HEALTHPEAK PROPERTIES, INC. All references in this report to "Healthpeak," the "Company," "we," "us" or "our" meanHealthpeak 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 significantly affect our future financial condition and results of operations. 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. As more fully set forth under Part II, Item 1A. "Risk Factors" in this report, 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 severity and duration of the COVID-19 pandemic; • actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact; • the impact of the COVID-19 pandemic and health and safety measures taken to slow its spread;
• operational risks associated with third party management contracts,
including the additional regulation and liabilities of our RIDEA lease
structures;
• 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;
• the imposition of laws or regulations prohibiting eviction of our tenants
or operators, including new governmental efforts in response to COVID-19;
• the financial condition of our existing and future tenants, operators and
borrowers, including potential bankruptcies and downturns in their
businesses, and their legal and regulatory proceedings, which may result
in uncertainties regarding our ability to continue to realize the full
benefit of such tenants' and operators' leases and borrowers' loans;
• our concentration in the healthcare property sector, particularly in
senior housing, life sciences and medical office buildings, which makes
our profitability more vulnerable to a downturn in a specific sector than
if we were investing in multiple industries;
• the effect on us and our tenants and operators of legislation, executive
orders and other legal requirements, including compliance with the
Americans with Disabilities Act, fire, safety and health regulations,
environmental laws, the Affordable Care Act, licensure, certification and
inspection requirements, and laws addressing entitlement programs and
related services, including Medicare and Medicaid, which may result in
future reductions in reimbursements or fines for noncompliance;
• our ability to identify replacement tenants and operators and thepotential renovation costs and regulatory approvals associated therewith;
• the risks associated with property development and redevelopment,
including costs above original estimates, project delays and lower
occupancy rates and rents than expected;
• the potential impact of uninsured or underinsured losses, including as a
result of hurricanes, earthquakes and other natural disasters, pandemics
such as COVID-19, acts of war and/or terrorism and other events that may
cause such losses and/or performance declines by us or our tenants and
operators;
• the risks associated with 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;
• competition for the acquisition and financing of suitable healthcare
properties as well as competition for tenants and operators, including
with respect to new leases and mortgages and the renewal or rollover of
existing leases;
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• our, or our counterparties', ability to fulfill obligations, such as
financing conditions and/or regulatory approval requirements, required to
successfully consummate acquisitions, dispositions, transitions,
developments, redevelopments, joint venture transactions or other
transactions;
• our ability to achieve the benefits of acquisitions or other investments
within expected time frames or at all, or within expected cost
projections;
• the potential impact on us and our tenants, operators and borrowers from
current and future litigation matters, including the possibility of larger
than expected litigation costs, adverse results and related developments;
• changes in federal, state or local laws and regulations, including those
affecting the healthcare industry that affect our costs of compliance or
increase the costs, or otherwise affect the operations, of our tenants and
operators;
• our ability to foreclose on collateral securing our real estate-related loans;
• volatility or uncertainty in the capital markets, the availability and
cost of capital as impacted by interest rates, changes in our credit
ratings, and the value of our common stock, and other conditions that may
adversely impact our ability to fund our obligations or consummate
transactions, or reduce the earnings from potential transactions;
• changes in global, national and local economic and other conditions,
including the ongoing economic downturn, volatility in the financial
markets and high unemployment rates;
• our ability to manage our indebtedness level and changes in the terms of
such indebtedness;
• competition for skilled management and other key personnel;
• our reliance on information technology systems and the potential impact of
system failures, disruptions or breaches; and
• our ability to maintain our qualification as a real estate investment
trust ("REIT").
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. 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: • Executive Summary • COVID-19 Update
• 2020 Transaction Overview
• Dividends • Results of Operations
• Liquidity and Capital Resources
• Contractual Obligations and Off-Balance Sheet Arrangements
• Non-GAAP Financial Measures Reconciliations
• Critical Accounting Policies and Recent Accounting Pronouncements
Executive SummaryHealthpeak Properties, Inc. is aStandard & Poor's ("S&P") 500 company that acquires, develops, owns, leases and manages healthcare real estate acrossthe United States ("U.S."). We are aMaryland corporation and qualify as a self-administered REIT. We are headquartered inIrvine, California , with additional offices inNashville andSan Francisco . We invest in a diversified portfolio of high-quality healthcare properties across our three core asset classes of senior housing, life science, and medical office real estate. Our senior housing properties are either operated under triple-net leases in our senior housing triple-net segment or through RIDEA structures in our senior housing operating portfolio ("SHOP") and continuing care retirement community ("CCRC") segments. Under the life science and medical office segments, we invest through the acquisition, development and management of life science buildings and medical office buildings. We have other non-reportable segments that are comprised primarily of hospital properties and debt investments. 34
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AtMarch 31, 2020 , our portfolio of investments, including properties in our unconsolidated joint ventures, consisted of interests in 636 properties. The following table summarizes information for our reportable segments for the three months endedMarch 31, 2020 (dollars in thousands): Percentage of Total Total Portfolio Portfolio Adjusted Segment Adjusted NOI(1) NOI(1) Number of Properties Senior housing triple-net $ 29,255 10 % 64 SHOP 41,010 14 % 141 CCRC 30,469 10 % 17 Life science 94,367 32 % 134 Medical office 87,382 30 % 269 Other non-reportable 12,099 4 % 11 Totals $ 294,582 100 % 636
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(1) Total Portfolio metrics include results of operations from disposed properties and properties that transitioned segments through the disposition or transition date. See Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations-Non-GAAP Financial Measures for additional information regarding Adjusted NOI and see Note 13 to the Consolidated Financial Statements for a reconciliation of Adjusted NOI by segment to net income (loss). For a description of our significant activities during 2020, see Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations-2020 Transaction Overview" in this report. 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, senior housing, life science and medical office, to
provide stability through inevitable market cycles.
(ii) Our financials: We maintain a strong investment-grade balance sheetwith 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 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.
COVID-19 Update
Beginning in late 2019, a novel strain of Coronavirus ("COVID-19") began to
spread throughout the world, including the United States , ultimately being
declared a pandemic by the World Health Organization . Over the past several
months, global health concerns and increased efforts to reduce the spread of the
COVID-19 pandemic have prompted federal, state, and local governments to
restrict normal daily activities, and have resulted in travel bans, quarantines,
"shelter-in-place" orders requiring individuals to remain in their homes other
than to conduct essential services or activities, as well as business
limitations and shutdowns. These health and safety measures, which may remain in
place for a significant amount of time, are placing a substantial strain on the
business operations of many of our tenants, operators, and borrowers.
SHOP, CCRC, and Senior Housing Triple-Net
Within our SHOP and CCRC properties, we expect occupancy rates to decline due to
a reduction in new tenant move-ins due to "shelter-in-place" orders, stricter
move-in criteria, lower inquiry volumes, and reduced in-person tours, as well as
incidences of COVID-19 outbreaks at our facilities or the perception that
outbreaks may occur. Outbreaks, which directly affect our residents and the
employees at our senior housing facilities, could materially and adversely
disrupt operations, as well as cause significant reputational harm to us, our
operators, and our tenants. As of April 30, 2020 , we had confirmed resident
COVID-19 cases at 54 of our 222 senior housing properties. Our senior housing
property operators are also facing significant cost increases as a result of
higher demands for staffing, the implementation of increased health and safety
measures and protocols, and increased usage and inventory of critical medical
supplies and personal protective equipment. At our SHOP and CCRC facilities, we
bear these significant cost increases.
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We also temporarily suspended development and redevelopment projects in the greaterSan Francisco andBoston areas as a result of "shelter-in-place" orders as well as across our senior housing portfolio in connection with state and federal guidelines. Although some of these development and redevelopment projects have been allowed to restart, future local, state or federal orders could cause us to re-suspend construction. Other projects remain suspended and we do not know when we will be able to restart construction. In locations where construction continues, construction workers are following applicable guidelines, including appropriate social distancing, limitations on large group gatherings in close proximity, and increased sanitation efforts, which may slow the pace of construction. Furthermore, our planned dispositions may not occur within the expected time or at all because of buyer terminations or withdrawals related to the pandemic, capital constraints or other factors relating to the pandemic. Medical Office Portfolio Within our medical office portfolio, sinceMarch 2020 , many physician practices have discontinued nonessential surgeries and procedures due to "shelter-in-place" orders and other health and safety measures, which has negatively impacted their cash flows. However, we have also seen a slight increase in new leases and lease renewal requests in March and April and we expect that planned move-outs will be delayed during the COVID-19 pandemic, which is expected to slightly increase retention in this portfolio. We have implemented a deferred rent program for May andJune 2020 that is limited to certain non-health system and non-hospital tenants in good standing, which will impact our cash flows during those months, although we are requiring that the deferred rent be repaid ratably over the remaining months until the end of 2020. We are also experiencing and expect to continue to experience a decline in leasing activity through the duration of the COVID-19 pandemic. Life Science Portfolio Within our life science portfolio, we have numerous tenants that are working tirelessly to address critical research and testing needs in the fight against COVID-19. We are focused on providing our tenants with the necessary space to complete their critical work and are in continuous contact with our tenants regarding how we can help them meet their needs. However, within our life science portfolio, we are experiencing and expect to continue to experience a decline in leasing activity through the duration of the COVID-19 pandemic. As a result of governmental restrictions on business activities, particularly in the greaterSan Francisco andBoston areas, we also temporarily suspended development, redevelopment, and tenant improvement projects at many of our life science properties and, in regions where we are able to continue such projects because they are considered "essential" (such asSan Diego ), we are experiencing time delays as a result of the implementation of health and safety protocols related to social distancing and proper hygiene and sanitization. Liquidity Although Moody's changed its outlook on our long term issuer and senior unsecured debt ratings from "stable" to "negative" inMarch 2020 , we believe that we are well positioned to manage the COVID-19 pandemic and measures to slow its spread while working closely with our tenants, operators, and borrowers as they navigate the pandemic. We had approximately$3.0 billion of liquidity available, including borrowing capacity under our unsecured revolving line of credit facility and cash and cash equivalents, as ofApril 30, 2020 . While the change in outlook from Moody's may ultimately lead to a downgrade in our credit rating, which would impact our cost of borrowing, we believe we continue to have access to the unsecured debt markets, and we could also seek to enter into one or more secured debt financings or issue additional securities, including under our 2020 ATM Program (as defined below), to fund future operating costs, capital expenditures, acquisitions, or dispositions, although no assurances can be made in this regard. Future Rent Collections The impact of COVID-19 on the ability of our tenants to pay rent in the future is currently unknown. We have, and will continue to monitor the credit quality of each of our tenants and write-off straight-line rent and accounts receivable as uncollectible in the future, as necessary. In the event that we conclude that either straight-line rent or accounts receivable are not probable of collection in the future, such amounts will be written off, which could have a material impact on our future results of operations. Employee Update We have taken, and will continue to take, proactive measures to provide for the well-being of our workforce. We have maximized our systems infrastructure as well as virtual and remote working technologies for our employees, including our executive team, to ensure productivity and connectivity internally, as well as with key third-party relationships. The extent of the impact of the COVID-19 pandemic on our business and financial results will depend on future developments, including the duration, severity, and spread of the pandemic, health and safety actions taken to contain its spread, any possible resurgence of COVID-19 that may occur after the initial outbreak subsides, and how quickly and to what extent normal economic and operating conditions can resume within the markets in which we operate, each of which are highly uncertain at this time and outside of our control. See "Item 1A, Risk Factors" in this Quarterly Report on Form 10-Q for information regarding the risks we face as result of the COVID-19 pandemic. 36
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2020 Transaction Overview Master Transaction and Cooperation Agreement with Brookdale InJanuary 2020 ,Healthpeak and Brookdale Senior Living Inc. ("Brookdale") completed certain of the transactions governed by the previously announced Master Transactions and Cooperation Agreement (the "2019 MTCA"), which includes a series of transactions related to the previously jointly owned 15-campus CCRC portfolio (the "CCRC JV") and the portfolio of senior housing properties that were triple-net leased to Brookdale. Specifically, the following transactions were completed onJanuary 31, 2020 : • We acquired Brookdale's 51% interest in 13 of the 15 communities in the
CCRC JV based on a valuation of
transitioned management (under new management agreements) of those 13
communities to Life Care Services LLC ("LCS");
• We paid Brookdale
agreements related to those 13 communities;
• Brookdale acquired 18 of the triple-net lease properties (the "Brookdale
Acquisition Assets") from us for cash proceeds of
• The remaining 24 triple-net lease properties were restructured into a
single master lease with 2.4% annual rent escalators and a maturity date
of
• A portion of annual rent (amount in excess of 6.5% of sales proceeds)
related to 14 of the 18 Brookdale Acquisition Assets was reallocated to
the remaining properties under the 2019 Amended Master Lease ; and
• Brookdale paid down
Master Lease .
The Post Acquisition
• In
science campus in
million nonrefundable deposit upon completing due diligence in January
2020 and closed the transaction in
Other Real Estate Transactions
• During the first quarter of 2020, we sold seven SHOP assets for
• During the first quarter of 2020, we sold a hospital under a direct
financing lease ("DFL") for
• During the three months ended
housing triple-net assets with Capital Senior Living Corporation ("CSL")
into a RIDEA structure, with CSL remaining as the manager, and
transitioned one senior housing triple-net asset with CSL into a RIDEA
structure with
transition two senior housing triple-net assets to a RIDEA structure with
Sunrise Senior Living, LLC as the operator during 2020.
• In
• In
our MOBs in
million nonrefundable deposit in
during the second quarter of 2020.
Financing Activities
• During the three months ended
provisions under the at-the-market equity offering program established in
aggregate of 2 million shares of our common stock at an initial weighted
average net price of
• During the three months ended
shares previously outstanding under (i) ATM forward contracts and (ii) a
2019 forward equity sales agreement at a weighted average net price of
billion.
Development Activities
• As part of the development program with HCA Healthcare Inc., at
2020, we had seven medical office building ("MOB") developments under
contract, six of which will be on-campus, with an aggregate total
estimated cost of $166 million .
• At
with an aggregate total estimated cost of approximately
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Dividends
The following table summarizes our common stock cash dividends declared in 2020:
Amount Dividend
Declaration Date Record Date Per Share Payment Date
January 30 February 18 $ 0.37 February 28
April 30 May 8 0.37 May 19
Results of Operations
We evaluate our business and allocate resources among our reportable business
segments: (i) senior housing triple-net, (ii) SHOP, (iii) CCRC, (iv) life
science, and (v) medical office. Our senior housing facilities, including CCRCs,
are managed utilizing triple-net leases and RIDEA structures. Under the life
science and medical office segments, we invest through the acquisition and
development of life science facilities and MOBs, which generally require a
greater level of property management. We have other non-reportable segments that
are comprised primarily of our debt investments and hospital properties. We
evaluate performance based upon: (i) property net operating income from
continuing operations ("NOI") and (ii) Adjusted NOI (Cash NOI) in each segment.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies in Note 2 to the Consolidated
Financial Statements in our Annual Report on Form 10-K for the year ended
December 31, 2019 filed with the U.S. Securities and Exchange Commission
("SEC"), as updated by Note 2 to the Consolidated Financial Statements herein.
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, and income from direct
financing leases and exclusive of interest income), less property level
operating expenses (which exclude transition costs); 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 measured because they
provides relevant and useful information by reflecting only income and operating
expense items that are incurred at the property level and presenting 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 SHOP and 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
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.
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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) 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,
such as a transition from a triple-net lease to a RIDEA 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 (such as
triple-net to SHOP) 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. For a reconciliation
of Same-Store to total portfolio Adjusted NOI and other relevant disclosures by
segment, refer to our Segment Analysis below.
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.
NAREIT FFO. FFO, as defined by the National Association of Real Estate
Investment Trusts ("NAREIT"), is net income (loss) applicable to common shares
(computed in accordance with GAAP), excluding gains or losses from sales of
depreciable property, including any current and deferred taxes directly
associated with sales of depreciable property, impairments of, or related to,
depreciable real estate, plus real estate and other real estate-related
depreciation and amortization, and adjustments to compute our share of NAREIT
FFO and FFO as Adjusted (see below) from joint ventures. Adjustments for joint
ventures are calculated to reflect our pro-rata share of both our consolidated
and unconsolidated joint ventures. We reflect our share of NAREIT FFO for
unconsolidated joint ventures by applying our actual ownership percentage for
the period to the applicable reconciling items on an entity by entity basis. For
consolidated joint ventures in which we do not own 100%, we reflect our share of
the equity by adjusting our NAREIT FFO to remove the third party ownership share
of the applicable reconciling items based on actual ownership percentage for the
applicable periods. Our pro-rata share information is prepared on a basis
consistent with the comparable consolidated amounts, is intended to reflect our
proportionate economic interest in the operating results of properties in our
portfolio and is calculated by applying our actual ownership percentage for the
period. We do not control the unconsolidated joint ventures, and the pro-rata
presentations of reconciling items included in NAREIT FFO do not represent our
legal claim to such items. The joint venture members or partners are entitled to
profit or loss allocations and distributions of cash flows according to the
joint venture agreements, which provide for such allocations generally according
to their invested capital.
The presentation of pro-rata information has limitations, which include, but are
not limited to, the following: (i) the amounts shown on the individual line
items were derived by applying our overall economic ownership interest
percentage determined when applying the equity method of accounting and do not
necessarily represent our legal claim to the assets and liabilities, or the
revenues and expenses and (ii) other companies in our industry may calculate
their pro-rata interest differently, limiting the usefulness as a comparative
measure. Because of these limitations, the pro-rata financial information should
not be considered independently or as a substitute for our financial statements
as reported under GAAP. We compensate for these limitations by relying primarily
on our GAAP financial statements, using the pro-rata financial information as a
supplement.
NAREIT FFO does not represent cash generated from operating activities in
accordance with GAAP, is not necessarily indicative of cash available to fund
cash needs and should not be considered an alternative to net income (loss). We
compute NAREIT FFO in accordance with the current NAREIT definition; however,
other REITs may report NAREIT FFO differently or have a different interpretation
of the current NAREIT definition from ours.
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FFO as Adjusted. In addition, we present NAREIT FFO on an adjusted basis before
the impact of non-comparable items including, but not limited to,
transaction-related items, impairments (recoveries) of non-depreciable assets,
losses (gains) from the sale of non-depreciable assets, severance and related
charges, prepayment costs (benefits) associated with early retirement or payment
of debt, litigation costs (recoveries), casualty-related charges (recoveries),
foreign currency remeasurement losses (gains), and changes in tax legislation
("FFO as Adjusted"). Transaction-related items include transaction expenses and
gains/charges incurred as a result of mergers and acquisitions and lease
amendment or termination activities. Prepayment costs (benefits) associated with
early retirement of debt include the write-off of unamortized deferred financing
fees, or additional costs, expenses, discounts, make-whole payments, penalties
or premiums incurred as a result of early retirement or payment of debt.
Management believes that FFO as Adjusted provides a meaningful supplemental
measurement of our FFO run-rate and is frequently used by analysts, investors,
and other interested parties in the evaluation of our performance as a REIT. At
the same time that NAREIT created and defined its FFO measure for the REIT
industry, it also recognized that "management of each of its member companies
has the responsibility and authority to publish financial information that it
regards as useful to the financial community." We believe stockholders,
potential investors, and financial analysts who review our operating performance
are best served by an FFO run-rate earnings measure that includes certain other
adjustments to net income (loss), in addition to adjustments made to arrive at
the NAREIT defined measure of FFO. FFO as Adjusted is used by management in
analyzing our business and the performance of our properties and we believe it
is important that stockholders, potential investors, and financial analysts
understand this measure used by management. We use FFO as Adjusted to: (i)
evaluate our performance in comparison with expected results and results of
previous periods, relative to resource allocation decisions, (ii) evaluate the
performance of our management, (iii) budget and forecast future results to
assist in the allocation of resources, (iv) assess our performance as compared
with similar real estate companies and the industry in general, and (v) evaluate
how a specific potential investment will impact our future results. Other REITs
or real estate companies may use different methodologies for calculating an
adjusted FFO measure, and accordingly, our FFO as Adjusted may not be comparable
to those reported by other REITs. For a reconciliation of net income (loss) to
NAREIT FFO and FFO as Adjusted and other relevant disclosure, refer to "Non-GAAP
Financial Measures Reconciliations" below.
Adjusted FFO ("AFFO")
AFFO is defined as FFO as Adjusted after excluding the impact of the following:
(i) amortization of deferred compensation expense, (ii) amortization of deferred
financing costs, net, (iii) straight-line rents, (iv) deferred income taxes, (v)
amortization of acquired market lease intangibles, net, (vi) non-cash interest
related to DFLs and lease incentive amortization (reduction of straight-line
rents), (vii) actuarial reserves for insurance claims that have been incurred
but not reported, and (viii) deferred revenues, excluding amounts amortized into
rental income that are associated with tenant funded improvements
owned/recognized by us and up-front cash payments made by tenants to reduce
their contractual rents. Also, AFFO: (i) is computed after deducting recurring
capital expenditures, including second generation leasing costs and second
generation tenant and capital improvements and (ii) includes lease restructure
payments and adjustments to compute our share of AFFO from our unconsolidated
joint ventures. Certain prior period amounts in the "Non-GAAP Financial Measures
Reconciliation" below for AFFO have been reclassified to conform to the current
period presentation. More specifically, recurring capital expenditures,
including second generation leasing costs and second generation tenant and
capital improvements ("AFFO capital expenditures") excludes our share from
unconsolidated joint ventures (reported in "other AFFO adjustments").
Adjustments for joint ventures are calculated to reflect our pro-rata share of
both our consolidated and unconsolidated joint ventures. We reflect our share of
AFFO for unconsolidated joint ventures by applying our actual ownership
percentage for the period to the applicable reconciling items on an entity by
entity basis. We reflect our share for consolidated joint ventures in which we
do not own 100% of the equity by adjusting our AFFO to remove the third party
ownership share of the applicable reconciling items based on actual ownership
percentage for the applicable periods (reported in "other AFFO adjustments").
See FFO for further disclosure regarding our use of pro-rata share information
and its limitations. Other REITs or real estate companies may use different
methodologies for calculating AFFO, and accordingly, our AFFO may not be
comparable to those reported by other REITs. Although our AFFO computation may
not be comparable to that of other REITs, management believes AFFO provides a
meaningful supplemental measure of our performance and is frequently used by
analysts, investors, and other interested parties in the evaluation of our
performance as a REIT. We believe AFFO is an alternative run-rate earnings
measure that improves the understanding of our operating results among investors
and makes comparisons with: (i) expected results, (ii) results of previous
periods, and (iii) results among REITs more meaningful. AFFO does not represent
cash generated from operating activities determined in accordance with GAAP and
is not necessarily indicative of cash available to fund cash needs as it
excludes the following items which generally flow through our cash flows from
operating activities: (i) adjustments for changes in working capital or the
actual timing of the payment of income or expense items that are accrued in the
period, (ii) transaction-related costs, (iii) litigation settlement expenses,
(iv) severance-related expenses, and (v) actual cash receipts from interest
income recognized on loans receivable (in contrast to our AFFO adjustment to
exclude non-cash interest and depreciation related to our investments in direct
financing leases). Furthermore, AFFO is adjusted for recurring capital
expenditures, which are generally not considered when determining cash flows
from operations or liquidity. AFFO is a non-GAAP supplemental financial measure
and should not be considered as an alternative to net income (loss) determined
in accordance with GAAP. For a reconciliation of net income (loss) to AFFO and
other relevant disclosure, refer to "Non-GAAP Financial Measures
Reconciliations" below.
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Comparison of the Three Months EndedMarch 31, 2020 to the Three Months EndedMarch 31, 2019 Overview -------------------------------------------------------------------------------- Three Months EndedMarch 31, 2020 and 2019 The following table summarizes results for the three months endedMarch 31, 2020 and 2019 (dollars in thousands): Three Months Ended March
31,
2020 2019 Change
Net income (loss) applicable to common shares $ 277,464 $ 61,029 $ 216,435
NAREIT FFO 171,549 206,036 (34,487 )
FFO as Adjusted 227,013 212,025 14,988
AFFO 207,576 191,471 16,105
Net income (loss) applicable to common shares increased primarily as a result of
the following:
• an increase in other income, net as a result of (i) a gain on
consolidation related to the acquisition of the outstanding equity
interests in 13 CCRCs from Brookdale during the first quarter of 2020 and
(ii) a gain on sale related to the sale of a hospital underlying a DFL
during the first quarter of 2020;
• an increase in net gain on sales of real estate during the first quarter
of 2020;
• an increase in income tax benefit as a result of the above-mentioned
acquisition of Brookdale's interest in 13 CCRCs and related management
termination fee expense paid to Brookdale in connection with transitioning
management to LCS during the first quarter of 2020 and the extension of
the net operating loss carryback period provided by the Coronavirus Aid,
Relief and Economic Security Act ("CARES Act"); and
• NOI generated from: (i) 2019 and 2020 acquisitions and consolidations of
real estate, (ii) development and redevelopment projects placed in service
during 2019 and 2020, and (iii) new leasing activity during 2019 and 2020.
The increase in net income (loss) applicable to common shares was partially offset by: • a reduction in income related to assets sold or deconsolidated during 2019
and 2020;
• increased depreciation and amortization expense as a result of: (i) assets
acquired during 2019 and 2020, (ii) the acquisition of Brookdale's
interest in and consolidation of 13 CCRCs during the first quarter of
2020, and (iii) development and redevelopment projects placed into service
during 2019 and 2020, partially offset by dispositions of real estate
throughout 2019 and 2020;
• an increase in impairment charges related to real estate during the first
quarter of 2020;
• increased interest expense as a result of senior unsecured notes issuances
and assumed mortgage debt in conjunction with real estate acquisitions,
partially offset by senior unsecured notes redemptions, repurchases, and
repayments during the third and fourth quarters of 2019; and
• increased credit losses related to loans receivable as a result of
adopting the new current expected credit losses model required underAccounting Standards Update No. 2016-13, Measurement of Credit Losses on
Financial Instruments ("ASU 2016-13") and the impact of COVID-19 on
expected credit losses.
NAREIT FFO decreased primarily as a result of the aforementioned events impacting net income (loss) applicable to common shares, except for the following, which are excluded from NAREIT FFO: • impairments of real estate;
• net gain on sales of real estate;
• the gain on consolidation related to the acquisition of Brookdale's
interest in 13 CCRCs; and
• depreciation and amortization expense.
FFO as Adjusted increased primarily as a result of the aforementioned events impacting NAREIT FFO, except for the following, which are excluded from FFO as adjusted: • the gain related to the sale of a hospital underlying a DFL; and
• the increase in credit losses.
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AFFO increased primarily as a result of the aforementioned events impacting FFO as Adjusted, except for the impact of straight-line rents and the increase in deferred tax benefit, which are excluded from AFFO. The increase in AFFO was partially offset by increased AFFO capital expenditures. Segment Analysis The following tables provide selected operating information for our Same-Store and total property portfolio for each of our reportable segments. For the three months endedMarch 31, 2020 , our Same-Store consists of 460 properties representing properties acquired or placed in service and stabilized on or prior toJanuary 1, 2019 and that remained in operations under a consistent reporting structure throughMarch 31, 2020 . Our total property portfolio consisted of 636 and 663 properties atMarch 31, 2020 and 2019, respectively. Senior Housing Triple-Net -------------------------------------------------------------------------------- The following table summarizes results at and for the three months endedMarch 31, 2020 and 2019 (dollars in thousands, except per unit data): SS
Total Portfolio(1)
Three Months Ended March 31, Three Months Ended March 31,
2020 2019 Change 2020 2019 Change
Rental and
related revenues $ 21,962 $ 20,212 $ 1,750 $ 33,135$ 49,440 $ (16,305 ) Income from direct financing leases - - - - 9,391 (9,391 ) Noncontrolling interests' share of consolidated joint venture real estate revenues - - - - (2 ) 2 Operating expenses (49 ) (44 ) (5 ) (506 ) (994 ) 488 Adjustments to NOI (531 ) 668 (1,199 ) (3,374 ) 566 (3,940 ) Adjusted NOI$ 21,382 $ 20,836 $ 546 29,255 58,401 (29,146 ) Less: non-SS adjusted NOI (7,873 ) (37,565 ) 29,692 SS adjusted NOI$ 21,382 $ 20,836 $ 546 Adjusted NOI % change 2.6 % Property count(2) 52 52 64 126 Average capacity (units)(3) 4,861 4,864 6,978 14,642 Average annual rent per unit$ 17,635 $ 17,171 $
17,060
_______________________________________
(1) Total Portfolio includes results of operations from disposed properties and
properties that transitioned segments through the disposition or transition
date.
(2) From our 2019 presentation of Same-Store, we removed 31 senior housing
triple-net properties that were sold, 33 senior housing triple-net properties
that were transitioned, or we agreed to transition, to SHOP, 9 senior housing
triple-net properties that were classified as held for sale, and 1 senior
housing triple-net property that was moved to other non-reportable.
(3) Represents average capacity as reported by the respective tenants or
operators for the three-month period.
Same-Store Adjusted NOI increased primarily as a result of annual rent
escalations.
Total Portfolio Adjusted NOI decreased primarily as a result of the following
Non-Same-Store impacts:
• the transfer of 21 and 7 senior housing triple-net facilities to our SHOP
segment during 2019 and 2020, respectively;
• the transfer of two senior housing triple-net facilities to our CCRC
segment during 2020, and
• senior housing triple-net facilities sold during 2019 and 2020.
The decrease in Total Portfolio Adjusted NOI is partially offset by the aforementioned increases to Same-Store.
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Senior Housing Operating Portfolio
--------------------------------------------------------------------------------
The following table summarizes results at and for the three months ended
SS Total Portfolio(1)
Three Months Ended March 31 ,
Three Months Ended
2020 2019 Change 2020 2019 Change
Resident fees and
services $ 40,787 $ 39,870 $ 917 $ 170,961 $ 126,181 $ 44,780
Healthpeak's
share of
unconsolidated
joint venture
real estate
revenues 20,101 20,220 (119 ) 25,765 5,649 20,116 Noncontrolling interests' share of consolidated joint venture real estate revenues (96 ) (97 ) 1 (538 ) (472 ) (66 ) Operating expenses (30,145 ) (29,586 ) (559 ) (138,130 ) (96,947 ) (41,183 ) Healthpeak's share of unconsolidated joint venture operating expenses (12,659 ) (12,269 ) (390 ) (17,956 ) (4,161 ) (13,795 ) Noncontrolling interests' share of consolidated joint venture operating expenses 64 63 1 377 350 27 Adjustments to NOI (114 ) 338 (452 ) 531 1,182 (651 ) Adjusted NOI$ 17,938 $ 18,539 $ (601 )
41,010 31,782 9,228 Less: non-SS adjusted NOI (23,072 ) (13,243 ) (9,829 ) SS adjusted NOI$ 17,938 $ 18,539 $ (601 ) Adjusted NOI % change (3.2 )% Property count(2) 50 50 141 112 Average Occupancy 87.0 % 87.4 % 85.7 % 83.4 % Average capacity (units)(3) 6,675 6,676 16,268 12,326 Average annual rent per unit$ 48,319 $ 48,125 $
53,852
_______________________________________
(1) Total Portfolio includes results of operations from disposed properties and
properties that transitioned segments through the disposition or transition
date.
(2) From our 2019 presentation of Same-Store, we removed seven SHOP properties
that were sold, five SHOP properties that were classified as held for sale,
and two SHOP properties that were placed in redevelopment.
(3) Represents average capacity as reported by the respective tenants or
operators for the three-month period.
Same Store Adjusted NOI decreased primarily as a result of the following: • additional expenses related to COVID-19 and
• higher labor costs, partially offset by
• increased rates for resident fees.
Total Portfolio Adjusted NOI increased primarily as a result of the following Non-Same-Store impacts: • increased NOI from (i) 2019 acquisitions and (ii) the transfer of 21 and 7
senior housing triple-net assets to our SHOP segment during 2019 and 2020,
respectively; partially offset by
• decreased NOI from assets sold in 2019 and 2020.
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Continuing Care Retirement Community
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The following table summarizes results at and for the three months ended
SS(1) Total Portfolio(2)
Three Months Ended March 31 ,
Three Months Ended
2020 2019 Change 2020 2019 Change
Resident fees and
services $ - $ - $ - $ 91,780 $ - $ 91,780
Healthpeak's
share of
unconsolidated
joint venture
real estate
revenues - - - 21,647 52,238 (30,591 )
Operating
expenses - - - (156,482 ) - (156,482 )
Healthpeak's
share of
unconsolidated
joint venture
operating
expenses - - - (18,037 ) (41,377 ) 23,340
Adjustments to
NOI - - - 91,561 3,452 88,109
Adjusted NOI $ - $ - $ - 30,469 14,313 16,156
Less: non-SS
adjusted NOI (30,469 ) (14,313 ) (16,156 )
SS adjusted NOI $ - $ - $ -
Adjusted NOI %
change - %
Property count - - 17 15
Average Occupancy - - 86.2 % 85.8 %
Average capacity
(units)(3) - - 8,322 7,269
Average annual
rent per unit $ - $ - $ 65,179 $ 62,600 _______________________________________
(1) All CCRC properties have been removed from the Same-Store population as they
are classified as held for sale, experienced a change in reporting structure,
or underwent an operator transition during the periods presented. As such, no
Same-Store results are presented in the table above.
(2) Total Portfolio includes results of operations from disposed properties and
properties that transitioned segments through the disposition or transition
date.
(3) Represents average capacity as reported by the respective tenants or
operators for the three-month period.
Total Portfolio Adjusted NOI increased primarily as a result of the following: • the acquisition of the remaining 51% interest in 13 communities previously
held in a joint venture; and
• the transfer of two CCRC properties that transitioned from senior housing
triple-net to RIDEA structures.
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