Business context and reporting period
HCP, Inc. (the registrant named in the filing) is a healthcare-focused REIT investing across senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as loans and joint ventures. This Form 10-Q covers the quarter and six months ended June 30, 2013; financial statements are unaudited.
Key financial metrics
| Metric | Q2 2013 | Q2 2012 |
|---|---|---|
| Total revenue | $516.3 million | $460.4 million |
| Net income | $216.7 million | $205.0 million |
| Net income attributable to HCP | $213.4 million | $202.0 million |
| Diluted EPS | $0.47 | $0.48 |
| NOI (non-GAAP) | $426.8 million | $388.7 million |
| Adjusted NOI (non-GAAP) | $402.3 million | $354.4 million |
| Diluted FFO per common share (non-GAAP) | $0.72 | $0.69 |
| Dividends declared per common share | $0.525 | $0.50 |
- For the six months ended June 30, revenue was $1.032 billion versus $915.3 million; net income was $450.5 million versus $401.5 million; and net income applicable to common shares was $443.1 million versus $376.7 million. Diluted EPS was $0.97 versus $0.90.
- Six-month operating cash flow was $571.6 million, compared with $483.6 million. Investing activities used $420.9 million and financing activities used $345.3 million.
- At June 30, cash and cash equivalents were $53.1 million. Total assets were $20.05 billion and total equity was $10.80 billion.
- Debt was approximately $8.72 billion at stated principal amounts, excluding $79 million of resident life-care bonds and deposits. Senior unsecured notes totaled $6.6 billion; mortgage debt totaled $1.7 billion.
Material changes versus the prior comparable period
- Q2 revenue increased about 12%, while HCP-attributable net income increased about 6%; diluted EPS declined one cent, reflecting a larger weighted-average share count.
- Revenue and portfolio growth chiefly reflect the 133-community, $1.73 billion Blackstone JV senior-housing acquisition, completed in stages in late 2012 and early 2013. HCP acquired the final four facilities for $38 million in Q1 2013.
- Q2 interest income rose to $14.1 million from $1.2 million, mainly from Four Seasons notes and the Barchester and Tandem loans. Depreciation and amortization rose to $110.7 million from $84.9 million, largely due to acquisitions; interest expense increased to $108.7 million from $102.4 million.
- Same-property adjusted NOI grew 6.4% in senior housing and 3.5% in post-acute/skilled nursing for Q2. Life science and medical-office same-property adjusted NOI were nearly flat; hospital reported NOI was affected by a $12 million correction to prior straight-line rent and lease-intangible accounting related to Medical City Dallas.
Outlook, risks and unusual items
- Management expects operating cash flow over the next 12 months to cover operations, debt service, recurring capital expenditures and common dividends. Acquisitions, development and debt maturities may require additional borrowing or equity/debt offerings; no earnings or FFO forecast is provided.
- Management reported compliance with credit-facility and term-loan covenants at June 30, including a minimum fixed-charge coverage requirement of 1.5 times. The $1.5 billion revolver matures in March 2016; $262 million was drawn at quarter-end. Scheduled principal maturities and repayments total about $655 million in the second half of 2013 and $667 million in 2014.
- Tenant and operator concentration is material: HCR ManorCare represented 32% of company gross assets and 28% of revenue for Q2; it accounted for 86% of post-acute/skilled nursing gross assets and revenue. Emeritus represented 14% of company gross assets and 13% of Q2 revenue. HCP cited operator financial health, healthcare reimbursement and regulation, capital-market conditions, interest rates, refinancing, acquisitions and tenant competition among key risks.
- The Barchester subordinated loan had a $165 million carrying value, matures in September 2013 and is secured by interests in 160 facilities. The filing says the acquisition was financed with a GBP draw on the revolver.
- HCP recorded an $11.0 million gain on sales of marketable equity securities in the first half, a $3.2 million Q2 gain contingency related to a past acquisition, and a $0.9 million gain on a real-estate sale. These items contributed to reported results and should be distinguished from recurring property operations.
- Management stated that there were no material changes to previously disclosed risk factors, no known legal proceedings expected to have a material adverse effect, and disclosure controls were effective at the reasonable-assurance level.
Important facts for investors to verify
- How much of the revenue, NOI and FFO growth is organic versus attributable to acquisitions, and how the Blackstone portfolio performs as lease-up properties stabilize.
- HCR ManorCare’s and other major operators’ ability to meet rent and debt obligations, given the disclosed concentration and healthcare-sector risks.
- Repayment or refinancing of the Barchester loan at its September 2013 maturity and the funding plan for upcoming debt maturities and committed development spending.
- The effect of the Medical City Dallas accounting correction and other nonrecurring gains on period-to-period comparability.
- Dividend coverage and leverage as HCP continues to fund investment activity; FFO and NOI are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.