. Therefore, we believe there will be continued demand for companies such as ours with expertise in health care real estate.
20
Table of Contents
The following chart illustrates the projected increase in the elderly population aged 65 and over:
Source: U.S. Census Bureau
Health care real estate investment opportunities tend to increase as demand for health care services increases. We recognize the need for health care real estate as it correlates to health care service demand. Health care providers require real estate to house their businesses and expand their services. We believe that investment opportunities in health care real estate will continue to be present due to the:
• | Specialized nature of the industry which enhances the credibility and experience of our company; | ||
• | Projected population growth combined with stable or increasing health care utilization rates which ensures demand; and | ||
• | On-going merger and acquisition activity. |
Economic Outlook
Beginning in late 2007 and throughout 2008, the U.S. and global economy entered a serious recession. The current economic environment is characterized by a severe residential housing slump, depressed commercial real estate valuations, weakened consumer confidence, rising unemployment and concerns regarding inflation, deflation and stagflation. Numerous financial systems around the globe have become illiquid and banks have become less willing to lend to other banks and borrowers. Further, capital markets have become and remain volatile as risk is repriced and investments are revalued. Uncertainty remains in terms of the depth and duration of these adverse economic conditions.
The conditions described above have created an environment of limited capital availability and increasing capital costs. This was most evident in the credit markets, where lending institutions cut back on loans, tightened credit standards and significantly increased interest rate spreads. The equity markets were characterized by sporadic accessibility until late 2008, when share prices in most sectors declined significantly. Continued volatility in the capital markets could limit our ability to access debt or equity funds which, in turn, could impact our ability to finance future investments and react to changing economic and business conditions. This difficult operating environment also may make it more difficult for some of our operators/tenants to meet their obligations to us.
During 2008, our focus gradually shifted from investment to capital preservation. To that end, our efforts in 2009 will be directed towards: liquidity, portfolio management and investment rationalization.
• | Liquidity. Liquidity has become increasingly important and we have concentrated our efforts on further strengthening our balance sheet. We raised over $1 billion in funds during 2008 from a combination of three common stock offerings, our dividend reinvestment plan, our new equity shelf program, property sales and loan payoffs. We generated an additional $284.7 million from these sources during the three months ended March 31, 2009. As always, we will continue to closely monitor the credit and capital markets for opportunities to raise reasonably priced capital. | ||
• | Portfolio Management. Our investment approach has produced a portfolio that is very diverse with strong property level payment coverages. Yet, today’s adverse economic conditions can negatively impact even the strongest portfolio. Our portfolio management program is designed to maintain our portfolio’s strength through a combination of extensive industry research, stringent origination and underwriting protocols and a rigorous asset management process. | ||
• | Investment Strategy. For the short-term, we expect to fund our ongoing development projects and will evaluate new investments selectively and only when funding sources are clearly identified. However, we will continue to strengthen our existing customer relationships and begin to cultivate new relationships. As we begin 2009, we remain focused on preserving liquidity, but we intend to take advantage of what we believe will be increasingly attractive investment opportunities over time. |
21
Table of Contents
Business Strategy
Our primary objectives are to protect stockholder capital and enhance stockholder value. We seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments to stockholders as a result of annual increases in rental and interest income and portfolio growth. To meet these objectives, we invest across a broad spectrum of senior housing and health care real estate and diversify our investment portfolio by property type, operator/tenant and geographic location.
Substantially all of our revenues and sources of cash flows from operations are derived from operating lease rentals and interest earned on outstanding loans receivable. These items represent our primary source of liquidity to fund distributions and are dependent upon our obligors’ continued ability to make contractual rent and interest payments to us. To the extent that our obligors experience operating difficulties and are unable to generate sufficient cash to make payments to us, there could be a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a variety of methods determined by the type of property and operator/tenant. Our asset management process includes review of monthly financial statements, periodic review of obligor credit, periodic property inspections and review of covenant compliance relating to licensure, real estate taxes, letters of credit and other collateral. In monitoring our portfolio, our personnel use a proprietary database to collect and analyze property-specific data. Additionally, we conduct extensive research to ascertain industry trends and risks. Through these asset management and research efforts, we are typically able to intervene at an early stage to address payment risk, and in so doing, support both the collectibility of revenue and the value of our investment.
With respect to our investment properties, we also structure our investments to help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties and/or letters of credit. In addition, operating leases are typically structured as master leases and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases or agreements between us and the obligor and its affiliates.
For the three months ended March 31, 2009, rental income and interest income represented 92% and 7%, respectively, of total gross revenues (including revenues from discontinued operations). Substantially all of our operating leases are designed with either fixed or contingent escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectibility assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. Our yield on loans receivable depends upon a number of factors, including the stated interest rate, the average principal amount outstanding during the term of the loan and any interest rate adjustments.
Depending upon the availability and cost of external capital, we anticipate investing in additional properties. New investments are generally funded from temporary borrowings under our unsecured line of credit arrangement, internally generated cash and the proceeds from sales of real property. Our investments generate internal cash from rent and interest receipts and principal payments on loans receivable. Permanent financing for future investments, which replaces funds drawn under the unsecured line of credit arrangement, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence or assumption of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service obligations (both principal and interest), make dividend distributions and finance future investments.
Depending upon market conditions, we believe that new investments will be available in the future with spreads over our cost of capital that will generate appropriate returns to our stockholders. During the three months ended March 31, 2009, we completed $173,764,000 of gross investments and $44,268,000 of investment payoffs, resulting in $129,496,000 of net new investments. We expect to complete gross new investments of approximately $600,000,000 during 2009, comprised of funded new development. We anticipate the sale of real property and the repayment of loans receivable totaling approximately $200,000,000 to $300,000,000 resulting in net new investments of approximately $300,000,000 to $400,000,000 during 2009. It is possible that additional loan repayments or sales of real property may occur in the future. To the extent that loan repayments and real property sales exceed new investments, our revenues and cash flows from operations could be adversely affected. We expect to reinvest the proceeds from any loan repayments and real property sales in new investments. To the extent that new investment requirements exceed our available cash on hand, we expect to borrow under our unsecured line of credit arrangement. At March 31, 2009, we had $19,180,000 of cash and cash equivalents, $16,358,000 of restricted cash and $815,000,000 of available borrowing capacity under our unsecured line of credit arrangement.
22
Table of Contents
Key Transactions in 2009
We have completed the following key transactions to date in 2009:
• | our Board of Directors approved a quarterly cash dividend of $0.68 per share, which is consistent with the quarterly dividend paid for 2008. The dividend declared for the quarter ended March 31, 2009 represents the 152nd consecutive quarterly dividend payment; | ||
• | we completed $173,764,000 of gross investments and had $44,268,000 of investment payoffs during the three months ended March 31, 2009; | ||
• | we were added to the S&P 500 Index in January 2009; | ||
• | we closed a public offering of 5,816,870 shares of common stock with net proceeds of approximately $210,911,000 in February 2009; and | ||
• | we completed a $133,000,000 first mortgage loan secured by 12 senior housing properties with multiple levels of service in April 2009. The 10-year debt has a fixed interest rate of 6.10%. KeyBank Capital Markets, Inc. originated the loan and intends to sell it to Freddie Mac. |
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business. These indicators are discussed below and relate to operating performance, concentration risk and credit strength. Management uses these key performance indicators to facilitate internal and external comparisons to our historical operating results, in making operating decisions and for budget planning purposes.
Operating Performance. We believe that net income attributable to common stockholders (“NICS”) is the most appropriate earnings measure. Other useful supplemental measures of our operating performance include funds from operations (“FFO”) and net operating income (“NOI”); however, these supplemental measures are not defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion and reconciliations of FFO and NOI. These earnings measures and their relative per share amounts are widely used by investors and analysts in the valuation, comparison and investment recommendations of companies. The following table reflects the recent historical trends of our operating performance measures for the periods presented (in thousands, except per share data):
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
Net income attributable to common stockholders | $ | 29,249 | $ | 155,410 | $ | 53,589 | $ | 21,850 | $ | 61,119 | ||||||||||
Funds from operations | 68,710 | 76,785 | 82,573 | 30,799 | 85,322 | |||||||||||||||
Net operating income | 124,607 | 129,495 | 135,126 | 136,907 | 134,819 | |||||||||||||||
Per share data (fully diluted): | ||||||||||||||||||||
Net income attributable to common stockholders | $ | 0.34 | $ | 1.73 | $ | 0.55 | $ | 0.21 | $ | 0.56 | ||||||||||
Funds from operations | 0.79 | 0.85 | 0.85 | 0.30 | 0.79 |
Credit Strength. We measure our credit strength both in terms of leverage ratios and coverage ratios. Our leverage ratios include debt to book capitalization and debt to market capitalization. The leverage ratios indicate how much of our balance sheet capitalization is related to long-term debt. The coverage ratios indicate our ability to service interest and fixed charges (interest, secured debt principal amortization and preferred dividends). We expect to maintain capitalization ratios and coverage ratios sufficient to maintain investment grade ratings with Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings. The coverage ratios are based on earnings before interest, taxes, depreciation and amortization (“EBITDA”) which is discussed in further detail, and reconciled to net income, below in “Non-GAAP Financial Measures.” Leverage ratios and coverage ratios are widely used by investors, analysts and rating agencies in the valuation, comparison, investment recommendations and rating of companies. The following table reflects the recent historical trends for our credit strength measures for the periods presented:
23
Table of Contents
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
Debt to book capitalization ratio | 52 | % | 53 | % | 45 | % | 47 | % | 43 | % | ||||||||||
Debt to undepreciated book capitalization ratio | 47 | % | 49 | % | 41 | % | 43 | % | 39 | % | ||||||||||
Debt to market capitalization ratio | 39 | % | 41 | % | 31 | % | 38 | % | 41 | % | ||||||||||
Interest coverage ratio | 2.86 | x | 6.17 | x | 3.50 | x | 2.70 | x | 3.88 | x | ||||||||||
Fixed charge coverage ratio | 2.37 | x | 5.15 | x | 2.91 | x | 2.24 | x | 3.18 | x |
Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix, customer mix and geographic mix. Concentration risk is a valuable measure in understanding what portion of our investments could be at risk if certain sectors were to experience downturns. Asset mix measures the portion of our investments that are real property. In order to qualify as an equity REIT, at least 75% of our real estate investments must be real property whereby each property, which includes the land, buildings, improvements, intangibles and related rights, is owned by us and leased to a tenant pursuant to a long-term operating lease. Investment mix measures the portion of our investments that relate to our various property types. Customer mix measures the portion of our investments that relate to our top five customers. Geographic mix measures the portion of our investments that relate to our top five states. The following table reflects our recent historical trends of concentration risk for the periods presented:
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
Asset mix: | ||||||||||||||||||||
Real property | 92 | % | 91 | % | 91 | % | 92 | % | 92 | % | ||||||||||
Real estate loans receivable | 8 | % | 9 | % | 9 | % | 8 | % | 8 | % | ||||||||||
Investment mix: | ||||||||||||||||||||
Independent living/CCRCs | 16 | % | 17 | % | 18 | % | 19 | % | 19 | % | ||||||||||
Assisted living facilities | 21 | % | 21 | % | 20 | % | 20 | % | 21 | % | ||||||||||
Skilled nursing facilities | 31 | % | 29 | % | 28 | % | 27 | % | 27 | % | ||||||||||
Specialty care facilities | 7 | % | 10 | % | 10 | % | 11 | % | 10 | % | ||||||||||
Medical office buildings | 25 | % | 23 | % | 24 | % | 23 | % | 23 | % | ||||||||||
Customer mix: | ||||||||||||||||||||
Senior Living Communities, LLC | 4 | % | 5 | % | 6 | % | 6 | % | 6 | % | ||||||||||
Signature Healthcare LLC | 6 | % | 6 | % | 6 | % | 5 | % | 5 | % | ||||||||||
Brookdale Senior Living Inc | 5 | % | 5 | % | 5 | % | 5 | % | 5 | % | ||||||||||
Life Care Centers of America, Inc. | 5 | % | 5 | % | 5 | % | 5 | % | 5 | % | ||||||||||
Emeritus Corporation | 7 | % | 5 | % | 5 | % | 4 | % | 4 | % | ||||||||||
Remaining customers | 73 | % | 74 | % | 73 | % | 75 | % | 75 | % | ||||||||||
Geographic mix: | ||||||||||||||||||||
Florida | 15 | % | 14 | % | 14 | % | 14 | % | 14 | % | ||||||||||
Texas | 13 | % | 12 | % | 12 | % | 11 | % | 11 | % | ||||||||||
California | 7 | % | 8 | % | 8 | % | 8 | % | 8 | % | ||||||||||
Massachusetts | 7 | % | 7 | % | 7 | % | 7 | % | 7 | % | ||||||||||
Tennessee | 6 | % | 6 | % | 6 | % | 6 | % | 5 | % | ||||||||||
Remaining states | 52 | % | 53 | % | 53 | % | 54 | % | 55 | % |
We evaluate our key performance indicators in conjunction with current expectations to determine if historical trends are indicative of future results. Our expected results may not be achieved and actual results may differ materially from our expectations. Factors that may cause actual results to differ from expected results are described in more detail in “Forward-Looking Statements and Risk Factors” and other sections of this Quarterly Report on Form 10-Q. Management regularly monitors economic and other factors to develop strategic and tactical plans designed to improve performance and maximize our competitive position. Our ability to achieve our financial objectives is dependent upon our ability to effectively execute these plans and to appropriately respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008, under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of these risk factors.
24
Table of Contents
Portfolio Update
Net operating income. The primary performance measure for our properties is net operating income (“NOI”) as discussed below in “Non-GAAP Financial Measures.” The following table summarizes our net operating income for the periods indicated (in thousands):
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
Net operating income: | ||||||||||||||||||||
Investment properties | $ | 102,321 | $ | 107,515 | $ | 112,200 | $ | 114,773 | $ | 112,960 | ||||||||||
Medical office buildings | 22,076 | 21,865 | 22,351 | 21,341 | 21,483 | |||||||||||||||
Non-segment/corporate | 210 | 115 | 575 | 793 | 376 | |||||||||||||||
Net operating income | $ | 124,607 | $ | 129,495 | $ | 135,126 | $ | 136,907 | $ | 134,819 | ||||||||||
Payment coverage. Payment coverage of the operators in our investment property portfolio continues to remain strong. Our overall payment coverage is at 1.97 times. The table below reflects our recent historical trends of portfolio coverage. Coverage data reflects the 12 months ended for the periods presented. CBMF represents the ratio of our customers’ earnings before interest, taxes, depreciation, amortization, rent and management fees to contractual rent or interest due us. CAMF represents the ratio of our customers’ earnings before interest, taxes, depreciation, amortization and rent (but after imputed management fees) to contractual rent or interest due us.
December 31, 2006 | December 31, 2007 | December 31, 2008 | ||||||||||||||||||||||
CBMF | CAMF | CBMF | CAMF | CBMF | CAMF | |||||||||||||||||||
Independent living/CCRCs | 1.39x | 1.19x | 1.45x | 1.23x | 1.29x | 1.09x | ||||||||||||||||||
Assisted living facilities | 1.56x | 1.35x | 1.59x | 1.37x | 1.56x | 1.33x | ||||||||||||||||||
Skilled nursing facilities | 2.19x | 1.57x | 2.26x | 1.66x | 2.25x | 1.64x | ||||||||||||||||||
Specialty care facilities | 2.77x | 2.21x | 2.64x | 2.07x | 2.36x | 1.95x | ||||||||||||||||||
Weighted averages | 1.94x | 1.51x | 1.99x | 1.55x | 1.97x | 1.53x |
Corporate Governance
Maintaining investor confidence and trust has become increasingly important in today’s business environment. Our Board of Directors and management are strongly committed to policies and procedures that reflect the highest level of ethical business practices. Our corporate governance guidelines provide the framework for our business operations and emphasize our commitment to increase stockholder value while meeting all applicable legal requirements. These guidelines meet the listing standards adopted by the New York Stock Exchange and are available on our website at www.hcreit.com and from us upon written request sent to the Senior Vice President – Administration and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box 1475, Toledo, Ohio 43603-1475.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, borrowings under the unsecured line of credit arrangement, public and private offerings of debt and equity securities, proceeds from the sales of real property and principal payments on loans receivable. Our primary uses of cash include dividend distributions, debt service payments (including principal and interest), real property investments (including construction advances), loan advances and general and administrative expenses. These sources and uses of cash are reflected in our Consolidated Statements of Cash Flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
Cash and cash equivalents at beginning of period | $ | 23,370 | $ | 30,269 | $ | (6,899 | ) | -23 | % | |||||||
Cash provided from (used in) operating activities | 84,557 | 75,672 | 8,885 | 12 | % | |||||||||||
Cash provided from (used in) investing activities | 29,945 | (203,897 | ) | 233,842 | n/a | |||||||||||
Cash provided from (used in) financing activities | (118,692 | ) | 130,238 | (248,930 | ) | n/a | ||||||||||
Cash and cash equivalents at end of period | $ | 19,180 | $ | 32,282 | $ | (13,102 | ) | -41 | % | |||||||
Operating Activities. The change in net cash provided from operating activities is primarily attributable to an increase in net income, excluding gains on sales of properties and depreciation and amortization. The increase in net income is discussed below in “Results of Operations.”
25
Table of Contents
The following is a summary of our straight-line rent and above/below market lease amortization (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
Gross straight-line rental income | $ | 5,030 | $ | 5,336 | $ | (306 | ) | -6 | % | |||||||
Cash receipts due to real property sales | (1,705 | ) | 0 | (1,705 | ) | n/a | ||||||||||
Prepaid rent receipts | (6,184 | ) | (2,975 | ) | (3,209 | ) | 108 | % | ||||||||
Amortization related to above (below) market leases, net | 356 | 263 | 93 | 35 | % | |||||||||||
$ | (2,503 | ) | $ | 2,624 | $ | (5,127 | ) | n/a | ||||||||
Gross straight-line rental income represents the non-cash difference between contractual cash rent due and the average rent recognized pursuant to Statement of Financial Accounting Standards No. 13, Accounting for Leases (“SFAS 13”), for leases with fixed rental escalators, net of collectibility reserves. This amount is positive in the first half of a lease term (but declining every year due to annual increases in cash rent due) and is negative in the second half of a lease term. The fluctuation in cash receipts due to real property sales is attributable to the lack of straight-line rent receivable balances on properties sold during the three months ended March 31, 2008. The fluctuation in prepaid rent receipts is primarily due to an increase in prepaid rent received from certain of our construction projects.
Investing Activities. The changes in net cash used in investing activities are primarily attributable to net changes in real property and real estate loans receivable. The following is a summary of our investment and disposition activities (dollars in thousands):
Three Months Ended | ||||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | |||||||||||||||
Properties | Amount | Properties | Amount | |||||||||||||
Real property acquisitions: | ||||||||||||||||
Independent living/CCRCs | $ | 0 | 1 | $ | 11,800 | |||||||||||
Assisted living facilities | 0 | 1 | 4,600 | |||||||||||||
Specialty care facilities | 0 | 1 | 35,200 | |||||||||||||
Medical office buildings | 0 | 3 | 41,628 | |||||||||||||
Total acquisitions | 0 | 0 | 6 | 93,228 | ||||||||||||
Less: Assumed debt | 0 | 0 | ||||||||||||||
Assumed other assets (liabilities), net | 0 | (887 | ) | |||||||||||||
Cash disbursed for acquisitions | 0 | 92,341 | ||||||||||||||
Construction in progress additions | 152,127 | 72,141 | ||||||||||||||
Capital improvements to existing properties | 7,569 | 3,932 | ||||||||||||||
Total cash invested in real property | 159,696 | 168,414 | ||||||||||||||
Real property dispositions: | ||||||||||||||||
Assisted living facilities | 1 | 3,427 | 0 | |||||||||||||
Specialty care facilities | 2 | 40,841 | 0 | |||||||||||||
Land parcels | 0 | 73 | ||||||||||||||
Total dispositions | 3 | 44,268 | 0 | 73 | ||||||||||||
Less: Gain/(loss) on sales of real property | 17,036 | 26 | ||||||||||||||
Proceeds from real property sales | 61,304 | 99 | ||||||||||||||
Net cash investments in real property | (3 | ) | $ | 98,392 | 6 | $ | 168,315 | |||||||||
Advances on real estate loans receivable: | ||||||||||||||||
Investments in new loans | $ | 296 | $ | 391 | ||||||||||||
Draws on existing loans | 5,938 | 7,360 | ||||||||||||||
Total gross investments in real estate loans | 6,234 | 7,751 | ||||||||||||||
Less: Seller financing on sales of real property | 0 | 0 | ||||||||||||||
Net cash advances on real estate loans receivable | 6,234 | 7,751 | ||||||||||||||
Receipts on real estate loans receivable: | ||||||||||||||||
Loan payoffs | 0 | 0 | ||||||||||||||
Principal payments on loans | 8,402 | 2,081 | ||||||||||||||
Total principal receipts on real estate loans | 8,402 | 2,081 | ||||||||||||||
Net cash advances (receipts) on real estate loans receivable | $ | (2,168 | ) | $ | 5,670 | |||||||||||
26
Table of Contents
Financing Activities. The changes in net cash provided from or used in financing activities are primarily attributable to changes related to our long-term debt arrangements, proceeds from the issuance of common stock and dividend payments.
For the three months ended March 31, 2009, we had a net decrease of $235,000,000 on our unsecured line of credit arrangement as compared to a net increase of $125,500,000 for the same period in 2008. The changes in our senior unsecured notes are due to the extinguishment of $21,723,000 of various senior unsecured notes in March 2009 and the extinguishment of $42,330,000 of our 7.625% senior unsecured notes in March 2008. During the three months ended March 31, 2008, we extinguished four secured debt loans totaling $25,683,000 with a weighted-average interest rate of 7.214% and recognized extinguishment gains of $1,326,000.
The following is a summary of our common stock issuances (dollars in thousands, except per share amounts):
Shares Issued | Average Price | Gross Proceeds | Net Proceeds | |||||||||||||
March 2008 public issuance | 3,000,000 | $ | 41.44 | $ | 124,320 | $ | 118,555 | |||||||||
2008 Dividend reinvestment plan issuances | 452,440 | 40.88 | 18,496 | 18,496 | ||||||||||||
2008 Option exercises | 48,722 | 24.69 | 1,203 | 1,203 | ||||||||||||
2008 Totals | 3,501,162 | $ | 144,019 | $ | 138,254 | |||||||||||
February 2009 public issuance | 5,816,870 | $ | 36.85 | $ | 214,352 | $ | 210,911 | |||||||||
2009 Dividend reinvestment plan issuances | 375,813 | 33.21 | 12,482 | 12,482 | ||||||||||||
2008 Totals | 6,192,683 | $ | 226,834 | $ | 223,393 | |||||||||||
In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income (including 100% of capital gains) to our stockholders. The increase in dividends is primarily attributable to an increase in our common stock.
The following is a summary of our dividend payments (in thousands, except per share amounts):
Three Months Ended | ||||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | |||||||||||||||
Per Share | Amount | Per Share | Amount | |||||||||||||
Common Stock | $ | 0.6800 | $ | 75,986 | $ | 0.6600 | $ | 57,190 | ||||||||
Series D Preferred Stock | 0.4922 | 1,969 | 0.4922 | 1,969 | ||||||||||||
Series E Preferred Stock | 0.3750 | 28 | 0.3750 | 28 | ||||||||||||
Series F Preferred Stock | 0.4766 | 3,336 | 0.4766 | 3,336 | ||||||||||||
Series G Preferred Stock | 0.4688 | 191 | 0.4688 | 814 | ||||||||||||
Totals | $ | 81,510 | $ | 63,337 | ||||||||||||
Off-Balance Sheet Arrangements
At March 31, 2009, we had five outstanding letter of credit obligations totaling $5,090,000 and expiring between 2009 and 2013. Please see Note 11 to our unaudited consolidated financial statements for additional information.
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on the general trend in interest rates at the applicable dates, our perception of the future volatility of interest rates and our relative levels of variable rate debt and variable rate investments. Please see Note 10 to our unaudited consolidated financial statements for additional information.
27
Table of Contents
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of March 31, 2009 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Contractual Obligations | Total | 2009 | 2010-2011 | 2012-2013 | Thereafter | |||||||||||||||
Unsecured line of credit arrangement | $ | 335,000 | $ | 0 | $ | 335,000 | $ | 0 | $ | 0 | ||||||||||
Senior unsecured notes (1) | 1,823,277 | 0 | 0 | 538,277 | 1,285,000 | |||||||||||||||
Secured debt (1) | 446,172 | 37,451 | 67,434 | 75,908 | 265,379 | |||||||||||||||
Contractual interest obligations | 1,175,182 | 111,294 | 267,577 | 228,407 | 567,904 | |||||||||||||||
Capital lease obligations | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Operating lease obligations | 163,014 | 3,163 | 8,364 | 7,843 | 143,644 | |||||||||||||||
Purchase obligations | 598,566 | 130,537 | 465,004 | 3,025 | 0 | |||||||||||||||
Other long-term liabilities | 4,753 | 262 | 488 | 4,003 | 0 | |||||||||||||||
Total contractual obligations | $ | 4,545,964 | $ | 282,707 | $ | 1,143,867 | $ | 857,463 | $ | 2,261,927 | ||||||||||
(1) | Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. |
At March 31, 2009, we had an unsecured line of credit arrangement with a consortium of sixteen banks in the amount of $1.15 billion, which is scheduled to expire on August 5, 2011. Borrowings under the agreement are subject to interest payable in periods no longer than three months at either the agent bank’s prime rate of interest or the applicable margin over LIBOR interest rate, at our option (1.12% at March 31, 2009). The applicable margin is based on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.6% at March 31, 2009. In addition, we pay a facility fee annually to each bank based on the bank’s commitment amount. The facility fee depends on our ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services and was 0.15% at March 31, 2009. We also pay an annual agent’s fee of $50,000. Principal is due upon expiration of the agreement. At March 31, 2009, we had $335,000,000 outstanding under the unsecured line of credit arrangement and estimated total contractual interest obligations of $16,103,000. Contractual interest obligations are estimated based on the assumption that the balance of $335,000,000 at March 31, 2009 is constant until maturity at interest rates in effect at March 31, 2009.
We have $1,823,277,000 of senior unsecured notes principal outstanding with fixed annual interest rates ranging from 4.75% to 8%, payable semi-annually. Total contractual interest obligations on senior unsecured notes totaled $1,029,498,000 at March 31, 2009. Additionally, we have secured debt with total outstanding principal of $446,172,000, collateralized by owned properties, with fixed annual interest rates ranging from 4.89% to 8.08%, payable monthly. The carrying values of the properties securing the debt totaled $767,076,000 at March 31, 2009. Total contractual interest obligations on secured debt totaled $129,581,000 at March 31, 2009.
At March 31, 2009, we had operating lease obligations of $163,014,000 relating primarily to ground leases at certain of our properties and office space leases.
Purchase obligations are comprised of unfunded construction commitments and contingent purchase obligations. At March 31, 2009, we had outstanding construction financings of $763,982,000 for leased properties and were committed to providing additional financing of approximately $592,515,000 to complete construction. At March 31, 2009, we had contingent purchase obligations totaling $6,051,000. These contingent purchase obligations primarily relate to deferred acquisition fundings and capital improvements. Deferred acquisition fundings are contingent upon a tenant satisfying certain conditions in the lease. Upon funding, amounts due from the tenant are increased to reflect the additional investment in the property.
Other long-term liabilities relate to our Supplemental Executive Retirement Plan (“SERP”) and certain non-compete agreements. We have a SERP, a non-qualified defined benefit pension plan, which provides certain executive officers with supplemental deferred retirement benefits. The SERP provides an opportunity for participants to receive retirement benefits that cannot be paid under our tax-qualified plans because of the restrictions imposed by ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and length of service and the SERP is unfunded. No contributions by the company are anticipated for the 2009 fiscal year. Benefit payments are expected to total $4,003,000 during the next five fiscal years and no benefit payments are expected to occur during the succeeding five fiscal years. We use a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the SERP was $3,289,000 and $3,109,000 at March 31, 2009 and December 31, 2008, respectively.
In connection with the Windrose merger, we entered into consulting agreements with Fred S. Klipsch and Frederick L. Farrar, which expired in December 2008. We entered into a new consulting agreement with Mr. Farrar in December 2008, which expires in December 2009 and may be terminated at any time by Mr. Farrar. Each consultant has agreed not to compete with us for a period of two years following termination or expiration of the agreement. In exchange for complying with the covenant not to compete, Messers. Klipsch and Farrar will receive eight quarterly payments of $75,000 and $37,500, respectively, with the first payment to be made on the date of termination or expiration of the agreement. The first payment to Mr. Klipsch was made in December 2008.
28
Table of Contents
Capital Structure
As of March 31, 2009, we had stockholders’ equity of $3,450,607,000 and a total outstanding debt balance of $2,589,873,000, which represents a debt to total book capitalization ratio of 43%. Our ratio of debt to market capitalization was 41% at March 31, 2009. For the three months ended March 31, 2009, our interest coverage ratio was 3.88 to 1.00. For the three months ended March 31, 2009, our fixed charge coverage ratio was 3.18 to 1.00. Also, at March 31, 2009, we had $19,180,000 of cash and cash equivalents, $16,358,000 of restricted cash and $815,000,000 of available borrowing capacity under our unsecured line of credit arrangement. During the three months ended March 31, 2009, we completed one public offering of 5,816,870 shares of common stock with net proceeds of approximately $210,911,000.
Our debt agreements contain various covenants, restrictions and events of default. Among other things, these provisions require us to maintain certain financial ratios and minimum net worth and impose certain limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As of March 31, 2009, we were in compliance with all of the covenants under our debt agreements. Please refer to the section entitled “Non-GAAP Financial Measures” for further discussion. None of our debt agreements contain provisions for acceleration which could be triggered by our debt ratings with Moody’s Investors Service and Standard & Poor’s Ratings Services. However, under our unsecured line of credit arrangement, these ratings on our senior unsecured notes are used to determine the fees and interest charged.
As of April 30, 2009, our senior unsecured notes were rated Baa2 (stable), BBB- (stable) and BBB (stable) by Moody’s Investors Service, Standard & Poor’s Ratings Services and Fitch Ratings, respectively. We plan to manage the company to maintain investment grade status with a capital structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any or all of the noted rating agencies could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition.
On May 12, 2006, we filed an open-ended automatic or “universal” shelf registration statement with the Securities and Exchange Commission covering an indeterminate amount of future offerings of debt securities, common stock, preferred stock, depositary shares, warrants and units. As of April 30, 2009, we had an effective registration statement on file in connection with our enhanced dividend reinvestment plan under which we may issue up to 10,760,247 shares of common stock. As of April 30, 2009, 7,534,550 shares of common stock remained available for issuance under this registration statement. In November 2008, we entered into an Equity Distribution Agreement with UBS Securities LLC relating to the offer and sale from time to time of up to $250,000,000 aggregate amount of our common stock (“Equity Shelf Program”). We did not issue any shares of common stock under the Equity Shelf Program during the three months ended March 31, 2009. As of April 30, 2009, we had $218,804,000 of remaining capacity under the Equity Shelf Program. Depending upon market conditions, we anticipate issuing securities under our registration statements to invest in additional properties and to repay borrowings under our unsecured line of credit arrangement.
Results of Operations
Our primary sources of revenue include rent and interest. Our primary expenses include interest expense, depreciation and amortization, property operating expenses and general and administrative expenses. These revenues and expenses are reflected in our Consolidated Statements of Income and are discussed in further detail below. The following is a summary of our results of operations (dollars in thousands except per share amounts):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | Amount | % | |||||||||||||
Net income attributable to common stockholders | $ | 61,119 | $ | 29,249 | $ | 31,870 | 109 | % | ||||||||
Funds from operations | 85,322 | 68,710 | 16,612 | 24 | % | |||||||||||
EBITDA | 136,032 | 113,631 | 22,401 | 20 | % | |||||||||||
Net operating income | 134,819 | 124,607 | 10,212 | 8 | % | |||||||||||
Per share data (fully diluted): | ||||||||||||||||
Net income attributable to common stockholders | $ | 0.56 | $ | 0.34 | $ | 0.22 | 65 | % | ||||||||
Funds from operations | 0.79 | 0.79 | 0.00 | 0 | % | |||||||||||
Interest coverage ratio | 3.88 | x | 2.86 | x | 1.02 | x | 36 | % | ||||||||
Fixed charge coverage ratio | 3.18 | x | 2.37 | x | 0.81 | x | 34 | % |
We evaluate our business and make resource allocations on our two business segments — investment properties and medical office buildings. Under the investment property segment, properties are primarily leased under triple-net leases and we are not involved in the management of the property. Under the medical office building segment, our properties are typically leased under gross leases, modified gross leases or triple-net leases, to multiple tenants, and generally require a certain level of property management. There are no
29
Table of Contents
intersegment sales or transfers. Non-segment revenue consists mainly of interest income on non-real estate investments and other income. Non-property specific revenues and expenses are not allocated to individual segments in determining net operating income. Please see Note 16 to our unaudited consolidated financial statements for additional information.
Investment Properties
The following is a summary of our results of operations for the investment properties segment (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 100,293 | $ | 84,130 | $ | 16,163 | 19 | % | ||||||||
Interest income | 9,953 | 9,092 | 861 | 9 | % | |||||||||||
Other income | 895 | 1,296 | (401 | ) | -31 | % | ||||||||||
111,141 | 94,518 | 16,623 | 18 | % | ||||||||||||
Expenses: | ||||||||||||||||
Interest expense | 1,460 | 176 | 1,284 | 730 | % | |||||||||||
Depreciation and amortization | 28,769 | 24,118 | 4,651 | 19 | % | |||||||||||
Gain on extinguishment of debt | 0 | (40 | ) | 40 | -100 | % | ||||||||||
Provision for loan losses | 140 | 0 | 140 | n/a | ||||||||||||
30,369 | 24,254 | 6,115 | 25 | % | ||||||||||||
Income from continuing operations before income taxes | 80,772 | 70,264 | 10,508 | 15 | % | |||||||||||
Income tax expense | 0 | (1,350 | ) | 1,350 | -100 | % | ||||||||||
Income from continuing operations | 80,772 | 68,914 | 11,858 | 17 | % | |||||||||||
Discontinued operations: | ||||||||||||||||
Gain (loss) on sales of properties | 17,036 | 26 | 17,010 | 65423 | % | |||||||||||
Income (loss) from discontinued operations, net | 1,120 | 3,714 | (2,594 | ) | -70 | % | ||||||||||
Discontinued operations, net | 18,156 | 3,740 | 14,416 | 385 | % | |||||||||||
Net income | $ | 98,928 | $ | 72,654 | $ | 26,274 | 36 | % | ||||||||
The increase in rental income is primarily attributable to the acquisitions of new investment properties subsequent to March 31, 2008 from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenant’s properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If gross operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. Interest income increased from 2008 primarily due to an increase in the balance of outstanding loans.
Interest expense for the three months ended March 31, 2009 represents $1,644,000 of secured debt interest expense offset by interest allocated to discontinued operations. Interest expense for the three months ended March 31, 2008 represents $1,973,000 of secured debt interest expense offset by interest allocated to discontinued operations. The change in secured debt interest expense is due to the net effect and timing of assumptions, extinguishments and principal amortizations. During the three months ended March 31, 2008, we extinguished two investment property secured debt loans and recognized extinguishment gains of $40,000. The following is a summary of our investment property secured debt principal activity (dollars in thousands):
30
Table of Contents
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||
Weighted Avg. | Weighted Avg. | |||||||||||||||
Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Beginning balance | $ | 94,234 | 6.996 | % | $ | 114,543 | 7.000 | % | ||||||||
Debt extinguished | 0 | 0.000 | % | (4,750 | ) | 7.125 | % | |||||||||
Principal payments | (677 | ) | 6.982 | % | (700 | ) | 6.974 | % | ||||||||
Ending balance | $ | 93,557 | 6.996 | % | $ | 109,093 | 6.994 | % | ||||||||
Monthly averages | $ | 93,902 | 6.996 | % | $ | 111,817 | 6.997 | % |
Depreciation and amortization increased primarily as a result of the acquisitions of new investment properties subsequent to March 31, 2008. To the extent that we acquire or dispose of additional properties in the future, our provision for depreciation and amortization will change accordingly.
At March 31, 2009, we had five assisted living facilities that satisfied the requirements of Statement No. 144 for held for sale treatment. We did not recognize any impairment losses on these assets as the fair value less estimated costs to sell exceeded our carrying values. During the three months ended March 31, 2009, we sold two assisted living facilities and one specialty care facility with carrying values of $44,268,000 for net gains of $17,036,000. The following illustrates the reclassification impact as a result of classifying investment properties sold subsequent to January 1, 2008 or held for sale at March 31, 2009 as discontinued operations for the periods presented. Please refer to Note 5 to our unaudited consolidated financial statements for further discussion.
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Rental income | $ | 1,819 | $ | 7,803 | ||||
Expenses: | ||||||||
Interest expense | 184 | 1,797 | ||||||
Provision for depreciation | 515 | 2,292 | ||||||
Income (loss) from discontinued operations, net | $ | 1,120 | $ | 3,714 | ||||
As a result of our quarterly evaluations, we recorded a $140,000 addition to the allowance for loan losses during the three months ended March 31, 2009. The provision for loan losses is related to our critical accounting estimate for the allowance for loan losses and is discussed in “Critical Accounting Policies.”
During the three months ended December 31, 2007, we recognized $3,900,000 of additional other income related to the payoff of a warrant equity investment. During the three months ended March 31, 2008, we determined that $1,325,000 of income taxes were due in connection with that investment gain.
31
Table of Contents
Medical Office Buildings
The following is a summary of our results of operations for the medical office buildings segment (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenues: | ||||||||||||||||
Rental income | $ | 32,598 | $ | 31,695 | $ | 903 | 3 | % | ||||||||
Other income | 213 | 210 | 3 | 1 | % | |||||||||||
32,811 | 31,905 | 906 | 3 | % | ||||||||||||
Expenses: | ||||||||||||||||
Interest expense | 5,081 | 5,241 | (160 | ) | -3 | % | ||||||||||
Property operating expenses | 11,419 | 10,712 | 707 | 7 | % | |||||||||||
Depreciation and amortization | 12,042 | 12,228 | (186 | ) | -2 | % | ||||||||||
Gain on extinguishment of debt | 0 | (1,286 | ) | 1,286 | -100 | % | ||||||||||
28,542 | 26,895 | 1,647 | 6 | % | ||||||||||||
Income from continuing operations before income taxes | 4,269 | 5,010 | (741 | ) | -15 | % | ||||||||||
Income tax (expense) benefit | (144 | ) | (32 | ) | (112 | ) | 350 | % | ||||||||
Income from continuing operations | 4,125 | 4,978 | (853 | ) | -17 | % | ||||||||||
Discontinued operations: | ||||||||||||||||
Net gain on sales of properties | 0 | 0 | 0 | n/a | ||||||||||||
Income (loss) from discontinued operations, net | (41 | ) | (474 | ) | 433 | -91 | % | |||||||||
Discontinued operations, net | (41 | ) | (474 | ) | 433 | -91 | % | |||||||||
Net income | 4,084 | 4,504 | (420 | ) | -9 | % | ||||||||||
Less: Net income attributable to noncontrolling interests | 2 | 62 | (60 | ) | -97 | % | ||||||||||
Net income attributable to common stockholders | $ | 4,082 | $ | 4,442 | $ | (360 | ) | -8 | % | |||||||
The increase in rental income is primarily attributable to the acquisitions of medical office buildings subsequent to March 31, 2008 from which we receive rent. Certain of our leases contain annual rental escalators that are contingent upon changes in the Consumer Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental income is recorded based on the contractual cash rental payments due for the period. If the Consumer Price Index does not increase, a portion of our revenues may not continue to increase. Sales of real property would offset revenue increases and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases could renew above or below current rent rates, resulting in an increase or decrease in rental income. Other income is attributable to third party management fee income.
Interest expense for the three months ended March 31, 2009 represents $5,213,000 of secured debt interest expense offset by interest allocated to discontinued operations. Interest expense for the three months ended March 31, 2008 represents $5,662,000 of secured debt interest expense offset by interest allocated to discontinued operations. The change in secured debt interest expense is primarily due to the net effect and timing of assumptions, extinguishments and principal amortizations. During the three months ended March 31, 2008, we extinguished three medical office building secured debt loans and recognized extinguishment gains of $1,286,000. The following is a summary of our medical office building secured debt principal activity (dollars in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||
Weighted Avg. | Weighted Avg. | |||||||||||||||
Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Beginning balance | $ | 354,145 | 5.799 | % | $ | 392,430 | 5.854 | % | ||||||||
Debt extinguished | 0 | 0.000 | % | (20,933 | ) | 7.234 | % | |||||||||
Principal payments | (1,529 | ) | 5.760 | % | (1,393 | ) | 5.727 | % | ||||||||
Ending balance | $ | 352,616 | 5.799 | % | $ | 370,104 | 5.777 | % | ||||||||
Monthly averages | $ | 353,412 | 5.799 | % | $ | 381,272 | 5.817 | % |
The increase in property operating expenses is primarily attributable to the acquisition of new medical office buildings for which we incur certain property operating expenses offset by property operating expenses associated with discontinued operations.
Income tax expense is related to third party management fee income.
32
Table of Contents
Net income attributable to noncontrolling interests primarily relates to certain joint venture properties that are consolidated in our operating results. The decrease is due to our buyout of a noncontrolling interest subsequent to March 31, 2008.
At March 31, 2009, we had 14 medical office buildings that satisfied the requirements of Statement No. 144 for held for sale treatment. We did not recognize any impairment loss on these properties in 2009 as the fair value less estimated costs to sell exceeded our carrying values. During the year ended December 31, 2008, an impairment charge of $32,648,000 was recorded to reduce the carrying value of the 14 medical office buildings to their estimated fair value less costs to sell. In determining the fair value of the medical office buildings, we used a combination of third party appraisals based on market comparable transactions, other market listings and asset quality as well as management calculations based on projected operating income and published capitalization rates. Please see Note 4 of our Annual Report on Form 10-K for the year ended December 31, 2008 for additional information. The following illustrates the reclassification impact as a result of classifying medical office buildings sold subsequent to January 1, 2008 or held for sale at March 31, 2009 as discontinued operations for the periods presented. Please refer to Note 5 to our unaudited consolidated financial statements for further discussion.
Three Months Ended | ||||||||
March 31, | ||||||||
2009 | 2008 | |||||||
Rental income | $ | 655 | $ | 1,538 | ||||
Expenses: | ||||||||
Interest expense | 132 | 421 | ||||||
Property operating expenses | 564 | 655 | ||||||
Provision for depreciation | 0 | 936 | ||||||
Income (loss) from discontinued operations, net | $ | (41 | ) | $ | (474 | ) | ||
Non-Segment/Corporate
The following is a summary of our results of operations for the non-segment/corporate activities (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Revenues: | ||||||||||||||||
Other income | $ | 376 | $ | 210 | $ | 166 | 79 | % | ||||||||
Expenses: | ||||||||||||||||
Interest expense | 21,154 | 29,685 | (8,531 | ) | -29 | % | ||||||||||
General and administrative | 17,361 | 12,328 | 5,033 | 41 | % | |||||||||||
Gain on extinguishments of debt | (1,678 | ) | 0 | (1,678 | ) | n/a | ||||||||||
36,837 | 42,013 | (5,176 | ) | -12 | % | |||||||||||
Net loss from continuing operations before income taxes | (36,461 | ) | (41,803 | ) | 5,342 | -13 | % | |||||||||
Income tax (expense) benefit | 94 | 103 | (9 | ) | -9 | % | ||||||||||
Net loss | (36,367 | ) | (41,700 | ) | 5,333 | -13 | % | |||||||||
Preferred stock dividends | 5,524 | 6,147 | (623 | ) | -10 | % | ||||||||||
Net loss attributable to common stockholders | $ | (41,891 | ) | $ | (47,847 | ) | $ | 5,956 | -12 | % | ||||||
Other income primarily represents income from non-real estate activities such as interest earned on temporary investments of cash reserves.
33
Table of Contents
The following is a summary of our non-segment/corporate interest expense (dollars in thousands):
Three Months Ended | Change | |||||||||||||||
Mar. 31, 2009 | Mar. 31, 2008 | $ | % | |||||||||||||
Senior unsecured notes | $ | 27,705 | $ | 28,391 | $ | (686 | ) | -2 | % | |||||||
Unsecured lines of credit | 1,684 | 4,826 | (3,142 | ) | -65 | % | ||||||||||
Capitalized interest | (9,865 | ) | (5,167 | ) | (4,698 | ) | 91 | % | ||||||||
SWAP losses (savings) | (40 | ) | (40 | ) | 0 | 0 | % | |||||||||
Loan expense | 1,670 | 1,675 | (5 | ) | 0 | % | ||||||||||
Totals | $ | 21,154 | $ | 29,685 | $ | (8,531 | ) | -29 | % | |||||||
�� |
The change in interest expense on senior unsecured notes is due to the effect of extinguishments. The following is a summary of our senior unsecured note principal activity (dollars in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||
Face | Weighted Avg. | Face | Weighted Avg. | |||||||||||||
Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
Beginning balance | $ | 1,845,000 | 5.782 | % | $ | 1,887,330 | 5.823 | % | ||||||||
Principal payments | (21,723 | ) | 6.504 | % | (42,330 | ) | 7.625 | % | ||||||||
Ending balance | $ | 1,823,277 | 5.773 | % | $ | 1,845,000 | 5.782 | % | ||||||||
Monthly averages | $ | 1,839,569 | 5.780 | % | $ | 1,876,748 | 5.813 | % |
The change in interest expense on the unsecured line of credit arrangement is due primarily to the net effect and timing of draws, paydowns and variable interest rate changes. The following is a summary of our unsecured line of credit arrangement (dollars in thousands):
Three Months Ended March 31, | ||||||||
2009 | 2008 | |||||||
Balance outstanding at quarter end | $ | 335,000 | $ | 432,500 | ||||
Maximum amount outstanding at any month end | $ | 559,000 | $ | 491,500 | ||||
Average amount outstanding (total of daily principal balances divided by days in period) | $ | 417,000 | $ | 406,687 | ||||
Weighted average interest rate (actual interest expense divided by average borrowings outstanding) | 1.62 | % | 4.75 | % |
We capitalize certain interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the balances outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized.
Please see Note 10 to our unaudited consolidated financial statements for a discussion of our interest rate swap agreements and their impact on interest expense.
Loan expense represents the amortization of deferred loan costs incurred in connection with the issuance and amendments of debt. Loan expense for the three months ended March 31, 2009 is consistent with the prior year.
General and administrative expenses as a percentage of consolidated revenues (including revenues from discontinued operations) for the three months ended March 31, 2009 were 11.83% as compared with 9.07% for the same period in 2008. The increase from 2008 is primarily related to $3,909,000 of non-recurring expenses recognized during the three months ended March 31, 2009 in connection with the departure of Raymond W. Braun who formerly served as President of the company.
34
Table of Contents
The change in preferred dividends is primarily attributable to preferred stock conversions into common stock. The following is a summary of our preferred stock activity (dollars in thousands):
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2009 | March 31, 2008 | |||||||||||||||
Weighted Avg. | Weighted Avg. | |||||||||||||||
Shares | Dividend Rate | Shares | Dividend Rate | |||||||||||||
Beginning balance | 11,516,302 | 7.696 | % | 12,879,189 | 7.676 | % | ||||||||||
Shares converted | (40,600 | ) | 7.500 | % | (79,300 | ) | 7.500 | % | ||||||||
Ending balance | 11,475,702 | 7.697 | % | 12,799,889 | 7.677 | % | ||||||||||
Monthly averages | 11,500,602 | 7.697 | % | 12,825,564 | 7.676 | % |
35
Table of Contents
Non-GAAP Financial Measures
We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings measurement. However, we consider FFO to be a useful supplemental measure of our operating performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP implicitly assumes that the value of real estate assets diminishes predictably over time as evidenced by the provision for depreciation. However, since real estate values have historically risen or fallen with market conditions, many industry investors and analysts have considered presentations of operating results for real estate companies that use historical cost accounting to be insufficient. In response, the National Association of Real Estate Investment Trusts (“NAREIT”) created FFO as a supplemental measure of operating performance for REITs that excludes historical cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
Net operating income (“NOI”) is used to evaluate the operating performance of our properties. We define NOI as total revenues, including tenant reimbursements, less property level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments and interest expense. We believe NOI provides investors relevant and useful information because it measures the operating performance of our properties at the property level on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the property level performance of our properties.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. We believe that EBITDA, along with net income and cash flow provided from operating activities, is an important supplemental measure because it provides additional information to assess and evaluate the performance of our operations. We primarily utilize EBITDA to measure our interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured debt principal amortization and preferred dividends.
A covenant in our line of credit arrangement contains a financial ratio based on a definition of EBITDA that is specific to that agreement. Failure to satisfy this covenant could result in an event of default that could have a material adverse impact on our cost and availability of capital, which could in turn have a material adverse impact on our consolidated results of operations, liquidity and/or financial condition. Due to the materiality of this debt agreement and the financial covenant, we have disclosed Adjusted EBITDA, which represents EBITDA as defined above and adjusted for stock-based compensation expense, provision for loan losses and gain/loss on extinguishment of debt. We use Adjusted EBITDA to measure our adjusted fixed charge coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve months basis. Fixed charges include total interest (excluding capitalized interest and non-cash interest expenses), secured debt principal amortization and preferred dividends. Our covenant requires an adjusted fixed charge ratio of at least 1.75 times.
Other than Adjusted EBITDA, our supplemental reporting measures and similarly entitled financial measures are widely used by investors, equity and debt analysts and rating agencies in the valuation, comparison, rating and investment recommendations of companies. Management uses these financial measures to facilitate internal and external comparisons to our historical operating results and in making operating decisions. Additionally, these measures are utilized by the Board of Directors to evaluate management. Adjusted EBITDA is used solely to determine our compliance with a financial covenant of our line of credit arrangement and is not being presented for use by investors for any other purpose. None of our supplemental measures represent net income or cash flow provided from operating activities as determined in accordance with U.S. GAAP and should not be considered as alternative measures of profitability or liquidity. Finally, the supplemental measures, as defined by us, may not be comparable to similarly entitled items reported by other real estate investment trusts or other companies. Multi-period amounts may not equal the sum of the individual quarterly amounts due to rounding.
36
Table of Contents
The table below reflects the reconciliation of FFO to net income attributable to common stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The provisions for depreciation and amortization include provisions for depreciation and amortization from discontinued operations. Amounts are in thousands except for per share data.
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
FFO Reconciliation: | ||||||||||||||||||||
Net income attributable to common stockholders | $ | 29,249 | $ | 155,410 | $ | 53,589 | $ | 21,850 | $ | 61,119 | ||||||||||
Depreciation and amortization | 39,574 | 39,630 | 41,690 | 42,150 | 41,326 | |||||||||||||||
Loss (gain) on sales of properties | (26 | ) | (118,168 | ) | (12,619 | ) | (33,120 | ) | (17,036 | ) | ||||||||||
Noncontrolling interests | (87 | ) | (87 | ) | (87 | ) | (81 | ) | (87 | ) | ||||||||||
Funds from operations | $ | 68,710 | $ | 76,785 | $ | 82,573 | $ | 30,799 | $ | 85,322 | ||||||||||
Average common shares outstanding: | ||||||||||||||||||||
Basic | 86,100 | 89,294 | 96,040 | 103,329 | 108,214 | |||||||||||||||
Diluted | 86,610 | 89,853 | 96,849 | 103,840 | 108,624 | |||||||||||||||
Per share data: | ||||||||||||||||||||
Net income attributable to common stockholders | ||||||||||||||||||||
Basic | $ | 0.34 | $ | 1.74 | $ | 0.56 | $ | 0.21 | $ | 0.56 | ||||||||||
Diluted | 0.34 | 1.73 | 0.55 | 0.21 | 0.56 | |||||||||||||||
Funds from operations | ||||||||||||||||||||
Basic | $ | 0.80 | $ | 0.86 | $ | 0.86 | $ | 0.30 | $ | 0.79 | ||||||||||
Diluted | 0.79 | 0.85 | 0.85 | 0.30 | 0.79 |
The table below reflects the reconciliation of NOI for the periods presented. All amounts include amounts from discontinued operations, if applicable. Amounts are in thousands.
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
NOI Reconciliation: | ||||||||||||||||||||
Total revenues: | ||||||||||||||||||||
Investment properties: | ||||||||||||||||||||
Rental income: | ||||||||||||||||||||
Independent living/CCRCs | $ | 13,414 | $ | 14,881 | $ | 18,545 | $ | 19,562 | $ | 19,996 | ||||||||||
Assisted living facilities | 30,228 | 31,071 | 28,189 | 27,521 | 27,708 | |||||||||||||||
Skilled nursing facilities | 40,100 | 40,260 | 40,687 | 40,595 | 41,731 | |||||||||||||||
Specialty care facilities | 8,191 | 10,595 | 12,650 | 12,359 | 12,677 | |||||||||||||||
Investment property rental income | 91,933 | 96,807 | 100,071 | 100,037 | 102,112 | |||||||||||||||
Interest income | 9,092 | 9,175 | 10,910 | 10,886 | 9,953 | |||||||||||||||
Other income | 1,296 | 1,533 | 1,219 | 3,850 | 895 | |||||||||||||||
Total investment property revenues | 102,321 | 107,515 | 112,200 | 114,773 | 112,960 | |||||||||||||||
Medical office buildings: | ||||||||||||||||||||
Rental income | 33,233 | 33,003 | 33,958 | 33,138 | 33,253 | |||||||||||||||
Other income | 210 | 237 | 261 | 222 | 213 | |||||||||||||||
Total medical office building revenues | 33,443 | 33,240 | 34,219 | 33,360 | 33,466 | |||||||||||||||
Corporate other income | 210 | 115 | 575 | 793 | 376 | |||||||||||||||
Total revenues | 135,974 | 140,870 | 146,994 | 148,926 | 146,802 | |||||||||||||||
Property operating expenses: | ||||||||||||||||||||
Investment properties | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Medical office buildings | 11,367 | 11,375 | 11,868 | 12,019 | 11,983 | |||||||||||||||
Non-segment/corporate | 0 | 0 | 0 | 0 | 0 | |||||||||||||||
Total property operating expenses | 11,367 | 11,375 | 11,868 | 12,019 | 11,983 | |||||||||||||||
Net operating income: | ||||||||||||||||||||
Investment properties | 102,321 | 107,515 | 112,200 | 114,773 | 112,960 | |||||||||||||||
Medical office buildings | 22,076 | 21,865 | 22,351 | 21,341 | 21,483 | |||||||||||||||
Non-segment/corporate | 210 | 115 | 575 | 793 | 376 | |||||||||||||||
Net operating income | $ | 124,607 | $ | 129,495 | $ | 135,126 | $ | 136,907 | $ | 134,819 | ||||||||||
37
Table of Contents
The table below reflects the reconciliation of EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.
Three Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
EBITDA Reconciliation: | ||||||||||||||||||||
Net income | $ | 35,458 | $ | 161,259 | $ | 59,320 | $ | 27,389 | $ | 66,645 | ||||||||||
Interest expense | 37,320 | 36,155 | 35,354 | 32,230 | 28,011 | |||||||||||||||
Income tax expense (benefit) | 1,279 | 44 | (153 | ) | 136 | 50 | ||||||||||||||
Depreciation and amortization | 39,574 | 39,630 | 41,690 | 42,150 | 41,326 | |||||||||||||||
EBITDA | $ | 113,631 | $ | 237,088 | $ | 136,211 | $ | 101,905 | $ | 136,032 | ||||||||||
Interest Coverage Ratio: | ||||||||||||||||||||
Interest expense | $ | 37,320 | $ | 36,155 | $ | 35,354 | $ | 32,230 | $ | 28,011 | ||||||||||
Non-cash interest expense | (2,790 | ) | (2,769 | ) | (2,773 | ) | (2,899 | ) | (2,772 | ) | ||||||||||
Capitalized interest | 5,167 | 5,063 | 6,364 | 8,435 | 9,865 | |||||||||||||||
Total interest | 39,697 | 38,449 | 38,945 | 37,766 | 35,104 | |||||||||||||||
EBITDA | $ | 113,631 | $ | 237,088 | $ | 136,211 | $ | 101,905 | $ | 136,032 | ||||||||||
Interest coverage ratio | 2.86 | x | 6.17 | x | 3.50 | x | 2.70 | x | 3.88 | x | ||||||||||
Fixed Charge Coverage Ratio: | ||||||||||||||||||||
Total interest | $ | 39,697 | $ | 38,449 | $ | 38,945 | $ | 37,766 | $ | 35,104 | ||||||||||
Secured debt principal payments | 2,093 | 1,817 | 2,080 | 2,129 | 2,206 | |||||||||||||||
Preferred dividends | 6,147 | 5,784 | 5,730 | 5,541 | 5,524 | |||||||||||||||
Total fixed charges | 47,937 | 46,050 | 46,755 | 45,436 | 42,834 | |||||||||||||||
EBITDA | $ | 113,631 | $ | 237,088 | $ | 136,211 | $ | 101,905 | $ | 136,032 | ||||||||||
Fixed charge coverage ratio | 2.37 | x | 5.15 | x | 2.91 | x | 2.24 | x | 3.18 | x |
The table below reflects the reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for depreciation and amortization include discontinued operations. Dollars are in thousands.
Twelve Months Ended | ||||||||||||||||||||
March 31, | June 30, | September 30, | December 31, | March 31, | ||||||||||||||||
2008 | 2008 | 2008 | 2008 | 2009 | ||||||||||||||||
Adjusted EBITDA Reconciliation: | ||||||||||||||||||||
Net income | $ | 144,565 | $ | 274,047 | $ | 303,603 | $ | 283,425 | $ | 314,613 | ||||||||||
Interest expense | 149,056 | 150,031 | 147,596 | 141,059 | 131,750 | |||||||||||||||
Income tax expense (benefit) | 1,456 | 1,569 | 1,439 | 1,306 | 77 | |||||||||||||||
Depreciation and amortization | 155,339 | 159,422 | 160,975 | 163,045 | 164,797 | |||||||||||||||
Stock-based compensation expense | 7,723 | 7,853 | 8,024 | 8,530 | 11,360 | |||||||||||||||
Provision for loan losses | 0 | 0 | 0 | 94 | 234 | |||||||||||||||
Loss (gain) on extinguishment of debt | (2,407 | ) | (2,407 | ) | (3,175 | ) | (2,094 | ) | (2,446 | ) | ||||||||||
Adjusted EBITDA | $ | 455,732 | �� | $ | 590,515 | $ | 618,462 | $ | 595,365 | $ | 620,385 | |||||||||
Adjusted Fixed Charge Coverage Ratio: | ||||||||||||||||||||
Interest expense | $ | 149,056 | $ | 150,031 | $ | 147,596 | $ | 141,059 | $ | 131,750 | ||||||||||
Capitalized interest | 15,367 | 17,860 | 21,062 | 25,029 | 29,727 | |||||||||||||||
Non-cash interest expense | (9,752 | ) | (11,047 | ) | (11,325 | ) | (11,231 | ) | (11,214 | ) | ||||||||||
Secured debt principal payments | 8,149 | 8,066 | 8,137 | 8,119 | 8,232 | |||||||||||||||
Preferred dividends | 24,960 | 24,427 | 23,840 | 23,201 | 22,579 | |||||||||||||||
Total fixed charges | 187,780 | 189,337 | 189,310 | 186,177 | 181,074 | |||||||||||||||
Adjusted EBITDA | $ | 455,732 | $ | 590,515 | $ | 618,462 | $ | 595,365 | $ | 620,385 | ||||||||||
Adjusted fixed charge coverage ratio | 2.43 | x | 3.12 | x | 3.27 | x | 3.20 | x | 3.43 | x |
38
Table of Contents
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which requires us to make estimates and assumptions. Management considers an accounting estimate or assumption critical if:
• | the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and | ||
• | the impact of the estimates and assumptions on financial condition or operating performance is material. |
Management has discussed the development and selection of its critical accounting policies with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the disclosure presented below relating to them. Management believes the current assumptions and other considerations used to estimate amounts reflected in our consolidated financial statements are appropriate and are not reasonably likely to change in the future. However, since these estimates require assumptions to be made that were uncertain at the time the estimate was made, they bear the risk of change. If actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations, liquidity and/or financial condition. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 for further information regarding significant accounting policies that impact us. There have been no material changes to these policies in 2009. See Note 2 to our consolidated financial statements for the impact of new accounting pronouncements.
The following table presents information about our critical accounting policies, as well as the material assumptions used to develop each estimate:
Nature of Critical | Assumptions/Approach | |
Accounting Estimate | Used | |
Allowance for Loan Losses | ||
We maintain an allowance for loan losses in accordance with Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, as amended, and SEC Staff Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and Documentation Issues. The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in our loans receivable. The determination of the allowance is based on a quarterly evaluation of all outstanding loans. If this evaluation indicates that there is a greater risk of loan charge-offs, additional allowances or placement on non-accrual status may be required. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due as scheduled according to the contractual terms of the original loan agreement. Consistent with this definition, all loans on non-accrual are deemed impaired. To the extent circumstances improve and the risk of collectibility is diminished, we will return these loans to full accrual status. | The determination of the allowance is based on a quarterly evaluation of all outstanding loans, including general economic conditions and estimated collectibility of loan payments and principal. We evaluate the collectibility of our loans receivable based on a combination of factors, including, but not limited to, delinquency status, historical loan charge-offs, financial strength of the borrower and guarantors and value of the underlying property. As a result of our quarterly evaluations, we recorded a $140,000 addition to the allowance for loan losses during the three months ended March 31, 2009 , resulting in an allowance for loan losses of $7,640,000 relating to loans with outstanding balances of $121,363,000. Also at March 31, 2009, we had loans with outstanding balances of $72,721,000 on non-accrual status. |
39
Table of Contents
Nature of Critical | Assumptions/Approach | |
Accounting Estimate | Used | |
Business Combinations | ||
Substantially all of the properties owned by us are leased under operating leases and are recorded at cost. The cost of our real property is allocated to land, buildings, improvements and intangibles in accordance with Statement of Financial Accounting Standards No. 141(R), Business Combinations adopted for business combinations subsequent to January 1, 2009. | We compute depreciation and amortization on our properties using the straight-line method based on their estimated useful lives which range from 15 to 40 years for buildings and five to 15 years for improvements. Lives for intangibles are based on the remaining term of the underlying leases. For the three months ended March 31, 2009, we recorded $30,645,000, $8,201,000 and $2,480,000 as provisions for depreciation and amortization relating to buildings, improvements and intangibles, respectively, including amounts reclassified as discontinued operations. The average useful life of our buildings, improvements and intangibles was 35.5 years, 10.9 years and 8.5 years, respectively, for the three months ended March 31, 2009. | |
Impairment of Long-Lived Assets | ||
We review our long-lived assets for potential impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets. An impairment charge must be recognized when the carrying value of a long-lived asset is not recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If it is determined that a permanent impairment of a long-lived asset has occurred, the carrying value of the asset is reduced to its fair value and an impairment charge is recognized for the difference between the carrying value and the fair value. | The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if there are indicators of impairment. These indicators may include anticipated operating losses at the property level, the tenant’s inability to make rent payments, a decision to dispose of an asset before the end of its estimated useful life and changes in the market that may permanently reduce the value of the property. If indicators of impairment exist, then the undiscounted future cash flows from the most likely use of the property are compared to the current net book value. This analysis requires us to determine if indicators of impairment exist and to estimate the most likely stream of cash flows to be generated from the property during the period the property is expected to be held. We did not record any impairment charges for the three months ended March 31, 2009. | |
Fair Value of Derivative Instruments | ||
The valuation of derivative instruments is accounted for in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS133”), as amended by Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. SFAS133, as amended, requires companies to record derivatives at fair market value on the balance sheet as assets or liabilities. | The valuation of derivative instruments requires us to make estimates and judgments that affect the fair value of the instruments. Fair values for our derivatives are estimated by utilizing pricing models that consider forward yield curves and discount rates. Such amounts and the recognition of such amounts are subject to significant estimates which may change in the future. We were not party to any derivative instruments at March 31, 2009. |
40
Table of Contents
Nature of Critical | Assumptions/Approach | |
Accounting Estimate | Used | |
Revenue Recognition | ||
Revenue is recorded in accordance with Statement of Financial Accounting Standards No. 13, Accounting for Leases, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, as amended (“SAB104”). SAB104 requires that revenue be recognized after four basic criteria are met. These four criteria include persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility. If the collectibility of revenue is determined incorrectly, the amount and timing of our reported revenue could be significantly affected. Interest income on loans is recognized as earned based upon the principal amount outstanding subject to an evaluation of collectibility risk. Substantially all of our operating leases contain fixed and/or contingent escalating rent structures. Leases with fixed annual rental escalators are generally recognized on a straight-line basis over the initial lease period, subject to a collectibility assessment. Rental income related to leases with contingent rental escalators is generally recorded based on the contractual cash rental payments due for the period. | We evaluate the collectibility of our revenues and related receivables on an on-going basis. We evaluate collectibility based on assumptions and other considerations including, but not limited to, the certainty of payment, payment history, the financial strength of the investment’s underlying operations as measured by cash flows and payment coverages, the value of the underlying collateral and guaranties and current economic conditions. If our evaluation indicates that collectibility is not reasonably assured, we may place an investment on non-accrual or reserve against all or a portion of current income as an offset to revenue. For the three months ended March 31, 2009, we recognized $9,953,000 of interest income and $135,365,000 of rental income, including discontinued operations. Cash receipts on leases with deferred revenue provisions were $7,889,000 as compared to gross straight-line rental income recognized of $5,030,000 for the three months ended March 31, 2009. At March 31, 2009, our straight-line receivable balance was $42,104,000, net of reserves totaling $251,000. Also at March 31, 2009, we had loans with outstanding balances of $72,721,000 on non-accrual status. |
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q may contain “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are based upon, among other things, the possible expansion of the company’s portfolio; the sale of properties; the performance of its operators and properties; its occupancy rates; its ability to acquire or develop properties; its ability to manage properties; its ability to enter into agreements with viable new tenants for vacant space or for properties that the company takes back from financially troubled tenants, if any; its ability to make distributions; its policies and plans regarding investments, financings and other matters; its tax status as a real estate investment trust; its ability to appropriately balance the use of debt and equity; its ability to access capital markets or other sources of funds; its critical accounting policies; and its ability to meet its earnings guidance. When the company uses words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “project,” “estimate” or similar expressions, it is making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The company’s expected results may not be achieved, and actual results may differ materially from expectations. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including availability and cost of capital; issues facing the health care industry, including compliance with, and changes to, regulations and payment policies; operators’/tenants’ difficulty in cost-effectively obtaining and maintaining adequate liability and other insurance; changes in financing terms; competition within the health care and senior housing industries; negative developments in the operating results or financial condition of operators/tenants, including, but not limited to, their ability to pay rent and repay loans; the company’s ability to transition or sell facilities with profitable results; the failure to make new investments as and when anticipated; the failure of closings to occur as and when anticipated; acts of God affecting the company’s properties; the company’s ability to re-lease space at similar rates as vacancies occur; the company’s ability to timely reinvest sale proceeds at similar rates to assets sold; operator/tenant bankruptcies or insolvencies; government regulations affecting Medicare and Medicaid reimbursement rates and operational requirements; liability or contract claims by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future acquisitions; environmental laws affecting the company’s properties; changes in rules or practices governing the company’s financial reporting; and legal and operational matters, including real estate investment trust qualification and key management personnel recruitment and retention. Other important factors are identified in the company’s Annual Report on Form 10-K for the year ended December 31, 2008, including factors identified under the headings “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Finally, the company assumes no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements.
41
Table of Contents
Item 3.Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. We may or may not elect to use financial derivative instruments to hedge interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. This section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates.
We historically borrow on our unsecured line of credit arrangement to acquire, construct or make loans relating to health care and senior housing properties. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under the unsecured line of credit arrangement.
A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt instruments whereby we modeled the change in net present values arising from a hypothetical 1% increase in interest rates to determine the instruments’ change in fair value. The following table summarizes the analysis performed as of the dates indicated (in thousands):
March 31, 2009 | December 31, 2008 | |||||||||||||||
Principal | Change in | Principal | Change in | |||||||||||||
balance | fair value | balance | fair value | |||||||||||||
Senior unsecured notes | $ | 1,823,277 | $ | (100,361 | ) | $ | 1,845,000 | $ | (112,438 | ) | ||||||
Secured debt | 446,172 | (17,943 | ) | 448,378 | (17,966 | ) | ||||||||||
Totals | $ | 2,269,449 | $ | (118,304 | ) | $ | 2,293,378 | $ | (130,404 | ) | ||||||
On September 12, 2007, we entered into two forward-starting interest rate swaps (the “September 2007 Swaps”) for a total notional amount of $250,000,000 to hedge 10 years of interest payments associated with a long-term borrowing that was expected to occur in 2008. The September 2007 Swaps each had an effective date of September 12, 2008 and a maturity date of September 12, 2018. We expected to settle the 2007 Swaps when the debt was to be priced. The September 2007 Swaps were to have the economic effect of fixing $250,000,000 of our future debt at 4.469% plus a credit spread for 10 years. The September 2007 Swaps had been designated as cash flow hedges and we expected the 2007 Swaps to be highly effective at offsetting changes in cash flows of interest payments on $250,000,000 of our future debt due to changes in the LIBOR swap rate. Therefore, effective changes in the fair value of the September 2007 Swaps were recorded in AOCI and were to be reclassified to interest expense when the hedged forecasted transactions affected earnings (as interest payments are made on the expected debt issuance). The ineffective portion of the changes in fair value was to be recorded directly in earnings. During the year ended December 31, 2008, as a result of the severe dislocation in the credit markets, we terminated plans to issue debt and also terminated the September 2007 Swaps for $23,393,000. Amounts previously recorded in AOCI were reclassified to realized loss on derivatives resulting in $23,393,000 of expense as the forecasted transaction was no longer probable to occur.
Our variable rate debt, including our unsecured line of credit arrangement, is reflected at fair value. At March 31, 2009, we had $335,000,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would result in increased annual interest expense of $3,350,000. At December 31, 2008, we had $570,000,000 outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in interest rates would have resulted in increased annual interest expense of $5,700,000.
We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited.
42
Table of Contents
Item 4.Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by us in the reports we file with or submit to the Securities and Exchange Commission (“SEC”) under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. No changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A.Risk Factors
Except as provided in “Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements and Risk Factors,” there have been no material changes from the risk factors identified under the heading “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES (1)
Total Number | Maximum Number | |||||||||||||||
of Shares Purchased | of Shares that May | |||||||||||||||
Total Number | as Part of Publicly | Yet Be Purchased | ||||||||||||||
of Shares | Average Price | Announced | Under the Plans or | |||||||||||||
Period | Purchased (2) | Paid Per Share | Plans or Programs (3) | Programs | ||||||||||||
January 1, 2009 through January 31, 2009 | 64,103 | $ | 37.60 | |||||||||||||
February 1, 2009 through February 28, 2009 | ||||||||||||||||
March 1, 2009 through March 31, 2009 | 683 | $ | 32.89 | |||||||||||||
Totals | 64,786 | $ | 37.55 |
(1) | In March 2009, the company purchased $5,000,000 of senior unsecured convertible notes due December 2026 and $5,000,000 of senior unsecured convertible notes due July 2027, which would have been convertible into cash in the future, and under certain circumstances, shares of our common stock. | |
(2) | During the three months ended March 31, 2009, the company acquired shares of common stock held by employees who tendered owned shares to satisfy the tax withholding on the lapse of certain restrictions on restricted stock. | |
(3) | No shares were purchased as part of publicly announced plans or programs. |
43
Table of Contents
Item 6.Exhibits
10.1 | Employment Agreement, dated January 19, 2009, between Health Care REIT, Inc. and John T. Thomas (filed with the SEC as Exhibit 10.10 to Health Care REIT, Inc.’s Form 10-K filed March 2, 2009, and incorporated herein by reference thereto). | ||
10.2 | Consulting Agreement, dated February 1, 2009, between Health Care REIT, Inc. and Raymond W. Braun (filed with the SEC as Exhibit 10.15(a) to Health Care REIT, Inc.’s Form 10-K filed March 2, 2009, and incorporated herein by reference thereto). | ||
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. | ||
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. | ||
32.1 | Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. | ||
32.2 | Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. |
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 hereunto duly authorized.
HEALTH CARE REIT, INC. | ||||||
Date: May 7, 2009 | By: | /s/George L. Chapman | ||||
George L. Chapman, | ||||||
Chairman, Chief Executive Officer and President | ||||||
(Principal Executive Officer) | ||||||
Date: May 7, 2009 | By: | /s/Scott A. Estes | ||||
Scott A. Estes, | ||||||
Executive Vice President and Chief Financial Officer | ||||||
(Principal Financial Officer) | ||||||
Date: May 7, 2009 | By: | /s/ Paul D. Nungester, Jr. | ||||
Paul D. Nungester, Jr., | ||||||
Vice President and Controller | ||||||
(Principal Accounting Officer) |
44