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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 MARCH 31, 2004
----------------------------------------
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.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
- -------- ----------
(State or other 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of April 30, 2004, the registrant had 51,333,401 shares of common
stock outstanding.
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INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2004 and December 31, 2003....................... 3
Consolidated Statements of Income - Three months ended March 31, 2004
and 2003............................................................................ 4
Consolidated Statements of Stockholders' Equity - Three months ended March 31, 2004
and 2003............................................................................ 5
Consolidated Statements of Cash Flows - Three months ended March 31, 2004 and 2003....... 6
Notes to Unaudited Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 15
Item 4. Controls and Procedures.................................................................. 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......... 16
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
SIGNATURES ......................................................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
MARCH 31 DECEMBER 31
2004 2003
(UNAUDITED) (NOTE)
----------- -----------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned
Land $ 174,888 $ 166,408
Buildings & improvements 1,786,296 1,712,868
Construction in progress 17,924 14,701
----------- -----------
1,979,108 1,893,977
Less accumulated depreciation (169,574) (152,440)
----------- -----------
Total real property owned 1,809,534 1,741,537
Loans receivable
Real property loans 218,434 213,480
Subdebt investments 45,173 45,254
----------- -----------
263,607 258,734
Less allowance for losses on loans receivable (8,125) (7,825)
----------- -----------
255,482 250,909
----------- -----------
Net real estate investments 2,065,016 1,992,446
Other assets:
Equity investments 3,298 3,299
Deferred loan expenses 9,554 10,331
Cash and cash equivalents 47,063 124,496
Receivables and other assets 61,390 52,159
----------- -----------
121,305 190,285
----------- -----------
Total assets $ 2,186,321 $ 2,182,731
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under unsecured lines of credit arrangements $ 0 $ 0
Senior unsecured notes 865,000 865,000
Secured debt 147,616 148,184
Accrued expenses and other liabilities 13,342 19,868
----------- -----------
Total liabilities 1,025,958 1,033,052
Stockholders' equity:
Preferred stock 119,631 120,761
Common stock 51,051 50,298
Capital in excess of par value 1,091,896 1,069,887
Treasury stock (850) (523)
Cumulative net income 681,371 660,446
Cumulative dividends (781,046) (749,166)
Accumulated other
comprehensive income 1 1
Other equity (1,691) (2,025)
----------- -----------
Total stockholders' equity 1,160,363 1,149,679
----------- -----------
Total liabilities and stockholders' equity $ 2,186,321 $ 2,182,731
=========== ===========
NOTE: The consolidated balance sheet at December 31, 2003 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
MARCH 31
2004 2003
------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rental income $54,535 $38,605
Interest income 5,713 4,940
Transaction fees and other income 713 592
------- -------
60,961 44,137
Expenses:
Interest expense 18,552 11,383
Provision for depreciation 17,134 10,920
General and administrative 3,159 2,611
Loan expense 891 635
Provision for loan losses 300 250
------- -------
40,036 25,799
------- -------
Income from continuing operations 20,925 18,338
Discontinued operations:
Net gain (loss) on sales of properties 34
Income (loss) from discontinued operations, net 925
------- -------
0 959
Net income 20,925 19,297
Preferred stock dividends 2,270 2,846
------- -------
Net income available to common stockholders $18,655 $16,451
======= =======
Average number of common shares outstanding:
Basic 50,580 39,971
Diluted 51,358 40,473
Earnings per share:
Basic:
Income from continuing operations
available to common stockholders $ 0.37 $ 0.39
Discontinued operations, net 0.02
------- -------
Net income available to common stockholders $ 0.37 $ 0.41
Diluted:
Income from continuing operations
available to common stockholders $ 0.36 $ 0.39
Discontinued operations, net 0.02
------- -------
Net income available to common stockholders $ 0.36 $ 0.41
Dividends declared and paid per common share $ 0.585 $ 0.585
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2004
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CAPITAL IN
PREFERRED COMMON EXCESS OF TREASURY CUMULATIVE CUMULATIVE
STOCK STOCK PAR VALUE STOCK NET INCOME DIVIDENDS
-----------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 120,761 $ 50,298 $1,069,887 $ (523) $ 660,446 $ (749,166)
Comprehensive income:
Net income 20,925
Other comprehensive income:
Unrealized gain (loss) on equity investments
Total comprehensive income
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 718 20,914 (327)
Conversion of preferred stock (1,130) 35 1,095
Restricted stock amortization
Compensation expense related
to stock options
Cash dividends paid:
Common stock-$0.585 per share (29,610)
Preferred stock, Series D-$0.492 per share (1,969)
Preferred stock, Series E-$0.375 per share (301)
-----------------------------------------------------------------------
Balances at end of period $ 119,631 $ 51,051 $1,091,896 $ (850) $ 681,371 $ (781,046)
=======================================================================
THREE MONTHS ENDED MARCH 31, 2004
-----------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE OTHER
INCOME EQUITY TOTAL
-----------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 1 $(2,025) $1,149,679
Comprehensive income:
Net income 20,925
Other comprehensive income:
Unrealized gain (loss) on equity investments 0
----------
Total comprehensive income 20,925
----------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 21,305
Conversion of preferred stock 0
Restricted stock amortization 239 239
Compensation expense related
to stock options 95 95
Cash dividends paid:
Common stock-$0.585 per share (29,610)
Preferred stock, Series D-$0.492 per share (1,969)
Preferred stock, Series E-$0.375 per share (301)
-----------------------------------
Balances at end of period $ 1 $ (1,691) $ 1,160,363
====================================
THREE MONTHS ENDED MARCH 31, 2003
-----------------------------------------------------------------------
CAPITAL IN
PREFERRED COMMON EXCESS OF TREASURY CUMULATIVE CUMULATIVE
STOCK STOCK PAR VALUE STOCK NET INCOME DIVIDENDS
-----------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 127,500 $ 40,086 $ 790,838 $ 0 $ 580,496 $ (638,085)
Comprehensive income:
Net income 19,297
Other comprehensive income:
Unrealized gain (loss) on equity investments
Foreign currency translation adjustment
Total comprehensive income
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 121 2,703
Restricted stock amortization
Compensation expense related
to stock options
Cash dividends paid:
Common stock-$0.585 per share (23,515)
Preferred stock, Series B-$0.555 per share (1,664)
Preferred stock, Series C-$0.563 per share (1,182)
-----------------------------------------------------------------------
Balances at end of period $ 127,500 $ 40,207 $ 793,541 $ 0 $ 599,793 $ (664,446)
=======================================================================
THREE MONTHS ENDED MARCH 31, 2003
---------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE OTHER
INCOME EQUITY TOTAL
---------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ (170) $ (3,433) $ 897,232
Comprehensive income:
Net income 19,297
Other comprehensive income:
Unrealized gain (loss) on equity investments (11) (11)
Foreign currency translation adjustment (163) (163)
------
Total comprehensive income 19,123
------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 2,824
Restricted stock amortization 493 493
Compensation expense related
to stock options 62 62
Cash dividends paid:
Common stock-$0.585 per share (23,515)
Preferred stock, Series B-$0.555 per share (1,664)
Preferred stock, Series C-$0.563 per share (1,182)
---------------------------------------
Balances at end of period $ (344) $(2,878) $ 893,373
=======================================
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31
---------------------------
2004 2003
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 20,925 $ 19,297
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 17,134 11,657
Amortization 1,118 1,188
Provision for loan losses 300 250
Rental income in excess of
cash received (6,664) (4,204)
Equity in (earnings) losses of affiliated companies (81)
(Gain) loss on sales of properties (34)
Increase (decrease) in accrued expenses and
other liabilities (6,525) (12,909)
Decrease (increase) in receivables and
other assets (3,338) 4,139
--------- ---------
Net cash provided from (used in) operating activities 22,950 19,303
INVESTING ACTIVITIES
Investment in real property (85,390) (38,796)
Investment in loans receivable
and subdebt investments (8,571) (18,098)
Other investments, net of payments 300
Principal collected on loans receivable
and subdebt investments 3,698 17,445
Proceeds from sales of properties 144
Other 703 (70)
--------- ---------
Net cash provided from (used in) investing activities (89,560) (39,075)
FINANCING ACTIVITIES
Net increase (decrease) under unsecured
lines of credit arrangements (35,400)
Proceeds from issuance of senior notes 100,000
Principal payments on secured debt (568) (101)
Net proceeds from the issuance of common stock 21,632 2,824
Decrease (increase) in deferred loan expense (7) 3,138
Cash distributions to stockholders (31,880) (26,361)
--------- ---------
Net cash provided from (used in) financing activities (10,823) 44,100
--------- ---------
Increase (decrease) in cash and cash equivalents (77,433) 24,328
Cash and cash equivalents at beginning of period 124,496 9,550
--------- ---------
Cash and cash equivalents at end of period $ 47,063 $ 33,878
========= =========
Supplemental cash flow information-interest paid $ 25,187 $ 20,289
========= =========
See notes to unaudited consolidated financial statements
6
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 three
months ended March 31, 2004 are not necessarily an indication of the results
that may be expected for the year ending December 31, 2004. For further
information, refer to the financial statements and footnotes thereto included in
our annual report on Form 10-K for the year ended December 31, 2003.
NOTE B - REAL ESTATE INVESTMENTS
During the three months ended March 31, 2004, we invested $81,908,000
in real property, provided permanent mortgage and loan financings of $8,281,000,
made construction advances of $3,482,000 and funded $290,000 of subdebt
investments. As of March 31, 2004, we had approximately $12,290,000 in unfunded
construction commitments. Also during the three months ended March 31, 2004, we
collected $3,327,000 and $371,000 as repayment of principal on loans receivable
and subdebt investments, respectively.
NOTE C - EQUITY INVESTMENTS
Equity investments, which consist of investments in private and public
companies for which we do not have the ability to exercise influence, are
accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. For investments in public companies that have readily
determinable fair market values, we classify our equity investments as
available-for-sale and, accordingly, record these investments at their fair
market values with unrealized gains and losses included in accumulated other
comprehensive income, a separate component of stockholders' equity. These
investments represent a minimal ownership interest in these companies.
NOTE D - DISTRIBUTIONS PAID TO COMMON STOCKHOLDERS
On February 20, 2004, we paid a dividend of $0.585 per share to
stockholders of record on January 30, 2004. This dividend related to the period
from October 1, 2003 through December 31, 2003.
NOTE E - DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, which is effective for fiscal years beginning after December 15, 2001.
We adopted the standard effective January 1, 2002.
7
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
There were no dispositions during the three months ended March 31,
2004. In accordance with Statement No. 144, we have reclassified the income and
expenses attributable to all properties sold subsequent to January 1, 2002 to
discontinued operations. Expenses include an allocation of interest expense
based on property carrying values and our weighted average cost of debt. The
following illustrates the reclassification impact of Statement No. 144 as a
result of classifying the properties as discontinued operations (in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------
2004 2003
------ ------
Revenues
Rental income $ 0 $2,155
Expenses
Interest expense 493
Provision for depreciation 737
------ ------
Income (loss) from discontinued operations, net $ 0 $ 925
====== ======
NOTE F - CONTINGENT LIABILITIES
We have guaranteed the payment of industrial revenue bonds for one
assisted living facility, in the event that the present owner defaults upon its
obligations. In consideration for this guaranty, we receive and recognize fees
annually related to this agreement. This guaranty expires upon the repayment of
the industrial revenue bonds which currently mature in 2009. At March 31, 2004,
we were contingently liable for $3,195,000 under this guaranty.
As of March 31, 2004, we had approximately $12,290,000 of unfunded
construction commitments.
On November 20, 2002, Doctors Community Health Care Corporation
("DCHCC") and five subsidiaries (collectively, "Doctors") filed for Chapter 11
bankruptcy protection in the United States Bankruptcy Court for the District of
Columbia. Doctors stated that its bankruptcy filing was due to the bankruptcy of
National Century Financial Enterprises and affiliates, which halted payments to
health care providers, including Doctors. We had provided mortgage financing to
Doctors in the form of a loan secured by the Pacifica Hospital of the Valley in
Sun Valley, CA ("Pacifica Hospital"), and the other assets of the Pacifica of
the Valley Corporation ("Pacifica"), one of the debtor subsidiaries. The
outstanding principal balance of the loan was approximately $18,797,000 on March
31, 2004. Pursuant to procedures approved by the bankruptcy court, the assets of
Doctors were the subject of an auction held on December 10 through December 16,
2003. At the conclusion of that auction, the debtors' independent director
declared certain members of Doctors' management the winning bidder. Their bid
contemplated a reorganization of Doctors with new equity and debt
capitalization. In connection with management's winning bid, we agreed to
advance additional loans and refinance the Pacifica loan. The results of this
auction were approved by the bankruptcy court on April 2, 2004 in connection
with the confirmation of the debtors' plan of reorganization, which also
occurred on April 2, 2004. The closing on the reorganization and the new
financings took place effective April 5, 2004. The new Pacifica loan, in the
principal amount of $18,800,000, is secured by the Pacifica Hospital and other
assets of Pacifica (other than the receivables of the Pacifica Hospital), and by
a subordinate lien on the receivables of the Pacifica Hospital and certain
assets of PACIN Healthcare-Hadley Memorial Hospital Corporation ("Hadley"). The
loan is guaranteed by DCHCC, Paul Tuft, Erich Mounce and Hadley (although the
Hadley guaranty is nonrecourse except as to the pledged assets of Hadley). This
loan bears an initial interest rate of 7%, which will increase at a defined
future point to 9.5%. The loan will have a term of up to seven years, and for a
defined initial period will be serviced on an interest-only basis. No interest
was paid for the period January 1, 2003 to April 5, 2004. An additional loan in
the amount of $3,400,000 was made by us to Hadley. This loan is secured by a
lien on the assets of the hospital operated by Hadley (other than the
receivables) and a subordinate lien on the receivables of the Hadley hospital.
The loan is guaranteed by DCHCC, Pacifica, Paul Tuft and Erich Mounce. This loan
bears an interest rate of 7.5%, has a term of five years, with a ten-year
amortization schedule and the remaining principal due at the end of five years.
8
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
----------------------
2004 2003
------- -------
Numerator for basic and diluted earnings
per share - net income available to common
stockholders $18,655 $16,451
======= =======
Denominator for basic earnings per
share - weighted average shares 50,580 39,971
Effect of dilutive securities:
Employee stock options 547 259
Non-vested restricted shares 231 243
------- -------
Dilutive potential common shares 778 502
------- -------
Denominator for diluted earnings per
share - adjusted weighted average shares 51,358 40,473
======= =======
Basic earnings per share $ 0.37 $ 0.41
======= =======
Diluted earnings per share $ 0.36 $ 0.41
======= =======
The diluted earnings per share calculation excludes the dilutive effect
of 0 options for the three month period ended March 31, 2004, and 50,000 options
for the same period in 2003, because the exercise price was greater than the
average market price. The Series E Cumulative Convertible and Redeemable
Preferred Stock was not included in this calculation as the effect of the
conversion was anti-dilutive.
NOTE H - OTHER EQUITY
Other equity consists of the following (in thousands):
MARCH 31
-----------------------
2004 2003
------- -------
Accumulated compensation expense related
to stock options $ 268 $ 62
Unamortized restricted stock (1,959) (2,940)
------- -------
$(1,691) $(2,878)
======= =======
Unamortized restricted stock represents the unamortized value of
restricted stock granted to employees and directors prior to December 31, 2002.
Expense, which is recognized as the shares vest based on the market value at the
date of the award, totaled $239,000 and $493,000 for the three months ended
March 31, 2004 and March 31, 2003, respectively.
9
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In December 2002, the Financial Accounting Standards Board issued
Statement No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, that we are required to adopt for fiscal years beginning after
December 15, 2002, with transition provisions for certain matters. This
Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. Effective
January 1, 2003, we commenced recognizing compensation expense in accordance
with Statement 123, as amended, on a prospective basis. Accumulated option
compensation expense represents the amount of amortized compensation costs
related to stock options awarded to employees and directors subsequent to
January 1, 2003.
The following table illustrates the effect on net income available to
common stockholders if we had applied the fair value recognition provisions of
Statement 123, as amended, to stock-based compensation for options granted since
1995 but prior to adoption at January 1, 2003 (in thousands, except per share
data):
THREE MONTHS ENDED
MARCH 31
----------------------
2004 2003
------- -------
Numerator:
Net income available to common
stockholders - as reported $18,655 $16,451
Deduct: Stock based employee
compensation expense determined
under fair value based method for
all awards 76 109
Net income available to common ------- -------
stockholders - pro forma $18,579 $16,342
======= =======
Denominator:
Basic weighted average shares -
as reported and pro forma 50,580 39,971
Effect of dilutive securities:
Employee stock options - pro forma 530 213
Non-vested restricted shares 231 243
------- -------
Dilutive potential common shares 761 456
Diluted weighted average shares - ------- -------
pro forma 51,341 40,427
======= =======
Net income available to common
stockholders per share - as reported
Basic $ 0.37 $ 0.41
Diluted 0.36 0.41
Net income available to common
stockholders per share - pro forma
Basic $ 0.37 $ 0.41
Diluted 0.36 0.40
10
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE I - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes unrealized gains or
losses on our equity investments and foreign currency translation adjustments.
These items are included as components of stockholders' equity. Other
comprehensive income for the three months ended March 31, 2004 totaled $0 and
($174,000) for the same period in 2003.
NOTE J - NEW ACCOUNTING POLICIES
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51 (the Interpretation). The Interpretation requires the consolidation of
variable interest entities in which an enterprise absorbs a majority of the
entity's expected losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Previously, entities were generally consolidated by an
enterprise that had a controlling financial interest through ownership of a
majority voting interest in the entity. The Interpretation is effective in the
current quarter for all variable interests. We have performed a quantitative
analysis for certain variable interests in our operators and determined that
none of the operators' businesses are variable interest entities as the fair
value of the equity of these businesses exceeds the expected losses as
calculated.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE OVERVIEW
Health Care REIT, Inc. is a self-administered, equity REIT that invests
in health care facilities, primarily skilled nursing and assisted living
facilities. We also invest in specialty care facilities. As of March 31, 2004,
long-term care facilities, which include skilled nursing and assisted living
facilities, comprised approximately 92% of our investment portfolio. Founded in
1970, we were the first REIT to invest exclusively in health care facilities.
As of March 31, 2004, we had $2,076,336,000 of net real estate
investments, inclusive of credit enhancements, in 340 facilities located in 33
states and managed by 48 different operators. At that date, the portfolio
included 221 assisted living facilities, 111 skilled nursing facilities and
eight specialty care facilities.
Our primary objectives are to protect stockholders' capital and enhance
stockholder value. We seek to pay consistent cash dividends to stockholders and
create opportunities to increase dividend payments from annual increases in
rental and interest income and portfolio growth. To meet these objectives, we
invest primarily in long-term care facilities managed by experienced operators
and diversify our investment portfolio by operator and geographic location.
Depending upon the availability and cost of external capital, we
anticipate making additional investments in health care related facilities. New
investments are generally funded from temporary borrowings under our unsecured
lines of credit arrangements, internally generated cash and the proceeds derived
from asset sales. Permanent financing for future investments, which replaces
funds drawn under the unsecured lines of credit arrangements, is expected to be
provided through a combination of public and private offerings of debt and
equity securities and the incurrence of secured debt. We believe our liquidity
and various sources of available capital are sufficient to fund operations, meet
debt service and dividend requirements and finance future investments.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2004, we had stockholders' equity of $1,160,363,000 and
a total outstanding debt balance of $1,012,616,000, which represents a debt to
total book capitalization ratio of 0.47 to 1.0.
As of April 30, 2004, we had an effective shelf registration on file
with the Securities and Exchange Commission under which we may issue up to
$581,794,619 of securities including debt securities, common and preferred
stock, depositary shares, warrants and units. Depending upon market conditions,
we anticipate issuing securities under our shelf registration to invest in
additional health care facilities and to repay borrowings under our unsecured
lines of credit arrangements.
As of April 30, 2004, we had an effective registration statement on
file with the Securities and Exchange Commission under which we may issue up to
6,314,213 shares of common stock pursuant to our dividend reinvestment and stock
purchase plan. As of April 30, 2004, 5,614,884 shares of common stock remained
available for issuance under this registration statement.
RESULTS OF OPERATIONS
Revenues were comprised of the following (dollars in thousands):
THREE MONTHS ENDED CHANGE
------------------------------ ---------------------
Mar. 31, 2004 Mar. 31, 2003 $ %
------------------------------ --------- -----------
Rental income $54,535 $38,605 $15,930 41%
Interest income 5,713 4,940 773 16%
Transaction fees
and other income 713 592 121 20%
------- ------- ------- ---
Totals $60,961 $44,137 $16,824 38%
======= ======= ======= ===
For the three months ended March 31, 2004, we generated increased
rental income as a result of the acquisition of properties for which we receive
rent. Interest income increased due to an increase in the balance of outstanding
loans.
12
Transaction fees and other income increase primarily due to interest earnings
generated from short-term investments of excess cash.
Expenses were comprised of the following (dollars in thousands):
THREE MONTHS ENDED CHANGE
---------------------------- -------------------
Mar. 31, 2004 Mar. 31, 2003 $ %
------------- ------------- ------- ---
Interest expense $18,552 $11,383 $ 7,169 63%
Provision for
depreciation 17,134 10,920 6,214 57%
General and
administrative 3,159 2,611 548 21%
Loan expense 891 635 256 40%
Provision for
loan losses 300 250 50 20%
------- ------- ------- --
Totals $40,036 $25,799 $14,237 55%
======= ======= ======= ==
The increase in interest expense from 2003 to 2004 was primarily due to
higher average borrowings and a decrease in the amount of capitalized interest
offsetting interest expense in 2004. This was partially offset by lower average
interest rates.
We capitalize certain interest costs associated with funds used to
finance the construction of properties owned directly by us. The amount
capitalized is based upon the borrowings outstanding during the construction
period using the rate of interest that approximates our cost of financing. Our
interest expense is reduced by the amount capitalized. Capitalized interest for
the three months ended March 31, 2004 totaled $137,000, as compared with
$258,000 for the same period in 2003.
The provision for depreciation increased primarily as a result of
additional investments in properties owned directly by us.
General and administrative expenses as a percentage of revenues
(including revenues from discontinued operations) for the three months ended
March 31, 2004 were 5.18%, as compared with 5.64% for the same period in 2003.
The increase in loan expense was primarily due to the additional
amortization of costs related to amending our primary unsecured line of credit
arrangement and costs related to obtaining consents to modify the covenant
packages of our senior unsecured notes.
Other items were comprised of the following (dollars in thousands):
THREE MONTHS ENDED CHANGE
--------------------------------- ----------------------
Mar. 31, 2004 Mar. 31, 2003 $ %
--------------------------------- ------------ --------
Gain (loss) on sales
of properties $ 0 $ 34 $ (34) n/a
Discontinued
operations, net 925 (925) n/a
Preferred dividends (2,270) (2,846) 576 (20)%
------- ------- ------- ---
Totals $(2,270) $(1,887) $ (383) 20%
======= ======= ======= ===
There were no dispositions during the three months ended March 31,
2004. All properties sold from January 1, 2003 through March 31, 2004 generated
$925,000 of income after deducting depreciation and interest expense from rental
income for the three months ended March 31, 2003.
The decrease in preferred dividends is primarily due to the reduction
in average outstanding preferred shares. Subsequent to March 31, 2003, the
holder of our Series C Cumulative Convertible Preferred Stock converted
2,100,000
13
shares into 2,049,000 shares of common stock, leaving no shares outstanding at
March 31, 2004 as compared to 2,100,000 at March 31, 2003.
In July 2003, we closed a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock. A portion of the proceeds from
this offering were used to redeem all 3,000,000 shares of our 8.875% Series B
Cumulative Redeemable Preferred Stock on July 15, 2003.
In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock. Subsequently, certain holders of our
Series E Cumulative Convertible and Redeemable Preferred Stock converted 274,765
shares into 210,319 shares of common stock, leaving 785,235 outstanding at March
31, 2004. Effective April 1, 2004, another 110,865 Series E shares were
converted into 84,862 common shares.
As a result of the various factors mentioned above, net income
available to common stockholders for the three months ended March 31, 2004 was
$18,655,000, or $0.36 per diluted share, as compared with $16,451,000, or $0.41
per diluted share, for the same period in 2003.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This report on Form 10-Q of the Company may contain "forward-looking"
statements as defined in the Private Securities Litigation Reform Act of 1995.
These forward-looking statements concern the possible expansion of our
portfolio; the performance of our operators and properties; our ability to enter
into agreements with new viable tenants for properties which we take back from
financially troubled tenants, if any; our ability to make distributions; our
policies and plans regarding investments, financings and other matters; our tax
status as a real estate investment trust; our ability to appropriately balance
the use of debt and equity; and our ability to access capital markets or other
sources of funds. When we use words such as "believe," "expect," "anticipate,"
or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Our expected results may not be achieved, and actual
results may differ materially from our expectations. This may be a result of
various factors, including, but not limited to: the status of the economy; the
status of capital markets, including prevailing interest rates; compliance with
and changes to regulations and payment policies within the health care industry;
changes in financing terms; competition within the health care and senior
housing industries; and changes in federal, state and local legislation. Other
important factors are identified in our Annual Report on Form 10-K for the year
ended December 31, 2003, including factors identified under the headings
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Finally, we assume no obligation to update or revise any
forward-looking statements or to update the reasons why actual results could
differ from those projected in any forward-looking statements.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. We seek to mitigate the effects
of fluctuations in interest rates by matching the terms of new investments with
new long-term fixed rate borrowings to the extent possible. The following
section is presented to provide a discussion of the risks associated with
potential fluctuations in interest rates.
We historically borrow on our unsecured lines of credit arrangements to
make acquisitions of, loans to or to construct health care facilities. Then, as
market conditions dictate, we will issue equity or long-term fixed rate debt to
repay the borrowings under the unsecured lines of credit
arrangements.
A change in interest rates will not affect the interest expense
associated with our fixed rate debt. Interest rate changes, however, will affect
the fair value of our fixed rate debt. A 1% increase in interest rates would
result in a decrease in fair value of our senior unsecured notes by
approximately $30,443,000 at March 31, 2004 ($15,465,000 at March 31, 2003).
Changes in the interest rate environment upon maturity of this fixed rate debt
could have an effect on our future cash flows and earnings, depending on whether
the debt is replaced with other fixed rate debt, variable rate debt, or equity
or repaid by the sale of assets.
Our variable rate debt, including our unsecured lines of credit
arrangements, is reflected at fair value. At March 31, 2004, we did not have any
borrowings outstanding under our unsecured lines of credit arrangements. As
such, a 1% increase in interest rates would have no effect on our annual
interest expense. At March 31, 2003, we had $78,100,000 outstanding related to
our variable rate debt and assuming no changes in outstanding balances, a 1%
increase in interest rates would result in increased annual interest expense of
$781,000.
We are subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of
refinancing may not be as favorable as the terms of current indebtedness. The
majority of our borrowings were completed under indentures or contractual
agreements that limit the amount of indebtedness we may incur. Accordingly, in
the event that we are unable to raise additional equity or borrow money because
of these limitations, our ability to acquire additional properties may be
limited.
We may or may not elect to use financial derivative instruments to
hedge variable interest rate exposure. These decisions are principally based on
our policy to match our variable rate investments with comparable borrowings,
but are also based on the general trend in interest rates at the applicable
dates and our perception of the future volatility of interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Our management, under the supervision and with the participation of our
Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures are effective in providing
reasonable assurance that information required to be disclosed by us in the
reports we file with or submit to the Securities Exchange Commission under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities Exchange Commission's rules and forms. No
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) occurred during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the disclosure in Note F to the Unaudited Consolidated Financial
Statements regarding the developments in the bankruptcy proceeding of Doctors
Community Health Care Corporation.
15
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
In September 2003, we issued 1,060,000 shares of 6% Series E Cumulative
Convertible and Redeemable Preferred Stock. Subsequently, certain holders of our
Series E Cumulative Convertible and Redeemable Preferred Stock converted 274,765
shares into 210,319 shares of common stock, leaving 785,235 outstanding at March
31, 2004. Effective April 1, 2004, another 110,865 Series E shares were
converted into 84,862 common shares. These shares are not included in the
following table.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number Maximum Number
of Shares Purchased of Shares that May
Total Number as Part of Publicly Yet Be Purchased
of Shares Average Price Announced Under the Plans or
Period Purchased(1) Paid Per Share Plans or Programs(2) Programs
---------------------- ---------------- ------------------ ----------------------- ---------------------
January 1, 2004
through
January 31, 2004 8,923 $36.68
---------------------- ---------------- ------------------ ----------------------- ---------------------
February 1, 2004
through
February 29, 2004
---------------------- ---------------- ------------------ ----------------------- ---------------------
March 1, 2004
through
March 31, 2004
---------------------- ---------------- ------------------ ----------------------- ---------------------
Totals 8,923 $36.68
---------------------- ---------------- ------------------ ----------------------- ---------------------
(1) All of the shares listed in the table are shares of common stock
that were transferred to the Company by certain key employees to
satisfy tax withholding obligations in connection with the lapse of
certain restrictions under their restricted stock agreements with the
Company.
(2) No shares were purchased as part of publicly announced plans or
programs.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Stock Plan for Non-Employee Directors of Health Care
REIT, Inc. effective January 20, 1997.
10.2 First Amendment to the Stock Plan for Non-Employee
Directors of Health Care REIT, Inc. effective
April 21, 1998.
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief
Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Executive Officer.
32.2 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Financial Officer.
(b) Reports on Form 8-K
Date of Report Item Description
-------------- ---- -----------
February 2, 2004 12 The Company issued a press release announcing
earnings results for the quarter and year ended
December 31, 2003.
May 6, 2004 12 The Company issued a press release announcing
earnings results for the quarter ended March 31, 2004.
16
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 10, 2004 By: /s/ GEORGE L. CHAPMAN
---------------------- ---------------------------------
George L. Chapman,
Chairman and Chief Executive Officer
Date: May 10, 2004 By: /s/ RAYMOND W. BRAUN
---------------------- ---------------------------------
Raymond W. Braun,
President and Chief Financial Officer
Date: May 10, 2004 By: /s/ MICHAEL A. CRABTREE
---------------------- ---------------------------------
Michael A. Crabtree,
Chief Accounting Officer
17