Business Context and Reporting Period
Company: Health Care Property Investors, Inc. (HCP)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: HCP is a Real Estate Investment Trust (REIT) specializing in health care-related real estate. As of December 31, 2003, the portfolio consisted of 554 properties across 44 states, including 31 hospitals, 173 long-term care facilities, 124 assisted/retirement living facilities, 196 medical office buildings, and 30 other health care facilities. Total investment in properties was approximately $3.4 billion.
Key Financial Metrics
| Metric | 2003 Value | 2002 Value |
|---|---|---|
| Total Revenue | $400,183,000 | $349,116,000 |
| Net Income Applicable to Common Shares | $121,849,000 | $112,480,000 |
| Diluted EPS (Common) | $0.97 | $0.96 |
| Total Assets | $3,035,957,000 | $2,748,417,000 |
| Total Debt Obligations | $1,407,284,000 | $1,333,848,000 |
| Stockholders' Equity | $1,440,617,000 | $1,280,889,000 |
| Dividends Paid (Common) | $206,166,000 ($1.66/share) | $188,449,000 ($1.63/share) |
| Cash and Cash Equivalents | $17,768,000 | $8,495,000 |
Debt Structure: Debt consists of Senior Notes ($1.05 billion), Mortgage Notes ($158.8 million), and Bank Notes ($198 million). The weighted average interest rate on Senior Notes was 6.89% in 2003.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 14.6% to $400.2 million, driven by facility acquisitions and increased interest income.
- Acquisitions: Acquired 11 properties for $189.4 million. Completed a $575 million acquisition of MedCap Properties, LLC (113 medical office buildings) via a joint venture (HCP MOP) with GE Commercial Finance.
- Dispositions: Sold 27 facilities for a net sales price of $56.1 million, realizing a net gain of $12.1 million.
- Capital Markets: Issued $295.5 million in preferred stock (Series E and F) and $200 million in 6.00% Senior Notes due 2015. Redeemed $293 million of older, higher-cost preferred stock, incurring a $18.6 million redemption charge.
- Stock Split: Announced a 2-for-1 stock split effective March 2, 2004 (reflected in all periods presented).
- Impairments: Recorded property impairments of $14.0 million in 2003, compared to $9.2 million in 2002.
Outlook, Risks, and Contingencies
Management Commentary: Management emphasizes a strategy of opportunistic investing, portfolio diversification, and a conservative balance sheet. Liquidity is maintained through a $490 million revolving line of credit (with $198 million drawn at year-end) and access to public debt and equity markets.
Key Risks and Contingencies:
- Tenet Healthcare Concentration: Tenet Healthcare Corporation accounts for 16% of Revenue Less Operating Expenses. Tenet is facing multiple federal and state investigations regarding billing practices, Medicare fraud, and corporate governance. Tenet's credit facility was reduced from $1.2 billion to $800 million in March 2004.
- HealthSouth Corporation: Accounts for 5% of revenue. HealthSouth is undergoing a forensic audit following SEC charges regarding financial statement inflation. However, they remain current on rent payments.
- Regulatory Compliance: A hospital leased to Tenet in Tarzana, California, is subject to California Senate Bill 1953 (seismic safety standards). The cost of compliance is currently unestimable.
- Legal Proceedings: On March 12, 2004, the Company's CFO, James G. Reynolds, filed a lawsuit against the Company and its Chairman/CEO alleging breach of contract, fraud, and wrongful termination, seeking unspecified damages.
- REIT Status: Failure to maintain REIT qualification would result in significant corporate taxation and reduced distributions to shareholders.
Investor Verification Checklist
- Tenet Exposure: Verify the current financial stability of Tenet Healthcare and the status of its ongoing government investigations to assess the risk to 16% of HCP's revenue.
- HealthSouth Status: Monitor HealthSouth's forensic audit results and ability to maintain rent payments on the 9 rehabilitation hospitals leased to them.
- Seismic Compliance Costs: Track the estimated remediation costs for the Tarzana, CA hospital under SB 1953 and the allocation of costs between HCP and Tenet.
- Executive Litigation: Review the progress of the lawsuit filed by former CFO James G. Reynolds and potential financial or reputational impact.
- Joint Venture Leverage: Assess the leverage and refinancing status of the HCP MOP joint venture, which recently secured $288 million in mortgage financing.