| NATIONWIDE HEALTH PROPERTIES INC Item 1A Risk Factors |
| Generally speaking, the risks facing our company fall into two categories: risks associated with the operations of our tenants and borrowers; and other risks unique to our operations |
| You should carefully consider the risks and uncertainties described below before making an investment decision in our company |
| These risks and uncertainties are not the only ones facing us and there may be additional matters that we are unaware of or that we currently consider immaterial |
| All of these could adversely affect our business, financial condition, results of operations and cash flows and, thus, the value of an investment in our company |
| RISKS RELATING TO OUR TENANTS AND BORROWERS Our financial position could be weakened and our ability to make distributions could be limited if any of our major tenants or borrowers were unable to meet their obligations to us or failed to renew or extend their relationship with us as their lease terms expire or their mortgages mature, or if we were unable to lease or re-lease our facilities or make mortgage loans on economically favorable terms |
| There may end up being more serious operator financial problems that lead to more extensive restructurings or tenant disruptions than we currently expect |
| This could be unique to a particular operator or it could be more industry wide, such as further federal or state governmental reimbursement reductions in the case of our skilled nursing facilities as governments work through their budget deficits, reduced occupancies for our assisted and independent living facilities due to general economic and other factors, increases in liability, insurance premiums and other expenses |
| These adverse developments could arise due to a number of factors, including those listed below |
| The bankruptcy, insolvency or financial deterioration of our tenants and borrowers could significantly delay our ability to collect unpaid rents or require us to find new operators for rejected facilities |
| We are exposed to the risk that our tenants and borrowers may not be able to meet their obligations, which may result in their bankruptcy or insolvency |
| Although our leases and loans provide us the right to terminate an agreement, evict a tenant, demand immediate repayment and 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 restrict our ability to collect unpaid rent and interest during the bankruptcy proceeding |
| Generally, the tenant is required to make rent payments to us during its bankruptcy until it rejects the lease |
| If the tenant assumes the lease, the court cannot change the rental amount or any other lease provision that could financially impact us |
| However, if the tenant rejects the lease, the facility would be returned to us |
| In that event, if we were able to re-lease the facility to a new operator only on unfavorable terms or after a significant delay, we could lose some or all of the associated revenue from that facility for an extended period of time |
| • Mortgage Loans |
| If an operator defaults under one of our mortgage loans, we may have to foreclose on the mortgage or protect our interest by acquiring title to a property and thereafter making substantial improvements or repairs in order to maximize the facility’s investment potential |
| Operators may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against an enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations |
| If an operator seeks bankruptcy protection, the automatic stay of the federal bankruptcy law would preclude us from enforcing foreclosure or other remedies against the operator unless relief is obtained from the court |
| In addition, an operator would not be required to make principal and interest payments while an automatic stay was in effect |
| High “loan to value” ratios or declines in the value of the facility may prevent us from realizing an amount equal to our mortgage loan upon foreclosure |
| The receipt of liquidation proceeds or 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 replacement of the operator licensed to manage the facility |
| In some instances, we may take possession of a property that exposes us to successor liabilities |
| These events, if they were to occur, could reduce our revenue and operating cash flow |
| 10 ______________________________________________________________________ [37]Table of Contents In addition, some of our leases provided for free rent at the beginning of the lease |
| These deferred amounts are repaid over the remainder of the lease term |
| Although the payment of cash rent is deferred, rental income is recorded on a straight-line basis over the life of the lease, such that the income recorded during the early years of the lease is higher than the actual cash rent received during that period, creating an asset on our balance sheet called deferred rent receivable |
| The balance of deferred rent receivable at December 31, 2005, net of allowances was dlra8dtta5 million |
| To the extent any of the operators under these leases, for the reasons discussed above, become unable to pay the deferred rents, we may be required to write down the rents receivable from those operators, which would reduce our net income |
| Operators that fail to comply with governmental reimbursement programs such as Medicare or Medicaid, licensing and certification requirements, fraud and abuse regulations or new legislative developments may be unable to meet their obligations to us |
| Our tenants and borrowers are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes (sometimes applied retroactively) resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law |
| The ultimate timing or effect of these changes cannot be predicted |
| These changes may have a dramatic effect on our operators’ costs of doing business and the amount of reimbursement by both government and other third-party payors |
| The failure of any of our operators to comply with these laws, requirements and regulations could adversely affect their ability to meet their obligations to us |
| In particular: • Medicare, Medicaid and Private Payor Reimbursement |
| A significant portion of the revenues generated by the operators of our skilled nursing facilities and specialty hospitals is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid |
| Failure to maintain certification and accreditation in these programs would result in a loss of funding from them |
| Moreover, federal and state governments have adopted and continue to consider various reform proposals to control health care costs |
| In recent years, there have been fundamental changes in the Medicare program that have resulted in reduced levels of payment for a substantial portion of health care services |
| For example, the Balanced Budget Act of 1997 established a Prospective Payment System for Medicare skilled nursing facilities under which facilities are paid a federal per diem rate for most covered nursing facility services |
| Under this system, skilled nursing facilities are no longer assured of receiving reimbursement adequate to cover the costs of operating the facilities |
| In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients |
| In addition, reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors |
| Governmental concern regarding health care costs and their budgetary impact may result in significant reductions in payment to health care facilities, and future reimbursement rates for either governmental or private payors may not be sufficient to cover cost increases in providing services to patients |
| Loss of certification or accreditation, or any changes in reimbursement policies that reduce reimbursement to levels that are insufficient to cover the cost of providing patient care, could cause the revenues of our operators to decline, potentially jeopardizing their ability to meet their obligations to us |
| In that event, our revenues from those facilities could be reduced, which could in turn cause the value of our affected properties to decline |
| • Licensing and Certification |
| Our facilities and the operators of the facilities are subject to regulatory and licensing requirements of federal, state and local authorities and are periodically audited by them to confirm compliance |
| Failure to obtain licensure or loss of licensure would prevent a facility, or in some cases, potentially all of an operator’s facilities in a state, from operating |
| Our skilled nursing facilities and specialty hospitals generally require governmental approval, often in the form of a certificate of need that generally varies by state and is subject to change, prior to the addition or construction of new beds, the addition of services or certain capital expenditures |
| Some of our facilities may not be able to satisfy current and future regulatory requirements and may for this reason be unable to continue operating in the future |
| In such event, our revenues from those facilities could be reduced or eliminated for an extended period of time |
| State licensing and/or Medicare and Medicaid laws also require the 11 ______________________________________________________________________ [38]Table of Contents operators of our facilities to comply with extensive standards governing operations |
| Federal and state agencies administering those laws regularly inspect our facilities and investigate complaints |
| The operators of our specialty hospitals must meet applicable conditions of participation set forth by the Department of Health and Human Services (“HHS”) relating to the type of hospital, standards of medical care, its equipment and personnel, as well as comply with state and federal laws and regulations |
| Our tenants and borrowers and their managers receive notices of potential sanctions and remedies from time to time, and such sanctions have been imposed from time to time on facilities operated by them |
| If they are unable to cure deficiencies which have been identified or which are identified in the future, such sanctions may be imposed and if imposed may adversely affect our tenants’ ability to operate and therefore pay rent to us |
| • Fraud and Abuse Laws and Regulations |
| There are various extremely complex and largely uninterpreted federal and state laws and regulations governing a wide array of referrals, relationships and arrangements and prohibiting fraud by health care providers |
| These laws include (i) civil and criminal laws that prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments, (ii) certain federal and state anti-remuneration and fee-splitting laws (including, in the case of certain states, laws that extend to arrangements that do not involve items or services reimbursable under Medicare or Medicaid), such as the federal health care Anti-Kickback Statute and federal self-referral law (also known as the “Stark law”), which govern various types of financial arrangements among health care providers and others who may be in a position to refer or recommend patients to these providers (iii) the Civil Monetary Penalties law, which may be imposed by HHS for certain fraudulent acts, (iv) federal and state patient privacy laws, such as the privacy and security provisions of the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and (v) certain state laws that prohibit the corporate practice of medicine |
| Many states have also adopted or are considering legislation to increase patient protections, such as criminal background checks on care providers and minimum staffing levels |
| Governments are devoting increasing attention and resources to anti-fraud initiatives against health care providers |
| In addition, certain laws, such as the Federal False Claims Act, allow for individuals to bring qui tam (or whistleblower) actions on behalf of the government for violations of fraud and abuse laws |
| These qui tam actions may be filed by present and former patients, nurses or other employees, or other third parties |
| The Balanced Budget Act of 1997 and HIPAA expand the penalties for health care fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs |
| Further, under anti-fraud demonstration projects such as Operation Restore Trust, the Office of Inspector General of HHS, in cooperation with other federal and state agencies, has focused and may continue to focus on the activities of skilled nursing facilities in certain states in which we have properties |
| The investigative and enforcement activities regarding skilled nursing quality compliance have also intensified as a result of HHS’ Nursing Home Quality Initiative program, which provides consumers with comparative information about nursing home facilities and assesses compliance with certain regulatory requirements |
| The violation of any of these laws by an operator may result in the imposition of criminal or civil fines or other penalties (including exclusion from the Medicare and Medicaid programs) that could jeopardize that operator’s ability to make lease or mortgage payments to us or to continue operating its facility |
| Under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Medicare Modernization Act”), an 18-month moratorium was imposed on the ability of specialty hospitals to use the “whole hospital exception” to the Stark law |
| The moratorium, however, did not affect specialty hospitals in operation or under development as of November 18, 2003 because such hospitals were “grandfathered” under the moratorium |
| A number of organizations, including the Medical Payment Advisory Commission (“MedPAC”) and HHS, have studied the utilization, costs of service, quality of care and financial impact of specialty hospitals and their physician owners relative to community hospitals |
| The 18-month moratorium expired in June 2005, but it is unclear whether Congress will take any further action in this area |
| These reports may result in legislation extending the moratorium or further restricting physician ownership of specialty hospitals |
| To the extent that any of the operators of our specialty hospitals have physician owners, those operators may have to undergo significant ownership and structural changes if such legislation is passed |
| Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would effect major changes in the health care system, either nationally or at the state level |
| Among the proposals under consideration are cost controls on state Medicaid reimbursements, hospital cost-containment initiatives by public and private payors, uniform electronic data transmission standards for health care claims and payment transactions, and higher standards to protect the security and privacy of health-related information |
| We cannot predict whether any proposals will be adopted or, if adopted, what effect, if any, these proposals would have on operators and, thus, our business |
| Our tenants and borrowers are faced with significant potential litigation and insurance costs that not only affect their ability to obtain and maintain adequate liability and other insurance, but also may affect their ability to pay their lease or mortgage payments and fulfill their insurance, indemnification and other obligations to us |
| In some states, advocacy groups have been created to monitor the quality of care at skilled nursing facilities and assisted and independent living facilities, and these groups have brought litigation against operators |
| Also, in several instances, private litigation by skilled nursing facility patients or assisted and independent living facility residents or the families of either has succeeded in winning very large damage awards for alleged abuses |
| The effect of this litigation and potential litigation has been to materially increase the costs of monitoring and reporting quality of care compliance incurred by our tenants |
| In addition, the cost of liability and medical malpractice insurance has increased and may increase further if this litigation environment continues |
| This has affected the ability of some of the operators of our facilities to obtain and maintain adequate liability and other insurance and, thus, manage their related risk exposures |
| In addition to being unable to fulfill their insurance, indemnification and other obligations to us under their leases and mortgages and thereby potentially exposing us to those risks, this could cause our tenants and borrowers to be unable to pay their lease or mortgage payments potentially decreasing our revenues and increasing our collection and litigation costs |
| Moreover, to the extent we are required to foreclose on the affected facilities, our revenues from those facilities could be reduced or eliminated for an extended period of time |
| In addition, we may in some circumstances be named as a defendant in litigation involving the actions of our tenants |
| For example, we have been named as a defendant in lawsuits for wrongful death at one of our facilities formerly operated by a now bankrupt operator with minimal insurance |
| Although we have no involvement in the activities of our tenants and our standard leases generally require our tenants to indemnify and carry insurance to cover us in certain cases, a significant judgment against us in such litigation could exceed our and our tenants’ insurance coverage, which would require us to make payments to cover the judgment |
| Increased competition has resulted in lower revenues for some operators and may affect the ability of our tenants and borrowers to meet their payment obligations to us |
| The health care industry is highly competitive and we expect that it may become more competitive in the future |
| The operators of our facilities are competing with numerous other providers of similar health care services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers |
| In addition, until recently past overbuilding in the assisted and independent living market caused a slow-down in the fill-rate of newly constructed buildings and a reduction in the monthly rate many newly built and previously existing facilities were able to obtain for their services and adversely impacted the occupancy of mature properties |
| This in turn resulted in lower revenues for the operators of certain of our facilities and contributed to the financial difficulties of some operators |
| While we believe that for the most part overbuilt markets have stabilized or neared stabilization, we cannot be certain that resumption of development will not again lead to overbuilding, adversely affecting the ability of the operators of our facilities to achieve occupancy and rate levels that will enable them to meet all of their obligations to us |
| In addition to renewed development, our tenants and borrowers are expected to encounter increased competition in the future that could limit their ability to attract residents or expand their businesses and therefore affect their ability to pay their lease or mortgage payments |
| 13 ______________________________________________________________________ [40]Table of Contents RISKS UNIQUE TO US AND OUR OPERATIONS In addition to the operator related risks discussed above, there are a number of risks directly associated with us and our operations |
| We are subject to particular risks associated with real estate ownership, which could result in unanticipated losses or expenses |
| Our business is subject to many risks that are associated with the ownership of real estate |
| For example, if our operators do not renew their leases, we may be unable to re-lease the facilities at favorable rental rates |
| Other risks that are associated with real estate acquisition and ownership include, among other things, the following: • general liability, property and casualty losses, some of which may be uninsured; • the inability to purchase or sell our assets rapidly to respond to changing economic conditions, due to the illiquid nature of real estate and the real estate market; • leases which are not renewed or are renewed at lower rental amounts at expiration; • the exercise of purchase options by tenants resulting in a reduction of our rental revenue; • costs relating to maintenance and repair of our facilities and the need to make expenditures due to changes in governmental regulations, including the Americans with Disabilities Act, however we have transferred primary responsibility for these issues to our tenants; • environmental hazards created by prior owners or occupants, existing tenants, mortgagors or other persons for which we may be liable; • acts of God affecting our properties; and • acts of terrorism affecting our properties |
| We rely on external sources of capital to fund future capital needs, and if our access to such capital on reasonable terms is limited, we may not be able to meet maturing commitments or make future investments necessary to grow our business |
| In order to qualify as a REIT under the Internal Revenue Code, we are required, among other things, to distribute each year to our stockholders at least 90prca of our REIT taxable income, disregarding the dividends paid deduction and excluding net capital gain |
| Because of this distribution requirement, we will not be able to fund, from cash retained from operations, all future capital needs, including capital needs to satisfy or refinance maturing commitments and to make investments |
| If we are unable to obtain needed capital at all or only on unfavorable terms from these sources, we might not be able to make the investments needed to grow our business, or to meet our obligations and commitments as they mature, which could negatively affect the ratings of our debt and even, in extreme circumstances, affect our ability to continue operations |
| Our access to capital depends upon a number of factors over which we have little or no control, including rising interest rates, inflation and other general market conditions and the market’s perception of our growth potential and our current and potential future earnings and cash distributions and the market price of the shares of our capital stock |
| In the early 2000’s, difficult capital market conditions in our industry limited our access to capital and as a result our historic level of new investments decreased |
| Although we believe our access to capital today is good, we may again encounter difficult market conditions that could limit our access to capital |
| This could limit our ability to make future investments or possibly affect our ability to meet our maturing commitments |
| Our potential capital sources include: • Equity Financing |
| As with other publicly-traded companies, the availability of equity capital will depend, in part, on the market price of our common stock which, in turn, will depend upon various 14 ______________________________________________________________________ [41]Table of Contents market conditions that may change from time to time |
| Among the market conditions and other factors that may affect the market price of our common stock are: • the extent of investor interest; • the reputation of REITs in general and the health care sector in particular and the attractiveness of REIT equity securities in comparison to other equity securities, including securities issued by other real estate-based companies; • our financial performance and that of our operators; • the contents of analyst reports about us and the REIT industry; • general stock and bond market conditions, including changes in interest rates on fixed income securities, which may lead prospective purchasers of our common stock to demand a higher annual yield from future distributions; • our failure to maintain or increase our dividend, which is dependent, to a large part, on growth of funds from operations which in turn depends upon increased revenues from additional investments and rental increases; and • other factors such as governmental regulatory action and changes in REIT tax laws |
| The market value of the equity securities of a REIT is generally based upon the market’s perception of the REIT’s growth potential and its current and potential future earnings and cash distributions |
| Our failure to meet the market’s expectation with regard to future earnings and cash distributions likely would adversely affect the market price of our common stock and reduce the value of your investment |
| • Debt Financing/Leverage |
| Financing for our maturing commitments and future investments may be provided by borrowings under our bank line of credit, private or public offerings of debt, the assumption of secured indebtedness, mortgage financing on a portion of our owned portfolio or through joint ventures |
| We are subject to risks normally associated with debt financing, including the risks that our cash flow will be insufficient to service our debt or make distributions to our stockholders, that we will be unable to refinance existing indebtedness and that the terms of refinancing may not be as favorable as the terms of existing indebtedness or may include restrictive covenants that limit our flexibility in operating our business |
| If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions, our cash flow may not be sufficient in all years to pay distributions to our stockholders and to repay all maturing debt |
| Furthermore, if prevailing interest rates, changes in our debt ratings or other factors at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to that refinanced indebtedness would increase, which could reduce our profitability and the amount of dividends we are able to pay |
| Moreover, additional debt financing increases the amount of our leverage |
| The degree of leverage could have important consequences to stockholders, including affecting our investment grade ratings, our ability to obtain additional financing in the future for working capital, capital expenditures, investments, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally |
| • Joint Ventures |
| In appropriate circumstances, we may develop or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures |
| Our participation in joint ventures is subject to the risks that: • our co-venturers or partners might at any time have economic or other business interests or goals that are inconsistent with our business interests or goals; • our co-venturers or partners may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives (including actions that may be inconsistent with our REIT status); 15 ______________________________________________________________________ [42]Table of Contents • our co-venturers or partners may have different objectives from us regarding the appropriate timing and pricing of any sale or refinancing of properties; and • our co-venturers or partners might become bankrupt or insolvent |
| Even when we have a controlling interest, certain major decisions may require partner approval |
| Increasing investor interest in our sector and consolidation at the operator or REIT level could increase competition and reduce our profitability |
| Our business is highly competitive and we expect that it may become more competitive in the future |
| We compete with a number of health care REITs and other financing sources, some of which are larger and have a lower cost of capital than we do |
| In addition to these competitors, recently there has been increasing interest from a number of other foreign and domestic investors in the senior housing and long-term care real estate sector |
| Additionally, consolidation has begun to occur at the operator level and may accelerate and expand to the REIT level |
| These developments could result in fewer investment opportunities for us and lower spreads over our cost of capital, which would hurt our growth and profitability |
| One of the tenants of our facilities accounts for more than 10prca of our revenues and may account for more if it acquires one or more of our other operators |
| If this operator experiences financial difficulties, or otherwise fails to make payments to us, our revenues may significantly decline |
| For the year ended December 31, 2005, as adjusted for facilities acquired and disposed of during that period, Brookdale Senior Living, Inc |
| (formerly Alterra Healthcare Corporation) accounted for 16prca of our revenues and has publicly announced its intent to acquire other operators, including one of our private tenants accounting for 3prca of our revenues |
| We cannot assure you that Brookdale will continue to satisfy its obligations to us |
| The failure or inability of Brookdale to pay its obligations to us could materially reduce our revenues and net income, which could in turn reduce the amount of dividends we pay and cause our stock price to decline |
| If we fail to maintain our REIT status, we will be subject to federal income tax on our taxable income at regular corporate rates |
| We intend to operate in a manner to qualify as a REIT under the Internal Revenue Code |
| While we believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Internal Revenue Code, it is possible that is not the case or that our future operations could cause us to fail to qualify |
| Qualification as a REIT requires us to satisfy numerous requirements established under highly technical and complex Internal Revenue Code provisions for which there are only limited judicial and administrative interpretations |
| The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT For example, in order to qualify as a REIT, at least 95prca of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating at least 90prca of our annual REIT taxable income, disregarding the dividends paid deduction and excluding net capital gain |
| You should be aware that future legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of qualification as a REIT If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates |
| Unless we are entitled to relief under statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification |
| If we fail to qualify as a REIT: • we would not be required to make distributions to stockholders; • we will face serious tax consequences that will substantially reduce the funds available for distributions to stockholders, payments of principal and interest on debt securities we issue, or investments; 16 ______________________________________________________________________ [43]Table of Contents • we would not be allowed a deduction for distributions to stockholders in computing our taxable income; and • we could be subject to the federal alternative minimum tax and increased state and local taxes |
| As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital, and could adversely affect the value of our common stock |
| There is no assurance that we will make distributions in the future |
| We intend to continue to pay quarterly distributions to our stockholders consistent with our historical practice |
| However, our ability to pay distributions will be adversely affected if any of the risks described herein occur |
| Our payment of distributions is subject to compliance with restrictions contained in our revolving bank credit facility and our senior notes indentures |
| All distributions are made at the discretion of our board of directors and our future distributions will depend upon our earnings, our cash flows, our anticipated cash flows, our financial condition, maintenance of our REIT tax status and such other factors as our board of directors may deem relevant from time to time |
| There are no assurances of our ability to pay distributions in the future |
| In addition, our distributions in the past have included, and may in the future include, a return of capital |
| A downgrade of our credit rating could impair our ability to obtain additional debt financing on favorable terms, if at all, and significantly reduce the trading price of our common stock |
| We currently have the lowest investment grade credit ratings of Baa3 from Moody’s Investors Service and BBB- from Standard & Poor’s Ratings Services and Fitch Ratings on our unsecured notes |
| If any of these rating agencies downgrade our credit rating, or place our rating under watch or review for possible downgrade, this could make it more difficult or expensive for us to obtain additional debt financing, and the trading price of our common stock will likely decline |
| Factors that may affect our credit rating include, among other things, our financial performance, our success in raising sufficient equity capital, our capital structure and level of indebtedness and pending or future changes in the regulatory framework applicable to our operators and our industry |
| We cannot assure you that these credit agencies will not downgrade our credit rating in the future |
| We have now, and may have in the future, exposure to floating interest rates, which can have the effect of reducing our profitability |
| We receive revenue primarily by leasing our assets under leases that are long-term triple-net leases in which the rental rate is generally fixed with annual rent escalations, subject to certain limitations |
| Certain of our debt obligations are floating-rate obligations with interest rate and related payments that vary with the movement of LIBOR or other indexes |
| The generally fixed rate nature of our revenue and the variable rate nature of certain of our interest obligations create interest rate risk and can have the effect of reducing our profitability or making our lease and other revenue insufficient to meet our obligations |
| Unforeseen costs associated with investments in new properties could reduce our profitability |
| Our business strategy contemplates future investments that may not prove to be successful |
| For example, we might expend a significant amount of money and management attention unsuccessfully pursuing an opportunity |
| Further, we might 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 issue equity securities or incur additional debt, or both, to finance future investments, it may reduce our per share financial results and/or increase our leverage |
| If we pursue new development projects, such projects would be subject to numerous risks, including risks of construction delays or cost overruns that may increase project costs, and new project commencement risks such as receipt of zoning, occupancy and other required governmental approvals and permits |
| Moreover, if we agree to provide funding to enable health care operators to build, expand or renovate facilities on our properties and the 17 ______________________________________________________________________ [44]Table of Contents project is not completed, we could be forced to become involved in the development to ensure completion or we could lose the property |
| These costs may negatively affect our results of operations |
| We may recognize losses on the sale of certain facilities |
| From time to time, we classify certain facilities, including unoccupied buildings and land parcels, as assets held for sale |
| For example, as of December 31, 2005, assets held for sale totaled approximately dlra9cmam198cmam000 |
| To the extent we are unable to sell these properties for book value, we may be required to take an impairment charge or loss on the sale, either of which would reduce our net income |
| We may face competitive risks 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 |
| In order to maintain our current financial results, we must re-invest these proceeds, on a timely basis, in health care 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 |
| Our success depends in part on our ability to retain key personnel |
| We depend on the efforts of our executive officers, particularly our Chief Executive Officer Mr |
| Douglas M Pasquale and our Senior Vice Presidents Mr |
| Donald D Bradley and Mr |
| Abdo H Khoury |
| The loss of the services of these persons or the limitation of their availability could have an adverse impact on our operations |
| Although we have entered into employment and/or security agreements with certain of these executive officers, these agreements may not assure their continued service |
| As owners of real estate, we are subject to environmental laws that expose us to the possibility of having to pay damages to the government and costs of remediation if there is contamination on our property |
| Under various laws, owners of real estate may be required to investigate and clean up hazardous substances present at a property, and may be held liable for property damage or personal injuries that result from environmental contamination |
| These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination, regardless of whether we were aware of, or responsible for, the environmental contamination |
| We review environmental surveys of the facilities we own prior to their purchase |
| Based upon those surveys 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 that could have a material adverse effect on our business or financial condition |
| If the holders of our notes exercise their rights to require us to repurchase their notes, we may have to make substantial payments, incur additional debt or issue equity securities to finance the repurchase |
| Some of our medium-term notes grant the holders the right to require us, on specified dates, to repurchase their notes at a price equal to the principal amount of the notes to be repurchased plus accrued and unpaid interest |
| If the holders of these notes elect to require us to repurchase their notes, we may be required to make significant payments, which could adversely affect our liquidity |
| Alternatively, we could finance the repurchase through the issuance of additional debt securities, which may have terms that are not as favorable as the notes we are repurchasing, or equity securities, which will dilute the interests of our existing stockholders |
| 18 ______________________________________________________________________ [45]Table of Contents Our level of indebtedness may adversely affect our financial results |
| As of December 31, 2005, we had total consolidated indebtedness of dlra1cmam030cmam503cmam000 and total assets of dlra1cmam867cmam220cmam000 |
| We expect to incur additional indebtedness in the future |
| The risks associated with financial leverage include: • increasing our sensitivity to general economic and industry conditions; • limiting our ability to obtain additional financing on favorable terms; • requiring a substantial portion of our cash flow to make interest and principal payments due on our indebtedness; • a possible downgrade of our credit rating; and • limiting our flexibility in planning for, or reacting to, changes in our business and industry |
| Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses |
| Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and New York Stock Exchange rules, are creating uncertainty for companies such as ours |
| These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices |
| We are committed to maintaining high standards of corporate governance and public disclosure |
| As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities |
| In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors’ audit of that assessment has required the commitment of significant financial and managerial resources |
| We expect these efforts to require the continued commitment of significant resources |
| Further, our board members, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties |
| As a result, we may have difficulty attracting and retaining qualified board members and executive officers, which could harm our business |
| If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed |
| Our charter and bylaws and the laws of the state of our incorporation contain provisions that may delay, defer or prevent a change in control or other transactions that could provide stockholders with the opportunity to realize a premium over the then-prevailing market price for our common stock |
| In order to protect us against the risk of losing our REIT status for US federal income tax purposes, our charter subjects the ownership by any single person of more than 9dtta9prca of the issued and outstanding shares of our voting stock to our right to redeem shares acquired or held in excess of such ownership limit |
| In addition, any transfer of our shares, options, warrants or other securities convertible into voting shares that would create a beneficial owner of more than 9dtta9prca of the outstanding shares of our stock shall be deemed null and void |
| The ownership limit may have the effect of delaying, deferring or preventing a change in control of our company and could adversely affect our stockholders’ ability to realize a premium over the market price for the shares of our common stock |
| Our board of directors has increased the ownership limit to 20prca with respect to one of our stockholders |
| Based on SEC filings, that stockholder beneficially owned 8cmam004cmam700 of our shares, or approximately 11dtta8prca of our common stock, as of September 30, 2005 |
| 19 ______________________________________________________________________ [46]Table of Contents Our charter authorizes us to issue additional shares of common stock and one or more series of preferred stock and to establish the preferences, rights and other terms of any series of preferred stock that we issue |
| Although our board of directors has no intention to do so at the present time, it could establish a series of preferred stock that could delay, defer or prevent a transaction or a change in control that might involve the payment of a premium over the market price for our common stock or otherwise be in the best interests of our stockholders |
| In addition, the laws of our state of incorporation and the following provisions of our charter may delay, defer or prevent a transaction that may be in the best interests of our stockholders: • in certain circumstances, a proposed consolidation, merger, share exchange or transfer must be approved by two-thirds of the votes of our preferred stockholders entitled to be cast on the matter; • business combinations must be approved by 90prca of the outstanding shares unless the transaction receives a unanimous vote or consent of our board of directors or is a combination solely with a wholly owned subsidiary; and • the classification of our board of directors into three groups, with each group of directors being elected for successive three-year terms, may delay any attempt to replace our board |
| As a Maryland corporation, we are subject to provisions of the Maryland Business Combination Act (“MBCA”) and the Maryland Control Share Act (“MCSA”) |
| The MBCA may prohibit certain future acquirors of 10prca or more of our stock (entitled to vote generally in the election of directors) and their affiliates from engaging in business combinations with us for a period of five years after such acquisition, and then only upon recommendation by the board of directors with (1) a stockholder vote of 80prca of the votes entitled to be cast (including two-thirds of the stock not held by the acquiror and its affiliates) or (2) if certain stringent fair price tests are met |
| The MCSA may cause acquirors of stock at levels of 10prca, 33prca or more than 50prca of the voting power of our stock to lose the voting rights of such stock unless voting rights are restored by vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding votes of stock held by the acquiring stockholder and our officers and employee directors |