Business context and reporting period
HCP, Inc. (now Healthpeak Properties) filed this Form 10-K for the fiscal year ended December 31, 2011. The REIT invests in U.S. healthcare real estate across senior housing, post-acute/skilled nursing, life science, medical office and hospital segments. Its strategy emphasizes opportunistic investment, portfolio diversification and conservative financing.
At year-end, HCP managed approximately $18.7 billion of investments, including its investment-management platform, and had interests in 1,010 facilities including joint-venture properties. The year’s results were significantly shaped by the April acquisition of HCR ManorCare’s real estate assets.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Total revenue | $1.725 billion | $1.253 billion |
| Income from continuing operations | $550.3 million | $320.7 million |
| Net income applicable to common shares | $515.3 million | $307.5 million |
| Diluted EPS | $1.29 | $1.00 |
| FFO per diluted common share | $2.19 | $2.25 |
| Adjusted FFO per diluted common share | $2.69 | $2.23 |
| Net cash from operating activities | $724.2 million | $580.5 million |
| Total assets | $17.408 billion | $13.332 billion |
| Debt obligations | $7.723 billion | $4.646 billion |
| Total equity | $9.221 billion | $8.146 billion |
Property-level NOI, a non-GAAP measure, was $1.403 billion, up from $878.4 million. It excludes corporate costs, interest, depreciation and other items, so it is not a consolidated operating margin. Cash and cash equivalents fell to $33.5 million from $1.037 billion. HCP paid $787.7 million in common and preferred dividends; shareholder and noncontrolling-interest distributions exceeded operating cash flow by approximately $79 million.
At December 31, 2011, 93% of debt was fixed-rate; total debt had a 5.59% weighted-average interest rate. The $1.5 billion revolving credit facility had $454 million drawn, leaving approximately $1.046 billion of stated capacity, subject to facility terms. Scheduled 2012 principal maturities were $316.8 million. HCP reported compliance with its credit-facility covenants.
Common dividends were $1.92 per share for 2011, up from $1.86 in 2010. In January 2012, the board declared a $0.50 quarterly dividend, implying an annualized rate of $2.00.
Material changes versus the prior comparable period
- Revenue increased about 38%, primarily reflecting the HCR ManorCare acquisition, consolidation of HCP Ventures II, and other property acquisitions. HCR ManorCare alone contributed 27% of 2011 total revenue, including pre-acquisition loan interest.
- HCP acquired HCR ManorCare real estate for approximately $6.0 billion of purchase consideration, including $4.0 billion cash and settlement of approximately $2.0 billion of HCP loans. It also invested $95 million for a 9.9% interest in HCR ManorCare’s operations.
- Interest expense rose to $419.3 million from $288.7 million, and debt increased substantially to fund the acquisition. HCP issued $2.4 billion of senior unsecured notes and $1.273 billion of common stock during 2011.
- Reported net income and EPS rose, but diluted FFO per share declined to $2.19 from $2.25. Adjusted diluted FFO per share increased to $2.69; adjustments included the $125 million Ventas settlement, a $15.4 million Cirrus loan impairment and merger-related items.
- Income from direct financing leases rose to $464.7 million from $49.4 million, largely because the HCR ManorCare master lease was accounted for as a direct financing lease. This accounting presentation is important when assessing recurring cash rental income.
Outlook, commentary, risks and unusual items
HCP stated that it expected operating cash flows and financing activities to meet its principal liquidity needs over the following 12 months. It did not provide quantitative earnings or FFO guidance in the supplied filing text. It announced a 2012 annualized common dividend rate of $2.00 per share.
- Tenant and reimbursement concentration: HCR ManorCare generated 27% of total 2011 revenue and accounted for 83% of post-acute/skilled nursing segment revenue. Management identified CMS’s July 2011 final rule reducing FY2012 skilled-nursing Medicare PPS payments by 11.1% versus FY2011 as a risk to operators and potentially to HCP’s investment.
- HCR ManorCare operating exposure: HCP held approximately 9.9% of the operating company. HCR ManorCare recorded $865 million of goodwill and intangible-asset impairments in 2011 after reimbursement reductions; HCP said these impairments did not affect its share of earnings or its investment carrying value.
- Litigation: HCP recorded a $125 million charge and paid that amount to settle remaining Ventas claims, in addition to $102.8 million paid in August 2011 on the earlier jury verdict. Management said ordinary-course legal proceedings were not expected to have a material adverse effect, apart from disclosed matters.
- Credit exposure: HCP placed its Cirrus senior secured loan on non-accrual status effective January 1, 2011 and recorded a $15.4 million impairment; the year-end carrying value was $75.7 million.
- Other risks: Management highlighted access to capital and refinancing, interest rates, operator solvency and bankruptcy, healthcare regulation and reimbursement, lease renewals, development execution, competition, environmental liabilities and natural-disaster exposure. Approximately 23% of gross real estate assets were in California.
- Market sensitivity: Management estimated a one-percentage-point increase in rates would raise annual net interest expense by approximately $4.2 million, assuming balances otherwise unchanged.
The filing reports unqualified audit opinions on the consolidated financial statements and internal control over financial reporting. Management concluded disclosure controls and internal controls were effective at year-end.
Most important facts for investors to verify
- HCR ManorCare’s rent coverage, liquidity, operating performance and ability to absorb Medicare and Medicaid reimbursement changes, given its concentration in HCP’s revenue and assets.
- How much of reported revenue and NOI translates into recurring cash receipts, particularly the direct-financing-lease income associated with the HCR ManorCare lease.
- Dividend coverage and liquidity: distributions exceeded operating cash flow in 2011, year-end cash was $33.5 million, and HCP had material debt maturities and commitments.
- FFO comparability and per-share performance, including the impact of acquisitions, equity issuance and adjustments excluded from adjusted FFO.
- Credit quality and recoverability of the Cirrus loan, along with any further deterioration in operators, tenants or unconsolidated investments.