Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

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

 

For the quarterly period ended June 30, 2010.

 

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)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer x

 

Accelerated Filer o

 

 

 

Non-accelerated Filer o

 

Smaller Reporting Company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of July 29, 2010, there were 310,066,208 shares of the registrant’s $1.00 par value common stock outstanding.

 

 

 



Table of Contents

 

HCP, INC.

INDEX

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements:

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Equity

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows

 

7

 

 

 

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

8

 

 

 

 

 

Item 2.

 

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

 

26

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

39

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

 

 

 

 

 

Item 1A.

 

Risk Factors

 

39

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

 

 

 

 

 

Item 6.

 

Exhibits

 

40

 

 

 

 

 

Signatures

 

 

 

44

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

8,087,909

 

$

7,802,979

 

Development costs and construction in progress

 

124,573

 

272,542

 

Land

 

1,557,168

 

1,544,004

 

Accumulated depreciation and amortization

 

(1,147,237

)

(1,047,641

)

Net real estate

 

8,622,413

 

8,571,884

 

 

 

 

 

 

 

Net investment in direct financing leases

 

604,382

 

600,077

 

Loans receivable, net

 

1,707,609

 

1,672,938

 

Investments in and advances to unconsolidated joint ventures

 

265,436

 

267,978

 

Accounts receivable, net of allowance of $8,239 and $10,772, respectively

 

37,050

 

43,726

 

Cash and cash equivalents

 

96,260

 

112,259

 

Restricted cash

 

39,817

 

33,000

 

Intangible assets, net

 

356,387

 

389,698

 

Real estate held for sale, net

 

 

13,461

 

Other assets, net

 

515,289

 

504,714

 

Total assets

 

$

12,244,643

 

$

12,209,735

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

 

$

 

Term loan

 

 

200,000

 

Senior unsecured notes

 

3,524,022

 

3,521,325

 

Mortgage and other secured debt

 

1,751,520

 

1,834,935

 

Other debt

 

94,956

 

99,883

 

Intangible liabilities, net

 

186,152

 

200,260

 

Accounts payable and accrued liabilities

 

312,775

 

309,596

 

Deferred revenue

 

81,898

 

85,127

 

Total liabilities

 

5,951,323

 

6,251,126

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

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; 308,038,877 and 293,548,162 shares issued and outstanding, respectively

 

308,039

 

293,548

 

Additional paid-in capital

 

6,157,609

 

5,719,400

 

Cumulative dividends in excess of earnings

 

(634,066

)

(515,450

)

Accumulated other comprehensive loss

 

(4,552

)

(2,134

)

Total stockholders’ equity

 

6,112,203

 

5,780,537

 

 

 

 

 

 

 

Joint venture partners

 

14,995

 

7,529

 

Non-managing member unitholders

 

166,122

 

170,543

 

Total noncontrolling interests

 

181,117

 

178,072

 

Total equity

 

6,293,320

 

5,958,609

 

Total liabilities and equity

 

$

12,244,643

 

$

12,209,735

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

 

 

 

Three months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

231,458

 

$

229,822

 

$

456,797

 

$

442,048

 

Tenant recoveries

 

22,120

 

21,010

 

43,906

 

44,660

 

Income from direct financing leases

 

11,995

 

13,204

 

24,210

 

26,129

 

Interest income

 

36,156

 

27,084

 

71,422

 

53,855

 

Investment management fee income

 

1,290

 

1,369

 

2,598

 

2,807

 

Total revenues

 

303,019

 

292,489

 

598,933

 

569,499

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

77,912

 

79,293

 

156,059

 

159,516

 

Interest expense

 

72,747

 

75,340

 

148,703

 

152,014

 

Operating

 

45,451

 

45,685

 

91,568

 

93,638

 

General and administrative

 

20,526

 

20,232

 

45,450

 

38,763

 

Impairments (recoveries)

 

 

5,781

 

(11,900

)

5,781

 

Total costs and expenses

 

216,636

 

226,331

 

429,880

 

449,712

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

224

 

1,648

 

580

 

(790

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes and equity income from unconsolidated joint ventures

 

86,607

 

67,806

 

169,633

 

118,997

 

Income taxes

 

(577

)

(840

)

(964

)

(1,727

)

Equity income from unconsolidated joint ventures

 

2,486

 

1,127

 

3,869

 

665

 

Income from continuing operations

 

88,516

 

68,093

 

172,538

 

117,935

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

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

 

14

 

2,670

 

93

 

4,180

 

Impairments

 

 

(125

)

 

(125

)

Gain on sales of real estate, net of income taxes

 

65

 

30,540

 

65

 

31,897

 

Total discontinued operations

 

79

 

33,085

 

158

 

35,952

 

 

 

 

 

 

 

 

 

 

 

Net income

 

88,595

 

101,178

 

172,696

 

153,887

 

Noncontrolling interests’ share in earnings

 

(3,494

)

(3,719

)

(6,559

)

(7,545

)

Net income attributable to HCP, Inc.

 

85,101

 

97,459

 

166,137

 

146,342

 

Preferred stock dividends

 

(5,283

)

(5,283

)

(10,566

)

(10,566

)

Participating securities’ share in earnings

 

(353

)

(392

)

(1,270

)

(707

)

Net income applicable to common shares

 

$

79,465

 

$

91,784

 

$

154,301

 

$

135,069

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.27

 

$

0.22

 

$

0.52

 

$

0.38

 

Discontinued operations

 

 

0.13

 

 

0.14

 

Net income applicable to common shares

 

$

0.27

 

$

0.35

 

$

0.52

 

$

0.52

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.27

 

$

0.22

 

$

0.52

 

$

0.38

 

Discontinued operations

 

 

0.13

 

 

0.14

 

Net income applicable to common shares

 

$

0.27

 

$

0.35

 

$

0.52

 

$

0.52

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

294,880

 

265,422

 

294,056

 

259,412

 

Diluted

 

296,037

 

265,542

 

295,067

 

259,516

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.465

 

$

0.460

 

$

0.93

 

$

0.92

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2010

 

11,820

 

$

285,173

 

293,548

 

$

293,548

 

$

5,719,400

 

$

(515,450

)

$

(2,134

)

$

5,780,537

 

$

178,072

 

$

5,958,609

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

166,137

 

 

166,137

 

6,559

 

172,696

 

Change in net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

 

 

(1,938

)

(1,938

)

 

(1,938

)

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

(22

)

(22

)

 

(22

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

 

 

(934

)

(934

)

 

(934

)

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

535

 

535

 

 

535

 

Change in Supplemental Executive Retirement Plan obligation

 

 

 

 

 

 

 

65

 

65

 

 

65

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(124

)

(124

)

 

(124

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

163,719

 

6,559

 

170,278

 

Issuance of common stock, net

 

 

 

14,496

 

14,496

 

431,423

 

 

 

445,919

 

(4,423

)

441,496

 

Repurchase of common stock

 

 

 

(145

)

(145

)

(4,045

)

 

 

(4,190

)

 

(4,190

)

Exercise of stock options

 

 

 

140

 

140

 

3,143

 

 

 

3,283

 

 

3,283

 

Amortization of deferred compensation

 

 

 

 

 

7,688

 

 

 

7,688

 

 

7,688

 

Preferred dividends

 

 

 

 

 

 

(10,566

)

 

(10,566

)

 

(10,566

)

Common dividends ($0.93 per share)

 

 

 

 

 

 

(274,187

)

 

(274,187

)

 

(274,187

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(8,195

)

(8,195

)

Sale of noncontrolling interests

 

 

 

 

 

 

 

 

 

8,395

 

8,395

 

Other

 

 

 

 

 

 

 

 

 

709

 

709

 

June 30, 2010

 

11,820

 

$

285,173

 

308,039

 

$

308,039

 

$

6,157,609

 

$

(634,066

)

$

(4,552

)

$

6,112,203

 

$

181,117

 

$

6,293,320

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

 

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2009

 

11,820

 

$

285,173

 

253,601

 

$

253,601

 

$

4,873,727

 

$

(130,068

)

$

(81,162

)

$

5,201,271

 

$

206,569

 

$

5,407,840

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

146,342

 

 

146,342

 

7,545

 

153,887

 

Change in net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 

 

 

61,787

 

61,787

 

 

61,787

 

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

(131

)

(131

)

 

(131

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 

 

 

32

 

32

 

 

32

 

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

590

 

590

 

 

590

 

Change in Supplemental Executive Retirement Plan obligation

 

 

 

 

 

 

 

44

 

44

 

 

44

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

21

 

21

 

 

21

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

208,685

 

7,545

 

216,230

 

Issuance of common stock, net

 

 

 

21,745

 

21,745

 

423,762

 

 

 

445,507

 

(21,873

)

423,634

 

Repurchase of common stock

 

 

 

(93

)

(93

)

(2,088

)

 

 

(2,181

)

 

(2,181

)

Amortization of deferred compensation

 

 

 

 

 

7,537

 

 

 

7,537

 

 

7,537

 

Preferred dividends

 

 

 

 

 

 

(10,566

)

 

(10,566

)

 

(10,566

)

Common dividends ($0.92 per share)

 

 

 

 

 

 

(234,132

)

 

(234,132

)

 

(234,132

)

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

(7,840

)

(7,840

)

Purchase of noncontrolling interests

 

 

 

 

 

(4,725

)

 

 

(4,725

)

(4,372

)

(9,097

)

June 30, 2009

 

11,820

 

$

285,173

 

275,253

 

$

275,253

 

$

5,298,213

 

$

(228,424

)

$

(18,819

)

$

5,611,396

 

$

180,029

 

$

5,791,425

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

172,696

 

$

153,887

 

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

 

156,059

 

159,516

 

Discontinued operations

 

824

 

711

 

Amortization of above and below market lease intangibles, net

 

(3,708

)

(10,980

)

Stock-based compensation

 

7,688

 

7,537

 

Amortization of debt premiums, discounts and issuance costs, net

 

5,304

 

4,313

 

Straight-line rents

 

(21,695

)

(25,759

)

Interest accretion

 

(30,742

)

(11,567

)

Deferred rental revenue

 

(2,022

)

7,890

 

Equity income from unconsolidated joint ventures

 

(3,869

)

(665

)

Distributions of earnings from unconsolidated joint ventures

 

3,648

 

2,589

 

Gain on sales of real estate

 

(65

)

(31,897

)

Marketable securities gains, net

 

(35

)

(293

)

Derivative losses, net

 

723

 

154

 

Impairments (recoveries)

 

(11,900

)

5,906

 

Changes in:

 

 

 

 

 

Accounts receivable

 

4,456

 

4,676

 

Other assets

 

1,375

 

(6,452

)

Accounts payable and accrued liabilities

 

(2,640

)

(9,469

)

Net cash provided by operating activities

 

276,097

 

250,097

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions and development of real estate

 

(157,176

)

(39,319

)

Lease commissions and tenant and capital improvements

 

(16,545

)

(18,826

)

Proceeds from sales of real estate, net

 

 

52,281

 

Contributions to unconsolidated joint ventures

 

(264

)

 

Distributions in excess of earnings from unconsolidated joint ventures

 

1,723

 

4,428

 

Proceeds from the sale of securities

 

242

 

4,800

 

Principal repayments on loans receivable and direct financing leases

 

25,586

 

4,727

 

Investments in loans receivable

 

(8,081

)

(16

)

(Increase) decrease in restricted cash

 

(6,817

)

2,727

 

Net cash provided by (used in) investing activities

 

(161,332

)

10,802

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments under bank line of credit

 

 

(50,000

)

Repayment of term loan

 

(200,000

)

(320,000

)

Repayments of mortgage debt

 

(87,720

)

(51,060

)

Repurchase of senior unsecured notes

 

 

(7,735

)

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

 

440,589

 

421,453

 

Dividends paid on common and preferred stock

 

(284,753

)

(244,698

)

Sale of noncontrolling interest

 

8,395

 

 

Purchase of noncontrolling interests

 

 

(9,097

)

Distributions to noncontrolling interests

 

(7,275

)

(7,840

)

Net cash used in financing activities

 

(130,764

)

(268,977

)

Net decrease in cash and cash equivalents

 

(15,999

)

(8,078

)

Cash and cash equivalents, beginning of period

 

112,259

 

57,562

 

Cash and cash equivalents, end of period

 

$

96,260

 

$

49,484

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)         Business

 

HCP, Inc., an S&P 500 company, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company is a self-administered, Maryland real estate investment trust (“REIT”) organized in 1985. The Company is headquartered in Long Beach, California, with offices in Nashville, Tennessee and San Francisco, California. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s portfolio is comprised of investments in the following five healthcare segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) hospital and (v) skilled nursing. The Company makes investments within its healthcare segments using the following five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) DownREITs.

 

(2)         Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

The condensed consolidated financial statements include the accounts of HCP, its wholly-owned subsidiaries and joint ventures that it controls through voting rights or other means. All material intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, the results of operations and the cash flows have been included. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).

 

Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale and associated liabilities have been reclassified on the condensed consolidated balance sheets and operating results reclassified from continuing to discontinued operations (see Note 4). All prior period interest income and interest expense have been reclassified to be presented as components of “revenues” and “costs and expenses,” respectively, from “other income (expense), net” as a result of a significant increase in the Company’s lending operations.

 

Accounting Change

 

Effective January 1, 2010, the Company implemented the requirements of Accounting Standards Update No. 2009-17, Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“Update No. 2009-17”). Update No. 2009-17 requires enterprises to perform a qualitative approach when determining whether or not a variable interest entity (“VIE”) will need to be consolidated on a continuous basis. This evaluation is based on an enterprise’s ability to direct the activities of a variable interest entity that most significantly impact that entity’s economic performance. As a result of its implementation analysis, the Company concluded that it had additional variable interests in various VIEs. The Company has determined that it is not the primary beneficiary of these additional VIEs (see Note 17).

 

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Table of Contents

 

Recent Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. The amendments in this update require, among other things, new disclosures and clarifications of existing disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities, and additional details of valuation techniques and inputs utilized. This update is consistent with the Company’s current accounting application for fair value measurements and disclosures and did not have a material impact on its consolidated financial position or results of operations.

 

In July 2010, the FASB issued Accounting Standards Update No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (“ASC 2010-20”). The amendments in this update require additional disclosure about the credit quality of financing receivables, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how allowances for credit losses are developed and how credit exposure is managed. ASC 2010-20 is effective for interim periods and fiscal years ending after December 15, 2010.

 

(3)         Real Estate Property Investments

 

During the six months ended June 30, 2010, the Company purchased five senior housing facilities for aggregate cash consideration of $110 million. The fair value of the acquired assets was allocated as follows: (i) $96.7 million for buildings and improvements; (ii) $13.1 million for land; and (iii) $0.4 million for intangible assets.

 

During the six months ended June 30, 2010, the Company funded an aggregate of $61 million for construction, tenant and other capital improvement projects, primarily in the life science segment. During the six months ended June 30, 2010, three of the Company’s life science facilities located in South San Francisco were placed into service representing 329,000 square feet.

 

During the six months ended June 30, 2009, the Company purchased the remaining noncontrolling interests in three senior housing joint ventures for $14 million and funded an aggregate of $55 million for construction, tenant and other capital improvement projects, primarily in our life science segment.

 

(4)   Dispositions of Real Estate and Discontinued Operations

 

Dispositions of Real Estate

 

On April 1, 2010, the Company sold one hospital for total consideration of $15 million, including a $13 million note receivable that is collaterized by this hospital.

 

During the three months ended June 30, 2009, the Company sold two hospitals for approximately $46 million and recognized gain on sales of real estate of $31 million. During the six months ended June 30, 2009, the Company sold nine properties for $52 million and recognized gain on sales of real estate of $32 million, primarily from the hospital and medical office segments.

 

Results from Discontinued Operations

 

The following table summarizes operating income from discontinued operations and gain on sales of real estate included in discontinued operations (dollars in thousands):

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Rental and related revenues

 

$

 

$

3,157

 

$

885

 

$

5,316

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

 

336

 

824

 

711

 

Operating expenses

 

 

220

 

4

 

393

 

Other (income) expenses, net

 

(14

)

(69

)

(36

)

32

 

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

 

$

14

 

$

2,670

 

$

93

 

$

4,180

 

 

 

 

 

 

 

 

 

 

 

Impairments

 

$

 

$

125

 

$

 

$

125

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate, net of income taxes

 

$

65

 

$

30,540

 

$

65

 

$

31,897

 

 

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Table of Contents

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Number of properties held for sale

 

 

6

 

 

6

 

Number of properties sold

 

1

 

2

 

1

 

9

 

Number of properties included in discontinued operations

 

1

 

8

 

1

 

15

 

 

(5)         Net Investment in Direct Financing Leases

 

The components of net investment in direct financing leases (“DFLs”) consist of the following (dollars in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Minimum lease payments receivable

 

$

1,266,992

 

$

1,338,634

 

Estimated residual values

 

409,270

 

467,248

 

Allowance for DFL losses

 

 

(54,957

)

Less unearned income

 

(1,071,880

)

(1,150,848

)

Net investment in direct financing leases

 

$

604,382

 

$

600,077

 

Properties subject to direct financing leases

 

27

 

30

 

 

Lease payments previously due to the Company relating to three land-only DFLs, along with the land, were subordinate to and served as collateral for first mortgage construction loans entered into by Erickson Retirement Communities and its affiliate entities (“Erickson”) to fund development costs related to the properties. On October 19, 2009, Erickson filed for bankruptcy protection, which included a plan of reorganization.

 

On December 23, 2009, an auction was concluded with respect to Erickson’s assets, and on December 30, 2009, Erickson filed an amended plan of reorganization providing additional detail about the results of the auction and the allocation of auction proceeds. The amended plan proposed that the Company would not be entitled to any of the proceeds with respect to the three DFLs, but would receive a nominal recovery with respect to the Company’s participation in the senior construction loan. Additionally, on January 4, 2010, Erickson served the Company with adversary complaints claiming, among other things, that the Company’s interest as a landlord under the DFLs should be treated as if it were instead the interest of a lender with a security interest in the properties. Even though Erickson’s amended plan of reorganization had not been confirmed in the bankruptcy proceedings, the Company concluded that, as a result of the auction, the subsequent allocation of the auction proceeds and management’s evaluation of Erickson’s pursuit of remedies consistent with the extinguishment of the Company’s DFL interests, it was appropriate to reduce the carrying value of these assets to a nominal amount associated with the expected partial recovery of the participation interest in the senior construction loan.

 

In February 2010, the Company entered into a settlement agreement with Erickson which was subsequently approved by the bankruptcy court. In April 2010, the reorganization was completed, which resulted in the Company (i) retaining deposits held by the Company with balances of $5 million and (ii) receiving an additional $9.6 million. As a result, during the three months ended March 31, 2010, the Company recognized aggregate income of $11.9 million in impairment recoveries, which represented the reversal of a portion of the allowances established pursuant to the previous impairment charges related to its investments in the three DFLs and participation interest in the senior construction loan. This amount is shown as impairment recoveries in the condensed consolidated statement of income.

 

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Table of Contents

 

(6)   Loans Receivable

 

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

 

 

 

June 30, 2010

 

December 31, 2009

 

 

 

Real Estate
Secured

 

Other

 

Total

 

Real Estate
Secured

 

Other
Secured

 

Total

 

Mezzanine

 

$

 

$

999,118

 

$

999,118

 

$

 

$

999,118

 

$

999,118

 

Other

 

782,708

 

87,081

 

869,789

 

783,798

 

84,079

 

867,877

 

Unamortized discounts, fees and costs

 

(100,490

)

(56,517

)

(157,007

)

(115,422

)

(66,196

)

(181,618

)

Allowance for loan losses

 

 

(4,291

)

(4,291

)

(8,148

)

(4,291

)

(12,439

)

 

 

$

682,218

 

$

1,025,391

 

$

1,707,609

 

$

660,228

 

$

1,012,710

 

$

1,672,938

 

 

On October 5, 2006, the Company acquired an interest-only, senior secured term loan made to an affiliate of the Cirrus Group, LLC (“Cirrus”). The loan had a maturity date of December 31, 2008, with a one-year extension period at the option of the borrower, subject to certain terms and conditions, under which amounts were borrowed to finance the acquisition, development, syndication and operation of new and existing surgical partnerships. The loan accrued interest at a rate of 14.0%, of which 9.5% is payable monthly and 4.5% is deferred until maturity. The loan is collateralized by all of the assets of the borrower (comprised primarily of interests in partnerships operating surgical facilities, some of which are on the premises of properties owned by HCP Ventures IV, LLC, an unconsolidated joint venture of the Company) and is supported in part by limited guarantees made by certain principals of Cirrus. Recourse under certain of these guarantees is limited to the guarantors’ respective interests in certain entities owning real estate that are pledged to secure such guarantees. At December 31, 2008, the borrower did not meet the conditions necessary to exercise its extension option and did not repay the loan upon maturity. On April 22, 2009, new terms for extending the maturity date of the loan were agreed to, including the payment of a $1.1 million extension fee, and the maturity date was extended to December 31, 2010. In July 2009, the Company issued a notice of default for the borrower’s failure to make interest payments. In December 2009, the Company determined that the loan was impaired and recognized a provision for loan loss of $4.3 million. This provision for loan loss resulted from discussions that began in December 2009 to restructure the loan. The proposed terms of the loan restructure include an extension of the maturity date and a reduction of the contractual interest rate for a portion of the outstanding principal balance. During the three months ended June 30, 2010, Cirrus informed the Company that it began marketing for sale certain assets included in its collateral pool; Cirrus expects the sales to be completed during the remaining period of 2010. Assuming that Cirrus is successful in selling these assets, the Company estimates a partial repayment of its loan to Cirrus of up to $60 million. At June 30, 2010 and December 31, 2009, the carrying value of this loan, including accrued interest of $6.2 million and $5.2 million, respectively, was $88.1 million and $83.5 million, respectively. During the three and six months ended June 30, 2010, the Company recognized interest income from this loan of $2.8 million and $5.7 million, respectively, and received cash payments from the borrower of $0.2 million and $0.9 million, respectively.

 

On December 21, 2007, the Company made an investment in mezzanine loans having an aggregate par value of $1.0 billion at a discount of $100 million, which resulted in an acquisition cost of $900 million, as part of the financing for The Carlyle Group’s $6.3 billion purchase of Manor Care, Inc. These interest-only loans mature in January 2013 and bear interest on their par values at a floating rate of one-month London Interbank Offered Rate (“LIBOR”) plus 4.0%. These loans are mandatorily pre-payable in January 2012 unless the borrower satisfies certain performance conditions. Among other things, these performance conditions require the borrower to: (i) maintain an interest-rate cap agreement(s) with a strike price of 5.25% at an equivalent maturity to that of the underlying loans; and (ii) maintain a trailing-twelve-month Debt Service Coverage Ratio, as defined in the respective agreement, of no less than 1.45 times. At closing, the loans were secured by an indirect pledge of equity ownership in 339 HCR ManorCare facilities located in 30 states and were subordinate to other debt of approximately $3.6 billion. At June 30, 2010 and December 31, 2009, the carrying value of these loans was $944 million and $934 million, respectively.

 

On August 3, 2009, the Company purchased a $720 million participation in the first mortgage debt of HCR ManorCare at a discount of $130 million, which resulted in an acquisition cost of $590 million. The $720 million participation bears interest at LIBOR plus 1.25% and represents 45% of the $1.6 billion most senior tranche of HCR ManorCare’s mortgage debt incurred as part of the above mentioned financing for The Carlyle Group’s acquisition of Manor Care, Inc. in December 2007. The mortgage debt matures in January 2013, if the borrower exercises a one-year extension option and meets certain performance conditions, which are similar to those described above. The mortgage debt was secured by a first lien on 331 facilities located in 30 states at closing. At June 30, 2010 and December 31, 2009, the carrying value of the participation in this loan was $621 million and $604 million, respectively.

 

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Table of Contents

 

(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 June 30, 2010 (dollars in thousands):

 

Entity(1)

 

Properties

 

Investment(2)

 

Ownership%

HCP Ventures II

 

25 senior housing facilities

 

$

138,598

 

35

HCP Ventures III, LLC

 

13 medical office buildings (“MOBs”)

 

10,400

 

30

HCP Ventures IV, LLC

 

54 MOBs and 4 hospitals

 

38,835

 

20

HCP Life Science(3)

 

4 life science facilities

 

64,779

 

50-63

Horizon Bay Hyde Park, LLC

 

1 senior housing development

 

8,195

 

75

Suburban Properties, LLC

 

1 MOB

 

3,098

 

67

Advances to unconsolidated joint ventures, net

 

 

 

1,531

 

 

 

 

 

 

$

265,436

 

 

Edgewood Assisted Living Center, LLC(4)

 

1 senior housing facility

 

$

(820

)

45

Seminole Shores Living Center, LLC(4)

 

1 senior housing facility

 

(277

)

50

 

 

 

 

$

264,339

 

 

 


(1)         These entities are not consolidated since the Company does not control, through voting rights or other means, the joint ventures. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2009 in the Company’s Annual Report on Form 10-K filed with the SEC 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 to the Consolidated Financial Statements for the year ended December 31, 2009 in the Company’s Annual Report on Form 10-K filed with the SEC regarding the Company’s policy for accounting for joint venture interests.

(3)         Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following partnerships: (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

(4)         As of June 30, 2010, the Company has guaranteed in the aggregate $4 million of a total of $8 million of notes payable for these joint ventures. No amounts have been recorded related to these guarantees at June 30, 2010. Negative investment amounts are included in accounts payable and accrued liabilities in the Company’s condensed consolidated financial statements.

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Real estate, net

 

$

1,639,345

 

$

1,655,754

 

Other assets, net

 

194,720

 

189,841

 

Total assets

 

$

1,834,065

 

$

1,845,595

 

 

 

 

 

 

 

Mortgage debt

 

$

1,153,948

 

$

1,159,589

 

Accounts payable

 

38,715

 

38,255

 

Other partners’ capital

 

456,924

 

462,243

 

HCP’s capital(1)

 

184,478

 

185,508

 

Total liabilities and partners’ capital

 

$

1,834,065

 

$

1,845,595

 

 


(1)          The aggregate basis difference of the Company’s investments in these joint ventures of $78 million, as of June 30, 2010, is primarily attributable to real estate and lease related intangible assets.

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Total revenues

 

$

46,959

 

$

45,998

 

$

92,803

 

$

92,600

 

Net income (loss)

 

3,492

 

75

 

4,383

 

(1,095

)

HCP’s equity income

 

2,486

 

1,127

 

3,869

 

665

 

Fees earned by HCP

 

1,290

 

1,369

 

2,598

 

2,807

 

Distributions received

 

3,147

 

3,835

 

5,371

 

7,017

 

 

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Table of Contents

 

(8)         Intangibles

 

At June 30, 2010 and December 31, 2009, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles, below market ground lease intangibles and intangible assets related to non-compete agreements, were $565.8 million and $592.1 million, respectively. At June 30, 2010 and December 31, 2009, the accumulated amortization of intangible assets was $209.4 million and $202.4 million, respectively.

 

At June 30, 2010 and December 31, 2009, below market lease and above market ground lease intangible liabilities were $275.6 million and $284.2 million, respectively. At June 30, 2010 and December 31, 2009, the accumulated amortization of intangible liabilities was $89.4 million and $83.9 million, respectively.

 

On October 5, 2006, the Company acquired CNL Retirement Properties, Inc. (“CRP”) in a merger and through the purchase method of accounting, allocated $35 million to above-market lease intangibles to 15 senior housing facilities that were operated by Sunrise Senior Living, Inc. In June 2009, in a subsequent review of the relative fair value calculations for these lease intangibles, the Company noted valuation errors, which resulted in an aggregate overstatement of above-market lease intangible assets and an understatement of building and improvements of $28 million. In the periods from October 5, 2006 through March 31, 2009, these errors resulted in an understatement of rental and related revenues and depreciation expense of approximately $6 million and $2 million, respectively.  The Company recorded the related corrections in the three months ended June 30, 2009, and determined that such misstatements to the Company’s results of operations and financial position during the periods from October 5, 2006 through June 30, 2009, were immaterial.

 

(9)         Other Assets

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

Marketable debt securities

 

$

170,538

 

$

172,799

 

Marketable equity securities

 

3,775

 

3,521

 

Straight-line rent assets, net of allowance of $52,784 and $48,681, respectively

 

180,825

 

158,674

 

Deferred debt issuance costs, net

 

14,810

 

18,607

 

Goodwill

 

50,346

 

50,346

 

Other

 

94,995

 

100,767

 

Total other assets

 

$

515,289

 

$

504,714

 

 

The cost or amortized cost, estimated fair value and gross unrealized gains and losses on marketable securities follows (in thousands):

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

Cost Basis (1)

 

Fair Value

 

Gains

 

Losses

 

June 30, 2010:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

160,830

 

$

170,538

 

$

9,858

 

$

(150

)

Equity securities

 

3,638

 

3,775

 

200

 

(63

)

Total investments

 

$

164,468

 

$

174,313

 

$

10,058

 

$

(213

)

 

 

 

 

 

 

 

 

 

 

December 31, 2009:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

160,830

 

$

172,799

 

$

11,969

 

$

 

Equity securities

 

3,685

 

3,521

 

236

 

(400

)

Total investments

 

$

164,515

 

$

176,320

 

$

12,205

 

$

(400

)

 


(1)          Represents the original cost basis of the marketable securities adjusted for discount accretion and other-than-temporary impairments recorded through earnings, if any.

 

At June 30, 2010, $141 million (par value) of the Company’s marketable debt securities accrue interest at 9.625% and mature in November 2016 and $20 million (par value) accrue interest at 9.25% and mature in May 2017. The issuers of these notes may elect to pay interest in cash or by issuing additional debt securities for all or a portion of the interest payments. In May 2009, the Company received $14 million of additional debt securities in lieu of its cash interest payment. In May 2009, the issuer of the Company’s 9.625% debt securities, which had previously elected to issue additional debt securities in lieu of its cash interest payment, elected to resume making its interest payments in cash.

 

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Table of Contents

 

During the three and six months ended June 30, 2009, the Company sold debt securities with a cost basis of $4 million, which resulted in gains of approximately $0.8 million, included in interest and other income (expense), net.

 

(10) Debt

 

Bank Line of Credit and Term Loan

 

The Company’s revolving line of credit facility with a syndicate of banks provides for an aggregate borrowing capacity of $1.5 billion and matures on August 1, 2011. This revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon the Company’s debt ratings. The Company pays a facility fee on the entire revolving commitment that depends upon its debt ratings. Based on the Company’s debt ratings at June 30, 2010, the margin on the revolving line of credit facility was 0.55% and the facility fee was 0.15%. At June 30, 2010, the Company had no amounts drawn under this revolving line of credit facility. At June 30, 2010, $113 million of aggregate letters of credit were outstanding against the revolving line of credit facility, including a $103 million letter of credit as a result of the Ventas, Inc. (“Ventas”) litigation. For further information regarding the Ventas litigation, see Note 11.

 

The Company’s revolving line of credit facility contains certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreement (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%, (iii) require a Fixed Charge Coverage ratio of 1.75 times, and (iv) require a formula-determined Minimum Consolidated Tangible Net Worth of $5.2 billion at June 30, 2010. At June 30, 2010, the Company was in compliance with each of these restrictions and requirements of the revolving line of credit facility.

 

On March 10, 2010, the Company repaid the total outstanding indebtedness of $200 million under its term loan. The term loan, with an original maturity of August 1, 2011, was repaid primarily with funds available under the Company’s revolving line of credit facility. As a result of the early repayment of the term loan, the Company recognized a charge of $1.3 million related to unamortized issuance costs. At the time the term loan was paid off, it accrued interest at a rate per annum equal to LIBOR plus 2.00%.

 

Senior Unsecured Notes

 

At June 30, 2010, the Company had senior unsecured notes outstanding with an aggregate principal balance of $3.5 billion. Interest rates on the notes ranged from 1.44% to 7.07%. The weighted-average effective interest rate on the senior unsecured notes at June 30, 2010 was 6.13%. Discounts and premiums are amortized to interest expense over the term of the related notes. The senior unsecured notes contain certain covenants including limitations on debt, cross-acceleration provisions and other customary terms. At June 30, 2010, the Company believes it was in compliance with these covenants.

 

Mortgage and Other Secured Debt

 

At June 30, 2010, the Company had $1.7 billion in aggregate principal amount of mortgage and other secured debt outstanding that is secured by 152 healthcare facilities, which had a carrying value of $2.2 billion, as well as a participation in a first mortgage loan with a carrying value of $621 million. Interest rates on the mortgage notes ranged from 0.70% to 8.30% with a weighted average effective rate of 4.87% at June 30, 2010.

 

Mortgage debt generally requires monthly principal and interest payments, is collateralized by certain properties and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered properties, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the properties in good condition, requires maintenance of insurance on the properties and includes requirements to obtain lender consent to enter into and terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple properties and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such properties.

 

Other Debt

 

At June 30, 2010, the Company had $95 million of non-interest bearing life care bonds at two of its continuing care retirement communities 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 June 30, 2010, $40.1 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $54.9 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.

 

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Debt Maturities

 

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2010 (in thousands):

 

Year

 

Senior
Unsecured
Notes

 

Mortgage
and Other
Secured
Debt

 

Total (1)

 

2010 (Six months)

 

$

206,421

 

$

20,235

 

$

226,656

 

2011

 

292,265

 

146,917

 

439,182

 

2012

 

250,000

 

63,776

 

313,776

 

2013

 

550,000

 

675,104

 

1,225,104

 

2014

 

87,000

 

177,435

 

264,435

 

Thereafter

 

2,150,000

 

665,680

 

2,815,680

 

 

 

3,535,686

 

1,749,147

 

5,284,833

 

(Discounts) and premiums, net

 

(11,664

)

2,373

 

(9,291

)

 

 

$

3,524,022

 

$

1,751,520

 

$

5,275,542

 

 


(1)              Excludes $95 million of other debt that represents non-interest bearing Life Care Bonds and occupancy fee deposits at three of the Company’s senior housing facilities, which have no scheduled maturities.

 

(11) Commitments and Contingencies

 

Legal Proceedings

 

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. Regardless of their merits, these matters may force the Company to expend significant financial resources. Except as described herein, the Company is not aware of any other legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition or results of operations. The Company’s policy is to accrue legal expenses as they are incurred.

 

On May 3, 2007, Ventas filed a complaint against the Company in the United States District Court for the Western District of Kentucky asserting claims of tortious interference with contract and tortious interference with prospective business advantage. The complaint alleged, among other things, that the Company interfered with Ventas’ purchase agreement with Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”); that the Company interfered with Ventas’ prospective business advantage in connection with the Sunrise REIT transaction; and that the Company’s actions caused Ventas to suffer damages. As part of the same litigation, the Company filed counterclaims against Ventas as successor to Sunrise REIT. On March 25, 2009, the District Court issued an order dismissing the Company’s counterclaims. On April 8, 2009, the Company filed a motion for leave to file amended counterclaims. On May 26, 2009, the District Court denied the Company’s motion.

 

Ventas sought approximately $300 million in compensatory damages plus punitive damages. On July 16, 2009, the District Court dismissed Ventas’ claim that HCP interfered with Ventas’ purchase agreement with Sunrise REIT, dismissed claims for compensatory damages based on alleged financing and other costs, and allowed Ventas’ claim of interference with prospective advantage to proceed to trial. Ventas’ claim was tried before a jury between August 18, 2009 and September 4, 2009. During the trial, the District Court dismissed Ventas’ claim for punitive damages. On September 4, 2009, the jury returned a verdict in favor of Ventas in the amount of approximately $102 million in compensatory damages. The District Court entered a judgment against the Company in that amount on September 8, 2009, which the Company recognized as a provision for litigation expense during the three months ended September 30, 2009.

 

On September 22, 2009, the Company filed a motion for judgment as a matter of law or for a new trial. Also on September 22, 2009, Ventas filed a motion seeking approximately $20 million in prejudgment interest and approximately $4 million in additional damages to account for changes in currency exchange rates. The District Court denied both parties’ post-trial motions on November 17, 2009. The Company filed a notice of appeal in the United States Court of Appeals for the Sixth Circuit on November 17, 2009; Ventas filed a notice of appeal on November 25, 2009. The Company is seeking to have the judgment against it reversed.  In the cross-appeal, Ventas is seeking reversal of the district court’s exclusion of Ventas’ claim for punitive damages, additional damages due to currency and stock-price fluctuations, and pre-judgment interest. The appeal and cross-appeal have now been fully briefed; the Court of Appeals has not yet set a date for oral argument.

 

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On June 29, 2009, several of the Company’s subsidiaries, together with three of its tenants, filed complaints in the Delaware Court of Chancery against Sunrise Senior Living, Inc. and three of its subsidiaries (“Sunrise”). A complaint was also filed on behalf of several other of the Company’s subsidiaries and one tenant on July 24, 2009 in the United States District Court for the Eastern District of Virginia. The complaints are based on Sunrise’s defaults under management and related agreements governing Sunrise’s operation of 64 Company subsidiary-owned facilities, 62 of which are leased to the tenants and two of which are leased directly to Sunrise. The complaints generally allege that Sunrise systematically breached various contractual and fiduciary duties by, among other things, (i) failing to maintain licenses necessary to the facilities’ operation; (ii) demonstrating a conscious disregard for the facilities’ budgets and other controls over expenditures related to the facilities; (iii) failing to provide various marketing and financial reports necessary for the Company’s subsidiaries’ and the tenants’ monitoring of Sunrise’s performance; (iv) retaining funds for Sunrise’s own benefit, and/or the benefit of its affiliates, that were properly due to the tenants; (v) charging the facilities for inappropriate overhead and similar corporate- level pass-through expenses that should have been borne by Sunrise and/or its affiliates; and (vi) obstructing the Company’s subsidiaries’ and the tenants’ contractually-prescribed audits of Sunrise’s operation of the facilities. The Company’s subsidiaries also allege that Sunrise’s policies constitute a breach of fiduciary duties to the Company’s subsidiaries and the tenants. The Company’s subsidiaries and tenants are generally seeking judicial confirmation of Sunrise’s material defaults of the management agreements and the Company’s subsidiaries’ and tenants’ rights to terminate the agreements for the 64 communities, and associated injunctive relief requiring Sunrise to vacate the facilities after cooperating in the transition of the facilities to another operator. In addition, the Company subsidiaries and tenants are seeking monetary damages related to the defaults. With regard to two of the Company’s subsidiary- owned facilities in the State of New York, the relevant Company’s subsidiary and tenant also seek judicial confirmation of the impossibility of the parties’ performance under the applicable management agreements due to the passage and implementation of new state legislation and related regulations.

 

In response to each of the complaints, Sunrise has asserted counterclaims against the Company, and certain of its subsidiaries and tenants alleging that (i) such subsidiaries and tenants have breached contractual duties and the implied covenant of good faith and fair dealing under the management and related agreements; (ii) the Company and its relevant subsidiaries have intentionally interfered with tenants’ performance of the management agreements; and (iii) the Company, its relevant subsidiaries and tenants have conspired to harm Sunrise’s business and reputation.

 

On April 30, 2010, the judge presiding over the cases filed in the Eastern District of Virginia dismissed the Company’s subsidiaries’ and tenants’ complaint in its entirety. On that same day, the judge also dismissed Sunrise’s counterclaims against the Company’s subsidiaries and the tenants in those cases. The Company’s subsidiaries and the tenants filed a notice of appeal in the United States Court of Appeals for the Fourth Circuit on May 28, 2010; Sunrise filed a notice of appeal on June 10, 2010. A trial date has not yet been set for the complaints filed in the Delaware Court of Chancery.

 

Concentration of Credit Risk

 

Concentrations of credit risks arise when a number of operators, tenants or obligors related to the Company’s investments are engaged in similar business activities, activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of risks. The Company believes the current portfolio is reasonably diversified across healthcare related real estate and does not contain any other significant concentration of credit risks, except as disclosed herein. The Company does not have significant foreign operations.

 

At June 30, 2010 and December 31, 2009, the Company had investments in mezzanine and secured loans to HCR ManorCare with an aggregate par value of $1.72 billion at each period end and carrying values of $1.56 billion and $1.54 billion, respectively. At June 30, 2010 and December 31, 2009, the carrying value of these investments represented approximately 86% and 85%, respectively, of the Company’s skilled nursing segment assets and 13%, at each period end, of its total assets. For the three months ended June 30, 2010 and 2009, the Company recognized $28 million and $15 million, respectively, in interest income from these investments, which represented approximately 74% and 61%, respectively, of the Company’s skilled nursing segment revenues and 9% and 5%, respectively, of its total revenues. For the six months ended June 30, 2010 and 2009, the Company recognized $55 million and $31 million, respectively, in interest income from these investments, which represented approximately 73% and 61%, respectively, of the Company’s skilled nursing segment revenues and 9% and 5%, respectively, of its total revenues.

 

At June 30, 2010, Sunrise operated 75 of the Company’s senior housing facilities. Sunrise is a publicly traded company and is subject to the informational filing requirements of the Securities Exchange Act of 1934, as amended, and is required to file periodic reports on Form 10-K and Form 10-Q with the SEC. Among other things, Sunrise has disclosed that as of December 31, 2009, it has no borrowing availability under its bank credit facility, has significant scheduled debt maturities in

 

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2010 and significant long-term debt that is in default. At June 30, 2010 and December 31, 2009, the aggregate carrying value of the Company’s gross assets leased to Sunrise represented approximately 40%, at each period end, of the Company’s senior housing segment assets and 14%, at each period end, of its total assets. For the three months ended June 30, 2010 and 2009, the Company recognized $31 million and $41 million, respectively, in revenues from facilities operated by Sunrise, which represented approximately 35% and 43%, respectively, of the Company’s senior housing segment revenues and 10% and 14%, respectively, of its total revenues. For the six months ended June 30, 2010 and 2009, the Company recognized $61 million and $69 million, respectively, in revenues from facilities operated by Sunrise, which represented approximately 35% and 39%, respectively of the Company’s senior housing segment revenues and 10% and 12%, respectively, of its total revenues.

 

To mitigate credit risk of certain senior housing leases, leases are combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.

 

DownREIT LLCs

 

In connection with the formation of certain DownREIT limited liability companies (“LLCs”), members may contribute appreciated real estate to a DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Internal Revenue Code of 1986, as amended (“make-whole payments”). These make-whole payments include a tax gross-up provision. At June 30, 2010, there were 4.1 million non-managing member units outstanding in six DownREIT LLCs, all of which the Company is the managing member. At June 30, 2010, the carrying and fair values of the 4.1 million DownREIT units were $166 million and $186 million, respectively.

 

Credit Enhancement Guarantee

 

Certain of the Company’s senior housing facilities serve as collateral for $130 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $361 million as of June 30, 2010.

 

(12) Equity

 

Preferred Stock

 

At June 30, 2010, the Company had two series of preferred stock outstanding, “Series E” and “Series F” preferred stock. The Series E and Series F preferred stock have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. Holders of each series of preferred stock generally have no voting rights, except under limited conditions, and all holders are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. To preserve the Company’s status as a REIT, each series of preferred stock is subject to certain restrictions on ownership and transfer. Dividends are payable quarterly in arrears on the last day of March, June, September and December. The Series E and Series F preferred stock are currently redeemable at the Company’s option.

 

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Table of Contents

 

The following table lists the Series E cumulative redeemable preferred stock cash dividends paid and declared by the Company during the six months ended June 30, 2010:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 1

 

March 15

 

$

0.45313

 

March 31

 

April 22

 

June 15

 

$

0.45313

 

June 30

 

 

The following table lists the Series F cumulative redeemable preferred stock cash dividends paid and declared by the Company during the six months ended June 30, 2010:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 1

 

March 15

 

$

0.44375

 

March 31

 

April 22

 

June 15

 

$

0.44375

 

June 30

 

 

On July 29, 2010, the Company announced that its Board 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 September 30, 2010 to stockholders of record as of the close of business on September 15, 2010.

 

Common Stock

 

On May 8, 2009, the Company completed a $440 million public offering of 20.7 million shares of common stock at a price per share of $21.25. The Company received net proceeds of $422 million, which were used to repay all amounts of indebtedness outstanding under the bridge loan with the remainder used for general corporate purposes.

 

In June 2010, the Company initiated a public offering, which resulted in the sale of 15.5 million shares of common stock at a price of $33.00 per share for gross proceeds of $512 million.  This offering included: (i) the June 2010 public offering of 13.5 million shares for $445.5 million; and (ii) the July 2010 sale of 2.025 million shares, for $66.8 million, as a result of the underwriters exercising the over-allotment option from the June 2010 public offering. The Company received total net proceeds of $492 million from these sales, which were used to repay the outstanding indebtedness under its revolving line of credit facility, fund acquisitions and capital expenditures, repay mortgage debt and for other general corporate purposes.

 

The following is a summary of the Company’s other common stock issuances:

 

 

 

Six months ended June 30,

 

 

 

2010

 

2009

 

 

 

(shares in thousands)

 

Dividend Reinvestment and Stock Purchase Plan (“DRIP”)

 

447

 

73

 

Conversion of DownREIT units

 

121

 

525

 

Exercise of stock options

 

140

 

 

Restricted stock awards(1)

 

202

 

291

 

Vesting of restricted stock units(1)

 

265

 

182

 

 


(1)         Issued under the Company’s 2006 Performance Incentive Plan.

 

The following table lists the common stock cash dividends paid and declared by the Company during the six months ended June 30, 2010:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 1

 

February 11

 

$

0.465

 

February 23

 

April 22

 

May 3

 

$

0.465

 

May 18

 

 

On July 29, 2010, the Company announced that its Board declared a quarterly cash dividend of $0.465 per share. The common stock cash dividend will be paid on August 24, 2010 to stockholders of record as of the close of business on August 9, 2010.

 

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Table of Contents

 

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

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

 

 

 

June 30,

 

December 31,

 

 

 

2010

 

2009

 

 

 

(in thousands)

 

AOCI—unrealized gains on available-for-sale securities, net

 

$

9,845

 

$

11,805

 

AOCI—unrealized losses on cash flow hedges, net

 

(11,168

)

(10,769

)

Supplemental Executive Retirement Plan minimum liability

 

(2,277

)

(2,342

)

Cumulative foreign currency translation adjustment

 

(952

)

(828

)

Total accumulated other comprehensive loss

 

$

(4,552

)

$

(2,134

)

 

Total Comprehensive Income

 

The following table provides a reconciliation of comprehensive income (in thousands):

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

88,595

 

$

101,178

 

$

172,696

 

$

153,887

 

Other comprehensive income

 

(4,146

)

58,650

 

(2,418

)

62,343

 

Total comprehensive income

 

$

84,449

 

$

159,828

 

$

170,278

 

$

216,230

 

 

Substantially all of other comprehensive income for the three and six months ended June 30, 2009 related to the change in the estimated fair value of the Company’s available-for-sale marketable debt securities. See additional discussions of available-for-sale marketable debt securities in Note 9.

 

(13) Segment Disclosures

 

The Company evaluates its business and makes resource allocations based on five business segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) hospital and (v) skilled nursing. Under the senior housing, life science, hospital and skilled nursing segments, the Company invests primarily in single operator or tenant properties, through the acquisition and development of real estate or through investments in debt issued by operators in these sectors. Under the medical office segment, the Company invests through the acquisition of MOBs that are primarily leased under gross or modified gross leases, which are generally to multiple tenants and require a greater level of property management. The accounting policies of the segments are the same as those described in Note 2 to the Consolidated Financial Statements for the year ended December 31, 2009 in the Company’s Annual Report on Form 10-K filed with the SEC. There were no intersegment sales or transfers during the six months ended June 30, 2010 and 2009. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”) and interest income of the combined investments in each segment.

 

Non-segment assets consist primarily of real estate held for sale and corporate assets including cash, restricted cash, accounts receivable, net and deferred financing costs. Interest expense, depreciation and amortization and non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s performance measure. See Note 11 for other information regarding concentrations of credit risk.

 

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Table of Contents

 

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

 

For the three months ended June 30, 2010:

 

Segments

 

Rental and
Related
Revenues

 

Tenant
Recoveries

 

Income
From
DFLs

 

Interest
Income

 

Investment
Management
Fee

 

Total
Revenues

 

NOI(1)

 

Senior housing

 

$

75,737

 

$

 

$

11,995

 

$

159

 

$

688

 

$

88,579

 

$

86,974

 

Life science

 

59,110

 

9,597

 

 

 

1

 

68,708

 

56,951

 

Medical office

 

65,294

 

11,940

 

 

 

601

 

77,835

 

44,924

 

Hospital

 

21,663

 

583

 

 

7,718

 

 

29,964

 

21,670

 

Skilled nursing

 

9,654

 

 

 

28,279

 

 

37,933

 

9,603

 

Total

 

$

231,458

 

$

22,120

 

$

11,995

 

$

36,156

 

$

1,290

 

$

303,019

 

$

220,122

 

 

For the three months ended June 30, 2009:

 

Segments

 

Rental and
Related
Revenues