UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (MARK ONE) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended June 30, 2001. OR [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from _______ to _______ Commission file number 1-8895 - -------------------------------------------------------------------------------- HEALTH CARE PROPERTY INVESTORS, INC. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- Maryland 33-0091377 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 4675 MacArthur Court, Suite 900 Newport Beach, California 92660 (Address of principal executive offices) (949) 221-0600 (Registrant's telephone number, including area code) -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No[_] As of August 2, 2001 there were 55,283,459 shares of $1.00 par value common stock outstanding. - --------------------------------------------------------------------------------
HEALTH CARE PROPERTY INVESTORS, INC. INDEX PART I. FINANCIAL INFORMATION PAGE NO. -------- <TABLE> <CAPTION> Item 1. Financial Statements: <S> <C> Condensed Consolidated Balance Sheets June 30, 2001 and December 31, 2000.................... 2 Condensed Consolidated Statements of Income Six and Three Months Ended June 30, 2001 and 2000...... 3 Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2001 and 2000................ 4 Notes to Condensed Consolidated Financial Statements... 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 12 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.... 24 Item 6. Exhibits and Reports on Form 8-K....................... 25 Signatures...................................................... 29 </TABLE> -1-
Health Care Property Investors, Inc. Condensed Consolidated Balance Sheets (Amounts in thousands) <TABLE> <CAPTION> June 30, December 31, 2001 2000 ---------- ----------- <S> <C> <C> (Unaudited) Assets Real Estate Investments: Buildings and Improvements $2,174,208 $2,140,591 Accumulated Depreciation (318,995) (287,719) ---------- ---------- 1,855,213 1,852,872 Land 244,232 247,637 ---------- ---------- 2,099,445 2,100,509 Loans Receivable 174,514 189,156 Investments in and Advances to Joint Ventures 22,215 22,615 Accounts Receivable 18,060 14,920 Other Assets 14,328 12,880 Cash and Cash Equivalents 16,131 58,623 ---------- ---------- Total Assets $2,344,693 $2,398,703 ========== ========== Liabilities and Stockholders' Equity Bank Notes Payable $ 40,300 $ 204,500 Senior Notes Payable 776,872 777,514 Mortgage Notes Payable 174,497 176,914 Accounts Payable, Accrued Liabilities and Deferred Income 53,890 55,676 Minority Interests in Joint Ventures 14,168 14,709 Minority Interests Convertible into Common Stock 27,741 24,835 Stockholders' Equity: Preferred Stock 274,487 274,487 Common Stock 55,219 50,874 Additional Paid-In Capital 1,065,093 927,182 Cumulative Net Income 822,842 761,918 Cumulative Dividends (960,416) (869,906) ---------- ---------- Total Stockholders' Equity 1,257,225 1,144,555 ---------- ---------- Total Liabilities and Stockholders' Equity $2,344,693 $2,398,703 ========== ========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. -2-
Health Care Property Investors, Inc. Condensed Consolidated Statements of Income (Unaudited) (Amounts in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, --------------------------- -------------------------- <S> <C> <C> <C> <C> 2001 2000 2001 2000 --------- --------- --------- --------- Revenue Rental Income, Triple Net Properties $58,958 $58,564 $112,160 $111,390 Rental Income, Managed Properties 20,144 19,695 39,988 39,809 Interest and Other Income 5,348 5,833 10,667 11,423 --------- --------- --------- --------- 84,450 84,092 162,815 162,622 --------- --------- --------- --------- Expense Interest Expense 19,553 21,535 40,549 42,749 Real Estate Depreciation and Amortization 18,101 17,447 36,840 34,593 Operating Expenses, Managed Properties 7,321 6,753 14,560 13,452 General and Administrative Expenses 3,509 3,220 6,765 6,739 --------- --------- --------- --------- 48,484 48,955 98,714 97,533 --------- --------- --------- --------- Income From Operations 35,966 35,137 64,101 65,089 Minority Interests (1,598) (1,664) (2,935) (3,077) Gain/(Loss) on Sale of Real Estate Properties 532 3,029 (242) 3,713 --------- --------- --------- --------- Income Before Extraordinary Item 34,900 36,502 60,924 65,725 Extraordinary Item- Gain on Extinguishment of Debt - - - 209 --------- --------- --------- --------- Net Income 34,900 36,502 60,924 65,934 Dividends to Preferred Stockholders (6,225) (6,225) (12,450) (12,450) --------- --------- --------- --------- Net Income Applicable to Common Shares $28,675 $30,277 $ 48,474 $ 53,484 ========= ========= ========= ========= Basic/Diluted Earnings Per Common Share $0.54 $0.59 $0.93 $1.04 ========= ========= ========= ========= Weighted Average Shares Outstanding - Basic 53,162 51,069 52,069 51,177 ========= ========= ========= ========= Weighted Average Shares Outstanding - Diluted 53,389 51,093 52,258 51,201 ========= ========= ========= ========= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. -3-
Health Care Property Investors, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (Amounts in thousands) <TABLE> <CAPTION> Six Months Ended June 30, ---------------------- 2001 2000 ---------- -------- <S> <C> <C> Cash Flows From Operating Activities: Net Income $ 60,924 $ 65,934 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Real Estate Depreciation 36,840 34,593 Non Cash Charges 2,132 1,810 Joint Venture Adjustments (7) 1,139 Loss/(Gain) on Sale of Real Estate Properties 242 (3,713) Gain on Extinguishment of Debt -- (209) Changes in: Operating Assets (1,816) 8,118 Operating Liabilities (3,090) (6,497) ---------- -------- Net Cash Provided By Operating Activities 95,225 101,175 ---------- -------- Cash Flows From Investing Activities: Acquisition of Real Estate (53,263) (12,618) Proceeds from the Sale of Real Estate Properties, Net 23,854 9,442 Final Payment on Mortgage Loan Receivable 11,823 -- Other Investments and Loans (1,755) (887) ---------- -------- Net Cash Used In Investing Activities (19,341) (4,063) ---------- -------- Cash Flows From Financing Activities: Net Change in Bank Notes Payable (164,200) 5,300 Cash Proceeds from Issuing Common Stock 139,537 1,414 Repayment of Senior Notes Payable (1,000) (10,000) Issuance of Senior Notes -- 24,865 Periodic Payments on Mortgages (2,417) (1,695) Repurchase of Common and Preferred Stock (24) (15,283) Repurchase of Convertible Subordinated Notes Payable -- (13,680) Dividends Paid (90,510) (86,696) Other Financing Activities 238 (1,856) ---------- -------- Net Cash Used In Financing Activities (118,376) (97,631) ---------- -------- Net Decrease In Cash And Cash Equivalents (42,492) (519) Cash And Cash Equivalents, Beginning Of Period 58,623 7,696 ---------- -------- Cash And Cash Equivalents, End Of Period $ 16,131 $ 7,177 ========== ======== Capitalized Interest $ -- $ 523 ========== ======== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. -4-
HEALTH CARE PROPERTY INVESTORS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 (Unaudited) (1) SIGNIFICANT ACCOUNTING POLICIES We, the management of Health Care Property Investors, Inc., believe that the unaudited financial information contained in this report reflects all adjustments that are necessary to state fairly the financial position, the results of operations, and the cash flows of the Company. Unless the context otherwise indicates, the Company or HCPI means Health Care Property Investors, Inc. and its affiliated subsidiaries and joint ventures. We both recommend and presume that users of this interim financial information read or have read or have access to the audited financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations for the preceding fiscal year ended December 31, 2000. Therefore, notes to the financial statements and other disclosures that would repeat the disclosures contained in our most recent annual report to security holders have been omitted. This interim financial information does not necessarily represent a full year's operations for various reasons, including acquisitions and dispositions, changes in rents and interest rates, and the timing of debt and equity financings. Facility Operations: We own interests in 91 medical office buildings ("MOBs") and physician group practice clinics where property management is provided by independent property management companies. These facilities are leased to multiple tenants under gross, modified gross or triple net leases. These independent property management companies are supervised by our Asset Management Department. Rents and operating income attributable to these properties is included in Rental Income, Managed Properties in our financial statements. Expenses related to the operation of these facilities are recorded as Operating Expenses, Managed Properties. Reclassifications: We have made reclassifications, where necessary, for comparative financial statement presentations. (2) QUARTERLY RESTATEMENT During 2000, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". We adopted this accounting pronouncement as required by the SEC during the quarter ended December 31, 2000. SAB 101 requires the recognition of contingent revenues after the performance hurdles of a lease are actually met. Prior to SAB 101, contingent revenues were estimated and recognized ratably when it was probable that lease revenue hurdles would be achieved. Due to our current lease structures, SAB 101 will delay the recognition of additional rents from the first quarter of a year to subsequent quarters of the year. Rents affected by SAB 101 generally have been received in cash ahead of what SAB 101 permits for income recognition and, in most cases, the annual revenue hurdles have historically been exceeded because of the stability of the revenue streams in our -5-
hospital facilities. It is anticipated that the SAB 101 standard will create volatility in our quarterly earnings and FFO while there should be minimal effect on our annual earnings and FFO. In accordance with Statement of Financial Accounting Standards No. 2 "Reporting Accounting Changes in Interim Financial Statements" and for ease of comparability, the quarterly results for 2000 are restated to reflect the following quarterly impact of the pronouncement: <TABLE> <CAPTION> SAB 101 As Reported Impact Restated ------------- ------------- ------------ <S> <C> <C> <C> Net Income: Quarter Ended March 31, 2000...... $ 33,154,000 $ (3,722,000) $ 29,432,000 Quarter Ended June 30, 2000....... 34,506,000 1,996,000 36,502,000 Quarter Ended September 30, 2000.. 29,501,000 1,407,000 30,908,000 Quarter Ended December 31, 2000... 36,606,000 319,000 36,925,000 ------------ ------------- ------------ Total Effect of SAB 101 for 2000... $133,767,000 $ -- $133,767,000 ============ ============= ============ Basic Earnings Per Share: Quarter Ended March 31, 2000...... $ 0.52 $ (0.07) $ 0.45 Quarter Ended June 30, 2000....... 0.55 0.04 0.59 Quarter Ended September 30, 2000.. 0.46 0.03 0.49 Quarter Ended December 31, 2000... 0.60 -- 0.60 ------------ ------------- ------------ Total Effect of SAB 101 for 2000... $ 2.13 $ -- $ 2.13 ============ ============= ============ Funds From Operations: Quarter Ended March 31, 2000...... $ 43,669,000 $ (3,722,000) $ 39,947,000 Quarter Ended June 30, 2000....... 43,351,000 1,996,000 45,347,000 Quarter Ended September 30, 2000.. 40,844,000 1,407,000 42,251,000 Quarter Ended December 31, 2000... 43,480,000 319,000 43,799,000 ------------ ------------ ------------ Total Effect of SAB 101 for 2000... $171,344,000 $ -- $171,344,000 ============ ============ ============ </TABLE> (3) OPERATORS At June 30, 2001, we had approximately 91 health care operators and approximately 625 leases in the managed portfolio. Major Operators: Listed below are our six largest operators and their respective percentage of total annualized revenue for the six months ended June 30, 2001. All of these operators are publicly traded companies and are subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and accordingly file periodic financial statements on Form 10-K and Form 10-Q with the Securities and Exchange Commission. -6-
<TABLE> <CAPTION> Revenue Percentage ------- ---------- (Dollar amounts in 000s) <S> <C> <C> Tenet Healthcare Corporation $55,652 19.0% HealthSouth Corporation 16,691 5.7% Kindred Healthcare, Inc. (formerly Vencor, Inc.) 16,586 5.7% Emeritus Corporation 13,769 4.7% Beverly Enterprises 12,669 4.3% HCA - The Healthcare Co. 12,216 4.2% </TABLE> Kindred Healthcare (formerly Vencor, Inc.): On May 1, 1998, Vencor, Inc. completed a spin-off transaction to become two publicly held entities -- Ventas, Inc., a REIT, and Vencor, Inc., a health care operating company, which at June 30, 2001 leased 32 of our properties of which nine are subleased to other operators. On September 13, 1999, Vencor, Inc. filed for bankruptcy protection. Vencor, Inc. exited bankruptcy in April 2001 and changed its name to Kindred Healthcare, Inc. ("Kindred"), assuming all 32 of our facility leases (including nine subleased facilities). We have negotiated new ten year leases with Kindred for 22 facilities that were scheduled to expire in August 2001. The annual rent on these facilities will increase by $3,300,000 to $16,100,000 in the first lease year. Of the remaining ten facilities, eight will be leased directly to current Kindred sublessees or third parties for lower rents to HCPI of an estimated $800,000 per year and two are being considered for sale or lease to a third party. Other Long-Term Care and Assisted Living Operators: The financial condition of many long-term care providers, in part due to the implementation of the Medicare Prospective Payment System, resulted in several long-term care provider lessees filing for Chapter XI bankruptcy protection during late 1999 and early 2000. Lessees that remain in bankruptcy and their respective percentage of our annualized revenue are Sun Healthcare 1.0%, Integrated Health Services 0.5%, Mariner Post Acute Network 0.4%, Lenox 0.3% and Genesis Health Ventures 0.2%. Certain leases with Sun, Integrated, Lenox and Genesis have been renegotiated. Most of the lessees in bankruptcy are current on all rents as of June 30, 2001 with the exception of minor pre- petition receivables which we believe will generally be payable once the plans of reorganization are confirmed. Improved reimbursements and a slowing economy with lower interest rates have improved nursing home operations generally, tempered in part by increased liability insurance and labor costs. There are still certain operators and facilities that continue to experience operating problems. Some long-term care facility operators continue to be plagued by low levels of Medicaid reimbursements in certain states. In Florida, tort liability reform legislation was enacted recently which may help to stabilize long-term care facility operations in that state. The Company owns ten long-term care facilities in Oklahoma, four West Coast long-term care facilities, and three additional long-term care facilities (one in Wisconsin, two in Massachusetts) whose operations have been negatively affected by the bankruptcies of the operators of these facilities (TLC, Lenox Healthcare and Genesis Health Ventures, respectively). The Company is presently recording net rental revenue of $650,000 from these 17 properties. In -7-
the second quarter of 2000, the Company recorded $1,300,000 from these same properties. Management expects improved results from higher lease revenue or sales of these properties in the next 12 months. The assisted living industry, from which the Company derives 14% of its revenue, has experienced overbuilding in a number of areas, slower fill-up rates compared to original forecasts, and margin pressure resulting from lower rents from residents and higher liability insurance costs. These factors have required operators to raise additional capital in order to sustain operations during fill-up periods and even more capital may be required. However, these factors have slowed development activity which should allow continuing fill-up of existing facilities and improvement in industry census. Many companies in the assisted living industry, including certain lessees of the Company, are in the process of reorganizing their capital structures including their leasing arrangements. We cannot assure you that the bankruptcies of certain long-term care operators and the trouble experienced by assisted living operators would not have a material adverse effect on our Net Income, FFO or the market value of our common stock. (4) REAL ESTATE INVESTMENTS AND DISPOSITIONS During the six months ended June 30, 2001, we acquired three skilled nursing facilities, an ownership interest in two medical office buildings, and three continuum of care model health facilities that emphasize nursing care, for an aggregate investment of approximately $57,000,000. The two medical office buildings are owned by HCPI/Utah, LLC, a limited liability company of which we are the managing member. HCPI/Utah, LLC issued 84,922 non-managing member units in a private placement under Section 4(2) of the Securities Act of 1933, as amended, related to the contribution of the two medical office buildings. These units which are recorded under Minority Interest in Joint Ventures are convertible into our common stock on a one-for- one basis. During the six months ended June 30, 2001, we wrote down to net realizable value a physician clinic and a medical office building expected to be sold during 2001. The $570,000 and $2,170,000 one-time charges for the three and six months ended June 30, 2001, respectively, are included in Real Estate Depreciation Expense. During the six months ended June 2001, we sold six clinics, two long-term care facilities, one medical office building and a land parcel for $24,000,000 resulting in a net loss of $242,000. -8-
(5) STOCKHOLDERS' EQUITY The following table provides a summary of the activity for the Stockholders' Equity account for the six months ended June 30, 2001 (amounts in thousands): <TABLE> <CAPTION> Preferred Stock Common Stock -------------------- ---------------------------------- Par Additional Total Number of Number of Value Paid In Cumulative Cumulative Stockholders' Shares Amount Shares Amount Capital Net Income Dividends Equity - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, December 31, 2000 11,722 $274,487 50,874 $50,874 $ 927,182 $761,918 $(869,906) $1,144,555 Stock Options Exercised 121 121 2,836 2,957 Stock Grants Issued 84 84 2,646 2,730 Cancelled Shares (1) (1) (23) (24) Common Stock Issued 4,141 4,141 132,452 136,593 Net Income 60,924 60,924 Dividends Paid--Preferred Shares (12,450) (12,450) Dividends Paid--Common Shares (78,060) (78,060) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, June 30, 2001 11,722 $274,487 55,219 $55,219 $1,065,093 $822,842 $(960,416) $1,257,225 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> In May 2001, we issued 4,025,000 shares of common stock at $34.80 per share realizing net proceeds of $133,000,000. As of June 30, 2001, a further $4,000,000 has been realized from our new Stock Purchase and Dividend Reinvestment Plan. These proceeds have been utilized to temporarily pay down the revolving line of credit, pending deployment on long-term investments. (6) EARNINGS PER COMMON SHARE We compute earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic earnings per common share is computed by dividing Net Income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share are calculated including the effect, if any, of dilutive securities. Options to purchase shares of common stock that had an exercise price in excess of the average market price of the common stock during the period are not included because they are not dilutive. (All amounts in thousands, except per share amounts) <TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended ------------------------------------- ------------------------------------ Per Share Per Share June 30, 2001 Income Shares Amount Income Shares Amount - -------------------------------------- ----------- ---------- ------------ ----------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic Earnings Per Common Share: Net Income Applicable to Common Shares $28,675 53,162 $0.54 $48,474 52,069 $0.93 ============ ========== Dilutive Options -- 227 -- 189 Diluted Earnings Per Common Share: Net Income Applicable to Common Shares Plus Assumed Conversions $28,675 53,389 $0.54 $48,474 52,258 $0.93 ============ ========== </TABLE> -9-
<TABLE> <CAPTION> For the Three Months Ended For the Six Months Ended ------------------------------------ ----------------------------------- Per Share Per Share June 30, 2000 Income Shares Amount Income Shares Amount - -------------------------------------- ---------- ---------- --------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> Basic Earnings Per Common Share: Net Income Applicable to Common Shares $30,277 51,069 $0.59 $53,484 51,177 $1.04 ========= ========== Dilutive Options -- 24 -- 24 Diluted Earnings Per Common Share: Net Income Applicable to Common Shares Plus Assumed Conversions $30,277 51,093 $0.59 $53,484 51,201 $1.04 ========= ========== </TABLE> (7) FUNDS FROM OPERATIONS We believe that Funds From Operations ("FFO") is the most important supplemental measure of operating performance for a real estate investment trust. Because the historical cost accounting convention used for real estate assets requires straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a real estate investment trust that uses historical cost accounting for depreciation could be less informative. The term FFO was designed by the real estate investment trust industry to address this problem. We adopted the definition of FFO prescribed by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as Net Income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property and extraordinary items, plus real estate depreciation and real estate related amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to net income. FFO, as we define it, may not be comparable to similarly entitled items reported by other real estate investment trusts that do not define it exactly as the NAREIT definition. Below are summaries of the calculation of FFO (all amounts in thousands): <TABLE> <CAPTION> Three Months Six Months Ended June 30, Ended June 30, ---------------------------- ---------------------------- 2001 2000 2001 2000 ---------- ---------- ----------- ---------- <S> <C> <C> <C> <C> Net Income Applicable to Common Shares $28,675 $30,277 $48,474 $53,484 Real Estate Depreciation and Amortization 18,101 17,447 36,840 34,593 Joint Venture Adjustments (113) 652 (7) 1,139 Extraordinary Item/Gain on Extinguishment of Debt --- --- --- (209) (Gain)/Loss on Sale of Real Estate Properties (532) (3,029) 242 (3,713) ---------- ---------- ---------- ---------- Funds From Operations $46,131 $45,347 $85,549 $85,294 ========== ========== ========== ========== </TABLE> -10-
HCPI is required to report information about operations on the basis that it uses internally to measure performance under Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, effective beginning in 1998. (8) COMMITMENTS In July 2001, we entered into a commitment to acquire 12 medical office buildings and six health care research and laboratory facilities. The estimated aggregate purchase price of $126,000,000 includes the initial purchase of six medical office buildings and five health care research and laboratory facilities for $81,200,000 with the remaining seven facilities to be constructed over the next two years. Funding for the properties will include our assumption of $18,600,000 in secured debt, the issuance of approximately $50,000,000 of equity in the form of operating units through a Down-REIT structure (a newly created LLC), and cash of $57,000,000. Additionally, we have acquired real estate properties and have outstanding commitments to fund the development of facilities on those properties of approximately $5,400,000, and are committed to construct $27,300,000 of healthcare facilities and acquire an additional $30,400,000 of existing healthcare real estate. (9) SUBSEQUENT EVENTS On July 23, 2001, the Board of Directors declared a quarterly dividend of $0.78 per common share payable on August 20, 2001 to shareholders of record on the close of business on August 3, 2001. The Board of Directors also declared a cash dividend of $0.492188 per share on its series A cumulative preferred stock, $0.54375 per share on its series B cumulative preferred stock and $0.5375 per share on its series C cumulative preferred stock depositary shares. These dividends will be paid on September 28, 2001 to shareholders of record as of the close of business on September 14, 2001. (10) NEW PROUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Statement 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Statement 133, as amended by SFAS 137 and 138, is effective for fiscal years beginning after June 15, 2000. The current effect of adopting Statement 133 is not material. -11-
HEALTH CARE PROPERTY INVESTORS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL We are in the business of acquiring health care facilities that we lease on a long-term basis to health care providers. HCPI also leases medical office space to providers and physicians on a shorter term basis. On a more limited basis, we have provided mortgage financing on health care facilities. As of June 30, 2001, our portfolio of properties, including equity investments, consisted of 409 facilities located in 42 states. These facilities are comprised of 176 long-term care facilities, 86 congregate care and assisted living facilities, 38 physician group practice clinics, 79 medical office buildings, 21 acute care hospitals, and nine freestanding rehabilitation facilities. The gross investment in the properties, which includes joint venture acquisitions, was approximately $2.6 billion at June 30, 2001. We have commitments to purchase and construct health care facilities totaling approximately $189 million which are expected to fund in the future. We expect that a significant portion of these commitments will be funded; however, experience suggests that some committed transactions may not close for various reasons including unsatisfied closing conditions, competitive financing sources, final negotiation differences or the operator's inability to obtain required internal or governmental approvals. The financial information presented for 2001 reflects the impact of the implementation of Securities and Exchange Commission Staff Accounting Bulletin No. 101 ("SAB 101" "Revenue Recognition in Financial Statements"). For comparability purposes, the Company has restated the results of operations for the three and six months ended June 30, 2000 to reflect the impact of SAB 101 had the pronouncement been adopted as of January 1, 2000. The effect of SAB 101 on the three and six months ended June 30, 2000 is to increase income by $1,996,000 or $0.04 per share and decrease income $1,726,000, or $0.03 per share, respectively. RESULTS OF OPERATIONS Net Income applicable to common shares for the three and six months ended June 30, 2001 totaled $28,675,000 and $48,474,000 or $0.54 and $0.93 of basic earnings per share on revenue of $84,450,000 and $162,815,000, respectively. This compares to $30,277,000 and $53,484,000 or $0.59 and $1.04 of basic earnings per share on revenue of $84,092,000 and $162,622,000 for the same period in 2000, as restated for the effects of SAB 101. Net Income applicable to common shares for the three months ended June 30, 2001 and June 30, 2000 included a $532,000 or $0.01 per basic share and $3,029,000 or $0.06 per basic share gain on the sale of real estate properties, respectively. Net Income applicable to common shares for the six months ended June 30, 2001 and June 30, 2000 included a $242,000 or $0.005 per basic share loss on the sale of real estate properties and $3,713,000 or $0.07 per basic share gain on the sale of real estate properties, respectively. In addition, Net Income applicable to common shares for the three months ended June 30, 2001 includes a $570,000 or $0.01 per basic share one time charge as a result of the write-down of one facility to realizable value expected to be sold during 2001. Net Income applicable to common shares for the six months ended June 30, 2001 includes -12-
a $2,170,000 or $0.04 per basic share one time charge as a result of the write- down of two facilities to realizable value expected to be sold during 2001. Rental Income, Triple Net Properties for the three and six months ended June 30, 2001 increased $394,000 and $770,000 to $58,958,000 and $112,160,000 as compared to the same period in the prior year. The increase was primarily the result of net rental income increases earned during the first and second quarter of 2001 and an increased impact from SAB 101 offset by dispositions made during 2000 and 2001. Rental Income, attributable to Managed Properties for the three and six months ended June 30, 2001 increased $449,000 and $179,000 to $20,144,000 and $39,988,000, respectively as compared to the same period in the prior year with a related increase in Operating Expenses, Managed Properties of $568,000 and $1,108,000 to $7,321,000 and $14,560,000 resulting in decreased net operating income on Managed Properties of $119,000 and $929,000. The decrease was primarily the result of vacancies in single tenant buildings and increases in operating expenses, including utility costs. Interest and Other Income for the three and six months ended June 30, 2001 decreased $485,000 and $756,000 to $5,348,000 and $10,667,000 primarily as a result of the payoff of two loans receivable at the beginning of the first quarter of 2001. Interest Expense for the three months and six ended June 30, 2001 decreased $1,982,000 and $2,200,000 to $19,553,000 and $40,549,000, respectively. The decrease is the result of the pay down of the line of credit with the equity offering proceeds and lower interest rates on short-term borrowings. The increase in Depreciation for the three and six months ended June 30, 2001 of $654,000 and $2,247,000 to $18,101,000 and $36,840,000 is the direct result of the write-down of the facilities held for sale discussed previously. We believe that Funds From Operations ("FFO"), the generally accepted measure of REIT operating performance, is an important supplemental measure of operating performance. FFO for the three months ended June 30, 2001 increased $784,000 to $46,131,000 as compared to the same period in the prior year. The increase is primarily due to an increase in Rental Income Triple Net Properties, an increased impact from SAB 101, and a decrease in Interest Expense offset by dispositions made during 2000 and 2001 and a decrease in Interest and Other Income all discussed in more detail above. FFO does not represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs and should not be considered as an alternative to Net Income. FFO, as we define it, may not be comparable to similarly entitled items reported by other real estate investment trusts that do not use the NAREIT definition. LIQUIDITY AND CAPITAL RESOURCES We have financed investments through the issuance of common and preferred stock, issuance of long-term debt, assumption of mortgage debt, the mortgaging of certain of our properties, use of short-term bank lines and use of internally generated cash flows. We have also raised cash through the disposition of assets. Management believes that our liquidity and sources of capital are adequate to finance our operations. Future investments in additional facilities will be dependent upon availability of cost effective sources of capital. -13-
At June 30, 2001, stockholders' equity totaled $1,257,225,000 and the debt to equity ratio was 0.79 to 1.00. For the six months ended June 30, 2001, FFO (before interest expense) covered Interest Expense at a ratio of 3.10 to 1.00. Tabulated below is the Company's debt maturity table by year and in the aggregate. 2001........... $ 15,000,000 2002........... 121,000,000 2003........... 83,000,000 2004........... 105,000,000 2005........... 236,000,000 Thereafter..... 432,000,000 ------------- $992,000,000 ============= The next significant refinancing by the Company will be the pay-off of $99,000,000 of 7.05% senior notes, scheduled for January 2002. Revolving Lines of Credit We have two revolving lines of credit with the same bank group, one for $103,000,000 that expires on November 2, 2001 and one for $207,000,000 that expires on November 3, 2003. As June 30, 2001, we had $266,200,000 available on these lines of credit. Secured Debt At June 30, 2001, we had a total of $174,497,000 in Mortgage Notes Payable secured by 33 health care facilities with a net book value of approximately $306,657,000. Interest rates on the Mortgage Notes ranged from 4.66% to 10.63% with an average rate of 8.01%. Senior Unsecured Debt Total debt presently represents 30.5% and 44.1% of our total market and book capitalization, respectively. Our senior debt is rated BBB+/BBB+/Baa2 by Standard & Poor's, Fitch and Moody's, respectively, and has been rated medium investment grade continuously since 1986, when we first received a bond rating. The following table summarizes the financing activities relating to Senior Unsecured Debt since January 2000: <TABLE> <CAPTION> Amount Date Maturity Coupon Rate Issued/(Redeemed) - ------------- -------- ----------- ------------------------ <S> <C> <C> <C> February 2000 -- 8.87% (10,000,000) February 2000 4 years 9.00% 25,000,000 March 2001 -- 7.05% (1,000,000) </TABLE> -14-
Equity In January and February 2000, we registered 89,452 and 593,247 shares of common stock for issuance, from time to time, to the holders of non-managing member units in two consolidated subsidiaries, HCPI/Indiana, LLC and HCPI/Utah, LLC, respectively. The non-managing member units are convertible from time to time by the non-managing members' into shares of our common stock, or at our option into the right to receive cash. In May 2001, we issued 4,025,000 shares of common stock at $34.80 per share realizing net proceeds of $133,000,000. A further $4,000,000 has been realized from our new Stock Purchase and Dividend Reinvestment Plan. These proceeds have been utilized to temporarily pay down the revolving line of credit, pending deployment on long-term investments. Retained Cash Flows Since our inception in May 1985, we have recorded approximately $1,061,882,000 in cumulative FFO. Of this amount, we have distributed a total of $895,511,000 to stockholders as dividends on common stock. We have retained the balance of $166,371,000 and used it as an additional source of capital. On May 18, 2001, we paid a dividend of $0.77 per common share or $39,318,000 in the aggregate. During the third quarter of 2001, we declared a dividend of $0.78 per common share or approximately $43,071,000 in the aggregate to be paid August 20, 2001 to shareholders of record on the close of business August 3, 2001. Available Financing Sources As of July 2001, we had $232,000,000 available for future financing of debt and equity securities under a shelf registration statement filed with the Securities and Exchange Commission. Of that amount, we have approximately $85,000,000 available under Medium-Term Note senior debt programs. These amounts may be issued from time to time in the future based on our needs and then existing market conditions. Planned Asset Sales We have presently identified approximately $28,000,000 of properties, excluding those that are vacant, that we may sell. These include medical office buildings, long-term care facilities and assisted living facilities. With respect to these properties, there is an expressed interest in the purchase of the property from either the existing tenant or a third party. These assets consist of properties that present an opportunity to raise capital for reinvestment at a positive spread. Due to the complexities of real estate transactions and the potential of leasing rather than selling, it is not possible to predict exactly whether, or when, such transactions will be consummated. Letters of Credit At July 26, 2001, we held approximately $50,470,000 in irrevocable letters of credit from commercial banks and depositary accounts to secure the obligations of many lessees' lease and borrowers' loan obligations. We may draw upon the letters of credit or depositary accounts if there are any defaults under the leases and/or loans. Amounts available under letters of credit or -15-
depositary accounts could change based upon facility operating conditions and other factors and such changes may be material. Facility Rollovers As of June 30, 2001, we have 9 facilities that are subject to lease expiration and mortgage maturities during the remainder of 2001. These facilities currently represent approximately 0.4% of annualized revenue. For the year ending December 31, 2002, we have five facilities, representing approximately 2.7% of annualized revenue, that are subject to lease expiration and mortgage maturities. SUPPLEMENTARY FINANCIAL AND OPERATING INFORMATION Internal Growth For the six months ended June 30, 2001, we had internal same facility rent growth, net of rent decreases, of approximately $1,212,000 or 1.1% of rents in our Triple Net portfolio. Acquisitions Through June 30, 2001, we had closed on eight new investments totaling $57,000,000 with an average lease rate of 11.3%. These purchases included three continuum of care model health care facilities, which emphasize nursing care but also include assisted living and Alzheimer care. The purchases also included two medical office buildings and three skilled nursing facilities. Vacant Facilities As of June 30, 2001, we have eight vacant buildings for which we are not receiving rent and one medical office/clinic building in Phoenix which is being rented to new tenants as it transitions from a single-tenant to a multi-tenant building. The fair market value of the eight vacant properties at June 30, 2001 is estimated to be $15,000,000. They consist primarily of small physician group practice clinics. We have implemented an aggressive program to sell or lease these properties. We sold three vacant facilities during the six months ended June 30, 2001. It is expected that at least two additional vacant buildings will be sold or leased before September 30, 2001. When all of the facilities are sold or leased, the positive effect on Funds From Operations is expected to be approximately $2,700,000 per year or $0.05 per share. Managed Medical Office And Clinic Portfolio The 3,900,000 square foot managed medical office building and physician group practice clinic portfolio produces approximately 18% of the Company's revenue. Although total second quarter 2001 occupancy decreased to 89%, due to a large tenant bankruptcy and subsequent default, second quarter leasing activity was strong with 22,000 square feet of new leases executed and the renewal of 66,000 square feet of existing leases. Occupancy for the remainder of the year is expected to increase including the effect of sales of vacant buildings, currently under contract. -16-
Future Earnings Growth Management expects that the combination of lower rents from certain properties and operators, the slow pace of new acquisitions and the long lead times necessary to sell or lease certain facilities may lower our growth in earnings and FFO over the near term. As market conditions continue to improve, we anticipate that we will deploy new capital in positive spread investments, thereby improving future growth rates over the long-term. -17-
PORTFOLIO OVERVIEW: <TABLE> <CAPTION> Physician Acute Long- Medical Congregate Group Rehabi- % of Care Term Care Office Care/Assisted Practice litation Portfolio Portfolio Managed Hospitals Facilities Buildings Living Facilities Clinics Hospitals Total Total Portfolio (3) - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Revenue by State (1) California $ 28,071 $ 5,161 $ 11,567 $ 3,742 $ 4,507 $ -- $ 53,048 18.1% Texas 8,147 2,110 10,985 9,228 1,541 1,753 33,764 11.5% Indiana -- 18,018 6,682 1,420 -- -- 26,120 8.9% Florida 7,408 6,597 1,738 2,842 2,593 2,250 23,428 8.0% Utah 8,047 473 8,574 -- -- -- 17,094 5.8% Tennessee -- 10,544 1,285 12 1,673 -- 13,514 4.6% North Carolina 7,619 3,131 -- 1,370 516 -- 12,636 4.3% Other (35 States) 21,866 36,766 17,492 22,659 3,506 11,551 113,840 38.8% ------------------------------------------------------------------------------------------------------------------ $ 81,158 $ 82,800 $ 58,323 $ 41,273 $ 14,336 $ 15,554 $ 293,444 100.0% $ 52,009 ------------------------------------------------------------------------------------------------------------------ Percentage of Total Revenue 27.7% 28.1% 19.9% 14.1% 4.9% 5.3% 100.0% 17.1% Investment (2) $ 657,603 $ 664,568 $ 617,270 $ 404,872 $ 151,812 $113,943 $ 2,610,068 $ 570,008 Return on Investments 12.3% 12.5% 9.4% 10.2% 9.4% 13.7% 11.2% -- Number of Properties 21 176 79 86 38 9 409 91 Vacant Properties -- 3 3 -- 2 -- 8 -- Number of Beds/Units 2,934 21,336 -- 6,554 -- 685 31,509 -- Number of Square Feet 3,040,000 6,389,000 4,439,000 4,597,000 1,056,000 708,000 20,229,000 3,906,000 Investment per Bed/Unit $ 224 $ 31 $ -- $ 62 $ -- $ 166 $ -- $ -- Investment per Square Foot $ 216 $ 104 $ 139 $ 88 $ 144 $ 161 $ -- $ 146 Occupancy Data-Current Quarter (4) 52% 83% -- 81% -- 75% -- 89% Occupancy Data- Prior Quarter (4) 50% 82% -- 80% -- 76% -- 90% </TABLE> (1) Annualized rental and interest income on total investments above. Includes net operating income (NOI) on managed portfolio. (2) Includes joint venture investments and incorporates all partners' assets. (3) Includes managed Medical Office Buildings and Physician Group Practice Clinics included in the preceding totals. (4) Excludes facilities under construction and newly completed facilities under start up. -18-
PORTFOLIO BY OPERATOR/TENANT: <TABLE> <CAPTION> Operator/Tenant (1) Revenue (2) Percentage - -------------------------------------------------------------------------------------------- <S> <C> <C> Tenet Healthcare $ 55,652 19.0% HealthSouth Corporation 16,691 5.7% Kindred Healthcare, Inc. 16,586 5.7% Emeritus Corporation 13,769 4.7% Beverly Enterprises 12,669 4.3% HCA - The Healthcare Company 12,216 4.2% Centennial Healthcare 8,668 3.0% Not-For-Profit Investment Grade Tenants 6,277 2.1% Other Publicly Traded Operators or Guarantors (14 Operators) 27,108 9.2% Other Non Public Operators and Tenants 123,808 42.1% ----------------------------------- Grand Total $293,444 100.0% =================================== </TABLE> OPERATORS AT RISK: <TABLE> <CAPTION> Annual Rental Operator Income to HCPI - ----------------------------------------------------------------------- <S> <C> Sun Healthcare $2,828 Integrated Health Services 1,558 Genesis Health Ventures 1,487 Mariner Post Acute Network 1,212 TLC 1,042 Lenox Healthcare 762 ------ $8,889 ------ Percent of Revenue 3.0% ------ Near Term Potential Future Rent Reduction From 1,055 the Above Operators Percent of Revenue 0.4% ----- </TABLE> (1) At June 30, 2001, the Company had approximately 91 health care operators and approximately 625 leases in the managed portfolio. (2) Annualized rental and interest income on total investments above. Includes net operating income (NOI) on managed portfolio. -19-
RENEWAL INFORMATION: Lease Expirations and Mortgage Maturities -------------------------------------------- Year Revenue (2) (3) Percentage - -------------------------------------------------------- 2001 $ 1,107 0.4% 2002 7,898 2.7% 2003 8,341 2.9% 2004 65,849 22.4% 2005 26,435 9.0% Thereafter 183,814 62.6% -------------------------------------------- Grand Total $293,444 100.0% ============================================ SAME STORE GROWTH: Rent Growth on Comparable Facilities for the Six Months Ended June 30, 2001 vs. June 30, 2000 Triple Net Properties: Number of Facilities 272 Revenue Increase $1,212 Managed Properties: Number of Facilities 83 Occupancy Percentage at June 30, 2001 92% Occupancy Percentage Change from June 30, 2000 (2%) Net Operating Income Decrease $ 803 LEASE UP STATISTICS ON NEW ASSISTED LIVING FACILITIES: <TABLE> <CAPTION> Average Months Percent of Occupancy Facilities in Operation Rents Revenue - ---------------------------------------------------------------------------- <S> <C> <C> <C> <C> 0% - 50% 3 20.5 $ 881 0.30% 50% - 70% 6 26.2 2,677 0.91% 70% - 90% 6 26.0 3,944 1.35% ------------ 2.56% ============ </TABLE> (2) Annualized rental and interest income on total investments above. Includes net operating income (NOI) on managed portfolio. (3) This column includes the revenue impact by year and the total annualized rental and interest income associated with the properties subject to lease expiration, lessees' renewal option and/or purchase options and mortgage maturities. -20-
Three Months Six Months Ended Ended June 30, 2001 June 30, 2001 ------------------------------------- CAPITAL EXPENDITURES: Acquisitions $28,739 $56,844 Rentable Square Footage 165 347 Current Quarter Prior Quarter ------------------------------------- CASH FLOW COVERAGE: Cash Flow Coverage Before Management Fees 2.6 2.6 Cash Flow Coverage After Management Fees 2.3 2.3 RETAINED FUNDS FROM OPERATIONS: Retained Funds From Operations $ 6,812 $ 677 Inception-to-Date of Funds From Operations Retained $166,371 $159,559 Inception-to-Date Percent of Funds From Operations Retained 15.7% 15.7% CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS Statements in this Quarterly Report that are not historical factual statements are "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements include, among other things, statements regarding the intent, belief or expectations of HCPI and its officers and can be identified by the use of terminology such as "may", "will", "expect", "believe", "intend", "plan", "estimate", "should" and other comparable terms or the negative thereof. In addition, we, through our senior management, from time to time make forward looking oral and written public statements concerning our expected future operations and other developments. Shareholders and investors are cautioned that, while forward looking statements reflect our good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Actual results may differ materially from the expectations contained in the forward-looking statements as a result of various factors. In addition to the factors set forth under the caption Risk Factors in our annual report on Form 10-K, readers should consider the following: (a) Legislative, regulatory, or other changes in the health care industry at the local, state or federal level which increase the costs of or otherwise affect the operations of our lessees; (b) Changes in the reimbursement available to our lessees and mortgagors by governmental or private payors, including changes in Medicare and Medicaid payment levels and the availability and cost of third party insurance coverage; (c) Competition for lessees and mortgagors, including with respect to new leases and mortgages and the renewal or rollover of existing leases; -21-
(d) Availability of suitable health care facilities to acquire at a favorable cost of capital and the competition for such acquisition and financing of health care facilities; (e) The ability of our lessees and mortgagors to operate our properties in a manner sufficient to maintain or increase revenues and to generate sufficient income to make rent and loan payments; (f) The financial weakness of operators in the long-term care and assisted living sectors, including the bankruptcies of certain of our tenants, which results in uncertainties in our ability to continue to realize the full benefit of such operators' leases; (g) Changes in national or regional economic conditions, including changes in interest rates and the availability and cost of capital for us; and (h) The risk that we will not be able to sell or lease facilities that are currently vacant. DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in interest rates on our mortgage loans receivable and on our debt instruments. We provide mortgage loans to operators of health care facilities in the normal course of business. All of the mortgage loans receivable have fixed interest rates or interest rates with periodic fixed increases. Therefore, the mortgage loans receivable are all considered to be fixed rate loans, and the current interest rate (the lowest rate) is used in the computation of market risk provided in the table below if material. We may assume mortgage notes payable already in place as part of an acquisition transaction. Currently we have two mortgage notes payable with variable interest rates and the remaining mortgage notes payable have fixed interest rates or interest rates with fixed periodic increases. Our Senior Notes are at fixed rates. The variable rate loans are at interest rates below the current prime rate of 6.75%, and fluctuations are tied to the prime rate or to a rate currently below the prime rate. Fluctuation in the interest rate environment will not affect our future earnings and cash flows on our fixed rate debt until that debt matures and must be replaced or refinanced. Interest rate changes will affect the fair value of the fixed rate instruments. Conversely, changes in interest rates on variable rate debt would change our future earnings and cash flows, but not affect the fair value on those instruments. Assuming a one percentage point increase in the interest rate related to the variable rate debt including the mortgage notes payable and the bank lines of credit, and assuming no change in the outstanding balance as of year end, interest expense for 2001 would increase by approximately $455,000. The principal amount and the average interest rates for the mortgage loans receivable and debt categorized by the final maturity dates is presented in the table below. Certain of the mortgage loans receivable and certain of the debt securities require periodic principal payments prior to the final maturity date. The fair value estimates for the mortgage loans receivable are based on the estimates of management and on rates currently prevailing for comparable loans. The fair market value estimates for debt securities are based on discounting future cash flows utilizing current rates offered to us for debt of the same type and remaining maturity. -22-
<TABLE> <CAPTION> Maturity ------------------------------------------------------------------------------------------ Fair 2001 2002 2003 2004 2005 Thereafter Total Value ------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> ASSETS Mortgage Loans Receivable $ 921 $ 3,048 $ 2,325 $ 2,528 $ 2,773 $134,727 $146,322 $140,827 Weighted Average Interest Rate 10.12% 9.96% 10.16% 10.16% 10.17% 10.19% 10.18% LIABILITIES Variable Rate Debt: Bank Notes Payable 40,300 40,300 40,300 Weighted Average Interest Rate 4.81% 4.81% Mortgage Notes Payable 249 685 215 230 245 3,537 5,161 5,161 Weighted Average Interest Rate 4.88% 4.91% 4.91% 4.91% 4.91% 4.91% 4.91% Fixed Rate Debt: Senior Notes Payable 13,000 116,000 31,000 92,000 231,000 293,872 776,872 767,569 Weighted Average Interest Rate 7.88% 7.25% 7.09% 7.78% 6.79% 7.41% 7.25% Mortgage Notes Payable 2,028 3,912 11,780 13,100 4,203 134,313 169,336 158,433 Weighted Average Interest Rate 8.08% 8.07% 8.04% 8.07% 8.06% 8.06% 8.06% </TABLE> We do not believe that the future market rate risks related to our mortgage loans receivable or debt instruments will have a material impact on us or the results of our future operations. Readers are cautioned that most of the statements contained in these "Disclosures about Market Risk" paragraphs are forward looking and should be read in conjunction with our disclosures under the heading "Cautionary Language Regarding Forward Looking Statements" set forth above. NEW PRONOUNCEMENTS See Note 11 to the financial statements for a discussion of our implementation of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and Note 2 for a discussion of our adoption of Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements" released by the Securities and Exchange Commission ("SEC"). In June 2001, the Financial Accounting Standards Board released Statements of Financial Accounting Standards No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets". The effect of these pronouncements is not expected to be material. -23-
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Company held its annual stockholders meeting on May 3, 2001. The following matters were voted upon at the meeting: 1. Election of Directors: Votes Cast ---------- Against or Name of Director Elected For Withheld ------------------------ ---------- ---------- Paul V. Colony 47,086,111 483,692 Peter L. Rhein 47,086,849 482,954 Name of Each Other Director Whose Term of Office as Director Continued After the Meeting --------------------------- Robert R. Fanning, Jr. Michael D. McKee Orville E. Melby Harold M. Messmer Kenneth B. Roath 2. Approval of Amendment to the Company's Charter to Increase the Company's Authorized Common Stock from 100,000,000 to 200,000,000: For Against Abstain ------------------------------ 44,504,257 2,544,830 520,716 3. Approval of Amendment to the Company's Charter to Set Forth New Restrictions on the Ownership and Transfer of Shares: For Against Abstain ------------------------------ 45,766,382 1,255,653 547,768 4. Ratification of Arthur Andersen LLP As the Company's Independent Accountants for the Fiscal Year Ending December 31, 2001: For Against Abstain ------------------------------ 47,109,361 191,478 269,014 The Company reconvened its annual stockholders meeting on May 24, 2001. The following matters were voted upon at the meeting: -24-
1. Approval of Amendment to the Company's Charter to Reduce the Affirmative Stockholder Vote Required to Approve Most Amendments to the Charter and Other Extraordinary Corporate Actions From Two-Thirds to a Majority: For Against Abstain ------------------------------ 34,999,372 2,484,745 610,485 2. Approval of Amendment to the Company's Charter to Reduce the Affirmative Stockholder Vote Required to Approve Certain Amendments to the Charter Relating to Sections 2, 3 and 4 of Article V From Ninety Percent to Two-Thirds. For Against Abstain ------------------------------ 35,573,966 1,925,526 595,111 Item 6. Exhibits and Reports on Form 8-K ---------------------------------- a) Exhibits: 2.1 Agreement and Plan of Merger, dated as of August 4, 1999, between HCPI and American Health Properties, Inc. (incorporated herein by reference to exhibit 2.1 to HCPI's current report on form 8-K dated August 4, 1999). 3.1 Articles of Restatement of HCPI. 3.2 Second amended and restated bylaws of HCPI (incorporated herein by reference to exhibit 3.2 of HCPI's quarterly report on form 10-Q for the period ended March 31, 1999). 4.1 Rights agreement, dated as of July 27, 2000, between Health Care Property Investors, Inc. and the Bank of New York which includes the form of Certificate of Designations of the Series D Junior Participating Preferred Stock of Health Care Property Investors, Inc. as Exhibit A, the form of Right Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Shares as Exhibit C (incorporated by reference to Exhibit 4.1 of Health Care Property Investors, Inc.'s Current Report on Form 8-K dated July 28, 2000). 4.2 Indenture, dated as of September 1, 1993, between HCPI and The Bank of New York, as Trustee, with respect to the Series C and D Medium Term Notes, the Senior Notes due 2006 and the Mandatory Par Put Remarketed Securities due 2015 (incorporated by reference to exhibit 4.1 to HCPI's registration statement on form S-3 dated September 9, 1993). 4.3 Indenture, dated as of April 1, 1989, between HCPI and The Bank of New York for Debt Securities (incorporated by reference to exhibit 4.1 to HCPI's registration statement on form S-3 dated March 20, 1989). 4.4 Form of Fixed Rate Note (incorporated by reference to exhibit 4.2 to HCPI's registration statement on form S-3 dated March 20, 1989). 4.5 Form of Floating Rate Note (incorporated by reference to exhibit 4.3 to HCPI's registration statement on form S-3 dated March 20, 1989). 4.6 Registration Rights Agreement dated November 20, 1998 between HCPI and James D. Bremner (incorporated by reference to exhibit 4.8 to HCPI's annual report on form 10-K for the year ended December 31, 1999). This -25-
exhibit is identical in all material respects to two other documents except the parties thereto. The parties to these other documents, other than HCPI, were James P. Revel and Michael F. Wiley. 4.7 Registration Rights Agreement dated January 20, 1999 between HCPI and Boyer Castle Dale Medical Clinic, L.L.C. (incorporated by reference to exhibit 4.9 to HCPI's annual report on form 10-K for the year ended December 31, 1999). This exhibit is identical in all material respects to 13 other documents except the parties thereto. The parties to these other documents, other than HCPI, were Boyer Centerville Clinic Company, L.C., Boyer Elko, L.C., Boyer Desert Springs, L.C., Boyer Grantsville Medical, L.C., Boyer-Ogden Medical Associates, LTD., Boyer Ogden Medical Associates No. 2, LTD., Boyer Salt Lake Industrial Clinic Associates, LTD., Boyer-St. Mark's Medical Associates, LTD., Boyer McKay-Dee Associates, LTD., Boyer St. Mark's Medical Associates #2, LTD., Boyer Iomega, L.C., Boyer Springville, L.C., and - Boyer Primary Care Clinic Associates, LTD. #2. 4.8 Form of Deposit Agreement (including form of Depositary Receipt with respect to the Depositary Shares, each representing one-one hundredth of a share of our 8.60% Cumulative Redeemable Preferred Stock, Series C) (incorporated by reference to exhibit 4.8 to HCPI's quarterly report on form 10-Q for the period ended March 31, 2001) dated as of March 1, 2001 by and among HCPI, Wells Fargo Bank Minnesota, N.A. and the holders from time to time of the Depositary Shares described therein. 4.9 Indenture, dated as of January 15, 1997, between American Health Properties, Inc. and The Bank of New York, as trustee (incorporated herein by reference to exhibit 4.1 to American Health Properties, Inc.'s current report on form 8-K (file no. 001-09381), dated January 21, 1997). 4.10 First Supplemental Indenture, dated as of November 4, 1999, between HCPI and The Bank of New York, as trustee (incorporated by reference to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999). 4.11 Dividend Reinvestment and Stock Purchase Plan, dated November 9, 2000 (incorporated by reference to exhibit 99.1 to HCPI's registration statement on form S-3 dated November 13, 2000). 10.1 Amendment No. 1, dated as of May 30, 1985, to Partnership Agreement of Health Care Property Partners, a California general partnership, the general partners of which consist of HCPI and certain affiliates of Tenet (incorporated by reference to exhibit 10.1 to HCPI's annual report on form 10-K for the year ended December 31, 1985). 10.2 HCPI Second Amended and Restated Directors Stock Incentive Plan (incorporated by reference to exhibit 10.43 to HCPI's quarterly report on form 10-Q for the period ended March 31, 1997).* 10.3 HCPI Second Amended and Restated Stock Incentive Plan (incorporated by reference to exhibit 10.44 to HCPI's quarterly report on form 10-Q for the period ended March 31, 1997).* 10.4 First Amendment to Second Amended and Restated Directors Stock Incentive Plan, effective as of November 3, 1999 (incorporated by reference to exhibit 10.1 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).* -26-
10.5 Second Amendment to Second Amended and Restated Directors Stock Incentive Plan, effective as of January 4, 2000 (incorporated by reference to exhibit 10.15 to HCPI's annual report on form 10-K for the year ended December 31, 1999).* 10.6 First Amendment to Second Amended and Restated Stock Incentive Plan effective as of November 3, 1999 (incorporated by reference to exhibit 10.3 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999).* 10.7 HCPI 2000 Stock Incentive Plan, effective as of March 23, 2000 (incorporated by reference to Appendix A of HCPI's Proxy Statement used at the annual meeting of stockholders held on May 9, 2000).* 10.8 HCPI Second Amended and Restated Directors Deferred Compensation Plan (incorporated by reference to exhibit 10.45 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1997).* 10.9 Second Amendment to Second Amended and Restated Directors Deferred Compensation Plan, effective as of November 3, 1999 (incorporated by reference to exhibit 10.2 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999). 10.10 Fourth Amendment to Second Amended and Restated Director Deferred Compensation Plan, effective as of January 4, 2000 (incorporated by reference to exhibit 10.17 to HCPI's annual report on form 10-K for the year ended December 31, 1999).* 10.11 Employment Agreement dated October 13, 2000 between HCPI and Kenneth B. Roath (incorporated by reference to exhibit 10.11 to HCPI's annual report on Form 10-K for the year ended December 31, 2001).* 10.12 Various letter agreements, each dated as of October 16, 2000, among HCPI and certain key employees of the Company (incorporated by reference to exhibit 10.12 to HCPI's annual report on Form 10-K for the year ended December 31, 2001).* 10.13 HCPI Executive Retirement Plan (incorporated by reference to exhibit 10.28 to HCPI's annual report on Form 10-K for the year ended December 31, 1987).* 10.14 Amendment No. 1 to HCPI Executive Retirement Plan (incorporated by reference to exhibit 10.39 to HCPI's annual report on form 10-K for the year ended December 31, 1995).* 10.15 Stock Transfer Agency Agreement between HCPI and The Bank of New York dated as of July 1, 1996 (incorporated by reference to exhibit 10.40 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1996). 10.16 Amended and Restated Limited Liability Company Agreement dated November 20, 1998 of HCPI/Indiana, LLC (incorporated by reference to exhibit 10.15 to HCPI's annual report on form 10-k for the year ended December 31, 1998). 10.17 Amended and Restated Limited Liability Company Agreement dated January 20, 1999 of HCPI/Utah, LLC (incorporated by reference to exhibit 10.16 to HCPI's annual report on form 10-K for the year ended December 31, 1998). 10.18 Revolving Credit Agreement, dated as of November 3, 1999, among HCPI, each of the banks identified on the signature pages hereof, The -27-
Bank of New York, as agent for the banks and as issuing bank, and Bank of America, N.A. and Wells Fargo Bank, N.A., as co- documentation agents, with BNY Capital Markets, Inc., as lead arranger and Book Manager (incorporated by reference to exhibit 10.4 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999). 10.19 364-Day Revolving Credit Agreement, dated as of November 3, 1999 among HCPI, each of the banks identified on the signature pages hereof, The Bank of New York, as agent for the banks, and Bank of America, N.A. and Wells Fargo Bank, N.A., as co- documentation agents, with BNY Capital Markets, Inc., as lead arranger and book manager (incorporated by reference to exhibit 10.5 to HCPI's quarterly report on form 10-Q for the period ended September 30, 1999). 10.20 Cross-Collateralization, Cross-Contribution and Cross-Default Agreement, dated as of July 20, 2000, by HCP Medical Office Buildings II, LLC, and Texas HCP Medical Office Buildings, L.P., for the benefit of First Union National Bank (incorporated by reference to exhibit 10.20 to HCPI's annual report on Form 10-K for the year ended December 31, 2001). 10.21 Cross-Collateralization, Cross-Contribution and Cross-Default Agreement, dated as of August 31, 2000, by HCP Medical Office Buildings I, LLC, and Meadowdome, LLC, for the benefit of First Union National Bank (incorporated by reference to exhibit 10.21 to HCPI's annual report on Form 10-K for the year ended December 31, 2001). 10.22 Amendment No. 2 to HCPI Executive Retirement Plan (incorporated by reference to exhibit 10.22 to HCPI's quarterly report on form 10-Q for the period ended March 31, 2001).* * Management Contract or Compensatory Plan or Arrangement. b) Reports on Form 8-K: On May 21, 2001, HCPI filed a Current Report on Form 8-K with the Securities and Exchange Commission regarding the Purchase Agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., Legg Mason Wood Walker, Incorporated and Banc of America Securities LLC pursuant to which HCPI agreed to issue and sell up to 4,025,000 shares of the Company's common stock. -28-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 2, 2001 HEALTH CARE PROPERTY INVESTORS, INC. (REGISTRANT) /S/ JAMES G. REYNOLDS ------------------------------------ James G. Reynolds Executive Vice President and Chief Financial Officer (Principal Financial Officer) /S/ DEVASIS GHOSE ------------------------------------ Devasis Ghose Senior Vice President-Finance and Treasurer (Principal Accounting Officer) -29-