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, 2001
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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
------------------------------------- ----------------------
(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 ______.
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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 October 25, 2001.
Class: Shares of Common Stock, $1.00 par value
Outstanding 32,595,721 shares
HEALTH CARE REIT, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2001
and December 31, 2000 3
Consolidated Statements of Income - Three
and nine months ended September 30, 2001 and 2000 4
Consolidated Statements of Shareholders'
Equity - Nine months ended September 30, 2001
and 2000 5
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2000 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 13
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
EXHIBIT INDEX 15
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
SEPTEMBER 30 DECEMBER 31
2001 2000
(UNAUDITED) (NOTE)
-------------- --------------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned:
Land $ 79,861 $ 74,319
Buildings & improvements 836,867 770,660
Construction in progress 8,995 11,976
-------------- --------------
925,723 856,955
Less accumulated depreciation (71,564) (52,968)
-------------- --------------
Total real property owned 854,159 803,987
Loans receivable
Real property loans 234,886 301,321
Subdebt investments 23,426 21,972
-------------- --------------
1,112,471 1,127,280
Less allowance for loan losses (6,611) (5,861)
-------------- --------------
Net real estate investments 1,105,860 1,121,419
Other Assets:
Equity investments 6,585 5,450
Deferred loan expenses 7,266 2,939
Cash and cash equivalents 43,564 2,844
Receivables and other assets 32,012 24,252
-------------- --------------
89,427 35,485
-------------- --------------
TOTAL ASSETS $ 1,195,287 $ 1,156,904
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit obligations $ 0 $ 119,900
Senior unsecured notes 412,250 255,000
Secured debt 3,801 64,852
Accrued expenses and other liabilities 16,250 18,545
-------------- --------------
TOTAL LIABILITIES 432,301 458,297
Shareholders' equity:
Preferred stock 150,000 150,000
Common stock 32,490 28,806
Capital in excess of par value 603,705 528,138
Overdistributed net income (18,922) (3,388)
Accumulated other
comprehensive loss (873) (744)
Unamortized restricted stock (3,414) (4,205)
-------------- --------------
TOTAL SHAREHOLDERS' EQUITY 762,986 698,607
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,195,287 $ 1,156,904
============== ==============
NOTE: The consolidated balance sheet at December 31, 2000 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
See notes to unaudited consolidated financial statements
-3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Rental income $ 25,756 $ 22,266 $ 72,227 $ 65,984
Interest income 7,187 9,695 23,974 31,408
Commitment fees and other income 934 1,390 2,861 4,657
Prepayment fees 856 0 990 57
--------- --------- --------- ---------
Total revenue 34,733 33,351 100,052 102,106
EXPENSES:
Interest expense 7,643 8,411 23,731 26,093
Loan expense 447 276 1,212 879
Provision for depreciation 7,244 5,985 21,023 16,558
Provision for losses 250 250 750 750
General and administrative expenses 2,070 1,823 5,956 5,654
--------- --------- --------- ---------
Total expenses 17,654 16,745 52,672 49,934
--------- --------- --------- ---------
Net income before gain on sale of
properties and loss on extraordinary item 17,079 16,606 47,380 52,172
Gain on sale of properties 101 555 124 1,072
--------- --------- --------- ---------
Net income before extraordinary item 17,180 17,161 47,504 53,244
Loss on extinguishment of debt (213) 0 (213) 0
--------- --------- --------- ---------
Net income 16,967 17,161 47,291 53,244
Preferred stock dividends 3,376 3,376 10,128 10,114
--------- --------- --------- ---------
Net income available to common
shareholders $ 13,591 $ 13,785 $ 37,163 $ 43,130
========= ========= ========= =========
Average number of common shares outstanding:
Basic 32,205 28,507 29,946 28,460
Diluted 32,762 28,650 30,358 28,603
Net income available to common shareholders
per share:
Basic $ 0.42 $ 0.48 $ 1.24 $ 1.52
Diluted 0.41 0.48 1.22 1.51
Dividends declared and paid per
common share $ 0.585 $ 0.585 $ 1.755 $ 1.750
See notes to unaudited consolidated financial statements
-4-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Nine months ended September 30, 2001
--------------------------------------------------------------------------------------------
Capital
In Accum.
In thousands Excess Other
of Unamortized Comprehensive
Preferred Common Par Restricted Overdistributed Income/
Stock Stock Value Stock Net Income (Loss) Total
--------------------------------------------------------------------------------------------
Balance at beginning of period $ 150,000 28,806 $ 528,138 $ (4,205) $ (3,388) $ (744) $ 698,607
Comprehensive income:
Net income 47,291 47,291
Unrealized losses on securities (89) (89)
Foreign currency translation adjustment (40) (40)
---------
Comprehensive income 47,162
Proceeds from issuance from
dividend reinvestment and
stock incentive plans,
net of forfeitures 234 4,827 (83) 4,978
Proceeds from issuance of common
shares 3,450 70,740 74,190
Restricted stock amortization 874 874
Cash dividends paid (62,825) (62,825)
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period $ 150,000 $ 32,490 $ 603,705 $ (3,414) $ (18,922) $ (873) $ 762,986
========= ========= ========= ========= ========= ========= =========
Nine months ended September 30, 2000
--------------------------------------------------------------------------------------------
Capital
In Accum.
Excess Other
of Unamortized Comprehensive
Preferred Common Par Restricted Overdistributed Income/
Stock Stock Value Stock Net Income (Loss) Total
--------------------------------------------------------------------------------------------
Balance at beginning of period $ 150,000 $ 28,532 $ 524,204 $ (5,216) $ 8,883 $ 593 $ 706,996
Comprehensive income:
Net income 53,244 53,244
Unrealized losses on securities (591) (591)
Foreign currency translation adjustment (717) (717)
---------
Comprehensive income 51,936
Proceeds from issuance of common
stock from dividend reinvestment and
stock incentive plans, net of
forfeitures 159 2,103 1,085 3,347
Restricted stock amortization 859 859
Cash dividends paid (60,126) (60,126)
--------- --------- --------- --------- --------- --------- ---------
Balance at end of period $ 150,000 $ 28,691 $ 526,307 $ (3,272) $ 2,001 $ (715) $ 703,012
========= ========= ========= ========= ========= ========= =========
See notes to unaudited consolidated financial statements
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
2001 2000
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 47,291 $ 53,244
Adjustments to reconcile net income to net cash
Provision for depreciation 21,201 16,751
Provision for losses 750 750
Amortization 2,124 1,737
Loan and commitment fees earned in excess of cash received (1,329) (1,154)
Rental income in excess of cash received (6,187) (4,396)
Interest and other income in excess of cash received (249) (235)
Decrease in accrued expenses and other liabilities (967) (3,623)
Increase in receivables and other assets (1,548) (4,554)
--------- ---------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 61,086 58,520
INVESTING ACTIVITIES
Investment in real properties (79,529) (37,833)
Investment in loans receivable (19,424) (14,478)
Other investments, net (685) (10,955)
Principal collected on loans 70,391 57,147
Proceeds from sale of properties 22,018 107,182
Other (203) (659)
--------- ---------
NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES (7,432) 100,404
FINANCING ACTIVITIES
Net payments under line of credit arrangements (119,900) (58,650)
Principal payments on long-term obligations (78,801) (41,475)
Issuance of long-term obligations 175,000 0
Net proceeds from the issuance of Common Stock 79,168 3,347
Increase in deferred loan expense (5,576) (633)
Cash distributions to shareholders (62,825) (60,126)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (12,934) (157,537)
--------- ---------
Increase in cash and cash equivalents 40,720 1,387
Cash and cash equivalents at beginning of period 2,844 2,129
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,564 $ 3,516
========= =========
Supplemental Cash Flow Information -- Interest Paid $ 25,096 $ 31,186
========= =========
See notes to unaudited consolidated financial statements
-6-
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 accounting principles generally accepted in the United States
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 accounting principles generally accepted in the United
States 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, 2001, are not necessarily an indication of the results that may be
expected for the year ending December 31, 2001. 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, 2000.
NOTE B - REAL ESTATE INVESTMENTS
During the nine months ended September 30, 2001, the Company invested
$69,605,000 in real property, made construction advances of $14,016,000 and
funded $2,665,000 of equity related investments. During the nine months ended
September 30, 2001, the Company sold properties valued at $22,018,000 and
received principal payments on real estate mortgages of $70,391,000.
With respect to the above-mentioned construction advances, funding for
construction in progress in connection with four properties owned directly by
the Company totaled $9,084,000, and funding associated with two construction
loans represented $4,932,000. During the nine months ended September 30, 2001,
two of the construction properties in progress with investment balances totaling
$12,065,000 completed the construction phase of the Company's investment process
and were converted to permanent operating leases and one of the construction
loans with an investment balance of $2,010,000 was converted to a permanent
mortgage loan.
NOTE C - EQUITY INVESTMENTS
Management determines the appropriate classification of an equity investment at
the time of acquisition and reevaluates such designation as of each balance
sheet date. At September 30, 2001, equity investments include the common stock
of a corporation, valued at historical cost, 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. The
ownership interest is accounted for under the equity method.
-7-
NOTE D - CONTINGENT LIABILITIES
As disclosed in the financial statements for the year ended December 31, 2000,
the Company was contingently liable for certain obligations amounting to
$11,425,000.
NOTE E - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS
On February 20, 2001, the Company paid a dividend of $0.585 per share to
shareholders of record on January 31, 2001. This dividend related to the period
from October 1, 2000 through December 31, 2000.
On May 21, 2001, the Company paid a dividend of $0.585 per share to shareholders
of record on May 1, 2001. This dividend related to the period January 1, 2001 to
March 31, 2001.
On August 20, 2001, the Company paid a dividend of $0.585 per share to
shareholders of record on August 1, 2001. This dividend related to the period
April 1, 2001 to June 30, 2001.
NOTE F - 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 Nine months ended
September 30 September 30
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Numerator for basic and diluted earnings per
share-income available to common shareholders $ 13,591 $ 13,785 $ 37,163 $ 43,129
========= ========= ========= =========
Denominator for basic earnings per share -
weighted average shares 32,205 28,507 29,946 28,460
Effect of dilutive securities:
Employee stock options 327 -- 182 --
Nonvested restricted shares 230 143 230 143
--------- --------- --------- ---------
Dilutive potential common shares 557 143 412 143
--------- --------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares 32,762 28,650 30,358 28,603
========= ========= ========= =========
Basic earnings per share $ 0.42 $ 0.48 $ 1.24 $ 1.52
Diluted earnings per share $ 0.41 $ 0.48 $ 1.22 $ 1.51
The diluted earnings per share calculation excludes the dilutive effect of
150,000 and 1,479,000 shares for the three month periods and 763,000 and
1,479,000 for the nine month periods ended September 30, 2001 and September 30,
2000, 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.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company's net real estate investments totaled
$1,105,860,000 which included 147 assisted living facilities, 48 nursing
facilities and seven specialty 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.
In March, 2001, the Company completed its approximately $200 million asset
divestiture program that it announced in October, 1999 in response to a lack of
capital for health care REITs and long-term care companies. This program
strengthened the Company's portfolio and generated liquidity, enhancing the
Company's balance sheet. The completion of this program positioned the Company
for new investment opportunities.
During the first half of 2001, improved operating results in the public nursing
home sector, reduced development of new assisted living facilities and a shift
in equity funds flow back into income-oriented investments resulted in new
access to appropriately priced capital for health care REITs.
In June, 2001, the Company issued 3,450,000 shares of Common Stock, $1 par
value, at a price of $22.75 per share, which generated net proceeds of
$74,190,000.
In August, 2001, the Company sold $175 million of senior unsecured notes due in
2007 at an effective yield of 7.775%. Pending their use to invest in additional
health care properties, the proceeds were used primarily to pay down borrowings
under the Company's unsecured and secured line of credit arrangements.
As of September 30, 2001, the Company had a total outstanding debt balance of
$416,051,000 and shareholders' equity of $762,986,000 which represents a debt to
equity ratio of .55 to 1.0, and a debt to total capitalization ratio of .35 to
1.0.
As of September 30, 2001, the Company had an unsecured revolving line of credit
expiring March 31, 2003 in the amount of $150,000,000 bearing interest at the
lender's prime rate or LIBOR plus 1.5%. In addition, the Company had an
unsecured revolving line of credit in the amount of $25,000,000 bearing interest
at the lender's prime rate expiring June 30, 2002. Also, at September 30, 2001,
the Company had secured line of credit arrangements totaling $64,000,000. At
September 30, 2001, the Company had no borrowings under the unsecured line of
credit arrangements and $3,000,000 outstanding on the secured line of credit
arrangements.
As of September 30, 2001, the Company had effective shelf registrations on file
with the Securities and Exchange Commission under which the Company may issue up
to $77,000,000 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.
-9-
RESULTS OF OPERATIONS
Revenues were comprised of the following:
Three months ended Change Year to date through Change
------------------------------ -------------------- ------------------------------ --------------------
Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ %
-------------- -------------- -------------------- ------------------------------ --------------------
(000's)
Rental income $ 25,756 $ 22,266 $ 3,490 15.67% $ 72,227 $ 65,984 $ 6,243 9.46%
Interest income 7,187 9,695 (2.508) -25.87% 23,974 31,408 (7,434) -23.67%
Commitment fees and
other income 934 1,390 (456) -32.81% 2,861 4,657 (1,796) -38.57%
Prepayment fees 856 - 856 100.00% 990 57 933 1637.84%
------------ ------------ -------- --------- ------------ ------------- -------- ---------
Total $ 34,733 $ 33,351 $ 1,382 4.14% $ 100,052 102,106 $ (2,054) -2.01%
============ ============ ======== ========= ============ ============= ======== =========
For the three and nine months ended September 30, 2001, the Company generated
increased rental income as a result of the completion of real property
construction projects for which the Company began receiving rent and the
purchase of properties previously financed by the Company. This offset a
reduction in interest income due to the repayment of mortgage loans and the
purchase of properties previously financed by the Company with mortgage loans.
Commitment fees and other income decreased as a result of the completion of
construction projects and curtailment of investing activity.
Expenses were comprised of the following:
Three months ended Change Year to date through Change
----------------------------- --------------------- ------------------------------ --------------------
Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ %
-------------- -------------- --------------------- ------------------------------ --------------------
(000's)
Interest expense $ 7,643 $ 8,411 $ (768) -9.13% $ 23,731 $ 26,093 $(2,362) -9.05%
Loan expense 447 276 171 6.20% 1,212 879 333 37.88%
Provision for
depreciation 7,244 5,985 1,259 2.10% 21,023 16,558 4,465 26.97%
Provision for losses 250 250 - -% 750 750 - -%
General and
admin. expenses 2,070 1,823 247 13.55% 5,956 5,654 302 5.34%
------------ ------------ --------- --------- ------------ ------------ -------- --------
Total $ 17,654 $ 16,745 $ 909 5.43% $ 52,672 $ 49,934 $ 2,738 5.48%
============ ============ ========= ========= ============ ============ ======== ========
The decrease in interest expense for both the three-month and year-to-date
periods was primarily due to lower average borrowings on the Company's lines of
credit and senior notes partially offset by a reduction in the amount of
capitalized interest offsetting interest expense. 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. Capitalized
interest for the three-month and year-to-date periods totaled $200,000 and
$739,000, respectively as compared with $603,000 and $2,777,000 for the same
periods in 2000.
The provision for depreciation increased over the comparable periods in 2000
primarily as a result of additional investments in properties owned directly by
the Company.
General and administrative expenses as a percentage of revenue for the
three-month and year-to-date periods were 5.96% and 5.95% as compared with 5.47%
and 5.54% for the same periods in 2000.
-10-
Other items:
Three months ended Change Year to date through Change
------------------------------ --------------------- ------------------------------ --------------------
Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ %
-------------- -------------- --------------------- ------------------------------ --------------------
(000's)
Other items:
Loss on extinguishment
of debt 213 - 213 100.00% 213 - 213 100.00%
Gain on sales of
properties $ 101 $ 555 $ (454) -81.80% $ 124 $ 1,072 $ (948) -88.43%
Preferred dividends 3,376 3,376 - -% 10,128 10,114 14 -
As a result of the various factors mentioned above, net income available to
common shareholders for the three-month and year-to-date periods was
$13,591,000, or $0.41 per diluted share, and $37,163,000 or $1.22 per diluted
share, respectively, as compared with $13,785,000, or $0.48 per diluted share,
and $43,130,000, or $1.51 per diluted share for the comparable periods in 2000.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This report on Form 10-Q of the Company includes forward looking statements that
reflect the Company's current view with respect to future events and financial
performance. The words "believe", "expect", "anticipate" and similar expressions
identify forward-looking statements. These statements involve risks and
uncertainties that could cause actual results to differ materially from those
described in the statements. These risks and uncertainties include (without
limitation) the following: the effect of economic and market conditions and
changes in interest rates, government regulations, including changes in Medicare
and Medicaid payment levels, changes in the healthcare industry, deterioration
of the operating results or financial condition, including bankruptcies, of the
Company's tenants and borrowers, the ability of the Company to attract new
operators for certain facilities, the amount of any additional investments,
access to capital markets and changes in the ratings of the Company's debt
securities. Forward-looking statements are not a guarantee of future performance
and actual results or developments may differ materially from expectations. The
Company undertakes no obligation to publicly update or revise any forward
looking statements, whether as a result of new information, future events, or
otherwise.
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
following section is presented to provide a discussion of the risks associated
with potential fluctuations in interest rates.
The Company historically borrows on its revolving lines of credit to make
acquisitions or to finance the construction of health care facilities. Then, as
market conditions dictate, the Company will issue equity or long-term fixed rate
debt to repay the borrowings under the revolving lines of credit.
A change in interest rates will not affect future earnings or cash flow on our
fixed rate debt. Interest rate changes, however, will affect the fair value of
such debt. A 1% increase in interest rates would result in a decrease in fair
value of the Company's Senior Unsecured Notes by approximately $17 million at
September 30, 2001. Changes in the interest rate environment upon maturity of
this fixed rate debt could have an affect on the future cash flows and earnings
of the Company, depending on whether the debt is replaced with other fixed rate
debt, with variable rate debt, with equity or by the sale of assets.
A change in interest rates will not affect the fair value of the Company's
variable rate debt, including its unsecured and secured revolving credit
arrangements. At September 30, 2001, the Company had limited variable rate debt,
so a 1% increase in interest rates would have an immaterial effect on annual
interest expense.
-11-
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.
From time to time, the Company's variable interest rate debt may exceed 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 (e.g., 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.
-12-
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On August 8, 2001, the Company issued a press release announcing the issuance of
$175 million in senior notes. On October 3, 2001, the Company issued a press
release announcing release of earnings and third quarter conference call. On
October 16, 2001, the Company issued a press release announcing third quarter
results and dividends.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Press release dated August 8, 2001
99.2 Press release dated October 3, 2001
99.3 Press release dated October 16, 2001
(b) Reports on Form 8-K
Form 8-K filed August 9, 2001
-13-
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: October 30, 2001 By: /S/ GEORGE L. CHAPMAN
-------------------------- --------------------------------------
George L. Chapman,
Chairman, Chief Executive Officer and
President
Date: October 30, 2001 By: /S/ RAYMOND W. BRAUN
------------------------- --------------------------------------
Raymond W. Braun,
Chief Financial Officer
Date: October 30, 2001 By: /S/ MICHAEL A. CRABTREE
------------------------- --------------------------------------
Michael A. Crabtree,
Chief Accounting Officer
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EXHIBIT INDEX
The following documents are included in this Form 10-Q as Exhibits:
DESIGNATION
NUMBER UNDER
ITEM 601 OF
REGULATION S-K EXHIBIT DESCRIPTION
-------------- -------------------
99.1 Press release dated August 8, 2001
99.2 Press release dated October 3, 2001
99.3 Press release dated October 16, 2001
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