Healthpeak Properties, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions unless stated otherwise.
Business context
Healthpeak is a healthcare-focused REIT. Its continuing reportable businesses are life science, medical office, and continuing care retirement community (CCRC) properties. The company continued its strategic exit from senior housing triple-net and SHOP properties, classifying qualifying assets and results as discontinued operations. Its portfolio, including unconsolidated joint ventures and excluding discontinued operations, comprised 473 properties at June 30.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $476.2 million | $408.6 million | $931.5 million | $789.6 million |
| Net income applicable to common shares | $276.0 million | $51.1 million | $419.3 million | $328.8 million |
| Diluted EPS | $0.51 | $0.09 | $0.78 | $0.63 |
| FFO as Adjusted, a non-GAAP measure | $217.2 million | $214.7 million | $432.6 million | $441.7 million |
| AFFO, a non-GAAP measure | $189.0 million | $191.9 million | $373.8 million | $399.5 million |
Q2 total portfolio Adjusted NOI was $257.0 million, up from $235.6 million. Same-store Adjusted NOI increased 7.4% in life science and 4.1% in medical office, while CCRC same-store Adjusted NOI declined 23.2%. The filing does not present a single company-wide operating margin.
For the six months, operating cash flow was $359.6 million versus $319.8 million. Investing activities provided $1.712 billion, largely reflecting real estate sale proceeds; financing activities used $2.009 billion, including debt repayments and $326.1 million of common dividends. Cash and cash equivalents were $96.9 million at June 30; cash, cash equivalents, and restricted cash totaled $244.3 million.
At June 30, reported debt carrying amounts totaled approximately $5.038 billion, excluding debt classified with discontinued operations. This included $720 million of commercial paper, $249 million on the term loan, $3.711 billion of senior notes, and $358 million of mortgage debt. The company reported that 78% of consolidated debt was fixed-rate, compared with 96% at June 30, 2020. It had no revolver borrowings outstanding. The quarterly dividend was $0.30 per share, down from $0.37 a year earlier.
Material changes and unusual items
- Revenue rose approximately 17% year over year in Q2, supported by life science and medical office acquisitions, development completions, leasing, and higher interest income. Q2 life science revenue was $177.5 million and medical office revenue was $165.3 million.
- Q2 common-share earnings increased substantially, but were significantly affected by gains on real estate sales and income from discontinued operations. Discontinued operations contributed $114.0 million in Q2 and $384.0 million in the first half; first-half results included $381.9 million of real estate sale gains.
- Continuing-operations income was $168.1 million in Q2, but $47.5 million for the first half, down from $207.5 million in the comparable 2020 period. The first-half comparison reflects, among other items, the prior-year gain upon consolidation of CCRCs and other unusual income.
- Debt extinguishment losses were $60.9 million in Q2 and $225.2 million for the first half, associated with repurchases and redemptions of senior notes. Interest expense nevertheless declined year over year as debt was repaid.
- Management shortened the estimated useful lives of certain life science properties to reflect planned campus densification. This increased depreciation expense by $11 million in Q2 and $15 million in the first half, reducing EPS by approximately $0.02 and $0.03, respectively.
- Senior housing portfolio sales generated substantial cash proceeds; some sale consideration was seller-financed. The company received $246 million of principal repayments in June on Sunrise portfolio financing.
Outlook, risks, and contingencies
Management stated that operating cash flow, available cash, and financing sources were expected to cover operating expenses, debt service, and distributions for at least the next 12 months. As of August 2, the company reported approximately $1.93 billion of liquidity, including $1.85 billion of borrowing capacity and approximately $86 million of cash and cash equivalents. No specific earnings or operating guidance was provided in the filing.
COVID-19 continued to pressure tenants, operators, and borrowers through elevated staffing, health, and safety costs. Management noted that the pandemic’s longer-term effects and tenants’ future ability to pay rent remained uncertain; renewed outbreaks could disrupt operations. CCRC occupancy and NOI remained affected, although lower pandemic-related costs and higher resident rates provided offsets. The company reported $347 million of commitments, primarily for development, redevelopment, and tenant improvements, and $61 million of remaining senior-housing capital-financing commitments.
Management reported compliance with debt covenants at June 30 and no known legal proceedings expected to have a material adverse effect. Other risks include refinancing and interest-rate exposure, healthcare regulation and reimbursement changes, tenant/operator financial health, development execution, and the company’s ability to maintain REIT status. A 1 percentage-point change in variable rates was estimated to affect annual interest expense by up to approximately $11 million.
Subsequent to quarter-end, Healthpeak issued $450 million of 1.35% senior notes due 2027 and repaid its $250 million term loan; it also declared a $0.30-per-share dividend payable August 20, 2021.
Important facts for investors to verify
- How much of reported earnings and EPS came from asset-sale gains and discontinued operations, versus recurring property operations.
- Whether life science and medical office same-store NOI growth can offset continued weakness in CCRC occupancy and NOI.
- The credit quality, repayment terms, and remaining exposure associated with seller-financed property sales and other loans receivable.
- Debt maturities, commercial-paper refinancing capacity, fixed-versus-variable-rate exposure, and the effect of post-quarter financing transactions.
- Whether cash generation and liquidity can support the dividend, development commitments, acquisitions, and remaining portfolio dispositions.
- The assumptions behind the useful-life changes, held-for-sale valuations, and impairment estimates, which rely in part on management forecasts and Level 3 inputs.