Business context and reporting period
HCP, Inc. (now Healthpeak Properties, Inc.) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2009. HCP was a U.S. healthcare-focused REIT investing in senior housing, life science, medical office, hospital and skilled nursing properties, as well as providing financing to healthcare providers. At quarter-end, its portfolio included interests in 682 facilities.
Financial performance and position
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2008 period unless noted.
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $267.3 | $248.8 | $519.0 | $493.6 |
| Net operating income (NOI), continuing operations | $220.8 | $200.9 | $423.3 | $396.0 |
| Income from continuing operations | $69.4 | $49.4 | $120.1 | $86.0 |
| Net income | $101.2 | $238.1 | $153.9 | $294.2 |
| Net income applicable to common shares | $91.8 | $225.9 | $135.1 | $270.7 |
| Diluted EPS | $0.35 | $0.96 | $0.52 | $1.19 |
| Operating cash flow | Not separately stated | Not separately stated | $250.1 | $272.7 |
Q2 revenue increased about 7%, and continuing-operations income rose about 40%; however, net income and diluted EPS fell sharply because property-sale gains in discontinued operations were much lower. Q2 NOI increased about 10%. NOI is a non-GAAP measure; the filing defines it as property revenue less property-level operating expenses.
For the six months, investing activities provided $10.8 million, including $52.3 million of net real-estate sale proceeds and $39.3 million of acquisition and development spending. Financing activities used $269.0 million. Cash and cash equivalents were $49.5 million at June 30, versus $57.6 million at December 31, 2008.
At June 30, total assets were $11.79 billion, total liabilities $5.99 billion and total equity $5.79 billion. Debt was approximately $5.5 billion; 86% was fixed-rate and 14% variable-rate, with a 5.87% weighted-average rate. The $1.5 billion revolving facility had $100 million drawn; a $200 million term loan was also outstanding. HCP repaid its $320 million bridge loan in May using proceeds from a common-stock offering. The company reported compliance with its credit-facility and senior-note covenants. Approximately $107.3 million of mortgage debt matured in the remainder of 2009.
Common dividends declared were $0.46 per share in each 2009 quarter reported, compared with $0.455 and $0.46 in the corresponding 2008 quarters. A further $0.46 quarterly common dividend was declared after quarter-end.
Material changes, outlook and risks
- HCP raised $422 million net from a May offering of 20.7 million common shares and used the proceeds principally to repay the bridge loan.
- Property-sale gains were $31.9 million for the first half of 2009, versus $200.6 million in 2008; HCP sold nine properties for $52 million, compared with 44 properties for $513 million in the prior-year period.
- Management said operating cash flows, financing activities and asset sales were expected to meet liquidity needs over the next 12 months. No earnings or revenue guidance was provided. Management expected direct-financing-lease income to remain below 2008 levels because two leases were on non-accrual/cost-recovery accounting.
- HCP recorded a $5.9 million impairment on lease intangibles at 12 senior housing facilities following the planned termination of Sunrise management agreements for 15 communities, effective October 1, 2009. HCP said it intended to arrange replacement operators.
- HCP and tenants sued Sunrise over alleged defaults affecting 64 communities and sought termination rights, injunctive relief and damages; outcome and financial impact were uncertain. Separately, Ventas claimed damages including approximately $100 million plus other amounts in litigation; a July 2009 ruling dismissed certain claims and damages, while other matters remained pending. HCP said it could not estimate potential loss.
- Credit exposure included approximately $926 million carrying value in HCR ManorCare mezzanine loans, subordinated to other borrower debt. A Cirrus-affiliated borrower missed two interest payments; HCP issued a notice of default in July but expected recovery based on collateral and guarantees. On August 3, HCP purchased a $720 million participation in HCR ManorCare first-mortgage debt for about $590 million, funded 72% with financing.
- Other risks included recession and capital-market volatility, tenant/operator financial weakness or bankruptcy, healthcare reimbursement and regulatory changes, refinancing needs, and litigation. HCP reported disclosure controls effective and no material change in internal control during the quarter.
Key investor verification points
- Track Sunrise operator transitions, facility performance, litigation developments and any further impairment or rent-collectibility effects.
- Assess credit quality, payment status and collateral coverage for the HCR ManorCare mezzanine loans, the August mortgage participation and the Cirrus loan.
- Review refinancing and liquidity needs, especially debt maturities, access to capital markets and compliance with debt covenants.
- Separate recurring property operations from disposal gains when evaluating earnings; compare NOI with GAAP income and operating cash flow.
- Monitor the disputed lease-intangible purchase-price allocation correction and the collectibility of straight-line rents; the filing said the prior-period correction was immaterial.