Document
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 June 30, 2017.
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, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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)
 
 
 
 
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES ☐ NO ☒
At July 28, 2017, there were 468,963,146 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):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

HCP, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
June 30,
2017
 
December 31,
2016
ASSETS
 

 
 

Real Estate:
 

 
 

Buildings and improvements
$
11,114,139

 
$
11,692,654

Development costs and construction in progress
444,528

 
400,619

Land
1,765,305

 
1,881,487

Accumulated depreciation and amortization
(2,672,489
)
 
(2,648,930
)
Net real estate
10,651,483

 
11,325,830

Net investment in direct financing leases
711,777

 
752,589

Loans receivable, net
393,575

 
807,954

Investments in and advances to unconsolidated joint ventures
829,231

 
571,491

Accounts receivable, net of allowance of $4,104 and $4,459, respectively
36,969

 
45,116

Cash and cash equivalents
391,965

 
94,730

Restricted cash
61,481

 
42,260

Intangible assets, net
414,404

 
479,805

Assets held for sale, net

 
927,866

Other assets, net
611,690

 
711,624

Total assets
$
14,102,575

 
$
15,759,265

LIABILITIES AND EQUITY
 

 
 

Bank line of credit
$
136,311

 
$
899,718

Term loans
218,832

 
440,062

Senior unsecured notes
6,889,045

 
7,133,538

Mortgage debt
146,337

 
623,792

Other debt
94,801

 
92,385

Intangible liabilities, net
51,463

 
58,145

Liabilities of assets held for sale, net

 
3,776

Accounts payable and accrued liabilities
389,690

 
417,360

Deferred revenue
147,155

 
149,181

Total liabilities
8,073,634

 
9,817,957

Commitments and contingencies


 


Common stock, $1.00 par value: 750,000,000 shares authorized; 468,879,344 and 468,081,489 shares issued and outstanding, respectively
468,879

 
468,081

Additional paid-in capital
8,216,781

 
8,198,890

Cumulative dividends in excess of earnings
(2,956,324
)
 
(3,089,734
)
Accumulated other comprehensive loss
(27,289
)
 
(29,642
)
Total stockholders' equity
5,702,047

 
5,547,595

Joint venture partners
149,456

 
214,377

Non-managing member unitholders
177,438

 
179,336

Total noncontrolling interests
326,894

 
393,713

Total equity
6,028,941

 
5,941,308

Total liabilities and equity
$
14,102,575

 
$
15,759,265

_______________________________________
See accompanying Notes to the Unaudited Consolidated Financial Statements.


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HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 

 
 

 
 
 
 
Rental and related revenues
$
263,820

 
$
292,168

 
$
550,038

 
$
582,548

Tenant recoveries
35,259

 
33,531

 
68,934

 
64,906

Resident fees and services
125,416

 
164,202

 
265,648

 
329,965

Income from direct financing leases
13,564

 
15,647

 
27,276

 
30,557

Interest income
20,869

 
32,787

 
39,200

 
50,816

Total revenues
458,928

 
538,335

 
951,096

 
1,058,792

Costs and expenses:
 

 
 

 
 
 
 
Interest expense
77,788

 
121,333

 
164,506

 
243,395

Depreciation and amortization
130,751

 
139,919

 
267,305

 
279,774

Operating
153,163

 
179,080

 
312,244

 
355,037

General and administrative
21,286

 
22,779

 
43,764

 
48,230

Acquisition and pursuit costs
867

 
823

 
1,924

 
3,298

Impairment
56,682

 

 
56,682

 

Total costs and expenses
440,537

 
463,934

 
846,425

 
929,734

Other income:
 

 
 

 
 
 
 
Gain on sales of real estate, net
412

 
119,614

 
317,670

 
119,614

Other income, net
71

 
2,340

 
51,279

 
3,632

Total other income, net
483

 
121,954

 
368,949

 
123,246

Income before income taxes and equity income (loss) from unconsolidated joint ventures
18,874

 
196,355

 
473,620

 
252,304

Income tax benefit (expense)
2,987

 
2,179

 
9,149

 
(1,525
)
Equity income (loss) from unconsolidated joint ventures
240

 
(1,067
)
 
3,509

 
(1,975
)
Income from continuing operations
22,101

 
197,467

 
486,278

 
248,804

Discontinued operations:
 

 
 

 
 
 
 
Income before income taxes

 
107,551

 

 
225,293

Income taxes

 
(176
)
 

 
(49,510
)
Total discontinued operations

 
107,375

 

 
175,783

Net income
22,101

 
304,842

 
486,278

 
424,587

Noncontrolling interests' share in earnings
(2,718
)
 
(3,125
)
 
(5,750
)
 
(6,751
)
Net income attributable to HCP, Inc.
19,383

 
301,717

 
480,528

 
417,836

Participating securities' share in earnings
(100
)
 
(342
)
 
(674
)
 
(651
)
Net income applicable to common shares
$
19,283

 
$
301,375

 
$
479,854

 
$
417,185

Basic earnings per common share:
 

 
 

 
 
 
 
Continuing operations
$
0.04

 
$
0.42

 
$
1.02

 
$
0.52

Discontinued operations

 
0.23

 

 
0.37

Net income applicable to common shares
$
0.04

 
$
0.65

 
$
1.02

 
$
0.89

Diluted earnings per common share:
 

 
 

 
 
 
 
Continuing operations
$
0.04

 
$
0.42

 
$
1.02

 
$
0.52

Discontinued operations

 
0.22

 

 
0.37

Net income applicable to common shares
$
0.04

 
$
0.64

 
$
1.02

 
$
0.89

Weighted average shares used to calculate earnings per common share:
 

 
 

 
 
 
 
Basic
468,646

 
467,084

 
468,474

 
466,579

Diluted
468,839

 
471,425

 
473,366

 
466,777

Dividends declared per common share
$
0.37

 
$
0.575

 
$
0.74

 
$
1.15

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
22,101

 
$
304,842

 
$
486,278

 
$
424,587

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized (losses) gains on securities
(3
)
 
10

 
6

 
(5
)
Change in net unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized (losses) gains
(6,131
)
 
1,038

 
(6,433
)
 
348

Reclassification adjustment realized in net income
(193
)
 
171

 
20

 
340

Change in Supplemental Executive Retirement Plan obligation
74

 
71

 
148

 
141

Foreign currency translation adjustment
7,622

 
(355
)
 
8,612

 
(1,092
)
Total other comprehensive income (loss)
1,369

 
935

 
2,353

 
(268
)
Total comprehensive income
23,470

 
305,777

 
488,631

 
424,319

Total comprehensive income attributable to noncontrolling interests
(2,718
)
 
(3,125
)
 
(5,750
)
 
(6,751
)
Total comprehensive income attributable to HCP, Inc.
$
20,752

 
$
302,652

 
$
482,881

 
$
417,568

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
January 1, 2017
468,081

 
$
468,081

 
$
8,198,890

 
$
(3,089,734
)
 
$
(29,642
)
 
$
5,547,595

 
$
393,713

 
$
5,941,308

Net income

 

 

 
480,528

 

 
480,528

 
5,750

 
486,278

Other comprehensive income

 

 

 

 
2,353

 
2,353

 

 
2,353

Issuance of common stock, net
850

 
850

 
12,443

 

 

 
13,293

 

 
13,293

Conversion of DownREIT units to common stock
68

 
68

 
2,003

 

 

 
2,071

 
(2,071
)
 

Repurchase of common stock
(141
)
 
(141
)
 
(4,220
)
 

 

 
(4,361
)
 

 
(4,361
)
Exercise of stock options
21

 
21

 
573

 

 

 
594

 

 
594

Amortization of deferred compensation

 

 
7,092

 

 

 
7,092

 

 
7,092

Common dividends ($0.74 per share)

 

 

 
(347,118
)
 

 
(347,118
)
 

 
(347,118
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(13,087
)
 
(13,087
)
Issuances of noncontrolling interests

 

 

 

 

 

 
650

 
650

Deconsolidation of noncontrolling interests

 

 

 

 

 

 
(58,061
)
 
(58,061
)
June 30, 2017
468,879

 
$
468,879

 
$
8,216,781

 
$
(2,956,324
)
 
$
(27,289
)
 
$
5,702,047

 
$
326,894

 
$
6,028,941

 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Loss
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
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

 

 

 
417,836

 

 
417,836

 
6,751

 
424,587

Other comprehensive income

 

 

 

 
(268
)
 
(268
)
 

 
(268
)
Issuance of common stock, net
1,715

 
1,715

 
41,357

 

 

 
43,072

 

 
43,072

Conversion of DownREIT units to common stock
120

 
120

 
4,902

 

 

 
5,022

 
(5,022
)
 

Repurchase of common stock
(109
)
 
(109
)
 
(3,765
)
 

 

 
(3,874
)
 

 
(3,874
)
Exercise of stock options
111

 
111

 
2,741

 

 

 
2,852

 

 
2,852

Amortization of deferred compensation

 

 
9,505

 

 

 
9,505

 

 
9,505

Common dividends ($1.15 per share)

 

 

 
(537,061
)
 

 
(537,061
)
 

 
(537,061
)
Distributions to noncontrolling interests

 

 
(36
)
 

 

 
(36
)
 
(12,437
)
 
(12,473
)
Issuances of noncontrolling interests

 

 

 

 

 

 
3,225

 
3,225

Deconsolidation of noncontrolling interests

 

 
(36
)
 
475

 

 
439

 
67

 
506

June 30, 2016
467,325

 
$
467,325

 
$
11,701,707

 
$
(2,857,164
)
 
$
(30,738
)
 
$
9,281,130

 
$
395,258

 
$
9,676,388

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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Table of Contents

HCP, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
Cash flows from operating activities:
 

 
 

Net income
$
486,278

 
$
424,587

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate, in-place lease and other intangibles:
 
 
 
Continuing operations
267,305

 
279,774

Discontinued operations

 
2,934

Amortization of deferred compensation
7,092

 
9,505

Amortization of deferred financing costs
7,702

 
10,561

Straight-line rents
(8,176
)
 
(11,117
)
Equity (income) loss from unconsolidated joint ventures
(3,509
)
 
1,975

Distributions of earnings from unconsolidated joint ventures
18,528

 
3,202

Gain on sales of real estate, net
(317,670
)
 
(119,614
)
Allowance for loan losses
56,682

 

Deferred income tax (benefit) expense
(12,472
)
 
49,156

Foreign exchange and other gains, net
(845
)
 
(91
)
Gain on sale of marketable securities
(50,895
)
 

Other non-cash items
(1,478
)
 
(1,502
)
Changes in:
 
 
 
Accounts receivable, net
(2,002
)
 
(2,871
)
Other assets, net
(6,775
)
 
(2,892
)
Accounts payable and accrued liabilities
(8,176
)
 
23,305

Net cash provided by operating activities
431,589

 
666,912

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(26,446
)
 
(94,271
)
Development of real estate
(157,898
)
 
(204,624
)
Leasing costs and tenant and capital improvements
(48,575
)
 
(41,161
)
Proceeds from sales of real estate, net
1,195,860

 
96,652

Contributions to unconsolidated joint ventures
(21,302
)
 
(10,156
)
Distributions in excess of earnings from unconsolidated joint ventures
1,609

 
6,421

Net proceeds from the RIDEA II transaction (Note 4)
480,614

 

Proceeds from the sales of Four Seasons investments
135,538

 

Principal repayments on direct financing leases, loans receivable and other
414,221

 
205,576

Investments in loans receivable and other
(18,433
)
 
(122,113
)
Decrease in restricted cash
2,398

 
10,058

Net cash provided by (used in) investing activities
1,957,586

 
(153,618
)
Cash flows from financing activities:
 
 
 
Net (repayments) borrowings under bank line of credit
(441,581
)
 
642,898

Repayments under bank line of credit
(339,826
)
 
(135,000
)
Repayment of term loans
(234,459
)
 

Repayments of senior unsecured notes
(250,000
)
 
(500,000
)
Issuance of mortgage and other debt
5,395

 

Repayments of mortgage and other debt
(481,667
)
 
(246,387
)
Issuance of common stock and exercise of options
13,887

 
45,924

Repurchase of common stock
(4,361
)
 
(3,874
)
Dividends paid on common stock
(347,118
)
 
(537,061
)
Issuance of noncontrolling interests
650

 
3,225

Distributions to noncontrolling interests
(13,087
)
 
(12,473
)
Net cash used in financing activities
(2,092,167
)
 
(742,748
)
Effect of foreign exchange on cash and cash equivalents
227

 
(596
)
Net increase (decrease) in cash and cash equivalents
297,235

 
(230,050
)
Cash and cash equivalents, beginning of period
94,730

 
346,500

Cash and cash equivalents, end of period
$
391,965

 
$
116,450

See accompanying Notes to the Unaudited 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, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, 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 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; (ii) senior housing operating portfolio (“SHOP”); (iii) life science and (iv) medical office.
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 variable interest entities ("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 six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. 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, 2016 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).
Real Estate
On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an acquired input and a substantive process that together significantly contribute to the ability to create outputs. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. This ASU is to be applied prospectively and the Company expects that a majority of its future real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. As a result, for asset acquisitions the Company will record identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill will be recognized, third party transaction costs will be capitalized and any associated contingent consideration will be recorded when the contingency is resolved. 
Segment Reporting
The Company’s reportable segments, based on how it evaluates its business and allocates resources, are as follows: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office.
Prior to the third quarter of 2016, the Company had 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 Quality Care Properties, Inc. (“QCP”) (NYSE:QCP), the Company revised its operating analysis structure and changed its reportable segments. 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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Table of Contents

Reclassifications
Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. Certain prior period amounts have been reclassified on consolidated statements of operations for discontinued operations (see Note 4). See Segment Reporting above for additional reclassifications.
Recent Accounting Pronouncements
In February 2017, the FASB issued ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). The amendments in ASU 2017-05 clarify the scope of the FASB’s recently established guidance on nonfinancial asset derecognition which applies to the derecognition of all nonfinancial assets and in-substance nonfinancial assets. In addition, ASU 2017-05 clarifies the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets to align with the new revenue recognition standard (see below). ASU 2017-05 is effective for annual periods beginning after December 15, 2017, including interim periods within, and must be adopted in conjunction with the Revenue ASUs (as defined below). ASU 2017-05 can be adopted using a full retrospective approach or a modified retrospective approach, resulting in a cumulative-effect adjustment to equity as of the beginning of the fiscal year in which the guidance is effective. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs (see below) on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the second half of 2017.
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. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. 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. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Upon adoption of ASU 2016-13, the Company is required to reassess its financing receivables, including direct finance leases and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations.
Between May 2014 and May 2016, the FASB issued three ASUs changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”) and (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. 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. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08 and ASU 2016-12, assumed the deferred effective date enforced by ASU 2015-14. Early adoption of the Revenue ASUs is permitted for annual periods, and interim periods within, beginning after December 15, 2016. A reporting entity may apply the amendments in the Revenue ASUs using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach.
As the primary source of revenue for the Company is generated through leasing arrangements, which are excluded from the Revenue ASUs (as it relates to the timing and recognition of revenue), the Company expects that it may be impacted in its recognition of non-lease revenue, such as certain resident fees in its RIDEA structures (a portion of which are not generated through leasing arrangements), non-lease components of revenue from lease agreements and its recognition of real estate sale transactions. Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control versus continuing involvement under current guidance. As a result, the Company generally expects that the new guidance will result in more transactions qualifying as sales of real estate and revenue being recognized at an earlier date than under current accounting guidance. Additionally, upon adoption of the Revenue ASUs in 2018, the Company anticipates that it will be required to separately disclose the components of

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its total revenue between lease revenue accounted for under existing lease guidance and service revenue accounted for under the new Revenue ASUs, including non-lease components such as certain services embedded in base leasing fees. The Company has not yet elected a transition method and is evaluating the complete impact of the adoption of the Revenue ASUs on January 1, 2018 to its consolidated financial position, results of operations and disclosures. The Company expects to complete its evaluation of the impacts of the Revenue ASUs during the second half of 2017.
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 transition method required by ASU 2016-02 varies based on the specific amendment being adopted. As a result of adopting ASU 2016-02, the Company will recognize all of its significant operating leases for which it is the lessee, including corporate office leases and ground leases, on its consolidated balance sheets and will capitalize fewer legal costs related to the drafting and execution of its lease agreements. From a lessor perspective, the Company expects that it will be required to further bifurcate lease agreements to separately recognize and disclose non-lease components that are executory in nature. Lease components will continue to be recognized on a straight-line basis over the lease term and certain non-lease components will be accounted for under the new revenue recognition guidance in ASU 2014-09. The disaggregated disclosure of lease and executory non-lease components (e.g., maintenance) will be required upon the adoption of ASU 2016-02 . The Company anticipates that it will elect a practical expedient offered in ASU 2016-02 that allows an entity to not reassess the following upon adoption (must be elected as a group): (i) whether an expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs. The Company does not expect the bifurcation of non-lease components from a lease agreement to significantly impact the existing revenue recognition pattern. The Company is still evaluating the complete impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position, results of operations and disclosures.
The following ASUs have been issued, but not yet adopted, and the Company does not expect a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption:
ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 is effective for fiscal years, including interim periods within, beginning after December 15, 2019 (upon the first goodwill impairment test performed during that fiscal year). Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. A reporting entity must apply the amendments in ASU 2017-04 using a prospective approach.
ASU No. 2016-18, Restricted Cash (“ASU 2016-18”). ASU 2016-18 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-18 using a full retrospective approach.
ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). 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 any year following issuance. A reporting entity must apply the amendments in ASU 2016-16 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. 
ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting entity must apply the amendments in ASU 2016-15 using a full retrospective approach.
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). 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. A reporting entity is required to apply the amendments in ASU 2016-01 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption.

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NOTE 3.  Real Estate Property Investments

The following table summarizes the Company’s real estate acquisitions for the six months ended June 30, 2017 (in thousands):
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid/
Debt Settled
 
Liabilities
Assumed
 
Real Estate
 
Net
Intangibles
Life science
 
$
26,019

 
$
155

 
$
24,398

 
$
1,776

Medical office
 
427

 
5

 
432

 

 
 
$
26,446

 
$
160

 
$
24,830

 
$
1,776


The following table summarizes the Company’s real estate acquisitions for the six months ended June 30, 2016 (in thousands):
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid/
Debt Settled
 
Liabilities
Assumed
 
Real Estate
 
Net
Intangibles
Senior housing triple-net
 
$
76,362

 
$
1,200

 
$
71,875

 
$
5,687

Other non-reportable segments
 
17,909

 

 
16,596

 
1,313

 
 
$
94,271

 
$
1,200

 
$
88,471

 
$
7,000

NOTE 4.  Discontinued Operations and Dispositions of Real Estate

Discontinued Operations - Quality Care Properties, Inc.
On October 31, 2016, the Company completed the spin-off (the “Spin-Off”) of its subsidiary, QCP. The Spin-Off included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self-managed and self-administrated REIT.
In connection with the Spin-Off, the Company 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 will terminate on the expiration of the term of the last service provided under the agreement, which will be on or prior to October 30, 2017. 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.
Summarized financial information for discontinued operations for the three and six months ended June 30, 2016 is as follows (in thousands):
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
Revenues:
 
 
 
Rental and related revenues
$
6,908

 
$
13,722

Tenant recoveries
399

 
761

Income from direct financing leases
116,453

 
229,511

Total revenues
123,760

 
243,994

Costs and expenses:
 
 
 
Depreciation and amortization
(1,467
)
 
(2,934
)
Operating
(1,045
)
 
(2,043
)
General and administrative
(14
)
 
(62
)
Acquisition and pursuit costs
(13,704
)
 
(13,704
)
Other income, net
21

 
42

Income before income taxes
107,551

 
225,293

Income tax expense
(176
)
 
(49,510
)
Total discontinued operations
$
107,375

 
$
175,783


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Table of Contents

HCR ManorCare, Inc.
Discontinued operations is primarily comprised of QCP’s HCRMC DFL investments. During the six months ended June 30, 2016, the Company received cash payments of $116 million from the HCRMC DFL investments.
No accretion related to its HCRMC DFL investments was recognized in 2016 due to the Company utilizing a cash basis method of accounting beginning January 1, 2016.
The Company’s acquisition of the HCRMC DFL investments in 2011 was subject to federal and state built-in gain tax of up to $2 billion if all the assets were sold within 10 years of the acquisition date. At the time of acquisition, the Company intended to hold the assets for at least 10 years, at which time the assets would no longer be subject to the built-in gain tax. In December 2015, the U.S. Federal Government passed legislation which permanently reduced the holding period, for federal tax purposes, to 5 years, which the Company satisfied in April 2016. This legislation was not extended to certain states, which maintain a 10 year requirement. During the three months ended March 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of $49 million representing its estimated exposure to state built-in gain tax.
Dispositions of Real Estate
Held for Sale
At June 30, 2017, there were no assets classified as held for sale.
At December 31, 2016, 64 senior housing triple-net facilities, four life science facilities and a SHOP facility were classified as held for sale, with an aggregate carrying value of $928 million, primarily comprised of real estate assets of $809 million. All facilities held for sale at December 31, 2016 were sold during the first quarter of 2017.
2017 Dispositions
In January 2017, the Company sold four life science facilities in Salt Lake City, Utah for $76 million, resulting in a net gain on sale of $45 million.
Also in January 2017, the Company completed the contribution of its ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“HCP/CPA PropCo” and “HCP/CPA OpCo,” together, the “HCP/CPA JV”). In addition, RIDEA II was recapitalized with $602 million of debt, of which $360 million was provided by a third-party and $242 million was provided by HCP. In return for both transaction elements, the Company received combined proceeds of $480 million from the HCP/CPA JV and $242 million in note receivables and retained an approximately 40% beneficial interest in RIDEA II (the note receivable and 40% beneficial interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. The RIDEA II Investments are now recognized and accounted for as equity method investments.
In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale Senior Living Inc. (“Brookdale”), for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a net gain on sale of $170 million.
In April 2017, the Company sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million.
2016 Dispositions
During the six months ended June 30, 2016, the Company sold five post-acute/skilled nursing facilities and two senior housing triple-net facilities for $130 million, a life science facility for $74 million, two medical office buildings for $19 million and a SHOP facility for $6 million and recognized total gain on sales of $120 million.
NOTE 5.  Net Investment in Direct Financing Leases

Net investment in DFLs consisted of the following (dollars in thousands):
 
June 30,
2017
 
December 31,
2016
Minimum lease payments receivable
$
1,081,187

 
$
1,108,237

Estimated residual value
500,368

 
539,656

Less unearned income
(869,778
)
 
(895,304
)
Net investment in direct financing leases
$
711,777

 
$
752,589

Properties subject to direct financing leases
29

 
30


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Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.
In February 2017, the Company sold a hospital within a DFL in Palm Beach Gardens, Florida for $43 million to the current tenant.
Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for DFLs at June 30, 2017 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
DFL Portfolio
 
Internal Ratings
Segment
 
 
 
Performing DFLs
 
Watch List DFLs
 
Workout DFLs
Senior housing triple-net
 
$
627,173

 
88%
 
$
268,815

359,586,000

$
358,358

 
$

Other non-reportable segments
 
84,604

 
12
 
84,604



 

 
 
$
711,777

 
100%
 
$
353,419

 
$
358,358

 
$

Beginning September 30, 2013, the Company placed a 14 property senior housing triple-net DFL (the “DFL Watchlist Portfolio”) on nonaccrual status and “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Watchlist Portfolio has been recognized on a cash basis. During both the three months ended June 30, 2017 and 2016, the Company recognized DFL income of $4 million and received cash payments of $5 million from the DFL Watchlist Portfolio. During the six months ended June 30, 2017 and 2016, the Company recognized DFL income of $7 million and $8 million, respectively, and received cash payments of $9 million and $10 million, respectively, from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was $358 million and $361 million at June 30, 2017 and December 31, 2016, respectively.
NOTE 6.  Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):
 
June 30, 2017
 
December 31, 2016
 
Real Estate
Secured
 
Other
Secured
 
Total
 
Real Estate
Secured
 
Other
Secured
 
Total
Mezzanine(1)
$

 
$
274,799

 
$
274,799

 
$

 
$
615,188

 
$
615,188

Other(2)
176,186

 

 
176,186

 
195,946

 

 
195,946

Unamortized discounts, fees and costs(1)

 
(728
)
 
(728
)
 
413

 
(3,593
)
 
(3,180
)
Allowance for loan losses

 
(56,682
)
 
(56,682
)
 

 

 

 
$
176,186

 
$
217,389

 
$
393,575

 
$
196,359

 
$
611,595

 
$
807,954

_______________________________________
(1)
At December 31, 2016, included £282 million ($348 million) outstanding and £2 million ($3 million) of associated unamortized discounts, fees and costs, both related to the HC-One Facility.
(2)
At June 30, 2017, included £119 million ($154 million) outstanding primarily related to Maria Mallaband loans.
Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at June 30, 2017 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
Loan Portfolio
 
Internal Ratings
Investment Type
 
 
 
Performing Loans
 
Watch List Loans
 
Workout Loans
Real estate secured
 
$
176,186

 
45%
 
$
176,186

 
$

 
$

Other secured
 
217,389

 
55
 
17,389

 
200,000

 


 
$
393,575

 
100%
 
$
193,575

 
$
200,000

 
$

Real Estate Secured Loans
Four Seasons Health Care. In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million).

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Other Secured Loans
HC-One Facility. On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan.
Tandem Health Care Loan. On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), as part of the recapitalization of a post-acute/skilled nursing portfolio (the “Tandem Portfolio”). The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. In May 2015, the Company increased and extended the mezzanine loan facility with Tandem to: (i) fund $50 million (the “Third Tranche”) and $5 million (the “Fourth Tranche”), which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt, respectively; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period through January 2017. The tranches (collectively, the “Tandem Mezzanine Loan”) bear interest at fixed annual rates of 12%14%,  6% and 6% per annum for the First, Second, Third and Fourth Tranches, respectively. The blended rate for the Tandem Mezzanine Loan is 11.5% per year.
Tandem leases the entire Tandem Portfolio to Consulate Health Care (“Consulate”) under a master lease (the “Tandem and Consulate Lease”). At June 30, 2017, as a result of the Tandem Portfolio’s operating performance, there are outstanding events of default under the Tandem and Consulate Lease (“Events of Default”) due to: (i) Consulate’s failure to meet certain financial covenants under the Tandem and Consulate Lease and (ii) events of default under Consulate’s working capital facility, which, through a cross-default provision, are Events of Default. Starting in April 2017, Consulate failed to pay the full amount of its rent under the Tandem and Consulate Lease which triggered another Event of Default. Through cross-default provisions, these Events of Default are also events of default under the Tandem Mezzanine Loan and Tandem’s senior mortgage debt (each, a “Loan Event of Default”). The Tandem Mezzanine Loan requires Tandem to pay default interest at a rate of 16.5% per year, during periods in which there is an outstanding Loan Event of Default. Tandem did not pay the additional 5% default interest rate spread above the 11.5% and, therefore created a monetary event of default under the Tandem Mezzanine Loan.
Although Tandem continues to remain current on its non-default interest payment obligations under the Tandem Mezzanine Loan, the Company believes that it is probable it will be unable to collect all interest and principal payments, including default interest payments, according to the contractual terms of the Tandem Mezzanine Loan. As the Tandem Mezzanine Loan is deemed collateral-dependent and the carrying amount of the Tandem Mezzanine Loan exceeded the fair value of the underlying collateral at June 30, 2017, as part of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million, which approximates the fair value of the collateral as of June 30, 2017. The decline in fair value of the collateral was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation of the fair value of the collateral was primarily based on an income approach technique and relies on forecasted EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent) and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates. All valuation inputs are considered to be Level 2 measurements within the fair value hierarchy.
Beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During both the three months ended June 30, 2017 and 2016, the Company recognized interest income and received cash payments of $7 million from Tandem. During both the six months ended June 30, 2017 and 2016, the Company recognized interest income and received cash payments of $14 million from Tandem.
The Company entered into a forbearance agreement with Tandem on May 1, 2017, pursuant to which it agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan until June 30, 2017, which was subsequently extended to July 31, 2017 with certain modifications.
On July 31, 2017, subsequent to its quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (“Agreement”) with the borrowers to repay the Tandem Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”). Upon execution of the Agreement, the borrowers posted a $2 million non-refundable deposit and secured the right to repay the Tandem Mezzanine Loan by October 25, 2017 (at the Repayment Value). A second non-refundable deposit of $2 million is required to be posted by August 31, 2017. The borrowers also retain the option to extend the term of the Agreement to December 31, 2017 upon satisfaction of one of the following requirements: (i) posting of an additional $4 million non-refundable deposit, (ii) providing evidence of a commitment letter(s) for financing to satisfy the full Repayment Value, which is subject to the Company’s approval and may be granted or withheld in the Company’s sole discretion, or (iii) paying down the principal balance of the Tandem Mezzanine Loan by at least $50 million. The borrowers are obligated to continue making interest payments based on the $257 million par value of the Tandem Mezzanine Loan through the repayment date, adjusted for any principal payments received from Tandem. As part of the Agreement, the Company agreed to forbear from exercising remedies, including waiving default interest, with respect to the above-described Loan Events of Default under the Tandem Mezzanine Loan, through December 31, 2017.

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Table of Contents

During the third quarter of 2017, the Company expects to record an additional $3 million impairment charge to write down the carrying value of the Tandem Mezzanine Loan to the Repayment Value and assign the Tandem Mezzanine Loan an internal rating of Workout. The repayment of the Tandem Mezzanine Loan is subject to customary closing conditions and may not occur within the anticipated timeframe or at all.
NOTE 7.  Investments in and Advances to Unconsolidated Joint Ventures

The Company owns interests in the following entities that are accounted for under the equity method at June 30, 2017 (dollars in thousands): 
 
 
 
 
 
 
Carrying Amount
 
 
 
 
 
 
 
 
June 30,
 
December 31,
Entity (1)
 
Segment
 
Ownership%
 
2017
 
2016
CCRC JV (2)
 
SHOP
 
 
49
 
 
$
433,507

 
$
439,449

RIDEA II
 
SHOP
 
 
40
 
 
258,505

 

HCP Life Science (3)
 
Life science
 

50 - 63

 
64,795

 
67,879

MBK JV
 
SHOP
 
 
50
 
 
38,806

 
38,909

Medical Office JVs (4)
 
Medical office
 

20 - 67

 
13,569

 
13,438

Development JVs (5)
 
SHOP
 

50 - 90

 
18,616

 
10,459

K&Y JVs
 
Other non-reportable segments
 
 
80
 
 
1,420

 
1,342

Advances to unconsolidated joint ventures, net
 
 
 
 
 
 
 
13

 
15

 
 
 
 
 
 
 
 
$
829,231

 
$
571,491

_______________________________________
(1)
These entities are not consolidated because the Company does not control, through voting rights or other means, the JV.
(2)
Includes two unconsolidated JVs in a RIDEA structure (CCRC PropCo and CCRC OpCo).
(3)
Includes the following unconsolidated partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).
(4)
Includes three unconsolidated medical office partnerships (and the Company’s ownership percentage): HCP Ventures VI, LLC (20%); HCP Ventures III, LLC (30%); and Suburban Properties, LLC (67%).
(5)
Includes four unconsolidated SHOP development partnerships (and the Company’s ownership percentage): (i) Vintage Park Development JV (85%); (ii) Waldwick JV (85%); (iii) Otay Ranch JV (90%); and (iv) MBK Development JV (50%).
See Note 4 for further information on the deconsolidation of RIDEA II.
NOTE 8.  Intangibles

The following tables summarize the Company’s intangible lease assets and liabilities (in thousands):
Intangible lease assets
 
June 30,
2017
 
December 31,
2016
Gross intangible lease assets
 
$
818,577

 
$
911,697

Accumulated depreciation and amortization
 
(404,173
)
 
(431,892
)
Net intangible lease assets
 
$
414,404

 
$
479,805

Intangible lease liabilities
 
June 30,
2017
 
December 31,
2016
Gross intangible lease liabilities
 
$
143,209

 
$
163,924

Accumulated depreciation and amortization
 
(91,746
)
 
(105,779
)
Net intangible lease liabilities
 
$
51,463

 
$
58,145


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NOTE 9.  Other Assets
The following table summarizes the Company’s other assets (in thousands):
 
June 30,
2017
 
December 31,
2016
Straight-line rent receivables, net of allowance of $24,737 and $25,059, respectively
$
320,485

 
$
311,776

Marketable debt securities, net
18,448

 
68,630

Leasing costs and inducements, net
91,818

 
156,820

Goodwill
47,019

 
42,386

Other
133,920

 
132,012

Total other assets, net
$
611,690

 
$
711,624

Four Seasons Health Care Senior Notes 
In March 2017, pursuant to a shift in the Company’s investment strategy, the Company sold its £138.5 million par value Four Seasons senior notes (the “Four Seasons Notes”) for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale, recognized in other income, net, as the sales price was above the previously-impaired carrying value of £41 million ($50 million).  
NOTE 10.  Debt
Bank Line of Credit and Term Loans
The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on March 31, 2018 and contains a committed one-year extension option, at a cost of 30 basis points. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends on the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at June 30, 2017, the margin on the Facility was 1.05% and the facility fee was 0.20%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. During the six months ended June 30, 2017, the Company had net repayments of $781 million primarily using proceeds from the RIDEA II joint venture disposition, the sale of its Four Seasons Notes and the repayment of its HC-One Facility. At June 30, 2017, the Company had £105 million ($136 million) outstanding under the Facility with a weighted average effective interest rate of 1.63%.
On July 30, 2012, the Company entered into a credit agreement with a syndicate of banks for a £137 million unsecured term loan (the “2012 Term Loan”). In March 2017, the Company repaid the 2012 Term Loan.
On June 30, 2017, the Company repaid £51 million of its four-year unsecured term loan entered into in January 2015 (the "2015 Term Loan"). Concurrently, the Company terminated its three-year interest rate swap which fixed the interest of the 2015 Term Loan. Effective June 30, 2017, the 2015 Term Loan accrues interest at a rate of GBP LIBOR plus 1.15%, subject to adjustments based on the Company's credit ratings. At June 30, 2017 the Company had £169 million ($219 million) outstanding on the 2015 Term Loan.
The Facility and 2015 Term Loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%; (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%; (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60%; and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility and Term Loan also require a Minimum Consolidated Tangible Net Worth of $6.5 billion at June 30, 2017. At June 30, 2017, the Company was in compliance with each of these restrictions and requirements of the Facility and Term Loan.
Senior Unsecured Notes
At June 30, 2017, the Company had senior unsecured notes outstanding with an aggregate principal balance of $7.0 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at June 30, 2017.

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The following table summarizes the Company’s senior unsecured notes payoffs for the year ended December 31, 2016 (dollars in thousands):
Date
 
Amount
 
Coupon Rate
February 1, 2016
 
$
500,000

 
3.750
%
September 15, 2016
 
$
400,000

 
6.300
%
November 30, 2016
 
$
500,000

 
6.000
%
November 30, 2016
 
$
600,000

 
6.700
%
The following table summarizes the Company's senior unsecured note payoffs for the six months ended June 30, 2017 (dollars in thousands):
Date
 
Amount
 
Coupon Rate
May 1, 2017
 
$
250,000

 
5.625
%
There were no senior unsecured notes issuances for the six months ended June 30, 2017 and the year ended December 31, 2016.
Mortgage Debt
At June 30, 2017, the Company had $140 million in aggregate principal of mortgage debt outstanding, which is secured by 16 healthcare facilities (including redevelopment properties) with a carrying value of $306 million. In March 2017, the Company paid off $472 million of mortgage debt.
Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2017 (in thousands):
Year
 
Bank Line of
Credit(1)
 
2015 Term Loan(2)
 
Senior
Unsecured
Notes(3)
 
Mortgage
Debt(4)
 
Total(5)
2017 (six months)
 
$

 
$

 
$

 
$
1,685

 
$
1,685

2018
 
136,311

 

 

 
3,512

 
139,823

2019
 

 
219,396

 
450,000

 
3,700

 
673,096

2020
 

 

 
800,000

 
3,758

 
803,758

2021
 

 

 
1,200,000

 
11,117

 
1,211,117

Thereafter
 

 

 
4,500,000

 
116,481

 
4,616,481

 
 
136,311

 
219,396

 
6,950,000

 
140,253

 
7,445,960

(Discounts), premium and debt costs, net
 

 
(564
)
 
(60,955
)
 
6,084

 
(55,435
)
 
 
$
136,311

 
$
218,832

 
$
6,889,045

 
$
146,337

 
$
7,390,525

_______________________________________
(1)
Represents £105 million translated into U.S. dollars (“USD”).
(2)
Represents £169 million translated into USD.
(3)
Effective interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective interest rate of 4.29% and a weighted average maturity of six years.
(4)
Interest rates on the mortgage debt ranged from 2.99% to 5.91% with a weighted average effective interest rate of 4.23% and a weighted average maturity of twenty years.
(5)
Excludes $95 million of other debt that have no scheduled maturities.
Subsequent Event
In July 2017, the Company repurchased $500 million of its 5.375% senior notes due 2021 and expects to record approximately $54 million of loss on debt extinguishment in the third quarter of 2017.

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NOTE 11.  Commitments and Contingencies

Commitments
From October 31, 2016 through June 2017, HCP was the sole lender to QCP of an unsecured revolving credit facility (the “Unsecured Revolving Credit Facility”) which had a total commitment of $100 million at inception. The Unsecured Revolving Credit Facility was available to be drawn upon by QCP through October 31, 2017 with any drawn amounts due on October 31, 2018. Commitments under the Unsecured Revolving Credit Facility automatically and permanently decreased 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 were 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 could 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 would have born 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 was 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. Through June 30, 2017, no amounts were drawn on the Unsecured Revolving Credit Facility and the total commitment has been reduced to zero at June 30, 2017.
Legal Proceedings
From time to time, the Company is a party to legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.
Class Action
On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCRMC, and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice in a pending suit against HCRMC arising from the False Claims Act. The plaintiff in the suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. As the Boynton Beach action is in its early stages and a lead plaintiff has not yet been named, the defendants have not yet responded to the complaint. The Company believes the suit to be without merit and intends to vigorously defend against it.
Derivative Actions
On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al., Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action. The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. As the Subodh/Stearns action is in the early stages, defendants have not yet responded to the complaint. On April 18, 2017, the Court approved the parties’ stipulation staying the action pending further developments, including in the related securities class action litigation. The Court also adjourned the status conference scheduled for April 27, 2017 to January 10, 2018.
On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al., Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative actions. In addition, the complaint asserts a claim under Section 14(a) of the Securities Exchange Act of 1934, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. Defendants have not yet been served or responded to the complaint. On July 11, 2017, the court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action.

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Table of Contents

On July 21, 2017, a purported stockholder of the Company filed a derivative action, Kelley v. HCR Manorcare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in the California and Ohio derivative actions and, like the Ohio action, asserts a claim under Section 14(a) of the Securities Exchange Act of 1934, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of billing fraud at HCRMC. Defendants have not yet been served or responded to the complaint.
The Company is unable to estimate amount of loss or range of reasonable possible losses with respect to matters discussed above at June 30, 2017.
NOTE 12.  Equity
Accumulated Other Comprehensive Loss
The following table summarizes the Company’s accumulated other comprehensive loss (in thousands):
 
June 30,
2017
 
December 31,
2016
Cumulative foreign currency translation adjustment
$
(14,205
)
 
$
(22,817
)
Unrealized losses on cash flow hedges, net
(10,055
)
 
(3,642
)
Supplemental Executive Retirement plan minimum liability
(2,981
)
 
(3,129
)
Unrealized losses on available for sale securities
(48
)
 
(54
)
Total other comprehensive loss
$
(27,289
)
 
$
(29,642
)

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Table of Contents

NOTE 13.  Segment Disclosures
The Company evaluates its business and allocates resources based on its reportable business segments: (i) Senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. Under the medical office segment, the Company invests through the acquisition and development of medical office buildings (“MOBs”), which generally require a greater level of property management. Otherwise, the Company primarily invests, through the acquisition and development of real estate, in single tenant and operator properties. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties and U.K. care homes. The accounting policies of the segments are the same as those in Note 2 to the Consolidated Financial Statements in the Company’s 2016 Annual Report on Form 10-K filed with the SEC, as updated by Note 2 herein. During the year ended December 31, 2016, 17 senior housing triple-net facilities were transitioned to a RIDEA structure (reported in the Company’s SHOP segment). During the six months ended June 30, 2017, one senior housing triple-net facility was transitioned to a RIDEA structure. The Company evaluates performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) adjusted NOI of the combined consolidated and unconsolidated investments in each segment. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, non-refundable entrance fees, net of entrance fee amortization and lease termination fees and the impact of deferred community fee income and expense (“Adjustments to NOI”). The Adjustments to NOI and resulting Adjusted NOI for SHOP have been restated for prior periods presented to conform to the current period presentation for the adjustment to exclude the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid.
Non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities and, if any, real estate held for sale. Interest expense, depreciation and amortization, and non-property specific revenues and expenses are not allocated to individual segments in evaluating the Company’s segment-level performance. See Note 17 for other information regarding concentrations of credit risk.

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Table of Contents

The following tables summarize information for the reportable segments (in thousands):
For the three months ended June 30, 2017:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
78,079

 
$
125,416

 
$
86,730

 
$
119,164

 
$
28,670

 
$

 
$
438,059

HCP share of unconsolidated JV revenues
 

 
81,368

 
2,004

 
496

 
417

 

 
84,285

Operating expenses
 
(882
)
 
(85,866
)
 
(18,744
)
 
(46,581
)
 
(1,090
)
 

 
(153,163
)
HCP share of unconsolidated JV operating expenses
 

 
(65,487
)
 
(429
)
 
(146
)
 
(19
)
 

 
(66,081
)
NOI
 
77,197

 
55,431

 
69,561

 
72,933

 
27,978

 

 
303,100

Adjustments to NOI(2)
 
(406
)
 
4,523

 
(91
)
 
(769
)
 
(864
)
 

 
2,393

Adjusted NOI
 
76,791

 
59,954

 
69,470

 
72,164

 
27,114

 

 
305,493

Addback adjustments
 
406

 
(4,523
)
 
91

 
769

 
864

 

 
(2,393
)
Interest income
 

 

 

 

 
20,869

 

 
20,869

Interest expense
 
(631
)
 
(1,166
)
 
(96
)
 
(127
)
 
(1,181
)
 
(74,587
)
 
(77,788
)
Depreciation and amortization
 
(25,519
)
 
(24,415
)
 
(31,004
)
 
(42,488
)
 
(7,325
)
 

 
(130,751
)
General and administrative
 

 

 

 

 

 
(21,286
)
 
(21,286
)
Acquisition and pursuit costs
 

 

 

 

 

 
(867
)
 
(867
)
Impairment
 

 

 

 

 
(56,682
)
 

 
(56,682
)
Gain (loss) on sales of real estate, net
 
(230
)
 
(232
)
 
1,280

 
(406
)
 

 

 
412

Other income, net
 

 

 

 

 

 
71

 
71

Income tax benefit
 

 

 

 

 

 
2,987

 
2,987

Less: HCP share of unconsolidated JV NOI
 

 
(15,881
)
 
(1,575
)
 
(350
)
 
(398
)
 

 
(18,204
)
Equity income (loss) from unconsolidated JVs
 

 
(1,065
)
 
763

 
303

 
239

 

 
240

Net income (loss)
 
$
50,817

 
$
12,672

 
$
38,929

 
$
29,865

 
$
(16,500
)
 
$
(93,682
)
 
$
22,101


21

Table of Contents

For the three months ended June 30, 2016:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
108,841

 
$
164,202

 
$
90,201

 
$
110,205

 
$
32,099

 
$

 
$
505,548

HCP share of unconsolidated JV revenues
 

 
52,855

 
1,898

 
524

 
407

 

 
55,684

Operating expenses
 
(1,642
)
 
(115,443
)
 
(17,961
)
 
(43,028
)
 
(1,006
)
 

 
(179,080
)
HCP share of unconsolidated JV operating expenses
 

 
(42,473
)
 
(400
)
 
(155
)
 
(7
)
 

 
(43,035
)
NOI
 
107,199

 
59,141

 
73,738

 
67,546

 
31,493

 

 
339,117

Adjustments to NOI(2)
 
(2,022
)
 
4,248

 
(544
)
 
(753
)
 
(214
)
 

 
715

Adjusted NOI
 
105,177

 
63,389

 
73,194

 
66,793

 
31,279

 

 
339,832

Addback adjustments
 
2,022

 
(4,248
)
 
544

 
753

 
214

 

 
(715
)
Interest income
 

 

 

 

 
32,787

 

 
32,787

Interest expense
 
(4,049
)
 
(7,837
)
 
(632
)
 
(1,625
)
 
(2,476
)
 
(104,714
)
 
(121,333
)
Depreciation and amortization
 
(34,202
)
 
(24,988
)
 
(32,077
)
 
(40,604
)
 
(8,048
)
 

 
(139,919
)
General and administrative
 

 

 

 

 

 
(22,779
)