HEALTHPEAK PROPERTIES, INC. quarterly report, Q3 FY2009

Business context and reporting period

The filing is HCP, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2009. The filing identifies the issuer as HCP, Inc.; the supplied request metadata names Healthpeak Properties, Inc. HCP was a healthcare-focused REIT with investments in senior housing, life science, medical office, hospital and skilled nursing properties, as well as healthcare-provider loans.

Financial results and position

Amounts below are in millions of dollars, except per-share data. Quarterly and nine-month comparisons are to the corresponding 2008 periods.

At September 30, 2009, total assets were $12.34 billion, cash and cash equivalents were $144.4 million, and total equity was $6.05 billion. Debt was approximately $5.70 billion, including $3.52 billion of senior unsecured notes, $1.86 billion of mortgage and other secured debt, and a $200 million term loan. The $1.5 billion revolving credit facility had no borrowings outstanding. Reported debt was 83% fixed-rate and 17% variable-rate; the weighted-average debt rate was 5.66%. HCP reported compliance with its debt covenants.

NOI margin, calculated as NOI divided by total revenue, was approximately 81.4% for Q3 2009 versus 81.1% in Q3 2008, and 81.4% for the nine months versus 80.5% in 2008. NOI is a non-GAAP measure and excludes corporate, financing, depreciation, litigation and other items.

Material changes versus prior periods

• Quarterly revenue declined 4.7%, chiefly because 2008 included $18 million in life-science lease termination fees. Nine-month revenue increased 1.7%, reflecting portfolio and occupancy contributions, partly offset by the absence of those fees.
• Q3 common-share results swung to a loss, primarily due to a $102 million litigation provision for the Ventas verdict, higher impairments and lower interest and other income. Nine-month common-share income fell substantially, also reflecting much lower gains from property sales: $34.4 million in 2009 versus $228.4 million in 2008.
• Nine-month operating cash flow fell to $389.7 million from $455.4 million. Investing activities used $68.7 million, while financing activities used $234.3 million; cash rose by $86.8 million to $144.4 million.
• HCP issued common stock in May and August, raising $845 million net in total, primarily to repay bridge and revolving-credit borrowings. Common shares issued and outstanding rose to 293.1 million from 253.6 million at year-end 2008.
• HCP purchased a $720 million face-value participation in HCR ManorCare first-mortgage debt for about $590 million, financing $425 million of the purchase with secured debt. It sold 11 properties for $58 million, compared with 47 properties sold for $629 million in the first nine months of 2008.

Outlook, risks, contingencies and unusual items

• Management said it expected operating cash flows, financing and asset sales to meet liquidity needs over the next 12 months. No earnings or revenue guidance was provided. The common dividend declared for payment in November was $0.46 per share.
• HCP recorded the $102 million Ventas judgment as an expense and intended to appeal. HCP had sought post-trial relief; Ventas separately sought about $20 million in prejudgment interest and $4 million in additional damages. Those motions had not been decided as of the filing.
• HCP and tenants were pursuing claims against Sunrise over alleged defaults involving 64 facilities; Sunrise filed counterclaims. HCP warned that litigation and enforcement could require significant spending and that outcomes were uncertain. Separately, the October 1 transition of 15 communities reduced Sunrise-managed properties to 75.
• HCR ManorCare exposure was significant: HCP reported approximately $1.7 billion face value and $1.5 billion carrying value in mezzanine and secured loans. The filing also disclosed a Cirrus borrower in default after missing four interest payments; HCP continued accrual accounting based on its collateral and guarantee assessment.
• Two impaired direct-financing leases had a $15.1 million quarterly loss provision. The lessees of all three related leases filed for Chapter 11 on October 19, 2009. Other risks include tenant/operator financial distress, refinancing and capital-market access, interest-rate changes, healthcare reimbursement and regulation, and potential uninsured property losses.
• Debt maturities included $632.5 million in 2011 and $1.23 billion in 2013. After quarter-end, HCP extended $86 million of mortgage debt from 2010 to 2015. HCP’s stated ratings on senior unsecured debt were Baa3 from Moody’s and BBB from S&P and Fitch.
• Management reported an immaterial correction to prior-period purchase-accounting estimates for lease intangibles. It also reported a $1.4 million goodwill impairment in Q1 2009.

Important facts for investors to verify

• Progress and final outcome of the Ventas appeal, including rulings on additional damages and interest.
• Sunrise litigation and the operating and financial results following the transition of the 15 communities.
• HCR ManorCare and Cirrus loan performance, collateral values, collections and any further impairment or non-accrual decisions.
• Debt refinancing needs, covenant headroom, access to capital and the effects of further equity issuance on per-share results.
• Whether operating cash flow and dividends remain sustainable given tenant performance, litigation costs, dispositions and required capital spending.