UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended September 30, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.For the transition period from ..... to .......
Commission file number 1-8895
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HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
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Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
(949) 221-0600
(Registrant's telephone number, including area code)
----------------------
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 such
filing requirements for the past 90 days: Yes [X] No[ ]
As of November 12, 1998 there were 30,986,736 shares of $1.00 par
value common stock outstanding.
1
HEALTH CARE PROPERTY INVESTORS, INC.
INDEX
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 . . . . . . . . . . . . 2
Condensed Consolidated Statements of Income
Nine Months and Three Months Ended September 30, 1998 and 1997 . 3
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997. . . . . . . . . . 4
Notes to Condensed Consolidated Financial Statements . . . . . . 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 11
PART II. OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2
HEALTH CARE PROPERTY INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
September 30, December 31,
1998 1997
--------------- ---------------
Assets
Real Estate Investments
Buildings and Improvements $ 983,284 $ 837,857
Accumulated Depreciation (188,796) (170,502)
---------- ----------
794,488 667,355
Construction in Progress 19,517 19,627
Land 131,112 99,520
---------- ----------
945,117 786,502
Loans Receivable 145,471 125,381
Investments in and Advances to Joint Ventures 50,377 14,241
Other Assets 15,300 10,756
Cash and Cash Equivalents 83,027 4,084
---------- ----------
Total Assets $1,239,292 $ 940,964
========== ==========
Liabilities and Stockholders' Equity
Bank Notes Payable $ --- $ 66,900
Senior Notes Payable 471,020 275,023
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 14,910 10,935
Accounts Payable, Accrued Liabilities and Deferred Income 39,661 23,492
Minority Interests in Joint Ventures 20,830 22,345
Stockholders' Equity:
Preferred Stock 187,847 57,810
Common Stock 30,972 30,216
Additional Paid-In Capital 432,972 408,924
Cumulative Net Income 504,860 444,759
Cumulative Dividends (563,780) (499,440)
---------- ---------
Total Stockholders' Equity 592,871 442,269
---------- ----------
Total Liabilities and Stockholders' Equity $1,239,292 $ 940,964
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
HEALTH CARE PROPERTY INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
Revenue
Base Rental Income $ 30,075 $ 23,567 $ 83,647 $ 68,337
Additional Rental and Interest Income 5,483 5,208 16,339 15,821
Interest and Other Income 6,608 3,532 16,462 10,767
--------- --------- --------- ---------
42,166 32,307 116,448 94,925
--------- --------- --------- ---------
Expense
Interest Expense 10,291 7,447 26,727 21,407
Depreciation/Non Cash Charges 8,366 6,521 23,750 19,056
Facility Operating Expenses 1,466 --- 3,211 ---
Other Expenses 2,488 1,875 6,292 5,511
--------- --------- --------- ---------
22,611 15,843 59,980 45,974
--------- --------- --------- ---------
Income From Operations 19,555 16,464 56,468 48,951
Minority Interests (889) (845) (3,109) (2,866)
Gain on Sale of Real Estate Properties 6,230 --- 6,742 2,047
--------- --------- --------- ---------
Net Income $ 24,896 $ 15,619 $ 60,101 $ 48,132
Dividends to Preferred Stockholders (2,060) (66) (4,422) (66)
--------- --------- --------- ---------
Net Income Applicable to Common Shares $ 22,836 $ 15,553 $ 55,679 $ 48,066
========= ========= ========= =========
Basic Earnings Per Common Share $ 0.74 $ 0.54 $ 1.82 $ 1.67
========= ========= ========= =========
Diluted Earnings Per Common Share $ 0.72 $ 0.54 $ 1.81 $ 1.66
========= ========= ========= =========
Weighted Average Shares
Outstanding - Basic 30,965 28,721 30,666 28,711
========= ========= ========= =========
Weighted Average Shares
Outstanding - Diluted 33,869 28,940 33,601 28,895
========= ========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
HEALTH CARE PROPERTY INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months
Ended September 30,
---------------------------
1998 1997
------------ ------------
Cash Flows From Operating Activities:
Net Income $ 60,101 $ 48,132
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Real Estate Depreciation 21,403 16,664
Non Cash Charges 2,301 2,392
Joint Venture Adjustments 233 (552)
Gain on Sale of Real Estate Properties (6,742) (2,047)
Changes in:
Operating Assets (1,974) (1,550)
Operating Liabilities 14,973 4,400
-------- --------
Net Cash Provided By Operating Activities 90,295 67,439
======== ========
Cash Flows From Investing Activities:
Acquisition of Real Estate (185,594) (96,456)
Assumption of Debt on Acquisition of Real Estate 5,065 ---
Proceeds from Sale of Real Estate Properties 11,703 8,624
Advances to Joint Ventures/Partnerships (36,583) ---
Other Investments and Loans (21,248) 1,084
-------- --------
Net Cash Used In Investing Activities (226,657) (86,748)
======== ========
Cash Flows From Financing Activities:
Net (Decrease) Increase in Bank Notes Payable (66,900) 7,400
Repayment of Senior Notes Payable (22,500) (12,500)
Issuance of Senior Notes Payable 218,154 19,876
Cash Proceeds from Issuing Preferred Stock 130,037 57,810
Cash Proceeds from Issuing Common Stock 23,566 416
Decrease in Minority Interests (1,000) ---
Periodic Payments on Mortgages (761) (722)
Dividends Paid (64,340) (52,548)
Other Financing Activities (951) (214)
-------- --------
Net Cash Provided By Financing Activities 215,305 19,518
======== ========
Net Increase In Cash And Cash Equivalents 78,943 209
Cash And Cash Equivalents, Beginning Of Period 4,084 2,811
--------- --------
Cash And Cash Equivalents, End Of Period $ 83,027 $ 3,020
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
5
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
We, the management of Health Care Property Investors, Inc., believe that the
unaudited financial information contained in this report reflects all
adjustments that are necessary to state fairly the financial position, the
results of operations, and cash flows of the Company. The Company is defined as
Health Care Property Investors, Inc. and its affiliated subsidiaries and joint
ventures. We presume that users of this interim financial information have read
or have access to the audited financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the preceding
fiscal year ended December 31, 1997. Therefore, notes to the financial
statements and other disclosures that would repeat the disclosures contained in
our most recent annual report to security holders have been omitted. This
interim financial information does not necessarily represent a full year's
operations for various reasons including acquisitions, changes in rents and
interest rates, and the timing of debt and equity financings.
Facility Operations:
During 1997 and 1998, we purchased 90 - 100 percent ownership interests in nine
medical office buildings ("MOBs") that are operated by independent property
management companies on our behalf. We lease these facilities to multiple
tenants under gross or triple net leases. Any income relating to these
properties, other than rental income, is recorded as facility operating revenue
and is included in Interest and Other Income. Expenses related to the operation
of these facilities are recorded as Facility Operating Expenses.
Reclassifications:
We have made reclassifications, where necessary, for comparative financial
statement presentations.
(2) MAJOR OPERATORS
Listed below are the Company's major operators and the percentage of annualized
revenue from these operators and their subsidiaries. Each of these operators is
subject to the informational filing requirements of the Securities Exchange Act
of 1934, as amended, and accordingly file periodic financial statements on Form
10-K and 10-Q with the Securities and Exchange Commission. We obtained all of
the financial and other information discussed below from these filings or from
other publicly available information.
6
Percentage of
Annualized Annualized
Operators Revenue Total Revenue
- ------------ ------------- -----------------
(in thousands)
HealthSouth Corporation $ 12,134 7%
Vencor, Inc. ("New Vencor") 11,949 7
Emeritus Corporation 11,164 7
Centennial Healthcare Corporation 8,917 5
Columbia/HCA Healthcare Corp. 8,214 5
Tenet Healthcare Corporation ("Tenet") 7,762 5
On May 1, 1998, Vencor, Inc. ("Old Vencor") completed a spinoff transaction
pursuant to which it became two publicly held entities-Ventas, Inc. ("Ventas"),
a real estate company which intends to qualify as a REIT, and New Vencor, a
healthcare company. New Vencor currently leases 40 of the Company's properties,
of which 17 are leased to various sublessees. Both Ventas and New Vencor are
responsible for payments due under the New Vencor leases and substantially all
of the New Vencor leases are guaranteed by Tenet.
Based upon public reports, Old Vencor's revenue and net income for the year
ended December 31, 1997 were approximately $3.1 billion and $130.9 million,
respectively; Old Vencor's total assets and stockholders' equity as of December
31, 1997 were approximately $3.3 billion and $905.4 million, respectively.
Based upon a recent press release issued by New Vencor, for the three months
ended September 30, 1998, New Vencor had revenue of approximately $718.1 million
and a net loss, excluding non-recurring transactions, of approximately $1.1
million. For the nine months ended September 30, 1998, New Vencor had revenue
of approximately $2.3 billion and a net loss (including an extraordinary loss
of $77.9 million) of approximately $44.9 million.
Based upon a recent press release issued by Ventas, Ventas' revenue, income from
operations and net income for the three months ended September 30, 1998 were
approximately $56.2 million, $13.0 million and $12.9 million, respectively. As
of September 30, 1998, Ventas had total assets of $960.0 million and a
stockholders' deficit of $24.2 million.
Tenet leases and those guaranteed by Tenet represented approximately 16% of the
Company's total annualized revenue as of September 30, 1998. During 1998, 14 of
the New Vencor leases that were guaranteed by Tenet expired. All of the related
properties have been re-leased, have agreements to re-lease in place with other
operators, or have other agreements in principle and will no longer be
guaranteed by Tenet.
Based upon a recent press release issued by Emeritus, for the three months ended
September 30, 1998, Emeritus had revenue of approximately $39.0 million and a
net loss of approximately $7.1 million. For the nine months ended September 30,
1998, Emeritus had revenue of $110.8 million and a net loss of $25.0 million.
Based upon public reports, as of June 30, 1998, Emeritus had total assets of
$212.0 million and a stockholders' deficit of $26.9 million.
7
(3) GAIN ON SALE OF REAL ESTATE
The Company sold three facilities and a partnership interest in another
facility during the third quarter, resulting in a gain of $6,230,000.
In addition, three financing leases and a mortgage loan receivable
were paid off.
(4) ISSUANCE OF PREFERRED STOCK
On September 4, 1998, the Company issued 5,385,000 shares of 8.70% Series B
Cumulative Redeemable Preferred Stock which generated net proceeds of
$130,000,000 (net of underwriters' discount and other offering expenses).
Dividends on the Preferred Stock are payable quarterly in arrears in March,
June, September and December, commencing with the quarter ending September 30,
1998. The Preferred Stock is not redeemable prior to September 30, 2003, after
which date the Preferred Stock may be redeemable at par ($25 per share or
$134,625,000 in the aggregate) any time for cash at the option of the Company.
The Preferred Stock has no stated maturity, will not be subject to any sinking
fund or mandatory redemption and is not convertible into any other securities of
the Company. The proceeds were used to pay off short-term bank debt. The
remainder was invested in short-term investments pending future acquisition and
development activity.
(5) STOCKHOLDERS' EQUITY
The following tabulation is a summary of the activity for the Stockholders'
Equity account for the nine months ended September 30, 1998 (amounts in
thousands):
Preferred Stock Common Stock
----------------- ---------------------------------
Par Additional Total
Number of Number of Value Paid-In Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 2,400 $57,810 30,216 $30,216 $408,924 $444,759 $(499,440) $442,269
Issuance of Preferred Stock, Net 5,385 130,037 130,037
Issuance of Common Stock, Net 756 756 24,048 24,804
Net Income 60,101 60,101
Dividends Paid - Preferred Shares (4,422) (4,422)
Dividends Paid - Common Shares (59,918) (59,918)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
September 30, 1998 7,785 $187,847 30,972 $30,972 $432,972 $504,860 $(563,780) $592,871
===================================================================================================================================
(6) EARNINGS PER COMMON SHARE
The Company adopted Statement of Financial Accountings Standards No. 128,
Earnings Per Share, effective December 15, 1997. As a result, both basic and
diluted earnings per common share are presented for each of the quarters and
nine months ended September 30, 1998 and 1997. In prior years, only basic
earnings per common share was disclosed. Basic earnings per common share is
computed by dividing net income applicable to common shares by the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per common share is calculated including the effect of dilutive
securities. Options to purchase shares of common stock that had an exercise
price in excess of the average market price of the common stock during the
period were not included because they are not dilutive. The convertible debt
was included only in those periods when the effect on earnings per common share
was dilutive.
8
(Amounts in thousands except per share amounts)
For the Three Months Ended For the Nine Months Ended
---------------------------- ------------------------------
Per Share Per Share
September 30, 1998 Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 22,836 30,965 $ 0.74 $ 55,679 30,666 $ 1.82
====== ======
Dilutive Options --- 142 --- 172
Interest and Amortization applicable to
Convertible Debt 1,599 2,645 4,798 2,645
Non Managing Member Units 77 117 230 118 ---
------- ------- ------- ------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 24,512 33,869 $ 0.72 $ 60,707 33,601 $ 1.81
====== ======
For the Three Months Ended For the Nine Months Ended
---------------------------- ------------------------------
Per Share Per Share
September 30, 1997 Income Shares Amount Income Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 15,553 28,721 $ 0.54 $ 48,066 28,711 $ 1.67
====== =======
Dilutive Options --- 219 --- 184
------- ------- ------- -------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 15,553 28,940 $ 0.54 $ 48,066 28,895 $ 1.66
====== ======
(7) FUNDS FROM OPERATIONS
We are required to report information about our operations on the basis that we
use internally to measure performance under Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise, effective
beginning in 1998.
We believe that Funds From Operations ("FFO") is our most important supplemental
measure of operating performance. Because the historical cost accounting
convention used for real estate assets requires straight-line depreciation
(except on land) such accounting presentation implies that the value of real
estate assets diminishes predictably over time. Since real estate values
instead have historically risen and fallen with market conditions, presentations
of operating results for a real estate investment trust that uses historical
cost accounting for depreciation could be less informative. The term FFO was
designed by the real estate investment trust industry to address this problem.
The Company adopted the definition of FFO prescribed by the National Association
of Real Estate Investment Trusts ("NAREIT"). FFO is defined as net income
applicable to common shares (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate depreciation and real estate related
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis.
FFO does not represent cash generated from operating activities in accordance
with generally accepted accounting principles, is not necessarily indicative of
cash available to fund cash needs and should not be considered as an alternative
to net income. FFO, as defined by the Company, may not be comparable to
similarly entitled items reported by other real estate investment trusts that do
not define it exactly as the NAREIT definition.
9
Below are summaries of the calculation of FFO and FFO per share of common stock
(all amounts in thousands except per share amounts):
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
Net Income Applicable to Common Shares $ 22,836 $ 15,553 $ 55,679 $ 48,066
Real Estate Depreciation and Amortization 7,512 5,692 21,403 16,664
Joint Venture Adjustments 189 (168) 233 (552)
Gain on Sale of Real Estate Properties (6,230) --- (6,742) (2,047)
--------- --------- --------- --------
Funds From Operations $ 24,307 $ 21,077 $ 70,573 $ 62,131
========= ========= ========= ========
For the Three Months Ended For the Nine Months Ended
---------------------------- ------------------------------
Per Share Per Share
September 30, 1998 FFO Shares Amount FFO Shares Amount
- ------------------------------------------------------------------------------------------------------------------------
Basic Funds From Operations per Share: $ 24,307 30,965 $ 0.78 $ 70,573 30,666 $ 2.30
====== ======
Interest and Amortization applicable to
Convertible Debt 1,599 2,645 4,798 2,645
Dilutive Options --- 142 --- 172
Non Managing Member Units 77 117 230 118
------- ------- -------- -------
Diluted Funds From Operations per
Share: $ 25,983 33,869 $ 0.77 $ 75,601 33,601 $ 2.25
====== ======
September 30, 1997
- --------------------------------------
Basic Funds From Operations per Share: $ 21,077 28,721 $ 0.73 $ 62,131 28,711 $ 2.16
====== ======
Interest and Amortization applicable to
Convertible Debt 1,599 2,645 4,798 2,645
Dilutive Options --- 219 --- 184
------- ------- ------- -------
Diluted Funds From Operations per
Share: $ 22,676 31,585 $ 0.72 $ 66,929 31,540 $ 2.12
====== ======
(8) COMMITMENTS
As of November 2, 1998, the Company has acquired real estate properties and has
outstanding commitments to fund development of facilities on those properties of
approximately $84,000,000.
The Company is also committed to acquire approximately $268,000,000 of existing
health care real estate. The Company expects that a significant portion of these
commitments will be funded; however, experience suggests that some committed
transactions will not close. The letters of intent representing such commitments
permit either party to elect not to go forward with the transaction under
various circumstances. We may not close committed transactions for various
reasons including unsatisfied pre-closing conditions, competitive financing
sources, final negotiation differences or the operator's inability to obtain
required internal or governmental approvals.
10
(9) NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999, although earlier
implementation is allowed.
We have not yet quantified the impacts of adopting Statement 133 on our
financial statements and have not determined the timing of or method of our
adoption of Statement 133. However, the effect is not expected to be material.
During May 1998, the Emerging Issues Task Force (EITF) Issue No. 98-9,
Accounting for Contingent Rent in Interim Financial Periods, was released. The
issue as it relates to the Company is how we as a lessor should account for
contingent rental income during interim periods that is based on future
specified targets within our fiscal year. In other words, if the target revenue
on which contingent rents are based has not yet been achieved for the current
year, the contingent rent should not be recognized. Recognition would be
allowed once the specified target is reached.
Because the vast majority of our contingent rents are based on quarterly
revenues, we feel that our current policy of recognizing additional rent on a
quarterly basis is proper. Therefore the effect of adopting EITF 98-9 is not
material to our financial condition or results of operations.
(10) SUBSEQUENT EVENTS
On October 20, 1998 the Board of Directors declared a quarterly dividend of
$0.67 per common share payable on November 20, 1998, to shareholders of record
on the close of business on November 3, 1998.
The Board of Directors also declared a cash dividend of $0.492188 per share on
its Series A cumulative preferred stock and $0.54375 per share on its Series B
cumulative preferred stock. These dividends will be paid on December 31, 1998
to shareholders of record as of the close of business on December 15, 1998.
11
HEALTH CARE PROPERTY INVESTORS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of acquiring health care facilities that we lease
on a long-term basis to health care providers. On a more limited basis, we have
provided mortgage financing on health care facilities. As of September 30, 1998,
the Company's portfolio of properties, including equity investments, consisted
of 302 facilities located in 42 states. These facilities are comprised of 145
long-term care facilities, 83 congregate care and assisted living facilities, 39
physician group practice clinics, 21 medical office buildings, seven acute care
hospitals, six freestanding rehabilitation facilities and one psychiatric care
facility. The gross acquisition price of the properties, which includes joint
venture acquisitions, was approximately $1,343,000,000 at September 30, 1998.
We have commitments to purchase and construct health care facilities totaling
approximately $352,000,000 for funding during 1998 and 1999. We expect that a
significant portion of these commitments will be funded but that a portion may
not be funded (see Note (8) to the Condensed Consolidated Financial
Statements).
RESULTS OF OPERATIONS
Net Income applicable to common shares for the three and nine months ended
September 30, 1998 totaled $22,836,000 and $55,679,000 or $0.72 and $1.81 of
diluted earnings per share on revenue of $42,166,000 and $116,448,000,
respectively. This compares to $15,553,000 and $48,066,000 or $.54 and $1.66 of
diluted earnings per share on revenue of $32,307,000 and $94,925,000,
respectively, for the same periods in 1997. Net Income for the three and nine
months ended September 30, 1998 included a $6,230,000 and $6,742,000, or $0.18
and $0.20 per diluted share, gain on the sale of real estate properties. Net
Income for the nine months ended September 30, 1997 included a $2,047,000 or
$0.07 per diluted share gain on the sale of real estate properties.
Base Rental Income for the three and nine months ended September 30, 1998
increased by $6,508,000 and $15,310,000 to $30,075,000 and $83,647,000 as
compared to the same period in the prior year. The majority of the increase in
Base Rental Income was generated by new investments of approximately
$250,000,000 and $262,000,000 made during 1998 and 1997. Interest and Other
Income for the three and nine months ended September 30, 1998 increased
$3,076,000 and $5,695,000 to $6,608,000 and $16,462,000. The increase was
primarily from growth in the lending portfolio and from an increase in income
from the operations of nine medical office buildings purchased during 1997
and 1998. There were $1,466,000 and $3,211,000 in related Facility Operating
Expenses during the three and nine months ended September 30, 1998.
Interest Expense for the three and nine months ended September 30, 1998
increased by $2,844,000 and $5,320,000. The increase is primarily the result
of an increase in short-term borrowings used to fund the acquisitions made
during 1998 and interest related to the MOPPRS senior debt issuance during
June 1998. The increase in Depreciation/Non Cash Charges for the three and
nine months ended September 30, 1998 of $1,845,000 and $4,694,000 to $8,366,000
and $23,750,000 is the direct result of the new investments made during 1997
and 1998.
12
We believe that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. (See Note (7) to the Condensed
Consolidated Financial Statements.)
FFO for the three and nine months ended September 30, 1998 increased $3,230,000
and $8,442,000 to $24,307,000 and $70,573,000, respectively. The increase is
attributable to increases in Base Rental Income and Interest and Other Income,
as offset by increases in Interest Expense and Facility Operating Expenses,
which are discussed above.
FFO does not represent cash generated from operating activities in accordance
with generally accepted accounting principles, is not necessarily indicative of
cash available to fund cash needs and should not be considered as an alternative
to net income. FFO, as we defined it, may not be comparable to similarly
entitled items reported by other real estate investment trusts that do not use
the NAREIT definition.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common and preferred
stock, issuance of long-term debt, assumption of mortgage debt, use of short-
term bank lines and through internally generated cash flows. Facilities under
construction are generally financed by means of cash on hand or short-term
borrowings under our existing bank lines. At the completion of construction and
commencement of the lease, short-term borrowings used in the construction phase
are generally refinanced with new long-term debt, including Medium Term Notes
("MTNs"), or with equity offerings.
MTN FINANCINGS
- ---------------
The following table summarizes the MTN financing activities during 1997 and
1998:
Amount
Date Maturity Coupon Rate Issued/(Redeemed)
---------------------------------------------------------------------
March 1997 10 years 7.30% $ 10,000,000
April 1997 10 years 7.62% 10,000,000
September 1997 --- 10.20% - 10.30% (12,500,000)
February 1998 --- 9.88% (10,000,000)
March 1998 5 years 6.66% 20,000,000
April 1998 --- 9.48% (1,000,000)
May 1998 --- 9.44%- 9.62% (6,500,000)
July 1998 --- 9.70% (5,000,000)
SENIOR DEBT OFFERINGS
- ---------------------
During June 1998, the Company issued $200 million of 6.875% MandatOry Par Put
Remarketed Securities ("MOPPRS") due June 8, 2015 which are subject to mandatory
tender on June 8, 2005. We received total proceeds of approximately
$203,000,000 (including the present value of a put option associated with the
debt) which was used to repay borrowings under our revolving lines of credit.
The weighted average cost of the debt including the amortization of the option
and offering expenses is 6.77%. The MOPPRS are senior, unsecured obligations of
the Company.
13
EQUITY OFFERINGS
- ----------------
During the past year, we have completed four equity offerings. On September 26,
1997, we issued $60,000,000, 7-7/8% Series A Cumulative Redeemable Preferred
Stock. During December 1997 we raised $55,000,000 of equity in a common stock
offering of 1,437,500 shares at $38.3125 per share. During April 1998, we sold
698,752 shares of common stock in a common stock offering at $33.2217 per share.
On September 4, 1998 we issued $135,000,000, 8.70% Series B Cumulative
Redeemable Preferred Stock. We used the net proceeds of $57,810,000,
$51,935,000, $23,000,000 and $130,000,000 from the respective equity offerings
to pay down or pay off short-term borrowings under the Company's revolving lines
of credit. We invested any excess funds in short-term investments until they
were needed for acquisitions or development.
At September 30, 1998, stockholders' equity totaled $592,871,000 and the debt to
equity ratio was 0.99 to 1.00. For the nine months ended September 30, 1998,
FFO (before interest expense) covered Interest Expense 3.64 to 1.00.
AVAILABLE FINANCING SOURCES
- ---------------------------
During June 1998, the Company registered $600,000,000 of debt and equity
securities under a shelf registration statement filed with the Securities and
Exchange Commission. As of September 30, 1998 we had $518,280,000 remaining on
shelf filings for future financings. Of that amount, we had approximately
$202,905,000 available under our MTN senior debt programs. These amounts may be
issued from time to time in the future based on Company needs and then existing
market conditions. On September 30, 1998 we renegotiated our lines of credit
with a group of seven banks. We have two revolving lines of credit, one for
$135,000,000 that expires on September 30, 2003 and one for $45,000,000 that
expires on September 30, 1999. As of September 30, 1998, the Company had all
$180,000,000 available on these lines of credit. Since 1986 the debt rating
agencies have rated our Senior Notes and Convertible Subordinated Notes
investment grade. Current ratings are as follows:
Moody's Standard & Poor's Duff & Phelps
--------------------------------------------------
Senior Notes Baa1 BBB+ A-
Convertible
Subordinated Notes Baa2 BBB BBB+
Since inception in May 1985, the Company has recorded approximately $664,786,000
in cumulative FFO. Of this amount, we have distributed a total of $558,111,000
to stockholders as dividends on common stock. We have retained the balance of
$106,675,000 and used it as an additional source of capital.
At September 30, 1998, the Company held approximately $41,000,000 in irrevocable
letters of credit from commercial banks to secure the obligations of many
lessees' lease and borrowers' loan obligations. We may draw upon the letters of
credit if there are any defaults under the leases and/or loans. Amounts
available under letters of credit could change based upon facility operating
conditions and other factors and such changes may be material.
14
We paid the third quarter 1998 dividend of $0.66 per common share or $20,436,000
in the aggregate on August 20, 1998. Total dividends paid during the nine
months ended September 30, 1998, as a percentage of FFO was 85%. The Company
declared a fourth quarter dividend of $0.67 per common share or approximately
$20,752,000 in the aggregate, payable on November 20, 1998.
FACILITY ROLLOVERS
- -------------------
The Company has concluded a significant number of "facility rollover"
transactions in 1995, 1996, 1997 and 1998 on properties that have been under
long-term leases and mortgages. "Facility rollover" transactions principally
include lease renewals and renegotiations, exchanges, sales of properties,
and, to a lesser extent, payoffs on mortgage receivables.
Annualized
Increase/(Decrease)
Year In FFO
- ----- -------------------
1995 Completed 20 facility rollovers including the sale
of ten facilities with concurrent "seller financing"
for a gain of $23,550,000. $ 900,000
1996 Completed 20 facility rollovers including the sale
of nine facilities in Missouri and the exchange of
the Dallas Rehabilitation Institute for the HealthSouth
Sunrise Rehabilitation Hospital in Fort Lauderdale,
Florida. (1,200,000)
1997 Completed 12 facility rollovers. (1,600,000)
1998 Completed or agreed to complete 37 facility rollovers
including the sale of ten facilities and the payoff of
three mortgage loans. (2,100,000)
Through December 31, 2000, we have 29 more facilities that are subject to lease
expiration, mortgage maturities or purchase options (which management believes
may be exercised). These facilities currently represent approximately 13% of
annualized revenues.
During 1997, the Company reached agreement with Tenet (the holder of
substantially all the option rights of the New Vencor leases) and with
Beverly Enterprises, Inc. ("Beverly") whereby they agreed to waive renewal
and purchase options, and related rights of first refusal, on up to 57
facilities. As part of these agreements, we have the right to continue to
own the facilities. Leases on 27 of those 57 facilities had expiration
dates through December 31, 2000. We have increased rents on six of the
facilities with leases that have already expired during 1998, and believe
we will be able to increase rents on other facilities whose lease terms
expire through 2001. However, there can be no assurance that we will be
able to realize any increased rents on future rollovers. The Company has
completed certain facility rollovers earlier than the scheduled lease
expirations or mortgage maturities and will continue to pursue such
opportunities where it is advantageous to do so.
We believe that the Company's liquidity and sources of capital are adequate to
finance its operations as well as its future investments in additional
facilities.
15
YEAR 2000 ISSUE
The Year 2000 issue is the result of widely used computer programs that
identified the year by two digits, rather than by four. It is believed that
continued use of these programs may result in widespread computer-generated
malfunctions and miscalculations beginning in the year 2000, when the digits
"00" are interpreted as "1900." Those miscalculations could cause disruption of
operations including the temporary inability to process transactions such as
invoices for payment. Those computer programs that identify the year based on
all four digits are considered "Year 2000 compliant."
We believe that we do not have significant exposure to Year 2000 issues with
respect to our own accounting and information systems or with respect to
embedded chips in elevators, security systems or other electronic systems
located within our corporate offices. We have been working with our computer
consultants to test and continually upgrade our management information systems
and we have reasonable assurance from our vendors and outside computer
consultants that our financial and other information systems are Year 2000
compliant. The cost to bring our management information systems into Year 2000
compliance has not been material. Any disruption in services at our corporate
offices due to failure of embedded chips within our office is not expected to
have a material adverse effect on our operations.
Because we believe our own accounting and information systems are substantially
Year 2000 compliant, we do not feel there will be material disruption to our
transaction processing on January 1, 2000. However, if our primary lessees and
mortgagors are not Year 2000 compliant, or if they face disruptions in their
cash flows due to Year 2000 issues, we could face significant temporary
disruptions in our cash flows after that date. These disruptions could be
exacerbated if the commercial banks that process our cash receipts and
disbursements and our lending institutions are not Year 2000 compliant.
To address this concern, during the second quarter of 1998, we commenced a
survey of our investment banks, commercial banks, primary lessees and mortgagors
and major vendors ("Material Third Parties") in order to assess what
preparations each has made to deal with the Year 2000 issue with respect to both
information technology and embedded microprocessors. In addition we asked each
respondent to inform us about their exposure to third party vendors, customers
and payors who may not be Year 2000 compliant. Through this process we have
been informed by most of those surveyed that they believe that they have
computer systems that are or will be Year 2000 compliant by the end of 1999.
All continue to assess their own exposure to the issue. However neither we nor
our lessees and mortgagors can be assured that the federal and state
governments, upon which they rely for Medicare and Medicaid revenue, will be in
compliance in a timely manner. The General Accounting Office has reported that
the Health Care Financing Administration ("HCFA"), which runs Medicare, is
behind schedule in taking steps to deal with the Year 2000 issue and that it is
highly unlikely that all of the Medicare systems will be compliant in time to
ensure the delivery of uninterrupted benefits and services into the year 2000.
We do not know at this time whether there will in fact be a disruption of
Medicare or Medicaid reimbursements to our lessees and mortgagors and we are
therefore unable to determine at this time whether the Year 2000 issue will have
a material adverse effect on the Company or its future operations.
We are in the process of assessing our exposure to failures of embedded
microprocessors in elevators, electrical systems, security systems and the
breakdown of other non-information technology due to the Year 2000 issue at a
number of our properties. Under a significant portion of our leases,
the Company is not responsible for the cost to repair such items and is
indemnified by the tenants for losses caused by their operations on the
property. For the Medical Office Buildings where the Company may be responsible
for repairing such items, we do not believe that the costs of repair will be
material to the Company and any such costs will be expensed as incurred.
16
The Company's exposure to the Year 2000 issue depends primarily on the readiness
of our Material Third Parties who, in turn, are dependent upon suppliers, payors
and other external parties, all of which is outside the Company's control. Many
respondents to our survey indicated that they are in the process of developing
contingency plans to cope with disruptions in their business as a result of the
Year 2000 issue. We will continue to seek information from these Material Third
Parties regarding theirs and as we develop more information, we will determine
what contingency plan may be available to the Company.
Readers are cautioned that most of the statements contained in the "Year 2000
Issue" paragraphs are forward looking and should be read in conjunction with the
Company's disclosures under the heading "CAUTIONARY LANGUAGE REGARDING FORWARD
LOOKING STATEMENTS" set forth below.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q that are not historical factual
statements are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The statements include, among other
things, statements regarding the intent, belief or expectations of the Company
and its officers and can be identified by the use of terminology such as "may",
"will", "expect", "believe", "intend", "plan", "estimate", "should" and other
comparable terms or the negative thereof. In addition, the Company, through its
senior management, from time to time makes forward looking oral and written
public statements concerning the Company's expected future operations and other
developments. Shareholders and investors are cautioned that, while forward
looking statements reflect the Company's good faith beliefs and best judgment
based upon current information, they are not guarantees of future performance
and are subject to known and unknown risks and uncertainties. Actual results
may differ materially from the expectations contained in the forward looking
statements as a result of various factors. Such factors include (i)
legislative, regulatory, or other changes in the healthcare industry at the
local, state or federal level which increase the costs of or otherwise affect
the operations of the Company's lessees; (ii) changes in the reimbursement
available to the Company's lessees and mortgagors by governmental or private
payors, including changes in Medicare and Medicaid payment levels and the
availability and cost of third party insurance coverage; (iii) competition for
lessees and mortgagors, including with respect to new leases and mortgages and
the renewal or roll-over of existing leases; (iv) competition for the
acquisition and financing of health care facilities; (v) the ability of the
Company's lessees and mortgagors to operate the Company's properties in a manner
sufficient to maintain or increase revenues and to generate sufficient income to
make rent and loan payments; and, (vi) changes in national or regional economic
conditions, including changes in interest rates and the availability and cost of
capital to the Company and (vii) the general uncertainty inherent in the Year
2000 issue, particularly the uncertainty of the Year 2000 readiness of third
parties who are material to the Company's business, such as public or private
healthcare reimbursers, over whom the Company has no control with the result
that the Company cannot ensure its ability to timely and cost-effectively avert
or resolve problems associated with the Year 2000 issue that may affect its
operations and business.
17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
27 Financial Data Schedule
10.1 Amended and Restated $45,000,000 Revolving Credit
Agreement dated as of October 22, 1997 and amended and
restated as of September 30, 1998 among Health Care Property
Investors, Inc., the banks named herein and The Bank of New
York and BNY Capital Markets, Inc.
10.2 Amended and Restated $135,000,000 Revolving Credit
Agreement dated as of October 22, 1997 and amended and
restated as of September 30, 1998 among Health Care Property
Investors, Inc., the banks named herein and The Bank of New
York and BNY Capital Markets, Inc.
b) Reports on Form 8-K:
On July 21, 1998, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission ("SEC") regarding exhibits required
to be filed related to the issuance of $200,000,000 of 6.875%
MandatOry Par Put Remarketed Securities due June 8, 2015 (the
"MOPPRS"). The exhibits filed were the June 3, 1998 Purchase
Agreement, an Officer's Certificate pursuant to Section 301 of the
Indenture dated as of September 1, 1993 between the Company and The
Bank of New York, as Trustee, establishing the series of securities;
the MOPPRS note; and an opinion re tax matters.
On August 27, 1998, the Company filed a Report on Form 8-K/A which
contained the required consent from Arthur Andersen LLP not previously
included in the June 17, 1998 8-K which related to the acquisition of
nine long-term care facilities and 33 clinics in 11 separate
transactions at an aggregate purchase price of approximately
$99,800,000.
On September 29, 1998, the Company filed a Report on Form 8-K with the
SEC regarding the following: the distribution agreement with Merrill
Lynch et al pursuant to which the Company agreed to sell up to
$150,000,000 Medium-Term Notes, Series D; the purchase agreement with
Merrill Lynch et al pursuant to which the Company agreed to sell up to
5,750,000 shares of 8.70% series B cumulative redeemable preferred
stock; and the September 9, 1998 press release announcing the issuance
of the Series B preferred shares.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 12, 1998 HEALTH CARE PROPERTY INVESTORS, INC.
(REGISTRANT)
/s/ James G. Reynolds
---------------------------
James G. Reynolds
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Devasis Ghose
---------------------------
Devasis Ghose
Senior Vice President-Finance
and Treasurer
(Principal Accounting Officer)