[COVER] HEALTH CARE REIT, INC. ANNUAL REPORT
1995
[PHOTO depicting the number 25 representing 25 years of business.]
[INSIDE COVER - Same photo as cover with this phrase underneath:]
Health Care REIT, Inc. has reached a major milestone - our 25th
Anniversary, celebrating 98 consecutive dividends. We look forward
with enthusiasm and optimism to the next quarter century, making
profitable investments for our shareholders.
TABLE OF CONTENTS
Corporate Profile . . . . . . . . . . . . . . . . . . . . . . . 1
Financial Highlights. . . . . . . . . . . . . . . . . . . . . . 1
Letter to Shareholders. . . . . . . . . . . . . . . . . . . . . 2
Portfolio Review. . . . . . . . . . . . . . . . . . . . . . . . 7
Management's Discussion and Analysis. . . . . . . . . . . . . . 8
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 12
Consolidated Statements of Income . . . . . . . . . . . . . . . 13
Consolidated Statements of Shareholders' Equity . . . . . . . . 14
Consolidated Statements of Cash Flows . . . . . . . . . . . . . 15
Notes to Consolidated Financial Statements. . . . . . . . . . . 16
Report of Independent Auditors. . . . . . . . . . . . . . . . . 25
Market and Dividend Information . . . . . . . . . . . . . . . . 26
Income Tax Information. . . . . . . . . . . . . . . . . . . . . 26
Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 27
Shareholder Information . . . . . . . . . . . . . . . . . . . . 28
<PAGE>
CORPORATE PROFILE
Founded in 1970, Health Care REIT, Inc. (the "Company"), a real
estate investment trust, invests in health care facilities -
primarily nursing homes, assisted living and retirement facilities.
The Company also invests in specialty care hospitals and primary
care facilities. The Company's investment portfolio is diversified
by type of facility, number of facilities, location and state.
The Company operates in accordance with federal tax laws and
regulations governing real estate investment trusts. By
maintaining its REIT status, the Company avoids substantial
corporate federal income tax, provided 95% of taxable income (not
including capital gains) is distributed as dividends.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(In thousands, except per share amounts)
<C> <C> <C> <C> <C>
<S>
Gross Income $ 44,596 $ 42,732 $ 36,018 $ 28,908 $ 29,248
Net Income 13,635 24,953 20,055 16,515 13,126
Loans Receivable 291,999 254,924 185,282 151,414 123,812
Investment in Operating-
Lease Properties and
Other 58,629 57,232 42,776 10,301 14,800
Investment in Direct
Financing Leases 11,246 11,428 52,950 65,411 68,391
Total Assets 358,092 324,102 285,024 226,207 207,204
Borrowings Under Line of
Credit Arrangements 106,700 70,900 35,000 78,900 62,200
Senior Notes and Other
Long-Term Obligations 56,060 57,373 61,311 24,819 28,144
Shareholders' Equity 187,598 189,180 184,132 118,948 113,956
Cash Distributions to
Shareholders 24,215 23,127 18,252 15,922 12,042
Cash Available for
Distribution (1) 27,938 31,697 22,780 18,654 14,927
Average Number of Shares
Outstanding 11,710 11,519 9,339 8,629 6,828
Per Share:
Net Income 1.16 2.17 2.15 1.91 1.92
Distributions 2.075 2.01 1.93 1.85 1.77
<FN>
(1) Cash Available for Distribution is defined as net cash provided
from operating activities, but does not consider the effects of
changes in operating assets and liabilities such as other
receivables and accrued expenses. The Company uses Cash Available
for Distribution in evaluating investments and the Company's
operating performance. Cash Available for Distribution 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 as an indicator of the
Company's operating performance or as an alternative to cash flow
as a measure of liquidity.
</FN>
</TABLE>
LETTER TO SHAREHOLDERS
The year 1995 was a significant transitional period for the
Company. In the face of many challenges, substantial progress was
made in repositioning and reengineering the Company for the future.
Appropriately, these changes have been impelled by the dynamism of
the health care industry and the capital markets.
Our success in developing relationships with new customers and
designing products that fit their needs continued in 1995.
However, during the previous four years, the extended period of low
interest rates caused a large "run-off" of direct financing leases
and loans. Such transactions produced large gains - $9.4 million
of option exercise gains and $6.9 million in loan prepayment fees.
While these gains reflect a successful underwriting process, it is
also clear that the capital markets are rewarding consistent,
rather than episodic, earnings and cash flow. Despite more than
$200 million of investments running off our books in the last four
years, over $400 million of new investments were recorded during
the same period, with longer terms and "lock-out" periods designed
to produce predictable earnings and cash flow in the future.
The key to the Company's marketing success is our ability to
differentiate the Company in terms of service, quality and
innovation. We work to understand the marketplace and customer
needs as they change from time to time. Our strength is in
establishing relationships with emerging health care companies who
appreciate our willingness to provide one-stop financing and the
"added value" of advice and counsel. In becoming the "provider of
growth capital to emerging chains" we have changed the composition
of our customer base from smaller operators with limited capital to
more sophisticated owner/operators with extensive operating
experience and significant capital backing. This change does not
indicate dissatisfaction with our historical niche; rather it
reflects the consolidation of the health care delivery system.
Today, more than 50% of our portfolio is comprised of substantial
companies, of which approximately one-half are public companies.
[PHOTO depicting professional persons standing on different levels
of peaks with the following statement in the upper left-hand
corner:]
Health Care REIT, with a diversified, growing portfolio of health
care facilities, is becoming one of the nation's premier health
care REITs, providing growth capital to emerging chains.
A good part of the Company's success comes from identifying
opportunities early. We were the first health care REIT to
identify assisted living as an integral part of any delivery
system. We continuously explore other cost effective, quality
investment opportunities across the continuum of care, as
distinctions among types of health care facilities blur in today's
dynamic health care industry. While our focus remains on long-term
care investments, an important part of our management
responsibility is to focus on tomorrow's opportunities and choose
new investments wisely.
As the health care REIT industry has evolved, competition from
other financing sources has dramatically increased. Access to
reasonably priced capital is becoming the factor that separates the
successful from the unsuccessful REITs and other financiers. In
this selection process clear capital market expectations relating
to performance and policies have developed. Size, self-
administration, appropriate leverage, investment grade status, and
effective shareholder communication directly influence a REIT's
cost of capital.
The following accomplishments during the last several years reflect
management's understanding of the importance of access to the
capital markets and the need to communicate effectively:
- - The Company became a listed New York Stock Exchange company in
late 1992 to enhance its visibility in the capital markets.
- - The Company received an investment grade rating for its $52
million private note transaction in 1993 that was raised in 1994
and reaffirmed in 1995. The reaffirmation also applies to a new
note issue of $30 million that is scheduled to close in the near
future at an attractive weighted average interest rate of 7.18%.
- - Sophisticated information systems have been developed, including
a database system that permits us to more effectively present the
Company's portfolio performance to the marketplace.
- - The Company has attained self-administered status, put senior
management succession in motion, and developed a compensation
system that closely aligns the interests of new management and
shareholders.
[PHOTO depicting a building with its structure being changed, added
on to, and extending higher, with the following statement:]
Repositioned and reengineered for the future, the attainment of
self-administered status and commitment to senior management
succession in 1995 builds a sound foundation for growth.
- - A new Chief Financial Officer with substantial financial, health
care and capital markets experience has been hired, completing the
new management team.
- - Since December 31, 1990, the Company's leverage has been reduced
from levels as high as 1.43 to 1 to levels approximating .9 to 1 at
the end of 1995.
We will continue to present the Company to the capital markets
seeking broader support and lower capital costs. Our understanding
of the health care industry, relationships with excellent operators
and innovative financing programs will carry the day.
Our vision is to enter the ranks of the premier health care REITs
as the "provider of growth capital to emerging chains." This goal
can be attained only through the continuous development of the best
trained, attentive management group in the industry attuned to the
ever-changing health care and capital markets.
\S\: BRUCE G. THOMPSON \S\: GEORGE L. CHAPMAN
- ----------------------- -----------------------
Bruce G. Thompson George L. Chapman
Chairman and Chief Executive Officer President
[PHOTO BELOW NAME] [PHOTO BELOW NAME]
1995 PORTFOLIO REVIEW
[PHOTO here depicting a map of the U.S. Each facility is marked on
the map and represented by a symbol according to type of facility.]
ALABAMA NEW JERSEY
Assisted Living Facilities Nursing Homes
Hoover* Clark*
ARIZONA NEW MEXICO
Nursing Homes Assisted Living Facilities
Camp Verde Hobbs*
Payson* Roswell*
Assisted Living Facilities Retirement Centers
Scottsdale* Santa Fe*
Retirement Centers
Chandler* NEW YORK
Nursing Homes
ARKANSAS Plattsburgh*
Specialty Care Assisted Living Facilities
Little Rock* Chestnut Ridge*
CALIFORNIA NORTH CAROLINA
Nursing Homes Assisted Living Facilities
Santa Rosa* Newton
Retirement Centers Statesville
Placentia* Yadkinville
Specialty Care
Brea* OHIO
Nursing Homes
COLORADO Ashland*
Nursing Homes Bellevue*
Pueblo* Calcutta*
Canal Winchester
CONNECTICUT Grand Rapids*
Nursing Homes Kent
Farmington* Stow
Guilford* Tallmadge*
Manchester (3)* Vermilion*
New Haven* Retirement Centers
Southington Toledo*
Waterbury* Behavioral Care
St. Clairsville*
FLORIDA Primary Care
Nursing Homes Huber Heights
Citrus County* Centerville
Daytona Beach*
Venice* OKLAHOMA
Assisted Living Facilities Assisted Living Facilities
Margate* Bartlesville*
Tampa Chickasha*
Behavioral Care Duncan*
Clearwater* Edmond*
Miami* Enid*
Lawton*
GEORGIA Midwest City*
Nursing Homes Norman*
Snellville* Oklahoma City*
Ponca City
IDAHO Shawnee*
Nursing Homes Stillwater*
Boise*
Coeur D'Alene* PENNSYLVANIA
Nursing Homes
ILLINOIS Easton
Retirement Centers Philadelphia*
Naperville* Assisted Living Facilities
Rockford* Baldwin Twp.*
Primary Care Primary Care
Bloomingdale Philadelphia (2)*
INDIANA TEXAS
Nursing Homes Nursing Homes
Knox Conroe*
Retirement Centers Fredericksburg*
Ft. Wayne* Jasper*
Behavioral Care San Antonio (2)*
Bloomington* San Antonio
Woodville*
KENTUCKY Assisted Living Facilities
Nursing Homes Houston*
Owensboro Wharton*
Retirement Centers
LOUISIANA Harlingen*
Behavioral Care Specialty Care
Alexandria* McAllen*
MARYLAND VIRGINIA
Assisted Living Facilities Assisted Living Facilities
Towson* Chesapeake
Poquoson
MASSACHUSETTS Williamsburg
Nursing Homes Manassas*
Braintree*
South Boston* WASHINGTON D.C.
Webster* Specialty Care
Weymouth* Washington, D.C.*
MICHIGAN WEST VIRGINIA
Nursing Homes Nursing Homes
Detroit* Glenville
Westland*
MISSOURI
Nursing Homes
Hannibal*
St. Joseph
St. Louis*
Retirement Centers
Kansas City*
Behavioral Care * loan site and/or
Springfield* credit enhancement
MANAGEMENT'S DISCUSSION AND ANALYSIS
Liquidity and Capital Resources
- -------------------------------
Loan interest payments, lease payments and loan and commitment
fees are the Company's primary sources of cash from operating
activities. Net cash provided from operating activities in each of
the three most recent years totalled $27,153,000 in 1995;
$31,977,000 in 1994; and $23,180,000 in 1993. The decrease in 1995
versus 1994 was primarily due to a $2,900,000 net reduction in gain
on exercise of options and prepayment fees in addition to the loss
of interest income during 1995 on three non-performing loans.
Interest income on these three loans totalled $2,155,000 in 1994.
The 1994 versus 1993 increase arose primarily from an increase in
the Company's net income. However, there are differences between
the recognition of income for financial reporting purposes and cash
receipts for both leases and mortgage loans which cause
period-to-period changes in net cash provided from operating
activities.
The level of the Company's investing activities varies over
time due to a number of factors, including economic conditions in
the health care financing market, the availability of capital
resources, and the timing of principal payments. Investing
activities in loans receivable and leases, net of principal
collected on loans, were $40,576,000, $84,797,000 and $67,720,000
for the years 1995, 1994 and 1993, respectively. The net increase
in investments in 1995 was unfavorably affected by higher loan
repayments of almost $21,000,000. Additionally, certain 1995
anticipated investments were delayed or, in the case of
construction loans, funded more slowly than expected. The net
increase in investments in 1994 versus 1993 was due to
significantly increased marketing activity.
The Company's investing activities are financed principally by
borrowings, proceeds from the exercise of lease purchase options,
loan repayments, and equity issuances, including issuances pursuant
to the Company's dividend reinvestment plan and the Company's
employee incentive stock option plans. On April 8, 1993, the
Company issued $52,000,000 of Senior Notes (the "Senior Notes") to
a group of institutional investors, the Company's first such debt
offering. These Senior Notes were issued in three tranches with an
initial effective interest rate of 7.63% and an average maturity of
approximately seven years.
The Company has a credit agreement for $150,000,000 with ten
banks which matures March 31, 1997. The agreement specifies that
borrowings under the revolving credit are subject to interest
rates, at the Company's option, based on either the agent bank's
prime rate of interest or 1.5% over LIBOR interest rate. The
Company is primarily utilizing the LIBOR pricing option with a
weighted average LIBOR interest rate of 7.32% at December 31, 1995.
In addition, the Company pays a commitment fee at an annual rate of
.5% of the unused line and an annual agent's fee of $75,000. At
December 31, 1995, the Company had $90,000,000 outstanding under
the revolving credit agreement.
The revolving credit agreement limited the amount of
borrowings available to 75% of the Company's borrowing base. The
Company's borrowing base consisted of mortgage loans and leases not
in default which, with the consent of the banks, are assigned to
the lenders' collateral pool. Each borrowing base property was
valued generally at the lower of the Company's cost or the market
value of the underlying property with substantially all such
properties valued at cost. As of December 31, 1995, the borrowing
base under the revolving credit agreement limited the amount of the
borrowing to $113,000,000. The Company's borrowing availability
was limited by the exclusion of certain assets from the borrowing
base such as construction loans. The Company anticipates that the
completion of facilities under construction and the inclusion of
leases and mortgage loans relating to completed facilities in its
borrowing base will enable it to increase its borrowings to the
$150,000,000 maximum availability. At December 31, 1995, the
Company had $188,190,000 of unfunded commitments.
The revolving credit agreement contains covenants that require
the Company to maintain a ratio of cash flow (as defined in the
agreement) to interest expense of not less than 2 to 1 in any
quarter; a ratio of total funded debt to sum of net worth and
convertible subordinated indebtedness of not more than 1.3 to 1;
and a tangible net worth of $180,000,000. The Company was in
compliance with those and all other covenants at December 31, 1995.
At December 31, 1995, the Company had two unsecured lines of
credit with two banks for a total of $35,000,000. Borrowings under
these lines are made pursuant to notes payable, are due on each
bank's demand and are subject to interest at each bank's prime rate
of interest. The Company had $16,700,000 outstanding at December
31, 1995, under these lines of credit.
The Company uses interest rate swap contracts solely to
accomplish the Company's policy of reducing its interest rate risk,
and thereby maintain a more consistent, predictable interest rate
margin. The Company monitors the amount of its variable interest
rate assets and debt and uses interest rate swap contracts to
partially balance the amount of variable interest rate debt with
its variable interest rate assets. Interest rate swap contracts
permit the Company to match either by fixing interest rates on a
portion of its line of credit borrowings, or converting a portion
of its fixed rate debt to variable rate. At December 31, 1995, the
Company had two five-year interest rate swap contracts which expire
in 1996 and 1997, which hedge the Company's interest rate risk
relating to $30,000,000 of variable interest rate borrowings. At
December 31, 1995, the Company was at risk for rising rates because
its variable interest rate debt exceeded its variable interest rate
assets.
Proceeds from the exercise of lease purchase options were
approximately $38,330,000 and $12,085,000 for the years 1994 and
1993, respectively. At December 31, 1995, the Company had a
limited number of direct financing leases and, therefore,
anticipates that proceeds from the exercise of purchase options
will be significantly reduced.
In the last three years, the Company has had one public
offering of Common Stock. In 1993, the Company issued 2,500,000
shares of Common Stock which provided net proceeds of $59,085,000
at $23.63 per share. The proceeds were initially used to pay down
the Company's bank lines of credit.
The dividend reinvestment plan and, to a lesser extent, the
employee incentive stock option plan together represent a
significant source of capital for the Company. During 1995, 1994
and 1993, issuance of Common Stock pursuant to these plans
generated $3,104,000, $3,222,000, and $4,296,000, respectively, in
cash for the Company.
The Company believes that funds provided from operating
activities, together with funds from new equity and debt issuances,
present credit lines, scheduled loan repayments and equity
issuances under Company stock plans, will be sufficient to meet
current operating requirements and existing commitments. For
example, the Company anticipates completing a $30,000,000 private
note issuance in the first quarter of 1996.
<TABLE>
<CAPTION>
SOURCES OF CAPITAL
Year Ended December 31 1995 1994 1993
- ------------------------------- ----------- ----------- ------------
<C> <C> <C>
<S>
Dividend Reinvestment and Stock
Option Plans $ 3,104,492 $ 3,221,667 $ 4,295,611
Net Increases (Decreases) in
Long-Term Borrowings Under
Line of Credit Arrangements 35,800,000 35,900,000 (43,900,000)
Borrowings Under Senior Notes 52,000,000
Equity Offering-Net 59,085,030
----------- ----------- ------------
$38,904,492 $39,121,667 $ 71,480,641
</TABLE>
Results of Operations
- ---------------------
Gross income increased $1,864,000, $6,714,000 and $7,110,000
in 1995, 1994 and 1993, respectively. In 1995, interest income on
loans receivable, operating lease rents, and loan and commitment
fees each increased while direct financing lease income decreased
when compared to 1994. The increases in interest income on loans
receivable, operating lease rents, and loan and commitment fees are
attributable to the growth in the loan and operating lease
properties portfolio, a long-term trend which the Company
anticipates will continue. The decrease in direct financing lease
income is a reflection of another long-term trend which should also
continue.
In 1994, interest income on loans receivable and operating
lease rents both increased while direct financing lease income
decreased when compared to 1993. These changes in components of
gross income reflect the trend of change in the components of the
investment portfolio discussed above.
Net income totalled $13,635,000 in 1995, $24,953,000 in 1994,
and $20,055,000 in 1993 and is the result of a number of factors.
Generally, the principal factors are the difference between the
Company's average earnings on assets versus its average cost of
borrowings and the Company's debt-to-equity ratio. Other factors
are the settlement of management contract, management fees, other
operating expenses and the provision for losses.
The 1995 decrease in net income was due in large part to the
$5,794,000 charge for settlement of management contract, a
$4,800,000 provision for losses and a decrease in net interest
margin. On November 30, 1995, the Manager merged with and into the
Company pursuant to a Revised Merger Agreement. Consideration for
this transaction of $5,048,000, plus $792,000 of related expenses,
less $46,000 in net assets acquired, were accounted for as a
settlement of a management contract. Also in 1995, the Company
charged operations $4,800,000 for provision for losses which
primarily relates to non-performing loans as well as an increase in
the general allowance. The Company's net interest margin decreased
116 basis points from 1994, which is almost solely due to a net
decline in gains on exercise of options and prepayment fees.
Without those items, average earnings on assets would have declined
approximately three basis points in 1995 versus 1994. The average
cost of borrowing was virtually the same for 1995 versus 1994, but
in 1995, there was a constant quarter-to-quarter decline, which is
a reflection of a general decline in interest rates during the
year. The Company anticipates that in 1996, its core average
earnings on assets will increase modestly and its average cost of
debt will decline.
The Company's 1995 net income was also affected by an increase
in the average quarter-end, debt-to-equity ratio from .65 to 1 in
1994 to .85 to 1 in 1995. During 1995, the Company was propor-
tionally using more debt as a source of funds. Therefore, the
Company proportionally incurred more interest expense for every
dollar of revenue, and thereby decreased its net interest margin
and net income.
The 1994 increase in net income was due in large part to the
growth in net interest margin. The Company's average earnings on
assets increased approximately 67 basis points from the same period
in 1993, while the Company's average cost of borrowing increased 37
basis points, thereby resulting in a 30 basis point increase in net
interest margin. The increase in the average earnings on assets
was solely due to gains on exercise of options and prepayment fees.
Without those items, average earnings on assets would have declined
approximately 35 basis points in 1994 versus 1993. The increase in
average cost of borrowing was due to a general rise in interest
rates in 1994 over 1993 as well as an increase in the LIBOR
interest rate spread in the Company's amended and expanded
revolving line of credit agreement.
The Company's 1994 net income was also affected by a decrease
in the average quarter-end, debt-to-equity ratio from 1 to 1 in
1993 to .65 to 1 in 1994. During 1994, the Company was proportion-
ally using less debt as a source of funds. Therefore, the Company
proportionally incurred less interest expense, and thereby
increased its net interest margin and net income.
Management fees and other operating expenses were $5,284,000
in 1995, $5,072,000 in 1994, and $3,878,000 in 1993. Management
fees declined significantly in 1995 versus 1994 due primarily to
lower net income in 1995, which reduced the incentive portion of
the fee, as well as the termination of the management contract on
November 30, 1995. The higher management fee in 1994 was due to
both higher net income and the 1993 equity offering which
substantially increased the base portion of the management fee.
The increase in other operating expenses in 1995 and 1994 resulted
from increased professional fees, general growth of the Company,
and increased marketing activity. The Company anticipates that due
to the management buyout, other operating expenses will be lower
than 1995's combined management fee and operating expenses, both in
aggregate dollars and as a percentage of revenues.
The Company has three loans totalling $14,712,000 from debtors
in bankruptcy. The Company has not recorded any interest income on
any of these loans since March 1995. In addition, the Company has
working capital loans totalling $2,518,000 at December 31, 1995,
which have been on a non-accrued status for several years. The
facility's financial performance has improved in recent years, and
the Company is recognizing interest income on a cash basis.
COMPONENTS OF GROSS INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
- -------------------------------------------------------------------------------
<C> <C> <C>
<S>
Interest and Other
Income $35,049,164 78% $26,225,155 61% $21,733,705 61%
Direct Financing and
Operating Leases 7,880,477 18% 9,833,424 23% 10,906,652 30%
Gain on Exercise of
Options 5,489,428 13% 2,175,334 6%
Loan and Commitment
Fees 1,666,286 4% 1,184,024 3% 1,202,516 3%
- -------------------------------------------------------------------------------
$44,595,927 100% $42,732,031 100% $36,018,207 100%
===============================================================================
</TABLE>
Impact of Inflation
- -------------------
During the past three years, inflation has not significantly
affected the earnings of the Company because of the moderate
inflation rate. Additionally, earnings of the Company are primarily
long-term investments with fixed interest rates. These investments
are mainly financed with a combination of equity, senior notes and
borrowings under the revolving lines of credit, of which a portion
is hedged with interest rate swaps. During inflationary periods,
which generally are accompanied by rising interest rates, the
Company's ability to grow may be adversely affected because the
yield on new investments may increase at a slower rate than new
borrowing costs. Presuming the current inflation rate remains
moderate and long-term interest rates do not increase
significantly, the Company believes that equity and debt financing
will be available.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31 1995 1994
------------ ------------
<C> <C>
<S>
Assets
Real estate related investments:
Loans receivable, including amounts from
related parties of $29,112,548 and
$29,283,939, respectively $291,998,722 $254,923,711
Operating-lease properties, less
accumulated depreciation of $4,220,655
and $2,803,787, respectively 58,628,509 57,231,651
Direct financing leases 11,246,492 11,427,721
- ------------------------------------------------------------------------------
361,873,723 323,583,083
Less allowance for losses 9,950,000 5,150,000
- ------------------------------------------------------------------------------
Net real estate related investments 351,923,723 318,433,083
Other Assets:
Deferred loan expenses 1,747,537 2,469,260
Cash and cash equivalents 860,350 935,449
Investment securities available for sale 845,297
Receivables and other assets 2,715,146 2,264,197
- ------------------------------------------------------------------------------
6,168,330 5,668,906
- ------------------------------------------------------------------------------
Total assets $358,092,053 $324,101,989
==============================================================================
Liabilities and shareholders' equity
Liabilities:
Borrowings under line of credit
arrangements $106,700,000 $ 70,900,000
Senior notes 52,000,000 52,000,000
Other long-term obligations 4,059,639 5,372,790
Accrued expenses and other liabilities 7,734,618 6,649,424
- ------------------------------------------------------------------------------
Total liabilities 170,494,257 134,922,214
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - None
Common Stock, $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 12,034,196
shares in 1995 and 11,595,115
shares in 1994 12,034,196 11,595,115
Capital in excess of par value 168,800,194 161,086,758
Undistributed net income 5,918,109 16,497,902
Unrealized gains on investment
securities available for sale 845,297
- ------------------------------------------------------------------------------
Total shareholders' equity 187,597,796 189,179,775
Commitments and contingencies
- ------------------------------------------------------------------------------
Total liabilities and shareholders' equity $358,092,053 $324,101,989
==============================================================================
See accompanying notes.
</TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31 1995 1994 1993
----------- ----------- -----------
<C> <C> <C>
<S>
Gross income, including amounts from
related parties of $3,798,347,
$3,810,340, and $3,611,580 for 1995,
994 and 1993, respectively:
Interest on loans receivable $34,918,572 $26,038,471 $21,603,573
Direct financing leases:
Lease income 1,528,655 4,353,192 8,094,184
Gain on exercise of options 5,389,399 2,175,334
Operating leases:
Rents 6,351,822 5,480,232 2,812,468
Gain on exercise of options 100,029
Loan and commitment fees 1,666,286 1,184,024 1,202,516
Interest and other income 130,592 186,684 130,132
- --------------------------------------------------------------------------------
44,595,927 42,732,031 36,018,207
Expenses:
Interest:
Line of credit arrangements 7,472,418 3,537,555 3,819,054
Senior notes and other long-
term obligations 5,279,232 6,146,589 6,997,992
Loan expense 752,115 637,625 328,187
Management fees 2,385,535 3,086,988 2,426,639
Provision for depreciation 1,579,544 1,385,077 790,471
Provision for losses 4,800,000 1,000,000 150,000
Settlement of management contract 5,793,534
Other operating expenses 2,898,576 1,985,279 1,450,926
- --------------------------------------------------------------------------------
30,960,954 17,779,113 15,963,269
- --------------------------------------------------------------------------------
Net income $13,634,973 $24,952,918 $20,054,938
================================================================================
Net income per share $ 1.16 $ 2.17 $ 2.15
Average number of shares outstanding 11,709,642 11,519,123 9,339,081
================================================================================
See accompanying notes.
</TABLE>
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital in
Common Excess of Undistributed Unrealized
Stock Par Value Net Income Gains Total
----------- ------------ ------------ ---------- ------------
<C> <C> <C> <C> <C>
<S>
Balances at January 1, 1993 $ 8,751,972 $ 97,327,593 $ 12,868,429 $ $118,947,994
Net income 20,054,938 20,054,938
Proceeds from the sale of
2,500,000 shares less
related expenses of
$3,727,470 2,500,000 56,585,030 59,085,030
Proceeds from issuance of
194,277 shares under the
dividend reinvestment and
stock option plans 194,277 4,101,334 4,295,611
Cash dividends paid--$1.93
per share (18,251,745) (18,251,745)
- --------------------------------------------------------------------------------------------------------------
Balances at December 31, 1993 11,446,249 158,013,957 14,671,622 184,131,828
Net income 24,952,918 24,952,918
Proceeds from issuance of
148,866 shares under the
dividend reinvestment and
stock option plans 148,866 3,072,801 3,221,667
Cash dividends paid--$2.01
per share (23,126,638) (23,126,638)
- --------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 11,595,115 161,086,758 16,497,902 189,179,775
Net income 13,634,973 13,634,973
Proceeds from issuance of
156,674 shares under the
dividend reinvestment and
stock option plans 156,674 2,947,818 3,104,492
Issuance of 282,407 shares
related to settlement of
management contract 282,407 4,765,618 5,048,025
Unrealized gains on invest-
ment securities available
for sale 845,297 845,297
Cash dividends paid--$2.075
per share (24,214,766) (24,214,766)
- --------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 $12,034,196 $168,800,194 $ 5,918,109 $845,297 $187,597,796
==============================================================================================================
See accompanying notes.
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
1995 1994 1993
--------------------------------------------
<C> <C> <C>
<S>
OPERATING ACTIVITIES
Net income $ 13,634,973 $ 24,952,918 $ 20,054,938
Adjustments to reconcile net
income to net cash provided
from operating activities:
Amortization of loan and
organization expenses 749,270 639,781 328,546
Provision for losses 4,800,000 1,000,000 150,000
Provision for depreciation 1,579,544 1,385,077 790,471
Settlement of management
contract 5,001,624
Loan and commitment fees
earned less than cash
received 1,466,865 693,213 494,292
Direct financing lease
income less than cash
received 181,229 905,860 376,046
Interest income less than
cash received 524,907 2,120,035 586,092
(Decrease) increase in
accrued expenses and
other liabilities (381,671) 856,127 547,715
Increase in receivables
and other assets (403,955) (575,571) (148,487)
- -------------------------------------------------------------------------------
Net cash provided from
operating activities 27,152,786 31,977,440 23,179,613
INVESTING ACTIVITIES
Investment in loans receivable (107,296,680) (118,204,990) (90,650,648)
Investment in operating-
lease properties (2,976,000) (14,053,050) (20,766,000)
Investment in direct financing
leases (1,300,000)
Principal collected on loans 69,696,762 48,760,717 43,696,715
Proceeds from exercise of
purchase options 38,330,065 12,085,262
Other (3,150) 135,000
- -------------------------------------------------------------------------------
Net cash used in investing
activities (40,579,068) (46,467,258) (55,499,671)
FINANCING ACTIVITIES
Increase in borrowings under
line of credit arrangements 176,000,000 266,900,000 209,400,000
Principal payments on borrow-
ings under line of credit
arrangements (140,200,000) (231,000,000) (253,300,000)
Borrowings under senior notes 52,000,000
Principal payments on other
long-term obligations (1,313,151) (3,938,325) (15,508,351)
Proceeds from the issuance
of shares 3,104,492 3,221,667 63,380,641
Increase in deferred loan
expense (25,392) (1,527,751) (770,041)
Cash distributions to
shareholders (24,214,766) (23,126,638) (18,251,745)
- -------------------------------------------------------------------------------
Net cash provided from
financing activities 13,351,183 10,528,953 36,950,504
- -------------------------------------------------------------------------------
(Decrease) increase in cash
and cash equivalents (75,099) (3,960,865) 4,630,446
Cash and cash equivalents at
beginning of year 935,449 4,896,314 265,868
- -------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 860,350 $ 935,449 $ 4,896,314
===============================================================================
See accompanying notes.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND RELATED MATTERS
Industry
- --------
The Company is predominantly engaged in financing and leasing
of health care and related properties in domestic markets.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary (organized in 1993)
after the elimination of all significant intercompany accounts and
transactions.
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.
Loans Receivable
- ----------------
Loans receivable consist of construction-period loans maturing
in two years or less, working capital loans to related parties, and
long-term mortgage loans. Interest income on loans is recognized
as earned based upon the principal amount outstanding. The loans
are generally collateralized by a first or second mortgage on or
assignment of partnership interest in the related facilities which
consist of nursing homes, assisted living facilities, retirement
centers, rehabilitation facilities, behavioral care facilities,
primary care facilities and specialty care hospitals.
Operating-Lease Properties
- --------------------------
Certain properties owned by the Company are leased under
operating leases. These properties are recorded at the lower of
cost or net realizable value. Depreciation is provided for at
rates which are expected to amortize the cost of the assets over
their estimated useful lives using the straight-line method.
Operating lease income includes the rent payments, which are
generally recognized on a straight-line basis over the minimum
lease period.
Direct Financing Leases
- -----------------------
Certain properties owned by the Company are subject to
long-term leases which are accounted for by the direct financing
method. The leases provide for payment of all taxes, insurance and
maintenance by the lessees. The leases are generally for a term of
20 years and include an option to purchase the properties generally
after a period of five years. Option prices equal or exceed the
Company's original cost of the property. Income from direct
financing leases is recorded based upon the implicit rate of
interest over the lease term. This income is greater than the
amount of cash received during the first six to seven years of the
lease term.
Allowance for Losses
- --------------------
The allowance for losses is maintained at a level believed
adequate to absorb potential losses in the Company's real estate
related investments. The determination of the allowance is based
on a quarterly evaluation of these earning assets (in the case of
direct financing leases, estimated residual values), including
general economic conditions, estimated collectibility of loan and
lease payments, reappraisals (where appropriate), and the
recoverability of the carrying amount of these investments in
relationship to their net realizable value.
Deferred Loan Expenses
- ----------------------
Deferred loan expenses are costs incurred in acquiring
financing for properties. The Company amortizes these costs by the
straight-line method over the term of the debt.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of all highly liquid
investments with an original maturity of three months or less.
Investment Securities Available for Sale
- ----------------------------------------
Management determines the appropriate classification of a
security at the time of acquisition and reevaluates such
designation as of each balance sheet date. Investment securities
available for sale are stated at fair value, with unrealized gains
and losses reported in a separate component of shareholders'
equity. At December 31, 1995, available-for-sale securities are
the common stock of a corporation, which were obtained by the
Company at no cost.
Loan and Commitment Fees
- ------------------------
Loan and commitment fees are earned by the Company for its
agreement to provide direct and standby financing to, and credit
enhancement for, owners of health care facilities. The Company
amortizes loan and commitment fees over the initial fixed term of
the lease, the mortgage or the construction period related to such
investments.
Federal Income Tax
- ------------------
No provision has been made for federal income taxes since the
Company has elected to be treated as a real estate investment trust
under the applicable provisions of the Internal Revenue Code, and
the Company believes that it has met the requirements for
qualification as such for each taxable year. See Note 8.
Stock Options
- -------------
The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to fair value of the
shares at the date of the grant. The Company accounts for stock
option grants in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and, accordingly, recognizes no
compensation expense for the stock option grants.
Net Income Per Share
- --------------------
Net income per share has been computed by dividing net income
by the weighted daily average number of shares outstanding.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the FASB issued Statement No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of". The Company's primary assets are real estate
related investments which are not covered by FASB 121.
Accordingly, based on the current circumstances, the Company does
not believe FASB 121 is applicable.
2. LOANS RECEIVABLE
The following is a summary of loans receivable:
December 31
1995 1994
- -------------------------------------------------------------------
Mortgage loans $245,150,474 $208,566,120
Mortgage loans to related parties 22,333,209 22,215,685
Construction and other short-term loans 17,735,699 17,073,652
Working capital loans to related parties 6,779,340 7,068,254
- -------------------------------------------------------------------
TOTALS $291,998,722 $254,923,711
===================================================================
Loans to related parties included above are at competitive rates,
but not at less than the Company's net interest cost on borrowings
to support such loans. The amount of interest earned on loans to
related parties amounted to $3,379,175, $3,220,092, and $2,869,911
for 1995, 1994 and 1993, respectively.
The following is a summary of mortgage loans at December 31,
1995:
<TABLE>
<CAPTION>
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
- ------- ------ ------------------------------ ------------ ------------
<C> <C> <C> <C> <C>
<S>
In Default 3 Loans in default which are
currently due and not
accruing interest. $ 15,495,000 $ 14,712,060
1996 2 Monthly payments from $676
to $34,447, including interest
from 12.93% to 13% 3,190,000 3,125,193
1997 3 Monthly payments from $8,338 to
$96,605, including interest
from 11.5% to 13.44% 11,348,977 10,378,082
1998 2 1 monthly payment of $57,779
and 1 quarterly payment of
$133,282, including interest
from 11.62% to 12.93% 10,332,150 10,726,774
1999 1 Monthly payment of $15,435,
including interest of 10.64% 1,850,000 1,908,449
2000 1 Quarterly payment of $136,817,
including interest of 11.73% 5,310,000 5,628,600
2002 2 Monthly payments from $60,585
to $61,595, including interest
from 12.55% to 13.17% 10,937,450 10,913,925
2003 1 Monthly payment of $45,158,
including interest of 10.56% 4,761,192 4,751,326
2007 10 Monthly payments from $3,693
to $42,102, including interest
from 8.75% to 12.26% 21,398,117 17,953,538
2008 13 Monthly payments from $17,765
to $271,529, including interest
from 10.6% to 13.44% 78,480,000 78,147,845
2009 5 Monthly payments from $24,461
to $61,052, including interest
from 10.35% to 11.91% 22,488,610 22,488,610
2010 3 Monthly payments from $14,713
to $130,615, including interest
from 9.84% to 10.19% 24,450,000 24,450,000
2014 3 Monthly payments from $30,805
to $41,578, including interest
from 11.3% to 13.44% 10,703,150 10,670,472
2015 6 Monthly payments from $21,958
to $111,169, including interest
from 10.28% to 11.42% 39,197,063 39,092,809
2016 2 Monthly payments from $39,274
to $73,231, including interest
from 10.39% to 10.7% 12,536,000 12,536,000
------------ ------------
TOTALS $272,477,709 $267,483,683
============ ============
</TABLE>
One loan in default has a prior lien of approximately $1,195,000;
and six loans maturing in 2007 have prior liens aggregating
$1,515,000. Several monthly mortgage payments increase by 2% per
year which also have negative amortization of principal due at
maturity.
The Company generally requires that the borrower have a
substantial initial investment in the property. No mortgage loan,
or multiple loans to a single borrower, has an outstanding
principal balance which exceeds 10.5% of total assets.
3. INVESTMENT IN LEASES
The following are the components of investment in direct
financing leases:
December 31
1995 1994
- ------------------------------------------------------------------
Total minimum lease payments
receivable--(i) $ 18,833,646 $ 20,543,530
Estimated unguaranteed residual
values of leased properties 6,063,649 6,063,649
Unearned income (13,650,803) (15,179,458)
- ------------------------------------------------------------------
Investment in direct financing leases $ 11,246,492 $ 11,427,721
==================================================================
(i) The leases contain an option to purchase the leased
property. Total minimum lease payments are computed
assuming that the option will not be exercised.
At December 31, 1995, future minimum lease payments receivable
(assuming that the option will not be exercised) are as follows:
Direct Financing Operating
Leases Leases
-------------------------------------------
1996 $ 1,653,875 $ 6,003,963
1997 1,665,320 5,967,131
1998 1,697,486 6,180,587
1999 1,729,651 6,078,811
2000 1,761,058 6,173,976
Thereafter 10,326,256 22,093,166
-------------------------------------------
TOTALS $18,833,646 $52,497,634
===========================================
During 1994, the Company restructured two direct financing
leases; one into a $3,324,000 mortgage loan and the other into a
$3,582,000 operating lease. During 1993, the Company restructured
a $10,500,000 mortgage loan into an operating lease. This noncash
investing activity is appropriately not reflected in the
accompanying statement of cash flows.
4. ALLOWANCE FOR LOSSES
The following is a summary of the allowance for losses for
1995, 1994 and 1993. The portion of the allowance relating to
loans receivable consists of amounts for specifically identified
loans and an unallocated amount for other potential losses in the
portfolio.
Total Allowance
Related to
Loans Receivable
------------------------------------------------
Balances at January 1, 1993 $4,000,000
Provision for losses 150,000
------------------------------------------------
Balances at December 31, 1993 4,150,000
Provision for losses 1,000,000
------------------------------------------------
Balances at December 31, 1994 5,150,000
Provision for losses 4,800,000
------------------------------------------------
Balances at December 31, 1995 $9,950,000
================================================
The allowance consists of $6,500,000 relating to specifically
identified loans of $14,712,000 and an unallocated amount for other
potential losses in the portfolio. Interest income on impaired
loans is recognized as payments are received. The Company
recognized $323,000 of interest income on impaired loans in 1995.
5. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has a credit arrangement with a consortium of ten
banks providing for a revolving line of credit (revolving credit)
in the amount of $150,000,000 which expires on March 31, 1997. The
agreement specifies that borrowings under the revolving credit are
subject to interest payable in periods no longer than three months
on either the agent bank's base rate of interest or 1.5% over LIBOR
interest rate (based at the Company's option). The effective
interest rate at December 31, 1995 was 7.32%. In addition, the
Company pays a commitment fee at an annual rate of .5% of the
unused line and an annual agent's fee of $75,000. At December 31,
1995, the revolving line of credit was collateralized by 37 real
estate related investments in health care facilities. Principal is
due upon expiration of the agreement, but the total amount
outstanding may not exceed a specified percentage of the
agreed-upon values of the collateral. The Company has two other
lines of credit with two banks for a total of $35,000,000 which
expire at various dates through May 31, 1996. Borrowings under
these lines of credit are subject to interest at each bank's prime
rate of interest (8.5% at December 31, 1995) and are due on demand.
The following information relates to aggregate borrowings under the
line of credit arrangements:
<TABLE>
<CAPTION>
Year Ended December 31
1995 1994 1993
------------------------------------------
<C> <C> <C>
<S>
Balance outstanding at December 31 $106,700,000 $ 70,900,000 $ 35,000,000
Maximum amount outstanding at any
month end 119,100,000 70,900,000 107,900,000
Average amount outstanding (total
of daily principal balances
divided by days in year) 88,850,548 51,422,466 76,241,644
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 8.41% 6.88% 5.01%
===============================================================================
</TABLE>
The Company has two five-year interest rate swap agreements
which expire at various dates through 1997, aggregating $30,000,000
for the purpose of reducing the Company's interest rate risk on its
borrowings under the revolving credit. Maximum rates of interest
under the swap agreements are 8.77% and 10%. At December 31, 1995,
the Company had elected to borrow $30,000,000 at six-month LIBOR.
The differential to be paid or received is accrued as interest
rates change and are recognized as an interest expense. The
related amount payable to or receivable from counterparties is
included in other liabilities or assets. The fair value of the
swap agreements are not recognized in the financial statements.
The Company may or may not elect to continue to match certain
of its borrowings with interest rate swap agreements. Such
decisions are principally based on the Company's policy to match
its variable rate investments with comparable borrowings, but is
also based on the general trend in interest rates at the applicable
dates and the Company's perception of future volatility of interest
rates. At December 31, 1995, the Company was at risk for rising
interest rates because its variable interest rate debt exceeded its
variable interest rate assets.
The Company is exposed to a credit loss in the event of
nonperformance by the other parties to the interest rate swap
agreements. However, the Company does not anticipate
nonperformance by the counterparties.
Interest paid amounted to $13,083,783, $9,256,551 and
$10,409,852 for 1995, 1994 and 1993, respectively, which includes
$706,318, $1,309,368 and $2,155,260, respectively, for the net cost
of the swaps.
6. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $52,000,000 of Senior Notes with interest
ranging from 7.16% to 8.24% and maturing in 1998, 2000 and 2003.
These notes are collateralized by 15 real estate related
investments in health care facilities.
The following information relates to other long-term obligations:
December 31
1995 1994
- ------------------------------------------------------------------
Notes payable related to industrial
development bonds, collateralized
by health care facilities--2 in
1995 and 3 in 1994, interest rates
from 11.25% to 15%, maturing at
various dates to 2002 $ 2,545,000 $ 3,620,000
Mortgage loans, collateralized by
health care facilities--2 in 1995
and 1994, interest rates from 8.75%
to 12%, maturing at various dates
to 2005 1,514,639 1,752,790
- ------------------------------------------------------------------
TOTALS $ 4,059,639 $ 5,372,790
==================================================================
At December 31, 1995, the annual payments on these long-term
obligations for the succeeding five years are as follows:
Principal Interest Total
----------- ---------- -----------
1996 $ 317,332 $4,453,791 $ 4,771,123
1997 665,764 4,401,306 5,067,070
1998 23,332,592 3,496,973 26,829,565
1999 203,326 2,619,681 2,823,007
2000 15,234,756 2,012,550 17,247,306
7. STOCK OPTION PLANS AND RETIREMENT ARRANGEMENTS
The Company's 1995 Stock Incentive Plan authorized up to
600,000 shares of Common Stock to be issued at the discretion of
the Board of Directors. The 1995 Plan replaced the 1985 Incentive
Stock Option Plan which had previously authorized up to 450,000
shares of Common Stock to be issued at the discretion of the Board
of Directors. There were 55,732 authorized shares which were
unissued under the 1985 Plan when it expired in 1995. The options
granted under the 1985 Plan continue to vest through 2005 and
expire ten years from the date of grant. All future grants will be
from the 1995 Plan under which officers and key salaried employees
of the Company are eligible to participate. Such options expire
ten years from the date of grant and one-fifth of all options
granted become exercisable each year.
The following summarizes the activity in the Plans:
Year Ended December 31
1995 1994
- -----------------------------------------------------------
Number of shares under option at
beginning of year 183,140 152,500
Options granted 316,268 51,000
Options exercised (14,140) (20,360)
- -----------------------------------------------------------
Number of shares under option at
end of year 485,268 183,140
===========================================================
At end of year:
Shares exercisable 187,107 123,166
===========================================================
Shares available to be granted 388,000 160,000
===========================================================
At December 31, 1995, the option prices ranged from $15.1325
to $23.9375 per share. The option prices were equivalent to the
market prices of the shares on the dates granted. Options
exercised during 1995 and 1994 were at prices ranging from $11.9375
to $17.6875 per share.
Effective December 1, 1995, the Company assumed First Toledo
Advisory Company's (the Manager) 401-K Profit Sharing Plan covering
all eligible employees. Under the Plan, eligible employees may
make contributions, and the Company may make a profit sharing
contribution. Company contributions to this Plan totaled $6,000 in
1995.
8. DISTRIBUTIONS
In order to continue to qualify as a real estate investment
trust for federal income tax purposes, 95% of taxable income (not
including capital gains) must be distributed to shareholders. Real
estate investment trusts which do not distribute a certain amount
of current year taxable income in the current year are also subject
to a 4% federal excise tax. The Company's excise tax expense was
$326,000, $575,000 and $132,000 for the years ended December 31,
1995, 1994 and 1993, respectively. Undistributed net income for
federal income tax purposes amounted to $12,741,000 at December 31,
1995. The principal reasons for the difference between
undistributed net income for federal income tax purposes and
financial statement purposes are the use of the operating method of
accounting for leases for federal income tax purposes, and the
recording of settlement of management contract expense for
reporting purposes. Cash distributions paid to shareholders, for
federal income tax purposes, are as follows:
Year Ended December 31 1995 1994 1993
- ---------------------------------------------------------------
Per Share:
Ordinary income $2.075 $ .72 $1.49
Capital gains 1.29 .44
- ---------------------------------------------------------------
TOTALS $2.075 $2.01 $1.93
===============================================================
9. COMMITMENTS AND CONTINGENCIES
At December 31, 1995, the Company has outstanding commitments
to provide financing for facilities in the approximate amount of
$187,836,000. The Company also has commitments to provide working
capital loans to related parties of approximately $354,000. The
above commitments are generally on similar terms as existing
financings of a like nature with rates of return to the Company
based upon current market rates at the time of the commitment.
The Company has entered into a number of agreements to
purchase health care facilities, or the loans with respect thereto,
in the event that the present owners default upon their
obligations. In consideration for these agreements, the Company
receives and recognizes fees annually related to these guarantees.
Although the terms of these agreements vary, the purchase prices
are equal to the amount of the outstanding obligations financing
the facility. These agreements expire between the years 1997 and
2005. At December 31, 1995, obligations under these agreements for
which the Company was contingently liable aggregated approximately
$19,530,000, all of which were with related parties.
The Company believes that it has the ability to obtain funds
to meet these commitments. The Company also believes that such
commitments represent no greater than normal risk.
10. MANAGEMENT AGREEMENT AND CERTAIN TRANSACTIONS
WITH RELATED PARTIES
Through November 30, 1995, the Company had a management
agreement with the Manager. F. D. Wolfe and B. G. Thompson, two of
the Company's nine directors, were officers and co-owners of the
Manager. The Company accrued a fee to the Manager at a monthly
rate of 1/10 of 1% of the Company's net assets, as defined in the
Management Agreement. Further, the Manager was entitled to an
annual incentive fee equal to 10% of the amount by which net
profits exceed 10% of the monthly average net worth of the Company,
as defined in the Management Agreement.
On November 30, 1995, the Manager merged with and into the
Company pursuant to a Revised Merger Agreement (the Merger).
Consideration for this transaction totaled approximately $5,048,000
which was solely comprised of 282,407 shares of the Company's
common stock. In addition, the Company acquired approximately
$46,000 in net assets and incurred approximately $792,000 of
related transaction expenses. The Merger was a tax-free
reorganization. The consideration, plus related transaction
expenses, were accounted for as a settlement of a management
contract.
Messrs. Wolfe and Thompson are also related to various
entities: a) to which the Company has made mortgage loans and
working capital loans yielding interest income (see Note 2); b)
with which the Company has entered into agreements to purchase
health care facilities, or the loans with respect thereto, upon
default of obligations by their present owners which provides fee
income of $383,100, $338,722 and $422,438 for 1995, 1994 and 1993,
respectively; and c) with which the Company has entered into
operating lease agreements (see Note 3).
The Company recorded income from related parties as follows:
1995 1994 1993
- -------------------------------------------------------------------
Interest income $3,379,175 $3,220,092 $2,869,911
Loan and guaranty fees 419,172 377,658 469,362
Operating lease rents 112,561 272,307
Gain on exercise of options 100,029
- -------------------------------------------------------------------
TOTALS $3,798,347 $3,810,340 $3,611,580
===================================================================
In accordance with the By-Laws of the Company, such
transactions were approved by a majority of the directors not
affiliated with the transactions.
11. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan approved by the
Board of Directors in July 1994, a Preferred Share Right (Right) is
attached to and automatically trades with each outstanding share of
Health Care REIT, Inc. common stock.
The Rights, which are redeemable, will become exercisable only
in the event that any person or group becomes a holder of 15% or
more of the Company's stock, or commences a tender or exchange
offer which, if consummated, would result in that person or group
owning at least 15% of the common stock. Once the Rights become
exercisable, they entitle all other shareholders to purchase one
one-thousandth of a share of a new series of junior participating
preferred stock for an exercise price of $48.00. The Rights will
expire on August 5, 2004 unless exchanged earlier or redeemed
earlier by the Company for $.01 per Right at any time before public
disclosure that a 15% position has been acquired.
12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it
is practicable to estimate that value.
Mortgage Loans--The fair value of all mortgage loans, except
those matched with debt, is estimated by discounting the future
cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and for the same
remaining maturities. Mortgage loans matched with debt are
presumed to be at fair value.
Working Capital and Construction Loans--The carrying amount is
a reasonable estimate of fair value for working capital and
construction loans because the interest earned on these instruments
is variable.
Cash and Cash Equivalents--The carrying amount approximates
fair value because of the short maturity of these financial
instruments.
Investment Securities Available-for-Sale--The asset is
recorded at its fair market value.
Borrowings Under Line of Credit Arrangements and Related
Items--The carrying amount of the line of credit approximates fair
value because the borrowings are interest rate adjustable. The
fair value of interest rate swaps is the estimated amount, taking
into account the current interest rate, that the Company would
receive or pay to terminate the swap agreements at the reporting
date.
Senior Notes and Industrial Development Bonds--The fair value
of the senior notes payable and the industrial development bonds
was estimated by discounting the future cash flow using the current
borrowing rate available to the Company for similar debt.
Mortgage Loans Payable--Mortgage loans payable is a reasonable
estimate of fair value because they are matched with loans
receivable.
Commitments to Finance and Guarantees of Obligations--The fair
value of the commitments to finance and guarantees of obligations
are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the
agreements, and the counterparties' credit standing.
The carrying amounts and estimated fair values of the
Company's financial instruments at December 31, 1995 and 1994 are
as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
- --------------------------------------------------------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- --------------------------------------------------------------------------------
<C> <C> <C> <C>
<S>
Financial Assets:
Mortgage loans $267,483,683 $270,148,000 $230,781,805 $225,306,000
Working capital and
construction loans 24,515,039 24,515,039 24,141,906 24,141,906
Cash and cash
equivalents 860,350 860,350 935,449 935,449
Investment securities
available-for-sale 845,297 845,297
Financial Liabilities:
Borrowings under line
of credit arrange-
ments 106,700,000 106,700,000 70,900,000 70,900,000
Senior notes payable 52,000,000 54,203,000 52,000,000 46,307,000
Industrial development
bonds 2,545,000 3,054,000 3,620,000 4,343,000
Mortgage loans payable 1,514,639 1,514,639 1,752,790 1,752,790
Unrecognized Financial
Instruments:
Interest rate swap
agreements 550,000 339,000
Commitments to finance 188,190,000 188,190,000 135,141,000 135,141,000
Guarantees of obliga-
tions 19,530,000 19,530,000 20,175,000 20,175,000
================================================================================
</TABLE>
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results
of operations of the Company for the years ended December 31, 1995
and 1994:
<TABLE>
<CAPTION>
Year Ended December 31, 1995
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------------------------------------------
<C> <C> <C> <C>
<S>
Gross Income $9,624,993 $ 9,677,526 $13,315,515 $11,977,893
Net Income 4,864,965 4,637,190 3,346,835 785,983
Net Income Per Share .42 .40 .28 .06
Year Ended December 31, 1994
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
-----------------------------------------------------
Gross Income $8,441,239 $12,730,715 $10,518,166 $11,041,911
Net Income 4,984,250 7,799,857 6,326,167 5,842,644
Net Income Per Share .43 .68 .55 .51
</TABLE>
REPORT OF INDEPENDENT AUDITORS
SHAREHOLDERS AND DIRECTORS
HEALTH CARE REIT, INC.
We have audited the accompanying consolidated balance sheets of
Health Care REIT, Inc. as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Health Care REIT, Inc. at December 31, 1995 and 1994,
and the consolidated results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995,
in conformity with generally accepted accounting principles.
\S\ ERNST & YOUNG LLP
--------------------
ERNST & YOUNG LLP
Toledo, Ohio
February 6, 1996
MARKET AND DIVIDEND INFORMATION
The following table sets forth, for the periods indicated, the high
and low prices of the Company's Common Stock on the New York Stock
Exchange, as reported on the Composite Tapes, and dividends paid
per share. There were 5,370 stockholders of record as of December
31, 1995.
Sales Price
High Low Dividends Paid
1995
- ----------------------------------------------------------------
First Quarter 22 3/8 19 7/8 $.515
Second Quarter 23 1/8 20 3/8 .52
Third Quarter 21 1/2 15 1/2 .52
Fourth Quarter 19 1/8 15 3/4 .52
================================================================
1994
- ----------------------------------------------------------------
First Quarter 25 3/8 22 1/2 $.495
Second Quarter 25 1/4 23 1/4 .50
Third Quarter 25 22 .505
Fourth Quarter 22 5/8 19 3/4 .51
INCOME TAX INFORMATION
<TABLE>
<CAPTION>
1995 Tax Information
- -----------------------------------------------------------------------------
Taxable Non-Taxable
as Ordinary Taxable as Return
Dividend Payment Income Capital Gains of Capital Totals
- -----------------------------------------------------------------------------
<C> <C> <C> <C>
<S>
February 20, 1995 $ .515 $.00 $.00 $ .515
May 19, 1995 .520 .00 .00 .520
August 21, 1995 .520 .00 .00 .520
November 20, 1995 .520 .00 .00 .520
- -----------------------------------------------------------------------------
$2.075 $.00 $.00 $2.075
=============================================================================
BOARD OF DIRECTORS
COMMITTEES
- ----------
1. Audit Committee; 2. Executive Committee; 3. Compensation
Committee; 4. Investment Committee; 5. Nominating Committee;
6. Planning Committee; 7. Special Committee
[PHOTO of each Director with the Committees on which they serve,
titles and companies appear above each of their names.]
Bruce G. Thompson
2, 4, 6
Chairman and Chief Executive Officer
Health Care REIT, Inc.
Toledo, Ohio
George L. Chapman
4, 6
President
Health Care REIT, Inc.
Toledo, Ohio
Frederic D. Wolfe
2, 4, 6
Chairman
First Toledo Corporation
Toledo, Ohio
Pier C. Borra
3, 4, 6, 7
Chairman, President and Chief Executive Officer
Arbor Health Care Company
Lima, Ohio
George Chopivsky, Jr.
4, 5, 6
Chairman
United Psychiatric Corporation
Washington, D.C.
Bruce Douglas
4, 6
Chairman of the Board
The Douglas Company
Toledo, Ohio
Richard C. Glowacki
1, 2, 5, 6, 7
President
Danberry Management Company and
subsidiary companies
Toledo, Ohio
Richard A. Unverferth
1, 2, 3, 4, 5, 6, 7
Chairman
Unverferth Manufacturing Company, Inc.
Kalida, Ohio
Chairman of the Board
H.C.F., Inc.
Kalida, Ohio
Sharon M. Oster (picture not shown)
6
Professor of Management
Yale School of Management, Yale University
New Haven, Connecticut
SHAREHOLDER INFORMATION
Officers Transfer Agent
- -------- --------------
Bruce G. Thompson Chemical Mellon Shareholder
Chairman and Chief Services
Executive Officer Stock Transfer Department
P. O. Box 469
George L. Chapman Washington Bridge Station
President New York, New York 10033
(800) 851-9677
Robert J. Pruger
Chief Financial Dividend Reinvestment Agent
Officer and Treasurer --------------------------
Chemical Bank
Erin C. Ibele c/o Chemical Mellon Share-
Vice President and holder Services
Corporate Secretary P. O. Box 750
Pittsburgh, PA 15230
Raymond W. Braun (800) 851-9677
Vice President and
Assistant General Annual Meeting
Counsel --------------
The Annual Meeting of Stock-
Kathleen S. Prephan holders is scheduled for
Controller Tuesday, May 21, 1996 in Toledo,
Ohio
General Offices Form 10-K
- --------------- ---------
Health Care REIT, Inc. The Company's Form 10-K Annual
One SeaGate, Suite 1950 Report, filed with the Securi-
P. O. Box 1475 ties and Exchange Commission,
Toledo, Ohio 43603-1475 is available at no charge upon
(419) 247-2800 written request to the Corpor-
(419) 247-2826 Fax ate Secretary.
Legal Counsel Exchange Listing
- ------------- ----------------
Shumaker, Loop & Kendrick New York Stock Exchange
Toledo, Ohio Trading Symbol: HCN
Independent Auditors Member
- -------------------- ------
Ernst & Young LLP National Association of Real
Toledo, Ohio Estate Investment Trusts, Inc.
[BACK INSIDE COVER] - A picture of the company logo with company
name and address.
</TABLE>
