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, 2011.
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
(Registrants 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 |
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|
|
Non-accelerated Filer o |
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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 27, 2011, there were 407,179,224 shares of the registrants $1.00 par value common stock outstanding.
HCP, INC.
PART I. FINANCIAL INFORMATION
Item 1. |
Financial Statements: |
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3 | |
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4 | |
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5 | |
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7 | |
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8 | |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
26 | |
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38 | ||
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38 | ||
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39 | ||
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39 | ||
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39 | ||
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39 | ||
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41 |
HCP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
|
|
June 30, |
|
December 31, |
| ||
|
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2011 |
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2010 |
| ||
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|
|
|
| ||
ASSETS |
|
|
|
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| ||
Real estate: |
|
|
|
|
| ||
Buildings and improvements |
|
$ |
8,986,880 |
|
$ |
8,209,806 |
|
Development costs and construction in progress |
|
156,198 |
|
144,116 |
| ||
Land |
|
1,731,589 |
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1,573,984 |
| ||
Accumulated depreciation and amortization |
|
(1,392,002 |
) |
(1,251,142 |
) | ||
Net real estate |
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9,482,665 |
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8,676,764 |
| ||
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| ||
Net investment in direct financing leases |
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6,649,852 |
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609,661 |
| ||
Loans receivable, net |
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110,980 |
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2,002,866 |
| ||
Investments in and advances to unconsolidated joint ventures |
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224,625 |
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195,847 |
| ||
Accounts receivable, net of allowance of $1,190 and $5,150, respectively |
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24,273 |
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34,504 |
| ||
Cash and cash equivalents |
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276,205 |
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1,036,701 |
| ||
Restricted cash |
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44,170 |
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36,319 |
| ||
Intangible assets, net |
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400,438 |
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316,375 |
| ||
Other assets, net |
|
479,850 |
|
422,886 |
| ||
Total assets |
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$ |
17,693,058 |
|
$ |
13,331,923 |
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LIABILITIES AND EQUITY |
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| ||
Bank line of credit |
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$ |
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$ |
|
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Senior unsecured notes |
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5,706,998 |
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3,318,379 |
| ||
Mortgage debt |
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1,780,665 |
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1,235,779 |
| ||
Other debt |
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89,466 |
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92,187 |
| ||
Intangible liabilities, net |
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137,848 |
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148,072 |
| ||
Accounts payable and accrued liabilities |
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589,818 |
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313,806 |
| ||
Deferred revenue |
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66,995 |
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77,653 |
| ||
Total liabilities |
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8,371,790 |
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5,185,876 |
| ||
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Commitments and contingencies |
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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 |
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285,173 |
| ||
Common stock, $1.00 par value: 750,000,000 shares authorized; 407,120,455 and 370,924,887 shares issued and outstanding, respectively |
|
407,120 |
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370,925 |
| ||
Additional paid-in capital |
|
9,328,607 |
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8,089,982 |
| ||
Cumulative dividends in excess of earnings |
|
(861,539 |
) |
(775,476 |
) | ||
Accumulated other comprehensive loss |
|
(13,833 |
) |
(13,237 |
) | ||
Total stockholders equity |
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9,145,528 |
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7,957,367 |
| ||
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Joint venture partners |
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4,715 |
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14,935 |
| ||
Non-managing member unitholders |
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171,025 |
|
173,745 |
| ||
Total noncontrolling interests |
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175,740 |
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188,680 |
| ||
Total equity |
|
9,321,268 |
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8,146,047 |
| ||
Total liabilities and equity |
|
$ |
17,693,058 |
|
$ |
13,331,923 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
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2011 |
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2010 |
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2011 |
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2010 |
| ||||
Revenues: |
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| ||||
Rental and related revenues |
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$ |
261,573 |
|
$ |
230,368 |
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$ |
517,736 |
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$ |
454,638 |
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Tenant recoveries |
|
22,441 |
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22,068 |
|
45,885 |
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43,829 |
| ||||
Income from direct financing leases |
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143,662 |
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11,995 |
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157,057 |
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24,210 |
| ||||
Interest income |
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60,526 |
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36,156 |
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98,622 |
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71,422 |
| ||||
Investment management fee income |
|
504 |
|
1,290 |
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1,111 |
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2,598 |
| ||||
Total revenues |
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488,706 |
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301,877 |
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820,411 |
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596,697 |
| ||||
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Costs and expenses: |
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Depreciation and amortization |
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90,052 |
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77,700 |
|
181,472 |
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155,634 |
| ||||
Interest expense |
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105,129 |
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72,745 |
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213,705 |
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148,697 |
| ||||
Operating |
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46,621 |
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45,416 |
|
93,467 |
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91,503 |
| ||||
General and administrative |
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34,872 |
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20,525 |
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56,824 |
|
45,449 |
| ||||
Impairment recoveries |
|
|
|
|
|
|
|
(11,900 |
) | ||||
Total costs and expenses |
|
276,674 |
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216,386 |
|
545,468 |
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429,383 |
| ||||
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Other income, net |
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7,518 |
|
181 |
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17,830 |
|
494 |
| ||||
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Income before income taxes and equity income from unconsolidated joint ventures |
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219,550 |
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85,672 |
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292,773 |
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167,808 |
| ||||
Income taxes |
|
(248 |
) |
(571 |
) |
(285 |
) |
(943 |
) | ||||
Equity income from unconsolidated joint ventures |
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14,950 |
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2,486 |
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15,748 |
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3,869 |
| ||||
Income from continuing operations |
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234,252 |
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87,587 |
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308,236 |
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170,734 |
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Discontinued operations: |
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Income before gain on sales of real estate, net of income taxes |
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943 |
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1,897 |
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Gain on sales of real estate, net of income taxes |
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65 |
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65 |
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Total discontinued operations |
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1,008 |
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1,962 |
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Net income |
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234,252 |
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88,595 |
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308,236 |
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172,696 |
| ||||
Noncontrolling interests share in earnings |
|
(5,493 |
) |
(3,494 |
) |
(9,384 |
) |
(6,559 |
) | ||||
Net income attributable to HCP, Inc. |
|
228,759 |
|
85,101 |
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298,852 |
|
166,137 |
| ||||
Preferred stock dividends |
|
(5,283 |
) |
(5,283 |
) |
(10,566 |
) |
(10,566 |
) | ||||
Participating securities share in earnings |
|
(483 |
) |
(353 |
) |
(1,347 |
) |
(1,270 |
) | ||||
Net income applicable to common shares |
|
$ |
222,993 |
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$ |
79,465 |
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$ |
286,939 |
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$ |
154,301 |
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| ||||
Basic earnings per common share: |
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| ||||
Continuing operations |
|
$ |
0.55 |
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$ |
0.27 |
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$ |
0.74 |
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$ |
0.52 |
|
Discontinued operations |
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| ||||
Net income applicable to common shares |
|
$ |
0.55 |
|
$ |
0.27 |
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$ |
0.74 |
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$ |
0.52 |
|
Diluted earnings per common share: |
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| ||||
Continuing operations |
|
$ |
0.55 |
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$ |
0.27 |
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$ |
0.73 |
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$ |
0.52 |
|
Discontinued operations |
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| ||||
Net income applicable to common shares |
|
$ |
0.55 |
|
$ |
0.27 |
|
$ |
0.73 |
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$ |
0.52 |
|
Weighted-average shares used to calculate earnings per common share: |
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| ||||
Basic |
|
406,193 |
|
294,880 |
|
389,249 |
|
294,056 |
| ||||
Diluted |
|
411,710 |
|
296,037 |
|
391,100 |
|
295,067 |
| ||||
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| ||||
Dividends declared per common share |
|
$ |
0.48 |
|
$ |
0.465 |
|
$ |
0.96 |
|
$ |
0.93 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
|
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Cumulative |
|
Accumulated |
|
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| ||||||||
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Additional |
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Dividends |
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Other |
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Total |
|
Total |
|
|
| ||||||||
|
|
Preferred Stock |
|
Common Stock |
|
Paid-In |
|
In Excess |
|
Comprehensive |
|
Stockholders |
|
Noncontrolling |
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Total |
| ||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Of Earnings |
|
Income (Loss) |
|
Equity |
|
Interests |
|
Equity |
| ||||||||
January 1, 2011 |
|
11,820 |
|
$ |
285,173 |
|
370,925 |
|
$ |
370,925 |
|
$ |
8,089,982 |
|
$ |
(775,476 |
) |
$ |
(13,237 |
) |
$ |
7,957,367 |
|
$ |
188,680 |
|
$ |
8,146,047 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
298,852 |
|
|
|
298,852 |
|
9,384 |
|
308,236 |
| ||||||||
Change in net unrealized gains on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Unrealized gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,331 |
|
1,331 |
|
|
|
1,331 |
| ||||||||
Change in net unrealized gains (losses) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Unrealized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,041 |
) |
(1,041 |
) |
|
|
(1,041 |
) | ||||||||
Less reclassification adjustment realized in net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,218 |
) |
(1,218 |
) |
|
|
(1,218 |
) | ||||||||
Change in Supplemental Executive Retirement Plan obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
66 |
|
|
|
66 |
| ||||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
266 |
|
266 |
|
|
|
266 |
| ||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298,256 |
|
9,384 |
|
307,640 |
| ||||||||
Issuance of common stock, net |
|
|
|
|
|
35,691 |
|
35,691 |
|
1,236,276 |
|
|
|
|
|
1,271,967 |
|
(2,599 |
) |
1,269,368 |
| ||||||||
Repurchase of common stock |
|
|
|
|
|
(131 |
) |
(131 |
) |
(4,678 |
) |
|
|
|
|
(4,809 |
) |
|
|
(4,809 |
) | ||||||||
Exercise of stock options |
|
|
|
|
|
635 |
|
635 |
|
16,381 |
|
|
|
|
|
17,016 |
|
|
|
17,016 |
| ||||||||
Amortization of deferred compensation |
|
|
|
|
|
|
|
|
|
10,205 |
|
|
|
|
|
10,205 |
|
|
|
10,205 |
| ||||||||
Preferred dividends |
|
|
|
|
|
|
|
|
|
|
|
(10,566 |
) |
|
|
(10,566 |
) |
|
|
(10,566 |
) | ||||||||
Common dividends ($0.96 per share) |
|
|
|
|
|
|
|
|
|
|
|
(374,349 |
) |
|
|
(374,349 |
) |
|
|
(374,349 |
) | ||||||||
Purchase of noncontrolling interests |
|
|
|
|
|
|
|
|
|
(19,559 |
) |
|
|
|
|
(19,559 |
) |
(14,059 |
) |
(33,618 |
) | ||||||||
Distributions to noncontrolling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,166 |
) |
(7,166 |
) | ||||||||
Noncontrolling interest in acquired assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500 |
|
1,500 |
| ||||||||
June 30, 2011 |
|
11,820 |
|
$ |
285,173 |
|
407,120 |
|
$ |
407,120 |
|
$ |
9,328,607 |
|
$ |
(861,539 |
) |
$ |
(13,833 |
) |
$ |
9,145,528 |
|
$ |
175,740 |
|
$ |
9,321,268 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
HCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Continued)
(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.
HCP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
Six Months Ended June 30, |
| ||||
|
|
2011 |
|
2010 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
308,236 |
|
$ |
172,696 |
|
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 |
|
181,472 |
|
155,634 |
| ||
Discontinued operations |
|
|
|
1,249 |
| ||
Amortization of above and below market lease intangibles, net |
|
(2,093 |
) |
(3,708 |
) | ||
Stock-based compensation |
|
10,205 |
|
7,688 |
| ||
Amortization of debt premiums, discounts and issuance costs, net |
|
18,402 |
|
5,304 |
| ||
Straight-line rents |
|
(32,912 |
) |
(21,695 |
) | ||
Interest accretion |
|
(41,858 |
) |
(30,742 |
) | ||
Deferred rental revenues |
|
(1,077 |
) |
(2,022 |
) | ||
Equity income from unconsolidated joint ventures |
|
(15,748 |
) |
(3,869 |
) | ||
Distributions of earnings from unconsolidated joint ventures |
|
1,569 |
|
3,648 |
| ||
Gain upon consolidation of joint venture |
|
(7,769 |
) |
(65 |
) | ||
Marketable securities gains, net |
|
|
|
(35 |
) | ||
Gain upon settlement of loans receivable |
|
(22,812 |
) |
|
| ||
Derivative (gains) losses, net |
|
(3,308 |
) |
723 |
| ||
Impairment recoveries |
|
|
|
(11,900 |
) | ||
Changes in: |
|
|
|
|
| ||
Accounts receivable, net |
|
8,822 |
|
4,456 |
| ||
Other assets |
|
(4,010 |
) |
1,375 |
| ||
Accounts payable and accrued liabilities |
|
35,696 |
|
(2,640 |
) | ||
Net cash provided by operating activities |
|
432,815 |
|
276,097 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Cash used in the HCR ManorCare Acquisition, net of cash acquired |
|
(3,801,624 |
) |
|
| ||
Cash used in the HCP Ventures II purchase, net of cash acquired |
|
(135,550 |
) |
|
| ||
Other acquisitions and development of real estate |
|
(148,032 |
) |
(157,176 |
) | ||
Leasing costs and tenant and capital improvements |
|
(20,940 |
) |
(16,545 |
) | ||
Purchase of an interest in and contributions to unconsolidated joint ventures |
|
(95,000 |
) |
(264 |
) | ||
Distributions in excess of earnings from unconsolidated joint ventures |
|
1,558 |
|
1,723 |
| ||
Proceeds from the sale of securities |
|
|
|
242 |
| ||
Principal repayments on loans receivable |
|
303,720 |
|
25,586 |
| ||
Investments in loans receivable |
|
(360,932 |
) |
(8,081 |
) | ||
Increase in restricted cash |
|
(7,851 |
) |
(6,817 |
) | ||
Net cash used in investing activities |
|
(4,264,651 |
) |
(161,332 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Repayment of term loan |
|
|
|
(200,000 |
) | ||
Repayments of mortgage debt |
|
(141,684 |
) |
(87,720 |
) | ||
Issuance of senior unsecured notes |
|
2,400,000 |
|
|
| ||
Debt issuance costs |
|
(42,852 |
) |
|
| ||
Net proceeds from the issuance of common stock and exercise of options |
|
1,281,575 |
|
440,589 |
| ||
Dividends paid on common and preferred stock |
|
(384,915 |
) |
(284,753 |
) | ||
Sale (purchase) of noncontrolling interests |
|
(33,618 |
) |
8,395 |
| ||
Distributions to noncontrolling interests |
|
(7,166 |
) |
(7,275 |
) | ||
Net cash provided by (used in) financing activities |
|
3,071,340 |
|
(130,764 |
) | ||
Net decrease in cash and cash equivalents |
|
(760,496 |
) |
(15,999 |
) | ||
Cash and cash equivalents, beginning of period |
|
1,036,701 |
|
112,259 |
| ||
Cash and cash equivalents, end of period |
|
$ |
276,205 |
|
$ |
96,260 |
|
See accompanying Notes to Condensed Consolidated Financial Statements.
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 Companys portfolio is comprised of investments in the following five healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The condensed consolidated financial statements include the accounts of HCP, its wholly-owned subsidiaries and joint ventures or variable interest entities (VIEs) 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 Companys financial position, results of operations and cash flows have been included. Operating results for the six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. 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, 2010 included in the Companys Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (SEC).
Certain amounts in the Companys 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 the related operating results reclassified from continuing to discontinued operations on the condensed consolidated income statements (see Note 5).
Recent Accounting Pronouncements
In April 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-02, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring (ASC 2011-02). The amendments in this update clarify, among other things, the guidance on a creditors evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The Company does not expect the adoption of ASC 2011-05 on July 1, 2011 to have an impact on its consolidated financial position or results of operations.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income (ASC 2011-05). The amendments require that all nonowner changes in stockholders equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The Company does not expect the adoption of ASC 2011-05 on January 1, 2012 to have an impact on its consolidated financial position or results of operations.
(3) HCR ManorCare Acquisition
On April 7, 2011, the Company completed its acquisition of substantially all of the real estate assets of HCR ManorCare, Inc. (HCR ManorCare), for a purchase price of $6 billion (HCR ManorCare Acquisition). The purchase price consisted of the following: (i) $4 billion in cash consideration; and (ii) $2 billion representing the fair value of the Companys former HCR ManorCare
debt investments that were settled as part of this acquisition. Through this transaction, the Company acquired 334 HCR ManorCare post-acute, skilled nursing and assisted living facilities. The facilities are located in 30 states, with the highest concentrations in Ohio, Pennsylvania, Florida, Illinois and Michigan. A wholly-owned subsidiary of HCR ManorCare will continue to operate the assets pursuant to a long-term triple-net master lease agreement supported by a guaranty from HCR ManorCare. Additionally, the Company exercised its option to purchase an interest in the operations of HCR ManorCare for $95 million that represented a 9.9% equity interest at closing.
The HCR ManorCare total purchase price is as follows (in thousands):
|
|
April 7, 2011 |
| |
|
|
|
| |
Payment of aggregate cash consideration, net of cash acquired |
|
$ |
3,801,624 |
|
HCPs loan investments in HCR ManorCares debt settled at fair value (1) |
|
1,990,406 |
| |
Assumed HCR ManorCare accrued liabilities at fair value |
|
224,932 |
| |
Total purchase consideration |
|
$ |
6,016,962 |
|
|
|
|
| |
Legal, accounting and other fees and costs(2) |
|
$ |
26,839 |
|
(1) The Company recognized a gain of approximately $23 million, included in interest income, which represents the fair value of the Companys existing mezzanine and mortgage loan investments in HCR ManorCare in excess of its carrying value on the acquisition date.
(2) Represents estimated fees and costs of $15.5 million and $11.3 million that were expensed and included in general and administrative expense and interest expense, respectively. These charges are directly attributable to the transaction and represent non-recurring costs.
The following table summarizes the fair values of the HCR ManorCare assets acquired and liabilities assumed at the acquisition date of April 7, 2011 (in thousands):
Assets acquired |
|
|
| |
Net investments in direct financing leases |
|
$ |
6,002,074 |
|
Cash and cash equivalents |
|
6,996 |
| |
Intangible assets, net |
|
14,888 |
| |
Total assets acquired |
|
$ |
6,023,958 |
|
|
|
|
| |
Total liabilities assumed |
|
$ |
224,932 |
|
Net assets acquired |
|
$ |
5,799,026 |
|
In connection with the HCR ManorCare Acquisition, the Company entered into a credit agreement for a 365-day bridge loan facility (from funding to maturity) in an aggregate amount of up to $3.3 billion. On March 22, 2011, the Company delivered notice to the lenders under the bridge loan facility that it had terminated the bridge loan facility in accordance with its terms effective March 25, 2011. Consequently, in March 2011 the Company incurred a charge of $11.3 million related to the write-off of unamortized loan fees associated with this bridge loan commitment that is included in interest expense for the six months ended June 30, 2011.
The related assets and liabilities of HCR ManorCare are included in the condensed consolidated financial statements from the date of acquisition, April 7, 2011.
Pro Forma Results of Operations
The following unaudited pro forma consolidated results of operations assume that the HCR ManorCare Acquisition, including the Companys equity interest in the operations of HCR ManorCare, was completed as of January 1 for each of the periods presented below (in thousands, except per share amounts):
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2011 |
|
2010 |
|
2011 |
|
2010 |
| ||||
Revenues |
|
$ |
472,767 |
|
$ |
413,226 |
|
$ |
913,117 |
|
$ |
820,186 |
|
Net income |
|
219,335 |
|
187,336 |
|
409,372 |
|
370,881 |
| ||||
Net income applicable to HCP, Inc. |
|
213,842 |
|
183,842 |
|
399,988 |
|
364,322 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Basic earnings per common share |
|
$ |
0.51 |
|
$ |
0.48 |
|
$ |
0.96 |
|
$ |
0.95 |
|
Diluted earnings per common share |
|
0.51 |
|
0.48 |
|
0.96 |
|
0.95 |
|
(4) Other Real Estate Property Investments
A summary of real estate acquisitions for the six months ended June 30, 2011 follows (in thousands):
|
|
Consideration |
|
Assets Acquired |
| |||||||||||
Segment |
|
Cash Paid |
|
Debt |
|
Noncontrolling |
|
Real Estate |
|
Net |
| |||||
Life science |
|
$ |
84,047 |
|
$ |
48,252 |
|
$ |
|
|
$ |
126,610 |
|
$ |
5,689 |
|
Medical office |
|
29,743 |
|
|
|
1,500 |
|
26,191 |
|
5,052 |
| |||||
|
|
$ |
113,790 |
|
$ |
48,252 |
|
$ |
1,500 |
|
$ |
152,801 |
|
$ |
10,741 |
|
See discussion of the purchase and consolidation of HCP Ventures II in Note 8.
During the six months ended June 30, 2011, the Company funded an aggregate of $54 million for construction, tenant and other capital improvement projects, primarily in its life science and medical office segments. During the six months ended June 30, 2011, two of the Companys life science facilities located in South San Francisco were placed in service representing 88,000 square feet.
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 Companys life science facilities located in South San Francisco were placed into service representing 329,000 square feet.
(5) Discontinued Operations
There were no properties classified as held for sale and reported as discontinued operations as of or during the three or six months ended June 30, 2011.
The following table summarizes operating income from discontinued operations (dollars in thousands):
|
|
Three Months Ended |
|
Six Months Ended |
| ||
Rental and related revenues |
|
$ |
1,142 |
|
$ |
3,121 |
|
|
|
|
|
|
| ||
Depreciation and amortization expenses |
|
212 |
|
1,249 |
| ||
Operating expenses |
|
45 |
|
69 |
| ||
Other income, net |
|
(58 |
) |
(94 |
) | ||
Income, net of income taxes |
|
$ |
943 |
|
$ |
1,897 |
|
Gain on sales of real estate, net of income taxes |
|
65 |
|
65 |
| ||
|
|
|
|
|
| ||
Number of properties held for sale |
|
13 |
|
13 |
| ||
Number of properties sold |
|
1 |
|
1 |
| ||
Number of properties included in discontinued operations |
|
14 |
|
14 |
|
(6) 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, |
| ||
|
|
2011 |
|
2010 |
| ||
Minimum lease payments receivable |
|
$ |
26,000,472 |
|
$ |
1,266,129 |
|
Estimated residual values |
|
4,010,514 |
|
409,270 |
| ||
Less unearned income |
|
(23,361,134 |
) |
(1,065,738 |
) | ||
Net investment in direct financing leases |
|
$ |
6,649,852 |
|
$ |
609,661 |
|
Properties subject to direct financing leases |
|
361 |
|
27 |
|
On April 7, 2011, the Company completed the acquisition of 334 HCR ManorCare properties subject to a single master lease that the Company classified as a DFL. See discussion of the $6 billion HCR ManorCare Acquisition in Note 3.
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. In December 2009, the Company concluded that it was appropriate to reduce the carrying value of these assets to a nominal amount. 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 of the April 2010 subsequent event, in 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 December 2009 impairment charges related to its investments in the three DFLs and participation interest in the senior construction loan.
(7) Loans Receivable
The following table summarizes the Companys loans receivable (in thousands):
|
|
June 30, 2011 |
|
December 31, 2010 |
| ||||||||||||||
|
|
Real Estate |
|
Other |
|
Total |
|
Real Estate |
|
Other |
|
Total |
| ||||||
Mezzanine |
|
$ |
|
|
$ |
90,229 |
|
$ |
90,229 |
|
$ |
|
|
$ |
1,144,485 |
|
$ |
1,144,485 |
|
Other |
|
26,777 |
|
|
|
26,777 |
|
1,030,454 |
|
|
|
1,030,454 |
| ||||||
Unamortized discounts, fees and costs |
|
(1,540 |
) |
(1,089 |
) |
(2,629 |
) |
(107,549 |
) |
(61,127 |
) |
(168,676 |
) | ||||||
Allowance for loan losses |
|
|
|
(3,397 |
) |
(3,397 |
) |
|
|
(3,397 |
) |
(3,397 |
) | ||||||
|
|
$ |
25,237 |
|
$ |
85,743 |
|
$ |
110,980 |
|
$ |
922,905 |
|
$ |
1,079,961 |
|
$ |
2,002,866 |
|
HCR ManorCare Loans
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. These interest-only loans paid interest on their par values at a floating rate of one-month London Interbank Offered Rate (LIBOR) plus 4.0%. At December 31, 2010, the carrying value of these loans was $953 million.
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. At December 31, 2010, the carrying value of the participations in this loan was $639 million. In connection with the HCR ManorCare Acquisition prefunding activities, on January 31, 2011, the Company purchased an additional $360 million participation in the first mortgage debt of HCR ManorCare. The $1.08 billion participations paid interest at LIBOR plus 1.25%.
Upon the April 7, 2011 closing of the HCR ManorCare Acquisition, the Companys loans to HCR ManorCare were settled, which resulted in additional interest income of $23 million that represents the excess of the loans fair values above their carrying values. See Note 3 for additional discussion related to the HCR ManorCare Acquisition.
Genesis HealthCare Loans
In September and October 2010 the Company purchased participations in a senior loan and mezzanine note of Genesis HealthCare (Genesis) with par values of $277.6 million and $50.0 million, respectively, each at a discount for $249.9 million and $40.0 million, respectively.
The Genesis senior loan paid interest on the par value at LIBOR (subject to a current floor of 1.5% increasing to 2.5% by maturity) plus a spread of 4.75% increasing to 5.75% by maturity. The senior loan was secured by all of Genesis assets. The mezzanine note paid interest on the par value at LIBOR plus a spread of 7.50%. In addition to the coupon interest payments, the mezzanine note required the payment of a termination fee, of which the Companys share prior to the early repayment of this loan was $2.3 million. The mezzanine note was subordinate to the senior loan and secured by an indirect pledge of equity ownership in Genesis assets.
On April 1, 2011, the Company received $330.4 million from the early repayment of its loans to Genesis, and recognized additional interest income of $34.8 million, which represents the related unamortized discount and termination fee.
Cirrus Group, LLC Loan
The Company holds 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 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 the Company or HCP Ventures IV, LLC, an unconsolidated joint venture of the Company) and is supported in part by limited guarantees made by certain post and current 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 borrowers 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. Effective January 1, 2011, the Company placed the loan on cost-recovery status, under which accrual of interest income is suspended and any payments received from the borrower are applied to reduce the recorded investment in the loan, as the amount and timing of payments from this loan have become less certain. Through July 2011, the Company has made various attempts to restructure the loan; however, currently there is no indication from the guarantors of the loan that they will approve the terms and conditions of a proposed loan restructure. However, the Company continues to believe that the value of the collateral supporting the loan exceeds the amount due. Cirrus is in the process of marketing certain of the collateral assets for sale as a means of paying off the loan. Should the borrower be unsuccessful in selling the collateral assets and other sources of repayment are inadequate, the Company could be required to further modify this loan or take possession of the collateral, either of which could result in additional impairment charges. At June 30, 2011 and December 31, 2010, the carrying value of this loan, including accrued interest of $6.0 million and $7.2 million, respectively, was $91.7 million and $93.1 million, respectively. During the three and six months ended June 30, 2011, the Company received cash payments from the borrower of $0.2 million and $1.2 million, respectively.
(8) Investments in and Advances to Unconsolidated Joint Ventures
HCP Ventures II
On January 14, 2011, the Company acquired its partners 65% interest in HCP Ventures II, a joint venture that owned 25 senior housing facilities, becoming the sole owner of the portfolio.
The HCP Ventures II purchase consideration is as follows (in thousands):
|
|
January 14, 2011 |
| |
|
|
|
| |
Cash paid for HCP Ventures IIs partnership interest |
|
$ |
135,550 |
|
Fair value of HCPs 35% interest in HCP Ventures II (carrying value of $65,223 at closing) (1) |
|
72,992 |
| |
Total purchase consideration |
|
$ |
208,542 |
|
|
|
|
| |
Estimated fees and costs |
|
|
| |
Legal, accounting and other fees and costs(2) |
|
$ |
150 |
|
Debt assumption fees(3) |
|
500 |
| |
Total |
|
$ |
650 |
|
(1) The Company recognized a gain of approximately $8 million, included in other income, net, which represents the fair value of the Companys 35% interest in HCP Ventures II in excess of its carrying value on the acquisition date.
(2) Represents estimated fees and costs that were expensed and included in general and administrative expenses. These charges are directly attributable to the transaction and represent non-recurring costs.
(3) Represents debt assumption fees that were capitalized as deferred debt costs.
In accordance with the accounting guidance applicable to acquisitions of the partners ownership interests that result in consolidation of previously unconsolidated entities, the Company recorded all of the assets and liabilities of HCP Ventures II at their fair value as of the acquisition date, January 14, 2011. The Company utilized relevant market data and valuation techniques to allocate the acquisition date fair value for HCP Ventures II. Relevant market data and valuation techniques included, but were not limited to, market data comparables for capitalization and discount rates, credit spreads and property specific cash flows assumptions. The capitalization and discount rates as well as credit spread assumptions utilized in the Companys valuation model were based on information that it believes to be within a reasonable range of current market data. The following table summarizes the fair values of the HCP Ventures II assets acquired and liabilities assumed as of the acquisition date of January 14, 2011 (in thousands):
Assets acquired |
|
|
| |
Buildings and improvements |
|
$ |
683,033 |
|
Land |
|
80,180 |
| |
Cash |
|
2,585 |
| |
Restricted cash |
|
1,861 |
| |
Intangible assets |
|
78,293 |
| |
Total assets acquired |
|
$ |
845,952 |
|
|
|
|
| |
Liabilities assumed |
|
|
| |
Mortgage debt |
|
$ |
635,182 |
|
Other liabilities |
|
2,228 |
| |
Total liabilities assumed |
|
637,410 |
| |
Net assets acquired |
|
$ |
208,542 |
|
The related assets, liabilities and results of operations of HCP Ventures II are included in the consolidated financial statements from the date of acquisition, January 14, 2011.
Summary of Unconsolidated Joint Venture Information
The Company owns interests in the following entities which are accounted for under the equity method at June 30, 2011 (dollars in thousands):
Entity(1) |
|
Properties/Segment |
|
Investment(2) |
|
Ownership% |
| |
HCRMC Operations, LLC |
|
post-acute/skilled nursing |
|
$ |
96,136 |
|
9.9(3) |
|
HCP Ventures III, LLC |
|
13 medical office |
|
9,359 |
|
30 |
| |
HCP Ventures IV, LLC |
|
54 medical office and 4 hospital |
|
36,793 |
|
20 |
| |
HCP Life Science(4) |
|
4 life science |
|
66,058 |
|
50-63 |
| |
Horizon Bay Hyde Park, LLC |
|
1 senior housing |
|
7,694 |
|
75 |
| |
Suburban Properties, LLC |
|
1 medical office |
|
8,368 |
|
67 |
| |
Advances to unconsolidated joint ventures, net |
|
|
|
217 |
|
|
| |
|
|
|
|
$ |
224,625 |
|
|
|
Edgewood Assisted Living Center, LLC(5) |
|
1 senior housing |
|
$ |
(297 |
) |
45 |
|
Seminole Shores Living Center, LLC(5) |
|
1 senior housing |
|
(809 |
) |
50 |
| |
|
|
|
|
$ |
(1,106 |
) |
|
|
(1) These entities are not consolidated because 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, 2010 in the Companys Annual Report on Form 10-K filed with the SEC regarding the Companys policy on consolidation.
(2) Represents the carrying value of the Companys investment in the unconsolidated joint venture. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2010 in the Companys Annual Report on Form 10-K filed with the SEC regarding the Companys policy for accounting for joint venture interests.
(3) Subject to dilution of certain equity awards, the ownership percentage is approximately 9.3%. See discussion of the HCR ManorCare Acquisition in Note 3.
(4) 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%).
(5) As of June 30, 2011, the Company has guaranteed in the aggregate $4 million of a total of $8 million of mortgage debt for these joint ventures. No amounts have been recorded related to these guarantees at June 30, 2011. Negative investment amounts are included in accounts payable and accrued liabilities in the Companys condensed consolidated financial statements.
Summarized combined financial information for the Companys unconsolidated joint ventures follows (in thousands):
|
|
June 30, |
|
December 31, |
| ||
|
|
2011(1) |
|
2010(1)(2) |
| ||
Real estate, net |
|
$ |
3,830,031 |
|
$ |
1,633,209 |
|
Goodwill |
|
3,495,500 |
|
|
| ||
Other assets, net |
|
3,070,286 |
|
131,714 |
| ||
Total assets |
|
$ |
10,395,817 |
|
$ |
1,764,923 |
|
|
|
|
|
|
| ||
Capital lease obligations and other debt |
|
$ |
6,513,100 |
|
$ |
|
|
Mortgage debt |
|
500,631 |
|
1,148,839 |
| ||
Accounts payable |
|
943,188 |
|
32,120 |
| ||
Other partners capital |
|
2,190,037 |
|
415,697 |
| ||
HCPs capital(3) |
|
248,861 |
|
168,267 |
| ||
Total liabilities and partners capital |
|
$ |
10,395,817 |
|
$ |
1,764,923 |
|
(1) Includes the financial information of HCRMC Operations, LLC, in which the Company acquired an interest for $95 million that represented a 9.9% equity interest at closing.
(2) Includes the financial information of HCP Ventures II, which was consolidated on January 14, 2011.
(3) The combined basis difference of the Companys investments in these joint ventures of $26 million, as of June 30, 2011, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.
|
|
Three Months Ended June 30,(1) |
|
Six Months Ended June 30,(1) |
| ||||||||
|
|
2011(2) |
|
2010 |
|
2011(2) |
|
2010 |
| ||||
Total revenues |
|
$ |
1,032,420 |
|
$ |
46,959 |
|
$ |
1,059,309 |
|
$ |
92,803 |
|
Net income (loss) |
|
(26,439 |
) |
3,492 |
|
(26,062 |
) |
4,383 |
| ||||
HCPs share in earnings(3) |
|
14,950 |
|
2,486 |
|
15,748 |
|
3,869 |
| ||||
Fees earned by HCP |
|
504 |
|
1,290 |
|
1,111 |
|
2,598 |
| ||||
Distributions received by HCP |
|
2,158 |
|
3,147 |
|
3,127 |
|
5,371 |
| ||||
(1) Includes the financial information of HCP Ventures II, which was consolidated on January 14, 2011.
(2) Includes the financial information of HCRMC Operations, LLC, in which the Company acquired an interest for $95 million that represented a 9.9% equity interest at closing.
(3) The Companys joint venture interest in HCRMC Operations, LLC is accounted for using the equity method and results in an ongoing reduction of DFL income, proportional to HCPs ownership in HCRMC Operations, LLC. Further, the Companys share of earnings from HCRMC Operations, LLC (equity income) increases for the corresponding reduction of related lease expense recognized at the HCRMC Operations, LLC level.
(9) Intangibles
At June 30, 2011 and December 31, 2010, intangible lease assets, including lease-up intangibles, above market tenant lease intangibles, below market ground lease intangibles and intangible assets related to non-compete agreements, were $586.5 million and $511.4 million, respectively. At June 30, 2011 and December 31, 2010, the accumulated amortization of intangible assets was $186.1 million and $195.0 million, respectively.
At June 30, 2011 and December 31, 2010, below market lease and above market ground lease intangible liabilities were $220.6 million and $233.5 million, respectively. At June 30, 2011 and December 31, 2010, the accumulated amortization of intangible liabilities was $82.8 million and $85.4 million, respectively.
(10) Other Assets
The Companys other assets consist of the following (in thousands):
|
|
June 30, |
|
December 31, |
| ||
|
|
2011 |
|
2010 |
| ||
Straight-line rent assets, net of allowance of $42,356 and $35,190, respectively |
|
$ |
239,308 |
|
$ |
206,862 |
|
Leasing costs, net |
|
85,826 |
|
86,676 |
| ||
Deferred debt issuance costs, net |
|
39,650 |
|
23,541 |
| ||
Goodwill |
|
50,346 |
|
50,346 |
| ||
Marketable equity securities |
|
23,780 |
|
|
| ||
Other |
|
40,940 |
|
55,461 |
| ||
Total other assets |
|
$ |
479,850 |
|
$ |
422,886 |
|
In June 2011, the Company purchased approximately $22.4 million of marketable equity securities.
(11) Debt
Bank Line of Credit and Term Loan
The Companys revolving line of credit facility provides for an aggregate borrowing capacity of $1.5 billion and matures on March 11, 2015, with a one-year committed extension option. The Company has the right to increase the commitments under the revolving line of credit facility by an aggregate amount of up to $500 million, subject to customary conditions. Borrowings under this revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends on the Companys debt ratings. The Company pays a facility fee on the entire revolving commitment that depends upon its debt ratings. Based on the Companys debt ratings at June 30, 2011, the margin on the revolving line of credit facility was 1.50% and the facility fee was 0.30%. At June 30, 2011 and December 31, 2010, the Company had no amounts drawn under this revolving line of credit facility. At June 30, 2011, $112.7 million of aggregate letters of credit were also 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 12.
The Companys 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 60%, (iii) require a minimum Fixed Charge Coverage ratio of 1.5 times, and (iv) require a formula-determined Minimum Consolidated Tangible Net Worth of $8.0 billion at June 30, 2011. At June 30, 2011, the Company was in compliance with each of these restrictions and requirements of the revolving line of credit facility.
Senior Unsecured Notes
At June 30, 2011, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.7 billion. Interest rates on the notes ranged from 1.15% to 7.07%. The weighted-average effective interest rate on the senior unsecured notes at June 30, 2011 was 5.64%. 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, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at June 30, 2011.
On January 24, 2011, the Company issued $2.4 billion of senior unsecured notes as follows: (i) $400 million of 2.70% notes due 2014; (ii) $500 million of 3.75% notes due 2016; (iii) $1.2 billion of 5.375% notes due 2021; and (iv) $300 million of 6.75% notes due 2041. The notes have a weighted average maturity of 10.3 years and a weighted average yield of 4.83%. The net proceeds from this offering totaled $2.37 billion and were used to fund a portion of the HCR ManorCare Acquisition (see Note 3 for additional information).
Mortgage Debt
At June 30, 2011, the Company had $1.8 billion in aggregate principal amount of mortgage debt outstanding that is secured by 144 healthcare facilities that had a carrying value of $2.8 billion. Interest rates on the mortgage debt ranged from 1.89% to 8.85% with a weighted-average effective rate of 6.11% at June 30, 2011.
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 real estate assets.
Other Debt
At June 30, 2011, the Company had $89.5 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, 2011, $33.8 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $55.7 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.
Debt Maturities
The following table summarizes the Companys stated debt maturities and scheduled principal repayments at June 30, 2011 (in thousands):
Year |
|
Senior |
|
Mortgage |
|
Total(1) |
| |||
2011 (Six months) |
|
$ |
292,265 |
|
$ |
19,291 |
|
$ |
311,556 |
|
2012 |
|
250,000 |
|
73,515 |
|
323,515 |
| |||
2013 |
|
550,000 |
|
366,895 |
|
916,895 |
| |||
2014 |
|
487,000 |
|
183,234 |
|
670,234 |
| |||
2015 |
|
400,000 |
|
301,530 |
|
701,530 |
| |||
Thereafter |
|
3,750,000 |
|
850,804 |
|
4,600,804 |
| |||
|
|
5,729,265 |
|
1,795,269 |
|
7,524,534 |
| |||
(Discounts) and premiums, net |
|
(22,267 |
) |
(14,604 |
) |
(36,871 |
) | |||
|
|
$ |
5,706,998 |
|
$ |
1,780,665 |
|
$ |
7,487,663 |
|
(1) Excludes $89 million of other debt that represents the Life Care Bonds at three of the Companys senior housing facilities that have no scheduled maturities.
(12) 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 Companys 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 Companys business, prospects, financial condition or results of operations. The Companys 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 Companys 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 Companys 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 Companys 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.
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 to 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 sought to have the judgment against it reversed. In the cross-appeal, Ventas sought reversal of the District Courts exclusion of Ventas claim for punitive damages, additional damages due to currency and stock-price fluctuations, and pre-judgment interest. Oral argument before the Court of Appeals was heard on March 10, 2011.
On May 17, 2011, the Court of Appeals held that the District Court had erred by not submitting Ventas claim for punitive damages to the jury, but affirmed the District Courts judgment in all other respects. It remanded the case to the District Court for a trial on the issue of Ventas claim against the Company for punitive damages. On May 31, 2011, the Company filed a petition seeking rehearing of the decision of the Court of Appeals, which petition was denied on July 5, 2011. The Company intends to continue vigorously defending against Ventas lawsuit.
The District Court has set a trial date of February 21, 2012 on the issue of Ventas claim for punitive damages. The Company expects that defending its interests will require it to expend significant funds. While the Company recognized $102 million as a provision for litigation expense during the three months ended September 30, 2009, due to the September 8, 2009 judgment in favor of Ventas the Company is unable to estimate the probability of additional loss or the ultimate aggregate amount of additional loss or financial impact with respect to Ventas claim for punitive damages as of June 30, 2011.
Concentration of Credit Risk
Concentrations of credit risks arise when a number of operators, tenants or obligors related to the Companys investments are engaged in similar business activities, or 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. Management 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.
The following table provides information regarding the Companys concentration with respect to certain operators; the information provided is presented for the gross assets and revenues that are associated with certain operators as percentages of the respective segments and total Companys gross assets and revenues:
Segment Concentrations:
|
|
Senior Housing Gross Assets |
|
Senior Housing Revenues |
| ||||||||
|
|
June 30, |
|
December 31, |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||
Operators |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
HCR ManorCare(1) |
|
13 |
% |
|
|
12 |
% |
|
|
7 |
% |
|
|
Emeritus Corporation (Emeritus)(2) |
|
18 |
% |
25 |
% |
24 |
% |
17 |
% |
25 |
% |
17 |
% |
Sunrise Senior Living, Inc. (Sunrise)(2)(3) |
|
22 |
% |
30 |
% |
19 |
% |
35 |
% |
20 |
% |
35 |
% |
|
|
Post-Acute/Skilled |
|
Post-Acute/ |
| ||||||||
|
|
June 30, |
|
December 31, |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||
Operators |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
HCR ManorCare(1) |
|
94 |
% |
75 |
% |
76 |
% |
75 |
% |
73 |
% |
74 |
% |
Total Company Concentrations:
|
|
Total Company Gross Assets |
|
Total Company Revenues |
| ||||||||
|
|
June 30, |
|
December 31, |
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||
Operators |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
HCR ManorCare(1) |
|
34 |
% |
12 |
% |
28 |
% |
9 |
% |
21 |
% |
9 |
% |
Emeritus(2) |
|
6 |
% |
8 |
% |
6 |
% |
5 |
% |
7 |
% |
5 |
% |
Sunrise(2)(3) |
|
7 |
% |
10 |
% |
5 |
% |
10 |
% |
6 |
% |
10 |
% |
(1) On April 7, 2011, the Company completed the acquisition of HCR ManorCares real estate assets, which included the settlement of the Companys HCR ManorCare debt investments, see Notes 5 and 7 for additional information.
(2) 27 properties formerly operated by Sunrise were transitioned to Emeritus effective November 1, 2010.
(3) Certain of our properties are leased to tenants who have entered into management contracts with Sunrise to operate the respective property on their behalf. To determine our concentration of revenues generated from properties operated by Sunrise, we aggregate revenue from these tenants with revenue generated from the two properties that are leased directly to Sunrise.
To mitigate credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often 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.
Credit Enhancement Guarantee
Certain of the Companys senior housing facilities serve as collateral for $125 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 $368 million as of June 30, 2011.
(13) Equity
Preferred Stock
At June 30, 2011, 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 Companys 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 Companys option.
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, 2011:
Declaration Date |
|
Record Date |
|
Amount |
|
Dividend |
| |
January 27 |
|
March 15 |
|
$ |
0.45313 |
|
March 31 |
|
April 28 |
|
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, 2011:
Declaration Date |
|
Record Date |
|
Amount |
|
Dividend |
| |
January 27 |
|
March 15 |
|
$ |
0.44375 |
|
March 31 |
|
April 28 |
|
June 15 |
|
$ |
0.44375 |
|
June 30 |
|
On July 28, 2011, 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, 2011 to stockholders of record as of the close of business on September 15, 2011.
Common Stock
The following table lists the common stock cash dividends paid and declared by the Company during the six months ended June 30, 2011:
Declaration Date |
|
Record Date |
|
Amount |
|
Dividend |
| |
January 27 |
|
February 10 |
|
$ |
0.48 |
|
February 23 |
|
April 28 |
|
May 9 |
|
$ |
0.48 |
|
May 24 |
|
On July 28, 2011, the Company announced that its Board declared a quarterly cash dividend of $0.48 per share. The common stock cash dividend will be paid on August 23, 2011 to stockholders of record as of the close of business on August 8, 2011.
On December 20, 2010, the Company completed a $1.472 billion public offering of 46 million shares of common stock at a price of $32.00 per share. The Company received total net proceeds of $1.413 billion, which it used, together with proceeds from its January 2011 senior unsecured notes offering, March 2011 common stock offerings and the reinvestment of proceeds from the repayment of the Companys existing HCR ManorCare debt investments, to finance the HCR ManorCare Acquisition.
In March 2011, the Company completed a $1.273 billion public offering of 34.5 million shares of common stock at a price of $36.90 per share. The Company received total net proceeds of $1.235 billion, which it used, together with proceeds from its December 2010 equity offering, January 2011 senior unsecured notes offering and the reinvestment of proceeds from the repayment of the Companys existing HCR ManorCare debt investments, to finance the HCR ManorCare Acquisition.
The following is a summary of the Companys other common stock issuances:
|
|
Six Months Ended June 30, |