HEALTHPEAK PROPERTIES, INC. quarterly report, Q3 FY2010

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Business context and reporting period

HCP, Inc. (now identified in the request as Healthpeak Properties) filed this unaudited Form 10-Q for the quarter ended September 30, 2010. The healthcare-focused REIT invests in senior housing, life science, medical office, skilled nursing and hospital properties, and makes loans to healthcare providers. At quarter-end, its portfolio included interests in 670 facilities and approximately $2.0 billion of mezzanine and other secured loans.

Financial performance and position

  • Revenue: Third-quarter revenue was $317.1 million, up 10.5% from $287.1 million a year earlier. Nine-month revenue was $914.1 million, up 6.9% from $854.7 million. Growth reflected higher rental revenue, loan interest income and the consolidation of certain Sunrise-operated properties.
  • Profit and per-share results: Third-quarter net income attributable to common shares was $17.0 million, or $0.05 per diluted share, versus a $52.4 million loss, or $0.18 loss per share, in 2009. Nine-month common income was $171.3 million, or $0.57 per diluted share, versus $82.7 million, or $0.31, a year earlier. Results include a $71.7 million noncash impairment of an unconsolidated joint-venture investment in Q3 2010; 2009 included a $102.0 million Ventas litigation provision.
  • FFO: Diluted FFO was $0.31 per share in Q3 versus $0.11; nine-month FFO was $1.39 versus $1.14. Company-defined diluted FFO before impairments, recoveries and litigation provision was $0.54 per share in Q3 versus $0.52, and $1.58 for nine months versus $1.60. These are non-GAAP measures, not substitutes for GAAP income or cash flow.
  • Operating performance: Continuing-operations NOI, a company-defined non-GAAP measure, increased 6.5% to $218.9 million in Q3 and 4.4% to $650.3 million for nine months. Operating expenses rose 31% in Q3 and 9% year to date, partly because the company began consolidating operations at 27 Sunrise-leased properties.
  • Cash flow and investment: Nine-month operating cash flow was $430.7 million, up from $389.7 million. Investing used $327.0 million, primarily for real estate, loan investments, leasing and capital improvements; financing used $163.4 million. Cash and cash equivalents were $52.6 million, down from $112.3 million at year-end 2009. Dividends paid exceeded operating cash flow by approximately $15 million when distributions to noncontrolling interests are included.
  • Debt and liquidity: Reported debt was approximately $5.326 billion, excluding $94 million of resident life-care bonds and occupancy deposits. It included $318 million drawn on a $1.5 billion revolving facility, $3.325 billion of senior unsecured notes and $1.683 billion of mortgage and secured debt. Debt maturities included $689.9 million in 2011 and $1.225 billion in 2013. The revolver matures August 2011; the company reported compliance with its covenants. Management said operating cash flow and financing activities should meet needs for the next 12 months.
  • Equity and dividends: Total equity was $6.254 billion at quarter-end. Common shares outstanding were 310.5 million; the declared quarterly common dividend was $0.465 per share, versus $0.46 in the comparable 2009 quarter.

Material changes versus the prior comparable period

  • Q3 revenue growth was led by senior housing and life science; interest income also benefited from the HCR ManorCare first-mortgage participation acquired in 2009. Nine-month interest income increased $20.2 million to $108.0 million.
  • Q3 2010 earnings included the $71.7 million HCP Ventures II impairment, related to deterioration in operating performance at properties leased to Horizon Bay. The 2009 comparison included the Ventas litigation charge; that judgment remained under appeal at September 30, 2010.
  • The company raised $492 million net from a 2010 common-stock offering and used proceeds for debt repayment, acquisitions, capital expenditures and general corporate purposes. Common shares issued and outstanding increased from 293.5 million at year-end 2009 to 310.5 million.
  • Rental revenue and operating expenses both reflect consolidation, beginning August 31, 2010, of four variable-interest-entity tenants covering 27 properties following the Sunrise settlement. This accounting presentation increased Q3 revenue and expense by $13.7 million each.

Outlook, commentary, risks and unusual items

  • No specific earnings or FFO guidance was provided. Management stated that it believed operating cash flows and financing sources would cover liquidity needs over the next 12 months; distributions exceeded operating cash flow during the first nine months.
  • On August 31, 2010, HCP agreed to pay Sunrise $50 million to end management contracts on 27 communities and settle litigation between the parties. Emeritus agreed to lease the properties under two 15-year triple-net master leases; the transition and final $10 million payment occurred November 1, after quarter-end.
  • Ventas had obtained a roughly $102 million compensatory-damages judgment. HCP appealed; Ventas cross-appealed seeking additional damages and interest. A $103 million letter of credit related to this litigation was outstanding under the revolving facility.
  • Credit concentration is material: HCR ManorCare loans had a $1.58 billion carrying value, about 13% of total assets, and generated 9% of nine-month revenue. Sunrise-operated facilities represented 14% of total assets and 11% of nine-month revenue. The filing also describes Sunrise’s financial distress.
  • Other risks include tenant/operator financial weakness or bankruptcy, healthcare reimbursement and regulatory changes, access to capital, interest-rate movements, debt refinancing, property leasing and acquisition conditions. HCP reported sensitivity of approximately $12.6 million in annual net interest income for a 100-basis-point rate increase, assuming balances remained unchanged.
  • Subsequent to quarter-end, HCP sold nine senior housing facilities for $27 million, recognizing an approximately $15 million gain, and received $46 million on early repayment of a hospital-secured loan, including an $11 million prepayment premium.

Important facts for investors to verify

  1. Review the HCP Ventures II valuation assumptions and the effect of the $71.7 million impairment, including Horizon Bay operating performance.
  2. Track the Ventas appeal, potential additional damages or interest, and associated letter-of-credit and liquidity requirements.
  3. Assess HCR ManorCare and Sunrise credit exposure, tenant concentration, and whether contractual payments and new operating arrangements remain sustainable.
  4. Evaluate the 2011 revolver maturity and near-term debt maturities, refinancing access, covenant headroom and the company’s reliance on equity or other capital raising.
  5. Compare dividends with recurring operating cash flow and distinguish GAAP earnings from FFO and adjusted FFO, which exclude significant items.