hcp_Current Folio_10Q

Table of Contents 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

 

 

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

 

For the quarterly period ended March 31, 2016.

 

OR

 

 

 

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  NO 

 

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  NO 

 

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 

 

Accelerated Filer 

 

 

 

Non-accelerated Filer 

 

Smaller Reporting Company 

(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  NO 

 

As of April 29, 2016, there were 467,087,589 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 (Unaudited):

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

 

 

 

 

Consolidated Statements of Equity

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

 

 

 

 

Item 2. 

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

34 

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

51 

 

 

 

 

 

Item 4. 

Controls and Procedures

52 

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1A. 

Risk Factors

53 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

53 

 

 

 

 

 

Item 5. 

Other Information

54 

 

 

 

 

 

Item 6. 

Exhibits

55 

 

 

 

 

 

Signatures 

57 

 

 

 

 

 

2


 

Table of Contents

HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

Buildings and improvements

 

$

12,314,826

 

$

12,198,704

 

Development costs and construction in progress

 

 

430,104

 

 

388,576

 

Land

 

 

1,956,841

 

 

1,948,757

 

Accumulated depreciation and amortization

 

 

(2,636,636)

 

 

(2,541,334)

 

Net real estate

 

 

12,065,135

 

 

11,994,703

 

Net investment in direct financing leases

 

 

5,857,210

 

 

5,905,009

 

Loans receivable, net

 

 

768,896

 

 

768,743

 

Investments in and advances to unconsolidated joint ventures

 

 

608,665

 

 

605,244

 

Accounts receivable, net of allowance of $4,161 and $3,261, respectively

 

 

45,224

 

 

48,929

 

Cash and cash equivalents

 

 

94,665

 

 

346,500

 

Restricted cash

 

 

46,280

 

 

60,616

 

Intangible assets, net

 

 

585,330

 

 

603,706

 

Real estate assets held for sale, net

 

 

311,243

 

 

314,126

 

Other assets, net

 

 

817,279

 

 

802,273

 

Total assets(1)

 

$

21,199,927

 

$

21,449,849

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Bank line of credit

 

$

810,313

 

$

397,432

 

Term loans

 

 

511,737

 

 

524,807

 

Senior unsecured notes

 

 

8,623,376

 

 

9,120,107

 

Mortgage debt

 

 

895,289

 

 

932,212

 

Other debt

 

 

95,229

 

 

94,445

 

Intangible liabilities, net

 

 

52,794

 

 

56,147

 

Intangible liabilities on assets held for sale, net

 

 

18,064

 

 

19,126

 

Accounts payable and accrued liabilities

 

 

433,144

 

 

436,239

 

Deferred revenue

 

 

129,656

 

 

123,017

 

Total liabilities(1)

 

 

11,569,602

 

 

11,703,532

 

Commitments and contingencies

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 466,924,935 and 465,488,492 shares issued and outstanding, respectively

 

 

466,925

 

 

465,488

 

Additional paid-in capital

 

 

11,685,541

 

 

11,647,039

 

Cumulative dividends in excess of earnings

 

 

(2,890,046)

 

 

(2,738,414)

 

Accumulated other comprehensive loss

 

 

(31,673)

 

 

(30,470)

 

Total stockholders’ equity

 

 

9,230,747

 

 

9,343,643

 

Joint venture partners

 

 

218,110

 

 

217,066

 

Non-managing member unitholders

 

 

181,468

 

 

185,608

 

Total noncontrolling interests

 

 

399,578

 

 

402,674

 

Total equity

 

 

9,630,325

 

 

9,746,317

 

Total liabilities and equity

 

$

21,199,927

 

$

21,449,849

 


(1)

HCP, Inc.’s consolidated total assets and total liabilities at March 31, 2016 and December 31, 2015 include certain assets of variable interest entities (“VIEs”) that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at March 31, 2016 include VIE assets as follows: buildings and improvements $3.4 billion; development costs $60 million; land $327 million; accumulated depreciation and amortization $567 million; investments in unconsolidated joint ventures $14 million; accounts receivable $18 million; cash $60 million; restricted cash $23 million; intangible assets, net $197 million; and other assets, net $66 million. Total assets at December 31, 2015 include VIE assets as follows: buildings and improvements $3.4 billion; development costs $54 million; land $327 million; accumulated depreciation and amortization $537 million; investments in unconsolidated joint ventures $14 million; accounts receivable $19 million; cash $61 million; restricted cash $21 million; intangible assets, net $204 million; and other assets, net $63 million. Total liabilities at March 31, 2016 include VIE liabilities as follows: mortgage debt $573 million; intangible liabilities, net $10 million; accounts payable and accrued liabilities of $107 million and deferred revenue of $23 million from VIEs. Total liabilities at December 31, 2015 include VIE liabilities as follows: mortgage debt $589 million; intangible liabilities, net $10 million; accounts payable and accrued liabilities of $107 million and deferred revenue of $19 million. See Note 16 to the Consolidated Financial Statements for additional information.

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

 

3


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

Rental and related revenues

 

$

297,194

 

$

275,082

 

Tenant recoveries

 

 

31,737

 

 

29,896

 

Resident fees and services

 

 

165,763

 

 

105,013

 

Income from direct financing leases

 

 

127,968

 

 

167,078

 

Interest income

 

 

18,029

 

 

33,262

 

Investment management fee income

 

 

91

 

 

460

 

Total revenues

 

 

640,782

 

 

610,791

 

Costs and expenses:

 

 

 

 

 

 

 

Interest expense

 

 

122,062

 

 

116,780

 

Depreciation and amortization

 

 

141,322

 

 

114,522

 

Operating

 

 

176,955

 

 

132,031

 

General and administrative

 

 

25,499

 

 

24,773

 

Acquisition and pursuit costs

 

 

2,475

 

 

3,390

 

Impairment

 

 

 —

 

 

478,464

 

Total costs and expenses

 

 

468,313

 

 

869,960

 

Other income:

 

 

 

 

 

 

 

Gain on sales of real estate

 

 

 —

 

 

6,264

 

Other income, net

 

 

1,222

 

 

1,724

 

Total other income, net

 

 

1,222

 

 

7,988

 

Income (loss) before income taxes and equity (loss) income from unconsolidated joint ventures

 

 

173,691

 

 

(251,181)

 

Income tax (expense) benefit

 

 

(53,038)

 

 

77

 

Equity (loss) income from unconsolidated joint ventures

 

 

(908)

 

 

13,601

 

Net income (loss)

 

 

119,745

 

 

(237,503)

 

Noncontrolling interests’ share in earnings

 

 

(3,626)

 

 

(3,111)

 

Net income (loss) attributable to HCP, Inc.

 

 

116,119

 

 

(240,614)

 

Participating securities’ share in earnings

 

 

(357)

 

 

(335)

 

Net income (loss) applicable to common shares

 

$

115,762

 

$

(240,949)

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.25

 

$

(0.52)

 

Diluted

 

$

0.25

 

$

(0.52)

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

Basic

 

 

466,074

 

 

460,880

 

Diluted

 

 

466,262

 

 

460,880

 

Dividends declared per common share

 

$

0.575

 

$

0.565

 

 

See accompanying Notes to the Consolidated Financial Statements.

4


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

  

2016

  

2015

 

Net income (loss)

 

$

119,745

 

$

(237,503)

 

 

 

 

 

 

 

 

 

Other comprehensive loss:

 

 

 

 

 

 

 

Change in net unrealized losses on securities

 

 

(15)

 

 

(5)

 

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

 

 

 

 

 

 

 

Unrealized (losses) gains

 

 

(690)

 

 

2,339

 

Reclassification adjustment realized in net income

 

 

169

 

 

(6)

 

Change in Supplemental Executive Retirement Plan obligation

 

 

70

 

 

69

 

Foreign currency translation adjustment

 

 

(737)

 

 

(6,963)

 

Total other comprehensive loss

 

 

(1,203)

 

 

(4,566)

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

118,542

 

 

(242,069)

 

Total comprehensive income attributable to noncontrolling interests

 

 

(3,626)

 

 

(3,111)

 

Total comprehensive income (loss) attributable to HCP, Inc.

 

$

114,916

 

$

(245,180)

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

5


 

Table of Contents

HCP, Inc.

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

 

Loss

 

Equity

 

Interests

 

Equity

 

January 1, 2016

 

465,488

 

$

465,488

 

$

11,647,039

 

$

(2,738,414)

 

$

(30,470)

 

$

9,343,643

 

$

402,674

 

$

9,746,317

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

116,119

 

 

 —

 

 

116,119

 

 

3,626

 

 

119,745

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,203)

 

 

(1,203)

 

 

 —

 

 

(1,203)

 

Issuance of common stock, net

 

1,428

 

 

1,428

 

 

33,978

 

 

 —

 

 

 —

 

 

35,406

 

 

 —

 

 

35,406

 

Conversion of DownREIT units to common stock

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,136)

 

 

(4,136)

 

Repurchase of common stock

 

(102)

 

 

(102)

 

 

(3,526)

 

 

 —

 

 

 —

 

 

(3,628)

 

 

 —

 

 

(3,628)

 

Exercise of stock options

 

111

 

 

111

 

 

2,741

 

 

 —

 

 

 —

 

 

2,852

 

 

 —

 

 

2,852

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

5,345

 

 

 —

 

 

 —

 

 

5,345

 

 

 —

 

 

5,345

 

Common dividends ($0.575 per share)

 

 —

 

 

 —

 

 

 —

 

 

(268,186)

 

 

 —

 

 

(268,186)

 

 

 —

 

 

(268,186)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

 —

 

 

(36)

 

 

(4,853)

 

 

(4,889)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,200

 

 

2,200

 

Deconsolidation of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

435

 

 

 —

 

 

435

 

 

67

 

 

502

 

March 31, 2016

 

466,925

 

$

466,925

 

$

11,685,541

 

$

(2,890,046)

 

$

(31,673)

 

$

9,230,747

 

$

399,578

 

$

9,630,325

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Loss

 

Equity

 

Interests

 

Equity

 

January 1, 2015

 

459,746

 

$

459,746

 

$

11,431,987

 

$

(1,132,541)

 

$

(23,895)

 

$

10,735,297

 

$

261,802

 

$

10,997,099

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(240,614)

 

 

 —

 

 

(240,614)

 

 

3,111

 

 

(237,503)

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,566)

 

 

(4,566)

 

 

 —

 

 

(4,566)

 

Issuance of common stock, net

 

1,155

 

 

1,155

 

 

35,657

 

 

 —

 

 

 —

 

 

36,812

 

 

(1,608)

 

 

35,204

 

Repurchase of common stock

 

(128)

 

 

(128)

 

 

(5,968)

 

 

 —

 

 

 —

 

 

(6,096)

 

 

 —

 

 

(6,096)

 

Exercise of stock options

 

811

 

 

811

 

 

26,410

 

 

 —

 

 

 —

 

 

27,221

 

 

 —

 

 

27,221

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

6,165

 

 

 —

 

 

 —

 

 

6,165

 

 

 —

 

 

6,165

 

Common dividends ($0.565 per share)

 

 —

 

 

 —

 

 

 —

 

 

(260,686)

 

 

 —

 

 

(260,686)

 

 

 —

 

 

(260,686)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(263)

 

 

 —

 

 

 —

 

 

(263)

 

 

(3,861)

 

 

(4,124)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,932

 

 

2,932

 

March 31, 2015

 

461,584

 

$

461,584

 

$

11,493,988

 

$

(1,633,841)

 

$

(28,461)

 

$

10,293,270

 

$

262,376

 

$

10,555,646

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

6


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

  

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

119,745

 

$

(237,503)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

141,322

 

 

114,522

 

Amortization of market lease intangibles, net

 

 

(468)

 

 

(378)

 

Amortization of deferred compensation

 

 

5,345

 

 

6,165

 

Amortization of deferred financing costs, net

 

 

5,280

 

 

4,752

 

Straight-line rents

 

 

(7,576)

 

 

(9,546)

 

Loan and direct financing lease non-cash interest

 

 

165

 

 

(21,032)

 

Deferred rental revenues

 

 

(619)

 

 

(902)

 

Equity loss (income) from unconsolidated joint ventures

 

 

908

 

 

(13,601)

 

Distributions of earnings from unconsolidated joint ventures

 

 

1,589

 

 

1,159

 

Lease termination income, net

 

 

 —

 

 

(1,103)

 

Gain on sales of real estate

 

 

 —

 

 

(6,264)

 

Deferred income tax expense

 

 

49,156

 

 

 —

 

Foreign exchange and other (gains) losses, net

 

 

(89)

 

 

134

 

Impairment

 

 

 —

 

 

478,464

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

3,705

 

 

(3,814)

 

Other assets

 

 

(6,847)

 

 

(5,839)

 

Accounts payable and accrued liabilities

 

 

(42,999)

 

 

(75,146)

 

Net cash provided by operating activities

 

 

268,617

 

 

230,068

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(94,271)

 

 

(71,373)

 

Development of real estate

 

 

(99,096)

 

 

(61,805)

 

Leasing costs and tenant and capital improvements

 

 

(19,964)

 

 

(11,540)

 

Contributions to unconsolidated joint ventures

 

 

(10,136)

 

 

(27,279)

 

Distributions in excess of earnings from unconsolidated joint ventures

 

 

5,336

 

 

1,022

 

Principal repayments on loans receivable, direct financing leases and other

 

 

155,320

 

 

17,496

 

Investments in loans receivable and other

 

 

(117,282)

 

 

(176,504)

 

Decrease in restricted cash

 

 

14,336

 

 

1,697

 

Net cash used in investing activities

 

 

(165,757)

 

 

(328,286)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings under bank line of credit

 

 

422,897

 

 

 —

 

Repayments under bank line of credit

 

 

 —

 

 

(455,506)

 

Borrowings under term loan

 

 

 —

 

 

333,014

 

Issuance of senior unsecured notes

 

 

 —

 

 

595,110

 

Repayments of senior unsecured notes

 

 

(500,000)

 

 

(200,000)

 

Repayments of mortgage and other debt

 

 

(36,918)

 

 

(6,354)

 

Deferred financing costs

 

 

 —

 

 

(7,687)

 

Issuance of common stock and exercise of options

 

 

34,122

 

 

62,425

 

Repurchase of common stock

 

 

(3,628)

 

 

(6,096)

 

Dividends paid on common stock

 

 

(268,186)

 

 

(260,686)

 

Issuance of noncontrolling interests

 

 

2,200

 

 

1,626

 

Distributions to noncontrolling interests

 

 

(4,889)

 

 

(4,124)

 

Net cash (used in) provided by financing activities

 

 

(354,402)

 

 

51,722

 

Effect of foreign exchange on cash and cash equivalents

 

 

(293)

 

 

(144)

 

Net decrease in cash and cash equivalents

 

 

(251,835)

 

 

(46,640)

 

Cash and cash equivalents, beginning of period

 

 

346,500

 

 

183,810

 

Cash and cash equivalents, end of period

 

$

94,665

 

$

137,170

 

See accompanying Notes to the Consolidated Financial Statements.

 

7


 

Table of Contents

HCP, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 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 organized in 1985 and qualifies as a self-administered real estate investment trust (“REIT”). The Company is headquartered in Irvine, California, with offices in Nashville, Los Angeles, San Francisco and London. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s diverse portfolio is comprised of investments in the following healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital.

 

NOTE 2.  Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management’s estimates.

 

The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and 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 three months ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. 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, 2015 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”).

 

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to simplify accounting for share-based payment transactions. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statements of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within, beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-09 on January 1, 2017 to its consolidated financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-08 on January 1, 2018 to its consolidated financial position or results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar to today’s accounting, (ii) eliminate current real estate specific lease

8


 

Table of Contents

provisions, and (iii) modify classification criteria and accounting for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position or results of operations.

 

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This update requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment at each reporting period. ASU 2016-01 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted only for certain disclosure requirements. The Company is evaluating the impact of the adoption of ASU 2016-01 on January 1, 2018 to its consolidated financial position or results of operations.

 

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by requiring the acquirer to (i) recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined, (ii) record, in the same period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, and (iii) present separately or disclose the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company adopted ASU 2015-16 on January 1, 2016; the adoption of which did not have a material impact on its consolidated financial position or results of operations.

 

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 requires amendments to both the VIE and voting consolidation accounting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify (a) the identification of variable interests (fees paid to a decision maker or service provider), (b) the VIE characteristics for a limited partnership or similar entity and (c) the primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. ASU 2015-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using either a modified retrospective or retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company adopted ASU 2015-02 on January 1, 2016; the adoption of which did not have a material impact to its consolidated financial position or results of operations.

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the requirements 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted for annual periods, and interim periods within, beginning after December 15, 2016. The Company is evaluating the impact of the adoption of ASU 2014-09 on January 1, 2018 to its consolidated financial position or results of operations.

 

Reclassification 

Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Assets held for sale and associated liabilities have been reclassified on the consolidated balance sheets (see Note 4).

 

9


 

Table of Contents

 

NOTE 3.  Real Estate Property Investments

2016 Acquisitions

A summary of real estate acquisitions for the three months ended March 31, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration

 

Assets Acquired(1)

 

 

 

 

 

Liabilities

 

 

 

 

Net

 

Segment

 

Cash Paid

 

Assumed

 

Real Estate

 

Intangibles

 

Senior housing

 

$

76,362

 

$

1,200

 

$

71,875

 

$

5,687

 

Post-acute/skilled nursing

 

 

17,909

 

 

 —

 

 

16,596

 

 

1,313

 

 

 

$

94,271

 

$

1,200

 

$

88,471

 

$

7,000

 


(1)

The purchase price allocation is preliminary and may be subject to change.

 

Acquisition of Private Pay Senior Housing Portfolio (“RIDEA III”)

On June 30, 2015, the Company and Brookdale Senior Living (“Brookdale”) acquired a portfolio of 35 private pay senior housing communities from Chartwell Retirement Residences, including two leasehold interests, representing 5,025 units. The portfolio was acquired in a RIDEA structure (“RIDEA III”), with Brookdale owning a 10% noncontrolling interest. Brookdale has operated these communities since 2011 and continues to manage the communities under a long-term management agreement, which is cancellable under certain conditions (subject to a fee if terminated within seven years from the acquisition date). The Company paid $770 million in cash consideration, net of cash assumed, and assumed $32 million of net liabilities and $29 million of noncontrolling interests to acquire: (i) real estate with a fair value of $771 million, (ii) lease-up intangible assets with a fair value of $53 million and (iii) working capital of $7 million. As a result of the acquisition, the Company recognized a net termination fee of $8 million in rental and related revenues, which represents the termination value of the two leasehold interests. The lease-up intangible assets recognized were attributable to the value of the acquired underlying operating resident leases of the senior housing communities that were stabilized or nearly stabilized (i.e., resident occupancy above 80%). As of March 31, 2016, the purchase price allocation is preliminary and may be subject to change.

 

Pro Forma Results of Operations

The following unaudited pro forma consolidated results of operations assume that the RIDEA III acquisition was completed as of January 1, 2014 (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended 

    

 

    

March 31, 2015

    

Revenues

 

$

654,354

 

Net loss

 

 

(233,598)

 

Net loss applicable to HCP, Inc.

 

 

(237,099)

 

Basic earnings per common share

 

 

(0.51)

 

Diluted earnings per common share

 

 

(0.51)

 

 

2015 Other Acquisitions

A summary of real estate acquisitions for the three months ended March 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration

 

Assets Acquired

 

 

 

 

 

Liabilities

 

Noncontrolling

 

 

 

 

Net

 

Segment

 

Cash Paid

 

Assumed

 

Interest

 

Real Estate

 

Intangibles

 

Senior housing

 

$

34,068

 

$

626

 

$

1,306

 

$

34,350

 

$

1,650

 

Medical office

 

 

180

 

 

 —

 

 

 —

 

 

180

 

 

 —

 

 

 

$

34,248

 

$

626

 

$

1,306

 

$

34,530

 

$

1,650

 

 

10


 

Table of Contents

Construction, Tenant and Other Capital Improvements

A summary of the Company’s funding for construction, tenant and other capital improvements (in thousands):

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

Segment

 

2016

 

2015

Senior housing

 

$

39,513

 

$

16,172

Post-acute/skilled nursing

 

 

 —

 

 

1,960

Life science

 

 

39,070

 

 

27,391

Medical office

 

 

30,920

 

 

19,233

Hospital

 

 

 —

 

 

37

 

 

$

109,503

 

$

64,793

 

 

Subsequent Event.  In May 2016, the Company announced it entered into definitive agreements to acquire a portfolio of seven private pay senior housing communities for $190 million, including the assumption of $75 million of debt maturing in 2044 at a 4.0% rate. Consisting of 526 assisted living and memory care units, the portfolio will be managed by Senior Lifestyle Corporation in a 100% owned RIDEA structure at closing. The closing of this transaction is expected in the second half of 2016 and remains subject to customary closing conditions.

 

 

NOTE 4.  Dispositions of Real Estate

At March 31, 2016 and December 31, 2015, four life science facilities were classified as held for sale, with an aggregate carrying value of $311 million and $314 million, respectively.

 

During the three months ended March 31, 2015, the Company sold eight senior housing facilities for $51 million resulting from Brookdale’s exercise of its purchase option received as part of the 2014 Brookdale transaction.

 

Subsequent Event.  In April 2016, the Company sold a life science facility for $74 million with a carrying value of $43 million at March 31, 2016.  

 

 

NOTE 5.  Net Investment in Direct Financing Leases

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2016

    

2015

 

Minimum lease payments receivable

 

$

26,044,849

 

$

26,283,392

 

Estimated residual values

 

 

3,930,300

 

 

3,900,679

 

Less unearned income

 

 

(23,300,899)

 

 

(23,462,022)

 

Net investment in direct financing leases before allowance

 

 

6,674,250

 

 

6,722,049

 

Allowance for DFL losses

 

 

(817,040)

 

 

(817,040)

 

Net investment in direct financing leases

 

$

5,857,210

 

$

5,905,009

 

Properties subject to direct financing leases

 

 

340

 

 

348

 

 

HCR ManorCare, Inc.

The Company acquired 334 post-acute, skilled nursing and assisted living facilities in its 2011 transaction with HCR ManorCare Inc. (“HCRMC”) and entered into a triple-net Master Lease and Security Agreement (the “Master Lease”) with a subsidiary (“Lessee”) of HCRMC.

 

As part of the Company’s fourth quarter 2015 review process, including its internal rating evaluation, it assessed the collectibility of all contractual rent payments under the HCRMC amended master lease (the “Amended Master Lease”). The Company’s evaluation included, but was not limited to, consideration of: (i) the continued decline in HCRMC’s operating performance and fixed charge coverage ratio during the second half of 2015, with the most significant deterioration occurring during the fourth quarter, (ii) the reduced growth outlook for the post-acute/skilled nursing business

11


 

Table of Contents

and (iii) HCRMC’s 2015 audited financial statements. The Company determined that the timing and amounts owed under the HCRMC DFL investments were no longer reasonably assured and assigned an internal rating of “Watch List” as of December 31, 2015. Further, the Company placed the HCRMC DFL investments on nonaccrual and utilizes the cash method of accounting in accordance with its policy.

 

As a result of assigning an internal rating of “Watch List” for its HCRMC DFL investments during the quarterly review process, the Company further evaluated the carrying amount of its HCRMC DFL investments. As a result of the significant decline in HCRMC’s fixed charge coverage ratio in the fourth quarter of 2015, combined with a lower growth outlook for the post-acute/skilled nursing business, the Company determined that it was probable that its HCRMC DFL investments were impaired and the amount of the loss could be reasonably estimated. In the fourth quarter of 2015, the Company recorded an allowance for DFL losses (impairment charge) of $817 million, reducing the carrying amount of its HCRMC DFL investments from $6.0 billion to $5.2 billion.

 

In December 2015, the Company reduced the carrying amount of its equity investment in HCRMC to zero, and income will be recognized only if cash distributions are received from HCRMC; as a result, the Company no longer recharacterizes (eliminates) its proportional ownership share of income from DFLs to equity income from unconsolidated joint ventures (see Note 7).

 

During the quarter ended March 31, 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that are under the Master Lease. HCRMC will receive an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by HCP. During the year ended December 31, 2015, the Company completed sales of 22 non-strategic HCRMC facilities for $219 million. During the three months ended March 31, 2016, the Company sold an additional 11 facilities for $62 million, bringing the total facilities sold through May 9, 2016 to 33, with the remaining facility sales expected to close by the end of 2016.

 

On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the Master Lease (the “HCRMC Lease Amendment”) effective April 1, 2015. The HCRMC Lease Amendment reduced initial annual rent by a net $68 million from $541 million to $473 million. Commencing on April 1, 2016, the minimum rent escalation was reset to 3.0% for each lease year through the expiration of the initial term of each applicable pool of facilities. Prior to the HCRMC Lease Amendment, rent payments would have increased 3.5% on April 1, 2015 and 2016 and 3.0% thereafter. The initial term was extended five years to an average of 16 years, and the extension options’ aggregate terms remained the same.

 

As consideration for the rent reduction, the Company received a Deferred Rent Obligation (“DRO”) from the Lessee equal to an aggregate amount of $525 million, which was allocated into two tranches: (i) a Tranche A DRO of $275 million and (ii) a Tranche B DRO of $250 million. The Lessee made rental payments equal to 6.9% of the outstanding amount (representing $19 million) for the initial lease year until the entire Tranche A DRO was paid in full in March 2016. Commencing on April 1, 2016, until the Tranche B DRO is paid in full, the outstanding principal balance of the Tranche B DRO will be increased annually by (i) 3.0% initially, (ii) 4.0% commencing on April 1, 2019, (iii) 5.0% commencing on April 1, 2020, and (iv) 6.0% commencing on April 1, 2021 and for the remainder of its term. The DRO is due and payable on the earlier of (i) certain capital or liquidity events of HCRMC, including an initial public offering or sale, or (ii) March 31, 2029, which is not subject to any extensions. The HCRMC Lease Amendment also imposes certain restrictions on the Lessee and HCRMC until the DRO is paid in full, including with respect to the payment of dividends and the transfer of interest in HCRMC.

 

Additionally, HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. Through March 31, 2016, HCRMC and HCP completed the nine facility purchases for $275 million, the proceeds of which were used to settle the Tranche A DRO. Following the purchase of a facility, the Lessee leases such facility from the Company pursuant to the Amended Master Lease. The nine facilities contribute an aggregate of $19 million of annual rent (subject to escalation) under the Amended Master Lease.

 

In March 2015, the Company recorded a net impairment charge of $478 million related to its HCRMC DFL investments. The impairment charge reduced the carrying value of the HCRMC DFL investments from $6.6 billion to $6.1 billion, based on the present value of the future lease payments effective April 1, 2015 under the Amended Master Lease discounted at the original DFL investments’ effective lease rate.

12


 

Table of Contents

 

During the three months ended March 31, 2016 and 2015, the Company recognized DFL income of $113 million and $152 million, respectively, and received cash payments of $113 million and $131 million, respectively, from the HCRMC DFL investments. During the three months ended March 31, 2015, the Company recognized a total of $21 million of net accretion related to its HCRMC DFL investments. The carrying value of the HCRMC DFL investments was $5.1 billion and $5.2 billion at March 31, 2016 and December 31, 2015, respectively.

 

The Company acquired the HCRMC DFL investments in 2011 through an acquisition of a C-Corporation, which was subject to federal and state built-in gain tax, if all the assets were sold within 10 years, of up to $2 billion. At the time, the Company intended to hold the assets for at least 10 years, at which time the assets would no longer be subject to the built-in gain tax.

 

In December 2015, the U.S. Federal Government passed legislation which permanently reduced the holding period, for federal tax purposes, to five years. The Company satisfied the five year holding period requirement in April 2016. However, certain states still require a 10-year holding period and, as such, the assets are still subject to state built-in gain tax.

 

During the three months ended March 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of approximately $49 million representing its estimated exposure to state built-in gain tax.

 

On April 20, 2015, the DOJ unsealed a previously filed complaint in the U.S. District Court for the Eastern District of Virginia against HCRMC and certain of its affiliates in three consolidated cases following a civil investigation arising out of three lawsuits filed by former employees of HCRMC under the qui tam provisions of the federal False Claims Act. The DOJ’s complaint in intervention is captioned United States of America, ex rel. Ribik, Carson, and Slough v. HCR ManorCare, Inc., ManorCare Inc., HCR ManorCare Services, LLC and Heartland Employment Services, LLC (Civil Action Numbers: 1:09cv13; 1:11cv1054; 1:14cv1228 (CMH/TCB)). The complaint alleges that HCRMC submitted claims to Medicare for therapy services that were not covered by the skilled nursing facility benefit, were not medically reasonable and necessary, and were not skilled in nature, and therefore not entitled to Medicare reimbursement. HCRMC and the DOJ have filed a motion requesting that the court adopt their Joint Proposed Discovery Plan, which establishes the scope of discovery and depositions. Under the Joint Proposed Discovery Plan, motions for summary judgment would be due to be filed in April 2017. While this litigation is at an early stage and HCRMC has indicated that it believes the claims are unjust and it will vigorously defend against them, a significant adverse judgment against HCRMC or significant settlement obligation could impact the carrying value of the Company’s HCRMC DFL investments further.  

 

See Notes 7 and 20 for additional discussion of HCRMC.

 

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at March 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Percentage of

 

Internal Ratings

 

Segment

    

Amount

    

DFL Portfolio

    

Performing DFLs

    

Watch List DFLs

    

Workout DFLs

 

Senior housing

 

$

1,794,409

 

31

 

$

261,765

 

$

1,532,644

 

$

 —

 

Post-acute/skilled nursing

 

 

3,938,910

 

67

 

 

 —

 

 

3,938,910

 

 

 —

 

Hospital

 

 

123,891

 

 2

 

 

123,891

 

 

 —

 

 

 —

 

 

 

$

5,857,210

 

100

 

$

385,656

 

$

5,471,554

 

$

 —

 

 

13


 

Table of Contents

Beginning September 30, 2013, the Company placed a 14-property senior housing DFL (the “DFL Portfolio”) on nonaccrual status and assigned an internal rating of “Watch List.” The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue from the DFL Portfolio is recognized on a cash basis. During the three months ended March 31, 2016 and 2015, the Company recognized DFL income of $3 million and $4 million, respectively, and received cash payments of $4 million and $5 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $364 million and $366 million at March 31, 2016 and December 31, 2015, respectively.

 

 

NOTE 6.  Loans Receivable

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

 

December 31, 2015

 

 

  

Real Estate

  

Other

  

 

 

  

Real Estate

  

Other

  

 

 

 

 

 

Secured

 

Secured

 

Total

 

Secured

 

Secured

 

Total

 

Mezzanine(1) (2) 

 

$

 —

 

$

657,235

 

$

657,235

 

$

 —

 

$

660,138

 

$

660,138

 

Other(2) (3) 

 

 

116,818

 

 

 —

 

 

116,818

 

 

114,322

 

 

 —

 

 

114,322

 

Unamortized discounts, fees and costs(1)

 

 

826

 

 

(5,983)

 

 

(5,157)

 

 

961

 

 

(6,678)

 

 

(5,717)

 

 

 

$

117,644

 

$

651,252

 

$

768,896

 

$

115,283

 

$

653,460

 

$

768,743

 


(1)

At March 31, 2016, included £278 million ($400 million) outstanding and £3 million ($5 million) of associated unamortized discounts, fees and costs. At December 31, 2015, included £273 million ($403 million) outstanding and £4 million ($5 million) of associated unamortized discounts, fees and costs.

(2)

At March 31, 2016, the Company had £43 million ($62 million) remaining under its commitments to fund development projects and capital expenditures under its United Kingdom (“U.K.”) development projects.

(3)

At March 31, 2016, the Company had $2 million remaining of commitments to fund development projects and capital expenditures under the senior housing development loan program.

 

Loans Receivable Internal Ratings

The following table summarizes the Company’s internal ratings for loans receivable at March 31, 2016 (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrying

 

Percentage of

 

Internal Ratings

 

Investment Type