HCP, Inc. (now Healthpeak Properties, Inc.) — 2015 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. The filing is by HCP, Inc., a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as healthcare-related loans. Unless otherwise stated, amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $607.5m | $536.1m | $1,218.3m | $1,066.1m |
| Net income (loss) applicable to common shares | $164.5m | $218.4m | $(76.4)m | $476.4m |
| Diluted EPS | $0.36 | $0.48 | $(0.17) | $1.04 |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $594.0m | $607.7m |
| Adjusted NOI (non-GAAP) | $413.3m | $409.2m | $829.1m | $810.2m |
| FFO as adjusted per diluted share (non-GAAP) | $0.79 | $0.75 | $1.57 | $1.50 |
| FAD per diluted share (non-GAAP) | $0.69 | $0.63 | $1.38 | $1.26 |
Q2 revenue rose about 13% year over year; first-half revenue rose about 14%. First-half GAAP results were dominated by $523.3m of impairment charges, including a $478m charge on HCR ManorCare direct financing leases and a $42m charge on Four Seasons notes. Operating cash flow declined about 2% year over year. Cash flow from investing was $(1,645.1)m, largely reflecting acquisitions and investments; financing provided $983.0m. Cash and cash equivalents were $115.8m at June 30, down from $183.8m at year-end 2014; restricted cash was a further $54.4m.
Balance sheet, debt and liquidity
- Total assets were $22.35bn and total equity was $10.53bn at June 30, 2015.
- Debt carrying value was approximately $11.12bn: $8.57bn senior unsecured notes, $1.02bn drawn on the revolver, $561.5m term loans and $967.1m mortgage debt. Total debt principal before discounts was $11.15bn.
- Weighted-average interest rate on debt excluding other debt was 4.41%; 90.8% of debt was fixed-rate or effectively fixed through swaps. Management reported compliance with debt covenants.
- The $2bn revolving facility matures in 2018, with $1.02bn drawn at quarter-end. The filing’s stated debt maturities include $1.41bn in 2016 and $1.63bn in 2018, including the revolver.
- Common dividends declared were $0.565 per share for each of Q1 and Q2; the July declaration maintained the $0.565 quarterly rate. First-half dividends paid were $521.9m.
Material changes and operating developments
- HCR ManorCare: An April 2015 lease amendment reduced initial annual rent by a net $68m, from $541m to $473m, and reset future minimum escalations to 3%. In exchange, HCP received deferred rent obligations totaling $525m, including $275m tied to planned property transfers, and extended the lease term by five years. The $478m noncash impairment reduced the carrying value of HCRMC lease investments from $6.6bn to $6.1bn.
- Acquisitions and investment: HCP and Brookdale acquired 35 private-pay senior housing communities representing 5,025 units on June 30 for $847m in a RIDEA structure. HCP also acquired medical office properties, expanded its UK HC-One investment, and increased its Tandem mezzanine loan to $256m.
- Segment performance: First-half same-property adjusted NOI increased 4.5% in senior housing and 5.8% in life science, but declined 3.9% in post-acute/skilled nursing, primarily reflecting the HCRMC rent amendment. Medical office same-property adjusted NOI increased 0.6% and hospital increased 1.8%.
- For Q2, adjusted FFO and FAD per share improved despite lower GAAP EPS and FFO. Management attributed the divergence chiefly to impairment charges, transaction-related costs and a $6.7m severance-related charge. Adjusted measures are non-GAAP and are not substitutes for GAAP earnings or cash flow.
Outlook, risks and contingencies
Management gave no specific full-year earnings or operating guidance in the provided filing text. It expected to meet the next 12 months’ operating costs, debt service and distributions primarily from operating cash flow, cash balances and financing activities, while funding investment needs through equity or debt issuance, credit facilities and property transactions. The company also had a $750m at-the-market equity program, with no shares issued under it as of the filing.
- HCRMC’s operating and payment capacity is a material risk. The Department of Justice alleged that HCRMC submitted Medicare claims for certain therapy services that were not covered, medically necessary or skilled; HCRMC disputed the allegations and stated it would defend itself. An adverse judgment or settlement could further affect HCP’s investments.
- HCRMC represented 27% of company assets and 23% of revenue in the reported concentration disclosure; HCRMC also accounted for 79% of post-acute/skilled nursing gross assets. Brookdale remained a significant senior-housing operator.
- HCP recorded a $42m impairment on Four Seasons notes following deterioration in that operator’s performance. Other exposures include a $17m workout loan and a 14-property senior-housing lease portfolio on non-accrual, for which rent income is recognized on a cash basis.
- HCP committed liquidity support to HCP Ventures IV, which had $107m of secured obligations coming due through February 2016; the maximum disclosed support exposure, including its commitment, was approximately $157m. Management expected refinancing, but this was not assured.
- Other risks cited include tenant/operator financial weakness, healthcare reimbursement and regulatory changes, concentration, access to capital, interest and foreign-exchange movements, joint-venture dependence, and maintaining REIT status.
Important facts for investors to verify
- Progress on HCRMC’s rent payments, deferred obligations and planned asset sales/transfers, and developments in the DOJ litigation.
- Whether HCRMC’s amended lease economics and its financial condition support the recorded lease investment value.
- Four Seasons’ operating recovery and ability to repay its notes; performance of the non-accrual lease and workout loan.
- Refinancing or repayment of HCP Ventures IV obligations and any resulting HCP funding requirement.
- Acquisition performance, especially RIDEA senior housing operations, alongside debt maturities, leverage and the sustainability of dividends and adjusted FFO/FAD.