Business context and reporting period
Issuer identification: The request identifies Healthpeak Properties, Inc., but the supplied filing is HCP, Inc.’s Form 10-K for the fiscal year ended December 31, 2015. Verify the intended issuer before relying on this summary. HCP was a healthcare-focused REIT with investments in senior housing, post-acute/skilled nursing, life science, medical office and hospitals. At year-end, its owned portfolio comprised 1,178 properties; total investments, including joint ventures and developments, were reported at approximately $23.5 billion.
Financial results and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total revenue | $2.544 billion | $2.266 billion |
| Net income (loss) applicable to common shares | $(560.6) million; $(1.21) per share | $919.8 million; $2.00 diluted per share |
| Operating cash flow | $1.222 billion | $1.249 billion |
| Investing cash flow | $(1.672) billion | $(1.512) billion |
| Financing cash flow | $614.1 million | $144.8 million |
| Adjusted FFO per diluted share (non-GAAP) | $3.16 | $3.04 |
| FAD per diluted share (non-GAAP) | $2.72 | $2.57 |
| Common dividends per share | $2.26 | $2.18 |
Revenue increased about 12%, while reported earnings swung to a loss, primarily because of impairment charges. 2015 impairments included approximately $1.3 billion related to HCR ManorCare (HCRMC) direct financing leases, $112 million on Four Seasons notes, and $46 million on HCRMC equity interests; a $6 million loan impairment recovery partly offset these charges. Adjusted FFO and FAD are non-GAAP measures and should not be treated as GAAP earnings or operating cash flow.
Year-end cash and cash equivalents were $346.5 million, versus $183.8 million a year earlier. Total assets were $21.45 billion and total equity was $9.75 billion. Debt obligations were approximately $11.1 billion, up from $9.7 billion; 96.4% of reported debt was fixed-rate, with a 4.57% weighted-average rate. The $2.0 billion revolving facility had $397 million drawn at year-end. HCP reported compliance with its credit facility and term-loan covenants.
Property adjusted cash NOI was $1.707 billion for 2015. Same-property adjusted NOI changes were: senior housing +3.7%, post-acute/skilled nursing −7.1%, life science +6.5%, medical office +2.1% and hospital +2.8%. These are non-GAAP property-level measures, not consolidated profit margins.
Material changes versus the prior comparable period
- Revenue rose from $2.266 billion to $2.544 billion, including a substantial increase in resident fees and services associated with HCP’s RIDEA senior-housing operations and acquisitions.
- Net income applicable to common shares fell from $919.8 million to a $560.6 million loss, chiefly due to impairments. Adjusted FFO per share nevertheless increased 4% and FAD per share increased 6%.
- Operating cash flow declined by $26.5 million; investing outflows increased by $160.1 million. HCP made approximately $2.4 billion of investments and paid about $1.0 billion of common dividends.
- Post-acute/skilled nursing adjusted NOI weakened amid lower HCRMC rent under the 2015 lease amendment and deteriorating operating conditions. HCP increased senior housing, life science and medical-office investments, including the $847 million RIDEA acquisition of 35 senior-housing communities.
Outlook, commentary, risks and unusual items
- HCRMC credit exposure: HCRMC represented 23% of HCP’s 2015 total revenue and 23% of gross assets. Its normalized fixed-charge coverage was 1.07x for 2015; fourth-quarter census in core skilled-nursing assets was 82.6%, down 175 basis points year over year. HCRMC had $125 million of cash at year-end and was current on amended-lease obligations, but HCP cited limited expected improvement in HCRMC’s 2016 coverage and free cash flow.
- HCP placed the HCRMC lease portfolio on its Watch List and began cash-basis recognition of related rent effective January 1, 2016, rather than recognizing non-cash lease accretion. It reduced the carrying value of the HCRMC lease investment to approximately $5.2 billion after the fourth-quarter $817 million impairment. The 2015 lease amendment had already reduced initial annual rent by $68 million, to $473 million, and extended the average initial lease term to 16 years.
- The DOJ’s civil False Claims Act case against HCRMC alleges improper Medicare therapy claims. HCRMC said it would defend the case; the outcome and any financial or operating consequences remained uncertain. HCRMC incurred $9 million of defense costs in 2015 and expected additional costs in 2016. HCP also reported $350 million of expected proceeds from HCRMC’s planned sale of 50 non-strategic facilities; $280 million had closed by the filing discussion, with the balance expected by mid-2016.
- Other significant concentration and credit risks include Brookdale, which was both a tenant and manager of HCP senior-housing properties, and Four Seasons, whose notes were impaired and placed on a cost-recovery basis. HCP warned of healthcare reimbursement, regulation, staffing, competition, litigation, property valuation, capital-market, interest-rate, foreign-exchange and REIT-qualification risks.
- HCP declared a $0.575-per-share quarterly dividend in January 2016, implying an annualized rate of $2.30, up from $2.26 for 2015. Management expected to fund near-term operations, debt service and distributions primarily with operating cash flow, available cash and financing activities; it did not provide a formal earnings or FFO forecast in the supplied text.
- At year-end, the debt maturity schedule showed about $1.38 billion of 2016 principal maturities, including $900 million of senior notes. HCP had issued $600 million of 4.00% notes due 2022 in December 2015 to prefund a $500 million note maturity, which it reported repaying in February 2016.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied filing is HCP, Inc., not a filing titled Healthpeak Properties, Inc.
- Review HCRMC’s audited financials, current rent and coverage, expected asset-sale proceeds, and the status and potential impact of the DOJ litigation.
- Check subsequent cash collections and accounting for HCRMC lease payments, the $250 million deferred rent obligation, and the remaining lease receivables.
- Assess the Four Seasons notes’ recoverability and the credit condition of other major tenants, operators and borrowers, including Brookdale.
- Reconcile reported debt maturities with the February 2016 note repayment, available revolver capacity, covenant headroom and funding needs for dividends and committed investments.
- Compare the non-GAAP adjusted FFO and FAD measures with GAAP results and operating cash flow; assess whether the dividend remains supported after recurring capital spending.
The filing reports an unqualified audit opinion on the financial statements and effective internal control over financial reporting as of December 31, 2015.