SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No.3)
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
Commission File Number 1-8895
HEALTH CARE PROPERTY INVESTORS, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0091377
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4675 MacArthur Court, Suite 900
Newport Beach, California 92660
(Address of principal executive offices)
Registrant's telephone number: (949) 221-0600
------------------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
Common Stock* New York Stock Exchange
7-7/8% Series A Cumulative
Redeemable Preferred Stock New York Stock Exchange
*The Common Stock has stock purchase rights attached which are registered
pursuant to Section 12(b) of the Act and listed on the New York Stock Exchange.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 19, 1998 there were 30,246,169 shares of Common Stock
outstanding. The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of these shares on
March 19, 1998 on the New York Stock Exchange, was approximately $1,073,107,000.
Portions of the definitive Proxy Statement for the registrant's 1998 Annual
Meeting of Stockholders have been incorporated by reference into Part III of
this Report.
<PAGE>
PART I
Item 1. BUSINESS
Health Care Property Investors, Inc. (the "Company"), a Maryland
corporation, was organized in March 1985 to qualify as a real estate investment
trust ("REIT"). The Company invests in health care related real estate located
throughout the United States, including long-term care facilities, congregate
care and assisted living facilities, acute care and rehabilitation hospitals,
medical office buildings, physician group practice clinics and psychiatric
facilities. Having commenced business nearly 13 years ago, the Company today is
the second oldest REIT specializing in health care real estate. At December 31,
1997, the Company owned an interest in 220 properties located in 39 states, of
which 213 are leased or subleased pursuant to long-term leases (the "Leases") to
53 health care providers (the "Lessees"), including affiliates of Beverly
Enterprises, Inc. ("Beverly"), Columbia/HCA Healthcare Corp. ("Columbia"),
Emeritus Corporation ("Emeritus"), HealthSouth Corporation ("HealthSouth"),
Tenet Healthcare Corporation ("Tenet") and Vencor, Inc. ("Vencor"). The
remaining seven properties are medical office buildings with multiple tenant
leases. Of the Lessees, only Vencor accounts for more than 10% of the Company's
revenue for the year ended December 31, 1997. The Company also holds mortgage
loans on 24 properties that are owned and operated by 12 health care providers
(the "Mortgagors") including Beverly, Columbia and Tenet.
At December 31, 1997, the gross acquisition price of the Company's 244
leased or mortgaged properties (the "Properties"), including partnership
acquisitions and mortgage loan acquisitions, was approximately $1.1 billion.
The average age of the Properties is 18 years. As of December 31, 1997,
approximately 70% of the Company's revenue is derived from Properties operated
by publicly traded health care providers.
Since receiving its initial senior debt rating of Baa1/BBB by Moody's
Investors Service, Inc. ("Moody's") and Standard & Poor's Ratings Group
("Standard & Poor's") in 1986, the Company has historically maintained or
improved its ratings. Currently, its senior debt is rated Baa1/BBB+/A- by
Moody's, Standard & Poor's and Duff & Phelps Credit Rating Co. ("Duff &
Phelps"), respectively. The Company believes that it has had an excellent track
record in attracting and retaining key employees. The Company's five executive
officers have worked with the Company on average for 12 years. The Company's
annualized return to its stockholders, assuming reinvestment of dividends and
before stockholders' income taxes is approximately 20% over the period from its
initial public offering in May 1985 through December 31, 1997.
References herein to the Company include Health Care Property Investors,
Inc. and its wholly-owned subsidiaries and affiliated partnerships, unless the
context otherwise requires.
THE PROPERTIES
Of the 244 health care facilities in which the Company has an investment as
of December 31, 1997, the Company directly owns 180 facilities including 98
long-term care facilities, two rehabilitation hospitals, 63 congregate care and
assisted living centers, three acute care hospitals, 11 medical office buildings
and three physician group practice clinics.
The Company has provided mortgage loans in the amount of $115,654,000 on 24
properties, including 15 long-term care facilities, three congregate care and
assisted living centers, three acute care hospitals and three medical office
buildings. At December 31, 1998, the remaining balance on these loans totaled
$101,729,000.
<PAGE>
At December 31, 1997, the Company also had varying percentage interests in
several joint ventures and partnerships that together own 40 facilities, as
further discussed below:
1. A 77% interest in a joint venture (Health Care Property Partners) which
owns two acute care hospitals, one psychiatric facility and 21 long-term
care facilities.
2. Interests of between 90% and 97% in four joint ventures (HCPI/San Antonio
Ltd. Partnership, HCPI/Colorado Springs Ltd. Partnership, HCPI/Little Rock
Ltd. Partnership, HCPI/Kansas City Ltd. Partnership), each of which was
formed to own a comprehensive rehabilitation hospital.
3. A 90% interest in a company (Cambridge Medical Property, LLC) formed to own
five medical office buildings.
4. An 80% interest in a company (Vista-Cal Associates, LLC) formed to own a
long-term care facility.
5. A 50% interest in five partnerships (HCPI/Austin Investors, HCPI/Baton
Rouge Investors, HCPI/Rhode Island Investors, HCPI Kenner Ltd. Partnership,
HCPI/Longmont Investors), each of which owns a congregate care facility.
6. A 45% interest in a company (Seminole Shores Living Center LLC) formed to
own a congregate care facility.
The following summary of the Company's Properties details certain pertinent
information grouped by type of facility and equity interest as of December 31,
1997:
<TABLE>
<CAPTION>
Equity Number Number Total
Interest of of Beds/ Investments Annual
Facility Type Percentage Facilities Units (1) (2) Rents/Interest
- --------------------------- ---------- ---------- ---------- ----------- --------------
(Dollar Amounts in thousands)
<S> <C> <C> <C> <C> <C>
Long-Term Care Facilities 100% 113 13,658 $ 365,475 $ 53,989
Long-Term Care Facilities 77-80 22 2,625 50,975 10,663
-----------------------------------------------------
135 16,283 416,450 64,652
-----------------------------------------------------
Acute Care Hospitals 100 6 656 53,690 6,047
Acute Care Hospitals 77 2 356 32,961 7,708
-----------------------------------------------------
8 1,012 86,651 13,755
-----------------------------------------------------
Rehabilitation Hospitals 100 2 168 27,385 4,167
Rehabilitation Hospitals 90-97 4 307 45,011 8,175
-----------------------------------------------------
6 475 72,396 12,342
-----------------------------------------------------
Congregate Care & Assisted Living Centers 100 66 5,507 292,776 26,732
Congregate Care & Assisted Living Centers 45-50 6 709 6,902(5) 4,919
-----------------------------------------------------
72 6,216 299,678 31,651
-----------------------------------------------------
Medical Office Buildings (3) 100 14 --- 85,236 9,308
Medical Office Buildings (3) 90 5 --- 42,300 4,700
Physician Group Practice Clinics (4) 100 3 --- 48,908 5,010
Psychiatric Facility 77 1 108 3,018 561
-----------------------------------------------------
Totals 244 24,094 $1,054,637 $ 141,979
=====================================================
</TABLE>
<PAGE>
(1) Congregate Care and Assisted Living Centers stated in units to give readers
an idea of the size of such facilities; all other facilities are stated
in beds, except the Medical Office Buildings and the Physician Group
Practice Clinics.
(2) Includes partnership investments, and incorporates all partners' assets and
construction commitments.
(3) The Medical Office Buildings encompass approximately 955,000 square feet.
(4) The Physician Group Practice Clinics encompass approximately 437,000 square
feet.
(5) Represents HCPI's net investment.
LONG-TERM CARE FACILITIES. The Company owns or holds mortgage loan
interests in 135 long-term care facilities. These facilities are leased to
various health care providers. Such long-term care facilities offer
restorative, rehabilitative and custodial nursing care for people not requiring
the more extensive and sophisticated treatment available at acute care
hospitals. Many long-term care facilities have experienced significant growth
in ancillary revenues and subacute care services over the past several years.
Ancillary revenues and subacute care services are derived from providing
services to residents beyond room and board care and include occupational,
physical, speech, respiratory and IV therapy, wound care, oncology treatment,
brain injury care and orthopedic therapy as well as sales of pharmaceutical
products and other services. In certain long-term care facilities some of the
foregoing services are provided on an out-patient basis. Such revenues
currently relate primarily to Medicare and private pay residents. These
facilities are designed to supplement hospital care and many have transfer
agreements with one or more acute care hospitals. These facilities depend to
some degree upon referrals from practicing physicians and hospitals. Such
services are paid for either by the patient or the patient's family, or through
the federal Medicare and state Medicaid programs.
Patients in long-term care facilities are generally provided with
accommodations, all meals, medical and nursing care, and rehabilitation services
including speech, physical and occupational therapy. As a part of the Omnibus
Budget Reconciliation Act ("OBRA") of 1981, Congress established a waiver
program under Medicaid to offer an alternative to institutional long-term care
services. The provisions of OBRA and the subsequent OBRA Acts of 1987 and 1990
allowed states, with federal approval, greater flexibility in program design as
a means of developing cost-effective alternatives to delivering services
traditionally provided in the long-term care setting. Recently this has led to
an increase in the number of assisted living facilities. This may adversely
affect some long-term care facilities for a period as individuals are shifted to
the lower cost delivery system provided in the assisted living setting.
Eligibility for assisted living services to be included as a Medicaid reimbursed
service does not necessarily mean that more Government spending will be
available for the delivery of health care services to the frail elderly.
CONGREGATE CARE AND ASSISTED LIVING CENTERS. The Company has investments
in 72 congregate care and assisted living centers. Congregate care centers
typically contain studio, one bedroom and two bedroom apartments which are
rented on a month-to-month basis by individuals, primarily those over 75 years
of age. Residents, who must be ambulatory, are provided meals and eat in a
central dining area; they may also be assisted with some daily living
activities. These centers offer programs and services that allow residents
certain conveniences and make it possible for them to live independently; staff
is also available when residents need assistance and for group activities.
Assisted living centers serve elderly persons who require more assistance
with daily living activities than congregate care residents, but who do not
require the constant supervision nursing homes provide. Services include
personal supervision and assistance with eating, bathing, grooming and
administering medication. Assisted living centers typically contain larger
common areas for dining, group activities and relaxation to encourage social
interaction. Residents typically rent studio and one bedroom units on a
month-to-month basis.
Charges for room and board and other services in both congregate care and
assisted living centers are generally paid from private sources.
<PAGE>
ACUTE CARE HOSPITALS. The Company has an interest in six general acute
care hospitals and two long-term acute care hospitals. Acute care hospitals
generally offer a wide range of services such as general and specialty surgery,
intensive care units, clinical laboratories, physical and respiratory therapy,
nuclear medicine, magnetic resonance imaging, neonatal and pediatric care units,
outpatient units and emergency departments, among others. Such services are
paid for by the patient or the patient's family, third party payors (e.g.
insurance, HMOs), or through the federal Medicare and state Medicaid programs.
Long-term acute care hospitals are defined as those facilities in which a
patient's stay is at least 25 days. These hospitals receive reimbursement on a
cost-based reimbursement system, subject to certain limitations, for Medicare
patients. Traditional general acute care hospitals are provided reimbursement
incentives by Medicare to minimize inpatient length of stay.
REHABILITATION HOSPITALS. The Company has an investment in six
rehabilitation hospitals. These hospitals provide inpatient and outpatient care
for patients who have sustained traumatic injuries or illnesses, such as spinal
cord injuries, strokes, head injuries, orthopedic problems, work related
disabilities and neurological diseases, as well as treatment for amputees and
patients with severe arthritis. Rehabilitation programs encompass physical,
occupational, speech and inhalation therapies, rehabilitative nursing and other
specialties. Such services are paid for by the patient or the patient's family,
third party payors (e.g. insurance, HMOs), or through the federal Medicare
program.
MEDICAL OFFICE BUILDINGS. The Company has investments in 19 medical office
buildings. These buildings are generally located adjacent to, or a short
distance from, acute care hospitals. Medical office buildings contain
physicians' offices and examination rooms, and may also include pharmacies,
hospital ancillary service space and day-surgery operating rooms. Medical office
buildings require more extensive plumbing, electrical, heating and cooling
capabilities than commercial office buildings for sinks, brighter lights and
special equipment physicians typically use. Except as noted below, the
Company's owned medical office buildings are generally master leased to a Lessee
which then subleases office space to physicians or other medical practitioners.
During 1997, the Company purchased seven medical office buildings which are
leased to multiple tenants under triple net or gross leases. These facilities
are operated by property management companies on behalf of the Company.
PHYSICIAN GROUP PRACTICE CLINICS. The Company has investments in three
physician group practice clinics. Physician group practice clinics generally
provide a broad range of medical services through organized physician groups
representing various medical specialties.
PSYCHIATRIC FACILITY. The Company has an investment in one psychiatric
facility which offers comprehensive, multidisciplinary adult and adolescent
care. A substance abuse program is offered in a separate unit of the facility.
COMPETITION. The Company competes for property acquisitions with health
care providers, other health care related real estate investment trusts, real
estate partnerships and other investors.
The Company's Properties are subject to competition from the properties of
other health care providers. Certain of these other operators have capital
resources substantially in excess of some of the operators of the Company's
facilities. In addition, the extent to which the Properties are utilized
depends upon several factors, including the number of physicians using the
health care facilities or referring patients there, competitive systems of
health care delivery and the area population, size and composition. Private,
federal and state payment programs and the effect of other laws and regulations
may also have a significant effect on the utilization of the Properties.
Virtually all of the Properties operate in a competitive environment and
patients and referral sources, including physicians, may change their
preferences for a health care facility from time to time.
<PAGE>
The following table shows, with respect to each Property, the location by
state, the number of beds/units, recent occupancy levels, patient revenue mix,
annual rents and interest and information regarding remaining lease terms, by
property type.
<TABLE>
<CAPTION>
Average
Number Private
Number of Beds/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
<S> <C> <C> <C> <C> <C> <C>
Long-Term Care Facilities
Alabama 1 174 95% 31% $ 903 --
Arkansas 9 866 77 48 2,203 8
California 21 2,083 88 50 7,828 10
Colorado 3 420 93 59 1,824 2
Connecticut 1 121 97 37 622 2
Florida 11 1,267 92 55 6,734 6
Illinois 2 201 86 54 475 4
Indiana 13 1,709 82 49 6,863 13
Iowa 1 201 90 37 656 1
Kansas 3 323 89 58 1,776 1
Kentucky 1 100 97 60 406 4
Louisiana 1 120 96 37 669 7
Maryland 3 438 87 28 2,287 20
Massachusetts 5 615 95 42 2,804 4
Michigan 3 286 86 61 908 4
Mississippi 1 120 100 6 358 4
Missouri 2 393 50 45 1,938 2
Montana 1 80 80 47 281 1
New Mexico 1 102 96 31 307 5
North Carolina 9 1,056 82 52 3,962 9
Ohio 9 1,226 92 54 5,970 3
Oklahoma 2 207 87 81 1,654 1
Oregon 1 110 82 45 332 --
South Carolina 2 52 90 100 392 13
Tennessee 10 1,754 97 43 5,170 4
Texas 10 1,094 59 35 3,023 3
Washington 1 84 73 60 290 1
Wisconsin 8 1,133 84 50 4,017 5
- ------------------------------------------------------------------------------------------------------------
Sub-Total 135 16,335 85 48 64,652 7
- ------------------------------------------------------------------------------------------------------------
Acute Care Hospitals
Arizona 1 21 3 100 375 15
California 1 182 56 92 3,820 1
Florida 1 285 34 92 1,147 5
Louisiana 2 325 43 92 5,153 5
Texas 3 199 38 100 3,260 5
- ------------------------------------------------------------------------------------------------------------
Sub-Total 8 1,012 41 94 13,755 4
- ------------------------------------------------------------------------------------------------------------
Rehabilitation Facilities
Arizona 1 60 74 100 1,917 1
Arkansas 1 60 74 100 1,874 3
Colorado 1 64 65 100 1,525 3
Florida 1 108 95 100 2,250 14
Kansas 1 75 70 100 2,677 1
Texas 1 108 64 100 2,099 5
- ------------------------------------------------------------------------------------------------------------
Sub-Total 6 475 75 100 12,342 6
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Average
Number Private
Number of Beds/ Average Patient Annual Average
of Units Occupancy Revenue Rents/ Remaining
Facility Location Facilities (1) (5) (2),(5) Interest Term
- --------------------------- ---------- -------- ---------- -------- --------- ----------
(Thousands) (Years)
<S> <C> <C> <C> <C> <C> <C>
Physician Group Practice Clinics (4)
Arkansas 1 --- --- 100 2,534 12
California 1 --- --- 100 1,956 14
Tennessee 1 --- --- 100 520 11
- ------------------------------------------------------------------------------------------------------------
Sub-Total 3 --- --- 100 5,010 13
- ------------------------------------------------------------------------------------------------------------
Psychiatric Facility - Georgia 1 108 14 100 560 ---
- ------------------------------------------------------------------------------------------------------------
Congregate Care and Assisted Living Centers
Alabama (3) 1 84 --- --- --- ---
Arkansas 1 17 92 100 27 12
Arizona 1 97 77 100 490 10
California (3) 11 1,013 83 100 4,113 13
Colorado 1 98 95 100 667 1
Delaware 1 52 89 100 375 10
Florida (3) 6 425 73 98 1,555 12
Georgia 1 40 97 100 230 13
Idaho 1 117 18 100 726 15
Kansas 1 110 81 100 583 1
Louisiana (3) 5 449 100 100 1,616 9
Maryland 1 86 37 100 794 12
Michigan (3) 1 100 --- --- --- ---
Missouri 1 73 74 100 428 4
New Jersey 3 195 71 100 1,266 12
New Mexico 2 285 55 100 1,935 13
New York 1 74 84 100 410 10
North Carolina 3 229 95 100 1,306 12
Ohio 1 156 93 100 776 13
Oregon 1 58 99 81 378 11
Pennsylvania 3 232 92 100 1,600 11
Rhode Island 1 172 99 100 1,531 3
South Carolina 5 400 90 100 2,514 13
Texas (3) 16 1,373 70 100 7,659 13
Virginia (3) 1 90 --- --- --- 15
Washington 2 139 93 87 673 10
- ------------------------------------------------------------------------------------------------------------
Sub-Total 72 6,164 78 99 31,652 12
- ------------------------------------------------------------------------------------------------------------
Medical Office Buildings (4)
Alaska 1 --- --- 100 841 3
California 7 --- --- 100 6,493 1
Minnesota 1 --- --- 100 1,300 ---
Texas 9 --- --- 100 4,817 9
Utah 1 --- --- 100 557 12
- ------------------------------------------------------------------------------------------------------------
Sub-Total 19 --- --- 100 14,008 4
- ------------------------------------------------------------------------------------------------------------
TOTAL FACILITIES 244 24,094 78% 62% $ 141,979 8
============================================================================================================
</TABLE>
(1) Congregate Care and Assisted Living Centers are measured in units.
Physician Group Practice Clinics and Medical Office Buildings are measured
in square feet and encompass approximately 437,000 and 955,000 square feet,
respectively. All other facilities are measured by bed count.
(2) All revenues, including Medicare revenues but excluding Medicaid revenues,
are included in "Private Patient" revenues.
(3) Includes facilities under construction, except for average occupancy data.
(4) Physician Group Practice Clinics and Medical Office Building lessees have
use of the leased facilities for their own use or for the use of
sub-lessees.
(5) This information is derived from information provided by the Company's
Lessees.
<PAGE>
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1997, the Company owned an interest in 244 Properties
located in 40 states, which are operated by 59 operators. Listed below are the
Company's major operators and the annualized revenue and the percentage of
annualized revenue derived from such operators.
<TABLE>
<CAPTION>
Percentage
Annualized of Annualized
Operators Facilities Revenue Revenue
- --------------------------------------------------------------------
<S> <C> <C> <C>
Vencor 51 $23,301,000 16%
HealthSouth 6 12,342,000 9
Emeritus 23 11,038,000 8
Beverly 25 9,915,000 7
Tenet 3 8,855,000 6
Columbia 12 8,202,000 6
</TABLE>
Lessees of 51 of the Company's 244 Properties are subsidiaries of Vencor
(formerly subsidiaries of The Hillhaven Corporation). Based upon public reports
filed by Vencor with the Securities and Exchange Commission ("SEC"), Vencor's
revenue and net income for the year ended December 31, 1997 were approximately
$3.1 billion and $130.9 million, respectively; and Vencor's total assets and
stockholders' equity as of December 31, 1997 were approximately $3.3 billion and
$905.4 million, respectively.
Through 1997, Tenet was financially responsible to the Company under a
guarantee through the primary lease term on four Properties, including the three
properties leased to subsidiaries of Tenet. In addition, Tenet has guaranteed
all of the properties leased to Vencor (see prior paragraph). However, as
discussed in more detail below, as part of an agreement reached between Tenet
and the Company during the fourth quarter, Tenet will no longer guarantee the
rental revenue on the Vencor facilities beyond the base term of the leases.
During 1997, one such lease expired and 14 more will expire during 1998. Tenet
is one of the nation's largest health care services companies, providing a broad
range of services through the ownership and management of health care
facilities. Based upon public reports filed by Tenet with the SEC, for the six
months ended November 30, 1997, Tenet reported net operating revenue and net
income of approximately $4.8 billion and $254 million, respectively. At
November 30, 1997, Tenet's total assets and shareholders' equity were
approximately $12.1 billion and $3.5 billion, respectively. Based on public
reports filed by Tenet with the SEC, for the year ended May 31, 1997, Tenet
reported net operating revenue and net loss of approximately $8.7 billion and
$254 million, respectively, and total assets and shareholders' equity of
approximately $11.7 billion and $3.2 billion, respectively. For certain
additional financial data with respect to Tenet, see Appendix I, attached
hereto.
The Company leases 15 facilities to Beverly. In addition, it is providing
a mortgage loan to Beverly that is secured by 10 facilities. Based upon public
reports filed by Beverly with the SEC, Beverly's net operating revenue and net
income for the nine months ended September 30, 1997 were approximately $2.4
billion and $66.6 million, respectively. Beverly's total assets and
stockholder's equity as of September 30, 1997 were approximately $2.5 billion
and $1.1 billion, respectively. For the year ended December 31, 1996, Beverly
reported net operating revenue and net income of approximately $3.2 billion and
$50.3 million, respectively, and total assets and stockholder's equity of $2.5
billion and $861.1 million, respectively. According to a recent press release
issued by Beverly, Beverly's net operating revenue and net income for the year
ended December 31, 1997 were $3.2 billion and $58.6 million, respectively.
<PAGE>
The Company separately concluded agreements with Tenet and Beverly in the
fourth quarter of 1997 that result in their forbearance or waiver of certain
renewal and purchase options and related rights of first refusal on facilities
currently leased to Vencor and Beverly. Options and related rights of first
refusal on up to 51 facilities operated by Vencor and eight facilities operated
by Beverly are covered under the agreements. As part of these agreements,
continued ownership of the facilities will remain with the Company.
The Company leases six rehabilitation hospitals to HealthSouth, including
three rehabilitation hospitals previously operated by Horizon discussed below.
Based upon public reports filed by HealthSouth with the SEC, HealthSouth's
revenue and net income for the nine months ended September 30, 1997 were
approximately $2.2 billion and $231.8 million, respectively. HealthSouth's
total assets and stockholders' equity at September 30, 1997 were approximately
$4.2 billion and $1.9 billion, respectively. HealthSouth reported revenue and
net income for the year ended December 31, 1996 of approximately $2.4 billion
and $220.8 million, respectively. HealthSouth's total assets and stockholders'
equity as of December 31, 1996 were approximately $3.4 billion and $1.5 billion,
respectively. According to a recent press release issued by HealthSouth,
HealthSouth's revenue and net income for the year ended December 31, 1997 were
$3.0 billion and $330.6 million, respectively.
During 1997, the Company had leased eight facilities to Horizon/CMS
Healthcare Corporation ("Horizon"), including the three rehabilitation hospitals
described above, four long-term care facilities and one congregate care
facility. HealthSouth purchased Horizon in October 1997, and subsequently sold
Horizon's long-term and congregate care operations to Integrated Health Services
("IHS"). These operations included four long-term care facilities and one
congregate care facility which are now leased to IHS by the Company.
The Company holds Loans (defined below) which initially totaled $34.5
million and which are secured by one hospital and two medical office buildings
operated by a wholly owned subsidiary of Columbia. At December 31, 1997, the
Company has provided or has committed to provide approximately $44 million in
acquisition or construction funds for eight medical office buildings which are
leased by HealthTrust, a wholly owned subsidiary of Columbia. All of these
medical office buildings have been completed with the exception of some tenant
improvements. In addition, Columbia leases one other medical office building.
Based upon public reports filed by Columbia with the SEC, Columbia's revenue and
net income for the nine months ended September 30, 1997 were approximately $14.4
billion and $988 million, respectively; and Columbia's total assets and
stockholders' equity as of September 30, 1997 were approximately $23.1 billion
and $8.9 billion, respectively. For the year ended December 31, 1996, Columbia
reported revenue and net income of approximately $19.9 billion and $1.5 billion,
respectively, and total assets and stockholders' equity of approximately $21.3
billion and $8.6 billion, respectively. According to a recent press release
issued by Columbia, Columbia's revenue and net loss for the year ended December
31, 1997 were $18.8 billion and $305.0 million, respectively.
According to publicly filed SEC reports, Columbia recently has been the
subject of various significant government investigations regarding its
compliance with Medicare, Medicaid and similar programs. According to such SEC
reports filed by Columbia, while it is too early to predict the outcome of any
of the on-going investigations or the initiation of any additional
investigations, were Columbia to be found in violation of federal or state laws
relating to Medicare, Medicaid or similar programs, Columbia could be subject to
substantial monetary fines, civil and criminal penalties, and exclusion from
participation in the Medicare and Medicaid programs. Columbia's senior debt
ratings remain investment grade, but have recently been reduced by Moody's to
Baa2 and by Standard & Poor's to BBB.
<PAGE>
The Company leases 19 assisted living and congregate care facilities and
three long-term care facilities to Emeritus. The Company also provided a
mortgage loan on an assisted living facility operated by Emeritus. Based on
public reports filed by Emeritus with the SEC, total operating revenue and net
loss for the nine months ended September 30, 1997 were approximately $85.0
million and $14.8 million, respectively. Emeritus' total assets and
shareholders' equity at September 30, 1997 were $203.6 million and $12.7
million, respectively. For the year ended December 31, 1996, Emeritus reported
total operating revenue and net loss of approximately $68.9 million and $8.2
million, respectively, and total assets and shareholders' equity of $158 million
and $26.2 million respectively. Subsequent to September 30, 1997, Emeritus
raised $25 million in additional preferred equity. According to a recent press
release issued by Emeritus, Emeritus' total operating revenue and net loss for
the year ended December 31, 1997 were $117.8 million and $28.2 million,
respectively.
Vencor, Tenet, Beverly, HealthSouth, Columbia and Emeritus are subject to
the informational filing requirements of the Securities Exchange Act of 1934, as
amended, and accordingly file periodic financial statements on Form 10-K and
Form 10-Q with the SEC. All of the financial and other information presented
herein with respect to such companies was obtained from such publicly filed
reports, except where indicated where certain additional information was
obtained from press releases issued by those companies.
LEASES AND LOANS
The initial base rental rates of the Leases entered into by the Company
during the three years ended December 31, 1997 have generally ranged from 9% to
12% per annum of the acquisition price of the related property. Rental rates
vary by lease, taking into consideration many factors, including, but not
limited to, creditworthiness of the Lessee, operating performance of the
facility, interest rates at the commencement of the lease, location, and type
and physical condition of the facility. Most of the Leases provide for
additional rents which are based upon a percentage of increased revenue over
specific base period revenue of the leased Properties. Initial interest rates
on mortgage loans ("Loans") held by the Company and entered into during the
three years ended December 31, 1997 have generally ranged from 9% to 12% per
annum. Certain Leases and Loans have fixed rent or interest increases or rent or
interest increases based on inflation indices or other factors. Additional
Rental and Interest Income (see Note 2 to the Consolidated Financial Statements
in this Annual Report on Form 10-K) received for the years ended December 31,
1997, 1996 and 1995 were $21.1 million, $20.9 million and $18.1 million,
respectively. The primary or fixed terms of the Leases generally range from 10
to 15 years, and generally have one or more five-year (or longer) renewal
options. The average remaining base lease term on the Company's portfolio of
properties is approximately eight years; the average remaining term on the Loans
is approximately ten years.
Most Leases contain credit enhancements in the form of guarantees, as well
as grouped lease renewals, grouped purchase options, and cross default and cross
collateralization features that may be employed when multiple facilities are
leased to a single operator. Obligations under the Leases, in most cases, have
corporate parent or shareholder guarantees; 120 Leases and Loans covering 14
facilities are backed by irrevocable letters of credit from various financial
institutions which cover from three to eighteen months of Lease or Loan
payments. The Lessees and Mortgagors are required to renew such letters of
credit during the Lease or Loan term in amounts which may change based upon the
passage of time, improved operating cash flow or improved credit ratings.
Currently, the Company has approximately $39.6 million in irrevocable standby
letters of credit from financial institutions. The letters of credit relating
to an individual Lease or Loan may be drawn upon in the event of a Lessee's or
Mortgagor's default under terms of a Lease or Loan. Amounts available under
letters of credit change from time to time; such changes may be material.
<PAGE>
The Company believes that the credit enhancements discussed above provide
it with significant protection for its investment portfolio. The Company is
currently receiving rents and interest in a timely manner from all Lessees and
Mortgagors as provided under the terms of the Leases or Loans. Based upon
information provided to the Company by Lessees or Mortgagors, certain facilities
that are current with respect to monthly rents and mortgage payments are
presently underperforming financially. Individual facilities may underperform
as a result of inadequate Medicaid reimbursement, low occupancy, less than
optimal patient mix, excessive operating costs, other operational issues or
capital needs. Management believes that, even if these facilities remain at
current levels of performance, the Lease and Loan provisions contain sufficient
security to assure that material rental and mortgage obligations will continue
to be met for the remainder of the Lease or Loan terms. In the future it is
expected that the Company will have certain properties which the Lessees may
choose not to renew their Leases at existing rental rates (see Table below).
Many Lessees have the right of first refusal to purchase the Properties
during the Lease terms; many Leases provide one or more five-year (or longer)
renewal options at existing Lease rates and continuing additional rent formulas
although certain Leases provide for Lease renewals at fair market value.
Certain Lessees also have options to purchase the Properties, generally for fair
market value, and generally at the expiration of the primary Lease term and/or
any renewal term under the Lease. If options are exercised, many such
provisions require Lessees to purchase or renew several facilities together,
precluding the possibility of Lessees purchasing or renewing only those
facilities with the best financial outcomes. Thirty-nine Properties are not
subject to purchase options until 2008 or later, and an additional 103 leased
Properties do not have any purchase options.
A table recapping Lease expirations, mortgage maturities, properties
subject to purchase options and financial underperformance follows:
<TABLE>
<CAPTION>
Current Annualized Revenues of
-----------------------------------------------------
Properties Subject to
Lease Expirations,
Purchase Options and Properties Subject Possible Revenue
Mortgage Maturities to Purchase Options (Loss)/Gains at Lease
Year (1) (2) Expiration(3),(4)
----- --------------------- ------------------- ----------------------
(Amounts in thousands, except percentages) % Amount
------- ----------
<S> <C> <C> <C> <C>
1998 $ 10,369 $ 3,177 (0.6) $ (800)
1999 19,103 12,298 (1.9) (2,600)
2000 10,794 9,666 (1.2) (1,600)
2001 17,035 7,599 0.2 300
2002 9,705 1,514 0.5 700
Thereafter 67,601 59,356 -- --
--------- --------- ----- -------
$ 134,607 $ 93,610 (3.0) $ 4,000
========= ========= ===== =======
</TABLE>
<PAGE>
(1) This column includes the revenue impact by year and the total annualized
rental and interest income associated with the Properties subject to
Lessees' renewal options and/or purchase options and mortgage maturities.
(2) This column includes the revenue impact by year and the total annualized
rental and interest income associated with Properties subject to purchase
options. If a purchase option is exercisable at more than one date, the
convention used in the table is to show the revenue subject to the purchase
option at the earliest possible purchase date. Although certain purchase
option periods commenced in earlier years, lessees have not exercised their
purchase options as of this time. The total for this column (2) is a
component (subset) of column (1), the total current annualized revenue of
properties subject to lease expirations, purchase options and mortgage
maturities ($134,607,000).
(3) Based on current market conditions, management estimates that there could
be a revenue loss (compared to current rental rates) upon the expiration of
the current term of the Leases in the percentages and amounts shown in the
table for Lease Expirations. Total revenue of the Company has grown at a
compound annual growth rate of 8.6% in the past five years. The
percentages are computed by taking the possible revenue loss as a
percentage of 1997 total revenue.
(4) The Company estimates that in addition to the possible reduction in income
from Lease expirations, it may also have a reduction of approximately
$400,000 in 1998 due to the reinvestment of cash received from mortgage
maturities and exercises of purchase options. This amount is calculated
based on current interest rate levels and is not estimated in years
subsequent to 1998 due to the unpredictable levels of interest rates and
their impact on Lessees' purchase options and mortgage maturities.
There are numerous factors that could have an impact on Lease renewals or
purchase options, including the financial strength of the Lessee, expected
facility operating performance, the relative level of interest rates and
individual Lessee financing options. Based upon management expectations of the
Company's continued growth, the facilities subject to renewal and/or purchase
options and mortgage maturities and any possible rent loss therefrom should
represent a smaller percentage of revenue in the year of renewal or purchase.
Each Lease is a triple net lease and the Lessee is responsible thereunder,
in addition to the minimum and additional rents, for all additional charges,
including charges related to non-payment or late payment of rent, taxes and
assessments, governmental charges with respect to the leased property and
utility and other charges incurred with the operation of the leased property.
Each Lessee is required, at its expense, to maintain its leased property in
good order and repair. The Company is not required to repair, rebuild or
maintain the Properties.
Each Lessee, at its expense, may make non-capital additions, modifications
or improvements to its leased property. All such alterations, replacements and
improvements must comply with the terms and provisions of the Lease, and become
the property of the Company or its affiliates upon termination of the Lease.
Each Lease requires the Lessee to maintain adequate insurance on the leased
property, naming the Company or its affiliates and any Mortgagees as additional
insureds. In certain circumstances, the Lessee may self-insure pursuant to a
prudent program of self-insurance if the Lessee or the guarantor of its Lease
obligations has substantial net worth. In addition, each Lease requires the
Lessee to indemnify the Company or its affiliates against certain liabilities in
connection with the leased property.
<PAGE>
DEVELOPMENT PROGRAM
The Company has a number of "build-to-suit" type agreements that by their
terms require conversions, upon the completion of the development of the
facilities to lease agreements or mortgage loans. During the construction of
the projects, funds are advanced pursuant to draw requests made by the
developers in accordance with the terms and conditions of the applicable
development agreements which require site visits prior to each advancement of
funds.
Since 1987, the Company has committed to the development of 44 facilities,
including five rehabilitation hospitals, 24 congregate care and assisted living
facilities, five long-term care facilities, seven medical office buildings and
three acute care hospitals representing an aggregate investment of approximately
$335 million. As of December 31, 1997, costs of approximately $248.1 million
have been funded and 32 facilities have been completed. The 32 completed
facilities comprise five rehabilitation hospitals, 13 congregate care and
assisted living facilities, five long-term care facilities, seven medical office
buildings and two acute care hospitals. The 12 remaining development projects
are scheduled for completion in 1998 and 1999. Simultaneously with the
commencement of each of the development programs and prior to funding, the
Company enters into a lease agreement with the developer/operator. The base
rent under the lease is generally established at a rate equivalent to a
specified number of basis points over the yield on the 10 year United States
Treasury note at the inception of the lease agreement.
The development program generally includes a variety of additional forms of
credit enhancement and collateral beyond those provided by the Leases. During
the development period, the Company generally requires additional security and
collateral in the form of more than one of the following: (a) irrevocable
letters of credit from financial institutions; (b) payment and performance
bonds; and (c) completion guarantees by either one or a combination of the
developer's parent entity, other affiliates or one or more of the individual
principals who control the developer. In addition, prior to any advance of
funds by the Company under the development agreement, the developer must provide
(a) satisfactory evidence in the form of an endorsement to the Company's title
insurance policy that no intervening liens have been placed on the property
since the date of the Company's previous advance; (b) a certificate executed by
the project architect that indicates that all construction work completed on the
project conforms with the requirements of the applicable plans and
specifications; (c) a certificate executed by the general contractor that all
work requested for reimbursement has been completed; and (d) satisfactory
evidence that the funds remaining unadvanced are sufficient for the payment of
all costs necessary for the completion of the project in accordance with the
terms and provisions of the agreement. As a further safeguard during the
development period, the Company generally will retain 10% of construction funds
incurred until it has received satisfactory evidence that the project will be
fully completed in accordance with the applicable plans and specifications. The
Company also monitors the progress of the development of each project and the
accuracy of the developer's draw requests by having its own in-house inspector
perform regular on-site inspections of the project prior to the release of any
requested funds.
FUTURE ACQUISITIONS
The Company anticipates acquiring additional health care related facilities
and leasing them to health care operators or investing in mortgages secured by
health care facilities.
<PAGE>
TAXATION OF THE COMPANY
Management of the Company believes that the Company has operated in such a
manner as to qualify for taxation as a real estate investment trust ("REIT")
under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the
"Code"), commencing with its taxable year ended December 31, 1985, and the
Company intends to continue to operate in such a manner. No assurance can be
given that it has operated or will be able to continue to operate in a manner so
as to qualify or to remain so qualified. This summary is qualified in its
entirety by the applicable Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretation thereof.
If the Company qualifies for taxation as a REIT, it will generally not be
subject to Federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (i.e., at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will continue to
be subject to federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is
managed by one or more trustees or directors; (ii) the beneficial ownership of
which is evidenced by transferable shares, or by transferable certificates of
beneficial interest; (iii) which would be taxable, but for Sections 856 through
860 of the Code, as a domestic corporation; (iv) which is neither a financial
institution nor an insurance company subject to certain provisions of the Code;
(v) the beneficial ownership of which is held by 100 or more persons; (vi)
during the last half of each taxable year not more than 50% in value of the
outstanding stock of which is owned, actually or constructively, by five or
fewer individuals; and (vii) which meets certain other tests, described below,
regarding the amount of its distributions and the nature of its income and
assets. The Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
There presently are two gross income requirements and, with respect to
taxable years of the Company beginning before August 6, 1997, there was a third
gross income requirement. First, at least 75% of the Company's gross income
(excluding gross income from Prohibited Transactions as defined below) for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property or from certain types of temporary
investment income. Second, at least 95% of the Company's gross income
(excluding gross income from Prohibited Transactions) for each taxable year must
be derived from income that qualifies under the 75% test and all other
dividends, interest and gain from the sale or other disposition of stock or
securities. Third, for taxable years of the Company beginning before August 6,
1997, short-term gains from the sale or other disposition of stock or
securities, gains from Prohibited Transactions and gains on the sale or other
disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of the Company's gross income for each such taxable year. A Prohibited
Transaction is a sale or other disposition of property (other than foreclosure
property) held for sale to customers in the ordinary course of business.
The Company, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, at least 75%
of the value of the Company's total assets must be represented by real estate
assets (including stock or debt instruments held for not more than one year,
purchased with the proceeds of a stock offering or long-term (more than five
years) public debt offering of the Company), cash, cash items and government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the Company's
total assets and the Company may not own more than 10% of any one issuer's
outstanding voting securities.
<PAGE>
The Company owns interests in various partnerships and limited liability
companies. In the case of a REIT that is a partner in a partnership or a member
of a limited liability company that is treated as a partnership under the Code,
Treasury Regulations provide that for purposes of the REIT income and asset
tests, the REIT will be deemed to own its proportionate share of the assets of
the partnership or limited liability company and will be deemed to be entitled
to the income of the partnership or limited liability company attributable to
such share. The ownership of an interest in a partnership or limited liability
company by a REIT may involve special tax risks, including the challenge by the
Internal Revenue Service of the allocations of income and expense items of the
partnership or limited liability company, which would affect the computation of
taxable income of the REIT, and the status of the partnership or limited
liability company as a partnership (as opposed to an association taxable as a
corporation) for federal income tax purposes. The Company also owns interests
in a number of subsidiaries which are intended to be treated as qualified real
estate investment trust subsidiaries (each a "QRS"). The Code provides that
such subsidiaries will be ignored for federal income tax purposes and all
assets, liabilities and items of income, deduction and credit of such
subsidiaries will be treated as assets, liabilities and such items of the
Company. If any partnership or subsidiary in which the Company owns an interest
were treated as a regular corporation (and not as a partnership or QRS) for
federal income tax purposes, the Company would likely fail to satisfy the REIT
asset tests described above and would therefore fail to qualify as a REIT. The
Company believes that each of the partnerships and subsidiaries in which it owns
an interest will be treated for tax purposes as a partnership or QRS,
respectively, although no assurance can be given that the Internal Revenue
Service will not successfully challenge the status of any such organization.
The Company, in order to qualify as a REIT, is required to distribute
dividends (other than capital gain dividends) to its stockholders in an amount
at least equal to (A) the sum of (i) 95% of the Company's "real estate
investment trust taxable income" (computed without regard to the dividends paid
deduction and the Company's net capital gain) and (ii) 95% of the net income, if
any (after tax), from foreclosure property, minus (B) the sum of certain items
of non-cash income. Such distributions must be paid in the taxable year to
which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year, if paid on or before the
first regular dividend payment date after such declaration and if the Company so
elects and specifies the dollar amount in its tax return. To the extent that
the Company does not distribute all of its net long-term capital gain or
distributes at least 95%, but less than 100%, of its "real estate investment
trust taxable income," as adjusted, it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if the Company should fail to distribute
during each calendar year at least the sum of (i) 85% of its real estate
investment trust ordinary income for such year, (ii) 95% of its real estate
investment capital gain income for such year, and (iii) any undistributed
taxable income from prior periods, the Company would be subject to a 4% excise
tax on the excess of such required distributions over the amounts actually
distributed.
<PAGE>
If the Company fails to qualify for taxation as a REIT in any taxable year,
and certain relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to the statutory relief. Failure to qualify for even one year could
substantially reduce distributions to stockholders and could result in the
Company's incurring substantial indebtedness (to the extent borrowings are
feasible) or liquidating substantial investments in order to pay the resulting
taxes.
In addition, President Clinton's Fiscal 1999 budget proposal includes a
provision which, if enacted in its present form, would result in the immediate
taxation of all gain inherent in a C corporation's assets upon an election by
the corporation to become a REIT in taxable years beginning after January 1,
1999, and thus could effectively preclude the Company from reelecting to be
taxed as a REIT if there were a loss of its REIT status.
Distributions made to the Company's taxable U.S. stockholders out of
current or accumulated earnings and profits, unless designated as capital gain
distributions, will be taken into account by them as ordinary income. Such
distributions will not be eligible for the dividends received deductions for
corporations as long as the Company qualifies as a REIT. Distributions made by
the Company that are properly designated by the Company as capital gain
dividends will be taxable to taxable U.S. stockholders as gains (to the extent
that they do not exceed the Company's actual net capital gain for the taxable
year) from the sale or disposition of a capital asset. Depending on the period
of time the Company held the assets which produced such gains, and on certain
designations, if any, which may be made by the Company, such gains may be
taxable to non-corporate U.S. stockholders at a 20%, 25% or 28% rate. Corporate
stockholders may, however, be required to treat up to 20% of any such capital
gain dividend as ordinary income. Distributions in excess of current or
accumulated earnings and profits will not be taxable to a U.S. stockholder to
the extent that they do not exceed the adjusted basis of the stockholder's
shares. To the extent that such distributions exceed the adjusted basis of a
U.S. stockholder's shares they will be included in income as capital gain (as
described below with respect to the sale or exchange of the shares) assuming the
shares are held as a capital asset in the hands of the stockholder.
Stockholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
The Company may elect to retain, rather than distribute as a capital gain
dividend, its net long-term capital gains. In such event, the Company would pay
tax on such retained net long-term capital gains. In addition, for tax years of
the Company beginning on or after January 1, 1998, to the extent designated by
the Company, a U.S. stockholder generally would (i) include its proportionate
share of such undistributed long-term capital gains in computing its long-term
capital gains in its return for its taxable year in which the last day of the
Company's taxable year falls (subject to certain limitations as to the amount so
includable), (ii) be deemed to have paid the capital gains tax imposed on the
Company on the designated amounts included in such stockholder's long-term
capital gains, (iii) receive a credit or refund for such amount of tax deemed
paid by it, (iv) increase the adjusted basis of its shares by the difference
between the amount of such includable gains and the tax deemed to have been paid
by it, and (v) in the case of a U.S. stockholder that is a corporation,
appropriately adjust its earnings and profits for the retained capital gains in
accordance with Treasury Regulations to be prescribed by the IRS.
<PAGE>
In general, any gain or loss upon a sale or exchange of shares by a taxable
U.S. stockholder who has held such shares as a capital asset will be taxable as
long-term capital gain if the shares have been held for more than eighteen
months, mid-term capital gain if the shares have been held for more than one
year but not more than eighteen months, or short-term capital gain if the shares
have been held for one year or less; provided however, any loss on the sale or
exchange of shares that have been held by such stockholder for six months or
less will be treated as a long-term capital loss to the extent of distributions
from the Company required to be treated by such stockholder as long-term capital
gain.
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its shareholders may not conform to the federal income tax consequences
discussed above.
GOVERNMENT REGULATION
The health care industry is heavily regulated by federal, state and local
laws. The Company is affected by government regulation of the health care
industry in that (i) the Company receives rent and debt payments from Lessees
and Mortgagors whose financial ability to make such payments may be affected by
government regulations such as licensure, certification for participation in
government programs, and government reimbursement, and (ii) the Company's
additional rents are generally based on its Lessees' gross revenue from
operations.
The underlying value of the Company's facilities depends on the revenue and
profit that a facility is able to generate. Aggressive efforts by health
insurers and governmental agencies to limit the cost of hospital services and to
reduce utilization of hospital and other health care facilities may reduce
future revenues or slow revenue growth from inpatient facilities and shift
utilization from inpatient to outpatient facilities. See the Health Care Reform
section below.
The various federal and state governments have made detecting and
eliminating fraud and abuse in government programs a high priority. Various
laws and regulations have been passed or considered to eliminate fraud and
abuse. The goal of these laws and regulations is to prohibit, through the
imposition of criminal and civil penalties that may include exclusion from
reimbursement programs, payment arrangements that include compensation for
patient referrals. Violations of these laws may jeopardize a Lessee's and
Mortgagor's ability to operate a facility or to make rent and debt payments,
thereby potentially adversely affecting the Company.
The Company's lease arrangements with Lessees may also be subject to these
fraud and abuse laws. Contingent or percentage rent arrangements are subject to
federal and state laws and regulations governing illegal rebates and kickbacks
where the Company's co-investors are physicians or others in a position to refer
patients to the facilities. Although only limited interpretive or enforcement
guidance is available, the Company has structured its rent arrangements in a
manner which it believes complies with such laws and regulations.
Health care facilities are subject to licensure in order to operate.
Failure to obtain licensure or loss of licensure would prevent the facility from
operating which could adversely affect the facility operator's ability to make
rent and debt payments. Expansion, including the addition of new beds or
services or acquisition of medical equipment, and occasionally the contraction
of health care facilities, may be subject to state and local regulatory approval
through certificate of need ("CON") programs. States vary in their utilization
of CON controls. In addition, health care facilities are also subject to the
Americans with Disabilities Act and building and safety codes which govern
access, physical design requirements for facilities and building standards.
<PAGE>
Health care facilities are also subject to a wide variety of federal, state
and local environmental and occupational health and safety laws and regulations
which affect facility operations. In addition, an owner of real property may be
liable in certain circumstances for the costs of remediation or removal of
hazardous or toxic substances, regardless of whether the owner of the real
property knew of or was responsible for the presence or disposal of the
hazardous or toxic substances. The Company's arrangements with its Lessees
generally require the Lessees to indemnify the Company for certain environmental
liabilities, but the scope of such indemnifications are limited and there is no
assurance that the Lessees would be able to fulfill their indemnification
obligations. The presence or improper disposal of hazardous or toxic substances
could adversely affect the value of the property which would affect the owner's
ability to sell or rent such property, or to use the property as collateral.
Revenues of Lessees and Mortgagors are generally derived from payments for
patient care. Such payments are received from the federal Medicare program,
state Medicaid programs, private insurance carriers, health care service plans,
health maintenance organizations, preferred provider arrangements, self-insured
employers as well as directly from patients. Efforts to reduce costs by these
payors should be expected to continue, which may result in reduced or slower
growth in reimbursement for certain services provided by some of the Company's
Lessees and Mortgagors. In addition, the failure of any of the Company's
Lessees and Mortgagors to comply with various laws and regulations could
jeopardize their ability to be certified to participate in the Medicare and
Medicaid programs.
Medicare payments for psychiatric, long-term and rehabilitative care are
based on allowable costs plus a return on equity for proprietary facilities.
Medicare payments to acute care hospitals for inpatient services are made
pursuant to the Prospective Payment System ("PPS") under which a hospital is
paid a prospectively established rate based on the category of the patient's
diagnosis ("Diagnostic Related Groups" or "DRGs"). In 1991, Medicare began to
phase-in over a period of years, reimbursement to hospitals for capital-related
inpatient costs under PPS using a federal rate rather than the cost-based
reimbursement system previously used. DRG rates are subject to adjustment on an
annual basis as part of the federal budget reconciliation process.
Medicaid programs generally pay for acute, rehabilitative and psychiatric
care based on reasonable costs at fixed rates; long-term care facilities are
generally reimbursed using fixed daily rates. Both Medicare and Medicaid
payments are generally below retail rates for Lessee-operated facilities.
Increasingly, states have introduced managed care contracting techniques in the
administration of Medicaid programs. Such mechanisms could have the impact of
reducing utilization of and reimbursement to Lessee-operated facilities.
Third party payors in various states and areas base payments on costs,
retail rates or, increasingly, negotiated rates, including discounts from normal
charges, fixed daily rates and prepaid capitated rates.
<PAGE>
LONG-TERM CARE FACILITIES. Regulation of long-term care facilities is
exercised primarily through the licensing of such facilities against a common
background established by federal law enacted as part of the Omnibus Budget
Reconciliation Act of 1987. Regulatory authorities and licensing standards
vary from state to state, and in some instances from locality to locality.
These standards are constantly reviewed and revised. Agencies periodically
inspect facilities, at which time deficiencies may be identified which must be
corrected as a condition to continued licensing or certification and
participation in government reimbursement programs. Depending on the nature of
such deficiencies, remedies can be routine or costly. Similarly, compliance
with regulations which cover a broad range of areas such as patients' rights,
staff training, quality of life and quality of resident care may increase
facility start-up and operating costs.
ACUTE CARE HOSPITALS. Acute care hospitals are subject to extensive
federal, state and local regulation. Acute care hospitals undergo periodic
inspections regarding standards of medical care, equipment and hygiene as a
condition of licensure. Various licenses and permits also are required for
purchasing and administering narcotics, operating laboratories and pharmacies
and the use of radioactive materials and certain equipment. Each of the
Lessees' facilities, the operation of which requires accreditation, is
accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Acute care hospitals must comply with requirements for various forms of
utilization review. In addition, under PPS, each state must have a Peer Review
Organization carry out federally mandated reviews of Medicare patient
admissions, treatment and discharges in acute care hospitals.
PSYCHIATRIC AND REHABILITATION HOSPITALS. Psychiatric and rehabilitation
hospitals are subject to extensive federal, state and local legislation,
regulation, inspection and licensure requirements similar to those of acute care
hospitals. For psychiatric hospitals, there are specific laws regulating civil
commitment of patients and disclosure of information. Many states have adopted
a "patient's bill of rights" which sets forth certain higher standards for
patient care that are designed to decrease restrictions and enhance dignity in
treatment. Insurance reimbursement for psychiatric treatment generally is more
limited than for general health care.
PHYSICIAN GROUP PRACTICE CLINICS. Physician group practice clinics are
subject to extensive federal, state and local legislation and regulation. Every
state imposes licensing requirements on individual physicians and on facilities
and services operated by physicians. In addition, federal and state laws
regulate health maintenance organizations and other managed care organizations
with which physician groups may have contracts. Many states require regulatory
approval, including CONs, before establishing certain types of
physician-directed clinics, offering certain services or making expenditures in
excess of statutory thresholds for health care equipment, facilities or
programs. In connection with the expansion of existing operations and the entry
into new markets, physician clinics and affiliated practice groups may become
subject to compliance with additional regulation.
HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control costs,
the migration of patients from acute care facilities into extended care and home
care settings and the vertical and horizontal consolidation of health care
providers. The pressure to control health care costs intensified during 1994
and 1995 as a result of the national health care reform debate and continued
into 1997 as Congress attempted to slow the rate of growth of federal health
care expenditures as part of its effort to balance the federal budget. For
example, the Balanced Budget Act of 1997 adopted a variety of changes to the
<PAGE>
Medicare and Medicaid programs which may have an effect upon the revenues of the
operators of Properties owned by the Company. These changes, which will be
implemented at various times, include (i) the adoption of the Medicare+Choice
program, which expands the Medicare beneficiaries' choices to include
traditional Medicare fee-for-service, private fee-for-service medical savings
accounts, various managed care plans, and provider sponsored organizations,
among others, (ii) the expansion and restriction of reimbursement for various
Medicare benefits, (iii) the freeze in hospital rates in 1998 and more limited
annual increases in hospital rates for 1999-2002, (iv) the adoption of a
prospective pay system for skilled nursing facilities, home health agencies,
hospital outpatient departments, and rehabilitation hospitals, (v) the repeal of
the Boren amendment in Medicaid so that states have the exclusive authority to
determine provider rates and providers have no federal right of action, (vi) the
reduction in Medicare disproportionate share payments to hospitals, and (vii)
the removal of the $150,000,000 limit on tax-exempt bonds for nonacute hospital
capital projects. In addition, the Balanced Budget Act of 1997 strengthens the
anti-fraud and abuse laws to provide for stiffer penalties for fraud and abuse
violations.
In addition to the reforms enacted and considered by Congress from time to
time, state legislatures periodically consider various health care reform
proposals. Congress and state legislatures can be expected to continue to
review and assess alternative health care delivery systems and payment
methodologies and public debate of these issues can be expected to continue in
the future. These changes in the law, new interpretations of existing laws, and
changes in payment methodology may have a dramatic effect on the definition of
permissible or impermissible activities, the relative costs associated with
doing business and the amount of reimbursement by both government and other
third-party payors and may be applied retroactively. The ultimate timing or
effect of legislative efforts cannot be predicted and may impact the Company in
different ways.
Spending in the U.S. health care industry during 1997 was estimated by the
Congressional Budget Office at approximately $1.085 trillion, representing 13.4%
of Gross Domestic Product. The Company believes that government and private
efforts to contain or reduce health care costs will continue. These trends are
likely to lead to reduced or slower growth in reimbursement for certain services
provided by some of the Company's Lessees. The Company believes that the vast
nature of the health care industry, the financial strength and operating
flexibility of its operators and the diversity of its portfolio will mitigate
the impact of any such diminution in reimbursements. However, the Company
cannot predict whether any of the above proposals or any other proposals will be
adopted and, if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on the Company's financial
condition or results of operations.
OBJECTIVES AND POLICIES
The Company is organized to invest in income-producing health care related
facilities. In evaluating potential investments, the Company considers such
factors as (1) the geographic area, type of property and demographic profile;
(2) the location, construction quality, condition and design of the property;
(3) the current and anticipated cash flow and its adequacy to meet operational
needs and lease obligations and to provide a competitive market return on equity
to the Company's investors; (4) the potential for capital appreciation, if any;
(5) the growth, tax and regulatory environment of the communities in which the
properties are located; (6) occupancy and demand for similar health facilities
in the same or nearby communities; (7) an adequate mix of private and government
sponsored patients; (8) potential alternative uses of the facilities; and (9)
prospects for liquidity through financing or refinancing.
<PAGE>
There are no limitations on the percentage of the Company's total assets
that may be invested in any one property or partnership. The Investment
Committee of the Board of Directors may establish limitations as it deems
appropriate from time to time. No limits have been set on the number of
properties in which the Company will seek to invest, or on the concentration of
investments in any one facility or any one city or state. The Company acquires
its investments primarily for income.
At December 31, 1997, the Company has preferred stock and two classes of
debt securities which are senior to the Common Stock. The Company may, in the
future, issue additional debt or equity securities which will be senior to the
Common Stock. The Company has authority to offer shares of its capital stock in
exchange for investments which conform to its standards and to repurchase or
otherwise acquire its shares or other securities.
The Company may incur additional indebtedness when, in the opinion of its
management and Directors, it is advisable. For short-term purposes the Company
from time to time negotiates lines of credit, or arranges for other short-term
borrowings from banks or otherwise. The Company may arrange for long-term
borrowings through public offerings or from institutional investors. Under its
Bylaws, the Company is subject to various restrictions with respect to
borrowings.
In addition, the Company may incur additional mortgage indebtedness on real
estate which it has acquired through purchase, foreclosure or otherwise. Where
leverage is present on terms deemed favorable, the Company invests in properties
subject to existing loans, or secured by mortgages, deeds of trust or similar
liens on the properties. The Company also may obtain non-recourse or other
mortgage financing on unleveraged properties in which it has invested or may
refinance properties acquired on a leveraged basis.
In July, 1990, the Company adopted a Rights Agreement whereby Company
stockholders received, for each share of Common Stock owned, one right to
purchase shares of Common Stock of the Company, or securities of an acquiring
entity, at one-half market value (the "Rights"). The Rights will be exercisable
only if and when certain circumstances occur, including the acquisition by a
person or group of 15% or more of the Company's outstanding common shares, or
the making of a tender offer for 30% or more of the Company's common shares.
The Rights are intended to protect stockholders of the Company from takeover
tactics that could deprive them of the full value of their shares.
The Company will not, without the prior approval of a majority of
Directors, acquire from or sell to any Director, officer or employee of the
Company, or any affiliate thereof, as the case may be, any of the assets or
other property of the Company.
The Company provides to its stockholders annual reports containing audited
financial statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by the Board of
Directors of the Company and may be changed without stockholder approval.
<PAGE>
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K that are not historical
factual statements are "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements include, among
other things, statements regarding the intent, belief or expectations of the
Company and its officers and can be identified by the use of terminology such as
"may", "will", "expect", "believe", "intend", "plan", "estimate", "should" and
other comparable terms or the negative thereof. In addition, the Company,
through its senior management, from time to time makes forward looking oral and
written public statements concerning the Company's expected future operations
and other developments. Shareholders and investors are cautioned that, while
forward looking statements reflect the Company's good faith beliefs and best
judgment based upon current information, they are not guarantees of future
performance and are subject to known and unknown risks and uncertainties.
Actual results may differ materially from the expectations contained in the
forward looking statements as a result of various factors. Such factors include
(i) legislative, regulatory, or other changes in the healthcare industry at the
local, state or federal level which increase the costs of or otherwise affect
the operations of the Company's Lessees; (ii) changes in the reimbursement
available to the Company's Lessees by governmental or private payors, including
changes in Medicare and Medicaid payment levels and the availability and cost of
third party insurance coverage; (iii) competition for tenants and mortgagors,
including with respect to new leases and mortgages and the renewal or roll-over
of existing leases; (iv) competition for the acquisition and financing of health
care facilities; (v) the ability of the Company's Lessees and Mortgagors to
operate the Company's properties in a manner sufficient to maintain or increase
revenues and to generate sufficient income to make rent and loan payments; and,
(vi) changes in national or regional economic conditions, including changes in
interest rates and the availability and cost of capital to the Company.
<PAGE>
PART II
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of acquiring health care facilities that it
leases on a long-term basis to health care providers. On a more limited basis,
the Company has provided mortgage financing on health care facilities. As of
December 31, 1997, the Company's portfolio of properties, including equity
investments, consisted of 244 facilities located in 40 states. These facilities
are comprised of 135 long-term care facilities, 72 congregate care and assisted
living facilities, 19 medical office buildings, eight acute care hospitals, six
freestanding rehabilitation facilities, three physician group practice clinics
and one psychiatric care facility. The gross acquisition price of the
properties, which includes joint venture acquisitions, was approximately
$1,112,000,000 at December 31, 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
Net Income applicable to common shares for the year ended December 31, 1997
totaled $63,542,000 or $2.21 of basic earnings per common share and $2.19 of
diluted earnings per common share (refer to footnote 9 of the 1997 financial
statements) on revenue of $128,503,000. This compares to Net Income applicable
to common shares of $60,641,000 or $2.12 of basic earnings per common share and
$2.10 of diluted earnings per common share on revenue of $120,393,000 for the
corresponding period in 1996. Included in Net Income applicable to common
shares for the year ended December 31, 1997 is the Gain on Sale of Real Estate
Properties of $2,047,000 or $0.07 per share of common stock. Net Income
applicable to common shares for the year ended December 31, 1996 included
$2,061,000 or $0.07 per share of common stock from the payoff of two mortgage
loans that had been purchased at a discount in 1992.
Base Rental Income for the year ended December 31, 1997 increased by
$8,428,000 to $92,130,000. The majority of this increase was generated by rents
on $226,000,000 of equity investments made in 1997 and a full year of rents on
$117,000,000 of equity investments made in 1996. These amounts represent
significant increases over the acquisition activity of prior years. Higher
Additional Rental and Interest Income from the existing portfolio also
contributed to the increase in revenue. After adjusting for the mortgage loan
income for 1996 described earlier, Additional Rental and Interest Income
increased by $2,196,000 to $21,060,000 from the prior year. The increases noted
above were offset by a decrease in Interest and Other Income for the year ended
December 31, 1997 of $1,232,000 to $14,534,000, due in part to the pay-down or
payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1997 increased by
$2,191,000 to $28,592,000. The increase in Interest Expense is directly
related to the Company's higher borrowing levels resulting from the significant
increase in new investment activity. The increase in Depreciation/Non Cash
Charges of $2,740,000 to $25,889,000 for the year ended December 31, 1997, is
related to the new investments discussed above.
<PAGE>
The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. Historical cost accounting for
real estate assets implicitly assumes that the value of real estate assets
diminishes predictably over time. Since real estate values instead have
historically risen and fallen with market conditions, presentations of operating
results for a real estate investment trust that uses historical cost accounting
for depreciation could be less informative. The term FFO was designed by the
Real Estate Investment Trust ("REIT") industry to address this problem.
The Company has adopted the definition of FFO prescribed by the National
Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as Net
Income applicable to common shares (computed in accordance with generally
accepted accounting principles), excluding gains (or losses) from debt
restructuring and sales of property, plus real estate depreciation, and after
adjustments for unconsolidated partnerships and joint ventures. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect FFO on
the same basis.
Funds From Operations for the years ended December 31, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
(Amounts in thousands)
<S> <C> <C>
Net Income Applicable to Common Shares $ 63,542 $ 60,641
Real Estate Depreciation 22,667 20,700
Joint Venture Adjustments (720) (824)
Gain on Sale of Real Estate Properties (2,047) ---
-------- --------
Funds From Operations $ 83,442 $ 80,517
======== ========
</TABLE>
FFO for the year ended December 31, 1997, increased $2,925,000 from the
comparable period in the prior year. The increases are attributable to increases
in Base Rental Income, Additional Rental and Interest Income, and offset by
increases in Interest Expense and decreases in Interest and Other Income all of
which are discussed in more detail above.
FFO does not represent cash generated from operating activities in
accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs and should not be considered as
an alternative to Net Income. FFO, as defined by the Company, may not be
comparable to similarly entitled items reported by other REITs that do not
define it exactly as the NAREIT definition.
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Net Income applicable to common shares for the year ended December 31, 1996
totaled $60,641,000 or $2.12 of basic earnings per common share and $2.10 of
diluted earnings per common share on revenue of $120,393,000. This compares to
Net Income applicable to common shares of $80,266,000 or $2.83 of basic earnings
per common share and $2.78 of diluted earnings per common share on revenue of
$105,696,000 for the corresponding period in 1995. Included in Net Income
applicable to common shares and basic earnings per common share for the year
ended December 31, 1995 is the Gain on Sale of Real Estate Properties of
$23,550,000 or $0.83 per share. Net Income applicable to common shares for the
year ended December 31, 1996 was favorably influenced in the amount of
$2,061,000, or $0.07 per share, attributable to the payoff of two mortgage loans
which had been purchased at a discount by the Company in 1992.
<PAGE>
Base Rental Income for the year ended December 31, 1996 increased by
$14,985,000 to $83,702,000. The majority of this increase was generated by rents
on $117,000,000 of equity investments made in 1996 and a full year of rents on
$98,000,000 of equity investments made in 1995. The increase in revenue was
also assisted by higher Additional Rental and Interest Income from the existing
portfolio for the year ended December 31, 1996 of $2,847,000 to $20,925,000.
The growth in Base Rental Income and Additional Rental and Interest Income for
1996 was moderated by the sale and concurrent financing of certain real estate
properties in 1995, which converted the character of the returns on those assets
from rental income to interest income. The increases noted above were offset by
a decrease in Interest and Other Income for the year ended December 31, 1996 of
$2,394,000 to $15,766,000, due in part to the payoff of certain mortgage loans.
Interest Expense for the year ended December 31, 1996 increased by
$7,062,000 to $26,401,000. The increase in Interest Expense is primarily due
to the Company's February 1996 issuance of $115,000,000 6.5% Senior Notes due
2006, the proceeds of which were invested in new long-term investments. The
increase in Depreciation/Non Cash Charges of $3,941,000 to $23,149,000 for the
year ended December 31, 1996, is related to the new investments discussed above.
Funds From Operations for the years ended December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1996 1995
-------- --------
(Amounts in thousands)
<S> <C> <C>
Net Income Applicable to Common Shares $ 60,641 $ 80,266
Real Estate Depreciation 20,700 16,691
Joint Venture Adjustments (824) (496)
Gain on Sale of Real Estate Properties --- (23,550)
-------- --------
Funds From Operations $ 80,517 $ 72,911
======== ========
</TABLE>
FFO for the year ended December 31, 1996, increased $7,606,000 or 10.4%
from the comparable period in the prior year. The increases are attributable to
increases in Base Rental Income, Additional Rental and Interest Income, as
offset by increases in Interest Expense and decreases in Interest and Other
Income all of which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common stock,
preferred stock, the issuance of long-term debt, the assumption of mortgage
debt, the use of short-term bank lines and through internally generated cash
flows. Facilities under construction are generally financed by means of cash on
hand or short-term borrowings under the Company's existing bank lines. At the
completion of construction and commencement of the lease, short-term borrowings
used in the construction phase are generally refinanced with new long-term debt
or equity offerings.
On February 15, 1996, the Company issued $115,000,000 of 6.5% Unsecured
Senior Notes due 2006. During March and April 1997, the Company issued two ten
year $10,000,000 Medium Term Notes ("MTNs") with coupon rates of 7.30% and
7.62%, respectively. During June 1997, $12,500,000 in MTNs with coupon rates of
10.20% and 10.30% were redeemed. On September 26, 1997, the Company issued
$60,000,000, 7-7/8% Series A Cumulative Redeemable Preferred Stock. During
December 1997, the Company raised $55,000,000 of equity in a common stock
offering of 1,437,500 shares at $38.3125 per share. The net proceeds of
$57,810,000 and $51,935,000 from the preferred and common stock offerings,
respectively, were utilized to pay down short-term borrowings under the
Company's revolving lines of credit. At December 31, 1997, stockholders' equity
in the Company totaled $442,269,000 and the debt to equity ratio was 1.02 to 1.
For the year ended December 31, 1997, FFO (before interest expense) covered
Interest Expense 3.92 to 1.
<PAGE>
As of December 31, 1997, the Company had approximately $300,000,000
available under its existing shelf registration statements for the future
issuance of debt and equity securities and for its Series B and Series C MTN
programs. These amounts may be issued from time to time in the future based on
Company needs and then existing market conditions. On October 22, 1997, the
Company renegotiated its line of credit with a group of seven banks. The
Company now has two revolving lines of credit, one for $100,000,000 which
expires on October 22, 2002 and one for $50,000,000 which expires on October 22,
1998. The Company expects these agreements to be renewed for one further year
in October 1998. As of December 31, 1997, the Company also had $83,100,000
available on its $150,000,000 revolving lines of credit. The Company's Senior
Notes and Convertible Subordinated Notes have been rated investment grade by
debt rating agencies since 1986. Current ratings are as follows:
<TABLE>
<CAPTION>
Moody's Standard & Poor's Duff & Phelps
-------- ----------------- --------------
<S> <C> <C> <C>
Senior Notes Baa1 BBB+ A-
Convertible
Subordinated Notes Baa2 BBB BBB+
</TABLE>
Since inception in May 1985, the Company has recorded approximately
$594,213,000 in cumulative FFO. Of this amount, a total of $499,440,000 has
been distributed to stockholders as dividends on common and preferred stock.
The balance of $94,773,000 has been retained, and has been an additional source
of capital for the Company.
At December 31, 1997, the Company held approximately $40,000,000 in
irrevocable letters of credit from commercial banks to secure the obligations of
many lessees' lease and borrowers' loan obligations. The Company may draw upon
the letters of credit if there are any defaults under the leases and/or loans.
Amounts available under letters of credit change based upon facility operating
conditions and other factors and such changes may be material.
The Company has concluded a significant number of "facility rollover"
transactions in 1995, 1996 and 1997 on properties that have been under long-term
leases and mortgages. "Facility rollover" transactions principally include lease
renewals and renegotiations, exchanges, sales of properties, and, to a lesser
extent, payoffs on mortgage receivables.
<TABLE>
<CAPTION>
Increase/(Decrease)
Year In FFO
- ------- -------------------
<S> <C> <C>
1995 Completed 20 facility rollovers including the sale
of ten facilities with concurrent "seller financing"
for a gain of $23,550,000. $ 900,000
1996 Completed 20 facility rollovers including the sale of
nine facilities in Missouri and the exchange of the
Dallas Rehabilitation Institute for the HealthSouth
Sunrise Rehabilitation Hospital in Fort Lauderdale,
Florida. (1,200,000)
1997 Completed or agreed to complete 10 facility rollovers. (1,300,000)
</TABLE>
<PAGE>
Through December 31, 2000, the Company has 62 more facilities that are
subject to lease expiration, mortgage maturities and purchase options (which
management believes may be exercised) representing approximately 30% of
annualized revenues. During 1997, the Company concluded agreements with Tenet
and Beverly that result in their forbearance or waiver of certain renewal and
purchase options and related rights of first refusal on up to 59 facilities
currently leased to Vencor and Beverly, of which 29 facilities have leases
expiring through December 31, 2000. As part of these agreements, continued
ownership of the facilities will remain with the Company. The Company paid
Tenet $5,000,000 in cash, accelerated the purchase option on two acute care
hospitals leased to Tenet, and reduced Tenet's guarantees on the facilities
leased to Vencor. The agreement with Beverly was conditioned on the consent of
the Company to the spin-off by Beverly of its pharmacy operations. As a result
of the forbearance or waiver of these options, the Company believes that, based
upon recent operating results, it may be able to increase rents on approximately
12 facilities whose lease terms expire between 1998 and 2001; however, there can
be no assurance that the Company will be able to realize any increased rents.
The 1998 lease expirations include 14, eight, and five long-term care facilities
leased to Vencor, Beverly and Integrated Health Services, respectively. The
Company has completed certain facility rollovers earlier than the scheduled
lease expirations or mortgage maturities and will continue to pursue such
opportunities where it is advantageous to do so.
Management believes that the Company's liquidity and sources of capital are
adequate to finance its operations as well as its future investments in
additional facilities.
YEAR 2000 ISSUE
Management believes it does not have any significant exposure to Year 2000
issues with respect to its own accounting and information systems. The Company
is discussing Year 2000 compliance requirements with its lessees, bankers and
others.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: February 11, 1999
HEALTH CARE PROPERTY INVESTORS, INC.
(Registrant)
/s/ James G. Reynolds
----------------------------
James G. Reynolds
Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
/s/ Devasis Ghose
----------------------------
Devasis Ghose
Senior Vice President- Finance
and Treasurer
(Principal Accounting Officer)
