Back to GetFilings.com
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, 1997
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.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number: (714) 221-0600
------------------------------
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
7-7/8% Series A Cumulative
Redeemable Preferred 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
registrant 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. [X]
As of March 19, 1998 there were 30,246,169 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 19, 1998 on the New York Stock Exchange, was approximately $1,073,107,000.
Portions of the definitive Proxy Statement for the registrant's 1998 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 13 years ago, the Company today is
the second oldest REIT specializing in health care real estate. At December 31,
1997, the Company owned an interest in 220 properties located in 39 states, of
which 213 are leased or subleased pursuant to long-term leases (the "Leases") to
53 health care providers (the "Lessees"), including affiliates of Beverly
Enterprises, Inc. ("Beverly"), Columbia/HCA Healthcare Corp. ("Columbia"),
Emeritus Corporation ("Emeritus"), HealthSouth Corporation ("HealthSouth"),
Tenet Healthcare Corporation ("Tenet") and Vencor, Inc. ("Vencor"). The
remaining seven properties are medical office buildings with multiple tenant
leases. Of the Lessees, only Vencor accounts for more than 10% of the Company's
revenue for the year ended December 31, 1997. The Company also holds mortgage
loans on 24 properties that are owned and operated by 12 health care providers
(the "Mortgagors") including Beverly, Columbia and Tenet.
At December 31, 1997, the gross acquisition price of the Company's 244
leased or mortgaged properties (the "Properties"), including partnership
acquisitions and mortgage loan acquisitions, was approximately $1.1 billion.
The average age of the Properties is 18 years. As of December 31, 1997,
approximately 70% 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 12 years. The Company's
annualized return to its stockholders, assuming reinvestment of dividends and
before stockholders' income taxes is approximately 20% over the period from its
initial public offering in May 1985 through December 31, 1997.
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 244 health care facilities in which the Company has an investment as
of December 31, 1997, the Company directly owns 180 facilities including 98 long
- - -term care facilities, two rehabilitation hospitals, 63 congregate care and
assisted living centers, three acute care hospitals, 11 medical office buildings
and three physician group practice clinics.
The Company has provided mortgage loans on 24 properties, including 15 long
- - -term care facilities, three congregate care and assisted living centers, three
acute care hospitals and three medical office buildings.
At December 31, 1997, the Company also had varying percentage interests in
several joint ventures and partnerships that together own 40 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 90% interest in a company formed to own five medical office buildings.
4. An 80% interest in a company formed to own a long-term care facility.
5. A 50% interest in five partnerships, each of which owns a congregate care
facility.
6. A 45% interest in a company formed to own 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,
1997:
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% 113 13,658 $ 365,475 $ 53,989
Long-Term Care Facilities 77-80 22 2,625 50,975 10,663
-------------------------------------------------------
135 16,283 416,450 64,652
-------------------------------------------------------
Acute Care Hospitals 100 6 656 53,690 6,047
Acute Care Hospitals 77 2 356 32,961 7,708
-------------------------------------------------------
8 1,012 86,651 13,755
-------------------------------------------------------
Rehabilitation Hospitals 100 2 168 27,385 4,167
Rehabilitation Hospitals 90-97 4 307 45,011 8,175
-------------------------------------------------------
6 475 72,396 12,342
-------------------------------------------------------
Congregate Care & Assisted Living Centers 100 66 5,507 292,776 26,732
Congregate Care & Assisted Living Centers 45-50 6 709 6,902(5) 4,919
-------------------------------------------------------
72 6,216 299,678 31,651
-------------------------------------------------------
Medical Office Buildings (3) 100 14 --- 85,236 9,308
Medical Office Buildings (3) 90 5 --- 42,300 4,700
Physician Group Practice Clinics (4) 100 3 --- 48,908 5,010
Psychiatric Facility 77 1 108 3,018 561
-------------------------------------------------------
Totals 244 24,094 $1,054,637 $ 141,979
=======================================================
(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 955,000 square feet.
(4) The Physician Group Practice Clinics encompass approximately 437,000 square
feet.
(5) Represents HCPI's net investment.
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 1990
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 72 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 generally paid from private sources.
ACUTE CARE HOSPITALS. The Company has an interest in six general acute
care hospitals and two long-term 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 by the patient or the patient's family, third party payors (e.g.
insurance, HMOs), or through the federal Medicare and state Medicaid programs.
Long-term acute care hospitals are defined as those facilities in which a
patient's stay is at least 25 days. These hospitals receive reimbursement on a
cost-based reimbursement system, subject to certain limitations, for Medicare
patients. Traditional general acute care hospitals are provided reimbursement
incentives by Medicare to minimize inpatient length of stay.
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 by the patient or the patient's family,
third party payors (e.g. insurance, HMOs), or through the federal Medicare
program.
MEDICAL OFFICE BUILDINGS. The Company has investments in 19 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. Except as noted below, the
Company's owned medical office buildings are generally master leased to a Lessee
which then subleases office space to physicians or other medical practitioners.
During 1997, the Company purchased seven medical office buildings which are
leased to multiple tenants under triple net or gross leases. These facilities
are operated by property management companies on behalf of the Company.
PHYSICIAN GROUP PRACTICE CLINICS. The Company has investments in three
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/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- - --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
Long-Term Care Facilities
Alabama 1 174 95% 31% $ 903 --
Arkansas 9 866 77 48 2,203 8
California 21 2,083 88 50 7,828 10
Colorado 3 420 93 59 1,824 2
Connecticut 1 121 97 37 622 2
Florida 11 1,267 92 55 6,734 6
Illinois 2 201 86 54 475 4
Indiana 13 1,709 82 49 6,863 13
Iowa 1 201 90 37 656 1
Kansas 3 323 89 58 1,776 1
Kentucky 1 100 97 60 406 4
Louisiana 1 120 96 37 669 7
Maryland 3 438 87 28 2,287 20
Massachusetts 5 615 95 42 2,804 4
Michigan 3 286 86 61 908 4
Mississippi 1 120 100 6 358 4
Missouri 2 393 50 45 1,938 2
Montana 1 80 80 47 281 1
New Mexico 1 102 96 31 307 5
North Carolina 9 1,056 82 52 3,962 9
Ohio 9 1,226 92 54 5,970 3
Oklahoma 2 207 87 81 1,654 1
Oregon 1 110 82 45 332 --
South Carolina 2 52 90 100 392 13
Tennessee 10 1,754 97 43 5,170 4
Texas 10 1,094 59 35 3,023 3
Washington 1 84 73 60 290 1
Wisconsin 8 1,133 84 50 4,017 5
- - --------------------------------------------------------------------------------------------------------
Sub-Total 135 16,335 85 48 64,652 7
- - --------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 3 100 375 15
California 1 182 56 92 3,820 1
Florida 1 285 34 92 1,147 5
Louisiana 2 325 43 92 5,153 5
Texas 3 199 38 100 3,260 5
- - --------------------------------------------------------------------------------------------------------
Sub-Total 8 1,012 41 94 13,755 4
- - --------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 74 100 1,917 1
Arkansas 1 60 74 100 1,874 3
Colorado 1 64 65 100 1,525 3
Florida 1 108 95 100 2,250 14
Kansas 1 75 70 100 2,677 1
Texas 1 108 64 100 2,099 5
- - ---------------------------------------------------------------------------------------------------------
Sub-Total 6 475 75 100 12,342 6
- - ---------------------------------------------------------------------------------------------------------
Average
Number Private
Number of Beds/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- - --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
Physician Group Practice Clinics (4)
Arkansas 1 --- --- 100 2,534 12
California 1 --- --- 100 1,956 14
Tennessee 1 --- --- 100 520 11
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 3 --- --- 100 5,010 13
- - ------------------------------------------------------------------------------------------------------------
Psychiatric Facility - Georgia 1 108 14 100 560 ---
- - ------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (3) 1 84 --- --- --- ---
Arkansas 1 17 92 100 27 12
Arizona 1 97 77 100 490 10
California (3) 11 1,013 83 100 4,113 13
Colorado 1 98 95 100 667 1
Delaware 1 52 89 100 375 10
Florida (3) 6 425 73 98 1,555 12
Georgia 1 40 97 100 230 13
Idaho 1 117 18 100 726 15
Kansas 1 110 81 100 583 1
Louisiana (3) 5 449 100 100 1,616 9
Maryland 1 86 37 100 794 12
Michigan (3) 1 100 --- --- --- ---
Missouri 1 73 74 100 428 4
New Jersey 3 195 71 100 1,266 12
New Mexico 2 285 55 100 1,935 13
New York 1 74 84 100 410 10
North Carolina 3 229 95 100 1,306 12
Ohio 1 156 93 100 776 13
Oregon 1 58 99 81 378 11
Pennsylvania 3 232 92 100 1,600 11
Rhode Island 1 172 99 100 1,531 3
South Carolina 5 400 90 100 2,514 13
Texas (3) 16 1,373 70 100 7,659 13
Virginia (3) 1 90 --- --- --- 15
Washington 2 139 93 87 673 10
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 72 6,164 78 99 31,652 12
- - ------------------------------------------------------------------------------------------------------------
Medical Office Buildings (4)
Alaska 1 --- --- 100 841 3
California 7 --- --- 100 6,493 1
Minnesota 1 --- --- 100 1,300 ---
Texas 9 --- --- 100 4,817 9
Utah 1 --- --- 100 557 12
- - ------------------------------------------------------------------------------------------------------------
Sub-Total 19 --- --- 100 14,008 4
- - ------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 244 24,094 78% 62% $ 141,979 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 437,000 and 955,000 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, except for average occupancy data.
(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.
(5) This information is derived from information provided by the Company's
Lessees.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1997, the Company owned an interest in 244 Properties
located in 40 states, which are operated by 59 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 51 $23,301,000 16%
HealthSouth 6 12,342,000 9
Emeritus 23 11,038,000 8
Beverly 25 9,915,000 7
Tenet 3 8,855,000 6
Columbia 12 8,202,000 6
Lessees of 51 of the Company's 244 Properties are subsidiaries of Vencor
(formerly subsidiaries of The Hillhaven Corporation). Based upon public
reports filed by Vencor with the Securities and Exchange Commission ("SEC"),
Vencor's revenue and net income for the year ended December 31, 1997 were
approximately $3.1 billion and $130.9 million, respectively; and Vencor's total
assets and stockholders' equity as of December 31, 1997 were approximately
$3.3 billion and $905.4 million, respectively.
Through 1997, Tenet was financially responsible to the Company under a
guarantee through the primary lease term on four Properties, including the three
properties leased to subsidiaries of Tenet. In addition, Tenet has guaranteed
all of the properties leased to Vencor (see prior paragraph). However, as
discussed in more detail below, as part of an agreement reached between Tenet
and the Company during the fourth quarter, Tenet will no longer guarantee the
rental revenue on the Vencor facilities beyond the base term of the leases.
During 1997, one such lease expired and 14 more will expire during 1998. 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 filed by Tenet with the SEC for the six
months ended November 30, 1997, Tenet reported net operating revenue and net
income of approximately $4.8 billion and $254 million, respectively. At
November 30, 1997, Tenet's total assets and shareholders' equity were
approximately $12.1 billion and $3.5 billion, respectively. Based on public
reports filed by Tenet with the SEC, for the year ended May 31, 1997, Tenet
reported net operating revenue and net loss of approximately $8.7 billion and
$254 million, respectively, and total assets and shareholders' equity of
approximately $11.7 billion and $3.2 billion, respectively. For certain
additional financial data with respect to Tenet, see Appendix I, attached
hereto.
The Company leases 15 facilities to Beverly. In addition, it is providing
a mortgage loan to Beverly that is secured by 10 facilities. Based upon public
reports filed by Beverly with the SEC, Beverly's net operating revenue and net
income for the nine months ended September 30, 1997 were approximately $2.4
billion and $66.6 million, respectively. Beverly's total assets and
stockholder's equity as of September 30, 1997 were approximately $2.5 billion
and $1.1 billion, respectively. For the year ended December 31, 1996, Beverly
reported net operating revenue and net income of approximately $3.2 billion and
$50.3 million, respectively, and total assets and stockholder's equity of $2.5
billion and $861.1 million, respectively. According to a recent press release
issued by Beverly, Beverly's net operating revenue and net income for the year
ended December 31, 1997 were $3.2 billion and $58.6 million, respectively.
The Company separately concluded agreements with Tenet and Beverly in the
fourth quarter of 1997 that result in their forbearance or waiver of certain
renewal and purchase options and related rights of first refusal on facilities
currently leased to Vencor and Beverly. Options and related rights of first
refusal on up to 51 facilities operated by Vencor and eight facilities operated
by Beverly are covered under the agreements. As part of these agreements,
continued ownership of the facilities will remain with the Company.
The Company leases six rehabilitation hospitals to HealthSouth, including
three rehabilitation hospitals previously operated by Horizon discussed below.
Based upon public reports filed by HealthSouth with the SEC, HealthSouth's
revenue and net income for the nine months ended September 30, 1997 were
approximately $2.2 billion and $231.8 million, respectively. HealthSouth's
total assets and stockholders' equity at September 30, 1997 were approximately
$4.2 billion and $1.9 billion, respectively. HealthSouth reported revenue and
net income for the year ended December 31, 1996 of approximately $2.4 billion
and $220.8 million, respectively. HealthSouth's total assets and stockholders'
equity as of December 31, 1996 were approximately $3.4 billion and $1.5 billion,
respectively. According to a recent press release issued by HealthSouth,
HealthSouth's revenue and net income for the year ended December 31, 1997 were
$3.0 billion and $330.6 million, respectively.
During 1997, the Company had leased eight facilities to Horizon/CMS
Healthcare Corporation ("Horizon"), including the three rehabilitation hospitals
described above, four long-term care facilities and one congregate care
facility. HealthSouth purchased Horizon in October 1997, and subsequently sold
Horizon's long-term and congregate care operations to Integrated Health Services
("IHS"). These operations included four long-term care facilities and one
congregate care facility which are now leased to IHS by the Company.
The Company holds Loans (defined below) which initially totaled $34.5
million and which are secured by one hospital and two medical office buildings
operated by a wholly owned subsidiary of Columbia. At December 31, 1997, the
Company has provided or has committed to provide approximately $44 million in
acquisition or construction funds for eight 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 some tenant
improvements. In addition, Columbia leases one other medical office building.
Based upon public reports filed by Columbia with the SEC, Columbia's revenue and
net income for the nine months ended September 30, 1997 were approximately $14.4
billion and $988 million, respectively; and Columbia's total assets and
stockholders' equity as of September 30, 1997 were approximately $23.1 billion
and $8.9 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. According to a recent press release
issued by Columbia, Columbia's revenue and net loss for the year ended December
31, 1997 were $18.8 billion and $305.0 million, respectively.
According to publicly filed SEC reports, Columbia recently has been the
subject of various significant government investigations regarding its
compliance with Medicare, Medicaid and similar programs. According to such SEC
reports filed by Columbia, while it is too early to predict the outcome of any
of the on-going investigations or the initiation of any additional
investigations, were Columbia to be found in violation of federal or state laws
relating to Medicare, Medicaid or similar programs, Columbia could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
participation in the Medicare and Medicaid programs. Columbia's senior debt
ratings remain investment grade, but have recently been reduced by Moody's to
Baa2 and by Standard & Poor's to BBB.
The Company leases 19 assisted living and congregate care facilities and
three long-term care facilities to Emeritus. The Company also provided a
mortgage loan on an assisted living facility operated by Emeritus. Based on
public reports filed by Emeritus with the SEC, total operating revenue and net
loss for the nine months ended September 30, 1997 were approximately $85.0
million and $14.8 million, respectively. Emeritus' total assets and
shareholders' equity at September 30, 1997 were $203.6 million and $12.7
million, respectively. For the year ended December 31, 1996, Emeritus reported
total operating revenue and net loss of approximately $68.9 million and $8.2
million, respectively, and total assets and shareholders' equity of $158 million
and $26.2 million respectively. Subsequent to September 30, 1997, Emeritus
raised $25 million in additional preferred equity. According to a recent press
release issued by Emeritus, Emeritus' total operating revenue and net loss for
the year ended December 31, 1997 were $117.8 million and $28.2 million,
respectively.
Vencor, Tenet, Beverly, HealthSouth, 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. All of the financial and
other information presented herein with respect to such companies was obtained
from such publicly filed reports except where indicated where certain additional
information was obtained from press releases issued by those companies.
LEASES AND LOANS
The initial base rental rates of the Leases entered into by the Company
during the three years ended December 31, 1997 have generally ranged from 9% 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, creditworthiness of the Lessee, operating performance of the
facility, interest rates at the commencement of the lease or interest, 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, 1997 have generally ranged from 9% to 12% per
annum. Certain Leases and Loans have fixed rent or interest increases or rent or
interest 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,
1997, 1996 and 1995 were $21.1 million, $20.9 million and $18.1 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 eight years; the average remaining term on the Loans
is approximately ten 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 a single operator. Obligations under the Leases, in most cases, have
corporate parent or shareholder guarantees; 120 Leases and Loans covering 14
facilities are backed by irrevocable letters of credit from various financial
institutions which cover from three to eighteen 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 $39.6 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).
Many Lessees have the right of first refusal to purchase the Properties
during the Lease terms; many 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, many 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. Thirty-nine Properties are not
subject to purchase options until 2008 or later, and an additional 103 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 Revenue of
-----------------------------------------------------
Properties Subject to
Lease Expirations,
Purchase Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gain at Lease
Year (1) (2) Expiration(3),(4)
----- --------------------- ------------------- ----------------------
(Amounts in thousands, except percentages) % Amount
------- ----------
1998 $ 10,369 $ 3,177 (0.6) $ (800)
1999 19,103 12,298 (1.9) (2,600)
2000 10,794 9,666 (1.2) (1,600)
2001 17,035 7,599 0.2 300
2002 9,705 1,514 0.5 700
Thereafter 67,601 59,356 -- --
--------- --------- ----- -------
$ 134,607 $ 93,610 (3.0) $(4,000)
========= ========= ===== =======
(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 purchase
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 (2) is a
component (subset) of column (1), the total current annualized revenue of
properties subject to lease expirations, purchase options and mortgage
maturities ($134,607,000).
(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 Lease Expirations. Total revenue of the Company has grown at a
compound annual growth rate of 8.6% in the past five years. The percentages
are computed by taking the possible revenue loss as a percentage of 1997
total revenue.
(4) The Company estimates that in addition to the possible reduction in income
from Lease expirations, it may also have a reduction of approximately
$400,000 in 1998 due to the reinvestment of cash received from mortgage
maturities and exercises of purchase option. This amount is calculated
based on current interest rate levels and is not estimated in years
subsequent to 1998 due to the unpredictable levels of interest rates
and their impact on Lessees' purchase options and mortgage maturities.
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 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 or mortgage loans. 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 44 facilities,
including five rehabilitation hospitals, 24 congregate care and assisted living
facilities, five long-term care facilities, seven medical office buildings and
three acute care hospitals representing an aggregate investment of approximately
$335 million. As of December 31, 1997, costs of approximately $248.1 million
have been funded and 32 facilities have been completed. The 32 completed
facilities comprise five rehabilitation hospitals, 13 congregate care and
assisted living facilities, five long-term care facilities, seven medical office
buildings and two acute care hospitals. The 12 remaining development projects
are scheduled for completion in 1998 and 1999. 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 presently are two gross income requirements and, with respect to
taxable years of the Company beginning before August 6, 1997, there was a third
gross income requirement. 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, for taxable years of the Company beginning before August 6,
1997, 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 such 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 and limited liability
companies. In the case of a REIT that is a partner in a partnership or a member
of a limited liability company that is treated as a partnership under the Code,
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 or limited liability company and will be deemed to be entitled
to the income of the partnership or limited liability company attributable to
such share. The ownership of an interest in a partnership or limited liability
company 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 or limited liability company, which would affect the computation of
taxable income of the REIT, and the status of the partnership or limited
liability company 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 (each a "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.
In addition, President Clinton's Fiscal 1999 budget proposal includes a
provision which, if enacted in its present form, would result in the immediate
taxation of all gain inherent in a C corporation's assets upon an election by
the corporation to become a REIT in taxable years beginning after January 1,
1999, and thus could effectively preclude the Company from reelecting to be
taxed as a REIT if there were a loss of its REIT status.
Distributions made to the Company's taxable U.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 made by
the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate. Corporate
stockholders may, however, 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 U.S. 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
U.S. stockholder's shares they will be included in income as 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.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition, for tax years of
the Company beginning on or after January 1, 1998, to the extent designated by
the Company, a U.S. stockholder generally would (i) include its proportionate
share of such undistributed long-term capital gains in computing its long-term
capital gains in its return for its taxable year in which the last day of the
Company's taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on the
Company on the designated amounts included in such stockholder's long-term
capital gains, (iii) receive a credit or refund for such amount of tax deemed
paid by it, (iv) increase the adjusted basis of its shares by the difference
between the amount of such includable gains and the tax deemed to have been paid
by it, and (v) in the case of a U.S. stockholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
In general, any gain or loss upon a sale or exchange of shares by a taxable
U.S. stockholder who has held such shares as a capital asset will be taxable as
long-term capital gain if the shares have been held for more than eighteen
months, mid-term capital gain if the shares have been held for more than one
year but not more than eighteen months, or short-term capital gain if the shares
have been held for one year or less; 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 health care industry is heavily regulated by federal, state and local
laws. The Company is affected by government regulation of the health care
industry in that (i) the Company receives rent and debt payments from Lessees
and Mortgagors whose financial ability to make such payments may be affected by
government regulations such as licensure, certification for participation in
government programs, and government reimbursement, and (ii) the Company's
additional rents are generally based on its Lessees' gross revenue from
operations.
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. See the Health Care Reform
section below.
The various federal and state governments have made detecting and
eliminating fraud and abuse in government programs a high priority. Various
laws and regulations have been passed or considered to eliminate fraud and
abuse. 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. Violations of these laws may jeopardize a Lessee's and
Mortgagor's ability to operate a facility or to make rent and debt payments,
thereby potentially adversely affecting the Company.
The Company's lease arrangements with Lessees may also be subject to these
fraud and abuse laws. 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. 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 subject to licensure in order to operate.
Failure to obtain licensure or loss of licensure would prevent the facility from
operating which could adversely affect the facility operator's ability to make
rent and debt payments. 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. In addition, health care facilities are also subject to the
Americans with Disabilities Act and building and safety codes which govern
access, physical design requirements for facilities and building standards.
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. In addition, an owner of real property may be
liable in certain circumstances for the costs of remediation or removal of
hazardous or toxic substances, regardless of whether the owner of the real
property knew of or was responsible for the presence or disposal of the
hazardous or toxic substances. The Company's arrangements with its Lessees
generally require the Lessees to indemnify the Company for certain environmental
liabilities, but the scope of such indemnifications are limited and there is no
assurance that the Lessees would be able to fulfill their indemnification
obligations. The presence or improper disposal of hazardous or toxic substances
could adversely affect the value of the property which would affect the owner's
ability to sell or rent such property, or to use the property as collateral.
Revenues of Lessees and Mortgagors 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. Efforts to reduce costs by these
payors should be expected to continue, which may result in reduced or slower
growth in reimbursement for certain services provided by some of the Company's
Lessees and Mortgagors. In addition, the failure of any of the Company's
Lessees and Mortgagors to comply with various laws and regulations could
jeopardize their ability to be certified to participate in the Medicare and
Medicaid programs.
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 and 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
Lessees' facilities, the operation of which requires accreditation, is
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under PPS, each state must have a Peer 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 1997 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, the Balanced Budget Act of 1997 adopted a variety of changes to the
Medicare and Medicaid programs which may have an effect upon the revenues of the
operators of Properties owned by the Company. These changes, which will be
implemented at various times, include (i) the adoption of the Medicare+Choice
program, which expands the Medicare beneficiaries' choices to include
traditional Medicare fee-for-service, private fee-for-service medical savings
accounts, various managed care plans, and provider sponsored organizations,
among others, (ii) the expansion and restriction of reimbursement for various
Medicare benefits, (iii) the freeze in hospital rates in 1998 and more limited
annual increases in hospital rates for 1999-2002, (iv) the adoption of a
prospective pay system for skilled nursing facilities, home health agencies,
hospital outpatient departments, and rehabilitation hospitals, (v) the repeal of
the Boren amendment in Medicaid so that states have the exclusive authority to
determine provider rates and providers have no federal right of action, (vi) the
reduction in Medicare disproportionate share payments to hospitals, and (vii)
the removal of the $150,000,000 limit on tax-exempt bonds for nonacute hospital
capital projects. In addition, the Balanced Budget Act of 1997 strengthens the
anti-fraud and abuse laws to provide for stiffer penalties for fraud and abuse
violations.
In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. These changes in the law, new interpretations of existing laws, and
changes in payment methodology may have a dramatic effect on the definition of
permissible or impermissible activities, the relative costs associated with
doing business and the amount of reimbursement by both government and other
third-party payors and may be applied retroactively. The ultimate timing or
effect of legislative efforts cannot be predicted and may impact the Company in
different ways.
Spending in the U.S. health care industry during 1997 was estimated by the
Congressional Budget Office at approximately $1.085 trillion, representing 13.4%
of 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, 1997, the Company has preferred stock and two classes of
debt securities which are senior to the Common Stock. The Company may, in the
future, issue additional debt or equity securities which will be senior to the
Common 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.
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.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not historical factual
statements are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The statements include, among other
things, statements regarding the intent, belief or expectations of the Company
and its officers and can be identified by the use of terminology such as "may",
"will", "expect", "believe", "intend", "plan", "estimate", "should" and other
comparable terms or the negative thereof. In addition, the Company, through its
senior management, from time to time makes forward looking oral and written
public statements concerning the Company's expected future operations and other
developments. Shareholders and investors are cautioned that, while forward
looking statements reflect the Company's good faith beliefs and best judgment
based upon current information, they are not guarantees of future performance
and are subject to known and unknown risks and uncertainties. Actual results
may differ materially from the expectations contained in the forward looking
statements as a result of various factors. Such factors include (i) legislative,
regulatory, or other changes in the healthcare industry at the local, state or
federal level which increase the costs of or otherwise affect the operations of
the Company's Lessess; (ii) changes in the reimbursement available to the
Company's Lessees by governmental or private payors, including changes in
Medicare and Medicaid payment levels and the availability and cost of third
party insurance coverage; (iii) competition for tenants and mortgagors,
including with respect to new leases and mortgages and the renewal or roll-over
of existing leases; (iv) competition for the acquisition and financing of health
care facilities; (v) the ability of the Company's Lessees and Mortgagors to
operate the Company's properties in a manner sufficient to maintain or increase
revenues and to generate sufficient income to make rent and loan payments; and,
(vi) changes in national or regional economic conditions, including changes in
interest rates and the availability and cost of capital to the Company.
Item 2. PROPERTIES
See Item 1. for details.
Item 3. LEGAL PROCEEDINGS
During 1997, 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.
1997 1996 1995
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $37 1/8 $33 1/8 $35 1/2 $31 1/2 $30 3/8 $28
Second Quarter 35 3/4 32 33 7/8 31 32 3/4 29 1/2
Third Quarter 38 3/4 35 7/8 34 1/2 32 5/8 34 7/8 31 5/8
Fourth Quarter 40 5/16 37 5/8 37 1/2 32 1/2 35 1/4 31 1/2
As of March 1, 1998 there were approximately 1,562 stockholders of record
and in excess of 40,000 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 on Common Stock are set forth below:
1997 1996 1995
------- ------- -------
First Quarter $ .60 $ .56 $ .52
Second Quarter .61 .57 .53
Third Quarter .62 .58 .54
Fourth Quarter .63 .59 .55
On November 21, 1997, the Company completed the acquisition of a managing
member interest in Cambridge Medical Properties, LLC, a Delaware limited
liability company ("CMP"). In connection with the acquisition, Cambridge
Medical Center of San Diego, LLC ("Cambridge") made a capital contribution to
CMP of real property and improvements with an equity value (net of assumed debt)
of $6.5 million in exchange for $1 million in cash and 142,450 non-managing
member units of CMP ("LLC Units") (representing a minority interest in CMP).
CMP also issued 1,048,951 units of membership interest to the Company in
exchange for a capital contribution of $40.5 million.
Beginning on November 21, 1998, the LLC Units held by Cambridge may be
exchanged by Cambridge for Common Stock of the Company or, at the option of the
Company, for cash. The LLC Units are exchangeable for Common Stock on a one to
one basis (subject to certain adjustments, such as stock splits and reclass-
ifications) or for an amount of cash equal to then-current market value of the
shares of Common Stock into which the LLC Units may be exchanged. CMP relied on
the exemption provided by Section 4(2) of the Securities Act of 1933,
as amended, in connection with the issuance and sale of the LLC Units.
The Company has agreed to provide certain registration rights with respect to
the shares of Common Stock for which the LLC Units may be exchanged.
PART II
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to the Company as
of and for the years ended December 31, 1997, 1996, 1995, 1994, and 1993.
Year Ended December 31,
1997 1996 1995 1994 1993
--------------------------------------------------
(Amounts in thousands, except per share data)
INCOME STATEMENT DATA:
Total Revenue $128,503 $120,393 $105,696 $98,996 $92,549
Net Income Applicable to
Common Shares 63,542 60,641 80,266 49,977 44,087
Basic Earnings per Common Share 2.21 2.12 2.83 1.87 1.66
Diluted Earnings per Common Share 2.19 2.10 2.78 1.86 1.65
BALANCE SHEET DATA:
Total Assets 940,964 753,653 667,831 573,826 549,638
Debt Obligations 452,858 379,504 299,084 271,463 245,291
Stockholders' Equity 442,269 336,806 339,460 269,403 269,873
OTHER DATA:
Funds From Operations (1) 83,442 80,517 72,911 65,274 59,201
Cash Flows From Operating
Activities 87,544 90,585 71,164 65,519 62,707
Cash Flows Used In Investing
Activities 205,238 104,797 80,627 61,383 29,315
Cash Flows Provided By (Used
In) Financing Activities 118,967 15,023 8,535 (24,418) (8,832)
Dividends Paid 71,926 65,905 60,167 52,831 49,030
Dividends Paid Per Common Share 2.460 2.300 2.140 1.980 1.845
- - ---------------------------
(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 applicable to
common shares (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.
1997 1996 1995 1994 1993
------------------------------------------------------
Net Income Applicable to Common Shares $ 63,542 $ 60,641 $ 80,266 $ 49,977 $ 44,087
Real Estate Depreciation 22,667 20,700 16,691 15,829 15,636
Joint Venture Adjustments (720) (824) (496) (532) (522)
Gain on Sale of Real Estate Properties (2,047) --- (23,550) --- ---
------------------------------------------------------
$ 83,442 $ 80,517 $ 72,911 $ 65,274 $ 59,201
======================================================
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, 1997, the Company's portfolio of properties, including equity
investments, consisted of 244 facilities located in 40 states. These facilities
are comprised of 135 long-term care facilities, 72 congregate care and assisted
living facilities, 19 medical office buildings, eight acute care hospitals, six
freestanding rehabilitation facilities, three physician group practice clinics
and one psychiatric care facility. The gross acquisition price of the
properties, which includes joint venture acquisitions, was approximately
$1,112,000,000 at December 31, 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Net Income applicable to common shares for the year ended December 31, 1997
totaled $63,542,000 or $2.21 of basic earnings per common share and $2.19 of
diluted earnings per common share (refer to footnote 9 of the 1997 financial
statements) on revenue of $128,503,000. This compares to Net Income applicable
to common shares of $60,641,000 or $2.12 of basic earnings per common share and
$2.10 of diluted earnings per common share on revenue of $120,393,000 for the
corresponding period in 1996. Included in Net Income applicable to common
shares for the year ended December 31, 1997 is the Gain on Sale of Real Estate
Properties of $2,047,000 or $0.07 per share of common stock. Net Income
applicable to common shares for the year ended December 31, 1996 included
$2,061,000 or $0.07 per share of common stock from the payoff of two mortgage
loans that had been purchased at a discount in 1992.
Base Rental Income for the year ended December 31, 1997 increased by
$8,428,000 to $92,130,000. The majority of this increase was generated by rents
on $226,000,000 of equity investments made in 1997 and a full year of rents on
$117,000,000 of equity investments made in 1996. These amounts represent
significant increases over the acquisition activity of prior years. Higher
Additional Rental and Interest Income from the existing portfolio also
contributed to the increase in revenue. After adjusting for the mortgage loan
income for 1996 described earlier, Additional Rental and Interest Income
increased by $2,196,000 to $21,060,000 from the prior year. The increases noted
above were offset by a decrease in Interest and Other Income for the year ended
December 31, 1997 of $1,232,000 to $14,534,000, due in part to the pay-down or
payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1997 increased by
$2,191,000 to $28,592,000. The increase in Interest Expense is directly
related to the Company's higher borrowing levels resulting from the significant
increase in new investment activity. The increase in Depreciation/Non Cash
Charges of $2,740,000 to $25,889,000 for the year ended December 31, 1997, is
related to the new investments discussed above.
The Company believes that Funds From Operations ("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 uses historical cost accounting
for depreciation could be less informative. The term FFO was designed by the
Real Estate Investment Trust ("REIT") industry to address this problem.
The Company has adopted the definition of FFO prescribed by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as Net
Income applicable to common shares (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.
Funds From Operations for the years ended December 31, 1997 and 1996 are as
follows:
1997 1996
-------- --------
(Amounts in thousands)
Net Income Applicable to Common Shares $ 63,542 $ 60,641
Real Estate Depreciation 22,667 20,700
Joint Venture Adjustments (720) (824)
Gain on Sale of Real Estate Properties (2,047) ---
-------- --------
Funds From Operations $ 83,442 $ 80,517
======== ========
FFO for the year ended December 31, 1997, increased $2,925,000 from the
comparable period in the prior year. The increases are attributable to increases
in Base Rental Income, Additional Rental and Interest Income, and offset by
increases in Interest Expense and decreases in Interest and Other Income all of
which are discussed in more detail above.
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, as defined by the Company, may not be
comparable to similarly entitled items reported by other REITs that do not
define it exactly as the NAREIT definition.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net Income applicable to common shares for the year ended December 31, 1996
totaled $60,641,000 or $2.12 of basic earnings per common share and $2.10 of
diluted earnings per common share on revenue of $120,393,000. This compares to
Net Income applicable to common shares of $80,266,000 or $2.83 of basic earnings
per common share and $2.78 of diluted earnings per common share on revenue of
$105,696,000 for the corresponding period in 1995. Included in Net Income
applicable to common shares and basic earnings per common share for the year
ended December 31, 1995 is the Gain on Sale of Real Estate Properties of
$23,550,000 or $0.83 per share. Net Income applicable to common shares 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.
Funds From Operations for the years ended December 31, 1996 and 1995 are as
follows:
1996 1995
-------- --------
(Amounts in thousands)
Net Income Applicable to Common Shares $ 60,641 $ 80,266
Real Estate Depreciation 20,700 16,691
Joint Venture 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 decreases in Interest and Other
Income all of which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common stock,
preferred stock, the issuance of long-term debt, the assumption of mortgage
debt, the use of short-term bank lines and through internally generated cash
flows. Facilities under construction are generally financed by means of cash on
hand or short-term borrowings under the Company's existing bank lines. 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 of 6.5% Unsecured
Senior Notes due 2006. During March and April 1997, the Company issued two ten
year $10,000,000 Medium Term Notes ("MTNs") with coupon rates of 7.30% and
7.62%, respectively. During June 1997, $12,500,000 in MTNs with coupon rates of
10.20% and 10.30% were redeemed. On September 26, 1997, the Company issued
$60,000,000, 7-7/8% Series A Cumulative Redeemable Preferred Stock. During
December 1997, the Company raised $55,000,000 of equity in a common stock
offering of 1,437,500 shares at $38.3125 per share. The net proceeds of
$57,810,000 and $51,935,000 from the preferred and common stock offerings,
respectively, were utilized to pay down short-term borrowings under the
Company's revolving lines of credit. At December 31, 1997, stockholders' equity
in the Company totaled $442,269,000 and the debt to equity ratio was 1.02 to 1.
For the year ended December 31, 1997, FFO (before interest expense) covered
Interest Expense 3.92 to 1.
As of December 31, 1997, the Company had approximately $300,000,000
available under its existing shelf registration statements for the future
issuance of debt and equity securities and for its Series B and Series C MTN
programs. These amounts may be issued from time to time in the future based on
Company needs and then existing market conditions. On October 22, 1997, the
Company renegotiated its line of credit with a group of seven banks. The
Company now has two revolving lines of credit, one for $100,000,000 which
expires on October 22, 2002 and one for $50,000,000 which expires on October 22,
1998. The Company expects these agreements to be renewed for one further year
in October 1998. As of December 31, 1997, the Company also had $83,100,000
available on its $150,000,000 revolving lines of credit. The Company's Senior
Notes and Convertible Subordinated Notes have been rated investment grade by
debt rating agencies since 1986. Current ratings 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
$594,213,000 in cumulative FFO. Of this amount, a total of $499,440,000 has
been distributed to stockholders as dividends on common and preferred stock.
The balance of $94,773,000 has been retained, and has been an additional source
of capital for the Company.
At December 31, 1997, the Company held approximately $40,000,000 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 based upon facility operating
conditions and other factors and such changes may be material.
The Company has concluded a significant number of "facility rollover"
transactions in 1995, 1996 and 1997 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.
Increase/(Decrease)
Year In FFO
- - ------- -------------------
1995 Completed 20 facility rollovers including the sale
of ten facilities with concurrent "seller financing"
for a gain of $23,550,000. $900,000
1996 Completed 20 facility rollovers including the sale of
nine facilities in Missouri and the exchange of the
Dallas Rehabilitation Institute for the HealthSouth
Sunrise Rehabilitation Hospital in Fort Lauderdale,
Florida. (1,200,000)
1997 Completed or agreed to complete 10 facility rollovers. (1,300,000)
Through December 31, 2000, the Company has 62 more facilities that are
subject to lease expiration, mortgage maturities and purchase options (which
management believes may be exercised) representing approximately 30% of
annualized revenues. During 1997, the Company concluded agreements with Tenet
and Beverly that result in their forbearance or waiver of certain renewal and
purchase options and related rights of first refusal on up to 59 facilities
currently leased to Vencor and Beverly, of which 29 facilities have leases
expiring through December 31, 2000. As part of these agreements, continued
ownership of the facilities will remain with the Company. As a result of the
forbearance or waiver of these options, the Company believes that, based upon
recent operating results, it may be able to increase rents on approximately 12
facilities whose lease terms expire between 1998 and 2001; however, there can be
no assurance that the Company will be able to realize any increased rents. The
1998 lease expirations include 14, eight, and five long-term care facilities
leased to Vencor, Beverly and Integrated Health Services, 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.
YEAR 2000 ISSUE
Management believes it does not have any significant exposure to Year 2000
issues with respect to its own accounting and information systems. The Company
is discussing Year 2000 compliance requirements with its lessees, bankers and
others.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Balance Sheets as of December 31, 1997 and 1996
and its Consolidated Statements of Income, Stockholders' Equity, and Cash Flows
for the years ended December 31, 1997, 1996 and 1995, 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 62 Chairman, President
and Chief Executive Officer
James G. Reynolds 46 Executive Vice President
and Chief Financial Officer
Devasis Ghose 44 Senior Vice President - Finance and Treasurer
Edward J. Henning 45 Senior Vice President, General Counsel
and Corporate Secretary
Stephen R. Maulbetsch 41 Senior Vice President - Acquisitions
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 May
12, 1998.
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 May 12, 1998.
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 May 12, 1998.
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 May 12, 1998.
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, 1997 and 1996
Consolidated Statements of Income - for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity - for the
years ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows - for the years ended
December 31, 1997,1996 and 1995
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:
On December 5, 1997, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission regarding the acquisition of assets with
an aggregate purchase price of $103.5 million as required under Rule 3-14
of Regulation S-X.
On December 15, 1997, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission regarding the Purchase Agreement with
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc., BT Alex.
Brown and EVEREN Securities, Inc., pursuant to which the Company agreed to
issue and sell up to 1,437,500 shares of the Company's Common Stock.
c) Exhibits:
3.1 Articles of Restatement of the Company./1
3.2 Amendment and Restated Bylaws of the Company./2
3.3 Articles Supplementary of the Company Classifying 2,760,000 Shares
of 7-7/8% Series A Cumulative Redeemable Preferred Stock./3
4.1 Rights Agreement, dated as of July 5, 1990, between the Company
and Manufacturers Hanover Trust Company of California, as
Rights Agent./4
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. /5
4.3 Indenture dated as of April 1, 1989 between the Company and The Bank
of New York for Debt Securities. /6
4.4 Form of Fixed Rate Note. /6
4.5 Form of Floating Rate Note. /6
4.6 Registration Rights Agreement dated November 21, 1997 between the
Company and Cambridge Medical Center of San Diego, LLC.
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"). /7
10.2 Amended and Restated Limited Liability Company Agreement dated
November 21, 1997 of Cambridge Medical Properties, LLC.
10.3 Health Care Property Investors, Inc. Second Amended and Restated
Directors Stock Incentive Plan. /8*
10.4 Health Care Property Investors, Inc. Second Amended and Restated
Stock Incentive Plan. /8*
10.5 Health Care Property Investors, Inc. Second Amended and Restated
Directors Deferred Compensation Plan. /9*
10.6 Employment Agreement dated April 28, 1988 between the Company and
Kenneth B. Roath. /10*
10.7 First Amendment to Employment Agreement dated February 1, 1990
between the Company and Kenneth B. Roath. /11*
10.8 Health Care Property Investors, Inc. Executive Retirement Plan. /12*
10.9 Amendment No. 1 to Health Care Property Investors, Inc. Executive
Retirement Plan. /13*
10.10 Revolving Credit Agreement dated as of October 22, 1997 among Health
Care Property Investors, Inc., the banks named therein and The Bank
of New York. /14
10.11 $50,000,000 Revolving Credit Agreement dated as of October 22, 1997
among Health Care Property Investors, Inc., the banks named therein
and The Bank of New York. /14
10.12 Stock Transfer Agency Agreement between Health Care Property
Investors, Inc. and The Bank of New York dated as of July 1, 1996.
/15
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 exhibit 3.1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
2. 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,
1996.
3. This exhibit is incorporated by reference to the Company's Form 8-A (file
no. 001-08895) filed with the Commission on September 25, 1997.
4. This exhibit is incorporated by reference to exhibit 1 to the Company's
Form 8-A filed with the Commission on July 17, 1990.
5. This exhibit is incorporated by reference to exhibit 4.1 to the Company's
Registration Statement on Form S-3 dated September 9, 1993.
6. These exhibits are incorporated by reference to exhibits 4.1, 4.2 and 4.3,
respectively, in the Company's Registration Statement on Form S-3 dated
March 20, 1989.
7. This exhibit is incorporated by reference to exhibit 10.1 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1985.
8. These exhibits are incorporated by reference to exhibits 10.43 and 10.44,
respectively, in the Company's Quarterly Report on Form 10-Q for the period
ended March 31, 1997 which are incorporated by reference to the Company's
Proxy Statement dated March 21, 1997.
9. This exhibit is incorporated by reference to exhibit number 10.45 filed as
part of the Company's Quarterly Report on Form 10-Q for the period ended
September 30, 1997.
10. This exhibit is incorporated by reference to exhibit 10.27 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1988.
11. This exhibit is incorporated by reference to Appendix B of the Company's
Annual Report on Form 10-K for the year ended December 31, 1990.
12. This exhibit is incorporated by reference to exhibit 10.28 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1987.
13. This exhibit is incorporated by reference to exhibit 10.39 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
14. These exhibits are incorporated by reference to exhibit numbers 10.37 and
10.38, respectively, filed as part of the Company's Quarterly Report on
Form 10-Q for the period ended September 30, 1997.
15. This exhibit is incorporated by reference to exhibit 10.40 in the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
* Management Contract or Compensatory Plan or Arrangement.
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 30, 1998
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 30, 1998 ------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
/s/ James G. Reynolds
March 30, 1998 ------------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Devasis Ghose
March 30, 1998 ------------------------------------------
Devasis Ghose, Senior Vice President-Finance
and Treasurer (Principal Accounting Officer)
/s/ Paul V. Colony
March 30, 1998 ------------------------------------------
Paul V. Colony, Director
/s/ Robert R. Fanning, Jr.
March 30, 1998 ------------------------------------------
Robert R. Fanning, Jr., Director
/s/ Michael D. McKee
March 30, 1998 ------------------------------------------
Michael D. McKee, Director
/s/ Orville E. Melby
March 30, 1998 ------------------------------------------
Orville E. Melby, Director
/s/ Harold M. Messmer, Jr.
March 30, 1998 ------------------------------------------
Harold M. Messmer, Jr., Director
/s/ Peter L. Rhein
March 30, 1998 ------------------------------------------
Peter L. Rhein, Director
EXHIBIT INDEX
Ex. 4.6 Registration Rights Agreement dated November 21, 1997 between the
Company and Cambridge Medical Center San Diego, LLC.
Ex. 10.2 Amended and Restated Limited Liability Company Agreement of Cambridge
Medical Properties, LLC.
Ex. 21.1 List of Subsidiaries
Ex. 23.1 Consent of Independent Public Accountants
Ex. 27.1 Financial Data Schedule
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - as of December 31, 1997 and 1996 F-3
Consolidated Statements of Income -
for the years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows -
for the years ended December 31, 1997, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7 -- F-21
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, 1997 and
1996, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. 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, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
January 19, 1998
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
-------------------------
1997 1996
----------- ----------
ASSETS
Real Estate Investments
Buildings and Improvements $ 837,857 $ 693,586
Accumulated Depreciation (170,502) (147,860)
--------- ---------
667,355 545,726
Construction in Progress 19,627 7,905
Land 99,520 70,103
--------- ---------
786,502 623,734
Loans Receivable 125,381 112,227
Investments in and Advances to Joint Ventures 14,241 6,531
Other Assets 10,756 8,350
Cash and Cash Equivalents 4,084 2,811
--------- ---------
TOTAL ASSETS $ 940,964 $ 753,653
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 66,900 $ ---
Senior Notes Payable 275,023 267,470
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 10,935 12,034
Accounts Payable, Accrued Expenses and Deferred Income 23,492 19,739
Minority Interests in Joint Ventures 22,345 17,604
Commitments
Stockholders' Equity:
Preferred Stock, 7-7/8% Series A, 50,000,000
shares authorized; 2,400,000 outstanding as of
December 31, 1997. 57,810 ---
Common Stock, $1.00 par value; 100,000,000
shares authorized; 30,216,319 and 28,677,574
outstanding as of December 31, 1997 and 1996. 30,216 28,678
Additional Paid-In Capital 408,924 355,672
Cumulative Net Income 444,759 379,970
Cumulative Dividends (499,440) (427,514)
--------- ---------
Total Stockholders' Equity 442,269 336,806
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 940,964 $ 753,653
========= =========
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,
--------------------------------------
1997 1996 1995
--------- --------- ---------
REVENUE
Base Rental Income $ 92,130 $ 83,702 $ 68,717
Additional Rental and Interest Income 21,060 20,925 18,078
Interest and Other Income 14,534 15,766 18,160
Facility Operating Revenue 779 --- 741
--------- --------- ---------
128,503 120,393 105,696
--------- --------- ---------
EXPENSES
Interest Expense 28,592 26,401 19,339
Depreciation/Non Cash Charges 25,889 23,149 19,208
Other Expenses 7,414 6,826 6,034
Facility Operating Expenses 162 --- 720
--------- --------- ---------
62,057 56,376 45,301
--------- --------- ---------
INCOME FROM OPERATIONS 66,446 64,017 60,395
Minority Interests (3,704) (3,376) (3,679)
Gain on Sale of Real Estate Properties 2,047 --- 23,550
--------- --------- ---------
NET INCOME $ 64,789 $ 60,641 $ 80,266
DIVIDENDS TO PREFERRED STOCKHOLDERS 1,247 --- ---
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHARES $ 63,542 $ 60,641 $ 80,266
========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 2.21 $ 2.12 $ 2.83
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 2.19 $ 2.10 $ 2.78
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 28,782 28,652 28,348
========= ========= =========
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)
Preferred Stock Common Stock
----------------- ------------------------------
Par Additional Total
Number of Number of Value Paid In Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
- - -------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1994 $ --- 26,733 $ 26,733 $ 305,049 $ 239,063 $ (301,442) $ 269,403
Issuance of Common 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 - Common Shares (60,167) (60,167)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1995 28,574 28,574 353,166 319,329 (361,609) 339,460
Issuance of Common 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 - Common Shares (65,905) (65,905)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1996 28,678 28,678 355,672 379,970 (427,514) 336,806
Issuance of Preferred Stock, Net 2,400 57,810 57,810
Issuance of Common Stock, Net 1,468 1,468 51,589 53,057
Exercise of Stock Options 70 70 1,663 1,733
Net Income 64,789 64,789
Dividends Paid - Preferred Shares (1,247) (1,247)
Dividends Paid - Common Shares (70,679) (70,679)
- - --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1997 2,400 $57,810 30,216 $30,216 $408,924 $444,759 $(499,440) $442,269
==========================================================================================================================
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,
--------------------------------------
1997 1996 1995
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 64,789 $ 60,641 $ 80,266
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 22,667 20,700 16,691
Non Cash Charges 3,222 2,449 2,517
Joint Venture Adjustments (720) (824) (496)
Gain on Sale of Real Estate Properties (2,047) --- (23,550)
Changes in:
Operating Assets (2,457) (973) (1,286)
Operating Liabilities 2,090 8,592 (2,978)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 87,544 90,585 71,164
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (200,032) (115,308) (83,345)
Proceeds from Sale of Real Estate Properties 8,624 --- 8,387
Advances Repaid by Joint Ventures --- 4,465 ---
Other Investments and Loans (13,830) 6,046 (5,669)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (205,238) (104,797) (80,627)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable 66,900 (31,700) 20,500
Repayment of Senior Notes (12,500) --- (75,000)
Issuance of Senior Notes 19,876 113,329 77,607
Cash Proceeds from Issuing Preferred Stock 57,810 --- ---
Cash Proceeds from Issuing Common Stock 53,667 1,536 47,109
Increase in Minority Interests 5,500 --- ---
Final Payments on Mortgages --- --- (637)
Periodic Payments on Mortgages (1,030) (1,324) (1,148)
Dividends Paid (71,926) (65,905) (60,167)
Other Financing Activities 670 (913) 271
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 118,967 15,023 8,535
--------- --------- ---------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS 1,273 811 (928)
Cash and Cash Equivalents, Beginning of Period 2,811 2,000 2,928
--------- --------- ---------
Cash and Cash Equivalents, End of Period $ 4,084 $ 2,811 $ 2,000
========= ========= =========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 28,832 $ 23,734 $ 21,783
========= ========= =========
Capitalized Interest $ 1,469 $ 1,017 $ 599
========= ========= =========
Mortgages Assumed on Acquired Properties $ --- $ --- $ 5,893
========= ========= =========
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, 1997, the Company owns interests in 244
properties (the "Properties") located in 40 states and operated by 59 health
care providers. The Properties include 135 long-term care facilities, 72
congregate care and assisted living centers, 19 medical office buildings, eight
acute care hospitals, six rehabilitation hospitals, three 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.
INVESTMENTS IN JOINT VENTURES:
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. HCPI also has an 80% interest in one
long-term care facility, and a 45% interest in a company that is building an
assisted living facility. These investments are accounted for using the equity
method. 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, 1997, the tax bases of the Company's net assets and liabilities are less
than the reported amounts by approximately $18,000,000. This net difference
includes a favorable tax depreciation adjustment attributable to an application
for change in accounting method, which is subject to review by the Internal
Revenue Service.
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.
FACILITY OPERATIONS:
During 1997, the Company purchased 90 - 100 percent ownership interests in
seven medical office buildings ("MOBs") which are operated by independent
property management companies on behalf of the Company. These MOBs are leased
to multiple tenants under gross or triple net leases. Rental and any other
income attributable to these properties is recorded as Facility Operating Income
in the accompanying financial statements. Expenses related to the operation of
these MOBs are recorded as Facility Operating Expense.
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 the period ended March 31, 1995, when the
facility was sold.
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.
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, 1997, minimum future rental income from 208 non-cancelable operating leases
is expected to be approximately $103,100,000 in 1998, $88,000,000 in 1999,
$78,700,000 in 2000, $68,600,000 in 2001, $61,300,000 in 2002 and $449,900,000
in the aggregate thereafter.
During 1997, the Company purchased and leased or agreed to construct a
total of 33 facilities operated by 17 different operators for an aggregate
investment of approximately $224,000,000. These facilities include 21 assisted
living facilities, three acute care facilities, seven MOBs, one physician group
practice clinic and one long-term care facility.
Five of the MOBs were acquired through the purchase of a majority interest
in a company in which the non-managing partner purchased 142,450 non-managing
member units. These units are convertible to HCPI common stock on a one-for-one
basis beginning in November 1998.
The Company separately concluded agreements with Tenet Healthcare
Corporation ("Tenet") and Beverly Enterprises, Inc. ("Beverly") in the fourth
quarter of 1997 that result in their forbearance or waiver of certain renewal
and purchase options and related rights of first refusal on facilities currently
leased to Vencor, Inc. ("Vencor") and Beverly. Options and related rights of
first refusal on up to 51 facilities operated by Vencor and eight facilities
operated by Beverly are covered under the agreements. As part of these
agreements, continued ownership of the facilities will remain with the Company.
In April 1995, the Company sold 10 leased facilities to 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, 1997 (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 $ 26,092 $ 32,639 $ 11,532 $ ---
Florida 8 4,680 26,039 30,719 6,864 ---
Indiana 11 2,725 37,898 40,623 10,059 ---
Maryland 3 1,287 19,177 20,464 6,286 ---
Massachusetts 5 1,587 16,872 18,459 7,876 ---
North Carolina 8 1,552 26,959 28,511 5,180 5,885
Ohio 6 1,125 25,037 26,162 8,945 905
Tennessee 10 1,072 37,838 38,910 10,576 174
Texas 9 744 15,011 15,755 5,794 ---
Wisconsin 7 1,197 17,021 18,218 6,134 ---
Others (17 States) 31 6,240 78,747 84,987 30,861 1,086
- - -------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 114 28,756 326,691 355,447 110,107 8,050
- - -------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
Tucson, Arizona 1 630 2,968 3,598 23 ---
Los Gatos, California 1 3,736 17,139 20,875 6,754 ---
Slidell, Louisiana 1 2,520 19,412 21,932 6,046 ---
Plaquemine, Louisiana 1 737 9,722 10,459 1,425 ---
Webster, Texas 1 890 5,167 6,057 37 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 5 8,513 54,408 62,921 14,285 ---
- - -------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 11 6,206 43,068 49,274 1,712 ---
Florida 5 2,320 12,680 15,000 1,919 ---
Louisiana 3 1,280 11,319 12,599 --- ---
New Jersey 3 719 12,061 12,780 531 ---
New Mexico 2 1,077 16,419 17,496 850 ---
North Carolina 2 420 9,733 10,153 701 ---
Pennsylvania 3 515 17,066 17,581 1,159 ---
South Carolina 5 1,045 30,836 31,881 1,954 ---
Texas 15 4,008 59,688 63,696 1,993 ---
Others (13 States) 14 6,658 54,248 60,906 5,641 810
- - -------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 63 24,248 267,118 291,366 16,460 810
- - -------------------------------------------------------------------------------------------------------------------------------
PSYCHIATRIC FACILITY, Georgia 1 738 3,181 3,919 1,585 ---
- - -------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Peoria, Arizona 1 1,565 7,051 8,616 1,399 ---
Little Rock, Arkansas 1 709 9,599 10,308 1,665 ---
Colorado Springs, Colorado 1 690 8,346 9,036 1,390 ---
Fort Lauderdale, Florida 1 2,000 16,769 18,769 10,429 ---
Overland Park, Kansas 1 2,316 10,719 13,035 2,196 ---
San Antonio, Texas 1 1,990 13,124 15,114 4,251 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 6 $ 9,270 $ 65,608 $ 74,878 $ 21,330 $ ---
- - -------------------------------------------------------------------------------------------------------------------------------
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- - -------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
California 6 $ 16,681 $ 42,484 $ 59,165 $ 171 $ ---
Minnesota 1 117 12,703 12,820 --- ---
Texas 8 1,966 40,100 42,066 3,935 ---
Utah 1 276 5,237 5,513 262 ---
- - -------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 16 19,040 100,524 119,564 4,368 ---
- - -------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS 3 8,955 39,954 48,909 2,367 2,075
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 208 99,520 857,484 957,004 170,502 10,935
- - -------------------------------------------------------------------------------------------------------------------------------
Partnership Investments,
Including All Partners' Assets 7 --- --- 35,124 --- ---
Financing Leases (See Note 6) 5 --- --- 18,056 --- ---
Mortgage Loans Receivable (See Note 6) 24 --- --- 101,729 --- ---
- - -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 244 $ 99,520 $857,484 $1,111,913 $170,502 $ 10,935
===============================================================================================================================
(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, 1997, 1996 and 1995. 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
Annualized Revenue
Investment at Year Ended December 31,
December 31, 1997 1997 1996 1995
--------------------- --------- --------- ---------
(Amounts in thousands)
Vencor, Inc. $ 156,398 16% 19% 23%
HealthSouth Corporation 74,878 9 5 6
Emeritus Corporation 115,388 8 7 3
Beverly Enterprises, Inc. 66,491 7 8 9
Columbia/HCA Healthcare Corp. 68,610 6 7 7
Tenet Healthcare Corporation 53,781 6 6 7
Horizon/CMS Healthcare Corp. --- -- 8 9
----------- ------ ------ ------
$ 535,546 52% 60% 64%
=========== ====== ====== ======
Certain of these facilities have been subleased or assigned to other
operators but with the original lessee remaining liable on the leases.
Tenet guaranteed 26% of the Company's total revenue for the year ended
December 31, 1997 represented by the leases of two acute care hospitals operated
by its subsidiaries, 51 long-term care and assisted living facilities leased by
subsidiaries of Vencor, one rehabilitation hospital operated by a subsidiary of
HealthSouth Corporation ("HealthSouth") and one psychiatric care facility
operated by another health care provider. As part of the agreements discussed
above in Note 3, Tenet will no longer guarantee the revenue on the Vencor
facilities as those leases expire beginning in 1998. During 1997 one such lease
expired, and 14 more will expire in 1998. During 1997, the Vencor facilities
represented 70% of the revenue guaranteed by Tenet, or 16% of the Company's
total revenue.
During 1997, HealthSouth acquired Horizon/CMS Healthcare Corporation in a
stock-for-stock merger. HealthSouth retained the rehabilitation hospital
division, and sold the long-term care division to Integrated Health Services,
Inc.
(5) INVESTMENTS IN JOINT VENTURES
The Company is the general partner and has a 50% equity interest in five
partnerships that each lease a congregate care center. During December 1997,
the Company purchased an 80% interest in a California long-term care facility
and a 45% interest in a Michigan assisted living facility.
Combined summarized financial information of the joint ventures follows:
December 31,
-------------------------
1997 1996
----------- ----------
(Amounts in thousands)
Real Estate Investments, Net $ 31,224 $ 24,401
Other Assets 2,627 2,369
--------- ---------
Total Assets $ 33,851 $ 26,770
========= =========
Notes Payable to Others $ 19,348 $ 19,880
Accounts Payable 545 439
Other Partners' Deficit (283) (80)
Investments and Advances from the Company, Net 14,241 6,531
--------- ---------
Total Liabilities and Partners' Capital $ 33,851 $ 26,770
========= =========
Rental and Interest Income $ 5,423 $ 4,938
========= =========
Net Income $ 1,741 $ 935
========= =========
Company's Equity in Joint Venture Operations $ 992 $ 634
========= =========
Distributions to the Company $ 916 $ 692
========= =========
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.
(6) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
-------------------------
1997 1996
----------- ----------
(Amounts in thousands)
Mortgage Loans (See below) $ 101,729 $ 94,424
Financing Leases 18,056 17,136
Other Loans 5,596 667
--------- ---------
Total Loans Receivable $125,381 $ 112,227
========= =========
The following is a summary of Mortgage Loans Receivable at December 31,
1997:
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- - -------------------------------------------------------------------------------------------
(Amounts in thousands)
2001 2 Monthly payments from $112,500 to $32,000 $21,031
$337,500 including average interest of 12.62%
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 10,974
interest of 9.86% on an acute care hospital
located in Florida and operated by
Tenet.
2009 2 Monthly payments from $40,900 to $10,228 $ 9,953
$63,000 including current interest of 11.41%
to 12.01% on one medical office building
and a long-term care facility both located
in California.
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- - -------------------------------------------------------------------------------------------
(Amounts in thousands)
2010 1 Monthly payments of $330,500 including $ 34,760 $ 34,090
current interest of 10.60% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2024 1 Construction loan (will convert to mortgage loan) 8,214 8,214
on acute care facility in Texas to be operated by
MedCath, Inc.; current interest rate of 10.5%.
1998-2031 7 Monthly payments from $9,900 to $51,500 including 19,062 17,467
current interest rates from 9.14% to 11.5% on
various facilities in various states.
--- -------- --------
Totals 14 $115,654 $101,729
=== ======== ========
At December 31, 1997, minimum future principal payments from non-cancelable
Mortgage Loans are expected to be approximately $7,578,000 in 1998, $4,050,000
in 1999, $4,561,000 in 2000, $12,876,000 in 2001, $3,440,000 in 2002 and
$69,224,000 in the aggregate thereafter.
(7) NOTES PAYABLE
SENIOR NOTES PAYABLE:
The following is a summary of Senior Notes outstanding at December 31, 1997
and 1996:
Year Prepayment
Issued 1997 1996 Interest Rate Maturity Without Penalty
- - ------------------------------------------------------------------------------------
(Amounts in thousands)
1989 $ 10,000 $ 10,000 10.56% 1999 None
1990 --- 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 115,000 115,000 6.5% 2006 None
1997 20,000 --- 7.30-7.62% 2007 None
--------- ---------
276,500 269,000
Less: Unamortized
Original Issue
Discount (1,477) (1,530)
--------- ----------
$ 275,023 $ 267,470
========= ==========
The weighted average interest rate on the Senior Notes was 7.5% and 7.7%
for 1997 and 1996, respectively, and the weighted average balance of the Senior
Note borrowings was approximately $277,646,000 and $254,625,000 during 1997 and
1996, 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, $10,000,000 in 2000,
$27,500,000 in 2001, $17,000,000 in 2002 and $202,000,000 in the aggregate
thereafter.
CONVERTIBLE SUBORDINATED NOTES PAYABLE:
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, 1997, Mortgage Notes Payable were $10,935,000 secured by 12
health care facilities with a net book value of approximately $35,713,000.
Interest rates on the Mortgage Notes ranged from 5.87% to 10.63%. Required
principal payments on the Mortgage Notes range from $815,000 to $1,382,000 per
year in the next five years and $5,200,000 in the aggregate thereafter.
BANK NOTES:
The Company has two unsecured revolving credit lines aggregating
$150,000,000 with certain banks. The credit lines for $50,000,000 and
$100,000,000 expire on October 22, 1998 and October 22, 2002, respectively, and
bear a total annual facility fee of 0.15% and 0.20%, respectively. These
agreements provide for interest at the Prime Rate, the London Interbank Offered
Rate ("LIBOR") plus 0.40% (LIBOR plus 0.45% for the $50,000,000 credit line) or
at a rate negotiated with each bank at the time of borrowing. Interest rates
incurred by the Company ranged from 7.13% to 5.38%, and 6.5% to 5.43%, on
maximum short-term bank borrowings of $87,400,000 and $84,000,000 for 1997 and
1996, respectively. The weighted average interest rates were approximately
5.91% and 5.77% on weighted average short-term bank borrowings of $39,976,000
and $31,841,000 for the same respective periods.
(8) PREFERRED STOCK
On September 26, 1997, the Company issued 2,400,000 shares of 7-7/8% Series
A Cumulative Redeemable Preferred Stock ("Preferred Stock") which generated net
proceeds of $57,810,000 (net of underwriters' discount and other offering
expenses). Dividends on the Preferred Stock are payable quarterly in arrears in
March, June, September and December, commencing with the quarter ended December
31, 1997. The Preferred Stock is not redeemable prior to September 30, 2002.
After this date, the Preferred Stock may be redeemed at anytime for cash of $25
per share (or $60,000,000 in the aggregate) at the option of the Company. The
Preferred Stock has no stated maturity, will not be subject to any sinking fund
or mandatory redemption and is not convertible into any other securities of the
Company.
(9) EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accountings Standards
("FASB") No. 128, Earnings Per Share, effective December 15, 1997. As a result,
both basic and diluted earnings per common share are presented for each of the
years ended December 31, 1997, 1996 and 1995. In prior years, only basic
earnings per common share data was disclosed. Basic earnings per common share
is computed by dividing net income applicable to common shares by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per common share is calculated using only dilutive securities. Options
to purchase shares of common stock which had an exercise price in excess of the
average market price during the period were not included because they are not
dilutive. The convertible debt was included only in 1995 when the effect on
earnings per common share was dilutive.
Year Ended December 31, 1997
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
Net Income $ 64,789,000
Less: Preferred Stock Dividends (1,247,000)
------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 63,542,000 28,782,000 $ 2.21
---------
Dilutive Options (See Note 11) --- 196,000
Non Managing Member Units (See Note 3) 40,000 16,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 63,582,000 28,994,000 $ 2.19
---------
Year Ended December 31, 1996
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $60,641,000 28,652,000 $ 2.12
----------
Dilutive Options (See Note 11) --- 174,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $60,641,000 28,826,000 $ 2.10
----------
Year Ended December 31, 1995
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $80,266,000 28,348,000 $ 2.83
----------
Dilutive Options (See Note 11) --- 166,000
Interest and Amortization applicable to
Convertible Debt (See Note 7) 6,397,000 2,645,000
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $86,663,000 31,159,000 $ 2.78
----------
(10) 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, 1997 December 31, 1996
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- --------
(Amounts in thousands)
Mortgage Loans Receivable $101,729 $111,000 $ 94,424 $103,000
Long-Term Debt $385,958 $396,000 $379,504 $377,000
(11) STOCK INCENTIVE PLANS
Directors and Officers and key employees of the Company are eligible to
participate in the Company's Directors' Stock Incentive Plan or the Company's
Amended Stock Incentive Plan ("Plans"). A summary of the status of the
Company's Plans at December 31, 1997, 1996 and 1995 and changes during the
years then ended is presented in the table and narrative below:
1997 1996 1995
------------------ ------------------ ------------------
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 896 $28 717 $25 665 $24
Granted 230 36 263 34 88 29
Exercised (70) 26 (74) 19 (36) 15
Forfeited -- -- (10) 29 -- --
------- ------- -------
Outstanding, end of year 1,056 30 896 28 717 25
Exercisable at end of year 543 26 423 25 327 23
Weighted average fair value
of options granted $4.49 $3.66 $9.73
Incentive Stock Awards
- - --------------------------
Issued 32 34 79
Canceled (1) (4) --
The incentive stock awards ("Awards") are granted at no cost to 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.
The following table describes the options outstanding as of December 31,
1997.
Weighted
Average Options
Total Options Weighted Contractual Life Exercisable At Weighted
Outstanding Exercise Average Remaining December 31, 1997 Average
(000's) Price Exercise Price (Years) (000's) Exercise Price
- - -------------------------------------------------------------------------------------------------------
47 $12 - $20 $16 3 47 $16
526 $22 - $30 $26 6 421 $26
483 $32 - $38 $35 9 75 $34
------ -----
1,056 543
===== =====
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
5.54% to 7.09% percent; expected lives of 10 years; and 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 instead in accordance with rules set out in FASB 123, the Company's
Net Income and Basic Earnings Per Common Share on a proforma basis would have
remained at existing levels.
During the years ended December 31, 1997 and 1996, respectively, the
Company made loans totaling $188,000 and $392,000 secured by stock in the
Company to Directors, Officers and key employees. The interest rate charged is
based on the prevailing applicable federal rate as of the inception of the loan.
Loans secured by stock totaling $855,000 and $667,000 were outstanding at
December 31, 1997 and 1996, respectively.
(12) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. A dividend of $0.64 per share was declared by
the Board of Directors on January 27, 1998, to be paid on February 20, 1998 to
stockholders of record on February 9, 1998.
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 common stock dividend payments made by the Company to its
stockholders were characterized in the following manner for tax purposes:
1997 1996 1995
-------- -------- -------
Ordinary Income $2.3750 $2.1250 $1.3450
Capital Gain Income .0850 .1750 .7950
-------- -------- --------
Total Dividends Paid $2.4600 $2.3000 $2.1400
======== ======== ========
Dividends on the 7-7/8% preferred stock are paid on the last day of the
quarter. The $.5195 per share preferred dividend payment made on December 31,
1997 was characterized as $.5045 ordinary income and $.0150 capital gain income.
(13) COMMITMENTS
As of March 30, 1998, the Company has outstanding commitments on closed
and to-be-closed development transactions of approximately $90 million and
$30 million, respectively. The Company is also committed to acquire
approximately $98 million of existing health care real estate. 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.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
1997 March 31 June 30 September 30 December 31
- - -------------------------- -------- -------- ------------ ------------
(Amounts in thousands, except per share data)
Revenue $ 30,867 $ 31,751 $ 32,307 $ 33,578
Net Income Applicable To
Common Shares $ 17,119(1) $ 15,394 $ 15,553 $ 15,476
Dividends Paid Per Common
Share $ .60 $ .61 $ .62 $ .63
Basic Earnings Per Common
Share $ .60(1) $ .54 $ .54 $ .53
Diluted Earnings Per
Common Share $ .59(1) $ .53 $ .54 $ .53
1996
Revenue $ 28,943 $ 30,586 $ 29,877 $ 30,987
Net Income Applicable To
Common Shares $ 14,601 $ 15,591 $ 15,028 $ 15,421
Dividends Paid Per Common
Share $ .56 $ .57 $ .58 $ .59
Basic Earnings Per Common
Share $ .51 $ .54 $ .52 $ .55
Diluted Earnings Per
Common Share $ .51 $ .54 $ .52 $ .53
(1) Includes $2,047 or $0.07 per common 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, 1997 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, 1997 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,
1997 1997
------------- --------
ASSETS
Cash and cash equivalents $ 14 $ 35
Short-term investments in debt securities 125 116
Accounts and notes receivable, less
allowance for doubtful accounts
($215 at November 30 and $224 at May 31) 1,559 1,346
Inventories of supplies, at cost 204 193
Deferred income taxes 213 294
Prepaid expenses and other assets 508 407
------- -------
Total current assets $ 2,623 $ 2,391
------- -------
Investments and other assets 565 678
Property, plant and equipment net 5,677 5,490
Intangible assets, at cost
Less accumulated amortization
($282 at November 30 and $226 at May 31) 3,318 3,146
------- -------
$12,183 $11,705
======= =======
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
1997 1997
------------ --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 16 $ 28
Accounts payable 476 540
Employee compensation and benefits 329 309
Reserves related to discontinued operations and
other non-recurring charges 199 423
Other current liabilities 614 569
------- -------
Total current liabilities 1,634 1,869
------- -------
Long-term debt, net of current portion 5,520 5,022
Other long-term liabilities and minority interests 1,260 1,282
Deferred income taxes 309 308
Common stock, $.075 par value; authorized
450,000,000 shares; 309,730,094 shares issued at
November 30, 1997 and 305,501,379 shares issued
at May 31,1997 23 23
Other shareholders' equity 3,507 3,240
Treasury stock, at cost, 3,754,891 shares at
November 30, 1997 and 2,676,091 at May 31, 1997 (70) (39)
------- -------
Total shareholders' equity 3,460 3,224
------- -------
$12,183 $11,705
======= =======
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended,
November 30, 1997 May 31, 1997
------------------ ------------
Net operating revenues $ 4,760 $ 8,691
-------- --------
Operating expenses (3,906) (7,094)
Depreciation and amortization (219) (443)
Interest expense, net of capitalized portion (230) (417)
Merger, facility consolidation and other
non-recurring charges --- (740)
-------- --------
Total costs and expenses (4,355) (8,694)
-------- --------
Investment earnings 12 26
Equity in earnings of unconsolidated affiliates --- 1
Minority interests in income of consolidated subsidiaries (13) (27)
Net loss on disposals of facilities
and long-term investments --- (18)
Gain from change in value of indexed long-term debt 18 ---
-------- --------
Income (loss) from continuing operations before
income taxes 422 (21)
Taxes on income (168) (52)
-------- --------
Income (loss) from continuing operations 254 (73)
-------- --------
Discontinued operations --- (134)
Extraordinary charge from early extinguishment of debt --- (47)
-------- --------
Net income (loss) $ 254 $ (254)
======== ========
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended,
November 30, 1997 May 31, 1997
------------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES $ 12 $ 404
(Includes changes in all operating assets and liabilities): -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (215) (406)
Purchase of new businesses, net of cash acquired (381) (787)
Proceeds from sales of facilities, investments and other assets 57 50
Other items (23) 18
-------- --------
Net cash used in investing activities (562) (1,125)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (889) (4,512)
Proceeds from other borrowings 1,386 5,117
Proceeds from sales of common stock --- 12
Proceeds from stock options exercised 32 59
Other items --- (23)
-------- --------
Net cash provided by financing activities 529 653
-------- --------
Net decrease in cash and cash equivalents (21) (68)
Cash and cash equivalents at beginning of year 35 107
Pooling adjustment to beginning of period
balance to conform fiscal years --- (4)
-------- --------
Cash and cash equivalents at end of year $ 14 $ 35
======== ========
_______________________________
1. This exhibit is incorporated by reference to exhibit 10.27 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1988.
2. This exhibit is incorporated by reference to exhibit 10.28 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1987.
3. This exhibit is incorporated by reference to exhibit 10.39 in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
4. These exhibits are incorporated by reference to exhibit numbers 10.37 and
10.38, respectively, filed as part of the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1997.
5. This exhibit is incorporated by reference to exhibit 10.40 in the Company's
Quarterly Report on Form 10-Q for the period ended September 30, 1996.
* Management Contract or Compensatory Plan or Arrangement.