HCP Inc. (HCP), a healthcare real estate investment trust (REIT), reported a radical decline in third quarter 2009 FFO (funds from operations) to $32.2 million or 11 cents per share, compared to $174.3 million or 70 cents per share in the year-earlier quarter. Funds from operations, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

The year-over-year decrease in FFO was due to the negative impact of non-recurring charges of 39 cents per share, primarily related to the jury verdict in Ventas Inc. (VTR) litigation. Excluding the one-time charges, FFO for the third quarter of 2009 was $149.3 million or 52 cents per share compared to $178.8 million or 72 cents per share in the year-ago period.

During the quarter, HCP purchased a $720 million participation in first mortgage debt of HCR ManorCare at a discount of $590 million. In addition, HCP sold marketable debt securities of $115 million, realizing aggregate gains of $6 million.

The company also sold two medical office buildings for $6 million at a profit of $2.5 million. At the same time, HCP funded $31 million for construction projects in its life science segment.

During the quarter, HCP completed the sale of 17.8 million shares at $24.75 each, raising net proceeds of $423 million. Bulk of the proceeds was used to repay the existing debt under the revolving credit facility and used for general corporate purposes. The company also repaid $100 million of mortgage debt utilizing proceeds from the equity offering and asset sales.

During the quarter, HCP received a negative jury verdict against Ventas related to its interference in the latter’s acquisition of Sunrise Senior Living REIT in April 2007. Ventas was awarded approximately $101.7 million in compensatory damages. Also during the quarter, HCP completed the transition of management agreements on 15 communities operated by Sunrise Senior Living Inc. (SRZ). Currently, Sunrise-managed properties in HCP’s portfolio have decreased to 75 communities down from its original tally of 101.

The company declared a quarterly cash dividend of 46 cents per share. For the full year 2009, the company has reiterated its earlier FFO guidance (before non-recurring items) of $2.10 to $2.16 per share.

Zacks Investment Research
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