Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

(Mark One)

 

x

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

 

 

For the quarterly period ended September 30, 2009.

 

OR

 

 

o

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

 

For the transition period from                to               

 

Commission file number 1-08895

 


 

HCP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

33-0091377

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

3760 Kilroy Airport Way, Suite 300
Long Beach, CA 90806

(Address of principal executive offices)

 

(562) 733-5100
(Registrant’s telephone number, including area code)

 

 

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

 


 

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

 

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

 

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

 

Large Accelerated Filer  x

 

Accelerated Filer o

 

 

 

Non-accelerated Filer  o
(Do not check if a smaller reporting company)

 

Smaller Reporting Company o

 

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

 

As of October 30, 2009, there were 293,138,580 shares of the registrant’s $1.00 par value common stock outstanding.

 

 

 



Table of Contents

 

HCP, INC.

INDEX

PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements:

 

 

 

 

 

Condensed Consolidated Balance Sheets

3

 

 

 

 

Condensed Consolidated Statements of Operations

4

 

 

 

 

Condensed Consolidated Statement of Equity

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows

6

 

 

 

 

Notes to the Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

Item 4.

Controls and Procedures

49

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

50

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 5.

Other Information

51

 

 

 

Item 6.

Exhibits

51

 

 

 

Signatures

 

55

 

2



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

Real estate:

 

 

 

 

 

Buildings and improvements

 

$

7,804,118

 

$

7,747,015

 

Development costs and construction in progress

 

273,567

 

224,337

 

Land

 

1,548,845

 

1,548,248

 

Accumulated depreciation and amortization

 

(1,003,177

)

(819,980

)

Net real estate

 

8,623,353

 

8,699,620

 

 

 

 

 

 

 

Net investment in direct financing leases

 

634,233

 

648,234

 

Loans receivable, net

 

1,674,329

 

1,076,392

 

Investments in and advances to unconsolidated joint ventures

 

261,364

 

272,929

 

Accounts receivable, net of allowance of $17,430 and $18,413, respectively

 

36,824

 

33,834

 

Cash and cash equivalents

 

144,366

 

57,562

 

Restricted cash

 

31,988

 

35,078

 

Intangible assets, net

 

410,366

 

505,936

 

Real estate held for sale, net

 

3,783

 

27,058

 

Other assets, net

 

517,604

 

493,183

 

Total assets

 

$

12,338,210

 

$

11,849,826

 

LIABILITIES AND EQUITY

 

 

 

 

 

Bank line of credit

 

$

 

$

150,000

 

Term loan

 

200,000

 

200,000

 

Bridge loan

 

 

320,000

 

Senior unsecured notes

 

3,520,577

 

3,523,513

 

Mortgage and other secured debt

 

1,863,404

 

1,641,734

 

Other debt

 

99,487

 

102,209

 

Intangible liabilities, net

 

207,847

 

232,630

 

Accounts payable and accrued liabilities

 

310,493

 

211,715

 

Deferred revenue

 

86,925

 

60,185

 

Total liabilities

 

6,288,733

 

6,441,986

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $1.00 par value: 50,000,000 shares authorized; 11,820,000 shares issued and outstanding, liquidation preference of $25.00 per share

 

285,173

 

285,173

 

Common stock, $1.00 par value: 750,000,000 shares authorized; 293,145,064 and 253,601,454 shares issued and outstanding, respectively

 

293,145

 

253,601

 

Additional paid-in capital

 

5,708,534

 

4,873,727

 

Cumulative dividends in excess of earnings

 

(407,210

)

(130,068

)

Accumulated other comprehensive loss

 

(9,838

)

(81,162

)

Total stockholders’ equity

 

5,869,804

 

5,201,271

 

 

 

 

 

 

 

Joint venture partners

 

7,927

 

12,912

 

Non-managing member unitholders

 

171,746

 

193,657

 

Total noncontrolling interests

 

179,673

 

206,569

 

Total equity

 

6,049,477

 

5,407,840

 

Total liabilities and equity

 

$

12,338,210

 

$

11,849,826

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)
(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Revenues:

 

 

 

 

 

 

 

 

 

Rental and related revenues

 

$

218,366

 

$

231,561

 

$

663,044

 

$

650,742

 

Tenant recoveries

 

22,464

 

20,225

 

67,124

 

61,817

 

Income from direct financing leases

 

13,173

 

14,543

 

39,302

 

43,646

 

Investment management fee income

 

1,326

 

1,523

 

4,133

 

4,448

 

Total revenues

 

255,329

 

267,852

 

773,603

 

760,653

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

82,301

 

77,292

 

242,318

 

232,574

 

Operating

 

46,173

 

49,104

 

139,812

 

143,849

 

General and administrative

 

22,860

 

17,077

 

61,625

 

55,859

 

Litigation provision

 

101,973

 

 

101,973

 

 

Impairments

 

15,123

 

3,710

 

20,904

 

5,284

 

Total costs and expenses

 

268,430

 

147,183

 

566,632

 

437,566

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest and other income, net

 

39,962

 

62,283

 

93,027

 

128,344

 

Interest expense

 

(74,039

)

(82,813

)

(226,053

)

(264,488

)

Total other income (expense)

 

(34,077

)

(20,530

)

(133,026

)

(136,144

)

 

 

 

 

 

 

 

 

 

 

Income (loss) before income tax (expense) benefit and equity income from unconsolidated joint ventures

 

(47,178

)

100,139

 

73,945

 

186,943

 

Income tax (expense) benefit

 

322

 

(853

)

(1,406

)

(4,327

)

Equity income from unconsolidated joint ventures

 

1,328

 

1,227

 

1,993

 

3,736

 

Income (loss) from continuing operations

 

(45,528

)

100,513

 

74,532

 

186,352

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income (loss) before gain on sales of real estate, net of income taxes

 

(152

)

3,291

 

1,903

 

19,158

 

Impairments

 

 

 

(125

)

(8,141

)

Gain on sales of real estate, net of income taxes

 

2,460

 

27,752

 

34,357

 

228,395

 

Total discontinued operations

 

2,308

 

31,043

 

36,135

 

239,412

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

(43,220

)

131,556

 

110,667

 

425,764

 

Noncontrolling interests’ and participating securities’ share in earnings

 

(3,895

)

(6,659

)

(12,147

)

(19,559

)

Preferred stock dividends

 

(5,282

)

(5,282

)

(15,848

)

(15,848

)

Net income (loss) applicable to common shares

 

$

(52,397

)

$

119,615

 

$

82,672

 

$

390,357

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.19

)

$

0.36

 

$

0.17

 

$

0.65

 

Discontinued operations

 

0.01

 

0.13

 

0.14

 

1.03

 

Net income (loss) applicable to common shares

 

$

(0.18

)

$

0.49

 

$

0.31

 

$

1.68

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.19

)

$

0.36

 

$

0.17

 

$

0.65

 

Discontinued operations

 

0.01

 

0.13

 

0.14

 

1.03

 

Net income (loss) applicable to common shares

 

$

(0.18

)

$

0.49

 

$

0.31

 

$

1.68

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to calculate earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

284,812

 

244,572

 

267,971

 

232,199

 

Diluted

 

284,812

 

245,482

 

268,041

 

233,036

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

0.46

 

$

0.455

 

$

1.38

 

$

1.365

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

4



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Dividends

 

Other

 

Total

 

Total

 

 

 

 

 

Preferred Stock

 

Common Stock

 

Paid-In

 

In Excess

 

Comprehensive

 

Stockholders’

 

Noncontrolling

 

Total

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Of Earnings

 

Income (Loss)

 

Equity

 

Interests

 

Equity

 

January 1, 2009

 

11,820

 

$

285,173

 

253,601

 

$

253,601

 

$

4,873,727

 

$

(130,068

)

$

(81,162

)

$

5,201,271

 

$

206,569

 

$

5,407,840

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

99,656

 

 

99,656

 

11,011

 

110,667

 

Change in net unrealized gains (losses) on securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains

 

 

 

 

 

 

 

75,180

 

75,180

 

 

75,180

 

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

(2,797

)

(2,797

)

 

(2,797

)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

 

 

(910

)

(910

)

 

(910

)

Less reclassification adjustment realized in net income

 

 

 

 

 

 

 

685

 

685

 

 

685

 

Change in Supplemental Executive Retirement Plan obligation

 

 

 

 

 

 

 

66

 

66

 

 

66

 

Foreign currency translation  adjustment

 

 

 

 

 

 

 

(900

)

(900

)

 

(900

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170,980

 

11,011

 

181,991

 

Issuance of common stock, net

 

 

 

39,639

 

39,639

 

830,617

 

 

 

870,256

 

(21,873

)

848,383

 

Repurchase of common stock

 

 

 

(95

)

(95

)

(2,153

)

 

 

(2,248

)

 

(2,248

)

Amortization of deferred  compensation

 

 

 

 

 

11,068

 

 

 

11,068

 

 

11,068

 

Preferred dividends

 

 

 

 

 

 

(15,849

)

 

(15,849

)

 

(15,849

)

Common dividends ($1.38 per share)

 

 

 

 

 

 

(360,949

)

 

(360,949

)

 

(360,949

)

Distributions to noncontrolling  interests

 

 

 

 

 

 

 

 

 

(11,662

)

(11,662

)

Purchase of noncontrolling interests

 

 

 

 

 

(4,725

)

 

 

(4,725

)

(4,372

)

(9,097

)

September 30, 2009

 

11,820

 

$

285,173

 

293,145

 

$

293,145

 

$

5,708,534

 

$

(407,210

)

$

(9,838

)

$

5,869,804

 

$

179,673

 

$

6,049,477

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

HCP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

110,667

 

$

425,764

 

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

 

 

 

 

 

Depreciation and amortization of real estate, in-place lease and other intangibles:

 

 

 

 

 

Continuing operations

 

242,318

 

232,574

 

Discontinued operations

 

266

 

7,178

 

Amortization of above and below market lease intangibles, net

 

(12,657

)

(6,020

)

Stock-based compensation

 

11,068

 

10,637

 

Amortization of debt premiums, discounts and issuance costs, net

 

6,187

 

7,409

 

Straight-line rents

 

(38,751

)

(28,645

)

Interest accretion

 

(23,813

)

(20,134

)

Deferred rental revenue

 

10,507

 

16,227

 

Equity income from unconsolidated joint ventures

 

(1,993

)

(3,736

)

Distributions of earnings from unconsolidated joint ventures

 

5,444

 

3,736

 

Gain on sales of real estate

 

(34,357

)

(228,395

)

Marketable securities (gains) losses, net

 

(6,420

)

2,746

 

Derivative losses, net

 

922

 

1,803

 

Impairments

 

21,029

 

13,425

 

Changes in:

 

 

 

 

 

Accounts receivable

 

11,310

 

14,881

 

Other assets

 

(2,991

)

(4,843

)

Accrued liability for litigation provision

 

101,973

 

 

Accounts payable and other accrued liabilities

 

(10,989

)

10,776

 

Net cash provided by operating activities

 

389,720

 

455,383

 

Cash flows from investing activities:

 

 

 

 

 

Acquisitions and development of real estate

 

(71,009

)

(132,436

)

Lease commissions and tenant and capital improvements

 

(27,321

)

(44,734

)

Proceeds from sales of real estate, net

 

58,046

 

629,404

 

Contributions to unconsolidated joint ventures

 

(48

)

(2,620

)

Distributions in excess of earnings from unconsolidated joint ventures

 

5,775

 

8,727

 

Purchase of marketable securities

 

 

(26,101

)

Proceeds from the sale of marketable securities

 

119,665

 

10,700

 

Proceeds from the sales of interests in unconsolidated joint ventures

 

 

2,855

 

Principal repayments on loans receivable and direct financing leases

 

8,654

 

14,590

 

Investments in loans receivable, net

 

(165,506

)

(2,863

)

Decrease (increase) in restricted cash

 

3,090

 

(883

)

Net cash provided by (used in) investing activities

 

(68,654

)

456,639

 

Cash flows from financing activities:

 

 

 

 

 

Net repayments under bank line of credit

 

(150,000

)

(951,700

)

Repayments of bridge loan

 

(320,000

)

(830,000

)

Repayments of mortgage debt

 

(206,329

)

(63,740

)

Issuance of mortgage debt

 

1,942

 

579,078

 

Repurchase and repayments of senior unsecured notes

 

(7,735

)

(300,000

)

Settlement of cash flow hedge

 

 

(9,658

)

Debt issuance costs

 

(718

)

(10,068

)

Net proceeds from the issuance of common stock and exercise of options

 

846,135

 

1,060,236

 

Dividends paid on common and preferred stock

 

(376,798

)

(337,097

)

Purchase of noncontrolling interests

 

(9,097

)

 

Distributions to noncontrolling interests

 

(11,662

)

(28,290

)

Net cash used in financing activities

 

(234,262

)

(891,239

)

Net increase in cash and cash equivalents

 

86,804

 

20,783

 

Cash and cash equivalents, beginning of period

 

57,562

 

96,269

 

Cash and cash equivalents, end of period

 

$

144,366

 

$

117,052

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

6



Table of Contents

 

HCP, INC.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(1)    Business

 

HCP, Inc. is a Maryland corporation that is organized to qualify as a self-administered 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. The Company acquires, develops, leases, disposes and manages healthcare real estate and provides financing to healthcare providers.

 

(2)    Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) as updated by the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2009.

 

Use of Estimates

 

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 financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of HCP, its wholly-owned subsidiaries and joint ventures that it controls, through voting rights or other means. All material intercompany transactions and balances have been eliminated in consolidation.

 

At inception of joint venture transactions, the Company identifies entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and determines which business enterprise is the primary beneficiary of the VIE. A variable interest entity is broadly defined as an entity where either (i) the equity investors as a group, if any, do not have a controlling financial interest, or (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support. The Company consolidates investments in VIEs when it is determined to be the primary beneficiary at either the creation of the VIE or upon the occurrence of a qualifying reconsideration event. Qualifying reconsideration events include, but are not limited to, the modification of contractual arrangements that affect the characteristics or adequacy of the entity’s equity investments at risk and the disposal of all or a portion of an interest held by the primary beneficiary. At September 30, 2009, the Company did not consolidate any significant variable interest entities.

 

The Company uses qualitative and quantitative approaches when determining whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to, the form of the Company’s ownership interest, its representation on the entity’s governing body, the size and seniority of its investment, various cash flow scenarios related to the VIE, its ability to participate in policy making decisions and the rights of the other investors to participate in the decision making process and to replace the Company as manager and/or liquidate the venture, if applicable .

 

At September 30, 2009, the Company had 60 properties leased to a total of eight tenants (‘‘VIE tenants’’) and a loan to a borrower where each tenant and borrower has been identified as a VIE. The Company acquired these leases and loan on October 5, 2006 in its merger with CNL Retirement Properties, Inc. (‘‘CRP’’). CRP determined it was not the primary

 

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beneficiary of these VIEs, and the Company is required to carry forward CRP’s accounting conclusions after the acquisition relative to their primary beneficiary assessments, provided the Company does not believe CRP’s accounting to be in error. The Company believes that its accounting for the VIEs is the appropriate application of GAAP. On December 21, 2007, the Company made an investment of approximately $900 million in mezzanine loans where each mezzanine borrower has been identified as a VIE. The Company has also determined that it is not the primary beneficiary of these VIEs.

 

The carrying value and classification of the related assets, liabilities and maximum exposure to loss as a result of the Company’s involvement with VIEs are presented below (in thousands):

 

VIE Type

 

Maximum Loss
Exposure(1)

 

Asset/Liability Type

 

Carrying
Value

 

VIE tenants—operating leases

 

$

483,758

 

Lease intangibles, net and straight-
line rent receivables

 

$

7,550

 

VIE tenants—DFLs(2)

 

650,000

 

Net investment in DFLs

 

215,137

 

Senior secured loans

 

81,322

 

Loans receivable, net

 

81,322

 

Mezzanine loans

 

929,942

 

Loans receivable, net

 

929,942

 

 


(1)    The Company’s maximum loss exposure related to the VIE tenants represents the future minimum lease payments over the remaining term of the respective leases, which may be mitigated by re-leasing the properties to new tenants. The Company’s maximum loss exposure related to loans to VIEs represents their current aggregate carrying value.

(2)    Direct financing leases (“DFLs”).

 

See Notes 6 and 11 for additional description of the nature, purpose and activities of the Company’s VIEs and interests therein.

 

For its investments in joint ventures, the Company evaluates the type of rights held by the limited partner(s), which may preclude consolidation in circumstances in which the sole general partner would otherwise consolidate the limited partnership. The assessment of limited partners’ rights and their impact on the presumption of control over limited partnership by the sole general partner should be made when an investor becomes the sole general partner and should be reassessed if (i) there is a change to the terms or in the exercisability of the rights of the limited partners, (ii) the sole general partner increases or decreases its ownership in the limited partnership interests, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. The Company similarly evaluates the rights of managing members of limited liability companies.

 

Investments in Unconsolidated Joint Ventures

 

Investments in entities which the Company does not consolidate but for which the Company has the ability to exercise significant influence over operating and financial policies are reported under the equity method of accounting. Under the equity method of accounting, the Company’s share of the investee’s earnings or losses are included in the Company’s consolidated results of operations.

 

The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the carrying value of the assets prior to the sale of interests in the joint venture. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference is generally amortized over the lives of the related assets and liabilities and included in the Company’s share of equity in earnings of the joint venture. The Company evaluates its equity method investments for impairment based upon a comparison of the estimated fair value of the equity method investment to its carrying value. When the Company determines a decline in the estimated fair value of an investment in an unconsolidated joint venture below its carrying value is other-than-temporary, an impairment is recorded. The Company recognizes gains on the sale of interests in joint ventures to the extent the economic substance of the transaction is a sale.

 

Revenue Recognition

 

The Company recognizes rental revenue from tenants on a straight-line basis over the lease term when collectibility is reasonably assured and the tenant has taken possession or controls the physical use of the leased asset. For assets acquired subject to leases, the Company recognizes revenue upon acquisition of the asset provided the tenant has taken possession or controls the physical use of the leased asset. If the lease provides for tenant improvements, the Company determines whether the tenant improvements, for accounting purposes, are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical use of the leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant

 

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improvements, any tenant improvement allowance that is funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Tenant improvement ownership is determined based on various factors including, but not limited to:

 

·       whether the lease stipulates how and on what a tenant improvement allowance may be spent;

 

·       whether the tenant or landlord retains legal title to the improvements at the end of the lease term;

 

·       whether the tenant improvements are unique to the tenant or general-purpose in nature; and

 

·       whether the tenant improvements are expected to have any residual value at the end of the lease .

 

Certain leases provide for additional rents contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. Such revenue is recognized only after the contingency has been removed (when the related thresholds are achieved), which may result in the recognition of rental revenue in periods subsequent to when such payments are received.

 

Tenant recoveries related to reimbursement of real estate taxes, insurance, repairs and maintenance, and other operating expenses are recognized as revenue in the period the applicable expenses are incurred. The reimbursements are recognized and presented gross, as the Company is generally the primary obligor with respect to purchasing goods and services from third-party suppliers, has discretion in selecting the supplier and bears the associated credit risk.

 

For leases with minimum scheduled rent increases, the Company recognizes income on a straight-line basis over the lease term when collectibility is reasonably assured. Recognizing rental income on a straight-line basis for leases results in recognized revenue exceeding amounts contractually due from tenants. Such cumulative excess amounts are included in other assets and were $151 million and $112 million, net of allowances, at September 30, 2009 and December 31, 2008, respectively. If the Company determines that collectibility of straight-line rents is not reasonably assured, the Company limits future recognition to amounts contractually owed and paid, and, when appropriate, establishes an allowance for estimated losses . The results for the three and nine months ended September 30, 2008 include lease termination fees of $18 million from a tenant in connection with the early termination of three leases on July 30, 2008 in the Company’s life science segment.

 

The Company maintains an allowance for doubtful accounts, including an allowance for straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. The Company monitors the liquidity and creditworthiness of its tenants and operators on an ongoing basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent amounts, the Company’s assessment is based on amounts estimated to be recoverable over the term of the lease. At September 30, 2009 and December 31, 2008, the Company had an allowance of $54 million and $40 million, respectively, included in other assets, as a result of the Company’s determination that collectibility is not reasonably assured for certain straight-line rent amounts .

 

The Company receives management fees from its investments in certain joint venture entities for various services provided as the managing member of the entities. Management fees are recorded as revenue when management services have been performed. Intercompany profit for management fees is eliminated.

 

The Company recognizes gains on sales of properties upon the closing of the transaction with the purchaser. Gains on properties sold are recognized using the full accrual method when the collectibility of the sales price is reasonably assured, the Company is not obligated to perform significant activities after the sale, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gains on sales of properties may be deferred in whole or in part until the requirements for gain recognition have been met.

 

The Company uses the direct finance method of accounting to record income from DFLs. For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. The difference between the future minimum lease payments and the estimated residual values less the cost of the properties is recorded as unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectibility of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized unearned income.

 

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Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held-for-investment are carried at amortized cost and are reduced by a valuation allowance for estimated credit losses as necessary. The Company recognizes interest income on loans, including the amortization of discounts and premiums, using the effective interest method. The effective interest method is applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums and discounts are recognized as yield adjustments over the life of the related loans. Loans are transferred from held-for-investment to held-for-sale when management’s intent is to no longer hold the loans for the foreseeable future. Loans held-for-sale are recorded at the lower of cost or estimated fair value.

 

Allowances are established for loans and DFLs based upon an estimate of probable losses for the individual loans and DFLs deemed to be impaired. Loans and DFLs are impaired when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. The allowance is based upon the Company’s assessment of the borrower’s or lessee’s overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the realizable value of any collateral. These estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at the loan’s or DFL’s effective interest rate, the estimated fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors.

 

Loans and DFLs are placed on non-accrual status when management determines that the collectibility of contractual amounts is not reasonably assured. While on non-accrual status, loans or DFLs are either accounted for on a cash basis, in which income is recognized only upon receipt of cash, or on a cost-recovery basis, in which all cash receipts reduce the carrying value of the loan or DFL, based on the Company’s judgment of future collectibility.

 

Real Estate

 

Real estate, consisting of land, buildings and improvements, is recorded at cost. The Company allocates the cost of the acquisition, including the assumption of liabilities, to the acquired tangible assets and identifiable intangibles based on their estimated fair values. The Company assesses fair value based on estimated cash flow projections that utilize appropriate discount and/or capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, and market and economic conditions. The estimated fair value of tangible assets of an acquired property is based on the value of the property as if it was vacant .

 

The Company records acquired “above and below” market leases at an estimated fair value using discount rates which reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the extended term for any leases with below market renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related costs .

 

The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the acquisition, development or construction of a real estate project. The Company capitalizes construction and development costs while substantive activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. For redevelopment of existing operating properties, the Company capitalizes costs based on the net carrying value of the existing property under redevelopment plus the cost for the construction and improvement incurred in connection with the redevelopment. Costs previously capitalized related to abandoned acquisitions or developments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred . The Company considers costs incurred in conjunction with re-leasing properties, including tenant improvements and lease commissions, to represent the acquisition of productive assets and, accordingly, such costs are reflected as investment activities in the Company’s statement of cash flows.

 

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The Company computes depreciation on properties using the straight-line method over the assets’ estimated useful life. Depreciation is discontinued when a property is identified as held-for-sale. Buildings and improvements are depreciated over useful lives ranging up to 45 years. Above and below market lease intangibles are amortized primarily to revenue over the remaining noncancellable lease terms and bargain renewal periods, if any. Other in-place lease intangibles are amortized to expense over the remaining noncancellable lease term and bargain renewal periods, if any.

 

Impairment of Long-Lived Assets and Goodwill

 

The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”), whenever events or changes in circumstances indicate that the carrying value of such asset or asset group may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected undiscounted cash flows to the carrying value of the real estate asset or asset group. If the carrying value exceeds the expected undiscounted cash flows, an impairment loss will be recognized by adjusting the carrying value of the real estate assets to their estimated fair value .

 

Goodwill is tested for impairment at least annually and whenever the Company identifies triggering events that may indicate an impairment has occurred by applying a two-step approach. Potential impairment indicators include a significant decline in real estate valuations, restructuring plans or a decline in the Company’s market capitalization below its carrying value. The Company tests for impairment of its goodwill by comparing the estimated fair value of a reporting unit containing goodwill to its carrying value. If the carrying value exceeds the estimated fair value, the second step of the test is needed to measure the amount of potential goodwill impairment. The second step requires the estimated fair value of the reporting unit to be allocated to all the assets and liabilities of the reporting unit as if it had been acquired in a business combination at the date of the impairment test. The excess estimated fair value of the reporting unit over the estimated fair value of assets and liabilities is the implied value of goodwill and is used to determine the amount of impairment. The Company selected the fourth quarter of each fiscal year to perform its annual impairment test .

 

Assets Held for Sale and Discontinued Operations

 

Certain long-lived assets are classified as held-for-sale and are reported at the lower of their carrying value or their estimated fair value less costs to sell and are no longer depreciated. Discontinued operations is a component of an entity that has either been disposed of or is deemed to be held for sale if, (i) the operations and cash flows of the component have been or will be eliminated from ongoing operations as a result of the disposal transaction, and (ii) the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction.

 

Stock-Based Compensation

 

Share-based compensation expense for share-based awards granted on or after January 1, 2006 to employees, including grants of employee stock options, are recognized in the statement of operations based on their estimated fair value. Compensation expense for awards with graded vesting is generally recognized ratably over the period from the date of grant to the date when the award is no longer contingent on the employee providing additional services.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on hand and short-term investments with original maturities of three months or less when purchased . The Company maintains cash deposits with major financial institutions which periodically exceed the Federal Deposit Insurance Corporation insurance limit. The Company has not experienced any losses to date related to cash or cash equivalents .

 

Restricted Cash

 

Restricted cash primarily consists of amounts held by mortgage lenders to provide for (i) future real estate tax expenditures, tenant improvements and capital expenditures, and (ii) security deposits and net proceeds from property sales that were executed as tax-deferred dispositions.

 

Derivatives

 

During its normal course of business, the Company uses certain types of derivative instruments for the purpose of managing interest rate risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions.

 

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The Company recognizes all derivative instruments, including embedded derivatives required to be bifurcated, as assets or liabilities in the Company’s condensed consolidated balance sheets at their estimated fair value. Changes in the estimated fair value of derivative instruments that are not designated as hedges or that do not meet the criteria of hedge accounting are recognized in earnings. For derivatives designated in qualifying cash flow hedging relationships, the change in the estimated fair value of the effective portion of the derivatives is recognized in accumulated other comprehensive income (loss), whereas the change in the estimated fair value of the ineffective portion is recognized in earnings. For derivatives designated in qualifying fair value hedging relationships, the change in the estimated fair value of the effective portion of the derivatives offsets the change in the estimated fair value of the hedged item, whereas the change in the estimated fair value of the ineffective portion is recognized in earnings.

 

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategy for undertaking various hedge transactions. This process includes designating all derivatives that are part of a hedging relationship to specific forecasted transactions as well as recognized obligations or assets in the balance sheet. The Company also assesses and documents, both at inception of the hedging relationship and on a quarterly basis thereafter, whether the derivatives that are designated in hedging transactions are highly effective in offsetting the designated risks associated with the respective hedged items. When it is determined that a derivative ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues hedge accounting prospectively and records the appropriate adjustment to earnings based on the current estimated fair value of the derivative.

 

Income Taxes

 

In 1985, HCP, Inc. elected REIT status and believes it has always operated so as to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue code of 1986, as amended (the “Code”). Accordingly, HCP, Inc. will not be subject to U.S. federal income tax, provided that it continues to qualify as a REIT and makes distributions to stockholders equal to or in excess of its taxable income. On July 27, 2007, the Company formed HCP Life Science REIT, a consolidated subsidiary, which elected REIT status for the year ended December 31, 2007. HCP, Inc., along with its consolidated REIT subsidiary, are each subject to the REIT qualification requirements under Sections 856 to 860 of the Code. If either REIT fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may be ineligible to qualify as a REIT for four subsequent tax years .

 

HCP, Inc. and HCP Life Science REIT are subject to state and local income taxes in some jurisdictions, and in certain circumstances each REIT may also be subject to federal excise taxes on undistributed income. In addition, certain activities the Company undertakes must be conducted by entities which elect to be treated as taxable REIT subsidiaries (“TRSs”). TRSs are subject to both federal and state income taxes.

 

Marketable Securities

 

The Company classifies its marketable equity and debt securities as available-for-sale. These securities are carried at their estimated fair value with unrealized gains and losses recognized in stockholders’ equity as a component of accumulated other comprehensive income (loss). Gains or losses on securities sold are determined based on the specific identification method. When the Company determines declines in the estimated fair value of marketable securities are other-than-temporary, a loss is recognized in earnings.

 

Capital Raising Issuance Costs

 

Costs incurred in connection with the issuance of common shares are recorded as a reduction of additional paid-in capital. Costs incurred in connection with the issuance of preferred shares are recorded as a reduction of the preferred stock amount. Debt issuance costs are deferred, included in other assets and amortized to interest expense over the remaining term of the related debt based on the effective interest method.

 

Segment Reporting

 

The Company’s segments are based on its internal method of reporting which classifies operations by healthcare sector. The Company’s business operations include five segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) hospital and (v) skilled nursing.

 

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Noncontrolling Interests and Mandatorily Redeemable Financial Instruments

 

The Company reports arrangements with noncontrolling interests as a component of equity separate from the parent’s equity. The Company accounts for purchases or sales of equity interests that do not result in a change in control as equity transactions. In addition, net income attributable to the noncontrolling interest is included in consolidated net income (loss) on the face of the statement of operations and, upon a gain or loss of control, the interest purchased or sold, as well as any interest retained, is recorded at its estimated fair value with any gain or loss recognized in earnings.

 

As of September 30, 2009, there were 4.3 million non-managing member units outstanding in six limited liability companies (“LLC”), for all of which the Company is the managing member: (i) HCPI/Tennessee, LLC; (ii) HCPI/Utah, LLC; (iii) HCPI/Utah II, LLC; (iv) HCP DR California, LLC; (v) HCP DR Alabama, LLC; and (vi) HCP DR MCD, LLC. The Company consolidates these entities since it exercises control and carries the noncontrolling interests at cost. The non-managing member LLC Units (“DownREIT units”) are exchangeable for an amount of cash approximating the then-current market value of shares in the Company’s common stock or, at the Company’s option, shares of the Company’s common stock (subject to certain adjustments, such as stock splits and reclassifications). At September 30, 2009, the carrying and market values of the 4.3 million DownREIT units were $172 million and $170 million, respectively. The market value of DownREIT units correlates to the changes in market value of our common stock and not the market value of the respective assets owned by the DownREIT LLCs.

 

Life Care Bonds Payable

 

Two of the Company’s continuing care retirement communities (“CCRCs”) issue non-interest bearing life care bonds payable to certain residents of the CCRCs. Generally, the bonds are refundable to the resident or to the resident’s estate upon termination or cancellation of the CCRC agreement. An additional senior housing facility owned by the Company collects non-interest bearing occupancy fee deposits that are refundable to the resident or the resident’s estate upon the earlier of the re-letting of the unit or after two years of vacancy. Proceeds from the issuance of new bonds are used to retire existing bonds, and since the maturity of the obligations for the three facilities is not determinable, no interest is imputed. These amounts are included in other debt in the Company’s condensed consolidated balance sheets.

 

Fair Value Measurements

 

The Company measures and discloses the estimated fair value of financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy:

 

·       Level 1 — quoted prices for identical instruments in active markets;

 

·       Level 2 — quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and

 

·       Level 3 — fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable .

 

The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at their estimated fair value on either a recurring or non-recurring basis. When available, the Company utilizes quoted market prices from an independent third party source to determine fair value and classifies such items in Level 1. In some instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies the asset or liability in Level 2.

 

If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads, market capitalization rates, etc. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow and Black Scholes valuation models. The Company also considers its counterparty’s and own credit risk on derivatives and other liabilities measured at fair value.  The Company has elected the mid-market pricing expedient when determining fair value.

 

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Earnings per Share

 

Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is calculated by including the effect of dilutive securities.

 

On January 1, 2009, the Company adopted the participating securities provision of Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) 260-10, Earnings Per Share - Overall (“ASC 260-10”). ASC 260-10 addresses whether instruments granted in share-based payment awards are participating securities prior to vesting, and therefore, need to be included in the earnings allocation when computing earnings per share under the two-class method as described in ASC 260-10. In accordance with ASC 260-10, unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. Upon adoption, all prior-period earnings per share data presented was adjusted retrospectively with no material impact.

 

Recent Accounting Pronouncements

 

In April 2009, the FASB issued additional disclosure provisions of ASC 825-10, Financial Instruments — Overall (“ASC 825-10”). ASC 825-10 requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies in addition to the annual financial statements. ASC 825-10 is effective for interim periods ending after June 15, 2009. Prior period presentation is not required for comparative purposes at initial adoption. The adoption of ASC 825-10 on June 30, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In April 2009, the FASB issued an amendment to ASC 320-10, Investment-Debt and Equity Securities — Overall (“ASC 320-10”). ASC 320-10 amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The amended provision of ASC 320-10 is effective for fiscal years and interim periods ending after June 15, 2009. The adoption of ASC 320-10 on June 30, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In April 2009, the FASB issued an amendment to ASC 820-10, Fair Value Measurements and Disclosures — Overall (“ASC 820-10”). ASC 820-10 provides additional guidance for estimating fair value when the volume and level of activity for both financial and nonfinancial assets or liabilities have significantly decreased. ASC 820-10 is effective for fiscal years and interim periods ending after June 15, 2009 and shall be applied prospectively. The adoption of ASC 820-10 on June 30, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In May 2009, the FASB issued ASC 855, Subsequent Events (“ASC 855”). ASC 855 provides general guidelines to account for the disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. These guidelines are consistent with current accounting requirements, but clarify the period, circumstances, and disclosures for properly identifying and accounting for subsequent events. ASC 855 is effective for interim periods and fiscal years ending after June 15, 2009. The adoption of ASC 855 on June 30, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)  (“SFAS No. 167”). SFAS No. 167 requires enterprises to perform a more qualitative approach to determining whether or not a variable interest entity will need to be consolidated on a quarterly basis. This evaluation will be based on an enterprise’s ability to direct and influence the activities of a variable interest entity that most significantly impact its economic performance. SFAS No. 167 is effective for interim periods and fiscal years beginning after November 15, 2009. Early adoption is not permitted. The Company is currently evaluating the impact of SFAS No. 167 on its consolidated financial position and results of operations.

 

In June 2009, the FASB Accounting Standards Codification (the “Codification”) was issued in the form of ASC 105, Generally Accepted Accounting Principles (“ASC 105”). Upon issuance, the Codification became the single source of authoritative, nongovernmental US GAAP. The Codification reorganized U.S. GAAP pronouncements into accounting topics, which are displayed using a single structure. Certain SEC guidance is also included in the Codification and will follow a similar topical structure in separate SEC sections. ASC 150 is effective for interim periods and fiscal years ending after September 15, 2009. The adoption of the Codification on September 30, 2009 did not have a material impact on the Company’s consolidated financial position or results of operations.

 

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Reclassifications

 

Certain amounts in the Company’s condensed consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. Assets sold or held for sale and associated liabilities have been reclassified on the condensed consolidated balance sheets and operating results reclassified from continuing to discontinued operations (see Note 4). All prior period noncontrolling interests on the condensed consolidated balance sheets have been reclassified as a component of equity and all prior period noncontrolling interests’ share of earnings on the condensed consolidated statements of operations have been reclassified to clearly identify net income attributable to the non-controlling interest.

 

(3)          Real Estate Property Investments

 

During the nine months ended September 30, 2009, the Company funded an aggregate of $86 million for construction, tenant and other capital improvement projects primarily in the life science segment.

 

During the nine months ended September 30, 2008, the Company acquired a senior housing facility for $11 million, purchased a joint venture interest valued at $29 million and funded an aggregate of $126 million for construction, tenant and capital improvement projects primarily in the life science and medical office segments.

 

(4)    Dispositions of Real Estate and Discontinued Operations

 

Dispositions of Real Estate

 

During the three months ended September 30, 2009, the Company sold two medical office buildings (“MOBs”) for approximately $6 million and recognized gain on sales of real estate of $2.5 million. During the three months ended September 30, 2008, the Company sold three hospitals for approximately $ 116 million and recognized gain on sales of real estate of approximately $28 million. The hospitals sold in 2008 included a hospital located in Tarzana, California, which was sold for $89 million resulting in a gain on sale of real estate of $18 million.

 

During the nine months ended September 30, 2009, the Company sold 11 properties for $58 million and recognized gain on sales of real estate of $34.4 million. The Company’s sales of properties during the nine months ended September 30, 2009 were made from the following segments: (i) 81% hospital; (ii) 18% medical office; and (iii) 1% senior housing. During the nine months ended September 30, 2008, the Company sold 47 properties for approximately $ 629 million and recognized gain on sales of real estate of approximately $228 million. The Company’s sales of properties during the nine months ended September 30, 2008 were made from the following segments: (i) 68% hospital; (ii) 15% skilled nursing; (iii) 14% medical office; and (iv) 3% senior housing.

 

Properties Held for Sale

 

At September 30, 2009, the Company held for sale one property with a carrying value of $4 million. At December 31, 2008, the Company held for sale 12 properties with an aggregate carrying value of $27 million.

 

Results from Discontinued Operations

 

The following table summarizes operating income from discontinued operations and gain on sales of real estate included in discontinued operations (dollars in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Rental and related revenues

 

$

150

 

$

5,912

 

$

2,836

 

$

34,792

 

Other revenues

 

 

29

 

 

51

 

 

 

150

 

5,941

 

2,836

 

34,843

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization expenses

 

56

 

414

 

266

 

7,178

 

Operating expenses

 

225

 

1,282

 

617

 

6,687

 

Other costs and expenses

 

21

 

954

 

50

 

1,820

 

Income (loss) before gain on sales of real estate, net of income taxes

 

$

(152

)

$

3,291

 

$

1,903

 

$

19,158

 

 

 

 

 

 

 

 

 

 

 

Impairments

 

$

 

$

 

$

125

 

$

8,141

 

 

 

 

 

 

 

 

 

 

 

Gain on sales of real estate

 

$

2,460

 

$

27,752

 

$

34,357

 

$

228,395

 

 

 

 

 

 

 

 

 

 

 

Number of properties held for sale

 

1

 

16

 

1

 

16

 

Number of properties sold

 

2

 

3

 

11

 

47

 

Number of properties included in discontinued operations

 

3

 

19

 

12

 

63

 

 

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Table of Contents

 

(5)          Net Investment in Direct Financing Leases

 

The components of net investment in DFLs consist of the following (dollars in thousands ):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Minimum lease payments receivable

 

$

1,330,836

 

$

1,373,283

 

Estimated residual values

 

467,248

 

467,248

 

Allowance for DFL losses (impairments)

 

(15,123

)

 

Unearned income

 

(1,148,728

)

(1,192,297

)

Net investment in direct financing leases

 

$

634,233

 

$

648,234

 

Properties subject to direct financing leases

 

30

 

30

 

 

The DFLs were acquired in the Company’s merger with CRP. CRP determined that these leases were DFLs, and the Company is required to carry forward CRP’s accounting conclusions after the acquisition date relative to their assessment of these leases, provided that the Company does not believe CRP’s accounting to be in error. The Company believes that its accounting for the leases is appropriate and in accordance with GAAP. Certain leases contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms.

 

Lease payments due to the Company relating to three DFLs with a carrying value of $38 million at September 30, 2009, are subordinate to, and along with the Company’s interest in the land, serve as collateral for first mortgage construction loans entered into by the tenants to fund development costs related to the properties. During the three months ended December 31, 2008, the Company determined that two of these DFLs were impaired and began recognizing income on a cost-recovery basis. During the three months ended September 30, 2009, the Company recognized provisions for DFL losses of $15.1 million, which reduces the carrying value of these DFLs to $19 million. These provisions for DFL losses reflect the anticipated restructure of these leases resulting from the bankruptcy of the lessee. On October 19, 2009, the lessees of all three DFLs filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. The Company includes provisions for DFL losses in impairments in its consolidated statements of operations.

 

(6)    Loans Receivable

 

The following table summarizes the Company’s loans receivable (in thousands):

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Real Estate
Secured

 

Other

 

Total

 

Real Estate
Secured

 

Other

 

Total

 

Mezzanine

 

$

 

$

999,118

 

$

999,118

 

$

 

$

999,891

 

$

999,891

 

Joint venture partners

 

 

778

 

778

 

 

7,055

 

7,055

 

Other

 

785,636

 

83,700

 

869,336

 

71,224

 

81,725

 

152,949

 

Unamortized discounts, fees and costs

 

(123,920

)

(70,983

)

(194,903

)

 

(83,262

)

(83,262

)

Loan loss allowance

 

 

 

 

 

(241

)

(241

)

 

 

$

661,716

 

$

1,012,613

 

$

1,674,329

 

$

71,224

 

$

1,005,168

 

$

1,076,392

 

 

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Table of Contents

 

On October 5, 2006, through its merger with CRP, the Company acquired an interest-only, senior secured term loan made to an affiliate of the Cirrus Group, LLC (“Cirrus”). The loan had a maturity date of December 31, 2008, with a one-year extension period at the option of the borrower, subject to certain conditions, under which amounts were borrowed to finance the acquisition, development, syndication and operation of new and existing surgical partnerships. The loan accrues interest at a rate of 14.0%, of which 9.5% is payable monthly and the balance of 4.5% is deferred until maturity. The loan is collateralized by all of the assets of the borrower (comprised primarily of interests in partnerships operating surgical facilities, some of which are on the premises of properties owned by HCP Ventures IV or the Company) and is supported in part by limited guarantees made by certain principals of Cirrus. Recourse under certain of these guarantees is limited to the guarantors’ respective interests in certain entities owning real estate that are pledged to secure such guarantees. At December 31, 2008, the borrower did not meet the conditions necessary to exercise its extension option and did not repay the loan upon maturity. On April 22, 2009, new terms for extending the maturity date of the loan were agreed to, including the payment of a $1.1 million extension fee, and the maturity was extended to December 31, 2010. At September 30, 2009 and December 31, 2008, the carrying value of this loan, including accrued interest of $3 million and $0.6 million, respectively, was $85 million and $80 million, respectively. In July 2009, the Company issued a notice of default for the borrower’s failure to make interest payments. Through September 30, 2009 the borrower has failed to make four of its contractual payments. However, at September 30, 2009, the Company continues to maintain this loan on accrual status as the Company believes it is reasonably assured it will collect all amounts outstanding under the loan, including accrued but unpaid interest, based on the estimated fair value of underlying collateral and guarantees supporting the loan. During the three and nine months ended September 30, 2009, the Company recognized interest income from this loan of $3.2 million and $9.1 million, respectively, and received cash payments from this borrower of $0.6 million and $3.0 million, respectively.

 

On December 21, 2007, the Company made an investment in mezzanine loans having an aggregate face value of $1.0 billion, for approximately $900 million, as part of the financing for The Carlyle Group’s $6.3 billion purchase of HCR ManorCare. These interest-only loans mature in January 2013 and bear interest on their face values at a floating rate of one-month London Interbank Offered Rate (“LIBOR”) plus 4.0%. These loans are mandatorily pre-payable in January 2012 unless the borrower satisfies certain performance conditions. At closing, the loans were secured by an indirect pledge of equity ownership in 339 HCR ManorCare facilities located in 30 states and were subordinate to other debt of approximately $3.6 billion. At September 30, 2009, the carrying value of these loans was $930 million.

 

On August 3, 2009, the Company purchased a $720 million participation in first mortgage debt of HCR ManorCare, at a discount of $130 million, for approximately $590 million. The $720 million participation bears interest at LIBOR plus 1.25% and represents 45% of the $1.6 billion most senior tranche of HCR ManorCare’s mortgage debt incurred as part of the above mentioned financing for The Carlyle Group’s acquisition of Manor Care, Inc. in December 2007. The mortgage debt matures in January 2012, with a one-year extension available at the borrower’s option subject to certain performance conditions, and was secured by a first lien on 331 facilities located in 30 states at closing. At September 30, 2009, the carrying value of the participation in this loan was $595 million.

 

(7)    Investments in and Advances to Unconsolidated Joint Ventures

 

The Company owns interests in the following entities which are accounted for under the equity method at September 30, 2009 (dollars in thousands):

 

Entity(1)

 

Properties

 

Investment (2)

 

Ownership%

 

HCP Ventures II

 

25 senior housing facilities

 

$

139,064

 

35

 

HCP Ventures III, LLC

 

13 MOBs

 

11,092

 

30

 

HCP Ventures IV, LLC

 

54 MOBs and 4 hospitals

 

41,284

 

20

 

HCP Life Science (3)

 

4 life science facilities

 

63,991

 

50 - 63

 

Suburban Properties, LLC

 

1 MOB

 

3,727

 

67

 

Advances to unconsolidated joint ventures, net

 

 

 

2,206

 

 

 

 

 

 

 

$

261,364

 

 

 

Edgewood Assisted Living Center, LLC (4)(5)

 

1 senior housing facility

 

$

(488

)

45

 

Seminole Shores Living Center, LLC (4)(5)

 

1 senior housing facility

 

(888

)

50

 

 

 

 

 

$

259,988

 

 

 

 


(1)          These joint ventures are not consolidated since the Company does not control, through voting rights or other means, the joint ventures. See Note 2 regarding the Company’s policy on consolidation.

(2)          Represents the carrying value of the Company’s investment in the unconsolidated joint venture. See Note 2 regarding the Company’s policy for accounting for joint venture interests.

(3)          Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following partnerships: (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

(4)          As of September 30, 2009, the Company has guaranteed in the aggregate $4 million of a total of $8 million of notes payable for these joint ventures. No amounts have been recorded related to these guarantees at September 30, 2009.

(5)          Negative investment amounts are included in accounts payable and accrued liabilities.

 

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Table of Contents

 

Summarized combined financial information for the Company’s unconsolidated joint ventures follows (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Real estate, net

 

$

1,659,879

 

$

1,703,308

 

Other assets, net

 

192,210

 

184,297

 

Total assets

 

$

1,852,089

 

$

1,887,605

 

 

 

 

 

 

 

Notes payable

 

$

1,162,994

 

$

1,172,702

 

Accounts payable

 

44,526

 

39,883

 

Other partners’ capital

 

465,557

 

488,860

 

HCP’s capital (1)

 

179,012

 

186,160

 

Total liabilities and partners’ capital

 

$

1,852,089

 

$

1,887,605

 

 


(1)           Aggregate basis difference of the Company’s investments in these joint ventures of $79 million, as of September 30, 2009, is primarily attributable to real estate and related intangible assets.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008 (1)

 

Total revenues

 

$

46,366

 

$

46,522

 

$

138,833

 

$

138,938

 

Net income (loss)

 

2

 

1,615

 

(1,093

)

5,408

 

HCP’s equity income

 

1,328

 

1,227

 

1,993

 

3,736

 

Fees earned by HCP

 

1,326

 

1,523

 

4,133

 

4,448

 

Distributions received, net

 

4,202

 

4,208

 

11,219

 

12,463

 

 


(1)           Includes the financial information of Arborwood Living Center, LLC and Greenleaf Living Centers, LLC, which were sold on April 3, 2008 and June 12, 2008, respectively.

 

(8)          Intangibles

 

At September 30, 2009 and December 31, 2008, intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles, below market ground lease intangibles and intangible assets related to non-compete agreements, were $617 million and $680 million, respectively. At September 30, 2009 and December 31, 2008, the accumulated amortization of intangible assets was $207 million and $174 million, respectively.

 

At September 30, 2009 and December 31, 2008, below market lease intangibles and above market ground lease intangibles were $289 million and $294 million, respectively. At September 30, 2009 and December 31, 2008, the accumulated amortization of intangible liabilities was $81 million and $61 million, respectively.

 

On October 5, 2006, the Company acquired CRP in a merger and, through the purchase method of accounting, it allocated $35 million of above-market lease intangibles related to 15 senior housing facilities that were operated by Sunrise Senior Living, Inc. and its subsidiaries (“Sunrise”).  In June 2009, in a subsequent review of the related calculations of the relative fair value of these lease intangibles, the Company noted valuation errors, which resulted in an aggregate overstatement of the above-market lease intangible assets and an understatement of building and improvements of $28 million. In the periods from October 5, 2006 through March 31, 2009, these errors resulted in an understatement of rental and related revenues and depreciation expense of approximately $6 million and $2 million, respectively.  The Company recorded the related corrections in June 2009, and determined that such misstatements to the Company’s results of operations or financial position during the periods from October 5, 2006 through June 30, 2009 were immaterial.

 

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Table of Contents

 

(9)          Other Assets

 

The Company’s other assets consisted of the following (in thousands):

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

Marketable debt securities

 

$

201,163

 

$

228,660

 

Marketable equity securities

 

3,931

 

3,845

 

Straight-line rent assets, net

 

151,132

 

112,038

 

Deferred debt issuance costs, net

 

19,909

 

23,512

 

Goodwill

 

50,346

 

51,746

 

Other

 

91,123

 

73,382

 

Total other assets

 

$

517,604

 

$

493,183

 

 

The cost or amortized cost, estimated fair value and gross unrealized gains and losses on marketable securities follows (in thousands):

 

 

 

 

 

 

 

Gross Unrealized

 

 

 

Cost Basis (1)

 

Fair Value

 

Gains

 

Losses

 

September 30, 2009:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

195,830

 

$

201,163

 

$

7,033

 

$

(1,700

)

Equity securities

 

3,695

 

3,931

 

417

 

(181

)

Total investments

 

$

199,525

 

$

205,094

 

$

7,450

 

$

(1,881

)

 

 

 

 

 

 

 

 

 

 

December 31, 2008:

 

 

 

 

 

 

 

 

 

Debt securities

 

$

295,138

 

$

228,660

 

$

 

$

(66,478

)

Equity securities

 

4,181

 

3,845

 

 

(336

)

Total investments

 

$

299,319

 

$

232,505

 

$

 

$

(66,814

)

 


(1)           Represents the original cost basis of the marketable securities adjusted for discount accretion and other-than-temporary impairments recorded through earnings, if any.

 

At September 30, 2009, $176 million of the Company’s marketable debt securities accrue interest at 9.625% and mature in November 2016 and $20 million accrue interest at 9.25% and mature in May 2017 . The issuers of these notes may elect to pay interest in cash or by issuing additional notes for all or a portion of the interest payments. In November 2008, the issuer of the Company’s 9.625% debt securities elected to make its next interest payment by issuing additional notes, and in May 2009, the Company received $14 million of additional debt securities in lieu of its cash interest payment. In May 2009, the issuer of the Company’s 9.625% debt securities elected to make its next interest payment in cash.

 

Marketable securities with unrealized losses at September 30, 2009 are not considered to be other-than-temporarily impaired as the Company has the intent and ability to hold these investments for a period of time sufficient to allow for an anticipated recovery in fair value. In addition, it is not likely that the Company will be required to sell its marketable debt securities prior to the recovery of their amortized cost basis.

 

During the three months ended September 30, 2008, the Company purchased $26 million of senior secured notes with an aggregate par value of $27 million that accrue interest at 9.625% and mature in November 2016. During the three months ended September 30, 2009, the Company sold marketable debt securities for $115 million, which resulted in gains of approximately $6 million. During the nine months ended September 30, 2009 and 2008, the Company sold debt securities for $120 million and $11 million, respectively, which resulted in gains of approximately $7 million and $1 million, respectively. During the nine months ended September 30, 2008, the Company recognized a $3.5 million loss related to an other-than-temporary impairment on marketable equity securities with a carrying value of $8 million. Gains and losses and other-than-temporary impairment losses related to available-for-sale marketable securities are included in interest and other income, net in each respective period.

 

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Table of Contents

 

(10) Debt

 

Bank Line of Credit and Bridge and Term Loans

 

The Company’s revolving line of credit facility with a syndicate of banks provides for an aggregate borrowing capacity of $1.5 billion and matures on August 1, 2011. This revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 0.325% to 1.00%, depending upon the Company’s debt ratings. The Company pays a facility fee on the entire revolving commitment ranging from 0.10% to 0.25%, depending upon its debt ratings. Based on the Company’s debt ratings at September 30, 2009, the margin on the revolving line of credit facility was 0.55% and the facility fee was 0.15%. At September 30, 2009, the Company had no outstanding amounts under this revolving line of credit facility.

 

At September 30, 2009, the outstanding balance of the Company’s term loan was $200 million and matures on August 1, 2011. The term loan accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 1.825% to 2.375%, depending upon the Company’s debt ratings (weighted-average effective interest rate of 2.73% at September 30, 2009) . Based on the Company’s debt ratings at September 30, 2009 , the margin on the term loan was 2.00%.

 

The Company’s revolving line of credit 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 agreement (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 65%, (iii) require a Fixed Charge Coverage ratio of 1.75 times, and (iv) require a formula-determined Minimum Consolidated Tangible Net Worth of $4.9 billion at September 30, 2009. At September 30, 2009, the Company was in compliance with each of these restrictions and requirements of the revolving line of credit facility and term loan.

 

On May 8, 2009, the Company repaid the remaining $320 million outstanding balance under its bridge loan credit facility with proceeds received from the issuance of shares of its common stock.

 

Senior Unsecured Notes

 

At September 30, 2009, the Company had $3.5 billion in aggregate principal amount of senior unsecured notes outstanding. Interest rates on the notes ranged from 1.20% to 7.07%. The weighted-average effective interest rate on the senior unsecured notes at September 30, 2009 was 6.13%. Discounts and premiums are amortized to interest expense over the term of the related notes.

 

The senior unsecured notes contain certain covenants including limitations on debt, cross-acceleration provisions and other customary terms . At September 30, 2009, the Company was in compliance with these covenants.

 

Mortgage and Other Secured Debt

 

At September 30, 2009, the Company had $1.9 billion in mortgage debt secured by 168 healthcare facilities with a carrying value of $2.4 billion. Interest rates on the mortgage notes ranged from 0.33% to 8.63% with a weighted average effective rate of 5.10% at September 30, 2009.

 

On August 3, 2009, in connection with the Company’s purchase of a $720 million (face value) participation in first mortgage debt of HCR ManorCare, the Company incurred $425 million in secured debt financing. This debt matures in January 2013, subject to certain conditions, and is secured by the first mortgage debt participation. See Note 6 for additional disclosures regarding this participating interest pledged as collateral for this debt.

 

On August 27, 2009, the Company repaid early $100 million of variable-rate mortgage debt. The mortgage debt, with an original maturity of January 2010, was repaid with proceeds from the Company’s August 2009 public equity offering and third quarter asset sales.

 

Mortgage debt generally requires monthly principal and interest payments, is collateralized by certain properties and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered properties, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the properties in good condition, requires maintenance of insurance on the properties and includes requirements to obtain lender consent to enter into and terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple properties and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such properties.

 

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Table of Contents

 

Other Debt

 

At September 30, 2009, the Company had $99 million of non-interest bearing life care bonds at two of its CCRCs and non-interest bearing occupancy fee deposits at another of its senior housing facilities, all of which were payable to certain residents of the facilities (collectively, “Life Care Bonds”) . At September 30, 2009, $44 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $55 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.

 

Debt Maturities

 

The following table summarizes our stated debt maturities and scheduled principal repayments, excluding debt premiums and discounts, at September 30, 2009 (in thousands):

 

Year

 

Term Loan

 

Senior
Unsecured
Notes

 

Mortgage
and Other
Secured
Debt
(1)

 

Other
Debt
(2)

 

Total

 

2009 (3 months)

 

$

 

$

 

$

22,813

 

$

99,487

 

$

122,300

 

2010

 

 

206,421

 

115,046

 

 

321,467

 

2011

 

200,000

 

292,265

 

140,235

 

 

632,500

 

2012

 

 

250,000

 

63,776

 

 

313,776

 

2013

 

 

550,000

 

675,104

 

 

1,225,104

 

Thereafter

 

 

2,237,000

 

843,114

 

 

3,080,114

 

 

 

$

200,000

 

$

3,535,686

 

$

1,860,088

 

$

99,487

 

$

5,695,261

 

 


(1)

On October 15, 2009, the Company exercised its election to extend the maturity date of $86 million of mortgage debt from 2010 to 2015. The above table reflects the reclassification of the portion of the mortgage debt that was extended to September 2015.

(2)

Other debt represents non-interest bearing Life Care Bonds and occupancy fee deposits at three of the Company’s senior housing facilities, which are payable on-demand, under certain conditions.

 

(11) Commitments and Contingencies

 

Legal Proceedings

 

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. Regardless of their merits, these matters may force the Company to expend significant financial resources. Except as described in this Note 11, the Company is not aware of any other legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s business, prospects, financial condition or results of operations. The Company’s policy is to accrue legal expenses as they are incurred.

 

On May 3, 2007, Ventas, Inc. (“Ventas”) filed a complaint against the Company in the United States District Court for the Western District of Kentucky asserting claims of tortious interference with contract and tortious interference with prospective business advantage. The complaint alleged, among other things, that the Company interfered with Ventas’ purchase agreement with Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”); that the Company interfered with Ventas’ prospective business advantage in connection with the Sunrise REIT transaction; and that the Company’s actions caused Ventas to suffer damages. As part of the same litigation, the Company filed counterclaims against Ventas as successor to Sunrise REIT. On March 25, 2009, the District Court issued an order dismissing the Company’s counterclaims. On April 8, 2009, the Company filed a motion for leave to file amended counterclaims. On May 26, 2009, the District Court denied the Company’s motion.

 

Ventas sought approximately $300 million in compensatory damages plus punitive damages. On July 16, 2009, the District Court dismissed Ventas’s claim that HCP interfered with Ventas’s purchase agreement with Sunrise REIT, dismissed claims for compensatory damages based on alleged financing and other costs, and allowed Ventas’s claim of interference with prospective advantage to proceed to trial. Ventas’s claim was tried before a jury between August 18, 2009 and September 4, 2009. During the trial, the District Court dismissed Ventas’s claim for punitive damages. On September 4, 2009, the jury returned a verdict in favor of Ventas in the amount of approximately $102 million in compensatory damages. The District Court entered a judgment against the Company in that amount on September 8, 2009. In relation to the Ventas matter, the Company recorded $102 million as a litigation provision expense during the three months ended September 30, 2009.

 

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On September 22, 2009, the Company filed a motion for judgment as a matter of law or for a new trial. Also on September 22, 2009, Ventas filed a motion seeking approximately $20 million in prejudgment interest and approximately $4 million in additional damages to account for changes in currency exchange rates. The District Court has not yet ruled on those motions. The Company intends to continue to defend itself on appeal, including by appealing the adverse judgment .

 

On June 29, 2009, several of the Company’s subsidiaries, together with three of its tenants, filed complaints in the Delaware Court of Chancery against Sunrise Senior Living, Inc. and three of its subsidiaries. A complaint was also filed on behalf of several other Company subsidiaries and one tenant on July 24, 2009 in the United States District Court for the Eastern District of Virginia. The complaints are based on Sunrise’s defaults under management and related agreements governing Sunrise’s operation of 64 Company subsidiary-owned facilities, 62 of which are leased to the tenants and two of which are leased directly to Sunrise. The complaints generally allege that Sunrise systematically breached various contractual and fiduciary duties by, among other things, (i) failing to maintain licenses necessary to the facilities’ operation; (ii) demonstrating a conscious disregard for the facilities’ budgets and other controls over expenditures related to the facilities; (iii) failing to provide various marketing and financial reports necessary for the Company subsidiaries’ and the tenants’ monitoring of Sunrise’s performance; (iv) retaining funds for Sunrise’s own benefit, and/or the benefit of its affiliates, that were properly due to the tenants; (v) charging the facilities for inappropriate overhead and similar corporate-level pass-through expenses that should have been borne by Sunrise and/or its affiliates; and (vi) obstructing the Company subsidiaries’ and the tenants’ contractually-prescribed audits of Sunrise’s operation of the facilities. The Company subsidiaries also allege that Sunrise’s policies constitute a breach of fiduciary duties to the Company subsidiaries and the tenants. The Company subsidiaries and tenants are generally seeking judicial confirmation of Sunrise’s material defaults of the management agreements and the Company subsidiaries’ and tenants’ rights to terminate the agreements for the 64 communities, and associated injunctive relief requiring Sunrise to vacate the facilities after cooperating in the transition of the facilities to another operator. In addition, the Company subsidiaries and tenants are seeking monetary damages related to the defaults. With regard to two Company subsidiary-owned facilities in the State of New York, the relevant Company subsidiary and tenant also seek judicial confirmation of the impossibility of the parties’ performance under the applicable management agreements due to the passage and implementation of new state legislation and related regulations.

 

In response to each of the complaints, Sunrise has asserted counterclaims against the Company, the relevant Company subsidiaries and tenants alleging that (i) such Company subsidiaries and tenants have breached contractual duties and the implied covenant of good faith and fair dealing under the management and related agreements; (ii) the Company and the relevant Company subsidiaries have intentionally interfered with tenants’ performance of the management agreements; and (iii) the Company, the relevant Company subsidiaries and tenants have conspired to harm Sunrise’s business and reputation.  The Company, the relevant Company subsidiaries and tenants have collectively filed motions to dismiss the counterclaims in both jurisdictions.

 

A trial date has not been set by either court. The Company expects that enforcing its and the Companies subsidiaries’ rights, and potentially defending against Sunrise’s counterclaims, will require it to expend significant funds. There can be no assurance that the Company subsidiaries or its tenants will prevail in their claims against Sunrise or in defending against Sunrise’s counterclaims.

 

On June 30, 2008, the Company, Health Care Property Partners (“HCPP”), a joint venture between the Company and an affiliate of Tenet Healthcare Corporation (“Tenet”), and Tenet executed a definitive settlement agreement relating to complaints filed by certain Tenet subsidiaries against the Company. On September 19, 2008, the parties closed the transactions contemplated by the settlement agreement, effecting, among other things: (i) the sale of a hospital in Tarzana, California, by the Company to a Tenet affiliate, (ii) the extension of the terms of three other hospitals leased by the Company to affiliates of Tenet, and (iii) the acquisition by the Company of Tenet’s 23% interest in HCPP. During the three months ended September 30, 2008, the Company recognized $28.6 million of income from this settlement of the above disputes, which was included in interest and other income, net and a gain of real estate for the sale of the hospital in Tarzana, California, of $18 million.

 

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The fair value of consideration exchanged and related income recognized as a result of the Company’s September 2008 settlement with Tenet follows (in thousands):

 

Consideration received

 

 

 

Cash proceeds for hospital in Tarzana, California and other settlement

 

$

105,760

 

Fair value of Tenet’s 23% interest in HCPP

 

29,137

 

Total consideration received

 

$

134,897

 

 

 

 

 

Consideration given

 

 

 

Fair value of hospital in Tarzana, California

 

$

88,900

 

Cash paid for Tenet’s interest in HCPP

 

17,379

 

Total consideration given

 

$

106,279

 

Settlement income

 

$

28,618

 

 

The gain on the sale of the Company’s hospital in Tarzana, California to Tenet consisted of the following (in thousands):

 

Fair value of hospital, net of costs

 

$

88,609

 

Carrying value of hospital sold

 

(70,590

)

Gain on sale of real estate

 

$

18,019

 

 

Development Commitments

 

As of September 30, 2009, the Company was committed under the terms of contracts to complete the construction of properties undergoing development at a remaining aggregate cost of approximately $10.8 million.

 

Concentration of Credit Risk

 

Concentrations of credit risks arise when a number of operators, tenants 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 risks. Management believes the current portfolio is reasonably diversified across healthcare related real estate and does not contain any other significant concentration of credit risks, except as disclosed herein. The Company does not have significant foreign operations .

 

On September 30, 2009, the Company had investments in mezzanine and secured loans to HCR ManorCare with an aggregate face value of $1.7 billion and a carrying value of $1.5 billion. At September 30, 2009, the carrying value of these investments represented approximately 85% of the Company’s skilled nursing segment assets and 12% of its total segment assets.

 

On September 30, 2009, the Company had 60 of its senior housing facilities, excluding the 15 communities transitioned on October 1, 2009 discussed below, leased to eight tenants that have been identified as VIE tenants. These VIE tenants are thinly capitalized entities that rely on the cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases. The 60 senior housing facilities leased to the VIE tenants are operated by Sunrise. Sunrise is a publicly traded company and is subject to the informational filing requirements of the Securities and Exchange Act of 1934, as amended, and is required to file periodic reports on Form 10-K and Form 10-Q with the SEC.

 

On October 1, 2009, the Company completed the transition of management agreements on 15 communities operated by Sunrise that were previously terminated for Sunrise’s failure to achieve certain performance thresholds. The transition of these facilities to new operators reduced the Company’s Sunrise-managed properties in its portfolio to 75 communities from the original 101 communities HCP acquired in the 2006 CRP transaction. The termination of the agreements did not require the payment of a termination fee to Sunrise by its tenants or the Company.

 

To mitigate credit risk of certain senior housing leases, leases are 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.

 

DownREIT LLCs

 

In connection with the formation of certain DownREIT LLCs, many members contribute appreciated real estate to the DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if the contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specially allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those

 

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members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Code (“make-whole payments”). These make-whole payments include a tax gross-up provision .

 

Credit Enhancement Guarantee

 

Certain of the Company’s senior housing facilities serve as collateral for $133 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as investments in DFLs, were acquired in the Company’s merger with CRP. As of September 30, 2009 , the DFLs had a carrying value of $355 million.

 

Environmental Costs

 

The Company monitors its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company carries environmental insurance and believes that the policy terms, conditions, limitations and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice.

 

General Uninsured Losses

 

The Company obtains various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, the Company has a large number of properties that are exposed to earthquake, flood and windstorm occurrences and the insurances for such losses carry high deductibles. Should a significant uninsured loss occur at a property, the Company’s assets may become impaired.

 

(12) Equity

 

Preferred Stock

 

At September 30, 2009, the Company had two series of preferred stock outstanding, “Series E” and “Series F” preferred stock. The Series E and Series F preferred stock have no stated maturity, are not subject to any sinking fund or mandatory redemption and are not convertible into any other securities of the Company. Holders of each series of preferred stock generally have no voting rights, except under limited conditions, and all holders are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. To preserve the Company’s status as a REIT, each series of preferred stock is subject to certain restrictions on ownership and transfer. Dividends are payable quarterly in arrears on the last day of March, June, September and December. The Series E and Series F preferred stock are currently redeemable at the Company’s option.

 

The following table lists the Series E cumulative redeemable preferred stock cash dividends paid and/or declared by the Company during the nine months ended September 30, 2009:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 2

 

March 16

 

$

0.45313

 

March 31

 

April 23

 

June 15

 

0.45313

 

June 30

 

July 29

 

September 15

 

0.45313

 

September 30

 

October 29

 

December 15

 

0.45313

 

December 31

 

 

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The following table lists the Series F cumulative redeemable preferred stock cash dividends paid and/or declared by the Company during the nine months ended September 30, 2009:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 2

 

March 16

 

$

0.44375

 

March 31

 

April 23

 

June 15

 

0.44375

 

June 30

 

July 29

 

September 15

 

0.44375

 

September 30

 

October 29

 

December 15

 

0.44375

 

December 31

 

 

Common Stock

 

During the nine months ended September 30, 2009 and 2008, the Company issued 106,000 and 397,000 shares of common stock, respectively, under its Dividend Reinvestment and Stock Purchase Plan (“DRIP”). The Company issued 525,000 and 2 million shares of common stock upon the conversion of DownREIT units during the nine months ended September 30, 2009 and 2008, respectively. The Company also issued 26,000 and 623,000 shares upon exercise of stock options during the nine months ended September 30, 2009 and 2008, respectively.

 

During the nine months ended September 30, 2009 and 2008, the Company issued 305,000 and 144,000 shares of restricted stock, respectively, under the Company’s 2000 Stock Incentive Plan, as amended, and the Company’s 2006 Performance Incentive Plan. The Company also issued 182,000 and 131,000 shares upon the vesting of performance restricted stock units during the nine months ended September 30, 2009 and 2008, respectively.

 

On May 8, 2009, the Company completed a $440 million public offering of 20.7 million shares of common stock at a price per share of $21.25. The Company received net proceeds of $422 million, which were used to repay all amounts of indebtedness outstanding under the bridge loan credit facility with the remainder used for general corporate purposes.

 

On August 10, 2009, the Company completed a $441 million public offering of 17.8 million shares of its common stock at a price of $24.75 per share. The Company received net proceeds of $423 million, which were used to repay the total outstanding indebtedness under the Company’s revolving line of credit facility, including borrowings for the acquired participation in first mortgage debt of HCR ManorCare, with the remainder used for general corporate purposes.

 

The following table lists the common stock cash dividends paid and/or declared by the Company during the nine months ended September 30, 2009:

 

Declaration Date

 

Record Date

 

Amount
Per Share

 

Dividend
Payable Date

 

February 2

 

February 9

 

$

0.46

 

February 23

 

April 23

 

May 5

 

0.46

 

May 21

 

July 29

 

August 6

 

0.46

 

August 19

 

October 29

 

November 9

 

0.46

 

November 24

 

 

Accumulated Other Comprehensive Income (Loss) (“AOCI”)

 

 

 

September 30,

 

December 31,

 

 

 

2009

 

2008

 

 

 

(in thousands)

 

AOCI—unrealized gains (losses) on available-for-sale securities, net

 

$

5,569

 

$

(66,814

)

AOCI—unrealized losses on cash flow hedges, net

 

(11,954

)

(11,729

)

Supplemental Executive Retirement Plan minimum liability

 

(1,755

)

(1,821

)

Cumulative foreign currency translation adjustment

 

(1,698

)

(798

)

Total accumulated other comprehensive loss

 

$

(9,838

)

$

(81,162

)

 

Noncontrolling Interests

 

On March 30, 2009, the Company purchased for $9 million the non-controlling interests in three senior housing joint ventures with a carrying value of $4 million. The $5 million excess of the payment above the carrying value of the noncontrolling interests was charged to additional paid-in capital.

 

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Total Comprehensive Income

 

The following table provides a reconciliation of comprehensive income (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net income (loss)

 

$

(43,220

)

$

131,556

 

$

110,667

 

$

425,764

 

Other comprehensive income (loss)

 

8,981

 

(20,683

)

71,324

 

(26,779

)

Total comprehensive income (loss)

 

$

(34,239

)

$

110,873

 

$

181,991

 

$

398,985

 

 

Substantially all of other comprehensive income for the three and nine months ended September 30, 2009 and 2008 related to the change in the estimated fair value of the Company’s available-for-sale marketable debt securities. See additional discussions of available-for-sale marketable debt securities in Note 9.

 

(13) Segment Disclosures

 

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) hospital, and (v) skilled nursing. Under the senior housing, life science, hospital and skilled nursing segments, the Company invests primarily in single operator or tenant properties, through the acquisition and development of real estate, and debt issued by operators in these sectors. Under the medical office segment, the Company invests through the acquisition of MOBs that are primarily leased under gross or modified gross leases, which are generally to multiple tenants, and require a greater level of property management. The accounting policies of the segments are the same as those described under Summary of Significant Accounting Policies (see Note 2). There were no intersegment sales or transfers during the nine months ended September 30, 2009 and 2008. The Company evaluates performance based upon property net operating income from continuing operations (“NOI”), and interest income of the combined investments in each segment.

 

Non-segment assets consist primarily of real estate held for sale and corporate assets including cash, restricted cash, accounts receivable, net and deferred financing costs. Interest expense, depreciation and amortization and non-property specific revenues and expenses are not allocated to individual segments in determining the Company’s performance measure. See Note 11 for other information regarding concentrations of credit risk.

 

Summary information for the reportable segments follows (in thousands):

 

For the three months ended September 30, 2009:

 

Segments

 

Rental and
Related
Revenues

 

Tenant
Recoveries

 

Income
From
DFLs

 

Investment
Management
Fees

 

Total
Revenues

 

NOI (1)

 

Interest
and Other

 

Senior housing

 

$

68,625

 

$

 

$

13,173

 

$

703

 

$

82,501

 

$

82,050

 

$

304

 

Life science

 

53,536

 

9,696

 

 

 

63,232

 

51,302

 

 

Medical office

 

65,419

 

12,271

 

 

623

 

78,313

 

44,117

 

 

Hospital

 

20,986

 

497

 

 

 

21,483

 

20,600

 

16,343

 

Skilled nursing

 

9,800

 

 

 

 

9,800

 

9,761

 

23,416

 

Total segments

 

218,366

 

22,464

 

13,173

 

1,326

 

255,329

 

207,830

 

40,063

 

Non-segment

 

 

 

 

 

 

 

(101

)

Total

 

$

218,366

 

$

22,464

 

$

13,173

 

$

1,326

 

$

255,329

 

$

207,830

 

$

39,962

 

 

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For the three months ended September 30, 2008:

 

Segments

 

Rental and
Related
Revenues

 

Tenant
Recoveries

 

Income
From
DFLs

 

Investment
Management
Fees

 

Total
Revenues

 

NOI (1)

 

Interest
and Other

 

Senior housing

 

$

70,554

 

$

 

$

14,543

 

$

867

 

$

85,964

 

$

82,031

 

$

311

 

Life science

 

65,997

 

7,513

 

 

1

 

73,511

 

63,697

 

 

Medical office

 

65,108

 

12,300

 

 

655

 

78,063

 

42,025

 

 

Hospital

 

20,752

 

412

 

 

 

21,164

 

20,337

 

11,074

 

Skilled nursing

 

9,150

 

 

 

 

9,150

 

9,135

 

20,811

 

Total segments

 

231,561

 

20,225

 

14,543

 

1,523

 

267,852

 

217,225

 

32,196

 

Non-segment

 

 

 

 

 

 

 

30,087

 

Total

 

$

231,561

 

$

20,225

 

$

14,543

 

$

1,523

 

$

267,852

 

$

217,225

 

$

62,283

 

 

For the nine months ended September 30, 2009:

 

Segments

 

Rental and
Related
Revenues

 

Tenant
Recoveries

 

Income
From
DFLs

 

Investment
Management
Fees

 

Total
Revenues

 

NOI (1)

 

Interest
and Other

 

Senior housing

 

$

217,353

 

$

 

$

39,302

 

$

2,224

 

$

258,879

 

$

252,714

 

$

880

 

Life science

 

159,072

 

30,311

 

 

2

 

189,385

 

154,744

 

 

Medical office

 

196,266

 

35,319

 

 

1,907

 

233,492

 

133,048

 

 

Hospital

 

62,164

 

1,494

 

 

 

63,658

 

61,116

 

39,047

 

Skilled nursing

 

28,189

 

 

 

 

28,189

 

28,036

 

54,751

 

Total segments

 

663,044

 

67,124

 

39,302

 

4,133

 

773,603

 

629,658

 

94,678

 

Non-segment

 

 

 

 

 

 

 

(1,651

)

Total

 

$

663,044

 

$

67,124

 

$

39,302

 

$

4,133

 

$

773,603

 

$

629,658

 

$

93,027

 

 

For the nine months ended September 30, 2008:

 

Segments

 

Rental and
Related
Revenues

 

Tenant
Recoveries

 

Income
From
DFLs

 

Investment
Management
Fees

 

Total
Revenues

 

NOI (1)

 

Interest
and Other

 

Senior housing

 

$

210,102

 

$

 

$

43,646

 

$

2,457

 

$

256,205

 

$

244,987

 

$

914

 

Life science

 

155,527

 

25,180

 

 

3

 

180,710

 

149,187

 

 

Medical office

 

195,914

 

35,272

 

 

1,988

 

233,174

 

130,310

 

 

Hospital

 

62,274

 

1,365

 

 

 

63,639

 

61,003

 

33,344

 

Skilled nursing

 

26,925

 

 

 

 

26,925

 

26,869

 

64,797

 

Total segments

 

650,742

 

61,817

 

43,646

 

4,448

 

760,653

 

612,356

 

99,055

 

Non-segment

 

 

 

 

 

 

 

29,289

 

Total

 

$

650,742

 

$

61,817

 

$

43,646

 

$

4,448

 

$

760,653

 

$

612,356

 

$

128,344

 

 


(1)           NOI is a non-GAAP supplemental financial measure used to evaluate the operating performance of real estate. The Company defines NOI as rental revenues, including tenant recoveries and income from direct financing leases, less property-level operating expenses. NOI excludes investment management fee income, depreciation and amortization, general and administrative expenses, litigation provision, impairments, interest and other income, net, interest expense, income taxes, equity income from unconsolidated joint ventures and discontinued operations. The Company believes NOI provides investors relevant and useful information because it measures the operating performance of the Company’s real estate at the property level on an unleveraged basis. The Company uses NOI to make decisions about resource allocations and assess property-level performance. The Company believes that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP since it does not reflect the aforementioned excluded items. Further, the Company’s definition of NOI may not be comparable to the definition used by other real estate investment trusts, as those companies may use different methodologies for calculating NOI.

 

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The following is a reconciliation from NOI to reported net income (loss), the most direct comparable financial measure calculated and presented in accordance with GAAP (in thousands):

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Net operating income from continuing operations

 

$

207,830

 

$

217,225

 

$

629,658

 

$

612,356

 

Investment management fee income

 

1,326

 

1,523

 

4,133

 

4,448

 

Depreciation and amortization

 

(82,301

)

(77,292

)

(242,318

)

(232,574

)

General and administrative

 

(22,860

)

(17,077

)

(61,625

)

(55,859

)

Litigation provision

 

(101,973

)

 

(101,973

)

 

Impairments

 

(15,123

)

(3,710

)

(20,904

)

(5,284

)

Interest and other income, net

 

39,962

 

62,283

 

93,027

 

128,344

 

Interest expense

 

(74,039

)

(82,813

)

(226,053

)

(264,488

)

Income tax (expense) benefit

 

322

 

(853

)

(1,406

)

(4,327

)

Equity income from unconsolidated joint ventures

 

1,328

 

1,227

 

1,993

 

3,736

 

Total discontinued operations

 

2,308

 

31,043

 

36,135

 

239,412

 

Net income (loss)

 

$

(43,220

)

$

131,556

 

$

110,667

 

$

425,764

 

 

The Company’s total assets by segment were:

 

 

 

September 30,

 

December 31,

 

Segments

 

2009

 

2008

 

Senior housing

 

$

4,414,818

 

$

4,437,358

 

Life science

 

3,599,250

 

3,545,913

 

Medical office

 

2,287,591

 

2,277,702

 

Hospital

 

1,008,261

 

1,033,206

 

Skilled nursing

 

1,797,976

 

1,191,091

 

Gross segment assets

 

13,107,896

 

12,485,270

 

Accumulated depreciation and amortization

 

(1,129,460

)

(933,178

)

Net segment assets

 

11,978,436

 

11,552,092

 

Real estate held for sale, net

 

3,783

 

27,058

 

Non-segment assets

 

355,991

 

270,676

 

Total assets

 

$

12,338,210

 

$

11,849,826

 

 

On October 5, 2006, simultaneous with the closing of the Company’s merger with CRP, the Company also merged with CNL Retirement Corp. (“CRC”). CRP was a REIT that invested primarily in senior housing and medical office buildings. Under the purchase method of accounting, the assets and liabilities of CRC were recorded at their estimated relative fair values, with $51.7 million paid in excess of the estimated fair value of CRC recorded as goodwill. The CRC goodwill amount was allocated in proportion to the assets of the Company’s reporting units (property sectors) subsequent to the CRP acquisition.

 

At September 30, 2009, goodwill was allocated to segment assets as follows: (i) senior housing—$30.5 million, (ii) medical office—$11.4 million, (iii) hospital—$5.1 million, and (iv) skilled nursing—$3.3 million. Due to a decrease in our market capitalization during the first quarter of 2009, we performed an interim assessment of goodwill. In connection with this review, the Company recognized an impairment charge of $1.4 million, included in interest and other income, net, for the goodwill allocated to the life science segment.

 

(14) Derivative Instruments

 

The Company uses derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized obligations or assets. The Company does not use derivative instruments for speculative or trading purposes.

 

The primary risks associated with derivative instruments are market and credit risk. Market risk is defined as the potential for loss in value of a derivative instrument due to adverse changes in market prices (interest rates). Utilizing derivative instruments allows the Company to effectively manage the risk of fluctuations in interest rates with respect to the potential effects these changes could have on future earnings, forecasted cash flows and the fair value of recognized obligations.

 

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Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation. The Company does not obtain collateral associated with its derivative instruments, but monitors the credit standing of its counterparties on a regular basis. Should a counterparty fail to perform, the Company would incur a financial loss to the extent that the associated derivative contract was in an asset position. At September 30, 2009, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts.

 

On June 12, 2009, the Company executed an interest-rate swap contract (pay float and receive fixed), which is designated as hedging the changes in fair value of fixed-rate senior unsecured notes due to fluctuations in the underlying benchmark interest rate. The fair value hedge terminates in September 2011, has a notional amount of $250 million, and hedges approximately 86% of the $292 million of outstanding senior unsecured notes maturing in September 2011. The estimated fair value of the contract at September 30, 2009 was $2.5 million and is included in other assets, net. During the nine months ended September 30, 2009, there was no ineffective portion related to the hedge.

 

On August 20, 2009, the Company executed two interest-rate swap contracts (pay float and receive fixed), which are designated as hedging fluctuations in interest receipts on a participation interest in a floating-rate secured mortgage note due to fluctuations in the underlying benchmark interest rate. These cash flow hedges terminate in February and August 2011 and have an aggregate notional amount of $500 million. The aggregate estimated fair value of the contracts at September 30, 2009 was $0.9 million and is included in other assets, net. During the three and nine months ended September 30, 2009, there were no ineffective portions related to the hedges.

 

The Company also had four interest-rate swap contracts outstanding at September 30, 2009, which hedge fluctuations in interest payments on variable-rate secured debt. At September 30, 2009, these interest-rate swap contracts had an aggregate notional amount of $60 million and estimated fair value of $4 million included in accounts payable and accrued liabilities. During the three and nine months ended September 30, 2009, there were no ineffective portions related to these hedging relationships.

 

During October and November 2007, the Company entered into two forward-starting interest-rate swap contracts with an aggregate notional amount of $900 million and settled the contracts during the three months ended June 30, 2008. The interest-rate swap contracts were designated in qualifying, cash flow hedging relationships, to hedge the Company’s exposure to fluctuations in the benchmark interest rate component of interest payments on forecasted, unsecured, fixed-rate debt currently expected to be issued in 2010. During the three and nine months ended September 30, 2009, there were no ineffective portions related to these hedging relationships.

 

At September 30, 2009, the Company expects that the hedged forecasted transactions, for each of the outstanding qualifying cash flow hedging relationships, remain probable of occurring and no gains or losses recorded to accumulated other comprehensive income (loss) are expected to be reclassified to earnings as a result.

 

The following table summarizes the Company’s outstanding interest-rate swap contracts as of September 30, 2009 (dollars in thousands):

 

Date Entered

 

Maturity Date

 

Hedge
Designation

 

Fixed
Rate

 

Floating
Rate Index

 

Notional
Amount

 

Fair Value

 

July 2005

 

July 2020

 

Cash Flow

 

3.82

%

BMA Swap Index

 

$

45,600

 

$

(3,909

)

June 2009

 

September 2011

 

Fair Value

 

5.95

%

1 Month LIBOR

 

250,000

 

2,461

 

July 2009

 

July 2013

 

Cash Flow

 

6.13

%

1 Month LIBOR

 

14,600

 

(192

)

August 2009

 

February 2011

 

Cash Flow

 

0.87

%

1 Month LIBOR

 

250,000

 

315

 

August 2009

 

August 2011

 

Cash Flow

 

1.24

%

1 Month LIBOR

 

250,000

 

551

 

 

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To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on the noted hedging instruments. We applied various basis point spreads, to the underlying interest rate curves of the derivative portfolio in order to determine the instruments’ change in estimated fair value. The following table summarizes the analysis performed (dollars in thousands):

 

 

 

 

 

Effects of Change in Interest Rates

 

Date Entered

 

Maturity Date

 

+50 Basis
Points

 

-50 Basis
Points

 

+100 Basis
Points

 

-100 Basis
Points

 

July 2005

 

July 2020

 

$

1,930

 

$

(2,318

)

$

4,055

 

$

(4,442

)

June 2009

 

September 2011

 

(2,653

)

1,820

 

(5,114

)

4,732

 

July 2009

 

July 2013

 

254

 

(266

)

513

 

(525

)

August 2009

 

February 2011

 

(1,718

)

1,719

 

(3,436

)

3,437

 

August 2009

 

August 2011

 

(2,279

)

2,393

 

(4,615

)

4,729

 

 

Other Financial Derivative Instruments

 

As part of the Company’s acquisition of SEUSA in August 2007, the Company received two warrants to purchase common stock in publicly traded corporations that currently expire in 2015 and 2016. At September 30, 2009, these derivative instruments had an aggregate fair value of $1.5 million, which is included in other assets, net. During the nine months ended September 30, 2009, the Company recognized a charge of $0.6 million in interest and other income, net due to a decrease in fair value of these instruments.

 

The following table summarizes the Company’s outstanding equity warrant instruments as of September 30, 2009 (dollars in thousands):

 

Acquisition Date

 

Expiration Date

 

Hedge
Designation

 

Warrant
Shares

 

Fair Value

 

August 2007

 

September 2015

 

Not Designated

 

50,000

 

$

132

 

August 2007

 

March 2016

 

Not Designated

 

200,000

 

$

1,336

 

 

(15) Supplemental Cash Flow Information

 

 

 

Nine Months Ended September 30,

 

 

 

2009

 

2008

 

 

 

(in thousands)

 

Supplemental cash flow information:

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

236,905

 

$

280,103

 

Taxes paid

 

2,101

 

4,266

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing activities:

 

 

 

 

 

Capitalized interest

 

18,994

 

22,479

 

Accrued construction costs

 

(3,359

)

(10,604

)

Loan received upon real estate disposition

 

251

 

 

Supplemental schedule of non-cash financing activities:

 

 

 

 

 

Mortgages assumed with real estate acquisitions

 

 

4,892

 

Secured debt obtained in purchase of participation in secured loan receivable

 

425,042

 

 

Restricted stock issued

 

305

 

144

 

Vesting of restricted stock units

 

182

 

131

 

Cancellation of restricted stock

 

(34

)

108

 

Conversion of non-managing member units into common stock

 

21,873

 

74,509

 

Unrealized gains on available-for-sale securities and derivatives designated as cash flow hedges, net

 

73,436

 

32,836

 

 

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(16) Earnings (Loss) Per Common Share

 

The following table illustrates the computation of basic and diluted earnings per share (dollars in thousands, except per share and share amounts):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Numerator

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(45,528

)

$

100,513

 

$

74,532

 

$

186,352

 

Noncontrolling interests’ and participating securities’ share in continuing operations

 

(3,895

)

(6,323

)

(12,147

)

(18,974

)

Preferred stock dividends

 

(5,282

)

(5,282

)

(15,848

)

(15,848

)

Income (loss) from continuing operations applicable to common shares

 

(54,705

)

88,908

 

46,537

 

151,530

 

Discontinued operations

 

2,308

 

31,043

 

36,135

 

239,412

 

Noncontrolling interests’ share in discontinued operations

 

 

(336

)

 

(585

)

Net income (loss) applicable to common shares

 

$

(52,397

)

$

119,615

 

$

82,672

 

$

390,357

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

Basic weighted average common shares

 

284,812

 

244,572

 

267,971

 

232,199

 

Dilutive stock options and restricted stock

 

 

910

 

70

 

837

 

Diluted weighted average common shares

 

284,812

 

245,482

 

268,041

 

233,036

 

 

 

 

 

 

 

 

 

 

 

Basic earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.19

)

$

0.36

 

$

0.17

 

$

0.65

 

Discontinued operations

 

0.01

 

0.13

 

0.14

 

1.03

 

Net income (loss) applicable to common stockholders

 

$

(0.18

)

$

0.49

 

$

0.31

 

$

1.68

 

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per common share

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

$

(0.19

)

$

0.36

 

$

0.17

 

$

0.65

 

Discontinued operations

 

0.01

 

0.13

 

0.14

 

1.03

 

Net income (loss) applicable to common shares

 

$

(0.18

)

$

0.49

 

$

0.31

 

$

1.68

 

 

Restricted stock and certain of the Company’s performance restricted stock units are considered participating securities which require the use of the two-class method when computing basic and diluted earnings per share. For the three months ended September 30, 2009 and 2008, earnings representing nonforfeitable dividends of $0.4 million and $0.5 million, respectively, were allocated to the participating securities. For the nine months ended September 30, 2009 and 2008, earnings representing nonforfeitable dividends of $1.1 million and $1.9 million, respectively, were allocated to the participating securities.

 

Options to purchase approximately 7.1 million and 0.5 million shares of common stock that had an exercise price in excess of the average market price of the common stock during the three months ended September 30, 2009 and 2008, respectively, were not included because they are anti-dilutive . Restricted stock and performance restricted stock units representing 1.5 million and 0.4 million shares of common stock during the three months ended September 30, 2009 and 2008, respectively, were not included because they are anti-dilutive. Additionally, 5.9 million shares issuable upon conversion of 4.3 million DownREIT units during the three months ended September 30, 2009 were not included since they are anti-dilutive. During the three months ended September 30, 2008, 8.0 million shares issuable upon conversion of 5.6 million DownREIT units were not included since they were anti-dilutive.

 

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(17) Fair Value Measurements

 

The following tables illustrate the Company’s fair value measurements of its financial assets and liabilities measured at fair value in the Company’s condensed consolidated financial statements. The second table includes the associated unrealized and realized gains and losses, as well as purchases, sales, issuances, exchanges, settlements (net) or transfers for financial instruments classified as Level 3 instruments within the fair value hierarchy. Recognized gains and losses are recorded in interest and other income, net on the Company’s condensed consolidated statements of operations.

 

The following is a summary of fair value measurements of financial assets and liabilities at September 30, 2009 (in thousands):

 

Financial Instrument

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Marketable debt securities

 

$

201,163

 

$

182,863

 

$

18,300

 

$

 

Marketable equity securities

 

3,931

 

3,931

 

 

 

Interest-rate swap assets(1)

 

3,327

 

 

3,327

 

 

Interest-rate swap liabilities(1)

 

(4,101

)

 

(4,101

)

 

Warrants(1)

 

1,468

 

 

 

1,468

 

 

 

$

205,788

 

$

186,794

 

$

17,526

 

$

1,468

 

 


(1)           Interest-rate swaps and common stock warrants are valued using observable and unobservable market assumptions, as well as standardized derivative pricing models.

 

The following is a reconciliation of fair value measurements classified as Level 3 at September 30, 2009 (in thousands):

 

 

 

Warrants

 

December 31, 2008

 

$

1,460

 

Total gains (realized and unrealized):

 

 

 

Included in earnings

 

(582

)

Included in other comprehensive income

 

 

Purchases, issuances, exchanges and settlements, net

 

590

 

Transfers in and/or out of Level 3

 

 

September 30, 2009

 

$

1,468

 

 

(18) Disclosures About Fair Value of Financial Instruments

 

The carrying values of cash and cash equivalents, restricted cash, receivables, payables, and accrued liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. Fair values for loans receivable, bank line of credit, bridge and term loans, mortgage and other secured debt, and other debt are estimates based on rates currently prevailing for similar instruments of similar maturities. The estimated fair values of the interest-rate swaps and warrants were determined based on observable market assumptions and standardized derivative pricing models. The fair values of the senior unsecured notes and marketable equity and debt securities were determined based on market quotes.

 

 

 

September 30, 2009

 

December 31, 2008

 

 

 

Carrying
Value

 

Fair Value

 

Carrying
Value

 

Fair Value

 

 

 

(in thousands)

 

Loans receivable, net

 

$

1,674,329

 

$

1,662,685

 

$

1,076,392

 

$

981,128

 

Marketable debt securities

 

201,163

 

201,163

 

228,660

 

228,660

 

Marketable equity securities

 

3,931

 

3,931

 

3,845

 

3,845

 

Warrants

 

1,468

 

1,468

 

1,460

 

1,460

 

Bank line of credit

 

 

 

150,000

 

150,000

 

Bridge and term loans

 

200,000

 

200,000

 

520,000

 

520,000

 

Senior unsecured notes

 

3,520,577

 

3,520,482

 

3,523,513

 

2,384,488

 

Mortgage and other secured debt

 

1,863,404

 

1,836,879

 

1,641,734

 

1,538,057

 

Other debt

 

99,487

 

99,487

 

102,209

 

102,209

 

Interest-rate swap assets

 

3,327

 

3,327

 

 

 

Interest-rate swap liabilities

 

(4,101

)

(4,101

)

2,324

 

2,324

 

 

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(19) Impairments

 

During the three months ended September 30, 2009, the Company recognized impairments of $15.1 million related to two of its DFLs (see Note 5). During the three months ended September 30, 2008, the Company recognized an impairment of $3.7 million related to intangible assets associated with the early termination of three leases in the life science segment.

 

During the nine months ended September 30, 2009, the Company recognized impairments of $21.0 million as a result of (i) $15.1 million related to two of its DFLs and (ii) $5.9 million related to intangible assets on 12 of 15 senior housing communities which were determined to be impaired due to the termination of the Sunrise management agreements effective October 1, 2009. During the nine months ended September 30, 2008, the Company recognized impairments of $13.4 million as follows: (i) $1.6 million related to two senior housing facilities as a result of a decrease in expected cash flows, (ii) $8.1 million, included in discontinued operations, related to the decrease in expected cash flows and anticipated dispositions of two senior housing properties and one hospital, and (iii) $3.7 million related to intangible assets associated with the early termination of three leases in the life science segment.

 

(20) Subsequent Events

 

The Company evaluated subsequent events through November 3, 2009, which is the date the September 30, 2009 condensed consolidated financial statements were issued.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Language Regarding Forward-Looking Statements

 

Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements.” We intend to have our forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with those provisions. Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectations as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. In addition, we, through our officers, from time to time, make forward-looking oral and written public statements concerning our expected future operations, strategies, securities offerings, growth and investment opportunities, dispositions, capital structure changes, budgets and other developments. Readers are cautioned that, while forward-looking statements reflect our good faith belief and reasonable assumptions based upon current information, we can give no assurance that our expectations or forecasts will be attained. Therefore, readers should be mindful that forward-looking statements are not guarantees of future performance and that they are subject to known and unknown risks and uncertainties that are difficult to predict. As more fully set forth under “Part I, Item 1A. Risk Factors” in the Company’s Annual report on Form 10-K for the fiscal year ended December 31, 2008, factors that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include:

 

(a)    Changes in national and local economic conditions, including a prolonged recession;

 

(b)    Continued volatility in the capital markets, including changes in interest rates and the availability and cost of capital;

 

(c)    The ability of the Company to manage its indebtedness level and changes in the terms of such indebtedness;

 

(d)    Changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations of our operators, tenants and borrowers;

 

(e)    The potential impact of existing and future litigation matters, including the possibility of larger than expected litigation costs and related development;

 

(f)     Competition for tenants and borrowers, including with respect to new leases and mortgages and the renewal or rollover of existing leases;

 

(g)    The ability of the Company to reposition its properties on the same or better terms if existing leases are not renewed or the Company exercises its right to replace an existing operator or tenant upon default;

 

(h)    Availability of suitable properties to acquire at favorable prices and the competition for the acquisition and financing of those properties;

 

(i)     The ability of our operators, tenants and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us;

 

(j)     The financial weakness of some operators and tenants, including potential bankruptcies and downturns in their businesses, which results in uncertainties regarding our ability to continue to realize the full benefit of such operators’ and/or tenants’ leases;

 

(k)    The risk that we will not be able to sell or lease properties that are currently vacant, at all or at competitive rates;

 

(l)     The financial, legal and regulatory difficulties of significant operators of our properties, including Sunrise Senior Living, Inc. and its subsidiaries (“Sunrise”);

 

(m)   The risk that we may not be able to integrate acquired businesses successfully or achieve the operating efficiencies and other benefits of acquisitions within expected time-frames or at all, or within expected cost projections;

 

(n)    The ability to obtain financing necessary to consummate acquisitions or on favorable terms; and

 

(o)    Changes in the reimbursement available to our tenants and borrowers by governmental or private payors, including changes in Medicare and Medicaid payment levels and the availability and cost of third party insurance coverage.

 

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Except as required by law, we undertake no, and hereby disclaim any, obligation to update any forward-looking statements, whether as a result of new information, changed circumstances or otherwise.

 

The information set forth in this Item 2 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:

 

·       Executive Summary

 

·       2009 Transaction Overview

 

·       Dividends

 

·       Critical Accounting Policies

 

·       Results of Operations

 

·       Liquidity and Capital Resources

 

·       Off-Balance Sheet Arrangements

 

·       Contractual Obligations

 

·       Inflation

 

·       Recent Accounting Pronouncements

 

Executive Summary

 

We are a self-administered REIT that, together with our consolidated subsidiaries, invests primarily in real estate serving the healthcare industry in the United States. We acquire, develop, lease, manage and dispose of healthcare real estate and provide financing to healthcare providers. At September 30, 2009, our portfolio of investments, excluding assets held for sale, but including properties owned by our Investment Management Platform, consisted of interests in 677 facilities. Our Investment Management Platform represents the following joint ventures: (i) HCP Ventures II, (ii) HCP Ventures III, LLC, (iii) HCP Ventures IV, LLC, and (iv) the HCP Life Science ventures.

 

Our business strategy is based on three principles: (i) opportunistic investing, (ii) portfolio diversification, and (iii) conservative financing. We actively redeploy capital from investments with lower return potential into assets with higher return potential and recycle capital from shorter-term to longer-term investments. We make investments where the expected risk-adjusted return exceeds our cost of capital and strive to leverage our operator, tenant and other business relationships.

 

Our strategy contemplates acquiring and developing properties on terms that are favorable to us. We attempt to structure transactions that are tax-advantaged and mitigate risks in our underwriting process. Generally, we prefer larger, more complex private transactions that leverage our management team’s experience and our infrastructure. We seek to mitigate the risk to us resulting from the significant healthcare regulatory risks faced by our tenants and operators by diversifying our portfolio among property types and geographical areas, diversifying our tenant and operator base to limit our exposure to any single entity, and seeking tenants and operators who are not primarily dependent on Medicaid reimbursement for their revenues.

 

We follow a disciplined approach to enhancing the value of our existing portfolio, including ongoing evaluation of potential disposition of properties and other investments that no longer fit our strategy. During the nine months ended September 30, 2009, we sold 11 properties for $58 million and marketable debt securities for $120 million.

 

We primarily generate revenue by leasing healthcare properties under long-term leases. Most of our rents and other earned income from leases are received under triple-net leases or leases that provide for substantial recovery of operating expenses; however, some of our medical office and life science leases are structured as gross or modified gross leases. Accordingly, for such medical office buildings (“MOBs”) and life science facilities we incur certain property operating expenses, such as real estate taxes, repairs and maintenance, property management fees, utilities and insurance. Our growth depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates

 

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Table of Contents

 

and occupancy levels; (ii) maximize tenant recoveries given the underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market specific, general economic and other conditions .

 

The slowdown in the economy, has affected, or may in the future adversely affect, the businesses of our tenants, operators and borrowers to varying degrees and may further impact their ability to meet their obligations to us and, in certain cases, could lead to additional restructurings, disruptions, or bankruptcies of our tenants, operators and/or borrowers. These market conditions could also adversely affect the amount of revenue we report, require us to increase our allowances for losses, result in impairment charges and valuation allowances that decrease our net income and equity, and reduce our cash flows from operations. In addition, these conditions or events could impair our credit rating and our ability to raise additional capital, require us to seek alternative operators or tenants, and finance or refinance debt secured by properties they operate or where they are tenants.

 

Access to external capital on favorable terms is critical to the success of our strategy. Generally, we attempt to match the long-term duration of most of our investments with long-term fixed-rate financing. At September 30, 2009, 17% of our consolidated debt is at variable interest rates, which includes our $200 million term loan and $498 million of mortgage and other secured debt. We intend to maintain an investment grade rating on our senior unsecured debt securities and manage various capital ratios and amounts within appropriate parameters.

 

Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as to fund future acquisitions and development through the issuance of additional securities or secured debt. As of October 30, 2009, we had a credit rating of Baa3 (stable) from Moody’s, BBB (stable) from Standard and Poor’s (“S&P”) and BBB (positive) from Fitch on our senior unsecured debt securities, and Ba1 (stable) from Moody’s, BBB- (stable) from S&P and BBB- (positive) from Fitch on our preferred equity securities . Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, credit ratings on our securities, and any changes to these ratings, the market price of our capital stock, the performance of our portfolio, tenants, borrowers and operators, including any restructurings, disruptions or bankruptcies of our tenants, borrowers and operators, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.

 

2009 Transaction Overview

 

Investments

 

During the nine months ended September 30, 2009, we purchased the remaining interests in three senior housing joint ventures for $9 million, which included $14 million of real estate encumbered by $5 million of mortgage debt, and funded $86 million for construction and other capital projects primarily in our life science segment.

 

During the nine months ended September 30, 2009, we sold 11 properties with an aggregate value of $58 million primarily from our hospital and medical office segments, including our Los Gatos, California hospital for $45 million. During the nine months ended September 30, 2009, we received proceeds of $120 million for the sale of marketable debt securities from our hospital segment.

 

On August 3, 2009, we purchased a $720 million participation in first mortgage debt of HCR ManorCare, at a discount of $130 million, for approximately $590 million. The $720 million participation bears interest at the London Interbank Offer Rate (“LIBOR”) plus 1.25% and represents 45% of the $1.6 billion most senior tranche of HCR ManorCare’s mortgage debt incurred as part of the financing for The Carlyle Group’s acquisition of Manor Care, Inc. in December 2007. The mortgage debt matures in January 2012, with a one-year extension available at the borrower’s option subject to certain performance conditions, and was secured by a first lien on 331 facilities located in 30 states at closing. We obtained favorable financing to fund 72% of the purchase price, resulting in a net cash payment by HCP of $166 million.

 

Financings

 

On May 8, 2009, we completed a $440 million public offering of 20.7 million shares of our common stock at a price per share of $21.25. We received net proceeds of $422 million, which were used to repay all amounts of indebtedness outstanding under our bridge loan credit facility with the remainder used for general corporate purposes.

 

On June 12, 2009, we entered into an interest-rate swap contract (pay float and receive fixed) with a notional amount of $250 million that terminates in 2011. This interest-rate swap contract reduces our net floating rate asset exposure, which increased as a result of the repayment of our floating-rate bridge loan credit facility.

 

On August 10, 2009, we completed a $441 million public offering of 17.8 million shares of our common stock at a price of $24.75 per share. We received net proceeds of $423 million, which were used to repay the total outstanding indebtedness under our revolving line of credit facility, including borrowings for the additional investment in HCR ManorCare discussed above, with the remainder used for general corporate purposes.

 

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On August 20, 2009, we entered into two interest-rate swap contracts (pay float and receive fixed) with an aggregate notional amount of $500 million that terminate in 2011. The interest-rate swap contracts reduced our net floating rate asset exposure, which had increased as a result of our additional investment in HCR ManorCare and third quarter repayments of floating rate debt, which were both funded with proceeds from our August 2009 public equity offering.

 

On August 27, 2009, we prepaid $100 million of variable-rate mortgage debt. The mortgage debt, with an original maturity of January 2010, was repaid with proceeds from our August 2009 public equity offering and third quarter asset sales.

 

Other

 

On June 29, 2009, we, together with three of our tenants, filed complaints against Sunrise based on Sunrise’s defaults under management and related agreements covering 64 of 75 Sunrise-managed communities owned by the Company. The complaints allege, among other things, that Sunrise systematically breached various contractual and fiduciary duties. In addition to equitable relief and monetary damages relating to the defaults, we are seeking judicial confirmation of rights to terminate the agreements on the 64 communities.

 

On September 4, 2009, a jury returned a verdict in favor of Ventas, Inc. (“Ventas”), in an action brought against us in the United States District Court for the Western District of Kentucky for tortious interference with prospective business advantage in connection with Ventas’s 2007 acquisition of Sunrise Senior Living Real Estate Investment Trust (“Sunrise REIT”). The jury awarded Ventas approximately $102 million in compensatory damages, which we recorded as a litigation provision expense during the quarter ended September 30, 2009. Ventas originally sought approximately $300 million in compensatory damages as well as punitive damages. We filed a motion with the court for post-trial relief and we intend to appeal an adverse judgment.

 

On October 1, 2009, we completed the transition of management agreements on 15 communities operated by Sunrise that were previously terminated for Sunrise’s failure to achieve certain performance thresholds. The transition of these facilities to new operators reduced our Sunrise-managed properties in our portfolio to 75 communities from the original 101 communities we acquired in the 2006 CNL Retirement Properties, Inc. transaction. The termination of the agreements did not require the payment of a termination fee to Sunrise by our tenants or us.

 

Dividends

 

On October 29, 2009, we announced that our Board declared a quarterly common stock cash dividend of $0.46 per share. The common stock dividend will be paid on November 24, 2009 to stockholders of record as of the close of business on November 9, 2009.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain.

 

Results of Operations

 

We evaluate our business and allocate resources among our five business segments: (i) senior housing, (ii) life science, (iii) medical office, (iv) hospital, and (v) skilled nursing. Under the senior housing, life science, hospital and skilled nursing segments, we invest primarily in single operator or tenant properties, through the acquisition and development of real estate, and debt issued by operators in these sectors. Under the medical office segment, we invest through the acquisition of MOBs that are leased under gross or modified gross leases, generally to multiple tenants, and which generally require a greater level of property management. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Condensed Consolidated Financial Statements).

 

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Our financial results for the three and nine months ended September 30, 2009 and 2008 are summarized as follows:

 

Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008

 

Rental and related revenues

 

 

 

Three Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Senior housing

 

$

68,625

 

$

70,554

 

$

(1,929

)

(3

)%

Life science

 

53,536

 

65,997

 

(12,461

)

(19

)

Medical office

 

65,419

 

65,108

 

311

 

 

Hospital

 

20,986

 

20,752

 

234

 

1

 

Skilled nursing

 

9,800

 

9,150

 

650

 

7

 

Total

 

$

218,366

 

$

231,561

 

$

(13,195

)

(6

)%

 

·       Senior housing.  The decrease in senior housing rental and related revenues for the three months ended September 30, 2009 primarily relates to a $2.5 million decrease in the facility-level operating revenues for three senior housing properties that were previously under management agreements and re-leased on a triple-net basis during 2009.

 

·       Life science Included in life science rental and related revenues for the three months ended September 30, 2008 are lease termination fees of $18 million from a tenant in connection with the early termination of three leases on July 30, 2008.  No similar early termination fees were recognized during the three months ended September 30, 2009. The decrease in life science rental and related revenues was partially offset by an increase in occupancy levels at our life science facilities and the impact of development assets placed in service during 2008.

 

Tenant recoveries

 

 

 

Three Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Life science

 

$

9,696

 

$

7,513

 

$

2,183

 

29

%

Medical office

 

12,271

 

12,300

 

(29

)

 

Hospital

 

497

 

412

 

85

 

21

 

Total

 

$

22,464

 

$

20,225

 

$

2,239

 

11

%

 

·       Life science. Life science tenant recoveries increased primarily as a result of an increase in occupancy levels at our life science facilities and the impact of development assets placed in service during 2008.

 

Income from direct financing leases

 

Income from direct financing leases (“DFLs”) decreased $1.4 million to $13.2 million for the three months ended September 30, 2009. The decrease was primarily due to two DFLs that were placed on non-accrual status and accounted for on a cost-recovery basis beginning in October 2008. We expect income from DFLs will remain lower in 2009 as compared to 2008 as a result of these DFLs (See Note 5 to the Condensed Consolidated Financial Statements).

 

Depreciation and amortization expense

 

Depreciation and amortization expense increased $5.0 million to $82.3 million for the three months ended September 30, 2009. Depreciation and amortization expense for the three months ended September 30, 2009 included $4.7 million of accelerated amortization of intangible assets as a result of the modification of the lease term of a tenant in one of our life science facilities. No similar lease modifications were made during the three months ended September 30, 2008.

 

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Operating expenses

 

 

 

Three Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Senior housing

 

$

(252

)

$

3,066

 

$

(3,318

)

NM

(1)

Life science

 

11,930

 

9,813

 

2,117

 

22

 

Medical office

 

33,573

 

35,383

 

(1,810

)

(5

)

Hospital

 

883

 

827

 

56

 

7

 

Skilled nursing

 

39

 

15

 

24

 

NM

(1)

Total

 

$

46,173

 

$

49,104

 

$

(2,931

)

(6

)%

 


(1)    Percentage change not meaningful.

 

Operating expenses are predominantly related to MOB and life science properties where we incur the expenses and recover all or a portion of those expenses from the tenants. The presentation of expenses as operating or general and administrative is based on the underlying nature of the expense. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses.

 

·       Senior housing.  The decrease in senior housing operating expenses primarily relates to a decrease in facility-level operating expenses for two senior housing properties that were previously under management agreements and re-leased on a triple-net basis during 2009.

 

·       Life science.  Life science operating expenses increased primarily as a result of an increase in occupancy levels at our life science facilities and the impact of development assets placed in service during 2008.

 

·       Medical office.  Medical office operating expenses decreased primarily as a result of cost saving initiatives implemented in 2009.

 

General and administrative expenses

 

General and administrative expenses increased $5.8 million to $22.9 million for the three months ended September 30, 2009. The increase in general and administrative expenses was primarily due to an increase in legal fees associated with litigation matters. For the three months ended September 30, 2009 and 2008, in relation to the Ventas litigation matter, we incurred legal expenses of $6.2 million and $1.5 million, respectively (See the information set forth under the heading “Legal Proceedings” of Note 11 to the Condensed Consolidated Financial Statements).

 

Litigation provision

 

On September 4, 2009 a jury returned a verdict in favor of Ventas, in an action brought against us in the United States District Court for the Western District of Kentucky for tortious interference with prospective business advantage in connection with Ventas’s 2007 acquisition of Sunrise REIT. The jury awarded Ventas approximately $102 million in compensatory damages, which we recorded as a litigation provision expense during the quarter ended September 30, 2009 (See the information set forth under the heading “Legal Proceedings” of Note 11 to the Condensed Consolidated Financial Statements).

 

Impairments

 

During the three months ended September 30, 2009, we recognized impairments of $15.1 million related to two of our senior housing DFLs as a result of an anticipated restructure of the underlying leases (see Note 5 to the Condensed Consolidated Financial Statements). During the three months ended September 30, 2008, we recognized impairments of $3.7 million related to intangible assets associated with the early termination of three leases in our life science segment.

 

Interest and other income, net

 

For the three months ended September 30, 2009, interest and other income, net decreased $22.3 million to $40.0 million. This decrease was primarily related to: (i) $28.6 million of income in 2008 related to the settlement of litigation with Tenet Healthcare Corporation (“Tenet”), (ii) a $5.1 million decrease in interest earned on variable-rate loans related to a decline in LIBOR and (iii) a decrease in interest income earned from cash and cash equivalents. The decrease was partially offset by: (i) gain on sales of marketable debt securities of $6.1 million during the three months ended September 30, 2009 and (ii) additional interest income of $7.7 million from the $720 million participation in first mortgage debt of HCR ManorCare purchased in August 2009.

 

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For a more detailed description of our mezzanine loan and marketable security investments, see Note 6 and Note 9, respectively, to the Condensed Consolidated Financial Statements and Item 3. Quantitative and Qualitative Disclosures About Market Risk .

 

Interest expense

 

Interest expense decreased $8.8 million to $74 million for the three months ended September 30, 2009. The decrease was primarily due to (i) $5.5 million from the repayment of the outstanding balance under our bridge loan and revolving line of credit facility, (ii) a $2.0 million decrease resulting from the repayment of $300 million senior unsecured floating rate notes in September 2008 and (iii) $1.1 million from higher capitalized interest related to assets placed in re-development. This decrease in interest expense was partially offset by a $1.0 million increase in interest expense from the net impact of mortgage debt placed on senior housing assets in 2008 and the repayment and prepayment of mortgage debt.

 

The table below sets forth information with respect to our debt, excluding premiums and discounts (dollars in thousands):

 

 

 

As of September 30,

 

 

 

2009

 

2008

 

Balance:

 

 

 

 

 

Fixed rate

 

$

4,722,757

 

$

5,223,688

 

Variable rate

 

972,504

 

741,869

 

Total

 

$

5,695,261

 

$

5,965,557

 

 

 

 

 

 

 

Percent of total debt:

 

 

 

 

 

Fixed rate

 

83

%

88

%

Variable rate

 

17

 

12

 

Total

 

100

%

100

%

 

 

 

 

 

 

Weighted average interest rate at end of period:

 

 

 

 

 

Fixed rate

 

6.32

%

6.27

%

Variable rate

 

2.49

%

3.54

%

Total weighted average rate

 

5.66

%

5.93

%

 

Income tax (expense) benefit

 

For the three months ended September 30, 2009, income tax expense decreased $1.2 million to a benefit of $0.3 million. This decrease is primarily due to lower interest earned due to a decline in LIBOR from a portion of one of our mezzanine loan investments and increased depreciation expense due to a correction of an immaterial error of one of our real estate investments, each of which are held in a taxable REIT subsidiary (“TRS”).

 

Discontinued operations

 

The decrease of $28.7 million in income from discontinued operations to $2.3 million for the three months ended September 30, 2009 compared to $31.0 million for the comparable period in the prior year is primarily due to a decrease in gains on real estate dispositions of $25.3 million. During the three months ended September 30, 2009 and 2008, we sold two properties for $5.8 million and three properties for $116 million, respectively. Discontinued operations for the three months ended September 30, 2009 included three properties compared to 19 properties for the three months ended September 30, 2008.

 

Noncontrolling interests’ and participating securities’ share in earnings

 

For the three months ended September 30, 2009, noncontrolling interests’ and participating securities’ share in earnings decreased $2.8 million to $3.9 million. This decrease was primarily due to (i) a $1.0 million decrease related to the conversions of 3.3 million of our noncontrolling interest DownREIT units into 4.2 million shares of our common stock from January 1, 2008 to September 30, 2009 and (ii) a $1.6 million decrease related to our purchase of other non-controlling interests.

 

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Comparison of the Nine Months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

 

Rental and related revenues

 

 

 

Nine Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Senior housing

 

$

217,353

 

$

210,102

 

$

7,251

 

3

%

Life science

 

159,072

 

155,527

 

3,545

 

2

 

Medical office

 

196,266

 

195,914

 

352

 

 

Hospital

 

62,164

 

62,274

 

(110

)

 

Skilled nursing

 

28,189

 

26,925

 

1,264

 

5

 

Total

 

$

663,044

 

$

650,742

 

$

12,302

 

2

%

 

·       Senior housing. Senior housing rental and related revenues for the nine months ended September 30, 2009 includes $6.4 million resulting from an adjustment to the purchase price allocation of certain assets acquired in 2006. No similar adjustments or additional rents were made in the nine months ended September 30, 2008. As a result of the transfer of an 11-property senior housing portfolio to Emeritus Corporation on December 1, 2008, we recognized an increase of $7.8 million primarily related to straight-line rents during the nine months ended September 30, 2009. These increases were partially offset by (i) additional rents from property level expense credits of $3.2 million related to our properties operated by Sunrise received in the nine months ended September 30, 2008 and (ii) a $5.3 million decrease in the facility-level operating revenues for three senior housing properties that were previously under management agreements and re-leased on a triple-net basis during 2009. No similar additional rents were received during the nine months ended September 30, 2009.

 

·       Life science The increase in life science rental and related revenues was primarily a result of a $21 million impact from development assets placed in service during 2008. Included in life science rental and related revenues for the nine months ended September 30, 2008 are lease termination fees of $18 million from a tenant in connection with the early termination of three leases on July 30, 2008. No similar early termination fees were recognized during the nine months ended September 30, 2009.

 

Tenant recoveries

 

 

 

Nine Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Life science

 

$

30,311

 

$

25,180

 

$

5,131

 

20

%

Medical office

 

35,319

 

35,272

 

47

 

 

Hospital

 

1,494

 

1,365

 

129

 

9

 

Total

 

$

67,124

 

$

61,817

 

$

5,307

 

9

%

 

·       Life science. Life science tenant recoveries increased primarily as a result of an increase in occupancy levels at our life science facilities and the impact of development assets placed in service during 2008.

 

Income from direct financing leases

 

Income from DFLs decreased $4.3 million to $39.3 million for the nine months ended September 30, 2009. The decrease was primarily due to two DFLs that were placed on non-accrual status and accounted for on a cost-recovery basis beginning October 2008. We expect income from DFLs will remain lower in 2009 as compared to 2008 as a result of these DFLs (See Note 5 to the Condensed Consolidated Financial Statements).

 

Depreciation and amortization expense

 

Depreciation and amortization expense increased $9.7 million to $ 242.3 million for the nine months ended September 30, 2009. The increase in depreciation and amortization expense was primarily related to: (i)  $4.7 million of accelerated amortization of intangible assets as a result of the modification of to the lease term of a tenant in one of our life science facilities, (ii) $3.1 million of the increase relates to development assets placed in service during 2008,

 

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(iii)  $4.1 million relates to the purchase in September 2008 of Tenet noncontrolling interest in Health Care Property Partners, a joint venture between HCP and an affiliate of Tenet, and (iv) $2.0 million resulting from an adjustment to the purchase price allocation related to certain assets acquired in 2006. The increase in depreciation and amortization expense was partially offset by $3.3 million due to the impact of properties which were taken out of service and placed into redevelopment during 2008 and 2009.

 

Operating expenses

 

 

 

Nine Months Ended
September 30,

 

Change

 

Segments

 

2009

 

2008

 

$

 

%

 

 

 

(dollars in thousands)

 

 

 

Senior housing

 

$

3,941

 

$

8,761

 

$

(4,820

)

(55

)%

Life science

 

34,639

 

31,520

 

3,119

 

10

 

Medical office

 

98,537

 

100,876

 

(2,339

)

(2

)

Hospital

 

2,542

 

2,636

 

(94

)

(4

)

Skilled nursing

 

153

 

56

 

97

 

NM

(1)

Total

 

$

139,812

 

$

143,849

 

$

(4,037

)

(3

)%

 


(1)    Percentage change not meaningful.

 

Operating expenses are predominantly related to MOB and life science properties where we incur the expenses and recover all or a portion of those expenses from the tenants. The presentation of expenses as operating or general and administrative is based on the underlying nature of the expense. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses.

 

·       Senior housing.  The decrease in senior housing operating expenses primarily relates to a decrease in facility-level operating expenses for two senior housing properties that were previously under management agreements and re-leased on a triple-net basis during 2009.

 

·       Life science.  Life science tenant recoveries increased primarily as a result of an increase in occupancy levels at our life science facilities and the impact of development assets placed in service during 2008.

 

·       Medical office.  Medical office operating expenses decreased primarily as a result of cost saving initiatives implemented in 2009.

 

General and administrative expenses

 

General and administrative expenses increased $5.8 million to $61.6 million for the nine months ended September 30, 2009. The increase in general and administrative expenses was primarily due to an increase in legal fees associated with litigation matters partially offset by lower compensation related expenses. For the nine months ended September 30, 2009 and 2008, in relation to the Ventas litigation matter, we incurred legal expenses of $12.7 million and $4.5 million, respectively (See the information set forth under the heading “Legal Proceedings” of Note 11 to the Condensed Consolidated Financial Statements).

 

Litigation provision

 

On September 4, 2009 a jury returned a verdict in favor of Ventas, Inc., in an action brought against us in the United States District Court for the Western District of Kentucky for tortious interference with prospective business advantage in connection with Ventas’s 2007 acquisition of Sunrise REIT. The jury awarded Ventas approximately $102 million in compensatory damages, which we recorded as a litigation provision expense during the quarter ended September 30, 2009 (See the information set forth under the heading “Legal Proceedings” of Note 11 to the Condensed Consolidated Financial Statements).

 

Impairments

 

During the nine months ended September 30, 2009, we recognized impairments of $21 million as a result of (i) $15.1 million related to two of our senior housing DFLs as a result of an anticipated restructure of the underlying leases (see Note 5 to the Condensed Consolidated Financial Statements) , and (ii) $5.9 million of intangible assets on 12 of 15 senior housing communities that were determined to be impaired due to the termination of the Sunrise management agreements on 15 senior housing communities effective October 1, 2009. During the nine months ended September 30, 2008, we recognized impairments of $13.4 million as follows: (i) $3.7 million related to intangible assets associated with the early termination of

 

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three leases in the life science segment, (ii) $1.6 million related to two senior housing facilities as a result of a decrease in expected cash flows, and (iii) $8.1 million, included in discontinued operations, related to the decrease in expected cash flows and anticipated dispositions of two senior housing properties and one hospital.

 

Interest and other income, net

 

For the nine months ended September 30, 2009, interest and other income, net decreased $35.3 million to $93.0 million. This decrease was primarily related to: (i) $28.6 million of income in 2008 related to the settlement of litigation with Tenet, (ii) a $17.7 million decrease in interest earned on variable-rate loans related to a decline in the LIBOR and repayment of various loans receivable, (iii) $1.4 million related to the sales of interests in two of our unconsolidated joint ventures in 2008 and (iv) a decrease in interest income related to cash balances and resulting from loan repayments of $3.7 million. The decrease was partially offset by: (i) additional interest income of $7.7 million from the $720 million participation in first mortgage debt of HCR ManorCare purchased in August 2009, (ii) increases in net gains on marketable securities of $3.4 million, (iii) a $3.5 million of other-than-temporary impairment on marketable equity securities in 2008, and (iv) a hedge ineffectiveness charge of $2.4 million upon the settlement of two forward-starting interest-rate swap contracts that were settled in June 2008.

 

For a more detailed description of our mezzanine loan and marketable security investments, see Note 6 and Note 9, respectively, to the Condensed Consolidated Financial Statements and Item 3. Quantitative and Qualitative Disclosures About Market Risk .

 

Interest expense

 

Interest expense decreased $38.4 million to $226.1 million for the nine months ended September 30, 2009. The decrease was primarily due to (i) $38.5 million from the repayment of the outstanding balance under our bridge loan and revolving line of credit facility, and (ii) a $8.3 million decrease resulting from the repayment of $300 million senior unsecured floating rate notes in September 2008. This decrease in interest expense was partially offset by a $9.4 million increase in interest expense from the net impact of mortgage debt placed on senior housing assets in 2008 and the repayment of mortgage debt related to contractual maturities.

 

Income tax expense

 

For the nine months ended September 30, 2009, income tax expense decreased $2.9 million to $1.4 million. This decrease is primarily due to lower interest earned due to a decline in LIBOR from a portion of one of our mezzanine loan investments and increased depreciation expense due to a correction of an immaterial error of one of our real estate investments, each of which are held in a TRS.

 

Equity income from unconsolidated joint ventures

 

For the nine months ended September 30, 2009, equity income from unconsolidated joint ventures decreased $1.7 million to $2.0 million. This decrease was primarily due to a change in the expected useful life of certain intangible assets related to one of our unconsolidated joint ventures that resulted in lower equity income due to higher amounts of amortization expense.

 

Discontinued operations

 

The decrease of $203.3 million in income from discontinued operations to $36.1 million for the nine months ended September 30, 2009 was primarily due to a decrease in gains on real estate dispositions of $194 million, and a decline in operating income from discontinued operations of $17.3 million. During the nine months ended September 30, 2009 and 2008, we sold 11 properties for $58 million and 47 properties for $629 million, respectively. Discontinued operations for the nine months ended September 30, 2009 included 12 properties compared to 63 properties for the nine months ended September 30, 2008.

 

Noncontrolling interests’ and participating securities’

 

For the nine months ended September 30, 2009, noncontrolling interests’ and participating securities’ share in earnings decreased $7.4 million to $12.1 million. This decrease is primarily due to (i) a $3.9 million decrease related to the conversions of 3.3 million of our noncontrolling interest DownREIT units into 4.2 million shares of our common stock from January 1, 2008 to September 30, 2009 and (ii) a $2.7 million decrease related to our purchase of other non-controlling interests.

 

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Liquidity and Capital Resources

 

Our principal liquidity needs are to (i) fund normal operating expenses, (ii) meet debt service requirements, including $22.8 million of our mortgage debt maturing in the remainder of 2009, (iii) fund capital expenditures, including tenant improvements and leasing costs, (iv) fund acquisition and development activities, and (v) make minimum distributions required to maintain our REIT qualification under the Code. We believe these needs will be satisfied using cash flows generated by operating activities, provided by financing activities and from sales of assets during the next twelve months.

 

Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as to fund future acquisitions and development through the issuance of additional securities or secured debt. As of October 30, 2009, we had a credit rating of Baa3 (stable) from Moody’s, BBB (stable) from S&P and BBB (positive) from Fitch on our senior unsecured debt securities, and Ba1 (stable) from Moody’s, BBB- (stable) from S&P and BBB- (positive) from Fitch on our preferred equity securities. During 2008, there was a decline in the availability of financing from the capital markets and widening credit spreads. Our ability to continue to access capital could be impacted by various factors including general market conditions and the continuing slowdown in the economy, interest rates, credit ratings on our securities, and any changes to these ratings, the market price of our capital stock, the performance of our portfolio, tenants, borrowers and operators, including any restructurings, disruptions or bankruptcies of our tenants, borrowers and operators, the perception of our potential future earnings and cash distributions, any unwillingness on the part of lenders to make loans to us and any deterioration in the financial position of lenders that might make them unable to meet their obligations to us.

 

Net cash provided by operating activities was $390 million and $455 million for the nine months ended September 30, 2009 and 2008, respectively. The decrease in operating cash flows from operations primarily reflects the 2008 litigation settlement income and termination fees.  The decrease was partially offset by increased revenues, as well as fluctuations in receivables, payables, accruals and deferred revenue. Our cash flows from operations are dependent upon the occupancy level of multi-tenant buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses and other factors.

 

Net cash used in investing activities was $69 million during the nine months ended September 30, 2009 and principally reflects fundings of $166 million for investments in loans receivable and $71 million for development of real estate, which were partially offset by sales of $120 million of marketable securities and $58 million of proceeds from sales of real estate. During the nine months ended September 30, 2009 and 2008, we used $27 million and $45 million, respectively, to fund lease commissions and tenant and capital improvements.

 

Net cash used in financing activities was $234 million for the nine months ended September 30, 2009 and principally reflects the net effects of: (i) repayment of our bridge loan credit facility of $320 million, (ii) net repayments under our bank revolving line of credit of $150 million, (iii) payments of common and preferred dividends aggregating $377 million, and (iv) repayment of our mortgage debt of $206 million. The amount of cash used in financing activities was partially offset by net proceeds of $846 million from the issuances of common stock.

 

At September 30, 2009, we held approximately $23.5 million in deposits and $33.6 million in irrevocable letters of credit from commercial banks securing tenants’ lease obligations and borrowers’ loan obligations. We may draw upon the letters of credit or depository accounts if there are defaults under the related leases or loans. Amounts available under letters of credit could change based upon facility operating conditions and other factors, and such changes may be material.

 

Debt

 

Bank Line of Credit and Bridge and Term Loans

 

Our revolving line of credit facility with a syndicate of banks provides for an aggregate borrowing capacity of $1.5 billion and matures on August 1, 2011. This revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 0.325% to 1.00%, depending upon our debt ratings. We pay a facility fee on the entire revolving commitment ranging from 0.10% to 0.25%, depending upon our debt ratings. Based on our debt ratings on September 30, 2009, the margin on the revolving line of credit facility was 0.55% and the facility fee was 0.15%. At September 30, 2009, we had no outstanding amounts under this revolving line of credit facility.

 

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At September 30, 2009, the outstanding balance of our term loan was $200 million and matures on August 1, 2011. The term loan accrues interest at a rate per annum equal to LIBOR plus a margin ranging from 1.825% to 2.375%, depending upon our debt ratings (weighted-average effective interest rate of 2.73% at September 30, 2009). Based on our debt ratings at September 30, 2009, the margin on the term loan was 2.00%.

 

Our revolving line of credit facility and term loan contain certain financial restrictions and other customary requirements. Among other things, these covenants, using terms defined in the agreement, (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 65%, (iii) require a Fixed Charge Coverage ratio of 1.75 times, and (iv) require a formula-determined Minimum Consolidated Tangible Net Worth of $4.9 billion at September 30, 2009. At September 30, 2009, we were in compliance with each of these restrictions and requirements of our revolving line of credit facility and term loan.

 

Our revolving line of credit facility and term loan also contain cross-default provisions to other indebtedness of ours, including in some instances, certain mortgages on our properties. Certain mortgages contain default provisions relating to defaults under the leases or operating agreements on the applicable properties by our operators or tenants, including default provisions relating to the bankruptcy filings of such operator or tenant. Although we believe that we would be able to secure amendments under the applicable agreements if a default as described above occurs, such default may result in significantly less favorable borrowing terms than currently available, material delays in the availability of funding or other material adverse consequences.

 

On May 8, 2009, we repaid the remaining $320 million outstanding balance under our bridge loan credit facility with proceeds received from the issuance of shares of common stock.

 

Senior Unsecured Notes

 

At September 30, 2009, we had $3.5 billion in aggregate principal amount of senior unsecured notes outstanding. Interest rates on the notes ranged from 1.20% to 7.07% with a weighted average effective interest rate of 6.13% at September 30, 2009. Discounts and premiums are amortized to interest expense over the term of the related notes.

 

The senior unsecured notes contain certain covenants including limitations on debt, cross-acceleration provisions and other customary terms . At September 30, 2009, we were in compliance with these covenants.

 

Mortgage and Other Secured Debt

 

At September 30, 2009, we had $1.9 billion in mortgage debt secured by 168 healthcare facilities with a carrying value of $2.4 billion. Interest rates on the mortgage notes ranged from 0.33% to 8.63% with a weighted average effective interest rate of 5.10% at September 30, 2009.

 

On August 3, 2009, in connection with our purchase of a $720 million (face value) participation in first mortgage debt of HCR ManorCare, we incurred $425 million in secured debt financing. This debt matures in January 2013, subject to certain conditions, and is secured by the first mortgage debt participation. See Note 6 to the Condensed Consolidated Financial Statements for additional disclosures regarding this participating interest pledged as collateral for this debt.

 

On August 27, 2009, we repaid early $100 million of variable-rate mortgage debt. The mortgage debt, with an original maturity of January 2010, was repaid with proceeds from our August 2009 public equity offering and third quarter asset sales.

 

Mortgage debt generally requires monthly principal and interest payments, is collateralized by certain properties and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered properties, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the properties in good condition, requires maintenance of insurance on the properties and includes requirements to obtain lender consent to enter into and terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple properties and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such properties .

 

Other Debt

 

At September 30, 2009, we had $99 million of non-interest bearing life care bonds at two of our continuing care retirement communities and non-interest bearing occupancy fee deposits at another of our senior housing facilities, all of which were payable to certain residents of the facilities (collectively, “Life Care Bonds”) . At September 30, 2009, $44 million of the Life Care Bonds were refundable to the residents upon the resident moving out or to their estate upon death, and $55 million of the Life Care Bonds were refundable after the unit is successfully remarketed to a new resident.

 

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Debt Maturities

 

The following table summarizes our stated debt maturities and scheduled principal repayments, excluding debt premiums and discounts, at September 30, 2009 (in thousands):

 

Year

 

Amount

 

2009 (3 months)

 

$

122,300

 

2010

 

321,467

 

2011

 

632,500

 

2012

 

313,776

 

2013

 

1,225,104

 

Thereafter(1)

 

3,080,114

 

 

 

$

5,695,261

 

 


(1)    On October 15, 2009, we exercised our election to extend the maturity date of $86 million of mortgage debt from 2010 to 2015. The above table reflects the reclassification of the portion of the mortgage debt that was extended to September 1, 2015.

 

Derivative Instruments

 

On June 12, 2009, we executed an interest-rate swap contract (pay float and receive fixed), which is designated as hedging the changes in fair value of fixed-rate senior unsecured notes due to fluctuations in the underlying benchmark interest rate. The fair value hedge terminates in September 2011, has a notional amount of $250 million, and hedges approximately 86% of the $292 million of outstanding senior unsecured notes maturing in September 2011. The estimated fair value of the contract at September 30, 2009 was $2.5 million and is included in other assets, net.

 

On August 20, 2009, we executed two interest-rate swap contracts (pay float and receive fixed), which are designated as hedging fluctuations in interest receipts on a participation interest in a floating-rate secured mortgage note due to fluctuations in the underlying benchmark interest rate. These cash flow hedges terminate in February and August 2011 and have an aggregate notional amount of $500 million. The aggregate estimated fair value of the contracts at September 30, 2009 was $0.9 million and is included in other assets, net.

 

We also have four interest-rate swap contracts outstanding at September 30, 2009, which hedge fluctuations in interest payments on variable-rate secured debt. At September 30, 2009, these interest-rate swap contracts had an aggregate notional amount of $60 million and estimated fair value of $4 million included in accounts payable and accrued liabilities.

 

For a more detailed description of our derivative financial instruments, see Note 14 of the Condensed Consolidated Financial Statements and Item 3. Quantitative and Qualitative Disclosures About Market Risk .

 

Equity

 

During the nine months ended September 30, 2009, we issued approximately 106,000 shares of our common stock under our Dividend Reinvestment and Stock Purchase Plan, at an average price per share of $22, for aggregate proceeds of $2.3 million. At September 30, 2009, equity totaled $6.0 billion and our equity securities had a market value of $8.9 billion.

 

On May 8, 2009, we completed a $440 million public offering of 20.7 million shares of our common stock at a price per share of $21.25. We received net proceeds of $422 million, which were used to repay all amounts of indebtedness outstanding under our bridge loan credit facility with the remainder used for general corporate purposes .

 

On August 10, 2009, we completed a $441 million public offering of 17.8 million shares of our common stock at a price of $24.75 per share. We received net proceeds of $423 million, which were used to repay the total outstanding indebtedness under our revolving line of credit facility, including borrowings for the additional investment in HCR ManorCare, with the remainder used for general corporate purposes.

 

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At September 30, 2009, there were a total of 4.3 million DownREIT units outstanding in six limited liability companies in which we are the managing member: (i) HCPI/Tennessee, LLC; (ii) HCPI/Utah, LLC; (iii) HCPI/Utah II, LLC; (iv) HCP DR California, LLC; (v) HCP DR Alabama, LLC; and (vi) HCP DR MCD, LLC. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). For the nine months ended September 30, 2009, we issued 525,000 shares of our common stock upon the conversion of 525,000 DownREIT units.

 

Shelf Registration

 

We have a prospectus on file with the SEC as part of a registration statement on Form S-3, using a shelf registration process which expires in September 2012. Under this “shelf” process, we may sell from time to time any combination of the securities in one or more offerings. The securities described in the prospectus include common stock, preferred stock and debt securities. Each time we sell securities under the shelf registration, we will provide a prospectus supplement that will contain specific information about the terms of the securities being offered and of the offering. We may offer and sell the securities pursuant to this prospectus from time to time in one or more of the following ways: through underwriters or dealers, through agents, directly to purchasers or through a combination of any of these methods of sales. Proceeds from the sale of these securities may be used for general corporate purposes, which may include repayment of indebtedness, working capital and potential acquisitions.

 

Off-Balance Sheet Arrangements

 

We own interests in certain unconsolidated joint ventures, including HCP Ventures II, HCP Ventures III, LLC and HCP Ventures IV LLC, as described under Note 7 to the Condensed Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities, as described under Note 11 to the Condensed Consolidated Financial Statements. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described below under Contractual Obligations .

 

Contractual Obligations

 

The following table summarizes our material contractual payment obligations and commitments at September 30, 2009 (in thousands):

 

 

 

Total

 

Less than
One Year

 

2010-2011

 

2012-2013

 

More than
Five Years

 

Senior unsecured notes

 

$

3,535,686

 

$

 

$

498,686

 

$

800,000

 

$

2,237,000

 

Mortgage and other secured debt(1)

 

1,860,088

 

22,813

 

255,281

 

738,880

 

843,114

 

Term loan

 

200,000

 

 

200,000

 

 

 

Other debt(2)

 

99,487

 

99,487

 

 

 

 

Ground and other operating leases

 

196,861

 

927

 

7,944

 

8,336

 

179,654

 

Development commitments(3)

 

10,776

 

5,578

 

5,198

 

 

 

Interest

 

1,648,305

 

77,245

 

578,404

 

478,996

 

513,660

 

Total

 

$

7,551,203

 

$

206,050

 

$

1,545,513

 

$

2,026,212

 

$

3,773,428

 

 


(1)    On October 15, 2009, we exercised our election to extend the maturity date of $86 million of mortgage debt from 2010 to 2015. The above table reflects the reclassification of the portion of the mortgage debt that was extended to September 1, 2015.

(2)    Other debt represents non-interest bearing Life Care Bonds and occupancy fee deposits at three of our senior housing facilities, which are payable on-demand, under certain conditions.

(3)    Represents construction and other commitments for developments in progress.

 

Inflation

 

Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Substantially all of our MOB leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of our senior housing, life science, skilled nursing and hospital leases require the operator or tenant to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the operator or tenant expense reimbursements and contractual rent increases described above .

 

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Recent Accounting Pronouncements

 

See Note 2 to the Condensed Consolidated Financial Statements for the impact of recent accounting pronouncements.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Interest Rate Risk.   At September 30, 2009 , we were exposed to market risks related to fluctuations in interest rates on approximately $1.7 billion of variable-rate HCR ManorCare loan investments (see note 6) and $92 million of other investments where the payments fluctuate with changes in LIBOR. Our exposure to income fluctuations related to our variable-rate investments is partially offset by (i)  $200 million of variable-rate term loan financing, (ii)  $498 million of variable-rate mortgage notes and other secured debt payable, excluding $46 million of variable-rate mortgage notes which have been hedged through interest-rate swap contracts, (iii) $25 million of variable-rate senior unsecured notes, and (iv) $750 million of additional variable interest rate exposure achieved through interest-rate swap contracts (pay float and receive fixed).

 

Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed-rate debt, loans receivable and debt securities unless such instruments mature or are otherwise terminated. However, interest rate changes will affect the fair value of our fixed rate instruments. Conversely, changes in interest rates on variable-rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to our variable-rate asset exposure, and assuming no change in the outstanding balance as of September 30, 2009 , net interest income would improve by approximately $3.2 million, or $0.01 per common share on a diluted basis. Assuming a 50 basis point decrease in interest rates under the above circumstances, taking into consideration that the index underlying many of our arrangements are currently below 50 basis points and is not expected to go below zero, net interest income would decline by $1.6 million.

 

We use derivative instruments during the normal course of business to manage or hedge interest rate risk. We do not use derivative financial instruments for speculative purposes. Derivatives are recorded on the balance sheet at their estimated fair value. See Note 14 to the Condensed Consolidated Financial Statements for further information.

 

To illustrate the effect of movements in the interest rate markets, we performed a market sensitivity analysis on the noted hedging instruments. We applied various basis point spreads, to the underlying interest rate curves of the derivative portfolio in order to determine the instruments’ change in estimated fair value. The following table summarizes the analysis performed (dollars in thousands):

 

 

 

 

 

Effects of Change in Interest Rates

 

Date Entered

 

Maturity Date

 

+50 Basis
Points

 

-50 Basis
Points

 

+100 Basis
Points

 

-100 Basis
Points

 

July 2005

 

July 2020

 

$

1,930

 

$

(2,318

)

$

4,055

 

$

(4,442

)

June 2009

 

September  2011

 

(2,653

)

1,820

 

(5,114

)

4,732

 

June 2009

 

July 2013

 

254

 

(266

)

513

 

(525

)

August  2009

 

February  2011

 

(1,718

)

1,719

 

(3,436

)

3,437

 

August  2009

 

August  2011

 

(2,279

)

2,393

 

(4,615

)

4,729

 

 

Market Risk.   We are directly and indirectly affected by changes in the equity and bond markets. We have investments in marketable debt and equity securities classified as available-for-sale. Gains and losses on these securities are recognized in income when realized and losses are recognized when an other-than-temporary decline in value is identified. The initial indicator of an other-than-temporary decline in value for marketable equity securities is a sustained decline in market price below the carrying value for an extended period of time. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our cost; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the stock or bond price, if any. At September 30, 2009 , the fair value and cost, or the adjusted cost basis for those securities where a recognized loss was recorded, of marketable equity securities was $3.9 million and $3.7 million, respectively, and the fair value and cost basis of marketable debt securities was $201.2 million and $195.8 million, respectively.

 

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Item 4.  Controls and Procedures

 

Disclosure Controls and Procedures.   We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Also, we have investments in certain unconsolidated entities. Our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our consolidated subsidiaries.

 

As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2009. Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting.   There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter to which this report relates that have materially affected, or are reasonable likely to materially affect, our internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The information set forth under the heading “Legal Proceedings” of Note 11 to the Condensed Consolidated Financial Statements, included in Part I, Item 1 of this Report, is incorporated herein by reference.

 

On May 3, 2007, Ventas filed a complaint against the Company in the United States District Court for the Western District of Kentucky asserting claims of tortious interference with contract and tortious interference with prospective business advantage. The complaint alleged, among other things, that the Company interfered with Ventas’ purchase agreement with Sunrise REIT; that the Company interfered with Ventas’ prospective business advantage in connection with the Sunrise REIT transaction; and that the Company’s actions caused Ventas to suffer damages. As part of the same litigation, the Company filed counterclaims against Ventas as successor to Sunrise REIT. On March 25, 2009, the District Court issued an order dismissing the Company’s counterclaims. On April 8, 2009, the Company filed a motion for leave to file amended counterclaims. On May 26, 2009, the District Court denied the Company’s motion.

 

Ventas sought approximately $300 million in compensatory damages plus punitive damages. On July 16, 2009, the District Court dismissed Ventas’s claim that HCP interfered with Ventas’s purchase agreement with Sunrise REIT, dismissed claims for compensatory damages based on alleged financing and other costs, and allowed Ventas’s claim of interference with prospective advantage to proceed to trial. Ventas’s claim was tried before a jury between August 18, 2009 and September 4, 2009. During the trial, the District Court dismissed Ventas’s claim for punitive damages. On September 4, 2009, the jury returned a verdict in favor of Ventas in the amount of approximately $102 million in compensatory damages. The District Court entered a judgment against the Company in that amount on September 8, 2009, which the Company recorded as a litigation provision expense during the quarter ended September 30, 2009.

 

On September 22, 2009, the Company filed a motion for judgment as a matter of law or for a new trial. Also on September 22, 2009, Ventas filed a motion seeking approximately $20 million in prejudgment interest and approximately $4 million in additional damages to account for changes in currency exchange rates. The District Court has not yet ruled on those motions. The Company intends to continue to defend itself on appeal, including by appealing the adverse judgment.

 

On June 29, 2009, several of the Company’s subsidiaries, together with three of its tenants, filed complaints in the Delaware Court of Chancery against Sunrise Senior Living, Inc. and three of its subsidiaries. A complaint was also filed on behalf of several other Company subsidiaries and one tenant on July 24, 2009 in the United States District Court for the Eastern District of Virginia. The complaints are based on Sunrise’s defaults under management and related agreements

 

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governing Sunrise’s operation of 64 Company subsidiary-owned facilities, 62 of which are leased to the tenants and two of which are leased directly to Sunrise. The complaints generally allege that Sunrise systematically breached various contractual and fiduciary duties by, among other things, (i) failing to maintain licenses necessary to the facilities’ operation; (ii) demonstrating a conscious disregard for the facilities’ budgets and other controls over expenditures related to the facilities; (iii) failing to provide various marketing and financial reports necessary for the Company subsidiaries’ and the tenants’ monitoring of Sunrise’s performance; (iv) retaining funds for Sunrise’s own benefit, and/or the benefit of its affiliates, that were properly due to the tenants; (v) charging the facilities for inappropriate overhead and similar corporate-level pass-through expenses that should have been borne by Sunrise and/or its affiliates; and (vi) obstructing the Company subsidiaries’ and the tenants’ contractually-prescribed audits of Sunrise’s operation of the facilities. The Company subsidiaries also allege that Sunrise’s policies constitute a breach of fiduciary duties to the Company subsidiaries and the tenants. The Company subsidiaries and tenants are generally seeking judicial confirmation of Sunrise’s material defaults of the management agreements and the Company subsidiaries’ and tenants’ rights to terminate the agreements for the 64 communities, and associated injunctive relief requiring Sunrise to vacate the facilities after cooperating in the transition of the facilities to another operator. In addition, the Company subsidiaries and tenants are seeking monetary damages related to the defaults. With regard to two Company subsidiary-owned facilities in the State of New York, the relevant Company subsidiary and tenant also seek judicial confirmation of the impossibility of the parties’ performance under the applicable management agreements due to the passage and implementation of new state legislation and related regulations.

 

In response to each of the complaints, Sunrise has asserted counterclaims against the Company, the relevant Company subsidiaries and tenants alleging that (i) such Company subsidiaries and tenants have breached contractual duties and the implied covenant of good faith and fair dealing under the management and related agreements; (ii) the Company and the relevant Company subsidiaries have intentionally interfered with tenants’ performance of the management agreements; and (iii) the Company, the relevant Company subsidiaries and tenants have conspired to harm Sunrise’s business and reputation.  The Company, the relevant Company subsidiaries and tenants have collectively filed motions to dismiss the counterclaims in both jurisdictions.

 

A trial date has not been set by either court. The Company expects that enforcing its and the Companies subsidiaries’ rights, and potentially defending against Sunrise’s counterclaims, will require it to expend significant funds. There can be no assurance that the Company subsidiaries or its tenants will prevail in their claims against Sunrise or in defending against Sunrise’s counterclaims.

 

Item 1A.  Risk Factors

 

There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)

 

None.

 

(b)

 

None.

 

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(c)

 

The table below sets forth information with respect to purchases of our common stock made by us or on our behalf or by any “affiliated purchaser,” as such term is defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, during the quarter ended September 30, 2009.

 

Period Covered

 

Total Number
Of Shares
Purchased(1)

 

Average Price
Paid Per Share

 

Total Number Of Shares
(Or Units) Purchased As
Part Of Publicly
Announced Plans Or
Programs

 

Maximum Number (Or
Approximate Dollar Value)
Of Shares (Or Units) That
May Yet Be Purchased
Under The Plans Or
Programs

 

July 1-31, 2009

 

501

 

$

21.74

 

 

 

August 1-31, 2009

 

1,810

 

26.23

 

 

 

September 1-30, 2009

 

322

 

28.49

 

 

 

Total

 

2,633

 

25.65

 

 

 

 


(1)    Represents restricted shares withheld under our Amended and Restated 2000 Stock Incentive Plan, as amended, and our 2006 Performance Incentive Plan (collectively, the “Incentive Plans”), to offset tax withholding obligations that occur upon vesting of restricted shares. Our Incentive Plans provide that the value of the shares withheld shall be the closing price of our common stock on the date the relevant transaction occurs.

 

Item 5.  Other Information

 

On October 29, 2009, the Company’s Board of Directors amended the Fourth Amended and Restated Bylaws of the Company, effective immediately, to provide, as permitted by Section 3-702(b) of the Maryland General Corporation Law (the “MGCL”), that Title 3 of Subtitle 7 of the MGCL (the Maryland Control Share Acquisition Act) shall not apply to acquisition by any person of shares of the Company (Article II, Section 9).  The above description is qualified in its entirety by Exhibit 3.2.2 to this Quarterly Report on Form 10-Q, which exhibit is specifically incorporated herein by reference.

 

Item 6.  Exhibits

 

2.1

 

Share Purchase Agreement, dated as of June 3, 2007, by and between HCP and SEGRO plc (incorporated herein by reference to Exhibit 2.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed June 6, 2007).

 

 

 

3.1

 

Articles of Restatement of HCP (incorporated by reference herein to Exhibit 3.1 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895), filed October 30, 2007).

 

 

 

3.2

 

Fourth Amended and Restated Bylaws of HCP (incorporated herein by reference to Exhibit 3.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed September 25, 2006).

 

 

 

3.2.1

 

Amendment No. 1 to Fourth Amended and Restated Bylaws of HCP (incorporated by reference herein to Exhibit 3.2.1 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895), filed October 30, 2007).

 

 

 

3.2.2

 

Amendment No. 2 to Fourth Amended and Restated Bylaws of HCP, filed November 3, 2009.

 

 

 

4.1

 

Indenture, dated as of September 1, 1993, between HCP and The Bank of New York, as Trustee (incorporated herein by reference to Exhibit 4.2 to HCP’s Registration Statement on Form S-3/A (Registration No. 333-86654), filed May 21, 2002).

 

 

 

4.2

 

Form of Fixed Rate Note (incorporated herein by reference to Exhibit 4.2 to HCP’s Registration Statement on Form S-3 (Registration No. 33-27671), filed March 20, 1989).

 

 

 

4.3

 

Form of Floating Rate Note (incorporated herein by reference to Exhibit 4.3 to HCP’s Registration Statement on Form S-3 (Registration No. 33-27671), filed March 20, 1989).

 

 

 

4.4

 

Registration Rights Agreement, dated as of January 20, 1999, by and between HCP and Boyer Castle Dale Medical Clinic, L.L.C. (incorporated herein by reference to Exhibit 4.9 to HCP’s Annual Report on Form 10-K (File No. 1-08895) for the year ended December 31, 1998). This Exhibit is identical in all material respects to 13 other documents except the parties thereto. The parties to these other documents, other than HCP, were Boyer Centerville Clinic Company, L.C., Boyer Elko, L.C., Boyer Desert Springs, L.C., Boyer Grantsville Medical, L.C., Boyer-Ogden Medical Associates, LTD., Boyer Ogden Medical Associates No. 2, LTD., Boyer Salt Lake Industrial Clinic Associates, LTD., Boyer-St. Mark’s Medical Associates, LTD., Boyer McKay-Dee Associates, LTD., Boyer St. Mark’s Medical Associates #2, LTD., Boyer Iomega, L.C., Boyer Springville, L.C., and Boyer Primary Care Clinic Associates, LTD. #2.

 

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4.5

 

Indenture, dated as of January 15, 1997, by and between American Health Properties, Inc. (a company that merged with and into HCP) and The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.1 to American Health Properties, Inc.’s Current Report on Form 8-K (File No. 1-08895), filed January 21, 1997).

 

 

 

4.6

 

First Supplemental Indenture, dated as of November 4, 1999, by and between HCP and The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895) for the quarter ended September 30, 1999).

 

 

 

4.7

 

Registration Rights Agreement, dated as of August 17, 2001, by and among HCP, Boyer Old Mill II, L.C., Boyer- Research Park Associates, LTD., Boyer Research Park Associates VII, L.C., Chimney Ridge, L.C., Boyer-Foothill Associates, LTD., Boyer Research Park Associates VI, L.C., Boyer Stansbury II, L.C., Boyer Rancho Vistoso, L.C., Boyer-Alta View Associates, LTD., Boyer Kaysville Associates, L.C., Boyer Tatum Highlands Dental Clinic, L.C., Amarillo Bell Associates, Boyer Evanston, L.C., Boyer Denver Medical, L.C., Boyer Northwest Medical Center Two, L.C., and Boyer Caldwell Medical, L.C. (incorporated herein by reference to Exhibit 4.12 to HCP’s Annual Report on Form 10-K405 (File No. 1-08895) for the year ended December 31, 2001).

 

 

 

4.8

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as Trustee, establishing a series of securities entitled “6.5% Senior Notes due February 15, 2006” (incorporated herein by reference to Exhibit 4.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 21, 1996).

 

 

 

4.9

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as Trustee, establishing a series of securities entitled “67/8% Mandatory Par Put Remarketed Securities due June 8, 2015” (incorporated herein by reference to Exhibit 4.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed July 21, 1998).

 

 

 

4.10

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as Trustee, establishing a series of securities entitled “6.45% Senior Notes due June 25, 2012” (incorporated herein by reference to Exhibit 4.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed June 25, 2002).

 

 

 

4.11

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as Trustee, establishing a series of securities entitled “6.00% Senior Notes due March 1, 2015” (incorporated herein by reference to Exhibit 3.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 28, 2003).

 

 

 

4.12

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as Trustee, establishing a series of securities entitled “55/8% Senior Notes due May 1, 2017” (incorporated herein by reference to Exhibit 4.2 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed April 27, 2005).

 

 

 

4.13

 

Registration Rights Agreement, dated as of October 1, 2003, by and among HCP, Charles Crews, Charles A. Elcan, Thomas W. Hulme, Thomas M. Klaritch, R. Wayne Price, Glenn T. Preston, Janet Reynolds, Angela M. Playle, James A. Croy, John Klaritch as Trustee of the 2002 Trust F/B/O Erica Ann Klaritch, John Klaritch as Trustee of the 2002 Trust F/B/O Adam Joseph Klaritch, John Klaritch as Trustee of the 2002 Trust F/B/O Thomas Michael Klaritch, Jr. and John Klaritch as Trustee of the 2002 Trust F/B/O Nicholas James Klaritch (incorporated herein by reference to Exhibit 4.16 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895) for the quarter ended September 30, 2003).

 

 

 

4.14

 

Amended and Restated Dividend Reinvestment and Stock Purchase Plan, amended as of October 30, 2008 (incorporated herein by reference to HCP’s Registration Statement on Form S-3 (Registration No. 333-137225), dated September 8, 2006).

 

 

 

4.15

 

Specimen of Stock Certificate representing the 7.1% Series F Cumulative Redeemable Preferred Stock, par value $1.00 per share (incorporated herein by reference to Exhibit 4.1 of HCP’s Registration Statement on Form 8-A12B (File No. 1-08895), filed on December 2, 2003).

 

 

 

4.16

 

Form of Fixed Rate Global Medium-Term Note (incorporated herein by reference to Exhibit 4.3 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed November 20, 2003).

 

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4.17

 

Form of Floating Rate Global Medium-Term Note (incorporated herein by reference to Exhibit 4.4 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed November 20, 2003).

 

 

 

4.18

 

Registration Rights Agreement, dated as of July 22, 2005, by and among HCP, William P. Gallaher, Trustee for the William P. & Cynthia J. Gallaher Trust, Dwayne J. Clark, Patrick R. Gallaher, Trustee for the Patrick R. & Cynthia M. Gallaher Trust, Jeffrey D. Civian, Trustee for the Jeffrey D. Civian Trust dated August 8, 1986, Jeffrey Meyer, Steven L. Gallaher, Richard Coombs, Larry L. Wasem, Joseph H. Ward, Jr., Trustee for the Joseph H. Ward, Jr. and Pamela K. Ward Trust, Borue H. O’Brien, William R. Mabry, Charles N. Elsbree, Trustee for the Charles N. Elsbree Jr. Living Trust dated February 14, 2002, Gary A. Robinson, Thomas H. Persons, Trustee for the Persons Family Revocable Trust under trust dated February 15, 2005, Glen Hammel, Marilyn E. Montero, Joseph G. Lin, Trustee for the Lin Revocable Living Trust, Ned B. Stein, John Gladstein, Trustee for the John & Andrea Gladstein Family Trust dated February 11, 2003, John Gladstein, Trustee for the John & Andrea Gladstein Family Trust dated February 11, 2003, Francis Connelly, Trustee for the The Francis J & Shannon A Connelly Trust, Al Coppin, Trustee for the Al Coppin Trust, Stephen B. McCullagh, Trustee for the Stephen B. & Pamela McCullagh Trust dated October 22, 2001, and Larry L. Wasem—SEP IRA (incorporated herein by reference to Exhibit 4.24 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895) for the quarter ended June 30, 2005).

 

 

 

4.19

 

Officers’ Certificate pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York, as trustee, setting forth the terms of HCP’s Fixed Rate Medium-Term Notes and Floating Rate Medium-Term Notes (incorporated herein by reference to Exhibit 4.2 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 17, 2006).

 

 

 

4.20

 

Form of Fixed Rate Global Medium-Term Note (incorporated herein by reference to Exhibit 4.3 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 17, 2006).

 

 

 

4.21

 

Form of Floating Rate Global Medium-Term Note (incorporated herein by reference to Exhibit 4.4 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 17, 2006).

 

 

 

4.22

 

Form of 5.95% Notes Due 2011 (incorporated herein by reference to Exhibit 4.2 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed September 19, 2006).

 

 

 

4.23

 

Form of 6.30% Notes Due 2016 (incorporated herein by reference to Exhibit 4.3 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed September 19, 2006).

 

 

 

4.24

 

Form of 5.65% Senior Notes Due 2013 (incorporated herein by reference to Exhibit 4.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed December 4, 2006).

 

 

 

4.25

 

Form of 6.00% Senior Notes Due 2017 (incorporated herein by reference to Exhibit 4.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed January 22, 2007).

 

 

 

4.26

 

Officers’ Certificate (including Form of 6.70% Senior Notes Due 2018 as Annex A thereto), dated October 15, 2007, pursuant to Section 301 of the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York Trust Company, N.A., as successor trustee to The Bank of New York, establishing a series of securities entitled “6.70% Senior Notes due 2018” (incorporated by reference herein to Exhibit 4.29 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895), filed October 30, 2007).

 

 

 

4.27

 

Acknowledgment and Consent, dated as of May 11, 2007, by and among Zions First National Bank, KC Gardner Company, L.C., HCPI/Utah, LLC, Gardner Property Holdings, L.C. and HCP (incorporated herein by reference to Exhibit 4.29 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895) for the quarter ended June 30, 2007).

 

 

 

4.28

 

Acknowledgment and Consent, dated as of May 11, 2007, by and among Zions First National Bank, KC Gardner Company, L.C., HCPI/Utah II, LLC, Gardner Property Holdings, L.C. and HCP (incorporated herein by reference to Exhibit 4.30 to HCP’s Quarterly Report on Form 10-Q (File No. 1-08895) for the quarter ended June 30, 2007).

 

 

 

10.1

 

Amended and Restated Dividend Reinvestment and Stock Purchase Plan, amended as of September 4, 2009 (incorporated by reference to HCP’s Registration Statement on Form S-3 (Registration No. 333-161721), dated September 4, 2009 and as supplemented on September 4, 2009).

 

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Table of Contents

 

10.2

 

Second Amended and Restated Director Deferred Compensation Plan.

 

 

 

31.1

 

Certification by James F. Flaherty III, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).

 

 

 

31.2

 

Certification by Thomas M. Herzog, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).

 

 

 

32.1

 

Certification by James F. Flaherty III, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.

 

 

 

32.2

 

Certification by Thomas M. Herzog, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.

101.INS

 

XBRL Instance Document.*

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.*

 

 

 

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.*

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.*

 

 

 

101.LAB

 

XBRL Taxonomy Extension Labels Linkbase Document.*

 

 

 

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.*

 


*

Furnished herewith .

 

54



Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: November 3, 2009

HCP, Inc.

 

 

 

(Registrant)

 

 

 

/s/ JAMES F. FLAHERTY III

 

James F. Flaherty III

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

 

 

 

 

/s/ THOMAS M. HERZOG

 

Thomas M. Herzog

 

Executive Vice President-

 

Chief Financial Officer and Treasurer

 

(Principal Financial Officer)

 

 

 

 

 

/s/ SCOTT A. ANDERSON

 

Scott A. Anderson

 

Senior Vice President-

 

Chief Accounting Officer

 

(Principal Accounting Officer)

 

55


 

Exhibit 3.2.2

 

Amendment No. 2 to Fourth Amended and Restated Bylaws of HCP, Inc.

 

Effective October 29, 2009, HCP, Inc. amended its Fourth Amended and Restated Bylaws (as previously amended by Amendment No. 1 thereto) by adding the following new Section 9 to Article II thereof:

 

“SECTION 9.  CONTROL SHARE ACQUISITION ACT.  Notwithstanding any other provision of the Charter or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (the “MGCL”) (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation.  This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.”

 


Exhibit 10.2

 

HCP, INC.

 

SECOND AMENDED AND RESTATED
DIRECTOR DEFERRED COMPENSATION PLAN

 

1.              Purpose .  This Second Amended and Restated Director Deferred Compensation Plan, as amended and restated (the “ Plan ”), is intended to provide non-employee directors of HCP, Inc. (formerly Health Care Property Investors, Inc.), a Maryland corporation (the “ Company ”), with a means to defer income until their termination of status as a director.  In addition, upon the termination of the Company’s Retirement Plan for Outside Directors (the “ Retirement Plan ”) on March 11, 1997, all accrued benefits (the “ Retirement Benefits ”) for each Director who was formerly a participant in the Retirement Plan were credited to accounts under this Plan and became subject to the terms of this Plan.

 

2.              Eligibility .  Each member of the Board of Directors (the “ Board ”) of the Company who is not an employee of the Company (a “ Director ”) shall be eligible to participate in this Plan, pursuant to the terms and conditions described herein.

 

3.              Participation .

 

(a)            Deferred Compensation .  A Director may elect to participate in the Plan by directing that all or any portion of the compensation which the Director may thereafter earn for services as a Director (including the Director’s retainer and any fees payable for services as a member of a committee of the Board) for each calendar year (“ Director Fees ”) shall be credited to an account or accounts subject to the terms of the Plan.  Any Director who elects to participate in the Plan is hereinafter referred to as a “ Participant .”

 

(i)             A Director’s election to defer all or a portion of his Director Fees under the Plan shall be in writing, substantially in the form attached hereto as Exhibit A-1, executed by the Director and shall indicate the percentage of the Director’s Director Fees to be deferred with respect to each calendar year.  The Director’s deferral election must be delivered to the Company no later than December 31 of the calendar year immediately preceding the calendar year in which the deferral election shall be effective for the deferral of Director Fees.  Notwithstanding the foregoing, an individual who first becomes a Director during a calendar year may elect to participate in the Plan during such calendar year by filing a deferral election with the Company no later than thirty (30) days after he first becomes a Director.  Such election shall become effective for Director Fees earned following the date such election is received by the Company.

 

(ii)            A Director’s deferral election under the Plan shall be irrevocable once made and shall continue in effect for the entire calendar year for which it is effective and each subsequent calendar year during the period that the Director remains a member of the Board unless prior to the commencement of such subsequent calendar year, the Director makes a new election pursuant to Section 3(a)(i) or provides the Company with written notice to terminate deferrals for future calendar years.  A Director who has filed an election to terminate deferrals under the Plan may elect to recommence deferrals for future calendar years by filing a new election pursuant to Section 3(a)(i).

 



 

(iii)           Upon making a deferral election pursuant to this Section 3(a), a Director shall elect the time and form of payment of such deferrals in accordance with Section 5.  A Director’s payment election shall continue in effect for each subsequent calendar year during the period that the Director remains a member of the Board unless prior to the commencement of such subsequent calendar year, the Director makes a new payment election by submitting to the Company a new deferral election form indicating the Director’s payment election; provided, however, that if the Director elects a specified payment date pursuant to Section 5(a)(iii) and such election remains in effect as of the end of the calendar year preceding the year in which the specified payment date occurs, the Director shall be deemed to have elected that deferrals for the calendar year in which the specified payment date occurs and future calendar years be paid upon the Participant’s Separation from Service in substantially equal monthly installments over 36 months.  The Company shall establish subaccounts of the Director’s Plan Accounts (defined below) as necessary to account for the Director’s payment elections.

 

(b)            Accrued Retirement Benefits .  Each Director who was formerly a participant in the Retirement Plan and who made an election directing that his Retirement Benefits be allocated to an account or accounts under this Plan shall be a Participant in this Plan, regardless of whether such Director has made or makes an election to defer compensation under Section 3(a).

 

4.              Interest Rate Accounts And Stock Credit Accounts .

 

(a)            Crediting of Accounts .  Upon electing to defer compensation under the Plan in accordance with Section 3(a)(i), each Participant shall designate the amount of such compensation which shall be credited to the Participant’s “ Interest Rate Account ” or “ Stock Credit Account ” as follows:

 

(i)             Interest Rate Accounts .  The Participant’s Interest Rate Account shall be credited, as of the date on which the Participant would otherwise have been entitled to receive such deferred Directors Fees, with the amount of compensation directed to be deferred and credited to the Participant’s Interest Rate Account.

 

(ii)            Stock Credit Accounts .  The Participant’s Stock Credit Account shall be credited, as of the first payment date for regular quarterly dividends paid to holders of the Company’s Common Stock (“ Common Stock ”) that follows the date on which the Participant would otherwise have been entitled to receive such deferred Directors Fees, with a number of units equal to the number of shares of Common Stock (including fractions of units reflecting fractions of shares) that could have been purchased at the average of the closing price of Common Stock (as reported in The Wall Street Journal, “ Closing Price ”) on each business day during the immediately preceding 10 business days (the “ Average Closing Price ”) with the amount of compensation directed to be deferred and credited to Participant’s Stock Credit Account.

 

2



 

(b)            Retirement Benefits .  Upon the transfer of the accrued benefits under the Retirement Plan as provided in Section 3(b) above, each Director designated that his Retirement Benefits be credited to either or both of the Participant’s Interest Rate Account or Stock Credit Account in such portions as was designated by such Director in his allocation election form filed with the Company.

 

(c)            The Plan Accounts .  The Interest Rate Accounts and the Stock Credit Accounts (sometimes collectively referred to herein as the “ Plan Accounts ,” including, in each case, any subaccounts established thereunder for separate calendar year payment elections or Retirement Benefits payment elections) shall be held by the Company in its general funds, shall be credited to an account or accounts, as applicable, in the name of each Participant and shall earn a rate of return as described herein.  All amounts credited to a Participant’s Plan Accounts shall be fully vested as of the time credited.

 

(d)            The Interest Rate Accounts .  The Interest Rate Accounts shall, based on the Participant’s Interest Rate Account balance at the beginning of each fiscal quarter, be credited at the end of each fiscal quarter with an interest equivalent to be calculated quarterly on the basis of one quarter of the percentage rate which is equal to one point below the prime interest rate charged by Bank of New York on the last day of the fiscal quarter or such other rate as may be set from time to time by the Compensation Committee of the Board.  “ Fiscal quarter ” shall mean any quarter of the fiscal year adopted by the Company for reporting its financial condition and operating results.

 

(e)            The Stock Credit Accounts .  The Stock Credit Accounts shall:

 

(i)             As of the date any dividend is paid to holders of Common Stock, the Participant’s Stock Credit Account shall also be credited with an additional number of units equal to the number of shares of Common Stock (including fractions of units reflecting fractions of shares) that could have been purchased at the Average Closing Price of Common Stock as of such date with the dividend paid on the number of shares of Common Stock to which the Participant’s Stock Credit Account is then equivalent (but not taking into account any units credited the same day pursuant to Sections 4(a)(ii) and 4(b)).  In case of any dividends paid in property, the dividend shall be deemed to be the fair market value of the property at the time of distribution of the dividend, as determined by the Committee.

 

(ii)            If at any time the number of outstanding shares of Common Stock shall be increased as the result of any stock dividend, subdivision or reclassification of shares, the number of shares of Common Stock to which each Participant’s Stock Credit Account is equivalent shall be increased in the same proportion as the outstanding number of shares of Common Stock is increased, or if the number of outstanding shares of Common Stock shall at any time be decreased as the result of any combination or reclassification of shares, the number of shares of Common Stock to which each Participant’s Stock Credit Account is equivalent shall be decreased in the same proportion as the outstanding number of shares of Common Stock is decreased.  In the event the Company shall at any time be consolidated with or merged into any other corporation and holders of the Company’s Common Stock receive common shares of the

 

3



 

resulting or surviving corporation, there shall be credited to each Participant’s Stock Credit Account, in place of the shares then credited thereto, a stock equivalent determined by multiplying the number of common shares of stock given in exchange for a share of Common Stock upon such consolidation or merger, by the number of shares of Common Stock to which the Participant’s account is then equivalent.  If in such a consolidation or merger, holders of the Company’s Common Stock shall receive any consideration other than common shares of the resulting or surviving corporation, the Committee shall determine the appropriate change in Participants’ accounts.

 

(iii)           At any given time, the cash equivalent balance of a Participant’s Stock Credit Account shall be determined by multiplying the number of credited units in the Participant’s Stock Credit Account by the Average Closing Price as of such date for such shares of stock.  No Participant shall be entitled to any voting or other stockholder rights with respect to units credited under the Plan.

 

(f)             Allocation Between Interest Rate Accounts And Stock Credit Accounts .

 

(i)             Each Participant’s Plan Accounts under the Plan shall continue to be held in each Participant’s Interest Rate Account or Stock Credit Account, as the case may be, until such time as the Participant may elect to have all or part of such amounts reallocated as provided herein.

 

(ii)            Participants may at any time file with the Company an election to reallocate all or any portion of amounts credited to Plan Accounts from Interest Rate Accounts to Stock Credit Accounts or vice versa; provided, however, that (A) no election to reallocate all or any portion of amounts credited to a Participant’s Stock Credit Accounts from such accounts to the Participant’s Interest Rate Accounts shall be made within six (6) months from the date on which any portion of the Participant’s Interest Rate Credit Accounts was reallocated from such accounts to the Participant’s Stock Credit Accounts and (B) no election to reallocate all or any portion of amounts credited to a Participant’s Interest Rate Credit Accounts from such accounts to the Participant’s Stock Credit Accounts shall be made within six (6) months from the date on which any portion of the Participant’s Stock Credit Accounts was reallocated from such accounts to the Participant’s Interest Rate Accounts. Subject to the preceding sentence, any reallocation shall be made by the delivery to the Company by the Participant of a written election, substantially in the form of Exhibit A-2 attached, executed by the Participant which shall become effective (1) only upon the approval of the Committee (defined in Section 10) in its sole discretion and (2) as of the first day of the month beginning immediately following the date on which the Committee approves such election. In reallocating any amounts from Interest Rate Accounts to Stock Credit Accounts or vice versa, the number of Common Stock units and the value of the Common Stock units to be reallocated shall be determined based upon the Average Closing Price of the Common Stock determined as of the effective date of the reallocation.

 

(iii)           Participants may at any time by written notice filed with the Company change the Plan Account to which future deferrals shall be credited. Any such change shall become effective on the first day of the month beginning immediately following the date on which the Company receives such notice, or at the beginning of any later month as may be designated in such notice.

 

4



 

5.              Distribution of Plan Accounts.    This Section 5 sets forth the rules governing distributions from the Plan with respect to any amounts credited to Plan Accounts (including any related earnings thereon).

 

(a)            Events Causing Distribution of Plan Accounts .  A Participant’s Plan Accounts shall become distributable upon the first to occur of any of the following events (such applicable date, the “ Distribution Date ”):

 

(i)             The Participant’s Separation From Service;

 

(ii)            The death of the Participant; or

 

(iii)                                Such earlier date as may be specified by the Participant at the time the Participant files his election form under the Plan in accordance with Section 3(a);

 

provided, however, that a Participant may not elect a specified payment date pursuant to Section 5(a)(iii) with respect to his or her Retirement Benefits credited hereunder.  A Participant’s Retirement Benefits (including any earnings thereon) may only be paid upon the first to occur of the Participant’s Separation from Service or the Participant’s death.

 

If a Participant does not make any election with respect to his or her deferrals for a particular year, such Participant shall be deemed to have elected to receive payment upon the Participant’s Separation from Service.  In addition, a Participant may request a distribution from his or her Plan Accounts for an Unforeseeable Emergency at any time in accordance with Section 5(c).

 

(b)            Form of Distribution of Plan Accounts .  At the time a Participant elects to defer compensation for a particular calendar year pursuant to Section 3(a), the Participant shall elect whether, in the case of a distribution upon the Participant’s Separation from Service or an earlier date specified by the Participant, such deferred compensation (and related earnings thereon) will be paid in: (1) a lump sum; (2) substantially equal monthly installments over 36 months; or (3) a partial lump sum with the remaining balance to be distributed in substantially equal monthly installments over 36 months.  If a Participant does not make any election with respect to his or her deferrals for a particular calendar year, such Participant shall be deemed to have elected to receive such deferrals in substantially equal monthly installments over 36 months.

 

(i)             Interest Rate Account .  The following rules shall apply with respect to distributions from a Participant’s Interest Rate Account (and subaccounts thereof, if applicable):

 

(a)            If the Participant elects a lump sum, such payment shall be made on or within 30 days following the Distribution Date.

 

5



 

(b)            If the Participant elects (or is deemed to have elected) 36 monthly installments, each distribution payment shall be equal to the balance in such Interest Rate Account as of such payment date multiplied by a fraction, the numerator of which is one, and the denominator of which is the number of installments yet to be paid to the Participant.  Payment shall commence 30 days after the Distribution Date, with interest continuing to accrue pursuant to Section 3(d) hereof until the entire balance of the Interest Rate Account is paid.

 

(c)            If the Participant elects a partial lump sum with the remaining balance to be distributed in 36 monthly installments, then the payment of the designated portion of the account to be distributed in a lump sum shall be made on or within 30 days following the Distribution Date and the payment of the remainder of the account shall commence 30 days after the Distribution Date, with each distribution payment equal to the balance in such Interest Rate Account as of such payment date multiplied by a fraction, the numerator of which is one, and the denominator of which is the number of installments yet to be paid to the Participant.  Payment shall commence 30 days after the Distribution Date, with interest continuing to accrue pursuant to Section 4(d) hereof until the entire balance of the Interest Rate Account is paid.

 

(ii)            Stock Credit Account .  The following rules shall apply with respect to distributions from a Participant’s Stock Credit Account (and subaccounts thereof, if applicable):

 

(a)            If the Participant elects a lump sum, such payment shall be made on or within 30 days following the Distribution Date.  The amount of the distribution payment shall be the cash equivalent equal to the Average Closing Price as of such payment date multiplied by the number of credited shares to be distributed for such payment.

 

(b)            If the Participant elects (or is deemed to have elected) 36 monthly installments, the amount of each distribution payment shall be the cash equivalent equal to the Average Closing Price as of such payment date multiplied by the number of credited units to be distributed for such payment.  The number of credited units to be distributed shall equal the credited unit balance of the Participant’s Stock Credit Account multiplied by a fraction, the numerator of which is one, and the denominator of which is the number of installments yet to be paid to the Participant.  Payment shall commence 30 days after the Distribution Date.  The number of credited units distributed as a cash equivalent payment to the Participant shall be debited from the Participant’s Stock Credit Account balance, and the Stock Credit Account shall continue to accrue pursuant to Section 3(e) hereof until the entire balance of the Stock Credit Account is paid.

 

6



 

(c)            If the Participant elects a partial lump sum with the remaining balance to be distributed in 36 monthly installments, then the payment of the designated portion of the account to be distributed in a lump sum shall be made on or within 30 days following the Distribution Date, and the payment of the remainder of the account shall commence 30 days after the Distribution Date.  Each distribution payment shall be the cash equivalent equal to the Average Closing Price as of such payment date multiplied by the number of credited shares to be distributed for such payment.  For the lump sum payment, the number of credited units to be distributed shall equal the elected percentage of the total units credited to the account to be distributed in the lump sum multiplied by the credited unit balance on such payment date.  For the installment payments, the number of credited units to be distributed shall equal the credited unit balance of the Participant’s Stock Credit Account multiplied by a fraction, the numerator of which is one, and the denominator of which is the number of installments yet to be paid to the Participant.

 

(d)            All distributions from Stock Credit Accounts shall be made in cash.

 

(iii)           Changes to Payment Elections .  Participants shall be allowed to change their distribution elections for a calendar year by filing a new distribution election form; provided (1) that such a change election must be filed with the Committee at least one year prior to the date on which the distribution would have otherwise been made (or, in the case of installment payments, would have otherwise commenced) but for such change election, (2) that such a change election will not be effective until at least one year after the date on which the election is made, (3) that, except in the case of distributions on account of death or Unforeseeable Emergency, such a change election shall defer the distribution date (or distribution commencement date) to a date that is not less than five years from the date such distribution would otherwise have been made (or commenced), and (4) that such a change election must be made on a form and in a manner prescribed by the Committee.  Prior to December 31, 2008, Participants may also make certain changes to their distribution elections as provided in Appendix A of the Plan.

 

(iv)           Distribution on Death .  Notwithstanding the foregoing provisions, in the event that a distribution of benefits hereunder is triggered by a Participant’s death, such benefits shall be paid to the Participant’s beneficiary in a lump sum not more than ninety (90) days following the date of death.

 

(c)            Unforeseeable Emergencies .  A Participant (or former Participant or beneficiary) may request a distribution from his Plan Accounts (including amounts attributable to Retirement Benefits) for an Unforeseeable Emergency (defined below) without penalty; provided that no distribution from the Participant’s Stock Credit Account shall be made within six (6) months from the date on which any portion of the Participant’s Interest Rate Credit Account was reallocated from such accounts to the Participant’s Stock Credit Account.  Such distribution for an Unforeseeable Emergency shall be subject to approval by the Committee and may be made only to the extent reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any federal, state or local income taxes or penalties reasonably

 

7



 

anticipated to result from the distribution).  A distribution for an Unforeseeable Emergency may not be made to the extent that such emergency is or may be relieved (1) through reimbursement or compensation by insurance or otherwise, (2) by liquidation of the Participant’s (or beneficiary’s) assets, to the extent the liquidation of such assets would not itself cause severe financial hardship, or (3) by cessation of deferrals under this Plan.  The Committee may require that the Participant (or beneficiary) provide a written representation that any such distribution satisfies the requirements set forth in this Section 5(c).  For distributions under this Section 5(c), the Participant shall designate on a withdrawal form provided by the Company from which Plan Account the distribution is to be made.  Such distributions will be made as soon as administratively practical following the Participant’s submission of a completed withdrawal form.  If the Participant elects to receive such distribution from his or her Stock Credit Account, the number of stock units subject to such distribution shall be determined by dividing the amount of the withdrawal by the Average Closing Price as of such payment date.

 

(d)            Definitions .  For purposes of this Plan, the following terms shall have the following meanings:

 

(i)             Separation From Service ” means, as to a particular Participant, a termination of services provided by the Participant to his or her Employer (as defined below), whether voluntarily or involuntarily, as determined by the Company in accordance with Section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and Treasury Regulation Section 1.409A-1(h).  Notwithstanding the foregoing, if a Participant provides services for an Employer as both an employee and as a member of its board of directors, to the extent permitted by Treasury Regulation Section 1.409A-1(h)(5), the services provided by such Participant as an employee shall not be taken into account in determining whether the Participant has experienced a Separation from Service as a director, for purposes of this Plan. For purposes of this definition of “Separation from Service,” the term “Employer” means the Company or subsidiary of the Company that the Participant last performed services for or was employed by, as applicable, on the date of his or her Separation from Service, and all other entities that are required to be aggregated together and treated as the employer under Treasury Regulation Section 1.409A-1(h)(3).

 

(ii)            Unforeseeable Emergency ” shall mean a severe financial hardship of the Participant resulting from (a) an illness or accident of the Participant, the Participant’s spouse, the Participant’s beneficiary or the Participant’s dependent (as defined in Code Section 152 without regard to paragraphs (b)(1), (b)(2) and (d)(1)(b) thereof), (b) a loss of the Participant’s property due to casualty, or (c) such other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, all as determined by the Committee based on the relevant facts and circumstances.

 

6.              Designation Of Beneficiary .  Each Participant may designate, by a form similar to Exhibit B attached, a beneficiary to receive distribution of the Participant’s Plan Accounts if the Participant is not living when any portion of such compensation becomes distributable.  If the Participant fails to designate a beneficiary, or if the Participant’s designated beneficiary does not survive until the time when any portion of the Participant’s Plan Accounts becomes distributable, such portion of the Participant’s Plan Accounts shall be paid in a lump sum to the Participant’s estate within 90 days immediately following the date of the Participant’s death.

 

8



 

7.              Administration .  The Plan shall be administered by the Compensation Committee of the Board (or another committee of the Board assuming the functions of the Committee under this Plan) (the “ Committee ”), which shall consist solely of two members appointed by and holding office at the pleasure of the Board; provided that with respect to any action taken by the Committee in connection with any transaction under the Plan that would be subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”), the Committee shall consist of two or more members each of whom is a “non-employee director” as defined by Rule 16b-3 under the Exchange Act.

 

(a)            Committee Duties and Powers . The Committee shall conduct the general administration of the Plan in accordance with the Plan and shall have all necessary power and authority to carry out that function. Among its necessary powers and duties are the following:

 

(i)             To delegate all or part of its function to others and to revoke any such delegation.

 

(ii)            To interpret the Plan for purpose of the administration and application of the Plan, in a manner not inconsistent with the Plan or applicable law and to amend or revoke any such interpretation.

 

(iii)           To determine questions of eligibility of Participants and their entitlement to benefits.

 

(b)            Limitations Upon Powers . The Plan shall be uniformly and consistently administered, interpreted and applied with regard to all Participants in similar circumstances. The Plan shall be administered, interpreted and applied fairly and equitably and in accordance with the specified purposes of the Plan.

 

(c)            Indemnification . The Company shall pay or reimburse Committee members for all expenses incurred by such Committee members in, and shall indemnify and hold them harmless from, all claims, liabilities and costs (including reasonable attorneys’ fees) arising out of the good faith performance of their duties under the Plan.

 

8.              Miscellaneous .

 

(a)            The Participant’s Plan Accounts under the Plan shall not be assignable by the Participant and shall not be subject to attachment, lien, levy, or other creditors’ rights under state or Federal law.

 

(b)            All funds or assets, together with all interest, accumulations and increments thereon, of the Plan Accounts of all Participants shall remain the funds and assets of the Company, and shall be subject to the Company’s absolute ownership and control until the time when such funds or assets are distributed in accordance herewith.  The obligation of the Company to Participants hereunder is a contractual obligation only, and the Participants shall have no preferred or specific interest, by way of trust, escrow, annuity or otherwise, in and to any specific assets or funds of the Company.

 

9



 

(c)            Copies of the Plan and any and all amendments thereto shall be made available to eligible Participants at all reasonable times at the office of the Corporate Secretary of the Company.  All notices to the Company hereunder shall be filed with the Corporate Secretary of the Company.

 

(d)            The Plan may be amended prospectively, from time to time, by the Committee, and the interest rate applicable hereunder may be increased or decreased prospectively (including with respect to amounts of compensation previously deferred by the Participants) by the Committee as provided in Section 4(d) hereof, but no amendment shall, in any event, be made to the Plan which would reduce the amounts already earned by any Participant or change the date or provisions for distribution of such amounts, unless the Participant consents in writing to such amendment insofar as the amendment affects the Participant.

 

(e)            It is the intent of the Company that this Plan satisfy and be interpreted in a manner that satisfies the applicable requirements of Rule 16b-3 promulgated under the Exchange Act so that elective deferrals will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder.  Any contrary interpretation shall be avoided.

 

(f)             To the extent that this Plan is subject to Section 409A of the Code or any Treasury Regulations or other guidance promulgated thereunder (collectively, “ Code Section 409A ”), this Plan shall be construed and interpreted to the maximum extent reasonably possible to avoid the imputation of any tax, penalty or interest pursuant to Code Section 409A.  If any portion of a Participant’s account balance under this Plan is required to be included in income by the Participant prior to receipt due to a failure of this Plan to comply with the requirements of Code Section 409A, the Company may determine that such Participant shall receive a distribution from this Plan in an amount equal to the lesser of (i) the portion of his or her account balance required to be included in income as a result of the failure of this Plan to comply with the requirements of Code Section 409A, or (ii) the Participant’s unpaid account balance.

 

This restated Plan is hereby adopted by HCP, Inc. effective                               .

 

 

 

/s/ Edward J. Henning

 

Edward J. Henning

 

Executive Vice President, General Counsel and Corporate Secretary

 

10



 

APPENDIX A

 

SECTION 409A TRANSITION RULES

 

A1.  As contemplated by IRS Notice 2005-1 and subsequent guidance from the IRS and subject to such rules and procedures as may be established by the Committee, a Participant may elect in writing to change any distribution election such Participant has made with respect to compensation deferred under this Plan, to the extent such amounts are subject to Code Section 409A, and any such election change need not comply with the requirements of Code Section 409A applicable to changes in distribution elections; provided, however, that any such change must be made on or before December 31, 2008 (or such earlier deadline as may be established by the Committee), and provided, further, that any such change may not relate to distributions that would otherwise be made in 2008 or result in any distributions being made in 2008.

 

A2.  Any election made by a Participant under this Appendix A must be irrevocable as of the date such election is required to be made pursuant to the terms hereof and must otherwise comply with the procedures for making distribution elections set forth in this Plan.

 



 

EXHIBIT A-1

 

HCP, INC.

DIRECTOR DEFERRED COMPENSATION PLAN

 

DEFERRAL AND PAYMENT ELECTION

 

Pursuant to the terms of the Second Amended and Restated Director Deferred Compensation Plan, as amended and restated (the “Plan”) of HCP, Inc. (the “Company”), I hereby make the deferral and/or payment elections set forth below with respect to my Directors Fees earned during calendar year 20       (and any related earnings thereon).  Capitalized terms not defined herein shall have the meaning described in the Plan.  I hereby acknowledge that I read and understand this form, and I have received, read and understood the Plan document.  I agree to be bound by the terms and conditions of the Plan.  If there is any inconsistency between this form and the Plan document, the Plan document controls.

 

I understand and agree that the elections I have marked below shall continue in effect for the entire calendar year for which they are effective and each subsequent calendar year until such time as I file a new election form, a written notice to terminate deferrals under the Plan for future calendar years with the Company, or I cease to be eligible to participate in the Plan.

 

Deferral Election

 

I hereby elect to defer                      (specify whole percentage from 0% to 100%) of my Director Fees.  Of such deferred amount,                      (specify whole percentage from 0% to 100%) shall be credited to my Interest Rate Account, and the remainder, if any, shall be credited to my Stock Credit Account, as provided for in Section 4(a) of the Plan.

 

Payment Election

 

(Please check and initial one of the options below or, if you would like to split your deferrals so that a portion of the deferrals will be paid to you on a date you select, check and initial both of the options below.  Please note that if you select both of the options below, the percentages of your deferrals you allocate to the two options must add up to 100%.)

 

o                                                                  I irrevocably elect to have         % (specify whole percentage from 0% to 100%) of my Director Fees paid on                         , 20       (specify date) .  I understand that if my service as a director terminates prior to the date I have selected, my election will be null and void, and my Director Fees will be paid in accordance with the terms of the Plan.  (Select one payment option below.  If you do not select any of these options, you will be deemed to have elected to receive distribution in monthly installments over 36 months .)

 

o                           a lump sum payment

 

o                           monthly installments over 36 months

 

o                           a partial lump sum payment of         % (specify whole percentage from 0% to 100%) of the amount indicated above, with the balance of such amount to be paid in monthly installments over 36 months

 



 

o                                                                     I irrevocably elect to have         % (specify whole percentage from 0% to 100%) of my Director Fees paid following termination of my service as a director.  (Select one payment option below.  If you do not select any of these options, you will be deemed to have elected to receive distribution in monthly installments over 36 months .)

 

o                           a lump sum payment

 

o                           monthly installments over 36 months

 

o                           a partial lump sum payment of         % (specify whole percentage) of the amount indicated above, with the balance of such amount to be paid in monthly installments over 36 months

 

 

 

 

Date

 

Signature of Director

 

 

 

 

 

Print: Name

 

 

 

 

 

Social Security Number

 

 

 

 

 

Date Spouse’s Signature

 

 

 

 

 

Print: Name

 

 

 

Received:

 

 

 

 

 

 

 

 

Date    , Corporate Secretary

 

 

 

2



 

EXHIBIT A-2

 

HCP, INC.

 

NOTICE OF ELECTION TO TRANSFER DEFERRED COMPENSATION

OR BENEFITS ACCOUNTS AMOUNTS

 

Pursuant to the terms of the Second Amended and Restated Director Deferred Compensation Plan, as amended and restated (the “Plan”) of HCP, Inc. (the “Company”), I hereby elect to reallocate the crediting of my account balance in the Plan.  Of the amount credited to my        accounts under the Plan,                      (enter “all” or “none” or state dollar amount or state percentage) shall be invested in the Interest Rate Account, the remainder, if any, shall be invested in the Stock Credit Account, as provided for in Section 4 of the Plan.  All transferred amounts shall be subject to the terms and conditions of the Plan.

 

 

 

 

Date

 

Signature of Director

 

 

 

 

 

 

 

 

Print Name

 

 

 

 

 

 

 

 

 

 

 

Social Security Number

 

 

 

 

 

 

 

 

 

 

 

Spouse’s Signature

 

 

 

 

 

 

 

 

Print Name

 

 

 

Received:

 

 

 

 

 

 

 

 

Date

 

, Corporate Secretary

 



 

EXHIBIT B

 

HCP, INC.

 

BENEFICIARY DESIGNATION
SECOND AMENDED AND RESTATED
DIRECTOR DEFERRED COMPENSATION PLAN

 

I designate the following beneficiary or beneficiaries to receive payment, in the event of my death, of my interest in any Plan Accounts (as defined in the Plan) heretofore or hereafter payable to me pursuant to HCP, Inc.’s Second Amended and Restated Director Deferred Compensation Plan, as amended and restated (please see “Instructions for Naming the Beneficiary” that accompany this form):

 

PRIMARY BENEFICIARY
OR BENEFICIARIES

 

AGE

 

RELATIONSHIP

 

ADDRESS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SUCCESSOR
BENEFICIARY
OR BENEFICIARIES

 

AGE

 

RELATIONSHIP

 

ADDRESS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I reserve the right to change any beneficiary from time to time by filing with the Company a new election on this form.

 

I agree that the last designation received by the Company prior to my death shall control any testamentary or other disposition I may make; however, if a former spouse is one of the beneficiaries named above but is not my spouse at the time of my death, such designation shall be deemed revoked.  I acknowledge that this designation is subject to laws in the state of my residence.  I further agree that the Company may make a lump sum payment to the legal representative of my estate if there is any question as to the right of any beneficiary to take hereunder, and the Company, its directors, the Compensation Committee and any member thereof, and any employee of the Company, shall have no further liability with respect hereto.

 

 

 

 

Date

 

Signature of Director

 

 

 

 

 

Print: Name

 

 

 

 

 

Social Security Number

 

 

 

 

 

Date Spouse’s Signature

 

 

 

 

 

Print: Name

 

 

 

Received:

 

 

 

 

 

 

 

 

Date    , Corporate Secretary

 

 

 


EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

I, James F. Flaherty III, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of HCP, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 3, 2009

/s/ JAMES F. FLAHERTY III

 

James F. Flaherty III

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 


EXHIBIT 31.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

I, Thomas M. Herzog, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of HCP, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

 

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: November 3, 2009

/s/ THOMAS M. HERZOG

 

Thomas M. Herzog

 

Executive Vice President-

 

Chief Financial Officer and Treasurer

 

(Principal Financial Officer)

 


EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

 

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of HCP, Inc., a Maryland corporation (the “Company”), hereby certifies, to his knowledge, that:

 

(i) the accompanying quarterly report on Form 10-Q of the Company for the period ended September 30, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 3, 2009

/s/ JAMES F. FLAHERTY III

 

James F. Flaherty III

 

Chairman and Chief Executive Officer

 

(Principal Executive Officer)

 

A signed original of this written statement required by Section 906 has been provided to HCP, Inc. and will be retained by HCP, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.

 


EXHIBIT 32.2

 

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

 

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of HCP, Inc., a Maryland corporation (the “Company”), hereby certifies, to his knowledge, that:

 

(i) the accompanying quarterly report on Form 10-Q of the Company for the period ended September 30, 2009 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

(ii) the information contained in the report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: November 3, 2009

/s/ THOMAS M. HERZOG

 

Thomas M. Herzog

 

Executive Vice President-

 

Chief Financial Officer and Treasurer

 

(Principal Financial Officer)

 

A signed original of this written statement required by Section 906 has been provided to HCP, Inc. and will be retained by HCP, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference.