HCP, Inc. — Q1 2010 Form 10-Q
Business context and period: The filing is for the three months ended March 31, 2010. HCP was a healthcare-focused REIT investing in senior housing, life science, medical office, hospital and skilled nursing properties, as well as provider loans. It reported interests in 677 facilities and approximately $1.9 billion of mezzanine and other secured loans.
Financial performance and position
- Revenue: $295.9 million, up 6.8% from $277.0 million in Q1 2009. Rental and related revenue rose 6% to $225.3 million; interest income increased to $35.3 million from $26.8 million, principally reflecting the HCR ManorCare mortgage participation acquired in 2009.
- Profit and per-share results: Net income was $84.1 million versus $52.7 million; net income attributable to HCP was $81.0 million versus $48.9 million. Common diluted EPS was $0.25 versus $0.17. Results included an $11.9 million impairment recovery related to Erickson investments.
- Operating costs and NOI: Depreciation and amortization was $78.1 million, down from $80.2 million. General and administrative expense increased to $24.9 million from $18.5 million, mainly due to higher litigation fees. Property NOI, a non-GAAP measure, was $213.2 million versus $200.8 million; NOI as a share of revenue was approximately 72.1% versus 72.5%.
- Cash flow: Operating cash flow was $109.5 million, down from $117.0 million. Investing activities used $38.7 million and financing activities used $138.4 million. Cash and equivalents fell to $44.6 million from $112.3 million at year-end. Common and preferred dividends paid totaled $142.6 million; distributions to shareholders and noncontrolling holders exceeded operating cash flow by approximately $37 million.
- Balance sheet and debt: Total assets were $12.14 billion and total equity was $5.91 billion at March 31. Debt carrying amounts included $210 million drawn on the revolver, $3.52 billion of senior unsecured notes, $1.83 billion of mortgage and other secured debt, and $97 million of other debt. Scheduled debt maturities and repayments totaled $5.57 billion, excluding the $97 million of resident-related obligations. The weighted-average rate on total debt was 5.56%.
- Liquidity: The revolving credit facility had a $1.5 billion commitment, with $210 million drawn and a $103 million letter of credit outstanding. HCP was in compliance with its credit-facility covenants. Management said operating cash flows and financing activities were expected to meet liquidity needs over the following 12 months.
Changes versus Q1 2009
- Revenue increased $18.9 million, while net income rose $31.4 million; reported earnings benefited from the Erickson impairment recovery and higher interest income.
- Rental and related revenues increased $13.1 million. Life science growth reflected newly leased development properties placed in service; tenant recoveries declined $1.9 million.
- Interest expense decreased modestly to $76.0 million from $76.7 million. General and administrative expense rose $6.4 million, principally from legal fees.
- Operating cash flow declined $7.6 million. Q1 2009 included $2.9 million of discontinued-operations income, including $1.4 million of property-sale gains; Q1 2010 had $0.1 million of discontinued-operations income.
Outlook, risks and unusual items
- Outlook: The filing provides no earnings or FFO guidance. Management cited operating cash flows and financing activities as expected sources for operating costs, debt service, capital spending, investment activity and dividends. It cautioned that quarterly results are not necessarily indicative of full-year results.
- Erickson settlement: A settlement approved by the bankruptcy court on April 15, 2010 provided for HCP to retain deposits totaling $5 million and receive an additional $9.6 million upon the expected closing of the asset sale. The closing was expected April 30 and remained subject to customary conditions. The Q1 $11.9 million impairment recovery is a notable nonrecurring item.
- Litigation: Ventas obtained a jury verdict of approximately $102 million against HCP; HCP appealed. A $103 million letter of credit was outstanding in connection with the case. Separately, HCP subsidiaries and tenants were litigating with Sunrise over management agreements covering 64 facilities; Sunrise asserted counterclaims. HCP warned that these matters could require significant legal spending and outcomes were uncertain.
- Tenant and borrower concentration: HCP’s HCR ManorCare mezzanine and secured loans had a $1.55 billion carrying value, about 13% of total assets. Sunrise-operated facilities represented about 15% of total assets and generated 10% of total revenue; the filing cited Sunrise’s financial difficulties. One Texas hospital was experiencing operational difficulties.
- Other risks: Key exposures include refinancing and capital-market access, interest-rate changes, tenant or borrower defaults and bankruptcies, healthcare reimbursement and regulation, and litigation. HCP reported no material change to the risk factors in its 2009 Form 10-K. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the Erickson asset-sale closing occurred and the final cash recovery matched the settlement terms.
- The status and potential financial impact of the Ventas appeal, Sunrise litigation and related legal costs.
- HCR ManorCare’s ability to service the loans, including the concentration and maturity risks associated with the 2013 loans.
- Sunrise’s operating and financial condition, rent payments, and any effects on HCP’s senior housing portfolio.
- HCP’s capacity to fund upcoming maturities and dividends, given the Q1 cash decline and distributions exceeding operating cash flow.