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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, 1999
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 27, 2000 there were 51,253,192 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 27, 2000 on the New York Stock Exchange, was approximately $1,306,956,000.
Portions of the definitive Proxy Statement for the registrant's 2000 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
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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 15 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. References to our annualized financial information give effect
to the acquisition of AHE.
As of December 31, 1999, our gross investment in our properties,
including partnership interests and mortgage loans, was approximately $2.6
billion. Our portfolio of 428 properties consisted of:
o 176 long-term care facilities
o 93 congregate care and assisted living facilities
o 82 medical office buildings
o 46 physician group practice clinics
o 22 acute care hospitals
o Nine rehabilitation hospitals
The average age of our properties is 16 years. As of December 31, 1999,
approximately 57% 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 14 years. Our
annualized return to stockholders, assuming reinvestment of dividends and before
stockholders' income taxes, is approximately 15% over the period from our
initial public offering in May 1985 through December 31, 1999.
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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, 1999, we had an ownership interest in 401 properties
located in 42 states. We leased 306 of our owned properties pursuant to
long-term triple net leases to 80 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:
o Tenet Healthcare Corporation ("Tenet")
o HealthSouth Corporation ("HealthSouth")
o Columbia/HCA Healthcare Corp. ("Columbia")
o Emeritus Corporation ("Emeritus")
o Vencor, Inc. ("Vencor")
o Beverly Enterprises, Inc. ("Beverly")
o Centennial Healthcare Corp. ("Centennial")
The remaining 95 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 27 properties that are owned and
operated by 14 health care providers including Beverly, Columbia and MedCath,
Incorporated. With the exception of Tenet which accounts for 18% of our
annualized revenue, no single lessee or operator accounts for more than 5.4% of
our revenue for the year ended December 31, 1999.
Of the 428 healthcare facilities in which we had an investment as of
December 31, 1999, we own 329 facilities outright, including:
o 127 long-term care facilities
o 85 congregate care and assisted living centers
o 52 medical office buildings
o 46 physician group practice clinics
o 16 acute care hospitals
o Three rehabilitation hospitals
We have provided mortgage loans in the amount of $179,404,000 on 27
properties, including 16 long-term care facilities, four congregate care and
assisted living centers, four acute care hospitals and three medical office
buildings. At December 31, 1999, the remaining balance on these loans totaled
$161,648,000.
At December 31, 1999, we also had varying percentage interests in
several limited liability companies and partnerships that together own 71
facilities, as further discussed below under "Investments in Consolidated and
Non-Consolidated Joint Ventures."
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4
The following is a summary of our properties grouped by type of
facility and equity interest as of December 31, 1999:
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% 143 17,786 $ 532,966 $ 66,513
Long-Term Care Facilities 77-80 33 3,786 94,998 11,883
-------------------------------------------------------------
176 21,572 627,964 78,396
-------------------------------------------------------------
Acute Care Hospitals 100 20 2,457 617,271 72,508
Acute Care Hospitals 77 2 356 42,807 7,834
-------------------------------------------------------------
22 2,813 660,078 80,342
-------------------------------------------------------------
Rehabilitation Hospitals 100 3 248 40,885 5,606
Rehabilitation Hospitals 90-97 6 437 71,693 9,969
-------------------------------------------------------------
9 685 112,578 15,575
-------------------------------------------------------------
Congregate Care & Assisted Living Centers 100 89 6,937 435,949 43,940
Congregate Care & Assisted Living Centers 45-50 4 412 2,559 (5) --
-------------------------------------------------------------
93 7,349 438,508 43,940
-------------------------------------------------------------
Medical Office Buildings (3) 100 55 -- 456,205 47,410
Medical Office Buildings (3) 50-90 27 -- 166,670 15,669
-------------------------------------------------------------
82 -- 622,875 63,079
-------------------------------------------------------------
Physician Group Practice Clinics (4) 100 46 -- 175,217 17,522
-------------------------------------------------------------
Totals 428 32,419 $2,637,220 $298,854
=============================================================
(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 4 and 5.
(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 4,659,000 square
feet.
(4) The physician group practice clinics encompass approximately 1,215,000
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 176 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 just over one
year ago. Ancillary 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
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5
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 20 general acute care
hospitals and two 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.
Congregate Care and Assisted Living Centers. We have investments in 93
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.
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6
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 82 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, 21 are master leased on a triple net basis to lessees that then
sublease office space to physicians or other medical practitioners, 58 are
multi-tenant medical office buildings that are leased under triple net, gross or
modified gross leases under which we are responsible for certain operating
expenses and three are mortgaged properties. Third party property management
companies manage the multi-tenant facilities on our behalf.
Physician Group Practice Clinics. We have investments in 46 physician
group practice clinic facilities that are leased to 17 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 85% 29% $ 863 4
Arizona 3 428 58 77 1,045 9
Arkansas 9 866 70 37 2,234 10
California 17 1,698 87 42 5,550 11
Colorado 7 1,055 82 60 5,089 10
Connecticut 1 121 97 36 659 2
Florida (4) 12 1,397 78 43 6,595 6
Georgia 2 168 53 57 123 16
Idaho 1 119 64 37 508 14
Illinois 1 128 90 53 306 6
Indiana 28 3,670 72 48 13,961 11
Iowa 1 201 84 38 649 14
Kansas 3 323 88 46 1,207 10
Kentucky 1 100 97 69 415 2
Louisiana 3 355 84 20 1,209 15
Maryland 3 438 84 28 1,825 18
Massachusetts 5 615 93 36 2,380 3
Michigan 4 406 78 54 1,396 4
Minnesota 1 94 72 48 117 11
Mississippi 1 120 100 4 366 2
Missouri 1 153 97 36 740 2
Montana 1 80 67 37 209 10
Nevada 2 266 33 100 1,522 10
New Mexico 1 102 95 24 324 4
North Carolina 9 1,056 87 37 4,018 9
Ohio 12 1,543 81 68 7,343 8
Oklahoma 12 1,395 60 40 4,395 16
Oregon 1 110 75 33 240 9
Pennsylvania 1 89 84 31 353 4
South Carolina 2 -- -- -- -- 12
Tennessee 10 1,754 91 39 5,280 2
Texas 10 1,113 56 26 2,717 7
Utah 1 120 71 35 455 14
Washington 2 252 78 56 719 --
Wisconsin 7 1,063 80 44 3,584 8
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 176 21,572 76 44 78,396 9
- --------------------------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 55 94 397 13
California 4 669 54 99 27,081 5
Florida 1 204 71 100 7,287 5
Georgia 1 167 51 100 7,036 5
Louisiana 2 325 36 97 5,209 7
Missouri 1 201 48 100 3,782 5
New Mexico (4) 1 56 -- -- 2,184 7
North Carolina 1 275 76 100 7,565 5
South Carolina 2 174 34 100 2,607 6
Texas (4) 7 582 37 85 9,382 6
Utah 1 139 26 100 7,812 5
- --------------------------------------------------------------------------------------------------------------------------
Sub-Total 22 2,813 43% 90% $ 80,342 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
- ---------------------------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 72% 100% $ 1,700 5
Arkansas 2 120 74 100 3,002 2
Colorado 1 64 54 100 1,600 1
Florida 1 108 96 100 2,250 12
Kansas 2 145 66 100 3,615 4
Texas 1 108 68 100 1,753 4
West Virginia 1 80 96 100 1,655 --
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 9 685 74 100 15,575 4
- ----------------------------------------------------------------------------------------------------------------------------
Physician Group Practice Clinics (5)
California 2 -- -- 100 4,454 11
Colorado 1 -- -- 100 310 8
Florida 11 -- -- 100 2,491 6
Georgia 3 -- -- 100 918 9
North Carolina 4 -- -- 100 910 7
Oklahoma 4 -- -- 100 519 6
Tennessee 4 -- -- 100 1,631 9
Texas 9 -- -- 100 2,999 6
Virginia 1 -- -- 100 258 9
Wisconsin 7 -- -- 100 3,032 15
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 46 -- -- 100 17,522 8
- ----------------------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (4) 1 84 3 100 870 15
Arizona 1 98 71 100 511 8
Arkansas 1 17 51 100 27 11
California 11 976 62 91 6,023 17
Delaware 1 52 89 100 402 8
Florida (4) 10 738 62 100 3,440 11
Georgia 1 40 84 100 236 12
Idaho 2 167 80 100 1,129 10
Indiana 3 278 5 33 511 3
Kansas (4) 2 194 31 48 174 12
Louisiana 3 240 42 100 1,631 14
Maryland (4) 2 140 42 50 1,732 13
Michigan (4) 3 300 11 33 -- 8
Missouri 1 73 64 100 437 2
Nebraska 1 73 69 100 519 9
New Jersey (4) 4 279 71 67 2,105 12
New Mexico 2 285 75 100 1,982 12
New York 1 75 93 100 441 8
North Carolina 3 230 92 100 1,347 10
Ohio 1 156 75 100 807 12
Oregon 1 58 92 100 390 10
Pennsylvania 3 232 92 100 1,946 9
South Carolina (4) 9 650 27 67 4,144 13
Tennessee 1 60 26 100 1,062 10
Texas 21 1,545 73 90 9,935 11
Virginia 1 90 59 100 776 14
Washington 3 219 93 82 1,363 8
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 93 7,349 60% 85% $ 43,940 11
- ----------------------------------------------------------------------------------------------------------------------------
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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
- ----------------------------------------------------------------------------------------------------------------------------
Medical Office Buildings (5)
Alaska 1 -- -- 100% $ 669 2
Arizona 6 -- 81% 100 3,490 11
California 12 -- 84 100 11,674 2
Florida 6 -- 97 100 2,897 --
Indiana 14 -- 92 100 6,747 5
Kentucky 1 -- 98 100 717 10
Maryland 1 -- -- 100 611 10
Massachusetts 1 -- 99 100 2,405 --
Minnesota 2 -- 100 100 2,324 8
Missouri 1 -- -- 100 540 8
Nevada 1 -- -- 100 258 19
New Jersey 2 -- 99 100 2,951 --
New York 1 -- 97 100 2,250 5
North Dakota 1 -- 96 100 1,000 6
Ohio 1 -- -- 100 460 13
Oregon 1 -- -- 100 674 15
Tennessee 1 -- -- 100 1,285 14
Texas 13 -- 88 100 12,308 6
Utah 15 -- 94 100 7,842 8
Washington 1 -- 100 100 1,977 --
- ----------------------------------------------------------------------------------------------------------------------------
Sub-Total 82 -- 92% 100 63,079 6
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 428 32,419 $ 298,854 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 1,215,000 and 4,659,000 square feet,
respectively. All other facilities are measured by bed count.
(2) This information is derived from information provided by our lessees.
(3) All revenues, including Medicare revenues but excluding Medicaid
revenues, are included in "Private Patient" revenues.
(4) Includes facilities under construction, except for average occupancy
data.
(5) 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. Average occupancies for medical office buildings are
provided on multi-tenant facilities only
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
sources, including physicians, may change their preferences for a healthcare
facility from time to time.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1999, we had investments in 428 properties located in
43 states, which are operated by 98 healthcare operators. In addition, over 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 percentage of annualized revenue derived from our
operators.
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Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
-------------------------------------------------------------------------
Tenet 9 $53,932,000 18%
HealthSouth 9 16,019,000 5
Columbia 14 14,919,000 5
Emeritus 27 13,591,000 5
Vencor 25 13,049,000 4
Beverly 27 12,289,000 4
Centennial 19 8,528,000 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 1.9% for
the year ended December 31, 1999. As discussed in more detail below, we have
recourse to Ventas, Inc. and Tenet for certain of the rent obligations under
Vencor leases through the primary term of those leases.
All of the operators listed above 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 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, 1999. All
of the following information is based upon such operators' public reports.
(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity (Deficit) Revenue Operations
-----------------------------------------------------------------------------
Tenet* $13,275 $4,089 $ 5,653 $ 263
HealthSouth 7,123 3,407 3,072 220
Columbia 16,627 5,509 12,715 566
Emeritus 192 (57) 93 (6)
Vencor 1,767 204 2,071 (98)
Beverly 1,970 674 1,907 (102)
Centennial 287 108 298 (6)
* The information described above for Tenet is for the six months ended
November 30, 1999 or as of November 30, 1999, as applicable.
The following table summarizes our major operators' assets,
stockholders' equity, annualized revenue and net income (or net loss) from
continuing operations as of or for the year ended December 31, 1998.
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(Amounts in millions)
Net Income/
Stockholders' (Loss) from
Operators Assets Equity Revenue Operations
--------------------------------------------------------------------------
Tenet* $12,833 $3,558 $ 9,895 $ 378
HealthSouth 6,773 3,423 4,006 47
Columbia 19,429 7,581 18,681 532
Emeritus 193 (46) 152 (29)
Vencor 1,774 313 3,000 (573)
Beverly 2,161 776 2,812 (25)
Centennial 285 114 358 --
* The information described above for Tenet is for the fiscal year ended
May 31, 1999 or as of May 31, 1999, 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 23, 2000
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, $6.7 billion; HealthSouth, $2.3 billion;
Columbia, $13.1 billion; Emeritus, $45.6 million; Vencor, $9.9 million; Beverly,
$326.7 million; and Centennial, $62.6 million.
Certain additional information about these operators is provided below:
Vencor
On May 1, 1998, Vencor completed a spin-off transaction. As a result,
it became two publicly held entities -- Ventas, Inc., a real estate company, and
Vencor, a healthcare company which at December 31, 1999 leased 36 of our
properties of which 11 are subleased to other operators. On September 13, 1999,
Vencor, Inc. filed for bankruptcy protection in part due to financial
difficulties it experienced as a result of the implementation of the Prospective
Payment System. We have recourse to Ventas, Inc. and Tenet Healthcare
Corporation (see discussion under Tenet below) for most of the rents payable by
Vencor under its leases. All rents due to us subsequent to the bankruptcy filing
have been received.
Under its filing for bankruptcy protection, Vencor has the right to
assume or reject its leases with us. If Vencor assumes a lease it must do so
pursuant to the original contract terms, cure all pre-petition and post-petition
defaults under the lease and provide adequate assurances of future performance.
If Vencor rejects a lease, we have the right to collect rent through the
rejection date and may lease the property to another operator. As of March 28,
2000, Vencor had made no proposals to reject any of their current leases with
us. We have received $735,000 of $1,008,000 of pre-petition rents and consider
the remaining balance to be fully collectible. However, we cannot assure you
that as a result of Vencor's bankruptcy filing we would be able to recover all
amounts due under our leases with Vencor, that we would be able to promptly
recover the premises or lease the property to another lessee or that the rent we
would receive from another lessee would equal amounts due under the Vencor
leases. We have recourse to Tenet for rents under all but five of the Vencor
leases, and on some leases we are receiving direct payment by sublessees of
Vencor, which may reduce the risk to us of not being able to collect on those
leases. However, some of Vencor's sublessees have also filed for bankruptcy
protection and although we are current on lease payments, we cannot assure you
that the bankruptcy filing of Vencor or certain of its sublessees would not have
a material adverse effect on our Net Income, Funds From Operations or the market
value of our common stock.
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12
Based upon public reports, for the three months ended September 30,
1999, Vencor had revenue of approximately $682 million and a net loss of
approximately $42 million. For the nine months ended September 30, 1999, Vencor
had revenue of approximately $2.1 billion and a net loss of approximately $107
million. Based upon public reports, Ventas' revenue, income from operations and
net income for the three months ended September 30, 1999 were approximately $59
million, $40 million and $13 million, respectively. As of September 30, 1999,
Ventas had total assets of $1.1 billion and a stockholders' equity of $19
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 31 Vencor leases, 20 of which expire on dates through December 31,
2000, and the remainder of which expire during 2001.
Columbia
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 Columbia: "It is too early to predict the outcome or
effect that the ongoing investigations, the initiation of additional
investigations, if any, and the related media coverage will have on [Columbia's]
financial condition or results of operations in future periods. Were [Columbia]
to be found in violation of federal or state laws relating to Medicare, Medicaid
or similar programs, [Columbia] could be subject to substantial monetary fines,
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. Any such sanctions could have a material adverse effect
on [Columbia's] financial position and results of operations." Columbia
maintains debt ratings of Ba2 from Moody's and BBB from Standard & Poor's.
Other Troubled Long-Term Care Providers
A number of nursing home operators other than Vencor have also been
adversely affected by the decrease in Medicare reimbursements following the
adoption of the Prospective Payment System. As discussed in our Annual Report on
Form 10-K for the year ended December 31, 1998, during the first quarter of 1999
certain of these operators were put on credit watch with negative implications.
The financial condition of many long-term care providers continued to erode
during the last year, in part due to the implementation of the Prospective
Payment System, and six of our operators (in addition to Vencor discussed above)
have filed for bankruptcy protection: Texas Health Enterprises, Inc. filed on
August 3, 1999; Sun Healthcare Group filed on October 14, 1999; Lenox
Healthcare, Inc. filed on November 3, 1999; Mariner Post-Acute Network, Inc.
filed on January 18, 2000; Integrated Health Services, Inc. filed on February 2,
2000; and RainTree Healthcare Corporation filed on February 29, 2000.
Additionally, Genesis Health Ventures has indicated that they will seek to
restructure their debt. Giving effect to our merger with American Health
Properties, these operators represented less than 4% of annualized revenue on a
pro forma basis for the period ended December 31, 1999 and no one of these
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operators represented more than 1% of annualized revenue for that same period.
Several of these facility leases have been assumed already and indications of
assumption have been made for a number of other facilities. Therefore, we
believe the financial impact of the bankruptcies by these tenants will not be
material.
LEASES AND LOANS
The initial base rental rates of the triple net leases we entered into
during the three years ended December 31, 1999 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,
1999 have generally ranged from 9% to 12% per annum. Rental rates vary by lease,
taking into consideration many factors, such as:
o Creditworthiness of the lessee
o Operating performance of the facility
o Interest rates at the beginning of the lease
o 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 that has a
triple net lease is responsible under the lease for all additional charges,
including charges related to non-payment or late payment of rent, taxes and
assessments, governmental charges with respect to the leased property and
utility and other charges incurred with the operation of the leased property.
Each triple net 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 ten years and the average
remaining term on the loans is approximately 11 years. The primary term of the
gross leases to multiple tenants in the medical office buildings range from 1 to
19 years, with an average of 4 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 135 leases and loans on 15 facilities which cover from 1
to 17 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 March 28,
2000, other than approximately $2.5 million in delinquent rents and interest, of
which approximately $1.2 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.
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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-nine properties are not subject to purchase
options until 2008 or later, and an additional 307 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,
1999 follows:
Current Annualized Revenue of
----------------------------------------------------------
Properties Subject to
Lease Expirations, Purchase
Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gain at Lease
Year (1) (2) Expiration(3),(4)
- -------------- ----------------------------- ------------------------- -----------------------------
(Amounts in thousands, except percentages) % Amount
------------ -------------
2000 $ 5,876 $ 2,270 (0.6)% $(1,700)
2001 19,108 6,367 0.2 600
2002 17,815 2,204 0.1 100
2003 10,200 4,005 (0.1) (100)
2004 65,554 38,896 -- --
Thereafter 180,301 63,934 -- --
----------------------------- ------------------------- ------------ -------------
$298,854 $117,676 (0.4)% $(1,100)
============================= ========================= ============ =============
(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)
is a component (subset) of column (1), the total current annualized
revenue of properties subject to lease expirations, purchase options
and mortgage maturities ($117,676,000).
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(3) Based on current market conditions, we estimate that there could be a
revenue 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. Our total revenue has grown at a
compound annual growth rate of 20.8% in the past five years. The
percentages are computed by taking the possible revenue loss as a
percentage of 1999 total annualized revenue.
(4) We estimate that in addition to the possible reduction in income from
lease expirations, we may also have an increase of approximately
$600,000 in 2000 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 2000 due to the unpredictable levels of 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.
Each lease requires 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 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
(representing an aggregate investment of approximately $424 million), including:
o 35 congregate care and assisted living facilities
o Seven medical office buildings
o Seven long-term care facilities
o Five rehabilitation hospitals
o Four acute care hospitals
As of December 31, 1999, we have funded costs of approximately $404
million and have completed 52 facilities of our total development commitment The
completed facilities comprise:
o 32 congregate care and assisted living facilities
o Seven medical office buildings
o Five rehabilitation hospitals
o Five long-term care facilities
o Three acute care hospitals
The six remaining development projects are scheduled for completion in
2000. Simultaneously with the commencement of each of these development programs
and prior to funding, we enter into a
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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 requires 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's parent entity, other affiliates or one or more of
the individual principals who control the developer.
In addition, before we advance any funds under the development
agreement, the developer 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.
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'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, 1999, we had varying percentage interests in several
limited liability companies and partnerships which together own 71 facilities,
as further discussed below:
(1) A 77% interest in a partnership (Health Care Property
Partners) which owns two acute care hospitals and 19 long-term
care facilities.
(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 99.95% interest in a limited liability company (Cambridge
Medical Property, LLC) which owns five medical office
buildings.
(4) A 90% interest in a limited liability company (HCPI Indiana,
LLC) which owns seven medical office buildings.
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(5) A 67% interest in a limited liability company (HCPI Utah, LLC)
which owns 15 medical office buildings.
(6) An 80% interest in eight limited liability companies
(Vista-Cal Associates, LLC; Oak City-Cal Associates, LLC;
Statesboro Associates, LLC; Ft. Worth-Cal Associates, LLC;
Perris-Cal Associates, LLC; Ponca-Cal Associates, LLC;
Louisiana-Two Associates, LLC; and Oklahoma-Four Associates,
LLC) which own an aggregate of 13 long-term care facilities.
(7) 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.
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 and, with respect to
our taxable years beginning before August 6, 1997, there was a third gross
income requirement. 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
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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. Third, for
our taxable years beginning before August 6, 1997, short-term gains from the
sale or other disposition of stock or securities, gains from prohibited
transactions and gains on the sale or other disposition of real property held
for less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of our gross income for each
such taxable year. 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.
Recently, 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 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
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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.
In addition, President Clinton's fiscal year 2001 budget proposal
includes a provision which, if enacted in its present form, would increase the
percentage of income REITs must timely distribute to shareholders to avoid the
excise tax to 98% of both ordinary income and capital gain net income. This
proposal would be effective for taxable years beginning after December 31, 2000.
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
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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 government 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.
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 $25,000 fines. Civil provisions prohibit
the knowing filing of a false claim or the knowing use of false statements to
obtain payment. The penalties for such a violation are fines of not less than
$5,000 nor more than $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,
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or to induce, the referral of Medicare and Medicaid 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, the federal government restricts certain financial relationships
between physicians and other providers of healthcare services.
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 expanded to numerous other states and to additional providers
including providers of ancillary nursing home services.
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 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
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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 may
include the federal Medicare program, state Medicaid programs, private insurance
carriers, health care service plans and health maintenance organizations, among
others. You should expect efforts to reduce costs by these payors to continue,
which may result in reduced or slower growth in reimbursement for certain
services provided by some of our lessees. In addition, the failure of any of our
lessees 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.
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 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.
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
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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 a "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 continued to erode during the past
year, in part due to the 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., RainTree Healthcare Corporation and Vencor, Inc..
These tenants and the percentage of our annualized revenues that they represent
are discussed more fully under the section entitled "Relationship with Major
Operators" and in the footnotes to our financial statements.
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 vary from state to
state, and in some instances from locality to locality. These standards are
constantly reviewed and revised. Agencies periodically inspect facilities, 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.
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 the lessees'
facilities, the operation of which requires accreditation, is accredited by the
Joint Commission on Accreditation of Healthcare Organizations.
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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 mandated reviews
of Medicare patient admissions, treatment and discharges in acute care
hospitals.
Congregate Care and Assisted Living Facilities. 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, the imposition of fines, suspension or
decertification from the Medicare and Medicaid program, and in extreme cases,
the revocation of a facility's license or closure of a facility. Such actions
may have an effect on the revenues of the operators of properties owned by 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, 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.
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.
In addition to the reforms enacted and considered by Congress from time
to time, state legislatures periodically consider various healthcare reform
proposals. 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
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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.
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 freeze in hospital rates in 1998 and more limited annual
increases in hospital rates for 1999-2002,
(4) The adoption of a Prospective Payment System for skilled
nursing facilities, home health agencies, hospital outpatient
departments, and rehabilitation hospitals,
(5) 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,
(6) The reduction in Medicare disproportionate share payments to
hospitals, and
(7) The removal of the $150,000,000 limit on tax-exempt bonds for
nonacute hospital capital projects.
The implementation of these amendments will occur at various times: for
instance, the Prospective Payment System for skilled nursing facilities went
into effect for the first cost reporting period after July 1, 1998, while the
Prospective Payment System for home health agencies will not be implemented
until October 1, 2000.
In seeking to limit Medicare reimbursement for long term care services,
Congress established the Prospective Payment System for skilled nursing facility
services to replace the cost-based reimbursement system.
See "Government Regulation -- Prospective Payment System."
In addition, the Balanced Budget Act of 1997 strengthens the anti-fraud
and abuse laws to provide for stiffer penalties for fraud and abuse violations.
The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997,
is expected to produce several billion dollars in net savings for Medicaid over
five years. 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 are "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 for skilled nursing facilities to:
o Use a public process for determining rates
o Publish proposed and final rates, the methodologies underlying
the rates, and justifications for the rates
o Give methodologies and justifications
During rate-setting procedures, 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 the Department of Health and Human Services is required to study and report
to Congress within four years concerning the effect of state rate-setting
methodologies on the access to and the quality of services provided to Medicaid
beneficiaries. The Balanced Budget Act also provides the federal government with
expanded enforcement powers to combat waste, fraud and abuse in delivery of
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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.
In November 1999, President Clinton signed into law the Medicare,
Medicaid and State Children's Health Insurance Programs Balanced Budget
Refinement Act of 1999 ("Budget Refinement Act") which reduces some of the
reimbursement cutbacks under the Balanced Budget Act. The Budget Refinement Act
delays implementation of cost-cutting measures and increases payments from the
Balanced Budget Act to some sectors of the healthcare industry. Long-term care
facilities will receive increased payments under the Budget Refinement Act. The
reduction in disproportionate share hospital funding will not be as steep. The
change to a PPS system for outpatient hospital services will be budget neutral
and not result in reduced reimbursement. Other changes also ameliorate changes
required by the Balanced Budget Act. The extent of the relief provided by the
Budget Refinement Act is estimated to be $16 billion over five years.
The Health Insurance Portability and Accountability Act of 1996
requires a significant overhaul of healthcare information systems to protect
individual medical information. In November 1999, the Department of Health and
Human Services released proposed regulations to protect the confidentiality of
individual health information. Although the final regulations have not yet been
released, the cost to the healthcare industry of complying with such regulations
may exceed the cost of complying with Year 2000 issues.
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 and payment methodologies and
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 availability of healthcare services.
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 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 reports that 1998 spending for healthcare continued a
five year trend of low growth 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. These trends are likely to lead to reduced or
slower growth in reimbursement for certain services provided by some of our
lessees. 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
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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.
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, 1999, we had three series of preferred stock and two
classes 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 its capital stock in exchange
for investments which conform to its standards and to repurchase or otherwise
acquire its shares or other securities.
We may incur additional indebtedness when, in the opinion of its
management and directors, it is advisable. For short-term purposes we from time
to time negotiate lines of credit, or arranges 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 it has invested or may refinance properties
acquired on a leveraged basis.
In July 1990, we adopted a rights agreement whereby we distributed a
dividend of one right for each outstanding share of common stock and authorized
the distribution of one right with respect to each subsequently issued share.
Each right, as adjusted for our 1992 stock split, will entitle its holder to
purchase one-half of a share of our common stock at an exercise price of $47.50
per share. The rights will become exercisable if a person acquires 15% or more
of our outstanding common stock or
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makes a tender offer which will result in the person's owning 30% or more of
our common stock. Under certain circumstances, the rights will entitle the
holders to purchase shares of our common stock, or securities of an entity
that acquires us, at one-half market value. We may redeem the rights at any
time prior to a person's acquiring 15% of our common stock. The rights are
intended to protect our stockholders from takeover tactics that could
deprive them of the full value of their shares.
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.
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.
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Health Care Property Investors
- -----------------------------------------|
|
|-- Texas HCP, Inc. | | HCPI/San Antonio LP
| 100% | 99% | 90%
| |--Texas HCP Holding, L.P. --|-------------------
|-- Texas HCP G.P., Inc. | 1% | Ft. Worth-Cal Assoc. LLC
| 100% | | 80%
|
|-- HCPI Trust
| 100%
|
|-- HCPI Knightdale, Inc.
| 100%
|
|-- HCPI Charlotte, Inc.
| 100%
|
|-- HCPI Mortgage Corp.
| 100%
|
|-- Meadowdome LLC
| 100%
|
|-- AHE of Somerville, Inc.
| 100%
|
|-- AHP of Nevada, Inc.
| 100%
|
|-- AHP of Washington, Inc.
| 100%
|
|-- AHP of California, Inc.
| 100%
|
|-- AHE Leasing Co.
| 100%
|
|-- Tucson-Cal Associates, 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 - 67% (Owns 100% of HCPI Davis North LLC)
Cambridge Medical Properties, LLC - 99.95%
Fayetteville Health Associates LP - 97%
Wichita Health Associates LP - 97%
Various Non-Consolidated LLCs*
* HCPI is non-managing member and has a 45%-80% interest in the following
limited liability companies:
Louisiana-Two Associates, LLC - 80% Vista-Cal Associates, LLC - 80%
Oak City-Cal Associates, LLC -80% Arborwood Living Center, LLC - 45%
Oklahoma-Four Associates, LLC - 80% Edgewood Assisted Living LLC - 45%
Perris-Cal Associates, LLC - 80% Greenleaf Living Center LLC - 45%
Ponca-Cal Associates, LLC - 80% Seminole Shores Living Center - 45%
Statesboro Associates, LLC - 80%
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ITEM 2. PROPERTIES
See Item 1. for details.
ITEM 3. LEGAL PROCEEDINGS
During 1999, we were not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on November 3, 1999 for the
purpose of approving the merger between HCPI and American Health Properties,
Inc. The merger was approved by the following vote:
Shares Voted Shares Voted Shares Broker
"For" "Against" Abstaining Non-Votes
------------------ ----------------- ---------- ---------
22,854,473 268,104 299,498 [0]
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