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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

          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:

          Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 

          As of May 14, 2003, there were 60,970,877 shares of $1.00 par value common stock outstanding.

HEALTH CARE PROPERTY INVESTORS, INC.

INDEX

1

Health Care Property Investors, Inc.

Condensed Consolidated Balance Sheets

(Amounts in Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations.

2

Health Care Property Investors, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(Amounts in Thousands, Except Per Share Amounts)

See accompanying Notes to Condensed Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations.

3

Health Care Property Investors, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations.

4

HEALTH CARE PROPERTY INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

(Unaudited)

          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 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, 2002.  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 Recognition:

          Rental income includes base and additional rental income. Additional rental income is generated by a percentage of increased revenue over specified base period revenue of the properties and/or increases based on inflation indices or other factors.  We have certain leases and mortgages that have contractual fixed increases in rents and interest. We record straight-line rents and interest in cases where we believe such rents and interest are sustainable and collectible.

          In accordance with the Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 101 (SAB 101) “Revenue Recognition in Financial Statements,” revenue is recognized after four basic criteria are met.  These four criteria are persuasive evidence of an arrangement, the rendering of service, fixed and determinable income and reasonably assured collectibility.  Income from additional rents based on facility revenue increases is recognized when the annual contractual facility revenue hurdle is exceeded.  Due to our lease structures, income related to cash receipts from some tenants for revenue associated with additional rents received in the first quarter of a year  are recognized in subsequent quarters of the year upon achievement of certain annual performance thresholds.  The effect on our first quarter 2003 and 2002 results was to delay the recognition of approximately $5,000,000 and $4,000,000, respectively, of cash received from tenants for additional rents in the first quarter to subsequent quarters.

Allowance For Doubtful Accounts:

          Rental revenue from our tenants is our principal source of revenue.  We monitor the liquidity and creditworthiness of our 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 in our consolidated balance sheets. 

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Depreciation and Useful Lives of Assets:

          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. 

Impairment of Long-Lived Assets:

          When indicators of impairment are present we compare the carrying value of the assets to the asset’s future estimated undiscounted cash flows.  If the asset’s undiscounted cash flow is less than the carrying value, an impairment charge is recorded for the excess of the carrying value over the asset’s fair value.  Assets we expect to sell are recorded at the lower of its carrying value or fair value less costs to sell. 

Discontinued Operations:

          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. 

Stock Options:

          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 implementation of Statement 123 is prospective and therefore the cost related to stock-based compensation included in net income for the first quarter of 2003 and 2002 is less than that which would have been recognized if the provisions of Statement 123 had been applied since the effective date (see Note 7).  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. 

Derivatives and Hedging:

          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.

Reclassifications:

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

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          As of March 31, 2003, our portfolio of properties, including equity investments, consisted of 453 facilities located in 44 states.  These facilities are comprised of 31 hospitals, 176 long-term care facilities, 126 retirement and assisted living facilities, 85 medical office buildings and 35 other healthcare facilities.  Our gross undepreciated investment in these properties, which includes joint ventures, was approximately $3,116,912,000 at March 31, 2003.

          For the quarter ended March 31, 2003, we acquired six properties totaling $22.4 million, with an average lease rate of 11.1%.  Also during the quarter, we completed a $9.5 million mezzanine loan secured by seven assisted living facilities with an interest rate of 13.5%.

          At March 31, 2003, we had approximately 314 properties leased to 91 operators under triple net leases, 50 properties securing loans to 14 operators and 89 properties with approximately 650 gross or modified gross leases in the Managed Portfolio.  Under a triple net lease, in addition to the rent obligation, the lessee is 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 those properties.

Major Operators:

          Listed below are our major operators, which represent three percent or more of our annualized cash provided by leases and loans as of March 31, 2003.

Annualized cash provided by leases and loans

          Annualized cash provided by leases and loans is intended to be an estimate of cash provided by leases and loans for the 12 months ending March 31, 2004 for assets owned on March 31, 2003 and is calculated as (a) base rents, interest or, in the case of our managed properties, net operating income, to be received by us during the 12 months ended March 31, 2004 under existing contracts; plus (b) additional rents received by us during the 12 months ended March 31, 2003, which were approximately $26 million in the aggregate; plus or minus (c) adjustments for the following items (to the extent they are expected to impact rents, interest or net operating income during the 12 months ending March 31, 2004): assets expected to be sold; known or expected changes in rent due to contract expirations or rent resets; and known or

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expected rent reductions.  We calculate the net operating income of our managed properties by subtracting from rent the expenses not covered by the tenant under the gross leases underlying such properties.  Our estimates of annualized cash provided by leases and loans are based on management assumptions and the information available to us at the time of this report. Actual annualized cash provided by leases and loans could differ materially and adversely from the estimates presented in this report.  All of the companies listed above 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.

          We have an 80% interest in each of five joint ventures that lease six long-term care facilities, a 45%-50% interest in four joint ventures that each operate an assisted living facility and a 9.8% interest in seven limited liability companies that own an aggregate of nine retirement living communities.  These limited liability companies are subsidiaries of American Retirement Corporation.  Since the other members in these joint ventures have significant voting rights relative to acquisition, sale and refinancing of assets as well as approval rights with respect to budgets, we account for these investments using the equity method of accounting.

          Combined summarized unaudited financial information of the unconsolidated joint ventures follows:

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          As of March 31, 2003, we have guaranteed approximately $7.0 million on notes payable obligations for four of these joint ventures.  The nine retirement living communities owned by the seven limited liability companies of which we have a 9.8% interest collateralize $169,000,000 of first mortgages with fixed and variable interest rates ranging from 2.25% to 9.5% and maturity dates ranging from January 2004 to June 2025. 

          As of March 31, 2003, we had 19 facilities with a net book value of $15,897,000 that we expect to sell.  The operations of these facilities as well as nine other facilities that had been sold between January 1, 2002, and March 31, 2003 are included in Discontinued Operations.  Discontinued Operations reflects an operating loss from these facilities of $340,000 for the three months ended March 31, 2003, and operating income of $477,000 for the three months ended March 31, 2002.

          On February 28, 2003, we issued $200,000,000 of 6.00% Senior Notes due 2015.  Interest on these notes is payable semi-annually in March and September.

          During the three months ended March 31, 2003, we paid off $30,000,000 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 9.00%.

          The following table provides a summary of the activity for the Stockholders’ Equity account for the three months ended March 31, 2003 (amounts in thousands):

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Other Equity:

Other equity consists of the following:

          Other 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 1).  Comprehensive income for the three months ended March 31, 2003 and 2002 was $27,870,000 and $30,689,000, respectively.

Stock Options Granted:

          As of January 1, 2002, we adopted the fair value recognition provisions of Statement 123 for all employee stock options awarded or granted after January 1, 2002. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the first quarter of 2002 and 2003 is less than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of Statement 123.  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.  The following table is in accordance with Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation” and illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period.

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          As of March 31, 2003, there were a total of 1,563,255 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 which are reflected in the balance sheet at $54,540,000 at March 31, 2003, are convertible into our common stock on a one-for-one basis.  During the first quarter of 2003, 117,700 non-managing member units were converted into the same number of common shares.

          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 is 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. 

(Amounts in thousands, except per share amounts)

          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”) and FFO per common share on a diluted basis are important supplemental measures 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 could be less informative.  The term FFO was designed by the real estate investment trust industry to address this problem. 

          We adopted the definition of FFO prescribed by the National Association of Real Estate Investment Trusts’ (NAREIT) October 1999 White Paper (as amended April 2002). 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

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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 us, 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 and FFO per common share on a diluted basis (all amounts in thousands):

(Amounts in thousands, except per share amounts)

          We have committed to acquire four medical office buildings for $77,500,000.  We have committed to fund additional development of facilities on existing properties of approximately $14,300,000, and are committed to fund $30,200,000 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 April 23, 2003, the Board of Directors declared a quarterly dividend of $0.83 per common share payable on May 20, 2003 to shareholders of record as of the close of business on May 5, 2003.

          The Board of Directors also declared a cash dividend of $0.492188 per share on our series A cumulative preferred stock and $0.54375 per share on our series B cumulative preferred stock.  These dividends will be paid on June 30, 2003 to shareholders of record as of the close of business on June 16, 2003.

          On May 2, 2003 we redeemed all of our outstanding 8.6% series C preferred stock.  The amount paid to redeem the preferred stock was $99.4 million plus accrued dividends of approximately $750,000.

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          Since March 31, 2003, our Board of Directors has granted to certain employees 62,650 shares of restricted stock with a five year vesting period, 28,300 stock performance awards the vesting of which is dependent upon satisfying performance measures for the three years ending December 31, 2005 and 150,000 stock options with an exercise price of $38.28 and a five year vesting period.  Additionally, a total of 60,000 stock options with an exercise price of $37.46 were issued to the non-employee members of our Board of Directors in April 2003. 

          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 Secured 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: