ITEM 1. BUSINESS
Health Care Property Investors, Inc. (HCPI), a Maryland corporation, was organized in March 1985 to qualify as a real estate investment trust (REIT). We invest in healthcare related real estate located throughout the United States, including long-term care facilities, congregate care and assisted living facilities, acute care and rehabilitation hospitals, medical office buildings and physician group practice clinics. We commenced business nearly 15 years ago, making us the second oldest REIT specializing in healthcare real estate.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and into HCPI in a stock-for-stock transaction, approved by the stockholders of both companies, with HCPI being the surviving corporation. AHE was a real estate investment trust specializing in healthcare facilities with a portfolio of 72 healthcare properties in 22 states. Under the terms of the merger agreement, each share of AHE common stock was converted into the right to receive 0.78 share of HCPI's common stock and AHE's 8.60% series B cumulative redeemable preferred stock was converted into shares of HCPI 8.60% series C cumulative redeemable preferred stock. The merger resulted in the issuance of 19,430,115 shares of HCPI's common stock and 4,000,000 depositary shares of HCPI's series C cumulative redeemable preferred stock. Additionally, we assumed AHE's debt comprised of $220 million of senior notes and $56 million of mortgage debt and paid $71 million in cash to replace their revolving line of credit upon consummation of the merger. The transaction was treated as a purchase for financial accounting purposes and, accordingly, the operating results of AHE have been included in our consolidated financial statements effective as of November 4, 1999. References to our annualized financial information give effect to the acquisition of AHE.
As of December 31, 1999, our gross investment in our properties, including partnership interests and mortgage loans, was approximately $2.6 billion. Our portfolio of 428 properties consisted of:
o 176 long-term care facilities
o 93 congregate care and assisted living facilities
o 82 medical office buildings
o 46 physician group practice clinics
o 22 acute care hospitals
o Nine rehabilitation hospitals
The average age of our properties is 16 years. As of December 31, 1999, approximately 57% of our revenue was derived from properties operated by publicly traded healthcare providers.
Since 1986, the debt rating agencies have rated our debt investment grade. Currently Moody's Investors Services, Standard & Poor's and Duff & Phelps rate our senior debt at Baa2/BBB+/BBB+, respectively. We believe that we have enjoyed an excellent track record in attracting and retaining key employees. Our five executive officers have worked with us on average for 14 years. Our annualized return to stockholders, assuming reinvestment of dividends and before stockholders' income taxes, is approximately 15% over the period from our initial public offering in May 1985 through December 31, 1999.
References herein to "HCPI", "we", "us" and "our" include Health Care Property Investors, Inc. and our wholly-owned subsidiaries and consolidated joint ventures and partnerships, unless the context otherwise requires.
OUR PROPERTIES
As of December 31, 1999, we had an ownership interest in 401 properties located in 42 states. We leased 306 of our owned properties pursuant to long-term triple net leases to 80 healthcare providers. Under a triple net lease, in addition to the rent obligation, the lessee is responsible for all operating expenses of the property such as utilities, property taxes, insurance and repairs and maintenance. The lessees under triple net leases include the following companies or their affiliates:
o Tenet Healthcare Corporation ("Tenet")
o HealthSouth Corporation ("HealthSouth")
o Columbia/HCA Healthcare Corp. ("Columbia")
o Emeritus Corporation ("Emeritus")
o Vencor, Inc. ("Vencor")
o Beverly Enterprises, Inc. ("Beverly")
o Centennial Healthcare Corp. ("Centennial")
The remaining 95 owned and managed properties are medical office buildings and clinics with triple net, gross or modified gross leases with multiple tenants. Under gross or modified gross leases, we may be responsible for property taxes, repairs and maintenance and/or insurance on those properties.
We also hold mortgage loans on 27 properties that are owned and operated by 14 health care providers including Beverly, Columbia and MedCath, Incorporated. With the exception of Tenet which accounts for 18% of our annualized revenue, no single lessee or operator accounts for more than 5.4% of our revenue for the year ended December 31, 1999.
Of the 428 healthcare facilities in which we had an investment as of December 31, 1999, we own 329 facilities outright, including:
o 127 long-term care facilities
o 85 congregate care and assisted living centers
o 52 medical office buildings
o 46 physician group practice clinics
o 16 acute care hospitals
o Three rehabilitation hospitals
We have provided mortgage loans in the amount of $179,404,000 on 27 properties, including 16 long-term care facilities, four congregate care and assisted living centers, four acute care hospitals and three medical office buildings. At December 31, 1999, the remaining balance on these loans totaled $161,648,000.
At December 31, 1999, we also had varying percentage interests in several limited liability companies and partnerships that together own 71 facilities, as further discussed below under "Investments in Consolidated and Non-Consolidated Joint Ventures."
The following is a summary of our properties grouped by type of facility and equity interest as of December 31, 1999:
(1) Congregate care and assisted living centers are apartment like facilities and are therefore stated in units (studio or one or two bedroom apartments) in order to indicate facility size; all other facilities are stated in beds, except the medical office buildings and the physician group practice clinics for which square footage is provided in footnotes 4 and 5.
(2) Includes partnership and limited liability company investments, and incorporates all partners' and members' assets and construction commitments.
(3) The medical office buildings encompass approximately 4,659,000 square feet.
(4) The physician group practice clinics encompass approximately 1,215,000 square feet.
(5) Represents our investment, net of partners' and members' interests.
The following paragraphs describe each type of property.
Long-Term Care Facilities. We have invested in 176 long-term care facilities. Various healthcare providers operate these facilities. Long-term care facilities offer restorative, rehabilitative and custodial nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Many long-term care facilities had experienced significant growth in ancillary revenues and demand for subacute care services over the past ten years until the Prospective Payment System was implemented just over one year ago. Ancillary revenues and revenue from subacute care services are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory and IV therapy, wound care, oncology treatment, brain injury care and orthopedic therapy as well as sales of pharmaceutical products and other services. Certain long-term care facilities provide some of the foregoing services on an out-patient basis. Long-term care
facilities are designed to supplement hospital care and many have transfer agreements with one or more acute care hospitals. These facilities depend to some degree upon referrals from practicing physicians and hospitals. Long-term care services are paid for either by private sources, or through the federal Medicare and state Medicaid programs.
Long-term care facilities generally provide patients with accommodations, complete medical and nursing care, and rehabilitation services including speech, physical and occupational therapy. As a part of the Omnibus Budget Reconciliation Act ("OBRA") of 1981, Congress established a waiver program under Medicaid to offer an alternative to institutional long-term care services. The provisions of OBRA and the subsequent OBRA Acts of 1987 and 1990 allow states, with federal approval, greater flexibility in program design as a means of developing cost-effective alternatives to delivering services traditionally provided in the long-term care setting. This is a contributing factor to the recent increase in the number of assisted living facilities, which may adversely affect some long-term care facilities as some individuals choose the residential environment and lower cost delivery system provided in the assisted living setting.
Acute Care Hospitals. We have an interest in 20 general acute care hospitals and two long-term acute care hospitals. Acute care hospitals offer a wide range of services such as fully-equipped operating and recovery rooms, obstetrics, radiology, intensive care, open heart surgery and coronary care, neurosurgery, neonatal intensive care, magnetic resonance imaging, nursing units, oncology, clinical laboratories, respiratory therapy, physical therapy, nuclear medicine, rehabilitation services and outpatient services.
Long-term acute care hospitals provide care for patients with complex medical conditions that require more intensive care, monitoring, or emergency back-up than that available in most skilled nursing-based subacute programs. Most long-term acute care hospital patients have severe chronic health problems and are medically unstable or at risk of medical instability. The most common cases treated in this setting include high acuity ventilator-dependent patients and patients with multiple system failures relating to cancer, spinal cord injuries or head injuries.
Services are paid for by private sources, third party payors (e.g., insurance and HMOs), or through the federal Medicare and state Medicaid programs. Medicare provides reimbursement incentives to traditional general acute care hospitals to minimize inpatient length of stay.
Rehabilitation Hospitals. We have investments in nine rehabilitation hospitals. These hospitals provide inpatient and outpatient care for patients who have sustained traumatic injuries or illnesses, such as spinal cord injuries, strokes, head injuries, orthopedic problems, work related disabilities and neurological diseases, as well as treatment for amputees and patients with severe arthritis. Rehabilitation programs encompass physical, occupational, speech and inhalation therapies, rehabilitative nursing and other specialties. Services are paid for by the patient or the patient's family, third party payors (e.g., insurance and HMOs), or through the federal Medicare program.
Congregate Care and Assisted Living Centers. We have investments in 93 congregate care and assisted living centers. Congregate care centers typically offer studio, one bedroom and two bedroom apartments on a month-to-month basis primarily to individuals who are over 75 years of age. Residents, who must be ambulatory, are provided meals and eat in a central dining area; they may also be assisted with some daily living activities. These centers offer programs and services that allow residents certain conveniences and make it possible for them to live independently; staff is also available when residents need assistance and for group activities.
Assisted living centers serve elderly persons who require more assistance with daily living activities than congregate care residents, but who do not require the constant supervision nursing homes provide. Services include personal supervision and assistance with eating, bathing, grooming and administering medication. Assisted living centers typically contain larger common areas for dining, group activities and relaxation to encourage social interaction. Residents typically rent studio and one and two bedroom units on a month-to-month basis.
Charges for room and board and other services in both congregate care and assisted living centers are generally paid from private sources.
Medical Office Buildings. We have investments in 82 medical office buildings. These buildings are generally located adjacent to, or a short distance from, acute care hospitals. Medical office buildings contain physicians' offices and examination rooms, and may also include pharmacies, hospital ancillary service space and day-surgery operating rooms. Medical office buildings require more extensive plumbing, electrical, heating and cooling capabilities than commercial office buildings for sinks, brighter lights and special equipment that physicians typically use. Of our owned medical office buildings, 21 are master leased on a triple net basis to lessees that then sublease office space to physicians or other medical practitioners, 58 are multi-tenant medical office buildings that are leased under triple net, gross or modified gross leases under which we are responsible for certain operating expenses and three are mortgaged properties. Third party property management companies manage the multi-tenant facilities on our behalf.
Physician Group Practice Clinics. We have investments in 46 physician group practice clinic facilities that are leased to 17 different tenants. These clinics generally provide a broad range of medical services through organized physician groups representing various medical specialties. Each clinic facility is generally leased to a single lessee under a triple net or modified gross lease.
The following table shows, with respect to each property type, the location by state, the number of beds/units, recent occupancy levels, patient revenue mix, annualized rents and interest, and information regarding remaining lease terms.
(1) Congregate care and assisted living centers are apartment-like facilities and are therefore stated in units (studio or one or two bedroom apartments) in order to indicate facility size. Physician group practice clinics and medical office buildings are measured in square feet and encompass approximately 1,215,000 and 4,659,000 square feet, respectively. All other facilities are measured by bed count.
(2) This information is derived from information provided by our lessees.
(3) All revenues, including Medicare revenues but excluding Medicaid revenues, are included in "Private Patient" revenues.
(4) Includes facilities under construction, except for average occupancy data.
(5) Physician group practice clinics and medical office building lessees have use of the leased facilities for their own use or for the use of sub-lessees. Average occupancies for medical office buildings are provided on multi-tenant facilities only
COMPETITION
We compete for real estate acquisitions and financings with healthcare providers, other healthcare related real estate investment trusts, real estate partnerships, real estate lenders, and other investors.
Our properties are subject to competition from the properties of other healthcare providers. Certain of these other operators have capital resources substantially in excess of some of the operators of our facilities. In addition, the extent to which the properties are utilized depends upon several factors, including the number of physicians using the healthcare facilities or referring patients there, competitive systems of healthcare delivery and the size and composition of the population in the surrounding area. Private, federal and state payment programs and the effect of other laws and regulations may also have a significant influence on the utilization of the properties. Virtually all of the properties operate in a competitive environment and patients and referral sources, including physicians, may change their preferences for a healthcare facility from time to time.
RELATIONSHIP WITH MAJOR OPERATORS
At December 31, 1999, we had investments in 428 properties located in 43 states, which are operated by 98 healthcare operators. In addition, over 650 tenants conduct business in the multi-tenant buildings. Listed below are our major operators, the number of facilities operated by our operators, and the annualized revenue and the percentage of annualized revenue derived from our operators.
Certain of the listed facilities have been subleased to other operators with the original lessee remaining liable on the leases. The revenue applicable to these sublessees is not included in the annualized revenue percentages above. The percentage of annualized revenue on these subleased facilities was 1.9% for the year ended December 31, 1999. As discussed in more detail below, we have recourse to Ventas, Inc. and Tenet for certain of the rent obligations under Vencor leases through the primary term of those leases.
All of the operators listed above are subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and accordingly file periodic financial statements on Form 10-K and Form 10-Q with the Securities and Exchange Commission. We obtained all of the financial and other information relating to these operators from their public reports.
The following table summarizes our major operators' assets, stockholders' equity, interim revenue and net income (or net loss) from continuing operations as of or for the nine months ended September 30, 1999. All of the following information is based upon such operators' public reports.
(Amounts in millions)
* The information described above for Tenet is for the six months ended November 30, 1999 or as of November 30, 1999, as applicable.
The following table summarizes our major operators' assets, stockholders' equity, annualized revenue and net income (or net loss) from continuing operations as of or for the year ended December 31, 1998.
(Amounts in millions)
* The information described above for Tenet is for the fiscal year ended May 31, 1999 or as of May 31, 1999, as applicable.
The current equity market capitalization for each of the operators listed above, based on the closing price of their common stock on March 23, 2000 as reported in the Wall Street Journal, and based on the number of outstanding shares of their common stock as reported in their most recent public filing available is as follows: Tenet, $6.7 billion; HealthSouth, $2.3 billion; Columbia, $13.1 billion; Emeritus, $45.6 million; Vencor, $9.9 million; Beverly, $326.7 million; and Centennial, $62.6 million.
Certain additional information about these operators is provided below:
Vencor
On May 1, 1998, Vencor completed a spin-off transaction. As a result, it became two publicly held entities -- Ventas, Inc., a real estate company, and Vencor, a healthcare company which at December 31, 1999 leased 36 of our properties of which 11 are subleased to other operators. On September 13, 1999, Vencor, Inc. filed for bankruptcy protection in part due to financial difficulties it experienced as a result of the implementation of the Prospective Payment System. We have recourse to Ventas, Inc. and Tenet Healthcare Corporation (see discussion under Tenet below) for most of the rents payable by Vencor under its leases. All rents due to us subsequent to the bankruptcy filing have been received.
Under its filing for bankruptcy protection, Vencor has the right to assume or reject its leases with us. If Vencor assumes a lease it must do so pursuant to the original contract terms, cure all pre-petition and post-petition defaults under the lease and provide adequate assurances of future performance. If Vencor rejects a lease, we have the right to collect rent through the rejection date and may lease the property to another operator. As of March 28, 2000, Vencor had made no proposals to reject any of their current leases with us. We have received $735,000 of $1,008,000 of pre-petition rents and consider the remaining balance to be fully collectible. However, we cannot assure you that as a result of Vencor's bankruptcy filing we would be able to recover all amounts due under our leases with Vencor, that we would be able to promptly recover the premises or lease the property to another lessee or that the rent we would receive from another lessee would equal amounts due under the Vencor leases. We have recourse to Tenet for rents under all but five of the Vencor leases, and on some leases we are receiving direct payment by sublessees of Vencor, which may reduce the risk to us of not being able to collect on those leases. However, some of Vencor's sublessees have also filed for bankruptcy protection and although we are current on lease payments, we cannot assure you that the bankruptcy filing of Vencor or certain of its sublessees would not have a material adverse effect on our Net Income, Funds From Operations or the market value of our common stock.
Based upon public reports, for the three months ended September 30, 1999, Vencor had revenue of approximately $682 million and a net loss of approximately $42 million. For the nine months ended September 30, 1999, Vencor had revenue of approximately $2.1 billion and a net loss of approximately $107 million. Based upon public reports, Ventas' revenue, income from operations and net income for the three months ended September 30, 1999 were approximately $59 million, $40 million and $13 million, respectively. As of September 30, 1999, Ventas had total assets of $1.1 billion and a stockholders' equity of $19 million.
Tenet
Tenet is one of the nation's largest healthcare services companies, providing a broad range of services through the ownership and management of healthcare facilities. Tenet has historically guaranteed Vencor's leases. During 1997 we reached an agreement with Tenet whereby Tenet agreed to forbear or waive some renewal and purchase options and related rights of first refusal on facilities leased to Vencor and we agreed to pay Tenet $5,000,000 in cash and to reduce Tenet's guarantees on the facilities leased to Vencor. As part of that same agreement, we only have recourse to Tenet for the rent payments on the Vencor leases until the end of their base term. Accordingly, we have recourse to Tenet on 31 Vencor leases, 20 of which expire on dates through December 31, 2000, and the remainder of which expire during 2001.
Columbia
According to published reports, Columbia has been the subject of various significant government investigations regarding its compliance with Medicare, Medicaid and other programs. The following is derived from public reports distributed by Columbia: "It is too early to predict the outcome or effect that the ongoing investigations, the initiation of additional investigations, if any, and the related media coverage will have on [Columbia's] financial condition or results of operations in future periods. Were [Columbia] to be found in violation of federal or state laws relating to Medicare, Medicaid or similar programs, [Columbia] could be subject to substantial monetary fines, civil and criminal penalties and exclusion from participation in the Medicare and Medicaid programs. Any such sanctions could have a material adverse effect on [Columbia's] financial position and results of operations." Columbia maintains debt ratings of Ba2 from Moody's and BBB from Standard & Poor's.
Other Troubled Long-Term Care Providers
A number of nursing home operators other than Vencor have also been adversely affected by the decrease in Medicare reimbursements following the adoption of the Prospective Payment System. As discussed in our Annual Report on Form 10-K for the year ended December 31, 1998, during the first quarter of 1999 certain of these operators were put on credit watch with negative implications. The financial condition of many long-term care providers continued to erode during the last year, in part due to the implementation of the Prospective Payment System, and six of our operators (in addition to Vencor discussed above) have filed for bankruptcy protection: Texas Health Enterprises, Inc. filed on August 3, 1999; Sun Healthcare Group filed on October 14, 1999; Lenox Healthcare, Inc. filed on November 3, 1999; Mariner Post-Acute Network, Inc. filed on January 18, 2000; Integrated Health Services, Inc. filed on February 2, 2000; and RainTree Healthcare Corporation filed on February 29, 2000. Additionally, Genesis Health Ventures has indicated that they will seek to restructure their debt. Giving effect to our merger with American Health Properties, these operators represented less than 4% of annualized revenue on a pro forma basis for the period ended December 31, 1999 and no one of these
operators represented more than 1% of annualized revenue for that same period. Several of these facility leases have been assumed already and indications of assumption have been made for a number of other facilities. Therefore, we believe the financial impact of the bankruptcies by these tenants will not be material.
LEASES AND LOANS
The initial base rental rates of the triple net leases we entered into during the three years ended December 31, 1999 have generally ranged from 9% to 13% per annum of the acquisition price of the related property. Initial interest rates on the loans we entered into during the three years ended December 31, 1999 have generally ranged from 9% to 12% per annum. Rental rates vary by lease, taking into consideration many factors, such as:
o Creditworthiness of the lessee
o Operating performance of the facility
o Interest rates at the beginning of the lease
o Location, type and physical condition of the facility
Certain leases provide for additional rents that are based upon a percentage of increased revenue over specific base period revenue of the leased properties. Others have rent increases based on inflation indices or other factors and some leases and loans have annual fixed rent or interest rate increases. (See Note 2 to the Consolidated Financial Statements in this Annual Report on Form 10-K.)
In addition to the minimum and additional rents, each lessee that has a triple net lease is responsible under the lease for all additional charges, including charges related to non-payment or late payment of rent, taxes and assessments, governmental charges with respect to the leased property and utility and other charges incurred with the operation of the leased property. Each triple net lessee is required, at its expense, to maintain its leased property in good order and repair. We are not required to repair, rebuild or maintain the properties leased under triple net leases.
Each lessee with a gross or modified gross lease is also responsible for minimum and additional rents, but may not be responsible for all operating expenses. Under gross or modified gross leases, we may be responsible for property taxes, repairs and maintenance and/or insurance on those properties.
The primary or fixed terms of the triple net and modified gross leases generally range from 10 to 15 years, and generally have one or more five-year (or longer) renewal options. The average remaining base lease-term on the triple net and modified gross leases is approximately ten years and the average remaining term on the loans is approximately 11 years. The primary term of the gross leases to multiple tenants in the medical office buildings range from 1 to 19 years, with an average of 4 years remaining on those leases. Obligations under the triple-net leases, in most cases, have corporate parent or shareholder guarantees. Irrevocable letters of credit from various financial institutions and lease deposits back 135 leases and loans on 15 facilities which cover from 1 to 17 months of lease or loan payments. We require the lessees and mortgagors to renew such letters of credit during the lease or loan term in amounts that may change based upon the passage of time, improved operating cash flows or improved credit ratings. We believe that the credit enhancements discussed above provide us with significant protection for our investment portfolio. As of March 28, 2000, other than approximately $2.5 million in delinquent rents and interest, of which approximately $1.2 million is covered by credit enhancements, we are currently receiving rents and interest in a timely manner from substantially all lessees and mortgagors as provided under the terms of the leases or loans.
Based upon information provided to us by lessees or mortgagors, certain facilities are presently underperforming financially. Individual facilities may underperform as a result of inadequate Medicaid reimbursement, low occupancy, less than optimal patient mix, excessive operating costs, other operational issues or capital needs. We believe that, even if these facilities remain at current levels of performance, the lease and loan provisions contain sufficient security to assure that material rental and mortgage obligations will continue to be met for the remainder of the lease or loan terms. In the future it is expected that some lessees may choose not to renew their leases on certain properties at existing rental rates (see Table below).
Many lessees have the right of first refusal to purchase the properties during the lease term; many leases provide one or more five-year (or longer) renewal options at existing lease rates and continuing additional rent formulas, although certain leases provide for lease renewals at fair market value. Certain lessees also have options to purchase the properties, generally for fair market value, and generally at the expiration of the primary lease term and/or any renewal term under the lease. If options are exercised, many such provisions require lessees to purchase or renew several facilities together, precluding the possibility of lessees purchasing or renewing only those facilities with the best financial outcomes. Fifty-nine properties are not subject to purchase options until 2008 or later, and an additional 307 leased properties do not have any purchase options.
A table recapping lease expirations, mortgage maturities, properties subject to purchase options and financial underperformance as of December 31, 1999 follows:
(1) This column includes the revenue impact by year and the total annualized rental and interest income associated with the properties subject to lessees' renewal options and/or purchase options and mortgage maturities.
(2) This column includes the revenue impact by year and the total annualized rental and interest income associated with properties subject to purchase options. If a purchase option is exercisable at more than one date, the convention used in the table is to show the revenue subject to the purchase option at the date management estimates is most likely for exercise of the option. Although certain purchase option periods commenced in earlier years, lessees have not exercised their purchase options as of this time. The total for this column (2) is a component (subset) of column (1), the total current annualized revenue of properties subject to lease expirations, purchase options and mortgage maturities ($117,676,000).
(3) Based on current market conditions, we estimate that there could be a revenue loss (compared to current rental rates) upon the expiration of the current term of the leases in the percentages and amounts shown in the table for lease expirations. Our total revenue has grown at a compound annual growth rate of 20.8% in the past five years. The percentages are computed by taking the possible revenue loss as a percentage of 1999 total annualized revenue.
(4) We estimate that in addition to the possible reduction in income from lease expirations, we may also have an increase of approximately $600,000 in 2000 due to the reinvestment of cash received from mortgage maturities and facility sales. This amount is calculated based on current interest rate levels and is not estimated in years subsequent to 2000 due to the unpredictable levels of interest rates and their impact on sales and mortgage maturities.
There are numerous factors that could have an impact on lease renewals or facility sales, including the financial strength of the lessee, expected facility operating performance, the relative level of interest rates and individual lessee financing options. Based upon management expectations of our continued growth, the facilities subject to renewal and/or sale and mortgage maturities and any possible rent loss therefrom should represent a small percentage of revenue in the year of renewal or purchase.
Each lessee, at its expense, may make non-capital additions, modifications or improvements to its leased property. All such alterations, replacements and improvements must comply with the terms and provisions of the lease, and become our or our affiliates' property upon termination of the lease. Each lease requires the lessee to maintain adequate insurance on the leased property, naming us or our affiliates and any mortgagees as additional insureds. In certain circumstances, the lessee may self-insure pursuant to a prudent program of self-insurance if the lessee or the guarantor of its lease obligations has substantial net worth. In addition, each lease requires the lessee to indemnify us or our affiliates against certain liabilities in connection with the leased property.
DEVELOPMENT OF FACILITIES
Since 1987, we have committed to the development of 58 facilities (representing an aggregate investment of approximately $424 million), including:
o 35 congregate care and assisted living facilities
o Seven medical office buildings
o Seven long-term care facilities
o Five rehabilitation hospitals
o Four acute care hospitals
As of December 31, 1999, we have funded costs of approximately $404 million and have completed 52 facilities of our total development commitment The completed facilities comprise:
o 32 congregate care and assisted living facilities
o Seven medical office buildings
o Five rehabilitation hospitals
o Five long-term care facilities
o Three acute care hospitals
The six remaining development projects are scheduled for completion in 2000. Simultaneously with the commencement of each of these development programs and prior to funding, we enter into a
lease agreement with the developer/operator. The base rent under the lease is generally established at a rate equivalent to a specified number of basis points over 1) the yield on the 10 year United States Treasury note or 2) our cost of money at the commencement of the lease.
Our build to suit development program generally includes a variety of additional forms of credit enhancement and collateral beyond those provided by the leases. During the development period, we generally requires additional security and collateral in the form of more than one of the following:
(a) Irrevocable letters of credit from financial institutions;
(b) Payment and performance bonds; and
(c) Completion guarantees by either one or a combination of the developer's parent entity, other affiliates or one or more of the individual principals who control the developer.
In addition, before we advance any funds under the development agreement, the developer must provide:
(a) Satisfactory evidence in the form of an endorsement to our title insurance policy that no intervening liens have been placed on the property since the date of our previous advance;
(b) A certificate executed by the project architect that indicates that all construction work completed on the project conforms with the requirements of the applicable plans and specifications;
(c) A certificate executed by the general contractor that all work requested for reimbursement has been completed; and
(d) Satisfactory evidence that the funds remaining unadvanced are sufficient for the payment of all costs necessary for the completion of the project in accordance with the terms and provisions of the agreement.
As a further safeguard during the development period, we generally will retain 10% of construction funds incurred until we have received satisfactory evidence that the project will be fully completed in accordance with the applicable plans and specifications. We also monitor the progress of the development of each project and the accuracy of the developer's draw requests by having its own in-house inspector perform regular on-site inspections of the project prior to the release of any requested funds.
INVESTMENTS IN CONSOLIDATED AND NON-CONSOLIDATED JOINT VENTURES
At December 31, 1999, we had varying percentage interests in several limited liability companies and partnerships which together own 71 facilities, as further discussed below:
(1) A 77% interest in a partnership (Health Care Property Partners) which owns two acute care hospitals and 19 long-term care facilities.
(2) Interests of between 90% and 97% in six partnerships (HCPI/San Antonio Ltd. Partnership, HCPI/Colorado Springs Ltd. Partnership, HCPI/Little Rock Ltd. Partnership, HCPI/Kansas Ltd. Partnership, Fayetteville Health Associates Ltd. Partnership and Wichita Health Associates Ltd. Partnership), each of which was formed to own a comprehensive rehabilitation hospital.
(3) A 99.95% interest in a limited liability company (Cambridge Medical Property, LLC) which owns five medical office buildings.
(4) A 90% interest in a limited liability company (HCPI Indiana, LLC) which owns seven medical office buildings.
(5) A 67% interest in a limited liability company (HCPI Utah, LLC) which owns 15 medical office buildings.
(6) An 80% interest in eight limited liability companies (Vista-Cal Associates, LLC; Oak City-Cal Associates, LLC; Statesboro Associates, LLC; Ft. Worth-Cal Associates, LLC; Perris-Cal Associates, LLC; Ponca-Cal Associates, LLC; Louisiana-Two Associates, LLC; and Oklahoma-Four Associates, LLC) which own an aggregate of 13 long-term care facilities.
(7) A 45% - 50% interest in four limited liability companies (Seminole Shores Living Center, LLC - 50%; Edgewood Assisted Living Center, LLC - 45%; Arborwood Living Center, LLC - 45%; and Greenleaf Living Center, LLC - 45%) each owning a congregate care facility.
FUTURE ACQUISITIONS
We anticipate acquiring additional healthcare related facilities and leasing them to healthcare operators or investing in mortgages secured by healthcare facilities.
TAXATION OF HCPI
We believe that we have operated in such a manner as to qualify for taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with our taxable year ended December 31, 1985, and we intend to continue to operate in such a manner. No assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or to remain so qualified. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof.
If we qualify for taxation as a REIT, we will generally not be required to pay federal corporate income taxes on the portion of our net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will be required to pay federal income tax under certain circumstances.
The Code defines a REIT as a corporation, trust or association (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) which would be taxable, but for Sections 856 through 860 of the Code, as a domestic corporation; (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals; and (vii) which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
There presently are two gross income requirements and, with respect to our taxable years beginning before August 6, 1997, there was a third gross income requirement. First, at least 75% of our gross income (excluding gross income from "prohibited transactions" as defined below) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property or from certain types of temporary investment income. Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived
from income that qualifies under the 75% test and all other dividends, interest and gain from the sale or other disposition of stock or securities. Third, for our taxable years beginning before August 6, 1997, short-term gains from the sale or other disposition of stock or securities, gains from prohibited transactions and gains on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of our gross income for each such taxable year. A "prohibited transaction" is a sale or other disposition of property (other than foreclosure property) held for sale to customers in the ordinary course of business.
At the close of each quarter of our taxable year, we must also satisfy three tests relating to the nature of our assets. First, at least 75% of the value of our total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year, purchased with the proceeds of a stock offering or long-term (more than five years) public debt offering by us), cash, cash items and government securities. Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer's outstanding voting securities.
Recently, legislation was enacted that modifies some of the rules that apply to REITs. Specifically, the legislation includes a provision that limits a REIT's ability to own more than 10% of the vote or value of the securities of a non-REIT corporation, other than certain debt securities. However, the legislation would allow a REIT to own any percentage of the voting stock and value of the securities of a corporation which jointly elects with the REIT to be a taxable REIT subsidiary, provided certain requirements are met. A taxable REIT subsidiary generally may engage in any business, including the provision of customary or noncustomary services to tenants of its parent REIT and of others, except a "taxable REIT subsidiary" may not manage or operate a healthcare facility. Also, the legislation imposes a 100% tax on a REIT if its rental, service or other agreements with its taxable REIT subsidiary are not on arms' length terms. This legislation will require us to monitor the securities we own in other corporations, and possibly restructure such investments if we own more than 10% of the value of the securities of any of these corporations. The provisions discussed above are generally effective for taxable years ending after December 31, 2000, and, assuming specified requirements are met, do not apply to investments in place on or before July 12, 1999. As is presently the case, a REIT may continue to own 100% of the stock of a qualified REIT subsidiary, as defined below.
We own interests in various partnerships and limited liability companies. In the case of a REIT that is a partner in a partnership or a member of a limited liability company that is treated as a partnership under the Code, Treasury Regulations provide that for purposes of the REIT income and asset tests, the REIT will be deemed to own its proportionate share of the assets of the partnership or limited liability company and will be deemed to be entitled to the income of the partnership or limited liability company attributable to such share. The ownership of an interest in a partnership or limited liability company by a REIT may involve special tax risks, including the challenge by the Internal Revenue Service (the "Service") of the allocations of income and expense items of the partnership or limited liability company, which would affect the computation of taxable income of the REIT, and the status of the partnership or limited liability company as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. We also own interests in a number of subsidiaries which are intended to be treated as qualified REIT subsidiaries (each a "QRS"). The Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of ours. If any partnership, limited liability company, or subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or QRS) for federal income tax purposes, we would likely fail to satisfy the REIT asset tests described above and would therefore fail to qualify as a REIT. We believe that each of the partnerships, limited liability companies, and subsidiaries in which we own an interest will be treated for tax purposes as a partnership (in the case of a partnership
or limited liability company) or QRS, respectively, although no assurance can be given that the Service will not successfully challenge the status of any such organization.
In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders in an amount at least equal to (A) the sum of (i) 95% of our "real estate investment trust taxable income" (computed without regard to the dividends paid deduction and our net capital gain) and (ii) 95% of the net income, if any (after tax), from foreclosure property, minus (B) the sum of certain items of non-cash income. Pursuant to recently enacted legislation, the 95% distribution requirement discussed above will be reduced to 90%, effective for taxable years beginning after December 31, 2000. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year, if paid on or before the first regular dividend payment date after such declaration and if we so elect and specify the dollar amount in our tax return. To the extent that we do not distribute all of our net long-term capital gain or distribute at least 95%, but less than 100%, of our "real estate investment trust taxable income," as adjusted, we will be required to pay tax thereon at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our capital gain income for such year, and (iii) any undistributed taxable income from prior periods, we would be required to pay a 4% excise tax on the excess of such required distributions over the amounts actually distributed.
In addition, President Clinton's fiscal year 2001 budget proposal includes a provision which, if enacted in its present form, would increase the percentage of income REITs must timely distribute to shareholders to avoid the excise tax to 98% of both ordinary income and capital gain net income. This proposal would be effective for taxable years beginning after December 31, 2000.
If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be required to pay tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify will not be deductible by us nor will they be required to be made. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes.
On November 4, 1999, we acquired AHE in a merger. AHE had also made an election to be taxed as a REIT. If AHE failed to qualify as a REIT for any of its taxable years, it would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. As successor-in-interest to AHE, we would be required to pay this tax. In addition, in connection with the merger, and to the extent that the merger is treated as a reorganization under the Code, we succeeded to various tax attributes of AHE, including any
undistributed C corporation earnings and profits of AHE. A C corporation is generally defined as a corporation which is required to pay a full corporate-level tax. If AHE qualified as a REIT for all years prior to the merger and the merger is treated as a reorganization under the Code, then AHE would not have any undistributed C corporation earnings and profits. If, however, AHE failed to qualify as a REIT for any year, then it is possible that we acquired undistributed C corporation earnings and profits from AHE. If we did not distribute these C corporation earnings and profits prior to the end of 1999, we would fail to qualify as a REIT. AHE's counsel rendered opinions in connection with the merger to the effect that, based on the facts, representations and assumptions stated therein, commencing with its taxable year ended December 31, 1987, AHE was organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and its method of operation enabled it to meet, through the effective time of the merger, the requirements for qualification and taxation as a REIT under the Code.
We and our stockholders may be required to pay state or local tax in various state or local jurisdictions, including those in which we or they transact business or reside. The state and local tax treatment of us and our stockholders may not conform to the federal income tax consequences discussed above.
GOVERNMENT REGULATION
The healthcare industry is heavily regulated by federal, state and local laws. This government regulation of the healthcare industry affects us because:
(1) The financial ability of lessees to make rent and debt payments to us may be affected by government regulations such as licensure, certification for participation in government programs, and government reimbursement, and
(2) Our additional rents are often based on our lessees' gross revenue from operations.
These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could affect its ability to operate its facility or facilities and could adversely affect such borrower's or lessee's ability to make debt or lease payments to us.
Fraud and Abuse. There are various federal and state laws prohibiting fraud by healthcare providers, including criminal provisions which prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Violation of these federal provisions is a felony punishable by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment. The penalties for such a violation are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed.
There are also laws that attempt to eliminate fraud and abuse by prohibiting payment arrangements that include compensation for patient referrals. The federal Anti-Kickback Law prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in return for,
or to induce, the referral of Medicare and Medicaid patients. A wide array of relationships and arrangements, including ownership interests in a company by persons who refer or who are in a position to refer patients, as well as personal services agreements, have under certain circumstances, been alleged or been found to violate these provisions. In addition to the Anti-Kickback Statute, the federal government restricts certain financial relationships between physicians and other providers of healthcare services.
State and federal governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers. The Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997 expand the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs. Further, under Operation Restore Trust, a major anti-fraud demonstration project, the Office of Inspector General of the U.S. Department of Health and Human Services, in cooperation with other federal and state agencies, has focused on the activities of skilled nursing facilities, home health agencies, hospices and durable medical equipment suppliers in certain states, including California, in which we have properties. Due to the success of Operation Restore Trust, the project has been expanded to numerous other states and to additional providers including providers of ancillary nursing home services.
Violations of such laws and regulations may jeopardize a borrower's or lessee's ability to operate a facility or to make rent and debt payments, thereby potentially adversely affecting us. Our lease arrangements with lessees may also be subject to these fraud and abuse laws. Federal and state laws governing illegal rebates and kickbacks regulate contingent or percentage rent arrangements where our co-investors are physicians or others in a position to refer patients to the facilities. Although only limited interpretive or enforcement guidance is available, we have structured our rent arrangements in a manner which we believe complies with such laws and regulations.
Based upon information we have periodically received from our operators over the terms of their respective leases and loans, we believe that the facilities in which we have investments are in substantial compliance with the various regulatory requirements applicable to them, although there can be no assurance that the operators are in compliance or will remain in compliance in the future.
Licensure Risks. Healthcare facilities must obtain licensure to operate. Failure to obtain licensure or loss of licensure would prevent a facility from operating. These events could adversely affect the facility operator's ability to make rent and debt payments. State and local laws also may regulate expansion, including the addition of new beds or services or acquisition of medical equipment, and occasionally the contraction of healthcare facilities by requiring certificate of need or other similar approval programs. In addition, healthcare facilities are subject to the Americans with Disabilities Act and building and safety codes which govern access to and physical design requirements and building standards for facilities.
Environmental Matters. A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender (such as us) may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owner or secured lender knew of, or was responsible for, the presence or disposal of such substances and may be imposed on the owner or secured lender in connection with the activities of an operator of the
property. The cost of any required remediation, removal, fines or personal or property damages and the owner's or secured lender's liability therefore could exceed the value of the property, and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral which, in turn, would reduce our revenues.
Although the mortgage loans that we provide and leases covering our properties require the borrower and the lessee to indemnify us for certain environmental liabilities, the scope of such obligations may be limited and we cannot assure that any such borrower or lessee would be able to fulfill its indemnification obligations.
Medicare and Medicaid Programs. Sources of revenue for lessees may include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans and health maintenance organizations, among others. You should expect efforts to reduce costs by these payors to continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our lessees. In addition, the failure of any of our lessees to comply with various laws and regulations could jeopardize their ability to continue participating in the Medicare and Medicaid programs.
Medicare payments for long-term and rehabilitative care are based on allowable costs plus a return on equity for proprietary facilities. Medicare payments to acute care hospitals for inpatient services are based on the Prospective Payment System. Under the Prospective Payment System, a hospital is paid a prospectively established rate based on the category of the patient's diagnosis ("Diagnostic Related Groups" or "DRGs"). Beginning in 1991, Medicare payments began to phase-in the Prospective Payment System for capital related inpatient costs over a period of years. Thus, Medicare reimbursement to hospitals for capital-related inpatient costs began using a federal rate rather than the cost-based reimbursement system previously used. DRG rates are subject to adjustment on an annual basis as part of the federal budget reconciliation process. The Balanced Budget Act of 1997 expanded the Prospective Payment System to include skilled nursing facilities, home health agencies, hospital outpatient departments, and rehabilitation hospitals. See "Healthcare Reform" section and further discussion below.
Medicaid programs generally pay for acute and rehabilitative care based on reasonable costs at fixed rates; long-term care facilities are generally reimbursed using fixed daily rates. Both Medicare and Medicaid payments are generally below retail rates for lessee-operated facilities. Increasingly, states have introduced managed care contracting techniques in the administration of Medicaid programs. Such mechanisms could have the impact of reducing utilization of and reimbursement to lessee-operated facilities.
Third party payors in various states and areas base payments on costs, retail rates or, increasingly, negotiated rates. Negotiated rates can include discounts from normal charges, fixed daily rates and prepaid capitated rates.
Prospective Payment System. Up until July 1, 1998, Medicare and most state Medicaid programs utilized a cost-based reimbursement system for skilled nursing facilities which reimbursed these facilities for the reasonable direct and indirect allowable costs incurred in providing routine services plus in certain states, a return on equity, subject to certain cost ceilings. These costs normally included allowances for administrative and general costs as well as the costs of property and equipment (depreciation and interest, fair rental allowance or rental expense). In certain states, cost-based
reimbursement was typically subject to retrospective adjustment through cost report settlement, and for certain states, payments made to a facility on an interim basis that were subsequently determined to be less than or in excess of allowable costs could be adjusted through future payments to the affected facility and to other facilities owned by the same owner. State Medicaid reimbursement programs varied as to the methodology used to determine the level of allowable costs which were reimbursed to operators.
Beginning on July 1, 1998, the congressionally mandated Prospective Payment System was implemented for skilled nursing facilities. Under the Prospective Payment System, skilled nursing facilities are paid a case-mix adjusted federal per diem rate for Medicare-covered services provided by skilled nursing facilities. The per diem rate is calculated to cover routine service costs, ancillary costs and capital-related costs. The phased-in implementation of the prospective payment system for skilled nursing facilities began with the first cost-reporting period beginning on or after July 1, 1998. The Prospective Payment System is expected to be fully implemented by July 1, 2001. The effect of the implementation of the Prospective Payment System on a particular skilled nursing facility will vary in relation to the amount of revenue derived from Medicare patients for each skilled nursing facility.
Skilled nursing facilities may need to restructure their operations to accommodate the new Medicare Prospective Payment System reimbursement. In part because of the uncertainty as to the effect of the Prospective Payment System on skilled nursing facilities, in November 1998, Standard & Poor's placed many skilled nursing facility companies on a "credit watch" because of the potential negative impact of the implementation of the Prospective Payment System on the financial condition of skilled nursing facilities, including the ability to make interest and principal payments on outstanding borrowings. The financial condition of many long-term care providers continued to erode during the past year, in part due to the implementation of the Medicare Prospective Payment System and a number of long-term care providers filed for bankruptcy protection during 1999 and the first quarter of 2000. Our tenants that have filed for Chapter XI bankruptcy protection are Sun Healthcare Group, Integrated Health Services, Inc., Mariner Post-Acute Network, Inc., Lenox Healthcare, Inc., Texas Health Enterprises, Inc., RainTree Healthcare Corporation and Vencor, Inc.. These tenants and the percentage of our annualized revenues that they represent are discussed more fully under the section entitled "Relationship with Major Operators" and in the footnotes to our financial statements.
Long-Term Care Facilities. Long-term care facilities are regulated primarily through the licensing of such facilities against a common background established by federal law enacted as part of the Omnibus Budget Reconciliation Act of 1987. Regulatory authorities and licensing standards vary from state to state, and in some instances from locality to locality. These standards are constantly reviewed and revised. Agencies periodically inspect facilities, at which time deficiencies may be identified. The facilities must correct these deficiencies as a condition to continued licensing or certification and participation in government reimbursement programs. Depending on the nature of such deficiencies, remedies can be routine or costly. Similarly, compliance with regulations which cover a broad range of areas such as patients' rights, staff training, quality of life and quality of resident care may increase facility start-up and operating costs.
Acute Care Hospitals. Acute care hospitals are also subject to extensive federal, state and local regulation. Acute care hospitals undergo periodic inspections regarding standards of medical care, equipment and hygiene as a condition of licensure. Various licenses and permits also are required for purchasing and administering narcotics, operating laboratories and pharmacies and the use of radioactive materials and certain equipment. Each of the lessees' facilities, the operation of which requires accreditation, is accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Such accreditation may be a more cost-effective and time-efficient method of meeting requirements for continued licensing and for participation in government sponsored provider programs.
Acute care hospitals must comply with requirements for various forms of utilization review. In addition, under the Prospective Payment System, each state must have a Peer Review Organization carry out federally mandated reviews of Medicare patient admissions, treatment and discharges in acute care hospitals.
Congregate Care and Assisted Living Facilities. Assisted living facilities are subject to federal, state and local licensure, certification and inspection laws. These laws regulate, among other matters, the number of licensed beds, the provision of services, equipment, staffing and operating policies and procedures. Failure to comply with these laws and regulations could result in the denial of reimbursement, the imposition of fines, suspension or decertification from the Medicare and Medicaid program, and in extreme cases, the revocation of a facility's license or closure of a facility. Such actions may have an effect on the revenues of the operators of properties owned by us and therefore adversely impact us.
Physician Group Practice Clinics. Physician group practice clinics are subject to extensive federal, state and local legislation and regulation. Every state imposes licensing requirements on individual physicians and on facilities and services operated by physicians. In addition, federal and state laws regulate health maintenance organizations and other managed care organizations with which physician groups may have contracts. Many states require regulatory approval, including certificates of need, before establishing certain types of physician-directed clinics, offering certain services or making expenditures in excess of statutory thresholds for healthcare equipment, facilities or programs. In connection with the expansion of existing operations and the entry into new markets, physician clinics and affiliated practice groups may become subject to compliance with additional regulation.
Rehabilitation Hospitals. Rehabilitation hospitals are subject to extensive federal, state and local legislation, regulation, inspection and licensure requirements similar to those of acute care hospitals. Many states have adopted a "patient's bill of rights" which provides for certain higher standards for patient care that are designed to decrease restrictions and enhance dignity in treatment.
HEALTHCARE REFORM
The healthcare industry has continually faced various challenges, including increased government and private payor pressure on healthcare providers to control costs, the migration of patients from acute care facilities into extended care and home care settings and the vertical and horizontal consolidation of healthcare providers. The pressure to control healthcare costs intensified during 1994 and 1995 as a result of the national healthcare reform debate and continues as Congress attempted to slow the rate of growth of federal healthcare expenditures as part of its effort to balance the federal budget.
In addition to the reforms enacted and considered by Congress from time to time, state legislatures periodically consider various healthcare reform proposals. Changes in the law, new interpretations of existing laws, and changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business
and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of legislative efforts cannot be predicted and may impact us in different ways.
These changes include:
(1) The adoption of the Medicare+Choice program, which expands Medicare beneficiaries' choices to include traditional Medicare fee-for-service, private fee-for-service medical savings accounts, various managed care plans, and provider sponsored organizations, among others,
(2) The expansion and restriction of reimbursement for various Medicare benefits,
(3) The freeze in hospital rates in 1998 and more limited annual increases in hospital rates for 1999-2002,
(4) The adoption of a Prospective Payment System for skilled nursing facilities, home health agencies, hospital outpatient departments, and rehabilitation hospitals,
(5) The repeal of the Boren amendment payment standard for Medicaid so that states have the exclusive authority to determine provider rates and providers have no federal right of action,
(6) The reduction in Medicare disproportionate share payments to hospitals, and
(7) The removal of the $150,000,000 limit on tax-exempt bonds for nonacute hospital capital projects.
The implementation of these amendments will occur at various times: for instance, the Prospective Payment System for skilled nursing facilities went into effect for the first cost reporting period after July 1, 1998, while the Prospective Payment System for home health agencies will not be implemented until October 1, 2000.
In seeking to limit Medicare reimbursement for long term care services, Congress established the Prospective Payment System for skilled nursing facility services to replace the cost-based reimbursement system. See "Government Regulation -- Prospective Payment System."
In addition, the Balanced Budget Act of 1997 strengthens the anti-fraud and abuse laws to provide for stiffer penalties for fraud and abuse violations. The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997, is expected to produce several billion dollars in net savings for Medicaid over five years. In addition, the Balanced Budget Act repealed the Boren Amendment under which states were required to pay long-term care providers, including skilled nursing facilities, rates that are "reasonable and adequate to meet the cost which must be incurred by efficiently and economically operated facilities." As a result of the repeal of the Boren Amendment, states are now required by the Balanced Budget Act for skilled nursing facilities to:
o Use a public process for determining rates
o Publish proposed and final rates, the methodologies underlying the rates, and justifications for the rates
o Give methodologies and justifications
During rate-setting procedures, states are required to take into account the situation of skilled nursing facilities that serve a disproportionate number of low-income patients with special needs. The Secretary of the Department of Health and Human Services is required to study and report to Congress within four years concerning the effect of state rate-setting methodologies on the access to and the quality of services provided to Medicaid beneficiaries. The Balanced Budget Act also provides the federal government with expanded enforcement powers to combat waste, fraud and abuse in delivery of
healthcare services. Though applicable to payments for services furnished on or after October 1, 1997, the new requirements are not retroactive. Thus, states that have not proposed changes in their payment methods or standards, or changes in rates for items and services furnished on or after October 1, 1997, need not immediately implement a Balanced Budget Act public approval process.
In November 1999, President Clinton signed into law the Medicare, Medicaid and State Children's Health Insurance Programs Balanced Budget Refinement Act of 1999 ("Budget Refinement Act") which reduces some of the reimbursement cutbacks under the Balanced Budget Act. The Budget Refinement Act delays implementation of cost-cutting measures and increases payments from the Balanced Budget Act to some sectors of the healthcare industry. Long-term care facilities will receive increased payments under the Budget Refinement Act. The reduction in disproportionate share hospital funding will not be as steep. The change to a PPS system for outpatient hospital services will be budget neutral and not result in reduced reimbursement. Other changes also ameliorate changes required by the Balanced Budget Act. The extent of the relief provided by the Budget Refinement Act is estimated to be $16 billion over five years.
The Health Insurance Portability and Accountability Act of 1996 requires a significant overhaul of healthcare information systems to protect individual medical information. In November 1999, the Department of Health and Human Services released proposed regulations to protect the confidentiality of individual health information. Although the final regulations have not yet been released, the cost to the healthcare industry of complying with such regulations may exceed the cost of complying with Year 2000 issues.
In addition to the reforms enacted and considered by Congress from time to time, state legislatures periodically consider various healthcare reform proposals. Congress and state legislatures can be expected to continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues can be expected to continue in the future. There are numerous initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of healthcare services. Changes in the law, new interpretations of existing laws, and changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of legislative efforts cannot be predicted and may impact us in different ways.
In 1998, health expenditures in the United States amounted to $1.1 trillion, representing 13.5 percent of Gross Domestic Product. The Health Care Financing Administration reports that 1998 spending for healthcare continued a five year trend of low growth below six percent annually, but reflected the highest annual percentage increase since 1993. Also, for the first time in a decade, public spending grew more slowly than private healthcare spending. The primary reason for the slow growth in public spending was Medicare, which was significantly affected by the adoption of reimbursement restriction measures in the Balanced Budget Act of 1997. Fraud savings also contributed. Because economic growth generally matched growth in healthcare spending since 1993, the healthcare share of gross domestic product has remained roughly the same since 1993. We believe that government and private efforts to contain or reduce healthcare costs will continue. These trends are likely to lead to reduced or slower growth in reimbursement for certain services provided by some of our lessees. We believe that the vast nature of the healthcare industry, the financial strength and operating flexibility of our operators and the diversity of our portfolio will mitigate the impact of any such diminution in reimbursements. However, we cannot predict whether any of the above proposals or any other proposals
will be adopted and, if adopted, no assurance can be given that the implementation of such reforms will not have a material adverse effect on our financial condition or results of operations.
OBJECTIVES AND POLICIES
We are organized to invest in income-producing healthcare related facilities. In evaluating potential investments, we consider such factors as:
(1) The geographic area, type of property and demographic profile;
(2) The location, construction quality, condition and design of the property;
(3) The current and anticipated cash flow and its adequacy to meet operational needs and lease obligations and to provide a competitive market return on equity to our investors;
(4) The potential for capital appreciation, if any;
(5) The growth, tax and regulatory environment of the communities in which the properties are located;
(6) Occupancy and demand for similar health facilities in the same or nearby communities;
(7) An adequate mix of private and government sponsored patients;
(8) Potential alternative uses of the facilities; and
(9) Prospects for liquidity through financing or refinancing.
There are no limitations on the percentage of our total assets that may be invested in any one property or partnership. The Investment Committee of the Board of Directors may establish limitations as it deems appropriate from time to time. No limits have been set on the number of properties in which we will seek to invest, or on the concentration of investments in any one facility or any one city or state. We acquire our investments primarily for income.
At December 31, 1999, we had three series of preferred stock and two classes of debt securities which are senior to the common stock. We may, in the future, issue additional debt or equity securities which will be senior to the common stock. We have authority to offer shares of its capital stock in exchange for investments which conform to its standards and to repurchase or otherwise acquire its shares or other securities.
We may incur additional indebtedness when, in the opinion of its management and directors, it is advisable. For short-term purposes we from time to time negotiate lines of credit, or arranges for other short-term borrowings from banks or otherwise. We arrange for long-term borrowings through public offerings or from institutional investors.
In addition, we may incur additional mortgage indebtedness on real estate which we have acquired through purchase, foreclosure or otherwise. Where leverage is present on terms deemed favorable, we invest in properties subject to existing loans, or secured by mortgages, deeds of trust or similar liens on the properties. We also may obtain non-recourse or other mortgage financing on unleveraged properties in which it has invested or may refinance properties acquired on a leveraged basis.
In July 1990, we adopted a rights agreement whereby we distributed a dividend of one right for each outstanding share of common stock and authorized the distribution of one right with respect to each subsequently issued share. Each right, as adjusted for our 1992 stock split, will entitle its holder to purchase one-half of a share of our common stock at an exercise price of $47.50 per share. The rights will become exercisable if a person acquires 15% or more of our outstanding common stock or
makes a tender offer which will result in the person's owning 30% or more of our common stock. Under certain circumstances, the rights will entitle the holders to purchase shares of our common stock, or securities of an entity that acquires us, at one-half market value. We may redeem the rights at any time prior to a person's acquiring 15% of our common stock. The rights are intended to protect our stockholders from takeover tactics that could deprive them of the full value of their shares.
We will not, without the prior approval of a majority of directors, acquire from or sell to any director, officer or employee of HCPI, or any affiliate thereof, as the case may be, any of our assets or other property.
We provide to our stockholders annual reports containing audited financial statements and quarterly reports containing unaudited information.
The policies set forth herein have been established by our Board of Directors and may be changed without stockholder approval.
* HCPI is non-managing member and has a 45%-80% interest in the following limited liability companies:
ITEM 2.
ITEM 2. PROPERTIES
See Item 1. for details.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
During 1999, we were not a party to any material legal proceedings.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders was held on November 3, 1999 for the purpose of approving the merger between HCPI and American Health Properties, Inc. The merger was approved by the following vote:
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the New York Stock Exchange. Set forth below for the fiscal quarters indicated are the reported high and low closing prices of our common stock on the New York Stock Exchange.
As of March 1, 2000 there were approximately 3,668 stockholders of record and approximately 64,000 beneficial stockholders of our common stock.
It has been our policy to declare quarterly dividends to the common stock shareholders so as to comply with applicable sections of the Internal Revenue Code governing REITs. The cash dividends per share we paid on common stock are set forth below:
Bremner & Wiley. On December 4, 1998, we completed the acquisition of a managing member interest in HCPI/Indiana, LLC, a Delaware limited liability company ("HCPI/Indiana"). In connection with the acquisition, several limited partnerships affiliated with James D. Bremner made a capital contribution to HCPI/Indiana of a portfolio of seven medical office buildings with an equity value (net of assumed debt) of approximately $6.7 million. In exchange for this capital contribution, the contributing limited partnerships designated their constituent partners to receive approximately $3.9 million in cash and 89,452 non-managing member units of HCPI/Indiana (representing a minority interest in HCPI/Indiana). HCPI/Indiana also issued 781,213 managing member units to us in exchange for a capital contribution of approximately $24.6 million.
Beginning on December 4, 1999, the non-managing member units could be exchanged for common stock or, at our option, for cash. The non-managing member units are exchangeable for common stock on a one for one basis (subject to certain adjustments, such as stock splits and reclassifications) or for an amount of cash equal to the then-current market value of the shares of common stock into which the non-managing member units may be exchanged. HCPI/Indiana relied on the exemption provided by Section 4(2) of the Securities Act, in connection with the issuance and sale of the non-managing member units. We have filed a registration statement with respect to the exchange of units for our common stock.
Boyer. On January 25, 1999, we completed the acquisition of a managing member interest in HCPI/Utah, LLC, a Delaware limited liability company ("HCPI/Utah"), in exchange for a cash contribution of approximately $18.9 million. In connection with this acquisition, several limited liability companies and general partnerships affiliated with The Boyer Company, L.C. ("Boyer") contributed a portfolio of 14 medical office buildings (including two ground leaseholds associated therewith) to HCPI/Utah with an aggregate equity value (net of assumed debt) of approximately $18.9 million. In exchange for this capital contribution, the contributing entities received 593,249 non-managing member units of HCPI/Utah. HCPI/Utah also issued 590,555 managing member units to HCPI. At the initial closing, HCPI/Utah was also granted the right to acquire five additional medical office buildings. During 1999, two of the five buildings were contributed to HCPI/Utah and the contributing entities received 48,212 non-managing member units of HCPI/Utah and 707,663 managing member units were issued to us. In addition, HCPI and HCPI/Utah agreed with Boyer that it would not acquire the medical office building known as Old Mill. HCPI anticipates that the contribution of the remaining two medical office buildings to HCPI/Utah will be completed by December 31, 2000. The Amended and Restated Limited Liability Company Agreement of HCPI/Utah provides that only we are authorized to act on behalf of HCPI/Utah and that we have responsibility for the management of its business.
The non-managing member units issued in connection with the initial closing became exchangeable for common stock on January 25, 2000 and the non-managing member units issued in connection with the subsequent closings will become exchangeable twelve months after the last issuance of units. The non-managing member units are exchangeable for common stock on a one for one basis (subject to certain adjustments, such as stock splits and reclassifications) or for an amount of cash equal to then-current market value of the shares of common stock into which the non-managing member units may be exchanged. HCPI/Utah relied on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in connection with the issuance and sale of the non-managing member units. We have filed a registration statement with respect to the exchange of units for our common stock.
Cambridge. On November 21, 1997, we completed the acquisition of a managing member interest in Cambridge Medical Properties, LLC, a Delaware limited liability company ("CMP"). In connection with the acquisition, Cambridge Medical Center of San Diego, LLC ("Cambridge") made a capital contribution to CMP of real property and improvements with an equity value (net of assumed debt) of $6.5 million in exchange for $1 million in cash and 142,450 non-managing member units of CMP (representing a minority interest in CMP). CMP also issued 1,048,951 units of membership interest to us in exchange for a capital contribution of $40.5 million.
Beginning on November 21, 1998, the non-managing member units held by Cambridge could be exchanged for common stock or, at our option, for cash. The non-managing member units are exchangeable for common stock on a one for one basis (subject to certain adjustments, such as stock splits and reclassifications) or for an amount of cash equal to the then-current market value of the shares of common stock into which the non-managing member units may be exchanged. CMP relied on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended, in connection with the issuance and sale of the non-managing member units. As of December 31, 1999, only 550 non-managing member units were outstanding and if they are presented for exchange we intend to cash them out.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is our selected financial data as of and for the years ended December 31, 1999, 1998, 1997, 1996, and 1995.
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(1) We believe that Funds From Operations ("FFO") is an important supplemental measure of operating performance. HCPI adopted the new definition of FFO prescribed by the National Association of Real Estate Investment Trusts (NAREIT). FFO is now defined as Net Income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation, and after adjustments for unconsolidated partnerships and joint ventures. FFO does not, and is not intended to, represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to Net Income. FFO, as defined by us may not be comparable to similarly entitled items reported by other REITs that do not define it in accordance with the definition prescribed by NAREIT. FFO for the years presented has been restated for the new definition. The following table represents items and amounts being aggregated to compute FFO.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Health Care Property Investors, Inc., including its wholly-owned subsidiaries and affiliated joint ventures (HCPI), generally acquires healthcare facilities and leases them on a long-term basis to healthcare providers. On a more limited basis, we provide mortgage financing on healthcare facilities. As of December 31, 1999, our portfolio of properties, including equity investments, consisted of 428 facilities located in 43 states. These facilities are comprised of 176 long-term care facilities, 93 congregate care and assisted living facilities, 82 medical office buildings, 46 physician group practice clinics, 22 acute care hospitals and nine freestanding rehabilitation facilities. Our gross investment in the properties, which includes joint venture acquisitions, was approximately $2,637,000,000 at December 31, 1999.
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and into HCPI in a stock-for-stock transaction, approved by the stockholders of both companies, with HCPI being the surviving corporation. AHE was a real estate investment trust specializing in healthcare facilities with a portfolio of 72 healthcare properties in 22 states. Under the terms of the merger agreement, each share of AHE common stock was converted into the right to receive 0.78 share of HCPI's common stock and AHE's 8.60% cumulative redeemable preferred stock, series B was converted into shares of HCPI 8.60% series C cumulative redeemable preferred stock. The merger resulted in the issuance of 19,430,115 shares of HCPI's common stock and 4,000,000 depositary shares of HCPI's series C cumulative redeemable preferred stock. Additionally, we assumed AHE's debt comprised of $220 million of senior notes, $56 million of mortgage debt and paid $71 million in cash to replace their revolving line of credit upon consummation of the merger. The transaction was treated as a purchase for financial accounting purposes and, accordingly, the operating results of AHE have been included in our consolidated financial statements effective as of November 4, 1999.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 VS. YEAR ENDED DECEMBER 31, 1998
Net Income applicable to common shares for the year ended December 31, 1999 totaled $78,450,000 or $2.25 per share on a diluted basis on revenue of $224,793,000. This compares to Net Income applicable to common shares of $78,635,000 or $2.54 per share on a diluted basis on revenue of $161,549,000 for the corresponding period in 1998. Included in Net Income applicable to common shares and earnings per share on a diluted basis for the years ended December 31, 1999 and 1998 is a Gain on Sale of Real Estate Properties of $10,303,000, or $0.27 per share, and $14,053,000, or $0.42 per share, respectively.
Rental Income for the year ended December 31, 1999 increased by $55,642,000 to $189,800,000. The majority of this increase was generated by a full year of rents on $429,000,000 of property acquisitions made in 1998, rents on $146,000,000 of new property acquisitions made in 1999 and rents on properties acquired in the merger with AHE. The 1999 acquisition activity, most of which is attributable to the acquisition of AHE's portfolio in the merger, represents a significant increase over the acquisition activity of prior years. Tenant Reimbursements increased by $6,970,000 to $9,770,000 from the prior year with a related increase in Facility Operating Expenses of $12,897,000 to $17,950,000 associated with managed medical office buildings. Since
November 1997, we have acquired 70 medical office buildings and multiple clinics that are leased on a gross, modified gross or triple net basis. Gross or modified gross basis means that we are responsible, subject to Tenant Reimbursements, for the payment of property taxes, insurance and other facility related operating expenses. Our increased investment in medical office buildings accounts for the increase in Tenant Reimbursements and Facility Operating Expenses during the last two years.
Interest Expense for the year ended December 31, 1999 increased by $20,948,000 to $57,701,000. The increase is primarily the result of a full year of interest on the June 1998 issuance of mandatory Par Put Remarketed Securities (MOPPRS) senior debt, an increase in short-term borrowings used to fund investments made during 1998 and 1999 and $343 million in debt assumed in the merger with AHE, all described in more detail below in the "Liquidity and Capital Resources" section. The increase in Depreciation/Non Cash Charges of $15,337,000 to $47,860,000 for the year ended December 31, 1999, is directly related to the new investments discussed above.
We believe that Funds From Operations (FFO) is the most important supplemental measure of operating performance for a real estate investment trust. (See Note 13 to the Consolidated Financial Statements.) FFO for the year ended December 31, 1999 increased by $18,265,000 to $114,520,000. The increase is mainly attributable to increases in Rental Income and Tenant Reimbursements, as offset by increases in Interest Expense and Facility Operating Expenses which are discussed in more detail above and Preferred Dividends.
YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
Net Income applicable to common shares for the year ended December 31, 1998 totaled $78,635,000 or $2.54 per share on a diluted basis on revenue of $161,549,000. This compares to Net Income applicable to common shares of $63,542,000 or $2.19 per share on a diluted basis on revenue of $128,503,000 for 1997. Included in Net Income applicable to common shares and earnings per share on a diluted basis for the years ended December 31, 1998 and 1997 is a Gain on Sale of Real Estate Properties of $14,053,000, or $0.42 per share, and $2,047,000, or $0.07 per share, respectively.
Rental Income for the year ended December 31, 1998 increased by $20,238,000 to $134,158,000. The majority of this increase was generated by rents on $429,000,000 of new property acquisitions made in 1998 and a full year of rents on $226,000,000 of property acquisitions made in 1997. The 1998 acquisition activity represents a significant increase over the acquisition activity of prior years. Tenant Reimbursements increased to $2,800,000 from the prior year with a related increase in Facility Operating Expenses of $4,891,000 associated with the acquisitions of medical office buildings in 1998. Interest and Other Income for the year ended December 31, 1998 increased by $10,008,000 to $24,591,000. The increase in Interest and Other Income was due in part to new loans made during 1998 and late 1997.
Interest Expense for the year ended December 31, 1998 increased by $7,928,000 to $36,753,000. The increase is primarily the result of an increase in short-term borrowings used to fund the acquisitions made during 1998 and interest related to the June 1998 issuance of Mandatory Par Put Remarketed Securities (MOPPRS) senior debt described in more detail below in the "Liquidity and Capital Resources" section. The increase in Depreciation/Non Cash Charges
of $6,867,000 to $32,523,000 for the year ended December 31, 1998 is directly related to the new investments discussed above.
FFO for the year ended December 31, 1998 increased by $12,813,000 to $96,255,000. The increase is mainly attributable to increases in Rental Income and Interest and Other Income, as offset by increases in Interest Expense and Facility Operating Expenses, which are discussed in more detail above.
LIQUIDITY AND CAPITAL RESOURCES
We have financed investments through the sale of common and preferred stock, issuance of long-term debt, assumption of mortgage debt, use of short-term bank lines and use of internally generated cash flows. Facilities under construction are generally financed by means of cash on hand or short-term borrowings under our existing bank lines. Management believes that our liquidity and sources of capital are adequate to finance our operations. Future investments in additional facilities will be dependent on availability of cost effective sources of capital.
MTN Financings
The following table summarizes the MTN financing activities since January 1998:
Other Senior Debt
On November 4, 1999, in connection with the merger with AHE, we assumed two series of outstanding senior notes of AHE, consisting of $100,000,000 principal amount of 7.05% senior notes due 2002 and $120,000,000 principal amount of 7.50% senior notes (8.16% effective rate) due 2007. Additionally, we assumed $56,000,000 of AHE's mortgage debt with interest rates ranging from 7.00% to 8.52% due 2003 to 2011.
At December 31, 1999, we had a total of $102,250,000 in Mortgage Notes Payable secured by 21 healthcare facilities with a net book value of approximately $200,279,000. Interest rates on the Mortgage Notes ranged from 5.75% to 10.63%.
During June 1998, we issued $200 million of 6.875% Mandatory Par Put Remarketed Securities (MOPPRS) due June 8, 2015, which are subject to mandatory tender on June 8, 2005. We received total proceeds of approximately $203,000,000 (including the present value of a put
option associated with the debt) which was used to repay borrowings under our revolving lines of credit. The weighted average cost of the debt including the amortization of the option and offering expenses is 6.77%. The MOPPRS are our senior, unsecured obligations.
Equity Offerings
Since January 1998, we have completed three equity offerings, summarized in the table below:
We used the net proceeds from the equity offerings to pay down or pay off short-term borrowings under our revolving lines of credit. We invested any excess funds in short-term investments until they were needed for acquisitions or development.
On November 4, 1999, in connection with the merger with AHE, we issued 19,430,115 shares of our common stock and 4,000,000 depositary shares of 8.60% series C cumulative redeemable preferred stock. (See Note 3 to the Consolidated Financial Statements.)
In January and February 2000, we registered 89,452 and 593,247 shares of common stock for issuance, from time to time, to the holders of non-managing member units in two consolidated subsidiaries, HCPI/Indiana, LLC and HCPI/Utah, LLC, respectively. The non-managing member units are convertible at the non-managing members option into shares of our common stock. At December 31, 1999, stockholders' equity totaled $1,200,257,000 and the debt to equity ratio was .98 to 1.00. For the year ended December 31, 1999, FFO (before interest expense) covered Interest Expense 2.98 to 1.00.
Available Financing Sources
As of February 2000, we had $372,000,000 available for future financing of debt and equity securities under a shelf registration statement filed with the Securities and Exchange Commission. Of that amount, we have approximately $85,000,000 available under MTN senior debt programs. These amounts may be issued from time to time in the future based on our needs and then existing market conditions.
On November 3, 1999, we renegotiated our lines of credit with a group of nine banks. We have two revolving lines of credit, one for $103,000,000 that expires on November 2, 2000 and one for $207,000,000 that expires on November 3, 2003. Availability on these lines of credit is reduced by outstanding letters of credit aggregating $3,500,000. As of December 31, 1999, we had $91,000,000 available on these lines of credit. Since 1986 the debt rating agencies have rated our Senior Notes and Convertible Subordinated Notes investment grade. Current ratings are as follows:
Since our inception in May 1985, we have recorded approximately $804,989,000 in cumulative FFO. Of this amount, we have distributed a total of $667,272,000 to stockholders as dividends on common stock. We have retained the balance of $137,717,000 and used it as an additional source of capital.
On November 20, 1999, we paid a dividend of $0.71 per common share or $22,752,000 in the aggregate. Total dividends paid on common stock during the year ended December 31, 1999, as a percentage of FFO, was 77%. During the first quarter of 2000, we declared and paid a dividend of $0.72 per common share or approximately $36,938,000 in the aggregate.
Letters of Credit
At December 31, 1999, we held approximately $800,000 in depository accounts and $60,700,000 in irrevocable letters of credit from commercial banks to secure the obligations of many lessees' lease and borrowers' loan obligations. We may draw upon the letters of credit or depository accounts if there are any defaults under the leases and/or loans. Amounts available under letters of credit could change based upon facility operating conditions and other factors and such changes may be material.
Facility Rollovers
We have concluded a significant number of "facility rollover" transactions on properties that have been under long-term leases and mortgages. Facility rollover transactions principally include lease renewals and renegotiations, exchanges, sales of properties, and, to a lesser extent, payoffs on mortgage receivables. The annualized impact on a pro forma basis as if the facility rollover transactions had occurred on January 1 of each year was to decrease FFO in each of the years 1997 through 1999 by $1,600,000, $3,100,000 and $3,400,000, respectively. Total rollovers were 12 facilities, 44 facilities and 26 facilities in each of the years 1997 through 1999.
For the year ending December 31, 2000, we have 14 facilities that are subject to lease expiration and mortgage maturities. These facilities currently represent approximately 1.2% of annualized revenues. For the year ending December 31, 2001, we have 39 facilities that are subject to lease expiration and mortgage maturities. These facilities currently represent approximately 4.0% of annualized revenue.
During 1997, we reached agreement with Tenet Healthcare Corporation (Tenet) (the holder of substantially all of the option rights under our leases with Vencor, Inc. (Vencor)) whereby Tenet agreed to waive renewal and purchase options, and related rights of first refusal, on up to 51 facilities. As part of these agreements, we have the right to continue to own the facilities. We paid Tenet $5,000,000 in cash, accelerated the purchase option on one acute care hospital leased to Tenet, and reduced Tenet's guarantees on the facilities leased to Vencor. Leases on 20 of those 51 facilities had expiration dates through December 31, 2000. We have increased rents on five of the facilities with leases that expired during 1998, and we believe we will be able to increase rents on other facilities whose lease terms expire in 2001. However, there can be no assurance that we will
be able to realize any increased rents on future rollovers. We have completed certain facility rollovers earlier than the scheduled lease expirations or mortgage maturities and will continue to pursue such opportunities where it is advantageous to do so.
YEAR 2000 ISSUE
The Year 2000 issue was the result of widely used computer programs that identify the year by two digits, rather than by four. It was believed that continued use of these programs may result in widespread computer-generated malfunctions and miscalculations beginning in the year 2000, when the digits "00" are interpreted as "1900." It was believed that those miscalculations could cause disruption of operations including the temporary inability to process transactions such as invoices for payment. Those computer programs that identify the year based on all four digits are considered "Year 2000 compliant." The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998.
Preparing for Year 2000 had been a high priority for us. Internal and external resources were engaged to achieve Year 2000 readiness. We successfully completed our Year 2000 preparedness plans including the upgrade and replacement of all systems, as well as full-scale testing and implementation of those systems. Our contingency plans were also thoroughly tested. The cost of the foregoing was not material. To date, we have not seen any adverse impact or disruption in cash flows as a result of the Year 2000 transition on any of our systems or those of our lessees or vendors.
Our remaining exposure to the Year 2000 issue is the possibility that reimbursement delays caused by a failure of federal and state welfare programs responsible for Medicare and Medicaid could adversely affect our tenants' cash flow, resulting in their temporary inability to meet their obligations under our leases. Depending upon the severity of any reimbursement delays and the financial strength of any particular operator, the operations of our tenants could be materially adversely affected, which in turn could have a material adverse effect on our results of operations. To date, we have not seen any adverse effect on our results of operations from the Year 2000 issue.
Readers are cautioned that statements contained in the "Year 2000 Issue" paragraphs are forward looking and should be read in conjunction with our disclosures under the heading "Cautionary Language Regarding Forward Looking Statements" set forth below.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Annual Report that are not historical factual statements are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements include, among other things, statements regarding the intent, belief or expectations of HCPI and its officers and can be identified by the use of terminology such as "may", "will", "expect", "believe", "intend", "plan", "estimate", "should" and other comparable terms or the negative thereof. In addition, we, through our senior management, from time to time make forward looking oral and written public statements concerning our expected future operations and other developments. Shareholders and investors are cautioned that, while forward looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Actual results may differ materially from the expectations contained in the forward-
looking statements as a result of various factors. In addition to the factors set forth under the caption Risk Factors in our annual report on Form 10-K, readers should consider the following:
(a) Legislative, regulatory, or other changes in the healthcare industry at the local, state or federal level which increase the costs of or otherwise affect the operations of our lessees;
(b) Changes in the reimbursement available to our lessees and mortgagors by governmental or private payors, including changes in Medicare and Medicaid payment levels and the availability and cost of third party insurance coverage;
(c) Competition for lessees and mortgagors, including with respect to new leases and mortgages and the renewal or rollover of existing leases;
(d) Competition for the acquisition and financing of healthcare facilities;
(e) The ability of our lessees and mortgagors to operate our properties in a manner sufficient to maintain or increase revenues and to generate sufficient income to make rent and loan payments;
(f) Changes in national or regional economic conditions, including changes in interest rates and the availability and cost of capital for us;
(g) General uncertainty inherent in the Year 2000 issue, particularly the uncertainty of the Year 2000 readiness of third parties who are material to our business, such as public or private healthcare reimbursers, over whom we have no control; and
(h) The expected benefits from the merger with AHE, such as cost savings, operating efficiencies and other synergies may not be realized due to increased demands on our management resources following the merger.
ITEM 7A.
ITEM 7A. DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in interest rates on our mortgage loans receivable and on our debt instruments. We provide the following discussion and table presented below to address the risks associated with potential changes in our interest rate environment.
We provide mortgage loans to operators of healthcare facilities in the normal course of business. All of the mortgage loans receivable have fixed interest rates or interest rates with periodic fixed increases. Therefore, the mortgage loans receivable are all considered to be fixed rate loans, and the current interest rate (the lowest rate) is used in the computation of market risk provided in the table below if material.
We generally borrow on our short-term bank lines of credit to complete acquisition transactions. We then repay borrowings using proceeds from subsequent long-term debt and equity offerings. We may also assume mortgage notes payable already in place as part of an acquisition transaction. Currently we have two mortgage notes payable with variable interest rates and the remaining mortgage notes payable have fixed interest rates or interest rates with fixed periodic increases. Our Senior Notes and Convertible Subordinated Notes are at fixed rates. The variable rate loans are at interest rates below the current prime rate of 8.75%, and fluctuations are tied to the prime rate or to a rate currently below the prime rate.
Fluctuation in the interest rate environment will not affect our future earnings and cash flows on our fixed rate debt until that debt matures and must be replaced or refinanced. Interest rate changes will affect the fair value of the fixed rate instruments. Conversely, changes in interest rates on variable rate debt would change our future earnings and cash flows, but not affect the fair value on those instruments. Assuming a one percentage point increase in the interest rate related to the variable rate debt including the mortgage notes payable and the bank lines of credit, and assuming no change in the outstanding balance as of year end, interest expense for 2000 would increase by approximately $2,217,000. Approximately 10% of the increase in interest expense related to the bank lines of credit, or $220,000, would be capitalized into construction projects.
The principal amount and the average interest rates for the mortgage loans receivable and debt categorized by the final maturity dates is presented in the table below. Certain of the mortgage loans receivable and certain of the debt securities, excluding the convertible debentures, require periodic principal payments prior to the final maturity date. The fair value estimates for the mortgage loans receivable are based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to us for debt of the same type and remaining maturity.
We do not believe that the future market rate risks related to the above securities will have a material impact on us or the results of our future operations. Readers are cautioned that most of the statements contained in these "Disclosures about Market Risk" paragraphs are forward looking and should be read in conjunction with our disclosures under the heading "Cautionary Language Regarding Forward Looking Statements" set forth above.
NEW PRONOUNCEMENTS
See Note 19 to the financial statements for a discussion of our implementation of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Balance Sheets as of December 31, 1999 and 1998 and Consolidated Statements of Income, Stockholders' Equity, and Cash Flows for the years ended December 31, 1999, 1998 and 1997, together with the Report of Arthur Andersen LLP, Independent Public Accountants, are included elsewhere herein. Reference is made to the "Index to Consolidated Financial Statements."
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers were as follows on March 22, 2000:
There is hereby incorporated by reference the information appearing under the captions "Board of Directors and Officers" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Registrant's definitive proxy statement relating to its Annual Meeting of Stockholders to be held on May 9, 2000.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
There is hereby incorporated by reference the information under the caption "Executive Compensation" in the Registrant's definitive proxy statement relating to its Annual Meeting of Stockholders to be held on May 9, 2000.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There is hereby incorporated by reference the information under the captions "Principal Stockholders" and "Board of Directors and Officers" in the Registrant's definitive proxy statement relating to its Annual Meeting of Stockholders to be held on May 9, 2000.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There is hereby incorporated by reference the information under the caption "Certain Transactions" in the Registrant's definitive proxy statement relating to its Annual Meeting of Stockholders to be held on May 9, 2000.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a) Financial Statements:
1) Report of Independent Public Accountants
2) Financial Statements
Consolidated Balance Sheets - December 31, 1999 and 1998
Consolidated Statements of Income - for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity - for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows - for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Note - All schedules have been omitted because the required information is presented in the financial statements and the related notes or because the schedules are not applicable.
b) Reports on Form 8-K:
On November 5, 1999, HCPI filed a Current Report on Form 8-K dated November 4, 1999, reporting the completion of the merger between American Health Properties and HCPI.
On November 19, 1999, HCPI filed Amendment No. 1 to its Current Report on Form 8-K/A stating that the required financial statements regarding the merger of American Health Properties and HCPI would be filed on or about December 15, 1999.
On December 15, 1999, HCPI filed Amendment No. 2 to its Current Report on Form 8-K/A containing the following financial statements:
Consolidated Balance Sheets of American Health Properties, Inc. - December 31, 1998 and 1997
Consolidated Statements of Operations of American Health Properties, Inc. - for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity of American Health Properties, Inc. - for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows of American Health Properties, Inc. - for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements of American Health Properties, Inc.
Consolidated Condensed Balance Sheets of American Health Properties, Inc. - June 30, 1999 and December 31, 1998
Consolidated Condensed Statements of Operations of American Health Properties, Inc. - for the three months ended June 30, 1999 and 1998 and for the six months ended June 30, 1999 and
Consolidated Condensed Statements of Cash Flows of American Health Properties, Inc. - for the six months ended June 30, 1999 and 1998
Notes to Consolidated Condensed Financial Statements of American Health Properties, Inc.
Unaudited Pro Forma Combined Balance Sheet of HCPI as of September 30, 1999
Unaudited Pro Forma Combined Statement of Income of HCPI for the nine months ended September 30, 1999
Unaudited Pro Forma Combined Statement of Income of HCPI for the year ended December 31, 1998
Notes to Unaudited Pro Forma Combined Financial Statements of HCPI
c) Exhibits:
10.16 Second Amendment to Second Amended and Restated Directors Deferred Compensation Plan, effective as of November 3, 1999 (incorporated by reference to exhibit 10.2 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).
10.17 Fourth Amendment to Second Amended and Restated Director Deferred Compensation Plan, effective as of January 4, 2000.
10.18 First Amendment to Second Amended and Restated Stock Incentive Plan effective as of November 3, 1999 (incorporated by reference to exhibit 10.3 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).
10.19 Revolving Credit Agreement, dated as of November 3, 1999, among HCPI, each of the banks identified on the signature pages hereof, The Bank of New York, as agent for the banks and as issuing bank, and Bank of America, N.A. and Wells Fargo Bank, N.A., as co-documentation agents, with BNY Capital Markets, Inc., as lead arranger and Book Manager (incorporated by reference to exhibit 10.4 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).
10.20 364-Day Revolving Credit Agreement, dated as of November 3, 1999 among HCPI, each of the banks identified on the signature pages hereof, The Bank of New York, as agent for the banks, and Bank of America, N.A. and Wells Fargo Bank, N.A., as co-documentation agents, with BNY Capital Markets, Inc., as lead arranger and book manager (incorporated by reference to exhibit 10.5 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).
21.1 List of Subsidiaries.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
* Management Contract or Compensatory Plan or Arrangement.
For the purposes of complying with the amendments to the rules governing Form S-8 (effective July 13, 1990) under the Securities Act of 1933, the undersigned registrant hereby undertakes as follows, which undertaking shall be incorporated by reference into registrant's Registration Statement on Form S-8 No.s 33-28483 and 333-90353 filed May 11, 1989 and November 5, 1999, respectively.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 29, 2000
HEALTH CARE PROPERTY INVESTORS, INC. (Registrant)
/s/ Kenneth B. Roath --------------------------------------------- Kenneth B. Roath, Chairman of the Board of Directors, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature and Title
March 29, 2000 /s/ Kenneth B. Roath -------------------------------------------- Kenneth B. Roath, Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer)
March 29, 2000 /s/ James G. Reynolds -------------------------------------------- James G. Reynolds, Executive Vice President and Chief Financial Officer (Principal Financial Officer)
March 29, 2000 /s/ Devasis Ghose -------------------------------------------- Devasis Ghose, Senior Vice President- Finance and Treasurer (Principal Accounting Officer)
March 29, 2000 /S/ Paul V. Colony -------------------------------------------- Paul V. Colony, Director
March 29, 2000 /S/ Robert R. Fanning -------------------------------------------- Robert R. Fanning, Jr., Director
March 29, 2000 /S/ Michael D. McKee -------------------------------------------- Michael D. McKee, Director
March 29, 2000 /S/ Orville E. Melby -------------------------------------------- Orville E. Melby, Director
March 29, 2000 /S/ Harold M. Messmer, Jr. -------------------------------------------- Harold M. Messmer, Jr., Director
March 29, 2000 /S/ Peter L. Rhein -------------------------------------------- Peter L. Rhein, Director
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Health Care Property Investors, Inc.:
We have audited the accompanying consolidated balance sheets of Health Care Property Investors, Inc. (a Maryland corporation) as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Health Care Property Investors, Inc. as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Orange County, California January 18, 2000
HEALTH CARE PROPERTY INVESTORS, INC. CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands, except par values)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
HEALTH CARE PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share amounts)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
HEALTH CARE PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Amounts in thousands)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
HEALTH CARE PROPERTY INVESTORS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar amounts in thousands)
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY
Health Care Property Investors, Inc., a Maryland corporation, was organized in March 1985 to qualify as a real estate investment trust (REIT). Health Care Property Investors, Inc. and its affiliated subsidiaries and partnerships (HCPI) were organized to invest in healthcare related properties located throughout the United States. As of December 31, 1999, HCPI owns or has investments in 428 properties located in 43 states. The properties include 176 long-term care facilities, 93 congregate care and assisted living centers, 82 medical office buildings (MOBs), 46 physician group practice clinics, 22 acute care hospitals, and nine freestanding rehabilitation hospitals. As of December 31, 1999, HCPI provided mortgage loans on or leased these properties to 98 healthcare operators and to over 650 tenants in the multi-tenant buildings.
(2) SIGNIFICANT ACCOUNTING POLICIES
REAL ESTATE:
HCPI records the acquisition of real estate at cost and uses the straight-line method of depreciation for buildings and improvements over estimated useful lives ranging up to 45 years. HCPI periodically evaluates its investments in real estate for potential impairment by comparing its investment to the expected future cash flows to be generated from the properties. If such impairments were to occur, HCPI would write down its investment in the property to estimated market value. HCPI has provided accelerated depreciation on certain of its investments based primarily on an estimation of net realizable value of such investments at the end of the primary lease terms.
Acquisition, development and construction arrangements are accounted for as real estate investments/joint ventures or loans based on the characteristics of the arrangements.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES AND PARTNERSHIPS:
HCPI consolidates the accounts of its subsidiaries and certain general and limited partnerships which are majority owned and controlled. All significant intercompany investments, accounts and transactions have been eliminated.
INVESTMENTS IN JOINT VENTURES:
HCPI has investments in certain general partnerships and joint ventures in which HCPI may serve as the general partner or managing member. However, since the other members in these joint ventures have significant voting rights relative to acquisition, sale and refinancing of assets, HCPI accounts for these investments using the equity method of accounting. The accounting policies of these joint ventures are substantially consistent with those of HCPI.
CASH AND CASH EQUIVALENTS:
Investments purchased with original maturities of three months or less are considered to be cash and cash equivalents.
FEDERAL INCOME TAXES:
HCPI has operated at all times so as to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986. As such, HCPI is not taxed on its income that is distributed to stockholders. At December 31, 1999, the tax bases of HCPI's net assets and liabilities are less than the reported amounts by approximately $187,000,000. This net difference includes a favorable tax depreciation adjustment attributable to an application for change in accounting method, which is subject to review by the Internal Revenue Service.
Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income for financial statements due to the treatment required under the Internal Revenue Code of certain interest income and expense items, depreciable lives, bases of assets and timing of rental income.
RENTAL INCOME:
Rental Income includes base and additional rental income. Additional rental income is generated by a percentage of increased revenue over specified base period revenue of the properties and increases based on inflation indices or other factors. In addition, HCPI may receive payments from its lessees upon transferring or assignment of existing leases; such amounts received are deferred and amortized over the remaining term of the leases.
FACILITY OPERATIONS:
Since November 1997, HCPI has purchased ownership interests in 70 MOBs which are operated by independent property management companies on behalf of HCPI. These facilities are leased to multiple tenants under gross, modified gross or triple-net leases. In addition, HCPI purchased several physician group practice clinics which are leased on a modified gross basis or triple net to several tenants. Operating income other than basic rental income attributable to these properties is recorded under Tenant Reimbursements in HCPI's financial statements. Expenses related to the operation of these facilities are recorded as Facility Operating Expenses.
RECLASSIFICATION:
Reclassifications have been made for comparative financial statement presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
Management is required to make estimates and assumptions in the preparation of financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expense during the reporting period. Actual results could differ from those estimates.
(3) BUSINESS COMBINATION
On November 4, 1999, American Health Properties, Inc. (AHE) merged with and into HCPI (the Merger) in a stock-for-stock transaction, approved by the stockholders of both companies, with HCPI being the surviving corporation. AHE was a real estate investment trust specializing in healthcare facilities with a portfolio of 72 healthcare properties in 22 states. Under the terms of the Merger agreement, each share of AHE common stock was converted into the right to receive 0.78 share of HCPI's common stock and AHE 8.60% cumulative redeemable preferred stock, series B was converted into HCPI's 8.60% series C cumulative redeemable preferred stock. The Merger resulted in the issuance of approximately 19,430,115 shares of HCPI's common stock and HCPI's series C cumulative redeemable preferred stock, in addition, HCPI assumed $343,000,000 of AHE's debt upon consummation of the Merger.
The transaction was treated as a purchase for financial accounting purposes and, accordingly, the operating results of AHE have been included in HCPI's consolidated financial statements effective as of November 4, 1999. The following summarizes the final purchase price (in thousands):
The following summarizes the allocation of the purchase price to the net assets acquired (in thousands):
PRO FORMA FINANCIAL INFORMATION (UNAUDITED):
The following unaudited pro forma consolidated statements of income information present the results of HCPI's operations for the years ended December 31, 1999 and 1998 as though the acquisition of AHE had occurred as of the beginning of each respective period:
Pro Forma Net Income applicable to common shares and earnings per basic and diluted share include $65,189,000 or $1.27 and $1.19 per share in 1999 and $14,053,000 or $0.28 and $0.26 per share in 1998 for Gain on the Sale of Real Estate.
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place at the beginning of the fiscal year or the results that may occur in the future. The pro forma results include additional interest on borrowed funds, increased depreciation and decreases in amortization expense associated with changes in fair value of the AHE depreciable property and other intangible assets and a reduction in general and administrative expenses.
(4) REAL ESTATE INVESTMENTS
HCPI was organized to make long-term, equity-oriented investments principally in operating, income-producing healthcare related properties. HCPI's equity investments have generally been structured as land and building leasebacks.
Under the terms of the lease agreements, HCPI earns fixed monthly base rental income and may earn periodic additional rental income. At December 31, 1999, minimum future rental income from 349 non-cancelable operating leases is expected to be approximately $242,559,000 in 2000, $228,770,000 in 2001, $213,095,000 in 2002, $204,168,000 in 2003, $151,628,000 in 2004 and $780,386,000 in the aggregate thereafter.
During 1999, HCPI purchased and leased or agreed to construct 105 facilities for an aggregate investment of approximately $1,141,000,000. These facilities include 14 assisted living facilities, 47 MOBs, seven physician group practice clinics, 20 long-term care facilities, three rehabilitation hospitals and 14 acute care hospitals. Twenty-three different lessees operate 70 of these facilities and 35 of the MOBs are multi-tenant.
During 1998 and 1999, 23 MOBs were acquired through the acquisition of a managing interest in two limited liability companies in which the non-managing members own 730,913 non-managing member units as of December 31, 1999. These units will be convertible into HCPI common stock on a one-for-one basis.
HCPI sold six facilities and its 50% ownership interests in four congregate care facilities during 1999, resulting in a gain of $10,303,000.
The following tabulation lists HCPI's total Real Estate Investments at December 31, 1999 (dollar amounts in thousands):
(5) OPERATORS
MAJOR OPERATORS:
Listed below are HCPI's major operators which represent five percent or more of HCPI's revenue, the investment in properties operated by those healthcare providers, and the percentage of total annualized revenue from these operators for the years ended December 31, 1999, 1998 and 1997. All of these operators are publicly traded companies and are subject to the informational filing requirements of the Securities and Exchange Act of 1934, as amended, and accordingly file periodic financial statements on Form 10-K and Form 10-Q with the Securities and Exchange Commission.
Certain of these properties have been subleased or assigned to other operators but with the original lessee remaining liable on the leases. The investment and revenue applicable to these subleased properties are not included in the table above. The percentage of annualized revenue on these subleased facilities was 2%, 4% and 7% in 1999, 1998 and 1997, respectively.
VENCOR:
On May 1, 1998, Vencor completed a spin-off transaction. As a result, it became two publicly held entities -- Ventas, Inc., a real estate company which intends to qualify as a REIT, and Vencor, a healthcare company which at December 31, 1999 leased 36 of HCPI's properties of which 11 are subleased to other operators. On September 13, 1999, Vencor, Inc. filed for bankruptcy protection. HCPI has recourse to Ventas, Inc. and Tenet Healthcare Corporation (see discussion under Tenet below) for most of the rents payable by Vencor under its leases. All rents due to HCPI subsequent to the bankruptcy filing have been received.
Vencor has an obligation to pay rents due to HCPI prior to filing for bankruptcy protection. However, Vencor has the right to assume or reject its leases with us. If Vencor assumes a lease it must do so pursuant to the original contract terms, must cure all pre-petition and post-petition defaults under the lease and provide adequate assurances of future performance. If Vencor rejects a lease, it may stop paying rent and we may lease the property to another operator. As of February 29, 2000, Vencor had made no proposals to reject any of their current leases with HCPI. HCPI has received $735,000 of $1,008,000 in pre-bankruptcy receivables and considers the remaining
balance to be fully collectible. However, we cannot assure you that as a result of Vencor's bankruptcy filing we would be able to recover all amounts due under our leases with Vencor, that we would be able to promptly recover the premises or lease the property to another lessee or that the rent we would receive from another lessee would equal amounts due under the Vencor leases. We have recourse to Tenet for rents under all but five of the Vencor leases, and on some leases we are receiving direct payment by sublessees of Vencor, which may reduce the risk to us of not being able to collect on those leases. However, we cannot assure you that the bankruptcy filing of Vencor would not have a material adverse effect on our Net Income, Funds From Operations or the market value of our common stock.
Based upon public reports, for the three months ended September 30, 1999, Vencor had revenue of approximately $682 million and a net loss of approximately $42 million. For the nine months ended September 30, 1999, Vencor had revenue of approximately $2.1 billion and a net loss (including a loss of $9 million for a change in accounting for start-up costs) of approximately $107 million. Based upon public reports, Ventas' revenue, income from operations and net income for the three months ended September 30, 1999 were approximately $59 million, $40 million and $13 million, respectively. As of September 30, 1999, Ventas had total assets of $1.1 billion and a stockholders' equity of $19 million.
Tenet is one of the nation's largest healthcare services companies, providing a broad range of services through the ownership and management of healthcare facilities. Tenet has historically guaranteed Vencor's leases. During 1997 we reached an agreement with Tenet whereby Tenet agreed to forbear or waive some renewal and purchase options and related rights of first refusal on facilities leased to Vencor. We only have recourse to Tenet for the rent payments on the remaining 31 guaranteed leases which expire during the next two years.
During 1999, as part of the AHE acquisition, we purchased the real estate interests of six Tenet hospitals with an investment value of $404,000,000.
OTHER TROUBLED LONG-TERM CARE PROVIDERS:
The financial condition of many long-term care providers has eroded during the past year, in part due to the implementation of the Medicare Prospective Payment System. As a result, certain of HCPI's long-term care provider lessees have filed for Chapter XI bankruptcy protection during the past six months. Lessees that have filed for bankruptcy and their respective percentage of annualized revenue are Sun Healthcare 1.0%, Integrated Health Services 1.0%, Mariner Post Acute Network 0.4%, Lenox Healthcare 0.4% and Texas Health Enterprises 0.2%.
The lessees in bankruptcy discussed in the previous paragraph were current on all rents as of December 31, 1999 with the exception of certain pre-petition receivables in the amount of $231,000 on the lessees noted which we believe will generally be payable once the plans of reorganization are confirmed. However, we can not assure you that the bankruptcies of those Lessees would not have a material adverse effect on our Net Income, Funds From Operations or the market value of our common stock.
OTHER OPERATORS:
HCPI has $2,350,000 of equity interests, including warrants at nominal values, in six private operators of long term care and assisted living facilities and has invested $23,803,000 in additional amounts in the form of mortgages and unsecured loans, $56,292,000 in operating facilities and property construction and unfunded investing or lending commitments of $8,556,000 to the same operators as of December 31, 1999.
(6) INVESTMENTS IN JOINT VENTURES
HCPI has an 80% interest in nine joint ventures that lease 14 long-term care facilities and a 45% interest in four joint ventures that each operate or are currently constructing an assisted living facility.
Combined summarized financial information of the joint ventures follows:
As of December 31, 1999, HCPI had guaranteed approximately $3.6 million on notes payable obligations for these joint ventures.
(7) LOANS RECEIVABLE
The following is a summary of the Loans Receivable:
The following is a summary of Mortgage Loans Receivable at December 31, 1999:
HCPI has certain financing leases that allow HCPI to "put" the facilities to the lessees at lease termination for an amount greater than HCPI's initial investment. These amounts are accreted to rental income over the lease term.
At December 31, 1999, minimum future principal payments from non-cancelable Mortgage Loans are expected to be approximately $4,633,000 in 2000, $14,495,000 in 2001, $2,672,000 in 2002, $2,025,000 in 2003, $2,210,000 in 2004 and $135,613,000 in the aggregate thereafter.
(8) OTHER ASSETS
The following is a summary of Other Assets:
The December 31, 1999 accounts receivable included balances due from Vencor and Long-Term Care Providers discussed in Note 5 and approximately $7 million associated with the AHE merger.
(9) NOTES PAYABLE
SENIOR NOTES PAYABLE:
The following is a summary of Senior Notes outstanding at December 31, 1999 and 1998:
On November 4, 1999, in connection with the merger with AHE, HCPI assumed two series of outstanding senior notes of AHE consisting of $100,000,000 principal amount of 7.05% senior notes due in 2002 and $120,000,000 principal amount of 7.50% senior notes (8.16% effective rate) due in 2007.
During June 1998, HCPI issued $200,000,000 of senior unsecured debt in the form of 6.875% MandatOry Par Put Remarketed Securities (MOPPRS) due June 8, 2015 which are subject to mandatory tender on June 8, 2005. HCPI received total proceeds of approximately $203,000,000 including the present value of the put option at June 8, 2005 associated with the debt instrument. The option is being amortized to interest expense over 17 years. The weighted average cost of the debt including the amortization of the option and offering expenses is 6.77%.
The weighted average interest rate on the Senior Notes was 7.2% for 1999 and 1998 and the weighted average balance of the Senior Note borrowings was approximately $558,333,000 and $387,733,000 during 1999 and 1998, respectively. Original issue discounts are amortized over the term of the Senior Notes. If held to maturity, the first required Senior Note maturities would be $10,000,000 in 2000, $13,000,000 in 2001, $117,000,000 in 2002, $31,000,000 in 2003, $67,000,000 in 2004 and $526,000,000 in the aggregate thereafter.
CONVERTIBLE SUBORDINATED NOTES PAYABLE:
On November 8, 1993, HCPI issued $100,000,000, 6% Convertible Subordinated Notes due November 8, 2000. These Notes are prepayable without penalty after November 8, 1998. The Notes are convertible into shares of common stock of HCPI at a conversion price of $37.806. A total of 2,645,083 shares of common stock have been reserved for such issuance. Subsequent to December 31, 1999, HCPI has repurchased $11,877,000 of these notes. HCPI expects to retire the remainder of the issue through the use of proceeds from asset sales, internally generated cash flow, new debt financings, the use of its bank lines of credit, or a combination of the foregoing options.
MORTGAGE NOTES PAYABLE:
At December 31, 1999, HCPI had a total of $102,250,000 in Mortgage Notes Payable secured by 21 healthcare facilities with a net book value of approximately $200,279,000. Interest rates on the Mortgage Notes ranged from 5.75% to 10.63%. Required principal payments on the Mortgage Notes are expected to be $3,790,000 in 2000, $4,117,000 in 2001, $4,335,000 in 2002, $11,677,000 in 2003, $12,447,000 in 2004 and $65,884,000 in the aggregate thereafter.
BANK NOTES:
HCPI has two unsecured revolving credit lines aggregating $310,000,000 with certain banks. The credit lines for $103,000,000 and $207,000,000 expire on November 2, 2000 and November 3, 2003, respectively, and bear a total annual facility fee of 0.20% and 0.30%, respectively. These agreements provide for interest at the Prime Rate, the London Interbank Offered Rate (LIBOR) plus 0.95% (LIBOR plus 1.05% for the $103,000,000 credit line) or at a rate negotiated with each bank at the time of borrowing. An additional fee of 0.125% is paid on borrowings when borrowings exceed 50% of the $310,000,000 of credit lines. Interest rates incurred by HCPI ranged from 4.94% to 8.25% and 4.85% to 9.75% on maximum short-term bank borrowings of $215,500,000 and $190,000,000 for 1999 and 1998, respectively. The weighted average interest rates were approximately 5.79% and 5.90% on weighted average short-term bank borrowings of $113,415,000 and $68,193,000 for the same respective periods.
(10) PREFERRED STOCK
On November 4, 1999, in connection with the merger with AHE, HCPI issued 4,000,000 depositary shares of 8.60% series C cumulative redeemable preferred stock with a recorded value at the time of the merger of $88,160,000 and a liquidation preference of $100 million. The series C preferred stock is not redeemable prior to October 27, 2002, after which date the preferred stock may be redeemable at par ($25.00 per share or $100,000,000 in the aggregate) any time for cash at HCPI's option.
On September 4, 1998, HCPI issued 5,385,000 shares of 8.70% series B cumulative redeemable preferred stock which generated net proceeds of $130,000,000 (net of underwriters' discount and other offering expenses). The series B preferred stock is not redeemable prior to September 30, 2003, after which date the preferred stock may be redeemable at par ($25 per share or $134,625,000 in the aggregate) any time for cash at HCPI's option.
On September 26, 1997, HCPI issued 2,400,000 shares of 7.875% series A cumulative redeemable preferred stock which generated net proceeds of $57,810,000 (net of underwriters' discount and other offering expenses). The series A preferred stock is not redeemable prior to September 30, 2002, after which date the series A preferred stock may be redeemable at par ($25 per share or $60,000,000 in the aggregate) any time for cash at the option of HCPI.
Dividends on the series A, series B, and series C preferred stock are payable quarterly in arrears on the last day of March, June, September and December. The series A, series B and series C preferred stock have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of HCPI.
(11) STOCK AND DEBT BUYBACK PROGRAM
In December 1999, HCPI's Board of Directors approved a $40,000,000 stock and debt repurchase program whereby $20,000,000 of HCPI's common and preferred stock and $20,000,000 of HCPI's convertible subordinated notes and senior debt may be repurchased on the open market. Through February 2000, HCPI repurchased 63,400 shares of the preferred stock for $947,000, 300,400 shares of common stock for $7,293,000, and $11,877,000 of convertible debt.
(12) EARNINGS PER COMMON SHARE
HCPI computes earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic earnings per common share is computed by dividing Net Income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share are calculated including the effect of dilutive securities. Options to purchase shares of common stock that had an exercise price in excess of the average market price of the common stock during the period were not included because they are not dilutive. The convertible debt was included only in 1998, when the effect on earnings per common share was dilutive. The non-managing member units were included only in 1998 and 1997 when the effect on earnings per common share was dilutive.
(Amounts in thousands except per share amounts)
(13) FUNDS FROM OPERATIONS
HCPI believes that Funds From Operations (FFO) is the most important supplemental measure of operating performance for a real estate investment trust. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land) such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a real estate investment trust that uses historical cost accounting for depreciation could be less informative. The term FFO was designed by the real estate investment trust industry to address this problem.
HCPI adopted the definition of FFO prescribed by the National Association of Real Estate Investment Trusts (NAREIT). FFO is defined as Net Income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from debt restructuring and sales of property, plus real estate depreciation and real estate related amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis.
FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income. FFO, as defined by HCPI, may not be comparable to similarly entitled items reported by other real estate investment trusts that do not define it exactly as the NAREIT definition.
Below are summaries of the calculation of FFO for the years ended December 31, 1999, 1998 and 1997 (all amounts in thousands):
HCPI is required to report information about operations on the basis that it uses internally to measure performance under Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, effective beginning in 1998.
(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amount for Cash and Cash Equivalents approximates fair value because of the short-term maturity of those instruments. Fair values for Mortgage Loans Receivable and Debt are based on the estimates of management and on rates currently prevailing for comparable loans and instruments of comparable maturities, and are as follows:
(15) STOCK INCENTIVE PLANS
Directors and officers and key employees of HCPI are eligible to participate in HCPI's Directors' Stock Incentive Plan or HCPI's Amended Stock Incentive Plan (Plans). As of November 5, 1999, pursuant to the terms of the merger with AHE, 787,000 stock options with an average exercise price of $30 were issued in exchange for AHE stock options outstanding as of the date of the merger. A summary of the status of HCPI's Plans and the options issued in the AHE merger at December 31, 1999, 1998 and 1997 and changes during the years then ended is presented in the table and narrative below:
The incentive stock awards (Awards) are granted at no cost to the employees. The Awards generally vest and are amortized over five-year periods. The stock options generally become exercisable on either a one-year or a five-year schedule after the date of the grant.
The following table describes the options outstanding as of December 31, 1999.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following ranges of assumptions: risk-free interest rates from 4.61% to 6.54%; expected dividend yields from 8.36% to 11.64% percent; and expected lives of 10 years; expected volatility of .17% to .18%.
HCPI accounts for stock options under Accounting Principles Board Opinion 25 (APB25), Accounting for Stock Issued to Employees, which is permitted under FASB Statement No. 123 (FASB 123), Accounting for Stock Based Compensation, issued in 1995. Had compensation cost for the Plans been determined instead in accordance with rules set out in FASB 123, HCPI's Net Income and Basic Earnings Per Common Share on a proforma basis would have been $0.01 lower for each of the years ended December 31, 1999, 1998 and 1997.
During the years ended December 31, 1999 and 1998, respectively, HCPI made loans totaling $92,000 and $976,000 secured by stock in HCPI to directors, officers and key employees. The interest rate charged is based on the prevailing applicable federal rate as of the inception of the loan. Loans secured by stock totaling $1,729,000 and $1,637,000 were outstanding at December 31, 1999 and 1998, respectively.
(16) DIVIDENDS
Common stock dividend payment dates are scheduled approximately 50 days following each calendar quarter. The Board of Directors declared a dividend of $0.72 per share on January 19, 2000 paid on February 18, 2000 to stockholders of record on February 3, 2000.
In order to qualify as a REIT, HCPI must generally, among other requirements, distribute at least 95% (90% effective January 1, 2001) of its taxable income to its stockholders. HCPI and other REITs generally distribute 100% of taxable income to avoid taxes on the remaining 5% (10% effective January 1, 2001) of taxable income.
Per share dividend payments made by HCPI to the stockholders were characterized in the following manner for tax purposes:
Dividends on all series of preferred stock are paid on the last day of each quarter.
(17) COMMITMENTS
HCPI has acquired real estate properties and has outstanding commitments to fund development of facilities on those properties of approximately $20,000,000, and is committed to acquire an additional $6,100,000 of existing healthcare real estate.
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
(1) Includes $152 or $0.004 per basic/diluted share for Gain on Sale of Real Estate Properties.
(2) Includes $10,151 or $0.32/$0.29 per basic/diluted share for Gain on Sale of Real Estate Properties.
(3) Includes $512 or $0.02 per basic/diluted share for Gain on Sale of Real Estate Properties.
(4) Includes $6,230 or $0.20/$0.18 per basic/diluted share for Gain on Sale of Real Estate Properties.
(5) Includes $7,311 or $0.24/$0.22 per basic/diluted share for Gain on Sale of Real Estate Properties.
(19) NEW PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in
the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133 is effective for fiscal years beginning after June 15, 2000, although earlier implementation is allowed.
HCPI has not yet quantified the impact of adopting Statement 133 on the financial statements and has not determined the timing of or method of the adoption of Statement 133. However, the effect is not expected to be material.
APPENDIX I
TENET HEALTHCARE CORPORATION
SET FORTH BELOW IS CERTAIN CONDENSED FINANCIAL DATA OF TENET HEALTHCARE CORPORATION ("TENET") WHICH IS TAKEN FROM TENET'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 1999 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ("THE COMMISSION") UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"), AND THE TENET QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 1999 AS FILED WITH THE COMMISSION.
The information and financial data contained herein concerning Tenet was obtained and has been condensed from Tenet's public filings under the Exchange Act. The Tenet financial data presented includes only the most recent interim and fiscal year end reporting periods. We can make no representation as to the accuracy and completeness of Tenet's public filings but has no reason not to believe the accuracy and completeness of such filings. It should be noted that Tenet has no duty, contractual of otherwise, to advise us of any events which might have occurred subsequent to the date of such publicly available information which could affect the significance or accuracy of such information.
Tenet is subject to the information filing requirements of the Exchange Act, and, in accordance herewith, is obligated to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Such reports, proxy statements and other information may be inspected at the offices of the Commission at 450 Fifth Street, N.W. Washington D.C., and should also be available at the following Regional Offices of the Commission: Room 1400, 75 Park Place, New York, New York 10007 and Suite 1400, Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661. Such reports and other information concerning Tenet can also be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, Room 1102, New York, New York 10005.
i
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollar amounts in millions, except par values)
ii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (Dollar amounts in millions, except par values and share amounts)
iii
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollar amounts in millions)
iv
TENET HEALTHCARE CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollar amounts in millions)
v
EXHIBIT INDEX