Healthpeak Properties, Inc. — Q2 2023 Form 10-Q
Business context and period: This unaudited filing covers the quarter and six months ended June 30, 2023. Healthpeak is a healthcare real estate REIT, with lab, outpatient medical, and continuing care retirement community (CCRC) segments. Its portfolio included interests in 475 properties at quarter-end. In February 2023, the company completed a reorganization into an UPREIT structure; management said it did not materially affect financial position or operations.
Financial performance and liquidity
| Metric | Q2 2023 | Prior-year comparable | Six months 2023 | Prior-year comparable |
|---|---|---|---|---|
| Total revenue | $545.4 million | $517.9 million | $1.071 billion | $1.016 billion |
| Net income applicable to common shares | $51.8 million; $0.09 per share | $68.1 million; $0.13 per share | $169.4 million; $0.31 per share | $137.7 million; $0.26 per share |
| Adjusted NOI | $299.5 million | $272.1 million | Not provided as a consolidated period total in the cited summary | Not provided |
| FFO as Adjusted | $249.2 million | $236.5 million | $478.7 million | $471.3 million |
| AFFO | $220.9 million | $195.6 million | $428.5 million | $397.6 million |
| Operating cash flow | Not separately stated for the quarter | Not separately stated | $471.7 million | $449.7 million |
Q2 revenue grew about 5%, while common-share net income fell about 24%. For the first half, revenue rose about 5% and common-share net income rose about 23%. Results included $86.5 million of real estate sale gains in the first half of 2023, versus $14.2 million in the prior-year period. Management attributed underlying operating improvement mainly to completed developments and redevelopments, rent increases, new leasing, and acquisitions. Q2 segment Adjusted NOI was $154.5 million for lab, $111.5 million for outpatient medical, and $27.8 million for CCRC. Same-store Adjusted NOI increased year over year by 3.8%, 2.5%, and 19.3%, respectively.
Cash, debt, and capital: At June 30, cash and cash equivalents were $103.8 million and restricted cash was $56.7 million. Total debt carrying value was approximately $6.57 billion, comprising $329 million of commercial paper, $496 million of term loans, $5.40 billion of senior notes, and $344 million of mortgage debt. The company issued $750 million of 5.25% senior notes due 2032 during the first half. Approximately 95% of consolidated debt was fixed rate; weighted-average rates were 3.70% for fixed-rate and 5.49% for variable-rate debt. The $3.0 billion revolving facility had no borrowings outstanding. Operating cash flow was $471.7 million; investing activities used $138.7 million and financing activities used $299.4 million in the first half. Development, redevelopment, and tenant-improvement commitments were $188 million. The quarterly dividend was $0.30 per share.
Material changes and unusual items
- Interest expense increased to $49.1 million in Q2 from $41.9 million, reflecting new senior notes, the term loans drawn in late 2022, and higher commercial-paper rates, partly offset by lower commercial-paper borrowings.
- First-half real estate sale gains were $86.5 million, including $60 million from two lab buildings and $21 million from two outpatient medical buildings sold in 2023.
- Healthpeak wrote off $9 million of straight-line rent receivable from Sorrento Therapeutics after its Chapter 11 filing. The development lease was rejected in bankruptcy; Healthpeak received $2 million under a letter of credit and has not recognized any additional potential recovery.
- A borrower missed a $150 million seller-financing loan maturity in January 2023, repaid $102 million in February, and refinanced the remaining $48 million to January 2024 at a higher variable rate. Management said higher rates and macroeconomic conditions contributed to increased loan-loss reserves.
- CCRC same-store occupancy averaged 83.4% in Q2 versus 81.1% a year earlier; outpatient medical total-portfolio occupancy was 90.1%, while lab total-portfolio occupancy was 97.7%.
Outlook, risks, and contingencies
Management stated that operating cash flow, cash balances, and financing sources are expected to cover operating expenses, debt service, distributions, and other anticipated needs for the next 12 months and the foreseeable future. The filing provides no specific earnings or revenue guidance. Management highlighted inflation, labor and construction costs, supply-chain delays, rising interest rates, capital-market access, tenant and borrower financial health, and development execution as risks. It reported compliance with debt covenants at quarter-end and no legal proceedings believed likely to have a material adverse effect. Certain noncontrolling-interest holders may put interests to the company; related redeemable interests totaled $63.8 million at quarter-end. The company expects remaining redemption conditions to be met in 2023 and 2024. Development and redevelopment commitments, loan-funding commitments, and potential Sorrento claim proceeds remain relevant to future cash flows.
Investor verification priorities
- Review the composition and sustainability of reported earnings, including sale gains, higher depreciation and interest expense, and non-GAAP FFO/AFFO adjustments.
- Monitor commercial-paper refinancing, debt maturities, borrowing costs, credit ratings, and compliance with financial covenants.
- Track lab leasing and occupancy, outpatient medical occupancy, CCRC operating costs and occupancy, and tenant/operator credit quality.
- Assess the $188 million development commitment, remaining $40 million seller-financing commitment, and any future cash put obligations for noncontrolling interests.
- Follow Sorrento bankruptcy proceedings and any recoveries beyond the $2 million already received; assess loan-loss reserves and the refinanced seller loan due in January 2024.