HCP, Inc. (filing supplied under Healthpeak Properties metadata) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited interim results. HCP invested primarily in U.S. healthcare real estate across senior housing triple-net, senior housing operating portfolio (SHOP), life science and medical office segments.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $456.0 million | $454.0 million | $1,404.8 million | $1,405.1 million |
| Net income (loss) attributable to common shares | $98.9 million | $(7.8) million | $228.3 million | $472.3 million |
| Diluted EPS | $0.21 | $(0.02) | $0.49 | $1.01 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $632.9 million | $637.9 million |
| FFO as adjusted | $208.2 million | $227.8 million | $655.1 million | $692.7 million |
| FAD | $186.5 million | $202.4 million | $578.4 million | $621.1 million |
Q3 NOI was $273.6 million, about 60% of revenue; Adjusted NOI was $272.9 million versus $283.6 million a year earlier. Nine-month NOI was $868.1 million, about 62% of revenue; Adjusted NOI was $854.0 million versus $876.7 million. NOI, Adjusted NOI, FFO and FAD are non-GAAP measures as defined by the company.
At September 30, total assets were $13.08 billion and total equity was $5.64 billion. Debt carrying value was $6.71 billion, down from $7.88 billion at December 31, 2017. Cash and cash equivalents were $78.9 million; including restricted cash, cash totaled $108.7 million. The $2.0 billion revolving facility had $636.7 million drawn. The company reported compliance with its credit-facility and term-loan covenants. It declared common dividends of $0.37 per share for each 2018 quarter through Q3 ($1.11 per share year to date).
Changes versus prior comparable periods
- Q3 revenue was nearly flat year over year. Common-share earnings improved from a loss to a profit, chiefly reflecting higher real-estate sale gains, lower impairments, lower interest expense and comparison with 2017 hurricane-related charges. These gains were partly offset by weaker senior-housing operating performance and reduced interest income.
- Nine-month revenue was also essentially flat, but common-share earnings fell from $472.3 million to $228.3 million. The comparison included a 2017 gain on real-estate sales and Four Seasons notes, plus lower senior-housing NOI and a 2018 loss on consolidating seven U.K. care homes.
- Nine-month FFO as adjusted declined 5% and FAD declined 7%. SHOP same-property Adjusted NOI fell 3.3% year to date, with management citing lower occupancy and higher labor costs. Life science and medical office same-property Adjusted NOI grew 1.2% and 2.1%, respectively; triple-net same-property Adjusted NOI grew 0.7%.
- Operating cash flow was slightly lower year over year. Investing cash inflow decreased to $817.5 million from $1.74 billion, while financing cash outflow narrowed to $1.42 billion from $2.35 billion.
Transactions, outlook, risks and unusual items
- HCP continued reducing Brookdale concentration through asset sales and operator transitions. Brookdale represented 5% of total Q3 revenue and 34% of senior-housing triple-net assets at quarter-end. HCP said exposure was expected to decline further as the transactions proceeded.
- In June, HCP sold a 51% interest in its U.K. portfolio to a joint venture partner, retained 49%, and received gross proceeds of $402 million. It also sold its remaining RIDEA II interest and related loans for total proceeds of $332 million.
- In August, HCP formed and consolidated a 51%-owned medical-office joint venture with MSREI; the partner contributed $298 million, and the venture acquired 16 Greenville-area buildings for $285 million.
- Subsequent to quarter-end, HCP sold 17 Brookdale-related assets for approximately $263 million; it expected the final two sales to close in Q4. It also agreed to sell the Shoreline Technology Center life-science campus for $1.0 billion, with a $65 million nonrefundable deposit and an anticipated Q4 closing. Management estimated an approximately $700 million gain if completed as expected.
- In July, HCP repaid $700 million of 5.375% notes due 2021 and recorded a $43.9 million extinguishment loss. It gave notice in October to redeem $450 million of 3.75% notes due 2019 in November, with no expected extinguishment loss.
- Management expected operating cash flow, available cash and financing sources to cover operating expenses, debt service, planned note redemption and distributions for at least the next 12 months. No specific earnings or FFO guidance was provided.
- Key operating risks include tenant and operator credit, senior-housing occupancy and labor costs, healthcare regulation and reimbursement, development and leasing execution, capital-market access, interest rates, foreign exchange and joint-venture dependence. The company disclosed ongoing securities class-action and derivative litigation related to HCR ManorCare; it considered the claims without merit, but could not estimate potential loss and recorded no contingency.
- Adoption of revenue-accounting standards produced a $79 million cumulative-effect increase to opening equity. The filing also describes a $41 million loss on consolidation of the U.K. care homes and $19.2 million of nine-month impairment charges.
Important facts for investors to verify
- Progress, closing proceeds and realized gain from the Shoreline campus sale and remaining Brookdale-related asset dispositions.
- SHOP occupancy, labor-cost trends and same-property NOI, alongside continued Brookdale tenant/operator exposure and transition execution.
- Cash flow and dividend coverage, including the distinction between GAAP operating cash flow and non-GAAP FAD.
- Debt refinancing and liquidity after the planned $450 million note redemption, and covenant compliance as asset sales and investments continue.
- Developments in the HCR ManorCare-related litigation and any change in the company’s assessment of potential loss.