DOC

Business Context and Reporting Period

Company: Health Care Property Investors, Inc. (HCP)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2005
Business Overview: HCP is a Real Estate Investment Trust (REIT) investing in healthcare-related properties across the United States, including medical office buildings, hospitals, and senior housing. As of March 31, 2005, the portfolio included interests in 525 facilities in 43 states.

Key Financial Metrics

Note: Debt obligations include Bank line of credit ($247.8M), Senior unsecured notes ($1.047B), and Mortgage debt ($138.1M).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14.1% year-over-year, driven primarily by a 35% increase in Medical Office Building (MOB) rental income ($29.8M vs. $22.0M) and a 15% increase in other property rental income ($72.7M vs. $63.2M). These gains were attributed to new developments placed in service in 2004 and acquisitions.
• Net Income Decline: Despite revenue growth, Net Income decreased 7.2% to $43.5M. This was largely due to a significant drop in income from discontinued operations (down 51% to $5.9M) and a decrease in equity income from unconsolidated joint ventures (down 83% to $0.2M).
• Expense Increases: Operating costs rose 51% to $13.3M, and interest expense increased 10% to $23.2M, reflecting higher borrowing levels and the addition of new MOB properties which incur operating expenses.
• Balance Sheet: Total assets decreased by approximately $54.5M, primarily due to the sale of real estate and a reduction in loans receivable. Cash and cash equivalents declined by $2.7M.

Outlook, Risks, and Management Commentary

• Capital Markets: On April 27, 2005, HCP issued $250 million of senior unsecured notes due 2017 at a 5.625% coupon. Proceeds were used to repay the revolving credit facility and for general corporate purposes.
• Acquisitions: Subsequent to the quarter end, the company acquired five assisted living facilities for $58 million and five medical office buildings for approximately $81 million.
• Key Risks:
  • Operator Concentration: Tenet Healthcare and American Retirement Corporation (ARC) accounted for 10.2% and 9.4% of revenue, respectively. The filing notes financial, legal, and regulatory difficulties facing certain operators.
  • Regulatory Compliance: A hospital in Tarzana, California, is subject to California Senate Bill 1953 (seismic safety standards). The company cannot currently estimate remediation costs or the allocation of costs between HCP and the tenant (Tenet).
  • Interest Rate Risk: Approximately 20% of consolidated debt is at variable rates. A 1% increase in rates would increase interest expense by approximately $2.8 million annually.
  • MOPPRS Option: $200 million of senior notes contain a mandatory par put remarketing feature. If 10-year Treasury rates are below 5.565% on June 8, 2005, the notes may be reissued at a higher premium rate.
• Dividends: The Board declared a quarterly common stock dividend of $0.42 per share (payable May 19, 2005) and preferred stock dividends totaling approximately $5.3M for the quarter.

Investor Verification Checklist

• Operator Solvency: Verify the current financial status of Tenet Healthcare and American Retirement Corporation, given their significant revenue contribution and noted difficulties.
• Seismic Compliance Costs: Monitor updates regarding the Tarzana hospital's SB 1953 compliance, as remediation costs could be material and currently unquantified.
• Debt Refinancing: Track the outcome of the June 8, 2005, remarketing event for the $200 million MOPPRS notes to determine future interest rate exposure.
• Discontinued Operations: Assess the sustainability of earnings given the 51% decline in income from discontinued operations compared to the prior year.
• Joint Venture Performance: Review the performance of the HCP Medical Office Portfolio (HCP MOP) joint venture, which saw a sharp decline in equity income contribution.