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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 MARCH 31, 2003
---------------------------------------
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 April 28, 2003.
Class: Shares of Common Stock, $1.00 par value
Outstanding 40,347,295 shares
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INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - March 31, 2003 and December 31, 2002....................... 3
Consolidated Statements of Income - Three months ended March 31, 2003 and 2002........... 4
Consolidated Statements of Stockholders' Equity - Three months ended March 31, 2003
and 2002............................................................................ 5
Consolidated Statements of Cash Flows -Three months ended March 31, 2003 and 2002........ 6
Notes to Unaudited Consolidated Financial Statements..................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk................................ 15
Item 4. Controls and Procedures.................................................................. 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................... 16
SIGNATURES ......................................................................................... 17
CERTIFICATIONS........................................................................................ 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
MARCH 31 DECEMBER 31
2003 2002
(UNAUDITED) (NOTE)
----------------- -----------------
(IN THOUSANDS)
ASSETS
Real estate investments:
Real property owned
Land $ 120,640 $ 112,044
Buildings & improvements 1,312,218 1,288,520
Construction in progress 26,162 19,833
----------- -----------
1,459,020 1,420,397
Less accumulated depreciation (125,173) (113,579)
----------- -----------
Total real property owned 1,333,847 1,306,818
Loans receivable
Real property loans 205,634 208,016
Subdebt investments 17,613 14,578
----------- -----------
223,247 222,594
Less allowance for losses on loans receivable (5,205) (4,955)
----------- -----------
218,042 217,639
----------- -----------
Net real estate investments 1,551,889 1,524,457
Other assets:
Equity investments 7,101 7,494
Deferred loan expenses 5,518 9,291
Cash and cash equivalents 33,878 9,550
Receivables and other assets 43,454 43,318
----------- -----------
89,951 69,653
----------- -----------
Total assets $ 1,641,840 $ 1,594,110
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under unsecured line of credit obligations $ 74,100 $ 109,500
Senior unsecured notes 615,000 515,000
Secured debt 51,730 51,831
Accrued expenses and other liabilities 7,637 20,547
----------- -----------
Total liabilities 748,467 696,878
Stockholders' equity:
Preferred stock 127,500 127,500
Common stock 40,207 40,086
Capital in excess of par value 793,541 790,838
Cumulative net income 599,793 580,496
Cumulative dividends (664,446) (638,085)
Accumulated other
comprehensive income (344) (170)
Other equity (2,878) (3,433)
----------- -----------
Total stockholders' equity 893,373 897,232
----------- -----------
Total liabilities and stockholders' equity $ 1,641,840 $ 1,594,110
=========== ===========
NOTE: The consolidated balance sheet at December 31, 2002 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
MARCH 31
2003 2002
-------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rental income $ 40,760 $ 28,739
Interest income 4,940 6,787
Commitment fees and other income 592 557
-------- --------
46,292 36,083
Expenses:
Interest expense 11,875 9,479
Provision for depreciation 11,652 8,293
General and administrative 2,611 2,261
Loan expense 635 577
Provision for loan losses 250 250
-------- --------
27,023 20,860
-------- --------
Income from continuing operations 19,269 15,223
Discontinued operations:
Net gain (loss) on sales of properties 34
Income (loss) from discontinued operations, net (6) 665
-------- --------
28 665
Net income 19,297 15,888
Preferred stock dividends 2,846 3,377
-------- --------
Net income available to common stockholders $ 16,451 $ 12,511
======== ========
Average number of common shares outstanding:
Basic 39,971 32,946
Diluted 40,473 33,693
Earnings per share:
Basic:
Income from continuing operations and
after preferred stock dividends $ 0.41 $ 0.36
Discontinued operations, net 0.02
-------- --------
Net income available to common stockholders $ 0.41 $ 0.38
Diluted:
Income from continuing operations and
after preferred stock dividends $ 0.41 $ 0.35
Discontinued operations, net 0.02
-------- --------
Net income available to common stockholders $ 0.41 $ 0.37
Dividends declared and paid per common share $ 0.585 $ 0.585
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED MARCH 31, 2003
-------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
CAPITAL IN COMPRE-
PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE HENSIVE OTHER
STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME EQUITY TOTAL
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 127,500 $ 40,086 $ 790,838 $ 580,496 $(638,085) $ (170) $ (3,433) $ 897,232
Comprehensive income:
Net income 19,297 19,297
Other comprehensive income:
Unrealized gain (loss) on
equity investments (11) (11)
Foreign currency translation
adjustment (163) (163)
---------
Total comprehensive income 19,123
---------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 121 2,703 2,824
Restricted stock amortization 493 493
Compensation expense related
to stock options 62 62
Cash dividends paid (26,361) (26,361)
-------------------------------------------------------------------------------------------
Balances at end of period $ 127,500 $ 40,207 $ 793,541 $ 599,793 $(664,446) $ (344) $ (2,878) $ 893,373
===========================================================================================
THREE MONTHS ENDED MARCH 31, 2002
-------------------------------------------------------------------------------------------
ACCUMULATED
OTHER
CAPITAL IN COMPRE-
PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE HENSIVE OTHER
STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME EQUITY TOTAL
-------------------------------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 150,000 $ 32,740 $ 608,942 $ 512,837 $(540,946) $ (923) $ (4,780) $ 757,870
Comprehensive income:
Net income 15,888 15,888
Other comprehensive income:
Unrealized gain (loss) on
equity investments 9 9
Foreign currency translation
adjustment (81) (81)
---------
Total comprehensive income 15,816
---------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 301 6,228 (189) 6,340
Proceeds from issuance of common shares 906 22,750 23,656
Restricted stock amortization 405 405
Cash dividends paid (22,527) (22,527)
-------------------------------------------------------------------------------------------
Balances at end of period $ 150,000 $ 33,947 $ 637,920 $ 528,725 $(563,473) $ (995) $ (4,564) $ 781,560
===========================================================================================
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31
2003 2002
-------------- ---------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 19,297 $ 15,888
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 11,658 8,696
Amortization 1,188 981
Provision for loan losses 250 250
Commitment fees earned
greater than cash received (456)
Rental income in excess of
cash received (4,204) (2,122)
Equity in (earnings) losses of affiliated companies (81) 104
(Gain) loss on sales of properties (34)
Increase (decrease) in accrued expenses and
other liabilities (12,909) (4,253)
Decrease (increase) in receivables and
other assets 4,139 (1,458)
--------- ---------
Net cash provided from (used in) operating activities 19,304 17,630
INVESTING ACTIVITIES
Investment in real property (38,796) (97,659)
Investment in loans receivable
and subdebt investments (18,098) (7,338)
Other investments, net of payments 300 (228)
Principal collected on loans receivable
and subdebt investments 17,445 731
Proceeds from sales of properties 144
Other (71) (8)
--------- ---------
Net cash provided from (used in) investing activities (39,076) (104,502)
FINANCING ACTIVITIES
Net increase (decrease) under unsecured
line of credit arrangements (35,400) 78,000
Proceeds from issuance of senior notes 100,000
Principal payments on secured debt (101) (90)
Net proceeds from the issuance of common stock 2,824 29,996
Decrease (increase) in deferred loan expense 3,138 (211)
Cash distributions to stockholders (26,361) (22,527)
--------- ---------
Net cash provided from (used in) financing activities 44,100 85,168
--------- ---------
Increase (decrease) in cash and cash equivalents 24,328 (1,704)
Cash and cash equivalents at beginning of period 9,550 9,826
--------- ---------
Cash and cash equivalents at end of period $ 33,878 $ 8,122
========= =========
Supplemental cash flow information-interest paid $ 20,289 $ 14,170
========= =========
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
March 31, 2003, are not necessarily an indication of the results that may be
expected for the year ending December 31, 2003. For further information, refer
to the financial statements and footnotes thereto included in our annual report
on Form 10-K for the year ended December 31, 2002.
NOTE B - REAL ESTATE INVESTMENTS
During the three months ended March 31, 2003, we invested $32,465,000 in real
property, provided permanent mortgage and loan financings of $14,911,000, made
construction advances of $6,331,000 and funded $3,187,000 of subdebt
investments. As of March 31, 2003, we had approximately $36,539,000 in unfunded
construction commitments. Also during the three months ended March 31, 2003, we
sold real property generating $144,000 of net proceeds and collected $17,293,000
and $152,000 as repayment of principal on loans receivable and subdebt
investments, respectively.
NOTE C - EQUITY INVESTMENTS
We have an investment in Atlantic Healthcare Finance L.P., a property group that
specializes in the financing, through sale and leaseback transactions, of
nursing and care homes located in the United Kingdom. This investment is
accounted for using the equity method of accounting because we have the ability
to exercise significant influence, but not control, over the investee due to our
31% ownership interest.
Other equity investments, which consist of investments in private and public
companies for which we do not have the ability to exercise influence, are
accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. For investments in public companies that have readily
determinable fair market values, we classify our equity investments as
available-for-sale and, accordingly, record these investments at their fair
market values with unrealized gains and losses included in accumulated other
comprehensive income, a separate component of stockholders' equity. These
investments represent a minimal ownership interest in these companies.
NOTE D - DISTRIBUTIONS PAID TO COMMON STOCKHOLDERS
On February 20, 2003, we paid a dividend of $0.585 per share to stockholders of
record on January 31, 2003. This dividend related to the period from October 1,
2002 through December 31, 2002.
7
NOTE E - DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is
effective for fiscal years beginning after December 15, 2001. We adopted the
standard effective January 1, 2002.
During the three months ended March 31, 2003, we sold one assisted living
facility with a carrying value of $110,000 for a net gain of $34,000. In
accordance with Statement No. 144, we have reclassified the income and expenses
attributable to all properties sold subsequent to January 1, 2002, to
discontinued operations. Expenses include an allocation of interest expense
based on property carrying values and our weighted average cost of debt. The
following illustrates the reclassification impact of Statement No. 144 as a
result of classifying the properties as discontinued operations (in thousands):
THREE MONTHS ENDED
MARCH 31
----------------------------
2003 2002
---------- ----------
Revenues
Rental income $ 0 $1,312
Expenses
Interest expense 1 263
Provision for depreciation 5 384
------ ------
Income (loss) from discontinued operation, net $ (6) $ 665
====== ======
NOTE F - CONTINGENT LIABILITIES
We have guaranteed the payment of industrial revenue bonds for one assisted
living facility, in the event that the present owner defaults upon its
obligations. In consideration for this guaranty, we receive and recognize fees
annually related to this agreement. This guaranty expires upon the repayment of
the industrial revenue bonds which currently mature in 2009. At March 31, 2003,
we were contingently liable for $3,195,000 under this guaranty.
In addition, we have an outstanding letter of credit issued to a bank, which
bank provided additional financing for a project on which we have a first
mortgage. We have also partially guaranteed the payment of loans made by the
bank on this project. The letter of credit currently matures in 2003 and the
guaranties expire upon the repayment of the loans, which currently mature in
2003. At March 31, 2003, obligations under these agreements for which we were
contingently liable aggregated approximately $4,650,000.
As of March 31, 2003, we had approximately $36,539,000 of unfunded construction
commitments.
On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries filed for Chapter 11 bankruptcy protection. Doctors has stated that
the bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, who halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property
that is owned by one of the debtor subsidiaries. The outstanding principal
balance of the loan is approximately $18.8 million at March 31, 2003. Based upon
a recent appraisal and the historical performance of Pacifica Hospital, we
expect to receive payment in full before December 31, 2003, of the outstanding
principal and accrued interest, which we believe we are entitled to as an
oversecured creditor. Doctors did not make an interest payment for the three
months ended March 31, 2003. As previously announced, we do not currently intend
to recognize any interest on the loan if payment is not received.
Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on
January 23, 2003. We have a master lease with Alterra for 45 assisted living
facilities with a depreciated book value of $105.6 million at March 31, 2003.
Alterra has remained current on rental payments through April 2003. Alterra
filed its plan of reorganization and disclosure statement on March 27, 2003 and
indicated its intention to assume the master lease at current rental levels.
Based on Alterra's plan and disclosure statement, we expect confirmation by
September 30, 2003.
8
NOTE G - 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
MARCH 31
-------------------------
2003 2002
-------- ---------
Numerator for basic and diluted earnings
per share - net income available to common
stockholders $16,451 $12,511
======= =======
Denominator for basic earnings per
share - weighted average shares 39,971 32,946
Effect of dilutive securities:
Employee stock options 259 492
Non-vested restricted shares 243 255
------- -------
Dilutive potential common shares 502 747
------- -------
Denominator for diluted earnings per
share - adjusted weighted average shares 40,473 33,693
======= =======
Basic earnings per share $ 0.41 $ 0.38
======= =======
Diluted earnings per share $ 0.41 $ 0.37
======= =======
The diluted earnings per share calculation excludes the dilutive effect of
50,000 and 10,000 shares for the three month periods ended March 31, 2003 and
March 31, 2002, 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 H - OTHER EQUITY
Other equity consists of the following (in thousands):
MARCH 31
-----------------------------
2003 2002
----------- -----------
Accumulated compensation expense related
to stock options $ 62 $ 0
Unamortized restricted stock (2,940) (4,564)
------- -------
$(2,878) $(4,564)
======= =======
Unamortized restricted stock represents the unamortized value of restricted
stock granted to employees and directors. Expense, which is recognized as the
shares vest based on the market value at the date of the award, totaled $493,000
and $405,000 for the three months ended March 31, 2003 and 2002, respectively.
In December 2002, the Financial Accounting Standards Board issued Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure, that
we are required to adopt for fiscal years beginning after December 15, 2002,
with transition provisions for certain matters. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Effective January 1, 2003, we commenced
recognizing compensation expense in accordance with Statement 123 on a
prospective basis. Accumulated option compensation expense represents the amount
of amortized compensation costs related to stock options awarded to employees
and directors in 2003.
9
The following table illustrates the effect on net income available to common
stockholders if we had applied the fair value recognition provisions of FASB 123
to stock-based compensation for options granted since 1995 (in thousands, except
per share data):
Three Months Ended
March 31
---------------------
2003 2002
-------- --------
Numerator:
Net income available to common
stockholders - as reported $16,451 $12,511
Deduct: Stock based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects 109 136
Net income available to common
------- -------
stockholders - pro forma $16,342 $12,375
======= =======
Denominator:
Basic weighted average shares -
as reported and pro forma 39,971 32,946
Effect of dilutive securities:
Employee stock options - pro forma 213 382
Non-vested restricted shares 243 255
------- -------
Dilutive potential common shares 456 637
Diluted weighted average shares -
------- -------
pro forma 40,427 33,583
======= =======
Net income available to common
stockholders per share - as reported
Basic $ 0.41 $ 0.38
Diluted 0.41 0.37
Net income available to common
stockholders per share - pro forma
Basic $ 0.41 $ 0.38
Diluted 0.40 0.37
NOTE I - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes unrealized gains or losses on
our equity investments and foreign currency translation adjustments. These items
are included as components of stockholders' equity. Other comprehensive income
for the three months ended March 31, 2003 and 2002, totaled ($174,000) and
($72,000), respectively.
NOTE J - SIGNIFICANT CHANGES AND EVENTS
In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in
September 2012, at an effective yield of 7.40%. These notes were an add-on to
the $150,000,000 senior unsecured notes sold in September 2002. The aggregate
principal amount of outstanding notes of this series is now $250,000,000.
10
NOTE K - NEW ACCOUNTING POLICIES
In April 2002, the Financial Accounting Standards Board issued Statement 145,
Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No.
13, and Technical Corrections. Statement 145 requires 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 is effective
for fiscal years beginning after December 15, 2002. We adopted the standard
effective January 1, 2003.
Effective January 1, 2003, we commenced recognizing compensation expense for
employee stock options in accordance with Statement 123 on a prospective basis.
See Note H.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003, our net real estate investments totaled approximately
$1,551,889,000 and included 162 assisted living facilities, 78 skilled nursing
facilities and eight specialty care facilities. Depending upon the availability
and cost of external capital, we anticipate making additional investments in
health care related facilities. New investments are funded from temporary
borrowings under our unsecured 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 unsecured line of credit
arrangements, is expected to be provided through a combination of public and
private offerings of debt and equity securities and the incurrence of secured
debt. We believe our liquidity and various sources of available capital are
sufficient to fund operations, meet debt service and dividend requirements and
finance future investments.
In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in
September 2012, at an effective yield of 7.40%. These notes were an add-on to
the $150,000,000 senior unsecured notes sold in September 2002. The aggregate
principal amount of outstanding notes of this series is now $250,000,000.
As of March 31, 2003, we had stockholders' equity of $893,373,000 and a total
outstanding debt balance of $740,830,000, which represents a debt to total book
capitalization ratio of 0.45 to 1.0.
In August 2002, we announced the amendment and extension of our primary
unsecured revolving line of credit. The line of credit was expanded to
$175,000,000, expires in August 2005 (with the ability to extend for one year at
our discretion if we are in compliance with all covenants) and currently bears
interest at the lender's prime rate or LIBOR plus 1.3% at our option. In
addition, at March 31, 2003, we had an unsecured revolving line of credit in the
amount of $25,000,000, bearing interest at the lender's prime rate and which
expires in June 2003. Also, at March 31, 2003, we had a secured line of credit
in the amount of $60,000,000 bearing interest at the lender's prime rate or
LIBOR plus 2.0%, at our option, with a floor of 7.0% and which expires in April
2004. Additionally, at March 31, 2003, we had a secured note in the amount of
$4,000,000 bearing interest at LIBOR plus 2.0% and which matures in November
2004. At March 31, 2003, we had $74,100,000 in borrowings outstanding under the
unsecured line of credit arrangements and $4,000,000 outstanding on the secured
note.
As of April 28, 2003, we had an effective shelf registration on file with the
Securities and Exchange Commission under which we may issue up to $285,557,000
of securities including debt securities, common and preferred stock and
warrants. Depending upon market conditions, we anticipate issuing securities
under our shelf registration to invest in additional health care facilities and
to repay borrowings under our unsecured line of credit arrangements.
RESULTS OF OPERATIONS
Revenues were comprised of the following:
Three months ended Change
------------------------------- -------------------------------
Mar. 31, 2003 Mar. 31, 2002 $ %
------------- ------------- ----------- ----------
(in thousands)
Rental income $ 40,760 $ 28,739 $ 12,021 42%
Interest income 4,940 6,787 (1,847) -27%
Commitment fees and
other income 592 557 35 6%
-------- -------- -------- --------
Totals $ 46,292 $ 36,083 $ 10,209 28%
======== ======== ======== ========
For the three months ended March 31, 2003, we generated increased rental income
as a result of the acquisition of properties for which we receive rent. This was
partially offset by a reduction in interest income due to the repayment of
mortgage loans.
12
Expenses were comprised of the following:
Three months ended Change
----------------------------- ----------------------------
Mar. 31, 2003 Mar. 31, 2002 $ %
------------- ------------- ----------- ----------
(in thousands)
Interest expense $11,875 $ 9,479 $ 2,396 25%
Provision for
depreciation 11,652 8,293 3,359 41%
General and administrative 2,611 2,261 350 15%
Loan expense 635 577 58 10%
Provision for loan losses 250 250 0 0%
------- ------- ------- -------
Totals $27,023 $20,860 $ 6,163 30%
======= ======= ======= =======
The increase in interest expense from 2002 to 2003 was primarily due to higher
average borrowings in 2003. This was partially offset by an increase in the
amount of capitalized interest offsetting interest expense.
We capitalize certain interest costs associated with funds used to finance the
construction of properties owned directly by us. The amount capitalized is based
upon the borrowings outstanding during the construction period using the rate of
interest that approximates our cost of financing. Our interest expense is
reduced by the amount capitalized. Capitalized interest for the three months
ended March 31, 2003, totaled $258,000. We had no capitalized interest for the
three months ended March 31, 2002.
The provision for depreciation increased primarily as a result of additional
investments in properties owned directly by us.
General and administrative expenses as a percentage of revenues (including
revenues from discontinued operations) for the three months ended March 31,
2003, were 5.64% as compared with 6.05% for the same period in 2002.
The increase in loan expense was primarily due to the additional amortization of
costs related to the unsecured line of credit renewal and the unsecured senior
notes issued in 2002.
Other items: Three months ended Change
--------------------------------- ------------------------
Mar. 31, 2003 Mar. 31, 2002 $ %
-------------- -------------- ----------- ----------
(in thousands)
Gain (loss) on sales of
properties $ 34 $ 0 $ 34 n/a
Discontinued operations, net (6) 665 (671) -101%
Preferred dividends (2,846) (3,377) 531 -16%
------- ------- ------- -----
Totals $(2,818) $(2,712) $ (106) 4%
======= ======= ======= =====
During the three months ended March 31, 2003, we sold one property with a
carrying value of $110,000 for a gain of $34,000. This property generated a net
loss of $6,000 after deducting depreciation and interest expense from rental
income for the three months ended March 31, 2003. All properties sold from
January 1, 2002 through March 31, 2003, generated $665,000 of income after
deducting depreciation and interest expense from rental income for the three
months ended March 31, 2002.
During the year ended December 31, 2002, the holder of our Series C Cumulative
Convertible Preferred Stock converted 900,000 shares into 878,000 shares of
common stock, leaving 2,100,000 shares outstanding at March 31, 2003 as compared
to 3,000,000 at March 31, 2002. The decrease in preferred dividends is due to
the reduction in outstanding preferred shares.
As a result of the various factors mentioned above, net income available to
common stockholders for the three months ended March 31, 2003 was $16,451,000,
or $0.41 per diluted share, as compared with $12,511,000, or $0.37 per diluted
share, for the same period in 2002.
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 enter into
agreements with 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,
13
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
"believe", "expect", "anticipate", 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, but not limited to: 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. Other important factors are identified in our Annual Report
on Form 10-K for the year ended December 31, 2002, including factors identified
under the headings "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." 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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates. We seek to mitigate the effects of
fluctuations in interest rates by matching the terms 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.
We historically borrow on our revolving lines of credit to make acquisitions of,
loans to or to construct health care facilities. Then, as market conditions
dictate, we 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 the interest expense associated with
our fixed rate debt. Interest rate changes, however, will affect the fair value
of our fixed rate debt. A 1% increase in interest rates would result in a
decrease in fair value of our senior unsecured notes by approximately $15
million at March 31, 2003 ($15 million at March 31, 2002). Changes in the
interest rate environment upon maturity of this fixed rate debt could have an
effect on our future cash flows and earnings, depending on whether the debt is
replaced with other fixed rate debt, variable rate debt, or equity or repaid by
the sale of assets.
Our variable rate debt, including our unsecured and secured revolving credit
arrangements, is reflected at fair value. At March 31, 2003, a 1% increase in
interest rates related to this variable rate debt (assuming no changes in
outstanding balances) would result in increased annual interest expense of
$781,000 ($1,110,000 at March 31, 2002).
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of refinancing may
not be as favorable as the terms of current indebtedness. The majority of our
borrowings were completed under indentures or contractual agreements that limit
the amount of indebtedness we may incur. Accordingly, in the event that we are
unable to raise additional equity or borrow money because of these limitations,
our ability to acquire additional properties may be limited.
We may or may not elect to use financial derivative instruments to hedge
variable interest rate exposure. These decisions are principally based on our
policy to match our variable rate investments with comparable borrowings, but
are also based on the general trend in interest rates at the applicable dates
and our perception of the future volatility of interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q,
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 March 31, 2003, 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.
15
PART II. OTHER INFORMATION
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.
(b) Reports on Form 8-K
Date of Report Item Description
-------------- ---- -----------
March 12, 2003 5 Documentation regarding an issuance of $100 million
in senior unsecured notes of the Company.
May 1, 2003 12 The Company issued a press release that announced
operating results of its first quarter ended March 31, 2003.
16
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: May 7, 2003 By: /S/ GEORGE L. CHAPMAN
------------------------- ---------------------------------
George L. Chapman,
Chairman and Chief Executive Officer
Date: May 7, 2003 By: /S/ RAYMOND W. BRAUN
------------------------- ---------------------------------
Raymond W. Braun,
President and Chief Financial Officer
Date: May 7, 2003 By: /S/ MICHAEL A. CRABTREE
------------------------- ---------------------------------
Michael A. Crabtree,
Chief Accounting Officer
17
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: May 7, 2003
-----------------------------
/s/ GEORGE L. CHAPMAN
--------------------------------
George L. Chapman,
Chief Executive Officer
18
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: May 7, 2003
-----------------------------
/s/ RAYMOND W. BRAUN
---------------------------------
Raymond W. Braun,
Chief Financial Officer
19