hcp_Current Folio_10Q

Table of Contents 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q


(Mark One)

 

 

 

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

 

For the quarterly period ended September 30, 2016.

 

OR

 

 

 

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

 

For the transition period from             to             

 

Commission file number 001-08895

 


 

HCP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Maryland

 

33-0091377

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

1920 Main Street, Suite 1200

Irvine, CA 92614

(Address of principal executive offices)

 

(949) 407-0700

(Registrant’s telephone number, including area code)

 

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

 


 

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

 

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

 

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

 

 

 

 

Large Accelerated Filer ☒

 

Accelerated Filer ☐

 

 

 

Non-accelerated Filer ☐

 

Smaller Reporting Company ☐

(Do not check if a smaller reporting company)

 

 

 

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

 

As of October 28, 2016, there were 467,971,166 shares of the registrant’s $1.00 par value common stock outstanding.

 

 

 

 

 

 


 

Table of Contents

HCP, INC.

INDEX

 

PART I. FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1.

Financial Statements (Unaudited):

 

 

 

 

 

 

 

Consolidated Balance Sheets

 

 

 

 

 

 

Consolidated Statements of Operations

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

Consolidated Statements of Equity

 

 

 

 

 

 

Consolidated Statements of Cash Flows

 

 

 

 

 

 

Notes to the Consolidated Financial Statements

 

 

 

 

 

Item 2. 

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

40 

 

 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

69 

 

 

 

 

 

Item 4. 

Controls and Procedures

70 

 

 

 

 

 

PART II. OTHER INFORMATION 

 

 

 

 

 

 

Item 1A. 

Risk Factors

71 

 

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

72 

 

 

 

 

 

Item 6. 

Exhibits

72 

 

 

 

 

 

Signatures 

74 

 

 

 

 

 

2


 

Table of Contents

HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

ASSETS

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

Buildings and improvements

 

$

12,534,471

 

$

12,198,704

 

Development costs and construction in progress

 

 

395,349

 

 

388,576

 

Land

 

 

1,971,601

 

 

1,948,757

 

Accumulated depreciation and amortization

 

 

(2,799,969)

 

 

(2,541,334)

 

Net real estate

 

 

12,101,452

 

 

11,994,703

 

Net investment in direct financing leases

 

 

5,860,401

 

 

5,905,009

 

Loans receivable, net

 

 

682,994

 

 

768,743

 

Investments in and advances to unconsolidated joint ventures

 

 

592,097

 

 

605,244

 

Accounts receivable, net of allowance of $4,704 and $3,261, respectively

 

 

41,371

 

 

48,929

 

Cash and cash equivalents

 

 

132,891

 

 

346,500

 

Restricted cash

 

 

71,727

 

 

60,616

 

Intangible assets, net

 

 

538,631

 

 

603,706

 

Real estate and related assets held for sale, net

 

 

372,968

 

 

314,126

 

Other assets, net

 

 

794,013

 

 

802,273

 

Total assets(1)

 

$

21,188,545

 

$

21,449,849

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Bank line of credit

 

$

1,372,032

 

$

397,432

 

Term loans

 

 

462,181

 

 

524,807

 

Senior unsecured notes

 

 

8,229,731

 

 

9,120,107

 

Mortgage debt

 

 

762,715

 

 

932,212

 

Other debt

 

 

93,876

 

 

94,445

 

Intangible liabilities, net

 

 

46,135

 

 

56,147

 

Intangible and other liabilities related to assets held for sale, net

 

 

23,002

 

 

19,126

 

Accounts payable and accrued liabilities

 

 

487,033

 

 

436,239

 

Deferred revenue

 

 

136,406

 

 

123,017

 

Total liabilities(1)

 

 

11,613,111

 

 

11,703,532

 

Commitments and contingencies

 

 

 

 

 

 

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 467,820,181 and 465,488,492 shares issued and outstanding, respectively

 

 

467,820

 

 

465,488

 

Additional paid-in capital

 

 

11,720,552

 

 

11,647,039

 

Cumulative dividends in excess of earnings

 

 

(2,975,096)

 

 

(2,738,414)

 

Accumulated other comprehensive loss

 

 

(30,164)

 

 

(30,470)

 

Total stockholders’ equity

 

 

9,183,112

 

 

9,343,643

 

Joint venture partners

 

 

212,807

 

 

217,066

 

Non-managing member unitholders

 

 

179,515

 

 

185,608

 

Total noncontrolling interests

 

 

392,322

 

 

402,674

 

Total equity

 

 

9,575,434

 

 

9,746,317

 

Total liabilities and equity

 

$

21,188,545

 

$

21,449,849

 


(1)

HCP, Inc.’s consolidated total assets and total liabilities at September 30, 2016 and December 31, 2015 include certain assets of variable interest entities (“VIEs”) that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at September 30, 2016 include VIE assets as follows: buildings and improvements $3.4 billion; development costs $23 million; land $324 million; accumulated depreciation and amortization $629 million; investments in unconsolidated joint ventures $14 million; accounts receivable $19 million; cash $59 million; restricted cash $27 million; intangible assets, net $177 million; and other assets, net $68 million. Total assets at December 31, 2015 include VIE assets as follows: buildings and improvements $3.4 billion; development costs $54 million; land $327 million; accumulated depreciation and amortization $537 million; investments in unconsolidated joint ventures $14 million; accounts receivable $19 million; cash $61 million; restricted cash $21 million; intangible assets, net $204 million; and other assets, net $63 million. Total liabilities at September 30, 2016 include VIE liabilities as follows: mortgage debt $568 million; intangible liabilities, net $9 million; accounts payable and accrued liabilities $127 million and deferred revenue $26 million. Total liabilities at December 31, 2015 include VIE liabilities as follows: mortgage debt $589 million; intangible liabilities, net $10 million; accounts payable and accrued liabilities $107 million and deferred revenue $19 million. See Note 16 to the Consolidated Financial Statements for additional information.

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

 

3


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

297,178

 

$

293,566

 

$

893,448

 

$

845,382

 

Tenant recoveries

 

 

35,195

 

 

33,084

 

 

100,862

 

 

94,356

 

Resident fees and services

 

 

170,752

 

 

155,290

 

 

500,717

 

 

367,141

 

Income from direct financing leases

 

 

130,663

 

 

155,717

 

 

390,731

 

 

478,976

 

Interest income

 

 

20,482

 

 

19,842

 

 

71,298

 

 

89,049

 

Total revenues

 

 

654,270

 

 

657,499

 

 

1,957,056

 

 

1,874,904

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

117,860

 

 

122,157

 

 

361,255

 

 

357,569

 

Depreciation and amortization

 

 

142,874

 

 

134,704

 

 

425,582

 

 

369,629

 

Operating

 

 

188,747

 

 

173,515

 

 

545,827

 

 

441,888

 

General and administrative

 

 

34,787

 

 

20,534

 

 

83,079

 

 

74,152

 

Acquisition and pursuit costs

 

 

17,568

 

 

1,553

 

 

34,570

 

 

23,350

 

Impairments

 

 

 —

 

 

69,622

 

 

 —

 

 

592,921

 

Total costs and expenses

 

 

501,836

 

 

522,085

 

 

1,450,313

 

 

1,859,509

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) gain on sales of real estate

 

 

(9)

 

 

52

 

 

119,605

 

 

6,377

 

Other income (expense), net

 

 

1,454

 

 

(572)

 

 

5,128

 

 

13,125

 

Total other income (expense), net

 

 

1,445

 

 

(520)

 

 

124,733

 

 

19,502

 

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

 

 

153,879

 

 

134,894

 

 

631,476

 

 

34,897

 

Income tax benefit (expense)

 

 

2,213

 

 

1,980

 

 

(48,822)

 

 

6,620

 

Equity (loss) income from unconsolidated joint ventures

 

 

(2,053)

 

 

8,314

 

 

(4,028)

 

 

33,916

 

Impairment of investments in unconsolidated joint ventures

 

 

 —

 

 

(27,234)

 

 

 —

 

 

(27,234)

 

Net income

 

 

154,039

 

 

117,954

 

 

578,626

 

 

48,199

 

Noncontrolling interests’ share in earnings

 

 

(2,789)

 

 

(2,592)

 

 

(9,540)

 

 

(8,566)

 

Net income attributable to HCP, Inc.

 

 

151,250

 

 

115,362

 

 

569,086

 

 

39,633

 

Participating securities’ share in earnings

 

 

(326)

 

 

(316)

 

 

(977)

 

 

(1,020)

 

Net income applicable to common shares

 

$

150,924

 

$

115,046

 

$

568,109

 

$

38,613

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.32

 

$

0.25

 

$

1.22

 

$

0.08

 

Diluted

 

$

0.32

 

$

0.25

 

$

1.22

 

$

0.08

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

467,628

 

 

463,337

 

 

466,931

 

 

462,039

 

Diluted

 

 

467,835

 

 

463,586

 

 

467,132

 

 

462,302

 

Dividends declared per common share

 

$

0.575

 

$

0.565

 

$

1.725

 

$

1.695

 

 

See accompanying Notes to the Consolidated Financial Statements.

4


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

  

2016

  

2015

  

2016

  

2015

 

Net income

 

$

154,039

 

$

117,954

 

$

578,626

 

$

48,199

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on securities

 

 

4

 

 

(361)

 

 

(1)

 

 

(358)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains (losses)

 

 

1,184

 

 

(87)

 

 

1,532

 

 

(289)

 

Reclassification adjustment realized in net income

 

 

154

 

 

(367)

 

 

494

 

 

(19)

 

Change in Supplemental Executive Retirement Plan obligation

 

 

70

 

 

70

 

 

211

 

 

208

 

Foreign currency translation adjustment

 

 

(838)

 

 

410

 

 

(1,930)

 

 

(8,097)

 

Total other comprehensive income (loss)

 

 

574

 

 

(335)

 

 

306

 

 

(8,555)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

154,613

 

 

117,619

 

 

578,932

 

 

39,644

 

Total comprehensive income attributable to noncontrolling interests

 

 

(2,789)

 

 

(2,592)

 

 

(9,540)

 

 

(8,566)

 

Total comprehensive income attributable to HCP, Inc.

 

$

151,824

 

$

115,027

 

$

569,392

 

$

31,078

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

5


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Loss

 

Equity

 

Interests

 

Equity

 

January 1, 2016

 

465,488

 

$

465,488

 

$

11,647,039

 

$

(2,738,414)

 

$

(30,470)

 

$

9,343,643

 

$

402,674

 

$

9,746,317

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

569,086

 

 

 —

 

 

569,086

 

 

9,540

 

 

578,626

 

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

306

 

 

306

 

 

 —

 

 

306

 

Issuance of common stock, net

 

2,290

 

 

2,290

 

 

53,421

 

 

 —

 

 

 —

 

 

55,711

 

 

 —

 

 

55,711

 

Conversion of DownREIT units to common stock

 

145

 

 

145

 

 

5,948

 

 

 —

 

 

 —

 

 

6,093

 

 

(6,093)

 

 

 —

 

Repurchase of common stock

 

(236)

 

 

(236)

 

 

(8,431)

 

 

 —

 

 

 —

 

 

(8,667)

 

 

 —

 

 

(8,667)

 

Exercise of stock options

 

133

 

 

133

 

 

3,340

 

 

 —

 

 

 —

 

 

3,473

 

 

 —

 

 

3,473

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

19,307

 

 

 —

 

 

 —

 

 

19,307

 

 

 —

 

 

19,307

 

Common dividends ($1.725 per share)

 

 —

 

 

 —

 

 

 —

 

 

(806,243)

 

 

 —

 

 

(806,243)

 

 

 —

 

 

(806,243)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

 —

 

 

(36)

 

 

(18,651)

 

 

(18,687)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,785

 

 

4,785

 

Deconsolidation of noncontrolling interests

 

 —

 

 

 —

 

 

(36)

 

 

475

 

 

 —

 

 

439

 

 

67

 

 

506

 

September 30, 2016

 

467,820

 

$

467,820

 

$

11,720,552

 

$

(2,975,096)

 

$

(30,164)

 

$

9,183,112

 

$

392,322

 

$

9,575,434

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Loss

 

Equity

 

Interests

 

Equity

 

January 1, 2015

 

459,746

 

$

459,746

 

$

11,431,987

 

$

(1,132,541)

 

$

(23,895)

 

$

10,735,297

 

$

261,802

 

$

10,997,099

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

39,633

 

 

 —

 

 

39,633

 

 

8,566

 

 

48,199

 

Other comprehensive loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(8,555)

 

 

(8,555)

 

 

 —

 

 

(8,555)

 

Issuance of common stock, net

 

4,054

 

 

4,054

 

 

140,591

 

 

 —

 

 

 —

 

 

144,645

 

 

(2,659)

 

 

141,986

 

Repurchase of common stock

 

(178)

 

 

(178)

 

 

(7,828)

 

 

 —

 

 

 —

 

 

(8,006)

 

 

 —

 

 

(8,006)

 

Exercise of stock options

 

820

 

 

820

 

 

26,691

 

 

 —

 

 

 —

 

 

27,511

 

 

 —

 

 

27,511

 

Amortization of deferred compensation

 

 —

 

 

 —

 

 

21,068

 

 

 —

 

 

 —

 

 

21,068

 

 

 —

 

 

21,068

 

Common dividends ($1.695 per share)

 

 —

 

 

 —

 

 

 —

 

 

(783,578)

 

 

 —

 

 

(783,578)

 

 

 —

 

 

(783,578)

 

Distributions to noncontrolling interests

 

 —

 

 

 —

 

 

(263)

 

 

 —

 

 

 —

 

 

(263)

 

 

(13,444)

 

 

(13,707)

 

Issuance of noncontrolling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

38,440

 

 

38,440

 

September 30, 2015

 

464,442

 

$

464,442

 

$

11,612,246

 

$

(1,876,486)

 

$

(32,450)

 

$

10,167,752

 

$

292,705

 

$

10,460,457

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

 

6


 

Table of Contents

HCP, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

  

2016

    

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

578,626

 

$

48,199

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

425,582

 

 

369,629

 

Amortization of market lease intangibles, net

 

 

(1,393)

 

 

(980)

 

Amortization of deferred compensation

 

 

19,307

 

 

21,068

 

Amortization of deferred financing costs

 

 

15,598

 

 

14,950

 

Straight-line rents

 

 

(14,412)

 

 

(24,817)

 

Loan and direct financing lease non-cash interest

 

 

385

 

 

(71,243)

 

Deferred rental revenues

 

 

(1,027)

 

 

(1,496)

 

Equity loss (income) from unconsolidated joint ventures

 

 

4,028

 

 

(33,916)

 

Distributions of earnings from unconsolidated joint ventures

 

 

5,919

 

 

4,587

 

Lease termination income, net

 

 

 —

 

 

(1,103)

 

Gain on sales of real estate

 

 

(119,605)

 

 

(6,377)

 

Deferred income tax expense

 

 

47,195

 

 

 —

 

Foreign exchange and other gains, net

 

 

(127)

 

 

(7,103)

 

Impairments

 

 

 —

 

 

620,155

 

Changes in:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

7,558

 

 

(10,634)

 

Other assets, net

 

 

(9,674)

 

 

(1,186)

 

Accounts payable and accrued liabilities

 

 

40,672

 

 

(52,073)

 

Net cash provided by operating activities

 

 

998,632

 

 

867,660

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(257,242)

 

 

(1,200,661)

 

Development of real estate

 

 

(304,818)

 

 

(190,082)

 

Leasing costs and tenant and capital improvements

 

 

(64,501)

 

 

(52,371)

 

Proceeds from sales of real estate, net

 

 

211,810

 

 

19,555

 

Contributions to unconsolidated joint ventures

 

 

(10,169)

 

 

(43,242)

 

Distributions in excess of earnings from unconsolidated joint ventures

 

 

14,458

 

 

16,086

 

Proceeds from the sales of marketable securities

 

 

 —

 

 

782

 

Principal repayments on loans receivable, direct financing leases and other

 

 

221,179

 

 

51,491

 

Investments in loans receivable and other

 

 

(129,335)

 

 

(283,252)

 

Decrease (increase) in restricted cash

 

 

4,459

 

 

(3,891)

 

Net cash used in investing activities

 

 

(314,159)

 

 

(1,685,585)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Net borrowings under bank line of credit

 

 

1,157,897

 

 

282,099

 

Repayments under bank line of credit

 

 

(135,000)

 

 

(102,063)

 

Borrowings under term loan

 

 

 —

 

 

333,014

 

Issuance of senior unsecured notes

 

 

 —

 

 

1,338,555

 

Repayments of senior unsecured notes

 

 

(900,000)

 

 

(400,000)

 

Repayments of mortgage and other debt

 

 

(249,540)

 

 

(50,187)

 

Deferred financing costs

 

 

(1,057)

 

 

(14,556)

 

Issuance of common stock and exercise of options

 

 

59,184

 

 

169,497

 

Repurchase of common stock

 

 

(8,667)

 

 

(8,006)

 

Dividends paid on common stock

 

 

(806,243)

 

 

(783,578)

 

Issuance of noncontrolling interests

 

 

4,785

 

 

4,812

 

Distributions to noncontrolling interests

 

 

(18,687)

 

 

(13,707)

 

Net cash (used in) provided by financing activities

 

 

(897,328)

 

 

755,880

 

Effect of foreign exchange on cash and cash equivalents

 

 

(754)

 

 

(1,267)

 

Net decrease in cash and cash equivalents

 

 

(213,609)

 

 

(63,312)

 

Cash and cash equivalents, beginning of period

 

 

346,500

 

 

183,810

 

Cash and cash equivalents, end of period

 

$

132,891

 

$

120,498

 

See accompanying Notes to the Consolidated Financial Statements.

 

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HCP, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1.  Business

HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company is a Maryland corporation organized in 1985 and qualifies as a self-administered real estate investment trust (“REIT”). The Company is headquartered in Irvine, California, with offices in Nashville, Los Angeles, San Francisco and London. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net (“SH NNN”), (ii) senior housing operating portfolio (“SHOP”), (iii) life science, (iv) medical office and (v) QCP (defined below).

 

On October 31, 2016, the Company completed its previously announced spin-off (the “Spin-Off”) of its subsidiary, Quality Care Properties, Inc. (“QCP”) (NYSE:QCP). QCP’s assets include 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and an equity investment in HCRMC. Following the completion of the Spin-Off on October 31, 2016, QCP is an independent, publicly-traded, self-managed and self-administrated REIT.

 

On October 17, 2016, subsidiaries of QCP issued $750 million in aggregate principal amount of senior secured notes due 2023 (the “QCP Notes”), the gross proceeds of which were deposited in escrow until they were released in connection with the consummation of the Spin-Off on October 31, 2016. The QCP Notes bear interest at a rate of 8.125% per annum, payable semiannually. From October 17, 2016 until the completion of the Spin-Off, QCP (a then wholly owned subsidiary of HCP) incurred $2 million in interest expense. In addition, immediately prior to the effectiveness of the Spin-Off, subsidiaries of QCP received $1.0 billion of proceeds from their borrowings under a senior secured term loan, bearing interest at a rate at QCP’s option of either: (i) LIBOR plus 5.25%, subject to a 1% floor or (ii) a base rate specified in the first lien credit and guaranty agreement plus 4.25%,  bringing the total gross proceeds raised by QCP and its subsidiaries under those financings to $1.75 billion. In connection with the consummation of the Spin-Off, QCP and its subsidiaries transferred $1.69 billion in cash and approximately 94 million shares of QCP common stock to HCP and certain of its other subsidiaries, and HCP and its applicable subsidiaries transferred the assets comprising the QCP portfolio to QCP and its subsidiaries. HCP then distributed substantially all of the outstanding shares of QCP common stock to its stockholders, based on the distribution ratio of one share of QCP common stock for every five shares of HCP common stock held by HCP stockholders as of the October 24, 2016 record date for the distribution. The Company will record the distribution of the assets and liabilities of QCP from its consolidated balance sheet on a historical cost basis as a dividend from stockholders’ equity, and no gain or loss will be recorded. The Company will use the $1.69 billion proceeds of the cash distribution it received from QCP upon consummation of the Spin-Off to pay down certain of the Company’s existing debt obligations.

 

Because QCP is presented as part of the Company’s continuing operations as of September 30, 2016, the consolidated financial information presented herein includes QCP for all periods presented. Beginning in the fourth quarter of 2016, the historical financial results of QCP will be reflected in the Company’s consolidated financial statements as discontinued operations for all periods presented.

 

The Company entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) with QCP in connection with the Spin-Off. The Separation and Distribution Agreement divides and allocates the assets and liabilities of the Company prior to the Spin-Off between QCP and HCP, governs the rights and obligations of the parties regarding the Spin-Off, and contains other key provisions relating to the separation of QCP’s business from HCP.

 

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In connection with the Spin-Off, the Company has entered into a Transition Services Agreement ("TSA") with QCP. Per the terms of the TSA, the Company has agreed to provide certain administrative and support services to QCP on a transitional basis for established fees. The TSA provides that QCP generally has the right to terminate a transition service upon thirty days notice to the Company. The TSA contains provisions under which the Company will, subject to certain limitations, be obligated to indemnify QCP for losses incurred by QCP resulting from the Company’s breach of the TSA.

 

Following completion of the Spin-Off, which occurred on October 31, 2016, HCP is the sole lender to QCP of a $100 million unsecured revolving credit facility maturing in 2018 (the "Unsecured Revolving Credit Facility"). Commitments under the Unsecured Revolving Credit Facility will automatically and permanently decrease each calendar month by an amount equal to 50% of QCP's and its restricted subsidiaries’ retained cash flow for the prior calendar month. All borrowings under the Unsecured Revolving Credit Facility will be subject to the satisfaction of certain conditions, including (i) QCP’s senior secured revolving credit facility being unavailable, (ii) the failure of HCRMC to pay rent and (iii) other customary conditions, including the absence of a default and the accuracy of representations and warranties. QCP may only draw on the Unsecured Revolving Credit Facility prior to the one-year anniversary of the completion of the Spin-Off. Borrowings under the Unsecured Revolving Credit Facility bear interest at a rate equal to LIBOR, subject to a 1.00% floor, plus an applicable margin of 6.25%. In addition to paying interest on outstanding principal under the Unsecured Revolving Credit Facility, QCP will be required to pay a facility fee equal to 0.50% per annum of the unused capacity under the Unsecured Revolving Credit Facility to HCP, payable quarterly.

 

NOTE 2.  Summary of Significant Accounting Policies

Basis of Presentation

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

 

The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”) and VIEs that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2015 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).

 

Segment Reporting

The Company reports its consolidated financial statements in accordance with Accounting Standards Codification 280, Segment Reporting (“ASC 280”). The Company’s reportable segments, based on how it evaluates its business and allocates resources in accordance with ASC 280, are as follows: (i) SH NNN, (ii) SHOP, (iii) life science, (iv) medical office and (v) QCP.

 

Prior to the third quarter of 2016, the Company operated through five reportable segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. During the third quarter of 2016, primarily as a result of the planned spin-off of QCP, the Company revised its operating analysis structure. The Company believes the change to its reportable segments is appropriate and consistent with how its chief operating decision makers review the Company’s operating results and determine resource allocations. Accordingly, all prior period segment information has been reclassified to conform to the current period presentation.

 

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Recent Accounting Pronouncements

In October 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑16,  Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). The amendments in ASU 2016-16 require an entity to recognize the income tax consequences of intra-entity transfers of assets other than inventory at the time that the transfer occurs. Current guidance does not require recognition of tax consequences until the asset is eventually sold to a third party. ASU 2016-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted as of the first interim period presented in a year. The Company is evaluating the impact of the adoption of ASU 2016‑16 on January 1, 2018 to its consolidated financial position or results of operations.

 

In August 2016, the FASB issued ASU No. 2016‑15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The amendments in ASU 2016-15 are intended to clarify current guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016‑15 on January 1, 2018 to its consolidated statements of cash flows.

 

In June 2016, the FASB issued ASU No. 2016‑13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. The Company is evaluating the impact of the adoption of ASU 2016‑13 on January 1, 2020 to its consolidated financial position or results of operations.

 

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

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to simplify accounting for share-based payment transactions. The areas for simplification in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statements of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within, beginning after December 15, 2016. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-09 on January 1, 2017 to its consolidated financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-08 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted at the original effective date of the new revenue standard described in ASU No. 2014-09 below (January 1, 2017). The Company is evaluating the impact of the adoption of ASU 2016-08 on January 1, 2018 to its consolidated financial position or results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar to requirements under current accounting guidance, (ii) eliminate current real estate specific lease provisions and (iii) modify the classification criteria and accounting for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2018. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position or results of operations.

 

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In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. This update also simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment at each reporting period. ASU 2016-01 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted only for updates to certain disclosure requirements. The Company is evaluating the impact of the adoption of ASU 2016-01 on January 1, 2018 to its consolidated financial position or results of operations.

 

In September 2015, the FASB issued ASU No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by requiring the acquirer to (i) recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined, (ii) record, in the same period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date and (iii) present separately or disclose the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company adopted ASU 2015-16 on January 1, 2016; the adoption of which did not have a material impact on its consolidated financial position or results of operations.

 

In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 requires amendments to both the VIE and voting consolidation accounting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify (a) the identification of variable interests (fees paid to a decision maker or service provider), (b) the VIE characteristics for a limited partnership or similar entity and (c) the primary beneficiary determination under the VIE model and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. ASU 2015-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using either a modified retrospective or retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company adopted ASU 2015-02 on January 1, 2016; the adoption of which did not have a material impact to its consolidated financial position or results of operations (see Note 16).

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the requirements for recognizing revenue. ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in ASU 2014-09 using either a modified retrospective or retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company is evaluating the impact of the adoption of ASU 2014-09 on January 1, 2018 to its consolidated financial position or results of operations.

 

Reclassifications

Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Real estate and related assets held for sale, net and intangible liabilities related to assets held for sale, net have been reclassified on the consolidated balance sheets (see Note 4). See Segment Reporting above for additional reclassifications.

 

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NOTE 3.  Real Estate Property Investments

2016 Acquisitions

The following table summarizes the Company’s real estate acquisitions for the nine months ended September 30, 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration

 

Assets Acquired(1)

 

 

 

 

 

Mortgage and Other

 

 

 

 

Net

 

Segment

 

Cash Paid

 

Liabilities Assumed

 

Real Estate

 

Intangibles

 

SH NNN

 

$

76,362

 

$

1,200

 

$

71,875

 

$

5,687

 

SHOP

 

 

113,971

 

 

76,931

 

 

177,551

 

 

13,351

 

Life Science

 

 

49,000

 

 

 —

 

 

47,400

 

 

1,600

 

Other

 

 

17,909

 

 

 —

 

 

16,596

 

 

1,313

 

 

 

$

257,242

 

$

78,131

 

$

313,422

 

$

21,951

 


(1)

The purchase price allocations are preliminary and may be subject to change. Revenues and earnings since the acquisition dates, as well as the supplementary pro forma information, assuming these acquisitions occurred as of the beginning of the prior periods, were not material.

 

2015 Acquisitions

Acquisition of Private Pay Senior Housing Portfolio (“RIDEA III”).  On June 30, 2015, the Company and Brookdale Senior Living, Inc. (“Brookdale”) acquired a portfolio of 35 private pay senior housing communities from Chartwell Retirement Residences, including two leasehold interests, representing 5,025 units (reported within the Company’s SHOP segment). The portfolio was acquired under a RIDEA structure which is permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”), with Brookdale owning a 10% noncontrolling interest. Brookdale has operated these communities since 2011 and continues to manage the communities under a long-term management agreement, which is cancellable under certain conditions (subject to a fee if terminated within seven years from the acquisition date). The Company paid $770 million in cash consideration, net of cash assumed, and assumed $32 million of net liabilities and $29 million of noncontrolling interests to acquire: (i) real estate with a fair value of $776 million, (ii) lease-up intangible assets with a fair value of $48 million and (iii) working capital of $7 million. As a result of the acquisition, the Company recognized a net termination fee of $8 million in rental and related revenues, which represents the termination value of the two leasehold interests. The lease-up intangible assets recognized were attributable to the value of the acquired underlying operating resident leases of the senior housing communities that were stabilized or nearly stabilized (i.e., resident occupancy above 80%).

 

Pro Forma Results of Operations.  The following unaudited pro forma consolidated results of operations assume that the RIDEA III acquisition was completed as of January 1, 2014 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

    

Nine Months Ended 

    

 

    

September 30, 2015

    

Revenues

 

$

1,963,402

 

Net income

 

 

56,009

 

Net income applicable to HCP, Inc.

 

 

46,662

 

Basic earnings per common share

 

 

0.10

 

Diluted earnings per common share

 

 

0.10

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consideration

 

Assets Acquired(1)

 

 

 

Cash Paid/

 

Liabilities

 

Noncontrolling