HEALTHPEAK PROPERTIES, INC. quarterly report, Q2 FY2014

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HCP, Inc. (now Healthpeak Properties): Q2 2014 Form 10-Q

Reporting period: Three and six months ended June 30, 2014. 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-provider debt. The filing was signed August 5, 2014.

Financial performance

  • Revenue: Q2 revenue was $536.1 million, up 4.7% from $512.2 million a year earlier. First-half revenue was $1.066 billion, up 4.2%.
  • Profit and EPS: Q2 net income attributable to HCP was $218.9 million; net income applicable to common shares was $218.4 million, or $0.48 per diluted share, versus $213.0 million and $0.47 a year earlier. First-half common-share income was $476.4 million, or $1.04 per diluted share, versus $443.1 million and $0.97.
  • REIT supplemental measures: Q2 diluted FFO per share was $0.73 versus $0.72; adjusted diluted FFO per share was $0.75 versus $0.72. First-half diluted FFO per share was $1.48 versus $1.46; adjusted diluted FFO per share was $1.49 versus $1.46. FFO is non-GAAP and is not a substitute for GAAP net income or operating cash flow.
  • Property operations: Q2 NOI was $439.9 million versus $423.7 million; adjusted (cash) NOI was $409.2 million versus $399.2 million. First-half NOI was $877.0 million versus $849.4 million; adjusted NOI was $810.2 million versus $781.8 million. Same-property adjusted NOI increased across senior housing, post-acute/skilled nursing, life science and medical office; hospital same-property adjusted NOI declined 5.3% in Q2.
  • Expenses and other items: Q2 interest expense decreased $1.6 million to $106.8 million, while depreciation and amortization rose $3.9 million to $113.1 million and G&A rose $5.0 million to $29.1 million. Other income fell to $0.7 million from $3.3 million. First-half discontinued operations included $28.0 million of property-sale gains, compared with $0.9 million in the prior-year period.
  • Cash flow: First-half operating cash flow was $607.7 million, up from $571.6 million. Investing used $385.2 million and financing used $469.0 million; cash and cash equivalents fell from $300.6 million at year-end to $54.1 million at June 30. HCP paid $500.4 million in common dividends.
  • Balance sheet and debt: Total assets were $20.14 billion and total liabilities $9.17 billion at June 30. Debt carrying value was approximately $8.60 billion, excluding $73 million of other debt; the debt maturity schedule totals $8.63 billion before discounts. Cash was $54.1 million. HCP had $310 million drawn on its $2.0 billion revolving facility and reported compliance with its credit-facility covenants. Senior unsecured notes had a 5.06% weighted-average effective rate and six-year weighted-average maturity; mortgage debt had a 6.20% weighted-average rate and three-year weighted-average maturity.

Material changes and transactions

  • HCP acquired 20 UK care homes in June for $127 million, its first UK real estate investment. The long-term triple-net lease began at annual rent of $9.7 million, with inflation-linked increases subject to a 2% floor and 4.5% cap.
  • First-half real estate acquisitions totaled $285.4 million; HCP also funded development and capital projects. Property-sale proceeds were $36.9 million.
  • In March, HCP expanded its revolving credit facility by $500 million to $2.0 billion and extended its maturity to March 2018, with a one-year extension option. It issued $350 million of 4.20% notes due 2024 and repaid maturing debt.
  • After quarter-end, Brookdale completed its acquisition of Emeritus on July 31. HCP’s agreed Brookdale transaction contemplated lease amendments on 153 communities, transferring 49 properties into a consolidated RIDEA partnership with Brookdale holding 20%, and a $1.2 billion CCRC joint venture in which HCP would hold 49%. HCP expected to close the transaction around August 29 and anticipated an approximately $36 million net lease-termination fee; these were forward-looking expectations, not completed Q2 results.

Outlook, risks and unusual items

  • Management said operating cash flow over the next 12 months was expected to cover operations, debt service, recurring capital expenditures and common dividends. Acquisitions, development and maturities could require additional borrowing or securities issuance. No specific earnings or FFO guidance was provided in the supplied filing text.
  • Credit concentration is material: HCR ManorCare accounted for 32% of HCP’s total assets and 28% of total revenue; it represented 89% of post-acute/skilled nursing gross assets. HCR ManorCare reported a Q2 net loss of $10.9 million, versus net income of $10.1 million a year earlier. Brookdale and Sunrise were also significant relationships.
  • A $372 million senior-housing direct-financing-lease portfolio remained on nonaccrual, with income recognized on a cash basis. It was rated Watch List; HCP stated it believed collateral value exceeded carrying value. Separately, a $17.5 million Delphis loan was on cost-recovery status and had a $13.4 million allowance.
  • HCP cited risks from operator and tenant credit, healthcare reimbursement and regulation, interest rates and capital-market access, debt refinancing, competition, acquisitions and joint ventures. It reported no known legal proceedings expected to have a material adverse effect and no material changes to its previously disclosed risk factors.
  • Reported hospital results were affected by a prior-period $12 million correction related to Medical City Dallas straight-line rent and lease-intangible amortization. Q2 depreciation also increased partly because of revised useful-life and residual-value estimates for certain properties potentially being sold. The Brookdale transaction and its expected accounting effects were subject to closing.

Important facts for investors to verify

  • HCR ManorCare’s operating and liquidity condition, rent coverage, and ability to meet obligations to HCP, given the portfolio concentration and its reported quarterly loss.
  • Closing, final terms and realized financial effects of the Brookdale transaction, including lease reductions, RIDEA operating exposure and the CCRC joint venture.
  • Cash available after dividends and investment spending, upcoming debt maturities—including $708.4 million scheduled in 2015 and $1.43 billion in 2016—and refinancing access and cost.
  • Collection and valuation assumptions for the nonaccrual senior-housing lease portfolio and the Delphis loan, and the status of the related allowances.
  • Underlying performance trends by segment, distinguishing recurring property operations from sale gains, lease-termination items and other nonrecurring effects.