10-Q 1 l94963ae10vq.txt HEALTH CARE REIT > FORM 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002 ------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [ ] For the transition period from __________________ to __________________ COMMISSION FILE NUMBER 1-8923 HEALTH CARE REIT, INC. ---------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 34-1096634 -------- ---------- (State or jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604 ------------------------------------- ----- (Address of principal executive office) (Zip Code) (Registrant's telephone number, including area code) (419) 247-2800 ----------------------- ---------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [ ]. No [ ]. APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 1, 2002. Class: Shares of Common Stock, $1.00 par value Outstanding 38,989,230 shares INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets - June 30, 2002 and December 31, 2001.................................................................... 3 Consolidated Statements of Income - Three and six months ended June 30, 2002 and 2001.............................................. 4 Consolidated Statements of Shareholders' Equity - Six months ended June 30, 2002 and 2001................................................................................. 5 Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001.................................................. 6 Notes to Unaudited Consolidated Financial Statements..................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk................................ 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders...................................... 13 Item 5. Other Information........................................................................ 14 Item 6. Exhibits and Reports on Form 8-K......................................................... 14 SIGNATURES ......................................................................................... 15 EXHIBIT INDEX......................................................................................... 16
-2- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS -------------------- CONSOLIDATED BALANCE SHEETS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES
JUNE 30 DECEMBER 31 2002 2001 (UNAUDITED) (NOTE) ----------- ----------- (IN THOUSANDS) ASSETS Real estate investments: Real property owned: Land ...................................................................... $ 106,299 $ 89,601 Buildings & improvements................................................... 1,155,541 947,794 ------------- -------------- 1,261,840 1,037,395 Less accumulated depreciation.............................................. (98,637) (80,544) ------------- -------------- Total real property owned............................................... 1,163,203 956,851 Loans receivable Real property and other loans........................................... 226,158 240,126 Subdebt investments..................................................... 24,132 23,448 ------------- -------------- 250,290 263,574 Less allowance for loan losses............................................. (7,361) (6,861) ------------- -------------- Net real estate investments............................................. 1,406,132 1,213,564 Other Assets: Equity investments......................................................... 6,891 6,498 Deferred loan expenses..................................................... 6,358 7,190 Cash and cash equivalents.................................................. 9,256 9,826 Receivables and other assets............................................... 37,667 32,765 ------------- -------------- ................................................................. 60,172 56,279 ------------- -------------- TOTAL ASSETS ................................................................. $ 1,466,304 $ 1,269,843 ============= ============== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Borrowings under line of credit obligations................................ $ 99,000 $ 0 Senior unsecured notes..................................................... 365,000 412,250 Secured debt............................................................... 112,033 78,966 Accrued expenses and other liabilities..................................... 19,114 20,757 ------------- -------------- TOTAL LIABILITIES............................................................. 595,147 511,973 Shareholders' equity: Preferred stock............................................................ 135,000 150,000 Common stock............................................................... 38,116 32,740 Capital in excess of par value............................................. 743,875 608,942 Cumulative net income...................................................... 545,557 512,837 Cumulative dividends....................................................... (586,669) (540,946) Accumulated other comprehensive loss....................................... (558) (923) Unamortized restricted stock............................................... (4,164) (4,780) ------------- -------------- TOTAL SHAREHOLDERS' EQUITY.................................................... 871,157 757,870 ------------- -------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................... $ 1,466,304 $ 1,269,843 ============= ==============
NOTE: The consolidated balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See notes to unaudited consolidated financial statements -3- CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 2002 2001 2002 2001 ------------------------------------ ---------------------------------- (IN THOUSANDS EXCEPT PER SHARE DATA) REVENUES: Rental income.............................. $ 32,782 $ 23,819 $ 62,784 $ 46,384 Interest income ............................ 7,107 7,842 13,894 16,787 Commitment fees and other income............ 749 1,037 1,306 1,927 Prepayment fees............................. 0 0 0 134 ---------------- ---------------- ------------- ------------ Total revenue.......................... 40,638 32,698 77,984 65,232 EXPENSES: Interest expense............................ 10,278 7,968 20,009 16,072 Loan expense................................ 580 389 1,157 764 Provision for depreciation.................. 9,634 6,982 18,300 13,757 Impairment of assets........................ 550 0 550 0 Provision for losses........................ 250 250 500 500 General and administrative expenses......... 2,285 2,034 4,546 3,885 ---------------- ---------------- ------------- ------------ Total expenses.......................... 23,577 17,623 45,062 34,978 ---------------- ---------------- ------------- ------------ Income from continuing operations before extraordinary item................... 17,061 15,075 32,922 30,254 DISCONTINUED OPERATIONS: Gain on sale of properties.................. 145 23 145 23 Income from discontinued operations, net.... 28 25 56 49 ---------------- ---------------- ------------- ------------ Income before extraordinary item................. 17,234 15,123 33,123 30,326 Loss on extinguishment of debt................... (403) 0 (403) 0 ---------------- ---------------- ------------- ------------ Net income....................................... 16,831 15,123 32,720 30,326 Preferred stock dividends........................ 3,341 3,376 6,718 6,752 ---------------- ---------------- ------------- ------------ Net income available to common shareholders......................... $ 13,490 $ 11,747 $ 26,002 $ 23,574 ================ ================ ============= ============ Average number of common shares outstanding: Basic................................... 35,446 28,985 34,196 28,802 Diluted................................. 36,223 29,402 34,954 29,137 Earnings per share Basic: Income from continuing operations and after preferred stock dividends....... $ 0.39 $ 0.41 $ 0.77 $ 0.82 Discontinued operations................. 0.00 0.00 0.00 0.00 Extraordinary item...................... (0.01) 0.00 (0.01) 0.00 Income available to common shareholders.......................... $ 0.38 $ 0.41 $ 0.76 $ 0.82 Diluted: Income from continuing operations and after preferred stock dividends....... $ 0.38 $ 0.40 $ 0.75 $ 0.81 Discontinued operations................. 0.00 0.00 0.00 0.00 Extraordinary item...................... (0.01) 0.00 (0.01) 0.00 Income available to common shareholders.......................... $ 0.37 $ 0.40 $ 0.74 $ 0.81 Dividends declared and paid per common share................................ $ 0.585 $ 0.585 $ 1.170 $ 1.170
See notes to unaudited consolidated financial statements -4- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES
Six months ended June 30, 2002 ---------------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Cumulative Cumulative Comprehensive IN THOUSANDS Stock Stock Par Value Stock Earnings Dividends Income/(Loss) Total ---------------------------------------------------------------------------------------------------- Balance at beginning of period $150,000 32,740 $608,942 $(4,780) $512,837 $(540,946) $ (923) $757,870 Comprehensive income: Net income 32,720 32,720 Unrealized losses on securities (37) (37) Foreign currency 402 402 translation adjustment ------- Comprehensive income 33,085 Proceeds from issuance from dividend reinvestment and stock incentive plans, net of forfeitures 435 9,548 (189) 9,794 Proceeds from issuance of common shares 4,356 110,970 115,326 Conversion of preferred stock (15,000) 585 14,415 0 Restricted stock amortization 805 805 Cash dividends paid (45,723) (45,723) -------- ------- -------- ------- -------- --------- -------- -------- Balance at end of period $135,000 $38,116 $743,875 $(4,164) $545,557 $(586,669) $ (558) $871,157 ======== ======= ======== ======= ======== ========= ======== ========
Six months ended June 30, 2001 ---------------------------------------------------------------------------------------------------- Capital In Unamortized Accum. Other Preferred Common Excess of Restricted Cumulative Cumulative Comprehensive Stock Stock Par Value Stock Earnings Dividends Income/(Loss) Total ---------------------------------------------------------------------------------------------------- Balance at beginning of period $150,000 $28,806 $528,138 $(4,205) $452,288 $(455,676) $ (744) $698,607 Comprehensive income: Net income 30,326 30,326 Unrealized losses on securities (82) (82) Foreign currency translation adjustment (333) (333) ------- Comprehensive income 29,911 Proceeds from issuance from dividend reinvestment and stock incentive plans, net of forfeitures 133 2,500 (99) 2,534 Proceeds from issuance of common shares 3,450 70,863 74,313 Restricted stock amortization 584 584 Cash dividends paid (40,502) (40,502) -------- ------- -------- ------- -------- --------- -------- -------- Balance at end of period $150,000 $32,389 $601,501 $(3,720) $482,614 $(496,178) $ (1,159) $765,447 ======== ======= ======== ======= ======== ========= ======== ========
See notes to unaudited consolidated financial statements -5- CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) HEALTH CARE REIT, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30 2002 2001 ------------------------------ (IN THOUSANDS) OPERATING ACTIVITIES Net income $ 32,720 $ 30,326 Adjustments to reconcile net income to net cash Provision for depreciation 18,391 13,897 Provision for losses 500 500 Provision for asset impairment 550 0 Amortization 1,961 1,349 Loan and commitment fees earned in excess of cash received (799) (1,202) Rental income in excess of cash received (4,531) (3,874) Interest and other income less than (in excess of) cash received 200 (166) Gain on sales of properties (145) (23) Decrease in accrued expenses and other liabilities (844) (1,357) Increase in receivables and other assets (383) (1,739) ---------- ---------- NET CASH PROVIDED FROM OPERATING ACTIVITIES 47,620 37,711 INVESTING ACTIVITIES Investment in real properties (204,682) (42,957) Investment in loans receivable (39,539) (12,510) Other investments, net (228) (457) Principal collected on loans 32,664 43,217 Proceeds from sale of properties 2,011 11,611 Other (58) (142) ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (209,832) (1,238) FINANCING ACTIVITIES Net increase (decrease) under unsecured lines of credit 99,000 (58,400) Net increase under secured lines of credit 31,000 0 Principal payments on long-term obligations (47,430) (10,034) Net proceeds from the issuance of Common Stock 125,120 76,847 Increase in deferred loan expense (325) (1,374) Cash distributions to shareholders (45,723) (40,502) ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES 161,642 (33,463) ------------ ------------ (Decrease) increase in cash and cash equivalents (570) 3,010 Cash and cash equivalents at beginning of period 9,826 2,844 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,256 $ 5,854 ============ =========== Supplemental Cash Flow Information -- Interest Paid $ 21,026 $ 17,379 ============ ===========
See notes to unaudited consolidated financial statements -6- NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS HEALTH CARE REIT, INC. AND SUBSIDIARIES NOTE A - BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered for a fair presentation have been included. Operating results for the three months ended June 30, 2002, are not necessarily an indication of the results that may be expected for the year ending December 31, 2002. For further information, refer to the financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2001. NOTE B - REAL ESTATE INVESTMENTS During the six months ended June 30, 2002, the Company invested $206,930,000 in real property, made loan advances of $17,375,000 and funded $1,112,000 of equity related investments. During the six months ended June 30, 2002, the Company sold properties with carrying values of $1,866,000 and received prepayments on loans totaling $31,455,000. NOTE C - EQUITY INVESTMENTS Management determines the appropriate classification of an equity investment at the time of acquisition and reevaluates such designation as of each balance sheet date. At June 30, 2002, equity investments include the common stock of a corporation, valued at historical cost, and ownership representing a 31% interest in Atlantic Healthcare Finance L.P., a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing homes located in the United Kingdom and continental Europe. The ownership interest in Atlantic Healthcare Finance L.P. is accounted for under the equity method. NOTE D - DISCONTINUED OPERATIONS In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after December 15, 2001. The Company adopted the standard effective January 1, 2002. During the second quarter of 2002 the Company sold one assisted living facility at a gain of $145,000. The property generated $99,000 of rental revenue and had expenses associated with the property of $43,000, generating income from discontinued operations of $56,000 for the six months ended June 30, 2002. For the six months ended June 30, 2001 the property generated $87,000 of rental revenue and had expenses associated with the property of $38,000, generating income from discontinued operations of $49,000 for that period. NOTE E - IMPAIRMENT OF ASSETS Management reviews its real estate portfolio on a quarterly basis to determine if there are any indicators of impairment. If indicators of impairment exist, management determines, using moderate assumptions and the information available at that time, if the projected undiscounted cash flows exceed the net book value of the property. If the projected undiscounted cash flows do not exceed the net book value, the property is written down to fair market value. During the quarter ended June 30, 2002, it was determined that the projected cash flows from a parcel of land did not exceed its net book value and a charge of $550,000 was recorded to reduce the property to its fair market value. The fair market value of the property was determined by an offer to purchase the property by a third party. NOTE F - CONTINGENT LIABILITIES As disclosed in the financial statements for the year ended December 31, 2001, the Company was contingently liable for certain obligations amounting to $11,425,000. -7- NOTE G - DISTRIBUTION PAID TO COMMON SHAREHOLDERS On February 20, 2002, the Company paid a dividend of $0.585 per share to shareholders of record on January 31, 2002. This dividend related to the period from October 1, 2001 through December 31, 2001. On May 20, 2002, the Company paid a dividend of $0.585 per share to shareholders of record on April 30, 2002. This dividend related to the period from January 1, 2002 through March 31, 2002. NOTE H - EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
Three months ended June 30 Six months ended June 30 --------------------------------- ---------------------------------- 2002 2001 2002 2001 --------- --------- --------- ---------- Numerator for basic and diluted earnings per share-income available to common shareholders $ 13,490 $ 11,747 $ 26,002 $ 23,574 ========= ========= ========= ========= Denominator for basic earnings per share - weighted average shares 35,446 28,985 34,196 28,802 Effect of dilutive securities: Employee stock options 522 192 503 110 Nonvested restricted shares 255 225 255 225 --------- --------- --------- --------- Dilutive potential common shares 777 417 758 335 --------- --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares 36,223 29,402 34,954 29,137 ========= ========= ========= ========= Basic earnings per share $ 0.38 $ 0.41 $ 0.76 $ 0.82 Diluted earnings per share $ 0.37 $ 0.40 $ 0.74 $ 0.81
The diluted earnings per share calculation excludes the dilutive effect of 10,000 and 1,350,000 shares for the periods ended June 30, 2002 and June 30, 2001, 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. NOTE I - COMPREHENSIVE INCOME Comprehensive income for the three months ended June 30, 2002 and 2001, totaled $17,269,000 and $14,958,000, respectively. NOTE J - NEW ACCOUNTING POLICY In April 2002, FASB issued SFAS 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections. Statement 145 will require gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under Statement 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. Statement 145 will be effective for fiscal years beginning after December 15, 2002 and the Company will reclassify prior periods upon adoption. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS ----------------------------------- LIQUIDITY AND CAPITAL RESOURCES At June 30, 2002, the Company's net real estate investments totaled $1,406,132,000 which included 157 assisted living facilities, 65 skilled nursing facilities and seven specialty care facilities. Depending upon the availability and cost of external capital, the Company anticipates making additional investments in health care related facilities. New investments are funded from temporary borrowings under the Company's line of credit arrangements, internally generated cash and the proceeds derived from asset sales. Permanent financing for future investments, which replaces funds drawn under the line of credit arrangements, is expected to be provided through a combination of private and public offerings of debt and equity securities and the assumption of secured debt. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements and finance future investments. In February, 2002, the Company issued 906,125 shares of Common Stock, $1 par value, at a price of $27.59 per share, which generated net proceeds of $23,657,000. In May, 2002, the Company issued 3,450,000 shares of Common Stock, $1 par value, at a price of $28.00 per share, which generated net proceeds of $91,669,000. During the quarter ended June 30, 2002, the holder of the Company's Series C Convertible Preferred Stock converted 600,000 shares into 585,000 shares of Common Stock. As of June 30, 2002, the Company had a total outstanding debt balance of $576,033,000 and shareholders' equity of $871,157,000 which represents a debt to equity ratio of .66 to 1.0, and a debt to total capitalization ratio of .40 to 1.0. As of June 30, 2002, the Company had an unsecured revolving line of credit expiring March 31, 2003 in the amount of $150,000,000 bearing interest at the lender's prime rate or LIBOR plus 1.5%. In addition, the Company had an unsecured revolving line of credit in the amount of $25,000,000 bearing interest at the lender's prime rate which expires June 30, 2003. Also, at June 30, 2002, the Company had secured line of credit arrangements totaling $64,000,000. At June 30, 2002, the Company had $99,000,000 in borrowings under the unsecured line of credit arrangements and $64,000,000 outstanding on the secured line of credit arrangements. As of June 30, 2002, the Company had an effective shelf registration on file with the Securities and Exchange Commission under which the Company may issue up to $560,574,000 of securities including debt securities, common and preferred stock and warrants. 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. RESULTS OF OPERATIONS Revenues were comprised of the following:
Three months ended Change Year to date through Change ---------------------------- --------------------- ----------------------------- --------------------- June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ % ------------- ------------- --------- --------- ------------- ------------- -------- --------- (000's) Rental income $ 32,782 $ 23,819 $ 8,963 38% $ 62,784 $ 46,384 $ 16,400 35% Interest income 7,107 7,842 (735) -9% 13,894 16,787 (2,893) -17% Commitment fees and other income 749 1,037 (288) -28% 1,306 1,927 (621) -32% Prepayment fees - - - -% - 134 (134) -100% ------------ ------------ --------- --------- ------------ ------------ -------- --------- Total $ 40,638 $ 32,698 $ 7,940 24% $ 77,984 $ 65,232 $ 12,752 20% ============ ============ ========= ========= ============ ============ ======== =========
For the three and six months ended June 30, 2002, the Company generated increased rental income as a result of the acquisition of properties for which the Company receives rent. This offset a reduction in interest income due to the repayment of mortgage loans. Commitment fees and other income decreased primarily as a result of the completion of construction projects. -9- Expenses were comprised of the following:
Three months ended Change Year to date through Change ------------------------------ --------------------- ----------------------------- -------------------- June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ % ------------- ------------- -------- -------- -------------- ------------- -------- --------- (000's) Interest expense $ 10,278 $ 7,968 $ 2,310 29% $ 20,009 $ 16,072 $ 3,937 24% Loan expense 580 389 191 49% 1,157 764 393 51% Provision for depreciation 9,634 6,982 2,652 38% 18,300 13,757 4,543 33% Provision for losses 250 250 - -% 500 500 - -% Impairment of assets 550 - 550 100% 550 - 550 100% General and admin. expenses 2,285 2,034 251 12% 4,546 3,885 661 17% ------------ ------------ -------- --------- ------------ ------------ ------- --------- Total $ 23,577 $ 17,623 $ 5,954 34% $ 45,062 $ 34,978 $10,084 29% ============ ============ ======== ========= ============ ============ ======= =========
The increase in interest expense for both the three month and year-to-date periods was primarily due to the issuance of $175 million in unsecured senior notes in August, 2001. This was offset by lower average borrowings on the Company's lines of credit and lower interest rates. In addition, there was a reduction in the amount of capitalized interest offsetting interest expense. The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. Capitalized interest for the three-month and year-to-date periods totaled $0 and $0, respectively as compared with $205,000 and $539,000 for the same periods in 2001. The provision for depreciation increased over the comparable periods in 2001 primarily as a result of additional investments in properties owned directly by the Company. General and administrative expenses as a percentage of revenues for the three-month and year-to-date periods were 5.63% and 5.83% as compared with 6.21% and 5.95% for the same periods in 2001. Other Items:
Three months ended Change Year to date through Change ------------------------------ --------------------- ------------------------------ -------------------- June 30, 2002 June 30, 2001 $ % June 30, 2002 June 30, 2001 $ % ------------- ------------- -------- ---------- -------------- ------------- --------- -------- (000's) Discontinued operations $ 173 $ 48 $ 125 260% $ 201 $ 72 $ 129 179% Loss on extinguishment of debt (403) - (403) (100%) (403) - (403) (100%) Preferred dividends 3,341 3,376 (35) (1%) 6,718 6,752 (34) (1%) ------------ ------------ -------- -------- ------------ ------------ ------- -------- Total $ 3,111 $ 3,424 $ (313) (9%) $ 6,516 $ 6,824 $ (308) (5%) ============ ============ ======== ======== ============ ============ ======= ========
During the second quarter of 2002 the Company sold properties with carrying values of $1,866,000 for a gain of $145,000. In addition, this property generated $56,000 of income after deducting depreciation and interest expense from rental income for the six months ended June 30, 2002. In April, 2002 the Company purchased $35,000,000 of unsecured senior notes that were due in 2003. The Company recorded a charge of $403,000 in connection with this early extinquishment. As a result of the various factors mentioned above, net income available to common shareholders for the three-month and year-to-date periods was $13,490,000, or $0.37 per diluted share, and $26,002,000, or $0.74 per diluted share, respectively, as compared with $11,747,000, or $0.40 per diluted share, and $23,574,000 or $0.81 per diluted share for the comparable periods in 2001. ACCOUNTING POLICIES Management reviews the adequacy of the allowance for loan losses on a quarterly basis. The Company makes mortgage loans and sometimes provides working capital and subdebt loans to operators of health care facilities in its portfolio. When reviewing the ultimate collectibility of these loans, management uses moderate assumptions of operating performance to determine the operator's ability to repay the obligation. As facts and circumstances change, management takes these into account to determine if the allowance for loan losses is adequate. -10- Management reviews its real estate portfolio on a quarterly basis to determine if there are any indicators of impairment. If indicators of impairment exist, management determines, using moderate assumptions and the information available at that time, if the projected undiscounted cash flows exceed the net book value of the property. If the projected undiscounted cash flows do not exceed the net book value, the property is written down to fair market value. During the quarter ended June 30, 2002, it was determined that the projected cash flows from a parcel of land did not exceed its net book value and a charge of $550,000 was recorded to reduce the property to its fair market value. STATEMENT REGARDING FORWARD LOOKING DISCLOSURE This report on Form 10-Q of the Company may contain "forward-looking" statements as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements concern the possible expansion of our portfolio; the performance of our operators and properties; our ability to obtain new viable tenants for properties which we take back from financially troubled tenants, if any; our ability to make distributions; our policies and plans regarding investments, financings and other matters; our tax status as a real estate investment trust; our ability to appropriately balance the use of debt and equity; and our ability to access capital markets or other sources of funds. When we use words such as "believes", "expects", "anticipates", or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our expected results may not be achieved, and actual results may differ materially from our expectations. This may be a result of various factors, including: the status of the economy; the status of capital markets, including prevailing interest rates; compliance with and changes to regulations and payment policies within the health care industry; changes in financing terms; competition within the health care and senior housing industries; and changes in federal, state and local legislation. Finally, we assume no obligation to update or revise any forward-looking statements or to update the reasons why actual results could differ from those projected in any forward-looking statements." -11- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings to the extent possible. The following section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates. The Company historically borrows on its revolving lines of credit to make acquisitions or to finance the construction of health care facilities. Then, as market conditions dictate, the Company will issue equity or long-term fixed rate debt to repay the borrowings under the revolving lines of credit. A change in interest rates will not affect future earnings or cash flow on our fixed rate debt. Interest rate changes, however, will affect the fair value of such debt. A 1% increase in interest rates would result in a decrease in fair value of the Company's Senior Unsecured Notes by approximately $15 million at June 30, 2002. Changes in the interest rate environment upon maturity of this fixed rate debt could have an affect on the future cash flows and earnings of the Company, depending on whether the debt is replaced with other fixed rate debt, with variable rate debt, with equity or by the sale of assets. A change in interest rates will not affect the fair value of the Company's variable rate debt, including its unsecured and secured revolving credit arrangements. At June 30, 2002, a 1% increase in interest rates related to this variable rate debt and assuming no changes in outstanding balances, would result in increased annual interest expense of $990,000. 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. From time to time, the Company's variable interest rate debt may exceed its variable interest rate assets, presenting an exposure to rising interest rates. The Company may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of future volatility of interest rates. -12- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------- The annual meeting of shareholders of Health Care REIT, Inc. was duly called and held on May 3, 2002 in Toledo, Ohio. Proxies for the meeting were solicited on behalf of the Company's management and Board of Directors pursuant to Regulation 14A of the General Rules and Regulations of the Commission. There was no solicitation in opposition to the management's nominees for election as directors as listed in the Proxy Statement and all such nominees were elected. Votes were cast at the meeting upon the proposals described in the Proxy Statement for the meeting (filed with the Commission pursuant to Regulation 14A and incorporated herein by reference) as follows: Proposal #1 - The election of three directors:
Nominee For Withheld --------------------------- ------------------------- ------------------------- William C. Ballard, Jr. 32,281,188 328,220 Peter J. Grua 32,279,512 329,896 R. Scott Trumbull 32,270,005 339,403
Proposal #2 - The ratification of the appointment of Ernst & Young LLP as independent auditors for the fiscal year 2002: For 32,063,450 Against 435,789 Abstain 110,169 -13- PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION ----------------- On May 7, 2002, the Company issued a press release announcing an offering of 3,000,000 shares of common stock. On May 9, 2002, the Company issued a press release announcing the pricing of 3,000,000 shares of common stock at $28.00 per share. On July 2, 2002, the Company issued a press release announcing release date of July 17, 2002 for earnings and second quarter conference call. On July 9, 2002, the Company issued a press release announcing investments of $124 million for second quarter. On July 16, 2002, the Company issued a press release announcing earnings results for second quarter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 10.1 Credit Agreement between Health Care REIT, Inc. and Fifth Third Bank dated as of May 31, 2002. 99.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. 99.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. 99.3 Press release dated May 7, 2002. 99.4 Press release dated May 9, 2002. 99.5 Press release dated July 2, 2002. 99.6 Press release dated July 9, 2002. 99.7 Press release dated July 16, 2002. (b) Reports on Form 8-K Form 8-K filed on May 8, 2002. Form 8-K/A filed on May 8, 2002. -14- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. Date: August 14, 2002 By: /S/ GEORGE L. CHAPMAN ------------------------------ --------------------------------- George L. Chapman, Chairman and Chief Executive Officer Date: August 14, 2002 By: /S/ RAYMOND W. BRAUN ------------------------------ --------------------------------- Raymond W. Braun, President and Chief Financial Officer Date: August 14, 2002 By: /S/ MICHAEL A. CRABTREE ----------------------------------- --------------------------------- Michael A. Crabtree, Chief Accounting Officer -15- EXHIBIT INDEX The following documents are included in this Form 10-Q as Exhibits:
DESIGNATION NUMBER UNDER ITEM 601 OF REGULATION S-K EXHIBIT DESCRIPTION -------------- ------------------- 10.1 Credit Agreement between Health Care REIT, Inc. and Fifth Third Bank dated as of May 31, 2002. 99.1 Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. 99.2 Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. 99.3 Press release dated May 7, 2002. 99.4 Press release dated May 9, 2002. 99.5 Press release dated July 2, 2002. 99.6 Press release dated July 9, 2002. 99.7 Press release dated July 16, 2002.
-16-