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, 2013.

 

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 25, 2013, there were 455,098,236 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

44

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

45

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

 

47

 

2


 

 


Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

10,692,628

 

$

10,522,399

 

Development costs and construction in progress

 

221,907

 

236,864

 

Land

 

1,852,768

 

1,847,928

 

Accumulated depreciation and amortization

 

(1,905,879

)

(1,731,742

)

Net real estate

 

10,861,424

 

10,875,449

 

 

 

 

 

 

 

Net investment in direct financing leases

 

6,958,129

 

6,881,393

 

Loans receivable, net

 

555,791

 

276,030

 

Investments in and advances to unconsolidated joint ventures

 

208,878

 

212,213

 

Accounts receivable, net of allowance of $2,058 and $1,668, respectively

 

33,270

 

34,150

 

Cash and cash equivalents

 

53,114

 

247,673

 

Restricted cash

 

44,953

 

37,848

 

Intangible assets, net

 

518,982

 

552,701

 

Real estate held for sale, net

 

6,936

 

9,578

 

Other assets, net

 

810,316

 

788,520

 

Total assets(1)

 

$

20,051,793

 

$

19,915,555

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

261,582

 

$

 

Term loan

 

208,418

 

222,694

 

Senior unsecured notes

 

6,564,842

 

6,712,624

 

Mortgage debt

 

1,653,426

 

1,676,544

 

Other debt

 

78,633

 

81,958

 

Intangible liabilities, net

 

108,864

 

105,909

 

Accounts payable and accrued liabilities

 

313,627

 

293,994

 

Deferred revenue

 

64,142

 

68,055

 

Total liabilities(2)

 

9,253,534

 

9,161,778

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 455,094,411 and 453,191,321 shares issued and outstanding, respectively

 

455,094

 

453,191

 

Additional paid-in capital

 

11,254,658

 

11,180,066

 

Cumulative dividends in excess of earnings

 

(1,100,834

)

(1,067,367

)

Accumulated other comprehensive loss

 

(12,360

)

(14,653

)

Total stockholders’ equity

 

10,596,558

 

10,551,237

 

 

 

 

 

 

 

Joint venture partners

 

16,910

 

14,752

 

Non-managing member unitholders

 

184,791

 

187,788

 

Total noncontrolling interests

 

201,701

 

202,540

 

Total equity

 

10,798,259

 

10,753,777

 

Total liabilities and equity

 

$

20,051,793

 

$

19,915,555

 

 


(1)      The Company’s consolidated total assets at December 31, 2012, include assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs as follows: accounts receivable, net, $2 million; cash and cash equivalents, $10 million; and other assets, net, $2 million. See Note 16 to the Condensed Consolidated Financial Statements for additional information.

(2)      The Company’s consolidated total liabilities at December 31, 2012, include liabilities of certain VIEs for which the VIE creditors do not have recourse to HCP, Inc. as follows: other debt, $0.2 million; accounts payable and accrued liabilities, $14 million; and deferred revenue, $2 million. See Note 16 to the Condensed Consolidated Financial Statements for additional information.

 

See accompanying Notes to the 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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

280,616

 

$

244,603

 

$

565,251

 

$

484,859

 

Tenant recoveries

 

25,146

 

23,581

 

49,349

 

46,231

 

Resident fees and services

 

37,590

 

35,569

 

74,481

 

71,748

 

Income from direct financing leases

 

158,286

 

154,976

 

315,156

 

309,511

 

Interest income

 

14,147

 

1,216

 

26,533

 

2,035

 

Investment management fee income

 

499

 

470

 

942

 

963

 

Total revenues

 

516,284

 

460,415

 

1,031,712

 

915,347

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

108,716

 

102,354

 

218,006

 

206,044

 

Depreciation and amortization

 

110,686

 

84,873

 

215,314

 

170,062

 

Operating

 

74,814

 

70,076

 

148,419

 

137,409

 

General and administrative

 

24,073

 

14,801

 

44,744

 

34,884

 

Total costs and expenses

 

318,289

 

272,104

 

626,483

 

548,399

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

3,240

 

1,028

 

15,303

 

1,462

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

201,235

 

189,339

 

420,532

 

368,410

 

Income taxes

 

(1,654

)

(171

)

(2,530

)

541

 

Equity income from unconsolidated joint ventures

 

15,585

 

15,732

 

30,386

 

29,407

 

Income from continuing operations

 

215,166

 

204,900

 

448,388

 

398,358

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income before gain on sales of real estate

 

672

 

75

 

1,234

 

325

 

Gain on sales of real estate

 

887

 

 

887

 

2,856

 

Total discontinued operations

 

1,559

 

75

 

2,121

 

3,181

 

 

 

 

 

 

 

 

 

 

 

Net income

 

216,725

 

204,975

 

450,509

 

401,539

 

Noncontrolling interests’ share in earnings

 

(3,324

)

(2,951

)

(6,523

)

(6,135

)

Net income attributable to HCP, Inc.

 

213,401

 

202,024

 

443,986

 

395,404

 

Preferred stock dividends

 

 

 

 

(17,006

)

Participating securities’ share in earnings

 

(378

)

(557

)

(856

)

(1,674

)

Net income applicable to common shares

 

$

213,023

 

$

201,467

 

$

443,130

 

$

376,724

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.48

 

$

0.97

 

$

0.90

 

Discontinued operations

 

 

 

0.01

 

0.01

 

Net income applicable to common shares

 

$

0.47

 

$

0.48

 

$

0.98

 

$

0.91

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.47

 

$

0.48

 

$

0.97

 

$

0.90

 

Discontinued operations

 

 

 

 

 

Net income applicable to common shares

 

$

0.47

 

$

0.48

 

$

0.97

 

$

0.90

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

454,618

 

420,468

 

454,137

 

415,243

 

Diluted

 

455,431

 

421,671

 

455,024

 

416,666

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.525

 

$

0.50

 

$

1.05

 

1.00

 

 

See accompanying Notes to the 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,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

216,725

 

$

204,975

 

$

450,509

 

$

401,539

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains on securities:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

(961

)

1,355

 

343

 

Reclassification adjustment realized in net income

 

 

 

(9,131

)

 

Change in net unrealized gains on cash flow hedges:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

4,025

 

(1,056

)

9,345

 

(780

)

Reclassification adjustment realized in net income

 

288

 

90

 

560

 

179

 

Change in Supplemental Executive Retirement Plan obligation

 

55

 

45

 

111

 

90

 

Foreign currency translation adjustment

 

(125

)

(155

)

53

 

47

 

Total other comprehensive income (loss)

 

4,243

 

(2,037

)

2,293

 

(121

)

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

220,968

 

202,938

 

452,802

 

401,418

 

Total comprehensive income attributable to noncontrolling interests

 

(3,324

)

(2,951

)

(6,523

)

(6,135

)

Total comprehensive income attributable to HCP, Inc.

 

$

217,644

 

$

199,987

 

$

446,279

 

$

395,283

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2013

 

453,191

 

$

453,191

 

$

11,180,066

 

$

(1,067,367

)

$

(14,653

)

$

10,551,237

 

$

202,540

 

$

10,753,777

 

Net income

 

 

 

 

443,986

 

 

443,986

 

6,523

 

450,509

 

Other comprehensive income

 

 

 

 

 

2,293

 

2,293

 

 

2,293

 

Issuance of common stock, net

 

1,097

 

1,097

 

49,221

 

 

 

50,318

 

(2,997

)

47,321

 

Repurchase of common stock

 

(46

)

(46

)

(2,224

)

 

 

(2,270

)

 

(2,270

)

Exercise of stock options

 

852

 

852

 

15,957

 

 

 

16,809

 

 

16,809

 

Amortization of deferred compensation

 

 

 

11,638

 

 

 

11,638

 

 

11,638

 

Common dividends ($1.05 per share)

 

 

 

 

(477,453

)

 

(477,453

)

 

(477,453

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(7,506

)

(7,506

)

Issuance of noncontrolling interests

 

 

 

 

 

 

 

3,141

 

3,141

 

June 30, 2013

 

455,094

 

$

455,094

 

$

11,254,658

 

$

(1,100,834

)

$

(12,360

)

$

10,596,558

 

$

201,701

 

$

10,798,259

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 loss

 

 

 

 

 

 

 

(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

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

6


 


Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

450,509

 

$

401,539

 

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

 

215,314

 

170,062

 

Discontinued operations

 

170

 

6,138

 

Amortization of above and below market lease intangibles, net

 

(6,068

)

(1,322

)

Amortization of deferred compensation

 

11,638

 

11,407

 

Amortization of deferred financing costs, net

 

9,440

 

8,459

 

Straight-line rents

 

(15,955

)

(21,787

)

Loan and direct financing lease interest accretion

 

(45,539

)

(48,159

)

Deferred rental revenues

 

(965

)

1,169

 

Equity income from unconsolidated joint ventures

 

(30,386

)

(29,407

)

Distributions of earnings from unconsolidated joint ventures

 

1,624

 

1,878

 

Gain on sales of real estate

 

(887

)

(2,856

)

Marketable securities gain on sales, net

 

(10,977

)

 

Foreign currency and derivative (gains) losses, net

 

780

 

(52

)

Changes in:

 

 

 

 

 

Accounts receivable, net

 

462

 

708

 

Other assets

 

(12,852

)

(8,188

)

Accounts payable and accrued liabilities

 

5,294

 

(6,038

)

Net cash provided by operating activities

 

571,602

 

483,551

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of real estate

 

(60,353

)

(10,970

)

Development of real estate

 

(67,983

)

(51,890

)

Leasing costs and tenant and capital improvements

 

(19,938

)

(27,112

)

Proceeds from sales of real estate, net

 

3,777

 

7,238

 

Distributions in excess of earnings from unconsolidated joint ventures

 

904

 

1,529

 

Purchases of marketable debt securities

 

(16,706

)

(214,859

)

Proceeds from the sale of marketable securities

 

28,030

 

 

Principal repayments on loans receivable

 

19,112

 

4,508

 

Investments in loans receivable

 

(300,673

)

(20,757

)

Increase in restricted cash

 

(7,105

)

(1,229

)

Net cash used in investing activities

 

(420,935

)

(313,542

)

Cash flows from financing activities:

 

 

 

 

 

Net borrowings (repayments) under bank line of credit

 

265,049

 

(238,985

)

Issuance of senior unsecured notes

 

 

450,000

 

Repayments of senior unsecured notes

 

(150,000

)

(250,000

)

Repayments of mortgage debt

 

(40,380

)

(42,538

)

Deferred financing costs

 

 

(10,236

)

Preferred stock redemption

 

 

(295,500

)

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

 

61,860

 

783,137

 

Dividends paid on common and preferred stock

 

(477,453

)

(422,852

)

Issuance of noncontrolling interests

 

3,141

 

873

 

Distributions to noncontrolling interests

 

(7,506

)

(7,778

)

Net cash used in financing activities

 

(345,289

)

(33,879

)

Effect of foreign exchange on cash and cash equivalents

 

63

 

 

Net increase (decrease) in cash and cash equivalents

 

(194,559

)

136,130

 

Cash and cash equivalents, beginning of period

 

247,673

 

33,506

 

Cash and cash equivalents, end of period

 

$

53,114

 

$

169,636

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

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Table of Contents

 

HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)         Business

 

HCP, Inc., an S&P 500 company, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company is a 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) investments in senior housing operations utilizing the structure permitted by the Housing and Economic Recovery Act of 2008, which is commonly referred to as “RIDEA.”

 

(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, Inc., 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, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, 2012 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “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 statements of income (see Note 4).

 

Acquisition Costs

 

Transaction costs related to acquisitions of businesses, including properties, are expensed as incurred.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). This update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The adoption of ASU 2013-02 on January 1, 2013 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In July 2012, the 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. The adoption of ASU 2012-01 on January 1, 2013 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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Table of Contents

 

(3)         Real Estate Property Investments

 

$1.73 Billion Senior Housing Portfolio Acquisition (the “Blackstone JV Acquisition”)

 

During the fourth quarter of 2012 and first quarter of 2013, the Company acquired 133 senior housing communities for $1.73 billion from a joint venture between Emeritus Corporation (“Emeritus”) and Blackstone Real Estate Partners VI, an affiliate of the Blackstone Group (the “Blackstone JV”). Located in 29 states, the portfolio encompasses a diversified care mix of 61% assisted living, 25% independent living, 13% memory care and 1% skilled nursing based on units. Based on operating performance at closing, the 133 communities consisted of 99 that were stabilized and 34 that were in lease-up. The transaction closed in two stages: (i) 129 senior housing facilities during the fourth quarter of 2012 for $1.7 billion; and (ii) four senior housing facilities during the first quarter of 2013 for $38 million. The Company paid $1.73 billion in cash consideration and assumed $13 million of mortgage debt to acquire: (i) real estate with a fair value of $1.57 billion, (ii) intangible assets with a fair value of $174 million; and (iii) assumed intangible liabilities with a fair value of $4 million. As of June 30, 2013, the purchase price allocation is preliminary, and the final purchase price allocation will be determined pending the receipt of information necessary to complete the valuation of certain assets and liabilities, which may result in changes from the initial estimates.

 

Emeritus operates the communities pursuant to a new triple-net master lease for 128 properties (the “Master Lease”) and five individual leases, all guaranteed by Emeritus (together, the “Leases”). The Leases provide aggregate contractual rent in the first year of $105.8 million. The contractual rent will increase annually by the greater of the percentage increase in the Consumer Price Index (“CPI”) or 3.7% on average over the initial five years, and thereafter by the greater of CPI or 3.0% for the remaining initial lease term. At the beginning of the sixth lease year, rent on the 34 lease-up properties will increase to the greater of the percentage increase in CPI or fair market, subject to a floor of 103% and a cap of 130% of the prior year’s rent.

 

The Master Lease properties are grouped into three pools that share comparable characteristics. The Leases have initial terms of 14 to 16 years. Emeritus has two extension options, which, if exercised, will provide for lease terms of 30 to 35 years.

 

Concurrent with the acquisition in 2012, Emeritus purchased nine communities from the Blackstone JV, for which the Company provided secured debt financing of $52 million with a four-year term. The loan is secured by the underlying real estate and is prepayable at Emeritus’ option. The interest rate on the loan was initially 6.1% and will gradually increase during its four year term to 6.8%.

 

Pro Forma Results of Operations

 

The following unaudited pro forma consolidated results of operations assume that the Blackstone JV Acquisition was completed as of January 1, 2012 (in thousands, except per share amounts):

 

 

 

Three Months
Ended
June 30, 2012

 

Six Months
Ended
June 30, 2012

 

Revenues

 

$

486,865

 

$

968,247

 

Net income

 

212,380

 

416,349

 

Net income applicable to HCP, Inc.

 

209,429

 

410,214

 

Basic earnings per common share

 

0.47

 

0.90

 

Diluted earnings per common share

 

0.47

 

0.90

 

 

Other Real Estate Acquisitions

 

In addition to the Blackstone JV Acquisition (discussed above), during the six months ended June 30, 2013, the Company acquired a senior housing facility for $18 million, exercised its purchase option for a senior housing facility it previously leased for $16 million and acquired 38 acres of land in the post-acute/skilled nursing segment for $408,000.

 

During the six months ended June 30, 2012, the Company acquired a life science facility for $8 million and 13 acres of land in the hospital segment for $3 million.

 

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Table of Contents

 

During the six months ended June 30, 2013 and 2012, the Company funded an aggregate of $76 million and $79 million, respectively, for construction, tenant and other capital improvement projects, primarily in its senior housing, life science and medical office segments.

 

(4)         Dispositions of Real Estate and Discontinued Operations

 

During the six months ended June 30, 2013, the Company sold a senior housing facility for $4 million. During the six months ended June 30, 2012, the Company sold a medical office building for $7 million.

 

At June 30, 2013, one hospital was classified as held for sale, with a carrying value of $7 million. At December 31, 2012, properties classified as held for sale included a senior housing facility and hospital with a combined aggregate carrying value of $10 million.

 

The following table summarizes operating loss from discontinued operations and gain on sales of real estate included in discontinued operations (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Rental and related revenues

 

$

779

 

$

4,024

 

$

1,620

 

$

8,349

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

81

 

3,051

 

170

 

6,138

 

Operating expenses

 

 

11

 

 

29

 

Other expense, net

 

26

 

887

 

216

 

1,857

 

Income before gain on sales of real estate

 

$

672

 

$

75

 

$

1,234

 

$

325

 

Gain on sales of real estate, net of income taxes

 

$

887

 

$

 

$

887

 

$

2,856

 

 

 

 

 

 

 

 

 

 

 

Number of properties included in discontinued operations

 

2

 

5

 

2

 

6

 

 

(5)         Net Investment in Direct Financing Leases

 

The components of net investment in direct financing leases (“DFLs”) consisted of the following (dollars in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Minimum lease payments receivable(1)

 

$

24,948,287

 

$

25,217,520

 

Estimated residual values

 

4,010,514

 

4,010,514

 

Less unearned income

 

(22,000,672

)

(22,346,641

)

Net investment in direct financing leases

 

$

6,958,129

 

$

6,881,393

 

Properties subject to direct financing leases

 

361

 

361

 

 


(1)          The minimum lease payments receivable are primarily attributable to HCR ManorCare, Inc. (“HCR ManorCare”) ($23.8 billion and $24.0 billion at June 30, 2013 and December 31, 2012, respectively). The triple-net master lease with HCR ManorCare provides for annual rent of $506 million beginning April 1, 2013 (prior to April 1, 2013, annual rent was $489 million). The rent increases by 3.5% per year over the next three 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 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.

 

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(6)         Loans Receivable

 

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

 

 

 

June 30, 2013

 

December 31, 2012

 

 

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

428,723

 

$

428,723

 

$

 

$

145,150

 

$

145,150

 

Other

 

161,957

 

 

161,957

 

147,264

 

 

147,264

 

Unamortized discounts, fees and costs

 

 

(21,479

)

(21,479

)

 

(2,974

)

(2,974

)

Allowance for loan losses

 

 

(13,410

)

(13,410

)

 

(13,410

)

(13,410

)

 

 

$

161,957

 

$

393,834

 

$

555,791

 

$

147,264

 

$

128,766

 

$

276,030

 

 

Barchester Loan

 

On May 2, 2013, the Company acquired £121 million of subordinated debt at a discount for £109 million. The loan is secured by an interest in 160 facilities leased and operated by Barchester Healthcare (“Barchester”). This loan matures in September 2013 and bears interest on its face value at a floating rate of London Interbank Offered Rate (“LIBOR”) plus a weighted-average margin of 3.14%. At June 30, 2013, the carrying value of this loan was $165 million. This loan investment was financed by a GBP denominated draw on the Company’s revolving line of credit facility that is discussed in Note 10.

 

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. At closing, the loan was subordinate to $400 million in senior mortgage debt and $137 million in senior mezzanine debt. The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. The Second Tranche was used to repay the senior mezzanine debt. At June 30, 2013, the loan was subordinate to $444 million of senior mortgage debt. The loan bears interest at a fixed rate of 12% and 14% per annum for the First and Second Tranches, respectively. The facility has a total term of up to 63 months from the initial closing, is prepayable at the borrower’s option and is secured by real estate partnership interests. The loan is subject to a prepayment premium if repaid on or before the third anniversary from the initial closing date.

 

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. The Borrower’s 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. Further, 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.

 

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. 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.

 

Pursuant to the 2012 Agreement, the Company received the remaining cash ($4.8 million, after reducing this amount by $0.5 million for related legal expenses) and other consideration ($2.1 million) of $6.9 million from the Guarantors. In addition, during 2012 the Company received $38.1 million in net proceeds from the sales of two of the primary collateral assets, which proceeds, together with the cash payments and other consideration, were applied to reduce the carrying value of the loan. The carrying value of the loan was $29.2 million and $30.7 million at June 30, 2013 and December 31, 2012, respectively. During the three and six months ended June 30, 2013, the Company received cash payments from the Borrower of $1.5 million. At June 30, 2013, the Company believes the fair value of the collateral supporting this loan is in excess of its carrying value.

 

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(7)         Investments in and Advances to Unconsolidated Joint Ventures

 

The Company owns interests in the following entities that are accounted for under the equity method at June 30, 2013 (dollars in thousands):

 

Entity(1)

 

Properties/Segment

 

Investment(2)

 

Ownership%

 

HCR ManorCare

 

post-acute/skilled nursing operations

 

$

88,018

 

9.5(3)

 

HCP Ventures III, LLC

 

13 medical office

 

7,335

 

30

 

HCP Ventures IV, LLC

 

54 medical office and 4 hospital

 

31,049

 

20

 

HCP Life Science(4)

 

4 life science

 

68,779

 

50-63

 

Horizon Bay Hyde Park, LLC

 

1 senior housing

 

6,496

 

72

 

Suburban Properties, LLC

 

1 medical office

 

6,950

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

251

 

 

 

 

 

 

 

$

208,878

 

 

 

 

 

 

 

 

 

 

 

Edgewood Assisted Living Center, LLC

 

1 senior housing

 

$

(387

)

45

 

Seminole Shores Living Center, LLC

 

1 senior housing

 

(634

)

50

 

 

 

 

 

$

(1,021

)

 

 

 


(1)          These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.

(2)          Represents the carrying value of the Company’s investment in the unconsolidated joint venture.

(3)          Presented after adjusting the Company’s 9.9% ownership for the dilution of certain of HCR ManorCare’s outstanding employee equity awards.

(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):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Real estate, net

 

$

3,690,920

 

$

3,731,740

 

Goodwill and other assets, net

 

5,807,180

 

5,734,318

 

Total assets

 

$

9,498,100

 

$

9,466,058

 

 

 

 

 

 

 

Capital lease obligations and mortgage debt

 

$

6,813,884

 

$

6,875,932

 

Accounts payable

 

1,047,460

 

971,095

 

Other partners’ capital

 

1,452,467

 

1,435,885

 

HCP’s capital(1)

 

184,289

 

183,146

 

Total liabilities and partners’ capital

 

$

9,498,100

 

$

9,466,058

 

 


(1)          The combined basis difference of the Company’s investments in these joint ventures of $23 million, as of June 30, 2013, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Total revenues

 

$

1,059,412

 

$

1,093,873

 

$

2,152,863

 

$

2,138,519

 

Net income

 

10,122

 

16,124

 

20,494

 

17,267

 

HCP’s share in earnings (1)

 

15,585

 

15,732

 

30,386

 

29,407

 

Fees earned by HCP

 

499

 

470

 

942

 

963

 

Distributions received by HCP

 

1,157

 

1,278

 

2,528

 

3,407

 

 


(1)          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 $15 million for both the three months ended June 30, 2013 and 2012. The Company recorded a reduction of $31 million and $30 million for the six months ended June 30, 2013 and 2012, respectively. 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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(8)         Intangibles

 

At both June 30, 2013 and December 31, 2012, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles, were $794 million. At June 30, 2013 and December 31, 2012, the accumulated amortization of intangible assets was $275 million and $241 million, respectively.

 

At June 30, 2013 and December 31, 2012, intangible lease liabilities, comprised of below market lease intangibles and above market ground lease intangible liabilities were $215 and $199 million, respectively. At June 30, 2013 and December 31, 2012, the accumulated amortization of intangible liabilities was $106 million and $93 million, respectively.

 

(9)         Other Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Straight-line rent assets, net of allowance of $34,147 and $33,521, respectively

 

$

339,464

 

$

306,294

 

Marketable debt securities(1)

 

225,285

 

222,809

 

Leasing costs, net

 

98,408

 

93,763

 

Deferred financing costs, net

 

39,986

 

45,490

 

Goodwill

 

50,346

 

50,346

 

Marketable equity securities

 

 

24,829

 

Other(2)

 

56,827

 

44,989

 

Total other assets

 

$

810,316

 

$

788,520

 

 


(1)          Includes £136.9 million ($208 million and $223 million at June 30, 2013 and December 31, 2012, respectively) of Four Seasons senior unsecured notes translated into U.S. dollars (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 June 30, 2013 and December 31, 2012, the carrying value of interest accrued related to the Delphis loan was zero. See Note 6 for additional information about the Delphis loan and the related impairment. At both June 30, 2013 and December 31, 2012, includes a loan receivable of $10 million from HCP Ventures IV, LLC, an unconsolidated joint venture (see Note 7 for additional information) with an interest rate of 12% which matures in May 2014. The loan is secured by HCP’s joint venture partner’s 80% partnership interest in the joint venture.

 

During the six months ended June 30, 2013, the Company realized gains from the sale of marketable equity securities of $11 million, which were included in other income, net. At December 31, 2012, the fair value and adjusted cost basis of the marketable equity securities were $24.8 million and $17.1 million, respectively. The marketable equity securities were classified as available-for-sale.

 

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 were 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 (“Four Seasons”), 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 was financed by a GBP denominated unsecured term loan that is discussed in Note 10. These senior unsecured notes are accounted for as marketable debt securities and classified as held-to-maturity.

 

(10) Debt

 

Bank Line of Credit and Term Loan

 

The Company’s $1.5 billion unsecured revolving line of credit facility (the “Facility”) matures in March 2016 and contains a one-year extension option. Borrowings under the 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, 2013, the margin on the Facility was 1.075%, and the facility fee was 0.175%. The Facility also includes a feature that will allow the Company to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. At June 30, 2013, the Company had $262 million (includes £109 million translated into U.S. dollars) outstanding under the Facility.

 

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On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million ($208 million at June 30, 2013) 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.

 

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 $9.2 billion at June 30, 2013. At June 30, 2013, the Company was in compliance with each of these restrictions and requirements of the Facility and Term Loan.

 

Senior Unsecured Notes

 

At June 30, 2013, the Company had senior unsecured notes outstanding with an aggregate principal balance of $6.6 billion. At June 30, 2013, interest rates on the notes ranged from 1.24% to 6.98% with a weighted average effective interest rate of 5.10% and a weighted average maturity of six 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, 2013.

 

On February 28, 2013, the Company repaid $150 million of maturing 5.625% senior unsecured notes.

 

On November 19, 2012, the Company issued $800 million of 2.625% senior unsecured notes due in 2020. The notes were priced at 99.7% of the principal amount with an effective yield to maturity of 2.7%; net proceeds from this offering were $793 million.

 

On July 23, 2012, the Company issued $300 million of 3.15% senior unsecured notes due in 2022. The notes were priced at 98.9% of the principal amount with an effective yield to maturity of 3.3%; net proceeds from the offering were $294 million.

 

On June 25, 2012, the Company repaid $250 million of maturing 6.45% senior unsecured notes. 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 99.5% of the principal amount with an effective yield to maturity of 3.8%; net proceeds from the offering were $444 million.

 

Mortgage Debt

 

At June 30, 2013, the Company had $1.7 billion in aggregate principal amount of mortgage debt outstanding that is secured by 138 healthcare facilities (including redevelopment properties) with a carrying value of $2.1 billion. At June 30, 2013, interest rates on the mortgage debt ranged from 0.69% to 8.69% with a weighted average effective interest rate of 6.12% and a weighted average maturity of three 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 or 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 June 30, 2013, the Company had $79 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”). The Life Care Bonds are refundable to the residents upon the termination of the contract or upon the successful resale of the unit.

 

Debt Maturities

 

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2013 (in thousands):

 

Year

 

Line of
Credit
(1)

 

Term Loan(2)

 

Senior
Unsecured
Notes

 

Mortgage
Debt

 

Total(3)

 

2013 (Six months)

 

$

 

$

 

$

400,000

 

$

254,973

 

$

654,973

 

2014

 

 

 

487,000

 

180,221

 

667,221

 

2015

 

 

 

400,000

 

308,611

 

708,611

 

2016

 

261,582

 

208,418

 

900,000

 

291,941

 

1,661,941

 

2017

 

 

 

750,000

 

550,788

 

1,300,788

 

Thereafter

 

 

 

3,650,000

 

73,468

 

3,723,468

 

 

 

261,582

 

208,418

 

6,587,000

 

1,660,002

 

8,717,002

 

(Discounts) and premiums, net

 

 

 

(22,158

)

(6,576

)

(28,734

)

 

 

$

261,582

 

$

208,418

 

$

6,564,842

 

$

1,653,426

 

$

8,688,268

 

 


(1)          Includes £109 million translated into U.S. dollars.

(2)          Represents £137 million translated into U.S. dollars.

(3)          Excludes $79 million of other debt that represents the Life Care Bonds that have no scheduled maturities.

 

(11) 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, results of operations or cash flows. The Company’s policy is to expense legal costs 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. The Company does not have significant foreign operations.

 

15



Table of Contents

 

The following table provides information regarding the Company’s concentrations with respect to certain operators and tenants; the information provided is presented for the gross assets and revenues that are associated with certain operators and tenants 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,

 

Operators

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Emeritus

 

35

%

35

%

35

%

23

%

35

%

21

%

Sunrise Senior Living (“Sunrise”)(1) 

 

17

 

17

 

13

 

17

 

13

 

16

 

HCR ManorCare

 

11

 

11

 

9

 

13

 

9

 

12

 

Brookdale Senior Living (“Brookdale”)(2) 

 

10

 

11

 

11

 

16

 

12

 

14

 

 

 

 

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,

 

Operators

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

HCR ManorCare

 

86

%

89

%

86

%

93

%

86

%

93

%

 

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

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

HCR ManorCare

 

32

%

31

%

28

%

31

%

28

%

31

%

Emeritus

 

14

 

13

 

13

 

7

 

13

 

7

 

Sunrise(1) 

 

7

 

7

 

5

 

5

 

5

 

5

 

Brookdale(2) 

 

4

 

4

 

4

 

5

 

4

 

5

 

 


(1)          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.

(2)          At June 30, 2013 and December 31, 2012, Brookdale percentages exclude $705 million and $692 million, respectively, of senior housing assets related to 21 senior housing facilities that Brookdale operates on the Company’s behalf under a RIDEA structure. Assuming that these assets were attributable to Brookdale, the percentage of segment assets for Brookdale would be 19% and 20% at June 30, 2013 and December 31, 2012, respectively. Assuming that these assets were attributable to Brookdale, the percentage of total assets for Brookdale would be 8% at both June 30, 2013 and December 31, 2012. For the three and six months ended June 30, 2013, Brookdale percentages exclude $37.6 million and $74.4 million, respectively, of senior housing revenues related to these facilities. Assuming that these revenues were attributable to Brookdale, the percentage of segment revenues for Brookdale would be 31% for both the three and six months ended June 30, 2013. Assuming that these revenues were attributable to Brookdale, the percentage of total revenues for Brookdale would be 12% and 11%, respectively, for the three and six months ended June 30, 2013. For the three and six months ended June 30, 2012, Brookdale percentages exclude $35.6 million and $70.7 million, respectively, of senior housing revenues related to these facilities. Assuming that these revenues were attributable to Brookdale, the percentage of segment revenues for Brookdale would be 42% and 38% for the three and six months ended June 30, 2012, respectively. Assuming that these revenues were attributable to Brookdale, the percentage of total revenues for Brookdale would be 12% for both the three and six months ended June 30, 2012.

 

HCR ManorCare’s summarized condensed consolidated financial information follows (in millions):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Real estate and other property, net

 

$

3,019.9

 

$

3,046.6

 

Cash and cash equivalents

 

161.5

 

120.5

 

Goodwill, intangible and other assets, net

 

5,566.9

 

5,625.4

 

Total assets

 

$

8,748.3

 

$

8,792.5

 

 

 

 

 

 

 

Debt and financing obligations

 

$

6,319.0

 

$

6,374.6

 

Accounts payable, accrued liabilities and other

 

1,011.8

 

1,021.9

 

Total equity

 

1,417.5

 

1,396.0

 

Total liabilities and equity

 

$

8,748.3

 

$

8,792.5

 

 

16


 

 


Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,032.7

 

$

1,034.3

 

$

2,101.4

 

$

2,075.5

 

Operating, general and administrative expense

 

(876.9

)

(897.5

)

(1,789.3

)

(1,782.9

)

Depreciation and amortization expense

 

(36.4

)

(41.6

)

(73.7

)

(83.6

)

Interest expense

 

(104.1

)

(105.8

)

(208.5

)

(212.1

)

Other income (expense), net

 

(0.5

)

3.1

 

1.7

 

6.4

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

14.8

 

(7.5

)

31.6

 

3.3

 

Income taxes

 

(4.7

)

4.6

 

(9.8

)

0.1

 

Net income (loss)

 

$

10.1

 

$

(2.9

)

$

21.8

 

$

3.4

 

 

To mitigate the 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 $114 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 $377 million as of June 30, 2013.

 

(12) 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 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 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 during the three months ended March 31, 2012 related to the original issuance costs of the preferred stock (this charge is presented as an additional preferred stock dividend in the Company’s condensed consolidated statements of income).

 

Common Stock

 

The following table lists the common stock cash dividends declared by the Company in 2013:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

January 24

 

February 4

 

$

0.525

 

February 19

 

April 25

 

May 6

 

0.525

 

May 21

 

July 25

 

August 5

 

0.525

 

August 20

 

 

In October 2012, the Company completed a $979 million offering of 22 million shares of common stock at a price of $44.50, which proceeds were primarily used to fund the Blackstone JV Acquisition.

 

In June 2012, the Company completed a $376 million offering of 8.97 million shares of common stock at a price of $41.88 per share, which proceeds were primarily used to repay $250 million of maturing senior unsecured notes.

 

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

 

17



Table of Contents

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2013

 

2012

 

Dividend Reinvestment and Stock Purchase Plan

 

925

 

501

 

Conversion of DownREIT units(1) 

 

85

 

67

 

Exercise of stock options

 

852

 

2,050

 

Vesting of restricted stock units(2)

 

103

 

378

 

 


(1)          Non-managing member LLC units.

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

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Unrealized gains on available for sale securities

 

$

 

$

7,776

 

Unrealized losses on cash flow hedges, net

 

(8,547

)

(18,452

)

Supplemental Executive Retirement Plan minimum liability

 

(3,039

)

(3,150

)

Cumulative foreign currency translation adjustment

 

(774

)

(827

)

Total accumulated other comprehensive loss

 

$

(12,360

)

$

(14,653

)

 

Noncontrolling Interests

 

At June 30, 2013, there were four million DownREIT units outstanding in four LLCs, for which the Company is the managing member. At June 30, 2013, the carrying and fair values of these DownREIT units were $185 million and $273 million, respectively.

 

(13) Segment Disclosures

 

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the senior housing, post-acute/skilled nursing, life science and hospital segments, the Company invests or co-invests primarily in single operator or tenant properties, through the acquisition and development of real estate and by debt issued by operators in these sectors. Under the medical office segment, the Company invests or co-invests through the acquisition and development of medical office buildings (“MOBs”) that are leased under gross, modified gross or triple-net leases, generally to multiple tenants, and which generally require a greater level of property management. The accounting policies of the segments are the same as those described in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2012 in the Company’s Annual Report on Form 10-K filed with the SEC. There were no intersegment sales or transfers during the six months ended June 30, 2013 and 2012. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”), adjusted NOI and interest income of the combined investments in each segment.

 

Non-segment assets consist primarily of corporate assets including cash, restricted cash, accounts receivable, net, marketable equity securities, deferred financing costs and, if any, real estate held-for-sale. Interest expense, depreciation and amortization and non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s performance measure. See Note 11 for other information regarding concentrations of credit risk.

 

18



Table of Contents

 

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

 

For the three months ended June 30, 2013:

 

Segments

 

Rental
Revenues
(1)

 

Resident Fees
and Services

 

Interest
Income

 

Investment
Management
Fee Income

 

Total
Revenues

 

NOI(2)

 

Adjusted
NOI
(2)
(Cash NOI)

 

Senior housing

 

$

150,261

 

$

37,590

 

$

2,806

 

$

 

$

190,657

 

$

163,714

 

$

148,400

 

Post-acute/skilled

 

137,520

 

 

11,029

 

 

148,549

 

136,867

 

120,128

 

Life science

 

75,227

 

 

 

1

 

75,228

 

61,388

 

58,265

 

Medical office

 

90,174

 

 

 

498

 

90,672

 

54,956

 

53,857

 

Hospital

 

10,866

 

 

312

 

 

11,178

 

9,899

 

21,609

 

Total

 

$

464,048

 

$

37,590

 

$

14,147

 

$

499

 

$

516,284

 

$

426,824

 

$

402,259

 

 

For the three months ended June 30, 2012:

 

Segments

 

Rental
Revenues
(1)

 

Resident Fees
and Services

 

Interest
Income

 

Investment
Management
Fee Income

 

Total
Revenues

 

NOI(2)

 

Adjusted
NOI(2)
(Cash NOI)

 

Senior housing

 

$

113,387

 

$

35,569

 

$

527

 

$

 

$

149,483

 

$

125,516

 

$

113,936

 

Post-acute/skilled

 

134,353

 

 

427

 

 

134,780

 

134,188

 

116,517

 

Life science

 

72,545

 

 

 

1

 

72,546

 

58,990

 

55,735

 

Medical office

 

80,905

 

 

 

469

 

81,374

 

48,926

 

47,682

 

Hospital

 

21,970

 

 

262

 

 

22,232

 

21,033