HEALTHPEAK PROPERTIES, INC. annual report, FY2018

Full document

Healthpeak Properties, Inc. (filed as HCP, Inc.) — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; it also provides quarterly results. The company is a healthcare-focused REIT with senior housing triple-net, senior housing operating portfolio (SHOP), life science, and medical office segments.

Financial and operating performance

  • Revenue: $1.847 billion, down slightly from $1.848 billion in 2017. GAAP net income applicable to common shares was $1.058 billion, or $2.25 per basic share, versus $413.0 million, or $0.88, in 2017.
  • Earnings quality: 2018 net income included a $926 million net gain on real estate sales, including a $726 million gain from the $1.0 billion Shoreline Technology Center sale. NAREIT FFO was $780.2 million ($1.66 diluted per share); adjusted FFO was $857.2 million ($1.82 diluted per share), down from $918.4 million ($1.95) in 2017. FAD was $746.4 million, versus $803.7 million.
  • Cash flow: Operating cash flow was $848.7 million, little changed from $847.0 million. Investing activities provided $1.829 billion, principally reflecting asset-sale proceeds; financing activities used $2.621 billion. Cash, cash equivalents, and restricted cash totaled $139.8 million at year-end.
  • Margins and portfolio operations: Total property NOI was $1.131 billion and adjusted NOI was $1.119 billion. Same-property adjusted NOI increased 2.0% in senior housing triple-net, 1.5% in life science, and 2.1% in medical office; SHOP same-property adjusted NOI declined 3.8%, reflecting lower occupancy and higher labor costs. Year-end occupancy was 95% for life science and 92% for medical office.
  • Debt and liquidity: Debt obligations were approximately $5.568 billion, down from $7.880 billion in 2017; total assets were $12.719 billion and total equity was $6.513 billion. About 98% of debt was fixed-rate. The $2.0 billion revolving facility had $80.1 million drawn at year-end. Management said operating cash flow, cash, and financing sources should cover operating needs, debt service, and distributions for at least 12 months.
  • Dividends: Cash dividends were $1.48 per common share for 2018. The board declared another $0.37 quarterly dividend in January 2019.

Material changes versus 2017

  • Revenue was broadly flat, but reported net income rose sharply, largely because the real estate gain was substantially higher. Adjusted FFO per share fell about 7%; FAD fell about 7%.
  • Debt declined by approximately $2.3 billion. The company repaid $700 million of 5.375% notes due 2021 and $450 million of 3.75% notes due 2019, recording a $44 million debt-extinguishment loss on the former repayment.
  • Brookdale exposure was reduced through sales and operator transitions. Brookdale represented 6% of total revenue in 2018, down from 8% in 2017, excluding SHOP operations; the company had transitioned 38 Brookdale-operated assets by year-end.
  • The company sold a 51% interest in its U.K. portfolio, retaining 49% and expecting to sell that remaining interest by 2020. It also formed a 51%-owned MOB joint venture with MSREI and acquired full ownership of three life science joint ventures.
  • SHOP performance remained pressured: same-property adjusted NOI declined, and the company recorded $55 million of net impairment charges, primarily on underperforming SHOP assets and a life science land parcel.

Outlook, risks, and unusual items

  • No quantitative 2019 earnings or operating guidance is stated in the provided filing text. Management described expected liquidity as adequate for at least the next 12 months and identified capital expenditures, acquisitions, and development as principal investment needs.
  • The active development and redevelopment pipeline was approximately $1.5 billion, with about $913 million of remaining costs to complete. Development carries construction-cost, timing, leasing, and occupancy risks.
  • Brookdale concentration and senior housing operating performance remain material risks. In SHOP/RIDEA structures, the company bears operating risks while relying on third-party managers for day-to-day operations.
  • Other disclosed risks include healthcare reimbursement and regulation, tenant/operator financial deterioration, labor costs, life science market and funding conditions, California concentration and natural disasters, interest rates, access to capital, and maintaining REIT status.
  • A securities class action and related derivative actions concerning historical HCR ManorCare disclosures remained pending. The company disputed the claims; it recorded no loss contingency because loss was not considered probable or estimable.
  • Accounting changes included adoption of revenue and partial-sale guidance, with a $79 million cumulative-effect adjustment to equity. The company adopted the new lease standard on January 1, 2019 and estimated it would recognize a $130–$165 million lease liability and a $145–$180 million right-of-use asset.

Important facts for investors to verify

  • How much of 2018 GAAP earnings came from property operations versus the Shoreline sale and other gains, and whether adjusted FFO and FAD trends stabilize.
  • SHOP occupancy, labor expense, same-property NOI, impairment exposure, and the results of Brookdale asset transitions.
  • Debt maturities and refinancing costs, revolving-facility availability, covenant compliance, and the impact of the 2020 note maturity.
  • Progress on development commitments and leasing, including the cost and expected returns of projects in the pipeline.
  • Execution of the planned sale of the remaining U.K. interest, and developments in the pending litigation and healthcare regulatory environment.