HEALTHPEAK PROPERTIES, INC. annual report, FY2019

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Business Context and Reporting Period

Healthpeak Properties, Inc. (formerly HCP, Inc.; NYSE: PEAK) filed its Form 10-K for the fiscal year ended December 31, 2019. The company is a U.S. healthcare real estate REIT with senior housing triple-net and operating (SHOP), life science, and medical office portfolios. At year-end, it held interests in 617 consolidated properties and 48 properties through unconsolidated joint ventures. It changed its name in October 2019; shares began trading as PEAK in November.

Financial Performance and Position

  • Revenue: $1.997 billion, up from $1.847 billion in 2018. Resident fees and services rose to $728.0 million from $544.8 million, while rental and related revenue was $1.222 billion versus $1.237 billion.
  • Profit: Net income applicable to common shares was $44.0 million ($0.09 per diluted share), compared with $1.058 billion ($2.24 per diluted share) in 2018. The prior year included $926.0 million in net gains on real estate sales, notably the Shoreline Technology Center sale. 2019 included $225.9 million in impairment charges.
  • REIT operating measures: NAREIT FFO was $780.3 million, or $1.59 per diluted share, versus $780.2 million, or $1.66, in 2018. FFO as Adjusted was $864.4 million, or $1.76 per diluted share, versus $857.2 million, or $1.82. FAD was $745.8 million versus $746.4 million. These are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
  • Property operations: Total portfolio Adjusted NOI was $1.087 billion, compared with $1.119 billion in 2018, reflecting dispositions and portfolio transitions. Same-property Adjusted NOI increased 2.4% in senior housing triple-net, declined 1.0% in SHOP, and increased 6.2% in life science and 3.0% in medical office. Average occupancy was 83.2% in SHOP, 96.7% in life science, and 92.1% in medical office.
  • Cash flow and investment: Cash from operations was $846.1 million, nearly unchanged from $848.7 million. Investing activities used $1.449 billion, including $2.4 billion of acquisitions, development, redevelopment, and loan investments, partly offset by asset-sale and joint-venture proceeds. Cash, cash equivalents, and restricted cash totaled $184.7 million at year-end.
  • Debt and liquidity: Reported debt obligations were $6.352 billion, up from $5.568 billion; total liabilities were $7.365 billion. The company had no year-end balance on its $2.5 billion revolving facility and had $93 million of commercial paper outstanding. Approximately 96% of consolidated debt was fixed-rate. Management stated that operating cash flow, available cash, and financing sources should be sufficient for operating needs, debt service, and distributions for at least 12 months. Year-end credit ratings were not specified in the filing excerpt; ratings reported as of February 10, 2020 were Baa1 from Moody’s and BBB+ from S&P and Fitch.
  • Dividends: Cash dividends remained $1.48 per common share for 2019, with $720.1 million paid. The board declared a $0.37 quarterly dividend in January 2020.

Material Changes and Transactions

  • Healthpeak completed significant acquisitions across senior housing and life science, including a $445 million senior housing portfolio and several life science properties. It also sold various assets and its remaining U.K. joint-venture interest, exiting U.K. real estate.
  • It formed a joint venture with a sovereign wealth fund, contributing 19 SHOP assets valued at $790 million and receiving $367 million for the partner’s 46.5% interest. The transaction generated a $161 million gain on deconsolidation.
  • During 2019, 41 senior housing triple-net properties transitioned to SHOP; 14 were converted from direct financing leases to real estate with no gain or loss. SHOP same-property results continued to face higher labor costs and operator-transition impacts.
  • In October 2019, Healthpeak and Brookdale agreed to a series of transactions. Most closed January 31, 2020: Healthpeak agreed to acquire Brookdale’s 51% interest in 13 CCRC communities, pay a $100 million management termination fee, sell Brookdale 18 properties for $385 million, and restructure 24 remaining leased properties under a master lease with 2.4% annual rent escalators through 2027. The two remaining CCRCs were to be marketed for sale. The filing expects related termination expense and gains to be recognized in 2020.
  • Debt refinancing included $1.3 billion of 2026 and 2029 notes and $750 million of 2030 notes; proceeds funded redemptions and repurchases of nearer-dated notes. The company also issued common equity and settled forward sales during the year.

Outlook, Risks, and Unusual Items

No specific 2020 earnings or FFO guidance is provided in the supplied filing text. Management cited a development and redevelopment pipeline of approximately $1.4 billion, with about $758 million of remaining costs to complete. It also entered into a definitive agreement to acquire a Waltham, Massachusetts life science campus for $320 million, with closing expected in the second quarter of 2020.

  • Key business risks include senior housing occupancy, labor costs, operator and tenant credit, healthcare regulation and reimbursement, and the company’s limited control over third-party operators in RIDEA structures while bearing substantial operating risks.
  • Life science and medical office portfolios are exposed to tenant demand, specialized re-leasing costs, hospital-system health, and geographic concentration. California accounted for 28% of 2019 revenue and 37% of year-end assets; much of the life science portfolio is in earthquake- and wildfire-exposed California markets.
  • Development cost overruns, delays, leasing shortfalls, financing-market conditions, interest rates, leverage, and access to external capital could affect returns and liquidity. The company also depends on continued REIT qualification.
  • 2019 impairment charges included $194 million for assets classified as held for sale and other real estate impairments. The 2019 net gain on real estate sales was $22.9 million, far below 2018’s $926.0 million. Debt extinguishments generated a $58.4 million loss.
  • A securities class-action complaint was dismissed in November 2019; plaintiffs moved to amend the judgment. Related derivative matters remained pending, and the company said potential loss could not be reasonably estimated. Deloitte issued unqualified opinions on the financial statements and internal controls; critical audit matters concerned Brookdale transaction consolidation judgments and real estate impairments.

Important Facts for Investors to Verify

  1. Whether the January 2020 Brookdale transactions deliver the expected portfolio-quality and operating benefits, and how the $100 million termination fee and subsequent CCRC sales affect results.
  2. SHOP occupancy, labor costs, and operator transitions, alongside same-property NOI performance across all segments.
  3. Progress, remaining funding needs, leasing, and expected returns for the $1.4 billion development pipeline.
  4. Asset-sale execution and the assumptions behind the $225.9 million of impairment charges and $504 million of year-end assets held for sale.
  5. Debt maturities, refinancing access, covenant headroom, and the sustainability of dividends relative to cash generation and capital needs.
  6. Exposure to California concentration and natural disasters, healthcare regulation, tenant credit, and the unresolved litigation matters.