HCP, Inc. 2017 Form 10-K
Entity note: The request identifies Healthpeak Properties, Inc., but the supplied filing is for HCP, Inc. for the fiscal year ended December 31, 2017. The summary below reflects the filing provided.
Business context and reporting period
HCP is a healthcare-focused REIT with senior housing triple-net, senior housing operating portfolio (SHOP), life science, medical office, and other investments. It reported 744 consolidated properties at year-end. The 2016 spin-off of Quality Care Properties (QCP), which included 338 properties primarily tied to HCR ManorCare, materially changed the portfolio and limits direct comparability with prior periods.
Financial performance and position
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Total revenue | $1.848 billion | $2.129 billion |
| Income from continuing operations | $422.6 million | $374.2 million |
| Net income attributable to common shares | $413.0 million; $0.88 per diluted share | $626.5 million; $1.34 per diluted share |
| Operating cash flow | $847.0 million | $1.214 billion |
| FFO | $661.1 million; $1.41 diluted per share | $1.119 billion; $2.39 diluted per share |
| FFO as adjusted | $918.4 million; $1.95 diluted per share | $1.282 billion; $2.74 diluted per share |
| Funds available for distribution (FAD) | $803.7 million | $1.216 billion |
| Total assets / total equity | $14.088 billion / $5.595 billion | $15.759 billion / $5.941 billion |
| Debt obligations | $7.880 billion | $9.189 billion |
- Revenue fell about 13% year over year, mainly reflecting dispositions, the QCP spin-off and reduced interest income. GAAP continuing-operations income rose, but common-share net income, FFO, adjusted FFO and FAD declined.
- Consolidated NOI was $1.126 billion, approximately 61% of revenue; this is a non-GAAP property-level measure, not a GAAP operating margin. Same-property adjusted NOI increased in senior housing triple-net (5.6%), SHOP (0.8%), life science (4.1%) and medical office (3.0%).
- Cash, cash equivalents and restricted cash totaled $82.2 million at year-end. HCP had a $2.0 billion revolving facility, with $1.017 billion drawn. Management said operating cash flow, cash and financing sources should cover operating costs, debt service and distributions for at least the next 12 months.
- About 84% of debt was fixed-rate. The company reported approximately $7.9 billion of outstanding debt, BBB/Baa2/BBB senior debt ratings from Fitch/Moody’s/S&P, and compliance with relevant facility and term-loan covenants at year-end.
- Cash dividends were $1.48 per common share for 2017; the board declared a further $0.37 quarterly dividend in February 2018. FAD exceeded cash dividends paid of $695.0 million, although FAD is a non-GAAP measure and not equivalent to operating cash flow.
Material changes versus the prior comparable period
- HCP sold 64 Brookdale-leased senior housing assets for $1.125 billion, completed the partial RIDEA II transaction, sold other properties and investments, and repaid approximately $1.4 billion of debt. These actions reduced debt but also lowered recurring revenue and earnings capacity.
- Brookdale-related revenue exposure decreased: Brookdale represented 8% of 2017 total revenue, versus 12% in 2016 as reported. Its managed SHOP properties still represented approximately 13% of HCP’s real estate investments by assets at year-end.
- Life science and medical office grew as a share of revenue, while senior housing triple-net and SHOP revenue declined. Medical office revenue rose to $477.5 million from $446.3 million; life science revenue was essentially flat at $358.8 million.
- HCP recognized $356.6 million of net real estate sale gains, compared with $164.7 million in 2016. These gains supported GAAP earnings but are excluded from NAREIT FFO.
- Operating cash flow declined by $367 million, and year-end cash and restricted cash fell to $82.2 million from $137.0 million.
Outlook, risks, contingencies and unusual items
- Brookdale restructuring: The November 2017 agreement provides for sales or operator transitions, and asset sales and joint-venture changes intended to reduce concentration. Several transactions were expected to close in 2018. If 32 triple-net assets were not sold or transitioned within a year, their leases would convert to cash-flow leases, shifting operating risks to HCP. The agreement also included a $5 million annual rent reduction on three assets beginning in 2018.
- Tandem loan impairment/default: Tandem missed interest payments beginning November 2017; HCP declared an event of default and recorded $144 million of 2017 impairments, leaving a $105 million year-end carrying value. HCP was evaluating a sale or foreclosure. The related Consulate qui tam judgment was vacated in January 2018, but an appeal was noticed; the outcome remained uncertain.
- Other significant items: HCP recorded a $54 million loss on early debt extinguishment, $23 million impairment on 11 senior housing assets, and about $13 million of hurricane-related losses, of which approximately $11 million was uninsured. The Tax Cuts and Jobs Act caused a $17 million tax expense from remeasurement of deferred taxes.
- Legal and operating risks: The filing describes securities class-action and derivative litigation related to historical HCR ManorCare disclosures, tenant/operator credit and bankruptcy risks, healthcare reimbursement and regulation, senior housing occupancy and labor costs, development execution, California concentration, natural disasters, interest rates, capital-market access, and REIT qualification. HCP stated it believed the securities litigation was without merit; it could not estimate a reasonably possible loss range.
- Guidance: No specific earnings or FFO guidance was provided in the supplied filing. Management emphasized a strategy of maintaining investment-grade financing, adequate liquidity and long-term fixed-rate debt, and stated that liquidity was expected to be adequate for at least 12 months.
Most important facts for investors to verify
- Confirm the filing issuer: the supplied 10-K is HCP, Inc., not Healthpeak Properties, Inc.
- Track completion and proceeds of the planned Brookdale asset sales and operator transitions, plus the expected RIDEA II sale and loan refinancing.
- Assess Tandem loan recovery against the $105 million carrying value, including any foreclosure or sale outcome and the impact of the Consulate appeal.
- Evaluate recurring earnings and dividend capacity after portfolio dispositions; distinguish GAAP income and sale gains from FFO, adjusted FFO and FAD.
- Review debt maturities, revolver availability, covenant headroom and the company’s ability to sustain distributions while funding development and capital expenditures.
- Monitor senior housing occupancy and expenses, life science occupancy and California concentration, and the status of material litigation and casualty recoveries.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2017.