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 |
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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 October 28, 2016, there were 467,971,166 shares of the registrant’s $1.00 par value common stock outstanding.
HCP, INC.
PART I. FINANCIAL INFORMATION |
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Item 1. |
Financial Statements (Unaudited): |
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3 |
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4 |
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5 |
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6 |
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7 |
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8 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
40 |
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69 |
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70 |
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71 |
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72 |
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72 |
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74 |
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2
HCP, Inc.
(In thousands, except share and per share data)
(Unaudited)
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September 30, |
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December 31, |
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2016 |
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2015 |
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ASSETS |
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Real estate: |
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Buildings and improvements |
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$ |
12,534,471 |
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$ |
12,198,704 |
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Development costs and construction in progress |
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395,349 |
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388,576 |
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Land |
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1,971,601 |
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1,948,757 |
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Accumulated depreciation and amortization |
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(2,799,969) |
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(2,541,334) |
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Net real estate |
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12,101,452 |
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11,994,703 |
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Net investment in direct financing leases |
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5,860,401 |
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5,905,009 |
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Loans receivable, net |
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682,994 |
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768,743 |
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Investments in and advances to unconsolidated joint ventures |
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592,097 |
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605,244 |
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Accounts receivable, net of allowance of $4,704 and $3,261, respectively |
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41,371 |
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48,929 |
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Cash and cash equivalents |
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132,891 |
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346,500 |
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Restricted cash |
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71,727 |
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60,616 |
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Intangible assets, net |
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538,631 |
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603,706 |
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Real estate and related assets held for sale, net |
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372,968 |
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314,126 |
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Other assets, net |
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794,013 |
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802,273 |
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Total assets(1) |
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$ |
21,188,545 |
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$ |
21,449,849 |
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LIABILITIES AND EQUITY |
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Bank line of credit |
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$ |
1,372,032 |
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$ |
397,432 |
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Term loans |
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462,181 |
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524,807 |
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Senior unsecured notes |
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8,229,731 |
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9,120,107 |
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Mortgage debt |
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762,715 |
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932,212 |
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Other debt |
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93,876 |
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94,445 |
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Intangible liabilities, net |
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46,135 |
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56,147 |
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Intangible and other liabilities related to assets held for sale, net |
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23,002 |
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19,126 |
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Accounts payable and accrued liabilities |
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487,033 |
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436,239 |
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Deferred revenue |
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136,406 |
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123,017 |
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Total liabilities(1) |
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11,613,111 |
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11,703,532 |
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Commitments and contingencies |
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Common stock, $1.00 par value: 750,000,000 shares authorized; 467,820,181 and 465,488,492 shares issued and outstanding, respectively |
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467,820 |
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465,488 |
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Additional paid-in capital |
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11,720,552 |
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11,647,039 |
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Cumulative dividends in excess of earnings |
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(2,975,096) |
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(2,738,414) |
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Accumulated other comprehensive loss |
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(30,164) |
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(30,470) |
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Total stockholders’ equity |
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9,183,112 |
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9,343,643 |
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Joint venture partners |
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212,807 |
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217,066 |
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Non-managing member unitholders |
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179,515 |
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185,608 |
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Total noncontrolling interests |
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392,322 |
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402,674 |
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Total equity |
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9,575,434 |
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9,746,317 |
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Total liabilities and equity |
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$ |
21,188,545 |
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$ |
21,449,849 |
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(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 $19 million. See Note 16 to the Consolidated Financial Statements for additional information. |
See accompanying Notes to the Consolidated Financial Statements.
3
HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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Revenues: |
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Rental and related revenues |
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$ |
297,178 |
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$ |
293,566 |
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$ |
893,448 |
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$ |
845,382 |
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Tenant recoveries |
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35,195 |
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33,084 |
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100,862 |
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94,356 |
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Resident fees and services |
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170,752 |
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155,290 |
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500,717 |
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367,141 |
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Income from direct financing leases |
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130,663 |
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155,717 |
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390,731 |
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478,976 |
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Interest income |
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20,482 |
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19,842 |
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71,298 |
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89,049 |
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Total revenues |
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654,270 |
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657,499 |
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1,957,056 |
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1,874,904 |
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Costs and expenses: |
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Interest expense |
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117,860 |
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122,157 |
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361,255 |
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357,569 |
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Depreciation and amortization |
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142,874 |
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134,704 |
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425,582 |
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369,629 |
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Operating |
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188,747 |
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173,515 |
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545,827 |
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441,888 |
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General and administrative |
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34,787 |
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20,534 |
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83,079 |
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74,152 |
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Acquisition and pursuit costs |
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17,568 |
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1,553 |
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34,570 |
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23,350 |
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Impairments |
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— |
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69,622 |
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— |
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592,921 |
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Total costs and expenses |
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501,836 |
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522,085 |
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1,450,313 |
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1,859,509 |
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Other income (expense): |
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(Loss) gain on sales of real estate |
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(9) |
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52 |
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119,605 |
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6,377 |
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Other income (expense), net |
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1,454 |
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(572) |
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5,128 |
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13,125 |
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Total other income (expense), net |
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1,445 |
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(520) |
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124,733 |
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19,502 |
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Income before income taxes and equity (loss) income from and impairment of unconsolidated joint ventures |
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153,879 |
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134,894 |
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631,476 |
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34,897 |
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Income tax benefit (expense) |
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2,213 |
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1,980 |
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(48,822) |
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6,620 |
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Equity (loss) income from unconsolidated joint ventures |
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(2,053) |
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8,314 |
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(4,028) |
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33,916 |
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Impairment of investments in unconsolidated joint ventures |
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— |
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(27,234) |
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— |
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(27,234) |
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Net income |
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154,039 |
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117,954 |
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578,626 |
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48,199 |
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Noncontrolling interests’ share in earnings |
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(2,789) |
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(2,592) |
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(9,540) |
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(8,566) |
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Net income attributable to HCP, Inc. |
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151,250 |
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|
115,362 |
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569,086 |
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39,633 |
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Participating securities’ share in earnings |
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(326) |
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(316) |
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(977) |
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(1,020) |
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Net income applicable to common shares |
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$ |
150,924 |
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$ |
115,046 |
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$ |
568,109 |
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$ |
38,613 |
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Earnings per common share: |
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Basic |
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$ |
0.32 |
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$ |
0.25 |
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$ |
1.22 |
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$ |
0.08 |
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Diluted |
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$ |
0.32 |
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$ |
0.25 |
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$ |
1.22 |
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$ |
0.08 |
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Weighted average shares used to calculate earnings per common share: |
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Basic |
|
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467,628 |
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463,337 |
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|
466,931 |
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|
462,039 |
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Diluted |
|
|
467,835 |
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|
463,586 |
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|
467,132 |
|
|
462,302 |
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Dividends declared per common share |
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$ |
0.575 |
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$ |
0.565 |
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$ |
1.725 |
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$ |
1.695 |
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See accompanying Notes to the Consolidated Financial Statements.
4
HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2016 |
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2015 |
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2016 |
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2015 |
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Net income |
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$ |
154,039 |
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$ |
117,954 |
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$ |
578,626 |
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$ |
48,199 |
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|
|
|
|
|
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Other comprehensive income (loss): |
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|
|
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|
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|
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Change in net unrealized gains (losses) on securities |
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4 |
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(361) |
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|
(1) |
|
|
(358) |
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Change in net unrealized gains (losses) on cash flow hedges: |
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|
|
|
|
|
|
|
|
|
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Unrealized gains (losses) |
|
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1,184 |
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(87) |
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|
1,532 |
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|
(289) |
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Reclassification adjustment realized in net income |
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|
154 |
|
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(367) |
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|
494 |
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(19) |
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Change in Supplemental Executive Retirement Plan obligation |
|
|
70 |
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|
70 |
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|
211 |
|
|
208 |
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Foreign currency translation adjustment |
|
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(838) |
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|
410 |
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(1,930) |
|
|
(8,097) |
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Total other comprehensive income (loss) |
|
|
574 |
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(335) |
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|
306 |
|
|
(8,555) |
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Total comprehensive income |
|
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154,613 |
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|
117,619 |
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|
578,932 |
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|
39,644 |
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Total comprehensive income attributable to noncontrolling interests |
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|
(2,789) |
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|
(2,592) |
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|
(9,540) |
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|
(8,566) |
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Total comprehensive income attributable to HCP, Inc. |
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$ |
151,824 |
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$ |
115,027 |
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$ |
569,392 |
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$ |
31,078 |
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See accompanying Notes to the Consolidated Financial Statements.
5
HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
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Cumulative |
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Accumulated |
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||
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Additional |
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Dividends |
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Other |
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Total |
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Total |
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|||||
|
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Common Stock |
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Paid-In |
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In Excess |
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Comprehensive |
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Stockholders’ |
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Noncontrolling |
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Total |
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|||||||||
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Shares |
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Amount |
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Capital |
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Of Earnings |
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Loss |
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Equity |
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Interests |
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Equity |
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|||||||
January 1, 2016 |
|
465,488 |
|
$ |
465,488 |
|
$ |
11,647,039 |
|
$ |
(2,738,414) |
|
$ |
(30,470) |
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$ |
9,343,643 |
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$ |
402,674 |
|
$ |
9,746,317 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
569,086 |
|
|
— |
|
|
569,086 |
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|
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
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.
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 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.
8
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.
9
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.
10
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.
11
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 $8 million in rental and related revenues, which represents the termination value of the two leasehold interests. The lease-up intangible assets recognized were attributable to the value of the acquired underlying operating resident leases of the senior housing communities that were stabilized or nearly stabilized (i.e., resident occupancy above 80%).
Pro Forma Results of Operations. The following unaudited pro forma consolidated results of operations assume that the RIDEA III acquisition was completed as of January 1, 2014 (in thousands, except per share data):
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Nine Months Ended |
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September 30, 2015 |
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Revenues |
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$ |
1,963,402 |
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Net income |
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56,009 |
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Net income applicable to HCP, Inc. |
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46,662 |
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Basic earnings per common share |
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0.10 |
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Diluted earnings per common share |
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0.10 |
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12
2015 Other Acquisitions. The following table summarizes the Company’s real estate acquisitions for the nine months ended September 30, 2015 (in thousands):
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Consideration |
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Assets Acquired(1) |
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Cash Paid/ |
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Liabilities |
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Noncontrolling |
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