Business context and reporting period
Healthpeak Properties, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2023. The healthcare-focused REIT invests in life science, medical office, and continuing care retirement community (CCRC) properties. Its portfolio comprised interests in 476 properties at quarter-end.
On February 10, 2023, the company completed an UPREIT reorganization: the publicly traded parent now conducts business through Healthpeak OP, LLC. The filing covers Old Healthpeak through February 9 and New Healthpeak beginning February 10; the reorganization did not materially affect financial position or operations.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Total revenue | $525.7 million | $498.4 million; up 5.5% |
| Net income attributable to common shares | $117.7 million; $0.22 per share | $69.6 million; $0.13 per share |
| Nareit FFO | $228.1 million | $243.4 million; down $15.3 million |
| FFO as Adjusted | $229.5 million | $234.8 million; down $5.3 million |
| AFFO | $207.7 million | $202.0 million; up $5.6 million |
| Cash from operating activities | $173.9 million | $194.2 million; down $20.3 million |
| Cash, cash equivalents and restricted cash | $117.2 million at quarter-end | $126.8 million at year-end 2022 |
Adjusted NOI, a non-GAAP measure, was $292.5 million. Life science contributed $147.9 million, medical office $112.8 million, CCRC $26.1 million, and other non-reportable segments $5.5 million. Same-store Adjusted NOI increased 6.3% in life science, 3.7% in medical office, and 9.5% in CCRC.
Total debt carrying value was approximately $6.45 billion: $5.06 billion of senior unsecured notes, $556 million of commercial paper, $496 million of term loans, and $345 million of mortgage debt. The company had no Revolving Facility balance and a $3.0 billion facility commitment. About 91% of consolidated debt was fixed-rate, including debt effectively fixed through swaps. Weighted average rates were 3.59% on fixed-rate debt and 5.55% on variable-rate debt. The company reported compliance with its debt covenants.
Investing activities provided $56.3 million, compared with $246.0 million used in Q1 2022, reflecting higher real estate sale proceeds and loan repayments, among other factors. Financing activities used $239.9 million. Common dividends were $0.30 per share for the quarter; distributions to shareholders and noncontrolling holders exceeded operating cash flow by approximately $14 million.
Material changes versus the prior comparable period
- GAAP net income rose substantially, mainly due to $81.6 million of gains on real estate sales, versus $3.9 million in Q1 2022. The 2023 gains included $60 million from two life science facilities and $21 million from two medical office buildings.
- Interest expense increased $10.4 million to $48.0 million, primarily due to higher commercial-paper rates, term loans drawn in late 2022, and the January 2023 notes issuance.
- Operating cash flow declined $20.3 million, attributed mainly to payment timing, higher interest expense, and higher property operating costs.
- FFO and FFO as Adjusted declined, while AFFO increased. The filing attributes differences among these measures to excluded gains, expenses, and other adjustments; these non-GAAP measures are not substitutes for GAAP results or cash flow.
- Rental revenue included a $9 million write-off of straight-line rent receivable from Sorrento Therapeutics after its Chapter 11 filing. Future rent from this tenant will be recognized on a cash basis.
Outlook, risks and unusual items
- Management expects operating cash flow, available cash, and financing sources to be adequate for the next 12 months and foreseeable future to fund operations, debt service, distributions, and planned capital needs. No specific earnings or FFO guidance is provided in the supplied filing text.
- Management cited inflation, rising interest rates, labor and construction costs, supply-chain delays, capital-market volatility, and bank-sector stress as uncertainties that may affect tenants, borrowers, financing costs, and development returns. The long-term effects of COVID-19 on CCRC operations and the senior housing joint venture remain uncertain.
- Other risks include tenant or borrower financial distress, healthcare-sector concentration, property development and leasing execution, joint-venture dependence, regulatory requirements, access to capital, and REIT qualification. A new risk-factor disclosure addresses potential liquidity and deposit-access impacts from bank failures or financial-institution stress.
- The company sold the two Durham life science facilities for $113 million and acquired a Cambridge life science property for $9 million. It also issued $400 million of 5.25% senior notes due 2032.
- A seller-financed loan borrower repaid $102 million of a matured loan; the remaining $48 million was refinanced to January 2024 at a variable SOFR-based rate. The company also has up to $40 million of remaining commitments for senior-housing redevelopment loans.
- Development and redevelopment commitments, including company-owned tenant improvements, were $217 million at quarter-end. One redeemable noncontrolling interest had become redeemable but had not been exercised; reported redeemable noncontrolling interests totaled $85.9 million.
- The company reported no material legal proceedings and no real estate impairment charges for the quarter. CARES Act grant income fell to $0.4 million from $7.4 million in Q1 2022; grant amounts are subject to recapture if conditions are not met.
Important facts for investors to verify
- How much of Q1 GAAP earnings growth reflects one-time property-sale gains, and how recurring operating performance is trending in FFO and AFFO.
- The impact of Sorrento’s bankruptcy and any further tenant or borrower credit deterioration on rent collection, loans, and asset values.
- Debt refinancing and interest-rate exposure, particularly commercial paper costs, maturities, and the effectiveness of interest-rate hedges.
- Whether operating cash flow can support dividends and planned development spending, given distributions exceeded operating cash flow in Q1.
- Progress, remaining cost, and expected returns on development commitments amid inflation and construction delays.
- Potential cash requirements from redeemable interests, seller-financing commitments, and other disclosed obligations.