Healthpeak Properties, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Healthpeak is a healthcare-focused REIT with lab, outpatient medical, and continuing care retirement community (CCRC) properties. It reported 475 properties, including unconsolidated joint venture interests, at quarter-end. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $556.2 million | $520.4 million | $1,627.4 million | $1,536.7 million |
| Net income applicable to common shares | $64.0 million | $353.4 million | $233.5 million | $491.4 million |
| Diluted earnings per share | $0.12 | $0.65 | $0.43 | $0.91 |
| Nareit FFO | $250.2 million | $225.1 million | $723.7 million | $704.7 million |
| FFO as Adjusted | $249.3 million | $233.2 million | $728.0 million | $704.5 million |
| AFFO | $217.3 million | $193.3 million | $645.8 million | $590.9 million |
Quarterly revenue increased about 6.9% year over year; nine-month revenue rose about 5.9%. Adjusted NOI for the total portfolio was $305.4 million in Q3, up from $275.4 million. Same-store Adjusted NOI grew 3.3% in lab, 3.4% in outpatient medical, and 32.1% in CCRC during the quarter. CCRC’s increase reflected higher resident rates and occupancy, as well as higher business-interruption insurance proceeds; labor and management costs partly offset the improvement. These NOI, FFO, and AFFO measures are non-GAAP measures, not substitutes for GAAP results.
Operating cash flow for the nine months was $725.0 million, versus $693.3 million a year earlier. Investing activities used $361.1 million, compared with $578.1 million; financing activities used $376.8 million, compared with $165.5 million. Cash, cash equivalents, and restricted cash totaled $113.9 million at September 30, including $63.5 million of unrestricted cash. The company paid $0.90 per share in dividends during the first nine months and declared a further $0.30 quarterly dividend for payment in November.
Balance sheet, debt, and liquidity
- Total assets were $15.60 billion and total equity was $6.98 billion at September 30, 2023.
- Debt carrying value totaled approximately $6.66 billion: $424 million of commercial paper, $496.6 million of term loans, $5.40 billion of senior notes, and $342.3 million of mortgage debt. Debt increased by about $167 million from year-end 2022, primarily following $750 million of 5.25% senior note issuances due 2032; lower commercial-paper balances partly offset that increase.
- Commercial paper outstanding carried a weighted average interest rate of 5.62%. About 94% of consolidated debt was fixed rate, including debt effectively fixed with swaps. A one-percentage-point rise in rates would increase annual interest expense on variable-rate debt by an estimated $4 million, assuming balances were unchanged.
- The $3.0 billion revolving facility had no balance outstanding and backs the commercial-paper program. Management said operating cash flow, available cash, and financing sources should be adequate for operating needs, debt service, dividends, and planned capital needs for the next 12 months and foreseeable future. The company reported compliance with its debt covenants.
- Remaining development, redevelopment, and tenant-improvement commitments were $124 million. The company also had up to $36 million of additional seller-financing commitments and $49 million of redeemable noncontrolling interests at quarter-end.
Material changes, outlook, and risks
- Reported earnings comparison: The sharp year-over-year decline in GAAP net income largely reflects a $311 million gain recognized in Q3 2022 when Healthpeak sold a 30% interest in South San Francisco lab properties and deconsolidated them. In 2023, higher depreciation and interest expense also weighed on earnings. By contrast, Q3 2023 FFO as Adjusted and AFFO increased year over year.
- Property activity: Healthpeak sold two Durham lab buildings for $113 million and two outpatient medical buildings for $32 million in 2023, recognizing total gains of about $81 million. Development and redevelopment projects placed in service contributed to operating growth. Development costs, labor shortages, supply delays, and higher financing costs remain potential pressures.
- Tenant and loan exposures: Healthpeak wrote off $9 million of Sorrento Therapeutics straight-line rent after its Chapter 11 filing and is recognizing subsequent rent on a cash basis. It received $2 million from a letter of credit related to a rejected development lease; further claim recoveries are uncertain. A separate seller-financed borrower had previously missed a January 2023 maturity, made a partial repayment, and refinanced the remaining $48 million to January 2024.
- Subsequent events: In October, Graphite Bio amended a lab lease for an upfront $37 million payment, to be recognized as rental revenue over the amended lease term through December 2024. Also on October 29, Healthpeak agreed to acquire Physicians Realty in a stock-and-unit transaction at a 0.674 exchange ratio, subject to customary conditions and shareholder approvals. The merger was not completed as of the filing.
- Outlook and risks: The filing provides no numerical full-year earnings or FFO guidance. Management cited inflation, elevated interest rates, labor and construction costs, capital availability, tenant and borrower financial health, and healthcare-sector concentration as risks. The proposed merger adds closing, integration, cost, and execution risks. Management stated that there were no known legal proceedings expected to have a material adverse effect; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether same-store NOI growth and CCRC occupancy gains persist, and how much CCRC performance depends on insurance proceeds and rising resident rates.
- Debt maturities, refinancing costs, commercial-paper interest rates, and covenant headroom as interest rates and credit markets change.
- The status and terms of the Physicians Realty merger, required approvals, expected costs, and integration and synergy assumptions.
- Tenant and borrower credit developments, including Sorrento claim recoveries and repayment of the refinanced seller loan due January 2024.
- How the $37 million Graphite Bio payment is recognized over the lease term and its effect on future reported rental revenue.