Business Context and Reporting Period
Company: Health Care Property Investors, Inc. (HCPI)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2003
Business Overview: HCPI acquires and leases healthcare facilities (hospitals, long-term care, assisted living, medical office buildings) and provides mortgage financing. As of June 30, 2003, the portfolio consisted of 448 properties in 44 states with a gross undepreciated investment of approximately $3.1 billion.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2003) | Amount ($ in thousands) |
|---|---|
| Total Revenue | $189,708 |
| Net Income | $64,578 |
| Net Income Applicable to Common Shares | $41,734 |
| Diluted EPS (Common) | $0.69 |
| Funds From Operations (FFO) - Diluted | $93,094 |
| FFO Per Diluted Share | $1.50 |
| Net Cash Provided by Operating Activities | $122,347 |
| Total Debt (Bank, Senior, and Mortgage Notes) | $1,391,429 |
| Cash and Cash Equivalents | $11,559 |
| Stockholders' Equity | $1,209,485 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 13.9% to $189.7 million for the six months ended June 30, 2003, compared to $166.6 million in 2002. Rental income from triple-net properties rose 8.0%, and managed properties rose 11.3%.
- Net Income Decline: Net income applicable to common shares decreased 28.4% to $41.7 million ($0.69/share) from $58.3 million ($1.01/share) in the prior year period.
- Primary Drivers of Decline:
- Preferred Stock Redemption Charge: A non-operating charge of $11.8 million ($0.19/share) resulted from the redemption of Series C preferred stock.
- Real Estate Dispositions: A net loss of $8.6 million on real estate dispositions in 2003 compared to a net loss of $0.6 million in 2002.
- Interest Expense: Increased 26.6% to $45.1 million due to new senior note issuances in 2002 and 2003.
- FFO Decline: Diluted FFO decreased 5.8% to $93.1 million, primarily due to the preferred stock redemption charge and rent reductions from troubled operators, partially offset by acquisitions.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management believes liquidity is adequate to finance operations through December 31, 2003. The company formed a joint venture with GE Commercial Finance to acquire up to $600 million of medical office buildings. HCPI has written commitments to acquire or construct an additional $55.8 million of healthcare real estate.
Unusual Items and Contingencies
- Preferred Stock Redemptions: In addition to the Series C redemption in Q2, HCPI announced plans to redeem all Series A preferred stock (Sept 10, 2003) and Series B preferred stock (Sept 30, 2003). These redemptions will incur charges of $2.19 million and $4.59 million, respectively, against net income applicable to common shares.
- Troubled Operators:
- Tenet Healthcare: Represents 16.2% of annualized cash flow. Subject to SEC and DOJ investigations regarding billing practices and fraud. Cash flow coverage decreased to 4.4x.
- HealthSouth: Represents 4.9% of annualized cash flow. Charged by SEC with inflating earnings. HCPI is excluding HealthSouth results from cash flow coverage metrics pending audit resolution.
- Centennial HealthCare: Filed Chapter 11 bankruptcy. HCPI successfully transitioned 11 of 20 leased facilities to new tenants but expects a revenue decrease of $350,000/month ($0.07/share annually) upon finalization.
- Sun Healthcare Group: Ceased rent payments in Jan 2003. HCPI is transitioning facilities, expecting a revenue decrease of $60,000/month ($0.01/share annually).
Risks
Key risks include legislative/regulatory changes in healthcare reimbursement (Medicare/Medicaid), financial weakness of operators in long-term care and assisted living sectors, and the ability to sell or lease vacant facilities.
Investor Verification Checklist
- Preferred Stock Charges: Verify the impact of the upcoming Series A and Series B redemptions on Q3 and Q4 earnings.
- Tenet and HealthSouth Exposure: Monitor the status of federal investigations and the financial stability of these two major tenants, which collectively represent over 21% of annualized cash flow.
- Centennial and Sun Transitions: Confirm the finalization of lease transitions and the actual revenue impact compared to management's estimates of $0.08/share annual reduction.
- Debt Maturities: Review the debt maturity schedule, noting $106 million due in 2004 and $420 million in 2005 (including $173 million revolving credit).
- FFO vs. Net Income: Analyze the divergence between Net Income and FFO, noting that FFO is the primary performance metric for REITs and excludes depreciation and one-time charges.