10-K 1 l87094ae10-k.txt HEALTHCARE REIT, INC. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2000 Commission File No. 1-8923 HEALTH CARE REIT, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1096634 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One SeaGate, Suite 1500, Toledo, Ohio 43604 (Address of principal executive office) (Zip Code) (419) 247-2800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ------------------- ------------------- Common Stock, $1.00 par value New York Stock Exchange 8.875% Series B Cumulative New York Stock Exchange Redeemable Preferred Stock Securities registered pursuant to Section 12(g) of the Act: None 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; and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of voting common stock held by non-affiliates of the Registrant on March 21, 2001 was $582,928,000 based on the reported closing sales price of such shares on the New York Stock Exchange for that date. As of March 21, 2001, there were 28,879,061 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the annual shareholders' meeting to be held May 3, 2001, are incorporated by reference into Part III. 2 HEALTH CARE REIT, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I Page ---- Item 1. Business......................................................... 3 Item 2. Properties.......................................................10 Item 3. Legal Proceedings................................................11 Item 4. Submission of Matters to a Vote of Security Holders..............11 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters...................................11 Item 6. Selected Financial Data..........................................12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......16 Item 8. Financial Statements and Supplementary Data......................17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........................33 PART III Item 10. Directors and Executive Officers of the Registrant...............33 Item 11. Executive Compensation...........................................33 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................33 Item 13. Certain Relationships and Related Transactions...................33 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................................34 -2- 3 PART I ITEM 1. BUSINESS GENERAL Health Care REIT, Inc. (the "Company") is a self-administered real estate investment trust that invests in health care facilities, primarily nursing homes and assisted living facilities. The Company also invests in specialty care facilities. As of December 31, 2000, long-term care facilities, which include nursing homes and assisted living facilities, comprised approximately 92% of the investment portfolio. Founded in 1970, the Company was the first real estate investment trust to invest exclusively in health care facilities. As of December 31, 2000, the Company had $1,139,225,000 of real estate investments, inclusive of credit enhancements, in 205 facilities located in 34 states and managed by 38 different operators. At that date, the portfolio included 150 assisted living facilities, 47 nursing homes, six specialty care facilities, and two behavioral care facilities. At December 31, 2000, the Company had approximately $14,663,000 in unfunded commitments. The Company's primary objectives are to protect shareholders' capital and enhance shareholder value. The Company seeks to pay consistent cash dividends to shareholders and create opportunities to increase dividend payments from annual increases in rental and interest income and portfolio growth. To meet these objectives, the Company invests primarily in long-term care facilities managed by experienced operators and diversifies its investment portfolio by operator and geographic location. The Company anticipates investing in additional health care facilities through operating lease arrangements with, and mortgage financings for, qualified health care operators. Capital for future investments may be provided by borrowing under the Company's revolving credit facilities, public offerings or private placements of debt or equity, and the assumption of secured indebtedness. PORTFOLIO OF PROPERTIES The following table reflects the diversification of the Company's portfolio as of December 31, 2000:
Percentage Number Number Investment Number Number Type of Investments of of of Beds/ Per Bed/ of of Facility (1) Portfolio Facilities Units Unit(2) Operators(3) States(3) -------- --- --------- ---------- ----- -------- ------------- ---------- (In thousands) Assisted Living Facilities $ 749,333 66% 150 10,150 $75,271 23 29 Nursing Homes 299,365 26% 47 6,625 45,187 15 14 Specialty Care Facilities 82,918 7% 6 708 117,186 3 5 Behavioral Care Facilities 7,609 1% 2 294 25,881 1 1 --------- ----- --- ------ ------- Totals $1,139,225 100% 205 17,777 ========== ==== === ======
-------------------------- (1) Investments include real estate investments and credit enhancements which amounted to $1,127,280,000 and $11,945,000, respectively. (2) Investment Per Bed/Unit was computed by using the total investment amount of $1,153,888,000 which includes real estate investments, unfunded commitments for which initial funding has commenced, and credit enhancements which total $1,127,280,000, $14,663,000 and $11,945,000, respectively. (3) The Company has investments in properties located in 34 states, managed by 38 different operators. -3- 4 Nursing Homes Skilled nursing facilities provide inpatient skilled nursing and custodial services as well as rehabilitative, restorative and transitional medical services. In some instances, nursing facilities supplement hospital care by providing specialized care for medically complex patients whose conditions require intense medical and therapeutic services, but who are medically stable enough to have these services provided in facilities that are less expensive than acute care hospitals. Assisted Living Facilities Assisted living facilities provide services to aid in everyday living, such as bathing, meals, security, transportation, recreation, medication supervision and limited therapeutic programs. More intensive medical needs of the resident are often met within assisted living facilities by home health providers, close coordination with the resident's physician and skilled nursing facilities. Assisted living facilities represent lower cost, less institutional alternatives for the health problems of the elderly or medically frail. Specialty Care Facilities Specialty care facilities provide specialized inpatient services for specific illnesses or diseases, including, among others, coronary and cardiovascular services. Specialty care facilities are lower cost alternatives to acute care hospitals. Behavioral Care Facilities Behavioral care facilities offer comprehensive inpatient and outpatient psychiatric treatment programs. Programs are tailored to the individual and include individual, group and family therapy. INVESTMENTS The Company invests in income producing health care facilities with a primary focus on long-term care facilities, which include skilled nursing facilities and assisted living facilities. The Company also invests in specialty care facilities. The Company intends to continue to diversify its investment portfolio by operator and geographic location. In determining whether to finance a facility, the Company focuses on: (a) the experience of the operator; (b) the financial and operational feasibility of the property; (c) the financial strength of the borrower or lessee; (d) the security available to support the financing; and (e) the amount of capital committed to the property by the borrower or lessee. Management conducts market research and analysis for all potential investments. In addition, Management reviews the value of all properties, the interest rates and debt service coverage requirements of any debt to be assumed and the anticipated sources for repayment for such debt. The Company's investments primarily take the form of operating lease transactions and permanent mortgage loans. Construction financing is provided, but only as a part of a permanent operating lease or mortgage financing. Substantially all of the Company's investments are designed with escalating rate structures. The Company's policy is to structure long term financings to maximize returns. Depending upon market conditions, the Company believes that appropriate new investments will be available in the future with substantially the same spreads over its costs of borrowing. Operating leases and mortgage loans are normally secured by guarantees and/or letters of credit. As of December 31, 2000, letters of credit from commercial banks and cash deposits aggregating $30,767,000 were available to the Company as security for operating lease and mortgage loan obligations. In addition, the leases and loans are generally cross-defaulted and the loans are cross-collateralized with any other mortgage loans, leases, or other agreements between the operator or any affiliate of the operator and the Company. The Company typically finances up to 90% of the appraised value of a property. Economic terms normally include annual rate increases and fair market value based purchase options in operating leases, and may include contingent interest for mortgage loans. The Company monitors its investments through a variety of methods, which are determined by the type of health care facility and operator. The monitoring process includes a review and analysis of facility, borrower or lessee, and guarantor financial statements; periodic site visits; property reviews; and meetings with operators. Such reviews of operators and facilities generally encompass licensure and regulatory compliance materials and reports, contemplated building improvements and other material developments. For certain investments, the Company receives warrants or other similar equity instruments that provide the Company with an opportunity to share in an operator's enterprise value. As of December 31, 2000, the Company had warrants from 14 operators to purchase their common stock or partnership interest. None of the warrants are publicly traded. In connection with investments in two operators, the Company also received warrants that were converted into shares of common stock. As of December 31, 2000, those shares of common stock were recorded on the Company's balance sheet at a value of $130,000. -4- 5 Operating Leases Each facility, which includes the land, buildings, improvements and related rights (the "Leased Properties") owned by the Company is leased to a health care provider pursuant to a long-term lease (collectively, the "Leases"). The Leases generally have a fixed term of 10 to 15 years and contain multiple five to 10-year renewal options. Each Lease is a triple net lease requiring the lessee to pay rent and all additional charges incurred in the operation of the Leased Property. The lessees are required to repair, rebuild and maintain the Leased Properties. The net value of the Company's completed leased properties aggregated approximately $792,011,000 at December 31, 2000. The base rents range from approximately 8.0% to 16.1% per annum of the Company's net book value in the leased properties. The rental yield to the Company from Leases depends upon a number of factors including the initial rent charged, any rental adjustments and the amount of the commitment fee charged at the inception of the transaction. The base rents for the renewal periods are generally fixed rents set at a spread above the Treasury yield for the corresponding period. Permanent Mortgage Loans The Company's investments in permanent mortgage loans are structured to provide the Company with interest income, principal amortization and commitment fees. Virtually all of the approximately $301,321,000 of permanent mortgage loans as of December 31, 2000, were first mortgage loans. The interest rate on the Company's investments in permanent mortgage loans for operating facilities ranges from 8.7% to 14.6% per annum on the outstanding balances. The yield to the Company on permanent mortgage loans depends upon a number of factors, including the stated interest rate, average principal amount outstanding during the term of the loan, the amount of the commitment fee charged at the inception of the loan and any interest rate adjustments. The permanent mortgage loans for operating facilities made through December 31, 2000, are generally subject to seven to 10-year terms with 25-year amortization schedules that provide for a balloon payment of the outstanding principal balance at the end of the term. Generally, the permanent mortgage loans provide five to seven years of prepayment protection. Construction Financing The Company provides construction financing that by its terms converts either into a long-term operating lease or mortgage loan upon the completion of the facility. Generally, the rates on the outstanding balances of the Company's construction financings are 225 to 350 basis points over the prime rate of a specified financial institution. The Company also typically charges a commitment fee at the commencement of the financing. The construction financing period commences upon funding and terminates upon the earlier of the completion of development of the applicable facility or the end of a specified period, generally 12 to 18 months. During the term of the construction financing, funds are advanced pursuant to draw requests made by the operator in accordance with the terms and conditions of the applicable financing agreement, which terms require, among other things, a site visit by a Company representative prior to the advancement of funds. Monthly payments are made on the total amount of the proceeds advanced during the development period. During the construction financing period, the Company generally requires additional security and collateral in the form of either payment and performance bonds and/or completion guarantees by either one, or a combination of, the operator's parent entity, other affiliates of the operator, or one or more of the individual principals of the operator. At December 31, 2000, the Company had outstanding construction financings of $16,028,000 ($11,976,000 leased properties and $4,052,000 mortgage loans) and was committed to providing additional financing of approximately $14,663,000 to complete construction. Subdebt Investments Subdebt investments represent debt instruments in operators of facilities that have been financed by the Company. Generally, these instruments are for five to seven-year terms with interest at 11% to 15%. At December 31, 2000, the Company had provided subdebt financing to six operators. 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 December 31, 2000, equity investments included the common stock of a corporation, 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. -5- 6 BORROWING POLICIES The Company may arrange for long-term borrowing from banks, private placements to institutional investors, or public offerings. For other short-term purposes, the Company may, from time to time, negotiate lines of credit, or arrange for other short-term borrowing from banks or others. In addition, the Company may incur mortgage indebtedness on real estate that it has acquired through purchase, foreclosure or otherwise. When terms are deemed favorable, the Company may invest in properties subject to existing loans and mortgages. In addition, the Company may obtain financing for unleveraged properties in which it has invested or may refinance properties acquired on a leveraged basis. Under documents pertaining to existing indebtedness, the Company is subject to various restrictions with respect to secured and unsecured indebtedness. ALLOWANCE FOR LOAN LOSSES The Company maintains an allowance for possible loan losses that is evaluated quarterly to determine its adequacy. See Notes 1 and 5 of Notes to Financial Statements. At December 31, 2000, the total allowance of $5,861,000 was not allocated to any specific properties. The Company believes that its allowance is adequate. COMPETITION The Company competes with other real estate investment trusts, real estate partnerships, banks, insurance companies and other investors in the acquisition, leasing and financing of health care facilities. The operators of the facilities compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for patients and residents based on a number of factors, including quality of care, reputation, physical appearance of facilities, services offered, family preferences, physicians, staff and price. EMPLOYEES As of December 31, 2000, the Company employed 22 full-time employees. CERTAIN GOVERNMENT REGULATIONS The Company invests in assisted living facilities (approximately two-third of investments), nursing facilities (approximately one-quarter of investments) and hospitals. All of these are single purpose health care facilities. The Company's customers must comply with the licensing requirements of federal, state and local health agencies, and with the requirements of municipal building codes, health codes, and local fire departments. In granting and renewing a facility's license, the state health agency considers, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and clinical staffs, the quality of health care programs and compliance with applicable laws. The remainder of the discussion in this section relates to only nursing facilities and hospitals. Nursing facilities and hospitals receive a substantial portion of their revenues from the federal Medicare program and state Medicaid programs; therefore, the Company's revenues may be indirectly affected by changes in these programs. The amount of program payments can be changed by legislative or regulatory actions and by determinations by agents for the programs. Since Medicaid programs are funded by both the states and the federal government, the amount of payments can be affected by changes at either the state or federal level. There is no assurance that payments under these programs will remain at levels comparable to present levels or be sufficient to cover costs allocable to these patients. Under Medicare and Medicaid programs, acute care hospitals are generally paid a fixed amount per discharge (based on the patient's diagnosis) for inpatient services. Behavioral and rehabilitation hospitals are generally paid on a cost basis, subject to limitations based on a "target amount" per discharge. The target amount is based on updates to the facility's costs per discharge in a base year. Medicare payment rules for such hospitals were changed effective October 1, 1997, to further limit reimbursable costs, reduce payment incentives for providers whose costs are below the target amount, and reduce capital-related payments by 15%. The target amount for any facility is now capped at the 75th percentile of the target amounts for facilities of the same type. For new facilities, the target is 110% of the median costs per discharge of similar hospitals. In addition, the target amount update is set at 0% for federal fiscal 1998. Depending on how the facility's costs per discharge compare to its target amount, increases thereafter range from 0% to the "market basket" percentage reflecting the inflation rate for costs of items purchased by similar facilities. -6- 7 In addition, payments to rehabilitation hospitals and units will be based on fixed rates per discharge that vary according to the nature of the patient's condition. The new system is being phased in over three years beginning with the cost reporting year commencing after October 1, 2000. Medicare and Medicaid programs have traditionally reimbursed nursing facilities for the reasonable direct and indirect allowable costs incurred in providing routine services (as defined by the programs), subject to certain cost ceilings. In 1998, the Medicare cost-based reimbursement system was replaced by a federal per diem rate based on the patient's condition, to be phased in over three years. New facilities were immediately paid based on the federal rate. The new per diem rate is the sole payment for both direct nursing care ("Part A services") and ancillary services that were previously billed separately from the cost-based reimbursement system ("Part B services"). Capital costs are also included in the per diem rate. Many states have also converted to a system based on prospectively determined fixed rates, which may be based in part on historical costs. The operations of long-term care companies have been negatively impacted by these changes in reimbursement, among other factors. Some of these companies have filed for bankruptcy protection. In 1999 and the first half of 2000, approximately 11% of nursing facilities in the United States filed for bankruptcy protection. A reduction in revenues could result in bankruptcy filings by significant customers of the Company. Furthermore, any failure by these customers to effectively conduct their operations could have a material adverse effect on their business reputation or on their ability to enlist and maintain patients in their facilities. On December 21, 2000, the President signed legislation that provides additional payments for certain Medicare providers. The estimated increase in payments to skilled nursing facilities is $1.6 billion over 5 years. Until 1997, state Medicaid programs were required to pay hospitals and nursing facilities based on rates that were reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities in order to provide services in conformity with federal and state standards and to assure reasonable access to patients. This law restricted the ability of the states to reduce Medicaid payments. Congress repealed this requirement in 1997. Under the new law, states need only publish the methodology used to develop the proposed rates, along with a justification for the methodology, and allow public comment. This change could result in reduced Medicaid payments to facilities operated by the Company's customers. Medicare and Medicaid regulations could adversely affect the resale value of the Company's health care facilities. Medicare regulations provide that effective December 1, 1997, when a facility changes ownership (by sale or under certain lease transactions), reimbursement for depreciation and interest will be based on the cost to the owner of record as of August 5, 1997, less depreciation allowed. Previously, the buyer would use its cost of purchase up to the original owner's historical cost before depreciation. Medicaid regulations allow a limited increase in the valuation of nursing facilities (but not hospitals) during the time the seller owned the facility. Other Medicaid regulations provide that upon resale, facilities are responsible to pay back prior depreciation reimbursement payments that are "recaptured" as a result of the sale. Recent interpretations of the Medicare laws limit the ability of hospitals and nursing facilities to be reimbursed for interest costs that are deemed to be unnecessary because the facilities have other funds derived from patient care activities that were put to other uses (such as investments) or transferred to related parties. This could reduce reimbursement to Company customers for interest on loans from the Company. Health care facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time. Such requirements may include a duty to admit Medicare and Medicaid patients, limiting the ability of the facility to increase its private pay census beyond certain limits. Medicare and Medicaid facilities are regularly inspected to determine compliance, and may be excluded from the programs--in some cases without a prior hearing--for failure to meet program requirements. Under the Medicare program, "peer review organizations" have been established to review the quality and appropriateness of care rendered by health care providers. These organizations may not only deny claims that fail to meet their criteria, but can also fine and/or recommend termination of participation in the program. Changes in the Medicare and Medicaid programs will likely result in increased use of "managed care" organizations to meet the needs of program beneficiaries. These organizations selectively contract with health care facilities, resulting in some facilities being excluded from the ability to serve program beneficiaries. Health care facilities also receive a substantial portion of their revenues from private insurance carriers, health maintenance organizations, preferred provider organizations, self-insured employees and other health benefit payment arrangements. Such payment sources increasingly pay facilities under contractual arrangements that include a limited panel of providers and/or discounted or other special payment arrangements, including arrangements that shift the risk of high utilization to the providers. A number of states have established rate-setting agencies that control inpatient health care facility rates, including private pay rates. Recent federal legislation substantially expanded activities to enforce laws against fraud and abuse in federally funded health care programs. These laws prohibit misrepresentations in billings and cost reports, payments to parties who influence purchases or referrals of covered services, and provision of unnecessary services. -7- 8 In order to meet a federal requirement, most states required providers to obtain certificates of need prior to construction of inpatient facilities and certain outpatient facilities. However, in 1987, the federal requirement was repealed. Some states have repealed these requirements, which may result in increased competition, and other states are considering similar repeals. Nursing facilities compete with other sub-acute care providers, including rehabilitation centers and hospitals. Many of these providers have underutilized facilities and are converting some or all of their facilities into nursing facilities. Some of these entities operate on a tax-exempt basis, which gives them a capital cost advantage. Furthermore, some states have granted rest homes the ability to provide limited nursing care services. Certain states have adopted pre-admission screening and other programs to promote utilization of outpatient and home-based services as an alternative to inpatient facility services. Recent changes in Medicaid regulations allow states to use Medicaid funding for alternatives to traditional inpatient care, including home health care and assisted living facilities. TAXATION General A corporation, trust or association meeting certain requirements may elect to be treated as a "real estate investment trust." Beginning with its first fiscal year and in all subsequent years, the Company has elected to be treated as a real estate investment trust under Sections 856 to 860, inclusive, of the Internal Revenue Code of 1986, as amended (the "Code"). The Company intends to operate in such manner as to continue to qualify as a real estate investment trust for federal income tax purposes. No assurance can be given that the actual results of the Company's operations for any one taxable year will satisfy such requirements. To qualify as a real estate investment trust, the Company must satisfy a variety of complex requirements each year, including organizational and stock ownership tests and percentage tests relating to the sources of its gross income, the nature of its assets and the distribution of its income. Generally, for each taxable year during which the Company qualifies as a real estate investment trust, it will not be taxed on the portion of its taxable income (including capital gains) that is distributed to shareholders. Any undistributed income or gains will be taxed to the Company at regular corporate tax rates. Any undistributed net long-term capital gains taxed to the Company will be treated as having been distributed to the shareholders and will be included by them in determining the amount of their capital gains. The tax paid by the Company on those gains will be allocated among the shareholders and may be claimed as a credit on their tax returns. The shareholders will receive an increase in the basis of their shares in the Company equal to the difference between the capital gain income and the tax credit allocated to them. The Company will be subject to tax at the highest corporate rate on its net income from foreclosure property, regardless of the amount of its distributions. The highest corporate tax rate is currently 35%. The Company may elect to treat any real property it acquires by foreclosure as foreclosure property. This would permit the Company to hold such property until the end of the third taxable year following the year of acquisition without adverse consequences. With the consent of the Treasury Department, this period can be extended for up to three additional taxable years. Subject to certain limitations, the Company will also be subject to an additional tax equal to 100% of the net income, if any, derived from prohibited transactions. A prohibited transaction is defined as a sale or disposition of inventory-type property or property held by the Company primarily for sale to customers in the ordinary course of its trade or business, which is not property acquired on foreclosure. The Company is subject to a nondeductible federal excise tax equal to 4% of the amount, if any, by which 85% of its ordinary income plus 95% of its capital gain net income (plus distribution deficiencies from prior years) exceeds distributions actually paid or treated as paid to shareholders during the taxable year, plus current year income upon which the Company pays tax and any overdistribution from prior years. Primarily as a result of large capital gains from the exercise of purchase options under leases, the Company did not satisfy this requirement in 1998 and incurred an excise tax of approximately $315,000 in that year. This requirement was met for 1999 and 2000. Failure To Qualify While the Company intends to operate so as to qualify as a real estate investment trust under the Code, if in any taxable year the Company fails to qualify, and certain relief provisions do not apply, its taxable income would be subject to tax (including alternative minimum tax) at corporate rates. If that occurred, the Company might have to dispose of a significant amount of its assets or incur a significant amount of debt in order to pay the resulting federal income tax. Further distributions to its stockholders would not be deductible by the Company nor would they be required to be made. Distributions out of the Company's current or accumulated earnings and profits would be taxable to stockholders as dividends and would be eligible for the dividends received deduction for corporations. No portion of any distributions would be eligible for designation as a capital gain dividend. Further, the Company would be unable to pass through its undistributed capital gains and the related tax paid by the Company. Unless entitled to relief under specific statutory provisions, the Company also would be disqualified from taxation as a real estate investment trust for the four taxable years following the year during which qualification was lost. -8- 9 Recent Legislation The Tax Relief Extension Act of 1999 included several modifications to the provisions of the Code governing the taxation of real estate investment trusts. Effective for tax years beginning after December 31, 2000, a REIT may not own more than ten percent of the outstanding voting securities of any issuer or more than ten percent of the total value of the outstanding securities of any issuer. Certain types of securities are not subject to these limitations and the limitations do not apply to certain securities owned on or before July 12, 1999. The revised asset limitation test must be satisfied at the end of each calendar quarter. The Company is currently in the process of reviewing its investment portfolio for compliance with these new standards. If it is determined that certain investments of the Company do not satisfy these tests, the terms of those investments will be restructured so that they do comply or a sufficient portion of those investments will be disposed of prior to March 31, 2001 to enable the Company to continue complying with the asset limitation tests. The foregoing is only a summary of some of the significant federal income tax considerations affecting the Company and is qualified in its entirety by reference to the applicable provisions of the Code, the rules and regulations promulgated thereunder, and the administrative and judicial interpretations thereof. Stockholders of the Company are urged to consult their own tax advisors as to the effects of these rules and regulations on them. In particular, foreign stockholders should consult with their tax advisors concerning the tax consequences of ownership of shares in the Company, including the possibility that distributions with respect to the shares will be subject to federal income tax withholding. SUBSIDIARIES AND AFFILIATES The Company has formed subsidiaries in connection with its real estate transactions. As of December 31, 2000, the Company's wholly-owned subsidiaries consisted of the following entities:
STATE OF ORGANIZATION DATE OF NAME OF SUBSIDIARY AND TYPE OF ENTITY ORGANIZATION ------------------ ------------------ ------------ HCRI Pennsylvania Properties, Inc. Pennsylvania corporation November 1, 1993 HCRI Overlook Green, Inc. Pennsylvania corporation July 9, 1996 HCRI Texas Properties, Inc. Delaware corporation December 27, 1996 HCRI Texas Properties, Ltd. Texas limited partnership December 30, 1996 Health Care REIT International, Inc. Delaware corporation February 11, 1998 HCN Atlantic GP, Inc. Delaware corporation February 20, 1998 HCN Atlantic LP, Inc. Delaware corporation February 20, 1998 HCRI Nevada Properties, Inc. Nevada corporation March 27, 1998 HCRI Southern Investments I, Inc. Delaware corporation June 11, 1998 HCRI Louisiana Properties, L.P. Delaware limited partnership June 11, 1998 HCN BCC Holdings, Inc. Delaware corporation September 25, 1998 HCRI Tennessee Properties, Inc. Delaware corporation September 25, 1998 HCRI Limited Holdings, Inc. Delaware corporation September 25, 1998 Pennsylvania BCC Properties, Inc. Pennsylvania corporation September 25, 1998 HCRI North Carolina Properties, LLC Delaware limited liability company December 10, 1999 HCRI Massachusetts Properties, Inc. Delaware corporation March 17, 2000 HCRI Massachusetts Properties Trust Massachusetts trust March 30, 2000 HCRI Indiana Properties, Inc. Delaware corporation June 15, 2000 HCRI Indiana Properties, LLC Indiana limited liability company June 16, 2000 HCRI Holdings Trust Massachusetts trust September 9, 2000
-9- 10 ITEM 2. PROPERTIES The Company's headquarters are currently located at One SeaGate, Suite 1500, Toledo, Ohio 43604. The following table sets forth certain information regarding the facilities that comprise the Company's investments as of December 31, 2000:
(In thousands) ------------------------- Number Number of of Beds/ Total Annualized Facility Location Facilities Units Investment(1) Income(2) ----------------- ---------- ----- ------------- --------- SKILLED NURSING FACILITIES: Arizona............................ 1 163 $ 3,827 $ 413 California......................... 1 122 5,019 620 Colorado........................... 1 180 5,915 638 Florida............................ 8 958 56,980 6,573 Idaho.............................. 3 393 21,073 2,253 Illinois........................... 2 212 13,847 1,688 Kentucky........................... 1 92 4,122 536 Massachusetts...................... 13 1,926 108,766 11,091 Missouri........................... 1 98 6,847 771 Ohio............................... 2 219 8,410 1,004 Oklahoma........................... 2 575 17,940 1,795 Oregon............................. 1 101 5,187 558 Pennsylvania....................... 4 464 23,034 3,058 Texas.............................. 7 1,122 18,397 2,385 ----------------------------------------------- Total............................. 47 6,625 299,364 33,383 ASSISTED LIVING FACILITIES: Alabama............................ 2 149 $ 10,498 $ 997 Arizona............................ 4 464 26,446 2,766 California......................... 7 341 26,764 3,080 Colorado........................... 1 50 3,890 369 Connecticut........................ 1 62 10,364 884 Florida............................ 18 896 73,222 7,900 Georgia............................ 4 361 36,389 4,133 Illinois........................... 2 321 9,682 148 Indiana............................ 9 462 42,545 5,208 Louisiana.......................... 2 209 21,016 2,397 Maryland........................... 5 431 21,890 2,440 Massachusetts...................... 1 130 10,553 1,210 Minnesota.......................... 1 78 6,354 724 Montana............................ 2 104 9,605 1,173 Nevada............................. 3 294 27,990 3,305 New Jersey......................... 2 400 26,539 3,162 New Mexico......................... 2 158 7,554 871 New York........................... 6 723 61,639 6,813 North Carolina..................... 9 581 57,729 6,774 Ohio............................... 8 664 43,600 5,224 Oklahoma........................... 17 586 24,772 3,137 Oregon............................. 2 70 9,424 1,102 Pennsylvania....................... 4 237 19,933 2,431 South Carolina..................... 5 230 20,531 2,377 Tennessee.......................... 4 194 14,950 1,778 Texas.............................. 26 1,788 106,792 12,190 Utah............................... 1 57 7,764 849 Virginia........................... 1 64 2,345 258 Washington......................... 1 46 8,554 940 ----------------------------------------------- Total............................. 150 10,150 749,334 84,640 SPECIALTY CARE FACILITIES: Arkansas........................... 1 84 $ 28,646 $ 3,495 California......................... 2 416 31,328 4,018 Minnesota.......................... 1 0 99 12 Texas.............................. 1 60 13,371 1,480 Washington D.C..................... 1 148 9,474 1,185 ----------------------------------------------- Total............................. 6 708 82,918 10,190 BEHAVIORAL CARE FACILITIES: Florida............................ 2 294 $ 7,609 $ 799 ----------------------------------------------- TOTAL ALL FACILITIES:............. 205 17,777 $1,139,225 $129,012 === ====== ========== ========
-------------------------- (1) Investments include real estate investments and credit enhancements which amounted to $1,127,280,000 and $11,945,000, respectively. (2) Reflects contract rate of annual base rent or interest recognized or to be recognized upon completion of construction. -10- 11 ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the periods indicated, the high and low prices of the Company's Common Stock on the New York Stock Exchange, as reported on the Composite Tape and dividends paid per share. There were 4,944 shareholders of record as of December 31, 2000.
SALES PRICE DIVIDENDS ----------- --------- HIGH LOW PAID ---- --- ---- 2000 First Quarter....................................... $17.4375 $14.7500 $.580 Second Quarter...................................... 16.7500 13.8125 .585 Third Quarter....................................... 19.2500 16.1875 .585 Fourth Quarter...................................... 18.2500 15.9400 .585 1999 First Quarter....................................... $26.6250 $21.1875 $.560 Second Quarter...................................... 25.6250 20.7500 .565 Third Quarter ...................................... 23.8750 19.3125 .570 Fourth Quarter...................................... 20.0000 14.6875 .575
-11- 12 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended December 31, 2000, are derived from the audited consolidated financial statements of the Company.
Year Ended December 31, ------------------------------------------------------------- (In thousands, except per share data) 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- OPERATING DATA Revenues ................................... $136,954 $129,307 $ 97,992 $ 73,308 $ 54,402 Expenses: Interest expense ......................... 34,622 26,916 18,030 15,365 14,635 Provision for depreciation ............... 22,706 17,885 10,254 5,287 2,427 General and administrative and other expenses (1) ................. 9,570 8,868 7,399 6,178 5,856 Loss on investment ....................... 2,000 808 -------- -------- -------- -------- -------- Total expenses ............................. 68,898 53,669 35,683 26,830 23,726 -------- -------- -------- -------- -------- Net income ................................. 68,056 75,638 62,309 46,478 30,676 Preferred stock dividends .................. 13,490 12,814 4,160 -------- -------- -------- -------- -------- Net income available to common shareholders $ 54,566 $ 62,824 $ 58,149 $ 46,478 $ 30,676 ======== ======== ======== ======== ======== OTHER DATA Average number of common shares outstanding: Basic ................................. 28,418 28,128 25,579 21,594 14,093 Diluted ............................... 28,643 28,384 25,954 21,929 14,150 PER SHARE Net income available to common shareholders: Basic ................................. $ 1.92 $ 2.23 $ 2.27 $ 2.15 $ 2.18 Diluted ............................... 1.91 2.21 2.24 2.12 2.17 Cash distributions per common share ........ 2.335 2.27 2.19 2.08 2.11
---------------------------------------------------------- (In thousands) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- BALANCE SHEET DATA Real estate investments, net.............................. $1,121,419 $1,241,722 $1,047,511 $716,193 $512,894 Total assets.............................................. 1,156,904 1,271,171 1,073,424 734,327 519,831 Total debt................................................ 439,752 538,842 418,979 249,070 184,395 Total liabilities......................................... 458,297 564,175 439,665 264,403 194,295 Total shareholders' equity................................ 698,607 706,996 633,759 469,924 325,536
-------------------------- (1) General and administrative and other expenses include loan expense, provision for loan losses, and other operating expenses. -12- 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2000, the Company's net real estate investments totaled approximately $1,121,419,000, which included 150 assisted living facilities, 47 nursing facilities, six specialty care facilities and two behavioral 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. During 2000, the underperformance of publicly owned nursing home and assisted living companies, combined with the much publicized shift in equity funds flow from income-oriented investments to high-growth opportunities, impaired the stock valuations in the health care REIT sector. The availability of external capital is limited and expensive, constraining new investment activity and earnings growth. The Company believes the restrictive capital environment will continue until the prospects for the long-term care industry improve. In October 1999, the Company announced a $200 million asset divestiture program. The limited asset dispositions were intended to strengthen the Company's portfolio and generate liquidity, enhancing the Company's balance sheet. During 2000, the Company received $173 million as a result of the asset disposition program. Included in these dispositions were $107 million of real property and $66 million of mortgage loans, which generated $1.7 million in gains and prepayment fees. These dispositions, along with cash flow from operations, provided the Company with the funds to pay $35 million of maturing senior note obligations, reduce the outstanding balances under the revolving line of credit arrangements from $177.5 million to $119.9 million, and fund additional investments. During 2000, the Company invested $18,113,000 in real property, provided permanent mortgage and loan financings of $5,199,000, made construction advances of $33,957,000 and funded $15,523,000 of subdebt investments. As of December 31, 2000, the Company had approximately $14,663,000 in unfunded commitments. During 2000, eight of the above-mentioned construction projects completed the construction phase of the Company's investment process and were converted to permanent real property investments, with an aggregate investment of $61,840,000, and three construction loans converted to permanent mortgage loans with an aggregate investment balance of $10,690,000. As of December 31, 2000, the Company had shareholders' equity of $698,607,000 and a total outstanding debt balance of $439,752,000, which represents a debt to total capitalization ratio of .39 to 1.00. As of December 31, 2000, the Company had an unsecured revolving line of credit expiring March 31, 2001, in the amount of $175,000,000 bearing interest at the lender's prime rate or LIBOR plus 1.0%. 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 April 30, 2001. In January 2001, the Company extended its primary revolving line of credit through March 31, 2003. Under the terms of the extension, the total commitment was reduced from $175 million to $150 million and the effective interest rate was adjusted to the lender's prime rate or LIBOR plus 1.50%. As of December 31, 2000, the Company has effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to $380,319,000 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. -13- 14 RESULTS OF OPERATIONS DECEMBER 31, 2000 VS. DECEMBER 31, 1999 Revenues were comprised of the following: Year ended Change ---------------------------- -------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- -------------- (in thousands) Rental income ............ $ 88,312 $ 72,700 $ 15,612 21% Interest income .......... 41,064 48,076 (7,012) -15% Commitment fees and other income ........ 5,837 6,263 (426) -7% Prepayment fees .......... 57 1,565 (1,508) -96% -------- -------- -------------- Totals ................... $135,270 $128,604 $ 6,666 5% ======== ======== ============== 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 offsets a reduction in interest income due to the repayment of mortgage loans and the purchase of properties previously financed by the Company. Expenses were comprised of the following:
Year ended Change ---------------------------------- -------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- -------------- (in thousands) Interest expense $ 34,622 $ 26,916 $ 7,706 29% Provision for depreciation 22,706 17,885 4,821 27% Loss on investment 2,000 0 2,000 n/a General and admin. expenses 7,405 7,359 46 1% Loan expense 1,165 909 256 28% Provision for losses 1,000 600 400 67% ------------ ------------ -------------- Totals $ 68,898 $ 53,669 $15,229 28% ============ ============ ==============
The increase in interest expense from 1999 to 2000 was due to higher average interest rates on the Company's line of credit and secured debt and 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. The Company's interest expense is reduced by the amount capitalized. Capitalized interest for the year ended December 31, 2000, totaled $3,079,000, as compared with $8,578,000 for the same period in 1999. The provision for depreciation increased as a result of additional investment in properties owned directly by the Company. In 2000, the Company restructured its investments with Summerville Health Care. As part of the restructuring agreement, Summerville agreed to permit the Company to re-lease 10 of its 11 facilities to new operators and repaid substantially all of the Company's subdebt investment. As part of Summerville's recapitalization, the Company's $2 million non-yielding preferred stock investment was substantially diluted. Accordingly, the Company wrote off its investment in 2000, resulting in a $2 million charge. Other items: Year ended Change ------------------------------ ------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- ------------ (in thousands) Other items: Gain on sales of properties $ 1,684 $ 703 $ 981 140% Preferred dividends 13,490 12,814 676 5% As a result of the various factors mentioned above, net income available to common shareholders was $54,566,000, or $1.91 per diluted share, for 2000 as compared with $62,824,000, or $2.21 per diluted share, for 1999. -14- 15 RESULTS OF OPERATIONS DECEMBER 31, 1999 VS. DECEMBER 31, 1998 Revenues for the year ended December 31, 1999, were $129,307,000 compared with $97,992,000 for the year ended December 31, 1998, an increase of $31,315,000 or 32%. Revenue growth resulted primarily from increased operating rent income of $30,747,000, from additional real estate investments made during the past 12 to 15 months. Expenses for the year ended December 31, 1999, totaled $53,669,000, an increase of $17,986,000 from expenses of $35,683,000 for the year ended December 31, 1998. The increase in total expenses for the year ended December 31, 1999, was primarily related to an increase in interest expense, additional expense associated with the provision for depreciation, and an increase in general and administrative expenses. Interest expense for the year ended December 31, 1999, was $26,916,000 compared with $18,030,000 for the year ended December 31, 1998. The increase in interest expense during 1999 was primarily due to the issuance in March 1999 of the Senior Unsecured Notes due 2006, the addition of $60,000,000 borrowed under the Secured Credit Facility and higher average borrowings under the unsecured lines of credit during 1999, which were offset by the amount of capitalized interest recorded in 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 year ended December 31, 1999, totaled $8,578,000, as compared with $7,740,000 for the same period in 1998. The provision for depreciation for the year ended December 31, 1999, totaled $17,885,000, an increase of $7,631,000 over the year ended 1998 as a result of additional real property investments. General and administrative expenses for the year ended December 31, 1999, totaled $7,359,000, as compared with $6,114,000 for the year ended December 31, 1998. The expenses for the year ended December 31, 1999, were 5.69% of revenues as compared with 6.24% for the year ended December 31, 1998. Dividend payments associated with the Company's outstanding preferred stock for the year ended December 31, 1999, totaled $12,814,000, as compared with $4,160,000 for 1998. As a result of the various factors mentioned above, net income available for common shareholders for the year ended December 31, 1999, was $62,824,000, or $2.21 per share, as compared with $58,149,000, or $2.24 per share, for the year ended December 31, 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 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 inflation will not impact the availability of equity and debt financing. -15- 16 ITEM 7A. 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 $9 million at December 31, 2000. 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. A 1% increase in interest rates related to this variable rate debt, and assuming no change in the outstanding balance at year-end, would result in increased annual interest expense of approximately $1,839,000. 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 December 31, 2000, 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. 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. 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 (which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "should" or comparable terms or the negative thereof), 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 and cost of capital, the ability of the Company's lessees and borrowers to make payments under their leases and loans, the ability of the Company to attract new operators for certain facilities, the amount of any additional investments, and regulatory and other changes in the health care sector, as described in the Company's filings with the Securities and Exchange Commission. -16- 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA REPORT OF INDEPENDENT AUDITORS Shareholders and Directors Health Care REIT, Inc. We have audited the accompanying consolidated balance sheets of Health Care REIT, Inc. as of December 31, 2000 and 1999, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14 (a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Care REIT, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Toledo, Ohio January 12, 2001 -17- 18 HEALTH CARE REIT, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 000 1999 ---------------------------- ASSETS (IN THOUSANDS) Real estate investments: Real property owned Land $ 74,319 $ 73,234 Buildings & improvements 770,660 730,337 Construction in progress 11,976 58,954 ----------- ----------- 856,955 862,525 Less accumulated depreciation (52,968) (35,746) ----------- ----------- Total real property owned 803,987 826,779 Loans receivable Real property loans 301,321 401,019 Subdebt investments 21,972 19,511 ----------- ----------- 1,127,280 1,247,309 Less allowance for loan losses (5,861) (5,587) ----------- ----------- Net real estate investments 1,121,419 1,241,722 Other assets: Equity investments 5,450 6,713 Deferred loan expenses 2,939 3,311 Cash and cash equivalents 2,844 2,129 Receivables and other assets 24,252 17,296 ----------- ----------- 35,485 29,449 ----------- ----------- Total assets $ 1,156,904 $ 1,271,171 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit arrangements $ 119,900 $ 177,500 Senior unsecured notes 255,000 290,000 Secured debt 64,852 71,342 Accrued expenses and other liabilities 18,545 25,333 ----------- ----------- Total liabilities 458,297 564,175 Shareholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - 6,000,000 shares in 2000 150,000 150,000 and 1999 at liquidation preference Common Stock, $1.00 par value: Authorized - 75,000,000 shares Issued and outstanding - 28,806,151 shares in 2000 and 28,532,419 shares in 1999 28,806 28,532 Capital in excess of par value 528,138 524,204 Undistributed/(overdistributed) net income (3,388) 8,883 Accumulated other comprehensive income (744) 593 Unamortized restricted stock (4,205) (5,216) ----------- ----------- Total shareholders' equity $ 698,607 $ 706,996 ----------- ----------- Total liabilities and shareholders' equity $ 1,156,904 $ 1,271,171 =========== ===========
See accompanying notes -18- 19 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 2000 1999 1998 -------------- --------------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Rental income $ 88,312 $ 72,700 $ 41,953 Interest income 41,064 48,076 48,488 Commitment fees and other income 5,837 6,263 5,914 Prepayment fees 57 1,565 588 -------------- --------------- --------------- 135,270 128,604 96,943 Expenses: Interest expense 34,622 26,916 18,030 Provision for depreciation 22,706 17,885 10,254 Loss on investment 2,000 General and administrative 7,405 7,359 6,114 Loan expense 1,165 909 685 Provision for loan losses 1,000 600 600 -------------- --------------- --------------- 68,898 53,669 35,683 -------------- --------------- --------------- Income before gain on sale of properties 66,372 74,935 61,260 Gains on sale of properties 1,684 703 1,049 -------------- --------------- --------------- Net Income 68,056 75,638 62,309 Preferred stock dividends 13,490 12,814 4,160 -------------- --------------- --------------- Net income available to common shareholders $ 54,566 $ 62,824 $ 58,149 ============== =============== =============== Average number of common shares outstanding: Basic 28,418 28,128 25,579 Diluted 28,643 28,384 25,954 Net income available to common shareholders per share: Basic $ 1.92 $ 2.23 $ 2.27 Diluted $ 1.91 $ 2.21 $ 2.24
See accompanying notes -19- 20 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED CAPITAL IN UNDISTRIBUTED/ OTHER UNAMORTIZED PREFERRED COMMON EXCESS OF (OVERDISTRIBUTED)COMPREHENSIVE RESTRICTED STOCK STOCK PAR VALUE NET INCOME INCOME STOCK TOTAL ----- ----- --------- ---------- ------ ----- ----- (In thousands, except per share data) Balances at January 1, 1998 $ $24,341 $435,603 $ 8,841 $4,671 $(3,532) $469,924 Comprehensive income: Net income 62,309 62,309 Other comprehensive income: Unrealized loss on marketable securities (565) (565) Foreign currency translation adjustment (124) (124) --------- Total comprehensive income 61,620 -------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans 440 9,986 (1,658) 8,768 Amortization of restricted stock grants 601 601 Proceeds from sale of common stock, net of expenses of $4,599 3,459 77,893 81,352 Net proceeds from sale of preferred stock 75,000 (2,790) 72,210 Cash dividends: Common stock -- $2.19 per share (56,556) (56,556) Preferred stock -- $1.39 per share (4,160) (4,160) -------- ------- --------- --------- ------ ------------- -------- Balances at December 31, 1998 75,000 28,240 520,692 10,434 3,982 (4,589) 633,759 Comprehensive income: Net income 75,638 75,638 Other comprehensive income: Unrealized loss on marketable securities (3,242) (3,242) Foreign currency translation adjustment (147) (147) --------- Total comprehensive income 72,249 -------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans 292 5,967 (1,707) 4,552 Amortization of restricted stock grants 1,080 1,080 Net proceeds from sale of preferred stock 75,000 (2,455) 72,545 Cash dividends: Common stock -- $2.27 per share (64,375) (64,375) Preferred stock, Series B--$2.22 per share (6,656) (6,656) Preferred stock, Series C--$2.19 per share (6,158) (6,158) -------- ------- --------- --------- ------ ------------- -------- Balances at December 31, 1999 150,000 28,532 524,204 8,883 593 (5,216) 706,996 Comprehensive income: Net income 68,056 68,056 Other comprehensive income: Unrealized loss on marketable securities (733) (733) Foreign currency translation adjustment (604) (604) --------- Total comprehensive income 66,719 -------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures 274 3,934 (79) 4,129 Amortization of restricted stock grants 1,090 1,090 Net proceeds from sale of preferred stock Cash dividends: Common stock -- $2.335 per share (66,837) (66,837) Preferred stock, Series B--$2.219 per share (6,656) (6,656) Preferred stock, Series C--$2.27 per share (6,834) (6,834) -------- ------- --------- --------- ------ ------------- -------- BALANCES AT DECEMBER 31, 2000 $150,000 $28,806 $528,138 $ (3,388) $ (744) $(4,205) $698,607 ======== ======= ========= ========= ====== ============= ========
See accompanying notes -20- 21 HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 2000 1999 1998 ----------------- ----------------- ---------------- (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 68,056 $ 75,638 $ 62,309 Adjustments to reconcile net income to net cash provided from operating activities: Provision for depreciation 22,961 18,106 10,348 Amortization 2,255 1,998 1,306 Provision for losses 1,000 600 600 Loss on investment 2,000 Loan and commitment fees earned less than (greater than) cash received (1,960) (399) 1,222 Direct financing lease income less than cash received 65 292 Rental income in excess of cash received (6,732) (6,692) (3,047) Interest income less than (greater than) cash received (318) 378 (380) Increase (decrease) in accrued expenses and other liabilities (4,827) 5,045 4,133 Decrease (increase) in receivables and other assets 264 1,394 (1,037) ------------ ------------ ---------- Net cash provided from operating activities 82,699 96,133 75,746 INVESTING ACTIVITIES Investment in real property (46,449) (215,491) (270,015) Investment in loans receivable (34,631) (56,089) (105,282) Other investments, net of payments (1,828) (2,024) (20,965) Principal collected on loans 70,567 42,731 38,629 Proceeds from sale of properties 107,182 18,112 11,378 Other (742) (444) (328) ------------ ------------ ---------- Net cash provided by (used in) investing activities 94,099 (213,205) (346,583) FINANCING ACTIVITIES Net increase (decrease) under line of credit arrangements (57,600) 5,950 93,150 Borrowings under senior notes 50,000 100,000 Proceeds from issuance of Secured Debt 64,000 Principal payments on other long-term obligations (41,491) (87) (23,241) Net proceeds from the issuance of Common Stock 4,129 4,552 90,120 Net proceeds from the issuance of Preferred Stock 72,545 72,210 Increase in deferred loan expense (794) (1,839) (798) Cash distributions to shareholders (80,327) (77,189) (60,716) ------------ ------------ ---------- Net cash provided from (used by) financing activities (176,083) 117,932 270,725 ------------ ------------ ---------- Increase (decrease) in cash and cash equivalents 715 860 (112) Cash and cash equivalents at beginning of year 2,129 1,269 1,381 ------------ ------------ ---------- Cash and cash equivalents at end of year $ 2,844 $ 2,129 $ 1,269 ============ ============ ========== Supplemental Cash Flow Information-interest paid $ 39,638 $ 32,826 $ 23,714 ============ ============ ==========
See accompanying notes -21- 22 Health Care REIT, Inc. Notes to Consolidated Financial Statements 1. ACCOUNTING POLICIES AND RELATED MATTERS INDUSTRY The Company is a self-administered real estate investment trust that invests primarily in long-term care facilities, which include nursing homes and assisted living facilities. The Company also invests in specialty care facilities. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. LOANS RECEIVABLE Loans receivable consist of long-term mortgage loans, construction-period loans maturing in two years or less, working capital loans and subdebt investments. Interest income on loans is recognized as earned based upon the principal amount outstanding. The mortgage, construction and working capital loans are primarily collateralized by a first mortgage on or assignment of partnership interest in the related facilities, which consist of nursing homes, assisted living facilities, behavioral care facilities, and specialty care hospitals. Subdebt investments represent debt instruments to operators of facilities that have been financed by the Company. These obligations are generally secured by the operator's leasehold rights and corporate guaranties. REAL PROPERTY INVESTMENTS Substantially all of the properties owned by the Company are leased under operating leases and are recorded at cost. These properties are depreciated on a straight-line basis over their estimated useful lives. The carrying value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that the depreciable life may need to be changed. The Company considers external factors relating to each asset. If these external factors and the projected undiscounted cash flows of the asset over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the estimated fair value. The leases generally extend for a minimum 10-year period and provide for payment of all taxes, insurance and maintenance by the lessees. In general, operating lease income includes base rent payments plus fixed annual rent increases, which are recognized on a straight-line basis over the minimum lease period. This income is greater than the amount of cash received during the first half of the lease term. CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST The Company capitalizes 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 capitalized interest costs of $3,079,000, $8,578,000, and $7,740,000, during 2000, 1999 and 1998, respectively, related to construction of real property owned by the Company. The Company's interest expense reflected in the statement of income has been reduced by the amounts capitalized. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in the Company's loans receivable. The determination of the allowance is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectibility of loan payments. -22- 23 1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED) DEFERRED LOAN EXPENSES Deferred loan expenses are costs incurred by the Company in connection with the issuance of short-term and long-term debt. The Company amortizes these costs over the term of the debt using the straight-line method, which approximates the interest yield method. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less. 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. Equity investments included 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. MARKETABLE SECURITIES Marketable securities available for sale are stated at market value with unrealized gains and losses reported in a separate component of shareholders' equity. Marketable securities reflect the market value of the common stock of two publicly owned corporations, which were obtained by the Company at no cost. LOAN AND COMMITMENT FEES Loan and commitment fees are earned by the Company for its agreement to provide direct and standby financing to, and credit enhancement for, owners of health care facilities. The Company amortizes loan and commitment fees over the initial fixed term of the lease, the mortgage or the construction period related to such investments. FEDERAL INCOME TAX No provision has been made for federal income taxes since the Company has elected to be treated as a real estate investment trust under the applicable provisions of the Internal Revenue Code, and the Company believes that it has met the requirements for qualification as such for each taxable year. See Note 10. NET INCOME PER SHARE Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of shares for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. COMPREHENSIVE INCOME Comprehensive income includes unrealized gains or losses on the Company's marketable securities and foreign currency translation adjustments. These items are included as a component of shareholders' equity. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities," which is effective January 1, 2001. Under the Statement, all financial instruments meeting the definition of a derivative will be carried at fair value. The Company currently has no derivative instruments nor has engaged in any hedging activities that would require a change in accounting. RECLASSIFICATIONS Certain amounts in the 1999 financial statements have been reclassified to conform to the 2000 presentation. These reclassifications had no effect on net income, total assets, or shareholders' equity. -23- 24 2. LOANS RECEIVABLE The following is a summary of loans receivable (in thousands):
DECEMBER 31 2000 1999 -------------------------------- Mortgage loans $ 275,312 $ 374,390 Construction loans 4,052 9,908 Working capital 20,720 15,221 Mortgage loans to related parties 1,237 1,500 Subdebt investments 21,972 19,511 ----------- ------------ TOTALS $ 323,293 $ 420,530 =========== ============
Loans to related parties (an entity whose ownership includes one Company director) included above are at rates comparable to other third-party borrowers equal to or greater than the Company's net interest cost on borrowings to support such loans. The amount of interest income and loan and commitment fees from related parties amounted to $152,000, $914,000, and $1,160,000 for 2000, 1999 and 1998, respectively. The following is a summary of mortgage loans at December 31, 2000 (in thousands):
Final Number Principal Payment of Amount at Carrying Due Loans Payment Terms Inception Amount --------- ----- ------------- --------- --------- 2001 4 Monthly payments from $17,302 $ 13,462 $ 9,486 to $45,278, including interest from 10.50% to 12.50% 2002 12 Monthly payments from $19,380 52,130 51,986 to $49,973, including interest at 9.50% 2003 1 Monthly payment at $27,884, 3,718 3,718 including interest at 9.00% 2004 1 Monthly payment at $29,755, 4,108 3,571 including interest at 10.00% 2006 5 Monthly payments from $4,534 to $96,412, 18,179 15,671 including interest from 9.68% to 12.42% 2007 5 Monthly payments from $3,592 to 20,653 13,548 $75,517, including interest from 8.72% to 12.17% 2008 2 Monthly payments from $1,429 to $92,028, 8,400 7,313 including interest from 12.17% to 14.61% 2009 2 Monthly payments from $13,680 to $71,669, 8,635 8,084 including interest from 11.49% to 12.00% 2010 3 Monthly payments from $5,579 to 20,025 18,313 $135,335, including interest from 11.07% to 12.17%
-24- 25 2. LOANS RECEIVABLE (CONTINUED)
Final Number Principal Payment of Amount at Carrying Due Loans Payment Terms Inception Amount ------ ----- ------------- --------- -------- 2012 1 Monthly payment at $309,651, $ 29,000 $ 28,646 including interest at 12.20% 2015 8 Monthly payments from $1,195 to 29,532 28,242 $124,679, including interest from 9.13% to 14.19% 2016 4 Monthly payments from $9,827 to 26,590 24,550 $125,212, including interest from 10.96% to 14.19% 2017 4 Monthly payments from $3,033 to 33,188 31,124 $239,153, including interest from 11.43% to 14.19% 2018 1 Monthly payment at $189,746, 21,000 20,595 including interest at 9.94% 2019 2 Monthly payments from $35,683 to 8,864 8,741 $48,408, including interest from 10.52% to 10.60% 2020 1 Monthly payment at $28,345, 2,975 2,961 including interest at 10.62% ----------- ----------- TOTALS $ 300,459 $ 276,549 =========== ===========
-25- 26 3. REAL ESTATE INVESTMENTS The following table summarizes certain information about the Company's real estate properties as of December 31, 2000 (in thousands):
Number of Building & Total Accumulated Facilities Land Improvements Investment Depreciation -------------------------------------------------------------------------- NURSING HOMES: Arizona 1 $ 180 $ 3,988 $ 4,168 $ 341 California 1 1,460 3,880 5,340 321 Colorado 1 370 6,051 6,421 506 Florida 7 4,022 50,718 54,740 3,000 Idaho 3 2,010 20,662 22,672 1,599 Illinois 2 1,010 11,446 12,456 596 Kentucky 1 130 4,870 5,000 878 Massachusetts 12 6,972 87,695 94,667 5,090 Ohio 2 786 8,778 9,564 1,155 Oklahoma 1 470 5,673 6,143 407 Oregon 1 300 5,316 5,616 429 Pennsylvania 3 669 17,567 18,236 2,375 Texas 1 663 12,588 13,251 2,713 ----------------------------------------------------------------------------------------------------------------------------- 36 19,042 239,232 258,274 19,410 ----------------------------------------------------------------------------------------------------------------------------- ASSISTED LIVING FACILITIES: Arizona 3 1,510 15,554 17,064 328 California 2 450 10,315 10,765 77 Connecticut 1 660 9,652 10,312 729 Florida 18 8,198 68,376 76,574 5,132 Georgia 2 3,166 24,541 27,707 1,232 Indiana 9 1,951 34,875 36,826 1,648 Louisiana 1 1,100 10,036 11,136 306 Maryland 1 1,320 13,641 14,961 825 Massachusetts 1 810 10,500 11,310 757 Minnesota 1 322 6,345 6,667 313 Montana 2 910 7,239 8,149 199 Nevada 3 2,086 26,129 28,215 1,205 New Jersey 2 4,597 23,627 28,224 1,685 New Mexico 1 233 5,355 5,588 481 New York 1 400 10,528 10,928 918 North Carolina 9 7,269 52,681 59,950 3,158 Ohio 7 3,512 31,647 35,159 2,305 Oklahoma 16 1,923 24,351 26,274 2,914 Oregon 2 1,077 8,757 9,834 409 Pennsylvania 4 1,951 17,199 19,150 753 South Carolina 5 2,072 18,912 20,984 610 Tennessee 4 1,521 12,461 13,982 532 Texas 21 6,839 83,231 90,070 6,795 Washington 1 1,400 5,476 6,876 247 Construction in Progress 3 11,976 ------------------------------------------------- ------------- ----------- ----------------- -------------- ---------------- 120 55,277 531,428 598,681 33,558 ------------------------------------------------- ------------- ----------- ----------------- -------------- ---------------- TOTAL REAL ESTATE 156 $74,319 $ 770,660 $ 856,955 $ 52,968 ------------------------------------------------- ------------- ----------- ----------------- -------------- ----------------
-26- 27 3. REAL ESTATE INVESTMENTS (CONTINUED) At December 31, 2000, future minimum lease payments receivable under operating leases are as follows (in thousands): 2001 $ 83,237 2002 85,223 2003 85,975 2004 86,918 2005 88,717 Thereafter 516,905 -------- TOTAL $946,975 ======== The Company converted $60,648,000, $16,309,000, and $73,430,000 of mortgage loans into operating lease properties in 2000, 1999 and 1998, respectively. This noncash activity is appropriately not reflected in the accompanying statements of cash flows. 4. CONCENTRATION OF RISK As of December 31, 2000, long-term care facilities, which include nursing homes and assisted living facilities, comprised 92% (93% at December 31, 1999) of the Company's real estate investments and were located in 34 states. Investments in assisted living facilities comprised 66% (70% at December 31, 1999) of the Company's real estate investments. The Company's investments with the three largest operators totaled approximately 27% (28% at December 31, 1999). No single operator has a real estate investment balance which exceeds 11% (14% at December 31, 1999) of total real estate investments, including credit enhancements. 5. ALLOWANCE FOR LOAN LOSSES The following is a summary of the allowance for loan losses (in thousands): 2000 1999 1998 ------- ------- ------- Balance at beginning of year $ 5,587 $ 4,987 $ 4,387 Provision for loan losses 1,000 600 600 Charge-offs (726) ------- ------- ------- Balance at end of year $ 5,861 $ 5,587 $ 4,987 ======= ======= ======= In addition, the Company recorded a $2,000,000 loss during 2000 related to an investment in the preferred stock of a private corporation that became substantially diluted as a result of a recapitalization of that corporation. 6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS The Company has an unsecured credit arrangement with a consortium of 10 banks providing for a revolving line of credit ("revolving credit") in the amount of $175,000,000, which expires on March 31, 2001. The agreement specifies that borrowings under the revolving credit are subject to interest payable in periods no longer than three months on either the agent bank's base rate of interest or 1.0% over LIBOR interest rate (based at the Company's option). The effective interest rate at December 31, 2000, was 7.97%. In addition, the Company pays a commitment fee ranging from an annual rate of 0.20% to 0.375% and an annual agent's fee of $50,000. Principal is due upon expiration of the agreement. In January 2001, the Company extended the revolving credit through March 31, 2003. Under the terms of the extension, the total commitment was reduced from $175,000,000 to $150,000,000 and the effective interest rate was adjusted to the agent bank's base rate or 1.5% over LIBOR. The Company has another unsecured line of credit with a bank for a total of $25,000,000, which expires April 30, 2001. Borrowings under this line of credit are subject to interest at the bank's prime rate of interest (9.5% at December 31, 2000) and are due on demand. -27- 28 6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS (CONTINUED) The following information relates to aggregate borrowings under the line of credit arrangements (in thousands, except percentages):
YEAR ENDED DECEMBER 31 2000 1999 1998 --------------------------------------------------------- Balance outstanding at December 31 $ 119,900 $ 177,500 $ 171,550 Maximum amount outstanding at any month end 185,000 180,950 171,550 Average amount outstanding (total of daily principal balances divided by days in year) 140,981 153,318 103,739 Weighted average interest rate (actual interest expense divided by average borrowings outstanding) 7.77% 6.61% 6.90%
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS The Company has $255,000,000 of Unsecured Senior Notes with interest ranging from 7.06% to 8.34%. The Company has one mortgage note payable, collateralized by a health care facility with an interest rate at 12%. The Company has one secured note collateralized by one health care facility with interest at 2% over LIBOR (8.62% at December 31, 2000). The Company has a $60,000,000 secured line of credit, collateralized by 14 health care facilities, with interest at 2% over LIBOR (8.62% at December 31, 2000). The carrying values of the health care properties securing the mortgages and secured debt totaled $139,481,000 at December 31, 2000. At December 31, 2000, the annual principal payments on these long-term obligations are as follows (in thousands):
SECURED LINE OF SECURED SENIOR NOTES CREDIT NOTE MORTGAGES ----------------- ----------------------- ------------ -------------- 2001 $ 10,000 $ 0 $ 0 $ 67 2002 20,000 0 0 75 2003 35,000 0 0 84 2004 40,000 60,000 4,000 133 2005 0 0 0 493 2006 50,000 0 0 0 2007 0 0 0 0 2008 100,000 0 0 0 Thereafter 0 0 0 0 --------- --------- -------- --------- $ 255,000 $ 60,000 $ 4,000 $ 852 ========= ========= ======== =========
8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS The Company's 1995 Stock Incentive Plan authorized up to 2,200,000 shares of Common Stock to be issued at the discretion of the Board of Directors. The 1995 Plan replaced the 1985 Incentive Stock Option Plan. The options granted under the 1985 Plan continue to vest through 2005 and expire 10 years from the date of grant. Officers and key salaried employees of the Company are eligible to participate in the 1995 Plan. The 1995 Plan allows for the issuance of stock options, restricted stock grants and Dividend Equivalency Rights. In addition, during 1997, the Company adopted a Stock Plan for Non-Employee Directors, which authorizes up to 240,000 shares to be issued. -28- 29 8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS (CONTINUED) The following table summarizes the activity in the Plans for the years ended December 31 (shares in thousands):
2000 1999 1998 ---- ---- ---- AVERAGE Average Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Stock Options ------------- Options at beginning of year 1,813 $21.62 1,418 $22.06 1,126 $21.56 Options granted 507 16.79 410 20.17 362 23.00 Options exercised (6) 21.81 (63) 18.57 Options terminated (367) 21.76 (9) 23.90 (7) 24.90 -------- ----------- -------- ----------- -------- ----------- 1,953 $20.34 1,813 $21.62 1,418 $22.06 ======== =========== ======== =========== ======== =========== At end of year: Options exercisable 949 $21.32 733 $21.17 466 $20.83 Weighted average fair value of options granted during the year $ .63 $ 2.11 $ 1.98
The stock options generally vest over a five-year period and expire 10 years from the date of grant. Options at December 31, 2000, had exercise prices ranging from $16.38 to $27.38 per share and a weighted average contractual life of 7.5 years. The Company issued 77,250, 86,250, and 74,100 restricted shares during 2000, 1999 and 1998, respectively, including 8,000, 9,000 and 2,250 shares for directors in 2000, 1999 and 1998, respectively. Vesting periods range from six months for directors to five years for officers and key salaried employees. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $1,090,000, $1,080,000, and $601,000, in 2000, 1999 and 1998, respectively. The following table summarizes information about stock options outstanding at December 31, 2000 (shares in thousands):
Options Outstanding Options Exerciseable ---------------------------------------------------- ----------------------------------- Weighted Average Range of Per Share Number Weighted Average Remaining Number Weighted Average Exercise Prices Outstanding Exercise Price Contract Life Exerciseable Exercise Price --------------- ----------- -------------- ------------- ------------ -------------- $16-$20 1,164 $ 18.14 8.2 444 $ 18.66 $20-$25 639 23.01 6.4 402 23.03 $25-$30 150 26.08 7.2 103 26.06 ------ -------- ----- ----- ------- 1,953 $ 20.34 7.5 949 $ 21.32 ====== ======== ===== ===== =======
The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees in accounting for its employee stock options as permitted under FASB Statement No. 123 ("FASB 123"), Accounting for Stock-Based Compensation, and, accordingly, recognizes no compensation expense for the stock option grants when the market price on the underlying stock on the date of grant equals the exercise price of the Company's employee stock option. Pro forma information has been determined as if the Company had accounted for its employee stock options and restricted shares under the fair value method. The pro forma disclosures are not likely to be representative of the effects on reported net income for future years because they do not take into consideration stock-based incentives granted prior to 1995. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following range of assumptions: risk-free interest rates from 5.10% to 7.60%, dividend yields of 8% to 12%, expected lives of seven years, and expected volatility of .18% to .244%. Had compensation cost for the stock-based compensation plans been determined in accordance with FASB 123, net income would have been reduced by $267,000, $621,000, and $393,000, in 2000, 1999 and 1998, respectively, and net income per common share would have been lower by $.01, $.02, and $.02, in 2000, 1999 and 1998, respectively. The Company has a 401-(k) Profit Sharing Plan covering all eligible employees. Under the Plan, eligible employees may make contributions, and the Company may make a profit sharing contribution. Company contributions to this Plan totaled $171,000, $144,000, and $120,000, in 2000, 1999 and 1998, respectively. -29- 30 9. PREFERRED STOCK In January 1999, the Company sold 3,000,000 shares of Series C 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 Non-Voting Preferred Stock with a liquidation preference of $25.00 per share. Dividends are payable quarterly in arrears. 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. 10. DISTRIBUTIONS To qualify as a real estate investment trust for federal income tax purposes, 95% of taxable income (not including capital gains) must be distributed to shareholders. Real estate investment trusts that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The Company had no excise tax expense for the years ended December 31, 2000 and 1999, and $315,000 of excise tax expense for the year ended December 31, 1998. The principal reasons for the difference between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes and the provision for losses for reporting purposes versus bad debt expense for tax purposes. Cash distributions paid to shareholders, for federal income tax purposes, are as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998 ------------------------------------------ Per Share: Ordinary income $ 2.330 $ 2.217 $ 2.142 Capital gains .005 .053 .048 ---------- --------- ----------- TOTALS $ 2.335 $ 2.270 $ 2.190 ========== ========= ===========
11. COMMITMENTS AND CONTINGENCIES At December 31, 2000, the Company had outstanding commitments to provide financing for facilities in the approximate amount of $14,663,000 for ongoing construction activity expected over the next 12 to 15 months. The above commitments are generally on similar terms as existing financings of a like nature with rates of return to the Company based upon current market rates at the time of the commitment. The Company has agreements to purchase two health care facilities, or the loans with respect thereto, in the event that the present owners default upon their obligations. In consideration for these agreements, the Company receives and recognizes fees annually related to these agreements. Although the terms of these agreements vary, the purchase prices are equal to the amount of the outstanding obligations financing the facility. These agreements expire through the year 2005. In addition, the Company has an outstanding letter of credit relating to one construction project. At December 31, 2000, obligations under these agreements for which the Company was contingently liable aggregated approximately $11,945,000. 12. SHAREHOLDER RIGHTS PLAN Under the terms of a Shareholder Rights Plan approved by the Board of Directors in July 1994, a Preferred Share Right ("Right") is attached to and automatically trades with each outstanding share of Common Stock. The Rights, which are redeemable, will become exercisable only in the event that any person or group becomes a holder of 15% or more of the Common Stock, or commences a tender or exchange offer, which, if consummated, would result in that person or group owning at least 15% of the Common Stock. Once the Rights become exercisable, they entitle all other shareholders to purchase one one-thousandth of a share of a new series of junior participating preferred stock for an exercise price of $48.00. The Rights will expire on August 5, 2004, unless exchanged earlier or redeemed earlier by the Company for $.01 per Right at any time before public disclosure that a 15% position has been acquired. -30- 31 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
2000 1999 1998 ---------- --------- ------ Numerator for basic and diluted earnings per share - income available to common shareholders $ 54,566 $ 62,824 $ 58,149 ========= ========= ========= Denominator for basic earnings per share - weighted average shares 28,418 28,128 25,579 Effect of dilutive securities: Employee stock options 15 174 Nonvested restricted shares 225 241 201 --------- --------- --------- Dilutive potential common shares 225 256 375 --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares 28,643 28,384 25,954 ========= ========= ========= Basic earnings per share $ 1.92 $ 2.23 $ 2.27 ========= ========= ========= Diluted earnings per share $ 1.91 $ 2.21 $ 2.24 ========= ========= =========
The diluted earnings per share calculation excludes the dilutive effect of 1,954,000, 1,813,000, and 179,000 options for 2000, 1999 and 1998, 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. 14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Mortgage Loans--The fair value of all mortgage loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Subdebt Investments--The carrying amount is a reasonable estimate of fair value based on the interest rates received, which approximates current market rates. Cash and Cash Equivalents--The carrying amount approximates fair value because of the short maturity of these financial instruments. Marketable Securities--Marketable securities are recorded at their fair market value. Borrowings Under Line of Credit Arrangements and Secured Debt--The carrying amount of the line of credit and secured debt approximates fair value because the borrowings are interest rate adjustable. Senior Unsecured Notes and Industrial Development Bonds--The fair value of the senior unsecured notes payable was estimated by discounting the future cash flow using the current borrowing rate available to the Company for similar debt. Mortgage Notes Payable--Mortgage notes payable is a reasonable estimate of fair value. -31- 32 14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2000 and 1999, are as follows (in thousands):
DECEMBER 31, 2000 December 31, 1999 -------------------------------------- ----------------------------------- CARRYING Carrying AMOUNT FAIR VALUE Amount Fair Value -------- ---------- -------- ---------- Financial Assets: Mortgage loans $301,321 $308,016 $401,019 $407,711 Subdebt investments 21,972 21,972 19,511 19,511 Cash and cash equivalents 2,844 2,844 2,129 2,129 Marketable securities 130 130 863 863 Financial Liabilities: Borrowings under line of credit arrangements 119,900 119,900 177,500 177,500 Senior unsecured notes 255,000 234,987 290,000 257,679 Secured debt 64,000 64,000 64,000 64,000 Mortgage notes payable 852 852 7,342 7,342
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations of the Company for the years ended December 31, 2000 and 1999 (in thousands, except per share data):
YEAR ENDED DECEMBER 31, 2000 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ---------------------------------------------------------------------------- Revenues $ 34,828 $ 33,927 $ 33,351 $ 33,164 Net Income Available to Common Shareholders 14,758 14,587 13,786 11,435 Net Income Available to Common Shareholders Per Share Basic .52 .52 .48 .40 Diluted .52 .51 .48 .40 Year Ended December 31, 1999 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ---------------------------------------------------------------------------- Revenues $ 28,164 $ 32,469 $ 34,160 $ 33,811 Net Income Available to Common Shareholders 16,219 15,787 16,195 14,623 Net Income Available to Common Shareholders Per Share Basic .58 .56 .57 .52 Diluted .57 .56 .57 .51
-32- 33 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the information under the heading "Election of Three Directors" and "Executive Officers of the Company" in the definitive proxy statement of the Company which will be filed with the Commission prior to May 3, 2001. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information under the heading "Remuneration" in the definitive proxy statement of the Company which will be filed with the Commission prior to May 3, 2001. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information under the heading "Security Ownership of Directors and Management" in the definitive proxy statement of the Company which will be filed with the Commission prior to May 3, 2001. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information under the heading "Certain Relationships and Related Transactions" in the definitive proxy statement of the Company which will be filed with the Commission prior to May 3, 2001. -33- 34 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) 1. The following Consolidated Financial Statements of the Company are included in Part II, Item 8: Report of Independent Auditors.......................................................................17 Consolidated Balance Sheets - December 31, 2000 and 1999.............................................18 Consolidated Statements of Income - Years ended December 31, 2000, 1999 and 1998.....................19 Consolidated Statements of Shareholders' Equity - Years ended December 31, 2000, 1999 and 1998...............................................................20 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998...............................................................21 Notes to Consolidated Financial Statements ..........................................................22
2. The following Financial Statement Schedules are included in Item 14 (d): III - Real Estate and Accumulated Depreciation IV - Mortgage Loans on Real Estate All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibit Index: 3.1 Second Restated Certificate of Incorporation. 3.2 By-Laws, as amended. 4.1 The Registrant, by signing this Report, agrees to furnish the Securities and Exchange Commission upon its request a copy of any instrument which defines the rights of holders of long-term debt of Registrant and which authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant. 4.2 Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.3 First Supplemental Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.4 Second Supplemental Indenture dated as of March 13, 1998 between Health Care REIT, Inc. and Fifth Third Bank. 4.5 Third Supplemental Indenture as of March 18, 1999 between Health Care REIT, Inc. and Fifth Third Bank. 4.6 Form of Certificate of Designation of 8-7/8% Series B Cumulative Redeemable Preferred Stock. 4.7 Certificate of Designations, Preferences and Rights of Series C Cumulative Convertible Preferred Stock of Health Care REIT, Inc. 10.1 Rights Agreement. 10.2 Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers a Party thereto, dated as of April 8, 1993. 10.3 Loan Agreement dated as of March 28, 1997 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, KeyBank National Association, as Administrative Agent, and Fleet Bank N.A., as Syndication Agent. 10.4 Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers a Party thereto, dated as of April 15, 1995. 10.5 The 1985 Incentive Stock Option Plan of Health Care REIT, Inc. as amended. -34- 35 10.6 The Health Care REIT, Inc. 1995 Stock Incentive Plan 10.7 Credit Agreement by and among Health Care REIT, Inc., and certain subsidiaries, Bank United and other lenders party thereto, dated as of February 24, 1999. 10.8 Amendment No. 1 to Loan Agreement dated as of October 1, 1998 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, and Key Corporate Capital Inc. 10.9 Amendment No. 2 to Loan Agreement dated as of January 29, 2001 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto and Key Corporate Capital Inc. 10.10 Amendment No. 1 to Credit Agreement by and among Health Care REIT, Inc. and certain subsidiaries, Bank United and other lenders party thereto, dated as of April 5, 1999. 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors. 24 Powers of Attorney. 99.1 Press Release dated October 12, 2000. 99.2 Press Release dated October 17, 2000. (b) Reports on Form 8-K filed in the fourth quarter of 2000: None. (c) Exhibits: The exhibits listed in Item 14(a)(3) above are either filed with this Form 10-K or incorporated by reference in accordance with Rule 12b-32 of the Exchange Act. (d) Financial Statement Schedules: Financial statement schedules are included in pages 37 through 43. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. (Registrant) By: /S/GEORGE L. CHAPMAN -------------------------------------- Chairman, Chief Executive Officer, President and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 23, 2001 by the following persons on behalf of the registrant and in the capacities and on the dates indicated. -35- 36 /S/ WILLIAM C. BALLARD, JR.* /S/ R. SCOTT TRUMBULL* ----------------------------------- ----------------------------- William C. Ballard, Jr., Director R. Scott Trumbull, Director /S/ PIER C. BORRA* /S/ RICHARD A. UNVERFERTH* ----------------------------------- ----------------------------- Pier C. Borra, Director Richard A. Unverferth, Director /S/ JEFFREY H. DONAHUE* /S/GEORGE L. CHAPMAN ----------------------------------- ----------------------------- Jeffrey H. Donahue, Director George L. Chapman, Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) /S/ PETER J. GRUA* /S/ RAYMOND W. BRAUN* ----------------------------------- ----------------------------- Peter J. Grua, Director Raymond W. Braun, Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) /S/ SHARON M. OSTER* /S/ MICHAEL A. CRABTREE* ----------------------------------- ----------------------------- Sharon M. Oster, Director Michael A. Crabtree, Treasurer & Controller (Principal Accounting Officer) /S/ BRUCE G. THOMPSON* *By: /S/GEORGE L. CHAPMAN ----------------------------------- ----------------------------- Bruce G. Thompson, Director George L. Chapman, Attorney-in-Fact
-36- 37 HEALTH CARE REIT, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000
Initial Cost to Company ----------------------------- Cost Capitalized Buildings & Subsequent to Description Encumbrances Land Improvements Acquisition ----------- ------------ ---- ------------ ------------ ASSISTED LIVING FACILITIES: Lake Havasu, AZ $ $110 $2,244 $ Lake Havasu, AZ 450 4,223 Mesa, AZ 950 9,087 Encinitas, CA 0 6,143 Marysville, CA 450 4,172 Litchfield, CT 660 8,812 840 Bradenton, FL 251 3,298 Bradenton, FL 25 450 Bradenton, FL 25 400 Bradenton, FL 50 850 Bradenton, FL 50 850 Clermont, FL 350 5,232 Ft. Myers, FL 1,230 13,098 Haines City, FL 80 1,937 Lake Wales, FL 80 1,939 Lauderhill, FL 20 1,374 161 Leesburg, FL 70 1,170 Margate, FL 500 5,343 1,960 Naples, FL 1,716 17,306 North Miami Beach, FL 300 5,621 88 North Miami Beach, FL 150 1,242 643 Orange City, FL 80 2,239 Plantation, FL 2,746 0 Sarasota, FL 475 3,175 Atlanta, GA 2,059 14,914 Roswell, GA 1,107 9,627 Auburn, IN 145 3,511 Avon, IN 170 3,504 Kokomo, IN 195 3,709 Laporte, IN 165 3,674 Marion, IN 175 3,504 Merrilville, IN 643 7,084 Shelbyville, IN 165 3,497 Terre Haute, IN 175 3,499 Vincennes, IN 118 2,893 Kenner, LA 1,100 10,036 Attleboro, MA 810 10,500 Ellicott City, MD 1,320 13,641 Gross Amount at Which Carried at Close of Period -------------------------------------------- Buildings & Accumulated Year Year Description Land Improvements Depreciation Acquired Built ----------- ---- ------------ ------------ -------- ----- ASSISTED LIVING FACILITIES: Lake Havasu, AZ $110 $2,244 $ 135 1998 1998 Lake Havasu, AZ 450 4,223 171 1999 1999 Mesa, AZ 950 9,087 22 2000 2000 Encinitas, CA 0 6,143 77 2000 2000 Marysville, CA 450 4,172 0 2000 2000 Litchfield, CT 660 9,652 729 1998 1998 Bradenton, FL 251 3,298 476 1996 1995 Bradenton, FL 25 450 39 1997 1992 Bradenton, FL 25 400 35 1997 1988 Bradenton, FL 50 850 73 1997 1996 Bradenton, FL 50 850 73 1997 1996 Clermont, FL 350 5,232 451 1997 1997 Ft. Myers, FL 1,230 13,098 707 1999 1999 Haines City, FL 80 1,937 91 1999 1999 Lake Wales, FL 80 1,939 91 1999 1999 Lauderhill, FL 20 1,535 117 1998 1995 Leesburg, FL 70 1,170 96 1998 1972 Margate, FL 500 7,303 619 1998 1972 Naples, FL 1,716 17,306 1,059 1999 1999 North Miami Beach, FL 300 5,709 461 1998 1987 North Miami Beach, FL 150 1,885 125 1998 1987 Orange City, FL 80 2,239 161 1998 1998 Plantation, FL 2,746 0 0 1999 1999 Sarasota, FL 475 3,175 458 1996 1995 Atlanta, GA 2,059 14,914 621 1999 1999 Roswell, GA 1,107 9,627 611 1999 1999 Auburn, IN 145 3,511 173 1999 1999 Avon, IN 170 3,504 138 1999 1999 Kokomo, IN 195 3,709 182 1999 1999 Laporte, IN 165 3,674 180 1999 1999 Marion, IN 175 3,504 107 1999 1999 Merrilville, IN 643 7,084 448 1999 1999 Shelbyville, IN 165 3,497 165 1999 1999 Terre Haute, IN 175 3,499 107 1999 1999 Vincennes, IN 118 2,893 148 1999 1999 Kenner, LA 1,100 10,036 306 2000 2000 Attleboro, MA 810 10,500 757 1998 1998 Ellicott City, MD 1,320 13,641 825 1999 1999
-37- 38 SCHEDULE III -Continued
Initial Cost to Company ----------------------------- Cost Capitalized Buildings & Subsequent to Description Encumbrances Land Improvements Acquisition ----------- ------------ ---- ------------ ------------ Rochester, MN $ $ 322 $ 6,345 Butte, MT 550 3,957 Kalispell, MT 360 3,282 Asheville, NC 204 3,489 Cary, NC 1,500 4,350 Durham, NC 1,476 10,659 Elizabeth City, NC 200 2,760 Hendersonville, NC 2,270 11,771 Morehead City, NC 200 3,104 Pineville, NC 1,009 10,554 Wake Forest, NC 200 3,003 Wilmington, NC 210 2,991 Brick, NJ 1,300 9,394 Cranford, NJ 3,297 11,703 2,530 Roswell, NM 233 5,355 Gardnerville, NV 1,326 12,549 Henderson, NV 380 9,220 Henderson, NV 380 4,360 Albany, NY 400 10,528 Canton, OH 300 2,098 Cincinnati, OH 1,728 10,272 Findlay, OH 200 1,800 Newark, OH 410 5,711 Piqua, OH 204 1,885 Sagamore Hills, OH 470 7,881 Troy, OH 200 2,000 Bartlesville, OK 100 1,380 Chickasha, OK 85 1,395 Duncan, OK 103 1,347 Edmond, OK 175 1,564 Enid, OK 90 1,390 Lawton, OK 144 1,456 Midwest City, OK 95 1,385 Muskogee, OK 150 1,433 Norman, OK 55 1,484 N. Oklahoma City, OK 87 1,508 Oklahoma City, OK 130 1,350 Oklahoma City, OK 220 2,943 Owasso, OK 215 1,380 Ponca City, OK 114 1,536 Shawnee, OK 80 1,400 Stillwater, OK 80 1,400 Portland OR 628 3,585 Salem, OR 449 5,172 Gross Amount at Which Carried at Close of Period -------------------------------------------- Buildings & Accumulated Year Year Description Land Improvements Depreciation Acquired Built ----------- ---- ------------ ------------ -------- ----- Rochester, MN $ 322 $ 6,345 $ 313 1999 1999 Butte, MT 550 3,957 0 2000 1999 Kalispell, MT 360 3,282 199 1998 1998 Asheville, NC 204 3,489 176 1999 1999 Cary, NC 1,500 4,350 305 1998 1996 Durham, NC 1,476 10,659 666 1999 1999 Elizabeth City, NC 200 2,760 135 1999 1999 Hendersonville, NC 2,270 11,771 804 1998 1998 Morehead City, NC 200 3,104 94 2000 2000 Pineville, NC 1,009 10,554 660 1999 1999 Wake Forest, NC 200 3,003 180 1999 1999 Wilmington, NC 210 2,991 138 1999 1999 Brick, NJ 1,300 9,394 170 2000 2000 Cranford, NJ 3,297 14,233 1,515 1996 1993 Roswell, NM 233 5,355 481 1997 1996 Gardnerville, NV 1,326 12,549 693 1999 1999 Henderson, NV 380 9,220 512 1998 1998 Henderson, NV 380 4,360 0 2000 2000 Albany, NY 400 10,528 918 1997 1997 Canton, OH 300 2,098 126 1998 1998 Cincinnati, OH 1,728 10,272 1,118 1997 1995 Findlay, OH 200 1,800 187 1997 1997 Newark, OH 410 5,711 387 1998 1997 Piqua, OH 204 1,885 146 1998 1998 Sagamore Hills, OH 470 7,881 140 2000 2000 Troy, OH 200 2,000 201 1997 1997 Bartlesville, OK 100 1,380 194 1994 1995 Chickasha, OK 85 1,395 189 1995 1996 Duncan, OK 103 1,347 174 1995 1996 Edmond, OK 175 1,564 198 1995 1996 Enid, OK 90 1,390 195 1995 1996 Lawton, OK 144 1,456 186 1995 1996 Midwest City, OK 95 1,385 194 1996 1996 Muskogee, OK 150 1,433 170 1996 1996 Norman, OK 55 1,484 226 1995 1996 N. Oklahoma City, OK 87 1,508 174 1995 1996 Oklahoma City, OK 130 1,350 181 1995 1996 Oklahoma City, OK 220 2,943 56 2000 2000 Owasso, OK 215 1,380 161 1996 1996 Ponca City, OK 114 1,536 225 1995 1995 Shawnee, OK 80 1,400 195 1995 1996 Stillwater, OK 80 1,400 196 1995 1996 Portland OR 628 3,585 157 1999 1999 Salem, OR 449 5,172 252 1999 1999
-38- 39 SCHEDULE III - Continued
Initial Cost to Company ----------------------------- Cost Capitalized Buildings & Subsequent to Description Encumbrances Land Improvements Acquisition ----------- ------------ ---- ------------ ------------ Lebanon, PA $ $ 400 $ 3,799 $ Saxonburg, PA 677 4,669 Seven Fields, PA 484 4,663 Williamsport, PA 390 4,068 Bluffton, SC 700 5,598 Florence, SC 380 2,881 Hilton Head, SC 510 6,037 N Augusta, SC 332 2,558 Walterboro, SC 150 1,838 Clarksville, TN 330 2,292 Columbia, TN 341 2,295 Morristown, TN 400 3,808 Oakridge, TN 450 4,066 Austin, TX 880 9,520 Benbrook, TX 1,050 7,550 27 Cedar Hill, TX 171 1,490 Claremore, TX 155 1,427 Corpus Christi, TX 420 4,796 Corpus Christi, TX 155 2,935 Desoto, TX 205 1,383 Ft. Worth, TX 210 3,790 Ft. Worth, TX 247 3,868 150 Georgetown, TX 200 2,100 Grand Prairie, TX 399 5,161 Harlingen, TX 92 2,057 Harlingen, TX 340 5,621 Houston, TX 550 10,751 Houston, TX 261 3,139 Kingwood, TX 300 3,309 N Richland Hills, TX 330 5,355 Palestine, TX 173 1,410 San Marcos, TX 355 4,560 Texarkana, TX 192 1,403 Waxahachie, TX 154 1,429 Everett, WA 1,400 5,476 -------- -------- ------ TOTAL ASSISTED LIVING FACILITIES: $55,277 $525,029 $6,399 Gross Amount at Which Carried at Close of Period -------------------------------------------- Buildings & Accumulated Year Year Description Land Improvements Depreciation Acquired Built ----------- ---- ------------ ------------ -------- ----- Lebanon, PA $ 400 $ 3,799 $ 136 1999 1999 Saxonburg, PA 677 4,669 248 1999 1994 Seven Fields, PA 484 4,663 230 1999 1999 Williamsport, PA 390 4,068 139 1999 1999 Bluffton, SC 700 5,598 26 2000 2000 Florence, SC 380 2,881 129 1999 1999 Hilton Head, SC 510 6,037 221 1999 1999 N Augusta, SC 332 2,558 126 1999 1999 Walterboro, SC 150 1,838 108 1999 1992 Clarksville, TN 330 2,292 137 1998 1998 Columbia, TN 341 2,295 115 1999 1999 Morristown, TN 400 3,808 136 1999 1999 Oakridge, TN 450 4,066 144 1999 1999 Austin, TX 880 9,520 512 1999 1999 Benbrook, TX 1,050 7,577 846 1997 1994 Cedar Hill, TX 171 1,490 169 1997 1997 Claremore, TX 155 1,427 169 1996 1996 Corpus Christi, TX 420 4,796 519 1997 1989 Corpus Christi, TX 155 2,935 266 1997 1997 Desoto, TX 205 1,383 155 1997 1997 Ft. Worth, TX 210 3,790 490 1992 1994 Ft. Worth, TX 247 4,018 356 1999 1996 Georgetown, TX 200 2,100 210 1997 1997 Grand Prairie, TX 399 5,161 326 1998 1998 Harlingen, TX 92 2,057 186 1997 1989 Harlingen, TX 340 5,621 455 1998 1998 Houston, TX 550 10,751 528 1999 1999 Houston, TX 261 3,139 387 1994 1995 Kingwood, TX 300 3,309 145 1999 1999 N Richland Hills, TX 330 5,355 291 1999 1999 Palestine, TX 173 1,410 167 1996 1996 San Marcos, TX 355 4,560 286 1998 1998 Texarkana, TX 192 1,403 163 1996 1996 Waxahachie, TX 154 1,429 169 1996 1996 Everett, WA 1,400 5,476 247 1999 1990 -------- -------- ------- TOTAL ASSISTED LIVING FACILITIES: $55,277 $531,428 $33,558
-39- 40 SCHEDULE III-Continued
Initial Cost to Company ----------------------------- Cost Capitalized Buildings & Subsequent to Description Encumbrances Land Improvements Acquisition ----------- ------------ ---- ------------ ------------ SKILLED NURSING FACILITIES: --------------------------- Payson, AZ $ $180 $3,988 $ Santa Rosa, CA 1,460 3,880 Pueblo, CO 370 6,051 Hilliard, FL 150 6,990 Lakeland, FL 696 4,581 262 New Port Richey, FL 624 6,930 377 North Fort Myers, FL 636 5,712 315 Sarasota, FL 560 8,474 Vero Beach, FL 660 7,642 1,398 West Palm Beach, FL 696 7,623 414 Boise, ID 600 7,383 Boise, ID 810 5,401 Coeur D'Alene 600 7,878 Granite City IL 400 4,303 Granite City, IL 610 7,143 Owensboro, KY 130 4,870 Braintree, MA 350 9,304 Braintree, MA 170 6,080 1,364 Braintree, MA 80 4,245 604 Fall River, MA 620 5,080 722 Falmouth, MA 670 3,022 123 South Boston, MA 385 1,463 342 Springfield, MA 2,100 8,845 Stoughton, MA 975 17,997 1,962 S. Boston, MA 0 3,016 115 Waltham, MA 0 11,516 Webster, MA 570 8,790 849 Worcester, MA 1,052 902 1,354 Kent, OH 215 3,367 Westlake, OH 571 5,411 Midwest City, OK 470 5,673 Eugene, OR 300 5,316 Bloomsburg, PA 0 3,918 Cheswick, PA 384 6,041 1,293 Easton, PA 285 6,315 San Antonio, TX 663 12,588 --------- ---------- -------- TOTAL SKILLED NURSING FACILITIES: $ 19,042 $ 227,738 $ 11,494 Construction in Progress 11,976 TOTAL INVESTMENT IN PROPERTIES $ 74,319 $ 764,743 $ 17,893 ========= ========== ======== Gross Amount at Which Carried at Close of Period -------------------------------------------- Buildings & Accumulated Year Year Description Land Improvements Depreciation Acquired Built ----------- ---- ------------ ------------ -------- ----- SKILLED NURSING FACILITIES: --------------------------- Payson, AZ $180 $3,988 $341 1998 1995 Santa Rosa, CA 1,460 3,880 321 1998 1968 Pueblo, CO 370 6,051 506 1998 1989 Hilliard, FL 150 6,990 395 1999 1994 Lakeland, FL 696 4,843 352 1998 1984 New Port Richey, FL 624 7,307 519 1998 1984 North Fort Myers, FL 636 6,027 432 1998 1984 Sarasota, FL 560 8,474 159 2000 2000 Vero Beach, FL 660 9,040 574 1998 1984 West Palm Beach, FL 696 8,037 569 1998 1984 Boise, ID 600 7,383 554 1998 1985 Boise, ID 810 5,401 459 1998 1996 Coeur D'Alene 600 7,878 586 1998 1996 Granite City IL 400 4,303 184 1999 1964 Granite City, IL 610 7,143 412 1998 1973 Owensboro, KY 130 4,870 878 1993 1967 Braintree, MA 350 9,304 203 1997 1968 Braintree, MA 170 7,444 806 1997 1973 Braintree, MA 80 4,849 561 2000 1973 Fall River, MA 620 5,802 671 1996 1966 Falmouth, MA 670 3,145 412 1996 1966 South Boston, MA 385 1,805 243 1995 1961 Springfield, MA 2,100 8,845 167 2000 1996 Stoughton, MA 975 19,959 367 2000 1996 S. Boston, MA 0 3,131 236 2000 1958 Waltham, MA 0 11,516 0 2000 1998 Webster, MA 570 9,639 1,120 1995 1982 Worcester, MA 1,052 2,256 304 1996 1973 Kent, OH 215 3,367 719 1989 1983 Westlake, OH 571 5,411 436 1998 1972 Midwest City, OK 470 5,673 407 1998 1958 Eugene, OR 300 5,316 429 1998 1976 Bloomsburg, PA 0 3,918 175 1999 1996 Cheswick, PA 384 7,334 543 1998 1982 Easton, PA 285 6,315 1,657 1993 1959 San Antonio, TX 663 12,588 2,713 1993 1978 --------- ----------- ----------- TOTAL SKILLED NURSING FACILITIES: $ 19,042 $ 239,232 $ 19,410 Construction in Progress 11,976 TOTAL INVESTMENT IN PROPERTIES $ 74,319 $ 782,636 $ 52,968 ========= =========== ===========
-40- 41 SCHEDULE III - Continued
Year ended December 31 2000 1999 1998 ---- ---- ---- Investment in Real Estate: Balance at Beginning of year $ 862,525 $ 639,613 $ 309,044 Additions: Acquisitions 0 81,109 110,432 Improvements 46,449 138,694 159,582 Other (1) 60,648 16,309 73,430 ---------- ---------- ----------- TOTAL ADDITIONS 107,097 236,112 343,444 Deductions: Cost of real estate sold (112,667) (13,200) (12,875) Other Total deductions (112,667) (13,200) (12,875) ---------- ---------- ----------- Balance at end of year $ 856,955 $ 862,525 $ 639,613 ========== ========== =========== Accumulated depreciation: Balance at beginning of year $ 35,746 $ 19,624 11,769 Additions: Depreciation expense 22,706 17,885 10,254 Deductions: Sale of properties (5,484) (1,763) (2,399) ---------- ----------- ----------------- Balance at end of year $ 52,968 $ 35,746 $ 19,624 ========== ========== ===========
(1) Represents mortgage loans converted to operating leases. (2) The tax basis for real property equals $788,674,000 at December 31, 2000. -41- 42 SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE HEALTH CARE REIT, INC. DECEMBER 31, 2000
(IN THOUSANDS) ------------------------- PRINCIPAL AMOUNT OF LOANS SUBJECT FINAL PERIODIC CARRYING TO DELINQUENT INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR DESCRIPTION RATE DATE TERMS LIENS OF MORTGAGES MORTGAGES INTEREST ----------- ---- ---- ----- ----- ------------ --------- -------- First Mortgages: --------------- McAllen, TX 11.07% 01/01/10 Monthly $13,750 $13,371 None (Specialty Care Payments Facility) $135,335 Little Rock, AK 12.20% 01/01/12 Monthly 29,000 28,646 None (Specialty Care Payments Facility) $309,651 Sun Valley, CA 12.83% 01/01/17 Monthly 21,500 20,851 None (Specialty Care Payments Facility) $239,153 Briarcliff, NY 10.96% 08/01/16 Monthly 12,810 12,594 None (Assisted Living Payments Facility) $125,212 New York City, NY 9.94% 03/01/18 Monthly 21,000 20,595 None (Assisted Living Facility) Payments $189,746 Oklahoma City, OK 9.68% 06/01/06 Monthly 12,204 12,204 None (Nursing Home) Payments $96,412 Brea, CA 13.17% 07/01/15 Monthly 11,000 10,477 None (Specialty Care Facility) Payments $124,679 49 mortgage loans relating to 6 From From 179,195 168,288 None nursing homes, 39 assisted living 8.72% to 12/01/01- facilities, 14.19% 05/01/20 6 behavioral care facilities and 1 specialty care facilities 2 construction loans (all with From N/A 7,010 4,052 None first mortgage liens) relating to 2 12.40% to ---------- ---------- -------- assisted living facilities 15.00% TOTALS $307,469 $280,601 $-0- ========== ========== =========
-42- 43 SCHEDULE IV - Continued
(in thousands) Year Ended December 31 --------------------------------------------------- 2000 1999 1998 ---- ---- ---- Reconciliation of mortgage loans: Balance at beginning of period $384,298 $398,682 $405,336 Additions during period: New mortgage loans 28,244 44,656 105,282 Negative principal amortization 6 ------------- ------------- ------------- 412,542 443,338 510,624 Deductions during period: Collections of principal (1) 70,567 42,731 38,512 Charge-offs 726 Other (2) 60,648 16,309 73,430 ------------- ------------- ------------- Balance at end of period $280,601 $384,298 $398,682 ============= ============= =============
(1) Includes collection of negative principal amortization. (2) Includes properties originally financed with mortgage loans that were purchased during the periods indicated. -43- 44 EXHIBIT INDEX The following documents are included in this Form 10-K as an Exhibit:
DESIGNATION NUMBER UNDER EXHIBIT ITEM 601 OF EXHIBIT PAGE NUMBER REGULATION S-K DESCRIPTION NUMBER ------- -------------- ------------ ------ 3.1(1) 3(i) Second Restated Certificate of Incorporation. 3.2(2) 3(ii) By-Laws, as amended. 4.1 4 The Registrant, by signing this Report, agrees to furnish the Securities and Exchange Commission upon its request a copy of any instrument which defines the rights of long-term debt of the Registrant and which authorizes a total amount of securities not in excess of 10% of the total assets of the Registrant. 4.2(3) 4 Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.3(4) 4 First Supplemental Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.4(5) 4 Second Supplemental Indenture dated as of March 13, 1998 between Health Care REIT, Inc. and Fifth Third Bank. 4.5(6) 4 Third Supplemental Indenture dated as of March 18, 1999 between Health Care REIT, Inc. and Fifth Third Bank. 4.6(6) 4 Form of Certificate of Designation of 8-7/8% Series B Cumulative Redeemable Preferred Stock 4.7(6) 4 Certificate of Designations, Preferences and Rights of Series C Cumulative Convertible Preferred Stock of Health Care REIT, Inc. 10.1(7) 10(ii)(A) Rights Agreement. 10.2(8) 10(ii)(A) Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers a Party thereto, dated as of April 8, 1993. 10.3(9) 10(i) Loan Agreement dated as of March 28, 1997 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, and KeyBank National Association, as Administrative Agent, and Fleet Bank, N.A., as Syndication Agent. 10.4(10) 10(ii) Note Purchase Agreement between Health Care REIT, Inc. and each of the Purchasers a Party thereto, dated April 15, 1996. 10.5(11) 10(iii)(A) The 1985 Incentive Stock Option Plan of Health Care REIT, Inc., as amended.
-44- 45 10.6(12) 10(iii)(A) The Health Care REIT, Inc. 1995 Stock Incentive Plan, as amended. 10.7 10(i) Credit Agreement by and among Health Care REIT Inc., and certain subsidiaries, Bank United and other lenders party thereto, dated as of February 24, 1999. 10.8 10(i) Amendment No. 1 to Loan Agreement dated as of October 1, 1998 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, and Key Corporate Capital Inc. 10.9 10(i) Amendment No. 2 to Loan Agreement dated as of January 29, 2001 by and among Health Care REIT, Inc., as certain subsidiaries, the banks signatory thereto and Key Corporate Capital Inc. 10.10 10(i) Amendment No. 1 to Credit Agreement by and among Health Care REIT, Inc. and certain subsidiaries, Bank United and other lenders party thereto, dated as of April 5, 1999. 21 21 Subsidiaries of the Registrant. 23 23 Consent of Independent Auditors. 24 24 Powers of Attorney. 99.1 99 Press Release dated October 12, 2000. 99.2 99 Press Release dated October 17, 2000.
--------------- (1) Incorporated by reference to Exhibit 3.1 to the Registrant's Form 10-K filed March 20, 2000. (2) Incorporated by reference to Exhibit 3.1 to the Registrant's Form 8-K filed October 24, 1997. (3) Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K filed on April 21, 1997. (4) Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on April 21, 1997. (5) Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-K filed on March 11, 1998. (6) Incorporated by reference to Exhibit 4.2 to the Registrant's Form 8-A filed on March 17, 1999. (7) Incorporated by reference to Exhibit 2 to the Registrant's Form 8-A filed on August 3, 1994 (File No. 1-8923). (8) Incorporated by reference to Exhibits 1-4 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1993. (9) Incorporated by reference to Exhibit 10.1 of the Registrant's Form 8-K filed on April 8, 1997. (10) Incorporated by reference to Exhibit 4 of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1996. (11) Incorporated by reference to Exhibit 4.4 to the Registrant's Registration Statement on Form S-8 (File No. 333-1237) filed on February 27, 1996. (12) Incorporated by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-8 (File No. 333-1239) filed on February 27, 1996. -45-