XNYS:HCP HCP Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 30, 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 001-08895

 


 

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 July 26, 2012, there were 429,523,635 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

 

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

 

26

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

43

 

 

 

 

Item 4.

Controls and Procedures

 

43

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

Item 1A.

Risk Factors

 

44

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

Signatures

 

 

46

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

8,994,048

 

$

8,933,278

 

Development costs and construction in progress

 

204,018

 

190,590

 

Land

 

1,734,469

 

1,729,677

 

Accumulated depreciation and amortization

 

(1,614,148

)

(1,472,272

)

Net real estate

 

9,318,387

 

9,381,273

 

 

 

 

 

 

 

Net investment in direct financing leases

 

6,804,929

 

6,727,777

 

Loans receivable, net

 

125,521

 

110,253

 

Investments in and advances to unconsolidated joint ventures

 

219,877

 

224,052

 

Accounts receivable, net of allowance of $1,696 and $1,341, respectively

 

25,974

 

26,681

 

Cash and cash equivalents

 

169,636

 

33,506

 

Restricted cash

 

42,782

 

41,553

 

Intangible assets, net

 

347,670

 

373,763

 

Real estate held for sale, net

 

 

4,159

 

Other assets, net

 

734,992

 

485,458

 

Total assets

 

$

17,789,768

 

$

17,408,475

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

215,015

 

$

454,000

 

Senior unsecured notes

 

5,615,979

 

5,416,063

 

Mortgage debt

 

1,726,944

 

1,764,571

 

Other debt

 

84,060

 

87,985

 

Intangible liabilities, net

 

114,939

 

124,142

 

Accounts payable and accrued liabilities

 

273,344

 

275,478

 

Deferred revenue

 

68,548

 

65,614

 

Total liabilities

 

8,098,829

 

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; 429,401,611 and 408,629,444 shares issued and outstanding, respectively

 

429,402

 

408,629

 

Additional paid-in capital

 

10,159,580

 

9,383,536

 

Cumulative dividends in excess of earnings

 

(1,062,049

)

(1,024,274

)

Accumulated other comprehensive loss

 

(19,703

)

(19,582

)

Total stockholders’ equity

 

9,507,230

 

9,033,482

 

 

 

 

 

 

 

Joint venture partners

 

15,855

 

16,971

 

Non-managing member unitholders

 

167,854

 

170,169

 

Total noncontrolling interests

 

183,709

 

187,140

 

Total equity

 

9,690,939

 

9,220,622

 

Total liabilities and equity

 

$

17,789,768

 

$

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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

248,627

 

$

260,157

 

$

492,962

 

$

513,238

 

Tenant recoveries

 

23,581

 

22,441

 

46,231

 

45,885

 

Resident fees and services

 

35,569

 

835

 

71,748

 

3,340

 

Income from direct financing leases

 

154,976

 

143,662

 

309,511

 

157,057

 

Interest income

 

1,216

 

60,526

 

2,035

 

98,622

 

Investment management fee income

 

470

 

504

 

963

 

1,111

 

Total revenues

 

464,439

 

488,125

 

923,450

 

819,253

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

103,225

 

105,129

 

207,793

 

213,705

 

Depreciation and amortization

 

87,924

 

89,814

 

176,165

 

180,996

 

Operating

 

70,087

 

46,615

 

137,436

 

93,460

 

General and administrative

 

14,812

 

34,872

 

34,914

 

56,824

 

Total costs and expenses

 

276,048

 

276,430

 

556,308

 

544,985

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

1,028

 

7,518

 

1,464

 

17,827

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

189,419

 

219,213

 

368,606

 

292,095

 

Income taxes

 

(176

)

(248

)

533

 

(285

)

Equity income from unconsolidated joint ventures

 

15,732

 

14,950

 

29,407

 

15,748

 

Income from continuing operations

 

204,975

 

233,915

 

398,546

 

307,558

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

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

 

 

337

 

137

 

678

 

Gain on sales of real estate, net of income taxes

 

 

 

2,856

 

 

Total discontinued operations

 

 

337

 

2,993

 

678

 

 

 

 

 

 

 

 

 

 

 

Net income

 

204,975

 

234,252

 

401,539

 

308,236

 

Noncontrolling interests’ share in earnings

 

(2,951

)

(5,493

)

(6,135

)

(9,384

)

Net income attributable to HCP, Inc.

 

202,024

 

228,759

 

395,404

 

298,852

 

Preferred stock dividends

 

 

(5,283

)

(17,006

)

(10,566

)

Participating securities’ share in earnings

 

(557

)

(483

)

(1,674

)

(1,347

)

Net income applicable to common shares

 

$

201,467

 

$

222,993

 

$

376,724

 

$

286,939

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.55

 

$

0.90

 

$

0.74

 

Discontinued operations

 

 

 

0.01

 

 

Net income applicable to common shares

 

$

0.48

 

$

0.55

 

$

0.91

 

$

0.74

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.55

 

$

0.90

 

$

0.73

 

Discontinued operations

 

 

 

 

 

Net income applicable to common shares

 

$

0.48

 

$

0.55

 

$

0.90

 

$

0.73

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

420,468

 

406,193

 

415,243

 

389,249

 

Diluted

 

421,671

 

411,710

 

416,666

 

391,100

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.50

 

$

0.48

 

$

1.00

 

$

0.96

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

204,975

 

$

234,252

 

$

401,539

 

$

308,236

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

(961

)

1,331

 

343

 

1,331

 

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

 

 

 

 

 

 

 

 

 

Unrealized losses

 

(1,056

)

(1,368

)

(780

)

(1,041

)

Reclassification adjustment realized in net income

 

90

 

95

 

179

 

(1,218

)

Change in Supplemental Executive Retirement Plan obligation

 

45

 

32

 

90

 

66

 

Foreign currency translation adjustment

 

(155

)

85

 

47

 

266

 

Total other comprehensive income (loss)

 

(2,037

)

175

 

(121

)

(596

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

202,938

 

234,427

 

401,418

 

307,640

 

Total comprehensive income attributable to noncontrolling interests

 

(2,951

)

(5,493

)

(6,135

)

(9,384

)

Total comprehensive income attributable to HCP, Inc.

 

$

199,987

 

$

228,934

 

$

395,283

 

$

298,256

 

 

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

 

 

 

 

 

 

395,404

 

 

395,404

 

6,135

 

401,539

 

Other comprehensive income

 

 

 

 

 

 

 

(121

)

(121

)

 

(121

)

Preferred stock redemption

 

(11,820

)

(285,173

)

 

 

 

(10,327

)

 

(295,500

)

 

(295,500

)

Issuance of common stock, net

 

 

 

18,912

 

18,912

 

737,145

 

 

 

756,057

 

(2,273

)

753,784

 

Repurchase of common stock

 

 

 

(189

)

(189

)

(7,678

)

 

 

(7,867

)

 

(7,867

)

Exercise of stock options

 

 

 

2,050

 

2,050

 

35,170

 

 

 

37,220

 

 

37,220

 

Amortization of deferred compensation

 

 

 

 

 

11,407

 

 

 

11,407

 

 

11,407

 

Preferred dividends

 

 

 

 

 

 

(6,679

)

 

(6,679

)

 

(6,679

)

Common dividends ($1.00 per share)

 

 

 

 

 

 

(416,173

)

 

(416,173

)

 

(416,173

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(7,778

)

(7,778

)

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

873

 

873

 

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

(388

)

(388

)

June 30, 2012

 

 

$

 

429,402

 

$

429,402

 

$

10,159,580

 

$

(1,062,049

)

$

(19,703

)

$

9,507,230

 

$

183,709

 

$

9,690,939

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

298,852

 

 

298,852

 

9,384

 

308,236

 

Other comprehensive loss

 

 

 

 

 

 

 

(596

)

(596

)

 

(596

)

Issuance of common stock, net

 

 

 

35,691

 

35,691

 

1,236,276

 

 

 

1,271,967

 

(2,599

)

1,269,368

 

Repurchase of common stock

 

 

 

(131

)

(131

)

(4,678

)

 

 

(4,809

)

 

(4,809

)

Exercise of stock options

 

 

 

635

 

635

 

16,381

 

 

 

17,016

 

 

17,016

 

Amortization of deferred compensation

 

 

 

 

 

10,205

 

 

 

10,205

 

 

10,205

 

Preferred dividends

 

 

 

 

 

 

(10,566

)

 

(10,566

)

 

(10,566

)

Common dividends ($0.96 per share)

 

 

 

 

 

 

(374,349

)

 

(374,349

)

 

(374,349

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(7,166

)

(7,166

)

Noncontrolling interest in acquired assets

 

 

 

 

 

 

 

 

 

1,500

 

1,500

 

Purchase of noncontrolling interests

 

 

 

 

 

(19,559

)

 

 

(19,559

)

(14,059

)

(33,618

)

June 30, 2011

 

11,820

 

$

285,173

 

407,120

 

$

407,120

 

$

9,328,607

 

$

(861,539

)

$

(13,833

)

$

9,145,528

 

$

175,740

 

$

9,321,268

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6


 


Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

401,539

 

$

308,236

 

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

 

176,165

 

180,996

 

Discontinued operations

 

35

 

476

 

Amortization of above and below market lease intangibles, net

 

(1,322

)

(2,093

)

Amortization of deferred compensation

 

11,407

 

10,205

 

Amortization of deferred financing costs, net

 

8,459

 

18,402

 

Straight-line rents

 

(21,787

)

(32,912

)

Loan and direct financing lease interest accretion

 

(48,159

)

(41,858

)

Deferred rental revenues

 

1,169

 

(1,077

)

Equity income from unconsolidated joint ventures

 

(29,407

)

(15,748

)

Distributions of earnings from unconsolidated joint ventures

 

1,878

 

1,569

 

Gain on sales of real estate

 

(2,856

)

 

Gain upon settlement of loans receivable

 

 

(22,812

)

Gain upon consolidation of joint venture

 

 

(7,769

)

Derivative gains, net

 

(52

)

(3,308

)

Changes in:

 

 

 

 

 

Accounts receivable, net

 

708

 

8,822

 

Other assets

 

(8,188

)

(4,010

)

Accounts payable and accrued liabilities

 

(6,038

)

35,696

 

Net cash provided by operating activities

 

483,551

 

432,815

 

Cash flows from investing activities:

 

 

 

 

 

Cash used in the HCR ManorCare Acquisition, net of cash acquired

 

 

(3,801,624

)

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

 

 

(135,550

)

Other acquisitions and development of real estate

 

(62,860

)

(148,032

)

Leasing costs and tenant and capital improvements

 

(27,112

)

(20,940

)

Proceeds from sales of real estate, net

 

7,238

 

 

Purchase of an interest in unconsolidated joint ventures

 

 

(95,000

)

Distributions in excess of earnings from unconsolidated joint ventures

 

1,529

 

1,558

 

Principal repayments on loans receivable

 

4,508

 

303,720

 

Investments in loans receivable

 

(20,757

)

(360,932

)

Increase in restricted cash

 

(1,229

)

(7,851

)

Purchase of marketable securities

 

(214,859

)

 

Net cash used in investing activities

 

(313,542

)

(4,264,651

)

Cash flows from financing activities:

 

 

 

 

 

Net repayments under bank line of credit

 

(238,985

)

 

Repayments of mortgage and other debt

 

(42,538

)

(141,684

)

Issuance of senior unsecured notes

 

450,000

 

2,400,000

 

Repayment of senior unsecured notes

 

(250,000

)

 

Deferred financing costs

 

(10,236

)

(42,852

)

Preferred stock redemption

 

(295,500

)

 

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

 

783,137

 

1,281,575

 

Dividends paid on common and preferred stock

 

(422,852

)

(384,915

)

Issuance (purchase) of noncontrolling interests

 

873

 

(33,618

)

Distributions to noncontrolling interests

 

(7,778

)

(7,166

)

Net cash provided by (used in) financing activities

 

(33,879

)

3,071,340

 

Net increase (decrease) in cash and cash equivalents

 

136,130

 

(760,496

)

Cash and cash equivalents, beginning of period

 

33,506

 

1,036,701

 

Cash and cash equivalents, end of period

 

$

169,636

 

$

276,205

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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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 Maryland corporation and was organized to qualify as a self-administered real estate investment trust (“REIT”) 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 six months ended June 30, 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).

 

Foreign Currency Translation and Transactions

 

Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during the related period. Gains or losses resulting from translation are included in accumulated other comprehensive income, a component of stockholders’ equity on the condensed consolidated balance sheets. Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates of the transactions. The effects of transaction gains or losses are included in other income, net in the condensed consolidated statements of income.

 

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.

 

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(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 represented 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. The Company recognized revenues and earnings from its investments related to HCR ManorCare of $143 million and $158 million, respectively, for the three months ended June 30, 2012, and $285 million and $313 million, respectively, for the six months ended June 30, 2012. The Company recognized revenues and earnings from its investments related to HCR ManorCare of $130 million and $145 million, respectively, for both the three and six months ended June 30, 2011.

 

See Note 8 for additional information regarding the Company’s investment related to HCR ManorCare.

 

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Table of Contents

 

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
June 30, 2011

 

Six Months
Ended
June 30, 2011

 

Revenues

 

$

472,186

 

$

911,959

 

Net income

 

219,335

 

409,372

 

Net income applicable to HCP, Inc.

 

213,842

 

399,988

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.51

 

$

0.96

 

Diluted earnings per common share

 

0.51

 

0.96

 

 

(4)         Other Real Estate Property Investments

 

A summary of real estate acquisitions for the six months ended June 30, 2012 follows (in thousands):

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Noncontrolling
Interest

 

Real Estate

 

Net
Intangibles

 

Life science

 

$

7,970

 

$

80

 

$

7,580

 

$

470

 

Hospital

 

3,000

 

 

3,000

 

 

 

 

$

10,970

 

$

80

 

$

10,580

 

$

470

 

 

During the six months ended June 30, 2012, the Company funded an aggregate of $79 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 six months ended June 30, 2011 follows (in thousands):

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Debt
Assumed

 

Noncontrolling
Interest

 

Real Estate

 

Net
Intangibles

 

Life science

 

$

84,047

 

$

48,252

 

$

 

$

126,610

 

$

5,689

 

Medical office

 

29,743

 

 

1,500

 

26,191

 

5,052

 

 

 

$

113,790

 

$

48,252

 

$

1,500

 

$

152,801

 

$

10,741

 

 

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

 

During the six months ended June 30, 2011, the Company funded an aggregate of $54 million for construction, tenant and other capital improvement projects, primarily in its life science and medical office segments. During the six months ended June 30, 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 first quarter of 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 June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Rental and related revenues

 

$

 

$

581

 

$

246

 

$

1,158

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

 

238

 

35

 

476

 

Operating expenses

 

 

6

 

2

 

7

 

Other (income) expense, net

 

 

 

72

 

(3

)

Income, net of income taxes

 

$

 

$

337

 

$

137

 

$

678

 

Gain on sales of real estate, net of income taxes

 

$

 

$

 

$

2,856

 

$

 

 

 

 

 

 

 

 

 

 

 

Number of properties included in discontinued operations

 

 

4

 

1

 

4

 

 

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Table of Contents

 

(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):

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Minimum lease payments receivable(1)

 

$

25,483,105

 

$

25,744,161

 

Estimated residual values

 

4,010,514

 

4,010,514

 

Less unearned income

 

(22,688,690

)

(23,026,898

)

Net investment in direct financing leases

 

$

6,804,929

 

$

6,727,777

 

Properties subject to direct financing leases

 

361

 

361

 

 


(1)          The minimum lease payments receivable are primarily attributable to HCR ManorCare ($24.3 billion and $24.5 billion at June 30, 2012 and December 31, 2011, respectively). The triple-net master lease with HCR ManorCare provides for annual rent of $489 million beginning April 1, 2012. The rent increases by 3.5% per year over the next four 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):

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

83,282

 

$

83,282

 

$

 

$

90,148

 

$

90,148

 

Other

 

57,258

 

 

57,258

 

35,643

 

 

35,643

 

Unamortized discounts, fees and costs

 

(521

)

(1,088

)

(1,609

)

(1,040

)

(1,088

)

(2,128

)

Allowance for loan losses

 

 

(13,410

)

(13,410

)

 

(13,410

)

(13,410

)

 

 

$

56,737

 

$

68,784

 

$

125,521

 

$

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 $4.9 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.

 

11


 


Table of Contents

 

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 $6.9 million, which the Company applied to the carrying value of the loan, reducing the balance to $68.8 million as of June 30, 2012 from its balance of $75.7 million as of December 31, 2011. During the six months ended June 30, 2011, the Company received cash payments from the Borrower of $1.2 million. At June 30, 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 determine 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 the then current market transactions.

 

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Table of Contents

 

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 June 30, 2012 (dollars in thousands):

 

Entity(1)

 

Properties/Segment

 

Investment(2)

 

Ownership%

 

HCR ManorCare

 

post-acute/skilled nursing operations

 

$

96,370

 

9.4(3)

 

HCP Ventures III, LLC

 

13 medical office

 

8,012

 

30

 

HCP Ventures IV, LLC

 

54 medical office and 4 hospital

 

33,964

 

20

 

HCP Life Science(4)

 

4 life science

 

66,883

 

50-63

 

Horizon Bay Hyde Park, LLC

 

1 senior housing

 

6,964

 

72

 

Suburban Properties, LLC

 

1 medical office

 

7,485

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

199

 

 

 

 

 

 

 

$

219,877

 

 

 

 

 

 

 

 

 

 

 

Edgewood Assisted Living Center, LLC

 

1 senior housing

 

$

(406

)

45

 

Seminole Shores Living Center, LLC

 

1 senior housing

 

(649

)

50

 

 

 

 

 

$

(1,055

)

 

 

 


(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 of HCR ManorCare’s employee 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%).

 

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Table of Contents

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Real estate, net

 

$

3,769,676

 

$

3,806,187

 

Goodwill

 

2,736,400

 

2,736,400

 

Other assets, net

 

3,029,772

 

3,061,290

 

Total assets

 

$

9,535,848

 

$

9,603,877

 

 

 

 

 

 

 

Capital lease obligations and other debt

 

$

6,037,500

 

$

5,976,500

 

Mortgage debt

 

890,488

 

895,243

 

Accounts payable

 

946,177

 

1,083,581

 

Other partners’ capital

 

1,476,857

 

1,465,536

 

HCP’s capital(1)

 

184,826

 

183,017

 

Total liabilities and partners’ capital

 

$

9,535,848

 

$

9,603,877

 

 


(1)          The combined basis difference of the Company’s investments in these joint ventures of $34 million, as of June 30, 2012, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.

 

 

 

Three Months Ended June 30,(1)

 

Six Months Ended June 30,(1)

 

 

 

2012

 

2011(2)

 

2012

 

2011(2)

 

Total revenues

 

$

1,093,873

 

$

1,032,420

 

$

2,138,519

 

$

1,059,309

 

Net income (loss)

 

16,124

 

(26,439

)

17,267

 

(26,062

)

HCP’s share in earnings (3) 

 

15,732

 

14,950

 

29,407

 

15,748

 

Fees earned by HCP

 

470

 

504

 

963

 

1,111

 

Distributions received by HCP

 

1,278

 

2,158

 

3,407

 

3,127

 

 


(1)          Beginning April 7, 2011, 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. The Company recorded a reduction of $14.8 million and $29.5 million for the three and six months ended June 30, 2012, respectively, and a reduction of $13.3 million for both the three and six months ended June 30, 2011. 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 June 30, 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 $560.9 million and $574.0 million, respectively. At June 30, 2012 and December 31, 2011, the accumulated amortization of intangible assets was $213.2 million and $200.2 million, respectively.

 

At June 30, 2012 and December 31, 2011, intangible lease liabilities, comprised of below market lease intangibles and above market ground lease intangible liabilities were $205.6 million and $219.6 million, respectively. At June 30, 2012 and December 31, 2011, the accumulated amortization of intangible liabilities was $90.7 million and $95.5 million, respectively.

 

(10) Other Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Straight-line rent assets, net of allowance of $34,822 and $34,457, respectively

 

$

287,590

 

$

266,620

 

Marketable debt securities(1) 

 

214,860

 

 

Leasing costs, net

 

93,524

 

92,288

 

Deferred financing costs, net

 

38,139

 

35,649

 

Goodwill

 

50,346

 

50,346

 

Marketable equity securities

 

17,396

 

17,053

 

Other(2) 

 

33,137

 

23,502

 

Total other assets

 

$

734,992

 

$

485,458

 

 


(1)          Represents £136.8 million translated into U.S. dollars as of June 30, 2012.

(2)          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 June 30, 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.

 

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Table of Contents

 

On June 28, 2012, the Company purchased senior unsecured notes with an aggregate par value of £138.5 million at a discount for £136.8 million ($214.9 million). The notes are issued by Elli Investments Limited, a subsidiary of Terra Firma, a European private equity firm, as part of its financing for the acquisition of Four Seasons Health Care, an elderly and specialist care provider in the United Kingdom. The notes mature in June 2020 and are non-callable until June 2016. The notes bear interest on their par value at a fixed rate of 12.25% per annum, with an original discount resulting in a yield to maturity of 12.5%. This investment is match funded by an equivalent GBP denominated unsecured term loan that is discussed in Note 11. These marketable debt securities are classified as held-to-maturity and had a carrying value of $214.9 million at June 30, 2012.

 

The marketable equity securities are classified as available-for-sale and had a fair value and adjusted cost basis of $17.4 million and $17.1 million, respectively, at June 30, 2012. At December 31, 2011, the fair value and adjusted cost basis of the marketable equity securities were both $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 June 30, 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 June 30, 2012, the Company had ₤137 million ($215 million) outstanding under this Facility with a weighted average effective interest rate of 2.07%, which was repaid in full on July 30, 2012 with proceeds from the Company’s unsecured term loan discussed below.

 

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 $8.3 billion at June 30, 2012. At June 30, 2012, the Company was in compliance with each of these restrictions and requirements of the Facility.

 

Term Loan

 

On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million four-year unsecured term loan (the “Loan”) that accrues interest at a rate of GBP LIBOR plus 1.20%, based on the Company’s current debt ratings. Concurrent with the closing of the Loan, the Company entered into a four-year interest rate swap agreement that fixes the rate of the Loan at 1.81%, subject to adjustments based on the Company’s credit ratings. The Loan contains a one-year committed extension option and similar covenants to those in the Facility.

 

Senior Unsecured Notes

 

At June 30, 2012, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.6 billion. At June 30, 2012, interest rates on the notes ranged from 1.37% to 7.07% with a weighted average effective interest rate of 5.51% and a weighted average maturity of 6.17 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 June 30, 2012.

 

On July 23, 2012, the Company issued $300 million of 3.15% senior unsecured notes due in 2022. The notes were priced at 98.888% of the principal amount with an effective yield to maturity of 3.28%; net proceeds from the offering were $294 million.

 

On June 25, 2012, the Company repaid $250 million of maturing senior unsecured notes, which accrued interest at a rate of 6.45%. The senior unsecured notes were repaid with proceeds from the Company’s June 2012 common stock offering.

 

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Table of Contents

 

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 June 30, 2012, the Company had $1.7 billion in aggregate principal amount of mortgage debt outstanding that is secured by 135 healthcare facilities (including redevelopment properties) with a carrying value of $2.2 billion. At June 30, 2012, interest rates on the mortgage debt ranged from 1.54% to 8.72% with a weighted average effective interest rate of 6.14% and a weighted average maturity of 3.93 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 June 30, 2012, the Company had $84 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 June 30, 2012, $28 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $56 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.

 

Debt Maturities

 

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2012 (in thousands):

 

Year

 

Bank Line of
Credit

 

Senior
Unsecured
Notes

 

Mortgage
Debt

 

Total(1)

 

2012 (Six months)

 

$

 

$

 

$

28,148

 

$

28,148

 

2013

 

 

550,000

 

367,374

 

917,374

 

2014

 

 

487,000

 

183,758

 

670,758

 

2015

 

 

400,000

 

302,102

 

702,102

 

2016

 

215,015

(2)

900,000

 

285,586

 

1,400,601

 

Thereafter

 

 

3,300,000

 

572,687

 

3,872,687

 

 

 

215,015

 

5,637,000

 

1,739,655

 

7,591,670

 

(Discounts) and premiums, net

 

 

(21,021

)

(12,711

)

(33,732

)

 

 

$

215,015

 

$

5,615,979

 

$

1,726,944

 

$

7,557,938

 

 


(1)              Excludes $84 million of other debt that represents the Life Care Bonds that have no scheduled maturities.

(2)              Represents £137 million obligation under the Facility translated into U.S. dollars as of June 30, 2012. This amount was repaid in full on July 30, 2012 with proceeds from the Company’s unsecured term loan.

 

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Table of Contents

 

(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

 

Percentage of
Senior Housing Revenues

 

 

 

June 30,

 

December 31,

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Senior Housing Operators

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1)

 

14

%

14

%

12

%

12

%

12

%

7

%

Brookdale(2) 

 

15

 

16

 

16

 

14

 

16

 

14

 

Emeritus

 

18

 

18

 

20

 

24

 

20

 

25

 

Sunrise(3) 

 

22

 

22

 

15

 

19

 

15

 

22

 

 

 

 

Percentage of Post-Acute/
Skilled Nursing Gross Assets

 

Percentage of Post-Acute/
Skilled Nursing Revenues

 

Percentage of Post-Acute/
Skilled Nursing Revenues

 

 

 

June 30,

 

December 31,

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Post-Acute/Skilled Nursing Operators

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

90

%

94

%

93

%

76

%

93

%

73

%

 

Total Company Concentrations:

 

 

 

Percentage of
Total Company Gross Assets

 

Percentage of
Total Company Revenues

 

Percentage of
Total Company Revenues

 

 

 

June 30,

 

December 31,

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Operators

 

2012

 

2011

 

2012

 

2011

 

2012