- - ----------------------------------------------------------------------------
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, 1998.
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
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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, CA 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 5, 1998 there were 30,963,046 shares of $1.00 par value
common stock outstanding.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 . . . . . . . . . . . . . . .
Condensed Consolidated Statements of Income
Six Months and Three Months Ended June 30, 1998 and 1997. . . . .
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 . . . . . . . . . . . . .
Notes to Condensed Consolidated Financial Statements . . . . . .
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . .
PART II. OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Real Estate Investments
Buildings and Improvements $ 938,707 $ 837,857
Accumulated Depreciation (184,295) (170,502)
---------- ----------
754,412 667,355
Construction in Progress 15,021 19,627
Land 127,510 99,520
---------- ----------
896,943 786,502
Loans Receivable 154,382 125,381
Investments in and Advances to Joint Ventures 39,523 14,241
Other Assets 16,146 10,756
Cash and Cash Equivalents 2,089 4,084
---------- ----------
Total Assets $1,109,083 $ 940,964
========== ==========
Liabilities and Stockholders' Equity
Bank Notes Payable $ 9,000 $ 66,900
Senior Notes Payable 481,003 275,023
Convertible Subordinated Notes Payable 100,000 100,000
Mortgage Notes Payable 10,233 10,935
Accounts Payable, Accrued Liabilities and Deferred Income 27,422 23,492
Minority Interests in Joint Ventures 21,174 22,345
Stockholders' Equity:
Preferred Stock 57,810 57,810
Common Stock 30,963 30,216
Additional Paid-In Capital 432,798 408,924
Cumulative Net Income 479,964 444,759
Cumulative Dividends (541,284) (499,440)
---------- ----------
Total Stockholders' Equity 460,251 442,269
---------- ----------
Total Liabilities and Stockholders' Equity $1,109,083 $ 940,964
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
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,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue
Base Rental Income $ 27,494 $ 22,859 $ 53,572 $ 44,770
Additional Rental and Interest Income 5,445 5,300 10,856 10,613
Interest and Other Income 5,009 3,592 9,854 7,235
--------- --------- --------- ---------
37,948 31,751 74,282 62,618
--------- --------- --------- ---------
Expense
Interest Expense 8,819 7,198 16,436 13,960
Depreciation/Non Cash Charges 7,962 6,301 15,384 12,535
Facility Operating Expenses 948 --- 1,745 ---
Other Expenses 1,932 1,855 3,804 3,636
--------- --------- --------- ---------
19,661 15,354 37,369 30,131
--------- --------- --------- ---------
Income From Operations 18,287 16,397 36,913 32,487
Minority Interests (1,072) (1,003) (2,220) (2,021)
Gain on Sale of Real Estate Properties 512 --- 512 2,047
--------- --------- --------- ---------
Net Income $ 17,727 $ 15,394 $ 35,205 $ 32,513
--------- --------- --------- ---------
Dividends to Preferred Stockholders 1,181 --- 2,362 ---
--------- --------- --------- ---------
Net Income Applicable to Common Shares $ 16,546 $ 15,394 $ 32,843 $ 32,513
========= ========= ========= =========
Basic Earnings Per Common Share $ 0.54 $ 0.54 $ 1.07 $ 1.13
========= ========= ========= =========
Diluted Earnings Per Common Share $ 0.53 $ 0.53 $ 1.06 $ 1.13
========= ========= ========= =========
Weighted Average Shares
Outstanding - Basic 30,789 28,712 30,740 28,707
========= ========= ========= =========
Weighted Average Shares
Outstanding - Diluted 31,079 28,860 31,050 28,858
========= ========= ========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 35,205 $ 32,513
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Real Estate Depreciation 13,891 10,972
Non Cash Charges 1,466 1,563
Joint Venture Adjustments 44 (384)
Gain on Sale of Real Estate Properties (512) (2,047)
Changes in:
Operating Assets (2,502) (885)
Operating Liabilities 3,763 121
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 51,355 41,853
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Real Estate (125,747) (79,733)
Proceeds from Sale of Real Estate Properties 1,883 8,624
Advances to Joint Ventures/Partnerships (25,764) ---
Other Investments and Loans (30,133) 746
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (179,761) (70,363)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Bank Notes Payable (57,900) 57,000
Repayment of Senior Notes Payable (17,500) (12,500)
Issuance of Senior Notes Payable 223,396 19,876
Cash Proceeds from Issuing Common Stock 23,383 167
Decrease in Minority Interests (1,000) ---
Periodic Payments on Mortgages (493) (519)
Dividends Paid (41,844) (34,741)
Other Financing Activities (1,631) (228)
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 126,411 29,055
---------- ----------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (1,995) 545
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,084 2,811
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,089 $ 3,356
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments that are necessary to state fairly the
financial position, the results of operations, and cash flows of Health Care
Property Investors, Inc. and its affiliated subsidiaries and joint ventures (the
"Company"). The Company presumes that users of the interim financial
information herein 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, 1997 and that the
adequacy of additional disclosures needed for a fair presentation, except in
regard to material contingencies, may be determined in that context.
Accordingly, footnotes and other disclosures that would substantially duplicate
the disclosures contained in the Company's most recent annual report to security
holders have been omitted. The interim financial information contained herein
is not necessarily representative of a full year's operations for various
reasons including acquisitions, changes in rents, interest rates and the timing
of debt and equity financings. These same considerations apply to all year-to-
year comparisons.
Facility Operations:
During 1997, the Company purchased 90 - 100 percent ownership interests in seven
medical office buildings ("MOBs") which are operated by independent property
management companies on behalf of the Company. These MOBs are leased to
multiple tenants under gross or triple net leases. Any income attributable to
these properties, other than Base Rental Income, is recorded as facility
operating revenue and is included in Interest and Other Income. Expenses related
to the operation of these MOBs are recorded as Facility Operating Expenses.
Reclassifications:
Reclassifications have been made, where applicable, for comparative financial
statement presentations.
(2) MAJOR OPERATORS
Listed below are the Company's major operators and the percentage of annualized
revenue from these operators and their subsidiaries. Each of these operators is
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 10-Q with the Securities and Exchange Commission. Except as otherwise
indicated, all of the financial and other information presented herein with
respect to such companies was obtained from such public reports.
<TABLE>
<CAPTION>
Percentage
of Annualized
Operators Revenue Total Revenue
- - ------------ ------------- -----------------
(in thousands)
<S> <C> <C>
Vencor, Inc. (" New Vencor") $ 19,398 12%
HealthSouth Corporation 12,253 7
Emeritus Corporation 11,094 7
Centennial Healthcare Corporation 9,281 6
Tenet Healthcare Corporation ("Tenet") 8,933 5
Columbia/HCA Healthcare Corp. 8,116 5
</TABLE>
On May 1, 1998, Vencor, Inc. ("Old Vencor") completed a spinoff transaction
pursuant to which it became two publicly held entities - Ventas, Inc.
("Ventas"), a real estate company which intends to qualify as a REIT, and
New Vencor, a healthcare company which at June 30, 1998 leased 42 of the
Company's properties. As of June 30, 1998, 36% of annualized revenue on
facilities leased to New Vencor relates to facilities sub-leased and operated
by other providers. Both Ventas and New Vencor are responsible for payments due
under the New Vencor leases and substantially all are guaranteed by Tenet.
Based upon public reports, Old Vencor's pre spin-off revenue and net income
for the three months ended March 31, 1998 were approximately $823.3 million and
$18.9 million, respectively; Old Vencor's total assets and stockholders'
equity as of March 31, 1998 were approximately $3.4 billion and $930.8 million,
respectively. Based upon public reports, Old Vencor's revenue and net income
for the year ended December 31, 1997 were approximately $3.1 billion and
$130.9 million, respectively; Old Vencor's total assets and stockholders'
equity as of December 31, 1997 were approximately $3.3 billion and $905.4
million, respectively.
Based upon a recent press release, New Vencor's revenue, loss excluding non-
recurring transactions and net loss for the three months ended June 30, 1998
(which includes the combined results of the predecessor company for all periods
prior to May 1, 1998) were approximately $778.7 million, $4.7 million and
$101.4 million, respectively.
Based upon a recent press release, Ventas' revenue, income from operations and
net income for the two months ended June 30, 1998 since commencing operations
were approximately $37.4 million, $8.2 million and $228,000, respectively.
Ventas' total assets and stockholders' deficit as of June 30, 1998 was $961.2
million and $39.4 million, respectively.
Tenet leases and those guaranteed by Tenet represented approximately 17% of the
Company's total annualized revenue as of June 30, 1998. During 1998, 14 of the
New Vencor leases expire. As of June 30, 1998, 12 of these leases have been
re-leased or have agreements to re-lease in place with other operators.
(3) ISSUANCE OF SENIOR DEBT
During June 1998, the Company issued $200,000,000 of senior unsecured debt in
the form of 6.875% MandatOry Par Put Remarketed Securities ("MOPPRS") due June
8, 2015 which are subject to mandatory tender on June 8, 2005. The Company
received total proceeds of approximately $203,000,000 including the present
value of the put option at June 8, 2005 associated with the debt instrument.
The option is being amortized to interest expense over 17 years. The weighted
average cost of the debt including the amortization of the option and offering
expenses is 6.77%. The proceeds were used to repay outstanding borrowings
under the Company's revolving lines of credit.
(4) STOCKHOLDERS' EQUITY
The following tabulation is a summary of the activity for the Stockholders'
Equity account for the six months ended June 30, 1998 (amounts in thousands):
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------- ---------------------------------
Par Additional Total
Number of Number of Value Paid-In Cumulative Stockholders'
Shares Amount Shares Amount Capital Net Income Dividends Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 2,400 $57,810 30,216 $30,216 $408,924 $444,759 $(499,440) $442,269
Issuance of Common Stock, Net 747 747 23,874 24,621
Net Income 35,205 35,205
Dividends Paid - Preferred Shares (2,362) (2,362)
Dividends Paid - Common Shares (39,482) (39,482)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1998 2,400 $57,810 30,963 $30,963 $432,798 $479,964 $(541,284) $460,251
===================================================================================================================================
</TABLE>
During April 1998, the Company sold 698,752 shares of common stock at $33.2217
per share. The net proceeds of approximately $23,000,000 were used to pay down
short-term borrowings under the Company's revolving lines of credit.
(5) EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accountings Standards No.
128, Earnings Per Share, effective December 15, 1997. As a result, both basic
and diluted earnings per common share are presented for each of the quarters and
six months ended June 30, 1998 and 1997. In prior years, only basic earnings per
common share data was disclosed. 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 is calculated using only dilutive securities. The convertible
debt and options to purchase shares of common stock which have an exercise
price in excess of the average market price during the periods presented are
not included because they are not dilutive.
(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, 1998 Income Shares Amount Income Shares Amount
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $16,546 30,789 $ 0.54 $32,843 30,740 $ 1.07
====== ======
Dilutive Options --- 173 --- 191
Non Managing Member Units 76 117 153 119
------- ------- ------- -------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $16,622 31,079 $ 0.53 $32,996 31,050 $ 1.06
====== ======
June 30, 1997
- - ---------------------------------------
Basic Earnings Per Common Share:
Net Income Applicable to Common Shares $ 15,394 28,712 $ 0.54 $ 32,513 28,707 $ 1.13
====== ======
Dilutive Options --- 148 --- 151
------- ------- ------- -------
Diluted Earnings Per Common Share:
Net Income Applicable to Common
Shares Plus Assumed Conversions $ 15,394 28,860 $ 0.53 $32,513 28,858 $ 1.13
====== ======
</TABLE>
(6) FUNDS FROM OPERATIONS
Under Statement of Financial Accounting Standards No. 131, Disclosures about
Segments of an Enterprise, effective beginning in 1998, the Company is required
to report information about its operations on the basis that the information is
used internally for evaluating the Company's performance.
The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. Historical cost accounting for
real estate assets implicitly assumes 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 uninformative. The term FFO was designed by the real
estate investment trust industry to address this problem.
The Company 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 debt restructuring and
sales of property, 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 defined by the Company, 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 and FFO per share of common stock
(all amounts in thousands except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net Income Applicable to Common Shares $16,546 $15,394 $32,843 $32,513
Real Estate Depreciation and Amortization 7,246 5,490 13,891 10,972
Joint Venture Adjustments 272 (192) 44 (384)
Gain on Sale of Real Estate Properties (512) --- (512) (2,047)
--------- --------- --------- ---------
Funds From Operations $23,552 $20,692 $46,266 $41,054
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
---------------------------- ------------------------------
Per Share Per Share
June 30, 1998 FFO Shares Amount FFO Shares Amount
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Funds From Operations per Share: $ 23,552 30,789 $ 0.76 $ 46,266 30,740 $ 1.51
====== ======
Interest and Amortization applicable to
Convertible Debt 1,599 2,645 3,199 2,645
Dilutive Options --- 173 --- 191
Non Managing Member Units 76 117 153 119
------- ------- ------- -------
Diluted Funds From Operations per
Share: $ 25,227 33,724 $ 0.75 $ 49,618 33,695 $ 1.47
====== ======
June 30, 1997
- - -----------------------------------------
Basic Funds From Operations per Share: $ 20,692 28,712 $ 0.72 $ 41,054 28,707 $ 1.43
====== ======
Interest and Amortization applicable to
Convertible Debt 1,599 2,645 3,199 2,645
Dilutive Options --- 148 --- 151
------- ------- ------- -------
Diluted Funds From Operations per
Share: $ 22,291 31,505 $ 0.71 $ 44,253 31,503 $ 1.40
====== ======
</TABLE>
(7) COMMITMENTS
As of August 7, 1998, the Company has outstanding commitments on closed and to-
be-closed development transactions of approximately $68,000,000 and $97,000,000,
respectively. The Company is also committed to acquire approximately
$78,000,000 of existing health care real estate. The Company expects that a
significant portion of these commitments will be funded; however, experience
suggests that some committed transactions will not close. Transactions do not
close for various reasons including unsatisfied pre-closing conditions,
competitive financing sources, final negotiation differences and the operator's
inability to obtain required internal or governmental approvals.
(8) NEW PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The Statement 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. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement the Statement as of the beginning of any fiscal
quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). Statement 133 cannot be applied retroactively. Statement 133 must
be applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired, or substantively
modified after December 31, 1997 (and, at the company's election, before January
1, 1998).
We have not yet quantified the impacts of adopting Statement 133 on our
financial statements and have not determined the timing of or method of our
adoption of Statement 133. However, the effect is not expected to be material.
(9) SUBSEQUENT EVENTS
On July 16, 1998 the Board of Directors declared a quarterly dividend of $0.66
per common share payable on August 20, 1998, to shareholders of record on the
close of business on August 3, 1998.
The Board of Directors also declared a cash dividend of $0.492188 per share on
its Series A cumulative preferred stock. This dividend will be paid on
September 30, 1998 to shareholders of record as of the close of business on
September 15, 1998.
<PAGE>
HEALTH CARE PROPERTY INVESTORS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company is in the business of acquiring health care facilities that it
leases on a long-term basis to health care providers. On a more limited basis,
the Company has provided mortgage financing on health care facilities. As of
June 30, 1998, the Company's portfolio of properties, including equity
investments, consisted of 292 facilities located in 41 states. These facilities
are comprised of 143 long-term care facilities, 79 congregate care and
assisted living facilities, 20 medical office buildings, eight acute
care hospitals, six freestanding rehabilitation facilities, 35 physician
group practice clinics and one psychiatric care facility. The gross
acquisition price of the properties, which includes joint venture
acquisitions, was approximately $1,293,000,000 at June 30, 1998.
The Company had commitments to purchase and construct health care facilities
totaling approximately $243,000,000 for funding during 1998 and 1999. The
Company expects that a significant portion of these commitments will be funded
but that a portion may not be funded (see Note (7) to the Condensed
Consolidated Financial Statements).
RESULTS OF OPERATIONS
Net Income applicable to common shares for the three and six months ended June
30, 1998 totaled $16,546,000 and $32,843,000 or $0.54 and $1.07 of basic
earnings per share on revenue of $37,948,000 and $74,282,000, respectively.
This compares to $15,394,000 and $32,513,000 or $.54 and $1.13 of basic
earnings per share on revenue of $31,751,000 and $62,618,000 for the same
periods in 1997. Net Income applicable to common shares for the three and
six months ended June 30, 1998 included a $512,000 or $0.02 per share
gain on the sale of real estate properties. Net Income applicable to
common shares for the six months ended June 30, 1997 included a $2,047,000 or
$0.07 per share gain on the sale of real estate properties.
Base Rental Income for the three and six months ended June 30, 1998 increased
$4,635,000 and $8,802,000 to $27,494,000 and $53,572,000, respectively, as
compared to the same period in the prior year. The majority of the increase in
Base Rental Income was generated by new investments of approximately
$178,000,000 and $262,000,000 made during 1998 and 1997. Interest and Other
Income for the three and six months ended June 30, 1998 increased $1,417,000
and $2,619,000 to $5,009,000 and $9,854,000, respectively, primarily from
growth in the lending portfolio and from an increase in income from the
operations of seven medical office buildings purchased during 1997 and one
clinic purchased during 1998. There were $948,000 and $1,745,000 in related
Facility Operating Expenses during the three and six months ended June 30, 1998.
Interest Expense for the three and six months ended June 30, 1998 increased
$1,621,000 and $2,476,000, respectively. The increase is primarily the result of
an increase in short-term borrowings used to fund the acquisitions made during
the fourth quarter of 1997 and the first half of 1998 and interest related to
the MOPPRS senior debt issuance during June 1998 (see Note (3) to the Condensed
Consolidated Financial Statements). The increase in Depreciation/Non Cash
Charges for the three and six months ended June 30, 1998 of $1,661,000
and $2,849,000 to $7,962,000 and $15,384,000, respectively, is the direct
result of the new investments made during 1998 and 1997.
The Company believes that Funds From Operations ("FFO") is an important
supplemental measure of operating performance. (See Note (6) to the
Condensed Consolidated Financial Statements.)
FFO for the three months ended June 30, 1998 increased $2,860,000 to
$23,552,000. The increase is attributable to increases in Base Rental Income
and Interest and Other Income, as offset by increases in Interest Expense and
Facility Operating Expenses, which are discussed 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 defined by the Company, 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed acquisitions through the sale of common and preferred
stock, issuance of long-term debt, assumption of mortgage debt, use of short-
term bank lines and through internally generated cash flows. Facilities under
construction are generally financed by means of cash on hand or short-term
borrowings under the Company's existing bank lines. At the completion of
construction and commencement of the lease, short-term borrowings used in the
construction phase are generally refinanced with new long-term debt, including
Medium Term Notes ("MTNs"), or with equity offerings.
The following table summarizes the MTN financing activities during 1997 and
1998:
<TABLE>
<CAPTION>
Amount
Date Maturity Coupon Rate Issued/(Redeemed)
---------------------------------------------------------------------
<S> <C> <C> <C>
March 1997 10 years 7.30% $ 10,000,000
April 1997 10 years 7.62% 10,000,000
June 1997 --- 10.20% - 10.30% (12,500,000)
February 1998 --- 9.88% (10,000,000)
March 1998 5 years 6.66% 20,000,000
April 1998 --- 9.48% (1,000,000)
May 1998 --- 9.44%- 9.62% (6,500,000)
</TABLE>
During June 1998, the Company issued $200 million of 6.875% MandatOry Par Put
Remarketed Securities ("MOPPRS") due June 8, 2015 which are subject to mandatory
tender on June 8, 2005. The Company received total proceeds of approximately
$203,000,000 (including the present value of the put option associated with the
debt) which was used to repay borrowings under the Company's revolving lines of
credit. The weighted average cost of the debt including the amortization of
the option and offering expenses is 6.77%. The MOPPRS are senior, unsecured
obligations of the Company.
During the past year, the Company has completed three equity offerings. On
September 26, 1997, the Company issued $60,000,000, 7-7/8% Series A Cumulative
Redeemable Preferred Stock. During December 1997, the Company raised
$55,000,000 of equity in a common stock offering of 1,437,500 shares at $38.3125
per share. During April 1998, the Company sold 698,752 shares of common stock
in a common stock offering at $33.2217 per share. The net proceeds of
$57,810,000, $51,935,000 and $23,000,000 from the preferred and common stock
offerings, respectively, were utilized to pay down short-term borrowings under
the Company's revolving lines of credit.
At June 30, 1998, stockholders' equity in the Company totaled $460,251,000 and
the debt to equity ratio was 1.30 to 1. For the six months ended June 30, 1998,
FFO (before interest expense) covered Interest Expense 3.81 to 1.
During June 1998, the Company registered $600,000,000 of debt and equity
securities under a shelf registration statement filed with the Securities and
Exchange Commission. The Company also had approximately $52,900,000 available
under its Series B and C MTN programs, for a total of $652,900,000 available as
of June 30, 1998. These amounts may be issued from time to time in the future
based on Company needs and then existing market conditions. On October 22, 1997,
the Company renegotiated its line of credit with a group of seven banks. The
Company now has two revolving lines of credit, one for $100,000,000 that
expires on October 22, 2002 and one for $50,000,000 that expires on October 22,
1998. As of June 30, 1998, the Company also had $141,000,000 available on its
$150,000,000 revolving lines of credit. The Company's Senior Notes and
Convertible Subordinated Notes have been rated investment grade by debt rating
agencies since 1986. Current ratings are as follows:
Moody's Standard & Poor's Duff & Phelps
--------------------------------------------------
Senior Notes Baa1 BBB+ A-
Convertible
Subordinated Notes Baa2 BBB BBB+
Since inception in May 1985, the Company has recorded approximately $640,479,000
in cumulative FFO. Of this amount, a total of $537,675,000 has been distributed
to stockholders as dividends on common stock. The balance of $102,804,000 has
been retained, and has been an additional source of capital for the Company.
At June 30, 1998, the Company held approximately $40,000,000 in irrevocable
letters of credit from commercial banks to secure the obligations of many
lessees' lease and borrowers' loan obligations. The Company may draw upon the
letters of credit if there are any defaults under the leases and/or loans.
Amounts available under letters of credit change based upon facility operating
conditions and other factors and such changes may be material.
The second quarter 1998 dividend of $0.65 per common share or $20,124,000 in the
aggregate was paid on May 20, 1998. Total dividends paid during the six months
ended June 30, 1998 as a percentage of FFO for the corresponding period was 85%.
The Company declared a third quarter dividend of $0.66 per common share
or approximately $20,436,000 in the aggregate, to be paid on August 20, 1998.
The Company has concluded a significant number of "facility rollover"
transactions in 1995, 1996, 1997 and 1998 on properties that have been under
long-term leases and mortgages. "Facility rollover" transactions principally
include lease renewals and renegotiations, exchanges, sales of properties,
and, to a lesser extent, payoffs on mortgage receivables.
<TABLE>
<CAPTION>
Annualized
Increase/(Decrease)
Year In FFO
- - ----- -------------------
<S> <C> <C>
1995 Completed 20 facility rollovers including the sale
of ten facilities with concurrent "seller financing"
for a gain of $23,550,000. $ 900,000
1996 Completed 20 facility rollovers including the sale
of nine facilities in Missouri and the exchange of
the Dallas Rehabilitation Institute for the HealthSouth
Sunrise Rehabilitation Hospital in Fort Lauderdale,
Florida. (1,200,000)
1997 Completed 12 facility rollovers. (1,600,000)
1998 Completed or agreed to complete 28 facility rollovers. (1,600,000)
</TABLE>
Through December 31, 2000, the Company has 39 more facilities that are subject
to lease expiration, mortgage maturities or purchase options (which manage-
ment believes may be exercised) representing approximately 18% of annualized
revenues. During 1997, the Company concluded agreements with Tenet and Beverly
Enterprises, Inc. ("Beverly") that resulted in their forbearance or waiver of
certain renewal and purchase options and related rights of first refusal on up
to 57 facilities leased to New Vencor and Beverly, of which 27 facilities
had leases expiring through December 31, 2000. As part of these agreements,
continued ownership of most of the facilities will remain with the Company.
As a result of the forbearance or waiver of these options, the Company
believes that, based upon recent operating results, it has increased or may be
able to increase rents on approximately 12 facilities whose lease terms
expire between 1998 and 2001; however, there can be no assurance that the
Company will be able to realize any increased rents. The Company has completed
certain facility rollovers earlier than the scheduled lease expirations or
mortgage maturities and will continue to pursue such opportunities where it
is advantageous to do so.
Management believes that the Company's liquidity and sources of capital are
adequate to finance its operations as well as its future investments in
additional facilities.
YEAR 2000 ISSUE
Management believes it does not have any significant exposure to Year 2000
issues with respect to its own accounting and information systems and has
reasonable assurance that its own systems are compliant with Year 2000. During
the second quarter of 1998, the Company commenced a survey of its investment
banks, commercial banks, primary lessees and major vendors in order to assess
what preparations each has made to deal with the issue. Through this process
the Company hopes to find out what potentially detrimental exposures that these
third parties, and therefore the Company, need to be prepared for before the end
of 1999. The Company, therefore, is not able to determine whether the Year 2000
issue will have a material adverse effect on the Company or its future
operations.
CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q 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 the Company
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, the Company, through its
senior management, from time to time makes forward looking oral and written
public statements concerning the Company's expected future operations and other
developments. Shareholders and investors are cautioned that, while forward
looking statements reflect the Company's good faith beliefs 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. Such factors include (i)
legislative, regulatory, or other changes in the healthcare industry at the
local, state or federal level which increase the costs of or otherwise affect
the operations of the Company's lessees; (ii) changes in the reimbursement
available to the Company's 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; (iii) competition for
lessees and mortgagors, including with respect to new leases and mortgages and
the renewal or roll-over of existing leases; (iv) competition for the
acquisition and financing of health care facilities; (v) the ability of the
Company's lessees and mortgagors to operate the Company's properties in a manner
sufficient to maintain or increase revenues and to generate sufficient income to
make rent and loan payments; and, (vi) changes in national or regional economic
conditions, including changes in interest rates and the availability and cost of
capital to the Company.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual stockholders meeting on May 12, 1998.
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 27,387,706 291,397
Peter L. Rhein 27,387,800 291,303
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, Jr.
Kenneth B. Roath
2. Ratification of Arthur Andersen LLP
As the Company's Independent
Accountants for the Fiscal Year
Ending December 31,1998
-----------------------------------
For Against Abstain
------------------------------
27,212,446 344,437 122,220
Item 6. Exhibits and Reports on Form 8-K
----------------------------------
a) Exhibits:
27 Financial Data Schedule
b) Reports on Form 8-K:
On April 16, 1998, the Company filed a Report on Form 8-K with the
Securities and Exchange Commission ("SEC") regarding the press release
announcing the Company's operating results for the quarter ended March
31, 1998.
On April 23, 1998, the Company filed a Report on Form 8-K with the SEC
regarding the Purchase Agreement with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated pursuant to which the
Company agreed to issue and sell up to 698,752 shares of the Company's
common stock.
On June 3, 1998, the Company filed a Report on Form 8-K with the SEC
regarding the Purchase Agreement with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Nationsbanc Montgomery
Securities LLC and Salomon Brothers Inc., pursuant to which the Company
agreed to issue and sell up to $200,000,000 aggregate principal amount
of the Company's 6.875% MandatOry Par Put Remarketed Securities due
June 8, 2015 (the "MOPPRS").
On June 17, 1998, the Company filed a Report on Form 8-K with the SEC
regarding the acquisition on nine long-term care facilities and 33
clinics in 11 separate transactions at an aggregate purchase price of
approximately $99,800,000.
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 7, 1998 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)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000765880
<NAME> HEALTH CARE PROPERTY INVESTORS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,089
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,081,238
<DEPRECIATION> 184,295
<TOTAL-ASSETS> 1,109,083
<CURRENT-LIABILITIES> 0
<BONDS> 591,236
0
57,810
<COMMON> 30,963
<OTHER-SE> 371,478
<TOTAL-LIABILITY-AND-EQUITY> 1,109,083
<SALES> 0
<TOTAL-REVENUES> 74,282
<CGS> 0
<TOTAL-COSTS> 17,604
<OTHER-EXPENSES> 5,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,436
<INCOME-PRETAX> 35,205
<INCOME-TAX> 0
<INCOME-CONTINUING> 35,205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 35,205
<EPS-PRIMARY> 1.07
<EPS-DILUTED> 1.06
</TABLE>
