SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K/A
(Amendment No. 1)
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2001
Commission File Number 1-8895
HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 221-0600
--------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------------------- -------------------------
Common Stock* New York Stock Exchange
7-7/8% Series A Cumulative
Redeemable Preferred Stock New York Stock Exchange
8.70% Series B Cumulative
Redeemable Preferred Stock New York Stock Exchange
8.60% Series C Cumulative
Redeemable Preferred Stock New York Stock Exchange
*The common stock has preferred stock purchase rights attached which
are registered pursuant to Section 12(b) of the Securities Act of 1933, as
amended, and listed on the New York Stock Exchange.
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [X] No [_]
As of March 13, 2002 there were 56,902,388 shares of common stock
outstanding. The aggregate market value of the shares of common stock held by
non-affiliates of the registrant, based on the closing price of these shares on
March 13, 2002 on the New York Stock Exchange, was approximately $2,165,336,000.
Portions of the definitive Proxy Statement for the registrant's 2002 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
PART I
Item 1. BUSINESS
Health Care Property Investors, Inc. (HCPI), a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust (REIT). We
invest in health care related real estate located throughout the United States,
including long-term care facilities, congregate care and assisted living
facilities, acute care and rehabilitation hospitals, medical office buildings,
health care laboratory and biotech research facilities and physician group
practice clinics. We commenced business nearly 17 years ago, making us the
second oldest REIT specializing in health care real estate.
As of December 31, 2001, our gross investment in our properties, including
partnership interests and mortgage loans, was approximately $2.7 billion. Our
portfolio of 429 properties in 42 states consisted of:
. 176 long-term care facilities
. 94 congregate care and assisted living facilities
. 86 medical office buildings
. 37 physician group practice clinics
. 21 acute care hospitals
. Nine rehabilitation hospitals
. Six health care laboratory and biotech research facilities
The average age of our properties is 17 years. As of December 31, 2001,
approximately 55% of our revenue was derived from properties operated by
publicly traded health care providers.
Our senior debt is rated Baa2 by Moody's and BBB+ by both Standard & Poor's
and Fitch, respectively, and has been rated medium investment grade continuously
since 1986, when we first received a bond rating. We believe that we have
enjoyed an excellent track record in attracting and retaining key employees. Our
five executive officers have worked with us on average for 16 years. Our average
annual return to stockholders, assuming reinvestment of dividends and before
stockholders' income taxes, was approximately 17.4% over the period from our
initial public offering in May 1985 through December 31, 2001.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and
into HCPI in a stock-for-stock transaction. The merger resulted in the issuance
of 19,430,115 shares of HCPI's common stock and 4,000,000 depositary shares of
HCPI's series C cumulative redeemable preferred stock. Additionally, upon
consummation of the merger, we assumed AHE's debt comprised of $220 million of
senior notes and $56 million of mortgage debt, and paid $71 million in cash to
replace its revolving line of credit. The transaction was treated as a purchase
for financial accounting purposes and, accordingly, the operating results of AHE
have been included in our consolidated financial statements effective as of
November 4, 1999.
References herein to "HCPI", "the Company", "we", "us" and "our" include
Health Care Property Investors, Inc. and our wholly-owned subsidiaries and
consolidated joint ventures and partnerships, unless the context otherwise
requires.
-1-
Our Properties
Lessees and Operators
As of December 31, 2001, we had an ownership interest in 401 properties
located in 40 states. We leased 300 of our owned properties pursuant to
long-term triple net leases to 82 health care providers. Under a triple net
lease, in addition to the rent obligation, the lessee is responsible for all
operating expenses of the property such as utilities, property taxes, insurance
and repairs and maintenance. The most significant lessees under triple net
leases include the following companies or their affiliates:
. Tenet Healthcare Corporation
. HealthSouth Corporation
. Kindred Healthcare, Inc.
. Emeritus Corporation
. HCA Inc.
. Beverly Enterprises, Inc.
. Centennial Healthcare Corp.
(See section on Facility Operators for percentages of annualized revenue
for these operators.)
The remaining 101 owned properties are medical office buildings, physician
clinics and health care laboratory and biotech research facilities with triple
net, gross or modified gross leases with multiple tenants which are managed by
independent property management companies on our behalf. Under gross or modified
gross leases, we may be responsible for property taxes, repairs and maintenance
and/or insurance on those properties.
We also hold mortgage loans on 28 properties that are owned and operated by
16 health care providers including Beverly, Emeritus and Centennial. We have
provided mortgage loans in the amount of $158,204,000 on those 28 properties,
including 16 long-term care facilities, seven congregate care and assisted
living centers, three acute care hospitals and two medical office buildings. At
December 31, 2001, the remaining balance on these loans totaled $148,075,000.
With the exception of Tenet which accounts for 18.3% of our annualized
revenue, no single lessee or operator accounts for more than 5.6% of our revenue
for the year ended December 31, 2001.
Equity Investments
Of the 401 health care facilities in which we had an ownership interest as
of December 31, 2001, we directly own 329 facilities outright, including:
. 136 long-term care facilities
. 83 congregate care and assisted living centers
. 54 medical office buildings
. 37 physician group practice clinics
. 16 acute care hospitals
. Three rehabilitation hospitals
-2-
At December 31, 2001, we also had varying percentage interests in several
limited liability companies and partnerships that together own 72 facilities and
two mortgages as further discussed below under "Investments in Consolidated and
Non-Consolidated Joint Ventures."
The following is a summary of our properties grouped by type of facility
and equity interest as of December 31, 2001:
Equity Number Number Total
Interest of of Beds / Investments Annualized
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- ---------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Long-Term Care Facilities 100% 151 18,613 $ 589,875 $ 73,523
Long-Term Care Facilities 77-80% 25 2,778 71,215 9,927
---------------------------------------------------------------
176 21,391 661,090 83,450
---------------------------------------------------------------
Acute Care Hospitals 100% 19 2,429 618,203 72,300
Acute Care Hospitals 77% 2 356 42,806 8,152
---------------------------------------------------------------
21 2,785 661,009 80,452
---------------------------------------------------------------
Rehabilitation Hospitals 100% 3 248 36,305 5,963
Rehabilitation Hospitals 90-97% 6 437 72,172 9,946
---------------------------------------------------------------
9 685 108,477 15,909
---------------------------------------------------------------
Congregate Care & Assisted Living Centers 100% 90 7,014 444,296 44,754
Congregate Care & Assisted Living Centers 45-50% 4 412 1,537 ---
---------------------------------------------------------------
94 7,426 445,833 44,754
---------------------------------------------------------------
Medical Office Buildings (3) 100% 55 --- 483,560 45,198
Medical Office Buildings (3) 54-90% 31 --- 167,850 16,697
---------------------------------------------------------------
86 --- 651,410 61,895
---------------------------------------------------------------
Health Care Laboratory and Biotech
Research Facilities (3) 54% 6 --- 53,984 4,872
---------------------------------------------------------------
Physician Group Practice Clinics (3) 100% 37 --- 147,566 14,053
---------------------------------------------------------------
Totals 429 32,287 $2,729,369 $305,385
===============================================================
(1) Congregate care and assisted living centers are apartment like facilities
and are therefore stated in units (studio, one or two bedroom apartments)
in order to indicate facility size; all other facilities are stated in
beds, except the medical office buildings, the physician group practice
clinics and the health care laboratory and biotech research facilities for
which square footage is provided in footnote 3.
(2) Includes partnership and limited liability company investments, and
incorporates all partners' and members' assets and construction commitments
as well as our investment in unconsolidated joint ventures.
(3) The medical office buildings, physician group practice clinics and health
care laboratory and biotech research facilities encompass approximately
4,671,000, 1,036,000 and 432,000 square feet, respectively.
The following paragraphs describe each type of property.
Long-Term Care Facilities. We have invested in 176 long-term care
-------------------------
facilities. Various health care providers operate these facilities. Long-term
care facilities offer restorative, rehabilitative and custodial nursing care for
people not requiring the more extensive and sophisticated treatment available at
acute care hospitals. Ancillary revenues and revenue from subacute care services
are derived from providing services to residents beyond room and board and
include occupational, physical, speech, respiratory and IV therapy, wound care,
oncology treatment, brain injury care and orthopedic therapy as well as sales of
pharmaceutical products and other services. Certain long-term
-3-
care facilities provide some of the foregoing services on an out-patient basis.
Long-term care facilities are designed to supplement hospital care and many have
transfer agreements with one or more acute care hospitals. These facilities
depend to some degree upon referrals from practicing physicians and hospitals.
Long-term care services are paid for either by private sources, or through the
federal Medicare and state Medicaid programs.
Long-term care facilities generally provide patients with accommodation,
complete medical and nursing care, and rehabilitation services including speech,
physical and occupational therapy. As a part of the Omnibus Budget
Reconciliation Act ("OBRA") of 1981, Congress established a waiver program under
Medicaid to offer an alternative to institutional long-term care services. The
provisions of OBRA and the subsequent OBRA Acts of 1987 and 1990 allow states,
with federal approval, greater flexibility in program design as a means of
developing cost-effective alternatives to delivering services traditionally
provided in the long-term care setting. This is a contributing factor to the
recent increase in the number of assisted living facilities, which may adversely
affect some long-term care facilities as some individuals choose the residential
environment and lower cost delivery system provided in the assisted living
setting.
Acute Care Hospitals. We have an interest in 18 general acute care
--------------------
hospitals and three long-term acute care hospitals. Acute care hospitals offer a
wide range of services such as fully-equipped operating and recovery rooms,
obstetrics, radiology, intensive care, open heart surgery and coronary care,
neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing
units, oncology, clinical laboratories, respiratory therapy, physical therapy,
nuclear medicine, rehabilitation services and outpatient services.
Long-term acute care hospitals provide care for patients with complex
medical conditions that require more intensive care, monitoring, or emergency
back-up than that available in most skilled nursing-based subacute programs.
Most long-term acute care hospital patients have severe chronic health problems
and are medically unstable or at risk of medical instability. The most common
cases treated in this setting include high acuity ventilator-dependent patients
and patients with multiple system failures relating to cancer, spinal cord
injuries or head injuries.
Services are paid for by private sources, third party payors (e.g.,
insurance and HMOs), or through the federal Medicare and state Medicaid
programs. Medicare provides reimbursement incentives to traditional general
acute care hospitals to minimize inpatient length of stay.
Rehabilitation Hospitals. We have investments in nine rehabilitation
------------------------
hospitals. These hospitals provide inpatient and outpatient care for patients
who have sustained traumatic injuries or illnesses, such as spinal cord
injuries, strokes, head injuries, orthopedic problems, work related disabilities
and neurological diseases, as well as treatment for amputees and patients with
severe arthritis. Rehabilitation programs encompass physical, occupational,
speech and inhalation therapies, rehabilitative nursing and other specialties.
Services are paid for by the patient or the patient's family, third party payors
(e.g., insurance and HMOs), or through the federal Medicare program.
Congregate Care and Assisted Living Centers. We have investments in 94
-------------------------------------------
congregate care and assisted living centers. Congregate care centers typically
offer studio, one bedroom and two bedroom apartments on a month-to-month basis
primarily to individuals who are over 75 years of age. Residents, who must be
ambulatory, are provided meals and eat in a central dining area; they may also
be assisted with some daily living activities. These centers offer programs and
services that
-4-
allow residents certain conveniences and make it possible for them to live
independently; staff is also available when residents need assistance and for
group activities.
Assisted living centers serve elderly persons who require more assistance
with daily living activities than congregate care residents, but who do not
require the constant supervision nursing homes provide. Services include
personal supervision and assistance with eating, bathing, grooming and
administering medication. Assisted living centers typically contain larger
common areas for dining, group activities and relaxation to encourage social
interaction. Residents typically rent studio and one and two bedroom units on a
month-to-month basis.
Charges for room and board and other services in both congregate care and
assisted living centers are generally paid from private sources.
Medical Office Buildings. We have investments in 86 medical office
------------------------
buildings. These buildings are generally located adjacent to, or on the campus
of, acute care hospitals. Medical office buildings contain physicians' offices
and examination rooms, and may also include pharmacies, hospital ancillary
service space and day-surgery operating rooms. Medical office buildings require
more extensive plumbing, electrical, heating and cooling capabilities than
commercial office buildings for sinks, brighter lights and special equipment
that physicians typically use. Of our owned medical office buildings, 16 are
master leased on a triple net basis to lessees that then sublease office space
to physicians or other medical practitioners, 68 are managed by third party
property management companies and are leased under triple net, gross or modified
gross leases under which we are responsible for certain operating expenses, and
two are mortgages.
Health Care Laboratory and Biotech Research Facilities. We have investments
------------------------------------------------------
in six health care laboratory and biotech research facilities. These facilities
are located on a research campus of a major university. The facilities are
designed for and accommodate research and development in the biopharmaceutical
industry, drug discovery and development, and predictive and personalized
medicine. The facilities are leased to two tenants on a long-term basis.
Physician Group Practice Clinics. We have investments in 37 physician group
--------------------------------
practice clinic facilities that are leased to 15 different tenants. These
clinics generally provide a broad range of medical services through organized
physician groups representing various medical specialties. Each clinic facility
is generally leased to a single lessee under a triple net or modified gross
lease.
The following table shows, with respect to each property type, the location
by state, the number of beds/units, recent occupancy levels, patient revenue
mix, annualized rents and interest, and information regarding remaining lease
terms.
-5-
High
Number Quality Average
Number of Beds/ Average Revenue Annualized Remaining
of Units Occupancy Mix Rents/ Term
Facility Location Facilities (1) (2) (2), (3) Interest (5)
- --------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Long-Term Care Facilities
Alabama 1 175 82% 37% $ 868 2
Arizona 3 428 70 33 1,101 6
Arkansas 9 866 53 33 2,265 8
California 17 1,698 86 41 5,724 12
Colorado 7 1,055 88 37 5,686 9
Connecticut 1 121 96 49 165 1
Florida 12 1,267 87 23 6,760 8
Georgia 1 60 84 30 122 20
Idaho 1 119 68 37 571 12
Illinois 1 128 98 61 322 4
Indiana 32 4,064 77 43 18,905 11
Iowa 1 201 89 47 696 12
Kansas 3 299 94 48 1,131 8
Kentucky 1 100 98 50 590 10
Louisiana 3 355 80 23 962 12
Maryland 3 438 85 39 1,933 16
Massachusetts 5 615 83 38 1,945 9
Michigan 4 406 88 48 1,038 7
Minnesota 1 94 95 57 115 9
Mississippi 1 120 97 30 376 10
Missouri 1 153 --- --- 540 10
Montana 1 80 60 38 205 8
Nevada 2 266 86 68 1,569 8
New Mexico 1 102 81 18 327 2
North Carolina 7 782 84 45 3,163 7
Ohio 12 1,543 83 46 8,073 10
Oklahoma 12 1,395 76 78 511 12
Oregon 1 110 --- --- 50 3
Pennsylvania 1 89 74 36 391 2
South Carolina 2 --- --- --- --- 10
Tennessee 13 2,192 84 42 10,859 9
Texas 6 689 67 47 1,621 7
Utah 1 120 69 25 494 12
Washington 2 252 74 54 995 9
Wisconsin 7 1,009 82 46 3,377 8
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 176 21,391 82 42 83,450 9
- --------------------------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 91 100 473 11
California 4 828 54 100 28,335 3
Florida 1 204 70 100 7,513 3
Georgia 1 167 54 100 7,387 3
Idaho 1 22 --- --- --- ---
Louisiana 2 325 40 100 5,468 3
Missouri 1 201 76 100 3,642 3
New Mexico 1 56 77 100 2,365 5
North Carolina 1 355 57 100 7,667 3
South Carolina 2 174 23 100 2,687 4
Texas 5 293 65 100 6,788 6
Utah 1 139 23 100 8,127 3
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 21 2,785 54% 100% $ 80,452 3
- --------------------------------------------------------------------------------------------------------------------------
-6-
High
Number Quality Average
Number of Beds/ Average Revenue Annualized Remaining
of Units Occupancy Mix Rents/ Term
Facility Location Facilities (1) (2) (2),(3) Interest (5)
- ----------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Rehabilitation Facilities
Arizona 1 60 72% 100% $ 1,804 3
Arkansas 2 120 80 100 3,193 8
Colorado 1 64 70 100 1,235 4
Florida 1 108 97 100 2,250 10
Kansas 2 145 62 100 3,765 2
Texas 1 108 70 100 1,753 2
West Virginia 1 80 94 100 1,909 10
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 9 685 77 100 15,909 6
- ----------------------------------------------------------------------------------------------------------------------------
Physician Group Practice Clinics (4)
California 2 --- --- --- 4,483 8
Colorado 1 --- --- --- 348 6
Florida 9 --- --- --- 2,442 6
Georgia 3 --- --- --- 362 7
North Carolina 2 --- --- --- 533 3
Oklahoma 4 --- --- --- 292 5
Tennessee 4 --- --- --- 1,629 9
Texas 4 --- --- --- 1,598 7
Virginia 1 --- --- --- 273 7
Wisconsin 7 --- --- --- 2,093 13
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 37 --- --- --- 14,053 8
- ----------------------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama 1 84 --- --- --- 13
Arizona 1 98 92 79 571 6
Arkansas 1 17 --- --- 28 9
California 7 535 78 100 5,444 14
Delaware 1 52 62 80 409 6
Florida 10 820 87 100 2,843 11
Georgia 2 80 89 100 293 9
Idaho 1 50 96 89 365 4
Indiana 4 378 --- --- 1,447 9
Kansas 2 194 62 46 158 12
Louisiana 3 240 94 100 1,698 12
Maryland 2 140 --- --- 970 10
Michigan 3 320 98 100 1,025 11
Mississippi 1 80 96 100 697 15
Missouri 1 73 43 73 317 10
Nebraska 1 73 --- --- 514 7
New Jersey 4 279 77 88 2,258 10
New Mexico 2 285 73 100 2,166 10
New York 1 75 85 100 489 6
North Carolina 3 230 84 100 1,403 9
Ohio 2 280 63 100 1,623 10
Oregon 1 58 85 100 403 8
Pennsylvania 3 232 89 100 2,040 7
South Carolina 9 650 73 94 4,324 11
Tennessee 1 60 33 100 16 ---
Texas 22 1,722 76 93 10,650 10
Virginia 1 90 --- --- 855 12
Washington 3 219 86 58 1,665 10
Wisconsin 1 12 96 100 83 7
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 94 7,426 79% 94% $ 44,754 10
- ----------------------------------------------------------------------------------------------------------------------------
-7-
High
Number Quality Average
Number of Beds/ Average Revenue Annualized Remaining
of Units Occupancy Mix Rents/ Term
Facility Location Facilities (1) (2) (3) Interest (5)
- ----------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Medical Office Buildings (4)
Arizona 9 --- --- --- $ 2,701 7
California 12 --- --- --- 11,934 5
Florida 5 --- --- --- 1,595 6
Indiana 14 --- --- --- 6,997 6
Kansas 1 --- --- 394 9
Kentucky 1 --- --- --- 685 4
Maryland 1 --- --- --- 611 8
Massachusetts 1 --- --- --- 1,814 7
Minnesota 2 --- --- --- 2,319 6
Missouri 1 --- --- --- 555 6
Nevada 1 --- --- --- 258 17
New Jersey 2 --- --- --- 2,720 3
New York 1 --- --- --- 2,340 6
North Dakota 1 --- --- --- 981 8
Ohio 1 --- --- --- 463 11
Oregon 1 --- --- --- 583 13
Tennessee 1 --- --- --- 1,285 12
Texas 11 --- --- --- 10,789 4
Utah 19 --- --- --- 10,755 8
Washington 1 --- --- --- 2,116 6
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 86 --- --- --- 61,895 6
- ----------------------------------------------------------------------------------------------------------------------------
Health Care Laboratory and
Biotech Research
Utah 6 --- --- --- 4,872 12
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 6 --- --- --- $ 4,872 12
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 429 32,287 --- --- $305,385 7
============================================================================================================================
(1) Congregate care and assisted living centers are apartment-like facilities
and are therefore stated in units (studio, one or two bedroom apartments)
in order to indicate facility size. Medical office buildings, physician
group practice clinics and health care laboratory and biotech research
facilities are measured in square feet and encompass approximately
4,671,000 square feet, 1,036,000 square feet and 432,000 square feet,
respectively. All other facilities are measured by licensed bed count.
(2) This information is derived from information provided by our lessees for
the most recent quarter. Excluded are facilities under construction, newly
completed facilities under start-up, vacant facilities, and facilities
where the data is not available or not meaningful. Occupancy computations
are weighted by number of beds/units. Long-Term Care Facilities are
computed using available beds which can sometimes be less than the number
of licensed beds a facility may have. In prior years, this information was
computed for all facilities using an average for the four most recent
quarters using a simple average on licensed beds for all facility types.
(3) This information is derived from information provided by our lessees
for the most recent quarter. Excluded are facilities under construction,
newly completed facilities under start up, vacant facilities and facilities
where the data is not available or not meaningful. All revenues, including
private patient and Medicare revenues but excluding Medicaid revenues, are
included in "High Quality" revenues. In prior years, this information was
computed for all facilities using an average for the four most recent
quarters using a simple average for all facility types.
(4) Physician group practice clinics and medical office building lessees have
use of the leased facilities for their own use or for the use of
sub-lessees.
(5) Average Remaining Lease Term calculations are weighted by annualized
revenue. Previously this information was computed using a simple average.
Competition
We compete for real estate acquisitions and financings with health care
providers, other health care related real estate investment trusts, real estate
partnerships, real estate lenders, and other investors.
-8-
Our properties are subject to competition from the properties of other
health care providers. Certain of these other operators have capital resources
substantially in excess of some of the operators of our facilities. In addition,
the extent to which the properties are utilized depends upon several factors,
including the number of physicians using the health care facilities or referring
patients there, competitive systems of health care delivery and the size and
composition of the population in the surrounding area. Private, federal and
state payment programs and the effect of other laws and regulations may also
have a significant influence on the utilization of the properties. Virtually all
of the properties operate in a competitive environment and patients and referral
sources, including physicians, may change their preferences for a health care
facility from time to time.
Facility Operators
At December 31, 2001, we had investments in 429 properties located in 42
states and operated by 93 health care operators. In addition, approximately 650
leases are in force in the multi-tenant buildings. Listed below are our major
operators, the number of facilities operated by our operators, and the
annualized revenue and the approximate percentage of annualized revenue derived
from those operators.
Percentage of
Annualized Total Annualized
Operators Facilities Revenue Revenue
--------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Tenet 9 $ 56,058 18%
HealthSouth 9 17,077 6
Kindred 24 16,372 5
Emeritus 27 15,367 5
HCA 9 14,752 5
Beverly 24 10,009 3
Centennial 18 8,744 3
Certain of the listed facilities have been subleased to other operators
with the original lessee remaining liable on the leases. The revenue applicable
to these sublessees is not included in the annualized revenue percentages above.
The percentage of annualized revenue on these subleased facilities was 1% for
the year ended December 31, 2001.
Tenet, HealthSouth, Kindred, Emeritus, HCA and Beverly are subject to the
informational filing requirements of the Securities Exchange Act of 1934, as
amended, and accordingly file periodic financial statements on Form 10-K and
Form 10-Q with the Securities and Exchange Commission. We obtained all of the
financial and other information relating to these operators listed below from
their public reports.
The following table summarizes our major public operators' assets,
stockholders' equity, interim revenue and net income (or net loss) from
continuing operations as of or for the nine months ended September 30, 2001. All
of the following information is based upon such operators' public reports.
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
-----------------------------------------------------------------------------------------------------------
(Dollar amounts in millions)
Tenet (1) $ 13,423 $ 5,301 $ 6,691 $ 416
HealthSouth 7,375 3,720 3,265 135
Kindred (2) 1,481 480 1,539 33
Emeritus 171 (73) 105 (4)
HCA 17,497 4,915 13,415 845
Beverly 1,857 560 2,033 (35)
-9-
(1) The information described above for Tenet is for the six months ended
November 30, 2001 or as of November 30, 2001, as applicable.
(2) The information described above for Kindred is for the six months ended
September 30, 2001 or as of September 30, 2001, as applicable.
The following table summarizes our major public operators' assets,
stockholders' equity, annualized revenue and net income (or net loss) from
continuing operations as of or for the year ended December 31, 2000.
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
---------------------------------------------------------------------------------
(Dollar amounts in millions)
Tenet* $ 12,995 $ 5,079 $ 12,053 $ 678
HealthSouth 7,380 3,527 4,195 279
Kindred 1,334 (472) 2,889 (65)
Emeritus 178 (66) 125 (22)
HCA 17,568 4,405 16,670 219
Beverly 1,876 584 2,628 (55)
* The information described above for Tenet is for the fiscal year ended May
31, 2001 or as of May 31, 2001, as applicable.
The current equity market capitalization for each of the operators listed
above, based on the closing price of their common stock on March 1, 2002 as
reported in the Wall Street Journal, and based on the number of outstanding
shares of their common stock as reported in their most recent public filing
available is as follows: Tenet, $18.9 billion; HealthSouth, $4.7 billion;
Kindred, $714 million; HCA, $20.9 billion; Emeritus, $48.4 million; and Beverly,
$635 million.
Certain additional information about these operators is provided below:
Tenet
Tenet, a Fortune 500 company, is one of the nations largest health care
services companies, providing a broad range of services through the ownership
and management of acute care hospitals. Tenet's unsecured debt ratings have
recently improved to Baa3/BBB by Moody's and Standard and Poor's.
Kindred Healthcare (formerly Vencor, Inc.):
We have negotiated a new lease with Kindred Healthcare, Inc. ("Kindred")
for 22 facilities whose leases were scheduled originally to expire in August
2001. For lease renewal purposes, the facilities comprise three groups with
maturities of nine, ten, and eleven years. The annual rent on these facilities
has increased by $3,300,000 to $16,100,000 in the first lease year. Ten
additional facilities were originally leased to Kindred. Of those ten, six have
been leased directly to former Kindred sublessees or third parties for lower
rents to us of an estimated $200,000 annually, three have been subsequently
sold, and one is being considered for lease to a third party.
-10-
Troubled Long-Term Care and Assisted Living Operators
We derive 27% of our revenue from the long-term care industry. A slowing
economy with lower labor costs, greater availability of nursing aides, less
labor turnover and lower interest costs is expected to continue to improve
nursing home operations, tempered in part by increased liability insurance costs
and lower increases or decreases in government reimbursement. While certain
long-term care operators and facilities continue to experience operating
problems in part due to low levels of Medicaid reimbursements in certain states,
many others have shown improvement. However, if the most recent Medicare
reimbursement increase is not extended beyond October 1, 2002 and various states
institute Medicaid rate cuts to reduce budget shortfalls, some operators may
again begin feeling the strain of inadequate reimbursement. Several long-term
care facility operators, including Kindred and Genesis Health Ventures, two of
our lessees, have successfully emerged from bankruptcy proceedings. In addition,
two other large long-term care operators and lessees, Sun Healthcare, which has
recently received approval for its reorganization plan, and Mariner Healthcare
which has submitted its plan for reorganization, may exit bankruptcy during the
first half of 2002.
We own eleven long-term care facilities in Oklahoma, four facilities in
North Carolina, and eight facilities in various other states whose operations
have been negatively affected by reduced reimbursement and the performance and
financial situation of the properties and their lessees. We recorded revenue of
approximately $1,400,000 less in the fourth quarter of this year from these 23
properties than in the corresponding quarter in 2000. Management expects
improved results from higher lease revenue or sales of these properties in the
next 12 months. We recently signed leases for six of these facilities and
letters of intent on another three properties.
The assisted living industry, from which we derive 15% of our revenue, has
been challenged by overbuilding in certain areas, slower than projected fill-up
rates, margin pressure from lower than projected rents and shortage of capital.
Development activity has slowed and there is improving census in a number of
communities. Various assisted living companies continue their efforts to
restructure their capital, debt and lease structures, while new operators are
emerging in the market with new capital for selective investment.
We own seven assisted living facilities currently leased to three operators
whose operations have been negatively affected by their current market position.
This has resulted in our recording revenue of approximately $700,000 less in the
fourth quarter of this year from these seven properties than in the same quarter
in 2000. Management believes that there will be a significant improvement in its
return on some of these buildings in 2002.
We cannot assure you that the bankruptcies of certain long-term care
operators and the trouble experienced by assisted living operators will not have
a material adverse effect on our Net Income, FFO or the market value of our
common stock.
Leases and Loans
The initial base rental rates of the triple net leases of properties we
acquired during the three years ended December 31, 2001 have generally ranged
from 9% to 12% per annum of the acquisition price of the related property.
Initial interest rates on the loans we entered into during the three years ended
December 31, 2001 have generally ranged from 8% to 11% per annum. Rental rates
vary by lease, taking into consideration many factors, such as:
. Creditworthiness of the lessee
. Operating performance of the facility
. Interest rates at the beginning of the lease
. Location, type and physical condition of the facility
Certain leases provide for additional rents that are based upon a
percentage of increased revenue over specific base period revenue of the leased
properties. Others have rent increases based on inflation indices or other
factors and some leases and loans have annual fixed rent or interest rate
increases (see Note 2 to the Consolidated Financial Statements in this Annual
Report on Form 10-K).
In addition to the minimum and additional rents, each lessee under a triple
net lease is responsible for all additional charges, including charges related
to non-payment or late payment of rent, taxes and assessments, governmental
charges, and utility and other charges. Each triple net
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lessee is required, at its expense, to maintain its leased property in good
order and repair. We are not required to repair, rebuild or maintain the
properties leased under triple net leases.
Each lessee with a gross or modified gross lease is also responsible for
minimum and additional rents, but may not be responsible for all operating
expenses. Under gross or modified gross leases, we may be responsible for
property taxes, repairs and maintenance and/or insurance on those properties.
The primary or fixed terms of the triple net and modified gross leases
generally range from ten to 15 years, and generally have one or more five-year
(or longer) renewal options. The average remaining base lease-term on the triple
net and modified gross leases is approximately seven years. The primary term of
the gross leases to multiple tenants in the medical office buildings range from
one to 20 years, with an average of six years remaining on those leases.
Obligations under the triple-net leases, in most cases, have corporate parent or
shareholder guarantees. Irrevocable letters of credit from various financial
institutions and lease deposits back 142 leases and loans on 15 facilities which
cover from one to 18 months of lease or loan payments. We require the lessees
and mortgagors to renew such letters of credit during the lease or loan term in
amounts that may change based upon the passage of time, improved operating cash
flows or improved credit ratings.
We believe that the credit enhancements discussed above provide us with
significant protection for our investment portfolio. As of January 31, 2002,
other than approximately $5.4 million in delinquent rents and interest, of which
approximately $1.1 million is covered by credit enhancements, we are currently
receiving rents and interest in a timely manner from substantially all lessees
and mortgagors as provided under the terms of the leases or loans; we have
provided reserves of $3.4 million against the remaining amounts.
Based upon information provided to us by lessees or mortgagors, certain
facilities are presently underperforming financially. Individual facilities may
underperform as a result of inadequate Medicaid reimbursement, low occupancy,
less than optimal patient mix, excessive operating costs, other operational
issues or capital needs. We believe that, even if these facilities remain at
current levels of performance, the lease and loan provisions contain sufficient
security to assure that material rental and mortgage obligations will continue
to be met for the remainder of the lease or loan terms. In the future it is
expected that some lessees may choose not to renew their leases on certain
properties at existing rental rates (see table below).
Many lessees have the right of first refusal to purchase the properties
during the lease term; many leases provide one or more five-year (or longer)
renewal options at existing lease rates and continuing additional rent formulas,
although certain leases provide for lease renewals at fair market value. Certain
lessees also have options to purchase the properties, generally for fair market
value, and generally at the expiration of the primary lease term and/or any
renewal term under the lease. If options are exercised, many such provisions
require lessees to purchase or renew several facilities together, precluding the
possibility of lessees purchasing or renewing only those facilities with the
best financial outcomes. Sixty one properties are not subject to purchase
options until 2008 or later, and an additional 292 leased properties do not have
any purchase options.
A table recapping lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance as of December 31,
2001 follows:
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Current Annualized Revenue of
----------------------------------------------------------
Properties Subject to
Lease Expirations, Purchase
Options and Properties Subject Estimated Revenue
Mortgage Maturities to Purchase Options Loss at Lease
Year (1) (2), (3) Expiration (4), (5)
- --------------------------------------------------------------------------------------------------------------
(Amounts in thousands, except percentages)
2002 $ 3,447 $ 2,108 0.32% $ 977
2003 8,759 3,577 0.35 1,079
2004 66,468 54,338 1.31 3,992
Thereafter 226,711 83,898 --- ---
-------------------------------------------------------------------------------------------
$305,385 $143,921 1.98% $ 6,048
===========================================================================================
(1) This column includes the revenue impact by year and the total annualized
rental and interest income associated with the properties subject to
lessees' renewal options and/or purchase options and mortgage maturities.
(2) This column includes the revenue impact by year and the total annualized
rental and interest income associated with properties subject to purchase
options. If a purchase option is exercisable at more than one date, the
convention used in the table is to show the revenue subject to the purchase
option at the date management estimates is most likely for exercise of the
option. Although certain purchase option periods commenced in earlier
years, lessees have not exercised their purchase options as of this time.
The total for this column (2) $143,921 is a component (subset) of column
(1), the total current annualized revenue of properties subject to lease
expirations, purchase options and mortgage maturities.
(3) Seven hospitals leased to Tenet Healthcare Corporation come up for renewal
or purchase option in 2004. Six of these leases were renewed in 1999 for a
five year term. Based on the current operations at these facilities and the
availability of contractual renewal rates below market, management of HCPI
expects that renewal of the leases in 2004 for another five year term is
likely.
(4) Based on current market conditions, we estimate that there could be a
revenue loss (compared to current rental rates) upon the expiration of the
current term of the leases in the percentages and amounts shown in the
table for lease expirations. The percentages are computed by taking the
possible revenue loss as a percentage of 2001 total annualized revenue.
(5) We estimate that in addition to the possible reduction in income from lease
expirations, we may also have an increase of approximately $700,000 in 2002
due to the reinvestment of cash received from mortgage maturities and
facility sales. This amount is calculated based on current interest rate
levels and is not estimated in years subsequent to 2002 due to the
unpredictable levels of facility sales and interest rates and their impact
on sales and mortgage maturities.
There are numerous factors that could have an impact on lease renewals or
facility sales, including the financial strength of the lessee, expected
facility operating performance, the relative level of interest rates and
individual lessee financing options. Based upon management expectations of our
continued growth, the facilities subject to renewal and/or sale and mortgage
maturities and any possible rent loss therefrom should represent a small
percentage of revenue in the year of renewal or purchase.
Each lessee, at its expense, may make non-capital additions, modifications
or improvements to its leased property. All such alterations, replacements and
improvements must comply with the terms and provisions of the lease, and become
our or our affiliates' property upon termination of the lease. Leases generally
require the lessee to maintain adequate insurance on the leased property, naming
us or our affiliates and any mortgagees as additional insureds. In certain
circumstances, the lessee may self-insure pursuant to a prudent program of
self-insurance if the lessee or the guarantor of
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its lease obligations has substantial net worth. In addition, each lease
requires the lessee to indemnify us or our affiliates against certain
liabilities in connection with the leased property.
Development of Facilities
Since 1987, we have committed to the development of 61 facilities. As of
December 31, 2001, we have funded costs of approximately $418 million and have
completed 58 facilities of our total development commitment. The completed
facilities comprise:
. 35 congregate care and assisted living facilities
. Seven long-term care facilities
. Seven medical office buildings
. Five rehabilitation hospitals
. Four acute care hospitals
Simultaneously with the commencement of each of these development programs
and prior to funding, we enter into a lease agreement with the
developer/operator. The base rent under the lease is generally established at a
rate equivalent to a specified margin over our cost of money at the commencement
of the lease.
Our build to suit development program generally includes a variety of
additional forms of credit enhancement and collateral beyond those provided by
the leases. During the development period, we generally require additional
security and collateral in the form of more than one of the following:
. Irrevocable letters of credit from financial institutions;
. Payment and performance bonds; and
. Completion guarantees by either one or a combination of the
developer/operator's parent entity, other affiliates or one or more of
the individual principals who control the developer/operator.
In addition, before we advance any funds under the development agreement,
the developer/operator must provide:
. Satisfactory evidence in the form of an endorsement to our title
insurance policy that no intervening liens have been placed on the
property since the date of our previous advance;
. A certificate executed by the project architect that indicates that all
construction work completed on the project conforms with the requirements
of the applicable plans and specifications;
. A certificate executed by the general contractor that all work requested
for reimbursement has been completed; and
. Satisfactory evidence that the funds remaining unadvanced are sufficient
for the payment of all costs necessary for the completion of the project
in accordance with the terms and provisions of the agreement.
As a further safeguard during the development period, we generally will
retain 10% of construction funds incurred until we have received satisfactory
evidence that the project will be fully
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completed in accordance with the applicable plans and specifications. We also
monitor the progress of the development of each project and the accuracy of the
developer/operator's draw requests by having our own in-house inspector perform
regular on-site inspections of the project prior to the release of any requested
funds.
Investments in Consolidated and Non-Consolidated Joint Ventures
At December 31, 2001, we also had varying percentage interests in several
limited liability companies and partnerships that together own 72 facilities and
two mortgages, as further discussed below:
(1) A 77% interest in a partnership (Health Care Property Partners) which owns
two acute care hospitals and 18 long-term care facilities and has one
mortgage on a long-term care facility.
(2) Interests of between 90% and 97% in six partnerships (HCPI/San Antonio Ltd.
Partnership, HCPI/Colorado Springs Ltd. Partnership, HCPI/Little Rock Ltd.
Partnership, HCPI/Kansas Ltd. Partnership, Fayetteville Health Associates
Ltd. Partnership and Wichita Health Associates Ltd. Partnership), each of
which was formed to own a comprehensive rehabilitation hospital.
(3) A 90% interest in a limited liability company (HCPI Indiana, LLC) which
owns six medical office buildings and has one mortgage on a medical office
building.
(4) A 59% interest in a limited liability company (HCPI Utah, LLC) which owns
18 medical office buildings.
(5) A 54% interest in a limited liability company (HCPI Utah II, LLC) which
owns six medical office buildings, five health care laboratory and biotech
research facilities and is constructing one health care laboratory and
biotech research facility.
(6) An 80% interest in five limited liability companies (Vista-Cal Associates,
LLC; Statesboro Associates, LLC; Ft. Worth-Cal Associates, LLC; Perris-Cal
Associates, LLC; and Louisiana-Two Associates, LLC) which own an aggregate
of six long-term care facilities.
(7) A 45% - 50% interest in four limited liability companies (Seminole Shores
Living Center, LLC - 50%; Edgewood Assisted Living Center, LLC - 45%;
Arborwood Living Center, LLC - 45%; and Greenleaf Living Center, LLC - 45%)
each owning a congregate care facility.
Future Acquisitions
We anticipate acquiring additional health care related facilities and
leasing them to health care operators or investing in mortgages secured by
health care facilities.
Taxation of HCPI
We believe that we have operated in such a manner as to qualify for
taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of
1986, as amended (the "Code"), commencing with our taxable year ended December
31, 1985, and we intend to continue to operate in such a manner. No assurance
can be given that we have operated or will be able to continue to operate in a
manner so as to qualify or to remain so qualified. This summary is qualified in
its entirety by the applicable Code provisions, rules and regulations
promulgated thereunder, and administrative and judicial interpretations thereof.
If we qualify for taxation as a REIT, we will generally not be required to
pay federal corporate income taxes on the portion of our net income that is
currently distributed to stockholders. This
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treatment substantially eliminates the "double taxation" (i.e., at the corporate
and stockholder levels) that generally results from investment in a corporation.
However, we will be required to pay federal income tax under certain
circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals; and (vii) which meets certain other tests, described below,
regarding the amount of its distributions and the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
There presently are two gross income requirements. First, at least 75% of
our gross income (excluding gross income from "prohibited transactions" as
defined below) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property or from
certain types of temporary investment income. Second, at least 95% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from income that qualifies under the 75% test and all other
dividends, interest and gain from the sale or other disposition of stock or
securities. A "prohibited transaction" is a sale or other disposition of
property (other than foreclosure property) held for sale to customers in the
ordinary course of business.
At the close of each quarter of our taxable year, we must also satisfy four
tests relating to the nature of our assets. First, at least 75% of the value of
our total assets must be represented by real estate assets (including stock or
debt instruments held for not more than one year, purchased with the proceeds of
a stock offering or long-term (more than five years) public debt offering by
us), cash, cash items and government securities. Second, not more than 25% of
our total assets may be represented by securities other than those in the 75%
asset class. Third, of the investments included in the 25% asset class, the
value of any one issuer's securities owned by us may not exceed 5% of the value
of our total assets and we may not own more than 10% of the vote or value of the
securities of a non-REIT corporation, other than certain debt securities and
interests in taxable REIT subsidiaries, as defined below. Fourth, not more than
20% of the value of our total assets may be represented by securities of one or
more taxable REIT subsidiaries.
The first three asset tests mentioned above were applicable for all of our
prior taxable years, except for the "10% value" requirement relating to the
securities of a non-REIT corporation. This provision and the fourth asset test,
which limits our ownership of taxable REIT subsidiaries, are effective for
taxable years ending after December 31, 2000.
We own interests in various partnerships and limited liability companies.
In the case of a REIT that is a partner in a partnership or a member of a
limited liability company that is treated as a partnership under the Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company and will be deemed to be entitled
to the income of the partnership or limited liability company attributable to
such share. The ownership of an interest in a partnership or limited
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liability company by a REIT may involve special tax risks, including the
challenge by the Internal Revenue Service (the "Service") of the allocations of
income and expense items of the partnership or limited liability company, which
would affect the computation of taxable income of the REIT, and the status of
the partnership or limited liability company as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. We also
own interests in a number of subsidiaries which are intended to be treated as
qualified REIT subsidiaries (each a "QRS"). The Code provides that such
subsidiaries will be ignored for federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of such subsidiaries will
be treated as assets, liabilities and such items of ours. If any partnership,
limited liability company, or subsidiary in which we own an interest were
treated as a regular corporation (and not as a partnership, QRS or taxable REIT
subsidiary) for federal income tax purposes, we would likely fail to satisfy the
REIT asset tests described above and would therefore fail to qualify as a REIT.
We believe that each of the partnerships, limited liability companies, and
subsidiaries (other than taxable REIT subsidiaries) in which we own an interest
will be treated for tax purposes as a partnership or disregarded entity (in the
case of a partnership or limited liability company), or QRS, respectively,
although no assurance can be given that the Service will not successfully
challenge the status of any such organization.
We also own interests in two subsidiaries which are intended to be treated
as taxable REIT subsidiaries (each a "TRS"). A REIT may own any percentage of
the voting stock and value of the securities of a corporation which jointly
elects with the REIT to be a TRS, provided certain requirements are met. A TRS
generally may engage in any business, including the provision of customary or
noncustomary services to tenants of its parent REIT and of others, except a TRS
may not manage or operate a health care facility. A TRS is treated as a regular
corporation and is subject to federal income tax and applicable state income and
franchise taxes at regular corporate rates. In addition, a 100% tax may be
imposed on a REIT if its rental, service or other agreements with its TRS, or
the TRS's agreements with the REIT's tenants, are not on arms' length terms.
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (A) the sum of (i) 90% of our "real estate investment trust taxable
income" (computed without regard to the dividends paid deduction and our net
capital gain) and (ii) 90% of the net income, if any (after tax), from
foreclosure property, minus (B) the sum of certain items of non-cash income. For
all of our taxable years beginning before January 1, 2001, the 90% distribution
requirement discussed above was 95%. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before we timely file our tax return for such year, if paid on or before the
first regular dividend payment date after such declaration and if we so elect
and specify the dollar amount in our tax return. To the extent that we do not
distribute all of our net long-term capital gain or distribute at least 90%, but
less than 100%, of our "real estate investment trust taxable income", as
adjusted, we will be required to pay tax thereon at regular corporate tax rates.
Furthermore, if we should fail to distribute during each calendar year at least
the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital
gain income for such year, and (iii) any undistributed taxable income from prior
periods, we would be required to pay a 4% excise tax on the excess of such
required distributions over the amounts actually distributed.
If we fail to qualify for taxation as a REIT in any taxable year, and
certain relief provisions do not apply, we will be required to pay tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify will not be deductible by us nor will they be required to be
made. Unless entitled to relief under specific statutory provisions, we will
also be disqualified from taxation as a REIT for the four
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taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances we would be entitled to the
statutory relief. Failure to qualify for even one year could substantially
reduce distributions to stockholders and could result in our incurring
substantial indebtedness (to the extent borrowings are feasible) or liquidating
substantial investments in order to pay the resulting taxes.
On November 4, 1999, we acquired AHE in a merger. AHE had also made an
election to be taxed as a REIT. If AHE failed to qualify as a REIT for any of
its taxable years, it would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. As successor-in-interest to AHE, we would be required to pay this tax. In
addition, in connection with the merger, and to the extent that the merger is
treated as a reorganization under the Code, we succeeded to various tax
attributes of AHE, including any undistributed C corporation earnings and
profits of AHE. A C corporation is generally defined as a corporation which is
required to pay a full corporate-level tax. If AHE qualified as a REIT for all
years prior to the merger and the merger is treated as a reorganization under
the Code, then AHE would not have any undistributed C corporation earnings and
profits. If, however, AHE failed to qualify as a REIT for any year, then it is
possible that we acquired undistributed C corporation earnings and profits from
AHE. If we did not distribute these C corporation earnings and profits prior to
the end of 1999, we would fail to qualify as a REIT. AHE's counsel rendered
opinions in connection with the merger to the effect that, based on the facts,
representations and assumptions stated therein, commencing with its taxable year
ended December 31, 1987, AHE was organized in conformity with the requirements
for qualification and taxation as a REIT under the Code, and its method of
operation enabled it to meet, through the effective time of the merger, the
requirements for qualification and taxation as a REIT under the Code.
We and our stockholders may be required to pay state or local tax in
various state or local jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of us and our
stockholders may not conform to the federal income tax consequences discussed
above.
Government Regulation
The health care industry is heavily regulated by federal, state and local
laws. This government regulation of the health care industry affects us because:
(1) The financial ability of lessees to make rent and debt payments to us may
be affected by governmental regulations such as licensure, certification
for participation in government programs, and government reimbursement, and
(2) Our additional rents are often based on our lessees' gross revenue from
operations in many instances, which in turn are affected by the amount of
reimbursement such lessees receive from the government.
These laws and regulations are subject to frequent and substantial changes
resulting from legislation, adoption of rules and regulations, and
administrative and judicial interpretations of existing law. These changes may
have a dramatic effect on the definition of permissible or impermissible
activities, the relative costs associated with doing business and the amount of
reimbursement by both government and other third-party payors. These changes may
be applied retroactively. The ultimate timing or effect of these changes cannot
be predicted. The failure of any borrower of funds from us or lessee of any of
our properties to comply with such laws, requirements
-18-
and regulations could affect its ability to operate its facility or facilities
and could adversely affect such borrower's or lessee's ability to make debt or
lease payments to us.
Fraud and Abuse. There are various federal and state laws prohibiting fraud
by health care providers, including criminal provisions which prohibit filing
false claims or making false statements to receive payment or certification
under Medicare and Medicaid, or failing to refund overpayments or improper
payments. Violation of these federal provisions is a felony punishable by up to
five years imprisonment and/or a $25,000 fine. Civil provisions prohibit the
knowing filing of a false claim or the knowing use of false statements to obtain
payment. The penalties for such violations may include fines ranging from $5,000
to $10,000, plus treble damages, for each claim filed.
There are also laws that attempt to eliminate fraud and abuse by
prohibiting payment arrangements that include compensation for patient
referrals. The federal Anti-Kickback Law prohibits, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for, or to induce, the referral of Medicare, Medicaid, or other federal health
care program patients. A wide array of relationships and arrangements, including
ownership interests in a company by persons who refer or who are in a position
to refer patients, as well as personal services agreements, have under certain
circumstances, been alleged or been found to violate these provisions. In
addition to the Anti-Kickback Statute, federal law also restricts physicians who
have financial relationships with hospitals and other providers of health care
services from making referrals for certain services to those providers. In
August 1995, the federal government released final regulations addressing
physician referral prohibitions relating to financial relationships with
entities that furnish clinical laboratory services. In January 2001, the federal
government released the first portion of final regulations that explain the
scope of the physician referral prohibition with respect to entities that
furnish certain "designated health services." Most of the provisions contained
within the January 2001 regulations became effective January 4, 2002. The second
part of the final regulations has not been promulgated and is not expected until
2002 or later. All of these regulations will impact health care providers'
financial and contractual arrangements with physicians.
Many states have adopted or are considering legislative proposals similar
to the federal Anti-Kickback Statute, some of which apply to the referral of
patients for health care services reimbursed by any source, not only the
Medicare and other federal government programs. In addition, several states have
enacted or are considering legislation that prohibits physician referral
arrangements or requires physicians to disclose any financial interest they may
have with a health care provider to their patients when referring patients to
that provider. The federal and state laws and regulations regarding fraud and
abuse are extremely complex, and little judicial or regulatory interpretation
exists.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against health care providers. The Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act
of 1997 expand the penalties for health care fraud, including broader provisions
for the exclusion of providers from the Medicare and Medicaid programs. Further,
under Operation Restore Trust, a major anti-fraud demonstration project, the
Office of Inspector General of the U.S. Department of Health and Human Services,
in cooperation with other federal and state agencies, has focused on the
activities of skilled nursing facilities, home health agencies, hospices and
durable medical equipment suppliers in certain states, including California, in
which we have properties. Due to the success of Operation Restore Trust, the
project has been expanded to numerous other states and to additional providers,
including providers of ancillary nursing home services.
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Another trend affecting the health care industry is the increased use of
the federal False Claims Act and, in particular, actions under the False Claims
Act's "whistleblower" provisions. Those provisions allow a private individual to
bring actions on behalf of the government alleging that the defendant has
defrauded the federal government. Recently, the number of suits brought against
health care providers by private individuals has increased. In addition, various
states are considering or have enacted laws modeled after the federal False
Claims Act. Even in instances when a whistleblower action is dismissed with no
judgment or settlement, the Lessee may incur substantial legal fees and other
costs relating to an investigation. Certain lessees have been faced with
whistleblower suits by former employees, alleging non-compliance with Medicare
rules and regulations. For instance, the U.S. Department of Justice recently
joined a whistleblower suit filed against Integrated Health Services, Inc.,
which alleges that the company admitted and retained patients in its long-term
care hospitals who did not require acute care and billed Medicare for these
allegedly unnecessary services.
Some Medicare fiscal intermediaries (private companies that contract with
the Centers for Medicare and Medicaid Services, "CMS," formerly the Health Care
Financing Administration, to administer the Medicare program) have also
increased scrutiny of cost reports filed by long-term care providers. Findings
of violations of the fraud and abuse laws and regulations may jeopardize a
borrower's or lessee's ability to operate a facility or to make rent and debt
payments, thereby potentially adversely affecting us. Our lease arrangements
with lessees may also be subject to these fraud and abuse laws. Federal and
state laws governing illegal rebates and kickbacks regulate contingent or
percentage rent arrangements where our co-investors are physicians or others in
a position to refer patients to the facilities. Although only limited
interpretive or enforcement guidance is available, we have structured our rent
arrangements in a manner that we believe complies with such laws and
regulations.
We have no knowledge regarding any facilities in which we have an
investment that would lead us to believe that the facilities in which we have
investments are not in substantial compliance with the various regulatory
requirements applicable to them, although there can be no assurance that the
operators are in compliance or will remain in compliance in the future.
Licensure Risks. Most health care facilities must obtain a license to
operate. Failure to obtain licensure or loss of licensure would prevent a
facility from operating. These events could adversely affect the facility
operator's ability to make rent and debt payments. State and local laws also may
regulate expansion, including the addition of new beds or services or
acquisition of medical equipment, and occasionally the contraction of health
care facilities by requiring certificate of need or other similar approval
programs. In addition, health care facilities are subject to the Americans with
Disabilities Act and building and safety codes which govern access to and
physical design requirements and building standards for facilities.
Environmental Matters. A wide variety of federal, state and local
environmental and occupational health and safety laws and regulations affect
health care facility operations. Under various federal, state and local
environmental laws, ordinances and regulations, an owner of real property or a
secured lender (such as us) may be liable for the costs of removal or
remediation of hazardous or toxic substances at, under or disposed of in
connection with such property, as well as other potential costs relating to
hazardous or toxic substances (including government fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner or secured lender knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner or secured lender in connection with
-20-
the activities of an operator of the property. The cost of any required
remediation, removal, fines or personal or property damages and the owner's or
secured lender's liability therefore could exceed the value of the property,
and/or the assets of the owner or secured lender. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn, would
reduce our revenue.
Although the mortgage loans that we provide and leases covering our
properties require the borrower and the lessee to indemnify us for certain
environmental liabilities, the scope of such obligations may be limited and we
cannot assure that any such borrower or lessee would be able to fulfill its
indemnification obligations.
Medicare and Medicaid Programs. Sources of revenue for lessees and
mortgagors may include the federal Medicare program, state Medicaid programs,
private insurance carriers, health care service plans and health maintenance
organizations, among others. Efforts to reduce costs by these payors will likely
continue, which may result in reduced or slower growth in reimbursement for
certain services provided by some of our operators. In addition, the failure of
any of our operators to comply with various laws and regulations could
jeopardize their ability to continue participating in the Medicare and Medicaid
programs.
Medicare payments to acute care hospitals for inpatient services are based
on the Prospective Payment System. Under the Prospective Payment System, a
hospital is paid a prospectively established rate based on the category of the
patient's diagnosis ("Diagnostic Related Groups" or "DRGs"). Beginning in 1991,
Medicare payments began to phase-in the Prospective Payment System for capital
related inpatient costs over a ten year period. Thus, current Medicare
reimbursement to hospitals for capital-related inpatient costs is based on a
federal prospective rate rather than the cost-based reimbursement system
previously used. DRG rates are subject to adjustment on an annual basis as part
of the federal budget reconciliation process. The Balanced Budget Act of 1997
expanded the Prospective Payment System to include skilled nursing facilities,
home health agencies, hospital outpatient departments, and rehabilitation
hospitals. See "Health Care Reform" section and further discussion following.
Beginning in August 2000, CMS implemented a prospective payment system
under which services and items furnished in hospital outpatient departments are
reimbursed using a predetermined amount for each Ambulatory Payment
Classification or "APC". Each Medicare outpatient APC is based on the specific
procedures performed and items furnished during a patient visit. Certain items
and services are paid on a fee schedule, and for certain drugs, biologies, and
technologies, hospitals are reimbursed additional amounts. APC rates are subject
to adjustment on an annual basis.
Medicaid programs generally pay for acute and rehabilitative care based on
reasonable costs at fixed rates; long-term care facilities are generally
reimbursed using fixed daily rates. Medicaid payments are generally below retail
rates for lessee-operated facilities. Increasingly, states have introduced
managed care contracting techniques in the administration of Medicaid programs.
Such mechanisms could have the impact of reducing utilization of and
reimbursement to lessee-operated facilities.
Third party payors in various states and areas base payments on costs,
retail rates or, increasingly, negotiated rates. Negotiated rates can include
discounts from normal charges, fixed daily rates and prepaid capitated rates.
-21-
Skilled Nursing Facility Prospective Payment System. Most state Medicaid
programs and, up until July 1, 1998, Medicare programs utilized a cost-based
reimbursement system for skilled nursing facilities, which reimbursed these
facilities for the reasonable direct and indirect allowable costs incurred in
providing routine services plus in certain states, a return on equity, subject
to certain cost ceilings. These costs normally included allowances for
administrative and general costs as well as the costs of property and equipment
(depreciation and interest, fair rental allowance or rental expense). Cost-based
reimbursement was typically subject to retrospective adjustment through cost
report settlement, and for certain states, payments made to a facility on an
interim basis that were subsequently determined to be less than or in excess of
allowable costs could be adjusted through future payments to the affected
facility. State Medicaid reimbursement programs varied as to the methodology
used to determine the level of allowable costs which were reimbursed to
operators.
Beginning on July 1, 1998, the congressionally mandated Prospective Payment
System was implemented for skilled nursing facilities. Under the Prospective
Payment System, skilled nursing facilities are paid a case-mix adjusted federal
per diem rate for Medicare-covered services provided by the skilled nursing
facilities. The per diem rate is calculated to cover routine service costs,
ancillary costs and most capital-related costs (see further discussion under
Health Care Reform).
Long-Term Care Facilities and Regulatory Issues. Long-term care facilities
are regulated primarily through the licensing of such facilities against a
common background established by federal law enacted as part of the Omnibus
Budget Reconciliation Act of 1987. Regulatory authorities and licensing
standards vary from state to state, and in some instances from locality to
locality. These standards are constantly reviewed and revised. State agencies
periodically inspect facilities to determine whether they comply with state
and/or federal regulations, at which time deficiencies may be identified. The
facilities must correct these deficiencies as a condition to continued licensing
or certification and participation in government reimbursement programs.
Depending on the nature of such deficiencies, remedies can be routine or costly.
Similarly, compliance with regulations which cover a broad range of areas such
as patients' rights, staff training, quality of life and quality of resident
care may increase facility start-up and operating costs.
In 1999 and 2000, Congress increased funding for state health agencies in
order to allow state agencies that conduct skilled nursing facility inspections
to intensify Medicare and Medicaid regulatory enforcement efforts. CMS has
instructed these state agencies to increase the number of unannounced nursing
home inspections and to investigate consumer complaints about skilled nursing
facilities promptly. As a result of these increased enforcement efforts, some of
our lessees may be subject to fines and other penalties that could increase
their operating costs.
Acute Care Hospitals. Acute care hospitals are also subject to extensive
federal, state and local regulation. Acute care hospitals undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Various licenses and permits also are required for
purchasing and administering narcotics, operating laboratories and pharmacies
and the use of radioactive materials and certain equipment. Each of our
facilities, the operation of which requires accreditation, is accredited by the
Joint Commission on Accreditation of Healthcare Organizations. Such
accreditation may be a more cost-effective and time-efficient method of meeting
requirements for continued licensing and for participation in government
sponsored provider programs.
-22-
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under the Prospective Payment System, each
state must have a Peer Review Organization (also known as a Quality Improvement
Organization) carry out federally funded mandated reviews of Medicare patient
admissions, treatment and discharges in acute care hospitals.
Congregate Care and Assisted Living Facilities. Certain congregate care and
assisted living facilities are subject to federal, state and local licensure,
certification and inspection laws. These laws regulate, among other matters, the
number of licensed beds, the provision of services, equipment, staffing and
operating policies and procedures. Failure to comply with these laws and
regulations could result in the denial of reimbursement in a few states and
decertification from the Medicaid program, the imposition of fines, suspension
or, and in extreme cases, the revocation of a facility's license or closure of a
facility. Such actions may have an effect on the revenue of the operators of
properties owned by or mortgaged to us and therefore adversely impact us.
Physician Group Practice Clinics. Physician group practice clinics are
subject to extensive federal, state and local legislation and regulation. Every
state imposes licensing requirements on individual physicians and on facilities
and services operated by physicians. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
with which physician groups may have contracts. Many states require regulatory
approval, including certificates of need, before establishing certain types of
physician-directed clinics, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the entry
into new markets, physician clinics and affiliated practice groups may become
subject to compliance with additional regulation.
Rehabilitation Hospitals. Rehabilitation hospitals are subject to extensive
federal, state and local legislation, regulation, inspection and licensure
requirements similar to those of acute care hospitals. Many states have adopted
a "patient's bill of rights" which provides for certain higher standards for
patient care that are designed to decrease restrictions and enhance dignity in
treatment.
Health Care Reform
The health care industry has continually faced various challenges,
including increased government and private payor pressure on health care
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings, and the vertical and horizontal
consolidation of health care providers. The pressure to control health care
costs intensified during 1994 and 1995 as a result of the national health care
reform debate and continued as Congress attempted to slow the rate of growth of
federal health care expenditures as part of its effort to balance the federal
budget.
Changes in the law, new interpretations of existing laws, and changes in
payment methodology may have a dramatic effect on the definition of permissible
or impermissible activities, the relative costs associated with doing business
and the amount of reimbursement furnished by both government and other
third-party payors. These changes may be applied retroactively under certain
circumstances. The ultimate timing or effect of legislative efforts cannot be
predicted and may impact us in different ways.
These changes include:
-23-
. The adoption of the Medicare+Choice program, which expands Medicare
beneficiaries' choices to include traditional Medicare fee-for-service,
private fee-for-service medical savings accounts, various managed care
plans, and provider sponsored organizations, among others;
. The expansion and restriction of reimbursement for various Medicare
benefits;
. The adoption of a Prospective Payment System for skilled nursing
facilities, home health agencies, hospital outpatient departments, and
rehabilitation hospitals;
. The repeal of the Boren amendment payment standard for Medicaid so that
states have the exclusive authority to determine provider rates and
providers have no federal right of action;
. The reduction in Medicare disproportionate share payments to hospitals;
and
. The removal of the $150,000,000 limit on tax-exempt bonds for nonacute
hospital capital projects.
The Balanced Budget Act of 1997, signed by President Clinton on August 5,
1997, was designed to produce several billion dollars in net savings for
Medicaid over the five years following enactment. In addition, the Balanced
Budget Act repealed the Boren Amendment under which states were required to pay
long-term care providers, including skilled nursing facilities, rates that were
"reasonable and adequate to meet the cost which must be incurred by efficiently
and economically operated facilities". As a result of the repeal of the Boren
Amendment, states are now required by the Balanced Budget Act to do the
following with respect to skilled nursing facility rates:
. Use a public process for determining rates;
. Publish proposed and final rates, the methodologies underlying the rates,
and justifications for the rates; and
. Give methodologies and justifications.
When determining rates, states are required to take into account the
situation of skilled nursing facilities that serve a disproportionate number of
low-income patients with special needs. The Secretary of Health and Human
Services is required to conduct a study concerning the effect of state
rate-setting methodologies on the access to and the quality of services provided
to Medicaid beneficiaries and report the study results to Congress. The Balanced
Budget Act also provides the federal government with expanded enforcement powers
to combat waste, fraud and abuse in delivery of health care services. Though
applicable to payments for services furnished on or after October 1, 1997, the
new requirements are not retroactive. Thus, states that have not proposed
changes in their payment methods or standards, or changes in rates for items and
services furnished on or after October 1, 1997, need not immediately implement a
Balanced Budget Act public approval process. The Balanced Budget Act of 1997
also strengthened the anti-fraud and abuse laws to provide for stiffer penalties
for fraud and abuse violations.
The Balanced Budget Act also reduced the payments made to long-term acute
care hospitals ("LTACs"). Regarding LTACs, the Balanced Budget Act reduced the
amount of reimbursement for incentive payments established pursuant to the Tax
Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), for capital expenditures
and bad debts, and for services to certain patients transferred from an acute
care hospital. In addition, the Balanced Budget Act for the first time imposed a
national ceiling limitation or "national cap" on payments that may be made in
each category of hospitals exempt from a prospective payment system. LTACs
constitute one such category. The reduction in payments to LTACs mandated by the
Budget Act many adversely effect an LTAC operator's ability to develop or
acquire LTACs in the future.
-24-
LTACs, currently excluded from a prospective payment system, are scheduled
to transition to a prospective payment system by October 1, 2002. A prospective
payment system for LTACs is mandated under the Balanced Budget Act. The Benefits
Improvement Act directs the Secretary of the U.S. Department of Health and Human
Services to study the question of whether to base the eventual prospective
payment system for LTACs on existing diagnosis-related groups, which are now
used for inpatient stays in acute care hospitals, or on refined diagnosis
related groups. To date, the Secretary has not proposed a prospective payment
system for LTACs. If the Secretary cannot implement a prospective payment system
specific to LTACs by October 1, 2002, the Secretary is required to instead
implement a prospective payment system based upon existing acute care hospital
diagnosis-related groups that have been modified where possible to account for
resource usage of LTAC patients.
In November 1999, President Clinton signed into law the Medicare, Medicaid
and SCHIP Balanced Budget Refinement Act of 1999 ("Budget Refinement Act") which
reduces some of the reimbursement cutbacks enacted under the Balanced Budget
Act. The Budget Refinement Act delayed implementation of cost-cutting measures
and increased payments to some sectors of the health care industry. Long-term
care facilities received increased payments under the Budget Refinement Act.
Disproportionate share hospital payment cutbacks were lessened. The Budget
Refinement Act provided that the change to a prospective payment system for
outpatient hospital services must be budget neutral and not result in reduced
reimbursement. The extent of the financial relief provided by the Budget
Refinement Act is estimated to be $16 billion over five years.
Continuing this trend, President Clinton signed the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
Act") in December 2000, which provides for across-the-board Medicare and
Medicaid payment increases for most health care providers. Overall, passage of
the Benefits Improvement Act is expected to result in approximately $35 billion
in additional reimbursement for providers over the next five years.
Additionally, the Benefits Improvement Act extended the moratorium on
implementation of the cap for outpatient therapy services throughout 2002.
Payments for home health services, hospice services, and long-term care hospital
services will also increase under the provisions of the Benefits Improvement
Act.
A number of the Budget Refinement Act and the Benefits Improvement Act
provisions that provide reimbursement relief to skilled nursing facilities are
set to expire on September 30, 2002. It has been estimated that the skilled
nursing facility sector will experience a 17% rate drop when these provisions
expire in fiscal year 2003. Various industry organizations are examining ways to
ameliorate the potentially adverse effects of such a Medicare rate drop.
Other federal initiatives will result in greater operational expenditures
for health care providers. For instance, the Health Insurance Portability and
Accountability Act of 1996 requires a significant overhaul of health care
information systems to protect individual medical information and to standardize
formatting of health care claims. In November 1999, the Department of Health and
Human Services released proposed regulations to protect the confidentiality of
individual health information. Final privacy regulations were released in
December 2000. Health care providers must comply with the privacy regulations by
April 14, 2003. The federal government has estimated that the United States
health care industry will spend approximately $18 billion over a ten-year period
in order to achieve compliance with these new privacy requirements.
In August 2000, the U.S. Department of Health and Human Services also
released final regulations that delineated uniform, national standards for the
electronic exchange of medical
-25-
information and filing of claims. Health care providers must comply with these
regulations by October 16, 2002, or receive a waiver from the Department to
extend the deadline for compliance to October 16, 2003. The federal government
estimates that compliance will cost health care providers approximately $3.5
billion. However, the federal government has predicted that implementation of
these uniform standards will help to speed conversion from manual to electronic
billing systems, resulting in cost savings of approximately $30 billion over the
next decade for health care providers.
In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to review
and assess alternative health care delivery systems, new regulatory enforcement
initiatives, and new payment methodologies. Public debate of these issues can be
expected to continue in the future. There are numerous initiatives at the
federal and state levels for comprehensive reforms affecting the payment for and
delivery of health care services. Changes in the law, new interpretations of
existing laws, and changes in payment methodology and enforcement priorities may
have a dramatic effect on the definition of permissible or impermissible
activities, the relative costs associated with doing business and the amount of
reimbursement by both government and other third-party payors. These changes may
be applied retroactively. The ultimate timing or effect of legislative efforts
cannot be predicted and may impact us in different ways.
In 1998, health expenditures in the United States amounted to $1.1
trillion, representing 13.5 percent of Gross Domestic Product. The Centers for
Medicaid and Medicare Services reported that 1998 spending for health care
continued a five-year trend of low growth to below six percent annually, but
reflected the highest annual percentage increase since 1993. Also, for the first
time in a decade, public spending grew more slowly than private health care
spending. The primary reason for the slow growth in public spending was
Medicare, which was significantly affected by the adoption of reimbursement
restriction measures in the Balanced Budget Act of 1997. Fraud savings also
contributed. Because economic growth generally matched growth in health care
spending since 1993, the health care share of gross domestic product has
remained roughly the same since 1993. We believe that government and private
efforts to contain or reduce health care costs will continue. These trends are
likely to lead to reduced or slower growth in reimbursement for certain services
provided by some of our lessees and mortgagors. We believe that the vast nature
of the health care industry, the financial strength and operating flexibility of
our operators and the diversity of our portfolio will mitigate the impact of any
such diminution in reimbursements. However, we cannot predict whether any of the
above proposals or any other proposals will be adopted and, if adopted, no
assurance can be given that the implementation of such reforms will not have a
material adverse effect on our financial condition or results of operations.
Objectives and Policies
We are organized to invest in income-producing health care related
facilities. In evaluating potential investments, we consider such factors as:
. The geographic area, type of property and demographic profile;
. The location, construction quality, condition and design of the property;
. The current and anticipated cash flow and its adequacy to meet
operational needs and lease obligations;
. The rent provides a competitive market return to our investors;
. The potential for capital appreciation;
-26-
. The tax laws related to real estate investment trusts;
. The regulatory and reimbursement environment in which the properties
operate;
. Occupancy and demand for similar health facilities in the same or nearby
communities;
. An adequate mix between private and government sponsored patients at
health facilities;
. Potential alternative uses of the facilities; and
. Prospects for liquidity through financing or refinancing.
There are no limitations on the percentage of our total assets that may be
invested in any one property or partnership. The Investment Committee of the
Board of Directors may establish limitations as it deems appropriate from time
to time. No limits have been set on the number of properties in which we will
seek to invest, or on the concentration of investments in any one facility or
any one city or state. We acquire our investments primarily for income.
At December 31, 2001, we had three series of preferred stock and one class
of debt securities which are senior to the common stock. We may, in the future,
issue additional debt or equity securities which will be senior to the common
stock. We have authority to offer shares of our capital stock in exchange for
investments which conform to our standards and to repurchase or otherwise
acquire our shares or other securities.
We may incur additional indebtedness when, in the opinion of our management
and directors, it is advisable. For short-term purposes we from time to time
negotiate lines of credit, or arrange for other short-term borrowings from banks
or otherwise. We arrange for long-term borrowings through public offerings or
from institutional investors.
In addition, we may incur additional mortgage indebtedness on real estate
which we have acquired through purchase, foreclosure or otherwise. Where
leverage is present on terms deemed favorable, we invest in properties subject
to existing loans, or secured by mortgages, deeds of trust or similar liens on
the properties. We also may obtain non-recourse or other mortgage financing on
unleveraged properties in which we have invested or may refinance properties
acquired on a leveraged basis.
In March 2001, we introduced a new Dividend Reinvestment and Stock Purchase
Plan (the "Plan"). Under the terms of the Plan, existing stockholders may
purchase shares of common stock by reinvesting all or a portion of the cash
dividends from their shares of common stock, or by making optional cash payments
to purchase additional shares of common stock.
On June 20, 2000 we adopted a Stockholder Rights Plan and declared a
dividend of one preferred share purchase right for each outstanding share of our
common stock. The rights will become exercisable if a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of our common stock or following the
commencement or announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 15% or more of our common stock. After the rights become
exercisable, each right will entitle the holder to purchase from us one
one-hundredth (1/100th) of a share of Series D Junior Participating Preferred
Stock at a price of $95 per one one-hundredth (1/100th) of a Preferred Share,
subject to certain anti-dilution adjustments. The rights will at no time have
any voting rights.
-27-
Each Series D Preferred Share purchasable upon exercise of the rights will
be entitled, when, as and if declared, to a minimum preferential quarterly
dividend payment of $1.00 per share but will be entitled to an aggregate
dividend of 100 times the dividend, if any, declare per common share. In the
event our liquidation, dissolution or winding up, the holders of the Series D
Preferred Shares will be entitled to a preferential liquidation payment of $100
per share plus any accrued but unpaid dividends but will be entitled to an
aggregate payment of 100 times the payment made per common share. Each Series D
Preferred Share will have 100 votes and will vote together with our common
stock. Finally, in the event of any merger, consolidation or other transaction
in which shares of our common stock are exchanged, each Series D Preferred Share
will be entitled to receive 100 times the amount received per share of common
stock. Series D Preferred Shares will not be redeemable. The rights are
protected by customary anti-dilution provisions. Because of the nature of the
Preferred Share's dividend, liquidation and voting rights, the value of one
one-hundredth of a Preferred Share purchasable upon exercise of each Right
should approximate the value of one common share.
Under certain circumstances, each holder of a right, other than rights that
are or were acquired or beneficially owned by a person or group acquiring 15% or
more (which rights will thereafter be void), will have the right to receive upon
exercise that number of common shares having a market value of two times the
then current purchase price of one right. In the event that, after a person
acquired 15% or more of our common stock, we were acquired in a merger or other
business combination transaction or more than 50% of our assets or earning power
were sold, each holder of a right shall have the right to receive, upon the
exercise thereof at the then current purchase price of the right, that number of
shares of common stock of the acquiring company which at the time of such
transaction would have a market value of two times the then current purchase
price of one right.
The rights may be redeemed by the Board of Directors at any time prior to
the time a person or group acquires 15% or more of our common stock.
The rights will expire on July 27, 2010 (unless earlier redeemed, exchanged
or terminated). The Bank of New York is the Rights Agent.
The rights are designed to assure that all of our stockholders receive fair
and equal treatment in the event of any proposed takeover of us and to guard
against partial tender offers, open market accumulations and other abusive
tactics to gain control of us without paying all stockholders a control premium.
The rights will cause substantial dilution to a person or group that acquires
15% or more of our stock on terms not approved by our Board of Directors. The
rights should not interfere with any merger or other business combination
approved by the Board of Directors at any time prior to the first date that a
person or group acquires 15% or more of our common stock.
We will not, without the prior approval of a majority of directors, acquire
from or sell to any director, officer or employee of HCPI, or any affiliate
thereof, as the case may be, any of our assets or other property.
We provide to our stockholders annual reports containing audited financial
statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by our Board of
Directors and may be changed without stockholder approval.
-28-
Health Care Property Investors
- -----------------------------------------------
50%
Health Care Investors, III
-- HCPI Mortgage Corp. = 50%
100%
-- Texas HCP, Inc. = 99%
100% Texas HCP Holding, L.P. = HCPI/San Antonio LP
\ 1% / 90%
-- Texas HCP G.P., Inc. = \ /
100% \99%/
Texas HCP Medical Office Buildings, L.P.
-- Texas HCP Medical G.P., Inc. = 1%
100%
-- HCPI Trust
100%
-- HCPI Knightdale, Inc.
100%
-- Meadowdome LLC
100%
-- AHE of Somerville, Inc.
100%
-- AHP of Nevada, Inc.
100%
-- AHP of Washington, Inc.
100%
-- Tucson-Cal Associates, LLC
100%
-- HCP Medical Office Buildings I, LLC
100%
-- HCP Medical Office Buildings II, LLC
100%
-- HCPI Investments, Inc.
100%
-- Indiana HCP G.P., Inc. = 1% ------
100%
-- Indiana HCP I, Inc. = 49.5% ------ --- Indiana HCP, L.P.
100% 100%
-- Indiana HCP II, Inc. = 49.5% ------
100%
-- Consolidated Partnerships and Limited Liability Companies:
Health Care Property Partners - 77%
HCPI/Colorado Springs LP - 97%
HCPI Indiana LLC - 90%
HCPI Kansas LP - 97%
HCPI/Little Rock LP - 97%
HCPI/Utah LLC - 59% (Owns 100% of HCPI Davis North LLC)
Fayetteville Health Associates LP - 97%
Wichita Health Associates LP - 97%
HCPI/Utah II LLC - 54% (Owns 100% of HCPI Stansbury LLC and HCPI
Wesley LLC)
HCPI Idaho Falls LLC - 100% Various Non-Consolidated LLCs*
* HCPI or a qualified REIT subsidiary is non-managing member and has a 45%-80%
interest in the following limited liability companies:
Louisiana-Two Associates, LLC - 80%
Arborwood Living Center, LLC - 45%
Perris-Cal Associates, LLC - 80%
Edgewood Assisted Living LLC - 45%
Statesboro Associates, LLC - 80%
Greenleaf Living Center LLC - 45%
Vista-Cal Associates, LLC - 80%
Seminole Shores Living Center LLC - 50%
Ft. Worth-Cal Assoc. LLC - 80%
-29-
Item 2. PROPERTIES
See Item 1. for details.
Item 3. LEGAL PROCEEDINGS
During 2001, we were not a party to any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-30-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange. Set forth below
for the fiscal quarters indicated are the reported high and low closing prices
of our common stock on the New York Stock Exchange.
2001 2000 1999
High Low High Low High Low
-----------------------------------------------------------------------------------------
First Quarter $34 1/2 $29 1/4 $26 $23 11/16 $31 3/8 $26 5/8
Second Quarter 36 13/16 33 29 25 32 15/16 27 5/16
Third Quarter 38 5/8 33 3/4 30 1/2 26 3/8 28 9/16 24 11/16
Fourth Quarter 39 1/16 35 1/8 29 15/16 27 1/4 27 1/8 21 15/16
As of March 13, 2002 there were approximately 4,800 stockholders of record
and approximately 70,000 beneficial stockholders of our common stock.
It has been our policy to declare quarterly dividends to the common stock
shareholders so as to comply with applicable sections of the Internal Revenue
Code governing REITs. The cash dividends per share paid on common stock are set
forth below:
2001 2000 1999
---------------------------------------------
First Quarter $.76 $.72 $.68
Second Quarter .77 .73 .69
Third Quarter .78 .74 .70
Fourth Quarter .79 .75 .71
Boyer. On January 25, 1999, we completed the acquisition of a managing
-----
member interest in HCPI/Utah, LLC, a Delaware limited liability company
("HCPI/Utah"), in exchange for a cash contribution of approximately $18.9
million. In connection with this acquisition, several limited liability
companies and general partnerships affiliated with The Boyer Company, L.C.
("Boyer") contributed a portfolio of 14 medical office buildings (including two
ground leaseholds associated therewith) to HCPI/Utah with an aggregate equity
value (net of assumed debt) of approximately $18.9 million. In exchange for this
capital contribution, the contributing entities received 593,247 non-managing
member units of HCPI/Utah. HCPI/Utah also issued 590,555 managing member units
to HCPI. At the initial closing, HCPI/Utah was also granted the right to acquire
five additional medical office buildings. During 1999, two of the five buildings
were contributed to HCPI/Utah and the contributing entities received 48,212
non-managing member units of HCPI/Utah and 707,663 managing member units were
issued to us. In addition, HCPI and HCPI/Utah agreed with Boyer that HCPI/Utah
would not acquire the medical office building known as Old Mill. During 2001,
two more of the buildings were contributed to HCPI/Utah and the contributing
entities received 84,922 non-managing member units of HCPI/Utah and 308,827
managing member units were issued. The Amended and Restated Limited Liability
Company Agreement of HCPI/Utah (the "Agreement") provides that only we are
authorized to act on behalf of HCPI/Utah and that we have responsibility for the
management of its business. In accordance with the Agreement, the contributing
entities also
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received an additional 29,688 units in 1999 and 8,324 units in 2001 as a result
of step-ups in value of certain of the buildings. During 2000, HCPI/Utah
determined that 505,881 managing member units previously recorded and issued to
HCPI during 1999 should have been recorded as a loan from HCPI to retire
existing debt of HCPI/Utah. Consequently, HCPI/Utah redesignated these units as
a loan from HCPI, which is secured by HCPI/Utah real estate assets.
Generally the non-managing member units issued in connection with the
initial closing became exchangeable for common stock on January 25, 2000. The
non-managing member units issued on or prior to August 17, 2001, in connection
with the subsequent closings will become exchangeable on August 17, 2002, and
the non-managing member units issued after August 17, 2001, in connection with
the subsequent closings, will become exchangeable twelve months after the last
issuance of units. The non-managing member units are exchangeable for common
stock on a one for one basis (subject to certain adjustments, such as stock
splits and reclassifications) or for an amount of cash equal to then-current
market value of the shares of common stock into which the non-managing member
units may be exchanged. HCPI/Utah relied on the exemption provided by Section
4(2) of the Securities Act of 1933, as amended, in connection with the issuance
and sale of the non-managing member units. During the first quarter of 2000, we
registered 593,247 shares of our common stock for issuance from time to time in
exchange for units.
On August 17, 2001, we completed the acquisition of a managing member
interest in HCPI/Utah, II, LLC, a Delaware limited liability company ("HCPI/Utah
II"), in exchange for a cash contribution of approximately $32.8 million. In
connection with the acquisition, several limited liability companies and general
partnerships affiliated with The Boyer Company, L.C., a Utah limited liability
company ("Boyer"), contributed a portfolio of four medical office buildings and
five health care laboratory and biotech research facilities (seven of which
buildings are owned through ground leasehold interests) to HCPI/Utah II with an
aggregate equity value (net of assumed debt) of approximately $25.7 million. In
exchange for this capital contribution, the contributing entities received
738,923 non-managing units of HCPI/Utah II. HCPI/Utah II also issued 942,670
managing member units to HCPI. At the initial closing, HCPI/Utah II was also
granted the right to acquire eight additional medical office buildings. During
2001, two of the eight buildings were contributed to HCPI/Utah II and the
contributing entities received 62,758 non-managing member units of HCPI/Utah II
and 15,509 managing member units were issued to us. The Amended and Restated
Limited Liability Company Agreement of HCPI/Utah II, as amended (the
"Agreement") provides that only we are authorized to act on behalf of HCPI/Utah
II and that we have responsibility for the management of its business.
Generally, the non-managing member units issued in connection with the
initial closing will become exchangeable for common stock on August 17, 2002,
and the non-managing member units issued in connection with the subsequent
closings will become exchangeable 12 months after the last issuance of units.
The non-managing member units are exchangeable for common stock on a one-for one
basis (subject to certain adjustments, such as stock splits and
reclassifications) or for an amount of cash equal to the then-current market
value of the shares of common stock into which the non-managing member units may
be exchanged. HCPI/Utah II relied on the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended, in connection with the issuance and sale
of the non-managing member units.
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Item 6. SELECTED FINANCIAL DATA
Set forth below is our selected financial data as of and for the years
ended December 31, 2001, 2000, 1999, 1998, and 1997.
Year Ended December 31,
2001 2000
(Revised)(2) (Revised)(2) 1999 1998 1997
---------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Income Statement Data:
Total Revenue $332,460 $329,807 $224,793 $161,549 $ 128,503
Net Income Applicable to
Common Shares 96,266 108,867 78,450 78,635 63,542
Basic Earnings per Common Share 1.79 2.13 2.25 2.56 2.21
Diluted Earnings per Common Share 1.78 2.13 2.25 2.54 2.19
Balance Sheet Data:
Total Assets 2,431,153 2,394,852 2,464,795 1,352,327 937,442
Debt Obligations 1,057,752 1,158,928 1,179,507 709,045 452,858
Stockholders' Equity 1,246,724 1,139,283 1,195,662 591,134 438,747
Other Data:
Basic Funds From Operations (1) 179,375 171,344 114,520 96,255 83,442
Cash Flows From Operating
Activities 200,848 205,511 124,117 112,311 87,544
Cash Flows Provided By (Used In)
Investing Activities (118,163) 63,714 (230,460) (417,524) (205,238)
Cash Flows Provided By (Used In)
Financing Activities (132,900) (218,298) 109,535 305,633 118,967
Dividends Paid 190,123 175,079 106,177 89,210 71,926
Dividends Paid Per Common Share 3.10 2.94 2.78 2.62 2.46
- --------------------------
(1) We believe that Funds From Operations ("FFO") is an important supplemental
measure of operating performance. HCPI adopted the new definition of FFO
prescribed by the National Association of Real Estate Investment Trusts
(NAREIT). FFO is defined as Net Income applicable to common shares
(computed in accordance with generally accepted accounting principles),
excluding gains (or losses) from debt restructuring and sales of property,
plus real estate depreciation, and after adjustments for unconsolidated
partnerships and joint ventures. FFO does not, and is not intended to,
represent cash generated from operating activities in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash available to fund cash needs and should not be considered as an
alternative to Net Income. FFO, as defined by us may not be comparable to
similarly entitled items reported by other REITs that do not define it in
accordance with the definition prescribed by NAREIT. The following table
represents items and amounts being aggregated to compute FFO.
2001 2000
(Revised)(2) (Revised)(2) 1999 1998 1997
-----------------------------------------------------------------
Net Income Applicable to Common Shares $ 96,266 $108,867 $ 78,450 $ 78,635 $63,542
Real Estate Depreciation 70,458 69,839 44,789 29,577 22,667
Impairment Losses Related to Depreciable Property 13,640 2,751 --- --- ---
Joint Venture Adjustments 243 1,917 1,584 2,096 (720)
Gain on Sale of Real Estate Properties (1,232) (11,756) (10,303) (14,053) (2,047)
Gain on Extinguishment of Debt --- (274) --- --- ---
-----------------------------------------------------------------
$179,375 $171,344 $114,520 $ 96,255 $83,442
=================================================================
(2) Our consolidated statements of income and consolidated statements of cash
flows have been revised from those originally reported to separately
reflect the impairment losses related to depreciable property of
$13,640,000 and $2,751,000 for the years ended December 31, 2001 and 2000,
respectively. The impairment losses related to depreciable property were
previously included in the Real Estate Depreciation. The revision had no
impact on our consolidated balance sheets or statements of stockholders'
equity. The revision had no impact on the net revenues, operating income,
net income or net income per share of common stock for the years ended
December 31, 2001 and 2000.
-33-
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Health Care Property Investors, Inc., including its wholly-owned
subsidiaries and affiliated joint ventures (HCPI), generally acquires health
care facilities and leases them on a long-term basis to health care providers.
We also lease medical office space to providers and physicians on a shorter term
basis. On a more limited basis, we provide mortgage financing on health care
facilities. As of December 31, 2001, our portfolio of properties, including
equity investments, consisted of 429 facilities located in 42 states. These
facilities are comprised of 176 long-term care facilities, 94 congregate care
and assisted living facilities, 86 medical office buildings, 37 physician group
practice clinics, 21 acute care hospitals, nine freestanding rehabilitation
facilities and six health care laboratory and biotech research facilities. Our
gross investment in the properties, which includes joint venture acquisitions,
was approximately $2.7 billion at December 31, 2001.
Revision of Consolidated Statements of Income and Statements of Cash Flows
Our consolidated statements of income and consolidated statements of cash
flows have been revised from those originally reported to separately reflect the
impairment losses related to depreciable property of $13,640,000 and $2,751,000
for the years ended December 31, 2001 and 2000, respectively. The losses arose
from the write down to fair value less costs to sell of 13 facilities during
2001 and four facilities during 2000 that will be or have been sold. (See Note 3
to the Consolidated Financial Statements.) The impairment losses related to
depreciable property were previously included in Real Estate Depreciation. The
revision had no impact on our consolidated balance sheets or statements of
stockholders' equity. The revision had no impact on the net revenues, operating
income, net income or net income per share of common stock for the years ended
December 31, 2001 and 2000.
The primary focus of operations for 2001 was the completion of $240 million
of new investments. We financed the acquisitions primarily through the proceeds
from the issuance of new equity and asset sales. However, the issuance of new
equity had the short-term impact of de-leveraging the Company by paying down the
bank lines with long-term capital. Additionally, we recorded lower market rents
on certain properties and recorded a $13.6 million write-down on 13 properties
related to the reorganization of certain nursing home and assisted living
operators.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and
into HCPI in a stock-for-stock transaction. The merger resulted in the issuance
of 19,430,115 shares of our common stock and 4,000,000 depositary shares of our
series C cumulative redeemable preferred stock. Additionally, upon consummation
of the merger, we assumed AHE's debt comprised of $220 million of senior notes
and $56 million of mortgage debt, and paid $71 million in cash to replace its
revolving line of credit. The transaction was treated as a purchase for
financial accounting purposes and, accordingly, the operating results of AHE
have been included in our consolidated financial statements effective November
1999.
Results of Operations
Year Ended December 31, 2001 Vs. Year Ended December 31, 2000
Net Income applicable to common shares for the year ended December 31, 2001
totaled $96,266,000 or $1.78 per share on a diluted basis on revenue of
$332,460,000. This compares to Net Income applicable to common shares of
$108,867,000 or $2.13 per share on a diluted basis on revenue of $329,807,000
for the corresponding period in 2000. Included in Net Income applicable to
common shares and earnings per share on a diluted basis for the year ended
December 31, 2001 is the net effect of a write-down of $13,640,000, or $0.25 per
share, to fair market value less costs to sell (see Note 3 to the Consolidated
Financial Statements) of 13 facilities to be sold offset by a net Gain on Sale
of Real Estate Properties of $1,232,000, or $0.02 per share. Net Income
applicable to common shares and earnings per share on a diluted basis for the
year ended December 31, 2000 includes the net effect of a write-down of
$2,751,000, or $0.05 per share, to fair market value less costs to sell of four
facilities to be sold and a net Gain on Sale of Real Estate Properties of
$11,756,000, or $0.23 per share. In addition, Net Income applicable to common
shares for the year ended December 31, 2000, includes a $2,000,000 or $0.04 per
share one-time charge as a result of an equity investment write-off.
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Rental Income attributable to Triple Net Leases for the year ended December
31, 2001 decreased 0.2% or $502,000 to $226,510,000. The decrease is primarily
the result of the impact of dispositions made during 2000 and 2001 offset by
acquisition activity during 2001. Rental Income attributable to Managed
Properties for the year ended December 31, 2001 increased 5.3% or $4,274,000 to
$84,092,000 with a related increase in Managed Properties Operating Expenses of
8.5% or $2,367,000 to $30,105,000. These increases were generated primarily from
2001 acquisition activity (see Note 3 to the Consolidated Financial Statements).
Interest and Other Income for the year ended December 31, 2001 decreased 4.9% or
$1,119,000 to $21,858,000 primarily as a result of a loan payoff in the first
quarter of 2001.
Interest Expense for the year ended December 31, 2001 decreased 9.5% or
$8,258,000 to $78,489,000. The decrease is primarily the result of lower
balances and interest rates on short-term bank loans all described in more
detail within the "Liquidity and Capital Resources" section. The Real Estate
Depreciation increased by $619,000 to $70,458,000 for the year ended December
31, 2001 as a result of 2001 acquisitions.
We believe that Funds From Operations (FFO) is the most important
supplemental measure of operating performance for a real estate investment trust
(see Note 14 to the Consolidated Financial Statements). FFO for the year ended
December 31, 2001 increased 4.7% or $8,031,000 to $179,375,000. The increase is
mainly attributable to an increase in Rental Income, Managed Properties and a
decrease in Interest Expense, offset by decreases in Rental Income, Triple Net
Properties and Interest and Other Income, and an increase in Managed Properties
Operating Expenses.
Year Ended December 31, 2000 Vs. Year Ended December 31, 1999
Net Income applicable to common shares for the year ended December 31, 2000
totaled $108,867,000 or $2.13 per share on a diluted basis on revenue of
$329,807,000. This compares to Net Income applicable to common shares of
$78,450,000 or $2.25 per share on a diluted basis on revenue of $224,793,000 for
the corresponding period in 1999. Included in Net Income applicable to common
shares and earnings per share on a diluted basis for the years ended December
31, 2000 and 1999 is a Gain on Sale of Real Estate Properties of $11,756,000, or
$0.23 per share, and $10,303,000, or $0.27 per share, respectively. In addition,
Net Income applicable to common shares for the year ended December 31, 2000
includes a $2,000,000 or $0.04 per share one-time charge as a result of an
equity investment write-off. Also included is a $2,751,000 or $0.05 per share
one-time charge as a result of the write-down to fair value less costs to sell
of four physician clinics to be sold (see Note 3 to the Consolidated Financial
Statements). The increase in Net Income applicable to common shares is primarily
the result of 1999 acquisition activity, most of which is attributable to the
acquisition of AHE's portfolio.
Rental Income attributable to Triple Net Leases for the year ended December
31, 2000 increased 57.8% or $83,164,000 to $227,012,000. Rental Income,
attributable to Managed Properties for the year ended December 31, 2000
increased 43.2% or $24,096,000 to $79,818,000 with a related increase in Managed
Properties Operating Expenses of 52.1% or $9,498,000 to $27,738,000. These
increases were generated primarily from 1999 acquisition activity, most of which
is related to the acquisition of AHE's portfolio. Interest and Other Income for
the year ended December 31, 2000
-35-
decreased 8.9% or $2,246,000 to $22,977,000 primarily as a result of the
divestiture during mid 1999 of certain partnership interests from which we were
receiving income.
Interest Expense for the year ended December 31, 2000 increased 48.4% or
$28,289,000 to $86,747,000. The increase is primarily the result of an increase
in borrowings used to fund the acquisitions made during 1999 and the interest
related to the debt assumed in the merger with AHE all described in more detail
within the "Liquidity and Capital Resources" section. The increase in Real
Estate Depreciation of 55.9% or $25,050,000 to $69,839,000 for the year ended
December 31, 2000 is the direct result of the new investments made during 1999
including the merger with AHE.
FFO for the year ended December 31, 2000 increased 49.6% or $56,824,000 to
$171,344,000. The increase is mainly attributable to increases in Rental Income,
as offset by increases in Interest Expense and Managed Properties Operating
Expenses which were previously discussed in more detail.
Liquidity and Capital Resources
We have financed investments through the sale of common and preferred
stock, issuance of long-term debt, assumption of mortgage debt, the mortgaging
of certain of our properties, use of short-term bank lines and use of internally
generated cash flows. We have also raised cash through the disposition of assets
in 2000 and 2001. Management believes that our liquidity and sources of capital
are adequate to finance our operations. Future investments in additional
facilities (see Note 9 to the Consolidated Financial Statements) will be
dependent on the availability of cost-effective sources of capital.
At December 31, 2001, stockholders' equity totaled $1,246,724,000. Our debt
to equity ratio was 0.85 to 1.00. For the year ended December 31, 2001, FFO
(before interest expense) covered Interest Expense 3.30 to 1.00.
Equity
Since January 1999, we have completed two equity offerings for cash,
summarized in the following table:
Date Issuance Shares Issued Net Proceeds
----------------------------------------------------------------------------------------------
May 1999 Common Stock at $31.4375/share 1,000,000 $ 29,600,000
May 2001 Common Stock at $34.80/share 4,025,000 $ 133,000,000
In March 2001, we introduced a new Dividend Reinvestment and Stock Purchase
Plan. As of December 31, 2001, 815,432 shares have been issued with net proceeds
of $28,900,000 realized under this plan. An additional $14,800,000 has been
realized through the exercise of stock options.
We used the net equity proceeds to pay down short-term borrowings under our
revolving lines of credit pending deployment on long-term investments. We
invested any excess funds in short-term investments until they were needed for
acquisitions or development.
-36-
Since 1998, we have issued 1,647,202 non-managing member units (convertible
one for one into shares of our common stock) to the non-managing members in
three limited liability companies of which we are the managing member, and
through which we have acquired medical office buildings and health care
laboratory and biotech research facilities.
On November 4, 1999, in connection with the merger with AHE, we issued
19,430,115 shares of our common stock and 4,000,000 depositary shares of 8.60%
series C cumulative redeemable preferred stock (see Note 5 to the Consolidated
Financial Statements).
Senior Unsecured Debt
The following table summarizes the Medium Term Note (MTN) financing
activities since January 1999:
Amount Issued
Date Maturity Coupon Rate /(Redeemed)
- ------------------------------ --------------------- ------------------------ --------------------------
February-April 1999 5 years 6.92%-7.48% $ 62,000,000
May-November 1999 --- 8.81%-10.57% (5,000,000)
February 2000 --- 8.87% (10,000,000)
February 2000 4 years 9.00% 25,000,000
March-November 2001 --- 7.05%-8.82% (14,000,000)
On November 4, 1999, in connection with the merger with AHE, we assumed the
outstanding senior notes of AHE, consisting of $120,000,000 principal amount of
7.50% senior notes (8.16% effective rate) due 2007 and $100,000,000 principal
amount of 7.05% senior notes due 2002; $1,000,000 of the 2002 series was retired
during 2001 with the remaining $99,000,000 paid off in January 2002.
Since 1986 the debt rating agencies have rated our Senior Notes investment
grade. Current senior debt ratings are Baa2 from Moody's and BBB+ from both
Standard & Poor's and Fitch.
Secured Debt
At December 31, 2001, we had a total of $185,022,000 in Mortgage Notes
Payable secured by 37 health care facilities with a net book value of
approximately $325,195,000. Interest rates on the Mortgage Notes ranged from
3.20% to 10.63%.
During 2001, we assumed secured debt of $18,600,000 in connection with the
acquisition of the first two phases of a $126,000,000 transaction to acquire
entities controlled by The Boyer Company (see Note 3 to Consolidated Financial
Statements).
During 2000, we completed a secured debt transaction which in the aggregate
resulted in loan proceeds of $83,000,000, on a portfolio of 12 medical office
buildings and physician clinics with an investment value of approximately
$138,000,000. The loan features an average coupon of 8.12% (8.43% effective
rate) with a ten year term. These proceeds were used to fund the final payment
of our convertible subordinated notes due November 8, 2000.
We assumed $56,000,000 of AHE's mortgage debt in late 1999 with interest
rates ranging from 7.00% to 8.52% due 2003 to 2011.
-37-
Revolving Lines of Credit
We have two revolving lines of credit, one for $188,000,000 that was
renewed recently and expires on October 30, 2002 and one for $207,000,000 that
expires on November 3, 2003. As of December 31, 2001, we had a total of
$283,000,000 available on these lines of credit.
Other
During the first two quarters of 2000, we repurchased $31,090,000 of our 6%
convertible subordinated notes due November 8, 2000 in open market transactions
at a gain of $274,000. The balance of $68,910,000 was paid off on the due date.
Retained Cash Flows
Since our inception in May 1985, we have recorded approximately
$1,155,708,000 in FFO. Of this amount, we have distributed a total of
$982,675,000 to stockholders as dividends on common stock. We have retained the
balance of $173,033,000 and used it as an additional source of capital.
On November 20, 2001, we paid a dividend of $0.79 per common share or
$44,042,000 in the aggregate. Total dividends paid on common stock during the
year ended December 31, 2001 were $165,223,000, and as a percentage of FFO was
92.1%. During the first quarter of 2002, we declared and paid a dividend of
$0.80 per common share or approximately $45,109,000 in the aggregate.
Available Shelf Registrations
As of February 2002, we had $232,000,000 available for future financing of
debt and equity securities under a shelf registration statement filed with the
Securities and Exchange Commission. Of that amount, we have approximately
$85,000,000 available under MTN senior debt programs. These amounts may be
issued from time to time in the future based on our needs and existing market
conditions.
Letters of Credit
At December 31, 2001, we held approximately $9,562,000 in depository
accounts and $46,637,000 in irrevocable letters of credit from commercial banks
to secure a number of lessees' lease and borrowers' loan obligations. We may
draw upon the letters of credit or depository accounts if there are any defaults
under the leases and/or loans. Amounts available under letters of credit could
change based upon facility operating conditions and other factors and such
changes may be material.
Facility Rollovers
We have concluded a significant number of "facility rollover" transactions
on properties that have been under long-term leases and mortgages. Facility
rollover transactions principally include lease renewals and renegotiations,
exchanges, sales of properties, and, to a lesser extent, payoffs on mortgage
receivables. The annualized impact on a pro forma basis as if the facility
rollover transactions had occurred on January 1 of each year was to decrease FFO
for the years 1999 and 2000 by $3,300,000 and $1,200,000, respectively, and have
no net effect on FFO for the year 2001. Total rollovers were 26 facilities, 40
facilities and 60 facilities in each of the years 1999 through 2001,
respectively.
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For the years ending December 31, 2002 and 2003, we have 14 facilities and
18 facilities in the triple net lease portfolio, respectively, that are subject
to lease expiration and mortgage maturities. Including lease expirations in the
managed portfolio, total Company revenue subject to lease expirations and
mortgage maturities are 1.1% for 2002 and 2.9% for 2003.
-39-
Troubled Long-Term Care and Assisted Living Operators
The financial weakness of operators in the long-term care and assisted
living sectors may result in some uncertainties in our ability to continue to
realize the full benefit of such operators' leases. We cannot assure you that
the bankruptcies of certain long-term care operators and the trouble experienced
by assisted living operators would not have a material adverse effect on our Net
Income, FFO or the market value of our common stock (see Note 4 to the
Consolidated Financial Statements).
Cautionary Language Regarding Forward Looking Statements
Statements in this Annual Report that are not historical factual statements
are "forward looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The statements include, among other things,
statements regarding the intent, belief or expectations of HCPI and its officers
and can be identified by the use of terminology such as "may," "will," "expect,"
"believe," "intend," "plan," "estimate," "should" and other comparable terms or
the negative thereof. In addition, we, through our senior management, from time
to time make forward looking oral and written public statements concerning our
expected future operations and other developments. Readers are cautioned that,
while forward looking statements reflect our good faith belief and best judgment
based upon current information, they are not guarantees of future performance
and are subject to known and unknown risks and uncertainties. Actual results may
differ materially from the expectations contained in the forward looking
statements as a result of various factors. In addition to the factors set forth
under the caption Risk Factors in this Annual Report, readers should consider
the following:
(a) Legislative, regulatory, or other changes in the health care industry
at the local, state or federal level which increase the costs of or
otherwise affect the operations of our lessees;
(b) Changes in the reimbursement available to our lessees and mortgagors by
governmental or private payors, including changes in Medicare and
Medicaid payment levels and the availability and cost of third party
insurance coverage;
(c) Competition for lessees and mortgagors, including with respect to new
leases and mortgages and the renewal or rollover of existing leases;
(d) Availability of suitable health care facilities to acquire at a
favorable cost of capital and the competition for such acquisition and
financing of health care facilities;
(e) The ability of our lessees and mortgagors to operate our properties in
a manner sufficient to maintain or increase revenues and to generate
sufficient income to make rent and loan payments;
(f) The financial weakness of operators in the long-term care and assisted
living sectors, including the bankruptcies of certain of our tenants,
which results in uncertainties in our ability to continue to realize
the full benefit of such operators' leases; and
(g) Changes in national or regional economic conditions, including changes
in interest rates and the availability and cost of capital for the
Company.
Item 7a. DISCLOSURES ABOUT MARKET RISK
Our investments are financed by the sale of common stock, long-term debt,
internally generated cash flows, and some short-term bank debt.
We generally have fixed base rent on our leases; in addition, there can be
additional rent based on a percentage of increased revenue over specified base
period revenue of the properties and/or
-40-
increases based on inflation indices or other factors. Financing costs are
comprised of dividends on preferred and common stock, fixed interest on
long-term debt and short-term interest on bank debt.
On a more limited basis, we have provided mortgage loans to operators of
health care facilities in the normal course of business. All of the mortgage
loans receivable have fixed interest rates or interest rates with periodic fixed
increases. Therefore, the mortgage loans receivable are all considered to be
fixed rate loans, and the current interest rate (the lowest rate) is used in the
computation of market risk provided in the following table if material.
We may assume existing mortgage notes payable as part of an acquisition
transaction. Currently we have two mortgage notes payable with variable interest
rates and the remaining mortgage notes payable have fixed interest rates or
interest rates with fixed periodic increases. Our Senior Notes are at fixed
rates with one exception for a $25,000,000 variable rate senior note for which
management has fixed the interest rate by means of a swap contract. The variable
rate loans are at interest rates below the current prime rate of 4.75%, and
fluctuations are tied to the prime rate or to a rate currently below the prime
rate.
At December 31, 2001, we are exposed to market risks related to
fluctuations in interest rates only on $4,882,000 of variable rate mortgage
notes payable and $108,500,000 of variable rate bank debt out of our portfolio
of real estate of $2,738,000,000.
Fluctuation in the interest rate environment will not affect our future
earnings and cash flows on our fixed rate debt until that debt matures and must
be replaced or refinanced. Interest rate changes will affect the fair value of
the fixed rate instruments. Conversely, changes in interest rates on variable
rate debt would change our future earnings and cash flows, but not affect the
fair value on those instruments. Assuming a one percentage point increase in the
interest rate related to the variable rate debt including the mortgage notes
payable and the bank lines of credit, and assuming no change in the outstanding
balance as of year end, interest expense for 2001 would increase by
approximately $1,134,000.
The principal amount and the average interest rates for the mortgage loans
receivable and debt categorized by the final maturity dates is presented in the
following table. The fair value estimates for the mortgage loans receivable are
based on the estimates of management and on rates currently prevailing for
comparable loans. The fair market value estimates for debt securities are based
on discounting future cash flows utilizing current rates offered to us for debt
of the same type and remaining maturity.
-41-
------------------------------Maturity-------------------------
Fair
2002 2003 2004 2005 2006 Thereafter Total Value
------------------------------------------------------------------------
ASSETS (Amounts in thousands, except percentages)
Mortgage Loans Receivable $3,576 $41,267 $103,232 $148,075 $143,319
Weighted Average Interest Rate 8.36% 9.56% 10.53% 10.21%
LIABILITIES
Variable Rate Debt:
Bank Notes Payable $108,500 $108,500 $108,500
Weighted Average Interest Rate 2.58% 2.58%
Mortgage Notes Payable $ 378 $4,504 $4,882 $4,882
Weighted Average Interest Rate 3.28% 3.20% 3.21%
Fixed Rate Debt:
Senior Notes Payable $116,000 $31,000 $92,000 $231,000 $135,000 $159,230 $764,230 $788,168
Weighted Average Interest Rate 7.25% 7.09% 7.78% 6.79% 6.74% 8.09% 7.26%
Mortgage Notes Payable $345 $ 8,620 $ 9,848 $14,261 $147,066 $180,140 $182,567
Weighted Average Interest Rate 9.00% 8.52% 7.59% 8.77% 8.08% 8.13%
We do not believe that the future market rate risks related to the above
securities will have a material impact on us or the results of our future
operations. Readers are cautioned that most of the statements contained in the
"Disclosures about Market Risk" paragraphs are forward looking and should be
read in conjunction with the disclosures under the heading "Cautionary Language
Regarding Forward Looking Statements" previously set forth.
New Pronouncements
See Note 19 to the Consolidated Financial Statements for a discussion of
our implementation of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No.141 "Business Combinations," No. 142 "Goodwill
and Other Intangible Assets," No. 143 "Accounting for Asset Retirement
Obligations," and No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".
-42-
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers were as follows on March 13, 2002:
Name Age Position
- -------------------------------- ------ ------------------------------------------------------------------------
Kenneth B. Roath 66 Chairman, President and Chief Executive Officer
James G. Reynolds 50 Executive Vice President and Chief Financial Officer
Devasis Ghose 48 Senior Vice President - Finance and Treasurer
Edward J. Henning 49 Senior Vice President, General Counsel and Corporate Secretary
Stephen R. Maulbetsch 45 Senior Vice President - Acquisitions
There is hereby incorporated by reference the information appearing under
the captions "Board of Directors and Officers" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Registrant's definitive
proxy statement relating to its Annual Meeting of Stockholders to be held on May
14, 2002.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on May 14, 2002.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There is hereby incorporated by reference the information under the
captions "Principal Stockholders" and "Board of Directors and Officers" in the
Registrant's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on May 14, 2002.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption
"Certain Transactions" and "Compensation Committee Interlocks and Insider
Participation" in the Registrant's definitive proxy statement relating to its
Annual Meeting of Stockholders to be held on May 14, 2002.
-43-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 2001 and 2000 Consolidated
Statements of Income - for the years ended December 31, 2001, 2000 and
1999
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - for the years ended December
31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Note: All schedules have been omitted because the required information
is presented in the financial statements and the related notes or
because the schedules are not applicable.
b) Reports on Form 8-K:
NONE
c) Exhibits:
3.1 Articles of Restatement of HCPI (incorporated herein by
reference to exhibit 3.1 of HCPI's quarterly report on Form
10-Q for the period ended June 30, 2001).
3.2 Second Amended and Restated Bylaws of HCPI (incorporated
herein by reference to exhibit 3.2 of HCPI's quarterly
report on form 10-Q for the period ended March 31, 1999).
3.3 Amendment No. 1 to Second Amended and Restated Bylaws of
HCPI.
4.1 Rights agreement, dated as of July 27, 2000, between Health
Care Property Investors, Inc. and the Bank of New York which
includes the form of Certificate of Designations of the
Series D Junior Participating Preferred Stock of Health Care
Property Investors, Inc. as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C (incorporated by
reference to exhibit 4.1 of Health Care Property Investors,
Inc.'s Current Report on Form 8-K dated July 28, 2000).
4.2 Indenture, dated as of September 1, 1993, between HCPI and
The Bank of New York, as Trustee, with respect to the Series
C and D Medium Term Notes, the Senior Notes due 2006 and the
Mandatory Par Put Remarketed Securities due 2015
(incorporated by reference to exhibit 4.1 to HCPI's
registration statement on Form S-3 dated September 9, 1993).
-44-
4.3 Indenture, dated as of April 1, 1989, between HCPI and The
Bank of New York for Debt Securities (incorporated by
reference to exhibit 4.1 to HCPI's registration statement on
Form S-3 dated March 20, 1989).
4.4 Form of Fixed Rate Note (incorporated by reference to
exhibit 4.2 to HCPI's registration statement on Form S-3
dated March 20, 1989).
4.5 Form of Floating Rate Note (incorporated by reference to
exhibit 4.3 to HCPI's registration statement on Form S-3
dated March 20, 1989).
4.6 Registration Rights Agreement dated November 20, 1998
between HCPI and James D. Bremner (incorporated by reference
to exhibit 4.8 to HCPI's annual report on Form 10-K for the
year ended December 31, 1999). This exhibit is identical in
all material respects to two other documents except the
parties thereto. The parties to these other documents, other
than HCPI, were James P. Revel and Michael F. Wiley.
4.7 Registration Rights Agreement dated January 20, 1999 between
HCPI and Boyer Castle Dale Medical Clinic, L.L.C.
(incorporated by reference to exhibit 4.9 to HCPI's annual
report on Form 10-K for the year ended December 31, 1999).
This exhibit is identical in all material respects to 13
other documents except the parties thereto. The parties to
these other documents, other than HCPI, were Boyer
Centerville Clinic Company, L.C., Boyer Elko, L.C., Boyer
Desert Springs, L.C., Boyer Grantsville Medical, L.C.,
Boyer-Ogden Medical Associates, LTD., Boyer Ogden Medical
Associates No. 2, LTD., Boyer Salt Lake Industrial Clinic
Associates, LTD., Boyer-St. Mark's Medical Associates, LTD.,
Boyer McKay-Dee Associates, LTD., Boyer St. Mark's Medical
Associates #2, LTD., Boyer Iomega, L.C., Boyer Springville,
L.C., and - Boyer Primary Care Clinic Associates, LTD. #2.
4.8 Form of Deposit Agreement (including form of Depositary
Receipt with respect to the Depositary Shares, each
representing one-one hundredth of a share of our 8.60%
Cumulative Redeemable Preferred Stock, Series C)
(incorporated by reference to exhibit 4.8 to HCPI's
quarterly report on Form 10-Q for the period ended March 31,
2001) dated as of March 1, 2001 by and among HCPI, Wells
Fargo Bank Minnesota, N.A. and the holders from time to time
of the Depositary Shares described therein.
4.9 Indenture, dated as of January 15, 1997, between American
Health Properties, Inc. and The Bank of New York, as trustee
(incorporated herein by reference to exhibit 4.1 to American
Health Properties, Inc.'s current report on Form 8-K (file
no. 001-09381), dated January 21, 1997).
4.10 First Supplemental Indenture, dated as of November 4, 1999,
between HCPI and The Bank of New York, as trustee
(incorporated by reference to HCPI's quarterly report on
Form 10-Q for the period ended September 30, 1999).
4.11 Dividend Reinvestment and Stock Purchase Plan, dated
November 9, 2000 (incorporated by reference to exhibit 99.1
to HCPI's registration statement on Form S-3 dated November
13, 2000, registration number 333-49796).
4.12 Registration Rights Agreement dated August 17, 2001 between
HCPI, Boyer Old Mill II, L.C., Boyer-Research Park
Associates, LTD., Boyer Research Park Associates VII, L.C.,
Chimney Ridge, L.C., Boyer-Foothill Associates, LTD., Boyer
Research Park Associates VI, L.C., Boyer Stansbury II, L.C.,
Boyer Rancho Vistoso, L.C., Boyer-Alta View Associates,
LTD., Boyer Kaysville Associates, L.C., Boyer Tatum
Highlands Dental Clinic, L.C., Amarillo Bell Associates,
Boyer Evanston, L.C., Boyer Denver Medical, L.C., Boyer
Northwest Medical Center Two, L.C., and Boyer Caldwell
Medical, L.C.
-45-
10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership
Agreement of Health Care Property Partners, a California
general partnership, the general partners of which consist
of HCPI and certain affiliates of Tenet (incorporated by
reference to exhibit 10.1 to HCPI's annual report on Form
10-K for the year ended December 31, 1985).
10.2 HCPI Second Amended and Restated Directors Stock Incentive
Plan (incorporated by reference to exhibit 10.43 to HCPI's
quarterly report on Form 10-Q for the period ended March 31,
1997).*
10.3 HCPI Second Amended and Restated Stock Incentive Plan
(incorporated by reference to exhibit 10.44 to HCPI's
quarterly report on Form 10-Q for the period ended March 31,
1997).*
10.4 First Amendment to Second Amended and Restated Directors
Stock Incentive Plan, effective as of November 3, 1999
(incorporated by reference to exhibit 10.1 to HCPI's
quarterly report on Form 10-Q for the period ended September
30, 1999).*
10.5 Second Amendment to Second Amended and Restated Directors
Stock Incentive Plan, effective as of January 4, 2000
(incorporated by reference to exhibit 10.15 to HCPI's annual
report on Form 10-K for the year ended December 31, 1999).*
10.6 First Amendment to Second Amended and Restated Stock
Incentive Plan effective as of November 3, 1999
(incorporated by reference to exhibit 10.3 to HCPI's
quarterly report on Form 10-Q for the period ended September
30, 1999).*
10.7 HCPI 2000 Stock Incentive Plan, effective as of March 23,
2000.*
10.8 HCPI Second Amended and Restated Directors Deferred
Compensation Plan (incorporated by reference to exhibit
10.45 to HCPI's quarterly report on Form 10-Q for the period
ended September 30, 1997).*
10.9 Second Amendment to Second Amended and Restated Directors
Deferred Compensation Plan, effective as of November 3, 1999
(incorporated by reference to exhibit 10.2 to HCPI's
quarterly report on Form 10-Q for the period ended September
30, 1999).
10.10 Fourth Amendment to Second Amended and Restated Director
Deferred Compensation Plan, effective as of January 4, 2000
(incorporated by reference to exhibit 10.17 to HCPI's annual
report on Form 10-K for the year ended December 31, 1999).*
10.11 Employment Agreement dated October 13, 2000 between HCPI
and Kenneth B. Roath (incorporated by reference to exhibit
10.11 to HCPI's annual report on Form 10-K for the year
ended December 31, 2000).*
10.12 Various letter agreements, each dated as of October 16,
2000, among HCPI and certain key employees of the Company
(incorporated by reference to exhibit 10.12 to HCPI's annual
report on Form 10-K for the year ended December 31, 2000).*
10.13 HCPI Amended and Restated Executive Retirement Plan.*
10.14 Stock Transfer Agency Agreement between HCPI and The Bank
of New York dated as of July 1, 1996 (incorporated by
reference to exhibit 10.40 to HCPI's quarterly report on
Form 10-Q for the period ended September 30, 1996).
10.15 Amended and Restated Limited Liability Company Agreement
dated November 20, 1998 of HCPI/Indiana, LLC (incorporated
by reference to
-46-
exhibit 10.15 to HCPI's annual report on Form 10-K for the
year ended December 31, 1998).
10.16 Amended and Restated Limited Liability Company Agreement
dated January 20, 1999 of HCPI/Utah, LLC (incorporated by
reference to exhibit 10.16 to HCPI's annual report on Form
10-K for the year ended December 31, 1998).
10.17 Revolving Credit Agreement, dated as of November 3, 1999,
among HCPI, each of the banks identified on the signature
pages hereof, The Bank of New York, as agent for the banks
and as issuing bank, and Bank of America, N.A. and Wells
Fargo Bank, N.A., as co-documentation agents, with BNY
Capital Markets, Inc., as lead arranger and Book Manager
(incorporated by reference to exhibit 10.4 to HCPI's
quarterly report on Form 10-Q for the period ended
September 30, 1999).
10.18 364-Day Revolving Credit Agreement, dated as of November 3,
1999 among HCPI, each of the banks identified on the
signature pages hereof, The Bank of New York, as agent for
the banks, and Bank of America, N.A. and Wells Fargo Bank,
N.A., as co-documentation agents, with BNY Capital Markets,
Inc., as lead arranger and book manager (incorporated by
reference to exhibit 10.5 to HCPI's quarterly report on
Form 10-Q for the period ended September 30, 1999).
10.19 Cross-Collateralization, Cross-Contribution and
Cross-Default Agreement, dated as of July 20, 2000, by HCP
Medical Office Buildings II, LLC, and Texas HCP Medical
Office Buildings, L.P., for the benefit of First Union
National Bank (incorporated by reference to exhibit 10.20
to HCPI's annual report on Form 10-K for the year ended
December 31, 2000).
10.20 Cross-Collateralization, Cross-Contribution and
Cross-Default Agreement, dated as of August 31, 2000, by
HCP Medical Office Buildings I, LLC, and Meadowdome, LLC,
for the benefit of First Union National Bank (incorporated
by reference to exhibit 10.21 to HCPI's annual report on
Form 10-K for the year ended December 31, 2000).
10.21 Amended and Restated Limited Liability Company Agreement
dated August 17, 2001 of HCPI/Utah II, LLC.
10.22 First Amendment to Amended and Restated Limited Liability
Company Agreement dated October 30, 2001 of HCPI/Utah II,
LLC.
10.23 Amendment No. 1, dated as of October 29, 2001, to the
364-Day Revolving Credit Agreement, dated as of November 3,
1999 among HCPI, each of the banks identified on the
signature pages thereto, The Bank of New York, as agent for
the banks, and Bank of America, N.A. and Wells Fargo Bank,
NA., as co-documentation agents, with BNY Capital Markets,
Inc., as lead arranger and book manager.
21.1 List of Subsidiaries
23.1 Consent of Independent Public Accountant
* Management Contract or Compensatory Plan or Arrangement.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
No.s 33-28483 and 333-90353 filed May 11, 1989 and November 5, 1999,
respectively, and Form S-8 No.s 333-54786 and 333-54784 each filed February 1,
2001.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy expressed in the Securities Act
of 1933 and will be governed by the final adjudication of such issue.
-47-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: June 6, 2002
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/S/ Kenneth B. Roath
-----------------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
-48-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - as of December 31, 2001 and 2000 F-3
Consolidated Statements of Income -
for the years ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 2001, 2000 and 1999 F-5
Consolidated Statements of Cash Flows -
for the years ended December 31, 2001, 2000 and 1999 F-6
Notes to Consolidated Financial Statements F-7 -- F-24
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care
Property Investors, Inc. (a Maryland corporation) as of December 31, 2001 and
2000, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health Care
Property Investors, Inc. as of December 31, 2001 and 2000, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States.
/S/ ARTHUR ANDERSEN LLP
Orange County, California
January 21, 2002
F-2
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
-------------------------------------
2001 2000
----------------- ----------------
ASSETS
Real Estate Investments:
Buildings and Improvements $2,267,030 $2,140,591
Accumulated Depreciation (339,971) (287,719)
----------------- ----------------
1,927,059 1,852,872
Construction in Progress 11,616 ---
Land 255,881 247,637
----------------- ----------------
2,194,556 2,100,509
Loans Receivable, Net 176,286 187,237
Investments in and Advances to Joint Ventures 21,750 22,615
Accounts Receivable, Net of Allowance for Doubtful Accounts of
$4,270 and $1,504 as of December 31, 2001 and 2000 20,940 16,341
Other Assets 9,213 9,527
Cash and Cash Equivalents 8,408 58,623
----------------- ----------------
TOTAL ASSETS $2,431,153 $2,394,852
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 108,500 $ 204,500
Senior Notes Payable 764,230 777,514
Mortgage Notes Payable 185,022 176,914
Accounts Payable, Accrued Expenses and Deferred Income 56,709 57,097
Minority Interests in Joint Ventures 13,767 14,709
Minority Interests Convertible into Common Stock 56,201 24,835
Stockholders' Equity:
Preferred Stock, $1.00 par value: Authorized - 50,000,000 shares;
11,721,600 shares outstanding as of
December 31, 2001 and 2000 274,487 274,487
Common Stock, $1.00 par value; 200,000,000
shares authorized; 56,386,868 and 50,873,902
outstanding as of December 31, 2001 and 2000 56,387 50,874
Additional Paid-In Capital 1,100,743 927,182
Other Equity (7,948) (5,272)
Cumulative Net Income 883,084 761,918
Cumulative Dividends (1,060,029) (869,906)
----------------- ----------------
Total Stockholders' Equity 1,246,724 1,139,283
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,431,153 $2,394,852
================= ================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-3
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
-------------------------------------------------
2001 2000
(Revised) (Revised) 1999
-------------- ------------- --------------
REVENUE
Rental Income, Triple Net Leases $ 226,510 $ 227,012 $ 143,848
Rental Income, Managed Properties 84,092 79,818 55,722
Interest and Other Income 21,858 22,977 25,223
-------------- ------------- --------------
332,460 329,807 224,793
-------------- ------------- --------------
EXPENSES
Interest Expense 78,489 86,747 58,458
Real Estate Depreciation 70,458 69,839 44,789
Managed Properties Operating Expenses 30,105 27,738 18,240
General and Administrative Expenses 13,239 13,266 11,908
Impairment Losses Related to Depreciable Property 13,640 2,751 ---
Impairment of Equity Investment --- 2,000 ---
-------------- ------------- --------------
205,931 202,341 133,395
-------------- ------------- --------------
INCOME FROM OPERATIONS 126,529 127,466 91,398
Minority Interests (6,595) (5,729) (5,476)
Gain on Sale of Real Estate Properties, Net 1,232 11,756 10,303
-------------- ------------- --------------
NET INCOME BEFORE EXTRAORDINARY ITEMS 121,166 133,493 96,225
Extraordinary Item-Gain on Extinguishment of Debt --- 274 ---
-------------- ------------- --------------
NET INCOME 121,166 133,767 96,225
Dividends to Preferred Stockholders 24,900 24,900 17,775
-------------- ------------- --------------
NET INCOME APPLICABLE TO COMMON SHARES $ 96,266 $ 108,867 $ 78,450
============== ============= ==============
BASIC EARNINGS PER COMMON SHARE $ 1.79 $ 2.13 $ 2.25
============== ============= ==============
DILUTED EARNINGS PER COMMON SHARE $ 1.78 $ 2.13 $ 2.25
============== ============= ==============
WEIGHTED AVERAGE SHARES OUTSTANDING (BASIC) 53,879 51,057 34,792
============== ============= ==============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-4
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Preferred Stock Common Stock
------------------ ---------------------------
Number Par Additional Total
Number of of Value Paid-In Cumulative Cumulative Other Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity Equity
- ----------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1998 7,785 $187,847 30,987 $30,987 $433,309 $531,926 $(588,650) $(4,285) $591,134
Issuances of Preferred Stock, 4,000 88,160 88,160
Net
Issuances of Common Stock, Net 20,488 20,488 508,382 528,870
Exercise of Stock Options 5 5 88 93
Net Income 96,225 96,225
Stock Repurchase (40) (966) (59) (59) (1,308) (2,333)
Dividends Paid - Preferred (17,775) (17,775)
Shares
Dividends Paid - Common Shares (88,402) (88,402)
Deferred Compensation (218) (218)
Notes Receivable From Officers (92) (92)
- ----------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1999 11,745 275,041 51,421 51,421 940,471 628,151 (694,827) (4,595) 1,195,662
Issuances of Common Stock, Net 75 75 2,093 2,168
Exercise of Stock Options 55 55 1,383 1,438
Net Income 133,767 133,767
Stock Repurchase (23) (554) (677) (677) (16,765) (17,996)
Dividends Paid - Preferred (24,900) (24,900)
Shares
Dividends Paid - Common Shares (150,179) (150,179)
Deferred Compensation (487) (487)
Notes Receivable From Officers (190) (190)
- ----------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 2000 11,722 274,487 50,874 50,874 927,182 761,918 (869,906) (5,272) 1,139,283
Issuances of Common Stock, Net 4,927 4,927 159,345 164,272
Exercise of Stock Options 586 586 14,216 14,802
Net Income 121,166 121,166
Dividends Paid - Preferred (24,900) (24,900)
Shares
Dividends Paid - Common Shares (165,223) (165,223)
Deferred Compensation (1,026) (1,026)
Notes Receivable From Officers (510) (510)
Other Comprehensive Income/(Loss):
Accumulated Comprehensive
Loss (See Note 2) (1,140) (1,140)
- ----------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 2001 11,722 $274,487 56,387 $56,387 $1,100,743 $883,084 $(1,060,029) $(7,948) $1,246,724
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
F-5
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
2001 2000
(Revised) (Revised) 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 121,166 $ 133,767 $ 96,225
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 70,458 69,839 44,789
Impairment Losses Related to Depreciable Property 13,640 2,751 ---
Non Cash Charges 4,282 4,028 3,071
Joint Venture Adjustments 243 1,917 1,584
Gain on Sale of Real Estate Properties (1,232) (11,756) (10,303)
Gain on Extinguishment of Debt --- (274) ---
Changes in:
Operating Assets (3,686) (1,036) (5,866)
Operating Liabilities (4,023) 6,275 (5,383)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 200,848 205,511 124,117
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (155,329) (21,558) (160,681)
Acquisition of American Health Properties, Net Cash Expended --- --- (80,071)
Proceeds from Sale of Real Estate Properties 29,303 81,022 46,098
Other Investments and Loans 7,863 4,250 (35,806)
------------- ------------- -------------
NET CASH (USED IN)/ PROVIDED BY INVESTING ACTIVITIES (118,163) 63,714 (230,460)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable (96,000) (11,000) 127,500
Repayment of Senior Notes (14,000) (10,000) (15,000)
Issuance of Senior Notes --- 24,865 62,000
Issuance of Secured Debt --- 83,000 ---
Cash Proceeds from Issuing Common Stock 176,310 1,438 31,969
Increase/(Decrease) in Minority Interests 546 (522) 17,182
Periodic and Final Payments on Mortgages (10,416) (3,815) (2,889)
Repurchase of Common and Preferred Stock --- (17,819) (2,333)
Repurchase of Convertible Subordinated Notes Payable --- (99,651) ---
Dividends Paid (190,123) (175,079) (106,177)
Other Financing Activities 783 (9,715) (2,717)
------------- ------------- -------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (132,900) (218,298) 109,535
------------- ------------- -------------
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (50,215) 50,927 3,192
Cash and Cash Equivalents, Beginning of Period 58,623 7,696 4,504
------------- ------------- -------------
Cash and Cash Equivalents, End of Period $ 8,408 $ 58,623 $ 7,696
============= ============= =============
ADDITIONAL CASH FLOW DISCLOSURES:
Interest Paid, Net of Capitalized Interest $ 80,160 $ 85,907 $ 55,127
============= ============= =============
Capitalized Interest $ 243 $ 514 $ 1,223
============= ============= =============
Mortgages Assumed on Acquired Properties exclusive of AHE Merger $ 18,569 $ $ 42,896
============= ============= =============
Equity Issued in Acquisition of Properties exclusive of AHE Merger $ 30,730 $ --- $ 969
============= ============= =============
Equity Issued in AHE Merger $ --- $ --- $ 585,154
============= ============= =============
Fair Value of AHE Assets Acquired $ --- $ --- $ 967,181
============= ============= =============
Liabilities Assumed in AHE Acquisition $ --- $ --- $ 298,911
============= ============= =============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Health Care Property Investors, Inc., a Maryland corporation, was organized
in March 1985 to qualify as a real estate investment trust (REIT). Health Care
Property Investors, Inc. and its affiliated subsidiaries and partnerships (HCPI)
were organized to invest in health care related properties located throughout
the United States. As of December 31, 2001, we own or have investments in 429
properties located in 42 states. The properties include 176 long-term care
facilities, 94 congregate care and assisted living centers, 86 medical office
buildings (MOBs), 37 physician group practice clinics, 21 acute care hospitals,
nine freestanding rehabilitation hospitals and six health care laboratory and
biotech research facilities. As of December 31, 2001, we provided mortgage loans
on or leased these properties to 93 health care operators and to approximately
650 tenants in the managed portfolio (defined in the following text).
Revision of Consolidated Statements of Income and Statements of Cash Flows
Our consolidated statements of income and consolidated statements of cash
flows have been revised from those originally reported to separately reflect the
impairment losses related to depreciable property of $13,640,000 and $2,751,000
for the years ended December 31, 2001 and 2000, respectively. The losses arose
from the write down to fair value less costs to sell of 13 facilities during
2001 and four facilities during 2000 that will be or have been sold. (See Note 3
to the Consolidated Financial Statements.) The impairment losses related to
depreciable property were previously included in Real Estate Depreciation. The
revision had no impact on our consolidated balance sheets or statements of
stockholders' equity. The revision had no impact on the net revenues, operating
income, net income or net income per share of common stock for the years ended
December 31, 2001 and 2000.
(2) SIGNIFICANT ACCOUNTING POLICIES
Rental And Interest Income:
Rental Income includes base and additional rental income. Additional rental
income is generated by a percentage of increased revenue over specified base
period revenue of the properties and/or increases based on inflation indices or
other factors. In addition, we may receive payments from lessees upon transfer
or assignment of existing leases; such amounts received are deferred and
amortized over the remaining term of the leases.
We have certain leases and mortgages that have contractual fixed increases
in rents and interest. We record straight-line rents and interest in cases where
we believe such rents and interest are sustainable.
During 2000, we adopted the Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements". Under SAB 101, we are required to defer income recognition of
additional rents that are based on facility revenue increases until an annual
(rather than quarterly) contractual facility revenue hurdle is exceeded. Due to
our current lease structures, SAB 101 will delay the recognition of certain
additional rents from the first quarter of a year to subsequent quarters of the
year. We previously followed the practice of estimating and applying rents
ratably throughout each of the quarters. SAB 101 had no impact on our results of
operations for the year ended December 31, 2001 and had a minor impact in
reducing income by $300,000 in our results of operations for the year ended
December 31, 2000.
Managed Property Operations:
We have ownership interests in 68 MOBs, 27 physician group practice clinics
and six health care laboratory and biotech research facilities which are managed
by independent property management companies on our behalf. These facilities are
leased to multiple tenants under gross, modified gross or triple net leases.
Both operating income and rental income (other than basic rental income
attributable to these properties) are recorded under Rental Income, Managed
Properties in our
F-7
financial statements. Expenses related to the operation of these facilities are
recorded as Managed Properties Operating Expenses.
Real Estate:
We record the acquisition of real estate at cost and use the straight-line
method of depreciation for buildings and improvements over estimated useful
lives ranging up to 45 years. We periodically evaluate our investments in real
estate for potential impairment by comparing our investment to the expected
future cash flows to be generated from the properties. If such impairments were
to occur, we would write-down our investment in the property to estimated market
value. In addition, certain of our investments are in the process of being sold.
In instances where the expected sales price is projected to be less than the net
investment we will write-down our investment in the property to market value.
Acquisition, development and construction arrangements are accounted for as real
estate investments/joint ventures or loans based on the characteristics of the
arrangements.
Investments In Consolidated Subsidiaries And Partnerships:
We consolidate the accounts of our subsidiaries and certain general and
limited partnerships which are majority owned and controlled. All significant
intercompany investments, accounts and transactions have been eliminated.
Investments In And Advances To Joint Ventures:
We have investments in certain general partnerships and joint ventures (see
Note 6 following) in which we may serve as the general partner or managing
member. However, since the other members in these joint ventures have
significant voting rights relative to acquisition, sale and refinancing of
assets, we account for these investments using the equity method of accounting.
The accounting policies of these joint ventures are substantially consistent
with those of HCPI.
Federal Income Taxes:
We have operated at all times so as to qualify as a REIT under Sections 856
to 860 of the Internal Revenue Code of 1986. As such, we are not taxed on our
income that is distributed to stockholders. At December 31, 2001, the tax basis
of our net assets and liabilities is less than the reported amounts by
approximately $216,000,000. The majority of this difference is attributable to
the merger of American Health Properties, Inc. in 1999, wherein, for reporting
purposes the assets are recordable at fair market value while tax bases remain
at historical cost. Additional variances are caused by accelerated depreciation
for tax assets and differences in tax basis value versus fair market value in
three limited liability companies which are consolidated (and where we are the
managing member).
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statements due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives, bases of assets and timing of rental
income.
Derivatives And Hedging:
F-8
During 1999, we entered into a $25,000,000 swap contract through which the
variable interest rate on a senior note is fixed until its February 2004
maturity. Pursuant to Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (Statement 133), which is applicable as of 2001, this
swap is recorded as a cash flow hedge. The swap qualifies for the short-cut
method under Statement 133 as the notional and principal amount are the same,
the fair value of the swap at inception is zero, net settlements under the swap
are based on the same index at each settlement date, the interest bearing
liability is not prepayable (as defined), and there are no other terms of the
hedged item or interest rate swap that would invalidate the assumption of
effectiveness. As such, we have reflected the unrealized loss based on the
change in fair market value of $1,140,000 as of December 31, 2001 as an
accumulated comprehensive loss (see Note 12), which is recorded under Other
Equity on the face of the balance sheet. If the note is held to maturity, the
unrealized loss will not be incurred. Prior to December 31, 2001, the fair
market value was considered immaterial.
Statement 133 established accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. Additionally, changes in the derivative's
fair value are recognized as comprehensive income if specific hedge accounting
criteria are met. If these criteria are not met, changes in the fair value are
to be included in earnings.
Cash And Cash Equivalents:
Investments purchased with original maturities of three months or less are
considered to be cash and cash equivalents.
Use Of Estimates In The Preparation Of Financial Statements:
Management is required to make estimates and assumptions in the preparation
of financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of expense during
the reporting period. Actual results could differ from those estimates.
Reclassification:
Reclassifications have been made for comparative financial statement
presentation.
(3) REAL ESTATE INVESTMENTS
HCPI was organized to make long-term, equity-oriented investments
principally in operating, income-producing health care related properties. Our
equity investments have generally been structured as land and building
leasebacks.
Under the terms of the lease agreements, we earn fixed monthly base rental
income and may earn periodic additional rental income. At December 31, 2001,
minimum future rental income from 364 properties with non-cancelable operating
leases is expected to be approximately $269,918,000 in 2002, $260,877,000 in
2003, $207,134,000 in 2004, $184,531,000 in 2005, $171,495,000 in 2006 and
$722,932,000 in the aggregate thereafter.
F-9
Investments:
During the year ended December 31, 2001, we completed the following
investment activity:
Acquisition Transactions $190,000,000
Facilities Under Construction 40,300,000
Mortgage Loans 10,000,000
--------------
Total Investments $240,300,000
==============
The $190,000,000 in acquisitions was comprised of 27 properties, including
eight skilled nursing facilities, eight medical office buildings, five health
care laboratory and biotech research facilities and six congregate care and
assisted living facilities. Facilities under construction include a $28,000,000
short stay hospital and medical office building and a $12,300,000 health care
laboratory and biotech research facility. At December 31, 2001, we had funded
$10,800,000 for construction of these facilities.
In September 2001, we invested $10,000,000 in a participation to fund three
loans each secured by an assisted living facility. One facility was sold in
November 2001 and $7,400,000 of our initial investment was repaid to us.
Total investments for 2001 include the first two phases of a $126,000,000
commitment to acquire 12 medical office buildings and six health care laboratory
and biotech research facilities from entities controlled by The Boyer Company.
The facilities are being acquired through HCPI/Utah II, LLC, a limited liability
company of which we are the managing member. The initial phase in August
included four medical office buildings and five health care laboratory and
biotech research facilities for $73,500,000, as well as the initial funding of
approximately $2,100,000 for the construction of a $12,300,000 health care
laboratory and biotech research facility. In October 2001, we acquired two
medical office buildings for $7,500,000. Funding for the first two phases
included the assumption of $18,600,000 in secured debt, the issuance of
approximately $28,000,000 of equity in the form of 801,681 non-managing member
units in HCPI/Utah II, LLC and the contribution of $36,500,000 in cash. The
non-managing member interests in HCPI/Utah II, LLC, which are recorded under
Minority Interests Convertible into Common Stock, are convertible into our
common stock on a one-for-one basis. Additional closings will occur as buildings
are constructed over the next two years. Future closings will be financed with
cash and the issuance of equity in the form of additional non-managing member
units.
During 2001, we acquired two medical office buildings which represented the
final phase of a commitment commenced in 1998 to acquire facilities from
entities controlled by The Boyer Company. The two medical office buildings were
acquired through HCPI/Utah, LLC, a limited liability company of which we are the
managing member. Funding for the acquisition of the two medical office buildings
consisted of the issuance of 84,922 non-managing member units in HCPI/Utah, LLC.
Funding for the acquisition of all 18 facilities consisted of the issuance of
756,069 non-managing member units in HCPI/Utah, LLC. These units, which are
recorded under Minority Interests Convertible into Common Stock, are convertible
into our common stock on a one-for-one basis.
In addition, during 2000 we purchased the equity interest of our joint
venture partner in three LLCs which owned seven long-term care facilities.
Through this acquisition, real estate assets increased by approximately
$18,326,000 and the investment in joint ventures was reduced.
F-10
Dispositions:
During 2001 we sold 13 facilities resulting in a net gain of $1,232,000.
During 2000 we sold 15 facilities and two land parcels, resulting in a net gain
of $11,756,000. In accordance with Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," we wrote down to fair value less costs to sell 13
facilities during 2001 and four facilities during 2000 that will be or have been
sold. The resulting impairment losses related to depreciable property were
$13,640,000 and $2,751,000 for the years ended December 31, 2001 and 2000,
respectively. The 2001 impairment loss on depreciable property includes
$7,360,000 pertaining to assets sold or leased by December 31, 2001.
F-11
The following tabulation lists HCPI's total real estate investments at
December 31, 2001 (Dollar amounts in thousands):
Number Mortgage Notes
of Buildings & Total Accumulated Payable
Facility Location Facilities Land Improvements Investments Depreciation (Note 8)
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE FACILITIES
Arizona 3 $ 809 $ 9,746 $ 10,555 $ 767 $ ---
Arkansas 6 209 8,233 8,442 3,476 ---
California 13 5,609 21,735 27,344 14,295 ---
Colorado 5 1,891 20,588 22,479 7,150 ---
Florida 9 6,609 28,402 35,011 9,382 ---
Indiana 30 5,505 135,566 141,071 19,503 ---
Kansas 3 788 10,547 11,335 4,315 ---
Maryland 3 1,287 20,755 22,042 8,276 ---
Massachusetts 5 1,587 15,293 16,880 10,356 ---
Michigan 3 451 9,896 10,347 2,220 ---
North Carolina 6 1,342 19,216 20,558 6,327 2,562
Ohio 12 2,365 53,211 55,576 13,845 662
Oklahoma 12 2,368 25,803 28,171 4,329 ---
Tennessee 13 1,807 59,486 61,293 15,017 ---
Texas 5 736 10,200 10,936 3,137 ---
Wisconsin 6 1,147 17,649 18,796 8,451 ---
Other (15 States) 18 6,620 59,849 66,469 16,574 1,867
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 152 41,130 526,175 567,305 147,420 5,091
- ------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
California 4 36,836 190,438 227,274 19,799 ---
Texas 3 1,640 19,931 21,571 2,091 ---
Other (8 States) 11 22,987 324,597 347,584 27,792 ---
- ------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 18 61,463 534,966 596,429 49,682 ---
- ------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 7 3,240 34,140 37,380 3,144 ---
Florida 9 4,992 30,948 35,940 3,897 ---
Louisiana 3 1,280 16,095 17,375 2,004 ---
New Jersey 4 1,619 20,098 21,717 2,709 ---
Pennsylvania 3 515 17,207 17,722 3,433 ---
South Carolina 9 1,674 39,247 40,921 6,100 ---
Texas 21 6,008 85,797 91,805 12,095 ---
Washington 3 844 11,530 12,374 1,805 ---
Other (18 States) 24 12,158 128,924 141,082 17,502 ---
- ------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 83 32,330 383,986 416,316 52,689 ---
- ------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Arizona 1 1,565 7,071 8,636 2,099 ---
Arkansas 2 1,409 19,566 20,975 3,199 ---
Colorado 1 690 8,346 9,036 2,175 ---
Florida 1 2,000 11,269 13,269 6,560 ---
Kansas 2 3,816 23,232 27,048 3,980 ---
Texas 1 1,990 13,123 15,113 5,265 ---
West Virginia 1 --- 14,400 14,400 895 ---
- ------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 9 $ 11,470 $ 97,007 $ 108,477 $ 24,173 $ ---
- ------------------------------------------------------------------------------------------------------------------------------
F-12
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- ------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
Arizona 9 $ 3,235 $ 45,014 $ 48,249 $ 2,360 $ 6,643
California 11 26,041 92,476 118,517 13,032 34,307
Florida 5 800 17,514 18,314 1,109 3,525
Indiana 13 13,590 59,167 72,757 5,179 4,337
Massachusetts 1 1,500 23,992 25,492 1,492 13,476
New Jersey 2 3,675 26,794 30,469 1,757 13,000
Texas 11 9,999 92,893 102,892 11,478 31,080
Utah 19 7,528 99,560 107,088 7,120 13,816
Other (11 States) 13 7,382 112,551 119,933 9,064 45,744
- ------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 84 73,750 569,961 643,711 52,591 165,928
- ------------------------------------------------------------------------------------------------------------------------------
HEALTH CARE LABORATORY AND
BIOTECH RESEARCH FACILITIES
Utah 6 2,335 51,775 54,110 408 13,625
- ------------------------------------------------------------------------------------------------------------------------------
Total Health Care Laboratory and
Biotech Research Facilities 6 2,335 51,775 54,110 408 13,625
- ------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS
California 2 8,070 37,693 45,763 4,765 ---
Florida 9 7,600 14,625 22,225 1,540 ---
Georgia 3 2,100 6,381 8,481 765 ---
North Carolina 2 2,400 3,553 5,953 370 ---
Tennessee 4 2,695 13,609 16,304 1,905 378
Texas 4 1,900 12,179 14,079 1,246 ---
Wisconsin 7 5,225 18,546 23,771 1,588 ---
Other (3 States) 6 2,800 8,190 10,990 829 ---
- ------------------------------------------------------------------------------------------------------------------------------
Total Physician Group Practice Clinics 37 32,790 114,776 147,566 13,008 378
- ------------------------------------------------------------------------------------------------------------------------------
Vacant Land Parcels --- 613 --- 613 --- ---
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 389 255,881 2,278,646 2,534,527 339,971 185,022
- ------------------------------------------------------------------------------------------------------------------------------
Joint Venture Investments,
Including All Partners' Assets (See Note 6) 10 --- --- 33,404 --- ---
Leasehold Interest (See Note 7) --- --- --- 13,500 --- ---
Financing Leases (See Note 7) 2 --- --- 8,192 --- ---
Mortgage Loans Receivable (See Note 7) 28 --- --- 148,075 --- ---
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 429 $ 255,881 $ 2,278,646 $ 2,737,698 $ 339,971 $ 185,022
- ------------------------------------------------------------------------------------------------------------------------------
F-13
(4) OPERATORS
Major Operators:
Listed below are our major operators which represent three percent or more
of our revenue, the investment in properties operated by those operators, and
the percentage of total annualized revenue from these operators for the years
ended December 31, 2001, 2000 and 1999. All of the companies listed below (with
the exception of Centennial Healthcare Corp.) are publicly traded companies and
are subject to the informational filing requirements of the Securities and
Exchange Act of 1934, as amended, and accordingly file periodic financial
statements on Form 10-K and Form 10-Q with the Securities and Exchange
Commission.
Percentage of Annualized
Total Revenue
Investment at Year Ended December 31,
December 31, 2001 2001 2000 1999
------------------------- --------- ---------- ---------
(Amounts in thousands)
Tenet Healthcare Corporation (Tenet) $ 459,773 18% 19% 18%
HealthSouth Corporation (HealthSouth) 108,477 6 6 5
Kindred Healthcare, Inc. (Kindred) 94,576 5 5 4
Emeritus Corporation (Emeritus) 140,994 5 5 5
HCA, Inc. (HCA) 80,175 5 4 5
Beverly Enterprises, Inc. (Beverly) 90,265 3 4 4
Centennial Healthcare Corp. 54,670 3 3 3
----------------- --------- ---------- ---------
$1,028,930 45% 46% 44%
================= ========= ========== =========
Certain properties have been subleased or assigned to other operators but
with the original lessee remaining liable on the leases. The investment and
revenue applicable to these subleased properties are not included in the table
above. The percentage of annualized revenue on these subleased facilities was
1%, 1% and 2% in 2001, 2000 and 1999, respectively.
Kindred Healthcare, Inc. (formerly Vencor, Inc.):
We have negotiated a new lease with Kindred Healthcare, Inc. ("Kindred")
for 22 facilities whose leases were scheduled originally to expire in August
2001. For lease renewal purposes, the facilities comprise three groups with
maturities of nine, ten, and eleven years. The annual rent on these facilities
has increased by $3,300,000 to $16,100,000 in the first lease year. Ten
additional facilities were originally leased to Kindred. Of those ten, six have
been leased directly to former Kindred sublessees or third parties for lower
rents to us of an estimated $200,000 annually, three have been subsequently
sold, and one is being considered for lease to a third party.
Troubled Long-Term Care and Assisted Living Operators:
We derive 27% of our income from the long-term care industry. A slowing
economy with lower labor costs, greater availability of nursing aides, less
labor turnover and lower interest costs is expected to continue to improve
nursing home operations, tempered in part by increased liability insurance costs
and lower increases in government reimbursement. While certain long-term care
operators and facilities continue to experience operating problems in part due
to low levels of
F-14
Medicaid reimbursements in certain states, many others have shown improvement.
However, if the most recent Medicare reimbursement increase is not extended
beyond October 1, 2002 and various states institute Medicaid rate cuts to reduce
budget shortfalls, some operators may again begin feeling the strain of
inadequate reimbursement. Several long-term care facility operators, including
Kindred and Genesis Health Ventures, two of our lessees, have successfully
emerged from bankruptcy proceedings. In addition, two other large long-term care
operators and lessees, Sun Healthcare, which has recently received approval for
its reorganization plan, and Mariner Healthcare which has submitted its plan for
reorganization, may exit bankruptcy during the first half of 2002.
The assisted living industry, from which we derive 15% of our revenue, has
been challenged by overbuilding in certain areas, slower than projected fill-up
rates, margin pressure from lower than projected rents and shortage of capital.
Development activity has slowed and there is improving census in a number of
communities. Various assisted living companies continue their efforts to
restructure their capital, debt and lease structures, while new operators are
emerging in the market with new capital for selective investment.
We cannot assure you that the bankruptcies of certain long-term care
operators and the trouble experienced by assisted living operators will not have
a material adverse effect on our Net Income, FFO or the market value of our
common stock.
(5) BUSINESS COMBINATION
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and
into HCPI (the "Merger") in a stock-for-stock transaction. The Merger resulted
in the issuance of approximately 19,430,115 shares of HCPI's common stock and
4,000,000 depositary shares of our series C cumulative redeemable preferred
stock. Additionally, upon consummation of the Merger, we assumed AHE's debt
comprised of $220 million of senior notes and $56 million of mortgage debt, and
paid $71 million in cash to replace its revolving line of credit.
The transaction was treated as a purchase for financial accounting purposes
and, accordingly, the operating results of AHE have been included in our
consolidated financial statements effective as of November 4, 1999. The
following summarizes the final purchase price (in thousands):
Equity Issued $585,154
AHE Liabilities Assumed 298,911
Bank Credit Facility Balance Assumed 71,000
Cash 12,116
-----------
Total Purchase Price $967,181
===========
Pro Forma Financial Information (Unaudited):
The following unaudited pro forma consolidated statements of income
information present the results of our operations for the year ended December
31, 1999 as though the acquisition of AHE had occurred as of the beginning of
1999:
(Dollar amounts in thousands except per share amounts)
Total Revenues $319,818
Net Income Applicable to Common Shares $169,546
Earnings Per Share
F-15
Basic $3.32
Diluted $3.26
Pro Forma Net Income applicable to common shares and earnings per basic and
diluted share include $65,189,000 or $1.27 and $1.19 per share in 1999 for Gain
on the Sale of Real Estate.
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
acquisitions taken place at the beginning of the fiscal year or the results that
may occur in the future. The pro forma results include additional interest on
borrowed funds, increased depreciation and decreases in amortization expense
associated with changes in fair value of the AHE depreciable property and other
intangible assets and a reduction in general and administrative expenses.
(6) INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
We have an 80% interest in five joint ventures that lease six long-term
care facilities and a 45%-50% interest in four joint ventures that each operate
an assisted living facility. Since the other members in these joint ventures
have significant voting rights relative to acquisition, sale and refinancing of
assets, we account for these investments using the equity method of accounting.
Combined summarized unaudited financial information of the joint ventures
follows:
December 31,
------------------------------------
2001 2000
-------------- --------------
(Amounts in thousands)
Real Estate Investments, Net $ 35,691 $ 37,604
Other Assets 2,770 2,136
------------- --------------
Total Assets $ 38,461 $ 39,740
============= ==============
Notes Payable $ 15,173 $ 14,927
Accounts Payable 2,085 2,632
Other Partners' Deficit (547) (434)
Investments and Advances from HCPI, Net 21,750 22,615
------------- --------------
Total Liabilities and Partners' Capital $ 38,461 $ 39,740
============= ==============
Rental and Interest Income $ 4,321 $ 3,581
============= ==============
Net Loss $ (817) $ (828)
============= ==============
Company's Equity in Joint Venture Operations $ 7 $ (743)
============= ==============
Distributions to HCPI $ 953 $ 1,392
============= ==============
As of December 31, 2001, we have guaranteed approximately $6.8 million on
notes payable obligations for four of these joint ventures.
In September 2000, we purchased the equity interest of our joint venture
partner in three LLCs previously accounted for as investments in joint ventures
(see Note 3).
F-16
(7) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
------------------------------------
2001 2000
-------------- --------------
(Amounts in thousands)
Mortgage Loans (See below) $148,075 $158,895
Financing Leases 8,192 8,192
Leasehold Interests and Other Loans 20,019 20,150
-------------- --------------
Total Loans Receivable $176,286 $187,237
============== ==============
At December 31, 2001, minimum future principal payments from Loans
Receivable are expected to be approximately $3,295,000 in 2002, $3,136,000 in
2003, $14,456,000 in 2004, $2,668,000 in 2005, $40,883,000 in 2006 and
$111,848,000 in the aggregate thereafter.
The following is a summary of Mortgage Loans Receivable at December 31,
2001:
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- --------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
2006 3 Monthly payments from $27,700 to $269,000 $ 39,521 $ 41,267
including interest from 9.39% to 11.40%
secured by an acute care hospital located in
Texas and retirement center located in
North Carolina.
2007 2 Monthly payments from $7,987 to $193,600 22,708 23,756
including interest from 10.32% to 10.50%, secured
by an acute care facility in New Mexico and an
assisted living facility in Wisconsin.
2010 1 Monthly payments of $337,400 including 34,760 32,641
interest of 10.90% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2002-2031 13 Monthly payments from $9,900 to $116,100 61,215 50,411
including interest rates from 7.95% to 12.41%
secured by various facilities in various states.
---- ---------- ----------
Totals 19 $158,204 $148,075
==== ========== ==========
F-17
(8) NOTES PAYABLE
Senior Notes Payable:
The following is a summary of Senior Notes outstanding at December 31, 2001
and 2000:
Year
Issued 2001 2000 Interest Rate Maturity
--------------------------------------------------------------------------------------------------
(Amounts in thousands)
1993 $ 11,000 $ 11,000 6.70-8.00% 2003
1994 5,000 10,000 9.10% 2004
1995 68,000 68,000 6.62-9.00% 2005-2015
1996 115,000 115,000 6.50% 2006
1997 239,000 240,000 7.05-8.16% 2002-2007
1998 240,000 248,000 6.66-7.88% 2003-2006
1999 62,000 62,000 6.92-7.48% 2004
2000 25,000 25,000 9.00% 2004
--------------- ----------------
765,000 779,000
Unamortized Option
Payment Received
Related to 1998
Debt, net 4,158 4,468
Less: Unamortized
Discount (4,928) (5,954)
--------------- ----------------
$ 764,230 $ 777,514
=============== ================
The weighted average interest rate on the Senior Notes was 7.24% and 7.25%
for 2001 and 2000 and the weighted average balance of the Senior Note borrowings
was approximately $774,892,000 and $773,965,000 during 2001 and 2000,
respectively. Original issue discounts are amortized over the term of the Senior
Notes. If held to maturity, the first required Senior Note maturities would be
$116,000,000 in 2002, $31,000,000 in 2003, $92,000,000 in 2004, $231,000,000 in
2005, $135,000,000 in 2006 and $160,000,000 in the aggregate thereafter. As of
February 2002, we have redeemed $99,000,000 of Senior Notes on maturity.
Convertible Subordinated Notes Payable:
During 2000, we paid off $100,000,000 of 6% Convertible Subordinated Notes
issued in 1993 at a gain of $274,000.
Mortgage Notes Payable:
At December 31, 2001, we had a total of $185,022,000 in Mortgage Notes
Payable secured by 37 health care facilities with a net book value of
approximately $325,195,000. Interest rates on the Mortgage Notes ranged from
3.20% to 10.63%. Required principal payments on the Mortgage Notes are expected
to be $6,018,000 in 2002, $12,232,000 in 2003, $13,485,000 in 2004, $15,827,000
in 2005, $7,606,000 in 2006 and $129,854,000 in the aggregate thereafter.
F-18
During 2001, we assumed secured debt of $18,600,000 in connection with the
acquisition of the first two phases of a $126,000,000 commitment to acquire
entities controlled by The Boyer Company (see Note 3).
During 2000, we completed a secured debt transaction which resulted in loan
proceeds of $83,000,000 on a portfolio of 12 medical office buildings and
physician clinics with an investment value of approximately $138,000,000. The
loan features an average coupon of 8.12% (8.43% effective rate based upon a 30
year amortization thereafter for the remainder of the ten year term). These
proceeds were initially invested in reducing the borrowings under our revolving
lines of credit and were used to fund the final payment on our convertible
subordinated notes paid off in 2000.
Bank Notes:
We have two unsecured revolving credit lines aggregating $395,000,000 with
certain banks. The credit lines for $188,000,000 and $207,000,000 expire on
October 30, 2002 and November 3, 2003, respectively, and bear an annual facility
fee of 0.20% and 0.30%, respectively. These agreements provide for interest at
the Prime Rate, the London Interbank Offered Rate (LIBOR) plus 0.95% (LIBOR plus
1.05% for the $188,000,000 credit line) or at a rate negotiated with each bank
at the time of borrowing. An additional fee of 0.125% is paid on borrowings when
borrowings exceed 50% of the $395,000,000 capacity. Interest rates incurred by
HCPI ranged from 1.55% to 7.88% and 5.79% to 9.50% on maximum short-term bank
borrowings of $204,500,000 and $256,300,000 for 2001 and 2000, respectively. The
weighted average interest rates were approximately 5.20% and 7.68% on weighted
average short-term bank borrowings of $100,622,000 and $192,625,000 for the same
respective periods.
(9) COMMITMENTS
We have commitments to acquire six medical office buildings $32,000,000. We
have outstanding commitments to fund additional development of facilities on
existing properties of approximately $3,600,000, and are committed to fund
$29,000,000 for construction of new health care facilities.
(10) COMMON STOCK
In May 2001, we issued 4,025,000 shares of common stock at $34.80 per share
realizing net proceeds of $133,000,000. Since March 2001, we have realized
proceeds of an additional $28,900,000 from the sale of common stock at an
average price per share of $35.44 under our new Dividend Reinvestment and Stock
Purchase Plan.
(11) PREFERRED STOCK
Preferred Stock is comprised of three series of cumulative redeemable
preferred stock summarized as follows:
Dividend Callable at Par
Issuance Shares Issued Issue Price Rate on or After
------------------ -------------- ------------- ---------------- ------------------
7.875% series A 2,400,000 $25/share 7.875% September 30, 2002
8.70% series B 5,385,000 $25/share 8.70% September 30, 2003
8.60% series C 4,000,000 $25/share 8.60% October 27, 2002
F-19
Dividends on the series A, series B, and series C preferred stock are
payable quarterly in arrears on the last day of March, June, September and
December. The series A, series B and series C preferred stock have no stated
maturity, are not subject to any sinking fund or mandatory redemption and are
not convertible into any other securities of HCPI. The carrying value of
preferred stock approximates fair value.
(12) OTHER EQUITY
Other equity consists of the following:
December 31,
------------------------------------
2001 2000
-------------- --------------
(Amounts in thousands)
Unamortized Balance on Deferred Compensation $ 4,379 $ 3,353
Notes Receivable From Officers and Directors for
Purchase of Common Stock 2,429 1,919
Accumulated Comprehensive Loss (See Note 2) 1,140 ---
-------------- --------------
Total Other Equity $ 7,948 $5,272
============== ==============
Accumulated comprehensive loss is a reduction to net income in calculating
comprehensive income. Comprehensive income is the change in equity from
non-owner sources. Comprehensive income for the years ended December 31, 2001
and 2000 was $120,026,000 and $133,767,000, respectively.
(13) EARNINGS PER COMMON SHARE
We compute earnings per share in accordance with Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic earnings per common
share is computed by dividing Net Income applicable to common shares by the
weighted average number of shares of common stock outstanding during the period.
Diluted earnings per common share are calculated including the effect of
dilutive securities. Approximately 800,000 options to purchase shares of common
stock that had an exercise price in excess of the average market price of the
common stock during the period were not included because they are not dilutive.
(Amounts in thousands except per share amounts)
For Year Ended December 31,
-----------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- --------------------------- ---------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
--------------------------- --------------------------- ---------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common
Shares $96,266 53,879 $1.79 $108,867 51,057 $2.13 $78,450 34,792 $2.25
Dilutive Options (See Note 16) --- 96 --- 43 --- 69
----------------- ------------------ ----------------
Diluted Earnings Per Common Share $96,266 53,975 $1.78 $108,867 51,100 $2.13 $78,450 34,861 $2.25
F-20
(14) FUNDS FROM OPERATIONS
We are required to report information about operations on the basis that we
use internally to measure performance under Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, effective beginning in 1998.
We believe that Funds From Operations (FFO) is the most important
supplemental measure of operating performance for a real estate investment
trust. Because the historical cost accounting convention used for real estate
assets requires straight-line depreciation (except on land) such accounting
presentation implies that the value of real estate assets diminishes predictably
over time. Since real estate values instead have historically risen and fallen
with market conditions, presentations of operating results for a real estate
investment trust that uses historical cost accounting for depreciation could be
less informative. The term FFO was designed by the real estate investment trust
industry to address this problem.
We adopted the definition of FFO prescribed by the National Association of
Real Estate Investment Trusts (NAREIT). FFO is defined as Net Income applicable
to common shares (computed in accordance with generally accepted accounting
principles), excluding gains (or losses) from debt restructuring and sales of
property, plus real estate depreciation and real estate related amortization,
and after adjustments for unconsolidated partnerships and joint ventures.
Adjustments for unconsolidated partnerships and joint ventures are calculated to
reflect FFO on the same basis.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income. FFO, as defined by HCPI, may not be comparable to
similarly entitled items reported by other real estate investment trusts that do
not define it exactly as the NAREIT definition.
Below are summaries of the calculation of FFO for the years ended December
31, 2001, 2000 and 1999 (all amounts in thousands):
2001 2000 1999
------------ ------------- ---------------
Net Income Applicable to Common Shares $ 96,266 $108,867 $ 78,450
Real Estate Depreciation and Amortization 70,458 69,839 44,789
Impairment losses related to depreciable properly 13,640 2,751 ---
Joint Venture Adjustments 243 1,917 1,584
Gain on Sale of Real Estate Properties (1,232) (11,756) (10,303)
Gain on Extinguishment of Debt --- (274) ---
------------ ------------- ---------------
Funds From Operations $179,375 $171,344 $114,520
============ ============= ===============
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. The carrying amount for Cash and Cash Equivalents approximates fair
value because of the short-term maturity of those instruments. Fair values for
Mortgage Loans Receivable and Senior Notes and Mortgage Notes Payable are based
on the estimates of management and on rates currently prevailing for comparable
loans and instruments of comparable maturities, and are as follows:
F-21
December 31, 2001 December 31, 2000
------------------------------ -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ------------- -------------
(Amounts in thousands)
Mortgage Loans Receivable $148,075 $143,319 $158,895 $153,952
Senior Notes and Mortgage Notes Payable $949,252 $975,617 $954,428 $923,762
(16) STOCK INCENTIVE PLAN
Directors, officers and key employees of HCPI are eligible to participate
in our 2000 Stock Incentive Plans (Plan). As of November 5, 1999, pursuant to
the terms of the merger with AHE, 787,000 stock options with an average exercise
price of $30 were issued in exchange for AHE stock options outstanding as of the
date of the merger. A summary of the status of our Plan and the options issued
in the AHE merger at December 31, 2001, 2000 and 1999 and changes during the
years then ended is presented in the following table and narrative:
2001 2000 1999
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Incentive Plan (Options) (000's) Price (000's) Price (000's) Price
- ------------------------------------- ---------- ----------- ---------- ------------ ---------- ------------
Outstanding, beginning of year 3,285 $28 2,729 $31 1,309 $32
Granted 1,717 34 1,383 24 1,425 28
Exercised (586) 25 (55) 26 (5) 20
Forfeited (13) (772) -- -- --
---------- ---------- ----------
Outstanding, end of year 4,403 31 3,285 28 2,729 31
Exercisable, end of year 803 31 1,199 30 1,166 28
Weighted average fair value
of options granted during the year $1.09 $0.47 $0.73
Incentive Stock Awards
- -------------------------------------
Issued 86 78 58
Canceled (1) (3) --
The incentive stock awards (Awards) are granted at no cost to the employees
or directors. The Awards generally vest and are amortized over five year periods
(four years for directors). The stock options generally become exercisable on
either a one year or a five year schedule after the date of the grant.
The following table describes the options outstanding as of December 31,
2001.
Options
Total Options Weighted Weighted Average Exercisable At Weighted
Outstanding Exercise Average Contractual Life December 31, 2001 Average
(000's) Price Exercise Price Remaining (Years) (000's) Exercise Price
- ------------------- ------------- ----------------- ------------------- --------------------- -----------------
1,827 $22-$30 $25 7 344 $27
1,189 $30-$35 $33 8 457 $33
1,387 $35-$40 $36 9 2 $35
- ------------------- ---------------------
4,403 803
=================== =====================
F-22
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following ranges of assumptions:
risk-free interest rates of 4.87% to 6.54%; expected dividend yields of 9.48% to
11.64%; expected lives of 10 years; and expected volatility of .17% to .19%.
We account for stock options under Accounting Principles Board Opinion 25
(APB 25), Accounting for Stock Issued to Employees, which is permitted under
FASB Statement No. 123 (FASB 123), Accounting for Stock Based Compensation,
issued in 1995. Had compensation cost for the Plans been determined instead in
accordance with rules set out in FASB 123, our Net Income and Basic Earnings Per
Common Share on a pro forma basis would have been lower by approximately
$1,800,000 and $0.03 per basic share, $650,000 or $0.01 per basic share, and
$500,000, or $0.01 per basic share for the years ended December 31, 2001, 2000
and 1999, respectively.
During the years ended December 31, 2001 and 2000, respectively, we made
loans totaling $607,000 and $422,000 secured by stock in HCPI to directors,
officers and key employees. The interest rate charged is based on the prevailing
applicable federal rate as of the inception of the loan. Loans secured by stock
totaling $2,429,000 and $1,919,000 were outstanding at December 31, 2001 and
2000, respectively, and are classified as other equity on the balance sheet.
(17) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. On January 23, 2002, the Board of Directors
declared a dividend of $0.80 per share paid on February 20, 2002 to stockholders
of record on February 4, 2002.
In order to qualify as a REIT, we must generally, among other requirements,
distribute at least 90% of our taxable income to our stockholders. HCPI and
other REITs generally distribute 100% of taxable income to avoid taxes on the
remaining 10% of taxable income.
Per share dividend payments made by HCPI to the stockholders were
characterized in the following manner for tax purposes:
2001 2000 1999
------------- -------------- --------------
Common Stock
-------------------------------
Ordinary Income $1.8098 $2.3824 $2.0261
Capital Gains Income -- .1352 .2494
Return of Capital 1.2902 .4224 .5045
------------- -------------- --------------
Total Dividends Paid $3.1000 $2.9400 $2.7800
============= ============== ==============
7.875% Preferred Stock Series A
-------------------------------
Ordinary Income $1.9688 $1.8633 $1.7514
Capital Gains Income -- .1055 .2174
------------- -------------- --------------
Total Dividends Paid $1.9688 $1.9688 $1.9688
============= ============== ==============
8.70% Preferred Stock Series B
-------------------------------
Ordinary Income $2.1750 $2.0584 $1.9350
Capital Gains Income -- .1166 .2402
------------- -------------- --------------
Total Dividends Paid $2.1750 $2.1750 $2.1752
============= ============== ==============
F-23
8.60% Preferred Stock Series C
-------------------------------
Ordinary Income $2.1500 $2.0348 $ .6376
Capital Gains Income -- .1152 .0791
------------- -------------- --------------
Total Dividends Paid $2.1500 $2.1500 $ .7167
------------- -------------- --------------
Dividends on all series of preferred stock are paid on the last day of each
quarter.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
---------------------------------------------------
March 31 June 30 September 30 December 31
-------- ---------- ------------ -----------
2001 (Amounts in thousands, except per share data)
Revenue $ 78,365 $ 84,450 $ 84,137 $ 85,508
Gain on Sale of Real Estate Properties $ (774) $ 532 $ 537 $ 937
Net Income Applicable to $ 19,799 $ 28,675 $ 17,848 $ 29,944
Common Shares
Dividends Paid Per Common Share $ .76 $ .77 $ .78 $ .79
Basic Earnings Per Common Share $ .39 $ .54 $ .32 $ .54
Diluted Earnings Per Common Share $ .39 $ .54 $ .32 $ .53
2000
Revenue $ 82,252 $ 82,096 $ 82,281 $ 83,178
Gain on Sale of Real Estate Properties $ 684 $ 3,029 $ 421 $ 7,622
Net Income Applicable to
Common Shares $ 26,929 $ 28,281 $ 23,276 $ 30,381
Dividends Paid Per Common Share $ .72 $ .73 $ .74 $ .75
Basic Earnings Per Common Share $ .53 $ .55 $ .46 $ .60
Diluted Earnings Per Common Share $ .52 $ .55 $ .46 $ .60
(19) NEW PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board released Statements
of Financial Accounting Standards No. 141 "Business Combinations," No. 142
"Goodwill and Other Intangible Assets" and No. 143 "Accounting for Asset
Retirement Obligations" and, in August 2001, No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." The effect of these pronouncements
on our financial statements is not expected to be material.
F-24
APPENDIX I
Tenet Healthcare Corporation
SET FORTH BELOW IS CERTAIN CONDENSED FINANCIAL DATA OF TENET HEALTHCARE
CORPORATION ("TENET") WHICH IS TAKEN FROM TENET'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED MAY 31, 2001 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("THE COMMISSION") UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"), AND THE TENET QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED NOVEMBER 30, 2001 AS FILED WITH THE COMMISSION.
The information and financial data contained herein concerning Tenet was
obtained and has been condensed from Tenet's public filings under the Exchange
Act. The Tenet financial data presented includes only the most recent interim
and fiscal year end reporting periods. We can make no representation as to the
accuracy and completeness of Tenet's public filings but have no reason not to
believe the accuracy and completeness of such filings. It should be noted that
Tenet has no duty, contractual of otherwise, to advise us of any events which
might have occurred subsequent to the date of such publicly available
information which could affect the significance or accuracy of such information.
Tenet is subject to the information filing requirements of the Exchange
Act, and, in accordance herewith, is obligated to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information may be inspected at the offices of the Commission at 450 Fifth
Street, N.W. Washington D.C., and should also be available at the following
Regional Offices of the Commission: Room 1400, 75 Park Place, New York, New York
10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Such reports and other information concerning Tenet can
also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, Room 1102, New York, New York 10005.
i
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values)
November 30, May 31,
2001 2001
------------ ---------
ASSETS
Cash and cash equivalents $ 63 $ 62
Short-term investments in debt securities 103 104
Accounts and notes receivable, less
allowances for doubtful accounts
($325 at November 30 and $333 at May 31) 2,377 2,386
Inventories of supplies, at cost 220 214
Deferred income taxes 160 155
Other assets 347 305
------- -------
Total current assets 3,270 3,226
------- -------
Investments and other assets 360 395
Property, plant and equipment net 6,308 5,976
Intangible assets, at cost
Less accumulated amortization
($669 at November 30 and $606 at May 31) 3,485 3,398
------- -------
$13,423 $12,995
======= =======
ii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
2001 2001
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 35 $ 25
Accounts payable 803 775
Accrued expenses 513 608
Other current liabilities 875 758
-------- -------
Total current liabilities 2,226 2,166
-------- -------
Long-term debt, net of current portion 4,321 4,202
Other long-term liabilities and minority interests 1,029 994
Deferred income taxes 546 554
Common stock, $.075 par value; authorized
700,000,000 shares; 333,313,865 shares
issued at November 30, 2001 and 329,222,000
shares issued at May 31, 2001 25 25
Other shareholders' equity 5,533 5,124
Treasury stock, at cost, 7,125,208 shares at
November 30, 2001 and 3,754,708 shares at May 31, 2001 (257) (70)
-------- --------
Total shareholders' equity 5,301 5,079
-------- --------
$ 13,423 $ 12,995
======== ========
iii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 2001 May 31, 2001
----------------- ------------
Net operating revenues $ 6,691 $ 12,053
---------- ---------
Operating expenses 5,387 9,809
Depreciation and amortization 300 554
Interest expense, net of capitalized portion 183 456
Impairment and other unusual charges 99 143
---------- ---------
Total costs and expenses 5,969 10,962
---------- ---------
Investment earnings 19 37
Minority interests in income of consolidated subsidiaries (19) (14)
Net gain on disposals of facilities
and long-term investments --- 28
---------- ---------
Income from continuing operations before
income taxes 722 1,142
Taxes on income (306) (464)
---------- ---------
Income from continuing operations 416 678
---------- ---------
Extraordinary charge from early extinguishment
of debt, net of taxes (172) (35)
---------- ---------
Net income $ 244 $ 643
========== =========
iv
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 2001 May 31, 2001
----------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,018 $ 1,818
--------- ----------
(Includes changes in all operating assets and liabilities)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (415) (601)
Purchase of new business, net of cash acquired (273) (105)
Proceeds from sales of facilities, investments and
other assets --- 132
Other items (27) ---
--------- ----------
Net cash used in investing activities (715) (574)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (1,749) (2,945)
Proceeds from other borrowings 2,600 1,387
Proceeds from sales of new senior notes 1,952 ---
Repurchase of senior and senior subordinated notes (2,991) ---
Purchases of treasury stock (187) ---
Proceeds from sales of common stock --- 15
Other items 73 226
--------- ----------
Net cash used in financing activities (302) (1,317)
--------- ----------
Net increase/(decrease) in cash and cash equivalents 1 (73)
Cash and cash equivalents at beginning of year 62 135
--------- ----------
Cash and cash equivalents at end of year $ 63 $ 62
--------- ----------
v