HCP, Inc. (10-K) — Fiscal year ended December 31, 2012
Reporting period: This is an annual report for fiscal 2012, not a standalone fourth-quarter filing. The filing also reports selected unaudited Q4 results.
Business context
HCP is a healthcare-focused U.S. REIT that owns, leases, develops and manages healthcare real estate and makes loans to healthcare providers. Its five segments are senior housing, post-acute/skilled nursing, life science, medical office and hospitals. At year-end, its owned portfolio included 1,086 properties; together with its investment management platform, HCP managed approximately $21.3 billion of investments.
Financial performance and position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $1.901 billion | $1.712 billion | +11.0% |
| Income from continuing operations | $812.9 million | $547.3 million | +48.5% |
| Net income applicable to common shares | $812.3 million | $515.3 million | +57.6% |
| Diluted EPS | $1.90 | $1.29 | +47.3% |
| Operating cash flow | $1.035 billion | $724.2 million | +42.9% |
| Adjusted NOI, a non-GAAP measure | $1.447 billion | $1.249 billion | +15.9% |
| Diluted FFO per share | $2.72 | $2.19 | +24.2% |
| Diluted adjusted FFO per share | $2.78 | $2.69 | +3.3% |
Q4 2012 revenue was $508.5 million; net income was $246.3 million; net income attributable to HCP was $241.0 million; diluted EPS was $0.53. Q4 2011 revenue was $458.3 million, net income was $70.8 million, and diluted EPS was $0.15. The comparison reflects significant acquisition and other nonrecurring effects.
At December 31, total assets were $19.92 billion, total equity $10.75 billion, and debt obligations $8.69 billion. Cash and cash equivalents were $247.7 million. Year-end debt was 99.5% fixed-rate, with a 5.22% weighted-average rate. Interest expense was $417.1 million; the filing does not present a single consolidated operating-margin measure as a primary GAAP metric. Adjusted NOI is supplemental and not comparable to GAAP net income.
Material changes and transactions
- In Q4, HCP acquired 129 senior housing communities for $1.7 billion and entered a guaranteed triple-net master lease with Emeritus. First-year contractual rent is $103.6 million, with contractual escalators; 34 communities were in lease-up at acquisition.
- Portfolio expansion and acquisitions drove much of revenue, asset, and cash-flow growth. Senior housing revenue also included more resident fees from RIDEA operations, while post-acute/skilled nursing growth reflected the full-year contribution of assets acquired from HCR ManorCare in 2011.
- HCP raised $3.5 billion in debt and equity capital during 2012, including common-stock offerings and new senior notes, and redeemed all $295.5 million of preferred stock. Common dividends were $2.00 per share for 2012, up from $1.92.
- Adjusted NOI growth varied by segment: senior housing total-portfolio adjusted NOI rose 10.9%; post-acute/skilled nursing 36.2%; life science 6.9%; medical office 6.1%; and hospitals 3.4%. Same-property adjusted NOI growth was more modest, including 3.5% for senior housing and 2.7% for medical office.
Liquidity, outlook, risks and unusual items
- Management expected operating cash flow over the next 12 months to cover operations, debt service, recurring capital expenditures and common dividends. HCP had no balance drawn on its $1.5 billion revolving credit facility at year-end; the facility matures in 2016 and has a one-year extension option.
- Scheduled 2013 principal maturities and repayments total approximately $841.7 million: $550 million of senior notes and $291.7 million of mortgage debt. Management noted that maturities, acquisitions and development could require borrowing or additional equity/debt offerings. The filing gives no specific earnings or FFO forecast.
- HCR ManorCare represented approximately 30% of 2012 revenue; the four largest named operator relationships represented approximately 48%. California, Texas and Florida together generated approximately 44% of revenue. These concentrations expose HCP to operator, regional, reimbursement and regulatory risk.
- Other principal risks include capital-market access and refinancing, rising interest rates, tenant/operator financial distress or bankruptcy, Medicare and Medicaid reimbursement changes, healthcare regulation, competition, development and joint-venture execution, uninsured losses, environmental liabilities and maintaining REIT status. HCP reported that it was in compliance with credit-facility and term-loan covenants at year-end.
- Unusual items included a $7.9 million impairment on a life-science land parcel sale in 2012 and a $125 million Ventas litigation settlement charge in 2011, with no comparable settlement charge in 2012. 2012 discontinued operations included $31.5 million of real-estate sale gains. The 2012 acquisition purchase-price allocation remained preliminary.
- The board declared a quarterly common dividend of $0.525 in January 2013, implying an annualized rate of $2.10. Deloitte issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the Emeritus master lease performs as expected, particularly the lease-up and rent reset provisions for the 34 initially unsettled communities.
- HCR ManorCare’s ability to meet lease obligations and the impact of reimbursement changes on this major revenue exposure.
- Refinancing plans and available liquidity for the approximately $841.7 million of 2013 maturities, alongside planned investment and dividend needs.
- How much reported earnings and FFO growth came from acquisitions, dispositions and other nonrecurring items versus same-property operations; review the filing’s non-GAAP reconciliations.
- Final purchase accounting for the $1.7 billion acquisition, and performance of 2012 acquisitions and development commitments.