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Investments in and Advances to Unconsolidated Joint Ventures

12 Months Ended

Dec. 31, 2012

Investments in and Advances to Unconsolidated Joint Ventures

Investments in and Advances to Unconsolidated Joint Ventures

(8) Investments in and Advances to Unconsolidated Joint Ventures

HCP Ventures II

On January 14, 2011, the Company acquired its partner's 65% interest in HCP Ventures II, a joint venture that owned 25 senior housing facilities, becoming the sole owner of the portfolio.

The HCP Ventures II consideration is as follows (in thousands):

	January 14, 2011

Cash paid for HCP Ventures II's partnership interest	$	135,550
Fair value of HCP's 35% interest in HCP Ventures II (carrying value of $65,223 at closing)⁽¹⁾		72,992

Total consideration	$	208,542

Estimated fees and costs
Legal, accounting, and other fees and costs⁽²⁾	$	150
Debt assumption fees⁽³⁾		500

Total	$	650

(1): At closing, the Company recognized a gain of approximately $8 million, included in other income, net, which represents the fair value of the Company's 35% interest in HCP Ventures II in excess of its carrying value as of the acquisition date.
(2): Represents estimated fees and costs that were expensed and included in general and administrative expenses. These charges are directly attributable to the transaction and represent non-recurring costs.
(3): Represents debt assumption fees that were capitalized as deferred debt costs.

In accordance with the accounting guidance applicable to acquisitions of the partner's ownership interests that result in consolidation of previously unconsolidated entities, the Company recorded all of the assets and liabilities of HCP Ventures II at their fair value as of the January 14, 2011 acquisition date. In determining the fair values, relevant market data and valuation techniques were utilized and included, but were not limited to, market data comparables for capitalization and discount rates, credit spreads and property specific cash flows assumptions. The capitalization and discount rates as well as credit spread assumptions utilized in the Company's valuation model were based on information that it believes to be within a reasonable range of current market data.

The following table summarizes the fair values of the HCP Ventures II assets acquired and liabilities assumed as of the acquisition date of January 14, 2011 (in thousands):

Assets acquired

Buildings and improvements	$	683,633
Land		79,580
Cash		2,585
Restricted cash		1,861
Intangible assets		78,293

Total assets acquired	$	845,952

Liabilities assumed
Mortgage debt	$	635,182
Other liabilities		2,228

Total liabilities assumed		637,410

Net assets acquired	$	208,542

The related assets, liabilities and results of operations of HCP Ventures II are included in the consolidated financial statements from the date of acquisition, January 14, 2011.

Summary of Unconsolidated Joint Venture Information

The Company owns interests in the following entities that are accounted for under the equity method at December 31, 2012 (dollars in thousands):

Entity⁽¹⁾	Properties/Segment	Investment⁽²⁾

HCR ManorCare	post-acute/skilled nursing operations	$	90,559		9.4⁽³⁾
HCP Ventures III, LLC	13 medical office		7,510		30
HCP Ventures IV, LLC	54 medical office and 4 hospital		32,249		20
HCP Life Science⁽⁴⁾	4 life science		67,785		50-63
Horizon Bay Hyde Park, LLC	1 senior housing		6,769		72
Suburban Properties, LLC	1 medical office		7,134		67
Advances to unconsolidated joint ventures, net			207

		$	212,213

Edgewood Assisted Living Center, LLC	1 senior housing	$	(417	)	45
Seminole Shores Living Center, LLC	1 senior housing		(674	)	50

		$	(1,091	)

(1): These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures. See Note 2 regarding the Company's accounting policies related to principles of consolidation.
(2): Represents the carrying value of the Company's investment in the unconsolidated joint venture. See Note 2 regarding the Company's accounting policy for joint venture interests.
(3): Presented after adjusting the Company's 9.9% ownership rate for the dilution of certain of HCR ManorCare's employee equity awards. See discussion of the HCR ManorCare Acquisition in Note 3.
(4): Includes three unconsolidated joint ventures between the Company and an institutional capital partner for which the Company is the managing member. HCP Life Science includes the following partnerships: (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%).

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

	December 31,

	2012		2011
Real estate, net	$	3,731,740	$	3,806,187
Goodwill and other assets, net		5,734,318		5,797,690

Total assets	$	9,466,058	$	9,603,877

Capital lease obligations and mortgage debt	$	6,875,932	$	6,871,743
Accounts payable		971,095		1,083,581
Other partners' capital		1,435,885		1,465,536
HCP's capital⁽¹⁾		183,146		183,017

Total liabilities and partners' capital	$	9,466,058	$	9,603,877

(1): The combined basis difference of the Company's investments in these joint ventures of $28 million, as of December 31, 2012, is primarily attributable to real estate, capital lease obligations, deferred tax assets, goodwill and lease-related net intangibles.

	Year Ended December 31,

	2012			2011⁽¹⁾⁽²⁾			2010⁽¹⁾
Total revenues	$	4,260,319		$	4,388,376		$	172,972
Net loss⁽³⁾⁽⁴⁾		(15,865	)		(827,306	)		(54,237	)
HCP's share in earnings^(3)(4)(5)		54,455			46,750			4,770
HCP's impairment of its investment in HCP Ventures II⁽⁴⁾		—			—			(71,693	)
Fees earned by HCP		1,895			2,073			4,666
Distributions received by HCP		6,299			5,681			9,738

(1): Includes the financial information of HCP Ventures II, up to the date in which it was consolidated on January 14, 2011.
(2): Beginning April 7, 2011, includes the financial information of HCR ManorCare, in which the Company acquired an interest for $95 million that represented a 9.9% equity interest at closing.
(3): The combined net loss for the year ended December 31, 2011, includes impairments, net of the related tax benefit, of $865 million related to HCR ManorCare's goodwill and intangible assets. The impairments at the operating entity were the result of reduced cash flows primarily caused by the reimbursement reductions for the Medicare skilled nursing facility Prospective Payment System announced by the Centers for Medicare & Medicaid Services (CMS) effective October 1, 2011. These reimbursement reductions were previously considered in the Company's underwriting assumptions for its initial investments in the operations of HCR ManorCare; therefore, the goodwill that was impaired was not part of the Company's basis in its investment. As such, HCR ManorCare's impairments during the year ended December 31, 2011 did not have an impact on the Company's share of earnings from or its investment in HCR ManorCare.
(4): Net loss for the year ended December 31, 2010, includes an impairment of $54.5 million related to straight-line rent assets of HCP Ventures II (the "Ventures"). Concurrently, during the year ended December 31, 2010 HCP recognized a $71.7 million impairment of its investment in the Ventures that was primarily attributable to a reduction in the fair value of the Ventures' real estate assets and included the Company's share of the impact of the Ventures' impairment of its straight-line rent assets. Therefore, HCP's share in earnings for the year ended December 31, 2010 related to the impact of the Ventures' impairment of its straight-line rent assets was not included in equity income from unconsolidated joint ventures on the consolidated statements of income.
(5): The Company's joint venture interest in HCR ManorCare is accounted for using the equity method and results in an ongoing reduction of DFL income, proportional to HCP's ownership in HCR ManorCare. The Company recorded a reduction in DFL income of $59.4 million and $42.2 million for the years ended December 31, 2012 and 2011, respectively. Further, the Company's share of earnings from HCR ManorCare (equity income) increases for the corresponding reduction of related lease expense recognized at the HCR ManorCare level.

- Definition

The entire disclosure for equity method investments and joint ventures. Equity method investments are investments that give the investor the ability to exercise significant influence over the operating and financial policies of an investee. Joint ventures are entities owned and operated by a small group of businesses as a separate and specific business or project for the mutual benefit of the members of the group.

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