Back to GetFilings.com
1
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, 1997 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
------------------- -------------------
Shares of Common Stock New York Stock Exchange
$1.00 par value
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 stock held by non-affiliates of the
Registrant on February 5, 1998 was $681,752,000 based on the reported closing
sales price of such shares on the New York Stock Exchange for that date. As of
February 5, 1998, there were 24,348,280 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the annual
shareholders' meeting to be held April 21, 1998, are incorporated by reference
into Part III.
2
HEALTH CARE REIT, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business...........................................................3
Item 2. Properties........................................................11
Item 3. Legal Proceedings.................................................12
Item 4. Submission of Matters to a Vote of Security Holders...............12
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters....................................12
Item 6. Selected Financial Data...........................................13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................14
Item 8. Financial Statements and Supplementary Data.......................17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure............................32
PART III
Item 10. Directors and Executive Officers of the Registrant................32
Item 11. Executive Compensation............................................32
Item 12. Security Ownership of Certain Beneficial Owners
and Management.................................................32
Item 13. Certain Relationships and Related Transactions....................32
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K............................................32
-2-
3
PART I
ITEM 1. BUSINESS
GENERAL
Health Care REIT, Inc. (the "Company") is a self-administered real estate
investment trust that invests in health care facilities, primarily nursing
homes, assisted living facilities and retirement centers. The Company also
invests in specialty care facilities. As of December 31, 1997, long-term care
facilities, which include nursing homes, assisted living facilities and
retirement centers, comprised approximately 86% 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, 1997, the Company had $733,509,000 of real estate
investments, inclusive of credit enhancements, in 183 facilities located in 29
states and managed by 49 different operators. At that date, the portfolio
included 116 assisted living facilities, 49 nursing homes, 10 retirement
centers, six specialty care facilities, and two behavioral care facilities. At
December 31, 1997, the Company had approximately $275,017,000 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 form of
investment, operator and geographic location.
The Company anticipates providing mortgage financing for qualified health care
operators and acquiring additional health care facilities through operating
lease arrangements. 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, 1997:
Number
Percentage Number of Investment Number Number
Type of Investments of of Beds/ Per Bed/ of of
Facility (1) Portfolio Facilities Units Unit(2) Operators States(3)
-------- ------------ --------- ---------- ----- ------- --------- ---------
(In thousands)
Assisted Living
Facilities $350,159 48% 116 7,812 $66,732 19 17
Nursing Homes 233,103 32% 49 6,430 38,223 23 17
Specialty Care
Facilities 92,591 13% 6 713 129,861 3 5
Retirement
Centers 47,332 6% 10 1,054 49,807 6 7
Behavioral Care 1%
Facilities 10,324 2% 294 35,115 1 1
------ ---- ------ ------
Totals $733,509 100% 183 16,303
======== ==== ===== ======
- --------------------------------------------
(1) Investments include real estate investments and credit enhancements which
amounted to $717,944,000 and $15,565,000, respectively.
(2) Investment Per Bed/Unit was computed by using the total investment amount
of $922,500,000 which includes real estate investments, unfunded
commitments for which initial funding has commenced, and credit
enhancements which total $717,944,000, $188,991,000 and $15,565,000,
respectively.
(3) The Company has investments in properties located in 29 states, managed by
49 different operators.
-3-
4
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
The assisted living facilities provide services to aid in everyday living, such
as bathing, meals, security, transportation, recreation, medication supervision
and limited therapeutic programs. More intensive medical needs of the resident
are often met within assisted living facilities by home health providers, close
coordination with the resident's physician and skilled nursing facilities.
Assisted living facilities are increasingly successful as lower cost, less
institutional alternatives for the health problems of the elderly or medically
frail.
Retirement Centers
The retirement centers offer specially designed residential units for active and
ambulatory elderly residents and provide various ancillary services. Retirement
centers offer residents an opportunity for an independent lifestyle with a range
of social and health services.
Specialty Care Facilities
The 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
The behavioral care facilities offer comprehensive inpatient and outpatient
psychiatric treatment programs. Programs are tailored to the individual and
include individual, group and family therapy.
INVESTMENTS
The Company invests in income producing health care facilities with a primary
focus on long-term care facilities, which include skilled nursing facilities,
assisted living facilities and retirement centers. The Company also invests in
specialty care facilities. The Company intends to continue to diversify its
investment portfolio by type of health care facilities and form of financing.
In determining whether to finance a facility, the Company focuses on: (a) the
experience of the operator; (b) the financial and operational feasibility of the
property; (c) the financial strength of the borrower or lessee; (d) the security
available to support the financing; and (e) the amount of capital committed to
the property by the borrower or lessee. Management conducts market research and
analysis for all potential investments. In addition, Management reviews the
value of all properties, the interest rates and debt service coverage
requirements of any debt to be assumed and the anticipated sources for repayment
for such debt.
The Company's investments primarily take the form of operating lease
transactions, permanent mortgage loans and construction financings.
Substantially all of the Company's mortgage loans are designed with escalating
rate structures that may result in principal payment prior to maturity. The
Company's policy is to structure long term financings to maximize returns. The
Company believes that appropriate new investments will be available in the
future with substantially the same spreads over its costs of borrowing
regardless of interest rate fluctuations.
Mortgage loans and operating leases are normally secured by guarantees and/or
letters of credit. As of December 31, 1997, letters of credit from commercial
banks, and cash deposits aggregating $39,159,000 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.
-4-
5
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, 1997, the Company had warrants
from 13 operators to purchase their common stock or partnership interest. None
of the warrants are publicly traded. In one instance, the underlying common
stock that relates to one set of warrants is publicly traded, and the market
price of the common stock exceeded the exercise price of the related warrants at
December 31, 1997.
In connection with investments in two operators, the Company also received
warrants that were converted into shares of common stock. As of December 31,
1997, those shares of common stock were recorded on the Company's balance sheet
at a value of $4,402,000.
Operating Leases
Each facility, which includes the land, buildings, improvements and related
rights (the "Leased Properties") owned by the Company is leased to a health care
provider pursuant to a long-term lease (collectively, the "Leases"). The Leases
generally have a fixed term of 10 to 13 years and contain multiple five to
ten-year renewal options. Each Lease is a triple net lease requiring the lessee
to pay rent and all additional charges incurred in the operation of the Leased
Property. The lessees are required to repair, rebuild and maintain the Leased
Properties.
The net value of the Company's completed leased properties aggregated
approximately $250,225,000 at December 31, 1997. The base rents range from
approximately 9.1% to 16.7% per annum of the Company's equity investment in the
leased properties. The base rents for the renewal periods are generally fixed
rents set at a spread above the Treasury yield for the corresponding period. In
addition, the Company typically charges a lease commitment fee at the initiation
of the transaction.
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 $377,638,000 of permanent mortgage loans as
of December 31, 1997 were first mortgage loans.
The interest rate on the Company's investments in permanent mortgage loans for
operating facilities ranges from 9.96% to 13.24% 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,
1997 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.
-5-
6
Construction Financing
The Company provides construction financing that by their terms converts either
into a long-term operating lease or mortgage loan upon the completion of the
facilities. Generally, the rates on the outstanding balances of the Company's
construction financings are 225 to 350 basis points over the prime rate of a
specified financial institution. The Company also typically charges a commitment
fee at the commencement of the financing. The construction financing period
commences upon funding and terminates upon the earlier of the completion of
development of the applicable facility or the end of a specified period,
generally 12 to 18 months. During the term of the construction financing, funds
are advanced pursuant to draw requests made by the operator in accordance with
the terms and conditions of the applicable financing agreement, which terms
require, among other things, a site visit by a Company representative prior to
the advancement of funds. Monthly payments are made on the total amount of the
proceeds advanced during the development period.
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, 1997, the Company had outstanding construction financings of
$74,748,000 ($47,050,000 leased properties and $27,698,000 mortgage loans) and
was committed to providing additional financing of approximately $164,744,000 to
complete construction.
BORROWING POLICIES
The Company may arrange for long-term borrowing from banks, private placements
to institutional investors, or public offerings. For other short-term purposes,
the Company may, from time to time, negotiate lines of credit, or arrange for
other short-term borrowing from banks or others.
In addition, the Company may incur mortgage indebtedness on real estate that it
has acquired through purchase, foreclosure or otherwise. When terms are deemed
favorable, the Company may invest in properties subject to existing loans and
mortgages. In addition, the Company may obtain financing for unleveraged
properties in which it has invested or may refinance properties acquired on a
leveraged basis.
Under documents pertaining to existing indebtedness, the Company is subject to
various restrictions with respect to secured and unsecured indebtedness.
ALLOWANCE FOR LOSSES
The Company maintains an allowance for possible losses that is evaluated
quarterly to determine its adequacy. See Notes 1 and 5 of Notes to Financial
Statements. At December 31, 1997, the total allowance of $4,387,000 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, 1997, the Company employed 19 full-time employees.
-6-
7
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 amounts 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.
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.
Recent legislation changes the Medicare payment methodology for skilled nursing
facilities effective for cost reporting years commencing after July 1, 1998. The
cost-based system is replaced by a federal per diem rate that 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.
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.
-7-
8
Recent interpretations of the Medicare laws limit the ability of hospitals and
nursing facilities to be reimbursed for interest costs that are deemed to be
unnecessary because the facilities have other funds derived from patient care
activities that were put to other uses (such as investments) or transferred to
related parties. This could reduce reimbursement to Company customers for
interest on loans from the Company.
Health care facilities that participate in Medicare or Medicaid must meet
extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. Such requirements may include
a duty to admit Medicare and Medicaid patients, limiting the ability of the
facility to increase its private pay census beyond certain limits. Medicare and
Medicaid facilities are regularly inspected to determine compliance, and may be
excluded from the programs--in some cases without a prior hearing--for failure
to meet program requirements.
Under the Medicare program, "peer review organizations" have been established to
review the quality and appropriateness of care rendered by health care
providers. These organizations may not only deny claims that fail to meet their
criteria, but can also fine and/or recommend termination of participation in the
program.
Recent changes in the Medicare and Medicaid programs will likely result in
increased use of "managed care" organizations to meet the needs of program
beneficiaries. These organizations selectively contract with health care
facilities, resulting in some facilities being excluded from the ability to
serve program beneficiaries.
Health care facilities also receive a substantial portion of their revenues from
private insurance carriers, health maintenance organizations, preferred provider
organizations, self-insured employees and other health benefit payment
arrangements. Such payment sources increasingly pay facilities under contractual
arrangements that include a limited panel of providers and/or discounted or
other special payment arrangements, including arrangements that shift the risk
of high utilization to the providers. A number of states have established
rate-setting agencies which control inpatient health care facility rates,
including private pay rates.
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.
On February 2, 1998 President Clinton submitted a budget proposed to Congress
that included a plan to allow able-bodied people aged 55 to 64 to buy in to the
Medicare program. The budget also proposed further expansion of the federal
government's enforcement programs against health care fraud and abuse. It is
impossible to predict with any certainty what form any budget legislation may
ultimately take.
In order to meet a federal requirement, most states required providers to obtain
certificates of need prior to construction of inpatient facilities and certain
outpatient facilities. However, in 1987, the federal requirement was repealed.
Some states have repealed these requirements, which may result in increased
competition, and other states are considering similar repeals.
Nursing facilities compete with other subacute care providers, including
rehabilitation centers and hospitals. Many of these providers have underutilized
facilities and are converting some or all of their facilities into nursing
facilities. Some of these entities operate on a tax-exempt basis, which gives
them a capital cost advantage. Furthermore, some states have granted rest homes
the ability to provide limited nursing care services.
Certain states have adopted pre-admission screening and other programs to
promote utilization of outpatient and home-based services as an alternative to
inpatient facility services. Recent changes in Medicaid regulations allow states
to use Medicaid funding for home and community-based alternatives to inpatient
care.
-8-
9
TAXATION
General
A corporation, trust or association meeting certain requirements may elect to be
treated as a "real estate investment trust." Beginning with its first fiscal
year and in all subsequent years, the Company has elected to be treated as a
real estate investment trust under Sections 856 to 860, inclusive, of the
Internal Revenue Code of 1986, as amended (the "Code"). The Company intends to
operate in such manner as to continue to qualify as a real estate investment
trust for federal income tax purposes. No assurance can be given that the actual
results of the Company's operations for any one taxable year will satisfy such
requirements.
To qualify as a real estate investment trust, the Company must satisfy a variety
of complex requirements each year, including organizational and stock ownership
tests and percentage tests relating to the sources of its gross income, the
nature of its assets and the distribution of its income.
Generally, for each taxable year during which the Company qualifies as a real
estate investment trust, it will not be taxed on the portion of its taxable
income (including capital gains) that is distributed to shareholders. Any
undistributed income or gains will be taxed to the Company at regular corporate
tax rates. Beginning in 1998, any undistributed net long term capital gains
taxed to the Company will be treated as having been distributed to the
shareholders and will be included by them in determining the amount of their
capital gains. The tax paid by the Company on those gains will be allocated
among the shareholders and may be claimed as a credit on their tax returns. The
shareholders will receive an increase in the basis of their shares in the
Company equal to the difference the capital gain income and the tax credit
allocated to them. The Company will be subject to tax at the highest corporate
rate on its net income from foreclosure property, regardless of the amount of
its distributions. The highest corporate tax rate is currently 35%. The Company
may elect to treat any real property it acquires by foreclosure as foreclosure
property. This would permit the Company to hold such property acquired before
January 1, 1998 for up to two years and to hold property acquired after December
31, 1997 until the end of the third taxable year after the year of acquisition
without adverse consequences. Subject to certain limitations, the Company will
also be subject to an additional tax equal to 100% of the net income, if any,
derived from prohibited transactions. A prohibited transaction is defined as a
sale or disposition of inventory-type property or property held by the Company
primarily for sale to customers in the ordinary course of its trade or business,
which is not property acquired on foreclosure.
The Company is subject to a nondeductible federal excise tax equal to 4% of the
amount, if any, by which 85% of its ordinary income plus 95% of its capital gain
net income (plus distribution deficiencies from prior years) exceeds
distributions actually paid or treated as paid to shareholders during the
taxable year, plus current year income upon which the Company pays tax and any
overdistribution from prior years. Due to the growth of the Company's income,
primarily as a result of large capital gains from the exercise of purchase
options under leases, the Company did not satisfy this requirement in 1997, 1996
and 1995 and incurred an excise tax of approximately $360,000, $317,000 and
$326,000 respectively, in those years. There is a cumulative underdistribution
of $15,926,000 that will carry over to 1998 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.
-9-
10
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
On November 1, 1993 and July 9, 1996, the Company formed two wholly-owned
subsidiaries, HCRI Pennsylvania Properties, Inc. and HCRI Overlook Green, Inc.,
respectively. These Pennsylvania corporations were created to own real estate in
the State of Pennsylvania.
On December 27, 1996 and December 30, 1996, the Company formed a wholly-owned
subsidiary, HCRI Texas Properties, Inc., a Delaware corporation, and HCRI Texas
Properties, Ltd., a Texas limited partnership, respectively. Both entities were
created in connection with real estate investments in the State of Texas.
-10-
11
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, 1997.
(in thousands)
-----------------------------
Number Number
of of Beds/ Total Annualized
Facility Location Facilities Units Investment(1) Income(2)
----------------- ---------- ----- ------------- ---------
NURSING FACILITIES:
Arizona............................ 3 351 $ 16,959 $ 2,025
California......................... 1 122 3,872 444
Colorado........................... 1 180 6,346 680
Connecticut........................ 2 240 14,956 1,462
Florida............................ 2 240 9,332 1,088
Idaho.............................. 3 404 19,857 2,174
Indiana............................ 1 50 1,058 168
Kentucky........................... 1 92 4,488 514
Massachusetts...................... 12 1,726 67,301 7,188
Michigan........................... 2 250 4,735 576
Missouri........................... 2 220 9,873 1,066
New York........................... 1 200 7,354 800
Ohio............................... 7 762 27,650 3,243
Oregon............................. 1 121 5,307 580
Pennsylvania....................... 2 287 12,877 1,610
Texas.............................. 7 1,120 19,868 2,305
West Virginia...................... 1 65 1,270 224
--- ---- --------- ----------
Total............................. 49 6,430 233,103 26,147
ASSISTED LIVING FACILITIES:
Connecticut........................ 1 80 2,880 315
Florida............................ 16 1,008 42,390 4,598
Georgia............................ 3 292 7,024 688
Idaho.............................. 1 48 2,669 267
Indiana............................ 1 60 1,120 120
Maryland........................... 3 261 5,670 616
Massachusetts...................... 1 131 5,185 555
Montana............................ 1 44 1,501 161
New Jersey......................... 1 264 17,187 1,770
New Mexico......................... 2 159 8,068 894
New York........................... 5 606 41,970 4,524
North Carolina..................... 14 748 25,706 2,613
Ohio............................... 4 327 17,656 1,856
Oklahoma........................... 16 540 23,651 2,520
Pennsylvania....................... 5 541 30,877 3,522
Texas.............................. 38 2,466 107,213 11,590
Virginia........................... 4 237 9,392 1,049
--- ------- --------- ----------
Total............................. 116 7,812 350,159 37,658
RETIREMENT CENTERS:
Arizona............................ 1 164 2,396 299
California......................... 1 92 2,396 299
Illinois........................... 2 320 11,991 244
Indiana............................ 2 111 2,502 268
New Mexico......................... 1 150 7,420 171
North Carolina..................... 2 159 16,091 1,666
Texas.............................. 1 58 4,536 480
--- ------ --------- ----------
Total............................. 10 1,054 47,332 3,427
SPECIALTY CARE FACILITIES:
Arkansas........................... 1 117 29,000 3,347
California......................... 2 416 32,149 3,824
Minnesota.......................... 1 n/a 530 66
Texas.............................. 1 70 13,750 1,431
Washington D.C..................... 1 110 17,162 2,061
--- ------ --------- ----------
Total............................. 6 713 92,591 10,729
BEHAVIORAL CARE FACILITIES:
Florida............................ 2 294 10,324 1,084
--- ------ --------- ----------
TOTAL ALL FACILITIES:............. 183 16,303 $ 733,509 $ 79,045
=== ======= ========= ==========
- --------------------------
(1) Investments include real estate investments and credit enhancements which
amounted to $717,944,000 and $15,565,000, respectively.
(2) Reflects contract rate of annual base rent or interest received or to be
received upon completion of construction.
-11-
12
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 5,722
shareholders of record as of December 31, 1997.
SALES PRICE
----------- DIVIDENDS
HIGH LOW PAID
---- --- ----
1997
First Quarter........................ $25.500 $23.625 $ 0.520
Second Quarter....................... 25.000 22.250 0.525
Third Quarter ....................... 27.625 24.250 0.530
Fourth Quarter....................... 28.750 25.500 0.535
1996
First Quarter........................ $ 22.625 $ 17.875 $ 0.520
Second Quarter....................... 23.000 20.500 0.520
Third Quarter........................ 23.250 20.875 0.520
Fourth Quarter....................... 25.250 23.000 0.520
-12-
13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data for the five years ended December 31, 1997
are derived from the audited consolidated financial statements of the Company.
Year Ended December 31,
------------------------------------------------
(In thousands, except per share data)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
OPERATING DATA
Revenues................................................... $73,308 $54,402 $44,596 $42,732 $36,018
Expenses:
Interest expense......................................... 15,365 14,635 12,752 9,684 10,817
Provision for depreciation............................... 5,287 2,427 1,580 1,385 790
General and administrative
and other expenses (1)................................. 6,178 6,664 10,835 6,710 4,356
Settlement of management
contract (2)........................................... -- -- 5,794 -- --
-------- -------- ------- -------- --------
Total expenses............................................. 26,830 23,726 30,961 17,779 15,963
-------- -------- ------- -------- --------
Net income................................................. $46,478 $30,676 $13,635 $24,953 $20,055
======= ======= ======= ======= =======
OTHER DATA
Average number of shares outstanding (3):
Basic................................................. 21,594 14,093 11,710 11,519 9,339
Diluted............................................... 21,929 14,150 11,728 11,548 9,373
Cash available for distribution (4)........................ $56,856 $36,705 $27,938 $31,697 $22,780
PER SHARE
Net income:
Basic................................................. $ 2.15 $ 2.18 $ 1.16 $ 2.17 $ 2.15
Diluted............................................... 2.12 2.17 1.16 2.16 2.14
Cash distributions......................................... 2.11 2.08 2.075 2.01 1.93
December 31,
---------------------------------------------------
(In thousands)
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA
Real estate investments, net............................... $713,557 $512,894 $351,924 $318,433 $276,858
Total assets............................................... 734,327 519,831 358,092 324,102 285,024
Total debt................................................. 249,070 184,395 162,760 128,273 96,311
Total liabilities.......................................... 264,403 194,295 170,494 134,922 100,892
Total shareholders' equity................................. 469,924 325,536 187,598 189,180 184,132
- --------------------------
(1) General and administrative and other expenses include loan expense,
management fees through November 30, 1995, provision for losses, expenses
related to disposition of investments and other operating expenses.
(2) On November 30, 1995, the Company's advisor merged into the Company.
Consideration for this transaction totaled approximately $5,048,000 which
was solely comprised of 282,407 Shares. In addition, the Company acquired
approximately $46,000 in net assets and incurred approximately $792,000 of
related transaction expenses. The consideration, plus related transaction
expenses, were accounted for as a settlement of a management contract.
(3) The earnings per share amounts prior to 1997 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion of earnings per share and the
impact of Statement No. 128, see the notes to the consolidated financial
statements beginning on page 22.
(4) Cash available for distribution is defined as net cash provided from
operating activities, 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.
-13-
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company's net real estate investments totaled
approximately $713,557,000, which included 116 assisted living facilities, 49
nursing facilities, 10 retirement centers, six specialty care facilities and two
behavioral care facilities. The Company funds its investments through a
combination of long-term and short-term financing, utilizing both debt and
equity.
During 1997, the Company provided permanent mortgage financings of $46,231,000,
invested $66,779,000 in operating leases, made construction advances of
$144,672,000, and funded $4,964,000 of equity related investments. During 1997,
the Company received principal payments on real estate mortgages of $8,487,000,
net draws on working capital loans of $1,529,000 and proceeds of $41,263,000
from the prepayment of mortgage loans.
During 1997, eight of the above-mentioned construction projects completed the
construction phase of the Company's investment process and were converted to
investments in operating leases, with an aggregate investment of $37,664,000,
and 14 construction loans converted to permanent mortgage loans with an
aggregate investment balance of $104,173,000.
As of December 31, 1997, the Company had shareholders' equity of $469,924,000
and a total outstanding debt balance of $249,070,000, which represents a debt to
equity ratio of 0.53 to 1.0.
In January 1997, in connection with the underwriters' exercise of an over
allotment option associated with the Company's December 18, 1996 offering of
2,200,000 shares of common stock, the Company issued 330,000 shares of Common
Stock, $1.00 par value per share, at the price of $23.875 per share, which
generated net proceeds of $7,485,000 to the Company.
In March 1997, the Company issued 3,150,000 shares of Common Stock, $1.00 par
value per share, at the price of $24.375 per share, which generated net proceeds
to the Company of $72,261,000.
In March 1997, the Company closed a $175 million unsecured credit facility which
replaced the Company's then existing secured credit facility. Simultaneous with
the closing of the new credit facility, all senior noteholders released
collateral which had served as security for the Company's then outstanding $82
million of senior indebtedness.
In April 1997, the Company completed the sale of $80 million of Senior Unsecured
Notes. The Company priced $20 million of notes due 2000, $20 million of notes
due 2002 and $40 million of notes due 2004. The notes have a weighted average
interest rate of 7.91%.
In October 1997, the Company issued 2,085,500 shares of Common Stock, $1.00 par
value per share, at the price of $26.625 per share, which generated net proceeds
to the Company of $52,963,000.
As of December 31, 1997, the Company had an unsecured revolving line of credit
expiring March 31, 2000 in the amount of $175,000,000 bearing interest at the
lender's prime rate or LIBOR plus 1.125%. In addition, the Company had an
unsecured revolving line of credit in the amount of $10,000,000 bearing interest
at the lenders' prime rate expiring January 31, 1999. At December 31, 1997,
under the Company's line of credit arrangements, available funding totaled
$106,600,000.
As of February 5, 1998, the Company has effective shelf registrations on file
with the Securities and Exchange Commission under which the Company may issue up
to $641,269,000 of securities including debt, convertible debt, common and
preferred stock. The Company anticipates issuing securities under such shelf
registrations to invest in additional health care facilities and to repay
borrowings under the Company's line of credit arrangements.
As of December 31, 1997, the Company had approximately $275,017,000 in unfunded
commitments. The Company believes its liquidity and various sources of available
capital are sufficient to fund operations, finance future investments, and meet
debt service and dividend requirements.
-14-
15
RESULTS OF OPERATIONS DECEMBER 31, 1997 VS. DECEMBER 31, 1996
Revenues for the year ended December 31, 1997 were $73,308,000 compared to
$54,402,000 for the year ended December 31, 1996, an increase of $18,906,000 or
35%. Revenue growth resulted primarily from increased operating lease income of
$12,330,000, interest income of $9,264,000, and loan and commitment fees of
$429,000 from additional real estate investments made during the past twelve to
fifteen months.
The growth in interest and rental income for the year ended December 31, 1997
was offset by prepayment fees and gains on the exercise of purchase options
earned during 1996, which totaled $3,059,000 and $576,000 respectively, as
compared with prepayment fees of $529,000 earned during 1997.
Expenses for the year ended December 31, 1997, totaled $26,830,000, an increase
of $3,104,000 from expenses of $23,726,000 for the year ended December 31, 1996.
The increase in total expenses for the year ended December 31, 1997 was
primarily related to an increase in interest expense, additional expense
associated with the provision for depreciation, and an increase in general and
administrative expenses. Expenses for the year ended December 31, 1996 were
negatively influenced by an $808,000 disposition of investment expense
associated with the Company's elimination of certain investments in behavioral
care facilities.
Interest expense for the year ended December 31, 1997 was $15,365,000 compared
with $14,635,000 for the year ended December 31, 1996. The increase in interest
expense during 1997 was primarily due to the issuance of $80,000,000 Senior
Notes in April 1997. The increase in the 1997 period was offset by the amount of
capitalized interest recorded in 1997.
The Company capitalizes certain interest costs associated with funds used to
finance the construction of properties owned directly by the Company. The amount
capitalized is based upon the borrowings outstanding during the construction
period using the rate of interest which approximates the Company's cost of
financing. The Company's interest expense is reduced by the amount capitalized.
Capitalized interest for the year ended December 31, 1997 totaled $2,306,000, as
compared with $287,000 for the same period in 1996.
The provision for depreciation for the year ended December 31, 1997 totaled
$5,287,000, an increase of $2,860,000 over the year ended 1996 as a result of
additional operating lease investments.
General and administrative expense for the year ended December 31, 1997 totaled
$4,858,000 as compared with $4,448,000 for the year ended December 31, 1996. The
expenses for the year ended December 31, 1997 were 6.63% of revenues as compared
with 8.18% for the year ended December 31, 1996.
As a result of the various factors mentioned above, net income for the year
ended December 31, 1997 was $46,478,000, or $2.12 per share, as compared with
$30,676,000, or $2.17 per share for the year ended December 31, 1996. Net income
for the year ended December 31, 1996 included $3,635,000, or $0.26 per share, of
prepayment fees and gains on the exercise of purchase options, as compared with
$529,000, or $0.02 per share, for the year ended December 31, 1997. All per
share amounts represent diluted earnings per share.
RESULTS OF OPERATIONS DECEMBER 31, 1996 VS. DECEMBER 31, 1995
Revenues for the year ended December 31, 1996, were $54,402,000 compared to
$44,596,000 for the year ended December 31, 1995, an increase of $9,806,000 or
22%. Revenue growth resulted primarily from increased interest income of
$5,457,000, operating lease income of $3,496,000 and loan and commitment fees of
$941,000 resulting primarily from additional real estate investments made during
the past twelve to fifteen months.
Expenses for the year ended December 31, 1996, totaled $23,726,000, a decrease
of $7,235,000 from expenses of $30,961,000 for the year ended December 31, 1995.
Expenses for the year ended December 31, 1995, were negatively influenced by
nonrecurring charges, primarily related to a $4,800,000 provision for losses and
a $5,794,000 charge for the settlement of the management contract, an expense
associated with the merger of the Company's advisor into the Company.
The provision for depreciation for the year ended December 31, 1996, totaled
$2,427,000, an increase of $848,000 over the year ended 1995 as a result of
additional operating lease investments.
-15-
16
Interest expense for the year ended December 31, 1996, was $14,635,000 compared
to $12,752,000 for the year ended December 31, 1995. The increase in interest
expense during 1996 was primarily due to the issuance of $30,000,000 Senior
Notes in April 1996 and higher average borrowings under the Company's line of
credit arrangements, which were offset by lower interest rates.
General and administrative expense for the year ended December 31, 1996 totaled
$4,448,000 as compared to $5,284,000 for the year ended December 31, 1995. The
expenses for the year ended December 31, 1996 were 8.18% of revenues as compared
to 11.85% for the year ended December 31, 1995.
During 1996 the Company stated its intention to systematically eliminate its
investments in behavioral care facilities. As a result, at September 30, 1996,
the Company declared a disposition of investment associated with its behavioral
care portfolio. As a result, any gains realized through the repayment or sale of
investments associated with the Company's behavioral care facilities were added
to the Company's general allowance for losses and applied against any losses
incurred through the repayment or sale of behavioral care related investments.
During the year ended December 31, 1996, the Company recorded an $808,000
disposition of investment expense as an offset to an $808,000 prepayment fee
received from the repayment of two behavioral care related mortgage loans.
Additionally, the Company's general allowance for losses was reduced by
$481,000, resulting from the repayment of these loans.
As a result of the various factors mentioned above, net income for the year
ended December 31, 1996, was $30,676,000 as compared to $13,635,000 for the year
ended December 31, 1995. Net income per share for the year ended December 31,
1996, was $2.17 versus $1.16 for the year ended December 31, 1995. The per share
increase resulted from an increase in net income offset by an increase in
average shares outstanding during 1996. All per share amounts represent diluted
earnings per share.
IMPACT OF INFLATION
During the past three years, inflation has not significantly affected the
earnings of the Company because of the moderate inflation rate. Additionally,
earnings of the Company are primarily long-term investments with fixed interest
rates. These investments are mainly financed with a combination of equity,
senior notes and borrowings under the revolving lines of credit. During
inflationary periods, which generally are accompanied by rising interest rates,
the Company's ability to grow may be adversely affected because the yield on new
investments may increase at a slower rate than new borrowing costs. Presuming
the current inflation rate remains moderate and long-term interest rates do not
increase significantly, the Company believes that equity and debt financing will
continue to be available.
OTHER INFORMATION
This document and supporting schedules may contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve known and unknown risks and uncertainties,
which may cause the Company's actual results in the future to differ materially
from expected results. These risks and uncertainties include, among others,
competition in the financing of health care facilities, the availability of
capital, and regulatory and other changes in the health care sector, as
described in the Company's filings with the Securities and Exchange Commission.
The Company has assessed its current computer software for proper functioning
with respect to dates in the year 2000 and thereafter. The year 2000 issue and
related costs are not expected to have a material impact on the operations of
the Company.
-16-
17
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Care REIT,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
January 30, 1998
Toledo, Ohio
-17-
18
HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1997 1996
-----------------------------------------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned
Land $ 22,445 $ 12,949
Buildings & improvements 239,549 136,256
Construction in progress 47,050 10,900
------------------ -----------------
309,044 160,105
Less accumulated depreciation (11,769) (6,482)
------------------ -----------------
Total real property owned 297,275 153,623
Loans receivable 412,734 358,182
Direct financing leases 7,935 10,876
----------------- -----------------
717,944 522,681
Less allowance for losses (4,387) (9,787)
----------------- -----------------
Net real estate investments 713,557 512,894
Other Assets:
Deferred loan expenses 2,275 1,432
Cash and cash equivalents 1,381 581
Investment securities 9,635 768
Receivables and other assets 7,479 4,156
------------------ -----------------
20,770 6,937
------------------ -----------------
Total assets $ 734,327 $ 519,831
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $ 78,400 $ 92,125
Senior unsecured notes 162,000 82,000
Bonds and mortgages payable 8,670 10,270
Accrued expenses and other liabilities 15,333 9,900
------------------ -----------------
Total liabilities 264,403 194,295
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - None
Common Stock, $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 24,341,030
shares in 1997 and 18,320,291
shares in 1996 24,341 18,320
Capital in excess of par value 435,603 298,281
Undistributed net income 8,841 8,167
Unrealized gains on investment
securities available for sale 4,671 768
Unamortized restricted stock (3,532)
------------------ -----------------
Total shareholders' equity 469,924 325,536
------------------ -----------------
Total liabilities and shareholders' equity $ 734,327 $ 519,831
================== =================
See accompanying notes
-18-
19
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Interest on loans receivable $ 45,999 $ 36,735 $ 30,837
Prepayment fees 529 3,059 4,082
Direct financing leases:
Lease income 1,238 1,464 1,529
Gain on exercise of options 421
Operating leases:
Rents 22,178 9,848 6,352
Gain on exercise of options 155
Loan and commitment fees 3,036 2,607 1,666
Interest and other income 328 113 130
-------------- --------------- ---------------
73,308 54,402 44,596
Expenses:
Interest expense 15,365 14,635 12,751
Provision for depreciation 5,287 2,427 1,580
General and administrative 4,858 4,448 2,899
Loan expense 720 808 752
Provision for losses 600 600 4,800
Disposition of investment 808
Settlement of management contract 5,793
Management fees 2,386
-------------- --------------- ---------------
26,830 23,726 30,961
-------------- --------------- ---------------
Net income $ 46,478 $ 30,676 $ 13,635
============== =============== ===============
Average number of shares outstanding:
Basic 21,594 14,093 11,710
Diluted 21,929 14,150 11,728
Net income per share:
Basic $ 2.15 $ 2.18 $ 1.16
Diluted 2.12 2.17 1.16
See accompanying notes
-19-
20
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL IN UNAMORTIZED
COMMON EXCESS OF UNDISTRIBUTED UNREALIZED RESTRICTED
STOCK PAR VALUE NET INCOME GAINS STOCK TOTAL
-------------- --------------- ---------------- -------------- --------------- --------------
(In thousands)
Balances at January 1, 1995 $ 11,595 $ 161,087 $ 16,498 $ 189,180
Net income 13,635 13,635
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 157 2,947 3,104
Issuance of shares related
to settlement of
management contract 282 4,766 5,048
Unrealized gains on investment
securities available for sale $ 845 845
Cash dividends paid--$2.075
per share (24,215) (24,215)
--------- ---------- ---------- --------- --------- ----------
Balances at December 31, 1995 12,034 168,800 5,918 845 187,597
Net income 30,676 30,676
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 176 3,479 3,655
Proceeds from sale of shares,
net of expenses of
$6,433,000 6,110 126,002 132,112
Change in unrealized gains
on investment securities
available for sale (77) (77)
Cash dividends paid --
$2.08 per share (28,427) (28,427)
--------- ---------- ------------ ---------- --------- ----------
Balances at December 31, 1996 18,320 298,281 8,167 768 325,536
Net income 46,478 46,478
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 455 10,179 $ (3,789) 6,845
Proceeds from sale of shares,
net of expenses of
$7,477,000 5,566 127,143 132,709
Change in unrealized gains
on investment securities
available for sale 3,903 3,903
Amortization of restricted
stock grants 257 257
Cash dividends paid --
$2.11 per share (45,804) (45,804)
--------- ---------- ------------ --------- --------- ------------
Balances at December 31, 1997 $ 24,341 $ 435,603 $ 8,841 $ 4,671 $ (3,532) $ 469,924
========= ========== ========== ========= ========== =========
See accompanying notes
-20-
21
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------ ------------------ -------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 46,478 $ 30,676 $ 13,635
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 5,361 2,461 1,580
Amortization 980 810 749
Provision for losses 600 600 4,800
Disposition of investment 808
Settlement of management contract 5,002
Loan and commitment fees earned
less than cash received 4,642 1,764 1,467
Direct financing lease income less
than cash received 372 90 181
Rental income in excess of
cash received (1,548) (370)
Interest income (more than) less
than cash received (29) (134) 525
Increase (decrease) in accrued
expenses and other liabilities 790 401 (382)
Increase in receivables and
other assets (1,638) (886) (404)
------------ ----------- -----------
Net cash provided from operating activities 56,008 36,220 27,153
INVESTING ACTIVITIES
Investment in loans receivable (123,376) (168,845) (107,297)
Investment in operating-lease properties (135,835) (66,083) (2,976)
Other investments (4,964)
Principal collected on loans 49,750 60,659 69,697
Proceeds from exercise of purchase options 2,569 9,508
Other (213) (221) (3)
------------ ----------- -----------
Net cash used in investing activities (212,069) (164,982) (40,579)
FINANCING ACTIVITIES
Net (decrease) increase under line of
credit arrangements (13,725) (14,575) 35,800
Borrowings under senior notes 80,000 30,000
Assumption of mortgage loan payable 6,539
Principal payments on other long-term
obligations (1,600) (329) (1,313)
Net proceeds from the issuance of shares 139,554 135,767 3,104
Increase in deferred loan expense (1,564) (492) (25)
Cash distributions to shareholders (45,804) (28,427) (24,215)
------------ ----------- -----------
Net cash provided from financing activities 156,861 128,483 13,351
----------- ---------- ----------
Decrease in cash and cash equivalents 800 (279) (75)
Cash and cash equivalents at beginning of year 581 860 935
----------- ---------- ----------
Cash and cash equivalents at end of year $ 1,381 $ 581 $ 860
=========== ========== ==========
See accompanying notes
-21-
22
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES AND RELATED MATTERS
INDUSTRY
The Company is a self-administered real estate investment trust that invests
primarily in long-term care facilities, which include nursing homes, assisted
living facilities, and retirement centers. The Company also invests in specialty
care facilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after the elimination of all significant
intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LOANS RECEIVABLE
Loans receivable consist of long-term mortgage loans, construction-period loans
maturing in two years or less, and working capital loans. Interest income on
loans is recognized as earned based upon the principal amount outstanding. The
loans are generally collateralized by a first or second mortgage on or
assignment of partnership interest in the related facilities which consist of
nursing homes, assisted living facilities, retirement centers, behavioral care
facilities, and specialty care hospitals.
OPERATING LEASE PROPERTIES
Certain properties owned by the Company are leased under operating leases. These
properties are recorded at the lower of cost or net realizable value.
Depreciation is provided for at rates which are expected to amortize the cost of
the assets over their estimated useful lives using the straight-line method. The
leases provide for payment of all taxes, insurance and maintenance by the
lessees. In general, operating lease income includes base rent payments plus
fixed annual rent increases, which are recognized on a straight-line basis over
the minimum lease period. This income is greater than the amount of cash
received during the first half of the lease term.
DIRECT FINANCING LEASES
Certain properties owned by the Company are subject to long-term leases which
are accounted for by the direct financing method. The leases provide for payment
of all taxes, insurance and maintenance by the lessees. The leases are generally
for a term of 20 years and include an option to purchase the properties
generally after a period of five years. Option prices equal or exceed the
Company's original cost of the property. Income from direct financing leases is
recorded based upon the implicit rate of interest over the lease term. This
income is greater than the amount of cash received during the first six to seven
years of the lease term.
CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST
The Company capitalizes interest costs associated with funds used to finance the
construction of facilities. 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.
-22-
23
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)
ALLOWANCE FOR LOSSES
The allowance for losses is maintained at a level believed adequate to absorb
potential losses in the Company's real estate investments. The determination of
the allowance is based on a quarterly evaluation of these earning assets (in the
case of direct financing leases, estimated residual values), including general
economic conditions, estimated collectibility of loan and lease payments,
reappraisals (where appropriate), and the recoverability of the carrying amount
of these investments in relationship to their net realizable value.
DEFERRED LOAN EXPENSES
Deferred loan expenses are costs incurred in acquiring financing for properties.
The Company amortizes these costs by the straight-line method over the term of
the debt.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less.
INVESTMENT SECURITIES
Management determines the appropriate classification of a security at the time
of acquisition and reevaluates such designation as of each balance sheet date.
If there is a readily determinable fair value, available-for-sale equity
securities are stated at fair value, with unrealized gains and losses reported
in a separate component of shareholders' equity. Other equity securities are
stated at historical cost. Debt securities which are classified as held to
maturity are stated at historical cost. Investment securities include the common
stock of two corporations, which were obtained by the Company at no cost, the
fair value of the common stock related to warrants in one corporation in excess
of the exercise price, the preferred stock of two private corporations and
subordinated debt securities in three corporations.
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
8.
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
NEW ACCOUNTING STANDARD
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Comprehensive Income, which is effective for periods beginning after December
31, 1997. Statement 130 establishes standards for reporting and display of
comprehensive income and its components. The Company will adopt Statement 130 in
the first quarter of 1998 and the impact will not be significant.
-23-
24
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
2. LOANS RECEIVABLE
The following is a summary of loans receivable (in thousands):
December 31
1997 1996
---------------------------------------------
Mortgage loans $ 375,693 $ 290,515
Mortgage loans to related parties 1,945 1,927
Construction loans 27,698 61,013
Working capital 3,551
Working capital loans to related parties 3,847 4,727
------------------ ------------------
TOTALS $ 412,734 $ 358,182
================== ==================
Loans to related parties (various entities whose ownership includes two Company
directors and former officers) included above are at competitive rates and are
equal to or greater than the Company's net interest cost on borrowings to
support such loans. The amount of interest income and loan and commitment fees
from related parties amounted to $980,000, $3,089,000 and $3,378,000 for 1997,
1996 and 1995, respectively.
The following is a summary of mortgage loans at December 31, 1997 (in
thousands):
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
------- ------ --------------------------------------- ---------- --------
1999 2 Monthly payments from $15,734 to $ 6,350 $ 5,037
$28,101, including interest from 10.64%
to 10.91%
2001 3 Monthly payments from $17,602 11,227 10,853
to $72,731, including interest from
10.50% to 12.0%
2002 2 Monthly payments from $24,663 to 8,455 8,321
$60,481, including interest from 10.71%
to 12.0%
2006 1 Monthly payment of $54,456, 5,537 5,484
including interest of 11.05%
2007 3 Monthly payments from $27,611 to 17,198 13,063
$73,483, including interest from
10.66% to 12.50%
2008 6 Monthly payments from $18,399 to 25,950 25,308
$82,769, including interest from
10.88% to 12.31%
2009 5 Monthly payments from $27,285 to 24,646 24,502
$68,341, including interest from
10.75% to 11.47%
2010 6 Monthly payments from $39,849 to 52,835 52,269
$140,857, including interest from
10.32% to 10.94%
-24-
25
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
2. LOANS RECEIVABLE (CONTINUED)
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
------- ------ --------------------------------------- ---------- --------
2011 11 Monthly payments from $24,370 to $ 47,163 $ 47,163
$86,557, including interest from
9.98% to 11.50%
2012 2 Monthly payments from $41,000 to 32,843 32,810
$278,883, including interest from
11.54% to 12.19%
2014 1 Monthly payment of $44,679, 3,970 3,940
including interest of 13.24%
2015 5 Monthly payments from $23,653 to 36,260 35,827
$116,680, including interest from
10.29% to 12.58%
2016 12 Monthly payments from $13,002 to 87,856 87,339
$222,956, including interest from
10.11% to 11.78%
2017 4 Monthly payments from $24,614 to 25,722 25,722
$107,900 including interest from
9.96% to 10.66%
----------------- -----------------
TOTALS $ 386,012 $ 377,638
================= =================
3. INVESTMENT IN LEASES
The following are the components of investments in direct financing leases (in
thousands):
December 31
1997 1996
----------------------------------------
Total minimum lease payments receivable $ 13,602 $ 17,291
Estimated unguaranteed residual values of
leased properties 3,437 5,779
Unearned income (9,104) (12,194)
---------------- ----------------
Investment in direct financing leases $ 7,935 $ 10,876
================ ================
The leases contain an option to purchase the leased property. Total minimum
lease payments are computed assuming that the purchase options are not
exercised.
-25-
26
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
3. INVESTMENT IN LEASES (CONTINUED)
At December 31, 1997, future minimum lease payments receivable (assuming that
purchase options are not exercised) are as follows (in thousands):
Direct Financing Operating
Leases Leases
---------------- --------------
1998 $ 1,199 $ 27,225
1999 1,219 40,156
2000 1,240 41,131
2001 1,260 42,093
2002 988 43,052
Thereafter 7,696 283,762
------------ -------------
TOTALS $ 13,602 $ 477,419
============ =============
During 1997 the Company converted three mortgage loans totaling $13,103,000 into
operating leases. During 1996 the Company converted nineteen mortgage loans
totaling $40,567,000 into operating leases. This noncash activity is
appropriately not reflected in the accompanying statements of cash flows.
4. CONCENTRATION OF RISK
As of December 31, 1997, long-term care facilities comprised 86% of the
Company's real estate investments and were located in 29 states. Investments in
assisted living facilities comprised 48% of the Company's real estate
investments. The Company's investments with the three largest operators totaled
approximately 27%. No single operator has a real estate investment balance which
exceeds 10% of total real estate investments, including credit enhancements.
5. ALLOWANCE FOR LOSSES
The following is a summary of the allowance for losses (in thousands):
1997 1996 1995
------------ ------------- ------------
Balance at beginning of year $ 9,787 $ 9,950 $ 5,150
Provision for losses 600 600 4,800
Disposition of investment 808
Charge-offs (6,000) (1,571)
------------ ------------- ------------
Balance at end of year $ 4,387 $ 9,787 $ 9,950
============ ============= ============
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 losses.
Interest income on impaired loans is recognized as payments are received. The
Company recognized $323,000 of interest income on impaired loans in 1995.
-26-
27
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has an unsecured credit arrangement with a consortium of twelve
banks providing for a revolving line of credit (revolving credit) in the amount
of $175,000,000 which expires on March 31, 2000. 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
1.125% over LIBOR interest rate (based at the Company's option). The effective
interest rate at December 31, 1997 was 7.08%. In addition, the Company pays a
commitment fee ranging from an annual rate of 0.20% to 0.375% and an annual
agent's fee of $50,000. Principal is due upon expiration of the agreement. The
Company has another line of credit with a bank for a total of $10,000,000 which
expires January 31, 1999. Borrowings under this line of credit are subject to
interest at the bank's prime rate of interest (8.5% at December 31, 1997) and
are due on demand.
The following information relates to aggregate borrowings under the line of
credit arrangements (in thousands except percentages):
Year Ended December 31
1997 1996 1995
---------------------------------------------------------------
Balance outstanding at December 31 $ 78,400 $ 92,125 $ 106,700
Maximum amount outstanding at any
month end 158,950 142,600 119,100
Average amount outstanding (total
of daily principal balances
divided by days in year) 78,826 110,667 88,851
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 7.63% 7.72% 8.41%
At December 31, 1997, 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.
Interest paid amounted to $16,444,000, $14,211,000 and $13,084,000 for 1997,
1996 and 1995, respectively. The Company capitalized interest costs of
$2,306,000 and $287,000 during 1997 and 1996, respectively, related to
construction of real property owned by the Company.
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $162,000,000 of unsecured Senior Notes with interest ranging
from 7.06% to 8.34% and maturing at various dates to 2003.
The following information relates to other long-term obligations (in thousands):
December 31
1997 1996
--------------------------------
Notes payable related to industrial development
bonds, collateralized by one health care facility in 1997
and two health care facilities in 1996; interest rates at
11.25% for 1997 and from 11.25% to 15%
in 1996 maturing in 2002 $ 1,160 $ 2,320
Mortgage notes payable, collateralized by two
health care facilities, interest rates from 7.625%
to 12%, maturing at various dates to 2034 7,510 7,950
---------------- ----------------
TOTALS $ 8,670 $ 10,270
================ ================
-27-
28
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)
At December 31, 1997, the annual principal payments on these long-term
obligations for the succeeding five years are 1998 - $23,242,000; 1999 -
$90,000; 2000 - $35,099,000; 2001 - $10,109,000; and 2002 - $20,121,000; 2003
and beyond - $82,009,000.
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 DERs. In addition, during 1997 the Company
adopted a Stock Incentive Plan for Non-Employee Directors which authorizes up to
142,000 shares to be issued.
The following summarizes the activity in the Plans for the years ended December
31 (shares in thousands):
1997 1996 1995
---- ---- ----
Average Average Average
Shares Exerise Price Shares Exercise Price Shares Exercise Price
------ ------------- ------ -------------- ------ --------------
Stock Options
- -------------
Options at beginning of year 749 $19.51 485 $19.95 183 $20.71
Options granted 475 24.44 425 19.14 316 19.28
Options exercised (84) 19.16 (44) 17.66 (14) 14.81
Options terminated (14) 23.61 (117) 20.67
-------- ----------- -------- ----------- -------- -----------
1,126 $21.56 749 $19.51 485 $19.95
======== =========== ======== =========== ======== ===========
At end of year:
Shares exercisable 406 $20.79 226 $21.45 243 20.10
Weighted average fair value
of options granted during the
year $ 1.97 $ 1.78 $ 1.54
The stock options generally vest over a five year period and expire ten years
from the date of grant.
The Company issued 157,000 restricted shares during 1997, including 2,000 shares
for directors. Vesting periods range from six months for directors to periods of
five to ten years for officers. Expense, which is recognized as the shares vest
based on the market value at the date of the award, totalled $257,000 in 1997.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees in accounting for its employee stock options as permitted
under FASB statement No. 123 ("FASB 123"), Accounting for Stock-Based
Compensation, and, accordingly, recognizes no compensation expense for the stock
option grants when the market price on the underlying stock on the date of grant
equals the exercise price of the Company's employee stock option.
Pro forma information has been determined as if the Company had accounted for
its employee stock options and restricted shares under the fair value method.
The pro forma disclosures are not likely to be representative of the effects on
reported net income for future years because they do not take into consideration
stock based incentives granted prior to 1995. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following range of assumptions: risk-free interest rates from
5.10% to 7.60%, dividend yields of 8%, expected lives of seven years, and
expected volatility of .18% to .21%. Had compensation cost for the stock based
compensation plans been determined in accordance with FASB 123, net income would
have been reduced by $212,000, $105,000, and $32,000 in 1997, 1996 and 1995,
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
$110,000, $90,000, and $6,000 in 1997, 1996, and 1995, respectively.
-28-
29
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
9. 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 $360,000, $317,000
and $326,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Undistributed net income for federal income tax purposes amounted to $15,926,000
at December 31, 1997. The principal reasons for the difference between
undistributed net income for federal income tax purposes and financial statement
purposes are the use of the operating method of accounting for leases for
federal income tax purposes and the provision for losses for reporting purposes
versus bad debt expense for tax purposes.
Cash distributions paid to shareholders, for federal income tax purposes, are as
follows:
Year Ended December 31
1997 1996 1995
---------------------------------------
Per Share:
Ordinary income $ 2.085 $ 2.030 $ 2.075
Capital gains .025 .050
------- -------- -------
TOTALS $ 2.110 $ 2.080 $ 2.075
======= ======== =======
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had outstanding commitments to provide
financing for facilities in the approximate amount of $275,017,000. 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 entered into several agreements to purchase health care
facilities, or the loans with respect thereto, in the event that the present
owners default upon their obligations. In consideration for these agreements,
the Company receives and recognizes fees annually related to these agreements.
Although the terms of these agreements vary, the purchase prices are equal to
the amount of the outstanding obligations financing the facility. These
agreements expire through the year 2005. At December 31, 1997, obligations under
these agreements for which the Company was contingently liable aggregated
approximately $15,565,000, all of which were with related parties.
11. MANAGEMENT AGREEMENT
Through November 30, 1995, the Company had a management agreement with First
Toledo Advisory Company (the Manager). Two of the Company's directors were
officers and co-owners of the Manager. The Company accrued a fee to the Manager
as defined in the Management Agreement. On November 30, 1995, the Manager merged
with and into the Company pursuant to a Revised Merger Agreement (the "Merger").
Consideration for this transaction totaled approximately $5,048,000 which was
solely comprised of 282,407 shares of the Company's common stock. In addition,
the Company acquired approximately $46,000 in net assets and incurred
approximately $792,000 of related transaction expenses. The Merger was a
tax-free reorganization. The consideration, plus related transaction expenses,
were accounted for as a settlement of a management contract.
-29-
30
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
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.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1997 1996 1995
---------- --------- ------
Numerator for basic and diluted earnings
per share - income available to common
shareholders $ 46,478 $ 30,676 $ 13,635
========= ========= =========
Denominator for basic earnings per
share - weighted average shares 21,594 14,093 11,710
Effect of dilutive securities:
Employee stock options 182 57 18
Nonvested restricted shares 153
--------- -------- --------
Dilutive potential common shares 335 57 18
--------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average shares 21,929 14,150 11,728
========= ========= ========
Basic earnings per share $2.15 $2.18 $1.16
========= ========= ========
Diluted earnings per share $2.12 $2.17 $1.16
========= ======== ========
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, except those matched with
debt, 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. Mortgage loans matched with debt are
presumed to be at fair value.
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.
Investment Securities --The assets are recorded at their fair market value.
-30-
31
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
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 Notes and Industrial Development Bonds--The fair value of the senior
notes payable and the industrial development bonds was estimated by discounting
the future cash flow using the current borrowing rate available to the Company
for similar debt.
Mortgage Notes Payable--Mortgage notes payable is a reasonable estimate of fair
value because they are matched with loans receivable.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows (in thousands):
December 31, 1997 December 31, 1996
-------------------------------------- ----------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial Assets:
Mortgage loans $377,638 $402,348 $ 292,442 $ 300,136
Working capital and
construction loans 35,096 35,096 65,740 65,740
Cash and cash equivalents 1,381 1,381 581 581
Investment securities 9,635 9,635 768 768
Financial Liabilities:
Borrowings under line of
credit arrangements 78,400 78,400 92,125 92,125
Senior notes 162,000 167,113 82,000 82,301
Industrial development bonds 1,160 1,225 2,320 2,650
Mortgage loans payable 7,510 7,445 7,950 7,950
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, 1997 and 1996 (in thousands except
per share data):
Year Ended December 31, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Revenues $ 16,569 $ 18,448 $ 18,559 $ 19,448
Net Income 9,826 11,928 11,773 12,667
Net Income Per Share
Basic .51 .55 .54 .55
Diluted .51 .54 .53 .54
Year Ended December 31, 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Revenues $ 10,890 $ 14,626 $ 14,068 $ 14,818
Net Income 5,677 8,569 7,383 9,047
Net Income Per Share
Basic .47 .66 .50 .55
Diluted .47 .65 .50 .55
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement 128.
-31-
32
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference to the
information under the heading "Election of Directors" and "Executive Officers of
the Company" in the definitive proxy statement of the Company which will be
filed with the Commission prior to April 21, 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the
information under the heading "Remuneration" in the definitive proxy statement
of the Company which will be filed with the Commission prior to April 21, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the
information under the heading "Security Ownership of Certain Beneficial Owners"
in the definitive proxy statement of the Company which will be filed with the
Commission prior to April 21, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the
information under the heading "Certain Relationships and Related Transactions"
in the definitive proxy statement of the Company which will be filed with the
Commission prior to April 21, 1998.
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, 1997 and 1996.................................18
Consolidated Statements of Income - Years ended December 31, 1997, 1996 and 1995.........19
Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1997, 1996 and 1995...................................................20
Consolidated Statements of Cash Flows - Years ended
December 31, 1997, 1996 and 1995...................................................21
Notes to Consolidated Financial Statements ..............................................22
-32-
33
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.
10.1 Rights Agreement.
10.2 Note Purchase Agreement between Health Care REIT, Inc.
and each of the Purchasers a Party thereto, dated as of
April 8, 1993.
10.3 Amended and Restated Credit Agreement dated as of
September 8, 1994 among Health Care REIT, Inc., certain
banks, and National City Bank, as Agent.
10.4 Note Purchase Agreement between Health Care REIT, Inc.
and each of the Purchasers a Party thereto, dated as of
April 15, 1995.
10.5 The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc. as amended.
10.6 The Health Care REIT, Inc. 1995 Stock Incentive Plan
21 Subsidiaries of the Registrant.
23 Consent of Independent Auditors.
24 Powers of Attorney.
27 Financial Data Schedule (Edgar version only).
(b) Reports on Form 8-K filed in the fourth quarter of 1996:
Form 8-K filed with the Securities and Exchange Commission on December 12,
1996.
(c) Exhibits:
The exhibits listed in Item 14(a)(3) above are filed with this Form 10-K.
(d) Financial Statement Schedules:
Financial statement schedules are included in pages 36 through 40.
-33-
34
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 February
6, 1998, on its behalf by the undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
(Registrant)
By: 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 February 6, 1998 by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/S/ WILLIAM C. BALLARD, JR.* /S/ RICHARD A. UNVERFERTH*
- ------------------------------------- -------------------------------------
William C. Ballard, Jr., Director Richard A. Unverferth, Director
/S/ PIER C. BORRA* /S/ FREDERIC D. WOLFE
- ------------------------------------- -------------------------------------
Pier C. Borra, Director Frederic D. Wolfe, Director
/S/ JEFFREY H. DONAHUE* GEORGE L. CHAPMAN
- ------------------------------------- -------------------------------------
Jeffrey H. Donahue, Director George L. Chapman, Chairman, Chief
Executive Officer, President and Director
(Principal Executive Officer)
/S/ EDWARD F. LANGE, JR.*
- ------------------------------------- -------------------------------------
Bruce Douglas, Director Edward F. Lange, Jr., Chief Financial
Officer (Principal Financial Officer)
/S/ RICHARD C. GLOWACKI* /S/ MICHAEL A. CRABTREE*
- ------------------------------------- -------------------------------------
Richard C. Glowacki, Director Michael A. Crabtree, Controller
(Principal Accounting Officer)
/S/ SHARON M. OSTER* *By: GEORGE L. CHAPMAN
- ------------------------------------- -------------------------------------
Sharon M. Oster, Director George L. Chapman, Attorney-in-Fact
/S/ BRUCE G. THOMPSON*
- -------------------------------------
Bruce G. Thompson, Director
-34-
35
HEALTH CARE REIT, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(in thousands)
Gross Amount at Which
Initial Cost to Company Carried at Close of Period
----------------------- ---------------------------------
Cost
Capitalized
Buildings & Subsequent to Buildings & Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- -----
Assisted Living Facilities:
- --------------------------
Bradenton, FL $ 252 $ 3,298 $ 252 $ 3,298 $ 188 1996 1995
Bradenton, FL 25 450 25 450 5 1997 1992
Bradenton, FL 25 400 25 400 4 1997 1988
Bradenton, FL 50 850 50 850 10 1997 1996
Bradenton, FL 50 850 50 850 10 1997 1996
Clermont, FL 350 5,232 350 5,232 6 1997 1997
Jacksonville, FL 400 3,674 400 3,674 4 1997 1997
Sarasota, FL 475 3,175 475 3,175 181 1996 1995
Boise, ID 200 2,500 200 2,500 31 1997 1997
Charlotte, NC 640 4,090 640 4,090 36 1997 1997
Newton, NC 21 819 180 21 999 89 1993 1985
Statesville, NC 34 1,331 293 34 1,624 145 1993 1990
Yadkinville, NC 32 1,263 277 32 1,540 138 1993 1983
Cranford, NJ 3,297 11,703 2,530 3,297 14,233 343 1996 1993
Roswell, NM 233 5,355 233 5,355 7 1997 1996
Albany, NY 400 10,528 400 10,528 13 1997 1997
Cincinnati, OH 1,728 10,272 1,728 10,272 271 1997 1985
Findlay, OH 200 1,800 200 1,800 36 1997 1997
Troy, OH 200 2,000 200 2,000 34 1997 1997
Bartlesville, OK 100 1,380 100 1,380 74 1994 1995
Chickasha, OK 85 1,395 85 1,395 69 1995 1996
Duncan, OK 103 1,347 103 1,347 57 1995 1996
Edmond, OK 175 1,564 175 1,564 65 1995 1996
Enid, OK 90 1,390 90 1,390 75 1995 1996
Lawton, OK 144 1,456 144 1,456 61 1995 1996
Midwest City, OK 95 1,385 95 1,385 75 1996 1996
Muskogee, OK 150 1,432 150 1,432 46 1996 1996
Norman, OK 55 1,484 55 1,484 74 1995 1996
N. Oklakhoma City, OK 87 1,508 87 1,508 45 1995 1996
Oklahoma City, OK 130 1,350 130 1,350 66 1995 1996
Owasso, OK 215 1,380 215 1,380 41 1996 1996
-35-
36
SCHEDULE III - Continued
Gross Amount at Which Carried
Initial Cost to Company at Close of Period
----------------------- -----------------------------
Cost
Capitalized
Buildings & Subsequent to Buildings & Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- -----
Ponca City, OK 114 1,536 114 1,536 97 1995 1995
Shawnee, OK 80 1,400 80 1,400 75 1995 1996
Stillwater, OK 80 1,400 80 1,400 75 1995 1996
Baldwin, PA 535 2,222 535 2,222 34 1997 1995
Pittsburgh, PA 430 6,736 430 6,736 328 1996 1989
Pittsburgh, PA 6,498 423 10,158 423 10,158 396 1996 1989
Benbrook, TX 1,050 7,550 27 1,050 7,577 204 1997 1984
Cedar Hill, TX 171 1,490 171 1,490 35 1997 1997
Claremore, TX 155 1,427 155 1,427 46 1996 1996
Corpus Christi, TX 420 4,796 420 4,796 46 1997 1989
Corpus Christi, TX 155 2,935 155 2,935 4 1997 1997
Desoto, TX 205 1,383 205 1,383 35 1997 1997
Ft. Worth, TX 210 3,790 210 3,790 178 1992 1984
Ft. Worth, TX 281 3,473 281 3,473 4 1997 1986
Georgetown, TX 200 2,100 200 2,100 36 1997 1997
Granbury, TX 80 2,020 80 2,020 41 1997 1997
Harlingen, TX 92 2,057 92 2,057 3 1997 1989
Houston, TX 261 3,139 261 3,139 131 1994 1995
Mt. Pleasant, TX 247 3,868 247 3,868 5 1997 1992
Palestine, TX 173 1,410 173 1,410 46 1996 1996
Texarkana, TX 192 1,403 192 1,403 42 1996 1996
Tyler, TX 147 2,699 147 2,699 3 1997 1991
Waxahachie, TX 154 1,429 154 1,429 46 1996 1996
Wolfforth, TX 110 1,898 110 1,898 2 1997 1990
Chesapeake, VA 81 1,011 81 1,011 127 1993 1988
Poquoson, VA 120 1,492 120 1,492 187 1993 1987
Williamsburg, VA 186 2,310 186 2,310 290 1993 1987
----- ---------- ---------- ----- -------- ------
Total Assisted Living Facilities: $16,393 $163,793 $ 3,307 $16,393 $167,100 $ 4,815
-36-
37
SCHEDULE III - Continued
Gross Amount at Which Carried
Initial Cost to Company at Close of Period
----------------------- ------------------------------
Cost
Capitalized
Buildings & Subsequent to Buildings & Accumulated Year Year
Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built
----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- -----
Skilled Nursing Facilities:
- --------------------------
Camp Verde, AZ $ 275 $ 3,149 $ 275 $ 3,149 $ 1,148 1990 1985
Southington, CT 937 9,563 937 9,563 1,168 1993 1975
Owensboro, KY 130 4,870 130 4,870 512 1993 1967
Braintree, MA 170 6,080 170 6,080 194 1997 1968
Braintree, MA 80 4,245 80 4,245 134 1997 1973
Worcester, MA 1,053 902 1,053 902 49 1997 1970
Fall River, MA 620 5,080 620 5,080 182 1996 1973
Falmouth, MA 670 3,022 670 3,022 105 1996 1966
S Boston, MA 385 1,463 3,016 385 4,479 71 1995 1961
Webster, MA 570 8,790 570 8,790 288 1995 1982
Kent, OH 215 3,367 215 3,367 397 1989 1983
Easton, PA 285 6,315 285 6,315 1,053 1997 1959
San Antonio TX 662 12,587 662 12,587 1,653 1993 1978
------- ---------- --------- ------- --------- ----------
Total Skilled Nursing Facilities $ 6,052 $ 69,433 $ 3,016 $ 6,052 $ 72,449 $ 6,954
Construction in Progress 47,050
Total Investment in Properties $22,445 $233,226 $ 6,323 $22,445 $286,599 $ 11,769
======= ========== ========= ======= ========= ==========
Reconciliation of Real Estate:
Carrying cost: Accumulated depreciation:
Balance at beginning period: $160,105 Balance at beginning of period: $6,482
Additions during period: Additions during period:
Acquisitions $79,727 Depreciation expense $5,287 5,287
Improvements, etc. 56,109 -----
Other (1) 13,103 148,939
-------
Balance at end of period $309,044 Balance at end of period $11,769
========= =======
(1) Represents three mortgage loans converted to operating leases.
-37-
38
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
HEALTH CARE REIT, INC.
DECEMBER 31, 1997
(In Thousands)
---------------------------
Principal Amount
Of Loans Subject
Final Periodic Carrying To Delinquent
Interest Maturity Payment Prior Face Amount Amount Of Principal Or
Description Rate Date Terms Liens Of Mortgages Mortgages Interest
----------- ---- ---- ----- ----- ------------ --------- --------
First Mortgages:
- ----------------
McAllen, TX 10.63% 01/01/10 Monthly $13,750 $13,750 None
(Specialty Care Payments
Facility) $121,802
Washington, D.C. 11.58% 07/01/15 Monthly 17,350 17,162 None
(Specialty Care Payments
Facility) $173,234
Stoughton, MA 10.32% 03/01/10 Monthly 19,450 19,329 None
(Nursing Home) Payments
$129,000
Little Rock, AK 11.54% 01/01/12 Monthly 29,000 29,000 None
(Specialty Care Payments
Facility) $278,883
Sun Valley, GA 11.78% 12/01/16 Monthly 21,500 21,363 None
(Specialty Care Payments
Facility) $222,956
Briarcliff, NY 10.11% 08/01/16 Monthly 12,810 12,805 None
(Assisted Living Payments
Facility) $107,924
Hendersonville, NC 9.96% 11/01/17 Monthly 13,000 13,000 None
(Retirement Center) Payments
$107,900
59 mortgage loans relating to 31 From From $262,385 $251,229 None
nursing homes, 20 assisted living 9.98% to 12/01/98-
facilities, 13.24% 01/01/17
5 retirement centers, 2 behavioral
care facilities and 2 specialty
care facility
-38-
39
SCHEDULE IV - Continued
(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
----------- ---- ---- ----- ----- ------------ --------- --------
14 construction loans (all with From N/A 65,519 27,698 None
first mortgage liens) relating to 10.75% to
14 assisted living facilities 12.00%
---------- --------- ----
TOTALS $454,764 $405,336 $-0-
========== ========= ====
(In Thousands)
Year Ended December 31
--------------------------------------------
1997 1996 1995
-------- -------- --------
Reconciliation of mortgage loans:
Balance at beginning of period $353,455 $285,219 $247,855
Additions during period:
New mortgage loans 120,705 163,963 103,276
Negative principal amortization 29 135 311
-------- -------- --------
474,189 449,317 351,442
Deductions during period:
Collections of principal (1) 55,750 55,295 66,223
Other (2) 13,103 40,567
-------- -------- --------
Balance at end of period $405,336 $353,455 $285,219
======== ======== ========
(1) Includes collection of negative principal amortization.
(2) During 1997 the Company restructured three loans totaling $13,103,000 into
operating leases and during 1996, the Company restructured nineteen loans
totaling $40,567,000 into operating leases.
-39-
40
EXHIBIT INDEX
-------------
The following documents are included in this Form 10-K as an Exhibit:
DESIGNATION
NUMBER UNDER
EXHIBIT ITEM 601 OF EXHIBIT PAGE
NUMBER REGULATION S-K DESCRIPTION NUMBER
------ -------------- ----------- ------
3.1 (1) 3(i) Second Restated Certificate of Incorporation.
3.2 (2) 3(ii) By-Laws, as amended.
4.1 4 The Registrant, by signing this Report, agrees to
furnish the Securities and Exchange Commission upon
its request a copy of any instrument which defines
the rights of long-term debt of the Registrant and
which authorizes a total amount of securities not in
excess of 10% of the total assets of the Registrant.
4.2 (3) 4 Indenture dated as of April 17, 1997 by and between
Health Care REIT, Inc. and Fifth Third Bank.
4.3 (4) 4 First Supplemental Indenture dated as of April 17,
1997 by and between Health Care REIT, Inc. and Fifth
Third Bank.
10.1 (5) 10(ii)(A) Rights Agreement.
10.2 (6) 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 (7) 10(ii)(C) Amended and Restated Credit Agreement dated as of
September 8, 1994 among Health Care REIT, Inc.,
certain banks, and National City Bank, as Agent.
10.4 (8) 10(ii)(D) Note Purchase Agreement between Health Care REIT,
Inc. and each of the Purchasers a Party thereto,
dated April 15, 1995.
10.5 (9) 10(iii)(A) The 1985 Incentive Stock Option Plan of Health Care
REIT, Inc., as amended.
10.6 (10) 10(iii)(B) The Health Care REIT, Inc. 1995 Stock Incentive Plan
21 21 Subsidiaries of the Registrant.
23 23 Consent of Independent Auditors.
24 24 Powers of Attorney.
27 27 Financial Data Schedule (EDGAR version only).
- ---------------
1 Incorporated by reference to Exhibit 3(i) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1994.
-40-
41
2 Incorporated by reference to Exhibit 3(ii) to the Registrant's Form 8-K
filed on October 24, 1997.
3 Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K
filed on April 21, 1997.
4 Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K
filed on April 21, 1997.
5 Incorporated by reference to the Exhibit to the Registrant's Form 8-A
filed on August 3, 1994 (File No. 1-8923).
6 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.
7 Incorporated by reference to Exhibit 1 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 1994.
8 Incorporated by reference to Exhibit 4 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended March 31, 1996.
9 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.
10 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.
-41-