HCP, Inc. (filing identifies registrant as HCP, Inc.; request metadata says HealthPeak Properties, Inc.) — FY 2014 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter filing. HCP was a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties. At year-end, it reported $24.3 billion of investments in its owned portfolio and unconsolidated joint ventures, plus $483 million in development, redevelopment and land assets.
Financial and operating metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $2.266 billion | $2.100 billion | +7.9% |
| Net income applicable to common shares | $919.8 million | $969.1 million | -5.1% |
| Diluted EPS | $2.00 | $2.13 | -6.1% |
| FFO per diluted share | $3.00 | $2.95 | +1.7% |
| Adjusted FFO per diluted share | $3.04 | $3.02 | +0.7% |
| FAD per diluted share | $2.57 | $2.54 | +1.2% |
| Net cash from operating activities | $1.249 billion | $1.149 billion | +$99.6 million |
| NOI | $1.805 billion | $1.714 billion | +5.4% |
| Adjusted (cash) NOI | $1.647 billion | $1.581 billion | +4.2% |
Cash and equivalents were $183.8 million, down from $300.6 million. Investing activities used $1.512 billion, primarily reflecting investment and acquisition activity; financing activities provided $144.8 million. Total assets were $21.370 billion, total equity $10.997 billion, and reported debt obligations $9.760 billion, up from $8.662 billion. Excluding other debt, debt was 91.3% fixed-rate, with a 4.71% weighted-average rate. HCP reported compliance with its credit-facility and term-loan covenants.
Common dividends were $2.18 per share for 2014, up 3.8%. The board subsequently declared $0.565 per share quarterly, implying a 2015 annualized rate of $2.26, up 3.7%. FAD and FFO are non-GAAP measures and should not be treated as substitutes for GAAP cash flow or earnings.
Material changes versus the prior period
- Revenue, operating cash flow and adjusted NOI increased. FFO per share rose modestly, while GAAP net income and diluted EPS declined, reflecting lower real-estate sale gains, higher depreciation and the HCRMC investment impairment.
- In August 2014, HCP completed a major Brookdale transaction: amended leases on 153 senior-housing properties, converted 48 properties to a RIDEA structure at closing, and formed a 14-campus CCRC joint venture in which HCP held 49%. The transaction produced a $38 million net lease-termination gain. A further property entered RIDEA in January 2015.
- HCP made $2.1 billion of investment transactions during 2014, including a $588 million contribution to the CCRC joint venture and a UK loan facility with £395 million of total capacity. It also issued $1.15 billion of senior notes and increased its revolving-credit facility to $2 billion.
- Senior housing operating revenues increased substantially following the RIDEA conversion; corresponding resident-service and operating expenses also increased. This changed the revenue mix and exposed HCP more directly to facility operating performance.
Outlook, risks and unusual items
- HCR ManorCare concentration and credit risk: HCRMC represented approximately 26% of 2014 revenue and 31% of gross assets. HCP recorded a $36 million impairment of its 9.4% HCRMC equity interest, citing weaker preliminary 2015 forecasts and a shift from Medicare to Medicare Advantage that affected skilled-nursing reimbursement and length of stay. HCP reported a projected year-end 2015 fixed-charge coverage ratio of 1.07x, versus 1.08x at 2014 year-end, before specified 2014 liability charges. Management said contractual master-lease collections remained reasonably assured, but warned that further deterioration could lead to non-accrual accounting or an impairment of the HCRMC direct-financing lease.
- HCRMC was responding to government investigative demands and information requests concerning skilled-nursing facilities, coordinated by federal agencies and certain state attorneys general. The ultimate outcome was uncertain. HCP stated that HCRMC believed it was in material compliance.
- Brookdale is a significant tenant and manager of HCP senior-housing assets. HCP relies on Brookdale to manage RIDEA properties; adverse operator or financial developments could affect rents, operating results and property performance.
- Revenue concentration is significant: HCRMC and Brookdale together generated about 40% of 2014 revenue. California and Texas accounted for approximately 23% and 12%, respectively. The filing also identifies healthcare reimbursement and regulation, tenant/operator financial weakness, competition, development execution, capital-market access, interest rates, foreign exchange, natural disasters, environmental exposure and REIT qualification as risks.
- Management expected to fund distributions and near-term needs primarily from operating cash flow and cash balances, and said the January 2015 $600 million note offering was expected to cover scheduled 2015 maturities. No formal earnings guidance is provided in the supplied filing text.
- Unusual items include the Brookdale transaction gain, the HCRMC impairment, and the 2013 comparison-period CEO severance charge. Fourth-quarter 2014 revenue was $603.5 million and diluted EPS was $0.43; the quarter included the HCRMC impairment.
Important facts for investors to verify
- Monitor HCRMC lease coverage, rent payment performance, reimbursement trends, the government inquiry and any subsequent non-accrual or impairment disclosures.
- Assess Brookdale’s financial condition and performance of the RIDEA properties, including occupancy, operating costs and management arrangements.
- Reconcile dividend coverage using GAAP operating cash flow and recurring capital needs as well as the company-defined FAD measure.
- Review debt maturities, revolving-facility availability and covenant headroom, particularly after the 2015 financing transactions.
- Check the full audited statements and notes for segment trends, lease expirations, joint-venture obligations and any developments after the December 31, 2014 reporting date.
The filing reports unqualified independent-auditor opinions on the financial statements and internal control over financial reporting as of December 31, 2014.