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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 Commission File No. 1-8923
December 31, 1995
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One SeaGate, Suite 1950, Toledo, Ohio 43604
(Address of principal executive office) (Zip Code)
(419) 247-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name on Each Exchange
Title of Each Class on Which Registered
---------------------- -----------------------
Shares of Common Stock New York Stock Exchange
$1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
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; 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 of this Form 10-K.
[X]
The aggregate market value of voting stock held by non-affiliates
of the Registrant of February 1, 1996 was $242,989,911 based on the
reported closing sales price of such shares on the New York Stock
Exchange for that date. As of February 1, 1996, there were
12,036,196 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the
year ended December 31, 1995 are incorporated by reference into
Part II.
Portions of the Registrant's definitive Proxy Statement for the
annual shareholders meeting to be held May 21, 1996 are
incorporated by reference into Part III.
HEALTH CARE REIT, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
- - ----
Item 1. Business . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . 14
PART II
Item 5. Market for the Registrant's Common Equity
and Related Stockholder Matters . . . . . . . . 15
Item 6. Selected Financial Data. . . . . . . . . . . . . . 16
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations . . . . . . . . . . . . . . . . . 16
Item 8. Financial Statements and Supplementary Data. . . . 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . 42
PART III
Item 10. Directors and Executive Officers of
the Registrant. . . . . . . . . . . . . . . . . 42
Item 11. Executive Compensation . . . . . . . . . . . . . . 42
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . 42
Item 13. Certain Relationships and Related
Transactions. . . . . . . . . . . . . . . . . . 42
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K . . . . . . . . . . . . 43
PART I
ITEM 1. BUSINESS
General
- - -------
Health Care REIT, Inc. (the "Company"), founded in 1970, is
a real estate investment trust that invests in health care
facilities, primarily nursing homes. The Company also invests in
assisted living facilities and retirement centers, specialty care
and primary care facilities. The Company's investment portfolio is
diversified by type of facility, number of facilities, operators,
location and state. At December 31, 1995, the largest aggregate
financing to any operator totalled $37,619,000 or 10.5% of real
estate related investments. This operator, Olympus Healthcare
Group, Inc., is an unrelated party.
Investment Portfolio
- - --------------------
The following table reflects the diversification of the
Company's investments at December 31, 1995:
Average
Number Invest- Number
Invest- Percentage Number of ment of
Type of ments of of Beds/ Per Bed Number of States
Facility (1)(3)(4) Portfolio Facilities Units /Unit Operators (2)
- - ------------- --------- --------- ---------- ------ ------- --------- ------
(in 000s)
Nursing Homes $203,779 45.6% 50 6,693 $ 30,447 29 18
Assisted
Living
Facilities 75,619 16.9 30 1,794 42,151 12 11
Specialty
Care
Facilities 61,635 13.8 4 397 155,251 2 4
Retirement
Centers 53,429 12.0 9 1,245 42,915 8 8
Behavioral
Care
Facilities 36,366 8.1 6 628 57,908 3 5
Primary Care
Facilities 16,071 3.6 5 N/A N/A 1 3
-------- ----- --- ------
TOTALS $446,899 100.0% 104 10,757
======== ===== === ======
(1) Investments include real estate related investments,
unfunded commitments and credit enhancements which amount to
$361,874,000, $65,495,000 and $19,530,000, respectively.
(2) The Company has investments in 28 states.
(3) Investments do not include $122,695,000 in commitments for
financings for which the Company has not yet funded any money.
(4) Due to a number of factors, it is possible that some portion
of the commitments for financings will not result in permanent
financing.
Nursing Homes.--These facilities offer a combination of
skilled and intermediate care services. Nursing homes provide
long-term care and, more recently, supplement hospital care by
providing subacute services formerly rendered in a hospital
setting. The Company believes that a substantial portion of the
payments received by operators of nursing homes financed by the
Company is in the form of Medicaid reimbursement. Remaining
payments come from private pay, Medicare, veterans' programs,
private insurance and other sources.
Assisted Living Facilities.--Assisted living facilities offer
residential units for the frail elderly who need assistance with
certain activities of daily living. Residents may participate in
structured group activities. Meals are provided and certain health
care services are available. Rent and services are typically paid
by the resident.
Specialty Care Facilities.--These facilities provide focused
acute in-patient care to patients suffering from specific illnesses
or diseases. Growth in demand for these services is due to the
need to attain greater cost efficiency. Services are paid for by
government programs (i.e., Medicare, Medicaid or veterans'
programs) as well as private insurance (including "managed care"
insurance providers).
Retirement Centers.--These facilities offer residential units
for active and ambulatory older individuals who need little or no
care. Residents may participate in structured group activities.
Meals are provided although apartments in most facilities have
their own kitchens and limited health care services are available.
Rent and services are typically paid by the resident.
Behavioral Care Facilities.--These facilities offer
comprehensive in-patient and out-patient psychiatric treatment
programs. Programs are tailored to the individual and include
individual, group and family therapy. Most programs are paid by
insurance programs.
Primary Care Facilities.--These facilities are designed to
offer primary care to individuals in a doctor-office setting.
These primary care facilities also offer a number of specialties in
one building such as obstetrics, gynecology, opthamology, and
pediatrics. These services are provided in a group-practice
setting and are usually offered in a "managed care" context.
Payment for services is principally through prepaid contracts.
Investments
- - -----------
In determining whether to finance a facility, the Company
places primary emphasis on the experience of the operator, the
feasibility of the project, the financial strength of the borrower
or lessee, the amount of security available to support the
financing and the amount of capital that is being committed to the
project by the borrower or lessee. In addition, the Company
considers a variety of other factors, including the site's
suitability, appraisal reports of the facility and the existence of
certificate of need procedures or other barriers that limit the
entry of competing facilities into the community.
The Company regularly monitors its investments through a
variety of methods depending on the operator and type of facility.
These procedures include the receipt and review of facility and
guarantor financial statements, periodic site visits, property
reviews and conferences with the operators. Such reviews of
operators and facilities generally encompass licensure and
regulatory compliance materials and reports, contemplated building
improvements and other material developments.
Substantially all of the Company's loans and leases are
designed with escalating rate structures that may result in
principal payment or purchase prior to maturity. However, the
Company's policy is to structure longer term financing to maximize
returns. The Company believes that appropriate new investments
will be available in the future with substantially the same spreads
over its costs of borrowing regardless of interest rate
fluctuations.
Investments are typically structured using mortgage loans or
operating leases which are normally secured by guarantees and/or
letters of credit. The Company typically finances up to 90% of the
appraised value of the property. Since 1986, the Company's mortgage
loan portfolio has substantially grown while its direct financing
lease portfolio has declined significantly. From 1986 to 1995, the
Company's mortgage loan portfolio has increased from $34,186,000 to
$267,484,000 while its direct financing lease portfolio has
declined from $91,696,000 to $11,246,000. From 1988 to 1995, the
Company's operating lease portfolio has increased from $7,709,000
to $58,629,000. In addition, the Company provides construction
financing, only in conjunction with permanent financing, and in the
past provided credit enhancements to facilitate bond financings.
The Company has obtained warrants from five operators to
purchase their common stock or a partnership interest. The
warrants may have the effect of increasing the Company's return on
its investments. None of the warrants are publicly traded.
However, the underlying common stock that relates to one set of
warrants is publicly traded, and the market price of such stock was
below the exercise price of the related warrants at December 31,
1995.
Mortgage Loans.--At December 31, 1995, the Company had 57
mortgage loans on 59 properties totalling $267,484,000, more than
95% of which are secured by first mortgages. Generally, the
Company's mortgage loans have initial terms of seven to ten years
with a renewal term, a 1% commitment fee, interest payment rates of
350 to 450 basis points over the relevant Treasury Note rate set at
the beginning of the mortgage loan, and a 2% to 3% annual increase
over the initial interest payment rate. Of the 57 mortgage loans,
52 require principal reduction, a feature not required for most
mortgage loans made before 1991. The interest rate on mortgage
loans closed through 1991 generally provided for an initial
interest payment rate set at 400 to 450 basis points over the five
or seven-year Treasury Note yield set at the beginning of the
mortgage loan plus an additional 100 to 300 basis points of
interest which is added to principal resulting in a repayment of
principal at maturity greater than the original amount. While the
Company's mortgage loans are structured to provide substantially
the same economic benefit (same internal rate of return) as direct
financing leases and operating leases over the life of the loan,
the timing on recognition of income is different among the three
types of investments. See the notes to the Consolidated Financial
Statements for an explanation of the recognition of income.
At December 31, 1995, interest rates on the Company's mortgage
loans ranged from 8.75% to 13.44% and earned an average of
approximately 11.05% (excluding prepayment fees) during 1995. The
Company's mortgage loans generally impose a substantial fee upon
prepayment equal to 9% of the principal balance of the mortgage
loan in the earliest years of the loan with the amount of the
prepayment fee declining through the last year of the mortgage loan
when the prepayment fee expires. Furthermore, since 1994, the
Company has included an initial period during which no prepayments
are permitted. During 1995, the Company received $63,344,000 in
principal prepayments, which generated $4,082,000 in prepayment
fees.
At December 31, 1995, the Company had three mortgage loans
totalling $8,439,000 that generally provide for a floating rate
with an interest payment rate of at least 300 basis points over the
base rate of a specified financial institution. These mortgage
loans generally have a 1% commitment fee.
Operating Leases.--The Company actively markets operating
leases. Such leases are priced by a variety of methods that are
designed to generate higher annual rents, either through the use of
specified increases or increasers based on some performance measure
of the facility, and with options to purchase at a price based upon
the then fair market value of the facility. At December 31, 1995,
there were ten such leases totalling an investment of $46,306,000.
All leases require the lessee to pay taxes, insurance and
maintenance.
The Company has also utilized operating leases in connection
with managing and operating properties that have been relinquished
to the Company by their previous owners, due to various loan and
bond defaults. At December 31, 1995, there were two such leases
with a total investment of $12,323,000.
Direct Financing Leases.--At December 31, 1995, the Company
had 6 direct financing leases outstanding with a total investment
of $11,246,000. Generally, the Company's direct financing leases
provide for a lease term of 20 years, a 1% commitment fee, rents of
400 to 425 basis points over the five-year Treasury Note rate set
at the beginning of the lease, and a 2% to 3% annual increase over
the initial payment. All leases require the lessee to pay taxes,
insurance and maintenance. Substantially all lease agreements have
been written with option prices that increase 2% to 3% per year
from a base equal to 100% of the original investment. All option
prices equal or exceed the Company's original investment in the
property. For an explanation of the Company's accounting policy
with respect to direct financing leases, see the notes to the
Consolidated Financial Statements.
Construction and Working Capital Loans.--At December 31, 1995,
the Company had 18 construction loans outstanding totalling
$17,736,000. Construction loans are made only to borrowers to whom
the Company has made a commitment for permanent financing.
Generally, construction loans have a 1% commitment fee and provide
for interest at a variable rate equal to at least 250 basis points
over the prime interest rate. Construction loans made by the
Company will normally have a term of not more than two years and
are secured by a mortgage on the facility under construction and by
guarantees or letters of credit.
The Company has also entered into other financing arrangements
that involve making working capital loans. These loans generally
had a 1% commitment fee and provided for interest at a variable
rate equal to at least 200 basis points over the prime interest
rate. The Company has not made any new working capital loans of
this type for several years and will make any future working
capital loans only on a very selective basis. Security for such
loans has consisted of second mortgage liens and, in some cases,
security interests in limited partnership interests.
At December 31, 1995, the Company had outstanding construction
and working capital loans totalling $24,515,000 and unfunded
commitments to provide an additional $57,304,000.
Credit Enhancements.--In 1984 and 1985, the Company provided
credit enhancements to four related parties which facilitated lower
cost industrial development revenue bond financing. These credit
enhancements took the form of agreements to purchase health care
facilities or the loans in respect thereof in the event the owners
default upon their obligations. In consideration for such credit
enhancements, the Company receives annual fees of 1.5% of the
original bond amounts ($383,100 recognized in 1995). The Company
does not anticipate offering credit enhancements in the future.
As of December 31, 1995, the Company had credit enhancements
relating to industrial development revenue bonds totalling
$19,530,000.
Allowance For Losses
- - --------------------
The Company maintains an allowance for possible losses which
is reevaluated quarterly to determine its adequacy. See Note 1 of
Notes to Financial Statements. At December 31, 1995, $6,500,000 of
the total allowance of $9,950,000 was allocated to three specific
properties. The Company believes that its allowance is adequate.
Certain Government Regulations
- - ------------------------------
The Company invests in single purpose health care facilities.
The Company's customers must comply with the licensing requirements
of federal, state and local health agencies, and with the
requirements of municipal building codes, health codes and local
fire departments. In granting and renewing a facility's license,
the state health agency considers, among other things, the physical
buildings and equipment, the qualifications of the administrative
personnel and clinical staffs, the quality of health care programs
and compliance with applicable laws.
Many of the facilities operated by the Company's customers
receive a substantial portion of their revenues from the federal
Medicare program and state Medicaid programs; therefore, the
Company's revenues may be indirectly affected by changes in these
programs. The amounts of program payments can be changed by
legislative or regulatory actions and by determinations by agents
for the programs. Since Medicaid programs are funded by both the
states and the federal government, the amount of payments can be
affected by changes at either the state or federal level. There is
no assurance that payments under these programs will remain at
levels comparable to present levels or be sufficient to cover costs
allocable to these patients.
Under Medicare and Medicaid programs, acute care hospitals are
generally paid a fixed amount per discharge (based on the patient's
diagnosis) for inpatient services. Behavioral and rehabilitation
hospitals are generally paid on a cost basis, subject to certain
limitations on allowable costs; however, proposals have been made
to change the system to a diagnosis-based fixed payment per
discharge.
Medicare and Medicaid programs have traditionally reimbursed
nursing facilities for the reasonable direct and indirect allowable
costs incurred in providing routine services (as defined by the
programs), subject to certain cost ceilings. However, many states
have converted to a system based on prospectively determined fixed
rates, which may be based in part on historical costs. The
Medicare program has been working to develop a fixed-payment-per
- - -discharge system for nursing facilities similar to that used for
acute care hospitals.
Medicare and Medicaid regulations could adversely affect the
resale value of the Company's health care facilities. Medicare
regulations provide that when a facility changes ownership (by sale
or under certain lease transactions), reimbursement for
depreciation and interest will be based on the lesser of the cost
to the new owner or the historical cost of the original owner.
Medicaid regulations allow a limited increase in the valuation of
nursing facilities (but not hospitals) during the time the seller
owned the facility. Other Medicare and Medicaid regulations
provide that upon resale, facilities are responsible to pay back
prior depreciation reimbursement payments that are "recaptured" as
a result of the sale.
Health care facilities that participate in Medicare or
Medicaid must meet extensive program requirements, including
physical plant and operational requirements, which are revised from
time to time. (Such requirements may include a duty to admit
Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census.) Medicare and
Medicaid facilities are regularly inspected to determine
compliance, and may be excluded from the programs--in some cases
without a prior hearing--for failure to meet program requirements.
Under the Medicare program, "peer review organizations" have
been established to review the quality and appropriateness of care
rendered by health care providers. These organizations may not
only deny claims that fail to meet their criteria, but can also
fine and/or recommend termination of participation in the program.
Recent changes in the Medicare and Medicaid programs will
likely result in increased use of "managed care" organizations to
meet the needs of program beneficiaries. These organizations
selectively contract with health care facilities, resulting in some
facilities being excluded from the ability to serve program
beneficiaries.
Health care facilities also receive a substantial portion of
their revenues from private insurance carriers, health maintenance
organizations, preferred provider organizations, self-insured
employees and other health benefit payment arrangements. Such
payment sources increasingly pay facilities under contractual
arrangements that include a limited panel of providers and/or
discounted or other special payment arrangements, including
arrangements that shift the risk of high utilization to the
providers. A number of states have established rate-setting
agencies which control inpatient health care facility rates,
including private pay rates.
Recent proposals to significantly reduce Medicare and Medicaid
spending at the federal level could reduce revenues of the
Company's customers. Congress passed legislation that would, over
seven years, reduce Medicare spending by an estimated $226 billion
and federal Medicaid spending by $133 billion. The proposed
reductions include specific elements that would affect the
Company's customers, including changes in the Medicare payment
system for skilled nursing facilities that would reduce payments by
approximately $9.5 billion. While the President vetoed this
legislation, he has proposed seven-year reductions of $124 billion
under Medicare and $59 billion under Medicaid.
The proposals of the President and the Congress share some
elements, including expanding the role of private managed care
organizations that selectively contract for facility services.
Major policy differences remain between these proposals, including
differences over whether to end the federal entitlement to Medicaid
benefits and convert the program to a block grant to states to use
as they see fit. Such a change would allow states to divert funds
currently used to pay facilities of the types operated by the
Company's customers to other purposes.
It is impossible to predict with certainty what form federal
health care legislation may ultimately take. However, it is likely
that some steps will be taken to reduce the rate of growth in both
the utilization and the cost of health care facility services.
In order to meet a federal requirement, most states required
providers to obtain certificates of need prior to construction of
inpatient facilities and certain outpatient facilities. However,
in 1987, the federal requirement was repealed. Some states have
repealed these requirements, which may result in increased
competition, and other states are considering similar repeals.
Nursing facilities compete with other subacute care providers,
including rehabilitation centers and hospitals. Many of these
providers have underutilized facilities and are converting some or
all of their facilities into nursing facilities. Some of these
entities operate on a tax-exempt basis, which gives them a capital
cost advantage. Furthermore, some states have granted rest homes
the ability to provide limited nursing care services.
Certain states have adopted pre-admission screening and other
programs to promote utilization of outpatient and home-based
services as an alternative to inpatient facility services. Recent
changes in Medicaid regulations allow states to use Medicaid
funding for home and community-based alternatives to inpatient
care.
Taxation
- - --------
General
-------
A corporation, trust or association meeting certain
requirements may elect to be treated as a "real estate investment
trust." Beginning with its first fiscal year, which commenced on
May 1, 1971, and in all subsequent years, the Company has elected
to be treated as a real estate investment trust under Sections 856
to 860, inclusive, of the Internal Revenue Code of 1986, as amended
(the "Code"). The Company intends to operate in such manner as to
continue to qualify as a real estate investment trust for federal
income tax purposes. No assurance can be given that the actual
results of the Company's operations for any one taxable year will
satisfy such requirements.
To qualify as a real estate investment trust, the Company must
satisfy a variety of complex requirements each year, including
organizational and stock ownership tests and percentage tests
relating to the sources of its gross income, the nature of its
assets and the distribution of its income.
Generally, for each taxable year during which the Company
qualifies as a real estate investment trust, it will not be taxed
on the portion of its taxable income (including capital gains) that
is distributed to stockholders. Any undistributed income or gains
will be taxed to the Company at regular corporate tax rates. The
Company will be subject to tax at the highest corporate rate on its
net income from foreclosure property, regardless of the amount of
its distributions. The highest corporate tax rate is currently
35%. The Company may elect to treat any real property it acquires
by foreclosure as foreclosure property, including any property
acquired in future foreclosure actions brought with respect to the
three loans in default referred to in the discussion of "Results of
Operations" below. This would permit the Company to hold such
property for up to two years without adverse consequences. Subject
to certain limitations, the Company will also be subject to an
additional tax equal to 100% of the net income, if any, derived
from prohibited transactions. A prohibited transaction is defined
as a sale or disposition of inventory-type property or property
held by the Company primarily for sale to customers in the ordinary
course of its trade or business, which is not property acquired on
foreclosure.
The Company is subject to a nondeductible federal excise tax
equal to 4% of the amount, if any, by which 85% of its ordinary
income plus 95% of its capital gain net income (plus distribution
deficiencies from prior years) exceeds distributions actually paid
or treated as paid to stockholders during the taxable year, plus
current year income upon which the Company pays tax and any
overdistribution from prior years. Due to the growth of the
Company's income, primarily as a result of large capital gains from
the exercise of purchase options under leases, the Company did not
satisfy this requirement in 1995, 1994 and 1993 and incurred an
excise tax of approximately $326,000, $575,000 and $132,000
respectively, in those years. There is a cumulative underdistri-
bution of $12,741,000 that will carry over to 1996 and later years
until reduced by distributions in a subsequent year that exceed the
percentage of that year's income that is required to be distributed
currently.
Failure To Qualify
------------------
While the Company intends to operate so as to qualify as a
real estate investment trust under the Code, if in any taxable year
the Company fails to qualify, and certain relief provisions do not
apply, its taxable income would be subject to tax (including
alternative minimum tax) at corporate rates. If that occurred, the
Company might have to dispose of a significant amount of its assets
or incur a significant amount of debt in order to pay the resulting
federal income tax. Further distributions to its stockholders
would not be deductible by the Company nor would they be required
to be made.
Distributions out of the Company's current or accumulated
earnings and profits would be taxable to stockholders as dividends
and would be eligible for the dividends received deduction for
corporations. No portion of any distributions would be eligible
for designation as a capital gain dividend.
Unless entitled to relief under specific statutory provisions,
the Company also would be disqualified from taxation as a real
estate investment trust for the four taxable years following the
year during which qualification was lost.
Summary
-------
The foregoing is only a summary of some of the significant
federal income tax considerations affecting the Company and is
qualified in its entirety by reference to the applicable provisions
of the Code, the rules and regulations promulgated thereunder, and
the administrative and judicial interpretations thereof.
Stockholders of the Company are urged to consult their own tax
advisors as to the effects of these rules and regulations on them.
In particular, foreign stockholders should consult with their tax
advisors concerning the tax consequences of ownership of shares in
the Company, including the possibility that distributions with
respect to the shares will be subject to federal income tax
withholding.
HCRI Pennsylvania Properties, Inc.
- - ----------------------------------
On November 1, 1993, the Company formed a wholly-owned
subsidiary, HCRI Pennsylvania Properties, Inc. This subsidiary was
created to own real estate in the State of Pennsylvania.
The Manager and Merger
- - ----------------------
First Toledo Corporation (the "Original Manager") was
organized in April 1970 under the laws of the State of Ohio for the
purpose of administering and managing the daily affairs of the
Company and advising the Company with respect to investments.
Effective June 1, 1994, First Toledo Corporation spun off the
management agreement (defined below) and certain other assets to
First Toledo Advisory Company (the "Manager"). On November 30,
1995, the Manager merged with and into the Company pursuant to a
Revised Merger Agreement (the "Merger"). Consideration for this
transaction totaled approximately $5,048,000 which was solely
comprised of 282,407 shares of the Company's common stock. In
addition, the Company acquired approximately $46,000 in net assets
and incurred approximately $792,000 of related transaction
expenses. The Merger was a tax-free reorganization. The consider-
ation, plus related transaction expenses, were accounted for as a
settlement of a management contract.
Messrs. Wolfe and Thompson were Directors of the Manager and
each owned 50% of the outstanding common stock of the Manager. In
addition, Robert J. Pruger, Chief Financial Officer of the Company,
was also a Director and Treasurer of the Manager. Erin C. Ibele,
Vice President and Corporate Secretary of the Company, was also a
Director, Vice President and Corporate Secretary of the Manager.
George L. Chapman, President of the Company, was Executive Vice
President and General Counsel of the Manager. The ownership
percentages, titles and duties of each individual noted above were
the same for the Manager and the Original Manager.
Pursuant to the Management Agreement (the "Agreement"), the
Manager assisted the Company in establishing investment policies
and in selecting and negotiating the terms of the Company's
investments. The Manager also administered the day-to-day affairs
of the Company. The Agreement was renewed annually upon the
approval of a majority of the Directors, and was ratified annually
by the holders of a majority of the outstanding shares of common
stock.
The Agreement provided that the Manager was to be compensated
for its services at the monthly rate of one-tenth of one percent of
the average invested assets of the Company less long- and short-
term debt obligations (excluding accrued expense and other
liabilities). Average invested assets were defined as the average
of the aggregate book value of the assets of the Company invested
in equity interests in and loans secured by real estate before
allowances for doubtful amounts or allowances to reduce certain
leases to option prices or other similar non-cash allowances,
computed by taking the average of such value at the end of each
month. The Manager was also entitled to receive an incentive fee
equal to 10% of the amount of net profits which exceed 10% of the
average net worth of the Company as defined in the Agreement.
For the years ended December 31, 1995, 1994 and 1993,
management fees amounted to $2,386,000, $3,087,000, and $2,427,000,
respectively. Of such amounts, $267,000, $807,000, and $771,000,
respectively, related to the profit based incentive fee. The fees
do not include $22,500 for 1994 and 1993, respectively, that were
paid directly by the Company to certain employees for certain
services.
The Manager paid all charges, including salaries, wages,
payroll taxes, costs of employee benefit plans and charges for
incidental help, attributable to its own operations in connection
with providing services under the Agreement. The Manager also paid
its own accounting fees and related expenses, legal fees,
insurance, rent, telephone, utilities and travel expenses of its
officers and employees.
Under the Agreement, the Company was required to indemnify the
Manager and its officers, directors and employees from any
liabilities arising out of the performance of the Manager's duties
under the Agreement unless such liabilities resulted from the bad
faith, willful malfeasance, gross negligence or reckless disregard
of its duties.
ITEM 2. PROPERTIES
The Company's headquarters are currently located at One
SeaGate, Suite 1950, Toledo, Ohio 43604. Office space, equipment
and services were furnished by the Manager through November 30,
1995. As part of the Merger, the office space and equipment were
acquired by the Company.
As part of its investment portfolio, at December 31, 1995, the
Company owned and leased to qualified professional operators 11
nursing homes, eight assisted living facilities, and three primary
care facilities. These facilities are located in Arizona,
Connecticut, Florida, Illinois, Indiana, Kentucky, Missouri, North
Carolina, Ohio, Oklahoma, Pennsylvania, Texas, Virginia and West
Virginia. The foregoing properties are also part of the Company's
investment portfolio. See Item 1. BUSINESS - "Investment
Portfolio" above.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of stockholders of Health Care REIT, Inc.
was duly called and held on November 28, 1995 in Toledo, Ohio.
Proxies for the meeting were solicited on behalf of the Company's
management and Board of Directors pursuant to Regulation 14A of the
General Rules and Regulations of the Commission. There was no
solicitation in opposition to the management's nominees for
election as directors as listed in the Proxy Statement, and all
such nominees were elected.
Votes were cast at the meeting upon the proposals described in
the Proxy Statement for the meeting (filed with the Commission
pursuant to Regulation 14A as follows:
Proposal #1 -- To approve the merger of the Manager with
and into the Company:
For 6,972,618
Against 273,146
Abstain 282,001
Proposal #2 -- To approve the Company's 1995 Stock
Incentive Plan:
For 6,103,250
Against 866,656
Abstain 377,858
Proposal #3 -- The election of three directors:
Nominee For Against
--------------------- ---------- -------
Richard C. Glowacki 10,558,121 238,033
Bruce G. Thompson 10,537,951 258,203
Richard A. Unverferth 10,523,115 273,039
Proposal #4 -- To ratify the appointment of Ernst & Young
LLP as independent auditors for 1996:
For 10,605,121
Against 54,407
Abstain 136,626
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the
high and low prices of the Company's Common Stock on the New York
Stock Exchange, as reported on the Composite Tapes, and dividends
paid per share. There were 5,370 stockholders of record as of
December 31, 1995.
Sales Price
Dividends
High Low Paid
1995 ------ ------ ---------
First Quarter 22 3/8 19 7/8 $ .515
Second Quarter 23 1/8 20 3/8 .52
Third Quarter 21 1/2 15 1/2 .52
Fourth Quarter 19 1/8 15 3/4 .52
1994
First Quarter 25 3/8 22 1/2 .495
Second Quarter 25 1/4 23 1/4 .50
Third Quarter 25 22 .505
Fourth Quarter 22 5/8 19 3/4 .51
ITEM 6. SELECTED FINANCIAL DATA
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
Gross Income $ 44,596 $ 42,732 $ 36,018 $ 28,908 $ 29,248
Net Income 13,635 24,953 20,055 16,515 13,126
Loans Receivable 291,999 254,924 185,282 151,414 123,812
Investment in Operating-
Lease Properties and
Other 58,629 57,232 42,776 10,301 14,800
Investment in Direct
Financing Leases 11,246 11,428 52,950 65,411 68,391
Total Assets 358,092 324,102 285,024 226,207 207,204
Borrowings Under Line
of Credit Arrange-
ments 106,700 70,900 35,000 78,900 62,200
Senior Notes and Other
Long-Term Obligations 56,060 57,373 61,311 24,819 28,144
Shareholders' Equity 187,598 189,180 184,132 118,948 113,956
Cash Distributions to
Shareholders 24,215 23,127 18,252 15,922 12,042
Average Number of Shares
Outstanding 11,710 11,519 9,339 8,629 6,828
Per Share:
Net Income 1.16 2.17 2.15 1.91 1.92
Distributions 2.075 2.01 1.93 1.85 1.77
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- - -------------------------------
Loan interest payments, lease payments and loan and commitment
fees are the Company's primary sources of cash from operating
activities. Net cash provided from operating activities in each of
the three most recent years totalled $27,153,000 in 1995;
$31,977,000 in 1994; and $23,180,000 in 1993. The decrease in 1995
versus 1994 was primarily due to a $2,900,000 net reduction in gain
on exercise of options and prepayment fees in addition to the loss
of interest income during 1995 on three non-performing loans.
Interest income on these three loans totalled $2,155,000 in 1994.
The 1994 versus 1993 increase arose primarily from an increase in
the Company's net income. However, there are differences between
the recognition of income for financial reporting purposes and cash
receipts for both leases and mortgage loans which cause
period-to-period changes in net cash provided from operating
activities.
The level of the Company's investing activities varies over
time due to a number of factors, including economic conditions in
the health care financing market, the availability of capital
resources, and the timing of principal payments. Investing
activities in loans receivable and leases, net of principal
collected on loans, were $40,576,000, $84,797,000 and $67,720,000
for the years 1995, 1994 and 1993, respectively. The net increase
in investments in 1995 was unfavorably affected by higher loan
repayments of almost $21,000,000. Additionally, certain 1995
anticipated investments were delayed or in the case of construction
loans funded more slowly than expected. The net increase in
investments in 1994 versus 1993 was due to significantly increased
marketing activity.
The Company's investing activities are financed principally by
borrowings, proceeds from the exercise of lease purchase options,
loan repayments, and equity issuances, including issuances pursuant
to the Company's dividend reinvestment plan and the Company's
employee incentive stock option plans. On April 8, 1993, the
Company issued $52,000,000 of Senior Notes (the "Senior Notes") to
a group of institutional investors, the Company's first such debt
offering. These Senior Notes were issued in three tranches with an
initial effective interest rate of 7.63% and an average maturity of
approximately seven years.
The Company has a credit agreement for $150,000,000 with ten
banks which matures March 31, 1997. The agreement specifies that
borrowings under the revolving credit are subject to interest
rates, at the Company's option, based on either the agent bank's
prime rate of interest or 1.5% over LIBOR interest rate. The
Company is primarily utilizing the LIBOR pricing option with a
weighted average LIBOR interest rate of 7.32% at December 31, 1995.
In addition, the Company pays a commitment fee at an annual rate of
.5% of the unused line and an annual agent's fee of $75,000. At
December 31, 1995, the Company had $90,000,000 outstanding under
the revolving credit agreement.
The revolving credit agreement limited the amount of
borrowings available to 75% of the Company's borrowing base. The
Company's borrowing base consisted of mortgage loans and leases not
in default which, with the consent of the banks, are assigned to
the lenders' collateral pool. Each borrowing base property was
valued generally at the lower of the Company's cost or the market
value of the underlying property with substantially all such
properties valued at cost. As of December 31, 1995, the borrowing
base under the revolving credit agreement limited the amount of the
borrowing to $113,000,000. The Company's borrowing availability
was limited by the exclusion of certain assets from the borrowing
base such as construction loans. The Company anticipates that the
completion of facilities under construction and the inclusion of
leases and mortgage loans relating to completed facilities in its
borrowing base will enable it to increase its borrowings to the
$150,000,000 maximum availability. At December 31, 1995, the
Company had $188,190,000 of unfunded commitments.
The revolving credit agreement contains covenants that require
the Company to maintain a ratio of cash flow (as defined in the
agreement) to interest expense of not less than 2 to 1 in any
quarter; a ratio of total funded debt to sum of net worth and
convertible subordinated indebtedness of not more than 1.3 to 1;
and a tangible net worth of $180,000,000. The Company was in
compliance with those and all other covenants at December 31, 1995.
At December 31, 1995, the Company had two unsecured lines of
credit with two banks for a total of $35,000,000. Borrowings under
these lines are made pursuant to notes payable, are due on each
bank's demand and are subject to interest at each bank's prime rate
of interest. The Company had $16,700,000 outstanding at December
31, 1995 under these lines of credit.
The Company uses interest rate swap contracts solely to
accomplish the Company's policy of reducing its interest rate risk,
and thereby maintain a more consistent, predictable interest rate
margin. The Company monitors the amount of its variable interest
rate assets and debt and uses interest rate swap contracts to
partially balance the amount of variable interest rate debt with
its variable interest rate assets. Interest rate swap contracts
permit the Company to match either by fixing interest rates on a
portion of its line of credit borrowings, or converting a portion
of its fixed rate debt to variable rate. At December 31, 1995, the
Company had two five-year interest rate swap contracts which expire
in 1996 and 1997, which hedge the Company's interest rate risk
relating to $30,000,000 of variable interest rate borrowings. At
December 31, 1995, the Company was at risk for rising rates because
its variable interest rate debt exceeded its variable interest rate
assets.
Proceeds from the exercise of lease purchase options were
approximately $38,330,000 and $12,085,000 for the years 1994 and
1993, respectively. At December 31, 1995, the Company had a
limited number of direct financing leases and, therefore,
anticipates that proceeds from the exercise of purchase options
will be significantly reduced.
In the last three years, the Company has had one public
offering of Common Stock. In 1993, the Company issued 2,500,000
shares of Common Stock which provided net proceeds of $59,085,000
at $23.63 per share. The proceeds were initially used to pay down
the Company's bank lines of credit.
The dividend reinvestment plan and, to a lesser extent, the
employee incentive stock option plan together represent a
significant source of capital for the Company. During 1995, 1994
and 1993, issuance of Common Stock pursuant to these plans
generated $3,104,000, $3,222,000, and $4,296,000, respectively, in
cash for the Company.
The Company believes that funds provided from operating
activities, together with funds from new equity and debt issuances,
present credit lines, scheduled loan repayments and equity
issuances under Company stock plans, will be sufficient to meet
current operating requirements and existing commitments. For
example, the Company anticipates completing a $30,000,000 private
note issuance in the first quarter of 1996.
Results of Operations
- - ---------------------
Gross income increased $1,864,000, $6,714,000 and $7,110,000
in 1995, 1994 and 1993, respectively. In 1995, interest income on
loans receivable, operating lease rents, and loan and commitment
fees each increased while direct financing lease income decreased
when compared to 1994. The increases in interest income on loans
receivable, operating lease rents, and loan and commitment fees are
attributable to the growth in the loan and operating lease
properties portfolio, a long-term trend which the Company
anticipates will continue. The decrease in direct financing lease
income is a reflection of another long-term trend which should also
continue.
In 1994, interest income on loans receivable and operating
lease rents both increased while direct financing lease income
decreased when compared to 1993. These changes in components of
gross income reflect the trend of change in the components of the
investment portfolio discussed above.
Net income totalled $13,635,000 in 1995, $24,953,000 in 1994,
and $20,055,000 in 1993 and is the result of a number of factors.
Generally, the principal factors are the difference between the
Company's average earnings on assets versus its average cost of
borrowings and the Company's debt-to-equity ratio. Other factors
are the settlement of management contract, management fees, other
operating expenses and the provision for losses.
The 1995 decrease in net income was due in large part to the
$5,794,000 charge for settlement of management contract, a
$4,800,000 provision for losses and a decrease in net interest
margin. On November 30, 1995, the Manager merged with and into the
Company pursuant to a Revised Merger Agreement. Consideration for
this transaction of $5,048,000, plus $792,000 of related expenses,
less $46,000 in net assets acquired, were accounted for as a
settlement of a management contract. Also in 1995, the Company
charged operations $4,800,000 for provision for losses which
primarily relates to non-performing loans as well as an increase in
the general allowance. The Company's net interest margin decreased
116 basis points from 1994, which is almost solely due to a net
decline in gains on exercise of options and prepayment fees.
Without those items, average earnings on assets would have declined
approximately three basis points in 1995 versus 1994. The average
cost of borrowing was virtually the same for 1995 versus 1994, but
in 1995, there was a constant quarter-to-quarter decline, which is
a reflection of a general decline in interest rates during the
year. The Company anticipates that in 1996, its core average
earnings on assets will increase modestly and its average cost of
debt will decline.
The Company's 1995 net income was also affected by an increase
in the average quarter-end, debt-to-equity ratio from .65 to 1 in
1994 to .85 to 1 in 1995. During 1995, the Company was propor-
tionally using more debt as a source of funds. Therefore, the
Company proportionally incurred more interest expense for every
dollar of revenue, and thereby decreased its net interest margin
and net income.
The 1994 increase in net income was due in large part to the
growth in net interest margin. The Company's average earnings on
assets increased approximately 67 basis points from the same period
in 1993, while the Company's average cost of borrowing increased 37
basis points, thereby resulting in a 30 basis point increase in net
interest margin. The increase in the average earnings on assets
was solely due to gains on exercise of options and prepayment fees.
Without those items, average earnings on assets would have declined
approximately 35 basis points in 1994 versus 1993. The increase in
average cost of borrowing was due to a general rise in interest
rates in 1994 over 1993 as well as an increase in the LIBOR
interest rate spread in the Company's amended and expanded
revolving line of credit agreement.
The Company's 1994 net income was also affected by a decrease
in the average quarter-end, debt-to-equity ratio from 1 to 1 in
1993 to .65 to 1 in 1994. During 1994, the Company was proportion-
ally using less debt as a source of funds. Therefore, the Company
proportionally incurred less interest expense, and thereby
increased its net interest margin and net income.
Management fees and other operating expenses were $5,284,000
in 1995, $5,072,000 in 1994, and $3,878,000 in 1993. Management
fees declined significantly in 1995 versus 1994 due primarily to
lower net income in 1995, which reduced the incentive portion of
the fee, as well as the termination of the management contract on
November 30, 1995. The higher management fee in 1994 was due to
both higher net income and the 1993 equity offering which
substantially increased the base portion of the management fee.
The increase in other operating expenses in 1995 and 1994 resulted
from increased professional fees, general growth of the Company,
and increased marketing activity. The Company anticipates that due
to the management buyout, other operating expenses will be lower
than 1995's combined management fee and operating expenses, both in
aggregate dollars and as a percentage of revenues.
The Company has three loans totalling $14,712,000 from debtors
in bankruptcy. The Company has not recorded any interest income on
any of these loans since March 1995. In addition, the Company has
working capital loans totalling $2,518,000 at December 31, 1995,
which have been on a non-accrued status for several years. The
facility's financial performance has improved in recent years, and
the Company is recognizing interest income on a cash basis.
Impact of Inflation
- - -------------------
During the past three years, inflation has not significantly
affected the earnings of the Company because of the moderate
inflation rate. Additionally, earnings of the Company are primarily
long-term investments with fixed interest rates. These investments
are mainly financed with a combination of equity, senior notes and
borrowings under the revolving lines of credit, of which a portion
is hedged with interest rate swaps. During inflationary periods,
which generally are accompanied by rising interest rates, the
Company's ability to grow may be adversely affected because the
yield on new investments may increase at a slower rate than new
borrowing costs. Presuming the current inflation rate remains
moderate and long-term interest rates do not increase
significantly, the Company believes that equity and debt financing
will be available.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Shareholders and Directors
Health Care REIT, Inc.
We have audited the accompanying consolidated balance sheets of
Health Care REIT, Inc. as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended
December 31, 1995. Our audits also include the financial statement
schedule listed in the Index at Item 14(a). These financial
statements and schedule 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 consolidated
financial position of Health Care REIT, Inc. at December 31, 1995
and 1994, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth herein.
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1996
Health Care REIT, Inc.
Consolidated Balance Sheets
December 31
1995 1994
------------------------------
ASSETS
Real estate related investments:
Loans receivable, including amounts
from related parties of $29,112,548
and $29,283,939, respectively $291,998,722 $254,923,711
Operating-lease properties, less
accumulated depreciation of
$4,220,655 and $2,803,787,
respectively 58,628,509 57,231,651
Direct financing leases 11,246,492 11,427,721
------------ ------------
361,873,723 323,583,083
Less allowance for losses 9,950,000 5,150,000
------------ ------------
Net real estate related investments 351,923,723 318,433,083
Other Assets:
Deferred loan expenses 1,747,537 2,469,260
Cash and cash equivalents 860,350 935,449
Investment securities available
for sale 845,297
Receivables and other assets 2,715,146 2,264,197
------------ ------------
6,168,330 5,668,906
------------ ------------
Total assets $358,092,053 $324,101,989
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit
arrangements $106,700,000 $ 70,900,000
Senior notes 52,000,000 52,000,000
Other long-term obligations 4,059,639 5,372,790
Accrued expenses and other liabilities 7,734,618 6,649,424
------------ ------------
Total liabilities 170,494,257 134,922,214
Shareholders' Equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - None
Common Stock - $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 12,034,196
shares in 1995 and 11,595,115
shares in 1994 12,034,196 11,595,115
Capital in excess of par value 168,800,194 161,086,758
Undistributed net income 5,918,109 16,497,902
Unrealized gains on investment
securities available for sale 845,297
------------ ------------
Total shareholders' equity 187,597,796 189,179,775
Commitments and contingencies
------------ ------------
Total liabilities and shareholders' equity $358,092,053 $324,101,989
============ ============
See accompanying notes.
Health Care REIT, Inc.
Consolidated Statements of Income
Year ended December 31
1995 1994 1993
----------- ----------- -----------
Gross income, including amounts
from related parties of $3,798,347,
$3,810,340 and $3,611,580 for 1995,
1994 and 1993, respectively:
Interest on loans receivable $34,918,572 $26,038,471 $21,603,573
Direct financing leases:
Lease income 1,528,655 4,353,192 8,094,184
Gain on exercise of options 5,389,399 2,175,334
Operating leases:
Rents 6,351,822 5,480,232 2,812,468
Gain on exercise of options 100,029
Loan and commitment fees 1,666,286 1,184,024 1,202,516
Interest and other income 130,592 186,684 130,132
----------- ----------- -----------
44,595,927 42,732,031 36,018,207
Expenses:
Interest:
Line of credit arrangements 7,472,418 3,537,555 3,819,054
Senior notes and other long-
term obligations 5,279,232 6,146,589 6,997,992
Loan expense 752,115 637,625 328,187
Management fees 2,385,535 3,086,988 2,426,639
Provision for depreciation 1,579,544 1,385,077 790,471
Provision for losses 4,800,000 1,000,000 150,000
Settlement of management contract 5,793,534
Other operating expenses 2,898,576 1,985,279 1,450,926
----------- ----------- -----------
30,960,954 17,779,113 15,963,269
----------- ----------- -----------
Net income $13,634,973 $24,952,918 $20,054,938
=========== =========== ===========
Net income per share $ 1.16 $ 2.17 $ 2.15
Average number of shares
outstanding 11,709,642 11,519,123 9,339,081
See accompanying notes.
Health Care REIT, Inc.
Consolidated Statements of Shareholders' Equity
Capital in
Common Excess of Undistributed Unrealized
Stock Par Value Net Income Gains Total
----------- ------------ ------------ ---------- ------------
Balances at January 1, 1993 $ 8,751,972 $ 97,327,593 $ 12,868,429 $ $118,947,994
Net income 20,054,938 20,054,938
Proceeds from the sale of
2,500,000 shares less
related expenses of
$3,727,470 2,500,000 56,585,030 59,085,030
Proceeds from issuance of
194,277 shares under the
dividend reinvestment and
stock option plans 194,277 4,101,334 4,295,611
Cash dividends paid--$1.93
per share (18,251,745) (18,251,745)
----------- ------------ ------------ ------------
Balances at December 31, 1993 11,446,249 158,013,957 14,671,622 184,131,828
Net income 24,952,918 24,952,918
Proceeds from issuance of
148,866 shares under the
dividend reinvestment and
stock option plans 148,866 3,072,801 3,221,667
Cash dividends paid--$2.01
per share (23,126,638) (23,126,638)
----------- ------------ ------------ ------------
Balances at December 31, 1994 11,595,115 161,086,758 16,497,902 189,179,775
Net income 13,634,973 13,634,973
Proceeds from issuance of
156,674 shares under the
dividend reinvestment and
stock option plans 156,674 2,947,818 3,104,492
Issuance of 282,407 shares
related to settlement of
management contract 282,407 4,765,618 5,048,025
Unrealized gains on invest-
ment securities available
for sale 845,297 845,297
Cash dividends paid--$2.075
per share (24,214,766) (24,214,766)
----------- ------------ ------------ -------- ------------
Balances at December 31, 1995 $12,034,196 $168,800,194 $ 5,918,109 $845,297 $187,597,796
=========== ============ ============ ======== ============
See accompanying notes.
Health Care REIT, Inc.
Consolidated Statements of Cash Flows
Year ended December 31
1995 1994 1993
--------------------------------------------
OPERATING ACTIVITIES
Net income $ 13,634,973 $ 24,952,918 $ 20,054,938
Adjustments to reconcile net
income to net cash provided
from operating activities:
Amortization of loan and
organization expenses 749,270 639,781 328,546
Provision for losses 4,800,000 1,000,000 150,000
Provision for depreciation 1,579,544 1,385,077 790,471
Settlement of management
contract 5,001,624
Loan and commitment fees
earned less than cash
received 1,466,865 693,213 494,292
Direct financing lease
income less than cash
received 181,229 905,860 376,046
Interest income less than
cash received 524,907 2,120,035 586,092
(Decrease) increase in
accrued expenses and
other liabilities (381,671) 856,127 547,715
Increase in receivables
and other assets (403,955) (575,571) (148,487)
------------ ------------ ------------
Net cash provided from
operating activities 27,152,786 31,977,440 23,179,613
INVESTING ACTIVITIES
Investment in loans receivable (107,296,680) (118,204,990) (90,650,648)
Investment in operating-
lease properties (2,976,000) (14,053,050) (20,766,000)
Investment in direct financing
leases (1,300,000)
Principal collected on loans 69,696,762 48,760,717 43,696,715
Proceeds from exercise of
purchase options 38,330,065 12,085,262
Other (3,150) 135,000
------------ ------------ ------------
Net cash used in investing
activities (40,579,068) (46,467,258) (55,499,671)
FINANCING ACTIVITIES
Increase in borrowings under
line of credit arrangements 176,000,000 266,900,000 209,400,000
Principal payments on borrow-
ings under line of credit
arrangements (140,200,000) (231,000,000) (253,300,000)
Borrowings under senior notes 52,000,000
Principal payments on other
long-term obligations (1,313,151) (3,938,325) (15,508,351)
Proceeds from the issuance
of shares 3,104,492 3,221,667 63,380,641
Increase in deferred loan
expense (25,392) (1,527,751) (770,041)
Cash distributions to
shareholders (24,214,766) (23,126,638) (18,251,745)
------------ ------------ ------------
Net cash provided from
financing activities 13,351,183 10,528,953 36,950,504
------------ ------------ ------------
(Decrease) increase in cash
and cash equivalents (75,099) (3,960,865) 4,630,446
Cash and cash equivalents at
beginning of year 935,449 4,896,314 265,868
------------ ------------ ------------
Cash and cash equivalents at
end of year $ 860,350 $ 935,449 $ 4,896,314
============ ============ ============
See accompanying notes.
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ACCOUNTING POLICIES AND RELATED MATTERS
Industry
- - --------
The Company is predominantly engaged in financing and leasing
of health care and related properties in domestic markets.
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary (organized in 1993)
after the elimination of all significant intercompany accounts and
transactions.
Use of Estimates
- - ----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Loans Receivable
- - ----------------
Loans receivable consist of construction-period loans maturing
in two years or less, working capital loans to related parties, and
long-term mortgage loans. Interest income on loans is recognized
as earned based upon the principal amount outstanding. The loans
are generally collateralized by a first or second mortgage on or
assignment of partnership interest in the related facilities, which
consist of nursing homes, assisted living facilities, retirement
centers, rehabilitation facilities, behavioral care facilities,
primary care facilities and specialty care hospitals.
Operating-Lease Properties
- - --------------------------
Certain properties owned by the Company are leased under
operating leases. These properties are recorded at the lower of
cost or net realizable value. Depreciation is provided for at
rates which are expected to amortize the cost of the assets over
their estimated useful lives using the straight-line method.
Operating lease income includes the rent payments, which are
generally recognized on a straight-line basis over the minimum
lease period.
Direct Financing Leases
- - -----------------------
Certain properties owned by the Company are subject to
long-term leases which are accounted for by the direct financing
method. The leases provide for payment of all taxes, insurance and
maintenance by the lessees. The leases are generally for a term of
20 years and include an option to purchase the properties generally
after a period of five years. Option prices equal or exceed the
Company's original cost of the property. Income from direct
financing leases is recorded based upon the implicit rate of
interest over the lease term. This income is greater than the
amount of cash received during the first six to seven years of the
lease term.
Allowance for Losses
- - --------------------
The allowance for losses is maintained at a level believed
adequate to absorb potential losses in the Company's real estate
related investments. The determination of the allowance is based
on a quarterly evaluation of these earning assets (in the case of
direct financing leases, estimated residual values), including
general economic conditions, estimated collectibility of loan and
lease payments, reappraisals (where appropriate), and the
recoverability of the carrying amount of these investments in
relationship to their net realizable value.
Deferred Loan Expenses
- - ----------------------
Deferred loan expenses are costs incurred in acquiring
financing for properties. The Company amortizes these costs by the
straight- line method over the term of the debt.
Cash and Cash Equivalents
- - -------------------------
Cash and cash equivalents consist of all highly liquid
investments with an original maturity of three months or less.
Investment Securities Available for Sale
- - ----------------------------------------
Management determines the appropriate classification of a
security at the time of acquisition and reevaluates such
designation as of each balance sheet date. Investment securities
available for sale are stated at fair value, with unrealized gains
and losses reported in a separate component of shareholders'
equity. At December 31, 1995, available-for-sale securities are
the common stock of a corporation, which were obtained by the
Company at no cost.
Loan and Commitment Fees
- - ------------------------
Loan and commitment fees are earned by the Company for its
agreement to provide direct and standby financing to, and credit
enhancement for, owners of health care facilities. The Company
amortizes loan and commitment fees over the initial fixed term of
the lease, the mortgage or the construction period related to such
investments.
Federal Income Tax
- - ------------------
No provision has been made for federal income taxes since the
Company has elected to be treated as a real estate investment trust
under the applicable provisions of the Internal Revenue Code, and
the Company believes that it has met the requirements for
qualification as such for each taxable year. See Note 8.
Stock Options
- - -------------
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to fair value of the
shares at the date of the grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
Net Income Per Share
- - --------------------
Net income per share has been computed by dividing net income
by the weighted daily average number of shares outstanding.
Impact of Recently Issued Accounting Standards
- - ----------------------------------------------
In March 1995, the FASB issued Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". The Company's primary assets are real estate
related investments which are not covered by FASB 121.
Accordingly, based on the current circumstances, the Company does
not believe FASB 121 is applicable.
2. LOANS RECEIVABLE
The following is a summary of loans receivable:
December 31
1995 1994
------------ ------------
Mortgage loans $245,150,474 $208,566,120
Mortgage loans to related parties 22,333,209 22,215,685
Construction and other short-term loans 17,735,699 17,073,652
Working capital loans to related parties 6,779,340 7,068,254
------------ -----------
TOTALS $291,998,722 $254,923,711
============ ============
Loans to related parties included above are at competitive rates,
but not at less than the Company's net interest cost on borrowings
to support such loans. The amount of interest earned on loans to
related parties amounted to $3,379,175, $3,220,092, and $2,869,911
for 1995, 1994 and 1993, respectively.
The following is a summary of mortgage loans at December 31,
1995:
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
- - ------- ------ ------------------------------ ------------ ------------
In Default 3 Loans in default which are
currently due and not
accruing interest $ 15,495,000 $ 14,712,060
1996 2 Monthly payments from $676
to $34,447, including interest
from 12.93% to 13% 3,190,000 3,125,193
1997 3 Monthly payments from $8,338 to
$96,605, including interest
from 11.5% to 13.44% 11,348,977 10,378,082
1998 2 1 monthly payment of $57,779
and 1 quarterly payment of
$133,282, including interest
from 11.62% to 12.93% 10,332,150 10,726,774
1999 1 Monthly payment of $15,435,
including interest from 10.64% 1,850,000 1,908,449
2000 1 Quarterly payment of $136,817,
including interest of 11.73% 5,310,000 5,628,600
2002 2 Monthly payments from $60,585
to $61,595, including interest
from 12.55% to 13.17% 10,937,450 10,913,925
2003 1 Monthly payment of $45,158,
including interest of 10.56% 4,761,192 4,751,326
2007 10 Monthly payments from $3,693
to $42,102, including interest
from 8.75% to 12.26% 21,398,117 17,953,538
2008 13 Monthly payments from $17,765
to $271,529, including interest
from 10.6% to 13.44% 78,480,000 78,147,845
2009 5 Monthly payments from $24,461
to $61,052, including interest
from 10.35% to 11.91% 22,488,610 22,488,610
2010 3 Monthly payments from $14,713
to $130,615, including interest
from 9.84% to 10.19% 24,450,000 24,450,000
2014 3 Monthly payments from $30,805
to $41,578, including interest
from 11.3% to 13.44% 10,703,150 10,670,472
2015 6 Monthly payments from $21,958
to $111,169, including interest
from 10.28% to 11.42% 39,197,063 39,092,809
2016 2 Monthly payments from $39,274
to $73,231, including interest
from 10.39% to 10.7% 12,536,000 12,536,000
------------ ------------
TOTALS $272,477,709 $267,483,683
============ ============
One loan in default has a prior lien of approximately $1,195,000,
and six loans maturing in 2007 have prior liens aggregating
$1,515,000. Several monthly mortgage payments increase by 2% per
year which also have negative amortization of principal due at
maturity.
The Company generally requires that the borrower have a
substantial initial investment in the property. No mortgage loan,
or multiple loans to a single borrower, has an outstanding
principal balance which exceeds 10.5% of total assets.
3. INVESTMENT IN LEASES
The following are the components of investment in direct
financing leases:
December 31
1995 1994
--------------------------
Total minimum lease payments
receivable--(i) $ 18,833,646 $ 20,543,530
Estimated unguaranteed residual
values of leased properties 6,063,649 6,063,649
Unearned income (13,650,803) (15,179,458)
------------ ------------
Investment in direct financing leases $ 11,246,492 $ 11,427,721
============ ============
(i) The leases contain an option to purchase the leased
property. Total minimum lease payments are computed
assuming that the option will not be exercised.
At December 31, 1995, future minimum lease payments receivable
(assuming that the option will not be exercised) are as follows:
Direct Financing Operating
Leases Leases
---------------- -----------
1996 $ 1,653,875 $ 6,003,963
1997 1,665,320 5,967,131
1998 1,697,486 6,180,587
1999 1,729,651 6,078,811
2000 1,761,058 6,173,976
Thereafter 10,326,256 22,903,166
----------- -----------
TOTALS $18,833,646 $52,497,634
=========== ===========
During 1994, the Company restructured two direct financing
leases; one into a $3,324,000 mortgage loan and the other into a
$3,582,000 operating lease. During 1993, the Company restructured
a $10,500,000 mortgage loan into an operating lease. This noncash
investing activity is appropriately not reflected in the
accompanying statement of cash flows.
4. ALLOWANCE FOR LOSSES
The following is a summary of the allowance for losses for
1995, 1994 and 1993. The portion of the allowance relating to
loans receivable consists of amounts for specifically identified
loans and an unallocated amount for other potential losses in the
portfolio.
Total Allowance
Related to
Loans Receivable
----------------
Balances at January 1, 1993 $4,000,000
Provision for losses 150,000
----------
Balances at December 31, 1993 4,150,000
Provision for losses 1,000,000
----------
Balances at December 31, 1994 5,150,000
Provision for losses 4,800,000
----------
Balances at December 31, 1995 $9,950,000
==========
The allowance consists of $6,500,000 relating to specifically
identified loans of $14,712,000 and an unallocated amount for other
potential losses in the portfolio. Interest income on impaired
loans is recognized as payments are received. The Company
recognized $323,000 of interest income on impaired loans in 1995.
5. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has a credit arrangement with a consortium of ten
banks providing for a revolving line of credit (revolving credit)
in the amount of $150,000,000 which expires on March 31, 1997. The
agreement specifies that borrowings under the revolving credit are
subject to interest payable in periods no longer than three months
on either the agent bank's base rate of interest or 1.5% over LIBOR
interest rate (based at the Company's option). The effective
interest rate at December 31, 1995 was 7.32%. In addition, the
Company pays a commitment fee at an annual rate of .5% of the
unused line and an annual agent's fee of $75,000. At December 31,
1994, the revolving line of credit was collateralized by 37 real
estate related investments in health care facilities. Principal is
due upon expiration of the agreement, but the total amount
outstanding may not exceed a specified percentage of the
agreed-upon values of the collateral. The Company has two other
lines of credit with two banks for a total of $35,000,000 which
expire at various dates through May 31, 1996. Borrowings under
these lines of credit are subject to interest at each bank's prime
rate of interest (8.5% at December 31, 1995) and are due on demand.
The following information relates to aggregate borrowings under the
line of credit arrangements:
Year Ended December 31
1995 1994 1993
------------------------------------------
Balance outstanding at December 31 $106,700,000 $ 70,900,000 $ 35,000,000
Maximum amount outstanding at any
month end 119,100,000 70,900,000 107,900,000
Average amount outstanding (total
of daily principal balances
divided by days in year) 88,850,548 51,422,466 76,241,644
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 8.41% 6.88% 5.01%
The Company has two five-year interest rate swap agreements,
which expire at various dates through 1997, aggregating $30,000,000
for the purpose of reducing the Company's interest rate risk on its
borrowings under the revolving credit. Maximum rates of interest
under the swap agreements are 8.77% and 10%. At December 31, 1995,
the Company had elected to borrow $30,000,000 at six-month LIBOR.
The differential to be paid or received is accrued as interest
rates change and are recognized as an interest expense. The
related amount payable to or receivable from counterparties is
included in other liabilities or assets. The fair value of the
swap agreements are not recognized in the financial statements.
The Company may or may not elect to continue to match certain
of its borrowings with interest rate swap agreements. Such
decisions are principally based on the Company's policy to match
its variable rate investments with comparable borrowings, but is
also based on the general trend in interest rates at the applicable
dates and the Company's perception of future volatility of interest
rates. At December 31, 1995, the Company was at risk for rising
interest rates because its variable interest rate debt exceeded its
variable interest rate assets.
The Company is exposed to a credit loss in the event of
nonperformance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate
nonperformance by the counterparties.
Interest paid amounted to $13,083,783, $9,256,551 and
$10,409,852 for 1995, 1994 and 1993, respectively, which includes
$706,318, $1,309,368 and $2,155,260, respectively, for the net cost
of the swaps.
6. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $52,000,000 of Senior Notes with interest
ranging from 7.16% to 8.24% and maturing in 1998, 2000 and 2003.
These notes are collateralized by 15 real estate related
investments in health care facilities.
The following information relates to other long-term obligations:
December 31
1995 1994
----------- -----------
Notes payable related to industrial
development bonds, collateralized
by health care facilities--2 in
1995 and 3 in 1994, interest rates
from 11.25% to 15%, maturing at
various dates to 2002 $ 2,545,000 $ 3,620,000
Mortgage loans, collateralized by
health care facilities--2 in 1995
and 1994, interest rates from 8.75%
to 12%, maturing at various dates
to 2005 1,514,639 1,752,790
----------- -----------
TOTALS $ 4,059,639 $ 5,372,790
=========== ===========
At December 31, 1995, the annual payments on these long-term
obligations for the succeeding five years are as follows:
Principal Interest Total
----------- ---------- -----------
1996 $ 317,332 $4,453,791 $ 4,771,123
1997 665,764 4,401,306 5,067,070
1998 23,332,592 3,496,973 26,829,565
1999 203,326 2,619,681 2,823,007
2000 15,234,756 2,012,550 17,247,306
7. STOCK OPTION PLANS AND RETIREMENT ARRANGEMENTS
The Company's 1995 Stock Incentive Plan authorized up to
600,000 shares of Common Stock to be issued at the discretion of
the Board of Directors. The 1995 Plan replaced the 1985 Incentive
Stock Option Plan which had previously authorized up to 450,000
shares of Common Stock to be issued at the discretion of the Board
of Directors. There were 55,732 authorized shares which were
unissued under the 1985 Plan when it expired in 1995. The options
granted under the 1985 Plan continue to vest through 2005 and
expire ten years from the date of grant. All future grants will be
from the 1995 Plan under which officers and key salaried employees
of the Company are eligible to participate. Such options expire
ten years from the date of grant and one-fifth of all options
granted become exercisable each year.
The following summarizes the activity in the Plan:
Year Ended December 31
1995 1994
----------------------
Number of shares under option at
beginning of year 183,140 152,500
Options granted 316,268 51,000
Options exercised (14,140) (20,360)
------- -------
Number of shares under option at
end of year 485,268 183,140
======= =======
At end of year:
Shares exercisable 187,107 123,166
======= =======
Shares available to be granted 388,000 160,000
======= =======
At December 31, 1995, the option prices ranged from $15.1325
to $23.9375 per share. The option prices were equivalent to the
market prices of the shares on the dates granted. Options
exercised during 1995 and 1994 were at prices ranging from $11.9375
to $17.6875 per share.
Effective December 1, 1995, the Company assumed First Toledo
Advisory Company's (the Manager) 401-K Profit Sharing Plan covering
all eligible employees. Under the Plan, eligible employees may
make contributions, and the Company may make a profit sharing
contribution. Company contributions to this Plan totaled $6,000 in
1995.
8. DISTRIBUTIONS
In order to continue to qualify as a real estate investment
trust for federal income tax purposes, 95% of taxable income (not
including capital gains) must be distributed to shareholders. Real
estate investment trusts which do not distribute a certain amount
of current year taxable income in the current year are also subject
to a 4% federal excise tax. The Company's excise tax expense was
$326,000, $575,000 and $132,000 for the years ended December 31,
1995, 1994 and 1993, respectively. Undistributed net income for
federal income tax purposes amounted to $12,741,000 at December 31,
1995. The principal reasons for the difference between
undistributed net income for federal income tax purposes and
financial statement purposes are the use of the operating method of
accounting for leases for federal income tax purposes, and the
recording of settlement of management contract expense for
reporting purposes. Cash distributions paid to shareholders, for
federal income tax purposes, are as follows:
Year Ended December 31
1995 1994 1993
----------------------------
Per Share:
Ordinary income $2.075 $ .72 $1.49
Capital gains 1.29 .44
------ ----- -----
TOTALS $2.075 $2.01 $1.93
====== ===== =====
9. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company has outstanding commitments
to provide financing for facilities in the approximate amount of
$187,836,000. The Company also has commitments to provide working
capital loans to related parties of approximately $354,000. The
above commitments are generally on similar terms as existing
financings of a like nature with rates of return to the Company
based upon current market rates at the time of the commitment.
The Company has entered into a number of agreements to
purchase health care facilities, or the loans with respect thereto,
in the event that the present owners default upon their
obligations. In consideration for these agreements, the Company
receives and recognizes fees annually related to these guarantees.
Although the terms of these agreements vary, the purchase prices
are equal to the amount of the outstanding obligations financing
the facility. These agreements expire between the years 1997 and
2005. At December 31, 1995, obligations under these agreements for
which the Company was contingently liable aggregated approximately
$19,530,000, all of which were with related parties.
The Company believes that it has the ability to obtain funds
to meet these commitments. The Company also believes that such
commitments represent no greater than normal risk.
10. MANAGEMENT AGREEMENT AND CERTAIN TRANSACTIONS
WITH RELATED PARTIES
Through November 30, 1995, the Company had a management
agreement with the Manager. F. D. Wolfe and B. G. Thompson, two of
the Company's nine directors, were officers and co-owners of the
Manager. The Company accrued a fee to the Manager at a monthly
rate of 1/10 of 1% of the Company's net assets, as defined in the
Management Agreement. Further, the Manager was entitled to an
annual incentive fee equal to 10% of the amount by which net
profits exceed 10% of the monthly average net worth of the Company,
as defined in the Management Agreement.
On November 30, 1995, the Manager merged with and into the
Company pursuant to a Revised Merger Agreement (the "Merger").
Consideration for this transaction totaled approximately $5,048,000
which was solely comprised of 282,407 shares of the Company's
common stock. In addition, the Company acquired approximately
$46,000 in net assets and incurred approximately $792,000 of
related transaction expenses. The Merger was a tax-free
reorganization. The consideration, plus related transaction
expenses, were accounted for as a settlement of a management
contract.
Messrs. Wolfe and Thompson are also related to various
entities: a) to which the Company has made mortgage loans and
working capital loans yielding interest income (see Note 2); b)
with which the Company has entered into agreements to purchase
health care facilities, or the loans with respect thereto, upon
default of obligations by their present owners which provides fee
income of $383,100, $338,722, and $422,438 for 1995, 1994 and 1993,
respectively; and c) with which the Company has entered into
operating lease agreements (see Note 3).
The Company recorded income from related parties as follows:
1995 1994 1993
---------- ---------- ----------
Interest income $3,379,175 $3,220,092 $2,869,911
Loan and guaranty fees 419,172 377,658 469,362
Operating lease rents 112,561 272,307
Gain on exercise of options 100,029
---------- ---------- ----------
TOTALS $3,798,347 $3,810,340 $3,611,580
========== ========== ==========
In accordance with the By-Laws of the Company, such
transactions were approved by a majority of the directors not
affiliated with the transactions.
11. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan approved by the
Board of Directors in July 1994, a Preferred Share Right (Right) is
attached to and automatically trades with each outstanding share of
Health Care REIT, Inc. common stock.
The Rights, which are redeemable, will become exercisable only
in the event that any person or group becomes a holder of 15% or
more of the Company's stock, or commences a tender or exchange
offer which, if consummated, would result in that person or group
owning at least 15% of the common stock. Once the Rights become
exercisable, they entitle all other shareholders to purchase one
one-thousandth of a share of a new series of junior participating
preferred stock for an exercise price of $48.00. The Rights will
expire on August 5, 2004 unless exchanged earlier or redeemed
earlier by the Company for $.01 per Right at any time before public
disclosure that a 15% position has been acquired.
12. DISCLOSURE 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.
Mortgage Loans--The fair value of all mortgage loans, except
those matched with debt, is estimated by discounting the future
cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same
remaining maturities. Mortgage loans matched with debt are
presumed to be at fair value.
Working Capital and Construction Loans--The carrying amount is
a reasonable estimate of fair value for working capital and
construction loans because the interest earned on these instruments
is variable.
Cash and Cash Equivalents--The carrying amount approximates
fair value because of the short maturity of these financial
instruments.
Investment Securities Available-for-Sale--The asset is
recorded at its fair market value.
Borrowings Under Line of Credit Arrangements and Related
Items--The carrying amount of the line of credit approximates fair
value because the borrowings are interest rate adjustable. The
fair value of interest rate swaps is the estimated amount, taking
into account the current interest rate, that the Company would
receive or pay to terminate the swap agreements at the reporting
date.
Senior Notes and Industrial Development Bonds--The fair value
of the senior notes payable and the industrial development bonds
was estimated by discounting the future cash flow using the current
borrowing rate available to the Company for similar debt.
Mortgage Loans Payable--Mortgage loans payable is a reasonable
estimate of fair value because they are matched with loans
receivable.
Commitments to Finance and Guarantees of Obligations--The fair
value of the commitments to finance and guarantees of obligations
are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements, and the counterparties' credit standing.
The carrying amounts and estimated fair values of the
Company's financial instruments at December 31, 1995 and 1994 are
as follows:
December 31, 1995 December 31, 1994
-------------------------- --------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Financial Assets:
Mortgage loans $267,483,683 $270,148,000 $230,781,805 $225,306,000
Working capital and
construction loans 24,515,039 24,515,039 24,141,906 24,141,906
Cash and cash
equivalents 860,350 860,350 935,449 935,449
Investment securities
available-for-sale 845,297 845,297
Financial Liabilities:
Borrowings under line
of credit arrange-
ments 106,700,000 106,700,000 70,900,000 70,900,000
Senior notes payable 52,000,000 54,203,000 52,000,000 46,307,000
Industrial development
bonds 2,545,000 3,054,000 3,620,000 4,343,000
Mortgage loans payable 1,514,639 1,514,639 1,752,790 1,752,790
Unrecognized Financial
Instruments:
Interest rate swap
agreements 550,000 339,000
Commitments to finance 188,190,000 188,190,000 135,141,000 135,141,000
Guarantees of obliga-
tions 19,530,000 19,530,000 20,175,000 20,175,000
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results
of operations of the Company for the years ended December 31, 1995
and 1994:
Year Ended December 31, 1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------------------------------------------
Gross Income $9,624,993 $ 9,677,526 $13,315,515 $11,977,893
Net Income 4,864,965 4,637,190 3,346,835 785,983
Net Income Per Share .42 .40 .28 .06
Year Ended December 31, 1994
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------
Gross Income $8,441,239 $12,730,715 $10,518,166 $11,041,911
Net Income 4,984,250 7,799,857 6,326,167 5,842,644
Net Income Per Share .43 .68 .55 .51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein
by reference to the information under the heading "Election of
Directors" and "Executive Officers of the Company" in the
definitive proxy statement of the Company which will be filed with
the Commission prior to April 29, 1996.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein
by reference to the information under the heading "Remuneration" in
the definitive proxy statement of the Company which will be filed
with the Commission prior to April 29, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item is incorporated herein
by reference to the information under the heading "Security
Ownership of Certain Beneficial Owners" in the definitive proxy
statement of the Company which will be filed with the Commission
prior to April 29, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein
by reference to the information under the heading "Certain
Relationships and Related Transactions" in the definitive proxy
statement of the Company which will be filed with the Commission
prior to April 29, 1996.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS
ON FORM 8-K
(a) 1. The following Financial Statements of the Registrant are
included in Part II, Item 8:
Report of Independent Auditors..................... 23
Consolidated Balance Sheets - December 31, 1995
and 1994........................................ 24
Consolidated Statements of Income - Years ended
December 31, 1995, 1994 and 1993................ 25
Consolidated Statements of Shareholders' Equity -
Years ended December 31, 1995, 1994 and 1993.... 26
Consolidated Statements of Cash Flows - Years
ended December 31, 1995, 1994 and 1993.......... 27
Notes to Consolidated Financial Statements -
December 31, 1995............................... 28
2. The following Financial Statement Schedule is included in
Item 14 (d):
IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been
omitted.
3. Exhibit Index:
3(i) Restated Certificate of Incorporation, as amended,
of the Registrant.
3(ii) By-Laws, as amended.
4 The Registrant, by signing this Report, agrees to
furnish the Securities and Exchange Commission upon
its request a copy of any instrument which defines
the rights of holders of long-term debt of
Registrant and which authorizes a total amount of
securities not in excess of 10% of the total assets
of the Registrant.
10(ii)(A) Management Agreement between the Registrant and
First Toledo Corporation and its successor First
Toledo Advisory Company, dated January 17, 1994.
10(ii)(B) Note Purchase Agreement between Health Care REIT,
Inc. and each of the Purchasers a Party thereto,
dated as of April 8, 1993.
10(ii)(B) Amended and Restated Credit Agreement dated as of
September 8, 1994 among Health Care REIT, Inc.,
certain banks, and National City Bank, as Agent.
10(iii)(A) The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc. as amended.
10(iii)(A) The Health Care REIT, Inc. 1995 Stock Incentive
Plan
13 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1995:
None.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) above are filed with
this Form 10-K.
(d) Financial Statement Schedule:
Financial statement schedule is included in pages 61
through 63.
EXHIBIT INDEX
The following documents are included in this Form 10-K as an
Exhibit:
Designation
Number
Under Item
601 of
Exhibit Regulation Page
Number S-K Exhibit Description Number
- - ------- ----------- ----------------------------------- ------
1* 3(i) Restated Certificate of Incorpora-
tion, as amended, of the Registrant.
2* 3(ii) Amendment to Restated Certificate
of Incorporation filed July 9,
1992.
3 4 The Registrant, by signing this
Report, agrees to furnish the
Securities and Exchange Commission
upon its request a copy of any
instrument which defines the rights
of long-term debt of the Registrant
and which authorizes a total amount
of securities not in excess of 10%
of the total assets of the
Registrant.
4** 10(ii)(A) Management Agreement between the
Registrant and First Toledo Corp-
oration and its successor First
Toledo Advisory Company dated
January 17, 1994.
5*** 10(ii)(B) Note Purchase Agreement between
Health Care REIT, Inc. and each of
the Purchasers a Party thereto,
dated as of April 8, 1993.
6**** 10(ii)(B) Amended and Restated Credit Agree-
ment dated as of September 8, 1994
among Health Care REIT, Inc., certain
banks, and National City Bank, as
Agent.
7***** 10(iii)(A) The 1985 Incentive Stock Option
Plan of Health Care REIT, Inc., as
amended.
8****** 10(iii)(A) The Health Care REIT, Inc. 1995
Stock Incentive Plan
9 21 Subsidiaries of the Registrant. 48
10 23 Consent of Independent Auditors. 49
11 24 Powers of Attorney. 50
12 27 Financial Data Schedule.
_______________
* Incorporated by reference to Exhibits 3(a) and 3(b) to the
Registrant's 1992 Annual Report on Form 10-K for the year
ended December 31, 1992.
** Incorporated by reference to Exhibit 4 to the Registrant's
Registration Statement on Form 10-K (File No. 1-8923)
filed on March 8, 1995.
*** Incorporated by reference to Exhibits 1-4 of the
Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1993.
**** Incorporated by reference to Exhibit 1 of the Registrant's
Quarterly Report on Form 10-Q for the quarterly period
ended September 30, 1994.
***** Incorporated by reference to Exhibit 4.4 to the
Registrant's Registration Statement on Form S-8 (File No.
333-1237) filed on February 27, 1996.
****** Incorporated by reference to Exhibit 4.1 to the
Registrant's Registration Statement on Form S-8 (File No.
333-1239) filed on February 27, 1996.
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
HEALTH CARE REIT, INC.
DECEMBER 31, 1995
Principal Amount
of Loans Subject
Final Periodic Carrying to Delinquent
Interest Maturity Payment Prior Face Amount Amount of Principal or
Description Rate Date Terms Liens of Mortgages Mortgages (A) Interest
- - ------------------- -------- -------- -------- ----- ------------ ------------- ----------------
FIRST MORTGAGES:
- - ---------------
Toledo, OH 11.50% 10/01/97 Monthly $ 9,503,977 $ 9,244,193 $ None
(Retirement Center) Payments
$ 96,605
Clearwater, FL Due to default, all principal & 10,000,000 10,143,089 10,143,089 (B)
(Behavioral Care interest is due and payable.
Facility)
McAllen, TX 10.19% 01/01/10 Monthly 13,750,000 13,750,000 None
(Specialty Care Payments
Facility) $130,615
Webster, MA 9.84% 01/01/10 Monthly 9,000,000 9,000,000 None
(Nursing Home) Payments
$ 80,770
Brea, CA 11.42% 07/01/15 Monthly 11,000,000 10,960,150 None
(Specialty Care Payments
Facility) $111,169
Washington, D.C. 11.23% 07/01/15 Monthly 9,950,000 9,924,641 None
(Specialty Care Payments
Facility) $100,195
Farmington, CT 12.39% 12/01/08 Monthly 25,100,000 24,919,093 None
Manchester, CT Payments
Manchester, CT $271,529
Manchester, CT
New Haven, CT
Waterbury, CT
(6 Nursing Homes)
48 mortgage loans From From 180,223,732 176,828,525 1,993,868 (B)
relating to 27 8.75% to 09/01/96 -
nursing homes, 13.44% 01/01/16
7 assisted living
facilities, 5
retirement centers,
4 behavioral care
facilities and 2
primary care
facilities
18 construction loans From N/A 74,686,000 17,735,699
(all with first 11.5% to
mortgage liens) 14.19%
relating to 15
assisted living
facilities, 2 nursing
homes and 1 specialty
care hospital
SECOND MORTGAGES:
- - ----------------
1 nursing home and 11.66% & 08/01/97
1 behavioral care 16.97% loan currently in
facility default is due and
payable 3,950,000 2,713,992 2,575,103 (B)
------------ ------------ -----------
TOTALS $347,163,709 $285,219,382 $14,712,060
============ ============ ===========
(A) For income tax purposes, the cost of investments is the carrying
amount less $6,500,000, as disclosed in the schedule.
(B) The Company is in dispute with two operators, both of which are over
three months past due on certain interest and principal payments. The
Company has evaluated these investments and has allocated in the
aggregate $6,500,000 of its allowance to reduce their carrying value to
their estimated net realizable value.
Year Ended December 31
------------------------------------------
1995 1994 1993
------------ ------------ ------------
Reconciliation of mortgage loans:
Balance at beginning of period $247,855,457 $178,047,274 $144,163,851
Additions during period:
New mortgage loans 103,275,637 112,764,951 85,389,242
Negative principal
amortization 311,295 642,630 1,219,807
Other 3,656,084
------------ ------------ ------------
351,442,389 295,110,939 230,772,900
Deductions during period:
Collections of principal 66,223,007 47,255,482 41,751,241
Foreclosures
Cost of mortgages sold
Amortization of premium
Other 10,974,385
------------ ------------ ------------
Balance at end of period $285,219,382 $247,855,457 $178,047,274
============ ============ ============
During 1994, the Company restructured a direct financing lease
into a mortgage loan.
Includes collection of negative principal amortization.
During 1993, the Company restructured a mortgage loan into an
operating lease.