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Healthcare real estate investment trust HCP, Inc. (HCP 0.28%) had an eventful third quarter, but not because of the earnings numbers, none of which was a big surprise. Instead, the company finished spinning off some unwanted assets, agreed to sell 64 properties from the remaining portfolio, and announced the first reduction to its dividend in more than three decades.
First, the numbers
HCP produced a solid quarter, with adjusted funds from operations (FFO) of $0.72 per share, which slightly surpassed analyst expectations. In addition, net income increased by 28% year over year, and although net income isn't the best metric of REIT profitability, shareholders should be pleased to see the improvement. Also, the company's funds available for distribution (FAD) also increased by about 2.5%, meaning that more money is available to be paid out as dividends.
However, the big news items in HCP's third-quarter earnings report weren't the net income, FFO, or FAD numbers. Rather, there were three big things shareholders need to know about.
- HCP finalized the spinoff transaction that created new REIT Quality Care Properties, or QCP (QCP +0.00%).
- HCP announced it was selling over $1 billion of its senior housing properties occupied by Brookdale Senior Living (BKD 4.28%).
- HCP announced a dividend of $0.37 per share, far below the previous payment of $0.575.
Since these are three important developments, let's look at each one individually.
The QCP spinoff is finally complete
I've written about the spinoff of Quality Care Properties, or QCP, several times before, so here's an overview if you don't know what I'm talking about.
In a nutshell, HCP spun off its skilled-nursing and post-acute properties to retain a portfolio made up mainly of stable, private-pay assets. This should result in better asset quality, more financial flexibility, and hopefully a dependable stream of growing dividend income for shareholders.
HCP plans to use virtually all of the proceeds from the spinoff to pay down debt, which should help achieve its financial objectives.
Tenant concentration was too high, so...
Brookdale Senior Living has been a major HCP tenant for some time now, but after the spinoff, the remaining portfolio is now a little too concentrated in Brookdale-occupied properties. In fact, Brookdale now accounts for more than one-third of HCP's net operating income.
To remedy this, HCP announced that it has agreed to sell 64 of its Brookdale-leased properties for $1.125 billion, which it expects to close during the first quarter of 2017. In addition, HCP plans to terminate leases on 25 Brookdale-operated properties over the next year, which will then mostly be sold.
Not only will this reduce the Brookdale concentration from 35% of HCP's cash net operating income to 27%, but it will increase the overall occupancy rate of the remaining Brookdale properties, improve HCP's financial condition, and add two or three new operator relationships to HCP's portfolio.
HCP cut its dividend, but don't panic
HCP also declared a dividend payment of $0.37 per share, a substantial cut from its previous quarterly payment of $0.575. The company also lowered its full-year 2016 FFO guidance range to $2.69-$2.75 from $2.83-$2.89, and issued 2017 guidance in the range of $1.89-$1.95. At first glance, this may look like terrible news -- especially as far as the dividend goes, since HCP had increased its dividend for 31 consecutive years.
However, keep in mind that none of this is actually bad news. Rather, it is simply the result of the lost profitability that came with the spinoff: HCP spun off roughly one-third of its properties into QCP, so it makes sense that 2017's guidance and the newly declared dividend payment are both roughly one-third less than they were while the two REITs were still one.
It remains to be seen what dividend policy QCP will implement, but as a shareholder, be sure to consider metrics like dividends, FFO, and FAD as a combination of the two companies when comparing with previous results.
What's next, and is HCP a good buy now?
While this is a transitional period for HCP, the company is certainly taking appropriate steps to achieve its vision for what the "new" HCP should be. As the dust settles, we'll have a better idea of what growth strategies will be employed by the company, but private-pay healthcare real estate is a long-term winner, and I think HCP's management is doing a great job of setting its shareholders up for success.
