1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996 ----------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------ ------------------------ Health Care REIT, Inc - ----------------------------------------------------------------------------- (Exact name of registrantUas specified in its charter) <TABLE> <S> <C> Delaware 34-1096634 - ---------------------------------- ---------------------------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One SeaGate, Suite 1500, Toledo, Ohio 43604 - -------------------------------------- -------------------------- (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code) (419) 247-2800 ------------------ ------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) </TABLE> 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 . ------ ------ APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes . No . ----- ----- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class: Shares of Common Stock, $1.00 par value Outstanding 12,082,519 shares
2 HEALTH CARE REIT, INC. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheet - March 31, 1996 and December 31, 1995 _ Consolidated Statements of Income - Three months ended March 31, 1996 and 1995 _ Consolidated Statements of Cash Flows - Three months ended March 31, 1996 and 1995 _ Consolidated Statements of Shareholders' Equity - Three months ended March 31, 1996 and 1995 _ Notes to Consolidated Financial Statements _ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations _ Part II. OTHER INFORMATION Item 5. Other Information __ Item 6. Exhibits and Reports on Form 8-K __ SIGNATURES __ -2-
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS HEALTH CARE REIT, INC. AND SUBSIDIARY <TABLE> <CAPTION> March 31 December 31 1996 1995 (Unaudited) (Note) ------------ ----------- <S> <C> <C> ASSETS Real Estate Related Investments: Loans receivable: Mortgage loans $283,033,241 $267,483,683 Construction and other short-term loans 26,247,410 17,735,699 Working capital loans to related parties 5,852,343 6,779,340 ------------ ------------ 315,132,994 291,998,722 Investment in operating-lease properties 74,218,594 58,628,509 Investment in direct financing leases 10,913,197 11,246,492 ------------ ------------ 400,264,785 361,873,723 Less allowance for losses 10,100,000 9,950,000 ------------ ------------ NET REAL ESTATE RELATED INVESTMENTS 390,164,785 351,923,723 Other Assets: Deferred loan expenses 1,573,079 1,747,537 Investment securities available for sale 1,569,836 845,297 Cash and cash equivalents 997,785 860,350 Receivables and other assets 3,107,216 2,715,146 ------------ ------------ 7,247,916 6,168,330 ------------ ------------ $397,412,701 $358,092,053 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit arrangements $142,600,000 $106,700,000 Other long-term obligations 56,010,382 56,059,639 Accrued expenses and other liabilities 10,109,361 7,734,618 ------------ ------------ TOTAL LIABILITIES 208,719,743 170,494,257 Shareholders' Equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - none Common Stock, $1.00 par value: Authorized - 40,000,000 shares Issued and outstanding - 12,082,519 in 1996 and 12,034,196 in 1995 12,082,519 12,034,196 Capital in excess of par value 169,704,207 168,800,194 Undistributed net income 5,336,396 5,918,109 Unrealized gains on investment securities available for sale 1,569,836 845,297 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 188,692,958 187,597,796 ------------ ------------ $397,412,701 $358,092,053 ============ ============ </TABLE> See notes to consolidated financial statements Note: The balance sheet at December 31, 1995 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. -3-
4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARY <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 ----------------------------------------- <S> <C> <C> Gross Income: Interest and other income $ 8,142,240 $ 7,526,250 Operating leases: Rents 1,960,513 1,541,609 Direct financing leases: Lease income 367,582 382,164 Loan and commitment fees 420,046 174,970 ----------- ----------- 10,890,381 9,624,993 Expenses: Interest: Senior notes and other long- term obligations 1,214,588 1,455,976 Line of credit arrangements 2,296,343 1,668,373 Loan expense 187,323 185,689 Management fees 645,658 Provision for depreciation 474,928 389,738 Provision for losses 150,000 Other operating expenses 890,091 414,594 ----------- ----------- 5,213,273 4,760,028 ----------- ----------- NET INCOME $ 5,677,108 $ 4,864,965 =========== =========== Average number of shares outstanding 12,052,353 11,619,386 Net income per share $ .47 $ .42 Dividends per share $ .52 $ .515 </TABLE> See notes to consolidated financial statements -4-
5 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARY <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 ----------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 5,677,108 $ 4,864,965 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of loan and organization expenses 187,862 186,228 Provision for losses 150,000 Provision for depreciation 470,010 389,738 Loan and commitment fees earned less than cash received 957,199 242,086 Direct financing lease income less than cash received 53,295 57,827 Interest income in excess of cash received (132,633) (45,863) Increase in accrued expenses and other -------- ------- liabilities 1,417,544 1,495,218 Increase in other receivables and prepaid items (397,527) (22,741) ------------ ------------ NET CASH PROVIDED FROM OPERATING ACTIVITIES 8,382,858 7,167,458 INVESTING ACTIVITIES Increase in investments (532,000) Investment in loans receivable (32,375,639) (10,063,758) Investment in operating-lease properties (8,380,095) Principal collected on loans 1,974,000 2,907,609 Other 4,919 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (38,776,815) (7,688,149) FINANCING ACTIVITIES Long-term borrowings under line of credit arrangements 74,600,000 27,700,000 Principal payments on long-term borrowings under line of credit arrangements (38,700,000) (22,300,000) Net proceeds from the issuance of shares 952,336 1,159,916 Principal payments on other long-term obligations (49,257) (194,042) Increase in deferred loan expense (12,865) (161,858) Cash distributions to shareholders (6,258,822) (5,971,488) ------------ ------------ NET CASH PROVIDED FROM FINANCING ACTIVITIES 30,531,392 232,528 ------------ ------------ Increase (decrease) in cash and cash equivalents 137,435 (288,163) Cash and cash equivalents at beginning of period 860,350 935,449 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 997,785 $ 647,286 ============ ============ Supplemental Cash Flow Information -- Interest Paid $ 1,957,214 $ 1,680,853 ============ ============ </TABLE> See notes to consolidated financial statements -5-
6 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARY <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 ---------------------------------- <S> <C> <C> Balances at beginning of period $187,597,796 $189,179,775 Net income 5,677,108 4,864,965 Proceeds from issuance of shares under the dividend reinvestment plan - 33,323 in 1996 and 54,610 in 1995 690,586 1,159,916 Proceeds from issuance of shares under the employee stock incentive plan - 15,000 in 1996 261,750 Unrealized gains on investment securities available for sale 724,540 Cash distributions to shareholders (6,258,822) (5,971,488) ------------ ------------ Balances at end of period $188,692,958 $189,233,168 ============ ============ </TABLE> See notes to consolidated financial statements -6-
7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HEALTH CARE REIT, INC. AND SUBSIDIARY NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the three months ended March 31, 1996 are not necessarily an indication of the results that may be expected for the year ended December 31, 1996. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1995. Net income per share has been computed by dividing net income by the average number of shares outstanding. NOTE B - INVESTMENTS Investment securities available for sale are stated at fair value with unrealized gains and losses reported in a separate component of shareholders' equity. At March 31, 1996, available-for-sale securities are the common stock of a corporation, which were obtained by the Company at no cost. NOTE C - CONTINGENCIES As disclosed in the financial statements for the year ended December 31, 1995, the Company was contingently liable for certain obligations amounting to approximately $19,530,000. No significant change in these contingencies has occurred as of March 31, 1996. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES In the first quarter of 1996, the Company made $16,275,000 of new mortgage loans, $7,200,000 of new investments in operating leases and continued to finance 25 construction loans, which construction advances totalled $15,911,710. The Company received $926,997 of working capital -7-
8 loan repayments. The above-mentioned investment activity contributed to increases in total loans receivable and investments in operating leases of $23,134,000 and $15,590,000, respectively, in the first quarter of 1996. With respect to the above-mentioned construction loans, five of the loans completed the construction phase of the Company's investment process and were converted to investments in operating leases, with an aggregate investment of $7,400,000. The Company's working capital loans, all to related parties, are expected to slowly decline as the underlying projects continue to improve their financial performance and thereby pay down these loans. Since December 31, 1995, borrowings under line of credit arrangements increased $35,900,000 due to the investment activity discussed above. As of March 31, 1996, the Company had approximately $211,116,000 in unfunded commitments and total available funding sources of approximately $42,400,000. The Company believes that funds provided from operating activities, together with funds from new equity and debt issuances, present credit lines, scheduled loan repayments and equity issuances under Company stock plans, will be sufficient to meet current operating requirements and existing commitments. During the first quarter of 1996, the Company received approximately $691,000 from the sale of its shares under the dividend reinvestment plan. RESULTS OF OPERATIONS Gross income for the first quarter of 1996 was $10,890,000 or 13.15% more than the first quarter of 1995. Interest income on loans receivable and operating lease rents increased while direct financing lease income declined. The increase in interest income on loans receivable and operating lease rents is attributable to the growth in the loan and operating lease portfolios, two long term trends which the Company anticipates will continue. The decrease in direct financing lease income is a reflection of another long term trend which should also continue due to the decreased market acceptance of direct financing leases. In the first quarters of 1996 and 1995, the Company did not receive income from gains on exercise of options. Future gains on exercise of options are anticipated to be modest, since the Company has only five remaining direct financing lease investments which total approximately $10,913,000. Net income totalled $5,677,000 in the first quarter of 1996 versus $4,865,000 for the comparable period in 1995. The increase in net income was reflected in the $.47 per share earned in the first quarter of 1996 versus $.42 per share earned in the first quarter of 1995. Contributing factors were improved earnings on assets, a reduction to the Company's average cost of borrowing and increased investment activity (as discussed above). -8-
9 Average earnings on assets increased 26 basis points in the first quarter of 1996 versus the first quarter of 1995. The increase in average earnings on assets was a reflection of the increased investment activity during the last nine months of 1995 and the first quarter of 1996. Interest on loans and rents from operating leases increased 7.91% and 27.17%, respectively, during the first three months of 1996 as compared to the comparable period in 1995. Loan and commitment fees earned during the first quarter of 1996 increased 140.07% as compared to the first quarter of 1995. Net income was affected by the average quarter end, debt-to-equity ratio of .98 to 1.00 in 1996 versus .68 to 1.00 in the first quarter of 1995. The increase is due to additional borrowings on the lines of credit, which have been utilized to fulfill the Company's investment commitments. At March 31, 1996, outstanding balances under the lines of credit totalled $142,600,000 as compared to $76,300,000 at March 31, 1995. The increase in debt had the effect of increasing the Company's interest related expenses. During the first three months of 1996, the Company experienced a 1.58% decrease in its average cost of borrowing, as compared to the comparable period in 1995. This was primarily due to a general decline in interest rates, and the Company's increased borrowings on its lines of credit, which had the effect of reducing the average cost of borrowing, as a percentage of outstanding debt. The Company's operating expenses decreased 16.05% in the first quarter of 1996 versus the first quarter of 1995. The 1995 operating expenses included management fees. The reduction in operating expenses was primarily due to cost savings realized as a result of the merger of the Company's advisor into the Company and the achievement of self-administered status. In addition, net income was affected by the Company's decision to increase its unallocated allowance for losses by $150,000 during the first quarter of 1996. Under the Company's By-Laws, stockholders must be notified when total operating expenses (for the twelve-month period then ended) exceed 2% of average invested assets or 25% of adjusted net income, whichever is greater. For the twelve month period ended March 31, 1996, total operating expenses, which totalled $10,067,000, exceeded 2% of average invested assets and exceeded 25% of adjusted net income. This was primarily due to costs incurred by the Company relating to the merger with the Company's former advisor. When the subject compliance test was adjusted for the expense associated with the contract settlement, the Company was in compliance. -9-
10 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On January 19, 1996, the Company issued a press release in which it announced that the Board of Directors voted to pay a quarterly dividend of $.52 per share payable to shareholders of record on February 2, 1996. On February 19, 1996, the Company issued a press release in which it announced, among other things, that the 1995 net income per share for the year was down $1.01 or 46.54% less than 1994. On March 13, 1996, the Company issued a press release in which it announced, among other things, the appointment Edward F. Lange, Jr. as Chief Financial Officer, effective March 11, 1996. In April 1996, the Company issued secured senior notes in the aggregate principal amount of $30 million which mature in 2001 and 2003 and have a weighted average interest rate of 7.18%. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits [C] [C] 4 Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers Party thereto dated as of April 15, 1996 and the Notes relating thereto. 99.1 Press release dated January 16, 1996 99.2 Press release dated February 19, 1996 99.3 Press release dated March 13, 1996 27 Financial Data Schedule (b) Reports on Form 8-K None. -10-
11 Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. Date: April 29, 1996 By: BRUCE G. THOMPSON ------------------------ ------------------------------------- Bruce G. Thompson, Chairman and Chief Executive Officer Date: April 29, 1996 By: EDWARD F. LANGE, JR. ----------------------- ------------------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: April 29, 1996 By: KATHLEEN S. PREPHAN ----------------------- ------------------------------------- Kathleen S. Prephan, Chief Accounting Officer -11-
12 Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. Date: April 29, 1996 By:____________________________________ ------------------------- Bruce G. Thompson, Chairman and Chief Executive Officer Date: April 29, 1996 By:____________________________________ ------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: April 29, 1996 By:____________________________________ ------------------------- Kathleen S. Prephan, Chief Accounting Officer -11-
13 EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: <TABLE> <CAPTION> DESIGNATION NUMBER UNDER EXHIBIT ITEM 601 OF PAGE NUMBER REGULATION S-K EXHIBIT DESCRIPTION NUMBER ------- -------------- ------------------------------------- ------ <S> <C> <C> <C> 1 4 Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers Party thereto dated as of April 15, 1996 and the Notes relating thereto. 2 99.1 Press release dated January 16, 1996 13 3 99.2 Press release dated February 19, 1996 14 4 99.3 Press release dated March 13, 1996 16 5 27 Financial Data Schedule </TABLE> -12-