UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the quarterly period ended March 31, 2015.
OR
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-08895
HCP, INC.
(Exact name of registrant as specified in its charter)
Maryland |
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33-0091377 |
(State or other jurisdiction of |
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(I.R.S. Employer |
1920 Main Street, Suite 1200
Irvine, CA 92614
(Address of principal executive offices)
(949) 407-0700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒ |
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Accelerated Filer ☐ |
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Non-accelerated Filer ☐ |
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Smaller Reporting Company ☐ |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ☐ NO ☒
As of April 30, 2015, there were 461,676,261 shares of the registrant’s $1.00 par value common stock outstanding.
HCP, INC.
PART I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements: |
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3 | |
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4 | |
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5 | |
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6 | |
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7 | |
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8 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
31 | |
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50 | ||
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51 | ||
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52 | ||
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53 | ||
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53 | ||
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55 |
2
HCP, Inc.
(In thousands, except share and per share data)
(Unaudited)
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March 31, |
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December 31, |
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2015 |
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2014 |
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ASSETS |
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Real estate: |
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Buildings and improvements |
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$ |
10,980,848 |
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$ |
10,972,973 |
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Development costs and construction in progress |
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293,492 |
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275,233 |
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Land |
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1,882,476 |
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1,889,438 |
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Accumulated depreciation and amortization |
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(2,319,791) |
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(2,250,757) |
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Net real estate |
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10,837,025 |
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10,886,887 |
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Net investment in direct financing leases |
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6,827,596 |
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7,280,334 |
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Loans receivable, net |
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1,025,278 |
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906,961 |
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Investments in and advances to unconsolidated joint ventures |
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642,795 |
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605,448 |
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Accounts receivable, net of allowance of $3,629 and $3,785, respectively |
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40,153 |
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36,339 |
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Cash and cash equivalents |
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137,170 |
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183,810 |
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Restricted cash |
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47,279 |
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48,976 |
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Intangible assets, net |
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458,249 |
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481,013 |
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Other assets, net |
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1,008,897 |
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940,172 |
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Total assets(1) |
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$ |
21,024,442 |
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$ |
21,369,940 |
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LIABILITIES AND EQUITY |
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Bank line of credit |
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$ |
358,555 |
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$ |
838,516 |
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Term loans |
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530,038 |
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213,610 |
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Senior unsecured notes |
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8,022,533 |
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7,626,194 |
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Mortgage debt |
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979,890 |
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984,431 |
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Other debt |
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95,747 |
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97,022 |
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Intangible liabilities, net |
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80,387 |
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84,723 |
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Accounts payable and accrued liabilities |
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314,226 |
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432,934 |
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Deferred revenue |
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87,420 |
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95,411 |
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Total liabilities(2) |
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10,468,796 |
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10,372,841 |
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Commitments and contingencies |
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Common stock, $1.00 par value: 750,000,000 shares authorized; 461,583,731 and 459,746,267 shares issued and outstanding, respectively |
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461,584 |
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459,746 |
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Additional paid-in capital |
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11,493,988 |
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11,431,987 |
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Cumulative dividends in excess of earnings |
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(1,633,841) |
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(1,132,541) |
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Accumulated other comprehensive loss |
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(28,461) |
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(23,895) |
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Total stockholders’ equity |
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10,293,270 |
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10,735,297 |
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Joint venture partners |
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75,397 |
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73,214 |
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Non-managing member unitholders |
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186,979 |
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188,588 |
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Total noncontrolling interests |
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262,376 |
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261,802 |
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Total equity |
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10,555,646 |
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10,997,099 |
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Total liabilities and equity |
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$ |
21,024,442 |
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$ |
21,369,940 |
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(1)The Company’s consolidated total assets at March 31, 2015 and December 31, 2014 include assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs. Total assets at March 31, 2015 include VIE assets as follows: buildings and improvements $699 million; land $114 million; accumulated depreciation and amortization $120 million; accounts receivable $15 million; cash $36 million; and other assets, net $14 million. Total assets at December 31, 2014 include VIE assets as follows: buildings and improvements $677 million; land $113 million; accumulated depreciation and amortization $111 million; accounts receivable $5 million; cash $42 million; and other assets, net of $23 million from VIEs. See Note 17 to the Consolidated Financial Statements for additional information.
(2)The Company’s consolidated total liabilities at March 31, 2015 and December 31, 2014 include certain liabilities of VIEs for which the VIE creditors do not have recourse to HCP, Inc. Total liabilities at March 31, 2015 include accounts payable and accrued liabilities of $33 million and deferred revenue of $9 million from VIEs. Total liabilities at December 31, 2014 include accounts payable and accrued liabilities of $34 million and deferred revenue of $12 million from VIEs. See Note 17 to the Consolidated Financial Statements for additional information.
See accompanying Notes to the Consolidated Financial Statements.
3
HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended March 31, |
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2015 |
2014 |
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Revenues: |
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Rental and related revenues |
$ |
275,082 |
$ |
284,823 | |||
Tenant recoveries |
29,896 | 25,434 | |||||
Resident fees and services |
105,013 | 38,053 | |||||
Income from direct financing leases |
167,078 | 164,537 | |||||
Interest income |
33,262 | 16,696 | |||||
Investment management fee income |
460 | 449 | |||||
Total revenues |
610,791 | 529,992 | |||||
Costs and expenses: |
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Interest expense |
116,780 | 106,638 | |||||
Depreciation and amortization |
114,522 | 107,388 | |||||
Operating |
132,031 | 75,707 | |||||
General and administrative |
24,773 | 20,899 | |||||
Acquisition and pursuit costs |
3,390 | 495 | |||||
Impairments |
478,464 |
— |
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Total costs and expenses |
869,960 | 311,127 | |||||
Gains on sales of real estate, net of income taxes |
6,264 |
— |
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Other income, net |
1,724 | 1,930 | |||||
(Loss) income before income taxes and equity income from unconsolidated joint ventures |
(251,181) | 220,795 | |||||
Income taxes benefit (provision) |
77 | (1,446) | |||||
Equity income from unconsolidated joint ventures |
13,601 | 14,528 | |||||
(Loss) income from continuing operations |
(237,503) | 233,877 | |||||
Discontinued operations: |
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Income before gain on sales of real estate, net of income taxes |
— |
1,736 | |||||
Gain on sales of real estate, net of income taxes |
— |
28,010 | |||||
Total discontinued operations |
— |
29,746 | |||||
Net (loss) income |
(237,503) | 263,623 | |||||
Noncontrolling interests’ share in earnings |
(3,111) | (4,512) | |||||
Net (loss) income attributable to HCP, Inc. |
(240,614) | 259,111 | |||||
Participating securities’ share in earnings |
(335) | (1,064) | |||||
Net (loss) income applicable to common shares |
$ |
(240,949) |
$ |
258,047 | |||
Basic earnings per common share: |
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Continuing operations |
$ |
(0.52) |
$ |
0.50 | |||
Discontinued operations |
— |
0.06 | |||||
Net (loss) income applicable to common shares |
$ |
(0.52) |
$ |
0.56 | |||
Diluted earnings per common share: |
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Continuing operations |
$ |
(0.52) |
$ |
0.50 | |||
Discontinued operations |
— |
0.06 | |||||
Net (loss) income applicable to common shares |
$ |
(0.52) |
$ |
0.56 | |||
Weighted average shares used to calculate earnings per common share: |
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Basic |
460,880 | 457,294 | |||||
Diluted |
460,880 | 457,674 | |||||
Dividends declared per common share |
$ |
0.565 | 0.545 |
See accompanying Notes to the Consolidated Financial Statements.
4
HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
(Unaudited)
Three Months Ended March 31, |
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2015 |
2014 |
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Net (loss) income |
$ |
(237,503) |
$ |
263,623 | |||
Other comprehensive loss: |
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Change in net unrealized gains (losses) on securities: |
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Unrealized gains (losses) |
(5) | 3 | |||||
Change in net unrealized gains (losses) on cash flow hedges: |
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Unrealized gains (losses) |
2,339 | (695) | |||||
Reclassification adjustment realized in net (loss) income |
(6) | 605 | |||||
Change in Supplemental Executive Retirement Plan obligation |
69 | 54 | |||||
Foreign currency translation adjustment |
(6,963) | (50) | |||||
Total other comprehensive loss |
(4,566) | (83) | |||||
Total comprehensive (loss) income |
(242,069) | 263,540 | |||||
Total comprehensive income attributable to noncontrolling interests |
(3,111) | (4,512) | |||||
Total comprehensive (loss) income attributable to HCP, Inc. |
$ |
(245,180) |
$ |
259,028 |
See accompanying Notes to the Consolidated Financial Statements.
5
HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
Cumulative |
Accumulated |
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Additional |
Dividends |
Other |
Total |
Total |
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Common Stock |
Paid-In |
In Excess |
Comprehensive |
Stockholders’ |
Noncontrolling |
Total |
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Shares |
Amount |
Capital |
Of Earnings |
Loss |
Equity |
Interests |
Equity |
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January 1, 2015 |
459,746 |
$ |
459,746 |
$ |
11,431,987 |
$ |
(1,132,541) |
$ |
(23,895) |
$ |
10,735,297 |
$ |
261,802 |
$ |
10,997,099 | |||||||||
Net loss |
— |
— |
— |
(240,614) |
— |
(240,614) | 3,111 | (237,503) | ||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
(4,566) | (4,566) |
— |
(4,566) | ||||||||||||||||
Issuance of common stock, net |
1,155 | 1,155 | 35,657 |
— |
— |
36,812 | (1,608) | 35,204 | ||||||||||||||||
Repurchase of common stock |
(128) | (128) | (5,968) |
— |
— |
(6,096) |
— |
(6,096) | ||||||||||||||||
Exercise of stock options |
811 | 811 | 26,410 |
— |
— |
27,221 |
— |
27,221 | ||||||||||||||||
Amortization of deferred compensation |
— |
— |
6,165 |
— |
— |
6,165 |
— |
6,165 | ||||||||||||||||
Common dividends ($0.565 per share) |
— |
— |
— |
(260,686) |
— |
(260,686) |
— |
(260,686) | ||||||||||||||||
Distributions to noncontrolling interests |
— |
— |
(263) |
— |
— |
(263) | (3,861) | (4,124) | ||||||||||||||||
Issuance of noncontrolling interests |
— |
— |
— |
— |
— |
— |
2,932 | 2,932 | ||||||||||||||||
March 31, 2015 |
461,584 |
$ |
461,584 |
$ |
11,493,988 |
$ |
(1,633,841) |
$ |
(28,461) |
$ |
10,293,270 |
$ |
262,376 |
$ |
10,555,646 |
Cumulative |
Accumulated |
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Additional |
Dividends |
Other |
Total |
Total |
||||||||||||||||||||
Common Stock |
Paid-In |
In Excess |
Comprehensive |
Stockholders’ |
Noncontrolling |
Total |
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Shares |
Amount |
Capital |
Of Earnings |
Loss |
Equity |
Interests |
Equity |
|||||||||||||||||
January 1, 2014 |
456,961 |
$ |
456,961 |
$ |
11,334,041 |
$ |
(1,053,215) |
$ |
(14,487) |
$ |
10,723,300 |
$ |
207,834 |
$ |
10,931,134 | |||||||||
Net income |
— |
— |
— |
259,111 |
— |
259,111 | 4,512 | 263,623 | ||||||||||||||||
Other comprehensive loss |
— |
— |
— |
— |
(83) | (83) |
— |
(83) | ||||||||||||||||
Issuance of common stock, net |
1,287 | 1,287 | 31,419 |
— |
— |
32,706 | (73) | 32,633 | ||||||||||||||||
Repurchase of common stock |
(208) | (208) | (7,860) |
— |
— |
(8,068) |
— |
(8,068) | ||||||||||||||||
Exercise of stock options |
4 | 4 | 91 |
— |
— |
95 |
— |
95 | ||||||||||||||||
Amortization of deferred compensation |
— |
— |
4,890 |
— |
— |
4,890 |
— |
4,890 | ||||||||||||||||
Common dividends ($0.545 per share) |
— |
— |
— |
(250,198) |
— |
(250,198) |
— |
(250,198) | ||||||||||||||||
Distributions to noncontrolling interests |
— |
— |
— |
— |
— |
— |
(3,975) | (3,975) | ||||||||||||||||
Issuance of noncontrolling interests |
— |
— |
— |
— |
— |
— |
1,193 | 1,193 | ||||||||||||||||
Purchase of noncontrolling interests |
— |
— |
— |
— |
— |
— |
(1,671) | (1,671) | ||||||||||||||||
March 31, 2014 |
458,044 |
$ |
458,044 |
$ |
11,362,581 |
$ |
(1,044,302) |
$ |
(14,570) |
$ |
10,761,753 |
$ |
207,820 |
$ |
10,969,573 |
See accompanying Notes to the Consolidated Financial Statements.
6
HCP, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended March 31, |
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2015 |
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2014 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
(237,503) |
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$ |
263,623 |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization of real estate, in-place lease and other intangibles |
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114,522 |
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107,388 |
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Amortization of market lease intangibles, net |
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(378) |
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(168) |
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Amortization of deferred compensation |
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6,165 |
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|
4,890 |
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Amortization of deferred financing costs, net |
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4,752 |
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|
4,965 |
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Straight-line rents |
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(9,546) |
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(13,968) |
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Loan and direct financing lease interest accretion |
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(21,032) |
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(21,503) |
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Deferred rental revenues |
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(902) |
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|
(145) |
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Equity income from unconsolidated joint ventures |
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(13,601) |
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|
(14,528) |
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Distributions of earnings from unconsolidated joint ventures |
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1,159 |
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|
2,430 |
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Lease termination income, net |
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(1,103) |
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|
— |
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Gain on sales of real estate |
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(6,264) |
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|
(28,010) |
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Marketable securities and other losses, net |
|
|
134 |
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|
63 |
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Impairments |
|
|
478,464 |
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|
— |
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Changes in: |
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|
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Accounts receivable, net |
|
|
(3,814) |
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|
(1,045) |
|
Other assets |
|
|
(5,839) |
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|
(8,942) |
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Accounts payable and accrued liabilities |
|
|
(75,146) |
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|
(47,869) |
|
Net cash provided by operating activities |
|
|
230,068 |
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|
247,181 |
|
Cash flows from investing activities: |
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|
|
|
|
|
Acquisitions and pending acquisitions of real estate |
|
|
(71,373) |
|
|
(5,473) |
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Development of real estate |
|
|
(61,805) |
|
|
(33,983) |
|
Leasing costs and tenant and capital improvements |
|
|
(11,540) |
|
|
(12,405) |
|
Proceeds from sales of real estate, net |
|
|
— |
|
|
36,753 |
|
Contributions to unconsolidated joint ventures |
|
|
(27,279) |
|
|
— |
|
Distributions in excess of earnings from unconsolidated joint ventures |
|
|
1,022 |
|
|
772 |
|
Principal repayments on loans receivable |
|
|
17,496 |
|
|
3,133 |
|
Investments in loans receivable and other |
|
|
(176,504) |
|
|
(42,281) |
|
Decrease in restricted cash |
|
|
1,697 |
|
|
6,933 |
|
Net cash used in investing activities |
|
|
(328,286) |
|
|
(46,551) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Net repayments under bank line of credit |
|
|
(455,506) |
|
|
— |
|
Borrowings under term loan |
|
|
333,014 |
|
|
— |
|
Issuance of senior unsecured notes |
|
|
595,110 |
|
|
350,000 |
|
Repayments of senior unsecured notes |
|
|
(200,000) |
|
|
(400,000) |
|
Repayments of mortgage debt |
|
|
(6,354) |
|
|
(162,739) |
|
Deferred financing costs |
|
|
(7,687) |
|
|
(9,239) |
|
Issuance of common stock and exercise of options |
|
|
62,425 |
|
|
32,728 |
|
Repurchase of common stock |
|
|
(6,096) |
|
|
(8,068) |
|
Dividends paid on common stock |
|
|
(260,686) |
|
|
(250,198) |
|
Issuance of noncontrolling interests |
|
|
1,626 |
|
|
41 |
|
Distributions to and purchase of noncontrolling interests |
|
|
(4,124) |
|
|
(3,975) |
|
Net cash provided by (used in) financing activities |
|
|
51,722 |
|
|
(451,450) |
|
Effect of foreign exchange on cash and cash equivalents |
|
|
(144) |
|
|
2 |
|
Net decrease in cash and cash equivalents |
|
|
(46,640) |
|
|
(250,818) |
|
Cash and cash equivalents, beginning of period |
|
|
183,810 |
|
|
300,556 |
|
Cash and cash equivalents, end of period |
|
$ |
137,170 |
|
$ |
49,738 |
|
See accompanying Notes to the Consolidated Financial Statements.
7
HCP, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Business
HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company is a Maryland corporation organized in 1985 and qualifies as a self-administered real estate investment trust (“REIT”). The Company is headquartered in Irvine, California, with offices in Nashville, Los Angeles, San Francisco and London. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s diverse portfolio is comprised of investments in the following healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital.
NOTE 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates.
The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and VIEs that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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, 2014 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”).
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability (consistent with debt discounts). ASU 2015-03 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2015-03 on January 1, 2016 to the Company’s consolidated financial position or results of operations.
In February 2015, the FASB issued Accounting Standards Update No. 2015-2, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 requires amendments to both the variable interest entity and voting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify (a) the identification of variable interests (fees paid to a decision maker or service provider), (b) the VIE characteristics for a limited partnership or similar entity and (c) the primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. ASU 2015-02 is effective for fiscal years, and interim periods within, beginning after
8
December 15, 2015. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2015-02 on January 1, 2016 to the Company’s consolidated financial position or results of operations.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the guidance for recognizing revenue. ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for fiscal years and interim periods beginning after December 15, 2016, although on April 29, 2015, the FASB issued a proposal for public comment to defer the effective date by one year. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2014-09 on its current adoption date of January 1, 2017 to the Company’s consolidated financial position or results of operations.
Reclassification
Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. As a result of the Company’s increasing transaction volume, “acquisition and pursuit costs” are separately presented on the consolidated statements of operations from “general and administrative expenses.”
NOTE 3. Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures (“Brookdale Transaction”)
On July 31, 2014, Brookdale Senior Living (“Brookdale”) completed its acquisition of Emeritus Corporation (“Emeritus”). On August 29, 2014, the Company and Brookdale completed a multiple-element transaction with three major components:
· |
amended existing lease agreements on 153 HCP-owned senior housing communities previously leased and operated by Emeritus, that included the termination of embedded purchase options in these leases relating to 30 properties and future rent reductions; |
· |
terminated existing lease agreements on 49 HCP-owned senior housing properties previously leased and operated by Emeritus, that included the termination of embedded purchase options in these leases relating to 19 properties. At closing, the Company contributed 48 of these properties to a newly formed consolidated partnership that is operated under a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”) (“RIDEA Subsidiaries”); the 49th property was contributed on January 1, 2015. Brookdale owns a 20% noncontrolling equity interest in the RIDEA Subsidiaries and manages the facilities on behalf of the partnership; and |
· |
entered into new unconsolidated joint ventures that own 14 campuses of continuing care retirement communities (“CCRC”) in a RIDEA structure (collectively, the “CCRC JV”) with the Company owning a 49% equity interest and Brookdale owning a 51% equity interest. Brookdale manages these communities on behalf of this partnership. |
NOTE 4. Real Estate Property Investments
2015 Acquisitions
A summary of real estate acquisitions for the three months ended March 31, 2015 follows (in thousands):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration |
|
Assets Acquired |
|
|||||||||||
|
|
|
|
|
Liabilities |
|
Noncontrolling |
|
|
|
|
Net |
|
|||
Segment |
|
Cash Paid |
|
Assumed |
|
Interest |
|
Real Estate |
|
Intangibles |
|
|||||
Senior housing |
|
$ |
34,068 |
|
$ |
626 |
|
$ |
1,306 |
|
$ |
34,350 |
|
$ |
1,650 |
|
Medical office |
|
|
180 |
|
|
— |
|
|
— |
|
|
180 |
|
|
— |
|
|
|
$ |
34,248 |
|
$ |
626 |
|
$ |
1,306 |
|
$ |
34,530 |
|
$ |
1,650 |
|
Subsequent Acquisitions. In April 2015, the Company converted £174 million of its HC-One Facility (see Note 7) to fee ownership in a portfolio of 36 care homes located throughout the United Kingdom (“U.K.”).
9
Pending Acquisitions. In March 2015, HCP and Brookdale entered into a definitive agreement to acquire from Chartwell Retirement Residences a portfolio of 35 private pay senior housing communities, including two leasehold interests, representing 5,025 units (the “Chartwell Portfolio”) for $849 million. The Chartwell Portfolio will be acquired in a RIDEA structure and Brookdale will acquire a 10% noncontrolling interest. Brookdale has operated these communities since 2011 after its acquisition of Horizon Bay, and will continue to manage the communities post-closing under a long-term management agreement, which is cancellable under certain conditions subject to a fee if terminated within the next seven years. The Company made a deposit of $37 million related to this pending acquisition, which is included in other assets, net. The closing of this acquisition is expected in the third quarter of 2015 and remains subject to regulatory approvals and other customary closing conditions.
In April 2015, the Company acquired a medical office building (“MOB”) for $161 million. The MOB is located in Philadelphia, Pennsylvania.
In April 2015, the Company exercised its purchase option right from a $41 million development loan to acquire a newly developed assisted living and memory care facility in Germantown, Tennessee for $72 million. The facility will be managed by Brookdale and placed in a RIDEA structure with Brookdale acquiring a 10% noncontrolling interest. The Company expects to close this acquisition in the second quarter of 2015, subject to customary closing conditions.
2014 Acquisitions
A summary of real estate acquisitions for the three months ended March 31, 2014 follows (in thousands):
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|
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|
|
|
|
Consideration |
|
Assets Acquired |
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|||||||||||
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|
|
|
|
Liabilities |
|
Noncontrolling |
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|
|
|
|||
Segment |
|
Cash Paid |
|
Assumed |
|
Interest |
|
Real Estate |
|
|||||||
Senior housing |
|
$ |
5,473 |
|
$ |
1 |
|
$ |
1,152 |
|
$ |
|
|
|
6,626 |
|
Completed Developments
During the three months ended March 31, 2014, the Company placed in service the following: (i) two life science facilities, (ii) a medical office building and (iii) a post-acute/skilled nursing facility. These completed developments represent $25 million of gross real estate on the Company’s consolidated balance sheets as of December 31, 2014. There were no completed developments during the three months ended March 31, 2015.
Construction, Tenant and Other Capital Improvements
A summary of the Company’s funding for construction, tenant and other capital improvements follows (in thousands):
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|
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Three Months Ended March 31, |
||||
Segment |
|
2015 |
|
2014 |
||
Senior housing |
|
$ |
16,172 |
|
$ |
6,950 |
Post-acute/skilled nursing |
|
|
1,960 |
|
|
2,381 |
Life science |
|
|
27,391 |
|
|
26,762 |
Medical office |
|
|
19,233 |
|
|
12,975 |
Hospital |
|
|
37 |
|
|
— |
|
|
$ |
64,793 |
|
$ |
49,068 |
10
NOTE 5. Dispositions of Real Estate and Discontinued Operations
During the three months ended March 31, 2015, the Company sold eight senior housing facilities for $51 million resulting from Brookdale’s purchase option exercise it received as part of the Brookdale Transaction.
During the three months ended March 31, 2014, the Company sold two post-acute/skilled nursing facilities for $22 million and a hospital for $17 million.
The Company separately presented as discontinued operations the results of operations for all consolidated assets disposed of and all properties held for sale, if any, prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, on April 1, 2014 (the “adoption date”). The amounts included in discontinued operations, for the three months March 31, 2014, represent the activity for properties sold prior to the adoption date. No properties sold subsequent to the adoption date met the new criteria for reporting 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 March 31, 2014 |
|
|
Rental and related revenues |
|
$ |
1,810 |
|
|
|
|
|
|
Operating expenses |
|
|
54 |
|
Other expenses, net |
|
|
20 |
|
Income before gain on sales of real estate, net of income taxes |
|
$ |
1,736 |
|
Gain on sales of real estate, net of income taxes |
|
$ |
28,010 |
|
|
|
|
|
|
Number of properties included in discontinued operations |
|
|
3 |
|
NOTE 6. Net Investment in Direct Financing Leases
The components of net investment in direct financing leases (“DFLs”) consisted of the following (dollars in thousands):
March 31, |
December 31, |
||||||
2015 |
2014 |
||||||
Minimum lease payments receivable |
$ |
26,825,121 |
$ |
24,182,525 | |||
Estimated residual values |
3,910,830 | 4,126,426 | |||||
Less unearned income |
(23,908,355) | (21,028,617) | |||||
Net investment in direct financing leases |
$ |
6,827,596 |
$ |
7,280,334 | |||
Properties subject to direct financing leases |
363 | 363 |
HCR ManorCare, Inc.
The Company acquired 334 post-acute, skilled nursing and assisted living facilities in its 2011 transaction with HCR ManorCare Inc. (“HCRMC”) and entered into a triple-net lease agreement (the “Master Lease”) with a subsidiary (“Lessee”) of HCRMC.
During the first quarter of 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic assets that are under the Master Lease. HCRMC will receive an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by HCP. The asset sales are expected to occur during the second half of 2015 and the first quarter of 2016.
On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the Master Lease (the “HCRMC Lease Amendment”) effective April 1, 2015. The HCRMC Lease Amendment reduced initial annual rent by a net $68 million from $541 million to $473 million. Commencing on April 1, 2016, the minimum rent escalation shall be reset to
11
3.0% for each lease year through the expiration of the initial term of each applicable pool of facilities. Prior to the HCRMC Lease Amendment, rent payments would have increased 3.5% on April 1, 2015 and 2016 and 3.0% thereafter. The initial term was extended five years to an average of 16 years and the extension options’ aggregate terms remained the same.
As consideration for the rent reduction, the Company received a Deferred Rent Obligation from Lessee equal to an aggregate amount of $525 million, which was allocated into two tranches (i) a Tranche A Deferred Rent Obligation of $275 million and (ii) a Tranche B Deferred Rent Obligation of $250 million. Until the entire Tranche A Deferred Rent Obligation is paid in full, Lessee will make rental payments equal to 6.9% of its outstanding amount (representing $19 million) for the initial lease year (the “Tranche A Current Payment”) increased each year thereafter by 3.0%. Commencing on April 1, 2016, until the Tranche B Deferred Rent Obligation is paid in full, the outstanding principal balance of Tranche B Deferred Rent Obligation will be increased annually by (i) 3.0% initially, (ii) 4.0% commencing on April 1, 2019, (iii) 5.0% commencing on April 1, 2020, and (iv) 6.0% commencing on April 1, 2021 and for the remainder of its term. The Deferred Rent Obligation is due and payable on the earlier of (i) certain capital or liquidity events of HCRMC, including an IPO or sale, or (ii) March 31, 2029, which is not subject to any extensions. The HCRMC Lease Amendment also imposes certain restrictions on Lessee and HCRMC until the Deferred Rent Obligation is paid in full, including with respect to the payment of dividends and the transfer of interest in HCRMC.
Additionally, HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. The proceeds from the nine facilities will be used to reduce the Tranche A Deferred Rent Obligation as the sales are consummated. The closing of the sales of these facilities will be subject to certain customary conditions and approvals. If the closing with respect to any of these facilities has not occurred by April 1, 2016, the obligation to purchase any unsold facilities will terminate. Following the sale of a facility, Lessee will lease such facility from the Company pursuant to the Master Lease. The nine facilities will contribute an aggregate of $19 million of annual rent (subject to escalation) under the Master Lease.
During the three months ended March 31, 2015, the Company recorded a net impairment charge of $478 million related to its DFL investments with HCRMC. The impairment charge reduced the carrying value of the HCRMC DFL investments from $6.6 billion to $6.1 billion, based on the present value of the future lease payments effective April 1, 2015 under the HCRMC Lease Amendment discounted at the original DFL investments’ effective lease rate. There is no related allowance for credit losses recorded within the carrying value of the HCRMC DFL investments.
See Note 8 for additional discussion on the Company’s 9.4% equity interest in HCRMC and the U.S. Department of Justice action related to HCRMC.
Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for net investment in DFLs at March 31, 2015 (dollars in thousands):
Carrying |
Percentage of DFL |
Internal Ratings |
|||||||||||||
Investment Type |
Amount |
Portfolio |
Performing DFLs |
Watch List DFLs |
Workout DFLs |
||||||||||
Senior housing |
$ |
1,562,875 | 23 |
$ |
1,193,903 |
$ |
368,972 |
$ |
— |
||||||
Post-acute/skilled nursing |
5,140,830 | 75 | 5,140,830 |
— |
— |
||||||||||
Hospital |
123,891 | 2 | 123,891 |
— |
— |
||||||||||
$ |
6,827,596 | 100 |
$ |
6,458,624 |
$ |
368,972 |
$ |
— |
12
Beginning September 30, 2013, the Company placed a 14-property senior housing DFL (the “DFL Portfolio”) on non-accrual status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Portfolio is recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on March 31, 2015 and determined that the DFL Portfolio was not impaired based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s carrying amount. The fair value of the DFL Portfolio was estimated based on a discounted cash flow model, the inputs to which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the three months ended March 31, 2015 and 2014, the Company recognized DFL income of $4 million and $5 million, respectively, and received cash payments of $5 million and $6 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $369 million and $370 million at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, the Company continues to believe that the fair value of the underlying collateral is in excess of the carrying value of this DFL.
As a result of HCRMC related events, the Company reassessed the collectability of all contractual rent payments under the amended Master Lease. The Company has concluded that the collection of the amended rent payments is reasonably assured and has assigned an internal rating of “Performing” to its HCRMC DFL investments.
NOTE 7. Loans Receivable
The following table summarizes the Company’s loans receivable (in thousands):
March 31, 2015 |
December 31, 2014 |
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Real Estate |
Other |
Real Estate |
Other |
||||||||||||||||
Secured |
Secured |
Total |
Secured |
Secured |
Total |
||||||||||||||
Mezzanine |
$ |
— |
$ |
930,587 |
$ |
930,587 |
$ |
— |
$ |
799,064 |
$ |
799,064 | |||||||
Other(1) |
122,514 |
— |
122,514 | 135,363 |
— |
135,363 | |||||||||||||
Unamortized discounts, fees and costs |
— |
(14,413) | (14,413) |
— |
(14,056) | (14,056) | |||||||||||||
Allowance for loan losses |
— |
(13,410) | (13,410) |
— |
(13,410) | (13,410) | |||||||||||||
$ |
122,514 |
$ |
902,764 |
$ |
1,025,278 |
$ |
135,363 |
$ |
771,598 |
$ |