FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 30, 2001 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _________________________ Commission File number 1-8923 HEALTH CARE REIT, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1096634 ------------------------------------- ---------------------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One SeaGate, Suite 1500, Toledo, Ohio 43604 ------------------------------------- ---------------------- (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code) (419) 247-2800 ---------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 ______. ------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes _____. No _____. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 25, 2001. Class: Shares of Common Stock, $1.00 par value Outstanding 32,595,721 shares
HEALTH CARE REIT, INC. INDEX Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three and nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk 11 PART II. OTHER INFORMATION Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 EXHIBIT INDEX 15 -2-
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 2001 2000 (UNAUDITED) (NOTE) -------------- -------------- <S> <C> <C> ASSETS (IN THOUSANDS) Real estate investments: Real property owned: Land $ 79,861 $ 74,319 Buildings & improvements 836,867 770,660 Construction in progress 8,995 11,976 -------------- -------------- 925,723 856,955 Less accumulated depreciation (71,564) (52,968) -------------- -------------- Total real property owned 854,159 803,987 Loans receivable Real property loans 234,886 301,321 Subdebt investments 23,426 21,972 -------------- -------------- 1,112,471 1,127,280 Less allowance for loan losses (6,611) (5,861) -------------- -------------- Net real estate investments 1,105,860 1,121,419 Other Assets: Equity investments 6,585 5,450 Deferred loan expenses 7,266 2,939 Cash and cash equivalents 43,564 2,844 Receivables and other assets 32,012 24,252 -------------- -------------- 89,427 35,485 -------------- -------------- TOTAL ASSETS $ 1,195,287 $ 1,156,904 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations $ 0 $ 119,900 Senior unsecured notes 412,250 255,000 Secured debt 3,801 64,852 Accrued expenses and other liabilities 16,250 18,545 -------------- -------------- TOTAL LIABILITIES 432,301 458,297 Shareholders' equity: Preferred stock 150,000 150,000 Common stock 32,490 28,806 Capital in excess of par value 603,705 528,138 Overdistributed net income (18,922) (3,388) Accumulated other comprehensive loss (873) (744) Unamortized restricted stock (3,414) (4,205) -------------- -------------- TOTAL SHAREHOLDERS' EQUITY 762,986 698,607 -------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,195,287 $ 1,156,904 ============== ============== </TABLE> NOTE: The consolidated balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See notes to unaudited consolidated financial statements -3-
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 2001 2000 2001 2000 --------- --------- --------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> REVENUES: Rental income $ 25,756 $ 22,266 $ 72,227 $ 65,984 Interest income 7,187 9,695 23,974 31,408 Commitment fees and other income 934 1,390 2,861 4,657 Prepayment fees 856 0 990 57 --------- --------- --------- --------- Total revenue 34,733 33,351 100,052 102,106 EXPENSES: Interest expense 7,643 8,411 23,731 26,093 Loan expense 447 276 1,212 879 Provision for depreciation 7,244 5,985 21,023 16,558 Provision for losses 250 250 750 750 General and administrative expenses 2,070 1,823 5,956 5,654 --------- --------- --------- --------- Total expenses 17,654 16,745 52,672 49,934 --------- --------- --------- --------- Net income before gain on sale of properties and loss on extraordinary item 17,079 16,606 47,380 52,172 Gain on sale of properties 101 555 124 1,072 --------- --------- --------- --------- Net income before extraordinary item 17,180 17,161 47,504 53,244 Loss on extinguishment of debt (213) 0 (213) 0 --------- --------- --------- --------- Net income 16,967 17,161 47,291 53,244 Preferred stock dividends 3,376 3,376 10,128 10,114 --------- --------- --------- --------- Net income available to common shareholders $ 13,591 $ 13,785 $ 37,163 $ 43,130 ========= ========= ========= ========= Average number of common shares outstanding: Basic 32,205 28,507 29,946 28,460 Diluted 32,762 28,650 30,358 28,603 Net income available to common shareholders per share: Basic $ 0.42 $ 0.48 $ 1.24 $ 1.52 Diluted 0.41 0.48 1.22 1.51 Dividends declared and paid per common share $ 0.585 $ 0.585 $ 1.755 $ 1.750 </TABLE> See notes to unaudited consolidated financial statements -4-
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Nine months ended September 30, 2001 -------------------------------------------------------------------------------------------- Capital In Accum. In thousands Excess Other of Unamortized Comprehensive Preferred Common Par Restricted Overdistributed Income/ Stock Stock Value Stock Net Income (Loss) Total -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $ 150,000 28,806 $ 528,138 $ (4,205) $ (3,388) $ (744) $ 698,607 Comprehensive income: Net income 47,291 47,291 Unrealized losses on securities (89) (89) Foreign currency translation adjustment (40) (40) --------- Comprehensive income 47,162 Proceeds from issuance from dividend reinvestment and stock incentive plans, net of forfeitures 234 4,827 (83) 4,978 Proceeds from issuance of common shares 3,450 70,740 74,190 Restricted stock amortization 874 874 Cash dividends paid (62,825) (62,825) --------- --------- --------- --------- --------- --------- --------- Balance at end of period $ 150,000 $ 32,490 $ 603,705 $ (3,414) $ (18,922) $ (873) $ 762,986 ========= ========= ========= ========= ========= ========= ========= <CAPTION> Nine months ended September 30, 2000 -------------------------------------------------------------------------------------------- Capital In Accum. Excess Other of Unamortized Comprehensive Preferred Common Par Restricted Overdistributed Income/ Stock Stock Value Stock Net Income (Loss) Total -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $ 150,000 $ 28,532 $ 524,204 $ (5,216) $ 8,883 $ 593 $ 706,996 Comprehensive income: Net income 53,244 53,244 Unrealized losses on securities (591) (591) Foreign currency translation adjustment (717) (717) --------- Comprehensive income 51,936 Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures 159 2,103 1,085 3,347 Restricted stock amortization 859 859 Cash dividends paid (60,126) (60,126) --------- --------- --------- --------- --------- --------- --------- Balance at end of period $ 150,000 $ 28,691 $ 526,307 $ (3,272) $ 2,001 $ (715) $ 703,012 ========= ========= ========= ========= ========= ========= ========= </TABLE> See notes to unaudited consolidated financial statements -5-
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 2001 2000 --------- --------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 47,291 $ 53,244 Adjustments to reconcile net income to net cash Provision for depreciation 21,201 16,751 Provision for losses 750 750 Amortization 2,124 1,737 Loan and commitment fees earned in excess of cash received (1,329) (1,154) Rental income in excess of cash received (6,187) (4,396) Interest and other income in excess of cash received (249) (235) Decrease in accrued expenses and other liabilities (967) (3,623) Increase in receivables and other assets (1,548) (4,554) --------- --------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 61,086 58,520 INVESTING ACTIVITIES Investment in real properties (79,529) (37,833) Investment in loans receivable (19,424) (14,478) Other investments, net (685) (10,955) Principal collected on loans 70,391 57,147 Proceeds from sale of properties 22,018 107,182 Other (203) (659) --------- --------- NET CASH PROVIDED FROM (USED IN) INVESTING ACTIVITIES (7,432) 100,404 FINANCING ACTIVITIES Net payments under line of credit arrangements (119,900) (58,650) Principal payments on long-term obligations (78,801) (41,475) Issuance of long-term obligations 175,000 0 Net proceeds from the issuance of Common Stock 79,168 3,347 Increase in deferred loan expense (5,576) (633) Cash distributions to shareholders (62,825) (60,126) --------- --------- NET CASH USED IN FINANCING ACTIVITIES (12,934) (157,537) --------- --------- Increase in cash and cash equivalents 40,720 1,387 Cash and cash equivalents at beginning of period 2,844 2,129 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 43,564 $ 3,516 ========= ========= Supplemental Cash Flow Information -- Interest Paid $ 25,096 $ 31,186 ========= ========= </TABLE> See notes to unaudited consolidated financial statements -6-
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS HEALTH CARE REIT, INC. AND SUBSIDIARIES NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the nine months ended September 30, 2001, are not necessarily an indication of the results that may be expected for the year ending December 31, 2001. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2000. NOTE B - REAL ESTATE INVESTMENTS During the nine months ended September 30, 2001, the Company invested $69,605,000 in real property, made construction advances of $14,016,000 and funded $2,665,000 of equity related investments. During the nine months ended September 30, 2001, the Company sold properties valued at $22,018,000 and received principal payments on real estate mortgages of $70,391,000. With respect to the above-mentioned construction advances, funding for construction in progress in connection with four properties owned directly by the Company totaled $9,084,000, and funding associated with two construction loans represented $4,932,000. During the nine months ended September 30, 2001, two of the construction properties in progress with investment balances totaling $12,065,000 completed the construction phase of the Company's investment process and were converted to permanent operating leases and one of the construction loans with an investment balance of $2,010,000 was converted to a permanent mortgage loan. NOTE C - EQUITY INVESTMENTS Management determines the appropriate classification of an equity investment at the time of acquisition and reevaluates such designation as of each balance sheet date. At September 30, 2001, equity investments include the common stock of a corporation, valued at historical cost, and ownership representing a 31% interest in Atlantic Healthcare Finance L.P., a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing homes located in the United Kingdom and continental Europe. The ownership interest is accounted for under the equity method. -7-
NOTE D - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 2000, the Company was contingently liable for certain obligations amounting to $11,425,000. NOTE E - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS On February 20, 2001, the Company paid a dividend of $0.585 per share to shareholders of record on January 31, 2001. This dividend related to the period from October 1, 2000 through December 31, 2000. On May 21, 2001, the Company paid a dividend of $0.585 per share to shareholders of record on May 1, 2001. This dividend related to the period January 1, 2001 to March 31, 2001. On August 20, 2001, the Company paid a dividend of $0.585 per share to shareholders of record on August 1, 2001. This dividend related to the period April 1, 2001 to June 30, 2001. NOTE F - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> Three months ended Nine months ended September 30 September 30 ------------------------ ------------------------ 2001 2000 2001 2000 --------- --------- --------- --------- <S> <C> <C> <C> <C> Numerator for basic and diluted earnings per share-income available to common shareholders $ 13,591 $ 13,785 $ 37,163 $ 43,129 ========= ========= ========= ========= Denominator for basic earnings per share - weighted average shares 32,205 28,507 29,946 28,460 Effect of dilutive securities: Employee stock options 327 -- 182 -- Nonvested restricted shares 230 143 230 143 --------- --------- --------- --------- Dilutive potential common shares 557 143 412 143 --------- --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares 32,762 28,650 30,358 28,603 ========= ========= ========= ========= Basic earnings per share $ 0.42 $ 0.48 $ 1.24 $ 1.52 Diluted earnings per share $ 0.41 $ 0.48 $ 1.22 $ 1.51 </TABLE> The diluted earnings per share calculation excludes the dilutive effect of 150,000 and 1,479,000 shares for the three month periods and 763,000 and 1,479,000 for the nine month periods ended September 30, 2001 and September 30, 2000, respectively; because the exercise price was greater than the average market price. The Series C Cumulative Convertible Preferred Stock was not included in this calculation as the effect of the conversion was anti-dilutive. -8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At September 30, 2001, the Company's net real estate investments totaled $1,105,860,000 which included 147 assisted living facilities, 48 nursing facilities and seven specialty care facilities. Depending upon the availability and cost of external capital, the Company anticipates making additional investments in health care related facilities. New investments are funded from temporary borrowings under the Company's line of credit arrangements, internally generated cash and the proceeds derived from asset sales. Permanent financing for future investments, which replaces funds drawn under the line of credit arrangements, is expected to be provided through a combination of private and public offerings of debt and equity securities and the assumption of secured debt. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements and finance future investments. In March, 2001, the Company completed its approximately $200 million asset divestiture program that it announced in October, 1999 in response to a lack of capital for health care REITs and long-term care companies. This program strengthened the Company's portfolio and generated liquidity, enhancing the Company's balance sheet. The completion of this program positioned the Company for new investment opportunities. During the first half of 2001, improved operating results in the public nursing home sector, reduced development of new assisted living facilities and a shift in equity funds flow back into income-oriented investments resulted in new access to appropriately priced capital for health care REITs. In June, 2001, the Company issued 3,450,000 shares of Common Stock, $1 par value, at a price of $22.75 per share, which generated net proceeds of $74,190,000. In August, 2001, the Company sold $175 million of senior unsecured notes due in 2007 at an effective yield of 7.775%. Pending their use to invest in additional health care properties, the proceeds were used primarily to pay down borrowings under the Company's unsecured and secured line of credit arrangements. As of September 30, 2001, the Company had a total outstanding debt balance of $416,051,000 and shareholders' equity of $762,986,000 which represents a debt to equity ratio of .55 to 1.0, and a debt to total capitalization ratio of .35 to 1.0. As of September 30, 2001, the Company had an unsecured revolving line of credit expiring March 31, 2003 in the amount of $150,000,000 bearing interest at the lender's prime rate or LIBOR plus 1.5%. In addition, the Company had an unsecured revolving line of credit in the amount of $25,000,000 bearing interest at the lender's prime rate expiring June 30, 2002. Also, at September 30, 2001, the Company had secured line of credit arrangements totaling $64,000,000. At September 30, 2001, the Company had no borrowings under the unsecured line of credit arrangements and $3,000,000 outstanding on the secured line of credit arrangements. As of September 30, 2001, the Company had effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $77,000,000 of securities including debt, convertible debt, common and preferred stock. Depending upon market conditions, the Company anticipates issuing securities under such shelf registrations to invest in additional health care facilities and to repay borrowings under the Company's line of credit arrangements. -9-
RESULTS OF OPERATIONS Revenues were comprised of the following: <TABLE> <CAPTION> Three months ended Change Year to date through Change ------------------------------ -------------------- ------------------------------ -------------------- Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ % -------------- -------------- -------------------- ------------------------------ -------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> (000's) Rental income $ 25,756 $ 22,266 $ 3,490 15.67% $ 72,227 $ 65,984 $ 6,243 9.46% Interest income 7,187 9,695 (2.508) -25.87% 23,974 31,408 (7,434) -23.67% Commitment fees and other income 934 1,390 (456) -32.81% 2,861 4,657 (1,796) -38.57% Prepayment fees 856 - 856 100.00% 990 57 933 1637.84% ------------ ------------ -------- --------- ------------ ------------- -------- --------- Total $ 34,733 $ 33,351 $ 1,382 4.14% $ 100,052 102,106 $ (2,054) -2.01% ============ ============ ======== ========= ============ ============= ======== ========= </TABLE> For the three and nine months ended September 30, 2001, the Company generated increased rental income as a result of the completion of real property construction projects for which the Company began receiving rent and the purchase of properties previously financed by the Company. This offset a reduction in interest income due to the repayment of mortgage loans and the purchase of properties previously financed by the Company with mortgage loans. Commitment fees and other income decreased as a result of the completion of construction projects and curtailment of investing activity. Expenses were comprised of the following: <TABLE> <CAPTION> Three months ended Change Year to date through Change ----------------------------- --------------------- ------------------------------ -------------------- Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ % -------------- -------------- --------------------- ------------------------------ -------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> (000's) Interest expense $ 7,643 $ 8,411 $ (768) -9.13% $ 23,731 $ 26,093 $(2,362) -9.05% Loan expense 447 276 171 6.20% 1,212 879 333 37.88% Provision for depreciation 7,244 5,985 1,259 2.10% 21,023 16,558 4,465 26.97% Provision for losses 250 250 - -% 750 750 - -% General and admin. expenses 2,070 1,823 247 13.55% 5,956 5,654 302 5.34% ------------ ------------ --------- --------- ------------ ------------ -------- -------- Total $ 17,654 $ 16,745 $ 909 5.43% $ 52,672 $ 49,934 $ 2,738 5.48% ============ ============ ========= ========= ============ ============ ======== ======== </TABLE> The decrease in interest expense for both the three-month and year-to-date periods was primarily due to lower average borrowings on the Company's lines of credit and senior notes partially offset by a reduction in the amount of capitalized interest offsetting interest expense. The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. Capitalized interest for the three-month and year-to-date periods totaled $200,000 and $739,000, respectively as compared with $603,000 and $2,777,000 for the same periods in 2000. The provision for depreciation increased over the comparable periods in 2000 primarily as a result of additional investments in properties owned directly by the Company. General and administrative expenses as a percentage of revenue for the three-month and year-to-date periods were 5.96% and 5.95% as compared with 5.47% and 5.54% for the same periods in 2000. -10-
Other items: <TABLE> <CAPTION> Three months ended Change Year to date through Change ------------------------------ --------------------- ------------------------------ -------------------- Sept. 30, 2001 Sept. 30, 2000 $ % Sept. 30, 2001 Sept. 30, 2000 $ % -------------- -------------- --------------------- ------------------------------ -------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> (000's) Other items: Loss on extinguishment of debt 213 - 213 100.00% 213 - 213 100.00% Gain on sales of properties $ 101 $ 555 $ (454) -81.80% $ 124 $ 1,072 $ (948) -88.43% Preferred dividends 3,376 3,376 - -% 10,128 10,114 14 - </TABLE> As a result of the various factors mentioned above, net income available to common shareholders for the three-month and year-to-date periods was $13,591,000, or $0.41 per diluted share, and $37,163,000 or $1.22 per diluted share, respectively, as compared with $13,785,000, or $0.48 per diluted share, and $43,130,000, or $1.51 per diluted share for the comparable periods in 2000. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This report on Form 10-Q of the Company includes forward looking statements that reflect the Company's current view with respect to future events and financial performance. The words "believe", "expect", "anticipate" and similar expressions identify forward-looking statements. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government regulations, including changes in Medicare and Medicaid payment levels, changes in the healthcare industry, deterioration of the operating results or financial condition, including bankruptcies, of the Company's tenants and borrowers, the ability of the Company to attract new operators for certain facilities, the amount of any additional investments, access to capital markets and changes in the ratings of the Company's debt securities. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. The Company undertakes no obligation to publicly update or revise any forward looking statements, whether as a result of new information, future events, or otherwise. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings to the extent possible. The following section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates. The Company historically borrows on its revolving lines of credit to make acquisitions or to finance the construction of health care facilities. Then, as market conditions dictate, the Company will issue equity or long-term fixed rate debt to repay the borrowings under the revolving lines of credit. A change in interest rates will not affect future earnings or cash flow on our fixed rate debt. Interest rate changes, however, will affect the fair value of such debt. A 1% increase in interest rates would result in a decrease in fair value of the Company's Senior Unsecured Notes by approximately $17 million at September 30, 2001. Changes in the interest rate environment upon maturity of this fixed rate debt could have an affect on the future cash flows and earnings of the Company, depending on whether the debt is replaced with other fixed rate debt, with variable rate debt, with equity or by the sale of assets. A change in interest rates will not affect the fair value of the Company's variable rate debt, including its unsecured and secured revolving credit arrangements. At September 30, 2001, the Company had limited variable rate debt, so a 1% increase in interest rates would have an immaterial effect on annual interest expense. -11-
The Company is subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of the Company's borrowings were completed pursuant to indentures or contractual agreements which limit the amount of indebtedness the Company may incur. Accordingly, in the event that the Company is unable to raise additional equity or borrow money because of these limitations, the Company's ability to acquire additional properties may be limited. From time to time, the Company's variable interest rate debt may exceed its variable interest rate assets, presenting an exposure to rising interest rates. The Company may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of future volatility of interest rates. Potential Risks from Bankruptcies The Company is exposed to the risk that its operators may not be able to meet the rent and interest payments due the Company, which may result in an operator bankruptcy or insolvency. Although the Company's operating lease agreements and loans provide the Company the right to terminate an investment, evict an operator, demand immediate repayment, and other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. An operator in bankruptcy may be able to restrict the Company's ability to collect unpaid rent or interest, and collect interest during the bankruptcy proceeding. The receipt of liquidation proceeds or the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the property or the replacement of the operator licensed to manage the facility. In addition, the Company may be required to fund certain expenses (e.g., real estate taxes and maintenance) to retain control of a property. In some instances the Company may take possession of a property, which may expose the Company to successor liabilities. Should such events occur, the Company's revenue and operating cash flow may be adversely affected. -12-
PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On August 8, 2001, the Company issued a press release announcing the issuance of $175 million in senior notes. On October 3, 2001, the Company issued a press release announcing release of earnings and third quarter conference call. On October 16, 2001, the Company issued a press release announcing third quarter results and dividends. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Press release dated August 8, 2001 99.2 Press release dated October 3, 2001 99.3 Press release dated October 16, 2001 (b) Reports on Form 8-K Form 8-K filed August 9, 2001 -13-
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. Date: October 30, 2001 By: /S/ GEORGE L. CHAPMAN -------------------------- -------------------------------------- George L. Chapman, Chairman, Chief Executive Officer and President Date: October 30, 2001 By: /S/ RAYMOND W. BRAUN ------------------------- -------------------------------------- Raymond W. Braun, Chief Financial Officer Date: October 30, 2001 By: /S/ MICHAEL A. CRABTREE ------------------------- -------------------------------------- Michael A. Crabtree, Chief Accounting Officer -14-
EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: DESIGNATION NUMBER UNDER ITEM 601 OF REGULATION S-K EXHIBIT DESCRIPTION -------------- ------------------- 99.1 Press release dated August 8, 2001 99.2 Press release dated October 3, 2001 99.3 Press release dated October 16, 2001 -15-