HEALTHPEAK PROPERTIES, INC. quarterly report, Q3 FY2019

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Healthpeak Properties, Inc. — Q3 2019 Form 10-Q

Business context and period. The filing covers the quarter and nine months ended September 30, 2019. Healthpeak, then formerly HCP, Inc., is a healthcare-focused REIT with senior housing triple-net, senior housing operating portfolio (SHOP), life science, and medical office segments. At quarter-end it reported interests in 642 consolidated properties and 98 properties held by unconsolidated joint ventures. The company changed its name on October 30, 2019; its shares were scheduled to begin trading as PEAK on November 5.

Financial performance and position

  • Revenue: Q3 revenue was $538.0 million, up 18.0% from $456.0 million. Nine-month revenue was $1.466 billion, up 4.3% from $1.405 billion. SHOP revenue increased materially, reflecting acquisitions and properties transferred from triple-net leases; triple-net revenue declined.
  • Profit: Q3 net loss applicable to common shares was $46.2 million, or $0.09 per share, versus income of $98.9 million, or $0.21 per share, a year earlier. Nine-month common-share income was $0.8 million, or effectively $0.00 per share, versus $228.3 million, or $0.49 per share.
  • Operating measures: Q3 NAREIT FFO was $181.6 million ($0.37 per diluted share), versus $155.6 million ($0.33); adjusted FFO was $220.6 million ($0.44 per diluted share), unchanged per share year over year. Nine-month adjusted FFO was $645.5 million ($1.33 per diluted share), down from $655.1 million ($1.39). FAD was $190.2 million in Q3 and $576.8 million for nine months, versus $186.5 million and $578.4 million, respectively. These are non-GAAP measures defined by the company.
  • Property operations: Q3 total-portfolio Adjusted NOI was $278.2 million, up from $272.9 million. Same-property Adjusted NOI rose 5.8% in life science, 2.5% in medical office, and 1.9% in senior housing triple-net, but fell 6.0% in SHOP. Management attributed the SHOP decline to lower occupancy and higher labor costs, partly offset by higher resident rates.
  • Cash flow: Nine-month operating cash flow was $628.6 million, compared with $632.9 million. Investing activities used $1.442 billion, mainly reflecting real estate acquisitions and development; financing activities provided $828.2 million. Cash, cash equivalents, and restricted cash ended at $155.1 million.
  • Balance sheet and debt: Total assets were $14.010 billion and total equity $6.523 billion. Debt carrying value totaled approximately $6.600 billion, including $737.8 million on the revolving line, $248.9 million on a term loan, $5.254 billion of senior notes, $275.0 million of mortgage debt, and $85.1 million of other debt. Cash and cash equivalents were $125.0 million. The $2.5 billion revolver had $738 million outstanding; the company reported no commercial paper outstanding at quarter-end, although $650 million was outstanding as of October 29, 2019.
  • Dividends and equity: Common dividends declared were $0.37 per share quarterly, or $1.11 per share for the first nine months. The company issued common stock and settled forward equity sales, contributing $510.7 million of cash proceeds during the nine-month period.

Material changes versus prior periods

  • Q3 earnings swung to a loss, primarily due to higher real estate impairment charges, sharply lower gains on property sales, and higher depreciation and amortization. Acquisitions, development completions, leasing activity, and lower debt-extinguishment losses partly offset these effects.
  • Nine-month common-share earnings fell substantially, mainly reflecting higher impairments, lower property-sale gains, increased depreciation, and reduced income following asset sales and joint-venture transactions. Interest expense declined by $44.1 million, partly offsetting the decline.
  • Nine-month impairments and recoveries, net, rose to $115.7 million from $19.2 million. Nine-month gains on real estate sales fell to $18.7 million from $162.2 million.
  • The company invested heavily in real estate: nine-month cash acquisitions were $1.315 billion, with a further $441.4 million spent on development and redevelopment. The comparable prior-year period had substantially higher sale and joint-venture transaction proceeds.
  • Adoption of lease accounting in 2019 added lease assets and liabilities to the balance sheet; at September 30, the reported right-of-use asset was $173.0 million and lease liability was $156.3 million.

Outlook, transactions, risks, and unusual items

  • Management said expected operating cash flow, cash balances, and financing access should be adequate for at least the next 12 months to fund operations, debt service, and distributions. It identified capital expenditures, acquisitions, and development as principal investment needs, with funding expected from operations, asset sales, debt, and/or equity. The filing provides no specific earnings or FFO guidance.
  • In October 2019, Healthpeak agreed to buy Brookdale's 51% interest in 13 CCRC communities, based on a $1.06 billion valuation, and pay a $100 million management termination fee. It also agreed to sell Brookdale 18 triple-net properties for $385 million and restructure the lease on 24 others. These linked transactions were expected to close in Q1 2020, subject to completion.
  • Other post-quarter plans included forming a SHOP joint venture involving 19 assets, with the partner contributing $367 million in cash, and selling Healthpeak's remaining U.K. JV interest for approximately $90 million net proceeds. Both were expected to close in Q4 2019.
  • At September 30, 54 properties across several segments were classified as held for sale, with aggregate carrying value of approximately $403 million. Nine-month development and redevelopment commitments were $355 million; additional HCA development agreements signed in October were estimated to cost about $34 million.
  • Brookdale remains a notable concentration: it accounted for 39% of senior housing triple-net revenue in Q3 and 6% of total assets at quarter-end. The company cited risks involving tenant/operator financial health, healthcare regulation, occupancy and labor costs, development execution, capital-market access, interest rates, and joint-venture counterparties.
  • The company recorded a $35.0 million Q3 loss on debt extinguishment after redeeming or repurchasing notes as part of a refinancing. It also reported ongoing securities class-action and derivative litigation relating to historic HCR ManorCare disclosures; Healthpeak said it believed the claims lacked merit, but could not estimate potential losses and recorded no contingency.

Important facts for investors to verify

  • Whether the Brookdale transactions closed as expected, and their effect on senior housing exposure, rent, management costs, and cash proceeds.
  • SHOP same-property occupancy, labor-cost trends, and whether the reported NOI declines persist.
  • The nature and potential sale outcomes of assets held for sale, including the risk of further impairment charges.
  • Debt maturities, revolver and commercial-paper usage after quarter-end, refinancing costs, and compliance with debt covenants.
  • Effects of outstanding forward equity contracts and any further share issuance on dilution and dividend coverage.
  • Progress and costs of acquisitions, development commitments, and the planned U.K. exit, including any realized sale losses.