Health Care REIT, Inc. 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
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) |
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(419) 247-2800 |
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(Registrants telephone number, including area code) |
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(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to the filing requirements for at least the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
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, 2006, the registrant had 62,116,551 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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2006 |
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2005 |
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(Unaudited) |
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(Note) |
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(In thousands) |
|
Assets |
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Real estate investments: |
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|
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Real property owned |
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|
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Land |
|
$ |
267,824 |
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$ |
261,236 |
|
Buildings & improvements |
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2,712,511 |
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|
2,659,746 |
|
Real property held for sale, net of accumulated depreciation |
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15,898 |
|
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|
11,912 |
|
Construction in progress |
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|
36,115 |
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|
3,906 |
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|
|
|
|
|
|
|
|
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|
3,032,348 |
|
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|
2,936,800 |
|
Less accumulated depreciation |
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|
(293,738 |
) |
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|
(274,875 |
) |
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|
|
|
|
Total real property owned |
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|
2,738,610 |
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|
2,661,925 |
|
Loans receivable |
|
|
177,704 |
|
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|
194,054 |
|
Less allowance for losses on loans receivable |
|
|
(6,711 |
) |
|
|
(6,461 |
) |
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|
|
|
|
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|
170,993 |
|
|
|
187,593 |
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Net real estate investments |
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|
2,909,603 |
|
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|
2,849,518 |
|
Other assets: |
|
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|
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|
|
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Equity investments |
|
|
2,970 |
|
|
|
2,970 |
|
Deferred loan expenses |
|
|
12,042 |
|
|
|
12,228 |
|
Cash and cash equivalents |
|
|
25,758 |
|
|
|
36,237 |
|
Receivables and other assets |
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|
62,267 |
|
|
|
71,211 |
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|
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|
103,037 |
|
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|
122,646 |
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Total assets |
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$ |
3,012,640 |
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$ |
2,972,164 |
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Liabilities and stockholders equity |
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Liabilities: |
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Borrowings under unsecured lines of credit arrangements |
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$ |
201,000 |
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$ |
195,000 |
|
Senior unsecured notes |
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1,195,378 |
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|
1,198,278 |
|
Secured debt |
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131,946 |
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|
107,540 |
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Accrued expenses and other liabilities |
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49,399 |
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40,590 |
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Total liabilities |
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1,577,723 |
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1,541,408 |
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Stockholders equity: |
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Preferred stock, $1.00 par value: |
|
|
276,875 |
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276,875 |
|
Authorized
25,000,000 shares |
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Issued and
outstanding 11,074,989 shares at March 31, 2006 and 11,074,989
shares at December 31, 2005 at liquidation preference |
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Common stock, $1.00 par value: |
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58,685 |
|
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|
58,050 |
|
Authorized 125,000,000 shares |
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Issued 58,856,110 shares at March 31, 2006 and 58,182,592 shares
at December 31, 2005 |
|
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Outstanding 58,779,874 shares at March 31, 2006 and 58,124,657
shares at December 31, 2005 |
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Capital in excess of par value |
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|
1,326,341 |
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|
1,306,471 |
|
Treasury stock |
|
|
(2,714 |
) |
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(2,054 |
) |
Cumulative net income |
|
|
855,081 |
|
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|
830,103 |
|
Cumulative dividends |
|
|
(1,080,688 |
) |
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|
(1,039,032 |
) |
Accumulated other comprehensive income |
|
|
0 |
|
|
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0 |
|
Other equity |
|
|
1,337 |
|
|
|
343 |
|
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|
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|
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|
Total stockholders equity |
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|
1,434,917 |
|
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|
1,430,756 |
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Total liabilities and stockholders equity |
|
$ |
3,012,640 |
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$ |
2,972,164 |
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NOTE: The consolidated balance sheet at December 31, 2005 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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2006 |
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2005 |
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|
(In thousands, except per share data) |
|
Revenues: |
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|
|
|
|
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|
Rental income |
|
$ |
72,785 |
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|
$ |
58,793 |
|
Interest income |
|
|
4,262 |
|
|
|
4,983 |
|
Transaction fees and other income |
|
|
366 |
|
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
77,413 |
|
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|
65,198 |
|
|
|
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|
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Expenses: |
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|
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|
Interest expense |
|
|
24,043 |
|
|
|
18,697 |
|
Provision for depreciation |
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|
23,053 |
|
|
|
18,580 |
|
General and administrative |
|
|
6,201 |
|
|
|
4,017 |
|
Loan expense |
|
|
711 |
|
|
|
863 |
|
Provision for loan losses |
|
|
250 |
|
|
|
300 |
|
|
|
|
|
|
|
|
|
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54,258 |
|
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|
42,457 |
|
|
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|
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Income from continuing operations |
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23,155 |
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|
22,741 |
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Discontinued operations: |
|
|
|
|
|
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Net gain (loss) on sales of properties |
|
|
1,553 |
|
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|
(110 |
) |
Income from discontinued operations, net |
|
|
270 |
|
|
|
608 |
|
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|
|
|
|
|
|
|
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|
1,823 |
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|
498 |
|
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|
|
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|
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Net income |
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|
24,978 |
|
|
|
23,239 |
|
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|
|
|
|
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|
Preferred stock dividends |
|
|
5,333 |
|
|
|
5,436 |
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
Net income available to common stockholders |
|
$ |
19,645 |
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|
$ |
17,803 |
|
|
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|
|
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|
Average number of common shares outstanding: |
|
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|
|
|
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|
Basic |
|
|
58,178 |
|
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|
52,963 |
|
Diluted |
|
|
58,535 |
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|
53,454 |
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|
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|
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Earnings per share: |
|
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|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
Income from continuing operations
available to common stockholders |
|
$ |
0.31 |
|
|
$ |
0.33 |
|
Discontinued operations, net |
|
|
0.03 |
|
|
|
0.01 |
|
|
|
|
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|
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|
Net income available to common stockholders |
|
$ |
0.34 |
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|
$ |
0.34 |
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|
|
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|
Diluted: |
|
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|
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|
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|
Income from continuing operations
available to common stockholders |
|
$ |
0.31 |
|
|
$ |
0.32 |
|
Discontinued operations, net |
|
|
0.03 |
|
|
|
0.01 |
|
|
|
|
|
|
|
|
Net income available to common stockholders |
|
$ |
0.34 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
|
|
Dividends declared and paid per common share |
|
$ |
0.62 |
|
|
$ |
0.60 |
|
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
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|
Three Months Ended March 31, 2006 |
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Accumulated |
|
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Capital in |
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|
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|
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|
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Other |
|
|
|
|
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|
Preferred |
|
Common |
|
Excess of |
|
Treasury |
|
Cumulative |
|
Cumulative |
|
Comprehensive |
|
Other |
|
|
|
|
Stock |
|
Stock |
|
Par Value |
|
Stock |
|
Net Income |
|
Dividends |
|
Income |
|
Equity |
|
Total |
|
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(In thousands) |
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|
|
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|
Balances at beginning of period |
|
$ |
276,875 |
|
|
$ |
58,050 |
|
|
$ |
1,306,471 |
|
|
$ |
(2,054 |
) |
|
$ |
830,103 |
|
|
$ |
(1,039,032 |
) |
|
$ |
0 |
|
|
$ |
343 |
|
|
$ |
1,430,756 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,978 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
635 |
|
|
|
20,391 |
|
|
|
(660 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18 |
) |
|
|
20,348 |
|
SFAS123(R) reclassification |
|
|
|
|
|
|
|
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
521 |
|
|
|
0 |
|
Compensation expense related
to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
491 |
|
|
|
491 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$0.62 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(36,323 |
) |
|
|
|
|
|
|
|
|
|
|
(36,323 |
) |
Preferred stock, Series D-$0.492 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E-$0.375 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28 |
) |
|
|
|
|
|
|
|
|
|
|
(28 |
) |
Preferred stock, Series F-$0.477 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
Balances at end of period |
|
$ |
276,875 |
|
|
$ |
58,685 |
|
|
$ |
1,326,341 |
|
|
$ |
(2,714 |
) |
|
$ |
855,081 |
|
|
$ |
(1,080,688 |
) |
|
$ |
0 |
|
|
$ |
1,337 |
|
|
$ |
1,434,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital In |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Preferred |
|
Common |
|
Excess of |
|
Treasury |
|
Cumulative |
|
Cumulative |
|
Comprehensive |
|
Other |
|
|
|
|
Stock |
|
Stock |
|
Par Value |
|
Stock |
|
Net Income |
|
Dividends |
|
Income |
|
Equity |
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Balances at beginning of period |
|
$ |
283,751 |
|
|
$ |
52,860 |
|
|
$ |
1,139,723 |
|
|
$ |
(1,286 |
) |
|
$ |
745,817 |
|
|
$ |
(884,890 |
) |
|
$ |
1 |
|
|
$ |
(697 |
) |
|
$ |
1,335,279 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,239 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on equity investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,239 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures |
|
|
|
|
|
|
454 |
|
|
|
12,947 |
|
|
|
(480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,921 |
|
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184 |
|
|
|
184 |
|
Compensation expense related
to stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
133 |
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock-$0.60 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,915 |
) |
|
|
|
|
|
|
|
|
|
|
(31,915 |
) |
Preferred stock, Series D-$0.492 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
|
|
|
|
|
|
|
|
|
|
(1,969 |
) |
Preferred stock, Series E-$0.375 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
|
|
|
|
(131 |
) |
Preferred stock, Series F-$0.477 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
|
|
|
|
|
|
|
(3,336 |
) |
|
|
|
Balances at end of period |
|
$ |
283,751 |
|
|
$ |
53,314 |
|
|
$ |
1,152,670 |
|
|
$ |
(1,766 |
) |
|
$ |
769,056 |
|
|
$ |
(922,241 |
) |
|
$ |
1 |
|
|
$ |
(380 |
) |
|
$ |
1,334,405 |
|
|
|
|
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 |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
24,978 |
|
|
$ |
23,239 |
|
Adjustments to reconcile net income to
net cash provided from operating
activities: |
|
|
|
|
|
|
|
|
Provision for depreciation |
|
|
23,262 |
|
|
|
20,396 |
|
Amortization |
|
|
3,207 |
|
|
|
1,042 |
|
Provision for loan losses |
|
|
250 |
|
|
|
300 |
|
Rental income less than (in excess of)
cash received |
|
|
7,910 |
|
|
|
(2,855 |
) |
(Gain) loss on sales of properties |
|
|
(1,553 |
) |
|
|
110 |
|
Increase (decrease) in accrued expenses and
other liabilities |
|
|
8,809 |
|
|
|
(7,871 |
) |
Decrease (increase) in receivables and
other assets |
|
|
(2,310 |
) |
|
|
(1,901 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) operating activities |
|
|
64,553 |
|
|
|
32,460 |
|
|
|
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
|
|
Investment in real property |
|
|
(89,994 |
) |
|
|
(35,382 |
) |
Investment in loans receivable |
|
|
(5,324 |
) |
|
|
(14,113 |
) |
Principal collected on loans receivable |
|
|
24,094 |
|
|
|
23,412 |
|
Proceeds from sales of properties |
|
|
14,527 |
|
|
|
9,188 |
|
Other |
|
|
(496 |
) |
|
|
60 |
|
|
|
|
|
|
|
|
Net cash provided from (used in) investing activities |
|
|
(57,193 |
) |
|
|
(16,835 |
) |
|
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
|
|
Net increase (decrease) under unsecured
lines of credit arrangements |
|
|
6,000 |
|
|
|
12,500 |
|
Principal payments on secured debt |
|
|
(643 |
) |
|
|
(6,323 |
) |
Net proceeds from the issuance of common stock |
|
|
18,985 |
|
|
|
13,401 |
|
Decrease (increase) in deferred loan expense |
|
|
(525 |
) |
|
|
(186 |
) |
Cash distributions to stockholders |
|
|
(41,656 |
) |
|
|
(37,351 |
) |
|
|
|
|
|
|
|
Net cash provided from (used in) financing activities |
|
|
(17,839 |
) |
|
|
(17,959 |
) |
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(10,479 |
) |
|
|
(2,334 |
) |
Cash and cash equivalents at beginning of period |
|
|
36,237 |
|
|
|
19,763 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
25,758 |
|
|
$ |
17,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information-interest paid |
|
$ |
17,477 |
|
|
$ |
26,817 |
|
|
|
|
|
|
|
|
See notes to unaudited consolidated financial statements
6
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A 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 for a fair presentation have been included. Operating results for
the three months ended March 31, 2006 are not necessarily an indication of the results that may be
expected for the year ending December 31, 2006. 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, 2005.
NOTE B Real Estate Investments
During the three months ended March 31, 2006, we invested $89,994,000 of cash in real property
(including $31,912,000 of advances for construction in progress) and provided cash loan financings
of $5,324,000. In addition, real property acquisitions included the assumption of debt totaling
$25,049,000. As of March 31, 2006, we had approximately $167,454,000 of unfunded construction
commitments relating to existing construction in progress projects. Also during the three months
ended March 31, 2006, we sold real property generating $14,527,000 of net cash proceeds and
collected $24,094,000 of cash as repayment of principal on loans receivable.
NOTE C Equity Investments
Equity investments, which consist of investments in private and public companies over which we
do not have the ability to exercise influence, are accounted for under the cost method. Under the
cost method of accounting, investments in private companies are carried at cost and are adjusted
only for other-than-temporary declines in fair value, distributions of earnings and additional
investments. For investments in public companies that have readily determinable fair market
values, we classify our equity investments as available-for-sale and, accordingly, record these
investments at their fair market values with unrealized gains and losses included in accumulated
other comprehensive income, a separate component of stockholders equity. These investments
represent a minimal ownership interest in these companies.
NOTE D Distributions Paid to Common Stockholders
On February 21, 2006, we paid a dividend of $0.62 per share to stockholders of record on
January 31, 2006. This dividend related to the period from October 1, 2005 through December 31,
2005.
NOTE E Derivative Instruments
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may elect to use financial derivative instruments to hedge interest
rate exposure. These decisions are principally based on our policy to match our variable rate
investments with comparable borrowings, but are also based on the general trend in interest rates
at the applicable dates and our perception of the future volatility of interest rates.
In June 2000, the Financial Accounting Standards Board (FASB) issued Statement No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities, which amends
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Statement No.
133, as amended, requires companies to record derivatives at fair market value on the balance sheet
as assets or liabilities.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement No. 133, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At March 31, 2006, the Swaps were reported at their fair value as a $651,000 other
liability ($2,211,000 other asset at December 31, 2005). For the three months ended March 31,
2006, we incurred $15,000 of losses related to the Swaps that was recorded as an addition to
interest expense. For the three months ended March 31, 2005, we generated $410,000 of savings
related to the Swaps that was recorded as a reduction in interest expense.
The valuation of derivative instruments requires us to make estimates and judgments that
affect the fair value of the instruments. Fair values for our derivatives are estimated by a third
party consultant, which utilizes pricing models that consider forward yield curves and discount
rates. Such amounts and the recognition of such amounts are subject to significant estimates which
may change in the future.
7
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F Discontinued Operations
Three assisted living facilities and one skilled nursing facility were held for sale as of
March 31, 2006. We did not recognize an impairment loss on these assets as the fair value less
estimated costs to sell exceeded our carrying values. During the three months ended March 31,
2006, we sold one assisted living facility, one skilled nursing facility and one parcel of land
with carrying values of $15,393,000 for a net gain of $1,553,000. In accordance with Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, we have reclassified the income and expenses attributable to all properties sold and
attributable to the properties held for sale at March 31, 2006 to discontinued operations.
Expenses include an allocation of interest expense based on property carrying values and our
weighted average cost of debt. The following illustrates the reclassification impact of Statement
No. 144 as a result of classifying properties as discontinued operations for the periods presented
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31 |
|
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Rental income |
|
$ |
674 |
|
|
$ |
3,372 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Interest expense |
|
|
195 |
|
|
|
948 |
|
Provision for depreciation |
|
|
209 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net |
|
$ |
270 |
|
|
$ |
608 |
|
|
|
|
|
|
|
|
NOTE G Contingent Liabilities
We have an outstanding letter of credit issued for the benefit of certain insurance companies
that provide workers compensation insurance to one of our tenants. Our obligation under the
letter of credit matures in 2009. At March 31, 2006, our obligation under the letter of credit was
$2,450,000.
As of March 31, 2006, we had approximately $167,454,000 of unfunded construction commitments.
NOTE H Accumulated Other Comprehensive Income
Accumulated other comprehensive income includes unrealized gains or losses on our equity
investments. This item is included as a component of stockholders equity. We did not recognize
any comprehensive income other than the recorded net income for the three months ended March 31,
2006 or 2005.
8
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE I 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 |
|
|
|
2006 |
|
|
2005 |
|
Numerator for basic and diluted earnings
per share net income available to
common stockholders |
|
$ |
19,645 |
|
|
$ |
17,803 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per
share weighted average shares |
|
|
58,178 |
|
|
|
52,963 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
97 |
|
|
|
260 |
|
Non-vested restricted shares |
|
|
260 |
|
|
|
221 |
|
|
|
|
|
|
|
|
Dilutive potential common shares |
|
|
357 |
|
|
|
481 |
|
|
|
|
|
|
|
|
Denominator for diluted earnings per
share adjusted weighted average shares |
|
|
58,535 |
|
|
|
53,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.34 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.34 |
|
|
$ |
0.33 |
|
|
|
|
|
|
|
|
The diluted earnings per share calculation excludes the dilutive effect of 257,000 options for
the three months ended March 31, 2006 because the exercise prices were greater than the average
market price. The diluted earnings per share calculation excludes the dilutive effect of 173,000
options for the three months ended March 31, 2005 because the exercise prices were greater than the
average market price. The Series E Cumulative Convertible and Redeemable Preferred Stock was not
included in these calculations as the effect of the conversion into common stock was anti-dilutive
for the periods presented.
NOTE J Other Equity
Other equity consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
|
December 31 |
|
|
|
2006 |
|
|
2005 |
|
Accumulated compensation expense related
to stock options |
|
$ |
1,337 |
|
|
$ |
864 |
|
Unamortized restricted stock |
|
|
0 |
|
|
|
(521 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,337 |
|
|
$ |
343 |
|
|
|
|
|
|
|
|
Unamortized restricted stock at December 31, 2005 represents the unamortized value of
restricted stock granted to key employees and directors prior to January 1, 2003. Pursuant to the
provisions of Statement No. 123(R) adopted on January 1, 2006, the unamortized restricted stock
balance of $521,000 was reclassified to capital in excess of par value. Expense, which is
recognized as the restricted shares vest based on the market value at the date of the award,
totaled $2,022,000 for the three months ended March 31, 2006 and $592,000 for the three months
ended March 31, 2005. See Note K for further discussion.
Accumulated option compensation expense represents the amount of amortized compensation costs
related to stock options awarded to employees and directors subsequent to January 1, 2003.
Expense, which is recognized as the options vest based on the market value at the date of the
award, totaled $491,000 for the three months ended March 31, 2006, and $133,000 for the same period
in 2005.
9
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K Stock Incentive Plans
Our 2005 Long-Term Incentive Plan authorizes up to 2,200,000 shares of common stock to be
issued at the discretion of the Compensation Committee of the Board of Directors. The 2005 Plan
replaced the 1995 Stock Incentive Plan and the Stock Plan for Non-Employee Directors. The options
granted to officers and key employees under the 1995 Plan continue to vest through 2015 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 and restricted shares range from three years for directors to five
years for officers and key employees. Options expire ten years from the date of grant.
Impact of the Adoption of Statement No. 123(R)
We adopted the fair value-based method of accounting for share-based payments effective
January 1, 2003 using the prospective method described in Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Currently, we
use the Black-Scholes-Merton option pricing model to estimate the value of stock option grants and
expect to continue to use this acceptable option valuation model. Because we adopted Statement No.
123 using the prospective transition method (which applied only to awards granted, modified or
settled after the adoption date of Statement No. 123), compensation cost for some previously
granted awards that were not recognized under Statement No. 123 will now be recognized effective
with the adoption of Statement No. 123(R) on January 1, 2006. In addition, we previously amortized
compensation cost for share based payments to the date that the awards became fully vested or to
the expected retirement date, if sooner. Effective with the adoption of Statement No. 123(R), we
began recognizing compensation cost to the date the awards become fully vested or to the retirement
eligible date, if sooner, which totaled $1,690,000 for the three months ended March 31, 2006. We
expect that the adoption of Statement No. 123(R) will increase compensation cost by approximately
$1,287,000 for the full year 2006 as a result of amortizing share based awards to the retirement
eligible date.
Valuation Assumptions
The fair value of each option grant is estimated on the date of grant using a
Black-Scholes-Merton option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
|
March 31, 2006 |
|
March 31, 2005 |
Dividend yield (1) |
|
|
0.00% - 6.79 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
20.3 |
% |
|
|
22.8 |
% |
Risk-free interest rate |
|
|
4.35 |
% |
|
|
4.25 |
% |
Expected life (in years) |
|
|
5 |
|
|
|
7 |
|
Weighted-average fair value (1) |
|
|
$5.26 |
|
|
$ |
12.48 |
|
|
|
|
(1) |
|
Certain of the options granted to employees in 2006 include dividend equivalent rights.
The fair value of these options are calculated based on the above assumptions and then
adjusted for the present value of estimated dividend payments over the expected life of the
options. Options granted to employees in 2005 include dividend equivalent rights. These
options are assumed to have a dividend yield of 0% for purposes of the Black-Scholes-Merton
option pricing model and result in higher fair values than options without dividend equivalent
rights. |
The dividend yield represented the dividend yield of our common stock on the dates of
grant. Our computation of expected volatility was based on historical volatility. The risk-free
interest rates used were the 10-year U.S. Treasury Notes yield on the dates 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.
10
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Option Award Activity
The following table summarizes information about stock option activity for the three months
ended March 31, 2006 (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted |
|
|
Weighted Average |
|
|
Aggregate |
|
|
|
of |
|
|
Average |
|
|
Remaining |
|
|
Intrinsic |
|
Stock Options |
|
Shares |
|
|
Exercise Price |
|
|
Contract Life |
|
|
Value |
|
Options at beginning of year |
|
|
685 |
|
|
$ |
26.87 |
|
|
|
6.3 |
|
|
|
|
|
Options granted |
|
|
155 |
|
|
|
36.50 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(117 |
) |
|
|
20.54 |
|
|
|
|
|
|
|
|
|
Options terminated |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options at end of period |
|
|
723 |
|
|
$ |
29.96 |
|
|
|
7.3 |
|
|
$ |
5,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
195 |
|
|
$ |
25.18 |
|
|
|
5.2 |
|
|
$ |
2,520 |
|
Weighted average fair value of
options granted during the period |
|
|
|
|
|
$ |
5.26 |
|
|
|
|
|
|
|
|
|
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, 2006. During the three months ended March 31, 2006 and 2005, the
aggregate intrinsic value of options exercised under our stock incentive plans was $1,825,000 and
$1,890,000, respectively, determined as of the date of option exercise. Cash received from option
exercises under our stock incentive plans for the three months ended March 31, 2006 and 2005 was
$2,232,000 and $3,235,000, respectively.
As of March 31, 2006, there was approximately $2,857,000 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, 2006,
there was approximately $6,833,000 of total unrecognized compensation cost related to unvested
restricted stock granted under our stock incentive plans. That cost is expected to be recognized
over a weighted average period of three years.
The following table summarizes information about non-vested stock incentive awards as of March
31, 2006 and changes for the three months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Restricted Stock |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
Number of |
|
|
Grant Date |
|
|
Number of |
|
|
Grant Date |
|
|
|
Shares |
|
|
Fair Value |
|
|
Shares |
|
|
Fair Value |
|
Non-vested at December 31,
2005 |
|
|
428 |
|
|
$ |
5.36 |
|
|
|
222 |
|
|
$ |
31.56 |
|
Vested |
|
|
(105 |
) |
|
|
5.23 |
|
|
|
(58 |
) |
|
|
30.72 |
|
Granted |
|
|
155 |
|
|
|
5.26 |
|
|
|
96 |
|
|
|
36.55 |
|
Terminated |
|
|
0 |
|
|
|
|
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested at March 31, 2006 |
|
|
478 |
|
|
$ |
5.35 |
|
|
|
260 |
|
|
$ |
33.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11
HEALTH CARE REIT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma Information for Periods Prior to the Adoption of Statement No. 123(R)
The following table illustrates the effect on net income available to common stockholders for
the periods presented if we had applied the fair value recognition provisions of Statement No. 123,
as amended, to stock-based compensation for options granted since 1995 but prior to adoption at
January 1, 2003 (in thousands, except per share data):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Numerator: |
|
|
|
|
Net income available to common stockholders as reported |
|
$ |
17,803 |
|
Deduct: Additional stock-based employee compensation
expense determined under fair value based method
for all awards |
|
|
45 |
|
|
|
|
|
Net income available to common stockholders pro forma |
|
$ |
17,758 |
|
|
|
|
|
|
Denominator: |
|
|
|
|
Basic weighted average shares as reported and pro forma |
|
|
52,963 |
|
Effect of dilutive securities: |
|
|
|
|
Employee stock options pro forma |
|
|
260 |
|
Non-vested restricted shares |
|
|
221 |
|
|
|
|
|
Dilutive potential common shares |
|
|
481 |
|
|
|
|
|
Diluted weighted average shares pro forma |
|
|
53,444 |
|
|
|
|
|
|
Net income available to common stockholders per
share as reported
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
|
|
|
Diluted |
|
$ |
0.33 |
|
|
|
|
|
|
Net income available to common stockholders per
share pro forma
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
|
|
|
Diluted |
|
$ |
0.33 |
|
|
|
|
|
NOTE L Significant Changes and Events
On April 12, 2006, we completed a public offering of 3,000,000 shares of common stock with net
proceeds to the company of approximately $102,450,000. On April 28, 2006, we issued an additional
222,800 shares of common stock pursuant to the over-allotment exercise, which generated net
proceeds of approximately $7,620,000.
12
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, 2005, including
factors identified under the headings Business, Risk Factors and Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Executive Overview
Business
Health Care REIT, Inc. is a self-administered, equity real estate investment trust that
invests in health care and senior housing properties. 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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments(1) |
|
|
Percentage of |
|
|
Revenues(2) |
|
|
Percentage of |
|
|
Number of |
|
|
Number of |
|
|
Investment per |
|
|
Number of |
|
|
Number of |
|
Type of Facility |
|
(in thousands) |
|
|
Investments |
|
|
(in thousands) |
|
|
Revenues |
|
|
Facilities |
|
|
Beds/Units |
|
|
Bed/Unit(3) |
|
|
Operators(4) |
|
|
States(4) |
|
Independent
living/CCRCs |
|
$ |
426,653 |
|
|
|
15 |
% |
|
$ |
9,300 |
|
|
|
12 |
% |
|
|
32 |
|
|
|
4,494 |
|
|
$ |
104,855 |
|
|
|
13 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted living
facilities |
|
|
974,154 |
|
|
|
33 |
% |
|
|
28,483 |
|
|
|
36 |
% |
|
|
201 |
|
|
|
12,343 |
|
|
|
88,182 |
|
|
|
23 |
|
|
|
33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Skilled nursing
facilities |
|
|
1,323,447 |
|
|
|
45 |
% |
|
|
35,613 |
|
|
|
46 |
% |
|
|
211 |
|
|
|
28,632 |
|
|
|
46,523 |
|
|
|
24 |
|
|
|
29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty care
facilities |
|
|
194,510 |
|
|
|
7 |
% |
|
|
4,691 |
|
|
|
6 |
% |
|
|
13 |
|
|
|
1,312 |
|
|
|
148,255 |
|
|
|
6 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
2,918,764 |
|
|
|
100 |
% |
|
$ |
78,087 |
|
|
|
100 |
% |
|
|
457 |
|
|
|
46,781 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investments include gross real estate investments and credit enhancements which amounted to
$2,916,314,000 and $2,450,000, respectively. |
|
(2) |
|
Revenues include gross revenues and revenues from discontinued operations for the three
months ended March 31, 2006. |
|
(3) |
|
Investment per Bed/Unit was computed by using the total investment amount of $3,086,218,000
which includes gross real estate investments, credit enhancements and unfunded construction
commitments for which initial funding has commenced which amounted to $2,916,314,000,
$2,450,000 and $167,454,000, respectively. |
|
(4) |
|
We have investments in properties located in 37 states and managed by 55 different operators. |
Our primary objectives are to protect stockholders 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 in properties managed by
experienced operators and diversify our investment portfolio by operator and geographic location.
Substantially all of our revenues and sources of cash flows from operations are derived from
operating lease rental income and interest earned on outstanding loans receivable. These items
represent our primary source of liquidity to fund distributions and are dependent upon our
operators continued ability to make contractual rent and interest payments to us. To the extent
that our operators 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 facility and
operator. Our asset management process includes review of monthly financial statements for each
facility, periodic review of operator credit, periodic facility 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
facility-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 and address payment risk, and in so doing, support both the collectibility 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. We typically limit our investments to no more than 90% of the
appraised value of a property. 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 operator and its affiliates. As of March 31,
2006, 88% of our real property was subject to master leases.
For the three months ended March 31, 2006, rental income and interest income represented 94%
and 5%, respectively, of total gross revenues (including revenues from discontinued operations).
Our standard lease structure contains annual rental escalators that are contingent upon changes in
the Consumer Price Index and/or changes in the gross operating revenues of the tenants properties.
These escalators are not fixed, so no straight-line rent is recorded; however, rental income is
recorded based on the contractual cash rental
13
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 anticipate making investments
in additional facilities. New investments are generally funded from temporary borrowings under our
unsecured lines of credit arrangements, 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 lines of credit arrangements, is expected to be provided through a
combination of public and private offerings of debt and equity securities and the incurrence of
secured debt. We believe our liquidity and various sources of available capital are sufficient to
fund operations, meet debt service obligations (both principal and interest), make dividend
distributions and finance future investments.
Depending upon market conditions, we believe that new investments will be available in the
future with spreads over our cost of capital that will generate appropriate returns to our
stockholders. During the three months ended March 31, 2006, we completed $123,083,000 of gross new
investments and had $36,633,000 of investment payoffs, resulting in net investments of $86,450,000.
We expect to complete gross new investments of $450,000,000 to $550,000,000 during 2006, including
acquisitions of approximately $300,000,000 and funded new development of approximately $150,000,000
to $250,000,000. We anticipate the sale of real property and the repayment of loans receivable
totaling approximately $100,000,000 to $150,000,000 during 2006. 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 lines of
credit arrangements. At March 31, 2006, we had $25,758,000 of cash and cash equivalents and
$339,000,000 of available borrowing capacity under our unsecured lines of credit arrangements.
Key Transactions in 2006
We have completed the following key transactions to date in 2006:
|
|
|
our Board of Directors increased our quarterly dividend to $0.64 per share, which
represents a two cent increase from the quarterly dividend of $0.62 paid for 2005. The
dividend declared for the quarter ended March 31, 2006 represents the 140th
consecutive dividend payment; |
|
|
|
|
we completed $123,083,000 of gross investments and had $36,633,000 of investment payoffs
during the three months ended March 31, 2006; and |
|
|
|
|
on April 12, 2006, we completed a public offering of 3,000,000 shares of common stock
with net proceeds to the company of approximately $102,450,000. On April 28, 2006, we
issued an additional 222,800 shares of common stock pursuant to the over-allotment
exercise, which generated net proceeds of approximately $7,620,000. |
Key Performance Indicators, Trends and Uncertainties
We utilize several key performance indicators to evaluate the various aspects of our business.
These indicators are discussed below and relate to operating performance, concentration risk and
credit strength. Management uses these key performance indicators to facilitate internal and
external comparisons to our historical operating results, in making operating decisions and for
budget planning purposes.
Operating Performance. We believe that net income available to common stockholders (NICS)
is the most appropriate earnings measure. Other useful supplemental measures of our operating
performance include funds from operations (FFO) and funds available for distribution (FAD);
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 of FFO and FAD and for reconciliations of FFO and FAD to NICS. 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):
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
|
|
|
|
|
|
Net
income (loss) available to
common stockholders |
|
|
|
|
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
Funds from
operations |
|
|
|
|
|
|
38,309 |
|
|
|
19,427 |
|
|
|
41,975 |
|
|
|
44,581 |
|
|
|
41,354 |
|
Funds available for distribution |
|
|
|
|
|
|
35,454 |
|
|
|
18,251 |
|
|
|
41,857 |
|
|
|
49,457 |
|
|
|
49,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data (fully diluted): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
|
|
|
|
$ |
0.33 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
Funds from
operations |
|
|
|
|
|
|
0.72 |
|
|
|
0.36 |
|
|
|
0.77 |
|
|
|
0.79 |
|
|
|
0.71 |
|
Funds available for
distribution |
|
|
|
|
|
|
0.66 |
|
|
|
0.34 |
|
|
|
0.77 |
|
|
|
0.88 |
|
|
|
0.84 |
|
Concentration Risk. We evaluate our concentration risk in terms of asset mix, investment
mix, operator 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 and related
rights, is owned by us and leased to an operator pursuant to a long-term operating lease.
Investment mix measures the portion of our investments that relate to our various facility types.
Operator mix measures the portion of our investments that relate to our top five operators.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
|
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
|
|
|
|
|
|
Asset mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property |
|
|
|
|
|
|
90 |
% |
|
|
91 |
% |
|
|
91 |
% |
|
|
93 |
% |
|
|
94 |
% |
Loans receivable |
|
|
|
|
|
|
10 |
% |
|
|
9 |
% |
|
|
9 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Independent
living/CCRCs (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15 |
% |
|
|
15 |
% |
Assisted living facilities |
|
|
|
|
|
|
55 |
% |
|
|
51 |
% |
|
|
50 |
% |
|
|
34 |
% |
|
|
33 |
% |
Skilled nursing facilities |
|
|
|
|
|
|
39 |
% |
|
|
42 |
% |
|
|
42 |
% |
|
|
44 |
% |
|
|
45 |
% |
Specialty care facilities |
|
|
|
|
|
|
6 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operator mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emeritus Corporation |
|
|
|
|
|
|
15 |
% |
|
|
14 |
% |
|
|
14 |
% |
|
|
13 |
% |
|
|
12 |
% |
Brookdale Senior Living Inc. (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 |
% |
Merrill Gardens L.L.C. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
Life Care Centers of America, Inc. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
Delta Health
Group, Inc. |
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
|
|
6 |
% |
Southern Assisted Living, Inc. (2) |
|
|
|
|
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
7 |
% |
|
|
|
|
Commonwealth Communities
Holdings LLC |
|
|
|
|
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
|
|
Home Quality Management, Inc. |
|
|
|
|
|
|
7 |
% |
|
|
7 |
% |
|
|
6 |
% |
|
|
|
|
|
|
|
|
Remaining operators |
|
|
|
|
|
|
55 |
% |
|
|
57 |
% |
|
|
58 |
% |
|
|
59 |
% |
|
|
58 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic mix: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Florida |
|
|
|
|
|
|
15 |
% |
|
|
15 |
% |
|
|
15 |
% |
|
|
14 |
% |
|
|
14 |
% |
Massachusetts |
|
|
|
|
|
|
15 |
% |
|
|
14 |
% |
|
|
13 |
% |
|
|
13 |
% |
|
|
12 |
% |
Ohio |
|
|
|
|
|
|
6 |
% |
|
|
6 |
% |
|
|
6 |
% |
|
|
|
|
|
|
9 |
% |
Texas |
|
|
|
|
|
|
|
|
|
|
9 |
% |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
North Carolina |
|
|
|
|
|
|
8 |
% |
|
|
7 |
% |
|
|
7 |
% |
|
|
8 |
% |
|
|
7 |
% |
California |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
% |
|
|
|
|
Tennessee |
|
|
|
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining states |
|
|
|
|
|
|
50 |
% |
|
|
49 |
% |
|
|
51 |
% |
|
|
50 |
% |
|
|
50 |
% |
|
|
|
(1) |
|
As a result of our significant independent living/continuing care retirement community
acquisitions in the fourth quarter of 2005, we began to separately disclose this facility
classification in our portfolio reporting. We adopted the National Investment Center
definitions and reclassified certain of our existing facilities to this classification. |
|
(2) |
|
In September 2005, Alterra Healthcare Corporation, one of our tenants, became an indirect
wholly-owned subsidiary of Brookdale as a result of Brookdales merger with FEBC-ALT Investors
LLC. In April 2006, Brookdale completed the acquisition of Southern Assisted Living, Inc. |
15
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 plus 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31 |
|
|
June 30 |
|
|
September 30 |
|
|
December 31 |
|
|
March 31 |
|
|
|
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
|
|
|
|
|
Debt to book
capitalization
ratio |
|
|
|
|
|
|
48 |
% |
|
|
51 |
% |
|
|
51 |
% |
|
|
51 |
% |
|
|
52 |
% |
Debt to market
capitalization
ratio |
|
|
|
|
|
|
38 |
% |
|
|
37 |
% |
|
|
37 |
% |
|
|
40 |
% |
|
|
38 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest coverage
ratio |
|
|
|
|
|
|
3.23 |
x |
|
|
2.32 |
x |
|
|
3.23 |
x |
|
|
3.52 |
x |
|
|
3.10 |
x |
Fixed charge
coverage
ratio |
|
|
|
|
|
|
2.54 |
x |
|
|
1.83 |
x |
|
|
2.59 |
x |
|
|
2.82 |
x |
|
|
2.54 |
x |
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, 2005, 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
Payment coverages in our portfolio continue to improve. Our overall payment coverage is at
1.94 times and represents an increase of 10 basis points from the prior year. The table below
reflects our recent historical trends of portfolio coverages. Coverage data reflects the 12 months
ended for the periods presented. CBMF represents the ratio of facilities earnings before
interest, taxes, depreciation, amortization, rent and management fees to contractual rent or
interest due us. CAMF represents the ratio of earnings before interest, taxes, depreciation,
amortization, and rent (but after management fees) to contractual rent or interest due us.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
December 31, 2005 |
|
|
|
CBMF |
|
|
CAMF |
|
|
CBMF |
|
|
CAMF |
|
Independent living/CCRCs (1) |
|
|
|
|
|
|
|
|
|
|
1.45x |
|
|
|
1.23x |
|
Assisted living facilities |
|
|
1.47x |
|
|
|
1.25x |
|
|
|
1.52x |
|
|
|
1.30x |
|
Skilled nursing facilities |
|
|
2.15x |
|
|
|
1.64x |
|
|
|
2.21x |
|
|
|
1.63x |
|
Specialty care facilities |
|
|
3.00x |
|
|
|
2.37x |
|
|
|
3.19x |
|
|
|
2.60x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted averages |
|
|
1.84x |
|
|
|
1.48x |
|
|
|
1.94x |
|
|
|
1.54x |
|
|
|
|
(1) |
|
As a result of our significant independent living/continuing care retirement community
acquisitions in the fourth quarter of 2005, we began to separately disclose this facility
classification in our portfolio reporting. We adopted the National Investment Center
definitions and reclassified certain of our existing facilities to this classification. |
Corporate Governance
Maintaining investor confidence and trust has become increasingly important in todays
business environment. Health Care REIT, Inc.s Board of Directors and management are strongly
committed to policies and procedures that reflect the highest level of ethical business practices.
Our corporate governance guidelines provide the framework for our business operations and emphasize
our commitment to increase stockholder value while meeting all applicable legal requirements. In
March 2004, the Board of Directors adopted its Corporate Governance Guidelines. These guidelines
meet the listing standards adopted by the New York Stock Exchange and are available on our Web site 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.
16
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary sources of cash include rent and interest receipts, borrowings under unsecured
lines of credit arrangements, public and private offerings of debt and equity securities, proceeds
from the sales of real property and principal payments on loans receivable. Our primary uses of
cash include dividend distributions, debt service payments (including principal and interest), real
property investments (including construction advances), loan advances and general and
administrative expenses. These sources and uses of cash are reflected in our Consolidated
Statements of Cash Flows and are discussed in further detail below.
The following is a summary of our sources and uses of cash flows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Cash and cash
equivalents at
beginning of
period |
|
$ |
36,237 |
|
|
$ |
19,763 |
|
|
$ |
16,474 |
|
|
|
83 |
% |
Cash provided from
(used in) operating
activities |
|
|
64,553 |
|
|
|
32,460 |
|
|
|
32,093 |
|
|
|
99 |
% |
Cash provided from
(used in) investing
activities |
|
|
(57,193 |
) |
|
|
(16,835 |
) |
|
|
(40,358 |
) |
|
|
240 |
% |
Cash provided from
(used in) financing
activities |
|
|
(17,839 |
) |
|
|
(17,959 |
) |
|
|
120 |
|
|
|
-1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end
of period |
|
$ |
25,758 |
|
|
$ |
17,429 |
|
|
$ |
8,329 |
|
|
|
48 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities. The change in net cash provided from operating activities is
primarily attributable to increases in net income, excluding the provision for depreciation and net
straight-line rental income, and changes in accrued expenses and other liabilities. Net income and
the provision for depreciation increased primarily as a result of net new investments in properties
owned by us. See the discussion of investing activities below for additional details. To the
extent that we acquire or dispose of additional properties in the future, our net income and
provision for depreciation will change accordingly. The change in accrued expenses and other
liabilities is primarily attributable to the timing of cash disbursements for our contractual
interest obligations.
Net straight-line rental income decreased primarily due to a decrease in gross straight-line
rental income and increases in cash payments outside normal monthly rental payments. The following
is a summary of our straight-line rent (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Gross straight-line rental income |
|
$ |
2,400 |
|
|
$ |
3,708 |
|
|
$ |
(1,308 |
) |
|
|
-35 |
% |
Cash receipts due to real property sales |
|
|
(604 |
) |
|
|
(352 |
) |
|
|
(252 |
) |
|
|
72 |
% |
Prepaid rent receipts |
|
|
(9,706 |
) |
|
|
(501 |
) |
|
|
(9,205 |
) |
|
|
1,837 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash receipts less than (in excess of) rental income |
|
$ |
(7,910 |
) |
|
$ |
2,855 |
|
|
$ |
(10,765 |
) |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross straight-line rental income represents the non-cash difference between contractual
cash rent due and the average rent recognized pursuant to Statement of Financial Accounting
Standards No. 13, Accounting for Leases. 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. Our standard lease structure contains annual rental escalators that are
contingent upon changes in the Consumer Price Index and/or changes in the gross operating revenues
of the tenants properties. These escalators are not fixed, so no straight-line rent is recorded.
Instead, rental income is recorded based on the contractual cash rental payment due for the period.
The increase in non-recurring cash receipts is primarily attributable to cash received in
connection with the acquisition of Commonwealth Communities Holdings LLC by Kindred Healthcare,
Inc. in February 2006 as discussed in our Annual Report on Form 10-K for the year ended December
31, 2005.
17
Investing Activities. The changes in net cash used in investing activities are primarily
attributable to net changes in real property and loans receivable. The following is a summary of
our investment and disposition activities (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
|
Facilities |
|
|
Amount |
|
|
Facilities |
|
|
Amount |
|
Real property acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
2 |
|
|
$ |
6,150 |
|
|
|
3 |
|
|
$ |
39,620 |
|
Skilled nursing facilities |
|
|
8 |
|
|
|
71,020 |
|
|
|
1 |
|
|
|
2,181 |
|
Land parcels |
|
|
|
|
|
|
3,274 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total acquisitions |
|
|
10 |
|
|
|
80,444 |
|
|
|
4 |
|
|
|
41,801 |
|
Less: Assumed debt |
|
|
|
|
|
|
(25,049 |
) |
|
|
|
|
|
|
(15,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash disbursed for
acquisitions |
|
|
|
|
|
|
55,395 |
|
|
|
|
|
|
|
26,198 |
|
Construction in progress
advances |
|
|
|
|
|
|
31,912 |
|
|
|
|
|
|
|
1,236 |
|
Capital improvements to existing
properties |
|
|
|
|
|
|
2,687 |
|
|
|
|
|
|
|
7,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash invested in real
property |
|
|
|
|
|
|
89,994 |
|
|
|
|
|
|
|
35,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real property dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assisted living facilities |
|
|
1 |
|
|
|
13,396 |
|
|
|
1 |
|
|
|
8,348 |
|
Skilled nursing facilities |
|
|
1 |
|
|
|
1,081 |
|
|
|
|
|
|
|
|
|
Land parcels |
|
|
|
|
|
|
50 |
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from real property sales |
|
|
2 |
|
|
|
14,527 |
|
|
|
1 |
|
|
|
9,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash investments in real
property |
|
|
8 |
|
|
$ |
75,467 |
|
|
|
3 |
|
|
$ |
26,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in new loans |
|
|
|
|
|
$ |
4,250 |
|
|
|
|
|
|
$ |
6,000 |
|
Draws on existing loans |
|
|
|
|
|
|
1,074 |
|
|
|
|
|
|
|
8,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments in loans |
|
|
|
|
|
|
5,324 |
|
|
|
|
|
|
|
14,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receipts on loans receivable: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan payoffs |
|
|
|
|
|
|
21,240 |
|
|
|
|
|
|
|
19,466 |
|
Principal payments on loans |
|
|
|
|
|
|
2,854 |
|
|
|
|
|
|
|
3,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total principal receipts on loans |
|
|
|
|
|
|
24,094 |
|
|
|
|
|
|
|
23,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash advances (receipts) on loans
receivable |
|
|
|
|
|
$ |
(18,770 |
) |
|
|
|
|
|
$ |
(9,299 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities. The changes in net cash provided from or used in financing
activities are primarily attributable to changes related to our unsecured lines of credit
arrangements, principal payments on secured debt, common stock issuances and cash distributions to
stockholders.
For the three months ended March 31, 2006, we had a net increase of $6,000,000 on our
unsecured lines of credit arrangements as compared to a net increase of $12,500,000 for the same
period in 2005. The decrease in principal payments on secured debt is primarily due to the payoff
of two mortgages totaling $5,695,000 in March 2005. Principal payments on secured debt for the
same period in 2006 were only regularly scheduled mortgage amortization payments.
The increase in net proceeds from the issuance of common stock is primarily attributable to
common stock issuances related to our dividend reinvestment and stock purchase plan (DRIP).
During the three months ended March 31, 2006, we issued 474,000 shares of common stock pursuant to
our DRIP, which generated net proceeds of approximately $16,841,000. During the three months ended
March 31, 2005, we issued 292,000 shares of common stock pursuant to our DRIP, which generated net
proceeds of approximately $9,893,000. The remaining difference in common stock issuances is
primarily due to issuances pursuant to stock incentive plans.
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 increases in
dividends are primarily attributable to increases in outstanding common and preferred stock shares
and increases in our annual common stock dividend per share.
18
The following is a summary of our dividend payments (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
|
Per Share |
|
|
Amount |
|
|
Per Share |
|
|
Amount |
|
Common Stock |
|
$ |
0.620 |
|
|
$ |
36,323 |
|
|
$ |
0.600 |
|
|
$ |
31,915 |
|
Series D Preferred
Stock |
|
|
0.492 |
|
|
|
1,969 |
|
|
|
0.492 |
|
|
|
1,969 |
|
Series E Preferred
Stock |
|
|
0.375 |
|
|
|
28 |
|
|
|
0.375 |
|
|
|
131 |
|
Series F Preferred
Stock |
|
|
0.477 |
|
|
|
3,336 |
|
|
|
0.477 |
|
|
|
3,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
|
|
|
$ |
41,656 |
|
|
|
|
|
|
$ |
37,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We have an outstanding letter of credit issued for the benefit of certain insurance companies
that provide workers compensation insurance to one of our tenants. Our obligation under the
letter of credit matures in 2009. At March 31, 2006, our obligation under the letter of credit was
$2,450,000.
We are exposed to various market risks, including the potential loss arising from adverse
changes in interest rates. We may or may not elect to use financial derivative instruments to hedge
interest rate exposure. These decisions are principally based on the general trend in interest
rates at the applicable dates, our perception of the future volatility of interest rates and our
relative levels of variable rate debt and variable rate investments. As of March 31, 2006, we
participated in two interest rate swap agreements related to our long-term debt. Our interest rate
swaps are discussed below in Contractual Obligations.
Contractual Obligations
The following table summarizes our payment requirements under contractual obligations as of
March 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
Contractual Obligations |
|
Total |
|
|
2006 |
|
|
2007-2008 |
|
|
2009-2010 |
|
|
Thereafter |
|
Unsecured lines of credit arrangements (1) |
|
$ |
540,000 |
|
|
$ |
40,000 |
|
|
$ |
500,000 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Senior unsecured notes |
|
|
1,194,830 |
|
|
|
|
|
|
|
94,830 |
|
|
|
|
|
|
|
1,100,000 |
|
Secured debt |
|
|
131,946 |
|
|
|
2,329 |
|
|
|
25,363 |
|
|
|
42,540 |
|
|
|
61,714 |
|
Contractual interest obligations |
|
|
755,416 |
|
|
|
89,663 |
|
|
|
202,167 |
|
|
|
165,218 |
|
|
|
298,368 |
|
Capital lease obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations |
|
|
14,034 |
|
|
|
1,045 |
|
|
|
2,001 |
|
|
|
1,857 |
|
|
|
9,131 |
|
Purchase obligations |
|
|
209,902 |
|
|
|
10,973 |
|
|
|
130,928 |
|
|
|
68,001 |
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
2,846,128 |
|
|
$ |
144,010 |
|
|
$ |
955,289 |
|
|
$ |
277,616 |
|
|
$ |
1,469,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unsecured lines of credit arrangements reflected at 100% capacity. |
We have an unsecured credit arrangement with a consortium of ten banks providing for a
revolving line of credit (revolving credit) in the amount of $500,000,000, which expires on June
22, 2008 (with the ability to extend for one year at our discretion if we are in compliance with
all covenants). The agreement specifies that borrowings under the revolving credit 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 (5.775% at March 31,
2006). The applicable margin is based on our ratings with Moodys Investors Service and Standard &
Poors Ratings Services and was 0.9% at March 31, 2006. In addition, we pay a facility fee
annually to each bank based on the banks commitment under the revolving credit facility. The
facility fee depends on our ratings with Moodys Investors Service and Standard & Poors Ratings
Services and was 0.225% at March 31, 2006. We also pay an annual agents fee of $50,000.
Principal is due upon expiration of the agreement. We have another unsecured line of credit
arrangement with a bank for a total of $40,000,000, which expires May 31, 2006. Borrowings under
this line of credit are subject to interest at either the banks prime rate of interest (7.75% at
March 31, 2006) or 1.3% over LIBOR interest rate, at our option. Principal is due upon expiration
of the agreement. At March 31, 2006, we had $201,000,000 outstanding under the unsecured lines of
credit arrangements and estimated total contractual interest obligations of $24,161,000.
Contractual interest obligations are estimated based on the assumption that the balance of
$201,000,000 at March 31, 2006 is constant until maturity at interest rates in effect at March 31,
2006.
We have $1,194,830,000 of senior unsecured notes principal outstanding with fixed annual
interest rates ranging from 5.875% to 8.0%, payable semi-annually. Total contractual interest
obligations on senior unsecured notes totaled $631,520,000 at March 31, 2006.
19
Additionally, we have mortgage loans totaling $131,946,000, collateralized by owned properties, with fixed annual
interest rates ranging from 5.3% to 8.5%, payable monthly. The carrying values of the properties
securing the mortgage loans totaled $207,151,000 at March 31, 2006. Total contractual interest
obligations on mortgage loans totaled $53,175,000 at March 31, 2006.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At March 31, 2006, total contractual interest obligations were estimated to be
$46,560,000.
At March 31, 2006, we had operating lease obligations of $14,034,000 relating to our office
space, one assisted living facility and seven skilled nursing facilities.
Purchase obligations are comprised of unfunded construction commitments and contingent
purchase obligations. At March 31, 2006, we had outstanding construction financings of $36,115,000
for leased properties and were committed to providing additional financing of approximately
$167,454,000 to complete construction. At March 31, 2006, we had contingent purchase obligations
totaling $42,448,000. 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.
Capital Structure
As of March 31, 2006, we had stockholders equity of $1,434,917,000 and a total outstanding
debt balance of $1,528,324,000, which represents a debt to total book capitalization ratio of 52%.
Our ratio of debt to market capitalization was 38% at March 31, 2006. For the three months ended
March 31, 2006, our interest coverage ratio was 3.10 to 1.00. For the three months ended March 31,
2006, our fixed charge coverage ratio was 2.54 to 1.00. Also, at March 31, 2006, we had
$25,758,000 of cash and cash equivalents and $339,000,000 of available borrowing capacity under our
unsecured lines of credit arrangements.
Our debt agreements contain various covenants, restrictions and events of default. Among
other things, these provisions require us to maintain certain financial ratios and minimum net
worth and impose certain limits on our ability to incur indebtedness, create liens and make
investments or acquisitions. As of March 31, 2006, we were in compliance with all of the covenants
under our debt agreements. None of our debt agreements contain provisions for acceleration which
could be triggered by our debt ratings. However, under our unsecured lines of credit arrangements,
the ratings on our senior unsecured notes are used to determine the fees and interest payable.
Our senior unsecured notes are rated Baa3 (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.
As of April 30, 2006, we had an effective shelf registration statement on file with the
Securities and Exchange Commission under which we may issue up to $321,344,619 of securities
including debt securities, common and preferred stock, depositary shares, warrants and units.
Also, as of April 30, 2006, we had an effective registration statement on file in connection with
our enhanced DRIP program under which we may issue up to 6,314,213 shares of common stock. As of
April 30, 2006, 2,486,942 shares of common stock remained available for issuance under this
registration statement. Depending upon market conditions, we anticipate issuing securities under
our registration statements to invest in additional properties and to repay borrowings under our
unsecured lines of credit arrangements.
Results of Operations
Net income available to common stockholders for the three months ended March 31, 2006 totaled
$19,645,000, or $0.34 per diluted share, as compared with $17,803,000, or $0.33 per diluted share,
for the same period in 2005. Net income available to common stockholders increased from the prior
year primarily due to an increase in rental income offset by increases in interest expense,
provision for depreciation and general and administrative expenses. These items are discussed in
further detail below.
FFO for the three months ended March 31, 2006 totaled $41,354,000, or $0.71 per diluted share,
as compared with $38,309,000, or $0.72 per diluted share, for the same period in 2005. FAD for the
three months ended March 31, 2006 totaled $49,264,000, or $0.84 per diluted share, as compared to
$35,454,000, or $0.66 per diluted share, for the same period in 2005. The increase in FFO is due
primarily to an increase in rental income offset by an increase in interest expense and general and
administrative expenses. The increase in FAD is primarily due to the items noted above for FFO and
the change in net straight-line rental income. Please refer to the discussion of
20
Non-GAAP Financial Measures below for further information regarding FFO and FAD and for
reconciliations of FFO and FAD to NICS.
FFO decreased on a per share basis primarily due to higher common shares outstanding. On a
fully diluted basis, average common shares increase 9.5% from 53,454,000 for the three months ended
March 31, 2005 to 58,535,000 for the same period in 2006. The increase from 2005 is primarily due
to the issuance of 3,000,000 shares of common stock in November 2005 and common stock issuances
pursuant to our DRIP subsequent to March 31, 2005.
EBITDA
for the three months ended March 31, 2006 totaled $75,685,000, as compared with
$64,322,000 for the same period in 2005. Our interest coverage ratio
was 3.10 times for the three
months ended March 31, 2006 as compared with 3.23 times for the same period in 2005. Our fixed
charge coverage ratio was 2.54 times for the three months ended
March 31, 2006 consistent with 2.54
times for the same period in 2005. The increase in EBITDA is primarily due to the increase in
rental income offset by an increase in general and administrative expenses. The decrease in our
interest coverage ratio is primarily due to the increase in interest expense. These items are
discussed in further detail below. Please refer to the discussion of Non-GAAP Financial Measures
below for further information regarding EBITDA and a reconciliation of EBITDA to net income.
Revenues were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Rental
income |
|
$ |
72,785 |
|
|
$ |
58,793 |
|
|
$ |
13,992 |
|
|
|
24 |
% |
Interest
income |
|
|
4,262 |
|
|
|
4,983 |
|
|
|
(721 |
) |
|
|
-14 |
% |
Transaction fees
and other
income |
|
|
366 |
|
|
|
1,422 |
|
|
|
(1,056 |
) |
|
|
-74 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
77,413 |
|
|
$ |
65,198 |
|
|
$ |
12,215 |
|
|
|
19 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in gross revenues is primarily attributable to increased rental income
resulting from the acquisitions of new properties from which we receive rent. See the discussion of
investing activities in Liquidity and Capital Resources above for further information. In
addition, our standard lease structure contains annual rental escalators that are contingent upon
changes in the Consumer Price Index and/or changes in the gross operating revenues of the tenants
properties. These escalators are not fixed, so no straight-line rent is recorded; however, rental
income is recorded based on the contractual cash rental payments due for the period. If gross
operating revenues at our facilities and/or the Consumer Price Index do not increase, a portion of
our revenues may not continue to increase. Sales of real property would offset revenue increases
and, to the extent that they exceed new acquisitions, could result in decreased revenues. Our
leases could renew above or below current rent rates, resulting in an increase or decrease in
rental income. As of March 31, 2006, we had no leases scheduled to expire before March 2009,
except for the assets held for sale referenced in Note F to our unaudited consolidated financial
statements.
Interest income decreased from 2005 primarily due to a decrease in the balance of outstanding
loans. Transaction fees and other income decreased primarily due to a $750,000 assignment consent
fee received in the first quarter of 2005 relating to a payoff which did not occur. There was no
such fee in the current year.
Expenses were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Interest
expense |
|
$ |
24,043 |
|
|
$ |
18,697 |
|
|
$ |
5,346 |
|
|
|
29 |
% |
Provision for
depreciation |
|
|
23,053 |
|
|
|
18,580 |
|
|
|
4,473 |
|
|
|
24 |
% |
General and
administrative |
|
|
6,201 |
|
|
|
4,017 |
|
|
|
2,184 |
|
|
|
54 |
% |
Loan
expense |
|
|
711 |
|
|
|
863 |
|
|
|
(152 |
) |
|
|
-18 |
% |
Provision for
loan
losses |
|
|
250 |
|
|
|
300 |
|
|
|
(50 |
) |
|
|
-17 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
54,258 |
|
|
$ |
42,457 |
|
|
$ |
11,801 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in total expenses is primarily attributable to increases in interest expense
and the provision for depreciation. The increase in interest expense is primarily due to higher
average borrowings offset by lower average borrowing costs.
21
The following is a summary of our interest expense (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Senior unsecured
notes |
|
$ |
19,574 |
|
|
$ |
15,572 |
|
|
$ |
4,002 |
|
|
|
26 |
% |
Secured
debt |
|
|
1,978 |
|
|
|
3,098 |
|
|
|
(1,120 |
) |
|
|
-36 |
% |
Unsecured lines of
credit |
|
|
2,873 |
|
|
|
1,650 |
|
|
|
1,223 |
|
|
|
74 |
% |
Capitalized
interest |
|
|
(202 |
) |
|
|
(265 |
) |
|
|
63 |
|
|
|
-24 |
% |
SWAP losses
(savings) |
|
|
15 |
|
|
|
(410 |
) |
|
|
425 |
|
|
|
n/a |
|
Discontinued
operations |
|
|
(195 |
) |
|
|
(948 |
) |
|
|
753 |
|
|
|
-79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
$ |
24,043 |
|
|
$ |
18,697 |
|
|
$ |
5,346 |
|
|
|
29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in interest expense on senior unsecured notes is due to higher average
borrowings offset by lower average interest rates. For the three months ended March 31, 2006, we
had $1,194,830,000 of senior unsecured notes principal outstanding with a weighted average interest
rate of 6.566% compared to $875,000,000 and 7.181% for the prior year.
The increase in interest expense on secured debt is due to the net effect and timing of
assumptions, extinguishments and principal amortizations. The following is a summary of our
secured debt activity (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
|
March 31, 2005 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
|
|
Amount |
|
|
Interest Rate |
|
|
Amount |
|
|
Interest Rate |
|
Beginning
balance |
|
$ |
107,540 |
|
|
|
7.328 |
% |
|
$ |
160,225 |
|
|
|
7.508 |
% |
Debt assumed |
|
|
25,049 |
|
|
|
6.315 |
% |
|
|
15,603 |
|
|
|
6.888 |
% |
Debt
extinguished |
|
|
|
|
|
|
|
|
|
|
(5,695 |
) |
|
|
6.367 |
% |
Principal
payments |
|
|
(643 |
) |
|
|
7.389 |
% |
|
|
(627 |
) |
|
|
7.694 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
|
$ |
131,946 |
|
|
|
7.135 |
% |
|
$ |
169,506 |
|
|
|
7.489 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly
averages |
|
$ |
113,482 |
|
|
|
7.272 |
% |
|
$ |
166,256 |
|
|
|
7.487 |
% |
The increase in interest expense on unsecured lines of credit arrangements is due
primarily to higher average outstanding borrowings and higher average interest rates. The
following is a summary of our unsecured lines of credit arrangements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
2006 |
|
2005 |
Balance outstanding at March 31 |
|
$ |
201,000 |
|
|
$ |
163,500 |
|
Maximum amount outstanding at any month end |
|
$ |
201,000 |
|
|
$ |
163,500 |
|
Average amount outstanding (total of daily
principal balances
divided by days in
period) |
|
$ |
184,367 |
|
|
$ |
140,544 |
|
Weighted average interest rate (actual interest
expense divided by
average borrowings
outstanding) |
|
|
6.23 |
% |
|
|
4.70 |
% |
We capitalize certain interest costs associated with funds used to finance the
construction of properties owned directly by us. The amount capitalized is based upon the
borrowings outstanding during the construction period using the rate of interest that approximates
our cost of financing. Our interest expense is reduced by the amount capitalized. Capitalized
interest for the three months ended March 31, 2006 totaled $202,000 as compared with $265,000 for
the same period in 2005.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. For the three months ended March 31, 2006, we incurred $15,000 of losses related to our
Swaps that was recorded as an addition to interest expense. For the three months ended March 31,
2005, we generated $410,000 of savings related to our Swaps that was recorded as a reduction of
interest expense.
22
The provision for depreciation increased primarily as a result of additional investments in
properties owned directly by us. See the discussion of investing activities in Liquidity and
Capital Resources above for additional details. To the extent that we acquire or dispose of
additional properties in the future, our provision for depreciation will change accordingly.
General and administrative expenses as a percentage of revenues (including revenues from
discontinued operations) for the three months ended March 31,
2006, were 7.94% as compared with
5.87% for the same period in 2005. Approximately $1,690,000 of the increase from 2005 to 2006
relates directly to the adoption of Statement of Financial Accounting Standards No. 123(R),
Accounting for Stock-Based Compensation, on January 1, 2006. Effective with the adoption of
Statement No. 123(R), we began recognizing stock-based compensation cost to the date the awards
become fully vested or to the retirement eligible date, if sooner. We expect that the adoption of
Statement No. 123(R) will increase compensation cost by approximately $1,287,000 for 2006 as a
result of amortizing share based awards to the retirement eligible date. See Note K to our
unaudited consolidated financial statements for additional information. The remaining increase
from 2005 is primarily related to costs associated with our initiatives to attract and retain
appropriate personnel to achieve our business objectives.
Loan expense represents the amortization of deferred loan costs incurred in connection with
the issuance and amendments of debt. The change in loan expense is primarily due to the net effect
of issuances and redemptions of senior unsecured notes subsequent to March 31, 2005. In April
2005, we issued $250,000,000 of 5.875% senior unsecured notes due May 2015. In May 2005, we
redeemed all of our outstanding $50,000,000 8.17% senior unsecured notes due March 2006, we
completed a public tender offer for $57,670,000 of our outstanding $100,000,000 7.625% senior
unsecured notes due March 2008, and we redeemed $122,500,000 of our outstanding $175,000,000 7.5%
senior unsecured notes due August 2007. In November 2005, we issued $300,000,000 of 6.2% senior
unsecured notes due June 2016.
The provision for loan losses is consistent with the prior year. The provision for loan losses
is related to our critical accounting estimate for the allowance for loan losses and is discussed
below in Critical Accounting Policies.
Other items were comprised of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Change |
|
|
|
Mar. 31, 2006 |
|
|
Mar. 31, 2005 |
|
|
$ |
|
|
% |
|
Gain (loss) on sales
of
properties |
|
$ |
1,553 |
|
|
$ |
(110 |
) |
|
$ |
1,663 |
|
|
|
n/a |
|
Discontinued
operations,
net |
|
|
270 |
|
|
|
608 |
|
|
|
(338 |
) |
|
|
-56 |
% |
Preferred
dividends |
|
|
(5,333 |
) |
|
|
(5,436 |
) |
|
|
103 |
|
|
|
-2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$ |
(3,510 |
) |
|
$ |
(4,938 |
) |
|
$ |
1,428 |
|
|
|
-29 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Three assisted living facilities and one skilled nursing facility were held for sale as
of March 31, 2006. We did not recognize an impairment loss on these assets as the fair value less
estimated costs to sell exceeded our carrying values. During the three months ended March 31,
2006, we sold one assisted living facility, one skilled nursing facility and one parcel of land
with carrying values of $15,393,000 for a net gain of $1,553,000. These properties generated
$270,000 of income after deducting depreciation and interest expense from rental revenue for the
three months ended March 31, 2006. All properties sold subsequent to January 1, 2005 and held for
sale at March 31, 2006 generated $608,000 of income after deducting depreciation and interest
expense from rental revenue for the three months ended March 31, 2005. Please refer to Note F of
our unaudited consolidated financial statements for further discussion.
The decrease in preferred stock dividends is due to a decrease in average outstanding
preferred shares as a result of conversions of Series E Cumulative Convertible and Redeemable
Preferred Stock into common stock subsequent to March 31, 2005.
23
Non-GAAP Financial Measures
We believe that net income, as defined by U.S. GAAP, is the most appropriate earnings
measurement. However, we consider FFO and FAD to be useful supplemental measures of our operating
performance. Historical cost accounting for real estate assets in accordance with U.S. GAAP
implicitly assumes that the value of real estate assets diminishes predictably over time as
evidenced by the provision for depreciation. However, since real estate values have historically
risen or fallen with market conditions, many industry investors and analysts have considered
presentations of operating results for real estate companies that use historical cost accounting to
be insufficient. In response, the National Association of Real Estate Investment Trusts (NAREIT)
created FFO as a supplemental measure of operating performance for REITs that excludes historical
cost depreciation from net income. FFO, as defined by NAREIT, means net income, computed in
accordance with U.S. GAAP, excluding gains (or losses) from sales of real estate, plus depreciation
and amortization, and after adjustments for unconsolidated partnerships and joint ventures. FAD
represents FFO excluding the non-cash straight-line rental adjustments.
In April 2002, the Financial Accounting Standards Board issued Statement No. 145 that requires
gains and losses on extinguishment of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under Statement No. 4. We
adopted the standard effective January 1, 2003 and have properly reflected the losses on
extinguishment of debt of $18,448,000, or $0.34 per diluted share, and $3,036,000, or $0.05 per
diluted share, for the three months ended June 30, 2005 and December 31, 2005, respectively. These
charges have not been added back for the calculations of FFO, FAD or EBITDA.
EBITDA
stands for earnings before interest, taxes, depreciation and amortization. We believe
that EBITDA, along with net income and cash flow provided from operating activities, is an
important supplemental measure because it provides additional information to assess and evaluate
the performance of our operations. Additionally, restrictive covenants in our long-term debt
arrangements contain financial ratios based on EBITDA. We primarily utilize EBITDA to measure our
interest coverage ratio, which represents EBITDA divided by total interest, and our fixed charge
coverage ratio, which represents EBITDA divided by fixed charges. Fixed charges include total
interest and preferred dividends.
FFO, FAD and EBITDA are financial measures that are widely used by investors, equity and debt
analysts and rating agencies in the valuation, comparison, rating and investment recommendations of
companies. Management uses these financial measures to facilitate internal and external
comparisons to our historical operating results and in making operating decisions. Additionally,
FFO and FAD are utilized by the Board of Directors to evaluate management. FFO, FAD and EBITDA do
not represent net income or cash flow provided from operating activities as determined in
accordance with U.S. GAAP and should not be considered as alternative measures of profitability or
liquidity. Finally, FFO, FAD and EBITDA, as defined by us, may not be comparable to similarly
entitled items reported by other real estate investment trusts or other companies.
24
The table below reflects the reconciliation of FFO to net income available to common
stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The
provision for depreciation includes provision for depreciation from discontinued operations.
Amounts are in thousands except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
|
|
FFO Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common
stockholders |
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,067 |
|
|
|
21,355 |
|
|
|
23,262 |
|
Loss (gain) on sales of
properties |
|
|
110 |
|
|
|
24 |
|
|
|
|
|
|
|
(3,361 |
) |
|
|
(1,553 |
) |
|
|
|
Funds from operations |
|
$ |
38,309 |
|
|
$ |
19,427 |
|
|
$ |
41,975 |
|
|
$ |
44,581 |
|
|
$ |
41,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,963 |
|
|
|
53,429 |
|
|
|
54,038 |
|
|
|
55,992 |
|
|
|
58,178 |
|
Diluted for net
income (loss)
purposes |
|
|
53,454 |
|
|
|
53,429 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
Diluted for FFO
purposes |
|
|
53,454 |
|
|
|
53,765 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
Diluted |
|
|
0.33 |
|
|
|
(0.03 |
) |
|
|
0.37 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.72 |
|
|
$ |
0.36 |
|
|
$ |
0.78 |
|
|
$ |
0.80 |
|
|
$ |
0.71 |
|
Diluted |
|
|
0.72 |
|
|
|
0.36 |
|
|
|
0.77 |
|
|
|
0.79 |
|
|
|
0.71 |
|
The table below reflects the reconciliation of FAD to net income available to common
stockholders, the most directly comparable U.S. GAAP measure, for the periods presented. The
provision for depreciation includes provision for depreciation from discontinued operations.
Amounts are in thousands except for per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
|
|
FAD Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common
stockholders |
|
$ |
17,803 |
|
|
$ |
(1,606 |
) |
|
$ |
19,908 |
|
|
$ |
26,587 |
|
|
$ |
19,645 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,067 |
|
|
|
21,355 |
|
|
|
23,262 |
|
Loss (gain) on sales of properties |
|
|
110 |
|
|
|
24 |
|
|
|
|
|
|
|
(3,361 |
) |
|
|
(1,553 |
) |
Gross
straight-line rental income |
|
|
(3,707 |
) |
|
|
(3,536 |
) |
|
|
(2,950 |
) |
|
|
(2,949 |
) |
|
|
(2,400 |
) |
Prepaid/straight-line
rent receipts |
|
|
852 |
|
|
|
2,360 |
|
|
|
2,832 |
|
|
|
7,825 |
|
|
|
10,310 |
|
|
|
|
Funds available for distribution |
|
$ |
35,454 |
|
|
$ |
18,251 |
|
|
$ |
41,857 |
|
|
$ |
49,457 |
|
|
$ |
49,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
52,963 |
|
|
|
53,429 |
|
|
|
54,038 |
|
|
|
55,992 |
|
|
|
58,178 |
|
Diluted for net
income (loss)
purposes |
|
|
53,454 |
|
|
|
53,429 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
Diluted for FAD
purposes |
|
|
53,454 |
|
|
|
53,765 |
|
|
|
54,359 |
|
|
|
56,368 |
|
|
|
58,535 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to
common stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.34 |
|
|
$ |
(0.03 |
) |
|
$ |
0.37 |
|
|
$ |
0.47 |
|
|
$ |
0.34 |
|
Diluted |
|
|
0.33 |
|
|
|
(0.03 |
) |
|
|
0.37 |
|
|
|
0.47 |
|
|
|
0.34 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds available for distribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.67 |
|
|
$ |
0.34 |
|
|
$ |
0.77 |
|
|
$ |
0.88 |
|
|
$ |
0.85 |
|
Diluted |
|
|
0.66 |
|
|
|
0.34 |
|
|
|
0.77 |
|
|
|
0.88 |
|
|
|
0.84 |
|
25
The table below reflects the reconciliation of EBITDA to net income, the most directly
comparable U.S. GAAP measure, for the periods presented. The provision for depreciation and
interest expense includes provision for depreciation and interest expense from discontinued
operations. Amortization represents the amount reflected on our consolidated
statement of cash flows for non-cash expenses accounted for in
accordance with U.S. GAAP and includes amortization of stock-based
compensation, deferred loan expenses and other items. Dollars are in thousands.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
|
March 31 |
|
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
2006 |
|
|
|
EBITDA Reconciliation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,239 |
|
|
$ |
3,830 |
|
|
$ |
25,297 |
|
|
$ |
31,921 |
|
|
$ |
24,978 |
|
Interest expense |
|
|
19,645 |
|
|
|
19,986 |
|
|
|
21,624 |
|
|
|
21,369 |
|
|
|
24,238 |
|
Provision for depreciation |
|
|
20,396 |
|
|
|
21,009 |
|
|
|
22,067 |
|
|
|
21,355 |
|
|
|
23,262 |
|
Amortization |
|
|
1,042 |
|
|
|
2,314 |
|
|
|
911 |
|
|
|
708 |
|
|
|
3,207 |
|
|
|
|
EBITDA |
|
$ |
64,322 |
|
|
$ |
47,139 |
|
|
$ |
69,899 |
|
|
$ |
75,353 |
|
|
$ |
75,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
19,645 |
|
|
$ |
19,986 |
|
|
$ |
21,624 |
|
|
$ |
21,369 |
|
|
$ |
24,238 |
|
Capitalized interest |
|
|
265 |
|
|
|
348 |
|
|
|
12 |
|
|
|
39 |
|
|
|
202 |
|
|
|
|
Total
interest |
|
|
19,910 |
|
|
|
20,334 |
|
|
|
21,636 |
|
|
|
21,408 |
|
|
|
24,440 |
|
EBITDA |
|
$ |
64,322 |
|
|
$ |
47,139 |
|
|
$ |
69,899 |
|
|
$ |
75,353 |
|
|
$ |
75,685 |
|
|
|
|
Interest coverage
ratio |
|
|
3.23 |
x |
|
|
2.32 |
x |
|
|
3.23 |
x |
|
|
3.52 |
x |
|
|
3.10 |
x |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Charge Coverage Ratio: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest |
|
$ |
19,910 |
|
|
$ |
20,334 |
|
|
$ |
21,636 |
|
|
$ |
21,408 |
|
|
$ |
24,440 |
|
Preferred dividends |
|
|
5,436 |
|
|
|
5,436 |
|
|
|
5,389 |
|
|
|
5,334 |
|
|
|
5,333 |
|
|
|
|
Total fixed
charges |
|
|
25,346 |
|
|
|
25,770 |
|
|
|
27,025 |
|
|
|
26,742 |
|
|
|
29,773 |
|
EBITDA |
|
$ |
64,322 |
|
|
$ |
47,139 |
|
|
$ |
69,899 |
|
|
$ |
75,353 |
|
|
$ |
75,685 |
|
|
|
|
Fixed charge
coverage
ratio |
|
|
2.54 |
x |
|
|
1.83 |
x |
|
|
2.59 |
x |
|
|
2.82 |
x |
|
|
2.54 |
x |
26
Critical Accounting Policies
Our consolidated financial statements are prepared in accordance with U.S. GAAP, which
requires us to make estimates and assumptions. Management considers an accounting estimate or
assumption critical if:
|
|
|
the nature of the estimates or assumptions is material due to the levels of subjectivity
and judgment necessary to account for highly uncertain matters or the susceptibility of
such matters to change; and |
|
|
|
|
the impact of the estimates and assumptions on financial condition or operating
performance is material. |
Management has discussed the development and selection of its critical accounting policies
with the Audit Committee of the Board of Directors and the Audit Committee has reviewed the
disclosure presented below relating to them. Management believes the current assumptions and other
considerations used to estimate amounts reflected in our consolidated financial statements are
appropriate and are not reasonably likely to change in the future. However, since these estimates
require assumptions to be made that were uncertain at the time the estimate was made, they bear the
risk of change. If actual experience differs from the assumptions and other considerations used in
estimating amounts reflected in our consolidated financial statements, the resulting changes could
have a material adverse effect on our consolidated results of operations, liquidity and/or
financial condition. Please refer to our Annual Report on Form 10-K for the year ended December
31, 2005 for further information on significant accounting policies that impact us. There have
been no material changes to these policies in 2006.
We
adopted Statement of Financial Accounting Standards No. 123(R) on
January 1, 2006. See Note K to our
unaudited consolidated financial statements for additional information.
The following table presents information about our critical accounting policies, as well as
the material assumptions used to develop each estimate:
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Allowance
for Loan Losses |
|
|
|
|
|
We maintain an allowance for loan losses in accordance with
Statement of Financial Accounting Standards No. 114, Accounting
by Creditors for Impairment of a Loan, as amended, and SEC Staff
Accounting Bulletin No. 102, Selected Loan Loss Allowance
Methodology and Documentation Issues. The allowance for loan
losses is maintained at a level believed adequate to absorb
potential losses in our loans receivable. The determination of
the allowance is based on a quarterly evaluation of all
outstanding loans. If this evaluation indicates that there is a
greater risk of loan charge-offs, additional allowances or
placement on non-accrual status may be required. A loan is
impaired when, based on current information and events, it is
probable that we will be unable to collect all amounts due as
scheduled according to the contractual terms of the original loan
agreement. Consistent with this definition, all loans on
non-accrual are deemed impaired. To the extent circumstances
improve and the risk of collectibility is diminished, we will
return these loans to full accrual status.
|
|
The determination of the allowance is based on a quarterly
evaluation of all outstanding loans, including general economic
conditions and estimated collectibility of loan payments and
principal. We evaluate the collectibility of our loans
receivable based on a combination of factors, including, but
not limited to, delinquency status, historical loan
charge-offs, financial strength of the borrower and guarantors
and value of the underlying property.
For the three months ended March 31, 2006, we recorded $250,000
as provision for loan losses, resulting in an allowance for
loan losses of $6,711,000 relating to loans with outstanding
balances of $32,285,000 at March 31, 2006. Also at March 31,
2006, we had loans with outstanding balances of $15,659,000 on
non-accrual status. |
27
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Depreciation and Useful Lives |
|
|
|
|
|
Substantially all of the properties owned by us are leased under
operating leases and are recorded at cost. The cost of our real
property is allocated to land, buildings, improvements and
intangibles in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations. The allocation of the
acquisition costs of properties is based on appraisals
commissioned from independent real estate appraisal firms.
|
|
We compute depreciation 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.
For the three months ended March 31, 2006, we recorded
$18,914,000 and $4,348,000 as provision for depreciation
relating to buildings and improvements, respectively. The
average useful life of our buildings and improvements was 33.1
years and 10.3 years, respectively, for the three months ended
March 31, 2006. |
Impairment of Long-Lived Assets |
|
|
|
|
|
We review our long-lived assets for potential impairment in
accordance with Statement of Financial Accounting Standards No.
144, Accounting for the Impairment and Disposal of Long-Lived
Assets. An impairment charge must be recognized when the carrying
value of a long-lived asset is not recoverable. The carrying
value is not recoverable if it exceeds the sum of the
undiscounted cash flows expected to result from the use and
eventual disposition of the asset. If it is determined that a
permanent impairment of a long-lived asset has occurred, the
carrying value of the asset is reduced to its fair value and an
impairment charge is recognized for the difference between the
carrying value and the fair value.
|
|
The net book value of long-lived assets is reviewed quarterly
on a property by property basis to determine if there are
indicators of impairment. These indicators may include
anticipated operating losses at the property level, the
tenants inability to make rent payments, a decision to dispose
of an asset before the end of its estimated useful life and
changes in the market that may permanently reduce the value of
the property. If indicators of impairment exist, then the
undiscounted future cash flows from the most likely use of the
property are compared to the current net book value. This
analysis requires us to determine if indicators of impairment
exist and to estimate the most likely stream of cash flows to
be generated from the property during the period the property
is expected to be held.
We did not record any impairment charges for the three months
ended March 31, 2006. |
Fair Value of Derivative Instruments |
|
|
|
|
|
The valuation of derivative instruments is accounted for in
accordance with Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities
(SFAS133), as amended by Statement of Financial Accounting
Standards No. 138, Accounting for Certain Derivative Instruments
and Certain Hedging Activities. SFAS133, as amended, requires
companies to record derivatives at fair market value on the
balance sheet as assets or liabilities.
|
|
The valuation of derivative instruments requires us to make
estimates and judgments that affect the fair value of the
instruments. Fair values for our derivatives are estimated by
a third party consultant, which utilizes pricing models that
consider forward yield curves and discount rates. Such amounts
and the recognition of such amounts are subject to significant
estimates which may change in the future. At March 31, 2006,
we participated in two interest rate swap agreements related to
our long-term debt. At March 31, 2006, the swaps were reported
at their fair value as a $651,000 other liability. For the
three months ended March 31, 2006, we incurred $15,000 of
losses related to our swaps that was recorded as an addition to
interest expense. |
28
|
|
|
Nature of Critical |
|
Assumptions/Approach |
Accounting Estimate |
|
Used |
Revenue Recognition |
|
|
|
|
|
Revenue is recorded in accordance with Statement of Financial
Accounting Standards No. 13, Accounting for Leases, and SEC Staff
Accounting Bulletin No. 101, Revenue Recognition in Financial
Statements, as amended (SAB101). SAB101 requires that revenue
be recognized after four basic criteria are met. These four
criteria include persuasive evidence of an arrangement, the
rendering of service, fixed and determinable income and
reasonably assured collectibility. If the collectibility of
revenue is determined incorrectly, the amount and timing of our
reported revenue could be significantly affected. Interest
income on loans is recognized as earned based upon the principal
amount outstanding subject to an evaluation of collectibility
risk. Our standard lease structure contains annual rental
escalators that are contingent upon changes in the Consumer Price
Index and/or changes in the gross operating revenues of the
property. 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.
|
|
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, 2006, we recognized
$4,262,000 of interest income and $73,459,000 of rental income,
including discontinued operations. Cash receipts on leases
with deferred revenue provisions were $10,310,000 as compared
to gross straight-line rental income recognized of $2,400,000
for the three months ended March 31, 2006. At March 31, 2006,
our straight-line receivable balance was $56,440,000. Also at
March 31, 2006, we had loans with outstanding balances of
$15,659,000 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 our portfolio; the performance of our
operators and properties; our ability to enter into agreements with new viable tenants for
properties that we take back from financially troubled tenants, if any; our ability to make
distributions; our policies and plans regarding investments, financings and other matters; our tax
status as a real estate investment trust; our ability to appropriately balance the use of debt and
equity; our ability to access capital markets or other sources of funds; and our ability to meet
our earnings guidance. When we use words such as may, will, intend, should, believe,
expect, anticipate, project, estimate or similar expressions, we are making forward-looking
statements. Forward-looking statements are not guarantees of future performance and involve risks
and uncertainties. Our expected results may not be achieved, and actual results may differ
materially from expectations. This may be a result of various factors, including, but not limited
to: the status of the economy; the status of capital markets, including prevailing interest rates;
serious issues facing the health care industry, including compliance with and changes to
regulations and payment policies and operators difficulty in obtaining and maintaining adequate
liability and other insurance; changes in financing terms available to us; competition within the
health care and senior housing industries; changes in federal, state and local legislation;
negative developments in the operating results or financial condition of operators, including, but
not limited to, their ability to pay rent and repay loans; our ability to transition or sell
underperforming facilities with a profitable result; inaccuracies in any of our assumptions;
operator bankruptcies; government regulations affecting Medicare and Medicaid reimbursement rates;
liability claims and insurance costs for our operators; unanticipated difficulties and/or
expenditures relating to future acquisitions; environmental laws affecting our properties; delays
in reinvestment of sales proceeds; changes in rules or practices governing our financial reporting;
and structure related factors, including REIT qualification, anti-takeover provisions and key
management personnel. Other important factors are identified in our Annual Report on Form 10-K for
the year ended December 31, 2005, including factors identified under the headings Business, Risk
Factors and Managements Discussion and Analysis of Financial Condition and Results of
Operations. Finally, we assume 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.
29
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 lines of credit arrangements 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 lines of credit arrangements.
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. A 1%
increase in interest rates would result in a decrease in fair value of our senior unsecured notes
by approximately $35,175,000 at March 31, 2006 ($26,667,000 at March 31, 2005). 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.
On May 6, 2004, we entered into two interest rate swap agreements (the Swaps) for a total
notional amount of $100,000,000 to hedge changes in fair value attributable to changes in the LIBOR
swap rate of $100,000,000 of fixed rate debt with a maturity date of November 15, 2013. The Swaps
are treated as fair-value hedges for accounting purposes and we utilize the short-cut method in
accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended. The Swaps are with highly rated counterparties in
which we receive a fixed rate of 6.0% and pay a variable rate based on six-month LIBOR plus a
spread. At March 31, 2006, the Swaps were reported at their fair value as a $651,000 other
liability ($1,890,000 other asset at March 31, 2005). A 1% increase in interest rates would result
in a decrease in fair value of our Swaps by approximately $6,328,000 at March 31, 2006 ($7,226,000
at March 31, 2005). Assuming no changes in the notional amount of $100,000,000 of our Swaps, a 1%
increase in interest rates would result in increased annual interest expense of $1,000,000.
Our variable rate debt, including our unsecured lines of credit arrangements, is reflected at
fair value. At March 31, 2006, we had $201,000,000 outstanding related to our variable rate debt
and assuming no changes in outstanding balances, a 1% increase in interest rates would result in
increased annual interest expense of $2,010,000. At March 31, 2005, we had $163,500,000 outstanding
related to our variable rate debt and assuming no changes in outstanding balances, a 1% increase in
interest rates would have resulted in increased annual interest expense of $1,635,000.
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.
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 change in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the
period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
30
PART II. OTHER INFORMATION
Item 1A. 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, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
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Total Number |
|
Maximum Number |
|
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|
|
|
|
|
|
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of Shares Purchased |
|
of Shares that May |
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|
Total Number |
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|
|
as Part of Publicly |
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Yet Be Purchased |
|
|
of Shares |
|
Average Price |
|
Announced |
|
Under the Plans or |
Period |
|
Purchased (1) |
|
Paid Per Share |
|
Plans or Programs (2) |
|
Programs |
January 1, 2006 through
January 31, 2006 |
|
|
18,301 |
|
|
$ |
36.23 |
|
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|
|
February 1, 2006 through
February 28, 2006 |
|
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March 1, 2006 through
March 31, 2006 |
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Totals |
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|
18,301 |
|
|
$ |
36.23 |
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(1) |
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During the three months ended March 31, 2006, the only securities purchased by the
Company were shares of common stock held by employees who tendered owned shares to
satisfy the tax withholding on the lapse of certain restrictions on restricted stock. |
|
(2) |
|
No shares were purchased as part of publicly announced plans or programs. |
Item 6. Exhibits
|
10.1 |
|
Amended and Restated Employment Agreement, effective March 17,
2006, by and between Health Care REIT, Inc. and Scott A. Estes. |
|
|
12 |
|
Statement Regarding Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Combined Fixed
Charges and Preferred Stock Dividends. |
|
|
31.1 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. |
|
|
31.2 |
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. |
|
|
32.1 |
|
Certification pursuant to 18 U.S.C. Section 1350 by Chief Executive Officer. |
|
|
32.2 |
|
Certification pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
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Date: May 10, 2006
|
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By:
|
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/s/ George L. Chapman |
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George L. Chapman, |
|
|
Chairman and Chief Executive Officer |
|
|
(Principal Executive Officer) |
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Date: May 10, 2006
|
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By:
|
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/s/ Scott A. Estes |
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Scott A. Estes, |
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Senior Vice President and Chief Financial Officer |
|
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(Principal Financial Officer) |
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Date: May 10, 2006
|
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By:
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/s/ Paul D. Nungester, Jr. |
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Paul D. Nungester, Jr., |
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Vice President and Controller |
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(Principal Accounting Officer) |
31