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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission file number 1-9028
NATIONWIDE HEALTH PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
-----------------
Maryland 95-3997619
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
610 Newport Center Drive, Suite 1150
Newport Beach, California 92660
(Address of principal executive offices)
(949) 718-4400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Shares of registrant's common stock, $.10 par value, outstanding at October 31,
2001--47,240,651.
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NATIONWIDE HEALTH PROPERTIES, INC.
FORM 10-Q
September 30, 2001
TABLE OF CONTENTS
Part I--Financial Information
Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets................................................ 2
Condensed Consolidated Statements of Operations...................................... 3
Condensed Consolidated Statements of Cash Flows...................................... 4
Notes to Condensed Consolidated Financial Statements................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Part II--Other Information
Item 6. Exhibits and Reports on Form 8-K..................................................... 14
1
PART I
NATIONWIDE HEALTH PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
(Dollars in thousands)
ASSETS
------
Investments in real estate
Real estate properties:
Land................................................................. $ 146,484 $ 142,721
Buildings and improvements........................................... 1,185,471 1,182,410
Construction in progress............................................. -- 8,478
---------- ----------
1,331,955 1,333,609
Less accumulated depreciation........................................ (208,736) (186,206)
---------- ----------
1,123,219 1,147,403
Mortgage loans receivable, net....................................... 140,500 185,623
---------- ----------
1,263,719 1,333,026
Cash and cash equivalents................................................... 4,422 6,149
Receivables................................................................. 8,774 7,607
Other assets................................................................ 41,015 34,225
---------- ----------
$1,317,930 $1,381,007
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Bank borrowings............................................................. $ 53,000 $ 79,000
Senior notes due 2001-2038.................................................. 582,750 627,900
Notes and bonds payable..................................................... 62,350 62,857
Accounts payable and accrued liabilities.................................... 56,457 47,778
Stockholders' equity:
Preferred stock $1.00 par value; 5,000,000 shares authorized; Issued and
outstanding: 2001--1,000,000; 2000--1,000,000, stated at liquidation
preference of $100 per share........................................... 100,000 100,000
Common stock $.10 par value; 100,000,000 shares authorized; Issued and
outstanding: 2001--47,240,651; 2000--46,226,484........................ 4,724 4,623
Capital in excess of par value........................................... 574,767 556,658
Cumulative net income.................................................... 628,324 575,619
Cumulative dividends..................................................... (744,442) (673,428)
---------- ----------
Total stockholders' equity........................................... 563,373 563,472
---------- ----------
$1,317,930 $1,381,007
========== ==========
See accompanying notes.
2
NATIONWIDE HEALTH PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ------------------
2001 2000 2001 2000
------- ------- -------- --------
Revenues:
Minimum rent................................................. $32,861 $33,157 $ 98,130 $ 98,058
Interest and other income.................................... 4,658 5,512 15,070 17,803
Additional rent and additional interest...................... 4,022 4,388 12,617 12,683
------- ------- -------- --------
41,541 43,057 125,817 128,544
Expenses:
Interest..................................................... 13,390 14,628 41,805 43,800
Depreciation and non-cash charges............................ 9,061 9,275 28,447 28,030
General and administrative................................... 2,304 1,423 5,903 4,295
------- ------- -------- --------
24,755 25,326 76,155 76,125
------- ------- -------- --------
Net income before gain on sale of properties.................... 16,786 17,731 49,662 52,419
Gain on sale of properties...................................... 3,043 -- 3,043 1,149
------- ------- -------- --------
Net income...................................................... 19,829 17,731 52,705 53,568
Preferred stock dividends....................................... (1,919) (1,919) (5,758) (5,758)
------- ------- -------- --------
Net income available to common stockholders..................... $17,910 $15,812 $ 46,947 $ 47,810
======= ======= ======== ========
Per share amounts:
Basic/diluted income from continuing operations available to
common stockholders........................................ $ .31 $ .34 $ .94 $ 1.01
======= ======= ======== ========
Basic/diluted net income available to common stockholders.... $ .38 $ .34 $ 1.01 $ 1.03
======= ======= ======== ========
Dividends paid per share..................................... $ .46 $ .46 $ 1.38 $ 1.38
======= ======= ======== ========
Weighted average shares outstanding............................. 47,301 46,226 46,679 46,226
======= ======= ======== ========
See accompanying notes.
3
NATIONWIDE HEALTH PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
September 30,
--------------------
2001 2000
--------- ---------
Cash flow from operating activities:
Net income.............................................. $ 52,705 $ 53,568
Gain on sale of properties.............................. (3,043) (1,149)
Depreciation and non-cash charges....................... 28,447 28,030
Amortization of deferred financing costs................ 727 766
Net (increase) decrease in other assets and liabilities. (2,290) 3,877
--------- ---------
Net cash provided by operating activities........... 76,546 85,092
Cash flow from investing activities:
Investment in real estate properties.................... (5,818) (18,111)
Disposition of real estate properties................... 19,695 18,949
Investment in mortgage loans receivable................. (1,261) (1,696)
Principal payments on mortgage loans receivable......... 34,055 13,318
--------- ---------
Net cash provided by investing activities........... 46,671 12,460
Cash flow from financing activities:
Bank borrowings......................................... 142,300 113,800
Repayment of bank borrowings............................ (168,300) (141,600)
Issuance of common stock................................ 18,034 --
Issuance of senior unsecured debt....................... 15,000 --
Repayments of senior unsecured debt..................... (60,150) (10,000)
Principal payments on notes and bonds................... (465) (368)
Dividends paid.......................................... (71,014) (70,321)
Other, net.............................................. (349) (240)
--------- ---------
Net cash used in financing activities............... (124,944) (108,729)
--------- ---------
Decrease in cash and cash equivalents...................... (1,727) (11,177)
Cash and cash equivalents, beginning of period............. 6,149 16,139
--------- ---------
Cash and cash equivalents, end of period................... $ 4,422 $ 4,962
========= =========
See accompanying notes.
4
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001
(Unaudited)
(i) We have prepared the condensed consolidated financial statements
included herein without audit. These financial statements include all
adjustments that are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three-month and nine-month
periods ended September 30, 2001 and 2000 pursuant to the rules and regulations
of the Securities and Exchange Commission. All such adjustments are of a normal
recurring nature. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. Although we believe that the disclosures in the financial
statements included herein are adequate to make the information presented not
misleading, these condensed consolidated financial statements should be read in
conjunction with our financial statements and the notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2000 filed with the
Securities and Exchange Commission ("2000 Annual Report"). The results of
operations for the three-month and nine-month periods ended September 30, 2001
and 2000 are not necessarily indicative of the results for a full year.
(ii) Nationwide Health Properties, Inc., a Maryland corporation, is a real
estate investment trust that invests primarily in health care related
facilities and provides financing to health care providers. Whenever we refer
herein to "the Company" or to "us" or use the terms "we" or "our," we are
referring to Nationwide Health Properties, Inc. and its subsidiaries.
As of September 30, 2001, we had investments in 318 facilities located in 37
states. The facilities include 174 skilled nursing facilities, 128 assisted
living facilities, 13 continuing care retirement communities, 2 rehabilitation
hospitals and 1 medical clinic. Our facilities are operated by 62 different
operators, including the following publicly traded companies: Alterra
Healthcare Corporation ("Alterra"), American Retirement Corporation, ARV
Assisted Living, Inc., Beverly Enterprises, Inc., Harborside Healthcare
Corporation, HEALTHSOUTH Corporation, Integrated Health Services, Inc., Mariner
Post-Acute Network, Inc. and Sun Healthcare Group, Inc. Of the operators of the
facilities, only Alterra, which accounted for 12% of our revenues for the nine
months ended September 30, 2001, accounts for more than 10% of our revenues.
As of September 30, 2001, we had direct ownership of 146 skilled nursing
facilities, 121 assisted living facilities, 9 continuing care retirement
communities, 2 rehabilitation hospitals and 1 medical clinic. Substantially all
of our owned facilities are leased under "net" leases that are accounted for as
operating leases.
The leases have initial terms ranging from 5 to 19 years, and generally have
two or more multiple-year renewal options. We earn fixed monthly minimum rents
and may earn periodic additional rents. The additional rent payments are
generally computed as a percentage of facility net patient revenues in excess
of base amounts or as a percentage of the increase in the Consumer Price Index.
Additional rents are generally calculated and payable monthly or quarterly.
While the calculations and payments are generally made on a quarterly basis,
SEC Staff Accounting Bulletin No. 101 Revenue Recognition in Financial
Statements ("SAB No. 101"), which we adopted during the fourth quarter of 2000,
does not allow for the recognition of such revenue until all possible
contingencies have been eliminated. For additional information about the
effects of SAB No. 101, please see Footnote 2 "Summary of Significant
Accounting Policies" and Footnote 16 "Quarterly Financial Data" to our
financial statements in our 2000 Annual Report. Most of the leases contain
provisions such that the total rent cannot decrease from one year to the next.
In addition, most of the leases contain cross-collateralization and
cross-default provisions tied to other leases with the same lessee, as well as
grouped lease renewals and grouped purchase options. Obligations under the
leases have corporate guarantees, and leases covering 207 facilities are backed
by irrevocable letters of credit or security deposits that cover from 1 to 12
months of monthly minimum rents. Under the terms of the leases, the lessees are
responsible for all maintenance, repairs, taxes and insurance on the leased
properties.
5
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 2001
(Unaudited)
As of September 30, 2001, we held 27 mortgage loans secured by 28 skilled
nursing facilities, 7 assisted living facilities and 4 continuing care
retirement communities. As of September 30, 2001, the mortgage loans had a net
book value of approximately $140,500,000 with individual outstanding balances
ranging from approximately $214,000 to $16,104,000 and maturities ranging from
2001 to 2024.
(iii) Basic earnings per share is computed by dividing income from
continuing operations available to common stockholders by the weighted average
common shares outstanding. Income available to common stockholders is
calculated by deducting dividends declared on preferred stock from income from
continuing operations and net income. Diluted earnings per share includes the
effect of the potential shares outstanding.
Three months ended September 30,
--------------------------------
2001 2000
---------------- ---------------
Income Shares Income Shares
------- ------ ------- ------
(In thousands)
Income before gain on sale of properties $16,786 $17,731
Less: preferred stock dividends......... 1,919 1,919
------- -------
Amounts used to calculate Basic EPS..... 14,867 47,241 15,812 46,226
Effect of dilutive securities:
Stock options........................ -- 60 -- --
------- ------ ------- ------
Amounts used to calculate Diluted EPS... $14,867 47,301 $15,812 46,226
======= ====== ======= ======
Nine months ended September 30,
--------------------------------
2001 2000
---------------- ---------------
Income Shares Income Shares
------- ------ ------- ------
(In thousands)
Income before gain on sale of properties $49,662 $52,419
Less: preferred stock dividends......... 5,758 5,758
------- -------
Amounts used to calculate Basic EPS..... 43,904 46,642 46,651 46,226
Effect of dilutive securities:
Stock options........................ -- 37 -- --
------- ------ ------- ------
Amounts used to calculate Diluted EPS... $43,904 46,679 $46,651 46,226
======= ====== ======= ======
(iv) The Company qualifies as a real estate investment trust under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended. The Company
intends to continue to qualify as such and therefore to distribute at least
ninety percent (90%) of its taxable income to its stockholders. Accordingly, no
provision has been made for federal income taxes.
(v) During the nine months ended September 30, 2001, we completed the
construction of one assisted living facility in which our aggregate investment
was approximately $10,401,000. Upon completion of construction, we concurrently
leased the facility under terms generally similar to our existing leases.
During this period we also funded approximately $2,121,000 in capital
improvements at certain facilities in accordance with existing lease
provisions. Such capital improvements generally result in an increase in the
minimum rents earned by us on these facilities.
6
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 2001
(Unaudited)
During the nine-month period ended September 30, 2001, we disposed of four
skilled nursing facilities, one assisted living facility and two residential
care facilities for the elderly in seven separate transactions for aggregate
proceeds of approximately $19,695,000, resulting in a net gain of $3,043,000.
During the nine months ended September 30, 2001, two mortgage loans
aggregating $20,727,000 secured by two skilled nursing facilities were repaid.
In addition, portions of two mortgage loans aggregating $11,563,000 secured by
three skilled nursing facilities were also repaid. During the nine-month period
ended September 30, 2001, we also foreclosed on one mortgage loan secured by a
skilled nursing facility and four mortgage loans secured by a total of four
parcels of land in the aggregate principal amount of approximately $5,625,000.
During the nine months ended September 30, 2001, we issued one million
shares of common stock at $18.00 per share to two mutual funds advised by Cohen
& Steers Capital Management, Inc. The issuance of the shares did not involve
any underwriting fees. We recorded the stock issuance net of approximately
$25,000 of legal and accounting fees related to the issuance and sale of the
shares.
During the nine-month period ended September 30, 2001, we repaid $60,150,000
in aggregate principal amount of medium-term notes that bore interest at a
weighted average fixed rate of 6.89%. During the nine months ended September
30, 2001, we also issued $15,000,000 in aggregate principal amount of
medium-term notes that bear interest at a fixed rate of 9.75% and mature on
March 20, 2008.
(vi) The Company capitalizes interest on facilities under construction. The
capitalization rates used are based on rates for our senior unsecured notes and
bank line of credit, as applicable. Capitalized interest for the nine months
ended September 30, 2001 and 2000 was $613,000 and $1,062,000, respectively.
(vii) In December 2000, Balanced Care Corporation ("BCC") notified us that
it would only be making a partial payment of its December rent. At the time, we
leased ten facilities in six states to BCC under two master leases. The
facilities were constructed and opened during 1999 and 2000 with an aggregate
investment of approximately $68,712,000. We immediately declared BCC in default
under its master leases and initiated steps to terminate the leases. BCC agreed
to return the facilities to us and the leases were terminated effective as of
January 1, 2001. We have leased the facilities to a new operator effective
April 1, 2001 at straight-lined lease rates comparable to those previously paid
by BCC of approximately $580,000 per month. BCC managed the facilities on an
interim basis on our behalf until we had a new lessee in place. We utilized the
forfeited cash security deposits totaling approximately $2,035,000 to cover the
majority of the rent from December through March.
7
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
September 30, 2001
(Unaudited)
Four of the operators of facilities we own have filed for protection under
the United States bankruptcy laws. Under bankruptcy statutes, the tenant must
either assume our leases or reject them and return the properties to us. If the
tenant assumes the leases, it is required to assume the leases under the
existing terms; the court cannot change the rental amount or other lease
provisions that could financially impact the Company. Our rent has been paid
each month on a timely basis. While there is a possibility that the tenants may
decide to reject the leases on these properties, and while we have identified
parties interested in leasing these facilities, any new leases may be at a
lower rental rate. The table below summarizes, for the three operators of
nursing homes, the filing dates of the bankruptcies, the number of our owned
facilities operated by each operator as of September 30, 2001, our investment
in facilities subject to the bankruptcies at September 30, 2001, the percentage
of our revenues for 2001 relating to the facilities operated by each operator
at September 30, 2001 and cash deposits and letters of credit currently held by
us as security for each operator. The fourth operator in bankruptcy, Assisted
Living Concepts, Inc. ("ALC"), which operates assisted living facilities, filed
for bankruptcy on October 1, 2001. We lease two buildings and have provided two
mortgage loans secured by two buildings to ALC that represent less than 1% of
our revenues and our total investments at September 30, 2001.
Number of Percentage
Bankruptcy Facilities Investment of 2001 Security
Operator Filing Date Operated in Facilities Revenues Deposits
-------- ---------------- ---------- ------------- ---------- ----------
Integrated Health Services, Inc. February 2, 2000 7 $35,109,000 3% $ 643,000
Mariner Post-Acute Network, Inc. January 18, 2000 7 28,022,000 3 1,190,000
Sun Healthcare Group, Inc....... October 14, 1999 6 25,623,000 2 870,000
-- ----------- - ----------
Totals.......................... 20 $88,754,000 8% $2,703,000
== =========== = ==========
8
NATIONWIDE HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
September 30, 2001
Statement Regarding Forward Looking Disclosure
Certain information contained in this report includes forward looking
statements. Forward looking statements include statements regarding our
expectations, beliefs, intentions, plans, objectives, goals, strategies, future
events or performance and underlying assumptions and other statements which are
other than statements of historical facts. These statements may be identified,
without limitation, by the use of forward looking terminology such as "may",
"will", "anticipates", "expects", "believes", "intends", "should" or comparable
terms or the negative thereof. All forward looking statements included in this
report are based on information available to us on the date hereof. Such
statements speak only as of the date hereof and we assume no obligation to
update such forward looking statements. These statements involve risks and
uncertainties that could cause actual results to differ materially from those
described in the statements. These risks and uncertainties include (without
limitation) the following: the effect of economic and market conditions and
changes in interest rates; the general distress of the healthcare industry;
government regulations, including changes in the reimbursement levels under the
Medicare and Medicaid programs; continued deterioration of the operating
results or financial condition, including bankruptcies, of the Company's
tenants; the ability of the Company to attract new operators for certain
facilities; occupancy levels at certain facilities; the ability of the Company
to sell certain facilities for their book value; the amount and yield of any
additional investments; changes in tax laws and regulations affecting real
estate investment trusts; access to the capital markets and the cost of
capital; changes in the ratings of the Company's debt securities; and the
additional risk factors set forth under the caption "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2000 ("2000 Annual
Report").
Operating Results
Nine Months 2001 Compared to Nine Months 2000
Minimum rent increased $72,000, or less than 1%, over the same period in
2000. The slight increase was primarily due to minimum rent from investments we
made in additional leased facilities during the last twelve months and the
conversion of two mortgage loans to leases during the same period, partially
offset by the disposal of ten facilities since March 31, 2000. Interest and
other income decreased by $2,733,000, or 15%, over the same period in 2000. The
decrease was primarily due to the payoff of mortgage loans securing eight
facilities since March 31, 2000, the conversion of five mortgage loans to
leases since March 31, 2000 and repayments of the principal balance on mortgage
loans and notes receivable during the last twelve months, partially offset by a
mortgage loan provided on one of the facilities sold in December 2000.
Additional rent and additional interest decreased by $66,000, or 1%, over the
same period in 2000 after the restatement of the September 30, 2000 additional
rent and additional interest amount from $12,659,000 to $12,683,000 caused by
the adoption of SEC Staff Accounting Bulletin No. 101 Revenue Recognition in
Financial Statements ("SAB No. 101") in the fourth quarter of 2000. The
decrease was primarily due to the disposal of facilities and the payoff of
mortgage loans discussed above partially offset by increased additional rent
and additional interest as provided for in the Company's existing leases and
mortgage loans receivable based on increases in the facility revenues or the
Consumer Price Index.
Interest and amortization of deferred financing costs decreased $1,995,000,
or 5%, over the same period in 2000. The decrease was primarily due to a
reduction in the borrowings and average interest rates on our $100,000,000 bank
line of credit and the payoff of $80,150,000 of fixed rate medium-term notes
during the last twelve months, partially offset by the issuance of $15,000,000
of fixed rate medium-term notes during the first quarter of 2001 and a
reduction in interest capitalized on construction projects. Depreciation and
non-cash charges increased $417,000, or 1%, over the same period in 2000. The
increase was primarily attributable to
9
increased depreciation due to the completion of additional facilities since
March 31, 2000 and the write-off of certain capitalized costs, partially offset
by the disposal of facilities during the same period. General and
administrative costs increased $1,608,000, or 37%, over the same period in
2000. The increase was primarily due to costs related to the bankruptcy
proceedings of and settlements with three of the operators of our facilities
discussed below, costs related to the return of ten facilities from an operator
also discussed below and increases in compensation and other general expenses.
Third Quarter 2001 Compared to Third Quarter 2000
Minimum rent decreased $296,000, or 1%, over the same period in 2000. The
decrease in minimum rent was primarily due to the disposal of ten facilities
since March 31, 2000, partially offset by minimum rent from investments we made
in additional leased facilities during the last twelve months and the
conversion of three mortgage loans to leases during the same period. Interest
and other income decreased by $854,000, or 15%, over the same period in 2000.
The decrease was primarily due to the payoff of mortgage loans securing eight
facilities since March 31, 2000, the conversion of five mortgage loans to
leases since March 31, 2000 and repayments of the principal balance on mortgage
loans and notes receivable during the last twelve months, partially offset by a
mortgage loan provided on one of the facilities sold in December 2000.
Additional rent and additional interest decreased by $366,000, or 8%, over the
same period in 2000 after the restatement of the September 30, 2000 additional
rent and additional interest amount from $4,222,000 to $4,388,000 caused by the
adoption of SAB No. 101 in the fourth quarter of 2000. The decrease was
primarily due to the disposal of facilities and the payoff of mortgage loans
discussed above partially offset by increased additional rent and additional
interest as provided for in the Company's existing leases and mortgage loans
receivable based on increases in the facility revenues or the Consumer Price
Index.
Interest and amortization of deferred financing costs decreased $1,238,000,
or 8%, over the same period in 2000. The decrease was primarily due to a
reduction in the borrowings and average interest rates on our $100,000,000 bank
line of credit and the payoff of $80,150,000 of fixed rate medium-term notes
during the last twelve months, partially offset by the issuance of $15,000,000
of fixed rate medium-term notes during the first quarter of 2001 and a
reduction in interest capitalized on construction projects. Depreciation and
non-cash charges decreased $214,000, or 2% over the same period in 2000. The
decrease in depreciation and non-cash charges was primarily attributable to the
disposal of facilities since March 31, 2000 partially offset by increased
depreciation due to the completion of additional facilities during the same
period. General and administrative costs increased $881,000, or 62%, over the
same period in 2000. The increase was primarily due to costs related to the
bankruptcy proceedings of and settlements with three of the operators of our
facilities discussed below, costs related to the return of ten facilities from
an operator also discussed below, and increases in compensation and other
general expenses.
We expect to receive increased additional rent and additional interest at
individual facilities because our leases and mortgages generally contain
provisions under which additional rents or interest income increase with
increases in facility revenues and increases in the Consumer Price Index.
Historically, revenues at our facilities and the Consumer Price Index generally
have increased, although there are no assurances that they will continue to
increase in the future. Sales of facilities or repayments of mortgages would
serve to offset the aforementioned revenue increases, and if sales and
repayments exceed additional investments, this would actually reduce revenues.
We expect that additional rent and additional interest may decrease due to
lease renewals that may result in a shift in the characterization of revenue
from additional rent to minimum rent. There is no assurance that leases will
renew at the aggregate existing rent level, so the impact of lease renewals may
be a decrease in the total rent received by the Company. Additional investments
in healthcare facilities would increase rental and/or interest income. As
additional investments in facilities are made, depreciation and/or interest
expense would also increase. We expect any such increases to be at least
partially offset by rents or interest income associated with the investments.
10
Information Regarding Certain Operators
Over-leveraging and changes in reimbursement levels during 1999 have had an
adverse impact on the financial performance of some of the companies that
operate nursing homes owned by the Company. Four of the companies that operate
our facilities have filed for protection under the United States bankruptcy
laws. The table below summarizes, for the three operators of nursing homes, the
filing dates of the bankruptcies, the number of our owned facilities operated
by each operator as of September 30, 2001, our investment in facilities subject
to the bankruptcies at September 30, 2001, the percentage of our revenues for
2001 relating to the facilities operated by each operator at September 30, 2001
and cash deposits and letters of credit currently held by us as security for
each operator. The fourth operator in bankruptcy, Assisted Living Concepts,
Inc. ("ALC"), which operates assisted living facilities, filed for bankruptcy
on October 1, 2001. We lease two buildings and have provided two mortgage loans
secured by two buildings to ALC that represent less than 1% of our 2001
revenues and our total investments at September 30, 2001.
Number of Percentage
Bankruptcy Facilities Investment in of 2001 Security
Operator Filing Date Operated Facilities Revenues Deposits
-------- ---------------- ---------- ------------- ---------- ----------
Integrated Health Services, Inc. February 2, 2000 7 $35,109,000 3% $ 643,000
Mariner Post-Acute Network...... January 18, 2000 7 28,022,000 3 1,190,000
Sun Healthcare Group, Inc....... October 14, 1999 6 25,623,000 2 870,000
-- ----------- -- ----------
Totals................... 20 $88,754,000 8% $2,703,000
== =========== == ==========
Under bankruptcy statutes, the tenant must either assume our leases or
reject them and return the properties to us. If the tenant assumes the leases,
it is required to assume the leases under the existing terms; the court cannot
change the rental amount or other lease provisions that could financially
impact the Company. The tenant's decision whether to assume leases is usually
based primarily on whether the properties that are operated by the tenant are
providing positive cash flows. Only a few of the 14 remaining facilities leased
to and operated by these three companies that have not been assumed are not
providing adequate cash flows on their own to cover the rent under the leases.
Our rent has been paid each month on a timely basis. Nevertheless, there is a
possibility that the tenants may decide to reject the leases on these
properties, and while we have identified parties interested in leasing these
facilities, any new leases may be at a lower rental rate.
Mariner Post-Acute Network ("Mariner") has assumed the leases on 6 of the 7
facilities it currently leases from us. It has returned 14 facilities to us to
date, all of which have been leased to new operators. The leases for 11 of the
returned facilities are at rates substantially consistent with what was
previously received from Mariner; however, the leases for the other 3
facilities are at significantly lower rental rates. Sun Healthcare Group, Inc.
("Sun") has not assumed any of the 6 facilities it currently leases from us. It
has returned 19 facilities to us to date, 17 of which have been leased to new
operators, one of which has been sold and one of which is not currently leased.
The leases on the buildings that have been leased to new operators are
substantially consistent with what was previously received from Sun. We expect
the net rate reduction on the facilities returned and those we believe may be
returned by Mariner and Sun to result in a decrease in income of approximately
$0.04 per share on an annualized basis.
In addition to the above, we have one mortgage loan directly with Mariner in
the amount of $7,497,000 that is secured by one facility. The revenues from
this mortgage loan represented approximately .5% of our revenues for the nine
months ended September 30, 2001 and the mortgage loan has a security deposit in
the amount of $400,000. We have not received any payments on this mortgage loan
subsequent to March 2000. Under bankruptcy statutes, the court imposes an
automatic stay with respect to our actions to collect or pursue remedies with
respect to mortgage loans and we are precluded from exercising foreclosure or
other remedies against the borrower. Unlike a lease, a mortgage loan is not
subject to assumption or rejection. The mortgage loan may be divided into (i) a
secured loan for the portion of the mortgage loan that does not exceed the
value of the property and (ii) an unsecured loan for the portion of the
mortgage loan that exceeds the value of the property, which
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unsecured portion would be treated like general unsecured claims in the
bankruptcy estate. We would only be entitled to the recovery of interest and
costs if and to the extent that the value of the collateral exceeds the amount
owed, and we believe it currently does. In addition, the courts may modify the
terms of a mortgage, including the rate of interest and timing of principal
payments.
In December 2000, Balanced Care Corporation ("BCC") notified us that it
would only be making a partial payment of its December rent. At the time, we
leased ten facilities in six states to BCC under two master leases. The
facilities were constructed and opened during 1999 and 2000 with an aggregate
investment of approximately $68,712,000. We immediately declared BCC in default
under its master leases and initiated steps to terminate the leases. BCC agreed
to return the facilities to us and the leases were terminated effective as of
January 1, 2001. We have leased the facilities to a new operator effective
April 1, 2001 at straight-lined lease rates comparable to those previously paid
by BCC of approximately $580,000 per month. BCC managed the facilities on an
interim basis on our behalf until we had a new lessee in place. We utilized the
forfeited cash security deposits totaling approximately $2,035,000 to cover the
majority of the rent from December through March.
In general, the replacement of operators that have defaulted on lease or
loan obligations could be delayed by the approval process of any regulatory
agency necessary for the transfer of the property or the replacement of the
operator licensed to operate the facility.
Liquidity and Capital Resources
During the nine months ended September 30, 2001, we completed the
construction of one assisted living facility in which our aggregate investment
was approximately $10,401,000. Upon completion of construction, we concurrently
leased the facility under terms generally similar to our existing leases.
During this period, we also funded approximately $2,121,000 in capital
improvements at certain facilities in accordance with existing lease
provisions. Such capital improvements generally result in an increase in the
minimum rents earned by us on these facilities. The construction advances and
capital improvements were funded by borrowings on our bank line of credit and
by cash on hand.
During the nine-month period ended September 30, 2001, we disposed of four
skilled nursing facilities, one assisted living facility and two residential
care facilities for the elderly in seven separate transactions for aggregate
proceeds of approximately $19,695,000, resulting in a net gain of $3,043,000.
The proceeds received were used to repay borrowings on our bank line of credit.
During the nine months ended September 30, 2001, two mortgage loans
aggregating $20,727,000 secured by two skilled nursing facilities were repaid.
In addition, portions of two mortgage loans aggregating $11,563,000 secured by
three skilled nursing facilities were also repaid. The proceeds received were
used to repay borrowings on our bank line of credit.
During the nine-month period ended September 30, 2001, we issued one million
shares of common stock at $18.00 per share to two mutual funds advised by Cohen
& Steers Capital Management, Inc. The issuance of the shares did not involve
any underwriting fees. We recorded the stock issuance net of approximately
$25,000 of legal and accounting fees related to the issuance and sale of the
shares. The proceeds received were used to repay borrowings on our bank line of
credit.
During the nine months ended September 30, 2001, we repaid $60,150,000 in
aggregate principal amount of medium-term notes that bore interest at a
weighted average fixed rate of 6.89%. The repayment was funded by borrowings on
our bank line of credit, by cash on hand and by the issuance of $15,000,000 in
aggregate principal amount of medium-term notes that bear interest at a fixed
rate of 9.75% and mature on March 20, 2008. We plan to repay the $18,000,000 of
medium-term notes that mature in December with borrowings on our bank line of
credit.
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At September 30, 2001, we had $47,000,000 available under our $100,000,000
bank line of credit that expires on March 31, 2003. We have shelf registrations
on file with the Securities and Exchange Commission under which we may issue
(a) up to $427,100,000 in aggregate principal amount of medium term notes and
(b) up to approximately $160,247,000 of securities including debt, convertible
debt, common and preferred stock.
We may make additional investments in healthcare related facilities,
although the level of our new investments has decreased during the last two
years. During that time, we have not been making significant additional
investments beyond our actual commitments because access to long-term capital
was not available under favorable terms. The common stock issuance during the
second quarter may indicate that our ability to access capital and fund
investments may be improving. Financing for future investments may be provided
by borrowings under our bank line of credit, private placements or public
offerings of debt or equity, the assumption of secured indebtedness, obtaining
mortgage financing on a portion of our owned portfolio or through joint
ventures. We believe we have sufficient liquidity and financing capability to
finance anticipated future investments, maintain our current dividend level and
repay borrowings at or prior to their maturity.
Market Risk Exposure
This "Market Risk Exposure" discussion is an update of material changes to
the "Market Risk Exposure" discussion included in our 2000 Annual Report and
should be read in conjunction with such discussion. Readers are cautioned that
many of the statements contained in the "Market Risk Exposure" discussion are
forward looking and should be read in conjunction with the disclosures under
the heading "Statement Regarding Forward Looking Disclosure" set forth above.
We are exposed to market risks related to fluctuations in interest rates on
our mortgage loans receivable and debt. The Company does not utilize interest
rate swaps, forward or option contracts on foreign currencies or commodities,
or other types of derivative financial instruments.
We provide mortgage loans to operators of healthcare facilities as part of
our normal operations. The majority of the loans have fixed rates. Three of the
mortgage loans have adjustable rates; however, the rates adjust only once or
twice over the loan lives and the minimum adjusted rates are equal to the
current rates. Therefore, all mortgage loans receivable are treated as fixed
rate notes.
The Company utilizes debt financing primarily for the purpose of making
additional investments in healthcare facilities. Historically, we have made
short-term borrowings on our variable rate bank line of credit to fund our
acquisitions until market conditions were appropriate, based on management's
judgment, to issue stock or fixed rate debt to provide long-term financing.
During the nine months ended September 30, 2001, we repaid $60,150,000 of
fixed rate debt at a weighted average rate of 6.89% and issued $15,000,000 of
9.75% fixed rate debt. In addition, the bank borrowings under our bank line of
credit have decreased from $79,000,000 to $53,000,000.
For fixed rate debt, changes in interest rates generally affect the fair
market value, but do not impact earnings or cash flows. Conversely, for
variable rate debt, changes in interest rates generally do not impact fair
market value, but do affect the future earnings and cash flows.
Increases in interest rates during 2000 made it more expensive for us to
access debt capital through our medium-term note program. Decreases in interest
rates during 2001 have resulted in a decrease in interest expense related to
our bank line of credit, but have not significantly reduced our cost to access
debt capital through our medium-term note program. Any future interest rate
increases may increase the cost of any borrowings to finance future
acquisitions or replace current long-term debt as it matures.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2001
NATIONWIDE HEALTH PROPERTIES, INC.
/s/ MARK L. DESMOND
By __________________________________
Mark L. Desmond
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
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