(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
All references in this report to "Healthpeak," the "Company," "we," "us" or "our" mean Healthpeak Properties, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to "Healthpeak Properties, Inc." mean the parent company without its subsidiaries.
Cautionary Language Regarding Forward-Looking Statements
Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements include, among other things, statements regarding our and our officers' intent, belief or expectation as identified by the use of words such as "may," "will," "project," "expect," "believe," "intend," "anticipate," "seek," "target," "forecast," "plan," "potential," "estimate," "could," "would," "should" and other comparable and derivative terms or the negatives thereof. Forward-looking statements reflect our current expectations and views about future events and are subject to risks and uncertainties that could cause actual results, including our future financial condition and results of operations, to differ materially from those expressed or implied by any forward-looking statements. You are urged to carefully review the disclosures we make concerning risks and uncertainties that may affect our business and future financial performance.
Forward-looking statements are based on certain assumptions and analysis made in light of our experience and perception of historical trends, current conditions and expected future developments as well as other factors that we believe are appropriate under the circumstances. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. Further, we cannot guarantee the accuracy of any such forward-looking statement contained in this Quarterly Report on Form 10-Q.
As more fully set forth under Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:
the coronavirus ("Covid") pandemic and health and safety measures intended to reduce its spread, the availability, effectiveness and public usage and acceptance of vaccines, and how quickly and to what extent normal economic and operating conditions can resume within the markets in which we operate;
the ability of our existing and future tenants, operators, and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and manage their expenses in order to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;
increased competition, operating costs, and market changes affecting our tenants, operators, and borrowers;
the financial condition of our tenants, operators, and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings;
our concentration of real estate investments in the healthcare property sector, which makes us more vulnerable to a downturn in a specific sector than if we invested in multiple industries and exposes us to the risks inherent in illiquid investments;
our ability to identify and secure replacement tenants and operators and the potential renovation costs and regulatory approvals associated therewith;
our property development, redevelopment, and tenant improvement activity risks, including project abandonments, project delays, and lower profits than expected;
changes within the life science industry;
high levels of regulation, funding requirements, expense and uncertainty faced by our life science tenants;
the ability of the hospitals on whose campuses our medical office buildings ("MOBs") are located and their affiliated healthcare systems to remain competitive or financially viable;
our ability to maintain or expand our hospital and health system client relationships;
operational risks associated with third party management contracts, including the additional regulation and liabilities of our properties operated through structures permitted by the Housing and Economic Recovery Act of 2008, which includes most of the provisions previously proposed in the REIT Investment Diversification and Empowerment Act of 2007 (commonly referred to as "RIDEA");
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economic and other conditions that negatively affect geographic areas from which we recognize a greater percentage of our revenue;
uninsured or underinsured losses, which could result in significant losses and/or performance declines by us or our tenants and operators;
our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners' financial condition and continued cooperation;
our use of fixed rent escalators, contingent rent provisions and/or rent escalators based on the Consumer Price Index;
competition for suitable healthcare properties to grow our investment portfolio;
our ability to foreclose on collateral securing our real estate-related loans;
our ability to make material acquisitions and successfully integrate them;
the potential impact on us and our tenants, operators, and borrowers from litigation matters, including rising liability and insurance costs;
an increase in our borrowing costs, including due to higher interest rates;
the availability of external capital on acceptable terms or at all, including due to rising interest rates, changes in our credit ratings and the value of our common stock, volatility or uncertainty in the capital markets, and other factors;
cash available for distribution to stockholders and our ability to make dividend distributions at expected levels;
our ability to manage our indebtedness level and covenants in and changes to the terms of such indebtedness;
changes in global, national and local economic and other conditions;
laws or regulations prohibiting eviction of our tenants;
the failure of our tenants, operators, and borrowers to comply with federal, state and local laws and regulations, including resident health and safety requirements, as well as licensure, certification, and inspection requirements;
required regulatory approvals to transfer our senior housing properties;
compliance with the Americans with Disabilities Act and fire, safety and other regulations;
the requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid;
legislation to address federal government operations and administration decisions affecting the Centers for Medicare and Medicaid Services;
our participation in the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") Provider Relief Fund and other Covid-related stimulus and relief programs;
provisions of Maryland law and our charter that could prevent a transaction that may otherwise be in the interest of our stockholders;
environmental compliance costs and liabilities associated with our real estate investments;
our ability to maintain our qualification as a real estate investment trust ("REIT");
changes to U.S. federal income tax laws, and potential deferred and contingent tax liabilities from corporate acquisitions;
calculating non-REIT tax earnings and profits distributions;
ownership limits in our charter that restrict ownership in our stock;
the loss or limited availability of our key personnel; and
our reliance on information technology systems and the potential impact of system failures, disruptions or breaches.
Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made.
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The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:
Market Trends and Uncertainties
Overview of Transactions
Results of Operations
Liquidity and Capital Resources
Non-GAAP Financial Measures Reconciliations
Critical Accounting Estimates and Recent Accounting Pronouncements
Healthpeak Properties, Inc. is a Standard & Poor's ("S&P") 500 company that acquires, develops, owns, leases and manages healthcare real estate across the United States ("U.S."). Our company was originally founded in 1985. We are a Maryland corporation and qualify as a self-administered REIT. Our corporate headquarters are located in Denver, Colorado and we have additional offices in California, Tennessee, and Massachusetts.
During 2020, we began the process of disposing of our senior housing triple-net and senior housing operating property ("SHOP") portfolios. As of December 31, 2020, we concluded that the planned dispositions represented a strategic shift that had and will have a major effect on our operations and financial results and, therefore, the assets are classified as discontinued operations in all periods presented herein. In September 2021, we successfully completed the disposition of both portfolios. See Note 4 to the Consolidated Financial Statements for further information regarding discontinued operations.
In conjunction with the disposal of our senior housing triple-net and SHOP portfolios, we focused our strategy on investing in a diversified portfolio of high-quality healthcare properties across our three core asset classes of life science, medical office, and continuing care retirement community ("CCRC") real estate. Under the life science and medical office segments, we invest through the acquisition, development and management of life science facilities, MOBs, and hospitals. Under the CCRC segment, our properties are operated through RIDEA structures. We have other non-reportable segments that are comprised primarily of debt investments and an interest in an unconsolidated joint venture that owns 19 senior housing assets (our "SWF SH JV").
At June 30, 2022, our portfolio of investments, including properties in our unconsolidated joint ventures, consisted of interests in 481 properties. The following table summarizes information for our reportable and other non-reportable segments, excluding discontinued operations, for the three months ended June 30, 2022 (dollars in thousands):
Total Portfolio Percentage of Total Segment Adjusted NOI(1) Portfolio Adjusted NOI Number of Properties Life science $ 137,422 50 % 149 Medical office 107,281 39 % 298 CCRC 23,292 9 % 15 Other non-reportable 4,119 2 % 19 Totals $ 272,114 100 % 481 _______________________________________
For a description of our significant activities during 2022, see "Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations-Overview of Transactions" in this report.
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We invest in and manage our real estate portfolio for the long-term to maximize benefit to our stockholders and support the growth of our dividends. Our strategy consists of four core elements:
(i)Our real estate: Our portfolio is grounded in high-quality properties in desirable locations. We focus on three purposely selected private pay asset classes-life science, medical office, and continuing care retirement community-to provide stability through inevitable market cycles.
(ii)Our financials: We maintain a strong investment-grade balance sheet with ample liquidity as well as long-term fixed-rate debt financing with staggered maturities to reduce our exposure to interest rate volatility and refinancing risk.
(iii)Our partnerships: We work with leading healthcare companies, operators, and service providers and are responsive to their space and capital needs. We provide high-quality property management services to encourage tenants to renew, expand, and relocate into our properties, which drives increased occupancy, rental rates, and property values.
(iv)Our platform: We have a people-first culture that we believe attracts, develops and retains top talent. We continually strive to create and maintain an industry-leading platform, with systems and tools that allow us to effectively and efficiently manage our assets and investment activity.
Market Trends and Uncertainties
Our operating results, including our sources and uses of capital, have been and will continue to be impacted by the Covid pandemic, as well as by global and national economic and market conditions generally and by the local economic conditions where our properties are located.
We do not yet know the full, long-term economic impact of the Covid pandemic and whether or when occupancy and revenue in our CCRC communities and the senior housing facilities owned by our SWF SH JV will return to pre-pandemic levels. In addition, our tenants, operators, and borrowers have experienced significant cost increases as a result of increased health and safety measures, staffing shortages, increased governmental regulation and compliance, vaccine mandates, and other operational changes necessitated either directly or indirectly by the Covid pandemic, as well as due to current inflationary pressures. Labor costs in particular have increased as a result of higher staffing hours, increased hourly wages and bonuses, greater overtime, and increased usage of contract labor. We anticipate that many of these expenses will remain at these higher levels even after the pandemic passes, and are likely to reduce margins in the business.
Further, the Covid pandemic and its ongoing impacts continue to cause disruptions in the U.S. and global economies and capital markets, resulting in volatility, widening credit spreads, and limited liquidity availability. Other factors, such as rising interest rates, high inflation, supply chain disruptions, growing geopolitical tensions, and increased volatility in public equity and fixed income markets have also led to increased costs and limited the availability of capital. To the extent our tenants or operators experience increased costs or financing difficulties due to the foregoing macroeconomic conditions, they may be unable or unwilling to make payments or perform their obligations when due.
We have also seen significant inflation in construction costs over the past 12-18 months, which may, together with rising costs of capital, negatively affect the expected yields on our development and redevelopment projects. In addition, labor shortages and global supply chain disruptions, including procurement delays and long lead times on certain materials, have adversely impacted and could continue to adversely impact the scheduled completion and/or costs of these projects.
We continuously monitor the effects of domestic and global events, including but not limited to the current and expected impact of the Covid pandemic, inflation, labor shortages, supply chain matters, and rising interest rates, on our operations and financial position, as well as on the operations and financial position of our tenants, operators, and borrowers, to ensure that we remain responsive and adaptable to the dynamic changes in our operating environment.
A discussion of potential long-term changes in the industry are more fully set forth under Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations-Covid Update" in our Annual Report on Form 10-K for the year ended December 31, 2021.
See Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 for additional discussion of the risks posed by the Covid pandemic and macroeconomic conditions, as well as the uncertainties we and our tenants, operators, and borrowers may face as a result.
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Overview of Transactions
67 Smith Place
In January 2022, we closed a life science acquisition in Cambridge, Massachusetts for $72 million.
Vista Sorrento Phase II
In January 2022, we closed a life science acquisition in San Diego, California for $24 million.
Webster MOB Portfolio
In March 2022, we acquired a portfolio of two MOBs in Houston, Texas for $43 million.
Northwest Medical Plaza
In May 2022, we acquired one MOB in Bentonville, Arkansas for $26 million.
Other Real Estate Transactions
During the six months ended June 30, 2022, we sold one life science facility in Utah for $14 million.
Also during the six months ended June 30, 2022, we sold our remaining hospital classified as a direct financing lease ("DFL") for $68 million.
During the three months ended June 30, 2022, we sold three MOBs and one MOB land parcel for $27 million.
In July 2022, we completed two MOB sales for aggregate proceeds of $9 million.
On August 1, 2022, we entered into a master equity transaction agreement with a sovereign wealth fund ("SWF Partner") that provides us the opportunity to sell up to 30% interests in certain redevelopment and future development projects owned by us.
Concurrently, we executed definitive agreements with the SWF Partner to sell a 30% interest in seven life science assets in South San Francisco, California for gross proceeds of $126 million. We and the SWF Partner will share in key decisions related to the planned redevelopment and operation of the assets, resulting in us deconsolidating the previously wholly-owned assets and recognizing our 70% share as an equity method investment.
In April 2022, we terminated our existing interest rate cap instruments associated with $142 million of variable rate mortgage debt and entered into two interest rate swap instruments that are designated as cash flow hedges and mature in May 2026.
At June 30, 2022, we had six life science development projects in process with an aggregate total estimated cost of approximately $1.0 billion.
During the six months ended June 30, 2022, the following projects were placed in service: (i) three MOB development projects with total costs incurred of $58 million, (ii) one MOB redevelopment project with total costs incurred of $10 million, (iii) three life science development projects with total costs incurred of $269 million, (iv) one life science redevelopment project with total costs incurred of $60 million, and (v) a portion of one life science development project with total costs incurred of $40 million.
Dividends The following table summarizes our common stock cash dividends declared in 2022: Amount Dividend Declaration Date Record Date Per Share Payment Date January 27 February 11 $ 0.30 February 22 April 28 May 9 0.30 May 20 July 28 August 8 0.30 August 19
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Results of Operations
We evaluate our business and allocate resources among our reportable business segments: (i) life science, (ii) medical office, and (iii) CCRC. Under the life science and medical office segments, we invest through the acquisition, development, and management of life science facilities, MOBs, and hospitals, which generally requires a greater level of property management. Our CCRCs are operated through RIDEA structures. We have other non-reportable segments that are comprised primarily of: (i) an interest in our unconsolidated SWF SH JV and
Non-GAAP Financial Measures
Net Operating Income
NOI and Adjusted NOI are non-U.S. generally accepted accounting principles ("GAAP") supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as real estate revenues (inclusive of rental and related revenues, resident fees and services, income from direct financing leases, and government grant income and exclusive of interest income), less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 13 to the Consolidated Financial Statements. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, termination fees, actuarial reserves for insurance claims that have been incurred but not reported, and the impact of deferred community fee income and expense. NOI and Adjusted NOI include our share of income (loss) generated by unconsolidated joint ventures and exclude noncontrolling interests' share of income (loss) generated by consolidated joint ventures. Adjusted NOI is oftentimes referred to as "Cash NOI." Management believes NOI and Adjusted NOI are important supplemental measures because they provide relevant and useful information by reflecting only income and operating expense items that are incurred at the property level and present them on an unlevered basis. We use NOI and Adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and to evaluate our Same-Store ("SS") performance, as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI and Adjusted NOI. NOI and Adjusted NOI should not be viewed as alternative measures of operating performance to net income (loss) as defined by GAAP since they do not reflect various excluded items. Further, our definitions of NOI and Adjusted NOI may not be comparable to the definitions used by other REITs or real estate companies, as they may use different methodologies for calculating NOI and Adjusted NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the Consolidated Financial Statements.
Operating expenses generally relate to leased medical office and life science properties, as well as CCRC facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense.
Same-Store NOI and Adjusted (Cash) NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our consolidated portfolio of properties. Same-Store Adjusted NOI excludes amortization of deferred revenue from tenant-funded improvements and certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis.
Properties are included in Same-Store once they are stabilized for the full period in both comparison periods. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space and rental payments have commenced) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. Properties that experience a change in reporting structure are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from Same-Store when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations, a change in reporting structure or operator transition has been agreed to, or a significant tenant relocates from a Same-Store property to a non Same-Store property and that change results in a corresponding increase in revenue. We do not report Same-Store metrics for our other non-reportable segments. For a reconciliation of Same-Store to total portfolio Adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below.
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Funds From Operations ("FFO")
FFO encompasses Nareit FFO and FFO as Adjusted, each of which is described in detail below. We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue.
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Aug 03, 2022
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