Business Context and Reporting Period
Company: HCP, Inc. (Healthpeak Properties, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: HCP is a self-administered Real Estate Investment Trust (REIT) investing primarily in healthcare real estate in the United States. Its portfolio includes senior housing, life science, medical office, hospital, and skilled nursing facilities. The company acquires, develops, leases, and manages these properties and provides financing to healthcare providers.
Key Financial Metrics
| Metric (in thousands) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $251,615 | $244,793 |
| Net Income | $52,709 | $56,128 |
| Net Income Applicable to Common Shares | $43,285 | $44,579 |
| Diluted EPS (Common) | $0.17 | $0.21 |
| Net Operating Income (NOI) | $202,501 | $195,105 |
| Cash Flow from Operating Activities | $117,012 | $131,675 |
| Total Assets | $11,801,289 | $11,849,826 |
| Total Liabilities | $6,470,377 | $6,441,986 |
| Total Debt (Principal) | $5,998,878 | $7,586,750 |
| Cash and Cash Equivalents | $66,376 | $154,000 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 3% to $251.6 million, driven by a 20% increase in Life Science rental revenues due to higher occupancy and new developments. Senior housing revenues declined 3% due to the absence of $1.4 million in additional rents received in the prior year.
- Net Income Decline: Net income decreased 6% to $52.7 million. This was primarily due to a significant drop in income from discontinued operations (down $17.5 million) caused by fewer property sales and lower gains on sales compared to Q1 2008.
- Interest Expense Reduction: Interest expense decreased 20% to $76.7 million, attributed to a net decrease in outstanding indebtedness and lower interest rates (LIBOR decline).
- Discontinued Operations: The company sold seven properties for $6.0 million in Q1 2009, recognizing a $1.4 million gain, compared to four properties sold for $30 million with a $10.1 million gain in Q1 2008.
- Goodwill Impairment: The company recognized a $1.4 million impairment charge related to goodwill in the Life Science segment due to a decrease in market capitalization.
Guidance, Outlook, Risks, and Unusual Items
- Dividends: The Board declared a quarterly common stock dividend of $0.46 per share, payable May 21, 2009. Preferred dividends were also declared for Series E and F.
- Subsequent Event: On April 10, 2009, the company sold its Los Gatos, California hospital for $45 million, recognizing a $31 million gain.
- Liquidity and Capital: The company maintains a $1.5 billion revolving credit facility with $235 million outstanding. It has $320 million in bridge loans maturing July 2009 and $117.8 million in mortgage debt maturing in the remainder of 2009. Credit ratings remain investment grade (Baa3/BBB).
- Risks and Contingencies:
- Legal Proceedings: Ventas, Inc. has sued HCP for alleged tortious interference regarding the Sunrise REIT transaction, claiming damages of $122 million plus additional costs. HCP intends to defend vigorously; a trial is set for August 18, 2009.
- Concentration Risk: Approximately 77% of the skilled nursing segment assets are tied to mezzanine loans to HCR ManorCare. Additionally, 80 senior housing facilities are leased to Variable Interest Entities (VIEs) operated by Sunrise Senior Living.
- Market Conditions: Management notes that economic slowdowns and credit market volatility may impact tenant ability to pay rent and the company's access to capital.
- Unusual Items: Two Direct Financing Leases (DFLs) were placed on non-accrual status in late 2008, reducing income from DFLs by $2.0 million in Q1 2009.
Investor Verification Checklist
- Debt Maturities: Verify the refinancing strategy for the $320 million bridge loan maturing in July 2009 and the $117.8 million mortgage debt due in late 2009.
- Legal Exposure: Monitor the status of the Ventas, Inc. litigation and potential financial impact of the $122 million+ claim.
- Tenant Concentration: Assess the financial health of Sunrise Senior Living (operator of 80 VIE properties) and HCR ManorCare (borrower on $1 billion mezzanine loans).
- Asset Quality: Review the status of the two DFLs on non-accrual status and the $1.4 million goodwill impairment in the Life Science segment.
- Cash Flow vs. Dividends: Confirm that operating cash flows ($117 million) remain sufficient to cover the $122 million in dividends paid during the quarter and future distribution requirements to maintain REIT status.