HCP, Inc. (now Healthpeak Properties, Inc.) — Q3 2015 Form 10-Q
Business context and reporting period. The filing is for the quarter and nine months ended September 30, 2015. HCP was a healthcare-focused REIT investing across senior housing, post-acute/skilled nursing, life science, medical office, and hospital properties, as well as healthcare-related loans and leases. Unless stated otherwise, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $658 | $597 | $1,876 | $1,663 |
| Net income | $118 | $251 | $48 | $737 |
| Net income applicable to common shares | $115 | $247 | $39 | $724 |
| Diluted EPS | $0.25 | $0.54 | $0.08 | $1.58 |
| Adjusted FFO per diluted share | $0.79 | $0.75 | $2.36 | $2.25 |
| FAD per diluted share | $0.67 | $0.65 | $2.05 | $1.90 |
Revenue rose 10% in Q3 and 13% year to date, helped by acquisitions and higher resident-fee revenue following the RIDEA III senior-housing acquisition. GAAP earnings fell sharply, chiefly reflecting impairments and, for the nine-month comparison, the absence of prior-year gains and Brookdale-related termination fees. Adjusted FFO and FAD increased; both are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Cash flow: Nine-month operating cash flow was $868 million, versus $883 million. Investing used $1.686 billion, versus $957 million; financing provided $756 million, versus $143 million used in 2014. Cash and cash equivalents were $120 million at September 30, down from $184 million at year-end 2014.
- Debt and liquidity: Debt carrying value was approximately $11.05 billion, comprising $1.00 billion on the revolving line, $541 million in term loans, $8.57 billion in senior notes, and $940 million in mortgage debt. The $2.0 billion revolver had $1.0 billion outstanding. The company reported compliance with its debt covenants. Scheduled debt maturities included about $1.39 billion in 2016 and $1.33 billion in 2017.
- Balance sheet and distributions: Total assets were $22.19 billion and total equity $10.46 billion at September 30. HCP declared dividends of $0.565 per common share for Q3; nine-month declared dividends were $1.695 per share.
- Property-level trends: Q3 same-property adjusted NOI rose 2.4% in senior housing, 5.7% in life science, 4.2% in medical office, and 6.5% in hospital, but declined 11.0% in post-acute/skilled nursing, primarily due to the HCRMC lease amendment.
Material changes and unusual items
- HCP acquired 35 private-pay senior-housing communities with 5,025 units through RIDEA III for approximately $847 million. From acquisition through September 30, the portfolio generated $47 million of revenue and $1 million of earnings.
- The HCRMC lease amendment reduced initial annual rent by $68 million, from $541 million to $473 million, in exchange for deferred rent obligations and the agreed purchase of nine facilities. HCP also recorded a $478 million impairment of HCRMC direct-financing-lease investments earlier in 2015.
- Q3 included a $70 million impairment of Four Seasons notes and a $27 million impairment of HCP’s HCRMC equity investment. Nine-month impairments also included the $478 million HCRMC lease impairment and a $3 million property impairment; the Four Seasons impairment totaled $112 million for the nine months.
- HCP issued $1.35 billion of senior unsecured notes in 2015 and raised $50 million net through its at-the-market equity program during the first nine months. It invested approximately $1.8 billion in acquisitions, development, joint ventures, and loans.
Outlook, risks, and contingencies
The filing provides no specific earnings or FFO guidance. Management expected to fund the next 12 months’ operating expenses, debt service, and distributions primarily with operating cash flow, available cash, and financing activities; planned investment needs included capital expenditures, acquisitions, and development. Management cited continued access to equity and debt markets, while noting capital-market conditions and credit ratings affect funding costs and availability.
- HCRMC was a major concentration: it represented 28% of HCP gross assets and 23% of total revenue for the nine months. HCP said amended rent collection was reasonably assured, but disclosed that the DOJ had filed a False Claims Act complaint alleging improper Medicare claims by HCRMC. HCP warned an adverse judgment or settlement could further affect its investments.
- HCP identified tenant/operator concentration, operator financial weakness, healthcare reimbursement and regulatory changes, joint-venture risks, interest rates, foreign exchange, capital-market access, and REIT qualification among key risks.
- HCP committed liquidity support for HCP Ventures IV, including support tied to $107 million of obligations coming due through February 2016. This exposure depended in part on refinancing or partner contributions.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether HCRMC meets lease obligations and completes the remaining facility purchases, and how the DOJ litigation develops.
- Whether Four Seasons’ operating performance and credit quality support repayment of the notes; the filing reports a $100 million carrying value after impairment.
- Near-term debt maturities, refinancing plans, revolver availability, and compliance with financial covenants.
- Whether post-acute/skilled-nursing weakness persists and whether growth in other segments offsets the HCRMC rent reduction.
- How acquisition, development, and equity issuance affect cash generation, leverage, and dividend coverage; review the company’s non-GAAP FFO and FAD reconciliations alongside GAAP cash flows.