1 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 March 31, 1998 ------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________________ to ______________________ 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 April 24, 1998. Class: Shares of Common Stock, $1.00 par value Outstanding 25,376,697 shares
2 HEALTH CARE REIT, INC. INDEX <TABLE> <CAPTION> Page <S> <C> <C> Part I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 3 Consolidated Statements of Income - Three months ended March 31, 1998 and 1997 4 Consolidated Statements of Shareholders' Equity - Three months ended March 31, 1998 and 1997 5 Consolidated Statements of Cash Flows- Three months ended March 31, 1998 and 1997 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Part II. OTHER INFORMATION Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 SIGNATURES 13 EXHIBIT INDEX 14 </TABLE> -2-
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONSOLIDATED BALANCE SHEETS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> March 31 December 31 1998 1997 (Unaudited) (Note) ----------- ----------- ASSETS (In thousands) <S> <C> <C> Real estate investments: Real property owned: Land $ 27,654 $ 22,445 Buildings & improvements 300,451 239,549 Construction in progress 62,676 47,050 --------- --------- 390,781 309,044 Less accumulated depreciation (13,638) (11,769) --------- --------- Total real property owned 377,143 297,275 Loans receivable 429,686 412,734 Direct financing leases 7,825 7,935 --------- --------- 814,654 717,944 Less allowance for losses on loans receivable (4,537) (4,387) --------- --------- Net real estate investments 810,117 713,557 Other Assets: Direct investments 8,680 4,964 Marketable securities 5,009 4,671 Cash and cash equivalents 1,689 1,381 Deferred loan expenses 2,584 2,275 Receivables and other assets 7,927 7,479 --------- --------- 25,889 20,770 --------- --------- Total assets $ 836,006 $ 734,327 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations $ 49,000 $ 78,400 Senior unsecured notes 262,000 162,000 Bonds and mortgages payable 8,650 8,670 Accrued expenses and other liabilities 19,255 15,333 --------- --------- TOTAL LIABILITIES 338,905 264,403 Shareholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - None Common Stock, $1.00 par value: Authorized - 40,000,000 shares Issued and outstanding - 25,367,997 in 1998 and 24,341,030 in 1997 25,368 24,341 Capital in excess of par value 461,102 435,603 Undistributed net income 9,102 8,841 Accumulated other comprehensive income 5,010 4,671 Unamortized restricted stock (3,481) (3,532) --------- --------- TOTAL SHAREHOLDERS' EQUITY 497,101 469,924 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 836,006 $ 734,327 ========= ========= </TABLE> NOTE: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to unaudited consolidated financial statements -3-
4 CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three Months Ended March 31 1998 1997 ------------------------------------ (In thousands except per share data) REVENUES: <S> <C> <C> Interest on loans receivable $ 11,922 $ 10,616 Operating lease rent 7,644 4,963 Direct financing lease income 214 357 Loan and commitment fees 1,226 584 Other income 220 49 -------- -------- Total revenue $ 21,226 $ 16,569 EXPENSES: Interest expense $ 4,240 $ 4,011 Loan expense 176 217 Provision for depreciation 1,870 1,185 Provision for losses 150 150 General and administrative expenses 1,381 1,180 -------- -------- Total expenses $ 7,817 $ 6,743 -------- -------- Net income $ 13,409 $ 9,826 ======== ======== Average number of shares outstanding: Basic 24,259 19,286 Diluted 24,642 19,450 Net income per share: Basic $ 0.55 $ 0.51 Diluted 0.54 0.51 </TABLE> See notes to unaudited consolidated financial statements -4-
5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three months ended March 31, 1998 ------------------------------------------------------------------------------------------------ Capital In Unamortized Accum. Other Common Excess of Restricted Undistributed Comprehensive In thousands Stock Par Value Stock Net Income Income Total ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Balance at beginning of period $24,341 $435,603 $ (3,532) $ 8,841 $ 4,671 $ 469,924 Comprehensive income: Net income 13,409 13,409 Unrealized gains on securities 339 339 --------- Comprehensive income 13,748 --------- Proceeds from issuance of shares from dividend reinvestment plan 79 2,053 2,132 Proceeds from issuance of shares from stock incentive plan 35 638 673 Proceeds from sale of shares 913 22,808 23,721 Reserved for restricted stock net of amortization 51 51 Cash dividends paid (13,148) (13,148) ------- -------- ---------- ----------- ---------- ---------- Balance at end of period $25,368 $461,102 $ (3,481) $ 9,102 $ 5,010 $ 497,101 ======= ======== ========== ========== ========== ========= </TABLE> <TABLE> <CAPTION> Three months ended March 31, 1997 ------------------------------------------------------------------------------------------------ Capital In Unamortized Accum. Other Common Excess of Restricted Undistributed Comprehensive Stock Par Value Stock Net Income Income Total ------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Balance at beginning of period $18,320 $298,281 $ 0 $ 8,167 $ 768 $ 325,536 Comprehensive income: Net income 9,826 9,826 Unrealized gains on securities 198 198 --------- Comprehensive income 10,024 --------- Proceeds from issuance of shares from dividend reinvestment plan 37 850 887 Proceeds from issuance of shares from stock incentive plan 50 1,037 1,087 Proceeds from sale of shares 3,330 73,275 76,605 Cash dividends paid (9,705) (9,705) ------- -------- --------- ----------- ---------- ---------- Balance at end of period $21,737 $373,443 $ 0 $ 8,288 $ 966 $ 404,434 ======= ========= ========= ========== ========== ========= </TABLE> See notes to unaudited consolidated financial statements. -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Three Months Ended March 31 1998 1997 ---------------------------------- (In thousands) OPERATING ACTIVITIES <S> <C> <C> Net income $ 13,409 $ 9,826 Adjustments to reconcile net income to net cash Provision for depreciation 1,897 1,199 Provision for losses 150 150 Amortization 291 218 Loan and commitment fees earned less than cash received 523 452 Direct financing lease income less than cash received 110 72 Rental income in excess of cash received (569) (333) Interest income in excess of cash received (5) (9) Increase in accrued expenses and other liabilities 3,400 1,382 (Increase)/decrease in receivables and other assets 86 (1,315) ---------- ------------ NET CASH PROVIDED FROM OPERATING ACTIVITIES 19,292 11,642 INVESTING ACTIVITIES Investment in real properties (68,419) (44,216) Investment in loans receivable (38,040) (44,576) Investment in equity related investments (3,716) 0 Principal collected on loans 7,774 713 Other 6 (7) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (102,395) (88,086) FINANCING ACTIVITIES Net (payments)/advances under line of credit arrangements (29,400) 8,375 Principal payments on long-term obligations (20) (173) Net proceeds from the issuance of shares 26,462 78,275 Proceeds from issuance of Senior Notes 100,000 0 Increase in deferred loan expense (483) (788) Cash distributions to shareholders (13,148) (9,705) ------------ ------------ NET CASH PROVIDED FROM FINANCING ACTIVITIES 83,411 75,984 Increase/(decrease) in cash and cash equivalents 308 (460) ------------ ------------ Cash and cash equivalents at beginning of period 1,381 581 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,689 $ 121 ============ =========== Supplemental Cash Flow Information -- Interest Paid $ 1,973 $ 3,359 ============ =========== </TABLE> See notes to unaudited consolidated financial statements -6-
7 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 generally accepted accounting principles 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 generally accepted accounting principles 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 three months ended March 31, 1998 are not necessarily an indication of the results that may be expected for the year ending December 31, 1998. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K/A for the year ended December 31, 1997. Note B - Real Estate Investments During the three months ended March 31, 1998, the Company provided permanent mortgage financings of $27,071,000, invested $43,455,000 in real property, made construction advances of $35,933,000, and funded $3,716,000 of equity related investments. During the three months ended March 31, 1998, the Company received principal payments on real estate mortgages of $7,361,000 and had net payments on working capital loans of $413,000. With respect to the above-mentioned construction advances, funding associated with 14 construction loans represented $10,969,000, and funding for construction in progress in connection with 27 properties owned directly by the Company totaled $24,964,000. During the three months ended March 31, 1998, two of the construction loans completed the construction phase of the Company's investment process and were converted to investments in permanent mortgage loans, with an aggregate investment of $7,595,000. Also during the three months ended March 31, 1998, three of the construction properties in progress completed the construction phase of the Company's investment process and were converted to permanent operating leases, with an aggregate investment balance of $9,337,000. Note C - Indebtedness and Shareholders' Equity In March 1998, the Company completed the sale of $100 million of 7.625% Senior Unsecured Notes due March 15, 2008. In March, 1998, the Company issued 913,242 shares of Common Stock, $1.00 par value per share, at the price of $27.375 per share, which generated net proceeds to the Company of $23,721,000. The Company has a total of $185,000,000 in unsecured credit facilities bearing interest at the lenders' prime rate or LIBOR plus 1.125%. A total of approximately $136,000,000 was available at March 31, 1998, subject to compliance with the terms and conditions of the unsecured credit facilities. -7-
8 Note D - Direct Investments Management determines the appropriate classification of a direct investment at the time of acquisition and reevaluates such designation as of each balance sheet date. Debt securities which are classified as held to maturity are stated at historical cost. Equity investments are stated at historical cost. At March 31, 1998, direct investments included the preferred stock of two private corporations and subordinated debt in four private corporations. Note E - Marketable Securities Marketable securities are stated at market value with unrealized gains and losses reported in a separate component of shareholders' equity. At March 31, 1998, marketable securities reflected the market value of the common stock of two publicly owned corporations, which were obtained by the Company at no cost, and the fair value of the common stock related to warrants in one publicly owned corporation in excess of the exercise price. Note F - Contingent Liabilities As disclosed in the financial statements for the year ended December 31, 1997, the Company was contingently liable for certain obligations amounting to $15,565,000. No significant change in these contingencies had occurred as of March 31, 1998. Note G - Distributions Paid to Shareholders On February 20, 1998, the Company paid a dividend of $0.54 per share to shareholders of record on February 3, 1998. This dividend related to the period from October 1, 1997 through December 31, 1997. Note H - 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 March 31 --------------------------- 1998 1997 ---- ---- <S> <C> <C> Numerator for basic and diluted earnings per share-income available to common shareholders $13,409 $ 9,826 ======= ======= Denominator for basic earnings per share - weighted average shares 24,259 19,286 Effect of dilutive securities: Employee stock options 143 Nonvested restricted shares 240 164 ------- ------- Dilutive potential common shares 383 164 ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 24,642 19,450 ======= ======= Basic earnings per share $ 0.55 $ 0.51 Diluted earnings per share $ 0.54 $ 0.51 </TABLE> -8-
9 Note I - Comprehensive Income As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires unrealized gains or losses on the Company's marketable securities to be included in other comprehensive income. Prior to adoption of Statement 130 unrealized gains and losses were reported seperately in shareholders' equity. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. During the first quarter of 1998 and 1997, total comprehensive income amounted to $13,748,000 and $10,024,000. Note J - Subsequent Events On April 21, 1998, the Company declared a dividend of $0.545 per share payable on May 20, 1998 to shareholders of record on May 5, 1998. The dividend relates to the period from January 1, 1998 through March 31, 1998. -9-
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At March 31, 1998, the Company's net real estate investments totaled approximately $810,117,000, which included 54 skilled nursing facilities, 120 assisted living facilities, 12 retirement centers, six specialty care facilities and two behavioral care facilities. The Company funds its investments through a combination of long-term and short-term financing, utilizing both debt and equity. As of March 31, 1998, the Company had shareholders' equity of $497,101,000 and a total outstanding debt balance of $319,650,000, which represents a debt to equity ratio of 0.64 to 1.0. In March 1998, the Company completed the sale of $100 million of 7.625% Senior Unsecured Notes due March 15, 2008. In March 1998, the Company issued 913,242 shares of Common Stock, $1.00 par value per share, at the price of $27.375 per share, which generated net proceeds to the Company of $23,721,000. During the three months ended March 31, 1998, the proceeds derived from the Company's capital raising activities were used to invest in additional health care properties and reduce bank debt under the Company's revolving lines of credit arrangements. As of March 31, 1998, the Company has effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $516,269,000 of securities including debt, convertible debt, common and preferred stock. The Company anticipates issuing securities under such shelf registrations to invest in additional health care facilities and to repay borrowings under the Company's line of credit arrangements. As of March 31, 1998, the Company had approximately $256,702,000 in unfunded commitments. Under the Company's line of credit arrangements, available funding totaled $136,000,000, subject to compliance with the terms and conditions of the line of credit arrangements. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, finance future investments, and meet debt service and dividend requirements. RESULTS OF OPERATIONS - --------------------- Revenues for the three months ended March 31, 1998 were $21,226,000 as compared with $16,569,000 for the three months ended March 31, 1997. Revenue growth resulted primarily from increased interest income of $1,306,000, increased operating lease income of $2,681,000 and increased loan and commitment fees of $642,000 as a result of additional real estate investments made during the past twelve months. Expenses for the three months ended March 31, 1998 totaled $7,817,000, an increase of $1,074,000 from expenses of $6,743,000 for the same period in 1997. The increase in total expenses for the three month period ended March 31, 1998 was related to an increase in interest expense, an additional expense associated with the provision for depreciation and an increase in general and administrative expenses. Interest expense for the three months ended March 31, 1998 was $4,240,000 as compared to $4,011,000 for the same period in 1997. The increase in the 1998 period was primarily due to the issuance of $80,000,000 Senior Notes in April 1997 and the issuance of $100,000,000 Senior Notes in March 1998. The increase in the 1998 period was offset by the amount of capitalized interest recorded during the first three months of 1998. -10-
11 The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. The Company's interest expense is reduced by the amount capitalized. Capitalized interest for the three month period in 1998 totaled $1,226,000, as compared with $247,000 for the same period in 1997. The provision for depreciation for the three month period ended March 31, 1998 totaled $1,870,000, an increase of $685,000 over the comparable period in 1997 as a result of additional investments in properties owned directly by the Company. General and administrative expense for the three month period ended March 31, 1998 totaled $1,381,000, as compared with $1,180,000 for the same period in 1997. The expenses for the three month period in 1998 were 6.51% of revenues as compared with 7.12% for the same period in 1997. As a result of the various factors mentioned above, net income for the three month period ended March 31, 1998 was $13,409,000, or $0.54 per diluted share, as compared with $9,826,000, or $0.51 per diluted share, for the comparable period in 1997. IMPACT OF INFLATION During the past three years, inflation has not significantly affected the earnings of the Company because of the moderate inflation rate. Additionally, earnings of the Company are primarily long-term investments with fixed interest rates. These investments are mainly financed with a combination of equity, senior notes and borrowings under the revolving lines of credit. During inflationary periods, which generally are accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Presuming the current inflation rate remains moderate and long-term interest rates do not increase significantly, the Company believes that equity and debt financing will continue to be available. OTHER INFORMATION This document and supporting schedules may contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause the Company's actual results in the future to differ materially from expected results. These risks and uncertainties include, among others, competition in the financing of health care facilities, the availability of capital, and regulatory and other changes in the health care sector, as described in the Company's filings with the Securities and Exchange Commission. The Company has assessed its current computer software for proper functioning with respect in dates in the year 2000 and thereafter. The year 2000 issue and related costs are not expected to have a material impact on the operations of the Company. -11-
12 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION On January 15, 1998, the Company issued a press release in which it announced record new investments of $262.6 million for 1997. On January 20, 1998, the Company issued a press release in which it announced that the Board of Directors voted to pay a quarterly dividend of $0.54 per share on February 20, 1998 payable to shareholders of record as of February 3, 1998. On February 4, 1998, the Company issued a press release in which it announced financial results for the fourth quarter and year ended December 31, 1997. On February 10, 1998, the Company issued a press release in which it announced an investment grade rating by Standard & Poor's. On February 17, 1998, the Company issued a press release in which it announced participation in a joint venture to invest in European health care facilities. On March 11, 1998, the Company issued a press release in which it announced the sale of $100 million of senior unsecured notes. On March 26, 1998, the Company issued a press release in which it announced the sale of 913,242 shares of common stock. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Reports 10.1 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and George L. Chapman 10.2 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Raymond W. Braun 10.3 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Edward F. Lange, Jr. 10.4 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Erin C. Ibele 27 Financial Data Schedule 99.1 Press release dated January 15, 1998 99.2 Press release dated January 20, 1998 99.3 Press release dated February 4, 1998 99.4 Press release dated February 10, 1998 99.5 Press release dated February 17, 1998 99.6 Press release dated March 11, 1998 99.7 Press release dated March 26, 1998 (b) Reports on Form 8-K Form 8-K filed on March 11, 1998 Form 8-K filed on March 26, 1998 -12-
13 Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. <TABLE> <CAPTION> HEALTH CARE REIT, INC. <S> ` <C> Date: April 28, 1998 By: GEORGE L. CHAPMAN ------------------------ ------------------------- George L. Chapman, Chairman, Chief Executive Officer, and President Date: April 28, 1998 By: EDWARD F. LANGE, JR. ----------------------- --------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: April 28, 1998 By: MICHAEL A. CRABTREE ----------------------- ------------------------- Michael A. Crabtree, Chief Accounting Officer </TABLE> -13-
14 EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits: <TABLE> <CAPTION> Designation Number Under Item 601 of Regulation S-K Exhibit Description -------------- ------------------- <S> <C> 10.1 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and George L. Chapman 10.2 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Raymond W. Braun 10.3 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Edward F. Lange, Jr. 10.4 Amended and Restated Employment Agreement effective as of January 1, 1998 by and between Health Care REIT, Inc. and Erin C. Ibele 27 Financial Data Schedule 99.1 Press release dated January 15, 1998 99.2 Press release dated January 20, 1998 99.3 Press release dated February 4, 1998 99.4 Press release dated February 10, 1998 99.5 Press release dated February 17, 1998 99.6 Press release dated March 11, 1998 99.7 Press release dated March 26, 1998 </TABLE>