Business Context and Reporting Period
HCP, Inc. (now identified in the request as Healthpeak Properties) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2012. HCP is a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as provider loans and joint ventures. Its portfolio included interests in 1,012 facilities, including investment-management ventures.
Unless stated otherwise, amounts below are in millions of dollars. HCP’s 2011 comparisons are affected by the April 2011 HCR ManorCare acquisition and by unusually large interest income from loan settlements and repayments in 2011.
Financial Results and Key Metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $464.4 | $488.1 | $923.5 | $819.3 |
| Net income | $205.0 | $234.3 | $401.5 | $308.2 |
| Net income applicable to common shares | $201.5 | $223.0 | $376.7 | $286.9 |
| Diluted EPS | $0.48 | $0.55 | $0.90 | $0.73 |
| Operating cash flow | Not separately stated | Not separately stated | $483.6 | $432.8 |
| Adjusted NOI | $357.9 | $339.8 | $712.0 | $562.9 |
| Diluted FFO per share | $0.69 | $0.78 | $1.34 | $1.19 |
| Diluted adjusted FFO per share | $0.69 | $0.77 | $1.36 | $1.35 |
At June 30, 2012, total assets were $17.79 billion, total equity $9.69 billion and cash and cash equivalents $169.6 million. Debt comprised $215.0 million on the bank line, $5.62 billion of senior unsecured notes, $1.73 billion of mortgage debt and $84.1 million of other debt. Senior notes had a 5.51% weighted-average effective rate and 6.17-year weighted-average maturity; mortgage debt had a 6.14% weighted-average effective rate and 3.93-year weighted-average maturity. The filing reports $7.56 billion of debt in its maturity schedule, excluding the $84 million of resident-related debt.
Common dividends declared were $0.50 per share quarterly, or $1.00 per share for the first six months. Adjusted NOI and FFO are non-GAAP measures; the company cautions that its definitions may differ from those used by other REITs.
Material Changes Versus the Prior Comparable Period
- Q2 revenue fell 4.9% year over year, while six-month revenue rose 12.7%. The different trends reflect, among other factors, 2011 loan-related interest income and the absence of a full comparable period for the ManorCare property investment.
- Q2 net income applicable to common shares declined to $201.5 million from $223.0 million, and diluted EPS fell to $0.48 from $0.55. Six-month common income and diluted EPS increased, to $376.7 million and $0.90, respectively.
- Q2 interest income dropped to $1.2 million from $60.5 million, principally because Genesis and HCR ManorCare debt investments had generated substantial repayment and settlement income in 2011. Six-month interest income similarly fell to $2.0 million from $98.6 million.
- Adjusted NOI increased 5.3% in Q2 and 26.5% for the first half. The company attributed portfolio-wide growth substantially to acquired properties; same-property adjusted NOI growth was more modest, including 2.1% in senior housing, 2.2% in post-acute/skilled nursing, 4.9% in life science, 3.0% in medical office and 3.5% in hospitals for Q2.
- Interest expense declined year over year, to $103.2 million in Q2 and $207.8 million for six months. HCP cited lower borrowing costs and, for the first half, the prior-year write-off of bridge-loan fees.
- HCP redeemed all preferred stock in April for $295.5 million and recorded a $10.4 million charge for original issuance costs. March and June common-stock offerings raised approximately $359 million and $376 million, respectively, increasing common shares outstanding.
- Cash increased to $169.6 million from $33.5 million at year-end 2011. Six-month operating cash flow was $483.6 million; investing activities used $313.5 million and financing activities used $33.9 million.
Outlook, Risks, Contingencies and Unusual Items
- Management said it expects operating cash flows and financing activities to meet operating, debt-service, capital, investment and dividend needs over the next 12 months. It provided no quantified earnings or FFO guidance in the supplied filing text.
- After quarter-end, HCP entered a £137 million four-year unsecured term loan, with a swap fixing the rate at 1.81% subject to rating adjustments; proceeds repaid the £137 million line-of-credit borrowing. It also issued $300 million of 3.15% notes due 2022, netting $294 million.
- HCP invested $214.9 million in UK care-provider-related notes with a 12.5% yield to maturity, match-funded by a sterling loan. The notes are issued by an affiliate of Terra Firma and mature in 2020.
- Two post-quarter medical-office acquisitions were announced: eight Scottsdale properties for $81 million and 12 properties valued at $179 million, both subject to closing conditions.
- Operator concentration is material: HCR ManorCare represented 35% of company gross assets and 31% of company revenues. It represented 90% of post-acute/skilled nursing gross assets and 93% of that segment’s revenues. HCP also disclosed potential risks from operator financial weakness, reimbursement changes, healthcare regulation, capital-market conditions, interest rates and refinancing needs. The filing cited an 11.1% Medicare skilled-nursing payment reduction for FY 2012 versus FY 2011.
- HCP stated that it was in compliance with its credit-facility covenants at June 30. It reported no known legal proceedings or claims expected to have a material adverse effect and no material changes to previously disclosed risk factors. Its disclosure controls were assessed as effective at a reasonable-assurance level.
- The company sold one medical-office property in the first quarter for $7 million and recorded a $2.9 million gain. It also received a $7.2 million insurance recovery in 2012 relating to earlier legal expenses.
Important Facts for Investors to Verify
- Review HCR ManorCare’s operating and financial condition, lease payments, and the scale of HCP’s concentration in the operator and post-acute/skilled nursing segment.
- Reconcile reported GAAP earnings with FFO, adjusted FFO and NOI, including the effects of acquisitions, loan-related income, nonrecurring items and share issuance.
- Assess debt maturities, refinancing requirements, covenant headroom and the effect of future capital-market access on acquisitions and dividends.
- Monitor same-property occupancy, leasing spreads and adjusted NOI, particularly in life science and medical office, and distinguish organic performance from acquired-portfolio growth.
- Track the closing and financing of the announced medical-office acquisitions and the credit, currency and counterparty risks of the UK notes and matching sterling borrowing.