HCP, Inc. (now Healthpeak Properties): Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The filing identifies the registrant as HCP, Inc. HCP was a healthcare-focused REIT investing in senior housing, post-acute/skilled nursing, life science, medical office and hospital properties, as well as healthcare-related debt.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $596.6 | $546.2 | $1,662.8 | $1,569.6 |
| Net income attributable to HCP | $247.7 | $233.8 | $725.7 | $677.7 |
| Diluted EPS | $0.54 | $0.51 | $1.58 | $1.49 |
| Adjusted (cash) NOI, non-GAAP | $413.4 | $395.2 | $1,223.6 | $1,177.0 |
| Diluted FFO per share, non-GAAP | $0.82 | $0.73 | $2.30 | $2.20 |
| Adjusted diluted FFO per share, non-GAAP | $0.75 | $0.79 | $2.24 | $2.25 |
- Revenue increased about 9% in Q3 and 6% year to date; attributable net income rose about 6% and 7%, respectively. Q3 results included no discontinued-operations income, compared with $9.8 million in Q3 2013.
- Q3 reported NOI was $479.1 million versus $428.2 million, including approximately $38 million of net lease-termination income from the Brookdale transaction. Adjusted cash NOI, which excludes specified non-cash and unusual items, rose about 5% in Q3 and 4% year to date.
- Operating cash flow was $883.0 million for the first nine months, compared with $843.7 million. Investing activities used $957.2 million and financing activities used $142.8 million. Cash and cash equivalents fell to $83.5 million from $300.6 million at December 31, 2013.
- Total assets were $20.7 billion; total liabilities were $9.7 billion and total equity was $11.0 billion at September 30. Debt was approximately $9.1 billion excluding $98 million of other debt without scheduled maturities. The $2.0 billion revolving facility had $70 million drawn; HCP reported covenant compliance.
- HCP declared dividends of $0.545 per share for each of the first three 2014 quarters, or $1.635 year to date. Cash dividends paid in the first nine months totaled $750.8 million.
Material changes and notable items
- Brookdale transaction: On August 29, HCP amended leases covering 153 senior housing properties and terminated leases on 49 others. The terminated properties were placed in a consolidated RIDEA structure in which Brookdale holds a 20% interest and manages the facilities. HCP recognized a net $38 million lease-termination gain after write-offs.
- The amended Brookdale leases retain 2014 base rent, but have reduced escalators and lower rent payments beginning in 2016: $6.5 million less in 2016 and $7.5 million less annually thereafter, according to the filing. The amendments also terminate certain tenant purchase options.
- HCP and Brookdale formed an unconsolidated joint venture owning 14 continuing-care-retirement-community campuses; HCP owns 49%. HCP contributed $370 million in cash and two properties. The campuses had $569 million of mortgage and entrance-fee obligations at closing.
- Q3 resident fees and services rose to $62.2 million from $36.4 million, in part reflecting the shift of properties from triple-net leases to RIDEA operations, where HCP records resident revenue and operating costs.
- HCP issued $800 million of 3.875% senior notes due 2024 in August and $350 million of 4.20% notes due 2024 in February. Senior unsecured notes had a 4.95% weighted-average effective rate and six-year weighted-average maturity at quarter end.
- Depreciation and amortization increased, partly due to revised estimates of useful lives and residual values for certain properties and assets placed in service. General and administrative expense declined versus 2013, which included $26.4 million of former-CEO severance-related charges.
Outlook, risks and contingencies
- Management stated that operating cash flow over the next 12 months was expected to be adequate for operations, debt service, recurring capital expenditures and dividends. Acquisitions, development and maturities could require borrowing or securities issuance. The filing provides no earnings or FFO guidance.
- HCR ManorCare was a material concentration: 31% of HCP’s total assets and 27% of total revenue for the first nine months were associated with it. HCP reported that HCR ManorCare fixed-charge coverage, excluding certain general and professional liability charges, declined year over year to 1.10 on a trailing-12-month basis and 1.04 on a trailing-three-month basis. HCP still considered contractual collection reasonably assured but warned further deterioration could lead to impairment of its equity-method investment or direct-financing-lease investment.
- HCP identified risks including tenant/operator financial weakness, healthcare reimbursement and regulatory changes, access to capital, interest rates, lease renewals, joint-venture dependence and acquisition/development execution. It reported no known legal proceedings expected to have a material adverse effect and no material change to the risk factors in its 2013 Form 10-K.
- After quarter end, HCP committed to lead a secured loan facility of approximately $630 million for a pending UK care-home acquisition; approximately $580 million was expected to be funded at closing, subject to customary conditions. Brookdale repaid a $68 million loan from HCP on November 3, 2014.
Important facts for investors to verify
- Whether HCR ManorCare’s operating coverage stabilizes and whether HCP’s large exposure produces any impairment or collection changes.
- The recurring earnings and cash-flow contribution of the Brookdale RIDEA conversions, separated from the one-time $38 million termination gain, and the effect of reduced lease payments.
- Liquidity and refinancing needs: cash declined substantially while debt and investment activity increased; review upcoming maturities, the revolving facility and capital-market access.
- Dividend coverage using recurring cash flow and adjusted FFO, noting adjusted diluted FFO per share was $0.75 in Q3 versus $0.79 a year earlier and $2.24 year to date versus $2.25.
- Execution, funding and credit risks associated with the planned UK loan and the CCRC joint venture’s debt and operating performance.