================================================================================ 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, 2003 --------------------------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |_| For the transition period from ______________________to ______________________ COMMISSION FILE NUMBER 1-8923 HEALTH CARE REIT, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 34-1096634 - -------- ---------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604 - ------------------------------------- ----- (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code) (419) 247-2800 -------------------------- - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| . No |_|. 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 April 28, 2003. Class: Shares of Common Stock, $1.00 par value Outstanding 40,347,295 shares ================================================================================
INDEX <TABLE> <CAPTION> PAGE <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 2003 and December 31, 2002....................... 3 Consolidated Statements of Income - Three months ended March 31, 2003 and 2002........... 4 Consolidated Statements of Stockholders' Equity - Three months ended March 31, 2003 and 2002............................................................................ 5 Consolidated Statements of Cash Flows -Three months ended March 31, 2003 and 2002........ 6 Notes to Unaudited Consolidated Financial Statements..................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk................................ 15 Item 4. Controls and Procedures.................................................................. 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................................... 16 SIGNATURES ......................................................................................... 17 CERTIFICATIONS........................................................................................ 18 </TABLE> 2
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> MARCH 31 DECEMBER 31 2003 2002 (UNAUDITED) (NOTE) ----------------- ----------------- (IN THOUSANDS) <S> <C> <C> ASSETS Real estate investments: Real property owned Land $ 120,640 $ 112,044 Buildings & improvements 1,312,218 1,288,520 Construction in progress 26,162 19,833 ----------- ----------- 1,459,020 1,420,397 Less accumulated depreciation (125,173) (113,579) ----------- ----------- Total real property owned 1,333,847 1,306,818 Loans receivable Real property loans 205,634 208,016 Subdebt investments 17,613 14,578 ----------- ----------- 223,247 222,594 Less allowance for losses on loans receivable (5,205) (4,955) ----------- ----------- 218,042 217,639 ----------- ----------- Net real estate investments 1,551,889 1,524,457 Other assets: Equity investments 7,101 7,494 Deferred loan expenses 5,518 9,291 Cash and cash equivalents 33,878 9,550 Receivables and other assets 43,454 43,318 ----------- ----------- 89,951 69,653 ----------- ----------- Total assets $ 1,641,840 $ 1,594,110 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Borrowings under unsecured line of credit obligations $ 74,100 $ 109,500 Senior unsecured notes 615,000 515,000 Secured debt 51,730 51,831 Accrued expenses and other liabilities 7,637 20,547 ----------- ----------- Total liabilities 748,467 696,878 Stockholders' equity: Preferred stock 127,500 127,500 Common stock 40,207 40,086 Capital in excess of par value 793,541 790,838 Cumulative net income 599,793 580,496 Cumulative dividends (664,446) (638,085) Accumulated other comprehensive income (344) (170) Other equity (2,878) (3,433) ----------- ----------- Total stockholders' equity 893,373 897,232 ----------- ----------- Total liabilities and stockholders' equity $ 1,641,840 $ 1,594,110 =========== =========== </TABLE> NOTE: The consolidated balance sheet at December 31, 2002 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See notes to unaudited consolidated financial statements 3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 2003 2002 -------------- --------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> Revenues: Rental income $ 40,760 $ 28,739 Interest income 4,940 6,787 Commitment fees and other income 592 557 -------- -------- 46,292 36,083 Expenses: Interest expense 11,875 9,479 Provision for depreciation 11,652 8,293 General and administrative 2,611 2,261 Loan expense 635 577 Provision for loan losses 250 250 -------- -------- 27,023 20,860 -------- -------- Income from continuing operations 19,269 15,223 Discontinued operations: Net gain (loss) on sales of properties 34 Income (loss) from discontinued operations, net (6) 665 -------- -------- 28 665 Net income 19,297 15,888 Preferred stock dividends 2,846 3,377 -------- -------- Net income available to common stockholders $ 16,451 $ 12,511 ======== ======== Average number of common shares outstanding: Basic 39,971 32,946 Diluted 40,473 33,693 Earnings per share: Basic: Income from continuing operations and after preferred stock dividends $ 0.41 $ 0.36 Discontinued operations, net 0.02 -------- -------- Net income available to common stockholders $ 0.41 $ 0.38 Diluted: Income from continuing operations and after preferred stock dividends $ 0.41 $ 0.35 Discontinued operations, net 0.02 -------- -------- Net income available to common stockholders $ 0.41 $ 0.37 Dividends declared and paid per common share $ 0.585 $ 0.585 </TABLE> See notes to unaudited consolidated financial statements 4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2003 ------------------------------------------------------------------------------------------- ACCUMULATED OTHER CAPITAL IN COMPRE- PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE HENSIVE OTHER STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME EQUITY TOTAL ------------------------------------------------------------------------------------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at beginning of period $ 127,500 $ 40,086 $ 790,838 $ 580,496 $(638,085) $ (170) $ (3,433) $ 897,232 Comprehensive income: Net income 19,297 19,297 Other comprehensive income: Unrealized gain (loss) on equity investments (11) (11) Foreign currency translation adjustment (163) (163) --------- Total comprehensive income 19,123 --------- Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures 121 2,703 2,824 Restricted stock amortization 493 493 Compensation expense related to stock options 62 62 Cash dividends paid (26,361) (26,361) ------------------------------------------------------------------------------------------- Balances at end of period $ 127,500 $ 40,207 $ 793,541 $ 599,793 $(664,446) $ (344) $ (2,878) $ 893,373 =========================================================================================== </TABLE> <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2002 ------------------------------------------------------------------------------------------- ACCUMULATED OTHER CAPITAL IN COMPRE- PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE HENSIVE OTHER STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME EQUITY TOTAL ------------------------------------------------------------------------------------------- (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> <C> <C> Balances at beginning of period $ 150,000 $ 32,740 $ 608,942 $ 512,837 $(540,946) $ (923) $ (4,780) $ 757,870 Comprehensive income: Net income 15,888 15,888 Other comprehensive income: Unrealized gain (loss) on equity investments 9 9 Foreign currency translation adjustment (81) (81) --------- Total comprehensive income 15,816 --------- Proceeds from issuance of common shares from dividend reinvestment and stock incentive plans, net of forfeitures 301 6,228 (189) 6,340 Proceeds from issuance of common shares 906 22,750 23,656 Restricted stock amortization 405 405 Cash dividends paid (22,527) (22,527) ------------------------------------------------------------------------------------------- Balances at end of period $ 150,000 $ 33,947 $ 637,920 $ 528,725 $(563,473) $ (995) $ (4,564) $ 781,560 =========================================================================================== </TABLE> See notes to unaudited consolidated financial statements 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 2003 2002 -------------- --------------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 19,297 $ 15,888 Adjustments to reconcile net income to net cash provided from operating activities: Provision for depreciation 11,658 8,696 Amortization 1,188 981 Provision for loan losses 250 250 Commitment fees earned greater than cash received (456) Rental income in excess of cash received (4,204) (2,122) Equity in (earnings) losses of affiliated companies (81) 104 (Gain) loss on sales of properties (34) Increase (decrease) in accrued expenses and other liabilities (12,909) (4,253) Decrease (increase) in receivables and other assets 4,139 (1,458) --------- --------- Net cash provided from (used in) operating activities 19,304 17,630 INVESTING ACTIVITIES Investment in real property (38,796) (97,659) Investment in loans receivable and subdebt investments (18,098) (7,338) Other investments, net of payments 300 (228) Principal collected on loans receivable and subdebt investments 17,445 731 Proceeds from sales of properties 144 Other (71) (8) --------- --------- Net cash provided from (used in) investing activities (39,076) (104,502) FINANCING ACTIVITIES Net increase (decrease) under unsecured line of credit arrangements (35,400) 78,000 Proceeds from issuance of senior notes 100,000 Principal payments on secured debt (101) (90) Net proceeds from the issuance of common stock 2,824 29,996 Decrease (increase) in deferred loan expense 3,138 (211) Cash distributions to stockholders (26,361) (22,527) --------- --------- Net cash provided from (used in) financing activities 44,100 85,168 --------- --------- Increase (decrease) in cash and cash equivalents 24,328 (1,704) Cash and cash equivalents at beginning of period 9,550 9,826 --------- --------- Cash and cash equivalents at end of period $ 33,878 $ 8,122 ========= ========= Supplemental cash flow information-interest paid $ 20,289 $ 14,170 ========= ========= </TABLE> See notes to unaudited consolidated financial statements 6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS HEALTH CARE REIT, INC. AND SUBSIDIARIES NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the three months ended March 31, 2003, are not necessarily an indication of the results that may be expected for the year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2002. NOTE B - REAL ESTATE INVESTMENTS During the three months ended March 31, 2003, we invested $32,465,000 in real property, provided permanent mortgage and loan financings of $14,911,000, made construction advances of $6,331,000 and funded $3,187,000 of subdebt investments. As of March 31, 2003, we had approximately $36,539,000 in unfunded construction commitments. Also during the three months ended March 31, 2003, we sold real property generating $144,000 of net proceeds and collected $17,293,000 and $152,000 as repayment of principal on loans receivable and subdebt investments, respectively. NOTE C - EQUITY INVESTMENTS We have an investment in Atlantic Healthcare Finance L.P., a property group that specializes in the financing, through sale and leaseback transactions, of nursing and care homes located in the United Kingdom. This investment is accounted for using the equity method of accounting because we have the ability to exercise significant influence, but not control, over the investee due to our 31% ownership interest. Other equity investments, which consist of investments in private and public companies for which we do not have the ability to exercise influence, are accounted for under the cost method. Under the cost method of accounting, investments in private companies are carried at cost and are adjusted only for other-than-temporary declines in fair value, distributions of earnings and additional investments. For investments in public companies that have readily determinable fair market values, we classify our equity investments as available-for-sale and, accordingly, record these investments at their fair market values with unrealized gains and losses included in accumulated other comprehensive income, a separate component of stockholders' equity. These investments represent a minimal ownership interest in these companies. NOTE D - DISTRIBUTIONS PAID TO COMMON STOCKHOLDERS On February 20, 2003, we paid a dividend of $0.585 per share to stockholders of record on January 31, 2003. This dividend related to the period from October 1, 2002 through December 31, 2002. 7
NOTE E - DISCONTINUED OPERATIONS In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. We adopted the standard effective January 1, 2002. During the three months ended March 31, 2003, we sold one assisted living facility with a carrying value of $110,000 for a net gain of $34,000. In accordance with Statement No. 144, we have reclassified the income and expenses attributable to all properties sold subsequent to January 1, 2002, to discontinued operations. Expenses include an allocation of interest expense based on property carrying values and our weighted average cost of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of classifying the properties as discontinued operations (in thousands): <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ---------------------------- 2003 2002 ---------- ---------- <S> <C> <C> Revenues Rental income $ 0 $1,312 Expenses Interest expense 1 263 Provision for depreciation 5 384 ------ ------ Income (loss) from discontinued operation, net $ (6) $ 665 ====== ====== </TABLE> NOTE F - CONTINGENT LIABILITIES We have guaranteed the payment of industrial revenue bonds for one assisted living facility, in the event that the present owner defaults upon its obligations. In consideration for this guaranty, we receive and recognize fees annually related to this agreement. This guaranty expires upon the repayment of the industrial revenue bonds which currently mature in 2009. At March 31, 2003, we were contingently liable for $3,195,000 under this guaranty. In addition, we have an outstanding letter of credit issued to a bank, which bank provided additional financing for a project on which we have a first mortgage. We have also partially guaranteed the payment of loans made by the bank on this project. The letter of credit currently matures in 2003 and the guaranties expire upon the repayment of the loans, which currently mature in 2003. At March 31, 2003, obligations under these agreements for which we were contingently liable aggregated approximately $4,650,000. As of March 31, 2003, we had approximately $36,539,000 of unfunded construction commitments. On November 20, 2002, Doctors Community Health Care Corporation and five subsidiaries filed for Chapter 11 bankruptcy protection. Doctors has stated that the bankruptcy filing was due to the bankruptcy of National Century Financial Enterprises and affiliates, who halted payments to health care providers, including Doctors. We have provided mortgage financing to Doctors in the form of a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property that is owned by one of the debtor subsidiaries. The outstanding principal balance of the loan is approximately $18.8 million at March 31, 2003. Based upon a recent appraisal and the historical performance of Pacifica Hospital, we expect to receive payment in full before December 31, 2003, of the outstanding principal and accrued interest, which we believe we are entitled to as an oversecured creditor. Doctors did not make an interest payment for the three months ended March 31, 2003. As previously announced, we do not currently intend to recognize any interest on the loan if payment is not received. Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on January 23, 2003. We have a master lease with Alterra for 45 assisted living facilities with a depreciated book value of $105.6 million at March 31, 2003. Alterra has remained current on rental payments through April 2003. Alterra filed its plan of reorganization and disclosure statement on March 27, 2003 and indicated its intention to assume the master lease at current rental levels. Based on Alterra's plan and disclosure statement, we expect confirmation by September 30, 2003. 8
NOTE G - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 ------------------------- 2003 2002 -------- --------- <S> <C> <C> Numerator for basic and diluted earnings per share - net income available to common stockholders $16,451 $12,511 ======= ======= Denominator for basic earnings per share - weighted average shares 39,971 32,946 Effect of dilutive securities: Employee stock options 259 492 Non-vested restricted shares 243 255 ------- ------- Dilutive potential common shares 502 747 ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 40,473 33,693 ======= ======= Basic earnings per share $ 0.41 $ 0.38 ======= ======= Diluted earnings per share $ 0.41 $ 0.37 ======= ======= </TABLE> The diluted earnings per share calculation excludes the dilutive effect of 50,000 and 10,000 shares for the three month periods ended March 31, 2003 and March 31, 2002, respectively, because the exercise price was greater than the average market price. The Series C Cumulative Convertible Preferred Stock was not included in this calculation as the effect of the conversion was anti-dilutive. NOTE H - OTHER EQUITY Other equity consists of the following (in thousands): <TABLE> <CAPTION> MARCH 31 ----------------------------- 2003 2002 ----------- ----------- <S> <C> <C> Accumulated compensation expense related to stock options $ 62 $ 0 Unamortized restricted stock (2,940) (4,564) ------- ------- $(2,878) $(4,564) ======= ======= </TABLE> Unamortized restricted stock represents the unamortized value of restricted stock granted to employees and directors. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $493,000 and $405,000 for the three months ended March 31, 2003 and 2002, respectively. In December 2002, the Financial Accounting Standards Board issued Statement No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, that we are required to adopt for fiscal years beginning after December 15, 2002, with transition provisions for certain matters. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Effective January 1, 2003, we commenced recognizing compensation expense in accordance with Statement 123 on a prospective basis. Accumulated option compensation expense represents the amount of amortized compensation costs related to stock options awarded to employees and directors in 2003. 9
The following table illustrates the effect on net income available to common stockholders if we had applied the fair value recognition provisions of FASB 123 to stock-based compensation for options granted since 1995 (in thousands, except per share data): <TABLE> <CAPTION> Three Months Ended March 31 --------------------- 2003 2002 -------- -------- <S> <C> <C> Numerator: Net income available to common stockholders - as reported $16,451 $12,511 Deduct: Stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects 109 136 Net income available to common ------- ------- stockholders - pro forma $16,342 $12,375 ======= ======= Denominator: Basic weighted average shares - as reported and pro forma 39,971 32,946 Effect of dilutive securities: Employee stock options - pro forma 213 382 Non-vested restricted shares 243 255 ------- ------- Dilutive potential common shares 456 637 Diluted weighted average shares - ------- ------- pro forma 40,427 33,583 ======= ======= Net income available to common stockholders per share - as reported Basic $ 0.41 $ 0.38 Diluted 0.41 0.37 Net income available to common stockholders per share - pro forma Basic $ 0.41 $ 0.38 Diluted 0.40 0.37 </TABLE> NOTE I - ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income includes unrealized gains or losses on our equity investments and foreign currency translation adjustments. These items are included as components of stockholders' equity. Other comprehensive income for the three months ended March 31, 2003 and 2002, totaled ($174,000) and ($72,000), respectively. NOTE J - SIGNIFICANT CHANGES AND EVENTS In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in September 2012, at an effective yield of 7.40%. These notes were an add-on to the $150,000,000 senior unsecured notes sold in September 2002. The aggregate principal amount of outstanding notes of this series is now $250,000,000. 10
NOTE K - NEW ACCOUNTING POLICIES In April 2002, the Financial Accounting Standards Board issued Statement 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. Statement 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. Statement 145 is effective for fiscal years beginning after December 15, 2002. We adopted the standard effective January 1, 2003. Effective January 1, 2003, we commenced recognizing compensation expense for employee stock options in accordance with Statement 123 on a prospective basis. See Note H. 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At March 31, 2003, our net real estate investments totaled approximately $1,551,889,000 and included 162 assisted living facilities, 78 skilled nursing facilities and eight specialty care facilities. Depending upon the availability and cost of external capital, we anticipate making additional investments in health care related facilities. New investments are funded from temporary borrowings under our unsecured line of credit arrangements, internally generated cash and the proceeds derived from asset sales. Permanent financing for future investments, which replaces funds drawn under the unsecured line of credit arrangements, is expected to be provided through a combination of public and private offerings of debt and equity securities and the incurrence of secured debt. We believe our liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements and finance future investments. In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in September 2012, at an effective yield of 7.40%. These notes were an add-on to the $150,000,000 senior unsecured notes sold in September 2002. The aggregate principal amount of outstanding notes of this series is now $250,000,000. As of March 31, 2003, we had stockholders' equity of $893,373,000 and a total outstanding debt balance of $740,830,000, which represents a debt to total book capitalization ratio of 0.45 to 1.0. In August 2002, we announced the amendment and extension of our primary unsecured revolving line of credit. The line of credit was expanded to $175,000,000, expires in August 2005 (with the ability to extend for one year at our discretion if we are in compliance with all covenants) and currently bears interest at the lender's prime rate or LIBOR plus 1.3% at our option. In addition, at March 31, 2003, we had an unsecured revolving line of credit in the amount of $25,000,000, bearing interest at the lender's prime rate and which expires in June 2003. Also, at March 31, 2003, we had a secured line of credit in the amount of $60,000,000 bearing interest at the lender's prime rate or LIBOR plus 2.0%, at our option, with a floor of 7.0% and which expires in April 2004. Additionally, at March 31, 2003, we had a secured note in the amount of $4,000,000 bearing interest at LIBOR plus 2.0% and which matures in November 2004. At March 31, 2003, we had $74,100,000 in borrowings outstanding under the unsecured line of credit arrangements and $4,000,000 outstanding on the secured note. As of April 28, 2003, we had an effective shelf registration on file with the Securities and Exchange Commission under which we may issue up to $285,557,000 of securities including debt securities, common and preferred stock and warrants. Depending upon market conditions, we anticipate issuing securities under our shelf registration to invest in additional health care facilities and to repay borrowings under our unsecured line of credit arrangements. RESULTS OF OPERATIONS Revenues were comprised of the following: <TABLE> <CAPTION> Three months ended Change ------------------------------- ------------------------------- Mar. 31, 2003 Mar. 31, 2002 $ % ------------- ------------- ----------- ---------- <S> <C> <C> <C> <C> (in thousands) Rental income $ 40,760 $ 28,739 $ 12,021 42% Interest income 4,940 6,787 (1,847) -27% Commitment fees and other income 592 557 35 6% -------- -------- -------- -------- Totals $ 46,292 $ 36,083 $ 10,209 28% ======== ======== ======== ======== </TABLE> For the three months ended March 31, 2003, we generated increased rental income as a result of the acquisition of properties for which we receive rent. This was partially offset by a reduction in interest income due to the repayment of mortgage loans. 12
Expenses were comprised of the following: <TABLE> <CAPTION> Three months ended Change ----------------------------- ---------------------------- Mar. 31, 2003 Mar. 31, 2002 $ % ------------- ------------- ----------- ---------- <S> <C> <C> <C> <C> (in thousands) Interest expense $11,875 $ 9,479 $ 2,396 25% Provision for depreciation 11,652 8,293 3,359 41% General and administrative 2,611 2,261 350 15% Loan expense 635 577 58 10% Provision for loan losses 250 250 0 0% ------- ------- ------- ------- Totals $27,023 $20,860 $ 6,163 30% ======= ======= ======= ======= </TABLE> The increase in interest expense from 2002 to 2003 was primarily due to higher average borrowings in 2003. This was partially offset by an increase in the amount of capitalized interest offsetting interest expense. We capitalize certain interest costs associated with funds used to finance the construction of properties owned directly by us. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest that approximates our cost of financing. Our interest expense is reduced by the amount capitalized. Capitalized interest for the three months ended March 31, 2003, totaled $258,000. We had no capitalized interest for the three months ended March 31, 2002. The provision for depreciation increased primarily as a result of additional investments in properties owned directly by us. General and administrative expenses as a percentage of revenues (including revenues from discontinued operations) for the three months ended March 31, 2003, were 5.64% as compared with 6.05% for the same period in 2002. The increase in loan expense was primarily due to the additional amortization of costs related to the unsecured line of credit renewal and the unsecured senior notes issued in 2002. <TABLE> <CAPTION> Other items: Three months ended Change --------------------------------- ------------------------ Mar. 31, 2003 Mar. 31, 2002 $ % -------------- -------------- ----------- ---------- <S> <C> <C> <C> <C> (in thousands) Gain (loss) on sales of properties $ 34 $ 0 $ 34 n/a Discontinued operations, net (6) 665 (671) -101% Preferred dividends (2,846) (3,377) 531 -16% ------- ------- ------- ----- Totals $(2,818) $(2,712) $ (106) 4% ======= ======= ======= ===== </TABLE> During the three months ended March 31, 2003, we sold one property with a carrying value of $110,000 for a gain of $34,000. This property generated a net loss of $6,000 after deducting depreciation and interest expense from rental income for the three months ended March 31, 2003. All properties sold from January 1, 2002 through March 31, 2003, generated $665,000 of income after deducting depreciation and interest expense from rental income for the three months ended March 31, 2002. During the year ended December 31, 2002, the holder of our Series C Cumulative Convertible Preferred Stock converted 900,000 shares into 878,000 shares of common stock, leaving 2,100,000 shares outstanding at March 31, 2003 as compared to 3,000,000 at March 31, 2002. The decrease in preferred dividends is due to the reduction in outstanding preferred shares. As a result of the various factors mentioned above, net income available to common stockholders for the three months ended March 31, 2003 was $16,451,000, or $0.41 per diluted share, as compared with $12,511,000, or $0.37 per diluted share, for the same period in 2002. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This report on Form 10-Q of the Company may contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern the possible expansion of our portfolio; the performance of our operators and properties; our ability to enter into agreements with new viable tenants for properties which we take back from financially troubled tenants, if any; our ability to make distributions; our policies and plans regarding investments, 13
financings and other matters; our tax status as a real estate investment trust; our ability to appropriately balance the use of debt and equity; and our ability to access capital markets or other sources of funds. When we use words such as "believe", "expect", "anticipate", or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including, but not limited to: the status of the economy; the status of capital markets, including prevailing interest rates; compliance with and changes to regulations and payment policies within the health care industry; changes in financing terms; competition within the health care and senior housing industries; and changes in federal, state and local legislation. Other important factors are identified in our Annual Report on Form 10-K for the year ended December 31, 2002, including factors identified under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Finally, we assume no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by matching the terms of new investments with new long-term fixed rate borrowings to the extent possible. The following section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates. We historically borrow on our revolving lines of credit to make acquisitions of, loans to or to construct health care facilities. Then, as market conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under the revolving lines of credit. A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. A 1% increase in interest rates would result in a decrease in fair value of our senior unsecured notes by approximately $15 million at March 31, 2003 ($15 million at March 31, 2002). Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on our future cash flows and earnings, depending on whether the debt is replaced with other fixed rate debt, variable rate debt, or equity or repaid by the sale of assets. Our variable rate debt, including our unsecured and secured revolving credit arrangements, is reflected at fair value. At March 31, 2003, a 1% increase in interest rates related to this variable rate debt (assuming no changes in outstanding balances) would result in increased annual interest expense of $781,000 ($1,110,000 at March 31, 2002). We are subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the terms of current indebtedness. The majority of our borrowings were completed under indentures or contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the event that we are unable to raise additional equity or borrow money because of these limitations, our ability to acquire additional properties may be limited. We may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. These decisions are principally based on our policy to match our variable rate investments with comparable borrowings, but are also based on the general trend in interest rates at the applicable dates and our perception of the future volatility of interest rates. ITEM 4. CONTROLS AND PROCEDURES Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2003, and the evaluation date. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of our evaluation. 15
PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. 99.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. (b) Reports on Form 8-K <TABLE> <CAPTION> Date of Report Item Description -------------- ---- ----------- <S> <C> <C> March 12, 2003 5 Documentation regarding an issuance of $100 million in senior unsecured notes of the Company. May 1, 2003 12 The Company issued a press release that announced operating results of its first quarter ended March 31, 2003. </TABLE> 16
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. Date: May 7, 2003 By: /S/ GEORGE L. CHAPMAN ------------------------- --------------------------------- George L. Chapman, Chairman and Chief Executive Officer Date: May 7, 2003 By: /S/ RAYMOND W. BRAUN ------------------------- --------------------------------- Raymond W. Braun, President and Chief Financial Officer Date: May 7, 2003 By: /S/ MICHAEL A. CRABTREE ------------------------- --------------------------------- Michael A. Crabtree, Chief Accounting Officer 17
CERTIFICATE OF CHIEF EXECUTIVE OFFICER I, GEORGE L. CHAPMAN, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Health Care REIT, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 7, 2003 ----------------------------- /s/ GEORGE L. CHAPMAN -------------------------------- George L. Chapman, Chief Executive Officer 18
CERTIFICATE OF CHIEF FINANCIAL OFFICER I, RAYMOND W. BRAUN, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Health Care REIT, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated: May 7, 2003 ----------------------------- /s/ RAYMOND W. BRAUN --------------------------------- Raymond W. Braun, Chief Financial Officer 19