HCP, Inc. (identified in the filing as the registrant; metadata names Healthpeak Properties, Inc.) — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. HCP was a healthcare-focused REIT with investments across senior housing, post-acute/skilled nursing, life science, medical office and hospital properties. Its portfolio, including unconsolidated joint ventures, comprised 1,200 facilities.
Financial performance and position
- Revenue: $640.8 million, up 4.9% from $610.8 million. Resident fees and services increased to $165.8 million from $105.0 million; direct-financing-lease income declined to $128.0 million from $167.1 million.
- Profit: Net income attributable to common shares was $115.8 million, or $0.25 per diluted share, versus a $240.9 million loss, or $0.52 per share, in Q1 2015. The prior-year quarter included a $478.5 million impairment charge; Q1 2016 included a $53.0 million income-tax expense, primarily for estimated state built-in-gain taxes.
- REIT measures: Adjusted FFO was $321.8 million, or $0.69 per diluted share, versus $364.3 million, or $0.79, a year earlier. FAD was $309.0 million, or $0.66 per diluted share, versus $319.6 million, or $0.69. Management attributed the declines chiefly to the HCR ManorCare (HCRMC) rent reduction and lower interest income, including changed income-recognition methods.
- Property operations: Same-property adjusted NOI increased 1.3% in senior housing, 9.6% in life science, 3.3% in medical office and 2.4% in hospitals. Post-acute/skilled nursing adjusted NOI fell 10.5%, primarily reflecting HCRMC lease changes and cash-basis recognition of certain lease income.
- Cash flow and dividends: Operating cash flow was $268.6 million, up from $230.1 million. Investing used $165.8 million; financing used $354.4 million. Cash and cash equivalents fell to $94.7 million from $346.5 million. Cash dividends paid were $268.2 million; the declared quarterly dividend rose to $0.575 per share from $0.565.
- Liquidity and debt: Total assets were $21.2 billion and total equity $9.6 billion. Balance-sheet debt was $10.84 billion across the line of credit, term loans, senior notes and mortgages, plus $95.2 million of other debt. The $2.0 billion revolving facility had $810.3 million drawn and matures in 2018. HCP reported compliance with its debt covenants. Approximately 92.6% of debt was fixed-rate; a 1 percentage-point increase in variable rates was estimated to add about $7 million in annual interest expense.
Material changes and notable items
- HCRMC-related post-acute/skilled nursing exposure was a central concern: HCP put its HCRMC direct-financing leases on nonaccrual in late 2015 and recognizes income on a cash basis. At March 31, 2016, $5.1 billion of HCRMC direct-financing-lease investments was reported; all $3.94 billion of post-acute/skilled nursing DFLs were classified as watch list. HCP reported a $817 million DFL allowance recorded in Q4 2015.
- HCRMC represented 24% of HCP’s gross assets and 18% of total company revenues. HCRMC was current on lease obligations at quarter-end, but its trailing-12-month normalized fixed-charge coverage was 1.06x. Its Q1 normalized EBITDAR rose sequentially but remained 17% below the prior-year quarter.
- HCP sold 11 additional non-strategic HCRMC facilities for $62 million during the quarter. The filing said the remaining 17 planned sales were expected to close by year-end 2016.
- In May 2016, HCP announced a proposed taxable spin-off of interests in 338 properties, primarily HCRMC-related, into a separate REIT, targeted for the second half of 2016. Completion remained subject to approvals and other conditions; HCP could change or abandon the transaction.
- HCP also announced a proposed RIDEA II contribution to a joint venture, with expected proceeds including $109 million cash and a $636 million note receivable, subject to approvals and closing conditions. Separately, it announced a $190 million senior-housing acquisition expected to close in the second half of 2016.
- HCRMC faced a Department of Justice False Claims Act case alleging improper Medicare therapy claims. The filing cautioned that an adverse judgment or settlement could further affect the value of HCP’s HCRMC investments.
Outlook, risks and contingencies
HCP gave no quantified full-year earnings or operating guidance in the provided filing text. Management expected to fund operating costs, debt service and distributions over the next 12 months primarily from operating cash flow, cash balances and financing activities; planned investment needs included capital expenditures, acquisitions and development. Key risks cited include HCRMC’s operating and payment capacity, tenant/operator concentration, healthcare reimbursement and regulatory changes, access to capital and refinancing, interest and currency movements, and execution of the proposed spin-off and other transactions. Management stated that disclosure controls were effective and that it was in compliance with applicable credit-facility covenants at quarter-end.
Important facts for investors to verify
- Confirm the HCRMC DFL carrying value, cash collections, watch-list status and any subsequent change in lease performance or impairment assumptions.
- Track HCRMC’s coverage, liquidity, lease payments, asset-sale proceeds and the outcome of the DOJ litigation.
- Verify the conditions, timing, tax consequences and final terms of the proposed SpinCo spin-off and RIDEA II transaction.
- Review debt maturities, revolving-credit availability, covenant headroom and the sustainability of FAD relative to the $0.575 quarterly dividend.
- Reconcile the company-name metadata with the filing itself, which identifies the registrant as HCP, Inc.