Business Context and Reporting Period
Company: Health Care Property Investors, Inc. (HCPI)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Nine months and three months ended September 30, 1999.
Business Overview: HCPI acquires health care facilities (long-term care, assisted living, medical office buildings, hospitals) and leases them to health care providers. As of September 30, 1999, the portfolio included 352 facilities in 42 states with a gross investment of approximately $1.7 billion.
Subsequent Event: On November 4, 1999, HCPI completed a stock-for-stock merger with American Health Properties, Inc. (AHE), expanding its portfolio to 424 properties in 43 states and assuming $325 million of AHE's debt.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 1999) | Amount ($000s) |
|---|---|
| Total Revenue | $153,651 |
| Net Income | $69,227 |
| Net Income Applicable to Common Shares | $56,899 |
| Funds From Operations (FFO) | $77,608 |
| Net Cash Provided by Operating Activities | $97,176 |
| Total Assets | $1,504,591 |
| Total Liabilities | $886,716 |
| Stockholders' Equity | $617,875 |
| Debt to Equity Ratio | 1.31 to 1.00 |
| Cash and Cash Equivalents | $8,199 |
Per Share Data (Nine Months): Basic EPS of $1.80; Diluted EPS of $1.80.
Dividends: Total dividends paid in the nine months were $77,977,000, representing 85% of FFO.
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 32% to $153.7 million (from $116.4 million in 1998), driven by new investments of approximately $458 million in 1998 and $147 million in 1999.
- Net Income: Net income applicable to common shares increased 2% to $56.9 million (from $55.7 million in 1998). This growth was aided by a $10.3 million gain on the sale of real estate properties.
- Expense Increases: Interest expense rose 48% to $39.5 million due to increased short-term borrowings for acquisitions and new senior debt issuances. Facility operating expenses increased significantly to $11.9 million due to additional multi-tenant leases where HCPI assumes operating costs.
- Balance Sheet: Total assets grew 11% to $1.5 billion. Real estate investments increased by $107.7 million, while loans receivable grew by $33.1 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management believes liquidity is adequate to finance operations and future investments. The company has $133.5 million in available borrowings under a new $310 million revolving credit facility established in November 1999. HCPI expects to fund approximately $52 million in committed acquisitions and developments in 1999 and 2000.
Risks and Contingencies
- Tenant Bankruptcies: Vencor, Inc. filed for bankruptcy protection on September 13, 1999. Vencor leases 36 properties (6.1% of annualized revenue). HCPI has recourse to Tenet Healthcare Corporation for most of these leases. Three other operators (Texas Health Enterprises, Sun Healthcare Group, Lenox Healthcare) also filed for bankruptcy, representing less than 4.8% of annualized revenue.
- Year 2000 (Y2K) Issues: HCPI's own systems are compliant. However, risks remain regarding the Y2K readiness of tenants, payors (Medicare/Medicaid), and third-party vendors. Disruptions in government reimbursement systems could materially affect tenant cash flows and rent payments.
- Interest Rate Risk: A 1% increase in interest rates on variable rate debt would increase annual interest expense by approximately $1.2 million.
Unusual Items
- Gain on Sale: The nine-month net income included a $10.3 million gain from the sale of six facilities and ownership interests in four others.
- Merger: The November 1999 merger with AHE is treated as a purchase for accounting purposes and significantly alters the company's scale and debt profile post-period.
Investor Verification Checklist
- Vencor Bankruptcy Impact: Verify the status of rent collections from Vencor and the enforceability of Tenet Healthcare's guarantees on the 31 remaining guaranteed leases.
- Merger Integration: Confirm the financial impact and debt assumptions ($325 million) resulting from the November 4, 1999 merger with American Health Properties.
- Y2K Exposure: Assess the risk of delayed Medicare/Medicaid reimbursements affecting tenant ability to pay rent in early 2000.
- Debt Maturities: Review the schedule of lease expirations and mortgage maturities, noting that 2.8% of annualized revenue is at risk in the remaining period of 1999 and through 2000.
- FFO vs. Net Income: Analyze the divergence between Net Income and Funds From Operations (FFO) to understand the impact of depreciation and asset sales on reported earnings.