DOC

Business Context and Reporting Period

Company: Health Care Property Investors, Inc. (HCPI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2001
Business Overview: HCPI acquires and leases health care facilities (long-term care, assisted living, medical office buildings, hospitals) to health care providers. As of March 31, 2001, the portfolio included 412 facilities in 42 states with a gross investment of approximately $2.6 billion.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenue decreased slightly by $165,000 (0.2%) to $78.4 million. Triple Net rental income increased by $376,000, while Managed Properties rental income decreased by $270,000 due to vacancies and higher operating expenses.
• Net Income: Net income applicable to common shares declined by $3.4 million (14.7%) to $19.8 million. This was driven by a $774,000 loss on property sales (vs. a gain in 2000) and a $1.6 million one-time write-down of a facility held for sale.
• FFO: Funds From Operations decreased by $529,000 (1.3%) to $39.4 million, primarily due to lower net operating income from managed properties and reduced interest income.
• Cash Flow: Net cash provided by operating activities decreased by $6.6 million. Cash and cash equivalents dropped significantly from $58.6 million to $6.2 million due to $45 million in bank note repayments and $45 million in dividends paid.
• Accounting Change: Results for Q1 2000 were restated to reflect the adoption of SAB 101 (Revenue Recognition), which delayed the recognition of contingent rents, reducing Q1 2000 income by $3.7 million for comparability.

Outlook, Risks, and Management Commentary

• Guidance: 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. Future growth is anticipated as market conditions improve.
• Acquisitions & Dispositions: The company acquired $28 million in real estate in Q1 2001 and has commitments for an additional $35 million. Approximately $30 million in properties are identified for potential sale.
• Vacancy Risk: As of May 1, 2001, 10 buildings (estimated value $21 million) were vacant. Management expects these to generate approximately $3 million annually in FFO once leased or sold.
• Operator Risks: Several long-term care and assisted living operators face financial distress or bankruptcy (e.g., Kindred Healthcare, TLC Healthcare). While most lessees are current on rent, there is uncertainty regarding lease renewals and potential rent reductions.
• Liquidity: The company maintains $147 million in available revolving credit lines and $372 million in shelf registration capacity for future debt and equity issuance.
• Dividends: A quarterly dividend of $0.77 per common share was declared for payment on May 18, 2001.

Investor Verification Checklist

• FFO vs. Net Income: Verify the impact of the $1.6 million facility write-down and the $774,000 loss on sales on Net Income versus the more stable FFO metric.
• Operator Concentration: Review the financial health of the top six operators (representing ~38% of revenue), particularly Tenet Healthcare and Kindred Healthcare, given recent bankruptcy filings in the sector.
• Vacancy Resolution: Monitor the timeline for leasing or selling the 10 vacant facilities to confirm the projected $3 million annual FFO recovery.
• Liquidity Position: Assess the sustainability of the dividend payout ($45 million in Q1) given the sharp reduction in cash reserves to $6.2 million and reliance on revolving credit lines.
• SAB 101 Impact: Understand how the new revenue recognition standard creates quarterly volatility in earnings, even if annual results remain stable.