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 June 30, 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 July 29, 2016, there were 467,583,448 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

38 

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

66 

 

 

 

 

 

Item 4. 

Controls and Procedures

67 

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1A. 

Risk Factors

68 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

68 

 

 

 

 

 

Item 6. 

Exhibits

68 

 

 

 

 

 

Signatures 

70 

 

 

 

 

 

2


 

Table of Contents

HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

Buildings and improvements

 

$

12,321,266

 

$

12,198,704

 

Development costs and construction in progress

 

 

387,560

 

 

388,576

 

Land

 

 

1,933,823

 

 

1,948,757

 

Accumulated depreciation and amortization

 

 

(2,716,880)

 

 

(2,541,334)

 

Net real estate

 

 

11,925,769

 

 

11,994,703

 

Net investment in direct financing leases

 

 

5,856,544

 

 

5,905,009

 

Loans receivable, net

 

 

708,096

 

 

768,743

 

Investments in and advances to unconsolidated joint ventures

 

 

604,941

 

 

605,244

 

Accounts receivable, net of allowance of $4,892 and $3,261, respectively

 

 

51,800

 

 

48,929

 

Cash and cash equivalents

 

 

116,450

 

 

346,500

 

Restricted cash

 

 

180,404

 

 

60,616

 

Intangible assets, net

 

 

550,569

 

 

603,706

 

Real estate and related assets held for sale, net

 

 

330,453

 

 

314,126

 

Other assets, net

 

 

791,431

 

 

802,273

 

Total assets(1)

 

$

21,116,457

 

$

21,449,849

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Bank line of credit

 

$

869,078

 

$

397,432

 

Term loans

 

 

477,890

 

 

524,807

 

Senior unsecured notes

 

 

8,626,559

 

 

9,120,107

 

Mortgage debt

 

 

688,910

 

 

932,212

 

Other debt

 

 

93,012

 

 

94,445

 

Intangible liabilities, net

 

 

49,448

 

 

56,147

 

Intangible liabilities related to assets held for sale, net

 

 

17,001

 

 

19,126

 

Accounts payable and accrued liabilities

 

 

482,133

 

 

436,239

 

Deferred revenue

 

 

136,038

 

 

123,017

 

Total liabilities(1)

 

 

11,440,069

 

 

11,703,532

 

Commitments and contingencies

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 467,324,914 and 465,488,492 shares issued and outstanding, respectively

 

 

467,325

 

 

465,488

 

Additional paid-in capital

 

 

11,701,707

 

 

11,647,039

 

Cumulative dividends in excess of earnings

 

 

(2,857,164)

 

 

(2,738,414)

 

Accumulated other comprehensive loss

 

 

(30,738)

 

 

(30,470)

 

Total stockholders’ equity

 

 

9,281,130

 

 

9,343,643

 

Joint venture partners

 

 

214,671

 

 

217,066

 

Non-managing member unitholders

 

 

180,587

 

 

185,608

 

Total noncontrolling interests

 

 

395,258

 

 

402,674

 

Total equity

 

 

9,676,388

 

 

9,746,317

 

Total liabilities and equity

 

$

21,116,457

 

$

21,449,849

 


(1)

HCP, Inc.’s consolidated total assets and total liabilities at June 30, 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 June 30, 2016 include VIE assets as follows: buildings and improvements $3.4 billion; development costs $16 million; land $324 million; accumulated depreciation and amortization $598 million; investments in unconsolidated joint ventures $14 million; accounts receivable $25 million; cash $59 million; restricted cash $25 million; intangible assets, net $184 million; and other assets, net $62 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 June 30, 2016 include VIE liabilities as follows: mortgage debt $571 million; intangible liabilities, net $10 million; accounts payable and accrued liabilities $116 million and deferred revenue $25 million. 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 $107 million and deferred revenue $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 June 30,

 

Six Months Ended June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

299,076

 

$

276,734

 

$

596,270

 

$

551,816

 

Tenant recoveries

 

 

33,930

 

 

31,376

 

 

65,667

 

 

61,272

 

Resident fees and services

 

 

164,202

 

 

106,838

 

 

329,965

 

 

211,851

 

Income from direct financing leases

 

 

132,100

 

 

156,181

 

 

260,068

 

 

323,259

 

Interest income

 

 

32,787

 

 

35,945

 

 

50,816

 

 

69,207

 

Investment management fee income

 

 

81

 

 

458

 

 

172

 

 

918

 

Total revenues

 

 

662,176

 

 

607,532

 

 

1,302,958

 

 

1,218,323

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

121,333

 

 

118,632

 

 

243,395

 

 

235,412

 

Depreciation and amortization

 

 

141,386

 

 

120,403

 

 

282,708

 

 

234,925

 

Operating

 

 

180,125

 

 

136,342

 

 

357,080

 

 

268,373

 

General and administrative

 

 

22,793

 

 

28,845

 

 

48,292

 

 

53,618

 

Acquisition and pursuit costs

 

 

14,527

 

 

18,407

 

 

17,002

 

 

21,797

 

Impairments

 

 

 —

 

 

44,835

 

 

 —

 

 

523,299

 

Total costs and expenses

 

 

480,164

 

 

467,464

 

 

948,477

 

 

1,337,424

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate

 

 

119,614

 

 

61

 

 

119,614

 

 

6,325

 

Other income, net

 

 

2,280

 

 

11,055

 

 

3,502

 

 

12,779

 

Total other income, net

 

 

121,894

 

 

11,116

 

 

123,116

 

 

19,104

 

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

 

 

303,906

 

 

151,184

 

 

477,597

 

 

(99,997)

 

Income tax benefit (expense)

 

 

2,003

 

 

4,563

 

 

(51,035)

 

 

4,640

 

Equity (loss) income from unconsolidated joint ventures

 

 

(1,067)

 

 

12,001

 

 

(1,975)

 

 

25,602

 

Net income (loss)

 

 

304,842

 

 

167,748

 

 

424,587

 

 

(69,755)

 

Noncontrolling interests’ share in earnings

 

 

(3,125)

 

 

(2,863)

 

 

(6,751)

 

 

(5,974)

 

Net income (loss) attributable to HCP, Inc.

 

 

301,717

 

 

164,885

 

 

417,836

 

 

(75,729)

 

Participating securities’ share in earnings

 

 

(342)

 

 

(370)

 

 

(651)

 

 

(704)

 

Net income (loss) applicable to common shares

 

$

301,375

 

$

164,515

 

$

417,185

 

$

(76,433)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.65

 

$

0.36

 

$

0.89

 

$

(0.17)

 

Diluted

 

$

0.64

 

$

0.36

 

$

0.89

 

$

(0.17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

467,084

 

 

461,874

 

 

466,579

 

 

461,380

 

Diluted

 

 

471,425

 

 

462,106

 

 

466,777

 

 

461,380

 

Dividends declared per common share

 

$

0.575

 

$

0.565

 

$

1.150

 

$

1.130

 

 

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 June 30,

 

Six Months Ended June 30,

 

 

  

2016

  

2015

  

2016

  

2015

 

Net income (loss)

 

$

304,842

 

$

167,748

 

$

424,587

 

$

(69,755)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on securities

 

 

10

 

 

8

 

 

(5)

 

 

3

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

1,038

 

 

(2,541)

 

 

348

 

 

(202)

 

Reclassification adjustment realized in net income

 

 

171

 

 

354

 

 

340

 

 

348

 

Change in Supplemental Executive Retirement Plan obligation

 

 

71

 

 

69

 

 

141

 

 

138

 

Foreign currency translation adjustment

 

 

(355)

 

 

(1,544)

 

 

(1,092)

 

 

(8,507)

 

Total other comprehensive income (loss)

 

 

935

 

 

(3,654)

 

 

(268)

 

 

(8,220)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income (loss)

 

 

305,777

 

 

164,094

 

 

424,319

 

 

(77,975)

 

Total comprehensive income attributable to noncontrolling interests

 

 

(3,125)

 

 

(2,863)

 

 

(6,751)

 

 

(5,974)

 

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

 

$

302,652

 

$

161,231

 

$

417,568

 

$

(83,949)

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

417,836

 

 

 —

 

 

417,836

 

 

6,751

 

 

424,587

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(268)

 

 

(268)

 

 

 —

 

 

(268)

 

Issuance of common stock, net

 

1,715

 

 

1,715

 

 

41,357

 

 

 —

 

 

 —

 

 

43,072

 

 

 —

 

 

43,072

 

Conversion of DownREIT units to common stock

 

120

 

 

120

 

 

4,902

 

 

 —

 

 

 —

 

 

5,022

 

 

(5,022)

 

 

 —

 

Repurchase of common stock

 

(109)

 

 

(109)

 

 

(3,765)

 

 

 —

 

 

 —

 

 

(3,874)

 

 

 —

 

 

(3,874)

 

Exercise of stock options

 

111

 

 

111

 

 

2,741

 

 

 —

 

 

 —

 

 

2,852

 

 

 —

 

 

2,852

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

9,505

 

 

 —

 

 

 —

 

 

9,505

 

 

 —

 

 

9,505

 

Common dividends ($1.15 per share)

 

 —

 

 

 —

 

 

 —

 

 

(537,061)

 

 

 —

 

 

(537,061)

 

 

 —

 

 

(537,061)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

 —

 

 

(36)

 

 

(12,437)

 

 

(12,473)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,225

 

 

3,225

 

Deconsolidation of noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

475

 

 

 —

 

 

439

 

 

67

 

 

506

 

June 30, 2016

 

467,325

 

$

467,325

 

$

11,701,707

 

$

(2,857,164)

 

$

(30,738)

 

$

9,281,130

 

$

395,258

 

$

9,676,388

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

 

 

 —

 

 

 —

 

 

(75,729)

 

 

 —

 

 

(75,729)

 

 

5,974

 

 

(69,755)

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,220)

 

 

(8,220)

 

 

 —

 

 

(8,220)

 

Issuance of common stock, net

 

2,094

 

 

2,094

 

 

66,047

 

 

 —

 

 

 —

 

 

68,141

 

 

(2,448)

 

 

65,693

 

Repurchase of common stock

 

(171)

 

 

(171)

 

 

(7,519)

 

 

 —

 

 

 —

 

 

(7,690)

 

 

 —

 

 

(7,690)

 

Exercise of stock options

 

817

 

 

817

 

 

26,608

 

 

 —

 

 

 —

 

 

27,425

 

 

 —

 

 

27,425

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

15,724

 

 

 —

 

 

 —

 

 

15,724

 

 

 —

 

 

15,724

 

Common dividends ($1.13 per share)

 

 —

 

 

 —

 

 

 —

 

 

(521,898)

 

 

 —

 

 

(521,898)

 

 

 —

 

 

(521,898)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(263)

 

 

 —

 

 

 —

 

 

(263)

 

 

(8,143)

 

 

(8,406)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

37,025

 

 

37,025

 

June 30, 2015

 

462,486

 

$

462,486

 

$

11,532,584

 

$

(1,730,168)

 

$

(32,115)

 

$

10,232,787

 

$

294,210

 

$

10,526,997

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

6


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

  

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

$

424,587

 

$

(69,755)

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

282,708

 

 

234,925

 

Amortization of market lease intangibles, net

 

 

(972)

 

 

(636)

 

Amortization of deferred compensation

 

 

9,505

 

 

15,724

 

Amortization of deferred financing costs

 

 

10,561

 

 

9,726

 

Straight-line rents

 

 

(11,117)

 

 

(17,748)

 

Loan and direct financing lease non-cash interest

 

 

278

 

 

(46,997)

 

Deferred rental revenues

 

 

(808)

 

 

(1,004)

 

Equity loss (income) from unconsolidated joint ventures

 

 

1,975

 

 

(25,602)

 

Distributions of earnings from unconsolidated joint ventures

 

 

3,202

 

 

2,493

 

Lease termination income, net

 

 

 —

 

 

(1,103)

 

Gain on sales of real estate

 

 

(119,614)

 

 

(6,325)

 

Deferred income tax expense

 

 

49,156

 

 

 —

 

Foreign exchange and other gains, net

 

 

(91)

 

 

(9,866)

 

Impairments

 

 

 —

 

 

523,299

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(2,871)

 

 

(6,464)

 

Other assets, net

 

 

(2,892)

 

 

(8,473)

 

Accounts payable and accrued liabilities

 

 

23,305

 

 

1,792

 

Net cash provided by operating activities

 

 

666,912

 

 

593,986

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(94,271)

 

 

(1,247,900)

 

Development of real estate

 

 

(204,624)

 

 

(121,510)

 

Leasing costs and tenant and capital improvements

 

 

(41,161)

 

 

(28,302)

 

Proceeds from sales of real estate, net

 

 

96,652

 

 

8,600

 

Contributions to unconsolidated joint ventures

 

 

(10,156)

 

 

(31,512)

 

Distributions in excess of earnings from unconsolidated joint ventures

 

 

6,421

 

 

1,994

 

Principal repayments on loans receivable, direct financing leases and other

 

 

205,576

 

 

53,081

 

Investments in loans receivable and other

 

 

(122,113)

 

 

(276,038)

 

Decrease (increase) in restricted cash

 

 

10,058

 

 

(3,481)

 

Net cash used in investing activities

 

 

(153,618)

 

 

(1,645,068)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings under bank line of credit

 

 

642,898

 

 

186,557

 

Repayments under bank line of credit

 

 

(135,000)

 

 

 —

 

Borrowings under term loan

 

 

 —

 

 

333,014

 

Issuance of senior unsecured notes

 

 

 —

 

 

1,338,555

 

Repayments of senior unsecured notes

 

 

(500,000)

 

 

(400,000)

 

Repayments of mortgage and other debt

 

 

(246,387)

 

 

(20,333)

 

Deferred financing costs

 

 

 —

 

 

(13,272)

 

Issuance of common stock and exercise of options

 

 

45,924

 

 

93,118

 

Repurchase of common stock

 

 

(3,874)

 

 

(7,690)

 

Dividends paid on common stock

 

 

(537,061)

 

 

(521,898)

 

Issuance of noncontrolling interests

 

 

3,225

 

 

3,397

 

Distributions to noncontrolling interests

 

 

(12,473)

 

 

(8,406)

 

Net cash (used in) provided by financing activities

 

 

(742,748)

 

 

983,042

 

Effect of foreign exchange on cash and cash equivalents

 

 

(596)

 

 

 —

 

Net decrease in cash and cash equivalents

 

 

(230,050)

 

 

(68,040)

 

Cash and cash equivalents, beginning of period

 

 

346,500

 

 

183,810

 

Cash and cash equivalents, end of period

 

$

116,450

 

$

115,770

 

See accompanying Notes to the Consolidated Financial Statements.

 

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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.

 

In May 2016, the Company announced its intention to spin off interests in 338 properties (including 17 non-strategic properties, of which we expect seven to be sold by the end of 2016 and the remaining 10 to be sold in the first quarter of 2017), primarily comprised of its HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and its equity investment in HCRMC (the “Spin-Off”). Quality Care Properties, Inc. (“QCP”) (formerly HCP SpinCo, Inc.) will be an independent, publicly-traded, self-managed and self-administrated company. QCP will elect and intends to qualify as a REIT. The Spin-Off is expected to be effectuated through a pro rata special distribution of QCP’s common shares to HCP stockholders and will not qualify as a tax-free spin-off for U.S. federal income tax purposes. The transaction is subject to certain conditions, including the filing and approval of QCP’s common stock to be listed on the New York Stock Exchange, customary third party consents, the U.S. Securities and Exchange Commission (the “SEC”) declaring effective a registration statement for the QCP common shares to be distributed, and approval and declaration of the distribution by the Company’s Board of Directors. The transaction is expected to be completed in the fourth quarter of 2016. The Company may, at any time and for any reason until the proposed transaction is complete, abandon, modify or change the terms of the Spin-Off. There can be no assurance as to whether or when the Spin-Off will occur. QCP filed its initial Registration Statement on Form 10 on June 17, 2016 and Amendment No. 1 to its Registration Statement on Form 10 on August 9, 2016.

 

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 and six months ended June 30, 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 SEC.

 

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to

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improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is evaluating the impact of the adoption of ASU 2016‑13 on January 1, 2020 to its consolidated financial position or results of operations.

 

In May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). The amendments in ASU 2016-12 do not change the core principles of the guidance in the new revenue standard described in ASU No. 2014-09 below. Rather, the amendments in ASU 2016-12 provide practical expedients and improvements on the previously narrow scope of the standard. ASU 2016-12 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted at the original effective date of the new revenue standard (January 1, 2017). The Company is evaluating the impact of the adoption of ASU 2016-12 on January 1, 2018 to its consolidated financial position or results of operations.

 

In March 2016, the FASB issued 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 accounting for share-based payment transactions, including 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 at the original effective date of the new revenue standard described in ASU No. 2014-09 below (January 1, 2017). 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 requirements under current accounting guidance, (ii) eliminate current real estate specific lease provisions and (iii) modify the classification criteria and accounting for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years, and interim periods within, 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”). ASU 2016-01 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 updates to 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

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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 (see Note 16).

 

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 within, beginning after December 15, 2017. Early adoption is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in ASU 2014-09 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 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. Real estate and related assets held for sale, net and intangible liabilities related to assets held for sale, net have been reclassified on the consolidated balance sheets (see Note 4).

 

 

NOTE 3.  Real Estate Property Investments

2016 Acquisitions

The following table summarizes the Company’s real estate acquisitions for the six months ended June 30, 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. Revenues and earnings since the acquisition dates as well as the supplementary pro forma information, assuming these acquisitions occurred as of the beginning of the prior periods, were not material.

 

2015 Acquisitions

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 under a RIDEA structure which is permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”),

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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 $776 million, (ii) lease-up intangible assets with a fair value of $48 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%).

 

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 data):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended 

 

Six Months Ended 

    

 

    

June 30, 2015

 

June 30, 2015

    

Revenues

 

$

651,095

 

$

1,305,449

 

Net income (loss)

 

 

171,653

 

 

(61,945)

 

Net income (loss) applicable to HCP, Inc.

 

 

168,400

 

 

(68,700)

 

Basic earnings per common share

 

 

0.36

 

 

(0.15)

 

Diluted earnings per common share

 

 

0.36

 

 

(0.15)

 

 

2015 Other Acquisitions.  The following table summarizes the Company’s real estate acquisitions for the six months ended June 30, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration

 

Assets Acquired

 

 

 

 

 

Liabilities

 

Noncontrolling

 

 

 

 

Net

 

Segment

 

Cash Paid

 

Assumed

 

Interest

 

Real Estate

 

Intangibles

 

Senior housing

 

$

178,888

(1)  

$

821

 

$

3,885

 

$

166,732

 

$

16,862

 

Post-acute/skilled nursing

 

 

178,707

(1)  

 

 —

 

 

 —

 

 

151,663

 

 

27,044

 

Medical office

 

 

377,351

 

 

12,851

 

 

 —

 

 

349,650

 

 

40,552

 

 

 

$

734,946

 

$

13,672

 

$

3,885

 

$

668,045

 

$

84,458

 


(1)Includes £174 million ($254 million) of the Company’s HC-One Facility (see Note 6) converted to fee ownership in a portfolio of 36 care homes located throughout the United Kingdom (“U.K.”).

 

Construction, Tenant and Other Capital Improvements

The following table summarizes the Company’s funding for construction, tenant and other capital improvements (in thousands):

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

Segment

 

2016

 

2015

Senior housing

 

$

65,290

 

$

36,826

Post-acute/skilled nursing

 

 

4,518

 

 

2,492

Life science

 

 

97,348

 

 

50,548

Medical office

 

 

55,391

 

 

49,534

Hospital

 

 

 —

 

 

37

 

 

$

222,547

 

$

139,437

 

 

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Pending Acquisitions

In May 2016, the Company announced it entered into definitive agreements to acquire a portfolio of seven private pay senior housing communities for $186 million, including the assumption of $75 million of debt maturing in 2044 at a 4.0% interest 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. This transaction is expected to close in the second half of 2016 and remains subject to regulatory and third party approvals and other customary closing conditions.

 

Subsequent Event.  In July 2016, the Company acquired two life science buildings and a parcel of land in San Diego, California for $49 million.

 

 

 

NOTE 4.  Dispositions of Real Estate

Held for Sale

At June 30, 2016, four life science facilities and a senior housing facility were classified as held for sale, with an aggregate carrying value of $330 million. At December 31, 2015, four life science facilities were classified as held for sale, with an aggregate carrying value of $314 million.

 

2016 Dispositions

During the six months ended June 30, 2016, the Company sold five post-acute/skilled nursing and two senior housing facilities for $130 million, a life science facility for $74 million, two medical office buildings for $19 million and a senior housing facility for $6 million and recognized total gain on sales of $120 million.

 

2015 Dispositions

During the six months ended June 30, 2015, the Company sold nine senior housing facilities for $60 million, resulting from Brookdale’s exercise of its purchase option received as part of a transaction with Brookdale in 2014.

 

Pending Dispositions

In June 2016, the Company entered into a sale agreement to sell a senior housing facility in Jacksonville, Florida for $22 million (classified as held for sale as of June 30, 2016 discussed above). The transaction is expected to close in the third quarter of 2016.

 

In May 2016, the Company entered into a master contribution agreement to contribute its ownership interest in joint venture entities that own and operate senior housing properties in a RIDEA structure (“RIDEA II”) to an unconsolidated joint venture owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (the “HCP/CPA JV”). In return, the Company will receive $109 million in cash proceeds from the HCP/CPA JV, a $636 million note receivable (the “Note”) and retain an approximately 40% beneficial interest in RIDEA II. This transaction, upon completion, would result in the Company deconsolidating the net assets of RIDEA II because it will not direct the activities that most significantly impact the venture. The Company further expects that the members will recapitalize RIDEA II, at which time the Company expects to receive cash proceeds in payment against the Note. The closing of these transactions is expected to occur in the second half of 2016 and remains subject to regulatory and third party approvals and other customary closing conditions.

 

In January 2016, the Company entered into a sale agreement for purchase options that were exercised on eight life science facilities in South San Francisco, California, to be sold in two tranches for $311 million (classified as held for sale as of June 30, 2016 discussed above) and $269 million, respectively. The transactions are expected to close in the second half of 2016 for the first tranche and in 2018 for the second tranche.

 

 

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NOTE 5.  Net Investment in Direct Financing Leases

Net investment in DFLs consisted of the following (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2016

    

2015

 

Minimum lease payments receivable

 

$