Business context and reporting period
HCP, Inc. (a healthcare-focused U.S. REIT) filed this unaudited Form 10-Q for the quarter ended March 31, 2011. It owns, develops, leases and finances healthcare real estate across senior housing, life science, medical office, post-acute/skilled nursing and hospital segments.
Key financial results
Amounts are in millions of dollars except per-share data. Comparisons are with the three months ended March 31, 2010.
- Revenue: $331.7, up 12.5% from $294.8. Rental and related revenue rose 14% to $256.2.
- Profit: Net income was $74.0 versus $84.1; net income applicable to common shares was $63.9 versus $74.8. Diluted EPS was $0.17 versus $0.25. Prior-year results included $11.9 of impairment recoveries and $0.01 per share from discontinued operations.
- NOI: Property net operating income, a non-GAAP measure, increased to $246.2 from $212.2. NOI was about 74% of revenue versus 72% a year earlier.
- Funds from operations: Diluted FFO per share was $0.40 versus $0.54; adjusted diluted FFO per share was $0.56 versus $0.50. Adjusted FFO excludes specified items and is not a GAAP measure or cash-flow measure.
- Cash flow: Operating cash flow was $149.8 versus $109.5. Investing used $575.5, while financing provided $3.38 billion, principally from debt and stock offerings. Cash and equivalents ended at $3.99 billion, up from $1.04 billion at year-end.
- Margins and expenses: Depreciation and amortization rose to $91.4 from $77.9; interest expense increased to $108.6 from $76.0. The quarter included an $11.3 write-off of fees on a terminated bridge-loan commitment.
- Debt and liquidity: Total debt carrying value was approximately $7.70 billion, including $5.71 billion of senior unsecured notes and $1.90 billion of mortgage debt. The company had no revolver borrowings and $113 million of letters of credit outstanding against its $1.5 billion facility. It reported compliance with credit-facility covenants.
- Dividends: Common dividends declared were $0.48 per share, compared with $0.465 in the prior-year quarter.
Material changes and transactions
- Total assets rose to $17.50 billion from $13.33 billion at December 31, 2010; liabilities increased to $8.23 billion from $5.19 billion. HCP issued $2.4 billion of senior notes and raised $1.235 billion net from a March common-stock offering, primarily to prefund a major acquisition.
- HCP acquired its partner’s 65% interest in HCP Ventures II in January, consolidating 25 senior housing facilities and recognizing an $8 million gain. It also acquired life-science and medical-office properties and funded development and capital projects.
- After quarter-end, on April 7, HCP completed its $6.1 billion acquisition of substantially all HCR ManorCare real estate assets: 334 facilities under a long-term triple-net master lease. Consideration included $4.02 billion cash and reinvestment of $2.08 billion in existing HCR ManorCare loans; HCP also bought a 9.9% interest in the operator for $95 million. HCP said it funded the purchase without drawing the bridge facility.
- HCR ManorCare loan investments were extinguished at closing, generating $23 million of additional interest income. Genesis repaid its loans on April 1, generating $35 million of additional interest income. Management cited approximately $58 million of combined incremental income from these post-quarter events.
Outlook, risks and unusual items
- Management stated that operating cash flow and financing activities were expected to meet liquidity needs over the next 12 months. No specific earnings or FFO guidance was provided in the supplied filing text.
- Common quarterly dividend of $0.48 per share was declared for payment in May 2011.
- Ventas litigation remained on appeal after a jury awarded approximately $102 million against HCP. Ventas sought additional interest and damages; the appeal hearing occurred in March. A $103 million letter of credit related to the matter was outstanding.
- Operator and tenant concentrations are significant. Sunrise operated 48 senior housing facilities; HCP disclosed Sunrise had no borrowing availability under its credit facility at year-end 2010, significant 2011 maturities and long-term debt in default. Emeritus operated 69 facilities. HCR ManorCare exposure was material at quarter-end but changed following the April acquisition.
- Other disclosed risks include economic weakness, capital-market access and interest rates, leverage, healthcare regulation and reimbursement, tenant/operator financial distress, lease renewals, acquisition execution and litigation. HCP reported no material changes to previously disclosed risk factors.
- Other unusual or period-comparison items include the $8 million HCP Ventures II consolidation gain, the prior-year $11.9 million Erickson-related impairment recovery, and the absence of discontinued operations in Q1 2011.
Important facts for investors to verify
- Review the final purchase accounting, financing and operating contribution of the HCR ManorCare acquisition, including lease terms and operator credit support.
- Confirm the amount and timing of post-quarter HCR ManorCare and Genesis income recognition and whether those items recur.
- Monitor the Ventas appeal, potential exposure beyond the recorded provision and the related letter of credit.
- Assess tenant/operator concentration and credit conditions, particularly Sunrise and Emeritus, and the resulting rent-collection risk.
- Reconcile the sharp increase in debt and share count with reported per-share earnings, FFO, dividend requirements and future debt maturities.
- Evaluate liquidity and covenant headroom after the acquisition; the filing reports quarter-end cash and facility capacity, but does not provide a clear post-acquisition liquidity balance.