HCP, Inc. (now Healthpeak Properties, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing registrant is HCP, Inc.; financial amounts below are in U.S. dollars unless noted.
Business context
HCP is a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as loans and direct financing leases. Its portfolio included interests in 1,191 properties at June 30, 2016. The company announced a planned spin-off of a portfolio centered on its HCR ManorCare (HCRMC) investments into Quality Care Properties (QCP), expected in Q4 2016, subject to approvals and other conditions. The distribution was not expected to qualify as tax-free for U.S. federal income tax purposes.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $662.2 million | $607.5 million | $1,303.0 million | $1,218.3 million |
| Net income (loss) | $304.8 million | $167.7 million | $424.6 million | $(69.8) million |
| Net income (loss) applicable to common shares | $301.4 million | $164.5 million | $417.2 million | $(76.4) million |
| Diluted EPS | $0.64 | $0.36 | $0.89 | $(0.17) |
| FFO per diluted common share | $0.71 | $0.65 | $1.40 | $0.40 |
| Adjusted FFO per diluted common share | $0.74 | $0.79 | $1.43 | $1.57 |
| FAD per diluted common share | $0.72 | $0.69 | $1.38 | $1.38 |
For the six months, operating cash flow was $666.9 million versus $594.0 million. Investing activities used $153.6 million, while financing activities used $742.7 million. Cash and cash equivalents were $116.5 million at June 30, down from $346.5 million at year-end 2015; restricted cash was $180.4 million. Common dividends paid during the half-year were $537.1 million. The quarterly dividend was $0.575 per share.
Total assets were $21.12 billion and total equity was $9.68 billion. Debt carrying value was $10.66 billion, compared with $11.07 billion at December 31, 2015; principal debt was $10.74 billion. Approximately 90.2% of principal debt was fixed-rate, with a 4.45% weighted-average interest rate. The $2.0 billion revolving facility had $869 million drawn and approximately $1.1 billion of remaining capacity. HCP reported compliance with its debt covenants.
Material changes versus prior periods
- Q2 revenue increased about 9%; six-month revenue increased about 7%. Growth included higher resident fees and services, reflecting senior housing operations and acquisitions, while income from direct financing leases declined.
- Q2 common-share income rose substantially, but included a $119.6 million gain on real estate sales. Six-month results also benefited from $119.6 million of sale gains and the absence of the $523.3 million of impairment charges recorded in the first half of 2015.
- Adjusted FFO per share declined 6% in Q2 and 9% for the first half, principally reflecting reduced HCRMC income and lower interest income from Four Seasons notes on cost-recovery status. FAD per share was flat for the first half.
- HCRMC-related income is recognized on a cash basis following concerns about collectibility. HCP reported HCRMC DFL income and cash receipts of $229 million each for the first half of 2016, compared with $292 million of income and $249 million of receipts in the prior-year period.
- HCP sold properties for $229 million in the first half and recognized $119.6 million in gains. Its $49 million estimated state built-in-gain tax liability contributed to $51.0 million of first-half income tax expense.
Outlook, risks and unusual items
- HCRMC credit exposure: HCRMC’s normalized EBITDAR fell 10% year over year in Q2 and 13% year to date. Its trailing-12-month fixed-charge coverage was 1.03x. HCRMC remained current on lease payments, but HCP identified its DFL investments as watch-list assets; HCRMC DFL carrying value was about $5.1 billion. Overall, $5.47 billion, or approximately 93%, of HCP’s DFL portfolio was classified as watch list.
- Litigation and operating risks: The DOJ’s False Claims Act case against HCRMC alleges improper Medicare billing. HCP warned an adverse judgment or settlement could further affect the value of its HCRMC investments. HCP also disclosed a putative shareholder securities class action and two derivative actions related to alleged HCRMC disclosures and controls; the company said it intended to defend the securities action.
- Spin-off uncertainty: The QCP transaction remained subject to regulatory, listing, third-party and board approvals and could be changed or abandoned. Management cited execution and related financing as risks.
- Capital plans: HCP expected to fund operating costs, debt service and distributions over the next 12 months primarily with operating cash flow, available cash and financing activities. It also planned continued development and investment. Pending transactions included a $186 million senior-housing acquisition and a RIDEA II contribution arrangement expected to provide $109 million cash and a $636 million note, subject to closing conditions.
- Other notable items: Management expected approximately $14 million of severance expense in Q3 2016 related primarily to the former CEO’s departure and anticipated increased transaction costs from the spin-off. A 1 percentage-point increase in rates was estimated to raise annual interest expense by about $9 million, or $0.02 per diluted share.
- No formal earnings guidance: The filing provides transaction and liquidity expectations, but no clear full-year earnings or FFO guidance.
Important facts for investors to verify
- QCP spin-off timing, final terms, tax treatment, financing and the assets and liabilities ultimately transferred.
- HCRMC’s operating performance, lease-payment capacity, coverage ratios and the effect of DOJ litigation on HCP’s DFL and equity exposures.
- Whether HCP’s cash flow and available credit remain sufficient for dividends, debt maturities, development commitments and planned transactions.
- How much of reported earnings growth reflects recurring operations versus property-sale gains, tax items and other unusual or non-GAAP adjustments.