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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, 1999 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 17, 2000 was $420,683,000 based on the reported closing
sales price of such shares on the New York Stock Exchange for that date. As of
March 17, 2000, there were 28,587,994 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 May 4, 2000, are incorporated by reference into
Part III.
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HEALTH CARE REIT, INC.
1999 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
and assisted living facilities. The Company also invests in specialty care
facilities. As of December 31, 1999, long-term care facilities, which include
nursing homes and assisted living facilities, 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, 1999, the Company had $1,240,223,000 of real estate
investments, inclusive of credit enhancements, in 238 facilities located in 34
states and managed by 38 different operators. At that date, the portfolio
included 182 assisted living facilities, 48 nursing homes, six specialty care
facilities, and two behavioral care facilities. At December 31, 1999, the
Company had approximately $53,356,000 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, 1999:
PERCENTAGE NUMBER NUMBER INVESTMENT NUMBER NUMBER
TYPE OF INVESTMENTS OF OF OF BEDS/ PER BED/ OF OF
FACILITY (1) PORTFOLIO FACILITIES UNITS UNIT (2) OPERATORS (3) STATES (3)
-------------- ----------- ---------- --------- ----------- ------------- ----------
(In thousands)
Assisted Living
Facilities $ 865,634 70% 182 12,238 $ 74,401 24 29
Nursing Homes 281,595 22% 48 6,807 42,612 13 14
Specialty Care
Facilities 83,807 7% 6 695 120,586 3 5
Behavioral Care
Facilities 9,187 1% 2 294 31,250 1 1
--------- ----- --- ------ -------
Totals $1,240,223 100% 238 20,034
========== ==== === ======
- --------------------------
(1) Investments include real estate investments and credit enhancements which
amounted to $1,227,798,000 and $12,425,000, respectively.
(2) Investment Per Bed/Unit was computed by using the total investment amount
of $1,293,579,000 which includes real estate investments, unfunded
commitments for which initial funding has commenced, and credit
enhancements which total $1,227,798,000, $53,356,000 and $12,425,000,
respectively.
(3) The Company has investments in properties located in 34 states, managed by
38 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.
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 and
assisted living facilities. The Company also invests in specialty care
facilities. The Company intends to continue to diversify its investment
portfolio by operator 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 investments are designed with escalating rate
structures. The Company's policy is to structure long term financings to
maximize returns. Depending upon market conditions, the Company believes that
appropriate new investments will be available in the future with substantially
the same spreads over its costs of borrowing.
Mortgage loans and operating leases are normally secured by guarantees and/or
letters of credit. As of December 31, 1999, letters of credit from commercial
banks and cash deposits aggregating $44,790,000 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.
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, 1999, the Company had warrants
from 19 operators to purchase their common stock or partnership interest. None
of the warrants are publicly traded.
In connection with investments in two operators, the Company also received
warrants that were converted into shares of common stock. As of December 31,
1999, those shares of common stock were recorded on the Company's balance sheet
at a value of $863,000.
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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 15 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 $767,825,000 at December 31, 1999. The base rents range from
approximately 7.68% to 14.91% per annum of the Company's net book value 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 $374,390,000 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 9.00% to 14.04% 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,
1999, 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, 1999, direct investments included the preferred stock of one
private corporation, subordinated debt in six 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 its terms converts either
into a long-term operating lease or mortgage loan upon the completion of the
facility. 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.
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, 1999, the Company had outstanding construction financings of
$68,862,000 ($58,954,000 leased properties and $9,908,000 mortgage loans) and
was committed to providing additional financing of approximately $53,356,000 to
complete construction.
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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 5 of Notes to Financial
Statements. At December 31, 1999, the total allowance of $5,587,000 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, 1999, 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. 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.
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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. The operations of long-term care companies have been
negatively impacted by these changes in reimbursement, among other factors. Some
of these companies have filed for bankruptcy protection. While the Company has
not been affected by any bankruptcy filings, a reduction in revenues could
result in bankruptcy filings by significant customers of the Company.
Furthermore, any failure by these customers to effectively conduct their
operations could have a material adverse effect on their business reputation or
on their ability to enlist and maintain patients in their facilities.
Due in part to the potential negative effect of the prospective payment system
on the financial condition of long-term care facilities, Standard & Poor's
placed many long-term care facility companies on a `credit watch' in November
1998. In March, 1999, Standard & Poor's lowered the ratings of several long-term
care facility companies, particularly those companies with substantial debt.
On November 29, 1999, the President signed legislation that provides additional
payments for certain Medicare providers. Among other things, Medicare payments
to skilled nursing facilities were increased by 4 percent per year for fiscal
2001 and 2002, and per diem payments for the 15 categories representing the most
medically complex cases were increased by 20 percent.
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
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other special payment arrangements, including arrangements that shift the risk
of high utilization to the providers. A number of states have established
rate-setting agencies which control inpatient health care facility rates,
including private pay rates.
Recent 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 fiscal 2001 would reduce payments to
Medicare providers by $6.37 billion over five years, $4.3 billion of which comes
from hospitals. The budget does not contain substantial funding reductions in
payments to skilled nursing facilities, according to Administration officials.
The budget also includes funding for new programs to improve quality of care in
Medicare and Medicaid-certified nursing facilities, much of which would be used
to bolster state enforcement efforts and to improve federal oversight of state
agencies. The budget proposal would also maintain and upgrade the Nursing Home
Compare World Wide Web site, which publishes information concerning
certification inspections. 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. 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 until the end of the third taxable year following the year
of acquisition without adverse consequences. With the consent of the Treasury
Department, this period can be extended for up to three additional taxable
years. 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.
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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 under leases, the Company did not satisfy this requirement in 1998, and
1997 and incurred an excise tax of approximately $315,000 and $360,000
respectively, in those years. This requirement was met for 1999. There is a
cumulative underdistribution of $6,242,000 that will carry over to 2000 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, 1999, 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. Delaware 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 North Carolina Properties, LLC Delaware limited liability company December 10, 1999
HCRI Properties, Inc. Rhode Island corporation April 22, 1999
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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, 1999.
(IN THOUSANDS)
----------------------------
NUMBER
NUMBER OF
OF BEDS/ TOTAL ANNUALIZED
FACILITY LOCATION FACILITIES UNITS INVESTMENT(1) INCOME(2)
----------------- ---------- ------- ------------- ----------
SKILLED NURSING FACILITIES:
Arizona............................ 1 163 $ 3,961 $ 413
California......................... 2 216 7,578 911
Colorado........................... 1 180 6,114 638
Florida............................ 8 947 55,864 6,391
Idaho.............................. 3 393 21,702 2,253
Illinois........................... 2 212 12,188 1,450
Kentucky........................... 1 92 4,244 536
Massachusetts...................... 13 1,926 88,279 9,833
Missouri........................... 1 98 6,917 763
Ohio............................... 2 219 8,688 1,004
Oklahoma........................... 2 575 18,132 1,770
Oregon............................. 1 121 5,356 558
Pennsylvania....................... 4 474 23,598 3,024
Texas.............................. 7 1,191 18,973 2,385
------------ -------- ------------- -------------
Total............................. 48 6,807 281,594 31,929
ASSISTED LIVING FACILITIES:
Alabama............................ 2 149 $ 10,498 $ 951
Arizona............................ 4 463 15,765 1,427
California......................... 6 351 22,157 2,469
Colorado........................... 1 50 3,890 404
Connecticut........................ 2 161 20,675 2,206
Florida............................ 20 1,116 83,593 9,327
Georgia............................ 4 361 37,396 3,573
Indiana............................ 9 460 36,243 4,139
Illinois........................... 2 321 10,425 165
Louisiana.......................... 2 209 16,360 1,786
Maryland........................... 4 340 20,739 2,111
Massachusetts...................... 1 130 10,851 1,210
Minnesota.......................... 1 78 6,537 724
Montana............................ 2 104 8,055 902
Nevada............................. 3 298 26,155 2,952
New Jersey......................... 2 400 20,517 2,410
New Mexico......................... 2 158 7,712 890
New York........................... 6 775 61,746 6,306
North Carolina..................... 18 988 87,690 9,083
Ohio............................... 10 819 55,659 6,522
Oklahoma........................... 17 586 25,349 3,107
Oregon............................. 2 70 9,673 1,102
Pennsylvania....................... 10 708 59,183 7,087
South Carolina..................... 5 232 18,259 2,117
Tennessee.......................... 4 204 14,443 1,654
Texas.............................. 39 2,458 156,640 17,512
Utah............................... 1 57 5,903 623
Virginia........................... 2 146 6,740 793
Washington......................... 1 46 6,781 747
------------ -------- ------------- -------------
Total............................. 182 12,238 865,634 94,299
SPECIALTY CARE FACILITIES:
Arkansas........................... 1 117 $ 28,855 $ 3,393
California......................... 2 398 31,621 3,872
Minnesota.......................... 1 0 246 31
Texas.............................. 1 70 13,507 1,436
Washington D.C..................... 1 110 9,578 1,189
------------ -------- ------------- -------------
Total............................. 6 695 83,807 9,921
BEHAVIORAL CARE FACILITIES:
Florida............................ 2 294 $ 9,188 $ 965
------------ -------- ------------- -------------
TOTAL ALL FACILITIES:............. 238 20,479 $1,240,223 $137,132
=== ====== ========== ========
- --------------------------
(1) Investments include real estate investments and credit enhancements which
amounted to $1,227,798,000 and $12,425,000, respectively.
(2) Reflects contract rate of annual base rent or interest recognized or to be
recognized 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 5,240
shareholders of record as of December 31, 1999.
SALES PRICE
--------------- DIVIDENDS
HIGH LOW PAID
---- --- ----
1999
First Quarter....................................... $ 26.6250 $ 21.1875 $ .560
Second Quarter...................................... 25.6250 20.7500 .565
Third Quarter....................................... 23.8750 19.3125 .570
Fourth Quarter...................................... 20.0000 14.6875 .575
1998
First Quarter....................................... $29.2500 $ 26.625 $ .540
Second Quarter...................................... 28.4375 25.375 .545
Third Quarter ...................................... 27.5000 22.375 .550
Fourth Quarter...................................... 26.6250 20.000 .555
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31,
1999, are derived from the audited consolidated financial statements of the
Company.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
(In thousands, except per share data)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
OPERATING DATA
Revenues.................................................. $129,307 $97,992 $73,308 $54,402 $44,596
Expenses:
Interest expense........................................ 26,916 18,030 15,365 14,635 12,752
Provision for depreciation.............................. 17,885 10,254 5,287 2,427 1,580
General and administrative
and other expenses (1)................................ 8,868 7,399 6,178 6,664 10,835
Settlement of management
contract
(2)....................................................... 5,794
--------- ------- ------- ------- -------
Total expenses............................................ 53,669 35,683 26,830 23,726 30,961
--------- ------- ------- ------- -------
Net income................................................ 75,638 62,309 46,478 30,676 13,635
Preferred stock dividends................................. 12,814 4,160
--------- ------- ------- ------- -------
Net income available to common shareholders.............. $ 62,824 $58,149 $46,478 $30,676 $13,635
========= ======= ======= ======= =======
OTHER DATA
Average number of common shares outstanding (3):
Basic................................................ 28,128 25,579 21,594 14,093 11,710
Diluted.............................................. 28,384 25,954 21,929 14,150 11,728
Cash available for distribution (4)....................... $ 76,880 $ 68,490 $56,856 $36,705 $27,938
PER SHARE
Net income available to common shareholders:
Basic................................................ $2.23 $2.27 $2.15 $2.18 $1.16
Diluted.............................................. 2.21 2.24 2.12 2.17 1.16
Cash distributions per common share....................... 2.27 2.19 2.11 2.08 2.075
DECEMBER 31,
-------------------------------------------------------
(In thousands)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
BALANCE SHEET DATA
Real estate investments, net.............................. $1,222,211 $1,027,706 $713,557 $512,894 $351,924
Total assets.............................................. 1,271,171 1,073,424 734,327 519,831 358,092
Total debt................................................ 538,842 418,979 249,070 184,395 162,760
Total liabilities......................................... 564,175 439,665 264,403 194,295 170,494
Total shareholders' equity................................ 706,996 633,759 469,924 325,536 187,598
- --------------------------
(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 23.
(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, 1999, the Company's net real estate investments totaled
approximately $1,222,211,000, which included 182 assisted living facilities, 48
nursing facilities, six specialty care facilities and two behavioral care
facilities. Depending upon the availability and cost of external capital, the
Company anticipates making additional investments in health care related
facilities. New investments are funded from temporary borrowings under the
Company's line of credit arrangements, internally generated cash and the
proceeds derived from asset sales. Permanent financing for future investments,
which replaces funds drawn under the line of credit arrangements, is expected to
be provided through a combination of private and public offerings of debt and
equity securities, and the assumption of secured debt. The Company believes its
liquidity and various sources of available capital are sufficient to fund
operations, meet debt service and dividend requirements, and finance future
investments.
During 1999, the underperformance of publicly owned nursing home and assisted
living companies, combined with the much publicized shift in equity funds flow
from income-oriented investments to high-growth opportunities, impaired the
stock valuations of all health care REITs. The availability of external capital
is limited and expensive, constraining new investment activity and earnings
growth. The Company believes the restrictive capital environment will continue
until the prospects for the long-term care industry improve.
In October 1999, the Company announced a $200 million asset divestiture program,
which is proceeding as planned. The Company believes the limited asset sales
will strengthen the Company's portfolio and generate liquidity, enhancing the
Company's balance sheet. This strategy should position the Company for new
investment and growth opportunities in the future.
During 1999, the Company invested $81,008,000 in real property, provided
permanent mortgage financings of $17,565,000, made construction advances of
$169,085,000, funded $7,462,000 of equity related investments and had net
advances on working capital loans of $9,440,000. During 1999, the Company
received principal payments on real estate mortgages of $4,515,000, proceeds of
$38,216,000 from the prepayment of mortgage loans, and proceeds of $18,112,000
derived from property sales. As of December 31, 1999, the Company had
approximately $53,356,000 in unfunded commitments.
During 1999, 43 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
$226,695,000, and twelve construction loans converted to permanent mortgage
loans with an aggregate investment balance of $67,553,000.
As of December 31, 1999, the Company had shareholders' equity of $706,996,000
and a total outstanding debt balance of $538,842,000, which represents a debt to
equity ratio of 0.76 to 1.0.
In January 1999, the Company announced the sale of 3,000,000 shares of
cumulative convertible preferred stock. These shares have a liquidation value of
$25.00 per share and will pay quarterly dividends equivalent to the greater of
$0.5625 or the quarterly dividend then payable per common share on an as
converted basis. 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.
In February 1999, the Company entered into a $75,000,000 Secured Credit
Facility. The Credit Facility bears interest at the lender's prime rate or LIBOR
plus 2.0%, with a floor of 7.0%. At December 31, 1999, $60,000,000 was advanced
under this Credit Agreement.
In March 1999, the Company completed the sale of $50 million of 8.17% Senior
Unsecured Notes due March 15, 2006.
As of December 31, 1999, 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 $20,000,000 bearing interest
at the lender's prime rate expiring April 30, 2000. At December 31, 1999, under
the Company's line of credit arrangements, available funding totaled
$17,500,000.
As of December 31, 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. Depending upon market conditions, the Company anticipates
issuing securities under such shelf registrations to invest in additional health
care facilities and to repay borrowings under the Company's line of credit
arrangements.
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RESULTS OF OPERATIONS DECEMBER 31, 1999 VS. DECEMBER 31, 1998
Revenues for the year ended December 31, 1999, were $129,307,000 compared to
$97,992,000 for the year ended December 31, 1998, an increase of $31,315,000 or
32%. Revenue growth resulted primarily from increased operating rent income of
$30,747,000, from additional real estate investments made during the past twelve
to fifteen months.
Expenses for the year ended December 31, 1999, totaled $53,669,000, an increase
of $17,986,000 from expenses of $35,683,000 for the year ended December 31,
1998. The increase in total expenses for the year ended December 31, 1999 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.
Interest expense for the year ended December 31, 1999, was $26,916,000 compared
with $18,030,000 for the year ended December 31, 1998. The increase in interest
expense during 1999 was primarily due to the issuance in March 1999 of the
Senior Unsecured Notes Due 2006, the addition of $60,000,000 borrowed under the
Secured Credit Facility and higher average borrowings under the unsecured lines
of credit during 1999, which were offset by the amount of capitalized interest
recorded in 1999.
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, 1999, totaled $8,578,000,
as compared with $7,740,000 for the same period in 1998.
The provision for depreciation for the year ended December 31, 1999, totaled
$17,885,000, an increase of $7,631,000 over the year ended 1998 as a result of
additional real property investments.
General and administrative expense for the year ended December 31, 1999, totaled
$7,359,000 as compared with $6,114,000 for the year ended December 31, 1998. The
expenses for the year ended December 31, 1999, were 5.69% of revenues as
compared with 6.24% for the year ended December 31, 1998.
Dividend payments associated with the Company's outstanding preferred stock for
the year ended December 31, 1999, totaled $12,814,000 as compared with
$4,160,000 for 1998.
As a result of the various factors mentioned above, net income available for
common shareholders for the year ended December 31, 1999, was $62,824,000, or
$2.21 per share, as compared with $58,149,000, or $2.24 per share for the year
ended December 31, 1998.
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.
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.
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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.
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, 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 inflation will not impact the
availability of equity and debt financing.
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 have
resulted in system failures, malfunctions, or miscalculations that would have
disrupted normal operations. The Company did not experience any Year 2000
related problems. In addition, the Company's outside vendors and
tenant/borrowers did not encounter any significant problems related to Year 2000
issues.
The Company's expenditures for remedies were not material.
The Company does not anticipate any future risk due to the Year 2000, but will
continue to monitor all computer software and hardware throughout the next year.
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 and
cost of capital, the ability of the Company's lessees and borrowers to make
payments under their leases and loans, and regulatory and other changes in the
health care sector, as described in the Company's filings with the Securities
and Exchange Commission.
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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 senior unsecured notes were $258
million and $239 million at December 31, 1999 and 1998, respectively. A 1%
increase in interest rates would result in a decrease in fair value of the
Company's senior unsecured notes by approximately $11 million at both December
31, 1999 and 1998.
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, 1999, 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.
Potential Risks from Bankruptcies
The Company is exposed to the risk that its operators may not be able to meet
the rent and interest payments due the Company, which may result in an operator
bankruptcy or insolvency. Although the Company's operating lease agreements and
loans provide the Company the right to terminate an investment, evict an
operator, demand immediate repayment, and other remedies, the Bankruptcy laws
afford certain rights to a party that has filed for bankruptcy or
reorganization. An operator in bankruptcy may be able to restrict the Company's
ability to collect unpaid rent or interest, and collect interest during the
bankruptcy proceeding.
The receipt of liquidation proceeds or the replacement of an operator that has
defaulted on its lease or loan could be delayed by the approval process of any
federal, state or local agency necessary for the transfer of the property or the
replacement of the operator licensed to manage the facility. In addition, the
Company may be required to fund certain expenses (i.e. real estate taxes and
maintenance) to retain control of a property. In some instances the Company may
take possession of a property, which may expose the Company to successor
liabilities. Should such events occur, the Company's revenue and operating cash
flow may be adversely affected.
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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, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. 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 21, 2000
Toledo, Ohio
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HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1999 1998
------------------------------------------
(IN THOUSANDS)
ASSETS
Real estate investments:
Real property owned
Land $ 73,234 $ 44,722
Buildings & improvements 730,337 443,574
Construction in progress 58,954 151,317
------------------ ------------------
862,525 639,613
Less accumulated depreciation (35,746) (19,624)
------------------ ------------------
Total real property owned 826,779 619,989
Loans receivable 401,019 412,704
------------------ ------------------
1,227,798 1,032,693
Less allowance for loan losses (5,587) (4,987)
------------------ ------------------
Net real estate investments 1,222,211 1,027,706
Other Assets:
Direct investments 25,361 26,180
Marketable securities 863 4,106
Deferred loan expenses 3,311 2,389
Cash and cash equivalents 2,129 1,269
Receivables and other assets 17,296 11,774
------------------ ------------------
48,960 45,718
------------------ ------------------
Total assets $ 1,271,171 $ 1,073,424
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $ 177,500 $ 171,550
Senior unsecured notes 290,000 240,000
Secured debt 71,342 7,429
Accrued expenses and other liabilities 25,333 20,686
------------------ -----------------
Total liabilities 564,175 439,665
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - 6,000,000 in 1999
and 3,000,000 in 1998
at liquidation preference 150,000 75,000
Common Stock, $1.00 par value:
Authorized - 75,000,000 shares
Issued and outstanding - 28,532,419
shares in 1999 and 28,240,165
shares in 1998 28,532 28,240
Capital in excess of par value 524,204 520,692
Undistributed net income 8,883 10,434
Accumulated other
comprehensive income 593 3,982
Unamortized restricted stock (5,216) (4,589)
------------------ ------------------
Total shareholders' equity 706,996 633,759
------------------ ------------------
Total liabilities and shareholders' equity $ 1,271,171 $ 1,073,424
================== ==================
See accompanying notes
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1999 1998 1997
-------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rental income $ 72,700 $ 41,953 $ 22,178
Interest income 48,076 48,488 47,237
Commitment fees and other income 6,263 5,914 3,364
Prepayment fees 1,565 588 529
-------------- --------------- ---------------
128,604 96,943 73,308
Expenses:
Interest expense 26,916 18,030 15,365
Provision for depreciation 17,885 10,254 5,287
General and administrative 7,359 6,114 4,858
Loan expense 909 685 720
Provision for loan losses 600 600 600
-------------- --------------- ---------------
53,669 35,683 26,830
-------------- --------------- ---------------
Income before gain on sale of properties 74,935 61,260 46,478
Gains on sale of properties 703 1,049
-------------- --------------- ---------------
Net Income 75,638 62,309 46,478
Preferred stock dividends 12,814 4,160
-------------- --------------- ---------------
Net income available to
common shareholders $ 62,824 $ 58,149 $ 46,478
============== =============== ===============
Average number of common shares outstanding:
Basic 28,128 25,579 21,594
Diluted 28,384 25,954 21,929
Net income available to common shareholders
per share:
Basic $ 2.23 $ 2.27 $ 2.15
Diluted $ 2.21 $ 2.24 $ 2.12
See accompanying notes
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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
--------- ------- ----------- ------------- ------------- ----------- ---------
(In thousands, except per share data)
Balances at January 1, 1997 $ $18,320 $298,281 $ 8,167 $ 768 $ 325,536
Comprehensive income:
Net income 46,478 46,478
Other comprehensive income:
Unrealized gain on marketable 3,903 3,903
securities --------
Total comprehensive income 50,381
--------
Proceeds from issuance of common stock
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 common stock,
net of expenses of $7,477 5,566 127,143 132,709
Cash dividends on common stock
--$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: 62,309 62,309
Net income
Other comprehensive income:
Unrealized loss on marketable (565) (565)
securities
Foreign currency translation adjustment (124) (124)
--------
Total comprehensive income 61,620
--------
Proceeds from issuance of common stock
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 common stock,
net of expenses of $4,599 3,459 77,893 81,352
Net proceeds from sale of preferred stock 75,000 (2,790) 72,210
Cash dividends:
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
Comprehensive income:
Net income 75,638 75,638
Other comprehensive income:
Unrealized loss on marketable (3,243) (3,243)
securities
Foreign currency translation adjustment (146) (146)
--------
Total comprehensive income 72,249
--------
Proceeds from issuance of common stock
from dividend reinvestment and stock
incentive plans 292 5,967 (1,707) 4,552
Amortization of restricted stock grants 1,080 1,080
Net proceeds from sale of preferred stock 75,000 (2,455) 72,545
Cash dividends:
Common stock -- $2.27 per share (64,375) (64,375)
Preferred stock, Series B--$2.22 per (6,656) (6,656)
share
Preferred stock, Series C--$2.19
per share (6,158) (6,158)
-------- ------- --------- --------- ------ -------- --------
BALANCES AT DECEMBER 31, 1999 $150,000 $28,532 $524,204 $ 8,883 $ 593 $(5,216) $706,996
======== ======= ========= ========= ====== ======== ========
See accompanying notes
-20-
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------ ------------------ -----------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 75,638 $ 62,309 $ 46,478
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 18,106 10,348 5,361
Amortization 1,998 1,306 980
Provision for losses 600 600 600
Loan and commitment fees earned
less than (greater than) cash (399) 1,222 4,642
received
Direct financing lease income less
than cash received 65 292 372
Rental income in excess of
cash received (6,692) (3,047) (1,548)
Interest income less than (greater
than) cash received 378 (380) (29)
Increase in accrued expenses and
other liabilities 5,045 4,133 790
Decrease (increase) in receivables and
other assets 1,394 (1,037) (1,638)
----------- ----------- -----------
Net cash provided from operating activities 96,133 75,746 56,008
INVESTING ACTIVITIES
Investment in real property (215,491) (270,015) (135,835)
Investment in loans receivable (56,089) (105,282) (123,376)
Other investments, net of payments (2,024) (20,965) (4,964)
Principal collected on loans 42,731 38,629 49,750
Proceeds from sale of properties 18,112 11,378 2,569
Other (444) (328) (213)
------------ ----------- -----------
Net cash used in investing activities (213,205) (346,583) (212,069)
FINANCING ACTIVITIES
Net increase (decrease) under line of
credit arrangements 5,950 93,150 (13,725)
Borrowings under senior notes 50,000 100,000 80,000
Proceeds from issuance of Secured Debt 64,000
Principal payments on other long-term
obligations (87) (23,241) (1,600)
Net proceeds from the issuance of Common Stock 4,552 90,120 139,554
Net proceeds from the issuance of Preferred 72,545 72,210
Stock
Increase in deferred loan expense (1,839) (798) (1,564)
Cash distributions to shareholders (77,189) (60,716) (45,804)
------------ ----------- -----------
Net cash provided from financing activities 117,932 270,725 156,861
------------ ----------- ----------
Increase (decrease) in cash and cash equivalents 860 (112) 800
Cash and cash equivalents at beginning of year 1,269 1,381 581
------------ ----------- ----------
Cash and cash equivalents at end of year $ 2,129 $ 1,269 $ 1,381
============ =========== ==========
Supplemental Cash Flow Information-interest paid $ 32,826 $ 23,714 $ 16,444
============ =========== ==========
See accompanying notes
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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 and assisted
living facilities. 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 primarily collateralized by a first mortgage on or assignment of
partnership interest in the related facilities which consist of nursing homes,
assisted living facilities, 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. These properties are depreciated on a straight-line basis
over their estimated useful lives. 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 depreciable
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 asset 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, 1999, 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.
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 $8,578,000, $7,740,000 and $2,306,000
during 1999, 1998 and 1997, respectively, related to construction of real
property owned by the Company. The Company's interest expense reflected in the
statement of income has been reduced by the amounts capitalized.
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.
-22-
23
1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)
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 six 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
10.
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 guidelines for the reporting and
display of comprehensive income and its components. Comprehensive income
includes unrealized gains or losses on the Company's marketable securities and
foreign currency translation adjustments. These items are included as a
component of shareholders' equity.
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, 2001. Under the Statement, all financial instruments
meeting the definition of a derivative will be carried at fair value. The impact
that this statement will have on the Company has not been determined. The
Company currently has no derivative instruments nor has engaged in any hedging
activities.
-23-
24
2. LOANS RECEIVABLE
The following is a summary of loans receivable (in thousands):
DECEMBER 31
1999 1998
-----------------------------------------
Mortgage loans $ 349,514 $ 362,715
Mortgage loans to related parties 24,876 0
Construction loans 9,908 42,708
Working capital 13,458 5,532
Working capital loans to related parties 3,263 1,749
------------------ ------------------
TOTALS $ 401,019 $ 412,704
================== ==================
Mortgage loans include $6,741,000 of direct financing leases in 1998. Loans to
related parties (various entities whose ownership includes two Company
directors) included above are at rates comparable to other third party borrowers
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 $3,639,000, $1,236,000 and $980,000 for 1999,
1998 and 1997, respectively.
The following is a summary of mortgage loans at December 31, 1999 (in
thousands):
FINAL NUMBER PRINCIPAL
PAYMENT OF AMOUNT AT CARRYING
DUE LOANS PAYMENT TERMS INCEPTION AMOUNT
------- ------ ------------- --------- --------
2001 3 Monthly payments from $21,460 $ 11,684 $ 9,434
to $58,932, including interest from
10.50% to 12.00%
2002 12 Monthly payments from $18,360 52,130 51,987
to $47,342, including interest
at 9.00%
2006 1 Monthly payment at $96,412, 12,204 12,204
including interest at 9.48%
2007 2 Monthly payments from $28,403 to 14,698 10,421
$73,860, including interest from
10.70% to 13.20%
2008 1 Monthly payment at $88,967, 7,400 7,228
including interest at 14.04%
2009 1 Monthly payment at $70,577, 7,072 6,917
including interest at 11.26%
2010 2 Monthly payments from $41,253 to 18,025 17,695
$133,235, including interest from
10.85% to 11.19%
-24-
25
2. LOANS RECEIVABLE (CONTINUED)
FINAL NUMBER PRINCIPAL
PAYMENT OF AMOUNT AT CARRYING
DUE LOANS PAYMENT TERMS INCEPTION AMOUNT
------- ------ ------------- --------- --------
2011 6 Monthly payments from $18,921 to $ 20,797 $ 20,588
$38,663, including interest from
9.48% to 11.90%
2012 3 Monthly payments from $42,607 to 38,668 38,492
$305,007, including interest from
9.70% to 11.98%
2013 1 Monthly payment at $45,173, 5,537 5,537
including interest at 9.79%
2015 3 Monthly payments from $53,679 to 26,360 25,461
$122,053, including interest from
11.18% to 12.82%
2016 3 Monthly payments from $44,413 to 25,346 24,962
$119,094, including interest from
10.41% to 11.60%
2017 9 Monthly payments from $26,649 to 75,886 74,733
$233,818, including interest from
9.74% to 12.48%
2018 7 Monthly payments from $24,892 to 48,657 48,022
$187,727, including interest from
9.38% to 10.43%
2019 5 Monthly payments from $22,500 to 20,735 20,709
$47,513, including interest from
10.00% to 10.39%
TOTALS $ 385,199 $ 374,390
========= =========
-25-
26
3. REAL ESTATE INVESTMENTS
The following table summarizes certain information about the Company's real
estate properties as of December 31, 1999 (in thousands):
Number of Building & Total Accumulated
Facilities Land Improvements Investment Depreciation
------------ ----------- ----------------- -------------- ----------------
NURSING HOMES:
Arizona 1 $ 180 $ 3,988 $ 4,168 $ 207
California 2 2,640 5,212 7,852 274
Colorado 1 370 6,051 6,421 307
Florida 6 3,462 41,258 44,720 1,727
Idaho 3 2,010 20,662 22,672 970
Illinois 2 1,010 11,446 12,456 268
Kentucky 1 130 4,870 5,000 756
Massachusetts 7 3,548 34,051 37,599 3,224
Ohio 2 786 8,778 9,564 876
Oklahoma 1 470 5,673 6,143 215
Oregon 1 300 5,316 5,616 260
Pennsylvania 3 669 17,567 18,236 1,866
Texas 1 663 12,588 13,251 2,359
Construction in Progress 7,576 7,576
- ---------------------------------- ------------- ----------- ----------------- ------------- --------------
31 16,238 185,036 201,274 13,309
- ---------------------------------- ------------- ----------- ----------------- ------------- --------------
ASSISTED LIVING FACILITIES:
Arizona 2 560 6,467 7,027 125
California 1 980 6,195 7,175 159
Connecticut 2 1,230 19,053 20,283 445
Florida 19 8,431 71,847 80,278 3,190
Georgia 2 3,166 24,542 27,708 225
Indiana 9 1,951 34,874 36,825 583
Maryland 1 1,320 13,641 14,961 276
Massachusetts 1 810 10,500 11,310 459
Minnesota 1 322 6,345 6,667 130
Montana 1 360 3,282 3,642 109
Nevada 2 1,706 21,769 23,475 435
New Jersey 1 3,297 14,233 17,530 1,124
New Mexico 1 233 5,355 5,588 323
New York 1 400 10,528 10,928 616
North Carolina 9 7,708 53,667 61,375 1,661
Ohio 8 4,103 40,364 44,467 1,822
Oklahoma 15 1,703 21,408 23,111 2,239
Oregon 2 1,077 8,756 9,833 160
Pennsylvania 10 5,889 55,479 61,368 2,872
South Carolina 4 1,372 13,315 14,687 193
Tennessee 4 1,521 12,461 13,982 168
Texas 25 7,457 93,320 100,777 5,028
Washington 1 1,400 5,476 6,876 95
Construction in Progress 51,378 51,378
- ---------------------------------- ------------- ----------- ----------------- ------------- --------------
122 56,996 604,255 661,251 22,437
- ---------------------------------- ------------- ----------- ----------------- ------------- --------------
TOTAL REAL ESTATE 153 $ 73,234 $ 789,291 $ 862,525 $ 35,746
- ---------------------------------- ------------- ----------- ----------------- ------------- --------------
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3. REAL ESTATE INVESTMENTS (CONTINUED)
At December 31, 1999, future minimum lease payments receivable under operating
leases are as follows (in thousands):
2000 $ 76,866
2001 83,167
2002 84,916
2003 85,829
2004 86,714
Thereafter 506,662
-------------
TOTAL $ 924,154
=============
The Company converted $16,309,000, $73,430,000, and $13,103,000, of mortgage
loans into operating lease properties in 1999, 1998 and 1997, respectively. This
noncash activity is appropriately not reflected in the accompanying statements
of cash flows.
The Company has leased one nursing home and five assisted living facilities to
an operator that has a director who is also a director of the Company and the
Company is constructing two assisted living facilities that will be leased to
this operator upon completion. The Company recognized $1,266,000 of rental
income from this operator in 1999. The Company did not recognize rental income
from this operator in 1998 or 1997. In 1999, a director of the Company was
appointed as a director of an operator which leases seven facilities from the
Company. The Company recognized $1,546,000 of rental income from this operator
in 1999.
4. CONCENTRATION OF RISK
As of December 31, 1999, long-term care facilities, which include nursing homes
and assisted living facilities, comprised 92% of the Company's real estate
investments and were located in 34 states. Investments in assisted living
facilities comprised 70% of the Company's real estate investments. The Company's
investments with the three largest operators totaled approximately 29%. No
single operator has a real estate investment balance which exceeds 14% of total
real estate investments, including credit enhancements.
5. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the allowance for loan losses (in thousands):
1999 1998 1997
--------------- ---------------- ----------------
Balance at beginning of year $ 4,987 $ 4,387 $ 9,787
Provision for loan losses 600 600 600
Charge-offs (6,000)
------------- ------------ -------------
Balance at end of year $ 5,587 $ 4,987 $ 4,387
============ ============ ============
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.
6. 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, 1999 was 7.05%. 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 unsecured line of credit with a bank for a total of
$20,000,000 which expires April 30, 2000. Borrowings under this line of credit
are subject to interest at the bank's prime rate of interest (8.50% at December
31, 1999) and are due on demand.
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28
6. 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
1999 1998 1997
-----------------------------------------------------------
Balance outstanding at December 31 $ 177,500 $ 171,550 $ 78,400
Maximum amount outstanding at any
month end 180,950 171,550 158,950
Average amount outstanding (total
of daily principal balances
divided by days in year) 153,318 103,739 78,826
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 6.61% 6.90% 7.63%
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $290,000,000 of unsecured Senior Notes with interest ranging
from 7.06% to 8.34% and maturing at various dates to 2008.
The Company has two mortgage notes payable, collateralized by two health care
facilities with interest rates from 7.625% to 12% and maturing at various dates
to 2034.
The Company has one secured note collateralized by one health care facility with
interest at 2% over LIBOR (8.16% at December 31, 1999).
The Company has a $75,000,000 secured line of credit, collateralized by fourteen
health care facilities, with interest at 2% over LIBOR (7.69% at December 31,
1999). The outstanding balance at December 31, 1999 was $60,000,000.
The carrying values of the health care properties securing the mortgages and
secured debt totaled $154,224,000 at December 31, 1999.
At December 31, 1999, the annual principal payments on these long-term
obligations are as follows (in thousands):
SECURED LINE OF SECURED
SENIOR NOTES CREDIT NOTE MORTGAGES
-------------- ---------------- --------- ---------
2000 $ 35,000 $ 0 $ 0 $ 99
2001 10,000 0 0 109
2002 20,000 0 0 121
2003 35,000 0 0 133
2004 40,000 60,000 4,000 186
2005 0 0 0 549
2006 50,000 0 0 62
2007 0 0 0 67
2008 100,000 0 0 72
Thereafter 0 0 0 5,944
--------- --------- -------- ---------
Total $ 290,000 $ 60,000 $ 4,000 $ 7,342
========= ========= ======== =========
8. 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 Plan for Non-Employee Directors which
authorizes up to 240,000 shares to be issued.
-28-
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8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS (CONTINUED)
The following summarizes the activity in the Plans for the years ended December
31 (shares in thousands):
1999 1998 1997
---- ---- ----
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
STOCK OPTIONS
- -------------
Options at beginning of year 1,418 $22.06 1,126 $21.56 749 $19.51
Options granted 410 20.17 362 23.00 475 24.44
Options exercised (6) 21.81 (63) 18.57 (84) 19.16
Options terminated (9) 23.90 (7) 24.90 (14) 23.61
-------- ----------- -------- ----------- -------- -----------
1,813 $21.62 1,418 $22.06 1,126 $21.56
======== =========== ======== =========== ======== ===========
At end of year:
Shares exercisable 733 $21.17 466 $20.83 406 $20.79
Weighted average fair value
of options granted during the
year $ 2.11 $ 1.98 $ 1.97
The stock options generally vest over a five year period and expire ten years
from the date of grant. Options at December 31, 1999, had exercise prices
ranging from $17.875 to $27.375 per share and a weighted average contractual
life of 4.7 years.
The Company issued 86,250, 74,100 and 157,000 restricted shares during 1999,
1998 and 1997, respectively, including 9,000, 2,250 and 2,000 shares for
directors in 1999, 1998 and 1997, respectively. Vesting periods range from six
months for directors to periods of five to ten years for officers and key
salaried employees. Expense, which is recognized as the shares vest based on the
market value at the date of the award, totaled $1,080,000, $601,000 and $257,000
in 1999, 1998 and 1997, respectively.
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 $621,000, $393,000, and $212,000 in 1999, 1998 and 1997,
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
$144,000, $120,000, and $110,000 in 1999, 1998 and 1997, respectively.
9. PREFERRED STOCK
In January 1999, the Company announced the sale of 3,000,000 shares of Series C
Cumulative Convertible Preferred Stock. These shares have a liquidation value of
$25.00 per share and will pay dividends equivalent to the greater of (i) the
annual dividend rate of $2.25 per share (a quarterly dividend rate of $0.5625
per share); or (ii) the quarterly dividend then payable per common share on an
as converted basis. 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.
In May 1998, the Company sold 3,000,000 shares of 8.875% Series B Cumulative
Redeemable Non-Voting Preferred Stock with a liquidation preference of $25.00
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 $25.00 per share, plus accrued and unpaid dividends thereon
to the redemption date.
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30
10. 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 $0, $315,000 and
$360,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Undistributed net income for federal income tax purposes amounted to $6,242,000
at December 31, 1999. The principal reasons for the difference between
undistributed net income for federal income tax purposes and financial statement
purposes are the recognition of straight-line rent for reporting 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
1999 1998 1997
-----------------------------------------------
Per Share:
Ordinary income $ 2.217 $ 2.142 $ 2.085
Capital gains .053 .048 .025
---------- --------- -----------
TOTALS $ 2.270 $ 2.190 $ 2.110
========== ========= ===========
11. COMMITMENTS AND CONTINGENCIES
At December 31, 1999, the Company had outstanding commitments to provide
financing for facilities in the approximate amount of $53,356,000 for ongoing
construction activity 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. In addition, the Company has an outstanding letter of credit
relating to one construction project. At December 31, 1999, obligations under
these agreements for which the Company was contingently liable aggregated
approximately $12,425,000.
12. 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
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1999 1998 1997
---------- --------- ----------
Numerator for basic and diluted earnings
per share - income available to common
shareholders $ 62,824 $ 58,149 $ 46,478
========= ========= =========
Denominator for basic earnings per
share - weighted average shares 28,128 25,579 21,594
Effect of dilutive securities:
Employee stock options 15 174 182
Nonvested restricted shares 241 201 153
--------- --------- --------
Dilutive potential common shares 256 375 335
--------- --------- --------
Denominator for diluted earnings per
share - adjusted weighted average shares 28,384 25,954 21,929
========= ========= =========
Basic earnings per share $ 2.23 $ 2.27 $ 2.15
========= ========= =========
Diluted earnings per share $ 2.21 $ 2.24 $ 2.12
========= ========= =========
The diluted earnings per share calculation excludes the dilutive effect of
1,813,000 and 179,000 shares for 1999 and 1998, respectively because the
exercise price was greater than the average market price. The Series C
Cumulative Convertible Preferred Stock was not included in this calculation as
the effect of the conversion was anti-dilutive.
14. 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 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.
Secured Debt--Same as Line of Credit Arrangements.
-31-
32
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1999 and 1998, are as follows (in thousands):
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------- ------------------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------------- --------------- ---------------- --------------
Financial Assets:
Mortgage loans $374,390 $381,082 $355,974 $375,252
Working capital and
construction loans 26,629 26,629 49,989 49,989
Cash and cash equivalents 2,129 2,129 1,269 1,269
Marketable securities 863 863 4,106 4,106
Direct investments 25,361 25,361 26,180 26,180
Financial Liabilities:
Borrowings under line of
credit arrangements 177,500 177,500 171,550 171,550
Senior unsecured notes 290,000 257,679 240,000 239,396
Secured debt 64,000 64,000
Mortgage notes payable 7,342 7,342 7,429 7,429
15. 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, 1999 and 1998 (in thousands, except
per share data):
YEAR ENDED DECEMBER 31, 1999
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
------------------------------------------------------------------------------
Revenues $ 28,164 $ 32,469 $ 34,160 $ 33,811
Net Income Available to
Common Shareholders 16,219 15,787 16,195 14,623
Net Income Available to
Common Shareholders
Basic .58 .56 .57 .52
Diluted .57 .56 .57 .51
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 .60
-32-
33
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 Three Directors" and "Executive
Officers of the Company" in the definitive proxy statement of the Company which
will be filed with the Commission prior to May 4, 2000.
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 May 4, 2000.
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 Directors and Management"
in the definitive proxy statement of the Company which will be filed with the
Commission prior to May 4, 2000.
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 May 4, 2000.
-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, 1999 and 1998.............................................18
Consolidated Statements of Income - Years ended December 31, 1999, 1998 and 1997.....................19
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1999, 1998 and 1997...............................................................20
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997...............................................................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 Second Supplemental Indenture dated as of March 13, 1998
between Health Care REIT, Inc. and Fifth Third Bank.
4.5 Third Supplemental Indenture dated as of March 18, 1999
between Health Care REIT, Inc. and Fifth Third Bank.
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 Loan Agreement dated as of March 28, 1997 by and among
Health Care REIT, Inc., its subsidiaries, the banks
signatory thereto, Keybank National Association, as
Administrative Agent, and Fleet Bank, N.A., as
Syndication 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.
-34-
35
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).
(b) Reports on Form 8-K filed in the fourth quarter of 1999:
None.
(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 37 through 43.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed 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 20, 2000 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.*
- -----------------------------------
William C. Ballard, Jr., Director
/s/ PIER C. BORRA*
- -----------------------------------
Pier C. Borra, Director
/s/ JEFFREY H. DONAHUE*
- -----------------------------------
Jeffrey H. Donahue, Director
/s/BRUCE DOUGLAS*
- -----------------------------------
Bruce Douglas, Director
/s/ PETER J. GRUA*
- -----------------------------------
Peter J. Grua, Director
/s/ SHARON M. OSTER*
- -----------------------------------
Sharon M. Oster, Director
/s/ BRUCE G. THOMPSON*
- -----------------------------------
Bruce G. Thompson, Director
/s/ R. SCOTT TRUMBULL*
- ----------------------------------
R. Scott Trumbull, Director
/s/ RICHARD A. UNVERFERTH*
- ----------------------------------
Richard A. Unverferth, Director
/s/ GEORGE L. CHAPMAN
- ----------------------------------
George L. Chapman, Chairman,
Chief Executive Officer, President
and Director (Principal Executive
Officer)
/s/ EDWARD F. LANGE, JR.*
- ----------------------------------
Edward F. Lange, Jr., Chief
Financial Officer (Principal
Financial Officer)
/s/ MICHAEL A. CRABTREE*
- ----------------------------------
Michael A. Crabtree, Controller
(Principal Accounting Officer)
*By: /s/GEORGE L. CHAPMAN
- -----------------------------------
George L. Chapman, Attorney-in-Fact
-36-
37
HEALTH CARE REIT, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
INITIAL COST
TO COMPANY
------------------------ GROSS AMOUNT AT WHICH
COST CARRIED AT CLOSE OF PERIOD
CAPITALIZED -----------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED YEAR YEAR
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ACQUIRED BUILT
----------- ------------ ---- ------------ ------------- ---- ------------ ------------ -------- -----
ASSISTED LIVING
FACILITIES:
Lake Havasu, AZ $ $110 $ 2,244 $ $110 $ 2,244 $ 72 1998 1998
Lake Havasu, AZ 450 4,223 450 4,223 54 1999 1999
Costa Mesa, CA 980 6,195 980 6,195 159 1999 1997
Litchfield, CT 660 8,812 660 8,812 362 1998 1998
South Windsor, CT 570 10,241 570 10,241 83 1999 1999
Bradenton, FL 252 3,298 252 3,298 380 1996 1995
Bradenton, FL 25 450 25 450 28 1997 1992
Bradenton, FL 25 400 25 400 25 1997 1988
Bradenton, FL 50 850 50 850 52 1997 1996
Bradenton, FL 50 850 50 850 52 1997 1996
Clermont, FL 350 5,232 350 5,232 302 1997 1997
Ft. Myers, FL 1,230 13,098 1,230 13,098 346 1999 1999
Haines City, FL 80 1,937 80 1,937 35 1999 1999
Jacksonville, FL 400 3,674 400 3,674 221 1997 1997
Lake Wales, FL 80 1,939 80 1,939 35 1999 1999
Lauderhill, FL 20 1,374 121 20 1,495 74 1998 1995
Leesburg, FL 70 1,170 70 1,170 59 1998 1972
Margate, FL 500 5,343 1,900 500 7,243 385 1998 1972
Naples, FL 1,716 17,306 1,716 17,306 357 1999 1999
North Miami Beach, FL 300 5,621 300 5,621 300 1998 1987
North Miami Beach, FL 150 1,242 628 150 1,870 75 1998 1987
Orange City, FL 80 2,238 80 2,238 98 1998 1998
Plantation, FL 2,578 0 2,578 0 0 1999 1999
Sarasota, FL 475 3,175 475 3,175 365 1996 1995
Atlanta, GA 2,059 14,914 2,059 14,914 17 1999 1999
Roswell, GA 1,107 9,628 1,107 9,628 208 1999 1999
Auburn, IN 145 3,511 145 3,511 76 1999 1999
Avon, IN 170 3,504 170 3,504 44 1999 1999
Kokomo, IN 195 3,709 195 3,709 81 1999 1999
Laporte, IN 165 3,674 165 3,674 80 1999 1999
Marion, IN 175 3,504 175 3,504 4 1999 1999
Merrilville, IN 643 7,084 643 7,084 153 1999 1999
Shelbyville, IN 165 3,497 165 3,497 69 1999 1999
Terre Haute, IN 175 3,499 175 3,499 4 1999 1999
Vincennes, IN 118 2,892 118 2,892 72 1999 1999
Attleboro, MA 810 10,500 810 10,500 459 1998 1998
Ellicott City MD 1,320 13,641 1,320 13,641 276 1999 1999
Rochester, MN 322 6,345 322 6,345 130 1999 1999
-37-
38
SCHEDULE III - Continued
INITIAL COST
TO COMPANY
---------------------- GROSS AMOUNT AT WHICH
COST CARRIED AT CLOSE OF PERIOD
CAPITALIZED ----------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED YEAR YEAR
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ACQUIRED BUILT
----------- ------------ ---- ------------ ------------- ---- ------------ ------------ -------- -----
Kalispell, MT $ 360 $ 3,282 $ $ 360 $ 3,282 $ 109 1998 1998
Ashville, NC 204 3,489 204 3,489 73 1999 1999
Cary, NC 1,500 4,350 1,500 4,350 185 1998 1996
Charlotte, NC 640 4,090 640 4,090 279 1997 1997
Durham, NC 1,476 10,659 1,476 10,659 224 1999 1999
Elizabeth City, NC 200 2,760 200 2,760 49 1999 1999
Hendersonville, NC 2,270 11,771 2,270 11,771 488 1998 1998
Pineville, NC 1,009 10,554 1,009 10,554 222 1999 1999
Wake Forest, NC 200 3,003 200 3,003 88 1999 1999
Wilmington, NC 210 2,991 210 2,991 53 1999 1999
Cranford, NJ 3,297 11,703 2,530 3,297 14,233 1,124 1996 1993
Gardnerville, NV 1,326 12,549 1,326 12,549 164 1999 1999
Roswell, NM 233 5,355 233 5,355 323 1997 1996
Henderson, NV 380 9,220 380 9,220 271 1998 1998
Albany, NY 400 10,528 400 10,528 616 1997 1997
Canton, OH 300 2,098 300 2,098 67 1998 1998
Cincinnati, OH 1,728 10,272 1,728 10,272 835 1997 1985
Dayton, OH 80 6,730 80 6,730 279 1998 1997
Findlay, OH 200 1,800 200 1,800 136 1997 1997
Mentor, OH 980 9,868 980 9,868 36 1999 1999
Newark, OH 410 5,711 410 5,711 229 1998 1997
Piqua, OH 204 1,885 204 1,885 94 1998 1998
Troy, OH 200 2,000 200 2,000 145 1997 1997
Bartlesville, OK 100 1,380 100 1,380 154 1994 1995
Chickasha, OK 85 1,395 85 1,395 149 1995 1996
Duncan, OK 103 1,347 103 1,347 135 1995 1996
Edmond, OK 175 1,564 175 1,564 154 1995 1996
Enid, OK 90 1,390 90 1,390 155 1995 1996
Lawton, OK 144 1,456 144 1,456 144 1995 1996
Midwest City, OK 95 1,385 95 1,385 155 1996 1996
Muskogee, OK 150 1,432 150 1,432 129 1996 1996
Norman, OK 55 1,484 55 1,484 176 1995 1996
N. Oklahoma City, OK 87 1,508 87 1,508 131 1995 1996
Oklahoma City, OK 130 1,350 130 1,350 143 1995 1996
Owasso, OK 215 1,380 215 1,380 121 1996 1996
Ponca City, OK 114 1,536 114 1,536 182 1995 1995
Shawnee, OK 80 1,400 80 1,400 155 1995 1996
Stillwater, OK 80 1,400 80 1,400 156 1995 1996
Portland OR 628 3,585 628 3,585 56 1999 1999
Salem, OR 449 5,172 449 5,172 104 1999 1999
Baldwin, PA 535 2,222 1,522 535 3.744 188 1997 1995
Beaver Falls, PA 850 7,910 850 7,910 363 1998 1998
Elizabeth, PA 740 2,561 197 740 2,758 118 1998 1986
Lebanon, PA 400 3,799 400 3,799 18 1999 1999
-38-
39
SCHEDULE III - Continued
INITIAL COST
TO COMPANY
-------------------- GROSS AMOUNT AT WHICH
COST CARRIED AT CLOSE OF PERIOD
CAPITALIZED ---------------------------------
BUILDINGS & SUBSEQUENT TO BUILDINGS & ACCUMULATED YEAR YEAR
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS ACQUISITION LAND IMPROVEMENTS DEPRECIATION ACQUIRED BUILT
----------- ------------ ---- ------------ ------------- ---- ------------ ------------ -------- -----
Library, PA $ $ 960 $ 5,040 $ 327 $ 960 $ 5,367 $ 220 1998 1995
Pittsburgh, PA 430 6,736 1,607 430 8,343 744 1996 1989
Pittsburgh, PA 6,431 423 10,158 423 10,158 991 1996 1989
Saxonburg, PA 677 4,669 677 4,669 109 1999 1994
Seven Fields, PA 484 4,663 484 4,663 95 1999 1999
Williamsport, PA 390 4,069 390 4,069 25 1999 1999
Florence, SC 380 2,881 380 2,881 41 1999 1999
Hilton Head, SC 510 6,037 510 6,037 50 1999 1999
N Augusta, SC 332 2,558 332 2,558 52 1999 1999
Walterboro, SC 150 1,838 150 1,838 51 1999 1992
Clarksville, TN 330 2,292 330 2,292 72 1998 1998
Columbia, TN 341 2,295 341 2,295 48 1999 1999
Morristown, TN 400 3,808 400 3,808 23 1999 1999
Oakridge, TN 450 4,066 450 4,066 25 1999 1999
Austin, TX 880 9,520 880 9,520 239 1999 1999
Benbrook, TX 1,050 7,550 27 1,050 7,577 632 1997 1984
Cedar Hill, TX 171 1,490 171 1,490 124 1997 1997
Claremore, TX 155 1,427 155 1,427 128 1996 1996
Corpus Christi, TX 420 4,796 420 4,796 361 1997 1989
Corpus Christi, TX 155 2,935 155 2,935 179 1997 1997
Desoto, TX 205 1,383 205 1,383 115 1997 1997
Ft. Worth, TX 210 3,790 210 3,790 386 1992 1984
Ft. Worth, TX 281 3,473 150 281 3,623 189 1999 1999
Georgetown, TX 200 2,100 200 2,100 152 1997 1997
Granbury, TX 80 2,020 80 2,020 157 1997 1997
Grand Prairie, TX 399 5,161 399 5,161 181 1998 1998
Harlingen, TX 92 2,057 92 2,057 125 1997 1989
Harlingen, TX 340 5,621 340 5,577 291 1998 1998
Houston, (CareMatrix) Tx 550 10,751 550 10,751 227 1999 1999
Houston, TX 261 3,139 261 3,139 302 1994 1995
Kingwood, TX 300 3,309 300 3,309 46 1999 1999
Mt. Pleasant, TX 247 3,868 247 3,868 234 1997 1992
N Richland Hills, TX 330 5,355 330 5,355 142 1999 1999
Palestine, TX 173 1,410 173 1,410 127 1996 1996
San Marcos, TX 355 4,560 355 4,560 159 1998 1998
Texarkana, TX 192 1,403 192 1,403 123 1996 1996
Tyler, TX 147 2,699 47 2,699 165 1997 1991
Waxahachie, TX 154 1,429 154 1,429 128 1996 1996
Wolfforth, TX 110 1,898 110 1,898 117 1997 1990
Everett, WA 1,400 5,476 1,400 5,476 95 1999 1990
------------- ------- --------- --------- ------- ----------- ----------
TOTAL ASSISTED LIVING
FACILITIES: $ 6,431 $56,996 $ 543,868 $ 9,009 $56,996 $ 552,877 $ 22,437
-39-
40
SCHEDULE III - Continued
INITIAL COST
TO COMPANY
--------------------- GROSS AMOUNT AT WHICH
COST CARRIED AT CLOSE OF PERIOD
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 $ 207 1998 1995
La Mesa, CA 1,180 1,332 1,180 1,332 79 1998 1961
Santa Rosa, CA 1,460 3,880 1,460 3,880 195 1998 1968
Pueblo, CO 370 6,051 370 6,051 307 1998 1989
Hilliard, FL 150 6,990 150 6,990 184 1999 1994
Lakeland, FL 697 4,581 261 697 4,842 222 1998 1984
New Port Richey, FL 624 6,930 377 624 7,307 328 1998 1984
North Fort Myers, FL 636 5,712 314 636 6,026 273 1998 1984
Vero Beach, FL 660 7,642 414 660 8,056 360 1998 1984
West Palm Beach, FL 696 7,623 414 696 8,037 360 1998 1984
Boise, ID 600 7,383 600 7,383 336 1998 1985
Boise, ID 810 5,401 810 5,401 278 1998 1996
Couer D'Alene 600 7,878 600 7,878 355 1998 1996
Granite City IL 400 4,303 400 4,303 58 1999 1964
Granite City, IL 610 7,143 610 7,143 210 1998 1973
Owensboro, KY 130 4,870 130 4,870 756 1993 1967
Braintree, MA 170 6,080 170 6,080 599 1997 1968
Braintree, MA 80 4,245 80 4,245 413 1997 1973
Clark, MA 1,053 902 1,331 1,053 2,233 216 1996 1973
Fall River, MA 620 5,080 620 5,080 505 1996 1966
Falmouth, MA 670 3,022 123 670 3,145 308 1996 1966
South Boston, MA 385 1,463 3,016 385 4,479 341 1995 1961
Webster, MA 570 8,790 570 8,790 841 1995 1982
Kent, OH 215 3,367 215 3,367 612 1989 1983
Westlake, OH 571 5,411 571 5,411 264 1998 1972
Midwest City, OK 470 5,673 470 5,673 215 1998 1958
Eugene, OR 300 5,316 300 5,316 260 1998 1976
Bloomsburg, PA 0 3,918 0 3,918 78 1999 1996
Cheswick, PA 384 6,041 1,293 384 7,334 333 1998 1982
Easton, PA 285 6,315 285 6,315 1,456 1993 1959
San Antonio, TX 662 12,588 662 12,588 2,360 1993 1978
------- ------------ -------- ------- --------- ----------
TOTAL SKILLED
NURSING FACILITIES: $16,238 $ 169,917 $ 7,543 $16,238 $ 177,460 $ 13,309
Construction in
Progress 58,954
---------
TOTAL INVESTMENT IN
PROPERTIES $73,234 $ 713,785 $ 16,554 $73,234 $ 789,291 $ 35,746
======= =========== ======== ======= ========= ==========
-40-
41
SCHEDULE III - Continued
YEAR ENDED DECEMBER 31
1999 1998 1997
---- ---- ----
Investment in Real Estate:
Balance at Beginning of year $ 639,613 $ 309,044 $ 160,105
Additions:
Acquisitions 81,109 110,432 79,727
Improvements 138,694 159,582 56,109
Other (1) 16,309 73,430 13,103
---------- ----------- -------------
Total Additions 236,112 343,444 148,939
Deductions:
Cost of real estate sold (13,200) (12,875)
Other
Total deductions (13,200) (12,875) 0
---------- ----------- -------------
Balance at end of year $ 862,525 $ 639,613 $ 309,044
========== =========== =============
Accumulated depreciation:
Balance at beginning of year $ 19,624 11,769 6,482
Additions:
Depreciation expense 17,885 10,254 5,287
Deductions:
Sale of properties (1,763) (2,399)
----------- ----------- ------------
Balance at end of year $ 35,746 $ 19,624 $ 11,769
=========== =========== ============
(1) Represents mortgage loans converted to operating leases.
-41-
42
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
HEALTH CARE REIT, INC.
DECEMBER 31, 1999
(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 10.85% 01/01/10 Monthly $13,750 $13,507 None
(Specialty Care Payments
Facility) $133,235
Stoughton, MA 11.17% 01/01/10 Monthly 19,341 19,026 None
(Nursing Home) Payments
$190,343
Little Rock, AK 11.98% 01/01/12 Monthly 29,000 28,855 None
(Specialty Care Payments
Facility) $305,007
Sun Valley, CA 12.48% 01/01/17 Monthly 21,500 21,033 None
(Specialty Care Payments
Facility) $233,818
Briarcliff, NY 10.41% 08/01/16 Monthly 12,810 12,710 None
(Assisted Living Payments
Facility) $119,094
New York City, NY 9.79% 03/01/18 Monthly 21,000 20,814 None
(Assisted Living Facility) Payments
$187,727
Oklahoma City, OK 9.48% 06/1/2006 Monthly 12,204 12,204 None
(Nursing Home) Payments
$96,412
50 mortgage loans relating to 9 From From 255,594 246,241 None
nursing homes, 38 assisted living 9.00% to 08/01/01-
facilities, 14.04% 05/01/19
2 behavioral care facilities and 3
specialty care facilities
6 construction loans (all with From N/A 19,273 9,908 None
first mortgage liens) relating to 6 11.00% to
assisted living facilities 15.00%
--------- --------- ---------
TOTALS $404,472 $384,298 $-0-
========= ========= =========
-42-
43
SCHEDULE IV - Continued
(IN THOUSANDS)
YEAR ENDED DECEMBER 31
-----------------------------------
1999 1998 1997
------------- ------------- --------------
Reconciliation of mortgage loans:
Balance at beginning of period $398,682 $405,336 $353,455
Additions during period:
New mortgage loans 44,656 105,282 120,705
Negative principal amortization 6 29
------------- ------------- --------------
443,338 510,624 474,189
Deductions during period:
Collections of principal (1) 42,731 38,512 55,750
Other (2) 16,309 73,430 13,103
------------- ------------- --------------
Balance at end of period $384,298 $398,682 $405,336
============= ============= ==============
(1) Includes collection of negative principal amortization.
(2) Includes properties originally financed with mortgage loans that were
purchased during the periods indicated.
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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 3(i) Second Restated Certificate of Incorporation.
3.2(1) 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 (2) 4 Indenture dated as of April 17, 1997 by and between
Health Care REIT, Inc. and Fifth Third Bank.
4.3 (3) 4 First Supplemental Indenture dated as of April 17,
1997 by and between Health Care REIT, Inc. and Fifth
Third Bank.
4.4 (4) 4 Second Supplemental Indenture dated as of March 13,
1998 between Health Care REIT, Inc. and Fifth Third
Bank.
4.5 (5) 4 Third Supplemental Indenture dated as of March 18,
1999 between Health Care REIT, Inc. and Fifth Third
Bank.
10.1 (6) 10(ii)(A) Rights Agreement.
10.2 (7) 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 (8) 10(ii)(C) Loan Agreement dated as of March 28, 1997 by and
among Health Care REIT, Inc., its subsidiaries, the
banks signatory thereto, and Keybank National
Association, as Administrative Agent, and Fleet Bank,
N.A., as Syndication Agent.
10.4 (9) 10(ii)(D) Note Purchase Agreement between Health Care REIT,
Inc. and each of the Purchasers a Party thereto,
dated April 15, 1996.
10.5 (10) 10(iii)(A) The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc., as amended.
10.6 (11) 10(iii)(B) The Health Care REIT, Inc. 1995 Stock Incentive Plan.
21 21 Subsidiaries of the Registrant.
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23 23 Consent of Independent Auditors.
24 24 Powers of Attorney.
27 27 Financial Data Schedule (EDGAR version only).
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(1) Incorporated by reference to Exhibit 3(ii) to the Registrant's Form 8-K
filed October 24, 1997.
(2) Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K
filed on April 21, 1997.
(3) Incorporated by reference to Exhibit 4.2 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 March 11, 1998.
(5) Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K
filed on March 17, 1999.
(6) Incorporated by reference to Exhibit 2 to the Registrant's Form 8-A filed
on August 3, 1994 (File No. 1-8923).
(7) 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.
(8) Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K
filed on April 8, 1997.
(9) Incorporated by reference to Exhibit 4 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996.
(10) 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.
(11) 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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