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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 SEPTEMBER 30, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 1-8923
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HEALTH CARE REIT, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
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(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604
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(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (419) 247-2800
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(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 October 30, 2002.
Class: Shares of Common Stock, $1.00 par value
Outstanding 39,056,541 shares
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - September 30, 2002 and December 31, 2001.................. 3
Consolidated Statements of Income - Three
and nine months ended September 30, 2002 and 2001................................... 4
Consolidated Statements of Stockholders'
Equity - Nine months ended September 30, 2002 and 2001.............................. 5
Consolidated Statements of Cash Flows -
Nine months ended September 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
Item 4. Controls and Procedures................................................................. 13
PART II. OTHER INFORMATION
Item 5. Other Information....................................................................... 13
Item 6. Exhibits and Reports on Form 8-K........................................................ 13
SIGNATURES.............................................................................. 14
CERTIFICATIONS.......................................................................... 15
EXHIBIT INDEX........................................................................... 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
SEPTEMBER 30 DECEMBER 31
2002 2001
(UNAUDITED) (NOTE)
---------------- -----------------
(IN THOUSANDS)
ASSETS
Real estate investments:
Real property owned:
Land ............................................................... $ 105,480 $ 89,601
Buildings & improvements............................................ 1,187,408 947,794
Construction in progress............................................ 12,791 0
---------------- -----------------
1,305,679 1,037,395
Less accumulated depreciation....................................... (102,286) (80,544)
---------------- -----------------
Total real property owned........................................ 1,203,393 956,851
Loans receivable
Real property and other loans.................................... 236,046 240,126
Subdebt investments.............................................. 23,057 23,448
---------------- -----------------
259,103 263,574
Less allowance for loan losses...................................... (7,611) (6,861)
---------------- -----------------
Net real estate investments...................................... 1,454,885 1,213,564
Other assets:
Equity investments.................................................. 7,215 6,498
Deferred loan expenses.............................................. 9,708 7,190
Cash and cash equivalents........................................... 21,440 9,826
Receivables and other assets........................................ 39,619 32,765
---------------- -----------------
77,982 56,279
---------------- -----------------
TOTAL ASSETS .......................................................... $ 1,532,867 $ 1,269,843
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit obligations......................... $ 72,600 $ 0
Senior unsecured notes.............................................. 515,000 412,250
Secured debt........................................................ 51,937 78,966
Accrued expenses and other liabilities.............................. 13,688 20,757
---------------- -----------------
TOTAL LIABILITIES...................................................... 653,225 511,973
Stockholders' equity:
Preferred stock..................................................... 127,500 150,000
Common stock........................................................ 39,057 32,740
Capital in excess of par value...................................... 764,261 608,942
Cumulative net income............................................... 565,321 512,837
Cumulative dividends................................................ (612,365) (540,946)
Accumulated other comprehensive loss................................ (370) (923)
Unamortized restricted stock........................................ (3,762) (4,780)
---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY............................................. 879,642 757,870
---------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 1,532,867 $ 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
-------------------------- -------------------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
REVENUES:
Rental income............................... $ 34,407 $ 24,436 $ 94,880 $ 68,266
Interest income ............................ 7,127 7,187 21,022 23,974
Commitment fees and other income............ 839 934 2,144 2,861
Prepayment fees............................. 0 856 0 990
------------ ----------- ------------- -------------
Total revenue............................ 42,373 33,413 118,046 96,091
EXPENSES:
Interest expense............................ 9,990 7,353 29,537 22,562
Loan expense................................ 599 447 1,756 1,212
Provision for depreciation.................. 10,158 6,969 27,916 20,195
Impairment of assets........................ 0 0 550 0
Provision for losses........................ 250 250 750 750
General and administrative expenses......... 2,496 2,070 7,040 5,956
------------ ----------- ------------- -------------
Total expenses........................... 23,493 17,089 67,549 50,675
------------ ----------- ------------- -------------
Income from continuing operations
before extraordinary item................ 18,880 16,324 50,497 45,416
DISCONTINUED OPERATIONS:
Gain on sale of properties.................. 439 101 584 124
Income from discontinued operations, net.... 444 755 1,806 1,964
------------ ----------- ------------- -------------
Income before extraordinary item............ 19,763 17,180 52,887 47,504
Loss on extinguishment of debt.............. 0 (213) (403) (213)
------------ ---------- ------------- -------------
Net income.................................. 19,763 16,967 52,484 47,291
Preferred stock dividends................... 2,878 3,376 9,596 10,128
------------ ----------- ------------- -------------
Net income available to
common stockholders...................... $ 16,885 $ 13,591 $ 42,888 $ 37,163
============ =========== ============= =============
Average number of common shares outstanding:
Basic.................................... 38,628 32,205 35,695 29,946
Diluted.................................. 39,324 32,762 36,451 30,358
EARNINGS PER SHARE:
BASIC:
Income from continuing operations and
after preferred stock dividends.......... $ 0.42 $ 0.40 $ 1.14 $ 1.18
Discontinued operations..................... 0.02 0.03 0.07 0.07
Extraordinary item.......................... 0.00 (0.01) (0.01) (0.01)
----------- ---------- ------------- -------------
Income available to common stockholders..... $ 0.44 $ 0.42 $ 1.20 $ 1.24
DILUTED:
Income from continuing operations and
after preferred stock dividends.......... $ 0.41 $ 0.39 $ 1.12 $ 1.16
Discontinued operations..................... 0.02 0.03 0.07 0.07
Extraordinary item.......................... 0.00 (0.01) (0.01) (0.01)
----------- ---------- ------------- -------------
Income available to common stockholders..... $ 0.43 $ 0.41 $ 1.18 $ 1.22
Dividends declared and paid per
common share............................. $ 0.585 $ 0.585 $ 1.755 $ 1.755
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
Nine months ended September 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 52,484 52,484
Unrealized losses on
securities (44) (44)
Foreign currency
translation adjustment 597 597
--------
Comprehensive income 53,037
--------
Proceeds from issuance from
dividend reinvestment and
stock incentive plans,
net of forfeitures 1,083 22,818 (189) 23,712
Proceeds from issuance of
common shares 4,356 110,879 115,235
Conversion of preferred stock (22,500) 878 21,622 0
Restricted stock amortization 1,207 1,207
Cash dividends paid (71,419) (71,419)
-------- ------- ------- ------- -------- --------- -------- ---------
Balance at end of period $127,500 $39,057 $764,261 $(3,762) $565,321 $(612,365) $ (370) $879,642
======== ======= ======== ======== ======== ========== ======== ========
Nine months ended September 30, 2001
------------------------------------------------------------------------------------------------
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 $28,806 $528,138 $(4,205) $452,288 $(455,676) $ (744) $698,607
Comprehensive income:
Net income 47,291 47,291
Unrealized losses on (89) (89)
securities
Foreign currency
translation adjustment (40) (40)
--------
Comprehensive income 47,162
--------
Proceeds from issuance from
dividend reinvestment and
stock incentive plans,
net of forfeitures 234 4,827 (83) 4,978
Proceeds from issuance of
common shares 3,450 70,740 74,190
Restricted stock amortization 874 874
Cash dividends paid (62,825) (62,825)
-------- ------- -------- ------- ------- --------- ------- --------
Balance at end of period $150,000 $32,490 $603,705 $(3,414) $499,579 $(518,501) $ (873) $762,986
======== ======= ======== ======= ======== ========= ======== ========
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
-------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income.................................................................. $ 52,484 $ 47,291
Adjustments to reconcile net income to net cash provided from
operating activities:
Provision for depreciation............................................... 28,662 21,201
Provision for losses..................................................... 750 750
Provision for asset impairment........................................... 550 0
Amortization............................................................. 2,961 2,124
Loan and commitment fees earned in excess of cash received............... (1,530) (1,329)
Rental income in excess of cash received................................. (5,346) (6,187)
Interest and other income less than (in excess of) cash received......... 220 (249)
Gain on sales of properties.............................................. (584) (124)
Decrease in accrued expenses and other liabilities....................... (5,536) (967)
Increase in receivables and other assets................................. (1,460) (1,548)
------------- --------------
NET CASH PROVIDED FROM OPERATING ACTIVITIES........................... 71,171 60,962
INVESTING ACTIVITIES
Investment in real properties............................................... (291,439) (79,529)
Investment in loans receivable.............................................. (61,433) (19,424)
Other investments, net...................................................... (228) (685)
Principal collected on loans................................................ 35,203 70,391
Proceeds from sale of properties............................................ 49,519 22,142
Other...................................................................... . (485) (203)
------------- -----------
NET CASH USED IN INVESTING ACTIVITIES................................. (268,863) (7,308)
FINANCING ACTIVITIES
Net increase (decrease) under unsecured lines of credit..................... 72,600 (119,900)
Net decrease under secured lines of credit.................................. (29,000) 0
Principal payments on long-term obligations................................. (47,527) (78,801)
Issuance of long-term obligations........................................... 150,000 175,000
Net proceeds from the issuance of Common Stock.............................. 138,947 79,168
Increase in deferred loan expense........................................... (4,295) (5,576)
Cash distributions to stockholders.......................................... (71,419) (62,825)
------------- --------------
NET CASH PROVIDED FROM (USED IN) FINANCING ACTIVITIES.................... 209,306 (12,934)
------------- --------------
Increase in cash and cash equivalents.......................................... 11,614 40,720
Cash and cash equivalents at beginning of period............................... 9,826 2,844
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 21,440 $ 43,564
============= =============
Supplemental Cash Flow Information -- Interest Paid............................ $ 35,935 $ 25,096
============= =============
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 nine months ended
September 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 nine months ended September 30, 2002, the Company invested
$291,439,000 in real property, made loan advances of $35,660,000 and funded
$1,830,000 of equity related investments. During the nine months ended September
30, 2002, the Company sold properties with carrying values of $48,935,000 and
received prepayments on loans totaling $36,083,000.
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 September 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 nine months ended September 30, 2002, the Company sold seven assisted
living facilities and one parcel of land at a gain of $584,000. The properties
generated $3,372,000 of rental revenue and had expenses associated with the
properties of $1,566,000, generating income from discontinued operations of
$1,806,000 for the nine months ended September 30, 2002. For the nine months
ended September 30, 2001, the properties generated $3,962,000 of rental revenue
and had expenses associated with the properties of $1,998,000, generating income
from discontinued operations of $1,964,000 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 nine months ended September 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 by a third party.
7
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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.
NOTE G - DISTRIBUTIONS PAID TO COMMON STOCKHOLDERS
On February 20, 2002, the Company paid a dividend of $0.585 per share to
stockholders 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 stockholders
of record on April 30, 2002. This dividend related to the period from January 1,
2002 through March 31, 2002.
On August 20, 2002, the Company paid a dividend of $0.585 per share to
stockholders of record on July 31, 2002. This dividend related to the period
from April 1, 2002 through June 30, 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator for basic and diluted earnings per
share-income available to common shareholders..... $ 16,885 $ 13,591 $ 42,888 $ 37,163
============ ========== ========== ==========
Denominator for basic earnings per share -
weighted average shares........................... 38,628 32,205 35,695 29,946
Effect of dilutive securities:
Employee stock options............................ 441 327 501 182
Nonvested restricted shares....................... 255 230 255 230
------------ ---------- ---------- ----------
Dilutive potential common shares..................... 696 557 756 412
------------ ---------- ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares................... 39,324 32,762 36,451 30,358
============ ========== ========== ==========
Basic earnings per share............................. $ 0.44 $ 0.42 $ 1.20 $ 1.24
Diluted earnings per share........................... $ 0.43 $ 0.41 $ 1.18 $ 1.22
The diluted earnings per share calculation excludes the dilutive effect of
10,000 and 1,350,000 shares for the periods ended September 30, 2002 and
September 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 September 30, 2002 and 2001,
totaled $19,952,000 and $17,251,000, 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
8
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company's net real estate investments totaled
$1,454,885,000 which included 154 assisted living facilities, 75 skilled nursing
facilities and eight 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 $91,578,000.
During the nine months ended September 30, 2002, the holder of the Company's
Series C Convertible Preferred Stock converted 900,000 shares into 878,000
shares of Common Stock.
In September 2002, the Company sold $150,000,000 of 8.0% unsecured senior notes,
maturing in September 2012.
As of September 30, 2002, the Company had a total outstanding debt balance of
$639,537,000 and stockholders' equity of $879,642,000 which represents a debt to
equity ratio of 0.73 to 1.00, and a debt to total capitalization ratio of 0.42
to 1.00.
In August 2002, the Company announced the amendment and extension of its primary
unsecured revolving line of credit. The line of credit was expanded to
$175,000,000, matures in August 2005 with the ability to extend for one year at
the Company's discretion if the Company is in compliance with all covenants, and
bears interest at the lender's prime rate or LIBOR plus 1.3%. In addition, at
September 30, 2002, the Company had an unsecured revolving line of credit in the
amount of $25,000,000 bearing interest at the lender's prime rate or LIBOR plus
2.0% which expires June 30, 2003. Also, at September 30, 2002, the Company had
secured line of credit arrangements totaling $64,000,000 bearing interest at
LIBOR plus 2.0% with a floor of 7.0% which mature in February 2004. At September
30, 2002, the Company had $72,600,000 in borrowings under the unsecured line of
credit arrangements and $4,000,000 outstanding on the secured line of credit
arrangements.
As of September 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 $410,574,000 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
------------------------------ --------------------- ----------------------------- --------------------
SEPT. 30, 2002 SEPT. 30, 2001 $ % SEPT. 30, 2002 SEPT. 30, 2001 $ %
-------------- -------------- -------------------- -------------- --------------- -------- ------
(000's)
Rental income....... $ 34,407 $ 24,436 $ 9,971 41% $ 94,880 $ 68,266 $ 26,614 39%
Interest income..... 7,127 7,187 (60) -1% 21,022 23,974 (2,952) -12%
Commitment fees and
other income..... 839 934 (95) -10% 2,144 2,861 (717) -25%
Prepayment fees..... 0 856 (856) -100% 0 990 (990) -100%
------------ ------------ --------- --------- ------------ ------------- --------- --------
Total............... $ 42,373 $ 33,413 $ 8,960 27% $ 118,046 $ 96,091 $ 21,955 23%
============ ============ ========= ========= ============ ============= ========= ========
9
For the three and nine months ended September 30, 2002, the Company generated
increased rental income as a result of the acquisition of properties for which
the Company receives rent. This was partially offset by 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.
Expenses were comprised of the following:
THREE MONTHS ENDED CHANGE YEAR TO DATE THROUGH CHANGE
------------------------------ --------------------- ------------------------------ ------------------
SEPT. 30, 2002 SEPT. 30, 2001 $ % SEPT. 30, 2002 SEPT. 30, 2001 $ %
-------------- -------------- ---------- --------- -------------- --------------- -------- ---------
(000's)
Interest expense.... $ 9,990 $ 7,353 $ 2,637 36% $ 29,537 $ 22,562 $ 6,975 31%
Loan expense........ 599 447 152 34% 1,756 1,212 544 45%
Provision for
depreciation..... 10,158 6,969 3,189 46% 27,916 20,195 7,721 38%
Provision for losses 250 250 0 0% 750 750 0 0%
Impairment of assets 0 0 0 0% 550 0 550 100%
General and
admin. expenses.. 2,496 2,070 426 21% 7,040 5,956 1,084 18%
------------ ----------- -------- --------- ----------- ----------- -------- --------
Total............... $ 23,493 $ 17,089 $ 6,404 37% $ 67,549 $ 50,675 $ 16,874 33%
============ =========== ======== ========= ============ =========== ======== ========
The increase in interest expense for both the three month and year-to-date
periods was primarily due to higher average borrowings during the 2002 periods,
including the issuance of $175 million senior notes in August 2001 and $150
million in September 2002. The proceeds from these additional borrowings was
used to invest in additional health care properties. This was offset by lower
interest rates on the Company's unsecured revolving lines of credit. 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 $200,000
and $739,000 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 (including
revenues from discontinued operations) for the three-month and year-to-date
periods were 5.89% and 5.96% as compared with 6.20% and 6.20% for the same
periods in 2001.
Other Items:
THREE MONTHS ENDED CHANGE YEAR TO DATE THROUGH CHANGE
----------------------------- -------------------- ------------------------------ -----------------
SEPT. 30, 2002 SEPT. 30, 2001 $ % SEPT. 30, 2002 SEPT. 30, 2001 $ %
-------------- -------------- -------------------- -------------- ---------------- -------- -------
(000's)
Discontinued
Operations......... $ 444 $ 755 $ (311) -41% $ 1,806 $ 1,964 $ (158) -8%
Loss on extinguishment
of debt.............. 0 (213) 213 -100% (403) (213) (190) 89%
Gain on sales of
Properties......... 439 101 338 335% 584 124 460 371%
Preferred dividends.. (2,878) (3,376) 498 -15% (9,596) (10,128) 532 -5%
------------ ------------- -------- -------- ------------- ------------- ------- -------
Total................ $ (1,995) $ (2,733) $ 738 -27% $ (7,609) $ (8,253) $ 644 -8%
============ ============= ========= ======== ============= ============= ======= =======
During the three and nine months ended September 30, 2002, the Company sold
properties with carrying values of $47,069,000 and $48,935,000 for gains of
$439,000 and $584,000, respectively. In addition, these properties generated
$444,000 and $1,806,000 of income after deducting depreciation and interest
expense from rental income for the three and nine months ended September 30,
2002, respectively.
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.
10
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
$16,885,000, or $0.43 per diluted share, and $42,888,000 or $1.18 per diluted
share, respectively, as compared with $13,591,000, or $0.41 per diluted share,
and $37,163,000 or $1.22 per diluted share for the comparable periods in 2001.
CRITICAL ACCOUNTING POLICIES
The consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the U.S., which require the Company to make
estimates and assumptions (see Note 1 to the consolidated financial statements).
The Company believes that of its significant accounting policies, the following
critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of its consolidated financial
statements.
IMPAIRMENT OF LONG-LIVED ASSETS
The net book value of long-lived assets is reviewed quarterly on a property by
property basis to determine if there are indicators of impairment. These
indicators may include anticipated operating losses at the property level, the
tenant's inability to make rent payments, and changes in the market that may
permanently reduce the value of the property. If indicators of impairment exist,
then the undiscounted future cash flows from the most likely use of the property
are compared to the current net book value. If the undiscounted cash flows are
less than the net book value, an impairment loss would be recognized to the
extent that the net book value exceeds the current fair market value. This
analysis requires the Company to determine if indicators of impairment exist and
to estimate the most likely stream of cash flows to be generated from the
property during the period the property is expected to be held. If the
projections or assumptions change in the future, the Company may be required to
record an impairment charge and reduce the net book value of the property owned.
ALLOWANCE FOR LOAN LOSSES
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.
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.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
September 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 September 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 $726,000.
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 that 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.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
Within 90 days of filing this quarterly report, an evaluation was performed
under the supervision and with the participation of our management, including
the chief executive officer and chief financial officer, of the effectiveness of
the design and operation of our disclosure controls and procedures. Based on
that evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2002, and the evaluation date. There have been no significant
changes in our internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our evaluation.
12
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
-----------------
On August 26, 2002, the Company issued a press release announcing the closing of
a $175 million unsecured credit facility.
On September 6, 2002, the Company issued a press release announcing the issuance
of $150 million in senior unsecured notes.
On October 1, 2002, the Company issued a press release announcing the release
date of October 15, 2002 for earnings and third quarter conference call.
On October 8, 2002, the Company issued a press release announcing investments of
$105 million for third quarter.
On October 15, 2002, the Company issued a press release announcing earnings
results for third quarter and declaration of regular dividend.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
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 August 26, 2002.
99.4 Press release dated September 6, 2002.
99.5 Press release dated October 1, 2002.
99.6 Press release dated October 8, 2002.
99.7 Press release dated October 15, 2002.
(b) Reports on Form 8-K
Date of Report Item Description
-------------- ---- -----------
August, 30, 2002 5 Effective August 23, 2002, the Company and its
subsidiaries entered into an Amended and Restated
Loan Agreement for a $175 million unsecured
credit facility.
September 9, 2002 5 Documentation regarding an issuance of $150
million in senior unsecured notes of the Company.
13
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: NOVEMBER 7, 2002 By: /s/ GEORGE L. CHAPMAN
----------------------------- ----------------------------------
George L. Chapman,
Chairman and Chief Executive Officer
Date: NOVEMBER 7 , 2002 By: /s/ RAYMOND W. BRAUN
----------------------------- ---------------------------------
Raymond W. Braun,
President and Chief Financial Officer
Date: NOVEMBER 7, 2002 By: /s/ MICHAEL A. CRABTREE
----------------------------- ----------------------------------
Michael A. Crabtree,
Chief Accounting Officer
14
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, GEORGE L. CHAPMAN, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Care
REIT, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: NOVEMBER 7, 2002
--------------------------
/s/ GEORGE L. CHAPMAN
----------------------------
George L. Chapman,
Chief Executive Officer
15
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, RAYMOND W. BRAUN, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Care
REIT, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weakness in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Dated: NOVEMBER 7, 2002
-------------------------
/s/ RAYMOND W. BRAUN
----------------------------
Raymond W. Braun,
Chief Financial Officer
16
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
-------------- --------------------
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 August 26, 2002.
99.4 Press release dated September 6, 2002.
99.5 Press release dated October 1, 2002.
99.6 Press release dated October 8, 2002
99.7 Press release dated October 15, 2002.
17