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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[ ] For the transition period from __________________ to __________________
COMMISSION FILE NUMBER 1-8923
HEALTH CARE REIT, INC.
- ----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
- -------- ----------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604
- ------------------------------------- -----
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (419) 247-2800
-----------------------
- ----------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]. No [ ].
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ]. No [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 1, 2002.
Class: Shares of Common Stock, $1.00 par value
Outstanding 38,989,230 shares
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2002
and December 31, 2001.................................................................... 3
Consolidated Statements of Income - Three
and six months ended June 30, 2002 and 2001.............................................. 4
Consolidated Statements of Shareholders'
Equity - Six months ended June 30, 2002
and 2001................................................................................. 5
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001.................................................. 6
Notes to Unaudited Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................................... 9
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................ 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...................................... 13
Item 5. Other Information........................................................................ 14
Item 6. Exhibits and Reports on Form 8-K......................................................... 14
SIGNATURES ......................................................................................... 15
EXHIBIT INDEX......................................................................................... 16
-2-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
JUNE 30 DECEMBER 31
2002 2001
(UNAUDITED) (NOTE)
----------- -----------
(IN THOUSANDS)
ASSETS
Real estate investments:
Real property owned:
Land ...................................................................... $ 106,299 $ 89,601
Buildings & improvements................................................... 1,155,541 947,794
------------- --------------
1,261,840 1,037,395
Less accumulated depreciation.............................................. (98,637) (80,544)
------------- --------------
Total real property owned............................................... 1,163,203 956,851
Loans receivable
Real property and other loans........................................... 226,158 240,126
Subdebt investments..................................................... 24,132 23,448
------------- --------------
250,290 263,574
Less allowance for loan losses............................................. (7,361) (6,861)
------------- --------------
Net real estate investments............................................. 1,406,132 1,213,564
Other Assets:
Equity investments......................................................... 6,891 6,498
Deferred loan expenses..................................................... 6,358 7,190
Cash and cash equivalents.................................................. 9,256 9,826
Receivables and other assets............................................... 37,667 32,765
------------- --------------
................................................................. 60,172 56,279
------------- --------------
TOTAL ASSETS ................................................................. $ 1,466,304 $ 1,269,843
============= ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit obligations................................ $ 99,000 $ 0
Senior unsecured notes..................................................... 365,000 412,250
Secured debt............................................................... 112,033 78,966
Accrued expenses and other liabilities..................................... 19,114 20,757
------------- --------------
TOTAL LIABILITIES............................................................. 595,147 511,973
Shareholders' equity:
Preferred stock............................................................ 135,000 150,000
Common stock............................................................... 38,116 32,740
Capital in excess of par value............................................. 743,875 608,942
Cumulative net income...................................................... 545,557 512,837
Cumulative dividends....................................................... (586,669) (540,946)
Accumulated other comprehensive loss....................................... (558) (923)
Unamortized restricted stock............................................... (4,164) (4,780)
------------- --------------
TOTAL SHAREHOLDERS' EQUITY.................................................... 871,157 757,870
------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $ 1,466,304 $ 1,269,843
============= ==============
NOTE: The consolidated balance sheet at December 31, 2001 has been derived
from the audited financial statements at that date but does not
include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete
financial statements.
See notes to unaudited consolidated financial statements
-3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2002 2001 2002 2001
------------------------------------ ----------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Rental income.............................. $ 32,782 $ 23,819 $ 62,784 $ 46,384
Interest income ............................ 7,107 7,842 13,894 16,787
Commitment fees and other income............ 749 1,037 1,306 1,927
Prepayment fees............................. 0 0 0 134
---------------- ---------------- ------------- ------------
Total revenue.......................... 40,638 32,698 77,984 65,232
EXPENSES:
Interest expense............................ 10,278 7,968 20,009 16,072
Loan expense................................ 580 389 1,157 764
Provision for depreciation.................. 9,634 6,982 18,300 13,757
Impairment of assets........................ 550 0 550 0
Provision for losses........................ 250 250 500 500
General and administrative expenses......... 2,285 2,034 4,546 3,885
---------------- ---------------- ------------- ------------
Total expenses.......................... 23,577 17,623 45,062 34,978
---------------- ---------------- ------------- ------------
Income from continuing operations
before extraordinary item................... 17,061 15,075 32,922 30,254
DISCONTINUED OPERATIONS:
Gain on sale of properties.................. 145 23 145 23
Income from discontinued operations, net.... 28 25 56 49
---------------- ---------------- ------------- ------------
Income before extraordinary item................. 17,234 15,123 33,123 30,326
Loss on extinguishment of debt................... (403) 0 (403) 0
---------------- ---------------- ------------- ------------
Net income....................................... 16,831 15,123 32,720 30,326
Preferred stock dividends........................ 3,341 3,376 6,718 6,752
---------------- ---------------- ------------- ------------
Net income available to
common shareholders......................... $ 13,490 $ 11,747 $ 26,002 $ 23,574
================ ================ ============= ============
Average number of common shares outstanding:
Basic................................... 35,446 28,985 34,196 28,802
Diluted................................. 36,223 29,402 34,954 29,137
Earnings per share
Basic:
Income from continuing operations and
after preferred stock dividends....... $ 0.39 $ 0.41 $ 0.77 $ 0.82
Discontinued operations................. 0.00 0.00 0.00 0.00
Extraordinary item...................... (0.01) 0.00 (0.01) 0.00
Income available to common
shareholders.......................... $ 0.38 $ 0.41 $ 0.76 $ 0.82
Diluted:
Income from continuing operations and
after preferred stock dividends....... $ 0.38 $ 0.40 $ 0.75 $ 0.81
Discontinued operations................. 0.00 0.00 0.00 0.00
Extraordinary item...................... (0.01) 0.00 (0.01) 0.00
Income available to common
shareholders.......................... $ 0.37 $ 0.40 $ 0.74 $ 0.81
Dividends declared and paid per
common share................................ $ 0.585 $ 0.585 $ 1.170 $ 1.170
See notes to unaudited consolidated financial statements
-4-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Six months ended June 30, 2002
----------------------------------------------------------------------------------------------------
Capital In Unamortized Accum. Other
Preferred Common Excess of Restricted Cumulative Cumulative Comprehensive
IN THOUSANDS Stock Stock Par Value Stock Earnings Dividends Income/(Loss) Total
----------------------------------------------------------------------------------------------------
Balance at beginning of
period $150,000 32,740 $608,942 $(4,780) $512,837 $(540,946) $ (923) $757,870
Comprehensive income:
Net income 32,720 32,720
Unrealized losses on
securities (37) (37)
Foreign currency 402 402
translation adjustment -------
Comprehensive income 33,085
Proceeds from issuance
from dividend reinvestment
and stock incentive plans,
net of forfeitures 435 9,548 (189) 9,794
Proceeds from issuance of
common shares 4,356 110,970 115,326
Conversion of preferred
stock (15,000) 585 14,415 0
Restricted stock
amortization 805 805
Cash dividends paid (45,723) (45,723)
-------- ------- -------- ------- -------- --------- -------- --------
Balance at end of period $135,000 $38,116 $743,875 $(4,164) $545,557 $(586,669) $ (558) $871,157
======== ======= ======== ======= ======== ========= ======== ========
Six months ended June 30, 2001
----------------------------------------------------------------------------------------------------
Capital In Unamortized Accum. Other
Preferred Common Excess of Restricted Cumulative Cumulative Comprehensive
Stock Stock Par Value Stock Earnings Dividends Income/(Loss) Total
----------------------------------------------------------------------------------------------------
Balance at beginning of
period $150,000 $28,806 $528,138 $(4,205) $452,288 $(455,676) $ (744) $698,607
Comprehensive income:
Net income 30,326 30,326
Unrealized losses on
securities (82) (82)
Foreign currency
translation adjustment (333) (333)
-------
Comprehensive income 29,911
Proceeds from issuance from
dividend reinvestment
and stock incentive plans,
net of forfeitures 133 2,500 (99) 2,534
Proceeds from issuance of
common shares 3,450 70,863 74,313
Restricted stock
amortization 584 584
Cash dividends paid (40,502) (40,502)
-------- ------- -------- ------- -------- --------- -------- --------
Balance at end of period $150,000 $32,389 $601,501 $(3,720) $482,614 $(496,178) $ (1,159) $765,447
======== ======= ======== ======= ======== ========= ======== ========
See notes to unaudited consolidated financial statements
-5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30
2002 2001
------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 32,720 $ 30,326
Adjustments to reconcile net income to net cash
Provision for depreciation 18,391 13,897
Provision for losses 500 500
Provision for asset impairment 550 0
Amortization 1,961 1,349
Loan and commitment fees earned in excess of cash received (799) (1,202)
Rental income in excess of cash received (4,531) (3,874)
Interest and other income less than (in excess of) cash received 200 (166)
Gain on sales of properties (145) (23)
Decrease in accrued expenses and other liabilities (844) (1,357)
Increase in receivables and other assets (383) (1,739)
---------- ----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES 47,620 37,711
INVESTING ACTIVITIES
Investment in real properties (204,682) (42,957)
Investment in loans receivable (39,539) (12,510)
Other investments, net (228) (457)
Principal collected on loans 32,664 43,217
Proceeds from sale of properties 2,011 11,611
Other (58) (142)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (209,832) (1,238)
FINANCING ACTIVITIES
Net increase (decrease) under unsecured lines of credit 99,000 (58,400)
Net increase under secured lines of credit 31,000 0
Principal payments on long-term obligations (47,430) (10,034)
Net proceeds from the issuance of Common Stock 125,120 76,847
Increase in deferred loan expense (325) (1,374)
Cash distributions to shareholders (45,723) (40,502)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES 161,642 (33,463)
------------ ------------
(Decrease) increase in cash and cash equivalents (570) 3,010
Cash and cash equivalents at beginning of period 9,826 2,844
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,256 $ 5,854
============ ===========
Supplemental Cash Flow Information -- Interest Paid $ 21,026 $ 17,379
============ ===========
See notes to unaudited consolidated financial statements
-6-
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered for a fair
presentation have been included. Operating results for the three months ended
June 30, 2002, are not necessarily an indication of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2001.
NOTE B - REAL ESTATE INVESTMENTS
During the six months ended June 30, 2002, the Company invested $206,930,000 in
real property, made loan advances of $17,375,000 and funded $1,112,000 of equity
related investments. During the six months ended June 30, 2002, the Company sold
properties with carrying values of $1,866,000 and received prepayments on loans
totaling $31,455,000.
NOTE C - EQUITY INVESTMENTS
Management determines the appropriate classification of an equity investment at
the time of acquisition and reevaluates such designation as of each balance
sheet date. At June 30, 2002, equity investments include the common stock of a
corporation, valued at historical cost, and ownership representing a 31%
interest in Atlantic Healthcare Finance L.P., a property investment group that
specializes in the financing, through sale and leaseback transactions, of
nursing homes located in the United Kingdom and continental Europe. The
ownership interest in Atlantic Healthcare Finance L.P. is accounted for under
the equity method.
NOTE D - DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is
effective for fiscal years beginning after December 15, 2001. The Company
adopted the standard effective January 1, 2002.
During the second quarter of 2002 the Company sold one assisted living facility
at a gain of $145,000. The property generated $99,000 of rental revenue and had
expenses associated with the property of $43,000, generating income from
discontinued operations of $56,000 for the six months ended June 30, 2002. For
the six months ended June 30, 2001 the property generated $87,000 of rental
revenue and had expenses associated with the property of $38,000, generating
income from discontinued operations of $49,000 for that period.
NOTE E - IMPAIRMENT OF ASSETS
Management reviews its real estate portfolio on a quarterly basis to determine
if there are any indicators of impairment. If indicators of impairment exist,
management determines, using moderate assumptions and the information available
at that time, if the projected undiscounted cash flows exceed the net book value
of the property. If the projected undiscounted cash flows do not exceed the net
book value, the property is written down to fair market value.
During the quarter ended June 30, 2002, it was determined that the projected
cash flows from a parcel of land did not exceed its net book value and a charge
of $550,000 was recorded to reduce the property to its fair market value. The
fair market value of the property was determined by an offer to purchase the
property by a third party.
NOTE F - CONTINGENT LIABILITIES
As disclosed in the financial statements for the year ended December 31, 2001,
the Company was contingently liable for certain obligations amounting to
$11,425,000.
-7-
NOTE G - DISTRIBUTION PAID TO COMMON SHAREHOLDERS
On February 20, 2002, the Company paid a dividend of $0.585 per share to
shareholders of record on January 31, 2002. This dividend related to the period
from October 1, 2001 through December 31, 2001.
On May 20, 2002, the Company paid a dividend of $0.585 per share to shareholders
of record on April 30, 2002. This dividend related to the period from January 1,
2002 through March 31, 2002.
NOTE H - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
Three months ended June 30 Six months ended June 30
--------------------------------- ----------------------------------
2002 2001 2002 2001
--------- --------- --------- ----------
Numerator for basic and diluted earnings per
share-income available to common shareholders $ 13,490 $ 11,747 $ 26,002 $ 23,574
========= ========= ========= =========
Denominator for basic earnings per share -
weighted average shares 35,446 28,985 34,196 28,802
Effect of dilutive securities:
Employee stock options 522 192 503 110
Nonvested restricted shares 255 225 255 225
--------- --------- --------- ---------
Dilutive potential common shares 777 417 758 335
--------- --------- --------- ---------
Denominator for diluted earnings per share -
adjusted weighted average shares 36,223 29,402 34,954 29,137
========= ========= ========= =========
Basic earnings per share $ 0.38 $ 0.41 $ 0.76 $ 0.82
Diluted earnings per share $ 0.37 $ 0.40 $ 0.74 $ 0.81
The diluted earnings per share calculation excludes the dilutive effect of
10,000 and 1,350,000 shares for the periods ended June 30, 2002 and June 30,
2001, respectively, because the exercise price was greater than the average
market price. The Series C Cumulative Convertible Preferred Stock was not
included in this calculation as the effect of the conversion was anti-dilutive.
NOTE I - COMPREHENSIVE INCOME
Comprehensive income for the three months ended June 30, 2002 and 2001, totaled
$17,269,000 and $14,958,000, respectively.
NOTE J - NEW ACCOUNTING POLICY
In April 2002, FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44,
and 62, Amendment of FASB Statement No. 13, and Technical Corrections. Statement
145 will require gains and losses on extinguishments of debt to be classified as
income or loss from continuing operations rather than as extraordinary items as
previously required under Statement 4. Extraordinary treatment will be required
for certain extinguishments as provided in APB Opinion No. 30. Statement 145
will be effective for fiscal years beginning after December 15, 2002 and the
Company will reclassify prior periods upon adoption.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company's net real estate investments totaled
$1,406,132,000 which included 157 assisted living facilities, 65 skilled nursing
facilities and seven specialty care facilities. Depending upon the availability
and cost of external capital, the Company anticipates making additional
investments in health care related facilities. New investments are funded from
temporary borrowings under the Company's line of credit arrangements, internally
generated cash and the proceeds derived from asset sales. Permanent financing
for future investments, which replaces funds drawn under the line of credit
arrangements, is expected to be provided through a combination of private and
public offerings of debt and equity securities and the assumption of secured
debt. The Company believes its liquidity and various sources of available
capital are sufficient to fund operations, meet debt service and dividend
requirements and finance future investments.
In February, 2002, the Company issued 906,125 shares of Common Stock, $1 par
value, at a price of $27.59 per share, which generated net proceeds of
$23,657,000.
In May, 2002, the Company issued 3,450,000 shares of Common Stock, $1 par value,
at a price of $28.00 per share, which generated net proceeds of $91,669,000.
During the quarter ended June 30, 2002, the holder of the Company's Series C
Convertible Preferred Stock converted 600,000 shares into 585,000 shares of
Common Stock.
As of June 30, 2002, the Company had a total outstanding debt balance of
$576,033,000 and shareholders' equity of $871,157,000 which represents a debt to
equity ratio of .66 to 1.0, and a debt to total capitalization ratio of .40 to
1.0.
As of June 30, 2002, the Company had an unsecured revolving line of credit
expiring March 31, 2003 in the amount of $150,000,000 bearing interest at the
lender's prime rate or LIBOR plus 1.5%. In addition, the Company had an
unsecured revolving line of credit in the amount of $25,000,000 bearing interest
at the lender's prime rate which expires June 30, 2003. Also, at June 30, 2002,
the Company had secured line of credit arrangements totaling $64,000,000. At
June 30, 2002, the Company had $99,000,000 in borrowings under the unsecured
line of credit arrangements and $64,000,000 outstanding on the secured line of
credit arrangements.
As of June 30, 2002, the Company had an effective shelf registration on file
with the Securities and Exchange Commission under which the Company may issue up
to $560,574,000 of securities including debt securities, common and preferred
stock and warrants. Depending upon market conditions, the Company anticipates
issuing securities under such shelf registrations to invest in additional health
care facilities and to repay borrowings under the Company's line of credit
arrangements.
RESULTS OF OPERATIONS
Revenues were comprised of the following:
Three months ended Change Year to date through Change
---------------------------- --------------------- ----------------------------- ---------------------
June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ %
------------- ------------- --------- --------- ------------- ------------- -------- ---------
(000's)
Rental income $ 32,782 $ 23,819 $ 8,963 38% $ 62,784 $ 46,384 $ 16,400 35%
Interest income 7,107 7,842 (735) -9% 13,894 16,787 (2,893) -17%
Commitment fees and
other income 749 1,037 (288) -28% 1,306 1,927 (621) -32%
Prepayment fees - - - -% - 134 (134) -100%
------------ ------------ --------- --------- ------------ ------------ -------- ---------
Total $ 40,638 $ 32,698 $ 7,940 24% $ 77,984 $ 65,232 $ 12,752 20%
============ ============ ========= ========= ============ ============ ======== =========
For the three and six months ended June 30, 2002, the Company generated
increased rental income as a result of the acquisition of properties for which
the Company receives rent. This offset a reduction in interest income due to the
repayment of mortgage loans. Commitment fees and other income decreased
primarily as a result of the completion of construction projects.
-9-
Expenses were comprised of the following:
Three months ended Change Year to date through Change
------------------------------ --------------------- ----------------------------- --------------------
June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ %
------------- ------------- -------- -------- -------------- ------------- -------- ---------
(000's)
Interest expense $ 10,278 $ 7,968 $ 2,310 29% $ 20,009 $ 16,072 $ 3,937 24%
Loan expense 580 389 191 49% 1,157 764 393 51%
Provision for
depreciation 9,634 6,982 2,652 38% 18,300 13,757 4,543 33%
Provision for losses 250 250 - -% 500 500 - -%
Impairment of assets 550 - 550 100% 550 - 550 100%
General and
admin. expenses 2,285 2,034 251 12% 4,546 3,885 661 17%
------------ ------------ -------- --------- ------------ ------------ ------- ---------
Total $ 23,577 $ 17,623 $ 5,954 34% $ 45,062 $ 34,978 $10,084 29%
============ ============ ======== ========= ============ ============ ======= =========
The increase in interest expense for both the three month and year-to-date
periods was primarily due to the issuance of $175 million in unsecured senior
notes in August, 2001. This was offset by lower average borrowings on the
Company's lines of credit and lower interest rates. In addition, there was a
reduction in the amount of capitalized interest offsetting interest expense. The
Company capitalizes certain interest costs associated with funds used to finance
the construction of properties owned directly by the Company. The amount
capitalized is based upon the borrowings outstanding during the construction
period using the rate of interest which approximates the Company's cost of
financing. Capitalized interest for the three-month and year-to-date periods
totaled $0 and $0, respectively as compared with $205,000 and $539,000 for the
same periods in 2001.
The provision for depreciation increased over the comparable periods in 2001
primarily as a result of additional investments in properties owned directly by
the Company.
General and administrative expenses as a percentage of revenues for the
three-month and year-to-date periods were 5.63% and 5.83% as compared with 6.21%
and 5.95% for the same periods in 2001.
Other Items:
Three months ended Change Year to date through Change
------------------------------ --------------------- ------------------------------ --------------------
June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ %
------------- ------------- -------- ---------- -------------- ------------- --------- --------
(000's)
Discontinued
operations $ 173 $ 48 $ 125 260% $ 201 $ 72 $ 129 179%
Loss on
extinguishment of
debt (403) - (403) (100%) (403) - (403) (100%)
Preferred dividends 3,341 3,376 (35) (1%) 6,718 6,752 (34) (1%)
------------ ------------ -------- -------- ------------ ------------ ------- --------
Total $ 3,111 $ 3,424 $ (313) (9%) $ 6,516 $ 6,824 $ (308) (5%)
============ ============ ======== ======== ============ ============ ======= ========
During the second quarter of 2002 the Company sold properties with carrying
values of $1,866,000 for a gain of $145,000. In addition, this property
generated $56,000 of income after deducting depreciation and interest expense
from rental income for the six months ended June 30, 2002.
In April, 2002 the Company purchased $35,000,000 of unsecured senior notes that
were due in 2003. The Company recorded a charge of $403,000 in connection with
this early extinquishment.
As a result of the various factors mentioned above, net income available to
common shareholders for the three-month and year-to-date periods was
$13,490,000, or $0.37 per diluted share, and $26,002,000, or $0.74 per diluted
share, respectively, as compared with $11,747,000, or $0.40 per diluted share,
and $23,574,000 or $0.81 per diluted share for the comparable periods in 2001.
ACCOUNTING POLICIES
Management reviews the adequacy of the allowance for loan losses on a quarterly
basis. The Company makes mortgage loans and sometimes provides working capital
and subdebt loans to operators of health care facilities in its portfolio. When
reviewing the ultimate collectibility of these loans, management uses moderate
assumptions of operating performance to determine the operator's ability to
repay the obligation. As facts and circumstances change, management takes these
into account to determine if the allowance for loan losses is adequate.
-10-
Management reviews its real estate portfolio on a quarterly basis to determine
if there are any indicators of impairment. If indicators of impairment exist,
management determines, using moderate assumptions and the information available
at that time, if the projected undiscounted cash flows exceed the net book value
of the property. If the projected undiscounted cash flows do not exceed the net
book value, the property is written down to fair market value.
During the quarter ended June 30, 2002, it was determined that the projected
cash flows from a parcel of land did not exceed its net book value and a charge
of $550,000 was recorded to reduce the property to its fair market value.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This report on Form 10-Q of the Company may contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements concern the possible expansion of our portfolio; the
performance of our operators and properties; our ability to obtain new viable
tenants for properties which we take back from financially troubled tenants, if
any; our ability to make distributions; our policies and plans regarding
investments, financings and other matters; our tax status as a real estate
investment trust; our ability to appropriately balance the use of debt and
equity; and our ability to access capital markets or other sources of funds.
When we use words such as "believes", "expects", "anticipates", or similar
expressions, we are making forward-looking statements. Forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. Our expected results may not be achieved, and actual results may
differ materially from our expectations. This may be a result of various
factors, including: the status of the economy; the status of capital markets,
including prevailing interest rates; compliance with and changes to regulations
and payment policies within the health care industry; changes in financing
terms; competition within the health care and senior housing industries; and
changes in federal, state and local legislation. Finally, we assume no
obligation to update or revise any forward-looking statements or to update the
reasons why actual results could differ from those projected in any
forward-looking statements."
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company seeks to mitigate
the effects of fluctuations in interest rates by matching the term of new
investments with new long-term fixed rate borrowings to the extent possible. The
following section is presented to provide a discussion of the risks associated
with potential fluctuations in interest rates.
The Company historically borrows on its revolving lines of credit to make
acquisitions or to finance the construction of health care facilities. Then, as
market conditions dictate, the Company will issue equity or long-term fixed rate
debt to repay the borrowings under the revolving lines of credit.
A change in interest rates will not affect future earnings or cash flow on our
fixed rate debt. Interest rate changes, however, will affect the fair value of
such debt. A 1% increase in interest rates would result in a decrease in fair
value of the Company's Senior Unsecured Notes by approximately $15 million at
June 30, 2002. Changes in the interest rate environment upon maturity of this
fixed rate debt could have an affect on the future cash flows and earnings of
the Company, depending on whether the debt is replaced with other fixed rate
debt, with variable rate debt, with equity or by the sale of assets.
A change in interest rates will not affect the fair value of the Company's
variable rate debt, including its unsecured and secured revolving credit
arrangements. At June 30, 2002, a 1% increase in interest rates related to this
variable rate debt and assuming no changes in outstanding balances, would result
in increased annual interest expense of $990,000.
The Company is subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of the Company's borrowings were completed pursuant to indentures or
contractual agreements which limit the amount of indebtedness the Company may
incur. Accordingly, in the event that the Company is unable to raise additional
equity or borrow money because of these limitations, the Company's ability to
acquire additional properties may be limited.
From time to time, the Company's variable interest rate debt may exceed its
variable interest rate assets, presenting an exposure to rising interest rates.
The Company may or may not elect to use financial derivative instruments to
hedge variable interest rate exposure. Such decisions are principally based on
the Company's policy to match its variable rate investments with comparable
borrowings, but is also based on the general trend in interest rates at the
applicable dates and the Company's perception of future volatility of interest
rates.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
----------------------------------------------------
The annual meeting of shareholders of Health Care REIT, Inc. was duly called and
held on May 3, 2002 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
and incorporated herein by reference) as follows:
Proposal #1 - The election of three directors:
Nominee For Withheld
--------------------------- ------------------------- -------------------------
William C. Ballard, Jr. 32,281,188 328,220
Peter J. Grua 32,279,512 329,896
R. Scott Trumbull 32,270,005 339,403
Proposal #2 - The ratification of the appointment of Ernst & Young LLP
as independent auditors for the fiscal year 2002:
For 32,063,450
Against 435,789
Abstain 110,169
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
-----------------
On May 7, 2002, the Company issued a press release announcing an offering of
3,000,000 shares of common stock.
On May 9, 2002, the Company issued a press release announcing the pricing of
3,000,000 shares of common stock at $28.00 per share.
On July 2, 2002, the Company issued a press release announcing release date of
July 17, 2002 for earnings and second quarter conference call.
On July 9, 2002, the Company issued a press release announcing investments of
$124 million for second quarter.
On July 16, 2002, the Company issued a press release announcing earnings results
for second quarter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
10.1 Credit Agreement between Health Care REIT, Inc. and
Fifth Third Bank dated as of May 31, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Financial Officer.
99.3 Press release dated May 7, 2002.
99.4 Press release dated May 9, 2002.
99.5 Press release dated July 2, 2002.
99.6 Press release dated July 9, 2002.
99.7 Press release dated July 16, 2002.
(b) Reports on Form 8-K
Form 8-K filed on May 8, 2002.
Form 8-K/A filed on May 8, 2002.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
Date: August 14, 2002 By: /S/ GEORGE L. CHAPMAN
------------------------------ ---------------------------------
George L. Chapman,
Chairman and Chief Executive Officer
Date: August 14, 2002 By: /S/ RAYMOND W. BRAUN
------------------------------ ---------------------------------
Raymond W. Braun,
President and Chief Financial Officer
Date: August 14, 2002 By: /S/ MICHAEL A. CRABTREE
- ----------------------------------- ---------------------------------
Michael A. Crabtree,
Chief Accounting Officer
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EXHIBIT INDEX
The following documents are included in this Form 10-Q as Exhibits:
DESIGNATION
NUMBER UNDER
ITEM 601 OF
REGULATION S-K EXHIBIT DESCRIPTION
-------------- -------------------
10.1 Credit Agreement between Health Care REIT, Inc. and Fifth Third Bank dated as of May 31, 2002.
99.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer.
99.3 Press release dated May 7, 2002.
99.4 Press release dated May 9, 2002.
99.5 Press release dated July 2, 2002.
99.6 Press release dated July 9, 2002.
99.7 Press release dated July 16, 2002.
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