UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1994
Commission File No. 33-17379
HEALTH EQUITY PROPERTIES INCORPORATED
(Exact name of registrant as specified in its charter)
North Carolina 56-1591771
(State or other jurisdiction of (I.R.S. Employer
of incorporation or organization) Identification No.)
915 West Fourth Street
Post Office Box 348
Winston-Salem, NC 27102
(Address of principal executive offices)
(Zip Code)
(910) 723-7580
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the
issuer's classes of common stock as of the latest practical date:
Common Stock $.01 Par Value
14,583,964
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
FORM 10-Q
March 31, 1994
TABLE OF CONTENTS
Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets.................. 3
Consolidated Statements of Operations........ 4
Consolidated Statements of
Shareholders' Equity.................... 5
Consolidated Statements of Cash Flows........ 6-7
Notes to Consolidated Financial Statements... 8-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II: OTHER INFORMATION
Items 1 through 4...................................... None
Item 5................................................. 16
Item 6................................................. 16
SIGNATURE PAGE......................................... 17
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1994 AND DECEMBER 31, 1993
March 31, December 31,
1994 1993
ASSETS (unaudited)
____________ ____________
Nursing home properties:
Land and improvements $ 8,443,201 $ 8,848,707
Buildings and improvements 99,356,659 106,828,059
Furniture and equipment 15,071,218 15,763,025
___________ ___________
122,871,078 131,439,791
Accumulated depreciation (29,233,855) (30,235,507)
___________ ____________
93,637,223 101,204,284
Cash and cash equivalents 11,137,427 6,272,153
Leasehold rights, net 4,164,887 4,576,214
Other assets 5,565,461 5,643,834
___________ ___________
$114,504,998 $117,696,485
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Notes and mortgages $ 26,231,165 $ 30,190,306
Convertible debentures 1,340,000 1,355,000
___________ ___________
27,571,165 31,545,306
Dividends payable 3,573,071 3,572,404
Other liabilities 984,999 1,341,267
___________ __________
32,129,235 36,458,977
___________ __________
Common stock, $.01 par value;
100,000,000 shares authorized;
14,585,813 shares issued at
March 31, 1994 and 14,583,086
shares issued at December 31,
1993 145,858 145,831
Paid in capital 81,122,599 81,108,412
Retained earnings 1,124,041 --
Less treasury stock of 1,849
shares, at cost (16,735) (16,735)
___________ __________
82,375,763 81,237,508
___________ ___________
$114,504,998 $117,696,485
=========== ===========
[FN]
The accompanying notes are an integral part of the
financial statements.
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1993
(unaudited)
Three Months Three Months
Ended Ended
March 31, March 31,
1994 1993
____________ ____________
Income:
Base rent $ 4,410,118 $ 4,263,528
Additional rent 354,587 254,286
Other 135,778 116,941
Gain on sale 2,590,418 --
__________ __________
$ 7,490,901 $ 4,634,755
__________ __________
Expenses:
Interest 697,992 646,651
Depreciation 1,164,183 1,130,674
Amortization 526,576 469,198
Administrative and other 405,038 411,503
__________ __________
2,793,789 2,658,026
__________ __________
Net income $ 4,697,112 $ 1,976,729
========== ==========
Per share:
Net income per share $ 0.32 $ 0.14
========== ==========
Average number of shares
outstanding 14,581,964 14,504,982
========== ==========
[FN]
The accompanying notes are an integral part of the
financial statements.
<PAGE>
<TABLE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1993
(unaudited)
<CAPTION>
Paid in
Common Capital in Retained
Treasury Total
Stock Excess of Par Earnings
Stock Equity
____________ ____________ ____________ _____
_______ ____________
<S> <C> <C> <C> <C> <C>
Balance,
January 1, 1993 $ 145,050 $ 85,997,667 $ --
$ -- $ 86,142,717
Net income for the
three months ended
March 31, 1993 -- -- 1,976,729
- - - -- 1,976,729
Cash dividends declared
at $.245 per share -- (1,576,992) (1,976,729)
- - - -- (3,553,721)
___________ ___________ ___________
___________ ___________
Balance,
March 31, 1993 $ 145,050 $ 84,420,675 $ --
$ -- $ 84,565,725
=========== =========== ===========
=========== ===========
Balance,
January 1, 1994 $ 145,831 $ 81,108,412 $ __
$ (16,735) $ 81,237,508
Issuance of 2,727 shares
of common stock, net
of issuance costs 27 14,187 --
- - - -- 14,214
Net income for the
three months ended
March 31, 1994 -- -- 4,697,112
- - - -- 4,697,112
Cash dividends declared
at $.245 per share -- -- (3,573,071)
- - - -- (3,573,071)
___________ ___________ ___________
___________ ___________
Balance,
March 31, 1994 $ 145,858 $ 81,122,599 $
1,124,041 $ (16,735) $ 82,375,763
=========== =========== ===========
=========== ===========
<FN>
The accompanying notes are an integral part of the
financial statements.
</TABLE>
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
MARCH 31, 1994 AND 1993
(unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Three Months Three Months
Ended Ended
March 31, March 31,
1994 1993
____________ ____________
Net Income: $ 4,697,112 $ 1,976,729
___________ ___________
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation 1,164,183 1,130,674
Amortization 526,576 469,198
Gain on sale (2,590,418) --
(Increase) decrease in
rent receivable (133,490) 187,949
Decrease in accrued interest
expense (92,755) (48,124)
Increase in prepaid expenses (68,340) (57,285)
Other (59,417) (234,236)
___________ ___________
Total adjustments (1,253,661) 1,448,176
___________ ___________
Net cash provided by
operating activities 3,443,451 3,424,905
___________ ___________
Cash flows from investing
activities:
Sale of nursing home properties 9,685,127 --
Improvements to nursing
home properties (766,203) (181,605)
Other 23,754 52,402
___________ ___________
Net cash provided (used)
by investing activities 8,942,678 (129,203)
___________ ___________
[FN]
continued.....
<PAGE>
(continued from preceding page)
Three Months Three Months
Ended Ended
March 31, March 31,
1994 1993
____________ ____________
Cash flows from financing
activities:
Proceeds of debt 674,836 --
Repayment of debt (4,633,977) (84,506)
Other 10,689 (89,967)
Dividends paid (3,572,403) (3,553,721)
___________ ___________
Net cash used by financing
activities (7,520,855) (3,728,194)
___________ ___________
Net increase (decrease) in
cash and cash equivalents 4,865,274 (432,492)
Cash and cash equivalents at
beginning of period 6,272,153 6,271,821
___________ __________
Cash and cash equivalents
at end of period $ 11,137,427 $ 5,839,329
=========== ===========
Supplemental schedule of non cash financing activities:
During the quarter ended March 31, 1994, senior convertible
debentures of $15,000 were converted to 2,727 shares of common
stock and unamortized loan costs of $786 were reclassified to
paid in capital.
A nursing home property was sold as follows:
1994
___________
Fair value of assets sold $ 10,100,000
Selling expenses (414,873)
___________
$ 9,685,127
===========
[FN]
The accompanying notes are an integral part of the
financial statements.
<PAGE>
HEALTH EQUITY PROPERTIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements of Health Equity Properties Incorporated
("the Company"), included herein have been prepared for submission to
the Securities and Exchange Commission on Form 10-Q. The financial
statements were prepared by management without audit, and include all
adjustments which are, in the opinion of management, necessary for a
fair presentation of the results of operations for the three months
ended March 31, 1994. The financial statements were prepared in
accordance with generally accepted accounting principles, however,
certain information and note disclosures normally included have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Management believes that the
disclosures in the financial statements are adequate to make the
information presented not misleading. The financial statements should
be read in conjunction with the Company's 1993 Annual Report filed
with the Securities and Exchange Commission on Form 10-K. The results
of operations for the three months ended March 31, 1994, are not
necessarily indicative of the results for a full year.
1. Related Party Transactions
Alden Management Services, Inc. ("Alden"), which leases four
properties, is wholly owned by a director of the company. Alden paid
base rent of $1,051,796 and $1,107,172 for each of the three months
ended March 31, 1994 and 1993, respectively. Alden has a note
outstanding with the Company, with a balance at March 31, 1994 of
$477,899 and at December 31, 1993 of $479,316. For the three months
ended March 31, 1994 and 1993, Alden overage rents were estimated to
be $49,335 and $20,000, respectively.
The Company sold one of its Alden leased properties to an Alden
affiliate on March 16, 1994. The property, having a net book value of
$7,094,709, was sold for $10,100,000 resulting in a gain of $2,590,418
after selling expenses of $414,873. Net proceeds from the sale were
$9,685,127.
<PAGE>
2. Debt
Debt consists of the following:
March 31, December 31,
1994 1993
___________ ___________
Notes and mortgages:
FHA mortgages payable in varying
monthly installments, through
2034, including interest from
7.5% to 8.25% $ 14,272,545 $ 13,622,939
Serial bonds payable monthly
in varying amounts, through
2016, including interest
from 9.5% to 9.75% 5,217,500 5,225,000
9.25% mortgage with monthly
payments of principal and
interest of $34,141 through
May 1996, interest rate adjusts
June 1996 to prime plus 1%,
floor of 7.25% and ceiling
of 11.25% through 2003 4,130,029 4,136,840
Mortgages payable in varying
monthly installments, through
2004, including interest at 12%
through 1994, 12.75% during 1995
and 1996 and 10.75% thereafter 2,611,091 4,156,790
11.25% note payable with
interest only payable
monthly due in 1997 -- 3,048,737
___________ ___________
26,231,165 30,190,306
Convertible debentures:
14% senior convertible debentures
with interest due semi-annually,
convertible at $5.50 per share due
in 2000 1,340,000 1,355,000
___________ ___________
$ 27,571,165 $ 31,545,306
=========== ===========
Interest expense paid was $790,747 and $694,775 for the three months
ended March 31, 1994 and 1993, respectively.
The Company has obtained a $5 million line of credit from a bank. The
three year line has an annual interest rate of prime plus one-half
percent and an annual facility fee of one percent. The outstanding
balance of the line was $0 at March 31, 1994.
Nursing home properties with an approximate net book value of $69
million are pledged as collateral.
<PAGE>
As of March 31, 1994, maturities of debt for the remaining nine months
of 1994 and for the years 1995 through 1999 and thereafter, are as
follows:
1994 (nine months) $ 246,000
1995 337,000
1996 404,000
1997 447,000
1998 491,000
1999 543,000
later years 25,103,165
___________
$ 27,571,165
===========
3. Leases
The Company is the lessor of 73 nursing homes and three personal care
facilities, under operating leases with current terms that expire from
1996 to 2006. Most leases are renewable for three five-year periods
at the lessees' options. In addition, lessees of 70 properties have
the option to purchase the properties. The purchase price will be at
the fair market value of the properties when the option is exercised.
The leases are net leases which require the lessee to pay for all
operating expenses, maintenance and repairs, and taxes and insurance
on the leased properties.
Future minimum lease payments due under noncancelable operating leases
as of March 31, 1994 are as follows:
1994 (nine months) $ 12,721,000
1995 16,988,000
1996 13,412,000
1997 7,017,000
1998 6,620,000
1999 5,864,000
later years 19,338,000
___________
$ 81,960,000
===========
4. Commitment
The Company's commitment to make $8 million in first and second
mortgage loans to an affiliate of Complete Care, Inc., one of the
Company's lessees, has expired. The borrower has requested an
extension; however, the Company has no obligation to extend its
commitment and is uncertain, at this time, if it will do so. The $5
million first mortgage loan would bear interest at 12% per year, with
additional interest based on increases in revenues, and would be self-
amortizing over a 20 year term. The $3 million second mortgage loan
would be fully amortized over eight years at an initial interest rate
of 15%.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Health Equity Properties Incorporated ("the Company") is referred
to below. The Company operates as a real estate investment trust
(REIT) for federal income tax purposes.
RESULTS OF OPERATIONS
The Company is the lessor of 73 nursing homes and three personal
care facilities. Rental income, which includes base and
additional rent, accounts for substantially all of the Company's
income and is derived from the leases of the Company's
facilities. The leases have a base rate, with some provisions
for rental increases. For the three months ended March 31, 1994,
the Company had base rental income of $4,410,118 compared to
$4,263,258 for the same period of 1993. The increase is due to
the purchase of a 106 bed adult assisted living facility in
Florida in June 1993, and corresponding rent increases due to
improvements made on existing properties. As discussed in more
detail below, the Company sold one of its Alden Management
Services, Inc. ("Alden") leased properties on March 16, 1994 and
base rent will be decreased in the second quarter.
Additional rent was $354,587 for the three months ended March 31,
1994, up from $254,286 for the same period of 1993. In the
normal course of business, additional rent is estimated and
accrued by the Company at the end of each quarter and payments
are received in the following quarter. Leases with respect to 66
of the 76 properties provide additional rent based on revenues
from operations of the facility. Additional rent under all such
leases range from 5.5% to 7% of gross revenues attributable to
such property in excess of gross revenues of such property earned
during the base period, subject to certain limitations. Alden's
gross revenues from public pay patients are excluded from the
above calculation. Instead, additional rent is equal to 7% of
the increase in public pay revenues over the preceding year.
Alden's public pay revenues are treated differently due to
reimbursement policies in Illinois. Due to the timing of
Illinois' reimbursements, Alden's additional rent paid to the
Company will tend to fluctuate. In 1993, Alden's additional rent
represented 14% of the total additional rent. Due to the sale
discussed above, Alden's additional rent is anticipated to be
slightly lower in the second quarter. Leases with respect to 7 of
the properties provided for additional rent based on increases in
the Cost of Living Index multiplied by the base rent, subject to
a maximum of 3% over the prior year's rent paid. With respect to
the remaining 3 leases, the base rent increases by 6% annually in
lieu of additional rent.
In June 1993, the Company entered into new leases on its two
North Carolina personal care facilities with the current lessee.
The Company and the lessee agreed to rehab the properties with
part of the proceeds of a Federal Housing Administration Section
232 loan. The details of the loan are discussed below. Under
the terms of the new leases, between March 1, 1993 and the
scheduled completion of the rehab, February 1994, the rent
remained the same as the rent at the end of the previous lease
term. The improvements are completed and the base rent has
increased by approximately 45% from $594,000 to $860,000. The
initial term of the new leases is for 10 years, expiring February
2003 and includes provisions for additional rent.
The gain on sale of $2,590,418 for the quarter ended March 31,
1994 is due to the sale on March 16, 1994 of one of the Company's
Alden leased properties. The sales price was $10.1 million, with
net proceeds of approximately $9.7 million. Proceeds of
approximately $4.5 million were used to repay debt and the
remaining proceeds will be used for general corporate purposes,
including further equity or debt investments in real property.
Due to the sale, the Company anticipates that gross revenues will
be lower in the second quarter of 1994 while the remaining
proceeds from the sale are reinvested. Interest expense is
anticipated to be lower in the second quarter of 1994 due to the
repayment of debt discussed above and net income is not
anticipated to be materially impacted. Other uses of the sale
proceeds will include investment in new properties and the
funding of mortgage loans. The sale will not affect REIT status,
that is, the Company's historical dividend rate will continue to
be sufficient to assure that 95% of the Company's taxable income
is distributed to its shareholders. Also, the Company does not
anticipate that the gain will generate taxes for the Company due
to loss carryforwards and the special treatment of dividends by
REITs.
In Indiana, the providers and the State continue to negotiate to
resolve their differences to provide a new system that is fair to
both parties. The Company believes that the new rules and
regulations will be an improvement over the existing system and
anticipates the changes to be positive. It is currently
anticipated that a new system will be implemented by July 1,
1994.
Other income for the three months ended March 31, 1994 was
$135,778, up from $116,941 for the same period of 1993. Other
income is primarily interest income on the Company's cash
reserves and notes receivable. The increase in other income is
due to increased interest income from cash reserves. Cash
reserves were higher in the first quarter of 1993 due to the sale
of the Alden property.
Interest expense for the three months ended March 31, 1994 was
$697,992, compared with $646,651 for the same period of 1993.
The increase in interest expense is due primarily to the
acquisition in June 1993 and the FHA refinancings discussed
below. The Company has limited exposure to rising interest rates
since most of the remaining debt has fixed rates and no debt
matures until 2000. The mortgage assumed in the 1993 acquisition
referred to above is an adjustable rate mortgage, with an
adjustment scheduled June 1996. The Company anticipates that
interest expense will increase in the future as the Company
employs more leverage in its acquisitions, refinancings and
investment in mortgages. Increased interest expense, however,
will be more than offset by increased revenues generated from
these investments.
Amortization of capitalized expenses was $526,576 for the three
months ended March 31, 1994 up from $469,198 for the same period
of 1993. The increase is due to the write-off of unamortized
loan costs in 1993 resulting from the early paydown of debt.
Depreciation expense for the three months ended March 31, 1994
was $1,164,183 compared to $1,130,674 for the same period of
1993. The increase is due to the Company's purchase of one
nursing home and improvements made to the Company's existing
homes. Administrative and other expense was $405,038 for the
three months ended March 31, 1994 compared to $411,503 for the
same period of 1993. Administrative expenses are anticipated to
be higher in 1994 over 1993 due to expenses related to the
Company's acquisition activities.
For the three months ended March 31, 1994, the Company had net
income of $4,697,112 or $.32 per share compared to net income of
$1,976,729 or $.14 per share for the same period of 1993. Net
income from operations, excluding the gain from sale of
$2,590,418 or $.18 per share, was $2,106,694 or $.14 per share.
For the three months ended March 31, 1994, the Company generated
funds from operations of $3,797,453 compared to $3,576,601 for
the same period of 1993. Funds from operations is defined by the
National Association of Real Estate Investment Trusts ("NAREIT"),
as net income (computed in accordance with generally accepted
accounting principles) less gains or plus losses from debt
restructuring and sales of property, plus depreciation and
amortization expenses. Thus, funds from operations does not
include the funds generated from the sale of the Alden leased
property. Net cash from operations was $3,443,451 for the three
months ended March 31, 1994, up from $3,424,905 for the same
period of 1993. Net cash provided by operating activities is
funds from operations adjusted by changes in certain balance
sheet accounts, such as accrued interest. The increase in both
funds from operations and net cash provided by operating
activities is due primarily to increased rent income as discussed
above and the timing of additional rent receipts.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1994, the Company had cash and cash equivalents
of $11,137,427 as compared with $6,272,153 at December 31, 1993.
The increase is due primarily to the proceeds from the sale of
the Alden leased property. The Company's cash reserves are
invested in commercial paper and bank deposits with initial
maturities of less than 90 days.
As of March 31, 1994, the Company had secured debt of
$26,231,165, compared with $30,190,306 at December 31, 1993. The
decrease is due to the paydown of debt from the proceeds of the
sale. Approximately $3 million and $1.5 million of the proceeds
from the sale was used to repay debt with annual interest rates
of 11.25% and 12%, respectively. Due to these paydowns, the
Company no longer has any remaining balloon debt. Approximately
74% of the Company's properties are pledged as collateral and the
secured debt is approximately 38% of the book value of the
properties. The Company had unsecured debt of $1,340,000 at
March 31, 1994 compared to $1,355,000 at December 31, 1993. The
Company's secured debt to equity ratio is approximately .3:1 at
March 31, 1994 compared to .4:1 at December 31, 1993.
On June 28, 1993, the Company received FHA Section 232 loans to
refinance and rehab its two North Carolina personal care
facilities. The loans total approximately $5.5 million, of which
$2.2 million was used in the rehab process. The rehab was
completed February 18, 1994 and on April 28, 1994 the
construction loans were replaced by permanent FHA loans that bear
interest at 8.25%, will self-amortize over 40 years and are
nonrecourse and non-callable.
The Company has obtained a $5 million line of credit from a bank.
The three year line has an annual interest rate of prime plus
one-half percent. As of March 31, 1994 no funds have been drawn
on the line of credit.
The Company is exploring financing opportunities, the proceeds of
which will be used to repay debt and for acquisition of
properties. As discussed earlier, proceeds from the sale of the
Alden leased property will be available for these purposes. If
the Company acquires additional debt due to acquisitions or
refinancing opportunities, interest expense will increase but
will be more than offset by increased revenues from acquisitions.
The Company does not plan to increase the Company's debt to
equity ratio to more than 1 to 1.
All of the Company's properties are subject to net leases that
pass the responsibility of the operating expenses, taxes and
insurance, and repairs and maintenance to the lessees. Under
five of the Company's leases, in the event specified capital
improvements are made during specified terms of the lease, the
Company is responsible for the unamortized portion of the
improvements upon the termination of the lease. Based on the
Company's inspection of these properties management does not
anticipate that the Company has any potential exposure with
respect to these items for the foreseeable future.
The Company's internal sources of liquidity include its cash
reserves and cash flow generated from operating activities after
the payment of debt amortization, reserves for improvements and
dividends. The Company's external sources of liquidity are
provided by potential debt and equity financing. Management
believes that internal sources of liquidity are adequate to cover
the Company's anticipated needs through December 31, 1996. In
addition, because the primary responsibility for improvements to
the Company's facilities lies with the lessees, management
anticipates that reserves are adequate to cover any such needs.
The Company may be dependent upon external sources of liquidity
to satisfy obligations due beyond 1996.
The Company distributes a large portion of the cash available
from operations. Cash dividends declared equalled $3,573,071
($0.245 per share) for the first quarter of 1994. Funds from
operations were $3,797,453 while net cash provided by operating
activities was $3,443,451. The Company's pay-out ratio, that is,
the ratio of the dividend to funds from operations, was 94% for
the first quarter of 1994. To qualify as a REIT, the Company is
required to distribute at least 95% of its taxable income to
shareholders each year. The Company does not anticipate a
problem complying with this requirement for the foreseeable
future. The Company will use cash flow from operations in excess
of dividends for working capital and to retire indebtedness. The
dividends of the Company are based upon funds from operations.
As result of non-cash expenses, primarily depreciation and
amortization, funds from operations and cash distributions have
exceeded the Company's earnings and profits in past years.
Portions of the Company's dividend which are not attributable to
earnings and profits represent a return of capital and are not
subject to federal income tax to the extent they do not exceed
the shareholders' basis in their shares.
At its first quarter 1993 meeting, the Board of Directors
determined that the quarterly dividend should remain at the
current base of $0.245 per share. The Company anticipates
operations will continue to support the dividend of $0.245.
While the dividend yield on the Company's common stock remains
high, the Company will continue to consider reacquiring
outstanding shares of common stock to further reduce the
Company's cost of capital. A primary objective of the Company
continues to be increasing the cash flow available for
distribution on a per share basis; maintaining the dividend at
the current level would have the benefit of reducing the
Company's pay-out ratio.
The Company sees continued growth in funds from operations for
the foreseeable future. Due to the timing of the investment of
the remaining proceeds from the sale, the Company anticipates a
temporary decrease in funds from operations for the second
quarter. Additional rent has been increasing every year and
leases not providing additional rent currently, will do so in
future years. As previously mentioned, the Company has and will
continue to refinance, when feasible, to repay its remaining high
constant debt. The Company will invest capital generated from
these refinancings, or additional offerings of debt or equity, in
new properties or improvements to existing properties with
corresponding rent increases.
The Company continues to pursue the reduction of its percentage
of revenue from Beverly Enterprises. On July 1, 1993, Res-Care
became the lessee of three Indiana facilities previously leased
by Beverly. If the change had occurred on January 1, 1993, the
percentage of base rent received from Beverly would have
decreased from 40% to 36%. The Company is exploring the
reduction of this dependency on Beverly further, by re-leasing
the properties, as well as by exploring possible sales of some or
all Beverly-leased properties. The Company is also exploring
further diversification in its portfolio by investing in other
than traditional nursing home properties.
The Company does not anticipate that President Clinton's
healthcare plan will materially impact our nursing homes or their
operators. Nursing homes are ideally situated in the middle of
the chain of healthcare providers. As less seriously ill persons
are moved from nursing homes into facilities providing less
services (personal care or assisted living facilities) at a lower
cost, more seriously ill patients will be moved from hospitals
into nursing homes where necessary services can be provided at a
lower cost. The impact of the healthcare plan should be
favorable to the nursing home industry.
Management continues to consider long-term healthcare properties
a sound investment. The Company is concerned, however, about the
opportunities for growth in the nursing home segment of the
elderly care industry. The Company's portfolio is situated in
the middle of the industry which spans from elderly housing to
acute medical care. Management believes there is a definite
movement in the industry toward sub-acute care but because of the
highly competitive market, the Company believes movement toward
the elderly housing segment would produce a dependable, steady
stream of income with growth potential.
The Company's lessees occasionally have difficulties from the
problems affecting state reimbursement plans, such as inadequate
funding and artificially low reimbursement rates. The Company
does not anticipate at this time, however, that such problems
will be of sufficient impact to impair the ability of the lessees
to meet their obligations under the leases. As discussed above,
the Company will consider opportunities to invest in other types
of properties to diversify its traditional nursing home holdings.
In the future, the Company may acquire additional income
producing, real estate properties, including, but not limited to,
nursing homes, congregate care facilities, assisted living
facilities, personal care facilities, retirement living
facilities and elderly housing, with funds generated from
additional offerings of debt or equity of the Company. In
general, the Company intends to acquire and finance additional
real estate properties and investments, to the extent possible,
in a manner which will enable it to maintain its ability to make
regular quarterly dividend payments to shareholders, to maintain
current levels of liquidity, and to maintain the debt to equity
ratio of less than 1 to 1. The future issuance of debt or equity
by the Company or the acquisition of a new property or
investments, however, could affect the yield to shareholders or
current levels of liquidity.
INFLATION
Except for the inflationary impact on the administrative
expenses, inflation should have minimal effects on the Company.
The additional rent provided for in the leases is based on
increases in gross revenues and percentage increases in the
Consumer Price Index. Although the majority of debt has fixed
rates and the increase in interest rates is not a major concern,
the Company does have limited exposure on the adjustable rate
mortgage assumed in 1993. The primary concern regarding
inflation and interest rate fluctuations is the ongoing ability
of the Company to purchase properties at reasonable prices, as
well as the ability of our lessees to operate the properties in a
profitable manner and the ability of the Company to find
replacement financing at similar interest rates as the existing
debt comes due.
ENVIRONMENTAL MATTERS
Pursuant to the terms of the Leases, the Company does not have
control over the operational activities of the lessees, nor does
it monitor lessees with respect to environmental matters.
Generally, the owner of real property with latent hazardous waste
problems may be liable for such problems even if such problems
were not caused by the current landowner. The Company has
obtained environmental reports from time to time covering some of
the properties. Such reports indicate these properties did not
have any identifiable concerns which would materially impact
their value. The Company has not obtained environmental reports
with respect to its remaining properties and does not obtain
environmental studies in the ordinary course of business. In
addition, the current lease form used by the Company specifically
requires the lessee to insulate the Company on environmental
issues.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5. OTHER MATTERS
The Company held its Annual Meeting of Shareholders on
April 28, 1994. Proxies were solicited for the
election of three directors and approval of two
proposals.
The following directors were nominated by management
and elected at the meeting: William G. Benton, Susan L
Christiansen and David Weil. The term of the following
directors continued after the meeting: Lisbeth C.
Evans, G. L. Clark, Jr., Perry C. Craven, Dr. Walter H.
Ettinger, Jr., Dr. Thomas K. Hearn, Jr. and Floyd A.
Schlossberg. There was no solicitation in opposition
to management's nominees as listed in the proxy
statement, and all of such nominees were elected.
Other matters voted upon at the meeting and the number
of affirmative and negatives votes cast with respect to
each such matter are as follows:
1. Proposal to amend the Company's Stock Option Plan
to increase the number of shares reserved for the
Plan from 564,927 to 1,500,000 shares and to
provide for the grant of restricted shares of
stock under the Plan. Affirmative votes:
7,407,992; Negative votes: 588,556; Abstentions:
372,971.
2. Proposal to authorize the Board of Directors to
purchase or cause to be purchased on behalf of the
Company, shares of the Company's common stock with
an aggregate maximum purchase price of $7,000,000
for a period of one year from the date of this
meeting. Affirmative votes: 12,653,466; Negative
votes: 285,930; Abstentions: 263,138.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
On April 12, 1994, the registrant electronically
filed its report on Form 8-K reporting the sale of
one facility.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HEALTH EQUITY PROPERTIES INCORPORATED
Registrant
By: William G. Benton
President and
Chief Executive Officer
By: Deborah O. Robinson
Chief Accounting Officer
Date: May 13, 1994
