FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(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, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Health Care REIT, Inc.
(Exact name of registrant as specified in its charter)
Delaware 34-1096634
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One SeaGate, Suite 1950, Toledo, Ohio 43604
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (419) 247-2800
___________________________________________________________________
(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 such filing requirements
for the past 90 days. Yes X. No ______.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12, 13 or
15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court.
Yes _____. No _____.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class: Shares of Common Stock, $1.00 par value
Outstanding 11,723,528 shares
HEALTH CARE REIT, INC.
INDEX
Page
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1995 and December 31, 1994. 3
Consolidated Statements of Income --- Three
months ended September 30, 1995 and 1994; nine
months ended September 30, 1995 and 1994. 4
Consolidated Statements of Cash Flows ---
Nine months ended September 30, 1995 and 1994. 5
Consolidated Statements of Shareholders' Equity
--- Nine months ended September 30, 1995 and 1994. 6
Notes to Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 8
Part II. OTHER INFORMATION
Item 5. Other Information. 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------- ----------
Consolidated Balance Sheets (Unaudited)
Health Care REIT, Inc. and Subsidiary
December 31
September 30 1994
1995 (Note)
------------ ------------
ASSETS
Real Estate Related Investments:
Loans receivable:
Mortgage loans $245,410,556 $230,781,805
Construction loans 29,584,792 17,073,652
Working capital loans to related parties 6,169,812 7,068,254
------------ ------------
281,165,160 254,923,711
Investment in operating-lease properties 59,032,468 57,231,651
Investment in direct financing leases 11,295,573 11,427,721
------------ ------------
351,493,201 323,583,083
Less allowance for losses 9,150,000 5,150,000
------------ ------------
NET REAL ESTATE RELATED INVESTMENTS 342,343,201 318,433,083
Other Assets:
Deferred loan expenses 1,834,160 2,469,260
Investments 532,000
Cash and cash equivalents 554,478 935,449
Receivables and other assets 12,742,537 2,264,197
------------ ------------
15,663,175 5,668,906
------------ ------------
$358,006,376 $324,101,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $106,400,000 $ 70,900,000
Other long-term obligations 56,995,816 57,372,790
Accrued expenses and other liabilities 8,099,445 6,649,424
------------ ------------
TOTAL LIABILITIES 171,495,261 134,922,214
Shareholders' Equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - none
Common Stock, $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 11,723,528
in 1995 and 11,595,115 in 1994 11,723,528 11,595,115
Capital in excess of par value 163,559,226 161,086,758
Undistributed net income 11,228,361 16,497,902
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 186,511,115 189,179,775
------------ ------------
$358,006,376 $324,101,989
============ ============
NOTE: The balance sheet at December 31, 1994 has been derived from
the audited consolidated financial statements of that date, but
does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
See notes to consolidated financial statements.
Consolidated Statements of Income (Unaudited)
Health Care REIT, Inc. and Subsidiary
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
------------------------- -------------------------
Gross Income:
Interest and other
income $10,706,786 $ 7,707,712 $25,743,594 $19,151,904
Operating leases:
Rents 1,581,145 1,412,448 4,705,624 3,937,348
Gains on exercise of
options 100,029
Direct financing leases:
Lease income 382,164 678,834 1,146,492 3,694,657
Gain on exercise of
options 229,379 3,851,147
Loan and commitment
fees 645,420 489,793 1,022,324 955,035
----------- ----------- ----------- -----------
13,315,515 10,518,166 32,618,034 31,690,120
Expenses:
Interest:
Long-term obligations 1,265,701 1,479,452 4,023,435 4,625,548
Line of credit
arrangements 2,114,652 827,029 5,638,735 2,253,344
Loan expense 187,323 89,897 559,791 450,495
Management fees 547,522 761,170 1,808,256 2,352,798
Provision for losses 4,000,000 250,000 4,000,000 500,000
Provision for depreci-
ation 395,108 349,229 1,175,183 998,259
Settlement of manage-
ment contract 763,500 763,500
Other operating
expenses 694,874 435,222 1,800,144 1,399,402
----------- ----------- ----------- -----------
9,968,680 4,191,999 19,769,044 12,579,846
----------- ----------- ----------- -----------
NET INCOME $ 3,346,835 $ 6,326,167 $12,848,990 $19,110,274
=========== =========== =========== ===========
Average number of
shares outstanding 11,708,175 11,529,947 11,667,512 11,500,842
Net income per share $ .28 $ .55 $ 1.10 $ 1.66
Dividends per share $ .52 $ .505 $ 1.555 $ 1.50
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows (Unaudited)
Health Care REIT, Inc. and Subsidiary
Nine Months Ended
September 30
1995 1994
-----------------------------
OPERATING ACTIVITIES:
Net income $ 12,848,990 $ 19,110,274
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of loan and organization
expenses 561,408 452,112
Provision for losses 4,000,000 500,000
Provision for depreciation 1,175,183 998,259
Loan and commitment fees earned less
than cash received 528,207 369,159
Direct financing lease income less
than cash received 132,148 785,753
Interest income (in excess of) less
than cash received (157,467) 2,180,448
Increase in accrued expenses and
other liabilities 921,814 1,473,154
Increase in other receivables and
prepaid items (10,479,957) (380,768)
------------ ------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 9,530,326 25,488,391
INVESTING ACTIVITIES:
Investment in operating-lease properties (2,976,000) (13,396,550)
Investment in loans receivable (69,551,237) (75,353,793)
Principal collected on loans 43,467,256 47,408,995
Increase in investments (532,000)
Proceeds from exercise of lease purchase
options 28,205,953
Increase in funds held in escrow--net (14,173,402)
Investment in direct financing leases (1,300,000)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (29,591,981) (28,608,797)
FINANCING ACTIVITIES:
Long-term borrowings under line of
credit arrangements 152,400,000 188,100,000
Principal payments on long-term borrowings
under line of credit arrangements (116,900,000) (169,100,000)
Net proceeds from the issuance of shares 2,600,881 2,364,180
Principal payments on other long-term
obligations (376,974) (3,871,119)
Decrease (increase) in deferred loan
expense 75,308 (1,345,544)
Cash distributions to shareholders (18,118,531) (17,229,221)
------------ ------------
NET CASH PROVIDED FROM (USED IN)
FINANCING ACTIVITIES 19,680,684 (1,081,704)
------------ ------------
Decrease in cash and cash equivalents (380,971) (4,202,110)
Cash and cash equivalents at beginning
of period 935,449 4,896,314
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 554,478 $ 694,204
============ ============
Supplemental Cash Flow Information --
Interest Paid $ 8,910,157 $ 5,747,073
============ ============
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity (Unaudited)
Health Care REIT, Inc. and Subsidiary
Nine Months Ended
September 30
1995 1994
------------------------------
Balances at beginning of period $189,179,775 $184,131,828
Net income 12,848,990 19,110,274
Proceeds from issuance of shares under
the dividend reinvestment plan -
114,273 in 1995 and 96,955 in 1994 2,391,492 2,264,194
Proceeds from issuance of shares under
the employee stock incentive plan -
14,140 in 1995 and 5,860 in 1994 209,389 99,986
Cash dividend paid (18,118,531) (17,229,221)
------------ ------------
Balances at end of period $186,511,115 $188,377,061
============ ============
See notes to financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HEALTH CARE REIT, INC.
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered for a fair
presentation have been included. Operating results for the nine
months ended September 30, 1995 are not necessarily an indication
of the results that may be expected for the year ended December 31,
1995. For further information, refer to the financial statements
and footnotes thereto included in the Company's annual report on
Form 10-K for the year ended December 31, 1994.
Net income per share has been computed by dividing net income
by the average number of shares outstanding.
Note B - Investments
During the first quarter of 1995, the Company purchased common
stock in a privately held company. This investment does not have
a readily determinable fair value. Accordingly, this investment is
recorded at the lower of cost or estimated net realizable value.
Note C - Management Agreement and Related Items
The Company has agreed to a proposed merger of First Toledo
Advisory Company ("FTAC") with and into the Company. The
agreement, which is expected to close by November 30, 1995, calls
for the issuance of 282,407 shares as consideration for the
acquisition of FTAC. Through September 30, 1995, the Company has
expensed $763,500 related to the merger and settlement of contract.
The Company will expense any additional costs as incurred, as well
as the fair value of the 282,407 shares when issued.
Note D - Contingencies
As disclosed in the financial statements for the year ended
December 31, 1994, the Company was contingently liable for certain
obligations amounting to approximately $20,175,000. No significant
change in these contingencies has occurred as of September 30,
1995.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
During the first nine months of 1995, the Company's net cash
proceeds from operating activities was approximately $9,530,000, a
decline of $15,958,000 from the same period in 1994. However,
approximately $10,095,000 of the decline arose from the delayed
receipt of funds until early October of two loans repaid on
September 30th. If these funds had been received by quarter end,
the decline would have been approximately $5,863,000. The adjusted
decline was principally attributable to the lack of gains on
exercise of options in the first nine months of 1995 versus
$3,951,000 of such gains in the first nine months of 1994. See
"Results of Operations" below for further discussion.
During the first nine months of 1995, the Company financed
seven mortgage loans for a total of approximately $36,061,000 with
initial interest rates ranging from 10.28% to 11.42%, and initial
terms of seven to ten years. All the obligors have rollover
provisions after the initial term. In addition, the Company
advanced approximately $36,254,000 for 18 construction loans, most
of which are for new facilities. During the first nine months of
1995, three of the construction loans were converted to permanent
financings. During the same period, nine mortgage loans for
approximately $39,040,000 were repaid. The above loan activity,
plus changes in working capital loans and regular principal
repayments, were the reasons net loans increased approximately
$26,241,000 and net cash used in investing activities was
approximately $29,592,000.
The Company's working capital loans, all to related parties,
are expected to continue to slowly decline as the underlying
projects continue to improve their financial performance and
thereby pay down these loans.
In the first quarter of 1995, the Company paid $532,000 for
common stock in a privately held company with which the Company has
several mortgage loans and operating-lease transactions. The
investment was made as a result of warrants granted to the Company
when it provided the mortgage loan and operating-lease financing.
This investment represented less than 1% of the invested company's
equity.
Since December 31, 1994, borrowings under line of credit
arrangements increased $35,500,000 to $106,400,000 (which debt has
a weighted average interest of 7.59% at September 30, 1995). As of
September 30, 1995, the Company had approximately $147,201,000 in
unfunded commitments and total available funding sources of
$73,600,000. The Company believes that funds provided from
operating activities, together with funds from loan repayments and
future equity or debt issuances, will be sufficient to meet current
operating requirements.
During the first nine months of 1995, the Company received
approximately $2,601,000 from the sale of its shares under the
dividend reinvestment and incentive stock option plans. The
borrowings under the line of credit arrangements plus the proceeds
from the dividend reinvestment and incentive stock option plans,
less dividends paid, were the principal reasons that net cash
provided from financing activities was approximately $19,681,000.
Results of Operations
Gross income for the first nine months of 1995 was
approximately $32,618,000 or 2.9% more than the first nine months
of 1994. Interest income on loans increased $6,592,000 and
operating lease rents increased approximately $768,000, while
direct financing lease income and gain on exercise of options
declined approximately $6,499,000. The increase in interest income
on loans receivable and operating lease rents is attributable to
the growth in the loan and operating-lease portfolios, a trend
which the Company anticipates will continue. The decrease in
direct financing lease income and gain on exercise of options is a
reflection of other long-term trends which should also continue due
to the greater market acceptance of mortgage loans and operating
leases.
In the first nine months of 1994, gross income included
approximately $3,951,000 in gains on exercise of options. There
were no such gains for the comparable period in 1995. Future gains
on exercise of options are anticipated to be modest since the
Company has only six remaining direct financing lease investments
which total approximately $11,296,000.
Net income totalled approximately $12,849,000 or $1.10 per
share in the first nine months of 1995, versus approximately
$19,110,000 or $1.66 per share for the comparable period in 1994.
Major contributing factors for the decrease were the absence of
gains on exercise of options in 1995 (discussed above), a
$4,000,000 provision for losses in the third quarter of 1995, a
$763,500 charge for settlement of management contract, and a
tightening of the Company's net interest margin. (See below for a
discussion of the last three items.)
In January 1995, the Company filed a lawsuit for collection of
past due interest and principal of approximately $1,994,000 related
to a nursing home in Detroit, Michigan. In March of 1995, the
Company filed two lawsuits in Florida to collect past due interest
and principal on a mortgage loan secured by two behavioral care
facilities. In connection with the March filing, the Company
presented for payment and received $1,125,000 on a letter of credit
securing the Florida mortgage loan. After application of the
letter of credit proceeds, the Company's carrying value of the
Florida mortgage loan is approximately $13,468,000. Each of these
loans was put on non-accrual status effective the beginning of the
month the respective lawsuits were filed. All three obligors are
in Chapter 11 bankruptcy.
In August 1995, the Company reached an agreement with the
obligors on the two behavioral care facilities to hire independent
professional management. Subsequently, the Company obtained
additional information on the operating prospects for these two
facilities and behavioral care facilities in general. Based on the
additional information, the Company recorded a $4,000,000 third
quarter provision for losses.
In addition, the Company recognized approximately $2,155,000
in interest income on the above three loans in 1994 when the
Detroit, Michigan obligor paid 12 monthly interest payments, and
the Florida obligor paid 11 monthly interest payments. Until the
lawsuits are settled, the Company's net income and cash flow will
be adversely affected. The Company is continuing to proceed
aggressively against the borrowers; however, bankruptcy proceedings
are slow. The Company has evaluated its allowance for losses and
believes that the allowance is adequate.
In September 1995, the Company announced that it had revised
the proposed merger agreement with First Toledo Advisory Company
(its Manager). Through September 30, 1995, the Company incurred
$763,500 of expenses related to the settlement of the management
contract. The Company anticipates that it will incur approximately
$100,000 of additional costs as well as the cost related to the
fair value of issuing 282,407 shares, all of which is expected to
be recognized in the fourth quarter of 1995.
During the first nine months of 1995, average earnings on
assets increased three basis points versus the same period for
1994, after excluding gains and other non-recurring items.
However, in the second and third quarters, average earnings on
assets declined 19 and 13 basis points, respectively, versus the
comparable periods in 1994. The decline in average earnings on
assets was caused by placing three loans on non-accrual status
(discussed above) during the first quarter of 1995 and the general
decline in interest rates during the last four quarters. During
the same nine-month period, the Company experienced a 45 basis
point increase in its average cost of borrowing. This was
primarily due to new borrowings predominantly at the prime rate,
which has not declined as quickly as U.S. Treasury rates used for
new investments. However, the Company's average cost of borrowing
declined in the second and third quarters of 1995 over the prior
respective quarters. This decline is expected to level off in the
final quarter of 1995. The above trends resulted in a tightening
of its interest rate margin on a year-to-date basis.
In the third quarter, the Company increased the use of its
LIBOR interest rate pricing option, which is available on its
primary line of credit. This interest rate pricing option has
historically been less expensive than prime interest rate.
Therefore, the greater utilization of LIBOR favorably affected the
average cost of debt.
Lastly, the Company's net income was affected by the average
quarter-end debt-to-equity ratio of .84 to 1 in 1995 versus .63 to
1 in the first nine months of 1994. The increase in debt had the
effect of increasing the Company's interest related expense.
PART II. OTHER INFORMATION
Item 5. Other Information
On July 19, 1995, the Company issued a press release in which
it announced, among other things, that the Board of Directors voted
to pay a quarterly cash dividend of $.52 payable to shareholders of
record on August 4, 1995, and that net income was $.40, a decrease
of $.28 from the second quarter of 1995. None of the declared
distribution constitutes return of capital on a GAAP basis since
the Company's undistributed net income was $13,963,359 at June 30,
1995.
On August 3, 1995, the Company issued a press release in which
it announced, among other things, that an agreement in principle
had been reached with debtors on two defaulted psychiatric hospital
loans to hire independent professional management.
On September 6, 1995, the Company issued a press release in
which it announced, among other things, that the Board of Directors
had approved revised terms of the acquisition of First Toledo
Advisory Company, the Manager of the Company. The transaction
described herein is subject to definitive agreements, stockholder
approval, and other customary conditions.
On September 25, 1995, the Company issued a press release in
which it announced, among other things, that it had closed a $2.8
million mortgage loan for an 89-bed assisted living facility in
Pennsylvania.
On September 26, 1995, the Company issued a press release in
which it announced, among other things, that it planned to send
proxy materials relating to the proposed acquisition of First
Toledo Advisory Company to shareholders of record on October 6,
1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99. Press release dated July 19, 1995
99. Press release dated August 3, 1995
99. Press release dated September 6, 1995
99. Press release dated September 25, 1995
99. Press release dated September 26, 1995
(b) Reports on Form 8-K
None.
Pursuant to the requirement of the Securities and Exchange Act
of 1934, the Registrant had duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
Date: November 1, 1995 By: BRUCE G. THOMPSON
Bruce G. Thompson, Chairman
and Chief Executive Officer
Date: November 1, 1995 By: GEORGE L. CHAPMAN
George L. Chapman, President
Date: November 1, 1995 By: ROBERT J. PRUGER
Robert J. Pruger, Chief
Financial Officer
Date: November 1, 1995 By: KATHLEEN S. PREPHAN
Kathleen S. Prephan, Chief
Accounting Officer
EXHIBIT INDEX
The following documents are included in this Form 10-Q as Exhibits:
Designation
Number Under
Exhibit Item 601 of Exhibit Page
Number Regulation S-K Description Number
- -------- -------------- ----------- ------
1 99 Press Release
dated July 19, 1995 14
2 99 Press Release
dated August 3, 1995 16
3 99 Press Release
dated September 6, 1995 17
4 99 Press Release
dated September 25, 1995 19
5 99 Press Release
dated September 26, 1995 20