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, 2018
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 31, 2018, there were 469,832,569 shares of the registrant’s $1.00 par value common stock outstanding.
 


Table of Contents

HCP, INC.
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents

HCP, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Real estate:
 

 
 

Buildings and improvements
$
10,683,541

 
$
11,239,732

Development costs and construction in progress
373,818

 
447,976

Land
1,655,012

 
1,785,865

Accumulated depreciation and amortization
(2,750,351
)
 
(2,741,695
)
Net real estate
9,962,020

 
10,731,878

Net investment in direct financing leases
712,570

 
714,352

Loans receivable, net
38,691

 
313,326

Investments in and advances to unconsolidated joint ventures
628,607

 
800,840

Accounts receivable, net of allowance of $4,755 and $4,425, respectively
43,965

 
40,733

Cash and cash equivalents
91,381

 
55,306

Restricted cash
30,548

 
26,897

Intangible assets, net
294,056

 
410,082

Assets held for sale, net
692,702

 
417,014

Proceeds receivable from U.K. JV transaction
402,447

 

Other assets, net
554,400

 
578,033

Total assets
$
13,451,387

 
$
14,088,461

LIABILITIES AND EQUITY
 

 
 

Bank line of credit
$
545,226

 
$
1,017,076

Term loan
222,923

 
228,288

Senior unsecured notes
6,401,502

 
6,396,451

Mortgage debt
140,321

 
144,486

Other debt
93,070

 
94,165

Intangible liabilities, net
49,976

 
52,579

Liabilities of assets held for sale, net
10,357

 
14,031

Accounts payable and accrued liabilities
398,920

 
401,738

Deferred revenue
172,369

 
144,709

Total liabilities
8,034,664

 
8,493,523

Commitments and contingencies


 


Common stock, $1.00 par value: 750,000,000 shares authorized; 469,829,639 and 469,435,678 shares issued and outstanding, respectively
469,830

 
469,436

Additional paid-in capital
8,187,385

 
8,226,113

Cumulative dividends in excess of earnings
(3,509,641
)
 
(3,370,520
)
Accumulated other comprehensive income (loss)
(4,080
)
 
(24,024
)
Total stockholders' equity
5,143,494

 
5,301,005

Joint venture partners
96,341

 
117,045

Non-managing member unitholders
176,888

 
176,888

Total noncontrolling interests
273,229

 
293,933

Total equity
5,416,723

 
5,594,938

Total liabilities and equity
$
13,451,387

 
$
14,088,461


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,
 
2018
 
2017
 
2018
 
2017
Revenues:
 

 
 

 
 
 
 
Rental and related revenues
$
279,056

 
$
263,820

 
$
558,634

 
$
550,038

Tenant recoveries
38,784

 
35,259

 
75,958

 
68,934

Resident fees and services
136,774

 
125,416

 
279,588

 
265,648

Income from direct financing leases
13,490

 
13,564

 
26,756

 
27,276

Interest income
1,447

 
20,869

 
7,812

 
39,200

Total revenues
469,551

 
458,928

 
948,748

 
951,096

Costs and expenses:
 

 
 

 
 
 
 
Interest expense
73,038

 
77,788

 
148,140

 
164,506

Depreciation and amortization
143,292

 
130,751

 
286,542

 
267,305

Operating
173,866

 
153,163

 
346,418

 
312,244

General and administrative
22,514

 
21,286

 
51,689

 
43,764

Transaction costs
2,404

 
867

 
4,599

 
1,924

Impairments (recoveries), net
13,912

 
56,682

 
13,912

 
56,682

Total costs and expenses
429,026

 
440,537

 
851,300

 
846,425

Other income (expense):
 

 
 

 
 
 
 
Gain (loss) on sales of real estate, net
46,064

 
412

 
66,879

 
317,670

Other income (expense), net
1,786

 
71

 
(38,621
)
 
51,279

Total other income (expense), net
47,850

 
483

 
28,258

 
368,949

Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures
88,375

 
18,874

 
125,706

 
473,620

Income tax benefit (expense)
4,654

 
2,987

 
9,990

 
9,149

Equity income (loss) from unconsolidated joint ventures
(101
)
 
240

 
469

 
3,509

Net income (loss)
92,928

 
22,101

 
136,165

 
486,278

Noncontrolling interests' share in earnings
(2,986
)
 
(2,718
)
 
(5,991
)
 
(5,750
)
Net income (loss) attributable to HCP, Inc.
89,942

 
19,383

 
130,174

 
480,528

Participating securities' share in earnings
(461
)
 
(100
)
 
(852
)
 
(674
)
Net income (loss) applicable to common shares
$
89,481

 
$
19,283

 
$
129,322

 
$
479,854

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.04

 
$
0.28

 
$
1.02

Diluted
$
0.19

 
$
0.04

 
$
0.28

 
$
1.02

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
469,769

 
468,646

 
469,664

 
468,474

Diluted
469,941

 
468,839

 
469,799

 
473,366

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.37

 
$
0.37

 
$
0.74

 
$
0.74

See accompanying Notes to the Unaudited Consolidated Financial Statements.


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HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net income (loss)
$
92,928

 
$
22,101

 
$
136,165

 
$
486,278

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Net unrealized gains (losses) on cash flow hedges
10,793

 
(6,131
)
 
5,629

 
(6,433
)
Reclassification adjustment realized in net income (loss)
17,683

 
(193
)
 
17,808

 
20

Change in Supplemental Executive Retirement Plan obligation and other
78

 
71

 
182

 
154

Foreign currency translation adjustment
(11,327
)
 
7,622

 
(3,675
)
 
8,612

Total other comprehensive income (loss)
17,227

 
1,369

 
19,944

 
2,353

Total comprehensive income (loss)
110,155

 
23,470

 
156,109

 
488,631

Total comprehensive income (loss) attributable to noncontrolling interests
(2,986
)
 
(2,718
)
 
(5,991
)
 
(5,750
)
Total comprehensive income (loss) attributable to HCP, Inc.
$
107,169

 
$
20,752

 
$
150,118

 
$
482,881

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 Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
December 31, 2017
469,436

 
$
469,436

 
$
8,226,113

 
$
(3,370,520
)
 
$
(24,024
)
 
$
5,301,005

 
$
293,933

 
$
5,594,938

Impact of adoption of ASU No. 2017-05(1)

 

 

 
79,144

 

 
79,144

 

 
79,144

January 1, 2018
469,436

 
$
469,436

 
$
8,226,113

 
$
(3,291,376
)
 
$
(24,024
)
 
$
5,380,149

 
$
293,933

 
$
5,674,082

Net income (loss)

 

 

 
130,174

 

 
130,174

 
5,991

 
136,165

Other comprehensive income (loss)

 

 

 

 
19,944

 
19,944

 

 
19,944

Issuance of common stock, net
511

 
511

 
2,922

 

 

 
3,433

 

 
3,433

Repurchase of common stock
(117
)
 
(117
)
 
(2,661
)
 

 

 
(2,778
)
 

 
(2,778
)
Amortization of deferred compensation

 

 
10,218

 

 

 
10,218

 

 
10,218

Common dividends ($0.74 per share)

 

 

 
(348,439
)
 

 
(348,439
)
 

 
(348,439
)
Distributions to noncontrolling interest

 

 

 

 

 

 
(9,466
)
 
(9,466
)
Issuances of noncontrolling interest

 

 

 

 

 

 
995

 
995

Purchase of noncontrolling interest

 

 
(49,207
)
 

 

 
(49,207
)
 
(18,224
)
 
(67,431
)
June 30, 2018
469,830

 
$
469,830

 
$
8,187,385

 
$
(3,509,641
)
 
$
(4,080
)
 
$
5,143,494

 
$
273,229

 
$
5,416,723

 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (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 (loss)

 

 

 
480,528

 

 
480,528

 
5,750

 
486,278

Other comprehensive income (loss)

 

 

 

 
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 interest

 

 

 

 

 

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

 

 

 

 

 

 
650

 
650

Deconsolidation of noncontrolling interest

 

 

 

 

 

 
(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

_______________________________________
(1)
On January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), and recognized the cumulative-effect of adoption to beginning retained earnings. Refer to Note 2 for a detailed impact of adoption.

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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income (loss)
$
136,165

 
$
486,278

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate, in-place lease and other intangibles:
286,542

 
267,305

Amortization of deferred compensation
10,218

 
7,092

Amortization of deferred financing costs
6,690

 
7,702

Straight-line rents
(16,479
)
 
(8,176
)
Equity loss (income) from unconsolidated joint ventures
(469
)
 
(3,509
)
Distributions of earnings from unconsolidated joint ventures
13,911

 
18,528

Deferred income tax expense (benefit)
(7,388
)
 
(12,472
)
Impairments (recoveries), net
13,912

 
56,682

Loss (gain) on sales of real estate, net
(66,879
)
 
(317,670
)
Loss (gain) on consolidation, net
41,017

 

Loss (gain) on sale of marketable securities

 
(50,895
)
Other non-cash items
(3,367
)
 
(2,323
)
Decrease (increase) in accounts receivable and other assets, net
(8,444
)
 
(8,777
)
Increase (decrease) in accounts payable and accrued liabilities
34,245

 
(8,176
)
Net cash provided by (used in) operating activities
439,674

 
431,589

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(23,087
)
 
(26,446
)
Development and redevelopment of real estate
(229,831
)
 
(157,898
)
Leasing costs, tenant improvements, and recurring capital expenditures
(45,591
)
 
(48,575
)
Proceeds from sales of real estate, net
319,224

 
1,235,851

Contributions to unconsolidated joint ventures
(6,053
)
 
(21,302
)
Distributions in excess of earnings from unconsolidated joint ventures
15,344

 
1,609

Proceeds from the RIDEA II transaction, net
335,709

 
462,242

Proceeds from sales/principal repayments on debt investments and direct financing leases
132,429

 
549,759

Investments in loans receivable, direct financing leases and other
(6,376
)
 
(18,433
)
Net cash provided by (used in) investing activities
491,768

 
1,976,807

Cash flows from financing activities:
 
 
 
Borrowings under bank line of credit, net
453,000

 
(441,581
)
Repayments under bank line of credit
(923,164
)
 
(339,826
)
Issuance and borrowings of debt, excluding bank line of credit

 
5,395

Repayments and repurchase of debt, excluding bank line of credit
(2,856
)
 
(966,126
)
Issuance of common stock and exercise of options
3,433

 
13,887

Repurchase of common stock
(2,778
)
 
(4,361
)
Dividends paid on common stock
(348,439
)
 
(347,118
)
Issuance of noncontrolling interests
995

 
650

Distributions to and purchase of noncontrolling interests
(71,931
)
 
(13,087
)
Net cash provided by (used in) financing activities
(891,740
)
 
(2,092,167
)
Effect of foreign exchanges on cash, cash equivalents and restricted cash
24

 
227

Net increase (decrease) in cash, cash equivalents and restricted cash
39,726

 
316,456

Cash, cash equivalents and restricted cash, beginning of period
82,203

 
136,990

Cash, cash equivalents and restricted cash, end of period
$
121,929

 
$
453,446

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

Overview
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. 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, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).
Recent Accounting Pronouncements
Revenue Recognition. Between May 2014 and February 2017, the Financial Accounting Standards Board (“FASB”) issued four 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”), (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), and (iv) ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). 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. ASU 2017-05 clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition and aligns the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets with the guidance in ASU 2014-09. The Company adopted the Revenue ASUs effective January 1, 2018 and utilized a modified retrospective adoption approach, resulting in a cumulative-effect adjustment to equity of $79 million as of January 1, 2018. Under the Revenue ASUs, the Company also elected to utilize a practical expedient which allows the Company to only reassess contracts that were not completed as of the adoption date, rather than all historical contracts.

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As the primary source of revenue for the Company is generated through leasing arrangements, for which timing and recognition of revenue are excluded from the Revenue ASUs, the impact of the Revenue ASUs, upon and subsequent to adoption, is generally limited to the following:
The Company, along with its JV partners and independent SHOP operators, provide certain ancillary services to SHOP residents that are not contemplated in the lease with each resident (i.e., guest meals, concierge services, pharmacy services, etc.). These services are provided and paid for in addition to the standard services included in each resident lease (i.e., room and board, standard meals, etc.). The Company bills residents for ancillary services one month in arrears and recognizes revenue as the services are provided, as the Company has no continuing performance obligation related to those services. The Company records ancillary service revenue within resident fees and services and, under the Revenue ASUs, is required to disclose, on an ongoing basis, ancillary service revenue generated from its RIDEA structures. Included within resident fees and services for the three months ended June 30, 2018 and 2017 is $10 million and $9 million, respectively, of ancillary service revenue. Included within resident fees and services for the six months ended June 30, 2018 and 2017 is $20 million and $19 million, respectively, of ancillary service revenue.
Prior to the adoption of the Revenue ASUs, the Company recognized a gain on sale of real estate using the full accrual method when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. The Company deferred all or a portion of a gain on sale of real estate if the requirements for gain recognition were not met at the time of sale. Subsequent to adopting the Revenue ASUs on January 1, 2018, the Company began recognizing a gain on sale of real estate upon transferring control of the asset to the purchaser, which is generally satisfied at the time of sale. In conjunction with its adoption of the Revenue ASUs, the Company reassessed its historical partial sale of real estate transactions to determine which transactions, if any, were not completed contracts (i.e., the transaction did not qualify for sale treatment under previous guidance). The Company concluded that it had one such material transaction, its partial sale of RIDEA II in the first quarter of 2017 (which was not a completed sale under historical guidance as of the Company's adoption date due to a minor obligation related to the interest sold). In accordance with the Revenue ASUs, the Company recorded its retained 40% equity investment at fair value as of the sale date. As a result, the Company recorded an adjustment to equity as of January 1, 2018 (under the modified retrospective transition approach) representing a step-up in the fair value of its equity investment in RIDEA II of $107 million (to a carrying value of $121 million as of January 1, 2018) and a $30 million impairment charge to decrease the carrying value to the sales price of the investment (see Note 4). The Company completed the sale of its equity investment in June 2018 and no longer holds an economic interest in RIDEA II. As such, the Revenue ASUs no longer have an impact on the Company’s consolidated financial position at June 30, 2018.
The Company generally expects that the new guidance will result in certain transactions qualifying as sales of real estate at an earlier date than under historical accounting guidance.
Additionally, effective January 1, 2018, the Company adopted the following ASUs, each of which did not have a material impact to its consolidated financial position, results of operations, cash flows or disclosures upon adoption:
ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”) and ASU No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (“ASU 2018-03”). The core principle of the amendments in ASU 2016-01 and ASU 2018-03 involves the measurement of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation) at fair value and the recognition of changes in fair value of those investments during each reporting period in net income (loss). As a result, ASU 2016-01 and ASU 2018-03 eliminate the cost method of accounting for equity securities that do not have readily determinable fair values. Pursuant to the new guidance, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
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. Historical guidance does not require recognition of tax consequences until the asset is eventually sold to a third party.
During the fourth quarter of 2017, the Company adopted ASU No. 2016-18, Restricted Cash (“ASU 2016-18”) and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) (collectively, the “Cash Flow ASUs”). ASU 2016-18 requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The full retrospective adoption approach is required for the Cash Flow ASUs and, accordingly, certain line items in the Company’s consolidated statements of cash flows have been reclassified to conform to the current period presentation.

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The following table illustrates changes in the Company’s cash flows as reported and as previously reported prior to the adoption of the Cash Flow ASUs during the fourth quarter of 2017 (in thousands):
 
 
Six Months Ended June 30, 2017
 
 
As Reported
 
As Previously Reported
Net cash provided by (used in) investing activities
    
$
1,976,807

 
$
1,957,586

Net increase (decrease) in balance(1)
 
316,456

 
297,235

Balance - beginning of period(1)
 
136,990

 
94,730

Balance - end of period(1)
 
453,446

 
391,965

_______________________________________
(1)
Amounts in the As Reported column include cash and cash equivalents and restricted cash as required upon the adoption of the Cash Flow ASUs. Amounts in the As Previously Reported column reflect only cash and cash equivalents.
In addition to the changes in the consolidated statements of cash flows as a result of the adoption of the Cash Flow ASUs, certain amounts within the consolidated statements of cash flows have been reclassified for prior periods to conform to the current period presentation. Such reclassifications primarily combined line items of similar classes of transactions and had no impact on cash flows from operating, investing and financing activities.
Leases. 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: (i) will recognize all of its significant operating leases for which it is the lessee, including corporate office leases, equipment leases, and ground leases, on its consolidated balance sheets through a right-of-use asset and corresponding lease liability, and (ii) may be required to increase its revenue and expense for the amount of real estate taxes and insurance paid by its tenants under triple-net leases.
ASU 2016-02 provides a practical expedient, which the Company plans to elect, 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.
Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”), which provides lessors with the option to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the nonlease component and the related lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease or service based and recognize the entire contract under the relevant accounting guidance (i.e., predominantly lease based would be accounted for under ASU 2016-02 and predominantly service based would be accounted for under the Revenue ASUs). The Company plans to elect this practical expedient as well. The Company is still evaluating the complete impact of the adoption of ASU 2016-02 and ASU 2018-11 on January 1, 2019 to its consolidated financial position, results of operations and disclosures.
Credit Losses. 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 financing leases (“DFLs”)

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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.
The following ASU has been issued, but not 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. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years, including interim periods within, beginning after December 15, 2018 and early adoption is permitted. The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow and net investment hedges existing at the date of adoption, a reporting entity must apply the amendments in ASU 2017-12 using the modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The presentation and disclosure amendments in ASU 2017-12 must be applied using a prospective approach.
NOTE 3.  Master Transactions and Cooperation Agreement with Brookdale

Master Transactions and Cooperation Agreement with Brookdale
On November 1, 2017, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transactions”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, the Company’s exposure to Brookdale is expected to be significantly reduced.
In connection with the overall transaction pursuant to the MTCA, the Company (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets, which accounted for primarily all of the assets subject to triple-net leases between the Company and the Lessee (before giving effect to the contemplated sale or transition of 34 assets discussed below). Under the Amended Master Lease, the Company has the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease including:
A security deposit (which increases if specified leverage thresholds are exceeded);
A termination right if certain financial covenants and a net worth test are not satisfied;
Enhanced reporting requirements and related remedies; and
The right to market for sale the CCRC portfolio (as defined below).
Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers.
The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, the Company and Brookdale agreed to the following:
The Company received the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year of executing the MTCA, the triple-net lease with respect to such assets will convert to a cash flow lease (under which the Company will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty;
The Company provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and
The Company would sell two triple-net assets to Brookdale or its affiliates for $35 million, both of which were sold in April 2018.

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Also pursuant to the MTCA, the Company and Brookdale agreed to the following:
The Company, which owned 90% of the interests in its RIDEA I and RIDEA III JVs with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each JV for an aggregate purchase price of $95 million. At the time the MTCA was executed, these JVs collectively owned and operated 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). The Company completed its acquisitions of the RIDEA III noncontrolling interest for $32 million in December 2017 and the RIDEA I noncontrolling interest for $63 million in March 2018;
The Company received the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year of executing the MTCA, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues;
The Company would sell four of the RIDEA Facilities to Brookdale or its affiliates for $240 million, one of which was sold in January 2018 for $32 million and the remaining three of which were sold in April 2018 for $208 million;
A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance-based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights), and two other existing facilities managed in separate RIDEA structures; and
The Company received the right to sell, to certain permitted transferees, its 49% ownership interest in JVs that own and operate a portfolio of continuing care retirement communities (the “CCRC Portfolio”) and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, the Company will have the right to initiate a sale of the CCRC Portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale.
In June 2018, the Company entered into definitive agreements with a third-party buyer to sell 11 senior housing triple-net assets (of the 32 noted above) and 11 RIDEA Facilities (of the 36 noted above) previously leased to Brookdale for total gross proceeds of $428 million. As part of this transaction, the buyer funded a $13 million nonrefundable deposit. The 11 senior housing triple-net assets and 11 RIDEA Facilities are classified as held for sale at June 30, 2018 and the Company anticipates the transaction will close in two installments, with one closing in the third quarter of 2018 and the other closing in the fourth quarter of 2018.
During the six months ended June 30, 2018, the Company terminated the previous management agreements or leases with Brookdale on 24 assets and completed the transition of 14 SHOP assets and 10 senior housing triple-net assets to other managers. Additionally, subsequent to June 30, 2018, the Company completed the transition of one SHOP asset and three senior housing triple-net assets.
NOTE 4.  Real Estate Transactions

Dispositions of Real Estate
Held for Sale
At June 30, 2018, 25 SHOP facilities, 11 senior housing triple-net facilities, four life science facilities and one undeveloped life science land parcel were classified as held for sale, with an aggregate carrying value of $693 million, primarily comprised of real estate assets of $652 million, net of accumulated depreciation of $184 million. At December 31, 2017, two senior housing triple-net facilities, four life science facilities and six SHOP facilities were classified as held for sale, with an aggregate carrying value of $417 million, primarily comprised of real estate assets of $393 million, net of accumulated depreciation of $93 million. Liabilities of assets held for sale is primarily comprised of intangible and other liabilities at both June 30, 2018 and December 31, 2017.
RIDEA II Sale Transaction
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 (“CPA”) (the “HCP/CPA JV”). Also in January 2017, 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 loans receivable and retained an approximately 40% ownership interest in RIDEA II. This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million.

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Refer to Note 2 for the impact of adopting the Revenue ASUs on January 1, 2018 to the Company’s partial sale of RIDEA II in the first quarter of 2017.
On November 1, 2017, the Company entered into a definitive agreement with an investor group led by CPA to sell its remaining 40% ownership interest in RIDEA II for $90 million and cause CPA to refinance the Company’s $242 million of loans receivable from RIDEA II. The Company completed the transaction in June 2018, resulting in proceeds of $332 million. The Company no longer holds an economic interest in RIDEA II.
U.K. Portfolio
In June 2018, the Company closed on the previously announced joint venture with an institutional investor (the “U.K. JV”) through which the Company sold a 51% interest in substantially all United Kingdom (“U.K.”) assets previously owned by the Company (the “U.K. Portfolio”) based on a total value of £382 million ($507 million). The Company retained a 49% noncontrolling interest in the joint venture and received total proceeds of $402 million, including proceeds from the refinancing of the Company’s previously held intercompany loans. Upon closing the U.K. JV, the Company deconsolidated the U.K. Portfolio, recognized its retained noncontrolling interest investment at fair value ($105 million) and recognized a gain on sale of $11 million, net of $17 million of cumulative foreign currency translation reclassified from other comprehensive income (see Note 18 for the reclassification impact of the Company’s hedge of its net investment in the U.K.). The U.K. JV provides numerous mechanisms by which the joint venture partner can acquire the Company’s remaining interest in the U.K. JV. The fair value of the Company’s retained noncontrolling interest investment is based on Level 2 measurements within the fair value hierarchy.
Although the U.K. JV closed on June 29, 2018, the Company was unable to access the proceeds held in escrow until July 2, 2018. As such, at June 30, 2018, the Company held a $402 million receivable from the escrow agent. On July 2, 2018, the Company received the full amount of proceeds in satisfaction of the receivable. The U.K. JV transaction is therefore treated as a non-cash transaction on the consolidated statement of cash flows for the six months ended June 30, 2018.
Additionally, the Company is marketing for sale its remaining £11 million development loan to Maria Mallaband Care Group (“MMCG”). Upon sale, the Company’s only remaining investment in the U.K. will be its noncontrolling interest investment in the U.K. JV.
2018 Dispositions 
In January 2018, the Company sold two SHOP assets for $35 million, resulting in gain on sales of $21 million (includes asset sales to Brookdale as discussed in Note 3 above).
In April 2018, the Company sold four SHOP assets and two senior housing triple-net assets for $266 million, resulting in gain on sales of $26 million (includes asset sales to Brookdale as discussed in Note 3 above).
In June 2018, the Company sold four SHOP assets for $38 million, resulting in no material gain or loss on sales.
In July 2018, the Company sold four life science assets in South San Francisco and four SHOP assets for $288 million and expects to recognize gain on sales of approximately $80 million during the third quarter of 2018.
2017 Dispositions
In January 2017, the Company sold four life science facilities in Salt Lake City, Utah for $76 million, resulting in a gain on sales of $45 million.
In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a 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, resulting in total gain on sales of $1 million.
In August 2017, the Company sold two senior housing triple-net facilities for $15 million, resulting in gain on sales of $5 million.
In October 2017, the Company sold two senior housing triple-net facilities for $12 million, resulting in gain on sales of $7 million.
In November 2017, the Company sold one medical office building (“MOB”) for $11 million and one SHOP facility for $24 million, resulting in gain on sales of $29 million.
In December 2017, the Company sold three SHOP facilities for $17 million and two MOBs for $3 million, resulting in loss on sales of $2 million.
Investments in Real Estate
During the six months ended June 30, 2018, the Company acquired development rights on a land parcel in the Boston suburb of Lexington, Massachusetts for $21 million. The Company commenced a life science development on the land in 2018.

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During the year ended December 31, 2017, the Company acquired 20 properties, the impact of which is summarized in the following table:
 
 
Consideration
 
Assets Acquired
Segment
 
Cash Paid
 
Liabilities Assumed
 
Real Estate
 
Net Intangibles
SHOP
 
$
44,258

 
$
797

 
$
37,940

 
$
7,115

Life science
 
315,255

 
3,524

 
305,760

 
13,019

Medical office
 
201,240

 
1,104

 
184,115

 
18,229

 
 
$
560,753

 
$
5,425

 
$
527,815

 
$
38,363

MOB JV
In July 2018, the Company and Morgan Stanley Real Estate Investment (“MSREI”) entered into definitive agreements to form a joint venture to own a portfolio of MOBs. To form the joint venture, MSREI expects to contribute cash and HCP expects to contribute nine wholly-owned MOBs (the “Contributed Assets”). The Contributed Assets are primarily located in Texas and Florida and are valued at approximately $320 million. The joint venture intends to use the cash contributed by MSREI to acquire an additional portfolio of MOBs in Greenville, South Carolina. Concurrent with acquiring the additional MOBs, the joint venture will enter into 10-year leases with an anchor tenant on each MOB, which will account for approximately 94% of the total leasable space in the portfolio. The Company expects to acquire the portfolio in South Carolina and enter into the new leases during the second half of 2018.
Impairments of Real Estate
During the second quarter 2018, in conjunction with classifying two underperforming SHOP portfolios as held for sale (13 assets total), the Company concluded that the assets were impaired and wrote-down the carrying value of the assets to each asset’s respective fair value less estimated costs to sell. Accordingly, the Company recognized a $6 million impairment charge during the second quarter of 2018. The fair value of the assets is based on contracted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.
Additionally, during the second quarter 2018, in conjunction with classifying an undeveloped life science land parcel as held for sale, the Company concluded that the land was impaired and wrote-down its carrying value to fair value less estimated costs to sell. Accordingly, the Company recognized an $8 million impairment charge during the second quarter of 2018. The fair value of the asset is based on contracted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.
NOTE 5.  Net Investment in Direct Financing Leases

Net investment in DFLs consisted of the following (dollars in thousands):
 
June 30,
2018
 
December 31,
2017
Minimum lease payments receivable
$
1,035,101

 
$
1,062,452

Estimated residual value
504,457

 
504,457

Less unearned income
(826,988
)
 
(852,557
)
Net investment in direct financing leases
$
712,570

 
$
714,352

Properties subject to direct financing leases
29

 
29

In February 2017, the Company sold a hospital within a DFL in Palm Beach Gardens, Florida for $43 million to the current tenant and recognized a gain on sale of $4 million.

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Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for DFLs at June 30, 2018 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
DFL Portfolio
 
Internal Ratings
Segment
 
 
 
Performing DFLs
 
Watch List DFLs
 
Workout DFLs
Senior housing triple-net
 
$
627,966

 
88
 
$
274,652

 
$
353,314

 
$

Other non-reportable segments
 
84,604

 
12
 
84,604

 

 

 
 
$
712,570

 
100
 
$
359,256

 
$
353,314

 
$

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 is being recognized on a cash basis. During both the three months ended June 30, 2018 and 2017, the Company recognized income from DFLs of $4 million and received cash payments of $5 million from the DFL Watchlist Portfolio. During both the six months ended June 30, 2018 and 2017, the Company recognized income from DFLs of $7 million and received cash payments of $9 million from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was $353 million and $356 million at June 30, 2018 and December 31, 2017, respectively.
NOTE 6.  Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):
 
June 30, 2018
 
December 31, 2017
 
Real Estate
Secured
 
Other
Secured
 
Total
 
Real Estate
Secured
 
Other
Secured
 
Total
Mezzanine(1)
$

 
$
22,153

 
$
22,153

 
$

 
$
269,299

 
$
269,299

Other(2)
16,611

 

 
16,611

 
188,418

 

 
188,418

Unamortized discounts, fees and costs

 
(73
)
 
(73
)
 

 
(596
)
 
(596
)
Allowance for loan losses(3)

 

 

 

 
(143,795
)
 
(143,795
)
 
$
16,611

 
$
22,080

 
$
38,691

 
$
188,418

 
$
124,908

 
$
313,326

_______________________________________
(1)
At June 30, 2018, the Company had $112 million remaining of commitments to fund a $115 million senior living development project.
(2)
Primarily includes loans denominated in British pound sterling (“GBP”). At December 31, 2017, includes the U.K. Bridge Loan discussed below.
(3)
Related to the Company’s mezzanine loan facility to Tandem Health Care discussed below.
Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at June 30, 2018 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
Loan Portfolio
 
Internal Ratings
Investment Type
 
 
 
Performing Loans
 
Watch List Loans
 
Workout Loans
Real estate secured
 
$
16,611

 
43
 
$
16,611

 
$

 
$

Other secured
 
22,080

 
57
 
22,080

 

 


 
$
38,691

 
100
 
$
38,691

 
$

 
$

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).
Additionally, 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 (expense), net, as the sales price was above the previously-impaired carrying value of £41 million ($50 million).

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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
From July 2012 through May 2015, the Company funded, in aggregate, $257 million under a collateralized mezzanine loan facility (the “Mezzanine Loan”) to certain affiliates of Tandem Health Care (together with its affiliates, “Tandem”). During 2017, the Company recorded impairment charges totaling $144 million on the Mezzanine Loan. The decline in fair value driving each impairment charge was based primarily on declining operating results of the collateral underlying the Mezzanine Loan, as well as market and industry data, which reflected a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The resulting carrying value of the Mezzanine Loan as of December 31, 2017 was $105 million. In conjunction with the declining operating results and industry trends, beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During the three and six months ended June 30, 2017, the Company recognized interest income and received cash payments of $7 million and $14 million, respectively, from Tandem. During the six months ended June 30, 2018, the Company did not recognize interest income nor receive cash payments from Tandem.
In March 2018, the Company sold the Mezzanine Loan to a third party for approximately $112 million, resulting in an impairment recovery, net of transaction costs and fees, of $3 million included in other income (expense), net. The Company holds no further economic interest in the operations of Tandem.
U.K. Bridge Loan
In 2016, the Company provided a £105 million ($131 million at closing) bridge loan to MMCG to fund the acquisition of a portfolio of seven care homes in the U.K. Under the bridge loan, the Company retained a three-year call option to acquire those seven care homes at a future date for £105 million, subject to certain conditions precedent being met. In March 2018, upon resolution of all conditions precedent, the Company began the process of exercising its call option to acquire the seven care homes and concluded that it should consolidate the real estate. As a result, the Company derecognized the outstanding loan receivable of £105 million and recognized a £29 million ($41 million) loss on consolidation. Refer to Note 15 for the complete impact of consolidating the seven care homes during the first quarter of 2018.
In June 2018, the Company completed the process of exercising the above-mentioned call option. The seven care homes acquired through the call option were included in the U.K. JV transaction (see Note 4).
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 (dollars in thousands): 
 
 
 
 
 
 
Carrying Amount
 
 
 
 
 
 
 
 
June 30,
 
December 31,
Entity(1)
 

 
Ownership%
 
2018
 
2017
CCRC JV
 

 
 
49
 
 
$
383,274

 
$
400,241

RIDEA II(2)
 

 
 
40
 
 

 
259,651

U.K. JV
 
 
 
 
49
 
 
104,955

 

Life Science JVs(3)
 

 

50 - 63

 
64,814

 
65,581

MBK JV
 

 
 
50
 
 
36,781

 
38,005

Development JVs(4)
 

 
 
50 - 90
 
 
25,008

 
23,365

Medical Office JVs(5)
 

 
 
20 - 67
 
 
12,428

 
12,488

K&Y JVs(6)
 

 
 
80
 
 
1,336

 
1,283

Advances to unconsolidated joint ventures, net
 
 
 
 
 
 
 
11

 
226

 
 
 
 
 
 
 
 
$
628,607

 
$
800,840

_______________________________________
(1)
These entities are not consolidated because the Company does not control, through voting rights or other means, the JVs.
(2)
Effective January 1, 2018, the Company increased its carrying value in RIDEA II as a net adjustment to retained earnings under its elected transition approach in accordance with the adoption of ASU 2017-05 (see Note 2). In June 2018, the Company sold its equity method investment in RIDEA II (see Note 4).
(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 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%).
(5)
Includes three unconsolidated medical office partnerships (and the Company’s ownership percentage): HCP Ventures IV, LLC (20%); HCP Ventures III, LLC (30%); and Suburban Properties, LLC (67%).

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Table of Contents

(6)
Includes three unconsolidated JVs.
See Note 4 for discussion of the formation of the U.K. JV and the Company’s equity method investment.
NOTE 8.  Intangibles

Intangible assets primarily consist of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles. Intangible liabilities primarily consist of below market lease intangibles and above market ground lease intangibles. The following tables summarize the Company’s intangible lease assets and liabilities (in thousands):
Intangible lease assets
 
June 30,
2018
 
December 31,
2017
Gross intangible lease assets
 
$
590,494

 
$
795,305

Accumulated depreciation and amortization
 
(296,438
)
 
(385,223
)
Intangible assets, net
 
$
294,056

 
$
410,082

Intangible lease liabilities
 
June 30,
2018
 
December 31,
2017
Gross intangible lease liabilities
 
$
112,489

 
$
126,212

Accumulated depreciation and amortization
 
(62,513
)
 
(73,633
)
Intangible liabilities, net
 
$
49,976

 
$
52,579

NOTE 9.  Debt
Bank Line of Credit and Term Loan
The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on October 19, 2021 and contains twosix-month extension options. 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, 2018, the margin on the Facility was 1.00% 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 $750 million, subject to securing additional commitments. At June 30, 2018, the Company had $545 million, including £85 million ($112 million), outstanding under the Facility, with a weighted average effective interest rate of 3.09%.
At June 30, 2018, the Company had £169 million ($223 million) outstanding on its term loan, which accrues interest at a rate of GBP LIBOR plus 1.15%, subject to adjustments based on the Company’s credit ratings. On July 3, 2018, the Company exercised its one-time right to repay the outstanding GBP balance and re-borrow in U.S. Dollars (“USD”) with all other key terms unchanged, which resulted in repayment of the £169 million balance and re-borrowing of $224 million. The term loan continues to mature in January 2019 and contains a one-year committed extension option.
The Facility and 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%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a Minimum Consolidated Tangible Net Worth of $6.5 billion. At June 30, 2018, the Company was in compliance with each of these restrictions and requirements of the Facility and term loan.
Senior Unsecured Notes
At June 30, 2018, the Company had senior unsecured notes outstanding with an aggregate principal balance of $6.5 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, 2018.
There were no senior unsecured notes repayments during the six months ended June 30, 2018.
On July 16, 2018, the Company repaid $700 million of its 5.375% senior notes due 2021, primarily using proceeds from the U.K. JV transaction and other asset sales (see Note 4), and expects to record a loss on debt extinguishment of approximately $44 million in the third quarter of 2018.

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The following table summarizes the Company’s senior unsecured notes payoffs during the year ended December 31, 2017 (dollars in thousands):
Date
 
Amount
 
Coupon Rate
May 1, 2017
 
$
250,000

 
5.625
%
July 27, 2017
 
$
500,000

 
5.375
%
There were no senior unsecured notes issuances during the six months ended June 30, 2018 or year ended December 31, 2017.
Mortgage Debt
At June 30, 2018, the Company had $135 million in aggregate principal of mortgage debt outstanding, which is secured by 15 healthcare facilities (including redevelopment properties) with a carrying value of $284 million. In March 2017, the Company paid off $472 million of mortgage debt.
Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires insurance on the assets and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets.
Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at June 30, 2018 (in thousands):
Year
 
Bank Line of
Credit(1)
 
Term Loan(2)
 
Senior
Unsecured
Notes(3)
 
Mortgage
Debt(4)
 
Total(5)
2018 (six months)
 
$

 
$

 
$

 
$
1,710

 
$
1,710

2019
 

 
223,131

 
450,000

 
3,561

 
676,692

2020
 

 

 
800,000

 
3,609

 
803,609

2021
 
545,226

 

 
700,000

 
10,957

 
1,256,183

2022
 

 

 
900,000

 
2,691

 
902,691

Thereafter
 

 

 
3,600,000

 
112,516

 
3,712,516

 
 
545,226

 
223,131

 
6,450,000

 
135,044

 
7,353,401

(Discounts), premium and debt costs, net
 

 
(208
)
 
(48,498
)
 
5,277

 
(43,429
)
 
 
$
545,226

 
$
222,923

 
$
6,401,502

 
$
140,321

 
$
7,309,972

_______________________________________
(1)
Includes £85 million translated into 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 4.20% and a weighted average maturity of five years. On July 15, 2018, the Company repaid $700 million of its 5.375% senior unsecured notes due 2021 (see discussion above).
(4)
Interest rates on the mortgage debt ranged from 2.25% to 5.91% with a weighted average effective interest rate of 4.19% and a weighted average maturity of 19 years.
(5)
Excludes $93 million of other debt that have no scheduled maturities.
NOTE 10.  Commitments and Contingencies

Legal Proceedings
From time to time, the Company is a party to, or has a significant relationship 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.

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Table of Contents

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, HCR ManorCare, Inc. (“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, as amended (the “Exchange Act”) 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 (“DoJ”) in a suit against HCRMC arising from the False Claims Act that the DoJ voluntarily dismissed with prejudice. The plaintiff in the class action 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. On November 28, 2017, the Court appointed Societe Generale Securities GmbH (SGSS Germany) and the City of Birmingham Retirement and Relief Systems (Birmingham) as Co-Lead Plaintiffs in the class action. The motion to dismiss was fully briefed on May 21, 2018. 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 “California derivative 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. On April 18, 2017, the Court approved the parties’ stipulation to stay the case pending disposition of the motion to dismiss the class action litigation.
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 action. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act, 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 alleged 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. 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.
On July 21, 2017, a purported stockholder of the Company filed another 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 Weldon and in the California derivative action. Like Weldon, the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. On November 28, 2017, the federal court in the Central District of California granted Defendants’ motion to transfer the action to the Northern District of Ohio (i.e., the court where the class action and other federal derivative action are pending). The Court in the Northern District of Ohio is currently considering whether to consolidate the Weldon and Kelley actions, appointment of lead plaintiffs and counsel, and whether the stay in Weldon should continue as to either or both actions.
The Company’s Board of Directors received letters dated August 17, 2016, April 19, 2017, and April 20, 2017 from private law firms acting on behalf of clients who are purported stockholders of the Company, each asserting allegations similar to those made in the California derivative action matters discussed above. Each letter demands that the Board of Directors take action to assert the Company’s rights. The Board of Directors completed its evaluation and determined to reject the demand letters. Rejection notices were sent in December of 2017.
The Company believes that the plaintiffs lack standing or the lawsuits and demands are without merit, but cannot predict the outcome of these proceedings or reasonably estimate any potential loss at this time. Accordingly, no loss contingency has been recorded for these matters as of June 30, 2018, as the likelihood of loss is not considered probable or estimable.


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Table of Contents

NOTE 11.  Equity
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the Company’s accumulated other comprehensive income (loss) (in thousands):
 
June 30,
2018
 
December 31,
2017
Cumulative foreign currency translation adjustment(1)
$

 
$
(6,955
)
Unrealized gains (losses) on cash flow hedges, net
(1,143
)
 
(13,950
)
Supplemental Executive Retirement plan minimum liability and other
(2,937
)
 
(3,119
)
Total other comprehensive income (loss)
$
(4,080
)
 
$
(24,024
)
_______________________________________
(1)
See Note 4 for a discussion of the U.K. JV transaction.
NOTE 12.  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. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties, unconsolidated JVs (see below) and U.K. investments. The accounting policies of the segments are the same as those in Note 2 to the Consolidated Financial Statements in the Company’s 2017 Annual Report on Form 10-K filed with the SEC, as updated by Note 2 herein.
During the three and six months ended June 30, 2018, 10 senior housing triple-net facilities were transferred to the Company’s SHOP segment. During the three and six months ended June 30, 2017, one senior housing triple-net facility was transferred to the Company’s SHOP segment. When an asset is transferred from one segment to another, the results associated with that asset are included in the original segment until the date of transfer. Results generated after the transfer date are included in the new segment.
The Company evaluates performance based upon: (i) property NOI and (ii) Adjusted NOI. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss). Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, termination fees, and the impact of deferred community fee income and expense.
During the fourth quarter of 2017, as a result of a change in how operating results are reported to the chief operating decision makers for the purpose of evaluating performance and allocating resources, the Company began excluding unconsolidated JVs from its evaluation of its segments' operating results. Unconsolidated JVs are now reflected in other non-reportable segments.
The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods to conform to the current period presentation which excludes: (i) the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid and (ii) adjustments related to unconsolidated JVs (see above).
Non-segment assets consist of assets in the Company's other non-reportable segments and corporate non-segment assets. Corporate non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, proceeds receivable from the U.K. JV transaction (see Note 4), marketable equity securities and, if any, real estate assets and liabilities held for sale. See Note 16 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, 2018:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
70,713

 
$
138,352

 
$
101,031

 
$
125,246

 
$
32,762

 
$

 
$
468,104

Operating expenses
 
(791
)
 
(101,767
)
 
(22,732
)
 
(47,271
)
 
(1,305
)
 

 
(173,866
)
NOI
 
69,922

 
36,585

 
78,299

 
77,975

 
31,457

 

 
294,238

Adjustments to NOI(2)
 
1,006

 
(124
)
 
(2,233
)
 
(993
)
 
(1,318
)
 

 
(3,662
)
Adjusted NOI
 
70,928

 
36,461

 
76,066

 
76,982

 
30,139

 

 
290,576

Addback adjustments
 
(1,006
)
 
124

 
2,233

 
993

 
1,318

 

 
3,662

Interest income
 

 

 

 

 
1,447

 

 
1,447

Interest expense
 
(607
)
 
(990
)
 
(80
)
 
(119
)
 
(742
)
 
(70,500
)
 
(73,038
)
Depreciation and amortization
 
(21,251
)
 
(28,002
)
 
(35,269
)
 
(46,419
)
 
(12,351
)
 

 
(143,292
)
General and administrative
 

 

 

 

 

 
(22,514
)
 
(22,514
)
Transaction costs
 

 

 

 

 

 
(2,404
)
 
(2,404
)
Recoveries (impairments), net
 
(6,273
)
 

 
(7,639
)
 

 

 

 
(13,912
)
Gain (loss) on sales of real estate, net
 
(23,039
)
 
48,252

 

 

 
20,851

 

 
46,064

Other income (expense), net
 

 

 

 

 

 
1,786

 
1,786

Income tax benefit (expense)
 

 

 

 

 

 
4,654

 
4,654

Equity income (loss) from unconsolidated JVs
 

 

 

 

 
(101
)
 

 
(101
)
Net income (loss)
 
$
18,752

 
$
55,845

 
$
35,311

 
$
31,437

 
$
40,561

 
$
(88,978
)
 
$
92,928

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.

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Table of Contents

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

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

 
(153,163
)
NOI
 
77,197

 
39,550

 
67,986

 
72,583

 
27,580

 

 
284,896

Adjustments to NOI(2)
 
(406
)
 
12

 
(123
)
 
(763
)
 
(864
)
 

 
(2,144
)
Adjusted NOI
 
76,791

 
39,562

 
67,863

 
71,820

 
26,716

 

 
282,752

Addback adjustments
 
406

 
(12
)
 
123

 
763

 
864

 

 
2,144

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
)
Transaction costs
 

 

 

 

 

 
(867
)
 
(867
)
Recoveries (impairments), net
 

 

 

 

 
(56,682
)
 

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

 
(406
)
 

 

 
412

Other income (expense), net
 

 

 

 

 

 
71

 
71

Income tax benefit (expense)
 

 

 

 

 

 
2,987

 
2,987

Equity income (loss) from unconsolidated JVs
 

 

 

 

 
240

 

 
240

Net income (loss)
 
$
50,817

 
$
13,737

 
$
38,166

 
$
29,562

 
$
(16,499
)
 
$
(93,682
)
 
$
22,101

_______________________________________
(1)
Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs.
(2)
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees.

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Table of Contents

For the six months ended June 30, 2018:
 
 
Senior Housing Triple-Net
 
SHOP
 
Life Science
 
Medical Office
 
Other Non-reportable
 
Corporate Non-segment
 
Total
Rental revenues(1)
 
$
145,003

 
$
283,022

 
$
200,653

 
$
249,180

 
$
63,078

 
$

 
$
940,936

Operating expenses
 
(1,837
)
 
(203,513
)
 
(44,541
)
 
(93,967
)
 
(2,560
)
 

 
(346,418
)
NOI
 
143,166

 
79,509

 
156,112

 
155,213

 
60,518

 

 
594,518

Adjustments to NOI(2)
 
(858
)
 
(1,732
)
 
(5,984
)
 
(2,064
)
 
(2,711
)
 

 
(13,349
)
Adjusted NOI
 
142,308

 
77,777

 
150,128

 
153,149

 
57,807

 

 
581,169

Addback adjustments
 
858

 
1,732

 
5,984

 
2,064

 
2,711

 

 
13,349

Interest income