Business context and reporting period
HCP, Inc. (the registrant named in this filing) is a healthcare-focused REIT that acquires, develops, leases and finances properties across senior housing, post-acute/skilled nursing, life science, medical office and hospital segments. This unaudited Form 10-Q covers the quarter ended March 31, 2013; comparisons are with the quarter ended March 31, 2012 unless noted.
Financial and operating performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $516.3 million | $455.8 million |
| Net income | $233.8 million | $196.6 million |
| Net income applicable to common shares | $230.1 million | $175.3 million |
| Diluted EPS | $0.51 | $0.43 |
| Net cash from operating activities | $214.4 million | $186.5 million |
| NOI (non-GAAP) | $429.8 million | $387.2 million |
| Adjusted NOI / cash NOI (non-GAAP) | $386.8 million | $351.4 million |
| Diluted FFO per common share (non-GAAP) | $0.74 | $0.64 |
Revenue rose about 13% and net income about 19%. Adjusted NOI increased about 10%; diluted FFO per share increased about 16%. The filing does not provide a single consolidated operating-margin figure. Common dividends declared were $0.525 per share, versus $0.50 a year earlier.
At March 31, 2013, total assets were $19.73 billion, cash and cash equivalents were $47.5 million, and restricted cash was $37.7 million. Debt carrying value was approximately $8.47 billion, excluding $78.8 million of resident life-care bonds and deposits. HCP had $14 million drawn on its $1.5 billion revolving credit facility and was in compliance with its debt covenants. Senior unsecured notes had a weighted-average effective rate of 5.10% and six-year weighted-average maturity; mortgage debt had a 6.13% weighted-average effective rate and three-year weighted-average maturity.
Cash from operations exceeded the prior-year quarter, but cash declined by $200.1 million to $47.5 million, primarily reflecting $238.5 million of dividends paid, debt repayments and other financing activity. Investing cash outflow was $57.4 million; financing cash outflow was $357.1 million. Management said operating cash flow over the next 12 months was expected to cover operations, debt service, recurring capital expenditures and dividends. Acquisition and development needs, and debt maturities, could require additional borrowing or equity or debt issuance.
Material changes and management commentary
- The Blackstone JV senior-housing acquisition added 133 communities for a total purchase price of $1.73 billion; four properties were acquired in Q1 for $38 million. The purchase-price allocation remained preliminary. First-year contractual rent under the Emeritus leases is $105.8 million.
- Interest income increased to $12.4 million, primarily due to the Tandem Health Care mezzanine loan and Four Seasons Health Care notes. Other income included an $11 million gain from selling marketable equity securities.
- Interest expense rose $5.6 million to $109.4 million, principally reflecting 2012 note issuance net of maturities. Depreciation and amortization increased $19.4 million, mainly due to the acquisition.
- Segment adjusted NOI rose in senior housing, post-acute/skilled nursing, medical office and hospital. Life science adjusted NOI declined 5.6%, partly because Q1 2012 included a $4 million lease-amendment payment and current rents reflected mark-to-market reductions.
- HCP reported $342.9 million of diluted FFO, or $0.74 per share, versus $267.9 million, or $0.64, a year earlier. Adjusted diluted FFO per share was $0.74 versus $0.67; the 2012 figure included a preferred-stock redemption charge.
- On May 2, 2013, HCP acquired approximately $165 million of debt secured by real estate. The board declared a further $0.525-per-share dividend payable May 21, 2013.
Risks, contingencies and unusual items
Credit concentration is significant: HCR ManorCare accounted for 32% of total gross assets and 28% of total revenue; it represented 89% of post-acute/skilled nursing gross assets and 87% of that segment’s revenue. Emeritus represented 14% of total gross assets and 13% of total revenue. HCP identifies tenant/operator financial condition, healthcare reimbursement changes (including Medicare reductions related to sequestration), capital-market access, interest rates, refinancing and acquisition risks among factors that could affect results. Management reported no material change to the risk factors in its 2012 Form 10-K and no known legal matter expected to have a material adverse effect.
HCP said it was compliant with applicable debt covenants. Approximately $683 million of stated debt maturities and scheduled repayments fell in the remaining nine months of 2013. HCP’s interest-rate and foreign-exchange derivatives were used for hedging, not trading; the company reported no anticipated counterparty nonperformance. HCP stated disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- Monitor HCR ManorCare and other major operators’ financial performance, rent coverage and ability to meet lease obligations.
- Assess the final Blackstone JV purchase-price allocation, lease-up of the 34 initially unstabilized communities, and actual rent collection from Emeritus.
- Review debt maturities, refinancing capacity and whether dividends and planned investment can be funded without increased leverage or securities issuance.
- Evaluate the quality and recurring nature of earnings, including the $11 million securities gain, noncash lease and financing adjustments, and non-GAAP NOI and FFO measures.
- Track life science leasing and rent resets, given the decline in adjusted NOI and new lease rents below the average rents on expiring space.