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.
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:
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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.
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•
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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.
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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.
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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:
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•
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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.
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•
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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.
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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.
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):
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Six Months Ended June 30, 2017
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As Reported
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As Previously Reported
|
Net cash provided by (used in) investing activities
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$
|
1,976,807
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$
|
1,957,586
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Net increase (decrease) in balance
(1)
|
|
316,456
|
|
|
297,235
|
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Balance - beginning of period
(1)
|
|
136,990
|
|
|
94,730
|
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Balance - end of period
(1)
|
|
453,446
|
|
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391,965
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_______________________________________
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(1)
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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.
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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”)
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:
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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.
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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:
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•
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A security deposit (which increases if specified leverage thresholds are exceeded);
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•
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A termination right if certain financial covenants and a net worth test are not satisfied;
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•
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Enhanced reporting requirements and related remedies; and
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•
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The right to market for sale the CCRC portfolio (as defined below).
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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:
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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;
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•
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The Company provided an aggregate
$5 million
annual reduction in rent on
three
assets, effective January 1, 2018; and
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•
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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:
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•
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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;
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•
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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;
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•
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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
;
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•
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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
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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.
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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
.
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.
During the year ended December 31, 2017, the Company acquired
20
properties, the impact of which is summarized in the following table:
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Consideration
|
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Assets Acquired
|
Segment
|
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Cash Paid
|
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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
|
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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
.
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
).
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%
).
|
|
|
(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
two
,
six
-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.
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.
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.
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.
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.
|
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.
|
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
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,812
|
|
|
—
|
|
|
7,812
|
|
Interest expense
|
|
(1,207
|
)
|
|
(1,979
|
)
|
|
(162
|
)
|
|
(239
|
)
|
|
(1,469
|
)
|
|
(143,084
|
)
|
|
(148,140
|
)
|
Depreciation and amortization
|
|
(43,157
|
)
|
|
(55,630
|
)
|
|
(71,350
|
)
|
|
(91,937
|
)
|
|
(24,468
|
)
|
|
—
|
|
|
(286,542
|
)
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(51,689
|
)
|
|
(51,689
|
)
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,599
|
)
|
|
(4,599
|
)
|
Recoveries (impairments), net
|
|
(6,273
|
)
|
|
—
|
|
|
(7,639
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13,912
|
)
|
Gain (loss) on sales of real estate, net
|
|
(23,039
|
)
|
|
69,067
|
|
|
—
|
|
|
—
|
|
|
20,851
|
|
|
—
|
|
|
66,879
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40,567
|
)
|
|
1,946
|
|
|
(38,621
|
)
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,990
|
|
|
9,990
|
|
Equity income (loss) from unconsolidated JVs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
469
|
|
|
—
|
|
|
469
|
|
Net income (loss)
|
|
$
|
69,490
|
|
|
$
|
90,967
|
|
|
$
|
76,961
|
|
|
$
|
63,037
|
|
|
$
|
23,146
|
|
|
$
|
(187,436
|
)
|
|
$
|
136,165
|
|
_______________________________________
|
|
(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.
|
For the
six
months ended
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Housing Triple-Net
|
|
SHOP
|
|
Life Science
|
|
Medical Office
|
|
Other Non-reportable
|
|
Corporate Non-segment
|
|
Total
|
Rental revenues
(1)
|
|
$
|
178,112
|
|
|
$
|
265,644
|
|
|
$
|
172,050
|
|
|
$
|
237,535
|
|
|
$
|
58,555
|
|
|
$
|
—
|
|
|
911,896
|
|
Operating expenses
|
|
(1,993
|
)
|
|
(180,405
|
)
|
|
(36,064
|
)
|
|
(91,444
|
)
|
|
(2,338
|
)
|
|
—
|
|
|
(312,244
|
)
|
NOI
|
|
176,119
|
|
|
85,239
|
|
|
135,986
|
|
|
146,091
|
|
|
56,217
|
|
|
—
|
|
|
599,652
|
|
Adjustments to NOI
(2)
|
|
(2,245
|
)
|
|
(299
|
)
|
|
(426
|
)
|
|
(1,726
|
)
|
|
(1,879
|
)
|
|
—
|
|
|
(6,575
|
)
|
Adjusted NOI
|
|
173,874
|
|
|
84,940
|
|
|
135,560
|
|
|
144,365
|
|
|
54,338
|
|
|
—
|
|
|
593,077
|
|
Addback adjustments
|
|
2,245
|
|
|
299
|
|
|
426
|
|
|
1,726
|
|
|
1,879
|
|
|
—
|
|
|
6,575
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39,200
|
|
|
—
|
|
|
39,200
|
|
Interest expense
|
|
(1,258
|
)
|
|
(6,017
|
)
|
|
(200
|
)
|
|
(256
|
)
|
|
(2,923
|
)
|
|
(153,852
|
)
|
|
(164,506
|
)
|
Depreciation and amortization
|
|
(51,930
|
)
|
|
(50,773
|
)
|
|
(64,795
|
)
|
|
(85,217
|
)
|
|
(14,590
|
)
|
|
—
|
|
|
(267,305
|
)
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,764
|
)
|
|
(43,764
|
)
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,924
|
)
|
|
(1,924
|
)
|
Recoveries (impairments), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(56,682
|
)
|
|
—
|
|
|
(56,682
|
)
|
Gain (loss) on sales of real estate, net
|
|
268,234
|
|
|
134
|
|
|
45,913
|
|
|
(406
|
)
|
|
3,795
|
|
|
—
|
|
|
317,670
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
50,895
|
|
|
384
|
|
|
51,279
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,149
|
|
|
9,149
|
|
Equity income (loss) from unconsolidated JVs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,509
|
|
|
—
|
|
|
3,509
|
|
Net income (loss)
|
|
$
|
391,165
|
|
|
$
|
28,583
|
|
|
$
|
116,904
|
|
|
$
|
60,212
|
|
|
$
|
79,421
|
|
|
$
|
(190,007
|
)
|
|
$
|
486,278
|
|
_______________________________________
|
|
(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.
|
The following table summarizes the Company’s revenues by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
Segment
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Senior housing triple-net
|
|
$
|
70,713
|
|
|
$
|
78,079
|
|
|
$
|
145,003
|
|
|
$
|
178,112
|
|
SHOP
|
|
138,352
|
|
|
125,416
|
|
|
283,022
|
|
|
265,644
|
|
Life science
|
|
101,031
|
|
|
86,730
|
|
|
200,653
|
|
|
172,050
|
|
Medical office
|
|
125,246
|
|
|
119,164
|
|
|
249,180
|
|
|
237,535
|
|
Other non-reportable segments
|
|
34,209
|
|
|
49,539
|
|
|
70,890
|
|
|
97,755
|
|
Total revenues
|
|
$
|
469,551
|
|
|
$
|
458,928
|
|
|
$
|
948,748
|
|
|
$
|
951,096
|
|
See Notes 3, 4 and 6 for significant transactions impacting the Company’s segment assets during the periods presented.
NOTE 13. Earnings Per Common Share
The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Numerator
|
|
|
|
|
|
|
|
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
|
|
Less: Participating securities' share in earnings
|
(461
|
)
|
|
(100
|
)
|
|
(852
|
)
|
|
(674
|
)
|
Net income (loss) applicable to common shares
|
$
|
89,481
|
|
|
$
|
19,283
|
|
|
$
|
129,322
|
|
|
$
|
479,854
|
|
Numerator - Dilutive
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common shares
|
$
|
89,481
|
|
|
$
|
19,283
|
|
|
$
|
129,322
|
|
|
$
|
479,854
|
|
Add: distributions on dilutive convertible units and other
|
—
|
|
|
—
|
|
|
—
|
|
|
3,655
|
|
Dilutive net income (loss) available to common shares
|
$
|
89,481
|
|
|
$
|
19,283
|
|
|
$
|
129,322
|
|
|
$
|
483,509
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
469,769
|
|
|
468,646
|
|
|
469,664
|
|
|
468,474
|
|
Dilutive potential common shares - equity awards
|
172
|
|
|
193
|
|
|
135
|
|
|
195
|
|
Dilutive potential common shares - DownREIT conversions
|
—
|
|
|
—
|
|
|
—
|
|
|
4,697
|
|
Diluted weighted average common shares
|
469,941
|
|
|
468,839
|
|
|
469,799
|
|
|
473,366
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.19
|
|
|
$
|
0.04
|
|
|
$
|
0.28
|
|
|
$
|
1.02
|
|
Diluted
|
$
|
0.19
|
|
|
$
|
0.04
|
|
|
$
|
0.28
|
|
|
$
|
1.02
|
|
Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, and require use of the two-class method when computing basic and diluted earnings per share.
For the three and
six
months ended
June 30, 2018
and the three months ended
June 30, 2017
,
7 million
shares issuable upon conversion of
4 million
DownREIT units were not included because they are anti-dilutive.
NOTE 14. Supplemental Cash Flow Information
The following table provides supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Supplemental cash flow information:
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
$
|
141,777
|
|
|
$
|
163,455
|
|
Income taxes paid
|
2,735
|
|
|
10,335
|
|
Capitalized interest
|
8,033
|
|
|
7,628
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
Accrued construction costs
|
66,233
|
|
|
68,618
|
|
Retained equity method investment and proceeds receivable from U.K. JV transaction
|
507,369
|
|
|
—
|
|
Derecognition of U.K. Bridge Loan receivable
|
147,474
|
|
|
—
|
|
Consolidation of net assets related to U.K. Bridge Loan
|
106,457
|
|
|
—
|
|
Deconsolidation of noncontrolling interest in connection with RIDEA II transaction
|
—
|
|
|
58,061
|
|
Vesting of restricted stock units and conversion of non-managing member units into common stock
|
340
|
|
|
2,451
|
|
See discussions related to the RIDEA II transaction and U.K. JV transaction in Note 4 and the U.K. Bridge Loan in Notes 6 and 15.
The following table summarizes cash, cash equivalents and restricted cash (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
Cash and cash equivalents
|
|
$
|
91,381
|
|
|
$
|
391,965
|
|
Restricted cash
|
|
30,548
|
|
|
61,481
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
121,929
|
|
|
$
|
453,446
|
|
NOTE 15. Variable Interest Entities
Unconsolidated Variable Interest Entities
At
June 30, 2018
, the Company had investments in: (i)
four
unconsolidated VIE JVs, (ii)
48
properties leased to VIE tenants, (iii) marketable debt securities of
one
VIE and (iv)
one
loan to a VIE borrower. The Company has determined that it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated JVs (CCRC OpCo, Vintage Park Development JV, Waldwick JV and the LLC investment discussed below), it has no formal involvement in these VIEs beyond its investments.
The Company holds a
49%
ownership interest in CCRC OpCo, a JV entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE. The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale, as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo, debt service payments and capital expenditures for the properties, and accounts payable and expense accruals associated with the cost of its CCRCs’ operations. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities).
The Company holds an
85%
ownership interest in a JV (Vintage Park Development JV), which has been identified as a VIE as power is shared with a member that does not have a substantive equity investment at risk. The assets of the JV primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of debt-service payments. Any assets generated by the JV may only be used to settle its respective contractual obligations (primarily debt service payments).
The Company holds an
85%
ownership interest in a development JV (Waldwick JV), which has been identified as a VIE as power is shared with a member that does not have a substantive equity investment at risk. The assets of the JV primarily consist of an in-progress senior housing facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated with the cost of its development obligations. Any assets generated by the JV may only be used to settle its respective contractual obligations (primarily development expenses and debt service payments).
The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner, and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
The Company leases
48
properties to a total of
seven
tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases.
The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets.
The Company provided seller financing of
$10 million
related to its sale of
seven
senior housing triple-net facilities. The financing was provided in the form of a secured
five
-year mezzanine loan to a “thinly capitalized” borrower created to acquire the facilities.
The classification of the related assets and liabilities and the maximum loss exposure as a result of the Company’s involvement with these VIEs at
June 30, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
VIE Type
|
|
Asset/Liability Type
|
|
Maximum Loss
Exposure
and Carrying
Amount
(1)
|
VIE tenants - DFLs
(2)
|
|
Net investment in DFLs
|
|
$
|
599,916
|
|
VIE tenants - operating leases
(2)
|
|
Lease intangibles, net and straight-line rent receivables
|
|
6,313
|
|
CCRC OpCo
|
|
Investments in unconsolidated joint ventures
|
|
183,528
|
|
Unconsolidated Development JVs
|
|
Investments in unconsolidated joint ventures
|
|
14,108
|
|
Loan - Seller Financing
|
|
Loans receivable, net
|
|
10,000
|
|
CMBS and LLC investment
|
|
Marketable debt and cost method investment
|
|
34,004
|
|
_______________________________________
|
|
(1)
|
The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest).
|
|
|
(2)
|
The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default.
|
At
June 30, 2018
, the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls).
See Notes 5, 6 and 7 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein.
Consolidated Variable Interest Entities
HCP, Inc.’s consolidated total assets and total liabilities at
June 30, 2018
and
December 31, 2017
include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets and total liabilities include VIE assets and liabilities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Assets
|
|
|
|
Buildings and improvements
|
$
|
1,537,928
|
|
|
$
|
2,436,414
|
|
Development costs and construction in progress
|
21,929
|
|
|
32,285
|
|
Land
|
128,889
|
|
|
227,162
|
|
Accumulated depreciation and amortization
|
(348,974
|
)
|
|
(542,091
|
)
|
Net real estate
|
1,339,772
|
|
|
2,153,770
|
|
Investments in and advances to unconsolidated joint ventures
|
1,897
|
|
|
2,231
|
|
Accounts receivable, net
|
7,251
|
|
|
10,242
|
|
Cash and cash equivalents
|
10,928
|
|
|
15,861
|
|
Restricted cash
|
2,951
|
|
|
2,619
|
|
Intangible assets, net
|
88,257
|
|
|
125,475
|
|
Other assets, net
|
33,336
|
|
|
33,749
|
|
Total assets
|
$
|
1,484,392
|
|
|
$
|
2,343,947
|
|
Liabilities
|
|
|
|
Mortgage debt
|
44,789
|
|
|
45,016
|
|
Intangible liabilities, net
|
11,261
|
|
|
10,672
|
|
Accounts payable and accrued liabilities
|
55,573
|
|
|
269,280
|
|
Deferred revenue
|
15,606
|
|
|
14,432
|
|
Total liabilities
|
$
|
127,229
|
|
|
$
|
339,400
|
|
HCP Ventures V, LLC
. The Company holds a
51%
ownership interest in and is the managing member of a JV entity formed in October 2015 that owns and leases MOBs (“HCP Ventures V”). Upon adoption of ASU No. 2015-02,
Amendments to the Consolidation Analysis
(“ASU 2015-02”), the Company classified HCP Ventures V as a VIE due to the non-managing member lacking substantive participation rights in the management of HCP Ventures V or kick-out rights over the managing member. The Company consolidates HCP Ventures V as the primary beneficiary because it has the ability to control the activities that most
significantly impact the VIE’s economic performance. The assets of HCP Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by HCP Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures).
Vintage Park JV.
The Company holds a
90%
ownership interest in a JV entity formed in January 2015 (“Vintage Park JV”) that owns an
85%
interest in an unconsolidated development VIE. Upon adoption of ASU 2015-02, the Company classified Vintage Park JV as a VIE due to the non-managing member lacking substantive participation rights in the management of the Vintage Park JV or kick-out rights over the managing member. The Company consolidates Vintage Park JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Vintage Park JV primarily consist of an investment in the Vintage Park Development JV and cash and cash equivalents; its obligations primarily consist of funding the ongoing development of the Vintage Park Development JV. Assets generated by the Vintage Park JV may only be used to settle its contractual obligations (primarily from the funding of the Vintage Park Development JV).
Watertown JV
. The Company holds a
95%
ownership interest in JV entities formed in November 2017 that own and operate a senior housing property in a RIDEA structure (“Watertown JV”). Watertown PropCo is a VIE as the Company and the non-managing member share in control of the entity, but substantially all of the entity's activities are performed on behalf of the Company. Watertown OpCo is a VIE as the non-managing member, through its equity interest, lacks substantive participation rights in the management of Watertown OpCo or kick-out rights over the managing member. The Company consolidates Watertown PropCo and Watertown OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of Watertown PropCo primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of Watertown OpCo primarily consist of leasehold interests in a senior housing facility (operating lease), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to Watertown PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the Watertown structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).
Hayden JV
. The Company holds a
99%
ownership interest in a JV entity formed in December 2017 that owns and leases a life science complex (“Hayden JV”). The Hayden JV is a VIE as the members share in control of the entity, but substantially all of the entity's activities are performed on behalf of the Company. The Company consolidates the Hayden JV as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Hayden JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by Hayden JV may only be used to settle its contractual obligations (primarily from capital expenditures).
Consolidated Lessees.
The Company leases
18
senior housing properties to lessee entities under cash flow leases through which the Company receives monthly rent equal to the residual cash flows of the properties. The lessee entities are classified as VIEs as they are "thinly capitalized" entities. The Company consolidates the lessee entities as it has the ability to control the activities that most significantly impact the economic performance of the lessee entities. The lessee entities' assets primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to the Company and operating expenses of the senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs).
DownREITs
. The Company holds a controlling ownership interest in and is the managing member of
five
limited liability companies (“DownREITs”). The Company classifies the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other Consolidated Real Estate Partnerships.
The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). The Company classifies the Partnerships as VIEs due to the limited partners (non-managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and
cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other consolidated VIEs.
The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development JV (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of a development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations.
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. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity had historically been identified as a VIE because it was “thinly capitalized.” The Company retained a
three
-year call option to acquire all the shares of the special purpose entity, which it could only exercise upon the occurrence of certain events. During the quarter ended March 31, 2018, the Company concluded that the conditions required to exercise the call option had been met and initiated the call option process to acquire the special purpose entity. In conjunction with initiating the process to legally exercise its call option and the satisfaction of required contingencies, the Company concluded that it was the primary beneficiary of the special purpose entity and therefore, should consolidate the entity. As such, during the quarter ended March 31, 2018, the Company derecognized the previously outstanding loan receivable, recognized the special purpose entity’s assets and liabilities at their respective fair values, and recognized a
£29 million
(
$41 million
) loss on consolidation (within other income (expense), net and income tax benefit (expense)), net of a tax benefit of
£2 million
(
$3 million
), to account for the difference between the carrying value of the loan receivable and the fair value of net assets and liabilities assumed. The fair value of net assets and liabilities consolidated during the first quarter of 2018 consisted of
£81 million
(
$114 million
) of net real estate,
£4 million
(
$5 million
) of intangible assets, and
£9 million
(
$13 million
) of net deferred tax liabilities.
In June 2018, the Company completed the exercise of the above-mentioned call option and formally acquired full ownership of the special purpose entity. As such, the Company reconsidered whether the special purpose entity was a VIE and concluded that it was no longer “thinly capitalized” as the previously outstanding bridge loan converted to equity at risk and, therefore, was no longer a VIE. The real estate assets held by the special purpose entity were contributed to the U.K. JV formed by the Company in June 2018 (see Note 4).
NOTE 16. Concentration of Credit Risk
Concentrations of credit risk arise when
one
or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks.
The following tables provide information regarding the Company’s concentrations of credit risk with respect to certain tenants:
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Total Assets
|
|
|
Total Company
|
|
Senior Housing Triple-Net
|
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
December 31,
|
Tenant
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Brookdale
|
|
8
|
|
10
|
|
36
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
|
Total Company
|
|
Senior Housing Triple-Net
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
Tenant
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Brookdale
(1)
|
|
6
|
|
8
|
|
6
|
|
10
|
|
41
|
|
47
|
|
42
|
|
55
|
_______________________________________
|
|
(1)
|
The Company's concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the Brookdale Transactions (see Note 3). Six months ended June 30, 2017 includes revenues from
64
senior housing triple-net facilities that were sold in March 2017.
|
At
June 30, 2018
and
December 31, 2017
, Brookdale managed or operated, in the Company’s SHOP segment, approximately
8%
and
13%
, respectively, of the Company’s real estate investments (based on total assets). Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. At
June 30, 2018
, Brookdale provided comprehensive facility management and accounting services with respect to
57
of the Company’s consolidated SHOP facilities and
16
SHOP facilities owned by its unconsolidated JVs, for which the Company or JV pay annual management fees pursuant to long-term management agreements. The Company's concentration with respect to Brookdale as an operator in its SHOP segment is expected to decrease with the completion of the Brookdale Transactions (see Note 3). Most of the management agreements have terms ranging from
10
to
15 years
, with
three
to
four
5
-year renewal periods. The base management fees are
4.5%
to
5.0%
of gross revenues (as defined) generated by the RIDEA properties. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.
See Note 3 for further information on the reduction of concentration related to Brookdale.
To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.
NOTE 17. Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are immaterial at
June 30, 2018
.
The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
(3)
|
|
December 31, 2017
(3)
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
Loans receivable, net
(2)
|
$
|
38,691
|
|
|
$
|
38,579
|
|
|
$
|
313,326
|
|
|
$
|
313,242
|
|
Marketable debt securities
(2)
|
18,941
|
|
|
18,941
|
|
|
18,690
|
|
|
18,690
|
|
Bank line of credit
(2)
|
545,226
|
|
|
545,226
|
|
|
1,017,076
|
|
|
1,017,076
|
|
Term loan
(2)
|
222,923
|
|
|
222,923
|
|
|
228,288
|
|
|
228,288
|
|
Senior unsecured notes
(1)
|
6,401,502
|
|
|
6,493,760
|
|
|
6,396,451
|
|
|
6,737,825
|
|
Mortgage debt
(2)
|
140,321
|
|
|
135,044
|
|
|
144,486
|
|
|
125,984
|
|
Other debt
(2)
|
93,070
|
|
|
93,070
|
|
|
94,165
|
|
|
94,165
|
|
Interest-rate swap liabilities
(2)
|
1,706
|
|
|
1,706
|
|
|
2,483
|
|
|
2,483
|
|
Cross currency swap liability
(2)
|
—
|
|
|
—
|
|
|
10,968
|
|
|
10,968
|
|
_______________________________________
|
|
(1)
|
Level 1: Fair value calculated based on quoted prices in active markets.
|
|
|
(2)
|
Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) for loans receivable, net, mortgage debt, and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loan and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating.
|
|
|
(3)
|
During the
six
months ended
June 30, 2018
and year ended
December 31, 2017
, there were no material transfers of financial assets or liabilities within the fair value hierarchy.
|
NOTE 18. Derivative Financial Instruments
The following table summarizes the Company’s outstanding swap contracts at
June 30, 2018
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Entered
|
|
Maturity Date
|
|
Hedge Designation
|
|
Notional
|
|
Pay Rate
|
|
Receive Rate
|
|
Fair Value
(1)
|
Interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2005
(2)
|
|
July 2020
|
|
Cash Flow
|
|
$
|
43,000
|
|
|
3.82%
|
|
BMA Swap Index
|
|
$
|
(1,706
|
)
|
______________________________________
|
|
(1)
|
Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.
|
|
|
(2)
|
Represents
three
interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.
|
The Company uses derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes. Assuming a one percentage point shift in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed
$1 million
.
On June 29, 2018, concurrent with closing the U.K. JV transaction, the Company terminated a cross currency swap contract, which was designated as a hedge of the Company’s net investment in the U.K. As such, upon deconsolidation of the U.K. Portfolio, the Company reclassified the
$6 million
loss in other comprehensive income related to the cross currency swap through gain (loss) on sales of real estate, net. On July 3, 2018, the Company settled the liability related to the cross currency swap termination (see Note 4 for additional discussion on the U.K. JV transaction).
At
June 30, 2018
,
£55 million
of the Company’s GBP-denominated borrowings under the Facility are designated as a hedge of a portion of the Company’s net investments in GBP-functional currency unconsolidated subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated
£55 million
GBP-denominated borrowings due primarily to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The balance in accumulated other comprehensive income (loss) will be reclassified to earnings when the Company sells its remaining investment in the U.K.