Business Context and Reporting Period
Company: HCP, Inc. (Healthpeak Properties, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: HCP is a Maryland corporation organized as a Real Estate Investment Trust (REIT) investing primarily in healthcare real estate in the United States. Its portfolio includes senior housing, life science, medical office, hospital, and skilled nursing facilities. The company acquires, develops, leases, manages, and disposes of healthcare real estate and provides mortgage and specialty financing.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2008 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Revenues | $497.9 million | $414.9 million |
| Net Income | $282.7 million | $216.6 million |
| Net Income Applicable to Common Shares | $272.1 million | $206.0 million |
| Diluted EPS (Common) | $1.20 | $1.00 |
| Net Operating Income (NOI) | $397.9 million | $326.8 million |
| Cash from Operating Activities | $272.7 million | $216.6 million |
| Cash from Investing Activities | $429.2 million | $579.7 million |
| Cash from Financing Activities | ($581.4 million) | ($505.7 million) |
| Total Assets | $12.22 billion | $12.52 billion |
| Total Liabilities | $7.14 billion | $8.08 billion |
| Stockholders' Equity | $4.81 billion | $4.10 billion |
| Cash and Cash Equivalents | $216.8 million | $96.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 20% year-over-year, driven primarily by the full-year impact of the Slough Estates USA (SEUSA) acquisition (closed August 2007) and increased interest income from a $1.0 billion mezzanine loan investment in HCR ManorCare.
- Discontinued Operations: Net income was significantly boosted by discontinued operations, which totaled $215.3 million for the six months ended June 30, 2008, compared to $147.3 million in the prior year. This increase was due to gains on the sale of 44 properties ($200.4 million gain) compared to 47 properties sold in the prior year ($106.1 million gain).
- Impairments: The company recognized $9.7 million in impairment charges during the period related to five properties (four senior housing, one hospital), compared to no impairments in the prior year.
- Debt Reduction: Total liabilities decreased by approximately $936 million. The company repaid its entire $951.7 million bank line of credit balance and $200 million of its bridge loan. In April 2008, the company issued 17 million shares of common stock raising approximately $560 million, proceeds of which were used to repay debt.
- Interest Expense: Interest expense increased to $181.8 million from $150.8 million, primarily due to new senior unsecured notes issued in 2007 and higher bridge loan balances, partially offset by increased capitalized interest.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects increased revenues and interest income for the remainder of 2008 due to the full-year impact of the SEUSA acquisition and mezzanine loan investments. However, the issuance of 17 million shares in April 2008 is expected to have a dilutive effect on future per-share amounts.
- Legal Proceedings (Tenet Healthcare): On June 30, 2008, HCP and Tenet Healthcare executed a definitive settlement agreement regarding disputes over hospital leases. The agreement involves the sale of a hospital in Tarzana, California, and lease non-renewals/extensions. The settlement is contingent on regulatory approvals and the closing of the sale. HCP expects to recognize income of $41 million to $46 million upon effectiveness.
- Legal Proceedings (Ventas): Ventas, Inc. has sued HCP alleging tortious interference regarding the Sunrise REIT transaction. HCP has filed counterclaims alleging fraudulent inducement. The outcome remains uncertain.
- Credit Risk (Sunrise Senior Living): HCP has 81 senior housing facilities leased to Variable Interest Entities (VIEs) operated by Sunrise Senior Living. Sunrise is subject to a formal SEC investigation and has not filed periodic reports since its 2007 10-K. HCP monitors this risk closely.
- Unusual Items:
- Derivative Settlement: HCP settled two forward-starting interest rate swaps in June 2008, resulting in a net payment of $9.6 million and a $2.4 million ineffectiveness charge recognized in earnings.
- Subsequent Event: On July 30, 2008, HCP received $18 million in lease termination fees and recognized a $4 million impairment related to life science leases.
Investor Verification Checklist
- Discontinued Operations Impact: Verify the sustainability of earnings by analyzing Net Income from Continuing Operations ($67.4 million) versus the total Net Income ($282.7 million), noting the heavy reliance on property sales gains.
- Debt Maturity Wall: Review the debt maturity schedule; $476.5 million is due in the remainder of 2008, and $1.42 billion is due in 2009 (including the bridge loan).
- Tenet Settlement Closing: Monitor the status of the Tenet Healthcare settlement, specifically the regulatory approval for the Tarzana hospital sale, which is a condition precedent for recognizing the expected $41-46 million gain.
- Sunrise Senior Living Exposure: Assess the creditworthiness of Sunrise Senior Living, given the SEC investigation and filing delays, as they operate 81 of HCP's senior housing facilities.
- Variable Rate Exposure: Confirm the current status of the $1.15 billion bridge loan (variable rate) and the company's hedging strategies, as interest rate fluctuations impact cash flows.