Business context and reporting period
HCP, Inc. (the registrant in this 2010 filing; a healthcare-focused REIT) invests in senior housing, life science, medical office, hospital and skilled nursing properties, and provides financing to healthcare providers. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2010. Unless noted otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $303.0 million | $292.5 million | $598.9 million | $569.5 million |
| Income from continuing operations | $88.5 million | $68.1 million | $172.5 million | $117.9 million |
| Net income | $88.6 million | $101.2 million | $172.7 million | $153.9 million |
| Net income applicable to common shares | $79.5 million | $91.8 million | $154.3 million | $135.1 million |
| Diluted EPS | $0.27 | $0.35 | $0.52 | $0.52 |
| Net cash from operating activities | Not presented by quarter | $276.1 million | $250.1 million |
- Q2 revenue rose 3.6%; continuing-operations income rose 30%. For the first half, revenue rose 5.2% and continuing-operations income rose 46%.
- Q2 net income and common EPS were lower than 2009, principally because prior-year discontinued operations included substantial real-estate sale gains. First-half common EPS was unchanged despite higher common earnings, with weighted-average shares increasing to 294.1 million from 259.4 million.
- Q2 NOI, a non-GAAP property-level measure, was $220.1 million versus $218.4 million. First-half NOI was $433.3 million versus $419.2 million.
- At June 30, total assets were $12.24 billion, total equity $6.29 billion and cash and cash equivalents $96.3 million. Debt included $3.52 billion of senior unsecured notes, $1.75 billion of mortgage and other secured debt, and $95.0 million of other debt. The $200 million term loan was repaid in March.
- Operating cash flow increased about 10% year over year. Investing used $161.3 million, chiefly for acquisitions and development; financing used $130.8 million. Cash declined $16.0 million during the half.
- Common dividends declared were $0.465 per share quarterly ($0.93 for the half), compared with $0.460 quarterly in 2009. The board declared another $0.465 quarterly dividend in July.
Material changes and notable transactions
- Interest income increased to $36.2 million in Q2 and $71.4 million for the half, primarily reflecting the HCR ManorCare first-mortgage participation acquired in 2009. Life science rental revenue also benefited from previously developed properties entering service.
- HCP acquired five senior housing facilities for about $110 million and funded $61 million of construction and capital projects in the first half. Three South San Francisco life science facilities totaling 329,000 square feet entered service. A further $48 million acquisition of one life science facility and two medical office buildings closed July 26, 2010.
- In June, HCP sold 13.5 million common shares at $33 each; the underwriters sold another 2.025 million shares in July. Total net proceeds were approximately $492 million, used for debt repayment, acquisitions, capital expenditures and general corporate purposes.
- An Erickson bankruptcy settlement resulted in HCP retaining $5 million of deposits and receiving $9.6 million. HCP recorded $11.9 million of impairment recoveries in Q1 2010.
Liquidity, outlook and risks
- HCP said operating cash flows and financing activities were expected to meet its needs over the next 12 months; this was not quantified earnings guidance. The $1.5 billion revolving facility had no borrowings at June 30, with $113 million of letters of credit outstanding, including $103 million related to Ventas litigation. HCP reported compliance with its financial covenants.
- Scheduled debt maturities and principal repayments total $5.28 billion, including $439 million in 2011 and $1.23 billion in 2013. HCP also reported $1.45 billion of future interest obligations in its contractual-obligations table.
- Distributions to shareholders and noncontrolling interest holders exceeded operating cash flow by approximately $15.9 million in the first half. HCP cited equity issuance and other financing sources as funding for the shortfall.
- Portfolio and counterparty concentration are significant: HCR ManorCare-related loan investments had a $1.56 billion carrying value, about 13% of total assets. Sunrise-operated facilities represented about 14% of total assets; Sunrise operated 75 HCP senior housing facilities and had disclosed financial difficulties.
- Ventas had obtained a $102 million jury verdict against HCP; HCP appealed, while Ventas cross-appealed seeking additional amounts. A $103 million letter of credit was outstanding in connection with the dispute. Sunrise-related disputes over management agreements for 64 facilities also remained in litigation, including appeals.
- Other risks include tenant and borrower defaults, healthcare reimbursement and regulatory changes, access to capital, interest-rate exposure, and refinancing. Management identified no material change to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Review the status and potential financial impact of the Ventas appeal and Sunrise litigation, including any changes to the related letter of credit.
- Assess credit performance and repayment prospects for HCR ManorCare investments and the concentration of interest income they represent.
- Check Sunrise’s financial condition and the operating and leasing status of the affected senior housing portfolio.
- Evaluate the 2011 and 2013 maturities, revolving-credit availability, covenant headroom, and reliance on capital markets.
- Compare recurring operating performance with reported net income, accounting for 2009 property-sale gains and the 2010 Erickson impairment recovery.
- Confirm the impact of the share issuance on per-share results and the sustainability of dividends relative to operating cash flow.