1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION DRAFT 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, 2001 ------------------------------------ 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 May 10, 2001. Class: Shares of Common Stock, $1.00 par value Outstanding 28,879,061 shares
2 HEALTH CARE REIT, INC. INDEX <TABLE> <CAPTION> Page ---- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 4 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 PART II. OTHER INFORMATION Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 12 EXHIBIT INDEX 13 </TABLE> -2-
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> MARCH 31 DECEMBER 31 2001 2000 (UNAUDITED) (NOTE) ASSETS (IN THOUSANDS) <S> <C> <C> Real estate investments: Real property owned: Land $ 77,109 $ 74,319 Buildings & improvements 792,745 770,660 Construction in progress 7,641 11,976 ------------------ ----------------- 877,495 856,955 Less accumulated depreciation (59,754) (52,968) ------------------ ------------------ Total real property owned 817,741 803,987 Loans receivable Real property loans 268,377 301,321 Subdebt investments 22,225 21,972 ------------------ ----------------- 1,108,343 1,127,280 Less allowance for loan losses (6,111) (5,861) ------------------ ------------------ Net real estate investments 1,102,232 1,121,419 Other Assets: Equity investments 5,501 5,450 Cash and cash equivalents 2,537 2,844 Deferred loan expenses 3,915 2,939 Receivables and other assets 27,096 24,252 ------------------ ----------------- 39,049 35,485 ------------------ ----------------- TOTAL ASSETS $ 1,141,281 $ 1,156,904 ================== ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations $ 110,300 $ 119,900 Senior unsecured notes 255,000 255,000 Secured debt 64,835 64,852 Accrued expenses and other liabilities 16,311 18,545 ------------------ ----------------- TOTAL LIABILITIES 446,446 458,297 Shareholders' equity: Preferred stock 150,000 150,000 Common stock 28,881 28,806 Capital in excess of par value 529,417 528,138 Undistributed/(overdistributed) net income (8,416) (3,388) Accumulated other comprehensive income (loss) (994) (744) Unamortized restricted stock (4,053) (4,205) ------------------ ------------------ TOTAL SHAREHOLDERS' EQUITY 694,835 698,607 ------------------ ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,141,281 $ 1,156,904 ================== ================= </TABLE> NOTE: The consolidated balance sheet at December 31, 2000 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. See notes to unaudited consolidated financial statements -3-
4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 2001 2000 ----------------------- --------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> REVENUES: Rental income $ 22,608 $ 21,630 Interest income 8,945 11,521 Commitment fees and other income 890 1,676 Prepayment fees 134 - ------------------ ----------------- Total revenue 32,577 34,827 EXPENSES: Interest expense 8,112 9,101 Loan expense 375 317 Provision for depreciation 6,786 5,263 Provision for losses 250 250 General and administrative expenses 1,851 1,900 ------------------ ------------------ Total expenses 17,374 16,831 ------------------ ------------------ Net income before gains on sale of properties 15,203 17,996 Gains on sale of properties - 123 ------------------ ------------------ Net income 15,203 18,119 Preferred stock dividends 3,376 3,362 ----------------- ----------------- Net Income Available to Common Shareholders $ 11,827 $ 14,757 ================== ================== Average number of shares outstanding: Basic 28,617 28,315 Diluted 28,871 28,546 Net income per share: Basic $ 0.41 $ 0.52 Diluted 0.41 0.52 Dividends declared and paid per common share $ 0.585 $ 0.580 </TABLE> See notes to unaudited consolidated financial statements -4-
5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three months ended March 31, 2001 -------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive In thousands Stock Stock Par Value Stock Net Income Income/Loss Total -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $150,000 28,806 $528,138 $(4,205) $ (3,388) $ (744) $698,607 Comprehensive income: Net income 15,203 15,203 Unrealized losses on securities (58) (58) Foreign currency translation adjustment (192) (192) -------- Comprehensive income 14,953 Proceeds from issuance of common stock from dividend reinvestment and 75 1,279 (141) 1,213 stock incentive plans, net of forfeitures Restricted stock amortization 293 293 Cash dividends paid (20,231) (20,231) ------- ------- ------- -------- ---------- --------- ---------- Balance at end of period $150,000 $28,881 $529,417 $(4,053) $ (8,416) $ (994) $694,835 ======== ======= ======== ======== ========== ========= ======== Three months ended March 31, 2000 -------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive Stock Stock Par Value Stock Net Income Income Total -------------------------------------------------------------------------------------------- Balance at beginning of period $150,000 $28,532 $524,204 $(5,216) $ 8,883 $ 593 $706,996 Comprehensive income: Net income 18,119 18,118 Unrealized losses on securities (318) (318) Foreign currency translation adjustment (27) (27) -------- Comprehensive income 17,774 Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures 45 574 118 737 Restricted stock amortization 317 317 Cash dividends paid (19,915) (19,915) ------- ------- --------- -------- --------- --------- -------- Balance at end of period $150,000 $28,577 $524,778 $(4,781) $ 7,087 $ 248 $705,909 ======== ======= ========= ======== ========== ========= ======== </TABLE> See notes to unaudited consolidated financial statements -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 2001 2000 ------------------------------ (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 15,203 $ 18,119 Adjustments to reconcile net income to net cash Provision for depreciation 6,845 5,484 Provision for losses 250 250 Amortization 668 633 Loan and commitment fees earned (more) less than cash received (559) (1,154) Rental income in excess of cash received (2,154) (1,697) Interest and other income in excess of cash received (84) (75) Increase/(decrease) in accrued expenses and other liabilities (1,676) (2,440) Increase in receivables and other assets (669) (2,060) ---------- ---------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 17,824 17,060 INVESTING ACTIVITIES Investment in real properties (6,857) (10,188) Investment in loans receivable (5,719) (3,799) Other investments, net (228) (5,754) Principal collected on loans 24,738 630 Proceeds from sale of properties - 26,248 Other (79) (679) ------------ ------------ NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES 11,855 6,458 FINANCING ACTIVITIES Net payments under line of credit arrangements (9,600) (4,600) Principal payments on long-term obligations (17) (24) Net proceeds from the issuance of Common Stock 1,213 737 Net proceeds from the issuance of Preferred Stock - - Proceeds from issuance of Senior Notes - - Proceeds from issuance of Secured Debt - - Increase in deferred loan expense (1,351) (466) Cash distributions to shareholders (20,231) (19,914) ------------ ------------ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES (29,986) (24,267) ------------ ----------- Decrease in cash and cash equivalents (307) (749) Cash and cash equivalents at beginning of period 2,844 2,129 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,537 $ 1,380 ============ =========== Supplemental Cash Flow Information -- Interest Paid $ 9,770 $ 11,522 ============ =========== </TABLE> See notes to unaudited consolidated financial statements -6-
7 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 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, 2001, are not necessarily an indication of the results that may be expected for the year ending December 31, 2001. 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, 2000. NOTE B - REAL ESTATE INVESTMENTS During the three months ended March 31, 2001, the Company invested $2,164,000 in real property, made construction advances of $6,777,000 and funded $273,000 of equity related investments. During the three months ended March 31, 2001, the Company received principal payments on real estate mortgages of $24,738,000. With respect to the above-mentioned construction advances, funding for construction in progress in connection with four properties owned directly by the Company totaled $4,694,000, and funding associated with two construction loans represented $2,083,000. During the three months ended March 31, 2001, one of the construction properties in progress with an investment balance of $9,027,000 completed the construction phase of the Company's investment process and was converted to permanent operating leases. NOTE C - EQUITY INVESTMENTS Management determines the appropriate classification of an equity investment at the time of acquisition and reevaluates such designation as of each balance sheet date. At March 31, 2001, equity investments include the common stock of a corporation, valued at historical cost, and ownership representing a 31% interest in Atlantic Healthcare Finance L.P., a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing homes located in the United Kingdom and continental Europe. The ownership interest is accounted for under the equity method. -7-
8 NOTE D - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 2000, the Company was contingently liable for certain obligations amounting to $11,945,000. NOTE E - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS On February 20, 2001, the Company paid a dividend of $0.585 per share to shareholders of record on January 31, 2001. This dividend related to the period from October 1, 2000 through December 31, 2000. NOTE F - 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 ----------------------------- 2001 2000 --------- ------- <S> <C> <C> Numerator for basic and diluted earnings per share-income available to common shareholders $ 11,827 $ 14,757 ========= ========= Denominator for basic earnings per share - weighted average shares 28,617 28,315 Effect of dilutive securities: Employee stock options 29 - Nonvested restricted shares 225 231 --------- ---------- Dilutive potential common shares 254 231 --------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares 28,871 28,546 ========= ========== Basic earnings per share $ 0.41 $ 0.52 Diluted earnings per share $ 0.41 $ 0.52 </TABLE> The diluted earnings per share calculation excludes the dilutive effect of 1,350,000 and 1,813,000 shares for the three months ended March 31, 2001 and 2000, 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. -8-
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company's net real estate investments totaled $1,102,232,000 which included 148 assisted living facilities, 43 nursing facilities and ten specialty care facilities. Depending upon the availability and cost of external capital, the Company anticipates making additional investments in health care related facilities. New investments are funded from temporary borrowings under the Company's 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 line of credit arrangements, is expected to be provided through a combination of private and public offerings of debt and equity securities and the assumption of secured debt. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements and finance future investments. During 1999 and 2000, the underperformance of publicly owned nursing home and assisted living companies, combined with the much publicized shift in equity funds flow from income-oriented investments to high-growth opportunities, impaired the stock valuations of all health care REITs. The availability of external capital is limited and expensive, constraining new investment activity and earnings growth. The Company believes the restrictive capital environment will continue until the prospects for the long-term care industry improve. In October 1999, the Company announced a $200 million asset divestiture program from which the Company has received $195,000,000 in proceeds through March 31, 2001. The Company believes the limited asset sales and loan prepayments have strengthened the Company's portfolio and generated liquidity, enhancing the Company's balance sheet. The completion of this program should position the Company for new investment and growth opportunities in the future. As of March 31, 2001, the Company had a total outstanding debt balance of $430,135,000 and shareholders' equity of $694,835,000 which represents a debt to equity ratio of .62 to 1.0, and a debt to total capitalization ratio of .38 to 1.0. As of March 31, 2001, the Company had an unsecured revolving line of credit expiring March 31, 2003 in the amount of $150,000,000 bearing interest at the lender's prime rate or LIBOR plus 1.5%. In addition, the Company had an unsecured revolving line of credit in the amount of $25,000,000 bearing interest at the lender's prime rate expiring April 30, 2002. At March 31, 2001, under the Company's line of credit arrangements, available funding, subject to customary lending conditions, totaled $64,700,000. As of March 31, 2001, the Company had effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $380,319,000 of securities including debt, convertible debt, common and preferred stock. Depending upon market conditions, the Company anticipates issuing securities under such shelf registrations to invest in additional health care facilities and to repay borrowings under the Company's line of credit arrangements. -9-
10 RESULTS OF OPERATIONS Revenues were comprised of the following: <TABLE> <CAPTION> Three months ended Change ------------------------------------- ---------------- March 31, 2001 March 31, 2000 $ % -------------- -------------- ---------------- <S> <C> <C> <C> <C> (000's) Rental income $ 22,608 $ 21,630 $ 978 5% Interest income 8,945 11,521 (2,576) -22% Commitment fees and other income 890 1,676 (786) -47% Prepayment fees 134 - 134 - ------------ -------------- ---------------- Total $ 32,577 $ 34,827 $(2,250) -6% ============ ============== ================ </TABLE> For the three months ended March 31, 2001, the Company generated increased rental income as a result of the completion of real property construction projects for which the Company began receiving rent and the purchase of properties previously financed by the Company. This offset a reduction in interest income due to the repayment of mortgage loans and the purchase of properties previously financed by the Company with mortgage loans. Commitment fees and other income decreased as a result of the completion of construction projects and curtailment of investing activity. Expenses were comprised of the following: <TABLE> <CAPTION> Three months ended Change ------------------------------------- ---------------------- March 31, 2001 March 31, 2000 $ % -------------- -------------- ---------------------- <S> <C> <C> <C> <C> (000's) Interest expense $ 8,112 $ 9,101 $ (989) -11% Loan expense 375 317 58 18% Provision for depreciation 6,786 5,263 1,523 29% Provision for losses 250 250 - - General and admin. expenses 1,851 1,900 (49) -3% ------------ -------------- ---------------- Total $ 17,374 $ 16,831 $ 543 3% ============ ============== ================ </TABLE> The decrease in interest expense was primarily due to lower average borrowings on the Company's lines of credit and senior notes partially offset by a reduction in the amount of capitalized interest offsetting interest expense. The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. Capitalized interest for the three-month period ended March 31, 2001 totaled $334,000 as compared with $1,220,000 for the same period in 2000. The provision for depreciation increased over the comparable periods in 2000 primarily as a result of additional investments in properties owned directly by the Company. General and administrative expenses for the three-month period was 5.68% of revenues as compared with 5.44% for the same period in 2000. -10-
11 Other items: <TABLE> <CAPTION> Three months ended Change ----------------------------------- ---------------------- March 31, 2001 March 31, 2000 $ % -------------- -------------- ---------------------- <S> <C> <C> <C> <C> (000's) Other items: Gain on sales of properties $ - $ 123 $ (123) -100% Preferred dividends 3,376 3,362 14 - </TABLE> As a result of the various factors mentioned above, net income available to common shareholders for the three-month period was $11,827,000, or $0.41 per diluted share, as compared with $14,757,000, or $0.52 per diluted share for the comparable period in 2000. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This report on Form 10-Q of the Company includes forward looking statements that reflect the Company's current view with respect to future events and financial performance. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government regulations, including changes in Medicare and Medicaid payment levels, changes in the healthcare industry, deterioration of the operating results or financial condition, including bankruptcies, of the Company's tenants and borrowers, the ability of the Company to attract new operators for certain facilities, the amount of any additional investments, access to capital markets and changes in the ratings of the Company's debt securities. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- For information on the Company's exposure to various market risks, see the discussion in the Company's annual report on Form 10-K for the year ended December 31, 2000. PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ----------------- On January 16, 2001, the Company declared fourth quarter dividend and conference call date. On January 29, 2001, the Company issued a press release announcing the extension of unsecured Bank Credit Facility. On January 30, 2001, the Company issued a press release reporting on the closing of Summerville transaction. On February 1, 2001, the Company issued a press release reporting its 2000 operating results. On February 27, 2001, the Company issued a press release reporting on the status of its portfolio with Alterra Healthcare Corporation. On April 10, 2001, the Company issued a press release announcing the schedule of its first quarter conference call. On April 17, 2001, the Company issued a press release declaring its regular dividend. On May 3, 2001, the Company issued a press release reporting on the first quarter results. -11-
12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 99.1 Press release dated January 16, 2001 99.2 Press release dated January 29, 2001 99.3 Press release dated January 30, 2001 99.4 Press release dated February 1, 2001 99.5 Press release dated February 27, 2001 99.6 Press release dated April 10, 2001 99.7 Press release dated April 17, 2001 99.8 Press release dated May 3, 2001 (b) Reports on Form 8-K None 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 14, 2001 By: /s/ GEORGE L. CHAPMAN -------------------- ------------------------------------- George L. Chapman, Chairman, Chief Executive Officer and President Date: May 14, 2001 By: /s/ RAYMOND W. BRAUN -------------------- ------------------------------------- Raymond W. Braun, Chief Financial Officer Date: May 14, 2001 By: /s/ MICHAEL A. CRABTREE -------------------- ------------------------------------- Michael A. Crabtree, Chief Accounting Officer -12-
13 EXHIBIT INDEX ------------- The following documents are included in this Form 10-Q as Exhibits: DESIGNATION NUMBER UNDER ITEM 601 OF REGULATION S-K EXHIBIT DESCRIPTION -------------- ------------------- 99.1 Press release dated January 16, 2001 99.2 Press release dated January 29, 2001 99.3 Press release dated January 30, 2001 99.4 Press release dated February 1, 2001 99.5 Press release dated February 27, 2001 99.6 Press release dated April 10, 2001 99.7 Press release dated April 17, 2001 99.8 Press release dated May 3, 2001 -13-