XNYS:HCP HCP Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended March 31, 2012.

 

OR

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to             

 

Commission file number 1-08895

 


 

HCP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

33-0091377

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

3760 Kilroy Airport Way, Suite 300
Long Beach, CA 90806

(Address of principal executive offices)

 

(562) 733-5100
(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES o  NO x

 

As of April 25, 2012, there were 419,503,466 shares of the registrant’s $1.00 par value common stock outstanding.

 

 

 



Table of Contents

 

HCP, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Income

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

5

 

 

 

 

Condensed Consolidated Statements of Equity

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows

7

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 4.

Controls and Procedures

39

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 6.

Exhibits

41

 

 

 

Signatures

 

42

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

8,974,639

 

$

8,933,278

 

Development costs and construction in progress

 

171,967

 

190,590

 

Land

 

1,729,560

 

1,729,677

 

Accumulated depreciation and amortization

 

(1,540,809

)

(1,472,272

)

Net real estate

 

9,335,357

 

9,381,273

 

 

 

 

 

 

 

Net investment in direct financing leases

 

6,768,111

 

6,727,777

 

Loans receivable, net

 

113,946

 

110,253

 

Investments in and advances to unconsolidated joint ventures

 

220,311

 

224,052

 

Accounts receivable, net of allowance of $1,543 and $1,341, respectively

 

24,381

 

26,681

 

Cash and cash equivalents

 

347,425

 

33,506

 

Restricted cash

 

45,458

 

41,553

 

Intangible assets, net

 

360,140

 

373,763

 

Real estate held for sale, net

 

 

4,159

 

Other assets, net

 

510,190

 

485,458

 

Total assets

 

$

17,725,319

 

$

17,408,475

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

 

$

454,000

 

Senior unsecured notes

 

5,864,940

 

5,416,063

 

Mortgage debt

 

1,756,252

 

1,764,571

 

Other debt

 

86,734

 

87,985

 

Intangible liabilities, net

 

119,412

 

124,142

 

Accounts payable and accrued liabilities

 

519,492

 

275,478

 

Deferred revenue

 

68,527

 

65,614

 

Total liabilities

 

8,415,357

 

8,187,853

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value: aggregate liquidation preference of $295.5 million as of December 31, 2011

 

 

285,173

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 419,433,018 and 408,629,444 shares issued and outstanding, respectively

 

419,433

 

408,629

 

Additional paid-in capital

 

9,776,708

 

9,383,536

 

Cumulative dividends in excess of earnings

 

(1,053,684

)

(1,024,274

)

Accumulated other comprehensive loss

 

(17,666

)

(19,582

)

Total stockholders’ equity

 

9,124,791

 

9,033,482

 

 

 

 

 

 

 

Joint venture partners

 

16,085

 

16,971

 

Non-managing member unitholders

 

169,086

 

170,169

 

Total noncontrolling interests

 

185,171

 

187,140

 

Total equity

 

9,309,962

 

9,220,622

 

Total liabilities and equity

 

$

17,725,319

 

$

17,408,475

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Revenues:

 

 

 

 

 

Rental and related revenues

 

$

244,335

 

$

253,081

 

Tenant recoveries

 

22,650

 

23,444

 

Resident fees and services

 

36,179

 

2,505

 

Income from direct financing leases

 

154,535

 

13,395

 

Interest income

 

819

 

38,096

 

Investment management fee income

 

493

 

607

 

Total revenues

 

459,011

 

331,128

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

Interest expense

 

104,568

 

108,576

 

Depreciation and amortization

 

88,241

 

91,182

 

Operating

 

67,349

 

46,845

 

General and administrative

 

20,102

 

21,952

 

Total costs and expenses

 

280,260

 

268,555

 

 

 

 

 

 

 

Other income, net

 

436

 

10,309

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

179,187

 

72,882

 

Income taxes

 

709

 

(37

)

Equity income from unconsolidated joint ventures

 

13,675

 

798

 

Income from continuing operations

 

193,571

 

73,643

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

Income before gain on sales of real estate, net of income taxes

 

137

 

341

 

Gain on sales of real estate, net of income taxes

 

2,856

 

 

Total discontinued operations

 

2,993

 

341

 

 

 

 

 

 

 

Net income

 

196,564

 

73,984

 

Noncontrolling interests’ share in earnings

 

(3,184

)

(3,891

)

Net income attributable to HCP, Inc.

 

193,380

 

70,093

 

Preferred stock dividends

 

(17,006

)

(5,283

)

Participating securities’ share in earnings

 

(1,117

)

(935

)

Net income applicable to common shares

 

$

175,257

 

$

63,875

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

Continuing operations

 

$

0.42

 

$

0.17

 

Discontinued operations

 

0.01

 

 

Net income applicable to common shares

 

$

0.43

 

$

0.17

 

Diluted earnings per common share:

 

 

 

 

 

Continuing operations

 

$

0.42

 

$

0.17

 

Discontinued operations

 

0.01

 

 

Net income applicable to common shares

 

$

0.43

 

$

0.17

 

Weighted-average shares used to calculate earnings per common share:

 

 

 

 

 

Basic

 

410,018

 

372,116

 

Diluted

 

411,661

 

373,960

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.50

 

$

0.48

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Net income

 

$

196,564

 

$

73,984

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Unrealized gains on securities

 

1,304

 

 

Change in net unrealized gains (losses) on cash flow hedges:

 

 

 

 

 

Unrealized gains

 

276

 

327

 

Reclassification adjustment realized in net income

 

89

 

(1,313

)

Change in Supplemental Executive Retirement Plan obligation

 

45

 

34

 

Foreign currency translation adjustment

 

202

 

181

 

Total other comprehensive income (loss), net of tax

 

1,916

 

(771

)

 

 

 

 

 

 

Total comprehensive income, net of tax

 

198,480

 

73,213

 

Total comprehensive income attributable to noncontrolling interest

 

(3,184

)

(3,891

)

Total comprehensive income attributable to HCP, Inc.

 

$

195,296

 

$

69,322

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2012

 

11,820

 

$

285,173

 

408,629

 

$

408,629

 

$

9,383,536

 

$

(1,024,274

)

$

(19,582

)

$

9,033,482

 

$

187,140

 

$

9,220,622

 

Net income

 

 

 

 

 

 

193,380

 

 

193,380

 

3,184

 

196,564

 

Other comprehensive income

 

 

 

 

 

 

 

1,916

 

1,916

 

 

1,916

 

Preferred stock redemption

 

(11,820

)

(285,173

)

 

 

 

(11,723

)

 

(296,896

)

 

(296,896

)

Issuance of common stock, net

 

 

 

9,559

 

9,559

 

358,397

 

 

 

367,956

 

(1,034

)

366,922

 

Repurchase of common stock

 

 

 

(167

)

(167

)

(6,817

)

 

 

(6,984

)

 

(6,984

)

Exercise of stock options

 

 

 

1,412

 

1,412

 

36,219

 

 

 

37,631

 

 

37,631

 

Amortization of deferred compensation

 

 

 

 

 

5,373

 

 

 

5,373

 

 

5,373

 

Preferred dividends

 

 

 

 

 

 

(5,283

)

 

(5,283

)

 

(5,283

)

Common dividends ($0.50 per share)

 

 

 

 

 

 

(205,784

)

 

(205,784

)

 

(205,784

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(3,912

)

(3,912

)

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

181

 

181

 

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

 

(388

)

(388

)

March 31, 2012

 

 

$

 

419,433

 

$

419,433

 

$

9,776,708

 

$

(1,053,684

)

$

(17,666

)

$

9,124,791

 

$

185,171

 

$

9,309,962

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2011

 

11,820

 

$

285,173

 

370,925

 

$

370,925

 

$

8,089,982

 

$

(775,476

)

$

(13,237

)

$

7,957,367

 

$

188,680

 

$

8,146,047

 

Net income

 

 

 

 

 

 

70,093

 

 

70,093

 

3,891

 

73,984

 

Other comprehensive loss

 

 

 

 

 

 

 

(771

)

(771

)

 

(771

)

Issuance of common stock, net

 

 

 

35,200

 

35,200

 

1,217,165

 

 

 

1,252,365

 

 

1,252,365

 

Repurchase of common stock

 

 

 

(122

)

(122

)

(4,355

)

 

 

(4,477

)

 

(4,477

)

Exercise of stock options

 

 

 

6

 

6

 

155

 

 

 

161

 

 

161

 

Amortization of deferred compensation

 

 

 

 

 

5,102

 

 

 

5,102

 

 

5,102

 

Preferred dividends

 

 

 

 

 

 

(5,283

)

 

(5,283

)

 

(5,283

)

Common dividends ($0.48 per share)

 

 

 

 

 

 

(178,926

)

 

(178,926

)

 

(178,926

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(3,667

)

(3,667

)

Noncontrolling interest in acquired assets

 

 

 

 

 

 

 

 

 

1,500

 

1,500

 

Purchase of noncontrolling interests

 

 

 

 

 

(18,098

)

 

 

(18,098

)

(489

)

(18,587

)

March 31, 2011

 

11,820

 

$

285,173

 

406,009

 

$

406,009

 

$

9,289,951

 

$

(889,592

)

$

(14,008

)

$

9,077,533

 

$

189,915

 

$

9,267,448

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

196,564

 

$

73,984

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization of real estate, in-place lease and other intangibles:

 

 

 

 

 

Continuing operations

 

88,241

 

91,182

 

Discontinued operations

 

35

 

238

 

Amortization of above and below market lease intangibles, net

 

(697

)

(906

)

Amortization of deferred compensation

 

5,373

 

5,102

 

Amortization of deferred financing costs, net

 

4,529

 

14,948

 

Straight-line rents

 

(9,927

)

(17,300

)

Loan and direct financing lease interest accretion

 

(25,878

)

(19,969

)

Deferred rental revenues

 

1,839

 

1,106

 

Equity income from unconsolidated joint ventures

 

(13,675

)

(798

)

Distributions of earnings from unconsolidated joint ventures

 

913

 

332

 

Gain on sales of real estate

 

(2,856

)

 

Gain upon consolidation of joint venture

 

 

(8,039

)

Derivative (gains) losses, net

 

203

 

(2,113

)

Changes in:

 

 

 

 

 

Accounts receivable, net

 

2,300

 

4,416

 

Other assets

 

(7,877

)

8,073

 

Accounts payable and accrued liabilities

 

(52,619

)

(429

)

Net cash provided by operating activities

 

186,468

 

149,827

 

Cash flows from investing activities:

 

 

 

 

 

Cash used in the HCP Ventures II purchase, net of cash acquired

 

 

(136,060

)

Other acquisitions and development of real estate

 

(22,340

)

(65,453

)

Leasing costs and tenant and capital improvements

 

(8,931

)

(9,493

)

Proceeds from sales of real estate, net

 

7,238

 

 

Distributions in excess of earnings from unconsolidated joint ventures

 

2,716

 

637

 

Principal repayments on loans receivable

 

4,015

 

287

 

Investments in loans receivable

 

(9,939

)

(359,683

)

Increase in restricted cash

 

(3,905

)

(5,738

)

Net cash used in investing activities

 

(31,146

)

(575,503

)

Cash flows from financing activities:

 

 

 

 

 

Net repayments under bank line of credit

 

(454,000

)

 

Repayments of mortgage debt

 

(10,057

)

(21,137

)

Issuance of senior unsecured notes

 

450,000

 

2,400,000

 

Deferred financing costs

 

(10,117

)

(42,852

)

Net proceeds from the issuance of common stock and exercise of options

 

397,569

 

1,248,049

 

Dividends paid on common and preferred stock

 

(211,067

)

(184,209

)

Issuance (purchase) of noncontrolling interests

 

181

 

(18,587

)

Distributions to noncontrolling interests

 

(3,912

)

(3,667

)

Net cash provided by financing activities

 

158,597

 

3,377,597

 

Net increase in cash and cash equivalents

 

313,919

 

2,951,921

 

Cash and cash equivalents, beginning of period

 

33,506

 

1,036,701

 

Cash and cash equivalents, end of period

 

$

347,425

 

$

3,988,622

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)         Business

 

HCP, Inc., an S&P 500 company, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company is a self-administered, Maryland real estate investment trust (“REIT”) organized in 1985. The Company is headquartered in Long Beach, California, with offices in Nashville, Tennessee and San Francisco, California. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s portfolio is comprised of investments in the following five healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. The Company makes investments within the healthcare segments using the following five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) RIDEA, which represents investments in senior housing operations utilizing the structure permitted by the Housing and Economic Recovery Act of 2008.

 

(2)         Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates.

 

The condensed consolidated financial statements include the accounts of HCP, its wholly-owned subsidiaries and joint ventures or variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2011 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).

 

Certain amounts in the Company’s condensed consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Assets sold or held for sale and associated liabilities have been reclassified on the condensed consolidated balance sheets and the related operating results reclassified from continuing to discontinued operations on the condensed consolidated income statements (see Note 5). Facility-level revenues from 21 senior housing communities that are in a RIDEA structure are presented in “resident fees and services” on the condensed consolidated income statements; all facility-level resident fee and service revenue previously reported in “rental and related revenues” has been reclassified to “resident fees and services” (see Note 12 for additional information regarding the 21 RIDEA facilities).

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). The amendments in this update result in additional fair value measurement and disclosure requirements within U.S. GAAP and International Financial Reporting Standards. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The adoption of ASU 2011-04 on January 1, 2012 did not have an impact on the Company’s consolidated financial position or results of operations.

 

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. In December 2011, the FASB deferred portions of this update in its issuance of Accounting Standards Update No. 2011-12 (see discussion below). The Company has elected the two-statement approach and the required financial statements are presented herein.

 

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In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 to defer indefinitely the requirement of ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.

 

(3)      HCR ManorCare Acquisition

 

On April 7, 2011, the Company completed its acquisition of substantially all of the real estate assets of HCR ManorCare, Inc. (“HCR ManorCare”), for a purchase price of $6 billion (“HCR ManorCare Acquisition”). The purchase price consisted of the following: (i) $4 billion in cash consideration; and (ii) $2 billion representing the fair value of the Company’s former HCR ManorCare debt investments that were settled as part of this acquisition. Through this transaction, the Company acquired 334 HCR ManorCare post-acute, skilled nursing and assisted living facilities. The facilities are located in 30 states, with the highest concentrations in Ohio, Pennsylvania, Florida, Illinois and Michigan. A wholly-owned subsidiary of HCR ManorCare operates the assets pursuant to a long-term triple-net master lease agreement supported by a guaranty from HCR ManorCare. Additionally, the Company exercised its option to purchase an ownership interest in HCR ManorCare for $95 million that represented a 9.9% equity interest at closing.

 

The total purchase price of the HCR ManorCare Acquisition follows (in thousands):

 

Payment of aggregate cash consideration, net of cash acquired

 

$

3,801,624

 

HCP’s loan investments in HCR ManorCare’s debt settled at fair value(1) 

 

1,990,406

 

Assumed HCR ManorCare accrued liabilities at fair value(2) 

 

224,932

 

Total purchase consideration

 

$

6,016,962

 

 

 

 

 

Legal, accounting and other fees and costs(3) 

 

$

26,839

 

 


(1)          At closing, the Company recognized a gain of approximately $23 million, included in interest income, which represents the fair value of the Company’s existing mezzanine and mortgage loan investments in HCR ManorCare in excess of its carrying value on the acquisition date.

(2)          In August 2011, the Company paid these amounts to certain taxing authorities or the seller.

(3)          Represents estimated fees and costs of $15.5 million (general and administrative) and the write-off of unamortized bridge loan fees of $11.3 million (interest expense) upon its termination that were expensed in 2010 and 2011, respectively. These charges are directly attributable to the transaction and represent non-recurring costs.

 

The following table summarizes the fair value of the HCR ManorCare assets acquired and liabilities assumed at the April 7, 2011 acquisition date (in thousands):

 

Assets acquired

 

 

 

Net investments in direct financing leases

 

$

6,002,074

 

Cash and cash equivalents

 

6,996

 

Intangible assets, net

 

14,888

 

Total assets acquired

 

6,023,958

 

 

 

 

 

Total liabilities assumed

 

224,932

 

Net assets acquired

 

$

5,799,026

 

 

In connection with the HCR ManorCare Acquisition, the Company entered into a credit agreement for a 365-day bridge loan facility (from funding to maturity) in an aggregate amount of up to $3.3 billion, which was terminated in accordance with its terms in March 2011.

 

The assets and liabilities of the Company’s investments related to HCR ManorCare and the related results of operations are included in the condensed consolidated financial statements from the April 7, 2011 acquisition date. For the three months ended March 31, 2012, the Company recognized revenues and earnings from its investments related to HCR ManorCare of $142 million and $155 million, respectively. See Note 8 for additional information regarding the Company’s investment related to HCR ManorCare.

 

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Pro Forma Results of Operations

 

The following unaudited pro forma consolidated results of operations assume that the HCR ManorCare Acquisition, including the Company’s equity interest in HCR ManorCare, was completed as of January 1, 2011 (in thousands, except per share amounts):

 

 

 

Three Months
Ended
March 31, 2011

 

Revenues

 

$

442,166

 

Net income

 

193,359

 

Net income applicable to HCP, Inc.

 

189,468

 

 

 

 

 

Basic earnings per common share

 

$

0.46

 

Diluted earnings per common share

 

0.46

 

 

(4)         Other Real Estate Property Investments

 

During the three months ended March 31, 2012, the Company funded an aggregate of $30 million for construction, tenant and other capital improvement projects, primarily in its life science and medical office segments.

 

A summary of real estate acquisitions for the three months ended March 31, 2011 follows (in thousands):

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Debt
Assumed

 

DownREIT
Units
(1)

 

Real Estate

 

Net
Intangibles

 

Life science

 

$

19,147

 

$

48,252

 

$

 

$

61,710

 

$

5,689

 

Medical office

 

29,743

 

 

1,500

 

26,191

 

5,052

 

 

 

$

48,890

 

$

48,252

 

$

1,500

 

$

87,901

 

$

10,741

 

 


(1)          Non-managing member limited liability company units.

 

See discussion of the January 2011 purchase and consolidation of HCP Ventures II in Note 8.

 

During the three months ended March 31, 2011, the Company funded an aggregate of $22 million for construction, tenant and other capital improvement projects, primarily in its life science and medical office segments. During the three months ended March 31, 2011, two of the Company’s life science facilities located in South San Francisco were placed in service representing 88,000 square feet.

 

(5)         Dispositions of Real Estate and Discontinued Operations

 

During the three months ended March 31, 2012, the Company sold a medical office building for $7 million.

 

The following table summarizes operating income from discontinued operations (dollars in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Rental and related revenues

 

$

246

 

$

577

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

35

 

238

 

Operating expenses

 

2

 

1

 

Other (income) expense, net

 

72

 

(3

)

Income, net of income taxes

 

$

137

 

$

341

 

Gain on sales of real estate, net of income taxes

 

$

2,856

 

$

 

 

 

 

 

 

 

Number of properties held for sale

 

 

4

 

Number of properties sold

 

1

 

 

Number of properties included in discontinued operations

 

1

 

4

 

 

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(6)         Net Investment in Direct Financing Leases

 

On April 7, 2011, the Company completed the acquisition of 334 HCR ManorCare properties subject to a single master lease that the Company classified as a direct financing lease (“DFL”). See discussion of the HCR ManorCare Acquisition in Note 3.

 

The components of net investment in DFLs consisted of the following (dollars in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Minimum lease payments receivable(1) 

 

$

25,615,872

 

$

25,744,161

 

Estimated residual values

 

4,010,514

 

4,010,514

 

Less unearned income

 

(22,858,275

)

(23,026,898

)

Net investment in direct financing leases

 

$

6,768,111

 

$

6,727,777

 

Properties subject to direct financing leases

 

361

 

361

 

 


(1)          The minimum lease payments receivable are primarily attributable to HCR ManorCare ($24.4 billion and $24.5 billion at March 31, 2012 and December 31, 2011, respectively). The triple-net master lease with HCR ManorCare provides for rent in the first year of $473 million ($489 million beginning April 1, 2012). The rent increases by 3.5% per year after each of the first five years and by 3% for the remaining portion of the initial lease term. The properties are grouped into four pools, and HCR ManorCare has a one-time extension option for each pool with rent increased for the first year of the extension option to the greater of fair market rent or a 3% increase over the rent for the prior year. Including the extension options, which the Company determined to be bargain renewal options, the four leased pools had total initial available terms ranging from 23 to 35 years.

 

Certain of the non-HCR ManorCare leases contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

 

(7)         Loans Receivable

 

The following table summarizes the Company’s loans receivable (in thousands):

 

 

 

March 31, 2012

 

December 31, 2011

 

 

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

83,710

 

$

83,710

 

$

 

$

90,148

 

$

90,148

 

Other

 

45,517

 

 

45,517

 

35,643

 

 

35,643

 

Unamortized discounts, fees and costs

 

(783

)

(1,088

)

(1,871

)

(1,040

)

(1,088

)

(2,128

)

Allowance for loan losses

 

 

(13,410

)

(13,410

)

 

(13,410

)

(13,410

)

 

 

$

44,734

 

$

69,212

 

$

113,946

 

$

34,603

 

$

75,650

 

$

110,253

 

 

Delphis Operations, L.P. Loan

 

The Company holds a secured term loan made to Delphis Operations, L.P. (“Delphis” or the “Borrower”) that is collateralized by all of the assets of the Borrower, which collateral is comprised primarily of interests in partnerships operating surgical facilities, some of which are on the premises of properties owned by the Company or HCP Ventures IV, LLC, an unconsolidated joint venture of the Company.  In December 2009, the Company determined that the loan was impaired and recognized a provision for loan loss (impairment) of $4.3 million. In January 2011, the Company placed the loan on cost-recovery status, whereby accrual of interest income was suspended and any payments received from the Borrower are applied to reduce the recorded investment in the loan. In September 2011, the Company determined that the fair value of the collateral assets was no longer in excess of the carrying value of the loan and therefore recognized an additional provision for losses of $15.4 million.

 

As part of a March 2012 agreement (the “2012 Agreement”) between Delphis, certain past and current principals of Delphis and the Cirrus Group, LLC (the “Guarantors”) and the Company, the Company agreed, among other things, to allow the distribution of $1.5 million to certain of the Guarantors from funds generated from sales of assets that were pledged as additional collateral for this loan. In consideration of this distribution, among other things, the Company received cash of $4.5 million (including  funds that had been escrowed from past sales of the Guarantors’ collateral) and the assignment of certain rights to general and limited partnership interests (including the release of claims by such entities). Further, the Company, as part of the 2012 Agreement, agreed to provide financial incentives to the Borrower regarding the liquidation of the primary collateral assets for this loan.

 

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The Company valued the cash payments and other consideration received through the 2012 Agreement (after reducing the consideration by $0.5 million for related legal expenses) at $6.5 million, which the Company applied to the carrying value of the loan, reducing the balance to $69.2 million as of March 31, 2012 from its balance of $75.7 million as of December 31, 2011. During the three months ended March 31 2011, the Company received cash payments from the Borrower of $1.0 million. At March 31, 2012, the Company believes that the fair value of the collateral supporting this loan is in excess of the loan’s carrying value.

 

HCR ManorCare Loans

 

In December 2007, the Company made a $900 million investment (at a discount of $100 million) in HCR ManorCare mezzanine loans, which paid interest at a floating rate of one-month London Interbank Offered Rate (“LIBOR”) plus 4.0%. Also, in August 2009 and January 2011, the Company purchased $720 million (at a discount of $130 million) and $360 million, respectively, in participations in HCR ManorCare first mortgage debt, which paid interest at LIBOR plus 1.25%.

 

On April 7, 2011, upon closing of the HCR ManorCare Acquisition, the Company’s loans to HCR ManorCare were settled, which resulted in additional interest income of $23 million, which represents the excess of the loans’ fair values above their carrying values at the acquisition date. See Note 3 for additional discussion related to the HCR ManorCare Acquisition.

 

Genesis HealthCare Loans

 

In September and October 2010, the Company purchased participations in a senior loan and mezzanine note of Genesis HealthCare (“Genesis”) with par values of $278 million (at a discount of $28 million) and $50 million (at a discount of $10 million), respectively. The Genesis senior loan paid interest at LIBOR (subject to a floor of 1.5%, increasing to 2.5% by maturity) plus a spread of 4.75%, increasing to 5.75% by maturity. The senior loan was secured by all of Genesis’ assets. The mezzanine note paid interest at LIBOR plus a spread of 7.50%. In addition to the coupon interest payments, the mezzanine note required the payment of a termination fee, of which the Company’s share prior to the early repayment of this loan was $2.3 million.

 

On April 1, 2011, the Company received $330.4 million from the early repayment of its loans to Genesis, and recognized additional interest income of $34.8 million, which represents the related unamortized discounts and termination fee.

 

(8)         Investments in and Advances to Unconsolidated Joint Ventures

 

HCP Ventures II

 

On January 14, 2011, the Company acquired its partner’s 65% interest in HCP Ventures II, a joint venture that owned 25 senior housing facilities, becoming the sole owner of the portfolio.

 

The purchase consideration of HCP Ventures II follows (in thousands):

 

Cash paid for HCP Ventures II’s partnership interest

 

$

135,550

 

Fair value of HCP’s 35% interest in HCP Ventures II (carrying value of $65,223 at closing)(1)

 

72,992

 

Total consideration

 

$

208,542

 

 

 

 

 

Estimated fees and costs

 

 

 

Legal, accounting and other fees and costs(2)

 

$

150

 

Debt assumption fees(3)

 

500

 

Total

 

$

650

 

 


(1)          In January 2011, the Company recognized a gain of approximately $8 million, included in other income, net, which represents the fair value of the Company’s 35% interest in HCP Ventures II in excess of its carrying value on the acquisition date.

(2)          Represents estimated fees and costs that were expensed and included in general and administrative expenses. These charges are directly attributable to the transaction and represent non-recurring costs.

(3)         Represents debt assumption fees that were capitalized as deferred financing costs.

 

In accordance with the accounting guidance applicable to acquisitions of the partner’s ownership interests that result in consolidation of previously unconsolidated entities, the Company recorded all of the assets and liabilities of HCP Ventures II at their fair values as of the January 14, 2011 acquisition date. The Company utilized relevant market data and valuation techniques to allocate the acquisition date fair value for HCP Ventures II. Relevant market data and valuation techniques included, but were not limited to, market data comparables for capitalization and discount rates, credit spreads, property specific building cost information and cash flow assumptions. The market data comparables utilized in the Company’s valuation model were based on information that it believes to be within a reasonable range of current market transactions.

 

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The following table summarizes the fair values of the HCP Ventures II assets acquired and liabilities assumed at the January 14, 2011 acquisition date (in thousands):

 

Assets acquired

 

 

 

Buildings and improvements

 

$

683,633

 

Land

 

79,580

 

Cash

 

2,585

 

Restricted cash

 

1,861

 

Intangible assets

 

78,293

 

Total assets acquired

 

$

845,952

 

 

 

 

 

Liabilities assumed

 

 

 

Mortgage debt

 

$

635,182

 

Other liabilities

 

2,228

 

Total liabilities assumed

 

637,410

 

Net assets acquired

 

$

208,542

 

 

The related assets, liabilities and results of operations of HCP Ventures II are included in the condensed consolidated financial statements from the January 14, 2011 acquisition date.

 

Summary of Unconsolidated Joint Venture Information

 

The Company owns interests in the following entities that are accounted for under the equity method at March 31, 2012 (dollars in thousands):

 

Entity(1)

 

Properties/Segment

 

Investment(2)

 

Ownership%

 

HCR ManorCare

 

post-acute/skilled nursing operations

 

$

96,040

 

9.4(3)

 

HCP Ventures III, LLC

 

13 medical office

 

8,186

 

30

 

HCP Ventures IV, LLC

 

54 medical office and 4 hospital

 

34,741

 

20

 

HCP Life Science(4)

 

4 life science

 

66,631

 

50-63

 

Horizon Bay Hyde Park, LLC

 

1 senior housing

 

6,957

 

72

 

Suburban Properties, LLC

 

1 medical office

 

7,554

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

202

 

 

 

 

 

 

 

$

220,311

 

 

 

 

 

 

 

 

 

 

 

Edgewood Assisted Living Center, LLC

 

1 senior housing

 

$

(432

)

45

 

Seminole Shores Living Center, LLC

 

1 senior housing

 

(708

)

50

 

 

 

 

 

$

(1,140

)

 

 

 


(1)         These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K filed with the SEC regarding the Company’s policy on consolidation.

(2)         Represents the carrying value of the Company’s investment in the unconsolidated joint venture. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K filed with the SEC regarding the Company’s policy for accounting for joint venture interests.

(3)         Presented after adjusting the Company’s 9.9% ownership rate for the dilution of certain equity awards. See HCR ManorCare Acquisition discussion in Note 3.

(4)         Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following partnerships: (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

 

Summarized combined financial information for the Company’s unconsolidated joint ventures follows (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Real estate, net

 

$

3,790,888

 

$

3,806,187

 

Goodwill

 

2,736,400

 

3,243,100

 

Other assets, net

 

3,034,490

 

2,554,590

 

Total assets

 

$

9,561,778

 

$

9,603,877

 

 

 

 

 

 

 

Capital lease obligations and other debt

 

$

6,059,100

 

$

5,976,500

 

Mortgage debt

 

892,846

 

895,243

 

Accounts payable

 

965,474

 

1,083,581

 

Other partners’ capital

 

1,460,943

 

1,465,536

 

HCP’s capital(1)

 

183,415

 

183,017

 

Total liabilities and partners’ capital

 

$

9,561,778

 

$

9,603,877

 

 


(1)          The combined basis difference of the Company’s investments in these joint ventures of $36 million, as of March 31, 2012, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.

 

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Three Months Ended March 31,

 

 

 

2012(1)

 

2011(2)

 

Total revenues

 

$

1,044,509

 

$

26,930

 

Net income

 

1,125

 

311

 

HCP’s share in earnings (3) 

 

13,675

 

798

 

Fees earned by HCP

 

493

 

607

 

Distributions received by HCP

 

3,629

 

969

 

 


(1)          Includes the financial information of HCR ManorCare, in which the Company acquired an interest for $95 million that represented a 9.9% equity interest at closing.

(2)          Includes the financial information of HCP Ventures II, which was consolidated on January 14, 2011.

(3)          The Company’s joint venture interest in HCR ManorCare is accounted for using the equity method and results in an ongoing reduction of DFL income, proportional to HCP’s ownership in HCR ManorCare. Further, the Company’s share of earnings from HCR ManorCare (equity income) increases for the corresponding reduction of related lease expense recognized at the HCR ManorCare level.

 

(9)         Intangibles

 

At March 31, 2012 and December 31, 2011, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles, below market ground lease intangibles and intangible assets related to non-compete agreements, were $562.6 million and $574.0 million, respectively. At March 31, 2012 and December 31, 2011, the accumulated amortization of intangible assets was $202.5 million and $200.2 million, respectively.

 

At March 31, 2012 and December 31, 2011, intangible lease liabilities, comprised of below market lease intangibles and above market ground lease intangible liabilities were $206.7 million and $219.6 million, respectively. At March 31, 2012 and December 31, 2011, the accumulated amortization of intangible liabilities was $87.3 million and $95.5 million, respectively.

 

(10) Other Assets

 

The Company’s other assets consisted of the following (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Straight-line rent assets, net of allowance of $34,312 and $34,457, respectively

 

$

275,652

 

$

266,620

 

Leasing costs, net

 

93,378

 

92,288

 

Deferred financing costs, net

 

40,325

 

35,649

 

Goodwill

 

50,346

 

50,346

 

Marketable equity securities

 

18,357

 

17,053

 

Other(1) 

 

32,132

 

23,502

 

Total other assets

 

$

510,190

 

$

485,458

 

 


(1)          Includes a $5.4 million allowance for losses related to accrued interest receivable on the Delphis loan, which accrued interest is included in other assets. At both March 31, 2012 and December 31, 2011, the carrying value of interest accrued related to the Delphis loan was zero. See Note 7 for additional information about the Delphis loan and the related impairment.

 

At March 31, 2012, the fair value and adjusted cost basis of marketable equity securities was $18.4 million and $17.1 million, respectively. At December 31, 2011, the fair value and adjusted cost basis of marketable equity securities were $17.1 million.

 

(11) Debt

 

Bank Line of Credit

 

On March 27, 2012, the Company executed an amendment to its existing $1.5 billion unsecured revolving line of credit facility (the “Facility”).  This amendment reduces the cost to the Company of the Facility (lower borrowing rate and facility fee) and extends the Facility’s maturity by one additional year to March 2016. The Facility contains a one-year extension option. Borrowings under this Facility accrue interest at LIBOR plus a margin that depends on the Company’s debt ratings. The Company pays a facility fee on the entire revolving commitment that depends upon its debt ratings. Based on the Company’s debt ratings at March 31, 2012, the margin on the Facility was 1.075%, and the facility fee was 0.175%. The Company has the right to increase the commitments under the Facility by an aggregate amount of up to $500 million, subject to customary conditions. At March 31, 2012, the Company had no balance outstanding under this Facility.

 

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Table of Contents

 

The Facility contains certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreement (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%, (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60%, (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times and (v) require a formula-determined Minimum Consolidated Tangible Net Worth of $8.0 billion at March 31, 2012. At March 31, 2012, the Company was in compliance with each of these restrictions and requirements of the Facility.

 

Senior Unsecured Notes

 

At March 31, 2012, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.9 billion. At March 31, 2012, interest rates on the notes ranged from 1.37% to 7.07% with a weighted average effective rate of 5.57% and a weighted average maturity of 6.15 years. Discounts and premiums are amortized to interest expense over the term of the related senior unsecured notes. The senior unsecured notes contain certain covenants including limitations on debt, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at March 31, 2012.

 

On January 23, 2012, the Company issued $450 million of 3.75% senior unsecured notes due in 2019; net proceeds from the offering were $444 million.

 

In September 2011, the Company repaid $292 million of maturing senior unsecured notes, which accrued interest at a rate of 4.82%. The senior unsecured notes were repaid with funds available under the Facility.

 

On January 24, 2011, the Company issued $2.4 billion of senior unsecured notes as follows: (i) $400 million of 2.70% notes due 2014; (ii) $500 million of 3.75% notes due 2016; (iii) $1.2 billion of 5.375% notes due 2021; and (iv) $300 million of 6.75% notes due 2041. The notes had an initial weighted average maturity of 10.3 years and a weighted average yield of 4.83%; net proceeds from the offering were $2.37 billion.

 

Mortgage Debt

 

At March 31, 2012, the Company had $1.8 billion in aggregate principal amount of mortgage debt outstanding that is secured by 138 healthcare facilities (including redevelopment properties) with a carrying value of $2.2 billion. At March 31, 2012, interest rates on the mortgage debt ranged from 1.94% to 8.75% with a weighted average effective interest rate of 6.12% and a weighted average maturity of 4.13 years.

 

Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires maintenance of insurance on the assets and includes conditions to obtain lender consent to enter into and terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple assets and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets.

 

Other Debt

 

At March 31, 2012, the Company had $87 million of non-interest bearing life care bonds at two of its continuing care retirement communities and non-interest bearing occupancy fee deposits at two of its senior housing facilities, all of which were payable to certain residents of the facilities (collectively, “Life Care Bonds”). At March 31, 2012, $30 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $57 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.

 

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Debt Maturities

 

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at March 31, 2012 (in thousands):

 

Year

 

Senior
Unsecured
Notes

 

Mortgage
Debt

 

Total(1)

 

2012 (Nine months)

 

$

250,000

 

$

57,955

 

$

307,955

 

2013

 

550,000

 

367,374

 

917,374

 

2014

 

487,000

 

183,758

 

670,758

 

2015

 

400,000

 

302,102

 

702,102

 

2016

 

900,000

 

285,586

 

1,185,586

 

Thereafter

 

3,300,000

 

572,687

 

3,872,687

 

 

 

5,887,000

 

1,769,462

 

7,656,462

 

(Discounts) and premiums, net

 

(22,060

)

(13,210

)

(35,270

)

 

 

$

5,864,940

 

$

1,756,252

 

$

7,621,192

 

 


(1)              Excludes $87 million of other debt that represents the Life Care Bonds that have no scheduled maturities.

 

(12) Commitments and Contingencies

 

Legal Proceedings

 

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. The Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition or results of operations. The Company’s policy is to accrue legal expenses as they are incurred.

 

Concentration of Credit Risk

 

Concentrations of credit risks arise when a number of operators, tenants or obligors related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of risks. Management believes the current portfolio is reasonably diversified across healthcare related real estate and does not contain any other significant concentration of credit risks, except as disclosed herein. The Company does not have significant foreign operations.

 

The following table provides information regarding the Company’s concentration with respect to certain operators; the information provided is presented for the gross assets and revenues that are associated with certain operators as percentages of the respective segment’s and total Company’s gross assets and revenues:

 

Segment Concentrations:

 

 

 

Percentage of
Senior Housing Gross Assets

 

Percentage of
Senior Housing Revenues

 

 

 

March 31,

 

December 31,

 

Three Months Ended March 31,

 

Senior Housing Operators

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

14

%

14

%

12

%

%

Brookdale(2) 

 

15

 

16

 

16

 

15

 

Emeritus

 

18

 

18

 

20

 

27

 

Sunrise(3)

 

22

 

22

 

15

 

24

 

 

 

 

Percentage of Post-Acute/
Skilled Nursing Gross Assets

 

Percentage of
Post-Acute/Skilled Nursing Revenues

 

 

 

March 31,

 

December 31,

 

Three Months Ended March 31,

 

Post-Acute/Skilled Nursing Operators

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

94

%

94

%

93

%

62

%

 

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Table of Contents

 

Total Company Concentrations:

 

 

 

Percentage of
Total Company Gross Assets

 

Percentage of
Total Company Revenues

 

 

 

March 31,

 

December 31,

 

Three Months Ended March 31,

 

Operators

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

35

%

35

%

31

%

9

%

Brookdale(2) 

 

5

 

5

 

5

 

5

 

Emeritus

 

6

 

6

 

7

 

9

 

Sunrise(3) 

 

7

 

7

 

5

 

8

 

 


(1)              On April 7, 2011, the Company completed the acquisition of HCR ManorCare’s real estate assets, which included the settlement of the Company’s HCR ManorCare debt investments, see Notes 3 and 7 for additional information.

(2)              For the three months ended March 31, 2012, Brookdale percentages exclude $35.1 million of senior housing revenues and $683.9 million of senior housing assets, related to 21 senior housing facilities that Brookdale operates on the Company’s behalf under a RIDEA structure. Assuming that these assets were attributable to Brookdale, the percentage of segment and total assets for Brookdale would be 27% and 9%, respectively, as of both March 31, 2012 and December 31, 2011. Assuming that these revenues were attributable to Brookdale, the percentage of segment and total revenues for Brookdale would be 39% and 13%, respectively, for the three months ended March 31, 2012.

(3)              Certain of the Company’s properties are leased to tenants who have entered into management contracts with Sunrise to operate the respective property on their behalf. The Company’s concentration of gross assets includes properties directly leased to Sunrise and properties that are managed by Sunrise on behalf of third party tenants.

 

On September 1, 2011, the Company completed a strategic venture with Brookdale that includes the operation of 37 HCP-owned senior living communities previously leased to or operated by Horizon Bay Retirement Living (“Horizon Bay”). As part of this transaction, Brookdale acquired Horizon Bay and: (i) assumed an existing triple-net lease for nine HCP communities; (ii) entered into a new triple-net lease related to four HCP communities; (iii) assumed Horizon Bay’s management of three HCP communities, one of which was developed by HCP; and (iv) entered into management contracts and a joint venture agreement for a 10% interest in the real estate and operations for 21 of the Company’s communities that are in a RIDEA structure. In connection with these transactions, the Company purchased $22.4 million of Brookdale’s common stock in June 2011 (see Note 10 for additional information regarding these marketable equity securities).

 

Under the provisions of RIDEA, a REIT may lease “qualified healthcare properties” on an arm’s length basis to a taxable REIT subsidiary if the property is operated on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” The three months ended March 31, 2012 include $35.1 million and $20.7 million in revenues and operating expenses, respectively, as a result of reflecting the facility-level results for the 21 RIDEA facilities operated by Brookdale beginning September 1, 2011.

 

To mitigate credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.

 

Credit Enhancement Guarantee

 

Certain of the Company’s senior housing facilities serve as collateral for $121 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $371 million as of March 31, 2012.

 

(13) Equity

 

Preferred Stock

 

On April 23, 2012, the Company redeemed all of its outstanding preferred stock consisting of 4,000,000 shares of its 7.25% Series E and the 7,820,000 shares of its 7.10% Series F preferred stock. The shares of Series E and Series F preferred stock were redeemed at a price of $25.00 per share, or $295.5 million in aggregate, plus all accrued and unpaid dividends to the redemption date. As a result of the redemption, which was announced on March 22, 2012,  the Company incurred a charge of $10.4 million related to the original issuance costs of the preferred stock and recognized an incremental preferred stock dividend of $1.3 million representing the acceleration of the accrued dividend from April 1, 2012 to the redemption date (the aggregate charge of $11.7 million is presented as an additional preferred stock dividend in the Company’s consolidated income statement for the three months ended March 31, 2012).

 

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Table of Contents

 

On January 26, 2012, the Company announced that its Board declared a quarterly cash dividend of $0.45313 per share on its Series E cumulative redeemable preferred stock and $0.44375 per share on its Series F cumulative redeemable preferred stock. These dividends were paid on March 30, 2012 to stockholders of record as of the close of business on March 15, 2012.

 

Common Stock

 

The following table lists the common stock cash dividends paid and declared by the Company in 2012:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

January 26

 

February 6

 

$

0.50

 

February 22

 

April 26

 

May 7

 

0.50

 

May 22

 

 

In March 2012, the Company completed a $359 million offering of 9.0 million shares of common stock at a price of $39.93 per share, which proceeds were primarily used to redeem the Company’s preferred stock.

 

In March 2011, the Company completed a $1.273 billion public offering of 34.5 million shares of common stock at a price of $36.90 per share. The Company received total net proceeds of $1.235 billion, which proceeds were used to fund the HCR ManorCare Acquisition. See Note 3 for additional information on the HCR ManorCare Acquisition.

 

The following is a summary of the Company’s other common stock issuances (shares in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Dividend Reinvestment and Stock Purchase Plan

 

210

 

497

 

Conversion of DownREIT units

 

36

 

 

Exercise of stock options

 

1,412

 

6

 

Vesting of restricted stock units(1)

 

314

 

207

 

 


(1)          Issued under the Company’s 2006 Performance Incentive Plan.

 

Accumulated Other Comprehensive Income (Loss)

 

The following is a summary of the Company’s accumulated other comprehensive loss (in thousands):

 

 

 

March 31,

 

December 31,

 

 

 

2012

 

2011

 

Unrealized gains on available for sale securities

 

$

1,304

 

$

 

Unrealized losses on cash flow hedges, net

 

(15,347

)

(15,712

)

Supplemental Executive Retirement Plan minimum liability

 

(2,749

)

(2,794

)

Cumulative foreign currency translation adjustment

 

(874

)

(1,076

)

Total accumulated other comprehensive loss

 

$

(17,666

)

$

(19,582

)

 

Noncontrolling Interests

 

At March 31, 2012, there were 4.2 million non-managing member units outstanding in five DownREIT LLCs, for which the Company is the managing member. At March 31, 2012, the carrying and fair values of these DownREIT units were $169.1 million and $231.4 million, respectively.

 

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Table of Contents

 

(14) Segment Disclosures

 

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the senior housing, post-acute/skilled nursing, life science and hospital segments, the Company invests or co-invests primarily in single operator or tenant properties, through the acquisition and development of real estate, management of operations and by debt issued by operators in these sectors. Under the medical office segment, the Company invests or co-invests through the acquisition and development of medical office buildings (“MOBs”) that are leased under gross, modified gross or triple-net leases, generally to multiple tenants, and which generally require a greater level of property management. The accounting policies of the segments are the same as those described in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K filed with the SEC. There were no intersegment sales or transfers during the three months ended March 31, 2012 and 2011. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”), adjusted NOI and interest income of the combined investments in each segment.

 

Non-segment assets consist primarily of real estate held-for-sale and corporate assets including cash, restricted cash, accounts receivable, net, marketable equity securities and deferred financing costs. Interest expense, depreciation and amortization and non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s performance measure. See Note 12 for other information regarding concentrations of credit risk.

 

Summary information for the reportable segments follows (in thousands):

 

For the three months ended March 31, 2012:

 

Segments

 

Rental
Revenues
(1)

 

Resident Fees
and Services

 

Interest
Income

 

Investment
Management
Fee Income

 

Total
Revenues

 

NOI(2)

 

Adjusted
NOI(2)

 

Senior housing

 

$

116,362

 

$

36,179

 

$

282

 

$

 

$

152,823

 

$

130,911

 

$

117,016

 

Post-acute/skilled

 

133,995

 

 

280

 

 

134,275

 

133,795

 

113,170

 

Life science

 

71,830

 

 

 

1

 

71,831

 

58,946

 

59,104

 

Medical office

 

79,955

 

 

 

492

 

80,447

 

48,250

 

46,921

 

Hospital

 

19,378

 

 

257

 

 

19,635

 

18,448

 

17,893

 

Total

 

$

421,520

 

$

36,179

 

$

819

 

$

493

 

$

459,011

 

$

390,350

 

$

354,104

 

 

For the three months ended March 31, 2011:

 

Segments

 

Rental
Revenues(1)

 

Resident Fees
and Services

 

Interest
Income

 

Investment
Management
Fee Income

 

Total
Revenues

 

NOI(2)

 

Adjusted
NOI(2)

 

Senior housing

 

$

109,510

 

$

2,505

 

$

 

$

70

 

$

112,085

 

$

111,030

 

$

97,612

 

Post-acute/skilled

 

9,440

 

 

37,691

 

 

47,131

 

9,420

 

9,097

 

Life science

 

72,425

 

 

 

1

 

72,426

 

59,587

 

53,624

 

Medical office

 

79,570

 

 

 

536

 

80,106

 

47,535

 

45,422

 

Hospital

 

18,975

 

 

405

 

 

19,380

 

18,008

 

17,355

 

Total

 

$

289,920

 

$

2,505

 

$

38,096

 

$

607

 

$

331,128

 

$

245,580

 

$

223,110

 

 


(1)          Represents rental and related revenues, tenant recoveries, and income from DFLs.

(2)          NOI is a non-GAAP supplemental financial measure used to evaluate the operating performance of real estate. The Company defines NOI as rental revenues, including tenant recoveries, resident fees and services, and income from direct financing leases, less property level operating expenses. NOI excludes interest income, investment management fee income, depreciation and amortization, interest expense, general and administrative expenses, impairments, impairment recoveries, other income, net, income taxes, equity income from and impairments of investments in unconsolidated joint ventures, and discontinued operations. The Company believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL accretion, amortization of above and below market lease intangibles, and lease termination fees. Adjusted NOI is sometimes referred to as “cash NOI.” The Company uses NOI and adjusted NOI to make decisions about resource allocations and to assess and compare property level performance. The Company believes that net income is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP because it does not reflect the aforementioned excluded items. Further, the Company’s definition of NOI may not be comparable to the definition used by other REITs, as those companies may use different methodologies for calculating NOI.

 

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Table of Contents

 

The following is a reconciliation from reported net income to NOI and adjusted NOI (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2012

 

2011

 

Net income

 

$

196,564

 

$

73,984

 

Interest income

 

(819

)

(38,096

)

Investment management fee income

 

(493

)

(607

)

Interest expense

 

104,568

 

108,576

 

Depreciation and amortization

 

88,241

 

91,182

 

General and administrative

 

20,102

 

21,952

 

Other income, net

 

(436

)

(10,309

)

Income taxes

 

(709

)

37

 

Equity income from unconsolidated joint ventures

 

(13,675

)

(798

)

Total discontinued operations, net of income taxes

 

(2,993

)

(341

)

NOI

 

390,350

 

245,580

 

Straight-line rents

 

(9,927

)

(17,300

)

DFL accretion

 

(25,622

)