HCP, Inc. (10-Q) — First Quarter 2015
Business and period. The filing is for the three months ended March 31, 2015. HCP was a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as loans and lease investments. Its portfolio included interests in 1,196 facilities, including joint ventures.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenue | $610.8 million | $530.0 million; up 15% |
| Net income (loss) attributable to common shares | $(240.9) million; $(0.52) per share | $258.0 million; $0.56 per share |
| Operating cash flow | $230.1 million | $247.2 million |
| NOI / adjusted (cash) NOI | $445.0 million / $415.9 million | $437.1 million / $401.0 million |
| FFO as adjusted / FAD | $0.79 / $0.69 per share | $0.75 / $0.63 per share |
| Cash and cash equivalents | $137.2 million at March 31 | $183.8 million at December 31, 2014 |
| Debt | Approximately $9.9 billion | — |
Revenue and margins. Revenue growth reflected higher resident fees and services following the Brookdale transaction, greater interest income (including the HC-One loan), and growth in direct-financing-lease income. Adjusted cash NOI rose about 3.7%; the filing does not provide a consolidated GAAP operating margin that is useful for comparison given the large impairment charge.
Debt and liquidity. HCP issued $600 million of 3.40% notes due 2025 and entered a £220 million term loan, whose rate was swapped to 1.79%. It reported $358.6 million outstanding on its $2.0 billion revolving facility and said it was in compliance with debt covenants. Fixed-rate debt represented 96.3% of debt in its interest-rate summary. The company said Q1 distributions exceeded operating cash flow by approximately $35 million, funded from cash on hand; it expected to fund distributions over the next 12 months primarily from operating cash flow and available cash. Scheduled 2015 maturities were expected to be covered by proceeds from the January notes offering.
Dividend. The quarterly common dividend declared was $0.565 per share, compared with $0.545 in Q1 2014. Q1 common dividends paid were $260.7 million; reported FAD applicable to common shares was $319.6 million.
Material changes and unusual items
- A $478.5 million non-cash impairment on HCR ManorCare (HCRMC) direct financing leases reduced their carrying value from $6.6 billion to $6.1 billion. This was the principal reason HCP swung from a prior-year profit to a quarterly loss.
- Effective April 1, 2015, an HCRMC lease amendment reduced initial annual rent by a net $68 million, from $541 million to $473 million, in exchange for deferred rent obligations totaling $525 million, transfer of nine facilities valued at $275 million, and a five-year extension to the initial lease term. The deferred obligations’ timing and collection depend partly on specified events and future payment terms.
- HCRMC represented 29% of HCP gross assets and 25% of revenue. HCP also held a 9.4% equity interest in HCRMC. HCRMC’s trailing-twelve-month normalized fixed-charge coverage was 1.08x, before reflecting the amended rent reduction.
- On April 20, 2015, the Department of Justice unsealed a False Claims Act complaint against HCRMC alleging improper Medicare claims for therapy services. The case was at an early stage; HCP warned an adverse outcome or settlement could further affect its HCRMC investments and lease income.
- Q1 investment activity included $71.4 million of real estate acquisitions and $61.8 million of development spending. The company also agreed to acquire the $849 million Chartwell senior-housing portfolio, expected to close in Q3 subject to approvals. Other April transactions and the Chartwell acquisition were not completed Q1 results.
Outlook, risks and management commentary
Management gave no specific full-year earnings guidance in the provided filing text. It described its strategy as maintaining a diversified healthcare portfolio, targeting approximately 40% financial leverage relative to assets, and using long-term, staggered debt financing. It expected to fund future acquisitions, development and capital needs through a mix of equity, debt, credit facilities and property interests.
Key risks include HCRMC’s operating, reimbursement, litigation and regulatory exposure; reliance on a small number of tenants and operators; tenant ability to meet lease and loan obligations; healthcare reimbursement and regulatory changes; interest rates, refinancing and capital-market access; foreign-exchange exposure; and joint-venture partner and liquidity-support commitments. HCP had committed support for HCP Ventures IV, including up to $107 million for debt obligations due through February 2016, in addition to separate capital-expenditure support.
Most important facts for investors to verify
- Whether HCRMC makes amended rent payments and satisfies the $525 million deferred rent obligations, and whether the nine facility transfers occur as planned.
- Developments in the DOJ case, including any settlement, judgment, reimbursement restrictions or impact on HCRMC’s ability to operate and pay rent.
- How much of reported revenue and cash flow is recurring cash income versus non-cash lease accretion, and whether HCRMC-related collections remain reliable.
- Liquidity after dividends, planned acquisitions and development commitments, including the Chartwell closing and HCP Ventures IV support needs.
- Debt maturities, covenant compliance, refinancing costs and continued access to capital markets; reported Q1 operating cash flow was below common dividends paid.