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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
Commission File Number 1-8895
HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification No.)
10990 Wilshire Boulevard, Suite 1200
Los Angeles, California 90024
(Address of principal executive offices)
Registrant's telephone number: (310) 473-1990
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock* New York Stock Exchange
*The Common Stock has stock purchase rights attached which are registered
pursuant to Section 12(b) of the Act and listed on the New York Stock Exchange.
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
registration was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 18, 1997 there were 28,708,284 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of these shares on
March 18, 1997 on the New York Stock Exchange, was approximately $957,000,000.
Portions of the definitive Proxy Statement for the registrant's 1997 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
PART I
ITEM 1. BUSINESS
Health Care Property Investors, Inc. (the "Company"), a Maryland
corporation, was organized in March 1985 to qualify as a real estate investment
trust ("REIT"). The Company invests in health care related real estate located
throughout the United States, including long-term care facilities, congregate
care and assisted living facilities, acute care and rehabilitation hospitals,
medical office buildings, physician group practice clinics and psychiatric
facilities. Having commenced business nearly 12 years ago, the Company today is
the second oldest REIT specializing in health care real estate. Presently, the
Company is one of the 25 largest REITs in terms of market value of common stock.
At December 31, 1996, the Company owned an interest in 191 properties located in
38 states, which are leased or subleased pursuant to long-term leases (the
"Leases") to 45 health care providers (the "Lessees"), including affiliates of
Beverly Enterprises, Inc. ("Beverly"), Columbia/HCA Healthcare Corp.
("Columbia"), Emeritus Corporation ("Emeritus"), HealthSouth Corporation
("HealthSouth"), Horizon/CMS Healthcare Corporation ("Horizon"), Tenet
Healthcare Corporation ("Tenet") and Vencor, Inc. ("Vencor"). Of the Lessees,
only Vencor accounts for more than 10% of the Company's revenue for the year
ended December 31, 1996. The Company also holds mortgage loans on 23 properties
that are owned and operated by 10 health care providers (the "Mortgagors")
including Beverly, Columbia and Tenet.
At December 31, 1996, the gross acquisition price of the Company's 214
leased or mortgaged properties (the "Properties"), including partnership
acquisitions and mortgage loan acquisitions, was approximately $915.3 million.
The average age of the Properties is 18 years. Approximately, 73% of the
Company's revenue is derived from Properties operated by publicly traded health
care providers.
Since receiving its initial senior debt rating of Baa1/BBB by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("Standard & Poor's") in 1986, the Company has historically maintained or
improved its ratings. Currently, its senior debt is rated Baa1/BBB+/A- by
Moody's, Standard & Poor's and Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), respectively. The Company believes that it has had an excellent track
record in attracting and retaining key employees. The Company's five executive
officers have worked with the Company on average for 11 years. The average
tenure overall of its employee base is seven years. The Company's annualized
return to its stockholders, assuming reinvestment of dividends and before income
taxes is approximately 21% over the period from its initial public offering in
May 1985 through December 31, 1996.
References herein to the Company include Health Care Property Investors,
Inc. and its wholly-owned subsidiaries and affiliated partnerships, unless the
context otherwise requires.
THE PROPERTIES
Of the 214 health care facilities in which the Company has an investment as
of December 31, 1996, the Company directly owns 158 facilities including 99
long-term care facilities, two rehabilitation hospitals, 45 congregate care and
assisted living centers, one acute care hospital, nine medical office buildings
and two physician group practice clinics.
The Company has provided mortgage loans on 23 properties, including 15
long-term care facilities, two congregate care and assisted living centers,
three acute care hospitals and three medical office buildings. In February 1997,
one of the mortgagors substituted an acute care hospital and a medical office
building which secured one of the mortgage loans with a medical office
building located in Alaska.
At December 31, 1996, the Company also had varying percentage interests in
several partnerships that together own 33 facilities, as further discussed
below:
1. A 77% interest in a joint venture which owns two acute care hospitals,
one psychiatric facility and 21 long-term care facilities.
2. Interests of between 90% and 97% in four joint ventures, each of
which was formed to own a comprehensive rehabilitation hospital.
3. A 50% interest in five partnerships, each of which owns a congregate
care facility.
The following summary of the Company's Properties details certain pertinent
information grouped by type of facility and equity interest as of December 31,
1996:
Equity Number Number Total
Interest of of Beds Investments Annual
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- --------------------------- ---------- ---------- ---------- ----------- --------------
(Dollar Amounts in thousands)
Long-Term Care Facilities 100% 114 13,902 $ 360,660 $ 53,335
Long-Term Care Facilities 77 21 2,438 56,672 9,778
----- ------- ---------- ----------
135 16,340 417,332 63,113
----- ------- ---------- ----------
Acute Care Hospitals 100 4 646 42,321 5,197
Acute Care Hospitals 77 2 356 42,807 7,629
----- ------- ---------- ----------
6 1,002 85,128 12,826
----- ------- ---------- ----------
Rehabilitation Hospitals 100 2 186 27,171 3,965
Rehabilitation Hospitals 97 3 204 32,380 6,097
Rehabilitation Hospital 90 1 108 15,113 2,058
----- ------- ---------- ----------
6 498 74,664 12,120
----- ------- ---------- ----------
Congregate Care & Assisted Living Centers 100 47 3,854 217,171 20,172
Congregate Care & Assisted Living Centers 50 5 609 33,105 4,856
----- ------- ---------- ----------
52 4,463 250,276 25,028
----- ------- ---------- ----------
Medical Office Buildings (3) 100 12 --- 55,654 6,063
Physician Group Practice Clinics (4) 100 2 --- 28,287 3,014
Psychiatric Facility 77 1 108 3,919 561
----- ------- ---------- ----------
Totals 214 22,411 $ 915,260 $ 122,725
----- ------- ---------- ----------
(1) Congregate Care and Assisted Living Centers are stated in units; all other
facilities are stated in beds, except the Medical Office Buildings and the
Physician Group Practice Clinics.
(2) Includes partnership investments, and incorporates all partners' assets and
construction commitments.
(3) The Medical Office Buildings encompass approximately 530,600 square feet.
(4) The Physician Group Practice Clinics encompass approximately 331,900 square
feet.
LONG-TERM CARE FACILITIES. The Company owns or holds mortgage loan
interests in 135 long-term care facilities. These facilities are leased to
various health care providers. Such long-term care facilities offer
restorative, rehabilitative and custodial nursing care for people not
requiring the more extensive and sophisticated treatment available at acute
care hospitals. Many long-term care facilities have experienced significant
growth in ancillary revenues and subacute care services over the past several
years. Ancillary revenues and subacute care services are derived from
providing services to residents beyond room and board care and include
occupational, physical, speech, respiratory and IV therapy, wound care,
oncology treatment, brain injury care and orthopedic therapy as well as sales
of pharmaceutical products and other services. In certain long-term
care facilities some of the foregoing services are provided on an out-patient
basis. Such revenues currently relate primarily to Medicare and private pay
residents. These facilities are designed to supplement hospital care and many
have transfer agreements with one or more acute care hospitals. These
facilities depend to some degree upon referrals from practicing physicians and
hospitals. Such services are paid for either by the patient or the patient's
family, or through the federal Medicare and state Medicaid programs.
Patients in long-term care facilities are generally provided with
accommodations, all meals, medical and nursing care, and rehabilitation services
including speech, physical and occupational therapy. As a part of the Omnibus
Budget Reconciliation Act ("OBRA") of 1981, Congress established a waiver
program under Medicaid to offer an alternative to institutional long-term care
services. The provisions of OBRA and the subsequent OBRA Acts of 1987 and 1991
allowed states, with federal approval, greater flexibility in program design as
a means of developing cost-effective alternatives to delivering services
traditionally provided in the long-term care setting. Recently this has led to
an increase in the number of assisted living facilities. This may adversely
affect some long-term care facilities for a period as individuals are shifted to
the lower cost delivery system provided in the assisted living setting.
Eligibility for assisted living services to be included as a Medicaid reimbursed
service does not necessarily mean that more Government spending will be
available for the delivery of health care services to the frail elderly.
CONGREGATE CARE AND ASSISTED LIVING CENTERS. The Company has investments
in 52 congregate care and assisted living centers. Congregate care
centers typically contain studio, one bedroom and two bedroom apartments
which are rented on a month-to-month basis by individuals, primarily
those over 75 years of age. Residents, who must be ambulatory, are provided
meals and eat in a central dining area; they may also be assisted with some
daily living activities. These centers offer programs and services that allow
residents certain conveniences and make it possible for them to live
independently; staff is also available when residents need assistance and for
group activities.
Assisted living centers serve elderly persons who require more assistance
with daily living activities than congregate care residents, but who do not
require the constant supervision nursing homes provide. Services include
personal supervision and assistance with eating, bathing, grooming and
administering medication. Assisted living centers typically contain larger
common areas for dining, group activities and relaxation to encourage social
interaction. Residents typically rent studio and one bedroom units on a
month-to-month basis.
Charges for room and board and other services in both congregate care and
assisted living centers are paid from private sources.
ACUTE CARE HOSPITALS. The Company has an interest in six acute care
hospitals. Acute care hospitals generally offer a wide range of services such as
general and specialty surgery, intensive care units, clinical laboratories,
physical and respiratory therapy, nuclear medicine, magnetic resonance imaging,
neonatal and pediatric care units, outpatient units and emergency departments,
among others. Such services are paid for either by the patient or the patient's
family, or through the federal Medicare and state Medicaid programs.
REHABILITATION HOSPITALS. The Company has an investment in six
rehabilitation hospitals. These hospitals provide inpatient and
outpatient care for patients who have sustained traumatic injuries or
illnesses, such as spinal cord injuries, strokes, head injuries, orthopedic
problems, work related disabilities and neurological diseases, as well as
treatment for amputees and patients with severe arthritis. Rehabilitation
programs encompass physical, occupational, speech and inhalation therapies,
rehabilitative nursing and other specialties. Such services are paid for either
by the patient or the patient's family, or through the federal Medicare program.
MEDICAL OFFICE BUILDINGS. The Company has investments in 12 medical office
buildings. These buildings are generally located adjacent to, or a short
distance from, acute care hospitals. Medical office buildings contain
physicians' offices and examination rooms, and may also include pharmacies,
hospital ancillary service space and day-surgery operating rooms. Medical office
buildings require more extensive plumbing, electrical, heating and cooling
capabilities than commercial office buildings for sinks, brighter lights and
special equipment physicians typically use. The Company's owned medical office
buildings are master leased to a Lessee which then subleases office space to
physicians or other medical practitioners.
PHYSICIAN GROUP PRACTICE CLINICS. The Company has investments in two
physician group practice clinics. Physician group practice clinics generally
provide a broad range of medical services through organized physician groups
representing various medical specialties.
PSYCHIATRIC FACILITY. The Company has an investment in one psychiatric
facility which offers comprehensive, multidisciplinary adult and adolescent
care. A substance abuse program is offered in a separate unit of the facility.
COMPETITION. The Company competes for property acquisitions with health
care providers, other health care related real estate investment trusts, real
estate partnerships and other investors.
The Company's Properties are subject to competition from the properties of
other health care providers. Certain of these other operators have capital
resources substantially in excess of some of the operators of the Company's
facilities. In addition, the extent to which the Properties are utilized
depends upon several factors, including the number of physicians using the
health care facilities or referring patients there, competitive systems of
health care delivery and the area population, size and composition. Private,
federal and state payment programs and the effect of other laws and regulations
may also have a significant effect on the utilization of the Properties.
Virtually all of the Properties operate in a competitive environment and
patients and referral sources, including physicians, may change their
preferences for a health care facility from time to time.
The following table shows, with respect to each Property, the location by
state, the number of beds/units, recent occupancy levels, patient revenue mix,
annual rents and interest and information regarding remaining lease terms, by
property type.
Average
Number Private
Number of Beds/ Patient Annual Average
of Units Average Revenue Rents/ Remaining
Facility Location Facilities (1) Occupancy (2) Interest Term
- --------------------------- ---------- -------- --------- -------- --------- ---------
(Thousands) (Years)
Long-Term Care Facilities
Alabama 1 174 95% 31% $ 774 1
Arkansas 9 866 78 48 2,184 9
California 20 1,896 89 48 6,328 4
Colorado 3 420 92 61 1,801 3
Connecticut 1 121 98 41 630 3
Florida 11 1,267 94 55 6,754 6
Illinois 2 201 90 53 472 5
Indiana 13 1,709 85 51 6,615 14
Iowa 1 201 88 34 605 2
Kansas 3 325 89 53 1,801 2
Kentucky 1 100 99 61 399 5
Louisiana 1 120 94 34 611 8
Maryland 3 438 87 35 3,120 1
Massachusetts 5 615 95 43 2,800 5
Michigan 3 286 87 53 898 5
Mississippi 1 120 99 6 351 5
Missouri 2 423 62 46 1,988 3
Montana 1 80 77 41 270 2
New Mexico 1 102 97 20 307 1
North Carolina 9 1,058 81 50 3,840 9
Ohio 9 1,226 93 53 5,609 4
Oklahoma 2 207 90 69 1,707 2
Oregon 1 110 80 41 334 1
South Carolina 2 52 92 100 390 14
Tennessee 10 1,754 97 43 5,075 5
Texas 11 1,242 53 35 3,132 4
Washington 1 84 82 66 292 2
Wisconsin 8 1,143 90 52 4,026 6
----- -------- ------ ------- --------- -----
Sub-Total 135 16,340 86 48 63,113 6
----- -------- ------ ------- --------- -----
Acute Care Hospitals
California 1 182 52 92 3,707 2
Florida 1 285 37 93 1,152 6
Louisiana 2 325 48 86 5,171 6
Texas 2 210 53 99 2,796 4
----- -------- ------ ------- --------- ------
Sub-Total 6 1,002 46 92 12,826 5
----- -------- ------ ------- --------- ------
Page Totals 141 17,342 84% 47% $ 75,939 6
----- -------- ------ ------- --------- ------
Average
Number Private
Number of Beds/ Patient Annual Average
of Units Average Revenue Rents/ Remaining
Facility Location Facilities (1) Occupancy (2) Interest Term
- --------------------------- ---------- -------- ---------- -------- ---------- ----------
(Thousands) (Years)
(Totals From Previous Page) 141 17,342 84% 47% $ 75,939 6
----- -------- ------ ------- --------- -----
Rehabilitation Facilities
Arizona 1 60 61 100 1,715 2
Arkansas 1 60 81 100 1,902 4
Colorado 1 64 76 100 1,545 4
Kansas 1 80 69 100 2,650 2
Texas 2 234 26 100 4,308 4
----- -------- ------ ------- --------- -----
Sub-Total 6 498 50 100 12,120 4
----- -------- ------ ------- --------- -----
Physician Group Practice Clinics (4)
Arkansas 1 -- -- 100 2,507 13
Tennessee 1 -- -- 100 507 12
----- -------- ------ ------- --------- -----
Sub-Total 2 -- -- 100 3,014 13
----- -------- ------ ------- --------- -----
Psychiatric Facility - Georgia 1 108 20 100 560 1
----- -------- ------ ------- --------- -----
Congregate Care and Assisted Living Centers
Arkansas 1 17 95 100 27 13
Arizona 1 97 90 100 490 11
California (3) 6 593 73 100 3,308 14
Colorado 1 98 90 100 646 2
Delaware 1 52 95 100 375 11
Florida 4 291 84 98 1,386 12
Idaho (3) 1 117 -- -- -- --
Kansas 1 110 90 100 591 2
Louisiana 2 209 99 100 1,688 3
Maryland 1 86 99 100 797 13
Missouri 1 73 76 100 359 5
New Jersey 1 117 96 100 644 11
New Mexico (3) 2 285 41 100 800 13
New York 1 74 72 100 410 11
North Carolina 3 229 94 100 1,306 13
Ohio 1 156 96 100 756 14
Oregon 1 58 97 90 373 12
Pennsylvania 3 200 95 100 1,594 11
Rhode Island 1 172 93 100 1,376 4
South Carolina 5 400 92 100 2,501 14
Texas (3) 11 825 40 100 4,313 13
Virginia 1 65 84 100 615 13
Washington 2 139 93 100 673 11
----- -------- ------ ------- --------- -----
Sub-Total 52 4,463 72 100 25,028 12
----- -------- ------ ------- --------- -----
Medical Office Buildings (4)
California 1 -- -- 100 690 12
Texas 10 -- -- 100 4,829 10
Utah 1 -- -- 100 545 13
----- -------- ------ ------- --------- -----
Sub-Total 12 -- -- 100 6,064 10
----- -------- ------ ------- --------- -----
Total Facilities 214 22,411 80% 59% $122,725 8
----- -------- ------ ------- --------- -----
(1) Congregate Care and Assisted Living Centers are measured in units.
Physician Group Practice Clinics and Medical Office Buildings are measured
in square feet and encompass approximately 331,900 and 530,600 square feet,
respectively. All other facilities are measured by bed count.
(2) All revenues, including Medicare revenues but excluding Medicaid revenues,
are included in "Private Patient" revenues.
(3) Includes facilities under construction.
(4) Physician Group Practice Clinics and Medical Office Building lessees have
use of the leased facilities for their own use or for the use of
Sub-lessees.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1996, the Company owned an interest in 214 Properties
located in 38 states, which are operated by 51 operators. Listed below are the
Company's major operators and the annualized revenue and the percentage of
annualized revenue derived from such operators.
Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
- ----------- ---------- ------------- -------------
Vencor 52 $ 23,344,000 19%
Beverly 25 9,922,000 8
Horizon 8 9,818,000 8
Emeritus 20 8,849,000 7
Columbia 13 8,169,000 7
Tenet 2 7,629,000 6
HealthSouth 3 6,023,000 5
Lessees of 52 of the Company's 214 Properties are subsidiaries of Vencor
(formerly subsidiaries of The Hillhaven Corporation ("Hillhaven")). Based
upon public reports, Vencor's revenue and net income for the nine months ended
September 30, 1996 were approximately $1.9 billion and $92 million,
respectively; and Vencor's total assets and stockholders' equity as of September
30, 1996 were approximately $2.0 billion and $829.9 million, respectively.
Vencor reported net operating revenue and net loss for the year ended December
31, 1995 of approximately $2.3 billion and $14.9 million, respectively. At
December 31, 1995, Vencor's net assets and stockholders' equity were
approximately $1.9 billion and $772 million, respectively.
Five Properties (two acute care hospitals, two rehabilitation hospitals and
one psychiatric facility) were initially leased to subsidiaries of Tenet. In
January 1994, subsidiaries of Tenet assigned the leases for the two
rehabilitation hospitals to HealthSouth. In March 1995, the lease on the
psychiatric facility was assigned to a new lessee. Tenet remains financially
responsible to the Company under its unconditional guarantee through the primary
lease term on the four of the five Properties as well as all properties
leased to Vencor (see prior paragraph). Tenet is one of the nation's largest
health care services companies, providing a broad range of services through
the ownership and management of health care facilities. Based upon public
reports for the six months ended November 30, 1996, Tenet reported net
operating revenue and net income of approximately $2.9 billion and $149 million,
respectively. At November 30, 1996, Tenet's net assets and stockholders' equity
were approximately $8.6 billion and $2.8 billion, respectively. Based on public
reports, for the year ended May 31, 1996, Tenet reported net operating revenue
and net income of approximately $5.6 billion and $350 million, respectively, and
total assets and stockholders' equity of approximately $8.3 billion and $2.6
billion, respectively.
The Company leases 15 facilities to Beverly. In addition, it is providing
a mortgage loan to Beverly that secures 10 facilities. Based upon public
reports, Beverly's net operating revenue and net income for the year ended
September 30, 1996 were approximately $2.4 billion and $53.6 million,
respectively. Beverly's total assets and stockholder's equity as of September
30, 1996 were approximately $2.6 billion and $866.7 million, respectively. For
the year ended December 31, 1995, Beverly reported net operating revenue and net
loss of approximately $3.2 billion and $8.1 million, respectively, and total
assets and stockholder's equity of $2.5 billion and $820.3 million,
respectively.
The Company has leased three rehabilitation hospitals to HealthSouth.
Based upon public reports, HealthSouth's revenue and net income for the nine
months ended September 30, 1996 were approximately $1.8 billion and $158.5
million, respectively. HealthSouth's total assets and stockholders' equity at
September 30, 1996 were approximately $3.2 billion and $1.4 billion,
respectively. HealthSouth reported revenue and net income for the year ended
December 31, 1995 of approximately $1.6 billion and $78.9 million, respectively.
HealthSouth's total assets and stockholders' equity as of December 31, 1995 were
approximately $2.5 billion and $927.7 million, respectively. On February 18,
1997, HealthSouth announced the signing of a definitive agreement pursuant to
which HealthSouth will acquire Horizon in a stock-for-stock merger.
The Company leases four long-term care facilities, one congregate care
facility and three rehabilitation hospitals to Horizon. Based on public
reports, for the six months ended November 30, 1996, Horizon reported net
operating revenue and net loss of approximately $887.9 million and $2.4 million,
respectively, and as of November 30, 1996, total assets and stockholders' equity
were approximately $1.5 billion and $649.5 million, respectively. For the year
ended May 31, 1996, Horizon reported net operating revenue and net loss of $1.8
billion and $24.8 million, respectively, and total assets and stockholders'
equity of approximately $1.5 billion and $651.3 million, respectively.
The Company holds Loans which were secured by two hospitals and two medical
office buildings initially totaling $34.5 million operated by a wholly-owned
subsidiary of Columbia. In February 1997, Columbia substituted a medical office
building located in Alaska for an acute care hospital and medical office
building as security for the loan. At December 31, 1996, the Company has
provided or has committed to provide approximately $43 million in acquisition or
construction funds for seven medical office buildings which are leased by
HealthTrust, a wholly owned subsidiary of Columbia. All of these medical office
buildings have been completed with the exception of initial tenant improvements.
Based upon public reports, Columbia's revenue and net income for the nine months
ended September 30, 1996 were approximately $14.8 billion and $1.1 billion,
respectively; and Columbia's total assets and stockholders' equity as of
September 30, 1996 were approximately $20.7 billion and $8.2 billion,
respectively. For the year ended December 31, 1996, Columbia reported revenue
and net income of approximately $19.9 billion and $1.5 billion, respectively,
and total assets and stockholders' equity of approximately $21.3 billion and
$8.6 billion, respectively.
The Company leases 17 assisted living facilities and three long-term care
facility to Emeritus. Based on public reports, total operating revenue and net
loss for the nine months ended September 30, 1996 were approximately $46.1
million and $4.5 million, respectively. Emeritus' total assets and
stockholders' equity at September 30, 1996 were $125.6 million and $29.9
million, respectively. For the year ended December 31, 1995, Emeritus reported
total operating revenue and net loss of approximately $21.3 million and $9.0
million, respectively, and total assets and stockholders' equity of $115.6
million and $34.9 million, respectively.
Vencor, Tenet, Beverly, HealthSouth, Horizon, Columbia and Emeritus are
subject to the informational filing requirements of the Securities Exchange Act
of 1934, as amended, and accordingly file periodic financial statements on Form
10-K and Form 10-Q with the Securities and Exchange Commission. For additional
financial data with respect to Tenet see Appendix I attached hereto. All of the
financial and other information presented herein with respect to such companies
was obtained from such public reports.
LEASES AND LOANS
The initial base rental rates of the Leases entered into by the Company
during the three years ended December 31, 1996 have generally ranged from 8% to
12% per annum of the acquisition price of the related property. Rental rates
vary by lease, taking into consideration many factors, including, but not
limited to, credit worthiness of the Lessee, operating performance of the
facility, interest rates at the commencement of the lease, location, and type
and physical condition of the facility. Most of the Leases provide for
additional rents which are based upon a percentage of increased revenue over
specific base period revenue of the leased Properties. Initial interest rates
on mortgage loans ("Loans") held by the Company and entered into during the
three years ended December 31, 1996 have generally ranged from 9% to 12% per
annum. Certain Leases and Loans have rent increases or rent increases based on
inflation indices or other factors. Additional Rental and Interest Income (see
Note 2 to the Consolidated Financial Statements in this Annual Report on Form
10-K) received for the years ended December 31, 1996, 1995 and 1994 were $20.9
million, $18.1 million and $16.7 million, respectively. The primary or fixed
terms of the Leases generally range from 10 to 15 years, and generally have one
or more five-year (or longer) renewal options. The average remaining base lease
term on the Company's portfolio of properties is approximately seven years; the
average remaining term on the Loans is approximately 11 years.
Most Leases contain credit enhancements in the form of guarantees, as well
as grouped lease renewals, grouped purchase options, and cross default and cross
collateralization features that may be employed when multiple facilities are
leased to individual operators. Obligations under the Leases, in most cases,
have corporate parent or shareholder guarantees; 110 Leases and Loans covering
13 facilities are backed by irrevocable letters of credit from various financial
institutions which cover from three to twelve months of Lease or Loan payments.
The Lessees and mortgagors are required to renew such letters of credit during
the Lease or Loan term in amounts which may change based upon the passage of
time, improved operating cash flow or improved credit ratings. Currently, the
Company has approximately $32.8 million in irrevocable standby letters of credit
from financial institutions. The letters of credit relating to an individual
Lease or Loan may be drawn upon in the event of a Lessee's or Mortgagor's
default under terms of a Lease or Loan. Amounts available under letters of
credit change from time to time; such changes may be material.
The Company believes that the credit enhancements discussed above provide
it with significant protection for its investment portfolio. The Company is
currently receiving rents and interest in a timely manner from all Lessees and
Mortgagors as provided under the terms of the Leases or Loans. Based upon
information provided to the Company by Lessees or Mortgagors, certain facilities
that are current with respect to monthly rents and mortgage payments are
presently underperforming financially. Individual facilities may underperform
as a result of inadequate Medicaid reimbursement, low occupancy, less than
optimal patient mix, excessive operating costs, other operational issues or
capital needs. Management believes that, even if these facilities remain at
current levels of performance, the Lease and Loan provisions contain sufficient
security to assure that material rental and mortgage obligations will continue
to be met for the remainder of the Lease or Loan terms. In the future it is
expected that the Company will have certain properties which the Lessees may
choose not to renew their Leases at existing rental rates (see Table below).
Lessees generally have the right of first refusal to purchase the
Properties during the Lease terms. Most Leases provide one or more five-year
(or longer) renewal options at existing Lease rates and continuing additional
rent formulas although certain Leases provide for Lease renewals at fair market
value. Certain Lessees also have options to purchase the Properties, generally
for fair market value, and generally at the expiration of the primary Lease term
and/or any renewal term under the Lease. If options are exercised, such
provisions require Lessees to purchase or renew several facilities together,
precluding the possibility of Lessees purchasing or renewing only those
facilities with the best financial outcomes. Forty one Properties are not
subject to purchase options until 2010 or later and an additional 27 leased
Properties do not have any purchase options.
A table recapping lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance follows:
Current Annualized Revenues of
-----------------------------------------------------
Properties Subject to
Lease Expirations and Properties Subject Possible Revenue Loss
Mortgage Maturities to Purchase Options at Underperforming
Year (1) (2) Properties (3)
----- --------------------- ------------------- ----------------------
(Amounts in thousands, except percentages) % Amount
------- ----------
1997 $ 4,199 $ 3,182 0.3% $ 400
1998 17,557 14,525 1.4 1,700
1999 20,455 20,293 0.9 1,100
2000 10,647 10,647 0.2 300
2001 17,170 17,170 0.7 800
Thereafter 52,697 36,483 -- --
--------- --------- ----- -------
Total $ 122,725 $ 102,300 3.5% $ 4,300
========= ========= ===== =======
(1) This column includes the revenue impact by year and the total annualized
rental and interest income associated with the Properties subject to
Lessees' renewal options and/or purchase options and mortgage maturities.
(2) This column includes the revenue impact by year and the total annualized
rental and interest income associated with Properties subject to both
purchase options and renewal options. If a purchase option is exercisable
at more than one date, the convention used in the table is to show the
revenue subject to the purchase option at the earliest possible purchase
date. Although certain purchase option periods commenced in earlier
years, lessees have not exercised their purchase options as of this time.
The total for this column is a component of the total current annualized
revenue of properties subject to lease expirations and mortgage maturities
($122,725,000).
(3) Based on current market conditions, management estimates that there could
be a revenue loss (compared to current rental rates) upon the expiration of
the current term of the Leases in the percentages and amounts shown in the
table for Underperforming Properties. Total revenue of the Company has
grown at a compound annual growth rate of 9.5% in the past five years. No
attempt has been made to show the possibility of expected gains, if any, on
Properties which might offset a portion of the possible revenue loss shown
above. The percentages are computed by taking the possible revenue loss as
a percentage of 1996 total revenue.
There are numerous factors that could have an impact on Lease renewals or
purchase options, including the financial strength of the Lessee, expected
facility operating performance, the relative level of interest rates and
individual Lessee financing options. Based upon management expectations of the
Company's continued growth, the facilities subject to renewal and/or purchase
options and mortgage maturities and any possible rent loss therefrom should
represent a smaller percentage of revenue in the year of renewal or purchase.
Each Lease is a "triple net lease" lease and the Lessee is responsible
thereunder, in addition to the minimum and additional rents, for all additional
charges, including charges related to non-payment or late payment of rent, taxes
and assessments, governmental charges with respect to the leased property and
utility and other charges incurred with the operation of
the leased property.
Each Lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Properties.
Each Lessee, at its expense, may make non-capital additions, modifications
or improvements to its leased property. All such alterations, replacements and
improvements must comply with the terms and provisions of the Lease, and become
the property of the Company or its affiliates upon termination of the Lease.
Each Lease requires the Lessee to maintain adequate insurance on the leased
property, naming the Company or its affiliates and any Mortgagees as additional
insureds. In certain circumstances, the Lessee may self-insure pursuant to a
prudent program of self-insurance if the Lessee or the guarantor of its Lease
obligations has substantial net worth. In addition, each Lease requires the
Lessee to indemnify the Company or its affiliates against certain liabilities in
connection with the leased property.
DEVELOPMENT PROGRAM
The Company has a number of "build-to-suit" type agreements that by their
terms require conversions upon the completion of the development of the
facilities, to lease agreements. During the construction of the projects, funds
are advanced pursuant to draw requests made by the developers in accordance with
the terms and conditions of the applicable development agreements which require
site visits prior to each advancement of funds.
Since 1987, the Company has committed to the development of 31 facilities,
including five rehabilitation hospitals, 14 congregate care and assisted living
facilities, five long-term care facilities and seven medical office buildings,
representing an aggregate investment of approximately $225 million. As of
December 31, 1996, costs of approximately $184.4 million have been funded and 26
facilities have been completed. The 26 completed facilities comprise five
rehabilitation hospitals, nine congregate care and assisted living facilities,
five long-term care facilities and seven medical office buildings. The five
remaining development projects are scheduled for completion in 1997 and 1998.
Simultaneously with the commencement of each of the development programs and
prior to funding, the Company enters into a lease agreement with the
developer/operator. The base rent under the lease is generally established at a
rate equivalent to a specified number of basis points over the yield on the 10
year United States Treasury note at the inception of the lease agreement.
The development program generally includes a variety of additional forms of
credit enhancement and collateral beyond those provided by the Leases. During
the development period, the Company generally requires additional security and
collateral in the form of more than one of the following: (a) irrevocable
letters of credit from financial institutions; (b) payment and performance
bonds; and (c) completion guarantees by either one or a combination of the
developer's parent entity, other affiliates or one or more of the individual
principals who control the developer. In addition, prior to any advance of
funds by the Company under the development agreement, the developer must provide
(a) satisfactory evidence in the form of an endorsement to the Company's title
insurance policy that no intervening liens have been placed on the property
since the date of the Company's previous advance; (b) a certificate executed by
the project architect that indicates that all construction work completed on the
project conforms with the requirements of the applicable plans and
specifications; (c) a certificate executed by the general contractor that all
work requested for reimbursement has been completed; and (d) satisfactory
evidence that the funds remaining unadvanced are sufficient for the payment of
all costs necessary for the completion of the project in accordance with the
terms and provisions of the agreement. As a further safeguard during the
development period, the Company generally will retain 10% of construction funds
incurred until it has received satisfactory evidence that the project will be
fully completed in accordance with the applicable plans and specifications. The
Company also monitors the progress of the development of each project and the
accuracy of the developer's draw requests by having its own in-house inspector
perform regular on-site inspections of the project prior to the release of any
requested funds.
FUTURE ACQUISITIONS
The Company anticipates acquiring additional health care related facilities
and leasing them to health care operators or investing in mortgages secured by
health care facilities.
TAXATION OF THE COMPANY
Management of the Company believes that the Company has operated in such a
manner as to qualify for taxation as a real estate investment trust ("REIT")
under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ended December 31, 1985, and the
Company intends to continue to operate in such a manner. No assurance can be
given that it has operated or will be able to continue to operate in a manner so
as to qualify or to remain so qualified. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretation thereof.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to Federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (i.e., at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will continue to
be subject to federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals; and (vii) which meets certain other tests, described below,
regarding the amount of its distributions and the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
There are three gross income requirements. First, at least 75% of the
Company's gross income (excluding gross income from Prohibited Transactions as
defined below) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property or from
certain types of temporary investment income. Second, at least 95% of the
Company's gross income (excluding gross income from Prohibited Transactions) for
each taxable year must be derived from income that qualifies under the 75% test
and all other dividends, interest and gain from the sale or other disposition of
stock or securities. Third, short-term gains from the sale or other disposition
of stock or securities, gains from Prohibited Transactions and gains on the sale
or other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income for each taxable year. A Prohibited
Transaction is a sale or other disposition of property (other than foreclosure
property) held for sale to customers in the ordinary course of business.
The Company, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by real estate
assets (including stock or debt instruments held for not more than one year,
purchased with the proceeds of a stock offering or long-term (more than five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
The Company owns interests in various partnerships. In the case of a REIT
that is a partner in a partnership, Treasury Regulations provide that for
purposes of the REIT income and asset tests, the REIT will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. The
ownership of an interest in a partnership by a REIT may involve special tax
risks, including the challenge by the Internal Revenue Service of the
allocations of income and expense items of the partnership, which would affect
the computation of taxable income of the REIT, and the status of the partnership
as a partnership (as opposed to an association taxable as a corporation) for
federal income tax purposes. The Company also owns interests in a number of
subsidiaries which are intended to be treated as qualified real estate
investment trust subsidiaries ("QRS"). The Code provides that such subsidiaries
will be ignored for federal income tax purposes and all assets, liabilities and
items of income, deduction and credit of such subsidiaries will be treated as
assets, liabilities and such items of the Company. If any partnership or
subsidiary in which the Company owns an interest were treated as a regular
corporation (and not as a partnership or QRS) for federal income tax purposes,
the Company would likely fail to satisfy the REIT asset tests described above
and would therefore fail to qualify as a REIT. The Company believes that each
of the partnerships and subsidiaries in which it owns an interest will be
treated for tax purposes as a partnership or QRS, respectively, although no
assurance can be given that the Internal Revenue Service will not successfully
challenge the status of any such organization.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "real estate
investment trust taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income, if
any (after tax), from foreclosure property, minus (B) the sum of certain items
of non-cash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year, if paid on or before the
first regular dividend payment date after such declaration and if the Company so
elects and specifies the dollar amount in its tax return. To the extent that
the Company does not distribute all of its net long-term capital gain or
distributes at least 95%, but less than 100%, of its "real estate investment
trust taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its real estate
investment trust ordinary income for such year, (ii) 95% of its real estate
investment capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distributions over the amounts actually
distributed.
If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to the statutory relief. Failure to qualify for even one year could
substantially reduce distributions to stockholders and could result in the
Company's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
Distributions made to the Company's stockholders out of current or
accumulated earnings and profits, unless designated as capital gain
distributions, will be taken into account by them as ordinary income. Such
distributions will not be eligible for the dividends received deductions for
corporations as long as the Company qualifies as a REIT. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains to
the extent they do not exceed the Company's actual net capital gain for the
taxable year, although corporate stockholders may be required to treat up to 20%
of any such capital gain dividend as ordinary income. Distributions in excess
of current or accumulated earnings and profits will not be taxable to a
stockholder to the extent that they do not exceed the adjusted basis of the
stockholder's shares. To the extent that such distributions exceed the adjusted
basis of a stockholder's shares they will be included in income as long-term or
short-term capital gain (as described below with respect to the sale or exchange
of the shares) assuming the shares are held as a capital asset in the hands of
the stockholder. Stockholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company.
In general, any gain or loss upon a sale or exchange of shares by a
stockholder who has held such shares as a capital asset will be long-term or
short-term depending on whether the stock was held for more than one year;
provided however, any loss on the sale or exchange of shares that have been held
by such stockholder for six months or less will be treated as a long-term
capital loss to the extent of distributions from the Company required to be
treated by such stockholder as long-term capital gain.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above.
GOVERNMENT REGULATION
The Company is affected by government regulation of the health care
industry in that the Company's additional rents are generally based on its
Lessees' gross revenue from operations and the underlying value of the Company's
facilities depends on the revenue and profit that a facility is able to
generate. Aggressive efforts by health insurers and governmental agencies to
limit the cost of hospital services and to reduce utilization of hospital and
other health care facilities may reduce future revenues or slow revenue growth
from inpatient facilities and shift utilization from inpatient to outpatient
facilities.
In addition, contingent or percentage rent arrangements are subject to
federal and state laws and regulations governing illegal rebates and kickbacks
where the Company's co-investors are physicians or others in a position to refer
patients to the facilities. The goal of these laws and regulations is to
prohibit, through the imposition of criminal and civil penalties that may
include exclusion from reimbursement programs, payment arrangements that include
compensation for patient referrals. Although only limited interpretive or
enforcement guidance is available, the Company has structured its rent
arrangements in a manner which it believes complies with such laws and
regulations.
Health care facilities are also subject to a wide variety of federal, state
and local environmental and occupational health and safety laws and regulations
which affect facility operations.
Expansion, including the addition of new beds or services or acquisition of
medical equipment, and occasionally the contraction of health care facilities,
may be subject to state and local regulatory approval through certificate of
need ("CON") programs. States vary in their utilization of CON controls.
Revenues of Lessees are generally derived from payments for patient care.
Such payments are received from the federal Medicare program, state Medicaid
programs, private insurance carriers, health care service plans, health
maintenance organizations, preferred provider arrangements, self-insured
employers as well as directly from patients. Medicare payments for psychiatric,
long-term and rehabilitative care are based on allowable costs plus a return on
equity for proprietary facilities. Medicare payments to acute care hospitals
for inpatient services are made pursuant to the Prospective Payment System
("PPS") under which a hospital is paid a prospectively established rate based on
the category of the patient's diagnosis ("Diagnostic Related Groups" or "DRGs").
In 1991, Medicare began to phase, in over a period of years, reimbursement to
hospitals for capital-related inpatient costs under PPS using a federal rate
rather than the cost-based reimbursement system previously used. DRG rates are
subject to adjustment on an annual basis as part of the federal budget
reconciliation process.
Medicaid programs generally pay for acute, rehabilitative and psychiatric
care based on reasonable costs at fixed rates; long-term care facilities are
generally reimbursed using fixed daily rates. Both Medicare and Medicaid
payments are generally below retail rates for Lessee-operated facilities.
Increasingly, states have introduced managed care contracting techniques in the
administration of Medicaid programs. Such mechanisms could have the impact of
reducing utilization of, reimbursement to, Lessee-operated facilities.
Third party payors in various states and areas base payments on costs,
retail rates or, increasingly, negotiated rates, including discounts from normal
charges, fixed daily rates and prepaid capitated rates.
LONG-TERM CARE FACILITIES. Regulation of long-term care facilities is
exercised primarily through the licensing of such facilities against a common
background established by federal law enacted as part of the Omnibus Budget
Reconciliation Act of 1987. Regulatory authorities and licensing standards vary
from state to state, and in some instances from locality to locality. These
standards are constantly reviewed and revised. Agencies periodically inspect
facilities, at which time deficiencies may be identified which must be corrected
as a condition to continued licensing or certification and participation in
government reimbursement programs. Depending on the nature of such deficiencies,
remedies can be routine or costly. Similarly, compliance with regulations which
cover a broad range of areas such as patients' rights, staff training, quality
of life and quality of resident care may increase facility start-up and
operating costs.
ACUTE CARE HOSPITALS. Acute care hospitals are subject to extensive
federal, state and local regulation. Acute care hospitals undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Various licenses and permits also are required for
purchasing and administering narcotics, operating laboratories and pharmacies
and the use of radioactive materials and certain equipment. Each of the
Company's facilities, the operation of which requires accreditation, is
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Such accreditation is generally required for continued licensing and for
participation in government sponsored provider programs.
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under PPS, each state must have a Professional
Review Organization carry out federally mandated reviews of Medicare patient
admissions, treatment and discharges in acute care hospitals.
PSYCHIATRIC AND REHABILITATION HOSPITALS. Psychiatric and rehabilitation
hospitals are subject to extensive federal, state and local legislation,
regulation, inspection and licensure requirements similar to those of acute care
hospitals. For psychiatric hospitals, there are specific laws regulating civil
commitment of patients and disclosure of information. Many states have adopted
a "patient's bill of rights" which sets forth certain higher standards for
patient care that are designed to decrease restrictions and enhance dignity in
treatment. Insurance reimbursement for psychiatric treatment generally is more
limited than for general health care.
PHYSICIAN GROUP PRACTICE CLINICS. Physician group practice clinics are
subject to extensive federal, state and local legislation and regulation. Every
state imposes licensing requirements on individual physicians and on facilities
and services operated by physicians. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
with which physician groups may have contracts. Many states require regulatory
approval, including CONs, before establishing certain types of
physician-directed clinics, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the entry
into new markets, physician clinics and affiliated practice groups may become
subject to compliance with additional regulation.
HEALTH CARE REFORM. The health care industry is facing various challenges,
including increased government and private payor pressure on health care
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings and the vertical and horizontal
consolidation of health care providers. The pressure to control health care
costs intensified during 1994 and 1995 as a result of the national health care
reform debate and continued into 1996 as Congress attempted to slow the rate of
growth of federal health care expenditures as part of its effort to balance the
federal budget. For example, bills have been passed by the House and the Senate
in the context of the federal budget reconciliation process which call for
reduced future reimbursement to hospitals under the existing Medicare system,
the establishment of a prospective payment system for Medicare reimbursement of
long-term care, reduced growth in future Medicaid reimbursement and the
establishment of a "block grant" program that would give states greater
discretion in designing and administering their Medicaid programs than presently
afforded under federal law.
Spending in the United States Health Care Industry during 1996 was
estimated by the Congressional Budget Office as approximately $1.032 trillion,
representing 13.6% of the Gross Domestic Product. The Company believes that
government and private efforts to contain or reduce health care costs will
continue. These trends are likely to lead to reduced or slower growth in
reimbursement for certain services provided by some of the Company's Lessees.
The Company believes that the vast nature of the health care industry,
the financial strength and operating flexibility of its operators and the
diversity of its portfolio will mitigate the impact of any such diminution in
reimbursements. However, the Company cannot predict whether any of the above
proposals or any other proposals will be adopted and, if adopted, no assurance
can be given that the implementation of such reforms will not have a material
adverse effect on the Company's financial condition or results of operations.
OBJECTIVES AND POLICIES
The Company is organized to invest in income-producing health care related
facilities. In evaluating potential investments, the Company considers such
factors as (1) the geographic area, type of property and demographic profile;
(2) the location, construction quality, condition and design of the property;
(3) the current and anticipated cash flow and its adequacy to meet operational
needs and lease obligations and to provide a competitive market return on equity
to the Company's investors; (4) the potential for capital appreciation, if any;
(5) the growth, tax and regulatory environment of the communities in which the
properties are located; (6) occupancy and demand for similar health facilities
in the same or nearby communities; (7) an adequate mix of private and government
sponsored patients; (8) potential alternative uses of the facilities; and (9)
prospects for liquidity through financing or refinancing.
There are no limitations on the percentage of the Company's total assets
that may be invested in any one property or partnership. The Investment
Committee of the Board of Directors may establish limitations as it deems
appropriate from time to time. No limits have been set on the number of
properties in which the Company will seek to invest, or on the concentration of
investments in any one facility or any one city or state. The Company acquires
its investments primarily for income.
At December 31, 1996, the Company has two classes of debt securities which
are senior to the Common Stock. The Company may, in the future, issue debt
securities which will be senior to the Common Stock. The Company has no present
plans to issue senior equity securities, although the Board of Directors is
authorized to issue up to 50,000,000 shares of preferred stock. The Company has
authority to offer shares of its capital stock in exchange for investments which
conform to its standards and to repurchase or otherwise acquire its shares or
other securities, but does not presently intend to do so.
The Company may incur additional indebtedness when, in the opinion of its
management and Directors, it is advisable. For short-term purposes the Company
from time to time negotiates lines of credit, or arranges for other short-term
borrowings from banks or otherwise. The Company may arrange for long-term
borrowings through public offerings or from institutional investors. Under its
Bylaws, the Company is subject to various restrictions with respect to
borrowings.
In addition, the Company may incur additional mortgage indebtedness on real
estate which it has acquired through purchase, foreclosure or otherwise. Where
leverage is present on terms deemed favorable, the Company invests in properties
subject to existing loans, or secured by mortgages, deeds of trust or similar
liens on the properties. The Company also may obtain non-recourse or other
mortgage financing on unleveraged properties in which it has invested or may
refinance properties acquired on a leveraged basis.
In July, 1990, the Company adopted a Rights Agreement whereby Company
stockholders received, for each share of Common Stock owned, one right to
purchase shares of Common Stock of the Company, or securities of an acquiring
entity, at one-half market value (the "Rights"). The Rights will be exercisable
only if and when certain circumstances occur, including the acquisition by a
person or group of 15% or more of the Company's outstanding common shares,
or the making of a tender offer for 30% or more of the Company's
common shares. The Rights are intended to protect stockholders of the Company
from takeover tactics that could deprive them of the full value of their shares.
The Company will not, without the prior approval of a majority of
Directors, acquire from or sell to any Director, officer or employee of the
Company, or any affiliate thereof, as the case may be, any of the assets or
other property of the Company.
The Company provides to its stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by the Board of
Directors of the Company and may be changed without stockholder approval.
ITEM 2. PROPERTIES
See Item 1. for details.
ITEM 3. LEGAL PROCEEDINGS
During 1996, the Company was not a party to any material legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is listed on the New York Stock Exchange. Set
forth below for the fiscal quarters indicated are the reported high and low
sales prices of the Company's Common Stock on the New York Stock Exchange.
1996 1995 1994
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $35 1/2 $31 1/2 $30 3/8 $28 $32 $27 1/4
Second Quarter 33 7/8 31 32 3/4 29 1/2 32 5/8 29 1/2
Third Quarter 34 1/2 32 5/8 34 7/8 31 5/8 31 1/4 27 7/8
Fourth Quarter 37 1/2 32 1/2 35 1/4 31 1/2 30 7/8 26 1/4
As of March 1, 1997 there were approximately 1,679 stockholders of record
and in excess of 35,000 beneficial stockholders of the Company's Common Stock.
It has been the Company's policy to declare quarterly dividends to the
holders of its shares of Common Stock so as to comply with applicable sections
of the Internal Revenue Code governing REITs. The cash dividends per share paid
by the Company are set forth below:
1996 1995 1994
------- ------- -------
First Quarter $ .5600 $ .5200 $ .4800
Second Quarter .5700 .5300 .4900
Third Quarter .5800 .5400 .5000
Fourth Quarter .5900 .5500 .5100
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the Company for
the years ended December 31, 1996, 1995, 1994, 1993, and 1992.
Year Ended December 31,
1996 1995 1994 1993 1992
-------------------------------------------------
(Amounts in thousands, except per share data)
Income Statement Data:
Total Revenue $120,393 $105,696 $ 98,996 $ 92,549 $ 83,727
Net Income 60,641 80,266 49,977 44,087 35,715
Net Income Per Share 2.12 2.83 1.87 1.66 1.38
Balance Sheet Data:
Total Assets 753,653 667,831 573,826 549,638 509,150
Debt Obligations 379,504 299,084 271,463 245,291 205,760
Stockholders' Equity 336,806 339,460 269,403 269,873 271,375
Other Data:
Funds From Operations (1) 80,517 72,911 64,274 59,201 51,866
Cash Flows From Operating
Activities 90,585 71,164 65,519 62,707 52,008
Cash Flows Used In Investing
Activities 104,797 80,627 61,383 29,315 69,087
Cash Flows Provided By (Used
In) Financing Activities 15,023 8,535 (24,418) (8,832) 16,645
Dividends Paid 65,905 60,167 52,831 49,030 44,136
Dividends Paid Per Share 2.3000 2.1400 1.9800 1.8450 1.7250
- ---------------------------
(1) The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. The Company adopted the new
definition of FFO prescribed by the National Association of Real Estate
Investment Trusts ("NAREIT"). FFO is now defined as Net Income (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate
depreciation, and after adjustments for unconsolidated partnerships and joint
ventures. FFO does not, and is not intended to, represent cash generated from
operating activities in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash needs
and should not be considered as an alternative to Net Income. FFO, as defined
by the Company may not be comparable to similarly entitled items reported by
other REITs that do not define it in accordance with the definition prescribed
by NAREIT. FFO for the years presented has been restated for the new
definition. The following table represents items and amounts being aggregated
to compute FFO.
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
Net Income $60,641 $80,266 $49,977 $44,087 $35,715
Real Estate Depreciation 20,700 16,691 15,829 15,861 16,348
Partnership Adjustments (827) (496) (532) (522) (197)
Gain on sale of Real Estate
Properties -- (23,550) -- -- --
------- ------- ------- ------- -------
$80,517 $72,911 $65,274 $59,201 $51,866
======= ======= ======= ======= =======
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of acquiring health care facilities that it
leases on a long-term basis to health care providers. On a more limited basis,
the Company has provided mortgage financing on health care facilities. As of
December 31, 1996, the Company's portfolio of properties, including equity
investments, consisted of 214 facilities located in 38 states. These facilities
are comprised of 135 long-term care facilities, 52 congregate care and assisted
living facilities, 12 medical office buildings, six acute care hospitals, six
rehabilitation facilities, two physician group practice clinics and one
psychiatric care facility. The gross acquisition price of the properties, which
includes partnership acquisitions, was approximately $915,260,000 at December
31, 1996.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net Income for the year ended December 31, 1996 totaled $60,641,000 or
$2.12 per share on revenue of $120,393,000. This compares to Net Income of
$80,266,000 or $2.83 per share on revenue of $105,696,000 for the corresponding
period in 1995. Included in Net Income and Net Income Per Share for the year
ended December 31, 1995 is the Gain on the Sale of Real Estate Properties of
$23,550,000 or $0.83 per share. Net Income for the year ended December 31, 1996
was favorably influenced in the amount of $2,061,000, or $0.07 per share,
attributable to the payoff of two mortgage loans which had been purchased at a
discount by the Company in 1992.
Base Rental Income for the year ended December 31, 1996 increased by
$14,985,000 to $83,702,000. The majority of this increase was generated by rents
on $117,000,000 of equity investments made in 1996 and a full year of rents on
$98,000,000 of equity investments made in 1995. The increase in revenue was
also assisted by higher Additional Rental and Interest Income from the existing
portfolio for the year ended December 31, 1996 of $2,847,000 to $20,925,000.
The growth in Base Rental Income and Additional Rental and Interest Income for
1996 was moderated by the sale and concurrent financing of certain real estate
properties in 1995, which converted the character of the returns on those assets
from rental income to interest income. The increases noted above were offset by
a decrease in Interest and Other Income for the year ended December 31, 1996 of
$2,394,000 to $15,766,000, due in part to the payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1996 increased by
$7,062,000 to $26,401,000. The increase in Interest Expense is primarily due
to the Company's February 1996 issuance of $115,000,000 6.5% Senior Notes due
2006, the proceeds of which were invested in new long-term investments. The
increase in Depreciation/Non Cash Charges of $3,941,000 to $23,149,000 for the
year ended December 31, 1996, is related to the new investments discussed above.
In 1996, the Company adopted the new definition of Funds From Operations
("FFO") prescribed by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO is now defined as Net Income (computed in accordance with
generally accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate depreciation, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect FFO on
the same basis. FFO does not represent cash generated from operating activities
in accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to Net Income. FFO for the years ended December 31, 1995 and
1994 has been restated for this new definition.
The Company believes that FFO is an important supplemental measure of
operating performance. Historical cost accounting for real estate assets
implicitly assumes that the value of real estate assets diminishes predictably
over time. Since real estate values instead have historically risen and fallen
with market conditions, presentations of operating results for a real estate
investment trust that use historical cost accounting for depreciation could be
uninformative. The term FFO was designed by the Real Estate Investment Trust
("REIT") industry to address this problem. FFO, as defined by the Company in
accordance with the NAREIT prescription may not be comparable to similarly
entitled items reported by other REITs that do not define it in accordance with
the NAREIT definition.
Funds From Operations for the years ended December 31, 1996 and 1995 are as
follows:
1996 1995
-------- --------
(Amounts in thousands)
Net Income $ 60,641 $ 80,266
Real Estate Depreciation 20,700 16,691
Partnership Adjustments (824) (496)
Gain on Sale of Real Estate Properties -- (23,550)
-------- --------
Funds From Operations $ 80,517 $ 72,911
======== ========
FFO for the year ended December 31, 1996, increased $7,606,000 or 10.4%
from the comparable period in the prior year. The increases are attributable to
increases in Base Rental Income, Additional Rental and Interest Income, as
offset by increases in Interest Expense and Other Expenses and decreases in
Interest and Other Income all of which are discussed in more detail above.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Net Income for the year ended December 31, 1995 was $80,266,000, or $2.83
per share, on revenue of $105,696,000. This is compared to Net Income for the
prior year of $49,977,000, or $1.87 per share, on revenue of $98,996,000. Net
Income and Net Income Per Share for the year ended December 31, 1995 included a
$23,550,000, or $0.83 per share, Gain on the Sale of 10 leased real estate
properties. Under the terms of the sale, the Company received net cash proceeds
of $8,387,000 and is providing a 15 year mortgage in the initial amount of
$34,760,000. Additionally, Net Income for the year ended December 31, 1994 was
favorably influenced by a $1,000,000 final settlement related to a partnership
investment.
The increase in total revenue of $6,700,000, or 6.8%, is due primarily to
increased Base Rental Income from facilities acquired in 1995 and a full year's
rents on the 1994 acquisitions. In addition, the increases in Additional Rental
and Interest Income of $1,371,000 were the result of increases at most of the
facilities that are eligible to pay such rents. The growth in Additional Rental
and Interest Income was slowed somewhat by the sale and concurrent financing of
certain real estate properties. Those sales converted the character of the
returns on the assets from Base and Additional Rental Income to Interest Income.
Interest and Other Income increased $3,118,000 primarily as a result of the
addition of approximately $42,954,000 in loans receivable during 1995.
Interest Expense decreased $794,000, or 3.9%, to $19,339,000 for the year
ended December 31, 1995 as compared to $20,133,000 for the prior year. The
decrease is primarily due to lower interest rates and lower average borrowings
from the Company redeeming in March 1995, without penalty, $75,000,000 of 9-7/8%
Senior Notes that were due in 1998. This was offset by the Company issuing
approximately $78,000,000 in Senior Notes during 1995 with interest rates
averaging 7.8%.
Funds From Operations for the years ended December 31, 1995 and 1994 are as
follows:
1996 1995
--------- ---------
(Amounts in thousands)
Net Income $ 80,266 $ 49,977
Real Estate Depreciation 16,691 15,829
Partnership Adjustments (496) (532)
Gain on Sale of Real Estate Properties (23,550) --
-------- --------
Funds From Operations $ 72,911 $ 65,274
======== ========
FFO for the year ended December 31, 1995, increased $7,637,000 or 11.7%
from the comparable period in the prior year. The increases are attributable to
increases in Base Rental Income, Additional Rental and Interest Income, and
Interest and Other Income, as off-set by increases in Other Expenses all of
which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common stock, the
issuance of long-term debt, the assumption of mortgage debt, the use of short-
term bank lines and internally generated cash flow. Facilities under
construction are generally financed by means of cash on hand or short-term
borrowings under the Company's existing bank lines. In the future, the Company
may use its Medium-Term Note ("MTN") program to finance a portion of the costs
of construction. At the completion of construction and commencement of the
lease, short-term borrowings used in the construction phase are generally
refinanced with new long-term debt or equity offerings.
On February 15, 1996, the Company issued $115,000,000 in Unsecured Senior
Notes due 2006 bearing a coupon of 6.5%. The majority of the proceeds from this
debt issuance was used to retire short-term bank debt and to fund acquisitions
made during 1996. At December 31, 1996, Stockholders' Equity in the Company
totaled $336,806,000 and the debt to equity ratio was 1.13 to 1. For the year
ended December 31, 1996, Funds From Operations covered Interest Expense 4.1
to 1.
At December 31, 1996, the Company had approximately $50,975,000 available
under its MTN program, registered pursuant to a shelf registration statement,
for future issuance of MTNs based on Company needs and then existing market
conditions. In September 1995, the Company registered $200,000,000 of debt
and equity securities under a shelf registration statement filed with the
Securities and Exchange Commission of which $85,000,000 in debt or equity
securities remains available to be offered by the Company. As of December 31,
1996, the Company had $100,000,000 available on its revolving line of credit.
This line of credit with a group of six domestic and international banks expires
on March 31, 2000. The Company's debt securities have been rated investment
grade by debt rating agencies since 1986. Current ratings of the Company's
Senior and Convertible Subordinated Notes are as follows:
Moody's Standard & Poor's Duff & Phelps
-------- ----------------- --------------
Senior Notes Baa1 BBB+ A-
Convertible
Subordinated Notes Baa2 BBB BBB+
Since inception in May 1985, the Company has recorded approximately
$510,771,000 in cumulative Funds From Operations. Of this amount, through
December 31, 1996, a total of $427,514,000 has been distributed to stockholders
as dividends. The balance of $83,257,000 has been retained, and has been an
additional source of capital for the Company. Dividends paid or payable as a
percentage of Funds From Operations were 82%, 83% and 81% for the years ended
December 31, 1996, 1995 and 1994. Since commencing business in 1985, the
Company has paid dividends equal to approximately 84% of Funds From Operations.
The Company has outstanding commitments on closed and to-be-closed
development transactions of approximately $39 million and $63 million,
respectively. The Company is also committed to acquire approximately $122
million of existing health care facilities. The Company expects that a
significant portion of these commitments will be funded; however, experience
suggests that some committed transactions will not close. Transactions do not
close for various reasons including unsatisfied pre-closing conditions,
competitive financing sources, final negotiation differences and the operator's
inability to obtain required internal or governmental approvals.
At December 31, 1996, the Company had approximately $32,800,000 in
irrevocable letters of credit from commercial banks to secure the obligations of
many lessees' lease and borrowers' loan obligations. The Company may draw upon
the letters of credit if there are any defaults under the leases and/or loans.
Amounts available under letters of credit change from time to time and such
changes may be material.
The Company and an affiliate of HealthSouth Corporation have exchanged the
Company's closed Dallas Rehabilitation Institute for the HealthSouth Sunrise
Rehabilitation Hospital in Fort Lauderdale, Florida. The Sunrise Rehabilitation
Hospital, which is licensed as a 108 bed acute rehabilitation hospital,
specializes in programs for burn patients, spinal and hand rehabilitation, and
pediatric trauma treatment and functions at a very high percentage of occupancy.
The Dallas facility lease was scheduled to expire in June 1999 with annual rent
aggregating approximately $3,100,000. Annual rent on the Florida property will
aggregate $2,250,000 with a fifteen year primary term. The Company began
recording the rent reduction in the second quarter of 1996. The lease
obligations are guaranteed by HealthSouth Corporation. The property exchange was
finalized during March 1997. The Company invested approximately $18,000,000 in
the Dallas facility when it was purchased in 1985.
The Company has concluded a significant number of "facility rollover"
transactions in 1995 and 1996 on properties that have been under long-term
leases and mortgages. "Facility rollover" transactions principally include
lease renewals and renegotiations, exchanges, sales of properties, and to a
lesser extent, payoffs on mortgage receivables. In 1995, the Company completed
20 facility rollovers including the sale of ten facilities with concurrent
"seller financing" for a gain of $23,550,000. The 1995 facility rollovers
generated an increase of $900,000 in Funds From Operations on an annualized
basis. During the year ended December 31, 1996, the Company completed or agreed
in principle to complete 20 facility rollovers including the sale of nine
facilities in Missouri and the exchange of the Dallas Rehabilitation Institute.
The 1996 facility rollovers through December 31, 1996, resulted in a decrease of
$1,200,000 in Funds From Operations on an annualized basis. Through December
31, 1999, the Company has 68 more facilities which are subject to lease
expiration, mortgage maturities and purchase options. The 1998 group includes
14, 10, and five long-term care facilities leased to Vencor, Beverly and
Horizon, respectively. The Company has completed certain facility rollovers
earlier than the scheduled lease expirations or mortgage maturities and will
continue to pursue such opportunities where it is advantageous to do so.
Management believes that the Company's liquidity and sources of capital are
adequate to finance its operations as well as its future investments in
additional facilities.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Balance Sheets as of December 31, 1996 and 1995
and its Consolidated Statements of Income, Stockholders' Equity, and Cash Flows
for the years ended December 31, 1996, 1995 and 1994, together with the Report
of Arthur Andersen LLP, Independent Public Accountants, are included elsewhere
herein. Reference is made to the "Index to Consolidated Financial Statements".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company were as follows on March 18, 1997:
Name Age Position
- ----------------- ------ ---------------------------------------
Kenneth B. Roath 61 Chairman, President and Chief Executive Officer
James G. Reynolds 45 Executive Vice President and Chief Financial Officer
Devasis Ghose 43 Senior Vice President - Finance and Treasurer
Edward J. Henning 44 Senior Vice President, General Counsel and Corporate Secretary
Stephen R. Maulbetsch 40 Senior Vice President - Property and Acquisition Analysis
There is hereby incorporated by reference the information appearing under
the captions "Board of Directors and Officers" and "Compliance with Section
16(a) of the Securities Exchange Act of 1934" in the Registrant's definitive
proxy statement relating to its Annual Meeting of Stockholders to be held on
April 23, 1997.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on April 23, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
There is hereby incorporated by reference the information under the
captions "Principal Stockholders" and "Board of Directors and Officers" in the
Registrant's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on April 23, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption
"Certain Transactions" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on April 23, 1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS
ON FORM 8-K
a) Financial Statements:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income - for the years ended December 31,
1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - for the years ended December
31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Note - All schedules have been omitted because the required
information is presented in the financial statements and the related
notes or because the schedules are not applicable.
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the fourth
quarter of 1996.
c) Exhibits
3.1 Articles of Restatement of the Company. 10/
3.2 Amended and Restated Bylaws of the Company. 1/
4.1 Rights Agreement, dated as of July 5, 1990, between the Company
and Manufacturers Hanover Trust Company of California, as
Rights Agent. 11/
4.2 Indenture dated as of September 1, 1993 between the Company and
The Bank of New York, as Trustee, with respect to the Series B
Medium Term Notes and the Senior Notes due 2006. 12/
4.3 Indenture dated as of April 1, 1989 between the Company and The
Bank of New York for Debt Securities. 2/
4.4 Form of Fixed Rate Note. 2/
4.5 Form of Floating Rate Note. 2/
10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership
Agreement of Health Care Property Partners, a California
general partnership ("HCPP"), the general partners of which
consist of the Company and certain affiliates of Tenet
Healthcare Corporation ("Tenet"). 3/
10.9 Corporate Guaranty of Obligations of Subsidiaries Pursuant to
Leases, Percentage Rent Agreement and Contract of Acquisition,
dated as of May 30, 1985, from Tenet in favor of HCPP. 3/
10.10 Deferred Compensation Plan of the Company. 3/
10.27 Employment Agreement dated April 28, 1988 between the Company
and Kenneth B. Roath. 5/
10.28 Health Care Property Investors, Inc. Executive Retirement
Plan. 4/
10.29 Health Care Property Investors, Inc. Amended Stock Incentive
Plan, as amended. 8/
10.30 Health Care Property Investors, Inc. Directors Stock Incentive
Plan, as amended. 8/
10.34 First Amendment to Employment Agreement dated February 1, 1990
between the Company and Kenneth B. Roath. 6/
10.36 Retirement Plan for Outside Directors of Health Care Property
Investors, Inc. as of January 1, 1991. 7/
10.37 Revolving Credit Agreement dated as of March 31, 1994 among
Health Care Property Investors, certain banks and The Bank of
New York as agent. 9/
10.38 Letter from The Bank of New York and banks that are signatories
to Revolving Credit Agreement extending commitment. 13/
10.39 Amendment No. 1 to Health Care Property Investors, Inc.
Executive Retirement Plan. 13/
10.40 Amended and Restated Director Deferred Compensation Plan. 14/
10.41 Letter from the Bank of New York and banks that are signatories
to Revolving Credit Agreement extending commitment. 14/
10.42 Letter from The Bank of New York, lead bank to Revolving Credit
Agreement, extending commitment.
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule
1/ This exhibit is incorporated by reference to the exhibit
numbered 3(ii) in the Company's quarterly report on Form 10-Q
for the period ended June 30, 1995
2/ This exhibit is incorporated by reference to exhibit 4.1, 4.2
and 4.3 in the Company's Form S-3 Registration Statement dated
March 20, 1989.
3/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's annual report on Form 10-K
for the year ended December 31, 1985.
4/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's annual report on Form 10-K
for the year ended December 31, 1987.
5/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's annual report on Form 10-K
for the year ended December 31, 1988.
6/ This exhibit is incorporated by reference to Appendix B of the
Company's Form 10-K for the year ended December 31, 1990.
7/ This exhibit is incorporated by reference to Appendix B of the
Company's Form 10-K for the year ended December 31, 1991.
8/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's annual report on Form 10-K
for the year ended December 31, 1992.
9/ The exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's Form 8-K as of February 8,
1995.
10/ This exhibit is incorporated by reference to exhibit 3.1 in the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994.
11/ This exhibit is incorporated by reference to exhibit 1 to the
Company's Registration Statement on Form 8-A filed with the
Commission on July 17, 1990.
12/ This exhibit is incorporated by reference to exhibit 4.1 to the
Company's Registration Statement on Form S-3 dated September 9,
1993.
13/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's annual report on Form 10-K
for the year ended December 31, 1994.
14/ This exhibit is incorporated by reference to the corresponding
numbered exhibit in the Company's quarterly report on Form
10-Q for the period ended March 31, 1996.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby undertakes as follows, which undertaking shall be
incorporated by reference into registrant's Registration Statement on Form S-8
Nos. 33-28483 (filed May 11, 1989):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy expressed in the Act and will be
governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 25, 1997
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/s/ Kenneth B. Roath
------------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
- ------ ------------------------
/s/ Kenneth B. Roath
March 25, 1997 ------------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
/s/ James G. Reynolds
March 25, 1997 ------------------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Devasis Ghose
March 25, 1997 ------------------------------------------------
Devasis Ghose, Senior Vice President- Finance
and Treasurer (Principal Accounting Officer)
/s/ Paul V. Colony
March 25, 1997 ------------------------------------------------
Paul V. Colony, Director
/s/ Robert R. Fanning
March 25, 1997 ------------------------------------------------
Robert R. Fanning, Jr., Director
/s/ Michael D. McKee
March 25, 1997 ------------------------------------------------
Michael D. McKee, Director
/s/ Orville E. Melby
March 25, 1997 ------------------------------------------------
Orville E. Melby, Director
/s/ Harold M. Messmer
March 25, 1997 ------------------------------------------------
Harold M. Messmer, Jr., Director
/s/ Peter L. Rhein
March 25, 1997 ------------------------------------------------
Peter L. Rhein, Director
EXHIBIT INDEX
--------------
Ex. 21.1 List of Subsidiaries
Ex. 23.1 Consent of Independent Public Accountants
Ex. 27.1 Financial Data Schedule
Ex. 10.42 Letter from The Bank of New York, lead bank to the Revolving Credit
Agreement, extending commitment.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-------
Report of Independent Public Accountants
Consolidated Balance Sheets - as of December 31, 1996 and 1995
Consolidated Statements of Income -
for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -
for the years ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care
Property Investors, Inc. (a Maryland corporation) as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period then ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Health Care
Property Investors, Inc. as of December 31, 1996 and 1995, and the results of
its operations and its cash flows for each of the three years in the period then
ended December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 14, 1997
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
--------------------------
1996 1995
----------- ----------
ASSETS
Real Estate Investments
Buildings and Improvements $ 693,586 $ 581,152
Accumulated Depreciation (147,860) (121,983)
--------- ---------
545,726 459,169
Construction in Progress 7,905 7,508
Land 70,103 61,317
--------- ---------
623,734 527,994
Loans Receivable 112,227 120,959
Investments in and Advances to Partnerships 6,531 9,248
Other Assets 8,350 7,630
Cash and Cash Equivalents 2,811 2,000
--------- ---------
TOTAL ASSETS $ 753,653 $ 667,831
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ --- $ 31,700
Senior Notes Due 1999 - 2015 267,470 153,994
Convertible Subordinated Notes Due 2000 100,000 100,000
Mortgage Notes Payable 12,034 13,390
Accounts Payable, Accrued Expenses and Deferred Income 19,739 10,568
Minority Interests in Partnerships 17,604 18,719
Commitments
Stockholders' Equity:
Preferred Stock, $1.00 par value, 50,000,000
shares authorized; none outstanding. --- ---
Common Stock, $1.00 par value; 100,000,000
shares authorized; 28,677,574 and 28,574,194
outstanding as of December 31, 1996 and 1995,
respectively. 28,678 28,574
Additional Paid-In Capital 355,672 353,166
Cumulative Net Income 379,970 319,329
Cumulative Dividends (427,514) (361,609)
--------- ---------
Total Stockholders' Equity 336,806 339,460
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 753,653 $ 667,831
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- ---------
REVENUE
Base Rental Income $ 83,702 $ 68,717 $ 64,811
Additional Rental and Interest Income 20,925 18,078 16,707
Interest and Other Income 15,766 18,160 15,042
Facility Operating Revenue --- 741 2,436
--------- --------- ---------
120,393 105,696 98,996
--------- --------- ---------
EXPENSES
Interest Expense 26,401 19,339 20,133
Depreciation/Non Cash Charges 23,149 19,208 17,521
Other Expenses 6,826 6,034 5,185
Facility Operating Expenses --- 720 2,595
--------- --------- ---------
56,376 45,301 45,434
--------- --------- ---------
INCOME FROM OPERATIONS 64,017 60,395 53,562
Minority Interests (3,376) (3,679) (3,585)
Gain on Sale of Real Estate Properties --- 23,550 ---
--------- --------- ---------
NET INCOME $ 60,641 $ 80,266 $ 49,977
========= ========= =========
NET INCOME PER SHARE $ 2.12 $ 2.83 $ 1.87
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 28,652 28,348 26,679
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Common Stock
------------------------
Par Additional Total
Number of Value Paid In Cumulative Cumulative Stockholders'
Shares Amount Capital Net Income Dividends Equity
- ---------------------------------------------------------------------------------------------------
Balances,
December 31, 1993 26,633 $ 26,633 $ 302,765 $ 189,086 $ (248,611) $ 269,873
Issuance of Stock, Net 17 17 575 592
Exercise of Stock Options 83 83 1,709 1,792
Net Income 49,977 49,977
Dividends Paid (52,831) (52,831)
- ---------------------------------------------------------------------------------------------------
Balances,
December 31, 1994 26,733 26,733 305,049 239,063 (301,442) 269,403
Issuance of Stock, Net 1,805 1,805 47,613 49,418
Exercise of Stock Options 36 36 504 540
Net Income 80,266 80,266
Dividends Paid (60,167) (60,167)
- ---------------------------------------------------------------------------------------------------
Balances,
December 31, 1995 28,574 28,574 353,166 319,329 (361,609) 339,460
Issuance of Stock, Net 30 30 1,044 1,074
Exercise of Stock Options 74 74 1,462 1,536
Net Income 60,641 60,641
Dividends Paid (65,905) (65,905)
- ---------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 28,678 $ 28,678 $ 355,672 $ 379,970 $ (427,514) $ 336,806
===================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 60,641 $ 80,266 $ 49,977
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 20,700 16,691 15,829
Non Cash Charges 2,449 2,517 1,692
Partnership Adjustments (824) (496) (532)
Gain on Sale of Real Estate Properties --- (23,550) ---
Changes in:
Operating Assets (973) (1,286) (366)
Operating Liabilities 8,592 (2,978) (1,081)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 90,585 71,164 65,519
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Real Estate (115,308) (83,345) (52,413)
Proceeds from Sale of Real Estate Properties --- 8,387 ---
Advances Repaid by Partnerships 4,465 --- 88
Other Investments and Loans 6,046 (5,669) (9,058)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (104,797) (80,627) (61,383)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net Change in Bank Notes Payable (31,700) 20,500 11,200
Repayment of Senior Notes --- (75,000) ---
Issuance of Senior Notes Due 1998-2015 113,329 77,607 14,914
Cash Proceeds from Issuing Common Stock 1,536 47,109 1,709
Final Payments on Mortgages --- (637) (1,897)
Periodic Payments on Mortgages (1,324) (1,148) (1,257)
Dividends Paid (65,905) (60,167) (52,831)
Other Financing Activities (913) 271 (256)
--------- --------- ---------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES 15,023 8,535 (28,418)
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 811 (928) (24,282)
Cash and Cash Equivalents, Beginning of Period 2,000 2,928 27,210
--------- --------- ---------
Cash and Cash Equivalents, End of Period $ 2,811 $ 2,000 $ 2,928
========= ========= =========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 23,734 $ 21,783 $ 20,127
========= ========= =========
Capitalized Interest $ 1,017 $ 599 $ 332
========= ========= =========
Mortgages Assumed on Acquired Properties $ --- $ 5,893 $ 3,114
========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Health Care Property Investors, Inc. ("HCPI"), a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust ("REIT").
HCPI and its affiliated subsidiaries and partnerships (the "Company") were
organized to invest in health care related properties located throughout the
United States, including long-term care facilities, assisted living and
congregate care facilities, medical office buildings, acute care and
rehabilitation hospitals, physician group practice clinics and psychiatric
facilities. As of December 31, 1996, the Company owns interests in 214
properties (the "Properties") located in 38 states and operated by 51 health
care providers. The Properties include 135 long-term care facilities, 52
congregate care and assisted living centers, 12 medical office buildings, six
acute care hospitals, six rehabilitation hospitals, two physician group practice
clinics and one psychiatric facility.
(2) SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE:
The Company records the acquisition of real estate at cost and uses the
straight-line method of depreciation for buildings and improvements over
estimated useful lives ranging up to 45 years. The Company periodically
evaluates its investments in real estate for potential impairment by comparing
its investment to the future cash flows expected to be generated from the
properties. If such impairments were to occur, the Company would write down its
investment in the property to estimated market value. The Company provides
accelerated depreciation on certain of its investments based primarily on an
estimation of net realizable value of such investments at the end of the primary
lease terms.
Acquisition, development and construction arrangements are accounted for as
real estate investments/joint ventures or loans based on the characteristics of
the arrangements.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS:
HCPI consolidates the accounts of its subsidiaries and certain general and
limited partnerships which are majority owned and controlled. All significant
intercompany investments, accounts and transactions have been eliminated.
EQUITY INVESTMENTS:
HCPI has investments in certain general partnerships in which it has a 50%
interest and serves as the managing general partner. Since the other general
partners in these general partnerships have significant rights relative to
acquisition, sale and refinancing of assets, HCPI accounts for these investments
using the equity method of accounting. The accounting policies of these
partnerships are substantially consistent with those of HCPI.
CASH AND CASH EQUIVALENTS:
Investments purchased with original maturities of three months or less are
considered to be cash and cash equivalents.
FEDERAL INCOME TAXES:
The Company has operated at all times so as to qualify as a REIT under
Sections 856 to 860 of the Internal Revenue Code of 1986. As such, the Company
is not taxed on its income which is distributed to stockholders. At December
31, 1996, the tax basis of the Company's net assets and liabilities exceeds the
reported amounts by approximately $17,000,000.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statements due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives, basis of assets and timing of rental
income.
ADDITIONAL RENTAL AND INTEREST INCOME:
Additional Rental and Interest Income includes the amounts in excess of the
initial annual Base Rental and Interest Income. Additional Rental and Interest
Income is generated by a percentage of increased revenue over specified base
period revenue of the Properties and increases based on inflation indices or
other factors. The Company has certain financing leases which allow the Company
to "put" the facilities to the lessees at lease termination for an amount
greater than the Company's initial investment. These amounts are accreted to
Additional Rental and Interest Income over the lease term. In addition, the
Company may receive payments from its lessees upon transferring or assignment of
existing leases; such amounts received are deferred and amortized over the
remaining term of the leases.
COMPANY OPERATED FACILITIES:
Periodically, the Company operates facilities as a result of lease
terminations. The related operations of one such facility was included in the
Company's consolidated financial statements under Facility Operating Revenue and
Facility Operating Expenses for 1994 and for the period through March 31, 1995
when the facility was sold.
NET INCOME PER SHARE:
Net Income Per Share is calculated by dividing Net Income by the weighted
average number of common shares outstanding during the period. The effect of
common stock equivalents is immaterial.
RECLASSIFICATION:
Reclassifications have been made for comparative financial statement
presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expense during the reporting period.
Actual results could differ from those estimates.
(3) REAL ESTATE INVESTMENTS
The Company was organized to make long-term equity-oriented investments
principally in operating, income-producing health care related properties. The
Company's equity investments have been structured as land and building
leasebacks and are made either directly by the Company or through partnerships
in which the Company is the general partner.
Under the terms of the lease agreements, the Company earns fixed monthly
Base Rental Income and may earn periodic Additional Rental Income. At December
31, 1996, minimum future rental income from 181 non-cancelable operating leases
is expected to be approximately $90,400,000 in 1997, $82,400,000 in 1998,
$69,600,000 in 1999, $61,500,000 in 2000, $51,600,000 in 2001 and $349,851,000
in the aggregate thereafter.
During 1996, the Company purchased and leased or agreed to construct a
total of 25 facilities operated by ten different operators for an aggregate
investment of approximately $117,000,000. In addition, the Company provided a
$4,000,000 mortgage loan. These facilities include 23 assisted living
facilities and three long-term care facilities.
In April 1995, the Company sold 10 leased facilities to Beverly
Enterprises, Inc. ("Beverly") for $43,450,000, resulting in a gain of
$23,550,000. Under the terms of the sale agreement, the Company received net
cash proceeds of $8,387,000 and provided a 15 year mortgage with an initial
interest rate of 10.4% to Beverly in the initial amount of $34,760,000.
The following tabulation lists the Company's total Real Estate Investments
at December 31, 1996 (dollar amounts in thousands):
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE FACILITIES
California 16 $ 6,547 $ 25,192 $ 31,739 $ 9,683 $ ---
Florida 8 4,680 25,819 30,499 6,289 ---
Indiana 11 2,725 37,674 40,399 8,888 ---
Maryland 3 1,287 18,972 20,259 5,764 ---
Massachusetts 5 1,587 16,872 18,459 7,237 ---
Missouri 2 1,215 12,350 13,565 7,614 ---
North Carolina 8 1,552 26,775 28,327 3,885 5,907
Ohio 6 1,125 23,835 24,960 8,254 949
Tennessee 10 1,072 36,541 37,613 9,648 422
Texas 10 816 16,890 17,706 5,882 ---
Wisconsin 7 1,197 16,737 17,934 5,559 ---
Others (15 States) 27 5,025 65,056 70,081 20,916 1,426
- ------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 113 $ 28,828 $ 322,713 $ 351,541 $ 99,619 $ 8,704
- ------------------------------------------------------------------------------------------------------------------------------
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- --------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
Los Gatos, California 1 $ 3,736 $ 17,139 $ 20,875 $ 6,158 $ ---
Slidell, Louisiana 1 2,520 19,412 21,932 5,545 ---
Plaquemine, Louisiana 1 737 9,722 10,459 1,165 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 3 6,993 46,273 53,266 12,868 ---
- -------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 6 5,624 30,195 35,819 797 ---
Florida 4 1,720 12,001 13,721 1,492 ---
Maryland 1 1,008 6,689 7,696 118 ---
New Mexico 2 1,077 10,232 11,310 496 ---
Pennsylvania 3 515 15,826 16,341 612 ---
Texas 10 2,237 29,628 31,865 393 ---
Others (13 States) 21 6,106 90,140 96,246 5,812 912
- --------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 47 18,287 194,711 212,998 9,720 912
- --------------------------------------------------------------------------------------------------------------------------------
PSYCHIATRIC FACILITY, Georgia 1 738 3,181 3,919 1,458 ---
- --------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Peoria, Arizona 1 1,565 7,050 8,616 1,221 ---
Little Rock, Arkansas 1 709 9,599 10,308 1,436 ---
Colorado Springs, Colorado 1 690 8,346 9,036 1,194 ---
Overland Park, Kansas 1 2,316 10,719 13,035 1,944 ---
San Antonio/Dallas, Texas 2 3,990 29,678 33,668 14,005 ---
- --------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 6 9,270 65,392 74,663 19,800 ---
- --------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
Texas 8 1,966 39,442 41,408 2,825 ---
Utah 1 276 5,237 5,512 140 ---
- ---------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 9 2,242 44,679 46,920 2,965 ---
- ---------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS 2 3,745 24,542 28,287 1,430 2,418
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 181 70,103 701,491 771,594 147,860 12,034
- ---------------------------------------------------------------------------------------------------------------------------------
Partnership Investments,
Including All Partners' Assets 5 --- --- 32,106 --- ---
Financing Leases (See Note 6) 5 --- --- 17,136 --- ---
Mortgage Loans Receivable (See Note 6) 23 --- --- 94,424 --- ---
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 214 $ 70,103 $ 701,491 $ 915,260 $ 147,860 $ 12,034
- ---------------------------------------------------------------------------------------------------------------------------------
(4) MAJOR OPERATORS
Listed below are the Company's major operators which represent five percent
or more of the Company's revenue, the investment in Properties operated by those
health care providers, and the percentage of total revenue from these operators
for the years ended December 31, 1996, 1995 and 1994. All of these operators
are publicly traded companies and are subject to the informational filing
requirements of the Securities and Exchange Act of 1934, as amended, and
accordingly file periodic financial statements on Form 10-K and Form 10-Q with
the Securities and Exchange Commission.
Percentage of Total Revenue
Investment at Year Ended December 31,
December 31, 1996 1996 1995 1994
--------------------- --------- --------- ---------
(Amounts in thousands)
Vencor, Inc. $ 158,423 19% 22% 23%
Beverly Enterprises, Inc. 70,506 8 11 12
Horizon/CMS Healthcare Corp. 53,237 8 9 10
Emeritus Corporation 94,179 7 1 --
Columbia/HCA Healthcare Corp. 70,435 7 7 7
Tenet Healthcare Corporation 42,807 6 8 8
HealthSouth Corporation 42,284 5 6 7
----------- ------ ------ ------
$ 531,871 60% 64% 67%
=========== ====== ====== ======
Certain of these facilities have been subleased or assigned to other
operators but with the original lessee remaining liable on the leases.
Tenet Healthcare Corporation unconditionally guarantees 30% of the
Company's total revenue for the year ended December 31, 1996 represented by the
leases of two acute care hospitals operated by its subsidiaries, 52 long-term
care and assisted living facilities leased by subsidiaries of Vencor, Inc., two
rehabilitation hospitals operated by subsidiaries of HealthSouth Corporation and
one psychiatric care facility operated by another health care provider.
On February 18, 1997, HealthSouth Corporation announced the signing of a
definitive agreement pursuant to which HealthSouth will acquire Horizon/CMS
Healthcare in a stock-for-stock merger.
(5) INVESTMENTS IN PARTNERSHIPS
The Company is the general partner and a 50% equity interest owner in five
partnerships that each lease a congregate care center.
The Company was the general partner and a 50% equity interest owner in
Health Care Investors I ("HCI"), a limited partnership that was created in 1985
to invest in nine long-term care facilities in Missouri and one long-term care
facility each in Illinois and Arkansas. A Director of the Company was a 15.185%
limited partner in this partnership since inception. In January 1996, the
Company acquired the partnership interests of all of the limited partners and
sold the nine Missouri facilities for $20,675,000. Outstanding mortgage loans
of $15,180,000, which were secured by the partnership assets, were repaid. The
Company now has a 100% investment in the two remaining long-term care
facilities.
Combined summarized financial information of the partnerships follows:
December 31,
-------------------------
1996 1995
----------- ----------
(Amounts in thousands)
Real Estate Investments, Net $ 24,401 $ 37,596
Other Assets 2,369 2,540
--------- ---------
Total Assets $ 26,770 $ 40,136
========= =========
Notes Payable to Others $ 19,880 $ 30,923
Accounts Payable 439 322
Other Partners' Deficit (80) (357)
Investments and Advances from the Company, Net 6,531 9,248
--------- ---------
Total Liabilities and Partners' Capital $ 26,770 $ 40,136
========= =========
Rental Income $ 4,938 $ 7,951
========= =========
Net Income $ 935 $ 1,874
========= =========
Company's Equity in Partnership Operations $ 482 $ 1,508
========= =========
Distributions to the Company $ 692 $ 1,746
========= =========
(6) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
--------------------------
1996 1995
----------- ----------
(Amounts in thousands)
Mortgage Loans (See below) $ 94,424 $ 97,451
Financing Leases 17,136 22,139
Equipment and Other Loans 667 1,369
--------- ---------
Total Loans Receivable $ 112,227 $ 120,959
========= =========
The following is a summary of Mortgage Loans Receivable at December 31,
1996:
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- --------------------------------------------------------------------------------------------
(Amounts in thousands)
1998-2002 3 Monthly payments from $9,900 to $26,700 $ 5,791 $ 4,319
including effective interest of approximately
26.01% secured by three long-term care facilities
located in California.
2001 2 Monthly payments from $112,500 to 32,000 23,514
$337,500 including average interest of 12.23%
secured by an acute care hospital and three
medical office buildings leased and operated
by Columbia/HCA Healthcare Corp.
2003 1 Monthly payment of $96,800 including 11,390 10,988
interest of 9.86% on an acute care hospital
located in Florida and operated by
Tenet Healthcare Corporation.
2006 1 Monthly payment of $33,900 including 3,991 3,915
interest of 9.14% on an assisted living
facility located in North Carolina operated
by Emeritus Corporation.
2009 2 Monthly payments from $40,600 to 10,228 10,033
$62,400 including current interest of 11.26%
to 11.91% on one medical office building
and a long-term care facility both located
in California.
2010 1 Monthly payments of $328,200 including 34,760 34,369
current interest of 10.50% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2015 1 Monthly payment of $18,000 including 1,800 1,752
fixed interest of 10.50% on a long-term care
facility located in Michigan.
2031 1 Monthly payments of $51,500 including 6,180 5,534
interest of 9.65% on a long-term care facility
located in Indiana.
--- -------- --------
Totals 12 $106,140 $ 94,424
=== ======== ========
At December 31, 1996, minimum future principal payments from non-cancelable
Mortgage Loans are expected to be approximately $3,177,000 in 1997, $6,832,000
in 1998, $3,769,000 in 1999, $4,203,000 in 2000, $12,421,000 in 2001 and
$64,022,000 in the aggregate thereafter.
At December 31, 1996, minimum future interest income from five non-
cancelable financing leases is expected to be approximately $3,060,000 in 1997,
$3,099,000 in 1998, $1,973,000 in 1999, $1,264,000 in 2000, $746,000 in 2001 and
$2,768,000 in the aggregate thereafter.
(7) NOTES PAYABLE
SENIOR NOTES DUE 1998 TO 2015:
The following is a summary of Senior Notes outstanding at December 31, 1996
and 1995:
Year Prepayment
Issued 1996 1995 Interest Rate Maturity Without Penalty
- ------ --------- --------- -------------- -------- ---------------
(Amounts in thousands)
1989 $ 10,000 $ 10,000 10.56% 1999 None
1990 12,500 12,500 10.20-10.30% 2000 1997-2000
1991 22,500 22,500 9.44-9.88% 2001 1998-2001
1993 10,000 10,000 8.00% 2003 2000-2003
1993 6,000 6,000 6.10-6.70% 1998-2003 None
1994 15,000 15,000 8.81-9.10% 1999-2004 None
1995 58,000 58,000 7.03-8.87% 2000-2005 None
1995 20,000 20,000 6.62-9.00% 2010-2015 2002-2015
1996 115,000 --- 6.5% 2006 None
-------- --------
269,000 154,000
Less: Unamortized
Original Issue
Discount (1,530) (6)
-------- --------
$ 267,470 $ 153,994
======= ========
The weighted average interest rate on the Senior Notes was 7.7% and 9.07%
for 1996 and 1995, respectively, and the weighted average balance of the Senior
Notes borrowings was approximately $254,625,000 and $129,500,000 during 1996 and
1995, respectively. Original issue discounts are amortized over the term of the
Senior Notes. If held to maturity, the first required Senior Note maturities
would be $5,000,000 in 1998, $15,000,000 in 1999, $22,500,000 in 2000,
$27,500,000 in 2001 and $199,000,000 in the aggregate thereafter.
CONVERTIBLE SUBORDINATED NOTES DUE 2000:
On November 8, 1993, the Company issued $100,000,000 6% Convertible
Subordinated Notes due November 8, 2000. These Notes are prepayable without
penalty after November 8, 1998. The Notes are convertible into shares of common
stock of the Company at a conversion price of $37.806. A total of 2,645,083
shares of common stock have been reserved for such issuance.
MORTGAGE NOTES PAYABLE:
At December 31, 1996, Mortgage Notes Payable were $12,034,000 secured by 13
health care facilities with a net book value of approximately $41,661,000.
Interest rates on the Mortgage Notes ranged from 4.50% to 9.75%. Required
principal payments on the Mortgage Notes range from $761,000 to $1,333,000 per
year in the next five years and $6,900,000 in the aggregate thereafter.
BANK NOTES:
The Company has an unsecured revolving credit line aggregating $100,000,000
with certain banks. This credit line expires on March 31, 2000 and bears an
annual facility fee of 0.20%. These agreements provide for interest at the
Prime Rate, the London Interbank Offered Rate plus .425% or at a rate negotiated
with each bank at the time of borrowing. Interest rates incurred by the Company
ranged from 6.5% to 5.43%, and 6.94% to 5.69%, on maximum short-term bank
borrowings of $84,000,000 and $53,300,000 for 1996 and 1995, respectively. The
weighted average interest rates were approximately 5.77% and 6.17% on weighted
average short-term bank borrowings of $5,758,000 and $13,456,000 for the same
respective periods.
(8) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value. The carrying amount for Cash and Cash Equivalents approximates fair
value because of the short-term maturity of those instruments. Fair values for
Mortgage Loans Receivable and long-term debt are based on the estimates of
management and on rates currently prevailing for comparable loans and
instruments of comparable maturities, and are as follows:
December 31, 1996 December 31, 1995
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- --------
(Amounts in thousands)
Mortgage Loans Receivable $ 94,424 $103,000 $ 97,451 $107,000
Long-Term Debt $379,504 $377,000 $267,384 $284,000
(9) STOCK INCENTIVE PLANS
Directors and Officers and key employees of the Company are eligible to
participate in the Company's Directors' Stock Incentive Plan and the Company's
Amended Stock Incentive Plan ("Plans"), respectively. A summary of the status
of the Company's Plans at December 31, 1996, 1995 and 1994 and changes during
the years then ended is presented in the table and narrative below:
1996 1995
1994
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Incentive Plan (000's) Price (000's) Price (000's) Price
------- -------- ------- -------- ------- --------
Outstanding, beginning of year 717 $25 665 $24 699 $22
Granted 263 34 88 29 69 30
Exercised (74) 19 (36) 15 (83) 21
Forfeited (10) 29 -- -- (20) 23
------- -------- ------- -------- ------- --------
Outstanding, end of year 896 28 717 25 665 24
Exercisable at end of year 423 25 327 23 190 21
Weighted average fair value
of options granted $3.66 $9.73 $3.83
Stock Grants
- -----------------------------
Issued 34 79 21
Canceled (4) --- (4)
The incentive stock awards ("Awards") are granted at no cost to the
employees. The Awards generally vest and are amortized over five-year periods.
The stock options become exercisable on either a one-year or a five-year
schedule after the date of the grant.
At December 31, 1996, 53,000 of the 896,000 options outstanding have
exercise prices between $12 and $20 with a weighted average exercise price of
$17 and a weighted average remaining contractual life of four years. All of
these options are exercisable. The remaining 843,000 options have exercise
prices between $21 and $35 with a weighted average exercise price of $29 and a
weighted average remaining contractual life of 7.5 years. Of these options,
370,000 are exercisable; their weighted average exercise price is $26.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following ranges of assumptions:
risk-free interest rates from 5.75% to 7.75%; expected dividend yields from
5.92% to 6.8% percent; and expected lives of 10 years; expected volatility of
.18% to .20%.
The Company accounts for stock options under Accounting Principles Board
Opinion 25 ("APB25"), Accounting for Stock Issued to Employees, which is
permitted under FASB Statement No. 123 ("FASB 123"), Accounting for Stock Based
Compensation, issued in 1995. Had compensation cost for the Plans been
determined consistent with FASB 123, the Company's Net Income and Earnings Per
Share on a proforma basis would have remained at existing levels.
During the year ended December 31, 1996, the Company made loans totaling
$392,000 secured by stock in the Company for the purpose of exercising incentive
stock options by Directors, Officers and key employees. No loans were made
during the year ended December 31, 1995. The interest rate charged is based on
the prevailing applicable federal rate as of the inception of the loan. Loans
secured by stock totaling $667,000 were outstanding at December 31, 1996.
(10) DIVIDENDS
Dividend payment dates are scheduled approximately 50 days following each
calendar quarter. A dividend of $0.60 per share was declared by the Board of
Directors on January 23, 1997, to be paid on February 20, 1997 to stockholders
of record on February 3, 1997.
In order to qualify as a REIT, the Company must, among other requirements,
distribute at least 95% of its taxable income to its stockholders.
Per share dividend payments by the Company to the stockholders were
characterized in the following manner for tax purposes:
1996 1995 1994
-------- -------- --------
Ordinary Income $2.1250 $1.3450 $1.9800
Capital Gain Income .1750 .7950 --
Return of Capital -- -- --
-------- -------- --------
Total Dividends Paid $2.3000 $2.1400 $1.9800
======== ======== ========
(11) COMMITMENTS
The Company has outstanding commitments on closed and to-be-closed
development transactions of approximately $39 million and $63 million,
respectively. The Company is also committed to acquire approximately $122
million of existing health care facilities. The Company expects that a
significant portion of these commitments will be funded; however, experience
suggests that some committed transactions will not close. Transactions do not
close for various reasons including unsatisfied pre-closing conditions,
competitive financing sources, final negotiation differences and the operator's
inability to obtain required internal or governmental approvals.
(12) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
March 31 June 30 September 30 December 31
-------- -------- ------------ ------------
(Amounts in thousands, except per share data)
1996
Revenue $ 28,943 $ 30,586 $ 29,877 $ 30,987
Net Income $ 14,601 $ 15,591 $ 15,028 $ 15,421
Dividends Paid Per Share $ .5600 $ .5700 $ .5800 $ .5900
Net Income Per Share $ .51 $ .54 $ .52 $ .55
1995
Revenue $ 26,728 $ 25,911 $ 26,274 $ 26,783
Net Income $ 13,756 $ 37,866 (1) $ 14,644 $ 14,000
Dividends Paid Per Share $ .5200 $ .5300 $ .5400 $ .5500
Net Income Per Share $ .50 $ 1.33 (1) $ .51 $ .49
(1) Includes $23,550 or $0.83 per share for Gain on Sale of Real Estate
Properties.
APPENDIX I
TENET HEALTHCARE CORPORATION
SET FORTH BELOW IS CERTAIN CONDENSED FINANCIAL DATA OF TENET HEALTHCARE
CORPORATION ("TENET") WHICH IS TAKEN FROM TENET'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED MAY 31, 1996 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(THE "COMMISSION") UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"), AND THE TENET QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED NOVEMBER 30, 1996 AS FILED WITH THE COMMISSION.
The information and financial data contained herein concerning Tenet was
obtained and has been condensed from Tenet's public filings under the Exchange
Act. The Tenet financial data presented includes only the most recent interim
and fiscal year end reporting periods. The Company can make no representation
as to the accuracy and completeness of Tenet's public filings but has no reason
not to believe the accuracy and completeness of such filings. It should be
noted that Tenet has no duty, contractual or otherwise, to advise the Company of
any events which might have occurred subsequent to the date of such publicly
available information which could affect the significance or accuracy of such
information.
Tenet is subject to the information filing requirements of the Exchange
Act, and, in accordance therewith, is obligated to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information may be inspected at the offices of the Commission at 450 Fifth
Street, N.W. Washington D.C., and should also be available at the following
Regional Offices of the Commission: Room 1400, 75 Park Place, New York, New
York 10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Such reports and other information concerning Tenet
can also be inspected at the offices of the New York Stock Exchange, Inc., 20
Broad Street, Room 1102, New York, New York 10005.
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values)
November 30, May 31,
1996 1996
------------- --------
ASSETS
Cash and cash equivalents $ 57 $ 89
Short-term investments in debt securities 103 112
Accounts and notes receivable, less
allowance for doubtful accounts
($182 at November 30 and $156 at May 31) 1,006 838
Inventories of supplies, at cost 135 128
Deferred income taxes 254 279
Assets held for sale --- 39
Prepaid expenses and other assets 81 60
------- -------
Total current assets $ 1,636 $ 1,545
------- -------
Investments and other assets 506 518
Property, plant and equipment net 3,738 3,648
Intangible assets, at cost
Less accumulated amortization
($161 at November 30 and $123 at May 31) 2,693 2,621
------- -------
$ 8,573 $ 8,332
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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
1996 1996
------------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 42 $ 60
Accounts payable 267 380
Employee compensation and benefits 136 120
Other current liabilities 500 574
------- -------
Total current liabilities 945 1,134
------- -------
Long-Term debt, net of current portion 3,333 3,191
Other long-term liabilities and minority interests 1,024 997
Deferred income taxes 425 394
Common stock, $.075 par value; authorized
450,000,000 shares; 218,713,406 shares issued at
November 30, 1996 and at May 31,1996 16 16
Other shareholders' equity 2,869 2,660
Treasury stock, at cost, 15,159,055 shares at
November 30, 1995 and 18,755,274 at May 31, 1995 (40) (40)
------- -------
Total stockholders' equity 2,846 2,636
------- -------
$ 8,573 $ 8,332
======= =======
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended,
November 30, 1996 May 31, 1996
------------------ ------------
Net operating revenues $ 2,915 $ 5,559
-------- --------
Operating and amortization (2,340) (4,460)
Depreciation and amortization (170) (407)
Interest expense, net of capitalized portion (141) (312)
-------- --------
Total costs and expenses (2,651) (5,179)
-------- --------
Investment earnings 10 22
Equity in earnings of unconsolidated affiliates 1 20
Minority interests in income of consolidated subsidiaries (10) (22)
Net gain on disposals of facilities
and long-term investments --- 329
Gain on sale of subsidiary's common stock --- 17
-------- --------
Income from continuing operations before income taxes 265 746
Taxes on income (116) (348)
-------- --------
Income from continuing operations 149 398
-------- --------
Discontinued operations --- (25)
Extraordinary charge from early extinguishment of debt --- (23)
-------- --------
Net income $ 149 $ 350
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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended,
November 30, 1996 May 31, 1996
------------------ ------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ (14) $ 195
(Includes changes in all operating assets and liabilities): -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (95) (370)
Purchase of new businesses, net of cash acquired (160) (410)
Proceeds from sales of facilities, investments and other assets 40 548
Other items 67 (36)
-------- --------
Net cash provided by (used in) investing activities (148) (268)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (636) (3,187)
Proceeds from other borrowings 751 2,961
Proceeds from exercises of performance options --- 203
Proceeds from stock options exercised 15 30
-------- --------
Net cash used in financing activities 130 7
-------- --------
Net decrease in cash and cash equivalents (32) (66)
Cash and cash equivalents at beginning of year 89 155
-------- --------
Cash and cash equivalents at end of year $ 57 $ 89
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