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 March 31, 2008
or
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o |
|
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, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
þ |
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Accelerated filer
o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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 April 30, 2008, the registrant had 89,799,692 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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March 31, |
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December 31, |
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2008 |
|
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2007 |
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|
(Unaudited) |
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|
(Note) |
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|
(In thousands) |
|
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 and land
improvements |
|
$ |
454,474 |
|
|
$ |
447,029 |
|
Buildings and
improvements |
|
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4,329,405 |
|
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|
4,224,955 |
|
Acquired lease
intangibles |
|
|
134,388 |
|
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|
131,312 |
|
Real property held for sale, net of accumulated
depreciation |
|
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2,150 |
|
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0 |
|
Construction in
progress |
|
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369,582 |
|
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|
313,709 |
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|
|
|
|
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|
Gross real property
owned |
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5,289,999 |
|
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|
5,117,005 |
|
Less accumulated depreciation and
amortization |
|
|
(517,487 |
) |
|
|
(478,373 |
) |
|
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|
|
|
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|
Net real property
owned |
|
|
4,772,512 |
|
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|
4,638,632 |
|
Real estate loans receivable: |
|
|
|
|
|
|
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Real estate loans
receivable |
|
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388,250 |
|
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|
381,394 |
|
Less allowance for losses on loans
receivable |
|
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(7,406 |
) |
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(7,406 |
) |
|
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|
|
|
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Net real estate loans
receivable |
|
|
380,844 |
|
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|
373,988 |
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|
|
|
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|
Net real estate investments |
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5,153,356 |
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|
5,012,620 |
|
Other assets: |
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|
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Equity
investments |
|
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1,168 |
|
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|
1,408 |
|
Deferred loan
expenses |
|
|
28,817 |
|
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|
30,499 |
|
Cash and cash
equivalents |
|
|
32,282 |
|
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|
30,269 |
|
Receivables and other
assets |
|
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171,833 |
|
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|
139,060 |
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Total other
assets |
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234,100 |
|
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|
201,236 |
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Total assets |
|
$ |
5,387,456 |
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$ |
5,213,856 |
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Liabilities and stockholders equity |
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Liabilities: |
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Borrowings under unsecured lines of credit
arrangements |
|
$ |
432,500 |
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$ |
307,000 |
|
Senior unsecured
notes |
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1,847,709 |
|
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|
1,890,192 |
|
Secured
debt |
|
|
478,228 |
|
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|
507,476 |
|
Accrued expenses and other
liabilities |
|
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110,715 |
|
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|
95,145 |
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Total liabilities |
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2,869,152 |
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2,799,813 |
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Minority interests |
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9,697 |
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9,687 |
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Stockholders equity: |
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Preferred stock, $1.00 par
value: |
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327,897 |
|
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|
330,243 |
|
Authorized - 50,000,000 shares |
|
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Issued and outstanding - 12,799,889
shares at March 31, 2008 and 12,879,189
shares
at December 31, 2007 |
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Common stock, $1.00 par
value: |
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88,992 |
|
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|
85,412 |
|
Authorized - 225,000,000 shares |
|
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Issued - 89,306,085 shares at March 31,
2008 and 85,600,333 shares at December
31, 2007 |
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Outstanding - 89,175,048 shares at March
31, 2008 and 85,496,164 shares
at December 31, 2007 |
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Capital in excess of par
value |
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2,510,260 |
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2,370,037 |
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Treasury stock |
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(3,986 |
) |
|
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(3,952 |
) |
Cumulative net
income |
|
|
1,110,854 |
|
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|
1,074,255 |
|
Cumulative
dividends |
|
|
(1,510,296 |
) |
|
|
(1,446,959 |
) |
Accumulated other comprehensive
income |
|
|
(18,474 |
) |
|
|
(7,381 |
) |
Other equity |
|
|
3,360 |
|
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|
2,701 |
|
|
|
|
|
|
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|
Total stockholders equity |
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|
2,508,607 |
|
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|
2,404,356 |
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Total liabilities and stockholders equity |
|
$ |
5,387,456 |
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|
$ |
5,213,856 |
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|
NOTE: The consolidated balance sheet at December 31, 2007 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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March 31, |
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2008 |
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2007 |
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(In thousands, except per share data) |
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Revenues: |
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Rental income |
|
$ |
125,044 |
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$ |
103,496 |
|
Interest income |
|
|
9,092 |
|
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|
5,149 |
|
Other income |
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|
1,716 |
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|
1,592 |
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|
Total
revenues |
|
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135,852 |
|
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|
110,237 |
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Expenses: |
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Interest expense |
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34,329 |
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|
31,330 |
|
Property operating expenses |
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11,367 |
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|
7,168 |
|
Depreciation and amortization |
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|
39,555 |
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|
32,682 |
|
General and administrative |
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|
12,328 |
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|
9,782 |
|
Loan expense |
|
|
1,772 |
|
|
|
1,267 |
|
Loss (gain) on extinguishment of debt |
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|
(1,326 |
) |
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0 |
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Total
expenses |
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|
98,025 |
|
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|
82,229 |
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Income from continuing operations before income taxes
and minority interests |
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37,827 |
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|
28,008 |
|
Income tax (expense) benefit |
|
|
(1,279 |
) |
|
|
(11 |
) |
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Income from continuing operations before minority interests |
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|
36,548 |
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|
27,997 |
|
Minority interests, net of tax |
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(62 |
) |
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|
(126 |
) |
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Income from continuing operations |
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36,486 |
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|
27,871 |
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|
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Discontinued operations: |
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Net gain (loss) on sales of properties |
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|
26 |
|
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|
977 |
|
Income (loss) from discontinued operations,
net |
|
|
87 |
|
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|
825 |
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Discontinued
operations,
net |
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113 |
|
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|
1,802 |
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Net income |
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|
36,599 |
|
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|
29,673 |
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|
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|
|
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Preferred stock dividends |
|
|
6,147 |
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|
6,317 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income available to common stockholders |
|
$ |
30,452 |
|
|
$ |
23,356 |
|
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|
|
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|
Average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
|
86,100 |
|
|
|
73,224 |
|
Diluted |
|
|
86,610 |
|
|
|
73,791 |
|
|
|
|
|
|
|
|
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|
Earnings per share: |
|
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|
|
|
|
|
|
Basic: |
|
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|
|
|
|
|
|
Income from continuing operations
available to common
stockholders |
|
$ |
0.35 |
|
|
$ |
0.29 |
|
Discontinued operations, net |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
Net income available to common stockholders* |
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
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|
Diluted: |
|
|
|
|
|
|
|
|
Income from continuing operations
available to common
stockholders |
|
$ |
0.35 |
|
|
$ |
0.29 |
|
Discontinued operations, net |
|
|
0.00 |
|
|
|
0.02 |
|
|
|
|
|
|
|
|
Net income available to common stockholders* |
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid per common share |
|
$ |
0.6600 |
|
|
$ |
0.2991 |
|
|
|
|
* |
|
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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|
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|
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|
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|
Three Months Ended March 31, 2008 |
|
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Accumulated |
|
|
|
|
|
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|
Capital in |
|
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|
|
|
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|
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Other |
|
|
|
|
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|
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 |
|
$ |
330,243 |
|
|
$ |
85,412 |
|
|
$ |
2,370,037 |
|
|
$ |
(3,952 |
) |
|
$ |
1,074,255 |
|
|
$ |
(1,446,959 |
) |
|
$ |
(7,381 |
) |
|
$ |
2,701 |
|
|
$ |
2,404,356 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,599 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
(240 |
) |
Cash flow hedge activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,853 |
) |
|
|
|
|
|
|
(10,853 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,506 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to issuance of common stock
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
523 |
|
|
|
22,379 |
|
|
|
(34 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38 |
) |
|
|
22,830 |
|
Net proceeds from sale of common stock |
|
|
|
|
|
|
3,000 |
|
|
|
115,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,555 |
|
Conversion of preferred stock |
|
|
(2,346 |
) |
|
|
57 |
|
|
|
2,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
697 |
|
|
|
697 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$0.66 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57,190 |
) |
|
|
|
|
|
|
|
|
|
|
(57,190 |
) |
Preferred stock, Series D-$0.4922 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E-$0.3750 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Preferred stock, Series F-$0.4766 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
Preferred stock, Series G-$0.4688 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
|
|
|
|
|
|
|
|
(814 |
) |
|
|
|
Balances at end of period |
|
$ |
327,897 |
|
|
$ |
88,992 |
|
|
$ |
2,510,260 |
|
|
$ |
(3,986 |
) |
|
$ |
1,110,854 |
|
|
$ |
(1,510,296 |
) |
|
$ |
(18,474 |
) |
|
$ |
3,360 |
|
|
$ |
2,508,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
338,993 |
|
|
$ |
73,152 |
|
|
$ |
1,873,811 |
|
|
$ |
(2,866 |
) |
|
$ |
932,853 |
|
|
$ |
(1,238,860 |
) |
|
$ |
(135 |
) |
|
$ |
1,845 |
|
|
$ |
1,978,793 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,673 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts related to issuance of common stock
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
779 |
|
|
|
28,375 |
|
|
|
(1,075 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100 |
) |
|
|
27,979 |
|
Option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
541 |
|
|
|
541 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$0.2991 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,285 |
) |
|
|
|
|
|
|
|
|
|
|
(22,285 |
) |
Preferred stock, Series D-$0.4922 per
share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E-$0.3750 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Preferred stock, Series F-$0.4766 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
Preferred stock, Series G-$0.4688 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(984 |
) |
|
|
|
|
|
|
|
|
|
|
(984 |
) |
|
|
|
Balances at end of period |
|
$ |
338,993 |
|
|
$ |
73,931 |
|
|
$ |
1,902,186 |
|
|
$ |
(3,941 |
) |
|
$ |
962,526 |
|
|
$ |
(1,267,462 |
) |
|
|
($135 |
) |
|
$ |
2,286 |
|
|
$ |
2,008,384 |
|
|
|
|
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
36,599 |
|
|
$ |
29,673 |
|
Adjustments to reconcile net income to
net cash provided from operating
activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
39,574 |
|
|
|
33,860 |
|
Other amortization expenses |
|
|
2,323 |
|
|
|
1,174 |
|
Capitalized interest |
|
|
(5,167 |
) |
|
|
(2,327 |
) |
Stock-based compensation expense |
|
|
3,848 |
|
|
|
3,177 |
|
Minority interests share of earnings |
|
|
62 |
|
|
|
126 |
|
Loss (gain) on extinguishment of debt, net |
|
|
(1,326 |
) |
|
|
0 |
|
Rental income less than (in excess of)
cash received |
|
|
(2,361 |
) |
|
|
(2,153 |
) |
Amortization related to above (below) market leases, net |
|
|
(263 |
) |
|
|
(460 |
) |
(Gain) loss on sales of properties |
|
|
(26 |
) |
|
|
(977 |
) |
Increase (decrease) in accrued expenses and
other liabilities |
|
|
4,452 |
|
|
|
(3,001 |
) |
Decrease (increase) in receivables and
other assets |
|
|
(264 |
) |
|
|
2,266 |
|
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities |
|
|
77,451 |
|
|
|
61,358 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Investment in real property |
|
|
(168,414 |
) |
|
|
(161,675 |
) |
Investment in real estate loans receivable |
|
|
(7,751 |
) |
|
|
(80,427 |
) |
Other investments, net of payments |
|
|
(26,819 |
) |
|
|
(2,716 |
) |
Principal collected on real estate loans receivable |
|
|
2,081 |
|
|
|
17,929 |
|
Proceeds from sales of real property |
|
|
99 |
|
|
|
11,537 |
|
Other |
|
|
(4,872 |
) |
|
|
(523 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) investing activities |
|
|
(205,676 |
) |
|
|
(215,875 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) under unsecured
lines of credit arrangements |
|
|
125,500 |
|
|
|
156,000 |
|
Principal payments on unsecured senior notes |
|
|
(42,330 |
) |
|
|
0 |
|
Principal payments on secured debt |
|
|
(27,776 |
) |
|
|
(1,894 |
) |
Net proceeds from the issuance of common stock |
|
|
138,254 |
|
|
|
24,467 |
|
Decrease (increase) in deferred loan expense |
|
|
(21 |
) |
|
|
(377 |
) |
Contributions by minority interests |
|
|
92 |
|
|
|
0 |
|
Distributions to minority interests |
|
|
(144 |
) |
|
|
0 |
|
Cash distributions to stockholders |
|
|
(63,337 |
) |
|
|
(28,602 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities |
|
|
130,238 |
|
|
|
149,594 |
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
2,013 |
|
|
|
(4,923 |
) |
Cash and cash equivalents at beginning of period |
|
|
30,269 |
|
|
|
36,216 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
32,282 |
|
|
$ |
31,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
23,781 |
|
|
$ |
21,934 |
|
Income taxes paid |
|
|
1,549 |
|
|
|
30 |
|
|
Supplemental schedule of non-cash activities: |
|
|
|
|
|
|
|
|
Assets and liabilities assumed from real property acquisitions: |
|
|
|
|
|
|
|
|
Secured debt |
|
$ |
0 |
|
|
$ |
0 |
|
Other liabilities |
|
|
887 |
|
|
|
0 |
|
Other assets |
|
|
0 |
|
|
|
0 |
|
See notes to unaudited consolidated financial statements
6
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Health Care REIT, Inc., with headquarters in Toledo, Ohio, is an equity real estate investment
trust (REIT) that invests in senior housing and health care real estate, including independent
living, assisted living and skilled nursing facilities, continuing care retirement communities,
hospitals and medical office buildings. Our full service platform also offers property management
and development services to our customers. As of March 31, 2008, our broadly diversified portfolio
consisted of 646 properties in 38 states. Founded in 1970, we were the first real estate
investment trust to invest exclusively in health care facilities. More information is available on
the Internet at www.hcreit.com.
2. Accounting Policies and Related Matters
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 necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2008 are not necessarily an indication of the results
that may be expected for the year ending December 31, 2008. 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, 2007.
New Accounting Standards
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). SFAS 157 introduces a
framework for measuring fair value and expands required disclosure about fair value measurements of
assets and liabilities. SFAS 157 for financial assets and liabilities is effective for fiscal
years beginning after November 15, 2007, and was adopted as the standard for those assets and
liabilities as of January 1, 2008. The impact of adoption was not significant. SFAS 157 defines
fair value as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. SFAS 157 also
establishes a fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard
describes three levels of inputs that may be used to measure fair value:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Interest rate swap agreements are valued using models that
assume a hypothetical transaction to sell the asset or transfer the liability in the
principal market for the asset or liability based on market data derived from interest rates
and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds,
loss severities, credit risks and default rates.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The market approach is utilized to measure fair value for our financial assets and
liabilities. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of March 31, 2008 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Equity investments (1) |
|
$ |
1,168 |
|
|
$ |
1,168 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Interest rate swap agreements (1) |
|
|
(18,802 |
) |
|
|
0 |
|
|
|
(18,802 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
(17,634 |
) |
|
$ |
1,168 |
|
|
$ |
(18,802 |
) |
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains or losses on equity investments and interest rate swap agreements are
recorded in accumulated other comprehensive income (loss) at each measurement date. |
7
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations (SFAS 141(R)) and Statement of Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51 (SFAS
160). SFAS 141(R) will change how business acquisitions are accounted for and will impact
financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change
the accounting and reporting for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of equity. Early adoption is prohibited for
both standards. The provisions of SFAS 141(R) and SFAS 160, effective on January 1, 2009, are to be
applied prospectively; however, the disclosure provisions of SFAS 160
are to be applied retrospectively.
In March 2008, the FASB issued Statement
of Financial Accounting Standards No. 161,
Disclosures About Derivative Instruments and Hedging Activities an amendment of FASB Statement
No. 133 (SFAS 161). SFAS 161 expands quarterly disclosure requirements in SFAS 133 concerning an
entitys derivative instruments and hedging activities. SFAS 161 is effective for fiscal years
beginning after November 15, 2008. We are currently assessing the impact of SFAS 161 on our
consolidated financial position and results of operations.
3. Real Property Acquisitions and Development
The following is a summary of our real property investment activity for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
Investment |
|
|
Medical Office |
|
|
|
|
|
|
Investment |
|
|
Medical Office |
|
|
|
|
|
|
Properties |
|
|
Buildings |
|
|
Totals |
|
|
Properties |
|
|
Buildings |
|
|
Totals |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs |
|
$ |
11,800 |
|
|
$ |
0 |
|
|
$ |
11,800 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Assisted living facilities |
|
|
4,600 |
|
|
|
|
|
|
|
4,600 |
|
|
|
9,875 |
|
|
|
|
|
|
|
9,875 |
|
Skilled nursing facilities |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
103,300 |
|
|
|
|
|
|
|
103,300 |
|
Specialty care facilities |
|
|
35,200 |
|
|
|
|
|
|
|
35,200 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Medical office buildings |
|
|
|
|
|
|
41,628 |
|
|
|
41,628 |
|
|
|
|
|
|
|
7,999 |
|
|
|
7,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
51,600 |
|
|
|
41,628 |
|
|
|
93,228 |
|
|
|
113,175 |
|
|
|
7,999 |
|
|
|
121,174 |
|
Less: Assumed debt |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
Assumed
other assets (liabilities), net |
|
|
|
|
|
|
(887 |
) |
|
|
(887 |
) |
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for acquisitions |
|
|
51,600 |
|
|
|
40,741 |
|
|
|
92,341 |
|
|
|
113,175 |
|
|
|
7,999 |
|
|
|
121,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress additions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs |
|
|
48,895 |
|
|
|
|
|
|
|
48,895 |
|
|
|
16,724 |
|
|
|
|
|
|
|
16,724 |
|
Assisted living facilities |
|
|
16,190 |
|
|
|
|
|
|
|
16,190 |
|
|
|
13,889 |
|
|
|
|
|
|
|
13,889 |
|
Skilled nursing facilities |
|
|
3,682 |
|
|
|
|
|
|
|
3,682 |
|
|
|
3,354 |
|
|
|
|
|
|
|
3,354 |
|
Specialty care facilities |
|
|
4,587 |
|
|
|
|
|
|
|
4,587 |
|
|
|
4,515 |
|
|
|
|
|
|
|
4,515 |
|
Medical office buildings |
|
|
|
|
|
|
3,954 |
|
|
|
3,954 |
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction in progress additions |
|
|
73,354 |
|
|
|
3,954 |
|
|
|
77,308 |
|
|
|
38,482 |
|
|
|
0 |
|
|
|
38,482 |
|
Less: Capitalized interest |
|
|
(5,025 |
) |
|
|
(142 |
) |
|
|
(5,167 |
) |
|
|
(2,320 |
) |
|
|
|
|
|
|
(2,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for construction in progress |
|
|
68,329 |
|
|
|
3,812 |
|
|
|
72,141 |
|
|
|
36,162 |
|
|
|
0 |
|
|
|
36,162 |
|
|
Capital improvements to existing properties |
|
|
2,998 |
|
|
|
934 |
|
|
|
3,932 |
|
|
|
3,574 |
|
|
|
765 |
|
|
|
4,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real property |
|
$ |
122,927 |
|
|
$ |
45,487 |
|
|
$ |
168,414 |
|
|
$ |
152,911 |
|
|
$ |
8,764 |
|
|
$ |
161,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2008, one independent living/CCRC facility with a book
basis of $19,889,000 and investment property expansions totaling $1,546,000 were placed into
service and began earning rent. During the three months ended March 31, 2007, one assisted living
facility with a book basis of $6,523,000 and investment property expansions totaling $398,000 were
placed into service and began earning rent.
8
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
4. Real Estate Intangibles
The following is a summary of our real estate intangibles as of the dates indicated (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Assets: |
|
|
|
|
|
|
|
|
In place lease intangibles |
|
$ |
82,586 |
|
|
$ |
81,068 |
|
Above market tenant leases |
|
|
9,778 |
|
|
|
9,592 |
|
Below market ground leases |
|
|
42,024 |
|
|
|
40,652 |
|
|
|
|
|
|
|
|
Gross historical cost |
|
|
134,388 |
|
|
|
131,312 |
|
Accumulated amortization |
|
|
(22,941 |
) |
|
|
(18,289 |
) |
|
|
|
|
|
|
|
Net book value |
|
$ |
111,447 |
|
|
$ |
113,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years |
|
|
24.7 |
|
|
|
28.4 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Below market tenant leases |
|
$ |
25,654 |
|
|
$ |
25,186 |
|
Above market ground leases |
|
|
3,499 |
|
|
|
3,499 |
|
|
|
|
|
|
|
|
Gross historical cost |
|
|
29,153 |
|
|
|
28,685 |
|
Accumulated amortization |
|
|
(5,681 |
) |
|
|
(4,446 |
) |
|
|
|
|
|
|
|
Net book value |
|
$ |
23,472 |
|
|
$ |
24,239 |
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years |
|
|
9.7 |
|
|
|
10.0 |
|
5. Dispositions, Assets Held for Sale and Discontinued Operations
At March 31, 2008, we had one skilled nursing facility held for sale. We did not recognize an
impairment loss on this asset as the fair value less estimated costs to sell exceeded our carrying
value. During the three months ended March 31, 2008, we sold one parcel of land with a carrying
value of $73,000 for a net gain of $26,000. 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
property held for sale at March 31, 2008 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 |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
122 |
|
|
$ |
2,672 |
|
Expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
16 |
|
|
|
669 |
|
Provision for depreciation |
|
|
19 |
|
|
|
1,178 |
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations,
net |
|
$ |
87 |
|
|
$ |
825 |
|
|
|
|
|
|
|
|
9
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
6. Real Estate Loans Receivable
All
real estate loans receivable are in our investment property segment. The following is a
summary of our real estate loan activity for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
Amount |
|
|
Amount |
|
Advances on real estate loans receivable: |
|
|
|
|
|
|
|
|
Investments in new loans |
|
$ |
391 |
|
|
$ |
69,546 |
|
Draws on existing loans |
|
|
7,360 |
|
|
|
10,881 |
|
|
|
|
|
|
|
|
Total
investments in real estate loans |
|
|
7,751 |
|
|
|
80,427 |
|
|
|
|
|
|
|
|
|
|
Receipts on real estate loans receivable: |
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
0 |
|
|
|
14,182 |
|
Principal payments on loans |
|
|
2,081 |
|
|
|
3,747 |
|
|
|
|
|
|
|
|
Total principal receipts on real estate loans |
|
|
2,081 |
|
|
|
17,929 |
|
|
|
|
|
|
|
|
|
Net cash advances (receipts) on real estate loans receivable |
|
$ |
5,670 |
|
|
$ |
62,498 |
|
|
|
|
|
|
|
|
7. Customer Concentration
At March 31, 2008, we had 67 investment property operators and over 800 medical office
building tenants. The following table summarizes certain information about our customer
concentration as of March 31, 2008 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Total |
|
|
Percent of |
|
|
|
Properties |
|
|
Investment |
|
|
Investment (2) |
|
Concentration by investment (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Emeritus Corporation |
|
|
50 |
|
|
$ |
353,593 |
|
|
|
7 |
% |
Signature Healthcare LLC |
|
|
34 |
|
|
|
323,953 |
|
|
|
6 |
% |
Life Care
Centers of America, Inc. |
|
|
25 |
|
|
|
257,902 |
|
|
|
5 |
% |
Brookdale
Senior Living, Inc. |
|
|
84 |
|
|
|
256,901 |
|
|
|
5 |
% |
Senior
Living Communities, LLC |
|
|
8 |
|
|
|
205,768 |
|
|
|
4 |
% |
Remaining portfolio |
|
|
445 |
|
|
|
3,762,645 |
|
|
|
73 |
% |
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
646 |
|
|
$ |
5,160,762 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Total |
|
|
Percent of |
|
|
|
Properties |
|
|
Revenue (3) |
|
|
Revenue (4) |
|
Concentration by revenue (1): |
|
|
|
|
|
|
|
|
|
|
|
|
Emeritus Corporation |
|
|
50 |
|
|
$ |
11,890 |
|
|
|
9 |
% |
Signature Healthcare LLC |
|
|
34 |
|
|
|
9,817 |
|
|
|
7 |
% |
Brookdale
Senior Living, Inc. |
|
|
84 |
|
|
|
9,126 |
|
|
|
7 |
% |
Life Care
Centers of America, Inc. |
|
|
25 |
|
|
|
6,468 |
|
|
|
5 |
% |
Lyric Health Care, LLC |
|
|
27 |
|
|
|
4,519 |
|
|
|
3 |
% |
Remaining portfolio |
|
|
426 |
|
|
|
92,438 |
|
|
|
68 |
% |
Other income |
|
|
n/a |
|
|
|
1,716 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
646 |
|
|
$ |
135,974 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All of our top five customers are in our investment properties segment. |
|
(2) |
|
Investments with our top five customers comprised 27% of total investments at December 31,
2007. |
|
(3) |
|
Revenues include gross revenues and revenues from discontinued operations for the three
months ended March 31, 2008. |
|
(4) |
|
Revenues from our top five customers were 37% for the three months ended March 31, 2007. |
10
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
8. Borrowings Under Line of Credit Arrangement and Related Items
At March 31, 2008, we had an unsecured line of credit arrangement with a consortium of
seventeen banks in the amount of $1,150,000,000, which is
scheduled to expire on August 5, 2011 (with the ability to extend for one year at our discretion if
we are in compliance with all covenants). 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 (3.30% at March 31, 2008). The
applicable margin is based on our ratings with Moodys Investors Service and Standard & Poors
Ratings Services and was 0.6% at March 31, 2008. In addition, we pay a facility fee annually to
each bank based on the banks commitment amount. The facility fee
depends on our ratings with Moodys Investors Service and Standard & Poors Ratings Services and
was 0.15% at March 31, 2008. We also pay an annual agents fee of $50,000. Principal is due upon
expiration of the agreement.
The following information relates to aggregate borrowings under the unsecured line of credit
arrangement for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
Balance outstanding at quarter end |
|
$ |
432,500 |
|
|
$ |
381,000 |
|
Maximum amount outstanding at any month end |
|
$ |
491,500 |
|
|
$ |
381,000 |
|
Average amount outstanding (total of daily
principal balances divided by days in period) |
|
$ |
406,687 |
|
|
$ |
243,650 |
|
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding) |
|
|
4.75 |
% |
|
|
6.63 |
% |
9. Senior Unsecured Notes and Secured Debt
We have $1,847,709,000 of senior unsecured notes with annual interest rates ranging from 4.75%
to 8.00%. The carrying amounts of the senior unsecured notes represent the par value of
$1,845,000,000 adjusted for any unamortized premiums or discounts and other basis adjustments
related to hedging the debt with derivative instruments. See Note 10 for further discussion
regarding derivative instruments. On March 15, 2008, we extinguished $42,330,000 of our 7.625%
senior unsecured notes at par upon maturity.
We have secured debt totaling $478,228,000, collateralized by owned properties, with annual
interest rates ranging from 4.89% to 8.08%. The carrying amounts of the secured debt represent the
par value of $479,197,000 adjusted for any unamortized fair value adjustments. The carrying values
of the properties securing the debt totaled $887,889,000 at March 31, 2008. During the
three months ended March 31, 2008, we extinguished four secured debt loans totaling $25,683,000
with a weighted-average interest rate of 7.214% prior to maturity and recognized extinguishment
gains of $1,326,000.
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.
At
March 31, 2008, the annual principal payments due on these debt obligations are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior |
|
|
Secured |
|
|
|
|
|
|
Unsecured Notes |
|
|
Debt |
|
|
Totals |
|
2008 |
|
$ |
0 |
|
|
$ |
20,684 |
|
|
$ |
20,684 |
|
2009 |
|
|
0 |
|
|
|
39,741 |
|
|
|
39,741 |
|
2010 |
|
|
0 |
|
|
|
15,403 |
|
|
|
15,403 |
|
2011 |
|
|
0 |
|
|
|
52,575 |
|
|
|
52,575 |
|
2012 |
|
|
250,000 |
|
|
|
21,788 |
|
|
|
271,788 |
|
Thereafter |
|
|
1,595,000 |
|
|
|
329,006 |
|
|
|
1,924,006 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,845,000 |
|
|
$ |
479,197 |
|
|
$ |
2,324,197 |
|
|
|
|
|
|
|
|
|
|
|
11
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
10. 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. Derivatives
are recorded at fair market value on the balance sheet as assets or liabilities.
On May 6, 2004, we entered into two interest rate swap agreements (the 2004 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
2004 Swaps were treated as fair-value hedges for accounting purposes and we utilized the short-cut
method to assess effectiveness. The 2004 Swaps were with highly rated counterparties in which we
received a fixed rate of 6.0% and paid a variable rate based on six-month LIBOR plus a spread. For
the three months ended March 31, 2007, we generated $1,000 of
savings related to the 2004 Swaps that was recorded as
a reduction of interest expense. On September 12, 2007, we terminated the 2004 Swaps and we
received a $2,125,000 cash settlement. The unamortized amount of this settlement at March 31, 2008
was $1,888,000 and is recorded as an adjustment to the hedged debt. This amount will be amortized
to interest expense over the life of the hedged debt using the effective interest method. For the
three months ended March 31, 2008, $85,000 of amortization was recognized as a reduction
to senior unsecured notes interest expense.
On July 2, 2007, we entered into two forward-starting interest rate swaps (the July 2007
Swaps), with an aggregate notional amount of $200,000,000 that were designated as cash flow hedges
of the variability in forecasted interest payments attributable to changes in the LIBOR swap rate,
on long-term fixed rate debt forecasted to be issued in 2007. The July 2007 Swaps had the economic
effect of fixing $200,000,000 of our debt at 4.913% for five years. The July 2007 Swaps were
settled on July 17, 2007, which was the date that the forecasted debt was priced. The cash
settlement value of these contracts at July 17, 2007 was $733,000. This amount represented the
effective portion of the hedges as there was no hedge ineffectiveness. Therefore, the $733,000
settlement value was deferred in accumulated other comprehensive income (AOCI) and will be
amortized to interest expense using the effective interest method. The unamortized amount of AOCI
related to these contracts at March 31, 2008 is $631,000. For the three months ended March 31,
2008, we reclassified $37,000 out of AOCI as a reduction of interest expense.
On September 12, 2007, we entered into two forward-starting interest rate swaps (the
September 2007 Swaps) for a total notional amount of $250,000,000 to hedge 10 years of interest
payments associated with a long-term borrowing that is expected to occur in 2008. The September
2007 Swaps each have an effective date of September 12, 2008 and a maturity date of September 12,
2018. We expect to settle the September 2007 Swaps when the forecasted debt is priced. The
September 2007 Swaps have the economic effect of fixing $250,000,000 of our future debt at 4.469%
plus a credit spread for 10 years. The September 2007 Swaps have been designated as cash flow
hedges and we expect the September 2007 Swaps to be highly effective at offsetting changes in cash
flows of interest payments on $250,000,000 of our future debt due to changes in the LIBOR swap
rate. Therefore, effective changes in the fair value of the September 2007 Swaps will be recorded
in AOCI and reclassified to interest expense when the hedged forecasted transactions affect
earnings (as interest payments are made on the expected debt issuance). The ineffective portion of
the changes in fair value will be recorded directly in earnings. At March 31, 2008, the September
2007 Swaps were reported at their fair value of negative $18,802,000 and are included in other
liabilities and AOCI.
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.
11. Commitments and Contingencies
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 to provide the
letter of credit terminates in 2009. At March 31, 2008, our obligation under the letter of credit
was $2,350,000.
We have an outstanding letter of credit issued for the benefit of certain insurance companies
that provide liability and property insurance to one of our tenants. Our obligation to provide the
letter of credit terminates in 2013. At March 31, 2008, our obligation under the letter of credit
was $1,000,000.
12
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
We have an outstanding letter of credit issued for the benefit of a village in Illinois that
secures the completion and installation of certain public improvements by one of our tenants in
connection with the development of a property. Our obligation to provide the letter of credit
terminates in 2010. At March 31, 2008, our obligation under the letter of credit was $679,320.
We have an outstanding letter of credit issued for the benefit of a municipality in
Pennsylvania in connection with the completion and installation of
certain property improvements by
one of our subsidiaries. The improvements are expected to be completed in 2009. At March 31,
2008, our obligation under the letter of credit was $485,810.
At March 31, 2008, we had outstanding construction financings of $369,582,000 for leased
properties and were committed to providing additional financing of approximately $757,625,000 to
complete construction. At March 31, 2008, we had contingent purchase obligations totaling
$24,524,000. These contingent purchase obligations primarily relate to deferred acquisition
fundings and capital improvements. Deferred acquisition fundings are contingent upon an operator
satisfying certain conditions such as payment coverage and value tests. Amounts due from the
tenant are increased to reflect the additional investment in the property.
At March 31, 2008, we had operating lease obligations of $54,604,000 relating to certain
ground leases and Company office space. We incurred rental expense relating to our Company office
space of $277,000 and $98,000 for the three months ended March 31, 2008 and 2007, respectively.
Regarding the ground leases, we have sublease agreements with certain of our operators that
require the operators to reimburse us for our monthly operating lease obligations. At March 31,
2008, aggregate future minimum rentals to be received under these noncancelable subleases totaled
$12,492,000.
At March 31, 2008, future minimum lease payments due under operating leases are as follows (in
thousands):
|
|
|
|
|
2008 |
|
$ |
2,588 |
|
2009 |
|
|
3,117 |
|
2010 |
|
|
2,952 |
|
2011 |
|
|
2,767 |
|
2012 |
|
|
2,829 |
|
Thereafter |
|
|
40,351 |
|
|
|
|
|
Totals |
|
$ |
54,604 |
|
|
|
|
|
12. Stockholders Equity
Preferred Stock
During the three months ended March 31, 2008, certain holders of our Series G Cumulative
Convertible Preferred Stock converted 79,300 shares into 56,754 shares of our common stock, leaving
1,724,900 of such shares outstanding at March 31, 2008.
Common Stock
The following is a summary of our common stock issuances during the three months ended March
31, 2008 and 2007 (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued |
|
|
Average Price |
|
|
Gross Proceeds |
|
|
Net Proceeds |
|
2007
Dividend reinvestment plan issuances |
|
|
338,685 |
|
|
$ |
44.78 |
|
|
$ |
15,166 |
|
|
$ |
15,166 |
|
2007 Option
exercises |
|
|
331,947 |
|
|
|
28.02 |
|
|
|
9,301 |
|
|
|
9,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Totals |
|
|
670,632 |
|
|
|
|
|
|
$ |
24,467 |
|
|
$ |
24,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2008 public issuance |
|
|
3,000,000 |
|
|
$ |
41.44 |
|
|
$ |
124,320 |
|
|
$ |
118,555 |
|
2008 Dividend reinvestment plan issuances |
|
|
452,440 |
|
|
|
40.88 |
|
|
|
18,496 |
|
|
|
18,496 |
|
2008 Option
exercises |
|
|
48,722 |
|
|
|
24.69 |
|
|
|
1,203 |
|
|
|
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Totals |
|
|
3,501,162 |
|
|
|
|
|
|
$ |
144,019 |
|
|
$ |
138,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
February 20, 2008, we paid a dividend of $0.66 per share to stockholders of record on
January 31, 2008. These dividends related to the period from
October 1, 2007 through December 31, 2007.
13
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
Accumulated Other Comprehensive Income
The following is a summary of accumulated other comprehensive income as of the dates indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Fair value of cash flow hedges |
|
$ |
18,046 |
|
|
$ |
7,194 |
|
Unrecognized
gains (losses) on equity
investments |
|
|
433 |
|
|
|
192 |
|
Unrecognized actuarial
gains (losses) |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
|
|
|
|
|
Totals |
|
$ |
18,474 |
|
|
$ |
7,381 |
|
|
|
|
|
|
|
|
Please see Note 10 for a discussion of our cash flow hedge activity. We did not recognize any
comprehensive income other than the recorded net income for the three months ended March 31, 2007.
Other Equity
Other equity consists of accumulated option compensation expense which 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 $697,000 and $541,000 for the three months ended
March 31, 2008 and 2007, respectively.
13. 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, deferred stock units and restricted shares generally range from three
years for non-employee directors to five years for officers and key employees. Options expire ten
years from the date of grant.
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2008 |
|
March 31, 2007 |
Dividend yield (1) |
|
|
6.47 |
% |
|
|
5.60 |
% |
Expected volatility |
|
|
20.5 |
% |
|
|
19.9 |
% |
Risk-free interest rate |
|
|
3.42 |
% |
|
|
4.74 |
% |
Expected life (in years) |
|
|
6.5 |
|
|
|
5 |
|
Weighted-average fair value (1) |
|
$ |
6.25 |
|
|
$ |
8.31 |
|
|
|
|
(1) |
|
Certain options granted to employees include dividend equivalent rights (DERs). The fair
value of options with DERs also includes the net present value of projected future dividend
payments over the expected life of the option discounted at the dividend yield rate. |
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 7-year U.S. Treasury Notes yield on the date of
grant for the 2008 grants and
the 5-year U.S. Treasury Notes yield on the date of grant for the
2007 grants. 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.
14
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 three months
ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
637 |
|
|
$ |
35.54 |
|
|
|
8.0 |
|
|
|
|
|
Options granted |
|
|
307 |
|
|
|
40.83 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(49 |
) |
|
|
28.24 |
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
(2 |
) |
|
|
40.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at end of period |
|
|
893 |
|
|
$ |
37.75 |
|
|
|
8.1 |
|
|
$ |
5,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
353 |
|
|
$ |
33.42 |
|
|
|
6.5 |
|
|
$ |
3,705 |
|
Weighted average fair value of
options granted during the period |
|
|
|
|
|
$ |
6.25 |
|
|
|
|
|
|
|
|
|
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 March 31, 2008. During the three months ended March 31, 2008, the aggregate
intrinsic value of options exercised under our stock incentive plans was $838,000 determined as of
the date of option exercise. During the three months ended March 31, 2007, the aggregate intrinsic
value of options exercised under our stock incentive plans was $5,341,000 determined as of the date
of option exercise. Cash received from option exercises under our stock incentive plans for the
three months ended March 31, 2008 was $1,203,000. Cash received from option exercises under our
stock incentive plans for the three months ended March 31, 2007
was $9,301,000.
As
of March 31, 2008, there was approximately $2,778,000 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 four years. As of March 31, 2008, there
was approximately $12,295,000 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 March
31, 2008 and changes for the three months ended March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2007 |
|
|
382 |
|
|
$ |
7.20 |
|
|
|
398 |
|
|
$ |
40.94 |
|
Vested |
|
|
(147 |
) |
|
|
6.02 |
|
|
|
(96 |
) |
|
|
36.37 |
|
Granted |
|
|
307 |
|
|
|
6.25 |
|
|
|
155 |
|
|
|
40.82 |
|
Terminated |
|
|
(2 |
) |
|
|
7.30 |
|
|
|
(1 |
) |
|
|
40.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2008 |
|
|
540 |
|
|
$ |
6.98 |
|
|
|
456 |
|
|
$ |
41.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
14. 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 |
|
|
|
March 31, |
|
|
|
2008 |
|
|
2007 |
|
Numerator
for basic and diluted earnings per share net income available to
common stockholders |
|
$ |
30,452 |
|
|
$ |
23,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per share weighted average shares |
|
|
86,100 |
|
|
|
73,224 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
54 |
|
|
|
178 |
|
Non-vested restricted shares |
|
|
456 |
|
|
|
389 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
510 |
|
|
|
567 |
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per share adjusted weighted average shares |
|
|
86,610 |
|
|
|
73,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
The diluted earnings per share calculation excludes the dilutive effect of 123,000 stock
options for the three months ended March 31, 2008 because the exercise prices were greater than the
average market price. The diluted earnings per share calculation excludes the dilutive effect of
124,000 stock options for the three months ended March 31, 2007 because the exercise prices were
greater than the average market price. The Series E Cumulative Convertible and Redeemable
Preferred Stock, the Series G Cumulative Convertible Preferred Stock, the $345,000,000 senior
unsecured convertible notes due December 2026 and the $400,000,000 senior unsecured convertible
notes due July 2027 were not included in these calculations as the effect of the conversions into
common stock was anti-dilutive for the relevant periods presented.
15. Segment Reporting
We
invest in senior housing and health care real estate. We evaluate
our business and make resource allocations on our two business segments investment properties and
medical office buildings. Under the investment property segment, we invest in senior housing and
health care real estate through acquisition and financing of primarily single tenant properties.
Properties acquired are primarily leased under triple-net leases and we are not involved in the
management of the property. Our primary investment property types include skilled nursing
facilities, assisted living facilities, independent living/continuing care retirement communities
and specialty care facilities. Under the medical office building segment, our properties are
typically leased under gross leases, modified gross leases or triple-net leases, to multiple
tenants, and generally require a certain level of property management. The accounting policies of
the segments are the same as those described in the summary of significant accounting policies (see
Note 1 to our Annual Report on Form 10-K for the year ended December 31, 2007). There are no
intersegment sales or transfers. We evaluate performance based upon net operating income of the
combined properties in each segment.
Non-segment revenue consists mainly of interest income on non-real estate investments and
other income. Non-segment assets consist of corporate assets
including cash, deferred loan expenses and corporate office equipment among others. Non-property specific revenues and expenses are not
allocated to individual segments in determining net operating income.
During the three months ended March 31, 2008, we changed the name of the operating properties
segment to medical office buildings and reclassified certain assets and related revenues. Four
specialty care facilities that were formerly classified as operating properties have been
reclassified to investment properties. Accordingly, we have reclassified the following prior year
amounts to be consistent with the current year classification: (i) rental income of $1,885,000;
(ii) real estate depreciation/amortization of $779,000; and (iii) total assets of $73,400,000.
Additionally, we have restated the following prior year non-segment/corporate assets and revenues
to be included in the related business segments to be consistent with the current year
classification: (i) $1,343,000 of other income has been reclassified to investment properties; (ii)
$75,184,000 of total assets have been reclassified to investment properties; and (iii) $16,395,000
of total assets have been reclassified to medical office buildings.
16
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS Continued
Summary information for the reportable segments during the three months ended March 31, 2008
and 2007 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
|
Net |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Rental |
|
|
Interest |
|
|
Other |
|
|
Total |
|
|
Operating |
|
|
Operating |
|
|
Depreciation/ |
|
|
Interest |
|
|
Total |
|
|
|
Income (1) |
|
|
Income |
|
|
Income |
|
|
Revenues (1) |
|
|
Expenses |
|
|
Income (2) |
|
|
Amortization (1) |
|
|
Expense (1) |
|
|
Assets |
|
Three months ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Properties |
|
$ |
91,933 |
|
|
$ |
9,092 |
|
|
$ |
1,296 |
|
|
$ |
102,321 |
|
|
|
|
|
|
$ |
102,321 |
|
|
$ |
26,410 |
|
|
$ |
1,973 |
|
|
$ |
3,993,615 |
|
Medical Office Buildings |
|
|
33,233 |
|
|
|
|
|
|
|
210 |
|
|
|
33,443 |
|
|
$ |
11,367 |
|
|
|
22,076 |
|
|
|
13,164 |
|
|
|
5,565 |
|
|
|
1,309,109 |
|
Non-segment/Corporate |
|
|
|
|
|
|
|
|
|
|
210 |
|
|
|
210 |
|
|
|
|
|
|
|
210 |
|
|
|
|
|
|
|
26,807 |
|
|
|
84,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
125,166 |
|
|
$ |
9,092 |
|
|
$ |
1,716 |
|
|
$ |
135,974 |
|
|
$ |
11,367 |
|
|
$ |
124,607 |
|
|
$ |
39,574 |
|
|
$ |
34,345 |
|
|
$ |
5,387,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Properties |
|
$ |
82,488 |
|
|
$ |
5,149 |
|
|
$ |
1,343 |
|
|
$ |
88,980 |
|
|
|
|
|
|
$ |
88,980 |
|
|
$ |
25,158 |
|
|
$ |
2,310 |
|
|
$ |
3,479,969 |
|
Medical Office Buildings |
|
|
23,680 |
|
|
|
|
|
|
|
|
|
|
|
23,680 |
|
|
$ |
7,168 |
|
|
|
16,512 |
|
|
|
8,702 |
|
|
|
4,305 |
|
|
|
915,994 |
|
Non-segment/Corporate |
|
|
|
|
|
|
|
|
|
|
249 |
|
|
|
249 |
|
|
|
|
|
|
|
249 |
|
|
|
|
|
|
|
25,384 |
|
|
|
62,691 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
106,168 |
|
|
$ |
5,149 |
|
|
$ |
1,592 |
|
|
$ |
112,909 |
|
|
$ |
7,168 |
|
|
$ |
105,741 |
|
|
$ |
33,860 |
|
|
$ |
31,999 |
|
|
$ |
4,458,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes amounts from discontinued operations. |
|
(2) |
|
Net operating income (NOI) is used to evaluate the operating performance of our properties.
We define NOI as total revenues, including tenant reimbursements, less property level
operating expenses, which exclude depreciation and amortization, general and administrative
expenses, impairments and interest expense. We believe NOI provides
investors relevant and useful information because it measures the operating performance of our
properties at the property level on an unleveraged basis. We use NOI to make decisions about
resource allocations and to assess the property level performance of our properties. |
16. Income Taxes
During the three months ended December 31, 2007, we recognized $3,900,000 of additional other
income related to the payoff of a warrant equity investment. During
the three months ended March 31, 2008, we determined that $1,325,000 of income taxes were due in
connection with that investment gain.
17
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the consolidated financial
statements of Health Care REIT, Inc. for the periods presented and should be read together with the
notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are
identified in our Annual Report on Form 10-K for the year ended December 31, 2007, including
factors identified under the headings Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Executive Summary
Company Overview
Health
Care REIT, Inc. is an equity real estate investment trust
(REIT) that invests in senior housing and health care real estate. Founded in 1970, we were the first REIT to
invest exclusively in health care facilities. The following table summarizes our portfolio as of
March 31, 2008:
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Investments |
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Percentage of |
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Number of |
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# Beds/Units |
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Investment per |
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Type of Property |
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(in thousands) |
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Investments |
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Properties |
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or Sq. Ft. |
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metric (1) |
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States |
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Independent living/CCRCs |
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$ |
837,050 |
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16 |
% |
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63 |
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7,681 |
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units |
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$ |
154,888 |
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per unit |
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22 |
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Assisted living facilities |
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1,058,998 |
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21 |
% |
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208 |
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12,880 |
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units |
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97,791 |
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per unit |
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33 |
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Skilled nursing facilities |
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1,588,520 |
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31 |
% |
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227 |
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30,656 |
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beds |
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52,502 |
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per bed |
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28 |
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Specialty care facilities |
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395,549 |
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7 |
% |
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23 |
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1,581 |
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beds |
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262,310 |
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per bed |
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10 |
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Medical office buildings |
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1,280,645 |
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25 |
% |
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|
125 |
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5,317,024 |
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sq. ft. |
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272 |
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per sq. ft. |
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20 |
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Totals |
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$ |
5,160,762 |
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100 |
% |
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646 |
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(1) |
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Investment per metric was computed by using the total
committed investment amount of $5,918,387,000,
which includes net real estate investments and unfunded construction commitments for which initial
funding has commenced which amounted to $5,160,762,000 and $757,625,000, respectively. |
Health
Care Industry
The
demand for health care services, and consequently health care properties, is projected to
reach unprecedented levels in the near future. The Centers for Medicare and Medicaid Services
projects that national health expenditures will rise to $3.8 trillion in 2015 or 18.8% of gross
domestic product (GDP). This is up from $2 trillion or 15.9% of GDP in 2005. Health
expenditures per capita are projected to rise 5.8% per year from 2005 to 2015. While demographics
are the primary driver of demand, economic conditions and availability of services contribute to
health care service utilization rates. We believe the health care property market is less susceptible to fluctuations and economic downturns relative to
other property sectors. Investor interest in the market remains strong, especially in specific
sectors such as medical office buildings, regardless of the current stringent lending environment.
As a REIT, we believe we are situated to benefit from any turbulence in the capital markets due to
our access to capital.
The total U.S.
population is projected to increase by 20% through 2030. The elderly are an important component of
health care utilization, especially independent living services, assisted living services, skilled
nursing services, inpatient and outpatient hospital services and physician ambulatory care. The
elderly population aged 65 and over is projected to increase by 85% through 2030. Most health care
services are provided within a health care facility such as a hospital, a physicians office or a
senior housing facility. Therefore, we believe there will be continued demand for companies such
as ours with expertise in health care real estate.
18
The following chart illustrates the projected increase in the elderly population aged 65 and
over:
65+
Population and % of Total
Source: U.S. Census Bureau
Health care real estate investment opportunities tend to increase as demand for health care
services increases. We recognize the need for health care real estate as it correlates to
health care service demand. Health care providers require real estate to house their businesses and
expand their services. We believe that investment opportunities in health care real estate will
continue to be present due to the:
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Specialized nature of the industry which enhances the credibility and experience of our
company; |
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Projected population growth combined with stable or increasing health care utilization
rates which ensures demand; and |
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On-going merger and acquisition activity. |
Business Strategy
Our primary objectives are to protect stockholder 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 across a broad spectrum of senior housing and
health care real estate and diversify our investment portfolio by property type, operator/tenant
and geographic location.
Substantially all of our revenues and sources of cash flows from operations are derived from
operating lease rentals and interest earned on outstanding loans receivable. These items represent
our primary source of liquidity to fund distributions and are dependent upon our obligors
continued ability to make contractual rent and interest payments to us. To the extent that our
obligors 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 property and operator/tenant. Our asset management
process includes review of monthly financial statements, periodic review of
obligor credit, periodic property 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
property-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 to
address payment risk, and in so doing, support both the collectibility of revenue and the value of
our investment.
With
respect to our investment properties, we also structure our investments to
help mitigate payment risk. 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 obligor and its affiliates.
For the three months ended March 31, 2008, rental income and interest income represented 92%
and 7%, respectively, of total gross revenues (including revenues from discontinued operations).
Substantially all of our operating leases are designed with either fixed or contingent escalating
rent structures. Leases with fixed annual rental escalators are generally recognized on a
straight-line basis over the initial lease period, subject to a collectibility assessment. Rental
income related to leases with contingent rental escalators is generally 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.
19
Depending upon the availability and cost of external capital, we anticipate investing in
additional properties. New investments are generally funded from temporary borrowings under our
unsecured line of credit arrangement, 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 line of credit arrangement, is expected to be provided through a
combination of public and private offerings of debt and equity securities and the incurrence or
assumption 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 three months ended March 31, 2008, we completed $181,285,000 of gross and
net new investments. We expect to complete gross new investments of
approximately $1.1 billion to $1.4 billion
during 2008, including acquisitions of approximately $700,000,000 to $900,000,000 and funded new
development of approximately $400,000,000 to $500,000,000. We anticipate the sale of real property
and the repayment of loans receivable totaling approximately $300,000,000 to $400,000,000 resulting
in net new investments of approximately $700,000,000 to $1.1 billion during 2008. 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 line of
credit arrangement. At March 31, 2008, we had $32,282,000 of cash and cash equivalents and
$717,500,000 of available borrowing capacity under our unsecured line of credit arrangement.
Key Transactions in 2008
We have completed the following key transactions to date in 2008:
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our Board of Directors increased our quarterly dividend to $0.68 per share, which
represents a two cent increase from the quarterly dividend of $0.66 paid for 2007. The
dividend declared for the quarter ended March 31, 2008 represents the 148th
consecutive quarterly dividend payment; |
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we completed $181,285,000 of gross and net investments during the three months ended
March 31, 2008; and |
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we completed a public offering of 3,000,000 shares of common stock with net proceeds of
approximately $118,555,000 in March 2008. |
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), funds available for distribution (FAD) and net
operating income (NOI); 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 and reconciliations of FFO, FAD and NOI. These earnings
measures and their relative per share amounts are widely used by 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):
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Three Months Ended |
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March 31, |
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June 30, |
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September 30, |
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December 31, |
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March 31, |
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2007 |
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2007 |
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2007 |
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2007 |
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2008 |
Net income available to
common stockholders |
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$ |
23,356 |
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$ |
25,620 |
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$ |
24,529 |
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$ |
42,768 |
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$ |
30,452 |
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Funds from operations |
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56,207 |
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59,979 |
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63,830 |
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71,099 |
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69,913 |
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Funds available for distribution |
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53,825 |
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59,016 |
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66,379 |
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73,564 |
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68,375 |
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Net operating income |
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105,741 |
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111,360 |
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115,550 |
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123,029 |
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124,607 |
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Per share data (fully diluted): |
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Net income available to
common stockholders |
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$ |
0.32 |
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$ |
0.32 |
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$ |
0.30 |
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$ |
0.52 |
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$ |
0.35 |
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Funds from operations |
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0.76 |
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0.75 |
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0.79 |
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0.86 |
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0.81 |
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Funds available for distribution |
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0.73 |
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0.74 |
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|
0.82 |
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|
0.89 |
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0.79 |
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20
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:
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Three Months Ended |
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March 31, |
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June 30, |
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September 30, |
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December 31, |
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March 31, |
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2007 |
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2007 |
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2007 |
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2007 |
|
2008 |
Debt to book capitalization ratio |
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54 |
% |
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52 |
% |
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53 |
% |
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53 |
% |
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52 |
% |
Debt to undepreciated book capitalization ratio |
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50 |
% |
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48 |
% |
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49 |
% |
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48 |
% |
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48 |
% |
Debt to market capitalization ratio |
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40 |
% |
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41 |
% |
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40 |
% |
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39 |
% |
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39 |
% |
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Interest coverage ratio |
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2.82 |
x |
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2.83 |
x |
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2.81 |
x |
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3.17 |
x |
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2.87 |
x |
Fixed charge coverage ratio |
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2.28 |
x |
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2.30 |
x |
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2.31 |
x |
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2.62 |
x |
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2.38 |
x |
Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment mix,
customer 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, intangibles and related rights, is
owned by us and leased to a tenant pursuant to a long-term operating lease. Investment mix measures
the portion of our investments that relate to our various property types. Customer mix measures the
portion of our investments that relate to our top five customers. 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:
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March 31, |
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June 30, |
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September 30, |
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December 31, |
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March 31, |
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2007 |
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2007 |
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2007 |
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2007 |
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2008 |
Asset mix: |
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Real property |
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94 |
% |
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95 |
% |
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94 |
% |
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92 |
% |
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92 |
% |
Real estate loans receivable |
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6 |
% |
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5 |
% |
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6 |
% |
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8 |
% |
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8 |
% |
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Investment mix: |
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Independent living/CCRCs |
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13 |
% |
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13 |
% |
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14 |
% |
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15 |
% |
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16 |
% |
Assisted living facilities |
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24 |
% |
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22 |
% |
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21 |
% |
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21 |
% |
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21 |
% |
Skilled nursing facilities |
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36 |
% |
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33 |
% |
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|
32 |
% |
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32 |
% |
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|
31 |
% |
Specialty care facilities |
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6 |
% |
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6 |
% |
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7 |
% |
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7 |
% |
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7 |
% |
Medical office buildings |
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21 |
% |
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26 |
% |
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26 |
% |
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25 |
% |
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25 |
% |
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Customer mix: |
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Emeritus Corporation |
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8 |
% |
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8 |
% |
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7 |
% |
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7 |
% |
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|
7 |
% |
Signature Healthcare LLC |
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6 |
% |
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6 |
% |
Brookdale Senior Living Inc. |
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7 |
% |
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6 |
% |
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|
5 |
% |
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|
5 |
% |
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|
5 |
% |
Life Care Centers of America, Inc. |
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6 |
% |
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|
5 |
% |
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|
5 |
% |
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|
5 |
% |
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|
5 |
% |
Senior Living Communities, LLC |
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|
4 |
% |
|
|
4 |
% |
Home Quality Management, Inc. |
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|
6 |
% |
|
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5 |
% |
|
|
5 |
% |
|
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|
Merrill Gardens L.L.C. |
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|
4 |
% |
|
|
4 |
% |
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|
4 |
% |
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Remaining customers |
|
|
69 |
% |
|
|
72 |
% |
|
|
74 |
% |
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|
73 |
% |
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|
73 |
% |
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Geographic mix: |
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Florida |
|
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16 |
% |
|
|
16 |
% |
|
|
16 |
% |
|
|
15 |
% |
|
|
15 |
% |
Texas |
|
|
13 |
% |
|
|
13 |
% |
|
|
13 |
% |
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|
13 |
% |
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|
13 |
% |
Massachusetts |
|
|
8 |
% |
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|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
California |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
Tennessee |
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|
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|
|
|
|
|
6 |
% |
|
|
6 |
% |
Ohio |
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
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Remaining states |
|
|
50 |
% |
|
|
51 |
% |
|
|
51 |
% |
|
|
52 |
% |
|
|
52 |
% |
21
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, 2007, 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
Net operating income. The primary performance measure for our properties is net operating
income (NOI) as discussed below in Non-GAAP Financial Measures. The following table summarizes
our net operating income for the periods indicated (in thousands):
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Three Months Ended |
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March 31, |
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June 30, |
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September 30, |
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|
December 31, |
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|
March 31, |
|
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2007 |
|
|
2008 |
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment properties |
|
$ |
88,980 |
|
|
$ |
93,504 |
|
|
$ |
94,538 |
|
|
$ |
102,495 |
|
|
$ |
102,321 |
|
Medical office buildings |
|
|
16,512 |
|
|
|
17,524 |
|
|
|
20,450 |
|
|
|
20,150 |
|
|
|
22,076 |
|
Non-segment/corporate |
|
|
249 |
|
|
|
332 |
|
|
|
562 |
|
|
|
384 |
|
|
|
210 |
|
|
|
|
Net operating income |
|
$ |
105,741 |
|
|
$ |
111,360 |
|
|
$ |
115,550 |
|
|
$ |
123,029 |
|
|
$ |
124,607 |
|
|
|
|
Payment coverage. Payment coverage of the operators in our investment property portfolio
continues to remain strong. Our overall payment coverage is at 1.99 times, which represents an improvement of five basis points from the prior year. The table below reflects our recent historical
trends of portfolio coverage. Coverage data reflects the 12 months ended for the periods
presented. CBMF represents the ratio of our customers earnings before interest, taxes, depreciation,
amortization, rent and management fees to contractual rent or
interest due us. CAMF represents
the ratio of our customers earnings before interest, taxes, depreciation, amortization and rent (but after
imputed management fees) to contractual rent or interest due us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
December 31, 2006 |
|
December 31, 2007 |
|
|
CBMF |
|
CAMF |
|
CBMF |
|
CAMF |
|
CBMF |
|
CAMF |
Independent living/CCRCs
|
|
1.45 |
x |
1.23 |
x |
1.39 |
x |
1.19 |
x |
1.45 |
x |
1.23x |
Assisted living facilities
|
|
1.52 |
x |
1.30 |
x |
1.56 |
x |
1.35 |
x |
1.59 |
x |
1.37x |
Skilled nursing facilities
|
|
2.21 |
x |
1.63 |
x |
2.19 |
x |
1.57 |
x |
2.26 |
x |
1.66x |
Specialty care facilities
|
|
3.19 |
x |
2.60 |
x |
2.77 |
x |
2.21 |
x |
2.64 |
x |
2.07x |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages
|
|
1.94 |
x |
1.54 |
x |
1.94 |
x |
1.51 |
x |
1.99 |
x |
1.55x |
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 adopted its Corporate Governance Guidelines. These guidelines meet the listing standards adopted
by the New York Stock Exchange and are available on our website 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.
22
Liquidity and Capital Resources
Sources and Uses of Cash
Our
primary sources of cash include rent and interest receipts,
borrowings under the unsecured
line of credit arrangement, 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Cash and cash equivalents at beginning of period |
|
$ |
30,269 |
|
|
$ |
36,216 |
|
|
$ |
(5,947 |
) |
|
|
-16 |
% |
Cash provided from (used in) operating activities |
|
|
77,451 |
|
|
|
61,358 |
|
|
|
16,093 |
|
|
|
26 |
% |
Cash provided from (used in) investing activities |
|
|
(205,676 |
) |
|
|
(215,875 |
) |
|
|
10,199 |
|
|
|
-5 |
% |
Cash provided from (used in) financing activities |
|
|
130,238 |
|
|
|
149,594 |
|
|
|
(19,356 |
) |
|
|
-13 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
32,282 |
|
|
$ |
31,293 |
|
|
$ |
989 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities. The change in net cash provided from operating activities is primarily
attributable to an increase in net income, excluding depreciation and amortization, and to changes
in accrued expenses and other liabilities. The increase in net income
is discussed below in Results of Operations. The change in accrued expenses and other liabilities is primarily attributable to the timing of cash disbursements for our contractual interest obligations and accounts payable related to our medical office buildings.
The
following is a summary of our straight-line rent and above/below
market lease amortization
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Gross straight-line rental income |
|
$ |
5,336 |
|
|
$ |
4,231 |
|
|
$ |
1,105 |
|
|
|
26 |
% |
Prepaid rent receipts |
|
|
(2,975 |
) |
|
|
(2,078 |
) |
|
|
(897 |
) |
|
|
43 |
% |
Amortization related to above (below) market leases, net |
|
|
263 |
|
|
|
460 |
|
|
|
(197 |
) |
|
|
-43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,624 |
|
|
$ |
2,613 |
|
|
$ |
11 |
|
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (SFAS 13), for leases with fixed rental escalators, net of
collectibility reserves. 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. The increase in gross straight-line rental income is primarily due to an increase in the
number of leases with fixed annual increases resulting from medical office building acquisitions
completed subsequent to March 31, 2007.
23
Investing Activities. The changes in net cash used in investing activities are primarily
attributable to net changes in real property and real estate loans receivable. The following is a summary of
our investment and disposition activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
|
Properties |
|
|
Amount |
|
|
Properties |
|
|
Amount |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs |
|
|
1 |
|
|
$ |
11,800 |
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
1 |
|
|
|
4,600 |
|
|
|
2 |
|
|
$ |
9,875 |
|
Skilled nursing facilities |
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
103,300 |
|
Specialty care facilities |
|
|
1 |
|
|
|
35,200 |
|
|
|
|
|
|
|
|
|
Medical office buildings |
|
|
3 |
|
|
|
41,628 |
|
|
|
1 |
|
|
|
7,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
6 |
|
|
|
93,228 |
|
|
|
10 |
|
|
|
121,174 |
|
Less: Assumed debt |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
0 |
|
Assumed other assets (liabilities), net |
|
|
|
|
|
|
(887 |
) |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for acquisitions |
|
|
|
|
|
|
92,341 |
|
|
|
|
|
|
|
121,174 |
|
Construction in progress additions |
|
|
|
|
|
|
72,141 |
|
|
|
|
|
|
|
36,162 |
|
Capital improvements to existing properties |
|
|
|
|
|
|
3,932 |
|
|
|
|
|
|
|
4,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real property |
|
|
|
|
|
|
168,414 |
|
|
|
|
|
|
|
161,675 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
11,537 |
|
Land parcels |
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from real property sales |
|
|
0 |
|
|
|
99 |
|
|
|
2 |
|
|
|
11,537 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash investments in real property |
|
|
6 |
|
|
$ |
168,315 |
|
|
|
8 |
|
|
$ |
150,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans |
|
|
|
|
|
$ |
391 |
|
|
|
|
|
|
$ |
69,546 |
|
Draws on existing loans |
|
|
|
|
|
|
7,360 |
|
|
|
|
|
|
|
10,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in real estate loans |
|
|
|
|
|
|
7,751 |
|
|
|
|
|
|
|
80,427 |
|
Receipts on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
14,182 |
|
Principal payments on loans |
|
|
|
|
|
|
2,081 |
|
|
|
|
|
|
|
3,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal receipts on real estate loans |
|
|
|
|
|
|
2,081 |
|
|
|
|
|
|
|
17,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash advances (receipts) on real estate loans receivable |
|
|
|
|
|
$ |
5,670 |
|
|
|
|
|
|
$ |
62,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities. The changes in net cash provided from or used in financing activities
are primarily attributable to changes related to our long-term debt arrangements, proceeds from the
issuance of common stock and dividend payments.
For the three months ended March 31, 2008, we had a net increase of $125,500,000 on our
unsecured line of credit arrangement as compared to a net increase of $156,000,000 for the same
period in 2007. On March 15, 2008, we extinguished $42,330,000 of our 7.625% senior unsecured
notes at maturity. During the three months ended March 31, 2008, we extinguished four secured debt
loans totaling $25,683,000 with a weighted-average interest rate of 7.214% prior to maturity and
recognized extinguishment gains of $1,326,000.
The following is a summary of our common stock issuances (dollars in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued |
|
|
Average Price |
|
|
Gross Proceeds |
|
|
Net Proceeds |
|
2007 Dividend reinvestment plan issuances |
|
|
338,685 |
|
|
$ |
44.78 |
|
|
$ |
15,166 |
|
|
$ |
15,166 |
|
2007 Option exercises |
|
|
331,947 |
|
|
|
28.02 |
|
|
|
9,301 |
|
|
|
9,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Totals |
|
|
670,632 |
|
|
|
|
|
|
$ |
24,467 |
|
|
$ |
24,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2008 public issuance |
|
|
3,000,000 |
|
|
$ |
41.44 |
|
|
$ |
124,320 |
|
|
$ |
118,555 |
|
2008 Dividend reinvestment plan issuances |
|
|
452,440 |
|
|
|
40.88 |
|
|
|
18,496 |
|
|
|
18,496 |
|
2008 Option exercises |
|
|
48,722 |
|
|
|
24.69 |
|
|
|
1,203 |
|
|
|
1,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Totals |
|
|
3,501,162 |
|
|
|
|
|
|
$ |
144,019 |
|
|
$ |
138,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 increase in
dividends is primarily attributable to an increase in our common stock
24
outstanding and the payment
of prorated dividends of $0.2991 per common share in February 2007 due to the prorated dividend payment of $0.3409 per common share in
December 2006 in conjunction with the Windrose merger.
The following is a summary of our dividend payments (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
|
Per Share |
|
|
Amount |
|
|
Per Share |
|
|
Amount |
|
Common Stock |
|
$ |
0.6600 |
|
|
$ |
57,190 |
|
|
$ |
0.2991 |
|
|
$ |
22,285 |
|
Series D Preferred Stock |
|
|
0.4922 |
|
|
|
1,969 |
|
|
|
0.4922 |
|
|
|
1,969 |
|
Series E Preferred Stock |
|
|
0.3750 |
|
|
|
28 |
|
|
|
0.3750 |
|
|
|
28 |
|
Series F Preferred Stock |
|
|
0.4766 |
|
|
|
3,336 |
|
|
|
0.4766 |
|
|
|
3,336 |
|
Series G Preferred Stock |
|
|
0.4688 |
|
|
|
814 |
|
|
|
0.4688 |
|
|
|
984 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
63,337 |
|
|
|
|
|
|
$ |
28,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
At March 31, 2008, we had four outstanding letter of credit obligations totaling $4,515,130
and expiring between 2009 and 2013. Please see Note 11 to our unaudited consolidated financial
statements for additional information.
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 March 31, 2008, we
participated in two forward-starting interest rate swap agreements related to our long-term debt.
Please see Note 10 to our unaudited consolidated financial statements for additional information.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of
March 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
2008 |
|
|
2009-2010 |
|
|
2011-2012 |
|
|
Thereafter |
|
Unsecured line of credit arrangement |
|
$ |
432,500 |
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
432,500 |
|
|
$ |
0 |
|
Senior unsecured notes (1) |
|
|
1,845,000 |
|
|
|
0 |
|
|
|
0 |
|
|
|
250,000 |
|
|
|
1,595,000 |
|
Secured debt (1) |
|
|
479,197 |
|
|
|
20,684 |
|
|
|
55,144 |
|
|
|
74,363 |
|
|
|
329,006 |
|
Contractual interest obligations |
|
|
1,362,325 |
|
|
|
119,655 |
|
|
|
294,332 |
|
|
|
264,132 |
|
|
|
684,206 |
|
Capital lease obligations |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Operating lease obligations |
|
|
54,604 |
|
|
|
2,588 |
|
|
|
6,069 |
|
|
|
5,596 |
|
|
|
40,351 |
|
Purchase obligations |
|
|
782,149 |
|
|
|
118,110 |
|
|
|
662,261 |
|
|
|
1,778 |
|
|
|
0 |
|
Other long-term liabilities |
|
|
4,190 |
|
|
|
112 |
|
|
|
788 |
|
|
|
3,290 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
4,959,965 |
|
|
$ |
261,149 |
|
|
$ |
1,018,594 |
|
|
$ |
1,031,659 |
|
|
$ |
2,648,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or
other fair value adjustments as reflected on the balance sheet. |
At March 31, 2008, we had an unsecured line of credit arrangement with a consortium of seventeen banks
in the amount of $1.15 billion, which
is scheduled to expire on August 5, 2011. 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 (3.30% at March 31, 2008). The
applicable margin is based on our ratings with Moodys Investors Service and Standard & Poors
Ratings Services and was 0.6% at March 31, 2008. In addition, we pay a facility fee annually to
each bank based on the banks commitment amount. The facility fee
depends on our ratings with Moodys Investors Service and Standard & Poors Ratings Services and
was 0.15% at March 31, 2008. We also pay an annual agents fee of $50,000. Principal is due upon
expiration of the agreement. At March 31, 2008, we had $432,500,000 outstanding under the
unsecured line of credit arrangement and estimated total contractual interest obligations of
$48,519,000. Contractual interest obligations are estimated based on the assumption that the
balance of $432,500,000 at March 31, 2008 is constant until maturity at interest rates in effect at
March 31, 2008.
We have $1,845,000,000 of senior unsecured notes principal outstanding with fixed annual
interest rates ranging from 4.75% to 8%, payable semi-annually. Total contractual interest
obligations on senior unsecured notes totaled $1,148,124,000 at March 31, 2008. Additionally, we
have secured debt with total outstanding principal of $479,197,000, collateralized by owned
properties, with fixed
25
annual interest rates ranging from 4.89% to 8.08%, payable monthly. The
carrying values of the properties securing the debt totaled $887,889,000 at March 31,
2008. Total contractual interest obligations on secured debt totaled $165,682,000 at March 31,
2008.
At March 31, 2008, we had operating lease obligations of $54,604,000 relating primarily to
ground leases at certain of our properties and office space leases.
Purchase obligations are comprised of unfunded construction commitments and contingent
purchase obligations. At March 31, 2008, we had outstanding construction financings of
$369,582,000 for leased properties and were committed to providing additional financing of
approximately $757,625,000 to complete construction. At March 31, 2008, we had contingent purchase
obligations totaling $24,524,000. 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.
Other long-term liabilities relate to our Supplemental Executive Retirement Plan (SERP) and
certain non-compete agreements. We have a SERP, a non-qualified defined benefit pension plan,
which provides certain executive officers with supplemental deferred retirement benefits. The SERP
provides an opportunity for participants to receive retirement benefits that cannot be paid under
our tax-qualified plans because of the restrictions imposed by ERISA and the Internal Revenue Code
of 1986, as amended. Benefits are based on compensation and length of service and the SERP is
unfunded. No contributions by the Company are anticipated for the 2008 fiscal year. Benefit
payments are expected to total $3,290,000 during the next five fiscal years and no benefit payments
are expected to occur during the succeeding five fiscal years. We use a December 31 measurement
date for the SERP. The accrued liability on our balance sheet for the
SERP was $2,035,000 and $1,915,000 at March 31, 2008 and December 31, 2007, respectively.
In connection with the Windrose merger, we entered into consulting agreements with Fred S.
Klipsch and Frederick L. Farrar, which expire in December 2008 and may be terminated at any time by
the consultant. Each consultant has agreed not to compete with the Company for a period of two
years following termination or expiration of the agreement. In exchange for complying with the
covenant not to compete, Messers. Klipsch and Farrar will receive eight quarterly payments of
$75,000 and $37,500, respectively, with the first payment to be made on the date of termination or
expiration of the agreement.
Capital Structure
As of March 31, 2008, we had stockholders equity of $2,508,607,000 and a total outstanding
debt balance of $2,758,437,000, which represents a debt to total book capitalization ratio of 52%.
Our ratio of debt to market capitalization was 39% at March 31, 2008. For the three months ended
March 31, 2008, our interest coverage ratio was 2.87 to 1.00. For the three months ended March 31,
2008, our fixed charge coverage ratio was 2.38 to 1.00. Also, at March 31, 2008, we had
$32,282,000 of cash and cash equivalents and $717,500,000 of available borrowing capacity under our
unsecured line of credit arrangement.
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 March 31, 2008, 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 with Moodys Investors Service and Standard & Poors Ratings
Services. However, under our unsecured line of credit arrangement, these ratings on our senior
unsecured notes are used to determine the fees and interest charged.
As of April 30, 2008, our senior unsecured notes were rated Baa2 (stable), 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 April
30, 2008, we had an effective registration statement on file in
connection with our enhanced dividend reinvestment plan under which we may issue up to 10,760,247 shares of common stock. As of April 30, 2008,
9,028,447 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 line of
credit arrangement.
26
Results of Operations
Our primary sources of revenue include rent and interest. Our primary expenses include
interest expense, depreciation and amortization, property operating expenses and general and
administrative expenses. These revenues and expenses are reflected in our Consolidated Statements
of Income and are discussed in further detail below. The following is a summary of our results of
operations (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Change |
|
|
Mar. 31, 2008 |
|
Mar. 31, 2007 |
|
$ |
|
% |
Net income available to
common stockholders |
|
$ |
30,452 |
|
|
$ |
23,356 |
|
|
$ |
7,096 |
|
|
|
30 |
% |
Funds from operations |
|
|
69,913 |
|
|
|
56,207 |
|
|
|
13,706 |
|
|
|
24 |
% |
Funds available for distribution |
|
|
68,375 |
|
|
|
53,825 |
|
|
|
14,550 |
|
|
|
27 |
% |
EBITDA |
|
|
113,569 |
|
|
|
96,810 |
|
|
|
16,759 |
|
|
|
17 |
% |
Net operating income |
|
|
124,607 |
|
|
|
105,741 |
|
|
|
18,866 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to
common stockholders |
|
$ |
0.35 |
|
|
$ |
0.32 |
|
|
$ |
0.03 |
|
|
|
9 |
% |
Funds from operations |
|
|
0.81 |
|
|
|
0.76 |
|
|
|
0.05 |
|
|
|
7 |
% |
Funds available for distribution |
|
|
0.79 |
|
|
|
0.73 |
|
|
|
0.06 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
2.87 |
x |
|
|
2.82 |
x |
|
|
0.05 |
x |
|
|
2 |
% |
Fixed charge coverage ratio |
|
|
2.38 |
x |
|
|
2.28 |
x |
|
|
0.10 |
x |
|
|
4 |
% |
We evaluate our business and make resource allocations on our two business segments
investment properties and medical office buildings. Under the investment property segment,
properties are primarily leased under triple-net leases and we are not involved in the management
of the property. Under the medical office building segment, our properties are typically leased
under gross leases, modified gross leases or triple-net leases, to multiple tenants, and generally
require a certain level of property management. There are no intersegment sales or transfers.
Non-segment revenue consists mainly of interest income on non-real estate investments and other
income. Non-property specific revenues and expenses are not allocated to individual segments in
determining net operating income. Please see Note 15 to our unaudited consolidated financial
statements for additional information.
Investment Properties
The following is a summary of our results of operations for the investment properties segment
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
91,811 |
|
|
$ |
79,816 |
|
|
$ |
11,995 |
|
|
|
15 |
% |
Interest income |
|
|
9,092 |
|
|
|
5,149 |
|
|
|
3,943 |
|
|
|
77 |
% |
Other income |
|
|
1,296 |
|
|
|
1,343 |
|
|
|
(47 |
) |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,199 |
|
|
|
86,308 |
|
|
|
15,891 |
|
|
|
18 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
1,957 |
|
|
|
1,641 |
|
|
|
316 |
|
|
|
19 |
% |
Depreciation and amortization |
|
|
26,391 |
|
|
|
23,980 |
|
|
|
2,411 |
|
|
|
10 |
% |
Gain on extinguishment of debt |
|
|
(40 |
) |
|
|
0 |
|
|
|
(40 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,308 |
|
|
|
25,621 |
|
|
|
2,687 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes |
|
|
73,891 |
|
|
|
60,687 |
|
|
|
13,204 |
|
|
|
22 |
% |
Income tax expense |
|
|
(1,350 |
) |
|
|
0 |
|
|
|
(1,350 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
72,541 |
|
|
|
60,687 |
|
|
|
11,854 |
|
|
|
20 |
% |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on sales of properties |
|
|
26 |
|
|
|
977 |
|
|
|
(951 |
) |
|
|
-97 |
% |
Income (loss) from discontinued
operations, net |
|
|
87 |
|
|
|
825 |
|
|
|
(738 |
) |
|
|
-89 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
113 |
|
|
|
1,802 |
|
|
|
(1,689 |
) |
|
|
-94 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
72,654 |
|
|
$ |
62,489 |
|
|
$ |
10,165 |
|
|
|
16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
27
The increase in rental income is primarily attributable to the acquisitions of new investment
properties from which we receive rent. See the discussion of investing activities in Liquidity and
Capital Resources above for further information. Certain of our leases contain 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.
Interest income increased from 2007 primarily due to an increase in the balance of outstanding
loans. Other income decreased from 2007 primarily due to the receipt of $673,000 from a lease
termination fee in the prior year.
Interest expense for the three months ended March 31, 2008 represents $1,973,000 of secured
debt interest expense offset by $16,000 of discontinued operations. Interest expense for the three
months ended March 31, 2007 represents $2,310,000 of secured debt interest expense offset by
$669,000 of discontinued operations. The change in secured debt interest expense is due to the net
effect and timing of assumptions, extinguishments and principal amortizations. During the three
months ended March 31, 2008, we extinguished two investment property secured debt loans prior to
maturity and recognized extinguishment gains of $40,000. The following is a summary of our
investment property secured debt activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
114,543 |
|
|
|
7.000 |
% |
|
$ |
129,617 |
|
|
|
7.134 |
% |
Debt extinguished |
|
|
(4,750 |
) |
|
|
7.125 |
% |
|
|
|
|
|
|
|
|
Principal payments |
|
|
(700 |
) |
|
|
6.974 |
% |
|
|
(820 |
) |
|
|
7.218 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
109,093 |
|
|
|
6.994 |
% |
|
$ |
128,797 |
|
|
|
7.134 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
111,817 |
|
|
|
6.997 |
% |
|
$ |
129,208 |
|
|
|
7.134 |
% |
Depreciation and amortization 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 and amortization will change
accordingly.
At March 31, 2008, we had one skilled nursing facility held for sale. We did not recognize an
impairment loss on this asset as the fair value less estimated costs to sell exceeded our carrying
value. During the three months ended March 31, 2008, we sold one parcel of land with a carrying
value of $73,000 for a net gain of $26,000. These properties generated $87,000 of income after
deducting depreciation and interest expense from rental revenue for the three months ended March
31, 2008. All properties sold subsequent to January 1, 2005 and held for sale at March 31, 2008
generated $825,000 of income after deducting depreciation and interest expense from rental revenue
for the three months ended March 31, 2007. Please refer to Note 5 to our unaudited consolidated
financial statements for further discussion.
During the three months ended December 31, 2007, we recognized $3,900,000 of additional other
income related to the payoff of a warrant equity investment. During
the three months ended March 31, 2008, we determined that $1,325,000 of income taxes were due in
connection with that investment gain.
28
Medical Office Buildings
The following is a summary of our results of operations for the medical office buildings
segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
33,233 |
|
|
$ |
23,680 |
|
|
$ |
9,553 |
|
|
|
40 |
% |
Other income |
|
|
210 |
|
|
|
0 |
|
|
|
210 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,443 |
|
|
|
23,680 |
|
|
|
9,763 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,565 |
|
|
|
4,305 |
|
|
|
1,260 |
|
|
|
29 |
% |
Property operating expenses |
|
|
11,367 |
|
|
|
7,168 |
|
|
|
4,199 |
|
|
|
59 |
% |
Depreciation and amortization |
|
|
13,164 |
|
|
|
8,702 |
|
|
|
4,462 |
|
|
|
51 |
% |
Loan expense |
|
|
97 |
|
|
|
76 |
|
|
|
21 |
|
|
|
28 |
% |
Gain on extinguishment of debt |
|
|
(1,286 |
) |
|
|
0 |
|
|
|
(1,286 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,907 |
|
|
|
20,251 |
|
|
|
8,656 |
|
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before
income taxes and minority interests |
|
|
4,536 |
|
|
|
3,429 |
|
|
|
1,107 |
|
|
|
32 |
% |
Income tax expense |
|
|
(32 |
) |
|
|
0 |
|
|
|
(32 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before minority interests |
|
|
4,504 |
|
|
|
3,429 |
|
|
|
1,075 |
|
|
|
31 |
% |
Minority interests |
|
|
(62 |
) |
|
|
(126 |
) |
|
|
64 |
|
|
|
-51 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
4,442 |
|
|
$ |
3,303 |
|
|
$ |
1,139 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in rental income is primarily attributable to the acquisitions of medical office
buildings from which we receive rent. See the discussion of investing activities in Liquidity and
Capital Resources above for further information. Certain of our leases contain annual rental
escalators that are contingent upon changes in the Consumer Price Index. 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 the Consumer Price Index
does 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. The increase in other income is attributable to third party
management fee income.
Interest expense for the three months ended March 31, 2008 represents $5,565,000 of secured
debt interest expense. Interest expense for the three months ended March 31, 2007 represents
$3,454,000 of secured debt interest expense plus $851,000 of interest expense related to the
subsidiary trust liability. The change in secured debt interest expense is primarily due to the
net effect and timing of assumptions, extinguishments and principal amortizations. During the
three months ended March 31, 2008, we extinguished two medical office building secured debt loans
prior to maturity and recognized extinguishment gains of $1,286,000. The following is a summary of
our medical office building secured debt activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
392,430 |
|
|
|
5.854 |
% |
|
$ |
248,783 |
|
|
|
5.939 |
% |
Debt extinguished |
|
|
(20,933 |
) |
|
|
7.234 |
% |
|
|
|
|
|
|
|
|
Principal payments |
|
|
(1,393 |
) |
|
|
5.727 |
% |
|
|
(1,074 |
) |
|
|
5.964 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
370,104 |
|
|
|
5.777 |
% |
|
$ |
247,709 |
|
|
|
5.939 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
381,272 |
|
|
|
5.817 |
% |
|
$ |
248,266 |
|
|
|
5.939 |
% |
Additionally, at March 31, 2007, we had $51,000,000 of trust preferred liability principal
outstanding with a fixed annual interest rate of 7.22%. On November 6, 2007, we purchased all
$50,000,000 of the outstanding trust preferred securities at par for the purpose of unwinding this
financing arrangement and extinguishing the liability of the operating partnership to the
subsidiary trust. For further information, please refer to Note 8 included in our Annual Report on
Form 10-K for the year ended December 31, 2007.
The increase in property operating expenses is primarily attributable to the acquisition of
new medical office buildings for which we incur certain property operating expenses.
29
Depreciation and amortization 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 and amortization will change
accordingly.
Income tax expense is related to third party management fee income.
Minority interests primarily relate to certain joint venture properties acquired in connection
with the Windrose merger in December 2006.
Non-Segment/Corporate
The following is a summary of our results of operations for the non-segment/corporate
activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
$ |
210 |
|
|
$ |
249 |
|
|
$ |
(39 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210 |
|
|
|
249 |
|
|
|
(39 |
) |
|
|
-16 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
26,807 |
|
|
|
25,384 |
|
|
|
1,423 |
|
|
|
6 |
% |
General and administrative |
|
|
12,328 |
|
|
|
9,782 |
|
|
|
2,546 |
|
|
|
26 |
% |
Loan expense |
|
|
1,675 |
|
|
|
1,191 |
|
|
|
484 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,810 |
|
|
|
36,357 |
|
|
|
4,453 |
|
|
|
12 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
from continuing operations before income taxes |
|
|
(40,600 |
) |
|
|
(36,108 |
) |
|
|
(4,492 |
) |
|
|
12 |
% |
Income tax
(expense) benefit |
|
|
103 |
|
|
|
(11 |
) |
|
|
114 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(40,497 |
) |
|
|
(36,119 |
) |
|
|
(4,378 |
) |
|
|
12 |
% |
Preferred stock dividends |
|
|
6,147 |
|
|
|
6,317 |
|
|
|
(170 |
) |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
common stockholders |
|
$ |
(46,644 |
) |
|
$ |
(42,436 |
) |
|
$ |
(4,208 |
) |
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income primarily represents income from non-real estate activities such as interest
earned on temporary investments of cash reserves.
The following is a summary of our non-segment/corporate interest expense (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2008 |
|
|
Mar. 31, 2007 |
|
|
$ |
|
|
% |
|
Senior unsecured notes |
|
$ |
27,188 |
|
|
$ |
23,671 |
|
|
$ |
3,517 |
|
|
|
15 |
% |
Unsecured lines of credit |
|
|
4,826 |
|
|
|
4,041 |
|
|
|
785 |
|
|
|
19 |
% |
Capitalized interest |
|
|
(5,167 |
) |
|
|
(2,327 |
) |
|
|
(2,840 |
) |
|
|
122 |
% |
SWAP losses (savings) |
|
|
(40 |
) |
|
|
(1 |
) |
|
|
(39 |
) |
|
|
3,900 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
26,807 |
|
|
$ |
25,384 |
|
|
$ |
1,423 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase
in interest expense on senior unsecured notes is due to higher average borrowings
offset partially by lower average interest rates. The following is a
summary of our senior unsecured note activity
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2008 |
|
|
March 31, 2007 |
|
|
|
Face |
|
|
Weighted Avg. |
|
|
Face |
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
1,887,330 |
|
|
|
5.823 |
% |
|
$ |
1,539,830 |
|
|
|
6.159 |
% |
Principal payments |
|
|
(42,330 |
) |
|
|
7.625 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,845,000 |
|
|
|
5.782 |
% |
|
$ |
1,539,830 |
|
|
|
6.159 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
1,876,748 |
|
|
|
5.813 |
% |
|
$ |
1,539,830 |
|
|
|
6.159 |
% |
30
The change in interest expense on the unsecured line of credit arrangement is due primarily to
the net effect and timing of draws, paydowns and variable interest rate changes. The
following is a summary of our unsecured line of credit arrangement (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2008 |
|
2007 |
Balance outstanding at quarter end |
|
$ |
432,500 |
|
|
$ |
381,000 |
|
Maximum amount outstanding at any month end |
|
$ |
491,500 |
|
|
$ |
381,000 |
|
Average amount outstanding (total of daily
principal balances divided by days in period) |
|
$ |
406,687 |
|
|
$ |
243,650 |
|
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding) |
|
|
4.75 |
% |
|
|
6.63 |
% |
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
months ended March 31, 2008 and 2007 totaled $5,167,000 and $2,327,000, respectively.
Please see Note 10 to our unaudited consolidated financial statements for a discussion of our
interest rate swap agreements and their impact on interest expense.
General and administrative expenses as a percentage of revenues (including revenues from
discontinued operations) for the three months ended March 31, 2008 and 2007, were 9.07% and 8.66%,
respectively. The increase from 2007 is primarily related to costs associated with our initiatives
to attract and retain appropriate personnel to achieve our business objectives.
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 costs
associated with the issuance of $400,000,000 of senior unsecured convertible notes in July 2007 and
costs associated with the amendment of our unsecured line of credit
arrangement in August 2007.
The change in preferred dividends is primarily attributable to preferred stock conversions.
The following is a summary of our preferred stock activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2008 |
|
March 31, 2007 |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
Weighted Avg. |
|
|
Shares |
|
Dividend Rate |
|
Shares |
|
Dividend Rate |
Beginning balance |
|
|
12,879,189 |
|
|
|
7.676 |
% |
|
|
13,174,989 |
|
|
|
7.672 |
% |
Shares converted |
|
|
(67,600 |
) |
|
|
7.500 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
12,811,589 |
|
|
|
7.677 |
% |
|
|
13,174,989 |
|
|
|
7.672 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
|
12,828,489 |
|
|
|
7.676 |
% |
|
|
13,174,989 |
|
|
|
7.672 |
% |
31
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, amortization of above/below market leases and
amortization of deferred loan expenses and adjusted for cash disbursed for capital expenditures,
tenant improvements and lease commissions related to our medical office buildings.
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.
Net operating income (NOI) is used to evaluate the operating performance of our properties.
We define NOI as total revenues, including tenant reimbursements, less property level operating
expenses, which exclude depreciation and amortization, general and administrative expenses,
impairments and interest expense. We believe NOI provides investors
relevant and useful information because it measures the operating performance of our properties at
the property level on an unleveraged basis. We use NOI to make decisions about resource allocations
and to assess the property level performance of our properties.
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. We have properly reflected the $1,326,000, or
$0.02 per diluted share, of gains on extinguishment of debt for the quarter ended March 31, 2008
and the $1,081,000, or $0.01 per diluted share, of gains on extinguishment of debt for the quarter
ended December 31, 2007. These amounts have not been added back for the calculations of FFO, FAD or
EBITDA.
During the quarter ended June 30, 2007, we recorded $1,750,000 ($0.02 per diluted share) of
one-time acquisition finders fees paid to former Windrose management in connection with the
closing of the Rendina/Paramount transaction. These fees relate to services rendered prior to the
consummation of the Windrose merger in December 2006. Due to the recipients current employment
status with the company, the fees were expensed as compensation rather than included in the
purchase price of the acquisition, as is typical with such fees. These fees have not been added
back for the calculations of FFO, FAD or EBITDA.
During the quarter ended March 31, 2008, we recorded $1,325,000 ($0.02 per diluted share) of
non-recurring income tax expense. These taxes have not been added back for the calculations of FFO
or FAD.
Our supplemental measures 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, these measures are utilized by the Board of Directors to evaluate management. Our
supplemental measures 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, the supplemental measures, as defined by us, may not be
comparable to similarly entitled items reported by other real estate investment trusts or other
companies.
32
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
provisions for depreciation and amortization include provisions for depreciation and amortization
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, |
FFO Reconciliation: |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
|
|
Net income available to
common stockholders |
|
$ |
23,356 |
|
|
$ |
25,620 |
|
|
$ |
24,529 |
|
|
$ |
42,768 |
|
|
$ |
30,452 |
|
Depreciation and amortization |
|
|
33,860 |
|
|
|
35,547 |
|
|
|
40,137 |
|
|
|
40,081 |
|
|
|
39,574 |
|
Loss (gain) on sales of properties |
|
|
(977 |
) |
|
|
(1,033 |
) |
|
|
(766 |
) |
|
|
(11,662 |
) |
|
|
(26 |
) |
Minority interests |
|
|
(32 |
) |
|
|
(155 |
) |
|
|
(70 |
) |
|
|
(88 |
) |
|
|
(87 |
) |
|
|
|
Funds from operations |
|
$ |
56,207 |
|
|
$ |
59,979 |
|
|
$ |
63,830 |
|
|
$ |
71,099 |
|
|
$ |
69,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
73,224 |
|
|
|
79,060 |
|
|
|
80,710 |
|
|
|
82,346 |
|
|
|
86,100 |
|
Diluted |
|
|
73,791 |
|
|
|
79,546 |
|
|
|
81,163 |
|
|
|
82,784 |
|
|
|
86,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.32 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
$ |
0.52 |
|
|
$ |
0.35 |
|
Diluted |
|
|
0.32 |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.52 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.77 |
|
|
$ |
0.76 |
|
|
$ |
0.79 |
|
|
$ |
0.86 |
|
|
$ |
0.81 |
|
Diluted |
|
|
0.76 |
|
|
|
0.75 |
|
|
|
0.79 |
|
|
|
0.86 |
|
|
|
0.81 |
|
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
provisions for depreciation and amortization include provisions for depreciation and amortization
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, |
FAD Reconciliation: |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
|
|
Net income available to
common stockholders |
|
$ |
23,356 |
|
|
$ |
25,620 |
|
|
$ |
24,529 |
|
|
$ |
42,768 |
|
|
$ |
30,452 |
|
Depreciation and amortization |
|
|
33,860 |
|
|
|
35,547 |
|
|
|
40,137 |
|
|
|
40,081 |
|
|
|
39,574 |
|
Loss (gain) on sales of properties |
|
|
(977 |
) |
|
|
(1,033 |
) |
|
|
(766 |
) |
|
|
(11,662 |
) |
|
|
(26 |
) |
Gross straight-line rental income |
|
|
(4,231 |
) |
|
|
(3,878 |
) |
|
|
(4,555 |
) |
|
|
(4,365 |
) |
|
|
(5,336 |
) |
Prepaid/straight-line rent receipts |
|
|
2,078 |
|
|
|
2,832 |
|
|
|
5,881 |
|
|
|
6,678 |
|
|
|
2,975 |
|
Amortization related to
above (below) market leases, net |
|
|
(460 |
) |
|
|
(464 |
) |
|
|
268 |
|
|
|
(136 |
) |
|
|
(263 |
) |
Amortization of deferred
loan expenses |
|
|
1,267 |
|
|
|
1,236 |
|
|
|
1,504 |
|
|
|
1,971 |
|
|
|
1,772 |
|
Cap Ex, tenant improvements,
lease commissions |
|
|
(1,063 |
) |
|
|
(762 |
) |
|
|
(704 |
) |
|
|
(1,763 |
) |
|
|
(765 |
) |
Minority interests |
|
|
(5 |
) |
|
|
(82 |
) |
|
|
85 |
|
|
|
(8 |
) |
|
|
(8 |
) |
|
|
|
Funds available for distribution |
|
$ |
53,825 |
|
|
$ |
59,016 |
|
|
$ |
66,379 |
|
|
$ |
73,564 |
|
|
$ |
68,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
73,224 |
|
|
|
79,060 |
|
|
|
80,710 |
|
|
|
82,346 |
|
|
|
86,100 |
|
Diluted |
|
|
73,791 |
|
|
|
79,546 |
|
|
|
81,163 |
|
|
|
82,784 |
|
|
|
86,610 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.32 |
|
|
$ |
0.32 |
|
|
$ |
0.30 |
|
|
$ |
0.52 |
|
|
$ |
0.35 |
|
Diluted |
|
|
0.32 |
|
|
|
0.32 |
|
|
|
0.30 |
|
|
|
0.52 |
|
|
|
0.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds available for distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.74 |
|
|
$ |
0.75 |
|
|
$ |
0.82 |
|
|
$ |
0.89 |
|
|
$ |
0.79 |
|
Diluted |
|
|
0.73 |
|
|
|
0.74 |
|
|
|
0.82 |
|
|
|
0.89 |
|
|
|
0.79 |
|
33
The table below reflects the reconciliation of EBITDA to net income, the most directly
comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for
depreciation and amortization includes discontinued operations. Amortization represents the amortization of deferred loan expenses. Adjusted EBITDA
represents EBITDA as adjusted below for items pursuant to covenant provisions of our unsecured line
of credit arrangement. Dollars are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
EBITDA Reconciliation: |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
|
|
Net income |
|
$ |
29,673 |
|
|
$ |
31,937 |
|
|
$ |
30,846 |
|
|
$ |
48,947 |
|
|
$ |
36,599 |
|
Interest expense |
|
|
31,999 |
|
|
|
33,624 |
|
|
|
35,082 |
|
|
|
35,593 |
|
|
|
34,345 |
|
Income tax expense (benefit) |
|
|
11 |
|
|
|
(69 |
) |
|
|
(23 |
) |
|
|
269 |
|
|
|
1,279 |
|
Depreciation and amortization |
|
|
33,860 |
|
|
|
35,547 |
|
|
|
40,137 |
|
|
|
40,081 |
|
|
|
39,574 |
|
Amortization of deferred loan expenses |
|
|
1,267 |
|
|
|
1,236 |
|
|
|
1,504 |
|
|
|
1,971 |
|
|
|
1,772 |
|
|
|
|
EBITDA |
|
|
96,810 |
|
|
|
102,275 |
|
|
|
107,546 |
|
|
|
126,861 |
|
|
|
113,569 |
|
Stock-based compensation expense |
|
|
3,177 |
|
|
|
1,276 |
|
|
|
1,301 |
|
|
|
1,298 |
|
|
|
3,848 |
|
Loss (gain) on extinguishment of debt |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
(1,081 |
) |
|
|
(1,326 |
) |
|
|
|
Adjusted EBITDA |
|
$ |
99,987 |
|
|
$ |
103,551 |
|
|
$ |
108,847 |
|
|
$ |
127,078 |
|
|
$ |
116,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
31,999 |
|
|
$ |
33,624 |
|
|
$ |
35,082 |
|
|
$ |
35,593 |
|
|
$ |
34,345 |
|
Capitalized interest |
|
|
2,327 |
|
|
|
2,570 |
|
|
|
3,162 |
|
|
|
4,468 |
|
|
|
5,167 |
|
|
|
|
Total interest |
|
|
34,326 |
|
|
|
36,194 |
|
|
|
38,244 |
|
|
|
40,061 |
|
|
|
39,512 |
|
EBITDA |
|
$ |
96,810 |
|
|
$ |
102,275 |
|
|
$ |
107,546 |
|
|
$ |
126,861 |
|
|
$ |
113,569 |
|
|
|
|
Interest coverage ratio |
|
|
2.82 |
x |
|
|
2.83 |
x |
|
|
2.81 |
x |
|
|
3.17 |
x |
|
|
2.87 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
$ |
99,987 |
|
|
$ |
103,551 |
|
|
$ |
108,847 |
|
|
$ |
127,078 |
|
|
$ |
116,091 |
|
|
|
|
Interest coverage ratio-adjusted |
|
|
2.91 |
x |
|
|
2.86 |
x |
|
|
2.85 |
x |
|
|
3.17 |
x |
|
|
2.94 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest |
|
$ |
34,326 |
|
|
$ |
36,194 |
|
|
$ |
38,244 |
|
|
$ |
40,061 |
|
|
$ |
39,512 |
|
Secured debt principal amortization |
|
|
1,894 |
|
|
|
1,900 |
|
|
|
2,022 |
|
|
|
2,147 |
|
|
|
2,093 |
|
Preferred dividends |
|
|
6,317 |
|
|
|
6,317 |
|
|
|
6,317 |
|
|
|
6,179 |
|
|
|
6,147 |
|
|
|
|
Total fixed charges |
|
|
42,537 |
|
|
|
44,411 |
|
|
|
46,583 |
|
|
|
48,387 |
|
|
|
47,752 |
|
EBITDA |
|
$ |
96,810 |
|
|
$ |
102,275 |
|
|
$ |
107,546 |
|
|
$ |
126,861 |
|
|
$ |
113,569 |
|
|
|
|
Fixed charge coverage ratio |
|
|
2.28 |
x |
|
|
2.30 |
x |
|
|
2.31 |
x |
|
|
2.62 |
x |
|
|
2.38 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA adjusted |
|
$ |
99,987 |
|
|
$ |
103,551 |
|
|
$ |
108,847 |
|
|
$ |
127,078 |
|
|
$ |
116,091 |
|
|
|
|
Fixed charge coverage ratio-adjusted |
|
|
2.35 |
x |
|
|
2.33 |
x |
|
|
2.34 |
x |
|
|
2.63 |
x |
|
|
2.43 |
x |
34
The
table below reflects the reconciliation of NOI for the periods presented.
All amounts include amounts from discontinued operations, if applicable. Amounts are in
thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
NOI Reconciliation: |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
2008 |
|
|
|
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment properties: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent living/CCRCs |
|
$ |
9,387 |
|
|
$ |
9,477 |
|
|
$ |
11,765 |
|
|
$ |
12,443 |
|
|
$ |
13,414 |
|
Assisted living facilities |
|
|
25,750 |
|
|
|
25,345 |
|
|
|
28,734 |
|
|
|
28,646 |
|
|
|
30,228 |
|
Skilled nursing facilities |
|
|
41,011 |
|
|
|
44,713 |
|
|
|
40,970 |
|
|
|
41,025 |
|
|
|
40,100 |
|
Specialty care facilities |
|
|
6,340 |
|
|
|
6,581 |
|
|
|
6,485 |
|
|
|
7,012 |
|
|
|
8,191 |
|
|
|
|
Sub-total rental income |
|
|
82,488 |
|
|
|
86,116 |
|
|
|
87,954 |
|
|
|
89,126 |
|
|
|
91,933 |
|
Interest income |
|
|
5,149 |
|
|
|
6,576 |
|
|
|
5,947 |
|
|
|
8,151 |
|
|
|
9,092 |
|
Other income |
|
|
1,343 |
|
|
|
812 |
|
|
|
637 |
|
|
|
5,218 |
|
|
|
1,296 |
|
|
|
|
Total investment property income |
|
|
88,980 |
|
|
|
93,504 |
|
|
|
94,538 |
|
|
|
102,495 |
|
|
|
102,321 |
|
Medical office buildings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
|
23,680 |
|
|
|
26,181 |
|
|
|
30,876 |
|
|
|
30,877 |
|
|
|
33,233 |
|
Other income |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
497 |
|
|
|
210 |
|
|
|
|
Total
medical office building income |
|
|
23,680 |
|
|
|
26,181 |
|
|
|
30,876 |
|
|
|
31,374 |
|
|
|
33,443 |
|
Non-segment/corporate other income |
|
|
249 |
|
|
|
332 |
|
|
|
562 |
|
|
|
384 |
|
|
|
210 |
|
|
|
|
Total revenues |
|
|
112,909 |
|
|
|
120,017 |
|
|
|
125,976 |
|
|
|
134,253 |
|
|
|
135,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment properties |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Medical office buildings |
|
|
7,168 |
|
|
|
8,657 |
|
|
|
10,426 |
|
|
|
11,224 |
|
|
|
11,367 |
|
Non-segment/corporate |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
Total property operating expenses |
|
|
7,168 |
|
|
|
8,657 |
|
|
|
10,426 |
|
|
|
11,224 |
|
|
|
11,367 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment properties |
|
|
88,980 |
|
|
|
93,504 |
|
|
|
94,538 |
|
|
|
102,495 |
|
|
|
102,321 |
|
Medical office buildings |
|
|
16,512 |
|
|
|
17,524 |
|
|
|
20,450 |
|
|
|
20,150 |
|
|
|
22,076 |
|
Non-segment/corporate |
|
|
249 |
|
|
|
332 |
|
|
|
562 |
|
|
|
384 |
|
|
|
210 |
|
|
|
|
Net operating income |
|
$ |
105,741 |
|
|
$ |
111,360 |
|
|
$ |
115,550 |
|
|
$ |
123,029 |
|
|
$ |
124,607 |
|
|
|
|
35
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, 2007 for further information regarding significant accounting policies that impact us. There
have been no material changes to these policies in 2008. See Note 2 to our consolidated financial
statements for the impact of new accounting pronouncements.
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.
As a result of our quarterly
evaluation, we concluded that the
allowance for loan losses at
December 31, 2007 remained
appropriate as of March 31, 2008,
resulting in an allowance for
loan losses of $7,406,000
relating to loans with
outstanding balances of
$115,656,000. Also at March 31,
2008, we had loans with
outstanding balances of
$6,799,000 on non-accrual status. |
36
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Business Combinations |
|
|
|
|
|
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.
|
|
We compute depreciation and
amortization 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. Lives for
intangibles are based on the
remaining term of the
underlying leases. |
|
|
|
|
|
For the three months ended
March 31, 2008, we recorded
$31,812,000, $4,082,000 and
$3,680,000 as provisions for
depreciation and
amortization relating to
buildings, improvements and
intangibles, respectively,
including amounts
reclassified as discontinued
operations. The average
useful life of our
buildings, improvements and
intangibles was 32.3 years,
13.0 years and 5.5 years,
respectively, for the three
months ended March 31, 2008. |
|
|
|
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
three months ended March 31,
2008. |
|
|
|
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 March 31,
2008, we participated in two
forward-starting interest
rate swap agreements. At
March 31, 2008, the swaps
were reported at their fair
value of negative
$18,802,000 and are included
in other liabilities and
accumulated other
comprehensive income. |
37
|
|
|
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. 104, Revenue
Recognition in Financial Statements,
as amended (SAB104). SAB104
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. Substantially all of our
operating leases contain fixed
and/or contingent escalating rent
structures. Leases with fixed annual
rental escalators are generally
recognized on a straight-line basis
over the initial lease period,
subject to a collectibility
assessment. Rental income related to
leases with contingent rental
escalators is generally 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 three months ended March 31,
2008, we recognized $9,092,000 of
interest income and $125,166,000 of
rental income, including
discontinued operations. Cash
receipts on leases with deferred
revenue provisions were $2,975,000
as compared to gross straight-line
rental income recognized of
$5,336,000 for the three months
ended March 31, 2008. At March 31,
2008, our straight-line receivable
balance was $55,141,000, net of
reserves totaling $1,152,000. Also
at March 31, 2008, we had loans with
outstanding balances of $6,799,000
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 the companys portfolio; the sale of
properties; the performance of its operators and properties; its occupancy rates; its ability to
acquire or develop properties; its ability to manage properties; its ability to enter into
agreements with new viable tenants for vacant space or for properties that the company takes back
from financially troubled tenants, if any; its ability to make distributions; its policies and
plans regarding investments, financings and other matters; its tax status as a real estate
investment trust; its ability to appropriately balance the use of debt and equity; its ability to
access capital markets or other sources of funds; its critical accounting policies; and its ability
to meet its earnings guidance. When the company uses words such as may, will, intend,
should, believe, expect, anticipate, project, estimate or similar expressions, it is
making forward-looking statements. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. The companys 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; issues facing the health care industry, including
compliance with, and changes to, regulations and payment policies, responding to government
investigations and punitive settlements and operators/tenants difficulty in cost-effectively
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/tenants, including, but not limited to, their
ability to pay rent and repay loans; the companys ability to transition or sell facilities with
profitable results; the failure to make new investments as and when anticipated; the failure of
closings to occur as and when anticipated; acts of God affecting the companys properties; the
companys ability to re-lease space at similar rates as vacancies occur; the companys ability to
timely reinvest sale proceeds at similar rates to assets sold; operator/tenant bankruptcies or
insolvencies; government regulations affecting Medicare and Medicaid reimbursement rates and
operational requirements; liability or contract claims by or against operators/tenants;
unanticipated difficulties and/or expenditures relating to future acquisitions; environmental laws
affecting the companys properties; changes in rules or practices governing the companys financial
reporting; and legal and operational matters, including real estate investment trust qualification
and key management personnel recruitment and retention. Other important factors are identified in
the companys Annual Report on Form 10-K for the year ended December 31, 2007, including factors
identified under the headings Business, Risk Factors and Managements Discussion and Analysis
of Financial Condition and Results of Operations. Finally, the company assumes 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.
38
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 line of credit arrangement 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 line of credit arrangement.
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. 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. To illustrate the impact of
changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt
instruments whereby we modeled the change in net present values arising from a hypothetical 1%
increase in interest rates to determine the instruments change in fair value. The following table
summarizes the analysis performed as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Principal |
|
|
Change in |
|
|
Principal |
|
|
Change in |
|
|
|
balance |
|
|
fair value |
|
|
balance |
|
|
fair value |
|
Senior unsecured notes |
|
$ |
1,845,000 |
|
|
$ |
(100,540 |
) |
|
$ |
1,887,330 |
|
|
$ |
(96,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured debt |
|
|
479,197 |
|
|
|
(24,121 |
) |
|
|
492,741 |
|
|
|
(24,530 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
2,324,197 |
|
|
$ |
(124,661 |
) |
|
$ |
2,380,071 |
|
|
$ |
(121,256 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
On September 12, 2007, we entered into two forward-starting interest rate swaps (the
September 2007 Swaps) for a total notional amount of $250,000,000 to hedge 10 years of interest
payments associated with a long-term borrowing that is expected to occur in 2008. The September
2007 Swaps each have an effective date of September 12, 2008 and a maturity date of September 12,
2018. We expect to settle the September 2007 Swaps when the forecasted debt is priced. The
September 2007 Swaps have the economic effect of fixing $250,000,000 of our future debt at 4.469%
plus a credit spread for 10 years. The September 2007 Swaps have been designated as cash flow
hedges and we expect the September 2007 Swaps to be highly effective at offsetting changes in cash
flows of interest payments on $250,000,000 of our future debt due to changes in the LIBOR swap
rate. Therefore, effective changes in the fair value of the September 2007 Swaps will be recorded
in accumulated other comprehensive income (AOCI) and reclassified to interest expense when the hedged forecasted transactions affect
earnings (as interest payments are made on the expected debt issuance). The ineffective portion of
the changes in fair value will be recorded directly in earnings. At March 31, 2008, the September
2007 Swaps were reported at their fair value of negative $18,802,000 and are included in other
liabilities and AOCI. A 1% increase in interest rates would
result in an increase in fair value of our September 2007 Swaps by approximately $1,226,000 at
March 31, 2008. At December 31, 2007, the September 2007 Swaps were reported at their fair value
of negative $7,990,000 and were included in other liabilities and AOCI. A 1% increase in interest rates would result in an increase in fair value of our September
2007 Swaps by approximately $10,871,000 at December 31, 2007.
Our variable rate debt, including our unsecured line of credit arrangement, is reflected at
fair value. At March 31, 2008, we had $432,500,000 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 $4,325,000. At December 31, 2007, we had $321,232,000
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 $3,212,000.
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.
39
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 changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the
fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
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, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number |
|
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
of Shares Purchased |
|
|
of Shares that May |
|
|
|
Total Number |
|
|
|
|
|
|
as Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
of Shares |
|
|
Average Price |
|
|
Announced |
|
|
Under the Plans or |
|
Period |
|
Purchased (1) |
|
|
Paid Per Share |
|
|
Plans or Programs (2) |
|
|
Programs |
|
January 1, 2008 through January 31, 2008 |
|
|
26,078 |
|
|
$ |
42.89 |
|
|
|
|
|
|
|
|
|
February 1, 2008 through February 29, 2008 |
|
March 1, 2008 through March 31, 2008 |
|
|
790 |
|
|
$ |
43.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
26,868 |
|
|
$ |
42.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the three months ended March 31, 2008, the only securities purchased by
the Company were shares of common stock held by employees who tendered owned shares to
satisfy the tax withholding on the lapse of certain restrictions on restricted stock. |
|
(2) |
|
No shares were purchased as part of publicly announced plans or programs. |
40
Item 6. Exhibits
|
10.1 |
|
Summary of Director Compensation. |
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. |
|
|
32.2 |
|
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. |
|
|
|
|
|
Date: May 9, 2008
|
|
By:
|
|
/s/ George L. Chapman |
|
|
|
|
|
|
|
George L. Chapman, |
|
|
Chairman and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
|
Date: May 9, 2008
|
|
By:
|
|
/s/ Scott A. Estes |
|
|
|
|
|
|
|
Scott A. Estes, |
|
|
Senior Vice President and Chief Financial Officer |
|
|
(Principal Financial Officer) |
|
|
|
|
|
Date: May 9, 2008
|
|
By:
|
|
/s/ Paul D. Nungester, Jr. |
|
|
|
|
|
|
|
Paul D. Nungester, Jr., |
|
|
Vice President and Controller |
|
|
(Principal Accounting Officer) |
41