Health Care REIT, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
or
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o |
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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)
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Delaware
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34-1096634 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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One SeaGate, Suite 1500, Toledo, Ohio
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43604 |
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(Address of principal executive office)
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(Zip Code) |
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(419) 247-2800
(Registrants telephone number, including area code)
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(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 the filing requirements for at least the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
As
of October 13, 2006, the registrant had 63,067,226 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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September 30 |
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December 31 |
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2006 |
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2005 |
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|
(Unaudited) |
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(Note) |
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(In thousands) |
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Assets |
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Real estate investments: |
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|
|
|
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Real property owned |
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|
|
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Land |
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$ |
276,480 |
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$ |
261,236 |
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Buildings & improvements |
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2,815,206 |
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|
2,659,746 |
|
Real property held for sale, net of accumulated depreciation |
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|
27,678 |
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|
11,912 |
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Construction in progress |
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|
98,675 |
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|
3,906 |
|
|
|
|
|
|
|
|
|
|
|
3,218,039 |
|
|
|
2,936,800 |
|
Less accumulated depreciation |
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|
(332,925 |
) |
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|
(274,875 |
) |
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|
|
|
|
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|
Total real property owned |
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|
2,885,114 |
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|
2,661,925 |
|
Loans receivable |
|
|
216,870 |
|
|
|
194,054 |
|
Less allowance for losses on loans receivable |
|
|
(7,156 |
) |
|
|
(6,461 |
) |
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|
|
|
|
|
|
|
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|
209,714 |
|
|
|
187,593 |
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|
|
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Net real estate investments |
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|
3,094,828 |
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|
2,849,518 |
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Other assets: |
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|
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|
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Equity investments |
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|
5,070 |
|
|
|
2,970 |
|
Deferred loan expenses |
|
|
12,309 |
|
|
|
12,228 |
|
Cash and cash equivalents |
|
|
15,490 |
|
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|
36,237 |
|
Receivables and other assets |
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|
73,132 |
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|
71,211 |
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|
|
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106,001 |
|
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|
122,646 |
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Total assets |
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$ |
3,200,829 |
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$ |
2,972,164 |
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Liabilities and stockholders equity |
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Liabilities: |
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Borrowings under unsecured lines of credit arrangements |
|
$ |
276,000 |
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|
$ |
195,000 |
|
Senior unsecured notes |
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|
1,196,897 |
|
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|
1,198,278 |
|
Secured debt |
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|
130,405 |
|
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|
107,540 |
|
Accrued expenses and other liabilities |
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|
50,558 |
|
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|
40,590 |
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Total liabilities |
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1,653,860 |
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1,541,408 |
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Stockholders equity: |
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|
|
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Preferred stock, $1.00 par value: |
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276,875 |
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276,875 |
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Authorized 25,000,000 shares
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Issued and outstanding 11,074,989 shares at September 30, 2006 and
11,074,989 shares at December 31, 2005 at liquidation preference
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Common stock, $1.00 par value: |
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63,005 |
|
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|
58,050 |
|
Authorized 125,000,000 shares
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|
Issued 64,143,473 shares at September 30, 2006 and 58,182,592 shares
at December 31, 2005
Outstanding 63,067,226 shares at September 30, 2006 and 58,124,657
shares at December 31, 2005
|
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|
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|
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|
Capital in excess of par value |
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1,469,491 |
|
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|
1,306,471 |
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Treasury stock |
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(2,714 |
) |
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(2,054 |
) |
Cumulative net income |
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|
909,894 |
|
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|
830,103 |
|
Cumulative dividends |
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|
(1,171,302 |
) |
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|
(1,039,032 |
) |
Accumulated other comprehensive income |
|
|
0 |
|
|
|
0 |
|
Other equity |
|
|
1,720 |
|
|
|
343 |
|
|
|
|
|
|
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|
Total stockholders equity |
|
|
1,546,969 |
|
|
|
1,430,756 |
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Total liabilities and stockholders equity |
|
$ |
3,200,829 |
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|
$ |
2,972,164 |
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NOTE: The consolidated balance sheet at December 31, 2005 has been derived from the audited
financial statements at that date but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements.
See notes to unaudited consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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Three Months Ended |
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Nine Months Ended |
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September 30 |
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September 30 |
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|
2006 |
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|
2005 |
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2006 |
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2005 |
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|
(In thousands, except per share data) |
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Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Rental income |
|
$ |
75,290 |
|
|
$ |
64,516 |
|
|
$ |
220,002 |
|
|
$ |
180,960 |
|
Interest income |
|
|
4,436 |
|
|
|
4,997 |
|
|
|
13,178 |
|
|
|
15,249 |
|
Transaction fees and other income |
|
|
1,019 |
|
|
|
773 |
|
|
|
3,049 |
|
|
|
2,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,745 |
|
|
|
70,286 |
|
|
|
236,229 |
|
|
|
198,951 |
|
|
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|
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Expenses: |
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|
|
|
|
|
|
|
|
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|
|
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|
Interest expense |
|
|
24,007 |
|
|
|
20,477 |
|
|
|
70,587 |
|
|
|
57,707 |
|
Provision for depreciation |
|
|
24,094 |
|
|
|
19,915 |
|
|
|
70,256 |
|
|
|
56,879 |
|
General and administrative |
|
|
5,223 |
|
|
|
4,640 |
|
|
|
16,517 |
|
|
|
12,993 |
|
Loan expense |
|
|
782 |
|
|
|
673 |
|
|
|
2,199 |
|
|
|
2,209 |
|
Loss on extinguishment of debt |
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|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
18,448 |
|
Provision for loan losses |
|
|
250 |
|
|
|
300 |
|
|
|
750 |
|
|
|
900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,356 |
|
|
|
46,005 |
|
|
|
160,309 |
|
|
|
149,136 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income from continuing operations |
|
|
26,389 |
|
|
|
24,281 |
|
|
|
75,920 |
|
|
|
49,815 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of properties |
|
|
108 |
|
|
|
0 |
|
|
|
2,590 |
|
|
|
(134 |
) |
Income from discontinued operations, net |
|
|
316 |
|
|
|
1,016 |
|
|
|
1,281 |
|
|
|
2,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
424 |
|
|
|
1,016 |
|
|
|
3,871 |
|
|
|
2,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
26,813 |
|
|
|
25,297 |
|
|
|
79,791 |
|
|
|
52,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends |
|
|
5,333 |
|
|
|
5,389 |
|
|
|
15,998 |
|
|
|
16,261 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
21,480 |
|
|
$ |
19,908 |
|
|
$ |
63,793 |
|
|
$ |
36,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
Average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
62,524 |
|
|
|
54,038 |
|
|
|
60,766 |
|
|
|
53,498 |
|
Diluted |
|
|
62,866 |
|
|
|
54,359 |
|
|
|
61,102 |
|
|
|
53,867 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common stockholders |
|
$ |
0.34 |
|
|
$ |
0.35 |
|
|
$ |
0.99 |
|
|
$ |
0.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.06 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common stockholders* |
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
1.05 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common stockholders |
|
$ |
0.33 |
|
|
$ |
0.35 |
|
|
$ |
0.98 |
|
|
$ |
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
0.01 |
|
|
|
0.02 |
|
|
|
0.06 |
|
|
|
0.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
available to common stockholders* |
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
1.04 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid per common share |
|
$ |
0.64 |
|
|
$ |
0.62 |
|
|
$ |
1.90 |
|
|
$ |
1.84 |
|
|
|
|
* |
|
Amounts may not sum due to rounding.
|
See
notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Capital in |
|
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|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Excess of |
|
|
Treasury |
|
|
Cumulative |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Other |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Par Value |
|
|
Stock |
|
|
Net Income |
|
|
Dividends |
|
|
Income |
|
|
Equity |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period |
|
$ |
276,875 |
|
|
$ |
58,050 |
|
|
$ |
1,306,471 |
|
|
$ |
(2,054 |
) |
|
$ |
830,103 |
|
|
$ |
(1,039,032 |
) |
|
$ |
0 |
|
|
$ |
343 |
|
|
$ |
1,430,756 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,791 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
1,732 |
|
|
|
57,015 |
|
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
58,069 |
|
Proceeds from issuance of common shares |
|
|
|
|
|
|
3,223 |
|
|
|
106,526 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,749 |
|
SFAS123(R) reclassification |
|
|
|
|
|
|
|
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521 |
|
|
|
0 |
|
Compensation expense related
to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874 |
|
|
|
874 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$1.90 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116,272 |
) |
|
|
|
|
|
|
|
|
|
|
(116,272 |
) |
Preferred stock, Series D-$1.4766 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,906 |
) |
|
|
|
|
|
|
|
|
|
|
(5,906 |
) |
Preferred stock, Series E-$1.125 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
(84 |
) |
Preferred stock, Series F-$1.4297 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,008 |
) |
|
|
|
|
|
|
|
|
|
|
(10,008 |
) |
|
|
|
Balances at end of period |
|
$ |
276,875 |
|
|
$ |
63,005 |
|
|
$ |
1,469,491 |
|
|
$ |
(2,714 |
) |
|
$ |
909,894 |
|
|
$ |
(1,171,302 |
) |
|
$ |
0 |
|
|
$ |
1,720 |
|
|
$ |
1,546,969 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital In |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common |
|
|
Excess of |
|
|
Treasury |
|
|
Cumulative |
|
|
Cumulative |
|
|
Comprehensive |
|
|
Other |
|
|
|
|
|
|
Stock |
|
|
Stock |
|
|
Par Value |
|
|
Stock |
|
|
Net Income |
|
|
Dividends |
|
|
Income |
|
|
Equity |
|
|
Total |
|
|
|
(In thousands) |
|
Balances at beginning of period |
|
$ |
283,751 |
|
|
$ |
52,860 |
|
|
$ |
1,139,723 |
|
|
$ |
(1,286 |
) |
|
$ |
745,817 |
|
|
$ |
(884,890 |
) |
|
$ |
1 |
|
|
$ |
(697 |
) |
|
$ |
1,335,279 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,366 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
1,467 |
|
|
|
44,962 |
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,949 |
|
Conversion of preferred stock |
|
|
(6,762 |
) |
|
|
207 |
|
|
|
6,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
552 |
|
|
|
552 |
|
Compensation expense related
to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
397 |
|
|
|
397 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$1.84 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,586 |
) |
|
|
|
|
|
|
|
|
|
|
(98,586 |
) |
Preferred stock, Series D-$1.4766 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,906 |
) |
|
|
|
|
|
|
|
|
|
|
(5,906 |
) |
Preferred stock, Series E-$1.125 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(347 |
) |
|
|
|
|
|
|
|
|
|
|
(347 |
) |
Preferred stock, Series F-$1.4297 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,008 |
) |
|
|
|
|
|
|
|
|
|
|
(10,008 |
) |
|
|
|
Balances at end of period |
|
$ |
276,989 |
|
|
$ |
54,534 |
|
|
$ |
1,191,240 |
|
|
$ |
(1,766 |
) |
|
$ |
798,183 |
|
|
$ |
(999,737 |
) |
|
$ |
1 |
|
|
$ |
252 |
|
|
$ |
1,319,696 |
|
|
|
|
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
79,791 |
|
|
$ |
52,366 |
|
Adjustments to reconcile net income to
net cash provided from operating
activities: |
|
|
|
|
|
|
|
|
Provision for depreciation |
|
|
71,918 |
|
|
|
63,473 |
|
Amortization |
|
|
2,199 |
|
|
|
3,318 |
|
Provision for loan losses |
|
|
750 |
|
|
|
900 |
|
Stock-based compensation expense |
|
|
3,543 |
|
|
|
949 |
|
Rental income less than (in excess of)
cash received |
|
|
9,756 |
|
|
|
(4,149 |
) |
(Gain) loss on sales of properties |
|
|
(2,590 |
) |
|
|
134 |
|
Increase (decrease) in accrued expenses and
other liabilities |
|
|
9,853 |
|
|
|
(1,243 |
) |
Decrease (increase) in receivables and
other assets |
|
|
(16,236 |
) |
|
|
(775 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities |
|
|
158,984 |
|
|
|
114,973 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Investment in real property |
|
|
(290,596 |
) |
|
|
(226,085 |
) |
Investment in loans receivable |
|
|
(74,126 |
) |
|
|
(39,125 |
) |
Investment
in investment securities |
|
|
(2,100 |
) |
|
|
0 |
|
Principal collected on loans receivable |
|
|
42,468 |
|
|
|
56,373 |
|
Proceeds from sales of properties |
|
|
35,288 |
|
|
|
9,900 |
|
Other |
|
|
(738 |
) |
|
|
259 |
|
|
|
|
|
|
|
|
Net cash provided from (used in) investing activities |
|
|
(289,804 |
) |
|
|
(198,678 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) under unsecured
lines of credit arrangements |
|
|
81,000 |
|
|
|
153,000 |
|
Proceeds from issuance of senior notes |
|
|
0 |
|
|
|
250,000 |
|
Principal payments on senior notes |
|
|
0 |
|
|
|
(230,170 |
) |
Principal payments on secured debt |
|
|
(2,184 |
) |
|
|
(8,210 |
) |
Net proceeds from the issuance of common stock |
|
|
165,808 |
|
|
|
46,429 |
|
Decrease (increase) in deferred loan expense |
|
|
(2,281 |
) |
|
|
(5,141 |
) |
Cash distributions to stockholders |
|
|
(132,270 |
) |
|
|
(114,847 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities |
|
|
110,073 |
|
|
|
91,061 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(20,747 |
) |
|
|
7,356 |
|
Cash and cash equivalents at beginning of period |
|
|
36,237 |
|
|
|
19,763 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,490 |
|
|
$ |
27,119 |
|
|
|
|
|
|
|
|
|
Supplemental cash flow information-interest paid |
|
$ |
64,549 |
|
|
$ |
63,283 |
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
6
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information
and with instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for
complete financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered for a fair presentation have been included. Operating results for
the nine months ended September 30, 2006 are not necessarily an indication of the results that may
be expected for the year ending December 31, 2006. For further information, refer to the financial
statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended
December 31, 2005.
NOTE B
Real Estate Investments
During the nine months ended September 30, 2006, we invested $290,596,000 of cash in real
property (including $103,236,000 of advances for construction in progress) and provided cash loan
financings of $74,126,000. In addition, real property acquisitions
included the assumption of secured debt
totaling $25,049,000. We also converted $12,093,000 of completed
construction projects and $11,204,000 of mortgage loans into
operating lease properties during the nine months ended
September 30, 2006. As of September 30, 2006, we had $265,112,000 of unfunded construction
commitments relating to existing construction in progress projects. Also during the nine months
ended September 30, 2006, we sold real property generating $35,288,000 of net cash proceeds and
collected $42,468,000 of cash as repayment of principal on loans receivable.
NOTE C
Equity Investments
Equity investments, which consist of investments in private and public companies over which we
do not have the ability to exercise influence, are accounted for under the cost method. Under the
cost method of accounting, investments in private companies are carried at cost and are adjusted
only for other-than-temporary declines in fair value, distributions of earnings and additional
investments. For investments in public companies that have readily determinable fair market
values, we classify our equity investments as available-for-sale and, accordingly, record these
investments at their fair market values with unrealized gains and losses included in accumulated
other comprehensive income, a separate component of stockholders equity. These investments
represent a minimal ownership interest in these companies.
NOTE D
Distributions Paid to Common Stockholders
On February 21, 2006, we paid a dividend of $0.62 per share to stockholders of record on
January 31, 2006. This dividend related to the period from October 1, 2005 through December 31,
2005.
On May 19, 2006, we paid a dividend of $0.64 per share to stockholders of record on April 28,
2006. This dividend related to the period from January 1, 2006 through March 31, 2006.
On August 21, 2006, we paid a dividend of $0.64 per share to stockholders of record on July
31, 2006. This dividend related to the period from April 1, 2006 through June 30, 2006.
NOTE E
Derivative Instruments
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may elect to use financial derivative instruments to hedge interest
rate exposure. These decisions are principally based on our policy to match our variable rate
investments with comparable borrowings, but are also based on the general trend in interest rates
at the applicable dates and our perception of the future volatility of interest rates.
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No.
133, as amended, requires companies to record derivatives at fair market value on the balance sheet
as assets or liabilities.
7
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At September 30, 2006, the Swaps were reported at their fair value as a $946,000 other
asset ($2,211,000 other asset at December 31, 2005). For the three and nine months ended September
30, 2006, we incurred $29,000 and $100,000, respectively, of losses related to the Swaps that was
recorded as an addition to interest expense. For the three and nine months ended September 30,
2005, we generated $200,000 and $977,000, respectively, of savings related to the Swaps that was
recorded as a reduction in interest expense.
The valuation of derivative instruments requires us to make estimates and judgments that
affect the fair value of the instruments. Fair values for our derivatives are estimated by a third
party consultant, which utilizes pricing models that consider forward yield curves and discount
rates. Such amounts and the recognition of such amounts are subject
to significant estimates that may change in the future.
NOTE F
Discontinued Operations
Eight assisted living facilities were held for sale as of September 30, 2006. We did not
recognize an impairment loss on these assets as the fair value less estimated costs to sell
exceeded our carrying values. During the nine months ended September 30, 2006, we sold four
assisted living facilities, three skilled nursing facilities and two parcels of land with carrying
values of $35,366,000 for a net gain of $2,590,000. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we
have reclassified the income and expenses attributable to all properties sold and attributable to
the properties held for sale at September 30, 2006 to discontinued operations. Expenses include
an allocation of interest expense based on property carrying values and our weighted average cost
of debt. The following illustrates the reclassification impact of Statement No. 144 as a result of
classifying properties as discontinued operations for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
1,015 |
|
|
$ |
4,314 |
|
|
$ |
3,954 |
|
|
$ |
12,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
267 |
|
|
|
1,147 |
|
|
|
1,012 |
|
|
|
3,548 |
|
Provision for depreciation |
|
|
432 |
|
|
|
2,151 |
|
|
|
1,661 |
|
|
|
6,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net |
|
$ |
316 |
|
|
$ |
1,016 |
|
|
$ |
1,281 |
|
|
$ |
2,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE G
Contingent Liabilities
We have an outstanding letter of credit issued for the benefit of certain insurance companies
that provide workers compensation insurance to one of our tenants. Our obligation under the
letter of credit matures in 2009. At September 30, 2006, our obligation under the letter of credit
was $2,450,000.
As of September 30, 2006, we had $265,112,000 of unfunded construction commitments.
NOTE H
Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes unrealized gains or losses on our equity
investments. This item is included as a component of stockholders equity. We did not recognize
any comprehensive income other than the recorded net income for the three or nine months ended
September 30, 2006 or 2005.
8
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30 |
|
|
September 30 |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Numerator for basic and diluted earnings
per share net income available to
common stockholders |
|
$ |
21,480 |
|
|
$ |
19,908 |
|
|
$ |
63,793 |
|
|
$ |
36,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares |
|
|
62,524 |
|
|
|
54,038 |
|
|
|
60,766 |
|
|
|
53,498 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options |
|
|
81 |
|
|
|
137 |
|
|
|
75 |
|
|
|
185 |
|
Non-vested restricted shares |
|
|
261 |
|
|
|
184 |
|
|
|
261 |
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
342 |
|
|
|
321 |
|
|
|
336 |
|
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per
share adjusted weighted average shares |
|
|
62,866 |
|
|
|
54,359 |
|
|
|
61,102 |
|
|
|
53,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
1.05 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
1.04 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The diluted earnings per share calculation excludes the dilutive effect of 0 and 112,000
stock options for the three and nine months ended September 30, 2006, respectively, because the
exercise prices were greater than the average market price. The diluted earnings per share
calculation excludes the dilutive effect of 0 and 112,000 stock options for the three and nine
months ended September 30, 2005, respectively, because the exercise prices were greater than the
average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not
included in these calculations as the effect of the conversion into common stock was anti-dilutive
for the periods presented.
NOTE J
Other Equity
Other equity consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30 |
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
Accumulated compensation expense related
to stock options |
|
$ |
1,720 |
|
|
$ |
864 |
|
Unamortized restricted stock |
|
|
0 |
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,720 |
|
|
$ |
343 |
|
|
|
|
|
|
|
|
Unamortized restricted stock at December 31, 2005 represents the unamortized value of
restricted stock granted to officers, key employees and directors prior to January 1, 2003. Pursuant to the
provisions of Statement No. 123(R) adopted on January 1, 2006, the unamortized restricted stock
balance of $521,000 was reclassified to capital in excess of par value. Expense, which is
recognized as the restricted shares vest based on the market value at the date of the award,
totaled $648,000 and $3,316,000 for the three and nine months ended September 30, 2006,
respectively, and $184,000 and $552,000 for the three and nine months ended September 30, 2005,
respectively. See Note K for further discussion.
Accumulated option compensation expense represents the amount of amortized compensation costs
related to stock options awarded to employees and directors subsequent to January 1, 2003.
Expense, which is recognized as the options vest based on the market value at the date of the
award, totaled $191,000 and $874,000 for the three and nine months ended September 30, 2006,
respectively, and $132,000 and $397,000 for the same periods in 2005.
9
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K
Stock Incentive Plans
Our 2005 Long-Term Incentive Plan authorizes up to 2,200,000 shares of common stock to be
issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan
replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee Directors. The options
granted to officers and key employees under the 1995 Plan continue to vest through 2010 and expire
ten years from the date of grant. Our non-employee directors, officers and key employees are
eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance of, among other
things, stock options, restricted stock, deferred stock units and dividend equivalent rights.
Vesting periods for options and restricted shares range from three years for directors to five
years for officers and key employees. Options expire ten years from the date of grant.
Impact of the Adoption of Statement No. 123(R)
We adopted the fair value-based method of accounting for share-based payments effective
January 1, 2003 using the prospective method described in Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Currently, we
use the Black-Scholes-Merton option pricing model to estimate the value of stock option grants and
expect to continue to use this acceptable option valuation model. Because we adopted Statement No.
123 using the prospective transition method (which applied only to awards granted, modified or
settled after the adoption date of Statement No. 123), compensation cost for some previously
granted awards that were not recognized under Statement No. 123 will now be recognized effective
with the adoption of Statement No. 123(R) on January 1, 2006. In addition, we previously amortized
compensation cost for share-based payments to the date that the awards became fully vested or to
the expected retirement date, if sooner. Effective with the adoption of Statement No. 123(R), we
began recognizing compensation cost to the date the awards become fully vested or to the retirement
eligible date, if sooner. Compensation cost totaled $1,690,000 for the nine months ended September 30, 2006.
We expect that the adoption of Statement No. 123(R) will increase compensation cost by
approximately $1,287,000 for the full year 2006 as a result of
amortizing share-based awards to the
retirement eligible date.
Valuation Assumptions
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
Nine Months Ended |
|
|
September 30, 2006 |
|
September 30, 2005 |
Dividend yield (1) |
|
|
0.00% 6.79 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
20.3 |
% |
|
|
22.8 |
% |
Risk-free interest rate |
|
|
4.35 |
% |
|
|
4.25 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
7 |
|
Weighted-average fair value (1) |
|
|
$5.26 |
|
|
$ |
12.48 |
|
|
|
|
(1) |
|
Certain of the options granted to employees in 2006 include dividend equivalent rights.
The fair value of these options are calculated based on the above assumptions and then
adjusted for the present value of estimated dividend payments over the expected life of the
options. All options granted to officers and key employees in 2005 include dividend equivalent rights. These
options are assumed to have a dividend yield of 0% for purposes of the Black-Scholes-Merton
option pricing model and result in higher fair values than options without dividend equivalent
rights. |
The dividend yield represented the dividend yield of our common stock on the dates of
grant. Our computation of expected volatility was based on historical volatility. The risk-free
interest rates used were the 10-year U.S. Treasury Notes yield on the dates of grant. The expected
life was based on historical experience of similar awards, giving consideration to the contractual
terms, vesting schedules and expectations regarding future employee behavior.
10
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Option Award Activity
The following table summarizes information about stock option activity for the nine months
ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
of |
|
|
Weighted |
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
Stock Options |
|
(000s) |
|
|
Exercise Price |
|
|
Contract Life (years) |
|
|
Value ($000s) |
|
Options at beginning of year |
|
|
685 |
|
|
$ |
26.87 |
|
|
|
6.3 |
|
|
|
|
|
Options granted |
|
|
155 |
|
|
|
36.50 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(214 |
) |
|
|
21.90 |
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at end of period |
|
|
626 |
|
|
$ |
30.94 |
|
|
|
7.7 |
|
|
$ |
2,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
164 |
|
|
$ |
26.07 |
|
|
|
5.7 |
|
|
$ |
1,462 |
|
Weighted average fair value of
options granted during the period |
|
|
|
|
|
$ |
5.26 |
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of
the underlying options and the quoted price of our common stock for the options that were
in-the-money at September 30, 2006. During the three and nine
months ended September 30, 2006, the
aggregate intrinsic value of options exercised under our stock incentive plans was $914,000 and
$3,025,000, respectively, determined as of the date of option exercise. During the three and nine
months ended September 30, 2005, the aggregate intrinsic value of options exercised under our stock
incentive plans was $915,000 and $4,395,000, respectively, determined as of the date of option
exercise. Cash received from option exercises under our stock incentive plans for the three and
nine months ended September 30, 2006 was $1,411,000 and $4,601,000, respectively. Cash received
from option exercises under our stock incentive plans for the three and nine months ended September
30, 2005 was $1,981,000 and $7,827,000, respectively.
As of September 30, 2006, there was approximately $2,474,000 of total unrecognized
compensation cost related to unvested stock options granted under our stock incentive plans. That
cost is expected to be recognized over a weighted average period of three years. As of September
30, 2006, there was approximately $5,553,000 of total unrecognized compensation cost related to
unvested restricted stock granted under our stock incentive plans. That cost is expected to be
recognized over a weighted average period of three years.
The following table summarizes information about non-vested stock incentive awards as of
September 30, 2006 and changes for the nine months ended September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Restricted Stock |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date |
|
|
Shares |
|
|
Grant Date |
|
|
|
(000s) |
|
|
Fair Value |
|
|
(000s) |
|
|
Fair Value |
|
Non-vested at December 31, 2005 |
|
|
428 |
|
|
$ |
5.36 |
|
|
|
222 |
|
|
$ |
31.56 |
|
Vested |
|
|
(105 |
) |
|
|
5.23 |
|
|
|
(59 |
) |
|
|
30.81 |
|
Granted |
|
|
155 |
|
|
|
5.26 |
|
|
|
98 |
|
|
|
36.51 |
|
Terminated |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at September 30, 2006 |
|
|
478 |
|
|
$ |
5.35 |
|
|
|
261 |
|
|
$ |
33.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma Information for Periods Prior to the Adoption of Statement No. 123(R)
The following table illustrates the effect on net income available to common stockholders for
the periods presented if we had applied the fair value recognition provisions of Statement No. 123,
as amended, to stock-based compensation for options granted since 1995 but prior to adoption at
January 1, 2003 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2005 |
|
|
September 30, 2005 |
|
Numerator: |
|
|
|
|
|
|
|
|
Net income available to common stockholders as reported |
|
$ |
19,908 |
|
|
$ |
36,105 |
|
Deduct: Additional stock-based employee compensation
expense determined under fair value based method
for all awards |
|
|
45 |
|
|
|
136 |
|
|
|
|
|
|
|
|
Net income available to common stockholders pro forma |
|
$ |
19,863 |
|
|
$ |
35,969 |
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
Basic weighted average shares as reported and pro forma |
|
|
54,038 |
|
|
|
53,498 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options pro forma |
|
|
129 |
|
|
|
379 |
|
Non-vested restricted shares |
|
|
184 |
|
|
|
184 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
313 |
|
|
|
563 |
|
|
|
|
|
|
|
|
Diluted weighted average shares pro forma |
|
|
54,351 |
|
|
|
54,061 |
|
|
|
|
|
|
|
|
|
Net income available to common stockholders per
share as reported |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.37 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
Net income available to common stockholders per
share pro forma |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.37 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.37 |
|
|
$ |
0.67 |
|
|
|
|
|
|
|
|
NOTE L New Accounting Pronouncements
On
September 29, 2006, the Financial Accounting Standards Board
issued Statement No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans An amendment of
FASB Statements No. 87, 88, 106 and 132(R). The statement requires employers to recognize the
overfunded and underfunded portion of a defined benefit plan as an asset
or liability, respectively, and any unrecognized gains and
losses or prior service costs as a component of accumulated other comprehensive income. It also
requires a plans funded status to be measured at the
employers fiscal year-end. The new
statement, which is effective as of December 31, 2006, is not expected to have a material impact on
our financial position.
NOTE M Significant Changes and Events
New
Unsecured Credit Facility
We closed on a $700,000,000 unsecured revolving credit facility to replace our $500,000,000
facility which was scheduled to mature in June 2008. Among other things, the new facility provides
us with additional financial flexibility and borrowing capacity, extends our agreement to July 2009
and adds two new lenders to the bank group in addition to commitment increases by eight of the ten
existing lenders.
Windrose
Merger Agreement
On
September 13, 2006, we announced a definitive merger agreement with Windrose Medical Properties
Trust (Windrose). The transaction will be consummated
through the issuance of Health Care REIT, Inc. common and preferred
stock and the assumption of Windrose liabilities. It is expected that the merger will be accounted for as a purchase of Windrose by Health Care
REIT, Inc. under U.S. GAAP. Under the purchase method of accounting, the assets and liabilities of
Windrose will be, as of the completion of the merger, recorded at their respective fair values and
added to our assets and liabilities. It is anticipated that the merger will close on or around
year-end 2006.
12
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Recent Developments
On
September 13, 2006, we announced the execution of a merger agreement with Windrose Medical Properties Trust
(Windrose). The merger will further diversify and expand
our real estate portfolio throughout the health care
delivery spectrum. The combined entity will have more than 550 properties in 37 states and gross real estate assets of
approximately $4 billion. We anticipate that the merger will
close on or around year-end 2006. The combined entity will offer:
|
|
|
expertise and critical mass across all sectors of senior housing and health care real
estate; |
|
|
|
property management and development capabilities; |
|
|
|
increased portfolio growth through expanded investment and
development opportunities; |
|
|
|
enhanced asset type diversification, reduced tenant concentration, and a favorable
investment maturity profile; and |
|
|
|
improved key portfolio metrics, including a higher non-governmental component of tenant
revenues. |
The following discussion and analysis is based primarily on the consolidated financial
statements of Health Care REIT, Inc. for the periods presented and should be read together with the
notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are
identified in our Annual Report on Form 10-K for the year ended December 31, 2005, including
factors identified under the headings Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Executive Overview
Business
Health Care REIT, Inc. is a self-administered, equity real estate investment trust that
invests in health care and senior housing properties. Founded in 1970, we were the first REIT to
invest exclusively in health care facilities. The following table summarizes our portfolio as of
September 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1) |
|
|
Percentage of |
|
|
Revenues(2) |
|
|
Percentage of |
|
|
Number of |
|
|
Number of |
|
|
Investment per |
|
|
Number of |
|
|
Number of |
|
Type of Facility |
|
(in thousands) |
|
|
Investments |
|
|
(in thousands) |
|
|
Revenues |
|
|
Facilities |
|
|
Beds/Units |
|
|
Bed/Unit(3) |
|
|
Operators(4) |
|
|
States(4) |
|
Independent
living/CCRCs |
|
$ |
488,863 |
|
|
|
16 |
% |
|
$ |
29,756 |
|
|
|
12 |
% |
|
|
39 |
|
|
|
5,224 |
|
|
$ |
112,737 |
|
|
|
16 |
|
|
|
18 |
|
Assisted living
facilities |
|
|
996,318 |
|
|
|
32 |
% |
|
|
85,271 |
|
|
|
36 |
% |
|
|
204 |
|
|
|
12,615 |
|
|
|
88,480 |
|
|
|
23 |
|
|
|
33 |
|
Skilled nursing
facilities |
|
|
1,413,508 |
|
|
|
46 |
% |
|
|
111,262 |
|
|
|
46 |
% |
|
|
220 |
|
|
|
30,063 |
|
|
|
47,662 |
|
|
|
22 |
|
|
|
28 |
|
Specialty care
facilities |
|
|
205,745 |
|
|
|
6 |
% |
|
|
13,894 |
|
|
|
6 |
% |
|
|
14 |
|
|
|
1,265 |
|
|
|
183,067 |
|
|
|
7 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
3,104,434 |
|
|
|
100 |
% |
|
$ |
240,183 |
|
|
|
100 |
% |
|
|
477 |
|
|
|
49,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments include gross real estate investments and credit enhancements which amounted to
$3,101,984,000 and $2,450,000, respectively. |
|
(2) |
|
Revenues include gross revenues and revenues from discontinued operations for the nine months
ended September 30, 2006. |
|
(3) |
|
Investment per Bed/Unit was computed by using the total investment amount of $3,369,546,000
which includes gross real estate investments, credit enhancements and unfunded construction
commitments for which initial funding has commenced which amounted to $3,101,984,000,
$2,450,000 and $265,112,000, respectively. |
|
(4) |
|
We have investments in properties located in 37 states and managed by 58 different operators. |
Our primary objectives are to protect stockholders capital and enhance stockholder
value. We seek to pay consistent cash dividends to stockholders and create opportunities to
increase dividend payments to stockholders as a result of annual increases in rental and interest
income and portfolio growth. To meet these objectives, we invest in properties managed by
experienced operators and diversify our investment portfolio by operator and geographic location.
Substantially all of our revenues and sources of cash flows from operations are derived from
operating lease rental income and interest earned on outstanding loans receivable. These items
represent our primary source of liquidity to fund distributions and are dependent upon our
operators continued ability to make contractual rent and interest payments to us. To the extent
that our operators experience operating difficulties and are unable to generate sufficient cash to
make payments to us, there could be a material adverse impact on our consolidated results of
operations, liquidity and/or financial condition. To mitigate this risk, we monitor our
investments through a variety of methods determined by the type of facility and operator. Our
asset management process includes review of monthly financial statements for each facility,
periodic review of operator credit, periodic facility inspections and review of covenant compliance
relating to licensure, real estate taxes, letters of credit and other collateral. In monitoring
our portfolio, our personnel use a proprietary database to collect and analyze facility-specific
data. Additionally, we conduct extensive research to ascertain industry trends and risks. Through
these asset management and research efforts, we are typically able to intervene at an early stage
and address payment risk, and in so doing, support both the collectibility of revenue and the value
of our investment.
In addition to our asset management and research efforts, we also structure our investments to
help mitigate payment risk. We typically limit our investments to no more than 90% of the
appraised value of a property. Operating leases and loans are normally credit enhanced by
guaranties and/or letters of credit. In addition, operating leases are typically structured as
master leases and loans are generally cross-defaulted and cross-collateralized with other loans,
operating leases or agreements between us and the operator and its affiliates. As of September 30,
2006, 87% of our real property was subject to master leases.
For the nine months ended September 30, 2006, rental income and interest income represented
93% and 5%, respectively, of total gross revenues (including revenues from discontinued
operations). Our standard lease structure contains annual rental escalators that are contingent
upon changes in the Consumer Price Index and/or changes in the gross operating revenues of the
tenants properties. These
13
escalators are not fixed, so no straight-line rent is recorded;
however, rental income is recorded based on the contractual cash rental payments due for the
period. Our yield on loans receivable depends upon a number of factors, including the stated
interest rate, the average principal amount outstanding during the term of the loan and any
interest rate adjustments.
Depending upon the availability and cost of external capital, we anticipate making investments
in additional facilities. New investments are generally funded from temporary borrowings under our
unsecured lines of credit arrangements, internally generated cash and the proceeds from sales of
real property. Our investments generate internal cash from rent and interest receipts and
principal payments on loans receivable. Permanent financing for future investments, which replaces
funds drawn under the unsecured lines of credit arrangements, is expected to be provided through a
combination of public and private offerings of debt and equity securities and the incurrence of
secured debt. We believe our liquidity and various sources of available capital are sufficient to
fund operations, meet debt service obligations (both principal and interest), make dividend
distributions and finance future investments.
Depending upon market conditions, we believe that new investments will be available in the
future with spreads over our cost of capital that will generate appropriate returns to our
stockholders. During the nine months ended September 30, 2006, we completed $395,814,000 of gross
new investments and had $65,412,000 of investment payoffs, resulting in net investments of
$330,402,000. We expect to complete gross new investments of $525,000,000 to $575,000,000 during
2006, including acquisitions of approximately $350,000,000 to
$400,000,000 and funded new development of
approximately $175,000,000. We anticipate the sale of real property and the repayment of loans
receivable totaling approximately $150,000,000 resulting in net new investments of
$375,000,000 to $425,000,000 during 2006. It is possible that additional loan repayments or sales
of real property may occur in the future. To the extent that loan repayments and real property
sales exceed new investments, our revenues and cash flows from operations could be adversely
affected. We expect to reinvest the proceeds from any loan repayments and real property sales in
new investments. To the extent that new investment requirements exceed our available cash on hand,
we expect to borrow under our unsecured lines of credit arrangements. At September 30, 2006, we
had $15,490,000 of cash and cash equivalents and $464,000,000 of available borrowing capacity under
our unsecured lines of credit arrangements.
Key Transactions in 2006
We have completed the following key transactions to date in 2006:
|
|
|
our Board of Directors increased our quarterly dividend to $0.64 per share, which
represents a two cent increase from the quarterly dividend of $0.62 paid for 2005. The
dividend declared for the quarter ended September 30, 2006 represents the 142nd
consecutive dividend payment; |
|
|
|
|
we completed $395,814,000 of gross investments and had $65,412,000 of investment payoffs
during the nine months ended September 30, 2006; |
|
|
|
|
we completed a public offering of 3,222,800 shares of common stock with net proceeds to
the company of approximately $109,749,000 in April 2006; |
|
|
|
|
we extended our $40,000,000 unsecured line of credit which matured in May 2006 to May
2007 and reduced pricing by 40 basis points; and |
|
|
|
|
we closed on a $700,000,000 unsecured revolving credit facility to replace our
$500,000,000 facility, which was scheduled to mature in June 2008. Among other things, the
new facility provides us with additional financial flexibility and borrowing capacity,
extends our agreement to July 2009 and adds two new lenders to the bank group in addition
to commitment increases by eight of the ten existing lenders. |
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business.
These indicators are discussed below and relate to operating performance, concentration risk and
credit strength. Management uses these key performance indicators to facilitate internal and
external comparisons to our historical operating results, in making operating decisions and for
budget planning purposes.
Operating Performance. We believe that net income available to common stockholders (NICS)
is the most appropriate earnings measure. Other useful supplemental measures of our operating
performance include funds from operations (FFO) and funds available for distribution (FAD);
however, these supplemental measures are not defined by U.S. generally accepted accounting
principles (U.S. GAAP). Please refer to the section entitled Non-GAAP Financial Measures for
further discussion of FFO and FAD and for reconciliations of FFO and FAD to NICS. These earnings
measures and their relative per share amounts are widely used by
14
investors and analysts in the
valuation, comparison and investment recommendations of companies. The following table reflects
the recent historical trends of our operating performance measures for the periods presented (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
Net income (loss) available to
common stockholders |
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
|
$ |
22,668 |
|
|
$ |
21,480 |
|
Funds from operations |
|
|
38,309 |
|
|
|
19,427 |
|
|
|
41,975 |
|
|
|
44,581 |
|
|
|
41,354 |
|
|
|
45,870 |
|
|
|
45,898 |
|
Funds available for distribution |
|
|
35,454 |
|
|
|
18,251 |
|
|
|
41,857 |
|
|
|
49,457 |
|
|
|
49,264 |
|
|
|
46,364 |
|
|
|
47,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
$ |
0.33 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
Funds from operations |
|
|
0.72 |
|
|
|
0.36 |
|
|
|
0.77 |
|
|
|
0.79 |
|
|
|
0.71 |
|
|
|
0.74 |
|
|
|
0.73 |
|
Funds available for distribution |
|
|
0.66 |
|
|
|
0.34 |
|
|
|
0.77 |
|
|
|
0.88 |
|
|
|
0.84 |
|
|
|
0.75 |
|
|
|
0.75 |
|
Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment
mix, operator mix and geographic mix. Concentration risk is a valuable measure in
understanding what portion of our investments could be at risk if certain sectors were to
experience downturns. Asset mix measures the portion of our investments that are real property.
In order to qualify as an equity REIT, at least 75% of our real estate investments must be real
property whereby each property, which includes the land, buildings, improvements and related
rights, is owned by us and leased to an operator pursuant to a long-term operating lease.
Investment mix measures the portion of our investments that relate to our various facility types.
Operator mix measures the portion of our investments that relate to our top five operators.
Geographic mix measures the portion of our investments that relate to our top five states. The
following table reflects our recent historical trends of concentration risk for the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
Asset mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property |
|
|
90 |
% |
|
|
91 |
% |
|
|
91 |
% |
|
|
93 |
% |
|
|
94 |
% |
|
|
94 |
% |
|
|
93 |
% |
Loans receivable |
|
|
10 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
16 |
% |
Assisted living facilities |
|
|
55 |
% |
|
|
51 |
% |
|
|
50 |
% |
|
|
34 |
% |
|
|
33 |
% |
|
|
33 |
% |
|
|
32 |
% |
Skilled nursing facilities |
|
|
39 |
% |
|
|
42 |
% |
|
|
42 |
% |
|
|
44 |
% |
|
|
45 |
% |
|
|
45 |
% |
|
|
46 |
% |
Specialty care facilities |
|
|
6 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operator mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emeritus Corporation |
|
|
15 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
11 |
% |
Brookdale Senior Living Inc. (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
% |
|
|
10 |
% |
|
|
9 |
% |
Home Quality Management, Inc. |
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
% |
Life Care Centers of America, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
Merrill Gardens L.L.C. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
Tara Cares, LLC |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
% |
|
|
|
|
Delta Health Group, Inc. |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
Southern Assisted Living, Inc. (2) |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Commonwealth Communities
Holdings LLC |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Remaining operators |
|
|
55 |
% |
|
|
57 |
% |
|
|
58 |
% |
|
|
59 |
% |
|
|
58 |
% |
|
|
57 |
% |
|
|
59 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
15 |
% |
Massachusetts |
|
|
15 |
% |
|
|
14 |
% |
|
|
13 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
11 |
% |
|
|
11 |
% |
Ohio |
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
9 |
% |
|
|
9 |
% |
|
|
8 |
% |
Texas |
|
|
|
|
|
|
9 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
North Carolina |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Tennessee |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining states |
|
|
50 |
% |
|
|
49 |
% |
|
|
51 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
51 |
% |
|
|
52 |
% |
15
|
|
|
(1) |
|
As a result of our significant independent living/continuing care retirement community
acquisitions in the fourth quarter of 2005, we began to separately disclose this facility
classification in our portfolio reporting. We adopted the National Investment Center
definitions and reclassified certain of our existing facilities to this classification. |
|
(2) |
|
In September 2005, Alterra Healthcare Corporation, one of our tenants, became an indirect
wholly-owned subsidiary of Brookdale Senior Living Inc. as a result of Brookdales merger with
FEBC-ALT Investors LLC. In April 2006, Brookdale completed the acquisition of Southern
Assisted Living, Inc. |
Credit Strength. We measure our credit strength both in terms of leverage ratios and
coverage ratios. Our leverage ratios include debt to book capitalization and debt to market
capitalization. The leverage ratios indicate how much of our balance sheet capitalization is
related to long-term debt. The coverage ratios indicate our ability to service interest and fixed
charges (interest,
secured debt principal amortization and preferred dividends). We expect to maintain capitalization
ratios and coverage ratios sufficient to maintain investment grade ratings with Moodys Investors
Service, Standard & Poors Ratings Services and Fitch Ratings. The coverage ratios are based on
earnings before interest, taxes, depreciation and amortization (EBITDA) which is discussed in
further detail, and reconciled to net income, below in Non-GAAP Financial Measures. Leverage
ratios and coverage ratios are widely used by investors, analysts and rating agencies in the
valuation, comparison, investment recommendations and rating of companies. The following table
reflects the recent historical trends for our credit strength measures for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
Debt to book capitalization ratio |
|
|
48 |
% |
|
|
51 |
% |
|
|
51 |
% |
|
|
51 |
% |
|
|
52 |
% |
|
|
49 |
% |
|
|
51 |
% |
Debt to market capitalization ratio |
|
|
38 |
% |
|
|
37 |
% |
|
|
37 |
% |
|
|
40 |
% |
|
|
38 |
% |
|
|
37 |
% |
|
|
36 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
3.21x |
|
|
|
2.31x |
|
|
|
3.22x |
|
|
|
3.52x |
|
|
|
2.99x |
|
|
|
3.16x |
|
|
|
2.98x |
|
Fixed charge coverage ratio |
|
|
2.46x |
|
|
|
1.78x |
|
|
|
2.51x |
|
|
|
2.75x |
|
|
|
2.41x |
|
|
|
2.52x |
|
|
|
2.41x |
|
We evaluate our key performance indicators in conjunction with current expectations to
determine if historical trends are indicative of future results. Our expected results may not be
achieved and actual results may differ materially from our expectations. Factors that may cause
actual results to differ from expected results are described in more detail in Forward-Looking
Statements and Risk Factors and other sections of this Quarterly Report on Form 10-Q. Management
regularly monitors economic and other factors to develop strategic and tactical plans designed to
improve performance and maximize our competitive position. Our ability to achieve our financial
objectives is dependent upon our ability to effectively execute these plans and to appropriately
respond to emerging economic and company-specific trends. Please refer to our Annual Report on
Form 10-K for the year ended December 31, 2005, under the headings Business, Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operations for further
discussion of these risk factors.
Portfolio Update
Payment coverages in our portfolio continue to remain strong. Our overall payment coverage is
at 1.95 times and represents an increase of four basis points from the prior year. The table below
reflects our recent historical trends of portfolio coverages. Coverage data reflects the 12 months
ended for the periods presented. CBMF represents the ratio of facilities earnings before
interest, taxes, depreciation, amortization, rent and management fees to contractual rent or
interest due us. CAMF represents the ratio of earnings before interest, taxes, depreciation,
amortization, and rent (but after imputed management fees) to contractual rent or interest due us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2005 |
|
|
June 30, 2006 |
|
|
|
CBMF |
|
|
CAMF |
|
|
CBMF |
|
|
CAMF |
|
Independent living/CCRCs (1) |
|
|
|
|
|
|
|
|
|
|
1.47x |
|
|
|
1.25x |
|
Assisted living facilities |
|
|
1.51x |
|
|
|
1.28x |
|
|
|
1.51x |
|
|
|
1.30x |
|
Skilled nursing facilities |
|
|
2.20x |
|
|
|
1.65x |
|
|
|
2.16x |
|
|
|
1.55x |
|
Specialty care facilities |
|
|
3.53x |
|
|
|
2.91x |
|
|
|
3.18x |
|
|
|
2.65x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages |
|
|
1.91x |
|
|
|
1.54x |
|
|
|
1.95x |
|
|
|
1.53x |
|
|
|
|
(1) |
|
As a result of our significant independent living/continuing care retirement community
acquisitions in the fourth quarter of 2005, we began to separately disclose this facility
classification in our portfolio reporting. We adopted the National Investment Center
definitions and reclassified certain of our existing facilities to this classification. |
Corporate Governance
Maintaining investor confidence and trust has become increasingly important in todays
business environment. Health Care REIT, Inc.s Board of Directors and management are strongly
committed to policies and procedures that reflect the highest level of ethical business practices.
Our corporate governance guidelines provide the framework for our business operations and emphasize
our commitment to increase stockholder value while meeting all applicable legal requirements. In
March 2004, the Board of Directors
16
adopted its Corporate Governance Guidelines. These guidelines
meet the listing standards adopted by the New York Stock Exchange and are available on our Web site
at www.hcreit.com and from us upon written request sent to the Senior Vice President
Administration and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box
1475, Toledo, Ohio 43603-1475.
17
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, borrowings under unsecured
lines of credit arrangements, public and private offerings of debt and equity securities, proceeds
from the sales of real property and principal payments on loans receivable. Our primary uses of
cash include dividend distributions, debt service payments (including principal and interest), real
property investments (including construction advances), loan advances and general and
administrative expenses. These sources and uses of cash are reflected in our Consolidated
Statements of Cash Flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Cash and cash equivalents at beginning of period |
|
$ |
36,237 |
|
|
$ |
19,763 |
|
|
$ |
16,474 |
|
|
|
83 |
% |
Cash provided from (used in) operating activities |
|
|
158,984 |
|
|
|
114,973 |
|
|
|
44,011 |
|
|
|
38 |
% |
Cash provided from (used in) investing activities |
|
|
(289,804 |
) |
|
|
(198,678 |
) |
|
|
(91,126 |
) |
|
|
46 |
% |
Cash provided from (used in) financing activities |
|
|
110,073 |
|
|
|
91,061 |
|
|
|
19,012 |
|
|
|
21 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
15,490 |
|
|
$ |
27,119 |
|
|
$ |
(11,629 |
) |
|
|
-43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities. The change in net cash provided from operating activities is
primarily attributable to an increase in net income. Net income increased primarily due to the
impact of the loss on extinguishment of debt recognized during the second quarter of 2005 on the
prior years net income.
Net straight-line rental income changed primarily due to a decrease in gross straight-line
rental income and increases in cash payments outside normal monthly rental payments. The following
is a summary of our straight-line rent (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Gross straight-line rental income |
|
$ |
6,520 |
|
|
$ |
10,193 |
|
|
$ |
(3,673 |
) |
|
|
-36 |
% |
Cash receipts due to real property sales |
|
|
(1,623 |
) |
|
|
(2,971 |
) |
|
|
1,348 |
|
|
|
-45 |
% |
Prepaid rent receipts |
|
|
(14,653 |
) |
|
|
(3,073 |
) |
|
|
(11,580 |
) |
|
|
377 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash receipts less than (in excess of) rental income |
|
$ |
(9,756 |
) |
|
$ |
4,149 |
|
|
$ |
(13,905 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross straight-line rental income represents the non-cash difference between contractual
cash rent due and the average rent recognized pursuant to Statement of Financial Accounting
Standards No. 13, Accounting for Leases. This amount is positive in the first half of a lease term
(but declining every year due to annual increases in cash rent due) and is negative in the second
half of a lease term. Our standard lease structure contains annual rental escalators that are
contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues
of the tenants properties. These escalators are not fixed, so no straight-line rent is recorded.
Instead, rental income is recorded based on the contractual cash rental payment due for the period.
The increase in non-recurring cash receipts is primarily attributable to cash received in
connection with the acquisition of Commonwealth Communities Holdings LLC by Kindred Healthcare,
Inc. in February 2006 as discussed in our Annual Report on Form 10-K for the year ended December
31, 2005.
18
Investing Activities. The changes in net cash used in investing activities are primarily
attributable to net changes in real property and loans receivable. The following is a summary of
our investment and disposition activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
|
Facilities |
|
|
Amount |
|
|
Facilities |
|
|
Amount |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs |
|
|
2 |
|
|
$ |
25,337 |
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
4 |
|
|
|
30,650 |
|
|
|
4 |
|
|
$ |
47,660 |
|
Skilled nursing facilities |
|
|
16 |
|
|
|
141,482 |
|
|
|
27 |
|
|
|
126,181 |
|
Specialty care facilities |
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
51,000 |
|
Land parcels |
|
|
|
|
|
|
3,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
22 |
|
|
|
200,743 |
|
|
|
36 |
|
|
|
224,841 |
|
Less: Assumed debt |
|
|
|
|
|
|
(25,049 |
) |
|
|
|
|
|
|
(22,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for acquisitions |
|
|
|
|
|
|
175,694 |
|
|
|
|
|
|
|
202,532 |
|
Construction in progress cash advances |
|
|
|
|
|
|
103,237 |
|
|
|
|
|
|
|
4,782 |
|
Capital improvements to existing properties |
|
|
|
|
|
|
11,665 |
|
|
|
|
|
|
|
18,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real property |
|
|
|
|
|
|
290,596 |
|
|
|
|
|
|
|
226,085 |
|
|
Real property dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
4 |
|
|
|
26,974 |
|
|
|
2 |
|
|
|
9,060 |
|
Skilled nursing facilities |
|
|
3 |
|
|
|
7,827 |
|
|
|
|
|
|
|
|
|
Land parcels |
|
|
|
|
|
|
487 |
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from real property sales |
|
|
7 |
|
|
|
35,288 |
|
|
|
2 |
|
|
|
9,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash investments in real property |
|
|
15 |
|
|
$ |
255,308 |
|
|
|
34 |
|
|
$ |
216,185 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans |
|
|
|
|
|
$ |
64,319 |
|
|
|
|
|
|
$ |
11,500 |
|
Draws on existing loans |
|
|
|
|
|
|
9,807 |
|
|
|
|
|
|
|
27,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in loans |
|
|
|
|
|
|
74,126 |
|
|
|
|
|
|
|
39,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipts on loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
|
|
|
|
30,046 |
|
|
|
|
|
|
|
38,146 |
|
Principal payments on loans |
|
|
|
|
|
|
12,422 |
|
|
|
|
|
|
|
18,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal receipts on loans |
|
|
|
|
|
|
42,468 |
|
|
|
|
|
|
|
56,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash advances (receipts) on loans receivable |
|
|
|
|
|
$ |
31,658 |
|
|
|
|
|
|
$ |
(17,248 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities. The changes in net cash provided from or used in financing
activities are primarily attributable to changes related to our unsecured lines of credit
arrangements, principal payments on senior notes, common stock issuances and cash distributions to
stockholders.
For the nine months ended September 30, 2006, we had a net increase of $81,000,000 on our
unsecured lines of credit arrangements as compared to a net increase of $153,000,000 for the same
period in 2005.
In April 2005, we closed on a public offering of $250,000,000 of 5.875% senior unsecured notes
due May 2015 at an effective yield of 5.913%. In May 2005, we redeemed all of our outstanding
$50,000,000 8.17% senior unsecured notes due March 2006, we completed a tender offer for
$57,670,000 of our outstanding $100,000,000 7.625% senior unsecured notes due March 2008 and we
redeemed $122,500,000 of our outstanding $175,000,000 7.5% senior unsecured notes due August 2007.
We recognized one-time charges on the extinguishment of debt totaling approximately $18,448,000 in
the second quarter of 2005 as a result of this activity.
The increase in net proceeds from the issuance of common stock is primarily attributable to
our April 2006 offering and common stock issuances related to our dividend reinvestment and stock
purchase plan (DRIP). In April 2006, we completed a public offering of 3,222,800 shares of
common stock, which generated net proceeds of approximately $109,749,000. During the nine months ended
September 30, 2006, we issued 1,440,000 shares of common stock pursuant to our DRIP, which
generated net proceeds of approximately $50,811,000. During the nine months ended September 30,
2005, we issued 1,081,000 shares of common stock pursuant to our DRIP, which generated net proceeds
of approximately $37,570,000. The remaining difference in common stock issuances is primarily due
to issuances pursuant to stock incentive plans.
19
In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90%
of our taxable income (including 100% of capital gains) to our stockholders. The increases in
dividends are primarily attributable to increases in outstanding shares of common stock and
increases in our annual common stock dividend per share.
The following is a summary of our dividend payments (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
|
Per Share |
|
|
Amount |
|
|
Per Share |
|
|
Amount |
|
Common Stock |
|
$ |
1.900 |
|
|
$ |
116,272 |
|
|
$ |
1.840 |
|
|
$ |
98,586 |
|
Series D Preferred Stock |
|
|
1.477 |
|
|
|
5,906 |
|
|
|
1.477 |
|
|
|
5,906 |
|
Series E Preferred Stock |
|
|
1.125 |
|
|
|
84 |
|
|
|
1.125 |
|
|
|
347 |
|
Series F Preferred Stock |
|
|
1.430 |
|
|
|
10,008 |
|
|
|
1.430 |
|
|
|
10,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
132,270 |
|
|
|
|
|
|
$ |
114,847 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We have an outstanding letter of credit issued for the benefit of certain insurance companies
that provide workers compensation insurance to one of our tenants. Our obligation under the
letter of credit matures in 2009. At September 30, 2006, our obligation under the letter of credit
was $2,450,000.
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may or may not elect to use financial derivative instruments to hedge
interest rate exposure. These decisions are principally based on the general trend in interest
rates at the applicable dates, our perception of the future volatility of interest rates and our
relative levels of variable rate debt and variable rate investments. As of September 30, 2006, we
participated in two interest rate swap agreements related to our long-term debt. Our interest rate
swaps are discussed below in Contractual Obligations.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of
September 30, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
2006 |
|
|
2007-2008 |
|
|
2009-2010 |
|
|
Thereafter |
|
Unsecured lines of credit arrangements (1) |
|
$ |
740,000 |
|
|
$ |
0 |
|
|
$ |
40,000 |
|
|
$ |
700,000 |
|
|
$ |
0 |
|
Senior unsecured notes (2) |
|
|
1,194,830 |
|
|
|
|
|
|
|
94,830 |
|
|
|
|
|
|
|
1,100,000 |
|
Secured debt |
|
|
130,405 |
|
|
|
787 |
|
|
|
25,363 |
|
|
|
42,540 |
|
|
|
61,715 |
|
Contractual interest obligations |
|
|
729,535 |
|
|
|
35,432 |
|
|
|
219,787 |
|
|
|
175,198 |
|
|
|
299,118 |
|
Capital lease obligations |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
17,782 |
|
|
|
366 |
|
|
|
2,909 |
|
|
|
2,765 |
|
|
|
11,742 |
|
Purchase obligations |
|
|
303,873 |
|
|
|
4,525 |
|
|
|
234,820 |
|
|
|
64,528 |
|
|
|
|
|
Other long-term liabilities |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
3,116,425 |
|
|
$ |
41,110 |
|
|
$ |
617,709 |
|
|
$ |
985,031 |
|
|
$ |
1,472,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unsecured lines of credit arrangements reflected at 100% capacity. |
|
(2) |
|
Senior unsecured notes represent principal amounts due and do not reflect unamortized
premiums/discounts or the fair value of interest-rate swap agreements as reflected on the
balance sheet. |
At September 30, 2006, we had an unsecured credit arrangement with a consortium of twelve
banks providing for a revolving line of credit (revolving credit) in the amount of $700,000,000,
which is scheduled to expire on July 26, 2009. Borrowings under
the agreement
are subject to interest payable in periods no longer than three months at either
the agent banks prime rate of interest or the applicable margin over LIBOR interest rate, at our
option (7.00% at September 30, 2006). The applicable margin is based on our ratings with Moodys
Investors Service and Standard & Poors Ratings Services and was 0.9% at September 30, 2006. In
addition, we pay a facility fee annually to each bank based on the banks commitment under the
revolving credit
facility. The facility fee depends on our ratings with Moodys Investors Service and Standard &
Poors Ratings Services and was 0.15% at September 30,
2006. We also pay an annual agents fee of
$50,000. Principal is due upon expiration of the agreement. We have another unsecured line of
credit arrangement with a bank for a total of $40,000,000, which expires May 31, 2007. Borrowings
under this line of credit are subject to interest at either the banks prime rate of interest
(8.25% at September 30, 2006) or 0.9% over LIBOR interest
20
rate, at our option. Principal is due upon expiration of the agreement. At September 30,
2006, we had $276,000,000 outstanding under the unsecured lines of credit arrangements and
estimated total contractual interest obligations of $46,983,000. Contractual interest obligations
are estimated based on the assumption that the balance of $276,000,000 at September 30, 2006 is
constant until maturity at interest rates in effect at September 30, 2006.
We have $1,194,830,000 of senior unsecured notes principal outstanding with fixed annual
interest rates ranging from 5.875% to 8.0%, payable semi-annually. Total contractual interest
obligations on senior unsecured notes totaled $588,566,000 at September 30, 2006. Additionally, we
have mortgage loans totaling $130,405,000, collateralized by owned properties, with fixed annual
interest rates ranging from 5.3% to 8.5%, payable monthly. The carrying values of the properties
securing the mortgage loans totaled $204,359,000 at September 30, 2006. Total contractual interest
obligations on mortgage loans totaled $48,461,000 at September 30, 2006.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At September 30, 2006, total contractual interest obligations were estimated to be
$45,525,000.
At September 30, 2006, we had operating lease obligations of $17,782,000 relating to our
office space, one assisted living facility and seven skilled nursing facilities.
Purchase obligations are comprised of unfunded construction commitments and contingent
purchase obligations. At September 30, 2006, we had outstanding construction financings of
$98,675,000 for leased properties and were committed to providing additional financing of
approximately $265,112,000 to complete construction. At September 30, 2006, we had contingent
purchase obligations totaling $38,761,000. These contingent purchase obligations primarily relate
to deferred acquisition fundings and capital improvements. Deferred acquisition fundings are
contingent upon a tenant satisfying certain conditions in the lease. Upon funding, amounts due
from the tenant are increased to reflect the additional investment in the property.
Capital Structure
As of September 30, 2006, we had stockholders equity of $1,546,969,000 and a total
outstanding debt balance of $1,603,302,000, which represents a debt to total book capitalization
ratio of 51%. Our ratio of debt to market capitalization was 36% at September 30, 2006. For the
nine months ended September 30, 2006, our interest coverage ratio was 3.04 to 1.00. For the nine
months ended September 30, 2006, our fixed charge coverage ratio was 2.44 to 1.00. Also, at
September 30, 2006, we had $15,490,000 of cash and cash equivalents and $464,000,000 of available
borrowing capacity under our unsecured lines of credit arrangements.
Our debt agreements contain various covenants, restrictions and events of default. Among
other things, these provisions require us to maintain certain financial ratios and minimum net
worth and impose certain limits on our ability to incur indebtedness, create liens and make
investments or acquisitions. As of September 30, 2006, we were in compliance with all of the
covenants under our debt agreements. None of our debt agreements contain provisions for
acceleration which could be triggered by our debt ratings. However, under our unsecured lines of
credit arrangements, the ratings on our senior unsecured notes are used to determine the fees and
interest payable.
As of October 13, 2006, our senior unsecured notes were rated Baa3 (positive), BBB- (positive)
and BBB- (stable) by Moodys Investors Service, Standard & Poors Ratings Services and Fitch
Ratings, respectively. We plan to manage the Company to maintain investment grade status with a
capital structure consistent with our current profile. Any downgrades in terms of ratings or
outlook by any or all of the noted rating agencies could have a material adverse impact on our cost
and availability of capital, which could in turn have a material adverse impact on our consolidated
results of operations, liquidity and/or financial condition.
On May 12, 2006, we filed an open-ended automatic or universal shelf registration statement
with the Securities and Exchange Commission covering an indeterminate amount of future offerings of
debt securities, common stock, preferred stock, depositary shares, warrants and units. As of
October 13, 2006, we had an effective registration statement on file in connection with our
enhanced DRIP program under which we may issue up to 6,314,213 shares of common stock. As of
October 13, 2006, 1,634,404 shares of common stock remained available for issuance under this
registration statement. Depending upon market conditions, we anticipate issuing securities under
our registration statements to invest in additional properties and to repay borrowings under our
unsecured lines of credit arrangements.
21
Results of Operations
Net income available to common stockholders for the three months ended September 30, 2006
totaled $21,480,000, or $0.34 per diluted share, as compared with $19,908,000, or $0.37 per diluted
share, for the same period in 2005. Net income available to common
stockholders for the nine months
ended September 30, 2006 totaled $63,793,000, or $1.04 per diluted share, as compared with
$36,105,000, or $0.67 per diluted share, for the same period in 2005. Net income available to
common stockholders increased from the prior year primarily due to an increase in rental income
offset by increases in interest expense and provision for depreciation and the recognition of a
loss on extinguishment of debt totaling $18,448,000, or $0.34 per diluted share, during the second
quarter of 2005. These items are discussed in further detail below.
FFO for the three months ended September 30, 2006 totaled $45,898,000, or $0.73 per diluted
share, as compared with $41,974,000, or $0.77 per diluted share, for the same period in 2005. FAD
for the three months ended September 30, 2006 totaled $47,250,000, or $0.75 per diluted share, as
compared to $41,857,000, or $0.77 per diluted share, for the same period in 2005. FFO for the nine
months ended September 30, 2006 totaled $133,120,000, or $2.18 per diluted share, as compared with
$99,712,000, or $1.85 per diluted share, for the same period in 2005. FAD for the nine months
ended September 30, 2006 totaled $142,876,000, or $2.34 per diluted share, as compared to
$95,563,000, or $1.77 per diluted share, for the same period in 2005. The increase in FFO is due
primarily to an increase in rental income offset by an increase in interest expense and general and
administrative expenses and the recognition of the loss on extinguishment of debt during the second
quarter of 2005. The increase in FAD is primarily due to the items noted above for FFO and the
change in net straight-line rental income. Please refer to the discussion of Non-GAAP Financial
Measures below for further information regarding FFO and FAD and for reconciliations of FFO and
FAD to NICS.
EBITDA for the three months ended September 30, 2006 totaled $76,464,000, as compared with
$69,582,000 for the same period in 2005. Our interest coverage ratio
was 2.98 times for the three
months ended September 30, 2006 as compared with 3.22 times for the same period in 2005. Our fixed
charge coverage ratio was 2.41 times for the three months ended September 30, 2006 as compared with
2.51 times for the same period in 2005. EBITDA for the nine months ended September 30, 2006
totaled $225,588,000, as compared with $180,632,000 for the same period in 2005. Our interest
coverage ratio was 3.04 times for the nine months ended
September 30, 2006 as compared with 2.92
times for the same period in 2005. Our fixed charge coverage ratio was 2.44 times for the nine
months ended September 30, 2006 as compared with 2.25 times for the same period in 2005. The
increases in EBITDA are primarily due to the increase in rental income offset by an increase in
general and administrative expenses and the recognition of a loss on extinguishment of debt
totaling $18,448,000 during the second quarter of 2005. The increases in our coverage ratios are
primarily due to the impact of the prior year recognition of a loss on extinguishment of debt.
These items are discussed in further detail below. Please refer to the discussion of Non-GAAP
Financial Measures below for further information regarding EBITDA and a reconciliation of EBITDA
to net income.
Revenues were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Rental income |
|
$ |
75,290 |
|
|
$ |
64,516 |
|
|
$ |
10,774 |
|
|
|
17 |
% |
|
$ |
220,002 |
|
|
$ |
180,960 |
|
|
$ |
39,042 |
|
|
|
22 |
% |
Interest income |
|
|
4,436 |
|
|
|
4,997 |
|
|
|
(561 |
) |
|
|
-11 |
% |
|
|
13,178 |
|
|
|
15,249 |
|
|
|
(2,071 |
) |
|
|
-14 |
% |
Transaction fees
and other income |
|
|
1,019 |
|
|
|
773 |
|
|
|
246 |
|
|
|
32 |
% |
|
|
3,049 |
|
|
|
2,742 |
|
|
|
307 |
|
|
|
11 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
80,745 |
|
|
$ |
70,286 |
|
|
$ |
10,459 |
|
|
|
15 |
% |
|
$ |
236,229 |
|
|
$ |
198,951 |
|
|
$ |
37,278 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross revenues is primarily attributable to increased rental income resulting
from the acquisitions of new properties from which we receive rent. See the discussion of investing
activities in Liquidity and Capital Resources above for further information. In addition, our
standard lease structure contains annual rental escalators that are contingent upon changes in the
Consumer Price Index and/or changes in the gross operating revenues of the tenants properties.
These escalators are not fixed, so no straight-line rent is recorded; however, rental income is
recorded based on the contractual cash rental payments due for the period. If gross operating
revenues at our facilities and/or the Consumer Price Index do not increase, a portion of our
revenues may not continue to increase. Sales of real property would offset revenue increases and,
to the extent that they exceed new acquisitions, could result in decreased revenues. Our leases
could renew above or below current rent rates, resulting in an increase or decrease in rental
income. As of September 30, 2006, we had no leases scheduled to expire before March 2009,
excluding the assets held for sale referenced in Note F to our unaudited consolidated financial
statements.
Interest income decreased from 2005 primarily due to a decrease in the balance of outstanding
loans. Transaction fees and other income increased for the year primarily due to the receipt of
$1,041,000 from a warrant position we held in a private company that was sold during the second
quarter of 2006. The prior year included a $750,000 assignment consent fee received in the first
quarter of 2005 relating to a payoff which did not occur.
22
Expenses were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Interest expense |
|
$ |
24,007 |
|
|
$ |
20,477 |
|
|
$ |
3,530 |
|
|
|
17 |
% |
|
$ |
70,587 |
|
|
$ |
57,707 |
|
|
$ |
12,880 |
|
|
|
22 |
% |
Provision for
depreciation |
|
|
24,094 |
|
|
|
19,915 |
|
|
|
4,179 |
|
|
|
21 |
% |
|
|
70,256 |
|
|
|
56,879 |
|
|
|
13,377 |
|
|
|
24 |
% |
General and
administrative |
|
|
5,223 |
|
|
|
4,640 |
|
|
|
583 |
|
|
|
13 |
% |
|
|
16,517 |
|
|
|
12,993 |
|
|
|
3,524 |
|
|
|
27 |
% |
Loan expense |
|
|
782 |
|
|
|
673 |
|
|
|
109 |
|
|
|
16 |
% |
|
|
2,199 |
|
|
|
2,209 |
|
|
|
(10 |
) |
|
|
0 |
% |
Loss on extinguishment
of debt |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
n/a |
|
|
|
0 |
|
|
|
18,448 |
|
|
|
(18,448 |
) |
|
|
-100 |
% |
Provision for
loan losses |
|
|
250 |
|
|
|
300 |
|
|
|
(50 |
) |
|
|
-17 |
% |
|
|
750 |
|
|
|
900 |
|
|
|
(150 |
) |
|
|
-17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
54,356 |
|
|
$ |
46,005 |
|
|
$ |
8,351 |
|
|
|
18 |
% |
|
$ |
160,309 |
|
|
$ |
149,136 |
|
|
$ |
11,173 |
|
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in total expenses is primarily attributable to increases in interest expense, the
provision for depreciation and general and administrative expense offset by the loss on
extinguishment of debt in 2005. The increase in interest expense is primarily due to higher
average borrowings offset by lower average borrowing costs.
The following is a summary of our interest expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Senior unsecured notes |
|
$ |
19,574 |
|
|
$ |
14,885 |
|
|
$ |
4,689 |
|
|
|
32 |
% |
|
$ |
58,723 |
|
|
$ |
46,544 |
|
|
$ |
12,179 |
|
|
|
26 |
% |
Secured debt |
|
|
2,357 |
|
|
|
3,204 |
|
|
|
(847 |
) |
|
|
-26 |
% |
|
|
6,704 |
|
|
|
9,491 |
|
|
|
(2,787 |
) |
|
|
-29 |
% |
Unsecured lines of credit |
|
|
3,698 |
|
|
|
3,747 |
|
|
|
(49 |
) |
|
|
-1 |
% |
|
|
8,566 |
|
|
|
6,823 |
|
|
|
1,743 |
|
|
|
26 |
% |
Capitalized interest |
|
|
(1,384 |
) |
|
|
(12 |
) |
|
|
(1,372 |
) |
|
|
11,433 |
% |
|
|
(2,494 |
) |
|
|
(626 |
) |
|
|
(1,868 |
) |
|
|
298 |
% |
SWAP losses (savings) |
|
|
29 |
|
|
|
(200 |
) |
|
|
229 |
|
|
|
n/a |
|
|
|
100 |
|
|
|
(977 |
) |
|
|
1,077 |
|
|
|
n/a |
|
Discontinued operations |
|
|
(267 |
) |
|
|
(1,147 |
) |
|
|
880 |
|
|
|
-77 |
% |
|
|
(1,012 |
) |
|
|
(3,548 |
) |
|
|
2,536 |
|
|
|
-71 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
24,007 |
|
|
$ |
20,477 |
|
|
$ |
3,530 |
|
|
|
17 |
% |
|
$ |
70,587 |
|
|
$ |
57,707 |
|
|
$ |
12,880 |
|
|
|
22 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense on senior unsecured notes is due to the net effect and timing
of issuances and extinguishments. The following is a summary of our senior unsecured note activity
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
Face |
|
|
Weighted Avg. |
|
|
Face |
|
|
Weighted Avg. |
|
|
Face |
|
|
Weighted Avg. |
|
|
Face |
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
894,830 |
|
|
|
6.689 |
% |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
875,000 |
|
|
|
7.181 |
% |
Debt issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
|
|
5.875 |
% |
Debt extinguished |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(230,170 |
) |
|
|
7.677 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
894,830 |
|
|
|
6.689 |
% |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
894,830 |
|
|
|
6.689 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
894,830 |
|
|
|
6.689 |
% |
|
$ |
1,194,830 |
|
|
|
6.566 |
% |
|
$ |
921,461 |
|
|
|
6.911 |
% |
23
The change in interest expense on secured debt is due to the net effect and timing of
assumptions, extinguishments and principal amortizations. The following is a summary of our
secured debt activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
September 30, 2006 |
|
|
September 30, 2005 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
131,178 |
|
|
|
7.135 |
% |
|
$ |
168,790 |
|
|
|
6.807 |
% |
|
$ |
107,540 |
|
|
|
7.328 |
% |
|
$ |
160,225 |
|
|
|
7.508 |
% |
Debt assumed |
|
|
|
|
|
|
|
|
|
|
6,705 |
|
|
|
5.800 |
% |
|
|
25,049 |
|
|
|
6.315 |
% |
|
|
22,309 |
|
|
|
6.561 |
% |
Debt extinguished |
|
|
|
|
|
|
|
|
|
|
(472 |
) |
|
|
11.891 |
% |
|
|
|
|
|
|
|
|
|
|
(6,168 |
) |
|
|
6.790 |
% |
Principal payments |
|
|
(773 |
) |
|
|
7.213 |
% |
|
|
(687 |
) |
|
|
7.556 |
% |
|
|
(2,184 |
) |
|
|
7.264 |
% |
|
|
(2,030 |
) |
|
|
7.623 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
130,405 |
|
|
|
7.135 |
% |
|
$ |
174,336 |
|
|
|
6.785 |
% |
|
$ |
130,405 |
|
|
|
7.135 |
% |
|
$ |
174,336 |
|
|
|
6.785 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
130,794 |
|
|
|
7.135 |
% |
|
$ |
169,894 |
|
|
|
7.465 |
% |
|
$ |
124,024 |
|
|
|
7.185 |
% |
|
$ |
168,288 |
|
|
|
7.478 |
% |
The
change in interest expense on unsecured lines of credit arrangements
is due primarily to the net effect and timing of average draws, paydowns and
variable
interest rate changes. The following is a
summary of our unsecured lines of credit arrangements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30 |
|
Nine Months Ended September 30 |
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
Balance outstanding at quarter end |
|
$ |
276,000 |
|
|
$ |
304,000 |
|
|
$ |
276,000 |
|
|
$ |
304,000 |
|
Maximum amount outstanding at any month end |
|
$ |
276,000 |
|
|
$ |
309,000 |
|
|
$ |
276,000 |
|
|
$ |
318,000 |
|
Average amount outstanding (total of daily
principal balances divided by days in period) |
|
$ |
209,662 |
|
|
$ |
303,988 |
|
|
$ |
168,518 |
|
|
$ |
184,395 |
|
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding) |
|
|
7.05 |
% |
|
|
4.93 |
% |
|
|
6.78 |
% |
|
|
4.93 |
% |
We capitalize certain interest costs associated with funds used to finance the construction of
properties owned directly by us. The amount capitalized is based upon the borrowings outstanding
during the construction period using the rate of interest that approximates our cost of financing.
Our interest expense is reduced by the amount capitalized. Capitalized interest for the three and
nine months ended September 30, 2006 totaled $1,384,000 and $2,494,000, respectively, as compared
with $12,000 and $626,000 for the same periods in 2005.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. For the three and nine months ended September 30, 2006, we incurred $29,000 and $100,000,
respectively, of losses related to our Swaps that was recorded as an addition to interest expense.
For the three and nine months ended September 30, 2005, we generated $200,000 and $977,000,
respectively, of savings related to our Swaps that was recorded as a reduction of interest expense.
The provision for depreciation increased primarily as a result of additional investments in
properties owned directly by us. See the discussion of investing activities in Liquidity and
Capital Resources above for additional details. To the extent that we acquire or dispose of
additional properties in the future, our provision for depreciation will change accordingly.
General and administrative expenses as a percentage of revenues (including revenues from
discontinued operations) for the three and nine months ended September 30, 2006, were 6.39% and
6.88%, respectively, as compared with 6.22% and 6.14% for the same period in 2005. Approximately
$1,690,000 of the year-to-date increase from 2005 to 2006 relates directly to the adoption of
Statement of Financial Accounting Standards No. 123(R), Accounting for Stock-Based Compensation, on
January 1, 2006. Effective with the adoption of Statement No. 123(R), we began recognizing
stock-based compensation cost to the date the awards become fully vested or to the retirement
eligible date, if sooner. We expect that the adoption of Statement No. 123(R) will increase
compensation cost by approximately $1,287,000 for 2006 as a result of
amortizing share-based awards
to the retirement eligible date. See Note K to our unaudited consolidated financial statements for
additional information. The remaining increase from 2005 is primarily related to costs associated
with our initiatives to attract and retain appropriate personnel to achieve our business
objectives.
24
Loan expense represents the amortization of deferred loan costs incurred in connection with
the issuance and amendments of debt. The change in loan expense is primarily due to the net effect
of issuances and redemptions of senior unsecured notes subsequent to September 30, 2005. In April
2005, we issued $250,000,000 of 5.875% senior unsecured notes due May 2015. In May 2005, we
redeemed all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006, we
completed a public tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior
unsecured notes due March 2008, and we redeemed $122,500,000 of our outstanding $175,000,000 7.5%
senior unsecured notes due August 2007. In November 2005, we issued $300,000,000 of 6.2% senior
unsecured notes due June 2016.
The provision for loan losses is consistent with the prior year. The provision for loan losses
is related to our critical accounting estimate for the allowance for loan losses and is discussed
below in Critical Accounting Policies.
Other items were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
Nine Months Ended |
|
|
Change |
|
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
|
Sept. 30, 2006 |
|
|
Sept. 30, 2005 |
|
|
$ |
|
|
% |
|
Gain (loss) on sales
of properties |
|
$ |
108 |
|
|
$ |
0 |
|
|
$ |
108 |
|
|
|
n/a |
|
|
$ |
2,590 |
|
|
$ |
(134 |
) |
|
$ |
2,724 |
|
|
|
n/a |
|
Discontinued
operations, net |
|
|
316 |
|
|
|
1,016 |
|
|
|
(700 |
) |
|
|
-69 |
% |
|
|
1,281 |
|
|
|
2,685 |
|
|
|
(1,404 |
) |
|
|
-52 |
% |
Preferred dividends |
|
|
(5,333 |
) |
|
|
(5,389 |
) |
|
|
56 |
|
|
|
-1 |
% |
|
|
(15,998 |
) |
|
|
(16,261 |
) |
|
|
263 |
|
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
(4,909 |
) |
|
$ |
(4,373 |
) |
|
$ |
(536 |
) |
|
|
12 |
% |
|
$ |
(12,127 |
) |
|
$ |
(13,710 |
) |
|
$ |
1,583 |
|
|
|
-12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight assisted living facilities were held for sale as of September 30, 2006. We did not
recognize an impairment loss on these assets as the fair value less estimated costs to sell
exceeded our carrying values. During the nine months ended September 30, 2006, we sold four
assisted living facilities, three skilled nursing facilities and two parcels of land with carrying
values of $35,366,000 for a net gain of $2,590,000. These properties
generated $1,281,000 of income
after deducting depreciation and interest expense from rental revenue for the nine months ended
September 30, 2006. All properties sold subsequent to January 1, 2005 and
held for sale at September 30, 2006 generated $2,685,000 of income after deducting depreciation and interest expense
from rental revenue for the nine months ended September 30, 2005. Please refer to Note F of our
unaudited consolidated financial statements for further discussion.
The decrease in preferred stock dividends is due to a decrease in average outstanding
preferred shares as a result of conversions of Series E Cumulative Convertible and Redeemable
Preferred Stock into common stock.
Non-GAAP Financial Measures
We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings
measurement. However, we consider FFO and FAD to be useful supplemental measures of our operating
performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP
implicitly assumes that the value of real estate assets diminishes predictably over time as
evidenced by the provision for depreciation. However, since real estate values have historically
risen or fallen with market conditions, many industry investors and analysts have considered
presentations of operating results for real estate companies that use historical cost accounting to
be insufficient. In response, the National Association of Real Estate Investment Trusts (NAREIT)
created FFO as a supplemental measure of operating performance for REITs that excludes historical
cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in
accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD
represents FFO excluding the non-cash straight-line rental adjustments.
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 that requires
gains and losses on extinguishment of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under Statement No. 4. We
adopted the standard effective January 1, 2003 and have properly reflected the losses on
extinguishment of debt of $18,448,000, or $0.34 per diluted share, for the three months ended June
30, 2005. These charges have not been added back for the calculations of FFO, FAD or EBITDA.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. We believe
that EBITDA, along with net income and cash flow provided from operating activities, is an
important supplemental measure because it provides additional information to assess and evaluate
the performance of our operations. Additionally, restrictive covenants in our long-term debt
arrangements contain financial ratios based on EBITDA. We primarily utilize EBITDA to measure our
interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge
coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total
interest, secured debt principal amortization and preferred dividends.
25
FFO, FAD and EBITDA are financial measures that are widely used by investors, equity and debt
analysts and rating agencies in the valuation, comparison, rating and investment recommendations of
companies. Management uses these financial measures to facilitate internal and external
comparisons to our historical operating results and in making operating decisions. Additionally,
FFO and FAD are utilized by the Board of Directors to evaluate management. FFO, FAD and EBITDA do
not represent net income or cash flow provided from operating activities as determined in
accordance with U.S. GAAP and should not be considered as alternative measures of profitability or
liquidity. Finally, FFO, FAD and EBITDA, as defined by us, may not be comparable to similarly
entitled items reported by other real estate investment trusts or other companies.
The table below reflects the reconciliation of FFO to net income available to common
stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The
provision for depreciation includes provision for depreciation from discontinued operations.
Amounts are in thousands except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
FFO Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
|
$ |
22,668 |
|
|
$ |
21,480 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,066 |
|
|
|
21,355 |
|
|
|
23,262 |
|
|
|
24,131 |
|
|
|
24,526 |
|
Loss (gain) on sales of properties |
|
|
110 |
|
|
|
24 |
|
|
|
0 |
|
|
|
(3,361 |
) |
|
|
(1,553 |
) |
|
|
(929 |
) |
|
|
(108 |
) |
|
|
|
Funds from operations |
|
$ |
38,309 |
|
|
$ |
19,427 |
|
|
$ |
41,974 |
|
|
$ |
44,581 |
|
|
$ |
41,354 |
|
|
$ |
45,870 |
|
|
$ |
45,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,963 |
|
|
|
53,429 |
|
|
|
54,038 |
|
|
|
55,992 |
|
|
|
58,178 |
|
|
|
61,548 |
|
|
|
62,524 |
|
Diluted for net income (loss) purposes |
|
|
53,454 |
|
|
|
53,429 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
61,868 |
|
|
|
62,866 |
|
Diluted for FFO purposes |
|
|
53,454 |
|
|
|
53,765 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
61,868 |
|
|
|
62,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
Diluted |
|
|
0.33 |
|
|
|
(0.03 |
) |
|
|
0.37 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
0.37 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.72 |
|
|
$ |
0.36 |
|
|
$ |
0.78 |
|
|
$ |
0.80 |
|
|
$ |
0.71 |
|
|
$ |
0.75 |
|
|
$ |
0.73 |
|
Diluted |
|
|
0.72 |
|
|
|
0.36 |
|
|
|
0.77 |
|
|
|
0.79 |
|
|
|
0.71 |
|
|
|
0.74 |
|
|
|
0.73 |
|
26
The table below reflects the reconciliation of FAD to net income available to common
stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The
provision for depreciation includes provision for depreciation from discontinued operations.
Amounts are in thousands except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
FAD Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
|
$ |
22,668 |
|
|
$ |
21,480 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,066 |
|
|
|
21,355 |
|
|
|
23,262 |
|
|
|
24,131 |
|
|
|
24,526 |
|
Loss (gain) on sales of properties |
|
|
110 |
|
|
|
24 |
|
|
|
0 |
|
|
|
(3,361 |
) |
|
|
(1,553 |
) |
|
|
(929 |
) |
|
|
(108 |
) |
Gross straight-line rental income |
|
|
(3,708 |
) |
|
|
(3,536 |
) |
|
|
(2,950 |
) |
|
|
(2,949 |
) |
|
|
(2,400 |
) |
|
|
(2,216 |
) |
|
|
(1,904 |
) |
Prepaid/straight-line rent receipts |
|
|
853 |
|
|
|
2,360 |
|
|
|
2,832 |
|
|
|
7,825 |
|
|
|
10,310 |
|
|
|
2,710 |
|
|
|
3,256 |
|
|
|
|
Funds available for distribution |
|
$ |
35,454 |
|
|
$ |
18,251 |
|
|
$ |
41,856 |
|
|
$ |
49,457 |
|
|
$ |
49,264 |
|
|
$ |
46,364 |
|
|
$ |
47,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,963 |
|
|
|
53,429 |
|
|
|
54,038 |
|
|
|
55,992 |
|
|
|
58,178 |
|
|
|
61,548 |
|
|
|
62,524 |
|
Diluted for net income (loss) purposes |
|
|
53,454 |
|
|
|
53,429 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
61,868 |
|
|
|
62,866 |
|
Diluted for FAD purposes |
|
|
53,454 |
|
|
|
53,765 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
61,868 |
|
|
|
62,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
Diluted |
|
|
0.33 |
|
|
|
(0.03 |
) |
|
|
0.37 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
0.37 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds available for distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.67 |
|
|
$ |
0.34 |
|
|
$ |
0.77 |
|
|
$ |
0.88 |
|
|
$ |
0.85 |
|
|
$ |
0.75 |
|
|
$ |
0.76 |
|
Diluted |
|
|
0.66 |
|
|
|
0.34 |
|
|
|
0.77 |
|
|
|
0.88 |
|
|
|
0.84 |
|
|
|
0.75 |
|
|
|
0.75 |
|
27
The table below reflects the reconciliation of EBITDA to net income, the most directly
comparable U.S. GAAP measure, for the periods presented. The provision for depreciation and
interest expense includes provision for depreciation and interest expense from discontinued
operations. Tax expense represents income-based taxes. Amortization represents the amortization
of deferred loan expenses. Adjusted EBITDA represents EBITDA as adjusted below for items pursuant
to covenant provisions of our unsecured lines of credit arrangements. Dollars are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
June 30 |
|
September 30 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
2006 |
|
2006 |
|
|
|
EBITDA Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,239 |
|
|
$ |
3,830 |
|
|
$ |
25,297 |
|
|
$ |
31,921 |
|
|
$ |
24,978 |
|
|
$ |
28,001 |
|
|
$ |
26,813 |
|
Interest expense |
|
|
19,645 |
|
|
|
19,986 |
|
|
|
21,624 |
|
|
|
21,369 |
|
|
|
24,238 |
|
|
|
23,087 |
|
|
|
24,274 |
|
Tax expense |
|
|
3 |
|
|
|
216 |
|
|
|
1 |
|
|
|
62 |
|
|
|
0 |
|
|
|
12 |
|
|
|
70 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,066 |
|
|
|
21,355 |
|
|
|
23,262 |
|
|
|
24,131 |
|
|
|
24,526 |
|
Amortization |
|
|
726 |
|
|
|
1,998 |
|
|
|
594 |
|
|
|
618 |
|
|
|
711 |
|
|
|
707 |
|
|
|
781 |
|
|
|
|
EBITDA |
|
|
64,009 |
|
|
|
47,039 |
|
|
|
69,582 |
|
|
|
75,325 |
|
|
|
73,189 |
|
|
|
75,938 |
|
|
|
76,464 |
|
Stock-based compensation expense |
|
|
316 |
|
|
|
316 |
|
|
|
317 |
|
|
|
90 |
|
|
|
2,513 |
|
|
|
838 |
|
|
|
192 |
|
Provision for loan losses |
|
|
300 |
|
|
|
300 |
|
|
|
300 |
|
|
|
300 |
|
|
|
250 |
|
|
|
250 |
|
|
|
250 |
|
Loss on extinguishment of debt, net |
|
|
0 |
|
|
|
18,448 |
|
|
|
0 |
|
|
|
2,214 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
Adjusted EBITDA |
|
$ |
64,625 |
|
|
$ |
66,103 |
|
|
$ |
70,199 |
|
|
$ |
77,929 |
|
|
$ |
75,952 |
|
|
$ |
77,026 |
|
|
$ |
76,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
19,645 |
|
|
$ |
19,986 |
|
|
$ |
21,624 |
|
|
$ |
21,369 |
|
|
$ |
24,238 |
|
|
$ |
23,087 |
|
|
$ |
24,274 |
|
Capitalized interest |
|
|
265 |
|
|
|
348 |
|
|
|
12 |
|
|
|
39 |
|
|
|
202 |
|
|
|
909 |
|
|
|
1,384 |
|
|
|
|
Total interest |
|
|
19,910 |
|
|
|
20,334 |
|
|
|
21,636 |
|
|
|
21,408 |
|
|
|
24,440 |
|
|
|
23,996 |
|
|
|
25,658 |
|
EBITDA |
|
$ |
64,009 |
|
|
$ |
47,039 |
|
|
$ |
69,582 |
|
|
$ |
75,325 |
|
|
$ |
73,189 |
|
|
$ |
75,938 |
|
|
$ |
76,464 |
|
|
|
|
Interest coverage ratio |
|
|
3.21x |
|
|
|
2.31x |
|
|
|
3.22x |
|
|
|
3.52x |
|
|
|
2.99x |
|
|
|
3.16x |
|
|
|
2.98x |
|
Adjusted EBITDA |
|
$ |
64,625 |
|
|
$ |
66,103 |
|
|
$ |
70,199 |
|
|
$ |
77,929 |
|
|
$ |
75,952 |
|
|
$ |
77,026 |
|
|
$ |
76,906 |
|
|
|
|
Interest
coverage ratio adjusted |
|
|
3.25x |
|
|
|
3.25x |
|
|
|
3.24x |
|
|
|
3.64x |
|
|
|
3.11x |
|
|
|
3.21x |
|
|
|
3.00x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest |
|
$ |
19,910 |
|
|
$ |
20,334 |
|
|
$ |
21,636 |
|
|
$ |
21,408 |
|
|
$ |
24,440 |
|
|
$ |
23,996 |
|
|
$ |
25,658 |
|
Secured debt principal amortization |
|
|
627 |
|
|
|
716 |
|
|
|
699 |
|
|
|
643 |
|
|
|
643 |
|
|
|
768 |
|
|
|
773 |
|
Preferred dividends |
|
|
5,436 |
|
|
|
5,436 |
|
|
|
5,389 |
|
|
|
5,334 |
|
|
|
5,333 |
|
|
|
5,333 |
|
|
|
5,333 |
|
|
|
|
Total fixed charges |
|
|
25,973 |
|
|
|
26,486 |
|
|
|
27,724 |
|
|
|
27,385 |
|
|
|
30,416 |
|
|
|
30,097 |
|
|
|
31,764 |
|
EBITDA |
|
$ |
64,009 |
|
|
$ |
47,039 |
|
|
$ |
69,582 |
|
|
$ |
75,325 |
|
|
$ |
73,189 |
|
|
$ |
75,938 |
|
|
$ |
76,464 |
|
|
|
|
Fixed charge coverage ratio |
|
|
2.46x |
|
|
|
1.78x |
|
|
|
2.51x |
|
|
|
2.75x |
|
|
|
2.41x |
|
|
|
2.52x |
|
|
|
2.41x |
|
EBITDA adjusted |
|
$ |
64,625 |
|
|
$ |
66,103 |
|
|
$ |
70,199 |
|
|
$ |
77,929 |
|
|
$ |
75,952 |
|
|
$ |
77,026 |
|
|
$ |
76,906 |
|
|
|
|
Fixed charge coverage
ratio adjusted |
|
|
2.49x |
|
|
|
2.50x |
|
|
|
2.53x |
|
|
|
2.85x |
|
|
|
2.50x |
|
|
|
2.56x |
|
|
|
2.42x |
|
28
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which
requires us to make estimates and assumptions. Management considers an accounting estimate or
assumption critical if:
|
|
|
the nature of the estimates or assumptions is material due to the levels of subjectivity
and judgment necessary to account for highly uncertain matters or the susceptibility of
such matters to change; and |
|
|
|
|
the impact of the estimates and assumptions on financial condition or operating
performance is material. |
Management has discussed the development and selection of its critical accounting policies
with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the
disclosure presented below relating to them. Management believes the current assumptions and other
considerations used to estimate amounts reflected in our consolidated financial statements are
appropriate and are not reasonably likely to change in the future. However, since these estimates
require assumptions to be made that were uncertain at the time the estimate was made, they bear the
risk of change. If actual experience differs from the assumptions and other considerations used in
estimating amounts reflected in our consolidated financial statements, the resulting changes could
have a material adverse effect on our consolidated results of operations, liquidity and/or
financial condition. Please refer to our Annual Report on Form 10-K for the year ended December
31, 2005 for further information regarding significant accounting policies that impact us. There
have been no material changes to these policies in 2006.
We adopted Statement of Financial Accounting Standards No. 123(R) on January 1, 2006. See
Note K to our unaudited consolidated financial statements for additional information.
The following table presents information about our critical accounting policies, as well as
the material assumptions used to develop each estimate:
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
|
|
|
Allowance for Loan Losses |
|
|
|
|
|
We maintain an allowance for loan
losses in accordance with Statement of
Financial Accounting Standards No.
114, Accounting by Creditors for
Impairment of a Loan, as amended, and
SEC Staff Accounting Bulletin No. 102,
Selected Loan Loss Allowance
Methodology and Documentation Issues.
The allowance for loan losses is
maintained at a level believed
adequate to absorb potential losses in
our loans receivable. The
determination of the allowance is
based on a quarterly evaluation of all
outstanding loans. If this evaluation
indicates that there is a greater risk
of loan charge-offs, additional
allowances or placement on non-accrual
status may be required. A loan is
impaired when, based on current
information and events, it is probable
that we will be unable to collect all
amounts due as scheduled according to
the contractual terms of the original
loan agreement. Consistent with this
definition, all loans on non-accrual
are deemed impaired. To the extent
circumstances improve and the risk of
collectibility is diminished, we will
return these loans to full accrual
status.
|
|
The determination of the
allowance is based on a quarterly
evaluation of all outstanding
loans, including general economic
conditions and estimated
collectibility of loan payments
and principal. We evaluate the
collectibility of our loans
receivable based on a combination
of factors, including, but not
limited to, delinquency status,
historical loan charge-offs,
financial strength of the
borrower and guarantors and value
of the underlying property.
For the nine months ended
September 30, 2006, we recorded
$750,000 as provision for loan
losses, resulting in an allowance
for loan losses of $7,156,000
relating to loans with
outstanding balances of
$67,181,000 at September 30,
2006. Also at September 30,
2006, we had loans with
outstanding balances of
$10,979,000 on non-accrual
status. |
29
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
|
|
|
Depreciation and Useful Lives |
|
|
|
|
|
Substantially all of the properties owned by
us are leased under operating leases and are
recorded at cost. The cost of our real
property is allocated to land, buildings,
improvements and intangibles in accordance
with Statement of Financial Accounting
Standards No. 141, Business Combinations.
The allocation of the acquisition costs of
properties is based on appraisals
commissioned from independent real estate
appraisal firms.
|
|
We compute depreciation
on our properties using the
straight-line method based
on their estimated useful
lives which range from 15 to
40 years for buildings and
five to 15 years for
improvements.
For the nine months ended September 30, 2006, we
recorded $58,476,000 and
$13,441,000 as provision for
depreciation relating to
buildings and improvements,
respectively. The average
useful life of our buildings
and improvements was 32.8
years and 10.3 years,
respectively, for the nine
months ended September 30,
2006. |
|
|
|
Impairment of Long-Lived Assets |
|
|
|
|
|
We review our long-lived assets for
potential impairment in accordance with
Statement of Financial Accounting Standards
No. 144, Accounting for the Impairment and
Disposal of Long-Lived Assets. An impairment
charge must be recognized when the carrying
value of a long-lived asset is not
recoverable. The carrying value is not
recoverable if it exceeds the sum of the
undiscounted cash flows expected to result
from the use and eventual disposition of the
asset. If it is determined that a permanent
impairment of a long-lived asset has
occurred, the carrying value of the asset is
reduced to its fair value and an impairment
charge is recognized for the difference
between the carrying value and the fair
value.
|
|
The net book value of
long-lived assets is
reviewed quarterly on a
property by property basis
to determine if there are
indicators of impairment.
These indicators may include
anticipated operating losses
at the property level, the
tenants inability to make
rent payments, a decision to
dispose of an asset before
the end of its estimated
useful life and changes in
the market that may
permanently reduce the value
of the property. If
indicators of impairment
exist, then the undiscounted
future cash flows from the
most likely use of the
property are compared to the
current net book value.
This analysis requires us to
determine if indicators of
impairment exist and to
estimate the most likely
stream of cash flows to be
generated from the property
during the period the
property is expected to be
held.
We did not record any
impairment charges for the
nine months ended September
30, 2006. |
|
|
|
Fair Value of Derivative Instruments |
|
|
|
|
|
The valuation of derivative instruments is
accounted for in accordance with Statement
of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and
Hedging Activities (SFAS133), as amended
by Statement of Financial Accounting
Standards No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging
Activities. SFAS133, as amended, requires
companies to record derivatives at fair
market value on the balance sheet as assets
or liabilities.
|
|
The valuation of derivative
instruments requires us to
make estimates and judgments
that affect the fair value
of the instruments. Fair
values for our derivatives
are estimated by a third
party consultant, which
utilizes pricing models that
consider forward yield
curves and discount rates.
Such amounts and the
recognition of such amounts
are subject to significant
estimates which may change
in the future. At September
30, 2006, we participated in
two interest rate swap
agreements related to our
long-term debt. At September
30, 2006, the swaps were
reported at their fair value
as a $946,000 other asset.
For the nine months ended
September 30, 2006, we
incurred $100,000 of losses
related to our swaps that
was recorded as an addition
to interest expense. |
30
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
|
|
|
Revenue Recognition |
|
|
|
Revenue is recorded in accordance
with Statement of Financial
Accounting Standards No. 13,
Accounting for Leases, and SEC Staff
Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements,
as amended (SAB101). SAB101
requires that revenue be recognized
after four basic criteria are met.
These four criteria include
persuasive evidence of an
arrangement, the rendering of
service, fixed and determinable
income and reasonably assured
collectibility. If the
collectibility of revenue is
determined incorrectly, the amount
and timing of our reported revenue
could be significantly affected.
Interest income on loans is
recognized as earned based upon the
principal amount outstanding subject
to an evaluation of collectibility
risk. Our standard lease structure
contains annual rental escalators
that are contingent upon changes in
the Consumer Price Index and/or
changes in the gross operating
revenues of the property. These
escalators are not fixed, so no
straight-line rent is recorded;
however, rental income is recorded
based on the contractual cash rental
payments due for the period.
|
|
We evaluate the collectibility
of our revenues and related
receivables on an on-going basis.
We evaluate collectibility based on
assumptions and other considerations
including, but not limited to, the
certainty of payment, payment
history, the financial strength of
the investments underlying
operations as measured by cash flows
and payment coverages, the value of
the underlying collateral and
guaranties and current economic
conditions.
If our evaluation indicates that
collectibility is not reasonably
assured, we may place an investment
on non-accrual or reserve against
all or a portion of current income
as an offset to revenue.
For the nine months ended September
30, 2006, we recognized $13,178,000
of interest income and $223,956,000
of rental income, including
discontinued operations. Cash
receipts on leases with deferred
revenue provisions were $16,276,000
as compared to gross straight-line
rental income recognized of
$6,520,000 for the nine months ended
September 30, 2006. At September
30, 2006, our straight-line
receivable balance was $54,594,000.
Also at September 30, 2006, we had
loans with outstanding balances of
$10,979,000 on non-accrual status. |
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q may contain forward-looking statements as defined in the
Private Securities Litigation Reform Act of 1995. These forward-looking statements concern and are
based upon, among other things, the possible expansion of our portfolio; the sale of properties;
the performance of our operators and properties; our ability to enter into agreements with new
viable tenants for properties that 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; our ability to access capital markets or other sources of funds; our
ability to meet our earnings guidance; and with respect to the prospective merger of the Company and Windrose Medical Properties Trust
(Windrose), the possible increase in the size and composition of the portfolios of each entity
and the combined entity; potential benefits associated with the proposed transaction; the sale of
properties; the performance of the operators and properties of each of the Company and Windrose;
the ability of each of the Company and Windrose to complete the transaction; the ability to make
new investments and to maintain returns from existing investments; the ability to enter into
agreements with new and existing tenants; the policies and plans of each of the Company and
Windrose regarding investments, financings and other matters; the tax status of each of the Company
and Windrose as a real estate investment trust; the ability of each of the Company and Windrose to
appropriately balance the use of debt and equity; the ability of each of the Company and Windrose
to access capital markets or other sources of funds; and the ability of each of the Company and
Windrose and of the combined entity to meet earnings guidance. When we use words such as may, will, intend,
should, believe, expect, anticipate, project, estimate 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 expectations. This may be a result of various factors,
including, but not limited to: the status of the economy; the status of capital markets, including
prevailing interest rates; serious issues facing the health care industry, including compliance
with, and changes to, regulations and payment policies and operators difficulty in obtaining and
maintaining adequate liability and other insurance; changes in financing terms; competition within
the health care and senior housing industries; negative developments in the operating results or
financial condition of operators, including, but not limited to, their ability to pay rent and
repay loans; our ability to transition or sell facilities with profitable results; the failure of
closings to occur as and when anticipated; acts of God affecting our properties; our ability to
reinvest sale proceeds at similar rates to assets sold; operator bankruptcies; government
regulations affecting Medicare and Medicaid reimbursement rates; liability claims and insurance
costs for our operators; unanticipated difficulties and/or expenditures relating to future
acquisitions; environmental laws affecting our properties; delays in reinvestment of sales
proceeds; changes in rules or practices governing our financial reporting; other factors,
including REIT qualification, anti-takeover provisions and key management personnel; and with respect to the prospective merger of the Company and Windrose, unexpected delays or
conditions to receipt of shareholder and third party approvals; delays in the implementation and
execution of merger integration plans; unexpected costs or delays in the successful integration of
IT systems and elimination of duplicative overhead and IT costs; and unanticipated developments
relating to previously disclosed lawsuits or similar matters. Other
important factors are identified in our Annual Report on Form 10-K for the year ended December 31,
2005, including factors identified under the headings Business, Risk Factors and Managements
Discussion and Analysis of Financial Condition and Results of Operations. 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.
31
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We seek to mitigate the effects of fluctuations in interest rates by
matching the terms of new investments with new long-term fixed rate borrowings to the extent
possible. We may or may not elect to use financial derivative instruments to hedge interest rate
exposure. These decisions are principally based on our policy to match our variable rate
investments with comparable borrowings, but are also based on the general trend in interest rates
at the applicable dates and our perception of the future volatility of interest rates. This
section is presented to provide a discussion of the risks associated with potential fluctuations in
interest rates.
We historically borrow on our unsecured lines of credit arrangements to acquire, construct or
make loans relating to health care and senior housing properties. Then, as market conditions
dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under the
unsecured lines of credit arrangements.
A change in interest rates will not affect the interest expense associated with our fixed rate
debt. Interest rate changes, however, will affect the fair value of our fixed rate debt. A 1%
increase in interest rates would result in a decrease in fair value of our senior unsecured notes
by approximately $33,301,000 at September 30, 2006 ($36,931,000 at September 30, 2005). Changes in
the interest rate environment upon maturity of this fixed rate debt could have an effect on our
future cash flows and earnings, depending on whether the debt is replaced with other fixed rate
debt, variable rate debt, or equity or repaid by the sale of assets.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At September 30, 2006, the Swaps were reported at their fair value as a $946,000 other
liability ($3,237,000 other asset at September 30, 2005). A 1% increase in interest rates would
result in a decrease in fair value of our Swaps by approximately $6,145,000 at September 30, 2006
($6,945,000 at September 30, 2005). Assuming no changes in the notional amount of $100,000,000 of
our Swaps, a 1% increase in interest rates would result in increased annual interest expense of
$1,000,000.
Our variable rate debt, including our unsecured lines of credit arrangements, is reflected at
fair value. At September 30, 2006, we had $276,000,000 outstanding related to our variable rate
debt and assuming no changes in outstanding balances, a 1% increase in interest rates would result
in increased annual interest expense of $2,760,000. At September 30, 2005, we had $304,000,000
outstanding related to our variable rate debt and assuming no changes in outstanding balances, a 1%
increase in interest rates would have resulted in increased annual interest expense of $3,040,000.
We are subject to risks associated with debt financing, including the risk that existing
indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the
terms of current indebtedness. The majority of our borrowings were completed under indentures or
contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the
event that we are unable to raise additional equity or borrow money because of these limitations,
our ability to acquire additional properties may be limited.
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in providing reasonable assurance that information
required to be disclosed by us in the reports we file with or submit to the Securities and Exchange
Commission (SEC) under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms. No change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1A. Risk Factors
Except
as provided in Item 2 Managements Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking Statements and Risk Factors, there have been no material changes from the risk factors identified under the heading Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.
Item 6. Exhibits
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2.1 |
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Agreement and Plan of Merger, dated as of September 12, 2006, by and among Health Care REIT,
Inc., Heat Merger Sub, LLC, Heat OP Merger Sub, L.P., Windrose Medical Properties Trust and
Windrose Medical Properties, L.P. (filed with the Commission as Exhibit 2.1 to the Companys
Form 8-K filed September 15, 2006, and incorporated herein by reference thereto). |
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2.2 |
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Amendment No. 1 to Agreement and Plan of Merger, dated as of October 12, 2006, by and among
Health Care REIT, Inc., Heat Merger Sub, LLC, Heat OP Merger Sub, L.P., Windrose Medical
Properties Trust and Windrose Medical Properties, L.P. (filed with the Commission as Exhibit
2.1 to the Companys Form 8-K filed October 13, 2006, and
incorporated herein by reference thereto). |
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10.1 |
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Third Amended and Restated Loan Agreement, dated as of July 26, 2006, by and among Health
Care REIT, Inc. and certain of its subsidiaries, the banks signatory thereto, KeyBank National
Association, as administrative agent, Deutsche Bank Securities Inc., as syndication agent, and
UBS Securities LLC, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as documentation
agents (filed with the Commission as Exhibit 10.2 to the Companys Form 10-Q filed July 28,
2006, and incorporated herein by reference thereto). |
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10.2 |
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Amendment No. 1 to Third Amended and Restated Loan Agreement by and among the Company and
certain of its subsidiaries, the banks signatory thereto, KeyBank National Association, as
administrative agent, Deutsche Bank Securities Inc., as syndication agent, and UBS Securities
LLC, Bank of America, N.A. and JPMorgan Chase Bank, N.A., as documentation agents, dated as of
September 20, 2006 (filed with the Commission as Exhibit 10.1 to the Companys Form 8-K filed
September 26, 2006, and incorporated herein by reference thereto). |
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12 |
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Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed
Charges and Preferred Stock Dividends. |
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31.1 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2 |
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1 |
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Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. |
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32.2 |
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Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. |
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.
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Date: October 20, 2006
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By:
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/s/ George L. Chapman
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George L. Chapman, |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: October 20, 2006
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By:
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/s/ Scott A. Estes |
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Scott A. Estes, |
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Senior Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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Date: October 20, 2006
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By:
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/s/ Paul D. Nungester, Jr. |
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Paul D. Nungester, Jr., |
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Vice President and Controller |
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(Principal Accounting Officer) |
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33