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Discontinued Operations and Dispositions of Real Estate | 3 Months Ended
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Mar. 31, 2017
Discontinued Operations and Dispositions of Real Estate |
Discontinued Operations and Dispositions of Real Estate | NOTE 4. Discontinued Operations and Dispositions of Real Estate Discontinued Operations - Quality Care Properties, Inc. On October 31, 2016, the Company completed the spin-off (the “Spin-Off”) of its subsidiary, QCP. The Spin-Off included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) direct financing lease (“DFL”) investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self-managed and self-administrated REIT. In connection with the Spin-Off, the Company entered into a Transition Services Agreement (“TSA”) with QCP. Per the terms of the TSA, the Company has agreed to provide certain administrative and support services to QCP on a transitional basis for established fees. The TSA will terminate on the expiration of the term of the last service provided under the agreement, which will be on or prior to October 30, 2017. The TSA provides that QCP generally has the right to terminate a transition service upon thirty days notice to the Company. The TSA contains provisions under which the Company will, subject to certain limitations, be obligated to indemnify QCP for losses incurred by QCP resulting from the Company’s breach of the TSA. Summarized financial information for discontinued operations for the three months ended March 31, 2016 is as follows (in thousands):
|  |  |  |  | Three Months Ended
|  |  |  | March 31, 2016
Revenues: |  |  |  |  |  |
Rental and related revenues |  |  |  |  | $ | 6,814
Tenant recoveries |  |  |  |  |  | 362
Income from direct financing leases |  |  |  |  |  | 113,058
Total revenues |  |  |  |  |  | 120,234
Costs and expenses: |  |  |  |  |  |
Depreciation and amortization |  |  |  |  |  | (1,467)
Operating |  |  |  |  |  | (998)
General and administrative |  |  |  |  |  | (48)
Other income, net |  |  |  |  |  | 21
Income before income taxes |  |  |  |  |  | 117,742
Income tax expense |  |  |  |  |  | (49,334)
Net income from discontinued operations |  |  |  |  | $ | 68,408
HCR ManorCare, Inc. Discontinued operations is primarily comprised of QCP’s HCRMC DFL investments. During the three months ended March 31, 2016, the Company recognized DFL income and received cash payments of $113 million from the HCRMC DFL investments. No accretion related to its HCRMC DFL investments was recognized in 2016 due to the Company utilizing a cash basis method of accounting beginning January 1, 2016. The Company’s acquisition of the HCRMC DFL investments in 2011 was subject to federal and state built-in gain tax of up to $2 billion, if all the assets were sold within 10 years of the acquisition date. At the time of acquisition, the Company intended to hold the assets for at least 10 years, at which time the assets would no longer be subject to the built-in gain tax. In December 2015, the U.S. Federal Government passed legislation which permanently reduced the holding period, for federal tax purposes, to five years, which the Company satisfied in April 2016. This legislation was not extended to certain states, which maintain a 10 year requirement. During the three months ended March 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of $49 million representing its estimated exposure to state built-in gain tax. Dispositions of Real Estate Held for Sale At December 31, 2016, 64 SH NNN facilities, four life science facilities and a SHOP facility were classified as held for sale, with an aggregate carrying value of $928 million, primarily comprised of real estate assets of $809 million. All facilities held for sale at December 31, 2016 were sold during the first quarter of 2017. At March 31, 2017, there were no assets classified as held for sale. 2017 Dispositions In January 2017, the Company sold four life science facilities in Salt Lake City, Utah for $76 million, resulting in a net gain on sale of $45 million. Also in January 2017, the Company completed the contribution of its ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“HCP/CPA PropCo” and “HCP/CPA OpCo,” together, the “HCP/CPA JV”). In addition, 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 HCP. In return, for both transaction elements the Company received combined proceeds of $480 million from the HCP/CPA JV and $242 million in note receivables and retained an approximately 40% beneficial interest in RIDEA II (the note receivable and 40% beneficial interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in the Company deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. The RIDEA II Investments are now recognized and accounted for as equity method investments. In March 2017, the Company sold 64 SH NNN assets, previously under triple-net leases with Brookdale Senior Living Inc. (“Brookdale”), for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P., resulting in a net gain on sale of $170 million. Subsequent Dispositions In April 2017, the Company sold a land parcel in San Diego, California for $27 million.

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