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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2010 AND FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 2010
| |
Page | |||
|---|---|---|---|---|
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 2010 |
3 | |||
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the nine months ended September 30, 2010 |
4 |
|||
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2009 |
5 |
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Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements |
6 |
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial statements presented below have been prepared based on certain pro forma adjustments to the historical consolidated financial statements of HCP, HCR ManorCare PropCo LLC ("HCR ManorCare PropCo") and HCP Ventures II as of and for the nine months ended September 30, 2010 and for the year ended December 31, 2009. The historical consolidated financial statements of HCP are contained in its Annual Report on Form 10-K for the year ended December 31, 2009, as updated by its Current Report on Form 8-K as filed with the SEC on November 2, 2010, and Quarterly Report on Form 10-Q for the quarter ended September 30, 2010. The historical consolidated financial statements of HCR ManorCare PropCo are included as Exhibits 99.2 and 99.3 to the Current Report on Form 8-K as filed with the SEC on December 14, 2010.
The accompanying unaudited pro forma condensed consolidated financial statements give effect to the proposed acquisition by HCP of all of the equity interest in HCR ManorCare PropCo (the "HCR ManorCare Facilities Acquisition") and the purchase of the remaining 65 percent interest in HCP Ventures II (the "HCP Ventures II Purchase") (collectively, the "Acquisitions"). The unaudited pro forma condensed consolidated balance sheet as of September 30, 2010 has been prepared as if the Acquisitions had occurred as of that date. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2009 and for the nine months ended September 30, 2010 have been prepared as if the Acquisitions had occurred as of January 1, 2009. Such statements also reflect the incurrence of debt and give effect to certain capital transactions undertaken by HCP in order to finance the Acquisitions.
The allocation of the purchase price of HCR ManorCare PropCo and HCP Ventures II reflected in these unaudited pro forma condensed consolidated financial statements has been based upon preliminary estimates of the fair value of assets acquired and liabilities assumed. A final determination of the fair values of HCR ManorCare PropCo's and HCP Ventures II's assets and liabilities will be based on the actual valuation of the tangible and intangible assets and liabilities of HCR ManorCare PropCo and HCP Ventures II that exist as of the date of completion of the transactions. Consequently, amounts preliminarily allocated to identifiable tangible and intangible assets and liabilities could change significantly from those used in the pro forma condensed consolidated financial statements presented below and could result in a material change in amortization of tangible and intangible assets and liabilities.
In the opinion of HCP's management, the pro forma financial statements include all significant necessary adjustments that can be factually supported to reflect the effects of the Acquisitions. The unaudited pro forma condensed consolidated financial statements are provided for informational purposes only. The unaudited pro forma condensed consolidated financial statements are not necessarily and should not be assumed to be an indication of the results that would have been achieved had the transactions been completed as of the dates indicated or that may be achieved in the future. The completion of the valuation, the allocation of the purchase price, the impact of ongoing integration activities, the timing of completion of the transactions and other changes in HCR ManorCare PropCo and HCP Ventures II tangible and intangible assets and liabilities that occur prior to completion of the transactions could cause material differences in the information presented. Furthermore, following consummation of the transactions, HCP expects to apply its own methodologies and judgments in accounting for the assets and liabilities acquired in the transaction, which may differ from those reflected in HCR ManorCare PropCo's and HCP Ventures II's historical financial statements and the pro forma financial statements.
2
HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2010
| |
HCP Historical |
HCR ManorCare PropCo Historical (A) |
HCR ManorCare PropCo Pro Forma Adjustments (B) |
HCP Ventures II Historical (A) |
HCP Ventures II Pro Forma Adjustments (P) |
HCP Pro Forma |
|||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands) |
||||||||||||||||||||||
ASSETS |
|||||||||||||||||||||||
Real estate: |
|||||||||||||||||||||||
Buildings, improvements and development |
$ | 8,260,220 | $ | — | $ | — | $ | 936,957 | $ | (249,404 | )(Q) | $ | 8,947,773 | ||||||||||
Land |
1,558,947 | — | — | 108,907 | (14,835 | )(Q) | 1,653,019 | ||||||||||||||||
Accumulated depreciation and amortization |
(1,189,998 | ) | — | — | (105,085 | ) | 105,085 | (Q) | (1,189,998 | ) | |||||||||||||
Net real estate |
8,629,169 | — | — | 940,779 | (159,154 | ) | 9,410,794 | ||||||||||||||||
Net investment in direct financing leases |
607,392 | 3,123,630 | 2,883,005 | (C) | — | — | 6,614,027 | ||||||||||||||||
Loans receivable, net |
1,852,521 | — | (1,578,697 | )(D) | — | — | 273,824 | ||||||||||||||||
Investments in and advances to unconsolidated joint ventures |
197,697 | — | — | — | (65,651 | )(R) | 132,046 | ||||||||||||||||
Accounts receivable, net |
38,414 | — | — | — | — | 38,414 | |||||||||||||||||
Cash, cash equivalents and restricted cash |
86,858 | 3,420 | — | 9,054 | — | 99,332 | |||||||||||||||||
Intangible assets, net |
325,859 | — | 13,500 | (E) | 36,530 | 41,845 | (S) | 417,734 | |||||||||||||||
Real estate held for sale, net |
12,554 | — | — | — | — | 12,554 | |||||||||||||||||
Other assets, net |
494,835 | 35,609 | (10,834 | )(F) | 6,242 | (5,742 | )(T) | 520,110 | |||||||||||||||
Total assets |
$ | 12,245,299 | $ | 3,162,659 | $ | 1,306,974 | $ | 992,605 | $ | (188,702 | ) | $ | 17,518,835 | ||||||||||
LIABILITIES AND EQUITY |
|||||||||||||||||||||||
Bank line of credit |
$ | 318,000 | $ | — | $ | 174,300 | (G) | $ | — | $ | — | $ | 492,300 | ||||||||||
Bridge loan facility |
— | — | 950,000 | (G) | — | — | 950,000 | ||||||||||||||||
Senior unsecured notes |
3,324,975 | — | 1,500,000 | (G) | — | — | 4,824,975 | ||||||||||||||||
Mortgage and other secured debt |
1,682,740 | — | (424,720 | )(G) | 652,036 | 314 | (U) | 1,910,370 | |||||||||||||||
Long-term debt |
— | 4,595,942 | (4,595,942 | )(G) | — | — | — | ||||||||||||||||
Other debt |
93,990 | — | — | — | — | 93,990 | |||||||||||||||||
Intangible liabilities, net |
153,522 | — | — | 989 | (989 | )(V) | 153,522 | ||||||||||||||||
Accounts payable and accrued expenses and deferred revenues |
418,288 | 1,048,549 | (931,259 | )(H) | 7,781 | (543 | )(R) | 542,816 | |||||||||||||||
Total liabilities |
5,991,515 | 5,644,491 | (3,327,621 | ) | 660,806 | (1,218 | ) | 8,967,973 | |||||||||||||||
Equity: |
|||||||||||||||||||||||
Preferred stock |
285,173 | — | — | — | — | 285,173 | |||||||||||||||||
Common stock |
310,507 | — | 41,545 | (I) | — | 4,455 | (I) | 382,216 | |||||||||||||||
|
25,709 | (J) | |||||||||||||||||||||
Additional paid-in capital |
6,237,663 | — | 1,233,772 | (I) | — | 132,348 | (I) | 8,429,474 | |||||||||||||||
|
825,691 | (J) | |||||||||||||||||||||
Cumulative dividends in excess of earnings |
(761,036 | ) | — | 44,921 | (D) | — | 7,662 | (Q) | (727,478 | ) | |||||||||||||
|
— | — | (18,875 | )(B) | — | (150 | )(P) | — | |||||||||||||||
Accumulated other comprehensive loss |
(7,426 | ) | — | — | — | — | (7,426 | ) | |||||||||||||||
Total members' equity (deficit) |
— | (2,481,832 | ) | 2,481,832 | (B) | 331,799 | (331,799 | )(P) | — | ||||||||||||||
Total stockholders' equity |
6,064,881 | (2,481,832 | ) | 4,634,595 | 331,799 | (187,484 | ) | 8,361,959 | |||||||||||||||
Total noncontrolling interests |
188,903 | — | — | — | — | 188,903 | |||||||||||||||||
Total equity |
6,253,784 | (2,481,832 | ) | 4,634,595 | 331,799 | (187,484 | ) | 8,550,862 | |||||||||||||||
Total liabilities and equity |
$ | 12,245,299 | $ | 3,162,659 | $ | 1,306,974 | $ | 992,605 | $ | (188,702 | ) | $ | 17,518,835 | ||||||||||
The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements.
3
HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2010
| |
HCP Historical |
HCR ManorCare PropCo Historical (A) |
HCR ManorCare PropCo Pro Forma Adjustments |
HCP Ventures II Historical (A) |
HCP Ventures II Pro Forma Adjustments (P) |
HCP Pro Forma |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per share data) |
||||||||||||||||||||
Revenues and other income: |
|||||||||||||||||||||
Rental and related revenues |
$ | 697,802 | $ | — | $ | — | $ | 58,003 | $ | (7,216 | )(W) | $ | 748,589 | ||||||||
Tenant recoveries |
67,262 | — | — | — | — | 67,262 | |||||||||||||||
Income from direct financing leases |
37,238 | 331,865 | 143,334 | (K) | — | — | 512,437 | ||||||||||||||
Interest income |
108,004 | — | (83,819 | )(L) | 1 | — | 24,186 | ||||||||||||||
Investment management fee income |
3,755 | — | — | — | (1,965 | )(X) | 1,790 | ||||||||||||||
Total revenues |
914,061 | 331,865 | 59,515 | 58,004 | (9,181 | ) | 1,354,264 | ||||||||||||||
Costs and expenses: |
|||||||||||||||||||||
Depreciation and amortization |
234,008 | — | — | 20,760 | 3,345 | (Y) | 258,113 | ||||||||||||||
Interest expense |
220,303 | 116,183 | (17,326 | )(M) | 28,637 | (454 | )(Z) | 347,343 | |||||||||||||
Operating |
152,028 | 1,274 | (1,159 | )(N) | 15 | — | 152,158 | ||||||||||||||
General and administrative |
65,039 | — | — | 3,330 | (3,209 | )(X) | 65,160 | ||||||||||||||
Impairments (recoveries) |
(11,900 | ) | — | — | 54,500 | (54,500 | )(AA) | (11,900 | ) | ||||||||||||
Total costs and expenses |
659,478 | 117,457 | (18,485 | ) | 107,242 | (54,818 | ) | 810,874 | |||||||||||||
Other income, net |
7,151 | (10,921 | ) | 10,921 | — | — | 7,151 | ||||||||||||||
Income before income taxes and equity income from and impairments of investments in unconsolidated joint ventures |
261,734 | 203,487 | 88,921 | (49,238 | ) | 45,637 | 550,541 | ||||||||||||||
Income taxes |
(1,809 | ) | (76,923 | ) | 76,923 | (O) | — | — | (1,809 | ) | |||||||||||
Equity income from unconsolidated joint ventures |
4,078 | — | — | — | (2,749 | )(BB) | 1,329 | ||||||||||||||
Impairments of investments in unconsolidated joint ventures |
(71,693 | ) | — | — | — | 71,693 | (BB) | — | |||||||||||||
Income from continuing operations |
192,310 | 126,564 | 165,844 | (49,238 | ) | 114,581 | 550,061 | ||||||||||||||
Noncontrolling interests' share of earnings |
(10,077 | ) | — | — | — | — | (10,077 | ) | |||||||||||||
Income from continuing operations applicable to HCP, Inc. |
182,233 | 126,564 | 165,844 | (49,238 | ) | 114,581 | 539,984 | ||||||||||||||
Preferred stock dividends |
(15,848 | ) | — | — | — | — | (15,848 | ) | |||||||||||||
Participating securities' share in earnings |
(1,648 | ) | — | — | — | — | (1,648 | ) | |||||||||||||
Income from continuing operations applicable to common shares |
$ | 164,737 | $ | 126,564 | $ | 165,844 | $ | (49,238 | ) | $ | 114,581 | $ | 522,488 | ||||||||
Income from continuing operations per common share—basic(CC) |
$ | 0.55 | $ | 1.41 | |||||||||||||||||
Income from continuing operations per common share—diluted(CC) |
$ | 0.55 | $ | 1.40 | |||||||||||||||||
Weighted average shares used to calculate income per common share: |
|||||||||||||||||||||
Basic(CC) |
299,243 | 67,254 | (DD) | 4,455 | (DD) | 370,952 | |||||||||||||||
Diluted(CC) |
300,468 | 67,254 | (DD) | 4,455 | (DD) | 372,177 | |||||||||||||||
The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements.
4
HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2009
| |
HCP Historical |
HCR ManorCare PropCo Historical (A) |
HCR ManorCare PropCo Pro Forma Adjustments |
HCP Ventures II Historical (A) |
HCP Ventures II Pro Forma Adjustments (P) |
HCP Pro Forma |
|||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
(in thousands, except per share data) |
||||||||||||||||||||
Revenues and other income: |
|||||||||||||||||||||
Rental and related revenues |
$ | 878,770 | $ | — | $ | — | $ | 83,510 | $ | (10,084 | )(W) | $ | 952,196 | ||||||||
Tenant recoveries |
89,582 | — | — | — | — | 89,582 | |||||||||||||||
Income from direct financing leases |
51,495 | 438,876 | 182,441 | (K) | — | — | 672,812 | ||||||||||||||
Interest income |
124,146 | — | (81,054 | )(L) | 1 | — | 43,093 | ||||||||||||||
Investment management fee income |
5,312 | — | — | — | (2,789 | )(X) | 2,523 | ||||||||||||||
Total revenues |
1,149,305 | 438,876 | 101,387 | 83,511 | (12,873 | ) | 1,760,206 | ||||||||||||||
Costs and expenses: |
|||||||||||||||||||||
Depreciation and amortization |
316,803 | — | — | 28,038 | 4,101 | (Y) | 348,942 | ||||||||||||||
Interest expense |
298,897 | 152,316 | (8,025) | (M) | 38,778 | (605 | )(Z) | 481,361 | |||||||||||||
Operating |
185,829 | 1,802 | (1,649 | )(N) | 7 | — | 185,989 | ||||||||||||||
General and administrative |
78,471 | — | — | 4,682 | (4,291 | )(X) | 78,862 | ||||||||||||||
Litigation provision |
101,973 | — | — | — | — | 101,973 | |||||||||||||||
Impairments (recoveries) |
75,389 | — | — | — | — | 75,389 | |||||||||||||||
Total costs and expenses |
1,057,362 | 154,118 | (9,674 | ) | 71,505 | (795 | ) | 1,272,516 | |||||||||||||
Other income, net |
7,768 | (5,757 | ) | 5,757 | — | — | 7,768 | ||||||||||||||
Income before income taxes and equity income from and impairments of investments in unconsolidated joint ventures |
99,711 | 279,001 | 116,818 | 12,006 | (12,078 | ) | 495,458 | ||||||||||||||
Income taxes |
(1,910 | ) | (105,408 | ) | 105,408 | (O) | — | — | (1,910 | ) | |||||||||||
Equity income from unconsolidated joint ventures |
3,511 | — | — | — | (5,541 | )(BB) | (2,030 | ) | |||||||||||||
Income from continuing operations |
101,312 | 173,593 | 222,226 | 12,006 | (17,619 | ) | 491,518 | ||||||||||||||
Noncontrolling interests' share of earnings |
(14,461 | ) | — | — | — | — | (14,461 | ) | |||||||||||||
Income from continuing operations applicable to HCP, Inc. |
86,851 | 173,593 | 222,226 | 12,006 | (17,619 | ) | 477,057 | ||||||||||||||
Preferred stock dividends |
(21,130 | ) | — | — | — | — | (21,130 | ) | |||||||||||||
Participating securities' share in earnings |
(1,491 | ) | — | — | — | — | (1,491 | ) | |||||||||||||
Income from continuing operations applicable to common shares |
$ | 64,230 | $ | 173,593 | $ | 222,226 | $ | 12,006 | $ | (17,619 | ) | $ | 454,436 | ||||||||
Income from continuing operations per common share—basic(CC) |
$ | 0.23 | $ | 1.31 | |||||||||||||||||
Income from continuing operations per common share—diluted(CC) |
$ | 0.23 | $ | 1.31 | |||||||||||||||||
Weighted average shares used to calculate income per common share: |
|||||||||||||||||||||
Basic(CC) |
274,216 | 67,254 | (DD) | 4,455 | (DD) | 345,925 | |||||||||||||||
Diluted(CC) |
274,631 | 67,254 | (DD) | 4,455 | (DD) | 346,340 | |||||||||||||||
The accompanying notes are an integral part of these
unaudited pro forma condensed consolidated financial statements.
5
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of HCP and HCR ManorCare PropCo for the year ended December 31, 2009 and as of and for the nine months ended September 30, 2010 that are incorporated herein by reference.
- (A)
- The
historical financial statements of HCR ManorCare PropCo and HCP Ventures II for the year ended December 31, 2009 and as of and for the nine
months ended September 30, 2010 have been presented based on the financial statement classification utilized by HCP.
- (B)
- On
December 13, 2010, HCP signed a definitive agreement to acquire HCR ManorCare PropCo, a wholly-owned subsidiary of HCR ManorCare, for a total
purchase price of approximately $6.1 billion, comprised of approximately $852 million of our common stock (See Note J), $3.5 billion in cash (adjusted for working capital),
and the $1.6 billion settlement of HCP's loan investments in HCR ManorCare PropCo's debt at its estimated fair value. Under the terms of the purchase agreement, HCP can elect to fund all or a
portion of the stock portion of the consideration with cash. After the HCR ManorCare Facilities Acquisition, HCR ManorCare will lease the Facilities acquired from HCR ManorCare PropCo back from HCP
pursuant to a long-term master lease. All obligations under the lease will be guaranteed by HCR ManorCare.
The calculation of the HCR ManorCare Facilities Acquisition total purchase price follows (in thousands):
| |
September 30, 2010 |
|||||
|---|---|---|---|---|---|---|
Calculation of HCR ManorCare PropCo purchase price |
||||||
Issuance of 25.7 million shares of HCP common stock |
$ | 852,000 | ||||
Payment of aggregate cash consideration, net of cash acquired |
3,432,227 | |||||
HCP's loan investment in HCR ManorCare PropCo's debt settled at fair value |
1,623,618 | |||||
Assumed HCR ManorCare PropCo accrued tax and other liabilities at fair value |
117,290 | |||||
Total purchase price |
$ | 6,025,135 | ||||
Estimated fees and costs |
||||||
Advisory fees(1) |
$ | 12,600 | ||||
Legal, accounting and other fees and costs(1) |
6,275 | |||||
Share registration rights |
600 | |||||
Debt issuance costs |
19,775 | |||||
Total |
$ | 39,250 | ||||
- (1)
- Represents
estimated fees and costs that will be expensed. These charges are directly attributable to the transaction and represent
non-recurring costs; therefore, the anticipated impact on the results of operations was excluded from the pro forma condensed consolidated statements of operations.
Adjustment to the total members' deficit represents the elimination of such historical deficit balance of HCR ManorCare PropCo.
- (C)
- Adjustment has been made to reflect HCR ManorCare PropCo's existing direct financing lease ("DFL") assets at their estimated fair value.
6
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (D)
- HCP's
historical investments in loan receivables from HCR ManorCare PropCo will be settled at the closing of the HCR ManorCare Facilities Acquisition
resulting in an estimated gain on settlement of $44.9 million, which represents the loan receivables' estimated fair value in excess of their carrying value. This gain is directly attributable
to the transaction and represents a non-recurring credit; therefore, the anticipated impact on HCP's results of operations was excluded from the pro forma condensed consolidated statements
of operations.
- (E)
- Recognition
of intangible assets associated with the acquired in-place ground leases that have favorable market rental rates.
- (F)
- Adjustments to HCR ManorCare PropCo's historical balance of other assets follow (in thousands):
Elimination of HCR ManorCare PropCo's historical deferred debt issuance costs |
$ | (35,442 | ) | ||
Elimination of HCR ManorCare PropCo's land parcel not acquired at closing |
(60 | ) | |||
Elimination of HCR ManorCare PropCo's derivative asset settled at closing |
(107 | ) | |||
Fair value of option to purchase a non-controlling interest in the lessee |
5,000 | ||||
Deferral of debt issuance costs associated with new borrowings |
19,775 | ||||
|
$ | (10,834 | ) | ||
- (G)
- HCP
expects to fund $2.6 billion of the cash consideration and other associated costs of the HCR ManorCare Facilities Acquisition primarily with
short-term financing and the issuance of senior notes. HCP has obtained a 364-day bridge loan (from funding to maturity) of up to $3.3 billion. Although HCP intends to
issue debt securities in lieu of some or all borrowings under this bridge loan, for purposes of these unaudited pro forma condensed consolidated financial statements we have assumed a drawn down of
$950 million at the closing of the HCR ManorCare Facilities Acquisition. In addition, we have assumed the issuance of $1.5 billion of senior unsecured notes with a term of three to ten
years. Any draw downs under the bridge loan are expected to be repaid after the HCR ManorCare Facilities Acquisition with proceeds from the issuance of additional senior notes with terms of three to
ten years. Additionally, HCP's $425 million secured debt collateralized by the participation investment in HCR ManorCare PropCo's mortgage debt was repaid in full in December 2010. All of HCR
ManorCare PropCo's long-term debt, including our aggregate investments in HCR ManorCare PropCo debt with an aggregate face amount of $1.72 billion, is assumed to be settled or
repaid at closing.
- (H)
- Adjustments to HCR ManorCare PropCo's historical balance of other liabilities follow (in thousands):
Elimination of HCR ManorCare PropCo's historical deferred tax liability |
$ | (907,248 | ) | ||
Payment of HCR ManorCare's historical accrued interest on its long-term debt |
(7,746 | ) | |||
Elimination of HCR ManorCare PropCo's net payable to its affiliate |
(16,265 | ) | |||
|
$ | (931,259 | ) | ||
At closing of the HCR ManorCare Facilities Acquisition, HCP will not be responsible for HCR ManorCare PropCo's recorded amounts of the deferred tax obligations; accordingly, such deferred tax obligations amounts were eliminated.
- (I)
- Adjustments represent the issuance of 46 million shares of HCP common stock in the December 2010 equity offering and the application of the estimated proceeds therefrom of approximately
7
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$1.4 billion to fund a portion of the cash consideration and other associated costs of the Acquisitions. HCP used $137 million to fund the HCP Ventures II Purchase with the remaining balance of approximately $1.3 billion to be used to partially fund the HCR ManorCare Facilities Acquisition. The shares of HCP common stock issued in connection with the December 2010 equity offering are valued as follows (in thousands, except share and per share data):
Number of shares issued |
46,000,000 | |||||
Price of shares of HCP common stock |
$ | 32.00 | (1) | |||
Value of shares issued |
$ | 1,472,000 | ||||
Less: Underwriting discount |
(58,880 | ) | ||||
Less: share registration and issuance costs |
(1,000 | ) | ||||
Total value of shares issued |
$ | 1,412,120 | ||||
- (1)
- Based
on the public offering price of HCP's common stock in the December 2010 equity offering.
The total value of the shares of HCP common stock issued is presented as follows:
Par value, $1.00 per share |
$ | 46,000 | |||
Additional paid-in capital |
1,366,120 | ||||
|
$ | 1,412,120 | |||
- (J)
- Adjustments represent the issuance of HCP common stock directly to the seller of HCR ManorCare PropCo, which is assumed to fund the equity consideration of the HCR ManorCare Facilities Acquisition. The shares of HCP common stock issued are valued as follows (in thousands, except share and per share data):
Number of shares issued |
25,709,113 | |||||
Assumed price of shares of HCP common stock |
$ | 33.14 | (1) | |||
Value of shares issued |
$ | 852,000 | ||||
Less: share registration and issuance costs |
(600 | ) | ||||
Total value of shares issued |
$ | 851,400 | ||||
- (1)
- Based
on the average of last reported sale prices of HCP's common stock for the 10 days before the day the definitive agreement was signed for the
HCR ManorCare Facilities Acquisition.
The total value of the shares of HCP common stock issued is presented as follows:
Par value, $1.00 per share |
$ | 25,709 | |||
Additional paid-in capital |
825,691 | ||||
|
$ | 851,400 | |||
8
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (K)
- Adjustments to income from DFLs follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Eliminate HCR ManorCare PropCo historical income from DFLs |
$ | (331,865 | ) | $ | (438,876 | ) | ||
Pro forma amortization of unearned income from DFLs under the effective interest method |
475,199 | 621,317 | ||||||
|
$ | 143,334 | $ | 182,441 | ||||
- (L)
- Represents
the elimination of interest earned on HCR ManorCare PropCo debt held as loan investments by HCP that will be settled at closing.
- (M)
- Adjustments to interest expense follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Interest expense and related amortization of issuance costs and fees associated with new borrowings used to finance the HCR ManorCare Facilities Acquisition (See Note G) |
$ | 103,004 | $ | 146,521 | ||||
Eliminate HCR ManorCare PropCo's historical interest expense |
(116,183 | ) | (152,316 | ) | ||||
Eliminate HCP's historical interest expense related to debt repaid at closing that is secured by HCP's loan investment participation in HCR ManorCare PropCo's mortgage debt |
(4,147 | ) | (2,230 | ) | ||||
|
$ | (17,326 | ) | $ | (8,025 | ) | ||
The pro forma increase in interest expense as a result of the assumed issuance of new debt in the HCR ManorCare Facilities Acquisition is calculated using market rates management believes would have been available to HCP for the borrowings assumed to have been issued as of December 13, 2010 (the date that the definitive agreement was executed to acquire HCR ManorCare PropCo). Each 1/8 of 1% increase in the annual interest assumed with respect to the debt would increase pro forma interest expense by $3.3 million for the year ended December 31, 2009 and $2.5 million for the nine months ended September 30, 2010.
- (N)
- Adjustments to operating expenses follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Eliminate HCR ManorCare PropCo's historical operating expenses |
$ | (1,274 | ) | $ | (1,802 | ) | ||
Recognize the amortization of acquired ground lease intangibles |
115 | 153 | ||||||
|
$ | (1,159 | ) | $ | (1,649 | ) | ||
For intangible assets associated with the value of in-place ground leases, a weighted-average remaining lease term of approximately 88 years was used to compute amortization expense. The
9
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Company computes amortization using the straight-line method over the remaining lease term of the related lease.
- (O)
- At
the closing of the Acquisition, 100% of the real estate of HCR ManorCare PropCo will be acquired by a REIT subsidiary of HCP; accordingly, assuming the
HCR ManorCare Facilities Acquisition was effective January 1, 2009, substantially all of the amounts of the income tax expense would then be eliminated.
- (P)
- On
January 14, 2011, HCP purchased its partner's 65 percent interest in HCP Ventures II, which owns 25 senior housing facilities, resulting in
HCP becoming the sole owner of the portfolio. The assets were acquired on October 5, 2006, through HCP's acquisition of CNL Retirement Properties, Inc., and were contributed to HCP
Ventures II in January 2007. HCP owned a 35 percent noncontrolling interest in HCP Ventures II that was accounted under the equity method as an unconsolidated joint venture at
September 30, 2010. In exchange for its partner's interest and the assumption of approximately $652 million of mortgage debt secured by the assets, HCP paid approximately
$137 million in cash for the transaction.
The calculation of the HCP Ventures II Purchase consideration and total purchase price follows (in thousands):
| |
September 30, 2010 |
|||||
|---|---|---|---|---|---|---|
Calculation of HCP Ventures II purchase price |
||||||
Payment of aggregate cash consideration, net of cash acquired |
$ | 136,153 | ||||
Fair value of 35 percent interest in HCP Ventures II |
73,313 | |||||
All HCP Ventures II debt assumed at par value |
652,350 | |||||
Total purchase price |
$ | 861,816 | ||||
Estimated fees and costs |
||||||
Legal, accounting and other fees and costs(1) |
$ | 150 | ||||
Debt assumption fees |
500 | |||||
Total |
$ | 650 | ||||
- (1)
- Represents
estimated fees and costs that will be expensed. These charges are directly attributable to the transaction and represent
non-recurring costs; therefore, the anticipated impact on the results of operations was excluded from the pro forma condensed consolidated statement of operations.
Adjustment to the total members' equity represents the elimination of such historical equity balance of HCP Ventures II.
- (Q)
- HCP Ventures II's real estate assets have been adjusted to their preliminary estimated fair values as of September 30, 2010 and the related historical accumulated depreciation and amortization balances are eliminated when real estate assets are recorded at fair value.
10
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (R)
- Adjustments to eliminate HCP's historical 35 percent interest in HCP Ventures II follow (in thousands):
Elimination of HCP's historical carrying value of HCP Ventures II |
$ | 65,108 | |||
Elimination of historical amounts due from HCP Ventures II |
543 | ||||
|
65,651 | ||||
Elimination of historical amounts due to HCP Ventures II |
$ | 543 | |||
The consolidation of HCP Ventures II results in an estimated gain of $7.7 million, which represents the estimated fair value of HCP's 35 percent noncontrolling interest in HCP Ventures II that is in excess of its carrying value at September 30, 2010. This gain is directly attributable to the transaction and represents a non-recurring credit; therefore, the impact on the results of operations was excluded from the pro forma consolidated statements of operations.
- (S)
- Adjustments to intangible assets follow (in thousands):
Recognition of lease-up related intangible assets associated with acquired leases |
$ | 78,375 | |||
Elimination of HCP Ventures II's historical intangible assets |
(36,530 | ) | |||
|
$ | 41,845 | |||
In-place lease intangible assets acquired include amounts for in-place lease values that are based on HCP's evaluation of the specific characteristics of each tenant's lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions, and costs to execute similar leases. In estimating carrying costs, HCP includes estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, HCP considers leasing commissions, legal and other related costs.
- (T)
- Adjustments to HCP Ventures II's historical balance of other assets follow (in thousands):
Deferral of debt issuance costs associated with debt assumed in the HCP Ventures II Purchase |
$ | 500 | |||
Elimination of HCP Ventures II's historical deferred debt issuance |
(3,500 | ) | |||
Elimination of HCP Ventures II's leasing incentive assets |
(2,742 | ) | |||
|
$ | (5,742 | ) | ||
- (U)
- Adjustment
to eliminate HCP Ventures II's historical discount on mortgage debt.
- (V)
- Adjustment eliminates HCP Ventures II's historical balance of intangible liabilities associated with acquired in-place leases that have below-market rental rates.
11
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (W)
- Adjustments to rental and related revenues follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Eliminate HCP Ventures II's historical straight-line rent revenue |
$ | (9,539 | ) | $ | (13,221 | ) | ||
Eliminate HCP Ventures II's historical amortization of lease intangibles and lease incentives |
2,323 | 3,137 | ||||||
|
$ | (7,216 | ) | $ | (10,084 | ) | ||
- (X)
- Adjustments to eliminate management fees follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Eliminate HCP's historical management fee income related to HCP Ventures II |
$ | (1,965 | ) | $ | (2,789 | ) | ||
Eliminate HCP Ventures II's historical management fees paid to HCP |
$ | 3,209 | $ | 4,291 | ||||
- (Y)
- Adjustments to depreciation and amortization expense follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Real estate depreciation expense as a result of the recording of HCP Ventures II's real estate at its estimated fair value |
$ | 17,189 | $ | 22,918 | ||||
Represents the incremental amortization expense related to lease-up related intangible assets associated with acquired leases |
6,916 | 9,221 | ||||||
Eliminate HCP Ventures II's historical depreciation and amortization |
(20,760 | ) | (28,038 | ) | ||||
|
$ | 3,345 | $ | 4,101 | ||||
An estimated useful life of 30 years was assumed to compute real estate depreciation. For assets and liabilities associated with the value of in-place leases, a weighted-average remaining lease term of approximately 8.5 years was used to compute amortization expense. The Company computes depreciation and amortization using the straight-line method over the properties estimated useful lives or the remaining lease term of the related intangible.
12
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (Z)
- Adjustments to interest expense follow (in thousands):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
||||||
|---|---|---|---|---|---|---|---|---|
Amortization of debt issuance costs associated with the assumed debt in the HCP Ventures II Purchase |
$ | 60 | $ | 80 | ||||
Eliminate HCP Ventures II's historical debt issuance costs amortization |
(514 | ) | (685 | ) | ||||
|
$ | (454 | ) | $ | (605 | ) | ||
- (AA)
- Adjustment
eliminates HCP Ventures II's historical impairment of its straight-line rent assets. In October 2010, HCP Ventures II determined
that the collectability of the straight-line rents was not reasonably assured and as a result established an allowance to fully impair the carrying value of its straight-line
rent assets effective July 1, 2010. Further, HCP Ventures II limited its recognition of rental revenues to amounts collected from the related tenant. Assuming the HCP Ventures II Purchase
occurred on January 1, 2009, no value would be attributed to straight-line asset in purchase accounting; therefore, no impairment of straight-line rent assets would have
occurred.
- (BB)
- Represents the elimination of HCP's historical equity income from and related impairment of its 35 percent interest in HCP Ventures II, which resulted from the pro forma consolidation of HCP Ventures II assumed on January 1, 2009.
13
HCP, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- (CC)
- The calculations of basic and diluted earnings from continuing operations attributable to common stock per share follow (in thousands, except per share data):
| |
Nine Months Ended September 30, 2010 |
Year Ended December 31, 2009 |
|||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| |
Historical | Pro Forma | Historical | Pro Forma | |||||||||||
Income from continuing operations |
$ | 192,310 | $ | 550,061 | $ | 101,312 | $ | 491,518 | |||||||
Noncontrolling interests' share of earnings |
(10,077 | ) | (10,077 | ) | (14,461 | ) | (14,461 | ) | |||||||
Income from continuing operations applicable to HCP, Inc. |
$ | 182,233 | $ | 539,984 | $ | 86,851 | $ | 477,057 | |||||||
Preferred stock dividends |
(15,848 | ) | (15,848 | ) | (21,130 | ) | (21,130 | ) | |||||||
Participating securities' share in earnings |
(1,648 | ) | (1,648 | ) | (1,491 | ) | (1,491 | ) | |||||||
Income from continuing operations applicable to common shares |
$ | 164,737 | $ | 522,488 | $ | 64,230 | $ | 454,436 | |||||||
Weighted average shares used to calculate earnings per common share—Basic |
299,243 | 370,952 | 274,216 | 345,925 | |||||||||||
Incremental weighted average effect of potentially dilutive instruments |
1,225 | 1,225 | 415 | 415 | |||||||||||
Adjusted weighted average shares used to calculate earnings per common share—Diluted |
300,468 | 372,177 | 274,631 | 346,340 | |||||||||||
Earnings from continuing operations per common share—Basic |
$ | 0.55 | $ | 1.41 | $ | 0.23 | $ | 1.31 | |||||||
Earnings from continuing operations per common share—Diluted |
$ | 0.55 | $ | 1.40 | $ | 0.23 | $ | 1.31 | |||||||
- (DD)
- The pro forma weighted-average shares outstanding are the historical weighted-average shares of HCP for the periods presented, adjusted for the assumed issuance of 71.7 million shares of HCP common stock on a weighted-average basis for the year ended December 31, 2009, and the nine months ended September 30, 2010.
14
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2010 AND FOR THE YEAR ENDED DECEMBER 31, 2009 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2010
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
HCP, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS