HCP, Inc. (now Healthpeak Properties) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is in the name of HCP, Inc. and covers its healthcare real estate business. HCP completed the spin-off of Quality Care Properties (QCP) on October 31, 2016; QCP’s results are presented as discontinued operations.
Business context and key financial metrics
HCP owned and invested in senior housing triple-net properties (SH NNN), senior housing operating properties (SHOP), life science, medical office, and other healthcare-related assets. At year-end, it reported total assets of $15.76 billion and debt obligations of approximately $9.19 billion.
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Total revenue | $2.129 billion | $1.940 billion | Up 9.7%; SHOP and acquisitions contributed to growth |
| Income from continuing operations | $374.2 million | $152.7 million | Improved year over year |
| Net income (loss) applicable to common shares | $626.5 million | $(560.6) million | 2015 included substantial impairments; 2016 included QCP discontinued-operations income |
| Diluted EPS | $1.34 | $(1.21) | Includes $0.57 per share from discontinued operations in 2016 |
| Adjusted FFO per diluted share | $2.74 | $3.16 | Down 13.3% |
| Funds available for distribution (FAD) | $1.216 billion | $1.262 billion | Down 3.7% |
| Cash from operating activities | $1.214 billion | $1.222 billion | Down $8.0 million |
| Cash and cash equivalents | $94.7 million | $340.4 million | At December 31; restricted cash is separate |
| Total debt obligations | $9.19 billion | $11.07 billion | Includes bank line, term loans, notes, mortgage and other debt |
Operating property NOI was $1.349 billion and adjusted NOI was $1.352 billion, including HCP’s pro-rata share of unconsolidated joint ventures. These are non-GAAP measures. The filing does not provide a single comparable operating margin measure.
Segment revenue was $423.1 million SH NNN, $686.8 million SHOP, $358.5 million life science, $446.3 million medical office, and $214.5 million other non-reportable segments. Life science occupancy averaged 97.4% in the total portfolio; medical office occupancy averaged 91.5%.
Material changes versus prior periods
- Revenue increased 9.7% year over year, with SHOP revenue rising to $686.8 million from $518.3 million. SH NNN revenue declined to $423.1 million from $428.3 million, partly reflecting asset sales and transitions to SHOP.
- Adjusted FFO per share declined to $2.74 from $3.16, mainly reflecting reduced HCR ManorCare-related income, the QCP spin-off, and lower interest income; acquisition and development growth and lower interest expense partly offset the decline.
- Cash dividends paid were $2.095 per share in 2016, versus $2.260 in 2015. The 2016 total includes the QCP stock distribution for tax reporting; quarterly cash dividends totaled $2.095 per share. The declared quarterly cash dividend was reduced to $0.37 per share for payment in March 2017, from $0.575 previously.
- Assets fell to $15.76 billion from $21.45 billion, principally following the QCP spin-off. HCP received $1.69 billion of net cash proceeds from the spin-off and used proceeds in part to repay debt.
Outlook, commentary, risks and unusual items
- Management expected to fund operating costs, debt service, distributions and investment needs over the next 12 months through operating cash flow, cash balances and financing sources. No quantified earnings or FFO guidance is provided in the supplied filing text.
- HCP sold properties for $665 million in 2016 and recognized $164.7 million of gains on real estate sales. It recorded a $46.0 million loss on debt extinguishments, largely from prepayment penalties on debt repaid using spin-off proceeds. Spin-off transaction costs were $86.8 million.
- A proposed $1.125 billion sale of 64 Brookdale-leased senior housing properties was pending at year-end, subject to approvals and closing conditions. HCP also had pending Brookdale asset transitions and a second life-science property sale tranche expected in 2018.
- Brookdale was a material concentration: its SH NNN leases represented 12% of total 2016 revenue; it also managed or operated properties representing about 18% of HCP’s real estate investments by gross assets. The filing describes Brookdale operating, occupancy, labor-cost and financial challenges.
- Credit quality warrants attention: $360.8 million of HCP’s DFL investments were classified Watch List, including a 14-property senior housing portfolio; a $256 million Tandem loan was also Watch List, although Tandem remained current on payments. Consulate, operator of Tandem facilities, faced a government qui tam billing-fraud trial beginning January 2017; HCP said the outcome could not be assessed.
- Other principal risks include healthcare reimbursement and regulatory changes, tenant/operator defaults or bankruptcy, dependence on external capital, interest-rate and refinancing exposure, California concentration, development execution, and REIT qualification. HCP reported compliance with its credit facility and term-loan covenants at year-end.
- A stockholder securities class action and derivative litigation related to HCR ManorCare allegations were pending. HCP said it believed the class action lacked merit; it could not estimate the ultimate financial impact of these matters.
At year-end, 83.1% of debt was fixed-rate and the weighted average debt rate was 3.91%. The $2.0 billion revolving facility had $899.7 million drawn at December 31, 2016; HCP subsequently paid down $440 million in January 2017. The filing reports investment-grade ratings of BBB (Fitch), Baa2 (Moody’s) and BBB (S&P Global) as of January 31, 2017. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for investors to verify
- Brookdale’s current rent coverage, operating trends and ability to meet lease and management obligations; also confirm the status and economics of the planned property sales and transitions.
- Underlying continuing-operations performance and cash generation after separating QCP, property-sale gains, spin-off costs and other non-recurring items; reconcile adjusted FFO and FAD to GAAP results.
- Debt maturities, revolving-facility availability after subsequent repayments, covenant headroom, and refinancing costs—particularly the stated 2017 maturities.
- Recovery prospects and collateral values for Watch List DFLs and loans, including Tandem and the senior housing DFL portfolio.
- Final outcomes and potential exposure from the pending litigation and the Consulate government case, plus the closing status of material announced dispositions.