HCP, Inc. (now Healthpeak Properties) — Q3 2012 Form 10-Q
Business context and period. The filing is for the quarter and nine months ended September 30, 2012. HCP was a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as healthcare-related loans. The filing identifies the registrant as HCP, Inc.
Financial performance and position
- Third-quarter revenue: $475.5 million, up 7.8% from $441.2 million a year earlier. Net income was $199.0 million versus $175.5 million; net income applicable to common shares was $195.6 million versus $166.4 million. Diluted EPS was $0.45 versus $0.41.
- Nine-month revenue: $1.393 billion, up 11.0% from $1.255 billion. Net income was $600.6 million versus $483.7 million; diluted EPS was $1.36 versus $1.14. Comparisons reflect portfolio changes and prior-year transaction-related items.
- Property operating measures: Q3 NOI, a company-defined non-GAAP measure, was $392.1 million, up 2.5%; adjusted NOI was $356.5 million, up 3.6%. Nine-month NOI was $1.169 billion and adjusted NOI was $1.064 billion; growth was significantly affected by the HCR ManorCare acquisition and other portfolio changes.
- FFO: Diluted FFO per share was $0.67 in Q3 versus $0.63; adjusted diluted FFO per share was $0.69 versus $0.67. For nine months, diluted FFO per share was $2.01 versus $1.83 and adjusted diluted FFO per share was $2.05 versus $2.02. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow and liquidity: Nine-month operating cash flow was $721.0 million versus $586.9 million. Investing cash outflow was $650.7 million versus $4.551 billion, primarily reflecting the prior-year HCR ManorCare acquisition. Financing cash outflow was $7.3 million versus $3.0 billion of inflow in 2011. Cash and cash equivalents were $96.5 million at September 30, up from $33.5 million at year-end 2011. Management believed operating cash flow and financing sources would meet needs over the next 12 months.
- Debt: Debt carrying value was $7.819 billion, excluding $84.6 million of resident-related life-care bonds; stated principal of debt with scheduled maturities was $7.854 billion. Senior unsecured notes totaled $5.9 billion, with a 5.40% weighted-average effective rate and 6.11-year weighted-average maturity. Mortgage debt was $1.7 billion, with a 6.14% weighted-average effective rate and 3.80-year weighted-average maturity. The $1.5 billion revolving facility had no balance drawn. HCP reported covenant compliance.
- Equity and distributions: HCP redeemed all preferred stock for $295.5 million in April and recorded a $10.4 million related charge. Common dividends declared were $0.50 per share for Q3; the filing reports $1.50 declared per share for the first nine months. Common shares outstanding at quarter-end were approximately 430.0 million.
Material changes and notable items
- Revenue and earnings increased year over year, while Q3 operating costs rose, notably partly due to RIDEA senior housing operations. Nine-month interest income fell sharply from 2011 because of the prior-year settlement of HCR ManorCare loans and repayment of Genesis loans; those items make comparisons less representative of ongoing performance.
- HCP acquired medical office properties and funded development and loan investments. It also made a $214.9 million investment in Four Seasons Health Care notes, financed with a GBP-denominated term loan whose rate was hedged.
- A $7.9 million impairment was recorded for a life-science land parcel in connection with an anticipated $19 million sale. In the prior-year period, HCP recorded a $15.4 million impairment on a secured loan.
- Subsequent to quarter-end, HCP agreed to acquire 133 senior housing communities for $1.73 billion, with first-year contractual rent of $105.5 million, and agreed to provide $52 million of secured financing. The acquisition was expected to close in phases beginning in November 2012; it was not completed as of the filing. HCP also completed a 22-million-share offering on October 19, receiving $979 million net.
- HCR ManorCare represented 34% of total company gross assets and 30% of Q3 revenue. It accounted for 89% of post-acute/skilled nursing gross assets, underscoring operator and sector concentration.
Outlook, risks and contingencies
No specific earnings or FFO guidance was provided. Management said future investments would depend on available cost-effective capital and identified operating cash flow, the revolving facility and public capital markets as principal funding sources. The filing cites risks including economic weakness, capital-market and interest-rate volatility, debt management, healthcare regulation and reimbursement changes, operator financial distress, lease renewals, acquisition financing and joint-venture dependence. It also notes that reimbursement reductions could affect operators and HCP’s approximately 10% equity interest in HCR ManorCare. HCP reported no legal proceeding it believed would have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether HCR ManorCare can meet lease obligations and how its concentration affects HCP under adverse operating or reimbursement conditions.
- Whether the announced $1.73 billion senior housing acquisition closes as planned, its financing, and the performance of the lease-up properties.
- Debt maturities, covenant headroom, access to capital and the effect of the October equity issuance and subsequent acquisitions on leverage and per-share results.
- How much reported growth reflects recurring property operations versus acquisition timing, RIDEA presentation changes, loan accretion and other nonrecurring items; review GAAP results alongside NOI and FFO reconciliations.
- Whether the $0.50 quarterly common dividend is supported by recurring cash generation, taking account of capital spending, debt service and investment commitments.