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 September 30, 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 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 October 31, 1996. Class: Shares of Common Stock, $1.00 par value Outstanding 16,083,931 shares HEALTH CARE REIT, INC. INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1996 and December 31, 1995 3 Consolidated Statements of Income - Three months ended September 30, 1996 and 1995; Nine months ended September 30, 1996 and 1995 4 Consolidated Statements of Cash Flows - Nine months ended September 30, 1996 and 1995 5 Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 1996 and 1995 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. OTHER INFORMATION Item 5. Other Information 11 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> September 30 December 31 1996 1995 (Unaudited) (Note) ------------ ------------ <C> <C> <S> ASSETS Real Estate Related Investments: Loans receivable: Mortgage loans $296,308,528 $267,483,683 Construction and other short-term loans 59,196,913 17,735,699 Working capital loans to related parties 4,952,093 6,779,340 ------------ ------------ 360,457,534 291,998,722 Investment in operating-lease properties 101,270,945 58,628,509 Investment in direct financing leases 10,849,375 11,246,492 ------------ ------------ 472,577,854 361,873,723 Less allowance for losses 10,925,443 9,950,000 ------------ ------------ NET REAL ESTATE RELATED INVESTMENTS 461,652,411 351,923,723 Other Assets: Deferred loan expenses 1,646,206 1,747,537 Investment securities available for sale 1,438,102 845,297 Cash and cash equivalents 3,475,548 860,350 Receivables and other assets 3,665,375 2,715,146 ------------ ------------ 10,225,231 6,168,330 ------------ ------------ $471,877,642 $358,092,053 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit arrangements $ 93,725,000 $106,700,000 Other long-term obligations 92,295,285 56,059,639 Accrued expenses and other liabilities 11,104,755 7,734,618 ------------ ------------ TOTAL LIABILITIES 197,125,040 170,494,257 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 - 16,079,931 in 1996 and 12,034,196 in 1995 16,079,931 12,034,196 Capital in excess of par value 249,750,778 168,800,194 Undistributed net income 7,483,791 5,918,109 Unrealized gains on investment securities available for sale 1,438,102 845,297 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 274,752,602 187,597,796 ------------ ------------ $471,877,642 $358,092,053 ============ ============ </TABLE> 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. See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> Three Months Ended Nine Months Ended September 30 September 30 1996 1995 1996 1995 ------------------------ ---------------------- <C> <C> <C> <C> <S> Gross Income: Interest and other income $ 9,689,598 $ 7,989,863 $26,864,737 $23,026,671 Prepayment Fees 843,948 2,716,923 2,384,558 2,716,923 Operating leases: Rents 2,488,135 1,581,145 6,713,517 4,705,624 Gain on exercise of options 155,270 Direct financing leases: Lease income 365,503 382,164 1,098,588 1,146,492 Gain on exercise of options 421,167 Loan and commitment fees 681,124 645,420 1,946,430 1,022,324 ----------- ----------- ----------- ----------- 14,068,308 13,315,515 39,584,267 32,618,034 Expenses: Interest: Senior notes and other long-term obligations 1,749,451 1,265,701 4,556,101 4,023,435 Line of credit arrangements 1,953,946 2,114,652 6,707,316 5,638,735 Loan expense 204,042 187,323 593,513 559,791 Provision for depreciation 636,641 395,108 1,656,074 1,175,183 Provision for losses 150,000 4,000,000 450,000 4,000,000 Disposition of investment 807,791 807,791 Management Fees 547,522 1,808,256 Settlement of management contract 763,500 763,500 Other operating expenses 1,183,158 694,874 3,184,214 1,800,144 ----------- ----------- ----------- ----------- 6,685,029 9,968,680 17,955,009 19,769,044 ----------- ----------- ----------- ----------- NET INCOME $ 7,383,279 $ 3,346,835 $21,629,258 $12,848,990 =========== =========== =========== =========== Average number of shares outstanding 14,817,878 11,708,175 13,315,005 11,667,512 Net income per share $ 0.50 $ 0.29 $ 1.62 $ 1.10 Dividends per share $ 0.52 $ 0.52 $ 1.56 $ 1.555 </TABLE> See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> Nine Months Ended September 30 1996 1995 ------------------------------- <C> <C> <S> OPERATING ACTIVITIES Net income $ 21,629,258 $ 12,848,990 Adjustments to reconcile net income to net cash: Provision for depreciation 1,676,366 1,175,183 Provision for losses-net of charge-offs 167,653 4,000,000 Disposition of investment 807,791 Amortization of loan and organization expenses 595,130 561,408 Capitalized interest (107,328) Loan and commitment fees earned less than cash received 1,335,445 528,207 Direct financing lease income less than cash received 117,117 132,148 Interest income in excess of cash received (128,682) (157,467) Increase in accrued expenses and other liabilities 2,034,693 921,814 Increase in other receivables and prepaid items (790,464) (10,479,957) NET CASH PROVIDED FROM OPERATING ACTIVITIES 27,336,979 9,530,326 INVESTING ACTIVITIES Investment in operating-lease properties (33,331,170) (2,976,000) Investment in loans receivable (118,167,751) (69,551,237) Principal collected on loans 29,749,620 43,467,256 Proceeds from exercise of lease purchase options 9,507,988 Decrease in investments (532,000) Other (181,671) ------------ ------------- NET CASH USED IN INVESTING ACTIVITIES (112,422,985) (29,591,981) FINANCING ACTIVITIES Borrowings under line of credit arrangements 243,230,000 152,400,000 Principal payments under line of credit arrangements (256,205,000) (116,900,000) Net proceeds from the issuance of Common Stock 85,083,593 2,600,881 Borrowings under Senior Notes 30,000,000 Assumption of mortgage loan 6,539,434 Principal payments on other long- term obligations (303,788) (376,974) Increase/(decrease) in deferred loan expense (579,458) 75,308 Cash distributions to shareholders (20,063,577) (18,118,531) ------------ ------------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 87,701,204 19,680,684 Increase (decrease) in cash and cash equivalents 2,615,198 (380,971) Cash and cash equivalents at beginning of period 860,350 935,449 ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,475,548 $ 554,478 ============ ============= Supplemental Cash Flow Information -- Interest Paid $ 8,304,548 $ 8,910,157 ============ ============= </TABLE> See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> Nine Months Ended September 30 1996 1995 ---------------------------- <C> <C> <S> Balances at beginning of period $187,597,796 $189,179,775 Net income 21,629,258 12,848,990 Proceeds from issuance of shares under the dividend reinvestment plan - 96,005 in 1996 and 114,273 in 1995 2,012,272 2,391,492 Proceeds from issuance of shares under the employee stock incentive plan - 40,000 in 1996 and 14,140 in 1995 713,939 209,389 Net Proceeds from sale of 3,910,000 shares 82,270,109 Change in net unrecognized gain on investment security available for sale 592,805 Cash dividends paid (20,063,577) (18,118,531) ------------ ------------ Balances at end of period $274,752,602 $186,511,115 ============ ============ </TABLE> See notes to consolidated financial statements
NOTES TO 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 nine months ended September 30, 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 - Real Estate Investments During the nine months ended September 30, 1996, the Company provided permanent mortgage financings of $47,653,000, invested $28,947,000 in operating leases and continued to finance 33 construction loans, which construction advances totaled $74,935,000. During the nine months ended September 30, 1996, the Company received principal payments on real estate mortgages of $2,625,000, repayments on working capital loans of $1,827,000 and proceeds of $25,298,000 from the prepayment of mortgage loans. Also during the nine months ended September 30, 1996, 12 of the above- mentioned construction loans completed the construction phase of the Company's investment process and were converted to investments in operating leases, with an aggregate investment of $20,088,000, and one construction loan converted to a permanent mortgage loan with an investment balance of $7,000,000. At September 30, 1996, the Company had $127,552,000 in unfunded commitments. Note C - Disposition of Investments in Behavioral Care It is the Company's intention to systematically eliminate its investments in behavioral care facilities. As a result, the Company has declared a disposi- tion of investment associated with its portfolio of behavioral care properties. At December 31, 1995 such investments aggregated $ 36,366,000 in six facilities owned and/or operated by three health care operating companies. During the three months ended September 30, 1996, the Company recognized a disposition of investment expense of $808,000, which amount was added to the Company's unallocated allowance for losses. At September 30, 1996, the Company had commenced discussions regarding the early repayment and/or sale of the remaining four mortgage loans. The Company is not certain that agreements will be reached and what the financial ramifications will be. The Company believes its allowance for losses with respect to such properties is adequate. At September 30, 1996, the Company's overall allowance for losses totaled $10,925,000. The allowance for losses is maintained at a level which the Company believes is adequate to absorb potential losses in the Company's real estate related investments. Note D - Indebtedness and Shareholders' Equity In April 1996, the Company issued Senior Notes in the aggregate principal amount of $30,000,000 which mature in 2001 and 2003, and have a weighted average interest rate of 7.18%. The Notes are secured by $40,000,000 of assets. In May 1996, the Company issued 2,322,200 shares of Common Stock, $1.00 par value per share, at the price of $22.00 per share, which generated net proceeds of $48,103,000 to the Company. In September 1996, the Company issued 1,587,800 shares of Common Stock, $1.00 par value per share, at the price of $22.00 per share, which generated net proceeds to the Company of $34,167,000. During the nine months ended September 30, 1996, the proceeds derived from the Company's capital raising activities were used to reduce bank debt under the Company's revolving lines of credit arrangements. The Company has a total of $185,000,000 in secured and unsecured credit facilities bearing interest at the lenders' prime rate or LIBOR plus 1.50%, of which $91,275,000 was available at September 30, 1996. Note E - Investment Securities Investment securities available for sale are stated at fair value with unrealized gains and losses reported in a separate component of shareholders' equity. At September 30, 1996, available-for-sale securities are the common stock of a corporation, which were obtained by the Company at no cost. Note F - Contingent Liabilities 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 had occurred as of September 30, 1996. Note G - Distributions Paid to Shareholders On August 20, 1996, the Company paid a dividend of $0.52 per share to shareholders of record on August 2, 1996. This dividend related to the period from April 1, 1996 through June 30, 1996. Note H - Subsequent Events On October 15, 1996, the Company declared a dividend of $0.52 per share payable on November 20, 1996 to shareholders of record on November 1, 1996. The dividend relates to the period from July 1, 1996 through September 30, 1996. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources At September 30, 1996, the Company's net real estate investments totaled approximately $461,652,000, which included 57 skilled nursing facilities, 52 assisted living facilities, 10 retirement centers, five specialty care facilities and four behavioral care facilities. The Company funds its investments through a combination of long-term and short-term financing, utilizing both debt and equity. As of September 30, 1996, the Company had shareholders' equity of $274,753,000 and a total outstanding debt balance of approximately $186,020,000, which represents a debt to equity ratio of 0.68 to 1.0. During the nine month period ended September 30, 1996, the Company issued Senior Notes in the aggregate principal amount of $30,000,000 which mature in 2001 and 2003, and have a weighted average interest rate of 7.18% The notes are secured by $40,000,000 of assets. During the second quarter of 1996, the Company issued 2,322,200 shares of Common Stock, $1.00 par value per share, at the price of $22.00 per share, which generated net proceeds of $48,103,000 to the Company. During the three month period ended September 30, 1996, the Company issued 1,587,800 shares of Common Stock, $1.00 par value per share, at the price of $22.00 per share, which generated net proceeds to the Company of $34,167,000. As of September 30, 1996, the Company had approximately $127,552,000 in unfunded commitments. Under the Company's line of credit arrangements, available funding totaled $91,275,000. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, finance future investments, and meet debt service and dividend requirements. Results of Operations Revenues for three months ended September 30, 1996 were $14,068,000 compared to $13,316,000 for the three months ended September 30, 1995. Revenue growth resulted from increased interest income of $1,700,000 and increased operating lease income of $907,000 as a result of additional real estate investments made during the past twelve months. The growth in interest income and rental income was offset by a high incidence of prepayment fees earned during the third quarter of 1995, which totaled $2,717,000 as compared to $844,000 for the same period in 1996. Revenues for the nine months ended September 30, 1996 were $39,584,000 compared to $32,618,000 for the nine months ended September 30, 1995, an increase of $6,966,000 or 21.4%. Revenue growth resulted primarily from increased interest income of $3,838,000 and increased operating lease income of $2,008,000 as a result of additional real estate investments made during the past twelve months. Expenses for the three months ended September 30, 1996 totaled $6,685,000, a decrease of $3,284,000 from expenses of $9,969,000 for the same period in 1995. Expenses for the nine month period ended September 30, 1996 totaled $17,955,000, a decrease of $1,814,000 from expenses of $19,769,000 for the comparable period in 1995. Expenses for the three and nine month periods ended September 30, 1995 were negatively influenced by nonrecurring charges, primarily related to a $4,000,000 provision for losses and a $764,000 charge for the settlement of the management contract, an expense associated with the merger of the Company's advisor into the Company. The provision for depreciation for the three and nine month periods ended September 30, 1996 totaled $637,000 and $1,656,000 respectively, an increase of $242,000 and $481,000 over the comparable periods in 1995 as a result of additional operating lease investments. Interest expense for the three months ended September 30, 1996 was $3,703,000 compared to $3,380,000 for the same period in 1995. For the nine month period ended September 30, 1996, interest expense totaled $11,263,000 compared to $9,662,000 for the same period in 1995. The increases in the 1996 periods were primarily due to the issuance of $30,000,000 Senior Notes in April 1996 and higher average borrowings under the Company's line of credit arrangements, which were offset by lower interest rates. General and administrative expense for the three and nine month periods in 1996 totaled $1,183,000 and $3,184,000 respectively, as compared to $1,242,000 and $3,608,000 for the same periods in 1995. The expenses for the three and nine month periods in 1996 were 8.41% and 8.04% of revenues as compared to 9.33% and 11.06% for the same periods in 1995. It is the Company's intention to systematically eliminate its investments in behavioral care facilities and declared a disposition of investment associated with its behavioral care portfolio. As a result, any gains realized through the repayment or sale of investments associated with the Company's behavioral care facilities will be added to the Company's general allowance for losses and applied against any losses incurred through the repayment or sale of behavioral care related investments. During the three months ended September 30, 1996, the Company recorded an $808,000 disposition of investment expense as an offset to an $808,000 prepayment fee received from the repayment of two behavioral care related mortgage loans. As a result of the various factors mentioned above, net income for the three and nine month periods ended September 30, 1996 was $7,383,000 and $21,629,000 respectively as compared to $3,347,000 and $12,849,000 for the same periods in 1995. Net income per share for the three and nine month periods ended September 30, 1996 was $.50 and $1.62 versus $.29 and $1.10 for the comparable 1995 periods. The per share increases resulted from an increase in net income offset by an increase in average shares outstanding during the 1996 periods. 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 September 30, 1996, total operating expenses, which totalled $9,181,000 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. PART II. OTHER INFORMATION Item 4. Other Information On July 17, 1996, the Company issued a press release in which it announced, among other things, that the Board of Directors voted to pay a quarterly cash dividend of $.52 per share, payable to shareholders of record on August 2, 1996, and that net income for the first quarter of 1996 was $.66 per share. On July 19, 1996, the Company issued a press release in which it announced that during the second quarter of 1996, it had closed $69 million of new investments. On September 5, 1996, the Company issued a press release in which it announced that it had filed a prospectus supplement for an offering of 1,587,800 shares of Common Stock. Item 5. Exhibits and Reports on Form 8-K (a) Exhibits 99.1 Press release dated July 17, 1996 99.2 Press release dated July 19, 1996 99.3 Press release dated September 5, 1996 27 Financial Data Schedule (b) Reports on Form 8-K A report on Form 8-K was filed on September 5, 1996, reporting on the terms of an underwriting agreement between Health Care REIT, Inc. and Alex. Brown & Sons, Incorporated. 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: November 14, 1996 By: GEORGE L. CHAPMAN George L. Chapman, Chairman, Chief Executive Officer and President Date: November 14, 1996 By: EDWARD F. LANGE, JR. Edward F. Lange, Jr., Chief Financial Officer Date: November 14, 1996 By: MICHAEL A. CRABTREE Michael A. Crabtree, Chief Accounting Officer EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: <TABLE> Designation Number Under Item 601 of Page Exhibit Regulation S-K Exhibit Description Number - - --------- -------------- ---------------------------------- ------ <C> <C> <C> <C> <S> 1 99.1 Press release dated July 17, 1996. 14 2 99.2 Press release dated July 19, 1996. 15 3 99.3 Press release dated September 5, 1996. 17 5 27 Financial Data Schedule 18 </TABLE>