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Business Context and Reporting Period

Company: Health Care Property Investors, Inc. (HCPI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: HCPI acquires and leases health care facilities (long-term care, medical office buildings, hospitals) to providers. As of March 31, 1999, the portfolio included 347 facilities in 43 states with a gross acquisition price of approximately $1.64 billion.

Key Financial Metrics

Note: Total Debt includes Bank Notes, Senior Notes, Convertible Subordinated Notes, and Mortgage Notes.

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 36.6% to $49.6 million, driven primarily by a $11.3 million increase in Rental Income from new investments made in 1998 and Q1 1999.
• Expense Increases: Interest expense rose 62% to $12.4 million due to increased short-term borrowings for acquisitions and new senior debt issuances. Depreciation and non-cash charges increased 37.7% to $10.2 million due to the expanded asset base.
• Net Income Decline: Despite higher revenue, Net Income applicable to common shares decreased 6.3% to $15.3 million, and Diluted EPS fell from $0.54 to $0.49, primarily due to higher interest and depreciation costs.
• FFO Improvement: Funds From Operations (FFO) increased 10% to $25.0 million, reflecting the operational performance of the expanded portfolio.
• Investing Activity: Net cash used in investing activities more than doubled to $66.3 million, largely due to $57.8 million in real estate acquisitions.

Outlook, Risks, and Management Commentary

Major Tenant Risk: Vencor

Vencor, Inc. (operator of 38 properties, representing 6% of annualized revenue) faces severe financial distress. Vencor reported a net loss of $605.9 million for Q4 1998 and has classified significant debt as current liabilities. Vencor failed to pay interest on senior subordinated notes in May 1999 and has been downgraded to "D" by S&P and "C" by Moody's. While most Vencor leases are guaranteed by Tenet Healthcare, the guarantee expires at the end of the base term for many leases. A Vencor bankruptcy could materially adversely affect HCPI's funds from operations.

Liquidity and Capital Resources

HCPI maintains a debt-to-equity ratio of 1.32 to 1.00. FFO covered interest expense 3.02 times in Q1 1999. The company has approximately $108 million available under revolving lines of credit and $397 million remaining on shelf filings for future financings. On May 3, 1999, HCPI issued 1 million shares of common stock for net proceeds of $29.6 million to pay down short-term debt.

Year 2000 Issues

HCPI believes its internal systems are compliant. However, the company faces risks if major tenants (reliant on Medicare/Medicaid) or financial institutions fail to be compliant, potentially disrupting cash flows. The General Accounting Office has reported delays in federal and state government Year 2000 readiness.

Dividends

The Board declared a quarterly dividend of $0.69 per common share for Q2 1999, payable May 20, 1999. Total dividends paid in Q1 1999 represented 84% of FFO.

Investor Verification Checklist

• Vencor Solvency: Monitor Vencor's ability to restructure debt and meet lease obligations, specifically the status of Tenet's guarantees on expiring leases.
• Interest Rate Exposure: Review the impact of variable rate debt (Bank Notes and some Mortgage Notes) on future interest expense if rates rise.
• Capital Commitments: Verify the funding status of the $87 million in commitments to purchase and construct facilities for 1999-2000.
• Year 2000 Compliance: Assess the readiness of major tenants and government payers (Medicare/Medicaid) to ensure uninterrupted rent payments.
• Debt Maturities: Track the maturity schedule of Senior Notes and Convertible Subordinated Notes to evaluate refinancing needs.