NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Business
Overview
Healthpeak Properties, Inc. (formerly 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, “Healthpeak” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). HealthpeakTM 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.
On October 30, 2019, the Company changed its name from HCP, Inc. to Healthpeak Properties, Inc. Common shares of the Company will begin trading on the New York Stock Exchange under the new name and a new ticker symbol, “PEAK”, on November 5, 2019.
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 Healthpeak Properties, Inc., its wholly-owned subsidiaries, joint ventures (“JVs”) and variable interest entities (“VIEs”) that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. All adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 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 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 allowed the Company to only reassess contracts that were not completed as of the adoption date, rather than all historical contracts.
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:
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Prior to the adoption of the Revenue ASUs, the Company recognized a gain on sale of real estate using the full accrual method when collectibility of the sales price was reasonably assured, the Company was not obligated to perform additional activities that may be considered significant, the initial investment from the buyer was sufficient and other profit recognition criteria had been satisfied. The Company deferred all or a portion of a gain on sale of real estate if the requirements for gain recognition were not met at the time of sale. Subsequent to adopting the Revenue ASUs on January 1, 2018, the Company began recognizing a gain on sale of real estate upon transferring control of the asset to the purchaser, which is generally satisfied at the time of sale. In conjunction with its adoption of the Revenue ASUs, the Company reassessed its historical partial sale of real estate transactions to determine which transactions, if any, were not completed contracts (i.e., the transaction did not qualify for sale treatment under previous guidance). The Company concluded that it had one such material transaction, its partial sale of RIDEA II in the first quarter of 2017 (which was not a completed sale under historical guidance as of the Company's adoption date due to a minor obligation related to the interest sold). In accordance with the Revenue ASUs, the Company recorded its retained 40% equity investment at fair value as of the sale date. As a result, the Company recorded an adjustment to equity as of January 1, 2018 (under the modified retrospective transition approach) representing a step-up in the fair value of its equity investment in RIDEA II of $107 million (to a carrying value of $121 million as of January 1, 2018) and a $30 million impairment charge to decrease the carrying value to the sales price of the investment (see Note 4). The Company completed the sale of its equity investment in June 2018 and no longer holds an economic interest in RIDEA II.
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The Company generally expects that the Revenue ASUs will result in certain transactions qualifying as sales of real estate at an earlier date than under historical accounting guidance.
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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., 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 and nine months ended September 30, 2018 is $41 million and $117 million, respectively, 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 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. The adoption of ASU 2017-12 did not have a material impact to the Company’s consolidated financial position, results of operations, cash flows, or disclosures.
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.
NOTE 3. Master Transactions and Cooperation Agreement with Brookdale
2019 Master Transactions and Cooperation Agreement with Brookdale
In October 2019, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “2019 MTCA”), which includes a series of transactions related to its jointly owned 15-campus continuing care retirement community (“CCRC”) portfolio (the “CCRC JV”) and the portfolio of 43 senior housing properties that Brookdale triple-net leases from the Company.
In connection with the 2019 MTCA, the Company and Brookdale, and certain of their respective subsidiaries, agreed to the following related to the CCRC JV:
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The Company, which owns a 49% interest in the CCRC JV, agreed to purchase Brookdale’s 51% interest in 13 of the 15 communities in the CCRC JV based on a valuation of $1.06 billion (the “CCRC Acquisition”), inclusive of one community that was added subsequent to executing the MTCA;
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The management agreements related to the CCRC Acquisition communities will be terminated, with management transitioned (under new management agreements) from Brookdale to Life Care Services LLC (“LCS”) simultaneous with closing the CCRC Acquisition;
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The Company will pay a $100 million management termination fee to Brookdale upon closing the CCRC Acquisition; and
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The remaining two CCRCs will be jointly marketed for sale to third parties.
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In addition, pursuant to the 2019 MTCA, the Company and Brookdale agreed to the following transactions related to properties that Brookdale triple-net leases from the Company:
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Brookdale will acquire 18 of the properties from the Company (the “Brookdale Acquisition Assets”) for cash proceeds of $385 million;
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The Company will terminate the triple-net lease related to one property and transition it to a RIDEA structure with LCS as the manager;
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The remaining 24 properties will be restructured into a single master lease with 2.4% annual rent escalators and a maturity date of December 31, 2027 (the “2019 Amended Master Lease”);
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A portion of annual rent (amount in excess of 6.5% of sales proceeds) related to 14 of the 18 Brookdale Acquisition Assets will be reallocated to the remaining properties under the 2019 Amended Master Lease;
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Upon closing of the Brookdale Acquisition, Brookdale will pay down $20 million of future rent under the 2019 Amended Master Lease; and
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The Company will provide up to $35 million of capital investment in the 2019 Amended Master Lease properties over a five-year term, which will increase rent by 7% of the amount spent, per annum.
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With the exception of the capital investment to be made over the next five years, each of the above transactions, including payment of the $100 million management termination fee, is required to close simultaneous with the other transactions, which the Company expects to occur during the first quarter of 2020.
2017 MTCA with Brookdale
In November 2017, the Company and Brookdale entered into a Master Transactions and Cooperation Agreement (the “2017 MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale. In connection with the overall transaction pursuant to the 2017 MTCA, the Company and Brookdale, and certain of their respective subsidiaries, agreed to the following:
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The Company, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the 2017 MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture. At the time the 2017 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;
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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 “2017 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 in Note 4;
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The Company provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and
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Brookdale agreed to purchase two of the assets under the 2017 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 in Note 4.
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Additionally, during 2018, the Company terminated the previous management agreements or leases with Brookdale on 37 assets as contemplated under the 2017 MTCA and completed the transition of 20 SHOP assets and 17 senior housing triple-net assets to other managers.
NOTE 4. Real Estate Transactions
2019 Real Estate Investments
Cambridge Acquisition
During the first quarter of 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 are operated by Discovery Senior Living, LLC.
Oakmont Portfolio Acquisitions
In May 2019, the Company acquired three senior housing communities for $113 million and in July 2019, the Company acquired an additional five senior housing communities for $284 million. Both portfolios were acquired from and continue to be operated by Oakmont Senior Living LLC (“Oakmont”). Each portfolio was contributed to a DownREIT joint venture in which the sellers received non-controlling interests in lieu of cash for a portion of the sales price. The Company, as the managing member, consolidates each DownREIT joint venture.
As part of the May and July 2019 Oakmont transactions, the Company assumed $50 million and $112 million, respectively, of secured mortgage debt, both of which were recorded at their relative fair values through asset acquisition accounting.
Sierra Point Towers Acquisition
In June 2019, the Company acquired two life science buildings in South San Francisco, California adjacent to the Company’s The Shore at Sierra Point development, for $245 million.
Senior Housing JV Interest Purchase (Vintage Park JV)
In June 2019, the Company acquired the outstanding equity interests of a senior housing joint venture structure (which owned one senior housing facility), in which the Company previously held an unconsolidated equity investment, for $24 million. Subsequent to acquisition, the Company owned 100% of the equity. As the Company began consolidating the facility upon acquisition, it derecognized the existing investment in the joint venture structure, marked the real estate to fair value (using a relative fair value allocation), and recognized a gain on consolidation of $12 million, net of a tax impact of $1 million. The gain on consolidation is recognized within other income (expense), net and the tax impact is recognized within income tax benefit (expense).
Hartwell Innovation Campus Acquisition
In July 2019, the Company acquired a life science campus in the suburban Boston submarket of Lexington, Massachusetts, for $228 million. The campus is comprised of four buildings.
Other
During the nine months ended September 30, 2019, the Company acquired one medical office building (“MOB”) in Kansas for $15 million and one life science building in the Sorrento Mesa submarket of San Diego, California for $16 million.
West Cambridge Acquisition
In August 2019, the Company entered into definitive agreements to acquire one life science building, adjacent to the Company’s existing properties in Cambridge, Massachusetts, for $333 million. The Company made two nonrefundable deposits totaling $33 million upon execution of the purchase and sale agreement, which are recorded in other assets, net on the consolidated balance sheet as of September 30, 2019. The Company expects to close the transaction during the fourth quarter of 2019.
SHOP Joint Venture
In October 2019, the Company entered into a definitive agreement with a sovereign wealth fund to form a new joint venture that will own 19 SHOP assets operated by Brookdale. The Company will own 53.5% of the joint venture and will contribute all 19 assets with an estimated fair value of $790 million. The joint venture partner will own the other 46.5% and will contribute cash of $367 million, which will be immediately distributed to the Company. The transaction is expected to close during the fourth quarter of 2019.
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 MOBs for which the Company is a 51% owner and consolidates. To form the joint venture, MSREI contributed cash of $298 million and the Company 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 15 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.
Other
During the nine months ended September 30, 2018, the Company acquired development rights on a land parcel in the Boston suburb of Lexington, Massachusetts for $21 million. The Company commenced a life science development on the land in 2018.
Development Activities
As part of the development program with HCA Healthcare, during the nine months ended September 30, 2019, the Company commenced development on four MOBs, three of which will be on-campus.
The Company’s commitments related to development and redevelopment projects increased by $56 million, to $355 million at September 30, 2019, when compared to December 31, 2018, primarily as a result of additional development and redevelopment projects.
In October 2019, as part of the development program with HCA Healthcare, the Company executed development agreements for two additional on-campus MOBs.
Held for Sale
At September 30, 2019, 20 senior housing triple-net facilities (inclusive of 18 facilities being sold to Brookdale under the 2019 MTCA - see Note 3), 6 MOBs, 20 SHOP facilities, and 2 facilities from the other non-reportable segment were classified as held for sale, with an aggregate carrying value of $403 million, primarily comprised of real estate assets of $375 million, net of accumulated depreciation of $192 million. Liabilities of assets held for sale was primarily comprised of mortgage debt and other liabilities at September 30, 2019.
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 liabilities and other liabilities at 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.
During the quarter ended June 30, 2019, the Company sold one SHOP asset for $14 million, five MOBs for $15 million, and one life science asset for $7 million, resulting in total gain on sales of $11 million.
During the quarter ended September 30, 2019, the Company sold one MOB for $3 million and one SHOP asset for $7 million, resulting in no material gain or loss on sales.
In October 2019, the Company sold one facility from the other non-reportable segment for $15 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 Healthpeak and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (the “Healthpeak/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 the Company. In return for both transaction elements, the Company received combined proceeds of $480 million from the Healthpeak/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 was 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.
In October 2019, the Company entered into a definitive agreement to sell its remaining 49% interest in the U.K. JV (see Note 7).
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 4 life science assets for $269 million, 11 SHOP assets for $76 million and 2 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.
Impairments of Real Estate
2019
During the three months ended September 30, 2019, the Company recognized an aggregate impairment charge of $34 million related to seven SHOP assets, four senior housing triple-net assets, two MOBs, and one other non-reportable asset that are classified as held for sale. The impaired assets were written down from their aggregate carrying value of $124 million to their aggregate fair value less estimated costs to sell of $90 million. Additionally, during the three months ended September 30, 2019, the Company recognized an impairment charge of $4 million related to one MOB that it intends to demolish. The Company expects to re-purpose the land for development.
During the nine months ended September 30, 2019, the Company recognized an aggregate impairment charge of $93 million in conjunction with classifying 4 senior housing triple-net assets, 15 SHOP assets, 2 MOBs, and 1 other non-reportable asset as held for sale and writing their aggregate carrying value of $288 million down to their aggregate fair value less estimated costs to sell of $195 million. During the nine months ended September 30, 2019, the Company also recognized an impairment charge of $4 million related to one MOB that it intends to demolish.
Additionally, during the nine months ended September 30, 2019, the Company recognized a $5 million casualty-related gain, net of deferred tax impacts, as a result of insurance proceeds received for property damage and other associated costs related to hurricanes in 2017. The gain is recorded in other income (expense), net.
Lastly, during the nine months ended September 30, 2019, the Company determined the carrying value of two MOBs that were 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 impaired assets was based on forecasted sales prices, which are considered to be Level 3 measurements within the fair value hierarchy. Forecasted sales prices were determined using a direct capitalization model or a market approach (comparable sales model), which rely on certain assumptions by management, including: (i) property hold periods, (ii) market capitalization rates, (iii) market prices per unit, and (iv) forecasted cash flow streams (lease revenue rates, expense rates, growth rates, etc.). There are inherent uncertainties in making these assumptions. For the Company’s impairment calculations during the nine months ended September 30, 2019, the Company used a range of (i) market capitalization rates ranging from 4.97% to 8.27%, with a weighted average rate of 6.09%, and (ii) prices per unit ranging from $46,000 to $125,000, with a weighted average price of $71,000.
2018
During the three months ended September 30, 2018, in conjunction with classifying three underperforming SHOP assets as held for sale, the Company concluded that the assets were impaired and wrote-down the carrying value of the assets to their fair value less estimated costs to sell. Accordingly, the Company recognized a $5 million impairment charge during the third quarter of 2018.
During the nine months ended September 30, 2018, in conjunction with classifying 16 underperforming SHOP assets and an undeveloped life science land parcel as held for sale, the Company concluded the assets were impaired and wrote-down the carrying value of the assets to their fair value less estimated costs to sell. Accordingly, the Company recognized a $19 million impairment charge during the nine months ended September 30, 2018.
The fair value of the assets impaired in 2018 was based on contractual sales prices, which are considered to be Level 2 measurements within the fair value hierarchy.
NOTE 5. Leases
Lease Income
The following table summarizes the Company’s lease income (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Fixed income from operating leases
|
$
|
255,447
|
|
|
$
|
246,148
|
|
|
$
|
730,277
|
|
|
$
|
772,388
|
|
|
Variable income from operating leases
|
57,153
|
|
|
57,706
|
|
|
177,742
|
|
|
166,058
|
|
|
Interest income from direct financing leases
|
9,590
|
|
|
13,573
|
|
|
33,304
|
|
|
40,329
|
|
Direct Financing Leases
Net investment in DFLs consists of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
Present value of minimum lease payments receivable
|
$
|
23,316
|
|
|
Present value of estimated residual value
|
84,604
|
|
|
Less deferred selling profits
|
(23,316
|
)
|
|
Net investment in direct financing leases before allowance
|
84,604
|
|
|
Allowance for direct financing lease losses
|
—
|
|
|
Net investment in direct financing leases
|
$
|
84,604
|
|
|
Properties subject to direct financing leases
|
2
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Percentage of
DFL Portfolio
|
|
Internal Ratings
|
|
Segment
|
|
|
|
Performing DFLs
|
|
Watch List DFLs
|
|
Workout DFLs
|
|
Other non-reportable segments
|
|
$
|
84,604
|
|
|
100
|
|
$
|
84,604
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
84,604
|
|
|
100
|
|
$
|
84,604
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Direct Financing Lease Conversion
During the first quarter of 2019, the Company converted a DFL portfolio of 14 senior housing triple-net properties, previously on “Watch List” status, 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, 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 Sale
During the second quarter of 2019, the Company entered into agreements to sell 13 senior housing facilities under DFLs (the “DFL Sale Portfolio”) for $274 million. Upon entering into the agreements, the Company recognized an allowance for DFL losses and related impairment charge of $10 million to write-down the carrying value of the DFL Sale Portfolio to its fair value. The fair value of the DFL Sale Portfolio was based upon the agreed upon sale price, less estimated costs to sell, which is considered to be a Level 2 measurement within the fair value hierarchy. In conjunction with the entering into agreements to sell the DFL Sale Portfolio, the Company placed the portfolio on nonaccrual status and began recognizing income equal to the amount of cash received.
The Company completed the sale of the DFL Sale Portfolio in September 2019.
The following table summarizes the activity of the DFL Sale Portfolio during the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Income from DFLs
|
|
$
|
5,412
|
|
|
$
|
5,868
|
|
|
$
|
17,287
|
|
|
$
|
17,420
|
|
|
Cash payments received
|
|
5,412
|
|
|
5,634
|
|
|
16,005
|
|
|
15,118
|
|
Direct Financing Lease Receivable Maturities
The following table summarizes future minimum lease payments contractually due under DFLs at September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2019 (three months)
|
|
$
|
4,177
|
|
|
2020
|
|
9,554
|
|
|
2021
|
|
8,409
|
|
|
2022
|
|
1,176
|
|
|
2023
|
|
—
|
|
|
2024
|
|
—
|
|
|
Thereafter
|
|
—
|
|
|
Undiscounted minimum lease payments receivable
|
|
23,316
|
|
|
Less: imputed interest
|
|
—
|
|
|
Present value of minimum lease payments receivable
|
|
$
|
23,316
|
|
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 September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2019 (three months)
|
|
$
|
247,606
|
|
|
2020
|
|
996,835
|
|
|
2021
|
|
958,669
|
|
|
2022
|
|
860,278
|
|
|
2023
|
|
782,443
|
|
|
2024
|
|
683,528
|
|
|
Thereafter
|
|
2,353,307
|
|
|
|
|
$
|
6,882,666
|
|
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
September 30,
|
|
Nine Months Ended
September 30,
|
|
Lease Expense Information:
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Total lease expense(1)
|
|
$
|
4,343
|
|
|
$
|
3,947
|
|
|
$
|
12,764
|
|
|
$
|
11,351
|
|
_______________________________________
|
|
|
|
(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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Supplemental Cash Flow Information:
|
|
2019
|
|
2018
|
|
Cash paid for amounts included in the measurement of lease liability:
|
|
|
|
|
|
Operating cash flows for operating leases
|
|
$
|
10,134
|
|
|
$
|
9,132
|
|
|
|
|
|
|
|
|
ROU asset obtained in exchange for new lease liability:
|
|
|
|
|
|
Operating leases
|
|
$
|
4,084
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Weighted Average Lease Term and Discount Rate:
|
|
September 30,
2019
|
|
Weighted average remaining lease term (years):
|
|
|
|
Operating leases
|
|
51
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
Operating leases
|
|
4.36
|
%
|
The following table summarizes future minimum lease payments under non-cancelable ground and other operating leases included in the Company’s lease liability as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2019 (three months)
|
|
$
|
2,391
|
|
|
2020
|
|
9,322
|
|
|
2021
|
|
8,958
|
|
|
2022
|
|
8,770
|
|
|
2023
|
|
8,542
|
|
|
2024
|
|
6,798
|
|
|
Thereafter
|
|
451,675
|
|
|
Undiscounted minimum lease payments included in the lease liability
|
|
496,456
|
|
|
Less: imputed interest
|
|
(340,159
|
)
|
|
Present value of lease liability
|
|
$
|
156,297
|
|
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 certain 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 September 30, 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 September 30, 2019 and 2018 is $0.4 million and $0.3 million, respectively, of depreciation expense related to corporate assets. Included within general and administrative expenses for the nine months ended September 30, 2019 and 2018 is $1.3 million and $0.7 million, respectively, of depreciation expense related to corporate assets.
NOTE 6. Loans Receivable
The following table summarizes the Company’s loans receivable (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Real Estate
Secured
|
|
Other
Secured
|
|
Total
|
|
Real Estate
Secured
|
|
Other
Secured
|
|
Total
|
|
Mezzanine
|
$
|
—
|
|
|
$
|
25,702
|
|
|
$
|
25,702
|
|
|
$
|
—
|
|
|
$
|
21,013
|
|
|
$
|
21,013
|
|
|
Participating development loans and other(1)
|
111,942
|
|
|
—
|
|
|
111,942
|
|
|
42,037
|
|
|
—
|
|
|
42,037
|
|
|
Unamortized discounts, fees and costs
|
—
|
|
|
(25
|
)
|
|
(25
|
)
|
|
—
|
|
|
(52
|
)
|
|
(52
|
)
|
|
|
$
|
111,942
|
|
|
$
|
25,677
|
|
|
$
|
137,619
|
|
|
$
|
42,037
|
|
|
$
|
20,961
|
|
|
$
|
62,998
|
|
_______________________________________
|
|
|
|
(1)
|
At September 30, 2019, the Company had $17 million remaining of commitments to fund a $115 million senior living development project.
|
Loans Receivable Internal Ratings
The following table summarizes the Company’s internal ratings for loans receivable at September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Amount
|
|
Percentage of
Loan Portfolio
|
|
Internal Ratings
|
|
Investment Type
|
|
|
|
Performing Loans
|
|
Watch List Loans
|
|
Workout Loans
|
|
Real estate secured
|
|
$
|
111,942
|
|
|
81
|
|
$
|
111,942
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Other secured
|
|
25,677
|
|
|
19
|
|
25,677
|
|
|
—
|
|
|
—
|
|
|
|
|
$
|
137,619
|
|
|
100
|
|
$
|
137,619
|
|
|
$
|
—
|
|
|
$
|
—
|
|
U.K. Bridge Loan
In 2016, the Company provided a £105 million ($131 million at closing) bridge loan (the “U.K. Bridge Loan”) to Maria Mallaband Care Group Ltd. (“MMCG”) 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 ($41 million) loss on consolidation. Refer to Note 15 for the complete impact of consolidating the seven care homes during the first quarter of 2018.
In June 2018, the Company completed the process of exercising the above-mentioned call option. The seven care homes acquired through the call option were included in the U.K. JV transaction (see Note 4).
NOTE 7. Investments in and Advances to Unconsolidated Joint Ventures
The Company owns interests in the following entities that are accounted for under the equity method (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
Entity(1)
|
|
Property Count
|
|
|
Ownership %
|
|
|
2019
|
|
2018
|
|
CCRC JV(2)
|
|
15
|
|
|
49
|
|
|
$
|
334,546
|
|
|
$
|
365,764
|
|
|
U.K. JV(3)
|
|
68
|
|
|
49
|
|
|
98,692
|
|
|
101,735
|
|
|
MBK JV
|
|
5
|
|
|
50
|
|
|
33,814
|
|
|
35,435
|
|
|
Other SHOP JVs(4)
|
|
4
|
|
|
41- 90
|
|
|
26,733
|
|
|
25,493
|
|
|
Medical Office JVs(5)
|
|
3
|
|
|
20 - 67
|
|
|
9,890
|
|
|
10,160
|
|
|
K&Y JVs(6)
|
|
3
|
|
|
80
|
|
|
1,545
|
|
|
1,430
|
|
|
Advances to unconsolidated joint ventures, net
|
|
|
|
|
|
|
|
25
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
$
|
505,245
|
|
|
$
|
540,088
|
|
_______________________________________
|
|
|
|
(1)
|
These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.
|
|
|
|
|
(2)
|
See Note 3 for discussion of the 2019 MTCA with Brookdale, including the pending acquisition of Brookdale’s interest in the CCRC JV.
|
|
|
|
|
(3)
|
See Note 4 for discussion of the formation of the U.K. JV and the Company’s equity method investment.
|
|
|
|
|
(4)
|
In June 2019, the Company acquired the outstanding equity interests in, and began consolidating, the Vintage Park JV (see Note 4). Remaining unconsolidated SHOP joint ventures (and the Company’s ownership percentage) include: (i) Waldwick JV (85%); (ii) Otay Ranch JV (90%); (iii) MBK Development JV (50%); (iv) Discovery Naples JV (41%); and (v) Discovery Sarasota JV (47%). The Company’s investments in the Discovery Naples JV and the Discovery Sarasota JV are preferred equity investments earning a 10% per annum fixed-rate return.
|
|
|
|
|
(5)
|
Includes three unconsolidated medical office joint ventures (and the Company’s ownership percentage): Ventures IV (20%); Ventures III (30%); and Suburban Properties, LLC (67%).
|
|
|
|
|
(6)
|
At September 30, 2019, includes two unconsolidated joint ventures. At December 31, 2018, includes three unconsolidated joint ventures. In October 2019, the Company sold its interest in one of the unconsolidated joint ventures for $4 million.
|
CCRC JV. During the third quarter of 2019, the CCRC JV classified one property that Brookdale and the Company committed to sell to a third-party as held for sale in the joint venture’s stand-alone financial statements. In conjunction with classifying the property as held for sale, the CCRC JV recognized an impairment charge of $12 million to reflect the write-down of the property’s previous carrying value to the estimated selling price, less costs to sell. The Company recognized its 49% share of the impairment charge ($6 million) through equity income (loss) from unconsolidated joint ventures during the three months ended September 30, 2019. The second property that Brookdale and the Company intend to sell to a third-party has not been classified as held for sale as an active program to locate a buyer had not been initiated as of September 30, 2019.
Additionally, in October 2019, the Company agreed to acquire Brookdale’s 51% interest in 13 of the 15 communities held by the CCRC JV. Refer to Note 3 for a detailed discussion of the 2019 MTCA with Brookdale.
U.K. JV. In October 2019, the Company entered into a definitive agreement to sell its remaining 49% interest in the U.K. JV for net proceeds of approximately $90 million. Upon sale, which is expected to close during the fourth quarter of 2019, the Company expects to recognize a loss on sale of approximately $8 million (based on exchange rates at the time the agreement was executed). The transaction will complete the Company’s strategic exit from the U.K.
NOTE 8. Intangibles
Intangible assets primarily consist of lease-up intangibles and above market tenant lease intangibles. Intangible liabilities primarily consist of below market lease intangibles. The following tables summarize the Company’s intangible lease assets and liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible lease assets
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Gross intangible lease assets
|
|
$
|
569,059
|
|
|
$
|
556,114
|
|
|
Accumulated depreciation and amortization
|
|
(265,337
|
)
|
|
(251,035
|
)
|
|
Intangible assets, net
|
|
$
|
303,722
|
|
|
$
|
305,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible lease liabilities
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Gross intangible lease liabilities
|
|
$
|
91,896
|
|
|
$
|
94,444
|
|
|
Accumulated depreciation and amortization
|
|
(36,983
|
)
|
|
(39,781
|
)
|
|
Intangible liabilities, net
|
|
$
|
54,913
|
|
|
$
|
54,663
|
|
During the nine months ended September 30, 2019, in conjunction with the Company’s acquisitions of real estate (see Note 4), the Company acquired intangible assets of $120 million and intangible liabilities of $12 million. The intangible assets and intangible liabilities acquired have a weighted average amortization period of 2 years and 6 years, respectively.
On January 1, 2019, in conjunction with the adoption of ASU 2016-12 (see Note 2), the Company reclassified $39 million of intangible assets, net and $6 million of intangible liabilities, net related to above and below market ground leases to right-of-use asset, net.
NOTE 9. Debt
Bank Line of Credit and Term Loans
On May 23, 2019, the Company executed a $2.5 billion unsecured revolving line of credit facility (the “Revolving Facility”), which matures on May 23, 2023 and contains two, six month extension options, subject to certain customary conditions. Borrowings under the Revolving Facility accrue interest at LIBOR plus a margin that depends on the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at September 30, 2019, the margin on the Revolving Facility was 0.825% and the facility fee was 0.15%. At September 30, 2019, the Company had $738 million, including £55 million ($68 million), outstanding under the Revolving Facility, with a weighted average effective interest rate of 3.04%.
In May 2019, the Company also entered into a new $250 million unsecured term loan facility, which the Company fully drew down on June 20, 2019 (the “2019 Term Loan” and, together with the Revolving Facility, the “Facilities”). The 2019 Term Loan matures on May 23, 2024. Based on the Company’s credit ratings at September 30, 2019, the 2019 Term Loan accrues interest at a rate of LIBOR plus 0.90%, with a weighted average effective interest rate of 3.04%.
The Facilities include a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. The Facilities also contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Enterprise Total Indebtedness to Enterprise Gross Asset Value to 60%; (ii) limit the ratio of Enterprise Secured Debt to Enterprise Gross Asset Value to 40%; (iii) limit the ratio of Enterprise Unsecured Debt to Enterprise Unencumbered Asset Value to 60%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a minimum Consolidated Tangible Net Worth of $7.0 billion. At September 30, 2019, the Company believes it was in compliance with each of these restrictions and requirements of the Facilities.
On July 3, 2018, the Company exercised its one-time right under a previously-drawn term loan to repay the outstanding British pound sterling (“GBP”) balance and re-borrow in U.S. Dollars (“USD”) with all other key terms unchanged, which resulted in repayment of a £169 million balance and re-borrowing of $224 million. In November 2018, the Company repaid the $224 million unsecured term loan, bringing the total term loan balance to zero at December 31, 2018.
Commercial Paper Program
In September 2019, the Company established an unsecured commercial paper program (the “Commercial Paper Program”). Under the terms of the Commercial Paper Program, the Company may issue, from time to time, unsecured short-term debt securities with varying maturities not in excess of 397 days from the date of issue. Amounts available under the Commercial Paper Program may be borrowed, repaid, and re-borrowed from time to time, with the maximum aggregate face or principal amount outstanding at any one time not exceeding $1.0 billion. Amounts borrowed under the Commercial Paper Program will be sold on terms that are customary for the U.S. commercial paper market and will be at least equal in right of payment with all of the Company’s other unsecured and unsubordinated indebtedness. The Company intends to use its Revolving Facility as a liquidity backstop for the repayment of unsecured short-term debt securities issued under the Commercial Paper Program. As of September 30, 2019, the Company had no borrowings outstanding under the Commercial Paper Program.
As of October 29, 2019, there was a balance of $650 million outstanding under the Commercial Paper Program, with original maturities ranging from three weeks to one month and a weighted average interest rate of 2.15%. The Company primarily utilized amounts borrowed under the Commercial Paper Program to repay amounts previously borrowed under the Revolving Facility.
Senior Unsecured Notes
At September 30, 2019, the Company had senior unsecured notes outstanding with an aggregate principal balance of $5.3 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at September 30, 2019.
The following table summarizes the Company’s senior unsecured notes issuances during the nine months ended September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Amount
|
|
Coupon Rate
|
|
Maturity Date
|
|
July 5, 2019
|
|
$
|
650,000
|
|
|
3.250
|
%
|
|
2026
|
|
July 5, 2019
|
|
$
|
650,000
|
|
|
3.500
|
%
|
|
2029
|
The following table summarizes the Company’s senior unsecured notes payoffs during the nine months ended September 30, 2019 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Amount
|
|
Coupon Rate
|
|
Maturity Date
|
|
July 22, 2019 (1)
|
|
$
|
800,000
|
|
|
2.625
|
%
|
|
2020
|
|
July 8, 2019 (1)
|
|
$
|
250,000
|
|
|
4.000
|
%
|
|
2022
|
|
July 8, 2019 (1)
|
|
$
|
250,000
|
|
|
4.250
|
%
|
|
2023
|
_______________________________________
|
|
|
|
(1)
|
Upon completing the redemption of the 2.625% senior unsecured notes due February 2020 and repurchasing a portion of the 4.250% senior unsecured notes due 2023 and the 4.000% senior unsecured notes due 2022, the Company recognized a $35 million loss on debt extinguishment.
|
There were no senior unsecured notes issuances during the year ended December 31, 2018.
The following table summarizes the Company’s senior unsecured notes payoffs during the year ended December 31, 2018 (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Amount
|
|
Coupon Rate
|
|
Maturity Date
|
|
July 16, 2018(1)
|
|
$
|
700,000
|
|
|
5.375
|
%
|
|
2021
|
|
November 8, 2018
|
|
$
|
450,000
|
|
|
3.750
|
%
|
|
2019
|
_______________________________________
|
|
|
|
(1)
|
The Company recorded a $44 million loss on debt extinguishment related to the repurchase of senior notes.
|
Mortgage Debt
At September 30, 2019, the Company had $262 million in aggregate principal of mortgage debt outstanding (excluding mortgage debt on assets held for sale), which is secured by 17 healthcare facilities with an aggregate carrying value of $523 million.
Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets, and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires insurance on the assets, and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets.
In May 2019, upon acquiring three senior housing assets from Oakmont, the Company assumed $50 million of secured mortgage debt maturing in 2028 and having a weighted average interest rate of 4.83%. In July 2019, upon acquiring five senior housing assets from Oakmont, the Company assumed an additional $112 million of secured mortgage debt with maturity dates ranging from 2027 to 2033 and a weighted average interest rate of 4.89% (see Note 4).
Debt Maturities
The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
Bank Line of
Credit(1)
|
|
Term Loan
|
|
Senior
Unsecured
Notes(2)
|
|
Mortgage
Debt(3)
|
|
Total(4)
|
|
2019 (three months)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,001
|
|
|
$
|
1,001
|
|
|
2020
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,132
|
|
|
4,132
|
|
|
2021
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,821
|
|
|
11,821
|
|
|
2022
|
|
—
|
|
|
—
|
|
|
650,000
|
|
|
3,886
|
|
|
653,886
|
|
|
2023
|
|
737,793
|
|
|
—
|
|
|
550,000
|
|
|
4,069
|
|
|
1,291,862
|
|
|
Thereafter
|
|
—
|
|
|
250,000
|
|
|
4,100,000
|
|
|
237,175
|
|
|
4,587,175
|
|
|
|
|
737,793
|
|
|
250,000
|
|
|
5,300,000
|
|
|
262,084
|
|
|
6,549,877
|
|
|
(Discounts), premium and debt costs, net
|
|
—
|
|
|
(1,118
|
)
|
|
(46,361
|
)
|
|
12,965
|
|
|
(34,514
|
)
|
|
|
|
737,793
|
|
|
248,882
|
|
|
5,253,639
|
|
|
275,049
|
|
|
6,515,363
|
|
|
Debt on assets held for sale(5)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32,594
|
|
|
32,594
|
|
|
|
|
$
|
737,793
|
|
|
$
|
248,882
|
|
|
$
|
5,253,639
|
|
|
$
|
307,643
|
|
|
$
|
6,547,957
|
|
_______________________________________
|
|
|
|
(1)
|
Includes £55 million translated into USD.
|
|
|
|
|
(2)
|
Effective interest rates on the senior notes ranged from 3.37% to 6.87% with a weighted average effective interest rate of 4.07% and a weighted average maturity of seven years.
|
|
|
|
|
(3)
|
Excluding mortgage debt on assets held for sale, effective interest rates on the mortgage debt ranged from 2.58% to 5.91% with a weighted average effective interest rate of 4.13% and a weighted average maturity of 13 years.
|
|
|
|
|
(4)
|
Excludes $85 million of other debt that have no scheduled maturities.
|
|
|
|
|
(5)
|
Represents mortgage debt on assets held for sale with interest rates that ranged from 3.45% to 6.80% and mature between 2026 and 2044.
|
NOTE 10. Commitments and Contingencies
Legal Proceedings
From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.
Class Action. On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCR ManorCare, Inc. (“HCRMC”), and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice (“DoJ”) in a suit against HCRMC arising from the False Claims Act that the DoJ voluntarily dismissed with prejudice. The plaintiff in the class action suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. On November 28, 2017, the Court appointed Societe Generale Securities GmbH (SGSS Germany) and the City of Birmingham Retirement and Relief Systems (Birmingham) as Co-Lead Plaintiffs in the class action. The motion to dismiss was fully briefed on May 21, 2018 and oral arguments were held on October 23, 2018. Subsequently, on December 6, 2018, HCRMC and its officers were voluntarily dismissed from the class action lawsuit without prejudice to such claims being refiled. The Company believes the suit to be without merit and intends to vigorously defend against it.
Derivative Actions. On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, Subodh v. HCR ManorCare Inc., et al., Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action (the “California derivative action”). The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects and failing to maintain adequate internal controls. On April 18, 2017, the Court approved the parties’ stipulation to stay the case pending disposition of the motion to dismiss the class action litigation.
On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al., Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative action. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of alleged billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. On July 11, 2017, the Court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action.
On July 21, 2017, a purported stockholder of the Company filed another derivative action, Kelley v. HCR ManorCare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in Weldon and in the California derivative action. Like Weldon, the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. On November 28, 2017, the federal court in the Central District of California granted Defendants’ motion to transfer the action to the Northern District of Ohio (i.e., the court where the class action and other federal derivative action are pending). The Court in the Northern District of Ohio is currently considering whether to consolidate the Weldon and Kelley actions, appointment of lead plaintiffs and counsel, and whether the stay in Weldon should continue as to either or both actions.
The Company’s Board of Directors received letters dated August 17, 2016, April 19, 2017, and April 20, 2017 from private law firms acting on behalf of clients who are purported stockholders of the Company, each asserting allegations similar to those made in the California derivative action matters discussed above. Each letter demands that the Board of Directors take action to assert the Company’s rights. The Board of Directors completed its evaluation and rejected the demand letters in December of 2017. One of the law firms has more recently requested that the Board of Directors reconsider its determination after a ruling on the motion to dismiss in the class action litigation.
The Company believes that the plaintiffs lack standing or the lawsuits and demands are without merit, but cannot predict the outcome of these proceedings or reasonably estimate any potential loss at this time. Accordingly, no loss contingency has been recorded for these matters as of September 30, 2019, as the likelihood of loss is not considered probable or estimable.
NOTE 11. Equity
At-The-Market Equity Offering Program
In June 2015, the Company established an at-the-market equity offering program (“ATM Program”) to sell shares of its common stock from time to time through a consortium of banks acting as sales agents or directly to the banks acting as principals. In May 2018, the Company renewed its ATM Program (the “2018 ATM Program”). During the year ended December 31, 2018, the Company issued 5.4 million shares of common stock at a weighted average net price of $28.27 per share, resulting in net proceeds of $154 million.
In February 2019, the Company terminated the 2018 ATM Program and established a new ATM Program (the “2019 ATM Program”) pursuant to which shares of common stock having an aggregate gross sales price of up to $1.0 billion may be sold (i) by the Company through a consortium of banks acting as sales agents or directly to the banks acting as principals or (ii) by a consortium of banks acting as forward sellers on behalf of any forward purchasers pursuant to a forward sale agreement. The use of a forward sale agreement allows the Company to lock in a share price on the sale of shares at the time the agreement is effective, but defer receiving the proceeds from the sale of shares until a later date.
ATM Direct Issuances
During the nine months ended September 30, 2019, the Company issued 5.9 million shares of common stock at a weighted average net price of $31.84 per share, after commissions, resulting in net proceeds of $189 million. The Company did not issue any shares of its common stock under the 2019 ATM Program during the three months ended September 30, 2019.
ATM Forward Contracts
During the three and nine months ended September 30, 2019, the Company utilized the forward provisions under the 2019 ATM Program to allow for the sale of up to an aggregate of 1.2 million and 14.8 million shares of its common stock, respectively, at an initial weighted average net price of $31.10 and $31.23 per share, after commissions, respectively.
During the nine months ended September 30, 2019, the Company settled 5.5 million shares at a weighted average net price of $30.91 per share, after commissions, resulting in net proceeds of $171 million. At September 30, 2019, 9.3 million shares remained outstanding under forward contracts, with a weighted average net price of $31.06 per share, after commissions.
At September 30, 2019, approximately $341 million of the Company’s common stock remained available for sale under the 2019 ATM Program.
Each forward sale has a one year term. At any time during the term, the Company may settle the forward sale by delivery of physical shares of common stock to the forward seller or, at the Company’s election, in cash or net shares. The forward sale price that the Company expects to receive upon settlement of outstanding forward contracts will be the initial forward price established upon the effective date, subject to adjustments for: (i) accrued interest, (ii) the forward purchasers’ stock borrowing costs, and (iii) certain fixed price reductions during the term of the agreement.
2018 Forward Equity Offering
In December 2018, the Company entered into a forward sales agreement to sell up to an aggregate of 15.25 million shares of its common stock (including shares issued through the exercise of underwriters’ options) at an initial net price of $28.60 per share, after underwriting discounts and commissions. The agreement has a one year term that expires on December 13, 2019 during which time the Company may settle the forward sales agreement by delivery of physical shares of common stock to the forward seller or, at the Company’s election, by settling in cash or net shares. The forward sale price that the Company expects to receive upon settlement of the agreement will be the initial net price of $28.60 per share, subject to adjustments for: (i) accrued interest, (ii) the forward purchasers’ stock borrowing costs, and (iii) certain fixed price reductions during the term of the agreement. During the three and nine months ended September 30, 2019, the Company settled 3.6 million and 5.1 million shares, respectively, under the forward sales agreement at a weighted average net price of $27.85 and $27.93 per share, respectively, resulting in net proceeds of $100 million and $142 million, respectively. At September 30, 2019, 10.15 million shares remained outstanding under the forward sales agreement.
In December 2018, contemporaneous with the forward equity offering discussed above, the Company completed an offering of 2 million shares of common stock at a net price of $28.60 per share, resulting in net proceeds of $57 million.
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the Company’s accumulated other comprehensive income (loss) (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
Cumulative foreign currency translation adjustment(1)
|
$
|
(2,887
|
)
|
|
$
|
(1,683
|
)
|
|
Unrealized gains (losses) on derivatives, net
|
16
|
|
|
(467
|
)
|
|
Supplemental Executive Retirement plan minimum liability and other
|
(2,352
|
)
|
|
(2,558
|
)
|
|
Total accumulated other comprehensive income (loss)
|
$
|
(5,223
|
)
|
|
$
|
(4,708
|
)
|
_______________________________________
|
|
|
|
(1)
|
See Note 4 for a discussion of the U.K. JV transaction.
|
NOTE 12. Segment Disclosures
The Company evaluates its business and allocates resources based on its reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science, and (iv) medical office. The Company has non-reportable segments that are comprised primarily of the Company’s unconsolidated joint ventures, hospital properties, and debt investments. The accounting policies of the segments are the same as those in Note 2 to the Consolidated Financial Statements in the Company’s 2018 Annual Report on Form 10-K filed with the SEC, as updated by Note 2 herein.
During the first quarter of 2019, as a result of a change in how operating results are reported to the chief operating decision makers for the purpose of evaluating performance and allocating resources, the Company reclassified operating results related to two facilities from its other non-reportable segment to its medical office segment. Accordingly, all prior period segment information has been recast to conform to current period presentation.
During the nine months ended September 30, 2019, 39 senior housing triple-net facilities were transferred to the Company’s SHOP segment as a result of terminating the triple-net leases and transitioning the assets to a RIDEA structure. There were no transfers of senior housing triple-net facilities to the Company’s SHOP segment during the three months ended September 30, 2019. During each of the three and nine months ended September 30, 2018, 6 and 16 senior housing triple-net facilities, respectively, were transferred to the Company’s SHOP segment. When an asset is transferred from one segment to another, the results associated with that asset are included in the original segment until the date of transfer. Results generated after the transfer date are included in the new segment.
The Company evaluates performance based upon property NOI and Adjusted NOI. NOI is defined as real estate revenues (inclusive of rental and related revenues, resident fees and services, and income from direct financing leases), less property level operating expenses (which exclude transition costs); NOI excludes all other financial statement amounts included in net income (loss). Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, termination fees, actuarial reserves for insurance claims that have been incurred but not reported, and the impact of deferred community fee income and expense.
NOI and Adjusted NOI exclude the Company’s share of income (loss) from unconsolidated joint ventures, which is recognized as equity income (loss) from unconsolidated joint ventures in the consolidated statements of operations.
Non-segment assets consist of assets in the Company's other non-reportable segments and corporate non-segment assets. Corporate non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities, and real estate assets and liabilities held for sale. See Note 16 for other information regarding concentrations of credit risk.
The following tables summarize information for the reportable segments (in thousands):
For the three months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Housing Triple-Net
|
|
SHOP
|
|
Life Science
|
|
Medical Office
|
|
Other Non-reportable
|
|
Corporate Non-segment
|
|
Total
|
|
Real estate revenues(1)
|
|
$
|
48,018
|
|
|
$
|
212,275
|
|
|
$
|
118,561
|
|
|
$
|
143,639
|
|
|
$
|
12,737
|
|
|
$
|
—
|
|
|
$
|
535,230
|
|
|
Operating expenses
|
|
(865
|
)
|
|
(166,201
|
)
|
|
(29,520
|
)
|
|
(51,472
|
)
|
|
(11
|
)
|
|
—
|
|
|
(248,069
|
)
|
|
NOI
|
|
47,153
|
|
|
46,074
|
|
|
89,041
|
|
|
92,167
|
|
|
12,726
|
|
|
—
|
|
|
287,161
|
|
|
Adjustments to NOI(2)
|
|
(1,537
|
)
|
|
740
|
|
|
(7,067
|
)
|
|
(1,568
|
)
|
|
469
|
|
|
—
|
|
|
(8,963
|
)
|
|
Adjusted NOI
|
|
45,616
|
|
|
46,814
|
|
|
81,974
|
|
|
90,599
|
|
|
13,195
|
|
|
—
|
|
|
278,198
|
|
|
Addback adjustments
|
|
1,537
|
|
|
(740
|
)
|
|
7,067
|
|
|
1,568
|
|
|
(469
|
)
|
|
—
|
|
|
8,963
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,741
|
|
|
—
|
|
|
2,741
|
|
|
Interest expense
|
|
(106
|
)
|
|
(2,637
|
)
|
|
(68
|
)
|
|
(108
|
)
|
|
—
|
|
|
(58,311
|
)
|
|
(61,230
|
)
|
|
Depreciation and amortization
|
|
(12,778
|
)
|
|
(58,152
|
)
|
|
(45,028
|
)
|
|
(54,152
|
)
|
|
(1,834
|
)
|
|
—
|
|
|
(171,944
|
)
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22,970
|
)
|
|
(22,970
|
)
|
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,319
|
)
|
|
(1,319
|
)
|
|
Recoveries (impairments), net
|
|
(7,430
|
)
|
|
(24,721
|
)
|
|
—
|
|
|
(5,729
|
)
|
|
(377
|
)
|
|
—
|
|
|
(38,257
|
)
|
|
Gain (loss) on sales of real estate, net
|
|
—
|
|
|
(734
|
)
|
|
(87
|
)
|
|
(7
|
)
|
|
44
|
|
|
—
|
|
|
(784
|
)
|
|
Loss on debt extinguishments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(35,017
|
)
|
|
(35,017
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
980
|
|
|
(287
|
)
|
|
693
|
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,261
|
|
|
6,261
|
|
|
Equity income (loss) from unconsolidated joint ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,643
|
)
|
|
—
|
|
|
(7,643
|
)
|
|
Net income (loss)
|
|
$
|
26,839
|
|
|
$
|
(40,170
|
)
|
|
$
|
43,858
|
|
|
$
|
32,171
|
|
|
$
|
6,637
|
|
|
$
|
(111,643
|
)
|
|
$
|
(42,308
|
)
|
_______________________________________
|
|
|
|
(1)
|
Represents rental and related revenues, resident fees and services, and income from DFLs.
|
|
|
|
|
(2)
|
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, net, and termination fees.
|
For the three months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Housing Triple-Net
|
|
SHOP
|
|
Life Science
|
|
Medical Office
|
|
Other Non-reportable
|
|
Corporate Non-segment
|
|
Total
|
|
Real estate revenues(1)
|
|
$
|
67,487
|
|
|
$
|
137,044
|
|
|
$
|
98,040
|
|
|
$
|
139,566
|
|
|
$
|
12,649
|
|
|
$
|
—
|
|
|
$
|
454,786
|
|
|
Operating expenses
|
|
(840
|
)
|
|
(106,182
|
)
|
|
(23,668
|
)
|
|
(50,478
|
)
|
|
(39
|
)
|
|
—
|
|
|
(181,207
|
)
|
|
NOI
|
|
66,647
|
|
|
30,862
|
|
|
74,372
|
|
|
89,088
|
|
|
12,610
|
|
|
—
|
|
|
273,579
|
|
|
Adjustments to NOI(2)
|
|
534
|
|
|
1,378
|
|
|
(1,439
|
)
|
|
(1,364
|
)
|
|
188
|
|
|
—
|
|
|
(703
|
)
|
|
Adjusted NOI
|
|
67,181
|
|
|
32,240
|
|
|
72,933
|
|
|
87,724
|
|
|
12,798
|
|
|
—
|
|
|
272,876
|
|
|
Addback adjustments
|
|
(534
|
)
|
|
(1,378
|
)
|
|
1,439
|
|
|
1,364
|
|
|
(188
|
)
|
|
—
|
|
|
703
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,236
|
|
|
—
|
|
|
1,236
|
|
|
Interest expense
|
|
(599
|
)
|
|
(688
|
)
|
|
(78
|
)
|
|
(117
|
)
|
|
—
|
|
|
(62,004
|
)
|
|
(63,486
|
)
|
|
Depreciation and amortization
|
|
(18,884
|
)
|
|
(25,166
|
)
|
|
(34,432
|
)
|
|
(51,977
|
)
|
|
(1,739
|
)
|
|
—
|
|
|
(132,198
|
)
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(23,503
|
)
|
|
(23,503
|
)
|
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,489
|
)
|
|
(4,489
|
)
|
|
Recoveries (impairments), net
|
|
—
|
|
|
(5,268
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,268
|
)
|
|
Gain (loss) on sales of real estate, net
|
|
463
|
|
|
10,163
|
|
|
80,580
|
|
|
3,903
|
|
|
223
|
|
|
—
|
|
|
95,332
|
|
|
Loss on debt extinguishments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,899
|
)
|
|
(43,899
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,604
|
|
|
1,604
|
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,929
|
|
|
4,929
|
|
|
Equity income (loss) from unconsolidated joint ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(911
|
)
|
|
—
|
|
|
(911
|
)
|
|
Net income (loss)
|
|
$
|
47,627
|
|
|
$
|
9,903
|
|
|
$
|
120,442
|
|
|
$
|
40,897
|
|
|
$
|
11,419
|
|
|
$
|
(127,362
|
)
|
|
$
|
102,926
|
|
_______________________________________
|
|
|
|
(1)
|
Represents rental and related revenues, resident fees and services, and income from DFLs.
|
|
|
|
|
(2)
|
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, net, and termination fees.
|
For the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Housing Triple-Net
|
|
SHOP
|
|
Life Science
|
|
Medical Office
|
|
Other Non-reportable
|
|
Corporate Non-segment
|
|
Total
|
|
Real estate revenues(1)
|
|
$
|
156,776
|
|
|
$
|
515,457
|
|
|
$
|
320,630
|
|
|
$
|
427,761
|
|
|
$
|
38,200
|
|
|
$
|
—
|
|
|
$
|
1,458,824
|
|
|
Operating expenses
|
|
(2,723
|
)
|
|
(400,608
|
)
|
|
(76,992
|
)
|
|
(150,635
|
)
|
|
(31
|
)
|
|
—
|
|
|
(630,989
|
)
|
|
NOI
|
|
154,053
|
|
|
114,849
|
|
|
243,638
|
|
|
277,126
|
|
|
38,169
|
|
|
—
|
|
|
827,835
|
|
|
Adjustments to NOI(2)
|
|
3,833
|
|
|
2,732
|
|
|
(17,159
|
)
|
|
(4,542
|
)
|
|
884
|
|
|
—
|
|
|
(14,252
|
)
|
|
Adjusted NOI
|
|
157,886
|
|
|
117,581
|
|
|
226,479
|
|
|
272,584
|
|
|
39,053
|
|
|
—
|
|
|
813,583
|
|
|
Addback adjustments
|
|
(3,833
|
)
|
|
(2,732
|
)
|
|
17,159
|
|
|
4,542
|
|
|
(884
|
)
|
|
—
|
|
|
14,252
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,868
|
|
|
—
|
|
|
6,868
|
|
|
Interest expense
|
|
(901
|
)
|
|
(4,626
|
)
|
|
(211
|
)
|
|
(328
|
)
|
|
—
|
|
|
(161,433
|
)
|
|
(167,499
|
)
|
|
Depreciation and amortization
|
|
(45,154
|
)
|
|
(134,481
|
)
|
|
(122,705
|
)
|
|
(161,350
|
)
|
|
(5,501
|
)
|
|
—
|
|
|
(469,191
|
)
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(71,445
|
)
|
|
(71,445
|
)
|
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,174
|
)
|
|
(7,174
|
)
|
|
Recoveries (impairments), net
|
|
(22,914
|
)
|
|
(77,685
|
)
|
|
—
|
|
|
(14,677
|
)
|
|
(377
|
)
|
|
—
|
|
|
(115,653
|
)
|
|
Gain (loss) on sales of real estate, net
|
|
3,557
|
|
|
8,844
|
|
|
3,651
|
|
|
2,876
|
|
|
(220
|
)
|
|
—
|
|
|
18,708
|
|
|
Loss on debt extinguishments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36,152
|
)
|
|
(36,152
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,797
|
|
|
11,037
|
|
|
24,834
|
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,583
|
|
|
11,583
|
|
|
Equity income (loss) from unconsolidated joint ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10,012
|
)
|
|
—
|
|
|
(10,012
|
)
|
|
Net income (loss)
|
|
$
|
88,641
|
|
|
$
|
(93,099
|
)
|
|
$
|
124,373
|
|
|
$
|
103,647
|
|
|
$
|
42,724
|
|
|
$
|
(253,584
|
)
|
|
$
|
12,702
|
|
_______________________________________
|
|
|
|
(1)
|
Represents rental and related revenues, resident fees and services, and income from DFLs.
|
|
|
|
|
(2)
|
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, net, and termination fees.
|
For the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Housing Triple-Net
|
|
SHOP
|
|
Life Science
|
|
Medical Office
|
|
Other Non-reportable
|
|
Corporate Non-segment
|
|
Total
|
|
Real estate revenues(1)
|
|
$
|
212,489
|
|
|
$
|
420,067
|
|
|
$
|
298,692
|
|
|
$
|
407,361
|
|
|
$
|
57,113
|
|
|
$
|
—
|
|
|
$
|
1,395,722
|
|
|
Operating expenses
|
|
(2,677
|
)
|
|
(309,694
|
)
|
|
(68,208
|
)
|
|
(146,881
|
)
|
|
(165
|
)
|
|
—
|
|
|
(527,625
|
)
|
|
NOI
|
|
209,812
|
|
|
110,373
|
|
|
230,484
|
|
|
260,480
|
|
|
56,948
|
|
|
—
|
|
|
868,097
|
|
|
Adjustments to NOI(2)
|
|
(323
|
)
|
|
(356
|
)
|
|
(7,423
|
)
|
|
(5,129
|
)
|
|
(820
|
)
|
|
—
|
|
|
(14,051
|
)
|
|
Adjusted NOI
|
|
209,489
|
|
|
110,017
|
|
|
223,061
|
|
|
255,351
|
|
|
56,128
|
|
|
—
|
|
|
854,046
|
|
|
Addback adjustments
|
|
323
|
|
|
356
|
|
|
7,423
|
|
|
5,129
|
|
|
820
|
|
|
—
|
|
|
14,051
|
|
|
Interest income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,048
|
|
|
—
|
|
|
9,048
|
|
|
Interest expense
|
|
(1,806
|
)
|
|
(2,067
|
)
|
|
(240
|
)
|
|
(356
|
)
|
|
(1,469
|
)
|
|
(205,688
|
)
|
|
(211,626
|
)
|
|
Depreciation and amortization
|
|
(62,041
|
)
|
|
(80,797
|
)
|
|
(105,782
|
)
|
|
(147,270
|
)
|
|
(22,850
|
)
|
|
—
|
|
|
(418,740
|
)
|
|
General and administrative
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(75,192
|
)
|
|
(75,192
|
)
|
|
Transaction costs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,088
|
)
|
|
(9,088
|
)
|
|
Recoveries (impairments), net
|
|
(6,273
|
)
|
|
(5,268
|
)
|
|
(7,639
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19,180
|
)
|
|
Gain (loss) on sales of real estate, net
|
|
(22,687
|
)
|
|
79,340
|
|
|
80,581
|
|
|
3,903
|
|
|
21,074
|
|
|
—
|
|
|
162,211
|
|
|
Loss on debt extinguishments
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(43,899
|
)
|
|
(43,899
|
)
|
|
Other income (expense), net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(40,567
|
)
|
|
3,550
|
|
|
(37,017
|
)
|
|
Income tax benefit (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
14,919
|
|
|
14,919
|
|
|
Equity income (loss) from unconsolidated joint ventures
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(442
|
)
|
|
—
|
|
|
(442
|
)
|
|
Net income (loss)
|
|
$
|
117,005
|
|
|
$
|
101,581
|
|
|
$
|
197,404
|
|
|
$
|
116,757
|
|
|
$
|
21,742
|
|
|
$
|
(315,398
|
)
|
|
$
|
239,091
|
|
_______________________________________
|
|
|
|
(1)
|
Represents rental and related revenues, resident fees and services, and income from DFLs.
|
|
|
|
|
(2)
|
Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, actuarial reserves for insurance claims that have been incurred but not reported, deferral of community fees, net, and termination fees.
|
The following table summarizes the Company’s revenues by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
Segment
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Senior housing triple-net
|
|
$
|
48,018
|
|
|
$
|
67,487
|
|
|
$
|
156,776
|
|
|
$
|
212,489
|
|
|
SHOP
|
|
212,275
|
|
|
137,044
|
|
|
515,457
|
|
|
420,067
|
|
|
Life science
|
|
118,561
|
|
|
98,040
|
|
|
320,630
|
|
|
298,692
|
|
|
Medical office
|
|
143,639
|
|
|
139,566
|
|
|
427,761
|
|
|
407,361
|
|
|
Other non-reportable segments
|
|
15,478
|
|
|
13,885
|
|
|
45,068
|
|
|
66,161
|
|
|
Total revenues
|
|
$
|
537,971
|
|
|
$
|
456,022
|
|
|
$
|
1,465,692
|
|
|
$
|
1,404,770
|
|
See Notes 3 and 4 for significant transactions impacting the Company’s segment assets during the periods presented.
NOTE 13. Earnings Per Common Share
Basic income (loss) per common share (“EPS”) is computed based upon the weighted average number of common shares outstanding. Diluted income (loss) per common share is computed based upon the weighted average number of common shares outstanding plus the impact of forward equity sales agreements using the treasury stock method and common shares issuable from the assumed conversion of DownREIT units, stock options, certain performance restricted stock units, and unvested restricted stock units. Only those instruments having a dilutive impact on the Company’s basic income (loss) per share are included in diluted income (loss) per share during the periods presented.
Restricted stock and certain performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, and require use of the two-class method when computing basic and diluted earnings per share.
During the three and nine months ended September 30, 2019, the Company utilized the forward sale provisions under the 2019 ATM Program to sell up to an aggregate of 1.2 million and 14.8 million shares of common stock, respectively, with a one year term. During the nine months ended September 30, 2019, the Company settled 5.5 million shares under ATM forward contracts, leaving 9.3 million shares outstanding thereunder.
Additionally, in December 2018, the Company entered into a forward equity sales agreement to sell up to an aggregate of 15.25 million shares of its common stock by December 13, 2019. During the three and nine months ended September 30, 2019, the Company settled 3.6 million and 5.1 million shares, respectively, under the December 2018 forward sales agreement. At September 30, 2019, 10.15 million shares remained outstanding thereunder. The Company expects to settle the remaining forward sales with shares of common stock prior to their respective expiration dates. See Note 11 for further details.
The Company considered the potential dilution resulting from the forward agreements to the calculation of earnings per share. At inception, the agreements do not have an effect on the computation of basic EPS as no shares are delivered until settlement. However, the Company uses the treasury stock method to determine the dilution, if any, resulting from the forward sales agreements during the period of time prior to settlement. The aggregate effect on the Company’s diluted weighted-average common shares for the nine months ended September 30, 2019, was 1.9 million weighted-average incremental shares from the forward equity sales agreements, respectively.
The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income (loss)
|
$
|
(42,308
|
)
|
|
$
|
102,926
|
|
|
$
|
12,702
|
|
|
$
|
239,091
|
|
|
Noncontrolling interests' share in earnings
|
(3,555
|
)
|
|
(3,555
|
)
|
|
(10,692
|
)
|
|
(9,546
|
)
|
|
Net income (loss) attributable to Healthpeak Properties, Inc.
|
(45,863
|
)
|
|
99,371
|
|
|
2,010
|
|
|
229,545
|
|
|
Less: Participating securities' share in earnings
|
(386
|
)
|
|
(425
|
)
|
|
(1,223
|
)
|
|
(1,278
|
)
|
|
Net income (loss) applicable to common shares
|
$
|
(46,249
|
)
|
|
$
|
98,946
|
|
|
$
|
787
|
|
|
$
|
228,267
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
491,203
|
|
|
469,867
|
|
|
482,595
|
|
|
469,732
|
|
|
Dilutive potential common shares - equity awards
|
—
|
|
|
251
|
|
|
296
|
|
|
144
|
|
|
Dilutive potential common shares - forward equity agreements(1)
|
—
|
|
|
—
|
|
|
1,901
|
|
|
—
|
|
|
Diluted weighted average common shares
|
491,203
|
|
|
470,118
|
|
|
484,792
|
|
|
469,876
|
|
|
Basic earnings per common share
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(0.09
|
)
|
|
$
|
0.21
|
|
|
$
|
0.00
|
|
|
$
|
0.49
|
|
|
Diluted
|
$
|
(0.09
|
)
|
|
$
|
0.21
|
|
|
$
|
0.00
|
|
|
$
|
0.49
|
|
_______________________________________
|
|
|
|
(1)
|
Represents the current dilutive impact of 19 million shares of common stock under forward sales agreements that have not been settled as of September 30, 2019. Based on the forward price of each agreement as of September 30, 2019, issuance of all 19 million shares would result in approximately $572 million of net proceeds.
|
For all periods presented in the above table, 7 million shares issuable upon conversion of DownREIT units were not included because they are anti-dilutive. Additionally, for the three and nine months ended September 30, 2019, 19 million and 18 million shares of common stock, respectively, issuable pursuant to the settlement of forward equity sales agreements were not included because they are anti-dilutive (see discussion above). For the three months ended September 30, 2019, diluted loss per share is calculated using the weighted-average common shares outstanding during the period. For all other periods presented in the above table, approximately 1 million shares of common stock subject to outstanding equity awards (restricted stock units and stock options) were not included because they are anti-dilutive.
NOTE 14. Supplemental Cash Flow Information
The following table provides supplemental cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
Interest paid, net of capitalized interest
|
$
|
164,761
|
|
|
$
|
226,907
|
|
|
Income taxes paid (refunded)
|
1,314
|
|
|
2,040
|
|
|
Capitalized interest
|
22,768
|
|
|
13,769
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
Accrued construction costs
|
113,936
|
|
|
78,557
|
|
|
Retained equity method investment from U.K. JV transaction
|
—
|
|
|
104,922
|
|
|
Derecognition of U.K. Bridge Loan receivable
|
—
|
|
|
147,474
|
|
|
Consolidation of net assets related to U.K. Bridge Loan
|
—
|
|
|
106,457
|
|
|
Vesting of restricted stock units and conversion of non-managing member units into common stock
|
4,534
|
|
|
389
|
|
|
Liabilities assumed with real estate acquisitions
|
172,565
|
|
|
2,093
|
|
|
Conversion of DFLs to real estate
|
350,540
|
|
|
—
|
|
|
Net noncash impact from the consolidation of previously unconsolidated joint ventures (see Note 3)
|
17,850
|
|
|
—
|
|
See discussions related to: (i) the U.K. JV transaction in Note 4, (ii) the U.K. Bridge Loan in Notes 6 and 15, (iii) the conversion of DFLs to real estate in Note 5, and (iv) the consolidation of previously unconsolidated joint ventures in Note 3.
The following table summarizes cash, cash equivalents and restricted cash (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
2019
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
124,990
|
|
|
$
|
78,864
|
|
|
Restricted cash
|
|
30,114
|
|
|
29,877
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
155,104
|
|
|
$
|
108,741
|
|
NOTE 15. Variable Interest Entities
Unconsolidated Variable Interest Entities
At September 30, 2019, the Company had investments in: (i) four properties leased to VIE tenants, (ii) five unconsolidated VIE joint ventures, (iii) marketable debt securities of one VIE, and (iv) one loan to a VIE borrower. The Company determined it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated joint ventures (CCRC OpCo, the development investment, Waldwick JV and the LLC investment discussed below), it has no formal involvement in these VIEs beyond its investments.
VIE Tenants. The Company leases four properties to a total of two tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases.
CCRC OpCo. The Company holds a 49% ownership interest in CCRC OpCo, a joint venture entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE. The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale, as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo, debt service payments, capital expenditures, accounts payable, and expense accruals. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities).
Waldwick Development JV. The Company holds an 85% ownership interest in a development joint venture (the “Waldwick JV”), which has been identified as a VIE as power is shared with a member that does not have a substantive equity investment at risk. The assets of the joint venture primarily consist of an in-progress senior housing facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated with the cost of its development obligations. Any assets generated by the joint venture may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
LLC Investment. The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments).
Development Investments. The Company holds investments (consisting of mezzanine debt and/or preferred equity) in two senior housing development joint ventures. The joint ventures are also capitalized by senior loans from a third party and equity from the third party managing-member, but are considered to be “thinly capitalized” as there is insufficient equity investment at risk.
Debt Securities Investment. The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets.
Seller Financing Loan. The Company provided seller financing of $10 million related to its sale of seven senior housing triple-net facilities. The financing was provided in the form of a secured five year mezzanine loan to a “thinly capitalized” borrower created to acquire the facilities.
The classification of the related assets and liabilities and the maximum loss exposure as a result of the Company’s involvement with these VIEs at September 30, 2019 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
VIE Type
|
|
Asset/Liability Type
|
|
Maximum Loss
Exposure
and Carrying
Amount(1)
|
|
VIE tenants - operating leases(2)
|
|
Lease intangibles, net and straight-line rent receivables
|
|
7,984
|
|
|
CCRC OpCo
|
|
Investments in unconsolidated joint ventures
|
|
167,612
|
|
|
Unconsolidated development joint ventures
|
|
Loans receivable, net and Investments in unconsolidated joint ventures
|
|
24,015
|
|
|
Loan - seller financing
|
|
Loans receivable, net
|
|
10,000
|
|
|
CMBS and LLC investment
|
|
Marketable debt and LLC investment
|
|
34,677
|
|
_______________________________________
|
|
|
|
(1)
|
The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest).
|
|
|
|
|
(2)
|
The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default.
|
At September 30, 2019, the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls).
See Notes 5, 6, and 7 for additional descriptions of the nature, purpose, and operating activities of the Company’s unconsolidated VIEs and interests therein.
Consolidated Variable Interest Entities
The Company’s consolidated total assets and total liabilities at September 30, 2019 and December 31, 2018 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to the Company. Total assets and total liabilities include VIE assets and liabilities as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
Buildings and improvements
|
$
|
2,799,041
|
|
|
$
|
1,949,582
|
|
|
Development costs and construction in progress
|
54,154
|
|
|
39,584
|
|
|
Land
|
426,027
|
|
|
151,746
|
|
|
Accumulated depreciation and amortization
|
(474,996
|
)
|
|
(398,143
|
)
|
|
Net real estate
|
2,804,226
|
|
|
1,742,769
|
|
|
Investments in and advances to unconsolidated joint ventures
|
—
|
|
|
1,550
|
|
|
Accounts receivable, net
|
6,151
|
|
|
7,904
|
|
|
Cash and cash equivalents
|
53,745
|
|
|
23,772
|
|
|
Restricted cash
|
8,976
|
|
|
3,399
|
|
|
Intangible assets, net
|
146,319
|
|
|
111,333
|
|
|
Right-of-use asset, net
|
92,933
|
|
|
—
|
|
|
Other assets, net
|
47,597
|
|
|
43,149
|
|
|
Total assets
|
$
|
3,159,947
|
|
|
$
|
1,933,876
|
|
|
Liabilities
|
|
|
|
|
Mortgage debt
|
216,340
|
|
|
44,598
|
|
|
Intangible liabilities, net
|
18,212
|
|
|
19,128
|
|
|
Lease liability
|
90,487
|
|
|
—
|
|
|
Accounts payable and accrued liabilities
|
78,815
|
|
|
66,736
|
|
|
Deferred revenue
|
28,084
|
|
|
24,215
|
|
|
Total liabilities
|
$
|
431,938
|
|
|
$
|
154,677
|
|
Ventures V, LLC. The Company holds a 51% ownership interest in and is the managing member of a joint venture entity formed in October 2015 that owns and leases MOBs (“Ventures V”). The Company classifies Ventures V as a VIE due to the non-managing member lacking substantive participation rights in the management of Ventures V or kick-out rights over the managing member. The Company consolidates Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures).
Watertown JV. The Company holds a 95% ownership interest in and is the managing member of joint venture entities formed in November 2017 that own and operate a senior housing property in a RIDEA structure (“Watertown JV”). Watertown PropCo is a VIE as the Company and the non-managing member share in control of the entity, but substantially all of the entity's activities are performed on behalf of the Company. Watertown OpCo is a VIE as the non-managing member, through its equity interest, lacks substantive participation rights in the management of Watertown OpCo or kick-out rights over the managing member. The Company consolidates Watertown PropCo and Watertown OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of Watertown PropCo primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of Watertown OpCo primarily consist of leasehold interests in a senior housing facility (operating lease), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to Watertown PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the Watertown structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities, and debt costs).
Life Science JVs. The Company holds a 99% ownership interest in multiple joint venture entities that own and lease life science assets (the “Life Science JVs”). The Life Science JVs are VIEs as the members share in control of the entities, but substantially all of the activities are performed on behalf of the Company. The Company consolidates the Life Science JVs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Life Science JVs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Life Science JVs may only be used to settle their contractual obligations (primarily from capital expenditures).
MSREI MOB JV. The Company holds a 51% ownership interest in, and is the managing member of, a joint venture entity formed in August 2018 that owns and leases MOBs (the “MSREI JV” - see Note 4). The MSREI JV is a VIE due to the non-managing member lacking substantive participation rights in the management of the joint venture or kick-out rights over the managing member. The Company consolidates the MSREI JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of the MSREI JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by the MSREI JV may only be used to settle its contractual obligations (primarily from capital expenditures).
Consolidated Lessee. The Company leases two senior housing properties to a lessee entity under a cash flow lease through which the Company receives monthly rent equal to the residual cash flows of the property. The lessee entity is classified as a VIE as it is a "thinly capitalized" entity. The Company consolidates the lessee entity as it has the ability to control the activities that most significantly impact the economic performance of the lessee entity. The lessee entity’s assets primarily consist of leasehold interests in a senior housing facility (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to the Company and operating expenses of the senior housing facility (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities, and debt costs).
DownREITs. The Company holds a controlling ownership interest in and is the managing member of seven limited liability companies (“DownREITs”). The Company classifies the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other Consolidated Real Estate Partnerships. The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). The Company classifies the Partnerships as VIEs due to the limited partners (non-managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures).
Other consolidated VIEs. The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development joint venture (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of a development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations.
U.K. Bridge Loan. In 2016, the Company provided a £105 million ($131 million at closing) bridge loan to MMCG to fund the acquisition of a portfolio of seven care homes in the U.K. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity had historically been identified as a VIE because it was “thinly capitalized.” The Company retained a three year call option to acquire all the shares of the special purpose entity, which it could only exercise upon the occurrence of certain events. During the quarter ended March 31, 2018, the Company concluded that the conditions required to exercise the call option had been met and initiated the call option process to acquire the special purpose entity. In conjunction with initiating the process to legally exercise its call option and the satisfaction of required contingencies, the Company concluded that it was the primary beneficiary of the special purpose entity and therefore, should consolidate the entity. As such, during the quarter ended March 31, 2018, the Company derecognized the previously outstanding loan receivable, recognized the special purpose entity’s assets and liabilities at their respective fair values, and recognized a £29 million ($41 million) loss on consolidation, net of a tax benefit of £2 million ($3 million), to account for the difference between the carrying value of the loan receivable and the fair value of net assets and liabilities assumed. The loss on consolidation was recognized within other income (expense), net and the tax benefit was recognized within income tax benefit (expense). The fair value of net assets and liabilities consolidated during the first quarter of 2018 consisted of £81 million ($114 million) of net real estate, £4 million ($5 million) of intangible assets, and £9 million ($13 million) of net deferred tax liabilities.
In June 2018, the Company completed the exercise of the above-mentioned call option and formally acquired full ownership of the special purpose entity. As such, the Company reconsidered whether the special purpose entity was a VIE and concluded that it was no longer “thinly capitalized” as the previously outstanding bridge loan converted to equity at risk and, therefore, was no longer a VIE. The real estate assets held by the special purpose entity were contributed to the U.K. JV formed by the Company in June 2018 (see Note 4).
NOTE 16. Concentration of Credit Risk
Concentrations of credit risk arise when one or more tenants, operators, or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks.
The following tables provide information regarding the Company’s concentrations of credit risk with respect to certain tenants:
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|
|
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|
|
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|
|
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|
|
|
Percentage of Total Assets
|
|
|
|
Total Company
|
|
Senior Housing Triple-Net
|
|
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
December 31,
|
|
Tenant
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Brookdale(1)
|
|
6
|
|
6
|
|
46
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Revenues
|
|
|
|
Total Company
|
|
Senior Housing Triple-Net
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
Three Months Ended September 30,
|
|
Nine Months Ended
September 30,
|
|
Tenant
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Brookdale(1)
|
|
3
|
|
5
|
|
4
|
|
6
|
|
39
|
|
37
|
|
36
|
|
40
|
_______________________________________
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|
(1)
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Excludes senior housing facilities operated by Brookdale in the Company’s SHOP segment as discussed below. Percentages of segment and total company revenues include partial-year revenue earned from senior housing triple-net facilities that were sold during 2018.
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At September 30, 2019 and December 31, 2018, Brookdale managed or operated, in the Company’s SHOP segment, approximately 6% and 7%, respectively, of the Company’s real estate investments (based on total assets). Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. At September 30, 2019, Brookdale provided comprehensive facility management and accounting services with respect to 25 of the Company’s consolidated SHOP facilities and 15 SHOP facilities owned by its unconsolidated joint ventures, for which the Company or joint venture pay annual management fees pursuant to long-term management agreements. Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewal periods. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA properties. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre-established EBITDAR (as defined) thresholds.
To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease.
NOTE 17. Fair Value Measurements
Financial assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets are immaterial at September 30, 2019.
The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands):
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|
|
|
September 30, 2019(3)
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|
December 31, 2018(3)
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Carrying
Value
|
|
Fair Value
|
|
Carrying
Value
|
|
Fair Value
|
|
Loans receivable, net(2)
|
$
|
137,619
|
|
|
$
|
137,619
|
|
|
$
|
62,998
|
|
|
$
|
62,998
|
|
|
Marketable debt securities(2)
|
19,614
|
|
|
19,614
|
|
|
19,202
|
|
|
19,202
|
|
|
Bank line of credit(2)
|
737,793
|
|
|
737,793
|
|
|
80,103
|
|
|
80,103
|
|
|
Term loan(2)
|
248,882
|
|
|
248,882
|
|
|
—
|
|
|
—
|
|
|
Senior unsecured notes(1)
|
5,253,639
|
|
|
5,681,330
|
|
|
5,258,550
|
|
|
5,302,485
|
|
|
Mortgage debt(2)
|
275,049
|
|
|
277,553
|
|
|
138,470
|
|
|
136,161
|
|
|
Other debt(2)
|
85,069
|
|
|
85,069
|
|
|
90,785
|
|
|
90,785
|
|
|
Interest-rate swap liabilities(2)
|
827
|
|
|
827
|
|
|
1,310
|
|
|
1,310
|
|
_______________________________________
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|
|
(1)
|
Level 1: Fair value calculated based on quoted prices in active markets.
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|
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|
(2)
|
Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) for loans receivable, net, mortgage debt and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loan and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating.
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|
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(3)
|
During the nine months ended September 30, 2019 and year ended December 31, 2018, there were no material transfers of financial assets or liabilities within the fair value hierarchy.
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NOTE 18. Derivative Financial Instruments
The following table summarizes the Company’s outstanding swap contracts at September 30, 2019 (dollars in thousands):
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Date Entered
|
|
Maturity Date
|
|
Hedge Designation
|
|
Notional
|
|
Pay Rate
|
|
Receive Rate
|
|
Fair Value(1)
|
|
Interest rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2005(2)
|
|
July 2020
|
|
Cash Flow
|
|
$
|
42,000
|
|
|
3.82%
|
|
BMA Swap Index
|
|
$
|
(827
|
)
|
______________________________________
|
|
|
|
(1)
|
Derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.
|
|
|
|
|
(2)
|
Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.
|
The Company uses derivative instruments to mitigate the effects of interest rate fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes. Assuming a one percentage point shift in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $1 million.
At September 30, 2019, £55 million of the Company’s GBP-denominated borrowings under the Revolving Facility are designated as a hedge of a portion of the Company’s net investments in GBP-functional currency unconsolidated subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated £55 million GBP-denominated borrowings due primarily to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The balance in accumulated other comprehensive income (loss) will be reclassified to earnings when the Company sells its remaining investment in the U.K.