Healthpeak Properties, Inc. (then HCP, Inc.) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; balance sheet compared with December 31, 2013. HCP was a healthcare-focused U.S. REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as provider loans and leases. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change / context |
|---|---|---|---|
| Total revenue | $530.0 | $511.2 | Up 3.7% |
| Income from continuing operations | $233.9 | $231.6 | Up 1.0% |
| Net income applicable to common shares | $258.0 | $230.1 | Up 12.1%; includes $28.0 gain on property sales in discontinued operations |
| Diluted EPS | $0.56 | $0.51 | Continuing-operations EPS was $0.50 in both periods |
| Operating cash flow | $247.2 | $214.4 | Up 15.3% |
| Adjusted (cash) NOI | $401.0 | $382.6 | Up 4.8%; non-GAAP measure |
| Diluted FFO per share | $0.75 | $0.74 | Up 1.4%; non-GAAP measure |
| Dividend declared per common share | $0.545 | $0.525 | Quarterly dividend increased; annualized rate $2.18 |
Revenue growth reflected higher lease and resident-service revenue and interest income. Interest expense declined to $106.6 million from $109.1 million, while depreciation and amortization rose to $107.4 million from $103.2 million. Other income fell to $1.9 million from $12.1 million, largely because Q1 2013 included an $11 million gain on marketable equity securities. HCP sold two skilled-nursing facilities and one hospital in Q1 2014, recording a $28.0 million gain.
Financial position, debt and liquidity
- At March 31, total assets were $19.86 billion, total liabilities $8.89 billion and total equity $10.97 billion. Cash and cash equivalents were $49.7 million, down from $300.6 million at year-end.
- Debt carrying value was $8.45 billion, comprising $6.91 billion of senior unsecured notes, $1.24 billion of mortgage debt, a $228.3 million term loan and $74.1 million of other debt. The filing reports $8.41 billion of principal debt excluding discounts and premiums.
- HCP issued $350 million of 4.20% notes due 2024 and repaid $400 million of maturing notes and approximately $163 million of mortgage debt during the quarter. Debt maturities included $104.6 million in the remaining nine months of 2014, $708.4 million in 2015 and $1.42 billion in 2016.
- The revolving credit facility was expanded by $500 million to $2.0 billion and extended to March 2018, with a one-year extension option. It was undrawn at quarter-end. HCP reported compliance with its facility and term-loan covenants.
- Operating cash flow was $247.2 million; investing activities used $46.6 million and financing activities used $451.5 million. The financing outflow included $250.2 million of common dividends. Management said expected operating cash flow over the next 12 months should cover operations, debt service, recurring capital expenditures and dividends; larger maturities and investment needs could require debt or equity financing.
Material changes, outlook and risks
- Property-level adjusted NOI increased across all five segments. Same-property adjusted NOI growth was strongest in hospitals (10.2%), followed by senior housing (4.7%), medical office (4.3%), post-acute/skilled nursing (3.6%) and life science (2.5%). Management cited rent escalations, occupancy and acquisitions/developments; senior housing results also reflected increased RIDEA occupancy.
- Credit concentration is significant: HCR ManorCare represented 32% of company assets and 28% of revenue, and 89% of post-acute/skilled nursing gross assets. Its Q1 revenue and net income declined year over year. HCP’s $7.19 billion direct-financing-lease portfolio was primarily attributable to HCR ManorCare.
- A 14-property senior-housing direct-financing-lease portfolio, carried at $373 million, remained on nonaccrual and was rated watch list. HCP recognized income on a cash basis and said collateral value exceeded carrying value. A separate $18.1 million Delphis loan remained on cost-recovery status, net of a $13.4 million allowance.
- After quarter-end, HCP and Brookdale agreed to proposed transactions contingent on Brookdale’s merger with Emeritus: a $1.2 billion, 14-campus CCRC joint venture; conversion of 49 non-stabilized Emeritus properties into a RIDEA venture; and amended leases for 153 properties, guaranteed by Brookdale. These transactions were not completed as of the filing.
- Principal risks identified include operator and tenant financial weakness, especially healthcare reimbursement and regulatory changes, concentration, capital-market access and refinancing costs, interest rates, lease renewals, litigation and joint-venture dependence. HCP reported no known legal matter expected to have a material adverse effect and no material change to previously disclosed risk factors.
- No specific earnings or operating guidance was provided. Management’s stated 12-month liquidity expectation is not a guarantee; interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- HCR ManorCare’s ability to meet lease obligations and the implications of its substantial share of HCP’s assets, revenue and direct-financing leases.
- Performance, cash collections and collateral assumptions for the nonaccrual senior-housing lease portfolio and the Delphis loan.
- Whether the Brookdale–Emeritus merger and related joint ventures and lease amendments closed, and their eventual effects on rent, operating exposure and ownership.
- Debt refinancing requirements, covenant headroom, interest-rate exposure and HCP’s ability to fund dividends and planned investment from recurring cash flows.
- The contribution of the one-time property-sale gain to reported net income; continuing-operations income and FFO provide different views of underlying performance.