Investments in and Advances to Unconsolidated Joint Ventures

9 Months Ended

Sep. 30, 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 purchase consideration of HCP Ventures II follows (in thousands):

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)In January 2011, the Company recognized a gain of approximately $8 million, included in other income (expense), net, which represents the fair value of the Company’s 35% interest in HCP Ventures II in excess of its carrying value on 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 financing 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 fair value as of the acquisition date. The Company utilized relevant market data and valuation techniques to determine the acquisition date fair value for HCP Ventures II. Relevant market data and valuation techniques included, but were not limited to, market data comparables for capitalization and discount rates, credit spreads, property specific building cost information and cash flow assumptions. The market data comparables utilized in the Company’s valuation model were based on information that it believes to be within a reasonable range of the then current market transactions.

The following table summarizes the fair values of the HCP Ventures II assets acquired and liabilities assumed at the January 14, 2011 acquisition date (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 condensed consolidated financial statements from the January 14, 2011 acquisition date.

Summary of Unconsolidated Joint Venture Information

The Company owns interests in the following entities that are accounted for under the equity method at September 30, 2012 (dollars in thousands):

Entity(1)	Properties/Segment	Investment(2)			Ownership%
HCR ManorCare	post-acute/skilled nursing operations	$	94,358		9.4(3)
HCP Ventures III, LLC	13 medical office	7,774			30
HCP Ventures IV, LLC	54 medical office and 4 hospital	33,071			20
HCP Life Science(4)	4 life science	67,263			50-63
Horizon Bay Hyde Park, LLC	1 senior housing	6,927			72
Suburban Properties, LLC	1 medical office	7,508			67
Advances to unconsolidated joint ventures, net		191
		$	217,092
Edgewood Assisted Living Center, LLC	1 senior housing	$	(449	)	45
Seminole Shores Living Center, LLC	1 senior housing	(737		)	50
		$	(1,186)	)

(1)These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K, as amended, filed with the SEC regarding the Company’s policy on consolidation.

(2)Represents the carrying value of the Company’s investment in the unconsolidated joint venture. See Note 2 to the Consolidated Financial Statements for the year ended December 31, 2011 in the Company’s Annual Report on Form 10-K, as amended, filed with the SEC regarding the Company’s policy for accounting 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 HCR ManorCare Acquisition discussion 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):

	September 30,		December 31,
	2012		2011
Real estate, net	$	3,751,592	$	3,806,187
Goodwill	2,736,400		2,736,400
Other assets, net	3,019,757		3,061,290
Total assets	$	9,507,749	$	9,603,877
Capital lease obligations and other debt	$	6,014,200	$	5,976,500
Mortgage debt	887,956		895,243
Accounts payable	954,622		1,083,581
Other partners’ capital	1,467,292		1,465,536
HCP’s capital(1)	183,679		183,017
Total liabilities and partners’ capital	$	9,507,749	$	9,603,877

(1)The combined basis difference of the Company’s investments in these joint ventures of $32 million, as of September 30, 2012, is primarily attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease related net intangibles.

	Three Months Ended September 30,					Nine Months Ended September 30,(1)
	2012			2011		2012		2011(2)
Total revenues	$	1,057,567		$	1,123,742	$	3,196,086	$	2,174,711
Net income (loss)	(8,851		)	31,076		8,416		9,198
HCP’s share in earnings(3)	13,396			17,050		42,803		32,798
Fees earned by HCP	460			494		1,423		1,605
Distributions received by HCP	1,419			1,271		4,826		4,398

(1)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.

(2)Includes the financial information of HCP Ventures II, which was consolidated on January 14, 2011.

(3)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 of $14.9 million and $44.4 million for the three and nine months ended September 30, 2012, respectively, and a reduction of $14.4 million and $27.7 million for the three and nine months ended September 30, 2011. 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.