Exhibit 99.3
HCP UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2007 AND FOR THE YEAR ENDED DECEMBER 31, 2006 AND THE SIX
MONTHS ENDED JUNE 30, 2007
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Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2007 | | 3 |
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Unaudited Pro Forma Condensed Consolidated Statement of Operations for the six months ended June 30, 2007 | | 4 |
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Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 2006 | | 5 |
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Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements | | 6 |
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial statements gives effect to the acquisition of Slough Estates USA, Inc. (“SEUSA”) by HCP, Inc. (“HCP”) (the “Acquisition”) and reflect the incurrence of debt by HCP in order to finance the Acquisition. The 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 and SEUSA for the year ended December 31, 2006 and for the six months ended June 30, 2007. The unaudited pro forma condensed consolidated balance sheet as of June 30, 2007 has been prepared as if the Acquisition had occurred as of that date. The unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2006 and for the six months ended June 30, 2007 have been prepared as if the Acquisition had occurred as of January 1, 2006.
In addition, the accompanying unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 gives effect to HCP’s acquisition of CNL Retirements Properties, Inc. (“CRP”) and CNL Retirement Corp., the external advisor to CRP (the “Advisor”) (together the “CRP Acquisitions”), which were completed on October 5, 2006, because the CRP Acquisitions are not fully reflected in HCP’s historical statement of operations for the year ended December 31, 2006. Such statement also reflects the incurrence of debt and give effect to certain capital transactions undertaken by HCP in order to finance the CRP Acquisitions. The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2006 has been prepared based on certain pro forma adjustments as if the CRP Acquisitions had occurred as of January 1, 2006.
The allocation of the purchase price of SEUSA 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. In the opinion of HCP’s management, all significant adjustments necessary to reflect the effects of the Acquisition and CRP Acquisitions that can be factually supported within the SEC regulations covering the preparation of pro forma financial statements have been made.
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 and the impact of ongoing integration activities could cause material differences in the information presented. Furthermore, following consummation of the Acquisition and the CRP Acquisitions, 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 SEUSA’s or CRP’s historical 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, SEUSA, CRP and the Advisor. The historical financial information with respect to HCP for the year ended December 31, 2006 has been a) restated to reflect the results of operations of certain properties that were initially classified as discontinued operations in the six months ended June 30, 2007, and b) includes a reclassification of equity income from unconsolidated joint ventures to conform to the presentation for the six months ended June 30, 2007. The restated historical consolidated financial statements of HCP for the year ended December 31, 2006, are contained in its Form 8-K as filed with the SEC on September 19, 2007. The historical consolidated financial statements of HCP for the six months ended June 30, 2007 are contained in HCP’s Form 10-Q as filed with the SEC on August 6, 2007. The historical consolidated financial statements of SEUSA for the six months ended June 30, 2007 and for the year ended December 31, 2006, are included as Exhibits 99.1 and 99.2 to this Current Report on Form 8-K, respectively. The historical consolidated financial statements of CRP and the Advisor for the nine months ended September 30, 2006 are contained in HCP’s Current Report on Form 8-K as filed with the SEC on January 9, 2007.
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HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2007
(In thousands)
| | | | SEUSA | | Pro Forma | | SEUSA and | | Consolidated | |
| | HCP | | Historical | | Adjustments | | Pro Forma | | Pro Forma | |
| | Historical | | (A) | | (B) | | Adjustments | | HCP | |
ASSETS | | | | | | | | | | | |
Real estate: | | | | | | | | | | | |
Buildings and improvements | | $ | 6,205,698 | | $ | 937,432 | | $ | 569,581 | (C) | $ | 1,507,013 | | $ | 7,712,711 | |
Developments in process | | 29,056 | | 213,493 | | 96,607 | (C) | 310,100 | | 339,156 | |
Land | | 770,010 | | 424,447 | | 486,008 | (C) | 910,455 | | 1,680,465 | |
Less: accumulated depreciation and amortization | | 618,321 | | 182,694 | | (182,694 | )(C) | — | | 618,321 | |
Net real estate | | 6,386,443 | | 1,392,678 | | 1,334,890 | | 2,727,568 | | 9,114,011 | |
| | | | | | | | | | | |
Net investment in direct financing leases | | 682,176 | | — | | — | | — | | 682,176 | |
Loans receivable, net | | 203,147 | | — | | — | | — | | 203,147 | |
Investments in and advances to unconsolidated joint ventures | | 214,904 | | 22,309 | | — | | 22,309 | | 237,213 | |
Accounts receivable, net | | 33,652 | | 1,628 | | — | | 1,628 | | 35,280 | |
Cash and cash equivalents | | 351,217 | | 16,577 | | (168,521 | )(F) | (151,944 | ) | 199,273 | |
Intangible assets, net | | 328,753 | | 20,117 | | 328,489 | (D) | 348,606 | | 677,359 | |
Real estate held for sale, net | | 204,683 | | — | | — | | — | | 204,683 | |
Other assets, net | | 474,351 | | 146,748 | | (77,157 | )(E) | 69,591 | | 543,942 | |
Total assets | | $ | 8,879,326 | | $ | 1,600,057 | | $ | 1,417,701 | | $ | 3,017,758 | | $ | 11,897,084 | |
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | |
Bank line of credit and term loan | | $ | — | | $ | 550,000 | | $ | 2,200,000 | (F) | $ | 2,750,000 | | $ | 2,750,000 | |
Due to SEGRO | | — | | 210,000 | | (210,000 | )(F) | — | | — | |
Senior unsecured notes | | 3,223,422 | | 383,608 | | (383,608 | )(F) | — | | 3,223,422 | |
Mortgage debt | | 1,260,885 | | 52,291 | | (19,840 | )(F) | 32,451 | | 1,293,336 | |
Other debt | | 108,497 | | — | | — | | — | | 108,497 | |
Intangible liabilities, net | | 145,047 | | 6,713 | | 147,734 | (G) | 154,447 | | 299,494 | |
Accounts payable and accrued expenses and deferred revenues | | 196,286 | | 143,128 | | (62,268 | )(H) | 80,860 | | 277,146 | |
Total liabilities | | 4,934,137 | | 1,345,740 | | 1,672,018 | | 3,017,758 | | 7,951,895 | |
Minority interests: | | | | | | | | | | | |
Joint venture partners | | 34,305 | | — | | — | | — | | 34,305 | |
Non-managing member unitholders | | 306,497 | | — | | — | | — | | 306,497 | |
Total minority interests | | 340,802 | | — | | — | | — | | 340,802 | |
Stockholders’ equity: | | | | | | | | | | | |
Preferred stock | | 285,173 | | 185,000 | | (185,000 | )(I) | — | | 285,173 | |
Common stock | | 206,379 | | 1 | | (1 | )(I) | — | | 206,379 | |
Additional paid-in capital | | 3,392,612 | | 33,413 | | (33,413 | )(I) | — | | 3,392,612 | |
Cumulative net income | | 2,155,265 | | 37,485 | | (37,485 | )(I) | — | | 2,155,265 | |
Cumulative dividends | | (2,449,360 | ) | — | | — | | — | | (2,449,360 | ) |
Accumulated other comprehensive income (loss) | | 14,318 | | (1,582 | ) | 1,582 | (I) | — | | 14,318 | |
Total stockholders’ equity | | 3,604,387 | | 254,317 | | (254,317 | ) | — | | 3,604,387 | |
Total liabilities and stockholders’ equity | | $ | 8,879,326 | | $ | 1,600,057 | | $ | 1,417,701 | | $ | 3,017,758 | | $ | 11,897,084 | |
The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.
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HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the six months ended June 30, 2007
(In thousands, except per share data)
| | | | | | | | Consolidated | |
| | HCP | | SEUSA | | Pro Forma | | Pro Forma | |
| | Historical | | Historical (A) | | Adjustments | | HCP | |
Revenues and other income: | | | | | | | | | |
Rental and related revenues | | $ | 407,946 | | $ | 76,277 | | $ | 15,605 | (J) | $ | 499,828 | |
Income from direct financing leases | | 30,205 | | — | | — | | 30,205 | |
Investment management fee income | | 10,459 | | — | | — | | 10,459 | |
Interest and other income | | 34,947 | | 880 | | — | | 35,827 | |
| | 483,557 | | 77,157 | | 15,605 | | 576,319 | |
| | | | | | | | | |
Costs and expenses: | | | | | | | | | |
Interest | | 151,337 | | 58,335 | | 28,027 | (K) | 237,699 | |
Depreciation and amortization | | 121,328 | | 29,017 | | 14,861 | (L) | 165,206 | |
Operating | | 81,350 | | 10,748 | | 9,512 | (M) | 101,610 | |
General and administrative | | 38,884 | | 16,583 | | — | | 55,467 | |
| | 392,899 | | 114,683 | | 52,400 | | 559,982 | |
| | | | | | | | | |
Operating income / (loss) | | 90,658 | | (37,526 | ) | (36,795 | ) | 16,337 | |
Equity income from unconsolidated joint ventures | | 2,516 | | 4,668 | | — | | 7,184 | |
Gains on sale of real estate interests, net | | 10,141 | | — | | — | | 10,141 | |
Minority interests’ share of earnings | | (11,974 | ) | (338 | ) | 338 | (N) | (11,974 | ) |
Income / (loss) before income taxes | | 91,341 | | (33,196 | ) | (36,457 | ) | 21,688 | |
| | | | | | | | | |
Income tax expense | | — | | (12,997 | ) | 12,997 | (O) | — | |
Income / (loss) from continuing operations | | 91,341 | | (20,199 | ) | (49,454 | ) | 21,688 | |
| | | | | | | | | |
Less: preferred stock dividends | | (10,566 | ) | — | | — | | (10,566 | ) |
Income / (loss) from continuing operations applicable to common stocks | | $ | 80,775 | | $ | (20,199 | ) | $ | (49,454 | ) | $ | 11,122 | |
| | | | | | | | | |
Income (loss) from continuing operations per common share –
basic (P) | | $ | 0.39 | | | | | | $ | 0.05 | |
Income (loss) from continuing operations per common share – diluted (P) | | $ | 0.39 | | | | | | $ | 0.05 | |
| | | | | | | | | |
Weighted average shares used to calculate income per common stock: | | | | | | | | | |
Basic (P) | | 204,882 | | | | 1,353 | (Q) | 206,235 | |
Diluted (P) | | 206,470 | | | | 1,353 | (Q) | 207,823 | |
The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.
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HCP, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
For the year ended December 31, 2006
(In thousands, except per share data)
| | | | | | | | | | Pro Forma | | | |
| | HCP | | | | | | Total HCP | | CRP | | Consolidated | |
| | Historical | | SEUSA | | Pro Forma | | Pro Forma | | Acquisitions | | Pro Forma | |
| | Restated | | Historical (A) | | Adjustments | | For SEUSA | | (R) | | HCP | |
Revenues and other income: | | | | | | | | | | | | | |
Rental and related revenues | | $ | 519,337 | | $ | 120,356 | | $ | 28,284 | (J) | $ | 667,977 | | $ | 261,396 | | $ | 929,373 | |
Income from direct financing leases | | 15,008 | | — | | — | | 15,008 | | 45,522 | | 60,530 | |
Investment management fee income | | 3,895 | | — | | — | | 3,895 | | — | | 3,895 | |
Interest and other income | | 36,184 | | 1,026 | | — | | 37,210 | | 5,773 | | 42,983 | |
| | 574,424 | | 121,382 | | 28,284 | | 724,090 | | 312,691 | | 1,036,781 | |
| | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | |
Interest | | 212,188 | | 29,192 | | 143,534 | (K) | 384,914 | | 167,634 | | 552,548 | |
Depreciation and amortization | | 133,714 | | 47,338 | | 40,419 | (L) | 221,471 | | 116,322 | | 337,793 | |
Operating | | 89,139 | | 15,932 | | 19,023 | (M) | 124,094 | | 26,689 | | 150,783 | |
General and administrative | | 47,290 | | 23,250 | | — | | 70,540 | | 36,508 | | 107,048 | |
Impairments | | 3,577 | | — | | — | | 3,577 | | — | | 3,577 | |
| | 485,908 | | 115,712 | | 202,976 | | 804,596 | | 347,153 | | 1,151,749 | |
| | | | | | | | | | | | | |
Operating income / (loss) | | 88,516 | | 5,670 | | (174,692 | ) | (80,506 | ) | (34,462 | ) | (114,968 | ) |
Equity income from unconsolidated joint ventures | | 8,331 | | 10,428 | | — | | 18,759 | | 328 | | 19,087 | |
Loss on sale of real estate interests and other investments, net | | — | | (546 | ) | — | | (546 | ) | — | | (546 | ) |
Minority interests | | (14,805 | ) | (1,652 | ) | 1,652 | (N) | (14,805 | ) | (414 | ) | (15,219 | ) |
Income / (loss) before income taxes | | 82,042 | | 13,900 | | (173,040 | ) | (77,098 | ) | (34,548 | ) | (111,646 | ) |
| | | | | | | | | | | | | |
Income tax expense | | — | | 4,630 | | (4,630 | )(O) | — | | 650 | | 650 | |
Income / (loss) from continuing operations | | 82,042 | | 9,270 | | (168,410 | ) | (77,098 | ) | (35,198 | ) | (112,296 | ) |
| | | | | | | | | | | | | |
Less: preferred stock dividends | | (21,130 | ) | — | | — | | (21,130 | ) | — | | (21,130 | ) |
Income / (loss) from continuing operations applicable to common stocks | | $ | 60,912 | | $ | 9,270 | | $ | (168,410 | ) | $ | (98,228 | ) | $ | (35,198 | ) | $ | (133,426 | ) |
| | | | | | | | | | | | | |
Income / (loss) from continuing operations per common share – basic (P) | | $ | 0.41 | | | | | | $ | (0.66 | ) | | | $ | (0.65 | ) |
Income / (loss) from continuing operations per common share – diluted (P) | | $ | 0.41 | | | | | | $ | (0.66 | ) | | | $ | (0.65 | ) |
| | | | | | | | | | | | | |
Weighted-average shares used to calculate income / (loss) per common stock: | | | | | | | | | | | | | |
Basic (P) | | 148,236 | | | | | | 148,236 | | 56,149 | (Q) | 204,385 | |
Diluted (P) | | 149,226 | | | | | | 148,236 | | 56,149 | (Q) | 204,385 | |
The accompanying notes are an integral part of these unaudited pro forma condensed consolidated financial statements.
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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 SEUSA for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007.
(A) The historical financial statements of SEUSA for the year ended December 31, 2006 and as of and for the six months ended June 30, 2007 have been presented based on the financial statement classification of HCP.
(B) On August 1, 2007 HCP, completed the acquisition of SEUSA, which was a wholly-owned subsidiary of SEGRO plc, a public limited company incorporated under the laws of England and Wales (“SEGRO”), pursuant to the Share Purchase Agreement, entered into between HCP and SEGRO, dated as of June 3, 2007 (the “Share Purchase Agreement”). The Acquisition was effected by HCP acquiring 100% of the capital stock of SEUSA, with SEUSA surviving as a wholly-owned subsidiary of HCP. Under the terms of the Share Purchase Agreement, HCP paid SEGRO cash consideration of approximately $2.9 billion, subject to certain adjustments. The calculation of the Acquisition consideration and total purchase price follow (in thousands):
Calculation of SEUSA purchase price | | | |
Payment of aggregate cash consideration | | $ | 2,900,000 | |
SEUSA intangible liabilities at book value | | 6,713 | |
All other SEUSA liabilities at book value | | 143,128 | |
Adjustment to record SEUSA intangible liabilities at fair value (Note G) | | 147,734 | |
Adjustment to record SEUSA other liabilities at fair value (Note H) | | (62,268 | ) |
Estimated fees and other expenses related to the Acquisition | | 10,000 | |
Total purchase price | | $ | 3,145,307 | |
The calculation of the estimated fees and other expenses related to the Acquisition follow (in thousands):
Advisory fees | | $ | 2,000 | |
Legal, accounting and other fees and costs | | 8,000 | |
Total | | $ | 10,000 | |
(C) SEUSA’s real estate assets have been adjusted to their preliminary estimated fair values as of June 30, 2007 and SEUSA’s historical accumulated depreciation and amortization balances are eliminated when real estate assets are recorded at fair value.
(D) Adjustments to SEUSA’s historical balance of intangible assets follow (in thousands):
Recognition of assets associated with the acquired in-place leases that have favorable market rental rates | | $ | 114,164 | |
Recognition of other related in-place lease intangibles | | 234,442 | |
Elimination of historical carrying value of in-place lease intangible assets | | (20,117 | ) |
| | $ | 328,489 | |
Other related 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.
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(E) Adjustments to SEUSA’s historical balance of other assets follow (in thousands):
Deferral of issuance costs associated with debt issued in the Acquisition | | $ | 8,521 | |
Elimination of historical straight-line rent receivable balance | | (61,814 | ) |
Elimination of historical deferred debt issuance and leasing costs and leasing commissions | | (23,864 | ) |
| | $ | (77,157 | ) |
(F) On August 1, 2007, HCP obtained a $2.75 billion bridge loan maturing on July 31, 2008 which also includes two six-month extension periods. In reflecting the funding for the Acquisition on the balance sheet as of June 30, 2007 to fund the consideration of $2.9 billion, estimated fees and costs related to the Acquisition of $10 million (Note B), and the $8.5 million bridge loan debt issuance costs (Note E), HCP was assumed to have used $169 million of cash on hand. Prior to August 1, 2007, SEUSA repaid its bank line of credit, senior unsecured notes and $20 million of mortgage debt using advances from SEGRO. The SEGRO advances were repaid in full at the date of closing of the SEUSA acquisition.
(G) Adjustments to SEUSA’s historical balance of intangible liabilities follow (in thousands):
Recognition of liabilities associated with the acquired in-place leases that have below-market rental rates | | $ | 154,447 | |
Elimination of liabilities associated with acquired in-place leases that have below-market rental rates | | (6,713 | ) |
| | $ | 147,734 | |
(H) Adjustments to SEUSA’s historical balance of other liabilities follow (in thousands):
Elimination of historical deferred tax liability | | $ | (46,527 | ) |
Elimination of deferred revenue | | (15,741 | ) |
| | $ | (62,268 | ) |
(I) Adjustments represent the elimination of historical SEUSA balances. Because the acquisition of SEUSA was financed with cash, no additional shares of HCP were issued in connection with the Acquisition.
(J) Adjustments to rental income and other revenues follow (in thousands):
| | Year Ended
December 31,
2006 | | Six Months
Ended June 30,
2007 | |
Recognize the total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from the assumed acquisition date of January 1, 2006 | | $ | 8,824 | | $ | 3,742 | |
Recognize the amortization of above-and below-market lease intangibles | | 3,362 | | 1,681 | |
Increase in tenant expense recoveries related to increase in real estate taxes (see Note M) | | 19,023 | | 9,512 | |
Eliminate SEUSA’s historical straight-line rent and deferred revenue adjustment, net | | 314 | | 2,254 | |
Eliminate SEUSA’s historical amortization of above- and below-market lease intangibles | | (3,239 | ) | (1,584 | ) |
| | $ | 28,284 | | $ | 15,605 | |
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(K) Adjustments to interest expense follow (in thousands):
| | Year Ended
December 31,
2006 | | Six Months
Ended June 30,
2007 | |
Interest expense associated with debt issued and assumed in the Acquisition | | $ | 167,360 | | $ | 83,680 | |
Amortization of the premium recognized on assumed debt | | (315 | ) | (158 | ) |
Amortization of debt issuance costs associated with new debt issued in the Acquisition | | 5,681 | | 2,840 | |
Eliminate SEUSA’s historical interest expense | | (29,192 | ) | (58,335 | ) |
| | $ | 143,534 | | $ | 28,027 | |
The pro forma increase in interest expense as a result of the issuance of new debt in the Acquisition is calculated using rates for the lines of credit and short-term borrowings issued on August 1, 2007 (the date that the Acquisition was completed). Each 1/8 of 1% increase in the annual interest assumed with respect to the debt will increase pro forma interest expense by $3.4 million for the year ended December 31, 2006 and $1.7 million for the six month period ended June 30, 2007.
(L) Adjustments to depreciation and amortization expense follow (in thousands):
| | Year Ended
December 31,
2006 | | Six Months
Ended June 30,
2007 | |
Real estate depreciation expense as a result of the recording of SEUSA’s real estate at its estimated fair value at the assumed acquisition date of January 1, 2006 | | $ | 47,599 | | $ | 23,799 | |
Amortization expense related to lease-up related intangible assets associated with acquired leases | | 40,158 | | 20,079 | |
Eliminate SEUSA’s historical depreciation and amortization | | (47,338 | ) | (29,017 | ) |
| | $ | 40,419 | | $ | 14,861 | |
An estimated useful life of 35 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 9 years was used to compute amortization expense. The Company computes depreciation and amortization using the straight-line method over the estimated useful lives of the properties or the remaining lease term of the related intangible.
(M) Net impact in real estate tax expense based on the step-up in basis of certain properties as a result of the Acquisition.
(N) Minority interests’ share of earnings of SEUSA has been eliminated because HCP acquired the interests of all minority shareholders in the Acquisition.
(O) At the closing of this Acquisition, 100% of the capital stock of SEUSA was acquired by a REIT subsidiary of HCP, which, assuming the acquisition was effective January 1, 2006, subtantially all of the amounts of the deferred tax obligations and income tax expense would then be eliminated.
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(P) The calculations of basic and diluted earnings from continuing operations attributable to common stock per share follow (in thousands, except per share data):
| | Year Ended December 31, 2006 | | Six Months Ended
June 30, 2007 | |
| | | | | | Total HCP | | | | | |
| | | | Total HCP | | Pro Forma | | | | | |
| | HCP | | Pro Forma | | for SEUSA | | HCP | | Pro Forma | |
| | Historical | | for SEUSA | | and CRP | | Historical | | HCP | |
Income (loss) from continuing operations | | $ | 82,042 | | $ | (77,098 | ) | $ | (112,296 | ) | $ | 91,341 | | $ | 21,688 | |
Less: preferred stock dividends | | (21,130 | ) | (21,130 | ) | (21,130 | ) | (10,566 | ) | (10,566 | ) |
Earnings (loss) from continuing operations attributable to common stocks | | $ | 60,912 | | $ | (98,228 | ) | $ | (133,426 | ) | $ | 80,775 | | $ | 11,122 | |
Weighted average shares used to calculate earnings per common stock–Basic | | 148,236 | | 148,236 | | 204,385 | | 204,882 | | 206,235 | |
Incremental weighted average effect of potentially dilutive instruments | | 990 | | — | | — | | 1,588 | | 1,588 | |
Adjusted weighted average shares used to calculate earnings (loss) per common stock–Diluted | | 149,226 | | 148,236 | | 204,385 | | 206,470 | | 207,823 | |
Earnings (loss) from continuing operations per common stock–Basic | | $ | 0.41 | | $ | (0.66 | ) | $ | (0.65 | ) | $ | 0.39 | | $ | 0.05 | |
Earnings (loss) from continuing operations per common stock–Diluted | | $ | 0.41 | | $ | (0.66 | ) | $ | (0.65 | ) | $ | 0.39 | | $ | 0.05 | |
(Q) The pro forma weighted-average shares outstanding are the historical weighted-average shares of HCP for the periods presented, adjusted for the issuance of 40.3 million shares (33.5 million shares issued in November 2006 and 6.8 million shares issued in January 2007) of HCP common stock whose proceeds were used to repay debt initially used to finance the CRP Acquisitions and the issuance of 27.2 million shares of HCP common stock issued in conjunction with the CRP Acquisitions, which were assumed to have been issued at January 1, 2006.
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(R) Because the results of CRP and the Advisor are not fully reflected in the historical statement of operations of HCP for the year ended December 31, 2006, pro forma information to reflect the CRP acquisitions for the year ended December 31, 2006 is presented (collectively, “Pro Forma CRP Acquisitions”). Additionally, HCP entered into certain capital market and financing transactions subsequent to the CRP acquisitions but related to the CRP acquisitions, which are not fully reflected in the historical statement of operations of HCP for year ended December 31, 2006. These Pro Forma CRP adjustments for the year ended December 31, 2006 have been prepared as if they had occurred as of January 1, 2006 for the year ended December 31, 2006. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements and the notes thereto of CRP and the Advisor for the year ended December 31, 2005 and as of and for the nine months ended September 30, 2006.
| | CRP | | | | | | | | Advisor | | | | | | | |
| | Historical | | | | | | | | Historical | | | | | | | |
| | Nine Months | | | | | | | | Nine Months | | | | | | | |
| | ended | | CRP Re- | | | | CRP | | ended | | Advisor | | CRP/ | | Pro Forma | |
| | September 30, | | Classifications | | CRP | | Pro Forma | | September 30, | | Pro Forma | | Advisor | | CRP | |
| | 2006 | | (R1) | | Reclassified | | Adjustments | | 2006 | | Adjustments | | Eliminations | | Acquisitions | |
Revenues and other income: | | | | | | | | | | | | | | | | | |
Rental and other revenues | | $ | — | | $ | 272,900 | | $ | 272,900 | | $ | 33,416 | (R2) | $ | — | | $ | — | | $ | — | | $ | 261,396 | |
| | | | | | | | (2,054 | )(R2) | | | | | | | | |
| | | | | | | | (32,034 | )(R2) | | | | | | | | |
| | | | | | | | 547 | (R2) | | | | | | | | |
| | | | | | | | (11,379 | )(R2) | | | | | | | | |
Seniors’ housing rental income | | 187,078 | | (187,078 | ) | — | | — | | — | | — | | — | | — | |
Earned income from direct financing leases | | 45,522 | | — | | 45,522 | | — | | — | | — | | — | | 45,522 | |
FF&E reserve income | | 6,038 | | (6,038 | ) | — | | — | | — | | — | | — | | — | |
Contingent rent | | 839 | | (839 | ) | — | | — | | — | | — | | — | | — | |
Medical facilities rental income and other revenues | | 78,945 | | (78,945 | ) | — | | — | | — | | — | | — | | — | |
Equity income from unconsolidated joint ventures | | 328 | | (328 | ) | — | | — | | — | | — | | — | | — | |
Acquisition fees | | — | | — | | — | | — | | 2,599 | | — | | (2,599 | )(R9) | — | |
Debt acquisition fees | | — | | — | | — | | — | | 4,328 | | — | | (4,328 | )(R9) | — | |
Management fees | | — | | — | | — | | — | | 15,742 | | — | | (15,742 | )(R9) | — | |
Interest and other income | | 5,773 | | — | | 5,773 | | — | | 2,278 | | — | | (2,278 | )(R9) | 5,773 | |
| | 324,523 | | (328 | ) | 324,195 | | (11,504 | ) | 24,947 | | — | | (24,947 | ) | 312,691 | |
| | | | | | | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | | | | | | |
Interest | | 71,164 | | — | | 71,164 | | 104,609 | (R3) | — | | — | | — | | 167,634 | |
| | | | | | | | (3,530 | )(R3) | | | | | | | | |
| | | | | | | | (225 | )(R4) | | | | | | | | |
| | | | | | | | (4,384 | )(R4) | | | | | | | | |
Depreciation and amortization | | 84,260 | | — | | 84,260 | | 23,718 | (R5) | — | | 4,538 | (R7) | — | | 116,322 | |
| | | | | | | | 6,530 | (R5) | | | | | | | | |
| | | | | | | | (2,724 | )(R5) | | | | | | | | |
Operating | | — | | 26,372 | | 26,372 | | 317 | (R6) | — | | — | | — | | 26,689 | |
Seniors’ housing property expenses | | 749 | | (749 | ) | — | | — | | — | | — | | — | | — | |
Medical facilities operating expenses | | 25,623 | | (25,623 | ) | — | | — | | — | | — | | — | | — | |
General and administrative | | 23,301 | | 7,676 | | 30,977 | | (7,193 | )(R10) | 15,002 | | — | | (2,278 | )(R9) | 36,508 | |
Asset management fees paid to related party | | 15,597 | | — | | 15,597 | | — | | — | | — | | (15,597 | )(R9) | — | |
Impairments | | — | | — | | — | | — | | — | | — | | — | | — | |
Provision for doubtful accounts | | 8,326 | | (8,326 | ) | — | | — | | — | | — | | — | | — | |
| | 229,020 | | (650 | ) | 228,370 | | 117,118 | | 15,002 | | 4,538 | | (17,875 | ) | 347,153 | |
| | | | | | | | | | | | | | | | | |
Income before minority interests | | 95,503 | | 322 | | 95,825 | | (128,622 | ) | 9,945 | | (4,538 | ) | (7,072 | ) | (34,462 | ) |
Equity income from unconsolidated joint ventures | | — | | 328 | | 328 | | — | | — | | — | | — | | 328 | |
Minority interests | | (414 | ) | — | | (414 | ) | — | | — | | — | | — | | (414 | ) |
Earnings before income taxes | | 95,089 | | 650 | | 95,739 | | (128,622 | ) | 9,945 | | (4,538 | ) | (7,072 | ) | (34,548 | ) |
Income tax expense | | — | | 650 | | 650 | | — | | 3,804 | | (3,804 | )(R8) | — | | 650 | |
Income from continuing operations | | $ | 95,089 | | $ | — | | $ | 95,089 | | $ | (128,622 | ) | $ | 6,141 | | $ | (734 | ) | $ | (7,072 | ) | $ | (35,198 | ) |
| | | | | | | | | | | | | | | | | |
Weighted-average shares used to calculate income/(loss) per common stock: | | | | | | | | | | | | | | | | | |
Basic (Q) | | | | | | | | 56,149 | | | | | | | | 56,149 | |
Diluted (Q) | | | | | | | | 56,149 | | | | | | | | 56,149 | |
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(R1) Reclassifications to conform certain CRP amounts to HCP’s presentation are as follows:
· “Seniors’ housing rental income,” “FF&E reserve income,” “Contingent rent,” and “Medical facilities rental income and other revenues” have been reclassified to “Rental and other revenues;”
· “Seniors’ housing property expenses” and “Medical facilities operating expenses” have been reclassified to “Operating;”
· “Provision for doubtful accounts” has been reclassified to “General and administrative;”
· Income taxes have been reclassified from “General and administrative” to a separate line item; and
· Reclassification of equity income from unconsolidated joint ventures from revenues and other income to other operating income to conform to classification used in 2007.
(R2) Adjustments to CRP’s rental income and other revenues are as follows (in thousands):
Recognize the total minimum lease payments provided under the acquired leases on a straight-line basis over the remaining term from January 1, 2006 | | $ | 33,416 | |
Recognize the amortization of above- and below-market lease intangibles | | (2,054 | ) |
Eliminate CRP’s historical straight-line rent adjustment | | (32,034 | ) |
Eliminate CRP’s historical amortization of above- and below-market lease intangibles | | 547 | |
Eliminate CRP’s historical rental revenue earned from divested properties | | (11,379 | ) |
| | $ | (11,504 | ) |
(R3) On October 5, 2006, in connection with the CRP Acquisitions, HCP entered into credit agreements with a syndicate of banks providing for aggregate borrowings of $3.4 billion. The credit facilities included a $700 million bridge loan, a $1.7 billion two-year term loan, and a $1.0 billion three-year revolving credit facility. $2.1 billion of the aggregate borrowings of $3.0 billion needed to acquire CRP were assumed or repaid using the proceeds from the following transactions:
a. On November 10, 2006, HCP issued 33.5 million shares of common stock and received net proceeds of approximately $960 million. (See note Q)
b. On December 4, 2006, HCP issued $400 million senior unsecured notes priced at 99.768% of the principal amount for an effective yield of 5.69%.
c.On January 19, 2007, HCP issued 6.8 million shares of common stock and received net proceeds of approximately $261 million (See note Q).
d. On January 22, 2007, HCP issued $500 million senior unsecured notes priced at 99.323% of the principal amount for an effective yield of 6.09%.
Pro Forma CRP interest expense adjustments for the above debt transactions are as follows (in thousands):
Increase in interest expense associated with senior unsecured notes, term loan and bridge loans for the CRP Acquisitions | | 104,609 | |
Eliminate amortization of issuance costs of bridge and term loans repaid with subsequent financing and capital market transactions | | (3,530 | ) |
| | $ | 101,079 | |
| | | | |
The pro forma increase in interest expense as a result of the issuance of $900 million senior unsecured notes and a $870 million term loan in the CRP Acquisitions is calculated using effective rates of the senior notes and the rates for the short-term borrowings issued on October 5, 2006 (the date that the CRP Acquisitions were completed), respectively. Each 1/8 of 1% increase in the annual interest assumed with respect to the debt will increase pro forma interest expense by $2.2 million for the year ended December 31, 2006.
(R4) Amortization of the net premiums and discounts recognized at the merger date of the CRP Acquisitions for the fair value of the assumed CRP mortgage debt of $225,000, and elimination of historical interest expense of approximately $4.4 million incurred on debt repaid in conjunction with divested properties.
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(R5) Adjustments to depreciation expenses are as follows (in thousands):
Represents the increase in real estate depreciation expense as a result of the recording of CRP’s real estate at its estimated fair value at the assumed CRP Acquisitions date of January 1, 2006 | | $ | 23,718 | |
Represents the incremental amortization expense related to lease-up related intangible assets associated with acquired leases | | 6,530 | |
Eliminate CRP’s historical depreciation expense incurred from divested properties | | (2,724 | ) |
| | $ | 27,524 | |
An estimated useful life of 35 years was assumed to compute the adjustment to real estate depreciation. For assets and liabilities associated with the value of in-place leases, a weighted-average remaining lease term of 7 years was used to compute amortization expense.
(R6) Operating expenses are adjusted to include amortization of below-market ground lease intangibles.
(R7) Depreciation and amortization is adjusted to include the amortization of non-compete contract intangibles. A 4 year period was used to compute amortization expense.
(R8) Income taxes of the Advisor have been eliminated as a result of the merger with CRP, which is assumed as of January 1, 2006. At the closing of this merger, the Advisor was merged into a Qualifying REIT Subsidiary (“QRS”) which, assuming the merger was effective as of January 1, 2006, would eliminate the Advisor’s income tax obligations.
(R9) Represents the elimination of acquisition, debt acquisition, management and other fees earned by the Advisor from CRP. Because acquisition fees and debt acquisition fees paid by CRP to the Advisor are capitalized by CRP, only management fees and other fees are eliminated within costs and expenses.
(R10) Represents the elimination of nonrecurring charges directly attributable to the CRP Acquisitions.
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