Business context and reporting period
HCP, Inc. (now Healthpeak Properties) filed this Form 10-K for the fiscal year ended December 31, 2013. It is a healthcare-focused REIT that owns, leases, develops and finances senior housing, post-acute/skilled nursing, life science, medical office and hospital properties. The company reported interests in 1,153 facilities, including joint-venture properties, and managed approximately $21.7 billion of investments.
The filing is an annual report, not a standalone Q4 filing. It also provides unaudited fourth-quarter results. Figures below are in U.S. dollars; financial statements are audited, and Deloitte issued an unqualified opinion.
Financial and operating performance
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $2.100 billion | $1.880 billion |
| Income from continuing operations | $910.6 million | $801.2 million |
| Net income applicable to common shares | $969.1 million | $812.3 million |
| Diluted EPS | $2.13 | $1.90 |
| Net cash provided by operating activities | $1.149 billion | $1.035 billion |
| Adjusted (cash) NOI, non-GAAP | $1.581 billion | $1.430 billion |
| Diluted FFO per share, non-GAAP | $2.95 | $2.72 |
| Diluted adjusted FFO per share, non-GAAP | $3.01 | $2.78 |
- Revenue rose about 11.7%; common-share net income rose about 19.3%. Adjusted NOI increased about 10.6%, while diluted FFO per share increased about 8.5%. FFO and NOI are supplemental non-GAAP measures, not substitutes for GAAP income or operating cash flow.
- Fourth-quarter revenue was $530.3 million versus $503.2 million in Q4 2012; net income attributable to HCP, Inc. was $293.1 million versus $241.0 million; diluted EPS was $0.64 versus $0.53. Q4 2013 included $59.5 million of discontinued-operations income.
- Year-end total assets were $20.08 billion and total equity was $10.93 billion. Debt obligations were approximately $8.66 billion; 99.6% of reported debt was fixed-rate or effectively fixed through swaps, with a 5.08% weighted-average rate.
- Cash and cash equivalents were $300.6 million. The $1.5 billion revolving credit facility had no borrowings outstanding at year-end. Management said expected operating cash flow over the next 12 months would cover operations, debt service, recurring capital expenditures and dividends.
- 2013 common dividends were $2.10 per share, up 5% from 2012. In January 2014, the board declared an annualized rate of $2.18 per share, a 3.8% increase.
Material changes versus the prior comparable period
- The 133-community Blackstone/Emeritus senior housing acquisition, completed in stages in late 2012 and early 2013, contributed materially to portfolio and revenue growth. The total purchase price was approximately $1.74 billion.
- Senior housing adjusted NOI rose to $594.5 million from $478.7 million, primarily reflecting the acquisition and improved same-property performance. Post-acute/skilled nursing adjusted NOI increased to $467.5 million from $453.5 million. Medical office adjusted NOI increased to $210.8 million from $195.8 million.
- Life science same-property adjusted NOI declined 1.6%, mainly due to lower rents on renewed leases and the absence of a $4 million lease-related payment received in 2012. Hospital NOI fell, partly due to a $12 million correction of previously recognized straight-line rent; adjusted hospital NOI increased 3.7%.
- Interest income increased to $86.2 million from $24.5 million, including $24 million from the discounted Barchester loan payoff. Interest expense rose to $435.3 million from $416.2 million, and depreciation and amortization increased to $423.3 million from $353.7 million.
- HCP issued $800 million of 4.25% senior unsecured notes due 2023 and repaid $810 million of senior unsecured and mortgage debt notes during the year. Operating cash flow increased to $1.149 billion; investing activities used $196.6 million, and financing activities used $900.4 million.
Outlook, risks and unusual items
- Outlook: No earnings or FFO guidance is provided in the supplied filing text. Management expected operating cash flow to cover near-term operating needs, debt service, recurring capital spending and dividends; acquisitions and development may require borrowing or securities issuance.
- Debt and liquidity: 2014 scheduled principal payments were approximately $666.5 million, including $487 million of unsecured notes and $179.5 million of mortgage debt. The company reported covenant compliance. Access to capital, refinancing costs, interest rates and credit ratings remain important risks.
- Tenant and operator concentration: HCR ManorCare generated 28% of total 2013 revenue and 83% of post-acute/skilled nursing segment revenue. Emeritus generated 13% of total revenue. California, Texas and Florida together accounted for approximately 41% of revenue.
- Credit concern: A 14-property senior housing direct-financing-lease portfolio, with a $376 million carrying amount, was placed on non-accrual in Q3 2013 because full collection was no longer reasonably assured. HCP reported no impairment at year-end based on its collateral valuation and collection assessment; it recognized income on a cash basis.
- Unusual items: The termination of the former chairman, CEO and president resulted in $27.2 million of 2013 severance-related charges. Real-estate disposition gains in discontinued operations were $69.9 million, contributing to the year-over-year increase in discontinued-operations income. The filing also reports an $11 million gain on sales of marketable equity securities.
- Other risks and contingencies: Healthcare reimbursement changes, regulation, tenant/operator financial distress or bankruptcy, lease renewals, development execution, joint-venture risks, natural disasters, environmental exposure and REIT qualification could adversely affect results. The filing says ordinary-course legal proceedings were not expected to have a material adverse effect; the prior Ventas litigation had been settled in 2011.
Most important facts for investors to verify
- HCR ManorCare’s operating performance, financial condition and ability to meet lease obligations, given its concentration in total revenue and skilled nursing.
- Collections and valuation assumptions for the 14-property non-accrual DFL portfolio, including whether payments recover to contractual levels.
- Funding and refinancing plans for 2014 maturities, the debt maturity schedule and sensitivity to changes in rates or credit-market access.
- Whether reported earnings growth is supported by recurring property cash flows, distinguishing acquisition effects, disposition gains, the Barchester payoff and severance charges; review GAAP results alongside FFO and NOI reconciliations.
- Execution, leasing and costs of the development pipeline, and lease rollover exposure. The filing estimates 17% of leased-asset base rent expires through 2017, assuming tenants do not exercise renewal options.
- Dividend coverage and the assumptions underlying management’s stated expectation that operating cash flow would fund dividends and near-term needs.