Business context and reporting period
HCP, Inc. (the registrant named in this filing) is a healthcare-focused REIT that acquires, develops, leases, owns and manages U.S. healthcare properties. Its reportable segments are senior housing triple-net, senior housing operating portfolio (SHOP), life science and medical office. This unaudited Form 10-Q covers the three months ended March 31, 2019; comparisons are with the first quarter of 2018 unless stated otherwise.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $436.2 million | $479.2 million |
| Net income attributable to HCP | $61.5 million | $40.2 million |
| Net income applicable to common shares | $61.0 million; $0.13 per diluted share | $39.8 million; $0.08 per diluted share |
| Operating cash flow | $158.6 million | $196.2 million |
| Investing cash flow | $(160.3) million | $10.7 million |
| Financing cash flow | $8.5 million | $(171.2) million |
| NOI / Adjusted NOI | $265.5 million / $263.2 million | $300.3 million / $290.6 million |
| NAREIT FFO / FFO as adjusted / FAD | $206.0 million / $212.0 million / $191.5 million | $219.4 million / $227.4 million / $201.7 million |
| Cash, cash equivalents and restricted cash | $146.7 million | $139.8 million at Dec. 31, 2018 |
| Total assets / total liabilities | $12.90 billion / $6.50 billion | $12.72 billion / $6.21 billion at Dec. 31, 2018 |
Revenue fell about 9%; net income attributable to HCP rose about 53%, while operating cash flow fell about 19%. NOI was approximately 61% of real estate revenues, versus approximately 64% a year earlier. Results include $8.9 million of impairment charges on two medical office buildings. These are GAAP and company-defined supplemental measures; FFO, Adjusted NOI and FAD are not substitutes for GAAP results or cash flow.
At March 31, reported debt included $5.26 billion of senior unsecured notes, $276.5 million drawn on the revolving credit facility, $137.5 million of mortgage debt and $89.2 million of other debt. The company also reported a $152.8 million lease liability following adoption of the new lease standard. Approximately 95% of consolidated debt was fixed-rate, including debt swapped to fixed. The $2.0 billion revolver matures in 2021; reported borrowings imply roughly $1.72 billion of undrawn capacity, subject to facility terms. Management said the company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Net income improved substantially, primarily because Q1 2018 included a $41.0 million loss on consolidation of seven U.K. care homes, and because interest expense, depreciation and amortization, and general and administrative expense declined. Lower property-sale gains and SHOP weakness partly offset the improvement.
- Interest expense decreased to $49.3 million from $75.1 million, reflecting 2018 debt repayments and a lower average revolver balance. General and administrative expense declined to $21.4 million from $29.2 million, mainly due to lower severance-related charges.
- Adjusted NOI fell 9.4%. Same-property Adjusted NOI rose 2.4% in senior housing triple-net, 6.5% in life science and 4.2% in medical office, but declined 7.7% in SHOP. Management cited SHOP occupancy declines and higher labor costs.
- Operating cash flow decreased by $37.6 million, with management citing asset dispositions, SHOP operating pressure and timing of liability payments. Investing cash flow turned negative as acquisitions and development spending increased, partly offset by property-sale proceeds.
- The company adopted lease accounting on Jan. 1, 2019, recording a $165.7 million right-of-use asset and $152.8 million lease liability at quarter-end. It also transitioned a 14-property direct-financing-lease portfolio to SHOP, reclassifying approximately $351 million from lease investment to real estate and intangibles without recognizing a gain or loss.
Outlook, management commentary, risks and unusual items
- Management expects cash from operations, available cash and financing sources to be adequate for at least the next 12 months to fund operating expenses, debt service and distributions. Distributions to stockholders and noncontrolling interest holders exceeded operating cash flow by approximately $24 million in Q1 and were funded from operating cash, revolver borrowings, property-sale proceeds and other sources.
- No specific earnings or operating guidance was provided in the supplied filing text. The company expects to fund future acquisitions, development and capital spending through operating cash flow, property-interest sales, credit facilities and debt or equity issuance.
- Q1 transactions included a $71 million Cambridge life-science acquisition, up to $27 million of adjacent development rights, and sales of senior housing and land assets for stated gross proceeds totaling $129 million; aggregate net gain on sales was $8 million. Subsequent to quarter-end, HCP acquired nine senior housing properties for $445 million in April and three communities for $113 million on May 1. It also planned a $245 million South San Francisco life-science acquisition, expected to close in Q2, and signed agreements for three HCA-related medical office developments estimated at $70 million.
- The company established a new $1.0 billion ATM equity program. By quarter-end it had arranged forward sales for up to 3.6 million shares at an initial weighted-average net price of $31.19; no shares had yet been issued under those forwards. It reported approximately $888 million remaining under the ATM program and later arranged additional forward sales for up to 1.5 million shares.
- Key risks include tenant and operator concentration and credit quality, senior-housing occupancy and labor costs, healthcare regulation and reimbursement changes, development and acquisition execution, capital-market access and refinancing costs, interest and foreign-exchange exposure, and litigation. Brookdale represented 6% of total assets and 4% of company revenue, and 31% of senior housing triple-net assets and 32% of that segment’s revenue. The company disclosed securities class-action and derivative litigation; it said it intended to defend the claims and could not estimate potential loss, so no loss contingency was recorded.
- The company reported no material change to previously disclosed risk factors and said disclosure controls were effective as of March 31, 2019. The expected adoption of the credit-loss accounting standard in 2020 may result in earlier recognition of losses on loans and direct financing leases; the impact was still being evaluated.
Important facts for investors to verify
- Whether SHOP occupancy, labor expenses and same-property NOI stabilize or continue to weaken.
- How distributions in excess of operating cash flow are funded, and whether future acquisitions or development increase reliance on debt or equity issuance.
- Execution, financing and expected returns for announced acquisitions, property transitions and development projects, including post-quarter transactions.
- Tenant/operator credit exposure, particularly Brookdale and the senior-housing portfolio, along with the status and potential financial impact of disclosed litigation.
- Debt maturity, covenant and interest-rate exposure, and the effects of outstanding forward equity sales and any future ATM issuance on leverage and share count.