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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, 2000
Commission File Number 1-8895
HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 221-0600
______________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Stock* New York Stock Exchange
7-7/8% Series A Cumulative
Redeemable Preferred Stock New York Stock Exchange
8.70% Series B Cumulative
Redeemable Preferred Stock New York Stock Exchange
8.60% Series C Cumulative
Redeemable Preferred Stock New York Stock Exchange
*The common stock has stock purchase rights attached which are
registered pursuant to Section 12(b) of the Securities Act of 1933, as amended,
and listed on the New York Stock Exchange.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
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 to this Form 10-K.
As of March 7, 2001 there were 50,978,878 shares of common stock
outstanding. The aggregate market value of the shares of common stock held by
non-affiliates of the registrant, based on the closing price of these shares on
March 7, 2001 on the New York Stock Exchange, was approximately $1,651,787,000.
Portions of the definitive Proxy Statement for the registrant's 2001 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
PART I
Item 1. BUSINESS
Health Care Property Investors, Inc. (HCPI), a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust (REIT). We
invest in healthcare related real estate located throughout the United States,
including long-term care facilities, congregate care and assisted living
facilities, acute care and rehabilitation hospitals, medical office buildings
and physician group practice clinics. We commenced business nearly 16 years ago,
making us the second oldest REIT specializing in healthcare real estate.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI in a stock-for-stock transaction, approved by the stockholders of
both companies, with HCPI being the surviving corporation. AHE was a real estate
investment trust specializing in healthcare facilities with a portfolio of 72
healthcare properties in 22 states. Under the terms of the merger agreement,
each share of AHE common stock was converted into the right to receive 0.78
share of HCPI's common stock and AHE's 8.60% series B cumulative redeemable
preferred stock was converted into shares of HCPI 8.60% series C cumulative
redeemable preferred stock. The merger resulted in the issuance of 19,430,115
shares of HCPI's common stock and 4,000,000 depositary shares of HCPI's series C
cumulative redeemable preferred stock. Additionally, we assumed AHE's debt
comprised of $220 million of senior notes and $56 million of mortgage debt and
paid $71 million in cash to replace their revolving line of credit upon
consummation of the merger. The transaction was treated as a purchase for
financial accounting purposes and, accordingly, the operating results of AHE
have been included in our consolidated financial statements effective as of
November 4, 1999.
As of December 31, 2000, our gross investment in our properties,
including partnership interests and mortgage loans, was approximately $2.6
billion. Our portfolio of 413 properties consisted of:
. 172 long-term care facilities
. 86 congregate care and assisted living facilities
. 80 medical office buildings
. 44 physician group practice clinics
. 22 acute care hospitals
. Nine rehabilitation hospitals
The average age of our properties is 17 years. As of December 31, 2000,
approximately 53% of our revenue was derived from properties operated by
publicly traded healthcare providers.
Since 1986, the debt rating agencies have rated our debt investment
grade. Currently Moody's Investors Services, Standard & Poor's and Duff & Phelps
rate our senior debt at Baa2/BBB+/BBB+, respectively. We believe that we have
enjoyed an excellent track record in attracting and retaining key employees. Our
five executive officers have worked with us on average for 15 years. Our average
annual return to stockholders, assuming reinvestment of dividends and before
stockholders' income taxes, is approximately 16.5% over the period from our
initial public offering in May 1985 through December 31, 2000.
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References herein to "HCPI", "we", "us" and "our" include Health Care
Property Investors, Inc. and our wholly-owned subsidiaries and consolidated
joint ventures and partnerships, unless the context otherwise requires.
Our Properties
As of December 31, 2000, we had an ownership interest in 385 properties
located in 42 states. We leased 289 of our owned properties pursuant to long-
term triple net leases to 86 healthcare providers. Under a triple net lease, in
addition to the rent obligation, the lessee is responsible for all operating
expenses of the property such as utilities, property taxes, insurance and
repairs and maintenance. The lessees under triple net leases include the
following companies or their affiliates:
. Tenet Healthcare Corporation ("Tenet")
. HealthSouth Corporation ("HealthSouth")
. HCA - The Healthcare Company ("HCA")
. Emeritus Corporation ("Emeritus")
. Vencor, Inc. ("Vencor")
. Beverly Enterprises, Inc. ("Beverly")
. Centennial Healthcare Corp. ("Centennial")
The remaining 96 owned and managed properties are medical office buildings
and clinics with triple net, gross or modified gross leases with multiple
tenants. Under gross or modified gross leases, we may be responsible for
property taxes, repairs and maintenance and/or insurance on those properties.
We also hold mortgage loans on 28 properties that are owned and operated by
15 health care providers including Beverly, HCA and MedCath, Inc. We have
provided mortgage loans in the amount of $180,204,000 on those 28 properties,
including 16 long-term care facilities, five congregate care and assisted living
centers, four acute care hospitals and three medical office buildings. At
December 31, 2000, the remaining balance on these loans totaled $158,895,000.
With the exception of Tenet which accounts for 19.3% of our annualized
revenue, no single lessee or operator accounts for more than 5.5% of our revenue
for the year ended December 31, 2000.
Of the 413 healthcare facilities in which we had an investment as of
December 31, 2000, we directly own 327 facilities outright, including:
. 132 long-term care facilities
. 77 congregate care and assisted living centers
. 55 medical office buildings
. 44 physician group practice clinics
. 16 acute care hospitals
. Three rehabilitation hospitals
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At December 31, 2000, we also had varying percentage interests in
several limited liability companies and partnerships that together own 58
facilities and one mortgage as further discussed below under "Investments in
Consolidated and Non-Consolidated Joint Ventures".
The following is a summary of our properties grouped by type of
facility and equity interest as of December 31, 2000:
Equity Number Number Total
Interest of of Beds / Investments Annualized
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- -------------------------------------------------------------------------------------------------------------------------
(Dollar amounts in thousands)
Long-Term Care Facilities 100% 147 18,039 $ 547,337 $ 66,634
Long-Term Care Facilities 77 - 80 25 2,778 73,428 10,289
-------------------------------------------------------------
172 20,817 620,765 76,923
-------------------------------------------------------------
Acute Care Hospitals 100 20 2,726 623,017 73,769
Acute Care Hospitals 77 2 356 42,807 7,978
-------------------------------------------------------------
22 3,082 665,824 81,747
-------------------------------------------------------------
Rehabilitation Hospitals 100 3 248 41,785 5,703
Rehabilitation Hospitals 90 - 97 6 437 72,158 9,382
-------------------------------------------------------------
9 685 113,943 15,085
-------------------------------------------------------------
Congregate Care & Assisted Living Centers 100 82 6,161 406,872 41,672
Congregate Care & Assisted Living Centers 45 - 50 4 412 1,808 /(5)/ ---
-------------------------------------------------------------
86 6,573 408,680 41,672
-------------------------------------------------------------
Medical Office Buildings (3) 100 58 --- 495,537 47,999
Medical Office Buildings (3) 50- 90 22 --- 120,246 11,381
-------------------------------------------------------------
80 --- 615,783 59,380
-------------------------------------------------------------
Physician Group Practice Clinics (4) 100 44 --- 168,358 16,844
-------------------------------------------------------------
Totals 413 31,157 $ 2,593,353 $ 291,651
=============================================================
(1) Congregate care and assisted living centers are apartment like
facilities and are therefore stated in units (studio or one or two
bedroom apartments) in order to indicate facility size; all other
facilities are stated in beds, except the medical office buildings and
the physician group practice clinics for which square footage is
provided in footnotes 3 and 4.
(2) Includes partnership and limited liability company investments, and
incorporates all partners' and members' assets and construction
commitments.
(3) The medical office buildings encompass approximately 4,535,000 square
feet.
(4) The physician group practice clinics encompass approximately 1,202,000
square feet.
(5) Represents our investment, net of partners' and members' interests.
The following paragraphs describe each type of property.
Long-Term Care Facilities. We have invested in 172 long-term care
facilities. Various healthcare providers operate these facilities. Long-term
care facilities offer restorative, rehabilitative and custodial nursing care for
people not requiring the more extensive and sophisticated treatment available at
acute care hospitals. Many long-term care facilities had experienced significant
growth in ancillary revenues and demand for subacute care services over the past
ten years until the Prospective Payment System was implemented in July 1998.
Ancillary
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revenues and revenue from subacute care services are derived from providing
services to residents beyond room and board and include occupational, physical,
speech, respiratory and IV therapy, wound care, oncology treatment, brain injury
care and orthopedic therapy as well as sales of pharmaceutical products and
other services. Certain long-term care facilities provide some of the foregoing
services on an out-patient basis. Long-term care facilities are designed to
supplement hospital care and many have transfer agreements with one or more
acute care hospitals. These facilities depend to some degree upon referrals from
practicing physicians and hospitals. Long-term care services are paid for either
by private sources, or through the federal Medicare and state Medicaid programs.
Long-term care facilities generally provide patients with
accommodations, complete medical and nursing care, and rehabilitation services
including speech, physical and occupational therapy. As a part of the Omnibus
Budget Reconciliation Act ("OBRA") of 1981, Congress established a waiver
program under Medicaid to offer an alternative to institutional long-term care
services. The provisions of OBRA and the subsequent OBRA Acts of 1987 and 1990
allow states, with federal approval, greater flexibility in program design as a
means of developing cost-effective alternatives to delivering services
traditionally provided in the long-term care setting. This is a contributing
factor to the recent increase in the number of assisted living facilities, which
may adversely affect some long-term care facilities as some individuals choose
the residential environment and lower cost delivery system provided in the
assisted living setting.
Acute Care Hospitals. We have an interest in 18 general acute care
--------------------
hospitals and four long-term acute care hospitals. Acute care hospitals offer a
wide range of services such as fully-equipped operating and recovery rooms,
obstetrics, radiology, intensive care, open heart surgery and coronary care,
neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing
units, oncology, clinical laboratories, respiratory therapy, physical therapy,
nuclear medicine, rehabilitation services and outpatient services.
Long-term acute care hospitals provide care for patients with complex
medical conditions that require more intensive care, monitoring, or emergency
back-up than that available in most skilled nursing-based subacute programs.
Most long-term acute care hospital patients have severe chronic health problems
and are medically unstable or at risk of medical instability. The most common
cases treated in this setting include high acuity ventilator-dependent patients
and patients with multiple system failures relating to cancer, spinal cord
injuries or head injuries.
Services are paid for by private sources, third party payors (e.g.,
insurance and HMOs), or through the federal Medicare and state Medicaid
programs. Medicare provides reimbursement incentives to traditional general
acute care hospitals to minimize inpatient length of stay.
Rehabilitation Hospitals. We have investments in nine rehabilitation
------------------------
hospitals. These hospitals provide inpatient and outpatient care for patients
who have sustained traumatic injuries or illnesses, such as spinal cord
injuries, strokes, head injuries, orthopedic problems, work related disabilities
and neurological diseases, as well as treatment for amputees and patients with
severe arthritis. Rehabilitation programs encompass physical, occupational,
speech and inhalation therapies, rehabilitative nursing and other specialties.
Services are paid for by the patient or the patient's family, third party payors
(e.g., insurance and HMOs), or through the federal Medicare program.
-4-
Congregate Care and Assisted Living Centers. We have investments in 86
-------------------------------------------
congregate care and assisted living centers. Congregate care centers typically
offer studio, one bedroom and two bedroom apartments on a month-to-month basis
primarily to individuals who are over 75 years of age. Residents, who must be
ambulatory, are provided meals and eat in a central dining area; they may also
be assisted with some daily living activities. These centers offer programs and
services that allow residents certain conveniences and make it possible for them
to live independently; staff is also available when residents need assistance
and for group activities.
Assisted living centers serve elderly persons who require more
assistance with daily living activities than congregate care residents, but who
do not require the constant supervision nursing homes provide. Services include
personal supervision and assistance with eating, bathing, grooming and
administering medication. Assisted living centers typically contain larger
common areas for dining, group activities and relaxation to encourage social
interaction. Residents typically rent studio and one and two bedroom units on a
month-to-month basis.
Charges for room and board and other services in both congregate care
and assisted living centers are generally paid from private sources.
Medical Office Buildings. We have investments in 80 medical office
------------------------
buildings. These buildings are generally located adjacent to, or a short
distance from, acute care hospitals. Medical office buildings contain
physicians' offices and examination rooms, and may also include pharmacies,
hospital ancillary service space and day-surgery operating rooms. Medical office
buildings require more extensive plumbing, electrical, heating and cooling
capabilities than commercial office buildings for sinks, brighter lights and
special equipment that physicians typically use. Of our owned medical office
buildings, 22 are master leased on a triple net basis to lessees that then
sublease office space to physicians or other medical practitioners, 55 are
managed by third party property management companies and are leased under triple
net, gross or modified gross leases under which we are responsible for certain
operating expenses, and three are mortgages.
Physician Group Practice Clinics. We have investments in 44 physician
--------------------------------
group practice clinic facilities that are leased to 18 different tenants. These
clinics generally provide a broad range of medical services through organized
physician groups representing various medical specialties. Each clinic facility
is generally leased to a single lessee under a triple net or modified gross
lease.
The following table shows, with respect to each property type, the
location by state, the number of beds/units, recent occupancy levels, patient
revenue mix, annualized rents and interest, and information regarding remaining
lease terms.
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Average
Number Private
Number of Beds/ Average Patient Annualized Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (2) (2), (3) Interest Term
==========================================================================================================================
(Thousands) (Years)
Long-Term Care Facilities
Alabama 1 174 89% 49% $ 877 3
Arizona 3 428 52 39 993 8
Arkansas 9 866 67 36 2,347 9
California 17 1,698 83 42 5,855 10
Colorado 7 1,055 80 43 5,171 8
Connecticut 1 121 99 32 166 1
Florida 12 1,267 77 38 6,335 9
Georgia 1 60 92 22 182 21
Idaho 1 119 65 29 524 13
Illinois 1 128 97 56 312 5
Indiana 27 3,515 72 41 14,998 9
Iowa 1 201 82 46 671 13
Kansas 3 289 86 45 1,035 9
Kentucky 1 100 97 43 419 1
Louisiana 3 355 84 22 747 12
Maryland 3 438 84 36 1,825 17
Massachusetts 5 615 91 53 2,731 2
Michigan 4 406 81 49 1,216 7
Minnesota 1 94 76 40 119 10
Mississippi 1 120 98 25 370 1
Missouri 1 153 -- -- 748 1
Montana 1 80 56 36 207 9
Nevada 2 266 60 75 1,522 9
New Mexico 1 102 93 14 314 3
North Carolina 7 782 89 44 3,108 8
Ohio 12 1,543 80 50 7,436 8
Oklahoma 12 1,395 44 39 3,226 15
Oregon 1 110 67 27 48 1
Pennsylvania 1 89 86 28 374 3
South Carolina 2 -- -- -- -- 11
Tennessee 10 1,754 92 53 5,342 1
Texas 10 1,113 57 25 2,664 6
Utah 1 120 74 39 470 13
Washington 2 252 75 75 988 12
Wisconsin 7 1,009 77 50 3,583 7
==========================================================================================================================
Sub-Total 172 20,817 74 41 76,923 8
==========================================================================================================================
Acute Care Hospitals
Arizona 1 21 68 100 405 12
California 4 828 55 100 28,037 4
Florida 1 204 78 100 7,386 4
Georgia 1 167 56 100 7,200 4
Louisiana 2 325 34 96 5,322 4
Missouri 1 201 46 100 3,756 4
New Mexico 1 56 63 100 2,313 6
North Carolina 1 355 60 100 7,677 4
South Carolina 2 174 25 100 2,622 5
Texas 7 612 50 99 9,210 7
Utah 1 139 27 100 7,819 4
==========================================================================================================================
Sub-Total 22 3,082 49% 99% $ 81,747 6
==========================================================================================================================
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Average
Number Private
Number of Beds/ Average Patient Annualized Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (2) (2),(3) Interest Term
- --------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Rehabilitation Facilities
Arizona 1 60 80% 100% $ 1,751 4
Arkansas 2 120 78 100 2,755 3
Colorado 1 64 61 100 1,199 5
Florida 1 108 94 100 2,250 11
Kansas 2 145 62 100 3,675 3
Texas 1 108 65 100 1,753 3
West Virginia 1 80 97 100 1,702 1
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 9 685 75 100 15,085 4
- --------------------------------------------------------------------------------------------------------------------------
Physician Group Practice Clinics (4)
California 2 -- -- 100 4,482 10
Colorado 1 -- -- 100 338 7
Florida 10 -- -- 100 2,593 6
Georgia 3 -- -- 100 263 5
North Carolina 4 -- -- 100 681 4
Oklahoma 4 -- -- 100 547 6
Tennessee 4 -- -- 100 1,681 9
Texas 8 -- -- 100 2,322 6
Virginia 1 -- -- 100 265 8
Wisconsin 7 -- -- 100 3,672 10
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 44 -- -- 100 16,844 7
- --------------------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama 1 84 49 100 906 14
Arizona 1 98 87 100 547 7
Arkansas 1 17 16 100 28 10
California 5 369 65 100 3,884 17
Delaware 1 52 88 100 422 7
Florida 9 636 67 100 3,036 12
Georgia 1 40 93 100 243 11
Idaho 1 50 96 100 353 5
Indiana 4 378 17 50 1,370 10
Kansas 2 194 42 96 1,114 11
Louisiana 3 240 63 100 1,664 13
Maryland 2 140 91 100 1,716 7
Michigan 2 200 50 100 -- 11
Missouri 1 73 -- -- 442 1
Nebraska 1 73 89 100 521 8
New Jersey 4 279 74 89 2,181 11
New Mexico 2 285 73 100 2,121 11
New York 1 75 95 100 470 7
North Carolina 3 230 88 100 1,351 9
Ohio 1 156 63 100 806 11
Oregon 1 58 94 100 411 9
Pennsylvania 3 232 94 100 2,003 8
South Carolina 9 650 46 78 4,232 12
Tennessee 1 60 41 100 468 9
Texas 21 1,564 76 93 9,062 10
Virginia 1 90 70 100 824 13
Washington 3 219 97 95 1,413 7
Wisconsin 1 31 -- -- 84 8
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 86 6,573 67% 91% $ 41,672 11
- --------------------------------------------------------------------------------------------------------------------------
-7-
Average
Number Private
Number of Beds/ Average Patient Annualized Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (2) (2),(3) Interest Term
- --------------------------------------------------------------------------------------------------------------------------
(Thousands) (Years)
Medical Office Buildings (4)
Alaska 1 -- -- 100% $ 507 1
Arizona 6 -- -- 100 2,173 4
California 12 -- -- 100 11,563 4
Florida 6 -- -- 100 2,731 5
Indiana 14 -- -- 100 6,682 7
Kentucky 1 -- -- 100 735 4
Maryland 1 -- -- 100 611 9
Massachusetts 1 -- -- 100 2,373 7
Minnesota 2 -- -- 100 2,390 6
Missouri 1 -- -- 100 540 7
Nevada 1 -- -- 100 258 18
New Jersey 2 -- -- 100 2,592 4
New York 1 -- -- 100 2,250 7
North Dakota 1 -- -- 100 1,032 9
Ohio 1 -- -- 100 460 12
Oregon 1 -- -- 100 564 14
Tennessee 1 -- -- 100 1,285 13
Texas 11 -- -- 100 10,758 5
Utah 15 -- -- 100 7,885 7
Washington 1 -- -- 100 1,991 7
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 80 -- -- 100% 59,380 11
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 413 31,157 $ 291,651 9
==========================================================================================================================
(1) Congregate care and assisted living centers are apartment-like
facilities and are therefore stated in units (studio or one or two
bedroom apartments) in order to indicate facility size. Physician group
practice clinics and medical office buildings are measured in square
feet and encompass approximately 1,202,000 and 4,535,000 square feet,
respectively. All other facilities are measured by bed count.
(2) This information is derived from information provided by our lessees
and determined on the basis of licensed beds.
(3) All revenues, including Medicare revenues but excluding Medicaid
revenues, are included in "Private Patient" revenues.
(4) Physician group practice clinics and medical office building lessees
have use of the leased facilities for their own use or for the use of
sub-lessees.
Competition
We compete for real estate acquisitions and financings with healthcare
providers, other healthcare related real estate investment trusts, real estate
partnerships, real estate lenders, and other investors.
Our properties are subject to competition from the properties of other
healthcare providers. Certain of these other operators have capital resources
substantially in excess of some of the operators of our facilities. In addition,
the extent to which the properties are utilized depends upon several factors,
including the number of physicians using the healthcare facilities or referring
patients there, competitive systems of healthcare delivery and the size and
composition of the population in the surrounding area. Private, federal and
state payment programs and the effect of other laws and regulations may also
have a significant influence on the utilization of the properties. Virtually all
of the properties operate in a competitive environment and patients and referral
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sources, including physicians, may change their preferences for a healthcare
facility from time to time.
Relationship With Major Operators
At December 31, 2000, we had investments in 413 properties located in
43 states and operated by 94 healthcare operators. In addition, approximately
650 tenants conduct business in the multi-tenant buildings. Listed below are our
major operators, the number of facilities operated by our operators, and the
annualized revenue and the approximate percentage of annualized revenue derived
from those operators.
Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
-------------------------------------------------------------------------------------------------------
Tenet 9 $ 56,244,000 19%
HealthSouth 9 16,174,000 6
Emeritus 26 13,584,000 5
Vencor 25 13,555,000 5
HCA-The Healthcare Company 12 12,760,000 4
Beverly 27 12,583,000 4
Centennial 18 8,605,000 3
Certain of the listed facilities have been subleased to other
operators with the original lessee remaining liable on the leases. The revenue
applicable to these sublessees is not included in the annualized revenue
percentages above. The percentage of annualized revenue on these subleased
facilities was 1.1% for the year ended December 31, 2000. As discussed in more
detail below, we have recourse to Ventas, Inc. and Tenet for certain of the rent
obligations under Vencor leases which will expire during 2001.
Tenet, HealthSouth, Emeritus, Vencor, HCA and Beverly are subject to
the informational filing requirements of the Securities Exchange Act of 1934, as
amended, and accordingly file periodic financial statements on Form 10-K and
Form 10-Q with the Securities and Exchange Commission. We obtained all of the
financial and other information relating to these operators from their public
reports.
The following table summarizes our major public operators' assets,
stockholders' equity, interim revenue and net income (or net loss) from
continuing operations as of or for the nine months ended September 30, 2000. All
of the following information is based upon such operators' public reports.
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
--------------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions)
Tenet* $ 13,121 $ 4,584 $ 5,808 $ 329
HealthSouth 7,180 3,403 3,118 202
Emeritus 185 (56) 92 (14)
Vencor 1,263 (427) 2,146 (48)
HCA - The Healthcare Company 17,507 5,406 12,497 198
Beverly 1,944 631 1,967 (8)
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* The information described above for Tenet is for the six months ended
November 30, 2000 or as of November 30, 2000, as applicable.
The following table summarizes our major public operators' assets,
stockholders' equity, annualized revenue and net income (or net loss) from
continuing operations as of or for the year ended December 31, 1999.
Stockholders' Net Income/
Equity (Loss) from
Operators Assets (Deficit) Revenue Operations
-----------------------------------------------------------------------------------------------------------------
(Dollar amounts in millions)
Tenet* $ 13,161 $ 4,066 $ 11,414 $ 340
HealthSouth 6,832 3,206 4,072 77
Emeritus 198 (37) 123 (21)
Vencor 1,236 (378) 2,666 (683)
HCA - The Healthcare Company 16,885 5,617 16,657 657
Beverly 1,983 641 2,547 (135)
* The information described above for Tenet is for the fiscal year ended May
31, 2000 or as of May 31, 2000, as applicable.
The current equity market capitalization for each of the operators
listed above, based on the closing price of their common stock on March 1, 2001
as reported in the Wall Street Journal, and based on the number of outstanding
shares of their common stock as reported in their most recent public filing
available is as follows: Tenet, $14.6 billion; HealthSouth, $6.0 billion; HCA,
$21.7 billion; Emeritus, $14.1 million; Vencor, $3.2 million; and Beverly,
$797.4 million.
Certain additional information about these operators is provided below:
Vencor
On May 1, 1998, Vencor completed a spin-off transaction to become two
publicly held entities -- Ventas, Inc., a REIT, and Vencor, a healthcare
operating company which at December 31, 2000 leased 34 of our properties of
which nine are subleased to other operators. On September 13, 1999, Vencor filed
for bankruptcy protection. HCPI has recourse to Ventas, Inc. and Tenet
Healthcare Corporation for most of the obligations payable by Vencor under its
leases until the third quarter of 2001. The bankruptcy court confirmed Vencor's
plan of reorganization in March 2001.
Vencor's plan proposes the assumption of all of our leased facilities
(including nine subleased facilities). The assumption of our leases would mean
the continued performance of all of Vencor's obligations under the leases,
including all amounts owing prior to Vencor's filing date. Vencor has paid most
of these prepetition amounts and has continued to remain current on its rent
during its bankruptcy proceedings.
Almost all of our Vencor facilities have leases which expire in 2001.
Negotiations are in progress on the 23 facilities that would remain as new
leases with Vencor, with definitive agreements in place on four of nine
subleased facilities with current operators. Progress has been made for current
operators to retain operations on most of the remaining five subleased
facilities. It
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is anticipated that a net rent increase will result from negotiation with Vencor
and others for the 32 facilities discussed in this paragraph.
Based upon public reports, for the three months ended September 30,
2000, Vencor had revenue of approximately $717 million and a net loss of
approximately $27 million. For the nine months ended September 30, 2000, Vencor
had revenue of approximately $2.1 billion and a net loss of approximately $48
million. Based upon public reports, Ventas' revenue and net income for the nine
months ended September 30, 2000 were approximately $180 million and $18 million,
respectively. As of September 30, 2000, Ventas had total assets of $1.0 billion
and a stockholders' deficit of $14 million.
Tenet
Tenet is one of the nation's largest healthcare services companies,
providing a broad range of services through the ownership and management of
healthcare facilities. Tenet has historically guaranteed Vencor's leases. During
1997 we reached an agreement with Tenet whereby Tenet agreed to forbear or waive
some renewal and purchase options and related rights of first refusal on
facilities leased to Vencor and we agreed to pay Tenet $5,000,000 in cash and to
reduce Tenet's guarantees on the facilities leased to Vencor. As part of that
same agreement, we only have recourse to Tenet for the rent payments on the
Vencor leases until the end of their base term. Accordingly, we have recourse to
Tenet on 29 Vencor leases which will expire during 2001.
HCA - The Healthcare Company
According to published reports, Columbia has been the subject of
various significant government investigations regarding its compliance with
Medicare, Medicaid and other programs. The following is derived from public
reports distributed by HCA, formerly known as Columbia/HCA Healthcare Corp.:
"HCA and its affiliates reached an agreement with the criminal division of the
Department of Justice (DOJ) and U.S. attorney's offices to resolve all pending
federal criminal issues in the Columbia investigation. The terms of this
agreement resulted in the recording of an after tax charge of approximately $95
million, or $0.17 per diluted share, in the fourth quarter of 2000. In the
second quarter of 2000, HCA recorded an after-tax charge of $498 million, or
$0.89 per diluted share, in connection with its civil settlement of certain
issues with the DOJ. HCA paid the criminal settlement in the first quarter of
2001 and expects to pay the civil settlement in the first or second quarter of
2001." HCA maintains debt ratings of Ba2 from Moody's and BB+ from Standard &
Poor's.
Other Troubled Long-Term Care Providers
The financial condition of many long-term care providers, in part due
to the implementation of the Medicare Prospective Payment System, resulted in
several long-term care provider lessees filing for Chapter XI bankruptcy
protection during late 1999 and early 2000. Lessees, other than Vencor, that
have filed for bankruptcy and their respective percentage of the Company's
annualized revenue are Sun Healthcare - 1.1%, Integrated Health Services - 0.5%,
Genesis Health Ventures - 0.5%, Mariner Post Acute Network - 0.4%, Lenox
Healthcare - 0.3% and Texas Health Enterprises - 0.2%. The lessees in bankruptcy
were current on all rents as of December 31, 2000 with the exception of minor
pre-petition receivables which we believe will
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generally be payable once the plans of reorganization are confirmed. Lenox
Healthcare and Texas Health Enterprises have both exited bankruptcy.
The assisted living industry, from which the Company derives 14.2% of
its revenue, has experienced overbuilding in a number of areas and slower
fill-up rates than were originally forecast. This has required certain operators
to raise additional capital to sustain operations during fill-up periods.
Additional capital may be required during 2001. However, these factors have
stemmed further development activity, which should allow improved fill-up of
existing facilities and improvement in industry census.
The Company's management recorded a complete write-off of a $2,000,000
equity investment in Summerville Senior Living (SSL), an assisted living
company. Although this investment represents less than 0.1% of gross real estate
investment and is outside the normal investment strategy of the Company, the
write-off reduces net income (see Impairment of Equity Investment) and reduces
reported FFO. No income has been recorded on this equity investment. In addition
to the equity investment, the Company has loaned $13,500,000 to SSL with ten
leased facilities in California as collateral and owns five facilities that are
leased to SSL. Revenue from SSL equals approximately 1.5% of the Company's total
revenue. The $1,200,000 letter of credit provided in connection with the five
facility leases and the loan (discussed previously) to SSL exceeds unpaid rents
and interest due from them.
We cannot assure you that the bankruptcies of certain long-term care
operators and the trouble experienced by assisted living operators would not
have a material adverse effect on our Net Income, FFO or the market value of our
common stock.
Leases and Loans
The initial base rental rates of the triple net leases we entered into
during the three years ended December 31, 2000 have generally ranged from 9% to
13% per annum of the acquisition price of the related property. Initial interest
rates on the loans we entered into during the three years ended December 31,
2000 have generally ranged from 9% to 12% per annum. Rental rates vary by lease,
taking into consideration many factors, such as:
. Creditworthiness of the lessee
. Operating performance of the facility
. Interest rates at the beginning of the lease
. Location, type and physical condition of the facility
Certain leases provide for additional rents that are based upon a
percentage of increased revenue over specific base period revenue of the leased
properties. Others have rent increases based on inflation indices or other
factors and some leases and loans have annual fixed rent or interest rate
increases. (See Note 2 to the Consolidated Financial Statements in this Annual
Report on Form 10-K.)
In addition to the minimum and additional rents, each lessee under a
triple net lease is responsible for all additional charges, including charges
related to non-payment or late payment of rent, taxes and assessments,
governmental charges, and utility and other charges. Each triple net
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lessee is required, at its expense, to maintain its leased property in good
order and repair. We are not required to repair, rebuild or maintain the
properties leased under triple net leases.
Each lessee with a gross or modified gross lease is also responsible
for minimum and additional rents, but may not be responsible for all operating
expenses. Under gross or modified gross leases, we may be responsible for
property taxes, repairs and maintenance and/or insurance on those properties.
The primary or fixed terms of the triple net and modified gross leases
generally range from 10 to 15 years, and generally have one or more five-year
(or longer) renewal options. The average remaining base lease-term on the triple
net and modified gross leases is approximately seven years. The primary term of
the gross leases to multiple tenants in the medical office buildings range from
one to 20 years, with an average of six years remaining on those leases.
Obligations under the triple-net leases, in most cases, have corporate parent or
shareholder guarantees. Irrevocable letters of credit from various financial
institutions and lease deposits back 127 leases and loans on 15 facilities which
cover from one to 18 months of lease or loan payments. We require the lessees
and mortgagors to renew such letters of credit during the lease or loan term in
amounts that may change based upon the passage of time, improved operating cash
flows or improved credit ratings.
We believe that the credit enhancements discussed above provide us with
significant protection for our investment portfolio. As of January 31, 2001,
other than approximately $2.7 million in delinquent rents and interest, of which
approximately $1.0 million is covered by credit enhancements, we are currently
receiving rents and interest in a timely manner from substantially all lessees
and mortgagors as provided under the terms of the leases or loans; we have
provided reserves against the remaining amounts.
Based upon information provided to us by lessees or mortgagors, certain
facilities are presently underperforming financially. Individual facilities may
underperform as a result of inadequate Medicaid reimbursement, low occupancy,
less than optimal patient mix, excessive operating costs, other operational
issues or capital needs. We believe that, even if these facilities remain at
current levels of performance, the lease and loan provisions contain sufficient
security to assure that material rental and mortgage obligations will continue
to be met for the remainder of the lease or loan terms. In the future it is
expected that some lessees may choose not to renew their leases on certain
properties at existing rental rates (see table below).
Many lessees have the right of first refusal to purchase the properties
during the lease term; many leases provide one or more five-year (or longer)
renewal options at existing lease rates and continuing additional rent formulas,
although certain leases provide for lease renewals at fair market value. Certain
lessees also have options to purchase the properties, generally for fair market
value, and generally at the expiration of the primary lease term and/or any
renewal term under the lease. If options are exercised, many such provisions
require lessees to purchase or renew several facilities together, precluding the
possibility of lessees purchasing or renewing only those facilities with the
best financial outcomes. Fifty-eight properties are not subject to purchase
options until 2008 or later, and an additional 309 leased properties do not have
any purchase options.
A table recapping lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance as of December 31,
2000 follows:
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Current Annualized Revenue of
----------------------------------------------------------
Properties Subject to
Lease Expirations, Purchase
Options and Properties Subject Estimated Revenue
Mortgage Maturities to Purchase Options Gain/(Loss) at Lease
Year (1) (2) Expiration (3), (4)
- -------------- ----------------------------- ------------------------- -----------------------------
(Amounts in thousands, except percentages)
2001 $ 15,545 $ 5,159 0.42% $ 1,233
2002 17,737 4,098 0.46 1,338
2003 9,444 4,070 (0.04) (117)
2004 67,738 56,243 (0.29) (850)
2005 27,706 17,325 -- --
Thereafter 153,481 58,503 -- --
----------------------------- ------------------------- ------------ -------------
$ 291,651 $ 145,398 0.55% $ 1,604
============================= ========================= ============ =============
(1) This column includes the revenue impact by year and the total
annualized rental and interest income associated with the properties
subject to lessees' renewal options and/or purchase options and
mortgage maturities.
(2) This column includes the revenue impact by year and the total
annualized rental and interest income associated with properties
subject to purchase options. If a purchase option is exercisable at
more than one date, the convention used in the table is to show the
revenue subject to the purchase option at the date management estimates
is most likely for exercise of the option. Although certain purchase
option periods commenced in earlier years, lessees have not exercised
their purchase options as of this time. The total for this column (2)
($145,398,000) is a component (subset) of column (1), the total current
annualized revenue of properties subject to lease expirations, purchase
options and mortgage maturities.
(3) Based on current market conditions, we estimate that there could be a
revenue gain/(loss) (compared to current rental rates) upon the
expiration of the current term of the leases in the percentages and
amounts shown in the table for lease expirations. The percentages are
computed by taking the possible revenue gain/(loss) as a percentage of
2000 total annualized revenue.
(4) We estimate that in addition to the possible reduction in income from
lease expirations, we may also have a decrease of approximately
$400,000 in 2001 due to the reinvestment of cash received from mortgage
maturities and facility sales. This amount is calculated based on
current interest rate levels and is not estimated in years subsequent
to 2001 due to the unpredictable levels of facility sales and interest
rates and their impact on sales and mortgage maturities.
There are numerous factors that could have an impact on lease renewals
or facility sales, including the financial strength of the lessee, expected
facility operating performance, the relative level of interest rates and
individual lessee financing options. Based upon management expectations of our
continued growth, the facilities subject to renewal and/or sale and mortgage
maturities and any possible rent loss therefrom should represent a small
percentage of revenue in the year of renewal or purchase.
Each lessee, at its expense, may make non-capital additions,
modifications or improvements to its leased property. All such alterations,
replacements and improvements must comply with the terms and provisions of the
lease, and become our or our affiliates' property upon termination of the lease.
Leases generally require the lessee to maintain adequate insurance on the leased
property, naming us or our affiliates and any mortgagees as additional insureds.
In certain circumstances, the lessee may self-insure pursuant to a prudent
program of self-insurance if the lessee or the guarantor of its lease
obligations has substantial net worth. In addition, each lease
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requires the lessee to indemnify us or our affiliates against certain
liabilities in connection with the leased property.
Development of Facilities
Since 1987, we have committed to the development of 58 facilities. As
of December 31, 2000, we have funded costs of approximately $407 million and
have completed all 58 facilities of our total development commitment. The
completed facilities comprise:
. 35 congregate care and assisted living facilities
. Seven long-term care facilities
. Seven medical office buildings
. Five rehabilitation hospitals
. Four acute care hospitals
Simultaneously with the commencement of each of these development
programs and prior to funding, we enter into a lease agreement with the
developer/operator. The base rent under the lease is generally established at a
rate equivalent to a specified number of basis points over 1) the yield on the
10 year United States Treasury note or 2) our cost of money at the commencement
of the lease.
Our build to suit development program generally includes a variety of
additional forms of credit enhancement and collateral beyond those provided by
the leases. During the development period, we generally require additional
security and collateral in the form of more than one of the following:
(a) Irrevocable letters of credit from financial institutions;
(b) Payment and performance bonds; and
(c) Completion guarantees by either one or a combination of the
developer/operator's parent entity, other affiliates or one or
more of the individual principals who control the
developer/operator.
In addition, before we advance any funds under the development
agreement, the developer/operator must provide:
(a) Satisfactory evidence in the form of an endorsement to our title
insurance policy that no intervening liens have been placed on
the property since the date of our previous advance;
(b) A certificate executed by the project architect that indicates
that all construction work completed on the project conforms with
the requirements of the applicable plans and specifications;
(c) A certificate executed by the general contractor that all work
requested for reimbursement has been completed; and
(d) Satisfactory evidence that the funds remaining unadvanced are
sufficient for the payment of all costs necessary for the
completion of the project in accordance with the terms and
provisions of the agreement.
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As a further safeguard during the development period, we generally will
retain 10% of construction funds incurred until we have received satisfactory
evidence that the project will be fully completed in accordance with the
applicable plans and specifications. We also monitor the progress of the
development of each project and the accuracy of the developer/operator's draw
requests by having its own in-house inspector perform regular on-site
inspections of the project prior to the release of any requested funds.
Investments in Consolidated and Non-Consolidated Joint Ventures
At December 31, 2000, we also had varying percentage interests in
several limited liability companies and partnerships that together own 58
facilities and one mortgage, as further discussed below:
(1) A 77% interest in a partnership (Health Care Property Partners) which
owns two acute care hospitals and 18 long-term care facilities and has
one mortgage on a long-term care facility.
(2) Interests of between 90% and 97% in six partnerships (HCPI/San Antonio
Ltd. Partnership, HCPI/Colorado Springs Ltd. Partnership, HCPI/Little
Rock Ltd. Partnership, HCPI/Kansas Ltd. Partnership, Fayetteville
Health Associates Ltd. Partnership and Wichita Health Associates Ltd.
Partnership), each of which was formed to own a comprehensive
rehabilitation hospital.
(3) A 90% interest in a limited liability company (HCPI Indiana, LLC) which
owns seven medical office buildings.
(4) A 54% interest in a limited liability company (HCPI Utah, LLC) which
owns 15 medical office buildings.
(5) An 80% interest in five limited liability companies (Vista-Cal
Associates, LLC; Statesboro Associates, LLC; Ft. Worth-Cal
Associates, LLC; Perris-Cal Associates, LLC; and Louisiana-Two
Associates, LLC) which own an aggregate of six long-term care
facilities.
(6) A 45% - 50% interest in four limited liability companies (Seminole
Shores Living Center, LLC - 50%; Edgewood Assisted Living Center, LLC -
45%; Arborwood Living Center, LLC - 45%; and Greenleaf Living Center,
LLC - 45%) each owning a congregate care facility.
Future Acquisitions
We anticipate acquiring additional healthcare related facilities and
leasing them to healthcare operators or investing in mortgages secured by
healthcare facilities.
Taxation of HCPI
We believe that we have operated in such a manner as to qualify for
taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of
1986, as amended (the "Code"), commencing with our taxable year ended December
31, 1985, and we intend to continue to operate in such a manner. No assurance
can be given that we have operated or will be able to continue to operate in a
manner so as to qualify or to remain so qualified. This summary is qualified in
its entirety by the applicable Code provisions, rules and regulations
promulgated thereunder, and administrative and judicial interpretations thereof.
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If we qualify for taxation as a REIT, we will generally not be required
to pay federal corporate income taxes on the portion of our net income that is
currently distributed to stockholders. This treatment substantially eliminates
the "double taxation" (i.e., at the corporate and stockholder levels) that
generally results from investment in a corporation. However, we will be required
to pay federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i)
which is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) which would be taxable, but for
Sections 856 through 860 of the Code, as a domestic corporation; (iv) which is
neither a financial institution nor an insurance company subject to certain
provisions of the Code; (v) the beneficial ownership of which is held by 100 or
more persons; (vi) during the last half of each taxable year not more than 50%
in value of the outstanding stock of which is owned, actually or constructively,
by five or fewer individuals; and (vii) which meets certain other tests,
described below, regarding the amount of its distributions and the nature of its
income and assets. The Code provides that conditions (i) to (iv), inclusive,
must be met during the entire taxable year and that condition (v) must be met
during at least 335 days of a taxable year of 12 months, or during a
proportionate part of a taxable year of less than 12 months.
There presently are two gross income requirements. First, at least 75%
of our gross income (excluding gross income from "prohibited transactions" as
defined below) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property or from
certain types of temporary investment income. Second, at least 95% of our gross
income (excluding gross income from prohibited transactions) for each taxable
year must be derived from income that qualifies under the 75% test and all other
dividends, interest and gain from the sale or other disposition of stock or
securities. A "prohibited transaction" is a sale or other disposition of
property (other than foreclosure property) held for sale to customers in the
ordinary course of business.
At the close of each quarter of our taxable year, we must also satisfy
three tests relating to the nature of our assets. First, at least 75% of the
value of our total assets must be represented by real estate assets (including
stock or debt instruments held for not more than one year, purchased with the
proceeds of a stock offering or long-term (more than five years) public debt
offering by us), cash, cash items and government securities. Second, not more
than 25% of our total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, the value of any one issuer's securities owned by us may not exceed 5% of
the value of our total assets and we may not own more than 10% of any one
issuer's outstanding voting securities.
In 1999, legislation was enacted that modifies some of the rules that
apply to REITs. Specifically, the legislation includes a provision that limits a
REIT's ability to own more than 10% of the vote or value of the securities of a
non-REIT corporation, other than certain debt securities. However, the
legislation would allow a REIT to own any percentage of the voting stock and
value of the securities of a corporation which jointly elects with the REIT to
be a taxable REIT subsidiary, provided certain requirements are met. A taxable
REIT subsidiary generally may engage in any business, including the provision of
customary or noncustomary services to tenants of its parent REIT and of others,
except a "taxable REIT subsidiary" may not manage or operate a healthcare
facility. Also, the legislation imposes a 100% tax on a REIT if its rental,
service or
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other agreements with its taxable REIT subsidiary are not on arms' length terms.
This legislation will require us to monitor the securities we own in other
corporations, and possibly restructure such investments if we own more than 10%
of the value of the securities of any of these corporations. The provisions
discussed above are generally effective for taxable years ending after December
31, 2000, and, assuming specified requirements are met, do not apply to
investments in place on or before July 12, 1999. As is presently the case, a
REIT may continue to own 100% of the stock of a qualified REIT subsidiary, as
defined below.
We own interests in various partnerships and limited liability
companies. In the case of a REIT that is a partner in a partnership or a member
of a limited liability company that is treated as a partnership under the Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company and will be deemed to be entitled
to the income of the partnership or limited liability company attributable to
such share. The ownership of an interest in a partnership or limited liability
company by a REIT may involve special tax risks, including the challenge by the
Internal Revenue Service (the "Service") of the allocations of income and
expense items of the partnership or limited liability company, which would
affect the computation of taxable income of the REIT, and the status of the
partnership or limited liability company as a partnership (as opposed to an
association taxable as a corporation) for federal income tax purposes. We also
own interests in a number of subsidiaries which are intended to be treated as
qualified REIT subsidiaries (each a "QRS"). The Code provides that such
subsidiaries will be ignored for federal income tax purposes and all assets,
liabilities and items of income, deduction and credit of such subsidiaries will
be treated as assets, liabilities and such items of ours. If any partnership,
limited liability company, or subsidiary in which we own an interest were
treated as a regular corporation (and not as a partnership or QRS) for federal
income tax purposes, we would likely fail to satisfy the REIT asset tests
described above and would therefore fail to qualify as a REIT. We believe that
each of the partnerships, limited liability companies, and subsidiaries in which
we own an interest will be treated for tax purposes as a partnership (in the
case of a partnership or limited liability company) or QRS, respectively,
although no assurance can be given that the Service will not successfully
challenge the status of any such organization.
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (A) the sum of (i) 95% of our "real estate investment trust taxable
income" (computed without regard to the dividends paid deduction and our net
capital gain) and (ii) 95% of the net income, if any (after tax), from
foreclosure property, minus (B) the sum of certain items of non-cash income.
Pursuant to recently enacted legislation, the 95% distribution requirement
discussed above will be reduced to 90%, effective for taxable years beginning
after December 31, 2000. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before we timely
file our tax return for such year, if paid on or before the first regular
dividend payment date after such declaration and if we so elect and specify the
dollar amount in our tax return. To the extent that we do not distribute all of
our net long-term capital gain or distribute at least 95%, but less than 100%,
of our "real estate investment trust taxable income", as adjusted, we will be
required to pay tax thereon at regular corporate tax rates. Furthermore, if we
should fail to distribute during each calendar year at least the sum of (i) 85%
of our ordinary income for such year, (ii) 95% of our capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, we
would be required to pay a 4% excise tax on the excess of such required
distributions over the amounts actually distributed.
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If we fail to qualify for taxation as a REIT in any taxable year, and
certain relief provisions do not apply, we will be required to pay tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify will not be deductible by us nor will they be required to be
made. Unless entitled to relief under specific statutory provisions, we will
also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost. It is not possible to
state whether in all circumstances we would be entitled to the statutory relief.
Failure to qualify for even one year could substantially reduce distributions to
stockholders and could result in our incurring substantial indebtedness (to the
extent borrowings are feasible) or liquidating substantial investments in order
to pay the resulting taxes.
On November 4, 1999, we acquired AHE in a merger. AHE had also made an
election to be taxed as a REIT. If AHE failed to qualify as a REIT for any of
its taxable years, it would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at regular corporate
rates. As successor-in-interest to AHE, we would be required to pay this tax. In
addition, in connection with the merger, and to the extent that the merger is
treated as a reorganization under the Code, we succeeded to various tax
attributes of AHE, including any undistributed C corporation earnings and
profits of AHE. A C corporation is generally defined as a corporation which is
required to pay a full corporate-level tax. If AHE qualified as a REIT for all
years prior to the merger and the merger is treated as a reorganization under
the Code, then AHE would not have any undistributed C corporation earnings and
profits. If, however, AHE failed to qualify as a REIT for any year, then it is
possible that we acquired undistributed C corporation earnings and profits from
AHE. If we did not distribute these C corporation earnings and profits prior to
the end of 1999, we would fail to qualify as a REIT. AHE's counsel rendered
opinions in connection with the merger to the effect that, based on the facts,
representations and assumptions stated therein, commencing with its taxable year
ended December 31, 1987, AHE was organized in conformity with the requirements
for qualification and taxation as a REIT under the Code, and its method of
operation enabled it to meet, through the effective time of the merger, the
requirements for qualification and taxation as a REIT under the Code.
We and our stockholders may be required to pay state or local tax in
various state or local jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of us and our
stockholders may not conform to the federal income tax consequences discussed
above.
Government Regulation
The healthcare industry is heavily regulated by federal, state and
local laws. This government regulation of the healthcare industry affects us
because:
(1) The financial ability of lessees to make rent and debt payments to us
may be affected by governmental regulations such as licensure,
certification for participation in government programs, and government
reimbursement, and
(2) Our additional rents are often based on our lessees' gross revenue from
operations, which in turn are affected by the amount of reimbursement
such lessees receive from the government.
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These laws and regulations are subject to frequent and substantial
changes resulting from legislation, adoption of rules and regulations, and
administrative and judicial interpretations of existing law. These changes may
have a dramatic effect on the definition of permissible or impermissible
activities, the relative costs associated with doing business and the amount of
reimbursement by both government and other third-party payors. These changes may
be applied retroactively. The ultimate timing or effect of these changes cannot
be predicted. The failure of any borrower of funds from us or lessee of any of
our properties to comply with such laws, requirements and regulations could
affect its ability to operate its facility or facilities and could adversely
affect such borrower's or lessee's ability to make debt or lease payments to us.
Fraud and Abuse. There are various federal and state laws prohibiting
fraud by healthcare providers, including criminal provisions which prohibit
filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund overpayments or
improper payments. Violation of these federal provisions is a felony punishable
by up to five years imprisonment and/or a $25,000 fine. Civil provisions
prohibit the knowing filing of a false claim or the knowing use of false
statements to obtain payment. The penalties for such violations may include
fines ranging from $5,000 to $10,000, plus treble damages, for each claim filed.
There are also laws that attempt to eliminate fraud and abuse by
prohibiting payment arrangements that include compensation for patient
referrals. The federal Anti-Kickback Law prohibits, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for, or to induce, the referral of Medicare, Medicaid, or other federal health
care program patients. A wide array of relationships and arrangements, including
ownership interests in a company by persons who refer or who are in a position
to refer patients, as well as personal services agreements, have under certain
circumstances, been alleged or been found to violate these provisions. In
addition to the Anti-Kickback Statute, federal law also restricts physicians who
have financial relationships with hospitals and other providers of healthcare
services from making referrals for certain services to those providers. In
August 1995, the federal government released final regulations addressing
physician referral prohibitions relating to financial relationships with
entities that furnish clinical laboratory services. In January 2001, the federal
government released the first portion of final regulations that explain the
scope of the physician referral prohibition with respect to entities that
furnish certain "designated health services." The provisions contained within
the January 2001 package are expected to take effect sometime in early 2002.
These regulations will impact healthcare providers' financial and contractual
arrangements with physicians.
State and federal governments are devoting increasing attention and
resources to anti-fraud initiatives against healthcare providers. The Health
Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act
of 1997 expand the penalties for healthcare fraud, including broader provisions
for the exclusion of providers from the Medicare and Medicaid programs. Further,
under Operation Restore Trust, a major anti-fraud demonstration project, the
Office of Inspector General of the U.S. Department of Health and Human Services,
in cooperation with other federal and state agencies, has focused on the
activities of skilled nursing facilities, home health agencies, hospices and
durable medical equipment suppliers in certain states, including California, in
which we have properties. Due to the success of Operation Restore Trust, the
project has been
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expanded to numerous other states and to additional providers, including
providers of ancillary nursing home services.
The federal government has investigated some of our lessees for alleged
violations of Medicare regulations. One lessee, Vencor, Inc., a long-term care
provider, announced in August 2000 that it will enter into a five-year Corporate
Integrity Agreement with the Office of Inspector General, which will partially
resolve ongoing federal investigations concerning alleged quality of care
problems and billing irregularities at Vencor facilities. This Corporate
Integrity Agreement will require Vencor to implement a broad variety of controls
to ensure compliance with Medicare regulations and will also require Vencor to
develop a comprehensive plan to improve the quality of care furnished at its
facilities.
Other lessees have been faced with whistleblower suits by former
employees, alleging non-compliance with Medicare rules and regulations. For
instance, the U.S. Department of Justice recently joined a whistleblower suit
filed against Integrated Health Services, Inc., which alleges that the company
admitted and retained patients in its long-term care hospitals who did not
require acute care and billed Medicare for these allegedly unnecessary services.
Some Medicare fiscal intermediaries (private companies that contract
with the Health Care Financing Administration("HCFA") to administer the Medicare
program) have also increased scrutiny of cost reports filed by long-term care
providers. Violations of such laws and regulations may jeopardize a borrower's
or lessee's ability to operate a facility or to make rent and debt payments,
thereby potentially adversely affecting us. Our lease arrangements with lessees
may also be subject to these fraud and abuse laws. Federal and state laws
governing illegal rebates and kickbacks regulate contingent or percentage rent
arrangements where our co-investors are physicians or others in a position to
refer patients to the facilities. Although only limited interpretive or
enforcement guidance is available, we have structured our rent arrangements in a
manner which we believe complies with such laws and regulations.
Based upon information we have periodically received from our operators
over the terms of their respective leases and loans, we believe that the
facilities in which we have investments are in substantial compliance with the
various regulatory requirements applicable to them, although there can be no
assurance that the operators are in compliance or will remain in compliance in
the future.
Licensure Risks. Healthcare facilities must obtain licensure to
operate. Failure to obtain licensure or loss of licensure would prevent a
facility from operating. These events could adversely affect the facility
operator's ability to make rent and debt payments. State and local laws also may
regulate expansion, including the addition of new beds or services or
acquisition of medical equipment, and occasionally the contraction of healthcare
facilities by requiring certificate of need or other similar approval programs.
In addition, healthcare facilities are subject to the Americans with
Disabilities Act and building and safety codes which govern access to and
physical design requirements and building standards for facilities.
Environmental Matters. A wide variety of federal, state and local
environmental and occupational health and safety laws and regulations affect
healthcare facility operations. Under various federal, state and local
environmental laws, ordinances and regulations, an owner of real property or a
secured lender (such as us) may be liable for the costs of removal or
remediation of hazardous or toxic substances at, under or disposed of in
connection with such property, as well as
-21-
other potential costs relating to hazardous or toxic substances (including
government fines and damages for injuries to persons and adjacent property).
Such laws often impose such liability without regard to whether the owner or
secured lender knew of, or was responsible for, the presence or disposal of such
substances and may be imposed on the owner or secured lender in connection with
the activities of an operator of the property. The cost of any required
remediation, removal, fines or personal or property damages and the owner's or
secured lender's liability therefore could exceed the value of the property,
and/or the assets of the owner or secured lender. In addition, the presence of
such substances, or the failure to properly dispose of or remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral which, in turn, would
reduce our revenues.
Although the mortgage loans that we provide and leases covering our
properties require the borrower and the lessee to indemnify us for certain
environmental liabilities, the scope of such obligations may be limited and we
cannot assure that any such borrower or lessee would be able to fulfill its
indemnification obligations.
Medicare and Medicaid Programs. Sources of revenue for lessees and
mortgagors may include the federal Medicare program, state Medicaid programs,
private insurance carriers, healthcare service plans and health maintenance
organizations, among others. Efforts to reduce costs by these payors will likely
continue, which may result in reduced or slower growth in reimbursement for
certain services provided by some of our operators. In addition, the failure of
any of our operators to comply with various laws and regulations could
jeopardize their ability to continue participating in the Medicare and Medicaid
programs.
Medicare payments for long-term and rehabilitative care are based on
allowable costs plus a return on equity for proprietary facilities. Medicare
payments to acute care hospitals for inpatient services are based on the
Prospective Payment System. Under the Prospective Payment System, a hospital is
paid a prospectively established rate based on the category of the patient's
diagnosis ("Diagnostic Related Groups" or "DRGs"). Beginning in 1991, Medicare
payments began to phase-in the Prospective Payment System for capital related
inpatient costs over a period of years. Thus, Medicare reimbursement to
hospitals for capital-related inpatient costs began using a federal rate rather
than the cost-based reimbursement system previously used. DRG rates are subject
to adjustment on an annual basis as part of the federal budget reconciliation
process. The Balanced Budget Act of 1997 expanded the Prospective Payment System
to include skilled nursing facilities, home health agencies, hospital outpatient
departments, and rehabilitation hospitals. See "Healthcare Reform" section and
further discussion below.
Beginning in August 2000, the Health Care Financing Administration
implemented a prospective payment system for hospital outpatient services. All
outpatient services paid under this new system are classified into groups called
Ambulatory Payment Classifications ("APCs"). Each APC has its own prospectively
established fixed payment rate. Depending upon the services provided, hospitals
may be paid for more than one APC during a single patient encounter. APC rates
are subject to adjustment on an annual basis.
Medicaid programs generally pay for acute and rehabilitative care based
on reasonable costs at fixed rates; long-term care facilities are generally
reimbursed using fixed daily rates. Both Medicare and Medicaid payments are
generally below retail rates for lessee-operated facilities. Increasingly,
states have introduced managed care contracting techniques in the administration
of
-22-
Medicaid programs. Such mechanisms could have the impact of reducing utilization
of and reimbursement to lessee-operated facilities .
Third party payors in various states and areas base payments on costs,
retail rates or, increasingly, negotiated rates. Negotiated rates can include
discounts from normal charges, fixed daily rates and prepaid capitated rates.
Skilled Nursing Facility Prospective Payment System. Up until July 1,
1998, Medicare and most state Medicaid programs utilized a cost-based
reimbursement system for skilled nursing facilities, which reimbursed these
facilities for the reasonable direct and indirect allowable costs incurred in
providing routine services plus in certain states, a return on equity, subject
to certain cost ceilings. These costs normally included allowances for
administrative and general costs as well as the costs of property and equipment
(depreciation and interest, fair rental allowance or rental expense). In certain
states, cost-based reimbursement was typically subject to retrospective
adjustment through cost report settlement, and for certain states, payments made
to a facility on an interim basis that were subsequently determined to be less
than or in excess of allowable costs could be adjusted through future payments
to the affected facility and to other facilities owned by the same owner. State
Medicaid reimbursement programs varied as to the methodology used to determine
the level of allowable costs which were reimbursed to operators.
Beginning on July 1, 1998, the congressionally mandated Prospective
Payment System was implemented for skilled nursing facilities. Under the
Prospective Payment System, skilled nursing facilities are paid a case-mix
adjusted federal per diem rate for Medicare-covered services provided by skilled
nursing facilities. The per diem rate is calculated to cover routine service
costs, ancillary costs and capital-related costs. The phased-in implementation
of the Prospective Payment System for skilled nursing facilities began with the
first cost-reporting period beginning on or after July 1, 1998. The Prospective
Payment System is expected to be fully implemented by July 1, 2001. The effect
of the implementation of the Prospective Payment System on a particular skilled
nursing facility will vary in relation to the amount of revenue derived from
Medicare patients for each skilled nursing facility.
Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare Prospective Payment System reimbursement. In part
because of the uncertainty as to the effect of the Prospective Payment System on
skilled nursing facilities, in November 1998, Standard & Poor's placed many
skilled nursing facility companies on "credit watch" because of the potential
negative impact of the implementation of the Prospective Payment System on the
financial condition of skilled nursing facilities, including the ability to make
interest and principal payments on outstanding borrowings. The financial
condition of many long-term care providers worsened following implementation of
the Medicare Prospective Payment System, and a number of long-term care
providers filed for bankruptcy protection during 1999 and the first quarter of
2000. Our tenants that have filed for Chapter XI bankruptcy protection are Sun
Healthcare Group, Integrated Health Services, Inc., Mariner Post-Acute Network,
Inc., Lenox Healthcare, Inc., Texas Health Enterprises, Inc., Genesis Health
Ventures and Vencor, Inc. Lenox Healthcare, Inc. and Texas Health Enterprises,
Inc. have both exited bankruptcy.
Long-Term Care Facilities. Long-term care facilities are regulated
primarily through the licensing of such facilities against a common background
established by federal law enacted as part of the Omnibus Budget Reconciliation
Act of 1987. Regulatory authorities and licensing standards
-23-
vary from state to state, and in some instances from locality to locality. These
standards are constantly reviewed and revised. State agencies periodically
inspect facilities to determine whether they comply with state and/or federal
regulations, at which time deficiencies may be identified. The facilities must
correct these deficiencies as a condition to continued licensing or
certification and participation in government reimbursement programs. Depending
on the nature of such deficiencies, remedies can be routine or costly.
Similarly, compliance with regulations which cover a broad range of areas such
as patients' rights, staff training, quality of life and quality of resident
care may increase facility start-up and operating costs.
In 1999 and 2000, Congress increased funding for state health agencies
in order to allow state agencies that conduct skilled nursing facility
inspections to intensify Medicare and Medicaid regulatory enforcement efforts.
The Health Care Financing Administration has instructed these state agencies to
increase the number of unannounced nursing home inspections and to investigate
consumer complaints about skilled nursing facilities promptly. As a result of
these increased enforcement efforts, some of our lessees may be subject to fines
and other penalties that could increase their operating costs.
Acute Care Hospitals. Acute care hospitals are also subject to
extensive federal, state and local regulation. Acute care hospitals undergo
periodic inspections regarding standards of medical care, equipment and hygiene
as a condition of licensure. Various licenses and permits also are required for
purchasing and administering narcotics, operating laboratories and pharmacies
and the use of radioactive materials and certain equipment. Each of our
facilities, the operation of which requires accreditation, is accredited by the
Joint Commission on Accreditation of Healthcare Organizations. Such
accreditation may be a more cost-effective and time-efficient method of meeting
requirements for continued licensing and for participation in government
sponsored provider programs.
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under the Prospective Payment System, each
state must have a Peer Review Organization carry out federally funded mandated
reviews of Medicare patient admissions, treatment and discharges in acute care
hospitals.
Congregate Care and Assisted Living Facilities. Certain congregate care
and assisted living facilities are subject to federal, state and local
licensure, certification and inspection laws. These laws regulate, among other
matters, the number of licensed beds, the provision of services, equipment,
staffing and operating policies and procedures. Failure to comply with these
laws and regulations could result in the denial of reimbursement in a few states
and decertification from the Medicaid program, the imposition of fines,
suspension or, and in extreme cases, the revocation of a facility's license or
closure of a facility. Such actions may have an effect on the revenue of the
operators of properties owned by or mortgaged to us and therefore adversely
impact us.
Physician Group Practice Clinics. Physician group practice clinics are
subject to extensive federal, state and local legislation and regulation. Every
state imposes licensing requirements on individual physicians and on facilities
and services operated by physicians. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
with which physician groups may have contracts. Many states require regulatory
approval, including certificates of need, before establishing certain types of
physician-directed clinics, offering certain services or making expenditures in
excess of statutory thresholds for healthcare equipment,
-24-
facilities or programs. In connection with the expansion of existing operations
and the entry into new markets, physician clinics and affiliated practice groups
may become subject to compliance with additional regulation.
Rehabilitation Hospitals. Rehabilitation hospitals are subject to
extensive federal, state and local legislation, regulation, inspection and
licensure requirements similar to those of acute care hospitals. Many states
have adopted a "patient's bill of rights" which provides for certain higher
standards for patient care that are designed to decrease restrictions and
enhance dignity in treatment.
-25-
Healthcare Reform
The healthcare industry has continually faced various challenges,
including increased government and private payor pressure on healthcare
providers to control costs, the migration of patients from acute care facilities
into extended care and home care settings, and the vertical and horizontal
consolidation of healthcare providers. The pressure to control healthcare costs
intensified during 1994 and 1995 as a result of the national healthcare reform
debate and continues as Congress attempted to slow the rate of growth of federal
healthcare expenditures as part of its effort to balance the federal budget.
Changes in the law, new interpretations of existing laws, and changes
in payment methodology may have a dramatic effect on the definition of
permissible or impermissible activities, the relative costs associated with
doing business and the amount of reimbursement furnished by both government and
other third-party payors. These changes may be applied retroactively. The
ultimate timing or effect of legislative efforts cannot be predicted and may
impact us in different ways.
These changes include:
(1) The adoption of the Medicare+Choice program, which expands
Medicare beneficiaries' choices to include traditional
Medicare fee-for-service, private fee-for-service medical
savings accounts, various managed care plans, and provider
sponsored organizations, among others,
(2) The expansion and restriction of reimbursement for various
Medicare benefits,
(3) The adoption of a Prospective Payment System for skilled
nursing facilities, home health agencies, hospital outpatient
departments, and rehabilitation hospitals,
(4) The repeal of the Boren amendment payment standard for
Medicaid so that states have the exclusive authority to
determine provider rates and providers have no federal right
of action,
(5) The reduction in Medicare disproportionate share payments to
hospitals, and
(6) The removal of the $150,000,000 limit on tax-exempt bonds for
nonacute hospital capital projects.
The Balanced Budget Act of 1997, signed by President Clinton on August
5, 1997, was designed to produce several billion dollars in net savings for
Medicaid over the five years following enactment. In addition, the Balanced
Budget Act repealed the Boren Amendment under which states were required to pay
long-term care providers, including skilled nursing facilities, rates that were
"reasonable and adequate to meet the cost which must be incurred by efficiently
and economically operated facilities". As a result of the repeal of the Boren
Amendment, states are now required by the Balanced Budget Act to do the
following with respect to skilled nursing facility rates:
-26-
. Use a public process for determining rates,
. Publish proposed and final rates, the methodologies underlying the
rates, and justifications for the rates, and
. Give methodologies and justifications.
When determining rates, states are required to take into account the
situation of skilled nursing facilities that serve a disproportionate number of
low-income patients with special needs. The Secretary of Health and Human
Services is required to conduct a study concerning the effect of state
rate-setting methodologies on the access to and the quality of services provided
to Medicaid beneficiaries and report the study results to Congress. The Balanced
Budget Act also provides the federal government with expanded enforcement powers
to combat waste, fraud and abuse in delivery of healthcare services. Though
applicable to payments for services furnished on or after October 1, 1997, the
new requirements are not retroactive. Thus, states that have not proposed
changes in their payment methods or standards, or changes in rates for items and
services furnished on or after October 1, 1997, need not immediately implement a
Balanced Budget Act public approval process. The Balanced Budget Act of 1997
also strengthened the anti-fraud and abuse laws to provide for stiffer penalties
for fraud and abuse violations.
In November 1999, President Clinton signed into law the Medicare,
Medicaid and State Children's Health Insurance Programs ("SCHIP") Balanced
Budget Refinement Act of 1999 ("Budget Refinement Act") which reduces some of
the reimbursement cutbacks enacted under the Balanced Budget Act. The Budget
Refinement Act delayed implementation of cost-cutting measures and increased
payments to some sectors of the healthcare industry. Long-term care facilities
received increased payments under the Budget Refinement Act. Disproportionate
share hospital payment cutbacks were lessened. The Budget Refinement Act
provided that the change to a prospective payment system for outpatient hospital
services must be budget neutral and not result in reduced reimbursement. The
extent of the financial relief provided by the Budget Refinement Act is
estimated to be $16 billion over five years.
Continuing this trend, President Clinton signed the Medicare, Medicaid
and SCHIP Benefits Improvement and Protection Act of 2000 ("Benefits Improvement
Act") in December 2000, which provides for across-the-board Medicare and
Medicaid payment increases for most healthcare providers. Overall, passage of
the Benefits Improvement Act is expected to result in approximately $35 billion
in additional reimbursement for providers over the next five years. In
particular, skilled nursing facility payments are expected to increase by an
average of 3.2 percent in 2001. Additionally, the Benefits Improvement Act
extended the moratorium on implementation of the cap for outpatient therapy
services throughout 2002. Payments for home health services, hospice services,
and long-term care hospital services will also increase under the provisions of
the Benefits Improvement Act.
Other federal initiatives will result in greater operational
expenditures for healthcare providers. For instance, the Health Insurance
Portability and Accountability Act of 1996 requires a significant overhaul of
healthcare information systems to protect individual medical information and to
standardize formatting of healthcare claims. In November 1999, the Department of
Health and Human Services released proposed regulations to protect the
confidentiality of individual health information. Final privacy regulations were
released in December 2000. While the privacy regulations are likely to become
effective in early 2001, the U.S. Department of Health and Human
-27-
Services will delay enforcement of the privacy regulations until at least
February 2003. The federal government has estimated that the United States
healthcare industry will spend approximately $18 billion over a ten-year period
in order to achieve compliance with these new privacy requirements.
In August 2000, the U.S. Department of Health and Human Services also
released final regulations that delineated uniform, national standards for the
electronic exchange of medical information and filing of claims. Healthcare
providers must comply with these regulations by October 2002. The federal
government estimates that compliance will cost healthcare providers
approximately $3.5 billion. However, the federal government has predicted that
implementation of these uniform standards will help to speed conversion from
manual to electronic billing systems, resulting in cost savings of approximately
$20 billion over the next decade for healthcare providers.
In addition to the reforms enacted and considered by Congress from time
to time, state legislatures periodically consider various healthcare reform
proposals. Congress and state legislatures can be expected to continue to review
and assess alternative healthcare delivery systems, new regulatory enforcement
initiatives, and new payment methodologies. Public debate of these issues can be
expected to continue in the future. There are numerous initiatives at the
federal and state levels for comprehensive reforms affecting the payment for and
delivery of healthcare services. Changes in the law, new interpretations of
existing laws, and changes in payment methodology and enforcement priorities may
have a dramatic effect on the definition of permissible or impermissible
activities, the relative costs associated with doing business and the amount of
reimbursement by both government and other third-party payors. These changes may
be applied retroactively. The ultimate timing or effect of legislative efforts
cannot be predicted and may impact us in different ways.
In 1998, health expenditures in the United States amounted to $1.1
trillion, representing 13.5 percent of Gross Domestic Product. The Health Care
Financing Administration reported that 1998 spending for healthcare continued a
five-year trend of low growth to below six percent annually, but reflected the
highest annual percentage increase since 1993. Also, for the first time in a
decade, public spending grew more slowly than private healthcare spending. The
primary reason for the slow growth in public spending was Medicare, which was
significantly affected by the adoption of reimbursement restriction measures in
the Balanced Budget Act of 1997. Fraud savings also contributed. Because
economic growth generally matched growth in healthcare spending since 1993, the
healthcare share of gross domestic product has remained roughly the same since
1993. We believe that government and private efforts to contain or reduce
healthcare costs will continue to some extent. These trends are likely to lead
to reduced or slower growth in reimbursement for certain services provided by
some of our lessees and mortgagors. We believe that the vast nature of the
healthcare industry, the financial strength and operating flexibility of our
operators and the diversity of our portfolio will mitigate the impact of any
such diminution in reimbursements. However, we cannot predict whether any of the
above proposals or any other proposals will be adopted and, if adopted, no
assurance can be given that the implementation of such reforms will not have a
material adverse effect on our financial condition or results of operations.
-28-
Objectives and Policies
We are organized to invest in income-producing healthcare related
facilities. In evaluating potential investments, we consider such factors as:
(1) The geographic area, type of property and demographic profile;
(2) The location, construction quality, condition and design of the
property;
(3) The current and anticipated cash flow and its adequacy to meet
operational needs and lease obligations and to provide a competitive
market return on equity to our investors;
(4) The potential for capital appreciation, if any;
(5) The growth, tax and regulatory environment of the communities in which
the properties are located;
(6) Occupancy and demand for similar health facilities in the same or
nearby communities;
(7) An adequate mix of private and government sponsored patients;
(8) Potential alternative uses of the facilities; and
(9) Prospects for liquidity through financing or refinancing.
There are no limitations on the percentage of our total assets that may
be invested in any one property or partnership. The Investment Committee of the
Board of Directors may establish limitations as it deems appropriate from time
to time. No limits have been set on the number of properties in which we will
seek to invest, or on the concentration of investments in any one facility or
any one city or state. We acquire our investments primarily for income.
At December 31, 2000, we had three series of preferred stock and one
class of debt securities which are senior to the common stock. We may, in the
future, issue additional debt or equity securities which will be senior to the
common stock. We have authority to offer shares of our capital stock in exchange
for investments which conform to our standards and to repurchase or otherwise
acquire our shares or other securities.
We may incur additional indebtedness when, in the opinion of our
management and directors, it is advisable. For short-term purposes we from time
to time negotiate lines of credit, or arrange for other short-term borrowings
from banks or otherwise. We arrange for long-term borrowings through public
offerings or from institutional investors.
In addition, we may incur additional mortgage indebtedness on real
estate which we have acquired through purchase, foreclosure or otherwise. Where
leverage is present on terms deemed favorable, we invest in properties subject
to existing loans, or secured by mortgages, deeds of trust or similar liens on
the properties. We also may obtain non-recourse or other mortgage financing on
unleveraged properties in which we have invested or may refinance properties
acquired on a leveraged basis.
On June 20, 2000 we adopted a Stockholder Rights Plan and declared a
dividend of one preferred share purchase right for each outstanding share of our
common stock. The rights will become exercisable if a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% of more of our common stock or following the
commencement or announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 15% or
-29-
more of our common stock. After the rights become exercisable, each right will
entitle the holder to purchase from us one one-hundredth (1/100th) of a share of
Series D Junior Participating Preferred Stock at a price of $95 per one one-
hundredth (1/100th) of a Preferred Share, subject to certain anti-dilution
adjustments. The rights will at no time have any voting rights.
Each Series D Preferred Share purchasable upon exercise of the rights
will be entitled, when, as and if declared, to a minimum preferential quarterly
dividend payment of $1.00 per share but will be entitled to an aggregate
dividend of 100 times the dividend, if any, declare per common share. In the
event our liquidation, dissolution or winding up, the holders of the Series D
Preferred Shares will be entitled to a preferential liquidation payment of $100
per share plus any accrued but unpaid dividends but will be entitled to an
aggregate payment of 100 times the payment made per common share. Each Series D
Preferred Share will have 100 votes and will vote together with our common
stock. Finally, in the event of any merger, consolidation or other transaction
in which share of our common stock are exchanged, each Series D Preferred Share
will be entitled to receive 100 times the amount received per share of common
stock. Series D Preferred Shares will not be redeemable. The rights are
protected by customary anti-dilution provisions. Because of the nature of the
Preferred Share's dividend, liquidation and voting rights, the value of one
one-hundredth of a Preferred Share purchasable upon exercise of each Right
should approximate the value of one Common Share.
Under certain circumstances, each holder of a right, other than rights
that are or were acquired or beneficially owned by a person or group acquiring
15% or more (which rights will thereafter be void), will have the right to
receive upon exercise that number of common shares having a market value of two
times the then current purchase price of one right. In the event that, after a
person acquired 15% or more of our common stock, we were acquired in a merger or
other business combination transaction or more than 50% of our assets or earning
power were sold, each holder of a right shall have the right to receive, upon
the exercise thereof at the then current purchase price of the right, that
number of shares of common stock of the acquiring company which at the time of
such transaction would have a market value of two times the then current
purchase price of one right.
The rights may be redeemed by the Board of Directors at any time prior
to the time a person or group acquires 15% or more of our common stock.
The rights will expire on July 27, 2010 (unless earlier redeemed,
exchanged or terminated). The Bank of New York is the Rights Agent.
The rights are designed to assure that all of our stockholders receive
fair and equal treatment in the event of any proposed takeover of us and to
guard against partial tender offers, open market accumulations and other abusive
tactics to gain control of us without paying all stockholders a control premium.
The rights will cause substantial dilution to a person or group that acquires
15% or more of our stock on terms not approved by our Board of Directors. The
rights should not interfere with any merger or other business combination
approved by the Board of Directors at any time prior to the first date that a
person or group acquires 15% or more of our common stock.
We will not, without the prior approval of a majority of directors,
acquire from or sell to any director, officer or employee of HCPI, or any
affiliate thereof, as the case may be, any of our assets or other property.
-30-
We provide to our stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by our Board of
Directors and may be changed without stockholder approval.
-31-
Health Care Property Investors
----------------------------------------------
50%
Health Care Investors, III
-- HCPI Mortgage Corp. > 50%
100%
-- Texas HCP, Inc. > 99%
100% Texas HCP Holding, L.P. > HCPI/San Antonio
LP
\ 1% / 90%
-- Texas HCP G.P., Inc. > \ /
100% \99%/
Texas HCP Medical Office Buildings, L.P.
-- Texas HCP Medical G.P., Inc. > 1%
100%
-- HCPI Trust
100%
-- HCPI Knightdale, Inc.
100%
-- Meadowdome LLC
100%
-- AHE of Somerville, Inc.
100%
-- AHP of Nevada, Inc.
100%
-- AHP of Washington, Inc.
100%
-- Tucson-Cal Associates, LLC
100%
-- HCP Medical Office Buildings I, LLC
100%
-- HCP Medical Office Buildings II, LLC
100%
-- Consolidated Partnerships and Limited Liability Companies:
Health Care Property Partners - 77%
HCPI/Colorado Springs LP - 97%
HCPI Indiana LLC - 90%
HCPI Kansas LP - 97%
HCPI/Little Rock LP - 97%
HCPI/Utah LLC - 54% (Owns 100% of HCPI Davis North LLC)
Fayetteville Health Associates LP - 97%
Wichita Health Associates LP - 97%
Various Non-Consolidated LLCs*
* HCPI or a qualified REIT subsidiary is non-managing member and has a 45%-
80% interest in the following limited liability companies:
Louisiana-Two Associates, LLC - 80% Arborwood Living Center, LLC - 45%
Perris-Cal Associates, LLC - 80% Edgewood Assisted Living LLC - 45%
Statesboro Associates, LLC - 80% Greenleaf Living Center LLC - 45%
Vista-Cal Associates, LLC - 80% Seminole Shores Living Center - 50%
Ft. Worth-Cal Assoc. LLC - 80%
-32-
Item 2. PROPERTIES
See Item 1. for details.
Item 3. LEGAL PROCEEDINGS
During 2000, we were not a party to any material legal proceedings.
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
Our common stock is listed on the New York Stock Exchange. Set forth
below for the fiscal quarters indicated are the reported high and low closing
prices of our common stock on the New York Stock Exchange.
2000 1999 1998
High Low High Low High Low
------------------------------------------------------------------------------------------
First Quarter $26 $23 11/16 $31 3/8 $26 5/8 $39 1/4 $35 3/16
Second Quarter 29 25 32 15/16 27 5/16 37 33 7/16
Third Quarter 30 1/2 26 3/8 28 9/16 24 11/16 37 1/2 30 3/16
Fourth Quarter 29 15/16 27 1/4 27 1/8 21 15/16 35 9/16 28 7/8
As of March 1, 2001 there were approximately 3,423 stockholders of
record and approximately 60,800 beneficial stockholders of our common stock.
It has been our policy to declare quarterly dividends to the common
stock shareholders so as to comply with applicable sections of the Internal
Revenue Code governing REITs. The cash dividends per share paid on common stock
are set forth below:
2000 1999 1998
-------------------------------------------
First Quarter $.72 $.68 $.64
Second Quarter .73 .69 .65
Third Quarter .74 .70 .66
Fourth Quarter .75 .71 .67
Bremner & Wiley. On December 4, 1998, we completed the acquisition of a
---------------
managing member interest in HCPI/Indiana, LLC, a Delaware limited liability
company ("HCPI/Indiana"). In connection with the acquisition, several limited
partnerships affiliated with James D. Bremner made a capital contribution to
HCPI/Indiana of a portfolio of seven medical office buildings with
-33-
an equity value (net of assumed debt) of approximately $6.7 million. In exchange
for this capital contribution, the contributing limited partnerships designated
their constituent partners to receive approximately $3.9 million in cash and
89,452 non-managing member units of HCPI/Indiana (representing a minority
interest in HCPI/Indiana). HCPI/Indiana also issued 781,213 managing member
units to us in exchange for a capital contribution of approximately $24.6
million.
Beginning on December 4, 1999, the non-managing member units could be
exchanged for common stock or, at our option, for cash. The non-managing member
units are exchangeable for common stock on a one for one basis (subject to
certain adjustments, such as stock splits and reclassifications) or for an
amount of cash equal to the then-current market value of the shares of common
stock into which the non-managing member units may be exchanged.
HCPI/Indiana relied on the exemption provided by Section 4(2) of the
Securities Act, in connection with the issuance and sale of the non-managing
member units. During the first quarter of 2000, we registered 89,452 shares of
our common stock for issuance from time to time in exchange for units.
Boyer. On January 25, 1999, we completed the acquisition of a managing
-----
member interest in HCPI/Utah, LLC, a Delaware limited liability company
("HCPI/Utah"), in exchange for a cash contribution of approximately $18.9
million. In connection with this acquisition, several limited liability
companies and general partnerships affiliated with The Boyer Company, L.C.
("Boyer") contributed a portfolio of 14 medical office buildings (including two
ground leaseholds associated therewith) to HCPI/Utah with an aggregate equity
value (net of assumed debt) of approximately $18.9 million. In exchange for this
capital contribution, the contributing entities received 593,247 non-managing
member units of HCPI/Utah. HCPI/Utah also issued 590,555 managing member units
to HCPI. At the initial closing, HCPI/Utah was also granted the right to acquire
five additional medical office buildings. During 1999, two of the five buildings
were contributed to HCPI/Utah and the contributing entities received 48,212
non-managing member units of HCPI/Utah and 707,663 managing member units were
issued to us. In addition, HCPI and HCPI/Utah agreed with Boyer that it would
not acquire the medical office building known as Old Mill. The Amended and
Restated Limited Liability Company Agreement of HCPI/Utah (the "Agreement")
provides that only we are authorized to act on behalf of HCPI/Utah and that we
have responsibility for the management of its business. In accordance with the
Agreement, the contributing entities also received an additional 29,688 non-
managing member units as a result of a step-up in value of one of the buildings.
During 2000, HCPI/Utah determined that 505,881 managing member units previously
recorded and issued to HCPI during 1999 should have been recorded as a loan from
HCPI to retire existing debt of HCPI/Utah. Consequently, HCPI/Utah redesignated
these units as a loan from HCPI, which is secured by HCPI/Utah real estate
assets.
The non-managing member units issued in connection with the initial
closing became exchangeable for common stock on January 25, 2000 and the
non-managing member units issued in connection with the subsequent closings will
become exchangeable twelve months after the last issuance of units. The
non-managing member units are exchangeable for common stock on a one for one
basis (subject to certain adjustments, such as stock splits and
reclassifications) or for an amount of cash equal to then-current market value
of the shares of common stock into which the non-managing member units may be
exchanged. HCPI/Utah relied on the exemption provided by Section 4(2) of the
Securities Act of 1933, as amended, in connection with the issuance and sale of
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the non-managing member units. During the first quarter of 2000, we registered
593,247 shares of our common stock for issuance from time to time in exchange
for units.
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Item 6. SELECTED FINANCIAL DATA
Set forth below is our selected financial data as of and for the years
ended December 31, 2000, 1999, 1998, 1997, and 1996.
Year Ended December 31,
2000 1999 1998 1997 1996
------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
Income Statement Data:
Total Revenue $ 329,807 $ 224,793 $ 161,549 $ 128,503 $ 120,393
Net Income Applicable to
Common Shares 108,867 78,450 78,635 63,542 60,641
Basic Earnings per Common Share 2.13 2.25 2.56 2.21 2.12
Diluted Earnings per Common Share 2.13 2.25 2.54 2.19 2.10
Balance Sheet Data:
Total Assets 2,398,703 2,469,390 1,356,612 940,964 753,653
Debt Obligations 1,158,928 1,179,507 709,045 452,858 379,504
Stockholders' Equity 1,144,555 1,200,257 595,419 442,269 336,806
Other Data:
Basic Funds From Operations/(1)/ 171,344 114,520 96,255 83,442 80,517
Cash Flows From Operating
Activities 205,511 124,117 112,311 87,544 90,585
Cash Flows Provided By (Used In
Investing Activities 63,714 (230,460) (417,524) (205,238) (104,797)
Cash Flows Provided By (Used
In) Financing Activities (218,298) 109,535 305,633 118,967 15,023
Dividends Paid 175,079 106,177 89,210 71,926 65,905
Dividends Paid Per Common Share 2.940 2.780 2.620 2.460 2.300
===========================
(1) We believe that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. HCPI adopted the new
definition of FFO prescribed by the National Association of Real Estate
Investment Trusts (NAREIT). FFO is defined as Net Income applicable to
common shares (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate depreciation, and
after adjustments for unconsolidated partnerships and joint ventures.
FFO does not, and is not intended to, 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. FFO, as defined by us may not be comparable to similarly
entitled items reported by other REITs that do not define it in
accordance with the definition prescribed by NAREIT. The following
table represents items and amounts being aggregated to compute FFO.
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
Net Income Applicable to Common Shares $ 108,867 $ 78,450 $ 78,635 $ 63,542 $ 60,641
Real Estate Depreciation 72,590 44,789 29,577 22,667 20,700
Joint Venture Adjustments 1,917 1,584 2,096 (720) (824)
Gain on Sale of Real Estate Properties (11,756) (10,303) (14,053) (2,047) ---
Gain on Extinguishment of Debt (274) --- --- --- ---
---------- ---------- ---------- ---------- ----------
$ 171,344 $ 114,520 $ 96,255 $ 83,442 $ 80,517
========== ========== ========== ========== ==========
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Health Care Property Investors, Inc., including its wholly-owned
subsidiaries and affiliated joint ventures (HCPI), generally acquires healthcare
facilities and leases them on a long-term basis to healthcare providers. HCPI
also leases medical office space to providers and physicians on a shorter term
basis. On a more limited basis, we provide mortgage financing on healthcare
facilities. As of December 31, 2000, our portfolio of properties, including
equity investments, consisted of 413 facilities located in 43 states. These
facilities are comprised of 172 long-term care facilities, 86 congregate care
and assisted living facilities, 80 medical office buildings, 44 physician group
practice clinics, 22 acute care hospitals and nine freestanding rehabilitation
facilities. Our gross investment in the properties, which includes joint venture
acquisitions, was approximately $2,593,000,000 at December 31, 2000.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI in a stock-for-stock transaction, approved by the stockholders of
both companies, with HCPI being the surviving corporation. AHE was a real estate
investment trust specializing in healthcare facilities with a portfolio of 72
healthcare properties in 22 states. Under the terms of the merger agreement,
each share of AHE common stock was converted into the right to receive 0.78
share of HCPI's common stock and AHE's 8.60% cumulative redeemable preferred
stock, series B was converted into shares of HCPI's 8.60% series C cumulative
redeemable preferred stock. The merger resulted in the issuance of 19,430,115
shares of HCPI's common stock and 4,000,000 depositary shares of HCPI's series C
cumulative redeemable preferred stock. Additionally, we assumed AHE's debt
comprised of $220 million of senior notes, $56 million of mortgage debt and paid
$71 million in cash to replace their revolving line of credit upon consummation
of the merger. The transaction was treated as a purchase for financial
accounting purposes and, accordingly, the operating results of AHE have been
included in our consolidated financial statements effective as of November 4,
1999.
The main focus of operations for 2000 centered upon the integration of the
acquisition of American Health Properties, and selling under utilized
investments and those of less strategic value. Additionally, lease renewals,
property management consolidation, mortgage financing and the issues created as
a result of nursing home operators reorganizing rounded out the accomplishments
of a difficult year.
Results of Operations
Year Ended December 31, 2000 Vs. Year Ended December 31, 1999
Net Income applicable to common shares for the year ended December 31,
2000 totaled $108,867,000 or $2.13 per share on a diluted basis on revenue of
$329,807,000. This compares to Net Income applicable to common shares of
$78,450,000 or $2.25 per share on a diluted basis on revenue of $224,793,000 for
the corresponding period in 1999. Included in Net Income applicable to common
shares and earnings per share on a diluted basis for the years ended December
31, 2000 and 1999 is a Gain on Sale of Real Estate Properties of $11,756,000, or
$0.23 per share, and $10,303,000, or $0.27 per share, respectively. In addition,
Net Income applicable to common shares for the year ended December 31, 2000
includes a $2,000,000 or $0.04 per share one time
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charge as a result of the Summerville equity investment write-off. (See Note 5
to the Consolidated Financial Statements.) Also included is a $2,751,000 or
$0.05 per share one-time charge as a result of the write-down to realizable
value in accordance with Statement of Financial Accounting Standards No. 121 of
four physician clinics that are expected to be sold during 2001. (See Note 4 to
the Consolidated Financial Statements.) The increase in Net Income applicable to
common shares is primarily the result of 1999 acquisition activity, most of
which is attributable to the acquisition of American Health Properties'
portfolio.
Rental Income, attributable to Triple Net Leases for the year ended
December 31, 2000 increased 57.8% or $83,164,000 to $227,012,000. Rental Income,
attributable to Managed Properties for the year ended December 31, 2000
increased 43.2% or $24,096,000 to $79,818,000 with a related increase in Managed
Properties Operating Expenses of 52.1% or $9,498,000 to $27,738,000. These
increases were generated primarily from 1999 acquisition activity, most of which
is related to the acquisition of American Health Properties' portfolio. Interest
and Other Income for the year ended December 31, 2000 decreased 8.9% or
$2,246,000 to $22,977,000 primarily as a result of the divestiture during mid
1999 of certain partnership interests from which we were receiving income.
Interest Expense for the year ended December 31, 2000 increased 48.4%
or $28,289,000 to $86,747,000. The increase is primarily the result of an
increase in borrowings used to fund the acquisitions made during 1999 and the
interest related to the debt assumed in the merger with American Health
Properties all described in more detail below in the "Liquidity and Capital
Resources" section. The increase in Real Estate Depreciation of 62.1% or
$27,801,000 to $72,590,000 for the year ended December 31, 2000 is the direct
result of the new investments made during 1999 including the merger with
American Health Properties as well as the write down of the four facilities held
for sale discussed above.
We believe that Funds From Operations (FFO) is the most important
supplemental measure of operating performance for a real estate investment
trust. (See Note 12 to the Consolidated Financial Statements.) FFO for the year
ended December 31, 2000 increased 49.6% or $56,824,000 to $171,344,000. The
increase is mainly attributable to increases in Rental Income, as offset by
increases in Interest Expense and Managed Properties Operating Expenses which
are discussed in more detail above.
Year Ended December 31, 1999 Vs. Year Ended December 31, 1998
Net Income applicable to common shares for the year ended December 31,
1999 totaled $78,450,000 or $2.25 per share on a diluted basis on revenue of
$224,793,000. This compares to Net Income applicable to common shares of
$78,635,000 or $2.54 per share on a diluted basis on revenue of $161,549,000 for
the corresponding period in 1998. Included in Net Income applicable to common
shares and earnings per share on a diluted basis for the years ended December
31, 1999 and 1998 is a Gain on Sale of Real Estate Properties of $10,303,000, or
$0.27 per share, and $14,053,000, or $0.42 per share, respectively.
Rental Income, attributable to Triple Net Leases for the year ended
December 31, 1999 increased $26,556,000 to $143,848,000. Rental Income,
attributable to Managed Properties for the year ended December 31, 1999
increased $36,056,000 to $55,722,000 with a related increase in Managed
Properties Operating Expenses of $13,187,000 to $18,240,000. The majority of
these
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increases were generated by a full year of rents on $429,000,000 of property
acquisitions made in 1998, rents on $146,000,000 of new property acquisitions
made in 1999 and rents on properties acquired in the merger with AHE. The 1999
acquisition activity, most of which is related to the acquisition of AHE's
portfolio in the fourth quarter of 1999, represents a significant increase over
the acquisition activity of prior years.
Interest Expense for the year ended December 31, 1999 increased
$21,072,000 to $58,458,000. The increase is primarily the result of a full year
of interest on the June 1998 issuance of MandatOry Par Put Remarketed Securities
(MOPPRS) senior debt, an increase in short-term borrowings used to fund
investments made during 1998 and 1999 and $343,000,000 in debt assumed in the
merger with AHE, all described in more detail below in the "Liquidity and
Capital Resources" section. The increase in Real Estate Depreciation of
$15,212,000 to $44,789,000 for the year ended December 31, 1999, is directly
related to the new investments discussed above.
FFO for the year ended December 31, 1999 increased by $18,265,000 to
$114,520,000. The increase is mainly attributable to increases in Rental Income
and Interest and Other Income, as offset by increases in Interest Expense and
Managed Properties Operating Expenses, which are discussed in more detail above.
Liquidity and Capital Resources
We have financed investments through the sale of common and preferred
stock, issuance of long-term debt, assumption of mortgage debt, the mortgaging
of certain of our properties, use of short-term bank lines and use of internally
generated cash flows. We have also raised cash through the disposition of assets
in 2000. Management believes that our liquidity and sources of capital are
adequate to finance our operations. Future investments in additional facilities
will be dependent on availability of cost effective sources of capital.
At December 31, 2000, stockholders' equity totaled $1,144,555,000 and
our debt to equity ratio was 1.01 to 1.00. For the year ended December 31, 2000,
FFO (before interest expense) covered Interest Expense 3.00 to 1.00.
Equity
Since January 1998, we have completed three equity offerings for cash,
summarized in the table below:
Shares Equity
Date Issuance Issued Raised Net Proceeds
- -------------------- ----------------------------------- ------------ --------------- ----------------
April 1998 Common Stock at $33.2217/share to 698,752 $ 23,200,000 $ 23,000,000
a Unit Investment Trust
September 1998 8.70% Series B Cumulative 5,385,000 $ 135,000,000 $ 130,000,000
Redeemable Preferred Stock
May 1999 Common Stock at $31.4375/share 1,000,000 $ 31,400,000 $ 29,600,000
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We used the net proceeds from the equity offerings to pay down or pay
off short-term borrowings under our revolving lines of credit. We invested any
excess funds in short-term investments until they were needed for acquisitions
or development.
On November 4, 1999, in connection with the merger with AHE, we issued
19,430,115 shares of our common stock and 4,000,000 depositary shares of 8.60%
series C cumulative redeemable preferred stock. (See Note 3 to the Consolidated
Financial Statements.)
In January and February 2000, we registered 89,452 and 593,247 shares
of common stock to be issued, from time to time, to the holders of non-managing
member units in two consolidated subsidiaries, HCPI/Indiana, LLC and HCPI/Utah,
LLC, respectively. The non-managing member units are convertible at the non-
managing members option into shares of our common stock.
Senior Unsecured Debt
The following table summarizes the Medium Term Note (MTN) financing
activities since January 1998:
Amount
Date Maturity Coupon Rate Issued/(Redeemed)
- ------------------------ ------------ ----------------- --------------------------
February-November 1998 --- 9.88% $ (27,500,000)
March 1998 5 years 6.66% 20,000,000
November 1998 3-8 years 7.30%-7.88% 28,000,000
February-April 1999 5 years 6.92%-7.48% 62,000,000
May-November 1999 --- 8.81%-10.57% (5,000,000)
February 2000 --- 8.87% (10,000,000)
February 2000 4 years 9.00% 25,000,000
On November 4, 1999, in connection with the merger with AHE, we assumed
two series of outstanding senior notes of AHE, consisting of $100,000,000
principal amount of 7.05% senior notes due 2002 and $120,000,000 principal
amount of 7.50% senior notes (8.16% effective rate) due 2007. During June 1998,
we issued $200 million of 6.875% MandatOry Par Put Remarketed Securities
(MOPPRS) due June 8, 2015, which are subject to mandatory tender on June 8,
2005.
Since 1986 the debt rating agencies have rated our Senior Notes
investment grade. Current senior debt ratings are Baa2 from Moody's and BBB+
from both Standard & Poor's and Fitch.
Secured Debt
During September 2000, we completed the final phase of a secured debt
transaction which in the aggregate resulted in loan proceeds of $83 million on a
portfolio of twelve medical office buildings and physician clinics with an
investment value of approximately $138 million. The transaction was closed in
two approximately equal installments. The loan features an average coupon of
8.12% (8.43% effective rate after including all costs) with interest payable
over the first three years and interest plus principal payments based upon a 30
year amortization thereafter for the remainder of the ten year term. These
proceeds were initially invested in reducing the borrowings under the Company's
revolving lines of credit and were used to fund the final payment of our
convertible subordinated notes due November 8, 2000.
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We assumed $56,000,000 of AHE's mortgage debt in late 1999 with
interest rates ranging from 7.00% to 8.52% due 2003 to 2011. At December 31,
2000, we had a total of $176,914,000 in Mortgage Notes Payable secured by 33
healthcare facilities with a net book value of approximately $310,525,000.
Interest rates on the Mortgage Notes ranged from 5.75% to 10.63%.
Convertible Subordinated Debt
During the first two quarters of 2000, we repurchased in open market
transactions $31,090,000 of our 6% convertible subordinated notes due November
8, 2000 at a gain of $274,000; the balance of $68,910,000 was paid off on the
due date. As discussed earlier, proceeds of the $83 million secured debt
financing were utilized to fund the payoff.
Revolving Lines of Credit
We have two revolving lines of credit, one for $103,000,000 that was
renewed recently and now expires on November 2, 2001 and one for $207,000,000
that expires on November 3, 2003. As of December 31, 2000, we had $102,000,000
available on these lines of credit.
Retained Cash Flows
Since our inception in May 1985, we have recorded approximately
$976,333,000 in FFO. Of this amount, we have distributed a total of $817,451,000
to stockholders as dividends on common stock. We have retained the balance of
$158,882,000 and used it as an additional source of capital.
On November 20, 2000, we paid a dividend of $0.75 per common share or
$38,222,000 in the aggregate. Total dividends paid on common stock during the
year ended December 31, 2000, as a percentage of FFO, was 87.6%. During the
first quarter of 2001, we declared and paid a dividend of $0.76 per common share
or approximately $38,696,000 in the aggregate.
Available Financing Sources
As of February 2001, we had $372,000,000 available for future financing
of debt and equity securities under a shelf registration statement filed with
the Securities and Exchange Commission. Of that amount, we have approximately
$85,000,000 available under MTN senior debt programs. These amounts may be
issued from time to time in the future based on our needs and then existing
market conditions.
Letters of Credit
At December 31, 2000, we held approximately $6,719,000 in depository
accounts and $52,672,000 in irrevocable letters of credit from commercial banks
to secure the obligations of many lessees' lease and borrowers' loan
obligations. We may draw upon the letters of credit or depository accounts if
there are any defaults under the leases and/or loans. Amounts available under
letters of credit could change based upon facility operating conditions and
other factors and such changes may be material.
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Facility Rollovers
We have concluded a significant number of "facility rollover"
transactions on properties that have been under long-term leases and mortgages.
Facility rollover transactions principally include lease renewals and
renegotiations, exchanges, sales of properties, and, to a lesser extent, payoffs
on mortgage receivables. The annualized impact on a pro forma basis as if the
facility rollover transactions had occurred on January 1 of each year was to
decrease FFO in each of the years 1998 through 2000 by $3,100,000, $3,400,000
and $1,300,000, respectively. Total rollovers were 44 facilities, 26 facilities
and 37 facilities in each of the years 1998 through 2000.
For the years ending December 31, 2001 and 2002, we have 48 facilities
and six facilities in the triple net lease portfolio, respectively, that are
subject to lease expiration and mortgage maturities. Including lease expirations
in the managed portfolio, total Company revenue subject to lease expirations and
mortgage maturities are 5.3% for 2001 and 6.1% for 2002.
During 1997, we reached agreement with Tenet Healthcare Corporation
(Tenet) (the holder of substantially all of the option rights under our leases
with Vencor, Inc. (Vencor)) whereby Tenet agreed to waive renewal and purchase
options, and related rights of first refusal, on up to 51 facilities. As part of
these agreements, we have the right to continue to own the facilities. We paid
Tenet $5,000,000 in cash, accelerated the purchase option on one acute care
hospital leased to Tenet, and reduced Tenet's guarantees on the facilities
leased to Vencor. Leases on 21 of those 51 facilities had expiration dates
through December 31, 2000. We have increased rents on five of the facilities
with leases that expired during 1998, and we believe we will be able to increase
rents on other facilities whose lease terms expire in 2001. However, there can
be no assurance that we will be able to realize any increased rents on future
rollovers.
Troubled Long-Term Care and Assisted Living Operators
The financial weakness of operators in the long-term care and assisted
living sectors, including the bankruptcies of certain of our tenants, may result
in uncertainties in our ability to continue to realize the full benefit of such
operators' leases. We cannot assure you that the bankruptcies of certain long-
term care operators and the trouble experienced by assisted living operators
would not have a material adverse effect on our Net Income, FFO or the market
value of our common stock. (See Note 5 to the Consolidated Financial
Statements.)
Year 2000 Issue
The Year 2000 issue was the result of widely used computer programs
that identify the year by two digits, rather than by four. It was believed that
continued use of these programs may result in widespread computer-generated
malfunctions and miscalculations beginning in the year 2000, when the digits
"00" are interpreted as "1900." It was believed that those miscalculations could
cause disruption of operations including the temporary inability to process
transactions such as invoices for payment. Preparing for Year 2000 had been a
high priority for us. We successfully completed our Year 2000 preparedness
including upgrading, replacing and testing our IT systems. The cost of such
preparations was not material and to date we have not seen any adverse effect on
our results of operations from the Year 2000 issue.
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Cautionary Language Regarding Forward Looking Statements
Statements in this Annual Report that are not historical factual
statements are "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The statements include, among other
things, statements regarding the intent, belief or expectations of HCPI and its
officers and can be identified by the use of terminology such as "may", "will",
"expect", "believe", "intend", "plan", "estimate", "should" and other comparable
terms or the negative thereof. In addition, we, through our senior management,
from time to time make forward looking oral and written public statements
concerning our expected future operations and other developments. Shareholders
and investors are cautioned that, while forward looking statements reflect our
good faith belief and best judgment based upon current information, they are not
guarantees of future performance and are subject to known and unknown risks and
uncertainties. Actual results may differ materially from the expectations
contained in the forward-looking statements as a result of various factors. In
addition to the factors set forth under the caption Risk Factors in our annual
report on Form 10-K, readers should consider the following:
(a) Legislative, regulatory, or other changes in the healthcare industry at
the local, state or federal level which increase the costs of or
otherwise affect the operations of our lessees;
(b) Changes in the reimbursement available to our lessees and mortgagors by
governmental or private payors, including changes in Medicare and
Medicaid payment levels and the availability and cost of third party
insurance coverage;
(c) Competition for lessees and mortgagors, including with respect to new
leases and mortgages and the renewal or rollover of existing leases;
(d) Availability of suitable healthcare facilities to acquire at a
favorable cost of capital and the competition for such acquisition and
financing of healthcare facilities;
(e) The ability of our lessees and mortgagors to operate our properties in
a manner sufficient to maintain or increase revenues and to generate
sufficient income to make rent and loan payments;
(f) The financial weakness of operators in the long-term care and assisted
living sectors, including the bankruptcies of certain of our tenants,
which results in uncertainties in our ability to continue to realize
the full benefit of such operators' leases; and
(g) Changes in national or regional economic conditions, including changes
in interest rates and the availability and cost of capital for us.
Item 7a. DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest
rates on our mortgage loans receivable and on our debt instruments.
We provide mortgage loans to operators of healthcare facilities in the
normal course of business. All of the mortgage loans receivable have fixed
interest rates or interest rates with periodic fixed increases. Therefore, the
mortgage loans receivable are all considered to be fixed rate loans, and the
current interest rate (the lowest rate) is used in the computation of market
risk provided in the table below if material.
We may assume mortgage notes payable already in place as part of an
acquisition transaction. Currently we have two mortgage notes payable with
variable interest rates and the remaining mortgage notes payable have fixed
interest rates or interest rates with fixed periodic
-43-
increases. Our Senior Notes are at fixed rates. The variable rate loans are at
interest rates below the current prime rate of 8.5%, and fluctuations are tied
to the prime rate or to a rate currently below the prime rate.
Fluctuation in the interest rate environment will not affect our future
earnings and cash flows on our fixed rate debt until that debt matures and must
be replaced or refinanced. Interest rate changes will affect the fair value of
the fixed rate instruments. Conversely, changes in interest rates on variable
rate debt would change our future earnings and cash flows, but not affect the
fair value on those instruments. Assuming a one percentage point increase in the
interest rate related to the variable rate debt including the mortgage notes
payable and the bank lines of credit, and assuming no change in the outstanding
balance as of year end, interest expense for 2000 would increase by
approximately $2,101,000.
The principal amount and the average interest rates for the mortgage
loans receivable and debt categorized by the final maturity dates is presented
in the table below. The fair value estimates for the mortgage loans receivable
are based on the estimates of management and on rates currently prevailing for
comparable loans. The fair market value estimates for debt securities are based
on discounting future cash flows utilizing current rates offered to us for debt
of the same type and remaining maturity.
------------------------Maturity---------------------------
------------------------------------------------------------------------
Fair
2001 2002 2003 2004 2005 Thereafter Total Value
------------------------------------------------------------------------
ASSETS
Mortgage Loans Receivable $11,823 $906 $146,166 $158,895 $153,952
Weighted Average Interest Rate 13.55% 9.50% 10.24% 10.48%
LIABILITIES
Variable Rate Debt:
Bank Notes Payable 204,500 204,500 204,500
Weighted Average Interest Rate 7.68% 7.68%
Mortgage Notes Payable 671 557 215 230 245 3,665 5,583 5,583
Weighted Average Interest Rate 5.76% 5.75% 5.75% 5.75% 5.75% 5.75% 5.75%
Fixed Rate Debt:
Senior Notes Payable 13,000 117,000 31,000 92,000 231,000 293,514 777,514 759,943
Weighted Average Interest Rate 7.88% 7.25% 7.09% 7.78% 6.78% 7.42% 7.25%
Mortgage Notes Payable 3,600 3,912 11,780 13,100 4,174 134,765 171,331 158,236
Weighted Average Interest Rate 8.08% 8.07% 8.04% 8.07% 8.06% 8.06% 8.06%
We do not believe that the future market rate risks related to the
above securities will have a material impact on us or the results of our future
operations. Readers are cautioned that most of the statements contained in these
"Disclosures about Market Risk" paragraphs are forward looking and should be
read in conjunction with our disclosures under the heading "Cautionary Language
Regarding Forward Looking Statements" set forth above.
-44-
New Pronouncements
See Note 17 to the Consolidated Financial Statements for a discussion
of our implementation of the Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities and our adoption of Staff Accounting Bulletin No. 101
(SAB 101) Revenue Recognition in Financial Statements released by the Securities
and Exchange Commission (SEC).
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Balance Sheets as of December 31, 2000 and 1999 and
Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for the
years ended December 31, 2000, 1999 and 1998, together with the Report of Arthur
Andersen LLP, Independent Public Accountants, are included elsewhere herein.
Reference is made to the "Index to Consolidated Financial Statements."
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers were as follows on March 7, 2001:
Name Age Position
- -------------------------- ------ ---------------------------------------------------------
Kenneth B. Roath 65 Chairman, President and Chief Executive Officer
James G. Reynolds 49 Executive Vice President and Chief Financial Officer
Devasis Ghose 47 Senior Vice President - Finance and Treasurer
Edward J. Henning 48 Senior Vice President, General Counsel and Corporate Secretary
Stephen R. Maulbetsch 44 Senior Vice President - Acquisitions
There is hereby incorporated by reference the information appearing
under the captions "Board of Directors and Officers" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's
definitive proxy statement relating to its Annual Meeting of Stockholders to be
held on May 3, 2001.
Item 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the
caption "Executive Compensation" in the Registrant's definitive proxy statement
relating to its Annual Meeting of Stockholders to be held on May 3, 2001.
-45-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the
captions "Principal Stockholders" and "Board of Directors and Officers" in the
Registrant's definitive proxy statement relating to its Annual Meeting of
Stockholders to be held on May 3, 2001.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the
caption "Certain Transactions" and "Compensation Committee Interlocks and
Insider Participation" in the Registrant's definitive proxy statement relating
to its Annual Meeting of Stockholders to be held on May 3, 2001.
-46-
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 2000 and 1999
Consolidated Statements of Income - for the years ended December 31,
2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity - for the
years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows - for the years ended December
31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Note - All schedules have been omitted because the required
information is presented in the financial statements and the related
notes or because the schedules are not applicable.
b) Reports on Form 8-K:
On July 28, 2000, HCPI filed a Current Report on Form 8-K, reporting
the adoption of a Rights Plan.
c) Exhibits:
2.1 Agreement and Plan of Merger, dated as of August 4, 1999,
between HCPI and American Health Properties, Inc. (incorporated
herein by reference to exhibit 2.1 to HCPI's current report on
form 8-K dated August 4, 1999).
3.1 Articles of Restatement of HCPI (incorporated herein by
reference to exhibit 3.1 to HCPI's annual report on form 10-K
for the year ended December 31, 1994).
3.2 Second amended and restated bylaws of HCPI (incorporated herein
by reference to exhibit 3.2 of HCPI's quarterly report on form
10-Q for the period ended March 31, 1999).
3.3 Articles supplementary establishing the terms of the 7 7/8%
Series A Cumulative Redeemable Preferred Stock (incorporated by
reference to exhibit 2.3 to HCPI's registration statement on
form 8-A filed on September 25, 1997).
3.4 Articles supplementary establishing and fixing the rights and
preferences of the 8.70% Series B Cumulative Preferred Stock
(incorporated herein by reference to exhibit 3.3 to HCPI's
registration statement on form 8-A dated September 2, 1998).
-47-
3.5 Articles supplementary establishing and fixing the rights and
preferences of the 8.60% Series C Cumulative Redeemable Preferred
Stock (incorporated herein by reference to exhibit 2.1 to HCPI's
current report on form 8-K dated August 4, 1999).
4.1 Rights agreement, dated as of July 27, 2000, between Health Care
Property Investors, Inc. and the Bank of New York which includes
the form of Certificate of Designations of the Series D Junior
Participating Preferred Stock of Health Care Property Investors,
Inc. as Exhibit A, the form of Right Certificate as Exhibit B and
the Summary of Rights to Purchase Preferred Shares as Exhibit C
(incorporated by reference to Exhibit 4.1 of Health Care Property
Investors, Inc.'s Current Report on Form 8-K dated July 28,
2000).
4.2 Indenture, dated as of September 1, 1993, between HCPI and The
Bank of New York, as Trustee, with respect to the Series C and D
Medium Term Notes, the Senior Notes due 2006 and the Mandatory
Par Put Remarketed Securities due 2015 (incorporated by reference
to exhibit 4.1 to HCPI's registration statement on form S-3 dated
September 9, 1993).
4.3 Indenture, dated as of April 1, 1989, between HCPI and The Bank
of New York for Debt Securities (incorporated by reference to
exhibit 4.1 to HCPI's registration statement on form S-3 dated
March 20, 1989).
4.4 Form of Fixed Rate Note (incorporated by reference to exhibit 4.2
to HCPI's registration statement on form S-3 dated March 20,
1989).
4.5 Form of Floating Rate Note (incorporated by reference to exhibit
4.3 to HCPI's registration statement on form S-3 dated March 20,
1989).
4.6 Registration Rights Agreement dated November 20, 1998 between
HCPI and James D. Bremner (incorporated by reference to exhibit
4.8 to HCPI's annual report on form 10-K for the year ended
December 31, 1999). This exhibit is identical in all material
respects to two other documents except the parties thereto. The
parties to these other documents, other than HCPI, were James P.
Revel and Michael F. Wiley.
4.7 Registration Rights Agreement dated January 20, 1999 between HCPI
and Boyer Castle Dale Medical Clinic, L.L.C. (incorporated by
reference to exhibit 4.9 to HCPI's annual report on form 10-K for
the year ended December 31, 1999). This exhibit is identical in
all material respects to 13 other documents except the parties
thereto. The parties to these other documents, other than HCPI,
were Boyer Centerville Clinic Company, L.C., Boyer Elko, L.C.,
Boyer Desert Springs, L.C., Boyer Grantsville Medical, L.C.,
Boyer-Ogden Medical Associates, LTD., Boyer Ogden Medical
Associates No. 2, LTD., Boyer Salt Lake Industrial Clinic
Associates, LTD., Boyer-St. Mark's Medical Associates, LTD.,
Boyer McKay-Dee Associates, LTD., Boyer St. Mark's Medical
Associates #2, LTD., Boyer Iomega, L.C., Boyer Springville, L.C.,
and - Boyer Primary Care Clinic Associates, LTD. #2.
4.8 Form of Deposit Agreement (including form of Depositary Receipt
with respect to the Depositary Shares, each representing one-one
hundredth of a share of our 8.60% Cumulative Redeemable Preferred
Stock, Series C) dated as of November 4, 1999 by and among HCPI,
ChaseMellon Shareholder Services, L.L.C. and the holders from
time to time of the Depositary Shares described therein
(incorporated herein by reference to
-48-
exhibit 4 to HCPI's registration statement on form 8-A filed on
November 4, 1999).
4.9 Indenture, dated as of January 15, 1997, between American Health
Properties, Inc. and The Bank of New York, as trustee
(incorporated herein by reference to exhibit 4.1 to American
Health Properties, Inc.'s current report on form 8-K (file no.
001-09381), dated January 21, 1997).
4.10 First Supplemental Indenture, dated as of November 4, 1999,
between HCPI and The Bank of New York, as trustee (incorporated
by reference to HCPI's quarterly report on form 10-Q for the
period ended September 30, 1999).
10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership
Agreement of Health Care Property Partners, a California general
partnership, the general partners of which consist of HCPI and
certain affiliates of Tenet (incorporated by reference to
exhibit 10.1 to HCPI's annual report on form 10-K for the year
ended December 31, 1985).
10.2 HCPI Second Amended and Restated Directors Stock Incentive Plan
(incorporated by reference to exhibit 10.43 to HCPI's quarterly
report on form 10-Q for the period ended March 31, 1997).*
10.3 HCPI Second Amended and Restated Stock Incentive Plan
(incorporated by reference to exhibit 10.44 to HCPI's quarterly
report on form 10-Q for the period ended March 31, 1997).*
10.4 First Amendment to Second Amended and Restated Directors
Stock Incentive Plan, effective as of November 3, 1999
(incorporated by reference to exhibit 10.1 to HCPI's quarterly
report on form 10-Q for the period ended September 30, 1999).*
10.5 Second Amendment to Second Amended and Restated Directors Stock
Incentive Plan, effective as of January 4, 2000 (incorporated by
reference to exhibit 10.15 to HCPI's annual report on form 10-K
for the year ended December 31, 1999).*
10.6 First Amendment to Second Amended and Restated Stock Incentive
Plan effective as of November 3, 1999 (incorporated by reference
to exhibit 10.3 to HCPI's quarterly report on form 10-Q for the
period ended September 30, 1999).*
10.7 HCPI 2000 Stock Incentive Plan, effective as of March 23, 2000
(incorporated by reference to Appendix A of HCPI's Proxy
Statement used at the annual meeting of stockholders held on May
9, 2000).*
10.8 HCPI Second Amended and Restated Directors Deferred Compensation
Plan (incorporated by reference to exhibit 10.45 to HCPI's
quarterly report on form 10-Q for the period ended September 30,
1997).*
10.9 Second Amendment to Second Amended and Restated Directors
Deferred Compensation Plan, effective as of November 3, 1999
(incorporated by reference to exhibit 10.2 to HCPI's quarterly
report on form 10-Q for the period ended September 30, 1999).
10.10 Fourth Amendment to Second Amended and Restated Director
Deferred Compensation Plan, effective as of January 4, 2000
(incorporated by reference to exhibit 10.17 to HCPI's annual
report on form 10-K for the year ended December 31, 1999).*
10.11 Employment Agreement dated October 13, 2000 between HCPI and
Kenneth B. Roath.*
-49-
10.12 Various letter agreements, each dated as of October 16, 2000,
among HCPI and certain key employees of the Company.*
10.13 HCPI Executive Retirement Plan (incorporated by reference to
exhibit 10.28 to HCPI's annual report on Form 10-K for the
year ended December 31, 1987).*
10.14 Amendment No. 1 to HCPI Executive Retirement Plan
(incorporated by reference to exhibit 10.39 to HCPI's annual
report on form 10-K for the year ended December 31, 1995).*
10.15 Stock Transfer Agency Agreement between HCPI and The Bank of
New York dated as of July 1, 1996 (incorporated by reference
to exhibit 10.40 to HCPI's quarterly report on form 10-Q for
the period ended September 30, 1996).
10.16 Amended and Restated Limited Liability Company Agreement
dated November 20, 1998 of HCPI/Indiana, LLC (incorporated by
reference to exhibit 10.15 to HCPI's annual report on form
10-k for the year ended December 31, 1998).
10.17 Amended and Restated Limited Liability Company Agreement
dated January 20, 1999 of HCPI/Utah, LLC (incorporated by
reference to exhibit 10.16 to HCPI's annual report on form
10-K for the year ended December 31, 1998).
10.18 Revolving Credit Agreement, dated as of November 3, 1999,
among HCPI, each of the banks identified on the signature
pages hereof, The Bank of New York, as agent for the banks
and as issuing bank, and Bank of America, N.A. and Wells
Fargo Bank, N.A., as co-documentation agents, with BNY
Capital Markets, Inc., as lead arranger and Book Manager
(incorporated by reference to exhibit 10.4 to HCPI's
quarterly report on form 10-Q for the period ended September
30, 1999).
10.19 364-Day Revolving Credit Agreement, dated as of November 3,
1999 among HCPI, each of the banks identified on the
signature pages hereof, The Bank of New York, as agent for
the banks, and Bank of America, N.A. and Wells Fargo Bank,
N.A., as co-documentation agents, with BNY Capital Markets,
Inc., as lead arranger and book manager (incorporated by
reference to exhibit 10.5 to HCPI's quarterly report on form
10-Q for the period ended September 30, 1999).
10.20 Cross-Collateralization, Cross-Contribution and Cross-Default
Agreement , dated as of July 20, 2000, by HCP Medical Office
Buildings II, LLC, and Texas HCP Medical Office Buildings,
L.P., for the benefit of First Union National Bank
(incorporated by reference to exhibit 10.21 to HCPI's
quarterly report on form 10-Q for the period ended
September 30, 2000).
10.21 Cross-Collateralization, Cross-Contribution and Cross-Default
Agreement, dated as of August 31, 2000, by HCP Medical Office
Buildings I, LLC, and Meadowdome, LLC, for the benefit of
First Union National Bank (incorporated by reference to
exhibit 10.22 to HCPI's quarterly report on form 10-Q for the
period ended September 30, 2000).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
* Management Contract or Compensatory Plan or Arrangement.
For the purposes of complying with the amendments to the rules governing
Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the
undersigned registrant hereby
-50-
undertakes as follows, which undertaking shall be incorporated by reference into
registrant's Registration Statement on Form S-8 No.s 33-28483 and 333-90353
filed May 11, 1989 and November 5, 1999, respectively, and Form S-8 No.s 333-
54786 and 333-54784 each filed February 1, 2001.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
-51-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 7, 2001
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/s/ Kenneth B. Roath
-----------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date Signature and Title
- ----
March 7, 2001 /s/ Kenneth B. Roath
--------------------------------------------
Kenneth B. Roath, Chairman of the Board of
Directors, President and Chief Executive Officer
(Principal Executive Officer)
March 7, 2001 /s/ James G. Reynolds
--------------------------------------------
James G. Reynolds, Executive Vice President
and Chief Financial Officer (Principal
Financial Officer)
March 7, 2001 /s/ Devasis Ghose
--------------------------------------------
Devasis Ghose, Senior Vice President- Finance
and Treasurer (Principal Accounting Officer)
-52-
March 7, 2001 /s/ Paul V. Colony
--------------------------------------------
Paul V. Colony, Director
March 7, 2001 /s/ Robert R. Fanning, Jr.
--------------------------------------------
Robert R. Fanning, Jr., Director
March 7, 2001 /s/ Michael D. McKee
--------------------------------------------
Michael D. McKee, Director
March 7, 2001 /s/ Orville E. Melby
--------------------------------------------
Orville E. Melby, Director
March 7, 2001 /s/ Harold M. Messmer, Jr
--------------------------------------------
Harold M. Messmer, Jr., Director
March 7, 2001 /s/ Peter L. Rhein
--------------------------------------------
Peter L. Rhein, Director
-53-
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Public Accountants F-2
Consolidated Balance Sheets - as of December 31, 2000 and 1999 F-3
Consolidated Statements of Income -
for the years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Stockholders' Equity -
for the years ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows -
for the years ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 -- F-26
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care
Property Investors, Inc. (a Maryland corporation) as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Health Care Property
Investors, Inc. as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
/S/ ARTHUR ANDERSEN LLP
Orange County, California
January 24, 2001
F-2
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except par values)
December 31,
-----------------------------------
2000 1999
------------- --------------
ASSETS
Real Estate Investments
Buildings and Improvements $2,140,591 $2,147,592
Accumulated Depreciation (287,719) (230,509)
-------------- --------------
1,852,872 1,917,083
Construction in Progress --- 20,312
Land 247,637 255,593
-------------- --------------
2,100,509 2,192,988
Loans Receivable 189,156 193,157
Investments in and Advances to Joint Ventures 22,615 47,642
Accounts Receivable 14,920 13,565
Other Assets 12,880 14,342
Cash and Cash Equivalents 58,623 7,696
-------------- --------------
TOTAL ASSETS $2,398,703 $2,469,390
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank Notes Payable $ 204,500 $ 215,500
Senior Notes Payable 777,514 761,757
Convertible Subordinated Notes Payable --- 100,000
Mortgage Notes Payable 176,914 102,250
Accounts Payable, Accrued Expenses and Deferred Income 55,676 49,222
Minority Interests in Joint Ventures 14,709 16,564
Minority Interests Convertible into Common Stock 24,835 23,840
Stockholders' Equity:
Preferred Stock, $1.00 par value: Authorized - 50,000,000 shares;
11,721,600 and 11,745,000 shares outstanding as of
December 31, 2000 and 1999. 274,487 275,041
Common Stock, $1.00 par value; 100,000,000
shares authorized; 50,873,902 and 51,421,191
outstanding as of December 31, 2000 and 1999. 50,874 51,421
Additional Paid-In Capital 927,182 940,471
Cumulative Net Income 761,918 628,151
Cumulative Dividends (869,906) (694,827)
-------------- --------------
Total Stockholders' Equity 1,144,555 1,200,257
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,398,703 $2,469,390
============== ==============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-3
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share amounts)
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
-------------- -------------- -------------
REVENUE
Rental Income, Triple Net Leases $ 227,012 $ 143,848 $ 117,292
Rental Income, Managed Properties 79,818 55,722 19,666
Interest and Other Income 22,977 25,223 24,591
-------------- -------------- -------------
329,807 224,793 161,549
-------------- -------------- -------------
EXPENSES
Interest Expense 86,747 58,458 37,386
Real Estate Depreciation 72,590 44,789 29,577
Managed Properties Operating Expenses 27,738 18,240 5,053
General and Administrative Expenses 13,266 11,908 10,429
Impairment of Equity Investment 2,000 --- ---
-------------- -------------- -------------
202,341 133,395 82,895
-------------- -------------- -------------
INCOME FROM OPERATIONS 127,466 91,398 78,654
Minority Interests (5,729) (5,476) (5,540)
Gain on Sale of Real Estate Properties 11,756 10,303 14,053
-------------- -------------- -------------
NET INCOME BEFORE EXTRAORDINARY ITEMS 133,493 96,225 87,167
Extraordinary Item-Gain on Extinguishment of Debt 274 --- ---
-------------- -------------- -------------
NET INCOME 133,767 96,225 87,167
Dividends to Preferred Stockholders 24,900 17,775 8,532
-------------- -------------- -------------
NET INCOME APPLICABLE TO COMMON SHARES $ 108,867 $ 78,450 $ 78,635
============== ============== =============
BASIC EARNINGS PER COMMON SHARE $ 2.13 $ 2.25 $ 2.56
============== ============== =============
DILUTED EARNINGS PER COMMON SHARE $ 2.13 $ 2.25 $ 2.54
============== ============== =============
WEIGHTED AVERAGE SHARES OUTSTANDING 51,057 34,792 30,747
============== ============== =============
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-4
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in thousands)
Preferred Stock Common Stock
=================== =================================
Par Additional Total
Number of Number of Value Paid In Cumulative Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
====================================================================================================================================
Balances,
December 31, 1997 2,400 $ 57,810 30,216 $30,216 $408,924 $444,759 $(499,440) $ 442,269
Issuance of Preferred Stock, Net 5,385 130,037 130,037
Issuance of Common Stock, Net 731 731 23,513 24,244
Exercise of Stock Options 40 40 872 912
Net Income 87,167 87,167
Dividends Paid - Preferred Shares (8,532) (8,532)
Dividends Paid - Common Shares (80,678) (80,678)
====================================================================================================================================
Balances,
December 31, 1998 7,785 187,847 30,987 30,987 433,309 531,926 (588,650) 595,419
Issuance of Preferred Stock, Net 4,000 88,160 88,160
Issuance of Common Stock, Net 20,488 20,488 508,382 528,870
Exercise of Stock Options 5 5 88 93
Net Income 96,225 96,225
Stock Repurchase (40) (966) (59) (59) (1,308) (2,333)
Dividends Paid - Preferred Shares (17,775) (17,775)
Dividends Paid - Common Shares (88,402) (88,402)
====================================================================================================================================
Balances,
December 31, 1999 11,745 275,041 51,421 51,421 940,471 628,151 (694,827) 1,200,257
Issuance of Common Stock, Net 75 75 2,093 2,168
Exercise of Stock Options 55 55 1,383 1,438
Net Income 133,767 133,767
Stock Repurchase (23) (554) (677) (677) (16,765) (17,996)
Dividends Paid - Preferred Shares (24,900) (24,900)
Dividends Paid - Common Shares (150,179) (150,179)
===================================================================================================================================
Balances,
December 31, 2000 11,722 $274,487 50,874 $50,874 $927,182 $761,918 $(869,906) $ 1,144,555
===================================================================================================================================
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-5
HEALTH CARE PROPERTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
Year Ended December 31,
-------------------------------------------------
2000 1999 1998
------------- ------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 133,767 $ 96,225 $ 87,167
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Real Estate Depreciation 72,590 44,789 29,577
Non Cash Charges 4,028 3,071 2,946
Joint Venture Adjustments 1,917 1,584 2,096
Gain on Sale of Real Estate Properties (11,756) (10,303) (14,053)
Gain on Extinguishment of Debt (274) --- ---
Changes in:
Operating Assets 385 (5,866) (806)
Operating Liabilities 4,854 (5,383) 5,384
------------- ------------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 205,511 124,117 112,311
------------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (21,558) (160,681) (411,722)
Acquisition of American Health Properties, Net Cash Expended --- (80,071) ---
Proceeds from Sale of Real Estate Properties 81,022 46,098 21,538
Other Investments and Loans 4,250 (35,806) (27,340)
------------- ------------- -----------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 63,714 (230,460) (417,524)
------------- ------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Change in Bank Notes Payable (11,000) 127,500 21,100
Repayment of Senior Notes (10,000) (15,000) (27,500)
Issuance of Senior Notes 24,865 62,000 251,469
Issuance of Secured Debt 83,000 --- ---
Cash Proceeds from Issuing Preferred Stock --- --- 130,037
Cash Proceeds from Issuing Common Stock 1,438 31,969 23,871
(Decrease)/Increase in Minority Interests (522) 17,182 201
Periodic Payments on Mortgages (3,815) (2,889) (1,107)
Repurchase of Common and Preferred Stock (17,819) (2,333) ---
Repurchase of Convertible Subordinated Notes Payable (99,651) --- ---
Dividends Paid (175,079) (106,177) (89,210)
Other Financing Activities (9,715) (2,717) (3,228)
------------- ------------- --------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES (218,298) 109,535 305,633
------------- ------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 50,927 3,192 420
Cash and Cash Equivalents, Beginning of Period 7,696 4,504 4,084
----------- ---------- -----------
Cash and Cash Equivalents, End of Period $ 58,623 $ 7,696 $ 4,504
=========== =========== ===========
ADDITIONAL CASH FLOW DISCLOSURES
Interest Paid, Net of Capitalized Interest $ 85,907 $ 55,127 $ 36,292
=========== =========== ===========
Capitalized Interest $ 514 $ 1,223 $ 1,800
=========== =========== ===========
Mortgages Assumed on Acquired Properties exclusive of AHE Merger $ --- $ 42,896 $ 12,715
=========== =========== ===========
Equity Issued in American Health Properties Merger $ --- $ 585,154 $ ---
=========== =========== ===========
Fair Value of American Health Properties Assets Acquired $ --- $ 967,181 $ ---
=========== =========== ===========
Liabilities Assumed in American Health Properties Acquisition $ --- $ 298,911 $ ---
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
F-6
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Health Care Property Investors, Inc., a Maryland corporation, was
organized in March 1985 to qualify as a real estate investment trust (REIT).
Health Care Property Investors, Inc. and its affiliated subsidiaries and
partnerships (HCPI) were organized to invest in healthcare related properties
located throughout the United States. As of December 31, 2000, HCPI owns or has
investments in 413 properties located in 43 states. The properties include 172
long-term care facilities, 86 congregate care and assisted living centers, 80
medical office buildings (MOBs), 44 physician group practice clinics, 22 acute
care hospitals, and nine freestanding rehabilitation hospitals. As of December
31, 2000, HCPI provided mortgage loans on or leased these properties to 94
healthcare operators and to approximately 650 tenants in the multi-tenant
buildings.
(2) SIGNIFICANT ACCOUNTING POLICIES
Real Estate:
HCPI records the acquisition of real estate at cost and uses the
straight-line method of depreciation for buildings and improvements over
estimated useful lives ranging up to 45 years. HCPI periodically evaluates its
investments in real estate for potential impairment by comparing its investment
to the expected future cash flows to be generated from the properties. If such
impairments were to occur, HCPI would write down its investment in the property
to estimated market value. HCPI has provided accelerated depreciation on certain
of its investments based primarily on an estimation of net realizable value of
such investments at the end of the primary lease terms. Acquisition, development
and construction arrangements are accounted for as real estate investments/joint
ventures or loans based on the characteristics of the arrangements.
Investments In Consolidated Subsidiaries And Partnerships:
HCPI consolidates the accounts of its subsidiaries and certain general
and limited partnerships which are majority owned and controlled. All
significant intercompany investments, accounts and transactions have been
eliminated.
Investments In Joint Ventures:
HCPI has investments in certain general partnerships and joint ventures
in which HCPI may serve as the general partner or managing member. However,
since the other members in these joint ventures have significant voting rights
relative to acquisition, sale and refinancing of assets, HCPI accounts for these
investments using the equity method of accounting. The accounting policies of
these joint ventures are substantially consistent with those of HCPI.
F-7
Cash And Cash Equivalents:
Investments purchased with original maturities of three months or less
are considered to be cash and cash equivalents.
Federal Income Taxes:
HCPI has operated at all times so as to qualify as a REIT under
Sections 856 to 860 of the Internal Revenue Code of 1986. As such, HCPI is not
taxed on its income that is distributed to stockholders. At December 31, 2000,
the tax bases of HCPI's net assets and liabilities are less than the reported
amounts by approximately $172,000,000.
Earnings and profits, which determine the taxability of dividends to
stockholders, differ from net income for financial statements due to the
treatment required under the Internal Revenue Code of certain interest income
and expense items, depreciable lives, bases of assets and timing of rental
income.
Rental Income:
Rental Income includes base and additional rental income. Additional
rental income is generated by a percentage of increased revenue over specified
base period revenue of the properties and/or increases based on inflation
indices or other factors. In addition, HCPI may receive payments from its
lessees upon transferring or assignment of existing leases; such amounts
received are deferred and amortized over the remaining term of the leases.
Facility Operations:
Since November 1997, HCPI has purchased ownership interests in 70 MOBs
which are operated by independent property management companies on behalf of
HCPI. These facilities are leased to multiple tenants under gross, modified
gross or triple-net leases. In addition, HCPI purchased several physician group
practice clinics which are leased on a modified gross basis or triple net to
several tenants. Operating income other than basic rental income attributable to
these properties is recorded under Rental Income, Managed Properties in HCPI's
financial statements. Expenses related to the operation of these facilities are
recorded as Managed Properties Operating Expenses.
Reclassification:
Reclassifications have been made for comparative financial statement
presentation.
Use Of Estimates In The Preparation Of Financial Statements:
Management is required to make estimates and assumptions in the
preparation of financial statements in conformity with generally accepted
accounting principles. These estimates and assumptions affect the reported
amounts of assets and liabilities and disclosure of contingent assets
F-8
and liabilities at the date of the financial statements and the reported amounts
of expense during the reporting period. Actual results could differ from those
estimates.
F-9
(3) BUSINESS COMBINATION
On November 4, 1999, American Health Properties, Inc. (AHE) merged with
and into HCPI (the "Merger") in a stock-for-stock transaction, approved by the
stockholders of both companies, with HCPI being the surviving corporation. AHE
was a real estate investment trust specializing in healthcare facilities with a
portfolio of 72 healthcare properties in 22 states. Under the terms of the
Merger agreement, each share of AHE common stock was converted into the right to
receive 0.78 share of HCPI's common stock and AHE 8.60% cumulative redeemable
preferred stock, series B was converted into HCPI's 8.60% series C cumulative
redeemable preferred stock. The Merger resulted in the issuance of approximately
19,430,115 shares of HCPI's common stock and 4,000,000 depositary shares of
HCPI's series C cumulative redeemable preferred stock. Additionally, we assumed
AHE's debt comprised of $220 million of senior notes, $56 million of mortgage
debt and paid $71 million in cash to replace their revolving line of credit upon
consummation of the Merger.
The transaction was treated as a purchase for financial accounting
purposes and, accordingly, the operating results of AHE have been included in
HCPI's consolidated financial statements effective as of November 4, 1999. The
following summarizes the final purchase price (in thousands):
Preferred Stock (4,000,000 Series C Cumulative Redeemable
Preferred Depositary Shares) $ 88,160
Common Stock (19,430,115 Shares) 496,994
---------------
Equity Issued 585,154
Fair Value of American Health Properties Liabilities Assumed 298,911
Bank Credit Facility Balance at Merger Date 71,000
Cash Paid for Merger Related Expenditures 12,116
---------------
Total Purchase Price $967,181
===============
The following summarizes the allocation of the purchase price to the
net assets acquired (in thousands):
Cash and Cash equivalents $ 3,045
Real Estate Properties 951,376
Loans Receivable 4,855
Other Assets 7,905
--------------
Assets Acquired $967,181
==============
Pro Forma Financial Information (Unaudited):
The following unaudited pro forma consolidated statements of income
information present the results of HCPI's operations for years ended December
31, 1999 and 1998 as though the acquisition of AHE had occurred as of the
beginning of each respective period:
F-10
December 31,
1999 1998
------------- -------------
(Dollar amounts in thousands
except per share amounts)
Total Revenues $319,818 $274,271
Net Income Applicable to Common Shares $169,546 $120,765
Earnings Per Share
Basic $ 3.32 $ 2.40
Diluted $ 3.26 $ 2.40
Pro Forma Net Income applicable to common shares and earnings per basic
and diluted share include $65,189,000 or $1.27 and $1.19 per share in 1999 and
$14,053,000 or $0.28 and $0.26 per share in 1998 for Gain on the Sale of Real
Estate.
The pro forma results have been prepared for comparative purposes only
and are not necessarily indicative of the actual results of operations had the
acquisitions taken place at the beginning of the fiscal year or the results that
may occur in the future. The pro forma results include additional interest on
borrowed funds, increased depreciation and decreases in amortization expense
associated with changes in fair value of the AHE depreciable property and other
intangible assets and a reduction in general and administrative expenses.
(4) REAL ESTATE INVESTMENTS
HCPI was organized to make long-term, equity-oriented investments
principally in operating, income-producing healthcare related properties. HCPI's
equity investments have generally been structured as land and building
leasebacks.
Under the terms of the lease agreements, HCPI earns fixed monthly base
rental income and may earn periodic additional rental income. At December 31,
2000, minimum future rental income from 374 non-cancelable operating leases is
expected to be approximately $250,298,000 in 2001, $235,030,000 in 2002,
$225,206,000 in 2003, $169,113,000 in 2004, $145,360,000 in 2005 and
$678,025,000 in the aggregate thereafter.
During 1998 and 1999, 23 MOBs were acquired through the acquisition of
a managing interest in two limited liability companies in which the non-managing
members own 760,599 non-managing member units as of December 31, 2000. These
units are convertible into HCPI common stock on a one-for-one basis.
During 2000, HCPI sold 15 facilities and two land parcels, resulting in
a gain of 11,756,000. In addition, during 2000 the Company purchased the equity
interest of its joint venture partner in three LLCs which owned seven long-term
care facilities. Through this acquisition, real estate assets increased by
approximately $18,326,000 and the investment in joint ventures was reduced.
Finally, during 2000, in accordance with Statement of Financial Accounting
Standards No. 121, the Company wrote down to net realizable value four physician
clinics that are expected to be sold during 2001. The $2,751,000 one-time charge
is included in Depreciation Expense.
F-11
The following tabulation lists HCPI's total Real Estate Investments at
December 31, 2000 (Dollar amounts in thousands):
Number Mortgage Notes
of Buildings & Total Accumulated Payable
Facility Location Facilities Land Improvements Investments Depreciation (Note 8)
- -------------------------------------------------------------------------------------------------------------------------------
LONG-TERM CARE FACILITIES
Arizona 3 $ 809 $ 9,704 $ 10,513 $ 400 $ ---
Arkansas 6 209 8,571 8,780 3,052 ---
California 13 5,609 23,362 28,971 14,881 ---
Colorado 5 1,891 20,566 22,457 6,376 ---
Florida 9 4,680 28,928 33,608 9,054 ---
Indiana 25 4,695 102,528 107,223 15,619 ---
Kansas 3 788 10,547 11,335 3,991 ---
Maryland 3 1,287 21,654 22,941 8,343 ---
Massachusetts 5 1,587 16,880 18,467 9,784 ---
Michigan 3 451 9,879 10,330 1,967 ---
North Carolina 6 1,342 20,066 21,408 6,588 2,575
Ohio 12 2,365 53,197 55,562 12,328 743
Oklahoma 12 2,368 31,573 33,941 3,446 ---
Tennessee 10 1,072 38,062 39,134 13,494 ---
Texas 9 1,119 15,273 16,392 5,175 ---
Wisconsin 6 1,147 17,626 18,773 7,635 ---
Other (15 States) 18 6,619 60,879 67,498 14,431 1,957
- -------------------------------------------------------------------------------------------------------------------------------
Total Long-Term Care Facilities 148 38,038 489,295 527,333 136,564 5,275
- -------------------------------------------------------------------------------------------------------------------------------
ACUTE CARE HOSPITALS
California 4 36,836 190,438 227,274 14,589 ---
Texas 4 2,040 21,713 23,753 1,859 ---
Other (8 States) 10 22,987 318,374 341,361 19,842 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Acute Care Hospitals 18 61,863 530,525 592,388 36,290 ---
- -------------------------------------------------------------------------------------------------------------------------------
CONGREGATE CARE AND ASSISTED LIVING CENTERS
California 5 1,940 22,735 24,675 2,231 ---
Florida 8 3,542 26,813 30,355 3,563 ---
Louisiana 3 1,280 16,095 17,375 1,477 ---
New Jersey 4 1,619 19,730 21,349 2,106 ---
Pennsylvania 3 515 17,160 17,675 2,951 ---
South Carolina 9 1,674 39,247 40,921 4,924 ---
Texas 21 6,008 83,174 89,182 9,077 ---
Washington 3 844 11,530 12,374 1,490 ---
Other (16 States) 21 10,157 112,079 122,236 13,781 320
- -------------------------------------------------------------------------------------------------------------------------------
Total Congregate Care and Assisted Living Centers 77 27,579 348,563 376,142 41,600 320
- -------------------------------------------------------------------------------------------------------------------------------
REHABILITATION HOSPITALS
Arizona 1 1,565 7,051 8,616 1,922 ---
Arkansas 2 1,409 19,610 21,019 2,685 ---
Colorado 1 690 8,346 9,036 1,979 ---
Florida 1 2,000 16,769 18,769 11,692 ---
Kansas 2 3,816 23,220 27,036 3,369 ---
Texas 1 1,990 13,077 15,067 5,011 ---
West Virginia 1 --- 14,400 14,400 483 ---
- -------------------------------------------------------------------------------------------------------------------------------
Total Rehabilitation Hospitals 9 $ 11,470 $ 102,473 $ 113,943 $ 27,141 $ ---
- -------------------------------------------------------------------------------------------------------------------------------
F-12
Number
of Buildings & Total Accumulated Mortgage Notes
Facility Location Facilities Land Improvements Investments Depreciation Payable
- ------------------------------------------------------------------------------------------------------------------------------
MEDICAL OFFICE BUILDINGS
Arizona 6 $ 1,690 $ 32,793 $ 34,483 $ 1,339 $ 6,800
California 11 26,041 90,953 116,994 9,503 34,803
Florida 6 800 25,722 26,522 863 3,833
Indiana 14 14,307 60,254 74,561 3,468 4,627
Massachusetts 1 678 22,836 23,514 1,774 14,342
New Jersey 2 3,675 26,202 29,877 894 12,735
Texas 10 9,849 93,456 103,305 8,427 31,627
Utah 15 3,177 77,296 80,473 4,569 17,880
Other (11 States) 12 8,075 110,168 118,243 4,873 43,819
- ------------------------------------------------------------------------------------------------------------------------------
Total Medical Office Buildings 77 68,292 539,680 607,972 35,710 170,466
- ------------------------------------------------------------------------------------------------------------------------------
PHYSICIAN GROUP PRACTICE CLINICS
California 2 8,070 37,460 45,530 3,447 ---
Florida 10 8,200 16,302 24,502 1,248 ---
Georgia 3 2,100 7,327 9,427 561 ---
North Carolina 4 4,050 6,195 10,245 479 ---
Tennessee 4 2,295 13,496 15,791 1,513 853
Texas 8 5,563 21,449 27,012 1,536 ---
Wisconsin 7 5,225 19,696 24,921 1,037 ---
Other (3 States) 6 2,800 8,130 10,930 593 ---
- ------------------------------------------------------------------------------------------------------------------------------
Total Physician Group Practice Clinics 44 38,303 130,055 168,358 10,414 853
- ------------------------------------------------------------------------------------------------------------------------------
Vacant Land Parcels --- 2,092 --- 2,092 --- ---
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL CONSOLIDATED REAL ESTATE OWNED 373 247,637 2,140,591 2,388,228 287,719 176,914
- ------------------------------------------------------------------------------------------------------------------------------
Joint Venture Investments,
Including All Partners' Assets 10 --- --- 24,538 --- ---
Leasehold Interest --- --- --- 13,500 --- ---
Financing Leases (See Note 7) 2 --- --- 8,192 --- ---
Mortgage Loans Receivable (See Note 7) 28 --- --- 158,895 --- ---
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO 413 $ 247,637 $ 2,140,591 $ 2,593,353 $ 287,719 $ 176,914
- ------------------------------------------------------------------------------------------------------------------------------
F-13
(5) OPERATORS
Major Operators:
Listed below are HCPI's major operators which represent five percent or
more of HCPI's revenue, the investment in properties operated by those
healthcare providers, and the percentage of total annualized revenue from these
operators for the years ended December 31, 2000, 1999 and 1998. Tenet, Emeritus,
HealthSouth, Vencor, Beverly and HCA are publicly traded companies and are
subject to the informational filing requirements of the Securities and Exchange
Act of 1934, as amended, and accordingly file periodic financial statements on
Form 10-K and Form 10-Q with the Securities and Exchange Commission.
Percentage of Annualized
Total Revenue
Investment at Year Ended December 31,
December 31, 2000 2000 1999 1998
------------------------- --------- ---------- ---------
(Amounts in thousands)
Tenet Healthcare Corporation (Tenet) $ 459,774 19% 18% 4%
Emeritus Corporation (Emeritus) 129,812 5 5 6
HealthSouth Corporation (HealthSouth) 113,944 6 5 7
Vencor, Inc. (Vencor) 97,629 5 4 7
Beverly Enterprises, Inc. (Beverly) 96,283 4 4 6
HCA - The Healthcare Company (HCA) 92,143 4 5 5
Centennial Healthcare Corp. 55,411 3 3 5
----------------- --------- ---------- ---------
$1,044,996 46% 44% 40%
================= ========= ========== =========
Certain properties have been subleased or assigned to other operators
but with the original lessee remaining liable on the leases. The investment and
revenue applicable to these subleased properties are not included in the table
above. The percentage of annualized revenue on these subleased facilities was
1%, 2% and 4% in 2000, 1999 and 1998, respectively.
Vencor:
On May 1, 1998, Vencor completed a spin-off transaction to become two
publicly held entities -- Ventas, Inc., a REIT, and Vencor, a healthcare
operating company. On September 13, 1999, Vencor filed for bankruptcy
protection. HCPI has recourse to Ventas, Inc. and Tenet Healthcare Corporation
for most of the obligations payable by Vencor under its leases until the third
quarter of 2001. (Tenet is one of the nation's largest healthcare services
companies, providing a broad range of services through the ownership and
management of healthcare facilities.) The bankruptcy court confirmed Vencor's
plan of reorganization in March 2001.
Its plan proposes the assumption of all of our leased facilities
(including nine subleased facilities) at December 31, 2000. The assumption of
our leases would mean the continued performance of all Vencor's obligations
under the leases, including all amounts owing prior to Vencor's filing date.
Vencor has paid most of these prepetition amounts and has continued to remain
current on its rent during its bankruptcy proceedings.
F-14
Almost all of our Vencor facilities have leases which expire in 2001.
Negotiations are in progress on the 23 facilities that would remain on new
leases with Vencor, with definitive agreements in place on four of nine
subleased facilities with current operators. Progress has been made for current
operators to retain operations on most of the remaining five subleased
facilities. It is anticipated that a net rent increase will result from
negotiation with Vencor and others for the 32 facilities discussed in this
paragraph.
Based upon public reports, for the three months ended September 30,
2000, Vencor had revenue of approximately $717 million and a net loss of
approximately $27 million. For the nine months ended September 30, 2000, Vencor
had revenue of approximately $2.1 billion and a net loss of approximately $48
million. Based upon public reports, Ventas' revenue and net income for the nine
months ended September 30, 2000 were approximately $180 million and $18 million,
respectively. As of September 30, 2000, Ventas had total assets of $1.0 billion
and a stockholders' deficit of $14 million.
Troubled Long-Term Care and Assisted Living Operators:
The financial condition of many long-term care providers, in part due
to the implementation of the Medicare Prospective Payment System, resulted in
several long-term care provider lessees filing for Chapter XI bankruptcy
protection during late 1999 and early 2000. Lessees, other than Vencor, that
filed for bankruptcy and their respective percentage of the Company's annualized
revenue are Sun Healthcare 1.1%, Integrated Health Services 0.5%, Genesis Health
Ventures 0.5%, Mariner Post Acute Network 0.4%, Lenox Healthcare 0.3% and Texas
Health Enterprises 0.2%. The lessees in bankruptcy were current on all rents as
of December 31, 2000 with the exception of minor pre-petition receivables which
we believe will generally be payable once the plans of reorganization are
confirmed. Lenox Healthcare and Texas Health Enterprises have both exited
bankruptcy.
The assisted living industry, from which the Company derives 14.2% of
its revenue, has experienced overbuilding in a number of areas and slower
fill-up rates than were originally forecast. This has required certain operators
to raise additional capital to sustain operations during fill-up periods.
Additional capital may be required during 2001. However, these factors have
stemmed further development activity, which should allow improved fill-up of
existing facilities and improvement in industry census.
The Company's management recorded a complete write-off of a $2,000,000
equity investment in Summerville Senior Living (SSL), an assisted living
company. Although this investment represents less than 0.1% of gross real estate
investment and is outside the normal investment strategy of the Company, the
write-off reduces net income (see Impairment of Equity Investment) and reduces
reported FFO. (See Note 12 for a definition of FFO.) No income has been recorded
on this equity investment. In addition to the equity investment, the Company has
loaned $13,500,000 to SSL with ten leased facilities in California as collateral
and owns five facilities that are leased to SSL. Revenue from SSL equals
approximately 1.5% of the Company's total revenue. The $1,200,000 letter of
credit provided in connection with the five facility leases and the loan
(discussed previously) to SSL exceeds unpaid rents and interest due from them.
F-15
We cannot assure you that the bankruptcies of certain long-term care
operators and the trouble experienced by assisted living operators would not
have a material adverse effect on our Net Income, FFO or the market value of our
common stock.
HCPI has minor equity interests, including warrants at nominal values,
in seven private operators of long-term care and assisted living facilities and
has invested $22,383,000 in additional amounts in the form of mortgages and
unsecured loans, $63,814,000 in operating facilities and unfunded investing
commitments of $1,771,000 to the same operators as of December 31, 2000.
(6) INVESTMENTS IN JOINT VENTURES
HCPI has an 80% interest in five joint ventures that lease six
long-term care facilities and a 45%-50% interest in four joint ventures that
each operate or are currently constructing an assisted living facility.
Combined summarized unaudited financial information of the joint
ventures follows:
December 31,
------------------------------------
2000 1999
-------------- --------------
(Amounts in thousands)
Real Estate Investments, Net $ 29,496 $ 51,125
Other Assets 1,696 4,612
-------------- --------------
Total Assets $ 31,192 $ 55,737
============== ==============
Notes Payable to Others $ 8,271 $ 8,080
Accounts Payable 740 629
Other Partners' Deficit (434) (614)
Investments and Advances from HCPI, Net 22,615 47,642
-------------- --------------
Total Liabilities and Partners' Capital $ 31,192 $ 55,737
============== ==============
Rental and Interest Income $ 3,581 $ 9,254
============== ==============
Net Income $ (643) $ 354
============== ==============
Company's Equity in Joint Venture Operations $ (743) $ 586
============== ==============
Distributions to HCPI $ 1,392 $ 2,501
============== ==============
As of December 31, 2000, HCPI had guaranteed approximately $3.7 million
on notes payable obligations for these joint ventures.
In September 2000, the Company purchased the equity interest of its
joint venture partner in three LLCs previously accounted for as investments in
joint ventures. (See Note 4.)
(7) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
December 31,
------------------------------------
2000 1999
-------------- --------------
(Amounts in thousands)
Mortgage Loans (See below) $158,895 $161,648
Financing Leases 8,192 8,061
Other Loans 22,069 23,448
-------------- --------------
Total Loans Receivable $189,156 $193,157
============== ==============
The following is a summary of Mortgage Loans Receivable at December 31,
2000:
F-16
Final Number Initial
Payment of Principal Carrying
Due Loans Payment Terms Amount Amount
- ---------------------------------------------------------------------------------------------------------------------
(Amounts in thousands)
2001 2 Monthly payments from $112,500 to $ 32,000 $ 11,823
$337,500 including interest of 13.69%
secured by an acute care hospital. Repaid
January 10, 2001.
2006 3 Monthly payments from $27,700 to $269,000 39,521 41,806
including interest from 9.19% to 11.20% on
an acute care hospital located in Texas and
retirement center located in North Carolina.
2007 2 Monthly payments from $7,987 to $193,600 22,708 23,762
including interest from 10.12% to 10.50%, secured
by an acute care facility in New Mexico and an
assisted living facility in Wisconsin.
2008 1 Monthly payment of $49,800 including 5,900 5,748
interest of 8.82% secured by an assisted living
facility in Nebraska.
2009 2 Monthly payments of $41,800 and 10,228 9,662
$64,900 including interest of 12.31%
and 11.86% on a long-term care facility and one
medical office building both located in California.
2010 1 Monthly payments of $337,400 including 34,760 33,026
interest of 10.90% secured
by a congregate care facility and nine long-
term care facilities operated by Beverly.
2010 2 Monthly payments of $57,200 and $116,100 18,397 17,520
including interest of 9.67% secured by two
long-term care facilities located in Colorado.
2002-2031 6 Monthly payments from $9,900 to $51,500 16,690 15,548
including interest rates from 9.50% to 11.5%
on various facilities in various states.
-------- ---------- ----------
Totals 19 $180,204 $158,895
======== ========== ==========
At December 31, 2000, minimum future principal payments from Loans
Receivable are expected to be approximately $14,740,000 in 2001, $3,413,000 in
2002, $4,673,000 in 2003, $15,436,000 in 2004, $2,792,000 in 2005 and
$148,102,000 in the aggregate thereafter.
F-17
(8) NOTES PAYABLE
Senior Notes Payable:
The following is a summary of Senior Notes outstanding at December 31,
2000 and 1999:
Year
Issued 2000 1999 Interest Rate Maturity
----------------------------------------------------------------------------------------------------
(Amounts in thousands)
1993 $ 10,000 $ 10,000 8.00% 2003
1993 1,000 1,000 6.70% 2003
1994 10,000 10,000 8.82-9.10% 2001-2004
1995 48,000 58,000 7.03-8.81% 2001-2005
1995 20,000 20,000 6.62-9.00% 2010-2015
1996 115,000 115,000 6.50% 2006
1997 20,000 20,000 7.30-7.62% 2007
1997 100,000 100,000 7.05% 2002
1997 120,000 120,000 8.16% 2007
1998 200,000 200,000 6.77% 2005
1998 48,000 48,000 6.66-7.88% 2001-2006
1999 62,000 62,000 6.92-7.48% 2004
2000 25,000 --- 9.00% 2004
--------------- ----------------
779,000 764,000
Unamortized Option
Payment Received
Related to 1998
Debt, net 4,468 4,777
Less: Unamortized
Discount (5,954) (7,020)
--------------- ----------------
$ 777,514 $ 761,757
=============== ================
On November 4, 1999, in connection with the merger with AHE, HCPI
assumed two series of outstanding senior notes of AHE consisting of $100,000,000
principal amount of 7.05% senior notes due in 2002 and $120,000,000 principal
amount of 7.50% senior notes (8.16% effective rate) due in 2007.
The weighted average interest rate on the Senior Notes was 7.25% and
7.22% for 2000 and 1999 and the weighted average balance of the Senior Note
borrowings was approximately $773,965,000 and $558,333,000 during 2000 and 1999,
respectively. Original issue discounts are amortized over the term of the Senior
Notes. If held to maturity, the first required Senior Note maturities would be
$13,000,000 in 2001, $117,000,000 in 2002, $31,000,000 in 2003, $92,000,000 in
2004, $231,000,000 in 2005 and $295,000,000 in the aggregate thereafter.
Convertible Subordinated Notes Payable:
On November 8, 1993, HCPI issued $100,000,000, 6% Convertible
Subordinated Notes due November 8, 2000. $31,090,000 was paid off during the
year at a gain of $274,000 with the
F-18
balance paid off on November 8, 2000. (The Notes were convertible into shares of
common stock of HCPI at a conversion price of $37.806.)
Mortgage Notes Payable:
During 2000, HCPI completed a secured debt transaction which resulted in
loan proceeds of $83 million on a portfolio of twelve medical office buildings
and physician clinics with an investment value of approximately $138 million.
The loan features an average coupon of 8.12% (8.43% effective rate based upon a
30 year amortization thereafter for the remainder of the ten year term). These
proceeds were initially invested in reducing the borrowings under the Company's
revolving lines of credit and were used to fund the final payment on the
Company's convertible subordinated notes due November 8, 2000.
At December 31, 2000, HCPI had a total of $176,914,000 in Mortgage Notes
Payable secured by 33 healthcare facilities with a net book value of
approximately $310,525,000. Interest rates on the Mortgage Notes ranged from
5.75% to 10.63%. Required principal payments on the Mortgage Notes are expected
to be $4,271,000 in 2001, $4,468,000 in 2002, $11,995,000 in 2003, $13,330,000
in 2004, $4,419,000 in 2005 and $140,675,000 in the aggregate thereafter.
Bank Notes:
HCPI has two unsecured revolving credit lines aggregating $310,000,000
with certain banks. The credit lines for $103,000,000 and $207,000,000 expire on
November 2, 2001 and November 3, 2003, respectively, and bear a total annual
facility fee of 0.20% and 0.30%, respectively. These agreements provide for
interest at the Prime Rate, the London Interbank Offered Rate (LIBOR) plus 0.95%
(LIBOR plus 1.05% for the $103,000,000 credit line) or at a rate negotiated with
each bank at the time of borrowing. An additional fee of 0.125% is paid on
borrowings when borrowings exceed 50% of the $310,000,000 of credit lines.
Interest rates incurred by HCPI ranged from 5.79% to 9.50% and 4.94% to 8.25% on
maximum short-term bank borrowings of $256,300,000 and $215,500,000 for 2000 and
1999, respectively. The weighted average interest rates were approximately 7.68%
and 5.79% on weighted average short-term bank borrowings of $192,625,000 and
$113,415,000 for the same respective periods.
(9) PREFERRED STOCK
On November 4, 1999, in connection with the merger with AHE, HCPI issued
4,000,000 depositary shares of 8.60% series C cumulative redeemable preferred
stock with a recorded value at the time of the merger of $88,160,000 and a
liquidation preference of $100 million. The series C preferred stock is not
redeemable prior to October 27, 2002, after which date the preferred stock may
be redeemable at par ($25.00 per share or $100,000,000 in the aggregate) any
time for cash at HCPI's option.
On September 4, 1998, HCPI issued 5,385,000 shares of 8.70% series B
cumulative redeemable preferred stock which generated net proceeds of
$130,000,000 (net of underwriters' discount and other offering expenses). The
series B preferred stock is not redeemable prior to September 30, 2003, after
which date the preferred stock may be redeemable at par ($25 per share or
$134,625,000 in the aggregate) any time for cash at HCPI's option.
F-19
On September 26, 1997, HCPI issued 2,400,000 shares of 7.875% series A
cumulative redeemable preferred stock which generated net proceeds of
$57,810,000 (net of underwriters' discount and other offering expenses). The
series A preferred stock is not redeemable prior to September 30, 2002, after
which date the series A preferred stock may be redeemable at par ($25 per share
or $60,000,000 in the aggregate) any time for cash at the option of HCPI.
Dividends on the series A, series B, and series C preferred stock are
payable quarterly in arrears on the last day of March, June, September and
December. The series A, series B and series C preferred stock have no stated
maturity, are not subject to any sinking fund or mandatory redemption and are
not convertible into any other securities of HCPI.
(10) STOCK AND DEBT BUYBACK PROGRAM
In December 1999, HCPI's Board of Directors approved a $40,000,000 stock
and debt repurchase program whereby $20,000,000 of HCPI's common and preferred
stock and $20,000,000 of HCPI's convertible subordinated notes and senior debt
may be repurchased on the open market. Through February 2001, HCPI repurchased
63,400 shares of the preferred stock for $947,000 and 735,535 shares of common
stock for $18,808,000. Approximately $31,090,000 of the convertible notes were
repurchased during the first two quarters of the year in part through the
repurchase program and the remainder pursuant to ordinary course debt
management. The balance on the convertible debt was repaid at maturity, November
8, 2000.
(11) EARNINGS PER COMMON SHARE
HCPI computes earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic earnings per
common share is computed by dividing Net Income applicable to common shares by
the weighted average number of shares of common stock outstanding during the
period. Diluted earnings per common share are calculated including the effect of
dilutive securities. Options to purchase shares of common stock that had an
exercise price in excess of the average market price of the common stock during
the period were not included because they are not dilutive. The convertible debt
was included only in 1998, when the effect on earnings per common share was
dilutive. The non-managing member units were included only in 1998 when the
effect on earnings per common share was dilutive.
F-20
(Amounts in thousands except per share amounts)
For the Year Ended December 31, 2000
Per Share
Income Shares Amount
-----------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 108,867 51,057 $ 2.13
================
Dilutive Options (See Note 14) --- 43
------------------ ------------------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 108,867 51,100 $ 2.13
================
For the Year Ended December 31, 1999
Per Share
Income Shares Amount
-----------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 78,450 34,792 $ 2.25
================
Dilutive Options (See Note 14) --- 69
------------------ ------------------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 78,450 34,861 $ 2.25
================
For the Year Ended December 31, 1998
Per Share
Income Shares Amount
-----------------------------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 78,635 30,747 $ 2.56
================
Dilutive Options (See Note 14) --- 155
Non-Managing Member Units (See Note 4) 308 117
Interest and Amortization applicable to
Convertible Debt (See Note 8) 6,397 2,645
------------------ ------------------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 85,340 33,664 $ 2.54
================
(12) FUNDS FROM OPERATIONS
HCPI believes that Funds From Operations (FFO) is the most important
supplemental measure of operating performance for a real estate investment
trust. Because the historical cost accounting convention used for real estate
assets requires straight-line depreciation (except on land) such accounting
presentation implies that the value of real estate assets diminishes predictably
over time. Since real estate values instead have historically risen and fallen
with market conditions, presentations of operating results for a real estate
investment trust that uses
F-21
historical cost accounting for depreciation could be less informative. The term
FFO was designed by the real estate investment trust industry to address this
problem.
HCPI adopted the definition of FFO prescribed by the National Association
of Real Estate Investment Trusts (NAREIT). FFO is defined as Net Income
applicable to common shares (computed in accordance with generally accepted
accounting principles), excluding gains (or losses) from debt restructuring and
sales of property, plus real estate depreciation and real estate related
amortization, and after adjustments for unconsolidated partnerships and joint
ventures. Adjustments for unconsolidated partnerships and joint ventures are
calculated to reflect FFO on the same basis.
FFO 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. FFO, as defined by HCPI, may not be comparable to
similarly entitled items reported by other real estate investment trusts that do
not define it exactly as the NAREIT definition.
Below are summaries of the calculation of FFO for the years ended
December 31, 2000, 1999 and 1998 (all amounts in thousands):
2000 1999 1998
------------ ------------ ------------
Net Income Applicable to Common Shares $ 108,867 $ 78,450 $ 78,635
Real Estate Depreciation and Amortization 72,590 44,789 29,577
Joint Venture Adjustments 1,917 1,584 2,096
Gain on Sale of Real Estate Properties (11,756) (10,303) (14,053)
Gain on Extinguishment of Debt (274) --- ---
---------- ---------- ----------
Funds From Operations $ 171,344 $ 114,520 $ 96,255
========== ========== ==========
HCPI is required to report information about operations on the basis that
it uses internally to measure performance under Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information, effective beginning in 1998.
(13) DISCLOSURES 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. The carrying amount for Cash and Cash Equivalents
approximates fair value because of the short-term maturity of those instruments.
Fair values for Mortgage Loans Receivable and Debt are based on the estimates of
management and on rates currently prevailing for comparable loans and
instruments of comparable maturities, and are as follows:
December 31, 2000 December 31, 1999
-------------------------------------- --------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ----------------- ----------------- -----------------
(Amounts in thousands)
Mortgage Loans Receivable $158,895 $153,952 $161,648 $160,477
Debt $954,428 $923,762 $964,007 $912,611
F-22
(14) STOCK INCENTIVE PLAN
Directors and officers and key employees of HCPI are eligible to
participate in HCPI's 2000 Stock Incentive Plan (Plan). As of November 5, 1999,
pursuant to the terms of the merger with AHE, 787,000 stock options with an
average exercise price of $30 were issued in exchange for AHE stock options
outstanding as of the date of the merger. A summary of the status of HCPI's Plan
and the options issued in the AHE merger at December 31, 2000, 1999 and 1998 and
changes during the years then ended is presented in the table and narrative
below:
2000 1999 1998
------------------------- ------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Stock Incentive Plan (000's) Price (000's) Price (000's) Price
- ---------------------------------------- ---------- ----------- ---------- ----------- ---------- ------------
Outstanding, beginning of year 2,729 $31 1,309 $32 1,056 $30
Granted 1,383 24 1,425 28 306 38
Exercised (55) 26 (5) 20 (40) 23
Forfeited (772) -- -- -- (13) 35
-------- -------- --------
Outstanding, end of year 3,285 28 2,729 31 1,309 32
Exercisable, end of year 1,199 30 1,166 28 581 26
Weighted average fair value
of options granted during the year $ 0.47 $ 0.73 $ 2.96
Incentive Stock Awards
- ----------------------------------------
Issued 78 58 33
Canceled (3) -- (1)
The incentive stock awards (Awards) are granted at no cost to the
employees. The Awards generally vest and are amortized over five year periods.
The stock options generally become exercisable on either a one year or a five
year schedule after the date of the grant.
The following table describes the options outstanding as of December 31,
2000.
Weighted
Average Options
Total Options Weighted Contractual Life Exercisable At Weighted
Outstanding Exercise Average Remaining December 31, 2000 Average
(000's) Price Exercise Price (Years) (000's) Exercise Price
- ------------------- ------------- ----------------- ------------------- --------------------- -----------------
35 $12-$20 $17 1 27 $17
2,379 $22-$30 $25 5 570 $26
435 $30-$35 $33 4 399 $33
436 $35-$41 $38 6 203 $37
- ------------------- ---------------------
3,285 1,199
=================== =====================
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following ranges of
assumptions: risk-free interest rates from 4.61% to 6.54%; expected dividend
yields from 8.36% to 11.64% percent; expected lives of 10 years; and expected
volatility of .17% to .18%.
F-23
HCPI accounts for stock options under Accounting Principles Board Opinion
25 (APB 25), Accounting for Stock Issued to Employees, which is permitted under
FASB Statement No. 123 (FASB 123), Accounting for Stock Based Compensation,
issued in 1995. Had compensation cost for the Plans been determined instead in
accordance with rules set out in FASB 123, HCPI's Net Income and Basic Earnings
Per Common Share on a proforma basis would have been $0.01 lower for each of the
years ended December 31, 2000, 1999 and 1998.
During the years ended December 31, 2000 and 1999, respectively, HCPI
made loans totaling $422,000 and $92,000 secured by stock in HCPI to directors,
officers and key employees. The interest rate charged is based on the prevailing
applicable federal rate as of the inception of the loan. Loans secured by stock
totaling $2,104,000 and $1,729,000 were outstanding at December 31, 2000 and
1999, respectively.
(15) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days
following each calendar quarter. The Board of Directors declared a dividend of
$0.76 per share on January 25, 2001 paid on February 20, 2001 to stockholders of
record on February 5, 2001.
In order to qualify as a REIT, HCPI must generally, among other
requirements, distribute at least 95% (90% effective January 1, 2001) of its
taxable income to its stockholders. HCPI and other REITs generally distribute
100% of taxable income to avoid taxes on the remaining 5% (10% effective January
1, 2001) of taxable income.
Per share dividend payments made by HCPI to the stockholders were
characterized in the following manner for tax purposes:
2000 1999 1998
------------- -------------- --------------
Common Stock
----------------------------------------------
Ordinary Income $2.3824 $2.0261 $2.4550
Capital Gains Income .1352 .2494 .1650
Return of Capital .4224 .5045 ---
------------- -------------- --------------
Total Dividends Paid $2.9400 $2.7800 $2.6200
============= ============== ==============
7.875% Preferred Stock Series A
----------------------------------------------
Ordinary Income $1.8633 $1.7514 $1.8438
Capital Gains Income .1055 .2174 .1250
------------- -------------- --------------
Total Dividends Paid $1.9688 $1.9688 $1.9688
============= ============== ==============
8.70% Preferred Stock Series B
----------------------------------------------
Ordinary Income $2.0584 $1.9350 $0.6619
Capital Gains Income .1166 .2402 0.0450
------------- -------------- --------------
Total Dividends Paid $2.1750 $2.1752 $0.7069
============= ============== ==============
8.60% Preferred Stock Series C
----------------------------------------------
Ordinary Income $2.0348 $ .6376 $ ---
Capital Gains Income .1152 .0791 ---
------------- -------------- --------------
Total Dividends Paid $2.1500 $ .7167 $ ---
============= ============== ==============
Dividends on all series of preferred stock are paid on the last day of
each quarter.
F-24
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
March 31 June 30 September 30 December 31
------------------- ------------------- -------------------- ------------------
2000 (Amounts in thousands, except per share data)
Revenue $ 82,252 $ 82,096 $ 82,281 $ 83,178
Gain on Sale of Real Estate
Properties $ 684 $ 3,029 $ 421 $ 7,622
Net Income Applicable To
Common Shares $ 26,929 $ 28,281 $ 23,276 $ 30,381
Dividends Paid Per Common
Share $ .72 $ .73 $ .74 $ .75
Basic Earnings Per Common
Share $ .53 $ .55 $ .46 $ .60
Diluted Earnings Per Common
Share $ .52 $ .55 $ .46 $ .60
1999 (Amounts in thousands, except per share data)
Revenue $ 49,621 $ 51,812 $ 52,217 $ 71,143
Gain on Sale of Real Estate
Properties $ --- $ 152 $ 10,151 $ ---
Net Income Applicable To Common
Shares $ 15,269 $ 15,566 $ 26,064 $ 21,551
Dividends Paid Per Common
Share $ .68 $ .69 $ .70 $ .71
Basic Earnings Per Common
Share $ .49 $ .49 $ .81 $ .49
Diluted Earnings Per Common
Share $ .49 $ .49 $ .80 $ .49
(17) NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Statement 133 is
effective for fiscal years beginning after June 15, 2000, although earlier
implementation is allowed. The effect of adopting Statement 133 is not expected
to be material.
F-25
During 2000, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 101 (SAB 101) Revenue Recognition in Financial
Statements. The Company has adopted this accounting pronouncement as required by
the SEC during the quarter ended December 31, 2000. SAB 101 had a minor impact
in reducing income by $300,000 in the Company's results of operations for the
year ended December 31, 2000.
Under SAB 101, the Company is required to defer income recognition of
additional rents that are based on facility revenue increases until an annual
(rather than quarterly) contractual facility revenue hurdle is exceeded. Due to
the Company's current lease structures, SAB 101 will delay the recognition of
additional rents from the first quarter of a year to subsequent quarters of the
year. If the Company had adopted this pronouncement as of January 1, 2000, the
quarterly results for 2000 would be altered as follows:
Increase/(Decrease) Increase/(Decrease)
In income In Income Per Share
------------- -------------------
Quarter Ended March 31, 2000........................ $(3,600,000) $(0.07)
Quarter Ended June 30, 2000......................... $ 1,900,000 $ 0.04
Quarter Ended September 30, 2000.................... $ 1,100,000 $ 0.02
Quarter Ended December 31, 2000..................... $ 300,000 $ 0.01
Rents affected by SAB 101 generally have been received in cash ahead of
what SAB 101 permits for income recognition and, in most cases, the annual
revenue hurdles have been exceeded for many years because of the stability of
revenue streams in the Company's hospital facilities. The Company previously
followed the practice of estimating and applying rents ratably throughout each
of the quarters.
It is anticipated that the SAB 101 standard will create volatility in the
Company's quarterly earnings while there should be minimal effect on the
Company's annual earnings and FFO.
F-26
APPENDIX I
Tenet Healthcare Corporation
SET FORTH BELOW IS CERTAIN CONDENSED FINANCIAL DATA OF TENET HEALTHCARE
CORPORATION ("TENET") WHICH IS TAKEN FROM TENET'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED MAY 31, 2000 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
("THE COMMISSION") UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"), AND THE TENET QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER
ENDED NOVEMBER 30, 2000 AS FILED WITH THE COMMISSION.
The information and financial data contained herein concerning Tenet was
obtained and has been condensed from Tenet's public filings under the Exchange
Act. The Tenet financial data presented includes only the most recent interim
and fiscal year end reporting periods. We can make no representation as to the
accuracy and completeness of Tenet's public filings but have no reason not to
believe the accuracy and completeness of such filings. It should be noted that
Tenet has no duty, contractual of otherwise, to advise us of any events which
might have occurred subsequent to the date of such publicly available
information which could affect the significance or accuracy of such information.
Tenet is subject to the information filing requirements of the Exchange
Act, and, in accordance herewith, is obligated to file periodic reports, proxy
statements and other information with the Commission relating to its business,
financial condition and other matters. Such reports, proxy statements and other
information may be inspected at the offices of the Commission at 450 Fifth
Street, N.W. Washington D.C., and should also be available at the following
Regional Offices of the Commission: Room 1400, 75 Park Place, New York, New York
10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60661. Such reports and other information concerning Tenet can
also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad
Street, Room 1102, New York, New York 10005.
i
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values)
November 30, May 31,
2000 2000
------------ ---------
ASSETS
Cash and cash equivalents $ 82 $ 135
Short-term investments in debt securities 105 110
Accounts and notes receivable, less
allowances for doubtful accounts
($354 at November 30 and $358 at May 31) 2,545 2,506
Inventories of supplies, at cost 219 223
Deferred income taxes 113 176
Other assets 465 444
--------- ---------
Total current assets 3,529 3,594
--------- ---------
Investments and other assets 369 344
Property, plant and equipment net 5,863 5,894
Intangible assets, at cost
Less accumulated amortization
($559 at November 30 and $501 at May 31) 3,360 3,329
--------- ---------
$ 13,121 $ 13,161
========= =========
ii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollar amounts in millions, except par values and share amounts)
November 30, May 31,
2000 2000
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 9 $ 9
Accounts payable 696 671
Accrued expenses 517 538
Other current liabilities 710 694
---------- ---------
Total current liabilities 1,932 1,912
---------- ---------
Long-term debt, net of current portion 5,047 5,668
Other long-term liabilities and minority interests 1,061 1,024
Deferred income taxes 497 491
Common stock, $.075 par value; authorized
700,000,000 shares; 320,249,985 shares
issued at November 30, 2000 and 317,214,748 shares
issued at May 31, 2000 24 24
Other shareholders' equity 4,630 4,112
Treasury stock, at cost, 3,754,708 shares at
November 30, 2000 and May 31, 2000 (70) (70)
---------- ---------
Total shareholders' equity 4,584 4,066
---------- ---------
$ 13,121 $ 13,161
========== =========
iii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 2000 May 31, 2000
----------------- ------------
Net operating revenues $ 5,808 $ 11,414
---------- ----------
Operating expenses 4,754 9,479
Depreciation and amortization 273 533
Interest expense, net of capitalized portion 241 479
Merger, facility consolidation and other
non-recurring charges --- 355
---------- ----------
Total costs and expenses 5,268 10,846
---------- ----------
Investment earnings 19 22
Minority interests in income of consolidated
subsidiaries (10) (21)
Net gain on disposals of facilities
and long-term investments --- 49
---------- ----------
Income from continuing operations before
income taxes 549 618
Taxes on income (220) (278)
---------- ----------
Income from continuing operations 329 340
---------- ----------
Cumulative effect of accounting change,
net of taxes --- (38)
---------- ----------
Net income $ 329 $ 302
========== ==========
iv
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollar amounts in millions)
Six Months Ended Year Ended
November 30, 2000 May 31, 2000
----------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 725 $ 869
--------- ----------
(Includes changes in all operating assets and liabilities)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (239) (619)
Purchase of new business, net of cash acquired (13) (181)
Proceeds from sales of facilities, investments and
other assets 29 764
Other items (47) ---
--------- ----------
Net cash used in investing activities (270) (36)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of other borrowings (1,234) (2,085)
Proceeds from other borrowings 605 1,298
Proceeds from sales of common stock --- 20
Proceeds from stock options exercised --- 25
Other items 121 15
--------- ----------
Net cash used in financing activities (508) (727)
--------- ----------
Net decrease in cash and cash equivalents (53) 106
Cash and cash equivalents at beginning of year 135 29
--------- ----------
Cash and cash equivalents at end of year $ 82 $ 135
--------- ----------
v