1
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 MARCH 31, 2000
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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 1-8923
HEALTH CARE REIT, INC.
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(Exact name of registrant as specified in its charter)
Delaware 34-1096634
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One SeaGate, Suite 1500, Toledo, Ohio 43604
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(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (419) 247-2800
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(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 .
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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 May 11, 2000.
Class: Shares of Common Stock, $1.00 par value
Outstanding 28,576,877 shares
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HEALTH CARE REIT, INC.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 3
Consolidated Statements of Income - Three
months ended March 31, 2000 and 1999 4
Consolidated Statements of Shareholders'
Equity - Three months ended March 31, 2000
and 1999 5
Consolidated Statements of Cash Flows -
Three months ended March 31, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk 11
PART II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT INDEX 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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CONSOLIDATED BALANCE SHEETS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
MARCH 31 DECEMBER 31
2000 1999
(UNAUDITED) (NOTE)
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ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned:
Land $ 72,373 $ 73,234
Buildings & improvements 720,601 730,337
Construction in progress 52,975 58,954
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845,949 862,525
Less accumulated depreciation (40,494) (35,746)
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Total real property owned 805,455 826,779
Loans receivable 404,189 401,019
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1,209,644 1,227,798
Less allowance for loan losses (5,837) (5,587)
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Net real estate investments 1,203,807 1,222,211
Other Assets:
Direct investments 31,164 25,361
Marketable securities 545 863
Cash and cash equivalents 1,380 2,129
Deferred loan expenses 3,461 3,311
Receivables and other assets 21,509 17,296
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58,059 48,960
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TOTAL ASSETS $ 1,261,866 $ 1,271,171
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit obligations $ 172,900 $ 177,500
Senior unsecured notes 290,000 290,000
Secured debt 71,318 71,342
Accrued expenses and other liabilities 21,739 25,333
----------- -----------
TOTAL LIABILITIES 555,957 564,175
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - 6,000,000 shares 150,000 150,000
Common Stock, $1.00 par value:
Authorized - 75,000,000 shares
Issued and outstanding - 28,576,877
in 2000 and 28,532,419 in 1999 28,577 28,532
Capital in excess of par value 524,778 524,204
Undistributed net income 7,087 8,883
Accumulated other
comprehensive income 248 593
Unamortized restricted stock (4,781) (5,216)
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TOTAL SHAREHOLDERS' EQUITY 705,909 706,996
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,261,866 $ 1,271,171
=========== ===========
NOTE: The consolidated balance sheet at December 31, 1999 has been derived from
the audited financial statements at 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 unaudited consolidated financial statements
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CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31
2000 1999
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(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Rental income $21,630 $14,140
Interest income 11,521 11,895
Commitment fees and other income 1,676 1,946
Prepayment fees - 183
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Total revenue 34,827 28,164
EXPENSES:
Interest expense 9,101 4,269
Loan expense 317 166
Provision for depreciation 5,263 3,555
Provision for losses 250 150
General and administrative expenses 1,900 1,674
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Total expenses 16,831 9,814
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Net income before gains on sale of properties 17,996 18,350
Gains on sale of properties 123 628
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Net income 18,118 18,978
Preferred stock dividends 3,362 2,759
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Net Income Available to Common Shareholders $14,757 $16,219
======= =======
Average number of shares outstanding:
Basic 28,315 28,077
Diluted 28,546 28,393
Net income per share:
Basic $ 0.52 $ 0.58
Diluted 0.52 0.57
Dividends declared and paid per common share $ 0.58 $ 0.56
See notes to unaudited consolidated financial statements
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Three months ended March 31, 2000
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Capital In Unamortized Accum. Other
Preferred Common Excess of Restricted Undistributed Comprehensive
Stock Stock Par Value Stock Net Income Income Total
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Balance at beginning of period $150,000 28,532 $524,204 $(5,216) $ 8,883 $ 593 $706,996
Comprehensive income:
Net income 18,118 18,118
Unrealized gains on securities (318) (318)
Foreign currency translation
adjustment (27) (27)
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Comprehensive income 18,042
Proceeds from issuance of shares
from dividend reinvestment and
stock incentive plans, net of
forfeitures 45 574 118 737
Restricted stock amortization 317 317
Cash dividends paid 19,914 19,914
------- ------- ------- -------- --------- --------- --------
Balance at end of period $150,000 $28,577 $524,778 $(4,781) $ 7,087 $ 248 $705,909
======== ======= ======== ======== ========= ========= ========
Three months ended March 31, 1999
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Capital In Unamortized Accum. Other
Preferred Common Excess of Restricted Undistributed Comprehensive
Stock Stock Par Value Stock Net Income Income Total
--------------------------------------------------------------------------------------------
Balance at beginning of period $75,000 $28,240 $520,692 $(4,589) $ 10,434 $ 3,982 $633,759
Comprehensive income:
Net income 18,978 18,978
Unrealized gains on securities (1,873) (1,873)
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Comprehensive income 17,105
Proceeds from issuance of shares
from dividend reinvestment plan 77 1,745 (228) 1,594
Proceeds from sale of Preferred Stock 75,000 (2,455) 72,545
Restricted stock amortization 269 269
Cash dividends paid (18,578) (18,578)
-------- ------- -------- ------- --------- -------- --------
Balance at end of period $150,000 $28,317 $519,982 $(4,548) $ 10,834 $ 2,109 $706,694
======== ======= ======== ======= ========= ======== ========
See notes to unaudited consolidated financial statements
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31
2000 1999
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(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 18,118 $ 18,978
Adjustments to reconcile net income to net cash
Provision for depreciation 5,484 3,650
Provision for losses 250 150
Amortization 633 443
Loan and commitment fees earned (more) less than cash received (1,154) 529
Direct financing lease income less than cash received - 35
Rental income in excess of cash received (1,697) (1,573)
Interest and other income in excess of cash received (75) (107)
Increase(decrease) in accrued expenses and other liabilities (2,440) 1,527
Increase in receivables and other assets (2,059) (1,730)
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NET CASH PROVIDED FROM OPERATING ACTIVITIES 17,060 21,902
INVESTING ACTIVITIES
Investment in real properties (10,188) (84,829)
Investment in loans receivable (3,799) (13,039)
Other investments, net (5,754) (1,919)
Principal collected on loans 630 6,634
Proceeds from sale of properties 26,248 5,567
Other (679) (318)
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NET CASH PROVIDED FROM/(USED IN) INVESTING ACTIVITIES 6,458 (87,904)
FINANCING ACTIVITIES
Net payments under line of credit arrangements (4,600) (82,350)
Principal payments on long-term obligations (24) (21)
Net proceeds from the issuance of Common Stock 737 1,594
Net proceeds from the issuance of Preferred Stock - 72,723
Proceeds from issuance of Senior Notes - 50,000
Proceeds from issuance of Secured Debt - 44,000
Increase in deferred loan expense (466) (1,404)
Cash distributions to shareholders (19,914) (18,578)
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NET CASH PROVIDED FROM/(USED IN) FINANCING ACTIVITIES (24,267) 65,964
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Decrease in cash and cash equivalents (749) (38)
Cash and cash equivalents at beginning of period 2,129 1,269
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,380 $ 1,231
============ ===========
Supplemental Cash Flow Information -- Interest Paid $ 11,522 $ 6,523
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See notes to unaudited consolidated financial statements
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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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 has been
included. Operating results for the three months ended March 31, 2000, are not
necessarily an indication of the results that may be expected for the year
ending December 31, 2000. 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, 1999.
NOTE B - REAL ESTATE INVESTMENTS
During the three months ended March 31, 2000, the Company invested $183,000 in
real property, made construction advances of $12,083,000 and funded $5,867,000
of equity related investments. During the three months ended March 31, 2000, the
Company sold $26,248,000 of real property, received principal payments on real
estate mortgages of $630,000 and had net advances on working capital loans of
$1,756,000.
With respect to the above-mentioned construction advances, funding for
construction in progress in connection with twelve properties owned directly by
the Company totaling $10,104,000, and funding associated with six construction
loans represented $1,979,000. During the three months ended March 31, 2000, one
of the construction properties in progress with an investment balance of
$3,305,000 completed the construction phase of the Company's investment process
and was converted to permanent operating leases.. Also, during the three months
ended March 31, 2000, one of the construction loans with an investment balance
of $2,975,000 completed the construction phase of the Company's investment
process and was converted to investments in permanent mortgage loans.
NOTE C - DIRECT INVESTMENTS
Management determines the appropriate classification of a direct investment at
the time of acquisition and reevaluates such designation as of each balance
sheet date. Debt securities which are classified as held to maturity are stated
at historical cost. Equity investments are stated at historical cost. At March
31, 2000, direct investments included the preferred stock of one private
corporation and subordinated debt in eight private corporations, and ownership
representing a 31% interest in Atlantic Healthcare Finance L.P., a property
investment group that specializes in the financing, through sale and leaseback
transactions, of nursing homes located in the United Kingdom and continental
Europe.
NOTE D - MARKETABLE SECURITIES
Marketable securities are stated at market value with unrealized gains and
losses reported in a separate component of shareholders' equity. At March 31,
2000, marketable securities reflected the market value of the common stock of
two publicly owned corporations which were obtained by the Company at no cost.
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NOTE E - CONTINGENT LIABILITIES
As disclosed in the financial statements for the year ended December 31, 1999,
the Company was contingently liable for certain obligations amounting to
$12,425,000.
NOTE F - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS
On February 21, 2000, the Company paid a dividend of $0.58 per share to
shareholders of record on February 2, 2000. This dividend related to the period
from October 1, 1999 through December 31, 1999.
NOTE G - 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
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2000 1999
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Numerator for basic and diluted earnings per
share-income available to common shareholders $ 14,757 $ 16,219
================== ==================
Denominator for basic earnings per share -
weighted average shares 28,315 28,077
Effect of dilutive securities:
Employee stock options - 116
Nonvested restricted shares 231 200
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Dilutive potential common shares 231 316
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Denominator for diluted earnings per share -
adjusted weighted average shares 28,546 28,393
================== ==================
Basic earnings per share $ 0.52 $ 0.58
Diluted earnings per share $ 0.52 $ 0.57
The diluted earnings per share calculation excludes the dilutive effect of
1,813,000 and 179,000 shares for 2000 and 1999, respectively, because the
exercise price was greater than the average market price. The Series C
Cumulative Convertible Preferred Stock was not included in this calculation as
the effect of the conversion was anti-dilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company's net real estate investments totaled
approximately $1,203,807,000, which included 179 assisted living facilities, 48
nursing facilities, six specialty care facilities and two behavioral care
facilities. Depending upon the availability and cost of external capital, the
Company anticipates making additional investments in health care related
facilities. New investments are funded from temporary borrowings under the
Company's line of credit arrangements, internally generated cash and the
proceeds derived from asset sales. Permanent financing for future investments,
which replaces funds drawn under the line of credit arrangements, is expected to
be provided through a combination of private and public offerings of debt and
equity securities, and the assumption of secured debt. The Company believes its
liquidity and various sources of available capital are sufficient to fund
operations, meet debt service and dividend requirements, and finance future
investments.
During 1999 and the first quarter of 2000, the underperformance of publicly
owned nursing home and assisted living companies, combined with the much
publicized shift in equity funds flow from income-oriented investments to
high-growth opportunities, impaired the stock valuations of all health care
REITs. The availability of external capital is limited and expensive,
constraining new investment activity and earnings growth. The Company believes
the restrictive capital environment will continue until the prospects for the
long-term care industry improve.
In October 1999, the Company announced a $200 million asset divestiture program,
which is proceeding as planned. The Company believes the limited asset sales
will strengthen the Company's portfolio and generate liquidity, enhancing the
Company's balance sheet. This strategy should position the Company for new
investment and growth opportunities in the future.
As of March 31, 2000, the Company had a total outstanding debt balance of
$534,218,000 and shareholders' equity of $705,909,000 which represents a debt to
equity ratio of 0.76 to 1.0, and a debt to total capitalization ratio of 0.43 to
1.0.
As of March 31, 2000, the Company had an unsecured revolving line of credit
expiring March 31, 2001 in the amount of $175,000,000 bearing interest at the
lender's prime rate or LIBOR plus 1.0%. In addition, the Company had an
unsecured revolving line of credit in the amount of $20,000,000 bearing interest
at the lender's prime rate expiring April 30, 2001. At March 31, 2000, under the
Company's line of credit arrangements, available funding totaled $22,100,000.
As of March 31, 2000, the Company has effective shelf registrations on file with
the Securities and Exchange Commission under which the Company may issue up to
$380,319,000 of securities including debt, convertible debt, common and
preferred stock. Depending upon market conditions, the Company anticipates
issuing securities under such shelf registrations to invest in additional health
care facilities and to repay borrowings under the Company's line of credit
arrangements.
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RESULTS OF OPERATIONS
Revenues for the three months ended March 31, 2000, were $34,950,000 as compared
with $28,792,000 for the three months ended March 31, 1999. Revenue growth was
generated primarily by increased rental income of $7,490,000 as a result of
additional real estate investments made during the past twelve months.
During the three months ended March 31, 2000, the Company recognized gains on
sales of properties and prepayment fees of $123,000 as compared with $811,000
for the same period in the prior year.
Expenses for the three months ended March 31, 2000, totaled $16,831,000, an
increase of $7,017,000 from expenses of $9,814,000 for the same period in 1999.
The increases in total were related to an increase in interest expense, an
additional expense associated with the provision for depreciation and an
increase in general and administrative expenses.
Interest expense for the three months ended March 31, 2000, was $9,101,000 as
compared to $4,269,000 for the same period in 1999. The increase in the 1999
period was primarily due to the issuance of $114,000,000 of long-term debt and
higher average borrowings under the Company's lines of credit. Interest expense
is offset by the amount of capitalized interest recorded.
The Company capitalizes certain interest costs associated with funds used to
finance the construction of properties owned directly by the Company. The amount
capitalized is based upon the borrowings outstanding during the construction
period using the rate of interest which approximates the Company's cost of
financing. The Company's interest expense is reduced by the amount capitalized.
Capitalized interest for the three months ended March 31, 2000 totaled
$1,220,000, as compared with $3,158,000 for the same period in 1999.
The provision for depreciation for the three months ended March 31, 2000,
totaled $5,263,000, an increase of $1,644,000 over the comparable period in 1999
as a result of additional investments in properties owned directly by the
Company.
General and administrative expenses for the three months ended March 31, 2000,
totaled $1,900,000, as compared with $1,674,000 for the same period in 1999. The
expenses for the three month period in 2000 were 5.4% of revenues as compared
with 5.8% for the same period in 1999.
Dividend expense, associated with the Company's outstanding preferred stock, for
the three months ended March 31, 2000, totaled $3,362,000, as compared with
$2,759,000 for the same period in 1999.
As a result of the various factors mentioned above, net income available to
common shareholders for the three months ended March 31, 2000, was $14,757,000,
or $.52 per diluted share, as compared with $16,219,000, or $0.57 per diluted
share, for the comparable periods in 1999.
IMPACT OF INFLATION
During the past three years, inflation has not significantly affected the
earnings of the Company because of the moderate inflation rate. Additionally,
earnings of the Company reflect long-term investments with fixed rents or
interest rates. These investments are mainly financed with a combination of
equity, senior notes and borrowings under the revolving lines of credit. During
inflationary periods, which generally are accompanied by rising interest rates,
the Company's ability to grow may be adversely affected because the yield on new
investments may increase at a slower rate than new borrowing costs.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company seeks to mitigate
the effects of fluctuations in interest rates by matching the term of new
investments with new long-term fixed rate borrowings to the extent possible.
The market value of the Company's long-term fixed rate borrowings is subject to
interest rate risk. Generally, the market value of fixed rate financial
instruments will decrease as interest rates rise and increase as interest rates
fall. The estimated fair value of the Company's senior unsecured notes at March
31, 2000 was $259 million. A 1% increase in interest rates would result in a
decrease in fair value of the Company's senior unsecured notes by approximately
$9 million.
The Company is subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of the Company's borrowings were completed pursuant to indentures or
contractual agreements which limit the amount of indebtedness the Company may
incur. Accordingly, in the event that the Company is unable to raise additional
equity or borrow money because of these limitations, the Company's ability to
acquire additional properties may be limited.
At March 31, 2000, the Company's variable interest rate debt exceeded its
variable interest rate assets, presenting an exposure to rising interest rates.
The Company may or may not elect to use financial derivative instruments to
hedge variable interest rate exposure. Such decisions are principally based on
the Company's policy to match its variable rate investments with comparable
borrowings, but is also based on the general trend in interest rates at the
applicable dates and the Company's perception of future volatility of interest
rates.
POTENTIAL RISKS FROM BANKRUPTCIES
The Company is exposed to the risk that its operators may not be able to meet
the rent and interest payments due the Company, which may result in an operator
bankruptcy or insolvency. Although the Company's operating lease agreements and
loans provide the Company the right to terminate an investment, evict an
operator, demand immediate repayment, and other remedies, the bankruptcy laws
afford certain rights to a party that has filed for bankruptcy or
reorganization. An operator in bankruptcy may be able to restrict the Company's
ability to collect unpaid rent or interest, and collect interest during the
bankruptcy proceeding.
The receipt of liquidation proceeds or the replacement of an operator that has
defaulted on its lease or loan could be delayed by the approval process of any
federal, state or local agency necessary for the transfer of the property or the
replacement of the operator licensed to manage the facility. In addition, the
Company may be required to fund certain expenses (i.e. real estate taxes and
maintenance) to retain control of a property. In some instances the Company may
take possession of a property, which may expose the Company to successor
liabilities. Should such events occur, the Company's revenue and operating cash
flow may be adversely affected.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
27 Financial Data Schedule
99.1 Press release dated January 10, 2000
99.2 Press release dated January 18, 2000
99.3 Press release dated January 20, 2000
99.4 Press release dated February 3, 2000
(b) Reports on Form 8-K
None
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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.
HEALTH CARE REIT, INC.
Date: May 15, 2000 By: /S/ GEORGE L. CHAPMAN
---------------------- ----------------------------------------
George L. Chapman,
Chairman, Chief Executive Officer
and President
Date: May 15, 2000 By: /S/ EDWARD F. LANGE, JR.
--------------------- ----------------------------------------
Edward F. Lange, Jr.,
Chief Financial Officer
Date: May 15, 2000 By: /S/ MICHAEL A. CRABTREE
--------------------- ----------------------------------------
Michael A. Crabtree,
Chief Accounting Officer
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EXHIBIT INDEX
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The following documents are included in this Form 10-Q as Exhibits:
DESIGNATION
NUMBER UNDER
ITEM 601 OF
REGULATION S-K EXHIBIT DESCRIPTION
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27 Financial Data Schedule
99.1 Press release dated January 10, 2000
99.2 Press release dated January 18, 2000
99.3 Press release dated January 20, 2000
99.4 Press release dated February 3, 2000
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