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, 1995 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 1950, 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 the latest practicable date. Class: Shares of Common Stock, $1.00 par value Outstanding 11,723,528 shares
HEALTH CARE REIT, INC. INDEX Page Part I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994. 3 Consolidated Statements of Income --- Three months ended September 30, 1995 and 1994; nine months ended September 30, 1995 and 1994. 4 Consolidated Statements of Cash Flows --- Nine months ended September 30, 1995 and 1994. 5 Consolidated Statements of Shareholders' Equity --- Nine months ended September 30, 1995 and 1994. 6 Notes to Consolidated Financial Statements. 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 8 Part II. OTHER INFORMATION Item 5. Other Information. 10 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 12
PART I. FINANCIAL INFORMATION Item 1. Financial Statements --------- ---------- Consolidated Balance Sheets (Unaudited) Health Care REIT, Inc. and Subsidiary <TABLE> December 31 September 30 1994 1995 (Note) ------------ ------------ <C> <C> <S> ASSETS Real Estate Related Investments: Loans receivable: Mortgage loans $245,410,556 $230,781,805 Construction loans 29,584,792 17,073,652 Working capital loans to related parties 6,169,812 7,068,254 ------------ ------------ 281,165,160 254,923,711 Investment in operating-lease properties 59,032,468 57,231,651 Investment in direct financing leases 11,295,573 11,427,721 ------------ ------------ 351,493,201 323,583,083 Less allowance for losses 9,150,000 5,150,000 ------------ ------------ NET REAL ESTATE RELATED INVESTMENTS 342,343,201 318,433,083 Other Assets: Deferred loan expenses 1,834,160 2,469,260 Investments 532,000 Cash and cash equivalents 554,478 935,449 Receivables and other assets 12,742,537 2,264,197 ------------ ------------ 15,663,175 5,668,906 ------------ ------------ $358,006,376 $324,101,989 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit arrangements $106,400,000 $ 70,900,000 Other long-term obligations 56,995,816 57,372,790 Accrued expenses and other liabilities 8,099,445 6,649,424 ------------ ------------ TOTAL LIABILITIES 171,495,261 134,922,214 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 - 11,723,528 in 1995 and 11,595,115 in 1994 11,723,528 11,595,115 Capital in excess of par value 163,559,226 161,086,758 Undistributed net income 11,228,361 16,497,902 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 186,511,115 189,179,775 ------------ ------------ $358,006,376 $324,101,989 ============ ============ </TABLE> NOTE: The balance sheet at December 31, 1994 has been derived from the audited consolidated financial statements of 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 Subsidiary <TABLE> Three Months Ended Nine Months Ended September 30 September 30 1995 1994 1995 1994 ------------------------- ------------------------- <C> <C> <C> <C> <S> Gross Income: Interest and other income $10,706,786 $ 7,707,712 $25,743,594 $19,151,904 Operating leases: Rents 1,581,145 1,412,448 4,705,624 3,937,348 Gains on exercise of options 100,029 Direct financing leases: Lease income 382,164 678,834 1,146,492 3,694,657 Gain on exercise of options 229,379 3,851,147 Loan and commitment fees 645,420 489,793 1,022,324 955,035 ----------- ----------- ----------- ----------- 13,315,515 10,518,166 32,618,034 31,690,120 Expenses: Interest: Long-term obligations 1,265,701 1,479,452 4,023,435 4,625,548 Line of credit arrangements 2,114,652 827,029 5,638,735 2,253,344 Loan expense 187,323 89,897 559,791 450,495 Management fees 547,522 761,170 1,808,256 2,352,798 Provision for losses 4,000,000 250,000 4,000,000 500,000 Provision for depreci- ation 395,108 349,229 1,175,183 998,259 Settlement of manage- ment contract 763,500 763,500 Other operating expenses 694,874 435,222 1,800,144 1,399,402 ----------- ----------- ----------- ----------- 9,968,680 4,191,999 19,769,044 12,579,846 ----------- ----------- ----------- ----------- NET INCOME $ 3,346,835 $ 6,326,167 $12,848,990 $19,110,274 =========== =========== =========== =========== Average number of shares outstanding 11,708,175 11,529,947 11,667,512 11,500,842 Net income per share $ .28 $ .55 $ 1.10 $ 1.66 Dividends per share $ .52 $ .505 $ 1.555 $ 1.50 </TABLE> See notes to consolidated financial statements. Consolidated Statements of Cash Flows (Unaudited) Health Care REIT, Inc. and Subsidiary <TABLE> Nine Months Ended September 30 1995 1994 ----------------------------- <C> <C> <S> OPERATING ACTIVITIES: Net income $ 12,848,990 $ 19,110,274 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of loan and organization expenses 561,408 452,112 Provision for losses 4,000,000 500,000 Provision for depreciation 1,175,183 998,259 Loan and commitment fees earned less than cash received 528,207 369,159 Direct financing lease income less than cash received 132,148 785,753 Interest income (in excess of) less than cash received (157,467) 2,180,448 Increase in accrued expenses and other liabilities 921,814 1,473,154 Increase in other receivables and prepaid items (10,479,957) (380,768) ------------ ------------ NET CASH PROVIDED FROM OPERATING ACTIVITIES 9,530,326 25,488,391 INVESTING ACTIVITIES: Investment in operating-lease properties (2,976,000) (13,396,550) Investment in loans receivable (69,551,237) (75,353,793) Principal collected on loans 43,467,256 47,408,995 Increase in investments (532,000) Proceeds from exercise of lease purchase options 28,205,953 Increase in funds held in escrow--net (14,173,402) Investment in direct financing leases (1,300,000) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (29,591,981) (28,608,797) FINANCING ACTIVITIES: Long-term borrowings under line of credit arrangements 152,400,000 188,100,000 Principal payments on long-term borrowings under line of credit arrangements (116,900,000) (169,100,000) Net proceeds from the issuance of shares 2,600,881 2,364,180 Principal payments on other long-term obligations (376,974) (3,871,119) Decrease (increase) in deferred loan expense 75,308 (1,345,544) Cash distributions to shareholders (18,118,531) (17,229,221) ------------ ------------ NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES 19,680,684 (1,081,704) ------------ ------------ Decrease in cash and cash equivalents (380,971) (4,202,110) Cash and cash equivalents at beginning of period 935,449 4,896,314 ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 554,478 $ 694,204 ============ ============ Supplemental Cash Flow Information -- Interest Paid $ 8,910,157 $ 5,747,073 ============ ============ </TABLE> See notes to consolidated financial statements. Consolidated Statements of Shareholders' Equity (Unaudited) Health Care REIT, Inc. and Subsidiary <TABLE> Nine Months Ended September 30 1995 1994 ------------------------------ <C> <C> <S> Balances at beginning of period $189,179,775 $184,131,828 Net income 12,848,990 19,110,274 Proceeds from issuance of shares under the dividend reinvestment plan - 114,273 in 1995 and 96,955 in 1994 2,391,492 2,264,194 Proceeds from issuance of shares under the employee stock incentive plan - 14,140 in 1995 and 5,860 in 1994 209,389 99,986 Cash dividend paid (18,118,531) (17,229,221) ------------ ------------ Balances at end of period $186,511,115 $188,377,061 ============ ============ </TABLE> See notes to financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HEALTH CARE REIT, INC. 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, 1995 are not necessarily an indication of the results that may be expected for the year ended December 31, 1995. 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, 1994. Net income per share has been computed by dividing net income by the average number of shares outstanding. Note B - Investments During the first quarter of 1995, the Company purchased common stock in a privately held company. This investment does not have a readily determinable fair value. Accordingly, this investment is recorded at the lower of cost or estimated net realizable value. Note C - Management Agreement and Related Items The Company has agreed to a proposed merger of First Toledo Advisory Company ("FTAC") with and into the Company. The agreement, which is expected to close by November 30, 1995, calls for the issuance of 282,407 shares as consideration for the acquisition of FTAC. Through September 30, 1995, the Company has expensed $763,500 related to the merger and settlement of contract. The Company will expense any additional costs as incurred, as well as the fair value of the 282,407 shares when issued. Note D - Contingencies As disclosed in the financial statements for the year ended December 31, 1994, the Company was contingently liable for certain obligations amounting to approximately $20,175,000. No significant change in these contingencies has occurred as of September 30, 1995. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources During the first nine months of 1995, the Company's net cash proceeds from operating activities was approximately $9,530,000, a decline of $15,958,000 from the same period in 1994. However, approximately $10,095,000 of the decline arose from the delayed receipt of funds until early October of two loans repaid on September 30th. If these funds had been received by quarter end, the decline would have been approximately $5,863,000. The adjusted decline was principally attributable to the lack of gains on exercise of options in the first nine months of 1995 versus $3,951,000 of such gains in the first nine months of 1994. See "Results of Operations" below for further discussion. During the first nine months of 1995, the Company financed seven mortgage loans for a total of approximately $36,061,000 with initial interest rates ranging from 10.28% to 11.42%, and initial terms of seven to ten years. All the obligors have rollover provisions after the initial term. In addition, the Company advanced approximately $36,254,000 for 18 construction loans, most of which are for new facilities. During the first nine months of 1995, three of the construction loans were converted to permanent financings. During the same period, nine mortgage loans for approximately $39,040,000 were repaid. The above loan activity, plus changes in working capital loans and regular principal repayments, were the reasons net loans increased approximately $26,241,000 and net cash used in investing activities was approximately $29,592,000. The Company's working capital loans, all to related parties, are expected to continue to slowly decline as the underlying projects continue to improve their financial performance and thereby pay down these loans. In the first quarter of 1995, the Company paid $532,000 for common stock in a privately held company with which the Company has several mortgage loans and operating-lease transactions. The investment was made as a result of warrants granted to the Company when it provided the mortgage loan and operating-lease financing. This investment represented less than 1% of the invested company's equity. Since December 31, 1994, borrowings under line of credit arrangements increased $35,500,000 to $106,400,000 (which debt has a weighted average interest of 7.59% at September 30, 1995). As of September 30, 1995, the Company had approximately $147,201,000 in unfunded commitments and total available funding sources of $73,600,000. The Company believes that funds provided from operating activities, together with funds from loan repayments and future equity or debt issuances, will be sufficient to meet current operating requirements. During the first nine months of 1995, the Company received approximately $2,601,000 from the sale of its shares under the dividend reinvestment and incentive stock option plans. The borrowings under the line of credit arrangements plus the proceeds from the dividend reinvestment and incentive stock option plans, less dividends paid, were the principal reasons that net cash provided from financing activities was approximately $19,681,000. Results of Operations Gross income for the first nine months of 1995 was approximately $32,618,000 or 2.9% more than the first nine months of 1994. Interest income on loans increased $6,592,000 and operating lease rents increased approximately $768,000, while direct financing lease income and gain on exercise of options declined approximately $6,499,000. The increase in interest income on loans receivable and operating lease rents is attributable to the growth in the loan and operating-lease portfolios, a trend which the Company anticipates will continue. The decrease in direct financing lease income and gain on exercise of options is a reflection of other long-term trends which should also continue due to the greater market acceptance of mortgage loans and operating leases. In the first nine months of 1994, gross income included approximately $3,951,000 in gains on exercise of options. There were no such gains for the comparable period in 1995. Future gains on exercise of options are anticipated to be modest since the Company has only six remaining direct financing lease investments which total approximately $11,296,000. Net income totalled approximately $12,849,000 or $1.10 per share in the first nine months of 1995, versus approximately $19,110,000 or $1.66 per share for the comparable period in 1994. Major contributing factors for the decrease were the absence of gains on exercise of options in 1995 (discussed above), a $4,000,000 provision for losses in the third quarter of 1995, a $763,500 charge for settlement of management contract, and a tightening of the Company's net interest margin. (See below for a discussion of the last three items.) In January 1995, the Company filed a lawsuit for collection of past due interest and principal of approximately $1,994,000 related to a nursing home in Detroit, Michigan. In March of 1995, the Company filed two lawsuits in Florida to collect past due interest and principal on a mortgage loan secured by two behavioral care facilities. In connection with the March filing, the Company presented for payment and received $1,125,000 on a letter of credit securing the Florida mortgage loan. After application of the letter of credit proceeds, the Company's carrying value of the Florida mortgage loan is approximately $13,468,000. Each of these loans was put on non-accrual status effective the beginning of the month the respective lawsuits were filed. All three obligors are in Chapter 11 bankruptcy. In August 1995, the Company reached an agreement with the obligors on the two behavioral care facilities to hire independent professional management. Subsequently, the Company obtained additional information on the operating prospects for these two facilities and behavioral care facilities in general. Based on the additional information, the Company recorded a $4,000,000 third quarter provision for losses. In addition, the Company recognized approximately $2,155,000 in interest income on the above three loans in 1994 when the Detroit, Michigan obligor paid 12 monthly interest payments, and the Florida obligor paid 11 monthly interest payments. Until the lawsuits are settled, the Company's net income and cash flow will be adversely affected. The Company is continuing to proceed aggressively against the borrowers; however, bankruptcy proceedings are slow. The Company has evaluated its allowance for losses and believes that the allowance is adequate. In September 1995, the Company announced that it had revised the proposed merger agreement with First Toledo Advisory Company (its Manager). Through September 30, 1995, the Company incurred $763,500 of expenses related to the settlement of the management contract. The Company anticipates that it will incur approximately $100,000 of additional costs as well as the cost related to the fair value of issuing 282,407 shares, all of which is expected to be recognized in the fourth quarter of 1995. During the first nine months of 1995, average earnings on assets increased three basis points versus the same period for 1994, after excluding gains and other non-recurring items. However, in the second and third quarters, average earnings on assets declined 19 and 13 basis points, respectively, versus the comparable periods in 1994. The decline in average earnings on assets was caused by placing three loans on non-accrual status (discussed above) during the first quarter of 1995 and the general decline in interest rates during the last four quarters. During the same nine-month period, the Company experienced a 45 basis point increase in its average cost of borrowing. This was primarily due to new borrowings predominantly at the prime rate, which has not declined as quickly as U.S. Treasury rates used for new investments. However, the Company's average cost of borrowing declined in the second and third quarters of 1995 over the prior respective quarters. This decline is expected to level off in the final quarter of 1995. The above trends resulted in a tightening of its interest rate margin on a year-to-date basis. In the third quarter, the Company increased the use of its LIBOR interest rate pricing option, which is available on its primary line of credit. This interest rate pricing option has historically been less expensive than prime interest rate. Therefore, the greater utilization of LIBOR favorably affected the average cost of debt. Lastly, the Company's net income was affected by the average quarter-end debt-to-equity ratio of .84 to 1 in 1995 versus .63 to 1 in the first nine months of 1994. The increase in debt had the effect of increasing the Company's interest related expense. PART II. OTHER INFORMATION Item 5. Other Information On July 19, 1995, 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 payable to shareholders of record on August 4, 1995, and that net income was $.40, a decrease of $.28 from the second quarter of 1995. None of the declared distribution constitutes return of capital on a GAAP basis since the Company's undistributed net income was $13,963,359 at June 30, 1995. On August 3, 1995, the Company issued a press release in which it announced, among other things, that an agreement in principle had been reached with debtors on two defaulted psychiatric hospital loans to hire independent professional management. On September 6, 1995, the Company issued a press release in which it announced, among other things, that the Board of Directors had approved revised terms of the acquisition of First Toledo Advisory Company, the Manager of the Company. The transaction described herein is subject to definitive agreements, stockholder approval, and other customary conditions. On September 25, 1995, the Company issued a press release in which it announced, among other things, that it had closed a $2.8 million mortgage loan for an 89-bed assisted living facility in Pennsylvania. On September 26, 1995, the Company issued a press release in which it announced, among other things, that it planned to send proxy materials relating to the proposed acquisition of First Toledo Advisory Company to shareholders of record on October 6, 1995. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 99. Press release dated July 19, 1995 99. Press release dated August 3, 1995 99. Press release dated September 6, 1995 99. Press release dated September 25, 1995 99. Press release dated September 26, 1995 (b) Reports on Form 8-K None. 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 1, 1995 By: BRUCE G. THOMPSON Bruce G. Thompson, Chairman and Chief Executive Officer Date: November 1, 1995 By: GEORGE L. CHAPMAN George L. Chapman, President Date: November 1, 1995 By: ROBERT J. PRUGER Robert J. Pruger, Chief Financial Officer Date: November 1, 1995 By: KATHLEEN S. PREPHAN Kathleen S. Prephan, Chief Accounting Officer EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: Designation Number Under Exhibit Item 601 of Exhibit Page Number Regulation S-K Description Number - -------- -------------- ----------- ------ 1 99 Press Release dated July 19, 1995 14 2 99 Press Release dated August 3, 1995 16 3 99 Press Release dated September 6, 1995 17 4 99 Press Release dated September 25, 1995 19 5 99 Press Release dated September 26, 1995 20