Healthpeak Properties, Inc. (HCP) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. HCP was a healthcare-focused REIT with 745 properties, including joint-venture interests, across senior housing triple-net, senior housing operating portfolio (SHOP), life science, and medical office. The filing was submitted under HCP, Inc.; the company name “Healthpeak Properties” in the request does not match the registrant name shown in this filing.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $491.6 million | $469.6 million | $927.7 million | $948.7 million |
| Net income (loss) attributable to HCP | $(13.6) million | $89.9 million | $47.9 million | $130.2 million |
| Net income (loss) applicable to common shares | $(14.0) million | $89.5 million | $47.0 million | $129.3 million |
| Diluted EPS | $(0.03) | $0.19 | $0.10 | $0.28 |
| Adjusted FFO applicable to common shares | $212.9 million | $219.5 million | $425.0 million | $446.9 million |
| FAD applicable to common shares | $195.1 million | $190.1 million | $386.5 million | $391.8 million |
| Cash from operating activities | Not separately presented for the quarter | $380.6 million | $439.7 million |
- Q2 revenue rose about 4.7%, as higher resident fees and services more than offset lower rental and direct-financing-lease income. For the first half, revenue declined about 2.2%.
- Q2 net loss reflected $68.5 million of net impairment charges, versus $13.9 million a year earlier, and lower gains on real estate sales. Q2 included a $12 million gain on consolidation of a senior housing joint venture and a casualty-related insurance recovery gain.
- First-half net income fell despite lower interest expense: impairments increased to $77.4 million from $13.9 million, real estate sale gains declined to $19.5 million from $66.9 million, and SHOP operating performance weakened.
- Q2 Adjusted NOI was $272.2 million, down from $290.6 million; first-half Adjusted NOI was $535.4 million, down from $581.2 million. These are company-defined non-GAAP measures.
- At June 30, total assets were $13.71 billion, total liabilities $7.09 billion, and total equity $6.62 billion. Cash and restricted cash totaled $156.1 million.
- Debt carrying amounts included $5.26 billion of senior unsecured notes, $530 million drawn on the revolving facility, a $249 million term loan, $162 million of mortgage debt, and $87 million of other debt. The new $2.5 billion revolving facility had a May 2023 maturity; the $250 million term loan matures in May 2024. Approximately 87% of consolidated debt was fixed-rate.
- HCP declared a quarterly common dividend of $0.37 per share. The company stated that expected operating cash flow, cash balances, and financing sources should be adequate for at least the next 12 months to meet operating costs, debt service, and distributions.
Material changes and transactions
- HCP acquired nine senior housing properties for $445 million, two life-science buildings for $245 million, and other assets during the first half. It also acquired three Oakmont senior housing communities for $113 million in May; five additional Oakmont communities were acquired in July for $284 million.
- HCP transitioned 33 senior housing triple-net properties, including a 14-property direct-financing-lease portfolio, to a RIDEA operating structure during the first half. It also agreed to sell 13 senior housing facilities under direct financing leases for $274 million, with completion expected in the second half of 2019.
- First-half real estate acquisitions totaled $870 million in the cash flow statement; development and redevelopment spending was $290 million. Development and redevelopment commitments increased $82 million to $382 million.
- Common equity issuance generated $407 million in first-half cash proceeds. HCP had $378 million remaining under its 2019 at-the-market program at June 30 and additional unsettled forward equity agreements.
- After quarter-end, HCP issued $1.3 billion of notes due 2026 and 2029, then redeemed $800 million of notes due 2020 and repurchased $500 million of notes due 2022 and 2023. It recorded an approximately $35 million debt-extinguishment loss in July.
Outlook, risks, and unusual items
- The filing provides no specific full-year earnings or operating guidance. Management cited occupancy, rental rates, tenant and operator performance, operating costs, and access to financing as important factors in results and liquidity.
- SHOP same-property Adjusted NOI declined 4.3% in the first half, which management attributed primarily to occupancy declines and higher labor costs. Life-science and medical-office same-property Adjusted NOI increased 6.5% and 4.2%, respectively.
- Brookdale represented 6% of total assets and 40% of senior housing triple-net assets at June 30; it generated 4% of total company revenue in the first half and 35% of senior housing triple-net revenue. The filing identifies tenant/operator concentration and tenant financial health as risks.
- Other identified risks include healthcare-sector concentration, regulatory and reimbursement changes, operator transitions, development costs and delays, joint-venture dependencies, capital-market access, interest-rate and foreign-currency exposure, and potential uninsured losses.
- HCP recorded $77.4 million of first-half impairments, including write-downs of assets classified as held for sale and a $10 million allowance related to the planned sale of direct-financing-lease facilities. Twenty SHOP facilities, six medical office buildings, and two senior housing triple-net facilities were classified as held for sale at June 30.
- A securities class action and related derivative matters concerning historical disclosures about HCR ManorCare remained unresolved. HCP said it intends to defend the class action; it had not recorded a loss contingency because loss was not considered probable or estimable.
- HCP adopted lease-accounting standards in January 2019, recognizing a $154.9 million lease liability and a $172.4 million right-of-use asset at June 30. The company expected to adopt the credit-loss standard in 2020 and noted it could lead to earlier recognition of losses on financing receivables.
Important facts for investors to verify
- Whether SHOP occupancy and labor-cost pressures persist, and how the 2019 senior housing acquisitions and operating-structure transitions affect property-level returns.
- The drivers and valuation assumptions behind the $77.4 million of first-half impairments and the expected proceeds and timing for held-for-sale properties and the DFL sale portfolio.
- Whether adjusted FFO and FAD trends, including the gap between GAAP earnings and non-GAAP measures, support the $0.37 quarterly dividend.
- Debt and liquidity after the July notes issuance and debt retirements, including remaining revolving capacity, upcoming maturities, covenant compliance, and the effect of further equity issuance.
- Developments in the HCR ManorCare-related litigation, Brookdale tenant exposure, and credit risks involving tenants, operators, borrowers, and joint ventures.