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, 1999 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to _______________________ Commission File number 1-8923 HEALTH CARE REIT, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1096634 ------------------------------ ------------------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One SeaGate, Suite 1500, Toledo, Ohio 43604 - -------------------------------------- ------------------- (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code) (419) 247-2800 --------------------------- - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No ______. APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____. No _____. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 29, 1999. Class: Shares of Common Stock, $1.00 par value Outstanding 28,317,335 shares
2 HEALTH CARE REIT, INC. INDEX Page ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three months ended March 31, 1999 and 1998 4 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 1999 and 1998 5 Consolidated Statements of Cash Flows- Three months ended March 31, 1999 and 1998 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 Part II. OTHER INFORMATION Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16 -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 1999 1998 (UNAUDITED) (NOTE) ---------- ---------- (IN THOUSANDS) <S> <C> <C> ASSETS Real estate investments: Real property owned: Land $ 57,763 $ 44,722 Buildings & improvements 588,713 443,574 Construction in progress 80,285 151,317 ---------- ---------- 726,761 639,613 Less accumulated depreciation (23,179) (19,624) ---------- ---------- Total real property owned 703,582 619,989 Loans receivable 412,368 405,963 Direct financing leases 1,139 6,741 ---------- ---------- 1,117,089 1,032,693 Less allowance for loan losses (5,137) (4,987) ---------- ---------- Net real estate investments 1,111,952 1,027,706 Other Assets: Direct investments 25,888 26,180 Marketable securities 2,233 4,106 Cash and cash equivalents 1,231 1,269 Deferred loan expenses 3,440 2,389 Receivables and other assets 15,301 11,774 ---------- ---------- 48,093 45,718 ---------- ---------- TOTAL ASSETS $1,160,045 $1,073,424 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations $ 89,200 $ 171,550 Senior unsecured notes 290,000 240,000 Secured debt 51,408 7,429 Accrued expenses and other liabilities 22,743 20,686 ---------- ---------- TOTAL LIABILITIES 453,351 439,665 Shareholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - 6,000,000 in 1999 150,000 75,000 Common Stock, $1.00 par value: Authorized - 40,000,000 shares Issued and outstanding - 28,317,335 in 1999 and 28,240,025 in 1998 28,317 28,240 Capital in excess of par value 519,982 520,692 Undistributed net income 10,834 10,434 Accumulated other comprehensive income 2,109 3,982 Unamortized restricted stock (4,548) (4,589) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 706,694 633,759 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,160,045 $1,073,424 ========== ========== </TABLE> NOTE: The balance sheet at December 31, 1998 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 1999 1998 ----------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> REVENUES: Rental income $14,240 $ 7,858 Interest income 11,795 12,116 Commitment fees and other income 1,946 1,252 Prepayment fees 183 0 ------- ------- Total revenue 28,164 21,226 EXPENSES: Interest expense 4,269 4,240 Loan expense 166 176 Provision for depreciation 3,555 1,870 Provision for losses 150 150 General and administrative expenses 1,674 1,381 ------- ------- Total expenses 9,814 7,817 ------- ------- Net income before gains on sale of properties 18,350 13,409 Gain on sale of properties 628 0 ------- ------- Net income 18,978 13,409 Preferred stock dividends 2,759 0 ------- ------- Net Income Available to Common Shareholders $16,219 $13,409 ======= ======= Average number of shares outstanding: Basic 28,077 24,259 Diluted 28,393 24,642 Net income per share: Basic $ 0.58 $ 0.55 Diluted 0.57 0.54 Dividends declared and paid per common share $ 0.56 $ 0.54 </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, 1999 ------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive In thousands Stock Stock Par Value Stock Net Income Income Total ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $75,000 $28,240 $520,692 $(4,589) $ 10,434 $ 3,982 $633,759 Comprehensive income: Net income 18,978 18,978 Unrealized gains on securities (1,873) (1,873) -------- Comprehensive income 17,105 -------- Proceeds from issuance of shares from dividend reinvestment plan and stock incentive plans 77 1,745 (228) 1,594 Proceeds from sale of shares 75,000 (2,455) 72,545 Amortization of restricted stock grants 269 269 Cash dividends paid (18,578) (18,578) -------- ------- -------- ------- -------- -------- -------- Balance at end of period $150,000 $28,317 $519,982 $(4,548) $ 10,834 $ 2,109 $706,694 ======== ======= ======== ======= ======== ======== ======== <CAPTION> Three months ended March 31, 1998 ------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive In thousands Stock Stock Par Value Stock Net Income Income Total ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $ $24,341 $435,603 $(3,532) $ 8,841 $ 4,671 $469,924 Comprehensive income: Net income 13,409 13,409 Unrealized gains on securities 339 339 ------- Comprehensive income 13,748 ------- Proceeds from issuance of shares from dividend reinvestment plan and stock incentive plans 114 2,691 (64) 2,741 Proceeds from sale of shares 913 22,808 23,721 Amortization of restricted stock grants 115 115 Cash dividends paid (13,148) (13,148) ------- ------- -------- ------- -------- -------- -------- Balance at end of period $ 0 $25,368 $461,102 $(3,481) $ 9,102 $ 5,010 $497,101 ======= ======= ======== ======= ======== ======== ======== </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 1999 1998 ---------------------------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 18,978 $ 13,409 Adjustments to reconcile net income to net cash Provision for depreciation 3,650 1,897 Provision for losses 150 150 Amortization 443 291 Loan and commitment fees earned less than cash received 529 523 Direct financing lease income less than cash received 35 110 Rental income in excess of cash received (1,573) (569) Interest and other income in excess of cash received (107) (5) Increase in accrued expenses and other liabilities 1,527 3,400 (Increase)/decrease in receivables and other assets (1,730) 86 ------- -------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 21,902 19,292 INVESTING ACTIVITIES Investment in real properties (84,829) (68,419) Investment in loans receivable (13,039) (38,040) Other investments (1,919) (3,716) Principal collected on loans 6,634 7,774 Proceeds from sale of properties 5,567 Other (318) 6 -------- --------- NET CASH USED IN INVESTING ACTIVITIES (87,904) (102,395) FINANCING ACTIVITIES Net (payments)/advances under line of credit arrangements (82,350) (29,400) Principal payments on long-term obligations (21) (19) Net proceeds from the issuance of Common Stock 1,594 26,462 Net proceeds from the issuance of Preferred Stock 72,545 Proceeds from issuance of Senior Notes 50,000 100,000 Proceeds from issuance of Secured Debt 44,000 Increase in deferred loan expense (1,226) (484) Cash distributions to shareholders (18,578) (13,148) -------- --------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 65,964 83,411 -------- --------- Increase/(decrease) in cash and cash equivalents (38) 308 Cash and cash equivalents at beginning of period 1,269 1,381 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,231 $ 1,689 ======== ========= Supplemental Cash Flow Information -- Interest Paid $ 6,523 $ 1,973 ======== ========= </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, 1999, are not necessarily an indication of the results that may be expected for the year ending December 31, 1999. 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, 1998. NOTE B - REAL ESTATE INVESTMENTS During the three months ended March 31, 1999, the Company invested $35,974,000 in real property, made construction advances of $60,217,000, provided permanent mortgage financings of $1,220,000, and funded $1,882,000 of equity related investments. During the three months ended March 31, 1999, the Company received principal payments on real estate mortgages of $6,634,000 and had net advances on working capital loans of $458,000. With respect to the above-mentioned construction advances, funding for construction in progress in connection with 48 properties owned directly by the Company totaled $48,856,000, and funding associated with 13 construction loans represented $11,361,000. During the three months ended March 31, 1999, 14 of the construction properties in progress completed the construction phase of the Company's investment process and were converted to permanent operating leases, with an aggregate investment balance of $119,887,000. Also, during the three months ended March 31, 1999, four 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 $28,909,000. NOTE C - INDEBTEDNESS In February 1999, the Company entered into a $50,000,000 Secured Credit Agreement. The Credit Agreement bears interest at the lender's prime rate or LIBOR plus 2.0%, with a floor interest rate of 7.0%. At March 31, 1999, $44,000,000 was advanced under this Credit Agreement. In March 1999, the Company completed the sale of $50 million of 8.17% Senior Unsecured Notes due March 15, 2006. The Company has a total of $190,000,000 in unsecured credit facilities bearing interest at the lenders' prime rate or LIBOR plus 1.0%. A total of approximately $100,800,000 was available at March 31, 1999, subject to compliance with the terms and conditions of the unsecured credit facilities. -7-
8 NOTE D - SHAREHOLDERS' EQUITY In January 1999, the Company announced the sale of 3,000,000 shares of cumulative convertible preferred stock. These shares have a liquidation value of $25.00 per share and will pay dividends equivalent to the greater of (i) the annual dividend rate of $2.25 per share (a quarterly dividend rate of $0.5625 per share); or (ii) the quarterly dividend then payable per common share on an as converted basis. The preferred shares are convertible into common stock at a conversion price of $25.625 per share. The Company has the right to redeem the preferred shares after five years. In May 1998, the Company sold 3,000,000 shares of 8.875% Series B Cumulative Redeemable Preferred Stock with a liquidation preference of $25.00 per share. On and after May 1, 2003, the Preferred Stock may be redeemed for cash at the option of the Company, in whole or in part, at $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date. NOTE E - DIRECT INVESTMENTS Management determines the appropriate classification of a direct investment at the time of acquisition and reevaluates such designation as of each balance sheet date. Debt securities which are classified as held to maturity are stated at historical cost. Equity investments are stated at historical cost. At March 31, 1999, direct investments included the preferred stock of one private corporation and subordinated debt in nine private corporations, 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. NOTE F - MARKETABLE SECURITIES Marketable securities are stated at market value with unrealized gains and losses reported in a separate component of shareholders' equity. At March 31, 1999, marketable securities reflected the market value of the common stock of two publicly owned corporations, which were obtained by the Company at no cost, and the fair value of the common stock related to warrants in one publicly owned corporation in excess of the exercise price. NOTE G - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 1998, the Company was contingently liable for certain obligations amounting to $9,365,000. No significant change in these contingencies had occurred as of March 31, 1999. NOTE H - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS On February 22, 1999, the Company paid a dividend of $0.56 per share to shareholders of record on February 2, 1999. This dividend related to the period from October 1, 1998 through December 31, 1998. -8-
9 NOTE I - 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 --------------------------- 1999 1998 ------- ------- <S> <C> <C> Numerator for basic and diluted earnings per share-income available to common shareholders $16,219 $13,409 ======= ======= Denominator for basic earnings per share - weighted average shares 28,077 24,259 Effect of dilutive securities: Employee stock options 116 143 Nonvested restricted shares 200 240 ------- ------- Dilutive potential common shares 316 383 ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 28,393 24,642 ======= ======= Basic earnings per share $ 0.58 $ 0.55 Diluted earnings per share $ 0.57 $ 0.54 </TABLE> -9-
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES At March 31, 1999, the Company's net real estate investments totaled approximately $1,111,952,000, which included 154 assisted living facilities, 53 skilled nursing facilities, 17 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, 1999, the Company had shareholders' equity of $706,694,000 and a total outstanding debt balance of $430,608,000, which represents a debt to equity ratio of 0.61 to 1.0. In January 1999, the Company announced the sale of 3,000,000 shares of cumulative convertible preferred stock. These shares have a liquidation value of $25.00 per share and will pay quarterly dividends equivalent to the greater of $0.5625 or the quarterly dividend then payable per common share on an as converted basis. The preferred shares are convertible into common stock at a conversion price of $25.625 per share. The Company has the right to redeem the preferred shares after five years. In February 1999, the Company entered into a $50,000,000 Secured Credit Facility. The Credit Facility bears interest at the lender's prime rate or LIBOR plus 2.0%, with a floor of 7.0%. At March 31, 1999, $44,000,000 was advanced under this Credit Agreement. In March 1999, the Company completed the sale of $50 million of 8.17% Senior Unsecured Notes due March 15, 2006. During the three months ended March 31, 1999, the proceeds derived from the Company's capital raising activities were used to invest in additional health care properties and reduce bank debt under the Company's revolving lines of credit arrangements. As of March 31, 1999, the Company has effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $330,319,000 of securities including debt, convertible debt, common and preferred stock. 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. As of March 31, 1999, the Company had approximately $263,511,000 in unfunded commitments. Under the Company's line of credit arrangements, available funding totaled $100,800,000, subject to compliance with the terms and conditions of the line of credit arrangements. 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. RESULTS OF OPERATIONS Revenues for the three months ended March 31, 1999, were $28,164,000 as compared with $21,226,000 for the three months ended March 31, 1998. Revenue growth was generated primarily by increased rental income of $6,382,000 and increased commitment fees and other income of $694,000, as a result of additional real estate investments made during the past twelve months. In addition, the Company recognized $628,000 in gains on sale of properties during the first three months in 1999. There were no such gains during the same period in 1998. Expenses for the three months ended March 31, 1999, totaled $9,814,000, an increase of $1,997,000 from expenses of $7,817,000 for the same period in 1998. The increase in total expenses for the three month period ended March 31, 1999, was related to an increase in interest expense, an additional expense associated with the provision for depreciation and an increase in general and administrative expenses. -10-
11 Interest expense for the three months ended March 31, 1999, was $4,269,000 as compared with $4,240,000 for the same period in 1998. The increase in the 1999 period was primarily due to the issuance of $50,000,000 Senior Unsecured Notes in March, 1999. The increase in the 1999 period was offset by the amount of capitalized interest recorded during the first three months of 1999. 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. The Company's interest expense is reduced by the amount capitalized. Capitalized interest for the three month period in 1999 totaled $3,159,000, as compared with $1,226,000 for the same period in 1998. The provision for depreciation for the three month period ended March 31, 1999, totaled $3,555,000, an increase of $1,685,000 over the comparable period in 1998 as a result of additional investments in properties owned directly by the Company. General and administrative expense for the three month period ended March 31, 1999, totaled $1,674,000, as compared with $1,381,000 for the same period in 1998. The expenses for the three month period in 1999 were 5.81% of revenues as compared with 6.51% for the same period in 1998. Dividends associated with the Company's outstanding preferred stock totaled $2,759,000 for the three months ended March 31, 1999. There were no such dividend payments for the same period in 1998. As a result of the various factors mentioned above, net income available to common shareholders for the three month period ended March 31, 1999, was $16,219,000, or $0.57 per diluted share, as compared with $13,409,000, or $0.54 per diluted share, for the comparable period in 1998. IMPACT OF INFLATION During the past three years, inflation has not significantly affected the earnings of the Company because of the moderate inflation rate. Additionally, earnings of the Company are primarily long-term investments with fixed interest rates. These investments are mainly financed with a combination of equity, senior notes and borrowings under the revolving lines of credit. During inflationary periods, which generally are accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Presuming the current inflation rate remains moderate and long-term interest rates do not increase significantly, the Company believes that equity and debt financing will continue to be available. YEAR 2000 COMPLIANCE The Year 2000 compliance issue concerns the inability of certain systems and devices to properly use or store dates beyond December 31, 1999. This could result in system failures, malfunctions, or miscalculations that disrupt normal operations. This issue affects most companies and organizations to large and small degrees, at least to the extent that potential exposures must be evaluated. The Company believes its own internal operations, technology infrastructure, information systems and software applications are Year 2000 compliant. The Company is reviewing the impact of outside vendors and tenants/borrowers. The Company initially focused this review on mission-critical operations, recognizing that other potential effects are expected to be less material. In those cases where there are external compliance issues, these are considered to be minor in nature. Expenditures for any remedies will not be material. With respect to the Company's tenants, borrowers and properties, the Company is assessing the tenants and borrowers compliance efforts, the possibility of any interface difficulties or electromechanical problems relating to compliance by material vendors, the effects of potential non-compliance, and remedies that may mitigate or -11-
12 obviate such effects. The Company plans to process information from tenant surveys beginning in 1999 and complete its assessment by mid-1999. Because the Company's evaluation of these issues has been conducted by its own personnel or by selected inquiries of its vendors and tenants in connection with their routine servicing operations, the Company believes that its expenditures for assessing Year 2000 issues, though difficult to quantify, have not been material. In addition, the Company is not aware of any issues that will require material expenditures by the Company in the future. Based upon current information, the Company believes that the risk posed by foreseeable Year 2000 related problems with its internal systems (including both information and non-information systems) is minimal. Year 2000 related problems with the Company's software applications and internal operational programs are unlikely to cause more than minor disruptions in the Company's operations. Year 2000 related problems at certain of its third-party service providers, such as its banks, payroll processor, and telecommunications provider is marginally greater, though, based upon current information, the Company does not believe any such problems would have a material effect on its operations. For example, Year 2000 related problems at such third-party service providers could delay the processing of financial transactions and the Company's payroll and could disrupt the Company's internal and external communications. The Company believes that the risk posed by Year 2000 related problems at its properties or with its tenants is marginally greater, though, based upon current information, the Company does not believe any such problems would have a material effect on its operations. Year 2000 related problems at certain governmental agencies and third-party payers could delay the processing of tenant financial transactions, though, based upon current information, the Company does not believe any such problems would have a material long-term effect on its operations. Year 2000 related problems with the electromechanical systems at its properties are unlikely to cause more than minor disruptions in the Company's operations. The Company intends to complete outstanding assessments, implement identified remedies, continue to monitor Year 2000 issues, and develop contingency plans if, and to the extent deemed, necessary. However, based upon current information and barring developments, the Company does not anticipate developing any substantive contingency plans with respect to Year 2000 issues. In addition, the Company has no plans to seek independent verification or review of its assessments. While the Company believes that it will be Year 2000 compliant by December 31, 1999, there can be no assurance that the Company will be successful in identifying and assessing all compliance issues, or that the Company's efforts to remedy all Year 2000 compliance issues will be effective such that they will not have a material adverse effect on the Company's business or results of operations. OTHER INFORMATION This document and supporting schedules may contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, among others, competition in the financing of health care facilities, the availability of capital, and regulatory and other changes in the health care sector, as described in the Company's filings with the Securities and Exchange Commission. -12-
13 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ---------------------------------------- ABOUT MARKET RISK ----------------- The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings to the extent possible. The market value of the Company's long-term fixed rate borrowings is subject to interest rate risk. Generally, the market value of fixed rate financial instruments will decrease as interest rates rise and increase as interest rates fall. The estimated fair value of the Company's total long-term borrowings at March 31, 1999, was $284 million. A 1% increase in interest rates would result in a decrease in fair value of long-term borrowings by approximately $13 million. The Company is subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of the Company's borrowings were completed pursuant to indentures or contractual agreements which limit the amount of indebtedness the Company may incur. Accordingly, in the event that the Company is unable to raise additional equity or borrow money because of these limitations, the Company's ability to acquire additional properties may be limited. At March 31, 1999, the Company's variable interest rate debt exceeded its variable interest rate assets, presenting an exposure to rising interest rates. The Company may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of future volatility of interest rate. -13-
14 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ----------------- On January 19, 1999, the Company issued a press release in which it announced an increase in quarterly dividend. On January 19, 1999, the Company issued a press release in which it announced the private placement of $75 million of convertible preferred stock. On January 20, 1999, the Company issued a press release in which it announced Peter J. Grua as a new Director. On January 21, 1999, the Company issued a press release in which it announced record new investments of $397 million for 1998. On February 2, 1999, the Company issued a press release in which it announced operating results for year ended December 31, 1998. On March 16, 1999, the Company issued a press release in which it announced the sale of $50 million of senior unsecured notes. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 27 Financial Data Schedule 99.1 Press release dated January 19, 1999 99.2 Press release dated January 19, 1999 99.3 Press release dated January 20, 1999 99.4 Press release dated January 21, 1999 99.5 Press release dated February 2, 1999 99.6 Press release dated March 16, 1999 (b) Reports on Form 8-K On March 17, 1999, the Company filed a Report on Form 8-K regarding the issuance of $50 million of senior unsecured notes. -14-
15 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: April 30, 1999 By: /S/ GEORGE L. CHAPMAN ------------------ -------------------------------------------- George L. Chapman, Chairman, Chief Executive Officer, and President Date: April 30, 1999 By: /S/ EDWARD F. LANGE, JR. ----------------- -------------------------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: April 30, 1999 By: /S/ MICHAEL A. CRABTREE ----------------- -------------------------------------------- Michael A. Crabtree, Chief Accounting Officer -15-
16 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 -------------- ------------------------------------ 27 Financial Data Schedule 99.1 Press release dated January 19, 1999 99.2 Press release dated January 19, 1999 99.3 Press release dated January 20, 1999 99.4 Press release dated January 21, 1999 99.5 Press release dated February 2, 1999 99.6 Press release dated March 16, 1999 -16-