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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 June 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 June 30,
2001--47,240,651.
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NATIONWIDE HEALTH PROPERTIES, INC.
FORM 10-Q
June 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.. 8
Part II--Other Information
Item 4. Submission of Matters to a Vote of Security Holders.................................... 13
Item 6. Exhibits and Reports on Form 8-K....................................................... 13
1
PART I
NATIONWIDE HEALTH PROPERTIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2001 2000
----------- ------------
(Unaudited)
(Dollars in thousands)
ASSETS
------
Investments in real estate
Real estate properties:
Land.............................................. $ 147,479 $ 142,721
Buildings and improvements........................ 1,177,506 1,182,410
Construction in progress.......................... 9,111 8,478
---------- ----------
1,334,096 1,333,609
Less accumulated depreciation..................... (201,135) (186,206)
---------- ----------
1,132,961 1,147,403
Mortgage loans receivable, net.................... 168,574 185,623
---------- ----------
1,301,535 1,333,026
Cash and cash equivalents............................. 6,788 6,149
Receivables........................................... 8,575 7,607
Other assets.......................................... 38,093 34,225
---------- ----------
$1,354,991 $1,381,007
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Bank borrowings....................................... $ 56,000 $ 79,000
Senior notes due 2001-2038............................ 622,900 627,900
Notes and bonds payable............................... 62,496 62,857
Accounts payable and accrued liabilities.............. 46,340 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...................... 574,708 556,658
Cumulative net income............................... 608,495 575,619
Cumulative dividends................................ (720,672) (673,428)
---------- ----------
Total stockholders' equity........................ 567,255 563,472
---------- ----------
$1,354,991 $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 Six Months
Ended June 30, Ended June 30,
---------------- ----------------
2001 2000 2001 2000
------- ------- ------- -------
Revenues:
Minimum rent............................. $32,664 $32,632 $65,269 $64,901
Interest and other income................ 5,091 5,956 10,412 12,291
Additional rent and additional interest.. 4,842 4,478 8,595 8,295
------- ------- ------- -------
42,597 43,066 84,276 85,487
Expenses:
Interest................................. 14,113 14,612 28,415 29,172
Depreciation and non-cash charges........ 8,895 8,913 19,386 18,755
General and administrative............... 1,880 1,375 3,599 2,872
------- ------- ------- -------
24,888 24,900 51,400 50,799
------- ------- ------- -------
Net income before gain on sale of
properties................................ 17,709 18,166 32,876 34,688
Gain on sale of properties................. -- 133 -- 1,149
------- ------- ------- -------
Net income................................. 17,709 18,299 32,876 35,837
Preferred stock dividends.................. (1,919) (1,919) (3,839) (3,839)
------- ------- ------- -------
Net income available to common
stockholders.............................. $15,790 $16,380 $29,037 $31,998
======= ======= ======= =======
Per share amounts:
Basic/diluted income from continuing
operations available to common
stockholders............................ $ .34 $ .35 $ .63 $ .67
======= ======= ======= =======
Basic/diluted net income available to
common stockholders..................... $ .34 $ .35 $ .63 $ .69
======= ======= ======= =======
Dividends paid per share................. $ .46 $ .46 $ .92 $ .92
======= ======= ======= =======
Weighted average shares outstanding........ 46,482 46,226 46,362 46,225
======= ======= ======= =======
See accompanying notes.
3
NATIONWIDE HEALTH PROPERTIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
-------------------
2001 2000
--------- --------
(In thousands)
Cash flow from operating activities:
Net income............................................... $ 32,876 $ 35,837
Gain on sale of properties............................... -- (1,149)
Depreciation and non-cash charges........................ 19,386 18,755
Amortization of deferred financing costs................. 484 513
Net increase in other assets and liabilities............. (8,673) 5,496
--------- --------
Net cash provided by operating activities.............. 44,073 59,452
Cash flow from investing activities:
Investment in real estate properties..................... (2,951) (24,494)
Disposition of real estate properties.................... 5,275 18,527
Investment in mortgage loans receivable.................. (704) (880)
Principal payments on mortgage loans receivable.......... 12,796 12,742
--------- --------
Net cash provided by investing activities.............. 14,416 5,895
Cash flow from financing activities:
Bank borrowings.......................................... 85,300 90,300
Repayment of bank borrowings............................. (108,300) (96,600)
Issuance of common stock................................. 18,034 --
Issuance of senior unsecured debt........................ 15,000 --
Repayments of senior unsecured debt...................... (20,000) (10,000)
Principal payments on notes and bonds.................... (304) (267)
Dividends paid........................................... (47,244) (47,075)
Other, net............................................... (336) (240)
--------- --------
Net cash used in financing activities.................. (57,850) (63,882)
--------- --------
Increase in cash and cash equivalents...................... 639 1,465
Cash and cash equivalents, beginning of period............. 6,149 16,139
--------- --------
Cash and cash equivalents, end of period................... $ 6,788 $ 17,604
========= ========
See accompanying notes.
4
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 six-month
periods ended June 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 six-month periods
ended June 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 June 30, 2001, we had investments in 321 facilities located in 37
states. The facilities include 177 skilled nursing facilities, 128 assisted
living facilities, 13 continuing care retirement communities, 2 rehabilitation
hospitals and 1 medical clinic. Our facilities are operated by 58 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 six months ended June 30, 2001, accounts for more than 10% of
our revenues.
As of June 30, 2001, we had direct ownership of 145 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 208 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)
June 30, 2001
(Unaudited)
As of June 30, 2001, we held 34 mortgage loans secured by 32 skilled
nursing facilities, 7 assisted living facilities and 4 continuing care
retirement communities. As of June 30, 2001, the mortgage loans had a net book
value of approximately $168,574,000 with individual outstanding balances
ranging from approximately $79,000 to $16,104,000 and maturities ranging from
2001 to 2025.
(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 June 30,
-----------------------------
2001 2000
-------------- --------------
Income Shares Income Shares
------- ------ ------- ------
(In thousands)
Income before gain on sale of properties......... $17,709 $18,166
Less: preferred stock dividends.................. 1,919 1,919
------- -------
Amounts used to calculate Basic EPS.............. 15,790 46,438 16,247 46,226
Effect of dilutive securities:
Stock options.................................. -- 44 -- --
------- ------ ------- ------
Amounts used to calculate Diluted EPS............ $15,790 46,482 $16,247 46,226
======= ====== ======= ======
Six months ended June 30,
-----------------------------
2001 2000
-------------- --------------
Income Shares Income Shares
------- ------ ------- ------
(In thousands)
Income before gain on sale of properties......... $32,876 $34,688
Less: preferred stock dividends.................. 3,839 3,839
------- -------
Amounts used to calculate Basic EPS.............. 29,037 46,337 30,849 46,225
Effect of dilutive securities:
Stock options.................................. -- 25 -- --
------- ------ ------- ------
Amounts used to calculate Diluted EPS............ $29,037 46,362 $30,849 46,225
======= ====== ======= ======
(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 six months ended June 30, 2001, we funded approximately
$1,763,000 in capital improvements at certain facilities in accordance with
certain existing lease provisions. Such capital improvements result in an
increase in the minimum rents earned by us on these facilities.
During the six-month period ended June 30, 2001, we disposed of three
skilled nursing facilities and two residential care facilities for the elderly
in five separate transactions for aggregate proceeds of approximately
$5,275,000.
During the six months ended June 30, 2001, a $7,000,000 portion of a
mortgage loan secured by a skilled nursing facility was repaid. In addition, a
$4,563,000 portion of another mortgage loan secured by two skilled nursing
facilities was also repaid.
6
NATIONWIDE HEALTH PROPERTIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
June 30, 2001
(Unaudited)
During the six-month period ended June 30, 2001, we 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 six months ended June 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 six-month period ended June 30, 2001, we repaid $20,000,000 in
aggregate principal amount of medium-term notes that bore interest at a fixed
rate of 6.68%. During the six months ended June 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 six
months ended June 30, 2001 and 2000 was $405,000 and $891,000, 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 could get a new
lessee in place and have the facility licenses transferred to the name of the
new operator. We utilized the forfeited cash security deposits totaling
approximately $2,035,000 to cover the majority of the rent from December
through March.
Three operators of nursing homes 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 the filing dates of the
bankruptcies, the number of our owned facilities operated by each operator,
our investment in facilities subject to the bankruptcies, the percentage of
our revenues for 2001 relating to the facilities operated by each operator and
cash deposits and letters of credit currently held by us as security for each
operator:
Number of Investment Percentage
Bankruptcy Facilities in of 2001 Security
Operator Filing Date Operated Facilities Revenues Deposits
-------- ---------------- ---------- ------------ ---------- ----------
Mariner Post-Acute
Network, Inc. ......... January 18, 2000 20 $ 60,354,000 6% $2,655,000
Sun Healthcare Group,
Inc. .................. October 14, 1999 15 50,349,000 4 1,267,000
Integrated Health
Services, Inc. ........ February 2, 2000 7 35,109,000 3 643,000
--- ------------ --- ----------
Totals.................. 42 $145,812,000 13% $4,565,000
=== ============ === ==========
7
NATIONWIDE HEALTH PROPERTIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
June 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
Six Months 2001 Compared to Six Months 2000
Minimum rent increased $368,000, or 1%, over the same period in 2000. The
increase was primarily due to 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, partially offset by
the disposal of nine facilities since March 31, 2000. Interest and other
income decreased by $1,879,000, or 15%, over the same period in 2000. The
decrease was primarily due to the payoff of mortgage loans securing six
facilities since March 31, 2000, the conversion of three mortgage loans to
leases during the last twelve months 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
during the last twelve months. Additional rent and additional interest
increased by $300,000, or 4%, over the same period in 2000 after the
restatement of the June 30, 2000 additional rent and additional interest
amount from $8,437,000 to $8,295,000 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 increase was primarily due to
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 partially offset by the
disposal of facilities and the payoff of mortgage loans discussed above.
Interest and amortization of deferred financing costs decreased $757,000,
or 3%, 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 $40,000,000 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 $631,000, or 3%, over the same period in 2000.
The increase was primarily attributable to increased depreciation due to the
completion of additional facilities since March 31, 2000 and the write-off of
8
certain capitalized costs, partially offset by the disposal of facilities
during the same period. General and administrative costs increased $727,000,
or 25%, over the same period in 2000. The increase was primarily due to costs
related to the bankruptcy proceedings of three of the operators of our
facilities discussed below, costs related to taking back ten facilities from
an operator that defaulted in December 2000 also discussed below, and
increases in compensation and other general expenses.
Second Quarter 2001 Compared to Second Quarter 2000
Minimum rent increased $32,000 over the same period in 2000. The consistent
level of minimum rent was primarily due to 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, offset by
the disposal of nine facilities since March 31, 2000. Interest and other
income decreased by $865,000, or 15%, over the same period in 2000. The
decrease was primarily due to the payoff of mortgage loans securing six
facilities since March 31, 2000, the conversion of three mortgage loans to
leases during the last twelve months 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
during the last twelve months. Additional rent and additional interest
increased by $364,000, or 8%, over the same period in 2000 after the
restatement of the June 30, 2000 additional rent and additional interest
amount from $4,225,000 to $4,478,000 caused by the adoption of SAB No. 101 in
the fourth quarter of 2000. The increase was primarily due to 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 partially offset by the disposal
of facilities and the payoff of mortgage loans discussed above.
Interest and amortization of deferred financing costs decreased $499,000,
or 3%, 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 $40,000,000 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 $18,000 over the same period in 2000. The
consistent level of depreciation and non-cash charges was primarily
attributable to the disposal of facilities since March 31, 2000 offset by
increased depreciation due to the completion of additional facilities during
the same period. General and administrative costs increased $505,000, or 37%,
over the same period in 2000. The increase was primarily due to costs related
to the bankruptcy proceedings of three of the operators of our facilities
discussed below, costs related to taking back ten facilities from an operator
that defaulted in December 2000 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 also 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.
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. Three
9
operators have filed for protection under the United States bankruptcy laws.
The table below summarizes the filing dates of the bankruptcies, the number of
our owned facilities operated by each operator, our investment in facilities
subject to the bankruptcies, the percentage of our revenues for 2001 relating
to the facilities operated by each operator and cash deposits and letters of
credit currently held by us as security for each operator:
Number of Percentage
Bankruptcy Facilities Investment of 2001 Security
Operator Filing Date Operated in Facilities Revenues Deposits
-------- ---------------- ---------- ------------- ---------- ----------
Mariner Post-Acute
Network, Inc. ......... January 18, 2000 20 $ 60,354,000 6% $2,655,000
Sun Healthcare Group,
Inc. .................. October 14, 1999 15 50,349,000 4 1,267,000
Integrated Health
Services, Inc. ........ February 2, 2000 7 35,109,000 3 643,000
--- ------------ --- ----------
Totals.............. 42 $145,812,000 13% $4,565,000
=== ============ === ==========
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 42 facilities leased to and
operated by these three companies 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.
We have entered into agreements for the return of 14 of the facilities that
Mariner Post-Acute Network, Inc. ("Mariner") operated at June 30, 2001. We
have since leased 3 of the facilities to a new operator and identified
operators interested in leasing the other 11 facilities. While the 3 newly
leased facilities are at significantly lower rental rates, the remaining
facilities are expected to be leased at rates substantially consistent with
what was previously received from Mariner. Mariner has also agreed to assume
the leases on 5 of the 6 other facilities they operated at June 30, 2001. We
have also entered into an agreement with Sun Healthcare Group, Inc. ("Sun")
for the return of 9 of the facilities that they operated at June 30, 2001 and
have identified operators interested in leasing these facilities at rates
consistent with what was previously received from Sun. We expect the net
rental reduction from these Mariner and Sun transactions to result in a
decrease in income of approximately $0.03 to $0.04 per share on an annualized
basis.
In addition to the above, we have one mortgage loan directly with Mariner
Post-Acute Network 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 six months ended June 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 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,
10
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 could get a new lessee in place and have the
facility licenses transferred to the name of the new operator. 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 six months ended June 30, 2001, we funded approximately
$1,763,000 in capital improvements at certain facilities in accordance with
certain existing lease provisions. Such capital improvements result in an
increase in the minimum rents earned by us on these facilities. The
construction advances and capital improvement advances were funded by
borrowings on our bank line of credit and by cash on hand.
During the six-month period ended June 30, 2001, we disposed of three
skilled nursing facilities and two residential care facilities for the elderly
in five separate transactions for aggregate proceeds of approximately
$5,275,000, which approximated net book value. The proceeds received were used
to repay borrowings on our bank line of credit.
During the six months ended June 30, 2001, a $7,000,000 portion of a
mortgage loan secured by a skilled nursing facility was repaid. In addition, a
$4,563,000 portion of another mortgage loan secured by two skilled nursing
facilities was also repaid. The proceeds received were used to repay
borrowings on our bank line of credit.
During the six-month period ended June 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 six months ended June 30, 2001, we repaid $20,000,000 in
aggregate principal amount of medium-term notes that bore interest at a fixed
rate of 6.68%. 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.
At June 30, 2001, we had $44,000,000 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
quarter and the announcement of a preliminary agreement with an institutional
investor that would make available $130,000,000 for new investments 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.
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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. Four 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 six months ended June 30, 2001, we repaid $20,000,000 of 6.68%
fixed rate debt and issued $15,000,000 of 9.75% fixed rate debt. In addition,
the bank borrowings under our bank line of credit have decreased to
$56,000,000 from $79,000,000.
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 the 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 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Stockholders was held on April 20, 2001 ("Annual
Meeting"). At the Annual Meeting, John C. Argue and David R. Banks were re-
elected as directors to serve for a three-year term until the 2004 Annual
Meeting of Stockholders. The other directors whose term of office continued
after the meeting are R. Bruce Andrews, William K. Doyle, Charles D. Miller
and Jack D. Samuelson. Additionally, the selection of Arthur Andersen LLP as
independent accountants for the year ended December 31, 2001 was ratified.
Voting at the Annual Meeting was as follows:
Votes Cast Votes Cast Abstentions/Broker
Matter For Against Non-Votes
------ ---------- ---------- ------------------
Election of John C. Argue......... 39,206,182 247,826
Election of David R. Banks........ 39,053,069 399,939
Ratification of selection of
Arthur Andersen LLP.............. 39,329,790 51,140 72,078
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
None.
(b) Reports on Form 8-K
A Form 8-K dated June 12, 2001 was filed with respect to the issuance of
one million shares of common stock resulting in net proceeds of
approximately $17,975,000.
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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: July 27, 2001
NATIONWIDE HEALTH PROPERTIES, INC.
/s/ Mark L. Desmond
By __________________________________
Mark L. Desmond
Senior Vice President and Chief
Financial Officer
(Principal Financial Officer)
14