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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2004.

OR

For the transition period from              to             

Commission file number 1-8895

HEALTH CARE PROPERTY INVESTORS, INC.

(Exact name of registrant as specified in its charter)

3760 Kilroy Airport Way, Suite 300

Long Beach, CA 90806

(Address of principal executive offices)

(562) 733-5100

(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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes  x    No  ¨

As of July 30, 2004, there were 132,704,423 shares of $ 1.00 par value common stock outstanding.

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HEALTH CARE PROPERTY INVESTORS, INC.

INDEX

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Health Care Property Investors, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Health Care Property Investors, Inc.

Condensed Consolidated Statements of Income

(Unaudited)

(In thousands, except per share data)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Health Care Property Investors, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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Health Care Property Investors, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

See accompanying Notes to Condensed Consolidated Financial Statements.

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HEALTH CARE PROPERTY INVESTORS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) ORGANIZATION AND BASIS OF PRESENTATION

Health Care Property Investors, Inc. is a real estate investment trust (“REIT”) that, together with its consolidated subsidiaries and joint ventures (collectively, “HCP” or the “Company”), invests directly, or through joint ventures and mortgage loans, in health care related properties located throughout the United States.

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Health Care Property Investors, Inc. and its consolidated subsidiaries and joint ventures. All significant intercompany balances and transactions have been eliminated in consolidation. The interim financial information reflects all adjustments, consisting only of normal recurring adjustments, which, in the opinion of management, are necessary for a fair presentation of financial condition and results of operations for the periods presented. These unaudited financial statements should be read in conjunction with the Company’s consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Annual Report”).

Certain information and disclosures normally included in financial statements prepared in conformity with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for any subsequent quarter or the full year. Certain prior period amounts have been reclassified to conform to the current period presentation.

Management is required to make estimates and assumptions in the preparation of financial statements in conformity with U.S. generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company’s 2003 Annual Report includes a summary of significant accounting policies and estimates. Actual results could differ materially from those estimates.

Principles of Consolidation

In the first quarter of 2003, the Company adopted Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (FIN 46), for variable interest entities created after January 31, 2003. On January 1, 2004, the Company adopted FIN 46 for variable interest entities created before February 1, 2003. Accordingly, the Company presently consolidates all variable interest entities in which it absorbs a majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. For entities that do not qualify as variable interest entities, the Company consolidates those entities that are majority owned and controlled. The adoption of FIN 46 in 2004 for variable interest entities created before February 1, 2003, resulted in the consolidation of five joint ventures effective January 1, 2004, that were previously accounted for under the equity method. The consolidation of these joint ventures did not have a significant effect on the Company’s consolidated balance sheet or statement of income.

The Company has eleven consolidated partnerships that have a limited life. As of June 30, 2004, the estimated settlement value of the minority interests is $6.0 million, which is approximately $4.0 million more than the carrying amount.

Federal Income Taxes

HCP has made an election to qualify, and believes it operates so as to qualify, as a REIT for federal income tax purposes. Accordingly, HCP generally will not be subject to federal income tax as long as distributions to its shareholders equal or exceed its taxable income. However, under the Tax Relief Extension Act of 1999, which became effective on January 1, 2001, HCP is permitted to participate in certain previously precluded activities and still maintain its REIT qualification. These activities must be conducted by entities which elect to be treated as taxable REIT subsidiaries (“TRSs”). Accordingly, the Company is subject to federal and state income taxes on the income generated within the TRSs. During the three months ended June 30, 2004, income tax expense related to activities of the Company’s TRSs approximated $0.5 million, and is included in general and administrative expenses.

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Stock Split

As of March 2, 2004, each shareholder of record on February 4, 2004, received one additional share of common stock for each share they owned on such record date resulting from a 2-for-1 stock split in the form of a stock dividend declared on January 22, 2004. The stock split has been reflected in all periods presented.

(2) INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES

HCP Medical Office Portfolio, LLC

The Company is the managing member of HCP Medical Office Portfolio, LLC (“HCP MOP”), and has a 33% equity interest therein. The joint venture is engaged in the acquisition and operation of medical office building properties. Summarized unaudited condensed financial information of HCP MOP follows:

HCP MOP acquired 100 properties from MedCap Properties, LLC (“MedCap”) in October 2003 for $460 million, including the assumption of $26 million of mortgage debt at the acquisition date. On January 20, 2004, HCP MOP completed $288 million of mortgage financings of which $254 million is at a weighted average fixed rate of 5.57% and the balance is at a floating rate based on one-month LIBOR plus 1.75%. The Company received $92 million of distributions from the financing.

In connection with the acquisition of properties by HCP MOP from MedCap, the Company acquired five medical office buildings, four of which were under construction. Construction of these properties was completed in the second quarter of 2004. At December 31, 2003, the Company expected these assets to be acquired by HCP MOP upon completion of construction; however, the Company ultimately retained ownership of these assets following the completion of the construction. Accordingly, such assets, with a carrying value of $37.6 million, were reclassified to construction in progress from investment in and advances to unconsolidated joint ventures at December 31, 2003.

Tenant improvements, lease acquisition costs and operating expenses of HCP MOP are funded through property operations. The Company may be required to provide additional funding if the joint venture does not have sufficient funds to cover these expenditures. At June 30, 2004, investments and advances to unconsolidated joint ventures in the Company’s consolidated balance sheet includes outstanding advances to HCP MOP of $10.3 million.

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Other Unconsolidated Joint Ventures

As of June 30, 2004, the Company had (i) a 45%-50% interest in four joint ventures that each operates an assisted living facility and (ii) a 9.8% interest in five joint ventures (subsidiaries of American Retirement Corporation or “ARC”) that each own a retirement living community (the “ARC JVs”). Summarized unaudited condensed combined financial information of the unconsolidated joint ventures follows:

As of June 30, 2004, the Company has guaranteed approximately $7.0 million out of a total of $15.7 million of notes payable for four of the joint ventures. Additionally, the properties owned by the ARC JVs secure $55.1 million of first mortgages. These mortgages have variable and fixed interest rates ranging from 1.1% to 9.6% and maturity dates ranging from May 2005 to June 2025.

At June 30, 2004 and December 31, 2003, the Company had a loan of $79.1 million and $76.2 million, respectively, to a subsidiary of ARC that was collateralized by the facilities held by the joint ventures. At June 30, 2004 and December 31, 2003, the Company had an additional secured loan to ARC of $0.5 million and $7.0 million, respectively. These loans are included in loans to joint venture partners on the Company’s consolidated balance sheets.

The Company’s maximum exposure to losses for joint ventures at June 30, 2004 is the carrying amount of the joint venture investments of $72.3 million and an additional $7.0 million resulting from the guarantee of notes payable discussed above. The Company’s exposure may increase if required to provide any additional funding to HCP MOP.

See note 10 to the Condensed Consolidated Financial Statements regarding subsequent events related to ARC.

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(3) LOANS RECEIVABLE, NET

Loans receivable consist of the following:

Loans to joint venture partners consist of the following:

(4) RENTAL INCOME

Rental income consists of the following:

(5) DISCONTINUED OPERATIONS

The Company sold 21 facilities during the six-month period ended June 30, 2004, and has seven properties at June 30, 2004, that it intends to sell within one year. The operating results for these 28 facilities, with revenues of $0.5 million and $4.6 million during the three and six-month periods ended June 30, 2004, respectively, are included in discontinued operations. For the three and six-month periods ended June 30, 2003, 53 facilities with revenues of $6.9 million and $14.1 million, respectively, were included in discontinued operations.

(6) REVENUE CONCENTRATION

Listed below are operators which represent five percent or more of consolidated revenue less operating expenses:

See Note 9 to the Condensed Consolidated Financial Statements regarding contingencies related to Tenet and HealthSouth.

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(7) EQUITY

During the six months ended June 30, 2004, the Company raised $10.8 million from sales of common stock under its Dividend Reinvestment and Stock Purchase Plan (“DRIP”) at an average sales price per share of $25.12.

On April 26, 2004, the Company announced that its Board of Directors declared a quarterly common stock cash dividend of $0.4175 per share. The common stock cash dividend was paid on May 21, 2004, to stockholders of record as of the close of business on May 6, 2004.

On July 23, 2004, the Company announced that its Board of Directors declared a quarterly common stock cash dividend of $0.4175 per share. The common stock cash dividend will be paid on August 19, 2004, to stockholders of record as of the close of business on August 4, 2004.

Other equity consists of the following:

Comprehensive income for the six months ended June 30, 2004 and 2003 was $88.7 million and $65.0 million, respectively.

(8) EARNINGS PER COMMON 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 potentially dilutive securities. Options to purchase 1,103,000 and 400,000 shares of common stock that had an exercise price in excess of the average market price of the common stock during the three-month periods ended June 30, 2004 and 2003, respectively, were not included because they are not dilutive. Additionally, 5,259,000 and 3,130,000 shares of common stock issuable upon conversion of non-managing member units were not included for the three and six–month periods ended June 30, 2004 and 2003, respectively, since they are not dilutive.

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(9) COMMITMENTS AND CONTINGENCIES

At June 30, 2004, the Company had contractual commitments to construct $22.4 million of health care real estate and capital projects.

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 compliance with certain seismic safety building standards for acute care hospital facilities by January 1, 2013. 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 the operator. Rent on the hospital in 2003 was $10.8 million and $4.1 million for the six months ended June 30, 2004. The carrying amount of the hospital is $79.2 million at June 30, 2004.

On March 12, 2004, James G. Reynolds, the Company’s former Executive Vice President and Chief Financial Officer, filed a lawsuit against the Company and Kenneth B. Roath, the Company’s Chairman, and James F. Flaherty III, the Company’s Chief Executive Officer and a director. The lawsuit was filed in Superior Court of California, County of Orange and is styled James G. Reynolds vs. Health Care Property Investors, Inc., Kenneth B. Roath and James Flaherty, III, et al. Reynolds, alleges, among other things, breach of oral contract, promissory fraud, defamation, wrongful constructive termination, infliction of emotional distress and age discrimination. In his complaint, Reynolds claims that he was promised an employment contract providing that, in the event he was terminated in breach of contract, he would receive two years of salary and bonus, and accelerated vesting of all unvested stock options and restricted stock as if he had been employed through and including five years after the date of such termination. He claims that age discrimination caused some of the employment decisions affecting his job duties in that he was constructively terminated. The Company filed a demurer on April 27, 2004, which was granted by the court with leave to amend. A first amended complaint was then filed with essentially the same allegations as before, and the Company again filed a demurer. A hearing on that demurer is presently set for August 13, 2004. Reynolds also claims that he was promised a supplemental executive retirement plan and an enhanced operational role in the Company. He further claims that he is owed $200,000 of unpaid wages relating to an alleged unpaid bonus for 2001 performance. Reynolds seeks unspecified compensatory, consequential and punitive damages relating to his claims. This matter is proceeding through discovery and the parties have agreed to non-binding mediation on August 24, 2004. The Company believes that Reynolds’ claims are not meritorious and is contesting them. While the Company accrued an immaterial charge related to such claims during the six months ended June 30, 2004, the Company’s ultimate liability, if any, cannot be reasonably estimated at this time. Furthermore, any such loss that the Company incurs may be partially offset through recoveries under its various insurance coverages. Nevertheless, there can be no assurance that the Company’s ultimate loss will not exceed amounts accrued.

According to public disclosures by Tenet and HealthSouth, these operators are experiencing significant legal, financial and regulatory difficulties. The Company cannot predict the impact, if any, of the outcome of these uncertainties on the Company’s consolidated financial statements. The failure or inability of these operators to pay their obligations could materially reduce revenues, net income, and cash flows, which could in turn reduce the amount of cash available for the payment of dividends, cause the Company’s stock price to decline, and cause the Company to incur impairment charges or a loss on the sale of the properties.

The Company is from time to time a party to legal proceedings, lawsuits and other claims in the ordinary course of business. These claims, even if not meritorious, could force the Company to spend significant financial resources. While the resolution of any of the aforementioned contingencies could materially and adversely affect the Company’s results of operations and cash flows in the period recorded, the Company is not aware of any legal proceedings, claims, or other contingencies that would have, individually or taken together, a material adverse effect on its business, prospects, or financial condition.

(10) SUBSEQUENT EVENTS

On July 13, 2004, the Company issued $37.0 million of 6.0% fixed rate medium-term senior notes maturing on June 15, 2014.

On July 15, 2004, the Company acquired substantially all of ARC’s interest in three continuing care retirement centers and one assisted living facility for $113 million, including transaction costs. Prior to the acquisition, the Company owned a 9.8% equity interest in three of the four entities that owned these facilities. All of the facilities have been leased to ARC. In addition, the Company closed a $5.7 million secured loan to ARC. ARC used a portion of the transaction proceeds to repay an $82.6 million mezzanine loan to the Company, including accrued interest.

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On July 30, 2004, the Company acquired 11 assisted living facilities from Emeritus Corporation for $84 million, including $56 million of assumed debt, through a sale-leaseback transaction. Emeritus used $17 million of the proceeds to repay mezzanine and other debt to the Company.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY LANGUAGE REGARDING FORWARD LOOKING STATEMENTS

Statements in this Quarterly Report that are not historical factual statements are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The statements include, among other things, statements regarding the intent, belief or expectations of 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 from time to time makes forward-looking oral and written public statements concerning our expected future operations and other developments. Readers are cautioned that, while forward-looking statements reflect the Company’s good faith belief and best judgment based upon current information, they are not guarantees of future performance and are subject to known and unknown risks and uncertainties. Actual results may differ materially from the expectations contained in the forward-looking statements as a result of various factors. In addition to risks and other factors set forth in this Quarterly Report, the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, and other documents filed with the Securities and Exchange Commission, readers should consider the following:

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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OVERVIEW

Health Care Property Investors, Inc., is a real estate investment trust (“REIT”) that, together with its consolidated subsidiaries and joint ventures (collectively, “HCP” or the “Company”) invests in health care related properties located throughout the United States. Generally, the Company acquires health care facilities and leases them on a long-term basis to health care providers; however, the Company also leases medical office space to providers and physicians on a shorter term basis. In addition, the Company provides mortgage financing on health care facilities.

As of June 30, 2004, the Company had investments in 538 properties located in 43 states, excluding assets which are held for sale. These properties include 30 hospitals, 178 long-term care facilities, 121 assisted and living and continuing care retirement communities (“CCRs”), 185 medical office buildings (“MOBs”) and 24 other health care facilities. The Company’s total investment in these properties, which represents the undepreciated historical cost of real estate and the net carrying amount of unconsolidated joint ventures and mortgage loans, was approximately $3.3 billion at June 30, 2004.

APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Certain of the Company’s critical accounting policies are complex and involve judgments by management, including the use of estimates and assumptions, which affect the reported amounts of assets, liabilities, revenues and expenses and the related disclosures. As a result, changes in these estimates and assumptions could significantly affect the Company’s financial position or results of operations. Actual results may differ from these estimates under different assumptions or conditions. The significant and critical accounting policies used in the preparation of the Company’s financial statements are described in the 2003 Annual Report.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Income from continuing operations applicable to common shares for the three months ended June 30, 2004 and 2003, was $37.1 million, or $0.28 per diluted share and $19.7 million, or $0.16 per diluted share, respectively.

Rental income consists of revenue earned under triple net and medical office building lease arrangements. Triple net rental income increased 8.8% to $67.9 million for the three months ended June 30, 2004, compared to $62.4 million in the year ago period. This increase was primarily attributable to acquisitions, lease resets, and contractual escalators. Medical office building rental income was $27.4 million for the three months ended June 30, 2004, an increase of 35.0% from $20.3 million in the year ago period. Medical office building operating expenses were $10.2 million for the three months ended June 30, 2004, an increase of 37.5% from $7.4 million in the year ago period. These increases were primarily attributable to the purchase of thirteen properties from MedCap Properties, LLC in October 2003 and completion of four development properties during the second quarter of 2004.

Equity income from unconsolidated joint ventures was $0.8 million for the three months ended June 30, 2004, compared to $22,000 in the year ago period. The increase was primarily due to the Company’s investment in HCP MOP in October 2003. During the three months ended June 30, 2004, the Company recognized $0.8 million in equity income from HCP MOP. At June 30, 2004, 105 properties were held by unconsolidated joint ventures, including HCP MOP, compared to 19 properties at June 30, 2003.

Interest and other income was $11.0 million for the three months ended June 30, 2004, an increase of 13.6% from $9.7 million for the same period a year ago. The increase in interest and other income was primarily due to fees earned from the HCP MOP joint venture of $0.8 million and the amortization of loan discounts, net of the impact of a partial repayment of a loan to American Retirement Corporation (“ARC”) and a change in the Company’s accrual rate on the remaining balance of that loan. During the third quarter of 2003, ARC repaid $52 million of outstanding principal and interest. Partially offsetting this repayment was an increase in the accrual rate on the remaining $76 million balance from 13.25% during the three months ended June 30, 2003, to 16.5% during the three months ended June 30, 2004. The accrual rate on the loan was increased during the third quarter of 2003 based on the Company’s evaluation of the sufficiency of the net assets collateralizing the loan.

Interest expense was $20.6 million for the three months ended June 30, 2004, a decrease of 8.0% from $22.4 million for the three months ended June 30, 2003. The decrease was primarily due to the repayment of certain mortgages and senior notes and a reduction of amounts outstanding on the Company’s line of credit.

General and administrative expenses were $8.4 million for the three months ended June 30, 2004, an increase of 48.3% from $5.7 million for the three months ended June 30, 2003. The increase in general and administrative expenses was primarily due to higher employee compensation and related costs, $0.7 million in expenses associated with the Company’s move of its corporate office to Long Beach, CA, and $0.5 million in income tax expense on income from certain assets held in a taxable REIT subsidiary.

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Impairment losses included in continuing operations were $1.2 million and zero for the three months ended June 30, 2004 and 2003, respectively. Impairment losses during the three-month period ended June 30, 2004 were due to flood damage in one of the Company’s facilities.

Real estate depreciation and amortization was $21.1 million for the three months ended June 30, 2004, an increase of 14.6% from $18.4 million in the year ago period. The increase was due to the acquisition of properties totaling $239.1 million during 2003, and $132.7 million during the six months ended June 30, 2004.

Losses from discontinued operations for the three months ended June 30, 2004, was $0.8 million or $0.01 per diluted share compared to income from discontinued operations for the three months ended June 30, 2003, of $0.6 million, or $0.01 per diluted share. The decrease in income from discontinued operations for the three months ended June 30, 2004, is due to operating income from discontinued operations of $0.1 million compared to $3.0 million in the year ago period, net of impairment losses included in discontinued operations of $1.2 million compared $2.8 million in the year ago period.

The Company reviews for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable by comparing the carrying amount of the asset to the expected undiscounted cash flows to be generated from the asset. Changes in the expected undiscounted cash flows, such as a change resulting from the expected use for the asset, may cause the Company to record additional impairment losses.

Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Income from continuing operations applicable to common shares for the six months ended June 30, 2004 and 2003, was $67.9 million, or $0.51 per diluted share and $44.7 million, or $0.37 per diluted share, respectively.

Rental income consists of revenue earned under triple net and medical office building lease arrangements. Triple net income increased 11.4% to $130.6 million for the six months ended June 30, 2004, compared to $117.2 million in the year ago period. The increase was primarily attributable to acquisitions, lease resets, and contractual escalators. Medical office building rental income was $52.0 million for the six months ended June 30, 2004, an increase of 27.9% from $40.7 million in the year ago period. Medical office building operating expenses were $19.2 million for the six months ended June 30, 2004, an increase of 30.6% from $14.7 million in the year ago period. The increases were primarily attributable to the purchase of thirteen properties from MedCap Properties, LLC in October 2003 and completion of development properties during the second quarter of 2004.

Equity income from unconsolidated joint ventures was $2.1 million for the six months ended June 30, 2004, compared to $0.2 million in the year ago period. The increase was primarily due to the Company’s investment in HCP MOP in October 2003. During the six months ended June 30, 2004, the Company recognized $1.8 million in equity income from HCP MOP. At June 30, 2004, 105 properties were held by unconsolidated joint ventures, including HCP MOP, compared to 19 properties at June 30, 2003.

Interest and other income was $20.1 million for the six months ended June 30, 2004, an increase of 2.4% from $19.7 million in the year ago period. The increase in interest and other income was primarily due to the $1.6 million in fees the Company recognized related to HCP MOP for the six months ended June 30, 2004, net of the partial repayment of a loan to American Retirement Corporation (“ARC”) and a change in the Company’s accrual rate on the remaining balance of that loan. During the third quarter of 2003, ARC repaid $52 million of outstanding principal and interest. Partially offsetting this repayment was an increase in the accrual rate on the remaining $76 million balance from 13.25% during the six months ended June 30, 2003, to 16.5% during the six months ended June 30, 2004. The accrual rate on the loan was increased during the third quarter of 2003 based on the Company’s evaluation of the sufficiency of the net assets collateralizing the loan.

Interest expense was $42.5 million for the six months ended June 30, 2004, a decrease of 2.8% from $43.7 million for the six months ended June 30, 2003. The decrease was primarily due to the repayment of certain mortgages and senior notes and a reduction of amounts outstanding on the Company’s line of credit.

General and administrative expenses were $15.7 million for the six months ended June 30, 2004, an increase of 44.0% from $10.9 million for the six months ended June 30, 2003. The increase in general and administrative expenses is primarily due to higher employee compensation and related costs, $0.7 million in expenses associated with the Company’s move of its corporate offices to Long Beach, CA, and $0.5 million in income tax expense on income from certain assets held in a taxable REIT subsidiary.

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Real estate depreciation and amortization was $41.6 million for the six months ended June 30, 2004, an increase of 13.5% from $36.6 million in the year ago period. The increase is due to the acquisition of properties totaling $239.1 million during 2003, and $132.7 million during the six months ended June 30, 2004.