DOC

Business Context and Reporting Period

Company: Health Care Property Investors, Inc. (HCPI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2001
Business Overview: HCPI acquires and leases health care facilities, including long-term care, assisted living, medical office buildings, and acute care hospitals. As of June 30, 2001, the portfolio consisted of 409 facilities in 42 states with a gross investment of approximately $2.6 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenue remained relatively flat, increasing slightly by $193,000 (0.1%) compared to the prior year. Triple Net rental income increased by $770,000, while Interest and Other Income decreased by $756,000 due to loan payoffs.
• Net Income: Net income applicable to common shares decreased by $5,010,000 (9.4%). This decline was driven by a $3,955,000 reduction in gains/losses on property sales (a $242,000 loss in 2001 vs. a $3,713,000 gain in 2000) and a $2,170,000 one-time charge for writing down facilities held for sale.
• Interest Expense: Decreased by $2,200,000 (5.1%) due to the paydown of the revolving line of credit using proceeds from a May 2001 equity offering and lower short-term interest rates.
• Liquidity: Cash and cash equivalents decreased by $42,492,000, primarily due to net cash used in financing activities ($118,376,000) which included significant dividend payments and debt repayments, partially offset by $139,537,000 in proceeds from issuing common stock.

Guidance, Outlook, and Risks

• Outlook: Management expects near-term earnings and FFO growth to be lower due to lower rents from certain operators, a slow pace of new acquisitions, and time required to sell or lease vacant facilities. Long-term growth is anticipated as market conditions improve and capital is deployed into positive spread investments.
• Dividends: A quarterly dividend of $0.78 per common share was declared on July 23, 2001, payable August 20, 2001.
• Acquisitions and Commitments: The company has commitments to purchase and construct facilities totaling approximately $189 million. In July 2001, a commitment was made to acquire 12 medical office buildings and six research facilities for an estimated $126 million.
• Risks and Contingencies:
  • Tenant Bankruptcies: Several long-term care operators (e.g., Sun Healthcare, Integrated Health Services) remain in bankruptcy. While most are current on rent, there is uncertainty regarding future lease renewals and potential rent reductions.
  • Vacancy: Eight vacant buildings (estimated value $15 million) are not generating rent. Management expects to sell or lease at least two additional vacant buildings by September 30, 2001.
  • Regulatory Environment: Changes in Medicare/Medicaid reimbursement and liability insurance costs continue to pressure operators, particularly in the assisted living and long-term care sectors.

Investor Verification Checklist

• FFO vs. Net Income: Verify the reconciliation of Net Income to Funds From Operations (FFO), noting the impact of the $2.17 million write-down charge on facilities held for sale.
• Debt Maturity: Review the debt maturity schedule; $99 million in senior notes are due in January 2002, requiring refinancing or repayment.
• Tenant Concentration: Assess the risk exposure to the top six operators, which represent 43.6% of annualized revenue, specifically Kindred Healthcare (formerly Vencor) which recently exited bankruptcy.
• Vacancy Resolution: Monitor the progress of leasing or selling the eight vacant properties to realize the projected $2.7 million annual FFO benefit.
• Equity Dilution: Note the issuance of 4,025,000 shares in May 2001 and the potential for further dilution from convertible minority interests in joint ventures.