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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
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: (949) 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
8.70% Series B 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 Securities Act of 1933, as amended, 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.
As of March 26, 1999 there were 31,040,276 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 26, 1999 on the New York Stock Exchange, was approximately $890,715,000.
Portions of the definitive Proxy Statement for the registrant's 1999 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. (HCPI), a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust (REIT).
HCPI 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 a psychiatric facility. HCPI commenced
business nearly 14 years ago, making it the second oldest REIT specializing in
health care real estate.
In 1986, Moody's rated HCPI's initial senior debt Baal and Standard &
Poor's rated it BBB. Standard & Poor's upgraded its rating in 1987 to BBB+.
HCPI has historically maintained these ratings and currently Moody's, Standard &
Poor's and Duff & Phelps rate its senior debt at Baal/BBB+/A-, respectively.
HCPI believes that it has had an excellent track record in attracting and
retaining key employees. HCPI's five executive officers have worked with HCPI
on average for 13 years. HCPI's annualized return to its stockholders, assuming
reinvestment of dividends and before stockholders' income taxes, is
approximately 18% over the period from its initial public offering in May 1985
through December 31, 1998.
As of December 31, 1998, HCPI's gross investment in its properties,
including partnership interests and mortgage loans, was approximately $1.5
billion. HCPI's portfolio of 332 properties consisted of:
- - 157 long-term care facilities
- - 84 congregate care and assisted living facilities
- - Eight acute care hospitals
- - Six rehabilitation hospitals
- - 35 medical office buildings
- - 41 physician group practice clinics
- - One psychiatric care facility
The average age of the properties is 17 years. As of December 31, 1998,
approximately 60% of HCPI's revenue was derived from properties operated by
publicly traded health care providers.
References herein to HCPI include Health Care Property Investors, Inc. and
its wholly-owned subsidiaries and consolidated joint ventures and partnerships,
unless the context otherwise requires.
THE PROPERTIES
As of December 31, 1998, HCPI had an ownership interest in 307 properties
located in 40 states. HCPI leased or subleased 269 of its owned properties
pursuant to long-term triple net leases to 84 health care providers. Under a
triple net lease, in addition to the rent obligation, the lessee is responsible
for all operating expenses of the property such as utilities, property taxes,
insurance and repairs and maintenance. The lessees include the following or
their affiliates:
- - HealthSouth Corporation ("HealthSouth")
- - Vencor, Inc. ("Vencor")
- - Emeritus Corporation ("Emeritus")
- - Beverly Enterprises, Inc. ("Beverly")
- - Columbia/HCA Healthcare Corp. ("Columbia")
- - Centennial Healthcare Corp. ("Centennial")
- - Tenet Healthcare Corporation ("Tenet")
The remaining 38 owned properties are medical office buildings and clinics
with gross or modified gross leases with multiple tenants. Under gross or
modified gross leases, HCPI may be responsible for property taxes, repairs and
maintenance and/or insurance on those properties.
HCPI also holds mortgage loans on 25 properties that are owned and operated
by 12 health care providers including Beverly, Columbia and Centennial.
No single lessee or operator accounts for more than 7% of HCPI's revenue for
the year ended December 31, 1998.
Of the 332 health care facilities in which HCPI had an investment as of
December 31, 1998, HCPI directly owns 248 facilities including:
- - 108 long-term care facilities
- - 74 congregate care and assisted living centers
- - 41 physician group practice clinics
- - 20 medical office buildings
- - Three acute care hospitals
- - Two rehabilitation hospitals
HCPI has provided mortgage loans in the amount of $155,918,000 on 25
properties, including 15 long-term care facilities, four congregate care and
assisted living centers, three acute care hospitals and three medical office
buildings. At December 31, 1998, the remaining balance on these loans totaled
$139,432,000.
At December 31, 1998, HCPI also had varying percentage interests in several
limited liability companies and partnerships which together own 59 facilities,
as further discussed below under "Investments in Consolidated and Non-
Consolidated Joint Ventures."
The following is a summary of HCPI's properties grouped by type of facility
and equity interest as of December 31, 1998:
Equity Number Number Total
Interest of of Beds/ Investments Annualized
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- --------------------------- ---------- ---------- ---------- ----------- --------------
(Dollar
Amounts in thousands)
Long-Term Care Facilities 100% 123 15,416 $ 438,650 $ 58,902
Long-Term Care Facilities 77-80 34 3,888 98,781 13,347
-----------------------------------------------------
157 19,304 537,431 72,249
-----------------------------------------------------
Acute Care Hospitals 100 6 427 72,868 7,189
Acute Care Hospitals 77 2 356 42,807 7,744
-----------------------------------------------------
8 783 115,675 14,933
-----------------------------------------------------
Rehabilitation Hospitals 100 2 168 27,385 4,014
Rehabilitation Hospitals 90-97 4 307 47,493 8,029
-----------------------------------------------------
6 475 74,878 12,043
-----------------------------------------------------
Congregate Care & Assisted Living Centers 100 78 6,234 365,438 32,664
Congregate Care & Assisted Living Centers 50 4 511 29,485 4,380
Congregate Care & Assisted Living Centers 45 2 200 1,033 (5) 50
-----------------------------------------------------
84 6,945 395,956 37,094
-----------------------------------------------------
Medical Office Buildings (3) 100 23 --- 154,637 16,052
Medical Office Buildings (3) 90 12 --- 87,650 8,082
Physician Group Practice Clinics (4) 100 41 --- 171,427 17,455
Psychiatric Facility 77 1 108 3,461 288
-----------------------------------------------------
Totals 332 27,615 $1,541,115 $ 178,196
=====================================================
(1) In order to indicate facility size, congregate care and assisted
living centers are stated in units (studio or one room apartments);
all other facilities are stated in beds, except the medical office
buildings and the physician group practice clinics for which square
footage is provided in footnotes 3 and 4.
(2) Includes partnership investments, and incorporates all partners'
assets and construction commitments.
(3) The medical office buildings encompass approximately 2,038,000 square
feet.
(4) The physician group practice clinics encompass approximately 1,325,000
square feet.
(5) Represents HCPI's investment, net of partners' interests.
The following paragraphs describe each type of property. The amount
of Medicare reimbursement allowed for services received at long-term facilities,
long-term acute care hospitals and rehabilitation hospitals has been limited by
the Prospective Payment System, as further described below under "Government
Regulation."
Long-Term Care Facilities. HCPI has invested in 157 long-term care
facilities. Various health care providers operate these facilities. 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 demand for subacute care services
over the past several years. Ancillary revenues and revenue from subacute care
services are derived from providing services to residents beyond room and board
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. Certain long-term care
facilities provide some of the foregoing services on an out-patient basis. Long-
term care 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.
Long-term care services are paid for either by private sources, or through the
federal Medicare and state Medicaid programs.
Long-term care facilities generally provide patients with accommodations,
complete 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 allow 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. This is a contributing factor to
the recent increase in the number of assisted living facilities, which may
adversely affect some long-term care facilities as some individuals
choose the residential environment and lower cost delivery system
provided in the assisted living setting.
Congregate Care and Assisted Living Centers. HCPI has investments in 84
congregate care and assisted living centers. Congregate care centers typically
offer studio, one bedroom and two bedroom apartments on a month-to-month basis
primarily to individuals who are 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. HCPI 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. Long-term acute care
hospitals provide for patients who require a stay of at least 25 days.
Services are paid for by private sources, third party payors (e.g. insurance,
HMOs), or through the federal Medicare and state Medicaid programs. Medicare
provides reimbursement incentives to traditional general acute care hospitals to
minimize inpatient length of stay.
Rehabilitation Hospitals. HCPI has investments 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.
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. HCPI has investments in 35 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. Twelve of HCPI's owned medical
office buildings are master leased on a triple net basis to lessees which then
sublease office space to physicians or other medical practitioners. During 1997
and 1998, HCPI purchased 23 multi-tenant medical office buildings which are
leased under gross or modified gross leases under which HCPI is responsible for
certain operating expenses. Third party property management companies manage
the multi-tenant facilities on behalf of HCPI.
Physician Group Practice Clinics. HCPI has investments in 41 physician
group practice clinic facilities, which are leased to 15 different operators.
These clinics generally provide a broad range of medical services through
organized physician groups representing various medical specialties. The clinic
facilities are generally leased to a single lessee under a triple net or
modified gross lease.
Psychiatric Facility. HCPI has an investment in one psychiatric facility
which offers comprehensive, multidisciplinary adult and adolescent care.
COMPETITION
HCPI competes for real estate acquisitions and financings with health care
providers, other health care related real estate investment trusts, real estate
partnerships, real estate lenders, and other investors.
HCPI'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 HCPI'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
size and composition of the population in the surrounding area. 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,
annualized rents and interest and information regarding remaining lease terms,
by property type.
Average
Number Private
Number of Beds/ Average Patient Annualized 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 91% 37% $ 879 4
Arkansas 9 866 75 47 2,444 10
Arizona 1 112 83 100 427 15
California 18 1,816 86 51 6,021 13
Colorado 5 782 83 53 4,286 14
Connecticut 1 121 97 38 632 1
Florida (3) 11 1,267 90 49 6,835 7
Georgia 1 60 91 26 182 22
Idaho 1 119 66 53 508 15
Illinois 1 128 85 59 421 7
Indiana 22 3,074 78 50 10,898 10
Iowa 1 201 90 38 859 15
Kansas 3 323 82 62 1,588 11
Kentucky 1 100 96 49 410 3
Louisiana 3 355 82 31 1,312 15
Maryland 3 438 87 37 1,825 19
Massachusetts 5 615 93 39 2,606 4
Michigan 4 406 84 56 1,420 5
Minnesota 1 94 71 58 116 11
Mississippi 1 120 100 26 361 3
Missouri 1 153 96 42 731 3
Montana 1 80 76 38 322 --
New Mexico 1 102 89 31 307 4
North Carolina 9 1,056 83 56 4,310 9
Ohio 6 876 88 52 3,827 2
Oklahoma 12 1,395 70 68 4,901 16
Oregon 1 110 81 42 277 9
Pennsylvania 1 89 88 36 353 4
South Carolina 2 68 90 100 484 12
Tennessee 10 1,754 95 41 5,220 3
Texas 10 1,113 56 35 2,676 9
Utah 1 120 76 53 455 15
Washington 1 84 66 58 284 --
Wisconsin 8 1,133 82 47 4,072 7
- ------------------------------------------------------------------------------------------------------------
Sub-Total 157 19,304 82 49 72,249 9
- ------------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 43 100 388 14
California 1 182 53 92 3,868 5
Louisiana 2 325 33 94 5,166 4
New Mexico(3) 1 56 -- -- -- 26
Texas(3) 3 199 48 69 5,511 19
- ------------------------------------------------------------------------------------------------------------
Sub-Total 8 783 39 81 14,933 14
- ------------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 59 100 1,764 --
Arkansas 1 60 78 100 1,880 2
Colorado 1 64 40 100 1,575 2
Florida 1 108 98 100 2,250 13
Kansas 1 75 70 100 2,638 --
Texas 1 108 68 100 1,936 4
- ------------------------------------------------------------------------------------------------------------
Sub-Total 6 475 72 100 12,043 5
- ------------------------------------------------------------------------------------------------------------
Average
Number Private
Number of Beds/ Average Patient Annualized 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 $ 2,560 11
California 2 --- --- 100 4,229 11
Colorado 1 --- --- 100 316 9
Florida 11 --- --- 100 2,624 7
Georgia 3 --- --- 100 970 9
North Carolina 4 --- --- 100 1,140 6
Ohio 1 --- --- 100 --- ---
Oklahoma 4 --- --- 100 529 7
Tennessee 4 --- --- 100 1,607 11
Texas 9 --- --- 100 3,229 7
Virginia 1 --- --- 100 251 10
- ------------------------------------------------------------------------------------------------------------
Sub-Total 41 --- --- 100 17,455 9
- ------------------------------------------------------------------------------------------------------------
Psychiatric Facility - Georgia 1 108 14 100 288 9
- ------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (3) 1 84 --- --- --- 15
Arkansas 1 17 92 100 27 11
Arizona 1 98 64 100 496 9
California 11 999 62 93 5,845 15
Delaware 1 52 74 100 382 9
Florida (3) 10 738 55 88 2,316 12
Georgia 1 40 90 100 232 12
Idaho 1 117 39 100 770 14
Kansas(3) 2 194 33 57 262 12
Louisiana 5 449 54 100 3,246 9
Maryland (3) 2 140 44 61 860 12
Michigan (3) 2 200 --- 50 50 12
Missouri 1 73 --- 100 432 3
Nebraska 1 73 31 100 518 10
New Jersey(3) 4 279 57 70 1,281 12
New Mexico 2 285 63 100 1,909 12
New York 1 75 96 100 429 9
North Carolina 3 230 92 100 1,320 11
Ohio 1 156 87 100 800 13
Oregon 1 58 92 90 381 10
Pennsylvania 3 232 82 100 1,751 10
Rhode Island 1 172 99 100 1,580 2
South Carolina(3) 9 582 55 66 2,457 13
Texas 16 1,373 72 93 8,443 12
Virginia 1 90 44 100 616 15
Washington 2 139 93 86 691 9
- ------------------------------------------------------------------------------------------------------------
Sub-Total 84 6,945 62 87 37,094 11
- ------------------------------------------------------------------------------------------------------------
Medical Office Buildings (4)
Alaska 1 --- --- 100 726 2
California 7 --- --- 100 6,148 3
Indiana 13 --- --- 100 6,652 6
Minnesota 2 --- --- 100 2,218 8
North Dakota 1 --- --- 100 649 7
New York 1 --- --- 100 2,090 5
Texas 9 --- --- 100 5,083 8
Utah 1 --- --- 100 568 11
- ------------------------------------------------------------------------------------------------------------
Sub-Total 35 --- --- 100 24,134 6
- ------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 332 27,615 76% 61% $178,196 9
============================================================================================================
(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 1,325,000 and 2,038,000 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 HCPI's lessees.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1998, HCPI had investments in 332 properties located in 42
states, which are operated by 84 health care operators. In addition, 188 tenants
conduct business in the multi-tenant buildings. Listed below are HCPI's major
operators, the number of facilities operated by such operators, and the
annualized revenue and the percentage of annualized revenue
derived from such operators.
Percentage
Number of Annualized of Annualized
Operators Facilities Revenue Revenue
- --------------------------------------------------------------------
HealthSouth 6 $12,043,000 7%
Vencor 39 11,648,000 7
Emeritus 23 11,227,000 6
Beverly 28 10,685,000 6
Columbia 12 8,083,000 5
Centennial 19 8,241,000 5
Tenet 2 7,744,000 4
Certain of the listed facilities have been subleased to other operators
with the original lessee remaining liable on the leases. The revenue applicable
to these sublessees is not included in the annualized revenue percentages
above. The percentage of annualized revenue on these subleased facilities was
4% for the year ended December 31, 1998. As discussed in more detail below, rent
obligations under Vencor leases are guaranteed through the primary term by
Tenet.
All of these operators listed above 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. HCPI obtained all of the financial and
other information relating to these operators from their public reports.
The following table summarizes HCPI's major operators' assets,
stockholders' equity, interim revenue and net income (or net loss) from
continuing operations as of or for the nine months ended September 30, 1998.
All of the following information is based upon such operators' public reports.
(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
- --------------------------------------------------------------------------
HealthSouth $ 7,057 $ 3,637 $ 2,898 $ 232
Vencor* 2,245 913 2,320 33
Emeritus 198 (38) 111 (23)
Beverly 2,199 869 2,116 61
Columbia 20,008 7,705 14,261 555
Centennial 273 115 265 1
Tenet** 13,629 3,864 5,116 262
* Includes the combined results of the predecessor company for all
periods prior to May 1, 1998.
** The information described above for Tenet is for the six months ended
November 30, 1998 or as of November 30, 1998, as applicable.
The following table summarizes HCPI's major operators' assets,
stockholders' equity, annualized revenue and net income (or net loss) from
continuing operations as of or for the year ended December 31, 1997.
(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity Revenue Operations
- --------------------------------------------------------------------------
HealthSouth $ 5,401 $ 3,157 $ 3,017 $ 331
Vencor* 3,335 905 3,116 135
Emeritus 229 1 118 (28)
Beverly 2,073 863 3,230 59
Columbia 22,002 7,250 18,819 182
Centennial 244 113 304 10
Tenet** 12,833 3,558 9,895 378
* Includes the combined results of the predecessor company for all
periods prior to May 1, 1998.
** The information described above for Tenet is for the fiscal year ended
May 31, 1998 or as of May 31, 1998, as applicable.
The current equity market capitalization for each of the operators listed
above, based on the closing price of their common stock on March 24, 1999 as
reported in the Wall Street Journal, and based on the number of outstanding
shares of their common stock as reported in their most recent public filing
available is as follows: HealthSouth, $4.2 billion; Vencor, $91.6 million;
Emeritus, $117.9 million; Beverly, $524.7 million; Columbia, $12.1 billion;
Centennial, $184.1 million; and Tenet, $5.8 billion.
Certain additional information about these operators is provided below:
On May 1, 1998, Vencor completed a spin-off transaction. As a result, it
became two publicly held entities - Ventas, Inc. ("Ventas"), a real estate
company which intends to qualify as a REIT, and Vencor, a health care company
which at December 31, 1998 leased 39 of HCPI's properties. As of December 31,
1998, 3% of annualized revenue on facilities leased to Vencor related to
facilities sub-leased and operated by other providers. Both Ventas and
Vencor are responsible for payments due under the Vencor leases, including
subleased facilities.
According to a recent press release issued by Vencor, Vencor expects
that its earnings for the fourth quarter of 1998 will be substantially lower
than for the third quarter of 1998. Vencor reported a loss of $.02 per
share for the third quarter ended September 30, 1998. In addition,
Vencor announced that it recently obtained a waiver of its net worth covenant
through March 31, 1999 from the lenders under its bank credit facility. Vencor
accounts for 6.5% of HCPI's annualized revenue. Vencor's senior subordinated
debt is rated CCC and B2 by Standard & Poor's and Moody's, respectively, and
is currently on credit-watch with negative implications by Standard & Poor's.
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. Tenet has historically guaranteed Vencor's leases.
However, during 1997 HCPI reached an agreement with Tenet whereby Tenet agreed
to forbear or waive some renewal and purchase options and related rights of
first refusal on facilities leased to Vencor. As part of that same agreement,
Tenet will guarantee the rent payments on the 36 Vencor leases that have not
reached the end of their base term as of December 31, 1998. All of those
remaining guaranteed leases expire within three years. During the year ended
December 31, 1998, 14 previously guaranteed Vencor leases expired. Eleven of
the fourteen were leased to third parties and three were retained by Vencor but
are no longer guaranteed by Tenet.
According to published reports, Columbia has been the subject of various
significant government investigations regarding its compliance with Medicare,
Medicaid and other programs. The following is derived from public reports
distributed by Columbia: "It is too early to predict the outcome or effect
that the ongoing investigations, the initiation of additional investigations,
if any, and the related media coverage will have on [Columbia's] financial
condition or results of operations in future periods. 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. Any such sanctions could have a material
adverse effect on [Columbia's] financial position and results of operations."
Columbia's senior debt ratings remain investment grade, but have recently
been reduced by Moody's to Ba2 and by Standard & Poor's to BBB. In
February 1998, Moody's further downgraded Columbia's commercial paper
rating to NP (not prime) from P-3.
Recently there has been publicity about the reimbursement of nursing home
companies being impacted by Medicare's adoption of the Prospective Payment
System. The ratings of the following operators of HCPI facilities have been
put on credit-watch with negative implications by Standard & Poor's (S&P), the
bond rating agency, because of the impact of the implementation of the
Prospective Payment System. The indicated ratings are for the subordinated
debt issues as of March 22, 1999.
Percentage
S&P Moody's of Annualized
Operators Rating Rating Revenue
- ------------------------------------------------------------------------------------
Genesis Health Ventures ("Genesis") B Ba3 2.4%
Integrated Health Services, Inc. ("IHS") CCC Ba3 2.1%
Sun Healthcare Group ("Sun") CCC Ba3 2.0%
Mariner Post-Acute Network, Inc. ("Mariner") CCC B1 0.6%
These operators are current on all of their rental obligations to HCPI.
Since all these companies are publicly traded, interested readers are directed
to the periodic financial statements filed by such companies on Form 10-K and
Form 10-Q with the SEC.
LEASES AND LOANS
The initial base rental rates of the leases entered into by HCPI during
the three years ended December 31, 1998 have generally ranged from 9% to 14%
per annum of the acquisition price of the related property. Initial interest
rates on the loans entered into by HCPI during the three years ended December
31, 1998 have generally ranged from 9% to 12% per annum. Rental rates vary by
lease, taking into consideration many factors, such as:
- Credit worthiness of the lessee,
- Operating performance of the facility,
- Interest rates at the beginning of the lease, and
- Location, type and physical condition of the facility.
Most of the leases provide for additional rents that are based upon a
percentage of increased revenue over specific base period revenue of the leased
properties. Some leases and loans have annual fixed rent or interest rate
increases while others have rent increases based on inflation indices or other
factors. Additional Rental and Interest Income received for the years ended
December 31, 1998, 1997 and 1996 were $22.0 million, $21.1 million and $20.9
million, respectively. (See Note 2 to the Consolidated Financial Statements in
this Annual Report on Form 10-K.)
Each lessee that has a triple net lease 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 triple net lessee is required, at its expense, to maintain its leased
property in good order and repair. HCPI is not required to repair, rebuild or
maintain the properties.
Each lessee with a gross or modified gross lease is also responsible for
minimum and additional rents, but may not be responsible for all operating
expenses. Under gross or modified gross leases, HCPI may be responsible for
property taxes, repairs and maintenance and/or insurance on those properties.
The primary or fixed terms of the triple net and modified gross 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
triple net and modified gross leases is approximately ten years and the average
remaining term on the loans is approximately 16 years. The primary term of the
gross leases to multiple tenants in the medical office buildings range from one
to ten years, with an average of five years remaining on those leases.
Obligations under the leases, in most cases, have corporate parent or
shareholder guarantees. Irrevocable letters of credit from various financial
institutions back 111 leases and loans covering 14 facilities which cover from
three to 18 months of lease or loan payments. HCPI requires the lessees and
mortgagors to renew such letters of credit during the lease or loan term in
amounts that may change based upon the passage of time, improved operating cash
flows or improved credit ratings.
HCPI believes that the credit enhancements discussed above provide it with
significant protection for its investment portfolio. HCPI is currently
receiving rents and interest in a timely manner from substantially all lessees
and mortgagors as provided under the terms of the leases or loans. Based upon
information provided to HCPI 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 some
lessees may choose not to renew their leases on certain properties
at existing rental rates (see Table below).
Many lessees have the right of first refusal to purchase the properties
during the lease term; 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. Fifty-nine properties are not
subject to purchase options until 2008 or later, and an additional 219 leased
properties do not have any purchase options.
A table recapping lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance follows:
Current Annualized Revenues of
-----------------------------------------------------
Properties Subject to
Lease Expirations,
Purchase Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gains at Lease
Year (1) (2) Expiration(3),(4)
----- --------------------- ------------------- ----------------------
(Amounts in thousands, except percentages) % Amount
------- ----------
1999 $7,383 $ 1,385 (0.6) $ (1,000)
2000 12,040 6,625 (0.9) (1,700)
2001 18,560 10,599 0.3 500
2002 11,838 1,511 0.1 200
2003 6,986 4,246 0.1 300
Thereafter 121,389 53,127 -- --
--------- --------- ----- -------
$ 178,196 $ 77,493 (1.0) $ (1,700)
========= ========= ===== =======
(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 ($178,196,000).
(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 HCPI has grown at a compound
annual growth rate of 13.0% in the past five years. The percentages are
computed by taking the possible revenue loss as a percentage of 1998 total
annualized revenue.
(4) HCPI estimates that in addition to the possible reduction in income from
lease expirations, it may also have a reduction of approximately $200,000
in 1999 due to the reinvestment of cash received from mortgage maturities
and exercises of purchase options. This amount is calculated based on
current interest rate levels and is not estimated in years subsequent to
1999 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
HCPI's continued growth, the facilities subject to renewal and/or purchase
options and mortgage maturities and any possible rent loss therefrom should
represent a small percentage of revenue in the year of renewal or purchase.
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 HCPI or its affiliates upon termination of the lease. Each
lease requires the lessee to maintain adequate insurance on the leased property,
naming HCPI 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
HCPI or its affiliates against certain liabilities in connection with the leased
property.
DEVELOPMENT OF FACILITIES
Since 1987, HCPI has committed to the development of 54 facilities
(representing an aggregate investment of approximately $407 million), including:
- - Five rehabilitation hospitals
- - 33 congregate care and assisted living facilities
- - Five long-term care facilities
- - Four acute care hospitals
- - Seven medical office buildings
As of December 31, 1998, costs of approximately $344 million have been
funded and 40 facilities have been completed. The completed facilities
comprise:
- - Five rehabilitation hospitals
- - 21 congregate care and assisted living facilities
- - Five long-term care facilities
- - Two acute care hospitals
- - Seven medical office buildings
The 14 remaining development projects are scheduled for completion in 1999
and 2000. Simultaneously with the commencement of each of these development
programs and prior to funding, HCPI 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 build to suit development program generally includes a variety of
additional forms of credit enhancement and collateral beyond those provided by
the leases. During the development period, HCPI 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 HCPI under the development
agreement, the developer must provide:
(a) Satisfactory evidence in the form of an endorsement to HCPI's title
insurance policy that no intervening liens have been placed on the property
since the date of HCPI'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, HCPI 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. HCPI 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.
INVESTMENTS IN CONSOLIDATED AND NON-CONSOLIDATED JOINT VENTURES
At December 31, 1998, HCPI had varying percentage interests in several
limited liability companies and partnerships which together own 59 facilities,
as further discussed below:
(1) A 77% interest in a partnership (Health Care Property Partners) which owns
two acute care hospitals, one psychiatric facility and 20 long-term care
facilities.
(2) Interests of between 90% and 97% in four partnerships (HCPI/San Antonio
Ltd. Partnership, HCPI/Colorado Springs Ltd. Partnership, HCPI/Little Rock
Ltd. Partnership, HCPI/Kansas Ltd. Partnership), each of which owns a
comprehensive rehabilitation hospital.
(3) A 90% interest in a limited liability company (Cambridge Medical Property,
LLC) which owns five medical office buildings.
(4) A 90% interest in a limited liability company (HCPI Indiana, LLC) which
owns seven medical office buildings.
(5) An 80% interest in six limited liability companies (Vista-Cal Associates,
LLC; Oak City-Cal Associates, LLC; Statesboro Associates, LLC; Ft. Worth-
Cal Associates, LLC; Tucson-Cal Associates, LLC; Perris-Cal Associates,
LLC) each of which owns a long-term care facility.
(6) An 80% interest in two limited liability companies (Ponca-Cal Associates,
LLC, Louisiana-Two Associates, LLC) each of which owns two long-term care
facilities.
(7) An 80% interest in one limited liability company (Oklahoma-Four Associates,
LLC) which owns four long-term care facilities.
(8) A 50% interest in four partnerships (HCPI/Austin Investors, HCPI/Baton
Rouge Investors, HCPI/Rhode Island Investors and HCPI/Kenner Investors),
each of which owns a congregate care facility.
(9) A 45% interest in two limited liability companies (Seminole Shores Living
Center, LLC and Edgewood Assisted Living Center, LLC) each formed to own a
congregate care facility.
FUTURE ACQUISITIONS
HCPI 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 HCPI
Management of HCPI believes that HCPI 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 HCPI 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 HCPI 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, HCPI 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 HCPI beginning before August 6, 1997, there was a third gross
income requirement. First, at least 75% of HCPI'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 HCPI'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
HCPI 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 HCPI'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.
HCPI, 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 HCPI'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 HCPI), cash, cash items and government securities. Second, not
more than 25% of HCPI'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 HCPI may not
exceed 5% of the value of HCPI's total assets and HCPI may not own more than 10%
of any one issuer's outstanding voting securities.
HCPI 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 (the "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. HCPI
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 HCPI. If
any partnership, limited liability company, or subsidiary in which HCPI owns an
interest were treated as a regular corporation (and not as a partnership or QRS)
for federal income tax purposes, HCPI would likely fail to satisfy the REIT
asset tests described above and would therefore fail to qualify as a REIT. HCPI
believes that each of the partnerships, limited liability companies, and
subsidiaries in which it owns an interest will be treated for tax purposes as a
partnership (in the case of a partnership or limited liability company) or QRS,
respectively, although no assurance can be given that the Service will not
successfully challenge the status of any such organization.
HCPI, 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 HCPI's "real estate investment trust taxable
income" (computed without regard to the dividends paid deduction and HCPI'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 HCPI timely files its tax return
for such year, if paid on or before the first regular dividend payment date
after such declaration and if HCPI so elects and specifies the dollar amount in
its tax return. To the extent that HCPI 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 HCPI 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, HCPI would be subject to a 4% excise tax on
the excess of such required distributions over the amounts actually distributed.
If HCPI fails to qualify for taxation as a REIT in any taxable year, and
certain relief provisions do not apply, HCPI 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 HCPI fails
to qualify will not be deductible by HCPI nor will they be required to be made.
Unless entitled to relief under specific statutory provisions, HCPI 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 HCPI would be entitled to the statutory relief. Failure to
qualify for even one year could substantially reduce distributions to
stockholders and could result in HCPI'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 2000 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,
2000 (i.e., for elections starting in 2001), and thus could effectively preclude
HCPI from reelecting to be taxed as a REIT if there were a loss of its REIT
status.
Distributions made to HCPI'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 HCPI qualifies as a REIT. Distributions made by HCPI
that are properly designated by HCPI as capital gain dividends will be taxable
to taxable U.S. stockholders as gains (to the extent that they do not exceed
HCPI's actual net capital gain for the taxable year) from the sale or
disposition of a capital asset. In general, such gains are taxable to non-
corporate U.S. stockholders at a 20% or 25% rate, depending on certain
designations, if any, which may be made by HCPI. 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
HCPI.
HCPI may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, HCPI would pay tax on
such retained net long-term capital gains. In addition, for tax years of HCPI
beginning on or after January 1, 1998, to the extent designated by HCPI, 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 HCPI'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 HCPI 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 Service.
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 one year 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 HCPI required to be treated by
such stockholder as long-term capital gain.
HCPI 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 HCPI 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. This government regulation of the health care industry affects HCPI
because:
(1) The financial ability of lessees to make rent and debt payments to HCPI may
be affected by government regulations such as licensure, certification for
participation in government programs, and government reimbursement, and
(2) HCPI's additional rents are generally based on its lessees' gross revenue
from operations.
These laws and regulations are subject to frequent and substantial changes
resulting from legislation, adoption of rules and regulations, and
administrative and judicial interpretations of existing law. These changes 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. These changes
may be applied retroactively. The ultimate timing or effect of these changes
cannot be predicted. The failure of any borrower of funds from us or lessee of
any of our properties to comply with such laws, requirements and regulations
could affect its ability to operate its facility or facilities and could
adversely affect such borrower's or lessee's ability to make debt or lease
payments to us.
Fraud and Abuse. There are various federal and state laws prohibiting fraud
by healthcare providers, including criminal provisions which prohibit filing
false claims or making false statements to receive payment or certification
under Medicare and Medicaid, or failing to refund overpayments or improper
payments. Violation of these federal provisions is a felony punishable by up to
five years imprisonment and/or $25,000 fines. Civil provisions prohibit the
knowing filing of a false claim or the knowing use of false statements to obtain
payment. The penalties for such a violation are fines of not less than $5,000
nor more than $10,000, plus treble damages, for each claim filed.
There are also laws that attempt to eliminate fraud and abuse by
prohibiting payment arrangements that include compensation for patient
referrals. The federal Anti-Kickback Law prohibits, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for, or to induce, the referral of Medicare and Medicaid patients. A wide array
of relationships and arrangements, including ownership interests in a company by
persons who refer or who are in a position to refer patients, as well as
personal services agreements, have under certain circumstances, been alleged or
been found to violate these provisions. In addition to the Anti-Kickback
Statute, the federal government restricts certain financial relationships
between physicians and other providers of healthcare services.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against healthcare providers. The Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act
expand the penalties for healthcare fraud, including broader provisions for the
exclusion of providers from the Medicare and Medicaid programs. Further, under
Operation Restore Trust, a major anti-fraud demonstration project, the Office of
Inspector General of the U.S. Department of Health and Human Services, in
cooperation with other federal and state agencies, has focused on the activities
of skilled nursing facilities, home health agencies, hospices and durable
medical equipment suppliers in certain states, including California, in which we
have properties. Due to the success of Operation Restore Trust, the project has
been expanded to numerous other states and to additional providers including
providers of ancillary nursing home services.
Violations of such laws and regulations may jeopardize a borrower's or
lessee's ability to operate a facility or to make rent and debt payments,
thereby potentially adversely affecting HCPI. HCPI's lease arrangements with
lessees may also be subject to these fraud and abuse laws. Federal and state
laws governing illegal rebates and kickbacks regulate contingent or
percentage rent arrangements where HCPI'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, HCPI has
structured its rent arrangements in a manner which it believes complies with
such laws and regulations.
Based upon information HCPI has periodically received from its operators
over the terms of their respective leases and loans, HCPI believes that the
facilities in which it has investments are in substantial compliance with the
various regulatory requirements applicable to them, although there can be no
assurance that the operators are in compliance or will remain in compliance in
the future.
Licensure Risks. Health care facilities must obtain licensure to operate.
Failure to obtain licensure or loss of licensure would prevent a facility from
operating. These events could adversely affect the facility operator's ability
to make rent and debt payments. State and local laws also may regulate
expansion, including the addition of new beds or services or acquisition of
medical equipment, and occasionally the contraction of health care facilities by
requiring certificate of need or other similar approval programs. In addition,
health care facilities are subject to the Americans with Disabilities Act and
building and safety codes which govern access to and physical design
requirements and building standards for facilities.
Environmental Matters. A wide variety of federal, state and local
environmental and occupational health and safety laws and regulations affect
healthcare facility operations. Under various federal, state and local
environmental laws, ordinances and regulations, an owner of real property or
a secured lender (such as HCPI) may be liable for the costs of removal or
remediation of hazardous or toxic substances at, under or disposed of in
connection with such property, as well as other potential costs relating to
hazardous or toxic substances (including government fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner or secured lender knew of,
or was responsible for, the presence or disposal of such substances and may
be imposed on the owner or secured lender in connection with the activities
of an operator of the property. The cost of any required remediation,
removal, fines or personal or property damages and the owner's or secured
lender's liability therefore could exceed the value of the property, and/or
the assets of the owner or secured lender. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn,
would reduce HCPI's revenues.
Although the mortgage loans that HCPI provides and leases covering its
properties require the borrower and the lessee to indemnify HCPI for certain
environmental liabilities, the scope of such obligations may be limited and HCPI
cannot assure that any such borrower or lessee would be able to fulfill its
indemnification obligations.
Medicare and Medicaid Programs. Sources of revenues for lessees may
include the federal Medicare program, state Medicaid programs, private insurance
carriers, health care service plans and health maintenance organizations, among
others. You should expect efforts to reduce costs by these payors to continue,
which may result in reduced or slower growth in reimbursement for certain
services provided by some of HCPI's lessees. In addition, the failure of any of
HCPI's lessees to comply with various laws and regulations could jeopardize
their ability to continue participating 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 based on
the Prospective Payment System. Under the Prospective Payment System, a
hospital is paid a prospectively established rate based on the category of
the patient's diagnosis ("Diagnostic Related Groups" or "DRGs"). Beginning
in 1991, Medicare payments began to phase-in the Prospective Payment System
over a period of years. Thus, Medicare reimbursement to hospitals for capital-
related inpatient costs began 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. The
Balanced Budget Act of 1997 expanded the Prospective Payment System to
include skilled nursing facilities, home health agencies, hospital outpatient
departments, and rehabilitation hospitals. See "Health Care Reform" section
and further discussion below.
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. Negotiated rates can include
discounts from normal charges, fixed daily rates and prepaid capitated rates.
Prospective Payment System. Up until July 1, 1998, Medicare and most state
Medicaid programs utilized a cost-based reimbursement system for skilled nursing
facilities which reimbursed these facilities for the reasonable direct and
indirect allowable costs incurred in providing routine services plus in certain
states, a return on equity, subject to certain cost ceilings. These costs
normally included allowances for administrative and general costs as well as
the costs of property and equipment (depreciation and interest, fair rental
allowance or rental expense). In certain states, cost-based reimbursement was
typically subject to retrospective adjustment through cost report settlement,
and for certain states, payments made to a facility on an interim basis that
were subsequently determined to be less than or in excess of allowable costs
could be adjusted through future payments to the affected facility and to
other facilities owned by the same owner. State Medicaid reimbursement programs
varied as to the methodology used to determine the level of allowable costs
which were reimbursed to operators.
Beginning on July 1, 1998, the congressionally mandated Prospective
Payment System was implemented for skilled nursing facilities. Under the
Prospective Payment System, skilled nursing facilities are paid a case-mix
adjusted federal per diem rate for Medicare-covered services
provided by skilled nursing facilities. The per diem rate is calculated to
cover routine service costs, ancillary costs and capital-related costs. The
phased-in implementation of the prospective payment system for skilled nursing
facilities began with the first cost-reporting period beginning on or after July
1, 1998. The Prospective Payment System is expected to be fully implemented
by July 1, 2001. The effect of the implementation of the Prospective
Payment System on a particular skilled nursing facility will vary in
relation to the amount of revenue derived from Medicare patients for each
skilled nursing facility.
Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare Prospective Payment System reimbursement. In part
because of the uncertainty as to the effect of the Prospective Payment System on
skilled nursing facilities, in November 1998, Standard & Poor's placed many
skilled nursing facility companies on a "credit watch" because of the potential
negative impact of the implementation of the Prospective Payment System on the
financial condition of skilled nursing facilities, including the ability to make
interest and principal payments on outstanding borrowings. In early March 1999,
Standard & Poor's lowered the ratings of several skilled nursing facility
companies, including HCPI's tenants Genesis, IHS, Sun and Mariner as discussed
above under "Relationship with Major Operators," because of the impact of the
implementation of the Prospective Payment System, particularly those companies
with substantial debt.
Long-Term Care Facilities. Long-term care facilities are regulated
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. The facilities must correct these
deficiencies 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.
Congregate Care and Assisted Living Facilities. Assisted living facilities
are subject to federal, state and local licensure, certification and inspection
laws. These laws regulate, among other matters, the number of licensed beds,
the provision of services, equipment, staffing and operating policies and
procedures. Failure to comply with these laws and regulations could result in
the denial of reimbursement, the imposition of fines, suspension or
decertification from the Medicare and Medicaid program, and in extreme cases,
the revocation of a facility's license or closure of a facility. Such actions
may have an effect on the revenues of the operators of properties owned by HCPI
and therefore adversely impact HCPI.
Acute Care Hospitals. Acute care hospitals are also 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.
Such accreditation may be a more cost-effective and time-efficient method of
meeting requirements for continued licensing and for participation in government
sponsored provider programs.
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under the Prospective Payment System, 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 provides for 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 certificates of need, 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 has continually faced 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.
In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. 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. These changes may be applied retroactively. The ultimate
timing or effect of legislative efforts cannot be predicted and may impact HCPI
in different ways.
These changes include:
(1) The adoption of the Medicare+Choice program, which expands 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,
(2) The expansion and restriction of reimbursement for various Medicare
benefits,
(3) The freeze in hospital rates in 1998 and more limited annual increases in
hospital rates for 1999-2002,
(4) The adoption of a Prospective Payment System for skilled nursing
facilities, home health agencies, hospital outpatient departments, and
rehabilitation hospitals,
(5) The repeal of the Boren amendment payment standard for Medicaid so that
states have the exclusive authority to determine provider rates and
providers have no federal right of action,
(6) The reduction in Medicare disproportionate share payments to hospitals, and
(7) The removal of the $150,000,000 limit on tax-exempt bonds for nonacute
hospital capital projects.
The implementation of these amendments will occur at various times: for
instance, the Prospective Payment System for skilled nursing facilities went
into effect for the first cost reporting period after July 1, 1998, while the
Prospective Payment System for home health agencies will not be implemented
until October 1, 2000.
In seeking to limit Medicare reimbursement for long term care services,
Congress established the Prospective Payment System for skilled nursing facility
services to replace the cost-based reimbursement system. See "Government
Regulation -- Prospective Payment System."
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.
The Balanced Budget Act of 1997 signed by President Clinton on August 5,
1997, is expected to produce several billion dollars in net savings for
Medicaid over five years. In addition, the Balanced Budget Act repealed the
Boren Amendment under which states were required to pay long-term care
providers, including skilled nursing facilities, rates that are "reasonable and
adequate to meet the cost which must be incurred by efficiently and economically
operated facilities." As a result of the repeal of the Boren Amendment, states
are now required by the Balanced Budget Act for skilled nursing facilities to:
- Use a public process for determining rates
- Publish proposed and final rates, the methodologies underlying the
rates, and justifications for the rates
- Give methodologies and justifications
During rate-setting procedures, states are required to take into account
the situation of skilled nursing facilities that serve a disproportionate number
of low-income patients with special needs. The Secretary of the Department of
Health and Human Services is required to study and report to Congress within
four years concerning the effect of state rate-setting methodologies on the
access to and the quality of services provided to Medicaid beneficiaries. The
Balanced Budget Act also provides the federal government with expanded
enforcement powers to combat waste, fraud and abuse in delivery of healthcare
services. Though applicable to payments for services furnished on or after
October 1, 1997, the new requirements are not retroactive. Thus, states that
have not proposed changes in their payment methods or standards, or changes in
rates for items and services furnished on or after October 1, 1997, need not
immediately implement a Balanced Budget Act public approval process.
President Clinton recently signed the Omnibus Consolidated and Emergency
Supplemental Appropriations Act of 1999 ("Appropriations Act") into law. The
Appropriations Act delays imposition of the Prospective Payment System for home
health agencies until October 1, 2000. Moreover, the Appropriations Act
increases both the per-enrollee and per-agency limits implemented under the
interim payment system imposed by the Balance Budget Act of 1997. According to
a statement from the House Commerce Committee, more than 65 percent of the
home health agencies will receive increased Medicare payments under the
Appropriations Act. A portion of the cost of these changes will be financed
by reducing the annual Medicare home health update by 1.1 percentage points
from 2000 to 2003. These changes may also affect the revenues of the
operators of the properties owned by HCPI.
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. There are numerous initiatives at the federal and state levels
for comprehensive reforms affecting the payment for and availability of
health care services. 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. These changes may be applied
retroactively. The ultimate timing or effect of legislative efforts cannot be
predicted and may impact HCPI in different ways.
In 1997, health expenditures in the United States amounted to $1.1
trillion, representing 13.5 percent of Gross Domestic Product. The Health Care
Financing Administration projects that national health spending growth will
accelerate beginning in 1998, growing at an average annual rate of 6.5 percent
between 1998 and 2001. This compares to a 5.0 percent average annual growth
rate from 1993 to 1996. HCPI 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 HCPI's lessees. HCPI 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, HCPI 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 HCPI's financial condition or results of operations.
OBJECTIVES AND POLICIES
HCPI is organized to invest in income-producing health care related
facilities. In evaluating potential investments, HCPI 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 HCPI'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 HCPI'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 HCPI will
seek to invest, or on the concentration of investments in any one facility or
any one city or state. HCPI acquires its investments primarily for income.
At December 31, 1998, HCPI has preferred stock and two classes of debt
securities which are senior to the common stock. HCPI may, in the future, issue
additional debt or equity securities which will be senior to the common stock.
HCPI 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.
HCPI may incur additional indebtedness when, in the opinion of its
management and directors, it is advisable. For short-term purposes HCPI from
time to time negotiates lines of credit, or arranges for other short-term
borrowings from banks or otherwise. HCPI may arrange for long-term borrowings
through public offerings or from institutional investors. Under its Bylaws,
HCPI is subject to various restrictions with respect to borrowings.
In addition, HCPI 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, HCPI invests in properties
subject to existing loans, or secured by mortgages, deeds of trust or similar
liens on the properties. HCPI 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, HCPI adopted a rights agreement whereby HCPI
distributed a dividend of one right for each outstanding share of common stock
and authorized the distribution of one right with respect to each subsequently
issued share. Each right, as adjusted for HCPI's 1992 stock split, will
entitle its holder to purchase one-half of a share of common stock of HCPI at
an exercise price of $47.50 per share. The rights will become exercisable if a
person acquires 15% or more of HCPI's outstanding common stock or makes a
tender offer which will result in the person's owning 30% or more of HCPI's
common stock. Under certain circumstances, the rights will entitle the holders
to purchase shares of HCPI's common stock, or securities of an entity that
acquires HCPI, at one-half market value. HCPI may redeem the rights at any
time prior to a person's acquiring 15% of HCPI's common stock. The rights are
intended to protect stockholders of HCPI from takeover tactics that could
deprive them of the full value of their shares.
HCPI will not, without the prior approval of a majority of directors,
acquire from or sell to any director, officer or employee of HCPI, or any
affiliate thereof, as the case may be, any of the assets or other property of
HCPI.
HCPI 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 HCPI and may be changed without stockholder approval.
Health Care Property Investors
|
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Texas HCP, Inc. Texas HCP, G.P., Inc. HCPI Trust HCPI Knightdale, Inc. HCPI Charlotte, Inc. HCPI Mortgage Corp. |
100 % 100% 100% 100% 100% 100% |
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Texas HCP Holding, LP |
| |
99% | 1% |
| |
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HCPI/San Antonio LP HCPI/Austin Investors** ----------------------------------------------------------------------------
- ------------------ ----------------------- |
90% 50% |
|
|
---------------------------------
Health Care Property Partners - 77%
HCPI Kansas LP - 97%
HCPI Indiana, LLC - 90%
HCPI/Little Rock, LP - 97%
HCPI/Colorado Springs, LP - 97%
HCPI/Baton Rouge Investors** - 50%
HCPI/Rhode Island Investors** - 50%
HCPI/Kenner Investors** - 50%
Cambridge Medical Properties, LLC - 90%
Seminole Shores Living Center, LLC** - 45%
Edgewood Assisted Living, LLC** - 45%
Various Non-Consolidated LLCs*
* HCPI is non-managing member and has an 80% interest in the following limited liability companies:
Ft. Worth-Cal Associates, LLC Ponca-Cal Associates, LLC
Louisiana-Two Associates, LLC Statesboro Associates, LLC
Oak City-Cal Associates, LLC Tucson-Cal Associates, LLC
Oklahoma-Four Associates, LLC Vista Cal Associates, LLC
Perris-Ca Associates, LLC
** Non-Consolidated Partnerships
ITEM 2. PROPERTIES
See Item 1. for details.
ITEM 3. LEGAL PROCEEDINGS
During 1998, HCPI 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
HCPI'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 closing
prices of HCPI's common stock on the New York Stock Exchange.
1998 1997 1996
High Low High Low High Low
------- ------- ------- ------- ------- -------
First Quarter $39 1/4 $35 13/16 $37 1/8 $33 1/8 $35 1/2 $31 1/2
Second Quarter 37 33 7/16 35 3/4 32 33 7/8 31
Third Quarter 37 1/2 30 3/16 38 3/4 35 7/8 34 1/2 32 5/8
Fourth Quarter 35 9/16 28 7/8 40 5/16 37 5/8 37 1/2 32 1/2
As of March 1, 1999 there were approximately 1,468 stockholders of record
and approximately 38,000 beneficial stockholders of HCPI's common stock.
It has been HCPI'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
HCPI on common stock are set forth below:
1998 1997 1996
------- ------- -------
First Quarter $.64 $.60 $.56
Second Quarter .65 .61 .57
Third Quarter .66 .62 .58
Fourth Quarter .67 .63 .59
Bremner & Wiley. On December 4, 1998, HCPI completed the acquisition of a
managing member interest in HCPI/Indiana, LLC, a Delaware limited liability
company ("HCPI/Indiana"). In connection with the acquisition, several limited
partnerships affiliated with James D. Bremner made a capital contribution to
HCPI/Indiana of a portfolio of seven medical office buildings with an equity
value (net of assumed debt) of approximately $6.7 million. In exchange for
this capital contribution, the contributing limited partnerships designated
their constituent partners to receive approximately $3.9 million in cash and
89,452 non-managing member units of HCPI/Indiana (representing a minority
interest in HCPI/Indiana). HCPI/Indiana also issued 781,213 managing member
units to HCPI in exchange for a capital contribution of approximately $24.6
million. In addition, HCPI has retained Bremner & Wiley, Inc., a company also
affiliated with James D. Bremner and the current manager of each of the
contributed properties, to provide property management and leasing services at
each contributed property and each purchased property for an initial period of
three years.
Beginning on December 4, 1999, the non-managing member units may be
exchanged for common stock or, at HCPI's option, for cash. The non-managing
member units will be exchangeable for common stock on a one to one basis
(subject to certain adjustments, such as stock splits and reclassifications) or
for an amount of cash equal to the then-current market value of the shares of
common stock into which the non-managing member units may be exchanged.
HCPI/Indiana relied on the exemption provided by Section 4(2) of the Securities
Act, in connection with the issuance and sale of the non-managing member units.
HCPI has agreed to provide registration rights with respect to the shares of
common stock for which the non-managing member units may be exchanged.
Boyer. On January 25, 1999, HCPI completed the acquisition of a managing
member interest in HCPI/Utah, LLC, a Delaware limited liability company
("HCPI/Utah"), in exchange for a cash contribution of approximately $18.9
million. In connection with this acquisition, several limited liability
companies and general partnerships affiliated with The Boyer Company, L.C.
("Boyer") contributed a portfolio of 14 medical office buildings (including two
ground lease holds associated therewith) to HCPI/Utah with an aggregate equity
value (net of assumed debt) of approximately $18.9 million. In exchange for
this capital contribution, the contributing entities received 593,249 non-
managing member units of HCPI/Utah. HCPI/Utah also issued 590,555 managing
member units to HCPI. HCPI/Utah was also granted the right to acquire five
additional medical office buildings. HCPI anticipates that the contribution of
these additional properties to HCPI/Utah will be completed prior to December 31,
1999. Although HCPI has a minority interest in HCPI/Utah as determined by the
number of outstanding membership units, the Amended and Restated Limited
Liability Company Agreement of HCPI/Utah provides that only HCPI is authorized
to act on behalf of HCPI/Utah and that HCPI has responsibility for the
management of its business. Beginning on January 25, 2000, the non-managing
member units may be exchanged for common stock or, at HCPI's option, for cash.
The non-managing member units will be exchangeable for common stock on a one to
one basis (subject to certain adjustments, such as stock splits and
reclassifications) or for an amount of cash equal to then-current market value
of the shares of common stock into which the non-managing member units may be
exchanged. HCPI/Utah 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 non-managing member units. HCPI has agreed to provide registration rights
with respect to the shares of common stock for which the non-managing member
units may be exchanged.
In connection with the contribution of properties to HCPI/Utah, HCPI
entered into a Future Projects Rights Agreement with Boyer. Under this
agreement HCPI obtained the right to purchase any health care facility which is
owned or ground leased by Boyer and is within two and one half miles of a health
care facility that has been acquired by HCPI/Utah from Boyer. In addition, HCPI
received a right of first offer to acquire any health care facility located in
the States of Arizona, Nevada or Utah which Boyer or any of its affiliates
proposes to sell. In return, HCPI has agreed that neither HCPI nor its
affiliates will act as or control any developer with respect to the development
of a heath care facility in Arizona, Nevada or Utah unless:
- HCPI engages Boyer or its affiliates as the developer; or
- At the time HCPI acquires the land on which the health care
facility is to be located or on or prior to the date HCPI or its
affiliate has committed to fund or pay the cost of development,
65% or more of the net rentable space in the health care facility
has been pre-leased to tenants for a minimum of five years.
HCPI has also provided Boyer with a right of first negotiation to act as
the manager, leasing agent and developer of certain development projects that
HCPI may undertake or fund or properties that HCPI may acquire within Arizona,
Nevada or Utah. Under a separate management agreement, HCPI has retained Boyer
to manage the properties contributed to HCPI/Utah by entities affiliated with
Boyer.
Cambridge. On November 21, 1997, HCPI 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
reclassifications) 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. HCPI has
agreed to provide certain registration rights with respect to the shares of
common stock for which the LLC Units may be exchanged.
Item 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data with respect to HCPI as of and
for the years ended December 31, 1998, 1997, 1996, 1995, and 1994.
Year Ended December 31,
1998 1997 1996 1995 1994
--------------------------------------------------------
(Amounts in thousands, except per share data)
Income Statement Data:
Total Revenue $161,549 $128,503 $120,393 $105,696 $98,996
Net Income Applicable to
Common Shares 78,635 63,542 60,641 80,266 49,977
Basic Earnings per Common Share 2.56 2.21 2.12 2.83 1.87
Diluted Earnings per Common Share 2.54 2.19 2.10 2.78 1.86
Balance Sheet Data:
Total Assets 1,356,612 940,964 753,653 667,831 573,826
Debt Obligations 709,045 452,858 379,504 299,084 271,463
Stockholders' Equity 595,419 442,269 336,806 339,460 269,403
Other Data:
Basic Funds From Operations (1) 96,255 83,442 80,517 72,911 65,274
Cash Flows From Operating
Activities 112,311 87,544 90,585 71,164 65,519
Cash Flows Used In Investing
Activities 417,524 205,238 104,797 80,627 61,383
Cash Flows Provided By (Used
In) Financing Activities 305,633 118,967 15,023 8,535 (24,418)
Dividends Paid 89,210 71,926 65,905 60,167 52,831
Dividends Paid Per Common Share 2.620 2.460 2.300 2.140 1.980
(1) HCPI believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. HCPI 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 HCPI 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.
1998 1997 1996 1995 1994
-------------------------------------------------------
Net Income Applicable to Common Shares $78,635 $63,542 $60,641 $80,266 $49,977
Real Estate Depreciation 29,577 22,667 20,700 16,691 15,829
Joint Venture Adjustments 2,096 (720) (824) (496) (532)
Gain on Sale of Real Estate Properties (14,053) (2,047) --- (23,550) ---
-------------------------------------------------------
$96,255 $83,442 $80,517 $72,911 $65,274
=======================================================
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Health Care Property Investors, Inc. (HCPI), including its wholly-owned
subsidiaries and affiliated joint ventures, acquires health care facilities and
generally leases them on a long-term basis to health care providers. On a more
limited basis, HCPI provides mortgage financing on health care facilities. As
of December 31, 1998, HCPI's portfolio of properties, including equity
investments, consisted of 332 facilities located in 42 states. These facilities
are comprised of 157 long-term care facilities, 84 congregate care and assisted
living facilities, 41 physician group practice clinics, 35 medical office
buildings, eight acute care hospitals, six freestanding rehabilitation
facilities, and one psychiatric care facility. The gross acquisition price of
the properties, which includes joint venture acquisitions, was approximately
$1,541,000,000 at December 31, 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Net Income applicable to common shares for the year ended December 31, 1998
totaled $78,635,000 or $2.54 per share on a diluted basis on revenue of
$161,549,000. This compares to Net Income applicable to common shares of
$63,542,000 or $2.19 per share on a diluted basis on revenue of $128,503,000 for
the corresponding period in 1997. Included in Net Income applicable to common
shares and earnings per share on a diluted basis for the years ended December
31, 1998 and 1997 is a Gain on Sale of Real Estate Properties of $14,053,000, or
$0.42 per share, and $2,047,000, or $0.07 per share, respectively.
Base Rental Income for the year ended December 31, 1998 increased by
$23,610,000 to $116,470,000. The majority of this increase was generated by
rents on $429,000,000 of new property acquisitions made in 1998 and a full year
of rents on $226,000,000 of property acquisitions made in 1997. These amounts
represent significant increases over the acquisition activity of prior years.
Additional Rental and Interest Income increased by $909,000 to $21,969,000 from
the prior year; Interest and Other Income for the year ended December 31, 1998
increased by $8,527,000 to $23,110,000. The increase in Interest and Other
Income was due in part to new loans made during 1998 and late 1997, and due to
an increase in facility operating income related to medical office buildings
that are leased on a gross or modified gross basis. There was $5,053,000 in
related Facility Operating Expenses during the year ended December 31, 1998, a
$4,891,000 increase over 1997. Facility Operating Expenses include property
taxes, insurance and other facility related operating expenses that HCPI is
responsible for under gross or modified gross leases. Since November 1997, HCPI
has acquired 23 medical office buildings and multiple clinics that are leased on
a gross or modified gross basis.
Interest Expense for the year ended December 31, 1998 increased by
$7,928,000 to $36,753,000. The increase is primarily the result of an increase
in short-term borrowings used to fund the acquisitions made during 1998 and
interest related to the June 1998 issuance of MandatOry Par Put Remarketed
Securities (MOPPRS) senior debt, described in more detail below in the
"LIQUIDITY AND CAPITAL RESOURCES" section. The increase in Depreciation/Non
Cash Charges of $6,867,000 to $32,523,000 for the year ended December 31, 1998,
is directly related to the new investments discussed above.
HCPI believes that Funds From Operations (FFO) is the most important
supplemental measure of operating performance. (See Note 10 to the Consolidated
Financial Statements)
FFO for the year ended December 31, 1998 increased by $12,813,000 to
$96,255,000. The increase is mainly attributable to increases in Base Rental
Income and Interest and Other Income, as offset by increases in Interest Expense
and Facility Operating Expenses, which are discussed in more detail above.
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 $2.19 per share on a diluted basis on revenue of
$128,503,000. This compares to Net Income applicable to common shares of
$60,641,000 or $2.10 per 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 a Gain on Sale of Real Estate Properties of
$2,047,000 or $0.07 per share of common stock on a diluted basis. Net Income
applicable to common shares for the year ended December 31, 1996 included
$2,061,000 or $0.07 per share on a diluted basis 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
$9,158,000 to $92,860,000. The majority of this increase was generated by rents
on $226,000,000 of new property acquisitions made in 1997 and a full year of
rents on $117,000,000 of property acquisitions made in 1996. Higher Additional
Rental and Interest Income from the existing portfolio also assisted 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
$1,183,000 to $14,583,000, due in part to the pay-down or payoff of certain
mortgage loans.
Interest Expense for the year ended December 31, 1997 increased by
$2,424,000 to $28,825,000. The increase in Interest Expense is directly related
to HCPI's higher borrowing levels resulting from the increase in new investment
activity. The increase in Depreciation/Non Cash Charges of $2,507,000 to
$25,656,000 for the year ended December 31, 1997, is related to the new
investments discussed above.
FFO for the year ended December 31, 1997, increased $2,925,000 from the
prior year. The increase is attributable to increases in Base Rental Income and
Additional Rental and Interest Income, and offset by increases in Interest
Expense and Other Expenses and decreases in Interest and Other Income all of
which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
HCPI has financed acquisitions through the sale of common and preferred
stock, issuance of long-term debt, assumption of mortgage debt, 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 its 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, including Medium Term Notes
(MTNs), or with equity offerings.
MTN FINANCINGS
The following table summarizes the MTN financing activities during 1997 and
1998:
Amount
Date Maturity Coupon Rate Issued/(Redeemed)
- --------------------------------------------------------------------------
March/April 1997 10 years 7.30% - 7.62% $20,000,000
June 1997 --- 10.20% - 10.30% (12,500,000)
February 1998 --- 9.88% (10,000,000)
March 1998 5 years 6.66% 20,000,000
April-November 1998 --- 6.10% - 9.70% (17,500,000)
November 1998 3-8 years 7.30% - 7.88% 28,000,000
OTHER SENIOR DEBT OFFERING
During June 1998, HCPI issued $200 million of 6.875% MandatOry Par Put
Remarketed Securities ("MOPPRS") due June 8, 2015 which are subject to mandatory
tender on June 8, 2005. HCPI received total proceeds of approximately
$203,000,000 (including the present value of a put option associated with the
debt) which was used to repay borrowings under HCPI's revolving lines of credit.
The weighted average cost of the debt including the amortization of the option
and offering expenses is 6.77%. The MOPPRS are senior, unsecured obligations of
HCPI.
Equity Offerings
Since September 1997, HCPI has completed four equity offerings, summarized
in the table below:
Shares Equity
Date Issuance Issued Raised Net Proceeds
- -----------------------------------------------------------------------------------------------
September 1997 7-7/8% Series A Cumulative 2,400,000 $ 60,000,000 $ 57,810,000
Redeemable Preferred Stock
December 1997 Common Stock at $38.3125/share 1,437,500 $ 55,000,000 $ 51,935,000
April 1998 Common Stock at $33.2217/share 698,752 $ 23,200,000 $ 23,000,000
to a Unit Investment Trust
September 1998 8.70% Series B Cumulative 5,385,000 $135,000,000 $130,000,000
Redeemable Preferred Stock
HCPI used the net proceeds from the equity offerings to pay down or pay off
short-term borrowings under its revolving lines of credit. HCPI invested any
excess funds in short-term investments until they were needed for acquisitions
or development.
At December 31, 1998, stockholders' equity totaled $595,419,000 and the
debt to equity ratio was 1.19 to 1.00. For the year ended December 31, 1998,
FFO (before interest expense) covered Interest Expense 3.62 to 1.00.
AVAILABLE FINANCING SOURCES
During June 1998, HCPI registered $600,000,000 of debt and equity
securities under a shelf registration statement filed with the Securities and
Exchange Commission. As of December 31, 1998 HCPI had $490,280,000 remaining on
shelf filings for future financings. Of that amount, HCPI had approximately
$174,905,000 available under MTN senior debt programs. These amounts may be
issued from time to time in the future based on HCPI's needs and then existing
market conditions. On September 30, 1998 HCPI renegotiated its lines of credit
with a group of seven banks. HCPI has two revolving lines of credit, one for
$135,000,000 that expires on September 30, 2003 and one for $45,000,000 that
expires on September 30, 1999. As of December 31, 1998, HCPI had $92,000,000
available on these lines of credit. Since 1986 the debt rating agencies have
rated HCPI's Senior Notes and Convertible Subordinated Notes investment grade.
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, HCPI has recorded approximately $690,469,000
in cumulative FFO. Of this amount, HCPI has distributed a total of $578,872,000
to stockholders as dividends on common stock. HCPI has retained the balance of
$111,597,000 and used it as an additional source of capital.
On November 20, 1998, HCPI paid a dividend of $0.67 per common share or
$20,761,000 in the aggregate. Total dividends paid during the year ended
December 31, 1998, as a percentage of FFO, was 84%. During the first quarter of
1999, HCPI declared and paid a dividend of $0.68 per common share or
approximately $21,072,000 in the aggregate.
LETTERS OF CREDIT
At December 31, 1998, HCPI held approximately $41,000,000 in irrevocable
letters of credit from commercial banks to secure the obligations of many
lessees' lease and borrowers' loan obligations. HCPI may draw upon the letters
of credit if there are any defaults under the leases and/or loans. Amounts
available under letters of credit could change based upon facility operating
conditions and other factors and such changes may be material.
FACILITY ROLLOVERS
HCPI has concluded a significant number of "facility rollover" transactions
in 1995, 1996, 1997 and 1998 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. The annualized impact was to increase
FFO in 1995 by $900,000 and decrease FFO in each of the years 1996 through 1998
by $1,200,000, $1,600,000 and $3,100,000. Total rollovers were 20 facilities,
20 facilities, 12 facilities and 44 facilities in each of the years 1995 - 1998.
For the year ending December 31, 1999, HCPI has 23 facilities that are
subject to lease expiration and mortgage maturities. These facilities currently
represent approximately 8% of annualized revenues. For the year ended December
31, 2000, HCPI has seven facilities that are subject to lease expiration and
mortgage maturities. These facilities currently represent approximately 5% of
annualized revenue.
During 1997, HCPI reached agreement with Tenet Healthcare Corporation
(Tenet) (the holder of substantially all the option rights of the Vencor, Inc.
(Vencor) leases) whereby Tenet agreed to waive renewal and purchase options, and
related rights of first refusal, on up to 51 facilities. As part of these
agreements, HCPI has the right to continue to own the facilities. HCPI paid
Tenet $5,000,000 in cash, accelerated the purchase option on two acute care
hospitals leased to Tenet, and reduced Tenet's guarantees on the facilities
leased to Vencor. Leases on 20 of those 51 facilities had expiration dates
through December 31, 2000. HCPI has increased rents on five of the facilities
with leases that have already expired during 1998, and believes it will be able
to increase rents on other facilities whose lease terms expire through 2001.
However, there can be no assurance that HCPI will be able to realize any
increased rents on future rollovers. HCPI 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 HCPI's liquidity and sources of capital are
adequate to finance its operations as well as its future investments in
additional facilities.
YEAR 2000 ISSUE
The Year 2000 issue is the result of widely used computer programs that
identify the year by two digits, rather than by four. It is believed that
continued use of these programs may result in widespread computer-generated
malfunctions and miscalculations beginning in the year 2000, when the digits
"00" are interpreted as "1900." Those miscalculations could cause disruption of
operations including the temporary inability to process transactions such as
invoices for payment. Those computer programs that identify the year based on
all four digits are considered "Year 2000 compliant." The statements in the
following section include "Year 2000 readiness disclosure" within the meaning of
the Year 2000 Information and Readiness Disclosure Act of 1998.
STATUS OF YEAR 2000 ISSUES WITH HCPI'S OWN INFORMATION TECHNOLOGY SYSTEMS AND
NON-IT SYSTEMS
HCPI's primary use of information technology ("IT") is in its financial
accounting systems, billing and collection systems and other information
management software. HCPI's operations are conducted out of its corporate
offices in Newport Beach, California where it uses and is exposed to non-IT
systems such as those contained in embedded micro-processors in telephone and
voicemail systems, elevators, heating, ventilation and air conditioning (HVAC)
systems, lighting timers, security systems, and other property operational
control systems.
HCPI believes that it does not have significant exposure to Year 2000
issues with respect to its own accounting and information software systems or
with respect to non-IT systems contained in embedded chips used in its corporate
offices. HCPI has been working with its computer consultants to test and
continually upgrade its management information systems and has reasonable
assurance from its vendors and outside computer consultants that HCPI's
financial and other information systems are Year 2000 compliant. The cost to
bring the management information systems into Year 2000 compliance has not been
material. While any disruption in services at HCPI's corporate offices due to
failure of non-IT systems may be inconvenient and disruptive to normal day-to-
day activities, it is not expected to have a material adverse effect on HCPI's
financial performance or operations.
EXPOSURE TO THIRD PARTIES' YEAR 2000 ISSUES
Because HCPI believes its own accounting and information systems are
substantially Year 2000 compliant, HCPI does not feel there will be material
disruption to its transaction processing on January 1, 2000. However, HCPI
depends upon its tenants for rents and cash flows, its financial institutions
for availability of working capital and capital markets financing and its
transfer agent to maintain and track investor information. If HCPI's primary
lessees and mortgagors are not Year 2000 compliant, or if they face disruptions
in their cash flows due to Year 2000 issues, HCPI could face significant
temporary disruptions in its cash flows after that date. These disruptions
could be exacerbated if the commercial banks that process HCPI's cash receipts
and disbursements and its lending institutions are not Year 2000 compliant.
Furthermore, to the extent there are broad market disruptions as a result of
widespread Year 2000 issues, HCPI's access to the capital markets to raise cash
for investing activity could be impaired.
To address this concern, during the second quarter of 1998, HCPI commenced
a written survey of all of its major tenants, Bank of New York in its capacity
as agent under HCPI's credit facilities, and as common stock Transfer Agent and
Trustee under its senior debt indenture, each other lender under HCPI's credit
facility, its primary investment banker for HCPI's capital raising activities,
and HCPI's independent public accountants and primary outside legal counsel.
The survey asked each respondent to assess its exposure to Year 2000 issues and
asked what preparations each has made to deal with the Year 2000 issue with
respect to both information technology and non-IT systems. In addition HCPI
asked each respondent to inform it about their exposure to third party vendors,
customers and payers who may not be Year 2000 compliant.
Through this process HCPI has been informed in writing by approximately 95%
of those surveyed that they believe that they have computer systems that are or
will be Year 2000 compliant by the end of 1999. All continue to assess their
own exposure to the issue. However neither HCPI nor its lessees and mortgagors
can be assured that the federal and state governments, upon which they rely for
Medicare and Medicaid revenue, will be in compliance in a timely manner.
HCPI is in the process of assessing its exposure to failures of embedded
microprocessors contained in elevators, electrical and HVAC systems, security
systems and the breakdown of other non-IT systems due to the Year 2000 issue at
the properties operated by its tenants. Under a significant portion of its
leases, HCPI is not responsible for the cost to repair such items and is
indemnified by the tenants for losses caused by their operations on the
property. For the medical office buildings where HCPI may be responsible for
repairing such items, HCPI does not believe that the costs of repair will be
material to HCPI and any such costs will be expensed as incurred.
RISKS TO HCPI OF YEAR 2000 ISSUES
HCPI's exposure to the Year 2000 issue depends primarily on the readiness
of its significant tenants and commercial banks, who in turn, are dependent upon
suppliers, payers and other external parties, all of which is outside HCPI's
control. HCPI believes the most reasonably likely worst case scenario faced by
HCPI as a result of the Year 2000 issue is the possibility that reimbursement
delays caused by a failure of federal and state welfare programs responsible for
Medicare and Medicaid could adversely affect its tenants' cash flow, resulting
in their temporary inability to meet their obligations under its leases.
Depending upon the severity of any reimbursement delays and the financial
strength of any particular operator, the operations of HCPI's tenants could be
materially adversely affected, which in turn could have a material adverse
effect on its results of operations.
In September 1998, the General Accounting Office reported that the Health
Care Financing Administration ("HCFA"), which runs Medicare, is behind schedule
in taking steps to deal with the Year 2000 issue and that it is highly unlikely
that all of the Medicare systems will be compliant in time to ensure the
delivery of uninterrupted benefits and services into the year 2000. The General
Accounting Office also reported in November 1998 that, based upon its survey of
the states, the District of Columbia and three territories, less than 16% of the
automated systems used by state and local government to administer Medicaid are
reported to be Year 2000 compliant. HCPI does not know at this time whether
there will in fact be a disruption of Medicare or Medicaid reimbursements to its
lessees and mortgagors and HCPI is therefore unable to determine at this time
whether the Year 2000 issue will have a material adverse effect on HCPI or its
future operations.
CONTINGENCY PLANS
If there are severe disruptions in HCPI's cash flow as a result of
disruptions in its tenant's or mortgagor's cash flow, HCPI may be forced to slow
its investment activity, or seek additional liquidity from its lenders.
Readers are cautioned that most of the statements contained in the "Year
2000 Issue" paragraphs are forward looking and should be read in conjunction
with HCPI's disclosures under the heading "CAUTIONARY LANGUAGE REGARDING FORWARD
LOOKING STATEMENTS" set forth below.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Annual Report 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 HCPI 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, HCPI, through its senior management, from
time to time makes forward looking oral and written public statements concerning
HCPI's expected future operations and other developments. Shareholders and
investors are cautioned that, while forward looking statements reflect HCPI'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:
(a) 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 HCPI's lessees;
(b) Changes in the reimbursement available to HCPI's lessees and mortgagors by
governmental or private payors, including changes in Medicare and Medicaid
payment levels and the availability and cost of third party insurance
coverage;
(c) Competition for lessees and mortgagors, including with respect to new
leases and mortgages and the renewal or rollover of existing leases;
(d) Competition for the acquisition and financing of health care facilities;
(e) The ability of HCPI's lessees and mortgagors to operate HCPI's properties
in a manner sufficient to maintain or increase revenues and to generate
sufficient income to make rent and loan payments;
(f) Changes in national or regional economic conditions, including changes in
interest rates and the availability and cost of capital to HCPI; and
(g) General uncertainty inherent in the Year 2000 issue, particularly the
uncertainty of the Year 2000 readiness of third parties who are material to
HCPI's business, such as public or private healthcare reimbursers, over
whom HCPI has no control with the result that HCPI cannot ensure its
ability to timely and cost-effectively avert or resolve problems associated
with the Year 2000 issue that may affect its operations and business.
Item 7a. DISCLOSURES ABOUT MARKET RISK
HCPI is exposed to market risks related to fluctuations in interest rates
on its mortgage loans receivable and on its debt instruments. The following
discussion and table presented below are provided to address the risks
associated with potential changes in HCPI's interest rate environment.
HCPI provides mortgage loans to operators of healthcare facilities in the
normal course of business. All of the mortgage loans receivable have fixed
interest rates or interest rates with periodic fixed increases. Therefore, the
mortgage loans receivable are all considered to be fixed rate loans, and the
current interest rate (the lowest rate) is used in the computation of market
risk provided in the table below if material.
HCPI generally borrows on its short-term bank lines of credit to complete
acquisition transactions. These borrowings are then repaid using proceeds from
subsequent long-term debt and equity offerings. HCPI may also assume mortgage
notes payable already in place as part of an acquisition transaction. Currently
HCPI has two mortgage notes payable with variable interest rates and the
remaining mortgage notes payable have fixed interest rates or interest rates
with fixed periodic increases. HCPI's senior notes and convertible debt are at
fixed rates. The variable rate loans are at interest rates below the current
prime rate of 7.75%, and fluctuations are tied to the prime rate or to a rate
currently below the prime rate.
Fluctuation in the interest rate environment will not impact HCPI's future
earnings and cash flows on its fixed rate debt until that debt matures and must
be replaced or refinanced. Interest rate changes will affect the fair value of
the fixed rate instruments. Conversely, changes in interest rates on variable
rate debt would change the future earnings and cash flows of HCPI, but not
affect the fair value on those instruments. Assuming a one percentage point
increase in the interest rate related to the variable rate debt including the
mortgage notes payable and the bank lines of credit, and assuming no change in
the outstanding balance as of year end, interest expense for the coming year
would increase by approximately $947,000. Approximately 50% of the increase in
interest expense related to the bank lines of credit, or $440,000, would be
capitalized into construction projects.
The principal amount and the average interest rates for the mortgage loans
receivable and debt categorized by the final maturity dates is presented in the
table below. Certain of the mortgage loans receivable and certain of the debt
securities, excluding the convertible debentures, require periodic principal
payments prior to the final maturity date. The fair value estimates for the
mortgage loans receivable are based on the estimates of management and on rates
currently prevailing for comparable loans. The fair market value estimates for
debt securities are based on discounting future cash flows utilizing current
rates offered to HCPI for debt of the same type and remaining maturity.
|----------------------------------Maturity---------------------------------------|
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
-----------------------------------------------------------------------------------
ASSETS
Mortgage Loans Receivable $18,295 $ 2,501 $ 118,637 $139,432 $148,000
13.03% 10.17% 9.84% 10.27%
LIABILITIES
Variable Rate Debt:
Bank Notes Payable 88,000 88,000 88,000
Weighted Average Interest Rate 5.90% 5.90%
Mortgage Notes Payable 1,679 5,006 6,685 4,838
Weighted Average Interest Rate 5.87% 5.75% 5.78%
Fixed Rate Debt:
Senior Notes Payable 15,000 10,000 13,000 17,000 31,000 413,162 499,162 480,278
Weighted Average Interest Rate 9.98% 8.87% 7.88% 8.40% 7.09% 6.90% 7.15%
Convertible Subordinated Notes Payable 100,000 100,000 99,234
Weighted Average Interest Rate 6.00% 6.00%
Mortgage Notes Payable 505 302 1,225 13,166 15,198 16,650
Weighted Average Interest Rate 8.91% 9.00% 9.00% 8.65% 8.71%
HCPI does not believe that the future market rate risks related to the
above securities will have a material impact on HCPI or the results of its
future operations. Readers are cautioned that most of the statements contained
in these "Disclosures about Market Risk" paragraphs are forward looking and
should be read in conjunction with HCPI's disclosures under the heading
"Cautionary Language Regarding Forward Looking Statements" set forth above.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HCPI's Consolidated Balance Sheets as of December 31, 1998 and 1997 and its
Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for the
years ended December 31, 1998, 1997 and 1996, 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 HCPI were as follows on March 18, 1998:
Name Age Position
- ----------------- ------ ----------------------------------------------------
Kenneth B. Roath 63 Chairman, President and Chief Executive Officer
James G. Reynolds 47 Executive Vice President and Chief Financial Officer
Devasis Ghose 45 Senior Vice President - Finance and Treasurer
Edward J. Henning 46 Senior Vice President, General Counsel and Corporate Secretary
Stephen R. Maulbetsch 42 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
April 28, 1999.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption
"Executive Compensation" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on April 28, 1999.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the
captions "Principal Stockholders" and "Board of Directors and Officers" in the
Registrant's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on April 28, 1999.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption
"Certain Transactions" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on April 28, 1999.
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, 1998 and 1997
Consolidated Statements of Income - for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity - for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - for the years ended December
31, 1998, 1997 and 1996
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 November 5, 1998, HCPI filed a Report on Form 8-K with the
Securities and Exchange Commission regarding the acquisition of assets
with an aggregate purchase price of $108.3 million as required under
Rule 3-14 of Regulation S-X.
c) Exhibits:
3.1 Articles of Restatement of HCPI./1
3.2 Amendment and Restated Bylaws of HCPI./2
3.3 Articles Supplementary of HCPI 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 HCPI
and Manufacturers Hanover Trust Company of California, as
Rights Agent./4
4.2 Indenture dated as of September 1, 1993 between HCPI 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 HCPI 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
HCPI and Cambridge Medical Center of San Diego, LLC./7
4.7 First Amendment to Rights Agreement dated as of January 28, 1999
between HCPI and The Bank of New York.
4.8 Registration Rights Agreement dated November 20, 1998 between
HCPI and James D. Bremner./8
4.9 Registration Rights Agreement dated January 20, 1999 between HCPI
and Boyer Castle Dale Medical Clinic, LLC./9
10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership
Agreement of Health Care Property Partners, a California general
partnership, the general partners of which consist of HCPI and
certain affiliates of Tenet./10
10.2 Amended and Restated Limited Liability Company Agreement dated
November 21, 1997 of Cambridge Medical Properties, LLC./7
10.3 Health Care Property Investors, Inc. Second Amended and Restated
Directors Stock Incentive Plan./11*
10.4 Health Care Property Investors, Inc. Second Amended and Restated
Stock Incentive Plan./11*
10.5 Health Care Property Investors, Inc. Second Amended and Restated
Directors Deferred Compensation Plan./12*
10.6 Employment Agreement dated April 28, 1988 between HCPI and
Kenneth B. Roath./13*
10.7 First Amendment to Employment Agreement dated February 1, 1990
between HCPI and Kenneth B. Roath./14*
10.8 Health Care Property Investors, Inc. Executive Retirement
Plan./15*
10.9 Amendment No. 1 to Health Care Property Investors, Inc. Executive
Retirement Plan./16*
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./17
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./17
10.12 Stock Transfer Agency Agreement between Health Care Property
Investors, Inc. and The Bank of New York dated as of July 1,
1996./18
10.13 Amended and Restated $45,000,000 Revolving Credit Agreement dated
as of October 22, 1997 and amended and restated as of September
30, 1998 among Health Care Property Investors, Inc., the banks
named herein and The Bank of New York and BNY Capital Markets,
Inc./19
10.14 Amended and Restated $135,000,000 Revolving Credit Agreement
dated as of October 22, 1997 and amended and restated as of
September 30, 1998 among Health Care Property Investors, Inc.,
the banks named herein and The Bank of New York and BNY Capital
Markets, Inc./19
10.15 Amended and Restated Limited Liability Company Agreement dated
November 20, 1998 of HCPI/Indiana, LLC.
10.16 Amended and Restated Limited Liability Company Agreement dated
January 20, 1999 of HCPI/Utah, LLC.
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
HCPI'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 HCPI's Quarterly Report on Form 10-Q for the period
ended June 30, 1996.
3. This exhibit is incorporated by reference to HCPI'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 HCPI's
Form 8-A filed with the Commission on July 17, 1990.
5. This exhibit is incorporated by reference to exhibit 4.1 to
HCPI'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 HCPI's Registration Statement on Form
S-3 dated March 20, 1989.
7. These exhibits are incorporated by reference to exhibits 4.6 and
10.2, respectively, in HCPI's Annual Report on Form 10-Q for the
year ended December 31, 1997.
8. This exhibit is identical in all material respects to two other
documents except the parties thereto. The parties to these other
documents, other than HCPI, were James P. Revel and Michael F.
Wiley.
9. This exhibit is identical in all material respects to 14 other
documents except the parties thereto. The parties to these other
documents, other than HCPI, were Centerville, LLC, Elko, LLC,
Desert Springs, LLC, Grantsville, LLC, Ogden, LP, Ogden II, LP,
SLIC, LP, Springville, LLC, SM I, LP, SM II, LP, SM II-Mckay, LP,
Desert Spings, LLC, Iomege, LLC and Primary, LLC.
10. This exhibit is incorporated by reference to exhibit 10.1 in
HCPI's Annual Report on Form 10-K for the year ended December 31,
1985.
11. These exhibits are incorporated by reference to exhibits 10.43
and 10.44, respectively, in HCPI's Quarterly Report on Form 10-Q
for the period ended March 31, 1997.
12. This exhibit is incorporated by reference to exhibit number 10.45
in HCPI's Quarterly Report on Form 10-Q for the period ended
September 30, 1997.
13. This exhibit is incorporated by reference to exhibit 10.27 in
HCPI's Annual Report on Form 10-K for the year ended December 31,
1988.
14. This exhibit is incorporated by reference to Appendix B of HCPI's
Annual Report on Form 10-K for the year ended December 31, 1990.
15. This exhibit is incorporated by reference to exhibit 10.28 in
HCPI's Annual Report on Form 10-K for the year ended December 31,
1987.
16. This exhibit is incorporated by reference to exhibit 10.39 in
HCPI's Annual Report on Form 10-K for the year ended December 31,
1995.
17. These exhibits are incorporated by reference to exhibit numbers
10.37 and 10.38, respectively, in HCPI's Quarterly Report on Form
10-Q for the period ended September 30, 1997.
18. This exhibit is incorporated by reference to exhibit 10.40 in
HCPI's Quarterly Report on Form 10-Q for the period ended
September 30, 1996.
19. These exhibits are incorporated by reference to exhibit numbers
10.1 and 10.2, respectively, in HCPI's Quarterly Report on Form
10-Q for the period ended September 30, 1998.
* 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
No. 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 Securities Act
of 1933 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 29, 1999
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
March 29, 1999 /S/ Kenneth B. Roath
-----------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
March 29, 1999 /S/ James G. Reynolds
-----------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
March 29, 1999 /S/ Devasis Ghose
--------------------------------------------
Devasis Ghose, Senior Vice President- Finance
and Treasurer (Principal Accounting Officer)
March 29, 1999 /S/ Paul V. Colony
--------------------------------------------
Paul V. Colony, Director
March 29, 1999 /S/ Robert R. Fanning
--------------------------------------------
Robert R. Fanning, Jr., Director
March 29, 1999 /S/ Michael D. McKee
--------------------------------------------
Michael D. McKee, Director
March 29, 1999 /S/ Orville E. Melby
--------------------------------------------
Orville E. Melby, Director
March 29, 1999 /S/ Harold M. Messmer, Jr.
--------------------------------------------
Harold M. Messmer, Jr., Director
March 29, 1999 /S/ Peter L. Rhein
--------------------------------------------
Peter L. Rhein, Director
EXHIBIT INDEX
EXHIBIT INDEX
- -------------------------
Ex. 4.7 First Amendment to Rights Agreement dated as of January 28, 1999
between HCPI and The Bank of New York.
Ex. 4.8 Registration Rights Agreement dated November 20, 1998 between HCPI and
James D. Bremner.
Ex. 4.9 Registration Rights Agreement dated January 20, 1999 between HCPI and
Boyer Castle Dale Medical Clinic, LLC.
Ex.10.15 Amended and Restated Limited Liability Company Agreement dated
November 20,1998 of HCPI/Indiana, LLC.
Ex.10.16 Amended and Restated Limited Liability Company Agreement dated January
20, 1999 of HCPI/Utah, 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
Consolidated Balance Sheets - as of December 31, 1998 and 1997
Consolidated Statements of Income -
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -
for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care
Property Investors, Inc. (a Maryland corporation) as of December 31, 1998 and
1997, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1998. 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, 1998 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Orange County, California
January 19, 1999
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
-------------------------
1998 1997
----------- ----------
ASSETS
Real Estate Investments
Buildings and Improvements $1,143,077 $ 837,857
Accumulated Depreciation (190,941) (170,502)
--------- ---------
952,136 667,355
Construction in Progress 26,938 19,627
Land 152,045 99,520
--------- ---------
1,131,119 786,502
Loans Receivable 154,363 125,381
Investments in and Advances to Joint Ventures 54,478 14,241
Other Assets 12,148 10,756
Cash and Cash Equivalents 4,504 4,084
--------- ---------
TOTAL ASSETS $1,356,612 $ 940,964
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 88,000 $ 66,900
Senior Notes Payable 499,162 275,023
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 21,883 10,935
Accounts Payable, Accrued Expenses and Deferred Income 28,758 23,492
Minority Interests in Joint Ventures 23,390 22,345
Commitments
Stockholders' Equity:
Preferred Stock, $1.00 par value:
Authorized_50,000,000 shares;
7,785,000 and 2,400,000 shares outstanding as of
December 31, 1998 and 1997. 187,847 57,810
Common Stock, $1.00 par value; 100,000,000
shares authorized; 30,987,536 and 30,216,319
outstanding as of December 31, 1998 and 1997. 30,987 30,216
Additional Paid-In Capital 433,309 408,924
Cumulative Net Income 531,926 444,759
Cumulative Dividends (588,650) (499,440)
--------- ---------
Total Stockholders' Equity 595,419 442,269
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,356,612 $ 940,964
========== ==========
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,
--------------------------------------
1998 1997 1996
--------- --------- ---------
REVENUE
Base Rental Income $ 116,470 $ 92,860 $ 83,702
Additional Rental and Interest Income 21,969 21,060 20,925
Interest and Other Income 23,110 14,583 15,766
--------- --------- ---------
161,549 128,503 120,393
--------- --------- ---------
EXPENSES
Interest Expense 36,753 28,825 26,401
Depreciation/Non Cash Charges 32,523 25,656 23,149
Other Expenses 8,566 7,414 6,826
Facility Operating Expenses 5,053 162 ---
--------- --------- ---------
82,895 62,057 56,376
--------- --------- ---------
INCOME FROM OPERATIONS 78,654 66,446 64,017
Minority Interests (5,540) (3,704) (3,376)
Gain on Sale of Real Estate Properties 14,053 2,047 ---
--------- --------- ---------
NET INCOME $ 87,167 $ 64,789 $ 60,641
DIVIDENDS TO PREFERRED STOCKHOLDERS 8,532 1,247 ---
--------- --------- ---------
NET INCOME APPLICABLE TO COMMON SHARES $ 78,635 $ 63,542 $ 60,641
========= ========= =========
BASIC EARNINGS PER COMMON SHARE $ 2.56 $ 2.21 $ 2.12
========= ========= =========
DILUTED EARNINGS PER COMMON SHARE $ 2.54 $ 2.19 $ 2.10
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 30,747 28,782 28,652
========= ========= =========
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, 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
Issuance of Preferred Stock, Net 5,385 130,037 130,037
Issuance of Common Stock, Net 731 731 23,513 24,244
Exercise of Stock Options 40 40 872 912
Net Income 87,167 87,167
Dividends Paid - Preferred Shares (8,532) (8,532)
Dividends Paid - Common Shares (80,678) (80,678)
- --------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 1998 7,785 $187,847 30,987 $30,987 $433,309 $531,926 $(588,650) $595,419
==========================================================================================================================
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,
--------------------------------------
1998 1997 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 87,167 $ 64,789 $ 60,641
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 29,577 22,667 20,700
Non Cash Charges 2,946 2,989 2,449
Joint Venture Adjustments 2,096 (720) (824)
Gain on Sale of Real Estate Properties (14,053) (2,047) ---
Changes in:
Operating Assets (806) (2,457) (973)
Operating Liabilities 5,384 2,323 8,592
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 112,311 87,544 90,585
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (411,722) (200,032) (115,308)
Proceeds from Sale of Real Estate Properties 21,538 8,624 ---
Advances Repaid by Joint Ventures --- --- 4,465
Other Investments and Loans (27,340) (13,830) 6,046
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES (417,524) (205,238) (104,797)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable 21,100 66,900 (31,700)
Repayment of Senior Notes (27,500) (12,500) ---
Issuance of Senior Notes 251,469 19,876 113,329
Cash Proceeds from Issuing Preferred Stock 130,037 57,810 ---
Cash Proceeds from Issuing Common Stock 23,871 53,667 1,536
Increase in Minority Interests 201 5,500 ---
Periodic Payments on Mortgages (1,107) (1,030) (1,324)
Dividends Paid (89,210) (71,926) (65,905)
Other Financing Activities (3,228) 670 (913)
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 305,633 118,967 15,023
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 420 1,273 811
Cash and Cash Equivalents, Beginning of Period 4,084 2,811 2,000
--------- --------- ---------
Cash and Cash Equivalents, End of Period $ 4,504 $ 4,084 $ 2,811
========= ========= =========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 36,292 $ 29,065 $ 23,734
========= ========= =========
Capitalized Interest $ 1,800 $ 1,469 $ 1,017
========= ========= =========
Mortgages Assumed on Acquired Properties $ 12,715 $ --- $ ---
========= ========= =========
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., a Maryland corporation, was organized
in March 1985 to qualify as a real estate investment trust (REIT). Health Care
Property Investors, Inc. and its affiliated subsidiaries and partnerships (HCPI)
were organized to invest in health care related properties located throughout
the United States. As of December 31, 1998, HCPI owns interests in 332
properties located in 42 states. The properties include 157 long-term care
facilities, 84 congregate care and assisted living centers, 41 physician group
practice clinics, 35 medical office buildings (MOBs), eight acute care
hospitals, six rehabilitation hospitals and one psychiatric facility. As of
December 31, 1998, HCPI provided mortgage loans or leased these properties to 84
health care operators and to 188 tenants in the multi-tenant buildings.
(2) SIGNIFICANT ACCOUNTING POLICIES
Real Estate:
HCPI 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. HCPI periodically evaluates its
investments in real estate for potential impairment by comparing its investment
to the expected future cash flows to be generated from the properties. If such
impairments were to occur, HCPI would write down its investment in the property
to estimated market value. HCPI 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 and joint ventures in
which HCPI may serve as the managing member. However, since the other members
in these joint ventures have significant voting rights relative to acquisition,
sale and refinancing of assets, HCPI accounts for these investments using the
equity method of accounting. The accounting policies of these members 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:
HCPI 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, HCPI is not taxed on
its income that is distributed to stockholders. At December 31, 1998, the tax
bases of HCPI's net assets and liabilities are less than the reported amounts by
approximately $32,000,000. 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, bases 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. HCPI has certain financing leases that allow HCPI to "put" the
facilities to the lessees at lease termination for an amount greater than HCPI's
initial investment. These amounts are accreted to Additional Rental and
Interest Income over the lease term. In addition, HCPI 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 and 1998, HCPI purchased 90 - 100 percent ownership interests
in 23 MOBs which are operated by independent property management companies on
behalf of HCPI. These facilities are leased to multiple tenants under gross,
modified gross or triple net leases. Operating income other than basic rental
income attributable to these properties is recorded under Interest and Other
Income on HCPI's books. Expenses related to the operation of these facilities
are recorded as Facility Operating Expenses.
During 1998 HCPI purchased several physician group practice clinics which
are leased on a modified gross basis to several tenants. The property taxes and
any other related operating expenses that HCPI is responsible for are included
in Facility Operating Expenses.
Reclassification:
Reclassifications have been made for comparative financial statement
presentation.
Use Of Estimates In The Preparation Of Financial Statements:
Management is required to make estimates and assumptions in the preparation
of financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions 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
HCPI was organized to make long-term equity-oriented investments
principally in operating, income-producing health care related properties.
HCPI's equity investments have generally been structured as land and building
leasebacks.
Under the terms of the lease agreements, HCPI earns fixed monthly Base
Rental Income and may earn periodic Additional Rental Income. At December 31,
1998, minimum future rental income from 305 non-cancelable operating leases is
expected to be approximately $147,000,000 in 1999, $139,000,000 in 2000,
$128,000,000 in 2001, $121,000,000 in 2002, $117,000,000 in 2003 and
$726,000,000 in the aggregate thereafter.
During 1998, HCPI purchased and leased or agreed to construct 100
facilities for an aggregate investment of approximately $429,000,000. These
facilities include 13 assisted living facilities, 16 MOBs, 38 physician group
practice clinics and 33 long-term care facilities. Twenty-eight different
lessees operate 84 of these facilities and the 16 MOBs are multi-tenant.
Seven of the MOBs were acquired through the acquisition of a majority interest
in a limited liability company in which the non-managing member purchased 89,452
non-managing member units. These units are convertible into HCPI common stock
on a one-for-one basis beginning in December 1999.
HCPI sold six facilities and a partnership interest in another facility
during 1998, resulting in a gain of $14,053,000.
The following tabulation lists HCPI's total Real Estate Investments at
December 31, 1998 (dollar amounts in thousands):
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE FACILITIES
California 14 $ 5,782 $ 24,148 $ 29,930 $ 11,265 $ ---
Florida 8 4,680 26,170 30,850 7,476 ---
Indiana 20 4,645 81,754 86,399 11,232 ---
Maryland 3 1,287 20,627 21,914 6,840 ---
Massachusetts 5 1,587 16,872 18,459 8,514 ---
North Carolina 8 1,552 28,075 29,627 6,234 5,862
Ohio 6 1,125 25,037 26,162 9,680 853
Oklahoma 5 825 14,640 15,465 2,443
Tennessee 10 1,072 38,062 39,134 11,557 ---
Texas 9 1,119 15,224 16,343 4,169 ---
Wisconsin 7 1,197 17,408 18,605 6,724 ---
Others (18 States) 31 5,382 85,545 90,927 25,270 2,709
- -------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 126 30,253 393,562 423,815 111,404 9,424
- -------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
Tucson, Arizona 1 630 2,989 3,619 92 ---
Los Gatos, California 1 3,736 17,139 20,875 7,338 ---
Slidell, Louisiana 1 2,520 19,412 21,932 6,539 ---
Plaquemine, Louisiana 1 737 9,722 10,459 1,703 ---
Webster, Texas 1 890 5,161 6,051 187 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 5 8,513 54,423 62,936 15,859 ---
- -------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 11 6,938 51,567 58,505 3,161 ---
Florida 9 4,092 27,848 31,940 2,463 ---
Louisiana 3 1,280 16,096 17,376 424 ---
New Jersey 4 1,619 15,767 17,386 927 ---
New Mexico 2 1,077 16,419 17,496 1,332 ---
North Carolina 2 420 9,733 10,153 1,066 ---
Pennsylvania 3 515 17,160 17,675 1,757 ---
South Carolina 9 953 32,544 33,497 2,630 ---
Texas 15 4,008 66,790 70,798 4,095 ---
Others (13 States) 16 8,175 68,154 76,329 7,751 644
- -------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 74 29,077 322,078 351,155 25,606 644
- -------------------------------------------------------------------------------------------------------------------------------
PSYCHIATRIC FACILITY, Georgia 1 280 3,181 3,461 1,712 ---
- -------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Peoria, Arizona 1 1,565 7,051 8,616 1,574 ---
Little Rock, Arkansas 1 709 10,311 11,020 1,894 ---
Colorado Springs, Colorado 1 690 8,346 9,036 1,586 ---
Fort Lauderdale, Florida 1 2,000 16,769 18,769 10,854 ---
Overland Park, Kansas 1 2,316 10,719 13,035 2,449 ---
San Antonio, Texas 1 1,990 13,087 15,077 4,504 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 6 $ 9,270 $ 66,283 $ 75,553 $ 22,861 $ ---
- -------------------------------------------------------------------------------------------------------------------------------
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- -------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
California 6 $ 16,681 $ 43,150 $ 59,831 $ 2,500 $ ---
Indiana 13 13,887 54,786 68,673 129 5,105
Minnesota 2 277 22,404 22,681 456 5,020
North Dakota 1 480 10,774 11,254 178 ---
New York 1 2,200 18,011 20,211 141 ---
Texas 8 1,966 40,778 42,744 4,907 ---
Utah 1 276 5,237 5,513 382 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 32 35,767 195,140 230,907 8,693 10,125
- -------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS
Arkansas 1 3,045 20,267 23,312 2,255 ---
California 2 8,070 37,662 45,732 743 ---
Florida 11 8,950 18,848 27,798 322 ---
Georgia 3 2,100 7,513 9,613 140 ---
North Carolina 4 4,050 5,975 10,025 114 ---
Tennessee 4 2,295 13,857 16,152 746 1,690
Texas 9 5,500 22,752 28,252 340 ---
Other (4 States) 7 3,000 8,474 11,474 146
- -------------------------------------------------------------------------------------------------------------------------------
Total Physician Group Practice Clinics 41 37,010 135,348 172,358 4,806 1,690
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 285 150,170 1,170,015 1,320,185 190,941 21,883
Vacant Land Parcels --- 1,875 --- 1,875 --- ---
Partnership Investments,
Including All Partners' Assets 20 --- --- 71,773 --- ---
Financing Leases (See Note 6) 2 --- --- 7,850 --- ---
Mortgage Loans Receivable (See Note 6) 25 --- --- 139,432 --- ---
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 332 $152,045 $1,170,015 $1,541,115 $190,941 $21,883
=============================================================================================================================
(4) MAJOR OPERATORS
Listed below are HCPI's major operators which represent five percent or
more of HCPI's revenue, the investment in properties operated by those health
care providers, and the percentage of total annualized revenue from these
operators for the years ended December 31, 1998, 1997 and 1996. 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, 1998 1998 1997 1996
--------------------- --------- --------- ---------
(Amounts in thousands)
Vencor, Inc. ("Vencor") $85,785 7% 10% 16%
HealthSouth Corporation ("HealthSouth") 74,878 7 9 5
Emeritus Corporation ("Emeritus") 116,111 6 8 7
Beverly Enterprises, Inc. ("Beverly") 98,224 6 6 8
Columbia/HCA Healthcare Corp. 66,551 5 6 7
Centennial Healthcare Corp. 48,761 5 3 4
Tenet Healthcare Corporation ("Tenet") 42,807 4 6 6
Horizon/CMS Healthcare Corp. --- --- --- 8
----------- ------ ------ ------
$ 533,117 40% 48% 61%
=========== ====== ====== ======
Certain of these properties have been subleased or assigned to other
operators but with the original lessee remaining liable on the leases. The
investment and revenue applicable to these subleased properties are not included
in the table above. The percentage of annualized revenue on these subleased
facilities was 4%, 7%, and 3% in 1998, 1997 and 1996, respectively.
On May 1, 1998, Vencor completed a spinoff transaction pursuant to which it
became two publicly held entities, Ventas, Inc. ("Ventas"), a real estate
company which intends to qualify as a REIT, and Vencor, a health care company.
Vencor currently leases 39 of HCPI's properties, of which 17 are leased to
various sublessees. Both Ventas and Vencor are responsible for payments due
under the Vencor leases and a majority of the Vencor leases are guaranteed by
Tenet, as described below.
Based upon public reports, for the three months ended September 30, 1998,
Vencor had revenue of approximately $718.1 million and a net loss, excluding non
recurring transactions, of approximately $1.1 million. For the nine months
ended September 30, 1998, Vencor had revenue of approximately $2.3 billion and a
net loss (including an extraordinary loss of $77.9 million) of approximately
$44.9 million.
Based upon public reports, Ventas' revenue, income from operations and net
income for the three months ended September 30, 1998 were approximately $56.2
million, $13.0 million and $12.9 million, respectively. As of September 30,
1998, Ventas had total assets of $960.0 million and a stockholders' deficit of
$24.2 million.
Tenet unconditionally guaranteed 17%, 26% and 30% of HCPI's total revenue
for the years ended December 31, 1998, 1997 and 1996. As of December 31, 1998,
those leases guaranteed by Tenet include two acute care hospitals operated by
Tenet's subsidiaries and 37 long-term care and assisted living facilities leased
by subsidiaries of Vencor. During 1998, 14 of the Vencor leases that were
guaranteed by Tenet expired. During 1997 one such lease expired. All of those
15 properties have been re-leased, have agreements to re-lease in place with
other operators, or have other agreements in principle and will no longer be
guaranteed by Tenet.
Based upon public reports, for the three months ended September 30, 1998,
Emeritus had revenue of approximately $39.0 million and a net loss of
approximately $7.1 million. For the nine months ended September 30, 1998,
Emeritus had revenue of $110.8 million and a net loss of $25.0 million. As of
September 30, 1998, Emeritus had total assets of $198.0 million and a
stockholders' deficit of $38.5 million.
Based upon a recent press release issued by Emeritus, for the three months
ended December 31, 1998, Emeritus had revenue of approximately $41.0 million and
a net loss, excluding non-recurring transactions, of approximately $6.0 million.
For the year ended December 31, 1998, Emeritus had revenue of approximately
$151.8 million and a net loss excluding non-recurring transactions of
approximately $28.8 million.
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
HCPI is the general partner and has a 50% equity interest in four general
partnerships that each owns a congregate care center. During 1997 and 1998,
HCPI acquired an 80% interest in nine joint ventures that lease 14 long-term
care facilities and a 45% interest in two joint ventures that each operate or
are currently constructing a Michigan assisted living facility.
Combined summarized financial information of the joint ventures follows:
December 31,
-------------------------
1998 1997
----------- ----------
(Amounts in thousands)
Real Estate Investments, Net $ 63,294 $ 31,224
Other Assets 5,881 2,627
--------- ---------
Total Assets $ 69,175 $ 33,851
========= =========
Notes Payable to Others $ 14,151 $ 19,348
Accounts Payable 1,087 545
Other Partners' Deficit (541) (283)
Investments and Advances from HCPI, Net 54,478 14,241
--------- ---------
Total Liabilities and Partners' Capital $ 69,175 $ 33,851
========= =========
Rental and Interest Income $ 9,254 $ 5,423
========= =========
Net Income $ 1,809 $ 1,741
========= =========
Company's Equity in Joint Venture Operations $ 1,099 $ 992
========= =========
Distributions to HCPI $ 2,016 $ 916
========= =========
(6) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
-------------------------
1998 1997
----------- ----------
(Amounts in thousands)
Mortgage Loans (See below) $ 139,432 $ 101,729
Financing Leases 7,850 18,056
Other Loans 7,081 5,596
--------- ---------
Total Loans Receivable $154,363 $125,381
========= =========
The following is a summary of Mortgage Loans Receivable at December 31, 1998:
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 $18,295
$337,500 including interest of 13.03%
secured by an acute care hospital and three
medical office buildings leased and operated
by Columbia/HCA Healthcare Corp.
2006 2 Monthly payments of $20,000 and $250,000 including 35,530 35,530
interest of 11.00% and 8.99% on an acute care hospital
located in Texas and operated by MedCath, Inc.
2007 1 Construction loan (will convert to mortgage loan) 4,713 4,713
on acute care facility in Albuquerque to be operated by
MedCath, Inc.; interest rate of 8.75%.
2008 1 Monthly payment of $48,800 including 5,900 5,890
interest of 8.82% secured by an assisted living
facility in Nebraska.
2009 2 Monthly payments of $41,200 and 10,228 9,866
$63,700 including interest of 12.11%
and 11.56% on a long-term care facility and one
medical office building both located in California.
2010 1 Monthly payments of $333,000 including 34,760 33,743
interest of 10.70% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2010 2 Monthly payments of $56,000 and $113,200 18,397 18,206
including interest of 9.29% secured by two
long-term care facilities located in Colorado.
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- -------------------------------------------------------------------------------------------
(Amounts in thousands)
2002-2031 5 Monthly payments from $9,900 to $51,500 including $ 14,390 $ 13,189
interest rates from 9.34% to 11.5% on
various facilities in various states.
--- -------- --------
Totals 16 $155,918 $139,432
=== ======== ========
At December 31, 1998, minimum future principal payments from non-cancelable
Mortgage Loans are expected to be approximately $4,104,000 in 1999, $4,596,000
in 2000, $13,327,000 in 2001, $4,265,000 in 2002, $2,200,000 in 2003 and
$110,940,000 in the aggregate thereafter.
(7) NOTES PAYABLE
Senior Notes Payable:
The following is a summary of Senior Notes outstanding at December 31, 1998
and 1997:
Year Prepayment
Issued 1998 1997 Interest Rate Maturity Without Penalty
- ------------------------------------------------------------------------------------
(Amounts in thousands)
1989 $ 10,000 $ 10,000 10.56% 1999 None
1991 --- 22,500 9.44-9.88% 2001 1998-2001
1993 10,000 10,000 8.00% 2003 2000-2003
1993 1,000 6,000 6.70% 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 20,000 7.30-7.62% 2007 None
1998 200,000 --- 6.77% 2005 None
1998 48,000 --- 6.66-7.88% 2001-2006 None
--------- ---------
497,000 276,500
MOPPRS Option,
Net 5,086 ---
Less:Unamortized
Original Issue
Discount (2,924) (1,477)
--------- ----------
$ 499,162 $ 275,023
========= ==========
During June 1998, HCPI issued $200,000,000 of senior unsecured debt in the
form of 6.875% MandatOry Par Put Remarketed Securities ("MOPPRS") due June 8,
2015 which are subject to mandatory tender on June 8, 2005. HCPI received total
proceeds of approximately $203,000,000 including the present value of the put
option at June 8, 2005 associated with the debt instrument. The option is
being amortized to interest expense over 17 years. The weighted average cost of
the debt including the amortization of the option and offering expenses is
6.77%.
The weighted average interest rate on the Senior Notes was 7.2% and 7.5%
for 1998 and 1997, respectively, and the weighted average balance of the Senior
Notes borrowings was approximately $387,733,000 and $277,646,000 during 1998 and
1997, 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 $15,000,000 in 1999, $10,000,000 in 2000, $13,000,000 in 2001,
$17,000,000 in 2002, $31,000,000 in 2003 and $411,000,000 in the aggregate
thereafter.
CONVERTIBLE SUBORDINATED NOTES PAYABLE:
On November 8, 1993, HCPI 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 HCPI
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, 1998, HCPI had a total of $21,883,000 in Mortgage Notes
Payable secured by 14 health care facilities with a net book value of
approximately $53,815,000. Interest rates on the Mortgage Notes ranged from
5.75% to 10.63%. Required principal payments on the Mortgage Notes range from
$728,000 to $1,779,000 per year in the next five years and $16,785,000 in the
aggregate thereafter.
BANK NOTES:
HCPI has two unsecured revolving credit lines aggregating $180,000,000 with
certain banks. The credit lines for $45,000,000 and $135,000,000 expire on
September 30, 1999 and September 30, 2003, 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 $45,000,000 credit line) or at a rate negotiated
with each bank at the time of borrowing. Interest rates incurred by HCPI ranged
from 9.75% to 4.85%, and 7.13% to 5.38%, on maximum short-term bank borrowings
of $190,000,000 and $87,400,000 for 1998 and 1997, respectively. The weighted
average interest rates were approximately 5.90% and 5.91% on weighted average
short-term bank borrowings of $68,193,000 and $39,976,000 for the same
respective periods.
(8) PREFERRED STOCK
On September 26, 1997, HCPI issued 2,400,000 shares of 7-7/8% Series A
Cumulative Redeemable Preferred Stock which generated net proceeds of
$57,810,000 (net of underwriters' discount and other offering expenses). The
Series A Preferred Stock is not redeemable prior to September 30, 2002, after
which date the Series A Preferred Stock may be redeemable at par ($25 per share
or $60,000,000 in the aggregate) any time for cash at the option of HCPI.
On September 4, 1998, HCPI issued 5,385,000 shares of 8.70% Series B
Cumulative Redeemable Preferred Stock which generated net proceeds of
$130,000,000 (net of underwriters' discount and other offering expenses). The
Series B Preferred Stock is not redeemable prior to September 30, 2003, after
which date the Preferred Stock may be redeemable at par ($25 per share or
$134,625,000 in the aggregate) any time for cash at HCPI's option.
Dividends on the both Series A and Series B Preferred Stock are payable
quarterly in arrears on the last day of March, June, September and December.
The Series A and Series B Preferred Stock have no stated maturity, will not be
subject to any sinking fund or mandatory redemption and are not convertible into
any other securities of HCPI.
(9) EARNINGS PER COMMON SHARE
HCPI adopted Statement of Financial Accountings Standards 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,
1998 and 1997 and 1996. Prior to 1997, only basic earnings per common share
were 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 period. Diluted earnings per common share
are calculated including the effect of dilutive securities. Options to purchase
shares of common stock that had an exercise price in excess of the average
market price of the common stock during the period were not included because
they are not dilutive. The convertible debt was included only in 1998, when the
effect on earnings per common share was dilutive.
(Amounts in thousands except per share amounts)
Year Ended December 31, 1998
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
Net Income $ 87,167
Less: Preferred Stock Dividends (8,532)
------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 78,635 30,747 $ 2.56
---------
Dilutive Options (See Note 12) --- 155
Non-Managing Member Units (See Note 3) 308 117
Interest and Amortization applicable
to Convertible Debt (See Note 7) 6,397 2,645
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 85,340 33,664 $ 2.54
---------
Year Ended December 31, 1997
--------------------------------------------
Per Share
Income Shares Amount
------------ ------------ ---------
Net Income $ 64,789
Less: Preferred Stock Dividends (1,247)
------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $63,542 28,782 $ 2.21
---------
Dilutive Options (See Note 12) --- 196
Non-Managing Member Units (See Note 3) 40 16
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 63,582 28,994 $ 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 28,652 $ 2.12
---------
Dilutive Options (See Note 12) --- 174
------------ -----------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 60,641 28,826 $ 2.10
---------
(10) FUNDS FROM OPERATIONS
HCPI is required to report information about operations on the basis that
it uses internally to measure performance under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, effective beginning in 1998.
HCPI believes that Funds From Operations ("FFO") is the most important
supplemental measure of operating performance. Because the historical cost
accounting convention used for real estate assets requires straight-line
depreciation (except on land) such accounting presentation implies 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 industry to address this
problem.
HCPI 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 real estate related
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to net income. FFO, as defined by HCPI, may not be comparable to
similarly entitled items reported by other real estate investment trusts that do
not define it exactly as the NAREIT definition.
Below are summaries of the calculation of FFO for the years ended December
31, 1998, 1997 and 1996 (all amounts in thousands):
1998 1997 1996
--------- --------- ---------
Net Income Applicable to Common Shares $ 78,635 $ 63,542 $ 60,641
Real Estate Depreciation and Amortization 29,577 22,667 20,700
Joint Venture Adjustments 2,096 (720) (824)
Gain on Sale of Real Estate Properties (14,053) (2,047) ---
--------- --------- ---------
Funds From Operations $ 96,255 $ 83,442 $ 80,517
========= ========= =========
(11) 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, 1998 December 31, 1997
------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- -------- ---------- -------
(Amounts in thousands)
Mortgage Loans Receivable $139,432 $148,000 $101,729 $111,000
Long-Term Debt $621,045 $601,000 $385,958 $396,000
(12) STOCK INCENTIVE PLANS
Directors and officers and key employees of HCPI are eligible to
participate in HCPI's Directors' Stock Incentive Plan or HCPI's Amended Stock
Incentive Plan ("Plans"). A summary of the status of HCPI's Plans at December
31, 1998, 1997 and 1996 and changes during the years then ended is presented in
the table and narrative below:
1998 1997 1996
------------------ ------------------ ------------------
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 1,056 $30 896 $28 717 $25
Granted 306 38 230 36 263 34
Exercised (40) 23 (70) 26 (74) 19
Forfeited (13) 35 -- -- (10) 29
------- ------- -------
Outstanding, end of year 1,309 32 1,056 30 896 28
Exercisable at end of year 581 26 543 26 423 25
Weighted average fair value
of options granted during
the year $2.96 $4.49 $3.66
Incentive Stock Awards
- ----------------------
Issued 33 32 34
Canceled (1) (1) (4)
The incentive stock awards ("Awards") are granted at no cost to the
employees. The Awards generally vest and are amortized over five-year periods.
The stock options become exercisable on either a one-year or a five-year
schedule after the date of the grant.
The following table describes the options outstanding as of December 31,
1998:
Weighted
Average Options
Total Options Weighted Contractual Life Exercisable At Weighted
Outstanding Exercise Average Remaining December 31, 1998 Average
(000's) Price Exercise Price (Years) (000's) Exercise Price
- -------------------------------------------------------------------------------------------------------
32 $12 - $20 $17 2 32 $17
503 $22 - $30 $26 5 477 $26
774 $32 - $39 $36 8 72 $33
------ -----
1,309 581
====== =====
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 4.50% to 6.30%; expected dividend yields from
5.54% to 7.78% percent; and expected lives of 10 years; expected volatility of
.16% to .19%.
HCPI 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, HCPI's Net Income and Basic Earnings
Per Common Share on a proforma basis would have been $0.01 lower for each of the
three years ended December 31, 1998, 1997 and 1996.
During the years ended December 31, 1998 and 1997, respectively, HCPI made
loans totaling $976,000 and $188,000 secured by stock in HCPI 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 $1,637,000 and $855,000 were outstanding at December
31, 1998 and 1997, respectively.
(13) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. The Board of Directors declared a dividend of
$0.68 per share on January 20, 1999, paid on February 19, 1999 to stockholders
of record on February 3, 1999.
In order to qualify as a REIT, HCPI must generally, among other
requirements, distribute at least 95% of its taxable income to its stockholders.
Per share dividend payments made by HCPI to the stockholders were
characterized in the following manner for tax purposes:
1998 1997 1996
--------- --------- ---------
Common Stock
Ordinary Income $2.4550 $2.3750 $2.1250
Capital Gains Income .1650 .0850 .1750
--------- -------- --------
Total Dividends Paid $2.6200 $2.4600 $2.3000
========= ======== ========
7-7/8% Preferred Stock Series A
Ordinary Income $1.8438 $0.5045 $ ---
Capital Gains Income .1250 .0150 ---
--------- -------- --------
Total Dividends Paid $1.9688 $0.5195 $ ---
========= ======== ========
8.70% Preferred Stock Series B
Ordinary Income $0.6619 $ --- $ ---
Capital Gains Income 0.0450 --- ---
--------- -------- --------
Total Dividends Paid $0.7069 $ --- $ ---
========= ======== ========
Dividends on both series of preferred stock are paid on the last day of
each quarter.
(14) COMMITMENTS
HCPI has acquired real estate properties and has outstanding commitments to
fund development of facilities on those properties of approximately $50,000,000.
Since year end, HCPI has acquired approximately $83,000,000 in existing
health care real estate, and is committed to acquire an additional $83,000,000
of existing health care real estate. HCPI expects that a significant portion of
these commitments will be funded; however, experience suggests that some
committed transactions will not close. The letters of intent representing such
commitments permit either party to elect not to go forward with the transaction
under various circumstances. HCPI may not close committed transactions for
various reasons including unsatisfied pre-closing conditions, competitive
financing sources, final negotiation differences or the operator's inability to
obtain required internal or governmental approvals.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
1998 March 31 June 30 September 30 December 31
- -------------------------- -------- -------- ------------ ------------
(Amounts in thousands, except per share data)
Revenue $ 36,334 $ 37,948 $ 42,166 $ 45,101
Net Income Applicable To
Common Shares $ 16,297 $ 16,546(1) $ 22,836(2) $ 22,956(3)
Dividends Paid Per Common
Share $ .64 $ .65 $ .66 $ .67
Basic Earnings Per Common
Share $ .54 $ .54(1) $ .74(2) $ .74(3)
Diluted Earnings Per
Common Share $ .54 $ .53(1) $ .72(2) $ .73(3)
1997
Revenue $ 30,867 $ 31,751 $ 32,307 $ 33,578
Net Income Applicable To
Common Shares $ 17,119(4) $ 15,394 $ 15,553 $ 15,476
Dividends Paid Per Common
Share $ .60 $ .61 $ .62 $ .63
Basic Earnings Per Common
Share $ .60(4) $ .54 $ .54 $ .53
Diluted Earnings Per
Common Share $ .59(4) $ .53 $ .54 $ .53
(1) Includes $512 or $0.02 per basic/diluted share for Gain on Sale of Real
Estate Properties.
(2) Includes $6,230 or $0.20/$0.18 per basic/diluted share for Gain on Sale of
Real Estate Properties.
(3) Includes $7,311 or $0.24/$0.22 per basic/diluted share for Gain on Sale of
Real Estate Properties.
(4) Includes $2,047 or $0.07 per basic/diluted share for Gain on Sale of Real
Estate Properties.
(16) NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 1999, although earlier
implementation is allowed.
HCPI has not yet quantified the impact of adopting Statement 133 on the
financial statements and has not determined the timing of or method of the
adoption of Statement 133. However, the effect is not expected to be material.
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, 1998 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, 1998 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 of 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 herewith, 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,
1998 1998
------------ ----------
ASSETS
Cash and cash equivalents $ 32 $ 23
Short-term investments in debt securities 139 132
Accounts and notes receivable, less
allowances for doubtful accounts
($203 at November 30 and $191 at May 31) 2,044 1,742
Inventories of supplies, at cost 237 214
Deferred income taxes 233 275
Prepaid expenses and other assets 398 504
------------- -------------
Total current assets $ 3,083 $ 2,890
------------- --------------
Investments and other assets 567 515
Property, plant and equipment net 6,422 6,014
Intangible assets, at cost
Less accumulated amortization
($381 at November 30 and $327 at May 31) 3,557 3,414
------------- --------------
$ 13,629 $ 12,833
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TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
1998 1998
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 10 $ 10
Accounts payable 554 657
Accrued expenses 507 461
Reserves related to discontinued operations and
other non-recurring charges 138 189
Other current liabilities 611 450
---------- -----------
Total current liabilities 1,820 1,767
========== ===========
Long-term debt, net of current portion 6,309 5,829
Other long-term liabilities and minority interests 1,201 1,256
Deferred income taxes 435 423
Common stock, $.075 par value; authorized
700,000,000 shares; 313,816,696 shares issued
at November 30, 1998 and 313,044,417 shares
issued at May 31, 1998 24 23
Other shareholders' equity 3,910 3,605
Treasury stock, at cost, 3,754,891 shares at
November 30, 1998 and May 31, 1998 (70) (70)
--------- -----------
Total shareholders' equity 3,864 3,558
--------- -----------
$ 13,629 $ 12,833
========= ===========
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 1998 May 31, 1998
----------------- -------------
Net operating revenues $ 5,116 $ 9,895
------------ -----------
Operating expenses (4,200) (8,086)
Depreciation and amortization (261) (460)
Interest expense, net of capitalized portion (238) (464)
Merger, facility consolidation and other
non-recurring charges --- (221)
------------ -----------
Total costs and expenses (4,699) (9,231)
------------ -----------
Investment earnings 13 22
Minority interests in income of consolidated subsidiaries (5) (22)
Net loss on disposals of facilities
and long-term investments --- (17)
------------ -----------
Income from continuing operations before
income taxes 425 647
Taxes on income (163) (269)
------------ ------------
Income from continuing operations 262 378
------------ ------------
Extraordinary charge from early extinguishment of debt --- (117)
------------ ------------
Net income $ 262 $ 261
============ ============
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 1998 May 31, 1998
----------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 297 $ 403
(Includes changes in all operating assets and liabilities) ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (241) (534)
Purchase of new business, net of cash acquired (446) (679)
Proceeds from sales of facilities, investments and
other assets 4 170
Other items (64) (40)
----------- -----------
Net cash used in investing activities (747) (1,083)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (1,667) (2,762)
Proceeds from other borrowings 2,118 3,349
Proceeds from sales of common stock --- 17
Proceeds from stock options exercised 8 80
Other items --- (16)
----------- -----------
Net cash provided by financing activities 459 668
----------- -----------
Net decrease in cash and cash equivalents 9 (12)
Cash and cash equivalents at beginning of year 23 35
----------- -----------
Cash and cash equivalents at end of year $ 32 $ 23
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