HCP, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; the filing also provides unaudited quarterly data, including Q4. HCP is a healthcare-focused U.S. REIT investing across senior housing, life science, medical office, hospitals and skilled nursing through property ownership, lending, development and joint ventures.
Financial performance and position
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Total revenue | $1.157 billion | $1.153 billion | Up 0.3% |
| Net operating income (NOI), continuing operations | $841.7 million | $823.3 million | Up 2.2% |
| Income from continuing operations | $106.3 million | $231.2 million | Down 54% |
| Net income applicable to common shares | $109.1 million | $425.4 million | Down 74% |
| Diluted EPS | $0.40 | $1.79 | Down $1.39 |
| Cash provided by operating activities | $515.6 million | $568.7 million | Down $53.1 million |
| Debt obligations, year-end | $5.656 billion | $5.937 billion | Down $281 million |
| Total assets / total equity, year-end | $12.210 billion / $5.959 billion | $11.850 billion / $5.408 billion | Assets and equity increased |
FY 2009 NOI was approximately 72.7% of total revenue, compared with approximately 71.4% in 2008; this is a calculated, non-GAAP ratio, not a reported operating margin. Interest expense declined to $298.9 million from $348.4 million. At year-end, 83% of debt was fixed-rate; the weighted-average rate was 5.65%.
Cash and cash equivalents were $112.3 million. HCP had a $1.5 billion revolving facility with no borrowings outstanding, although a $103 million letter of credit was issued against it; a separate $200 million term loan remained outstanding. Management said operating cash flow and financing activities were expected to meet needs over the following 12 months. Stated 2010 debt principal payments and maturities were about $309 million.
Q4 2009 revenue was $296.4 million versus $294.9 million in Q4 2008. Common-share net income was $26.4 million, or $0.09 per diluted share, versus $34.7 million, or $0.14, respectively. Q4 2009 includes substantial Erickson-related impairment charges. Quarterly figures are unaudited.
Material changes and notable items
- Revenue was nearly flat, while NOI increased modestly. Segment occupancy varied: senior housing fell to 86% from 89%; life science rose to 91% from 88%; medical office edged up to 91% from 90%; hospital occupancy declined to 37% from 42%; and skilled nursing was 85% versus 86%.
- Common-share earnings fell sharply, largely reflecting a $102.0 million Ventas litigation provision, $75.4 million of impairment charges, and lower gains on property sales. Discontinued-operations income declined to $39.8 million from $239.8 million, principally because property-sale gains were much lower.
- Operating cash flow declined, partly because 2008 included litigation-settlement income and higher termination fees. Financing cash flow included $852.9 million of net common-stock proceeds and $517.1 million of common and preferred dividends paid.
- HCP raised $881 million in two common-stock offerings and used proceeds principally to repay bridge and revolving borrowings. It also acquired a $720 million par-value participation in HCR ManorCare first-mortgage debt for $590 million, financed in part with $425 million of secured debt.
- During 2009, HCP sold 14 properties for $72 million, recognizing $37 million of gains, and sold $157 million of HCA marketable debt securities, recognizing gains of approximately $9 million.
Outlook, risks and contingencies
- No specific earnings or investment guidance is provided. Management described its priorities as opportunistic investing, portfolio diversification and conservative financing, and said it expected liquidity sources to cover near-term requirements.
- Credit and tenant concentration are significant. HCR ManorCare accounted for approximately 7% of total revenue; its HCP loans had $1.72 billion aggregate par value and $1.54 billion carrying value at year-end. Sunrise accounted for about 11% of revenue. HCP disclosed Sunrise’s liquidity, debt-default and maturity difficulties; 15 Sunrise-managed communities had transitioned to new operators in October 2009.
- The $102 million Ventas jury award was recorded as an expense and was under appeal at filing. A $103 million letter of credit had been issued in connection with the judgment. Sunrise-related litigation also remained pending, with no trial date stated.
- Erickson’s bankruptcy and auction led HCP to write down substantially all carrying value associated with three direct-financing leases and a senior construction-loan participation. HCP stated it would continue pursuing legal remedies; the amended reorganization plan had not been confirmed.
- Other risks include operator or borrower defaults, senior housing demand and occupancy weakness, healthcare reimbursement and regulatory changes, refinancing and capital-market access, variable interest rates, development execution, environmental exposure, REIT qualification, and the relative illiquidity of real estate. HCP reported compliance with its debt covenants at year-end.
- The board declared a Q1 2010 common dividend of $0.465 per share, following $1.84 per share paid in 2009. Future distributions remain subject to board discretion and available cash.
Most important facts for investors to verify
- Whether the Ventas appeal changes the recorded judgment, related costs or available liquidity.
- HCR ManorCare’s payment performance, collateral value, loan maturities and HCP’s concentration exposure.
- Sunrise’s financial condition and the operating and financial results after management transitions.
- Recoveries, final treatment and any further losses tied to Erickson’s bankruptcy and HCP’s impaired assets.
- Funding and refinancing plans for 2010 maturities and the larger 2011–2013 obligations, alongside dividend coverage and access to capital.
- Occupancy, leasing and development progress, particularly in senior housing and hospitals and in life science properties concentrated in California.
The audited financial statements received an unqualified opinion from Ernst & Young LLP, and management and the auditor reported effective internal control over financial reporting as of December 31, 2009.