UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

 

 

 

 

x

 

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

 

 

 

For the quarterly period ended September 30, 2007.

 

 

 

OR

 

 

 

o

 

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

 

 

 

 

 

For the transition period from              to

 

Commission file number 1-08895


HCP, INC.
(Exact name of registrant as specified in its charter)

Maryland

 

33-0091377

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

3760 Kilroy Airport Way, Suite 300
Long Beach, CA 90806
(Address of principal executive offices)

(562) 733-5100
(Registrant’s telephone number, including area code)

Health Care Property Investors, Inc. (address and fiscal year remain unchanged)
(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days  YES  x   NO  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer  
x Accelerated Filer  o  Non-accelerated Filer  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
YES  
o  NO  x

As of October 25, 2007, there were 216,263,469 shares of the registrant’s $1.00 par value common stock outstanding.

 

 

 

 



 

HCP, INC.

INDEX

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements:

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

Condensed Consolidated Statements of Income

 

4

 

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

Item 2.

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

 

30

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

Item 4.

Controls and Procedures

 

43

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

Legal Proceedings

 

44

 

 

 

 

Item 1A.

Risk Factors

 

44

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

44

 

 

 

 

Item 5.

Other Information

 

44

 

 

 

 

Item 6.

Exhibits

 

45

 

 

 

 

Signatures

 

 

 

 

 

 

 

 

 

2


 


HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

8,017,019

 

$

5,767,079

 

Developments in process

 

266,903

 

42,346

 

Land

 

1,601,529

 

653,435

 

Less accumulated depreciation and amortization

 

672,401

 

523,732

 

Net real estate

 

9,213,050

 

5,939,128

 

 

 

 

 

 

 

Net investment in direct financing leases

 

637,742

 

678,013

 

Loans receivable, net

 

159,879

 

196,480

 

Investments in and advances to unconsolidated joint ventures

 

248,676

 

25,389

 

Accounts receivable, net of allowance of $23,273 and $24,205, respectively

 

34,403

 

31,026

 

Cash and cash equivalents

 

568,853

 

58,405

 

Restricted cash

 

65,080

 

40,786

 

Intangible assets, net

 

648,915

 

380,568

 

Real estate held for sale, net

 

5,578

 

502,278

 

Real estate held for contribution, net

 

 

1,684,341

 

Other assets, net

 

513,957

 

476,335

 

Total assets

 

$

12,096,133

 

$

10,012,749

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Bank line of credit

 

$

 

$

624,500

 

Bridge and term loans

 

2,750,000

 

504,593

 

Senior unsecured notes

 

3,224,215

 

2,748,522

 

Mortgage debt

 

1,280,515

 

1,288,681

 

Mortgage debt on assets held for sale

 

3,779

 

38,617

 

Mortgage debt on assets held for contribution

 

 

889,356

 

Other debt

 

109,208

 

107,746

 

Intangible liabilities, net

 

286,270

 

134,050

 

Accounts payable and accrued liabilities

 

214,809

 

200,088

 

Deferred revenue

 

44,454

 

20,795

 

Total liabilities

 

7,913,250

 

6,556,948

 

 

 

 

 

 

 

Minority interests:

 

 

 

 

 

Joint venture partners

 

33,177

 

34,211

 

Non-managing member unitholders

 

305,850

 

127,554

 

Total minority interests

 

339,027

 

161,765

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $1.00 par value: 50,000,000 shares authorized; 11,820,000 shares issued and outstanding, liquidation preference of $25.00 per share

 

285,173

 

285,173

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 207,277,390 and 198,599,054 shares issued and outstanding, respectively

 

207,277

 

198,599

 

Additional paid-in capital

 

3,413,124

 

3,108,908

 

Cumulative dividends in excess of earnings

 

(69,436

)

(316,369

)

Accumulated other comprehensive income

 

7,718

 

17,725

 

Total stockholders’ equity

 

3,843,856

 

3,294,036

 

Total liabilities and stockholders’ equity

 

$

12,096,133

 

$

10,012,749

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

3



HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)
(Unaudited)

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues and other income:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

242,267

 

$

112,234

 

$

648,994

 

$

320,174

 

Income from direct financing leases

 

18,832

 

 

49,037

 

 

Investment management fee income

 

1,602

 

678

 

12,062

 

2,675

 

Interest and other income

 

21,548

 

6,903

 

54,755

 

25,987

 

 

 

284,249

 

119,815

 

764,848

 

348,836

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Interest

 

103,829

 

36,727

 

255,918

 

101,986

 

Depreciation and amortization

 

74,253

 

27,779

 

195,415

 

80,033

 

Operating

 

52,582

 

19,902

 

133,664

 

56,252

 

General and administrative

 

16,558

 

8,261

 

55,443

 

25,137

 

 

 

247,222

 

92,669

 

640,440

 

263,408

 

 

 

 

 

 

 

 

 

 

 

Operating income:

 

37,027

 

27,146

 

124,408

 

85,428

 

Equity income from unconsolidated joint ventures

 

1,242

 

1,044

 

3,758

 

7,580

 

Gain on sale of real estate interest

 

 

 

10,141

 

 

Minority interests’ share of earnings

 

(6,018

)

(3,511

)

(17,992

)

(11,458

)

Income from continuing operations:

 

32,251

 

24,679

 

120,315

 

81,550

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Operating income

 

3,744

 

16,411

 

26,136

 

52,833

 

Impairments

 

 

 

 

(4,711

)

Gains on sales of real estate

 

286,153

 

35,728

 

392,269

 

46,601

 

 

 

289,897

 

52,139

 

418,405

 

94,723

 

 

 

 

 

 

 

 

 

 

 

Net income:

 

322,148

 

76,818

 

538,720

 

176,273

 

Preferred stock dividends

 

(5,282

)

(5,282

)

(15,848

)

(15,848

)

Net income applicable to common shares:

 

$

316,866

 

$

71,536

 

$

522,872

 

$

160,425

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.14

 

$

0.51

 

$

0.48

 

Discontinued operations

 

1.41

 

0.38

 

2.04

 

0.70

 

Net income applicable to common shares

 

$

1.54

 

$

0.52

 

$

2.55

 

$

1.18

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.13

 

$

0.14

 

$

0.51

 

$

0.48

 

Discontinued operations

 

1.40

 

0.38

 

2.02

 

0.69

 

Net income applicable to common shares

 

$

1.53

 

$

0.52

 

$

2.53

 

$

1.17

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

206,186

 

136,682

 

205,322

 

136,402

 

Diluted

 

207,070

 

137,578

 

206,672

 

137,209

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share:

 

$

0.445

 

$

0.425

 

$

1.335

 

$

1.275

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



HCP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(In thousands except per share data)
(Unaudited)

 

 

Nine Months
Ended 
September 30, 
2007

 

Preferred Stock, $1.00 Par Value

 

 

 

Shares, beginning and ending

 

11,820

 

Amounts, beginning and ending

 

$

285,173

 

 

 

 

 

Common Stock, Shares

 

 

 

Shares at beginning of period

 

198,599

 

Issuance of common stock, net

 

8,350

 

Exercise of stock options

 

328

 

Shares at end of period

 

207,277

 

 

 

 

 

Common Stock, $1.00 Par Value

 

 

 

Balance at beginning of period

 

$

198,599

 

Issuance of common stock, net

 

8,350

 

Exercise of stock options

 

328

 

Balance at end of period

 

$

207,277

 

 

 

 

 

Additional Paid-In Capital

 

 

 

Balance at beginning of period

 

$

3,108,908

 

Issuance of common stock, net

 

290,089

 

Exercise of stock options

 

5,611

 

Amortization of deferred compensation

 

8,516

 

Balance at end of period

 

$

3,413,124

 

 

 

 

 

Cumulative Dividends in Excess of Earnings

 

 

 

Balance at beginning of period

 

$

(316,369

)

Net income

 

538,720

 

Preferred dividends

 

(15,848

)

Common dividends ($1.335 per share)

 

(275,939

)

Balance at end of period

 

$

(69,436

)

 

 

 

 

Accumulated Other Comprehensive Income

 

 

 

Balance at beginning of period

 

$

17,725

 

Net unrealized gains (losses) on securities:

 

 

 

Unrealized losses

 

(6,296

)

Reclassification adjustment for gains recognized in net income

 

(4,405

)

Unrealized gains on cash flow hedges

 

646

 

Changes in Supplemental Executive Retirement Plan (“SERP”) obligation

 

76

 

Foreign currency translation adjustment

 

(28

)

Balance at end of period

 

$

7,718

 

 

 

 

 

Total Comprehensive Income

 

 

 

Net income

 

$

538,720

 

Other comprehensive loss

 

(10,007

)

Total comprehensive income

 

$

528,713

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

538,720

 

$

176,273

 

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

 

195,415

 

80,033

 

Discontinued operations

 

6,465

 

15,792

 

Amortization of above and below market lease intangibles, net

 

(3,185

)

(1,383

)

Stock-based compensation

 

8,516

 

6,060

 

Debt issuance costs amortization

 

15,274

 

2,746

 

Recovery of loan losses

 

(386

)

 

Straight-line rents and interest accretion on direct financing leases

 

(45,895

)

(7,436

)

Deferred rental revenue

 

8,937

 

360

 

Equity income from unconsolidated joint ventures

 

(3,758

)

(7,580

)

Distributions of earnings from unconsolidated joint ventures

 

3,148

 

7,580

 

Minority interests’ share of earnings

 

17,992

 

11,458

 

Impairments

 

 

4,711

 

Gains on sales of real estate and real estate interest

 

(402,410

)

(46,601

)

Gains on sales of securities

 

(4,874

)

(1,552

)

Changes in:

 

 

 

 

 

Accounts receivable

 

(2,626

)

637

 

Loans receivables and other assets

 

(18,384

)

(6,898

)

Accounts payable and accrued liabilities

 

(3,128

)

20,293

 

Net cash provided by operating activities

 

309,821

 

254,493

 

Cash flows from investing activities:

 

 

 

 

 

Cash used in SEUSA acquisition, net of cash acquired

 

(2,977,564

)

 

Other cash used in the acquisition and development of real estate

 

(339,692

)

(336,709

)

Lease commissions and tenant and capital improvements

 

(27,029

)

(12,003

)

Net proceeds from sales of real estate

 

854,505

 

100,217

 

Contributions to unconsolidated joint ventures

 

(2,619

)

 

Distributions in excess of earnings from unconsolidated joint ventures

 

476,992

 

161

 

Purchases of securities

 

(26,647

)

(12,895

)

Proceeds from the sales of securities

 

53,514

 

5,630

 

Principal repayments on loans receivable and direct financing leases

 

101,340

 

45,525

 

Investments in loans receivable

 

(18,615

)

(4,005

)

Increase in restricted cash

 

(28,461

)

(122,895

)

Net cash used in investing activities

 

(1,934,276

)

(336,974

)

Cash flows from financing activities:

 

 

 

 

 

Net repayments under bank lines of credit

 

(624,500

)

(258,600

)

Repayments of term loan

 

(504,593

)

 

Borrowings under bridge loan

 

2,750,000

 

 

Repayments of mortgage debt

 

(82,482

)

(20,399

)

Issuance of mortgage debt

 

143,421

 

161,874

 

Repayments of senior unsecured notes

 

(20,000

)

(135,000

)

Issuance of senior unsecured notes

 

500,000

 

1,150,000

 

Debt issuance costs

 

(18,659

)

(7,123

)

Settlement of cash flow hedges

 

 

(4,354

)

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

 

300,591

 

21,686

 

Dividends paid on common and preferred stock

 

(291,787

)

(191,287

)

Distributions to minority interests

 

(17,088

)

(10,295

)

Net cash provided by financing activities

 

2,134,903

 

706,502

 

Net increase in cash and cash equivalents

 

510,448

 

624,021

 

Cash and cash equivalents, beginning of period

 

58,405

 

21,342

 

Cash and cash equivalents, end of period

 

$

568,853

 

$

645,363

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1) Business

HCP, Inc., formerly known as Health Care Property Investors, Inc., is a self-administered real estate investment trust (“REIT”) that, together with its consolidated entities (collectively, “HCP” or the “Company”), invests directly, or through joint ventures, in healthcare-related facilities located primarily throughout the United States.

(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 and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2006 included in the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission (“SEC”) on September 20, 2007.

Use of Estimates

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 revenue and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of HCP, its wholly-owned subsidiaries and its controlled, through voting rights or other means, joint ventures. All material intercompany transactions and balances have been eliminated in consolidation.

The Company applies Financial Accounting Standards Board (“FASB”) Interpretation No. 46R, Consolidation of Variable Interest Entities, as revised (“FIN 46R”), for arrangements with variable interest entities. FIN 46R provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise is the primary beneficiary of the VIE. A variable interest entity is broadly defined as an entity where either (i) the equity investors as a group, if any, do not have a controlling financial interest or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates investments in VIEs when the Company is the primary beneficiary of the VIE at either the creation of the variable interest entity or upon the occurrence of a reconsideration event.

The Company applies Emerging Issues Task Force (“EITF”) Issue 04-5, Investor’s Accounting for an Investment in a Limited Partnership When the Investor is the Sole General Partner and the Limited Partners Have Certain Rights (“EITF 04-05”), effective June 2005. EITF 04-05 concludes as to what rights held by the limited partner(s) preclude consolidation in circumstances in which the sole general partner would otherwise consolidate the limited partnership in accordance with GAAP. The assessment of limited partners’ rights and their impact on the presumption of control of the limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of the limited partners, (ii) the sole general partner increases or decreases its ownership of limited partnership interests, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. EITF 04-05 also applies to managing members in limited liability companies.

 

 

7



Investments in Unconsolidated Joint Ventures

Investments in entities which the Company does not consolidate but for which the Company has the ability to exercise significant influence over operating and financial policies are reported under the equity method. Under the equity method of accounting, the Company’s share of the investee’s earnings or loss is included in the Company’s operating results.

The carrying value of the investment in unconsolidated joint ventures is based on the amount paid to purchase the interest or the carrying value of the assets prior to the sale of interests in the joint venture. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference is amortized over the life of the related assets and liabilities and included in the Company’s share of equity in earnings of the joint venture. The Company recognizes gains on the sale of interests in joint ventures to the extent the economic substance of the transaction is a sale in accordance with the American Institute of Certified Public Accountants Statement of Position 78-9, Accounting for Investments in Real Estate Ventures and Statement of Financial Accounting Standards (“SFAS”) No. 66, Accounting for Sales of Real Estate (“SFAS No. 66”).

Revenue Recognition

Rental income from tenants is recognized in accordance with GAAP, including SEC Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB 104”). The Company recognizes rental revenue when the tenant takes possession or controls the physical use of the leased space. However, when the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession of the space until the tenant improvements are substantially completed. Certain leases provide for additional rents based upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when the related thresholds are achieved. For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue exceeding amounts contractually due from tenants. Such cumulative excess amounts are included in other assets and were $65.6 million and $35.6 million, net of allowances, at September 30, 2007 and December 31, 2006, respectively. In the event the Company determines that collectibility of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed, and, where appropriate, the Company establishes an allowance for estimated losses.

The Company monitors the liquidity and creditworthiness of its tenants and borrowers on an ongoing basis. The evaluation considers industry and economic conditions, property performance, security deposits and guarantees and other matters. The Company establishes provisions and maintains an allowance for estimated losses resulting from the possible inability of its tenants and borrowers to make payments sufficient to recover recognized assets. For straight-line rent amounts, the Company’s assessment is based on income recoverable over the term of the lease. At September 30, 2007 and December 31, 2006, the Company had an allowance of $32 million and $30 million, respectively, included in other assets, as a result of the Company’s determination that collectibility is not reasonably assured for certain straight-line rent amounts. The results for the three and nine months ended September 30, 2007, include income of $9 million and $15 million, respectively, resulting from the Company’s change in estimate relating to the collectibility of straight-line rents due from Summerville Senior Living, Inc. (“Summerville”) and Emeritus Corporation (“Emeritus”), of which $6 million is included in discontinued operations for the three and nine months ended September 30, 2007. On September 4, 2007, Emeritus acquired Summerville and provided the Company with additional security under its leases with Summerville.

The Company recognizes gains on sales of properties only upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the full accrual method when the collectibility of the sales price is reasonably assured, the Company is not obligated to perform significant activities after the sale, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the requirements for gain recognition under SFAS No. 66 have been met.

 

 

8



Loans Receivable

Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held for investment are carried at amortized cost reduced by a valuation allowance for estimated credit losses. The Company recognizes interest income on loans, including the amortization of discounts and premiums, using the effective interest method.

Real Estate

Real estate, consisting of land, buildings and improvements, is recorded at cost. The Company allocates acquisition costs to the acquired tangible and identified intangible assets and liabilities, primarily lease intangibles, based on their estimated fair values in accordance with SFAS No. 141, Business Combinations.

The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends and market and economic conditions. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant.

The Company records acquired “above and below” market leases at fair value using discount rates which reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the term for any below market fixed rate renewal options for below market leases. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rentals at market rates during the hypothetical expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related costs.

The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a project. In accordance with SFAS No. 34, Capitalization of Interest Cost and SFAS No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, construction and development costs are capitalized while substantive activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have stopped, are expensed as incurred. Costs previously capitalized related to abandoned acquisitions or development are written off. Expenditures for repairs and maintenance are expensed as incurred.

The Company computes depreciation on properties using the straight-line method over the assets’ estimated useful lives. Depreciation is discontinued when a property is identified as held for sale. Building and improvements are depreciated over useful lives ranging up to 45 years. Above and below market rent intangibles are amortized primarily to revenue over the remaining noncancellable lease terms and bargain renewal periods, if any. Other in-place lease intangibles are amortized to expense over the remaining noncancellable lease term and bargain renewal periods, if any.

At September 30, 2007 and December 31, 2006, intangible lease assets, net, comprised of lease-up intangibles, above market tenant lease intangibles, below market ground lease intangibles and intangible assets related to non-compete agreements, were $649 million and $381 million, respectively. At September 30, 2007 and December 31, 2006, the accumulated amortization of intangible assets was $78 million and $50 million, respectively. At September 30, 2007 and December 31, 2006, below market tenant lease intangibles and above market ground lease intangibles, net were $286 million and $134 million, respectively. At September 30, 2007 and December 31, 2006, the accumulated amortization of intangible liabilities was $24 million and $7 million, respectively.

 

9



Impairment of Long-Lived Assets and Goodwill

The Company assesses the carrying value of its long-lived assets, including investments in unconsolidated joint ventures, whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS No. 144”) and, with respect to goodwill, at least annually applying a fair-value-based test in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. If the sum of the expected future net undiscounted cash flows is less than the carrying amount of the long-lived asset, an impairment loss will be recognized by adjusting the asset’s carrying amount to its estimated fair value. The determination of the fair value of long-lived assets, including goodwill, involves significant judgment. This judgment is based on the Company’s analysis and estimates of the future operating results and resulting cash flows of each long-lived asset whose carrying amount may not be recoverable. The Company’s ability to accurately predict future operating results, and resulting cash flows, impact the determination of fair value.

Net Investment in Direct Financing Leases

The Company uses the direct finance method of accounting to record income from direct financing leases (“DFLs”). For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. The difference between the future minimum lease payments and the estimated residual values less the cost of the properties is recorded as unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield. Investments in direct financing leases are presented net of unamortized unearned income. DFLs have initial terms that range from 5 to 35 years.

Assets Held for Sale and Discontinued Operations

Certain long-lived assets are classified as discontinued operations in accordance with SFAS No. 144.  Long-lived assets to be disposed of are reported at the lower of their carrying amount or their fair value less cost to sell. Further, depreciation of these assets ceases at the time the assets are classified as discontinued operations. Discontinued operations are defined in SFAS No. 144 as a component of an entity that has either been disposed of or is deemed to be held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

Assets Held for Contribution

Properties classified as held for contribution to joint ventures qualify as held for sale under SFAS No. 144, but are not included in discontinued operations due to the Company’s continuing interest in the ventures.

Stock-Based Compensation

On January 1, 2002, the Company adopted the fair value method of accounting for stock-based compensation in accordance with SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS No. 148”). The fair value provisions of SFAS No. 123 were adopted prospectively with the fair value of all new stock option grants recognized as compensation expense beginning January 1, 2002. Since only new grants are accounted for under the fair value method, stock-based compensation expense is less than that which would have been recognized if the fair value method had been applied to all awards. Compensation expense for awards with graded vesting is generally recognized ratably over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional services.

SFAS No. 123R, Share-Based Payments (“SFAS No. 123R”), which is a revision of SFAS No. 123, was issued in December 2004. Generally, the approach in SFAS No. 123R is similar to that in SFAS No. 123. However, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. On January 1, 2006, the Company adopted SFAS No. 123R using the modified prospective application transition method which provides for only current and future period stock-based awards to be measured and recognized at fair value.

 

10



Cash and Cash Equivalents

Cash and cash equivalents includes short-term investments with original maturities of three months or less when purchased.

Restricted Cash

Restricted cash primarily consists of amounts held by mortgage lenders to provide for future real estate tax expenditures and tenant improvements, tenant capital improvement reserves, security deposits and net proceeds from property sales that were executed as a tax-deferred disposition.

Derivatives

The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“SFAS No. 133”). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities. It requires the recognition of all derivative instruments as assets or liabilities in the Company’s condensed consolidated balance sheets at fair value. Changes in the fair value of derivative instruments that are not designated as hedges or that do not meet the hedge accounting criteria of SFAS No. 133 are recognized in earnings. For derivatives designated as hedging instruments in qualifying cash flow hedges, the change in fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss) whereas the change in fair value of the ineffective portion is recognized in earnings.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to specific assets and liabilities in the balance sheet. The Company also assesses and documents, both at the hedging instrument’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows associated with the hedged items. When it is determined that a derivative ceases to be highly effective as a hedge, the Company discontinues hedge accounting prospectively.

Income Taxes

The Company has elected and believes it operates so as to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”). Under the Code, the Company generally is not subject to federal income tax on its taxable income distributed to stockholders if certain distribution, income, asset and stockholder tests are met. In order to maintain its REIT status, a REIT must generally distribute at least 90% of its annual taxable income, excluding any net capital gain, to stockholders.

On August 1, 2007, the Company acquired Slough Estates USA Inc. (“SEUSA”). Prior to the acquisition, SEUSA was a corporation subject to federal and state income taxes. The Company merged SEUSA with one of its subsidiaries, forming a new REIT subsidiary effective upon close of the transaction. This REIT subsidiary would be subject to a federal and state corporate level tax at the highest regular corporate rate if any gain is recognized within ten years of SEUSA’s conversion to a REIT from a taxable disposition of any assets that SEUSA held at the effective time of its election to be a REIT, but only to the extent of the built-in gain based on the fair market value of those assets on the effective date of the REIT election (which was August 1, 2007). The Company does not expect to dispose of any asset included in the SEUSA acquisition if such a disposition would result in the imposition of a material tax liability. As a result, the Company has not recorded a deferred tax liability associated with this corporate-level tax. Gains from asset dispositions occurring more than 10 years after the acquisition will not be subject to this corporate-level tax. However, the Company may dispose of SEUSA assets before the 10-year period if it is able to affect a tax deferred exchange. At September 30, 2007, the tax basis of the Company’s net assets included in the SEUSA acquisition is less than the reported amounts by $1.8 billion.

 

11



Certain activities the Company undertakes must be conducted by entities which elect to be treated as taxable REIT subsidiaries (“TRSs”). TRSs are subject to both federal and state income taxes. For the nine months ended September 30, 2007, income taxes, which are recognized in general and administrative expenses, related to the Company’s TRSs were approximately $1 million and were insignificant for the nine months ended September 30, 2006.

Effective January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the highest amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. The adoption of FIN 48 on January 1, 2007 did not have a significant impact on the Company’s financial position or results of operations.

The Company, its partnerships and its TRSs file U.S. federal income tax returns and state income and franchise tax returns in over 40 state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state income tax examinations by taxing authorities for years prior to 2004.  The Company’s policy is to recognize interest relating to unrecognized tax benefits in interest expense and related penalties as additional tax expense.  The Company has no material unrecognized tax benefits or no material associated interest or penalty accrual at September 30, 2007.

Marketable Securities

The Company classifies its existing marketable equity and debt securities as available-for-sale in accordance with the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Investment. These securities are carried at fair market value with unrealized gains and losses reported in stockholders’ equity as a component of accumulated other comprehensive income. Gains or losses on securities sold are based on the specific identification method. When the Company determines declines in fair value of marketable securities are other than temporary, the impairment loss is recognized, to the extent of the decline, as a realized investment loss in the current period’s net income.

Capital Raising Issuance Costs

Costs incurred in connection with the issuance of both common and preferred shares are recorded as a reduction in additional paid-in capital. Costs incurred in connection with the issuance of debt are deferred and included in other assets and amortized to interest expense over the remaining term of the related debt.

Minority Interest — Non-managing Member Unitholders

As of September 30, 2007, there were 8 million non-managing member units outstanding in seven limited liability companies of which the Company is the managing member: HCP DR MCD, LLC; HCPI/Tennessee, LLC; HCPI/Utah, LLC; HCPI/Utah II, LLC; HCPI/Indiana, LLC; HCP DR California, LLC and HCP DR Alabama, LLC. The Company consolidates these entities since it exercises control over them. The non-managing member LLC Units (“DownREIT units”) are exchangeable for an amount of cash approximating the then-existing market value of shares of the Company’s common stock or, at the Company’s option, shares of the Company’s common stock (subject to certain adjustments, such as stock splits and reclassifications).  At September 30, 2007, the market value of the 8 million DownREIT units was $335 million.

Segment Reporting

The Company reports its consolidated financial statements in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS No. 131”). The Company’s segments are based on the Company’s method of internal reporting which classifies its operations by sector. The Company’s segments include six business segments— (i) Senior Housing, (ii) Medical Office, (iii) Life Science, (iv) Hospital, (v) Skilled Nursing and (vi) Other Healthcare-related.

12



The acquisition of SEUSA, on August 1, 2007, resulted in a change to the Company’s reportable segments. Prior to the SEUSA acquisition, the Company operated through two reportable segments – Triple-net Leased and Medical Office Buildings.

Life Care Bonds Payable

Two of the Company’s continuing care retirement communities (“CCRCs”) issue non-interest bearing life care bonds payable to certain residents of the CCRCs. Generally, the bonds are refundable to the resident or to the resident’s estate upon termination or cancellation of the CCRC agreement. One of the Company’s other senior housing facilities requires that certain residents of the facility post non-interest bearing occupancy fee deposits that are refundable to the resident or the resident’s estate upon the earlier of the re-letting of the unit or after two years of vacancy. Proceeds from the issuance of new bonds are used to retire existing bonds. As the maturity of these obligations is not determinable, no interest is imputed. These amounts are included in other debt in the Company’s condensed consolidated balance sheets.

New Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurement. SFAS No. 157 requires prospective application for fiscal years beginning after November 15, 2007. The Company is evaluating SFAS No. 157 and has not yet determined the impact the adoption will have on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS No. 159”). SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company is evaluating SFAS No. 159 and has not yet determined the impact the adoption will have on the Company’s financial position or results of operations.

Reclassifications

Certain amounts in the prior years’ condensed consolidated financial statements have been reclassified to conform to the current year presentation. The reclassifications include the reclassification of properties sold or held for sale to discontinued operations in accordance with SFAS No. 144.

 

(3) Mergers and Acquisitions

Slough Estates USA Inc.

On August 1, 2007, the Company closed its acquisition of SEUSA for aggregate cash consideration of approximately $3.0 billion. SEUSA’s life science portfolio is concentrated in the San Francisco Bay Area and San Diego County and comprises 83 existing properties and an established development pipeline.

The calculation of total consideration follows (in thousands):

 

Payment of aggregate cash consideration

 

$

2,973,911

Estimated acquisition costs

 

11,290

Preliminary purchase price, net of assumed liabilities

 

2,985,201

Fair value of liabilities assumed, including debt

 

220,257

Preliminary purchase price

 

$

 3,205,458

 

 

13



Under the purchase method of accounting, the assets and liabilities of SEUSA were recorded at their relative fair values as of the date of the acquisition. As of September 30, 2007, the purchase price allocation is preliminary, and the final purchase price allocation will be determined pending the receipt of information necessary to complete the valuation of certain assets and liabilities, which may result in a change from the initial estimate.

HCP has not identified any material unrecorded pre-acquisition contingencies where an impairment of the related asset or determination of the related liability is probable and the amount can be reasonably estimated. If information becomes available which would indicate it is probable that such events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation.

The following table summarizes the preliminary estimated fair values of the SEUSA assets acquired and liabilities assumed as of the acquisition date of August 1, 2007 (in thousands):

 

Assets acquired

 

 

 

Buildings and improvements

 

$

 1,757,338

 

Developments in process

 

196,695

 

Land

 

839,700

 

Investments in and advances to unconsolidated joint ventures

 

33,345

 

Intangible assets

 

340,900

 

Cash and cash equivalents

 

7,637

 

Other assets

 

29,843

 

Total assets acquired

 

$

 3,205,458

 

 

 

 

 

Liabilities assumed

 

 

 

Mortgages payable and other debt

 

$

 33,553

 

Intangible liabilities

 

148,900

 

Other liabilities

 

37,804

 

Total liabilities assumed

 

220,257

 

Net assets acquired

 

$

 2,985,201

 

 

In connection with the Company’s acquisition of SEUSA, the Company obtained, from a syndicate of banks, a financing commitment for a $3.0 billion bridge loan under which $2.75 billion was borrowed at closing. Using proceeds from the sales of real estate in August 2007 and capital market transactions consummated in October 2007, the Company made aggregate payments of approximately $1.4 billion, reducing the outstanding principal balance of the bridge loan to $1.35 billion.

CNL Retirement Properties, Inc. and CNL Retirement Corp.

On October 5, 2006, HCP acquired CNL Retirement Properties, Inc. (“CRP”). CRP was a REIT that invested primarily in senior housing and medical office buildings located across the United States. In connection with the CRP merger, the Company incurred merger integration costs, such as employee transition costs and severance costs for certain former CRP employees.

Under the merger agreement with CRP, each share of CRP common stock was exchanged for $11.1293 in cash and 0.0865 of a share of HCP’s common stock, equivalent to approximately $2.9 billion in cash, and 22.8 million shares. Fractional shares were paid in cash. The Company financed the cash consideration paid to CRP stockholders and the expenses related to the transaction through a $1.0 billion offering of senior unsecured notes and a draw down under term and bridge loan facilities and a three year revolving credit facility. As of January 22, 2007, the term and bridge facilities had been repaid with proceeds from the issuance of senior notes, secured debt and common stock, disposition of certain real estate properties and from real estate joint ventures.  Simultaneous with the closing of the merger with CRP, HCP also merged with CNL Retirement Corp. (“CRC”) for aggregate consideration of approximately $120 million, which included the issuance of 4.4 million shares of HCP common stock.

 

14



Pro Forma Information

The following unaudited pro forma consolidated results of operations for the three and nine months ended September 30, 2007 and 2006 assume that the acquisitions of CRP, CRC and SEUSA were completed as of January 1, 2006 (in thousands, except per share amounts):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Revenues

 

$

303,073

 

$

264,205

 

$

879,392

 

$

782,710

 

Net income

 

303,026

 

8,362

 

449,945

 

81,941

 

Basic earnings per common share

 

1.44

 

0.02

 

2.11

 

0.34

 

Diluted earnings per common share

 

1.44

 

0.02

 

2.10

 

0.34

 

 

Pro forma data may not be indicative of the results that would have been obtained had the acquisitions actually occurred at the beginning of each of the periods presented, nor is it intended to be a projection of future results.

(4) Acquisitions of Real Estate Properties

A summary of acquisitions for the nine months ended September 30, 2007, excluding SEUSA (Note 3), follows (in thousands):

 

 

Consideration

 

Assets Acquired

 

Acquisitions (1)

 

Cash Paid

 

Real Estate

 

Debt Assumed

 

DownREIT Units (2)

 

Real Estate

 

Net Intangibles

 

Senior housing facilities

 

$

15,747

 

$

 

$

5,357

 

$

 

$

247,996

 

$

12,873

 

Medical office buildings

 

166,982

 

 

 

93,887

 

20,432

 

672

 

Hospitals

 

120,562

 

35,205

 

 

84,719

 

235,084

 

5,402

 

Other healthcare facilities

 

1,815

 

 

 

2,092

 

3,907

 

 

 

 

$

305,106

 

$

35,205

 

$

5,357

 

$

180,698

 

$

507,419

 

$

18,947

 

 

A summary of acquisitions during the year ended December 31, 2006, excluding CRP and CRC (Note 3) and consolidation of HCP Medical Office Portfolio, LLC (“HCP MOP”) (Note 7), is as follows (in thousands):

 

 

Consideration

 

Assets Acquired

 

Acquisitions (1)

 

Cash Paid

 

Real Estate

 

Debt Assumed

 

DownREIT Units (2)

 

Real Estate

 

Net Intangibles

 

Senior housing facilities

 

$

222,275

 

$

16,600

 

$

68,819

 

$

 

$

299,970

 

$

7,724

 

Medical office buildings

 

141,449

 

 

11,928

 

5,523

 

147,522

 

11,378

 

Hospitals

 

41,490

 

 

 

 

40,661

 

829

 

Other healthcare facilities

 

36,070

 

 

 

 

33,306

 

2,764

 

 

 

$

441,284

 

$

16,600

 

$

80,747

 

$

5,523

 

$

521,459

 

$

22,695

 


(1)                                  Includes transaction costs, if any.

(2)                                  Non-managing member LLC units.

During the nine months ended September 30, 2007, excluding the acquisition of SEUSA, the Company acquired properties aggregating $526 million, including the following significant acquisitions:

On January 31, 2007, the Company acquired three long-term acute care hospitals and received proceeds of $36 million in exchange for 11 skilled nursing facilities (“SNFs”) valued at approximately $77 million. The Company recognized a $47 million gain on the sale of these 11 SNFs. The three acquired properties have an initial lease term of ten years with two ten-year renewal options, and an initial contractual yield of 12% with escalators based on the lessee’s revenue growth. The acquired properties are included in a new master lease that contains 14 properties leased to the same operator.

 

15



On February 9, 2007, the Company acquired a medical campus that includes two hospital towers, six MOBs and three parking garages for approximately $350 million, including DownREIT units valued at $179 million. The initial yield on this campus is 7.2%.

On February 28, 2007, the Company acquired three MOBs for $25 million from the Cirrus Group, LLC (“Cirrus”). The three MOBs include approximately 131,000 rentable square feet and have an initial yield of 8.2%.

(5) Dispositions of Real Estate, Real Estate Interests and Discontinued Operations

Dispositions of Real Estate

During the nine months ended September 30, 2007, the Company sold 89 properties for $896 million, and recognized gains on sales of real estate of approximately $392 million, which included the sale of 41 properties to Emeritus for $502 million. During the nine months ended September 30, 2006, the Company sold 12 properties for $117 million and recognized gains on sales of real estate of approximately $47 million.

Dispositions of Real Estate Interests

On January 5, 2007, the Company formed a senior housing joint venture (“HCP Ventures II”), which included 25 properties valued at $1.1 billion and encumbered by a $686 million secured debt facility. The 25 properties included in this joint venture were acquired in the Company’s acquisition of CRP and were classified as held for contribution within three months from the close of the CRP acquisition. These assets were not depreciated or amortized, as these assets were held for contribution, and the value allocated to these assets was based on the disposition proceeds received. The Company received approximately $280 million in proceeds, including a one-time acquisition fee of $5.4 million, and no gain or loss was recognized for the sale of the Company’s 65% interest in this joint venture.

On April 30, 2007, the Company formed a medical office buildings (“MOB”) joint venture, HCP Ventures IV, LLC (“HCP Ventures IV”), which included 55 properties valued at approximately $585 million and encumbered by $344 million of secured debt. Upon the disposition of an 80% interest in this venture, the Company received proceeds of $196 million, including a one-time acquisition fee of $3 million, and recognized a gain of $10 million. There were no sales of interests in joint ventures during the nine months ended September 30, 2006.

Properties Held for Sale

At September 30, 2007 and December 31, 2006, the number of assets held for sale was seven and 96 with carrying amounts of $6 million and $502 million, respectively.

Properties Held for Contribution

At December 31, 2006, the Company classified as held for contribution 25 senior housing assets and 52 MOBs with an aggregate carrying value of $1.7 billion. There were no assets classified as held for contribution at September 30, 2007.The following table summarizes income from discontinued operations, gains on sales of real estate and impairments included in discontinued operations for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

16



 

 

Three Months Ended
September 30,

 

Nine Months ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Rental and related revenues

 

$

4,063

 

$

21,885

 

$

33,995

 

$

68,817

 

Other revenues

 

9

 

68

 

3,035

 

1,118

 

Total revenues

 

4,072

 

21,953

 

37,030

 

69,935

 

Depreciation and amortization expenses

 

51

 

5,009

 

6,465

 

15,792

 

Operating expenses

 

194

 

277

 

593

 

582

 

Other costs and expenses

 

83

 

256

 

3,836

 

728

 

Operating income from discontinued operations

 

$

3,744

 

$

16,411

 

$

26,136

 

$

52,833

 

 

 

 

 

 

 

 

 

 

 

Gains on sales of real estate

 

$

286,153

 

$

35,728

 

$

392,269

 

$

46,601

 

 

 

 

 

 

 

 

 

 

 

Impairments

 

$

 

$

 

$

 

$

4,711

 

 

 

 

 

 

 

 

 

 

 

Number of properties held for sale

 

7

 

141

 

7

 

141

 

Number of properties sold

 

42

 

4

 

89

 

12

 

Number of properties included in discontinued operations

 

49

 

145

 

96

 

153

 

 

See discussions of the HCP Ventures II and HCP Ventures IV transactions in Note 7.

(6) Net Investment in Direct Financing Leases

The components of net investment in DFLs consisted of the following at September 30, 2007 (dollars in thousands):

Minimum lease payments receivable

 

$

1,424,438

 

Estimated residual values

 

468,770

 

 

Less unearned income

 

(1,255,466

)

 

Net investment in direct financing leases

 

$

637,742

 

 

 

 

 

 

Properties subject to direct financing leases

 

30

 

 

 

The DFLs were acquired in the Company’s merger with CRP. CRP determined that these leases were DFLs, and the Company is generally required to carry forward CRP’s accounting conclusions after the acquisition date relative to their assessment of these leases. Certain leases contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms. Lease payments due to the Company relating to three land-only DFLs with a carrying value of $59.5 million are subordinate to first mortgage construction loans with third parties entered into by the tenants to fund development costs related to the properties. In addition, the Company’s land interest serves as collateral to the first mortgage construction lender.

During the three months ended September 30, 2007, two DFL tenants exercised their purchase options and the Company received proceeds of $51 million and recognized gains of $4.3 million, which are included in income from direct financing leases.

 

17



(7) Investments in and Advances to Unconsolidated Joint Ventures

The Company owns interests in the following entities which are accounted for under the equity method at September 30, 2007 (dollars in thousands):

Entity (1)

 

Investment (2)

 

Ownership

 

HCP Ventures II

 

$

145,244

 

35

%

HCP Ventures III, LLC

 

13,520

 

30

%

HCP Ventures IV, LLC

 

49,762

 

20

%

Arborwood Living Center, LLC (4)

 

914

 

45

%

Greenleaf Living Centers, LLC (4)

 

455

 

45

%

Suburban Properties, LLC

 

5,176

 

67

%

LASDK LP (5)

 

14,193

 

63

%

Britannia Biotech Gateway LP (5)

 

13,971

 

55

%

Torrey Pines Science Center LP (5)

 

5,364

 

50

%

Advances to unconsolidated joint ventures, net

 

77

 

 

 

 

 

$

248,676

 

 

 

 

 

 

 

 

 

Edgewood Assisted Living Center, LLC (3)(4)

 

$

(484

)

45

%

Seminole Shores Living Center, LLC (3)(4)

 

(908

)

50

%

 

 

$

(1,392

)

 

 


(1)                                  These joint ventures are not consolidated since the Company does not control, through voting rights or other means, the joint ventures. See Note 2 regarding the Company’s policy on consolidation.

(2)                                  Represents the carrying value of the Company’s investment in the unconsolidated joint venture. See Note 2 regarding the Company’s policy for accounting for joint venture interests.

(3)                                  Negative investment amounts are included in accounts payable and accrued liabilities.

(4)                                  As of September 30, 2007, the Company has guaranteed in the aggregate $7 million of a total of $15 million of notes payable for these four joint ventures. No liability has been recorded related to these guarantees as of September 30, 2007.

(5)                                  Represents interests acquired in the SEUSA acquisition.

On October 27, 2006, the Company formed an MOB joint venture, HCP Ventures III, LLC (“HCP Ventures III”), with an institutional capital partner. The joint venture includes 13 properties valued at $140 million and encumbered by $92 million of mortgage debt. Upon sale of a 70% interest in the venture, the Company received approximately $36 million in proceeds, including a one-time acquisition fee of $0.7 million. A 30% interest in the venture was retained by an 85% owned subsidiary of the Company, which represents an effective 26% interest. The Company acts as the managing member and expects to receive ongoing asset management fees.

On January 5, 2007, the Company formed a senior housing joint venture, HCP Ventures II, with an institutional capital partner.  The joint venture includes 25 properties valued at $1.1 billion and encumbered by a $686 million secured debt facility. Upon the sale of a 65% interest in the venture, the Company received approximately $280 million in proceeds, including a one-time acquisition fee of $5.4 million. The one-time acquisition fee of $5.4 million is included in investment management fee income for the nine months ended September 30, 2007. The Company acts as the managing member and expects to receive ongoing asset management fees.

On April 30, 2007, the Company formed an MOB joint venture, HCP Ventures IV, with an institutional capital partner. The joint venture included 55 properties valued at approximately $585 million and encumbered by $344 million of secured debt. Upon the sale of an 80% interest in the venture, the Company received proceeds of $196 million and recognized a gain on sale of real estate interest of $10 million. These proceeds included a one-time acquisition fee of $3 million, which is included in investment management fee income for the nine months ended September 30, 2007. The Company acts as the managing member and expects to receive ongoing asset management fees.

During the nine months ended September 30, 2007, HCP Ventures IV acquired three MOBs valued at $58 million and concurrently placed $38 million of secured debt.  The acquisitions were funded pro-rata by the Company and its joint venture partner.

 

18



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

 

 

September 30,
2007

 

December 31,
2006

 

Real estate, net

 

$

1,761,517

 

$

150,206

 

Other assets, net

 

196,488

 

25,358

 

Total assets

 

$

1,958,005

 

$

175,564

 

 

 

 

 

 

 

Notes payable

 

$

1,195,485

 

$

116,805

 

Accounts payable

 

44,689

 

13,690

 

Other partners’ capital

 

520,927

 

32,549

 

HCP’s capital (1)

 

196,904

 

12,520

 

Total liabilities and partners’ capital

 

$

1,958,005

 

$

175,564

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006 (2)

 

2007

 

2006 (2)

 

Total revenues

 

$

44,380

 

$

20,652

 

$

129,412

 

$

60,760

 

Discontinued operations

 

 

1,779

 

 

19,805

 

Net income

 

1,634

 

2,750

 

10,100

 

22,463

 

HCP’s equity income

 

1,242

 

1,044

 

3,758

 

7,580

 

Fees earned by HCP

 

1,602

 

678

 

12,062

 

2,675

 

Distributions received

 

2,388

 

8,561

 

480,140

 

13,968

 


(1)                                 Aggregate basis difference of the Company’s investments in these joint ventures of $50 million is primarily attributable to real estate and related intangible assets.

(2)                                 The amounts for the three and nine months ended September 30, 2006, include the results of HCP MOP.

HCP Medical Office Portfolio, LLC

HCP MOP was a joint venture formed in June 2003 between the Company and an affiliate of General Electric Company (“GE”). HCP MOP was engaged in the acquisition, development and operation of MOB properties. Prior to November 30, 2006, the Company was the managing member and had a 33% ownership interest therein. On November 30, 2006, the Company acquired the interest held by GE for $141 million, which resulted in the consolidation of HCP MOP beginning on that date. The Company is now the sole owner of the venture and its 59 MOBs. Under the purchase method of accounting, the cost of the HCP MOP acquisition was allocated based on the relative fair values as of the date that the Company acquired each of its interests in HCP MOP. During the nine months ended September 30, 2007, the Company revised its initial purchase price allocation of its acquired interest in HCP MOP, which resulted in the Company allocating an additional $43 million to land and reducing intangible assets by the same amount from its preliminary allocation at December 31, 2006.  The changes from the Company’s initial purchase price allocation did not have a significant impact on the Company’s results of operations during the nine months ended September 30, 2007.

Prior to November 30, 2006, the Company accounted for its investment in HCP MOP using the equity method of accounting because it exercised significant influence through voting rights and its position as managing member. However, the Company did not consolidate HCP MOP until November 30, 2006, since it did not control, through voting rights or other means, the joint venture as GE had substantive participating decision making rights and had the majority of the economic interest. The accounting policies of HCP MOP prior to November 30, 2006, are the same as those described in the summary of significant accounting policies (see Note 2).

 

19



(8) Loans Receivable

Loans receivable, net consist of the following (in thousands):

 

 

September 30, 2007

 

December 31, 2006

 

 

 

Real Estate
Secured

 

Other

 

Total

 

Real Estate
 Secured

 

Other

 

Total

 

Joint venture partners

 

$

 

$

7,047

 

$

7,047

 

$

 

$

7,054

 

$

7,054

 

Others

 

69,275

 

83,798

 

153,073

 

121,482

 

69,624

 

191,106

 

Loan loss allowance

 

 

(241

)

(241

)

 

(1,680

)

(1,680

)

 

 

$

69,275

 

$

90,604

 

$

159,879

 

$

121,482

 

$

74,998

 

$

196,480

 

 

Through the Company’s merger with CRP, it assumed an agreement to provide an affiliate of the Cirrus Group, LLC with an interest only, senior secured term loan, maturing December 31, 2008, under which up to $85 million may be borrowed to finance the acquisition, development, syndication and operation of new and existing surgical partnerships. Certain of these surgical partnerships are tenants in the MOBs CRP acquired from Cirrus. This loan accrues interest at a rate of 14.0%, of which 9.5% will be payable monthly and the balance of 4.5% will be deferred. The loan is subject to equity contribution requirements and borrower financial covenants that will dictate the draw down availability. The loan is collateralized by all of the assets of the borrower (comprised primarily of interests in partnerships operating surgical facilities in premises leased from a Cirrus affiliate, HCP Ventures IV or the Company) and is guaranteed up to $50 million through a combination of (i) a personal guarantee of up to $13 million by a principal of Cirrus and (ii) a guarantee of the balance by other principals of Cirrus under arrangements for recourse limited only to their interests in certain entities owning real estate.   At September 30, 2007, the carrying value of this loan is $83 million, including accrued interest of $5 million.

On July 12, 2007, the Company received $44 million in proceeds, including $4 million in excess of the carrying value, which was recorded in interest and other income, upon the early repayment of a secured loan receivable due December 28, 2015. This loan was secured by a hospital in Texas and carried an interest rate of 8.75% per annum.

(9) Other Assets

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

 

 

September 30,
2007

 

December 31,
2006

 

Available-for-sale debt securities

 

$

291,256

 

$

322,500

 

Available-for-sale equity securities

 

15,569

 

15,159

 

Goodwill

 

51,746

 

51,746

 

Straight-line rent assets, net

 

65,644

 

35,582

 

Other

 

89,742

 

51,348

 

Total other assets

 

$

513,957

 

$

476,335

 

 

Marketable Securities

At September 30, 2007, the Company had debt securities with a carrying value of $291 million, which includes $16 million in unrealized gains. At December 31, 2006, the Company had debt securities with a carrying value of $323 million, which includes $23 million in unrealized gains. At September 30, 2007 and December 31, 2006, there were no debt securities with unrealized losses. These securities accrue interest at interest rates ranging from 9.25% to 9.625%, and mature in November 2016 and April 2017. During the nine months ended September 30, 2007, the Company realized gains totaling $4 million, which were recognized in interest and other income, related to the sale of $45 million, or a portion, of the debt securities. There were no sales of debt securities during the three months ended September 30, 2007 and 2006 or the nine months ended September 30, 2006.

 

20



At September 30, 2007, the Company had equity securities with a carrying value of $16 million, which includes $2.6 million in gross unrealized losses and $0.4 million in gross unrealized gains. During the nine months ended September 30, 2007 and 2006, the Company realized gains totaling $1 million and $2 million, respectively, related to the sale of various equity securities. At December 31, 2006, the Company had equity securities with a carrying value of $­­­15 million, which includes $2 million in unrealized gains.

There were no other-than-temporary impairments to debt and equity marketable securities during the three and nine months ended September 30, 2007 and 2006.

(10) Debt

Bank Lines of Credit and Bridge and Term Loans

In connection with the completion of the SEUSA acquisition, on August 1, 2007, the Company terminated its former $1.0 billion line of credit facility and closed on a $2.75 billion bridge loan and a $1.5 billion revolving line of credit facility with a syndicate of banks. The Company incurred a charge of $6.2 million related to the write-off of unamortized loan fees associated with its previous revolving credit facility that was terminated in August 2007.

The Company’s $1.5 billion revolving line of credit facility matures on August 1, 2011, and accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 0.325% to 1.00%, depending upon the Company’s non-credit enhanced senior unsecured long-term debt ratings (“debt ratings”). The Company pays a facility fee on the entire revolving commitment ranging from 0.10% to 0.25%, depending upon its debt ratings. The revolving line of credit facility contains a negotiated rate option available for up to 50% of the borrowings, whereby the lenders participating in the credit facility bid on the interest to be charged and which may result in a reduced interest rate. Based on the Company’s debt ratings on October 1, 2007, the margin on the revolving line of credit facility is 0.55% and the facility fee is 0.15%. As of September 30, 2007, there was no balance outstanding under the $1.5 billion revolving line of credit facility.

The Company’s bridge loan for $2.75 billion matures on July 31, 2008 and accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 0.425% to 1.25%, depending upon the Company’s debt ratings. Based on the Company’s debt ratings on October 26, 2007, the margin on the bridge loan facility is 0.70%. The bridge loan facility includes two 6-month extensions. Using proceeds from sales of real estate in August 2007 and capital market transactions in October 2007, the Company made aggregate payments of approximately $1.4 billion, reducing the outstanding principal balance of the bridge loan to $1.35 billion.

The revolving line of credit facility contains certain financial restrictions and other customary requirements. Among other things, these covenants, using terms defined in the agreement, initially limit the ratio of (i) Consolidated Total Indebtedness to Consolidated Total Asset Value to 75%, (ii) Secured Debt to Consolidated Total Asset Value to 30% and (iii) Unsecured Debt to Consolidated Unencumbered Asset Value to 90%. The agreement also requires that the Company maintains (i) a Fixed Charge Coverage ratio, as defined in the agreement, of 1.50 times and (ii) a formula-determined Minimum Consolidated Tangible Net Worth. These financial covenants become more restrictive over a period of approximately two years and ultimately (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 65% and (iii) require a Fixed Charge Coverage ratio, as defined in the agreement, of 1.75 times. As of September 30, 2007, the Company was in compliance with each of the restrictions and requirements of its revolving line of credit facility.

On January 22, 2007, the Company repaid all amounts outstanding under a former $1.7 billion term loan, issued in connection with the October 2006 CRP acquisition, with proceeds from capital market and joint venture transactions.

 

21



Senior Unsecured Notes

On January 22, 2007, the Company issued $500 million in aggregate principal amount of 6.00% senior unsecured notes due in 2017. The notes were priced at 99.323% of the principal amount for an effective yield of 6.09%. The Company received net proceeds of approximately $493 million, which were used to repay its former term loan facility and reduce outstanding borrowings under its revolving credit facility.

At September 30, 2007, the Company had $3.2 billion in aggregate principal amount of senior unsecured notes outstanding. Interest rates on the notes ranged from 4.88% to 7.07% with a weighted average effective rate of 6.09% at September 30, 2007. Discounts and premiums are amortized to interest expense over the term of the related debt.

On October 15, 2007, the Company issued $600 million in aggregate principal amount of 6.70% senior unsecured notes due in 2018. The notes were priced at 99.793% of the principal amount for an effective yield of 6.73%. The Company received net proceeds of approximately $595 million, which were used to repay outstanding borrowings under the Company’s bridge loan.

The senior unsecured notes contain certain covenants including limitations on debt and other customary terms. As of September 30, 2007, the Company was in compliance with these covenants.

Mortgage Debt

On April 27, 2007, in anticipation of the formation of HCP Ventures IV, $122 million of 10-year term mortgage notes were placed with an interest rate of 5.53%. The proceeds from the placement of these notes were used to repay borrowings under the Company’s previous $1.0 billion revolving credit facility and for other general corporate purposes.

At September 30, 2007, the Company had $1.3 billion in mortgage debt secured by 200 healthcare facilities with a carrying amount of $3.0 billion. Interest rates on the mortgage notes ranged from 3.80% to 8.63% with a weighted average effective rate of 6.07% at September 30, 2007.

The instruments encumbering the properties restrict title transfer of the respective properties subject to the terms of the mortgage, prohibit additional liens, restrict prepayment, require payment of real estate taxes, maintenance of the properties in good condition, maintenance of insurance on the properties and include a requirement to obtain lender consent to enter into and terminate material tenant leases.

Other Debt

At September 30, 2007, the Company had $109.2 million of non-interest bearing Life Care Bonds at two of its CCRCs and non-interest bearing occupancy fee deposits at another of its senior housing facilities, all of which were payable to certain residents of the facilities (collectively “Life Care Bonds”). At September 30, 2007, $38.4 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to a resident’s estate upon the resident’s death, and $70.8 million of the Life Care Bonds were refundable after the unit has been successfully remarketed to a new resident.

(11) Stockholders’ Equity

Preferred Stock

On January 29, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.45313 per share on its Series E cumulative redeemable preferred stock and $0.44375 per share on its Series F cumulative redeemable preferred stock. These dividends were paid on March 31, 2007 to stockholders of record as of the close of business on March 15, 2007.

On April 25, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.45313 per share on its Series E cumulative redeemable preferred stock and $0.44375 per share on its Series F cumulative redeemable preferred stock. These dividends were paid on June 29, 2007 to stockholders of record as of the close of business on June 15, 2007.

 

22



On July 26, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.45313 per share on its Series E cumulative redeemable preferred stock and $0.44375 per share on its Series F cumulative redeemable preferred stock. These dividends were paid on September 28, 2007 to stockholders of record as of the close of business on September 14, 2007.

On October 25, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.45313 per share on its Series E cumulative redeemable preferred stock and $0.44375 per share on its Series F cumulative redeemable preferred stock. These dividends will be paid on December 31, 2007 to stockholders of record as of the close of business on December 17, 2007.

Common Stock

During the nine months ended September 30, 2007 and 2006, the Company issued 1.1 million and 596,000 shares, respectively, of common stock under its Dividend Reinvestment and Stock Purchase Plan. The Company issued 328,000 and 360,000 shares upon exercise of stock options during the nine months ended September 30, 2007 and 2006, respectively.

During the nine months ended September 30, 2007 and 2006, the Company issued 273,000 and 102,000 shares of restricted stock, respectively, under the Company’s 2000 Stock Incentive Plan, as amended, and the Company’s 2006 Performance Incentive Plan. The Company also issued 110,000 and 121,000 shares upon the vesting of performance restricted stock units during the nine months ended September 30, 2007 and 2006, respectively.

On January 19, 2007, the Company issued 6.8 million shares of its common stock and received net proceeds of approximately $261.1 million, which were used to repay outstanding borrowings under the Company’s previous term loan and previous $1.0 billion revolving credit facility.

On January 29, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.445 per share of common stock. The common stock cash dividend was paid on February 21, 2007 to stockholders of record as of the close of business on February 5, 2007.

On April 25, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.445 per share of common stock. The common stock cash dividend was paid on May 18, 2007 to stockholders of record as of the close of business on May 7, 2007.

On July 26, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.445 per share of common stock. The common stock cash dividend was paid on August 21, 2007 to stockholders of record as of the close of business on August 6, 2007.

On October 5, 2007, the Company issued 9 million shares of common stock and received net proceeds of approximately $302.6 million, which were used to repay borrowings under the Company’s bridge loan.

On October 25, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.445 per share of common stock. The common stock cash dividend will be paid on November 19, 2007 to stockholders of record as of the close of business on November 5, 2007.

Accumulated Other Comprehensive Income (“AOCI”)

 

 

September 30,
2007

 

December 31,
2006

 

 

 

(in thousands)

 

AOCI—unrealized gains on available-for-sale securities

 

$

13,835

 

$

24,536

 

AOCI—unrealized losses on cash flow hedges, net

 

(3,950

)

(4,596

)

Foreign currency translation adjustment

 

(28

)

 

Supplemental Executive Retirement Plan minimum liability

 

(2,139

)

(2,215

)

 

 

$

7,718

 

$

17,725

 

 

 

23



 

(12) Operator Concentration

Revenue from rental properties and DFLs managed by Sunrise Senior Living, Inc. (“Sunrise”) accounted for 14% of the Company’s revenue for the nine months ended September 30, 2007. The carrying amount of the Company’s real estate assets and DFL properties managed by Sunrise was $2.1 billion at September 30, 2007. Prior to the Company’s merger with CRP on October 5, 2006, Sunrise was not an operator of any of the Company’s properties.

Sunrise is a publicly traded company and is subject to the informational filing requirements of the Securities and Exchange Act of 1934, as amended. Accordingly, Sunrise is required to file periodic reports on Form 10-K and Form 10-Q with the SEC disclosing the results of its operations and its financial condition among other factors affecting its business.

Certain operators of the Company’s properties, including Sunrise, are experiencing financial, legal and regulatory difficulties. The loss of a significant operator or a combination of smaller operators could have a material adverse impact on the Company’s financial position or results of operations.

(13) Impairments

During the three and nine months ended September 30, 2007, no properties were deemed to be impaired. During the nine months ended September 30, 2006, three properties were deemed impaired resulting in impairment charges of $4.7 million. Impairment charges principally arose as a result of an assessment of the planned near-term disposition of two properties and a decrease in expected cash flows from a third property.

(14) Segment Disclosures

The Company invests directly, or through joint ventures, in healthcare-related facilities located primarily throughout the United States. The Company evaluates its business and makes resource allocations on its six business segments— (i) Senior Housing, (ii) Medical Office, (iii) Life Science, (iv) Hospital, (v) Skilled Nursing and (vi) Other Healthcare-related. Under the Senior Housing, Life Science, Hospital, Skilled Nursing and Other Healthcare-related segments, the Company invests primarily in single tenant properties through acquisition and development of real estate, secured financing and investment in marketable debt securities of operators in these sectors. Under the Medical Office segment, the Company invests through acquisition and secured financing in MOBs that are primarily leased under gross or modified gross leases, generally to multiple tenants, and which generally require a greater level of property management. The acquisition of SEUSA on August 1, 2007 resulted in a change to the Company’s reportable segments. Prior to the SEUSA acquisition, the Company operated through two reportable segments – Triple-net Leased and Medical Office Buildings. The Senior Housing, Life Science, Hospital, Skilled Nursing and Other Healthcare-related segments were previously aggregated under the Company’s Triple-net Leased segment. SEUSA’s results are included in the Company’s consolidated financial statements from the date of the Company’s acquisition on August 1, 2007. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2). There are no intersegment sales or transfers. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”) of the combined properties in each segment.

Non-segment revenue consists mainly of gains on sales of marketable securities and other income. Non-segment assets consist of corporate assets including cash, restricted cash, accounts receivable, net, equity securities and deferred financing costs. Interest expense, depreciation and amortization and other non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s performance measure.

 

24



HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

For the three months ended September 30, 2007:

Segments

 

Rental and
Related
Revenues

 

Income
From
DFLs

 

Investment
Management
Fees

 

Interest
and Other

 

Total
Revenues

 

NOI (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Housing

 

$

79,351

 

$

18,832

 

$

806

 

$

632

 

$

99,621

 

$

75,797

 

Medical Office

 

80,679

 

 

796

 

2,942

 

84,417

 

42,795

 

Life Science

 

35,730

 

 

 

 

35,730

 

25,884

 

Hospital

 

33,497

 

 

 

7,495

 

40,992

 

32,650

 

Skilled Nursing

 

10,905

 

 

 

439

 

11,344

 

10,828

 

Other Healthcare-related

 

2,105

 

 

 

 

2,105

 

1,731

 

Total segments

 

242,267

 

18,832

 

1,602

 

11,508

 

274,209

 

189,685

 

Non-segment revenues

 

 

 

 

10,040

 

10,040

 

 

Total

 

$

242,267

 

$

18,832

 

$

1,602

 

$

21,548

 

$

284,249

 

$

189,685

 

 

For the three months ended September 30, 2006:

Segments

 

Rental and
Related
Revenues

 

Investment
Management
Fees

 

Interest
and Other

 

Total
Revenues

 

NOI (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Housing

 

$

30,530

 

$

 

$

597

 

$

31,127

 

$

27,258

 

Medical Office

 

41,399

 

678

 

18

 

42,095

 

26,095

 

Life Science

 

4,420

 

 

 

4,420

 

3,436

 

Hospital

 

23,431

 

 

2,214

 

25,645

 

23,431

 

Skilled Nursing

 

10,423

 

 

591

 

11,014

 

10,417

 

Other Healthcare-related

 

2,031

 

 

 

2,031

 

1,695

 

Total segments

 

112,234

 

678

 

3,420

 

116,332

 

92,332

 

Non-segment revenues

 

 

 

3,483

 

3,483

 

 

Total

 

$

112,234

 

$

678

 

$

6,903

 

$

119,815

 

$

92,332

 

 

For the nine months ended September 30, 2007: 

Segments

 

Rental and
Related
Revenues

 

Income
From
DFLs

 

Investment
Management
Fees

 

Interest
and Other

 

Total
Revenues

 

NOI (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Housing

 

$

217,045

 

$

49,037

 

$

7,770

 

$

1,589

 

$

275,441

 

205,885

 

Medical Office

 

251,289

 

 

4,292

 

8,029

 

263,610

 

143,218

 

Life Science

 

45,875

 

 

 

 

45,875

 

33,624

 

Hospital

 

96,074

 

 

 

23,076

 

119,150

 

95,111

 

Skilled Nursing

 

32,449

 

 

 

1,318

 

33,767

 

32,321

 

Other Healthcare-related

 

6,262

 

 

 

 

6,262

 

5,171

 

Total segments

 

648,994

 

49,037

 

12,062

 

34,012

 

744,105

 

515,330

 

Non-segment revenues

 

 

 

 

20,743

 

20,743

 

 

Total

 

$

648,994

 

$

49,037

 

$

12,062

 

$

54,755

 

$

764,848

 

$

515,330

 

 

 

25



For the nine months ended September 30, 2006:

Segments

 

Rental and
Related
Revenues

 

Investment
Management
Fees

 

Interest
and Other

 

Total
Revenues

 

NOI (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Housing

 

$

82,909

 

$

 

$

2,364

 

$

85,273

 

$

73,941

 

Medical Office

 

119,946

 

2,675

 

55

 

122,676

 

76,623

 

Life Science

 

12,800

 

 

 

12,800

 

9,796

 

Hospital

 

67,828

 

 

6,751

 

74,579

 

67,827

 

Skilled Nursing

 

30,648

 

 

9,659

 

40,307

 

30,626

 

Other Healthcare-related

 

6,043

 

 

 

6,043

 

5,109

 

Total segments

 

320,174

 

2,675

 

18,829

 

341,678

 

263,922

 

Non-segment revenues

 

 

 

7,158

 

7,158

 

 

Total

 

$

320,174

 

$

2,675

 

$

25,987

 

$

348,836

 

$

263,922

 


(1)                                  NOI is a non-GAAP supplemental financial measure used to evaluate the operating performance of real estate properties. The Company defines NOI as rental revenues, including tenant reimbursements, less property-level operating expenses, which exclude depreciation and amortization, general and administrative expenses, impairments, interest expense and discontinued operations. The Company believes NOI provides investors relevant and useful information because it measures the operating performance of the Company’s real estate at the property level on an unleveraged basis. The Company uses NOI to make decisions about resource allocations and assess property-level performance. The Company believes that net income is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP since it does not reflect the aforementioned excluded items. Further, the Company’s definition of NOI may not be comparable to that of other real estate investment trusts, as those companies may use different methodologies for calculating NOI.

The following is a reconciliation from NOI to reported net income, a financial measure under GAAP (in thousands):

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

Net operating income from continuing operations

 

$

189,685

 

$

92,332

 

$

515,330

 

$

263,922

 

Income from DFLs

 

18,832

 

 

49,037

 

 

Investment management fee income

 

1,602

 

678

 

12,062

 

2,675

 

Interest and other income

 

21,548

 

6,903

 

54,755

 

25,987

 

Interest expense

 

(103,829

)

(36,727

)

(255,918

)

(101,986

)

Depreciation and amortization

 

(74,253

)

(27,779

)

(195,415

)

(80,033

)

General and administrative

 

(16,558

)

(8,261

)

(55,443

)

(25,137

)

Equity income from unconsolidated joint ventures

 

1,242

 

1,044

 

3,758

 

7,580

 

Gain on sale of real estate interest

 

 

 

10,141

 

 

Minority interests’ share of earnings

 

(6,018

)

(3,511

)

(17,992

)

(11,458

)

Total discontinued operations

 

289,897

 

52,139

 

418,405

 

94,723

 

Net income

 

$

322,148

 

$

76,818

 

$

538,720

 

$

176,273

 

 

The Company’s total assets by segment follows (in thousands):

 

Segments

 

September 30,
2007

 

December 31,
2006

 

 

 

 

 

 

 

Senior Housing

 

$

4,334,925

 

$

5,919,517

 

Medical Office

 

2,276,135

 

2,438,607

 

Life Science

 

3,207,335

 

164,724

 

Hospital

 

1,389,486

 

951,548

 

Skilled Nursing

 

324,374

 

336,494

 

Other Healthcare-related

 

68,585

 

99,574

 

Gross segment assets

 

11,600,840

 

9,910,464

 

Accumulated depreciation and amortization

 

(727,233

)

(660,670

)

Net segment assets

 

10,873,607

 

9,249,794

 

Non-segment assets

 

1,222,526

 

762,955

 

Total assets

 

$

12,096,133

 

$

10,012,749

 

 

 

26



(15) Supplemental Cash Flow

Supplemental Cash Flow Information

 

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

 

 

(in thousands )

 

Interest paid, net of capitalized interest and other

 

$

234,051

 

$

98,364

 

Taxes paid

 

958

 

13

 

Supplemental schedule of non-cash investing activities:

 

 

 

 

 

Capitalized interest

 

4,024

 

588

 

Accrued construction costs

 

18,868

 

 

Real estate exchanged in real estate acquisitions

 

35,205

 

16,600

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

Restricted stock issued

 

273

 

102

 

Vesting of restricted stock units

 

110

 

117

 

Cancellation of restricted stock

 

(34

)

(60

)

Conversion of non-managing member units into common stock

 

157

 

274

 

Mortgages assumed with real estate acquisitions

 

5,357

 

73,321

 

Non-managing member units issued in connection with acquisitions

 

180,698

 

5,523

 

Unrealized gains (losses) on available for sale securities and derivatives designated as cash flow hedges

 

(6,241

)

314

 

 

See also discussions of the SEUSA and CRP acquisitions and HCP Ventures II and HCP Ventures IV transactions in Notes 3 and 7, respectively.

(16) Earnings Per Share of Common Stock

The Company computes earnings per share in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated including the effect of dilutive securities. Approximately 0.6 million and 1.2 million options to purchase shares of common stock during the three months ended September 30, 2007 and 2006, respectively, were not included because they are not dilutive. Additionally, 10.1 million shares issuable upon conversion of 7.6 million DownREIT units during the three months ended September 30, 2007, and 6.0 million shares issuable upon conversion of 3.4 million DownREIT units during the three months ended September 30, 2006, were not included because they are not dilutive.

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands, except per share data)

 

(in thousands, except  per share data)

 

Numerator

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

32,251

 

$

24,679

 

$

120,315

 

$

81,550

 

Preferred stock dividends

 

(5,282

)

(5,282

)

(15,848

)

(15,848

)

Income from continuing operations applicable to common shares

 

26,969

 

19,397

 

104,467

 

65,702

 

Discontinued operations

 

289,897

 

52,139

 

418,405

 

94,723

 

Net income applicable to common shares for basic and diluted earnings per share

 

$

316,866