HCP, Inc. (now Healthpeak Properties) — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the same periods in 2012. The filing identifies the registrant as HCP, Inc. The company is a healthcare-focused REIT investing across senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as provider loans.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $544.0 million | $468.1 million | $1,563.3 million | $1,371.0 million |
| Net income attributable to HCP | $233.8 million | $196.1 million | $677.7 million | $591.5 million |
| Net income applicable to common shares | $233.3 million | $195.6 million | $676.4 million | $572.4 million |
| Diluted EPS | $0.51 | $0.45 | $1.49 | $1.36 |
| Adjusted NOI (non-GAAP) | $392.0 million | $349.1 million | $1,168.0 million | $1,041.9 million |
| Diluted FFO per share (non-GAAP) | $0.73 | $0.67 | $2.20 | $2.01 |
| Diluted adjusted FFO per share (non-GAAP) | $0.79 | $0.69 | $2.25 | $2.05 |
- Revenue rose about 16% in Q3 and 14% for the nine-month period; common-share net income rose about 19% and 18%, respectively. Growth included the Blackstone senior-housing portfolio acquisition, higher interest income and portfolio rent growth.
- Q3 interest income increased to $42.1 million from $10.3 million, notably reflecting a $24 million gain in interest income from the discounted Barchester debt payoff. Nine-month interest income was $68.6 million versus $12.3 million.
- Q3 general and administrative expense rose to $45.4 million from $19.4 million, including $26.4 million of CEO termination-related charges. Depreciation and amortization also increased, partly due to prior-year acquisitions.
- Nine-month operating cash flow was $843.7 million, up from $721.0 million. Investing used $274.0 million; financing used $768.6 million, including $716.9 million of common dividends. Cash ended at $49.4 million, down from $247.7 million at year-end 2012.
- At September 30, total assets were $19.89 billion, total liabilities $9.04 billion and total equity $10.85 billion. Debt carrying value was $8.48 billion; principal debt was approximately $8.51 billion, excluding $78 million of resident life-care bonds and deposits.
- The $1.5 billion unsecured revolver had $285 million outstanding. The company reported compliance with debt covenants. Scheduled debt principal repayments were $414 million for the remainder of 2013 and $667 million in 2014. The company declared quarterly common dividends of $0.525 per share; the announced annualized rate was $2.10.
Changes, outlook and risks
- Portfolio-wide adjusted NOI increased, with senior housing growth materially supported by the 133-community Blackstone acquisition. Same-property adjusted NOI grew 7.2% in senior housing, 3.6% in post-acute/skilled nursing, 0.7% in medical office and 6.5% in hospitals for the nine months. Life-science same-property adjusted NOI declined 2.5%.
- HCP placed a 14-property senior-housing direct-financing-lease portfolio on cash-basis revenue recognition after collection of all rent was no longer reasonably assured. Its $376 million carrying value was not impaired, based on management’s collateral valuation; the assessment used significant unobservable inputs.
- Credit exposure is concentrated: HCR ManorCare represented 32.1% of company assets and 28.0% of nine-month revenue; it accounted for 88.1% of post-acute/skilled nursing gross assets. Emeritus represented 14.6% of assets and 12.6% of nine-month revenue. Four hospitals, with a $130.8 million carrying value, were classified as held for sale.
- Management expected operating cash flow over the next 12 months to cover operations, debt service, recurring capital spending and dividends. Acquisitions, development and maturities could require additional debt or equity financing. No specific earnings or FFO guidance was provided.
- The board terminated the former Chairman, CEO and President on October 2, 2013. The $26.4 million related charge was recorded in Q3; the filing identifies severance and accelerated vesting of deferred compensation. The CEO transition is a notable subsequent event.
- Other items affecting comparability include a $9.2 million nine-month gain on real-estate sales and $11.4 million of gains from selling marketable equity securities. The filing also describes a $12 million correction reducing previously recognized straight-line rent in the hospital segment.
- Principal disclosed risks include operator and tenant financial weakness, healthcare reimbursement and regulatory changes, interest rates and capital-market access, debt refinancing, property occupancy and lease renewals, and reliance on joint-venture partners. Management reported no material change to previously disclosed risk factors and no legal matters believed likely to have a material adverse effect.
Important facts for investors to verify
- HCR ManorCare’s financial condition and ability to meet lease obligations, given HCP’s high tenant and asset concentration.
- The status and rent collections of the 14-property DFL portfolio, and the assumptions supporting its $376 million valuation.
- The effect of the CEO transition, severance costs and related leadership changes on expenses and operations.
- Debt maturities, revolver availability, refinancing costs and funding needs for development and acquisitions.
- Whether reported growth is sustained by same-property performance, rather than acquisitions, loan-related income or nonrecurring gains; review the company’s non-GAAP NOI and FFO reconciliations alongside GAAP results.