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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 1998 Commission File No. 1-8923
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One SeaGate, Suite 1500, Toledo, Ohio 43604
(Address of principal executive office) (Zip Code)
(419) 247-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common Stock, $1.00 par value New York Stock Exchange
8.875% Series B Cumulative New York Stock Exchange
Redeemable Preferred Stock
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months; and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [ ]
The aggregate market value of voting common stock held by non-affiliates of the
Registrant on March 1, 1999 was $683,702,000 based on the reported closing sales
price of such shares on the New York Stock Exchange for that date. As of March
1, 1999, there were 28,317,335 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the annual
shareholders' meeting to be held April 20, 1999, are incorporated by reference
into Part III.
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HEALTH CARE REIT, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business........................................................ 3
Item 2. Properties......................................................10
Item 3. Legal Proceedings...............................................11
Item 4. Submission of Matters to a Vote of Security Holders.............11
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters..................................11
Item 6. Selected Financial Data.........................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................13
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......16
Item 8. Financial Statements and Supplementary Data.....................17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................33
PART III
Item 10. Directors and Executive Officers of the Registrant..............33
Item 11. Executive Compensation..........................................33
Item 12. Security Ownership of Certain Beneficial Owners
and Management...............................................33
Item 13. Certain Relationships and Related Transactions..................33
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K..........................................34
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PART I
ITEM 1. BUSINESS
GENERAL
Health Care REIT, Inc. (the "Company") is a self-administered real estate
investment trust that invests in health care facilities, primarily nursing
homes, assisted living facilities and retirement centers. The Company also
invests in specialty care facilities. As of December 31, 1998, long-term care
facilities, which include nursing homes, assisted living facilities and
retirement centers, comprised approximately 90% of the investment portfolio.
Founded in 1970, the Company was the first real estate investment trust to
invest exclusively in health care facilities.
As of December 31, 1998, the Company had $1,042,058,000 of real estate
investments, inclusive of credit enhancements, in 224 facilities located in 34
states and managed by 45 different operators. At that date, the portfolio
included 147 assisted living facilities, 54 nursing homes, 15 retirement
centers, six specialty care facilities, and two behavioral care facilities. At
December 31, 1998, the Company had approximately $209,900,000 in unfunded
commitments.
The Company's primary objectives are to protect shareholders' capital and
enhance shareholder value. The Company seeks to pay consistent cash dividends to
shareholders and create opportunities to increase dividend payments from annual
increases in rental and interest income and portfolio growth. To meet these
objectives, the Company invests primarily in long-term care facilities managed
by experienced operators and diversifies its investment portfolio by operator
and geographic location.
The Company anticipates investing in additional health care facilities through
operating lease arrangements with, and mortgage financings for, qualified health
care operators. Capital for future investments may be provided by borrowing
under the Company's revolving credit facilities, public offerings or private
placements of debt or equity, and the assumption of secured indebtedness.
PORTFOLIO OF PROPERTIES
The following table reflects the diversification of the Company's portfolio as
of December 31, 1998:
Number
Percentage Number of Investment Number Number
Type of Investments of of Beds/ Per Bed/ Of of
Facility (1) Portfolio Facilities Units Unit(2) Operators(3) States(3)
-------- ------------ --------- ---------- ----- ------- ------------ ---------
(In thousands)
Assisted Living
Facilities $ 584,288 56% 147 9,824 $ 72,335 21 26
Nursing Homes 294,414 28% 54 7,005 45,253 18 18
Specialty Care
Facilities 91,994 9% 6 713 129,024 3 5
Retirement Centers 60,876 6% 15 1,366 53,668 7 7
Behavioral Care
Facilities 10,486 1% 2 294 35,667 1 1
---------- --- --- ------
Totals $1,042,058 100% 224 19,202
========== === === ======
- --------------------------
(1) Investments include real estate investments and credit enhancements which
amounted to $1,032,693,000 and $9,365,000, respectively.
(2) Investment Per Bed/Unit was computed by using the total investment amount
of $1,203,403,000 which includes real estate investments, unfunded
commitments for which initial funding has commenced, and credit
enhancements which total $1,032,693,000, $161,345,000 and $9,365,000,
respectively.
(3) The Company has investments in properties located in 34 states, managed by
45 different operators.
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Nursing Homes
Skilled nursing facilities provide inpatient skilled nursing and custodial
services as well as rehabilitative, restorative and transitional medical
services. In some instances, nursing facilities supplement hospital care by
providing specialized care for medically complex patients whose conditions
require intense medical and therapeutic services, but who are medically stable
enough to have these services provided in facilities that are less expensive
than acute care hospitals.
Assisted Living Facilities
Assisted living facilities provide services to aid in everyday living, such as
bathing, meals, security, transportation, recreation, medication supervision and
limited therapeutic programs. More intensive medical needs of the resident are
often met within assisted living facilities by home health providers, close
coordination with the resident's physician and skilled nursing facilities.
Assisted living facilities are increasingly successful as lower cost, less
institutional alternatives for the health problems of the elderly or medically
frail.
Retirement Centers
Retirement centers offer specially designed residential units for active and
ambulatory elderly residents and provide various ancillary services. Retirement
centers offer residents an opportunity for an independent lifestyle with a range
of social and health services.
Specialty Care Facilities
Specialty care facilities provide specialized inpatient services for specific
illnesses or diseases, including, among others, coronary and cardiovascular
services. Specialty care facilities are lower cost alternatives to acute care
hospitals.
Behavioral Care Facilities
Behavioral care facilities offer comprehensive inpatient and outpatient
psychiatric treatment programs. Programs are tailored to the individual and
include individual, group and family therapy.
INVESTMENTS
The Company invests in income producing health care facilities with a primary
focus on long-term care facilities, which include skilled nursing facilities,
assisted living facilities and retirement centers. The Company also invests in
specialty care facilities. The Company intends to continue to diversify its
investment portfolio by type of health care facilities, number of operators and
geographic location.
In determining whether to finance a facility, the Company focuses on: (a) the
experience of the operator; (b) the financial and operational feasibility of the
property; (c) the financial strength of the borrower or lessee; (d) the security
available to support the financing; and (e) the amount of capital committed to
the property by the borrower or lessee. Management conducts market research and
analysis for all potential investments. In addition, Management reviews the
value of all properties, the interest rates and debt service coverage
requirements of any debt to be assumed and the anticipated sources for repayment
for such debt.
The Company's investments primarily take the form of operating lease
transactions, permanent mortgage loans and construction financings.
Substantially all of the Company's mortgage loans are designed with escalating
rate structures that may result in principal payment prior to maturity. The
Company's policy is to structure long term financings to maximize returns. The
Company believes that appropriate new investments will be available in the
future with substantially the same spreads over its costs of borrowing
regardless of interest rate fluctuations.
Mortgage loans and operating leases are normally secured by guarantees and/or
letters of credit. As of December 31, 1998, letters of credit from commercial
banks, and cash deposits aggregating $48,260,000 were available to the Company
as security for operating lease, permanent mortgage loan and construction loan
obligations. In addition, the leases and loans are generally cross-defaulted and
the loans are cross-collateralized with any other mortgage loans, leases, or
other agreements between the operator or any affiliate of the operator and the
Company.
The Company typically finances up to 90% of the appraised value of a property.
Economic terms normally include annual rate increases and fair market value
based purchase options in operating leases, and may include contingent interest
for mortgage loans.
The Company monitors its investments through a variety of methods, which are
determined by the type of health care facility and operator. The monitoring
process includes a review and analysis of facility, borrower or lessee, and
guarantor financial statements; periodic site visits; property reviews; and
meetings with operators. Such reviews of operators and facilities generally
encompass licensure and regulatory compliance materials and reports,
contemplated building improvements and other material developments.
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For certain investments, the Company receives warrants or other similar equity
instruments that provide the Company with an opportunity to share in an
operator's enterprise value. As of December 31, 1998, the Company had warrants
from 19 operators to purchase their common stock or partnership interest. None
of the warrants are publicly traded. In one instance, the underlying common
stock that relates to one set of warrants is publicly traded, and the market
price of the common stock exceeded the exercise price of the related warrants at
December 31, 1998, the value of which was recorded on the Company's balance
sheet in an amount equal to $596,000.
In connection with investments in two operators, the Company also received
warrants that were converted into shares of common stock. As of December 31,
1998, those shares of common stock were recorded on the Company's balance sheet
at a value of $3,510,000.
Operating Leases
Each facility, which includes the land, buildings, improvements and related
rights (the "Leased Properties") owned by the Company is leased to a health care
provider pursuant to a long-term lease (collectively, the "Leases"). The Leases
generally have a fixed term of 10 to 13 years and contain multiple five-to
ten-year renewal options. Each Lease is a triple net lease requiring the lessee
to pay rent and all additional charges incurred in the operation of the Leased
Property. The lessees are required to repair, rebuild and maintain the Leased
Properties.
The net value of the Company's completed leased properties aggregated
approximately $468,672,000 at December 31, 1998. The base rents range from
approximately 9.4% to 13.7% per annum of the Company's equity investment in the
leased properties. The rental yield to the Company from Leases depends upon a
number of factors including the initial rent charged, any rental adjustments and
the amount of the commitment fee charged at the inception of the transaction.
The base rents for the renewal periods are generally fixed rents set at a spread
above the Treasury yield for the corresponding period.
Permanent Mortgage Loans
The Company's investments in permanent mortgage loans are structured to provide
the Company with interest income, principal amortization and commitment fees.
Virtually all of the approximately $355,974,000 of permanent mortgage loans as
of December 31, 1998 were first mortgage loans.
The interest rate on the Company's investments in permanent mortgage loans for
operating facilities ranges from 8.89% to 13.46% per annum on the outstanding
balances. The yield to the Company on permanent mortgage loans depends upon a
number of factors, including the stated interest rate, average principal amount
outstanding during the term of the loan, the amount of the commitment fee
charged at the inception of the loan and any interest rate adjustments.
The permanent mortgage loans for operating facilities made through December 31,
1998 are generally subject to seven- to ten-year terms with 25-year
amortization schedules that provide for a balloon payment of the outstanding
principal balance at the end of the term. Generally, the permanent mortgage
loans provide five to seven years of prepayment protection.
Direct Investments
Management determines the appropriate classification of a direct investment at
the time of acquisition and reevaluates such designation as of each balance
sheet date. Debt securities which are classified as held to maturity are stated
at historical cost. Equity investments are stated at historical cost. At
December 31, 1998, direct investments included the preferred stock of one
private corporation, subordinated debt in eight private corporations, 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.
Construction Financing
The Company provides construction financing that by their terms converts either
into a long-term operating lease or mortgage loan upon the completion of the
facilities. Generally, the rates on the outstanding balances of the Company's
construction financings are 225 to 350 basis points over the prime rate of a
specified financial institution. The Company also typically charges a commitment
fee at the commencement of the financing. The construction financing period
commences upon funding and terminates upon the earlier of the completion of
development of the applicable facility or the end of a specified period,
generally 12 to 18 months. During the term of the construction financing, funds
are advanced pursuant to draw requests made by the operator in accordance with
the terms and conditions of the applicable financing agreement, which terms
require, among other things, a site visit by a Company representative prior to
the advancement of funds. Monthly payments are made on the total amount of the
proceeds advanced during the development period.
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During the construction financing period, the Company generally requires
additional security and collateral in the form of either payment and performance
bonds and/or completion guarantees by either one, or a combination of, the
operator's parent entity, other affiliates of the operator, or one or more of
the individual principals of the operator.
At December 31, 1998, the Company had outstanding construction financings of
$194,025,000 ($151,317,000 leased properties and $42,708,000 mortgage loans) and
was committed to providing additional financing of approximately $151,850,000 to
complete construction.
BORROWING POLICIES
The Company may arrange for long-term borrowing from banks, private placements
to institutional investors, or public offerings. For other short-term purposes,
the Company may, from time to time, negotiate lines of credit, or arrange for
other short-term borrowing from banks or others.
In addition, the Company may incur mortgage indebtedness on real estate that it
has acquired through purchase, foreclosure or otherwise. When terms are deemed
favorable, the Company may invest in properties subject to existing loans and
mortgages. In addition, the Company may obtain financing for unleveraged
properties in which it has invested or may refinance properties acquired on a
leveraged basis.
Under documents pertaining to existing indebtedness, the Company is subject to
various restrictions with respect to secured and unsecured indebtedness.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for possible loan losses that is evaluated
quarterly to determine its adequacy. See Notes 1 and 6 of Notes to Financial
Statements. At December 31, 1998, the total allowance of $4,987,000 was not
allocated to any specific properties. The Company believes that its allowance is
adequate.
COMPETITION
The Company competes with other real estate investment trusts, real estate
partnerships, banks, insurance companies and other investors in the acquisition,
leasing and financing of health care facilities.
The operators of the facilities compete on a local and regional basis with
operators of facilities that provide comparable services. Operators compete for
patients and residents based on a number of factors, including quality of care,
reputation, physical appearance of facilities, services offered, family
preferences, physicians, staff and price.
EMPLOYEES
As of December 31, 1998, the Company employed 23 full-time employees.
CERTAIN GOVERNMENT REGULATIONS
The Company invests in single purpose health care facilities. The Company's
customers must comply with the licensing requirements of federal, state and
local health agencies, and with the requirements of municipal building codes,
health codes, and local fire departments. In granting and renewing a facility's
license, the state health agency considers, among other things, the physical
buildings and equipment, the qualifications of the administrative personnel and
clinical staffs, the quality of health care programs and compliance with
applicable laws.
Many of the facilities operated by the Company's customers receive a substantial
portion of their revenues from the federal Medicare program and state Medicaid
programs; therefore, the Company's revenues may be indirectly affected by
changes in these programs. The amount of program payments can be changed by
legislative or regulatory actions and by determinations by agents for the
programs. Since Medicaid programs are funded by both the states and the federal
government, the amount of payments can be affected by changes at either the
state or federal level. There is no assurance that payments under these programs
will remain at levels comparable to present levels or be sufficient to cover
costs allocable to these patients.
Under Medicare and Medicaid programs, acute care hospitals are generally paid a
fixed amount per discharge (based on the patient's diagnosis) for inpatient
services. Behavioral and rehabilitation hospitals are generally paid on a cost
basis, subject to limitations based on a "target amount" per discharge. The
target amount is based on updates to the facility's costs per discharge in a
base year.
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Medicare payment rules for such hospitals were changed effective October 1, 1997
to further limit reimbursable costs, reduce payment incentives for providers
whose costs are below the target amount, and reduce capital-related payments by
15%. The target amount for any facility is now capped at the 75th percentile of
the target amounts for facilities of the same type. (For new facilities, the
target is 110% of the median costs per discharge of similar hospitals.) In
addition, the target amount update is set at 0% for federal fiscal 1998.
Depending on how the facility's costs per discharge compare to its target
amount, increases thereafter range from 0% to the "market basket" percentage
reflecting the inflation rate for costs of items purchased by similar
facilities.
In addition, payments to rehabilitation hospitals and units will be based on
fixed rates per discharge that vary according to the nature of the patient's
condition. The new system will be phased in over three years beginning with the
cost reporting year commencing after October 1, 2000.
Medicare and Medicaid programs have traditionally reimbursed nursing facilities
for the reasonable direct and indirect allowable costs incurred in providing
routine services (as defined by the programs), subject to certain cost ceilings.
In 1998, the Medicare cost-based reimbursement system was replaced by a federal
per diem rate based on the patient's condition, which is phased in over three
years. (New facilities are immediately paid based on the federal rate.) The new
per diem rate will be the sole payment for both direct nursing care ("Part A
services") and ancillary services that were previously billed separately from
the cost-based reimbursement system ("Part B services"). Capital costs are also
included in the per diem rate. Many states have also converted to a system based
on prospectively determined fixed rates, which may be based in part on
historical costs. Initial estimates indicated that the new Federal System will
reduce revenues of Company financed nursing facilities by approximately 3%,
which should be offset in part by cost reductions. Overall, the new system will
increase the importance of effective and efficient management.
Until 1997, state Medicaid programs were required to pay hospitals and nursing
facilities based on rates that were reasonable and adequate to meet the costs
that must be incurred by efficiently and economically operated facilities in
order to provide services in conformity with federal and state standards and to
assure reasonable access to patients. This law restricted the ability of the
states to reduce Medicaid payments. Congress repealed this requirement in 1997.
Under the new law, states need only publish the methodology used to develop the
proposed rates, along with a justification for the methodology, and allow public
comment. This change could result in reduced Medicaid payments to facilities
operated by the Company's customers.
Medicare and Medicaid regulations could adversely affect the resale value of the
Company's health care facilities. Medicare regulations provide that effective
December 1, 1997, when a facility changes ownership (by sale or under certain
lease transactions), reimbursement for depreciation and interest will be based
on the cost to the owner of record as of August 5, 1997, less depreciation
allowed. Previously, the buyer would use its cost of purchase up to the original
owner's historical cost BEFORE depreciation. Medicaid regulations allow a
limited increase in the valuation of nursing facilities (but not hospitals)
during the time the seller owned the facility. Other Medicaid regulations
provide that upon resale, facilities are responsible to pay back prior
depreciation reimbursement payments that are "recaptured" as a result of the
sale.
Recent interpretations of the Medicare laws limit the ability of hospitals and
nursing facilities to be reimbursed for interest costs that are deemed to be
unnecessary because the facilities have other funds derived from patient care
activities that were put to other uses (such as investments) or transferred to
related parties. This could reduce reimbursement to Company customers for
interest on loans from the Company.
Health care facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs--in some cases without a prior hearing--for failure
to meet program requirements.
Under the Medicare program, "peer review organizations" have been established to
review the quality and appropriateness of care rendered by health care
providers. These organizations may not only deny claims that fail to meet their
criteria, but can also fine and/or recommend termination of participation in the
program.
Recent changes in the Medicare and Medicaid programs will likely result in
increased use of "managed care" organizations to meet the needs of program
beneficiaries. These organizations selectively contract with health care
facilities, resulting in some facilities being excluded from the ability to
serve program beneficiaries.
Health care facilities also receive a substantial portion of their revenues from
private insurance carriers, health maintenance organizations, preferred provider
organizations, self-insured employees and other health benefit payment
arrangements. Such payment sources increasingly pay facilities under contractual
arrangements that include a limited panel of providers and/or discounted or
other special payment arrangements, including arrangements that shift the risk
of high utilization to the providers. A number of states have established
rate-setting agencies which control inpatient health care facility rates,
including private pay rates.
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Recent federal legislation substantially expanded activities to enforce laws
against fraud and abuse in federally funded health care programs. These laws
prohibit misrepresentations in billings and cost reports, payments to parties
who influence purchases or referrals of covered services, and provision of
unnecessary services.
President Clinton's budget proposal for federal fiscal 2000 includes the
following: (i) a $1,000 tax credit for families taking care of elderly and
disabled relatives at home, (ii) funding of a family caregivers' support program
to provide a range of critical services for the elderly, and (iii) permission
for the states to liberalize Medicaid eligibility standards for home and
community based long-term care in order to make those standards the same as for
nursing facility care. These proposals, if adopted, could reduce the demand for
nursing facility services. The budget proposal would also allow persons between
ages 62 and 65 to purchase Medicare coverage, and would further expand the
federal government's enforcement programs against health care fraud and abuse.
It is impossible to predict with any certainty what form any budget legislation
may ultimately take.
In order to meet a federal requirement, most states required providers to obtain
certificates of need prior to construction of inpatient facilities and certain
outpatient facilities. However, in 1987, the federal requirement was repealed.
Some states have repealed these requirements, which may result in increased
competition, and other states are considering similar repeals.
Nursing facilities compete with other subacute care providers, including
rehabilitation centers and hospitals. Many of these providers have underutilized
facilities and are converting some or all of their facilities into nursing
facilities. Some of these entities operate on a tax-exempt basis, which gives
them a capital cost advantage. Furthermore, some states have granted rest homes
the ability to provide limited nursing care services.
Certain states have adopted pre-admission screening and other programs to
promote utilization of outpatient and home-based services as an alternative to
inpatient facility services. Recent changes in Medicaid regulations allow states
to use Medicaid funding for alternatives to traditional inpatient care,
including home health care and assisted living facilities.
TAXATION
General
A corporation, trust or association meeting certain requirements may elect to be
treated as a "real estate investment trust." Beginning with its first fiscal
year and in all subsequent years, the Company has elected to be treated as a
real estate investment trust under Sections 856 to 860, inclusive, of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company intends to
operate in such manner as to continue to qualify as a real estate investment
trust for federal income tax purposes. No assurance can be given that the actual
results of the Company's operations for any one taxable year will satisfy such
requirements.
To qualify as a real estate investment trust, the Company must satisfy a variety
of complex requirements each year, including organizational and stock ownership
tests and percentage tests relating to the sources of its gross income, the
nature of its assets and the distribution of its income.
Generally, for each taxable year during which the Company qualifies as a real
estate investment trust, it will not be taxed on the portion of its taxable
income (including capital gains) that is distributed to shareholders. Any
undistributed income or gains will be taxed to the Company at regular corporate
tax rates. Beginning in 1998, any undistributed net long-term capital gains
taxed to the Company will be treated as having been distributed to the
shareholders and will be included by them in determining the amount of their
capital gains. The tax paid by the Company on those gains will be allocated
among the shareholders and may be claimed as a credit on their tax returns. The
shareholders will receive an increase in the basis of their shares in the
Company equal to the difference the capital gain income and the tax credit
allocated to them. The Company will be subject to tax at the highest corporate
rate on its net income from foreclosure property, regardless of the amount of
its distributions. The highest corporate tax rate is currently 35%. The Company
may elect to treat any real property it acquires by foreclosure as foreclosure
property. This would permit the Company to hold such property acquired before
January 1, 1998 for up to two years and to hold property acquired after December
31, 1997 until the end of the third taxable year after the year of acquisition
without adverse consequences. Subject to certain limitations, the Company will
also be subject to an additional tax equal to 100% of the net income, if any,
derived from prohibited transactions. A prohibited transaction is defined as a
sale or disposition of inventory-type property or property held by the Company
primarily for sale to customers in the ordinary course of its trade or business,
which is not property acquired on foreclosure.
The Company is subject to a nondeductible federal excise tax equal to 4% of the
amount, if any, by which 85% of its ordinary income plus 95% of its capital gain
net income (plus distribution deficiencies from prior years) exceeds
distributions actually paid or treated as paid to shareholders during the
taxable year, plus current year income upon which the Company pays tax and any
overdistribution from prior years. Due to the growth of the Company's income,
primarily as a result of large capital gains from the exercise of purchase
options
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under leases, the Company did not satisfy this requirement in 1998, 1997 and
1996 and incurred an excise tax of approximately $315,000, $360,000 and $317,000
respectively, in those years. There is a cumulative underdistribution of
$16,353,000 that will carry over to 1999 and later years until reduced by
distributions in a subsequent year that exceed the percentage of that year's
income that is required to be distributed currently.
Failure To Qualify
While the Company intends to operate so as to qualify as a real estate
investment trust under the Code, if in any taxable year the Company fails to
qualify, and certain relief provisions do not apply, its taxable income would be
subject to tax (including alternative minimum tax) at corporate rates. If that
occurred, the Company might have to dispose of a significant amount of its
assets or incur a significant amount of debt in order to pay the resulting
federal income tax. Further distributions to its stockholders would not be
deductible by the Company nor would they be required to be made.
Distributions out of the Company's current or accumulated earnings and profits
would be taxable to stockholders as dividends and would be eligible for the
dividends received deduction for corporations. No portion of any distributions
would be eligible for designation as a capital gain dividend. Further, the
Company would be unable to pass through its undistributed capital gains and the
related tax paid by the Company.
Unless entitled to relief under specific statutory provisions, the Company also
would be disqualified from taxation as a real estate investment trust for the
four taxable years following the year during which qualification was lost.
The foregoing is only a summary of some of the significant federal income tax
considerations affecting the Company and is qualified in its entirety by
reference to the applicable provisions of the Code, the rules and regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof. Stockholders of the Company are urged to consult their own tax advisors
as to the effects of these rules and regulations on them. In particular, foreign
stockholders should consult with their tax advisors concerning the tax
consequences of ownership of shares in the Company, including the possibility
that distributions with respect to the shares will be subject to federal income
tax withholding.
SUBSIDIARIES AND AFFILIATES
The Company has formed subsidiaries in connection with its real estate
transactions. As of December 31, 1998, the Company's wholly-owned subsidiaries
consisted of the following entities:
STATE OF ORGANIZATION DATE OF
NAME OF SUBSIDIARY AND TYPE OF ENTITY ORGANIZATION
- ------------------ ---------------------- ------------
HCRI Pennsylvania Properties, Inc. Pennsylvania corporation November 1, 1993
HCRI Overlook Green, Inc. Pennsylvania corporation July 9, 1996
HCRI Texas Properties, Inc. Texas corporation December 27, 1996
HCRI Texas Properties, Ltd. Texas limited partnership December 30, 1996
Health Care REIT International, Inc. Delaware corporation February 11, 1998
HCN Atlantic GP, Inc. Delaware corporation February 20, 1998
HCN Atlantic LP, Inc. Delaware corporation February 20, 1998
HCRI Nevada Properties, Inc. Nevada corporation March 27, 1998
HCRI Southern Investments I, Inc. Delaware corporation June 11, 1998
HCRI Louisiana Properties, L.P. Delaware limited partnership June 11, 1998
HCN BCC Holdings, Inc. Delaware corporation September 25, 1998
HCRI Tennessee Properties, Inc. Delaware corporation September 25, 1998
HCRI Limited Holdings, Inc. Delaware corporation September 25, 1998
Pennsylvania BCC Properties, Inc. Pennsylvania corporation September 25, 1998
HCRI Tennessee Properties, L.P. Tennessee limited partnership October 26, 1998
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ITEM 2. PROPERTIES
The Company's headquarters are currently located at One SeaGate, Suite 1500,
Toledo, Ohio 43604. The following table sets forth certain information regarding
the facilities that comprise the Company's investments as of December 31, 1998.
(In thousands)
Number Number --------------------------
of of Beds/ Total Annualized
Facility Location Facilities Units Investment(1) Income(2)
----------------- ---------- ----- ------------- ---------
SKILLED NURSING FACILITIES:
Arizona ................ 1 103 $ 4,095 $ 413
California ............. 2 222 7,755 911
Colorado ............... 1 180 6,313 638
Connecticut ............ 1 150 9,076 850
Florida ................ 6 720 41,143 4,604
Idaho .................. 3 404 22,331 2,253
Illinois ............... 1 120 7,745 902
Kentucky ............... 1 92 4,366 536
Massachusetts .......... 14 1,920 82,763 9,125
Michigan ............... 1 111 2,733 342
Missouri ............... 1 100 6,983 771
New York ............... 1 200 7,834 888
Ohio ................... 7 762 27,827 3,251
Oklahoma ............... 2 200 18,324 1,770
Oregon ................. 1 121 5,524 558
Pennsylvania ........... 3 415 18,996 2,433
Texas .................. 7 1,120 19,436 2,385
West Virginia .......... 1 65 1,170 224
-------------------------------------------------------
Total ................. 54 7,005 $ 294,414 $ 32,854
ASSISTED LIVING FACILITIES:
Alabama ................ 2 160 $ 2,865 $ 291
Arizona ................ 2 88 5,236 578
California ............. 2 87 6,053 614
Colorado ............... 1 50 2,454 249
Connecticut ............ 2 161 13,553 1,557
Florida ................ 19 1,157 68,830 7,550
Georgia ................ 4 361 28,248 2,786
Idaho .................. 1 48 2,602 297
Indiana ................ 1 60 7,007 738
Louisiana .............. 2 209 6,750 741
Maryland ............... 7 261 17,618 1,881
Massachusetts .......... 1 131 11,148 1,210
Montana ................ 2 104 5,362 608
Nevada ................. 1 115 9,570 1,052
New Jersey ............. 1 314 16,796 1,912
New Mexico ............. 2 159 7,886 892
New York ............... 6 823 62,510 6,352
North Carolina ......... 14 754 56,103 5,856
Ohio ................... 10 822 40,253 4,586
Oklahoma ............... 16 540 22,989 2,755
Oregon ................. 1 24 2,087 248
Pennsylvania ........... 8 744 40,919 4,864
South Carolina ......... 2 105 3,229 363
Tennessee .............. 3 162 4,607 497
Texas .................. 36 2,310 134,861 14,937
Virginia ............... 1 75 4,752 516
-------------------------------------------------------
Total ................. 147 9,824 $ 584,288 $ 63,930
RETIREMENT CENTERS:
Arizona ................ 1 164 $ 2,369 $ 307
California ............. 1 92 2,369 307
Illinois ............... 2 320 11,114 179
Indiana ................ 6 291 14,932 1,738
Nevada ................. 1 126 7,153 824
North Carolina ......... 2 159 14,640 1,472
Texas .................. 2 214 8,299 902
-------------------------------------------------------
Total ................. 15 1,366 $ 60,876 $ 5,729
SPECIALTY CARE FACILITIES:
Arkansas ............... 1 117 $ 29,000 $ 3,410
California ............. 2 416 31,894 3,905
Minnesota .............. 1 0 394 49
Texas .................. 1 70 13,633 1,449
Washington D.C ......... 1 110 17,073 2,131
-------------------------------------------------------
Total ................. 6 713 $ 91,994 $ 10,994
-------------------------------------------------------
BEHAVIORAL CARE FACILITIES:
Florida ................ 2 294 $ 10,486 $ 1,101
-------------------------------------------------------
TOTAL ALL FACILITIES: . 224 19,202 $1,042,058 $ 114,558
========== ========== ========== ==========
- ----------
(1) Investments include real estate investments and credit enhancements which
amounted to $1,032,693,000 and $9,365,000, respectively.
(2) Reflects contract rate of annual base rent or interest received or to be
received upon completion of construction.
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ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The following table sets forth, for the periods indicated, the high and low
prices of the Company's Common Stock on the New York Stock Exchange, as reported
on the Composite Tape and dividends paid per share. There were 5,555
shareholders of record as of December 31, 1998.
SALES PRICE DIVIDENDS
----------- ---------
HIGH LOW PAID
---- --- ----
1998
First Quarter..................................... $ 29.2500 $ 26.625 $ 0.540
Second Quarter.................................... 28.4375 25.375 0.545
Third Quarter..................................... 27.5000 22.375 0.550
Fourth Quarter.................................... 26.6250 20.000 0.555
1997
First Quarter..................................... $ 25.500 $23.625 $ 0.520
Second Quarter.................................... 25.000 22.250 0.525
Third Quarter .................................... 27.625 24.250 0.530
Fourth Quarter.................................... 28.750 25.500 0.535
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31, 1998
are derived from the audited consolidated financial statements of the Company.
Year Ended December 31,
----------------------------------------------------------
(In thousands, except per share data)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
OPERATING DATA
Revenues ......................................................... $97,992 $73,308 $54,402 $44,596 $42,732
Expenses:
Interest expense ............................................... 18,030 15,365 14,635 12,752 9,684
Provision for depreciation ..................................... 10,254 5,287 2,427 1,580 1,385
General and administrative
and other expenses(1) ........................................ 7,399 6,178 6,664 10,835 6,710
Settlement of management
contract(2) .................................................. -- -- -- 5,794 --
------- ------- ------- ------- -------
Total expenses ................................................... 35,683 26,830 23,726 30,961 17,779
------- ------- ------- ------- -------
Net income ....................................................... 62,309 46,478 30,676 13,635 24,953
Preferred stock dividends ........................................ 4,160 -- -- -- --
------- ------- ------- ------- -------
Net income available to common shareholders ..................... $58,149 $46,478 $30,676 $13,635 $24,953
======= ======= ======= ======= =======
OTHER DATA
Average number of common shares outstanding(3):
Basic ....................................................... 25,579 21,594 14,093 11,710 11,519
Diluted ..................................................... 25,954 21,929 14,150 11,728 11,548
Cash available for distribution(4) ............................... $68,490 $56,856 $36,705 $27,938 $31,697
PER SHARE
Net income available to common shareholders:
Basic ....................................................... $ 2.27 $ 2.15 $ 2.18 $ 1.16 $ 2.17
Diluted ..................................................... 2.24 2.12 2.17 1.16 2.16
Cash distributions per common share .............................. 2.19 2.11 2.08 2.075 2.01
December 31,
--------------------------------------------------------
(In thousands)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA
Real estate investments, net...................................... $1,027,706 $713,557 $512,894 $351,924 $318,433
Total assets...................................................... 1,073,424 734,327 519,831 358,092 324,102
Total debt........................................................ 418,979 249,070 184,395 162,760 128,273
Total liabilities................................................. 439,665 264,403 194,295 170,494 134,922
Total shareholders' equity........................................ 633,759 469,924 325,536 187,598 189,180
- --------------------------
(1) General and administrative and other expenses include loan expense,
management fees through November 30, 1995, provision for losses, expenses
related to disposition of investments and other operating expenses.
(2) On November 30, 1995, the Company's advisor merged into the Company.
Consideration for this transaction totaled approximately $5,048,000 which
was solely comprised of 282,407 Shares. In addition, the Company acquired
approximately $46,000 in net assets and incurred approximately $792,000 of
related transaction expenses. The consideration, plus related transaction
expenses, were accounted for as a settlement of a management contract.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page 22.
(4) Cash available for distribution is defined as net cash provided from
operating activities less preferred dividends, but does not consider the
effects of changes in operating assets and liabilities such as other
receivables and accrued expenses. The Company uses cash available for
distribution in evaluating investments and the Company's operating
performance. Cash available for distribution does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles, is not necessarily indicative of cash available to
fund cash needs, and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or as an
alternative to cash flow as a measure of liquidity.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company's net real estate investments totaled
approximately $1,027,706,000, which included 147 assisted living facilities, 54
nursing facilities, 15 retirement centers, six specialty care facilities and two
behavioral care facilities. The Company attempts to match fund its investments
through a combination of long-term and short-term financing, utilizing both debt
and equity.
During 1998, the Company invested $110,432,000 in real property, provided
permanent mortgage financings of $52,897,000, made construction advances of
$211,968,000, and funded $22,203,000 of equity related investments. During 1998,
the Company received principal payments on real estate mortgages of $5,788,000,
net payments on working capital loans of $117,000 and proceeds of $32,724,000
from the prepayment of mortgage loans.
During 1998, ten of the above-mentioned construction projects completed the
construction phase of the Company's investment process and were converted to
permanent real property investments, with an aggregate investment of
$55,315,000, and ten construction loans converted to permanent mortgage loans
with an aggregate investment balance of $37,375,000.
As of December 31, 1998, the Company had shareholders' equity of $633,759,000
and a total outstanding debt balance of $418,979,000, which represents a debt to
equity ratio of 0.66 to 1.0.
In March 1998, the Company completed the sale of $100 million of 7.625% Senior
Unsecured Notes due March 15, 2008 (the "Senior Unsecured Notes Due 2008").
In March 1998, the Company issued 913,242 shares of Common Stock, $1.00 par
value per share, at the price of $27.375 per share, which generated net proceeds
to the Company of $23,721,000.
In May 1998, the Company issued 3,000,000 shares of 8.875% Cumulative Redeemable
Preferred Stock at the price of $25.00 per share, which generated net proceeds
to the Company of $72,210,000.
In October 1998, the Company issued 2,546,000 shares of Common Stock, $1.00 par
value per share, at the price of $23.9375 per share, which generated net
proceeds to the Company of $57,631,000.
As of December 31, 1998, the Company had an unsecured revolving line of credit
expiring March 31, 2001 in the amount of $175,000,000 bearing interest at the
lender's prime rate or LIBOR plus 1.0%. In addition, the Company had an
unsecured revolving line of credit in the amount of $15,000,000 bearing interest
at the lender's prime rate expiring January 31, 2000. At December 31, 1998,
under the Company's line of credit arrangements, available funding totaled
$18,450,000.
In January 1999, the Company announced the sale of 3,000,000 shares of
cumulative convertible preferred stock with a liquidation price of $25 per
share, which generated net proceeds to the Company of $73,125,000.
As of March 1, 1999, the Company has effective shelf registrations on file with
the Securities and Exchange Commission under which the Company may issue up to
$380,319,000 of securities including debt, convertible debt, common and
preferred stock. 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.
As of December 31, 1998, the Company had approximately $209,900,000 in unfunded
commitments. 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.
RESULTS OF OPERATIONS DECEMBER 31, 1998 VS. DECEMBER 31, 1997
Revenues for the year ended December 31, 1998 were $97,992,000 compared to
$73,308,000 for the year ended December 31, 1997, an increase of $24,684,000 or
34%. Revenue growth resulted primarily from increased operating rent income of
$19,775,000, interest income of $1,516,000, and loan and commitment fees of
$2,245,000 from additional real estate investments made during the past twelve
to fifteen months.
Expenses for the year ended December 31, 1998, totaled $35,683,000, an increase
of $8,853,000 from expenses of $26,830,000 for the year ended December 31, 1997.
The increase in total expenses for the year ended December 31, 1998 was
primarily related to an increase in interest expense, additional expense
associated with the provision for depreciation, and an increase in general and
administrative expenses.
-13-
14
Interest expense for the year ended December 31, 1998 was $18,030,000 compared
with $15,365,000 for the year ended December 31, 1997. The increase in interest
expense during 1998 was primarily due to the issuance in March 1998 of the
Senior Unsecured Notes Due 2008, which was offset by the amount of capitalized
interest recorded in 1998.
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. The Company's interest expense is reduced by the amount capitalized.
Capitalized interest for the year ended December 31, 1998 totaled $7,740,000, as
compared with $2,306,000 for the same period in 1997.
The provision for depreciation for the year ended December 31, 1998 totaled
$10,254,000, an increase of $4,967,000 over the year ended 1997 as a result of
additional operating lease investments.
General and administrative expense for the year ended December 31, 1998 totaled
$6,114,000 as compared with $4,858,000 for the year ended December 31, 1997. The
expenses for the year ended December 31, 1998 were 6.24% of revenues as compared
with 6.63% for the year ended December 31, 1997.
Dividend payments associated with the Company's outstanding preferred stock for
the year ended December 31, 1998 totaled $4,160,000. There were no such dividend
payments in 1997.
As a result of the various factors mentioned above, net income available for
common shareholders for the year ended December 31, 1998 was $58,149,000, or
$2.24 per share, as compared with $46,478,000, or $2.12 per share for the year
ended December 31, 1997.
RESULTS OF OPERATIONS DECEMBER 31, 1997 VS. DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 were $73,308,000 compared with
$54,402,000 for the year ended December 31, 1996, an increase of $18,906,000 or
35%. Revenue growth resulted primarily from increased operating lease rent of
$12,330,000, interest income of $9,264,000, and loan and commitment fees of
$429,000 from additional real estate investments made during the past twelve to
fifteen months.
The growth in interest and rental income for the year ended December 31, 1997
was offset by prepayment fees and gains on the sale of properties earned during
1996, which totaled $3,059,000 and $576,000, respectively, as compared with
prepayment fees of $529,000 earned during 1997.
Expenses for the year ended December 31, 1997, totaled $26,830,000, an increase
of $3,104,000 from expenses of $23,726,000 for the year ended December 31, 1996.
The increase in total expenses for the year ended December 31, 1997 was
primarily related to an increase in interest expense, additional expense
associated with the provision for depreciation, and an increase in general and
administrative expenses. Expenses for the year ended December 31, 1996 were
negatively influenced by an $808,000 disposition of investment expense
associated with the Company's elimination of certain investments in behavioral
care facilities.
Interest expense for the year ended December 31, 1997 was $15,365,000 compared
with $14,635,000 for the year ended December 31, 1996. The increase in interest
expense during 1997 was primarily due to the issuance of $80,000,000 Senior
Unsecured Notes in April 1997. The increase in the 1997 period was offset by
the amount of capitalized interest recorded in 1997.
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. The Company's interest expense is reduced by the amount capitalized.
Capitalized interest for the year ended December 31, 1997 totaled $2,306,000, as
compared with $287,000 for the same period in 1996.
The provision for depreciation for the year ended December 31, 1997 totaled
$5,287,000, an increase of $2,860,000 over the year ended 1996 as a result of
additional operating lease investments.
General and administrative expense for the year ended December 31, 1997 totaled
$4,858,000 as compared with $4,448,000 for the year ended December 31, 1996. The
expenses for the year ended December 31, 1997 were 6.63% of revenues as compared
with 8.18% for the year ended December 31, 1996.
As a result of the various factors mentioned above, net income for the year
ended December 31, 1997 was $46,478,000, or $2.12 per share, as compared with
$30,676,000, or $2.17 per share for the year ended December 31, 1996. Net income
for the year ended December 31, 1996 included $3,635,000, or $0.26 per share, of
prepayment fees and gains on the exercise of purchase options, as compared with
$529,000, or $0.02 per share, for the year ended December 31, 1997. All per
share amounts represent diluted earnings per share.
IMPACT OF INFLATION
During the past three years, inflation has not significantly affected the
earnings of the Company because of the moderate inflation rate. Additionally,
earnings of the Company are primarily long-term investments with fixed interest
rates. These investments are mainly financed with a combination of equity,
senior notes and borrowings under the revolving lines of credit. During
inflationary periods,
-14-
15
which generally are accompanied by rising interest rates, the Company's ability
to grow may be adversely affected because the yield on new investments may
increase at a slower rate than new borrowing costs. Presuming the current
inflation rate remains moderate and long-term interest rates do not increase
significantly, the Company believes that equity and debt financing will continue
to be available.
YEAR 2000 COMPLIANCE
The Year 2000 compliance issue concerns the inability of certain systems and
devices to properly use or store dates beyond December 31, 1999. This could
result in system failures, malfunctions, or miscalculations that disrupt normal
operations. This issue affects most companies and organizations to large and
small degrees, at least to the extent that potential exposures must be
evaluated.
The Company believes its own internal operations, technology infrastructure,
information systems and software applications are Year 2000 compliant. The
Company is reviewing the impact of outside vendors and tenants/borrowers. The
Company initially focused this review on mission-critical operations,
recognizing that other potential effects are expected to be less material. In
those cases where there are external compliance issues, these are considered to
be minor in nature. Expenditures for any remedies will not be material.
With respect to the Company's tenants, borrowers and properties, the Company is
assessing the tenants and borrowers compliance efforts, the possibility of any
interface difficulties or electromechanical problems relating to compliance by
material vendors, the effects of potential non-compliance, and remedies that may
mitigate or obviate such effects. The Company plans to process information from
tenant surveys beginning in 1999 and complete its assessment by mid-1999.
Because the Company's evaluation of these issues has been conducted by its own
personnel or by selected inquiries of its vendors and tenants in connection with
their routine servicing operations, the Company believes that its expenditures
for assessing Year 2000 issues, though difficult to quantify, have not been
material. In addition, the Company is not aware of any issues that will require
material expenditures by the Company in the future.
Based upon current information, the Company believes that the risk posed by
foreseeable Year 2000 related problems with its internal systems (including both
information and non-information systems) is minimal. Year 2000 related problems
with the Company's software applications and internal operational programs are
unlikely to cause more than minor disruptions in the Company's operations. Year
2000 related problems at certain of its third-party service providers, such as
its banks, payroll processor, and telecommunications provider is marginally
greater, though, based upon current information, the Company does not believe
any such problems would have a material effect on its operations. For example,
Year 2000 related problems at such third-party service providers could delay the
processing of financial transactions and the Company's payroll and could disrupt
the Company's internal and external communications.
The Company believes that the risk posed by Year 2000 related problems at its
properties or with its tenants is marginally greater, though, based upon current
information, the Company does not believe any such problems would have a
material effect on its operations. Year 2000 related problems at certain
governmental agencies and third-party payers could delay the processing of
tenant financial transactions, though, based upon current information, the
Company does not believe any such problems would have a material long-term
effect on its operations. Year 2000 related problems with the electromechanical
systems at its properties are unlikely to cause more than minor disruptions in
the Company's operations.
The Company intends to complete outstanding assessments, implement identified
remedies, continue to monitor Year 2000 issues, and develop contingency plans
if, and to the extent deemed, necessary. However, based upon current information
and barring developments, the Company does not anticipate developing any
substantive contingency plans with respect to Year 2000 issues. In addition, the
Company has no plans to seek independent verification or review of its
assessments.
While the Company believes that it will be Year 2000 compliant by December 31,
1999, there can be no assurance that the Company will be successful in
identifying and assessing all compliance issues, or that the Company's efforts
to remedy all Year 2000 compliance issues will be effective such that they will
not have a material adverse effect on the Company's business or results of
operations.
OTHER INFORMATION
This document and supporting schedules may contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause the Company's actual results in the future to differ materially
from expected results. These risks and uncertainties include, among others,
competition in the financing of health care facilities, the availability of
capital, and regulatory and other changes in the health care sector, as
described in the Company's filings with the Securities and Exchange Commission.
-15-
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company seeks to mitigate
the effects of fluctuations in interest rates by matching the term of new
investments with new long-term fixed rate borrowings to the extent possible.
The market value of the Company's long-term fixed rate borrowings is subject to
interest rate risk. Generally, the market value of fixed rate financial
instruments will decrease as interest rates rise and increase as interest rates
fall. The estimated fair value of the Company's total long-term borrowings at
December 31, 1998 was $239 million. A 1% increase in interest rates would result
in a decrease in fair value of long-term borrowings by approximately $11
million.
The Company is subject to risks associated with debt financing, including the
risk that existing indebtedness may not be refinanced or that the terms of such
refinancing may not be as favorable as the terms of current indebtedness. The
majority of the Company's borrowings were completed pursuant to indentures or
contractual agreements which limit the amount of indebtedness the Company may
incur. Accordingly, in the event that the Company is unable to raise additional
equity or borrow money because of these limitations, the Company's ability to
acquire additional properties may be limited.
At December 31, 1998, the Company's variable interest rate debt exceeded 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.
-16-
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Shareholders and Directors
Health Care REIT, Inc.
We have audited the accompanying consolidated balance sheets of Health Care
REIT, Inc. as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. Our audits also included the
financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Care REIT,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
January 20, 1999
Toledo, Ohio
-17-
18
HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1998 1997
-----------------------------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned
Land $ 44,722 $ 22,445
Buildings & improvements 443,574 239,549
Construction in progress 151,317 47,050
----------- -----------
639,613 309,044
Less accumulated depreciation (19,624) (11,769)
----------- -----------
Total real property owned 619,989 297,275
Loans receivable 405,963 412,734
Direct financing leases 6,741 7,935
----------- -----------
1,032,693 717,944
Less allowance for loan losses (4,987) (4,387)
----------- -----------
Net real estate investments 1,027,706 713,557
Other Assets:
Direct investments 26,180 4,964
Marketable securities 4,106 4,671
Deferred loan expenses 2,389 2,276
Cash and cash equivalents 1,269 1,381
Receivables and other assets 11,774 7,478
----------- -----------
45,718 20,770
----------- -----------
Total assets $ 1,073,424 $ 734,327
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $ 171,550 $ 78,400
Senior unsecured notes 240,000 162,000
Bonds and mortgages payable 7,429 8,670
Accrued expenses and other liabilities 20,686 15,333
----------- -----------
Total liabilities 439,665 264,403
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - 3,000,000 in 1998
at liquidation preference 75,000
Common Stock, $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 28,240,025
shares in 1998 and 24,341,030
shares in 1997 28,240 24,341
Capital in excess of par value 520,692 435,603
Undistributed net income 10,434 8,841
Accumulated other
comprehensive income 3,982 4,671
Unamortized restricted stock (4,589) (3,532)
----------- -----------
Total shareholders' equity 633,759 469,924
----------- -----------
Total liabilities and shareholders' equity $ 1,073,424 $ 734,327
=========== ===========
See accompanying notes
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Interest income $47,515 $45,999 $36,735
Prepayment fees 588 529 3,059
Operating lease rents 41,953 22,178 9,848
Gains on sale of properties 1,049 576
Direct financing lease income 973 1,238 1,464
Loan and commitment fees 5,281 3,036 2,607
Other income 633 328 113
------- ------- -------
97,992 73,308 54,402
Expenses:
Interest expense 18,030 15,365 14,635
Provision for depreciation 10,254 5,287 2,427
General and administrative 6,114 4,858 4,448
Loan expense 685 720 808
Provision for loan losses 600 600 600
Disposition of investment 808
------- ------- -------
35,683 26,830 23,726
------- ------- -------
Net income 62,309 46,478 30,676
Preferred stock dividends 4,160
------- ------- -------
Net income available to
common shareholders $58,149 $46,478 $30,676
======= ======= =======
Average number of common shares outstanding:
Basic 25,579 21,594 14,093
Diluted 25,954 21,929 14,150
Net income available to common shareholders per share:
Basic $ 2.27 $ 2.15 $ 2.18
Diluted $ 2.24 $ 2.12 $ 2.17
See accompanying notes
-19-
20
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN OTHER UNAMORTIZED
PREFERRED COMMON EXCESS OF UNDISTRIBUTED COMPREHENSIVE RESTRICTED
STOCK STOCK PAR VALUE NET INCOME INCOME STOCK TOTAL
--------------------------------------------------------------------------------------------
Balances at January 1, 1996 $ $12,034 $168,800 $5,918 $845 $ $187,597
Comprehensive income:
Net income 30,676 30,676
Other comprehensive income:
Unrealized loss on marketable
securities (77) (77)
--------
Total comprehensive income 30,599
--------
Proceeds from issuance of shares from
dividend reinvestment and stock
incentive plans 176 3,479 3,655
Proceeds from sale of shares,
net of expenses of $6,433,000 6,110 126,002 132,112
Cash dividends paid -- $2.08 per share (28,427) (28,427)
-------- --------- ---------- ------- --------- -------- --------
Balances at December 31, 1996 18,320 298,281 8,167 768 325,536
Comprehensive income:
Net income 46,478 46,478
Other comprehensive income:
Unrealized gain on marketable
securities 3,903 3,903
--------
Total comprehensive income 50,381
--------
Proceeds from issuance of shares from
dividend reinvestment and stock
incentive plans 455 10,179 (3,789) 6,845
Amortization of restricted stock
grants 257 257
Proceeds from sale of shares,
net of expenses of $7,477,000 5,566 127,143 132,709
Cash dividends paid -- $2.11 per share (45,804) (45,804)
-------- --------- ---------- ------- --------- -------- --------
Balances at December 31, 1997 24,341 435,603 8,841 4,671 3,532) 469,924
Comprehensive income:
Net income 62,309 62,309
Other comprehensive income:
Unrealized loss on marketable
securities (565) (565)
Foreign currency translation
adjustment (124) (124)
--------
Total comprehensive income 61,620
Proceeds from issuance of shares from --------
dividend reinvestment and stock
incentive plans 440 9,986 (1,658) 8,768
Amortization of restricted stock grants 601 601
Proceeds from sale of shares,
net of expenses of $4,599,000 3,459 77,893 81,352
Net proceeds from sale of Preferred
Stock 75,000 (2,790) 72,210
Cash dividends paid:
Common stock -- $2.19 per share (56,556) (56,556)
Preferred stock -- $1.39 per share (4,160) (4,160)
-------- --------- ---------- ------- --------- -------- --------
BALANCES AT DECEMBER 31, 1998 $ 75,000 $ 28,240 $ 520,692 $10,434 $ 3,982 $ (4,589) $633,759
======== ========= ========== ======= ========= ======== ========
See accompanying notes
-20-
21
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 62,309 $ 46,478 $ 30,676
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 10,348 5,361 2,461
Amortization 1,306 980 810
Provision for losses 600 600 600
Disposition of investment 808
Loan and commitment fees earned
less than cash received 1,222 4,642 1,764
Direct financing lease income less
than cash received 292 372 90
Rental income in excess of
cash received (3,047) (1,548) (370)
Interest income more than cash received (380) (29) (134)
Increase in accrued expenses and
other liabilities 4,133 790 401
Increase in receivables and
other assets (1,037) (1,638) (886)
--------- --------- ---------
Net cash provided from operating activities 75,746 56,008 36,220
INVESTING ACTIVITIES
Investment in real property (270,015) (135,835) (66,083)
Investment in loans receivable (105,282) (123,376) (168,845)
Other investments (20,965) (4,964)
Principal collected on loans 38,629 49,750 60,659
Proceeds from sale of properties 11,378 2,569 9,508
Other (328) (213) (221)
--------- --------- ---------
Net cash used in investing activities (346,583) (212,069) (164,982)
FINANCING ACTIVITIES
Net (decrease) increase under line of
credit arrangements 93,150 (13,725) (14,575)
Borrowings under senior notes 100,000 80,000 30,000
Assumption of mortgage loan payable 6,539
Principal payments on other long-term
obligations (23,241) (1,600) (329)
Net proceeds from the issuance of Common Stock 90,120 139,554 135,767
Net proceeds from the issuance of Preferred Stock 72,210
Increase in deferred loan expense (798) (1,564) (492)
Cash distributions to shareholders (60,716) (45,804) (28,427)
--------- --------- ---------
Net cash provided from financing activities 270,725 156,861 128,483
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (112) 800 (279)
Cash and cash equivalents at beginning of year 1,381 581 860
--------- --------- ---------
Cash and cash equivalents at end of year $ 1,269 $ 1,381 $ 581
========= ========= =========
Supplemental Cash Flow Information-interest paid $ 23,714 $ 16,444 $ 14,211
========= ========= =========
See accompanying notes
-21-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES AND RELATED MATTERS
INDUSTRY
The Company is a self-administered real estate investment trust that invests
primarily in long-term care facilities, which include nursing homes, assisted
living facilities, and retirement centers. The Company also invests in specialty
care facilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after the elimination of all significant
intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LOANS RECEIVABLE
Loans receivable consist of long-term mortgage loans, construction-period loans
maturing in two years or less, and working capital loans. Interest income on
loans is recognized as earned based upon the principal amount outstanding. The
loans are generally collateralized by a first or second mortgage on or
assignment of partnership interest in the related facilities which consist of
nursing homes, assisted living facilities, retirement centers, behavioral care
facilities, and specialty care hospitals.
REAL PROPERTY INVESTMENTS
Certain properties owned by the Company are leased under operating leases and
are recorded at cost. The carrying value of long-lived assets is reviewed
quarterly on a property by property basis to determine if facts and
circumstances suggest that the assets may be impaired or that the depreciation
life may need to be changed. The Company considers external factors relating to
each asset. If these external factors and the projected undiscounted cash flows
of the company over the remaining amortization period indicate that the asset
will not be recoverable, the carrying value will be adjusted to the estimated
fair value. As of December 31, 1998, the Company does not believe there is any
indication that the carrying value or the amortization period of its assets
needs to be adjusted. The leases generally extend for a minimum ten year period
and provide for payment of all taxes, insurance and maintenance by the lessees.
In general, operating lease income includes base rent payments plus fixed annual
rent increases, which are recognized on a straight-line basis over the minimum
lease period. This income is greater than the amount of cash received during the
first half of the lease term.
DIRECT FINANCING LEASES
Certain properties owned by the Company are subject to long-term leases which
are accounted for by the direct financing method. The leases provide for payment
of all taxes, insurance and maintenance by the lessees. The leases are generally
for a term of 20 years and include an option to purchase the properties
generally after a period of five years. Option prices equal or exceed the
Company's original cost of the property. Income from direct financing leases is
recorded based upon the implicit rate of interest over the lease term. This
income is greater than the amount of cash received during the first six to seven
years of the lease term.
CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST
The Company capitalizes 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.
The Company capitalized interest costs of $7,740,000, $2,306,000 and $287,000
during 1998, 1997 and 1996, respectively, related to construction of real
property owned by the Company. The Company's interest expense has been reduced
by the amounts capitalized.
-22-
23
1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level believed adequate to
absorb potential losses in the Company's loans receivable. The determination of
the allowance is based on a quarterly evaluation of these loans, including
general economic conditions and estimated collectibility of loan payments.
DEFERRED LOAN EXPENSES
Deferred loan expenses are costs incurred by the Company in connection with the
issuance of short-term and long-term debt. The Company amortizes these costs
over the term of the debt using the straight-line method, which approximates the
interest yield method.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less.
DIRECT INVESTMENTS
Management determines the appropriate classification of a direct investment at
the time of acquisition and reevaluates such designation as of each balance
sheet date. Debt securities which are classified as held to maturity are stated
at historical cost. Equity investments are stated at historical cost. Direct
investments included the preferred stock of one private corporation,
subordinated debt in eight private corporations, 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.
MARKETABLE SECURITIES
Marketable securities available for sale are stated at market value with
unrealized gains and losses reported in a separate component of shareholders'
equity. Marketable securities reflect the market value of the common stock of
two publicly owned corporations, which were obtained by the Company at no cost,
and the fair value of the common stock related to warrants in one publicly owned
corporation in excess of the exercise price.
LOAN AND COMMITMENT FEES
Loan and commitment fees are earned by the Company for its agreement to provide
direct and standby financing to, and credit enhancement for, owners of health
care facilities. The Company amortizes loan and commitment fees over the initial
fixed term of the lease, the mortgage or the construction period related to such
investments.
FEDERAL INCOME TAX
No provision has been made for federal income taxes since the Company has
elected to be treated as a real estate investment trust under the applicable
provisions of the Internal Revenue Code, and the Company believes that it has
met the requirements for qualification as such for each taxable year. See Note
11.
NET INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted-average number of shares for the period. The
computation of diluted earnings per share is similar to basic earnings per
share, except that the number of shares is increased to include the number of
additional common shares that would have been outstanding if the potentially
dilutive common shares had been issued.
COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components. The adoption of this
Statement had no impact on the Company's net income or shareholders' equity.
Statement 130 requires unrealized gains or losses on the Company's marketable
securities and foreign currency translation adjustments to be included in
comprehensive income. Prior to adoption of Statement 130, these items were
reported separately in shareholders' equity. Prior year financial statements
have been reclassified to conform to the requirements of Statement 130.
-23-
24
NEW ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is
effective January 1, 2000. The impact that this statement will have on the
Company has not been determined.
2. LOANS RECEIVABLE
The following is a summary of loans receivable (in thousands):
DECEMBER 31
1998 1997
---------------------
Mortgage loans $355,974 $375,693
Mortgage loans to related parties 0 1,945
Construction loans 42,708 27,698
Working capital 5,532 3,551
Working capital loans to related parties 1,749 3,847
-------- --------
TOTALS $405,963 $412,734
======== ========
Loans to related parties (various entities whose ownership includes two Company
directors and former officers) included above are at competitive rates and are
equal to or greater than the Company's net interest cost on borrowings to
support such loans. The amount of interest income and loan and commitment fees
from related parties amounted to $1,236,000, $980,000 and $3,089,000 for 1998,
1997 and 1996, respectively.
The following is a summary of mortgage loans at December 31, 1998 (in
thousands):
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
- --------- ----- ------------------------------------ --------- ---------
1999 1 Monthly payment at $8,600, $ 4,500 $ 769
including interest at 10.00%
2001 3 Monthly payments from $20,282 11,684 10,880
to $71,471, including interest from
10.50% to 12.50%
2006 1 Monthly payment at $94,378, 12,204 12,204
including interest at 9.28%
2007 3 Monthly payments from $28,020 to 16,990 12,930
$73,081, including interest from
10.70% to 12.97%
2008 5 Monthly payments from $18,619 to 20,100 19,521
$85,879, including interest from
11.92% to 13.46%
2009 1 Monthly payment at $69,467, 7,072 6,983
including interest at 11.04%
2010 4 Monthly payments from $40,554 to 42,042 41,780
$186,177, including interest from
10.57% to 10.96%
-24-
25
2. LOANS RECEIVABLE (CONTINUED)
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
------- ----- ----------------------------------------- --------- --------
2011 9 Monthly payments from $18,921 to $ 30,791 $ 30,697
$38,703, including interest from
9.28% to 11.70%
2012 4 Monthly payments from $38,000 to 42,511 42,449
$284,200, including interest from
9.50% to 12.19%
2015 5 Monthly payments from $23,954 to 36,260 35,572
$119,385, including interest from
10.29% to 12.58%
2016 7 Monthly payments from $36,980 to 65,436 64,432
$228,417, including interest from
10.58% to 12.13%
2017 3 Monthly payments from $24,008 to 16,191 16,188
$80,121 including interest from
10.15% to 10.66%
2018 10 Monthly payments from $21,660 to 61,569 61,569
$155,575 including interest from
8.89% to 10.31%
----------- -----------
TOTALS $ 367,350 $ 355,974
=========== ===========
3. DIRECT FINANCING LEASES
The following are the components of investments in direct financing leases (in
thousands):
DECEMBER 31
1998 1997
------------------------
Total minimum lease payments receivable $ 11,092 $ 13,602
Estimated unguaranteed residual values of
leased properties 2,994 3,437
Unearned income (7,345) (9,104)
-------- --------
Investment in direct financing leases $ 6,741 $ 7,935
======== ========
The leases contain an option to purchase the leased property. Total minimum
lease payments are computed assuming that the purchase options are not
exercised.
At December 31, 1998, future minimum lease payments receivable (assuming that
purchase options are not exercised) are as follows (in thousands):
1999 $ 1,009
2000 1,027
2001 1,044
2002 1,076
2003 747
Thereafter 6,189
------------
TOTAL $ 11,092
============
-25-
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4. REAL ESTATE INVESTMENTS
The following table summarizes certain information about Health Care REIT's real
estate properties as of December 31, 1998.
Number of Building & Total Accumulated
Facilities Land Improvements Investment Depreciation
----------------------------------------------------------------------
NURSING HOMES:
Arizona 1 $ 180 $ 3,988 $ 4,168 $ 73
California 2 2,640 5,212 7,852 96
Colorado 1 370 6,051 6,421 108
Connecticut 1 937 9,563 10,500 1,424
Florida 5 3,312 32,488 35,800 676
Kentucky 1 130 4,870 5,000 634
Idaho 3 2,010 20,662 22,672 341
Illinois 1 610 7,143 7,753 9
Massachusetts 8 3,548 33,929 37,477 2,119
Ohio 2 786 8,778 9,564 597
Oklahoma 1 470 5,673 6,143 24
Oregon 1 300 5,316 5,616 92
Pennsylvania 2 669 12,356 13,025 1,402
Texas 1 663 12,587 13,250 2,006
Construction in Process 769
- -----------------------------------------------------------------------------------------------------------------------
30 16,625 168,616 186,010 9,601
=======================================================================================================================
ASSISTED LIVING FACILITIES:
Arizona 1 110 2,244 2,354 8
Connecticut 1 660 8,812 9,472 114
Florida 14 2,747 34,917 37,664 1,342
Idaho 1 200 2,500 2,700 98
Massachusetts 1 810 10,500 11,310 161
Montana 1 360 3,282 3,642 19
Nevada 1 380 9,220 9,600 30
New Jersey 1 3,297 14,233 17,530 734
New Mexico 1 233 5,355 5,588 165
New York 1 400 10,528 10,928 314
North Carolina 2 2,140 8,440 10,580 222
Ohio 7 3,123 30,495 33,618 937
Oklahoma 15 1,703 21,408 23,111 1,617
Pennsylvania 6 3,938 34,628 38,566 1,563
Tennessee 1 330 2,292 2,622 8
Texas 21 5,396 64,333 69,729 2,520
Construction in Process 28 128,462
- -----------------------------------------------------------------------------------------------------------------------
103 25,827 263,187 417,476 9,852
=======================================================================================================================
RETIREMENT CENTERS:
North Carolina 1 2,270 11,771 14,041 171
Construction in Process 7 22,086
- -----------------------------------------------------------------------------------------------------------------------
8 2,270 11,771 36,127 171
=======================================================================================================================
TOTAL REAL ESTATE 141 $ 44,722 $443,574 $639,613 $ 19,624
=======================================================================================================================
-26-
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4. REAL ESTATE INVESTMENTS (CONTINUED)
At December 31, 1998, future minimum lease payments receivable under operating
leases are as follows (in thousands):
1999 $ 61,807
2000 73,392
2001 75,240
2002 76,965
2003 78,521
Thereafter 517,289
------------
TOTAL $ 883,214
============
The Company converted $73,430,000, $13,103,000, and $40,567,000 of mortgage
loans into operating lease properties in 1998, 1997, and 1996, respectively.
This noncash activity is appropriately not reflected in the accompanying
statements of cash flows.
The Company is constructing six assisted living facilities for an operator that
has a director who is also a director of the Company. These facilities will be
leased to this related party upon completion.
5. CONCENTRATION OF RISK
As of December 31, 1998, long-term care facilities, which include nursing homes,
assisted living facilities, and retirement centers, comprised 90% of the
Company's real estate investments and were located in 34 states. Investments in
assisted living facilities comprised 56% of the Company's real estate
investments. The Company's investments with the three largest operators totaled
approximately 25%. No single operator has a real estate investment balance which
exceeds 10% of total real estate investments, including credit enhancements.
6. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the allowance for loan losses (in thousands):
1998 1997 1996
----------- ------------- -------------
Balance at beginning of year $ 4,387 $ 9,787 $ 9,950
Provision for loan losses 600 600 600
Disposition of investment 808
Charge-offs (6,000) (1,571)
----------- ------------- -------------
Balance at end of year $ 4,987 $ 4,387 $ 9,787
=========== ============= =============
During 1997, two loans with an aggregate balance of $12,073,000 and a
specifically identified allowance of $6,000,000 were extinguished. The Company
recognized payments of $6,073,000 and recorded a charge of $6,000,000 against
the allowance for loan losses.
7. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has an unsecured credit arrangement with a consortium of ten banks
providing for a revolving line of credit (revolving credit) in the amount of
$175,000,000 which expires on March 31, 2001. The agreement specifies that
borrowings under the revolving credit are subject to interest payable in periods
no longer than three months on either the agent bank's base rate of interest or
1.0% over LIBOR interest rate (based at the Company's option). The effective
interest rate at December 31, 1998 was 6.58%. In addition, the Company pays a
commitment fee ranging from an annual rate of 0.20% to 0.375% and an annual
agent's fee of $50,000. Principal is due upon expiration of the agreement. The
Company has another line of credit with a bank for a total of $15,000,000 which
expires January 31, 2000. Borrowings under this line of credit are subject to
interest at the bank's prime rate of interest (7.75% at December 31, 1998) and
are due on demand.
-27-
28
7. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS (CONTINUED)
The following information relates to aggregate borrowings under the line of
credit arrangements (in thousands except percentages):
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------------
Balance outstanding at December 31 $171,550 $ 78,400 $ 92,125
Maximum amount outstanding at any
month end 171,550 158,950 142,600
Average amount outstanding (total
of daily principal balances
divided by days in year) 103,739 78,826 110,667
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 6.90% 7.63% 7.72%
8. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $240,000,000 of unsecured Senior Notes with interest ranging
from 7.06% to 8.34% and maturing at various dates to 2008.
The following information relates to other long-term obligations (in thousands):
DECEMBER 31
1998 1997
---------------------
Mortgage notes payable, collateralized by two
health care facilities, interest rates from 7.625%
to 12%, maturing at various dates to 2034 $7,429 $7,510
Other long-term obligations, interest at 11.25% for 1997 0 1,160
------ ------
TOTALS $7,429 $8,670
====== ======
At December 31, 1998, the annual principal payments on these long-term
obligations are as follows (in thousands):
SENIOR NOTES OTHER
-----------------------
1999 $ 0 $ 90
2000 35,000 99
2001 10,000 109
2002 20,000 121
2003 35,000 133
2004 40,000 186
2005 0 549
2006 0 62
2007 0 67
2008 100,000 72
Thereafter 0 5,941
-------- ------
Total $240,000 $7,429
======== ======
9. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS
The Company's 1995 Stock Incentive Plan authorized up to 2,200,000 shares of
Common Stock to be issued at the discretion of the Board of Directors. The 1995
Plan replaced the 1985 Incentive Stock Option Plan. The options granted under
the 1985 Plan continue to vest through 2005 and expire ten years from the date
of grant. Officers and key salaried employees of the Company are eligible to
participate in the 1995 Plan. The 1995 Plan allows for the issuance of stock
options, restricted stock grants and Dividend Equivalency Rights. In addition,
during 1997 the Company adopted a Stock Incentive Plan for Non-Employee
Directors which authorizes up to 192,000 shares to be issued.
-28-
29
9. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS (CONTINUED)
The following summarizes the activity in the Plans for the years ended December
31 (shares in thousands):
1998 1997 1996
---- ---- ----
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
Stock Options
- -------------
Options at beginning of year 1,126 $21.56 749 $19.51 485 $19.95
Options granted 362 23.00 475 24.44 425 19.14
Options exercised (67) 18.57 (84) 19.16 (44) 17.66
Options terminated (7) 24.90 (14) 23.61 (117) 20.67
-------- ----------- -------- ----------- -------- -----------
1,418 $22.06 1,126 $21.56 749 $19.51
======== =========== ======== =========== ======== ===========
At end of year:
Shares exercisable 466 $20.83 406 $20.79 226 $21.45
Weighted average fair value
of options granted during the
year $ 1.98 $ 1.97 $ 1.78
The stock options generally vest over a five year period and expire ten years
from the date of grant. Options at December 31, 1998 had exercise prices ranging
from $17.875 to $27.375 per share and a weighted average contractual life of 8.6
years.
The Company issued 71,850 and 157,000 restricted shares during 1998 and 1997
respectively, including 2,250 shares and 2,000 shares for directors in 1998 and
1997, respectively. Vesting periods range from six months for directors to
periods of five to ten years for officers. Expense, which is recognized as the
shares vest based on the market value at the date of the award, totaled $601,000
in 1998 and $257,000 in 1997.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees in accounting for its employee stock options as permitted
under FASB Statement No. 123 ("FASB 123"), Accounting for Stock-Based
Compensation, and, accordingly, recognizes no compensation expense for the stock
option grants when the market price on the underlying stock on the date of grant
equals the exercise price of the Company's employee stock option.
Pro forma information has been determined as if the Company had accounted for
its employee stock options and restricted shares under the fair value method.
The pro forma disclosures are not likely to be representative of the effects on
reported net income for future years because they do not take into consideration
stock based incentives granted prior to 1995. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following range of assumptions: risk-free interest rates from
5.10% to 7.60%, dividend yields of 8% to 9%, expected lives of seven years, and
expected volatility of .18% to .23%. Had compensation cost for the stock based
compensation plans been determined in accordance with FASB 123, net income would
have been reduced by $393,000, $212,000, and $105,000 in 1998, 1997 and 1996,
respectively.
The Company has a 401-(k) Profit Sharing Plan covering all eligible employees.
Under the Plan, eligible employees may make contributions, and the Company may
make a profit sharing contribution. Company contributions to this Plan totaled
$120,000, $110,000, and $90,000 in 1998, 1997, and 1996, respectively.
10. PREFERRED STOCK
In May 1998, the Company sold 3,000,000 shares of 8.875% Series B Cumulative
Redeemable Preferred Stock with a liquidation preference of $25 per share.
Dividends are payable quarterly in arrears. On and after May 1, 2003, the
Preferred Stock may be redeemed for cash at the option of the Company, in whole
or in part, at $25 per share, plus accrued and unpaid dividends thereon to the
redemption date.
-29-
30
11. DISTRIBUTIONS
To qualify as a real estate investment trust for federal income tax purposes,
95% of taxable income (not including capital gains) must be distributed to
shareholders. Real estate investment trusts which do not distribute a certain
amount of current year taxable income in the current year are also subject to a
4% federal excise tax. The Company's excise tax expense was $315,000, $360,000
and $317,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Undistributed net income for federal income tax purposes amounted to $16,353,000
at December 31, 1997. The principal reasons for the difference between
undistributed net income for federal income tax purposes and financial statement
purposes are the use of the operating method of accounting for leases for
federal income tax purposes and the provision for losses for reporting purposes
versus bad debt expense for tax purposes. Cash distributions paid to
shareholders, for federal income tax purposes, are as follows:
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------------------
Per Share:
Ordinary income $ 2.142 $ 2.085 $ 2.030
Capital gains .048 .025 .050
---------- --------- -----------
TOTALS $ 2.190 $ 2.110 $ 2.080
========== ========= ===========
12. COMMITMENTS AND CONTINGENCIES
At December 31, 1998, the Company had outstanding commitments to provide
financing for facilities in the approximate amount of $209,900,000 for ongoing
construction activity and acquisitions expected over the next twelve to fifteen
months. The above commitments are generally on similar terms as existing
financings of a like nature with rates of return to the Company based upon
current market rates at the time of the commitment.
The Company has agreements to purchase two health care facilities, or the loans
with respect thereto, in the event that the present owners default upon their
obligations. In consideration for these agreements, the Company receives and
recognizes fees annually related to these agreements. Although the terms of
these agreements vary, the purchase prices are equal to the amount of the
outstanding obligations financing the facility. These agreements expire through
the year 2005. At December 31, 1998, obligations under these agreements for
which the Company was contingently liable aggregated approximately $9,365,000,
all of which were with related parties.
13. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan approved by the Board of Directors
in July 1994, a Preferred Share Right (Right) is attached to and automatically
trades with each outstanding share of Common Stock.
The Rights, which are redeemable, will become exercisable only in the event that
any person or group becomes a holder of 15% or more of the Common Stock, or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning at least 15% of the Common Stock. Once the Rights become
exercisable, they entitle all other shareholders to purchase one one-thousandth
of a share of a new series of junior participating preferred stock for an
exercise price of $48.00. The Rights will expire on August 5, 2004 unless
exchanged earlier or redeemed earlier by the Company for $.01 per Right at any
time before public disclosure that a 15% position has been acquired.
-30-
31
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1998 1997 1996
---------- --------- ------
Numerator for basic and diluted earnings
per share - income available to common
shareholders $ 58,149 $ 46,478 $ 30,676
========= ========= =========
Denominator for basic earnings per
share - weighted average shares 25,579 21,594 14,093
Effect of dilutive securities:
Employee stock options 174 182 57
Nonvested restricted shares 201 153
--------- -------- --------
Dilutive potential common shares 375 335 57
--------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average shares 25,954 21,929 14,150
========= ========= ========
Basic earnings per share $2.27 $2.15 $2.18
========= ========= ========
Diluted earnings per share $2.24 $2.12 $2.17
========= ======== ========
The diluted earnings per share calculation for 1998 excludes the dilutive effect
of 179,000 shares because the exercise price is greater than the average market
price.
15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
Mortgage Loans--The fair value of all mortgage loans is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities.
Working Capital and Construction Loans--The carrying amount is a reasonable
estimate of fair value for working capital and construction loans because the
interest earned on these instruments is variable.
Cash and Cash Equivalents--The carrying amount approximates fair value because
of the short maturity of these financial instruments.
Marketable Securities --The assets are recorded at their fair market value.
Direct Investments--Direct investments are recognized at historical cost, which
the Company believes approximates fair market value.
Borrowings Under Line of Credit Arrangements--The carrying amount of the line of
credit approximates fair value because the borrowings are interest rate
adjustable.
Senior Unsecured Notes and Industrial Development Bonds--The fair value of the
senior unsecured notes payable and the industrial development bonds was
estimated by discounting the future cash flow using the current borrowing rate
available to the Company for similar debt.
Mortgage Notes Payable--Mortgage notes payable is a reasonable estimate of fair
value.
-31-
32
15. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1998 and 1997 are as follows (in thousands):
DECEMBER 31, 1998 December 31, 1997
----------------------------------- ----------------------------------
CARRYING Carrying
AMOUNT FAIR VALUE Amount Fair Value
------------ ---------------- ---------------- ------------
Financial Assets:
Mortgage loans $355,974 $375,252 $377,638 $402,348
Working capital and
construction loans 49,989 49,989 35,096 35,096
Cash and cash equivalents 1,269 1,269 1,381 1,381
Marketable securities 4,106 4,106 4,671 4,671
Direct investments 26,180 26,180 4,964 4,964
Financial Liabilities:
Borrowings under line of
credit arrangements 171,550 171,550 78,400 78,400
Senior unsecured notes 240,000 239,396 162,000 167,113
Industrial development bonds 0 0 1,160 1,225
Mortgage notes payable 7,429 7,429 7,510 7,445
16. SUBSEQUENT EVENT
On January 19, 1999 the Company announced the sale of 3,000,000 shares of
cumulative convertible preferred stock. These shares have a liquidation value of
$25 per share and will pay dividends equivalent to the greater of $0.5625 or the
quarterly divided then payable per common share. The preferred shares are
convertible into common stock at a conversion price of $25.625 per share. The
Company has the right to redeem the preferred shares after five years.
17. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations of
the Company for the years ended December 31, 1998 and 1997 (in thousands except
per share data):
YEAR ENDED DECEMBER 31, 1998
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------------------------------------------
Revenues $ 21,226 $ 23,159 $ 25,837 $ 27,770
Net Income Available to
Common Shareholders 13,409 13,907 14,365 16,468
Net Income Available to
Common Shareholders
Basic .55 .55 .57 .60
Diluted .54 .54 .56 .59
Year Ended December 31, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
------------------------------------------------------------------
Revenues $ 16,569 $ 18,448 $ 18,559 $ 19,448
Net Income Available to
Common Shareholders 9,826 11,928 11,773 12,667
Net Income Available to
Common Shareholders
Basic .51 .55 .54 .55
Diluted .51 .54 .53 .54
-32-
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information under the heading "Election of Directors" and "Executive Officers of
the Company" in the definitive proxy statement of the Company which will be
filed with the Commission prior to April 20, 1999.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information under the heading "Remuneration" in the definitive proxy statement
of the Company which will be filed with the Commission prior to April 20, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners"
in the definitive proxy statement of the Company which will be filed with the
Commission prior to April 20, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information under the heading "Certain Relationships and Related Transactions"
in the definitive proxy statement of the Company which will be filed with the
Commission prior to April 20, 1999.
-33-
34
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)1. The following Consolidated Financial Statements of the Company
are included in Part II, Item 8:
Report of Independent Auditors...................................17
Consolidated Balance Sheets - December 31, 1998 and 1997.........18
Consolidated Statements of Income - Years ended December 31,
1998, 1997 and 1996..............................................19
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1998, 1997 and 1996...........................20
Consolidated Statements of Cash Flows - Years ended
December 31, 1998, 1997 and 1996...........................21
Notes to Consolidated Financial Statements ......................22
2. The following Financial Statement Schedules are included in
Item 14(d):
III - Real Estate and Accumulated Depreciation
IV - Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable and
therefore have been omitted.
3. Exhibit Index:
3.1 Second Restated Certificate of Incorporation.
3.2 By-Laws, as amended.
4.1 The Registrant, by signing this Report, agrees to
furnish the Securities and Exchange Commission upon its
request a copy of any instrument which defines the
rights of holders of long-term debt of Registrant and
which authorizes a total amount of securities not in
excess of 10% of the total assets of the Registrant.
4.2 Indenture dated as of April 17, 1997 by and between
Health Care REIT, Inc. and Fifth Third Bank.
4.3 First Supplemental Indenture dated as of April 17, 1997
by and between Health Care REIT, Inc. and Fifth Third
Bank.
4.4(5) Form of Second Supplemental Indenture dated as of
March 13, 1998 between Health Care REIT, Inc. and
Fifth Third Bank.
4.5(6) Form of Certificate of Designation of 8-7/8% Series B
Cumulative Redeemable Preferred Stock.
4.6 Certificate of Designations of Series C Cumulative
Convertible Preferred Stock, Preferences and Rights
of HealthCare REIT, Inc.
10.1 Rights Agreement.
10.2 Note Purchase Agreement between Health Care REIT, Inc.
and each of the Purchasers a Party thereto, dated as of
April 8, 1993.
10.3 Amended and Restated Credit Agreement dated as of
September 8, 1994 among Health Care REIT, Inc., certain
banks, and National City Bank, as Agent.
10.4 Note Purchase Agreement between Health Care REIT, Inc.
and each of the Purchasers a Party thereto, dated as of
April 15, 1995.
10.5 The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc. as amended.
10.6 The Health Care REIT, Inc. 1995 Stock Incentive Plan
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedules (Edgar version only).
-34-
35
(b) Reports on Form 8-K filed in the fourth quarter of 1998:
Form 8-K filed with the Securities and Exchange Commission on October 7,
1998.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) above are filed with this Form 10-K.
(d) Financial Statement Schedules:
Financial statement schedules are included in pages 36 through 40.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment on its behalf on by
the undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
(Registrant)
By: /s/ GEORGE L. CHAPMAN
----------------------------------
Chairman, Chief Executive Officer,
President and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on March 5, 1999 by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
-35-
36
/S/ WILLIAM C. BALLARD, JR.* /S/ RICHARD A. UNVERFERTH*
- ------------------------------------- -------------------------------------
William C. Ballard, Jr., Director Richard A. Unverferth, Director
/S/ PIER C. BORRA* /S/ FREDERIC D. WOLFE*
- ------------------------------------- -------------------------------------
Pier C. Borra, Director Frederic D. Wolfe, Director
/S/ JEFFREY H. DONAHUE* /S/ GEORGE L. CHAPMAN
- ------------------------------------- -------------------------------------
Jeffrey H. Donahue, Director George L. Chapman, Chairman,
Chief Executive, President and
Director (Principal Executive
Officer)
/S/ BRUCE DOUGLAS* /S/ EDWARD F. LANGE, JR.*
- ------------------------------------- -------------------------------------
Bruce Douglas, Director Edward F. Lange, Jr., Chief Financial
Officer (Principal Financial Officer)
/S/ PETER J. GRUA* /S/ MICHAEL A. CRABTREE*
- ------------------------------------- -------------------------------------
Peter J. Grua, Director Michael A. Crabtree, Controller
(Principal Accounting Officer)
/S/ SHARON M. OSTER* *By: /S/ GEORGE L. CHAPMAN
- ------------------------------------- -------------------------------------
Sharon M. Oster, Director George L. Chapman, Attorney-in-Fact
/S/ BRUCE G. THOMPSON*
- -------------------------------------
Bruce G. Thompson, Director
-36-
37
HEALTH CARE REIT, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
Initial Cost Gross Amount at Which
to Company Carried at Close of Period
------------------ --------------------------------
Cost
Capitalized Buildings
Buildings & Subsequent to & Improve- Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land ments Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- -------- ------------ -------- ------
ASSISTED LIVING FACILITIES:
Lake Havasu, AZ $ $110 $ 2,244 $ $110 $ 2,244 $ 8 1998 1998
Litchfield, CT 660 8,812 660 8,812 114 1998 1998
Bradenton, FL 252 3,298 252 3,298 284 1996 1995
Bradenton, FL 25 450 25 450 16 1997 1992
Bradenton, FL 25 400 25 400 15 1997 1988
Bradenton, FL 50 850 50 850 31 1997 1996
Bradenton, FL 50 850 50 850 31 1997 1996
Clermont, FL 350 5,232 350 5,232 154 1997 1997
Jacksonville, FL 400 3,674 400 3,674 113 1997 1997
Lauderhill, FL 20 1,374 20 1,374 35 1998 1995
Leesburg, FL 70 1,170 70 1,170 23 1998 1972
Margate, FL 500 5,343 500 5,343 163 1998 1972
North Miami Beach, FL 300 5,621 300 5,621 140 1998 1987
North Miami Beach, FL 150 1,242 150 1,242 30 1998 1987
Orange City, FL 80 2,238 80 2,238 34 1998 1998
Sarasota, FL 475 3,175 475 3,175 273 1996 1995
Boise, ID 200 2,500 200 2,500 98 1997 1997
Attleboro, MA 810 10,500 810 10,500 161 1998 1998
Kalispell, MT 360 3,282 360 3,282 19 1998 1998
Cary, NC 1,500 4,350 1,500 4,350 65 1998 1996
Charlotte, NC 640 4,090 640 4,090 157 1997 1997
Cranford, NJ 3,297 11,703 2,530 3,297 14,233 734 1996 1993
Roswell, NM 233 5,355 233 5,355 165 1997 1996
Henderson, NV 380 9,220 380 9,220 30 1998 1998
Albany, NY 400 10,528 400 10,528 314 1997 1997
Canton, OH 300 2,098 300 2,098 7 1998 1998
Cincinnati, OH 1,728 10,272 1,728 10,272 553 1997 1985
Dayton, OH 80 6,730 80 6,730 88 1998 1997
Findlay, OH 200 1,800 200 1,800 86 1997 1997
Newark, OH 410 5,711 410 5,711 72 1998 1997
Piqua, OH 204 1,885 204 1,885 41 1998 1998
Troy, OH 200 2,000 200 2,000 90 1997 1997
Bartlesville, OK 100 1,380 100 1,380 114 1994 1995
Chickasha, OK 85 1,395 85 1,395 109 1995 1996
Duncan, Ok 103 1,347 103 1,347 96 1995 1996
Edmond, OK 175 1,564 175 1,564 109 1995 1996
Eid, OK 90 1,390 90 1,390 115 1995 1996
Lawton, OK 144 1,456 144 1,456 103 1995 1996
-37-
38
SCHEDULE III - Continued
Initial Cost Gross Amount at Which
to Company Carried at Close of Period
------------------- ----------------------------------
Cost
Capitalized
Buildings & Subsequent to Buildings & Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- -----
Midwest City, OK $ $ 95 $ 1,385 $ $ 95 $ 1,385 $ 115 1996 1996
Muskogee, OK 150 1,432 150 1,432 87 1996 1996
Norman, OK 55 1,484 55 1,484 125 1995 1996
N. Oklahoma City, OK 87 1,508 87 1,508 88 1995 1996
Oklahoma City, OK 130 1,350 130 1,350 104 1995 1996
Owasso, OK 215 1,380 215 1,380 81 1996 1996
Ponca City, OK 114 1,536 114 1,536 140 1995 1995
Shawnee, OK 80 1,400 80 1,400 115 1995 1996
Stillwater, OK 80 1,400 80 1,400 116 1995 1996
Baldwin, PA 535 2,222 535 2,222 107 1997 1995
Beaver Falls, PA 850 7,910 850 7,910 128 1998 1998
Elizabeth, PA 740 2,561 740 2,561 37 1998 1986
Library, PA 960 5,040 960 5,040 69 1998 1995
Pittsburgh, PA 430 6,736 430 6,736 530 1996 1989
Pittsburgh, PA 6,465 423 10,158 423 10,158 693 1996 1989
Clarksville, TN 330 2,292 330 2,292 8 1998 1998
Benbrook, TX 1,050 7,550 27 1,050 7,577 418 1997 1984
Cedar Hill, TX 171 1,490 171 1,490 80 1997 1997
Claremore, TX 155 1,427 155 1,427 87 1996 1996
Corpus Christi, TX 420 4,796 420 4,796 203 1997 1989
Corpus Christi, TX 155 2,935 155 2,935 92 1997 1997
Desoto, TX 205 1,383 205 1,383 75 1997 1997
Ft. Worth, TX 210 3,790 210 3,790 282 1992 1984
Ft. Worth, TX 281 3,473 142 281 3,615 95 1997 1986
Georgetown, TX 200 2,100 200 2,100 94 1997 1997
Granbury, TX 80 2,020 80 2,020 99 1997 1997
Grand Prairie, TX 399 5,161 399 5,161 36 1998 1998
Harlingen, TX 92 2,057 92 2,057 64 1997 1989
Harlingen, TX 340 5,577 340 5,577 128 1998 1998
Houston, TX 261 3,139 261 3,139 216 1994 1995
Mt. Pleasant, TX 247 3,868 247 3,868 119 1997 1992
Palestine, TX 173 1,410 173 1,410 86 1996 1996
San Marcos, TX 355 4,560 355 4,560 32 1998 1998
Texarkana, TX 192 1,403 192 1,403 83 1996 1996
Tyler, TX 47 2,699 47 2,699 84 1997 1991
Waxahachie, TX 154 1,429 154 1,429 87 1996 1996
Wolfforth, TX 110 1,898 110 1,898 59 1997 1990
--------- ------- ---------- ---------- -------- ----------- ------
TOTAL ASSISTED LIVING
FACILITIES: $ 6,465 $25,827 $ 260,488 $ 2,699 $ 25,827 $ 263,187 $9,852
-38-
39
SCHEDULE III - Continued
Initial Cost Gross Amount at Which
to Company Carried at Close of Period
-------------------- -----------------------------------
Cost
Capitalized
Buildings & Subsequent to Buildings & Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- -----
SKILLED NURSING FACILITIES:
Payson, AZ $ $ 180 $ 3,987 $ $ 180 $ 3,987 $ 73 1998 1995
La Mesa, CA 1,180 1,332 1,180 1,332 28 1998 1961
Santa Rosa, CA 1,460 3,880 1,460 3,880 68 1998 1968
Pueblo, CO 370 6,051 370 6,051 108 1998 1989
Southington, CT 937 9,563 937 9,563 1,424 1993 1975
Lakeland, FL 697 4,581 697 4,581 97 1998 1984
New Port Richey, FL 624 6,930 624 6,930 144 1998 1984
North Fort Myers, FL 636 5,712 636 5,712 120 1998 1984
Vero Beach, FL 660 7,642 660 7,642 158 1998 1984
West Palm Beach, FL 696 7,623 696 7,623 158 1998 1984
Boise, ID 600 7,383 600 7,383 118 1998 1985
Boise, ID 810 5,401 810 5,401 98 1998 1996
Couer D'Alene 600 7,878 600 7,878 125 1998 1996
Grantie City, IL 610 7,143 610 7,143 8 1998 1973
Owensboro, KY 130 4,870 130 4,870 634 1993 1967
Braintree, MA 170 6,080 170 6,080 396 1997 1968
Braintree, MA 80 4,245 80 4,245 274 1997 1973
Clark, MA 1,053 902 1,331 1,053 2,233 129 1996 1973
Fall River, MA 620 5,080 620 5,080 343 1996 1966
Falmouth, MA 670 3,022 670 3,022 206 1996 1966
South Boston, MA 385 1,463 3,016 385 4,479 206 1995 1961
Webster, MA 570 8,790 570 8,790 564 1995 1982
Kent, OH 215 3,367 215 3,367 505 1989 1983
Westlake, OH 571 5,411 571 5,411 93 1998 1972
Midwest City, OK 470 5,673 470 5,673 24 1998 1958
Eugene, OR 300 5,316 300 5,316 91 1998 1976
Cheswick, PA 384 6,041 384 6,041 148 1998 1982
Easton, PA 285 6,315 285 6,315 1,254 1993 1959
San Antonio, TX 662 12,588 662 12,588 2,007 1993 1978
--------- ---------- --------- --------- --------- --------
TOTAL SKILLED NURSING FACILITIES: $ 16,625 $ 164,269 $ 4,347 $ 16,625 $ 168,616 $ 9,601
RETIREMENT CENTERS:
Hendersonville, NC 2,270 11,771 2,270 11,771 171 1998 1998
Construction in Progress 151,317
---------
TOTAL INVESTMENT IN PROPERTIES: $ 44,722 $ 436,528 $ 7,046 $ 44,722 $ 594,891 $ 19,624
========= =========== ========= ========= ========= ==========
-39-
40
SCHEDULE III - Continued
Year ended December 31
1998 1997 1996
---- ---- ----
Investment in Real Estate:
Balance at Beginning of year $ 309,044 $ 160,105 $ 63,000
Additions:
Acquisitions 110,432 79,727 50,398
Improvements 159,582 56,109 15,685
Other(1) 73,430 13,103 40,847
---------- ---------- -----------
Total Additions 343,444 148,939 169,930
Deductions:
Cost of real estate sold (12,875) (9,825)
Other
---------- ---------- -----------
Total deductions (12,875) 0 (9,825)
---------- ---------- -----------
Balance at end of year $ 639,613 $ 309,044 $ 160,105
========== ========== ===========
Accumulated depreciation:
Balance at beginning of year 11,769 6,482 4,372
Additions:
Depreciation expense 10,254 5,287 2,427
Deductions:
Sale of properties
(2,399) (317)
---------- ---------- -----------
Balance at end of year $ 19,624 $ 11,769 $ 6,482
========== ========== ===========
(1) Represents mortgage loans converted to operating leases.
-40-
41
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
HEALTH CARE REIT, INC.
DECEMBER 31, 1998
(IN THOUSANDS)
PRINCIPAL AMOUNT
OF LOANS SUBJECT
FINAL PERIODIC CARRYING TO DELINQUENT
INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR
DESCRIPTION RATE DATE TERMS LIENS OF MORTGAGES MORTGAGES INTEREST
- ---------------- -------- -------- -------- ----- ------------ --------- ---------------
First Mortgages:
- ----------------
McAllen, TX 10.63% 01/01/10 Monthly $13,750 $13,633 None
(Specialty Care Payments
Facility) $131,104
Washington, D.C. 12.85% 07/01/15 Monthly 17,350 17,073 None
(Specialty Care Payments
Facility) $190,475
Stoughton, MA 10.87% 03/01/10 Monthly 19,207 19,182 None
(Nursing Home) Payments
$186,177
Little Rock, AK 11.76% 01/01/12 Monthly 29,000 29,000 None
(Specialty Care Payments
Facility) $284,200
Sun Valley, CA 12.13% 12/01/16 Monthly 21,500 21,203 None
(Specialty Care Payments
Facility) $228,417
Briarcliff, NY 10.11% 08/01/16 Monthly 12,810 12,810 None
(Assisted Living Payments
Facility) $107,924
New York City, NY 8.89% 03/01/18 Monthly 21,000 21,000 None
(Assisted Living Facility) Payments
$155,575
Oklahoma City, OK 9.28% 7/1/2006 Monthly 12,204 12,204 None
(Nursing Home) Payments
$94,378
Atlanta, GA 10.14% 4/1/19 Monthly 16,757 13,632 None
(Assisted Living Facility) Payments
$116,514
56 mortgage loans relating to 20 From From $220,528 $209,869 None
nursing homes, 25 assisted living 9.00% to 05/01/99-
facilities, 13.46% 09/01/18
4 retirement centers, 2 behavioral
care facilities and 2 specialty
care facility
-41-
42
SCHEDULE IV - Continued
PRINCIPAL AMOUNT
OF LOANS SUBJECT
FINAL PERIODIC CARRYING TO DELINQUENT
INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR
DESCRIPTION RATE DATE TERMS LIENS OF MORTGAGES MORTGAGES INTEREST
- ---------------- -------- -------- -------- ----- ------------ --------- ---------------
11 construction loans (all with From N/A 51,109 29,076 None
first mortgage liens) relating to 10.00% to
11 assisted living facilities 11.25%
---------- --------- ---------
TOTALS $435,215 $398,682 $-0-
========== ========= =========
(in thousands)
Year Ended December 31
-----------------------------------------------------
1998 1997 1996
---- ---- ----
Reconciliation of mortgage loans:
Balance at beginning of period $405,336 $353,455 $285,219
Additions during period:
New mortgage loans 105,282 120,705 163,963
Negative principal amortization 6 29 135
------------- -------------- -------------
510,624 474,189 449,317
Deductions during period:
Collections of principal (1) 38,512 55,750 55,295
Other (2) 73,430 13,103 40,567
------------- -------------- -------------
Balance at end of period $398,682 $405,336 $353,455
============= ============== =============
(1) Includes collection of negative principal amortization.
(2) Includes properties originally financed with mortgages loans that were
purchased during the periods indicated.
-42-
43
EXHIBIT INDEX
-------------
The following documents are included in this Form 10-K as an Exhibit:
DESIGNATION
NUMBER UNDER
EXHIBIT ITEM 601 OF EXHIBIT PAGE
NUMBER REGULATION S-K DESCRIPTION NUMBER
------ -------------- ----------- ------
3.1(1) 3(i) Second Restated Certificate of Incorporation.
3.2(2) 3(ii) By-Laws, as amended.
4.1 4 The Registrant, by signing this Report, agrees to
furnish the Securities and Exchange Commission upon
its request a copy of any instrument which defines
the rights of long-term debt of the Registrant and
which authorizes a total amount of securities not in
excess of 10% of the total assets of the Registrant.
4.2(3) 4 Indenture dated as of April 17, 1997 by and between
Health Care REIT, Inc. and Fifth Third Bank.
4.3(4) 4 First Supplemental Indenture dated as of April 17,
1997 by and between Health Care REIT, Inc. and Fifth
Third Bank.
4.4(5) 4 Form of Second Supplemental Indenture dated as of
March 13, 1998 between Health Care REIT, Inc. and
Fifth Third Bank.
4.5(6) 4 Form of Certificate of Designation of 8-7/8% Series B
Cumulative Redeemable Preferred Stock.
4.6 4 Certificate of Designations of Series C Cumulative
Convertible Preferred Stock, Preferences and Rights
of Health Care REIT, Inc.
10.1(7) 10(ii)(A) Rights Agreement.
10.2(8) 10(ii)(B) Note Purchase Agreement between Health Care REIT,
Inc. and each of the Purchasers a Party thereto,
dated as of April 8, 1993.
10.3(9) 10(ii)(C) Amended and Restated Credit Agreement dated as of
September 8, 1994 among Health Care REIT, Inc.,
certain banks, and National City Bank, as Agent.
10.4(10) 10(ii)(D) Note Purchase Agreement between Health Care REIT,
Inc. and each of the Purchasers a Party thereto,
dated April 15, 1995.
10.5(11) 10(iii)(A) The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc., as amended.
10.6(12) 10(iii)(B) The Health Care REIT, Inc. 1995 Stock Incentive Plan.
-43-
44
21 21 Subsidiaries of the Registrant.
23 23 Consent of Independent Auditors.
24 24 Powers of Attorney.
27 27 Financial Data Schedule (EDGAR version only).
- ---------------
1 Incorporated by reference to Exhibit 3(i) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
2 Incorporated by reference to Exhibit 3(ii) to the Registrant's Form 8-K filed on
October 24, 1997.
3 Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K filed on
April 21, 1997.
4 Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on
April 21, 1997.
5 Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on
March 10, 1998.
6 Incorporated by reference to Exhibit 2.3 to the Registrant's Form 8-A filed on
May 8, 1998.
7 Incorporated by reference to the Exhibit to the Registrant's Form 8-A filed on
August 3, 1994 (File No. 1-8923).
8 Incorporated by reference to Exhibits 1-4 of the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1993.
9 Incorporated by reference to Exhibit 1 of the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1994.
10 Incorporated by reference to Exhibit 4 of the Registrant's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 1996.
11 Incorporated by reference to Exhibit 4.4 to the Registrant's Registration
Statement on Form S-8 (File No. 333-1237) filed on February 27, 1996.
12 Incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (File No. 333-1239) filed on February 27, 1996.
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