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 September 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 October 25, 2012, there were 452,066,005 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

27

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

48

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

Item 5.

Other Information

49

 

 

 

Item 6.

Exhibits

50

 

 

 

Signatures

 

51

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

9,069,420

 

$

8,822,653

 

Development costs and construction in progress

 

229,543

 

190,590

 

Land

 

1,724,563

 

1,723,601

 

Accumulated depreciation and amortization

 

(1,662,116

)

(1,452,688

)

Net real estate

 

9,361,410

 

9,284,156

 

 

 

 

 

 

 

Net investment in direct financing leases

 

6,843,249

 

6,727,777

 

Loans receivable, net

 

240,929

 

110,253

 

Investments in and advances to unconsolidated joint ventures

 

217,092

 

224,052

 

Accounts receivable, net of allowance of $1,498 and $1,341, respectively

 

31,763

 

26,681

 

Cash and cash equivalents

 

96,476

 

33,506

 

Restricted cash

 

43,428

 

41,553

 

Intangible assets, net

 

382,321

 

372,390

 

Assets held for sale, net

 

91,226

 

102,649

 

Other assets, net

 

771,442

 

485,458

 

Total assets

 

$

18,079,336

 

$

17,408,475

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

 

$

454,000

 

Term loan

 

221,214

 

 

Senior unsecured notes

 

5,913,690

 

5,416,063

 

Mortgage debt

 

1,684,514

 

1,715,039

 

Liabilities related to assets held for sale, net

 

5,649

 

55,897

 

Other debt

 

84,580

 

87,985

 

Intangible liabilities, net

 

105,191

 

117,777

 

Accounts payable and accrued liabilities

 

270,843

 

275,478

 

Deferred revenue

 

65,802

 

65,614

 

Total liabilities

 

8,351,483

 

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; 429,980,165 and 408,629,444 shares issued and outstanding, respectively

 

429,980

 

408,629

 

Additional paid-in capital

 

10,185,982

 

9,383,536

 

Cumulative dividends in excess of earnings

 

(1,081,317

)

(1,024,274

)

Accumulated other comprehensive loss

 

(16,646

)

(19,582

)

Total stockholders’ equity

 

9,517,999

 

9,033,482

 

 

 

 

 

 

 

Joint venture partners

 

14,884

 

16,971

 

Non-managing member unitholders

 

194,970

 

170,169

 

Total noncontrolling interests

 

209,854

 

187,140

 

Total equity

 

9,727,853

 

9,220,622

 

Total liabilities and equity

 

$

18,079,336

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

249,409

 

$

250,809

 

$

736,645

 

$

758,322

 

Tenant recoveries

 

23,425

 

23,879

 

69,656

 

69,764

 

Resident fees and services

 

36,076

 

11,974

 

107,824

 

15,314

 

Income from direct financing leases

 

155,834

 

153,496

 

465,345

 

310,553

 

Interest income

 

10,278

 

577

 

12,313

 

99,199

 

Investment management fee income

 

460

 

494

 

1,423

 

1,605

 

Total revenues

 

475,482

 

441,229

 

1,393,206

 

1,254,757

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

103,513

 

103,459

 

309,875

 

315,695

 

Depreciation and amortization

 

88,686

 

86,672

 

259,039

 

265,742

 

Operating

 

72,667

 

57,662

 

210,083

 

151,103

 

General and administrative

 

19,443

 

19,647

 

54,356

 

76,471

 

Impairments

 

7,878

 

15,400

 

7,878

 

15,400

 

Total costs and expenses

 

292,187

 

282,840

 

841,231

 

824,411

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

770

 

(772

)

2,233

 

17,056

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

184,065

 

157,617

 

554,208

 

447,402

 

Income taxes

 

598

 

(5

)

1,131

 

(289

)

Equity income from unconsolidated joint ventures

 

13,396

 

17,050

 

42,803

 

32,798

 

Income from continuing operations

 

198,059

 

174,662

 

598,142

 

479,911

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

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

 

984

 

809

 

(416

)

3,796

 

Gain on sales of real estate, net of income taxes

 

 

 

2,856

 

 

Total discontinued operations

 

984

 

809

 

2,440

 

3,796

 

 

 

 

 

 

 

 

 

 

 

Net income

 

199,043

 

175,471

 

600,582

 

483,707

 

Noncontrolling interests’ share in earnings

 

(2,935

)

(3,276

)

(9,070

)

(12,660

)

Net income attributable to HCP, Inc.

 

196,108

 

172,195

 

591,512

 

471,047

 

Preferred stock dividends

 

 

(5,282

)

(17,006

)

(15,848

)

Participating securities’ share in earnings

 

(479

)

(546

)

(2,154

)

(1,893

)

Net income applicable to common shares

 

$

195,629

 

$

166,367

 

$

572,352

 

$

453,306

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.45

 

$

0.41

 

$

1.36

 

$

1.14

 

Discontinued operations

 

0.01

 

 

 

0.01

 

Net income applicable to common shares

 

$

0.46

 

$

0.41

 

$

1.36

 

$

1.15

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.45

 

$

0.41

 

$

1.36

 

$

1.13

 

Discontinued operations

 

 

 

 

0.01

 

Net income applicable to common shares

 

$

0.45

 

$

0.41

 

$

1.36

 

$

1.14

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

429,557

 

407,081

 

420,049

 

395,258

 

Diluted

 

430,778

 

408,646

 

421,404

 

397,013

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.50

 

$

0.48

 

$

1.50

 

$

1.44

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

199,043

 

$

175,471

 

$

600,582

 

$

483,707

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities

 

5,374

 

(11,483

)

5,716

 

(10,152

)

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

 

 

 

 

 

 

 

 

 

Unrealized losses

 

(2,734

)

(3,051

)

(3,513

)

(4,092

)

Reclassification adjustment realized in net income

 

129

 

96

 

308

 

(1,122

)

Change in Supplemental Executive Retirement Plan obligation

 

46

 

34

 

136

 

100

 

Foreign currency translation adjustment

 

243

 

(246

)

289

 

20

 

Total other comprehensive income (loss)

 

3,058

 

(14,650

)

2,936

 

(15,246

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

202,101

 

160,821

 

603,518

 

468,461

 

Total comprehensive income attributable to noncontrolling interests

 

(2,935

)

(3,276

)

(9,070

)

(12,660

)

Total comprehensive income attributable to HCP, Inc.

 

$

199,166

 

$

157,545

 

$

594,448

 

$

455,801

 

 

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

 

 

 

 

 

 

591,512

 

 

591,512

 

9,070

 

600,582

 

Other comprehensive income

 

 

 

 

 

 

 

2,936

 

2,936

 

 

2,936

 

Preferred stock redemption

 

(11,820

)

(285,173

)

 

 

 

(10,327

)

 

(295,500

)

 

(295,500

)

Issuance of common stock, net

 

 

 

19,096

 

19,096

 

744,412

 

 

 

763,508

 

(2,438

)

761,070

 

Repurchase of common stock

 

 

 

(196

)

(196

)

(7,971

)

 

 

(8,167

)

 

(8,167

)

Exercise of stock options

 

 

 

2,451

 

2,451

 

49,058

 

 

 

51,509

 

 

51,509

 

Amortization of deferred compensation

 

 

 

 

 

16,947

 

 

 

16,947

 

 

16,947

 

Preferred dividends

 

 

 

 

 

 

(6,679

)

 

(6,679

)

 

(6,679

)

Common dividends ($1.50 per share)

 

 

 

 

 

 

(631,549

)

 

(631,549

)

 

(631,549

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(11,759

)

(11,759

)

Noncontrolling interests in acquisitions

 

 

 

 

 

 

 

 

 

27,432

 

27,432

 

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

826

 

826

 

Purchase of noncontrolling interests

 

 

 

 

 

 

 

 

 

(417

)

(417

)

September 30, 2012

 

 

$

 

429,980

 

$

429,980

 

$

10,185,982

 

$

(1,081,317

)

$

(16,646

)

$

9,517,999

 

$

209,854

 

$

9,727,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

471,047

 

 

471,047

 

12,660

 

483,707

 

Other comprehensive loss

 

 

 

 

 

 

 

(15,246

)

(15,246

)

 

(15,246

)

Issuance of common stock, net

 

 

 

36,256

 

36,256

 

1,254,609

 

 

 

1,290,865

 

(2,533

)

1,288,332

 

Repurchase of common stock

 

 

 

(135

)

(135

)

(4,805

)

 

 

(4,940

)

 

(4,940

)

Exercise of stock options

 

 

 

733

 

733

 

18,758

 

 

 

19,491

 

 

19,491

 

Amortization of deferred compensation

 

 

 

 

 

15,286

 

 

 

15,286

 

 

15,286

 

Preferred dividends

 

 

 

 

 

 

(15,848

)

 

(15,848

)

 

(15,848

)

Common dividends ($1.44 per share)

 

 

 

 

 

 

(570,200

)

 

(570,200

)

 

(570,200

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(11,001

)

(11,001

)

Noncontrolling interests in acquisitions

 

 

 

 

 

 

 

 

 

1,500

 

1,500

 

Issuance of noncontrolling interests

 

 

 

 

 

 

 

 

 

14,028

 

14,028

 

Purchase of noncontrolling interests

 

 

 

 

 

(20,045

)

 

 

(20,045

)

(14,059

)

(34,104

)

September 30, 2011

 

11,820

 

$

285,173

 

407,779

 

$

407,779

 

$

9,353,785

 

$

(890,477

)

$

(28,483

)

$

9,127,777

 

$

189,275

 

$

9,317,052

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

600,582

 

$

483,707

 

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

 

259,039

 

265,742

 

Discontinued operations

 

7,300

 

4,286

 

Amortization of above and below market lease intangibles, net

 

(1,855

)

(3,271

)

Amortization of deferred compensation

 

16,947

 

15,286

 

Amortization of deferred financing costs, net

 

12,415

 

22,118

 

Straight-line rents

 

(33,608

)

(46,936

)

Loan and direct financing lease interest accretion

 

(71,923

)

(65,973

)

Deferred rental revenues

 

1,101

 

(1,284

)

Equity income from unconsolidated joint ventures

 

(42,803

)

(32,798

)

Distributions of earnings from unconsolidated joint ventures

 

2,775

 

2,462

 

Gain on sales of real estate

 

(2,856

)

 

Gain upon consolidation of joint venture

 

 

(7,769

)

Gain upon settlement of loans receivable

 

 

(22,812

)

Derivative (gains) losses, net

 

43

 

(1,226

)

Impairments

 

7,878

 

15,400

 

Changes in:

 

 

 

 

 

Accounts receivable, net

 

(5,082

)

3,206

 

Other assets

 

(7,303

)

28,631

 

Accounts payable and accrued liabilities

 

(21,697

)

(71,848

)

Net cash provided by operating activities

 

720,953

 

586,921

 

Cash flows from investing activities:

 

 

 

 

 

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

 

 

(4,026,556

)

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

 

 

(135,550

)

Other acquisitions of real estate

 

(172,380

)

(113,462

)

Development of real estate

 

(87,119

)

(57,167

)

Leasing costs and tenant and capital improvements

 

(42,817

)

(31,772

)

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

 

2,051

 

1,936

 

Purchase of marketable securities

 

(214,859

)

(22,449

)

Principal repayments on loans receivable

 

4,660

 

303,867

 

Investments in loans receivable

 

(145,597

)

(363,337

)

Increase in restricted cash

 

(1,875

)

(11,532

)

Net cash used in investing activities

 

(650,698

)

(4,551,022

)

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) under bank line of credit

 

(454,000

)

375,000

 

Borrowings under term loan

 

214,789

 

 

Repayments of mortgage debt

 

(109,569

)

(152,517

)

Issuance of senior unsecured notes

 

750,000

 

2,400,000

 

Repayment of senior unsecured notes

 

(250,000

)

(292,265

)

Deferred financing costs

 

(18,256

)

(43,716

)

Preferred stock redemption

 

(295,500

)

 

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

 

804,412

 

1,302,883

 

Dividends paid on common and preferred stock

 

(638,228

)

(586,048

)

Issuance of noncontrolling interests

 

826

 

14,028

 

Purchase of noncontrolling interests

 

 

(34,104

)

Distributions to noncontrolling interests

 

(11,759

)

(11,001

)

Net cash provided by (used in) financing activities

 

(7,285

)

2,972,260

 

Net increase (decrease) in cash and cash equivalents

 

62,970

 

(991,841

)

Cash and cash equivalents, beginning of period

 

33,506

 

1,036,701

 

Cash and cash equivalents, end of period

 

$

96,476

 

$

44,860

 

 

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 nine months ended September 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, as amended, 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 (expense), net in the condensed consolidated statements of income.

 

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Recent Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-01, Continuing Care Retirement Communities—Refundable Advance Fees (“ASU 2012-01”). This update clarifies the situations in which recognition of deferred revenue for refundable advance fees is appropriate. ASU 2012-01 is effective for fiscal years beginning after December 15, 2012. The Company does not expect the adoption of ASU 2012-01 on January 1, 2013 to have a material impact on its consolidated financial position or results of operations.

 

In July 2012, the FASB issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU 2012-02 is effective for fiscal years and interim periods beginning after September 15, 2012. The Company does not expect the adoption of ASU 2012-02 on January 1, 2013 to have an impact on its consolidated financial position or results of operations.

 

In May 2011, the 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. The amendments update 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.

 

(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

 

 

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Table of Contents

 

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. From the acquisition date to September 30, 2011, the Company recognized revenues and earnings from its investments related to HCR ManorCare of $270.4 million and $301.5 million, respectively.

 

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

 

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):

 

 

 

Nine Months Ended
September 30, 2011

 

Revenues

 

$

1,351,574

 

Net income

 

590,333

 

Net income applicable to HCP, Inc.

 

577,673

 

 

 

 

 

Basic earnings per common share

 

$

1.38

 

Diluted earnings per common share

 

1.38

 

 

(4)         Other Real Estate Property Investments

 

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

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Debt and Other
Liabilities
Assumed

 

Noncontrolling
Interest

 

Real Estate

 

Net
Intangibles

 

Medical office

 

$

157,556

 

$

35,120

 

$

27,346

(1)

$

170,443

 

$

49,579

 

Life science

 

7,964

 

 

86

 

7,580

 

470

 

Senior housing

 

3,860

 

 

 

3,541

 

319

 

Hospital

 

3,000

 

 

 

3,000

 

 

 

 

$

172,380

 

$

35,120

 

$

27,432

 

$

184,564

 

$

50,368

 

 


(1)          Represents non-managing member limited liability company units.

 

During the nine months ended September 30, 2012, the Company funded an aggregate of $126 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 nine months ended September 30, 2011 follows (in thousands):

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Debt
Assumed

 

Noncontrolling
Interest

 

Real Estate

 

Net
Intangibles

 

Life science

 

$

84,087

 

$

57,869

 

$

 

$

133,040

 

$

8,916

 

Medical office

 

29,743

 

 

1,500

 

26,191

 

5,052

 

 

 

$

113,830

 

$

57,869

 

$

1,500

 

$

159,231

 

$

13,968

 

 

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

 

During the nine months ended September 30, 2011, the Company funded an aggregate of $87 million for construction, tenant and other capital improvement projects, primarily in its life science and medical office segments. During the nine months ended September 30, 2011, two of the Company’s life science facilities located in South San Francisco were placed in service representing 88,000 square feet.

 

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Table of Contents

 

(5)         Dispositions of Real Estate and Discontinued Operations

 

During the nine months ended September 30, 2012, the Company sold a medical office building for $7 million.

 

At September 30, 2012, properties classified as held for sale included two senior housing facilities with an aggregate carrying value of $91.2 million. At September 30, 2011, properties classified as held for sale included five senior housing facilities and a medical office building, with a combined aggregate carrying value of $102.6 million.

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Rental and related revenues

 

$

2,844

 

$

3,443

 

$

8,816

 

$

10,326

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

1,453

 

1,884

 

7,300

 

4,286

 

Operating expenses

 

4

 

10

 

26

 

36

 

Other expense, net

 

403

 

740

 

1,906

 

2,208

 

Income (loss)

 

$

984

 

$

809

 

$

(416

)

$

3,796

 

Gain on sales of real estate, net of income taxes

 

$

 

$

 

$

2,856

 

$

 

 

 

 

 

 

 

 

 

 

 

Number of properties included in discontinued operations

 

2

 

6

 

3

 

6

 

 

(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):

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Minimum lease payments receivable(1)

 

$

25,350,888

 

$

25,744,161

 

Estimated residual values

 

4,010,514

 

4,010,514

 

Less unearned income

 

(22,518,153

)

(23,026,898

)

Net investment in direct financing leases

 

$

6,843,249

 

$

6,727,777

 

Properties subject to direct financing leases

 

361

 

361

 

 


(1)          The minimum lease payments receivable are primarily attributable to HCR ManorCare ($24.2 billion and $24.5 billion at September 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):

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

183,253

 

$

183,253

 

$

 

$

90,148

 

$

90,148

 

Other

 

74,413

 

 

74,413

 

35,643

 

 

35,643

 

Unamortized discounts, fees and costs

 

(255

)

(3,072

)

(3,327

)

(1,040

)

(1,088

)

(2,128

)

Allowance for loan losses

 

 

(13,410

)

(13,410

)

 

(13,410

)

(13,410

)

 

 

$

74,158

 

$

166,771

 

$

240,929

 

$

34,603

 

$

75,650

 

$

110,253

 

 

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Table of Contents

 

Tandem Health Care Loan

 

On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), an affiliate of Formation Capital, as part of the recapitalization of a post-acute/skilled nursing portfolio. The Company funded $100 million (the “First Tranche”) at closing and expects to fund an additional $105 million (the “Second Tranche”) between March 2013 and August 2013. The Second Tranche will be used to repay debt senior to the Company’s loan. The loan is subordinate to $400 million in senior mortgage debt and $137 million in senior mezzanine debt. The loan bears interest at a fixed rate of 12% and 14% per annum for the First and Second Tranche, respectively. The facility will have a total term of up to 63 months from the initial closing.

 

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.

 

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 September 30, 2012 from its balance of $75.7 million as of December 31, 2011. During the nine months ended September 30, 2011, the Company received cash payments from the Borrower of $2.1 million. At September 30, 2012, the Company believes that the fair value of the collateral supporting this loan is in excess of the loan’s carrying value.

 

Subsequent to September 30, 2012, Delphis closed on the sale of one of the primary collateral assets for the loan, and the Company received $9.7 million in sales proceeds, net of an incentive payment provided for in the 2012 Agreement, which net proceeds were applied to reduce the principal balance of the loan to $59.1 million as of October 2012.

 

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.

 

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Table of Contents

 

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 (expense), 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 fair value as of the 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.

 

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.

 

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Table of Contents

 

Summary of Unconsolidated Joint Venture Information

 

The Company owns interests in the following entities that are accounted for under the equity method at September 30, 2012 (dollars in thousands):

 

Entity(1)

 

Properties/Segment

 

Investment(2)

 

Ownership%

 

HCR ManorCare

 

post-acute/skilled nursing operations

 

$

94,358

 

9.4(3)

 

HCP Ventures III, LLC

 

13 medical office

 

7,774

 

30

 

HCP Ventures IV, LLC

 

54 medical office and 4 hospital

 

33,071

 

20

 

HCP Life Science(4) 

 

4 life science

 

67,263

 

50-63

 

Horizon Bay Hyde Park, LLC

 

1 senior housing

 

6,927

 

72

 

Suburban Properties, LLC

 

1 medical office

 

7,508

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

191

 

 

 

 

 

 

 

$

217,092

 

 

 

Edgewood Assisted Living Center, LLC

 

1 senior housing

 

$

(449

)

45

 

Seminole Shores Living Center, LLC

 

1 senior housing

 

(737

)

50

 

 

 

 

 

$

(1,186

)

 

 

 


(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, as amended, 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, as amended, 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%).

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Real estate, net

 

$

3,751,592

 

$

3,806,187

 

Goodwill

 

2,736,400

 

2,736,400

 

Other assets, net

 

3,019,757

 

3,061,290

 

Total assets

 

$

9,507,749

 

$

9,603,877

 

 

 

 

 

 

 

Capital lease obligations and other debt

 

$

6,014,200

 

$

5,976,500

 

Mortgage debt

 

887,956

 

895,243

 

Accounts payable

 

954,622

 

1,083,581

 

Other partners’ capital

 

1,467,292

 

1,465,536

 

HCP’s capital(1) 

 

183,679

 

183,017

 

Total liabilities and partners’ capital

 

$

9,507,749

 

$

9,603,877

 

 


(1)          The combined basis difference of the Company’s investments in these joint ventures of $32 million, as of September 30, 2012, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,(1)

 

 

 

2012

 

2011

 

2012

 

2011(2)

 

Total revenues

 

$

1,057,567

 

$

1,123,742

 

$

3,196,086

 

$

2,174,711

 

Net income (loss)

 

(8,851

)

31,076

 

8,416

 

9,198

 

HCP’s share in earnings (3) 

 

13,396

 

17,050

 

42,803

 

32,798

 

Fees earned by HCP

 

460

 

494

 

1,423

 

1,605

 

Distributions received by HCP

 

1,419

 

1,271

 

4,826

 

4,398

 

 


(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 $14.9 million and $44.4 million for the three and nine months ended September 30, 2012, respectively, and a reduction of $14.4 million and $27.7 million for the three and nine months ended September 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.

 

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(9)         Intangibles

 

At September 30, 2012 and December 31, 2011, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles, were $607.6 million and $571.5 million, respectively. At September 30, 2012 and December 31, 2011, the accumulated amortization of intangible assets was $225.3 million and $199.1 million, respectively.

 

At September 30, 2012 and December 31, 2011, intangible lease liabilities, comprised of below market lease intangibles and above market ground lease intangible liabilities were $194.0 million and $208.2 million, respectively. At September 30, 2012 and December 31, 2011, the accumulated amortization of intangible liabilities was $88.8 million and $90.4 million, respectively.

 

(10) Other Assets

 

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

 

 

 

September 30,

 

December 31,

 

 

 

2012

 

2011

 

Straight-line rent assets, net of allowance of $32,940 and $34,457, respectively

 

$

299,754

 

$

266,620

 

Marketable debt securities(1) 

 

221,018

 

 

Leasing costs, net

 

93,619

 

92,288

 

Deferred financing costs, net

 

40,782

 

35,649

 

Goodwill

 

50,346

 

50,346

 

Marketable equity securities

 

22,769

 

17,053

 

Other(2) 

 

43,154

 

23,502

 

Total other assets

 

$

771,442

 

$

485,458

 

 


(1)          Represents £136.8 million of Four Seasons senior unsecured notes translated into U.S. dollars as of September 30, 2012 (see below for additional information).

(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 September 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.

 

The marketable equity securities are classified as available-for-sale and had a fair value and adjusted cost basis of $22.8 million and $17.1 million, respectively, at September 30, 2012. At December 31, 2011, the fair value and adjusted cost basis of the marketable equity securities were both $17.1 million.

 

Four Seasons Health Care Senior Unsecured Notes

 

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 through June 2016. The notes bear interest on their par value at a fixed rate of 12.25% per annum, with an original issue discount resulting in a yield to maturity of 12.5%. This investment is financed by a GBP denominated unsecured term loan that is discussed in Note 11. These senior unsecured notes are accounted for as marketable debt securities and classified as held-to-maturity.

 

(11) Debt

 

Bank Line of Credit and Term Loan

 

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 September 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 September 30, 2012, the Company had had no balance outstanding under this Facility.

 

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Table of Contents

 

On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million ($221 million at September 30, 2012) four-year unsecured term loan (the “Term 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 Term Loan, the Company entered into a four-year interest rate swap contract that fixes the interest rate of the Term Loan at 1.81%, subject to adjustments based on the Company’s debt ratings. The Term Loan contains a one-year committed extension option and covenants similar to those in the Facility.

 

The Facility and Term Loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements (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 September 30, 2012. At September 30, 2012, the Company was in compliance with each of these restrictions and requirements of the Facility and Term Loan.

 

Senior Unsecured Notes

 

At September 30, 2012, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.9 billion. At September 30, 2012, interest rates on the notes ranged from 1.29% to 7.07% with a weighted average effective interest rate of 5.40% and a weighted average maturity of 6.11 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 September 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.

 

On January 23, 2012, the Company issued $450 million of 3.75% senior unsecured notes due in 2019. The notes were priced at 99.523% of the principal amount with an effective yield to maturity of 3.83%; net proceeds from the offering were $444 million.

 

On September 15, 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 September 30, 2012, the Company had $1.7 billion in aggregate principal amount of mortgage debt outstanding that is secured by 137 healthcare facilities (including redevelopment properties) with a carrying value of $2.1 billion. At September 30, 2012, interest rates on the mortgage debt ranged from 1.54% to 8.69% with a weighted average effective interest rate of 6.14% and a weighted average maturity of 3.80 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.

 

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Table of Contents

 

Other Debt

 

At September 30, 2012, the Company had $85 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 September 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 $57 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 September 30, 2012 (in thousands):

 

Year

 

Term Loan(1)

 

Senior
Unsecured
Notes

 

Mortgage
Debt

 

Total(2)

 

2012 (Three months)

 

$

 

$

 

$

8,715

 

$

8,715

 

2013

 

 

550,000

 

320,207

 

870,207

 

2014

 

 

487,000

 

184,495

 

671,495

 

2015

 

 

400,000

 

304,761

 

704,761

 

2016

 

221,214

 

900,000

 

293,175

 

1,414,389

 

Thereafter

 

 

3,600,000

 

584,762

 

4,184,762

 

 

 

221,214

 

5,937,000

 

1,696,115

 

7,854,329

 

(Discounts) and premiums, net

 

 

(23,310

)

(11,601

)

(34,911

)

 

 

$

221,214

 

$

5,913,690

 

$

1,684,514

 

$

7,819,418

 

 


(1)              Represents £137 million translated into U.S. dollars as of September 30, 2012.

(2)              Excludes $85 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

 

Percentage of
Senior Housing Revenues

 

 

 

September 30,

 

December 31,

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Operators

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

14

%

14

%

12

%

13

%

12

%

9

%

Brookdale Senior Living(2) 

 

14

 

14

 

14

 

16

 

14

 

17

 

Emeritus Corporation

 

18

 

19

 

20

 

23

 

21

 

25

 

Sunrise Senior Living(3) 

 

22

 

22

 

16

 

18

 

16

 

21

 

 

 

 

Percentage of Post-Acute/
Skilled Nursing Gross Assets

 

Percentage of Post-Acute/
Skilled Nursing Revenues

 

Percentage of Post-Acute/
Skilled Nursing Revenues

 

 

 

September 30,

 

December 31,

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Operators

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1) 

 

89

%

94

%

87

%

93

%

91

%

80

%

 

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Table of Contents

 

Total Company Concentrations:

 

 

 

Percentage of
Total Company Gross Assets

 

Percentage of
Total Company Revenues

 

Percentage of
Total Company Revenues

 

 

 

September 30,

 

December 31,

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Operators

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

HCR ManorCare(1)

 

34

%

35

%

30

%

32

%

31

%

22

%

Brookdale Senior Living(2)

 

4

 

5

 

5

 

5

 

5

 

5

 

Emeritus Corporation

 

6

 

6

 

7

 

7

 

7

 

7

 

Sunrise Senior Living(3)

 

7

 

7

 

5

 

6

 

5

 

6

 

 


(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)          As of September 30, 2012 and December 31, 2011, Brookdale Senior Living (“Brookdale”) percentages exclude $685.4 and $682.7 million, respectively, of senior housing assets related to 21 senior housing facilities that Brookdale operates (beginning September 1, 2011) 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 25% and 8%, respectively, as of September 30, 2012. Assuming that these assets were attributable to Brookdale, the percentage of segment and total assets for Brookdale would be 26% and 9%, respectively, as of December 31, 2011. For the three and nine months ended September 30, 2012, Brookdale percentages exclude $36.1 million and $106.8 million, respectively, of senior housing revenues related to these facilities. Assuming that these revenues were attributable to Brookdale, the percentage of segment and total revenues for Brookdale would be 38% and 12% respectively, for both the three months and nine months ended September 30, 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. Concurrent 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 September 30, 2012 include $36.1 million and $24.1 million in revenues and operating expenses, respectively, and the nine months ended September 30, 2012 include $106.8 million and $67.5 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 $119 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 $374 million as of September 30, 2012.

 

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Table of Contents

 

(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 preferred stock 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 (this charge is presented as an additional preferred stock dividend in the Company’s consolidated income statements).

 

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 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

 

July 26

 

August 6

 

0.50

 

August 21

 

October 25

 

November 5

 

0.50

 

November 20