HCP, Inc. (Healthpeak Properties) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. HCP was a healthcare-focused REIT with 801 properties, including joint-venture properties, across senior housing, life science and medical office segments. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / prior period |
|---|---|---|
| Total revenue | $492.2 million | $520.5 million |
| Net income attributable to common shares | $460.4 million; diluted EPS $0.97 | $115.8 million; diluted EPS $0.25 |
| FFO applicable to common shares | $288.2 million; $0.61 per diluted share | $319.3 million; $0.68 per diluted share |
| FFO as adjusted | $240.2 million; $0.51 per diluted share | $321.8 million; $0.69 per diluted share |
| Funds available for distribution (FAD) | $218.6 million | $309.0 million |
| Cash from operating activities | $193.1 million | $268.6 million |
| Cash and cash equivalents | $764.1 million at March 31 | $94.7 million at December 31, 2016 |
| Total debt, before discounts and premiums | $8.11 billion | $10.92 billion at March 31, 2016 |
Reported earnings rose sharply primarily because HCP recorded $317.3 million of real-estate sale gains and a $51.2 million gain on the sale of Four Seasons notes. These items do not indicate a comparable improvement in recurring performance: FFO, adjusted FFO and FAD all declined year over year. Interest expense fell to $86.7 million from $122.1 million, mainly reflecting prior debt repayments. The filing does not provide a single consolidated operating-margin measure.
Property NOI was $333.9 million, versus $338.8 million; adjusted NOI was $333.3 million, versus $336.4 million. Same-property adjusted NOI increased 5.1% in senior housing triple-net, 2.9% in SHOP, 4.7% in life science and 4.4% in medical office. The common dividend declared was $0.37 per share, compared with $0.575 in Q1 2016.
Investing activities provided $1.72 billion, largely from asset sales and the RIDEA II transaction; financing activities used $1.24 billion, including debt repayments and $173.6 million of common dividends paid. At quarter-end, 93.9% of debt was fixed-rate and the weighted-average interest rate was 4.10%. HCP reported compliance with its revolving facility and term-loan covenants. Its $2.0 billion revolving facility matures March 2018 and had $492 million outstanding at quarter-end. Management said operating cash flow, cash balances and financing sources should cover operating needs, debt service and distributions for at least the next 12 months.
Material changes and transactions
- HCP sold 64 Brookdale-leased senior housing triple-net properties for $1.125 billion, recognizing a $170 million gain, and sold four life science facilities for $76 million, recognizing a $45 million gain. These and other sales contributed to the quarter’s $317 million real-estate gain.
- HCP contributed its RIDEA II interest to an unconsolidated joint venture, received $480 million in cash and $242 million in notes, and retained an approximately 40% beneficial interest. It deconsolidated RIDEA II and recognized a $99 million gain. The filing also notes that adoption of new asset-derecognition guidance would increase this gain by an estimated $107 million upon adoption.
- HCP sold its Four Seasons senior notes for $101 million, recording a $51 million gain, and sold its Four Seasons senior secured term loan for about $35 million. It repaid a £137 million term loan and $472 million of mortgage debt during the quarter.
- Revenue declined 5.4% year over year, with resident fees and services down to $140.2 million from $165.8 million. The comparison reflects the QCP spin-off in October 2016 and the RIDEA II deconsolidation. Q1 2016 included $68.4 million of discontinued-operation income from QCP; Q1 2017 had none.
- Net real estate decreased to $10.63 billion from $11.33 billion at year-end 2016, principally reflecting dispositions. Total assets declined to $14.86 billion from $15.76 billion.
Outlook, risks and unusual items
- No numerical full-year earnings or FFO guidance is provided in the supplied filing text. Management stated that it expected liquidity to be adequate for at least 12 months and identified capital expenditures, leasing costs, acquisitions and development as investment needs.
- The $257 million Tandem mezzanine loan was on the watch list and was subordinate to approximately $372 million of senior mortgage debt. Consulate, the operator leasing the portfolio, had lease and cross-default events, failed to pay the full April 2017 rent, and did not pay default interest. HCP believed full contractual collection was probably not assured, but did not record an impairment because estimated collateral value, net of senior debt, exceeded the loan’s carrying amount. HCP entered a conditional forbearance agreement through June 30, 2017; the senior lender’s forbearance was also required.
- A jury had returned a $348 million judgment against five Consulate entities in a government overbilling case; execution was stayed pending post-trial proceedings. HCP warned that an adverse outcome could further weaken Consulate and Tandem and impair debt service to HCP.
- HCP disclosed securities class-action and shareholder derivative litigation related to alleged misstatements and HCR ManorCare. The company said it believed the class action lacked merit; it could not estimate potential losses.
- Brookdale remained a significant concentration: it represented 12% of HCP revenue in Q1 2017 and 11% of gross assets at March 31. HCP also highlighted healthcare reimbursement and regulatory changes, tenant/operator financial health, capital-market access, interest rates, foreign exchange and healthcare-sector concentration as material risks.
- Subsequent events included a £105 million revolving-facility repayment in April, repayment of $250 million of senior notes on May 1, and a $27 million land sale in April. Management reported effective disclosure controls as of March 31.
Important facts for investors to verify
- Whether Tandem and its senior lender satisfied the forbearance conditions, and whether the loan’s collateral remains sufficient to avoid impairment.
- Developments in the Consulate judgment and related healthcare billing litigation, including effects on Tandem’s rent and debt-service capacity.
- Recurring operating performance apart from property-sale gains and the Four Seasons note-sale gain; in particular, adjusted FFO, FAD and segment same-property NOI trends.
- Brookdale’s financial condition and HCP’s remaining exposure following the sale of the 64 triple-net properties.
- Debt maturities and refinancing plans, including the revolving facility’s March 2018 maturity, and the sustainability of the $0.37 quarterly dividend relative to FAD and cash needs.
- The impact of the RIDEA II transaction and the anticipated accounting adjustment to its sale gain when the relevant derecognition guidance is adopted.