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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 001-08895
 
HCP, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
Maryland
 
33-0091377
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1920 Main Street, Suite 1200
Irvine, CA 92614
(Address of principal executive offices)
(949) 407-0700
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Common stock, $1.00 par value
HCP
New York Stock Exchange
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
 
Accelerated Filer ☐
Non-accelerated Filer ☐
 
Smaller Reporting Company ☐
 
 
Emerging Growth Company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES ☐ NO ☒
At April 30, 2019, there were 477,983,011 shares of the registrant’s $1.00 par value common stock outstanding.
 



HCP, INC.
INDEX
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


HCP, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 
March 31,
2019
 
December 31,
2018
ASSETS
 

 
 

Real estate:
 

 
 

Buildings and improvements
$
11,220,557

 
$
10,877,248

Development costs and construction in progress
605,165

 
537,643

Land
1,717,259

 
1,637,506

Accumulated depreciation and amortization
(2,915,798
)
 
(2,842,947
)
Net real estate
10,627,183

 
10,209,450

Net investment in direct financing leases
363,395

 
713,818

Loans receivable, net
86,139

 
62,998

Investments in and advances to unconsolidated joint ventures
531,966

 
540,088

Accounts receivable, net of allowance of $5,175 and $5,127, respectively
48,555

 
48,171

Cash and cash equivalents
120,117

 
110,790

Restricted cash
26,535

 
29,056

Intangible assets, net
275,565

 
305,079

Assets held for sale, net
10,842

 
108,086

Right-of-use asset, net
165,748

 

Other assets, net
643,456

 
591,017

Total assets
$
12,899,501

 
$
12,718,553

LIABILITIES AND EQUITY
 

 
 

Bank line of credit
$
276,500

 
$
80,103

Senior unsecured notes
5,260,622

 
5,258,550

Mortgage debt
137,525

 
138,470

Other debt
89,223

 
90,785

Intangible liabilities, net
49,488

 
54,663

Liabilities of assets held for sale, net
132

 
1,125

Lease liability
152,837

 

Accounts payable and accrued liabilities
352,642

 
391,583

Deferred revenue
181,467

 
190,683

Total liabilities
6,500,436

 
6,205,962

Commitments and contingencies


 


Common stock, $1.00 par value: 750,000,000 shares authorized; 477,928,816 and 477,496,499 shares issued and outstanding, respectively
477,929

 
477,496

Additional paid-in capital
8,405,258

 
8,398,847

Cumulative dividends in excess of earnings
(3,042,422
)
 
(2,927,196
)
Accumulated other comprehensive income (loss)
(3,883
)
 
(4,708
)
Total stockholders' equity
5,836,882

 
5,944,439

Joint venture partners
389,369

 
391,401

Non-managing member unitholders
172,814

 
176,751

Total noncontrolling interests
562,183

 
568,152

Total equity
6,399,065

 
6,512,591

Total liabilities and equity
$
12,899,501

 
$
12,718,553


See accompanying Notes to the Unaudited Consolidated Financial Statements.


3


HCP, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Revenues:
 
 
 
Rental and related revenues
$
294,222

 
$
316,752

Resident fees and services
126,695

 
142,814

Income from direct financing leases
13,524

 
13,266

Interest income
1,713

 
6,365

Total revenues
436,154

 
479,197

Costs and expenses:
 
 
 
Interest expense
49,327

 
75,102

Depreciation and amortization
131,951

 
143,250

Operating
168,927

 
172,552

General and administrative
21,355

 
29,175

Transaction costs
4,518

 
2,195

Impairments (recoveries), net
8,858

 

Total costs and expenses
384,936

 
422,274

Other income (expense):
 
 
 
Gain (loss) on sales of real estate, net
8,044

 
20,815

Other income (expense), net
3,133

 
(40,407
)
Total other income (expense), net
11,177

 
(19,592
)
Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures
62,395

 
37,331

Income tax benefit (expense)
3,458

 
5,336

Equity income (loss) from unconsolidated joint ventures
(863
)
 
570

Net income (loss)
64,990

 
43,237

Noncontrolling interests' share in earnings
(3,520
)
 
(3,005
)
Net income (loss) attributable to HCP, Inc.
61,470

 
40,232

Participating securities' share in earnings
(441
)
 
(391
)
Net income (loss) applicable to common shares
$
61,029

 
$
39,841

Earnings per common share:
 
 
 
Basic
$
0.13

 
$
0.08

Diluted
$
0.13

 
$
0.08

Weighted average shares outstanding:
 
 
 
Basic
477,766

 
469,557

Diluted
479,131

 
469,695

See accompanying Notes to the Unaudited Consolidated Financial Statements.


4


HCP, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2019
 
2018
Net income (loss)
$
64,990

 
$
43,237

 
 
 
 
Other comprehensive income (loss):
 
 
 
Net unrealized gains (losses) on derivatives
94

 
(5,164
)
Change in Supplemental Executive Retirement Plan obligation and other
69

 
104

Foreign currency translation adjustment
662

 
7,652

Reclassification adjustment realized in net income (loss)

 
125

Total other comprehensive income (loss)
825

 
2,717

Total comprehensive income (loss)
65,815

 
45,954

Total comprehensive income (loss) attributable to noncontrolling interests
(3,520
)
 
(3,005
)
Total comprehensive income (loss) attributable to HCP, Inc.
$
62,295

 
$
42,949

See accompanying Notes to the Unaudited Consolidated Financial Statements.


5


HCP, Inc.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands, except per share data)
(Unaudited)
 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
December 31, 2018
477,496

 
$
477,496

 
$
8,398,847

 
$
(2,927,196
)
 
$
(4,708
)
 
$
5,944,439

 
$
568,152

 
$
6,512,591

Impact of adoption of ASU No. 2016-02(1)

 

 

 
590

 

 
590

 

 
590

January 1, 2019
477,496

 
477,496

 
8,398,847

 
(2,926,606
)
 
(4,708
)
 
5,945,029

 
568,152

 
6,513,181

Net income (loss)

 

 

 
61,470

 

 
61,470

 
3,520

 
64,990

Other comprehensive income (loss)

 

 

 

 
825

 
825

 

 
825

Issuance of common stock, net
342

 
342

 
1,190

 

 

 
1,532

 

 
1,532

Conversion of DownREIT units to common stock
184

 
184

 
3,890

 

 

 
4,074

 
(4,074
)
 

Repurchase of common stock
(95
)
 
(95
)
 
(2,824
)
 

 

 
(2,919
)
 

 
(2,919
)
Exercise of stock options
2

 
2

 
44

 

 

 
46

 

 
46

Amortization of deferred compensation

 

 
4,111

 

 

 
4,111

 

 
4,111

Common dividends ($0.37 per share)

 

 

 
(177,286
)
 

 
(177,286
)
 

 
(177,286
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(5,415
)
 
(5,415
)
March 31, 2019
477,929

 
$
477,929

 
$
8,405,258

 
$
(3,042,422
)
 
$
(3,883
)
 
$
5,836,882

 
$
562,183

 
$
6,399,065

 
Common Stock
 
Additional Paid-In Capital
 
Cumulative Dividends In Excess Of Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total Stockholders’ Equity
 
Total Noncontrolling Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
December 31, 2017
469,436

 
$
469,436

 
$
8,226,113

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

 
$
293,933

 
$
5,594,938

Impact of adoption of ASU No. 2017-05(2)

 

 

 
79,144

 

 
79,144

 

 
79,144

January 1, 2018
469,436

 
$
469,436

 
$
8,226,113

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

 
$
293,933

 
$
5,674,082

Net income (loss)

 

 

 
40,232

 

 
40,232

 
3,005

 
43,237

Other comprehensive income (loss)

 

 

 

 
2,717

 
2,717

 

 
2,717

Issuance of common stock, net
382

 
382

 
2,392

 

 

 
2,774

 

 
2,774

Repurchase of common stock
(93
)
 
(93
)
 
(2,051
)
 

 

 
(2,144
)
 

 
(2,144
)
Amortization of deferred compensation

 

 
5,919

 

 

 
5,919

 

 
5,919

Common dividends ($0.37 per share)

 

 

 
(174,149
)
 

 
(174,149
)
 

 
(174,149
)
Distributions to noncontrolling interests

 

 

 

 

 

 
(5,077
)
 
(5,077
)
Issuances of noncontrolling interests

 

 

 

 

 

 
995

 
995

Purchase of noncontrolling interests

 

 
(49,207
)
 

 

 
(49,207
)
 
(18,224
)
 
(67,431
)
March 31, 2018
469,725

 
$
469,725

 
$
8,183,166

 
$
(3,425,293
)
 
$
(21,307
)
 
$
5,206,291

 
$
274,632

 
$
5,480,923

_______________________________________
(1)
On January 1, 2019, the Company adopted a series of Accounting Standards Updates (“ASUs”) related to accounting for leases, and recognized the cumulative-effect of adoption to beginning retained earnings. Refer to Note 2 for a detailed impact of adoption.
(2)
On January 1, 2018, the Company adopted ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”), and recognized the cumulative-effect of adoption to beginning retained earnings. Refer to Note 2 for a detailed impact of adoption.
See accompanying Notes to the Unaudited Consolidated Financial Statements.

6


HCP, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three Months Ended
March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
64,990

 
$
43,237

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization of real estate, in-place lease and other intangibles
131,951

 
143,250

Amortization of deferred compensation
4,111

 
5,919

Amortization of deferred financing costs
2,699

 
3,336

Straight-line rents
(5,091
)
 
(10,686
)
Equity loss (income) from unconsolidated joint ventures
863

 
(570
)
Distributions of earnings from unconsolidated joint ventures
5,232

 
5,336

Deferred income tax expense (benefit)
(3,800
)
 
(2,394
)
Impairments (recoveries), net
8,858

 
(3,298
)
Loss (gain) on sales of real estate, net
(8,044
)
 
(20,815
)
Loss (gain) on consolidation, net

 
41,017

Other non-cash items
560

 
(2,401
)
Decrease (increase) in accounts receivable and other assets, net
(11,114
)
 
(18,082
)
Increase (decrease) in accounts payable, accrued liabilities and deferred revenue
(32,633
)
 
12,315

Net cash provided by (used in) operating activities
158,582

 
196,164

Cash flows from investing activities:
 
 
 
Acquisitions of real estate
(106,298
)
 
(22,121
)
Development and redevelopment of real estate
(136,654
)
 
(113,648
)
Leasing costs, tenant improvements, and recurring capital expenditures
(19,220
)
 
(19,246
)
Proceeds from sales of real estate, net
122,678

 
30,392

Contributions to unconsolidated joint ventures
(3,870
)
 
(3,688
)
Distributions in excess of earnings from unconsolidated joint ventures
5,497

 
7,257

Proceeds from sales/principal repayments on debt investments and direct financing leases
481

 
132,429

Investments in loans receivable, direct financing leases and other
(22,891
)
 
(647
)
Net cash provided by (used in) investing activities
(160,277
)
 
10,728

Cash flows from financing activities:
 
 
 
Borrowings under bank line of credit
320,000

 
240,000

Repayments under bank line of credit
(125,000
)
 
(170,000
)
Repayments and repurchase of debt, excluding bank line of credit
(2,437
)
 
(1,172
)
Issuance of common stock and exercise of options
1,578

 
2,774

Repurchase of common stock
(2,919
)
 
(2,144
)
Dividends paid on common stock
(177,286
)
 
(174,149
)
Issuance of noncontrolling interests

 
995

Distributions to and purchase of noncontrolling interests
(5,415
)
 
(67,542
)
Net cash provided by (used in) financing activities
8,521

 
(171,238
)
Effect of foreign exchanges on cash, cash equivalents and restricted cash
(20
)
 
111

Net increase (decrease) in cash, cash equivalents and restricted cash
6,806

 
35,765

Cash, cash equivalents and restricted cash, beginning of period
139,846

 
82,203

Cash, cash equivalents and restricted cash, end of period
$
146,652

 
$
117,968

See accompanying Notes to the Unaudited Consolidated Financial Statements.

7


HCP, Inc.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) 
NOTE 1.  Business

Overview
HCP, Inc., a Standard & Poor’s 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company acquires, develops, leases, owns and manages healthcare real estate. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net; (ii) senior housing operating portfolio (“SHOP”); (iii) life science and (iv) medical office.
NOTE 2.  Summary of Significant Accounting Policies

Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from management’s estimates.
The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”) and variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2018 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”).
Recent Accounting Pronouncements
Adopted
Revenue Recognition. Between May 2014 and February 2017, the Financial Accounting Standards Board (“FASB”) issued four Accounting Standards Updates (“ASUs”) changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), and (iv) ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. ASU 2017-05 clarifies the scope of the FASB’s guidance on nonfinancial asset derecognition and aligns the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets with the guidance in ASU 2014-09. The Company adopted the Revenue ASUs effective January 1, 2018 and utilized a modified retrospective adoption approach, resulting in a cumulative-effect adjustment to equity of $79 million as of January 1, 2018. Under the Revenue ASUs, the Company also elected to utilize a practical expedient which allows the Company to only reassess contracts that were not completed as of the adoption date, rather than all historical contracts.

8


As the timing and recognition of the majority of the Company’s revenue is the same whether accounted for under the Revenue ASUs or lease accounting guidance (see discussion below), the impact of the Revenue ASUs, upon and subsequent to adoption, is generally limited to the following:
Prior to the adoption of the Revenue ASUs, the Company recognized a gain on sale of real estate using the full accrual method when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. The Company deferred all or a portion of a gain on sale of real estate if the requirements for gain recognition were not met at the time of sale. Subsequent to adopting the Revenue ASUs on January 1, 2018, the Company began recognizing a gain on sale of real estate upon transferring control of the asset to the purchaser, which is generally satisfied at the time of sale. In conjunction with its adoption of the Revenue ASUs, the Company reassessed its historical partial sale of real estate transactions to determine which transactions, if any, were not completed contracts (i.e., the transaction did not qualify for sale treatment under previous guidance). The Company concluded that it had one such material transaction, its partial sale of RIDEA II in the first quarter of 2017 (which was not a completed sale under historical guidance as of the Company's adoption date due to a minor obligation related to the interest sold). In accordance with the Revenue ASUs, the Company recorded its retained 40% equity investment at fair value as of the sale date. As a result, the Company recorded an adjustment to equity as of January 1, 2018 (under the modified retrospective transition approach) representing a step-up in the fair value of its equity investment in RIDEA II of $107 million (to a carrying value of $121 million as of January 1, 2018) and a $30 million impairment charge to decrease the carrying value to the sales price of the investment (see Note 3). The Company completed the sale of its equity investment in June 2018 and no longer holds an economic interest in RIDEA II.
The Company generally expects that the new guidance will result in certain transactions qualifying as sales of real estate at an earlier date than under historical accounting guidance.
The Company, along with its joint venture partners and independent SHOP operators, provide certain ancillary services to SHOP residents that are not contemplated in the lease with each resident (i.e., guest meals, concierge services, pharmacy services, etc.). These services are provided and paid for in addition to the standard services included in each resident lease (i.e., room and board, standard meals, etc.). The Company bills residents for ancillary services one month in arrears and recognizes revenue as the services are provided, as the Company has no continuing performance obligation related to those services. Included within resident fees and services for both the three months ended March 31, 2019 and 2018 is $10 million of ancillary service revenue.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 (codified under Accounting Standards Codification (“ASC”) 842, Leases) amends the previous accounting for leases to: (i) require lessees to put most leases on their balance sheets (not required for short-term leases with lease terms of 12 months or less), but continue recognizing expenses on their income statements in a manner similar to requirements under prior accounting guidance, (ii) eliminate real estate specific lease provisions, and (iii) modify the classification criteria and accounting for sales-type leases for lessors. Additionally, ASU 2016-02 provides a practical expedient, which the Company elected, that allows an entity to not reassess the following upon adoption (must be elected as a group): (i) whether an expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs.
As a result of adopting ASU 2016-02 on January 1, 2019 using the modified retrospective transition approach, the Company recognized a cumulative-effect adjustment to equity of $1 million as of January 1, 2019. Under ASU 2016-02, the Company began capitalizing fewer costs related to the drafting and negotiation of its lease agreements. Additionally, the Company began recognizing all of its significant operating leases for which it is the lessee, including corporate office leases, equipment leases, and ground leases, on its consolidated balance sheets as a lease liability and corresponding right-of-use asset. As such, the Company recognized a lease liability of $153 million and right-of-use asset of $166 million on January 1, 2019. The aggregate lease liability is calculated as the present value of minimum lease payments, discounted using a rate that approximates the Company’s secured incremental borrowing rate, adjusted for the noncancelable term of each lease. The right-of-use asset is calculated as the aggregate lease liability, adjusted for the existing accrued straight-line rent liability balance of $20 million and net unamortized above/below market ground lease intangible assets of $33 million.
Under ASU 2016-02, a practical expedient was offered to lessees to make a policy election, which the Company elected, to not separate lease and nonlease components, but rather account for the combined components as a single lease component under ASC 842. In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements (“ASU 2018-11”), which provides lessors with a similar option to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which: (i) the timing and pattern of transfer are the same for the nonlease component and the related lease component and (ii) the lease component, if accounted for separately, would be classified as an operating lease. This practical expedient causes an entity to assess whether a contract is predominantly lease or service based and recognize the entire contract under the relevant accounting guidance (i.e.,

9


predominantly lease-based would be accounted for under ASU 2016-02 and predominantly service-based would be accounted for under the Revenue ASUs). The Company elected this practical expedient as well and, as a result, beginning January 1, 2019, the Company recognizes revenue from its senior housing triple-net, medical office, and life science segments under ASC 842 and revenue from its SHOP segment under the Revenue ASUs (codified under ASC 606, Revenue from Contracts with Customers).
In conjunction with reaching the conclusions above, the Company concluded it was appropriate (under ASC 205, Presentation of Financial Statements) to reclassify amounts previously classified as revenue from tenant recoveries (within the senior housing triple-net, life science, and medical office segments) and present them combined with rental and related revenues within the consolidated statements of operations. The Company implemented this change during the fourth quarter of 2018. Included within rental and related revenues for the three months ended March 31, 2018 is $37 million of tenant recoveries.
In December 2018, the FASB issued ASU No. 2018-20, Narrow Scope Improvements for Lessors (“ASU 2018-20”), which requires that a lessor: (i) exclude certain lessor costs paid directly by a lessee to third parties on behalf of the lessor from a lessor's measurement of variable lease revenue and associated expense (i.e., no gross up of revenue and expense for these costs), and (ii) include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense (i.e., gross up revenue and expense for these costs). This is consistent with the Company’s historical presentation and did not require a material change on January 1, 2019.
Other. Effective January 1, 2019, the Company adopted the following ASU, which did not have a material impact to its consolidated financial position, results of operations, cash flows or disclosures upon adoption:
ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). The amendments in ASU 2017-12 expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. For cash flow and net investment hedges existing at the date of adoption, the Company adopted the amendments in ASU 2017-12 using the modified retrospective approach. For amendments impacting presentation and disclosure, the Company adopted ASU 2017-12 using a prospective approach.
Not Yet Adopted
Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Upon adoption of ASU 2016-13, the Company is required to reassess its financing receivables, including direct financing leases (“DFLs”) and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations.
Segment Reporting
The Company’s reportable segments, based on how it evaluates its business and allocates resources, are as follows: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. During the first quarter of 2019, as a result of a change in how operating results are reported to the Company's chief operating decision makers for the purpose of evaluating performance and allocating resources, two facilities were reclassified from other non-reportable segments to the medical office segment. Accordingly, all prior period segment information has been recast to conform to the current period presentation.


10


NOTE 3.  Real Estate Transactions


2019 Real Estate Investments
Cambridge Acquisition
During the three months ended March 31, 2019, the Company acquired a life science facility for $71 million and development rights at an adjacent undeveloped land parcel for consideration of up to $27 million. The existing facility and land parcel are located in Cambridge, Massachusetts.
Discovery Portfolio Acquisition
In April 2019, the Company acquired a portfolio of nine senior housing properties for $445 million. The properties are located across Florida, Georgia and Texas and will be operated by Discovery Senior Living, LLC (“Discovery”).
Oakmont Portfolio Acquisition and Transitions
On May 1, 2019, the Company acquired three newly-built, senior housing communities for $113 million. The portfolio will be operated by Oakmont Senior Living LLC (“Oakmont”). Additionally, the Company transitioned four senior housing triple-net properties to RIDEA structures with Oakmont continuing as the operator.
2018 Real Estate Investments
MSREI MOB JV
In August 2018, the Company and Morgan Stanley Real Estate Investment (“MSREI”) formed a joint venture (the “MSREI JV”) to own a portfolio of medical office buildings (“MOBs”), which the Company owns 51% of and consolidates. To form the joint venture, MSREI contributed cash of $298 million and HCP contributed nine wholly-owned MOBs (the “Contributed Assets”). The Contributed Assets are primarily located in Texas and Florida and were valued at approximately $320 million at the time of contribution. The MSREI JV used substantially all of the cash contributed by MSREI to acquire an additional portfolio of 16 MOBs in Greenville, South Carolina (the “Greenville Portfolio”) for $285 million. Concurrent with acquiring the additional MOBs, the MSREI JV entered into 10-year leases with the anchor tenants in the Greenville Portfolio.
The Contributed Assets are accounted for at historical depreciated cost by the Company, as the assets continue to be consolidated. The Greenville Portfolio was accounted for as an asset acquisition, which required the Company to record the individual components of the acquisition at their relative fair values. As a result, the Company recorded net real estate of $276 million and net intangible assets of $20 million during the three months ended September 30, 2018 related to the Greenville Portfolio. Additionally, during the three months ended September 30, 2018, the Company recognized a noncontrolling interest of $298 million related to the interest owned by MSREI. Refer to Note 14 for a discussion of the Company’s consolidation of the MSREI JV.
Life Science JV Interest Purchase
In November 2018, the Company acquired the outstanding equity interests in three life science joint ventures (which owned four buildings) for $92 million, bringing the Company’s equity ownership to 100% for all three joint ventures. As the Company began consolidating the assets upon acquisition, it derecognized the existing investment in the joint ventures, marked the real estate to fair value (using a relative fair value allocation), and recognized a gain on consolidation of $50 million within other income (expense), net.
Sierra Point Towers Acquisition
In November 2018, the Company entered into definitive agreements to acquire two life science buildings in South San Francisco, California adjacent to the Company’s The Shore at Sierra Point development, for $245 million. The Company made a $15 million nonrefundable deposit upon completing due diligence and expects to close the transaction in the second quarter of 2019.
Other
During the three months ended March 31, 2018, the Company acquired development rights on a land parcel in the Boston suburb of Lexington, Massachusetts for $21 million. The Company commenced a life science development on the land in 2018.
Development Activities
As part of the development program with HCA Healthcare, during the first quarter of 2019, the Company signed definitive agreements to develop three additional MOBs, two of which will be on-campus, with an aggregate estimated cost of $70 million. Construction on these projects is expected to commence in the second quarter of 2019.

11


Held for Sale
At March 31, 2019, two MOBs and one SHOP facility were classified as held for sale, with an aggregate carrying value of $11 million, primarily comprised of real estate assets of $10 million, net of accumulated depreciation of $5 million. At December 31, 2018, nine SHOP facilities and one undeveloped life science land parcel were classified as held for sale, with an aggregate carrying value of $108 million, primarily comprised of real estate assets of $101 million, net of accumulated depreciation of $30 million. Liabilities of assets held for sale was primarily comprised of intangible and other liabilities at both March 31, 2019 and December 31, 2018.
2019 Dispositions of Real Estate
During the quarter ended March 31, 2019, the Company sold nine SHOP assets for $68 million, two senior housing triple-net assets for $26 million, and one undeveloped life science land parcel for $35 million, resulting in total gain on sales of $8 million.
2018 Dispositions of Real Estate
Shoreline Technology Center
In November 2018, the Company sold its Shoreline Technology Center life science campus located in Mountain View, California for $1.0 billion and recognized a gain on sale of $726 million.
RIDEA II Sale Transaction
In January 2017, the Company completed the contribution of its ownership interest in RIDEA II to an unconsolidated joint venture owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (the “HCP/CPA JV”). Also in January 2017, RIDEA II was recapitalized with $602 million of debt, of which $360 million was provided by a third-party and $242 million was provided by HCP. In return for both transaction elements, the Company received combined proceeds of $480 million from the HCP/CPA JV and $242 million in loans receivable and retained an approximately 40% ownership interest in RIDEA II. This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. Refer to Note 2 for the impact of adopting the Revenue ASUs on January 1, 2018 to the Company’s partial sale of RIDEA II in the first quarter of 2017.
In June 2018, the Company sold its remaining 40% ownership interest in RIDEA II to an investor group led by CPA for $91 million. Additionally, CPA refinanced the Company’s $242 million of loans receivable from RIDEA II, resulting in total proceeds of $332 million. The Company no longer holds an economic interest in RIDEA II.
U.K. Portfolio
In June 2018, the Company entered into a joint venture with an institutional investor (the “U.K. JV”) through which the Company sold a 51% interest in substantially all United Kingdom (“U.K.”) assets previously owned by the Company (the “U.K. Portfolio”) based on a total value of £382 million ($507 million). The Company retained a 49% noncontrolling interest in the joint venture and received gross proceeds of $402 million, including proceeds from the refinancing of the Company’s previously held intercompany loans. Upon closing the U.K. JV, the Company deconsolidated the U.K. Portfolio, recognized its retained noncontrolling interest investment at fair value ($105 million) and recognized a gain on sale of $11 million, net of $17 million of cumulative foreign currency translation reclassified from other comprehensive income. The U.K. JV provides numerous mechanisms by which the joint venture partner can acquire the Company’s remaining interest in the U.K. JV. The fair value of the Company’s retained noncontrolling interest investment is based on Level 2 measurements within the fair value hierarchy.
Additionally, in August 2018, the Company sold its remaining £11 million U.K. development loan at par.
Other
During the quarter ended March 31, 2018, the Company sold two SHOP assets for $35 million, resulting in total gain on sales of $21 million.
During the quarter ended June 30, 2018, the Company sold eight SHOP assets for $268 million and two senior housing triple-net assets for $35 million, resulting in total gain on sales of $25 million.
During the quarter ended September 30, 2018, the Company sold four life science assets for $269 million, 11 SHOP assets for $76 million and two MOBs for $21 million, resulting in total gain on sales of $95 million.
During the quarter ended December 31, 2018, the Company sold two SHOP facilities for $15 million, two MOBs for $4 million, and one undeveloped land parcel for $3 million, resulting in no material gain or loss on sales.
Additionally, during 2018, the Company sold 19 senior housing assets to a third-party buyer for $377 million, resulting in a gain on sale of $40 million.

12


Impairments of Real Estate
2019
During the three months ended March 31, 2019, the Company determined that the carrying value of two MOBs that are candidates for potential future sale was no longer recoverable due to the Company’s shortened intended hold period under the held-for-use impairment model. Accordingly, the Company wrote-down the carrying amount of these two assets to their respective fair value, which resulted in an aggregate impairment charge of $9 million. The fair value of the assets was based on forecasted sales prices which are considered to be Level 2 measurements within the fair value hierarchy.
Brookdale MTCA Transactions
In November 2017, the Company and Brookdale Senior Living, Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transactions”). In connection with the overall transaction pursuant to the MTCA, the Company and Brookdale, and certain of their respective subsidiaries, agreed to the following:
The Company, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. At the time the MTCA was executed, these joint ventures collectively owned and operated 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). The Company completed its acquisitions of the RIDEA III noncontrolling interest for $32 million in December 2017 and the RIDEA I noncontrolling interest for $63 million in March 2018;
The Company received the right to sell, or transition to other operators, 32 of the 78 total assets under an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”) with Brookdale and 36 of the RIDEA Facilities (and terminate related management agreements with an affiliate of Brookdale without penalty), certain of which were sold during 2018 and 2019 and are included in the disposition transactions discussed above;
The Company provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and
Brookdale agreed to purchase two of the assets under the Amended Master Lease for $35 million and four of the RIDEA Facilities for $240 million, all of which were sold in 2018 and are included in the 2018 disposition transactions discussed above.
Additionally, during 2018, the Company terminated the previous management agreements or leases with Brookdale on 37 assets contemplated under the MTCA and completed the transition of 20 SHOP assets and 17 senior housing triple-net assets to other managers.


13


NOTE 4.  Leases

Lease Income
The following table summarizes the Company’s lease income:
 
Three Months Ended
March 31,
 
2019
 
2018
Operating lease income
$
294,222

 
$
316,752

Interest income on direct financing leases
13,524

 
13,266


Direct Financing Leases
Net investment in DFLs consists of the following (dollars in thousands):
 
March 31,
2019
Present value of minimum lease payments receivable
$
273,629

Present value of estimated residual value
114,364

Less deferred selling profits
(24,598
)
Net investment in direct financing leases
$
363,395

Properties subject to direct financing leases
15


 
December 31,
2018
Minimum lease payments receivable
$
1,013,976

Estimated residual value
507,484

Less unearned income
(807,642
)
Net investment in direct financing leases
$
713,818

Properties subject to direct financing leases
29


Direct Financing Lease Internal Ratings
The following table summarizes the Company’s internal ratings for DFLs at March 31, 2019 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
DFL Portfolio
 
Internal Ratings
Segment
 
 
 
Performing DFLs
 
Watch List DFLs
 
Workout DFLs
Senior housing triple-net
 
$
278,791

 
77
 
$
278,791

 
$

 
$

Other non-reportable segments
 
84,604

 
23
 
84,604

 

 

 
 
$
363,395

 
100
 
$
363,395

 
$

 
$


Beginning September 30, 2013, the Company placed a 14-property senior housing triple-net DFL (the “DFL Watchlist Portfolio”) on nonaccrual status and “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Watchlist Portfolio is being recognized on a cash basis. During the three months ended March 31, 2019 and 2018, the Company recognized income from DFLs of $4 million and $3 million, respectively. During the three months ended March 31, 2019 and 2018, the Company received cash payments of $5 million from the DFL Watchlist Portfolio. The carrying value of the DFL Watchlist Portfolio was zero and $351 million at March 31, 2019 and December 31, 2018, respectively.
Direct Financing Lease Transition
During the first quarter of 2019, the Company transitioned the DFL Watchlist Portfolio to a RIDEA structure, requiring the Company to recognize net assets equal to the lower of the net assets’ fair value or the carrying value of the net investment in the DFL. As a result, the Company derecognized the $351 million carrying value of the net investment in DFL related to the 14 properties and recognized a combination of net real estate ($331 million) and net intangibles assets ($20 million) for the same aggregate amount,

14


with no gain or loss recognized. As a result of the transaction, the 14 properties were transitioned from the senior housing triple-net segment to the SHOP segment during the first quarter of 2019.
Direct Financing Lease Receivable Maturities
The following table summarizes future minimum lease payments contractually due under DFLs at March 31, 2019 (in thousands):
Year
    
Amount
2019 (nine months)
 
$
29,365

2020
 
32,558

2021
 
31,989

2022
 
25,346

2023
 
24,774

Thereafter
 
416,286

Undiscounted minimum lease payments receivable
 
560,318

Less: imputed interest
 
(286,689
)
Present value of minimum lease payments receivable
 
$
273,629

The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2018 (in thousands):
Year
 
Amount
2019
 
$
114,970

2020
 
63,308

2021
 
63,687

2022
 
58,135

2023
 
58,570

Thereafter
 
655,306

 
 
$
1,013,976


Residual Value Risk
Quarterly, the Company reviews the estimated unguaranteed residual value of assets under DFLs to determine if there have been any material changes compared to the prior quarter. As needed, the Company and/or the related tenants will invest necessary funds to maintain the residual value of each asset.
Operating Leases
Future Minimum Rents
The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of March 31, 2019 (in thousands):
Year
 
Amount
2019 (nine months)
 
$
733,816

2020
 
952,756

2021
 
884,923

2022
 
782,066

2023
 
703,054

Thereafter
 
2,505,848

 
 
$
6,562,463


15


The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of December 31, 2018 (in thousands):
Year
    
Amount
2019
 
$
971,417

2020
 
928,102

2021
 
853,451

2022
 
751,972

2023
 
675,537

Thereafter
 
2,320,847

 
 
$
6,501,326


Lease Costs
The following tables provide information regarding the Company’s leases to which it is the lessee, such as corporate offices and ground leases (dollars in thousands):
 
 
Three Months Ended
March 31,
Lease Expense Information:
 
2019
 
2018
Total lease expense(1)
 
$
4,803

 
$
5,024

_______________________________________
(1)
Lease expense related to corporate assets is included in general and administrative expenses and lease expense related to ground leases is included within operating expenses in the Company’s consolidated statements of operations.
 
 
Three Months Ended
March 31,
Supplemental Cash Flow Information:
 
2019
 
2018
Cash paid for amounts included in the measurement of lease liability:
 
 
 
 
Operating cash flows for operating leases
 
$
3,963

 
$
4,253

 
 
 
 
 
ROU asset obtained in exchange for new lease liability:
 
 
 
 
Operating leases
 
$
880

 
$


Weighted Average Lease Term and Discount Rate:
 
March 31,
2019
Weighted average remaining lease term (years):
 
 
Operating leases
 
52

 
 
 
Weighted average discount rate:
 
 
Operating leases
 
4.36
%


16


The following table summarizes future minimum lease obligations under non-cancelable ground and other operating leases as of March 31, 2019 (in thousands):
Year
    
Amount
2019 (nine months)
 
$
5,937

2020
 
7,816

2021
 
7,888

2022
 
8,028

2023
 
8,198

Thereafter
 
471,083

Undiscounted minimum lease payments payable
 
508,950

Less: imputed interest
 
(356,113
)
Present value of lease liability
 
$
152,837

The following table summarizes future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2018 (in thousands):
Year
 
Amount
2019
 
$
5,597

2020
 
5,687

2021
 
5,776

2022
 
5,862

2023
 
5,983

Thereafter
 
466,130

 
 
$
495,035


Depreciation Expense
While the Company leases the majority of its property, plant, and equipment to various tenants under operating leases and DFLs, in certain situations, the Company owns and operates property, plant, and equipment for general corporate purposes. Corporate assets are recorded within other assets, net within the Company’s consolidated balance sheets and depreciation expense for those assets is recorded in general and administrative expenses in the Company’s consolidated statements of operations. Included within other assets, net as of both March 31, 2019 and December 31, 2018 is $3 million and $2 million, respectively, of accumulated depreciation related to corporate assets. Included within general and administrative expenses for the three months ended March 31, 2019 and 2018 is $0.4 million and $0.2 million, respectively, of depreciation expense related to corporate assets.
NOTE 5.  Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):
 
March 31, 2019
 
December 31, 2018
 
Real Estate
Secured
 
Other
Secured
 
Total
 
Real Estate
Secured
 
Other
Secured
 
Total
Mezzanine
$

 
$
20,545

 
$
20,545

 
$

 
$
21,013

 
$
21,013

Participating development loans and other(1)
65,635

 

 
65,635

 
42,037

 

 
42,037

Unamortized discounts, fees and costs

 
(41
)
 
(41
)
 

 
(52
)
 
(52
)
 
$
65,635

 
$
20,504

 
$
86,139

 
$
42,037

 
$
20,961

 
$
62,998

_______________________________________
(1)
At March 31, 2019, the Company had $53 million remaining of commitments to fund a $115 million senior living development project.


17


Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at March 31, 2019 (dollars in thousands):
 
 
Carrying
Amount
 
Percentage of
Loan Portfolio
 
Internal Ratings
Investment Type
 
 
 
Performing Loans
 
Watch List Loans
 
Workout Loans
Real estate secured
 
$
65,635

 
76
 
$
65,635

 
$

 
$

Other secured
 
20,504

 
24
 
20,504

 

 


 
$
86,139

 
100
 
$
86,139

 
$

 
$


U.K. Bridge Loan
In 2016, the Company provided a £105 million ($131 million at closing) bridge loan to MMCG (the “U.K. Bridge Loan”) to fund the acquisition of a portfolio of seven care homes in the U.K. Under the U.K. Bridge Loan, the Company retained a three year call option to acquire those seven care homes at a future date for £105 million, subject to certain conditions precedent being met. In March 2018, upon resolution of all conditions precedent, the Company began the process of exercising its call option to acquire the seven care homes and concluded that it should consolidate the real estate. As a result, the Company derecognized the outstanding loan receivable of £105 million and recognized a £29 million ($