Healthpeak Properties, Inc. (HCP) — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; this is an annual report, not a quarterly filing. The company was then named HCP, Inc. It was a U.S. healthcare real estate REIT operating across senior housing, life science, medical office, post-acute/skilled nursing, and hospital segments.
Financial performance and position
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Total revenue | $1.255 billion | $1.149 billion | Up 9.3% |
| Income from continuing operations | $321.6 million | $101.1 million | Increase includes comparison against 2009 litigation and impairment charges |
| Net income applicable to common shares | $307.5 million; diluted EPS $1.00 | $109.1 million; diluted EPS $0.40 | 2010 EPS also reflects discontinued operations and nonrecurring items |
| FFO, diluted, as adjusted | $695.2 million; $2.23 per share | $596.0 million; $2.14 per share | Up 16.6% in total and 4.2% per share; non-GAAP measure |
| Net operating income (NOI) | $880.0 million | $833.7 million | Up 5.6%; NOI was about 70% of revenue versus 73% in 2009 |
| Cash from operating activities | $580.5 million | $515.6 million | Up 12.6% |
| Cash from investing activities | $(430.9) million | $(61.4) million | Greater property, development, and loan investment |
| Cash from financing activities | $774.9 million | $(399.5) million | Driven largely by common stock offerings |
| Year-end cash and total assets | $1.037 billion; $13.332 billion | $112.3 million; $12.210 billion | Cash rose substantially following equity issuance |
| Debt obligations | About $4.6 billion | About $5.7 billion | 93% of debt was fixed-rate at year-end; weighted average rate 6.19% |
| Total equity | $8.146 billion | $5.959 billion | Increase reflects substantial equity issuance |
| Common dividend | $1.86 per share | $1.84 per share | Board subsequently declared $0.48 quarterly, or $1.92 annualized |
Material changes versus 2009
- Rental and related revenue increased 8% to $951.9 million. Senior housing revenue rose 16%, primarily reflecting portfolio and operator changes, acquisitions, and rent increases; life science revenue rose 11%, including properties placed in service.
- Interest income increased $36.0 million to $160.2 million, mainly from HCR ManorCare and Genesis loan investments and an $11 million mortgage prepayment premium. Interest expense declined $10.2 million to $288.7 million.
- Operating expenses increased 13% to $210.3 million, partly because certain Sunrise-related properties were temporarily consolidated. General and administrative expense rose to $83.0 million.
- HCP recorded a $71.7 million impairment of its HCP Ventures II investment, linked to deterioration in Horizon Bay-operated senior housing properties. It also recorded an $11.9 million impairment recovery relating to the Erickson bankruptcy settlement.
- 2009 results included a $102.0 million Ventas litigation provision and $75.4 million of impairment expense. 2010 had no litigation provision and reported a net $11.9 million impairment recovery in continuing operations; however, the separate $71.7 million joint-venture impairment reduced 2010 continuing income.
- HCP raised approximately $2.4 billion net from common stock offerings in 2010. Common shares outstanding increased from 293.5 million to 370.9 million.
Transactions, outlook, and principal risks
- HCR ManorCare acquisition: A definitive agreement signed in December 2010 contemplated acquiring 334 facilities for $6.1 billion: $3.53 billion cash, reinvestment of HCP’s existing $1.72 billion par-value debt investments, and 25.7 million HCP shares or, at HCP’s option, $852 million cash. Closing was anticipated in March 2011. The facilities were to be operated by HCR ManorCare under a long-term triple-net master lease with a guaranty.
- HCP issued $2.4 billion of senior unsecured notes on January 24, 2011, with a 4.83% weighted-average yield and 10.3-year weighted-average maturity. Management expected higher 2011 interest expense. If the acquisition did not close by the specified deadline, the notes generally had to be redeemed at 101% of principal.
- Management said operating and financing needs over the following 12 months were expected to be met by operating cash flows and financing activities. However, 2010 distributions to shareholders and noncontrolling holders exceeded operating cash flow by approximately $26 million. The 2011 common dividend announcement represented a 3.2% increase over the 2010 annual rate.
- Liquidity included $1.037 billion cash and a $1.5 billion revolving facility with no borrowings at year-end; $113 million of letters of credit were outstanding. The facility matured August 1, 2011. Scheduled 2011 debt principal repayments were approximately $350 million; stated maturities were notably higher in 2013 and 2015.
- Revenue concentration was material: the five largest named relationships—Emeritus, HCR ManorCare, Sunrise, HCA, and Brookdale—generated approximately 38% of 2010 revenue. HCR ManorCare debt investments represented about 12% of total assets; Sunrise-operated facilities generated about 11% of revenue. HCP disclosed Sunrise’s reported financial distress.
- Other key risks include tenant/operator defaults or bankruptcy, healthcare reimbursement and regulatory changes, capital-market access and refinancing costs, interest rates, development and leasing risks, impairment valuation uncertainty, natural disasters and environmental liabilities, and REIT qualification.
- The Ventas judgment for approximately $102 million remained under appeal, with oral argument scheduled for March 10, 2011; Ventas’s cross-appeal sought additional damages and interest. A $103 million letter of credit related to the litigation was outstanding under HCP’s revolving facility.
- Management reported effective disclosure controls and internal control over financial reporting; the independent auditor gave unqualified opinions on the 2010 financial statements and internal controls.
Investor verification priorities
- Verify whether and when the HCR ManorCare acquisition closed, its final consideration and funding mix, and the resulting lease terms, guarantees, and debt profile.
- Assess the credit quality and operating performance of HCR ManorCare, Sunrise, Emeritus, and other concentrated tenants and borrowers, including reimbursement exposure.
- Reconcile GAAP earnings with FFO and adjusted FFO, emphasizing the 2009 Ventas provision, 2010 joint-venture impairment, impairment recovery, disposition gains, and share-count growth.
- Review cash available for dividends after recurring investment, debt service, and acquisition funding; compare cash distributions with operating cash flow.
- Confirm refinancing and covenant headroom, revolving-facility renewal, near-term maturities, and the effect of the 2011 note issuance on leverage and interest expense.
- Track the Ventas appeal and potential exposure beyond the recorded provision, and review other contingencies and guarantees.