HCP, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. The filing identifies the registrant as HCP, Inc. HCP is a healthcare-focused REIT owning, leasing, developing and financing properties across senior housing, post-acute/skilled nursing, life science, medical office and hospital segments.
Key financial results
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $444.7 million | $317.0 million | $1,265.1 million | $913.7 million |
| Net income | $175.5 million | $26.2 million | $483.7 million | $198.9 million |
| Net income applicable to common shares | $166.4 million | $17.0 million | $453.3 million | $171.3 million |
| Diluted EPS | $0.41 | $0.05 | $1.14 | $0.57 |
| Net operating income (NOI) | $385.9 million | $218.9 million | $1,013.1 million | $650.1 million |
| Diluted FFO as adjusted per share | $0.67 | $0.54 | $2.02 | $1.58 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $586.9 million | $430.7 million |
Q3 total revenue increased about 40% year over year, principally reflecting the HCR ManorCare acquisition and increased direct-financing-lease income. For the nine-month comparison, the acquisition also materially increased revenue and earnings. Reported results are not directly comparable without considering acquisition timing, equity issuance and other transaction effects.
Financial position, debt and liquidity
- At September 30, 2011, total assets were $17.44 billion, total liabilities $8.12 billion and total equity $9.32 billion. Cash and cash equivalents were $44.9 million, down from $1.04 billion at December 31, 2010.
- Debt carrying amounts included $375 million outstanding on the revolving credit line, $5.42 billion of senior unsecured notes, $1.78 billion of mortgage debt and $89 million of other debt. Stated debt principal, excluding life-care bonds, totaled $7.61 billion.
- The $1.5 billion revolving facility matures in March 2015; $375 million was drawn and $12.3 million of letters of credit were outstanding. HCP reported compliance with its financial covenants. Management said operating cash flows and financing activities were expected to meet liquidity needs over the next 12 months.
- Debt maturities include $1.08 billion in 2015 and $4.61 billion thereafter. Nine-month financing cash flow was $2.97 billion, while investing cash use was $4.55 billion, largely reflecting the HCR ManorCare transaction. Dividends paid on common and preferred shares totaled $586.0 million, exceeding operating cash flow by approximately $10 million when distributions to noncontrolling holders are also considered.
- Common dividends declared were $0.48 per share each quarter in the first nine months of 2011, versus $0.465 in the comparable 2010 quarter. A further $0.48 quarterly dividend was declared in October 2011.
Material changes and notable transactions
- On April 7, 2011, HCP completed its acquisition of substantially all HCR ManorCare real estate assets for approximately $6.0 billion of purchase consideration, acquiring 334 post-acute, skilled nursing and assisted-living facilities. The assets were leased to an HCR ManorCare subsidiary under a long-term triple-net master lease. HCP also invested $95 million for a 9.9% interest in the operating company.
- HCR ManorCare accounted for 35% of HCP gross assets and 32% of company revenue in Q3 2011, increasing operator and tenant concentration. It represented 94% of post-acute/skilled nursing gross assets at quarter-end.
- HCP raised capital to fund the acquisition, including $2.4 billion of senior notes issued in January and a $1.273 billion common-stock offering in March. Common shares outstanding rose to approximately 407.8 million from 370.9 million at year-end 2010.
- In January, HCP acquired its partner’s 65% interest in HCP Ventures II, consolidating 25 senior-housing facilities and recognizing an approximately $8 million gain. In April, repayment of Genesis loans generated $34.8 million of additional interest income.
- In September, HCP entered a strategic venture with Brookdale involving 37 senior-living communities, including 21 facilities operated under a RIDEA structure. Facility-level resident revenue and operating costs are reported for these properties.
- Q3 included a $15.4 million impairment related to the Cirrus secured loan. The loan was placed on cost-recovery status; HCP cited weaker collateral performance and uncertainty around recovery. Interest income from that loan was no longer accruing.
Outlook, risks and contingencies
- No quantified earnings or FFO guidance was provided. Management’s liquidity assessment assumes access to operating cash flows and financing activities; future results may differ and interim results are not necessarily indicative of full-year performance.
- The Ventas litigation remains significant. HCP paid the $102 million compensatory judgment in August 2011, but a punitive-damages claim was remanded for trial, scheduled for February 2012. HCP said it could not estimate the probability or amount of additional loss; an unfavorable outcome could materially affect results and financial condition. HCP had petitioned the U.S. Supreme Court for review.
- Management cited risks from economic weakness, capital-market access and interest rates, debt levels, healthcare regulation and reimbursement, tenant/operator financial health, lease renewals, acquisitions and litigation. The filing specifically noted a CMS final rule reducing FY2012 Medicare skilled-nursing-facility payments by 11.1% versus FY2011.
- HCP reported an unrealized $10.1 million loss on Brookdale shares purchased for $22.4 million, recorded in other comprehensive loss and judged not other-than-temporary at quarter-end. HCP stated it intended and was able to hold the investment while awaiting a potential recovery.
- Interest-rate sensitivity analysis estimated that a one-percentage-point increase in rates would raise annual interest expense by approximately $3.4 million, or $0.01 per diluted common share, assuming no other balance changes.
Investor items to verify
- How much of the reported growth and adjusted FFO reflects durable operating performance versus acquisition accounting, accretion, transaction-related items and share-count changes.
- HCR ManorCare’s rent coverage, financial condition and ability to meet lease obligations, given its substantial share of HCP assets and revenue and exposure to reimbursement changes.
- The range of potential additional Ventas litigation costs or damages and the status and outcome of the pending proceedings.
- Debt maturity, refinancing and covenant headroom, including the effect of low period-end cash and reliance on capital markets and the revolving facility.
- Whether operating cash generation supports the dividend and planned investment needs; FFO and FFO as adjusted are non-GAAP measures and are not equivalent to cash available for distribution.