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 SEPTEMBER 30, 1999 -------------------------------------------------- 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 November 4, 1999. Class: Shares of Common Stock, $1.00 par value Outstanding 28,490,600 shares
2 HEALTH CARE REIT, INC. INDEX PAGE PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3 Consolidated Statements of Income - Three and nine months ended September 30, 1999 and 1998 4 Consolidated Statements of Shareholders' Equity - Nine months ended September 30, 1999 and 1998 5 Consolidated Statements of Cash Flows - Nine months ended September 30, 1999 and 1998 6 Notes to Unaudited Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk 13 PART II. OTHER INFORMATION Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 SIGNATURES 15 EXHIBIT INDEX 16 -2-
3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> SEPTEMBER 30 DECEMBER 31 1999 1998 (UNAUDITED) (NOTE) ------------ ------------ ASSETS (IN THOUSANDS) <S> <C> <C> Real estate investments: Real property owned: Land $ 63,627 $ 44,722 Buildings & improvements 687,429 443,574 Construction in progress 77,717 151,317 ----------- ----------- 828,773 639,613 Less accumulated depreciation (32,113) (19,624) ----------- ----------- Total real property owned 796,660 619,989 Loans receivable 411,842 405,963 Direct financing leases 6,741 ----------- ----------- 1,208,502 1,032,693 Less allowance for loan losses (5,437) (4,987) ----------- ----------- Net real estate investments 1,203,065 1,027,706 Other Assets: Direct investments 28,555 26,180 Marketable securities 1,257 4,106 Cash and cash equivalents 7,779 1,269 Deferred loan expenses 3,342 2,389 Receivables and other assets 17,861 11,774 ----------- ----------- 58,794 45,718 ----------- ----------- TOTAL ASSETS $ 1,261,859 $ 1,073,424 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations $ 178,100 $ 171,550 Senior unsecured notes 290,000 240,000 Secured debt 61,364 7,429 Accrued expenses and other liabilities 24,269 20,686 ----------- ----------- TOTAL LIABILITIES 553,733 439,665 Shareholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - 6,000,000 in 1999 and 3,000,000 in 1998 150,000 75,000 Common Stock, $1.00 par value: Authorized - 75,000,000 shares Issued and outstanding - 28,413,350 in 1999 and 28,240,025 in 1998 28,413 28,240 Capital in excess of par value 522,057 520,692 Undistributed net income 10,642 10,434 Accumulated other comprehensive income 875 3,982 Unamortized restricted stock (3,861) (4,589) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 708,126 633,759 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,261,859 $ 1,073,424 =========== =========== </TABLE> NOTE: The balance sheet at December 31, 1998 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 NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 ------- ------- ------- ------- (IN THOUSANDS EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> REVENUES: Rental income $19,554 $12,213 $51,828 $29,482 Interest income 12,419 11,625 36,502 36,000 Commitment fees and other income 1,280 1,578 4,898 4,319 Prepayment fees 907 421 1,565 421 ------- ------- ------- ------- Total revenue $34,160 $25,837 $94,793 $70,222 EXPENSES: Interest expense $ 7,733 $ 4,878 $18,682 $13,579 Loan expense 242 176 660 533 Provision for depreciation 4,608 2,964 12,614 7,126 Provision for losses 150 150 450 450 General and administrative expenses 1,881 1,640 5,427 4,357 ------- ------- ------- ------- Total expenses $14,614 $ 9,808 $37,833 $26,045 ------- ------- ------- ------- Net income before gain on sale of properties $19,546 $16,029 $56,960 $44,177 Gain on sale of properties 703 ------- ------- ------- ------- Net Income 19,546 16,029 57,663 44,177 Preferred stock dividends 3,351 1,664 9,462 2,496 ------- ------- ------- ------- Net Income Available to Common Shareholders $16,195 $14,365 $48,201 $41,681 ======= ======= ======= ======= Average number of common shares outstanding: Basic 28,196 25,356 28,141 24,966 Diluted 28,418 25,637 28,403 25,301 Net income per share: Basic $ 0.57 $ 0.57 $ 1.71 $ 1.67 Diluted 0.57 0.56 1.70 1.65 Dividends declared and paid per common share $ 0.57 $ 0.55 $ 1.695 $ 1.635 </TABLE> See notes to unaudited consolidated financial statements -4-
5 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> Nine months ended September 30, 1999 -------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive In thousands Stock Stock Par Value Stock Net Income Income Total -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at beginning of period $ 75,000 $ 28,240 $ 520,692 $ (4,589) $ 10,434 $ 3,982 $633,759 Comprehensive income: Net income 57,663 57,663 Unrealized gains on securities (2,848) (2,848) Foreign currency translation adjustment (259) (259) -------- Comprehensive income 54,556 -------- Proceeds from issuance of shares from dividend reinvestment plan 165 3,637 3,802 Proceeds from issuance of shares from employee stock incentive plans 8 183 (172) 19 Proceeds from issuance of shares 75,000 (2,455) 72,545 Restricted stock amortization 900 900 Cash dividends paid (57,455) (57,455) -------- -------- --------- -------- --------- -------- -------- Balance at end of period $150,000 $ 28,413 $ 522,057 $ (3,861) $ 10,642 $ 875 $708,126 ======== ======== ========= ======== ========= ======== ======== <CAPTION> Nine months ended September 30, 1998 -------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Undistributed Comprehensive In thousands Stock Stock Par Value Stock Net Income Income Total -------------------------------------------------------------------------------------- <S> <C> <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 44,177 44,177 Unrealized gains on securities (1,704) (1,704) Foreign currency translation adjustment 6 6 --------- Comprehensive income 42,479 --------- Proceeds from issuance of shares from dividend reinvestment plan 217 5,429 5,646 Proceeds from issuance of shares from employee stock incentive plan 70 1,244 (64) 1,250 Proceeds from sale of shares 913 22,808 23,721 Proceeds from sale of Preferred Stock 75,000 (2,790) 72,210 Restricted stock amortization 393 393 Cash dividends paid (43,490) (43,490) -------- -------- --------- -------- --------- ---------- --------- Balance at end of period $ 75,000 $ 25,541 $ 462,294 $ (3,203) $ 9,528 $ 2,973 $ 572,133 ======== ======== ========= ========= ========= ========== ========= </TABLE> See notes to unaudited consolidated financial statements -5-
6 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30 1999 1998 --------- --------- (IN THOUSANDS) <S> <C> <C> OPERATING ACTIVITIES Net income $ 57,663 $ 44,177 Adjustments to reconcile net income to net cash Provision for depreciation 12,774 7,162 Provision for losses 450 450 Amortization 1,397 927 Loan and commitment fees earned less than cash received 1,001 1,222 Direct financing lease income less than cash received 60 257 Rental income in excess of cash received (4,983) (1,918) Interest and other income in excess of cash received (196) (271) Increase in accrued expenses and other liabilities 2,581 5,416 Decrease in receivables and other assets (881) (1,101) --------- --------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 69,866 56,321 INVESTING ACTIVITIES Investment in real properties (189,541) (189,677) Investment in loans receivable (47,940) (76,246) Other investments (4,754) (19,422) Principal collected on loans 42,061 19,333 Proceeds from sale of properties 9,255 9,200 Other (384) (270) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (191,303) (257,082) FINANCING ACTIVITIES Net advances under line of credit arrangements (6,550) 65,400 Principal payments on long-term obligations (64) (23,220) Net proceeds from the issuance of Common Stock 3,993 30,617 Net proceeds from the issuance of Preferred Stock 72,545 72,210 Proceeds from issuance of Senior Notes 50,000 100,000 Proceeds from issuance of Secured Debt 54,000 Increase in deferred loan expense (1,622) (664) Cash distributions to shareholders (57,455) (43,490) --------- --------- NET CASH PROVIDED FROM FINANCING ACTIVITIES 127,947 200,853 --------- --------- Increase in cash and cash equivalents 6,510 92 Cash and cash equivalents at beginning of period 1,269 1,381 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,779 $ 1,473 ========= ========= Supplemental Cash Flow Information -- Interest Paid $ 22,541 $ 11,499 ========= ========= </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 September 30, 1999, are not necessarily an indication of the results that may be expected for the year ending December 31, 1999. 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, 1998. NOTE B - REAL ESTATE INVESTMENTS During the nine months ended September 30, 1999, the Company invested $79,530,000 in real property, made construction advances of $140,585,000, provided permanent mortgage financings of $14,735,000, and funded $5,896,000 of equity related investments. During the nine months ended September 30, 1999, the Company received principal payments on real estate mortgages of $42,061,000 and net advances on working capital loans totaled $7,547,000. With respect to the above-mentioned construction advances, funding for construction in progress in connection with 50 properties owned directly by the Company totaled $110,010,000, and funding associated with 15 construction loans represented $30,575,000. During the nine months ended September 30, 1999, 32 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 $183,611,000. Also, during the nine months ended September 30, 1999, eleven 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 $62,006,000. NOTE C - INDEBTEDNESS In February 1999, the Company entered into a $75,000,000 Secured Credit Agreement. The Credit Agreement bears interest at the lender's prime rate or LIBOR plus 2.0%, with a floor interest rate of 7.0%. At June 30, 1999, $50,000,000 was advanced under this Credit Agreement. In March 1999, the Company completed the sale of $50 million of 8.17% Senior Unsecured Notes due March 15, 2006. The Company has a total of $195,000,000 in unsecured credit facilities bearing interest at the lenders' prime rate or LIBOR plus 1.0%. A total of approximately $16,900,000 was available at September 30, 1999, subject to compliance with the terms and conditions of the unsecured credit facilities. -7-
8 NOTE D - SHAREHOLDERS' EQUITY In January 1999, the Company announced the sale of 3,000,000 shares of cumulative convertible preferred stock. These shares have a liquidation value of $25.00 per share and will pay dividends equivalent to the greater of (i) the annual dividend rate of $2.25 per share (a quarterly dividend rate of $0.5625 per share); or (ii) the quarterly dividend then payable per common share on an as converted basis. The preferred shares are convertible into common stock at a conversion price of $25.625 per share. The Company has the right to redeem the preferred shares after five years. In May 1998, the Company sold 3,000,000 shares of 8.875% Series B Cumulative Redeemable Preferred Stock with a liquidation preference of $25.00 per share. On and after May 1, 2003, the Preferred Stock may be redeemed for cash at the option of the Company, in whole or in part, at $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date. NOTE E - 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 September 30, 1999, direct investments included the preferred stock of one private corporation and subordinated debt in eight private corporations, 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. NOTE F - MARKETABLE SECURITIES Marketable securities are stated at market value with unrealized gains and losses reported in a separate component of shareholders' equity. At September 30, 1999, 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 G - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 1998, the Company was contingently liable for certain obligations amounting to $9,365,000. At September 30, 1999, the contingent obligations totaled $8,925,000. NOTE H - DISTRIBUTIONS PAID TO COMMON SHAREHOLDERS On February 22, 1999, the Company paid a dividend of $0.56 per share to shareholders of record on February 2, 1999. This dividend related to the period from October 1, 1998 through December 31, 1998. On May 20, 1999, the Company paid a dividend of $0.565 per share to shareholders of record on May 4, 1999. This dividend related to the period from January 1, 1999 to March 31, 1999. On August 20, 1999, the Company paid a dividend of $0.57 per share to shareholders of record on August 3, 1999. This dividend related to the period from April 1, 1999 to June 30, 1999. -8-
9 NOTE I - 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> Nine months ended September 30 ------------------------------ 1999 1998 ------- ------- <S> <C> <C> Numerator for basic and diluted earnings per share-income available to common shareholders $48,201 $41,681 ======= ======= Denominator for basic earnings per share - weighted average shares 28,141 24,966 Effect of dilutive securities: Employee stock options 64 192 Nonvested restricted shares 198 143 ------- ------- Dilutive potential common shares 262 335 ------- ------- Denominator for diluted earnings per share - adjusted weighted average shares 28,403 25,301 ======= ======= Basic earnings per share $ 1.71 $ 1.67 Diluted earnings per share $ 1.70 $ 1.65 </TABLE> -9-
10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company's net real estate investments totaled approximately $1,203,000,000 which included 167 assisted living facilities, 49 skilled nursing facilities, 15 retirement centers, six specialty care facilities and two behavioral care facilities. 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 and internally generated cash. 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. As of September 30, 1999, the Company had a total outstanding debt balance of $529,464,000, and shareholders' equity of $708,126,000, which represents a debt to equity ratio of 0.75 to 1.0. In January 1999, the Company announced the sale of 3,000,000 shares of cumulative convertible preferred stock. These shares have a liquidation value of $25.00 per share and will pay quarterly dividends equivalent to the greater of $0.5625 or the quarterly dividend then payable per common share on an as converted basis. The preferred shares are convertible into common stock at a conversion price of $25.625 per share. The Company has the right to redeem the preferred shares after five years. In February 1999, the Company entered into a $75,000,000 Secured Credit Facility. The Credit Facility bears interest at the lender's prime rate or LIBOR plus 2.0%, with a floor of 7.0%. At September 30, 1999, $50,000,000 was advanced under this Credit Agreement. In March 1999, the Company completed the sale of $50 million of 8.17% Senior Unsecured Notes due March 15, 2006. During the nine months ended September 30, 1999, 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 September 30, 1999, the Company has effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $330,319,000 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 September 30, 1999, the Company had approximately $102,194,000 in unfunded commitments. Under the Company's line of credit arrangements, available funding totaled $16,900,000, subject to compliance with the terms and conditions of the line of credit arrangements. -10-
11 RESULTS OF OPERATIONS Revenues for the three months ended September 30, 1999, were $34,160,000 as compared with $25,837,000 for the three months ended September 30, 1998. Revenue growth was generated primarily by increased rental income of $7,341,000 as a result of additional real estate investments made during the past twelve months. Revenues for the nine months ended September 30, 1999, were $94,793,000 as compared with $70,222,000 for the nine months ended September 30, 1998, an increase of $24,571,000 or 35%. Revenue growth resulted primarily from increased operating lease income of $22,346,000 as a result of additional real estate investments made during the past twelve months. During the three months ended September 30, 1999, the Company recognized gains on sales of properties and prepayment fees of $907,000 as compared with $421,000 for the same period in the prior year. Gains on sales of properties and prepayment fees for the nine months ended September 30, 1999, were $2,268,000 as compared with $421,000 for the nine months ended September 30, 1998. Expenses for the three months ended September 30, 1999, totaled $14,614,000, an increase of $4,806,000 from expenses of $9,808,000 for the same period in 1998. Expenses for the nine months ended September 30, 1999 totaled $37,833,000, an increase of $11,788,000 from expenses of $26,045,000 for the same period in 1998. The increases in total expenses for the three and nine month periods ended September 30, 1999, were 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 September 30, 1999, was $7,733,000 as compared to $4,878,000 for the same period in 1998. For the nine month period ended September 30, 1999, interest expense totaled $18,682,000 as compared to $13,579,000 for the same period in 1998. The increase in the 1999 period was primarily due to the issuance of $50,000,000 Senior Notes in March, 1999 and the issuance of $100,000,000 Senior Notes in March, 1998. The increases in the 1999 periods were offset by the amount of capitalized interest recorded during the first six months of 1999. 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 and nine month periods in 1999 totaled $1,913,000, and $7,054,000, respectively, as compared with $2,130,000 and $4,973,000 for the same periods in 1998. The provision for depreciation for the three and nine month periods ended September 30, 1999, totaled $4,608,000 and $12,614,000, respectively, increases of $1,644,000 and $5,488,000 over the comparable periods in 1998 as a result of additional investments in properties owned directly by the Company. General and administrative expenses for the three and nine month periods ended September 30, 1999, totaled $1,881,000 and $5,427,000, respectively, as compared with $1,640,000 and $4,357,000 for the same periods in 1998. The expenses for the three and nine month periods in 1999 were 5.5% and 5.7% of revenues as compared with 6.3% and 6.2% for the same periods in 1998. Dividend expense, associated with the Company's outstanding preferred stock, for the three and nine month periods ended September 30, 1999, totaled $3,351,000 and $9,462,000, respectively, as compared with $1,664,000 and $2,496,000 for the same periods in 1998. -11-
12 As a result of the various factors mentioned above, net income available to common shareholders for the three and nine month periods ended September 30, 1999, was $16,195,000, or $.57 per diluted share, and $48,201,000, or $1.70 per diluted share, respectively, as compared with $14,365,000, or $0.56 per diluted share, and $41,681,000, or $1.65 per diluted share for the comparable periods in 1998. 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 reflect long-term investments with fixed rents or 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. YEAR 2000 COMPLIANCE The Year 2000 compliance issue concerns the inability of certain systems and devices to properly use or store dates beyond December 31, 1999. This could result in system failures, malfunctions, or miscalculations that disrupt normal operations. This issue affects most companies and organizations to large and small degrees, at least to the extent that potential exposures must be evaluated. The Company believes its own internal operations, technology infrastructure, information systems and software applications are Year 2000 compliant. The Company is reviewing the impact of outside vendors and tenants/borrowers. The Company initially focused this review on mission-critical operations, recognizing that other potential effects are expected to be less material. In those cases where there are external compliance issues, these are considered to be minor in nature. Expenditures for any remedies will not be material. With respect to the Company's tenants, borrowers and properties, the Company has assessed the tenants' and borrowers' compliance efforts, the possibility of any interface difficulties or electromechanical problems relating to compliance by material vendors, the effects of potential non-compliance, and remedies that may mitigate or obviate such effects. Based upon responses from tenant and borrower surveys, the Company does not believe that there are tenant, borrower, or property related non-compliance issues that would have a material impact upon the Company's operations. Because the Company's evaluation of these issues has been conducted by its own personnel or by selected inquiries of its vendors and tenants in connection with their routine servicing operations, the Company believes that its expenditures for assessing Year 2000 issues, though difficult to quantify, have not been material. In addition, the Company is not aware of any issues that will require material expenditures by the Company in the future. Based upon current information, the Company believes that the risk posed by foreseeable Year 2000 related problems with its internal systems (including both information and non-information systems) is minimal. Year 2000 related problems with the Company's software applications and internal operational programs are unlikely to cause more than minor disruptions in the Company's operations. Year 2000 related problems at certain of its third-party service providers, such as its banks, payroll processor, and telecommunications provider is marginally greater. Based upon current information, the Company does not believe any such problems would have a material effect on its operations. For example, Year 2000 related problems at such third-party service providers could delay the processing of financial transactions and the Company's payroll and could disrupt the Company's internal and external communications. -12-
13 The Company believes that the risk posed by Year 2000 related problems at its properties or with its tenants is marginally greater. Year 2000 related problems at certain governmental agencies and third-party payers could delay the processing of tenant financial transactions. Based upon current information, the Company does not believe any such problems would have a material long-term effect on its operations. However, neither the Company nor its tenants and borrowers can be assured that the federal and state governments upon which they rely for Medicare and Medicaid revenue will be in compliance in a timely manner. Year 2000 related problems with the electromechanical systems at its properties are unlikely to cause more than minor disruptions in the Company's operations. The Company intends to complete outstanding assessments, implement identified remedies, continue to monitor Year 2000 issues, and develop contingency plans if, and to the extent deemed, necessary. However, based upon current information and barring developments, the Company does not anticipate developing any substantive contingency plans with respect to Year 2000 issues. In addition, the Company has no plans to seek independent verification or review of its assessments. While the Company believes that it will be Year 2000 compliant by December 31, 1999, there can be no assurance that the Company will be successful in identifying and assessing all compliance issues, or that the Company's efforts to remedy all Year 2000 compliance issues will be effective such that they will not have a material adverse effect on the Company's business or results of operations. 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. 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 market value of the Company's long-term fixed rate borrowings is subject to interest rate risk. Generally, the market value of fixed rate financial instruments will decrease as interest rates rise and increase as interest rates fall. The estimated fair value of the Company's total long-term borrowings at September 30, 1999, was $258 million. A 1% increase in interest rates would result in a decrease in fair value of long-term borrowings by approximately $11 million. 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. At September 30, 1999, the Company's variable interest rate debt exceeded its variable interest rate assets, presenting an exposure to rising interest rates. The Company may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of future volatility of interest rates. -13-
14 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ----------------- On July 13, 1999, the Company issued a press release in which it announced second quarter investment activity of $100 million. On July 20, 1999, the Company issued a press release in which it announced record second quarter 1999 results and increase in the quarterly dividend payment. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 27 Financial Data Schedule 99.1 Press release dated July 13, 1999 99.2 Press release dated July 20, 1999 (b) Reports on Form 8-K None -14-
15 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: November 5, 1999 By: /S/ GEORGE L. CHAPMAN ---------------------- -------------------------------------------- George L. Chapman, Chairman, Chief Executive Officer and President Date: November 5, 1999 By: /S/ EDWARD F. LANGE, JR. --------------------- -------------------------------------------- Edward F. Lange, Jr., Chief Financial Officer Date: November 5, 1999 By: /S/ MICHAEL A. CRABTREE --------------------- -------------------------------------------- Michael A. Crabtree, Chief Accounting Officer -15-
16 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 -------------- ------------------- 27 Financial Data Schedule 99.1 Press release dated July 13, 1999 99.2 Press release dated July 20, 1999 -16-