HCP (NYSE:HCP) and HCR ManorCare, Inc. (“HCRMC”) have agreed to
amend their Master Lease (the “Amended Master Lease”) encompassing
a portfolio of 333 post-acute, skilled nursing and assisted living
facilities owned by HCP.
Amended Master Lease Highlights
Commencing April 1, 2015, HCP will provide an annual net rent
reduction of $68 million, which equates to initial lease year rent
of $473 million, compared to $541 million that would have commenced
April 1, 2015 prior to the amendment. The contractual rent will
increase by 3.0% annually during the initial term. In exchange, HCP
will receive the following consideration:
- Fee ownership in nine new post-acute
facilities valued at $275 million with a median age of four years,
currently owned and operated by HCRMC. The ownership transfer to
HCP is expected to be completed within the next 12 months, subject
to customary licensing and regulatory approvals. Commencing April
1, 2015, HCP will begin to receive the allocated annual rent on the
nine facilities totaling $19 million (included in the amended
initial lease year rent of $473 million above). In the event
ownership does not transfer for any of the nine facilities, HCP
will retain a lease receivable of equal value, earning an
equivalent initial cash lease yield of 6.9%, increased annually by
3.0% under the Amended Master Lease;
- A second lease receivable with an
initial amount of $250 million, payable by HCRMC upon the earlier
of: (i) end of the initial term of the first renewal pool under the
Amended Master Lease, or (ii) certain capital or liquidity events
of HCRMC, including an IPO or sale. The $250 million lease
receivable amount will increase each year as follows: 3% in April
2016 through 2018, 4% in 2019, 5% in 2020 and 6% in 2021 until the
end of the initial lease term; and
- Extension of the initial lease term by
five years, to an average of 16 years.
Other than as described above, the Amended Master Lease
possesses substantially the same terms and conditions as those
prior to the amendment. HCP has posted supplemental information
relating to the Amended Master Lease on the Investor Relations
section of its website at www.hcpi.com.
Update on Sale of 50 Non-Strategic Assets
HCP and HCRMC continue to advance their efforts on the
previously disclosed marketing of up to 50 non-strategic
facilities. The asset sales are expected to be completed in late
2015 to early 2016, and generate net proceeds between $250 and $350
million. Based on the previously announced 7.75% yield on sale
proceeds to HCP, this will result in an annual rent reduction under
the Amended Master Lease between $19 and $27 million after
completion.
Combined, the lease amendment and asset sale transactions are
expected to result in the following benefits for HCP:
- HCRMC corporate fixed charge coverage
is projected to increase to 1.28x – 1.30x, and facility-level rent
coverage is projected to improve to 0.98x – 1.00x, each on a pro
forma, full-year run rate basis, thus strengthening HCP’s future
growing rental stream;
- Reduced tenant concentration in HCRMC
from 29% to projected 25% of our annualized portfolio income on a
pro forma, full-year run rate basis; and
- HCRMC’s cash flows must be retained or
reinvested to advance its growth plans until HCP’s lease receivable
is fully repaid. And HCP participates, via its 9.4% equity
interest, in the projected increase in cash flows and value of
HCRMC OpCo over time.
“We appreciate our strong relationship with and continued
support from HCP. This pivotal transaction will immediately improve
our financial flexibility and allow us to continue to grow the HCR
ManorCare franchise,” said Paul Ormond, Chairman, President and CEO
of HCRMC. “HCP is an experienced capital partner that understands
the challenges faced by our industry in the current
environment.”
“The lease amendment directly addresses concerns regarding low
coverage ratios on our HCR ManorCare lease, and we believe that the
benefits HCP receives represent a fair trade for our shareholders,”
said Lauralee Martin, President and CEO of HCP. “This amendment not
only results in improved lease coverage, but positions HCR for
growth by ensuring that adequate capital is available to advance
their strategic business initiatives including continued investment
in our real estate portfolio.”
Non-Cash Impairment Charge
HCP will record a non-cash impairment charge estimated to be
approximately $481 million, or $1.03 per diluted share, related to
our direct financing lease (“DFL”) investments with HCRMC. HCP
acquired the HCRMC real estate portfolio in April 2011 for a
purchase price of $6.1 billion. The non-cash charge will reduce the
current carrying value of the HCRMC DFL investments from $6.6
billion to $6.1 billion, based on the present value of the future
lease payments under the Amended Master Lease.
Updated Full Year 2015 Guidance
HCP is updating its full year 2015 guidance solely to reflect
the impact from the Amended Master Lease described herein and the
non-cash impairment charge above. The guidance does not reflect the
previously announced acquisition of 35 private pay senior housing
communities from Chartwell Retirement Residences for $849 million
or other unannounced investments or dispositions, and is as
follows: HCP expects Funds From Operations (“FFO”) applicable to
common shares to range between $2.02 and $2.08 per diluted share;
FFO as adjusted applicable to common shares to range between $3.06
and $3.12 per diluted share; Funds Available for Distribution
(“FAD”) applicable to common shares to range between $2.63 and
$2.69 per diluted share; and net income applicable to common shares
to range between $0.87 and $0.93 per diluted share. Full year 2015
FFO and net income per share amounts reflect the estimated non-cash
impairment charge of $1.03 per diluted share above.
FFO, FFO as adjusted and FAD are supplemental non-GAAP financial
measures that HCP believes are useful in evaluating the operating
performance of real estate investment trusts. A reconciliation of
these non-GAAP financial measures to GAAP earnings per diluted
share is included below.
Additional Information
HCP has posted supplemental information relating to the Amended
Master Lease on the Investor Relations section of its website at
www.hcpi.com. This supplemental information will also be furnished
by HCP in a Form 8-K to be filed with the SEC on March 30, 2015.
The contents of HCP’s website (including the supplemental
information referred to herein) are not, and shall not be deemed to
be, part of this press release or any other report or document that
HCP files with the SEC.
About HCP
HCP, Inc. is a fully integrated real estate investment trust
(REIT) that invests primarily in real estate serving the healthcare
industry in the United States. HCP's portfolio of assets is
diversified among five distinct sectors: senior housing,
post-acute/skilled nursing, life science, medical office and
hospital. A publicly traded company since 1985, HCP: (i) was the
first healthcare REIT selected to the S&P 500 index; (ii) has
increased its dividend per share for 30 consecutive years; (iii) is
the only REIT included in the S&P 500 Dividend Aristocrats
index; and (iv) is a global leader in sustainability as a member of
the CDP, Dow Jones and FTSE4Good sustainability leadership indices,
as well as the GRESB Global Healthcare Sector Leader. For more
information regarding HCP, visit HCP's website at www.hcpi.com.
Forward Looking Statements
“Safe Harbor” Statement under the Private Securities Litigation
Reform Act of 1995: The statements contained in this release which
are not historical facts 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.
These statements include, among other things, statements regarding
FFO, FAD, income, lease coverage, fixed charge coverage and other
financial projections and assumptions; future business strategies;
expectations regarding the benefits of the Amended Master Lease;
and anticipated outcomes relating to the Amended Master Lease, the
potential benefits of HCP’s relationship with HCRMC and the
anticipated benefit from the sale of non-strategic assets,
including the amount of estimated sale proceeds. These statements
are made as of the date hereof, are not guarantees of future
performance and are subject to known and unknown risks,
uncertainties, assumptions and other factors—many of which are out
of HCP’s and its management’s control and difficult to
forecast—that could cause actual results to differ materially from
those set forth in or implied by such forward-looking statements.
These risks and uncertainties include but are not limited to: the
risk that HCP may not be able to achieve the benefits of the
Amended Master Lease or the sale of the non-strategic assets
described above within expected time-frames or at all; risks
relating to HCP’s ability to fully evaluate HCRMC’s ability to meet
its contractual obligations under the Amended Master Lease; any
financial, legal, regulatory or reputational difficulties that
HCRMC may experience; the risk that HCRMC’s financial performance
will continue to decline; the risk that licensing and regulatory
approvals required for the transfer of facilities under the Amended
Master Lease are not obtained or are obtained subject to
unanticipated conditions; HCP’s reliance on a concentration of a
small number of tenants and operators, including HCRMC, for a
significant portion of its revenues; the financial weakness of
tenants and operators, including potential bankruptcies and
downturns in their businesses, which results in uncertainties
regarding HCP’s ability to continue to realize the full benefit of
such tenants’ and/or operators’ leases, including with respect to
HCRMC; the ability of HCP’s tenants and operators, including HCRMC,
to conduct their respective businesses in a manner sufficient to
maintain or increase their revenues and to generate sufficient
income to make rent and loan payments to HCP and HCP’s ability to
recover investments made, if applicable, in their operations; HCP’s
ability to negotiate the same or better terms with new tenants or
operators if existing leases are not renewed or HCP exercises its
right to replace an existing tenant or operator upon default; the
potential impact of future litigation matters, including the
possibility of larger than expected litigation costs, adverse
results and related developments; the effect on healthcare
providers of legislation addressing entitlement programs and
related services, including Medicare and Medicaid, which may result
in future reductions in reimbursements; changes in federal, state
or local laws and regulations, including those affecting the
healthcare industry that affect HCP’s costs of compliance or
increase the costs, or otherwise affect the operations, of its
tenants and operators, including HCRMC; and other risks and
uncertainties described from time to time in HCP’s Securities and
Exchange Commission filings, including its 2014 Annual Report on
Form 10-K and quarterly reports on Form 10-Q. HCP assumes no, and
hereby disclaims any, obligation to update any of the foregoing or
any other forward-looking statements as a result of new information
or new or future developments, except as otherwise required by law.
These statements should not be relied upon as representing HCP’s
views as of any date subsequent to the date of this release.
HCP, Inc.
Projected Future
Operations(1)
(Unaudited)
Full Year 2015 Low
High
Diluted earnings per common share
$
0.87
$ 0.93 Real estate depreciation and amortization 1.04 1.04 Other
depreciation and amortization 0.05 0.05 Gain on sales of real
estate (0.01 ) (0.01 ) Joint venture FFO adjustments 0.07
0.07
Diluted FFO per common share
$ 2.02 $ 2.08 Impairment(2) 1.03 1.03
Transaction-related items 0.01 0.01
Diluted FFO as adjusted per common share $
3.06 $ 3.12 Amortization of net market lease
intangibles and deferred revenues (0.01 ) (0.01 ) Amortization of
deferred compensation 0.05 0.05 Amortization of deferred financing
costs, net 0.04 0.04 Straight-line rents (0.06 ) (0.06 ) DFL
accretion(3) (0.18 ) (0.18 ) Other depreciation and amortization
(0.05 ) (0.05 ) Leasing costs and tenant and capital improvements
(0.18 ) (0.18 ) Lease restructure payments 0.05 0.05 Joint venture
adjustments – CCRC entrance fees 0.06 0.06 Joint venture and other
FAD adjustments(3) (0.15 ) (0.15 )
Diluted FAD per
common share
$
2.63 $ 2.69
________________________________________
(1) Except as otherwise noted above, the foregoing
projections reflect management's view of current and future market
conditions, including assumptions with respect to rental rates,
occupancy levels, development items and the earnings impact of the
events referenced in this release. Except as otherwise noted, these
estimates do not reflect the potential impact of future
acquisitions, dispositions, other impairments or recoveries, the
future bankruptcy or insolvency of our operators, lessees,
borrowers or other obligors, the effect of any future restructuring
of our contractual relationships with such entities, gains or
losses on marketable securities, ineffectiveness related to our
cash flow hedges, or existing and future litigation matters
including the possibility of larger than expected litigation costs
and related developments. There can be no assurance that our actual
results will not differ materially from the estimates set forth
above. The aforementioned ranges represent management’s best
estimates based upon the underlying assumptions as of the date of
this press release. Except as otherwise required by law, management
assumes no, and hereby disclaims any, obligation to update any of
the foregoing projections as a result of new information or new or
future developments. (2) As described in this release, we
will record a non-cash impairment charge related to our DFL
investments with HCRMC. (3) Our ownership interest in HCRMC
is accounted for using the equity method, which requires an ongoing
elimination of DFL income that is proportional to our ownership in
HCRMC. Further, our share of earnings from HCRMC (equity income)
increases for the corresponding elimination of related lease
expense recognized at the HCRMC entity level, which we present as a
non-cash joint venture FAD adjustment.
We believe Funds From Operations (“FFO”) is an important
supplemental measure 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 uses historical
cost accounting for depreciation could be less informative. The
term FFO was developed by the REIT industry to address this issue.
FFO as defined by the National Association of Real Estate
Investment Trusts (“NAREIT”) is net income applicable to common
shares (computed in accordance with U.S. generally accepted
accounting principles or “GAAP”), excluding gains or losses from
sales of property, impairments of, or related to, depreciable real
estate, plus real estate, direct financing lease (“DFL”) and other
depreciation and amortization, and after adjustments for joint
ventures. Adjustments for joint ventures are calculated to reflect
FFO on the same basis. FFO does not represent cash generated from
operating activities determined 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. We compute
FFO in accordance with the current NAREIT definition; however,
other REITs may report FFO differently or have a different
interpretation of the current NAREIT definition from ours. FFO as
adjusted represents FFO before the impact of impairments
(recoveries) of non-depreciable assets, transaction-related items
(defined below) and severance-related charges. Transaction-related
items include acquisition and pursuit costs (e.g., due diligence
and closing) and gains/charges incurred as a result of mergers and
acquisitions and lease amendment or termination activities.
Management believes that FFO as adjusted provides a meaningful
supplemental measurement of our FFO run-rate. This measure is a
modification of the NAREIT definition of FFO and should not be used
as an alternative to net income (determined in accordance with
GAAP) or NAREIT FFO.
Funds Available for Distribution (“FAD”) is defined as FFO as
adjusted after excluding the impact of the following: (i)
amortization of acquired market lease intangibles, net; (ii)
amortization of deferred compensation expense; (iii) amortization
of deferred financing costs, net; (iv) straight-line rents; (v)
accretion and depreciation related to DFLs and lease incentive
amortization (reduction of straight-line rents); and (vi) 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, FAD: (i) is computed after deducting
recurring capital expenditures, including leasing costs and second
generation tenant and capital improvements; and (ii) includes lease
restructure payments and adjustments to compute our share of FAD
from our unconsolidated joint ventures and those related to CCRC
non-refundable entrance fees. Other REITs or real estate companies
may use different methodologies for calculating FAD, and
accordingly, our FAD may not be comparable to those reported by
other REITs. Although our FAD computation may not be comparable to
that of other REITs, management believes FAD 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. FAD does not represent cash generated
from operating activities determined in accordance with GAAP, is
not necessarily indicative of cash available to fund cash needs,
and should not be considered as an alternative to net income
determined in accordance with GAAP.
HCP, Inc.Timothy M. SchoenExecutive Vice President and Chief
Financial Officer(949) 407-0400
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