HCP, Inc. (now Healthpeak Properties): Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. HCP was a healthcare-focused REIT with interests in 1,198 properties, including senior housing, life science, medical office and QCP assets. The filing was signed November 1, 2016. Unless noted otherwise, figures below are in U.S. dollars.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $654.3 million | $657.5 million | $1,957.1 million | $1,874.9 million |
| Net income attributable to HCP | $151.3 million | $115.4 million | $569.1 million | $39.6 million |
| Diluted EPS | $0.32 | $0.25 | $1.22 | $0.08 |
| Diluted FFO per share | $0.65 | $0.57 | $2.05 | $0.97 |
| FFO as adjusted per share | $0.72 | $0.79 | $2.15 | $2.36 |
| Funds available for distribution (FAD) | $317.5 million | $309.9 million | $964.4 million | $948.3 million |
- Q3 revenue was nearly flat year over year, while HCP-attributable net income rose about 31%. Nine-month revenue increased about 4%; reported net income rose sharply from a weak prior-year comparison.
- The net income comparison is heavily affected by unusual items: 2015 included substantial impairments, including a $478 million charge on HCR ManorCare (HCRMC) direct financing lease investments and a $112 million impairment of Four Seasons notes. No impairment charges were recorded in the first nine months of 2016; 2016 results included $120 million of real estate sale gains and $49 million of income tax expense.
- Underlying adjusted FFO weakened: $0.72 per share in Q3 versus $0.79, and $2.15 for nine months versus $2.36. Management attributed the decline mainly to lower HCRMC-related income, asset sales and a shift to cash-basis recognition, plus lower Four Seasons note income. Acquisitions, rent increases and completed developments partly offset the declines.
- FAD increased about 2% for both the quarter and nine-month period. Q3 adjusted NOI for the same-property portfolio increased across SHOP, life science and medical office; SH NNN same-property adjusted NOI rose 1.0% and QCP rose 3.0%. Nine-month QCP same-property adjusted NOI declined 1.1%.
Cash flow, balance sheet and debt
- Operating cash flow was $998.6 million for the first nine months, up from $867.7 million. Investing activities used $314.2 million, versus $1.69 billion in 2015; financing activities used $897.3 million, compared with $755.9 million provided in 2015.
- HCP paid $806.2 million in common dividends during the nine months. Cash and cash equivalents fell to $132.9 million at September 30 from $346.5 million at year-end 2015. Restricted cash was $71.7 million.
- Total assets were $21.19 billion and total liabilities $11.61 billion at September 30. Stockholders’ equity was $9.18 billion; total equity including noncontrolling interests was $9.58 billion.
- Debt principal totaled $10.89 billion: $8.30 billion senior unsecured notes, $1.37 billion drawn on the $2.0 billion revolving credit facility, $758 million mortgage debt and $463 million term loans. The weighted average debt rate was 4.25%; 85.8% of debt was fixed-rate or presented as fixed after hedging. The company reported covenant compliance.
- Scheduled principal maturities included $1.51 billion in 2017 and $1.98 billion in 2018, including the revolving facility. HCP had approximately $628 million of undrawn capacity on its $2.0 billion revolver at quarter end. On November 1, it issued redemption notices for $1.1 billion of notes due in 2017 and 2018 and expected $47 million of associated prepayment costs.
Material changes, outlook and risks
- QCP spin-off: HCP completed the spin-off of Quality Care Properties on October 31, 2016, after quarter end. QCP included 338 properties, primarily HCRMC lease investments and an HCRMC equity investment. QCP raised $1.75 billion through secured debt financings; approximately $1.69 billion in cash was transferred to HCP in connection with the transaction. HCP said it expected to use the proceeds to repay debt. QCP’s results will be reported as discontinued operations beginning in Q4 2016.
- HCRMC credit exposure: HCRMC remained current on rent, but its fixed-charge coverage was 1.02x for the trailing 12 months and 0.98x for the trailing three months ended September 30. HCP had placed its HCRMC lease investments on watch list and recognized income on a cash basis. HCRMC represented 24% of HCP gross assets and 18% of total revenue for the nine months; HCP said the spin-off reduced its subsequent HCRMC concentration to less than 10%.
- HCRMC reported declining operating performance, attributing pressure to payor mix, shorter lengths of stay and a weaker flu season. The DOJ’s False Claims Act litigation against HCRMC remained unresolved; potential consequences could affect HCRMC’s liquidity and ability to meet obligations. HCP also faced securities and derivative lawsuits relating to disclosures about HCRMC; the company could not estimate the financial impact.
- Brookdale was another significant concentration. HCP disclosed that, pro forma for the QCP spin-off, Brookdale would have represented 12% of nine-month revenue and 16% of NOI from RIDEA-managed properties. Brookdale-related asset sale, rent reallocation and operating-structure transactions were pending and subject to approvals and closing conditions.
- Other planned transactions included a proposed $1.125 billion sale of 64 Brookdale-leased assets, expected in Q1 2017, and a planned RIDEA II recapitalization. These were not completed as of the filing date and remained conditional.
- Management said it expected to meet operating costs, debt service and distributions over the next 12 months primarily with operating cash flow, cash balances and financing activities. It anticipated funding investment needs through equity or debt issuance, credit facilities, or property sales. The filing provides no specific earnings or FFO guidance.
- Additional risks include tenant and operator creditworthiness, healthcare reimbursement and regulatory changes, refinancing and capital-market access, interest and foreign-exchange exposure, litigation, and the ability to maintain REIT qualification. Management reported effective disclosure controls at September 30.
Important facts for investors to verify
- How the QCP spin-off, cash distribution and subsequent debt repayments affected HCP’s post-spin leverage, liquidity, dividend capacity and continuing-operations results.
- Whether HCRMC’s operating performance and rent coverage improved, and whether cash-basis lease income and the existing $817 million DFL loss allowance remain appropriate.
- Completion, proceeds and rent effects of the pending Brookdale and RIDEA II transactions, including any changes in Brookdale concentration.
- Whether adjusted FFO and FAD trends support the dividend after the QCP separation; compare these non-GAAP measures with GAAP cash flow and recurring capital needs.
- Refinancing of near-term debt maturities, costs of the announced note redemptions, covenant headroom and availability of revolver capacity.
- Developments in the DOJ case against HCRMC and related shareholder litigation, including any settlement, reimbursement, penalty or operational consequences.