Business context and reporting period
HCP, Inc. (the registrant named in this 10-Q; now Healthpeak Properties) is a healthcare-focused REIT investing in senior housing, life science, medical office and other healthcare assets. This unaudited filing covers the quarter and nine months ended September 30, 2017. Portfolio count was 818 properties, including unconsolidated joint ventures.
Key financial results
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2016 period.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $454.0 | $530.6 | $1,405.1 | $1,589.3 |
| Net income (loss) applicable to common shares | $(7.8) | $150.9 | $472.3 | $568.1 |
| Diluted EPS | $(0.02) | $0.32 | $1.01 | $1.22 |
| FFO per diluted share | $0.33 | $0.65 | $1.30 | $2.05 |
| Adjusted FFO per diluted share | $0.48 | $0.72 | $1.47 | $2.15 |
| Operating cash flow | Not stated separately | Not stated separately | $637.9 | $998.6 |
| Adjusted NOI | $307.5 | $333.9 | $946.0 | $1,009.5 |
Q3 revenue declined about 14% and nine-month revenue about 12%. Common-share earnings moved to a Q3 loss; nine-month EPS fell about 17%. Adjusted FFO per share also declined. Adjusted NOI, a non-GAAP measure, fell about 8% for the quarter and 6% for the nine months. These figures reflect portfolio changes as well as operating performance.
Balance sheet, debt and liquidity
- At September 30, total assets were $13.9 billion, down from $15.8 billion at December 31, 2016. Cash and cash equivalents were $133.9 million; restricted cash was $27.1 million.
- Debt carrying value was approximately $7.37 billion, compared with $9.19 billion at year-end 2016. Debt included $6.39 billion of senior unsecured notes and $605.8 million drawn on the revolving facility. The filing reports $7.42 billion of scheduled maturities and repayments before discounts and debt costs.
- Operating cash flow was $637.9 million; investing activities provided $1.76 billion, principally reflecting asset sales and repayments; financing activities used $2.35 billion, including debt repayments and $520.8 million of common dividends paid.
- Management said cash flows, available cash and financing sources were expected to be adequate for at least the next 12 months. On October 19, after quarter-end, HCP replaced its revolving facility with a $2.0 billion facility maturing in October 2021, with two six-month extension options. The company reported covenant compliance at September 30.
- Dividends declared were $0.37 per share for Q3 and $1.11 per share for the first nine months, versus $0.575 and $1.725, respectively, in 2016.
Material changes and significant items
- Revenue and portfolio NOI were affected by the 2016 QCP spin-off, 2017 property dispositions, and the January 2017 partial sale and deconsolidation of RIDEA II. HCP sold 64 Brookdale-leased senior housing assets for $1.125 billion and recognized a $170 million gain; total nine-month net gains on real estate sales were $322.9 million.
- Results included an aggregate $82.0 million of impairment charges for the nine months, including a $59 million impairment on the Tandem mezzanine loan and $23 million on 11 underperforming senior housing triple-net assets. Q3 also included approximately $11 million of hurricane-related casualty losses, net of a small insurance recovery.
- HCP repurchased $500 million of 5.375% senior notes due 2021 and recorded a $54.2 million loss on debt extinguishment. Interest expense fell to $235.8 million for the nine months from $361.3 million, while interest income declined to $51.0 million from $71.3 million.
- Same-property adjusted NOI increased in the reported segments: senior housing triple-net rose 2.7% for Q3 and 3.9% for the nine months; SHOP rose 5.3% and 2.5%; life science rose 4.0% and 4.1%; and medical office rose 2.5% and 3.2%. Total portfolio results were weaker in some segments due to dispositions and portfolio transfers. SHOP commentary cited occupancy declines alongside higher resident rates.
Outlook, risks and contingencies
- No specific earnings or FFO guidance is provided in the filing. Management cited continued needs for capital expenditures, leasing costs, acquisitions and development, to be funded through cash flow, securities issuance, debt, credit facilities or property transactions.
- On November 1, 2017, after quarter-end, HCP and Brookdale entered into an agreement intended to reduce Brookdale concentration through asset sales, transitions and revised lease and management terms. Certain assets could convert to cash-flow leases, which would expose HCP to operating risks. HCP also agreed to sell assets and acquire Brookdale’s minority interests in two joint ventures.
- Also on November 1, HCP agreed to sell its remaining 40% RIDEA II interest; the transaction was expected to close in 2018. Expected proceeds from the sale and refinancing of related $242 million loan receivables were $332 million.
- Tandem’s borrower and operator were in default-related circumstances, including failure to pay full rent. HCP classified the $197 million carrying-value loan as workout and agreed to forbear from remedies through December 31, 2017 while the borrower pursued a discounted repayment. Repayment was not assured; the contractual loan balance was $257 million.
- Brookdale remained a major tenant/operator concentration: it represented 11% of company gross assets and 8% of Q3 revenue; it also managed or operated about 13% of real estate investments in SHOP. Other risks include tenant and borrower credit, senior housing sector conditions, healthcare regulation, capital-market access, interest and currency movements, joint-venture dependence, and litigation.
- Pending securities class-action and derivative litigation related to HCR ManorCare, and a separate non-compete case involving an executive, remained unresolved. HCP said it could not estimate reasonably possible losses for the matters described; it considered the class action and non-compete suit without merit.
Important facts for investors to verify
- Whether Brookdale-related asset sales, transitions, lease changes and joint-venture transactions close as expected, and how they affect recurring revenue and operating exposure.
- Whether the Tandem borrower completes the discounted repayment by the extended deadline, and HCP’s recovery if it does not.
- How much of the earnings decline reflects asset sales and accounting/one-time items versus underlying same-property performance; review GAAP results alongside the company’s non-GAAP FFO, adjusted FFO and NOI definitions.
- The refinancing and repayment schedule, availability under the new revolving facility, covenant headroom and access to capital markets.
- Potential outcomes and financial exposure from the disclosed litigation, and any further credit deterioration among tenants, operators or borrowers.