EXHIBIT 99.1
NEWS RELEASE
Contact: | James G. Reynolds | |
Talya Nevo-Hacohen | ||
949-221-0600 |
HEALTH CARE PROPERTY INVESTORS, INC. REPORTS RESULTS
FOR THE QUARTER AND YEAR ENDED DECEMBER 31, 2003
NEWPORT BEACH, CA., January 27, 2004 — Health Care Property Investors, Inc. (NYSE:HCP), an equity health care real estate investment trust (REIT), announced today operating results for the quarter and year ended December 31, 2003. Net Income applicable to common shares for the year totaled $121,849,000, or $1.93 per diluted share of common stock, on revenue of $400,183,000. This compares with Net Income applicable to common shares of $112,480,000, or $1.92 per diluted share of common stock on revenue of $349,116,000 for the year ended December 31, 2002.
Funds From Operations (FFO) for the year ended December 31, 2003 was $206,231,000, or $3.28 per diluted share of common stock, compared with $199,210,000, or $3.41 per diluted share of common stock, for the year ended December 31, 2002.
Included in Net Income applicable to common shares and FFO for the year ended December 31, 2003 are non-operating preferred stock redemption charges totaling $18,553,000, or $0.29 per diluted share of common stock. Included in Interest and Other Income for the quarter and year ended December 31, 2003 is a $3,424,000, or $0.05 per diluted share of common stock, accrual reversal which relates to the 1999 acquisition of American Health Properties.
The Company’s calculation of FFO does not include previously disclosed asset impairment charges of $13,992,000, or $0.22 per diluted share of common stock, and $11,007,000, or $0.18 per diluted share of common stock, for the years ended December 31, 2003 and 2002, respectively. See note (4) on page six for a description of FFO and the treatment and impact of asset impairment charges.
FOURTH QUARTER HIGHLIGHTS AND RECENT DEVELOPMENTS
· | On October 2, 2003, the Company and HCP Medical Office Portfolio, LLC, a joint venture with GE Commercial Finance, completed the acquisition of 113 medical office buildings from MedCap Properties, LLC for $575 million. The Company is the managing member of HCP Medical Office Portfolio, LLC and has a one-third economic interest therein. |
· | In December 2003, the Company issued 7,820,000 shares of 7.1% Series F Cumulative Redeemable Preferred Stock at $25.00 per share, generating gross proceeds of $195,500,000. |
· | On January 20, 2004, HCP Medical Office Portfolio, LLC completed $288 million of mortgage financings of which $254 million are at a weighted average fixed rate of 5.57% and the balance is at a floating rate based on LIBOR plus 1.75%. The Company received $92 million of net proceeds from the financing, representing its one-third share of the joint venture. |
· | On January 22, 2004, the Company announced that its Board of Directors approved a 2-for-1 stock split in the form of a stock dividend. Stockholders of record as of the close of business on February 4, 2004 will receive one additional share of common stock for each share they own. Total outstanding shares will increase from approximately 65.5 million to approximately 131 million. Certificates for the new shares will be issued on or about March 1, 2004. |
· | On January 22, 2004, the Company announced that its Board of Directors declared a quarterly common stock cash dividend of $0.835 per share on a pre-split basis ($0.4175 on a post-split basis). The common stock cash dividend will be paid on February 19, 2004 to stockholders of record as of the close of business on February 4, 2004. This most recent dividend equals $3.34 on an annualized pre-split basis compared with $3.32 for 2003. The Board of Directors of the Company has determined to continue to follow the policy established in January 2003 of considering further dividend increases on an annual rather than quarterly basis. |
· | On January 22, 2004, the Company announced that its Board of Directors elected David B. Henry and Joseph P. Sullivan to the Company’s Board of Directors. Henry is Vice Chairman and Chief Investment Officer of Kimco Realty Corporation. Sullivan is presently Chairman of the Board of Advisors of RAND Health and a member of the Board of Directors of Amylin Pharmaceuticals, Inc. Previously, Sullivan was Chairman of the Board, President and Chief Executive Officer of American Health Properties, Inc., an equity health care REIT that the Company acquired in 1999. |
· | On January 22, 2004, the Company announced the undertaking of certain corporate governance initiatives that it believes are in the best interests of the Company’s stockholders. The Company’s Board of Directors has approved an amendment to the Company’s stockholder rights plan (“poison pill”) that will cause the rights to expire on February 2, 2004 and has approved amendments to the Company’s charter and bylaws that would declassify its Board of Directors and provide for the annual election of directors. Under the current classified system, directors are elected to a three-year term and approximately one-third of the full board is up for election each year. The charter amendment providing for declassification will require stockholder approval, which the Company intends to seek at its 2004 annual stockholders’ meeting. |
· | On January 26, 2004, the Company reported that 66% of its 2003 common stock dividend is taxable as ordinary income and 34% is a non-taxable return of capital. |
· | Today the Company announced that Mark A. Wallace was named Senior Vice President and Chief Financial Officer effective March 15, 2004. He was formerly the Executive Vice President and Chief Financial Officer of Tremont Corporation and TIMET, its principal operating subsidiary, which were both publicly traded NYSE companies during his tenure. |
Health Care Property Investors, Inc. has scheduled a conference call and webcast today, Tuesday, January 27, 2004 at 9:00 a.m. Pacific Time (12:00 p.m. Eastern Time) in order to present the Company’s performance and operating results for the quarter and year ended December 31, 2003. The conference call is accessible by dialing 800-811-7286. The webcast is accessible via the Company’s Internet web site at www.hcpi.com. A webcast replay of the conference call will be available after 1 p.m. Pacific Time on January 27, 2004 through February 7, 2004 on the Company’s web site.
Health Care Property Investors, Inc. (NYSE:HCP) is a self-administered equity real estate investment trust (REIT) that invests directly or through joint ventures in health care facilities. As of December 31, 2003, the Company’s portfolio of properties, including those invested in through joint ventures, includes 554 properties in 44 states and consisted of 31 hospitals, 173 long-term care facilities, 124 assisted and retirement living facilities, 196 medical office buildings and 30 other properties. For more information on Health Care Property Investors, Inc., visit the Company’s web site at www.hcpi.com.
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Statements in this news release and the supplement that are not historical may contain forward-looking statements subject to risks and uncertainties, such as competition for the acquisition and financing of health-care facilities, competition for lessees and mortgagors (including with respect to new leases and mortgages and the renewal or roll-over of existing leases); continuing operational difficulties in the long-term care and assisted living sectors; the Company’s ability to acquire, sell or lease facilities and the timing of acquisitions, sales and leasings; changes in health care laws and regulations and other changes in the health-care industry which affect the operations of the company’s lessees or mortgagors; changes in management; costs of compliance with building regulations; changes in tax laws and regulations; changes in the financial position of the Company’s lessees and mortgagors; changes in rules governing financial reporting, including new accounting pronouncements; and changes in economic conditions, including changes in interest rates and the availability and cost of capital, which affect opportunities for profitable investments. Some of these risks are described from time to time in the SEC reports filed by the Company.
HEALTH CARE PROPERTY INVESTORS, INC.
Summary Information for Quarter and Year Ended December 31, 2003 and 2002
(Unaudited) Amounts in Thousands, Except Per Share Amounts
Quarter Ended December 31, | Year Ended December 31, | |||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||
Revenue | $ | 110,195 | (4) | $ | 95,692 | $ | 400,183 | (4) | $ | 349,116 | ||||
Net Income Applicable to Common Shares | $ | 41,435 | $ | 23,149 | $ | 121,849 | (3),(4) | $ | 112,480 | |||||
Basic Earnings Per Share | $ | 0.64 | (4) | $ | 0.39 | $ | 1.95 | (3),(4) | $ | 1.95 | ||||
Diluted Earnings Per Share (1) | $ | 0.63 | (4) | $ | 0.39 | $ | 1.93 | (3),(4) | $ | 1.92 | ||||
Weighted Average Shares Outstanding | 65,510 | 59,742 | 63,065 | 58,495 | ||||||||||
(Diluted Earnings Per Share) (1) | ||||||||||||||
Funds From Operations (2) | $ | 62,270 | $ | 52,312 | $ | 206,231 | (3) | $ | 199,210 | |||||
Diluted Funds From Operations Per Share (1) | $ | 0.94 | $ | 0.88 | $ | 3.28 | (3) | $ | 3.41 | |||||
(1) Diluted Earnings and Funds From Operations Per Share have been adjusted from amounts previously reported for the impact of unvested restricted stock grants and unvested employee stock options to conform with current presentation. The effect on periods in 2002 aggregates up to $0.02 per diluted share.
(2) The Company believes that Funds From Operations (FFO) is an 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 issue.
The Company adopted the definition of FFO prescribed by the National Association of Real Estate Investment Trusts' (NAREIT) October 1999 White Paper (as amended April 2002). Accordingly, FFO is defined as Net Income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding asset impairment charges and gains (or losses) from sales of property, plus real estate depreciation and 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.
In October 2003, NAREIT informed its member companies that the Securities and Exchange Commission (SEC) has taken the position that asset impairment charges should not be excluded in calculating FFO. The SEC's interpretation is that recurring impairments on real property are not an appropriate adjustment. If the Company adopted the SEC's interpretation of FFO and did not adjust for asset impairment charges, the Company's basic FFO, diluted FFO and FFO per diluted share for historical periods would be different than the amounts reported in this release and in previous disclosures. According to NAREIT, there is inconsistency among NAREIT member companies as to the adoption of the SEC's interpretation of FFO. Therefore, a comparison of the Company's FFO results to another company's FFO results may not be meaningful. See note (4) on page six for a presentation of the impact of impairment charges.
(3) Includes the impact of preferred stock redemption charges of $18,553,000, or $0.29 per diluted share, for the year ended December 31, 2003.
(4) Includes income from the reversal of non-cash accruals related to the 1999 acquisition of American Health Properties of $3,424,000, or $0.05 per diluted share of common stock for the quarter and year ended December 31, 2003.
HEALTH CARE PROPERTY INVESTORS, INC.
Consolidated Statements of Income
(Unaudited) Amounts in Thousands, Except Per Share Amounts
Quarter Ended December 31, | Year Ended December 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | ||||||||||||||||
Rental Income (2) | $ | 66,166 | $ | 61,047 | $ | 248,773 | $ | 233,088 | ||||||||
Medical Office Building Rental Income (2) | 27,011 | 23,525 | 99,876 | 89,007 | ||||||||||||
Equity Income from Unconsolidated Joint Ventures | 2,435 | 838 | 2,889 | 920 | ||||||||||||
Interest and Other Income | 14,583 | 10,282 | 48,645 | 26,101 | ||||||||||||
110,195 | 95,692 | 400,183 | 349,116 | |||||||||||||
Expense | ||||||||||||||||
Interest Expense | 23,389 | 21,719 | 90,749 | 77,418 | ||||||||||||
Real Estate Depreciation and Amortization | 20,908 | 19,313 | 79,095 | 73,455 | ||||||||||||
Operating Expenses from Medical Office Buildings | 11,961 | 8,705 | 38,694 | 31,358 | ||||||||||||
General and Administrative Expenses | 8,311 | 6,093 | 24,731 | 18,733 | ||||||||||||
Impairment Losses on Real Estate | 2,090 | — | 2,090 | — | ||||||||||||
66,659 | 55,830 | 235,359 | 200,964 | |||||||||||||
Income From Operations | 43,536 | 39,862 | 164,824 | 148,152 | ||||||||||||
Minority Interests | (3,454 | ) | (2,118 | ) | (9,751 | ) | (8,396 | ) | ||||||||
Income Before Discontinued Operations | 40,082 | 37,744 | 155,073 | 139,756 | ||||||||||||
Discontinued Operations | ||||||||||||||||
Operating Income from Discontinued Operations | 533 | 875 | 3,278 | 7,953 | ||||||||||||
Gain/(Loss) on Real Estate Dispositions and Impairments | 3,783 | (9,245 | ) | 234 | (10,329 | ) | ||||||||||
4,316 | (8,370 | ) | 3,512 | (2,376 | ) | |||||||||||
Net Income | $ | 44,398 | $ | 29,374 | $ | 158,585 | $ | 137,380 | ||||||||
Dividends to Preferred Stockholders | (2,963 | ) | (6,225 | ) | (18,183 | ) | (24,900 | ) | ||||||||
Preferred Stock Redemption Charges | — | — | (18,553 | ) | — | |||||||||||
Net Income Applicable to Common Shares | $ | 41,435 | $ | 23,149 | $ | 121,849 | $ | 112,480 | ||||||||
Basic Earnings Per Share | ||||||||||||||||
Income from Continuing Operations Applicable to Common Shares | 0.57 | 0.53 | 1.89 | 1.99 | ||||||||||||
Discontinued Operations | 0.07 | (0.14 | ) | 0.06 | (0.04 | ) | ||||||||||
Net Income Applicable to Common Shares | $ | 0.64 | $ | 0.39 | $ | 1.95 | $ | 1.95 | ||||||||
Diluted Earnings Per Share (1) | ||||||||||||||||
Income from Continuing Operations Applicable to Common Shares | 0.57 | 0.53 | 1.88 | 1.96 | ||||||||||||
Discontinued Operations | 0.06 | (0.14 | ) | �� | 0.05 | (0.04 | ) | |||||||||
Net Income Applicable to Common Shares | $ | 0.63 | $ | 0.39 | $ | 1.93 | $ | 1.92 | ||||||||
Weighted Average Shares Outstanding—Basic | 64,612 | 58,733 | 62,471 | 57,586 | ||||||||||||
Weighted Average Shares Outstanding—Diluted | 65,510 | 59,742 | 63,065 | 58,495 | ||||||||||||
(1) Diluted Earnings Per Share has been adjusted from amounts previously reported for the impact of unvested restricted stock grants and unvested employee stock options to conform with current presentation. The effect on periods in 2002 aggregates up to $0.02 per diluted share.
(2) For the year ended December 31, 2003, the Company changed its classification of revenues. Previously the Company differentiated lease revenue amounts earned under triple net leases and amounts earned from managed properties. The current presentation differentiates between revenue generated from Medical Office Buildings and revenue generated from all other properties. The presentation of Interest and Other Income has not changed. Amounts have been reclassified in all periods presented to conform with the current year presentation.
HEALTH CARE PROPERTY INVESTORS, INC.
Consolidated Statements of Funds From Operations
(Unaudited) Dollars in Thousands, Except Per Share Amounts
Funds From Operations | Quarter Ended December 31, | Year Ended December 31, | ||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net Income Applicable to Common Shares | $ | 41,435 | $ | 23,149 | $ | 121,849 | (3) | $ | 112,480 | |||||||
Real Estate Depreciation and Amortization | 20,908 | 19,313 | 79,095 | 73,455 | ||||||||||||
(Gain)/Loss on Real Estate Dispositions | (4,033 | ) | (55 | ) | (12,136 | ) | (678 | ) | ||||||||
Impairment Losses | 2,340 | 9,300 | 13,992 | 11,007 | ||||||||||||
Depreciation and Amortization included in Discontinued Operations | 33 | 584 | 1,028 | 2,696 | ||||||||||||
Joint Venture FFO Adjustments | 1,587 | 21 | 2,403 | 250 | ||||||||||||
Basic Funds From Operations (4) | $ | 62,270 | $ | 52,312 | $ | 206,231 | (3) | $ | 199,210 | |||||||
Dividends on Convertible Operating Partnership Units | 2,194 | 1,449 | 6,068 | 5,374 | ||||||||||||
Diluted Funds From Operations (4) | $ | 64,464 | $ | 53,761 | $ | 212,299 | (3) | $ | 204,584 | |||||||
Diluted Funds From Operations Per Share (1), (4) | $ | 0.94 | $ | 0.88 | $ | 3.28 | (3) | $ | 3.41 | |||||||
Weighted Average Shares Outstanding—Diluted FFO (2) | 68,219 | 61,308 | 64,667 | 60,055 | ||||||||||||
(1) Diluted Funds From Operations Per Share has been adjusted from amounts previously reported for the impact of unvested restricted stock grants and unvested employee stock options to conform with current presentation. The effect on periods in 2002 aggregates up to $0.02 per diluted share.
(2) Weighted average shares outstanding-Diluted FFO includes Weighted Average Shares Outstanding- Diluted and shares of common stock issuable upon exchange of outstanding securities of the Company's subsidiaries.
(3) Includes the impact of preferred stock redemption charges of $18,553,000, or $0.29 per diluted share for the year ended December 31, 2003.
(4) The Company believes that Funds From Operations (FFO) is an 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 issue.
The Company adopted the definition of FFO prescribed by the National Association of Real Estate Investment Trusts' (NAREIT) October 1999 White Paper (as amended April 2002). Accordingly, FFO is defined as Net Income applicable to common shares (computed in accordance with generally accepted accounting principles), excluding asset impairment charges and gains (or losses) from sales of property, plus real estate depreciation and 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.
In October 2003, NAREIT informed its member companies that the Securities and Exchange Commission (SEC) has taken the position that asset impairment charges should not be excluded in calculating FFO. The SEC's interpretation is that recurring impairments on real property are not an appropriate adjustment. If the Company adopted the SEC's interpretation of FFO and did not adjust for asset impairment charges, the Company's basic FFO, diluted FFO and FFO per diluted share for historical periods would be different than the amounts reported in this release and in previous disclosures.
The following table presents the Company's FFO results reflecting the impact of asset impairment charges (the SEC's interpretation) for the quarters and years ended December 31, 2003 and 2002:
Quarter Ended December 31, | Year Ended December 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Basic Funds From Operations | $ | 62,270 | $ | 52,312 | $ | 206,231 | $ | 199,210 | ||||||||
Impairment Losses | (2,340 | ) | (9,300 | ) | (13,992 | ) | (11,007 | ) | ||||||||
Basic Funds From Operations Including Impairment Losses | 59,930 | 43,012 | 192,239 | 188,203 | ||||||||||||
Dividends on Convertible Operating Partnership Units | 2,194 | 1,449 | 6,068 | 5,374 | ||||||||||||
Diluted Funds From Operations Including Impairment Losses | $ | 62,124 | $ | 44,461 | $ | 198,307 | $ | 193,577 | ||||||||
Diluted Funds From Operations Per Share Including Impairment Losses | $ | 0.91 | $ | 0.73 | $ | 3.07 | $ | 3.22 | ||||||||
Weighted Average Shares Outstanding—Diluted FFO | 68,219 | 61,308 | 64,667 | 60,055 | ||||||||||||
According to NAREIT, there is inconsistency among NAREIT member companies as to the adoption of the SEC's interpretation of FFO. Therefore, a comparison of the Company's FFO results to another company's FFO results may not be meaningful.
HEALTH CARE PROPERTY INVESTORS, INC.
Consolidated Balance Sheets
(Unaudited) Dollars in Thousands
December 31, | ||||||||
2003 | 2002 | |||||||
Assets | ||||||||
Real Estate Investments: | ||||||||
Buildings and Improvements | $ | 2,682,206 | $ | 2,514,876 | ||||
Accumulated Depreciation | (486,421 | ) | (424,788 | ) | ||||
2,195,785 | 2,090,088 | |||||||
Construction in Progress | 26,708 | 6,873 | ||||||
Land | 283,352 | 274,450 | ||||||
2,505,845 | 2,371,411 | |||||||
Loans Receivable, Net | 267,613 | 300,165 | ||||||
Investments in and Advances to Joint Ventures | 210,045 | 32,664 | ||||||
Accounts Receivable, Net | 16,471 | 22,382 | ||||||
Other Assets | 18,215 | 13,300 | ||||||
Cash and Cash Equivalents | 17,768 | 8,495 | ||||||
Total Assets | $ | 3,035,957 | $ | 2,748,417 | ||||
Liabilities and Stockholders' Equity | ||||||||
Bank Notes Payable | $ | 198,000 | $ | 267,800 | ||||
Senior Notes Payable | 1,050,476 | 888,126 | ||||||
Mortgage Notes Payable | 158,808 | 177,922 | ||||||
Accounts Payable, Accrued Expenses and Deferred Income | 71,135 | 62,145 | ||||||
Minority Interests in Joint Ventures | 12,931 | 13,017 | ||||||
Minority Interests Convertible into Common Stock | 103,990 | 58,518 | ||||||
Stockholders' Equity: | ||||||||
Preferred Stock | 285,173 | 274,487 | ||||||
Common Stock | 65,520 | 59,470 | ||||||
Additional Paid-In Capital | 1,420,819 | 1,211,551 | ||||||
Other Equity | (12,217 | ) | (11,705 | ) | ||||
Cumulative Net Income | 1,179,049 | 1,020,464 | ||||||
Cumulative Dividends | (1,497,727 | ) | (1,273,378 | ) | ||||
Total Stockholders' Equity | 1,440,617 | 1,280,889 | ||||||
Total Liabilities and Stockholders' Equity | $ | 3,035,957 | $ | 2,748,417 | ||||
HEALTH CARE PROPERTY INVESTORS, INC.
Supplemental Financial and Operating Information
As of December 31, 2003
INVESTMENTS
Total new investments for the quarter and year ended December 31, 2003 are summarized as follows:
Quarter Ended December 31, 2003 | Year Ended December 31, 2003 | |||||
Acquisition of Properties | $ | 49,000,000 | $ | 239,100,000 | ||
Equity Investments | 181,000,000 | 181,000,000 | ||||
Loans | — | 16,500,000 | ||||
New Construction and Expansion | — | 5,700,000 | ||||
$ | 230,000,000 | $ | 442,300,000 | |||
Rentable Square Footage Acquired (1) | 5,878,000 | 7,134,000 | ||||
(1) Rentable Square Footage is based on owned facilities including joint venture and partner interests and loans secured by property.
MedCap Properties, LLC
On October 2, 2003, the Company and HCP Medical Office Portfolio, LLC (“HCP MOP”), a joint venture that was formed in June 2003 with GE Commercial Finance, completed the $575 million acquisition of MedCap Properties, LLC, which included ownership interests in 113 medical office buildings. The acquisition was structured in the following three components:
· | HCP MOP acquired 100 of the medical office buildings at an acquisition price of $460 million. The Company has a $153 million investment, which represents a one-third interest, in HCP MOP and also earns management, acquisition and disposition fees for serving as the managing member of HCP MOP. During the fourth quarter of 2003, the Company recognized equity income of $4,678,000 from its one-third ownership interest, management fees and acquisition fees. At the time of the acquisition, the joint venture assumed $26 million in mortgage debt at a rate of approximately 7.1%. On January 20, 2004, HCP MOP completed $288 million of mortgage financings on certain of these properties of which $254 million are at a weighted average fixed rate of 5.57% and the balance is at a floating rate based on LIBOR plus 1.75%. The Company received $92 million of net proceeds from the mortgage financings representing its one-third share of the joint venture. |
· | Eight of the acquired medical office buildings, with an investment value of $49 million, were contributed to a joint venture between the Company and the senior management of MedCap Properties, LLC. The joint venture issued 1,064,539 units valued at $45.26 each, which are redeemable for cash or, at the Company’s option, HCP common stock beginning October 2, 2004. |
· | The remaining five buildings with initial investments of $28 million are construction projects with an expected total cost of $67 million and are scheduled for completion in 2004. As of December 31, 2003 a total of $38 million had been expended, including the initial $28 million investment. These assets will be acquired by HCP MOP upon completion of construction. |
Acquisition and Construction Commitments
As of December 31, 2003, the Company had contractual commitments to acquire or construct $116 million of health care real estate and capital projects including the remaining $29 million of construction projects related to the MedCap Properties, LLC acquisition noted above. It is expected that the acquisitions and construction will be substantially completed by December 31, 2004. The Company expects 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.
As of December 31, 2003, the Company’s gross investment in properties, including partnership interests and mortgage loans, was approximately $3.4 billion.
LEASE EXPIRATIONS AND LOAN RECEIVABLE MATURITIES
As of December 31, 2003, we had 311 properties leased under triple net leases, 46 properties securing loans and 92 properties under gross or modified gross leases. Under a triple net lease, in addition to the rent obligation, the lessee is generally responsible for all operating expenses of the property such as utilities, property taxes, insurance, repairs and maintenance. Under gross or modified gross leases, we may be responsible for property taxes, repairs, and/or insurance on the leased properties.
The following reflects the annual impact by year in terms of 2003 revenues resulting from lease expirations and mortgage maturities:
Year | 2003 Revenue (1) | Percentage of 2003 Revenue | ||||
2004 | $ | 8,885,000 | 2.5 | % | ||
2005 | 17,934,000 | 5.1 | % | |||
2006 | 21,074,000 | 6.0 | % | |||
2007 | 26,232,000 | 7.5 | % | |||
2008 | 46,355,000 | 13.2 | % | |||
Thereafter | 231,196,000 | 65.7 | % | |||
$ | 351,676,000 | 100.0 | % | |||
(1) 2003 Revenue reflects Revenue of $400,183,000, less Operating Expenses from Medical Office Buildings of $38,694,000, and non-property specific revenue of $9,813,000.
DISPOSITIONS AND DISCONTINUED OPERATIONS
During the quarter ended December 31, 2003, the Company sold 12 facilities for a net sales price of $31.4 million, resulting in a net gain on sale of $4 million. For the year ended December 31, 2003, a total of 26 facilities were sold for a net sales price of $58.2 million and a net gain on sale of $12.1 million. The Company recognized a total of $12 million of impairment losses on 14 facilities classified as discontinued operations during the year ended December 31, 2003 including a $250,000 impairment on one facility charged in the fourth quarter. In addition, during the fourth quarter of 2003, the Company recognized an impairment loss of $2.1 million on one operating facility reflected in continuing operations. As of December 31, 2003, the Company had nine facilities classified as discontinued operations that it had not yet sold.
SELECTED OPERATORS
Tenet Healthcare Corporation
During the year ended December 31, 2003, Tenet Healthcare Corporation (“Tenet”) leased from the Company eight acute care hospitals and one medical office building. Rents from Tenet properties constituted approximately 16% of the Company’s 2003 revenue. One of the hospital leases is scheduled to expire on May 31, 2005. Tenet can renew that lease for an additional five years by providing notice at least 180 days prior to lease expiration. Tenet exercised five-year extensions on six facility leases – five with terms now set to expire in February 2009 and one now set to expire in May 2009. In October 2003, Tenet assigned the lease for a hospital located in Poplar Bluff, Missouri to Health Management Associates (HMA). HMA is a strong health care services operator with hospitals concentrated primarily in the southeast and southwest areas of the United States. The lease on that hospital provided for rent of $3.7 million for 2003 and has a lease term set to expire in February 2009. As of December 31, 2003, the Company has an aggregate investment of $424 million in facilities leased to Tenet.
Tenet informed the Company that one of the Company’s hospitals located in Tarzana, California, and operated by Tenet under a lease expiring in February 2009 is affected by State of California Senate Bill 1953 (SB 1953), which requires certain seismic safety building standards for acute care hospital facilities. The Company and Tenet are currently reviewing the SB 1953 compliance of this hospital, multiple plans of action to cause such compliance, the estimated time for completing the same and the cost of performing necessary remediation of the property. The Company cannot currently estimate the potential costs of SB 1953 compliance with respect to the affected hospital or the final allocation of such costs between the Company and Tenet. Rent on the hospital in 2003 was $10.8 million and the net book value is $81 million.
Tenet announced its adoption of new policies, as of January 1, 2003, for calculating Medicare reimbursement for patients who require high cost treatments (“outlier payments”) which has led to reduced revenues at certain of its hospitals. Cash flow coverage of rents for the Tenet hospitals was 4.3 for the twelve months ended September 30, 2003. This is down from a coverage level of 5.1 for the twelve months ended September 30, 2002.
Tenet is currently undergoing an investigation by the Securities and Exchange Commission relating to its billing practices and financial and other disclosures. In addition, according to public disclosures by Tenet, the United States Department of Justice is suing Tenet over Medicare fraud allegations; the U.S. Attorney’s office is investigating Tenet’s use of physician relocation agreements, certain contractual matters related to physicians and others and Medicare outlier payments; a federal grand jury has returned an indictment accusing a subsidiary of Tenet of illegal use of physician relocation agreements; the Internal Revenue Service has assessed a $157 million tax deficiency with interest of $118 million as of September 30, 2003 against Tenet; the United States Senate Finance Committee is investigating Tenet’s corporate governance practices with respect to federal health care programs; Tenet is litigating several federal securities class action and shareholder derivative suits and several state law actions; the United States Department of Health and Human Services is investigating Tenet’s relationship with the Women’s Cancer Center; a former executive of Tenet recently received a $148 million judgment against Tenet for certain stock incentive awards; and Tenet is subject to other federal and state investigations
regarding its business practices. Tenet is responding to a Justice Department subpoena regarding the outlier payments at the Company’s Tarzana facility. The Company cannot predict the impact, if any, that these recent developments may have on individual hospital performance and the related rent.
HealthSouth Corporation
Five percent of the Company’s 2003 revenue was generated from facilities leased to HealthSouth Corporation (“HealthSouth”), primarily from nine rehabilitation hospitals. In March 2003, the Securities and Exchange Commission charged HealthSouth and its former chief executive officer with inflating earnings and overstating assets and as a result HealthSouth has announced that its previous financial statements should not be relied upon. HealthSouth has announced that it is undergoing a financial audit and forensic examination to assess the accuracy of its financial information. In October 2003, HealthSouth announced that it paid its semi-annual interest payments to bondholders and announced its intention to remain current on all interest payments. On January 16, 2004, HealthSouth announced the refinancing of a Subordinated Debt Issue and that it is now current on all of its outstanding principal and interest payments due under HealthSouth’s various borrowing agreements. The nine rehabilitation hospitals leased by HealthSouth have an average remaining lease term of four years not taking into account renewal options. The average age of these hospitals is 14 years. Fourth quarter 2003 occupancy for the nine facilities, as provided by HealthSouth, ranged from 58% to 99%, with an average occupancy of 75%. HealthSouth is current on rent payments through January 2004.
FUTURE OPERATIONS
The Company projects Diluted Funds From Operations (FFO) for 2004 to range between $3.52 and $3.62 per share on a pre-stock split basis. Projected Diluted FFO for 2004 is based on diluted earnings per share adjusted in accordance with the NAREIT definition of FFO as detailed in the following table. The mid-range below assumes no 2004 dispositions and only acquisitions in 2004 committed as of December 31, 2003.
Low | Mid | High | ||||||||||
Diluted Earnings per Common Share | $ | 2.42 | $ | 2.24 | $ | 2.27 | ||||||
Gain on Sale | (0.21 | ) | — | — | ||||||||
Real Estate Depreciation | 1.26 | 1.28 | 1.30 | |||||||||
Joint Venture Adjustments | 0.06 | 0.06 | 0.06 | |||||||||
Dilutive Adjustments Related to Operating Partnership Units | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||
Diluted Funds From Operations | $ | 3.52 | $ | 3.57 | $ | 3.62 | ||||||
CAPITAL MARKETS ACTIVITY
During 2003, the Company strengthened its financial position through various capital market transactions, including the following:
DEBT FINANCING
On February 28, 2003, the Company issued $200,000,000 of 6% Senior Notes due 2015. Interest on these notes is payable semi-annually in March and September.
The Company has a revolving line of credit totaling $490,000,000. Borrowings under the line of credit were $198,000,000 at December 31, 2003. The average annual interest rate on the line of credit for the year ended December 31, 2003 was 2.1%.
During the year ended December 31, 2003, the Company repaid $31,000,000 of maturing long-term debt with an average interest rate of 7.11% and redeemed $5,000,000 in Medium Term Notes due March 10, 2015, which carried an interest rate of 9%. These payments were initially financed with funds available under the Company’s revolving lines of credit.
Total debt represented 27.2% and 49.4% of the Company’s total market and book capitalization, respectively, at December 31, 2003, compared with 33.6% and 51.0%, respectively, at the end of 2002. The Company’s senior debt is rated Baa2/BBB+/BBB+ by Moody’s, Standard & Poor’s and Fitch, respectively.
Tabulated below is the Company’s debt maturity table by year and in the aggregate:
2004 | $ | 106,000,000 | ||
2005 | 445,000,000 | (1) | ||
2006 | 143,000,000 | |||
2007 | 144,000,000 | |||
2008 | 20,000,000 | |||
Thereafter | 549,000,000 | |||
$ | 1,407,000,000 | |||
(1) Includes $198,000,000 for the revolving line of credit due October 2005.
PREFERRED STOCK
Issuances
On September 15, 2003, the Company issued 4,000,000 shares of 7.25% Series E Cumulative Redeemable Preferred Stock at $25.00 per share, raising gross proceeds of $100,000,000.
On December 3, 2003, the Company issued 7,820,000 shares of 7.1% Series F Cumulative Redeemable Preferred Stock at $25.00 per share, raising gross proceeds of $195,500,000.
Redemptions
On May 2, 2003, the Company redeemed all of its outstanding 8.6% series C preferred stock. The amount paid to redeem the preferred stock was approximately $99.4 million plus accrued dividends. The redemption amount above the carrying amount of the series C preferred stock gave rise to a non-operating charge of $11.8 million, or $0.19 per diluted share of common stock in the second quarter of 2003.
On September 10, 2003, the Company redeemed all of its outstanding 7.875% series A preferred stock. The amount paid to redeem the series A preferred stock was approximately $60.9 million plus accrued dividends. The redemption amount above the carrying amount of the series A preferred stock gave rise to a non-operating charge of $2.2 million, or $0.03 per diluted share of common stock in the third quarter of 2003.
On October 1, 2003, the Company redeemed its 8.7% series B preferred stock. The amount paid to redeem the series B preferred stock was approximately $133.7 million plus accrued dividends. The redemption amount above the carrying amount of the series B preferred stock gave rise to a non-operating charge of $4.6 million, or $0.07 per diluted share of common stock in the third quarter of 2003.
During the year ended December 31, 2003, the total of preferred stock redemption charges, detailed above, aggregated $18,553,000, or $0.29 per diluted share of common stock.
COMMON STOCK
On July 10, 2003, the Company issued 1,400,000 shares of common stock at a net offering price of $41.50 per share, generating gross proceeds of $58,100,000.
During the year ended December 31, 2003, the Company raised $123,379,000 under its Dividend Reinvestment and Stock Purchase Plan (DRIP) at an average price per share of $39.88. $98,848,000 of this amount was attributable to the optional investment portion and $24,531,000 of this amount was attributable to the reinvestment of dividends portion. Recent optional investment activity in the DRIP has declined significantly from previous levels due to the exclusion of certain participants who were managing multiple accounts and engaging in short term trading activities. The optional investment in December 2003 was $243,000 as compared with average monthly optional investments during the first 11 months of 2003 of $8,964,000. Also, beginning January 1, 2004, the Company reduced the discount on its shares of common stock purchased through the DRIP from 2% to 1%.
Earnings and FFO Per Share
On January 22, 2004, the Company announced that its Board of Directors approved a 2-for-1 stock split in the form of a stock dividend. Stockholders of record as of the close of business on February 4, 2004 will receive one additional share of common stock for each share they own. Total outstanding shares will increase from approximately 65.5 million to approximately 131 million. Certificates for the new shares will be issued on or about March 1, 2004. The impact on
Basic and Diluted Earnings Per Share and Diluted FFO per share will be reflected in operating results reported after February 4, 2004.
The Company has adjusted certain historical per share results to reflect the impact of unvested restricted stock grants and unvested employee stock options to conform with current presentation.
OTHER INFORMATION
The following summarizes certain significant operational information for the years ended December 31, 2003 and 2002:
Year Ended December 31, | ||||||
2003 | 2002 | |||||
(Amounts in Thousands) | ||||||
Capitalized Interest | $ | 1,210 | $ | 1,323 | ||
Amortization of Deferred Financing Costs | 2,639 | 2,096 | ||||
Income from Straight Line Rents and Interest | 2,120 | 1,823 | ||||
Lease Commission and Tenant and Capital Improvements on Medical Office Buildings | 6,470 | 8,989 |
HEALTH CARE PROPERTY INVESTORS, INC.
Supplementary Financial Information Portfolio Overview as of December 31, 2003
(Unaudited) Dollars in Thousands, Except Investment Per Square Foot
PORTFOLIO OVERVIEW (2) | ||||||||||||||||||||||||||||||||
Hospitals | Long-Term Care | Assisted & Retirement Living | Medical Office Buildings (Excl. MOP) | Other | Subtotal | HCP Medical Office Portfolio, LLC ("MOP") (8) | Portfolio Total | |||||||||||||||||||||||||
Revenue (1) | $ | 98,952 | $ | 85,524 | $ | 82,380 | $ | 66,835 | $ | 17,985 | $ | 351,676 | $ | 3,452 | $ | 355,128 | ||||||||||||||||
Percent of Revenue | 27.9 | % | 24.1 | % | 23.2 | % | 18.8 | % | 5.0 | % | 99.0 | % | 1.0 | % | 100.0 | % | ||||||||||||||||
Investment (3) | $ | 803,091 | $ | 686,054 | $ | 829,173 | $ | 702,486 | $ | 183,355 | $ | 3,204,159 | $ | 178,624 | $ | 3,382,783 | ||||||||||||||||
Return on Investments (4) | 12.5 | % | 12.5 | % | 9.9 | % | 9.6 | % | 10.1 | % | 11.0 | % | 2.3 | % | 10.6 | % | ||||||||||||||||
Number of Properties | 31 | 173 | 124 | 91 | 30 | 449 | 105 | 554 | ||||||||||||||||||||||||
Assets Held for Sale | — | 1 | — | — | 8 | 9 | — | 9 | ||||||||||||||||||||||||
Number of Beds/Units (7) | 3,507 | 21,375 | 13,368 | — | — | 38,250 | — | 38,250 | ||||||||||||||||||||||||
Number of Square Feet | 3,695,000 | 6,601,000 | 11,562,000 | 5,205,000 | 1,351,000 | 28,414,000 | 5,778,938 | 34,192,938 | ||||||||||||||||||||||||
Investment per Bed/Unit (4) | $ | 228 | $ | 32 | $ | 62 | — | — | — | — | — | |||||||||||||||||||||
Investment per Square Foot (4) | $ | 218 | $ | 104 | $ | 72 | $ | 137 | $ | 136 | — | $ | 82 | — | ||||||||||||||||||
Occupancy Data-Current Quarter (5), (7) | 60 | % | 81 | % | 83 | % | 94 | % | 100 | % | — | 87 | % | — | ||||||||||||||||||
Occupancy Data-Prior Quarter (5), (7) | 61 | % | 81 | % | 83 | % | 95 | % | 100 | % | — | — | — | |||||||||||||||||||
Cash Flow Coverage (5), (6), (7) | ||||||||||||||||||||||||||||||||
Before Management Fees | 3.9 | 1.5 | 1.3 | — | — | 2.2 | — | — | ||||||||||||||||||||||||
After Management Fees | 3.6 | 1.1 | 1.1 | — | — | 1.9 | — | — | ||||||||||||||||||||||||
(1) Revenues for the year ended December 31, 2003 includes lease revenue from triple net leases, net operating income from gross or modified gross leases, interest income and equity income from non-consolidated joint ventures.
(2) All amounts exclude assets held for sale.
(3) Includes partnership and limited liability company investments and construction commitments as well as our investment in unconsolidated joint ventures.
(4) Excludes facilities under construction.
(5) Excludes facilities under construction, newly completed facilities under start up, vacant facilities and facilities where data is not available or meaningful.
(6) Results exclude data related to nine rehabilitation facilities leased to HealthSouth until greater assurances about HealthSouth's financial information is received.
(7) Information in this table was derived from financial information provided by our lessees.
(8) The Company is the managing member of HCP Medical Office Portfolio, LLC and has a one-third economic interest therein. Revenue and Return on Investment reflect our one-third interest from October 2, 2003 to December 31, 2003. Investment reflects the Company's one-third interest as of December 31, 2003.
TENANT OVERVIEW |
| SAME STORE OVERVIEW | ||||||||||
PORTFOLIO BY OPERATOR/TENANT: | SAME PROPERTY GROWTH (2): | |||||||||||
Year ended December 31, 2003 | ||||||||||||
Operator/Tenant (1) (2) | Revenue | Percentage | Rent Growth on Comparable Facilities for the Year Ended December 31, 2003 vs. December 31, 2002 | |||||||||
Tenet Healthcare | $ | 57,059 | 16.2 | % | Investment Properties, excluding Medical Office Buildings | |||||||
American Retirement Corp. | 33,440 | 9.5 | % | Number of Facilities | 267 | |||||||
Emeritus Corporation | 19,663 | 5.6 | % | Revenue Decrease | $ | 350 | ||||||
Kindred Healthcare, Inc. | 17,971 | 5.1 | % | |||||||||
HealthSouth Corporation | 17,268 | 5.0 | % | Medical Office Buildings: | ||||||||
HCA Inc. | 13,127 | 3.7 | % | Number of Facilities | 74 | |||||||
Not-For-Profit Investment Grade Tenants | 6,375 | 1.8 | % | Occupancy Percentage at December 31, 2003 | 94 | % | ||||||
Other Publicly Traded Operators or Guarantors | Occupancy Percentage Change from September 30 ,2003 | — | ||||||||||
(11 Operators) | 37,884 | 10.8 | % | Net Operating Income Increase | $ | 1,554 | ||||||
Other Non Public Operators and Tenants | 148,889 | 42.3 | % | |||||||||
$ | 351,676 | 100.0 | % | |||||||||
(1) At December 31, 2003, the Company had approximately 97 health care operators and approximately 600 leases in the medical office portfolio.
(2) All amounts exclude assets held for sale.