e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File number 1-8923
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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34-1096634 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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One SeaGate, Suite 1500, Toledo, Ohio
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43604 |
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(Address of principal executive office)
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(Zip Code) |
(419) 247-2800
(Registrants telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for at least the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of April 30, 2010, the registrant had 124,112,014 shares of common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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March 31, |
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December 31, |
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2010 |
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2009 |
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(Unaudited) |
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(Note) |
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(In thousands) |
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Assets |
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Real estate investments: |
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Real property owned: |
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Land and land improvements |
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$ |
551,594 |
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$ |
521,055 |
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Buildings and improvements |
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5,512,467 |
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5,185,328 |
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Acquired lease intangibles |
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147,957 |
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127,390 |
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Real property held for sale, net of accumulated depreciation |
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27,607 |
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45,686 |
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Construction in progress |
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374,849 |
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456,832 |
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Gross real property owned |
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6,614,474 |
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6,336,291 |
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Less accumulated depreciation and amortization |
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(718,671 |
) |
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(677,851 |
) |
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Net real property owned |
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5,895,803 |
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5,658,440 |
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Real estate loans receivable: |
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Real estate loans receivable |
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444,457 |
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427,363 |
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Less allowance for losses on loans receivable |
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(5,025 |
) |
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(5,183 |
) |
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Net real estate loans receivable |
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439,432 |
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422,180 |
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Net real estate investments |
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6,335,235 |
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6,080,620 |
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Other assets: |
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Equity investments |
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166,654 |
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5,816 |
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Deferred loan expenses |
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25,405 |
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22,698 |
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Cash and cash equivalents |
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36,558 |
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35,476 |
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Restricted cash |
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17,692 |
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23,237 |
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Receivables and other assets |
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192,834 |
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199,339 |
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Total other assets |
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439,143 |
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286,566 |
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Total assets |
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$ |
6,774,378 |
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$ |
6,367,186 |
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Liabilities and equity |
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Liabilities: |
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Borrowings under unsecured lines of credit arrangements |
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$ |
425,000 |
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$ |
140,000 |
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Senior unsecured notes |
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1,677,518 |
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1,653,027 |
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Secured debt |
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725,969 |
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620,995 |
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Accrued expenses and other liabilities |
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185,975 |
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145,713 |
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Total liabilities |
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3,014,462 |
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2,559,735 |
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Equity: |
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Preferred stock, $1.00 par value |
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287,974 |
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288,683 |
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Common stock, $1.00 par value |
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123,979 |
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123,385 |
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Capital in excess of par value |
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3,916,837 |
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3,900,666 |
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Treasury stock |
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(11,303 |
) |
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(7,619 |
) |
Cumulative net income |
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1,578,990 |
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1,547,669 |
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Cumulative dividends |
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(2,147,690 |
) |
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(2,057,658 |
) |
Accumulated other comprehensive income |
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(4,092 |
) |
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(2,891 |
) |
Other equity |
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5,539 |
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4,804 |
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Total Health Care REIT, Inc. stockholders equity |
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3,750,234 |
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3,797,039 |
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Noncontrolling interests |
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9,682 |
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10,412 |
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Total equity |
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3,759,916 |
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3,807,451 |
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Total liabilities and equity |
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$ |
6,774,378 |
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$ |
6,367,186 |
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NOTE: The consolidated balance sheet at December 31, 2009 has been derived from the audited
financial statements at that date but does not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial statements.
See notes to unaudited consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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Three Months Ended |
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March 31, |
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2010 |
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2009 |
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(In thousands, except per share data) |
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Revenues: |
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Rental income |
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$ |
142,715 |
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$ |
127,409 |
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Interest income |
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9,048 |
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9,953 |
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Other income |
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996 |
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1,484 |
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Total revenues |
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152,759 |
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138,846 |
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Expenses: |
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Interest expense |
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29,791 |
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26,679 |
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Property operating expenses |
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12,513 |
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11,049 |
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Depreciation and amortization |
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43,387 |
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38,198 |
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Transaction costs |
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7,714 |
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General and administrative |
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16,821 |
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17,361 |
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Loss (gain) on extinguishment of debt |
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18,038 |
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(1,678 |
) |
Provision for loan losses |
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140 |
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Total expenses |
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128,264 |
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91,749 |
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Income from continuing operations before income taxes and income from unconsolidated joint ventures |
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24,495 |
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47,097 |
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Income tax expense |
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(84 |
) |
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(50 |
) |
Income from unconsolidated joint ventures |
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768 |
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Income from continuing operations |
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25,179 |
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47,047 |
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Discontinued operations: |
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Net gain on sales of properties |
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6,718 |
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17,036 |
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Income (loss) from discontinued operations, net |
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(203 |
) |
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2,562 |
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Discontinued operations, net |
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6,515 |
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19,598 |
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Net income |
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31,694 |
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66,645 |
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Less: Preferred stock dividends |
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5,509 |
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5,524 |
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Net income attributable to noncontrolling interests |
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373 |
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2 |
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Net income attributable to common stockholders |
|
$ |
25,812 |
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$ |
61,119 |
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Average number of common shares outstanding: |
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Basic |
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123,270 |
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108,214 |
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Diluted |
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123,790 |
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108,624 |
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Earnings per share: |
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Basic: |
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Income from continuing operations attributable to common stockholders |
|
$ |
0.16 |
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$ |
0.38 |
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Discontinued operations, net |
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0.05 |
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|
0.18 |
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Net income attributable to common stockholders* |
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$ |
0.21 |
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$ |
0.56 |
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Diluted: |
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Income from continuing operations attributable to common stockholders |
|
$ |
0.16 |
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|
$ |
0.38 |
|
Discontinued operations, net |
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0.05 |
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|
0.18 |
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|
|
|
|
|
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|
Net income attributable to common stockholders* |
|
$ |
0.21 |
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|
$ |
0.56 |
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|
|
|
|
|
|
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Dividends declared and paid per common share |
|
$ |
0.68 |
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|
$ |
0.68 |
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* |
|
Amounts may not sum due to rounding |
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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(in thousands) |
|
Three Months Ended March 31, 2010 |
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Accumulated |
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Capital in |
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Other |
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Preferred |
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Common |
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Excess of |
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Treasury |
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Cumulative |
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Cumulative |
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Comprehensive |
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Other |
|
Noncontrolling |
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Stock |
|
Stock |
|
Par Value |
|
Stock |
|
Net Income |
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Dividends |
|
Income |
|
Equity |
|
Interests |
|
Total |
Balances at beginning of period |
|
$ |
288,683 |
|
|
$ |
123,385 |
|
|
$ |
3,900,666 |
|
|
$ |
(7,619 |
) |
|
$ |
1,547,669 |
|
|
$ |
(2,057,658 |
) |
|
$ |
(2,891 |
) |
|
$ |
4,804 |
|
|
$ |
10,412 |
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|
$ |
3,807,451 |
|
Comprehensive income: |
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|
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Net income |
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31,321 |
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|
|
|
|
|
|
|
|
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|
373 |
|
|
|
31,694 |
|
Other comprehensive income: |
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|
|
|
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|
|
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|
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|
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|
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|
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|
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|
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|
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|
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Unrealized gain (loss) on equity investments |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
90 |
|
Cash flow hedge activity |
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|
|
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|
|
|
|
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|
(1,291 |
) |
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|
|
|
|
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|
(1,291 |
) |
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|
|
|
|
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|
|
|
|
|
|
|
|
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|
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Total comprehensive income |
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,493 |
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|
|
|
|
|
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|
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|
|
|
|
|
|
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|
|
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|
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|
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|
|
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|
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|
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|
|
|
|
Contributions by noncontrolling interests |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,359 |
|
|
|
1,359 |
|
Distributions to noncontrolling interests |
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|
|
|
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|
|
|
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|
|
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|
|
|
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|
|
|
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|
(2,462 |
) |
|
|
(2,462 |
) |
Amounts related to issuance of common stock
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
577 |
|
|
|
24,044 |
|
|
|
(3,684 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(238 |
) |
|
|
|
|
|
|
20,699 |
|
Equity component of convertible debt |
|
|
|
|
|
|
|
|
|
|
(8,565 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,565 |
) |
Conversion of preferred stock |
|
|
(709 |
) |
|
|
17 |
|
|
|
692 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Option compensation expense |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
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|
973 |
|
|
|
|
|
|
|
973 |
|
Cash dividends paid: |
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|
|
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|
|
|
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Common stock |
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|
|
|
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|
|
|
|
|
|
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|
(84,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
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|
|
(84,523 |
) |
Preferred stock, Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Preferred stock, Series F |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
Preferred stock, Series G |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176 |
) |
|
|
|
Balances at end of period |
|
$ |
287,974 |
|
|
$ |
123,979 |
|
|
$ |
3,916,837 |
|
|
$ |
(11,303 |
) |
|
$ |
1,578,990 |
|
|
$ |
(2,147,690 |
) |
|
$ |
(4,092 |
) |
|
$ |
5,539 |
|
|
$ |
9,682 |
|
|
$ |
3,759,916 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Preferred |
|
Common |
|
Excess of |
|
Treasury |
|
Cumulative |
|
Cumulative |
|
Comprehensive |
|
Other |
|
Noncontrolling |
|
|
|
|
Stock |
|
Stock |
|
Par Value |
|
Stock |
|
Net Income |
|
Dividends |
|
Income |
|
Equity |
|
Interests |
|
Total |
Balances at beginning of period |
|
$ |
289,929 |
|
|
$ |
104,635 |
|
|
$ |
3,204,690 |
|
|
$ |
(5,145 |
) |
|
$ |
1,354,400 |
|
|
$ |
(1,723,819 |
) |
|
$ |
(1,113 |
) |
|
$ |
4,105 |
|
|
$ |
10,603 |
|
|
$ |
3,238,285 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,643 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
66,645 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(195 |
) |
|
|
|
|
|
|
|
|
|
|
(195 |
) |
Cash flow hedge activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions by noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
857 |
|
|
|
857 |
|
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(976 |
) |
|
|
(976 |
) |
Amounts related to issuance of common stock
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
464 |
|
|
|
17,516 |
|
|
|
(2,432 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,548 |
|
Proceeds from issuance of common shares |
|
|
|
|
|
|
5,817 |
|
|
|
205,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
210,911 |
|
Conversion of preferred stock |
|
|
(1,201 |
) |
|
|
29 |
|
|
|
1,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,082 |
|
|
|
|
|
|
|
1,082 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,986 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75,986 |
) |
Preferred stock, Series D |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Preferred stock, Series F |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
Preferred stock, Series G |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(191 |
) |
|
|
|
Balances at end of period |
|
$ |
288,728 |
|
|
$ |
110,945 |
|
|
$ |
3,428,472 |
|
|
$ |
(7,577 |
) |
|
$ |
1,421,043 |
|
|
$ |
(1,805,329 |
) |
|
$ |
(1,348 |
) |
|
$ |
5,187 |
|
|
$ |
10,486 |
|
|
$ |
3,450,607 |
|
|
|
|
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,694 |
|
|
$ |
66,645 |
|
Adjustments to reconcile net income to
net cash provided from (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
43,581 |
|
|
|
41,326 |
|
Other amortization expenses |
|
|
3,414 |
|
|
|
3,578 |
|
Provision for loan losses |
|
|
|
|
|
|
140 |
|
Stock-based compensation expense |
|
|
7,550 |
|
|
|
6,579 |
|
Loss (gain) on extinguishment of debt, net |
|
|
18,038 |
|
|
|
(1,678 |
) |
Income from unconsolidated joint ventures |
|
|
(768 |
) |
|
|
|
|
Rental income less than (in excess of) cash received |
|
|
(2,715 |
) |
|
|
2,859 |
|
Amortization
related to above (below) market leases, net |
|
|
(487 |
) |
|
|
(356 |
) |
Gain on sales of properties |
|
|
(6,718 |
) |
|
|
(17,036 |
) |
Increase (decrease) in accrued expenses and other liabilities |
|
|
5,824 |
|
|
|
(3,564 |
) |
Increase in receivables and other assets |
|
|
(6,925 |
) |
|
|
(4,071 |
) |
|
|
|
|
|
|
|
Net cash provided from operating activities |
|
|
92,488 |
|
|
|
94,422 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Investment in real property |
|
|
(161,811 |
) |
|
|
(159,696 |
) |
Capitalized interest |
|
|
(7,076 |
) |
|
|
(9,865 |
) |
Investment in real estate loans receivable |
|
|
(11,151 |
) |
|
|
(6,234 |
) |
Other investments, net of payments |
|
|
(114 |
) |
|
|
(11,543 |
) |
Principal collected on real estate loans receivable |
|
|
4,666 |
|
|
|
8,402 |
|
Contributions to unconsolidated joint ventures |
|
|
(159,981 |
) |
|
|
|
|
Decrease in restricted cash |
|
|
5,545 |
|
|
|
137,712 |
|
Proceeds from sales of real property |
|
|
38,059 |
|
|
|
61,304 |
|
|
|
|
|
|
|
|
Net cash provided from (used in) investing activities |
|
|
(291,863 |
) |
|
|
20,080 |
|
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) under unsecured lines of credit arrangements |
|
|
285,000 |
|
|
|
(235,000 |
) |
Proceeds from issuance of senior unsecured notes |
|
|
335,212 |
|
|
|
|
|
Payments to extinguish senior unsecured notes |
|
|
(342,394 |
) |
|
|
(19,796 |
) |
Payments on secured debt |
|
|
(3,378 |
) |
|
|
(2,206 |
) |
Net proceeds from the issuance of common stock |
|
|
17,791 |
|
|
|
223,393 |
|
Increase in deferred loan expenses |
|
|
(639 |
) |
|
|
(3,454 |
) |
Contributions by noncontrolling interests |
|
|
1,359 |
|
|
|
857 |
|
Distributions to noncontrolling interests |
|
|
(2,462 |
) |
|
|
(976 |
) |
Cash distributions to stockholders |
|
|
(90,032 |
) |
|
|
(81,510 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities |
|
|
200,457 |
|
|
|
(118,692 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
1,082 |
|
|
|
(4,190 |
) |
Cash and cash equivalents at beginning of period |
|
|
35,476 |
|
|
|
23,370 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
36,558 |
|
|
$ |
19,180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
25,215 |
|
|
$ |
28,152 |
|
Income taxes paid |
|
|
94 |
|
|
|
211 |
|
See notes to unaudited consolidated financial statements
6
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Business
Health Care REIT, Inc., an S&P 500 company with headquarters in Toledo, Ohio, is an
equity real estate investment trust (REIT) that invests in senior housing and health care real
estate. Our full service platform also offers property management and development services to our
customers. As of March 31, 2010, our broadly diversified portfolio consisted of 608 properties in
39 states. Founded in 1970, we were the first real estate investment trust to invest exclusively in
health care facilities. More information is available on our website at www.hcreit.com.
2. Accounting Policies and Related Matters
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial
information and with instructions to Quarterly Report on Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been
included. Operating results for three months ended March 31, 2010 are not necessarily an indication
of the results that may be expected for the year ending December 31, 2010. For further information,
refer to the financial statements and footnotes thereto included in our Annual Report on Form 10-K
for the year ended December 31, 2009.
New Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) amended the consolidation
guidance for variable interest entities. The new guidance, to be applied on a continuous basis,
requires enterprises to perform a qualitative approach to determining whether or not a variable
interest entity will need to be consolidated. This evaluation is based on an enterprises ability
to direct and influence the activities of a variable interest entity that most significantly impact
its economic performance. This amendment was effective as of January 1, 2010. The adoption of
this guidance did not have a material impact on our consolidated financial position or results of
operations.
3. Real Property Acquisitions and Development
The following is a summary of our real property investment activity for the periods
presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office buildings |
|
$ |
|
|
|
$ |
223,152 |
|
|
$ |
223,152 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
|
|
|
|
223,152 |
|
|
|
223,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Assumed debt |
|
|
|
|
|
|
(108,244 |
) |
|
|
(108,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Assumed other assets (liabilities), net |
|
|
|
|
|
|
(31,048 |
) |
|
|
(31,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for acquisitions |
|
|
|
|
|
|
83,860 |
|
|
|
83,860 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress additions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing facilities |
|
|
27,445 |
|
|
|
|
|
|
|
27,445 |
|
|
|
104,164 |
|
|
|
|
|
|
|
104,164 |
|
Skilled nursing facilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,313 |
|
|
|
|
|
|
|
9,313 |
|
Hospitals |
|
|
|
|
|
|
35,928 |
|
|
|
35,928 |
|
|
|
|
|
|
|
22,210 |
|
|
|
22,210 |
|
Medical office buildings |
|
|
|
|
|
|
18,669 |
|
|
|
18,669 |
|
|
|
|
|
|
|
26,305 |
|
|
|
26,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction in progress additions |
|
|
27,445 |
|
|
|
54,597 |
|
|
|
82,042 |
|
|
|
113,477 |
|
|
|
48,515 |
|
|
|
161,992 |
|
Less: Capitalized interest |
|
|
(3,652 |
) |
|
|
(3,424 |
) |
|
|
(7,076 |
) |
|
|
(7,174 |
) |
|
|
(2,691 |
) |
|
|
(9,865 |
) |
Accruals(1) |
|
|
|
|
|
|
(4,475 |
) |
|
|
(4,475 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for construction in progress |
|
|
23,793 |
|
|
|
46,698 |
|
|
|
70,491 |
|
|
|
106,303 |
|
|
|
45,824 |
|
|
|
152,127 |
|
Capital improvements to existing properties |
|
|
2,304 |
|
|
|
5,156 |
|
|
|
7,460 |
|
|
|
4,884 |
|
|
|
2,685 |
|
|
|
7,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real property |
|
$ |
26,097 |
|
|
$ |
135,714 |
|
|
$ |
161,811 |
|
|
$ |
111,187 |
|
|
$ |
48,509 |
|
|
$ |
159,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents non-cash accruals for amounts to be paid in future periods relating to properties that converted in the period noted above. |
7
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the construction projects that were placed into service and
began generating revenues during the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
Development projects: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing facilities |
|
$ |
149,075 |
|
|
$ |
|
|
|
$ |
149,075 |
|
|
$ |
37,072 |
|
|
$ |
|
|
|
$ |
37,072 |
|
Medical office buildings |
|
|
|
|
|
|
13,652 |
|
|
|
13,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development projects |
|
|
149,075 |
|
|
|
13,652 |
|
|
|
162,727 |
|
|
|
37,072 |
|
|
|
|
|
|
|
37,072 |
|
Expansion projects |
|
|
1,298 |
|
|
|
|
|
|
|
1,298 |
|
|
|
357 |
|
|
|
|
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total construction in progress conversions |
|
$ |
150,373 |
|
|
$ |
13,652 |
|
|
$ |
164,025 |
|
|
$ |
37,429 |
|
|
$ |
|
|
|
$ |
37,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction costs for the three months ended March 31, 2010 primarily represent a $5,000,000
termination fee incurred in connection with the transfer of an entrance fee property to a new
operator and costs incurred in connection with the acquisition of 17 medical office buildings.
4. Real Estate Intangibles
The following is a summary of our real estate intangibles, excluding those classified as
held for sale, as of the dates indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Assets: |
|
|
|
|
|
|
|
|
In place lease intangibles |
|
$ |
85,077 |
|
|
$ |
74,198 |
|
Above market tenant leases |
|
|
16,170 |
|
|
|
10,232 |
|
Below market ground leases |
|
|
43,246 |
|
|
|
39,806 |
|
Lease commissions |
|
|
3,464 |
|
|
|
3,154 |
|
|
|
|
|
|
|
|
Gross historical cost |
|
|
147,957 |
|
|
|
127,390 |
|
Accumulated amortization |
|
|
(32,298 |
) |
|
|
(29,698 |
) |
|
|
|
|
|
|
|
Net book value |
|
$ |
115,659 |
|
|
$ |
97,692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years |
|
|
25.8 |
|
|
|
30.0 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Below market tenant leases |
|
$ |
54,009 |
|
|
$ |
22,961 |
|
Above market ground leases |
|
|
4,084 |
|
|
|
4,084 |
|
|
|
|
|
|
|
|
Gross historical cost |
|
|
58,093 |
|
|
|
27,045 |
|
Accumulated amortization |
|
|
(11,580 |
) |
|
|
(10,478 |
) |
|
|
|
|
|
|
|
Net book value |
|
$ |
46,513 |
|
|
$ |
16,567 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average amortization period in years |
|
|
12.1 |
|
|
|
12.1 |
|
5. Dispositions, Assets Held for Sale and Discontinued Operations
During the year ended December 31, 2009, an impairment charge of $25,223,000 was recorded to
reduce the carrying value of eight medical facilities to their estimated fair value less costs to
sell. In determining the fair value of the properties, we used a combination of third party
appraisals based on market comparable transactions, other market listings and asset quality as well
as management calculations based on projected operating income and published capitalization rates.
During the three months ended March 31, 2010, we sold two medical facilities that were held for
sale. At March 31, 2010, we had four senior housing and care facilities and six medical facilities
that satisfied the requirements for held for sale treatment. We did not recognize any impairment
loss on these properties in 2010 as the fair value less estimated costs to sell exceeded our
carrying values. The following is a summary of our real property disposition activity for the
periods presented (in thousands):
8
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
Real property dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing facilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,427 |
|
|
$ |
|
|
|
$ |
3,427 |
|
Skilled nursing facilities |
|
|
25,097 |
|
|
|
|
|
|
|
25,097 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Hospitals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,841 |
|
|
|
40,841 |
|
Medical office buildings |
|
|
|
|
|
|
6,244 |
|
|
|
6,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dispositions |
|
|
25,097 |
|
|
|
6,244 |
|
|
|
31,341 |
|
|
|
3,427 |
|
|
|
40,841 |
|
|
|
44,268 |
|
Add: Gain on sales of real property |
|
|
5,728 |
|
|
|
990 |
|
|
|
6,718 |
|
|
|
2,681 |
|
|
|
14,355 |
|
|
|
17,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from real property sales |
|
$ |
30,825 |
|
|
$ |
7,234 |
|
|
$ |
38,059 |
|
|
$ |
6,108 |
|
|
$ |
55,196 |
|
|
$ |
61,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have reclassified the income and expenses attributable to all properties sold and
attributable to properties held for sale at March 31, 2010 to discontinued operations. Expenses
include an allocation of interest expense based on property carrying values and our weighted
average cost of debt. The following illustrates the reclassification impact as a result of
classifying properties as discontinued operations for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
1,392 |
|
|
$ |
7,956 |
|
Expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
194 |
|
|
|
1,332 |
|
Property operating expenses |
|
|
1,207 |
|
|
|
934 |
|
Provision for depreciation |
|
|
194 |
|
|
|
3,128 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net |
|
$ |
(203 |
) |
|
$ |
2,562 |
|
|
|
|
|
|
|
|
6. Real Estate Loans Receivable
The following is a summary of our real estate loan activity for the periods presented (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
Advances on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans |
|
$ |
634 |
|
|
$ |
|
|
|
$ |
634 |
|
|
$ |
296 |
|
|
$ |
|
|
|
$ |
296 |
|
Draws on existing loans |
|
|
10,517 |
|
|
|
|
|
|
|
10,517 |
|
|
|
5,193 |
|
|
|
745 |
|
|
|
5,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash advances on real estate loans |
|
|
11,151 |
|
|
|
|
|
|
|
11,151 |
|
|
|
5,489 |
|
|
|
745 |
|
|
|
6,234 |
|
Receipts on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
1,599 |
|
|
|
|
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on loans |
|
|
3,067 |
|
|
|
|
|
|
|
3,067 |
|
|
|
7,956 |
|
|
|
446 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receipts on real estate loans |
|
|
4,666 |
|
|
|
|
|
|
|
4,666 |
|
|
|
7,956 |
|
|
|
446 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances (receipts) on real estate loans |
|
$ |
6,485 |
|
|
$ |
|
|
|
$ |
6,485 |
|
|
$ |
(2,467 |
) |
|
$ |
299 |
|
|
$ |
(2,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Investments in Unconsolidated Joint Ventures
During the three months ended March 31, 2010, we entered into a joint venture investment
with Forest City Enterprises (NYSE:FCE.A and FCE.B). We acquired a 49% interest in a six-building
life science campus with approximately 1.1 million square feet located in University Park in
Cambridge, MA, which is immediately adjacent to the campus of the Massachusetts Institute of
Technology. The portfolio is 100% leased and includes affiliates of investment grade pharmaceutical
and research tenants such as
9
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Novartis, Genzyme, Millennium (a subsidiary of Takeda
Pharmaceuticals), and Brigham and Womens Hospital. Forest City Enterprises self-developed the
portfolio and will continue to manage it on behalf of the joint venture. The life science campus is
part of a mixed-use project that includes a 210-room hotel, 674 residential units, a grocery store,
restaurants and retail.
In connection with this transaction, we invested $159,981,000 of cash which is recorded
as an equity investment on the balance sheet. Our share of the non-recourse secured debt assumed
by the joint venture was approximately $142,190,000 with weighted-average interest rates of 7.2%.
The results of operations for these properties have been included in our consolidated results of
operations from the date of acquisition by the joint venture and are reflected in our income
statement as income from unconsolidated joint ventures. The aggregate remaining unamortized basis
difference of our investment in this joint venture of $23,754,000 at March 31, 2010 is primarily
attributable to real estate and related intangible assets and will be amortized over the life of
the related properties and included in the reported amount of income from unconsolidated joint
ventures.
8. Customer Concentration
The following table summarizes certain information about our customer concentration as of
March 31, 2010 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Total |
|
|
Percent of |
|
Concentration by investment:(1) |
|
Properties |
|
|
Investment(2) |
|
|
Investment(3) |
|
|
|
|
|
|
|
Senior Living Communities, LLC |
|
|
11 |
|
|
$ |
531,942 |
|
|
|
8 |
% |
Aurora Health Care, Inc. |
|
|
18 |
|
|
|
312,839 |
|
|
|
5 |
% |
Brookdale Senior Living, Inc. |
|
|
86 |
|
|
|
308,396 |
|
|
|
5 |
% |
Signature Healthcare LLC |
|
|
32 |
|
|
|
267,390 |
|
|
|
4 |
% |
Emeritus Corporation |
|
|
21 |
|
|
|
239,739 |
|
|
|
4 |
% |
Remaining portfolio |
|
|
440 |
|
|
|
5,005,879 |
|
|
|
74 |
% |
|
|
|
|
|
|
Totals |
|
|
608 |
|
|
$ |
6,666,185 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
(1) |
|
All of our top five customers, except for Aurora Health Care, Inc., are in our senior housing
and care segment. |
|
(2) |
|
Includes our share of unconsolidated joint venture investment of $325,925,000. Please see
Note 7 for additional information. |
|
(3) |
|
Investments with our top five customers comprised 24% of total investments at December 31,
2009. |
9. Borrowings Under Line of Credit Arrangement and Related Items
At March 31, 2010, we had an unsecured line of credit arrangement with a consortium of
sixteen banks in the amount of $1,150,000,000, which is scheduled to expire on August 5, 2011 (with
the ability to extend for one year at our discretion if we are in compliance with all covenants).
Borrowings under the agreement are subject to interest payable in periods no longer than three
months at either the agent banks prime rate of interest or the applicable margin over LIBOR
interest rate, at our option (0.85% at March 31, 2010). The applicable margin is based on our
ratings with Moodys Investors Service and Standard & Poors Ratings Services and was 0.6% at March
31, 2010. In addition, we pay a facility fee annually to each bank based on the banks commitment
amount. The facility fee depends on our ratings with Moodys Investors Service and Standard &
Poors Ratings Services and was 0.15% at March 31, 2010. We also pay an annual agents fee of
$50,000. Principal is due upon expiration of the agreement.
The following information relates to aggregate borrowings under the unsecured line of
credit arrangement for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
Balance outstanding at quarter end |
|
$ |
425,000 |
|
|
$ |
335,000 |
|
Maximum amount outstanding at any month end |
|
$ |
425,000 |
|
|
$ |
559,000 |
|
Average amount outstanding (total of daily
principal balances divided by days in period) |
|
$ |
283,111 |
|
|
$ |
417,000 |
|
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding) |
|
|
1.47 |
% |
|
|
1.62 |
% |
10
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
10. Senior Unsecured Notes and Secured Debt
We have $1,677,518,000 of senior unsecured notes with annual stated interest rates
ranging from 3.00% to 8.00%. The carrying amounts of the senior unsecured notes represent the par
value of $1,702,129,000 adjusted for any unamortized premiums or discounts and other basis
adjustments related to hedging the debt with derivative instruments. See Note 11 for further
discussion regarding derivative instruments.
During the three months ended December 31, 2006, we issued $345,000,000 of 4.75% senior
unsecured convertible notes due December 2026, generating net proceeds of $337,517,000. The notes
are convertible, in certain circumstances, into cash and, if applicable, shares of common stock at
an initial conversion rate of 20.8833 shares per $1,000 principal amount of notes, which represents
an initial conversion price of approximately $47.89 per share. In general, upon conversion, the
holder of each note would receive, in respect of the conversion value of such note, cash up to the
principal amount of such note and common stock for the notes conversion value in excess of such
principal amount. In addition, on each of December 1, 2011, December 1, 2016 and December 1, 2021,
holders may require us to purchase all or a portion of their notes at a purchase price in cash
equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid
interest. During the three months ended March 31, 2009, we extinguished $5,000,000 of these notes
and recognized a gain of $446,000. During the three months ended March 31, 2010, we extinguished
$129,393,000 of these notes, recognized a loss of $5,480,000 and paid $12,758,000 to reacquire the
equity component of convertible debt. As of March 31, 2010, we had $210,607,000 of these notes
outstanding.
In July 2007, we issued $400,000,000 of 4.75% senior unsecured convertible notes due July
2027, generating net proceeds of $388,943,000. The notes are convertible, in certain circumstances,
into cash and, if applicable, shares of our common stock at an initial conversion rate of
20.0000 shares per $1,000 principal amount of notes, which represents an initial conversion price
of approximately $50.00 per share. In general, upon conversion, the holder of each note would
receive, in respect of the conversion value of such note, cash up to the principal amount of such
note and common stock for the notes conversion value in excess of such principal amount. In
addition, on each of July 15, 2012, July 15, 2017 and July 15, 2022, holders may require us to
purchase all or a portion of their notes at a purchase price in cash equal to 100% of the principal
amount of the notes to be purchased, plus any accrued and unpaid interest. During the three months
ended March 31, 2009, we extinguished $5,000,000 of these notes and recognized a gain of $594,000.
During the three months ended March 31, 2010, we extinguished $172,725,000 of these notes,
recognized a loss of $12,558,000 and paid $17,353,000 to reacquire the equity component of
convertible debt. As of March 31, 2010, we had $222,275,000 of these notes outstanding.
During the three months ended March 31, 2010, we issued $342,394,000 of 3.00% senior unsecured
convertible notes due December 2029, generating net proceeds of $335,212,000. The notes are
convertible, in certain circumstances, into cash and, if applicable, shares of common stock at an
initial conversion rate of 19.5064 shares per $1,000 principal amount of notes, which represents an
initial conversion price of approximately $51.27 per share. In general, upon conversion, the holder
of each note would receive, in respect of the conversion value of such note, cash up to the
principal amount of such note and common stock for the notes conversion value in excess of such
principal amount. In addition, on each of December 1, 2014, December 1, 2019 and December 1, 2024,
holders may require us to purchase all or a portion of their notes at a purchase price in cash
equal to 100% of the principal amount of the notes to be purchased, plus any accrued and unpaid
interest. In connection with this issuance, we recognized $21,546,000 of equity component of
convertible debt.
We have secured debt totaling $725,969,000, collateralized by owned properties, with annual
stated interest rates ranging from 4.89% to 7.98%. The carrying amounts of the secured debt
represent the par value of $725,809,000 adjusted for any unamortized fair value adjustments. The
carrying values of the properties securing the debt totaled $1,067,247,000 at March 31, 2010.
During the three months ended March 31, 2010, we assumed $106,140,000 of first mortgage loans with
an average rate of 7.35% secured by 17 medical office buildings.
Our debt agreements contain various covenants, restrictions and events of default.
Certain agreements require us to maintain certain financial ratios and minimum net worth and impose
certain limits on our ability to incur indebtedness, create liens and make investments or
acquisitions. As of March 31, 2010, we were in compliance with all of the covenants under our debt
agreements.
11
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2010, the annual principal payments due on these debt obligations are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior |
|
|
Secured |
|
|
|
|
|
|
Unsecured Notes(1) |
|
|
Debt (1) |
|
|
Totals |
|
2010 |
|
$ |
|
|
|
$ |
12,671 |
|
|
$ |
12,671 |
|
2011 |
|
|
|
|
|
|
17,526 |
|
|
|
17,526 |
|
2012 |
|
|
76,853 |
|
|
|
24,010 |
|
|
|
100,863 |
|
2013 |
|
|
300,000 |
|
|
|
73,147 |
|
|
|
373,147 |
|
2014 |
|
|
|
|
|
|
133,991 |
|
|
|
133,991 |
|
Thereafter |
|
|
1,325,276 |
|
|
|
464,464 |
|
|
|
1,789,740 |
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
1,702,129 |
|
|
$ |
725,809 |
|
|
$ |
2,427,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent principal amounts due and do not include unamortized premiums/discounts or other fair value adjustments as reflected on the balance sheet. |
11. Derivative Instruments
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may elect to use financial derivative instruments to hedge interest
rate exposure. These decisions are principally based on our policy to manage the general trend in
interest rates at the applicable dates and our perception of the future volatility of interest
rates. Derivates are recorded at fair value on the balance sheet as assets or liabilities. The
valuation of derivative instruments requires us to make estimates and judgments that affect the
fair value of the instruments. Fair values of our derivatives are estimated by pricing models that
consider the forward yield curves and discount rates. Such amounts and the recognition of such
amounts are subject to significant estimates that may change in the future.
The following is a summary of the fair value of our derivative instruments (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet |
|
Fair Value |
|
|
Location |
|
March 31, 2010 |
|
December 31, 2009 |
Cash flow hedge interest rate swaps |
|
Other liabilities |
|
$ |
3,632 |
|
|
$ |
2,381 |
|
Cash Flow Hedges
For instruments that are designated and qualify as a cash flow hedge, the effective portion of
the gain or loss on the derivative is reported as a component of other comprehensive income
(OCI), and reclassified into earnings in the same period, or periods, during which the hedged
transaction affects earnings. Gains and losses on the derivative representing either hedge
ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in
earnings. Approximately $2,977,000 of losses, which are included in accumulated other
comprehensive income, are expected to be reclassified into earnings in the next 12 months.
The following presents the impact of derivative instruments on the statement of operations and
OCI for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Location |
|
March 31, 2010 |
|
March 31, 2009 |
Gain (loss) on interest rate swap recognized in OCI (effective portion) |
|
|
n/a |
|
|
$ |
(2,054 |
) |
|
$ |
(40 |
) |
Gain (loss) reclassified from AOCI into income (effective portion) |
|
Interest expense |
|
|
(804 |
) |
|
|
|
|
Gain (loss) recognized in income (ineffective portion and
amount excluded from effectiveness testing) |
|
Realized loss |
|
|
|
|
|
|
|
|
On August 7, 2009, we entered into an interest rate swap (the August 2009 Swap) for a total
notional amount of $52,198,000 to hedge seven years of interest payments associated with long-term
LIBOR based borrowings. The August 2009 Swap has an effective date of August 12, 2009 and a
maturity date of September 1, 2016. The August 2009 Swap has the economic effect of fixing
$52,198,000 at 3.93% plus a credit spread for seven years. The August 2009 Swap has been
designated as a cash flow hedge and we expect it to be
12
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
highly effective at offsetting changes in
cash flows of interest payments on $52,198,000 of long-term debt due to changes in the LIBOR swap
rate.
On September 28, 2009, we entered into an interest rate swap (the September 2009 Swap) for a
total notional amount of $48,155,000 to hedge seven years of interest payments associated with
long-term LIBOR based borrowings. The September 2009 Swap has an effective date of September 30,
2009 and a maturity date of October 1, 2016. The September 2009 Swap has the economic effect of
fixing $48,155,000 at 3.2675% plus a credit spread for seven years. The September 2009 Swap has
been designated as a cash flow hedge and we expect it to be highly effective at offsetting changes
in cash flows of interest payments on $48,155,000 of long-term debt due to changes in the LIBOR
swap rate.
Fair Value Hedges
For derivative instruments that are designated as a fair value hedge, the gain or loss on the
derivative as well as the offsetting loss or gain on the hedged risk are recognized in current
earnings. There were no outstanding fair value hedges at March 31, 2010 or December 31, 2009.
12. Commitments and Contingencies
We have two outstanding letters of credit issued for the benefit of certain insurance
companies that provide workers compensation insurance to one of our tenants. Our obligation to
provide the letters of credit terminates in 2013. At March 31, 2010, our obligation under the
letters of credit was $4,200,000.
We have an outstanding letter of credit issued for the benefit of certain insurance
companies that provide liability and property insurance to one of our tenants. Our obligation to
provide the letter of credit terminates in 2013. At March 31, 2010, our obligation under the letter
of credit was $1,000,000.
We have an outstanding letter of credit issued for the benefit of a village in Illinois
that secures the completion and installation of certain public improvements by one of our tenants
in connection with the development of a property. Our obligation to provide the letter of credit
terminates in November 2010. At March 31, 2010, our obligation under the letter of credit was
$129,057.
At March 31, 2010, we had outstanding construction financings of $374,849,000 for leased
properties and were committed to providing additional financing of approximately $193,876,000 to
complete construction. At March 31, 2010, we had contingent purchase obligations totaling
$12,482,000. These contingent purchase obligations primarily relate to deferred acquisition
fundings and capital improvements. Deferred acquisition fundings are contingent upon an operator
satisfying certain conditions such as payment coverage and value tests. Rents due from the tenant
are increased to reflect the additional investment in the property.
At March 31, 2010, we had operating lease obligations of $187,255,000 relating to certain
ground leases and company office space. We incurred rental expense relating to our company office
space of $333,000 for the three months ended March 31, 2010, as compared to $297,000 for the same
period in 2009. Regarding the ground leases, we have sublease agreements with certain of our
operators that require the operators to reimburse us for our monthly operating lease obligations.
At March 31, 2010, aggregate future minimum rentals to be received under these noncancelable
subleases totaled $32,410,000.
At March 31, 2010, future minimum lease payments due under operating leases are as
follows (in thousands):
|
|
|
|
|
2010 |
|
$ |
3,502 |
|
2011 |
|
|
4,749 |
|
2012 |
|
|
4,429 |
|
2013 |
|
|
4,441 |
|
2014 |
|
|
4,463 |
|
Thereafter |
|
|
165,671 |
|
|
|
|
|
Totals |
|
$ |
187,255 |
|
|
|
|
|
13
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
13. Stockholders Equity
The following is a summary of our stockholders equity capital accounts as of the dates
indicated:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
December 31, 2009 |
Preferred Stock, $1.00 par value: |
|
|
|
|
|
|
|
|
Authorized shares |
|
|
50,000,000 |
|
|
|
50,000,000 |
|
Issued shares |
|
|
11,450,107 |
|
|
|
11,474,093 |
|
Outstanding shares |
|
|
11,450,107 |
|
|
|
11,474,093 |
|
|
|
|
|
|
|
|
|
|
Common Stock, $1.00 par value: |
|
|
|
|
|
|
|
|
Authorized shares |
|
|
225,000,000 |
|
|
|
225,000,000 |
|
Issued shares |
|
|
124,265,589 |
|
|
|
123,583,242 |
|
Outstanding shares |
|
|
123,982,913 |
|
|
|
123,385,317 |
|
Preferred Stock. During the three months ended March 31, 2009, certain holders of our
Series G Cumulative Convertible Preferred Stock converted 40,600 shares into 29,056 shares of our
common stock, leaving 400,713 of such shares outstanding at March 31, 2009. During the three
months ended March 31, 2010, certain holders of our Series G Cumulative Convertible Preferred Stock
converted 23,986 shares into 17,166 shares of our common stock, leaving 375,727 of such shares
outstanding at March 31, 2010.
Common Stock. The following is a summary of our common stock issuances during the three
months ended March 31, 2010 and 2009 (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued |
|
|
Average Price |
|
|
Gross Proceeds |
|
|
Net Proceeds |
|
February 2009 public issuance |
|
|
5,816,870 |
|
|
$ |
36.85 |
|
|
$ |
214,352 |
|
|
$ |
210,911 |
|
2009 Dividend reinvestment plan issuances |
|
|
375,813 |
|
|
|
33.21 |
|
|
|
12,482 |
|
|
|
12,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Totals |
|
|
6,192,683 |
|
|
|
|
|
|
$ |
226,834 |
|
|
$ |
223,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Dividend reinvestment plan issuances |
|
|
385,875 |
|
|
$ |
42.00 |
|
|
$ |
16,208 |
|
|
$ |
16,208 |
|
2010 Option exercises |
|
|
42,287 |
|
|
|
37.43 |
|
|
|
1,583 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Totals |
|
|
428,162 |
|
|
|
|
|
|
$ |
17,791 |
|
|
$ |
17,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends. The following is a summary of our dividend payments (dollars in thousands,
except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Per Share |
|
|
Amount |
|
|
Per Share |
|
|
Amount |
|
Common Stock |
|
$ |
0.6800 |
|
|
$ |
84,523 |
|
|
$ |
0.6800 |
|
|
$ |
75,986 |
|
Series D Preferred Stock |
|
|
0.4922 |
|
|
|
1,969 |
|
|
|
0.4922 |
|
|
|
1,969 |
|
Series E Preferred Stock |
|
|
0.3750 |
|
|
|
28 |
|
|
|
0.3750 |
|
|
|
28 |
|
Series F Preferred Stock |
|
|
0.4766 |
|
|
|
3,336 |
|
|
|
0.4766 |
|
|
|
3,336 |
|
Series G Preferred Stock |
|
|
0.4688 |
|
|
|
176 |
|
|
|
0.4688 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
90,032 |
|
|
|
|
|
|
$ |
81,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income
The following is a summary of accumulated other comprehensive income/(loss) as of the
dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Unrecognized losses on cash flow hedges |
|
$ |
(3,198 |
) |
|
$ |
(1,907 |
) |
Unrecognized losses on equity investments |
|
|
(460 |
) |
|
|
(550 |
) |
Unrecognized actuarial losses |
|
|
(434 |
) |
|
|
(434 |
) |
|
|
|
|
|
|
|
Totals |
|
$ |
(4,092 |
) |
|
$ |
(2,891 |
) |
|
|
|
|
|
|
|
The following is a summary of comprehensive income/(loss) for the periods indicated (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Unrecognized losses on cash flow hedges |
|
$ |
(1,291 |
) |
|
$ |
(40 |
) |
Unrecognized gains (losses) on equity investments |
|
|
90 |
|
|
|
(195 |
) |
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
(1,201 |
) |
|
|
(235 |
) |
Net income attributable to controlling interests |
|
|
31,321 |
|
|
|
66,643 |
|
|
|
|
|
|
|
|
Comprehensive income attributable to controlling interests |
|
|
30,120 |
|
|
|
66,408 |
|
Net and comprehensive income attributable to noncontrolling interests |
|
|
373 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
30,493 |
|
|
$ |
66,410 |
|
|
|
|
|
|
|
|
Other Equity
Other equity consists of accumulated option compensation expense which represents the
amount of amortized compensation costs related to stock options awarded to employees and directors.
Expense, which is recognized as the options vest based on the market value at the date of the
award, totaled $973,000 for the three months ended March 31, 2010, as compared to $1,082,000 for
the same period in 2009.
14. Stock Incentive Plans
Our Amended and Restated 2005 Long-Term Incentive Plan authorizes up to 6,200,000 shares
of common stock to be issued at the discretion of the Compensation Committee of the Board of
Directors. The 2005 Plan replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee
Directors. The options granted to officers and key employees under the 1995 Plan continue to vest
through 2010 and expire ten years from the date of grant. Our non-employee directors, officers and
key employees are eligible to participate in the 2005 Plan. The 2005 Plan allows for the issuance
of, among other things, stock options, restricted stock, deferred stock units and dividend
equivalent rights. Vesting periods for options, deferred stock units and restricted shares
generally range from three years for non-employee directors to five years for officers and key
employees. Options expire ten years from the date of grant.
Valuation Assumptions
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2010 |
|
March 31, 2009 |
Dividend yield
|
|
|
6.28 |
% |
|
|
7.35 |
% |
Expected volatility
|
|
|
34.08 |
% |
|
|
29.36 |
% |
Risk-free interest rate
|
|
|
3.23 |
% |
|
|
2.33 |
% |
Expected life (in years)
|
|
|
7.0 |
|
|
|
7.0 |
|
Weighted-average fair value
|
|
$ |
7.82 |
|
|
$ |
4.38 |
|
The dividend yield represented the dividend yield of our common stock on the dates of
grant. Our computation of expected
15
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
volatility was based on historical volatility. The risk-free
interest rates used were the 7-year U.S. Treasury Notes yield on the date of grant. The expected
life was based on historical experience of similar awards, giving consideration to the contractual
terms, vesting schedules and expectations regarding future employee behavior.
Option Award Activity
The following table summarizes information about stock option activity for the three
months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted |
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
Shares |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
Stock Options |
|
(000s) |
|
|
Exercise Price |
|
|
Contract Life (years) |
|
|
Value ($000s) |
|
Options at beginning of year |
|
|
1,062 |
|
|
$ |
37.71 |
|
|
|
8.1 |
|
|
|
|
|
Options granted |
|
|
280 |
|
|
|
43.29 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(42 |
) |
|
|
37.44 |
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
(3 |
) |
|
|
38.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at end of period |
|
|
1,297 |
|
|
$ |
$38.92 |
|
|
|
7.8 |
|
|
$ |
8,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
526 |
|
|
$ |
36.76 |
|
|
|
6.0 |
|
|
$ |
4,489 |
|
Weighted average fair value of
options granted during the period |
|
|
|
|
|
$ |
$7.82 |
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value is calculated as the difference between the exercise price of
the underlying options and the quoted price of our common stock for the options that were
in-the-money at March 31, 2010. During the three months ended March 31, 2010, the aggregate
intrinsic value of options exercised under our stock incentive plans was $307,000 (determined as of
the date of option exercise). There were no option exercises during the three months ended March
31, 2009. Cash received from option exercises under our stock incentive plans was $1,583,000 for
the three months ended March 31, 2010.
As of March 31, 2010, there was approximately $3,266,000 of total unrecognized compensation
cost related to unvested stock options granted under our stock incentive plans. That cost is
expected to be recognized over a weighted average period of four years. As of March 31, 2010, there
was approximately $10,156,000 of total unrecognized compensation cost related to unvested
restricted stock granted under our stock incentive plans. That cost is expected to be recognized
over a weighted average period of four years.
The following table summarizes information about non-vested stock incentive awards as of March
31, 2010 and changes for the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Restricted Stock |
|
|
|
Number of |
|
|
Weighted Average |
|
|
Number of |
|
|
Weighted Average |
|
|
|
Shares |
|
|
Grant Date |
|
|
Shares |
|
|
Grant Date |
|
|
|
(000s) |
|
|
Fair Value |
|
|
(000s) |
|
|
Fair Value |
|
Non-vested at December 31, 2009 |
|
|
675 |
|
|
$ |
5.44 |
|
|
|
405 |
|
|
$ |
40.26 |
|
Vested |
|
|
(181 |
) |
|
|
5.91 |
|
|
|
(228 |
) |
|
|
42.05 |
|
Granted |
|
|
280 |
|
|
|
7.82 |
|
|
|
239 |
|
|
|
43.23 |
|
Terminated |
|
|
(4 |
) |
|
|
8.38 |
|
|
|
(1 |
) |
|
|
38.55 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2010 |
|
|
770 |
|
|
$ |
6.18 |
|
|
|
415 |
|
|
$ |
41.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
15. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Numerator for basic and diluted earnings
per share net income attributable to
common stockholders |
|
$ |
25,812 |
|
|
$ |
61,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares |
|
|
123,270 |
|
|
|
108,214 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
105 |
|
|
|
|
|
Non-vested restricted shares |
|
|
415 |
|
|
|
410 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
520 |
|
|
|
410 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per
share adjusted weighted average shares |
|
|
123,790 |
|
|
|
108,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.21 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.21 |
|
|
$ |
0.56 |
|
|
|
|
|
|
|
|
The diluted earnings per share calculations exclude the dilutive effect of 381,000 and
1,098,000 stock options for the three months ended March 31, 2010 and March 31, 2009, respectively,
because the exercise prices were less than the average market price. The Series E Cumulative
Convertible and Redeemable Preferred Stock, the Series G Cumulative Convertible Preferred Stock,
and outstanding convertible senior unsecured notes were not included in these calculations as the
effect of the conversions into common stock was anti-dilutive for the relevant periods presented.
16. 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 and Other Real Estate Loans Receivable The fair value of mortgage loans and other
real estate loans receivable is generally estimated by discounting the estimated 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.
Cash and Cash Equivalents The carrying amount approximates fair value.
Available-for-sale Equity Investments Available-for-sale equity investments are recorded at their
fair value.
Borrowings Under Unsecured Lines of Credit Arrangements The carrying amount of the unsecured line
of credit arrangement approximates fair value because the borrowings are interest rate adjustable.
Senior Unsecured Notes The fair value of the senior unsecured notes payable was estimated based
on publicly available trading prices.
Secured Debt The fair value of fixed rate secured debt is estimated by discounting the estimated
future cash flows using the current rates at which similar loans would be made with similar credit
ratings and for the same remaining maturities. The carrying amount of variable rate secured debt
approximates fair value because the borrowings are interest rate adjustable.
Interest Rate Swap Agreements Interest rate swap agreements are recorded as assets or liabilities
on the balance sheet at fair market value. Fair market value is estimated by utilizing pricing
models that consider forward yield curves and discount rates.
17
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts and estimated fair values of our financial instruments are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
December 31, 2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans receivable |
|
$ |
85,166 |
|
|
$ |
84,524 |
|
|
$ |
74,517 |
|
|
$ |
74,765 |
|
Other real estate loans receivable |
|
|
359,291 |
|
|
|
357,997 |
|
|
|
352,846 |
|
|
|
354,429 |
|
Available-for-sale equity investments |
|
|
1,139 |
|
|
|
1,139 |
|
|
|
1,050 |
|
|
|
1,050 |
|
Cash and cash equivalents |
|
|
36,558 |
|
|
|
36,558 |
|
|
|
35,476 |
|
|
|
35,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under unsecured lines of credit arrangements |
|
$ |
425,000 |
|
|
$ |
425,000 |
|
|
$ |
140,000 |
|
|
$ |
140,000 |
|
Senior unsecured notes |
|
|
1,677,518 |
|
|
|
1,836,182 |
|
|
|
1,653,027 |
|
|
|
1,762,129 |
|
Secured debt |
|
|
725,969 |
|
|
|
734,765 |
|
|
|
620,995 |
|
|
|
623,266 |
|
Interest rate swap agreements |
|
|
3,632 |
|
|
|
3,632 |
|
|
|
2,381 |
|
|
|
2,381 |
|
U.S. GAAP provides authoritative guidance for measuring and disclosing fair value measurements
of assets and liabilities. The guidance for financial assets and liabilities was previously
adopted as the standard for those assets and liabilities as of January 1, 2008. Additional guidance
for non-financial assets and liabilities is effective for fiscal years beginning after November 15,
2008, and was adopted as the standard for those assets and liabilities as of January 1, 2009. The
impact of adoption was not significant. The guidance defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The guidance also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The guidance describes three levels of inputs that may be used
to measure fair value:
|
|
Level 1 Quoted prices in active markets for identical assets or liabilities. |
|
|
Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term
of the assets or liabilities. Interest rate swap agreements are valued using models that
assume a hypothetical transaction to sell the asset or transfer the liability in the
principal market for the asset or liability based on market data derived from interest rates
and yield curves observable at commonly quoted intervals, volatilities, prepayment timing,
loss severities, credit risks and default rates. |
|
|
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities. |
The market approach is utilized to measure fair value for our financial assets and
liabilities. The market approach uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of March 31, 2010 |
|
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
Available-for-sale equity investments(1) |
|
$ |
1,139 |
|
|
$ |
1,139 |
|
|
$ |
|
|
|
$ |
|
|
Interest rate swap agreements(2) |
|
|
(3,632 |
) |
|
|
|
|
|
|
(3,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
(2,493 |
) |
|
$ |
1,139 |
|
|
$ |
(3,632 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unrealized gains or losses on equity investments are recorded in accumulated other comprehensive income (loss) at each measurement date. |
|
(2) |
|
Please see Note 11 for additional information. |
18
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
17. Segment Reporting
We invest in senior housing and health care real estate. We evaluate our business and
make resource allocations on our two business segments senior housing and care and medical
facilities. Our primary senior housing and care property types include skilled nursing facilities,
assisted living facilities, independent living/continuing care retirement communities and
combinations thereof. Under the senior housing and care segment, we invest in senior housing and
health care real estate through acquisition and financing of primarily single tenant properties.
Properties acquired are primarily leased under triple-net leases and we are not involved in the
management of the property. Our primary medical facility property types include medical office
buildings, hospitals and life science buildings. Our medical office buildings are typically leased
to multiple tenants and generally require a certain level of property management. Our hospital
investments are structured similar to our senior housing and care investments. Our life science
investments are currently held in an unconsolidated joint venture (see Note 7 for additional
information). The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1 to the financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2009). There are no intersegment sales
or transfers. We evaluate performance based upon net operating income of the combined properties in
each segment. Non-segment revenue consists mainly of interest income on non-real estate investments
and other income. Non-segment assets consist of corporate assets including cash, deferred loan
expenses and corporate offices and equipment among others. Non-property specific revenues and
expenses are not allocated to individual segments in determining net operating income.
During the three months ended March 31, 2010, we changed the names of our segments and
reclassified certain assets and related revenues. All hospitals that were formerly classified as
investment properties have been reclassified to medical facilities. Accordingly, we have
reclassified the following prior period amounts to be consistent with the current year
classification: (i) rental income of $12,677,000;
(ii) interest income of $1,230,000; (iii) other
income of $103,000; (iv) real estate depreciation/amortization of $3,668,000; and (v) total assets
of $586,117,000.
Summary information for the reportable segments during the three months ended March 31,
2010 and 2009 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property |
|
|
Net |
|
|
Real Estate |
|
|
|
|
|
|
|
|
|
Rental |
|
|
Interest |
|
|
Other |
|
|
Total |
|
|
Operating |
|
|
Operating |
|
|
Depreciation/ |
|
|
Interest |
|
|
Total |
|
|
|
Income (1) |
|
|
Income |
|
|
Income |
|
|
Revenues (1) |
|
|
Expenses (1) |
|
|
Income(2) |
|
|
Amortization(1) |
|
|
Expense(1) |
|
|
Assets |
|
Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing and care |
|
$ |
93,238 |
|
|
$ |
8,575 |
|
|
$ |
494 |
|
|
$ |
102,307 |
|
|
$ |
|
|
|
$ |
102,307 |
|
|
$ |
26,399 |
|
|
$ |
4,671 |
|
|
$ |
4,123,216 |
|
Medical facilities(3) |
|
|
50,869 |
|
|
|
473 |
|
|
|
271 |
|
|
|
51,613 |
|
|
|
13,720 |
|
|
|
37,893 |
|
|
|
17,182 |
|
|
|
5,577 |
|
|
|
2,559,986 |
|
Non-segment/Corporate |
|
|
|
|
|
|
|
|
|
|
231 |
|
|
|
231 |
|
|
|
|
|
|
|
231 |
|
|
|
|
|
|
|
19,737 |
|
|
|
91,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
144,107 |
|
|
$ |
9,048 |
|
|
$ |
996 |
|
|
$ |
154,151 |
|
|
$ |
13,720 |
|
|
$ |
140,431 |
|
|
$ |
43,581 |
|
|
$ |
29,985 |
|
|
$ |
6,774,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing and care |
|
$ |
89,435 |
|
|
$ |
8,723 |
|
|
$ |
792 |
|
|
$ |
98,950 |
|
|
$ |
|
|
|
$ |
98,950 |
|
|
$ |
25,615 |
|
|
$ |
1,644 |
|
|
|
|
|
Medical facilities |
|
|
45,930 |
|
|
|
1,230 |
|
|
|
316 |
|
|
|
47,476 |
|
|
|
11,983 |
|
|
|
35,493 |
|
|
|
15,711 |
|
|
|
5,213 |
|
|
|
|
|
Non-segment/Corporate |
|
|
|
|
|
|
|
|
|
|
376 |
|
|
|
376 |
|
|
|
|
|
|
|
376 |
|
|
|
|
|
|
|
21,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
135,365 |
|
|
$ |
9,953 |
|
|
$ |
1,484 |
|
|
$ |
146,802 |
|
|
$ |
11,983 |
|
|
$ |
134,819 |
|
|
$ |
41,326 |
|
|
$ |
28,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes amounts from discontinued operations. |
|
(2) |
|
Net operating income (NOI) is used to evaluate the operating performance of our properties.
We define NOI as total revenues, including tenant reimbursements, less property level
operating expenses, which exclude depreciation and amortization, general and administrative
expenses, impairments and interest expense. We believe NOI provides investors relevant and
useful information because it measures the operating performance of our properties at the
property level on an unleveraged basis. We use NOI to make decisions about resource
allocations and to assess the property level performance of our properties. |
|
(3) |
|
Excludes amounts related to our life science buildings held in an unconsolidated joint
venture. Please see Note 7 for additional information. |
18. Subsequent Events
Senior Unsecured Notes. On April 7, 2010, we completed the issuance of $300,000,000 of
6.125% senior unsecured notes due April 15, 2020. The notes were priced to yield 6.22% and we
generated approximately $295,441,000 of net proceeds.
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is based primarily on the consolidated financial
statements of Health Care REIT, Inc. for the periods presented and should be read together with the
notes thereto contained in this Quarterly Report on Form 10-Q. Other important factors are
identified in our Annual Report on Form 10-K for the year ended December 31, 2009, including
factors identified under the headings Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Executive Summary
Company Overview
Health Care REIT, Inc. is an equity real estate investment trust (REIT) that invests in
senior housing and health care real estate. Founded in 1970, we were the first REIT to invest
exclusively in health care facilities. The following table summarizes our portfolio as of March 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
Percentage of |
|
|
Number of |
|
|
# Beds/Units |
|
|
Investment per |
|
|
|
|
Type of Property |
|
(in thousands) |
|
|
Investments |
|
|
Properties |
|
|
or Sq. Ft. |
|
|
metric(1) |
|
|
States |
|
Senior housing facilities |
|
$ |
2,546,029 |
|
|
|
38.1 |
% |
|
|
229 |
|
|
18,199 units |
|
$ 140,580 per unit |
|
|
33 |
|
Skilled nursing facilities |
|
|
1,457,083 |
|
|
|
21.9 |
% |
|
|
207 |
|
|
27,923 beds |
|
52,182 per bed |
|
|
26 |
|
Hospitals |
|
|
673,271 |
|
|
|
10.1 |
% |
|
|
29 |
|
|
1,716 beds |
|
460,437 per bed |
|
|
13 |
|
Medical office buildings |
|
|
1,663,877 |
|
|
|
25.0 |
% |
|
|
137 |
|
|
7,028,449 sq. ft. |
|
246 per sq. ft. |
|
|
23 |
|
Life science buildings(2) |
|
|
325,925 |
|
|
|
4.9 |
% |
|
|
6 |
|
|
|
|
|
|
|
n/a |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
6,666,185 |
|
|
|
100.0 |
% |
|
|
608 |
|
|
|
|
|
|
|
|
|
|
|
39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment per metric was computed by using the total investment amount of $6,534,136,000, which includes net real estate investments and unfunded
construction commitments for which initial funding has commenced which amounted to $6,340,260,000 and $193,876,000, respectively. |
|
(2) |
|
Includes our share of unconsolidated joint venture investments. Please see Note 7 to our unaudited financial statements for additional information. |
Health Care Industry
The demand for health care services, and consequently health care properties, is projected to
reach unprecedented levels in the near future. The Centers for Medicare and Medicaid Services
projects that national health expenditures will rise to $3.4 trillion in 2015 or 17.7% of gross
domestic product (GDP). This is up from $2 trillion or 15.9% of GDP in 2005. Health
expenditures per capita are projected to rise approximately 4.7% per year from 2005 to 2015. While
demographics are the primary driver of demand, economic conditions and availability of services
contribute to health care service utilization rates. We believe the health care property market is
less susceptible to fluctuations and economic downturns relative to other property sectors.
Investor interest in the market remains strong, especially in specific sectors such as medical
office buildings, regardless of the current stringent lending environment. As a REIT, we believe
we are situated to benefit from any turbulence in the capital markets due to our access to capital.
The total U.S. population is projected to increase by 16.4% through 2030. The elderly are an
important component of health care utilization, especially independent living services, assisted
living services, skilled nursing services, inpatient and outpatient hospital services and physician
ambulatory care. The elderly population aged 65 and over is projected to increase by 76.6% through
2030. Most health care services are provided within a health care facility such as a hospital, a
physicians office or a senior housing facility. Therefore, we believe there will be continued
demand for companies such as ours with expertise in health care real estate.
The following chart illustrates the projected increase in the elderly population aged 65 and
over:
20
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Source: U.S. Census Bureau
Health care real estate investment opportunities tend to increase as demand for health care
services increases. We recognize the need for health care real estate as it correlates to health
care service demand. Health care providers require real estate to house their businesses and
expand their services. We believe that investment opportunities in health care real estate will
continue to be present due to the:
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|
|
Specialized nature of the industry which enhances the credibility and experience of our
company; |
|
|
|
|
Projected population growth combined with stable or increasing health care utilization
rates which ensures demand; and |
|
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|
|
On-going merger and acquisition activity. |
Health Reform Laws
In March 2010, the President signed into law The Patient Protection and Affordable Care Act
(PPACA) and The Health Care and Education and Reconciliation Act of 2010 (the Reconciliation
Act), which amends the PPACA (collectively, the Health Reform Laws). The Health Reform Laws
contain various provisions that may impact us directly and that may impact the operators and
tenants of our properties. Some of the provisions of these laws may have a positive impact on
operators or tenants revenues, by increasing coverage of uninsured individuals for example, while
others will have a negative impact on the reimbursement of our operators or tenants, for example,
by altering the market basket adjustments for certain types of health care facilities. The Health
Reform Laws also enhance certain fraud and abuse penalty provisions that could apply to our
operators and tenants in the event of one or more violations of the federal health care laws. In
addition, there are provisions that impact the health coverage that we and our operators and
tenants provide to our respective employees.
Impact to Reimbursement of the Operators and Tenants of Our Properties. The Health Reform
Laws provide for various changes to the reimbursement that our operators and tenants may receive.
One such change is a reduction to the market basket adjustments for inpatient acute hospitals,
long-term care hospitals, inpatient rehabilitation facilities, home health agencies, psychiatric
hospitals, hospice care and outpatient hospitals. Beginning in 2010, the otherwise applicable
percentage increase to the market basket for inpatient acute hospitals will decrease. Beginning in
2012, inpatient acute hospitals will also face a downward adjustment of the annual percentage
increase to the market basket rate by a productivity adjustment. The productivity adjustment may
cause the annual percentage increase to be less than zero, which would mean that inpatient acute
hospitals could face payment rates for a fiscal year that are less than the payment rates for the
preceding year.
A similar productivity adjustment also applies to skilled nursing facilities beginning in
2012, which means that the payment rates for skilled nursing facilities may decrease from one year
to the next. Long-term care hospitals will face a specified percentage decrease in their annual
update for discharges beginning in 2010. Additionally, beginning in 2012, long-term care hospitals
will be subject to the productivity adjustments, which may decrease the federal payment rates for
long-term care hospitals. Similar productivity adjustments and other adjustments to payment rates
will apply to inpatient rehabilitation facilities, psychiatric hospitals and outpatient hospitals
beginning in 2010.
The Health Reform Laws revise other reimbursement provisions that may affect our business. The
PPACA calls for a one year extension of the exceptions for medical therapy caps. These exceptions
are now applicable though December 31, 2010. The Health
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Reform Laws also reduce states Medicaid
disproportionate share hospital (DSH) allotments starting in 2014. These allotments would have
provided additional funding for DSH hospitals that are operators or tenants of our properties, and
thus, any reduction might negatively impact these operators or tenants.
Additionally, beginning in fiscal year 2015, payments will decrease to hospitals for treatment
associated with hospital acquired conditions. This decreased payment rate may negatively impact our
operators or tenants. The Health Reform Laws also call for reductions in payments for discharges
beginning October 2012 in order to account for excess readmissions. While the exact amount of the
reduction is not yet known, a reduction in payments to our operators or tenants may affect their
ability to make payments to us.
The PPACA additionally calls for the creation of the Independent Payment Advisory Board, which
will be responsible for establishing payment polices, including recommendations in the event that
Medicare costs exceed a threshold. Proposals for recommendations submitted prior to December 31,
2018 may not include recommendations that would reduce payments for hospitals, skilled nursing
facilities, and physicians, among other providers, prior to December 31, 2019. The Health Reform
Laws also create other devices that could permit significant changes to payment. For example, The
Center for Medicare and Medicaid Innovation has been created to test innovative payment and service
delivery models to reduce program expenditures through the use of demonstration programs that can
waive existing reimbursement methodologies. The Health Reform Laws also provide additional
Medicaid funding to states for expansion of coverage to certain financially-eligible individuals
beginning in 2014.
Additionally, the Health Reform Laws delay until at least October 1, 2011 the implementation
of the Resource Utilization Group, Version Four (RUG-IV) that would revise the payment
classification system for skilled nursing facilities. The Health Reform Laws also extend certain
payment rules related to long-term acute care hospitals found in the Medicare, Medicaid, and SCHIP
Extension Act of 2007.
Finally, many other changes resulting from the Health Reform Laws, or implementing regulations
or guidance may negatively impact our operators or tenants. We will continue to evaluate the
Health Reform Laws and implementing regulations and guidance to determine other potential effects
of the reform.
Impact to Fraud and Abuse Provisions. The Health Reform Laws revise fraud and abuse
provisions that will affect our operators and tenants. Specifically, the PPACA allows for up to
treble damages under the False Claims Act for violations related to state-based health insurance
exchanges authorized by the Health Reform Laws, which will be implemented beginning in 2014. The
Health Reform Laws also impose new civil monetary penalties for false statements or actions that
lead to delayed inspections, with penalties of up to $15,000 per day for failure to grant timely
access and up to $50,000 for a knowing violation. The Health Reform laws also provide for
additional funding to investigate and prosecute health care fraud and abuse.
Additionally, provisions of Title VI of PPACA are designed to increase transparency and
program integrity by skilled nursing facilities, other nursing facilities and similar providers.
Specifically, skilled nursing facilities and other providers and suppliers will be required to
institute compliance and ethics programs. Additionally, the PPACA makes it easier for consumers to
file complaints against nursing homes by mandating that states establish complaint websites. The
provisions calling for increased transparency will increase the administrative burden and costs on
these providers. The increased penalties for violations of fraud and abuse provisions could have a
negative impact on these providers if they are subject to the penalties.
Impact to the Health Care Plans Offered to Our Employees. The Health Reform Laws will affect
employers that provide health plans to their employees. The new laws will change the tax treatment
of the Medicare Part D retiree drug subsidy and extend dependent
coverage for dependents up to age 26, among other changes. We are evaluating our health care plans in light of these changes. These
changes may affect our operators and tenants as well.
Medicare Program Reimbursement Changes
On May 4, 2010, the Centers for Medicare and Medicaid Services (CMS) published in the
Federal Register its proposed rule updating, in part, the inpatient prospective payment system
(IPPS) for long-term care hospitals for fiscal year 2011. Due to the timing of the passage of
the Health Reform Laws, the proposed rule does not reflect any changes enacted by that legislation.
CMS will issue separate rulemaking to the extent the Health Reform Laws affect any policies in the
proposed rule.
The proposed rule decreases the standard federal rate for prospective payment to long-term
care hospitals by 0.1%, which includes a proposed market basket adjustment increase of 2.4% and a
coding adjustment decrease of 2.5%. Based on CMS data from 421 long-term care hospitals, CMS
estimates that the proposed changes to the IPPS will result in an increase in estimated payments of
22
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
approximately $41 million. CMS also proposed to change the amounts and factors used to determine
the rates for Medicare acute care hospital inpatient services for operating costs and capital
related costs.
The impact that these changes to the IPPS will have on our operators and tenants is unclear
because the proposed changes are subject to revision by CMS in the final rule codifying revisions
to the IPPS. We will evaluate the financial impact of any changes to the IPPS to our operators or
tenants and to us once CMS promulgates its final rule, which is scheduled to be published by August
1, 2010.
Additionally, CMS adjusts annually the Medicare Physician Fee Schedule payment rates based on
an update formula that includes application of the Sustainable Growth Rate (SGR). This annual
adjustment has been negative since 2002. However, in April 2010, Congress passed stays of the
negative update to the SGR for the period beginning January 1, 2010 and ending May 31, 2010.
Economic Outlook
Beginning in late 2007, the U.S. and global economy entered a serious recession. Although
there has been some recent optimism, the current economic environment continues to be
characterized by a severe residential housing slump, depressed commercial real estate valuations,
weakened consumer confidence, rising unemployment and concerns regarding inflation, deflation and
stagflation. Numerous financial systems around the globe have become illiquid and banks have
become less willing to lend to other banks and borrowers. Further, capital markets have become and
remain volatile as risk is repriced and investments are revalued. Uncertainty remains in terms of
the depth and duration of these adverse economic conditions.
The conditions described above created an environment of limited capital availability and
increasing capital costs. This was most evident in the credit markets, where lending institutions
cut back on loans, tightened credit standards and significantly increased interest rate spreads.
The equity markets were characterized by sporadic accessibility until late 2008, when share prices
in most sectors declined significantly. Continued volatility in the capital markets could limit
our ability to access debt or equity funds which, in turn, could impact our ability to finance
future investments and react to changing economic and business conditions. This difficult
operating environment also may make it more difficult for some of our operators/tenants to meet
their obligations to us.
During 2008, our focus gradually shifted from investment to capital preservation. To that
end, our efforts in 2009 were directed towards liquidity, portfolio management and investment
strategy. These elements remain an important part of our strategy in 2010.
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|
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Liquidity. Liquidity has become increasingly important and we have concentrated our
efforts on further strengthening our balance sheet. We raised over $1 billion in funds
during each of 2008 and 2009 from a combination of common stock offerings, our dividend
reinvestment plan, our equity shelf program, property sales and loan payoffs. We generated
an additional $56 million from these sources during the three months ended March 31, 2010.
As always, we will continue to closely monitor the credit and capital markets for
opportunities to raise reasonably priced capital. |
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|
Portfolio Management. Our investment approach has produced a portfolio that is very
diverse with strong property level payment coverages. Yet, todays adverse economic
conditions can negatively impact even the strongest portfolio. Our portfolio management
program is designed to maintain our portfolios strength through a combination of extensive
industry research, stringent origination and underwriting protocols and a rigorous asset
management process. |
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Investment Strategy. We expect to fund our ongoing development projects and will
continue to evaluate new investments. We remain focused on strengthening our existing
customer relationships, cultivating new relationships, preserving liquidity and taking
advantage of attractive investment opportunities, including acquisitions and joint venture
investments. |
Business Strategy
Our primary objectives are to protect stockholder capital and enhance stockholder value. We
seek to pay consistent cash dividends to stockholders and create opportunities to increase dividend
payments to stockholders as a result of annual increases in rental and interest income and
portfolio growth. To meet these objectives, we invest across the full spectrum of senior housing
and health care real estate and diversify our investment portfolio by property type, customer and
geographic location.
Substantially all of our revenues and sources of cash flows from operations are derived from
operating lease rentals and interest earned on outstanding loans receivable. These items represent
our primary source of liquidity to fund distributions and are dependent upon our obligors
continued ability to make contractual rent and interest payments to us. To the extent that our
obligors experience operating difficulties and are unable to generate sufficient cash to make
payments to us, there could be a material adverse impact on our consolidated results of operations,
liquidity and/or financial condition. To mitigate this risk, we monitor our investments through a
variety of methods determined by the type of property and operator/tenant. Our asset management
process includes review of monthly
23
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
financial statements for each property, periodic review of
obligor credit, periodic property inspections and review of covenant compliance relating to
licensure, real estate taxes, letters of credit and other collateral. In monitoring our portfolio,
our personnel use a proprietary database to collect and analyze property-specific data.
Additionally, we conduct extensive research to ascertain industry trends and risks. Through these
asset management and research efforts, we are typically able to intervene at an early stage to
address payment risk, and in so doing, support both the collectability of revenue and the value of
our investment.
In addition to our asset management and research efforts, we also structure our investments to
help mitigate payment risk. Operating leases and loans are normally credit enhanced by guaranties
and/or letters of credit. In addition, operating leases are typically structured as master leases
and loans are generally cross-defaulted and cross-collateralized with other loans, operating leases
or agreements between us and the obligor and its affiliates.
For the three months ended March 31, 2010, rental income and interest income represented 93%
and 6% respectively, of total gross revenues (including revenues from discontinued operations).
Substantially all of our operating leases are designed with either fixed or contingent escalating
rent structures. Leases with fixed annual rental escalators are generally recognized on a
straight-line basis over the initial lease period, subject to a collectability assessment. Rental
income related to leases with contingent rental escalators is generally recorded based on the
contractual cash rental payments due for the period. Our yield on loans receivable depends upon a
number of factors, including the stated interest rate, the average principal amount outstanding
during the term of the loan and any interest rate adjustments.
Depending upon the availability and cost of external capital, we believe our liquidity is
sufficient to fund operations, meet debt service obligations (both principal and interest), make
dividend distributions and complete construction projects in process. We also anticipate
evaluating opportunities to finance future investments. New investments are generally funded from
temporary borrowings under our unsecured line of credit arrangement, internally generated cash and
the proceeds from sales of real property. Our investments generate internal cash from rent and
interest receipts and principal payments on loans receivable. Permanent financing for future
investments, which replaces funds drawn under the unsecured line of credit arrangement, has
historically been provided through
a combination of public and private offerings of debt and equity securities and the incurrence or
assumption of secured debt.
Depending upon market conditions, we believe that new investments will be available in the
future with spreads over our cost of capital that will generate appropriate returns to our
stockholders. We expect to complete gross new investments of $1.0 to $1.4 billion in 2010,
comprised of acquisitions/joint ventures totaling $700 million to $1.0 billion and funded new
development of $300 million to $400 million. We anticipate the sale of real property and the
repayment of loans receivable totaling approximately $300 million during 2010. It is possible that
additional loan repayments or sales of real property may occur in the future. To the extent that
loan repayments and real property sales exceed new investments, our revenues and cash flows from
operations could be adversely affected. We expect to reinvest the proceeds from any loan repayments
and real property sales in new investments. To the extent that new investment requirements exceed
our available cash on-hand, we expect to borrow under our unsecured line of credit arrangement. At
March 31, 2010, we had $36,558,000 of cash and cash equivalents, $17,692,000 of restricted cash and
$725,000,000 of available borrowing capacity under our unsecured line of credit arrangement.
Key Transactions in 2010
We have completed the following key transactions to date in 2010:
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our Board of Directors approved a quarterly cash dividend of $0.68 per common share,
which is consistent with the quarterly dividend paid for 2009. The dividend declared for
the quarter ended March 31, 2010 represents the 156th consecutive quarterly
dividend payment; |
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|
we completed $584,712,000 of gross investments and had $32,940,000 of investment payoffs
during the three months ended March 31, 2010; |
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we issued $342,394,000 of 3.00% convertible senior unsecured notes due 2029 and
repurchased $302,118,000 of 4.75% convertible senior unsecured notes due 2026 and 2027 in
March 2010; and |
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we issued $300,000,000 of 6.125% senior unsecured notes due 2020 with net proceeds of
$295,441,000 in April 2010. |
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business.
These indicators are discussed below and relate to operating performance, concentration risk and
credit strength. Management uses these key performance indicators to facilitate internal and
external comparisons to our historical operating results, in making operating decisions and for
budget planning purposes.
Operating Performance. We believe that net income attributable to common stockholders (NICS)
is the most appropriate
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
earnings measure. Other useful supplemental measures of our operating
performance include funds from operations (FFO) and net operating income (NOI); however, these
supplemental measures are not defined by U.S. generally accepted accounting principles (U.S.
GAAP). Please refer to the section entitled Non-GAAP Financial Measures for further discussion
and reconciliations of FFO and NOI. These earnings measures and their relative per share amounts
are widely used by investors and analysts in the valuation, comparison and investment
recommendations of companies. The following table reflects the recent historical trends of our
operating performance measures for the periods presented (in thousands, except per share data):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended |
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March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
Net income attributable to
common stockholders |
|
$ |
61,119 |
|
|
$ |
59,240 |
|
|
$ |
19,130 |
|
|
$ |
31,700 |
|
|
$ |
25,812 |
|
Funds from operations |
|
|
85,322 |
|
|
|
89,207 |
|
|
|
60,933 |
|
|
|
56,290 |
|
|
|
63,087 |
|
Net operating income |
|
|
134,819 |
|
|
|
133,228 |
|
|
|
133,964 |
|
|
|
145,667 |
|
|
|
143,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Per share data (fully diluted): |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common stockholders |
|
$ |
0.56 |
|
|
$ |
0.53 |
|
|
$ |
0.17 |
|
|
$ |
0.26 |
|
|
$ |
0.21 |
|
Funds from operations |
|
|
0.79 |
|
|
|
0.80 |
|
|
|
0.53 |
|
|
|
0.46 |
|
|
|
0.51 |
|
Credit Strength. We measure our credit strength both in terms of leverage ratios and
coverage ratios. Our leverage ratios include debt to book capitalization and debt to market
capitalization. The leverage ratios indicate how much of our balance sheet capitalization is
related to long-term debt. The coverage ratios indicate our ability to service interest and fixed
charges (interest, secured debt principal amortization and preferred dividends). We expect to
maintain capitalization ratios and coverage ratios sufficient to maintain investment grade ratings
with Moodys Investors Service, Standard & Poors Ratings Services and Fitch Ratings. The coverage
ratios are based on earnings before interest, taxes, depreciation and amortization (EBITDA) which
is discussed in further detail, and reconciled to net income, below in Non-GAAP Financial
Measures. Leverage ratios and coverage ratios are widely used by
investors, analysts and rating agencies in the valuation, comparison, investment recommendations
and rating of companies. The following table reflects the recent historical trends for our credit
strength measures for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
Debt to book capitalization ratio |
|
|
43 |
% |
|
|
44 |
% |
|
|
39 |
% |
|
|
39 |
% |
|
|
43 |
% |
Debt to undepreciated book
capitalization ratio |
|
|
39 |
% |
|
|
40 |
% |
|
|
35 |
% |
|
|
35 |
% |
|
|
39 |
% |
Debt to market capitalization ratio |
|
|
41 |
% |
|
|
40 |
% |
|
|
31 |
% |
|
|
30 |
% |
|
|
32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
3.88 |
x |
|
|
3.74 |
x |
|
|
2.63 |
x |
|
|
3.21 |
x |
|
|
3.08 |
x |
Fixed charge coverage ratio |
|
|
3.18 |
x |
|
|
3.07 |
x |
|
|
2.16 |
x |
|
|
2.57 |
x |
|
|
2.44 |
x |
Concentration Risk. We evaluate our concentration risk in terms of asset mix,
investment mix, customer mix and geographic mix. Concentration risk is a valuable measure in
understanding what portion of our investments could be at risk if certain sectors were to
experience downturns. Asset mix measures the portion of our investments that are real property. In
order to qualify as an equity REIT, at least 75% of our real estate investments must be real
property whereby each property, which includes the land, buildings, improvements, intangibles and
related rights, is owned by us and leased to a tenant pursuant to a long-term operating lease.
Investment mix measures the portion of our investments that relate to our various property types.
Customer mix measures the portion of our investments that relate to our top five customers.
Geographic mix measures the portion of our investments that relate to our top five states. The
following table reflects our recent historical trends of concentration risk for the periods
presented:
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
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|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
|
|
|
|
|
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
|
Asset mix: |
|
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|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
Real property |
|
|
92 |
% |
|
|
92 |
% |
|
|
92 |
% |
|
|
93 |
% |
|
|
93 |
% |
|
|
|
|
Real estate loans receivable |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment mix:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing facilities |
|
|
40 |
% |
|
|
40 |
% |
|
|
40 |
% |
|
|
42 |
% |
|
|
38 |
% |
|
|
|
|
Skilled nursing facilities |
|
|
27 |
% |
|
|
26 |
% |
|
|
26 |
% |
|
|
25 |
% |
|
|
22 |
% |
|
|
|
|
Hospitals |
|
|
10 |
% |
|
|
10 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
|
10 |
% |
|
|
|
|
Medical office buildings |
|
|
23 |
% |
|
|
24 |
% |
|
|
23 |
% |
|
|
23 |
% |
|
|
25 |
% |
|
|
|
|
Life science buildings |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer mix:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Living Communities, LLC |
|
|
6 |
% |
|
|
6 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
|
|
Aurora Health Care, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
% |
|
|
|
|
Brookdale Senior Living Inc |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
|
|
Signature Healthcare LLC |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
5 |
% |
|
|
4 |
% |
|
|
|
|
Emeritus Corporation |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
4 |
% |
|
|
|
|
Life Care Centers of America, Inc. |
|
|
5 |
% |
|
|
4 |
% |
|
|
3 |
% |
|
|
3 |
% |
|
|
|
|
|
|
|
|
Remaining customers |
|
|
75 |
% |
|
|
76 |
% |
|
|
76 |
% |
|
|
76 |
% |
|
|
74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic mix:(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
14 |
% |
|
|
13 |
% |
|
|
13 |
% |
|
|
12 |
% |
|
|
12 |
% |
|
|
|
|
Massachusetts |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
11 |
% |
|
|
|
|
Texas |
|
|
11 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
11 |
% |
|
|
10 |
% |
|
|
|
|
California |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
|
|
Wisconsin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
|
|
Ohio |
|
|
|
|
|
|
|
|
|
|
5 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
Tennessee |
|
|
5 |
% |
|
|
5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining states |
|
|
55 |
% |
|
|
56 |
% |
|
|
56 |
% |
|
|
55 |
% |
|
|
51 |
% |
|
|
|
|
|
|
|
(1) |
|
Includes our share of unconsolidated joint venture investments. |
We evaluate our key performance indicators in conjunction with current expectations
to determine if historical trends are indicative of future results. Our expected results may not be
achieved and actual results may differ materially from our expectations. Factors that may cause
actual results to differ from expected results are described in more detail in Forward-Looking
Statements and Risk Factors and other sections of this Quarterly Report on Form 10-Q. Management
regularly monitors economic and other factors to develop strategic and tactical plans designed to
improve performance and maximize our competitive position. Our ability to achieve our financial
objectives is dependent upon our ability to effectively execute these plans and to appropriately
respond to emerging economic and company-specific trends. Please refer to our Annual Report on Form
10-K for the year ended December 31, 2009 under the headings Business, Risk Factors and
Managements Discussion and Analysis of Financial Condition and Results of Operations for further
discussion of these risk factors.
Portfolio Update
Net operating income. The primary performance measure for our properties is net operating
income (NOI) as discussed below in Non-GAAP Financial Measures. The following table summarizes
our net operating income for the periods indicated (in thousands):
26
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2010 |
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing and care |
|
$ |
98,950 |
|
|
$ |
100,137 |
|
|
$ |
99,252 |
|
|
$ |
101,024 |
|
|
$ |
102,307 |
|
Medical facilities(1) |
|
|
35,493 |
|
|
|
32,729 |
|
|
|
34,512 |
|
|
|
44,411 |
|
|
|
40,517 |
|
Non-segment/corporate |
|
|
376 |
|
|
|
362 |
|
|
|
200 |
|
|
|
232 |
|
|
|
231 |
|
|
|
|
Net operating income |
|
$ |
134,819 |
|
|
$ |
133,228 |
|
|
$ |
133,964 |
|
|
$ |
145,667 |
|
|
$ |
143,055 |
|
|
|
|
|
|
|
(1) |
|
Includes our share of net operating income from unconsolidated joint ventures. |
Payment coverage. Payment coverage of our operators continues to remain strong. Our
overall payment coverage is at 1.99 times. The table below reflects our recent historical trends of
portfolio coverage. Coverage data reflects the 12 months ended for the periods presented. CBMF
represents the ratio of our customers earnings before interest, taxes, depreciation, amortization,
rent and management fees to contractual rent or interest due us. CAMF represents the ratio of our
customers earnings before interest, taxes, depreciation, amortization and rent (but after imputed
management fees) to contractual rent or interest due us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
December 31, 2008 |
|
December 31, 2009 |
|
|
CBMF |
|
CAMF |
|
CBMF |
|
CAMF |
|
CBMF |
|
CAMF |
Senior housing facilities |
|
|
1.56x |
|
|
|
1.34x |
|
|
|
1.49x |
|
|
|
1.27x |
|
|
|
1.49x |
|
|
|
1.28x |
|
Skilled nursing facilities |
|
|
2.26x |
|
|
|
1.66x |
|
|
|
2.25x |
|
|
|
1.64x |
|
|
|
2.29x |
|
|
|
1.68x |
|
Hospitals |
|
|
2.64x |
|
|
|
2.07x |
|
|
|
2.36x |
|
|
|
1.95x |
|
|
|
2.39x |
|
|
|
2.07x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages |
|
|
1.99x |
|
|
|
1.55x |
|
|
|
1.97x |
|
|
|
1.53x |
|
|
|
1.99x |
|
|
|
1.57x |
|
Corporate Governance
Maintaining investor confidence and trust has become increasingly important in todays
business environment. Our Board of Directors and management are strongly committed to policies and
procedures that reflect the highest level of ethical business practices. Our corporate governance
guidelines provide the framework for our business operations and emphasize our commitment to
increase stockholder value while meeting all applicable legal requirements. These guidelines meet
the listing standards adopted by the New York Stock Exchange and are available on our website at
www.hcreit.com and from us upon written request sent to the Senior Vice President Administration
and Corporate Secretary, Health Care REIT, Inc., One SeaGate, Suite 1500, P.O. Box 1475, Toledo,
Ohio 43603-1475.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, borrowings under the unsecured
line of credit arrangement, public and private offerings of debt and equity securities, proceeds
from the sales of real property and principal payments on loans receivable. Our primary uses of
cash include dividend distributions, debt service payments (including principal and interest), real
property investments (including construction advances), loan advances and general and
administrative expenses. These sources and uses of cash are reflected in our Consolidated
Statements of Cash Flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
$ |
|
|
% |
|
Cash and cash equivalents at beginning of period |
|
$ |
35,476 |
|
|
$ |
23,370 |
|
|
$ |
12,106 |
|
|
|
52 |
% |
Cash provided from operating activities |
|
|
92,488 |
|
|
|
94,422 |
|
|
|
(1,934 |
) |
|
|
-2 |
% |
Cash provided from (used in) investing activities |
|
|
(291,863 |
) |
|
|
20,080 |
|
|
|
(311,943 |
) |
|
|
n/a |
|
Cash provided from (used in) financing activities |
|
|
200,457 |
|
|
|
(118,692 |
) |
|
|
319,149 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
36,558 |
|
|
$ |
19,180 |
|
|
$ |
17,378 |
|
|
|
91 |
% |
|
|
|
|
|
|
|
|
|
Operating Activities. The change in net cash provided from operating activities is
primarily attributable to an increase in net
27
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
income, excluding gains/losses on sales of properties,
depreciation and amortization and debt extinguishment charges. These items are discussed below in
Results of Operations. The following is a summary of our straight-line rent and above/below
market lease amortization (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
$ |
|
|
% |
|
Gross straight-line rental income |
|
$ |
4,453 |
|
|
$ |
5,030 |
|
|
$ |
(577 |
) |
|
|
-11 |
% |
Cash receipts due to real property sales |
|
|
|
|
|
|
(1,705 |
) |
|
|
1,705 |
|
|
|
-100 |
% |
Prepaid rent receipts |
|
|
(1,738 |
) |
|
|
(6,184 |
) |
|
|
4,446 |
|
|
|
-72 |
% |
Amortization
related to below (above) market leases, net |
|
|
487 |
|
|
|
356 |
|
|
|
131 |
|
|
|
37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,202 |
|
|
$ |
(2,503 |
) |
|
$ |
5,705 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross straight-line rental income represents the non-cash difference between contractual
cash rent due and the average rent recognized pursuant to U.S. GAAP for leases with fixed rental
escalators, net of collectability reserves. This amount is positive in the first half of a lease
term (but declining every year due to annual increases in cash rent due) and is negative in the
second half of a lease term. The fluctuation in cash receipts due to real property sales is
attributable to the lack of straight-line rent receivable balances on properties sold during the
current year. The fluctuation in prepaid rent receipts is primarily due to changes in prepaid rent
received at certain construction projects.
Investing Activities. The changes in net cash used in investing activities are primarily
attributable to net changes in real property and real estate loans receivable. The following is a
summary of our investment and disposition activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Properties |
|
|
Amount |
|
|
Properties |
|
|
Amount |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office buildings |
|
|
17 |
|
|
$ |
223,152 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
17 |
|
|
|
223,152 |
|
|
|
|
|
|
|
|
|
Less: Assumed debt |
|
|
|
|
|
|
(108,244 |
) |
|
|
|
|
|
|
|
|
Assumed other assets (liabilities), net |
|
|
|
|
|
|
(31,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for acquisitions |
|
|
|
|
|
|
83,860 |
|
|
|
|
|
|
|
|
|
Construction in progress additions |
|
|
|
|
|
|
70,491 |
|
|
|
|
|
|
|
152,127 |
|
Capital improvements to existing properties |
|
|
|
|
|
|
7,460 |
|
|
|
|
|
|
|
7,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real property |
|
|
|
|
|
|
161,811 |
|
|
|
|
|
|
|
159,696 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing facilities |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
3,427 |
|
Skilled nursing facilities |
|
|
2 |
|
|
|
25,097 |
|
|
|
|
|
|
|
|
|
Hospitals |
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
40,841 |
|
Medical office buildings |
|
|
2 |
|
|
|
6,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total dispositions |
|
|
4 |
|
|
|
31,341 |
|
|
|
3 |
|
|
|
44,268 |
|
Less: Gains (losses) on sales of real property |
|
|
|
|
|
|
6,718 |
|
|
|
|
|
|
|
17,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from real property sales |
|
|
|
|
|
|
38,059 |
|
|
|
|
|
|
|
61,304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash investments in real property |
|
|
13 |
|
|
$ |
123,752 |
|
|
|
(3 |
) |
|
$ |
98,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
March 31, 2009 |
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
Senior Housing |
|
|
Medical |
|
|
|
|
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
|
and Care |
|
|
Facilities |
|
|
Totals |
|
Advances on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans |
|
$ |
634 |
|
|
$ |
|
|
|
$ |
634 |
|
|
$ |
296 |
|
|
$ |
|
|
|
$ |
296 |
|
Draws on existing loans |
|
|
10,517 |
|
|
|
|
|
|
|
10,517 |
|
|
|
5,193 |
|
|
|
745 |
|
|
|
5,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash advances on real estate loans |
|
|
11,151 |
|
|
|
|
|
|
|
11,151 |
|
|
|
5,489 |
|
|
|
745 |
|
|
|
6,234 |
|
Receipts on real estate loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
1,599 |
|
|
|
|
|
|
|
1,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on loans |
|
|
3,067 |
|
|
|
|
|
|
|
3,067 |
|
|
|
7,956 |
|
|
|
446 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total receipts on real estate loans |
|
|
4,666 |
|
|
|
|
|
|
|
4,666 |
|
|
|
7,956 |
|
|
|
446 |
|
|
|
8,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net advances (receipts) on real estate loans |
|
$ |
6,485 |
|
|
$ |
|
|
|
$ |
6,485 |
|
|
$ |
(2,467 |
) |
|
$ |
299 |
|
|
$ |
(2,168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The contributions to unconsolidated joint ventures represent $159,981,000 of cash
invested by us in the joint venture with Forest City Enterprises. Please see Note 7 to our
unaudited financial statements for additional information.
Financing Activities. The changes in net cash provided from or used in financing activities
are primarily attributable to changes related to our long-term debt arrangements, proceeds from the
issuance of common stock and dividend payments.
For the three months ended March 31, 2010, we had a net increase of $285,000,000 on our
unsecured line of credit arrangement as compared to a net decrease of $235,000,000 for the same
period in 2009. The changes in our senior unsecured notes are due to (i) the issuance of
$342,394,000 of convertible senior unsecured notes in March 2010; (ii) the repurchase of
$302,118,000 of convertible senior unsecured notes in March 2010; and (iii) the extinguishment of
$21,723,000 of various senior unsecured notes in March 2009.
The following is a summary of our common stock issuances for the three months ended March 31,
2010 and 2009 (dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued |
|
|
Average Price |
|
|
Gross Proceeds |
|
|
Net Proceeds |
|
February 2009 public issuance |
|
|
5,816,870 |
|
|
$ |
36.85 |
|
|
$ |
214,352 |
|
|
$ |
210,911 |
|
2009 Dividend reinvestment
plan issuances |
|
|
375,813 |
|
|
|
33.21 |
|
|
|
12,482 |
|
|
|
12,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 Totals |
|
|
6,192,683 |
|
|
|
|
|
|
$ |
226,834 |
|
|
$ |
223,393 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Dividend reinvestment
plan issuances |
|
|
385,875 |
|
|
$ |
42.00 |
|
|
$ |
16,208 |
|
|
$ |
16,208 |
|
2010 Option exercises |
|
|
42,287 |
|
|
|
37.43 |
|
|
|
1,583 |
|
|
|
1,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 Totals |
|
|
428,162 |
|
|
|
|
|
|
$ |
17,791 |
|
|
$ |
17,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In order to qualify as a REIT for federal income tax purposes, we must distribute at
least 90% of our taxable income (including 100% of capital gains) to our stockholders. The increase
in dividends is primarily attributable to an increase in our common stock. The following is a
summary of our dividend payments (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
Per Share |
|
|
Amount |
|
|
Per Share |
|
|
Amount |
|
Common Stock |
|
$ |
0.6800 |
|
|
$ |
84,523 |
|
|
$ |
0.6800 |
|
|
$ |
75,986 |
|
Series D Preferred Stock |
|
|
0.4922 |
|
|
|
1,969 |
|
|
|
0.4922 |
|
|
|
1,969 |
|
Series E Preferred Stock |
|
|
0.3750 |
|
|
|
28 |
|
|
|
0.3750 |
|
|
|
28 |
|
Series F Preferred Stock |
|
|
0.4766 |
|
|
|
3,336 |
|
|
|
0.4766 |
|
|
|
3,336 |
|
Series G Preferred Stock |
|
|
0.4688 |
|
|
|
176 |
|
|
|
0.4688 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
90,032 |
|
|
|
|
|
|
$ |
81,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Arrangements
During the three months ended March 31, 2010, we entered into a joint venture investment with
Forest City Enterprises (NYSE:FCE.A and FCE.B). In connection with this transaction, we invested
$159,981,000 of cash which is recorded as an equity investment on the balance sheet. Our share of
the non-recourse secured debt assumed by the joint venture was approximately
$142,190,000 with weighted-average interest rates of 7.2%. Please see Note 7 to our unaudited
consolidated financial statements for additional information.
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may or may not elect to use financial derivative instruments to hedge
interest rate exposure. These decisions are principally based on the general trend in interest
rates at the applicable dates, our perception of the future volatility of interest rates and our
relative levels of variable rate debt and variable rate investments. Please see Note 11 to our
unaudited consolidated financial statements for additional information.
At March 31, 2010, we had four outstanding letter of credit obligations totaling $5,329,057
and expiring between 2010 and 2013. Please see Note 12 to our unaudited consolidated financial
statements for additional information.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of
March 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
2010 |
|
|
2011-2012 |
|
|
2013-2014 |
|
|
Thereafter |
|
Unsecured line of credit arrangement |
|
$ |
425,000 |
|
|
$ |
|
|
|
$ |
425,000 |
|
|
$ |
|
|
|
$ |
|
|
Senior unsecured notes(1) |
|
|
1,702,129 |
|
|
|
|
|
|
|
76,853 |
|
|
|
300,000 |
|
|
|
1,325,276 |
|
Secured debt(1) |
|
|
725,809 |
|
|
|
12,671 |
|
|
|
41,536 |
|
|
|
207,138 |
|
|
|
464,464 |
|
Contractual interest obligations |
|
|
1,048,035 |
|
|
|
104,502 |
|
|
|
242,553 |
|
|
|
199,352 |
|
|
|
501,628 |
|
Operating lease obligations |
|
|
187,255 |
|
|
|
3,502 |
|
|
|
9,178 |
|
|
|
8,904 |
|
|
|
165,671 |
|
Purchase obligations |
|
|
206,358 |
|
|
|
45,675 |
|
|
|
160,683 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
5,170 |
|
|
|
299 |
|
|
|
1,065 |
|
|
|
1,903 |
|
|
|
1,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
4,299,756 |
|
|
$ |
166,649 |
|
|
$ |
956,868 |
|
|
$ |
717,297 |
|
|
$ |
2,458,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent principal amounts due and do not reflect unamortized premiums/discounts or other fair value
adjustments as reflected on the balance sheet. |
At March 31, 2010, we had an unsecured line of credit arrangement with a consortium
of sixteen banks in the amount of $1.15 billion, which is scheduled to expire on August 5, 2011.
Borrowings under the agreement are subject to interest payable in periods no longer than three
months at either the agent banks prime rate of interest or the applicable margin over LIBOR
interest rate, at our option (0.85% at March 31, 2010). The applicable margin is based on our
ratings with Moodys Investors Service and Standard & Poors Ratings Services and was 0.6% at March
31, 2010. In addition, we pay a facility fee annually to each bank based on the banks commitment
amount. The facility fee depends on our ratings with Moodys Investors Service and Standard &
Poors Ratings Services and was 0.15% at March 31, 2010. We also pay an annual agents fee of
$50,000. Principal is due upon expiration of the agreement. At March 31, 2010, we had $425,000,000
outstanding under the unsecured line of credit arrangement and estimated total contractual interest
obligations of $4,759,000. Contractual interest obligations are estimated based on the assumption
that the balance of $425,000,000 at March 31, 2010 is constant until maturity at interest rates in
effect at March 31, 2010.
We have $1,702,129,000 of senior unsecured notes principal outstanding with fixed annual
interest rates ranging from 3.00% to 8.00%, payable semi-annually. Total contractual interest
obligations on senior unsecured notes totaled $846,367,000 at March 31, 2010. A total of
$775,276,000 of our senior unsecured notes are convertible notes that also contain put features.
Please see Note 10 to our unaudited consolidated financial statements for additional information.
Additionally, we have secured debt with total outstanding principal of $725,809,000,
collateralized by owned properties, with fixed annual interest rates ranging from 4.89% to 7.98%,
payable monthly. The carrying values of the properties securing the debt totaled $1,067,247,000 at
March 31, 2010. Total contractual interest obligations on secured debt totaled $196,909,000 at
March 31, 2010.
At March 31, 2010, we had operating lease obligations of $187,255,000 relating primarily to
ground leases at certain of our properties and office space leases.
Purchase obligations are comprised of unfunded construction commitments and contingent
purchase obligations. At March 31, 2010, we had outstanding construction financings of $374,849,000
for leased properties and were committed to providing additional
30
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
financing of approximately
$193,876,000 to complete construction. At March 31, 2010, we had contingent purchase obligations
totaling $12,482,000. These contingent purchase obligations primarily relate to deferred
acquisition fundings and capital improvements. Deferred acquisition fundings are contingent upon a
tenant satisfying certain conditions in the lease. Upon funding, amounts due from the tenant are
increased to reflect the additional investment in the property.
Other long-term liabilities relate to our Supplemental Executive Retirement Plan (SERP) and
certain non-compete agreements. We have a SERP, a non-qualified defined benefit pension plan, which
provides certain executive officers with supplemental deferred
retirement benefits. The SERP provides an opportunity for participants to receive retirement
benefits that cannot be paid under our tax-qualified plans because of the restrictions imposed by
ERISA and the Internal Revenue Code of 1986, as amended. Benefits are based on compensation and
length of service and the SERP is unfunded. No contributions by the company are anticipated for the
2010 fiscal year. Benefit payments are expected to total $4,758,000 during the next five fiscal
years and no benefit payments are expected to occur during the succeeding five fiscal years. We use
a December 31 measurement date for the SERP. The accrued liability on our balance sheet for the
SERP was $3,432,000 and $3,287,000 at March 31, 2010 and December 31, 2009, respectively.
In connection with the Windrose merger, we entered into consulting agreements with Fred S.
Klipsch and Frederick L. Farrar, which expired in December 2008. We entered into a new consulting
agreement with Mr. Farrar in December 2008, which expired in December 2009. Each consultant has
agreed not to compete with us for a period of two years following the expiration of the agreement.
In exchange for complying with the covenant not to compete, Messers. Klipsch and Farrar will
receive eight quarterly payments of $75,000 and $37,500, respectively, with the first payment to be
made on the date of expiration of the agreement. The first payment to Mr. Klipsch was made in
December 2008. The first payment to Mr. Farrar was made in January 2010.
Capital Structure
As of March 31, 2010, we had stockholders equity of $3,759,916,000 and a total outstanding
debt balance of $2,828,487,000, which represents a debt to total book capitalization ratio of 43%.
Our ratio of debt to market capitalization was 32% at March 31, 2010. For the three months ended
March 31, 2010, our interest coverage ratio was 3.08x. For the three months ended March 31, 2010,
our fixed charge coverage ratio was 2.44x. Also, at March 31, 2010, we had $36,558,000 of cash and
cash equivalents, $17,692,000 of restricted cash and $725,000,000 of available borrowing capacity
under our unsecured line of credit arrangement.
Our debt agreements contain various covenants, restrictions and events of default. Certain
agreements require us to maintain certain financial ratios and minimum net worth and impose certain
limits on our ability to incur indebtedness, create liens and make investments or acquisitions. As
of March 31, 2010, we were in compliance with all of the covenants under our debt agreements.
Please refer to the section entitled Non-GAAP Financial Measures for further discussion. None of
our debt agreements contain provisions for acceleration which could be triggered by our debt
ratings with Moodys Investors Service and Standard & Poors Ratings Services. However, under our
unsecured line of credit arrangement, these ratings on our senior unsecured notes are used to
determine the fees and interest charged.
As of April 30, 2010, our senior unsecured notes were rated Baa2 (stable), BBB- (positive) and
BBB (stable) by Moodys Investors Service, Standard & Poors Ratings Services and Fitch Ratings,
respectively. We plan to manage the company to maintain investment grade status with a capital
structure consistent with our current profile. Any downgrades in terms of ratings or outlook by any
or all of the noted rating agencies could have a material adverse impact on our cost and
availability of capital, which could in turn have a material adverse impact on our consolidated
results of operations, liquidity and/or financial condition.
On May 7, 2009, we filed an open-ended automatic or universal shelf registration statement
with the Securities and Exchange Commission covering an indeterminate amount of future offerings of
debt securities, common stock, preferred stock, depositary shares, warrants and units. As of April
30, 2010, we had an effective registration statement on file in connection with our enhanced
dividend reinvestment plan under which we may issue up to 10,760,247 shares of common stock. As of
April 30, 2010, 6,057,901 shares of common stock remained available for issuance under this
registration statement. In November 2008, we entered into an Equity Distribution Agreement with UBS
Securities LLC relating to the offer and sale from time to time of up to $250,000,000 aggregate
amount of our common stock (Equity Shelf Program). As of April 30, 2010, we had $139,356,000 of
remaining capacity under the Equity Shelf Program. Depending upon market conditions, we anticipate
issuing securities under our registration statements to invest in additional properties and to
repay borrowings under our unsecured line of credit arrangement.
Results of Operations
Our primary sources of revenue include rent and interest. Our primary expenses include
interest expense, depreciation and amortization, property operating expenses and general and
administrative expenses. These revenues and expenses are reflected in our Consolidated Statements
of Income and are discussed in further detail below. The following is a summary of our results of
operations
31
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Change |
|
|
March 31, |
|
March 31, |
|
|
|
|
|
|
2010 |
|
2009 |
|
Amount |
|
% |
Net income attributable to
common stockholders |
|
$ |
25,812 |
|
|
$ |
61,119 |
|
|
$ |
(35,307 |
) |
|
|
-58 |
% |
Funds from operations |
|
|
63,087 |
|
|
|
85,322 |
|
|
|
(22,235 |
) |
|
|
-26 |
% |
EBITDA |
|
|
105,344 |
|
|
|
136,032 |
|
|
|
(30,688 |
) |
|
|
-23 |
% |
Net operating income |
|
|
143,055 |
|
|
|
134,819 |
|
|
|
8,236 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common stockholders |
|
$ |
0.21 |
|
|
$ |
0.56 |
|
|
$ |
(0.35 |
) |
|
|
-63 |
% |
Funds from operations |
|
|
0.51 |
|
|
|
0.79 |
|
|
|
(0.28 |
) |
|
|
-35 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage ratio |
|
|
3.08 |
x |
|
|
3.88 |
x |
|
|
-0.80 |
x |
|
|
-21 |
% |
Fixed charge coverage ratio |
|
|
2.44 |
x |
|
|
3.18 |
x |
|
|
-0.74 |
x |
|
|
-23 |
% |
We evaluate our business and make resource allocations on our two business segments
senior housing and care properties and medical facilities. Please see Note 17 to our unaudited
consolidated financial statements for additional information.
Senior Housing and Care Properties
The following is a summary of our results of operations for the senior housing and care
properties segment (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
92,628 |
|
|
$ |
84,648 |
|
|
$ |
7,980 |
|
|
|
9 |
% |
Interest income |
|
|
8,575 |
|
|
|
8,723 |
|
|
|
(148 |
) |
|
|
-2 |
% |
Other income |
|
|
494 |
|
|
|
792 |
|
|
|
(298 |
) |
|
|
-38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,697 |
|
|
|
94,163 |
|
|
|
7,534 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
4,535 |
|
|
|
787 |
|
|
|
3,748 |
|
|
|
476 |
% |
Depreciation and amortization |
|
|
26,205 |
|
|
|
23,498 |
|
|
|
2,707 |
|
|
|
12 |
% |
Transaction costs |
|
|
5,019 |
|
|
|
|
|
|
|
5,019 |
|
|
|
n/a |
|
Provision for loan losses |
|
|
|
|
|
|
140 |
|
|
|
(140 |
) |
|
|
-100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,759 |
|
|
|
24,425 |
|
|
|
11,334 |
|
|
|
46 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations |
|
|
65,938 |
|
|
|
69,738 |
|
|
|
(3,800 |
) |
|
|
-5 |
% |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sales
of properties |
|
|
5,728 |
|
|
|
2,681 |
|
|
|
3,047 |
|
|
|
114 |
% |
Income from
discontinued operations, net |
|
|
280 |
|
|
|
1,813 |
|
|
|
(1,533 |
) |
|
|
-85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
6,008 |
|
|
|
4,494 |
|
|
|
1,514 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
71,946 |
|
|
$ |
74,232 |
|
|
$ |
(2,286 |
) |
|
|
-3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in rental income is primarily attributable to the conversion of newly constructed
senior housing and care properties subsequent to March 31, 2009 from which we receive rent. Certain
of our leases contain annual rental escalators that are contingent upon changes in the Consumer
Price Index and/or changes in the gross operating revenues of the tenants properties. These
escalators
32
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
are not fixed, so no straight-line rent is recorded; however, rental income is recorded
based on the contractual cash rental payments due for the period. If gross operating revenues at
our facilities and/or the Consumer Price Index do not increase, a portion of our revenues may not
continue to increase. Sales of real property would offset revenue increases and, to the extent
that they exceed new acquisitions, could result in decreased revenues. Our leases could renew
above or below current rent rates, resulting in an increase or decrease in rental income.
Interest expense for the three months ended March 31, 2010 represents $4,671,000 of secured
debt interest expense offset by interest allocated to discontinued operations. Interest expense
for the three months ended March 31, 2009 represents $1,644,000 of secured debt interest expense
offset by interest allocated to discontinued operations. The change in secured debt interest
expense is due to the net effect and timing of assumptions, extinguishments and principal
amortizations. The following is a summary of our senior housing and care property secured debt
principal activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
298,492 |
|
|
|
5.998 |
% |
|
$ |
94,234 |
|
|
|
6.996 |
% |
Principal payments |
|
|
(1,341 |
) |
|
|
6.011 |
% |
|
|
(677 |
) |
|
|
6.982 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
297,151 |
|
|
|
5.997 |
% |
|
$ |
93,557 |
|
|
|
6.996 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
297,850 |
|
|
|
5.998 |
% |
|
$ |
93,902 |
|
|
|
6.996 |
% |
Depreciation and amortization increased primarily as a result of the conversions of newly
constructed investment properties subsequent to March 31, 2009. To the extent that we acquire or
dispose of additional properties in the future, our provision for depreciation and amortization
will change accordingly.
Transaction costs for the three months ended March 31, 2010 primarily represent a $5,000,000
termination fee incurred in connection with the transfer of an entrance fee property to a new
operator.
At March 31, 2010, we had four senior housing and care properties that satisfied the
requirements for held for sale treatment. We did not recognize any impairment losses on these
assets as the fair value less estimated costs to sell exceeded our carrying values. During the
three months ended March 31, 2010, we sold two senior housing and care properties. The following
illustrates the reclassification impact as a result of classifying the properties sold subsequent
to January 1, 2009 or held for sale at March 31, 2010 as discontinued operations for the periods
presented. Please refer to Note 5 to our unaudited consolidated financial statements for further
discussion.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Rental income |
|
$ |
610 |
|
|
$ |
4,787 |
|
Expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
136 |
|
|
|
857 |
|
Provision for depreciation |
|
|
194 |
|
|
|
2,117 |
|
|
|
|
|
|
|
|
Income from discontinued operations, net |
|
$ |
280 |
|
|
$ |
1,813 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010, we had one reserved loan payoff resulting in a
$158,000 write-off and related net reduction of the allowance balance. As a result of our quarterly
evaluations, we did not further adjust our allowance for loan losses during the three months ended
March 31, 2010. The provision for loan losses is related to our critical accounting estimate for
the allowance for loan losses and is discussed in Critical Accounting Policies.
33
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Medical Facilities
The following is a summary of our results of operations for the medical facilities segment
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
$ |
50,087 |
|
|
$ |
42,761 |
|
|
$ |
7,326 |
|
|
|
17 |
% |
Interest income |
|
|
473 |
|
|
|
1,230 |
|
|
|
(757 |
) |
|
|
-62 |
% |
Other income |
|
|
271 |
|
|
|
316 |
|
|
|
(45 |
) |
|
|
-14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,831 |
|
|
|
44,307 |
|
|
|
6,524 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
5,519 |
|
|
|
4,738 |
|
|
|
781 |
|
|
|
16 |
% |
Property operating expenses |
|
|
12,513 |
|
|
|
11,049 |
|
|
|
1,464 |
|
|
|
13 |
% |
Depreciation and amortization |
|
|
17,182 |
|
|
|
14,700 |
|
|
|
2,482 |
|
|
|
17 |
% |
Transaction costs |
|
|
2,695 |
|
|
|
|
|
|
|
2,695 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,909 |
|
|
|
30,487 |
|
|
|
7,422 |
|
|
|
24 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and income
from unconsolidated joint ventures |
|
|
12,922 |
|
|
|
13,820 |
|
|
|
(898 |
) |
|
|
-6 |
% |
Income tax expense |
|
|
(58 |
) |
|
|
(144 |
) |
|
|
86 |
|
|
|
-60 |
% |
Income from unconsolidated
joint ventures |
|
|
768 |
|
|
|
|
|
|
|
768 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
13,632 |
|
|
|
13,676 |
|
|
|
(44 |
) |
|
|
0 |
% |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sales of properties |
|
|
990 |
|
|
|
14,356 |
|
|
|
(13,366 |
) |
|
|
-93 |
% |
Income (loss) from
discontinued operations, net |
|
|
(483 |
) |
|
|
749 |
|
|
|
(1,232 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net |
|
|
507 |
|
|
|
15,105 |
|
|
|
(14,598 |
) |
|
|
-97 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
14,139 |
|
|
|
28,781 |
|
|
|
(14,642 |
) |
|
|
-51 |
% |
Less: Net income attributable to
noncontrolling interests |
|
|
373 |
|
|
|
2 |
|
|
|
371 |
|
|
|
18550 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to
common stockholders |
|
$ |
13,766 |
|
|
$ |
28,779 |
|
|
$ |
(15,013 |
) |
|
|
-52 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in rental income is primarily attributable to the acquisitions and construction
conversions of medical facilities subsequent to March 31, 2009 from which we receive rent. Certain
of our leases contain annual rental escalators that are contingent upon changes in the Consumer
Price Index. These escalators are not fixed, so no straight-line rent is recorded; however, rental
income is recorded based on the contractual cash rental payments due for the period. If the
Consumer Price Index does not increase, a portion of our revenues may not continue to increase.
Sales of real property would offset revenue increases and, to the extent that they exceed new
acquisitions, could result in decreased revenues. Our leases could renew above or below current
rent rates, resulting in an increase or decrease in rental income. Interest income decreased from
the prior period primarily due to a decline in outstanding balances for medical facility real
estate loans. Other income is attributable to third party management fee income.
Interest expense for the three months ended March 31, 2010 represents $5,577,000 of secured
debt interest expense offset by interest allocated to discontinued operations. Interest expense
for the three months ended March 31, 2009 represents $5,213,000 of secured debt interest expense
offset by interest allocated to discontinued operations. The change in secured debt interest
expense is primarily due to the net effect and timing of assumptions, extinguishments and principal
amortizations. During the three months ended March 31, 2010, we assumed $106,140,000 of secured
debt loans in connection with the acquisition of 17 medical office buildings. The following is a
summary of our medical facilities secured debt principal activity (dollars in thousands):
34
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
314,065 |
|
|
|
5.677 |
% |
|
$ |
354,145 |
|
|
|
5.799 |
% |
Debt assumed |
|
|
106,140 |
|
|
|
7.352 |
% |
|
|
|
|
|
|
0.000 |
% |
Principal payments |
|
|
(1,837 |
) |
|
|
5.875 |
% |
|
|
(1,529 |
) |
|
|
5.760 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
418,368 |
|
|
|
6.101 |
% |
|
$ |
352,616 |
|
|
|
5.799 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
366,311 |
|
|
|
5.919 |
% |
|
$ |
353,412 |
|
|
|
5.799 |
% |
The increase in property operating expenses and depreciation and amortization is primarily
attributable to acquisitions and construction conversions of new medical facilities for which we
incur certain property operating expenses offset by property operating expenses associated with
discontinued operations.
Transaction costs for the three months ended March 31, 2010 represent costs incurred in
connection with the acquisition of 17 medical office buildings.
Income tax expense is primarily related to third party management fee income.
Income from unconsolidated joint ventures represents our share of net income related to our
joint venture investment with Forest City Enterprises. The following is a summary of our net
income from this investment for the three months ended March 31, 2010 (in thousands):
|
|
|
|
|
Revenues |
|
$ |
3,725 |
|
Operating expenses |
|
|
1,101 |
|
|
|
|
|
Net operating income |
|
|
2,624 |
|
Depreciation and amortization |
|
|
775 |
|
Interest expense |
|
|
923 |
|
Asset management fee |
|
|
158 |
|
|
|
|
|
Net income |
|
$ |
768 |
|
|
|
|
|
During the year ended December 31, 2009, an impairment charge of $25,223,000 was recorded to
reduce the carrying value of eight medical facilities to their estimated fair value less costs to
sell. In determining the fair value of the properties, we used a combination of third party
appraisals based on market comparable transactions, other market listings and asset quality as well
as management calculations based on projected operating income and published capitalization rates.
During the three months ended March 31, 2010, we sold two medical facilities that were held for
sale. At March 31, 2010, we had six medical facilities that satisfied the requirements for held
for sale treatment. We did not recognize any impairment loss on these properties in 2010 as the
fair value less estimated costs to sell exceeded our carrying values. The following illustrates
the reclassification impact as a result of classifying medical facilities sold subsequent to
January 1, 2009 or held for sale at March 31, 2010 as discontinued operations for the periods
presented. Please refer to Note 5 to our unaudited consolidated financial statements for further
discussion.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Rental income |
|
$ |
782 |
|
|
$ |
3,169 |
|
Expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
58 |
|
|
|
475 |
|
Property operating expenses |
|
|
1,207 |
|
|
|
934 |
|
Provision for depreciation |
|
|
|
|
|
|
1,011 |
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net |
|
$ |
(483 |
) |
|
$ |
749 |
|
|
|
|
|
|
|
|
35
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Net income attributable to non-controlling interests primarily relates to certain joint
venture properties that are consolidated in our operating results.
Non-Segment/Corporate
The following is a summary of our results of operations for the non-segment/corporate
activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
$ |
231 |
|
|
$ |
376 |
|
|
$ |
(145 |
) |
|
|
-39 |
% |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
19,737 |
|
|
|
21,154 |
|
|
|
(1,417 |
) |
|
|
-7 |
% |
General and administrative |
|
|
16,821 |
|
|
|
17,361 |
|
|
|
(540 |
) |
|
|
-3 |
% |
Loss on extinguishments of debt |
|
|
18,038 |
|
|
|
(1,678 |
) |
|
|
19,716 |
|
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,596 |
|
|
|
36,837 |
|
|
|
17,759 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
before income taxes |
|
|
(54,365 |
) |
|
|
(36,461 |
) |
|
|
(17,904 |
) |
|
|
49 |
% |
Income tax (expense) benefit |
|
|
(26 |
) |
|
|
94 |
|
|
|
(120 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(54,391 |
) |
|
|
(36,367 |
) |
|
|
(18,024 |
) |
|
|
50 |
% |
Preferred stock dividends |
|
|
5,509 |
|
|
|
5,524 |
|
|
|
(15 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to
common stockholders |
|
$ |
(59,900 |
) |
|
$ |
(41,891 |
) |
|
$ |
(18,009 |
) |
|
|
43 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income primarily represents income from non-real estate activities such as interest
earned on temporary investments of cash reserves.
The following is a summary of our non-segment/corporate interest expense (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Senior unsecured notes |
|
$ |
24,066 |
|
|
$ |
27,705 |
|
|
$ |
(3,639 |
) |
|
|
-13 |
% |
Secured debt |
|
|
139 |
|
|
|
|
|
|
|
139 |
|
|
|
n/a |
|
Unsecured lines of credit |
|
|
1,040 |
|
|
|
1,684 |
|
|
|
(644 |
) |
|
|
-38 |
% |
Capitalized interest |
|
|
(7,076 |
) |
|
|
(9,865 |
) |
|
|
2,789 |
|
|
|
-28 |
% |
SWAP savings |
|
|
(40 |
) |
|
|
(40 |
) |
|
|
|
|
|
|
0 |
% |
Loan expense |
|
|
1,608 |
|
|
|
1,670 |
|
|
|
(62 |
) |
|
|
-4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
19,737 |
|
|
$ |
21,154 |
|
|
$ |
(1,417 |
) |
|
|
-7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in interest expense on senior unsecured notes is due to the net effect of issuances
and extinguishments. The following is a summary of our senior unsecured note principal activity
(dollars in thousands):
36
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning balance |
|
$ |
1,661,853 |
|
|
|
5.557 |
% |
|
$ |
1,845,000 |
|
|
|
5.782 |
% |
Debt issued |
|
|
342,394 |
|
|
|
3.000 |
% |
|
|
|
|
|
|
0.000 |
% |
Debt extinguished |
|
|
(302,118 |
) |
|
|
4.750 |
% |
|
|
(21,723 |
) |
|
|
6.504 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
1,702,129 |
|
|
|
5.186 |
% |
|
$ |
1,823,277 |
|
|
|
5.773 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
$ |
1,671,922 |
|
|
|
5.462 |
% |
|
$ |
1,839,569 |
|
|
|
5.780 |
% |
During the three months ended September 30, 2009, we completed a $10,750,000 first mortgage
loan secured by a commercial real estate campus. The 10-year debt has a fixed interest rate of
6.37%.
The change in interest expense on the unsecured line of credit arrangement is due primarily to
the net effect and timing of draws, paydowns and variable interest rate changes. The following is
a summary of our unsecured line of credit arrangement (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2010 |
|
2009 |
Balance outstanding at quarter end |
|
$ |
425,000 |
|
|
$ |
335,000 |
|
Maximum amount outstanding at any month end |
|
$ |
425,000 |
|
|
$ |
559,000 |
|
Average amount outstanding (total of daily
principal balances divided by days in period) |
|
$ |
283,111 |
|
|
$ |
417,000 |
|
Weighted average interest rate (actual interest
expense divided by average borrowings outstanding) |
|
|
1.47 |
% |
|
|
1.62 |
% |
We capitalize certain interest costs associated with funds used to finance the
construction of properties owned directly by us. The amount capitalized is based upon the balances
outstanding during the construction period using the rate of interest that approximates our cost of
financing. Our interest expense is reduced by the amount capitalized.
Please see Note 11 to our unaudited consolidated financial statements for a discussion of
our interest rate swap agreements and their impact on interest expense. Loan expense represents
the amortization of deferred loan costs incurred in connection with the issuance and amendments of
debt. Loan expense for the three months ended March 31, 2010 is consistent with the prior year.
General and administrative expenses as a percentage of consolidated revenues (including
revenues from discontinued operations) for the three months ended March 31, 2010 and 2009 were
10.91% and 11.83%, respectively. The change from prior year is primarily related to $3,909,000 of
non-recurring expenses recognized during the three months ended March 31, 2009 in connection with
the departure of Raymond W. Braun who formerly served as President of the company. This was
partially offset by the recognition of $2,853,000 of expenses in connection with a
performance-based stock grant during the three months ended March 31, 2010.
The change in preferred dividends is primarily attributable to preferred stock
conversions into common stock. The following is a summary of our preferred stock activity (dollars
in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
Weighted Avg. |
|
|
|
|
|
|
Weighted Avg. |
|
|
|
Shares |
|
|
Dividend Rate |
|
|
Shares |
|
|
Dividend Rate |
|
Beginning balance |
|
|
11,474,093 |
|
|
|
7.697 |
% |
|
|
11,516,302 |
|
|
|
7.696 |
% |
Shares converted |
|
|
(23,986 |
) |
|
|
7.500 |
% |
|
|
(40,600 |
) |
|
|
7.500 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
|
11,450,107 |
|
|
|
7.697 |
% |
|
|
11,475,702 |
|
|
|
7.697 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly averages |
|
|
11,462,100 |
|
|
|
7.697 |
% |
|
|
11,500,602 |
|
|
|
7.697 |
% |
37
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Non-GAAP Financial Measures
We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings
measurement. However, we consider FFO to be a useful supplemental measure of our operating
performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP
implicitly assumes that the value of real estate assets diminishes predictably over time as
evidenced by the provision for depreciation. However, since real estate values have historically
risen or fallen with market conditions, many industry investors and analysts have considered
presentations of operating results for real estate companies that use historical cost accounting to
be insufficient. In response, the National Association of Real Estate Investment Trusts (NAREIT)
created FFO as a supplemental measure of operating performance for REITs that excludes historical
cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in
accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and joint ventures.
Net operating income (NOI) is used to evaluate the operating performance of our
properties. We define NOI as total revenues, including tenant reimbursements, less property level
operating expenses, which exclude depreciation and amortization, general and administrative
expenses, impairments and interest expense. We believe NOI provides investors relevant and useful
information because it measures the operating performance of our properties at the property level
on an unleveraged basis. We use NOI to make decisions about resource allocations and to assess the
property level performance of our properties.
EBITDA stands for earnings before interest, taxes, depreciation and amortization. We
believe that EBITDA, along with net income and cash flow provided from operating activities, is an
important supplemental measure because it provides additional information to assess and evaluate
the performance of our operations. We primarily utilize EBITDA to measure our interest coverage
ratio, which represents EBITDA divided by total interest, and our fixed charge coverage ratio,
which represents EBITDA divided by fixed charges. Fixed charges include total interest, secured
debt principal amortization and preferred dividends.
A covenant in our line of credit arrangement contains a financial ratio based on a
definition of EBITDA that is specific to that agreement. Failure to satisfy this covenant could
result in an event of default that could have a material adverse impact on our cost and
availability of capital, which could in turn have a material adverse impact on our consolidated
results of operations, liquidity and/or financial condition. Due to the materiality of this debt
agreement and the financial covenant, we have disclosed Adjusted EBITDA, which represents EBITDA as
defined above and adjusted for stock-based compensation expense, provision for loan losses and
gain/loss on extinguishment of debt. We use Adjusted EBITDA to measure our adjusted fixed charge
coverage ratio, which represents Adjusted EBITDA divided by fixed charges on a trailing twelve
months basis. Fixed charges include total interest (excluding capitalized interest and non-cash
interest expenses), secured debt principal amortization and preferred dividends. Our covenant
requires an adjusted fixed charge ratio of at least 1.75 times.
Other than Adjusted EBITDA, our supplemental reporting measures and similarly entitled
financial measures are widely used by investors, equity and debt analysts and rating agencies in
the valuation, comparison, rating and investment recommendations of companies. Management uses
these financial measures to facilitate internal and external comparisons to our historical
operating results and in making operating decisions. Additionally, these measures are utilized by
the Board of Directors to evaluate management. Adjusted EBITDA is used solely to determine our
compliance with a financial covenant of our line of credit arrangement and is not being presented
for use by investors for any other purpose. None of our supplemental measures represent net income
or cash flow provided from operating activities as determined in accordance with U.S. GAAP and
should not be considered as alternative measures of profitability or liquidity. Finally, the
supplemental measures, as defined by us, may not be comparable to similarly entitled items reported
by other real estate investment trusts or other companies. Multi-period amounts may not equal the
sum of the individual quarterly amounts due to rounding.
38
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of FFO to net income attributable to common
stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The
provisions for depreciation and amortization include provisions for depreciation and amortization
from discontinued operations. Noncontrolling interest amounts represent the noncontrolling
interests share of depreciation and amortization. Unconsolidated joint venture amounts represent
our share of unconsolidated joint ventures depreciation and amortization. Amounts are in
thousands except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
FFO Reconciliation: |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
Net income attributable to
common stockholders |
|
$ |
61,119 |
|
|
$ |
59,240 |
|
|
$ |
19,130 |
|
|
$ |
31,700 |
|
|
$ |
25,812 |
|
Depreciation and amortization |
|
|
41,326 |
|
|
|
40,731 |
|
|
|
41,085 |
|
|
|
41,780 |
|
|
|
43,581 |
|
Loss (gain) on sales of properties |
|
|
(17,036 |
) |
|
|
(10,677 |
) |
|
|
806 |
|
|
|
(16,487 |
) |
|
|
(6,718 |
) |
Noncontrolling interests |
|
|
(87 |
) |
|
|
(87 |
) |
|
|
(88 |
) |
|
|
(703 |
) |
|
|
(363 |
) |
Unconsolidated joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775 |
|
|
|
|
Funds from operations |
|
$ |
85,322 |
|
|
$ |
89,207 |
|
|
$ |
60,933 |
|
|
$ |
56,290 |
|
|
$ |
63,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
108,214 |
|
|
|
110,864 |
|
|
|
114,874 |
|
|
|
122,700 |
|
|
|
123,270 |
|
Diluted |
|
|
108,624 |
|
|
|
111,272 |
|
|
|
115,289 |
|
|
|
123,105 |
|
|
|
123,790 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.56 |
|
|
$ |
0.53 |
|
|
$ |
0.17 |
|
|
$ |
0.26 |
|
|
$ |
0.21 |
|
Diluted |
|
|
0.56 |
|
|
|
0.53 |
|
|
|
0.17 |
|
|
|
0.26 |
|
|
|
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.79 |
|
|
$ |
0.80 |
|
|
$ |
0.53 |
|
|
$ |
0.46 |
|
|
$ |
0.51 |
|
Diluted |
|
|
0.79 |
|
|
|
0.80 |
|
|
|
0.53 |
|
|
|
0.46 |
|
|
|
0.51 |
|
39
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following table reflects the reconciliation of NOI for the periods presented. All
amounts include amounts from discontinued operations, if applicable. Our share of revenues and
expenses from unconsolidated joint ventures for life science buildings are included in medical
facilities. Amounts are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
NOI Reconciliation: |
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2009 |
|
|
2010 |
|
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing and care: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing |
|
$ |
47,704 |
|
|
$ |
47,678 |
|
|
$ |
47,446 |
|
|
$ |
47,856 |
|
|
$ |
52,366 |
|
Skilled nursing facilities |
|
|
41,731 |
|
|
|
42,978 |
|
|
|
41,983 |
|
|
|
40,733 |
|
|
|
40,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
89,435 |
|
|
|
90,656 |
|
|
|
89,429 |
|
|
|
88,589 |
|
|
|
93,238 |
|
Interest income |
|
|
8,723 |
|
|
|
8,911 |
|
|
|
9,266 |
|
|
|
9,046 |
|
|
|
8,575 |
|
Other income |
|
|
792 |
|
|
|
570 |
|
|
|
557 |
|
|
|
3,389 |
|
|
|
494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total senior housing
and care revenues |
|
|
98,950 |
|
|
|
100,137 |
|
|
|
99,252 |
|
|
|
101,024 |
|
|
|
102,307 |
|
Medical facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office buildings |
|
|
33,253 |
|
|
|
32,593 |
|
|
|
35,008 |
|
|
|
35,980 |
|
|
|
40,088 |
|
Hospitals |
|
|
12,677 |
|
|
|
10,628 |
|
|
|
10,884 |
|
|
|
10,779 |
|
|
|
10,781 |
|
Life science buildings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub-total |
|
|
45,930 |
|
|
|
43,221 |
|
|
|
45,892 |
|
|
|
46,759 |
|
|
|
54,594 |
|
Interest income |
|
|
1,230 |
|
|
|
1,247 |
|
|
|
1,262 |
|
|
|
1,201 |
|
|
|
473 |
|
Other income |
|
|
316 |
|
|
|
305 |
|
|
|
332 |
|
|
|
8,415 |
|
|
|
271 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total medical facilities
revenues |
|
|
47,476 |
|
|
|
44,773 |
|
|
|
47,486 |
|
|
|
56,375 |
|
|
|
55,338 |
|
Corporate other income |
|
|
376 |
|
|
|
362 |
|
|
|
200 |
|
|
|
232 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
146,802 |
|
|
|
145,272 |
|
|
|
146,938 |
|
|
|
157,631 |
|
|
|
157,876 |
|
Property operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical office buildings |
|
|
11,983 |
|
|
|
12,044 |
|
|
|
12,974 |
|
|
|
11,964 |
|
|
|
12,992 |
|
Hospitals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728 |
|
Life science buildings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property operating
expenses |
|
|
11,983 |
|
|
|
12,044 |
|
|
|
12,974 |
|
|
|
11,964 |
|
|
|
14,821 |
|
Net operating income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior housing and care |
|
|
98,950 |
|
|
|
100,137 |
|
|
|
99,252 |
|
|
|
101,024 |
|
|
|
102,307 |
|
Medical facilities |
|
|
35,493 |
|
|
|
32,729 |
|
|
|
34,512 |
|
|
|
44,411 |
|
|
|
40,517 |
|
Non-segment/corporate |
|
|
376 |
|
|
|
362 |
|
|
|
200 |
|
|
|
232 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating income |
|
$ |
134,819 |
|
|
$ |
133,228 |
|
|
$ |
133,964 |
|
|
$ |
145,667 |
|
|
$ |
143,055 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of EBITDA to net income, the most directly
comparable U.S. GAAP measure, for the periods presented. Interest expense and the provisions for
depreciation and amortization include discontinued operations. Dollars are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
EBITDA Reconciliation: |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
Net income |
|
$ |
66,645 |
|
|
$ |
64,759 |
|
|
$ |
24,685 |
|
|
$ |
36,838 |
|
|
$ |
31,694 |
|
Interest expense |
|
|
28,011 |
|
|
|
27,332 |
|
|
|
28,833 |
|
|
|
25,596 |
|
|
|
29,985 |
|
Income tax expense (benefit) |
|
|
50 |
|
|
|
21 |
|
|
|
(55 |
) |
|
|
151 |
|
|
|
84 |
|
Depreciation and amortization |
|
|
41,326 |
|
|
|
40,731 |
|
|
|
41,085 |
|
|
|
41,780 |
|
|
|
43,581 |
|
|
|
|
EBITDA |
|
$ |
136,032 |
|
|
$ |
132,843 |
|
|
$ |
94,548 |
|
|
$ |
104,365 |
|
|
$ |
105,344 |
|
Interest Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
28,011 |
|
|
$ |
27,332 |
|
|
$ |
28,833 |
|
|
$ |
25,596 |
|
|
$ |
29,985 |
|
Non-cash interest expense |
|
|
(2,772 |
) |
|
|
(2,844 |
) |
|
|
(2,895 |
) |
|
|
(3,387 |
) |
|
|
(2,841 |
) |
Capitalized interest |
|
|
9,865 |
|
|
|
11,026 |
|
|
|
9,975 |
|
|
|
10,305 |
|
|
|
7,076 |
|
|
|
|
Total interest |
|
|
35,104 |
|
|
|
35,514 |
|
|
|
35,913 |
|
|
|
32,514 |
|
|
|
34,220 |
|
EBITDA |
|
$ |
136,032 |
|
|
$ |
132,843 |
|
|
$ |
94,548 |
|
|
$ |
104,365 |
|
|
$ |
105,344 |
|
|
|
|
Interest coverage ratio |
|
|
3.88 |
x |
|
|
3.74 |
x |
|
|
2.63 |
x |
|
|
3.21 |
x |
|
|
3.08 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest |
|
$ |
35,104 |
|
|
$ |
35,514 |
|
|
$ |
35,913 |
|
|
$ |
32,514 |
|
|
$ |
34,220 |
|
Secured debt principal payments |
|
|
2,206 |
|
|
|
2,177 |
|
|
|
2,298 |
|
|
|
2,611 |
|
|
|
3,378 |
|
Preferred dividends |
|
|
5,524 |
|
|
|
5,516 |
|
|
|
5,520 |
|
|
|
5,520 |
|
|
|
5,509 |
|
|
|
|
Total fixed charges |
|
|
42,834 |
|
|
|
43,207 |
|
|
|
43,731 |
|
|
|
40,645 |
|
|
|
43,107 |
|
EBITDA |
|
$ |
136,032 |
|
|
$ |
132,843 |
|
|
$ |
94,548 |
|
|
$ |
104,365 |
|
|
$ |
105,344 |
|
|
|
|
Fixed charge coverage ratio |
|
|
3.18 |
x |
|
|
3.07 |
x |
|
|
2.16 |
x |
|
|
2.57 |
x |
|
|
2.44 |
x |
41
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The table below reflects the reconciliation of Adjusted EBITDA to net income, the most
directly comparable U.S. GAAP measure, for the periods presented. Interest expense and the
provisions for depreciation and amortization include discontinued operations. Dollars are in
thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended |
|
|
March 31, |
|
June 30, |
|
September 30, |
|
December 31, |
|
March 31, |
Adjusted EBITDA Reconciliation: |
|
2009 |
|
2009 |
|
2009 |
|
2009 |
|
2010 |
|
|
|
Net income |
|
$ |
314,613 |
|
|
$ |
218,112 |
|
|
$ |
183,478 |
|
|
$ |
192,927 |
|
|
$ |
157,976 |
|
Interest expense |
|
|
131,750 |
|
|
|
122,927 |
|
|
|
116,406 |
|
|
|
109,772 |
|
|
|
111,746 |
|
Income tax expense |
|
|
77 |
|
|
|
54 |
|
|
|
152 |
|
|
|
168 |
|
|
|
201 |
|
Depreciation and amortization |
|
|
164,797 |
|
|
|
165,898 |
|
|
|
165,292 |
|
|
|
164,923 |
|
|
|
167,177 |
|
Stock-based compensation
expense |
|
|
11,360 |
|
|
|
11,034 |
|
|
|
10,637 |
|
|
|
9,633 |
|
|
|
10,619 |
|
Provision for loan losses |
|
|
234 |
|
|
|
234 |
|
|
|
234 |
|
|
|
23,261 |
|
|
|
23,121 |
|
Loss (gain) on extinguishment of debt |
|
|
(2,446 |
) |
|
|
(2,446 |
) |
|
|
24,696 |
|
|
|
25,107 |
|
|
|
44,822 |
|
|
|
|
Adjusted EBITDA |
|
$ |
620,385 |
|
|
$ |
515,813 |
|
|
$ |
500,895 |
|
|
$ |
525,791 |
|
|
$ |
515,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Fixed Charge Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
131,750 |
|
|
$ |
122,927 |
|
|
$ |
116,406 |
|
|
$ |
109,772 |
|
|
$ |
111,746 |
|
Capitalized interest |
|
|
29,727 |
|
|
|
35,690 |
|
|
|
39,301 |
|
|
|
41,170 |
|
|
|
38,381 |
|
Non-cash interest expense |
|
|
(11,214 |
) |
|
|
(11,289 |
) |
|
|
(11,410 |
) |
|
|
(11,898 |
) |
|
|
(11,967 |
) |
Secured debt principal payments |
|
|
8,232 |
|
|
|
8,592 |
|
|
|
8,810 |
|
|
|
9,292 |
|
|
|
10,464 |
|
Preferred dividends |
|
|
22,579 |
|
|
|
22,311 |
|
|
|
22,101 |
|
|
|
22,079 |
|
|
|
22,064 |
|
|
|
|
Total fixed charges |
|
|
181,074 |
|
|
|
178,231 |
|
|
|
175,208 |
|
|
|
170,415 |
|
|
|
170,688 |
|
Adjusted EBITDA |
|
$ |
620,385 |
|
|
$ |
515,813 |
|
|
$ |
500,895 |
|
|
$ |
525,791 |
|
|
$ |
515,662 |
|
|
|
|
Adjusted fixed charge coverage ratio |
|
|
3.43 |
x |
|
|
2.89 |
x |
|
|
2.86 |
x |
|
|
3.09 |
x |
|
|
3.02 |
x |
42
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which
requires us to make estimates and assumptions. Management considers an accounting estimate or
assumption critical if:
|
|
|
the nature of the estimates or assumptions is material due to the levels of subjectivity
and judgment necessary to account for highly uncertain matters or the susceptibility of
such matters to change; and |
|
|
|
|
the impact of the estimates and assumptions on financial condition or operating
performance is material. |
Management has discussed the development and selection of its critical accounting policies
with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the
disclosure presented below relating to them. Management believes the current assumptions and other
considerations used to estimate amounts reflected in our consolidated financial statements are
appropriate and are not reasonably likely to change in the future. However, since these estimates
require assumptions to be made that were uncertain at the time the estimate was made, they bear the
risk of change. If actual experience differs from the assumptions and other considerations used in
estimating amounts reflected in our consolidated financial statements, the resulting changes could
have a material adverse effect on our consolidated results of operations, liquidity and/or
financial condition. Please refer to Note 1 to the financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2009 for further information regarding
significant accounting policies that impact us. There have been no material changes to these
policies in 2010.
The following table presents information about our critical accounting policies, as well as
the material assumptions used to develop each estimate:
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Revenue Recognition |
|
|
|
|
|
Revenue is recorded in accordance with
U.S. GAAP, which requires that revenue
be recognized after four basic
criteria are met. These four criteria
include persuasive evidence of an
arrangement, the rendering of service,
fixed and determinable income and
reasonably assured collectability. If
the collectability of revenue is
determined incorrectly, the amount and
timing of our reported revenue could
be significantly affected. Interest
income on loans is recognized as
earned based upon the principal amount
outstanding subject to an evaluation
of collectability risk. Substantially
all of our operating leases contain
fixed and/or contingent escalating
rent structures. Leases with fixed
annual rental escalators are generally
recognized on a straight-line basis
over the initial lease period, subject
to a collectability assessment. Rental
income related to leases with
contingent rental escalators is
generally recorded based on the
contractual cash rental payments due
for the period.
|
|
We evaluate the collectibility of
our revenues and related
receivables on an on-going basis.
We evaluate collectibility based
on assumptions and other
considerations including, but not
limited to, the certainty of
payment, payment history, the
financial strength of the
investments underlying
operations as measured by cash
flows and payment coverages, the
value of the underlying
collateral and guaranties and
current economic conditions.
If our evaluation indicates that
collectibility is not reasonably
assured, we may place an
investment on non-accrual or
reserve against all or a portion
of current income as an offset to
revenue.
For the three months ended March
31, 2010, we recognized
$9,048,000 of interest income and
$144,107,000 of rental income,
including discontinued
operations. Cash receipts on
leases with deferred revenue
provisions were $1,738,000 as
compared to gross straight-line
rental income recognized of
$4,453,000 for the three months
ended March 31, 2010. At March
31, 2010, our straight-line
receivable balance was
$82,056,000, net of reserves
totaling $273,000. Also at March
31, 2010, we had real estate
loans with outstanding balances
of $78,104,000 on non-accrual
status. |
43
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Business Combinations |
|
|
|
|
|
Substantially all of the properties owned
by us are leased under operating leases
and are recorded at cost. The cost of
our real property is allocated to land,
buildings, improvements and intangibles
in accordance with U.S. GAAP.
|
|
We compute depreciation and amortization on our properties using the straight-line
method based on their estimated useful lives which range from 15 to 40 years for
buildings and five to 15 years for improvements. Lives for intangibles are based on
the remaining term of the underlying leases.
For the three months ended March 31, 2010, we recorded $32,131,000, $9,285,000 and
$2,165,000 as provisions for depreciation and amortization relating to buildings,
improvements and intangibles, respectively, including amounts reclassified as
discontinued operations. The average useful life of our buildings, improvements and
intangibles was 39.2 years, 11.5 years and 9.6 years, respectively, for the three
months ended March 31, 2010. |
|
|
|
Impairment of Long-Lived Assets |
|
|
|
|
|
We review our long-lived assets for
potential impairment in accordance with
U.S. GAAP. An impairment charge must be
recognized when the carrying value of a
long-lived asset is not recoverable. The
carrying value is not recoverable if it
exceeds the sum of the undiscounted cash
flows expected to result from the use and
eventual disposition of the asset. If it
is determined that a permanent impairment
of a long-lived asset has occurred, the
carrying value of the asset is reduced to
its fair value and an impairment charge
is recognized for the difference between
the carrying value and the fair value.
|
|
The net book value of long-lived assets is reviewed quarterly on a property by
property basis to determine if there are indicators of impairment. These indicators
may include anticipated operating losses at the property level, the tenants
inability to make rent payments, a decision to dispose of an asset before the end of
its estimated useful life and changes in the market that may permanently reduce the
value of the property. If indicators of impairment exist, then the undiscounted
future cash flows from the most likely use of the property are compared to the
current net book value. This analysis requires us to determine if indicators of
impairment exist and to estimate the most likely stream of cash flows to be generated
from the property during the period the property is expected to be held. |
|
|
|
|
|
We did not record any impairment charges during the three months ended March 31, 2010. |
Fair Value of Derivative Instruments |
|
|
|
|
|
The valuation of derivative instruments
is accounted for in accordance with U.S.
GAAP, which requires companies to record
derivatives at fair market value on the
balance sheet as assets or liabilities.
|
|
The valuation of derivative instruments requires us to make estimates and judgments
that affect the fair value of the instruments. Fair values for our derivatives are
estimated by utilizing pricing models that consider forward yield curves and discount
rates. Such amounts and the recognition of such amounts are subject to significant
estimates which may change in the future. At March 31, 2010, we participated in two
interest rate swap agreements which are reported at their fair value of $3,632,000
and are included in other liabilities and accumulated other comprehensive income. |
44
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Allowance for Loan Losses |
|
|
|
|
|
We maintain an allowance for loan losses
in accordance with U.S. GAAP. The
allowance for loan losses is maintained
at a level believed adequate to absorb
potential losses in our loans receivable.
The determination of the allowance is
based on a quarterly evaluation of all
outstanding loans. If this evaluation
indicates that there is a greater risk of
loan charge-offs, additional allowances
or placement on non-accrual status may be
required. A loan is impaired when, based
on current information and events, it is
probable that we will be unable to
collect all amounts due as scheduled
according to the contractual terms of the
original loan agreement. Consistent with
this definition, all loans on non-accrual
are deemed impaired. To the extent
circumstances improve and the risk of
collectability is diminished, we will
return these loans to full accrual
status.
|
|
The determination of the
allowance is based on a
quarterly evaluation of all
outstanding loans, including
general economic conditions
and estimated collectability
of loan payments and
principal. We evaluate the
collectability of our loans
receivable based on a
combination of factors,
including, but not limited to,
delinquency status, historical
loan charge-offs, financial
strength of the borrower and
guarantors and value of the
underlying property.
During the three months ended
March 31, 2010, we had one
reserved loan payoff resulting
in a $158,000 write-off and
related net reduction of the
allowance balance. As a result
of our quarterly evaluations,
we did not further adjust our
allowance for loan losses
during the three months ended
March 31, 2010, resulting in
an allowance for loan losses
of $5,025,000 relating to real
estate loans with outstanding
balances of $91,453,000. Also
at March 31, 2010, we had real
estate loans with outstanding
balances of $78,104,000 on
non-accrual status. |
Forward-Looking Statements and Risk Factors
This Quarterly Report on Form 10-Q may contain forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements
concern and are based upon, among other things, the possible expansion of the companys portfolio;
the sale of properties; the performance of its operators and properties; its occupancy rates; its
ability to acquire or develop properties; its ability to manage properties; its ability to enter
into agreements with viable new tenants for vacant space or for properties that the company takes
back from financially troubled tenants, if any; its ability to make distributions; its policies and
plans regarding investments, financings and other matters; its tax status as a real estate
investment trust; its ability to appropriately balance the use of debt and equity; its ability to
access capital markets or other sources of funds; its critical accounting policies; and its ability
to meet its earnings guidance. When the company uses words such as may, will, intend,
should, believe, expect, anticipate, project, estimate or similar expressions, it is
making forward-looking statements. Forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. The companys expected results may not be
achieved, and actual results may differ materially from expectations. This may be a result of
various factors, including, but not limited to: the status of the economy; the status of capital
markets, including availability and cost of capital; issues facing the health care industry,
including compliance with, and changes to, regulations and payment policies, responding to
government investigations and punitive settlements and operators/tenants difficulty in
cost-effectively obtaining and maintaining adequate liability and other insurance; changes in
financing terms; competition within the health care, senior housing and life science industries;
negative developments in the operating results or financial condition of operators/tenants,
including, but not limited to, their ability to pay rent and repay loans; the companys ability to
transition or sell facilities with profitable results; the failure to make new investments as and
when anticipated; acts of God affecting the companys properties; the companys ability to re-lease
space at similar rates as vacancies occur; the companys ability to timely reinvest sale proceeds
at similar rates to assets sold; operator/tenant or joint venture partner bankruptcies or
insolvencies; the cooperation of joint venture partners; government regulations affecting Medicare
and Medicaid reimbursement rates and operational requirements; regulatory approval and market
acceptance of the products and technologies of life science tenants; liability or contract claims
by or against operators/tenants; unanticipated difficulties and/or expenditures relating to future
acquisitions; environmental laws affecting the companys properties; changes in rules or practices
governing the companys financial reporting; and legal and operational matters, including real
estate investment trust qualification and key management personnel recruitment and retention.
Other important factors are identified in the companys Annual Report on Form 10-K for the year
ended December 31, 2009, including factors identified under the headings Business, Risk Factors
and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Finally, the company assumes no obligation to update or revise any forward-looking statements or to
update the reasons why actual results could differ from those projected in any forward-looking
statements.
45
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various market risks, including the potential loss arising from
adverse changes in interest rates. We seek to mitigate the effects of fluctuations in interest
rates by matching the terms of new investments with new long-term fixed rate borrowings to the
extent possible. We may or may not elect to use financial derivative instruments to hedge interest
rate exposure. These decisions are principally based on our policy to match our variable rate
investments with comparable borrowings, but are also based on the general trend in interest rates
at the applicable dates and our perception of the future volatility of interest rates. This section
is presented to provide a discussion of the risks associated with potential fluctuations in
interest rates.
We historically borrow on our unsecured line of credit arrangement to acquire,
construct or make loans relating to health care and senior housing properties. Then, as market
conditions dictate, we will issue equity or long-term fixed rate debt to repay the borrowings under
the unsecured line of credit arrangement.
A change in interest rates will not affect the interest expense associated with our
fixed rate debt. Interest rate changes, however, will affect the fair value of our fixed rate debt.
Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect
on our future cash flows and earnings, depending on whether the debt is replaced with other fixed
rate debt, variable rate debt or equity or repaid by the sale of assets. To illustrate the impact
of changes in the interest rate markets, we performed a sensitivity analysis on our fixed rate debt
instruments whereby we modeled the change in net present values arising from a hypothetical 1%
increase in interest rates to determine the instruments change in fair value. The following table
summarizes the analysis performed as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Principal |
|
|
Change in |
|
|
Principal |
|
|
Change in |
|
|
|
balance |
|
|
fair value |
|
|
balance |
|
|
fair value |
|
Senior unsecured notes |
|
$ |
1,702,129 |
|
|
$ |
(139,070 |
) |
|
$ |
1,661,853 |
|
|
$ |
(129,350 |
) |
Secured debt |
|
|
594,686 |
|
|
|
(28,449 |
) |
|
|
491,094 |
|
|
|
(22,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
2,296,815 |
|
|
$ |
(167,519 |
) |
|
$ |
2,152,947 |
|
|
$ |
(151,872 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
On August 7, 2009, we entered into an interest rate swap (the August 2009 Swap) for a total
notional amount of $52,198,000 to hedge seven years of interest payments associated with long-term
LIBOR based borrowings. The August 2009 Swap has an effective date of August 12, 2009 and a
maturity date of September 1, 2016. The August 2009 Swap has the economic effect of fixing
$52,198,000 at 3.93% plus a credit spread for seven years. The August 2009 Swap has been
designated as a cash flow hedge and we expect it to be highly effective at offsetting changes in
cash flows of interest payments on $52,198,000 of long-term debt due to changes in the LIBOR swap
rate.
On September 28, 2009, we entered into an interest rate swap (the September 2009 Swap) for a
total notional amount of $48,155,000 to hedge seven years of interest payments associated with
long-term LIBOR based borrowings. The September 2009 Swap has an effective date of September 30,
2009 and a maturity date of October 1, 2016. The September 2009 Swap has the economic effect of
fixing $48,155,000 at 3.2675% plus a credit spread for seven years. The September 2009 Swap has
been designated as a cash flow hedge and we expect it to be highly effective at offsetting changes
in cash flows of interest payments on $48,155,000 of long-term debt due to changes in the LIBOR
swap rate.
Our variable rate debt, including our unsecured line of credit arrangement, is reflected at
fair value. At March 31, 2010, we had $425,000,000 outstanding related to our variable rate line of
credit and $131,456,000 outstanding related to our variable rate secured debt. Assuming no changes
in outstanding balances, a 1% increase in interest rates would result in increased annual interest
expense of $5,565,000. At December 31, 2009, we had $140,000,000 outstanding related to our
variable rate line of credit and $131,952,000 outstanding related to our variable rate secured
debt. Assuming no changes in outstanding balances, a 1% increase in interest rates would have
resulted in increased annual interest expense of $2,720,000.
We are subject to risks associated with debt financing, including the risk that existing
indebtedness may not be refinanced or that the terms of refinancing may not be as favorable as the
terms of current indebtedness. The majority of our borrowings were completed under indentures or
contractual agreements that limit the amount of indebtedness we may incur. Accordingly, in the
event that we are unable to raise additional equity or borrow money because of these limitations,
our ability to acquire additional properties may be limited.
46
Item 4. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are effective in providing reasonable assurance that information
required to be disclosed by us in the reports we file with or submit to the Securities and Exchange
Commission (SEC) under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms. No changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the
fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1A. Risk Factors
Except as provided in Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations Forward Looking Statements and Risk Factors, there have been
no material changes from the risk factors identified under the heading Risk Factors in our Annual
Report on Form 10-K for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of Shares |
|
|
Maximum Number of |
|
|
|
Total Number |
|
|
|
|
|
|
Purchased as Part of |
|
|
Shares that May Yet Be |
|
|
|
of Shares |
|
|
Average Price Paid |
|
|
Publicly Announced Plans |
|
|
Purchased Under the Plans |
|
Period |
|
Purchased(1) |
|
|
Per Share |
|
|
or Programs(2) |
|
|
or Programs |
|
January 1, 2010 through March 31, 2010 |
|
|
83,653 |
|
|
$ |
43.47 |
|
|
|
|
|
|
|
|
|
February 1, 2010 through February 28, 2010 |
|
|
465 |
|
|
|
42.36 |
|
|
|
|
|
|
|
|
|
March 1, 2010 through March 31, 2010 |
|
|
633 |
|
|
|
45.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
84,751 |
|
|
$ |
43.48 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During the three months ended March 31, 2010, the company acquired shares of common stock held by employees who tendered owned shares to satisfy the tax
withholding on the lapse of certain restrictions on restricted stock. |
|
(2) |
|
No shares were purchased as part of publicly announced plans or programs. |
Item 5. Other Information
Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Health Care REIT, Inc. was duly called and held on
May 6, 2010 in Toledo, Ohio. The voting results for each of the proposals submitted to a vote of
the stockholders at the annual meeting are as follows:
Proposal #1 Election of three directors for a term of three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
Withheld |
|
Broker Non-Votes |
Thomas J. DeRosa |
|
|
90,059,946 |
|
|
|
952,205 |
|
|
|
16,930,294 |
|
Jeffrey H. Donahue |
|
|
89,362,121 |
|
|
|
1,650,030 |
|
|
|
16,930,294 |
|
Fred S. Klipsch |
|
|
89,538,959 |
|
|
|
1,473,192 |
|
|
|
16,930,294 |
|
Proposal #2 Ratification of the appointment of Ernst & Young LLP as independent registered
public accounting firm for the fiscal year 2010:
|
|
|
|
|
|
|
|
|
For |
|
Against |
|
Abstentions |
106,467,850 |
|
|
866,179 |
|
|
|
608,416 |
|
47
Item 6. Exhibits
|
|
|
4.1
|
|
Indenture, dated as of March 15, 2010, between Health Care REIT, Inc. and The Bank of New
York Mellon Trust Company, N.A. (filed with the SEC as Exhibit 4.1 to Health Care REIT, Inc.s
Form 8-K filed March 15, 2010, and incorporated herein by reference thereto). |
|
|
|
4.2
|
|
Supplemental Indenture No. 1, dated as of March 15, 2010, between Health Care REIT, Inc. and
The Bank of New York Mellon Trust Company, N.A. (filed with the SEC as Exhibit 4.2 to Health
Care REIT, Inc.s Form 8-K filed March 15, 2010, and incorporated herein by reference
thereto). |
|
|
|
4.3
|
|
Supplemental Indenture No. 2, dated as of April 7, 2010, between Health Care REIT, Inc. and
The Bank of New York Mellon Trust Company, N.A. (filed with the SEC as Exhibit 4.2 to Health
Care REIT, Inc.s Form 8-K filed April 7, 2010, and incorporated herein by reference thereto). |
|
|
|
10.1
|
|
Form of Stock Option Agreement (without Dividend Equivalent Rights) for the Chief Executive Officer under the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan. |
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10.2
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Form of Stock Option Agreement (without Dividend Equivalent Rights) for Executive Officers under the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan. |
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10.3
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Form of Restricted Stock Agreement for the Chief Executive Officer under the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan. |
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10.4
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Form of Restricted Stock Agreement for Executive Officers under the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan. |
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10.5
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Form of Deferred Stock Unit Grant Agreement for Non-Employee Directors under the Amended and Restated Health Care REIT, Inc. 2005 Long-Term Incentive Plan. |
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31.1
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Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
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31.2
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Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
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32.1
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Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. |
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32.2
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Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. |
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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 hereunto duly authorized.
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HEALTH CARE REIT, INC. |
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Date: May 10, 2010
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By:
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/s/ GEORGE L. CHAPMAN
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George L. Chapman,
Chairman, Chief Executive Officer and President
(Principal Executive Officer) |
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Date: May 10, 2010
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By:
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/s/ SCOTT A. ESTES |
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Scott A. Estes,
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
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Date: May 10, 2010
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By:
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/s/ PAUL D. NUNGESTER, JR. |
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Paul D. Nungester, Jr.,
Vice President and Controller
(Principal Accounting Officer) |
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49