HCP, Inc. — Q1 2012 Form 10-Q
Business context and reporting period. HCP is a healthcare-focused REIT that owns, leases, develops and finances healthcare real estate. This unaudited filing covers the three months ended March 31, 2012; amounts below are in U.S. dollars. Results are not necessarily indicative of full-year results.
Financial performance and condition
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Total revenue | $459.0 million | $331.1 million |
| Net income | $196.6 million | $74.0 million |
| Net income attributable to common shares | $175.3 million | $63.9 million |
| Diluted EPS | $0.43 | $0.17 |
| Net cash from operating activities | $186.5 million | $149.8 million |
| NOI / adjusted NOI | $390.4 million / $354.1 million | $245.6 million / $223.1 million |
| Diluted FFO / adjusted diluted FFO per share | $0.64 / $0.67 | $0.40 / $0.56 |
| Common dividend declared per share | $0.50 | $0.48 |
Reported NOI was approximately 85% of revenue versus 74% a year earlier; adjusted NOI was approximately 77% versus 67%. These are non-GAAP supplemental measures, not substitutes for GAAP earnings or cash flow.
At March 31, 2012, total assets were $17.7 billion, total liabilities $8.4 billion and total equity $9.3 billion. Cash and cash equivalents were $347.4 million, up from $33.5 million at year-end. Debt carrying value was $7.62 billion: $5.86 billion of senior unsecured notes and $1.76 billion of mortgage debt, plus $86.7 million of other debt. The $1.5 billion revolving facility had no borrowings outstanding. Management reported compliance with debt covenants. Scheduled debt repayments for the remaining nine months of 2012 totaled approximately $308 million.
Cash from operations exceeded the prior-year quarter, while investing cash outflow was $31.1 million versus $575.5 million, largely because the 2011 period included substantial loan investments and the HCP Ventures II transaction. Financing provided $158.6 million, including $450 million of note issuance and $397.6 million of net common-stock and option proceeds, partly offset by $454 million of revolver repayments and $211.1 million of dividends paid.
Material changes versus the prior comparable period
- Revenue and earnings rose substantially, but the comparison is materially affected by the April 2011 acquisition of HCR ManorCare’s real estate assets. The acquired assets contributed $142 million of revenue and $155 million of earnings in Q1 2012 and were not included in reported Q1 2011 results.
- HCR ManorCare-related direct financing lease income was a major revenue source. By contrast, interest income fell $37.3 million to $0.8 million, mainly because HCR ManorCare and Genesis loan investments had been repaid or settled in 2011.
- Adjusted NOI increased across the same-property portfolio: senior housing 1.9%, post-acute/skilled nursing 3.3%, life science 10.9%, medical office 3.0% and hospitals 3.8%. Companywide growth also reflects acquisitions and portfolio changes.
- HCP issued $450 million of 3.75% notes due 2019 and completed a $359 million common-stock offering. It redeemed all preferred shares on April 23, 2012 for $295.5 million plus accrued dividends; the Q1 common-share earnings calculation includes an $11.7 million preferred redemption-related charge.
Outlook, commentary and risks
- Management said it expects operating cash flow and financing activities to meet liquidity needs over the next 12 months. No specific earnings or FFO guidance is provided in the supplied filing text.
- The amended revolver extends to March 2016, lowers pricing and includes a one-year extension option. Management expects future investments to depend on access to cost-effective capital; the company cited investment-grade debt ratings as of April 25, 2012.
- Operator concentration is significant: HCR ManorCare represented 35% of total gross assets and 31% of total revenue, and 94% of post-acute/skilled nursing gross assets and 93% of that segment’s revenue. The HCR ManorCare master lease provides first-year rent of $473 million, increasing to $489 million beginning April 1, 2012, with contractual escalators.
- Risks identified include economic and capital-market conditions, debt refinancing and interest rates, healthcare regulation and reimbursement, tenant/operator financial health, lease renewals, acquisition competition and joint-venture dependence. The filing highlights a CMS rule reducing FY2012 Medicare skilled-nursing-facility payments by 11.1% versus FY2011 as a potential sector risk.
- The company reported no legal matters it believed would have a material adverse effect, no material changes to previously disclosed risk factors, and effective disclosure controls. It uses interest-rate derivatives for hedging, not trading; management reported no anticipated counterparty nonperformance.
Most important facts for investors to verify
- Separate the underlying year-over-year trend from the HCR ManorCare acquisition effect and other changes in portfolio composition; consider the pro forma comparison disclosed for Q1 2011.
- Assess HCR ManorCare’s ability to meet lease obligations and the effects of healthcare reimbursement changes, given the concentration of assets and revenue.
- Review debt maturities, refinancing access, covenant headroom and the funding of dividends and planned investment; Q1 distributions to shareholders and noncontrolling holders exceeded operating cash flow by approximately $29 million.
- Confirm the post-quarter preferred-stock redemption’s effect on capital structure, dividends and per-share measures, and distinguish the one-time redemption charge from recurring performance.
- Interpret NOI, adjusted NOI and FFO alongside GAAP results and cash flow; these non-GAAP measures use company-specific definitions.