Business context and reporting period
HCP, Inc. (the registrant named in this filing; filing metadata identifies Healthpeak Properties, Inc.) is a healthcare-focused REIT. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Its portfolio included 799 properties at quarter-end across senior housing triple-net, senior housing operating (SHOP), life science and medical office, among other investments. Comparisons are affected by the October 2016 spin-off of Quality Care Properties (QCP), portfolio sales and the 2017 deconsolidation of part of RIDEA II.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $458.9 million | $538.3 million | $951.1 million | $1,058.8 million |
| Net income applicable to common shares | $19.3 million | $301.4 million | $479.9 million | $417.2 million |
| Diluted EPS | $0.04 | $0.64 | $1.02 | $0.89 |
| FFO per diluted share | $0.35 | $0.71 | $0.96 | $1.40 |
| Adjusted FFO per diluted share | $0.48 | $0.74 | $0.99 | $1.43 |
| FAD applicable to common shares | $200.2 million | $337.9 million | $418.7 million | $646.9 million |
- Operating cash flow: $431.6 million for the first half, versus $666.9 million a year earlier. Investing activities provided $1.96 billion, largely from asset sales, joint-venture proceeds and loan repayments; financing used $2.09 billion, including debt repayments and $347.1 million of common dividends. Cash and cash equivalents were $392.0 million at June 30, up from $94.7 million at year-end.
- Debt and liquidity: Balance-sheet debt included $136.3 million on the revolving line, $218.8 million in term loans, $6.89 billion of senior unsecured notes, $146.3 million of mortgage debt and $94.8 million of other debt. The $2.0 billion revolving facility matures March 2018 and had $136.3 million drawn; the company reported covenant compliance. Management said available cash, operating cash flow and financing sources should cover operating needs, debt service and distributions for at least 12 months.
- Balance sheet: Total assets were $14.10 billion and total equity was $6.03 billion at June 30, compared with $15.76 billion and $5.94 billion, respectively, at December 31, 2016. No assets remained classified as held for sale at quarter-end.
- Portfolio operating measure: Second-quarter adjusted NOI was $305.5 million, compared with $339.8 million. Same-property adjusted NOI grew 2.6% in senior housing triple-net, 2.6% in medical office and 3.7% in life science; SHOP same-property adjusted NOI declined 1.6%.
- Dividend: The company declared $0.37 per common share for each of the first two quarters of 2017 ($0.74 for the half), compared with $1.15 for the first half of 2016.
Material changes versus the prior comparable period
- Second-quarter revenue fell about 15%, while common-share net income and diluted EPS dropped sharply. The 2016 quarter included $107.4 million of discontinued QCP income and $119.6 million of real-estate sale gains; Q2 2017 had no discontinued operations and only $0.4 million of net real-estate gains.
- First-half common-share net income rose despite lower revenue, primarily due to $317.7 million of net real-estate sale gains and a $51.3 million gain on sale of Four Seasons notes. FFO, adjusted FFO and FAD all declined year over year.
- HCP sold 64 Brookdale-leased senior housing triple-net properties for $1.125 billion, recognizing a $170 million gain; it also sold other properties and interests, including a partial RIDEA II interest. These transactions reduced reported portfolio revenues and changed segment composition.
- Interest expense declined to $164.5 million for the first half from $243.4 million, reflecting debt repayments. Interest income also declined, partly because prior-year loan repayments had generated incremental income.
Outlook, risks and unusual items
- Tandem loan deterioration: Following tenant rent-payment failures and related defaults, HCP recorded a $56.7 million second-quarter impairment, reducing the loan carrying value to $200 million. On July 31, borrowers agreed to repay $197 million, subject to conditions and deadlines. HCP expected a further $3 million impairment in Q3; repayment may be delayed or may not occur.
- Subsequent debt action: In July, HCP repurchased $500 million of 5.375% notes due 2021 and expected to record an approximately $54 million debt-extinguishment loss in Q3.
- Concentration and operating risks: Brookdale represented 11% of gross assets and 8% of total company revenues at June 30; it accounted for 47% of second-quarter senior housing triple-net revenue. SHOP results also face occupancy and expense pressures. Management identifies tenant and borrower financial condition, healthcare reimbursement and regulation, capital-market access, interest rates, foreign exchange, JV dependencies and REIT qualification among key risks.
- Legal matters: Securities class and derivative actions allege, among other matters, misleading disclosures relating to HCR ManorCare and alleged billing fraud. HCP said it considers the class action without merit and intends to defend itself; it could not estimate a loss or range of losses.
- No earnings guidance: The filing provides no quantified full-year earnings or FFO guidance. Management’s stated liquidity outlook is for at least the next 12 months. The filing cautions that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the Tandem borrowers complete the agreed repayment, and whether the expected impairment or recovery differs from management’s estimate.
- How post-sale portfolio composition, QCP’s spin-off and RIDEA II deconsolidation affect comparable revenues, NOI, FFO and dividend coverage.
- Brookdale’s credit and operating condition, rent performance, and HCP’s exposure to other concentrated tenants, operators and borrowers.
- HCP’s refinancing and liquidity position ahead of the revolving facility’s March 2018 maturity, including the effects of subsequent debt repurchases and planned investment spending.
- The status and potential financial impact of the HCR ManorCare-related litigation, which the filing says cannot yet be estimated.