1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1997 ------------------------------------ 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 April 30, 1997. Class: Shares of Common Stock, $1.00 par value Outstanding 21,887,294 shares
2 HEALTH CARE REIT, INC. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1997 and December 31, 1996 3 Consolidated Statements of Income - Three months ended March 31, 1997 and 1996 4 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 1997 and 1996 5 Consolidated Statements of Cash Flows- Three months ended March 31, 1997 and 1996 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 12 SIGNATURES 13 EXHIBIT INDEX 14 -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 1997 1996 (UNAUDITED) (NOTE) ----------------- ----------------- (IN THOUSANDS) <S> <C> <C> ASSETS Real estate investments: Loans receivable: Mortgage loans $ 367,327 $ 292,442 Construction loans 27,303 61,013 Working capital loans 7,425 4,727 ----------------- ----------------- 402,055 358,182 Investment in operating leases 196,653 153,623 Investment in direct financing leases 10,804 10,876 ----------------- ----------------- 609,512 522,681 Less allowance for losses 9,937 9,787 ----------------- ----------------- NET REAL ESTATE INVESTMENTS 599,575 512,894 Other Assets: Investment securities available for sale 966 768 Deferred loan expenses 2,002 1,432 Cash and cash equivalents 121 581 Receivables and other assets 5,768 4,156 ----------------- ----------------- 8,857 6,937 ----------------- ----------------- TOTAL ASSETS $ 608,432 $ 519,831 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit arrangements $ 100,500 $ 92,125 Senior notes 82,000 82,000 Other long-term obligations 10,097 10,270 Accrued expenses and other liabilities 11,401 9,900 ----------------- ----------------- TOTAL LIABILITIES $ 203,998 $ 194,295 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 - 21,737,294 in 1997 and 18,320,291 in 1996 21,737 18,320 Capital in excess of par value 373,443 298,281 Undistributed net income 8,288 8,167 Unrealized gains on investment securities available for sale 966 768 ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY 404,434 325,536 ----------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 608,432 $ 519,831 ================= ================= </TABLE> NOTE: The balance sheet at December 31, 1996 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 -3-
4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 1997 1996 ---------------------- ----------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> GROSS INCOME: Interest and other income $ 10,616 $ 8,104 Operating leases: Rent 4,963 1,960 Direct financing leases: Lease income 357 368 Loan and commitment fees 584 420 Interest and other income 49 38 ------------ --------------- Gross Income $ 16,569 $ 10,890 EXPENSES: Interest: Line of credit arrangements $ 2,161 $ 2,296 Senior notes and other long- term obligations 1,850 1,215 Loan expense 217 187 Provision for depreciation 1,185 475 Provision for losses 150 150 General and administrative expenses 1,180 890 --------------- ----------------- Total expenses 6,743 5,213 --------------- ----------------- Net Income $ 9,826 $ 5,677 =============== ================= Average number of shares outstanding 19,301 12,052 Net income per share $ 0.51 $ 0.47 Dividends per share $ 0.52 $ 0.52 </TABLE> See notes to consolidated financial statements -4-
5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 1997 1996 ------------------------------------ (IN THOUSANDS) <S> <C> <C> Balances at beginning of period $ 325,536 $ 187,598 Net income 9,826 5,677 Proceeds from issuance of shares under the dividend reinvestment plan - 36,577 in 1997 and 33,323 in 1996 887 691 Proceeds from issuance of shares under the employee stock incentive plans - 50,426 in 1997 and 15,000 in 1996 1,087 261 Net Proceeds from sale of 3,330,000 shares in 1997 76,605 Change in net unrecognized gain on investment securities available for sale 198 725 Cash dividends paid (9,705) (6,259) --------------- -------------- Balances at end of period $ 404,434 $ 188,693 =============== ============== </TABLE> See notes to consolidated financial statements -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31 1997 1996 ----------------------------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 9,826 $ 5,677 Adjustments to reconcile net income to net cash Provision for depreciation 1,199 470 Provision for losses 150 150 Amortization of loan and organization expenses 218 188 Loan and commitment fees earned less than cash received 452 957 Direct financing lease income less than cash received 72 53 Interest income in excess of cash received (9) (133) Increase in accrued expenses and other liabilities 1,049 1,418 Increase in other receivables and prepaid items (1,315) (397) -------- -------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 11,642 8,383 INVESTING ACTIVITIES Investment in operating-lease properties (44,216) (8,380) Investment in loans receivable (44,576) (32,376) Principal collected on loans 713 1,974 Other (7) 5 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (88,086) (38,777) FINANCING ACTIVITIES Net borrowings under line of credit arrangements 8,375 35,900 Principal payments on long-term obligations (173) (49) Net proceeds from the issuance of Common Stock 78,275 952 Increase in deferred loan expense (788) (12) Cash distributions to shareholders (9,705) (6,259) -------- -------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 75,984 30,532 -------- -------- Increase/(decrease) in cash and cash equivalents (460) 138 Cash and cash equivalents at beginning of period 581 860 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 121 $ 998 ======== ======== Supplemental Cash Flow Information -- Interest Paid $ 3,359 $ 1,957 ======== ======== </TABLE> See notes to consolidated financial statements -6-
7 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 three months ended March 31, 1997 are not necessarily an indication of the results that may be expected for the year ended December 31, 1997. 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, 1996. Net income per share has been computed by dividing net income by the average number of common shares and common stock equivalents outstanding. NOTE B - REAL ESTATE INVESTMENTS During the three months ended March 31, 1997, the Company provided permanent mortgage financings of $26,304,000, invested $36,891,000 in operating leases and made construction advances of $26,183,000. During the three months ended March 31, 1997, the Company received principal payments on real estate mortgages of $685,000 and had net advances on working capital loans of $2,698,000. With respect to the above-mentioned construction advances, funding associated with seventeen construction loans represented $18,859,000, and funding for construction in progress in connection with eight properties owned directly by the Company totaled $7,324,000. During the three months ended March 31, 1997, five of the construction loans completed the construction phase of the Company's investment process and were converted to investments in permanent mortgage loans, with an aggregate investment of $52,492,000. Also during the three months ended March 31, 1997, one of the construction properties in progress completed the construction phase of the Company's investment process and was converted to a permanent operating lease, with an investment balance of $1,588,000. At March 31, 1997, the Company had $147,140,000 in unfunded commitments. NOTE C - INDEBTEDNESS AND SHAREHOLDERS' EQUITY In January 1997, in connection with the underwriters' exercise of an over allotment option associated with the Company's December 18, 1996 offering of 2,200,000 shares of common stock, the Company issued 330,000 shares of Common Stock, $1.00 par value per share, at the price of $23.875 per share, which generated net proceeds of $7,485,000 to the Company. -7-
8 In March 1997, the Company issued 3,000,000 shares of Common Stock, $1.00 par value per share, at the price of $24.375 per share, which generated net proceeds to the Company of $69,120,000. In March 1997, the Company closed a $175 million unsecured credit facility which replaced the Company's then existing secured credit facility. Simultaneous with the closing of the new credit facility, all senior noteholders released collateral which had served as security for the Company's $82 million of senior indebtedness. The senior unsecured notes are rated `BBB-' (triple-B-minus) by Duff & Phelps Credit Rating Co. The Company has a total of $185,000,000 in unsecured credit facilities bearing interest at the lenders' prime rate or LIBOR plus 1.125%, of which $84,500,000 was available at March 31, 1997. NOTE D - INVESTMENT SECURITIES AVAILABLE FOR SALE Investment securities available for sale are stated at fair value with unrealized gains and losses reported in a separate component of shareholders' equity. At March 31, 1997, available-for-sale securities are the common stock of a corporation, which were obtained by the Company at no cost. NOTE E - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 1996, the Company was contingently liable for certain obligations amounting to approximately $18,815,000. No significant change in these contingencies had occurred as of March 31, 1997. NOTE F - DISTRIBUTIONS PAID TO SHAREHOLDERS On February 20, 1997, the Company paid a dividend of $0.52 per share to shareholders of record on February 4, 1997. This dividend related to the period from October 1, 1996 through December 31, 1996. NOTE G - EARNINGS PER SHARE In February, 1997, the Financial Accounting Standards Board issued Statement No. 128, Earning per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share. The impact on primary earnings per share and fully diluted earnings per share is not expected to be material. NOTE H - SUBSEQUENT EVENTS On April 22, 1997, the Company declared a dividend of $0.525 per share payable on May 20, 1997 to shareholders of record on May 5, 1997. The dividend relates to the period from January 1, 1997 through March 31, 1997. -8-
9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At March 31, 1997, the Company's net real estate investments totaled approximately $599,575,000, which included 59 skilled nursing facilities, 73 assisted living facilities, 11 retirement centers, six specialty care facilities and two 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 March 31, 1997, the Company had shareholders' equity of $404,434,000 and a total outstanding debt balance of $192,597,000, which represents a debt to equity ratio of 0.48 to 1.0. In January 1997, in connection with the underwriters exercise of an over allotment option associated with the Company's December 18, 1996 offering of 2,200,000 shares of common stock, the Company issued 330,000 shares of Common Stock, $1.00 par value per share, at the price of $23.875 per share, which generated net proceeds of $7,485,000 to the Company. In March 1997, the Company issued 3,000,000 shares of Common Stock, $1.00 par value per share, at the price of $24.375 per share, which generated net proceeds to the Company of $69,120,000. During the three months ended March 31, 1997, 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. In March 1997, the Company closed a $175 million unsecured credit facility which replaced the Company's then existing secured credit facility. Simultaneous with the closing of the new credit facility, all senior noteholders released collateral which had served as security for the Company's $82 million of senior indebtedness. The senior unsecured notes are rated `BBB-' (triple-B-minus) by Duff & Phelps Credit Rating Co. As of March 31, 1997, the Company had approximately $147,140,000 in unfunded commitments. Under the Company's line of credit arrangements, available funding totaled $84,500,000. 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 March 31, 1997 were $16,569,000 compared to $10,890,000 for the three months ended March 31, 1996. Revenue growth resulted primarily from increased interest income of $2,512,000 and increased operating lease income of $3,003,000 as a result of additional real estate investments made during the past twelve months. Expenses for the three months ended March 31, 1997 totaled $6,743,000, an increase of $1,530,000 from expenses of $5,213,000 for the same period in 1996. The increase in total expenses was primarily related to an increase in interest expense, additional expense associated with the provision for depreciation, and increased other operating expenses. Interest expense for the three months ended March 31, 1997 was $4,011,000 compared to $3,511,000 for the same period in 1996. The increase in the 1997 period was primarily due to the issuance of $30,000,000 Senior Notes in April 1996. -9-
10 The provision for depreciation for the three month period ended March 31, 1997 totaled $1,185,000, an increase of $710,000 over the comparable period in 1996 as a result of additional operating lease investments. General and administrative expenses for the three month period in 1997 totaled $1,180,000, as compared to $890,000 for the same period in 1996. The expenses for the three month period in 1997 were 7.12% of revenues as compared to 8.17% for the same period in 1996. As a result of the various factors mentioned above, net income for the three month period ended March 31, 1997 was $9,826,000 as compared to $5,677,000 for the same period in 1996. Net income per share for the three month period ended March 31, 1997 was $.51 versus $.47 for the comparable 1996 period. The per share increases resulted from an increase in net income offset by an increase in average shares outstanding during the 1997 period. -10-
11 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ----------------- On January 9, 1997, the Company issued a press release in which it announced that during the fourth quarter of 1996 it had funded $78.6 million of new investments. On January 10, 1997, the Company issued a press release in which it announced that the underwriters for the Company's December 18, 1996 offering of 2,200,000 common shares exercised an over allotment option to purchase 330,000 additional shares at a purchase price of $23.875 per share. On January 15, 1997, the Company issued a press release in which it announced that during 1996 it had funded $230 million of new investments. On January 16, 1997, the Company issued a press release in which it announced that it had filed a shelf registration with the Securities and Exchange Commission enabling the Company to offer in the future up to an aggregate of $300 million of securities. On January 20, 1997, the Company issued a press release in which it announced that the Board of Directors voted to pay a quarterly cash dividend of $.52 per share, payable to shareholders of record on February 20, 1997. On January 21, 1997, the Company issued a press release in which it announced that Raymond W. Braun had been appointed Chief Operating Officer of the Company. On February 4, 1997, the Company issued a press release in which it announced that during the month of January 1997 it had funded $62.8 million of new investments. On February 5, 1997, the Company issued a press release in which it announced financial results for the fourth quarter 1996 and the year ended 1996. On March 7, 1997, the Company issued a press release in which it announced that it had filed a prospectus supplement for an offering of 3,000,000 shares of Common Stock. On March 31, 1997, the Company issued a press release in which it announced that it had closed a $175 million unsecured credit facility. -11-
12 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Reports 10.1 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and George L. Chapman 10.2 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Raymond W. Braun 10.3 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Edward F. Lange, Jr. 10.4 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Erin C. Ibele 10.5 Stock Plan for Non-Employee Directors 27 Financial Data Schedule 99.1 Press release dated January 9, 1997 99.2 Press release dated January 10, 1997 99.3 Press release dated January 15, 1997 99.4 Press release dated January 16, 1997 99.5 Press release dated January 20, 1997 99.6 Press release dated January 21, 1997 99.7 Press release dated February 4, 1997 99.8 Press release dated February 5, 1997 99.9 Press release dated March 7, 1997 99.10 Press release dated March 31, 1997 (b) Reports on Form 8-K Form 8-K filed on March 6, 1997 -12-
13 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: May 12, 1997 By: GEORGE L. CHAPMAN ------------------------ ------------------------- George L. Chapman, Chairman, Chief Executive Office, and President Date: May 12, 1997 By: EDWARD F. LANGE, JR. ----------------------- --------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: May 12, 1997 By: MICHAEL A. CRABTREE ----------------------- ------------------------- Michael A. Crabtree, Chief Accounting Officer -13-
14 EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: <TABLE> <CAPTION> DESIGNATION NUMBER UNDER ITEM 601 OF PAGE REGULATION S-K EXHIBIT DESCRIPTION NUMBER -------------- ------------------- ------ <S> <C> 10.1 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and George L. Chapman 10.2 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Raymond W. Braun 10.3 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Edward F. Lange, Jr. 10.4 Employment Agreement dated as of January 1, 1997 by and between Health Care REIT, Inc. and Erin C. Ibele 10.5 Stock Plan for Non-Employee Directors 27 Financial Data Schedule 99.1 Press release dated January 9, 1997 99.2 Press release dated January 10, 1997 99.3 Press release dated January 15, 1997 99.4 Press release dated January 16, 1997 99.5 Press release dated January 20, 1997 99.6 Press release dated January 21, 1997 99.7 Press release dated February 4, 1997 99.8 Press release dated February 5, 1997 99.9 Press release dated March 7, 1997 99.10 Press release dated March 31, 1997 </TABLE> -14-