Health Care Property Investors, Inc.
4675 MacArthur Court, Suite 900
Newport Beach, CA 92660
(949) 221-0600 Fax (949) 221-0607
December 13, 2002
Mr. Jonathan G. Katz
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Re: Conditions for Use of Non-GAAP Financial Measures (File No. S7-43-02)
Dear Mr. Katz:
Health Care Property Investors, Inc. ("HCPI") is pleased to have the opportunity to respond to the Securities and Exchange Commission ("Commission") regarding the proposals set forth in Release No. 33-8145 and 34-46788 ("Releases"). HCPI is a self-administered real estate investment trust that invests exclusively in health care related facilities throughout the United States. The Company's real estate investments, as of September 30, 2002, consisted of 442 facilities totaling 29 million square feet located in 42 states. Portfolio investments include long-term care facilities, assisted living facilities, medical office buildings, acute care hospitals, physician group practice clinics, rehabilitation facilities, health care laboratory and biotech research facilities and retirement living communities. The Company leases its single-tenant buildings to health care providers on a long-term basis and its multi-tenant buildings to health care providers under various market terms. Acquired properties are leased to various health care providers. As of September 30, 2002, HCPI had gross assets of $3.1 billion.
HCPI supports the Commission in its efforts to reform the use of Non-GAAP financial measures by public companies. We agree with the need to improve the transparency and quality of public disclosures, including pro forma financial information. We agree with most of the Commission's proposals relating to the use of Non-GAAP financial measures. However, HCPI is concerned that one aspect of the proposals could be counterproductive to the interests of investors. HCPI respectfully opposes the Commission's proposal that would prohibit the use of Non-GAAP per share information in corporate earnings releases.
HCPI supports the Commission's proposal that any Non-GAAP financial measure must be reconciled with the comparable GAAP measure. Additionally, we agree that any comparable GAAP measure must be presented with greater prominence of the comparable non-GAAP measure.
However, similar to most real estate investment trusts we use a non-GAAP measure, Funds From Operations (FFO), as an important supplemental indicator of our company's operating profitability. 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 problem. Reporting FFO, as well as other Non-GAAP measures, on only an absolute basis, not on a per-share basis, would be inappropriate since the issuance of shares or the repurchase of shares could affect the absolute measure. Additionally, investors have advised us that these Non-GAAP per-share measures, including Funds From Operations and Net Asset Value, are important supplemental indicators of a real estate company's operating profitability and financial condition.
We recommend that the final rule allow per share reporting of non-GAAP measures and require that both the numerator (the non-GAAP measure) and the denominator (the applicable diluted number of shares) be reconciled to GAAP net income and the number of diluted shares used to calculate GAAP net income per share respectively. This position agrees with the alternative suggested in "Questions regarding amendments to Item 10 of Regulation S-K, Item 10 of Regulation S-B and Form 20-F" of the Release.
HCPI thanks the Commission for the opportunity to comment on this proposal. Please contact Jim Reynolds, Executive Vice President and Chief Financial Officer or me if you have any questions regarding this letter.
/s/ Dev Ghose
Senior Vice President-Finance
cc: Jim Reynolds