HCP, Inc. (healthcare REIT) — Q1 2018 filing summary
Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. The filing is for HCP, Inc., the registrant identified in the filing.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $479.2 million | $492.2 million; down 2.6% |
| Net income attributable to HCP | $40.2 million | $461.1 million |
| Net income applicable to common shares / diluted EPS | $39.8 million / $0.08 | $460.4 million / $0.97 diluted |
| FFO / adjusted FFO | $219.4 million / $227.4 million | $288.2 million / $240.2 million |
| Adjusted FFO per diluted share | $0.48 | $0.51 |
| Funds available for distribution (FAD) | $201.7 million | $218.6 million |
| Operating cash flow | $196.2 million | $193.1 million |
| Cash, cash equivalents and restricted cash | $118.0 million | $82.2 million at December 31, 2017 |
| Total assets / equity | $14.07 billion / $5.48 billion | $14.09 billion / $5.59 billion at December 31, 2017 |
| Debt carrying value | Approximately $7.97 billion | Approximately $7.88 billion at December 31, 2017 |
| Dividend declared per common share | $0.37 | $0.37 |
Property NOI was $300.3 million, versus $314.8 million a year earlier; adjusted NOI was $290.6 million, versus $310.3 million. The filing defines both as non-GAAP measures. Total operating expenses were $172.6 million, including $143.3 million of depreciation and amortization. Interest expense was $75.1 million, down from $86.7 million.
Material changes versus the prior period
- GAAP earnings fell sharply, chiefly because real-estate sale gains declined to $20.8 million from $317.3 million. The 2017 comparison included major property dispositions and a gain on the Four Seasons notes; Q1 2018 also included a $41.0 million loss on consolidating seven U.K. care homes.
- Adjusted FFO declined 5.3%, and FAD declined 7.7%. The filing attributes pressure in part to lower interest income following the Tandem loan sale and HC-One loan repayment, and lower property NOI following prior-year dispositions. Lower interest expense and growth from acquisitions, rent increases and completed developments partly offset these effects.
- Segment trends were mixed: senior housing triple-net same-property adjusted NOI increased 0.5%; SHOP same-property adjusted NOI decreased 6.4%, reflecting occupancy declines and higher labor costs, partly offset by higher resident rates. Life science and medical office same-property adjusted NOI rose 0.4% and 1.6%, respectively.
- Operating cash flow was broadly stable. Investing cash flow was $10.7 million, versus $1.73 billion in Q1 2017, when large asset-sale proceeds were received. Financing cash outflow was $171.2 million, including $174.1 million of common dividends and the $63 million purchase of Brookdale’s RIDEA I interest.
Liquidity, transactions and outlook
- At quarter-end, $1.09 billion was outstanding on the $2.0 billion unsecured revolving credit facility; the filing reports a weighted-average effective rate of 2.99%. HCP had $236.9 million outstanding under a term loan maturing in January 2019, with a one-year extension option. Management reported compliance with debt covenants.
- Management expected operating cash flow, available cash and financing sources to be adequate for at least the next 12 months to cover operating costs, debt service and distributions. It identified capital spending, tenant improvements, leasing, acquisitions and development as investment needs, to be funded through asset sales, credit facilities and debt or equity issuance. No specific earnings guidance was provided.
- On April 6, 2018, HCP repaid $290 million on its revolver, primarily with Brookdale asset-sale proceeds. Brookdale transactions also included sales of assets and operator transitions intended to reduce concentration. At March 31, Brookdale represented 10% of total assets and 7% of revenue; management expected that exposure to decline as transactions progress.
- On May 1, HCP agreed to sell a 51% interest in its U.K. portfolio to a joint venture based on a total portfolio value of £394 million, retaining 49%; closing and the expected gain were prospective, not completed at quarter-end. HCP also expected its remaining 40% RIDEA II interest sale for $91 million to close in Q2 2018.
- HCP adopted new revenue and asset-derecognition accounting guidance on January 1, 2018, recording a $79.1 million cumulative adjustment to beginning equity. The filing says the new lease accounting standard was expected to be adopted January 1, 2019; its impact was still under evaluation.
Risks, contingencies and unusual items
- Key business risks include tenant and operator creditworthiness, healthcare-sector concentration, occupancy and operating costs, development and redevelopment execution, access to capital and refinancing, interest rates, foreign exchange, regulation and REIT qualification.
- A securities class action and related derivative actions concern alleged disclosures and HCR ManorCare; HCP disputed the claims and intended to defend itself. As of March 31, 2018, it could not estimate a loss or range of reasonably possible losses.
- The $355 million carrying value of a senior-housing direct financing lease watchlist portfolio remained on nonaccrual, with rental income recognized on a cash basis because collection was not reasonably assured.
- The Tandem mezzanine loan was sold in March for approximately $112 million, generating a $3 million net impairment recovery. The U.K. care-home consolidation generated a $41 million loss. The former Executive Chairman’s departure contributed to $8.7 million of severance and related charges used in the adjusted-FFO reconciliation.
Important facts for investors to verify
- Progress, proceeds and accounting outcomes of the Brookdale asset sales and operator transitions, and the resulting change in tenant/operator concentration.
- Closing terms and realized gain or loss for the U.K. joint venture and RIDEA II sale, including the planned refinancing of the related $242 million loan receivable after the RIDEA II sale.
- SHOP occupancy, labor-cost trends and the watchlist lease’s cash collections; these could affect property cash flows.
- Debt maturities, especially the January 2019 term loan, revolver utilization, refinancing costs and covenant headroom.
- Resolution and potential financial impact of the HCR ManorCare-related litigation; the filing does not provide a clear loss estimate.
- Reconciliation of reported GAAP earnings to FFO, adjusted FFO and FAD, which are non-GAAP measures and are not substitutes for operating cash flow.