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 September 30, 2014.

 

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 October 30, 2014, there were 459,263,486 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

 

 

 

 

Condensed Consolidated Statements of Income

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

 

 

 

Condensed Consolidated Statements of Equity

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

 

 

Item 2. 

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

35 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

58 

 

 

 

Item 4. 

Controls and Procedures

58 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

Item 1A. 

Risk Factors

60 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

60 

 

 

 

Item 6. 

Exhibits

60 

 

 

 

Signatures 

63 

 

 

 

 

2


 

Table of Contents

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

Buildings and improvements

 

$

10,852,544 

 

$

10,544,110 

 

Development costs and construction in progress

 

 

261,514 

 

 

225,869 

 

Land

 

 

1,885,081 

 

 

1,822,862 

 

Accumulated depreciation and amortization

 

 

(2,159,115)

 

 

(1,965,592)

 

Net real estate

 

 

10,840,024 

 

 

10,627,249 

 

 

 

 

 

 

 

 

 

Net investment in direct financing leases

 

 

7,245,122 

 

 

7,153,399 

 

Loans receivable, net

 

 

418,801 

 

 

366,001 

 

Investments in and advances to unconsolidated joint ventures

 

 

647,923 

 

 

196,576 

 

Accounts receivable, net of allowance of $4,073 and $1,529, respectively

 

 

34,687 

 

 

27,494 

 

Cash and cash equivalents

 

 

83,531 

 

 

300,556 

 

Restricted cash

 

 

54,448 

 

 

37,229 

 

Intangible assets, net

 

 

479,226 

 

 

489,842 

 

Real estate assets held for sale, net

 

 

 —

 

 

9,819 

 

Other assets, net

 

 

941,128 

 

 

867,705 

 

Total assets(1)

 

$

20,744,890 

 

$

20,075,870 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Bank line of credit

 

$

70,000 

 

$

 —

 

Term loan

 

 

222,118 

 

 

226,858 

 

Senior unsecured notes

 

 

7,625,041 

 

 

6,963,375 

 

Mortgage debt

 

 

1,199,633 

 

 

1,396,485 

 

Other debt

 

 

97,845 

 

 

74,909 

 

Intangible liabilities, net

 

 

88,490 

 

 

98,810 

 

Accounts payable and accrued liabilities

 

 

329,209 

 

 

318,427 

 

Deferred revenue

 

 

76,380 

 

 

65,872 

 

Total liabilities(2)

 

 

9,708,716 

 

 

9,144,736 

 

 

    

 

 

    

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 459,145,515 and 456,960,648 shares issued and outstanding, respectively

 

 

459,146 

 

 

456,961 

 

Additional paid-in capital

 

 

11,409,843 

 

 

11,334,041 

 

Cumulative dividends in excess of earnings

 

 

(1,078,400)

 

 

(1,053,215)

 

Accumulated other comprehensive loss

 

 

(17,464)

 

 

(14,487)

 

Total stockholders’ equity

 

 

10,773,125 

 

 

10,723,300 

 

 

 

 

 

 

 

 

 

Joint venture partners

 

 

73,977 

 

 

23,729 

 

Non-managing member unitholders

 

 

189,072 

 

 

184,105 

 

Total noncontrolling interests

 

 

263,049 

 

 

207,834 

 

Total equity

 

 

11,036,174 

 

 

10,931,134 

 

Total liabilities and equity

 

$

20,744,890 

 

$

20,075,870 

 


(1)  The Company’s consolidated total assets at September 30, 2014 and December 31, 2013 include assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs. Total assets at September 30, 2014 includes VIE assets as follows: buildings and improvements $668 million;  land $113 million; accumulated depreciation and amortization $105 million; accounts receivable $2 million; cash $52 million; and other assets $19 million. Total assets at December 31, 2013 includes other assets of $1 million from VIEs. See Note 17 to the Condensed Consolidated Financial Statements for additional information.

(2)  The Company’s consolidated total liabilities at September 30, 2014 and December 31, 2013 include certain liabilities of VIEs for which the VIE creditors do not have recourse to HCP, Inc. Total liabilities at September 30, 2014 includes accounts payable and accrued liabilities of $36 million and deferred revenue of $11 million from VIEs. Total liabilities at December 31, 2013 includes accounts payable and accrued liabilities of $9 million from VIEs. See Note 17 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 September 30,

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

321,451 

 

$

284,072 

 

$

894,465 

 

$

843,380 

 

Tenant recoveries

 

 

29,323 

 

 

25,920 

 

 

81,867 

 

 

75,266 

 

Resident fees and services

 

 

62,213 

 

 

36,370 

 

 

138,205 

 

 

108,509 

 

Income from direct financing leases

 

 

165,687 

 

 

157,253 

 

 

495,724 

 

 

472,409 

 

Interest income

 

 

17,517 

 

 

42,078 

 

 

51,150 

 

 

68,611 

 

Investment management fee income

 

 

447 

 

 

464 

 

 

1,340 

 

 

1,406 

 

Total revenues

 

 

596,638 

 

 

546,157 

 

 

1,662,751 

 

 

1,569,581 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

111,275 

 

 

108,088 

 

 

324,755 

 

 

325,650 

 

Depreciation and amortization

 

 

122,975 

 

 

104,783 

 

 

343,496 

 

 

317,172 

 

Operating

 

 

99,599 

 

 

75,417 

 

 

254,173 

 

 

221,990 

 

General and administrative

 

 

24,954 

 

 

45,326 

 

 

75,410 

 

 

90,043 

 

Total costs and expenses

 

 

358,803 

 

 

333,614 

 

 

997,834 

 

 

954,855 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

3,111 

 

 

1,632 

 

 

5,750 

 

 

17,032 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

 

240,946 

 

 

214,175 

 

 

670,667 

 

 

631,758 

 

Income taxes

 

 

(55)

 

 

(1,034)

 

 

(2,840)

 

 

(3,553)

 

Equity income from unconsolidated joint ventures

 

 

10,168 

 

 

13,892 

 

 

39,388 

 

 

44,278 

 

Income from continuing operations

 

 

251,059 

 

 

227,033 

 

 

707,215 

 

 

672,483 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 —

 

 

1,527 

 

 

1,736 

 

 

5,699 

 

Gain on sales of real estate, net of income taxes

 

 

 —

 

 

8,298 

 

 

28,010 

 

 

9,185 

 

Total discontinued operations

 

 

 —

 

 

9,825 

 

 

29,746 

 

 

14,884 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

251,059 

 

 

236,858 

 

 

736,961 

 

 

687,367 

 

Noncontrolling interests’ share in earnings

 

 

(3,405)

 

 

(3,102)

 

 

(11,311)

 

 

(9,625)

 

Net income attributable to HCP, Inc.

 

 

247,654 

 

 

233,756 

 

 

725,650 

 

 

677,742 

 

Participating securities’ share in earnings

 

 

(446)

 

 

(474)

 

 

(1,999)

 

 

(1,330)

 

Net income applicable to common shares

 

$

247,208 

 

$

233,282 

 

$

723,651 

 

$

676,412 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.54 

 

$

0.49 

 

$

1.52 

 

$

1.46 

 

Discontinued operations

 

 

 —

 

 

0.02 

 

 

0.06 

 

 

0.03 

 

Net income applicable to common shares

 

$

0.54 

 

$

0.51 

 

$

1.58 

 

$

1.49 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.54 

 

$

0.49 

 

$

1.52 

 

$

1.46 

 

Discontinued operations

 

 

 —

 

 

0.02 

 

 

0.06 

 

 

0.03 

 

Net income applicable to common shares

 

$

0.54 

 

$

0.51 

 

$

1.58 

 

$

1.49 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

458,799 

 

 

455,345 

 

 

458,119 

 

 

454,553 

 

Diluted

 

 

459,141 

 

 

456,078 

 

 

458,473 

 

 

455,388 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.545 

 

$

0.525 

 

$

1.635 

 

 

1.575 

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

    

2014

    

2013

 

Net income

 

$

251,059 

 

$

236,858 

 

$

736,961 

 

$

687,367 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

(1)

 

 

 —

 

 

(5)

 

 

1,355 

 

Reclassification adjustment realized in net income

 

 

 —

 

 

 —

 

 

 —

 

 

(9,131)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

2,521 

 

 

(3,710)

 

 

1,829 

 

 

5,635 

 

Reclassification adjustment realized in net income

 

 

(1,409)

 

 

191 

 

 

(766)

 

 

751 

 

Change in Supplemental Executive Retirement Plan obligation

 

 

55 

 

 

56 

 

 

163 

 

 

167 

 

Foreign currency translation adjustment

 

 

(6,961)

 

 

(56)

 

 

(4,198)

 

 

(3)

 

Total other comprehensive loss

 

 

(5,795)

 

 

(3,519)

 

 

(2,977)

 

 

(1,226)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

245,264 

 

 

233,339 

 

 

733,984 

 

 

686,141 

 

Total comprehensive income attributable to noncontrolling interests

 

 

(3,405)

 

 

(3,102)

 

 

(11,311)

 

 

(9,625)

 

Total comprehensive income attributable to HCP, Inc.

 

$

241,859 

 

$

230,237 

 

$

722,673 

 

$

676,516 

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

725,650 

 

 

 —

 

 

725,650 

 

 

11,311 

 

 

736,961 

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,977)

 

 

(2,977)

 

 

 —

 

 

(2,977)

 

Issuance of common stock, net

 

2,351 

 

 

2,351 

 

 

67,474 

 

 

 —

 

 

 —

 

 

69,825 

 

 

(73)

 

 

69,752 

 

Repurchase of common stock

 

(297)

 

 

(297)

 

 

(11,302)

 

 

 —

 

 

 —

 

 

(11,599)

 

 

 —

 

 

(11,599)

 

Exercise of stock options

 

131 

 

 

131 

 

 

3,176 

 

 

 —

 

 

 —

 

 

3,307 

 

 

 —

 

 

3,307 

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

16,467 

 

 

 —

 

 

 —

 

 

16,467 

 

 

 —

 

 

16,467 

 

Common dividends ($1.635 per share)

 

 —

 

 

 —

 

 

 —

 

 

(750,835)

 

 

 —

 

 

(750,835)

 

 

 —

 

 

(750,835)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,706)

 

 

(11,706)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

57,354 

 

 

57,354 

 

Purchase of noncontrolling interests

 

 —

 

 

 —

 

 

(13)

 

 

 —

 

 

 —

 

 

(13)

 

 

(1,671)

 

 

(1,684)

 

September 30, 2014

 

459,146 

 

$

459,146 

 

$

11,409,843 

 

$

(1,078,400)

 

$

(17,464)

 

$

10,773,125 

 

$

263,049 

 

$

11,036,174 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

677,742 

 

 

 —

 

 

677,742 

 

 

9,625 

 

 

687,367 

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,226)

 

 

(1,226)

 

 

 —

 

 

(1,226)

 

Issuance of common stock, net

 

1,859 

 

 

1,859 

 

 

78,647 

 

 

 —

 

 

 —

 

 

80,506 

 

 

(2,997)

 

 

77,509 

 

Repurchase of common stock

 

(51)

 

 

(51)

 

 

(2,451)

 

 

 —

 

 

 —

 

 

(2,502)

 

 

 —

 

 

(2,502)

 

Exercise of stock options

 

875 

 

 

875 

 

 

16,622 

 

 

 —

 

 

 —

 

 

17,497 

 

 

 —

 

 

17,497 

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

33,833 

 

 

 —

 

 

 —

 

 

33,833 

 

 

 —

 

 

33,833 

 

Common dividends ($1.575 per share)

 

 —

 

 

 —

 

 

 —

 

 

(716,869)

 

 

 —

 

 

(716,869)

 

 

 —

 

 

(716,869)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,536)

 

 

(11,536)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

12,387 

 

 

12,387 

 

September 30, 2013

 

455,874 

 

$

455,874 

 

$

11,306,717 

 

$

(1,106,494)

 

$

(15,879)

 

$

10,640,218 

 

$

210,019 

 

$

10,850,237 

 

 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

 

 

 

 

 

6


 

Table of Contents

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2014

    

2013

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

736,961 

 

$

687,367 

 

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

 

 

343,496 

 

 

317,172 

 

Discontinued operations

 

 

 —

 

 

4,604 

 

Amortization of above and below market lease intangibles, net

 

 

(619)

 

 

(6,414)

 

Amortization of deferred compensation

 

 

16,467 

 

 

33,833 

 

Amortization of deferred financing costs, net

 

 

14,122 

 

 

13,922 

 

Straight-line rents

 

 

(35,082)

 

 

(28,559)

 

Loan and direct financing lease interest accretion

 

 

(58,271)

 

 

(65,296)

 

Deferred rental revenues

 

 

(420)

 

 

73 

 

Equity income from unconsolidated joint ventures

 

 

(39,388)

 

 

(44,278)

 

Distributions of earnings from unconsolidated joint ventures

 

 

3,895 

 

 

2,724 

 

Lease termination income, net

 

 

(38,001)

 

 

 —

 

Gain on sales of real estate

 

 

(28,010)

 

 

(9,185)

 

Marketable securities and other gains, net

 

 

(2,143)

 

 

(10,964)

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(7,193)

 

 

6,389 

 

Other assets

 

 

(14,345)

 

 

(43,939)

 

Accounts payable and accrued liabilities

 

 

(8,447)

 

 

(13,769)

 

Net cash provided by operating activities

 

 

883,022 

 

 

843,680 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Cash used to acquire the CCRC unconsolidated joint venture interest, net

 

 

(370,186)

 

 

 —

 

Acquisitions of real estate

 

 

(467,147)

 

 

(63,878)

 

Development of real estate

 

 

(118,732)

 

 

(96,914)

 

Leasing costs and tenant and capital improvements

 

 

(44,953)

 

 

(33,964)

 

Proceeds from sales of real estate, net

 

 

36,938 

 

 

3,777 

 

Contributions to unconsolidated joint ventures

 

 

(2,935)

 

 

 —

 

Distributions in excess of earnings from unconsolidated joint ventures

 

 

1,986 

 

 

1,194 

 

Purchases of marketable debt securities

 

 

 —

 

 

(16,706)

 

Proceeds from the sales of marketable securities

 

 

 —

 

 

28,403 

 

Principal repayments on loans receivable and direct financing leases, net

 

 

49,503 

 

 

231,004 

 

Investments in loans receivable and other

 

 

(24,480)

 

 

(316,494)

 

Increase in restricted cash

 

 

(17,219)

 

 

(10,376)

 

Net cash used in investing activities

 

 

(957,225)

 

 

(273,954)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings under bank line of credit

 

 

70,000 

 

 

283,082 

 

Issuance of senior unsecured notes

 

 

1,150,000 

 

 

 —

 

Repayments of senior unsecured notes

 

 

(487,000)

 

 

(150,000)

 

Issuance of mortgage and other debt

 

 

39,671 

 

 

6,798 

 

Repayments of mortgage debt

 

 

(202,134)

 

 

(285,005)

 

Deferred financing costs

 

 

(16,550)

 

 

 —

 

Issuance of common stock and exercise of options

 

 

73,059 

 

 

92,504 

 

Repurchase of common stock

 

 

(11,599)

 

 

 —

 

Dividends paid on common stock

 

 

(750,835)

 

 

(716,869)

 

Issuance of noncontrolling interests

 

 

4,282 

 

 

12,387 

 

Distributions to and purchase of noncontrolling interests

 

 

(11,719)

 

 

(11,536)

 

Net cash used in financing activities

 

 

(142,825)

 

 

(768,639)

 

Effect of foreign exchange on cash and cash equivalents

 

 

 

 

654 

 

Net decrease in cash and cash equivalents

 

 

(217,025)

 

 

(198,259)

 

Cash and cash equivalents, beginning of period

 

 

300,556 

 

 

247,673 

 

Cash and cash equivalents, end of period

 

$

83,531 

 

$

49,414 

 

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 nine months ended September 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 5).

 

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

8


 

Table of Contents

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 earnings before interest, tax, and depreciation and amortization (“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.

 

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 beginning 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 beginning after December 15, 2016. 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 and results of operations.

 

9


 

Table of Contents

(3)Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures (“Brookdale Transaction”)

 

On July 31, 2014, Brookdale Senior Living (“Brookdale”) completed its acquisition of Emeritus Corporation (“Emeritus”).  Brookdale, as the acquiring entity, became the Company’s largest senior housing lessee and operator. On August 29, 2014, the Company and Brookdale completed a multiple-element transaction that has three major components:

 

·

amended existing lease agreements on 153 HCP-owned senior housing communities previously leased and operated by Emeritus that included the termination of embedded purchase options in leases relating to 30 properties and future rent reductions;

·

terminated existing lease agreements on 49 HCP-owned senior housing properties previously leased and operated by Emeritus (including the termination of embedded purchase options in these leases relating to 19 properties). At closing, the Company contributed 48 of these properties to a newly formed consolidated RIDEA partnership structure (“RIDEA Subsidiaries”); the 49th property is expected to be contributed in December 2014. Brookdale owns a 20% noncontrolling equity interest in the RIDEA Subsidiaries and manages the facilities on behalf of the partnership; and

·

entered into new unconsolidated joint ventures that own 14 campuses of continuing care retirement communities (“CCRC”) in a RIDEA structure (collectively, the “CCRC JV”) with the Company owning a 49% equity interest and Brookdale owning a 51% equity interest. Brookdale manages these communities on behalf of the CCRC JV. 

Leases Amended on 153 Properties (“NNN Lease Restructuring”)

 

The Company and Brookdale entered into amended and restated triple-net master leases for 153 properties formerly leased to Emeritus. As part of the lease amendments, Brookdale forfeited purchase option rights related to 30 of these properties. The master leases have weighted average terms of 15 years, with two extension options that average 10 years each. Total base rent for 2014 will remain unchanged from the existing 2014 rent. However, these leases provide for reduced escalators beginning 2015 compared to those which were in-place; beginning in 2016, the leases contain reduced rent payments of $6.5 million in 2016 and $7.5 million each subsequent year thereafter. All obligations under the amended and restated leases are guaranteed by Brookdale. In addition, the new leases include a purchase option in favor of Brookdale for up to 10 communities at an aggregate purchase price not to exceed $60 million.

 

Effectively, the Company paid consideration of $129 million to terminate the existing purchase options and received consideration of: (i) $76 million for lower rent payments and escalators discussed above, which take effect beginning 2015 and 2016 and (ii) $53 million to settle the amount that the Company owed to Brookdale for the RIDEA Subsidiaries transaction discussed below. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information.

 

The Company will amortize the $53 million of net consideration paid to Brookdale for the NNN Lease Restructuring as a reduction in rental income on a straight-line basis over the term of the new leases. Additionally, the lease-related intangibles, initial direct costs and straight-line rent receivables associated with the previous leases will be amortized prospectively over the new (or amended) lease terms.

 

Lease Terminations of 49 Properties that were contributed to a RIDEA Structure (“RIDEA Subsidiaries”)

 

The Company and Brookdale terminated leases for a 49 property portfolio, which resulted in Brookdale forfeiting its purchase option rights to 19 of these properties; the net value of the terminated leases and forfeited purchase options was $108 million ($131 million for the value of the terminated leases, less $23 million for the value of the forfeited purchase options). At closing, the Company contributed the properties into partnerships, with Brookdale owning a  20% noncontrolling equity interest in each of the RIDEA Subsidiaries (SH PropCo and SH OpCo). Brookdale’s 20% interest in the RIDEA Subsidiaries was valued at $47 million. Brookdale also manages the properties on behalf of the RIDEA Subsidiaries under long-term management contracts. See the Fair Value Measurement Techniques and Quantitative Information section below for additional information.

 

10


 

Table of Contents

As consideration for the net value of $108 million for of the terminated leases and the $47 million sale to Brookdale of the 20% noncontrolling interest in the RIDEA Subsidiaries, the Company received the following: (i) a  $34 million short-term receivable recorded in other assets; (ii) a $68 million note from Brookdale (the “Brookdale Receivable”) recorded in loans receivable (see Note 7 for additional information); and (iii) an effective offset for the $53 million associated with the additional consideration owed by the Company to Brookdale for the NNN Lease Restructuring transaction discussed above. The fair values of the short-term receivable and Brookdale Receivable were estimated based on similar instruments available in the marketplace and are considered to be Level 2 measurements within the fair value hierarchy.

 

As a result of terminating these leases, the Company recognized a net gain of $38 million consisting of: (i) $108 million gain based on the fair value of the net consideration received; less (ii) $70 million to write-off the direct leasing costs and straight-line rent receivables related to the former in-place leases.

 

The Company has identified the SH PropCo and SH OpCo entities as VIEs (see Note 17 for additional information).

 

Continuing Care Retirement Communities Joint Venture

 

HCP and Brookdale formed new unconsolidated joint ventures that own 14 CCRC campuses in a RIDEA structure (“CCRC PropCo” and “CCRC OpCo”). HCP and Brookdale own 49% and 51%, respectively, of CCRC PropCo and CCRC OpCo, based on each company’s respective contributions. CCRC PropCo owns eight campuses that are leased to CCRC OpCo; CCRC OpCo owns six campuses and the operations of the campuses leased from CCRC PropCo. Brookdale manages the campuses of the CCRC JV under long-term management contracts.

 

At closing, Brookdale contributed eight of its owned campuses; the Company contributed two campuses previously leased to Brookdale valued at $162 million (carrying value of $92 million) and $370 million of cash (includes amounts used to fund the purchase of properties and working captital), which was primarily used to acquire four additional campuses from third parties. At closing, the CCRC JV campuses were encumbered by $569 million of mortgage and entrance fee obligations.

 

The Company has identified the CCRC OpCo entity as a VIE (see Note 17 for additional information).

 

Fair Value Measurement Techniques and Quantitative Information

 

The fair values of the forfeited rental payments and purchase option rights related to the NNN Lease Restructuring and the RIDEA Subsidiaries were based on the income approach and are considered Level 3 measurements within the fair value hierarchy. The Company utilized discounted cash flow models with observable and unobservable valuation inputs. These fair value measurements, or valuation techniques, were based on current market participant expectations and information available as of the close of the transaction on August 29, 2014.

11


 

Table of Contents

 

A summary of the quantitative information about fair value measurements for the NNN Lease Restructuring and RIDEA Subsidiaries transactions follows (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Fair Value

    

Valuation Technique

    

Valuation Inputs

    

Input Average or Range

 

NNN Lease Restructuring

 

 

 

 

 

 

 

 

 

 

Rental payment concessions by HCP

 

$

76,000

 

Discounted Cash Flow

 

NNN Rent Coverage Ratio

 

1.20x

 

(benefiting Brookdale)

 

 

 

 

 

 

NNN Rent Growth Rate

 

3.0 

%  

 

 

 

 

 

 

 

Discount Rate

 

8.00%-8.50

%  

Forfeited purchase options by

 

$

(129,000)

 

Discounted Cash Flow

 

Capitalization Rates

 

7.50%-9.25

%  

Brookdale (benefiting HCP)

 

 

 

 

 

 

Discount Rate

 

10.50%-11.00

%  

 

 

 

 

 

 

 

Exercise Probability

 

100.00 

%  

RIDEA Subsidiaries

 

 

 

 

 

 

 

 

 

 

Forfeited rental payments by HCP

 

$

131,000

 

Discounted Cash Flow

 

NNN Rent Coverage Ratio

 

1.20x

 

(benefiting Brookdale)

 

 

 

 

 

 

NNN Rent Growth Rate

 

3.0 

%  

 

 

 

 

 

 

 

EBITDAR Growth Rate

 

5.5 

%  

 

 

 

 

 

 

 

Discount Rate

 

8.00%-11.00

%  

Forfeited purchase options by

 

$

(23,000)

 

Discounted Cash Flow

 

Capitalization Rates

 

7.50%-9.25

%  

Brookdale (benefiting HCP)

 

 

 

 

 

 

Discount Rate

 

10.50%-11.00

%  

 

 

 

 

 

 

 

Exercise Probability

 

100.00 

%