HEALTH CARE REIT INC /DE/ Item 1A Risk Factors Forward-Looking Statements and Risk Factors This Annual Report on Form 10-K and the documents incorporated by reference contain statements that constitute “forward-looking statements” as that term is defined in the federal securities laws |
These forward-looking statements include those regarding: • the possible expansion of our portfolio; • the sale of properties; • the performance of our operators and properties; • our ability to enter into agreements with new viable tenants for properties that we take back from financially troubled tenants, if any; • our ability to make distributions; • our policies and plans regarding investments, financings and other matters; • our tax status as a real estate investment trust; • our ability to appropriately balance the use of debt and equity; 25 _________________________________________________________________ [86]Table of Contents • our ability to access capital markets or other sources of funds; and • our ability to meet our earnings guidance |
For example, when we use words such as “may,” “will,” “intend,” “should,” “believe,” “expect,” “anticipate,” “estimate” or similar expressions, we are making forward-looking statements |
Forward-looking statements are not guarantees of future performance and involve risks and uncertainties |
Our expected results may not be achieved, and actual results may differ materially from our expectations |
This may be a result of various factors, including, but not limited to: • the status of the economy; • the status of capital markets, including prevailing interest rates; • serious issues facing the health care industry, including compliance with, and changes to, regulations and payment policies and operators’ difficulty in obtaining and maintaining adequate liability and other insurance; • changes in financing terms; • competition within the health care and senior housing industries; • negative developments in the operating results or financial condition of operators, including, but not limited to, their ability to pay rent and repay loans; • the Company’s ability to transition or sell facilities with profitable results; • the failure of closings to occur as and when anticipated; • acts of God affecting our properties; • our ability to reinvest sale proceeds at similar rates to assets sold; • operator bankruptcies or insolvencies; • government regulations affecting Medicare and Medicaid reimbursement rates; • liability claims and insurance costs for our operators; • unanticipated difficulties and/or expenditures relating to future acquisitions; • environmental laws affecting our properties; • delays in reinvestment of sale proceeds; • changes in rules or practices governing the Company’s financial reporting; • other factors, including REIT qualification, anti-takeover provisions and key management personnel; and • the risks described below: Risk factors related to our operators’ revenues and expenses Our facility operators’ revenues are primarily driven by occupancy, Medicare and Medicaid reimbursement, if applicable, and private pay rates |
Expenses for these facilities are primarily driven by the costs of labor, food, utilities, taxes, insurance and rent or debt service |
Revenues from government reimbursement have, and may continue, to come under pressure due to reimbursement cuts and state budget shortfalls |
Liability insurance and staffing costs continue to increase for our operators |
To the extent that any decrease in revenues and/or any increase in operating expenses result in a facility not generating enough cash to make payments to us, the credit of our operator and the value of other collateral would have to be relied upon |
26 _________________________________________________________________ [87]Table of Contents Risk factors related to operator bankruptcies We are exposed to the risk that our operators may not be able to meet the rent, principal and interest or other payments due us, which may result in an operator bankruptcy or insolvency, or that an operator might become subject to bankruptcy or insolvency proceedings for other reasons |
Although our operating lease agreements provide us with the right to evict an operator, demand immediate payment of rent and exercise other remedies, and our loans provide us with the right to terminate any funding obligation, demand immediate repayment of principal and unpaid interest, foreclose on the collateral and exercise other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization |
An operator in bankruptcy may be able to limit or delay our ability to collect unpaid rent in the case of a lease or to receive unpaid principal and interest in the case of a loan, and to exercise other rights and remedies |
We may be required to fund certain expenses (eg, real estate taxes and maintenance) to preserve the value of a facility, avoid the imposition of liens on a facility and/or transition a facility to a new operator |
In some instances, we have terminated our lease with an operator and relet the facility to another operator |
In some of those situations, we have provided working capital loans to and limited indemnification of the new operator |
If we cannot transition a leased facility to a new operator, we may take possession of that facility, which may expose us to certain successor liabilities |
Should such events occur, our revenue and operating cash flow may be adversely affected |
Risk factors related to government regulations Our operators’ businesses are affected by government reimbursement and private payor rates |
To the extent that a facility receives a significant portion of its revenues from governmental payors, primarily Medicare and Medicaid, such revenues may be subject to statutory and regulatory changes, retroactive rate adjustments, recovery of program overpayments or set-offs, administrative rulings, policy interpretations, payment or other delays by fiscal intermediaries, government funding restrictions (at a program level or with respect to specific facilities) and interruption or delays in payments due to any ongoing governmental investigations and audits at such facility |
In recent years, governmental payors have frozen or reduced payments to health care providers due to budgetary pressures |
Health care reimbursement will likely continue to be of paramount importance to federal and state authorities |
We cannot make any assessment as to the ultimate timing or effect any future legislative reforms may have on the financial condition of the skilled nursing industry, the specialty care industry or the health care industry in general |
There can be no assurance that adequate reimbursement levels will continue to be available for services provided by any facility operator, whether the facility receives reimbursement from Medicare, Medicaid or private payors |
Significant limits on the scope of services reimbursed and on reimbursement rates and fees could have a material adverse effect on an operator’s liquidity, financial condition and results of operations, which could adversely affect the ability of an operator to meet its obligations to us |
In addition, the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility |
Risk factors related to liability claims and insurance costs Long-term care facility operators (skilled nursing facilities, assisted living facilities, and independent living/continuing care retirement communities) have experienced substantial increases in both the number and size of patient care liability claims in recent years, particularly in the states of Texas and Florida |
As a result, general and professional liability costs have increased and may continue to increase |
Long-term care liability insurance rates are increasing nationwide because of large jury awards in states like Texas and Florida |
Over the past four years, both Texas and Florida have adopted skilled nursing facility liability laws that modify or limit tort damages |
Despite some of these reforms, the long-term care industry overall continues to experience very high general and professional liability costs |
Insurance companies have responded to this claims crisis by severely restricting their capacity to write long-term care general and professional liability policies |
No assurances can be given that the climate for long-term care general and professional liability insurance will improve in any of the foregoing states or any other states where the facility operators conduct business |
Insurance companies may continue to reduce or stop writing general and professional liability policies for long-term care facilities |
Thus, general professional liability insurance coverage may be restricted or very costly, which may adversely affect the facility operators’ future 27 _________________________________________________________________ [88]Table of Contents operations, cash flows and financial condition, and may have a material adverse effect on the facility operators’ ability to meet their obligations to us |
Risk factors related to acquisitions We are exposed to the risk that our future acquisitions may not prove to be successful |
We could encounter unanticipated difficulties and expenditures relating to any acquired properties, including contingent liabilities, and newly acquired properties might require significant management attention that would otherwise be devoted to our ongoing business |
If we agree to provide construction funding to an operator and the project is not completed, we may need to take steps to ensure completion of the project or we could lose the property |
Moreover, if we issue equity securities or incur additional debt, or both, to finance future acquisitions, it may reduce our per share financial results |
These costs may negatively affect our results of operations |
Risk factors related to environmental laws Under various federal and state laws, owners or operators of real estate may be required to respond to the release of hazardous substances on the property and may be held liable for property damage, personal injuries or penalties that result from environmental contamination |
These laws also expose us to the possibility that we may become liable to reimburse the government for damages and costs it incurs in connection with the contamination |
Generally, such liability attaches to a person based on the person’s relationship to the property |
Our tenants or borrowers are primarily responsible for the condition of the property and since we are a passive landlord, we do not “participate in the management” of any property in which we have an interest |
Moreover, we review environmental site assessments of the properties that we own or encumber prior to taking an interest in them |
Those assessments are designed to meet the “all appropriate inquiry” standard, which qualifies us for the innocent purchaser defense if environmental liabilities arise |
Based upon such assessments, we do not believe that any of our properties are subject to material environmental contamination |
However, environmental liabilities may be present in our properties and we may incur costs to remediate contamination, which could have a material adverse effect on our business or financial condition |
Risk factors related to reinvestment of sale proceeds From time to time, we will have cash available from (1) the proceeds of sales of our securities, (2) principal payments on our loans receivable and (3) the sale of properties, including non-elective dispositions, under the terms of master leases or similar financial support arrangements |
We must re-invest these proceeds, on a timely basis, in properties or in qualified short-term investments |
We compete for real estate investments with a broad variety of potential investors |
This competition for attractive investments may negatively affect our ability to make timely investments on terms acceptable to us |
Delays in acquiring properties may negatively impact revenues and perhaps our ability to make distributions to stockholders |
Other risk factors We are also subject to a number of other risks |
First, we might fail to qualify or remain qualified as a REIT We intend to operate as a REIT under the Internal Revenue Code and believe we have and will continue to operate in such a manner |
Since REIT qualification requires us to meet a number of complex requirements, it is possible that we may fail to fulfill them, and if we do, our earnings will be reduced by the amount of federal taxes owed |
A reduction in our earnings would affect the amount we could distribute to our stockholders |
Also, if we were not a REIT, we would not be required to make distributions to stockholders since a non-REIT is not required to pay dividends to stockholders amounting to at least 90prca of its annual taxable income (including 100prca of capital gains) |
See “Item 1 — Business — Taxation” for a discussion of the provisions of the Internal Revenue Code that apply to us and the effects of non-qualification |
Second, our Second Restated Certificate of Incorporation and Amended and Restated By-Laws contain anti-takeover provisions (staggered board provisions, restrictions on share ownership and transfer and super majority stockholder approval requirements for business combinations) that could make it more difficult for or even prevent 28 _________________________________________________________________ [89]Table of Contents a third party from acquiring us without the approval of our incumbent Board of Directors |
Provisions and agreements that inhibit or discourage takeover attempts could reduce the market value of our common stock |
Third, we are dependent on key personnel |
Although we have entered into employment agreements with our executive officers, losing any one of them could, at least temporarily, have an adverse impact on our operations |
We believe that losing more than one would have a material adverse impact on our business |