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, 2014.

 

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
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

1920 Main Street, Suite 1200

Irvine, CA 92614

(Address of principal executive offices)

 

(949) 407-0700

(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 31, 2014, there were 458,820,961 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

42

 

 

 

Item 4.

Controls and Procedures

43

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

Item 1A.

Risk Factors

43

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43

 

 

 

Item 6.

Exhibits

44

 

 

 

Signatures

46

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

10,783,296

 

$

10,544,110

 

Development costs and construction in progress

 

251,400

 

225,869

 

Land

 

1,880,408

 

1,822,862

 

Accumulated depreciation and amortization

 

(2,100,223

)

(1,965,592

)

Net real estate

 

10,814,881

 

10,627,249

 

 

 

 

 

 

 

Net investment in direct financing leases

 

7,223,878

 

7,153,399

 

Loans receivable, net

 

375,717

 

366,001

 

Investments in and advances to unconsolidated joint ventures

 

190,730

 

196,576

 

Accounts receivable, net of allowance of $3,052 and $1,529, respectively

 

32,719

 

27,494

 

Cash and cash equivalents

 

54,070

 

300,556

 

Restricted cash

 

34,329

 

37,229

 

Intangible assets, net

 

477,837

 

489,842

 

Real estate assets held for sale, net

 

 

9,819

 

Other assets, net

 

940,008

 

867,705

 

Total assets(1) 

 

$

20,144,169

 

$

20,075,870

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

310,000

 

$

 

Term loan

 

234,352

 

226,858

 

Senior unsecured notes

 

6,826,884

 

6,963,375

 

Mortgage debt

 

1,229,773

 

1,396,485

 

Other debt

 

73,020

 

74,909

 

Intangible liabilities, net

 

90,426

 

98,810

 

Accounts payable and accrued liabilities

 

339,364

 

318,427

 

Deferred revenue

 

67,756

 

65,872

 

Total liabilities(2)

 

9,171,575

 

9,144,736

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 458,742,070 and 456,960,648 shares issued and outstanding, respectively

 

458,742

 

456,961

 

Additional paid-in capital

 

11,388,641

 

11,334,041

 

Cumulative dividends in excess of earnings

 

(1,075,583

)

(1,053,215

)

Accumulated other comprehensive loss

 

(11,669

)

(14,487

)

Total stockholders’ equity

 

10,760,131

 

10,723,300

 

 

 

 

 

 

 

Joint venture partners

 

23,391

 

23,729

 

Non-managing member unitholders

 

189,072

 

184,105

 

Total noncontrolling interests

 

212,463

 

207,834

 

Total equity

 

10,972,594

 

10,931,134

 

Total liabilities and equity

 

$

20,144,169

 

$

20,075,870

 

 


(1)      The Company’s consolidated total assets at June 30, 2014 and December 31, 2013 each include $1 million of other assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs. See Note 16 to the Condensed Consolidated Financial Statements for additional information.

(2)      The Company’s consolidated total liabilities at June 30, 2014 and December 31, 2013 each include $9 million of accounts payable and accrued liabilities of certain VIEs for which the VIE creditors do not have recourse to HCP, Inc.  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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

288,191

 

$

277,769

 

$

573,014

 

$

559,308

 

Tenant recoveries

 

27,110

 

25,144

 

52,544

 

49,346

 

Resident fees and services

 

37,939

 

36,394

 

75,992

 

72,139

 

Income from direct financing leases

 

165,500

 

158,286

 

330,037

 

315,156

 

Interest income

 

16,937

 

14,147

 

33,633

 

26,533

 

Investment management fee income

 

444

 

499

 

893

 

942

 

Total revenues

 

536,121

 

512,239

 

1,066,113

 

1,023,424

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Interest expense

 

106,842

 

108,452

 

213,480

 

217,562

 

Depreciation and amortization

 

113,133

 

109,210

 

220,521

 

212,389

 

Operating

 

78,867

 

73,887

 

154,574

 

146,573

 

General and administrative

 

29,062

 

24,062

 

50,456

 

44,717

 

Total costs and expenses

 

327,904

 

315,611

 

639,031

 

621,241

 

Other income, net

 

709

 

3,288

 

2,639

 

15,400

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

208,926

 

199,916

 

429,721

 

417,583

 

Income taxes

 

(1,339

)

(1,604

)

(2,785

)

(2,519

)

Equity income from unconsolidated joint ventures

 

14,692

 

15,585

 

29,220

 

30,386

 

Income from continuing operations

 

222,279

 

213,897

 

456,156

 

445,450

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

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

 

 

1,941

 

1,736

 

4,172

 

Gain on sales of real estate, net of income taxes

 

 

887

 

28,010

 

887

 

Total discontinued operations

 

 

2,828

 

29,746

 

5,059

 

 

 

 

 

 

 

 

 

 

 

Net income

 

222,279

 

216,725

 

485,902

 

450,509

 

Noncontrolling interests’ share in earnings

 

(3,394

)

(3,324

)

(7,906

)

(6,523

)

Net income attributable to HCP, Inc.

 

218,885

 

213,401

 

477,996

 

443,986

 

Participating securities’ share in earnings

 

(489

)

(378

)

(1,552

)

(856

)

Net income applicable to common shares

 

$

218,396

 

$

213,023

 

$

476,444

 

$

443,130

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.46

 

$

0.98

 

$

0.96

 

Discontinued operations

 

 

0.01

 

0.06

 

0.02

 

Net income applicable to common shares

 

$

0.48

 

$

0.47

 

$

1.04

 

$

0.98

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.48

 

$

0.46

 

$

0.98

 

$

0.96

 

Discontinued operations

 

 

0.01

 

0.06

 

0.01

 

Net income applicable to common shares

 

$

0.48

 

$

0.47

 

$

1.04

 

$

0.97

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

458,247

 

454,618

 

457,773

 

454,137

 

Diluted

 

458,588

 

455,431

 

458,134

 

455,024

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.545

 

$

0.525

 

$

1.09

 

1.05

 

 

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,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

222,279

 

$

216,725

 

$

485,902

 

$

450,509

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

(7

)

 

(4

)

1,355

 

Reclassification adjustment realized in net income

 

 

 

 

(9,131

)

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

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

3

 

4,025

 

(692

)

9,345

 

Reclassification adjustment realized in net income

 

38

 

288

 

643

 

560

 

Change in Supplemental Executive Retirement Plan obligation

 

54

 

55

 

108

 

111

 

Foreign currency translation adjustment

 

2,813

 

(125

)

2,763

 

53

 

Total other comprehensive income

 

2,901

 

4,243

 

2,818

 

2,293

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

225,180

 

220,968

 

488,720

 

452,802

 

Total comprehensive income attributable to noncontrolling interests

 

(3,394

)

(3,324

)

(7,906

)

(6,523

)

Total comprehensive income attributable to HCP, Inc.

 

$

221,786

 

$

217,644

 

$

480,814

 

$

446,279

 

 

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, 2014

 

456,961

 

$

456,961

 

$

11,334,041

 

$

(1,053,215

)

$

(14,487

)

$

10,723,300

 

$

207,834

 

$

10,931,134

 

Net income

 

 

 

 

477,996

 

 

477,996

 

7,906

 

485,902

 

Other comprehensive income

 

 

 

 

 

2,818

 

2,818

 

 

2,818

 

Issuance of common stock, net

 

1,954

 

1,954

 

51,728

 

 

 

53,682

 

(73

)

53,609

 

Repurchase of common stock

 

(284

)

(284

)

(10,802

)

 

 

(11,086

)

 

(11,086

)

Exercise of stock options

 

111

 

111

 

2,681

 

 

 

2,792

 

 

2,792

 

Amortization of deferred compensation

 

 

 

11,006

 

 

 

11,006

 

 

11,006

 

Common dividends ($1.09 per share)

 

 

 

 

(500,364

)

 

(500,364

)

 

(500,364

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

(7,967

)

(7,967

)

Issuance of noncontrolling interests

 

 

 

 

 

 

 

6,434

 

6,434

 

Purchase of noncontrolling interests

 

 

 

(13

)

 

 

(13

)

(1,671

)

(1,684

)

June 30, 2014

 

458,742

 

$

458,742

 

$

11,388,641

 

$

(1,075,583

)

$

(11,669

)

$

10,760,131

 

$

212,463

 

$

10,972,594

 

 

 

 

 

 

 

 

 

 

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

 

 

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,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

485,902

 

$

450,509

 

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

 

220,521

 

212,389

 

Discontinued operations

 

 

3,095

 

Amortization of above and below market lease intangibles, net

 

(343

)

(6,068

)

Amortization of deferred compensation

 

11,006

 

11,638

 

Amortization of deferred financing costs, net

 

9,474

 

9,440

 

Straight-line rents

 

(26,455

)

(15,955

)

Loan and direct financing lease interest accretion

 

(39,401

)

(45,539

)

Deferred rental revenues

 

(515

)

(965

)

Equity income from unconsolidated joint ventures

 

(29,220

)

(30,386

)

Distributions of earnings from unconsolidated joint ventures

 

2,655

 

1,624

 

Gain on sales of real estate

 

(28,010

)

(887

)

Marketable securities and other (gains) losses, net

 

58

 

(10,197

)

Changes in:

 

 

 

 

 

Accounts receivable, net

 

(5,225

)

462

 

Other assets

 

(6,136

)

(12,852

)

Accounts payable and accrued liabilities

 

13,394

 

5,294

 

Net cash provided by operating activities

 

607,705

 

571,602

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions of real estate

 

(285,429

)

(60,353

)

Development of real estate

 

(72,334

)

(67,983

)

Leasing costs and tenant and capital improvements

 

(27,458

)

(19,938

)

Proceeds from sales of real estate, net

 

36,897

 

3,777

 

Distributions in excess of earnings from unconsolidated joint ventures

 

1,113

 

904

 

Purchases of marketable debt securities

 

 

(16,706

)

Proceeds from the sales of marketable securities

 

 

28,030

 

Principal repayments on loans receivable

 

5,547

 

19,112

 

Investments in loans receivable and other

 

(46,434

)

(300,673

)

(Increase) decrease in restricted cash

 

2,900

 

(7,105

)

Net cash used in investing activities

 

(385,198

)

(420,935

)

Cash flows from financing activities:

 

 

 

 

 

Net borrowings under bank line of credit

 

310,000

 

265,049

 

Issuance of senior unsecured notes

 

350,000

 

 

Repayments of senior unsecured notes

 

(487,000

)

(150,000

)

Repayments of mortgage debt

 

(169,843

)

(40,380

)

Deferred financing costs

 

(9,239

)

 

Issuance of common stock and exercise of options

 

56,401

 

61,860

 

Repurchase of common stock

 

(11,086

)

 

Dividends paid on common stock

 

(500,364

)

(477,453

)

Issuance of noncontrolling interests

 

113

 

3,141

 

Distributions to and purchase of noncontrolling interests

 

(7,980

)

(7,506

)

Net cash used in financing activities

 

(468,998

)

(345,289

)

Effect of foreign exchange on cash and cash equivalents

 

5

 

63

 

Net decrease in cash and cash equivalents

 

(246,486

)

(194,559

)

Cash and cash equivalents, beginning of period

 

300,556

 

247,673

 

Cash and cash equivalents, end of period

 

$

54,070

 

$

53,114

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

7



Table of Contents

 

HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)         Business

 

HCP, Inc., a Standard & Poor’s (“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 Irvine, 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, joint ventures and 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 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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, 2013 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. For periods through March 31, 2014, operating results for real estate assets sold have been reclassified from continuing to discontinued operations on the condensed consolidated statements of income (see Note 4).

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease.

 

The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA, along with liquidity. The Company evaluates, on a monthly basis or immediately upon a change in circumstances, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company.

 

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In connection with the Company’s quarterly loans receivable and direct financing leases (“DFLs”) (collectively, “Finance Receivables”) review process, Finance Receivables are assigned an internal rating of Performing, Watch List or Workout. Finance Receivables that are deemed Performing meet all present contractual obligations, and collection and timing of all amounts owed is reasonably assured. Watch List Finance Receivables meet all present contractual obligations; however, the timing and/or collection of all amounts owed may not be reasonably assured. Workout Finance Receivables are defined as Finance Receivables where the Company has determined, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the agreement.

 

Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured. If the ultimate collectibility of the recorded nonaccrual Finance Receivable balance is in doubt, the cost recovery method is used, and cash collected is applied to first reduce the carrying value of the Finance Receivable. Otherwise, the cash basis method is used, whereby income may be recognized to the extent cash is received. Generally, the Company returns a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of remaining loan or lease payments is no longer in doubt.

 

Allowances are established for Finance Receivables based upon an estimate of probable losses on an individual basis, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon the Company’s assessment of the borrower’s or lessee’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate.

 

Recent Accounting Pronouncements

 

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). This update changes the requirements for reporting and the definition of discontinued operations. Based on the current revisions, the disposal of a component of an entity, or a group of components of an entity, is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when certain defined criteria are met. ASU 2014-08 is effective for fiscal years and interim periods ending after December 15, 2014 and shall be applied prospectively. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. On April 1, 2014, the Company early adopted ASU 2014-08; the adoption of ASU 2014-08 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the guidance for recognizing revenue. ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years and interim periods ending after December 15, 2016, including interim periods. Early adoption is not permitted. The Company is evaluating the impact of the adoption of ASU 2014-09 on January 1, 2017 to the Company’s consolidated financial position or results of operations.

 

(3)         Real Estate Property Investments

 

On June 6, 2014, the Company acquired a portfolio of 20 care homes for $127 million (£75.8 million) subject to long-term triple-net leases. These facilities are located throughout the United Kingdom (“UK”) and are leased to Maria Mallaband Care Group. The triple-net leases have initial terms of 15 years, plus two 10-year extension options and provide for initial annual rent of $9.7 million (£5.8 million). The cross-defaulted contractual rents will increase annually based on the Retail Price Index (UK measure of inflation), subject to a floor of 2% and a ceiling of 4.5%.

 

A summary of real estate acquisitions for the six months ended June 30, 2014 follows (in thousands):

 

 

 

Consideration

 

Assets Acquired

 

Segment

 

Cash Paid

 

Debt and Other
Liabilities
Assumed

 

Noncontrolling
Interest

 

Real Estate

 

Net
Intangibles

 

Senior housing

 

$

215,381

(1)

$

1

 

$

6,321

(2)

$

204,758

 

$

16,945

 

Life science

 

43,500

 

250

 

 

41,281

 

2,469

 

Medical office

 

26,548

 

272

 

 

22,820

 

4,000

 

 

 

$

285,429

 

$

523

 

$

6,321

 

$

268,859

 

$

23,414

 

 


(1)          Includes £75.8 million translated into U.S. dollars.

(2)          Includes $5 million of non-managing member limited liability company units.

 

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During the six months ended June 30, 2013, the Company acquired four senior housing communities from a joint venture between Emeritus Corporation (“Emeritus”) and Blackstone Real Estate Partners VI for $38 million, 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, 2014 and 2013, the Company funded an aggregate of $101 million and $76 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, 2014, the Company sold two post-acute/skilled nursing facilities for $22 million, a hospital for $17 million and a medical office building (“MOB”) for $145,000. During the six months ended June 30, 2013, the Company sold a senior housing facility for $4 million.

 

There were no assets classified as held for sale at June 30, 2014. At December 31, 2013, one hospital and two post-acute/skilled nursing facilities were classified as held for sale, with a carrying value of $10 million.

 

The following table summarizes operating income 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

 

2014

 

2013

 

Rental and related revenues

 

$

4,824

 

$

1,810

 

$

9,908

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

1,557

 

 

3,095

 

Operating expenses

 

927

 

54

 

1,846

 

Other expenses, net

 

399

 

20

 

795

 

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

 

$

1,941

 

$

1,736

 

$

4,172

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate, net of income taxes

 

$

887

 

$

28,010

 

$

887

 

 

 

 

 

 

 

 

 

Number of properties included in discontinued operations

 

16

 

2

 

16

 

 

(5)        Net Investment in Direct Financing Leases

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Minimum lease payments receivable

 

$

24,517,865

 

$

24,808,386

 

Estimated residual values

 

4,134,405

 

4,134,405

 

Less unearned income

 

(21,428,392

)

(21,789,392

)

Net investment in direct financing leases

 

$

7,223,878

 

$

7,153,399

 

Properties subject to direct financing leases

 

364

 

364

 

 

The minimum lease payments receivable are primarily attributable to HCR ManorCare, Inc. (“HCR ManorCare”) ($23.3 billion and $23.5 billion at June 30, 2014 and December 31, 2013, respectively). The triple-net master lease with HCR ManorCare provides for annual rent of $524 million beginning April 1, 2014 (prior to April 1, 2014, annual rent was $506 million). The rent increases by 3.5% per year over the next two 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.

 

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The following table summarizes the Company’s internal ratings for net investment in DFLs at June 30, 2014 (in thousands):

 

 

 

Carrying

 

Percentage of
DFL

 

Internal Ratings

 

Investment Type

 

Amount

 

Portfolio

 

Performing DFLs

 

Watch List DFLs

 

Workout DFLs

 

Senior housing

 

$

1,488,704

 

20

 

$

1,116,401

 

$

372,303

 

$

 

Post-acute/skilled nursing

 

5,611,283

 

78

 

5,611,283

 

 

 

Hospital

 

123,891

 

2

 

123,891

 

 

 

 

 

$

7,223,878

 

100

 

$

6,851,575

 

$

372,303

 

$

 

 

During the quarter ended September 30, 2013, the Company placed a 14-property senior housing DFL (the “DFL Portfolio”) on non-accrual status. Based on the Company’s determination that the timing of the collection of all rental payments was no longer reasonably assured, rental revenue for the DFL Portfolio is recognized on a cash basis. Furthermore, the Company determined that the DFL Portfolio was not impaired at September 30, 2013, based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s $376 million carrying amount. The fair value of the DFL Portfolio was estimated based on a discounted cash flow model, which inputs are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the three months ended June 30, 2014 and 2013, the Company recognized DFL income of $5 million and $7 million, respectively, and received cash payments of $6 million in each period, respectively, from the DFL Portfolio. During the six months ended June 30, 2014 and 2013, the Company recognized DFL income of $10 million and $14 million, respectively, and received cash payments of $12 million in each period from the DFL Portfolio. The carrying value of the DFL Portfolio was $372 million and $374 million at June 30, 2014 and December 31, 2013, respectively. At June 30, 2014, the Company believes the fair value of the collateral supporting this loan is in excess of its carrying value.

 

(6)   Loans Receivable

 

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

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

233,854

 

$

233,854

 

$

 

$

234,455

 

$

234,455

 

Other(1) 

 

157,819

 

 

157,819

 

147,669

 

 

147,669

 

Unamortized discounts, fees and costs

 

 

(2,546

)

(2,546

)

 

(2,713

)

(2,713

)

Allowance for loan losses

 

 

(13,410

)

(13,410

)

 

(13,410

)

(13,410

)

 

 

$

157,819

 

$

217,898

 

$

375,717

 

$

147,669

 

$

218,332

 

$

366,001

 

 


(1)          Includes $128 million and $117 million at June 30, 2014 and December 31, 2013, respectively, of construction loans outstanding related to senior housing development projects.  At June 30, 2014, the Company had $19.5 million remaining under its commitments to fund development projects.

 

The following table summarizes the Company’s internal ratings for loans receivable at June 30, 2014 (in thousands):

 

 

 

Carrying

 

Percentage of
Loan

 

Internal Ratings

 

Investment Type

 

Amount

 

Portfolio

 

Performing Loans

 

Watch List Loans

 

Workout Loans

 

Real estate secured

 

$

157,819

 

42

 

$

157,819

 

$

 

$

 

Other secured

 

217,898

 

58

 

200,428

 

 

17,470

 

 

 

$

375,717

 

100

 

$

358,247

 

$

 

$

17,470

 

 

Other Secured Loans

 

Barchester Loan.  On May 2, 2013, the Company acquired £121 million ($188 million) of subordinated debt at a discount for £109 million ($170 million). The loan was secured by an interest in 160 facilities leased and operated by Barchester Healthcare (“Barchester”). On August 23, 2013, the Company acquired an additional investment in this loan of £9 million ($14 million) at a discount for £5 million ($8 million). This loan accrued interest on its face value at a floating rate of LIBOR plus a weighted-average margin of 3.14%. 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. On September 6, 2013, the Company received £129 million ($202 million) from the par payoff of its Barchester debt investments. As a result, the Company recognized interest income of $24 million primarily representing the debt investment’s unamortized discounts. A portion of the proceeds from the Barchester repayment were used to repay the total outstanding amount of the Company’s GBP denominated draw on its revolving line of credit facility.

 

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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”), as part of the recapitalization of a post-acute/skilled nursing portfolio. The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. At June 30, 2014, the loans were subordinate to $442 million of senior mortgage debt. The loans bear interest at fixed rates of 12% and 14% per annum for the First and Second Tranches, respectively. This loan facility has a total term of up to 63 months from the First Tranche closing, is prepayable at the borrower’s option and is secured by real estate partnership interests. The loans are subject to prepayment premiums if repaid on or before the third anniversary from the First Tranche 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 assets of the Borrower. The Borrower’s collateral is comprised primarily of a partnership interest in an operating surgical facility that leases a property owned by the Company. This loan is on cost recovery status. The carrying value of the loan, net of an allowance for loan losses of $13 million, was $17.5 million and $18.1 million at June 30, 2014 and December 31, 2013, respectively. During the three and six months ended June 30, 2014, the Company received cash payments from the Borrower of $0.6 million. At June 30, 2014, the Company believes the fair value of the collateral supporting this loan is in excess of its carrying value.

 

A reconciliation of the Company’s allowance related to the Company’s senior secured loan to Delphis follows (in thousands):

 

 

 

Amount

 

Balance at January 1, 2014

 

$

13,410

 

Additions

 

 

Balance at June 30, 2014

 

$

13,410

 

 

(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, 2014 (dollars in thousands):

 

Entity(1)

 

Segment

 

Investment(2)

 

Ownership%

 

HCR ManorCare

 

post-acute/skilled nursing

 

$

80,777

 

9.4

 

HCP Ventures III, LLC

 

medical office

 

6,944

 

30

 

HCP Ventures IV, LLC

 

medical office and hospital

 

28,369

 

20

 

HCP Life Science(3) 

 

life science

 

68,329

 

50-63

 

Suburban Properties, LLC

 

medical office

 

5,952

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

359

 

 

 

 

 

 

 

$

190,730

 

 

 

 

 

 

 

 

 

 

 

Edgewood Assisted Living Center, LLC

 

senior housing

 

$

(384

)

 

 

Seminole Shores Living Center, LLC

 

senior housing

 

(580

)

 

 

 

 

 

 

$

(964

)

 

 

 


(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 ventures. Negative balances are recorded in accounts payable and accrued liabilities on the Company’s Condensed Consolidated Balance Sheets. Includes a 72% interest in a senior housing partnership that has a zero investment balance.

(3)          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 (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Real estate, net

 

$

3,627,622

 

$

3,662,450

 

Goodwill and other assets, net

 

5,326,719

 

5,384,553

 

Total assets

 

$

8,954,341

 

$

9,047,003

 

 

 

 

 

 

 

Capital lease obligations and mortgage debt

 

$

6,700,301

 

$

6,768,815

 

Accounts payable

 

1,033,229

 

1,045,260

 

Other partners’ capital

 

1,089,086

 

1,098,228

 

HCP’s capital(1)

 

131,725

 

134,700

 

Total liabilities and partners’ capital

 

$

8,954,341

 

$

9,047,003

 

 


(1)          The combined basis difference of the Company’s investments in these joint ventures of $58 million, as of June 30, 2014, 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,

 

 

 

2014

 

2013

 

2014

 

2013

 

Total revenues

 

$

1,064,655

 

$

1,051,012

 

$

2,137,843

 

$

2,135,263

 

Loss from discontinued operations

 

(4,200

)

(3,000

)

(5,600

)

(5,700

)

Net (loss) income

 

(11,834

)

10,122

 

(3,973

)

20,494

 

HCP’s share of earnings(1) 

 

14,692

 

15,585

 

29,220

 

30,386

 

Fees earned by HCP

 

444

 

499

 

893

 

942

 

Distributions received by HCP

 

566

 

1,157

 

3,768

 

2,528

 

 


(1)          The Company’s joint venture interest in HCR ManorCare is accounted for using the equity method and results in an ongoing elimination of DFL income proportional to HCP’s ownership in HCR ManorCare. The elimination of the respective proportional lease expense at the HCR ManorCare level in substance results in $16 million and $15 million of DFL income that is recharacterized to the Company’s share of earnings from HCR ManorCare (equity income from unconsolidated joint ventures) for the three months ended June 30, 2014 and 2013, respectively. For both the six months ended June 30, 2014 and 2013, $31 million of DFL income was recharacterized to the Company’s share of earnings from HCR ManorCare.

 

(8)         Intangibles

 

At June 30, 2014 and December 31, 2013, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles, were $796 million and $781 million, respectively. At June 30, 2014 and December 31, 2013, the accumulated amortization of intangible assets was $318 million and $291 million, respectively.

 

At both June 30, 2014 and December 31, 2013, intangible lease liabilities, comprised of below market lease intangibles and above market ground lease intangibles were $207 million. At June 30, 2014 and December 31, 2013, the accumulated amortization of intangible liabilities was $117 million and $108 million, respectively.

 

(9)         Other Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Straight-line rent assets, net of allowance of $34,274 and $34,230 respectively

 

$

392,766

 

$

368,919

 

Marketable debt securities, net

 

251,888

 

244,089

 

Leasing costs, net

 

104,984

 

104,601

 

Deferred financing costs, net

 

45,782

 

42,106

 

Goodwill

 

50,346

 

50,346

 

Other(1) 

 

94,242

 

57,644

 

Total other assets

 

$

940,008

 

$

867,705

 

 


(1)    Includes a $5.4 million allowance for losses related to accrued interest receivable on the Delphis loan, which accrued interest is included in other assets. At both June 30, 2014 and December 31, 2013, the carrying value of interest accrued related to the Delphis loan was zero. Also includes a loan receivable for $12 million and $10 million at June 30, 2014 and December 31, 2013, respectively, from HCP Ventures IV, LLC, an unconsolidated joint venture (see Note 7 for additional information). The loan bears interest at a fixed rate of 12% per annum and matures in May 2015.

 

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During the six months ended June 30, 2013, the Company realized gains from the sale of marketable equity securities of $11 million that were included in other income, net.

 

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 (par value of $237 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 UK. 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

 

On March 31, 2014, the Company amended its unsecured revolving line of credit facility (the “Facility”) with a syndicate of banks, which was scheduled to mature in March 2016, increasing the borrowing capacity by $500 million to $2.0 billion. The amended Facility matures on March 31, 2018, with a one-year committed extension option. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon the Company’s debt ratings. The Company pays a facility fee on the entire revolving commitment that depends on its debt ratings. Based on the Company’s debt ratings at June 30, 2014, the margin on the Facility was 0.925%, and the facility fee was 0.15%. 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, 2014, the Company had $310 million outstanding under the Facility with a weighted average effective interest rate of 1.42%.

 

On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million ($234 million at June 30, 2014) four-year unsecured term loan (the “Term Loan”). Based on the Company’s debt ratings at June 30, 2014, the Term Loan accrues interest at a rate of GBP LIBOR plus 1.20%. 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% and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility and Term Loan also require a Minimum Consolidated Tangible Net Worth of $9.5 billion at June 30, 2014. At June 30, 2014, the Company was in compliance with each of these restrictions and requirements of the Facility and Term Loan.

 

Senior Unsecured Notes

 

At June 30, 2014, the Company had senior unsecured notes outstanding with an aggregate principal balance of $6.9 billion. At June 30, 2014, interest rates on the notes ranged from 2.79% to 6.99% with a weighted average effective interest rate of 5.06% and a weighted average maturity of six years. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at June 30, 2014.

 

On February 12, 2014, the Company issued $350 million of 4.20% senior unsecured notes due 2024. The notes were priced at 99.537% of the principal amount with an effective yield-to-maturity of 4.257%; net proceeds from this offering were $346 million.

 

On February 1, 2014, the Company repaid $400 million of maturing senior unsecured notes, which accrued interest at a rate of 2.7%. The senior unsecured notes were repaid with a portion of the proceeds from the Company’s November 2013 bond offering.

 

On December 16, 2013, the Company repaid $400 million of maturing senior unsecured notes, which accrued interest at a rate of 5.65%. The senior unsecured notes were repaid with a portion of the proceeds from the Company’s November 2013 bond offering.

 

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Table of Contents

 

On November 12, 2013, the Company issued $800 million of 4.25% senior unsecured notes due 2023. The notes were priced at 99.540% of the principal amount with an effective yield to maturity of 4.307%; net proceeds from this offering were $789 million.

 

On February 28, 2013, the Company repaid $150 million of maturing senior unsecured notes, which accrued interest at a rate of 5.625%.

 

Mortgage Debt

 

At June 30, 2014, the Company had $1.2 billion in aggregate principal amount of mortgage debt outstanding secured by 94 healthcare facilities (including redevelopment properties) with a carrying value of $1.5 billion. At June 30, 2014, interest rates on the mortgage debt ranged from 0.44% to 8.69% with a weighted average effective interest rate of 6.20% 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.

 

Debt Maturities

 

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2014 (in thousands):

 

Year

 

Bank Line of
Credit

 

Term Loan(1)

 

Senior
Unsecured
Notes

 

Mortgage
Debt

 

Total(2)

 

2014 (Six months)

 

$

 

$

 

$

 

$

11,573

 

$

11,573

 

2015

 

 

 

400,000

 

308,421

 

708,421

 

2016

 

 

234,352

 

900,000

 

291,736

 

1,426,088

 

2017

 

 

 

750,000

 

550,477

 

1,300,477

 

2018

 

310,000

 

 

600,000

 

6,583

 

916,583

 

Thereafter

 

 

 

4,200,000

 

65,242

 

4,265,242

 

 

 

310,000

 

234,352

 

6,850,000

 

1,234,032

 

8,628,384

 

Discounts, net

 

 

 

(23,116

)

(4,259

)

(27,375

)

 

 

$

310,000

 

$

234,352

 

$

6,826,884

 

$

1,229,773

 

$

8,601,009

 

 


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

(2)          Excludes $73 million of other debt that represents Life Care Bonds that have no scheduled maturities that are discussed below.

 

Other Debt

 

At June 30, 2014, the Company had $73 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 generally refundable to the residents upon the termination of the contract or upon the successful resale of the unit.

 

(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.

 

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Table of Contents

 

Concentration of Credit Risk

 

Concentrations of credit risks arise when one or more 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.

 

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 assets and revenues:

 

The following table lists the Company’s senior housing 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

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

HCR ManorCare

 

11

%

11

%

10

%

10

%

10

%

10

%

Brookdale Senior Living (“Brookdale”)(1) 

 

46

 

48

 

46

 

46

 

46

 

46

 

Sunrise Senior Living (“Sunrise”)(2)

 

17

 

17

 

11

 

13

 

11

 

13

 

 

The following table lists the Company’s post-acute/skilled nursing concentrations:

 

 

 

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

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

HCR ManorCare

 

89

%

89

%

86

%

87

%

86

%

88

%

 

The following table lists the total Company concentrations:

 

 

 

Percentage of
Total Company 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

 

2014

 

2013

 

2014

 

2013

 

2014

 

2013

 

HCR ManorCare

 

32

%

32

%

28

%

29

%

28

%

28

%

Brookdale(1) 

 

19

 

19

 

17

 

17

 

17

 

17

 

Sunrise(2)

 

7

 

7

 

4

 

5

 

4

 

5

 

 


(1)          On July 31, 2014, Brookdale completed its acquisition of Emeritus Corporation (“Emeritus”). These percentages of segment revenues, total revenues, segment assets and total assets for all periods presented are prepared on a pro forma basis to reflect the combined concentration for Brookdale and Emeritus, as if the merger had occurred as of the beginning of the periods presented. Additionally, on April 23, 2014, the Company agreed to amend or terminate its Emeritus (pre-merger) leases and enter into two RIDEA joint ventures with Brookdale (see Note 20 for additional information regarding these potential transactions).Percentages do not include senior housing facilities that Brookdale manages (is not a tenant) on behalf of the Company, under a RIDEA structure.

(2)          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.

 

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Table of Contents

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Real estate and other property, net

 

$

2,970.7

 

$

2,993.2

 

Cash and cash equivalents

 

150.7

 

141.8

 

Goodwill, intangible and other assets, net

 

5,099.9

 

5,174.9

 

Total assets

 

$

8,221.3

 

$

8,309.9

 

 

 

 

 

 

 

Debt and financing obligations

 

$

6,191.7

 

$

6,258.5

 

Accounts payable, accrued liabilities and other

 

996.4

 

1,013.4

 

Total equity

 

1,033.2

 

1,038.0

 

Total liabilities and equity

 

$

8,221.3

 

$

8,309.9

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

1,039.1

 

$

1,024.3

 

$

2,086.7

 

$

2,083.8

 

Operating, general and administrative expense

 

(914.5

)

(864.4

)

(1,810.3

)

(1,764.0

)

Depreciation and amortization expense

 

(35.3

)

(35.7

)

(70.9

)

(72.4

)

Interest expense

 

(102.2

)

(103.9

)

(204.7

)

(208.1

)

Other income (expense), net

 

1.6

 

(0.5

)

4.5

 

1.7

 

(Loss) income from continuing operations before income tax benefit (expense)

 

(11.3

)

19.8

 

5.3

 

41.0

 

Income tax benefit (expense)

 

4.6

 

(6.7

)

(2.2

)

(13.5

)

(Loss) income from continuing operations

 

(6.7

)

13.1

 

3.1

 

27.5

 

Loss from discontinued operations, net of taxes

 

(4.2

)

(3.0

)

(5.6

)

(5.7

)

Net (loss) income

 

$

(10.9

)

$

10.1

 

$

(2.5

)

$

21.8

 

 

Brookdale is subject to the registration and reporting requirements of the SEC and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale contained or referred to in this Quarterly Report on Form 10-Q has been derived from SEC filings made by Brookdale, as the case may be, or other publicly available information, or was provided to the Company by Brookdale, and the Company has not verified this information through an independent investigation or otherwise. The Company has no reason to believe that this information is inaccurate in any material respect, but the Company cannot assure the reader of its accuracy. The Company is providing this data for informational purposes only, and encourages the reader to obtain Brookdale’s publicly available filings, which can be found at the SEC’s website at www.sec.gov.

 

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 $108 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 $372 million as of June 30, 2014.

 

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Table of Contents

 

(12) Equity

 

Common Stock

 

The following table lists the common stock cash dividends declared by the Company in 2014:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

January 30

 

February 10

 

$

0.545

 

February 25

 

May 1

 

May 12

 

0.545

 

May 27

 

July 31

 

August 11

 

0.545

 

August 26

 

 

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

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

Dividend Reinvestment and Stock Purchase Plan

 

1,386

 

925

 

Conversion of DownREIT units(1) 

 

2

 

85

 

Exercise of stock options

 

111

 

852

 

Vesting of restricted stock units

 

567

 

103

 

 


(1)          Non-managing member LLC units.

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2014

 

2013

 

Unrealized losses on available for sale securities

 

$

(4

)

$

 

Unrealized losses on cash flow hedges, net

 

(10,846

)

(10,797

)

Supplemental Executive Retirement Plan minimum liability

 

(2,802

)

(2,910

)

Cumulative foreign currency translation adjustment

 

1,983

 

(780

)

Total accumulated other comprehensive loss

 

$

(11,669

)

$

(14,487

)

 

Noncontrolling Interests

 

At June 30, 2014, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”), for which the Company is the managing member. At June 30, 2014, the carrying and fair values of these DownREIT units were $189 million and $253 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 primarily invests, through the acquisition and development of real estate, in single operator or tenant properties and debt issued by operators in these sectors. Under the medical office segment, the Company invests through the acquisition and development of MOBs, 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 herein and in the Company’s 2013 Annual Report on Form 10-K filed with the SEC. There were no intersegment sales or transfers during the six months ended June 30, 2014 and 2013. The Company evaluates performance based upon net operating income from continuing operations (“NOI”), adjusted (cash) NOI and interest income of the investments in each segment.

 

Non-segment assets consist primarily of corporate assets including cash and cash equivalents, 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.

 

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Table of Contents

 

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

 

For the three months ended June 30, 2014:

 

Segments

 

Rental
Revenues
(1)

 

Resident Fees
and Services

 

Interest
Income

 

Investment
Management
Fee Income

 

Total
Revenues

 

NOI(2)

 

Adjusted
(Cash) NOI(2)

 

Senior housing

 

$

151,904

 

$

37,939

 

$

3,430

 

$

 

$

193,273

 

$

165,020

 

$

153,476

 

Post-acute/skilled

 

138,548

 

 

13,507

 

 

152,055

 

138,015

 

122,105

 

Life science

 

77,541

 

 

 

1

 

77,542

 

62,092

 

59,339

 

Medical office

 

91,541

 

 

 

443

 

91,984

 

54,376

 

53,770

 

Hospital

 

21,267

 

 

 

 

21,267

 

20,370

 

20,475

 

Total

 

$

480,801

 

$

37,939

 

$

16,937

 

$

444

 

$

536,121

 

$

439,873

 

$

409,165

 

 

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
(Cash) NOI(2)

 

Senior housing

 

$

150,261

 

$

36,394

 

$

2,806

 

$

 

$

189,461

 

$

163,319

 

$

148,005

 

Post-acute/skilled

 

135,255

 

 

11,029

 

 

146,284