Business Context and Reporting Period
Company: HCP, Inc. (formerly Health Care Property Investors, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: HCP is a self-administered Real Estate Investment Trust (REIT) investing in healthcare-related facilities (Senior Housing, Medical Office, Life Science, Hospital, Skilled Nursing) primarily in the United States. The company operates through direct ownership and joint ventures.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2007) | Value (in thousands) |
|---|---|
| Total Revenues | $764,848 |
| Net Income | $538,720 |
| Net Income Applicable to Common Shares | $522,872 |
| Diluted EPS (Common) | $2.53 |
| Operating Cash Flow | $309,821 |
| Total Assets | $12,096,133 |
| Total Liabilities | $7,913,250 |
| Total Debt (Principal) | $7,379,749 |
| Cash and Cash Equivalents | $568,853 |
Note: Net Income includes significant gains from discontinued operations ($418.4 million for the nine months ended Sept 30, 2007).
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 119% to $764.8 million (nine months 2007) from $348.8 million (nine months 2006). This is primarily driven by the acquisition of Slough Estates USA Inc. (SEUSA) in August 2007 and the consolidation of HCP Medical Office Portfolio (HCP MOP).
- Net Income Surge: Net income rose to $538.7 million from $176.3 million year-over-year. The increase is largely attributable to $392.3 million in gains on sales of real estate classified as discontinued operations.
- Asset Expansion: Total assets grew by approximately $2.1 billion to $12.1 billion, reflecting the $3.0 billion SEUSA acquisition and other property acquisitions.
- Debt Structure: Total debt increased significantly to $7.4 billion. This includes a $2.75 billion bridge loan secured in August 2007 to fund the SEUSA acquisition. As of September 30, 2007, 44% of consolidated debt was at variable interest rates.
- Dispositions: The company sold 89 properties for $896 million during the nine months ended September 30, 2007, compared to 12 properties for $117 million in the prior year period.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Capital Markets: In October 2007 (subsequent to the period end), the company issued $600 million in senior unsecured notes and 9 million shares of common stock to repay a portion of the bridge loan, reducing the outstanding balance to $1.35 billion.
- Dividends: The Board declared a quarterly common stock dividend of $0.445 per share on October 25, 2007.
- Strategy: Management continues to focus on opportunistic investing, portfolio diversification, and conservative financing, aiming to recycle capital from lower-return assets to higher-return opportunities.
Risks and Contingencies
- Legal Proceedings:
- Ventas, Inc. Lawsuit: Ventas filed a complaint alleging tortious interference regarding the Sunrise REIT transaction, seeking damages exceeding $100 million. HCP intends to vigorously defend the claim.
- Tenet Healthcare Dispute: Disputes regarding lease defaults and compliance with California Senate Bill 1953 (seismic safety) at a Tarzana hospital. Tenet has filed complaints and arbitration actions; HCP has terminated leases for four other hospitals effective December 31, 2007.
- Operator Concentration: Sunrise Senior Living, Inc. accounted for 14% of revenue for the nine months ended September 30, 2007. Financial difficulties of significant operators pose a risk.
- Interest Rate Risk: The company has significant exposure to variable interest rates due to the bridge loan. A 1% increase in rates would increase interest expense by approximately $32.7 million annually.
Unusual Items
- Discontinued Operations: The financial results are heavily influenced by the sale of properties previously classified as held for sale or contribution, resulting in substantial one-time gains.
- Accounting Changes: The acquisition of SEUSA resulted in a change to reportable segments, expanding from two segments to six (Senior Housing, Medical Office, Life Science, Hospital, Skilled Nursing, Other).
Investor Verification Checklist
- Bridge Loan Refinancing: Verify the status of the $2.75 billion bridge loan maturing July 31, 2008, and the success of subsequent refinancing efforts (noted as partially repaid in October 2007).
- Legal Exposure: Monitor the progress of the Ventas and Tenet lawsuits, as potential liabilities could be material.
- Operator Health: Assess the financial stability of major tenants, particularly Sunrise Senior Living, given the 14% revenue concentration.
- Discontinued Operations: Distinguish between recurring operating income and one-time gains from property sales when evaluating future earnings potential.
- Variable Rate Exposure: Review the company's hedging strategies and refinancing plans to mitigate interest rate risk on the remaining variable debt.