Healthpeak Properties - 10-Q quarterly report FY

As of August 9, 2002 there were 58,277,021 shares of $1.00 par value common stock outstanding.

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, 2001. 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.

Revenue is recorded in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB 101 requires that revenue be recognized after four basic criteria are met. These four criteria include persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility. If the collectibility of revenue is determined incorrectly, the amount and timing of our reported revenue could be significantly affected.

Rental revenue from our tenants is our principal source of revenue. We monitor the liquidity and creditworthiness of our lessees and other tenants on an on-going basis. Based on these reviews, we have established provisions, and maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments. An allowance for doubtful accounts is recorded during each period and is recorded against rental revenue in our consolidated statements of operations. The total amount of the allowance for doubtful accounts, which represents the cumulative allowances less write-offs of uncollectible rent, is recorded against tenant and other receivables on our consolidated balance sheets. If we incorrectly estimate the required allowances for doubtful accounts, our financial condition and results of operations could be significantly affected.

We compute depreciation on our properties using the straight-line method based on an estimated useful life ranging up to 45 years. A significant portion of the acquisition cost of each property is allocated to building (usually approximately 90%). The allocation of the acquisition cost to building and the determination of the useful life of a property are based on appraisals commissioned from independent real estate appraisal firms. If we do not allocate appropriately to the building or incorrectly estimate the useful life of our properties, the computation of depreciation will not appropriately reflect the allocation of our capital expenditures over future periods.

We periodically review long-lived assets (primarily real estate, investments in unconsolidated joint ventures and notes receivable) for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of the fair value of the investment involves significant judgment. This judgment is based on analysis of the future operating results or projected rents for each long-lived asset. Our ability to accurately predict future cash flows may impact the determination of fair value.

In the event that a decline in fair value of a long-lived asset occurs, we may be required to make a determination as to whether the decline in fair value is other than temporary. Our assessment as to the nature of a decline in fair value is primarily based on estimates of expectations of future rents or future operating results, and our intent to hold the long-lived asset. If an investment is considered impaired and the decline in value is considered to be other than temporary, a write-down is recognized.

We have reclassified certain facilities operations as Discontinued Operations in accordance with Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (Statement 144) which was issued in August 2001. Statement 144 established accounting and reporting standards requiring that long-lived assets to be disposed of be reported as Discontinued Operations if management has committed to a plan to sell the asset under usual and customary terms within one year of establishing the plan to sell. See Note 3 for the impact of Statement 144 on previously reported periods.

As of January 1, 2002, we commenced recognizing compensation expense in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (Statement 123). The total charge related to the amortization of 2002 stock options for the six months ended June 30, 2002 has been included in General and Administrative Expense in the second quarter of 2002. The implementation of Statement 123 is prospective and therefore 2001 operating results have not been impacted. We use the Black Scholes model for calculating stock option expense. This model requires us to make certain estimates including stock volatility, discount rate and the termination discount factor. If we incorrectly estimate these variables, our results of operations could be affected.

Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (Statement 133) established 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. Additionally, changes in the derivative’s fair value are recognized as comprehensive income if specific hedge accounting criteria are met. If these criteria are not met, changes in the fair value are to be included in earnings. See Note 5 for the impact of agreements requiring the application of Statement 133.

We have made reclassifications, where necessary, for comparative financial statement presentations.

As of June 30, 2002, our portfolio of properties, including equity investments, consisted of 432 facilities located in 42 states. These facilities are comprised of 181 long-term care facilities, 89 assisted living facilities, 84 medical office buildings, 37 physician group practice clinics, 21 acute care hospitals, nine freestanding rehabilitation facilities, six health care laboratory and biotech research facilities and five retirement living communities. Our gross undepreciated investment in these properties, which includes joint ventures, was approximately $2,905,198,000 at June 30, 2002.

During the six months ended June 30, 2002, we acquired 17 properties for an aggregate purchase price of $175,000,000. These properties have an average annual lease rate of 10.72%. The properties consist of nine long-term care facilities, four assisted living facilities, two retirement living communities and two medical office buildings.

During the first six months of the year, construction continued on two new facilities, a $28,000,000 acute care hospital and medical office building in Idaho Falls of which $13,757,000 has been incurred to date and a $12,300,000 health care research facility of which $7,843,000 has been incurred to date.

In accordance with Statement of Financial Accounting Standards No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” we wrote down three facilities to be sold to fair value less costs to sell. The resulting $1,307,000 loss is included in Gain/(Loss) on Real Estate Dispositions and offsets the $702,000 gain on five facilities that were sold. The net loss on real estate dispositions for the six months ended June 30, 2002 was $605,000.

Statement 144 requires that the operating results generated on long-lived assets to be disposed of be reclassified as Discontinued Operations. The reclassification has no impact on Net Income, FFO or per share amounts.

When we have committed to a plan to sell the asset under usual and customary terms within one year of establishing the plan to sell, the financial results for all periods presented are reclassified as Discontinued Operations. The following illustrates the net reclassification impact of Statement 144 on previously issued financial statements as a result of classifying facilities as Discontinued Operations during the second quarter of 2002.

At June 30, 2002, we had 11 facilities classified as Discontinued Operations. Included in Discontinued Operations is operating income from these 11 facilities of $1,456,000 and $607,000 for the three months ended June 30, 2002 and 2001 and $1,619,000 and $2,213,000 for the six months ended June 30, 2002 and 2001. Of these 11 facilities, six with a net book value of $7,200,000 had not yet been sold as of June 30, 2002.

At June 30, 2002, we had approximately 97 health care operators and approximately 650 leases in the Managed Portfolio.

Listed below are our major operators, which represent three percent or more of our annualized revenue, the annualized revenue in properties operated by those operators, and the percentage of total annualized revenue from these operators as of June 30, 2002. Annualized revenue is the expected rental income from leased properties, interest income from mortgage properties and net operating income (NOI) on Managed Portfolio properties over the next twelve months. Amounts incorporate expected sales, mortgage payoffs, lease renewals or rent resets based on our best estimates. All of the companies listed below (with the exception of Centennial Healthcare Corp.) are publicly traded companies and are subject to the informational filing requirements of the Securities and 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.

As of June 30, 2002, we had 98 owned properties—65 medical office buildings (“MOBs”), six healthcare laboratory and biotech research facilities and 27 physician group practice clinics with triple net, gross and modified gross leases with multiple tenants that are managed by independent property management companies on our behalf (“Managed Portfolio”). These facilities are consolidated since they are either fully or majority owned and controlled by the Company or our subsidiaries. Rents and operating income attributable to these properties are 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.

On June 25, 2002, we issued $250,000,000 of 6.45% coupon (6.74% effective rate after including related costs) Senior Notes due 2012. Interest on these notes is payable semi-annually in June and December.

During the six months ended June 30, 2002, we paid off $111,000,000 of maturing long-term debt with an average interest rate of 7.24%.

During 1999, we entered into a $25,000,000 swap contract through which the variable interest rate on a senior note was fixed until its February 2004 maturity. We have reflected the change in the fair market value of this instrument of $77,000 as of June 30, 2002 as an accumulated comprehensive loss, which is recorded under Other Equity. If the note is held to maturity as planned, the unrealized loss will not be incurred.

Accounts receivable consists of the following:

The following table provides a summary of the activity for the Stockholders’ Equity account for the six months ended June 30, 2002 (amounts in thousands):

Accumulated comprehensive loss is a reduction to net income in calculating comprehensive income. Comprehensive income is the change in equity from non-owner sources. Our comprehensive income reflects the change in the fair market value of our interest rate swap (see Note 5). Comprehensive income for the six months ended June 30, 2002 and 2001 was $70,687,000 and $60,924,000, respectively.

As of January 1, 2002, we commenced recognizing compensation expense in accordance with Statement 123. Stock option expense represents the amount of amortized compensation costs related to 2002 stock options awarded to employees. The charge of $154,000 has been included in General and Administrative Expense. Previously, we had accounted for all stock options under Accounting Principles Board Opinion 25 (APB 25), “Accounting for Stock Issued to Employees”, which is permitted under Statement 123. Had compensation expense for stock options been determined with rules set out in Statement 123 since the effective date, our Net Income and Basic Earnings Per Common Share would have been lower by approximately $234,000 and $0.004 per basic share and $319,000 and $0.006 per basic share for the six months ended June 30, 2002 and 2001, respectively.

As of June 30, 2002, there were a total of 1,638,969 non-managing member units outstanding in three limited liability companies of which we are the managing member: HCPI/Utah, LLC, HCPI/Utah II, LLC and HCPI/Indiana, LLC. These non-managing member units are convertible into our common stock on a one-for-one basis.

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 of dilutive securities. Options to purchase shares of common stock that have 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.

We are required to report information about operations on the bases that we use internally to measure performance under Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information.”

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 use historical cost accounting for depreciation

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, discontinued operations, impairment losses related to depreciable property 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 our FFO (all amounts in thousands):

We have committed to acquire seven medical office buildings and one assisted living facility for $45,000,000. We have committed to fund additional development of facilities on existing properties of approximately $12,000,000, and are committed to fund $50,000,000 for construction of new health care facilities. 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.

On July 25, 2002, the Board of Directors declared a quarterly dividend of $0.82 per common share payable on August 20, 2002 to shareholders of record as of the close of business on August 5, 2002.

The Board of Directors also declared a cash dividend of $0.492188 per share on our series A cumulative preferred stock, $0.54375

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amount for Cash and Cash Equivalents approximates fair value because of the short-term maturity of those instruments. Fair values for Mortgage Loans Receivable and Senior Notes and Mortgage Notes Payable are based on the estimates of management and on rates currently prevailing for comparable loans and instruments of comparable maturities, and are as follows:

In April 2002, the FASB released Statement of Financial Accounting Standard No. 145 “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (Statement 145), effective with fiscal years beginning after May 15, 2002. These rescinded Statements primarily relate to the extinguishment of debt and lease accounting. In June 2002, the FASB released Statement of Financial Accounting Standard No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” effective with fiscal years beginning after December 31, 2002 with early application encouraged. The effect of these two pronouncements on our financial statements is not expected to be material.

Health Care Property Investors, Inc., including our wholly-owned subsidiaries and affiliated joint ventures (HCPI), generally acquires health care facilities and leases them on a long-term basis to health care providers. We also lease medical office space to providers and physicians on a shorter term basis. On a more limited basis, we provide mortgage financing on health care facilities. As of June 30, 2002, our portfolio of properties, including equity investments, consisted of 432 facilities located in 42 states. These facilities are comprised of 181 long-term care facilities, 89 assisted living facilities, 84 medical office buildings, 37 physician group practice clinics, 21 acute care hospitals, nine freestanding rehabilitation facilities, six health care laboratory and biotech research facilities and five retirement living communities. Our gross undepreciated investment in these properties, which includes joint ventures, was approximately $2.9 billion at June 30, 2002.

For the six months ended June 30, 2002, we acquired 17 properties for an aggregate purchase price of $175,000,000. These properties have an average annual lease rate of 10.72%. The properties consist of nine long-term care facilities, four assisted living facilities, two retirement living communities and two medical office building. We financed the acquisitions primarily through the proceeds from the issuance of new debt and equity, from asset sales and the use of our line of credit.

Shortly after the end of the second quarter of 2002, we acquired two additional facilities for $13,000,000. As of June 30, 2002, we had written commitments to acquire or construct an additional $63,000,000 of health care real estate. Also during the second quarter of 2002, construction continued on two new facilities, a $28,000,000 acute care hospital and medical office building in Idaho Falls of which $13,757,000 has been incurred to date and a $12,300,000 health care research facility of which $7,843,000 has been incurred to date.

Revenue is recorded in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements (SAB 101), as amended. SAB 101 requires that revenue be recognized after four basic criteria are met. These criteria are persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility. If the collectibility of revenue is determined incorrectly, the amount and timing of our reported revenue could be significantly affected.

Rental revenue from our tenants is our principal source of revenue. We monitor the liquidity and creditworthiness of our lessees and other tenants on an on-going basis. Based on these reviews, we have established provisions, and maintain an allowance for doubtful accounts for estimated losses resulting from the possible inability of our tenants to make required rent payments to us. An allowance for doubtful accounts is recorded during each period and is recorded against rental revenue in our consolidated statements of operations. The allowance for doubtful accounts, which represents the cumulative allowances less write-offs of uncollectible rent, is recorded against tenant and other receivables on our consolidated balance sheets. If we incorrectly estimate the required allowances for doubtful accounts, our financial condition and results of operations could be significantly affected.

We compute depreciation on our properties using the straight-line method based on an estimated useful life ranging up to 45 years. A significant portion of the acquisition cost of each property is allocated to building (usually approximately 90%). The allocation of the acquisition cost to building and the determination of the useful life of a property are based on appraisals commissioned from independent real estate appraisal firms. If we do not allocate appropriately to the building or incorrectly estimate the useful life of our properties, the computation of depreciation will not appropriately reflect the allocation of our capital expenditures over future periods.

We periodically review long-lived assets (primarily real estate, investments in unconsolidated joint ventures entities and notes receivable) for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. The determination of the fair value of the investment involves significant judgment. This judgment is based on analysis of the future operating results and resulting cash flows of each long-lived asset. Our ability to accurately predict future cash flows may impact the determination of fair value.

In the event that a decline in fair value of a long-lived asset occurs, we may be required to make a determination as to whether the decline in fair value is other than temporary. Our assessment as to the nature of a decline in fair value is primarily based on estimates of expectations of future rents or future operating results, and our intent to hold the long-lived asset. If an investment is considered impaired and the decline in value is considered to be other than temporary, a write-down is recognized.

As of January 1, 2002, we commenced recognizing compensation expense in accordance with Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (Statement 123). The total charge related to the amortization of 2002 stock options for the six months ended June 30, 2002 has been included in General and Administrative Expense in the second quarter of 2002. The implementation of Statement 123 is prospective and therefore 2001 operating results have not been impacted. We use the Black Scholes model for calculating stock option expense. This model requires us to make certain estimates including stock volatility, discount rate and the termination discount factor. If we incorrectly estimate these variables, our results of operations could be affected.

Net Income applicable to common shares for the three and six months ended June 30, 2002 totaled $34,130,000 and $58,314,000 or $0.59 and $1.01 per diluted share of common stock on revenue of $89,259,000 and $169,780,000, respectively. This compares with Net Income applicable to common shares of $28,675,000 and $48,474,000 or $0.54 and $0.93 per diluted share of common stock on revenue of $83,414,000 and $159,762,000 respectively for the three and six months ended June 30, 2001.

Net Income applicable to common shares for the three months ended June 30, 2002 and June 30, 2001 includes a $714,000 (or $0.01 per diluted share of common stock) net gain on real estate dispositions and a $532,000 (or $0.01 per diluted share of common stock) net gain on real estate dispositions, respectively. Net Income applicable to common shares for the six months ended June 30, 2002 and June 30, 2001 includes a $605,000 (or $0.01 per diluted share of common stock) and a $242,000 (or $0.005 per diluted common share) net loss on real estate dispositions, respectively. Also included in Net Income applicable to common shares for the three and six months ended June 30, 2002 is a write-down to fair market value less costs to sell of $330,000 (or $0.005 per diluted share of common stock) of one facility to be sold and $1,307,000 (or $0.02 per diluted share of common stock) of three facilities to be sold,

Rental Income attributable to Triple Net Leases for the three and six months ended June 30, 2002 increased $3,867,000 and $5,203,000 to $62,084,000 and $114,895,000, respectively, as compared to the same period in the prior year. The increases are primarily the result of the positive impact of acquisitions made during 2001 and the first half of 2002 and positive rent growth offset by rent reductions on certain properties (see discussion elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations) and dispositions made during 2001 and the first half of 2002.

Rental Income attributable to Managed Properties for the three and six months ended June 30, 2002 increased $2,271,000 and $4,914,000 to $22,120,000 and $44,321,000, respectively, as compared to the same periods in the prior year. There was a related increase in Managed Properties Operating Expenses in the three and six months ended June 30, 2002 of $307,000 and $584,000 to $7,500,000 and $14,885,000, respectively compared to the same periods of 2001. Net operating income on Managed Properties for the three and six months ended June 30, 2002 increased $1,964,000 and $4,330,000, respectively, as compared to the same periods in the prior year. These increases were generated primarily from 2001 acquisition activity.

Interest and Other Income for the three and six months ended June 30, 2002 decreased $293,000 and $99,000 to $5,055,000 and $10,564,000, respectively, as compared to the same period in the prior year primarily as a result of the pay off of two loans early in 2002.

Interest Expense for the three months and six months ended June 30, 2002 decreased $1,334,000 and $4,794,000 to $18,219,000 and $40,549,000, respectively, as compared to the same periods in the prior year. The decreases are primarily the result of lower interest rates on short-term bank loans as well as the refinancing at lower rates of maturing senior debt. The increase in General and Administrative Expenses for the three months ended June 30, 2002 includes a $400,000 write-down of a working capital loan to an operator as well as $215,000 in property taxes paid on behalf of troubled operators and vacant facilities. The increase in General and Administrative Expenses for the six months ended June 30, 2002 includes an additional $263,000 in property taxes paid on behalf of troubled operators and vacant facilities. Real Estate Depreciation for the three and six months ended June 30, 2002 increased $1,418,000 and $2,396,000 to $18,648,000 and $36,485,000, respectively, compared to the same periods in 2001. These increases resulted from depreciation on the properties acquired during the last six months of 2001 and the first six months of 2002.

We believe that Funds From Operations (FFO) is the most important supplemental measure of operating performance for a real estate investment trust. (See Note 10 to the Condensed Consolidated Financial Statements). FFO for the three months ended June 30, 2002 increased $6,018,000 to $52,149,000 as compared to the same period in the prior year. The increase is primarily due to the positive impact of our acquisitions made during 2001 and the first half of 2002 and a decrease in Interest Expense offset by dispositions made during 2001.

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

We have financed investments through the sale 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 in 2000, 2001 and 2002. Management believes that our liquidity and sources of capital are adequate to finance our operations for the foreseeable future, including through December 31, 2002. Future investments in additional facilities will be dependent on the availability of cost-effective sources of capital.

At June 30, 2002, stockholders’ equity totaled $1,258,315,000 and our equity securities had a market value of $2,838,437,000. Total debt presently represents 30% and 48% 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. For the six months ended June 30, 2002, earnings covered fixed charges and preferred stock dividends at a ratio of 2.2 to 1.00 and FFO (before interest expense) covered Interest Expense at a ratio of 3.9 to 1.00.

Tabulated below is our debt maturity table by year and in the aggregate.

On June 25, 2002, we issued $250,000,000 of 6.45% coupon (6.74% effective rate after including related costs) Senior Notes due 2012. Interest on these notes is payable semi-annually in June and December.

During the first six months of 2002, we paid off $111,000,000 of maturing long-term debt with an average interest rate of 7.24%. These payments were initially financed with funds available under our revolving lines of credit.

We have revolving lines of credit totaling $395,000,000. Of this amount, $188,000,000 will mature in November 2002, with the balance maturing in November 2003. As of June 30, 2002, we had $290,100,000 available under these lines of credit. Borrowings under the lines of credit averaged $274,000,000 for the quarter ended June 30, 2002 at a rate of 2.81%. In the second quarter of 2001, we had average borrowings of $93,000,000 at a rate of 5.55%.

At June 30, 2002, we had a total of $180,035,000 in Mortgage Notes Payable secured by 36 health care facilities with a net book value of approximately $316,870,000. Interest rates on the Mortgage Notes ranged from 2.8% to 10.63% with an average rate of 8.0%.

During the six months ended June 30, 2002, we raised $36,844,000 under our Dividend Reinvestment and Stock Purchase Plan at an average price per share of $38.68.

As of June 30, 2002, there were a total of 1,638,969 non-managing member units outstanding in three limited liability companies of which we are the managing member: HCPI/Utah, LLC, HCPI/Utah II, LLC and HCPI/Indiana, LLC. These non-managing member units are convertible into our common stock on a one-for-one basis.

On April 19, 2002, we filed a registration statement with the Securities and Exchange Commission for the registration of $975,000,000 of debt and equity securities that may be issued from time to time. As of July 2002, we have $725,000,000 available for future financing of debt and equity securities.

At June 30, 2002, we held approximately $8,198,000 in depository accounts and $45,880,000 in irrevocable letters of credit from commercial banks to secure a number of lessees’ lease obligations and borrowers’ loan obligations. We may draw upon the letters of credit or depository accounts if there are any defaults under the leases or loans. Amounts available under letters of credit could change based upon facility operating conditions and other factors and such changes may be material.

As of June 30, 2002, we had eight facilities that are subject to lease expirations and mortgage maturities during the remainder of 2002. These facilities currently represent approximately 0.1% of annualized revenue. For the year ending December 31, 2003, we have 15 facilities, representing approximately 2.3% of annualized revenue, subject to lease expirations and mortgage maturities.

We have an 80% interest in five joint ventures that lease six long-term care facilities and a 45%-50% interest in four joint ventures that each operate an assisted living facility. Since the other members in these joint ventures have significant voting rights relative to acquisition, sale and refinancing of assets, we account for these investments using the equity method of accounting.

Combined summarized unaudited financial information of the joint ventures follows:

As of June 30, 2002, we have guaranteed approximately $6.8 million on notes payable obligations for four of these joint ventures.

As of June, 2002, we derived 29% of our annualized revenue, or $95,000,000, from 21 acute care and nine rehabilitation hospitals. The hospital sector continues to post strong financial performance. The operating performance of our hospitals ranks in the top quartile of hospitals in the nation.

We have one hospital acquired as part of the American Health Properties acquisition which is located in West Valley City near Salt Lake City, Utah that has above-market rent. The facility has consistently performed well. Recently, we concluded an agreement to renew the lease from 2003 through 2017 at a rate commensurate with market conditions which will result in a reduction in earnings of approximately $2,000,000 per year beginning in July 2002. The agreement requires funding of approximately $10 million for capital additions for the facility over the next three years without an increase in rent resulting in an overall reduction in earnings of $2,800,000 per year when the capital additions are complete.

Twenty-seven percent of our annualized revenue as of June 30, 2002 was derived from the long-term care sector. Access to affordable liability insurance, and adequacy of Medicare and Medicaid reimbursements continue to be significant challenges for the long-term care industry. Although some states have improved Medicaid reimbursement, the economic slowdown has placed pressure on many state budgets, which could slow rate increases planned for 2002. Laws supporting certain Medicare reimbursements expire October 1, 2002 and are currently under review. Medicare rates could fall as much as 5% as a result.

On the positive side, occupancies and operations improved for many facilities. Several long-term care facility operators, including Kindred Health Care, Genesis Health Ventures, Sun Healthcare and Mariner Healthcare, four of our lessees, have successfully emerged from bankruptcy proceedings.

Within our long-term care portfolio the operations of 12 facilities in Oklahoma, four facilities in North Carolina, and 11 facilities in various other states have been negatively affected by reduced reimbursement and the performance and financial situation of the lessees. We are presently recording revenue of approximately $800,000 less in the second quarter of this year from these 27 properties than in the corresponding quarter in 2001. Management expects improved results from higher lease revenue or sales of some of these properties in the next 12 months. Leases are now in effect for 12 of these properties, five additional leases are to become effective upon operator licensure and new leases are being negotiated on an additional five facilities.

As of June 30, 2002, we derived 14% of our annualized revenue from the assisted living industry. This health care sector has been challenged by over-building, slow fill-up, rising insurance costs and higher operating costs associated with increased acuity of residents. Development of new assisted living facilities has slowed significantly and occupancy rates and bottom line performance are improving, albeit slower than operators had forecasted. Recently, several operators have been in the market for acquisitions of existing assisted living facilities, indicating a positive signal for the industry.

We own eight assisted living facilities currently leased to four operators whose operations have been negatively affected by their current market position. This has resulted in recording revenue of approximately $600,000 less in the second quarter of this year from these properties than in the same quarter in 2001. We have new leases in effect on two facilities with new operators and one facility being operated by a manager on our behalf. Management believes that there will be a significant improvement in the return on some of these facilities in the next 12 months.

For the six months ended June 30, 2002, we had internal same facility rent growth, net of rent decreases, of approximately $281,000, or 0.3% of rents, in our Triple Net portfolio.

Our 4,434,000 square foot managed medical office building, health care laboratory and biotech research facility and physician group practice clinic portfolio produced approximately 18% of our annualized revenue as of June 30, 2002. Occupancy for this portfolio remained at 91%.

During the six months ended June 30, 2002, we completed $175,000,000 in investments with an average return of 10.72%. As a result, we expect that earnings and FFO should improve for 2002 over 2001. However, our 2002 results will be dependent on execution of our $400,000,000 acquisition program, stable capital costs and an early resolution of customer reorganizations and bankruptcies. As market conditions continue to improve, we anticipate that we will deploy new capital in positive spread investments, thereby improving future growth rates.