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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
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 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. [ ]
As of March 27, 2000 there were 51,253,192 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 27, 2000 on the New York Stock Exchange, was approximately $1,306,956,000.
Portions of the definitive Proxy Statement for the registrant's 2000 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
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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 healthcare 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
and physician group practice clinics. We commenced business nearly 15 years ago,
making us the second oldest REIT specializing in healthcare real estate.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI in a stock-for-stock transaction, approved by the stockholders of
both companies, with HCPI being the surviving corporation. AHE was a real estate
investment trust specializing in healthcare facilities with a portfolio of 72
healthcare properties in 22 states. Under the terms of the merger agreement,
each share of AHE common stock was converted into the right to receive 0.78
share of HCPI's common stock and AHE's 8.60% series B cumulative redeemable
preferred stock was converted into shares of HCPI 8.60% series C cumulative
redeemable preferred stock. 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, 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 their revolving line of credit upon
consummation of the merger. 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 to our annualized financial information give effect
to the acquisition of AHE.
As of December 31, 1999, our gross investment in our properties,
including partnership interests and mortgage loans, was approximately $2.6
billion. Our portfolio of 428 properties consisted of:
o 176 long-term care facilities
o 93 congregate care and assisted living facilities
o 82 medical office buildings
o 46 physician group practice clinics
o 22 acute care hospitals
o Nine rehabilitation hospitals
The average age of our properties is 16 years. As of December 31, 1999,
approximately 57% of our revenue was derived from properties operated by
publicly traded healthcare providers.
Since 1986, the debt rating agencies have rated our debt investment
grade. Currently Moody's Investors Services, Standard & Poor's and Duff & Phelps
rate our senior debt at Baa2/BBB+/BBB+, respectively. 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 14 years. Our
annualized return to stockholders, assuming reinvestment of dividends and before
stockholders' income taxes, is approximately 15% over the period from our
initial public offering in May 1985 through December 31, 1999.
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References herein to "HCPI", "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.
OUR PROPERTIES
As of December 31, 1999, we had an ownership interest in 401 properties
located in 42 states. We leased 306 of our owned properties pursuant to
long-term triple net leases to 80 healthcare 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 lessees under triple net leases include the
following companies or their affiliates:
o Tenet Healthcare Corporation ("Tenet")
o HealthSouth Corporation ("HealthSouth")
o Columbia/HCA Healthcare Corp. ("Columbia")
o Emeritus Corporation ("Emeritus")
o Vencor, Inc. ("Vencor")
o Beverly Enterprises, Inc. ("Beverly")
o Centennial Healthcare Corp. ("Centennial")
The remaining 95 owned and managed properties are medical office
buildings and clinics with triple net, gross or modified gross leases with
multiple tenants. 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 27 properties that are owned and
operated by 14 health care providers including Beverly, Columbia and MedCath,
Incorporated. With the exception of Tenet which accounts for 18% of our
annualized revenue, no single lessee or operator accounts for more than 5.4% of
our revenue for the year ended December 31, 1999.
Of the 428 healthcare facilities in which we had an investment as of
December 31, 1999, we own 329 facilities outright, including:
o 127 long-term care facilities
o 85 congregate care and assisted living centers
o 52 medical office buildings
o 46 physician group practice clinics
o 16 acute care hospitals
o Three rehabilitation hospitals
We have provided mortgage loans in the amount of $179,404,000 on 27
properties, including 16 long-term care facilities, four congregate care and
assisted living centers, four acute care hospitals and three medical office
buildings. At December 31, 1999, the remaining balance on these loans totaled
$161,648,000.
At December 31, 1999, we also had varying percentage interests in
several limited liability companies and partnerships that together own 71
facilities, as further discussed below under "Investments in Consolidated and
Non-Consolidated Joint Ventures."
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The following is a summary of our properties grouped by type of
facility and equity interest as of December 31, 1999:
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% 143 17,786 $ 532,966 $ 66,513
Long-Term Care Facilities 77-80 33 3,786 94,998 11,883
-------------------------------------------------------------
176 21,572 627,964 78,396
-------------------------------------------------------------
Acute Care Hospitals 100 20 2,457 617,271 72,508
Acute Care Hospitals 77 2 356 42,807 7,834
-------------------------------------------------------------
22 2,813 660,078 80,342
-------------------------------------------------------------
Rehabilitation Hospitals 100 3 248 40,885 5,606
Rehabilitation Hospitals 90-97 6 437 71,693 9,969
-------------------------------------------------------------
9 685 112,578 15,575
-------------------------------------------------------------
Congregate Care & Assisted Living Centers 100 89 6,937 435,949 43,940
Congregate Care & Assisted Living Centers 45-50 4 412 2,559 (5) --
-------------------------------------------------------------
93 7,349 438,508 43,940
-------------------------------------------------------------
Medical Office Buildings (3) 100 55 -- 456,205 47,410
Medical Office Buildings (3) 50-90 27 -- 166,670 15,669
-------------------------------------------------------------
82 -- 622,875 63,079
-------------------------------------------------------------
Physician Group Practice Clinics (4) 100 46 -- 175,217 17,522
-------------------------------------------------------------
Totals 428 32,419 $2,637,220 $298,854
=============================================================
(1) Congregate care and assisted living centers are apartment like
facilities and are therefore stated in units (studio or one or two
bedroom apartments) in order to indicate facility size; all other
facilities are stated in beds, except the medical office buildings and
the physician group practice clinics for which square footage is
provided in footnotes 4 and 5.
(2) Includes partnership and limited liability company investments, and
incorporates all partners' and members' assets and construction
commitments.
(3) The medical office buildings encompass approximately 4,659,000 square
feet.
(4) The physician group practice clinics encompass approximately 1,215,000
square feet.
(5) Represents our investment, net of partners' and members' interests.
The following paragraphs describe each type of property.
Long-Term Care Facilities. We have invested in 176 long-term care
facilities. Various healthcare 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. Many long-term care facilities had experienced significant
growth in ancillary revenues and demand for subacute care services over the past
ten years until the Prospective Payment System was implemented just over one
year ago. 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 care facilities
provide some of the foregoing services on an out-patient basis. Long-term care
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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
accommodations, 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 20 general acute care
hospitals and two 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 93
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 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.
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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 82 medical office
buildings. These buildings are generally located adjacent to, or a short
distance from, 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, 21 are master leased on a triple net basis to lessees that then
sublease office space to physicians or other medical practitioners, 58 are
multi-tenant medical office buildings that are leased under triple net, gross or
modified gross leases under which we are responsible for certain operating
expenses and three are mortgaged properties. Third party property management
companies manage the multi-tenant facilities on our behalf.
Physician Group Practice Clinics. We have investments in 46 physician
group practice clinic facilities that are leased to 17 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.
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AVERAGE
NUMBER PRIVATE
NUMBER OF BEDS/ AVERAGE PATIENT ANNUALIZED AVERAGE
OF UNITS OCCUPANCY REVENUE RENTS/ REMAINING
FACILITY LOCATION FACILITIES (1) (2) (2),(3) INTEREST TERM
- --------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Long-Term Care Facilities
Alabama 1 174 85% 29% $ 863 4
Arizona 3 428 58 77 1,045 9
Arkansas 9 866 70 37 2,234 10
California 17 1,698 87 42 5,550 11
Colorado 7 1,055 82 60 5,089 10
Connecticut 1 121 97 36 659 2
Florida (4) 12 1,397 78 43 6,595 6
Georgia 2 168 53 57 123 16
Idaho 1 119 64 37 508 14
Illinois 1 128 90 53 306 6
Indiana 28 3,670 72 48 13,961 11
Iowa 1 201 84 38 649 14
Kansas 3 323 88 46 1,207 10
Kentucky 1 100 97 69 415 2
Louisiana 3 355 84 20 1,209 15
Maryland 3 438 84 28 1,825 18
Massachusetts 5 615 93 36 2,380 3
Michigan 4 406 78 54 1,396 4
Minnesota 1 94 72 48 117 11
Mississippi 1 120 100 4 366 2
Missouri 1 153 97 36 740 2
Montana 1 80 67 37 209 10
Nevada 2 266 33 100 1,522 10
New Mexico 1 102 95 24 324 4
North Carolina 9 1,056 87 37 4,018 9
Ohio 12 1,543 81 68 7,343 8
Oklahoma 12 1,395 60 40 4,395 16
Oregon 1 110 75 33 240 9
Pennsylvania 1 89 84 31 353 4
South Carolina 2 -- -- -- -- 12
Tennessee 10 1,754 91 39 5,280 2
Texas 10 1,113 56 26 2,717 7
Utah 1 120 71 35 455 14
Washington 2 252 78 56 719 --
Wisconsin 7 1,063 80 44 3,584 8
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 176 21,572 76 44 78,396 9
- --------------------------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 55 94 397 13
California 4 669 54 99 27,081 5
Florida 1 204 71 100 7,287 5
Georgia 1 167 51 100 7,036 5
Louisiana 2 325 36 97 5,209 7
Missouri 1 201 48 100 3,782 5
New Mexico (4) 1 56 -- -- 2,184 7
North Carolina 1 275 76 100 7,565 5
South Carolina 2 174 34 100 2,607 6
Texas (4) 7 582 37 85 9,382 6
Utah 1 139 26 100 7,812 5
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 22 2,813 43% 90% $ 80,342 6
- --------------------------------------------------------------------------------------------------------------------------
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AVERAGE
NUMBER PRIVATE
NUMBER OF BEDS/ AVERAGE PATIENT ANNUALIZED AVERAGE
OF UNITS OCCUPANCY REVENUE RENTS/ REMAINING
FACILITY LOCATION FACILITIES (1) (2) (2),(3) INTEREST TERM
- ---------------------------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 72% 100% $ 1,700 5
Arkansas 2 120 74 100 3,002 2
Colorado 1 64 54 100 1,600 1
Florida 1 108 96 100 2,250 12
Kansas 2 145 66 100 3,615 4
Texas 1 108 68 100 1,753 4
West Virginia 1 80 96 100 1,655 --
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 9 685 74 100 15,575 4
- ----------------------------------------------------------------------------------------------------------------------------
Physician Group Practice Clinics (5)
California 2 -- -- 100 4,454 11
Colorado 1 -- -- 100 310 8
Florida 11 -- -- 100 2,491 6
Georgia 3 -- -- 100 918 9
North Carolina 4 -- -- 100 910 7
Oklahoma 4 -- -- 100 519 6
Tennessee 4 -- -- 100 1,631 9
Texas 9 -- -- 100 2,999 6
Virginia 1 -- -- 100 258 9
Wisconsin 7 -- -- 100 3,032 15
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 46 -- -- 100 17,522 8
- ----------------------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (4) 1 84 3 100 870 15
Arizona 1 98 71 100 511 8
Arkansas 1 17 51 100 27 11
California 11 976 62 91 6,023 17
Delaware 1 52 89 100 402 8
Florida (4) 10 738 62 100 3,440 11
Georgia 1 40 84 100 236 12
Idaho 2 167 80 100 1,129 10
Indiana 3 278 5 33 511 3
Kansas (4) 2 194 31 48 174 12
Louisiana 3 240 42 100 1,631 14
Maryland (4) 2 140 42 50 1,732 13
Michigan (4) 3 300 11 33 -- 8
Missouri 1 73 64 100 437 2
Nebraska 1 73 69 100 519 9
New Jersey (4) 4 279 71 67 2,105 12
New Mexico 2 285 75 100 1,982 12
New York 1 75 93 100 441 8
North Carolina 3 230 92 100 1,347 10
Ohio 1 156 75 100 807 12
Oregon 1 58 92 100 390 10
Pennsylvania 3 232 92 100 1,946 9
South Carolina (4) 9 650 27 67 4,144 13
Tennessee 1 60 26 100 1,062 10
Texas 21 1,545 73 90 9,935 11
Virginia 1 90 59 100 776 14
Washington 3 219 93 82 1,363 8
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 93 7,349 60% 85% $ 43,940 11
- ----------------------------------------------------------------------------------------------------------------------------
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AVERAGE
NUMBER PRIVATE
NUMBER OF BEDS/ AVERAGE PATIENT ANNUALIZED AVERAGE
OF UNITS OCCUPANCY REVENUE RENTS/ REMAINING
FACILITY LOCATION FACILITIES (1) (2) (2),(3) INTEREST TERM
- ----------------------------------------------------------------------------------------------------------------------------
Medical Office Buildings (5)
Alaska 1 -- -- 100% $ 669 2
Arizona 6 -- 81% 100 3,490 11
California 12 -- 84 100 11,674 2
Florida 6 -- 97 100 2,897 --
Indiana 14 -- 92 100 6,747 5
Kentucky 1 -- 98 100 717 10
Maryland 1 -- -- 100 611 10
Massachusetts 1 -- 99 100 2,405 --
Minnesota 2 -- 100 100 2,324 8
Missouri 1 -- -- 100 540 8
Nevada 1 -- -- 100 258 19
New Jersey 2 -- 99 100 2,951 --
New York 1 -- 97 100 2,250 5
North Dakota 1 -- 96 100 1,000 6
Ohio 1 -- -- 100 460 13
Oregon 1 -- -- 100 674 15
Tennessee 1 -- -- 100 1,285 14
Texas 13 -- 88 100 12,308 6
Utah 15 -- 94 100 7,842 8
Washington 1 -- 100 100 1,977 --
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 82 -- 92% 100 63,079 6
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 428 32,419 $ 298,854 9
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(1) Congregate care and assisted living centers are apartment-like
facilities and are therefore stated in units (studio or one or two
bedroom apartments) in order to indicate facility size. Physician group
practice clinics and medical office buildings are measured in square
feet and encompass approximately 1,215,000 and 4,659,000 square feet,
respectively. All other facilities are measured by bed count.
(2) This information is derived from information provided by our lessees.
(3) All revenues, including Medicare revenues but excluding Medicaid
revenues, are included in "Private Patient" revenues.
(4) Includes facilities under construction, except for average occupancy
data.
(5) 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. Average occupancies for medical office buildings are
provided on multi-tenant facilities only
COMPETITION
We compete for real estate acquisitions and financings with healthcare
providers, other healthcare related real estate investment trusts, real estate
partnerships, real estate lenders, and other investors.
Our properties are subject to competition from the properties of other
healthcare 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 healthcare facilities or referring
patients there, competitive systems of healthcare 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 healthcare
facility from time to time.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1999, we had investments in 428 properties located in
43 states, which are operated by 98 healthcare operators. In addition, over 650
tenants conduct business 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 percentage of annualized revenue derived from our
operators.
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Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
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Tenet 9 $53,932,000 18%
HealthSouth 9 16,019,000 5
Columbia 14 14,919,000 5
Emeritus 27 13,591,000 5
Vencor 25 13,049,000 4
Beverly 27 12,289,000 4
Centennial 19 8,528,000 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 1.9% for
the year ended December 31, 1999. As discussed in more detail below, we have
recourse to Ventas, Inc. and Tenet for certain of the rent obligations under
Vencor leases through the primary term of those leases.
All of the operators listed above 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 from their public reports.
The following table summarizes our major 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, 1999. All
of the following information is based upon such operators' public reports.
(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
-----------------------------------------------------------------------------
Tenet* $13,275 $4,089 $ 5,653 $ 263
HealthSouth 7,123 3,407 3,072 220
Columbia 16,627 5,509 12,715 566
Emeritus 192 (57) 93 (6)
Vencor 1,767 204 2,071 (98)
Beverly 1,970 674 1,907 (102)
Centennial 287 108 298 (6)
* The information described above for Tenet is for the six months ended
November 30, 1999 or as of November 30, 1999, as applicable.
The following table summarizes our major operators' assets,
stockholders' equity, annualized revenue and net income (or net loss) from
continuing operations as of or for the year ended December 31, 1998.
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(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity Revenue Operations
--------------------------------------------------------------------------
Tenet* $12,833 $3,558 $ 9,895 $ 378
HealthSouth 6,773 3,423 4,006 47
Columbia 19,429 7,581 18,681 532
Emeritus 193 (46) 152 (29)
Vencor 1,774 313 3,000 (573)
Beverly 2,161 776 2,812 (25)
Centennial 285 114 358 --
* The information described above for Tenet is for the fiscal year ended
May 31, 1999 or as of May 31, 1999, 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 23, 2000
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, $6.7 billion; HealthSouth, $2.3 billion;
Columbia, $13.1 billion; Emeritus, $45.6 million; Vencor, $9.9 million; Beverly,
$326.7 million; and Centennial, $62.6 million.
Certain additional information about these operators is provided below:
Vencor
On May 1, 1998, Vencor completed a spin-off transaction. As a result,
it became two publicly held entities -- Ventas, Inc., a real estate company, and
Vencor, a healthcare company which at December 31, 1999 leased 36 of our
properties of which 11 are subleased to other operators. On September 13, 1999,
Vencor, Inc. filed for bankruptcy protection in part due to financial
difficulties it experienced as a result of the implementation of the Prospective
Payment System. We have recourse to Ventas, Inc. and Tenet Healthcare
Corporation (see discussion under Tenet below) for most of the rents payable by
Vencor under its leases. All rents due to us subsequent to the bankruptcy filing
have been received.
Under its filing for bankruptcy protection, Vencor has the right to
assume or reject its leases with us. If Vencor assumes a lease it must do so
pursuant to the original contract terms, cure all pre-petition and post-petition
defaults under the lease and provide adequate assurances of future performance.
If Vencor rejects a lease, we have the right to collect rent through the
rejection date and may lease the property to another operator. As of March 28,
2000, Vencor had made no proposals to reject any of their current leases with
us. We have received $735,000 of $1,008,000 of pre-petition rents and consider
the remaining balance to be fully collectible. However, we cannot assure you
that as a result of Vencor's bankruptcy filing we would be able to recover all
amounts due under our leases with Vencor, that we would be able to promptly
recover the premises or lease the property to another lessee or that the rent we
would receive from another lessee would equal amounts due under the Vencor
leases. We have recourse to Tenet for rents under all but five of the Vencor
leases, and on some leases we are receiving direct payment by sublessees of
Vencor, which may reduce the risk to us of not being able to collect on those
leases. However, some of Vencor's sublessees have also filed for bankruptcy
protection and although we are current on lease payments, we cannot assure you
that the bankruptcy filing of Vencor or certain of its sublessees would not have
a material adverse effect on our Net Income, Funds From Operations or the market
value of our common stock.
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12
Based upon public reports, for the three months ended September 30,
1999, Vencor had revenue of approximately $682 million and a net loss of
approximately $42 million. For the nine months ended September 30, 1999, Vencor
had revenue of approximately $2.1 billion and a net loss of approximately $107
million. Based upon public reports, Ventas' revenue, income from operations and
net income for the three months ended September 30, 1999 were approximately $59
million, $40 million and $13 million, respectively. As of September 30, 1999,
Ventas had total assets of $1.1 billion and a stockholders' equity of $19
million.
Tenet
Tenet is one of the nation's largest healthcare services companies,
providing a broad range of services through the ownership and management of
healthcare facilities. Tenet has historically guaranteed Vencor's leases. During
1997 we reached an agreement with Tenet whereby Tenet agreed to forbear or waive
some renewal and purchase options and related rights of first refusal on
facilities leased to Vencor and we agreed to pay Tenet $5,000,000 in cash and to
reduce Tenet's guarantees on the facilities leased to Vencor. As part of that
same agreement, we only have recourse to Tenet for the rent payments on the
Vencor leases until the end of their base term. Accordingly, we have recourse to
Tenet on 31 Vencor leases, 20 of which expire on dates through December 31,
2000, and the remainder of which expire during 2001.
Columbia
According to published reports, Columbia has been the subject of
various significant government investigations regarding its compliance with
Medicare, Medicaid and other programs. The following is derived from public
reports distributed by Columbia: "It is too early to predict the outcome or
effect that the ongoing investigations, the initiation of additional
investigations, if any, and the related media coverage will have on [Columbia's]
financial condition or results of operations in future periods. Were [Columbia]
to be found in violation of federal or state laws relating to Medicare, Medicaid
or similar programs, [Columbia] could be subject to substantial monetary fines,
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. Any such sanctions could have a material adverse effect
on [Columbia's] financial position and results of operations." Columbia
maintains debt ratings of Ba2 from Moody's and BBB from Standard & Poor's.
Other Troubled Long-Term Care Providers
A number of nursing home operators other than Vencor have also been
adversely affected by the decrease in Medicare reimbursements following the
adoption of the Prospective Payment System. As discussed in our Annual Report on
Form 10-K for the year ended December 31, 1998, during the first quarter of 1999
certain of these operators were put on credit watch with negative implications.
The financial condition of many long-term care providers continued to erode
during the last year, in part due to the implementation of the Prospective
Payment System, and six of our operators (in addition to Vencor discussed above)
have filed for bankruptcy protection: Texas Health Enterprises, Inc. filed on
August 3, 1999; Sun Healthcare Group filed on October 14, 1999; Lenox
Healthcare, Inc. filed on November 3, 1999; Mariner Post-Acute Network, Inc.
filed on January 18, 2000; Integrated Health Services, Inc. filed on February 2,
2000; and RainTree Healthcare Corporation filed on February 29, 2000.
Additionally, Genesis Health Ventures has indicated that they will seek to
restructure their debt. Giving effect to our merger with American Health
Properties, these operators represented less than 4% of annualized revenue on a
pro forma basis for the period ended December 31, 1999 and no one of these
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operators represented more than 1% of annualized revenue for that same period.
Several of these facility leases have been assumed already and indications of
assumption have been made for a number of other facilities. Therefore, we
believe the financial impact of the bankruptcies by these tenants will not be
material.
LEASES AND LOANS
The initial base rental rates of the triple net leases we entered into
during the three years ended December 31, 1999 have generally ranged from 9% to
13% 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,
1999 have generally ranged from 9% to 12% per annum. Rental rates vary by lease,
taking into consideration many factors, such as:
o Creditworthiness of the lessee
o Operating performance of the facility
o Interest rates at the beginning of the lease
o 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 that has a
triple net lease is responsible under the lease for all additional charges,
including charges related to non-payment or late payment of rent, taxes and
assessments, governmental charges with respect to the leased property and
utility and other charges incurred with the operation of the leased property.
Each triple net 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 10 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 ten years and the average
remaining term on the loans is approximately 11 years. The primary term of the
gross leases to multiple tenants in the medical office buildings range from 1 to
19 years, with an average of 4 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 135 leases and loans on 15 facilities which cover from 1
to 17 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 March 28,
2000, other than approximately $2.5 million in delinquent rents and interest, of
which approximately $1.2 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.
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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. Fifty-nine properties are not subject to purchase
options until 2008 or later, and an additional 307 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,
1999 follows:
Current Annualized Revenue of
----------------------------------------------------------
Properties Subject to
Lease Expirations, Purchase
Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gain at Lease
Year (1) (2) Expiration(3),(4)
- -------------- ----------------------------- ------------------------- -----------------------------
(Amounts in thousands, except percentages) % Amount
------------ -------------
2000 $ 5,876 $ 2,270 (0.6)% $(1,700)
2001 19,108 6,367 0.2 600
2002 17,815 2,204 0.1 100
2003 10,200 4,005 (0.1) (100)
2004 65,554 38,896 -- --
Thereafter 180,301 63,934 -- --
----------------------------- ------------------------- ------------ -------------
$298,854 $117,676 (0.4)% $(1,100)
============================= ========================= ============ =============
(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)
is a component (subset) of column (1), the total current annualized
revenue of properties subject to lease expirations, purchase options
and mortgage maturities ($117,676,000).
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(3) 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. Our total revenue has grown at a
compound annual growth rate of 20.8% in the past five years. The
percentages are computed by taking the possible revenue loss as a
percentage of 1999 total annualized revenue.
(4) We estimate that in addition to the possible reduction in income from
lease expirations, we may also have an increase of approximately
$600,000 in 2000 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 2000 due to the unpredictable levels of 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.
Each lease requires 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 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 58 facilities
(representing an aggregate investment of approximately $424 million), including:
o 35 congregate care and assisted living facilities
o Seven medical office buildings
o Seven long-term care facilities
o Five rehabilitation hospitals
o Four acute care hospitals
As of December 31, 1999, we have funded costs of approximately $404
million and have completed 52 facilities of our total development commitment The
completed facilities comprise:
o 32 congregate care and assisted living facilities
o Seven medical office buildings
o Five rehabilitation hospitals
o Five long-term care facilities
o Three acute care hospitals
The six remaining development projects are scheduled for completion in
2000. Simultaneously with the commencement of each of these development programs
and prior to funding, we enter into a
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lease agreement with the developer/operator. The base rent under the lease is
generally established at a rate equivalent to a specified number of basis points
over 1) the yield on the 10 year United States Treasury note or 2) 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 requires additional
security and collateral in the form of more than one of the following:
(a) Irrevocable letters of credit from financial institutions;
(b) Payment and performance bonds; and
(c) Completion guarantees by either one or a combination of the
developer's parent entity, other affiliates or one or more of
the individual principals who control the developer.
In addition, before we advance any funds under the development
agreement, the developer must provide:
(a) 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;
(b) 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;
(c) A certificate executed by the general contractor that all work
requested for reimbursement has been completed; and
(d) 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 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's draw requests by
having its 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, 1999, we had varying percentage interests in several
limited liability companies and partnerships which together own 71 facilities,
as further discussed below:
(1) A 77% interest in a partnership (Health Care Property
Partners) which owns two acute care hospitals and 19 long-term
care facilities.
(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 99.95% interest in a limited liability company (Cambridge
Medical Property, LLC) which owns five medical office
buildings.
(4) A 90% interest in a limited liability company (HCPI Indiana,
LLC) which owns seven medical office buildings.
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(5) A 67% interest in a limited liability company (HCPI Utah, LLC)
which owns 15 medical office buildings.
(6) An 80% interest in eight limited liability companies
(Vista-Cal Associates, LLC; Oak City-Cal Associates, LLC;
Statesboro Associates, LLC; Ft. Worth-Cal Associates, LLC;
Perris-Cal Associates, LLC; Ponca-Cal Associates, LLC;
Louisiana-Two Associates, LLC; and Oklahoma-Four Associates,
LLC) which own an aggregate of 13 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 healthcare related facilities and
leasing them to healthcare operators or investing in mortgages secured by
healthcare 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 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 and, with respect to
our taxable years beginning before August 6, 1997, there was a third gross
income requirement. 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
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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. Third, for
our taxable years beginning before August 6, 1997, short-term gains from the
sale or other disposition of stock or securities, gains from prohibited
transactions and gains on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of our gross income for each
such taxable year. 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
three 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 any one
issuer's outstanding voting securities.
Recently, legislation was enacted that modifies some of the rules that
apply to REITs. Specifically, the legislation includes a provision that limits a
REIT's ability to own more than 10% of the vote or value of the securities of a
non-REIT corporation, other than certain debt securities. However, the
legislation would allow a REIT to own any percentage of the voting stock and
value of the securities of a corporation which jointly elects with the REIT to
be a taxable REIT subsidiary, provided certain requirements are met. A taxable
REIT subsidiary 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 "taxable REIT subsidiary" may not manage or operate a healthcare
facility. Also, the legislation imposes a 100% tax on a REIT if its rental,
service or other agreements with its taxable REIT subsidiary are not on arms'
length terms. This legislation will require us to monitor the securities we own
in other corporations, and possibly restructure such investments if we own more
than 10% of the value of the securities of any of these corporations. The
provisions discussed above are generally effective for taxable years ending
after December 31, 2000, and, assuming specified requirements are met, do not
apply to investments in place on or before July 12, 1999. As is presently the
case, a REIT may continue to own 100% of the stock of a qualified REIT
subsidiary, as defined below.
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 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 or QRS) 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 in which
we own an interest will be treated for tax purposes as a partnership (in the
case of a partnership
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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.
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) 95% of our "real estate investment trust taxable
income" (computed without regard to the dividends paid deduction and our net
capital gain) and (ii) 95% of the net income, if any (after tax), from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Pursuant to recently enacted legislation, the 95% distribution requirement
discussed above will be reduced to 90%, effective for taxable years beginning
after December 31, 2000. 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 95%, 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.
In addition, President Clinton's fiscal year 2001 budget proposal
includes a provision which, if enacted in its present form, would increase the
percentage of income REITs must timely distribute to shareholders to avoid the
excise tax to 98% of both ordinary income and capital gain net income. This
proposal would be effective for taxable years beginning after December 31, 2000.
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 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
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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 healthcare industry is heavily regulated by federal, state and
local laws. This government regulation of the healthcare industry affects us
because:
(1) The financial ability of lessees to make rent and debt
payments to us may be affected by government 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.
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 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 healthcare 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 $25,000 fines. Civil provisions prohibit
the knowing filing of a false claim or the knowing use of false statements to
obtain payment. The penalties for such a violation are fines of not less than
$5,000 nor more than $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,
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or to induce, the referral of Medicare and Medicaid 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, the federal government restricts certain financial relationships
between physicians and other providers of healthcare services.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against healthcare providers. The Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act
of 1997 expand the penalties for healthcare 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.
Violations of such 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 which we believe complies with such laws and regulations.
Based upon information we have periodically received from our operators
over the terms of their respective leases and loans, we believe that the
facilities in which we have investments are 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. Healthcare facilities must obtain licensure 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 healthcare
facilities by requiring certificate of need or other similar approval programs.
In addition, healthcare 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
healthcare 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 the activities of an operator
of the
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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 revenues.
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 may
include the federal Medicare program, state Medicaid programs, private insurance
carriers, health care service plans and health maintenance organizations, among
others. You should expect efforts to reduce costs by these payors to continue,
which may result in reduced or slower growth in reimbursement for certain
services provided by some of our lessees. In addition, the failure of any of our
lessees to comply with various laws and regulations could jeopardize their
ability to continue participating in the Medicare and Medicaid programs.
Medicare payments for long-term and rehabilitative care are based on
allowable costs plus a return on equity for proprietary facilities. 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 period of years. Thus, Medicare reimbursement to
hospitals for capital-related inpatient costs began using a federal 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 "Healthcare Reform" section and
further discussion below.
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. Both Medicare and 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.
Prospective Payment System. Up until July 1, 1998, Medicare and most
state Medicaid 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). In certain states, cost-based
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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 and to other facilities owned by the same owner. 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 skilled
nursing facilities. The per diem rate is calculated to cover routine service
costs, ancillary costs and capital-related costs. The phased-in implementation
of the prospective payment system for skilled nursing facilities began with the
first cost-reporting period beginning on or after July 1, 1998. The Prospective
Payment System is expected to be fully implemented by July 1, 2001. The effect
of the implementation of the Prospective Payment System on a particular skilled
nursing facility will vary in relation to the amount of revenue derived from
Medicare patients for each skilled nursing facility.
Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare Prospective Payment System reimbursement. In part
because of the uncertainty as to the effect of the Prospective Payment System on
skilled nursing facilities, in November 1998, Standard & Poor's placed many
skilled nursing facility companies on a "credit watch" because of the potential
negative impact of the implementation of the Prospective Payment System on the
financial condition of skilled nursing facilities, including the ability to make
interest and principal payments on outstanding borrowings. The financial
condition of many long-term care providers continued to erode during the past
year, in part due to the implementation of the Medicare Prospective Payment
System and a number of long-term care providers filed for bankruptcy protection
during 1999 and the first quarter of 2000. Our tenants that have filed for
Chapter XI bankruptcy protection are Sun Healthcare Group, Integrated Health
Services, Inc., Mariner Post-Acute Network, Inc., Lenox Healthcare, Inc., Texas
Health Enterprises, Inc., RainTree Healthcare Corporation and Vencor, Inc..
These tenants and the percentage of our annualized revenues that they represent
are discussed more fully under the section entitled "Relationship with Major
Operators" and in the footnotes to our financial statements.
Long-Term Care Facilities. 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. Agencies periodically inspect facilities, 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.
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 the lessees'
facilities, the operation of which requires accreditation, is accredited by the
Joint Commission on Accreditation of Healthcare Organizations.
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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.
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 carry out federally mandated reviews
of Medicare patient admissions, treatment and discharges in acute care
hospitals.
Congregate Care and Assisted Living Facilities. 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, the imposition of fines, suspension or
decertification from the Medicare and Medicaid program, and in extreme cases,
the revocation of a facility's license or closure of a facility. Such actions
may have an effect on the revenues of the operators of properties owned by 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 healthcare 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.
HEALTHCARE REFORM
The healthcare industry has continually faced various challenges,
including increased government and private payor pressure on healthcare
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 healthcare providers. The pressure to control healthcare
costs intensified during 1994 and 1995 as a result of the national healthcare
reform debate and continues as Congress attempted to slow the rate of growth of
federal healthcare expenditures as part of its effort to balance the federal
budget.
In addition to the reforms enacted and considered by Congress from time
to time, state legislatures periodically consider various healthcare reform
proposals. 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
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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.
These changes include:
(1) 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,
(2) The expansion and restriction of reimbursement for various
Medicare benefits,
(3) The freeze in hospital rates in 1998 and more limited annual
increases in hospital rates for 1999-2002,
(4) The adoption of a Prospective Payment System for skilled
nursing facilities, home health agencies, hospital outpatient
departments, and rehabilitation hospitals,
(5) 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,
(6) The reduction in Medicare disproportionate share payments to
hospitals, and
(7) The removal of the $150,000,000 limit on tax-exempt bonds for
nonacute hospital capital projects.
The implementation of these amendments will occur at various times: for
instance, the Prospective Payment System for skilled nursing facilities went
into effect for the first cost reporting period after July 1, 1998, while the
Prospective Payment System for home health agencies will not be implemented
until October 1, 2000.
In seeking to limit Medicare reimbursement for long term care services,
Congress established the Prospective Payment System for skilled nursing facility
services to replace the cost-based reimbursement system.
See "Government Regulation -- Prospective Payment System."
In addition, the Balanced Budget Act of 1997 strengthens the anti-fraud
and abuse laws to provide for stiffer penalties for fraud and abuse violations.
The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997,
is expected to produce several billion dollars in net savings for Medicaid over
five years. 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 are "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 for skilled nursing facilities to:
o Use a public process for determining rates
o Publish proposed and final rates, the methodologies underlying
the rates, and justifications for the rates
o Give methodologies and justifications
During rate-setting procedures, 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 the Department of Health and Human Services is required to study and report
to Congress within four years concerning the effect of state rate-setting
methodologies on the access to and the quality of services provided to Medicaid
beneficiaries. The Balanced Budget Act also provides the federal government with
expanded enforcement powers to combat waste, fraud and abuse in delivery of
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healthcare 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.
In November 1999, President Clinton signed into law the Medicare,
Medicaid and State Children's Health Insurance Programs Balanced Budget
Refinement Act of 1999 ("Budget Refinement Act") which reduces some of the
reimbursement cutbacks under the Balanced Budget Act. The Budget Refinement Act
delays implementation of cost-cutting measures and increases payments from the
Balanced Budget Act to some sectors of the healthcare industry. Long-term care
facilities will receive increased payments under the Budget Refinement Act. The
reduction in disproportionate share hospital funding will not be as steep. The
change to a PPS system for outpatient hospital services will be budget neutral
and not result in reduced reimbursement. Other changes also ameliorate changes
required by the Balanced Budget Act. The extent of the relief provided by the
Budget Refinement Act is estimated to be $16 billion over five years.
The Health Insurance Portability and Accountability Act of 1996
requires a significant overhaul of healthcare information systems to protect
individual medical information. In November 1999, the Department of Health and
Human Services released proposed regulations to protect the confidentiality of
individual health information. Although the final regulations have not yet been
released, the cost to the healthcare industry of complying with such regulations
may exceed the cost of complying with Year 2000 issues.
In addition to the reforms enacted and considered by Congress from time
to time, state legislatures periodically consider various healthcare reform
proposals. Congress and state legislatures can be expected to continue to review
and assess alternative healthcare delivery systems and payment methodologies and
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 availability of healthcare services.
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 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 Health Care
Financing Administration reports that 1998 spending for healthcare continued a
five year trend of low growth 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 healthcare 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 healthcare spending since 1993, the
healthcare share of gross domestic product has remained roughly the same since
1993. We believe that government and private efforts to contain or reduce
healthcare 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. We believe that the vast nature of the healthcare 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
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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 healthcare related
facilities. In evaluating potential investments, we consider such factors as:
(1) The geographic area, type of property and demographic profile;
(2) The location, construction quality, condition and design of
the property;
(3) The current and anticipated cash flow and its adequacy to meet
operational needs and lease obligations and to provide a
competitive market return on equity to our investors;
(4) The potential for capital appreciation, if any;
(5) The growth, tax and regulatory environment of the communities
in which the properties are located;
(6) Occupancy and demand for similar health facilities in the same
or nearby communities;
(7) An adequate mix of private and government sponsored patients;
(8) Potential alternative uses of the facilities; and
(9) 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, 1999, we had three series of preferred stock and two
classes 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 its capital stock in exchange
for investments which conform to its standards and to repurchase or otherwise
acquire its shares or other securities.
We may incur additional indebtedness when, in the opinion of its
management and directors, it is advisable. For short-term purposes we from time
to time negotiate lines of credit, or arranges 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 it has invested or may refinance properties
acquired on a leveraged basis.
In July 1990, we adopted a rights agreement whereby we distributed a
dividend of one right for each outstanding share of common stock and authorized
the distribution of one right with respect to each subsequently issued share.
Each right, as adjusted for our 1992 stock split, will entitle its holder to
purchase one-half of a share of our common stock at an exercise price of $47.50
per share. The rights will become exercisable if a person acquires 15% or more
of our outstanding common stock or
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makes a tender offer which will result in the person's owning 30% or more of
our common stock. Under certain circumstances, the rights will entitle the
holders to purchase shares of our common stock, or securities of an entity
that acquires us, at one-half market value. We may redeem the rights at any
time prior to a person's acquiring 15% of our common stock. The rights are
intended to protect our stockholders from takeover tactics that could
deprive them of the full value of their shares.
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.
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Health Care Property Investors
- -----------------------------------------|
|
|-- Texas HCP, Inc. | | HCPI/San Antonio LP
| 100% | 99% | 90%
| |--Texas HCP Holding, L.P. --|-------------------
|-- Texas HCP G.P., Inc. | 1% | Ft. Worth-Cal Assoc. LLC
| 100% | | 80%
|
|-- HCPI Trust
| 100%
|
|-- HCPI Knightdale, Inc.
| 100%
|
|-- HCPI Charlotte, Inc.
| 100%
|
|-- HCPI Mortgage Corp.
| 100%
|
|-- Meadowdome LLC
| 100%
|
|-- AHE of Somerville, Inc.
| 100%
|
|-- AHP of Nevada, Inc.
| 100%
|
|-- AHP of Washington, Inc.
| 100%
|
|-- AHP of California, Inc.
| 100%
|
|-- AHE Leasing Co.
| 100%
|
|-- Tucson-Cal Associates, LLC
| 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 - 67% (Owns 100% of HCPI Davis North LLC)
Cambridge Medical Properties, LLC - 99.95%
Fayetteville Health Associates LP - 97%
Wichita Health Associates LP - 97%
Various Non-Consolidated LLCs*
* HCPI is non-managing member and has a 45%-80% interest in the following
limited liability companies:
Louisiana-Two Associates, LLC - 80% Vista-Cal Associates, LLC - 80%
Oak City-Cal Associates, LLC -80% Arborwood Living Center, LLC - 45%
Oklahoma-Four Associates, LLC - 80% Edgewood Assisted Living LLC - 45%
Perris-Cal Associates, LLC - 80% Greenleaf Living Center LLC - 45%
Ponca-Cal Associates, LLC - 80% Seminole Shores Living Center - 45%
Statesboro Associates, LLC - 80%
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ITEM 2. PROPERTIES
See Item 1. for details.
ITEM 3. LEGAL PROCEEDINGS
During 1999, we were not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on November 3, 1999 for the
purpose of approving the merger between HCPI and American Health Properties,
Inc. The merger was approved by the following vote:
Shares Voted Shares Voted Shares Broker
"For" "Against" Abstaining Non-Votes
------------------ ----------------- ---------- ---------
22,854,473 268,104 299,498 [0]
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.
1999 1998 1997
High Low High Low High Low
- -------------------------------------------------------------------------------
First Quarter $31 3/8 $26 5/8 $39 1/4 $35 13/16 $37 1/8 $33 1/8
Second Quarter 32 15/16 27 5/16 37 33 7/16 35 3/4 32
Third Quarter 28 9/16 24 11/16 37 1/2 30 3/16 38 3/4 35 7/8
Fourth Quarter 27 1/8 21 15/16 35 9/16 28 7/8 40 5/16 37 5/8
As of March 1, 2000 there were approximately 3,668 stockholders of
record and approximately 64,000 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 we paid on common
stock are set forth below:
1999 1998 1997
---- ---- ----
First Quarter $.68 $.64 $.60
Second Quarter .69 .65 .61
Third Quarter .70 .66 .62
Fourth Quarter .71 .67 .63
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Bremner & Wiley. On December 4, 1998, we completed the acquisition of a
managing member interest in HCPI/Indiana, LLC, a Delaware limited liability
company ("HCPI/Indiana"). In connection with the acquisition, several limited
partnerships affiliated with James D. Bremner made a capital contribution to
HCPI/Indiana of a portfolio of seven medical office buildings with an equity
value (net of assumed debt) of approximately $6.7 million. In exchange for this
capital contribution, the contributing limited partnerships designated their
constituent partners to receive approximately $3.9 million in cash and 89,452
non-managing member units of HCPI/Indiana (representing a minority interest in
HCPI/Indiana). HCPI/Indiana also issued 781,213 managing member units to us in
exchange for a capital contribution of approximately $24.6 million.
Beginning on December 4, 1999, the non-managing member units could be
exchanged for common stock or, at our option, for cash. 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/Indiana relied on the exemption provided by Section 4(2) of the Securities
Act, in connection with the issuance and sale of the non-managing member units.
We have filed a registration statement with respect to the exchange of units for
our common stock.
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 593,249 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 it would
not acquire the medical office building known as Old Mill. HCPI anticipates that
the contribution of the remaining two medical office buildings to HCPI/Utah will
be completed by December 31, 2000. The Amended and Restated Limited Liability
Company Agreement of HCPI/Utah provides that only we are authorized to act on
behalf of HCPI/Utah and that we have responsibility for the management of its
business.
The non-managing member units issued in connection with the initial
closing became exchangeable for common stock on January 25, 2000 and the
non-managing member units issued 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. We have filed a registration statement with
respect to the exchange of units for our common stock.
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Cambridge. On November 21, 1997, we completed the acquisition of a
managing member interest in Cambridge Medical Properties, LLC, a Delaware
limited liability company ("CMP"). In connection with the acquisition, Cambridge
Medical Center of San Diego, LLC ("Cambridge") made a capital contribution to
CMP of real property and improvements with an equity value (net of assumed debt)
of $6.5 million in exchange for $1 million in cash and 142,450 non-managing
member units of CMP (representing a minority interest in CMP). CMP also issued
1,048,951 units of membership interest to us in exchange for a capital
contribution of $40.5 million.
Beginning on November 21, 1998, the non-managing member units held by
Cambridge could be exchanged for common stock or, at our option, for cash. 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. CMP 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. As of December 31, 1999, only 550 non-managing
member units were outstanding and if they are presented for exchange we intend
to cash them out.
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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, 1999, 1998, 1997, 1996, and 1995.
Year Ended December 31,
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(Amounts in thousands, except per share data)
INCOME STATEMENT DATA:
Total Revenue $ 224,793 $ 161,549 $ 128,503 $ 120,393 $ 105,696
Net Income Applicable to
Common Shares 78,450 78,635 63,542 60,641 80,266
Basic Earnings per Common Share 2.25 2.56 2.21 2.12 2.83
Diluted Earnings per Common Share 2.25 2.54 2.19 2.10 2.78
BALANCE SHEET DATA:
Total Assets 2,469,390 1,356,612 940,964 753,653 667,831
Debt Obligations 1,179,507 709,045 452,858 379,504 299,084
Stockholders' Equity 1,200,257 595,419 442,269 336,806 339,460
OTHER DATA:
Basic Funds From Operations(1) 114,520 96,255 83,442 80,517 72,911
Cash Flows From Operating
Activities 124,117 112,311 87,544 90,585 71,164
Cash Flows Used In Investing
Activities 230,460 417,524 205,238 104,797 80,627
Cash Flows Provided By (Used
In) Financing Activities 109,535 305,633 118,967 15,023 8,535
Dividends Paid 106,177 89,210 71,926 65,905 60,167
Dividends Paid Per Common Share 2.78 2.620 2.460 2.300 2.140
- ----------
(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 now 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. FFO for the years presented has been
restated for the new definition. The following table represents items
and amounts being aggregated to compute FFO.
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Net Income Applicable to Common Shares $ 78,450 $ 78,635 $ 63,542 $ 60,641 $ 80,266
Real Estate Depreciation 44,789 29,577 22,667 20,700 16,691
Joint Venture Adjustments 1,584 2,096 (720) (824) (496)
Gain on Sale of Real Estate Properties (10,303) (14,053) (2,047) -- (23,550)
--------- --------- --------- --------- ---------
$ 114,520 $ 96,255 $ 83,442 $ 80,517 $ 72,911
========= ========= ========= ========= =========
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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 healthcare
facilities and leases them on a long-term basis to healthcare providers. On a
more limited basis, we provide mortgage financing on healthcare facilities. As
of December 31, 1999, our portfolio of properties, including equity investments,
consisted of 428 facilities located in 43 states. These facilities are comprised
of 176 long-term care facilities, 93 congregate care and assisted living
facilities, 82 medical office buildings, 46 physician group practice clinics, 22
acute care hospitals and nine freestanding rehabilitation facilities. Our gross
investment in the properties, which includes joint venture acquisitions, was
approximately $2,637,000,000 at December 31, 1999.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI in a stock-for-stock transaction, approved by the stockholders of
both companies, with HCPI being the surviving corporation. AHE was a real estate
investment trust specializing in healthcare facilities with a portfolio of 72
healthcare properties in 22 states. Under the terms of the merger agreement,
each share of AHE common stock was converted into the right to receive 0.78
share of HCPI's common stock and AHE's 8.60% cumulative redeemable preferred
stock, series B was converted into shares of HCPI 8.60% series C cumulative
redeemable preferred stock. 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, we assumed AHE's debt
comprised of $220 million of senior notes, $56 million of mortgage debt and paid
$71 million in cash to replace their revolving line of credit upon consummation
of the merger. 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.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Net Income applicable to common shares for the year ended December 31,
1999 totaled $78,450,000 or $2.25 per share on a diluted basis on revenue of
$224,793,000. This compares to Net Income applicable to common shares of
$78,635,000 or $2.54 per share on a diluted basis on revenue of $161,549,000 for
the corresponding period in 1998. Included in Net Income applicable to common
shares and earnings per share on a diluted basis for the years ended December
31, 1999 and 1998 is a Gain on Sale of Real Estate Properties of $10,303,000, or
$0.27 per share, and $14,053,000, or $0.42 per share, respectively.
Rental Income for the year ended December 31, 1999 increased by
$55,642,000 to $189,800,000. The majority of this increase was generated by a
full year of rents on $429,000,000 of property acquisitions made in 1998, rents
on $146,000,000 of new property acquisitions made in 1999 and rents on
properties acquired in the merger with AHE. The 1999 acquisition activity, most
of which is attributable to the acquisition of AHE's portfolio in the merger,
represents a significant increase over the acquisition activity of prior years.
Tenant Reimbursements increased by $6,970,000 to $9,770,000 from the prior year
with a related increase in Facility Operating Expenses of $12,897,000 to
$17,950,000 associated with managed medical office buildings. Since
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November 1997, we have acquired 70 medical office buildings and multiple clinics
that are leased on a gross, modified gross or triple net basis. Gross or
modified gross basis means that we are responsible, subject to Tenant
Reimbursements, for the payment of property taxes, insurance and other facility
related operating expenses. Our increased investment in medical office buildings
accounts for the increase in Tenant Reimbursements and Facility Operating
Expenses during the last two years.
Interest Expense for the year ended December 31, 1999 increased by
$20,948,000 to $57,701,000. The increase is primarily the result of a full year
of interest on the June 1998 issuance of mandatory Par Put Remarketed Securities
(MOPPRS) senior debt, an increase in short-term borrowings used to fund
investments made during 1998 and 1999 and $343 million in debt assumed in the
merger with AHE, all described in more detail below in the "Liquidity and
Capital Resources" section. The increase in Depreciation/Non Cash Charges of
$15,337,000 to $47,860,000 for the year ended December 31, 1999, is directly
related to the new investments discussed above.
We believe that Funds From Operations (FFO) is the most important
supplemental measure of operating performance for a real estate investment
trust. (See Note 13 to the Consolidated Financial Statements.) FFO for the year
ended December 31, 1999 increased by $18,265,000 to $114,520,000. The increase
is mainly attributable to increases in Rental Income and Tenant Reimbursements,
as offset by increases in Interest Expense and Facility Operating Expenses which
are discussed in more detail above and Preferred Dividends.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Net Income applicable to common shares for the year ended December 31,
1998 totaled $78,635,000 or $2.54 per share on a diluted basis on revenue of
$161,549,000. This compares to Net Income applicable to common shares of
$63,542,000 or $2.19 per share on a diluted basis on revenue of $128,503,000 for
1997. Included in Net Income applicable to common shares and earnings per share
on a diluted basis for the years ended December 31, 1998 and 1997 is a Gain on
Sale of Real Estate Properties of $14,053,000, or $0.42 per share, and
$2,047,000, or $0.07 per share, respectively.
Rental Income for the year ended December 31, 1998 increased by
$20,238,000 to $134,158,000. The majority of this increase was generated by
rents on $429,000,000 of new property acquisitions made in 1998 and a full year
of rents on $226,000,000 of property acquisitions made in 1997. The 1998
acquisition activity represents a significant increase over the acquisition
activity of prior years. Tenant Reimbursements increased to $2,800,000 from the
prior year with a related increase in Facility Operating Expenses of $4,891,000
associated with the acquisitions of medical office buildings in 1998. Interest
and Other Income for the year ended December 31, 1998 increased by $10,008,000
to $24,591,000. The increase in Interest and Other Income was due in part to new
loans made during 1998 and late 1997.
Interest Expense for the year ended December 31, 1998 increased by
$7,928,000 to $36,753,000. The increase is primarily the result of an increase
in short-term borrowings used to fund the acquisitions made during 1998 and
interest related to the June 1998 issuance of Mandatory Par Put Remarketed
Securities (MOPPRS) senior debt described in more detail below in the "Liquidity
and Capital Resources" section. The increase in Depreciation/Non Cash Charges
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of $6,867,000 to $32,523,000 for the year ended December 31, 1998 is directly
related to the new investments discussed above.
FFO for the year ended December 31, 1998 increased by $12,813,000 to
$96,255,000. The increase is mainly attributable to increases in Rental Income
and Interest and Other Income, as offset by increases in Interest Expense and
Facility Operating Expenses, which are discussed in more detail above.
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, use of
short-term bank lines and use of internally generated cash flows. Facilities
under construction are generally financed by means of cash on hand or short-term
borrowings under our existing bank lines. Management believes that our liquidity
and sources of capital are adequate to finance our operations. Future
investments in additional facilities will be dependent on availability of cost
effective sources of capital.
MTN Financings
The following table summarizes the MTN financing activities since
January 1998:
AMOUNT
DATE MATURITY COUPON RATE ISSUED/(REDEEMED)
---- -------- ----------- -----------------
February 1998 --- 9.88% $ (10,000,000)
March 1998 5 years 6.66% 20,000,000
April-November 1998 --- 6.10%-9.70% (17,500,000)
November 1998 3-8 years 7.30%-7.88% 28,000,000
February 1999 5 years 6.92% 25,000,000
April 1999 5 years 7.00% - 7.48% 37,000,000
May 1999 --- 10.55%-10.57% (10,000,000)
November 1999 --- 8.81% (5,000,000)
February 2000 --- 8.87% (10,000,000)
February 2000 4 years 9.00% 25,000,000
Other Senior Debt
On November 4, 1999, in connection with the merger with AHE, we assumed
two series of outstanding senior notes of AHE, consisting of $100,000,000
principal amount of 7.05% senior notes due 2002 and $120,000,000 principal
amount of 7.50% senior notes (8.16% effective rate) due 2007. Additionally, we
assumed $56,000,000 of AHE's mortgage debt with interest rates ranging from
7.00% to 8.52% due 2003 to 2011.
At December 31, 1999, we had a total of $102,250,000 in Mortgage Notes
Payable secured by 21 healthcare facilities with a net book value of
approximately $200,279,000. Interest rates on the Mortgage Notes ranged from
5.75% to 10.63%.
During June 1998, we issued $200 million of 6.875% Mandatory Par Put
Remarketed Securities (MOPPRS) due June 8, 2015, which are subject to mandatory
tender on June 8, 2005. We received total proceeds of approximately $203,000,000
(including the present value of a put
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option associated with the debt) which was used to repay borrowings under our
revolving lines of credit. The weighted average cost of the debt including the
amortization of the option and offering expenses is 6.77%. The MOPPRS are our
senior, unsecured obligations.
Equity Offerings
Since January 1998, we have completed three equity offerings, summarized
in the table below:
SHARES EQUITY
DATE ISSUANCE ISSUED RAISED NET PROCEEDS
- -------------- -------------------------- --------- ------------ ------------
April 1998 Common Stock at 698,752 $23,200,000 $23,000,000
$33.2217/share to a Unit
Investment Trust
September 1998 8.70% Series B Cumulative 5,385,000 $135,000,000 $130,000,000
Redeemable Preferred Stock
May 1999 Common Stock at 1,000,000 $31,400,000 $29,600,000
$31.4375/share
We used the net proceeds from the equity offerings to pay down or pay
off short-term borrowings under our revolving lines of credit. We invested any
excess funds in short-term investments until they were needed for acquisitions
or development.
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 3 to the Consolidated
Financial Statements.)
In January and February 2000, we registered 89,452 and 593,247 shares of
common stock for issuance, from time to time, to the holders of non-managing
member units in two consolidated subsidiaries, HCPI/Indiana, LLC and HCPI/Utah,
LLC, respectively. The non-managing member units are convertible at the
non-managing members option into shares of our common stock. At December 31,
1999, stockholders' equity totaled $1,200,257,000 and the debt to equity ratio
was .98 to 1.00. For the year ended December 31, 1999, FFO (before interest
expense) covered Interest Expense 2.98 to 1.00.
Available Financing Sources
As of February 2000, we had $372,000,000 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 then existing
market conditions.
On November 3, 1999, we renegotiated our lines of credit with a group of
nine banks. We have two revolving lines of credit, one for $103,000,000 that
expires on November 2, 2000 and one for $207,000,000 that expires on November 3,
2003. Availability on these lines of credit is reduced by outstanding letters of
credit aggregating $3,500,000. As of December 31, 1999, we had $91,000,000
available on these lines of credit. Since 1986 the debt rating agencies have
rated our Senior Notes and Convertible Subordinated Notes investment grade.
Current ratings are as follows:
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Moody's Standard & Poor's Duff & Phelps
------- ----------------- -------------
Senior Notes Baa2 BBB+ BBB+
Convertible
Subordinated Notes Baa3 BBB BBB
Since our inception in May 1985, we have recorded approximately
$804,989,000 in cumulative FFO. Of this amount, we have distributed a total of
$667,272,000 to stockholders as dividends on common stock. We have retained the
balance of $137,717,000 and used it as an additional source of capital.
On November 20, 1999, we paid a dividend of $0.71 per common share or
$22,752,000 in the aggregate. Total dividends paid on common stock during the
year ended December 31, 1999, as a percentage of FFO, was 77%. During the first
quarter of 2000, we declared and paid a dividend of $0.72 per common share or
approximately $36,938,000 in the aggregate.
Letters of Credit
At December 31, 1999, we held approximately $800,000 in depository
accounts and $60,700,000 in irrevocable letters of credit from commercial banks
to secure the obligations of many 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 in each of the years 1997 through 1999 by $1,600,000, $3,100,000
and $3,400,000, respectively. Total rollovers were 12 facilities, 44 facilities
and 26 facilities in each of the years 1997 through 1999.
For the year ending December 31, 2000, we have 14 facilities that are
subject to lease expiration and mortgage maturities. These facilities currently
represent approximately 1.2% of annualized revenues. For the year ending
December 31, 2001, we have 39 facilities that are subject to lease expiration
and mortgage maturities. These facilities currently represent approximately 4.0%
of annualized revenue.
During 1997, we reached agreement with Tenet Healthcare Corporation
(Tenet) (the holder of substantially all of the option rights under our leases
with Vencor, Inc. (Vencor)) whereby Tenet agreed to waive renewal and purchase
options, and related rights of first refusal, on up to 51 facilities. As part of
these agreements, we have the right to continue to own the facilities. We paid
Tenet $5,000,000 in cash, accelerated the purchase option on one acute care
hospital leased to Tenet, and reduced Tenet's guarantees on the facilities
leased to Vencor. Leases on 20 of those 51 facilities had expiration dates
through December 31, 2000. We have increased rents on five of the facilities
with leases that expired during 1998, and we believe we will be able to increase
rents on other facilities whose lease terms expire in 2001. However, there can
be no assurance that we will
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be able to realize any increased rents on future rollovers. We have completed
certain facility rollovers earlier than the scheduled lease expirations or
mortgage maturities and will continue to pursue such opportunities where it is
advantageous to do so.
YEAR 2000 ISSUE
The Year 2000 issue was the result of widely used computer programs that
identify the year by two digits, rather than by four. It was believed that
continued use of these programs may result in widespread computer-generated
malfunctions and miscalculations beginning in the year 2000, when the digits
"00" are interpreted as "1900." It was believed that those miscalculations could
cause disruption of operations including the temporary inability to process
transactions such as invoices for payment. Those computer programs that identify
the year based on all four digits are considered "Year 2000 compliant." The
statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998.
Preparing for Year 2000 had been a high priority for us. Internal and
external resources were engaged to achieve Year 2000 readiness. We successfully
completed our Year 2000 preparedness plans including the upgrade and replacement
of all systems, as well as full-scale testing and implementation of those
systems. Our contingency plans were also thoroughly tested. The cost of the
foregoing was not material. To date, we have not seen any adverse impact or
disruption in cash flows as a result of the Year 2000 transition on any of our
systems or those of our lessees or vendors.
Our remaining exposure to the Year 2000 issue is the possibility that
reimbursement delays caused by a failure of federal and state welfare programs
responsible for Medicare and Medicaid could adversely affect our tenants' cash
flow, resulting in their temporary inability to meet their obligations under our
leases. Depending upon the severity of any reimbursement delays and the
financial strength of any particular operator, the operations of our tenants
could be materially adversely affected, which in turn could have a material
adverse effect on our results of operations. To date, we have not seen any
adverse effect on our results of operations from the Year 2000 issue.
Readers are cautioned that statements contained in the "Year 2000 Issue"
paragraphs are forward looking and should be read in conjunction with our
disclosures under the heading "Cautionary Language Regarding Forward Looking
Statements" set forth below.
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. Shareholders
and investors 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-
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looking statements as a result of various factors. In addition to the factors
set forth under the caption Risk Factors in our annual report on Form 10-K,
readers should consider the following:
(a) Legislative, regulatory, or other changes in the healthcare 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) Competition for the acquisition and financing of healthcare
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) Changes in national or regional economic conditions, including changes
in interest rates and the availability and cost of capital for us;
(g) General uncertainty inherent in the Year 2000 issue, particularly the
uncertainty of the Year 2000 readiness of third parties who are
material to our business, such as public or private healthcare
reimbursers, over whom we have no control; and
(h) The expected benefits from the merger with AHE, such as cost savings,
operating efficiencies and other synergies may not be realized due to
increased demands on our management resources following the merger.
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ITEM 7A. DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates
on our mortgage loans receivable and on our debt instruments. We provide the
following discussion and table presented below to address the risks associated
with potential changes in our interest rate environment.
We provide mortgage loans to operators of healthcare 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 table below if material.
We generally borrow on our short-term bank lines of credit to complete
acquisition transactions. We then repay borrowings using proceeds from
subsequent long-term debt and equity offerings. We may also assume mortgage
notes payable already in place 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 and Convertible Subordinated
Notes are at fixed rates. The variable rate loans are at interest rates below
the current prime rate of 8.75%, and fluctuations are tied to the prime rate or
to a rate currently below the prime rate.
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 2000 would increase by
approximately $2,217,000. Approximately 10% of the increase in interest expense
related to the bank lines of credit, or $220,000, would be capitalized into
construction projects.
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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 table below. Certain of the mortgage loans receivable and certain of the
debt securities, excluding the convertible debentures, require periodic
principal payments prior to the final maturity date. 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.
|------------------------------------MATURITY-------------------------------------|
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
------- --------- -------- -------- ------- ---------- ---------- ----------
ASSETS
Mortgage Loans Receivable $ 15,248 $ 2,503 $ 143,897 $ 161,648 $ 160,477
Weighted Average Interest Rate 13.55% 10.16% 9.80% 10.16%
LIABILITIES
Variable Rate Debt:
Bank Notes Payable 12,500 203,000 215,500 215,500
Weighted Average Interest Rate 6.79% 6.79% 6.79%
Mortgage Notes Payable 1,279 4,906 6,185 4,959
Weighted Average Interest Rate 5.87% 5.75% 5.77%
Fixed Rate Debt:
Senior Notes Payable 10,000 13,000 117,000 31,000 67,000 523,757 761,757 715,729
Weighted Average Interest Rate 8.00% 7.88% 7.25% 7.09% 7.32% 7.19% 7.22%
Convertible Subordinated
Notes Payable 100,000 100,000 98,401
Weighted Average Interest Rate 6.00% 6.00%
Mortgage Notes Payable 379 9,339 10,367 75,980 96,065 93,522
Weighted Average Interest Rate 9.00% 8.52% 7.59% 8.07% 7.80%
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 these
"Disclosures about Market Risk" paragraphs are forward looking and should be
read in conjunction with our disclosures under the heading "Cautionary Language
Regarding Forward Looking Statements" set forth above.
NEW PRONOUNCEMENTS
See Note 19 to the financial statements for a discussion of our
implementation of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Balance Sheets as of December 31, 1999 and 1998 and
Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for
the years ended December 31, 1999, 1998 and 1997, together with the Report of
Arthur Andersen LLP, Independent Public Accountants, are included elsewhere
herein. Reference is made to the "Index to Consolidated Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers were as follows on March 22, 2000:
Name Age Position
- --------------------- ---- ----------------------------------------------------
Kenneth B. Roath 64 Chairman, President and Chief Executive Officer
James G. Reynolds 48 Executive Vice President and Chief Financial Officer
Devasis Ghose 46 Senior Vice President - Finance and Treasurer
Edward J. Henning 47 Senior Vice President, General Counsel and Corporate Secretary
Stephen R. Maulbetsch 43 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 9, 2000.
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 9, 2000.
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 9, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the
caption "Certain Transactions" in the Registrant's definitive proxy statement
relating to its Annual Meeting of Stockholders to be held on May 9, 2000.
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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, 1999 and 1998
Consolidated Statements of Income - for the years ended December
31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - for the years ended
December 31, 1999, 1998 and 1997
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:
On November 5, 1999, HCPI filed a Current Report on Form 8-K
dated November 4, 1999, reporting the completion of the merger
between American Health Properties and HCPI.
On November 19, 1999, HCPI filed Amendment No. 1 to its Current
Report on Form 8-K/A stating that the required financial
statements regarding the merger of American Health Properties and
HCPI would be filed on or about December 15, 1999.
On December 15, 1999, HCPI filed Amendment No. 2 to its Current
Report on Form 8-K/A containing the following financial
statements:
Consolidated Balance Sheets of American Health Properties, Inc. -
December 31, 1998 and 1997
Consolidated Statements of Operations of American Health
Properties, Inc. - for the years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Stockholders' Equity of American
Health Properties, Inc. - for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows of American Health
Properties, Inc. - for the years ended December 31, 1998, 1997
and 1996
Notes to Consolidated Financial Statements of American Health
Properties, Inc.
Consolidated Condensed Balance Sheets of American Health
Properties, Inc. - June 30, 1999 and December 31, 1998
-44-
45
Consolidated Condensed Statements of Operations of American
Health Properties, Inc. - for the three months ended June 30,
1999 and 1998 and for the six months ended June 30, 1999 and
1998
Consolidated Condensed Statements of Cash Flows of American
Health Properties, Inc. - for the six months ended June 30,
1999 and 1998
Notes to Consolidated Condensed Financial Statements of American
Health Properties, Inc.
Unaudited Pro Forma Combined Balance Sheet of HCPI as of
September 30, 1999
Unaudited Pro Forma Combined Statement of Income of HCPI for the
nine months ended September 30, 1999
Unaudited Pro Forma Combined Statement of Income of HCPI for the
year ended December 31, 1998
Notes to Unaudited Pro Forma Combined Financial Statements of
HCPI
c) Exhibits:
2.1 Agreement and Plan of Merger, dated as of August 4, 1999,
between HCPI and American Health Properties, Inc.
(incorporated herein by reference to exhibit 2.1 to HCPI's
current report on form 8-K dated August 4, 1999).
3.1 Articles of Restatement of HCPI (incorporated herein by
reference to exhibit 3.1 to HCPI's annual report on form
10-K for the year ended December 31, 1994).
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 Articles supplementary establishing the terms of the 7
7/8% Series A Cumulative Redeemable Preferred Stock
(incorporated by reference to exhibit 2.3 to HCPI's
registration statement on form 8-A filed on September 25,
1997).
3.4 Articles supplementary establishing and fixing the rights
and preferences of the 8.70% Series B Cumulative Preferred
Stock (incorporated herein by reference to exhibit 3.3 to
HCPI's registration statement on form 8-A dated September
2, 1998).
3.5 Articles supplementary establishing and fixing the rights
and preferences of the 8.60% Series C Cumulative
Redeemable Preferred Stock (incorporated herein by
reference to exhibit 2.1 to HCPI's current report on form
8-K dated August 4, 1999).
4.1 Rights agreement, dated as of July 5, 1990, between HCPI
and Manufacturers Hanover Trust Company of California, as
rights agent (incorporated herein by reference to exhibit
1 to HCPI's registration statement on form 8-A filed on
July 17, 1990).
4.2 Indenture, dated as of September 1, 1993, between HCPI and
The Bank of New York, as Trustee, with respect to the
Series B
Medium Term Notes and the Senior Notes due 2006
(incorporated by reference to exhibit 4.1 to HCPI's
registration statement on form S-3 dated September 9,
1993).
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).
-45-
46
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 21, 1997,
between HCPI and Cambridge Medical Center of San Diego,
LLC (incorporated by reference to exhibit 4.6 to HCPI's
annual report on form 10-K for the year ended December 31,
1997).
4.7 First Amendment to Rights Agreement dated as of January
28, 1999 between HCPI and The Bank of New York
(incorporated by reference to exhibit 4.7 to HCPI's annual
report on form 10-K for the year ended December 31, 1998).
4.8 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.
4.9 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.
4.10 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) dated as
of November 4, 1999 by and among HCPI, ChaseMellon
Shareholder Services, L.L.C. and the holders from time to
time of the Depositary Shares described therein
(incorporated herein by reference to exhibit 4 to HCPI's
registration statement on form 8-A filed on November 4,
1999).
4.11 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).
4.12 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).
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).
-46-
47
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 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).*
10.5 Employment Agreement dated April 28, 1988 between HCPI and
Kenneth B. Roath (incorporated by reference to exhibit
10.27 to HCPI's annual report on form 10-K for the year
ended December 31, 1988).*
10.6 First Amendment to Employment Agreement dated February 1,
1990 between HCPI and Kenneth B. Roath (incorporated by
reference to Appendix B of HCPI's annual report on form
10-K for the year ended December 31, 1990).*
10.7 HCPI Executive Retirement Plan (incorporated by reference
to exhibit 10.28 to HCPI's annual report on Form 10-K for
the year ended December 31, 1987).*
10.8 Amendment No. 1 to HCPI Executive Retirement Plan
(incorporated by reference to exhibit 10.39 to HCPI's
annual report on form 10-K for the year ended December 31,
1995).*
10.9 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).
10.10 Amended and Restated $45,000,000 Revolving Credit
Agreement dated as of October 22, 1997 and amended and
restated as of September 30, 1998 among HCPI, the banks
named herein and The Bank of New York and BNY Capital
Markets, Inc. (incorporated by reference to exhibit 10.1
to HCPI's quarterly report on form 10-Q for the period
ended September 30, 1998).
10.11 Amended and Restated $135,000,000 Revolving Credit
Agreement dated as of October 22, 1997 and amended and
restated as of September 30, 1998 among HCPI, the banks
named herein and The Bank of New York and BNY Capital
Markets, Inc. (incorporated by reference to exhibit 10.2
to HCPI's quarterly report on form 10-Q for the period
ended September 30, 1998).
10.12 Amended and Restated Limited Liability Company Agreement
dated November 20, 1998 of HCPI/Indiana, LLC (incorporated
by reference to exhibit 10.15 to HCPI's annual report on
form 10-k for the year ended December 31, 1998).
10.13 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).
10.14 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).
10.15 Second Amendment to Second Amended and Restated Directors
Stock Incentive Plan, effective as of January 4, 2000.
-47-
48
10.16 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).
10.17 Fourth Amendment to Second Amended and Restated Director
Deferred Compensation Plan, effective as of January 4,
2000.
10.18 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).
10.19 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).
10.20 364-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).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
* 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.
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.
-48-
49
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: March 29, 2000
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/s/ Kenneth B. Roath
---------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
March 29, 2000 /s/ Kenneth B. Roath
--------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive
Officer (Principal Executive Officer)
March 29, 2000 /s/ James G. Reynolds
--------------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
March 29, 2000 /s/ Devasis Ghose
--------------------------------------------
Devasis Ghose, Senior Vice President-
Finance and Treasurer (Principal Accounting
Officer)
49
50
March 29, 2000 /S/ Paul V. Colony
--------------------------------------------
Paul V. Colony, Director
March 29, 2000 /S/ Robert R. Fanning
--------------------------------------------
Robert R. Fanning, Jr., Director
March 29, 2000 /S/ Michael D. McKee
--------------------------------------------
Michael D. McKee, Director
March 29, 2000 /S/ Orville E. Melby
--------------------------------------------
Orville E. Melby, Director
March 29, 2000 /S/ Harold M. Messmer, Jr.
--------------------------------------------
Harold M. Messmer, Jr., Director
March 29, 2000 /S/ Peter L. Rhein
--------------------------------------------
Peter L. Rhein, Director
50
51
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - as of December 31, 1999 and 1998 F-3
Consolidated Statements of Income -
for the years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows -
for the years ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 -- F-25
F-1
52
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, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1999. 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, 1999 and 1998, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN LLP
Orange County, California
January 18, 2000
F-2
53
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
-----------------------------
1999 1998
----------- -----------
ASSETS
Real Estate Investments
Buildings and Improvements $ 2,147,592 $ 1,143,077
Accumulated Depreciation (230,509) (190,941)
----------- -----------
1,917,083 952,136
Construction in Progress 20,312 26,938
Land 255,593 152,045
----------- -----------
2,192,988 1,131,119
Loans Receivable 193,157 154,363
Investments in and Advances to Joint Ventures 47,642 54,478
Other Assets 27,907 12,148
Cash and Cash Equivalents 7,696 4,504
----------- -----------
TOTAL ASSETS $ 2,469,390 $ 1,356,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 215,500 $ 88,000
Senior Notes Payable 761,757 499,162
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 102,250 21,883
Accounts Payable, Accrued Expenses and Deferred Income 49,222 28,758
Minority Interests in Joint Ventures 16,564 20,576
Minority Interests Convertible into Common Stock 23,840 2,814
Commitments
Stockholders' Equity:
Preferred Stock, $1.00 par value: Authorized - 50,000,000
shares; 11,745,000 and 7,785,000 shares outstanding as of
December 31, 1999 and 1998 275,041 187,847
Common Stock, $1.00 par value; 100,000,000
shares authorized; 51,421,191 and 30,987,536
outstanding as of December 31, 1999 and 1998 51,421 30,987
Additional Paid-In Capital 940,471 433,309
Cumulative Net Income 628,151 531,926
Cumulative Dividends (694,827) (588,650)
----------- -----------
Total Stockholders' Equity 1,200,257 595,419
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,469,390 $ 1,356,612
=========== ===========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-3
54
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
REVENUE
Rental Income $ 189,800 $ 134,158 $ 113,920
Tenant Reimbursements 9,770 2,800 --
Interest and Other Income 25,223 24,591 14,583
--------- --------- ---------
224,793 161,549 128,503
--------- --------- ---------
EXPENSES
Interest Expense 57,701 36,753 28,825
Depreciation/Non Cash Charges 47,860 32,523 25,656
Facility Operating Expenses 17,950 5,053 162
Other Expenses 9,884 8,566 7,414
--------- --------- ---------
133,395 82,895 62,057
--------- --------- ---------
INCOME FROM OPERATIONS 91,398 78,654 66,446
Minority Interests (5,476) (5,540) (3,704)
Gain on Sale of Real Estate Properties 10,303 14,053 2,047
--------- --------- ---------
NET INCOME $ 96,225 $ 87,167 $ 64,789
DIVIDENDS TO PREFERRED STOCKHOLDERS 17,775 8,532 1,247
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHARES $ 78,450 $ 78,635 $ 63,542
========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 2.25 $ 2.56 $ 2.21
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 2.25 $ 2.54 $ 2.19
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 34,792 30,747 28,782
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-4
55
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Preferred Stock Common Stock
------------------- -----------------------------
Par Additional Total
Number of Number of Value Paid In Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 -- $ -- 28,678 $ 28,678 $ 355,672 $ 379,970 $ (427,514) $ 336,806
Issuance of Preferred Stock, Net 2,400 57,810 57,810
Issuance of Common Stock, Net 1,468 1,468 51,589 53,057
Exercise of Stock Options 70 70 1,663 1,733
Net Income 64,789 64,789
Dividends Paid - Preferred Shares (1,247) (1,247)
Dividends Paid - Common Shares (70,679) (70,679)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1997 2,400 57,810 30,216 30,216 408,924 444,759 (499,440) 442,269
Issuance of Preferred Stock, Net 5,385 130,037 130,037
Issuance of Common Stock, Net 731 731 23,513 24,244
Exercise of Stock Options 40 40 872 912
Net Income 87,167 87,167
Dividends Paid - Preferred Shares (8,532) (8,532)
Dividends Paid - Common Shares (80,678) (80,678)
- ----------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1998 7,785 187,847 30,987 30,987 433,309 531,926 (588,650) 595,419
Issuance of Preferred Stock, Net 4,000 88,160 88,160
Issuance 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 Shares (17,775) (17,775)
Dividends Paid - Common Shares (88,402) (88,402)
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1999 11,745 $275,041 51,421 $51,421 $940,471 $628,151 $(694,827) $1,200,257
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-5
56
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 96,225 $ 87,167 $ 64,789
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 44,789 29,577 22,667
Non Cash Charges 3,071 2,946 2,989
Joint Venture Adjustments 1,584 2,096 (720)
Gain on Sale of Real Estate Properties (10,303) (14,053) (2,047)
Changes in:
Operating Assets (5,866) (806) (2,457)
Operating Liabilities (5,383) 5,384 2,323
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 124,117 112,311 87,544
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (160,681) (411,722) (200,032)
Acquisition of American Health Properties, Net Cash Expended (80,071) -- --
Proceeds from Sale of Real Estate Properties 46,098 21,538 8,624
Other Investments and Loans (35,806) (27,340) (13,830)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (230,460) (417,524) (205,238)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable 127,500 21,100 66,900
Repayment of Senior Notes (15,000) (27,500) (12,500)
Issuance of Senior Notes 62,000 251,469 19,876
Cash Proceeds from Issuing Preferred Stock -- 130,037 57,810
Cash Proceeds from Issuing Common Stock 31,969 23,871 53,667
Increase in Minority Interests 17,182 201 5,500
Periodic Payments on Mortgages (2,889) (1,107) (1,030)
Repurchase of Common and Preferred Stock (2,333) -- --
Dividends Paid (106,177) (89,210) (71,926)
Other Financing Activities (2,717) (3,228) 670
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 109,535 305,633 118,967
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,192 420 1,273
Cash and Cash Equivalents, Beginning of Period 4,504 4,084 2,811
--------- --------- ---------
Cash and Cash Equivalents, End of Period $ 7,696 $ 4,504 $ 4,084
========= ========= =========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 55,127 $ 36,292 $ 29,065
========= ========= =========
Capitalized Interest $ 1,223 $ 1,800 $ 1,469
========= ========= =========
Mortgages Assumed on Acquired Properties exclusive of AHE
Merger $ 42,896 $ 12,715 $ --
========= ========= =========
Equity Issued in American Health Properties Merger $ 585,154 $ -- $ --
========= ========= =========
Fair Value of American Health Properties Assets Acquired $ 967,181 $ -- $ --
========= ========= =========
Liabilities Assumed in American Health Properties
Acquisition $ 298,911 $ -- $ --
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
F-6
57
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 healthcare related properties
located throughout the United States. As of December 31, 1999, HCPI owns or has
investments in 428 properties located in 43 states. The properties include 176
long-term care facilities, 93 congregate care and assisted living centers, 82
medical office buildings (MOBs), 46 physician group practice clinics, 22 acute
care hospitals, and nine freestanding rehabilitation hospitals. As of December
31, 1999, HCPI provided mortgage loans on or leased these properties to 98
healthcare operators and to over 650 tenants in the multi-tenant buildings.
(2) SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE:
HCPI records the acquisition of real estate at cost and uses the
straight-line method of depreciation for buildings and improvements over
estimated useful lives ranging up to 45 years. HCPI periodically evaluates its
investments in real estate for potential impairment by comparing its investment
to the expected future cash flows to be generated from the properties. If such
impairments were to occur, HCPI would write down its investment in the property
to estimated market value. HCPI has provided accelerated depreciation on certain
of its investments based primarily on an estimation of net realizable value of
such investments at the end of the primary lease terms.
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:
HCPI consolidates the accounts of its 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 JOINT VENTURES:
HCPI has investments in certain general partnerships and joint ventures
in which HCPI 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, HCPI accounts for these
investments using the equity method of accounting. The accounting policies of
these joint ventures are substantially consistent with those of HCPI.
F-7
58
CASH AND CASH EQUIVALENTS:
Investments purchased with original maturities of three months or less
are considered to be cash and cash equivalents.
FEDERAL INCOME TAXES:
HCPI has 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, HCPI is not taxed on
its income that is distributed to stockholders. At December 31, 1999, the tax
bases of HCPI's net assets and liabilities are less than the reported amounts by
approximately $187,000,000. This net difference includes a favorable tax
depreciation adjustment attributable to an application for change in accounting
method, which is subject to review by the Internal Revenue Service.
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.
RENTAL 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 increases based on inflation indices
or other factors. In addition, HCPI may receive payments from its lessees upon
transferring or assignment of existing leases; such amounts received are
deferred and amortized over the remaining term of the leases.
FACILITY OPERATIONS:
Since November 1997, HCPI has purchased ownership interests in 70 MOBs
which are operated by independent property management companies on behalf of
HCPI. These facilities are leased to multiple tenants under gross, modified
gross or triple-net leases. In addition, HCPI purchased several physician group
practice clinics which are leased on a modified gross basis or triple net to
several tenants. Operating income other than basic rental income attributable to
these properties is recorded under Tenant Reimbursements in HCPI's financial
statements. Expenses related to the operation of these facilities are recorded
as Facility Operating Expenses.
RECLASSIFICATION:
Reclassifications have been made for comparative financial statement
presentation.
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.
F-8
59
(3) BUSINESS COMBINATION
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI (the Merger) in a stock-for-stock transaction, approved by the
stockholders of both companies, with HCPI being the surviving corporation. AHE
was a real estate investment trust specializing in healthcare facilities with a
portfolio of 72 healthcare properties in 22 states. Under the terms of the
Merger agreement, each share of AHE common stock was converted into the right to
receive 0.78 share of HCPI's common stock and AHE 8.60% cumulative redeemable
preferred stock, series B was converted into HCPI's 8.60% series C cumulative
redeemable preferred stock. The Merger resulted in the issuance of approximately
19,430,115 shares of HCPI's common stock and HCPI's series C cumulative
redeemable preferred stock, in addition, HCPI assumed $343,000,000 of AHE's debt
upon consummation of the Merger.
The transaction was treated as a purchase for financial accounting
purposes and, accordingly, the operating results of AHE have been included in
HCPI's consolidated financial statements effective as of November 4, 1999. The
following summarizes the final purchase price (in thousands):
Preferred Stock (4,000,000 Series C Cumulative Redeemable
Preferred Depositary Shares) $ 88,160
Common Stock (19,430,115 Shares) 496,994
--------
Equity Issued 585,154
Fair Value of American Health Properties Liabilities Assumed 298,911
Bank Credit Facility Balance at Merger Date 71,000
Cash Paid for Merger Related Expenditures 12,116
--------
Total Purchase Price $967,181
========
The following summarizes the allocation of the purchase price to the net
assets acquired (in thousands):
Cash and Cash equivalents $ 3,045
Real Estate Properties 951,376
Loans Receivable 4,855
Other Assets 7,905
-----
Assets Acquired $967,181
========
PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma consolidated statements of income
information present the results of HCPI's operations for the years ended
December 31, 1999 and 1998 as though the acquisition of AHE had occurred as of
the beginning of each respective period:
F-9
60
December 31,
----------------------------
1999 1998
----------- -----------
(Dollar amounts in 000s except per share amounts)
Total Revenues $319,818 $274,271
Net Income Applicable to Common Shares $169,546 $120,765
Earnings Per Share
Basic $3.32 $2.40
Diluted $3.26 $2.40
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 and
$14,053,000 or $0.28 and $0.26 per share in 1998 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.
(4) REAL ESTATE INVESTMENTS
HCPI was organized to make long-term, equity-oriented investments
principally in operating, income-producing healthcare related properties. HCPI's
equity investments have generally been structured as land and building
leasebacks.
Under the terms of the lease agreements, HCPI earns fixed monthly base
rental income and may earn periodic additional rental income. At December 31,
1999, minimum future rental income from 349 non-cancelable operating leases is
expected to be approximately $242,559,000 in 2000, $228,770,000 in 2001,
$213,095,000 in 2002, $204,168,000 in 2003, $151,628,000 in 2004 and
$780,386,000 in the aggregate thereafter.
During 1999, HCPI purchased and leased or agreed to construct 105
facilities for an aggregate investment of approximately $1,141,000,000. These
facilities include 14 assisted living facilities, 47 MOBs, seven physician group
practice clinics, 20 long-term care facilities, three rehabilitation hospitals
and 14 acute care hospitals. Twenty-three different lessees operate 70 of these
facilities and 35 of the MOBs are multi-tenant.
During 1998 and 1999, 23 MOBs were acquired through the acquisition of a
managing interest in two limited liability companies in which the non-managing
members own 730,913 non-managing member units as of December 31, 1999. These
units will be convertible into HCPI common stock on a one-for-one basis.
HCPI sold six facilities and its 50% ownership interests in four
congregate care facilities during 1999, resulting in a gain of $10,303,000.
F-10
61
The following tabulation lists HCPI's total Real Estate Investments at
December 31, 1999 (dollar amounts in thousands):
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- -----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE FACILITIES
California 13 $ 5,609 $ 25,405 $ 31,014 $ 14,076 $ --
Colorado 5 1,891 20,566 22,457 5,524 --
Florida 9 6,680 26,865 33,545 8,179 --
Indiana 26 5,145 99,440 104,585 13,907 --
Maryland 3 1,287 21,686 22,973 7,493 --
North Carolina 8 1,712 28,376 30,088 7,292 5,793
Ohio 12 2,365 53,197 55,562 10,533 1,185
Oklahoma 5 825 14,674 15,499 2,863
Tennessee 10 1,072 38,062 39,134 12,528 --
Texas 9 1,119 15,272 16,391 4,654 --
Wisconsin 6 1,147 16,538 17,685 6,853 --
Other (19 States) 38 10,454 111,171 121,625 30,602 1,942
- -----------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 144 39,306 471,252 510,558 124,504 8,920
- -----------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
California 4 36,836 185,039 221,875 8,658 --
Florida 1 4,200 57,800 62,000 258 --
Georgia 1 6,900 54,100 61,000 241 --
North Carolina 1 2,600 69,400 72,000 310 --
Utah 1 2,900 46,300 49,200 207 --
Other (6 States) 10 8,427 110,584 119,011 10,246 --
----------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 18 61,863 523,223 585,086 19,920 --
- -----------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 11 7,023 52,713 59,736 4,588 --
Florida 9 4,092 30,862 34,954 3,421 --
Louisiana 3 1,280 16,095 17,375 951 --
Maryland 2 1,776 12,917 14,693 710 --
New Jersey 4 1,619 19,734 21,353 1,485 --
New Mexico 2 1,077 16,418 17,495 1,813 --
Pennsylvania 3 515 17,160 17,675 2,362 --
South Carolina 9 1,592 42,835 44,427 3,679 --
Texas 21 6,009 84,760 90,769 6,467 --
Other (19 States) 21 8,470 97,898 106,368 10,436 575
- -----------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 85 33,453 391,392 424,845 35,912 575
- -----------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Arizona 1 1,565 7,050 8,615 1,748 --
Arkansas 2 1,409 19,100 20,509 2,164 --
Colorado 1 690 8,346 9,036 1,783 --
Florida 1 2,000 16,769 18,769 11,273 --
Kansas 2 3,816 23,220 27,036 2,757 --
Texas 1 1,990 13,123 15,113 4,758 --
West Virginia 1 -- 13,500 13,500 60 --
- -----------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 9 $ 11,470 $101,108 $112,578 $ 24,543 $ --
- -----------------------------------------------------------------------------------------------------------------------------------
F-11
62
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- ---------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
Arizona 6 $ 1,680 $ 33,509 $ 35,189 $ 398 $ 6,922
California 11 26,041 90,362 116,403 5,459 9,339
Florida 6 800 25,051 25,851 112 3,976
Indiana 14 14,308 59,272 73,580 1,707 4,757
Massachusetts 1 1,500 23,513 25,013 105 15,009
Minnesota 2 278 22,602 22,880 1,104 4,905
New Jersey 2 3,675 25,621 29,296 114 --
New York 1 2,200 18,011 20,211 642 --
Texas 12 10,266 104,219 114,485 6,355 17,031
Utah 15 3,093 75,623 78,716 2,260 19,170
Other (9 States) 9 4,375 67,339 71,714 880 10,367
- ---------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 79 68,216 545,122 613,338 19,136 91,476
- ---------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS
California 2 8,070 37,673 45,743 2,131 --
Florida 11 8,950 18,091 27,041 838 --
Georgia 3 2,100 7,327 9,427 352 --
North Carolina 3 3,150 4,876 8,026 229 --
Oklahoma 4 1,450 3,930 5,380 178 --
Tennessee 4 2,695 13,479 16,174 1,132 1,279
Texas 9 5,520 22,987 28,507 977 --
Wisconsin 7 5,225 21,792 27,017 415 --
Other (3 States) 3 2,250 5,652 7,902 242 --
- ---------------------------------------------------------------------------------------------------------------------------------
Total Physician Group Practice Clinics 46 39,410 135,807 175,217 6,494 1,279
- ---------------------------------------------------------------------------------------------------------------------------------
Vacant Land Parcels -- 1,875 -- 1,875 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 381 255,593 2,167,904 2,423,497 230,509 102,250
- ---------------------------------------------------------------------------------------------------------------------------------
Partnership Investments,
Including All Partners' Assets 18 -- -- 44,014 -- --
Financing Leases (See Note 7) 2 -- -- 8,061 -- --
Mortgage Loans Receivable (See Note 7) 27 -- -- 161,648 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 428 $ 255,593 $2,167,904 $2,637,220 $ 230,509 $ 102,250
- ---------------------------------------------------------------------------------------------------------------------------------
F-12
63
(5) OPERATORS
MAJOR OPERATORS:
Listed below are HCPI's major operators which represent five percent or
more of HCPI's revenue, the investment in properties operated by those
healthcare providers, and the percentage of total annualized revenue from these
operators for the years ended December 31, 1999, 1998 and 1997. All of these
operators 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, 1999 1999 1998 1997
----------------------- -------- -------- -------
(Amounts in thousands)
Tenet Healthcare Corporation (Tenet) $ 452,224 18% 4% 6%
Emeritus Corporation (Emeritus) 134,195 5 6 8
HealthSouth Corporation (HealthSouth) 112,578 5 7 9
Columbia/HCA Healthcare Corp. 107,712 5 5 6
Vencor, Inc. (Vencor) 98,164 4 7 10
Beverly Enterprises, Inc. (Beverly) 88,614 4 6 6
Centennial Healthcare Corp. 50,948 3 5 3
------------- -------- -------- -------
$ 1,044,435 44% 40% 48%
============= ======== ======== =======
Certain of these 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 2%, 4% and 7% in 1999, 1998 and 1997, respectively.
VENCOR:
On May 1, 1998, Vencor completed a spin-off transaction. As a result, it
became two publicly held entities -- Ventas, Inc., a real estate company which
intends to qualify as a REIT, and Vencor, a healthcare company which at December
31, 1999 leased 36 of HCPI's properties of which 11 are subleased to other
operators. On September 13, 1999, Vencor, Inc. filed for bankruptcy protection.
HCPI has recourse to Ventas, Inc. and Tenet Healthcare Corporation (see
discussion under Tenet below) for most of the rents payable by Vencor under its
leases. All rents due to HCPI subsequent to the bankruptcy filing have been
received.
Vencor has an obligation to pay rents due to HCPI prior to filing for
bankruptcy protection. However, Vencor has the right to assume or reject its
leases with us. If Vencor assumes a lease it must do so pursuant to the original
contract terms, must cure all pre-petition and post-petition defaults under the
lease and provide adequate assurances of future performance. If Vencor rejects a
lease, it may stop paying rent and we may lease the property to another
operator. As of February 29, 2000, Vencor had made no proposals to reject any of
their current leases with HCPI. HCPI has received $735,000 of $1,008,000 in
pre-bankruptcy receivables and considers the remaining
F-13
64
balance to be fully collectible. However, we cannot assure you that as a result
of Vencor's bankruptcy filing we would be able to recover all amounts due under
our leases with Vencor, that we would be able to promptly recover the premises
or lease the property to another lessee or that the rent we would receive from
another lessee would equal amounts due under the Vencor leases. We have recourse
to Tenet for rents under all but five of the Vencor leases, and on some leases
we are receiving direct payment by sublessees of Vencor, which may reduce the
risk to us of not being able to collect on those leases. However, we cannot
assure you that the bankruptcy filing of Vencor would not have a material
adverse effect on our Net Income, Funds From Operations or the market value of
our common stock.
Based upon public reports, for the three months ended September 30,
1999, Vencor had revenue of approximately $682 million and a net loss of
approximately $42 million. For the nine months ended September 30, 1999, Vencor
had revenue of approximately $2.1 billion and a net loss (including a loss of $9
million for a change in accounting for start-up costs) of approximately $107
million. Based upon public reports, Ventas' revenue, income from operations and
net income for the three months ended September 30, 1999 were approximately $59
million, $40 million and $13 million, respectively. As of September 30, 1999,
Ventas had total assets of $1.1 billion and a stockholders' equity of $19
million.
Tenet is one of the nation's largest healthcare services companies,
providing a broad range of services through the ownership and management of
healthcare facilities. Tenet has historically guaranteed Vencor's leases. During
1997 we reached an agreement with Tenet whereby Tenet agreed to forbear or waive
some renewal and purchase options and related rights of first refusal on
facilities leased to Vencor. We only have recourse to Tenet for the rent
payments on the remaining 31 guaranteed leases which expire during the next two
years.
During 1999, as part of the AHE acquisition, we purchased the real
estate interests of six Tenet hospitals with an investment value of
$404,000,000.
OTHER TROUBLED LONG-TERM CARE PROVIDERS:
The financial condition of many long-term care providers has eroded
during the past year, in part due to the implementation of the Medicare
Prospective Payment System. As a result, certain of HCPI's long-term care
provider lessees have filed for Chapter XI bankruptcy protection during the past
six months. Lessees that have filed for bankruptcy and their respective
percentage of annualized revenue are Sun Healthcare 1.0%, Integrated Health
Services 1.0%, Mariner Post Acute Network 0.4%, Lenox Healthcare 0.4% and Texas
Health Enterprises 0.2%.
The lessees in bankruptcy discussed in the previous paragraph were
current on all rents as of December 31, 1999 with the exception of certain
pre-petition receivables in the amount of $231,000 on the lessees noted which we
believe will generally be payable once the plans of reorganization are
confirmed. However, we can not assure you that the bankruptcies of those Lessees
would not have a material adverse effect on our Net Income, Funds From
Operations or the market value of our common stock.
F-14
65
OTHER OPERATORS:
HCPI has $2,350,000 of equity interests, including warrants at nominal
values, in six private operators of long term care and assisted living
facilities and has invested $23,803,000 in additional amounts in the form of
mortgages and unsecured loans, $56,292,000 in operating facilities and property
construction and unfunded investing or lending commitments of $8,556,000 to the
same operators as of December 31, 1999.
(6) INVESTMENTS IN JOINT VENTURES
HCPI has an 80% interest in nine joint ventures that lease 14 long-term
care facilities and a 45% interest in four joint ventures that each operate or
are currently constructing an assisted living facility.
Combined summarized financial information of the joint ventures follows:
December 31,
------------------------------
1999 1998
------------ ------------
(Amounts in thousands)
Real Estate Investments, Net $ 51,125 $ 66,542
Other Assets 4,612 6,037
------------ ------------
Total Assets $ 55,737 $ 72,579
============ ============
Notes Payable to Others $ 8,080 $ 16,858
Accounts Payable 629 1,313
Other Partners' Deficit (614) (70)
Investments and Advances from HCPI, Net 47,642 54,478
------------ ------------
Total Liabilities and Partners' Capital $ 55,737 $ 72,579
============ ============
Rental and Interest Income $ 9,254 $ 9,287
============ ============
Net Income $ 354 $ 1,558
============ ============
Company's Equity in Joint Venture Operations $ 586 $ 1,099
============ ============
Distributions to HCPI $ 2,501 $ 2,016
============ ============
As of December 31, 1999, HCPI had guaranteed approximately $3.6 million
on notes payable obligations for these joint ventures.
(7) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
------------------------------
1999 1998
------------ ------------
(Amounts in thousands)
Mortgage Loans (See below) $161,648 $ 139,432
Financing Leases 8,061 7,850
Other Loans 23,448 7,081
------------ ------------
Total Loans Receivable $193,157 $154,363
============ ============
F-15
66
The following is a summary of Mortgage Loans Receivable at December 31,
1999:
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- -----------------------------------------------------------------------------------------------------------
(Amounts in thousands)
2001 2 Monthly payments from $112,500 to $32,000 $15,248
$337,500 including interest of 13.69%
secured by an acute care hospital.
2006 3 Monthly payments from $27,200 to $263,000 39,521 41,865
including interest from 8.99% to 11.00% on
an acute care hospital located in Texas and
retirement center located in North Carolina.
2007 1 Monthly payment of $181,110 interest only at 21,908 21,908
9.92%, secured by an acute care facility in
New Mexico.
2008 1 Monthly payment of $48,800 including 5,900 5,820
interest of 8.82% secured by an assisted living
facility in Nebraska.
2009 2 Monthly payments of $41,200 and 10,228 9,770
$63,700 including interest of 12.11%
and 11.56% on a long-term care facility and one
medical office building both located in California.
2010 1 Monthly payments of $333,000 including 34,760 33,394
interest of 10.70% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2010 2 Monthly payments of $56,000 and $113,200 18,397 17,890
including interest of 9.29% secured by two
long-term care facilities located in Colorado.
2002-2031 6 Monthly payments from $9,900 to $51,500 16,690 15,753
including interest rates from 9.50% to 11.5%
on various facilities in various states.
------ -------- --------
Totals 18 $179,404 $161,648
====== ======== ========
HCPI has certain financing leases that allow HCPI to "put" the
facilities to the lessees at lease termination for an amount greater than HCPI's
initial investment. These amounts are accreted to rental income over the lease
term.
At December 31, 1999, minimum future principal payments from
non-cancelable Mortgage Loans are expected to be approximately $4,633,000 in
2000, $14,495,000 in 2001, $2,672,000 in 2002, $2,025,000 in 2003, $2,210,000 in
2004 and $135,613,000 in the aggregate thereafter.
F-16
67
(8) OTHER ASSETS
The following is a summary of Other Assets:
December 31,
-----------------------------
1999 1998
----------- ------------
(Amounts in thousands)
Accounts Receivable $13,565 $ 1,765
Prepaid Expenses and Deferred Costs 11,026 7,267
Other Assets 3,316 3,116
------- -------
Total Other Assets $27,907 $12,148
======= =======
The December 31, 1999 accounts receivable included balances due from
Vencor and Long-Term Care Providers discussed in Note 5 and approximately $7
million associated with the AHE merger.
(9) NOTES PAYABLE
SENIOR NOTES PAYABLE:
The following is a summary of Senior Notes outstanding at December 31,
1999 and 1998:
Year
Issued 1999 1998 Interest Rate Maturity
------ ---- ---- ------------- --------
(Amounts in thousands)
1989 $ -- $ 10,000 10.56% 1999
1993 10,000 10,000 8.00% 2003
1993 1,000 1,000 6.70% 2003
1994 10,000 15,000 8.82-9.10% 2001-2004
1995 58,000 58,000 7.03-8.87% 2000-2005
1995 20,000 20,000 6.62-9.00% 2010-2015
1996 115,000 115,000 6.50% 2006
1997 20,000 20,000 7.30-7.62% 2007
1997 100,000 -- 7.05% 2002
1997 120,000 -- 8.16% 2007
1998 200,000 200,000 6.77% 2005
1998 48,000 48,000 6.66-7.88% 2001-2006
1999 62,000 -- 6.92-7.48% 2004
------------- -------------
764,000 497,000
MOPPRS Option,
Net 4,777 5,086
Less: Unamortized
Original Issue
Discount (7,020) (2,924)
----------- -------------
$ 761,757 $ 499,162
=========== =============
On November 4, 1999, in connection with the merger with AHE, HCPI
assumed two series of outstanding senior notes of AHE consisting of $100,000,000
principal amount of 7.05% senior notes due in 2002 and $120,000,000 principal
amount of 7.50% senior notes (8.16% effective rate) due in 2007.
F-17
68
During June 1998, HCPI issued $200,000,000 of senior unsecured debt in
the form of 6.875% MandatOry Par Put Remarketed Securities (MOPPRS) due June 8,
2015 which are subject to mandatory tender on June 8, 2005. HCPI received total
proceeds of approximately $203,000,000 including the present value of the put
option at June 8, 2005 associated with the debt instrument. The option is being
amortized to interest expense over 17 years. The weighted average cost of the
debt including the amortization of the option and offering expenses is 6.77%.
The weighted average interest rate on the Senior Notes was 7.2% for 1999
and 1998 and the weighted average balance of the Senior Note borrowings was
approximately $558,333,000 and $387,733,000 during 1999 and 1998, 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 $10,000,000
in 2000, $13,000,000 in 2001, $117,000,000 in 2002, $31,000,000 in 2003,
$67,000,000 in 2004 and $526,000,000 in the aggregate thereafter.
CONVERTIBLE SUBORDINATED NOTES PAYABLE:
On November 8, 1993, HCPI issued $100,000,000, 6% Convertible
Subordinated Notes due November 8, 2000. These Notes are prepayable without
penalty after November 8, 1998. The Notes are convertible into shares of common
stock of HCPI at a conversion price of $37.806. A total of 2,645,083 shares of
common stock have been reserved for such issuance. Subsequent to December 31,
1999, HCPI has repurchased $11,877,000 of these notes. HCPI expects to retire
the remainder of the issue through the use of proceeds from asset sales,
internally generated cash flow, new debt financings, the use of its bank lines
of credit, or a combination of the foregoing options.
MORTGAGE NOTES PAYABLE:
At December 31, 1999, HCPI had a total of $102,250,000 in Mortgage Notes
Payable secured by 21 healthcare facilities with a net book value of
approximately $200,279,000. Interest rates on the Mortgage Notes ranged from
5.75% to 10.63%. Required principal payments on the Mortgage Notes are expected
to be $3,790,000 in 2000, $4,117,000 in 2001, $4,335,000 in 2002, $11,677,000 in
2003, $12,447,000 in 2004 and $65,884,000 in the aggregate thereafter.
BANK NOTES:
HCPI has two unsecured revolving credit lines aggregating $310,000,000
with certain banks. The credit lines for $103,000,000 and $207,000,000 expire on
November 2, 2000 and November 3, 2003, respectively, and bear a total 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 $103,000,000 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 $310,000,000 of credit lines.
Interest rates incurred by HCPI ranged from 4.94% to 8.25% and 4.85% to 9.75% on
maximum short-term bank borrowings of $215,500,000 and $190,000,000 for 1999 and
1998, respectively. The weighted average interest rates were approximately 5.79%
and 5.90% on weighted average short-term bank borrowings of $113,415,000 and
$68,193,000 for the same respective periods.
F-18
69
(10) PREFERRED STOCK
On November 4, 1999, in connection with the merger with AHE, HCPI issued
4,000,000 depositary shares of 8.60% series C cumulative redeemable preferred
stock with a recorded value at the time of the merger of $88,160,000 and a
liquidation preference of $100 million. The series C preferred stock is not
redeemable prior to October 27, 2002, after which date the preferred stock may
be redeemable at par ($25.00 per share or $100,000,000 in the aggregate) any
time for cash at HCPI's option.
On September 4, 1998, HCPI issued 5,385,000 shares of 8.70% series B
cumulative redeemable preferred stock which generated net proceeds of
$130,000,000 (net of underwriters' discount and other offering expenses). The
series B preferred stock is not redeemable prior to September 30, 2003, after
which date the preferred stock may be redeemable at par ($25 per share or
$134,625,000 in the aggregate) any time for cash at HCPI's option.
On September 26, 1997, HCPI issued 2,400,000 shares of 7.875% series A
cumulative redeemable preferred stock which generated net proceeds of
$57,810,000 (net of underwriters' discount and other offering expenses). The
series A preferred stock is not redeemable prior to September 30, 2002, after
which date the series A preferred stock may be redeemable at par ($25 per share
or $60,000,000 in the aggregate) any time for cash at the option of HCPI.
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.
(11) STOCK AND DEBT BUYBACK PROGRAM
In December 1999, HCPI's Board of Directors approved a $40,000,000 stock
and debt repurchase program whereby $20,000,000 of HCPI's common and preferred
stock and $20,000,000 of HCPI's convertible subordinated notes and senior debt
may be repurchased on the open market. Through February 2000, HCPI repurchased
63,400 shares of the preferred stock for $947,000, 300,400 shares of common
stock for $7,293,000, and $11,877,000 of convertible debt.
(12) EARNINGS PER COMMON SHARE
HCPI computes 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. 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. The convertible debt
was included only in 1998, when the effect on earnings per common share was
dilutive. The non-managing member units were included only in 1998 and 1997 when
the effect on earnings per common share was dilutive.
F-19
70
(Amounts in thousands except per share amounts)
FOR THE YEAR ENDED DECEMBER 31, 1999
Per Share
Income Shares Amount
--------------------------------------
BASIC EARNINGS PER COMMON SHARE:
Net Income Applicable to Common Shares $78,450 34,792 $ 2.25
==============
Dilutive Options (See Note 15) -- 69
------- ------
DILUTED EARNINGS PER COMMON SHARE:
Net Income Applicable to Common
Shares Plus Assumed Conversions $78,450 34,861 $ 2.25
==============
FOR THE YEAR ENDED DECEMBER 31, 1998
Per Share
Income Shares Amount
--------------------------------------
BASIC EARNINGS PER COMMON SHARE:
Net Income Applicable to Common Shares $78,635 30,747 $ 2.56
========
Dilutive Options (See Note 15) -- 155
Non-Managing Member Units (See Note 4) 308 117
Interest and Amortization applicable to
Convertible Debt (See Note 9) 6,397 2,645
------- -----
DILUTED EARNINGS PER COMMON SHARE:
Net Income Applicable to Common
Shares Plus Assumed Conversions $85,340 33,664 $ 2.54
========
FOR THE YEAR ENDED DECEMBER 31, 1997
Per Share
Income Shares Amount
--------------------------------------
BASIC EARNINGS PER COMMON SHARE:
Net Income Applicable to Common Shares $63,542 28,782 $ 2.21
========
Dilutive Options (See Note 15) -- 196
Non-Managing Member Units (See Note 4) 40 16
------- ------
DILUTED EARNINGS PER COMMON SHARE:
Net Income Applicable to Common
Shares Plus Assumed Conversions $63,582 28,994 $ 2.19
========
(13) FUNDS FROM OPERATIONS
HCPI believes 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.
F-20
71
HCPI 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, 1999, 1998 and 1997 (all amounts in thousands):
1999 1998 1997
--------- --------- ---------
Net Income Applicable to Common Shares $ 78,450 $ 78,635 $ 63,542
Real Estate Depreciation and Amortization 44,789 29,577 22,667
Joint Venture Adjustments 1,584 2,096 (720)
Gain on Sale of Real Estate Properties (10,303) (14,053) (2,047)
--------- --------- ---------
Funds From Operations $ 114,520 $ 96,255 $ 83,442
========= ========= =========
HCPI is required to report information about operations on the basis
that it uses 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.
(14) 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 Debt are based on the estimates of
management and on rates currently prevailing for comparable loans and
instruments of comparable maturities, and are as follows:
December 31, 1999 December 31, 1998
------------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- -------------- --------------
(Amounts in thousands)
Mortgage Loans Receivable $161,648 $160,477 $139,432 $148,000
Debt $964,007 $912,611 $621,045 $601,000
F-21
72
(15) STOCK INCENTIVE PLANS
Directors and officers and key employees of HCPI are eligible to
participate in HCPI's Directors' Stock Incentive Plan or HCPI's Amended Stock
Incentive Plan (Plans). 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 HCPI's Plans and the options issued in the
AHE merger at December 31, 1999, 1998 and 1997 and changes during the years then
ended is presented in the table and narrative below:
1999 1998 1997
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Incentive Plan (000's) Price (000's) Price (000's) Price
- --------------------------------- -------- --------- -------- --------- ------- ----------
Outstanding, beginning of year 1,309 $32 1,056 $30 896 $28
Granted 1,425 28 306 38 230 36
Exercised (5) 20 (40) 23 (70) 26
Forfeited -- -- (13) 35 -- --
-------- -------- -------
Outstanding, end of year 2,729 31 1,309 32 1,056 30
Exercisable at end of year 1,166 28 581 26 543 26
Weighted average fair value
of options granted during $0.73 $2.96 $4.49
the year
Incentive Stock Awards
- ---------------------------------
Issued 58 33 32
Canceled -- (1) (1)
The incentive stock awards (Awards) are granted at no cost to the
employees. The Awards generally vest and are amortized over five-year periods.
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,
1999.
Weighted
Average Options
Total Options Weighted Contractual Exercisable Weighted
Outstanding Exercise Average Life At December Average
(000's) Price Exercise Remaining 31, 1999 Exercise
Price (Years) (000's) Price
- ---------------- ---------- -------------- --------------- --------------- -------------
38 $12-$20 $18 1 38 $18
1,421 $22-$30 $27 5 725 $26
740 $30-$35 $32 4 303 $32
530 $35-$41 $38 6 100 $36
- ---------------- ---------------
2,729 1,166
================ ===============
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 from 4.61% to 6.54%; expected dividend
yields from 8.36% to 11.64% percent; and expected lives of 10 years; expected
volatility of .17% to .18%.
F-22
73
HCPI accounts for stock options under Accounting Principles Board
Opinion 25 (APB25), 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, HCPI's Net
Income and Basic Earnings Per Common Share on a proforma basis would have been
$0.01 lower for each of the years ended December 31, 1999, 1998 and 1997.
During the years ended December 31, 1999 and 1998, respectively, HCPI
made loans totaling $92,000 and $976,000 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 $1,729,000 and $1,637,000 were outstanding at December 31, 1999 and
1998, respectively.
(16) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. The Board of Directors declared a dividend of
$0.72 per share on January 19, 2000 paid on February 18, 2000 to stockholders of
record on February 3, 2000.
In order to qualify as a REIT, HCPI must generally, among other
requirements, distribute at least 95% (90% effective January 1, 2001) of its
taxable income to its stockholders. HCPI and other REITs generally distribute
100% of taxable income to avoid taxes on the remaining 5% (10% effective January
1, 2001) of taxable income.
Per share dividend payments made by HCPI to the stockholders were
characterized in the following manner for tax purposes:
1999 1998 1997
----------- ----------- -----------
Common Stock
--------------------------------------
Ordinary Income $2.0261 $2.4550 $2.3750
Capital Gains Income .2494 .1650 .0850
Return of Capital .5045 -- --
----------- ----------- -----------
Total Dividends Paid $2.7800 $2.6200 $2.4600
=========== =========== ===========
7-7/8% Preferred Stock Series A
--------------------------------------
Ordinary Income $1.7514 $1.8438 $0.5045
Capital Gains Income .2174 .1250 .0150
----------- ----------- -----------
Total Dividends Paid $1.9688 $1.9688 $0.5195
=========== =========== ===========
8.70% Preferred Stock Series B
--------------------------------------
Ordinary Income $1.9350 $0.6619 $ --
Capital Gains Income .2402 0.0450 --
----------- ----------- -----------
Total Dividends Paid $2.1752 $0.7069 $ --
=========== =========== ===========
8.60% Preferred Stock Series C
--------------------------------------
Ordinary Income $ .6376 $ -- $ --
Capital Gains Income .0791 -- --
----------- ----------- -----------
Total Dividends Paid $ .7167 $ -- $ --
=========== =========== ===========
Dividends on all series of preferred stock are paid on the last day of
each quarter.
F-23
74
(17) COMMITMENTS
HCPI has acquired real estate properties and has outstanding commitments
to fund development of facilities on those properties of approximately
$20,000,000, and is committed to acquire an additional $6,100,000 of existing
healthcare real estate.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
March 31 June 30 September 30 December 31
--------- ------------- --------------- --------------
1999 (Amounts in thousands, except per share data)
Revenue $ 49,621 $ 51,812 $ 52,217 $ 71,142
Net Income Applicable To
Common Shares $ 15,269 $ 15,566(1) $ 26,064(2) $ 21,551
Dividends Paid Per Common
Share $ .68 $ .69 $ .70 $ .71
Basic Earnings Per Common
Share $ .49 $ .49(1) $ .81(2) $ .49
Diluted Earnings Per Common
Share $ .49 $ .49(1) $ .80(2) $ .49
1998 (Amounts in thousands, except per share data)
Revenue $ 36,334 $ 37,948 $ 42,166 $ 45,101
Net Income Applicable To
Common Shares $ 16,297 $ 16,546(3) $ 22,836(4) $ 22,956(5)
Dividends Paid Per Common
Share $ .64 $ .65 $ .66 $ .67
Basic Earnings Per Common
Share $ .54 $ .54(3) $ .74(4) $ .74(5)
Diluted Earnings Per Common
Share $ .54 $ .53(3) $ .72(4) $ .73(5)
(1) Includes $152 or $0.004 per basic/diluted share for Gain on Sale of Real
Estate Properties.
(2) Includes $10,151 or $0.32/$0.29 per basic/diluted share for Gain on Sale
of Real Estate Properties.
(3) Includes $512 or $0.02 per basic/diluted share for Gain on Sale of Real
Estate Properties.
(4) Includes $6,230 or $0.20/$0.18 per basic/diluted share for Gain on Sale
of Real Estate Properties.
(5) Includes $7,311 or $0.24/$0.22 per basic/diluted share for Gain on Sale
of Real Estate Properties.
(19) NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in
F-24
75
the balance sheet as either an asset or liability measured at its fair value.
The Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Statement 133 is effective for fiscal years beginning after June 15, 2000,
although earlier implementation is allowed.
HCPI has not yet quantified the impact of adopting Statement 133 on the
financial statements and has not determined the timing of or method of the
adoption of Statement 133. However, the effect is not expected to be material.
F-25
76
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, 1999 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, 1999 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 has 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
77
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values)
November 30, May 31,
1999 1999
------- -------
ASSETS
Cash and cash equivalents $ 31 $ 29
Short-term investments in debt securities 123 130
Accounts and notes receivable, less
allowances for doubtful accounts
($293 at November 30 and $287 at May 31) 2,468 2,318
Inventories of supplies, at cost 218 221
Deferred income taxes 126 196
Other assets 552 1,068
------- -------
Total current assets 3,518 3,962
------- -------
Investments and other assets 546 569
Property, plant and equipment net 5,843 5,839
Intangible assets, at cost
Less accumulated amortization
($458 at November 30 and $409 at May 31) 3,368 3,401
------- -------
$13,275 $13,771
======= =======
ii
78
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
1999 1999
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 36 $ 45
Accounts payable 605 713
Accrued expenses 481 553
Other current liabilities 803 711
-------- --------
Total current liabilities 1,925 2,022
-------- --------
Long-term debt, net of current portion 5,780 6,391
Other long-term liabilities and minority interests 1,054 1,048
Deferred income taxes 427 440
Common stock, $.075 par value; authorized
700,000,000 shares; 315,588,851 shares issued
at November 30, 1999 and 314,778,323 shares
issued at May 31, 1999 24 24
Other shareholders' equity 4,135 3,916
Treasury stock, at cost, 3,754,708 shares at
November 30, 1999 and May 31, 1999 (70) (70)
-------- --------
Total shareholders' equity 4,089 3,870
-------- --------
$ 13,275 $ 13,771
======== ========
iii
79
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 1999 May 31, 1999
----------------- ------------
Net operating revenues $ 5,653 $ 10,880
-------- --------
Operating expenses 4,727 9,022
Depreciation and amortization 266 556
Interest expense, net of capitalized portion 244 485
Merger, facility consolidation and other
non-recurring charges -- 363
-------- --------
Total costs and expenses 5,237 10,426
-------- --------
Investment earnings 11 27
Minority interests in income of consolidated subsidiaries (10) (7)
Net gain on disposals of facilities
and long-term investments 68 --
Income from continuing operations before
income taxes 485 474
Taxes on income (222) (225)
-------- --------
Income from continuing operations 263 249
-------- --------
Cumulative effect of accounting change, net of taxes (19) --
-------- --------
Net income $ 244 $ 249
======== ========
iv
80
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 1999 May 31, 1999
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 325 $ 582
------- -------
(Includes changes in all operating assets and liabilities)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (264) (592)
Purchase of new business, net of cash acquired (38) (646)
Proceeds from sales of facilities, investments and
other assets 643 72
Other items (34) 19
------- -------
Net cash used in investing activities 307 (1,147)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (1,430) (5,085)
Proceeds from other borrowings 802 5,634
Proceeds from sales of common stock -- 23
Proceeds from stock options exercised -- 13
Other items (2) (14)
------- -------
Net cash provided by financing activities (630) 571
------- -------
Net decrease in cash and cash equivalents 2 6
Cash and cash equivalents at beginning of year 29 23
------- -------
Cash and cash equivalents at end of year $ 31 $ 29
------- -------
v
81
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.17 Second Amendment to Second Amended and Restated Directors Stock
Incentive Plan, effective as of January 4, 2000.
10.19 Fourth Amendment to Second Amended and Restated Director Deferred
Compensation Plan, effective as of January 4, 2000.
21.1 List of Subsidiaries
23.1 Consent of Independent Public Accountants
27.1 Financial Data Schedule