Healthpeak Properties Annual Report 2017

Plain-text annual report

2017ANNUAL REPORT + SHAREHOLDER LETTERHAYDEN RESEARCH CAMPUS, GREATER BOSTON, MA LIFE SCIENCE AnnUAL RePORT + SHAReHOLdeR LeTTeR a KINGWOOD MOB, KINGWOOD, TX MEDICAL OFFICE DEAR FELLOW SHAREHOLDERS, 2017 was a transformational year for HCP as we took decisive actions to exit higher-risk noncore investments, reduce certain operator concentrations, improve our portfolio and increase our financial strength. As a result of these repositioning efforts, we will own a vastly enhanced portfolio that we believe would produce higher-quality cash flows, which in turn would support consistent earnings and dividend growth over the long term. With our streamlining efforts near completion, we are focused on growing value in the three private-pay segments of Medical Office, Life Science and Senior Housing. The Opportunity in Healthcare Real Estate We believe private-pay healthcare real estate is a compelling investment opportunity given the sector’s favorable demographic trends, namely aging population, and fragmented ownership. The number of Americans over 75 is expected to increase by 11 million in the upcoming decade, which represents a 50% increase in this cohort. According to Centers for Medicare & Medicaid Services (CMS), seniors age 65 and up, on average, spend four times as much on their annual healthcare costs as compared to younger generations. As a result of these trends, CMS projects U.S. healthcare spending to increase by approximately 70%, from $3.3 trillion to $5.7 trillion within the next decade. The needs of our aging population will drive demand in each of our three portfolio segments. Companies developing new and innovative drugs, treatments and healthcare devices will require laboratory space in our Life Science properties. Outpatient services and specialist doctor visits, performed more efficiently in an outpatient setting, will drive demand for our 81% on-campus Medical Office portfolio. And, increasing demand for senior housing communities offering recreational & social activities, daily living assistance, and coordination with outside healthcare providers will drive growth in our independent living and assisted living communities. In addition to our portfolio strategy, we intend to maintain a strong, flexible balance sheet, align with preferred operators and tenants, and enhance our operational excellence. As we successfully execute these strategic objectives, we believe we will be even better positioned to deliver strong and consistent shareholder return over the long term. As Baby Boomers age, they will seek... PARKER ADVENTIST DENVER, CO THE COVE AT OYSTER POINT SOUTH SAN FRANCISCO, CA SOLANA PRESERVE VINTAGE PARK HOUSTON, TX Medical Office Life Science Senior Housing Outpatient services and specialist doctor visits performed more efficiently in a medical office setting New and innovative drugs, treatments and healthcare devices, which will be serviced by our life science portfolios Senior housing communities offering social activities, daily living assistance and coordination with outside healthcare providers 1 2017 SHAREHOLDER LETTERAnnUAL RePORT + SHAReHOLdeR LeTTeR Strengthening Our Portfolio and Balance Sheet We entered 2017 with a vastly improved portfolio following the spin-off of our Skilled nursing business in late 2016. during the balance of 2017, we took a number of additional actions to strengthen our portfolio and balance sheet. Diversified Our Senior Housing Operators In november, we announced transactions that provided a clear path to reduce our Brookdale Senior Living tenant concentration from 27% to approximately 16% through a combination of dispositions and transitions to other leading senior housing operators. In addition to lowering our tenant concentration and generating proceeds to repay debt, the transactions significantly improved lease coverage levels for our triple-net leased communities. Balancing our Senior Housing operator mix was one of our highest priorities during 2017 and I am especially pleased with our team’s efforts to successfully execute this critical initiative. Exited Mezzanine Loan Investments We recently exited the last of our high-leverage, high-yield mezzanine loan investments as we determined these volatile cash flows were not aligned with our goal of targeting direct ownership of high-quality real estate with stable growth. While this decision resulted in near-term earnings dilution, it will lead to higher quality and more consistent earnings power over the long term. Invested in Core Segments and Repaid Debt during 2017, we used proceeds from disposition activities to fund reinvestment in our three segments. We closed on, or committed to, approximately $1 billion in high-quality, higher-growth acquisitions, new developments, and redevelopments during the year. We also used $1.3 billion of additional disposition proceeds to repay debt which strengthened our balance sheet and credit profile. during 2018, we expect to repay an additional $1.5 billion of debt and are targeting a net debt to Adjusted eBITdA ratio in the low-6x range by year end. HCP 3Q 2016 Targeted Pro Forma HCP(1) 29% 55% What We Have Done Our portfolio will soon be comprised of approximately 55% high-quality specialty office assets in our medical office and life science segments. We believe we will be well positioned to allocate capital across our three segments, and expect our diversification will allow us to find attractive investment opportunities through the inevitable cycles. 78% 95% The needs of our aging population will drive demand in each of our dynamic, private-pay healthcare segments. Our portfolio has minimal exposure to properties reliant on unpredictable government reimbursement policies. MOB and Life Science % Private Pay Top 3 Tenant Concentration TOP 3 54% 31% With our announced 2017 transactions, we intend to dramatically increase our tenant diversity by selling and transitioning certain senior housing assets to reduce the top three tenant concentration to approximately 31% of cash nOI. Mezzanine Loan Investments $ International Investments $719 million $0 Highly leveraged mezzanine loans do not align with our long-term strategy of generating stable cash flows. As such, we exited these investments. $ € £ $850 million $0 After evaluating our U.K. portfolio in the context of the impact of Brexit and tax matters, we decided to actively market our U.K. assets for sale to focus upon the strong demographic opportunities in the U.S. (1) Target percentages represent 4Q 2017 cash nOI plus interest income adjusted to reflect (i) acquisitions and dispositions as if they occurred on the first day of the quarter, and (ii) the sale of (x) our remaining 40% interest in our RIdeA II joint venture, (y) our U.K. holdings and Tandem Health Care investment, and (z) four life science properties that were held for sale as of december 31, 2017. Also includes $3 million of anticipated quarterly stabilized cash nOI from our Hayden (life science asset) acquisition and stabilized cash nOI from Phase II of The Cove. Percentages also reflect assumed Brookdale Senior Living, Inc. asset sales and transitions expected to occur during 2018 (see our Annual Report for additional information). 2 HCP, INC. ANNuAL RePORT + SHAReHOLdeR LeTTeR Our Portfolio Going Forward The actions taken during the last two years enable our company to be more targeted in how we will invest in the future. Our portfolio is projected to consist of approximately 55% high-quality specialty office assets in our Medical Office and Life Science segments, 40% in our diversified Senior Housing segment and with the balance in a portfolio of well-covered hospitals. We like the balance, stable growth and investment opportunities that our repositioned portfolio provides. We believe we will be well-positioned to allocate capital across these three dynamic, private-pay healthcare segments, and expect our diversification will allow us to find attractive investment opportunities through the inevitable cycles. We will continue to refresh our portfolio through capital recycling, development and redevelopment activities. We will take advantage of opportunities to grow our portfolio when strategic and accretive acquisitions can be funded with favorable cost of capital. TARGET PRO FORMA PORTFOLIO 5% Senior Housing CCRC-JV 7% Hospital 26% Life Science 27% Medical Office 22% Senior Housing Triple-Net 13% Senior Housing Operating Portfolio “SHOP” MEDICAL OFFICE Please see footnote on page 2 for additional information. Our Medical Office portfolio will represent 27% of our Net Operating Income (NOI) and span 19 million square feet on a pro forma basis. A sector-leading 81% of our square footage is located “on-campus” of the hospitals they serve, providing stable demand from tenants such as specialist physicians, diagnostic testing facilities and other outpatient service providers. As healthcare providers and consumers continue to seek more affordable alternatives for lower-acuity needs, we believe on-campus medical office space will continue to be a preferred solution for specialist physicians, hospitals and health systems. The stable nature of our Medical Office portfolio has resulted in average occupancy and same property cash NOI growth of 92% and 2.5%, respectively, over the last five years. We have assembled a strong and diversified tenant base and maintain collaborative relationships with industry leaders such as HCA Healthcare, a $65 billion healthcare service provider, Providence St. Joe’s, the third largest health system in the nation, and Memorial Hermann, the largest not-for-profit health system in Houston and Southeast Texas. Going forward, we will continue to utilize our deep relationships with hospitals and health systems to target on-campus or specialty off-campus acquisitions anchored by leading hospitals or large physician group practices. With an average age of more than 20 years, our on-campus portfolio comprises many irreplaceable locations that present attractive redevelopment opportunities. Over the next several years, we plan to increase our Medical Office redevelopment pipeline to $75 to $100 million annually with projected cash-on- cash returns ranging from 9% to 12%. CYPRESS MOB, CYPRESS, TX MEDICAL OFFICE 3 2017 SHAREHOLDER LETTERANNuAL RePORT + SHAReHOLdeR LeTTeR SENIOR HOUSING Our Senior Housing portfolio is well-diversified across the core product offerings of independent living, assisted living and memory care and will represent about 40% of our NOI on a pro forma basis. Following the completion of our announced sales transactions, we will own a portfolio with higher concentration in the top 30 senior housing markets, with a stronger demographic profile and lower exposure to new supply. In addition to the portfolio improvement efforts, we made significant strides in improving our senior housing asset management infrastructure and bolstered the management team with several key hires to enhance our operational excellence. In addition, we have focused on partnering with a select group of experienced and high-quality operators. LIFE SCIENCE FREEDOM POINT, THE VILLAGES, FL SENIOR HOUSING Our 8 million square foot Life Science portfolio will represent 26% of our NOI on a pro forma basis and is located primarily in San Francisco, San diego and Boston. Notably, we are the largest life science landlord in South San Francisco, a market where HCP has owned, developed and operated for over two decades. We have had tremendous leasing success at our Class-A development project, The Cove, and are pleased to have recently broken ground on Sierra Point, our next major life science development project. In November, we made a strategic entry into the greater Boston market with the acquisition of the Hayden Research Campus, located in the life science market of Lexington. In addition to compelling leasing and development opportunities, Hayden also provides immediate operational scale in a market we have targeted for long-term growth. The fundamentals for the life science sector remain favorable with record venture capital funding, strong M&A activity and an open IPO market. Our strategy of owning clusters of real estate in key life science markets allows us to creatively work with tenants to meet their evolving real estate needs while limiting vacancy downtime. In addition, we have taken advantage of redevelopment opportunities at select assets to enhance our growth and improve portfolio quality. We plan to grow our Life Science business over time partly by investing in ground-up developments. We have 1.6 million developable square feet of entitled land, which creates a shadow pipeline of close to $1 billion. While the current fundamentals support future growth potential in this segment, we remain mindful of the dynamic nature of tenant demand and will not overextend our balance sheet pursuing speculative growth. In addition to demand-driven new development, we will leverage our extensive market knowledge to identify value-added acquisitions and redevelopment opportunities across our Life Science footprint. 4 SOLEDAD, SAN DIEGO, CA LIFE SCIENCE HCP, INC. AnnuAl REPORt + SHAREHOldER lEttER In Closing After two years of transformational execution focused on our portfolio, balance sheet and team, we believe HCP is well-positioned to deliver strong and stable long-term total shareholder return. I am very pleased and appreciative of the progress our team has made and excited about our future. In closing, I’d like to thank our employees, business partners and fellow shareholders for your continued support and we look forward to another productive and rewarding year. THOMAS M. HERZOG President and Chief Executive Officer 5 2017 SHAREHOLDER LETTERAnnuAl REPORt + SHAREHOldER lEttER Sustainability Highlights We believe that sustainability is an important element of corporate responsibility. In 2017, we continued advancing our commitment with a focus on achieving goals in each of the Environmental, Social and Governance (ESG) dimensions of sustainability. Our environmental management programs strive to protect the environment and provide a positive impact on our communities, while also improving our profitability. We continue to support our social responsibility with local philanthropic and volunteer activities. Finally, we continue to take actions we believe will build long-term trust from our investors and other stakeholders, including strong corporate governance and transparency in communications and disclosures. Our 2017 sustainability achievements are summarized below. For additional information regarding our ESG initiatives, including our approach to climate change, please visit our website at www.hcpi.com/sustainability. HCP was named an ENERGY STAR Partner of the Year by the Environmental Protection Agency for outstanding efforts to improve energy efficiency at our properties. named to the north America Dow Jones Sustainability Index (dJSI) for 4th consecutive year and to the World dJSI for 2nd year in a row, for outperforming our peers in sustainability metrics based on an analysis of financially material economic, environmental and social factors Included in The Sustainability Yearbook, a listing of the world’s most sustainable companies that are ranked in the top 15% of their industry as scored by the dJSI Received the 2016 National Association of Real Estate Investment Trusts (NAREIT) Healthcare Leader in the Light Award for contributions to sustainable real estate ownership and operations with a sustainability program that produces significant, measurable results Ranked 2nd in the Healthcare Sector by the Global Real Estate Sustainability Benchmark (GRESB) and achieved Green Star designation for 5th year in a row, for leadership in approach to ESG disclosure, and achieving a score of “A-” named to the leadership category by CDP (formerly Carbon disclosure Project) for demonstrating leadership in best practices in environmental management, and achieving a score of “A-” named to the FTSE4Good Index series for the 5th consecutive year for meeting globally recognized corporate responsibility standards and demonstrating strong ESG practices 6 HCP, INC. 2017 F O R M 1 0 - K THIS PAGE INTENTIONALLY LEFT BLANK Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT Form 10-K ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. OF 1934 For the fiscal year ended December 31, 2017 or For the transition period from to Commission file number 001-08895 HCP, Inc. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 1920 Main Street, Suite 1200 Irvine, California (Address of principal executive offices) 33-0091377 (I.R.S. Employer Identification No.) 92614 (Zip Code) Registrant’s telephone number, including area code (949) 407-0700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock Name of each exchange on which registered New York Stock Exchange Act. Yes x No ¨ Act. Yes ¨ No x Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated Accelerated filer x filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes ¨ No x State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $12.8 billion. As of January 31, 2018 there were 469,443,487 shares of common stock outstanding. Portions of the definitive Proxy Statement for the registrant’s 2018 Annual Meeting of Stockholders have been DOCUMENTS INCORPORATED BY REFERENCE incorporated by reference into Part III of this Report. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) Form 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2017 or ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 001-08895 HCP, Inc. (Exact name of registrant as specified in its charter) Maryland (State or other jurisdiction of incorporation or organization) 1920 Main Street, Suite 1200 Irvine, California (Address of principal executive offices) 33-0091377 (I.R.S. Employer Identification No.) 92614 (Zip Code) Registrant’s telephone number, including area code (949) 407-0700 Securities registered pursuant to Section 12(b) of the Act: Title of each class Common Stock Name of each exchange on which registered New York Stock Exchange Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x Indicate by check mark whether the registrant; (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨ Emerging growth company ¨ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes ¨ No x State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $12.8 billion. As of January 31, 2018 there were 469,443,487 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the definitive Proxy Statement for the registrant’s 2018 Annual Meeting of Stockholders have been incorporated by reference into Part III of this Report. TABLE OF CONTENTS HCP, INC. Form 10-K For the Fiscal Year Ended December 31, 2017 135 135 135 135 135 135 136 136 140 CAUTIONARY LANGUAGE REGARDING FORWARD- LOOKING STATEMENTS PART 1 Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART 2 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures Item 8. Item 9. About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information 3 PART 3 Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART 4 Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary 5 5 12 29 29 32 32 33 33 36 37 62 64 132 132 134 All references in this report to “HCP,” the “Company,” “we,” “us” or “our” mean HCP, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to “HCP, Inc.” mean the parent company without its subsidiaries. CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS Statements in this Annual Report on Form 10-K that are • our concentration in the healthcare property sector, not historical factual statements are “forward-looking particularly in senior housing, life sciences and medical statements” within the meaning of Section 27A of the office buildings, which makes our profitability more Securities Act of 1933, as amended, and Section 21E vulnerable to a downturn in a specific sector than if we of the Securities Exchange Act of 1934, as amended. were investing in multiple industries; Forward-looking statements include, among other things, • our ability to identify replacement tenants and operators statements regarding our and our officers’ intent, belief and the potential renovation costs and regulatory or expectation as identified by the use of words such as approvals associated therewith; “may,” “will,” “project,” “expect,” “believe,” “intend,” • the risks associated with property development “anticipate,” “seek,” “forecast,” “plan,” “potential,” and redevelopment, including costs above original “estimate,” “could,” “would,” “should” and other comparable estimates, project delays and lower occupancy rates and and derivative terms or the negatives thereof. Forward- rents than expected; looking statements reflect our current expectations and • the risks associated with our investments in joint views about future events and are subject to risks and ventures and unconsolidated entities, including our lack uncertainties that could significantly affect our future of sole decision making authority and our reliance on our financial condition and results of operations. While partners’ financial condition and continued cooperation; forward-looking statements reflect our good faith belief • our ability to achieve the benefits of acquisitions or and assumptions we believe to be reasonable based other investments within expected time frames or at all, upon current information, we can give no assurance that or within expected cost projections; our expectations or forecasts will be attained. Further, • the potential impact on us and our tenants, operators we cannot guarantee the accuracy of any such forward- and borrowers from current and future litigation looking statement contained in this Annual Report, and matters, including the possibility of larger than such forward-looking statements are subject to known and expected litigation costs, adverse results and unknown risks and uncertainties that are difficult to predict. related developments; As more fully set forth under “Item 1A, Risk Factors” in this • operational risks associated with third party report, these risks and uncertainties include, but are not management contracts, including the additional limited to: • our reliance on a concentration of a small number of tenants and operators for a significant percentage of our revenues; • the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans; • the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations; • competition for the acquisition and financing of suitable healthcare properties as well as competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases; regulation and liabilities of our RIDEA lease structures; • the effect on us and our tenants and operators of legislation, executive orders and other legal requirements, including compliance with the Americans with Disabilities Act, fire, safety and health regulations, environmental laws, the Affordable Care Act, licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements or fines for noncompliance; • changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants • our ability to foreclose on collateral securing our real and operators; estate-related loans; • volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may 2 http://www.hcpi.com 2017 Annual Report 3 TABLE OF CONTENTS HCP, INC. Form 10-K For the Fiscal Year Ended December 31, 2017 CAUTIONARY LANGUAGE REGARDING FORWARD- LOOKING STATEMENTS PART 1 Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART 2 3 PART 3 Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART 4 Item 15. Exhibits, Financial Statement Schedules Item 16. Form 10-K Summary 135 135 135 135 135 135 136 136 140 5 5 12 29 29 32 32 33 33 36 37 62 64 132 134 Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with 132 Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information All references in this report to “HCP,” the “Company,” “we,” “us” or “our” mean HCP, Inc., together with its consolidated subsidiaries. Unless the context suggests otherwise, references to “HCP, Inc.” mean the parent company without its subsidiaries. CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS Statements in this Annual Report on Form 10-K that are not historical factual statements are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include, among other things, statements regarding our and our officers’ intent, belief or expectation as identified by the use of words such as “may,” “will,” “project,” “expect,” “believe,” “intend,” “anticipate,” “seek,” “forecast,” “plan,” “potential,” “estimate,” “could,” “would,” “should” and other comparable and derivative terms or the negatives thereof. Forward- looking statements reflect our current expectations and views about future events and are subject to risks and uncertainties that could significantly affect our future financial condition and results of operations. While forward-looking statements reflect our good faith belief and assumptions we believe to be reasonable based upon current information, we can give no assurance that our expectations or forecasts will be attained. Further, we cannot guarantee the accuracy of any such forward- looking statement contained in this Annual Report, and such forward-looking statements are subject to known and unknown risks and uncertainties that are difficult to predict. As more fully set forth under “Item 1A, Risk Factors” in this report, these risks and uncertainties include, but are not limited to: • • our reliance on a concentration of a small number of tenants and operators for a significant percentage of our revenues; the financial condition of our existing and future tenants, operators and borrowers, including potential bankruptcies and downturns in their businesses, and their legal and regulatory proceedings, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and operators’ leases and borrowers’ loans; the ability of our existing and future tenants, operators and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations; • competition for the acquisition and financing of suitable healthcare properties as well as competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases; • • our concentration in the healthcare property sector, particularly in senior housing, life sciences and medical office buildings, which makes our profitability more vulnerable to a downturn in a specific sector than if we were investing in multiple industries; • our ability to identify replacement tenants and operators • • and the potential renovation costs and regulatory approvals associated therewith; the risks associated with property development and redevelopment, including costs above original estimates, project delays and lower occupancy rates and rents than expected; the risks associated with our investments in joint ventures and unconsolidated entities, including our lack of sole decision making authority and our reliance on our partners’ financial condition and continued cooperation; • our ability to achieve the benefits of acquisitions or • other investments within expected time frames or at all, or within expected cost projections; the potential impact on us and our tenants, operators and borrowers from current and future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments; • operational risks associated with third party • management contracts, including the additional regulation and liabilities of our RIDEA lease structures; the effect on us and our tenants and operators of legislation, executive orders and other legal requirements, including compliance with the Americans with Disabilities Act, fire, safety and health regulations, environmental laws, the Affordable Care Act, licensure, certification and inspection requirements, and laws addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements or fines for noncompliance; • changes in federal, state or local laws and regulations, including those affecting the healthcare industry that affect our costs of compliance or increase the costs, or otherwise affect the operations, of our tenants and operators; • our ability to foreclose on collateral securing our real estate-related loans; • volatility or uncertainty in the capital markets, the availability and cost of capital as impacted by interest rates, changes in our credit ratings, and the value of our common stock, and other conditions that may 2 http://www.hcpi.com 2017 Annual Report 3 CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions; • our reliance on information technology systems and the potential impact of system failures, disruptions or breaches; and • changes in global, national and local economic and other • our ability to maintain our qualification as a real estate conditions, including currency exchange rates; • our ability to manage our indebtedness level and changes in the terms of such indebtedness; • competition for skilled management and other • key personnel; the potential impact of uninsured or underinsured losses; investment trust. Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made. PART I ITEM 1. BUSINESS General Overview HCP, an S&P 500 company, invests primarily in real estate On October 31, 2016, we completed the spin-off (the serving the healthcare industry in the United States (“U.S.”). “Spin-Off”) of Quality Care Properties, Inc. (“QCP”) We are a Maryland corporation organized in 1985 and (NYSE: QCP). The Spin-Off included 338 properties, primarily qualify as a self-administered real estate investment trust comprised of the HCR ManorCare, Inc. (“HCRMC”) direct (“REIT”). We are headquartered in Irvine, California, with financing lease (“DFL”) investments and an equity investment offices in Nashville and San Francisco. Our diverse portfolio in HCRMC. QCP is an independent, publicly-traded, self- is comprised of investments in the following reportable managed and self-administrated REIT. See Note 5 to the healthcare segments: (i) senior housing triple-net, (ii) senior Consolidated Financial Statements for further information housing operating portfolio (“SHOP”), (iii) life science on the Spin-Off. and (iv) medical office. At December 31, 2017, we had 190 full-time employees. For a description of our significant activities during 2017, see Item 7 in this report. Business Strategy We invest and manage our real estate portfolio for the their physical environment, adjacency to established long-term to maximize the benefit to our stockholders and businesses (e.g., hospital systems) and educational support the growth of our dividends. The core elements centers, proximity to sources of business growth and of our strategy are: (i) to acquire, develop, lease, own and other local demographic factors. manage a diversified portfolio of quality healthcare properties • Replace tenants and operators at the best available across multiple geographic locations and business segments market terms and lowest possible transaction costs. including senior housing, medical office, and life science, We believe that we are well-positioned to attract new among others; (ii) to align ourselves with leading healthcare tenants and operators and achieve attractive rental companies, operators and service providers which, over the rates and operating cash flow as a result of the location, long-term, should result in higher relative rental rates, net design and maintenance of our properties, together operating cash flows and appreciation of property values; with our reputation for high-quality building services and and (iii) to maintain an investment grade balance sheet with responsiveness to tenants, and our ability to offer space adequate liquidity and long-term fixed rate debt financing alternatives within our portfolio. with staggered maturities, which supports the longer-term • Extend and modify terms of existing leases prior nature of our investments, while reducing our exposure to to expiration. We structure lease extensions, early interest rate volatility and refinancing risk at any point in the renewals or modifications, which reduce the cost interest rate or credit cycles. Internal Growth Strategies We believe our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing associated with lease downtime or the re-investment risk resulting from the exercise of tenants’ purchase options, while securing the tenancy and relationship of our high quality tenants and operators on a long-term basis. Investment Strategies tenants and operators to address their space and capital The delivery of healthcare services requires real estate and, needs; and (ii) provide high-quality property management as a result, tenants and operators depend on real estate, services in order to motivate tenants to renew, expand or in part, to maintain and grow their businesses. We believe relocate into our properties. We expect to continue our internal growth as a result of our ability to: that the healthcare real estate market provides investment opportunities due to the: (i) compelling long-term demographics driving the demand for healthcare services; (ii) specialized nature of healthcare real estate investing; and • Build and maintain long-term leasing and management (iii) ongoing consolidation of the fragmented healthcare real relationships with quality tenants and operators. In estate sector. choosing locations for our properties, we focus on 4 http://www.hcpi.com 2017 Annual Report 5 CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS adversely impact our ability to fund our obligations or • our reliance on information technology systems and consummate transactions, or reduce the earnings from the potential impact of system failures, disruptions or potential transactions; breaches; and • changes in global, national and local economic and other • our ability to maintain our qualification as a real estate conditions, including currency exchange rates; investment trust. • our ability to manage our indebtedness level and changes in the terms of such indebtedness; • competition for skilled management and other key personnel; • the potential impact of uninsured or underinsured losses; Except as required by law, we do not undertake, and hereby disclaim, any obligation to update any forward-looking statements, which speak only as of the date on which they are made. PART I ITEM 1. BUSINESS General Overview HCP, an S&P 500 company, invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). We are a Maryland corporation organized in 1985 and qualify as a self-administered real estate investment trust (“REIT”). We are headquartered in Irvine, California, with offices in Nashville and San Francisco. Our diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net, (ii) senior housing operating portfolio (“SHOP”), (iii) life science and (iv) medical office. At December 31, 2017, we had 190 full-time employees. Business Strategy We invest and manage our real estate portfolio for the long-term to maximize the benefit to our stockholders and support the growth of our dividends. The core elements of our strategy are: (i) to acquire, develop, lease, own and manage a diversified portfolio of quality healthcare properties across multiple geographic locations and business segments including senior housing, medical office, and life science, among others; (ii) to align ourselves with leading healthcare companies, operators and service providers which, over the long-term, should result in higher relative rental rates, net operating cash flows and appreciation of property values; and (iii) to maintain an investment grade balance sheet with adequate liquidity and long-term fixed rate debt financing with staggered maturities, which supports the longer-term nature of our investments, while reducing our exposure to interest rate volatility and refinancing risk at any point in the interest rate or credit cycles. Internal Growth Strategies We believe our real estate portfolio holds the potential for increased future cash flows as it is well-maintained and in desirable locations. Our strategy for maximizing the benefits from these opportunities is to: (i) work with new or existing tenants and operators to address their space and capital needs; and (ii) provide high-quality property management services in order to motivate tenants to renew, expand or relocate into our properties. We expect to continue our internal growth as a result of our ability to: • Build and maintain long-term leasing and management relationships with quality tenants and operators. In choosing locations for our properties, we focus on On October 31, 2016, we completed the spin-off (the “Spin-Off”) of Quality Care Properties, Inc. (“QCP”) (NYSE: 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. See Note 5 to the Consolidated Financial Statements for further information on the Spin-Off. For a description of our significant activities during 2017, see Item 7 in this report. their physical environment, adjacency to established businesses (e.g., hospital systems) and educational centers, proximity to sources of business growth and other local demographic factors. • Replace tenants and operators at the best available market terms and lowest possible transaction costs. We believe that we are well-positioned to attract new tenants and operators and achieve attractive rental rates and operating cash flow as a result of the location, design and maintenance of our properties, together with our reputation for high-quality building services and responsiveness to tenants, and our ability to offer space alternatives within our portfolio. • Extend and modify terms of existing leases prior to expiration. We structure lease extensions, early renewals or modifications, which reduce the cost associated with lease downtime or the re-investment risk resulting from the exercise of tenants’ purchase options, while securing the tenancy and relationship of our high quality tenants and operators on a long-term basis. Investment Strategies The delivery of healthcare services requires real estate and, as a result, tenants and operators depend on real estate, in part, to maintain and grow their businesses. We believe that the healthcare real estate market provides investment opportunities due to the: (i) compelling long-term demographics driving the demand for healthcare services; (ii) specialized nature of healthcare real estate investing; and (iii) ongoing consolidation of the fragmented healthcare real estate sector. 4 http://www.hcpi.com 2017 Annual Report 5 PART I PART I While we emphasize healthcare real estate ownership, we may also provide real estate secured financing to, or invest in equity or debt securities of, healthcare operators or other entities engaged in healthcare real estate ownership. We may also acquire all or substantially all of the securities or assets of other REITs, operating companies or similar entities where such investments would be consistent with our investment strategies. We may co-invest alongside institutional or development investors through partnerships or limited liability companies. • our track record and reputation for executing acquisitions responsively and efficiently, which provides confidence to domestic and foreign institutions and private investors who seek to sell healthcare real estate in our market areas; • our relationships with nationally recognized financial institutions that provide capital to the healthcare and real estate industries; and • our control of sites (including assets under contract with radius restrictions). We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), structuring transactions as master leases, requiring tenant or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits. We believe we are well-positioned to achieve external growth through acquisitions, financing and development. Other factors that contribute to our competitive position include: • our reputation gained through over 30 years of successful operations and the strength of our existing portfolio of properties; • our relationships with leading healthcare operators and systems, investment banks and other market intermediaries, corporations, private equity firms, non-profits and public institutions seeking to monetize existing assets or develop new facilities; • our relationships with institutional buyers and sellers of high-quality healthcare real estate; Financing Strategies Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we don’t retain a significant amount of capital. As a result, we regularly access the public equity and debt markets to raise the funds necessary to finance acquisitions and debt investments, develop and redevelop properties, and refinance maturing debt. We may finance acquisitions and other investments through the following vehicles: • borrowings under our credit facility; • issuance or origination of debt, including unsecured notes, term loans and mortgage debt; sale of ownership interests in properties or other investments; or issuance of common or preferred stock or its equivalent. • • We maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long- term fixed rate with staggered maturities. We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility or arrange for other short-term borrowings from banks or other sources. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and joint venture partners. Segments The following table summarizes our revenues by segment (dollars in thousands): Segment Senior housing triple-net SHOP Life science Medical office Other non-reportable segments Total revenues 2017 $ 313,547 525,473 358,816 477,459 173,083 $1,848,378 Year Ended December 31, 2016 % 17 $ 423,118 686,822 29 358,537 19 446,280 26 214,537 9 100 $2,129,294 2015 % 20 $ 428,269 518,264 32 342,984 17 415,351 21 235,621 10 100 $1,940,489 % 22 27 18 21 12 100 6 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 7 Senior housing (triple-net and SHOP). Our senior housing Our senior housing property types under both triple-net facilities are managed utilizing triple-net leases and leases and RIDEA structures are further described below: RIDEA structures, which are permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”), and include independent living facilities (“ILFs”), assisted living facilities (“ALFs”), and memory care facilities (“MCFs”), and continuing care retirement communities (“CCRCs”) which cater to different segments of the elderly population based upon their personal needs. Services provided by our tenants or operators in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicare and Medicaid. • Independent Living Facilities. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded socially by their peers with services such as housekeeping, meals and activities. Additionally, the programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These residents generally do not need assistance with activities of daily living (“ADL”). However, in some of our facilities, residents have the option to contract for these services. We have entered into long-term agreements with • Assisted Living Facilities. ALFs are licensed care facilities operators to manage properties under a RIDEA structure. that provide personal care services, support and housing Under the provisions of RIDEA, a REIT may lease a for those who need help with ADL, such as bathing, “qualified healthcare property” on an arm’s length basis eating, dressing and medication management, yet to a taxable REIT subsidiary (“TRS”), if the property is require limited medical care. These facilities are often managed on behalf of such subsidiary by a person who in apartment-like buildings with private residences qualifies as an “eligible independent contractor.” RIDEA ranging from single rooms to large apartments. Certain structures allow us to own the risks and rewards of the ALFs may have a dedicated portion of a facility that operations of healthcare facilities (as compared to leasing offers higher levels of personal assistance for residents the property for contractual triple-net rents) in a tax requiring memory care as a result of Alzheimer’s efficient manner. We view RIDEA as a structure primarily disease or other forms of dementia. Levels of personal to be used on properties that present attractive valuation assistance are based in part on local regulations. entry points and/or growth profiles by: (i) transitioning the • Memory Care Facilities. MCFs address the unique asset to a new operator that can bring scale, operating challenges of our residents with Alzheimer’s disease efficiencies, and/or ancillary services; or (ii) investing or other forms of dementia. Residents may live in capital to reposition the asset. Our operators provide semi-private apartments or private rooms and have comprehensive facility management and accounting structured activities delivered by staff members trained services for a majority of our senior housing RIDEA specifically on how to care for residents with memory properties, for which we pay annual management fees impairment. These facilities offer programs that provide pursuant to the aforementioned agreements. Most of the comfort and care in a secure environment. management agreements have terms ranging from 10 to • Continuing Care Retirement Communities. CCRCs 15 years, with three to four 5-year renewals. The base offer several levels of service, including independent management fees are 4.5% to 5.0% of gross revenues living, assisted living and nursing home care. CCRCs (as defined) generated by the RIDEA facilities. In addition, are different from other housing and care options there are incentive management fees payable to our for seniors because they usually provide written operators if operating results of the RIDEA properties agreements or long-term contracts between residents exceed pre-established EBITDAR (defined as earnings and the communities (frequently lasting the term of the before interest, taxes, depreciation and amortization, and resident’s lifetime), which offer a continuum of housing, rent) thresholds. services and healthcare on one campus or site. CCRCs are appealing as they allow residents to “age in place.” CCRCs typically require the individual to be in relatively good health and independent upon entry. The following table provides information about our senior housing triple-net tenant concentration for the year ended December 31, 2017: Tenant Brookdale Senior Living, Inc. (“Brookdale”)(1) Percentage of Segment Revenues Percentage of Total Revenues 47% 8% (1) Excludes facilities operated by Brookdale in our SHOP segment, as discussed below. Our concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the transaction with Brookdale (see Note 3 in the Consolidated Financial Statements for additional information). PART I While we emphasize healthcare real estate ownership, we • our track record and reputation for executing may also provide real estate secured financing to, or invest acquisitions responsively and efficiently, which provides in equity or debt securities of, healthcare operators or confidence to domestic and foreign institutions and other entities engaged in healthcare real estate ownership. private investors who seek to sell healthcare real estate We may also acquire all or substantially all of the securities in our market areas; or assets of other REITs, operating companies or similar • our relationships with nationally recognized financial entities where such investments would be consistent with institutions that provide capital to the healthcare and our investment strategies. We may co-invest alongside real estate industries; and institutional or development investors through partnerships • our control of sites (including assets under contract with or limited liability companies. radius restrictions). We monitor, but do not limit, our investments based on the percentage of our total assets that may be invested in any one property type, investment vehicle or geographic location, the number of properties that may be leased to a single tenant or operator, or loans that may be made to a single borrower. In allocating capital, we target opportunities with the most attractive risk/reward profile for our portfolio as a whole. We may take additional measures to mitigate risk, including diversifying our investments (by sector, geography, tenant or operator), Financing Strategies Our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains); therefore, we don’t retain a significant amount of capital. As a result, we regularly access the public equity and debt markets to raise the funds necessary to finance acquisitions and debt investments, develop and redevelop properties, and refinance maturing debt. We may finance acquisitions and other investments through structuring transactions as master leases, requiring tenant the following vehicles: or operator insurance and indemnifications, and obtaining credit enhancements in the form of guarantees, letters of credit or security deposits. We believe we are well-positioned to achieve external growth through acquisitions, financing and development. Other factors that contribute to our competitive position include: • our reputation gained through over 30 years of successful operations and the strength of our existing portfolio of properties; • our relationships with leading healthcare operators and systems, investment banks and other market intermediaries, corporations, private equity firms, non-profits and public institutions seeking to monetize existing assets or develop new facilities; • our relationships with institutional buyers and sellers of high-quality healthcare real estate; • borrowings under our credit facility; issuance or origination of debt, including unsecured notes, term loans and mortgage debt; sale of ownership interests in properties or other investments; or issuance of common or preferred stock or its equivalent. • • • We maintain a disciplined balance sheet by actively managing our debt to equity levels and maintaining multiple sources of liquidity. Our debt obligations are primarily long- term fixed rate with staggered maturities. We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize our revolving line of credit facility or arrange for other short-term borrowings from banks or other sources. We arrange for longer-term financing by offering debt and equity securities, placing mortgage debt and obtaining capital from institutional lenders and joint venture partners. The following table summarizes our revenues by segment (dollars in thousands): Segments Segment Senior housing triple-net SHOP Life science Medical office Other non-reportable segments Total revenues Year Ended December 31, 2017 % 2016 % 2015 $ 313,547 17 $ 423,118 20 $ 428,269 525,473 358,816 477,459 173,083 29 19 26 9 686,822 358,537 446,280 214,537 32 17 21 10 518,264 342,984 415,351 235,621 % 22 27 18 21 12 $1,848,378 100 $2,129,294 100 $1,940,489 100 Senior housing (triple-net and SHOP). Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures, which are permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”), and include independent living facilities (“ILFs”), assisted living facilities (“ALFs”), and memory care facilities (“MCFs”), and continuing care retirement communities (“CCRCs”) which cater to different segments of the elderly population based upon their personal needs. Services provided by our tenants or operators in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicare and Medicaid. We have entered into long-term agreements with operators to manage properties under a RIDEA structure. Under the provisions of RIDEA, a REIT may lease a “qualified healthcare property” on an arm’s length basis to a taxable REIT subsidiary (“TRS”), if the property is managed on behalf of such subsidiary by a person who qualifies as an “eligible independent contractor.” RIDEA structures allow us to own the risks and rewards of the operations of healthcare facilities (as compared to leasing the property for contractual triple-net rents) in a tax efficient manner. We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points and/or growth profiles by: (i) transitioning the asset to a new operator that can bring scale, operating efficiencies, and/or ancillary services; or (ii) investing capital to reposition the asset. Our operators provide comprehensive facility management and accounting services for a majority of our senior housing RIDEA properties, for which we pay annual management fees pursuant to the aforementioned agreements. Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewals. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to our operators if operating results of the RIDEA properties exceed pre-established EBITDAR (defined as earnings before interest, taxes, depreciation and amortization, and rent) thresholds. PART I Our senior housing property types under both triple-net leases and RIDEA structures are further described below: • Independent Living Facilities. ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded socially by their peers with services such as housekeeping, meals and activities. Additionally, the programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These residents generally do not need assistance with activities of daily living (“ADL”). However, in some of our facilities, residents have the option to contract for these services. • Assisted Living Facilities. ALFs are licensed care facilities that provide personal care services, support and housing for those who need help with ADL, such as bathing, eating, dressing and medication management, yet require limited medical care. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may have a dedicated portion of a facility that offers higher levels of personal assistance for residents requiring memory care as a result of Alzheimer’s disease or other forms of dementia. Levels of personal assistance are based in part on local regulations. • Memory Care Facilities. MCFs address the unique challenges of our residents with Alzheimer’s disease or other forms of dementia. Residents may live in semi-private apartments or private rooms and have structured activities delivered by staff members trained specifically on how to care for residents with memory impairment. These facilities offer programs that provide comfort and care in a secure environment. • Continuing Care Retirement Communities. CCRCs offer several levels of service, including independent living, assisted living and nursing home care. CCRCs are different from other housing and care options for seniors because they usually provide written agreements or long-term contracts between residents and the communities (frequently lasting the term of the resident’s lifetime), which offer a continuum of housing, services and healthcare on one campus or site. CCRCs are appealing as they allow residents to “age in place.” CCRCs typically require the individual to be in relatively good health and independent upon entry. The following table provides information about our senior housing triple-net tenant concentration for the year ended December 31, 2017: Tenant Brookdale Senior Living, Inc. (“Brookdale”)(1) Percentage of Segment Revenues Percentage of Total Revenues 47% 8% (1) Excludes facilities operated by Brookdale in our SHOP segment, as discussed below. Our concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the transaction with Brookdale (see Note 3 in the Consolidated Financial Statements for additional information). 6 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 7 PART I PART I As of December 31, 2017, Brookdale operated, in our SHOP segment, approximately 13% of our real estate investments based on total assets. Our concentration with respect to Brookdale as an operator in our SHOP segment is expected to decrease with the completion of the transaction with Brookdale (see Note 3 in the Consolidated Financial Statements for additional information) and the sale of our remaining 40% ownership interest in RIDEA II (see Note 5 in the Consolidated Financial Statements for additional information). Because operators manage our facilities in exchange for the receipt of a management fee, we are not directly exposed to the credit risk of the operators in the same manner or to the same extent as our triple-net tenants. However, adverse developments in their business and affairs or financial condition could impair their ability to efficiently and effectively manage our facilities. Life science. These properties contain laboratory and office space primarily for biotechnology, medical device and pharmaceutical companies, scientific research institutions, government agencies and other organizations involved in the life science industry. While these properties have characteristics similar to commercial office buildings, they generally contain more advanced electrical, mechanical, and heating, ventilating and air conditioning (“HVAC”) systems. The facilities generally have specialty equipment including emergency generators, fume hoods, lab bench tops and related amenities. In many instances, life science tenants make significant investments to improve their leased space, in addition to landlord improvements, to accommodate biology, chemistry or medical device research initiatives. Life science properties are primarily configured in business park or campus settings and include multiple buildings. The business park and campus settings allow us the opportunity to provide flexible, contiguous/adjacent expansion to accommodate the growth of existing tenants. Our properties are located in well-established geographical markets known for scientific research and drug discovery, including San Francisco (63%) and San Diego (25%), California, Boston, Massachusetts, and Durham, North Carolina (based on square feet). At December 31, 2017, 93% of our life science properties were triple-net leased (based on leased square feet). The following table provides information about our life science tenant concentration for the year ended December 31, 2017: Tenants Amgen, Inc. Google LLC Percentage of Segment Revenues Percentage of Total Revenues 15% 10% 3% 2% Medical office. Medical office buildings (“MOBs”) typically contain physicians’ offices and examination rooms, and may also include pharmacies, hospital ancillary service space and outpatient services such as diagnostic centers, rehabilitation clinics and day-surgery operating rooms. While these facilities are similar to commercial office buildings, they require additional plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, and special equipment such as x-ray machines. In addition, MOBs are often built to accommodate higher structural loads for certain equipment and may contain vaults or other specialized construction. Our MOBs are typically multi-tenant properties leased to healthcare providers (hospitals and physician practices), with approximately 81% of our MOBs, based on square feet, located on hospital campuses and 94% affiliated with hospital systems. Occasionally, we invest in MOBs located on hospital campuses, which may be subject to ground leases. At December 31, 2017, approximately 54% of our medical office buildings were net leased (based on leased square feet) with the remaining leased under gross or modified gross leases. The following table provides information about our medical office tenant concentration for the year ended December 31, 2017: Tenant Hospital Corporation of America (“HCA”)(1) Percentage of Segment Revenues Percentage of Total Revenues 17% 6% (1) Percentage of total revenues from HCA includes revenues earned from both our medical office and other non-reportable segments. Other non-reportable segments. At December 31, 2017, we had interests in 14 hospitals, 61 care homes in the United Kingdom (“U.K.”), one post-acute/skilled nursing facilities (“SNF”) and debt investments. Additionally, we had interests in 72 senior housing facilities, four life science facilities, three MOBs and three SNFs owned and operated by our unconsolidated joint ventures. Services provided by our tenants and operators in hospitals are paid for by private sources, third-party payors (e.g., insurance and HMOs) or through Medicare and Medicaid programs. Our hospital property types include acute care, long-term acute care, and specialty and rehabilitation hospitals. Care homes offer personal care services, such as lodging, meal services, housekeeping and laundry services, medication management and assistance with ADL. Care homes are custodial nursing care for people following a hospital stay registered to provide different levels of services, ranging or not requiring the more extensive and complex treatment from personal care to nursing care. Some homes can be available at hospitals. All of our care homes in the U.K., further registered for a specific care need, such as dementia hospitals and SNFs are triple-net leased. or terminal illness. SNFs offer restorative, rehabilitative and Competition Investing in real estate serving the healthcare industry is Income from our investments depends on our tenants’ highly competitive. We face competition from other REITs, and operators’ ability to compete with other companies investment companies, pension funds, private equity on multiple levels, including: the quality of care provided, investors, sovereign funds, healthcare operators, lenders, reputation, success of product or drug development, the developers and other institutional investors, some of whom physical appearance of a facility, price and range of services may have greater flexibility (e.g., non-REIT competitors), offered, alternatives for healthcare delivery, the supply of resources and lower costs of capital than we do. Increased competing properties, physicians, staff, referral sources, competition makes it more challenging for us to identify location, the size and demographics of the population in and successfully capitalize on opportunities that meet our surrounding areas, and the financial condition of our tenants objectives. Our ability to compete may also be impacted and operators. For a discussion of the risks associated with by global, national and local economic trends, availability competitive conditions affecting our business, see “Item 1A, of investment alternatives, availability and cost of capital, Risk Factors” in this report. construction and renovation costs, existing laws and regulations, new legislation and population trends. Government Regulation, Licensing and Enforcement Overview Fraud and Abuse Enforcement Our healthcare facility operators (which include our TRSs There are various extremely complex U.S. federal and when we use a RIDEA structure) and tenants are typically state laws and regulations (and in relation to our facilities subject to extensive and complex federal, state and located in the U.K., national laws and regulations of England, local healthcare laws and regulations relating to quality Scotland, Northern Ireland, and Wales) governing healthcare of care, licensure and certificate of need, government providers’ relationships and arrangements and prohibiting reimbursement, fraud and abuse practices, and similar fraudulent and abusive practices by such providers. These laws governing the operation of healthcare facilities, laws include: (i) U.S. federal and state false claims acts and and we expect that the healthcare industry, in general, U.K. anti-fraud legislation and regulation, which, among will continue to face increased regulation and pressure other things, prohibit providers from filing false claims in the areas of fraud, waste and abuse, cost control, or making false statements to receive payment from healthcare management and provision of services, among Medicare, Medicaid or other U.S. federal or state or U.K. others. These regulations are wide ranging and can healthcare programs; (ii) U.S. federal and state anti-kickback subject our tenants and operators to civil, criminal and and fee-splitting statutes, including the Medicare and administrative sanctions. Affected tenants and operators Medicaid anti-kickback statute, which prohibit or restrict may find it increasingly difficult to comply with this the payment or receipt of remuneration to induce referrals complex and evolving regulatory environment because or recommendations of healthcare items or services, and of a relative lack of guidance in many areas as certain of U.K. legislation and regulations on financial inducements our healthcare properties are subject to oversight from and vested interests; (iii) U.S. federal and state physician several government agencies, and the laws may vary from self-referral laws (commonly referred to as the “Stark one jurisdiction to another. Changes in laws, regulations, Law”), which generally prohibit referrals by physicians to reimbursement enforcement activity and regulatory non- entities with which the physician or an immediate family compliance by our tenants and operators can all have a member has a financial relationship; and (iv) the federal significant effect on their operations and financial condition, Civil Monetary Penalties Law, which prohibits, among other which in turn may adversely impact us, as detailed below and things, the knowing presentation of a false or fraudulent set forth under “Item 1A, Risk Factors” in this report. claim for certain healthcare services. Violations of U.S. and The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us. U.K. healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and 8 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 9 PART I As of December 31, 2017, Brookdale operated, in our SHOP characteristics similar to commercial office buildings, they segment, approximately 13% of our real estate investments generally contain more advanced electrical, mechanical, and based on total assets. Our concentration with respect to heating, ventilating and air conditioning (“HVAC”) systems. Brookdale as an operator in our SHOP segment is expected The facilities generally have specialty equipment including to decrease with the completion of the transaction with emergency generators, fume hoods, lab bench tops and Brookdale (see Note 3 in the Consolidated Financial related amenities. In many instances, life science tenants Statements for additional information) and the sale of our make significant investments to improve their leased space, remaining 40% ownership interest in RIDEA II (see Note 5 in addition to landlord improvements, to accommodate in the Consolidated Financial Statements for additional biology, chemistry or medical device research initiatives. information). Because operators manage our facilities in exchange for the receipt of a management fee, we are not directly exposed to the credit risk of the operators in the same manner or to the same extent as our triple-net tenants. However, adverse developments in their business and affairs or financial condition could impair their ability to efficiently and effectively manage our facilities. Life science properties are primarily configured in business park or campus settings and include multiple buildings. The business park and campus settings allow us the opportunity to provide flexible, contiguous/adjacent expansion to accommodate the growth of existing tenants. Our properties are located in well-established geographical markets known for scientific research and drug discovery, Life science. These properties contain laboratory and office including San Francisco (63%) and San Diego (25%), space primarily for biotechnology, medical device and California, Boston, Massachusetts, and Durham, North pharmaceutical companies, scientific research institutions, Carolina (based on square feet). At December 31, 2017, 93% government agencies and other organizations involved of our life science properties were triple-net leased (based in the life science industry. While these properties have on leased square feet). The following table provides information about our life science tenant concentration for the year ended December 31, 2017: Tenants Amgen, Inc. Google LLC Percentage of Segment Revenues Percentage of Total Revenues 15% 10% 3% 2% Medical office. Medical office buildings (“MOBs”) typically and may contain vaults or other specialized construction. contain physicians’ offices and examination rooms, and Our MOBs are typically multi-tenant properties leased to may also include pharmacies, hospital ancillary service healthcare providers (hospitals and physician practices), space and outpatient services such as diagnostic centers, with approximately 81% of our MOBs, based on square rehabilitation clinics and day-surgery operating rooms. feet, located on hospital campuses and 94% affiliated with While these facilities are similar to commercial office hospital systems. Occasionally, we invest in MOBs located buildings, they require additional plumbing, electrical and on hospital campuses, which may be subject to ground mechanical systems to accommodate multiple exam rooms leases. At December 31, 2017, approximately 54% of our that may require sinks in every room, and special equipment medical office buildings were net leased (based on leased such as x-ray machines. In addition, MOBs are often built to square feet) with the remaining leased under gross or accommodate higher structural loads for certain equipment modified gross leases. The following table provides information about our medical office tenant concentration for the year ended December 31, 2017: Tenant Hospital Corporation of America (“HCA”)(1) Percentage of Segment Revenues Percentage of Total Revenues 17% 6% (1) Percentage of total revenues from HCA includes revenues earned from both our medical office and other non-reportable segments. Other non-reportable segments. At December 31, 2017, by our tenants and operators in hospitals are paid for by we had interests in 14 hospitals, 61 care homes in the private sources, third-party payors (e.g., insurance and United Kingdom (“U.K.”), one post-acute/skilled nursing HMOs) or through Medicare and Medicaid programs. Our facilities (“SNF”) and debt investments. Additionally, we hospital property types include acute care, long-term had interests in 72 senior housing facilities, four life science acute care, and specialty and rehabilitation hospitals. Care facilities, three MOBs and three SNFs owned and operated homes offer personal care services, such as lodging, meal by our unconsolidated joint ventures. Services provided services, housekeeping and laundry services, medication management and assistance with ADL. Care homes are registered to provide different levels of services, ranging from personal care to nursing care. Some homes can be further registered for a specific care need, such as dementia or terminal illness. SNFs offer restorative, rehabilitative and Competition Investing in real estate serving the healthcare industry is highly competitive. We face competition from other REITs, investment companies, pension funds, private equity investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater flexibility (e.g., non-REIT competitors), resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted by global, national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends. PART I custodial nursing care for people following a hospital stay or not requiring the more extensive and complex treatment available at hospitals. All of our care homes in the U.K., hospitals and SNFs are triple-net leased. Income from our investments depends on our tenants’ and operators’ ability to compete with other companies on multiple levels, including: the quality of care provided, reputation, success of product or drug development, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. For a discussion of the risks associated with competitive conditions affecting our business, see “Item 1A, Risk Factors” in this report. Government Regulation, Licensing and Enforcement Overview Our healthcare facility operators (which include our TRSs when we use a RIDEA structure) and tenants are typically subject to extensive and complex federal, state and local healthcare laws and regulations relating to quality of care, licensure and certificate of need, government reimbursement, fraud and abuse practices, and similar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide ranging and can subject our tenants and operators to civil, criminal and administrative sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties are subject to oversight from several government agencies, and the laws may vary from one jurisdiction to another. Changes in laws, regulations, reimbursement enforcement activity and regulatory non- compliance by our tenants and operators can all have a significant effect on their operations and financial condition, which in turn may adversely impact us, as detailed below and set forth under “Item 1A, Risk Factors” in this report. The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us. Fraud and Abuse Enforcement There are various extremely complex U.S. federal and state laws and regulations (and in relation to our facilities located in the U.K., national laws and regulations of England, Scotland, Northern Ireland, and Wales) governing healthcare providers’ relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include: (i) U.S. federal and state false claims acts and U.K. anti-fraud legislation and regulation, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other U.S. federal or state or U.K. healthcare programs; (ii) U.S. federal and state anti-kickback and fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit or restrict the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, and U.K. legislation and regulations on financial inducements and vested interests; (iii) U.S. federal and state physician self-referral laws (commonly referred to as the “Stark Law”), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship; and (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services. Violations of U.S. and U.K. healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and 8 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 9 PART I Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and in the U.S. can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our tenants and operators are subject to these laws, and may become the subject of governmental enforcement actions or whistleblower actions if they fail to comply with applicable laws. Additionally, beginning in November 2019, the licensed operators of our U.S. long-term care facilities will be required to have compliance and ethics programs that meet the requirements of federal regulations. We have begun the process of developing and implementing such programs. Laws and Regulations Governing Privacy and Security There are various U.S. federal and state and U.K. privacy laws and regulations, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996 (commonly referred to as “HIPAA”) and the U.K. Data Protection Act 1998, which provide for the privacy and security of personal health information. An increasing focus of the U. S. Federal Trade Commission’s (“FTC’s”) consumer protection regulation is the impact of technological change on protection of consumer privacy. The FTC has taken enforcement action against companies that do not abide by their representations to consumers regarding electronic security and privacy. To the extent we or our affiliated operating entities are a covered entity or business associate under HIPAA and the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), compliance with those requirements would require us to, among other things, conduct a risk analysis, implement a risk management plan, implement policies and procedures, and conduct employee training. In most cases, we are dependent on our tenants and management companies to fulfill our compliance obligations. Because of the far reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information could subject us to civil or criminal liability and adverse publicity, and could harm our business and impair our ability to attract new customers and residents. We may be required to notify individuals, as well as government agencies and the media, if we experience a data breach. Reimbursement Sources of revenue for some of our tenants and operators include, among others, governmental healthcare programs, such as the federal Medicare programs and state Medicaid programs and, in the U.K., the National Health Service (“NHS”) and local authority funding, and non-governmental third-party payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant current and future budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operators. Similarly, in the U.K., the NHS and the local authorities are undertaking efforts to reduce costs, which may result in reduced or slower growth in reimbursement for certain services provided by our U.K. tenants and operators. Additionally, new and evolving payor and provider programs in the U.S., including but not limited to Medicare Advantage, Dual Eligible, Accountable Care Organizations (“ACO”), and Bundled Payments could adversely impact our tenants’ and operators’ liquidity, financial condition or results of operations. Healthcare Licensure and Certificate of Need Certain healthcare facilities in our portfolio (including our facilities located in the U.K.) are subject to extensive national, federal, state and local licensure, certification and inspection laws and regulations. A healthcare facility’s failure to comply with these laws and regulations could result in a revocation, suspension, or non-renewal of the facility’s license, which could adversely affect the facility’s operations and ability to bill for items and services provided at the facility. In addition, various licenses and permits are required to handle controlled substances (including narcotics), operate pharmacies, handle radioactive materials and operate equipment. Many states in the U.S. require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact the ability of some of our tenants and operators to expand or change their businesses. Life Science Facilities While our life science tenants include some well-established companies, other tenants are less established and, in some cases, may not yet have a product approved by the Food and Drug Administration, or other regulatory authorities, for PART I commercial sale. Creating a new pharmaceutical product or expenditures to address ADA concerns. Should barriers to medical device requires substantial investments of time and access by persons with disabilities be discovered at any of capital, in part because of the extensive regulation of the our properties, we may be directly or indirectly responsible healthcare industry; it also entails considerable risk of failure for additional costs that may be required to make facilities in demonstrating that the product is safe and effective and ADA-compliant. Noncompliance with the ADA could in gaining regulatory approval and market acceptance. result in the imposition of fines or an award of damages to Senior Housing Entrance Fee Communities Certain of our senior housing facilities, primarily the CCRCs in our unconsolidated joint ventures, are operated as entrance fee communities. Generally, an entrance fee is an upfront fee or consideration paid by a resident, a portion of which may be refundable, in exchange for some form of long-term benefit, typically consisting of a right to receive certain personal or health care services. Some of the entrance fee communities are subject to significant state regulatory oversight, including, for example, oversight of each facility’s financial condition, establishment and monitoring of reserve requirements and other financial restrictions, the right of residents to cancel their contracts within a specified period of time, the right of residents to receive a refund of their entrance fees, lien rights in favor of the residents, restrictions on change of ownership and similar matters. (the “ADA”) Americans with Disabilities Act private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one, and we continue to assess our properties and make modifications as appropriate in this respect. Environmental Matters A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and any related liability therefore could exceed or impair the value Our properties must comply with the ADA and any similar of the property and/or the assets. In addition, the presence state or local laws to the extent that such properties are of such substances, or the failure to properly dispose of or “public accommodations” as defined in those statutes. The remediate such substances, may adversely affect the value ADA may require removal of barriers to access by persons of such property and the owner’s ability to sell or rent such with disabilities in certain public areas of our properties property or to borrow using such property as collateral where such removal is readily achievable. To date, we which, in turn, could reduce our earnings. For a description have not received any notices of noncompliance with of the risks associated with environmental matters, the ADA that have caused us to incur substantial capital see “Item 1A, Risk Factors” in this report. Insurance We obtain various types of insurance to mitigate the We maintain property insurance for all of our properties, impact of property, business interruption, liability, flood, primary for our SHOP, life science and medical office windstorm, earthquake, environmental and terrorism segments. Tenants under triple-net leases, primarily in related losses. We attempt to obtain appropriate policy our senior housing triple-net segment, are required to terms, conditions, limits and deductibles considering the provide primary property, business interruption and liability relative risk of loss, the cost of such coverage and current insurance. We maintain separate general and professional industry practice. There are, however, certain types of liability insurance for our SHOP facilities. Additionally, extraordinary losses, such as those due to acts of war our corporate general liability insurance program also or other events that may be either uninsurable or not extends coverage for all of our properties beyond the economically insurable. In addition, we have a large number aforementioned. We periodically review whether we or our of properties that are exposed to earthquake, flood and RIDEA operators will bear responsibility for maintaining windstorm occurrences which carry higher deductibles. the required insurance coverage for the applicable SHOP properties, but the costs of such insurance are facility expenses paid from the revenues of those properties, regardless of who maintains the insurance. 10 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 11 PART I Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and in the U.S. can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. Many of our tenants and operators are subject to these laws, and may become the subject of governmental enforcement actions or whistleblower actions if they fail to comply with applicable laws. Additionally, beginning in November 2019, the licensed operators of our U.S. long-term care facilities will be required to have compliance and ethics programs that meet the requirements of federal regulations. We have begun the process of developing and implementing such programs. Laws and Regulations Governing Privacy and Security Reimbursement Sources of revenue for some of our tenants and operators include, among others, governmental healthcare programs, such as the federal Medicare programs and state Medicaid programs and, in the U.K., the National Health Service (“NHS”) and local authority funding, and non-governmental third-party payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant current and future budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operators. Similarly, in the U.K., the NHS and the local authorities are undertaking efforts to reduce costs, which may result in reduced or slower growth in reimbursement for certain services provided by our U.K. tenants and operators. Additionally, new and evolving payor and provider There are various U.S. federal and state and U.K. privacy programs in the U.S., including but not limited to Medicare laws and regulations, including the privacy and security Advantage, Dual Eligible, Accountable Care Organizations rules contained in the Health Insurance Portability and (“ACO”), and Bundled Payments could adversely impact Accountability Act of 1996 (commonly referred to as our tenants’ and operators’ liquidity, financial condition or “HIPAA”) and the U.K. Data Protection Act 1998, which results of operations. provide for the privacy and security of personal health information. An increasing focus of the U. S. Federal Trade Commission’s (“FTC’s”) consumer protection regulation is the impact of technological change on protection of consumer privacy. The FTC has taken enforcement action against companies that do not abide by their representations to consumers regarding electronic security and privacy. To the extent we or our affiliated operating entities are a covered entity or business associate under HIPAA and the Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), compliance with those requirements would require us to, among other things, conduct a risk analysis, implement a risk management plan, implement policies and procedures, and conduct employee training. In most cases, we are dependent on our tenants and management companies to fulfill our compliance obligations. Because of the far reaching nature of these laws, there can be no assurance that we would not be required to alter one or more of our systems and data security procedures to be in compliance with these laws. Our failure to protect health information could subject us to civil or criminal liability and adverse publicity, and could harm our business and impair our ability to attract new customers and residents. We may be required to notify individuals, as well as government agencies and the media, if we experience a data breach. Healthcare Licensure and Certificate of Need Certain healthcare facilities in our portfolio (including our facilities located in the U.K.) are subject to extensive national, federal, state and local licensure, certification and inspection laws and regulations. A healthcare facility’s failure to comply with these laws and regulations could result in a revocation, suspension, or non-renewal of the facility’s license, which could adversely affect the facility’s operations and ability to bill for items and services provided at the facility. In addition, various licenses and permits are required to handle controlled substances (including narcotics), operate pharmacies, handle radioactive materials and operate equipment. Many states in the U.S. require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion or closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact the ability of some of our tenants and operators to expand or change their businesses. Life Science Facilities While our life science tenants include some well-established companies, other tenants are less established and, in some cases, may not yet have a product approved by the Food and Drug Administration, or other regulatory authorities, for commercial sale. Creating a new pharmaceutical product or medical device requires substantial investments of time and capital, in part because of the extensive regulation of the healthcare industry; it also entails considerable risk of failure in demonstrating that the product is safe and effective and in gaining regulatory approval and market acceptance. Senior Housing Entrance Fee Communities Certain of our senior housing facilities, primarily the CCRCs in our unconsolidated joint ventures, are operated as entrance fee communities. Generally, an entrance fee is an upfront fee or consideration paid by a resident, a portion of which may be refundable, in exchange for some form of long-term benefit, typically consisting of a right to receive certain personal or health care services. Some of the entrance fee communities are subject to significant state regulatory oversight, including, for example, oversight of each facility’s financial condition, establishment and monitoring of reserve requirements and other financial restrictions, the right of residents to cancel their contracts within a specified period of time, the right of residents to receive a refund of their entrance fees, lien rights in favor of the residents, restrictions on change of ownership and similar matters. Americans with Disabilities Act (the “ADA”) Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are “public accommodations” as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with the ADA that have caused us to incur substantial capital Insurance We obtain various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental and terrorism related losses. We attempt to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, we have a large number of properties that are exposed to earthquake, flood and windstorm occurrences which carry higher deductibles. PART I expenditures to address ADA concerns. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one, and we continue to assess our properties and make modifications as appropriate in this respect. Environmental Matters A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and any related liability therefore could exceed or impair the value of the property and/or the assets. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the value of such property and the owner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our earnings. For a description of the risks associated with environmental matters, see “Item 1A, Risk Factors” in this report. We maintain property insurance for all of our properties, primary for our SHOP, life science and medical office segments. Tenants under triple-net leases, primarily in our senior housing triple-net segment, are required to provide primary property, business interruption and liability insurance. We maintain separate general and professional liability insurance for our SHOP facilities. Additionally, our corporate general liability insurance program also extends coverage for all of our properties beyond the aforementioned. We periodically review whether we or our RIDEA operators will bear responsibility for maintaining the required insurance coverage for the applicable SHOP properties, but the costs of such insurance are facility expenses paid from the revenues of those properties, regardless of who maintains the insurance. 10 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 11 PART I PART I See Note 16 to the Consolidated Financial Statements for further information relating to casualty-related losses and recoveries incurred as a result of the hurricanes in the third quarter of 2017. We also maintain directors and officers liability insurance which provides protection for claims against our directors and officers arising from their responsibilities as directors and officers. Such insurance also extends to us in certain situations. Sustainability We believe that sustainability initiatives are a vital part of corporate responsibility, which supports our primary goal of increasing stockholder value through profitable growth. We continue to advance our commitment to sustainability, with a focus on achieving goals in each of the Environmental, Social and Governance (“ESG”) dimensions of sustainability. Our environmental management programs strive to capture cost efficiencies that ultimately benefit our investors, tenants, operators, employees and other stakeholders, while providing a positive impact on the communities in which we operate. Our social responsibility team leads our local philanthropic and volunteer activities, and our transparent corporate governance initiatives incorporate sustainability as a critical component to achieving our business objectives and properly managing risks. Available Information Our website address is www.hcpi.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Our 2017 sustainability achievements include being named an ENERGY STAR Partner of the Year and constituency in the FTSE4Good Index series for the sixth consecutive year. We also earned the Green Star designation from the Global Real Estate Sustainability Benchmark, or GRESB, and were named to the Leadership Band by CDP for outstanding ESG performance. We achieved constituency in the North America Dow Jones Sustainability Index (“DJSI”) for the fifth consecutive year, as well as the World DJSI for the third time. Additionally, we were included in The Sustainability Yearbook 2018, a listing of the world’s most sustainable companies. The list is compiled according to the results of RobecoSAM’s annual Corporate Sustainability Assessment, which also determines constituency for the Dow Jones Sustainability Index (“DJSI”) series. For additional information regarding our ESG sustainability initiatives and our approach to climate change, please visit our website at www.hcpi.com/sustainability. Act”) are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the U.S. Securities and Exchange Commission (“SEC”). ITEM 1A. RISK FACTORS The section below discusses the most significant risk factors that may materially adversely affect our business, results of operations and financial condition. As set forth below, we believe that the risks we face generally fall into the following categories: • • • • risks related to our business and operations; risks related to our capital structure and market conditions; risks related to other events; and risks related to tax, including REIT-related risks. Risks Related to Our Business and Operations We depend on one tenant and operator, Brookdale, for a significant percentage of our revenues and net operating income. Continuing adverse developments, including operational challenges, in Brookdale’s business and affairs or financial condition would likely have a materially adverse effect on us. We manage our facilities utilizing RIDEA and triple-net lease structures. As of December 31, 2017, Brookdale leased or managed 78 senior housing facilities that we own and 62 SHOP facilities owned by our unconsolidated joint venture pursuant to long-term leases and management agreements. These properties represent a substantial portion of our portfolio, revenues and operating income. Properties managed by Brookdale in our SHOP segment events, declining operational and financial performance of as of December 31, 2017, accounted for 13% of our total our properties, acceleration of Brookdale’s indebtedness, assets. Although we have various rights as the property impairment of its continued access to capital, the owner under our management agreements, we rely on enforcement of default remedies by its counterparties or Brookdale’s personnel, expertise, technical resources and the commencement of insolvency proceedings by or against information systems, proprietary information, good faith it under the U.S. Bankruptcy Code. and judgment to manage our related senior living operations efficiently and effectively. We also rely on Brookdale to set appropriate resident fees, manage occupancy, provide accurate and complete property-level financial results for these senior housing communities in a timely manner and otherwise operate them in compliance with the terms of our management agreements and all applicable laws and regulations. In addition, Brookdale depends on private sources for its revenues and the ability of its patients and residents to pay its fees. For example, costs associated with independent and assisted living services are not generally reimbursable under governmental reimbursement programs such as Medicare and Medicaid. Accordingly, Brookdale depends on attracting seniors with appropriate levels of income and assets, which may be affected by many factors including Properties leased by Brookdale accounted for 8% of our prevailing economic and market trends, consumer revenues for the year ended December 31, 2017. In its confidence and demographics. Consequently, if Brookdale capacity as a triple-net tenant, we depend on Brookdale fails to effectively conduct its operations, or to maintain to pay all insurance, tax, utilities, maintenance and repair and improve our properties, it would adversely affect its expenses in connection with the leased properties. business reputation and its ability to attract and retain Brookdale may not have sufficient assets, income and patients and residents in our properties, which would have a access to financing to enable it to satisfy its obligations to materially adverse effect on its and our business, results of us, and any failure, inability or unwillingness by Brookdale to operations and financial condition. do so would have a material adverse effect on us. In addition, we depend on Brookdale’s adequate maintenance and repair of the properties to remain competitive and attract and retain patients and residents. Adverse developments in Brookdale’s business and related declining rent coverage ratios have increased its credit risk. If these adverse developments result in prolonged inadequate property maintenance or improvements, or impair Brookdale’s access to capital necessary for maintenance or improvements, it would likely lead to a significant reduction in occupancy rates and market rents and have a materially adverse effect on us. Brookdale also relies on reimbursements from governmental programs for a portion of its revenues. Changes in reimbursement policies and other governmental regulation, such as potential changes to, or repeal of, the Patient Protection and Affordable Care Act, along with the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”), that may result from actions by Congress or executive orders, may result in reductions in Brookdale’s revenues, operations and cash flows and affect its ability to meet its obligations to us. For a further discussion of the legislation and regulation that are applicable to us and our tenants, operators and Brookdale has experienced significant challenges in recent borrowers, see “The requirements of, or changes to, years, including poor operational performance, ongoing governmental reimbursement programs such as Medicare class action litigation, stockholder activism and portfolio or Medicaid, may adversely affect our tenants’, operators’ restructuring execution, among others. Brookdale has and borrowers’ ability to meet their financial and other been adversely affected by increased competition that has contractual obligations to us.” While Brookdale generally negatively impacted occupancy rates and, in certain cases, has also agreed to indemnify us for various claims, litigation Brookdale has offered additional discounts and incentives and liabilities arising in connection with its business, it to residents. Brookdale, as well as our other operators, have may have insufficient assets, income, access to financing also experienced labor expense pressure and increased and/or insurance coverage to enable them to satisfy its labor turnover. Additionally, Brookdale has announced indemnification obligations. that it is considering corporate strategic alternatives. Brookdale’s operational, legal and financial challenges and its pursuit of strategic alternatives could significantly divert management’s attention, increase employee turnover, and impair its ability to manage our properties or its operations efficiently and effectively. These challenges and any adverse developments in Brookdale’s business, affairs and financial results could result in, among other adverse We are currently in the process of reducing our exposure to Brookdale through asset sales and transitions to other operators (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—2017 Transaction Overview—Master Transactions and Cooperation Agreement with Brookdale” for more information). However, we may not be able to sell or 12 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 13 See Note 16 to the Consolidated Financial Statements for We also maintain directors and officers liability insurance further information relating to casualty-related losses and which provides protection for claims against our directors recoveries incurred as a result of the hurricanes in the third and officers arising from their responsibilities as directors and officers. Such insurance also extends to us in certain situations. PART I quarter of 2017. Sustainability We believe that sustainability initiatives are a vital part Our 2017 sustainability achievements include being named of corporate responsibility, which supports our primary an ENERGY STAR Partner of the Year and constituency in goal of increasing stockholder value through profitable the FTSE4Good Index series for the sixth consecutive year. growth. We continue to advance our commitment to We also earned the Green Star designation from the Global sustainability, with a focus on achieving goals in each of the Real Estate Sustainability Benchmark, or GRESB, and were Environmental, Social and Governance (“ESG”) dimensions named to the Leadership Band by CDP for outstanding of sustainability. Our environmental management programs strive to capture cost efficiencies that ultimately benefit our investors, tenants, operators, employees and other stakeholders, while providing a positive impact on the communities in which we operate. Our social responsibility team leads our local philanthropic and volunteer activities, and our transparent corporate governance initiatives incorporate sustainability as a critical component to achieving our business objectives and properly managing risks. ESG performance. We achieved constituency in the North America Dow Jones Sustainability Index (“DJSI”) for the fifth consecutive year, as well as the World DJSI for the third time. Additionally, we were included in The Sustainability Yearbook 2018, a listing of the world’s most sustainable companies. The list is compiled according to the results of RobecoSAM’s annual Corporate Sustainability Assessment, which also determines constituency for the Dow Jones Sustainability Index (“DJSI”) series. For additional information regarding our ESG sustainability initiatives and our approach to climate change, please visit our website at www.hcpi.com/sustainability. Available Information Our website address is www.hcpi.com. Our Annual Reports Act”) are available on our website, free of charge, as soon on Form 10-K, Quarterly Reports on Form 10-Q, Current as reasonably practicable after we electronically file such Reports on Form 8-K and any amendments to those materials with, or furnish them to, the U.S. Securities and reports filed or furnished pursuant to Section 13(a) or 15(d) Exchange Commission (“SEC”). of the Securities Exchange Act of 1934 (the “Exchange ITEM 1A. RISK FACTORS The section below discusses the most significant risk factors that may materially adversely affect our business, results of operations and financial condition. As set forth below, we believe that the risks we face generally fall into the following categories: • • • • risks related to our business and operations; risks related to our capital structure and market conditions; risks related to other events; and risks related to tax, including REIT-related risks. Risks Related to Our Business and Operations We depend on one tenant and operator, Brookdale, for a We manage our facilities utilizing RIDEA and triple-net significant percentage of our revenues and net operating lease structures. As of December 31, 2017, Brookdale income. Continuing adverse developments, including leased or managed 78 senior housing facilities that we own operational challenges, in Brookdale’s business and affairs and 62 SHOP facilities owned by our unconsolidated joint or financial condition would likely have a materially adverse venture pursuant to long-term leases and management effect on us. agreements. These properties represent a substantial portion of our portfolio, revenues and operating income. Properties managed by Brookdale in our SHOP segment as of December 31, 2017, accounted for 13% of our total assets. Although we have various rights as the property owner under our management agreements, we rely on Brookdale’s personnel, expertise, technical resources and information systems, proprietary information, good faith and judgment to manage our related senior living operations efficiently and effectively. We also rely on Brookdale to set appropriate resident fees, manage occupancy, provide accurate and complete property-level financial results for these senior housing communities in a timely manner and otherwise operate them in compliance with the terms of our management agreements and all applicable laws and regulations. Properties leased by Brookdale accounted for 8% of our revenues for the year ended December 31, 2017. In its capacity as a triple-net tenant, we depend on Brookdale to pay all insurance, tax, utilities, maintenance and repair expenses in connection with the leased properties. Brookdale may not have sufficient assets, income and access to financing to enable it to satisfy its obligations to us, and any failure, inability or unwillingness by Brookdale to do so would have a material adverse effect on us. In addition, we depend on Brookdale’s adequate maintenance and repair of the properties to remain competitive and attract and retain patients and residents. Adverse developments in Brookdale’s business and related declining rent coverage ratios have increased its credit risk. If these adverse developments result in prolonged inadequate property maintenance or improvements, or impair Brookdale’s access to capital necessary for maintenance or improvements, it would likely lead to a significant reduction in occupancy rates and market rents and have a materially adverse effect on us. Brookdale has experienced significant challenges in recent years, including poor operational performance, ongoing class action litigation, stockholder activism and portfolio restructuring execution, among others. Brookdale has been adversely affected by increased competition that has negatively impacted occupancy rates and, in certain cases, Brookdale has offered additional discounts and incentives to residents. Brookdale, as well as our other operators, have also experienced labor expense pressure and increased labor turnover. Additionally, Brookdale has announced that it is considering corporate strategic alternatives. Brookdale’s operational, legal and financial challenges and its pursuit of strategic alternatives could significantly divert management’s attention, increase employee turnover, and impair its ability to manage our properties or its operations efficiently and effectively. These challenges and any adverse developments in Brookdale’s business, affairs and financial results could result in, among other adverse PART I events, declining operational and financial performance of our properties, acceleration of Brookdale’s indebtedness, impairment of its continued access to capital, the enforcement of default remedies by its counterparties or the commencement of insolvency proceedings by or against it under the U.S. Bankruptcy Code. In addition, Brookdale depends on private sources for its revenues and the ability of its patients and residents to pay its fees. For example, costs associated with independent and assisted living services are not generally reimbursable under governmental reimbursement programs such as Medicare and Medicaid. Accordingly, Brookdale depends on attracting seniors with appropriate levels of income and assets, which may be affected by many factors including prevailing economic and market trends, consumer confidence and demographics. Consequently, if Brookdale fails to effectively conduct its operations, or to maintain and improve our properties, it would adversely affect its business reputation and its ability to attract and retain patients and residents in our properties, which would have a materially adverse effect on its and our business, results of operations and financial condition. Brookdale also relies on reimbursements from governmental programs for a portion of its revenues. Changes in reimbursement policies and other governmental regulation, such as potential changes to, or repeal of, the Patient Protection and Affordable Care Act, along with the Health Care and Education Reconciliation Act of 2010 (the “Affordable Care Act”), that may result from actions by Congress or executive orders, may result in reductions in Brookdale’s revenues, operations and cash flows and affect its ability to meet its obligations to us. For a further discussion of the legislation and regulation that are applicable to us and our tenants, operators and borrowers, see “The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” While Brookdale generally has also agreed to indemnify us for various claims, litigation and liabilities arising in connection with its business, it may have insufficient assets, income, access to financing and/or insurance coverage to enable them to satisfy its indemnification obligations. We are currently in the process of reducing our exposure to Brookdale through asset sales and transitions to other operators (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—2017 Transaction Overview—Master Transactions and Cooperation Agreement with Brookdale” for more information). However, we may not be able to sell or 12 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 13 PART I transition assets managed or leased by Brookdale according to our plans or within our anticipated timeframe. In addition, the sale and transition process may divert Brookdale’s attention from the performance of the properties we are selling or transitioning, or from our properties Brookdale will continue to manage or lease from us following the contemplated transactions. This could result in further operational challenges and/or declining financial performance of our properties during or after the transition period. The inability, unwillingness or other failure of Brookdale to pursue the optimal performance of our properties or to meet its obligations to us under its leases and management agreements could materially reduce our cash flow, net operating income and results of operations and have other materially adverse effects on our business, results of operations and financial condition. The bankruptcy, insolvency or financial deterioration of one or more of our major tenants, operators or borrowers may materially adversely affect our business, results of operations and financial condition. We lease our properties directly to operators in most cases, and in certain other cases, we lease to third party tenants who enter into long-term management agreements with operators to manage the properties. We are also a direct or indirect lender to various tenants and operators and separately provide loans to certain third parties. We have very limited control over the success or failure of our tenants’, operators’ and borrowers’ businesses. Any of our tenants or operators may experience a downturn in their business that materially weakens their financial condition. As a result, they may fail to make payments when due. For example, one of our borrowers, Tandem Health Care (“Tandem”), has failed to make its required interest payments to us since November 10, 2017, which resulted in an event of default and adversely affected our revenues. Although we generally have arrangements and other agreements that give us the right under specified circumstances to terminate a lease, evict a tenant or operator, or demand immediate repayment of outstanding loan amounts or other obligations to us, we may determine not to do so if we believe that enforcement of our rights would be more detrimental to our business than seeking alternative approaches. A downturn in any of our tenants’, operators’ or borrowers’ businesses could ultimately lead to bankruptcy if it is unable to timely resolve the underlying causes, which may be largely outside of its control. Bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization that may render certain of these remedies unenforceable, or, at the least, delay our ability to pursue such remedies and realize any recoveries in connection therewith. For example, we cannot evict a tenant or operator solely because of its bankruptcy filing. A debtor has the right to assume, or to assume and assign to a third party, or to reject its executory contracts and unexpired leases in a bankruptcy proceeding. If a debtor were to reject its leases with us, obligations under such rejected leases would cease. The claim against the rejecting debtor would be an unsecured claim, which would be limited by the statutory cap set forth in the U.S. Bankruptcy Code. This statutory cap may be substantially less than the remaining rent actually owed under the lease. In addition, a debtor may also assert in bankruptcy proceedings that leases should be re-characterized as financing agreements, which could result in our being deemed a lender instead of a landlord. A lender’s rights and remedies, as compared to a landlord’s, generally are materially less favorable, and our rights as a lender may be subordinated to other creditors’ rights. Furthermore, the automatic stay provisions of the U.S. Bankruptcy Code would preclude us from enforcing our remedies unless we first obtain relief from the court having jurisdiction over the bankruptcy case. This would effectively limit or delay our ability to collect unpaid rent or interest payments, and we may ultimately not receive any payment at all. In addition, we would likely be required to fund certain expenses and obligations (e.g., real estate taxes, insurance, debt costs and maintenance expenses) to preserve the value of our properties, avoid the imposition of liens on our properties or transition our properties to a new tenant, operator or manager. Additionally, we lease many of our facilities to healthcare providers who provide long-term custodial care to the elderly. Evicting these operators for failure to pay rent while the facility is occupied may involve specific procedural or regulatory requirements and may not be successful. Even if eviction is possible, we may determine not to do so due to reputational or other risks. Bankruptcy or insolvency proceedings typically also result in increased costs to the operator, significant management distraction and performance declines. If we are unable to transition affected properties, they would likely experience prolonged operational disruption, leading to lower occupancy rates and further depressed revenues. Publicity about the operator’s financial condition and insolvency proceeds may also negatively impact their and our reputations, decreasing customer demand and revenues. Any or all of these risks could have a material adverse effect on our revenues, results of operations and cash flows. These risks would be magnified where we lease multiple properties to a single operator under a master lease, as an operator failure or default under a master lease would expose us to these risks across multiple properties. Additionally, the financial weakness or other inability of our tenants, operators or borrowers to make payments or comply with certain other lease obligations may affect our compliance with certain covenants contained in our PART I debt securities, credit facilities and the mortgages on the existing facilities were able to obtain for their services properties leased or managed by such borrowers, tenants to decrease. Our tenants, operators and borrowers may and operators, or otherwise adversely affect our results of be unable to achieve occupancy and rate levels, and to operations. Under certain conditions, defaults under the manage their expenses, in a way that will enable them to underlying mortgages may result in cross default under our meet all of their obligations to us. Further, many competing other indebtedness. Although we may be able to secure companies may have resources and attributes that are amendments under the applicable agreements in those superior to those of our tenants, operators and borrowers. circumstances, the bankruptcy of a borrower, tenant or Our tenants, operators and borrowers may encounter operator may result in less favorable borrowing terms than increased competition that could limit their ability to currently available, delays in the availability of funding or maintain or attract residents or expand their businesses or other materially adverse consequences. Increased competition and market and legislative changes have resulted and may further result in lower net revenues for some of our tenants, operators and borrowers and may affect their ability to meet their financial and other contractual obligations to us. The healthcare industry is highly competitive. The occupancy levels at, and rental income from, our facilities are dependent on our ability and the ability of our tenants, operators and borrowers to compete with other tenants and operators on a number of different levels, including the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, and the size and demographics of the population in the surrounding area. In addition, our tenants, operators and borrowers face an increasingly competitive labor market for skilled management personnel and nurses. An inability to attract and retain skilled management personnel and to manage their expenses, either of which could materially adversely affect their ability to meet their financial and other contractual obligations to us, potentially decreasing our revenues and impairing our assets and/or increasing collection and dispute costs. In addition, our operators’ revenues are determined by a number of factors, including licensed bed capacity, occupancy, the healthcare needs of residents, the rate of reimbursement, and the income and assets of seniors in the regions in which we operate. For example, due to generally increased vulnerability to illness, a severe flu season, an epidemic or any other widespread illness could result in early move-outs or delayed move-ins during quarantine periods, which would reduce our operators’ revenues. Additionally, new and evolving payor and provider programs in the United States, including but not limited to Medicare Advantage, Dual Eligible, Accountable Care Organizations, and Bundled Payments, have resulted in reduced reimbursement rates, average length of stay and average daily census, particularly for higher acuity patients. nurses and other trained personnel could negatively impact Furthermore, potential executive orders and legislation the ability of our tenants, operators and borrowers to meet have introduced uncertainty in the direction of the their obligations to us. A shortage of nurses or other trained healthcare regulatory landscape and we cannot predict personnel or general inflationary pressures on wages may the impact of any regulatory or legislative changes force tenants, operators and borrowers to enhance pay on the industry or our ability to compete effectively and benefits packages to compete effectively for skilled therein. See the risks described under “Legislation personnel, or to use more expensive contract personnel, and Regulation-The requirements of, or changes to, but they be unable to offset these added costs by increasing governmental reimbursement programs such as Medicare the rates charged to residents. Any increase in labor costs or Medicaid, may adversely affect our tenants’, operators’ and other property operating expenses or any failure by and borrowers’ ability to meet their financial and other our tenants, operators or borrowers to attract and retain contractual obligations to us.” qualified personnel could adversely affect our cash flow and have a materially adverse effect on our business, results of operations and financial condition. Competition may make it difficult to identify and purchase, or develop, suitable healthcare facilities to grow our investment portfolio, to finance acquisitions on favorable Our tenants, operators and borrowers also compete with terms, or to retain or attract tenants and operators. numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. This competition, which is due, in part, to over-development in some segments in which we invest, has caused the occupancy rate of newly constructed buildings to slow and the monthly rate that many newly built and previously We face significant competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize 14 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 15 PART I transition assets managed or leased by Brookdale A debtor has the right to assume, or to assume and assign according to our plans or within our anticipated timeframe. to a third party, or to reject its executory contracts and In addition, the sale and transition process may divert unexpired leases in a bankruptcy proceeding. If a debtor Brookdale’s attention from the performance of the were to reject its leases with us, obligations under such properties we are selling or transitioning, or from our rejected leases would cease. The claim against the rejecting properties Brookdale will continue to manage or lease from debtor would be an unsecured claim, which would be limited us following the contemplated transactions. This could by the statutory cap set forth in the U.S. Bankruptcy Code. result in further operational challenges and/or declining This statutory cap may be substantially less than the financial performance of our properties during or after the remaining rent actually owed under the lease. In addition, transition period. The inability, unwillingness or other failure a debtor may also assert in bankruptcy proceedings that of Brookdale to pursue the optimal performance of our leases should be re-characterized as financing agreements, properties or to meet its obligations to us under its leases which could result in our being deemed a lender instead and management agreements could materially reduce our of a landlord. A lender’s rights and remedies, as compared cash flow, net operating income and results of operations to a landlord’s, generally are materially less favorable, and have other materially adverse effects on our business, and our rights as a lender may be subordinated to other results of operations and financial condition. creditors’ rights. The bankruptcy, insolvency or financial deterioration of Furthermore, the automatic stay provisions of the U.S. one or more of our major tenants, operators or borrowers Bankruptcy Code would preclude us from enforcing our may materially adversely affect our business, results of remedies unless we first obtain relief from the court having operations and financial condition. We lease our properties directly to operators in most cases, and in certain other cases, we lease to third party tenants who enter into long-term management agreements with operators to manage the properties. We are also a direct or indirect lender to various tenants and operators and separately provide loans to certain third parties. We have very limited control over the success or failure of our tenants’, operators’ and borrowers’ businesses. Any of our tenants or operators may experience a downturn in their business that materially weakens their financial condition. As a result, they may fail to make payments when due. For example, one of our borrowers, Tandem Health Care (“Tandem”), has failed to make its required interest payments to us since November 10, 2017, which jurisdiction over the bankruptcy case. This would effectively limit or delay our ability to collect unpaid rent or interest payments, and we may ultimately not receive any payment at all. In addition, we would likely be required to fund certain expenses and obligations (e.g., real estate taxes, insurance, debt costs and maintenance expenses) to preserve the value of our properties, avoid the imposition of liens on our properties or transition our properties to a new tenant, operator or manager. Additionally, we lease many of our facilities to healthcare providers who provide long-term custodial care to the elderly. Evicting these operators for failure to pay rent while the facility is occupied may involve specific procedural or regulatory requirements and may not be successful. Even if eviction is possible, we may determine not to do so due to reputational or other risks. resulted in an event of default and adversely affected our Bankruptcy or insolvency proceedings typically also result revenues. Although we generally have arrangements and in increased costs to the operator, significant management other agreements that give us the right under specified distraction and performance declines. If we are unable to circumstances to terminate a lease, evict a tenant or transition affected properties, they would likely experience operator, or demand immediate repayment of outstanding prolonged operational disruption, leading to lower loan amounts or other obligations to us, we may determine occupancy rates and further depressed revenues. Publicity not to do so if we believe that enforcement of our rights about the operator’s financial condition and insolvency would be more detrimental to our business than seeking proceeds may also negatively impact their and our alternative approaches. A downturn in any of our tenants’, operators’ or borrowers’ businesses could ultimately lead to bankruptcy if it is unable to timely resolve the underlying causes, which may be largely outside of its control. Bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization that may render certain of reputations, decreasing customer demand and revenues. Any or all of these risks could have a material adverse effect on our revenues, results of operations and cash flows. These risks would be magnified where we lease multiple properties to a single operator under a master lease, as an operator failure or default under a master lease would expose us to these risks across multiple properties. these remedies unenforceable, or, at the least, delay our Additionally, the financial weakness or other inability of ability to pursue such remedies and realize any recoveries our tenants, operators or borrowers to make payments in connection therewith. For example, we cannot evict a or comply with certain other lease obligations may affect tenant or operator solely because of its bankruptcy filing. our compliance with certain covenants contained in our debt securities, credit facilities and the mortgages on the properties leased or managed by such borrowers, tenants and operators, or otherwise adversely affect our results of operations. Under certain conditions, defaults under the underlying mortgages may result in cross default under our other indebtedness. Although we may be able to secure amendments under the applicable agreements in those circumstances, the bankruptcy of a borrower, tenant or operator may result in less favorable borrowing terms than currently available, delays in the availability of funding or other materially adverse consequences. Increased competition and market and legislative changes have resulted and may further result in lower net revenues for some of our tenants, operators and borrowers and may affect their ability to meet their financial and other contractual obligations to us. The healthcare industry is highly competitive. The occupancy levels at, and rental income from, our facilities are dependent on our ability and the ability of our tenants, operators and borrowers to compete with other tenants and operators on a number of different levels, including the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, and the size and demographics of the population in the surrounding area. In addition, our tenants, operators and borrowers face an increasingly competitive labor market for skilled management personnel and nurses. An inability to attract and retain skilled management personnel and nurses and other trained personnel could negatively impact the ability of our tenants, operators and borrowers to meet their obligations to us. A shortage of nurses or other trained personnel or general inflationary pressures on wages may force tenants, operators and borrowers to enhance pay and benefits packages to compete effectively for skilled personnel, or to use more expensive contract personnel, but they be unable to offset these added costs by increasing the rates charged to residents. Any increase in labor costs and other property operating expenses or any failure by our tenants, operators or borrowers to attract and retain qualified personnel could adversely affect our cash flow and have a materially adverse effect on our business, results of operations and financial condition. Our tenants, operators and borrowers also compete with numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. This competition, which is due, in part, to over-development in some segments in which we invest, has caused the occupancy rate of newly constructed buildings to slow and the monthly rate that many newly built and previously PART I existing facilities were able to obtain for their services to decrease. Our tenants, operators and borrowers may be unable to achieve occupancy and rate levels, and to manage their expenses, in a way that will enable them to meet all of their obligations to us. Further, many competing companies may have resources and attributes that are superior to those of our tenants, operators and borrowers. Our tenants, operators and borrowers may encounter increased competition that could limit their ability to maintain or attract residents or expand their businesses or to manage their expenses, either of which could materially adversely affect their ability to meet their financial and other contractual obligations to us, potentially decreasing our revenues and impairing our assets and/or increasing collection and dispute costs. In addition, our operators’ revenues are determined by a number of factors, including licensed bed capacity, occupancy, the healthcare needs of residents, the rate of reimbursement, and the income and assets of seniors in the regions in which we operate. For example, due to generally increased vulnerability to illness, a severe flu season, an epidemic or any other widespread illness could result in early move-outs or delayed move-ins during quarantine periods, which would reduce our operators’ revenues. Additionally, new and evolving payor and provider programs in the United States, including but not limited to Medicare Advantage, Dual Eligible, Accountable Care Organizations, and Bundled Payments, have resulted in reduced reimbursement rates, average length of stay and average daily census, particularly for higher acuity patients. Furthermore, potential executive orders and legislation have introduced uncertainty in the direction of the healthcare regulatory landscape and we cannot predict the impact of any regulatory or legislative changes on the industry or our ability to compete effectively therein. See the risks described under “Legislation and Regulation-The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” Competition may make it difficult to identify and purchase, or develop, suitable healthcare facilities to grow our investment portfolio, to finance acquisitions on favorable terms, or to retain or attract tenants and operators. We face significant competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize 14 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 15 PART I on opportunities that meet our business goals and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition and development activities. Similarly, our properties face competition for tenants and operators from other properties in the same market, which may affect our ability to attract and retain tenants and operators, or may reduce the rents we are able to charge. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcare facilities at favorable prices, finance acquisitions on commercially favorable terms, or attract and retain profitable tenants and operators, our business, results of operations and financial condition may be materially adversely affected. We depend on investments in the healthcare property sector, making our profitability more vulnerable to a downturn or slowdown in that specific sector than if we were investing in multiple industries. We concentrate our investments in the healthcare property sector. As a result, we are subject to risks inherent to investments in a single industry. A downturn or slowdown in the healthcare property sector would have a greater adverse impact on our business than if we had investments in multiple industries. Specifically, a downturn in the healthcare property sector could negatively impact the ability of our tenants, operators and borrowers to meet their obligations to us, as well as the ability to maintain rental and occupancy rates. This could adversely affect our business, financial condition and results of operations. In addition, a downturn in the healthcare property sector could adversely affect the value of our properties and our ability to sell properties at prices or on terms acceptable to us. In addition, we are exposed to the risks inherent in concentrating our investments in real estate, which investments are relatively illiquid. Our ability to quickly sell or transition any of our properties in response to changes in the performance of our properties or economic and other conditions is limited. We may be unable to recognize full value for any property that we seek to sell for liquidity reasons. Our inability to respond rapidly to changes in the performance of our investments could adversely affect our financial condition and results of operations. Changes within the life science industry may adversely impact our revenues and results of operations. Our life science investments could be adversely affected if the life science industry is impacted by an economic, financial, or banking crisis or if the life science industry migrates from the U.S. to other countries or to areas outside of primary life science markets in South San Francisco, San Diego and greater Boston. Also, some of our properties may be better suited for a particular life science industry client tenant and could require modification before we are able to re-lease vacant space to another life science industry client tenant. Generally, our properties may not be suitable for lease to traditional office client tenants without significant expenditures on renovations. Our ability to negotiate contractual rent escalations on future leases and to achieve increases in rental rates will depend upon market conditions and the demand for life science properties at the time the leases are negotiated and the increases are proposed. Many life science entities have completed mergers or consolidations. Future mergers or consolidations of life science entities could reduce the amount of rentable square footage requirements of our client tenants and prospective client tenants, which may adversely impact our revenues from lease payments and results of operations. Our tenants in the life science industry face high levels of regulation, expense and uncertainty. Life science tenants, particularly those involved in developing and marketing pharmaceutical products, are subject to certain unique risks, including the following: • • some of our tenants require significant outlays of funds for the research, development, clinical testing and manufacture of their products and technologies. If private investors, the government or other sources of funding are unavailable to support such activities, a tenant’s business may be adversely affected or fail; the research, development, clinical testing, manufacture and marketing of some of our tenants’ products require federal, state and foreign regulatory approvals which may be costly or difficult to obtain, may take several years and be subject to delay, may not be obtained at all, require valuation through clinical trials and the use of substantial resources, and may often be unpredictable; • even after a life science tenant gains regulatory approval and market acceptance, the product may still present significant regulatory and liability risks, including, among others, the possible later discovery of safety concerns and other defects and potential loss of approvals, competition from new products and the expiration of patent protection for the product; • our tenants with marketable products may be adversely affected by healthcare reform and the reimbursement policies of government or private healthcare payors; • dependence on the commercial success of certain products, which may be reliant on the efficacy of the products, acceptance of the products among doctors and patients, negative publicity and the negative results or safety signals from the clinical trials of competitors which may reduce demand or prompt regulatory actions; and PART I • our tenants may be unable to adapt to the rapid both new and existing clients. If we fail to maintain these technological advances in the industry and to adequately relationships, including through a lack of responsiveness, protect their intellectual property under patent, failure to adapt to the current market and employment of copyright or trade secret laws and defend against third individuals with adequate experience, our reputation and party claims of intellectual property violations. relationships will be harmed and we may lose business If our tenants’ businesses are adversely affected, they may have difficulty making payments to us, which could materially adversely affect our business, results of operations and financial condition. The hospitals on whose campuses our MOBs are located and their affiliated healthcare systems could fail to remain competitive or financially viable, which could adversely to competitors. If our relationships with hospitals and their affiliated health systems deteriorate, it could have a materially adverse effect on us. Economic and other conditions that negatively affect geographic areas from which a greater percentage of our revenue is recognized could materially adversely affect our business, results of operations and financial condition. impact their ability to attract physicians and physician For the year ended December 31, 2017, 26% of our revenue groups to our MOBs and our other facilities that serve the was derived from properties located in California, which is healthcare industry. Our MOBs and other facilities that serve the healthcare industry depend on the viability of the hospitals on whose campuses our MOBs are located and their affiliated healthcare systems in order to attract physicians and other healthcare-related users. The viability of these hospitals, in turn, depends on factors such as the quality and mix of healthcare services provided, competition, demographic trends in the surrounding community, market position and growth potential, as well as the ability of the affiliated healthcare systems to provide economies of scale and access to capital. If a hospital whose campus is located also where substantially all of our life science portfolio is located. As a result, we are subject to increased exposure to adverse conditions affecting the state, including downturns in the local economies or changes in local real estate conditions, increased competition or decreased demand, changes in state-specific legislation and local climate events and natural disasters (such as earthquakes, wildfires and hurricanes), which could cause significant disruption in our businesses in the region, harm our ability to compete effectively, result in increased costs and divert more management attention, any or all of which could adversely affect our business and results of operations. on or near one of our MOBs is unable to meet its financial If we must replace any of our tenants or operators, we obligations, and if an affiliated healthcare system is unable may have difficulty identifying replacements and we may to support that hospital, the hospital may not be able be required to incur substantial renovation costs to make to compete successfully or could be forced to close or certain of our healthcare properties suitable for other relocate, which could adversely impact its ability to attract tenants and operators. physicians and other healthcare-related users. Because we rely on our proximity to and affiliations with these hospitals to create tenant demand for space in our MOBs, their inability to remain competitive or financially viable, or to attract physicians and physician groups, could adversely affect our MOB operations and have a materially adverse effect on us. We cannot predict whether our tenants will renew existing leases beyond their current term. If we or our tenants terminate or do not renew the leases for our properties, we would attempt to reposition those properties with another tenant or operator. We may also voluntarily change operators for a variety of reasons. For example, in November 2017, we announced a plan to transition a In addition, the potential repeal of the Affordable Care Act significant number of properties managed by Brookdale to and related regulations and uncertainty regarding potential other operators as part of our strategic plan to reduce our replacement legislation, could result in significant changes concentration of assets managed or leased by Brookdale. to the scope of insurance coverage and reimbursement Healthcare facilities are typically highly customized. The policies, which could put negative pressure on the improvements generally required to conform a property operations and revenues of our MOBs. We may be unable to maintain or expand our relationships with our existing and future hospital and health system clients. to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant- specific and are typically subject to regulatory requirements. A new or replacement tenant or operator may require different features in a property, depending on that tenant’s The success of our medical office portfolio depends, to a or operator’s particular business. In addition, infrastructure large extent, on past, current and future relationships with improvements for life science facilities typically are hospitals and their affiliated health systems. We invest significantly more costly than improvements to other significant amounts of time in developing relationships with property types, and we may be unable to recover part or 16 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 17 PART I improve the bargaining power of property owners seeking we are able to re-lease vacant space to another life science to sell, thereby impeding our investment, acquisition industry client tenant. Generally, our properties may not be and development activities. Similarly, our properties suitable for lease to traditional office client tenants without face competition for tenants and operators from other significant expenditures on renovations. properties in the same market, which may affect our ability to attract and retain tenants and operators, or may reduce the rents we are able to charge. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcare facilities at favorable prices, finance acquisitions on commercially favorable terms, or attract Our ability to negotiate contractual rent escalations on future leases and to achieve increases in rental rates will depend upon market conditions and the demand for life science properties at the time the leases are negotiated and the increases are proposed. and retain profitable tenants and operators, our business, Many life science entities have completed mergers or results of operations and financial condition may be consolidations. Future mergers or consolidations of life materially adversely affected. We depend on investments in the healthcare property sector, making our profitability more vulnerable to a downturn or slowdown in that specific sector than if we were investing in multiple industries. We concentrate our investments in the healthcare property science entities could reduce the amount of rentable square footage requirements of our client tenants and prospective client tenants, which may adversely impact our revenues from lease payments and results of operations. Our tenants in the life science industry face high levels of regulation, expense and uncertainty. sector. As a result, we are subject to risks inherent to Life science tenants, particularly those involved in investments in a single industry. A downturn or slowdown developing and marketing pharmaceutical products, are in the healthcare property sector would have a greater subject to certain unique risks, including the following: adverse impact on our business than if we had investments in multiple industries. Specifically, a downturn in the healthcare property sector could negatively impact the ability of our tenants, operators and borrowers to meet their obligations to us, as well as the ability to maintain rental and occupancy rates. This could adversely affect our business, financial condition and results of operations. In addition, a downturn in the healthcare property sector could adversely affect the value of our properties and our ability to sell properties at prices or on terms acceptable to us. In addition, we are exposed to the risks inherent in concentrating our investments in real estate, which investments are relatively illiquid. Our ability to quickly sell • some of our tenants require significant outlays of funds for the research, development, clinical testing and manufacture of their products and technologies. If private investors, the government or other sources of funding are unavailable to support such activities, a tenant’s business may be adversely affected or fail; • the research, development, clinical testing, manufacture and marketing of some of our tenants’ products require federal, state and foreign regulatory approvals which may be costly or difficult to obtain, may take several years and be subject to delay, may not be obtained at all, require valuation through clinical trials and the use of substantial resources, and may often be unpredictable; or transition any of our properties in response to changes • even after a life science tenant gains regulatory approval in the performance of our properties or economic and other conditions is limited. We may be unable to recognize full value for any property that we seek to sell for liquidity reasons. Our inability to respond rapidly to changes in the and market acceptance, the product may still present significant regulatory and liability risks, including, among others, the possible later discovery of safety concerns and other defects and potential loss of approvals, performance of our investments could adversely affect our competition from new products and the expiration of financial condition and results of operations. patent protection for the product; Changes within the life science industry may adversely impact our revenues and results of operations. • our tenants with marketable products may be adversely affected by healthcare reform and the reimbursement policies of government or private healthcare payors; Our life science investments could be adversely affected • dependence on the commercial success of certain if the life science industry is impacted by an economic, products, which may be reliant on the efficacy of the financial, or banking crisis or if the life science industry products, acceptance of the products among doctors migrates from the U.S. to other countries or to areas and patients, negative publicity and the negative results outside of primary life science markets in South San or safety signals from the clinical trials of competitors Francisco, San Diego and greater Boston. Also, some of our which may reduce demand or prompt regulatory properties may be better suited for a particular life science actions; and on opportunities that meet our business goals and could industry client tenant and could require modification before • our tenants may be unable to adapt to the rapid technological advances in the industry and to adequately protect their intellectual property under patent, copyright or trade secret laws and defend against third party claims of intellectual property violations. If our tenants’ businesses are adversely affected, they may have difficulty making payments to us, which could materially adversely affect our business, results of operations and financial condition. The hospitals on whose campuses our MOBs are located and their affiliated healthcare systems could fail to remain competitive or financially viable, which could adversely impact their ability to attract physicians and physician groups to our MOBs and our other facilities that serve the healthcare industry. Our MOBs and other facilities that serve the healthcare industry depend on the viability of the hospitals on whose campuses our MOBs are located and their affiliated healthcare systems in order to attract physicians and other healthcare-related users. The viability of these hospitals, in turn, depends on factors such as the quality and mix of healthcare services provided, competition, demographic trends in the surrounding community, market position and growth potential, as well as the ability of the affiliated healthcare systems to provide economies of scale and access to capital. If a hospital whose campus is located on or near one of our MOBs is unable to meet its financial obligations, and if an affiliated healthcare system is unable to support that hospital, the hospital may not be able to compete successfully or could be forced to close or relocate, which could adversely impact its ability to attract physicians and other healthcare-related users. Because we rely on our proximity to and affiliations with these hospitals to create tenant demand for space in our MOBs, their inability to remain competitive or financially viable, or to attract physicians and physician groups, could adversely affect our MOB operations and have a materially adverse effect on us. In addition, the potential repeal of the Affordable Care Act and related regulations and uncertainty regarding potential replacement legislation, could result in significant changes to the scope of insurance coverage and reimbursement policies, which could put negative pressure on the operations and revenues of our MOBs. We may be unable to maintain or expand our relationships with our existing and future hospital and health system clients. The success of our medical office portfolio depends, to a large extent, on past, current and future relationships with hospitals and their affiliated health systems. We invest significant amounts of time in developing relationships with PART I both new and existing clients. If we fail to maintain these relationships, including through a lack of responsiveness, failure to adapt to the current market and employment of individuals with adequate experience, our reputation and relationships will be harmed and we may lose business to competitors. If our relationships with hospitals and their affiliated health systems deteriorate, it could have a materially adverse effect on us. Economic and other conditions that negatively affect geographic areas from which a greater percentage of our revenue is recognized could materially adversely affect our business, results of operations and financial condition. For the year ended December 31, 2017, 26% of our revenue was derived from properties located in California, which is also where substantially all of our life science portfolio is located. As a result, we are subject to increased exposure to adverse conditions affecting the state, including downturns in the local economies or changes in local real estate conditions, increased competition or decreased demand, changes in state-specific legislation and local climate events and natural disasters (such as earthquakes, wildfires and hurricanes), which could cause significant disruption in our businesses in the region, harm our ability to compete effectively, result in increased costs and divert more management attention, any or all of which could adversely affect our business and results of operations. If we must replace any of our tenants or operators, we may have difficulty identifying replacements and we may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other tenants and operators. We cannot predict whether our tenants will renew existing leases beyond their current term. If we or our tenants terminate or do not renew the leases for our properties, we would attempt to reposition those properties with another tenant or operator. We may also voluntarily change operators for a variety of reasons. For example, in November 2017, we announced a plan to transition a significant number of properties managed by Brookdale to other operators as part of our strategic plan to reduce our concentration of assets managed or leased by Brookdale. Healthcare facilities are typically highly customized. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant- specific and are typically subject to regulatory requirements. A new or replacement tenant or operator may require different features in a property, depending on that tenant’s or operator’s particular business. In addition, infrastructure improvements for life science facilities typically are significantly more costly than improvements to other property types, and we may be unable to recover part or 16 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 17 PART I all of these higher costs. Therefore, if a current tenant or operator is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property and experience delays before we are able to secure another tenant or operator or to accommodate multiple tenants or operators. These expenditures or renovations and delays may materially adversely affect our business, results of operations and financial condition. Additionally, we may fail to identify suitable replacements or enter into leases or other arrangements with new tenants or operators on a timely basis or on terms as favorable to us as our current leases, if at all. Furthermore, during transition periods to new tenants or operators, we anticipate that the attention of existing tenants or operators will be diverted from the performance of the properties, which would cause the financial and operational performance at these properties to further decline. We also may be required to fund certain expenses and obligations such as real estate taxes, debt costs and maintenance expenses, to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. In addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator, which could have a materially adverse effect on our business, results of operations and financial condition. We face additional risks associated with property development and redevelopment that can render a project less profitable or not profitable at all and, under certain circumstances, prevent completion of development activities once undertaken. Property development is a component of our growth strategy. At December 31, 2017, our actual investment and estimated commitments under our development and redevelopment platforms, including land held for development, represented approximately $682 million, or 5% of our total assets. Large-scale, ground-up development of healthcare properties presents additional risks for us, including risks that: • a development opportunity may be abandoned after • • expending significant resources resulting in the loss of deposits or failure to recover expenses already incurred; the development and construction costs of a project may exceed original estimates due to increased interest rates and higher materials, transportation, labor, leasing or other costs, which could make the completion of the development project less profitable; the project may not be completed on schedule as a result of a variety of factors that are beyond our control, including natural disasters, labor conditions, material shortages, regulatory hurdles, civil unrest and acts of war, which result in increases in construction costs and debt service expenses or provide tenants or operators with the right to terminate pre-construction leases; and • occupancy rates and rents at a newly completed property may not meet expected levels and could be insufficient to make the property profitable. Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. Our use of joint ventures may limit our flexibility with jointly owned investments. We have and may continue to develop and/or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to risks that may not be present with other methods of ownership, including: • we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes, including litigation or arbitration; • our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms and strategies for any investments, and what levels of debt to incur or carry; • our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our interest may be limited; • our joint venture partners may be structured differently than us for tax purposes, and this could create conflicts of interest and risks to our REIT status; • our joint venture partners might become insolvent, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and • our joint venture partners may have competing interests in our markets that could create conflict of interest issues. Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. In addition, in some instances, we and/or our joint venture partner will have the right to cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to acquire our partner’s interest will be limited if we do not have sufficient cash, available borrowing capacity or other capital resources. This would require us to sell our interest in the joint venture when we would otherwise prefer to retain it. PART I From time to time we have made, and we may seek to underestimate future operating expenses or the costs make, one or more material acquisitions, which may involve necessary to bring properties up to standards established the expenditure of significant funds. for their intended use or for property improvements. We regularly review potential transactions in order to If we have difficulties with any of these areas, or if we later maximize stockholder value. Our review process may discover additional liabilities or experience unforeseen costs require significant management attention and a potential relating to our acquired companies, we might not achieve transaction could be abandoned or rejected by us or the economic benefits we expect from our acquisitions, and the other parties involved after we expend significant this may materially adversely affect our business, results of resources and time. In addition, future acquisitions may operations and financial condition. require the issuance of securities, the incurrence of debt, assumption of contingent liabilities or incurrence of significant expenditures, each of which could materially adversely impact our business, financial condition or Our tenants, operators and borrowers face litigation and may experience rising liability and insurance costs. In some states, advocacy groups have been created to results of operations. In addition, the financing required for monitor the quality of care at healthcare facilities, and acquisitions may not be available on commercially favorable these groups have brought litigation against the tenants terms or at all. From time to time, we acquire other companies, and if we are unable to successfully integrate these operations, our business, results of operations and financial condition may be materially adversely affected. and operators of such facilities. Also, in several instances, private litigation by patients, residents or “whistleblowers” has sought, and sometimes resulted in, large damage awards. See “The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ Acquisitions require the integration of companies that have and borrowers’ ability to meet their financial and other previously operated independently. Successful integration contractual obligations to us.” The effect of this litigation of the operations of these companies depends primarily on and other potential litigation may materially increase the our ability to consolidate operations, systems, procedures, costs incurred by our tenants, operators and borrowers properties and personnel, and to eliminate redundancies and for monitoring and reporting quality of care compliance. costs. We may encounter difficulties in these integrations. In addition, their cost of liability and medical malpractice Potential difficulties associated with acquisitions include insurance can be significant and may increase or not our ability to effectively monitor and manage our expanded be available at a reasonable cost so long as the present portfolio of properties, the loss of key employees, the healthcare litigation environment continues. Cost increases disruption of our ongoing business or that of the acquired could cause our tenants and operators to be unable to make entity, possible inconsistencies in standards, controls, their lease or mortgage payments or fail to purchase the procedures and policies, and the assumption of unexpected appropriate liability and malpractice insurance, or cause liabilities, including: • liabilities relating to the cleanup or remediation of undisclosed environmental conditions; our borrowers to be unable to meet their obligations to us, potentially decreasing our revenues and increasing our collection and litigation costs. • unasserted claims of vendors, residents, patients or In addition, as a result of our ownership of healthcare other persons dealing with the seller; facilities, we may be named as a defendant in lawsuits • liabilities, claims and litigation, whether or not incurred in arising from the alleged actions of our tenants or operators. the ordinary course of business, relating to periods prior While our operators generally have agreed to indemnify to our acquisition; us for various claims, litigation and liabilities arising in • claims for indemnification by general partners, directors, connection with their operation of our properties, they officers and others indemnified by the seller; may have insufficient assets, income, access to financing • claims for return of government reimbursement and/or insurance coverage to enable them to satisfy their • liabilities for taxes relating to periods prior to unanticipated expenditures. Furthermore, although our payments; and our acquisition. indemnification obligations, in which case we would incur leases and agreements provide us with certain information rights with respect to our tenants and operators, one or more of our tenants may be or become party to pending litigation or investigation to which we are unaware or do not have a right to participate or evaluate. In such cases, we would be unable to determine the potential impact of such litigation or investigation on our tenants or our In addition, the acquired companies and their properties may fail to perform as expected, including in respect of estimated cost savings. Inaccurate assumptions regarding future rental or occupancy rates could result in overly optimistic estimates of future revenues. Similarly, we may 18 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 19 PART I PART I all of these higher costs. Therefore, if a current tenant or • occupancy rates and rents at a newly completed operator is unable to pay rent and/or vacates a property, property may not meet expected levels and could be we may incur substantial expenditures to modify a property insufficient to make the property profitable. and experience delays before we are able to secure another tenant or operator or to accommodate multiple tenants or operators. These expenditures or renovations and delays Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. may materially adversely affect our business, results of Our use of joint ventures may limit our flexibility with operations and financial condition. jointly owned investments. Additionally, we may fail to identify suitable replacements or We have and may continue to develop and/or acquire enter into leases or other arrangements with new tenants properties in joint ventures with other persons or or operators on a timely basis or on terms as favorable to us entities when circumstances warrant the use of these as our current leases, if at all. Furthermore, during transition structures. Our participation in joint ventures is subject periods to new tenants or operators, we anticipate that to risks that may not be present with other methods of the attention of existing tenants or operators will be ownership, including: diverted from the performance of the properties, which would cause the financial and operational performance at these properties to further decline. We also may be required to fund certain expenses and obligations such as real estate taxes, debt costs and maintenance expenses, to preserve the value of, and avoid the imposition of liens on, our properties while they are being repositioned. In addition, we may incur certain obligations and liabilities, including obligations to indemnify the replacement tenant or operator, which could have a materially adverse effect on our business, results of operations and financial condition. • we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes, including litigation or arbitration; • our joint venture partners could have investment and financing goals that are not consistent with our objectives, including the timing, terms and strategies for any investments, and what levels of debt to incur or carry; • our ability to transfer our interest in a joint venture to a third party may be restricted and the market for our We face additional risks associated with property development and redevelopment that can render a project interest may be limited; less profitable or not profitable at all and, under certain • our joint venture partners may be structured differently circumstances, prevent completion of development than us for tax purposes, and this could create conflicts activities once undertaken. Property development is a component of our growth strategy. At December 31, 2017, our actual investment and estimated commitments under our development and redevelopment platforms, including land held for development, represented approximately $682 million, or 5% of our total assets. Large-scale, ground-up development of healthcare properties presents additional risks for us, including risks that: • a development opportunity may be abandoned after expending significant resources resulting in the loss of deposits or failure to recover expenses already incurred; • the development and construction costs of a project may exceed original estimates due to increased interest rates and higher materials, transportation, labor, leasing or other costs, which could make the completion of the development project less profitable; • the project may not be completed on schedule as a result of a variety of factors that are beyond our control, including natural disasters, labor conditions, material shortages, regulatory hurdles, civil unrest and acts of war, which result in increases in construction costs and debt service expenses or provide tenants or operators with the right to terminate pre-construction leases; and of interest and risks to our REIT status; • our joint venture partners might become insolvent, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and • our joint venture partners may have competing interests in our markets that could create conflict of interest issues. Any of the foregoing risks could materially adversely affect our business, results of operations and financial condition. In addition, in some instances, we and/or our joint venture partner will have the right to cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to acquire our partner’s interest will be limited if we do not have sufficient cash, available borrowing capacity or other capital resources. This would require us to sell our interest in the joint venture when we would otherwise prefer to retain it. From time to time we have made, and we may seek to make, one or more material acquisitions, which may involve the expenditure of significant funds. underestimate future operating expenses or the costs necessary to bring properties up to standards established for their intended use or for property improvements. We regularly review potential transactions in order to maximize stockholder value. Our review process may require significant management attention and a potential transaction could be abandoned or rejected by us or the other parties involved after we expend significant resources and time. In addition, future acquisitions may require the issuance of securities, the incurrence of debt, assumption of contingent liabilities or incurrence of significant expenditures, each of which could materially adversely impact our business, financial condition or results of operations. In addition, the financing required for acquisitions may not be available on commercially favorable terms or at all. From time to time, we acquire other companies, and if we are unable to successfully integrate these operations, our business, results of operations and financial condition may be materially adversely affected. Acquisitions require the integration of companies that have previously operated independently. Successful integration of the operations of these companies depends primarily on our ability to consolidate operations, systems, procedures, properties and personnel, and to eliminate redundancies and costs. We may encounter difficulties in these integrations. Potential difficulties associated with acquisitions include our ability to effectively monitor and manage our expanded portfolio of properties, the loss of key employees, the disruption of our ongoing business or that of the acquired entity, possible inconsistencies in standards, controls, procedures and policies, and the assumption of unexpected liabilities, including: • liabilities relating to the cleanup or remediation of undisclosed environmental conditions; • unasserted claims of vendors, residents, patients or • other persons dealing with the seller; liabilities, claims and litigation, whether or not incurred in the ordinary course of business, relating to periods prior to our acquisition; • claims for indemnification by general partners, directors, officers and others indemnified by the seller; • claims for return of government reimbursement • payments; and liabilities for taxes relating to periods prior to our acquisition. In addition, the acquired companies and their properties may fail to perform as expected, including in respect of estimated cost savings. Inaccurate assumptions regarding future rental or occupancy rates could result in overly optimistic estimates of future revenues. Similarly, we may If we have difficulties with any of these areas, or if we later discover additional liabilities or experience unforeseen costs relating to our acquired companies, we might not achieve the economic benefits we expect from our acquisitions, and this may materially adversely affect our business, results of operations and financial condition. Our tenants, operators and borrowers face litigation and may experience rising liability and insurance costs. In some states, advocacy groups have been created to monitor the quality of care at healthcare facilities, and these groups have brought litigation against the tenants and operators of such facilities. Also, in several instances, private litigation by patients, residents or “whistleblowers” has sought, and sometimes resulted in, large damage awards. See “The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us.” The effect of this litigation and other potential litigation may materially increase the costs incurred by our tenants, operators and borrowers for monitoring and reporting quality of care compliance. In addition, their cost of liability and medical malpractice insurance can be significant and may increase or not be available at a reasonable cost so long as the present healthcare litigation environment continues. Cost increases could cause our tenants and operators to be unable to make their lease or mortgage payments or fail to purchase the appropriate liability and malpractice insurance, or cause our borrowers to be unable to meet their obligations to us, potentially decreasing our revenues and increasing our collection and litigation costs. In addition, as a result of our ownership of healthcare facilities, we may be named as a defendant in lawsuits arising from the alleged actions of our tenants or operators. While our operators generally have agreed to indemnify us for various claims, litigation and liabilities arising in connection with their operation of our properties, they may have insufficient assets, income, access to financing and/or insurance coverage to enable them to satisfy their indemnification obligations, in which case we would incur unanticipated expenditures. Furthermore, although our leases and agreements provide us with certain information rights with respect to our tenants and operators, one or more of our tenants may be or become party to pending litigation or investigation to which we are unaware or do not have a right to participate or evaluate. In such cases, we would be unable to determine the potential impact of such litigation or investigation on our tenants or our 18 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 19 PART I business or results. Moreover, negative publicity of any of our operators’ or tenants’ litigation, other legal proceedings or investigations may also negatively impact their and our reputation, resulting in lower customer demand and revenues, which could have a material adverse effect on our financial condition, results of operations and cash flow. We, through our subsidiaries, enter into management contracts with third party eligible independent contractors to manage some of our facilities whereby we assume additional operational risks and are subject to additional regulation and liability. RIDEA structures at the year ended December 31, 2017, accounted for 12% of our total assets. RIDEA permits REITs, such as us, to lease healthcare facilities that we own or partially own to a TRS, provided that our TRS hires an independent qualifying management company to operate the facility. Under the RIDEA lease structure, the independent qualifying management company receives a management fee from our TRS for operating the facility as an independent contractor. As the owner of the facility contracting out operational responsibility, we assume most of the operational risk relative to other structures because we lease our facility to our own partially- or wholly-owned subsidiary rather than a third party operator. Our resulting revenues therefore depend most on occupancy rates, the rates charged to residents and the ability to control operating expenses. Our TRS, and hence we, are responsible for any operating deficits incurred by the facility. The operator, which would be our TRS when we use a RIDEA lease structure, of a healthcare facility is generally required to be the holder of the applicable healthcare license. This licensing requirement subjects our TRS and us (through our ownership interest in our TRS) to various regulatory laws, including those described above. Most states regulate and inspect healthcare facility operations, patient care, construction and the safety of the physical environment. If one or more of our healthcare real estate facilities fails to comply with applicable laws, our TRS, if it holds the healthcare license and is the entity enrolled in government health care programs, would be subject to penalties including loss or suspension of license, certification or accreditation, exclusion from government healthcare programs (i.e., Medicare, Medicaid), administrative sanctions, civil monetary penalties, and in certain instances, criminal penalties. Additionally, when we receive individually identifiable health information relating to residents of our TRS-operated healthcare facilities, we are subject to federal and state data privacy and confidentiality laws and rules, and could be subject to liability in the event of an audit, complaint, or data breach. Furthermore, if our TRS holds the healthcare license, it could have exposure to professional liability claims arising out of an alleged breach of the applicable standard of care rules. In addition, rents from this TRS structure are treated as qualifying rents from real property if (i) they are paid pursuant to an arms-length lease of a “qualified healthcare property” with the TRS and (ii) the manager qualifies as an “eligible independent contractor,” as defined in the Internal Revenue Code of 1986, as amended (the “Code”). If either of these conditions is not satisfied, then the rents will not be qualifying rents. The requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us. Certain of our tenants, operators and borrowers are affected, directly or indirectly, by an extremely complex set of federal, state and local laws and regulations pertaining to governmental reimbursement programs. These laws and regulations are subject to frequent and substantial changes that are sometimes applied retroactively. See “Item 1—Business—Government Regulation, Licensing and Enforcement.” For example, to the extent that our tenants, operators or borrowers receive a significant portion of their revenues from governmental payors, primarily Medicare and Medicaid, they are generally subject to, among other things: • • • • statutory and regulatory changes; retroactive rate adjustments; recovery of program overpayments or set-offs; federal, state and local litigation and enforcement actions; • administrative proceedings; • policy interpretations; • payment or other delays by fiscal intermediaries or carriers; • government funding restrictions (at a program level or • with respect to specific facilities); and interruption or delays in payments due to any ongoing governmental investigations and audits at such properties. The failure to comply with the extensive laws, regulations and other requirements applicable to their business and the operation of our properties could result in, among other challenges: (i) becoming ineligible to receive reimbursement from governmental reimbursement programs; (ii) bans on admissions of new patients or residents; (iii) civil or criminal penalties; and (iv) significant operational changes. These laws and regulations are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. PART I For example, we have provided a loan to Tandem Health Sometimes, governmental payors freeze or reduce Care (“Tandem”), a property company that owns and payments to healthcare providers, or provide annual operates 32 post-acute/skilled nursing facilities, in addition reimbursement rate increases that are smaller than to operating nine leasehold interests, totaling 4,766 beds expected, due to budgetary and other pressures. Healthcare (the “Tandem Portfolio”) (see Note 7 to the Consolidated reimbursement will likely continue to be of significant Financial Statements for additional information). Affiliates importance to federal and state authorities. We cannot of the sole tenant and operator of Tandem’s facilities, make any assessment as to the ultimate timing or the Consulate, were named in a qui tam or “whistleblower” effect that any future legislative reforms may have on our action that alleged that Consulate overbilled the federal tenants’, operators’ and borrowers’ costs of doing business government and the State of Florida (United States of and on the amount of reimbursement by government and America v. CMC II, LLC, et al, U.S. District Court, M.D. other third-party payors. The failure of any of our tenants, Florida). In February, 2017, a jury returned an adverse verdict operators or borrowers to comply with these laws and against five Consulate entities as defendants, resulting in a regulations, and significant limits on the scope of services $348 million judgment against all defendants. As a result of reimbursed and on reimbursement rates and fees, could these legal and financial challenges, Consulate has failed to materially adversely affect their ability to meet their financial fully pay its contractual rent to Tandem since April 1, 2017, and contractual obligations to us. which has impacted Tandem’s ability to service its debt obligations to us. Since November 10, 2017, Tandem has failed to make its required interest payment to us, resulting in an event of default and adversely impacting our results of operations. On January 11, 2018, the Court overturned the jury verdict against Consulate and vacated the judgment. The plaintiff has provided notice that it will appeal the ruling, and we cannot predict the outcome. It is also possible that the parties could reach an out-of-court settlement. An unfavorable ruling against Consulate on appeal would have a materially adverse effect on its financial condition, cash flows and results of operations. This would cause additional Furthermore, executive orders and legislation may amend or repeal the Affordable Care Act and related regulations in whole or in part. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare system. We cannot quantify or predict the likely impact of these possible changes on our business model, prospects, financial condition or results of operations. declines in the Tandem Portfolio’s operating performance Legislation to address federal government operations and would likely negatively affect Consulate’s and Tandem’s and administration decisions affecting the Centers for ability to raise capital, which would further adversely affect Medicare and Medicaid Services could have a materially Tandem’s ability to meet its debt service obligations to adverse effect on our tenants’, operators’ and borrowers’ us. We are currently evaluating our options in respect of liquidity, financial condition or results of operations. the Tandem mezzanine loan. Regardless of the ultimate outcome, our tenants, operators and borrowers could be adversely affected by the resources required to respond to an investigation or other enforcement action. In such event, the results of operations and financial condition of our tenants and the results of operations of our properties operated by those entities could be materially adversely affected, which, in turn, could have a materially adverse effect on us. We are unable to predict future federal, state and local regulations and legislation, including the Medicare and Medicaid statutes and regulations, or the intensity of Congressional consideration of legislation pertaining to the federal debt ceiling, the Affordable Care Act, tax reform and entitlement programs, including reimbursement rates for physicians, could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations. In particular, reduced funding for entitlement programs such as Medicare and Medicaid would result in increased costs and fees for programs such as Medicare Advantage Plans and additional reductions in reimbursements to providers. Amendments to or repeal of the Affordable Care Act and decisions by the Centers for Medicare and Medicaid Services could impact enforcement efforts with respect to such regulations and the delivery of services and benefits under Medicare, legislation, and any changes in the regulatory framework Medicaid or Medicare Advantage Plans and could affect our could have a materially adverse effect on our tenants and tenants and operators and the manner in which they are operators, which, in turn, could have a materially adverse reimbursed by such programs. Such changes could have effect on us. a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of 20 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 21 PART I business or results. Moreover, negative publicity of any of In addition, rents from this TRS structure are treated our operators’ or tenants’ litigation, other legal proceedings as qualifying rents from real property if (i) they are paid or investigations may also negatively impact their and pursuant to an arms-length lease of a “qualified healthcare our reputation, resulting in lower customer demand and property” with the TRS and (ii) the manager qualifies as an revenues, which could have a material adverse effect on our “eligible independent contractor,” as defined in the Internal financial condition, results of operations and cash flow. Revenue Code of 1986, as amended (the “Code”). If either of these conditions is not satisfied, then the rents will not be We, through our subsidiaries, enter into management contracts with third party eligible independent contractors qualifying rents. to manage some of our facilities whereby we assume The requirements of, or changes to, governmental additional operational risks and are subject to additional reimbursement programs such as Medicare or Medicaid, regulation and liability. RIDEA structures at the year ended December 31, 2017, accounted for 12% of our total assets. RIDEA permits may adversely affect our tenants’, operators’ and borrowers’ ability to meet their financial and other contractual obligations to us. REITs, such as us, to lease healthcare facilities that we Certain of our tenants, operators and borrowers are own or partially own to a TRS, provided that our TRS hires affected, directly or indirectly, by an extremely complex set an independent qualifying management company to of federal, state and local laws and regulations pertaining operate the facility. Under the RIDEA lease structure, the to governmental reimbursement programs. These laws independent qualifying management company receives and regulations are subject to frequent and substantial a management fee from our TRS for operating the facility changes that are sometimes applied retroactively. See as an independent contractor. As the owner of the facility “Item 1—Business—Government Regulation, Licensing and contracting out operational responsibility, we assume most Enforcement.” For example, to the extent that our tenants, of the operational risk relative to other structures because operators or borrowers receive a significant portion of their we lease our facility to our own partially- or wholly-owned revenues from governmental payors, primarily Medicare and subsidiary rather than a third party operator. Our resulting Medicaid, they are generally subject to, among other things: revenues therefore depend most on occupancy rates, the rates charged to residents and the ability to control operating expenses. Our TRS, and hence we, are responsible for any operating deficits incurred by the facility. • • • • statutory and regulatory changes; retroactive rate adjustments; recovery of program overpayments or set-offs; federal, state and local litigation and The operator, which would be our TRS when we use a RIDEA enforcement actions; lease structure, of a healthcare facility is generally required • administrative proceedings; to be the holder of the applicable healthcare license. This • policy interpretations; licensing requirement subjects our TRS and us (through • payment or other delays by fiscal intermediaries our ownership interest in our TRS) to various regulatory or carriers; laws, including those described above. Most states regulate • government funding restrictions (at a program level or and inspect healthcare facility operations, patient care, with respect to specific facilities); and construction and the safety of the physical environment. • interruption or delays in payments due to any If one or more of our healthcare real estate facilities fails ongoing governmental investigations and audits at to comply with applicable laws, our TRS, if it holds the such properties. healthcare license and is the entity enrolled in government health care programs, would be subject to penalties including loss or suspension of license, certification or accreditation, exclusion from government healthcare programs (i.e., Medicare, Medicaid), administrative sanctions, civil monetary penalties, and in certain instances, criminal penalties. Additionally, when we receive individually identifiable health information relating to residents of our TRS-operated healthcare facilities, we are subject to federal and state data privacy and confidentiality laws and rules, and could be subject to liability in the event of an audit, complaint, or data breach. Furthermore, if our TRS holds the healthcare license, it could have exposure to professional liability claims arising out of an alleged breach of the applicable standard of care rules. The failure to comply with the extensive laws, regulations and other requirements applicable to their business and the operation of our properties could result in, among other challenges: (i) becoming ineligible to receive reimbursement from governmental reimbursement programs; (ii) bans on admissions of new patients or residents; (iii) civil or criminal penalties; and (iv) significant operational changes. These laws and regulations are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or “whistleblower” actions. For example, we have provided a loan to Tandem Health Care (“Tandem”), a property company that owns and operates 32 post-acute/skilled nursing facilities, in addition to operating nine leasehold interests, totaling 4,766 beds (the “Tandem Portfolio”) (see Note 7 to the Consolidated Financial Statements for additional information). Affiliates of the sole tenant and operator of Tandem’s facilities, Consulate, were named in a qui tam or “whistleblower” action that alleged that Consulate overbilled the federal government and the State of Florida (United States of America v. CMC II, LLC, et al, U.S. District Court, M.D. Florida). In February, 2017, a jury returned an adverse verdict against five Consulate entities as defendants, resulting in a $348 million judgment against all defendants. As a result of these legal and financial challenges, Consulate has failed to fully pay its contractual rent to Tandem since April 1, 2017, which has impacted Tandem’s ability to service its debt obligations to us. Since November 10, 2017, Tandem has failed to make its required interest payment to us, resulting in an event of default and adversely impacting our results of operations. On January 11, 2018, the Court overturned the jury verdict against Consulate and vacated the judgment. The plaintiff has provided notice that it will appeal the ruling, and we cannot predict the outcome. It is also possible that the parties could reach an out-of-court settlement. An unfavorable ruling against Consulate on appeal would have a materially adverse effect on its financial condition, cash flows and results of operations. This would cause additional declines in the Tandem Portfolio’s operating performance and would likely negatively affect Consulate’s and Tandem’s ability to raise capital, which would further adversely affect Tandem’s ability to meet its debt service obligations to us. We are currently evaluating our options in respect of the Tandem mezzanine loan. Regardless of the ultimate outcome, our tenants, operators and borrowers could be adversely affected by the resources required to respond to an investigation or other enforcement action. In such event, the results of operations and financial condition of our tenants and the results of operations of our properties operated by those entities could be materially adversely affected, which, in turn, could have a materially adverse effect on us. We are unable to predict future federal, state and local regulations and legislation, including the Medicare and Medicaid statutes and regulations, or the intensity of enforcement efforts with respect to such regulations and legislation, and any changes in the regulatory framework could have a materially adverse effect on our tenants and operators, which, in turn, could have a materially adverse effect on us. PART I Sometimes, governmental payors freeze or reduce payments to healthcare providers, or provide annual reimbursement rate increases that are smaller than expected, due to budgetary and other pressures. Healthcare reimbursement will likely continue to be of significant importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or the effect that any future legislative reforms may have on our tenants’, operators’ and borrowers’ costs of doing business and on the amount of reimbursement by government and other third-party payors. The failure of any of our tenants, operators or borrowers to comply with these laws and regulations, and significant limits on the scope of services reimbursed and on reimbursement rates and fees, could materially adversely affect their ability to meet their financial and contractual obligations to us. Furthermore, executive orders and legislation may amend or repeal the Affordable Care Act and related regulations in whole or in part. We also anticipate that Congress, state legislatures, and third-party payors may continue to review and assess alternative healthcare delivery and payment systems and may propose and adopt legislation or policy changes or implementations effecting additional fundamental changes in the healthcare system. We cannot quantify or predict the likely impact of these possible changes on our business model, prospects, financial condition or results of operations. Legislation to address federal government operations and administration decisions affecting the Centers for Medicare and Medicaid Services could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations. Congressional consideration of legislation pertaining to the federal debt ceiling, the Affordable Care Act, tax reform and entitlement programs, including reimbursement rates for physicians, could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of operations. In particular, reduced funding for entitlement programs such as Medicare and Medicaid would result in increased costs and fees for programs such as Medicare Advantage Plans and additional reductions in reimbursements to providers. Amendments to or repeal of the Affordable Care Act and decisions by the Centers for Medicare and Medicaid Services could impact the delivery of services and benefits under Medicare, Medicaid or Medicare Advantage Plans and could affect our tenants and operators and the manner in which they are reimbursed by such programs. Such changes could have a materially adverse effect on our tenants’, operators’ and borrowers’ liquidity, financial condition or results of 20 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 21 PART I operations, which could adversely affect their ability to satisfy their obligations to us and could have a materially adverse effect on us. Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely affect our cash flows. Our properties must comply with applicable ADA and any similar state and local laws. This may require removal of barriers to access by persons with disabilities in public areas of our properties. Noncompliance could result in imposition of fines or an award of damages to private litigants and the incurrence of additional costs associated with bringing the properties into compliance. While the tenants to whom we lease our properties are obligated to comply with the ADA and similar state and local provisions, and typically under tenant leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected. As a result, we could be required to expend funds to comply with the provisions of the ADA and similar state and local laws on behalf of tenants, which could adversely affect our results of operations and financial condition. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations. New and revised regulations and codes may be adopted by governmental agencies and bodies and become applicable to our properties. Compliance could require substantial capital expenditures, and may restrict our ability to renovate our properties. These expenditures and restrictions could have a material adverse effect on our ability to meet our financial obligations. Tenants and operators that fail to comply with federal, state, local and international laws and regulations, including licensure, certification and inspection requirements, may cease to operate or be unable to meet their financial and other contractual obligations to us. Our tenants, operators and borrowers are subject to or impacted by extensive, frequently changing federal, state, local and international laws and regulations. These laws and regulations include, among others: laws protecting consumers against deceptive practices; laws relating to the operation of our properties and how our tenants and operators conduct their business, such as fire, health and safety, data security and privacy laws; federal and state laws affecting hospitals, clinics and other healthcare communities that participate in both Medicare and Medicaid that mandate allowable costs, pricing, reimbursement procedures and limitations, quality of services and care, food service and physical plants, and similar foreign laws regulating the healthcare industry; resident rights laws (including abuse and neglect laws) and fraud laws; anti-kickback and physician referral laws; the ADA and similar state and local laws; and safety and health standards set by the Occupational Safety and Health Administration or similar foreign agencies. Certain of our properties may also require a license, registration and/or certificate of need to operate. Our tenants’, operators’ or borrowers’ failure to comply with any of these laws, regulations or requirements could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from government healthcare programs, civil liability, loss of license or closure of the facility and/or the incurrence of considerable costs arising from an investigation or regulatory action, which may have an adverse effect on facilities owned by or mortgaged to us, and therefore may materially adversely impact us. See “Item 1—Business—Government Regulation, Licensing and Enforcement—Healthcare Licensure and Certificate of Need” above. We may be unable to successfully foreclose on the collateral securing our real estate-related loans, and even if we are successful in our foreclosure efforts, we may be unable to successfully operate, occupy or reposition the underlying real estate, which may adversely affect our ability to recover our investments. If a tenant or operator defaults under one of our mortgages or mezzanine loans, we may have to foreclose on the loan or protect our interest by acquiring title to the collateral and thereafter making substantial improvements or repairs in order to maximize the property’s investment potential. In some cases, the collateral consists of the equity interests in an entity that directly or indirectly owns the applicable real property or interests in operating facilities and, accordingly, we may not have full recourse to assets of that entity, or that entity may have incurred unexpected liabilities. Tenants, operators or borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against our exercise of enforcement or other remedies and/or bring claims for lender liability in response to actions to enforce mortgage obligations. Foreclosure-related costs, high loan-to-value ratios or declines in the value of the facility may prevent us from realizing an amount equal to our mortgage or mezzanine loan upon foreclosure, and we may be required to record a valuation allowance for such losses. Even if we are able to successfully foreclose on the collateral securing our real estate-related loans, we may inherit properties for which we may be unable to expeditiously secure tenants or operators, if at all, or we may acquire equity interests that we are unable to immediately resell due to limitations under the securities laws, either of which would adversely affect our ability to fully recover our investment. PART I Required regulatory approvals can delay or prohibit state or local government agency necessary for the transfer transfers of our healthcare facilities. Transfers of healthcare facilities to successor tenants or operators are typically subject to regulatory approvals or ratifications, including, but not limited to, change of ownership approvals and Medicare and Medicaid provider arrangements that are not required for transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval process of any federal, of the facility or the replacement of the operator licensed to manage the facility. If we are unable to find a suitable replacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which could expose us to successor liability, require us to indemnify subsequent operators to whom we transfer the operating rights and licenses, or require us to spend substantial time and funds to preserve the value of the property and adapt the facility to other uses, all of which may materially adversely affect our business, results of operations and financial condition. Risks Related to Our Capital Structure and Market Conditions Interest rate increases could result in a decrease in our would otherwise be the case. Failure to hedge effectively stock price and increased interest costs on new debt against interest rate risk could adversely affect our results and existing variable rate debt, which could materially of operations and financial condition. adversely impact our ability to refinance existing debt, sell assets and conduct acquisition, investment and development activities. We rely on external sources of capital to fund future capital needs, and if access to such capital is unavailable on acceptable terms or at all, it could have a materially An increase in interest rates could reduce the amount adverse effect on our ability to meet commitments as they investors are willing to pay for our common stock. Because become due or make future investments necessary to REIT stocks are often perceived as high-yield investments, grow our business. investors may perceive less relative benefit to owning REIT stocks as interest rates and the yield on government treasuries and other bonds increase. We may not be able to fund all future capital needs, including capital expenditures, debt maturities and other commitments, from cash retained from operations and Additionally, we have existing debt obligations that are dispositions. If we are unable to obtain enough internal variable rate obligations with interest and related payments capital, we may need to rely on external sources of capital that vary with the movement of certain indices. If interest (including debt and equity financing) to fulfill our capital rates increase, so would our interest costs for any variable requirements. Our access to capital depends upon a number rate debt and for new debt. This increased cost would make of factors, some of which we have little or no control over, the financing of any acquisition and development activity including but not limited to: more costly. Rising interest rates could limit our ability to refinance existing debt when it matures, or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. • general availability of capital, including less favorable terms, rising interest rates and increased borrowing costs; • the market price of the shares of our equity securities and the credit ratings of our debt and any preferred securities we may issue; • the market’s perception of our growth potential and our current and potential future earnings and We manage a portion of our exposure to interest rate risk cash distributions; by accessing debt with staggered maturities and through • our degree of financial leverage and the use of derivative instruments, primarily interest rate operational flexibility; swap agreements. However, no amount of hedging activity • the financial integrity of our lenders, which might impair can fully insulate us from the risks associated with changes their ability to meet their commitments to us or their in interest rates. Swap agreements involve risk, including willingness to make additional loans to us, and our that counterparties may fail to honor their obligations inability to replace the financing commitment of any under these arrangements, that these arrangements may such lender on favorable terms, or at all; not be effective in reducing our exposure to interest rate the stability of the market value of our properties; changes, that the amount of income we earn from hedging the financial performance and general market transactions may be limited by federal tax provisions perception of our tenants and operators; • • governing REITs and that these arrangements may cause us to pay higher interest rates on our debt obligations than 22 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 23 PART I PART I Required regulatory approvals can delay or prohibit transfers of our healthcare facilities. Transfers of healthcare facilities to successor tenants or operators are typically subject to regulatory approvals or ratifications, including, but not limited to, change of ownership approvals and Medicare and Medicaid provider arrangements that are not required for transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval process of any federal, state or local government agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. If we are unable to find a suitable replacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which could expose us to successor liability, require us to indemnify subsequent operators to whom we transfer the operating rights and licenses, or require us to spend substantial time and funds to preserve the value of the property and adapt the facility to other uses, all of which may materially adversely affect our business, results of operations and financial condition. Risks Related to Our Capital Structure and Market Conditions Interest rate increases could result in a decrease in our stock price and increased interest costs on new debt and existing variable rate debt, which could materially adversely impact our ability to refinance existing debt, sell assets and conduct acquisition, investment and development activities. would otherwise be the case. Failure to hedge effectively against interest rate risk could adversely affect our results of operations and financial condition. An increase in interest rates could reduce the amount investors are willing to pay for our common stock. Because REIT stocks are often perceived as high-yield investments, investors may perceive less relative benefit to owning REIT stocks as interest rates and the yield on government treasuries and other bonds increase. Additionally, we have existing debt obligations that are variable rate obligations with interest and related payments that vary with the movement of certain indices. If interest rates increase, so would our interest costs for any variable rate debt and for new debt. This increased cost would make the financing of any acquisition and development activity more costly. Rising interest rates could limit our ability to refinance existing debt when it matures, or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions. We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities and through the use of derivative instruments, primarily interest rate swap agreements. However, no amount of hedging activity can fully insulate us from the risks associated with changes in interest rates. Swap agreements involve risk, including that counterparties may fail to honor their obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs and that these arrangements may cause us to pay higher interest rates on our debt obligations than We rely on external sources of capital to fund future capital needs, and if access to such capital is unavailable on acceptable terms or at all, it could have a materially adverse effect on our ability to meet commitments as they become due or make future investments necessary to grow our business. We may not be able to fund all future capital needs, including capital expenditures, debt maturities and other commitments, from cash retained from operations and dispositions. If we are unable to obtain enough internal capital, we may need to rely on external sources of capital (including debt and equity financing) to fulfill our capital requirements. Our access to capital depends upon a number of factors, some of which we have little or no control over, including but not limited to: • general availability of capital, including less • • favorable terms, rising interest rates and increased borrowing costs; the market price of the shares of our equity securities and the credit ratings of our debt and any preferred securities we may issue; the market’s perception of our growth potential and our current and potential future earnings and cash distributions; • our degree of financial leverage and • • • operational flexibility; the financial integrity of our lenders, which might impair their ability to meet their commitments to us or their willingness to make additional loans to us, and our inability to replace the financing commitment of any such lender on favorable terms, or at all; the stability of the market value of our properties; the financial performance and general market perception of our tenants and operators; operations, which could adversely affect their ability to laws (including abuse and neglect laws) and fraud laws; satisfy their obligations to us and could have a materially anti-kickback and physician referral laws; the ADA and adverse effect on us. Compliance with the Americans with Disabilities Act and fire, safety and other regulations may require us to make expenditures that adversely affect our cash flows. Our properties must comply with applicable ADA and any similar state and local laws. This may require removal of barriers to access by persons with disabilities in public areas of our properties. Noncompliance could result in imposition of fines or an award of damages to private litigants and the incurrence of additional costs associated with bringing the properties into compliance. While the tenants to whom we lease our properties are obligated to comply with the ADA and similar state and local provisions, and typically under tenant leases are obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the similar state and local laws; and safety and health standards set by the Occupational Safety and Health Administration or similar foreign agencies. Certain of our properties may also require a license, registration and/or certificate of need to operate. Our tenants’, operators’ or borrowers’ failure to comply with any of these laws, regulations or requirements could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from government healthcare programs, civil liability, loss of license or closure of the facility and/or the incurrence of considerable costs arising from an investigation or regulatory action, which may have an adverse effect on facilities owned by or mortgaged to us, and therefore may materially adversely impact us. See “Item 1—Business—Government Regulation, Licensing and Enforcement—Healthcare Licensure and Certificate of Need” above. ability of these tenants to cover costs could be adversely We may be unable to successfully foreclose on the affected. As a result, we could be required to expend funds collateral securing our real estate-related loans, and even to comply with the provisions of the ADA and similar state if we are successful in our foreclosure efforts, we may be and local laws on behalf of tenants, which could adversely unable to successfully operate, occupy or reposition the affect our results of operations and financial condition. underlying real estate, which may adversely affect our In addition, we are required to operate our properties in ability to recover our investments. compliance with fire and safety regulations, building codes If a tenant or operator defaults under one of our mortgages and other land use regulations. New and revised regulations or mezzanine loans, we may have to foreclose on the loan and codes may be adopted by governmental agencies and or protect our interest by acquiring title to the collateral and bodies and become applicable to our properties. Compliance thereafter making substantial improvements or repairs in could require substantial capital expenditures, and may order to maximize the property’s investment potential. In restrict our ability to renovate our properties. These some cases, the collateral consists of the equity interests expenditures and restrictions could have a material adverse in an entity that directly or indirectly owns the applicable effect on our ability to meet our financial obligations. real property or interests in operating facilities and, Tenants and operators that fail to comply with federal, state, local and international laws and regulations, including licensure, certification and inspection requirements, may cease to operate or be unable to meet their financial and other contractual obligations to us. accordingly, we may not have full recourse to assets of that entity, or that entity may have incurred unexpected liabilities. Tenants, operators or borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against our exercise of enforcement or other remedies and/or bring claims for lender liability Our tenants, operators and borrowers are subject to or in response to actions to enforce mortgage obligations. impacted by extensive, frequently changing federal, state, Foreclosure-related costs, high loan-to-value ratios or local and international laws and regulations. These laws declines in the value of the facility may prevent us from and regulations include, among others: laws protecting realizing an amount equal to our mortgage or mezzanine consumers against deceptive practices; laws relating to loan upon foreclosure, and we may be required to record a the operation of our properties and how our tenants and valuation allowance for such losses. Even if we are able to operators conduct their business, such as fire, health and successfully foreclose on the collateral securing our real safety, data security and privacy laws; federal and state estate-related loans, we may inherit properties for which we laws affecting hospitals, clinics and other healthcare may be unable to expeditiously secure tenants or operators, communities that participate in both Medicare and Medicaid if at all, or we may acquire equity interests that we are that mandate allowable costs, pricing, reimbursement unable to immediately resell due to limitations under the procedures and limitations, quality of services and care, securities laws, either of which would adversely affect our food service and physical plants, and similar foreign ability to fully recover our investment. laws regulating the healthcare industry; resident rights 22 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 23 PART I PART I • • changes in the credit ratings on U.S. government debt securities or default or delay in payment by the United States of its obligations; issues facing the healthcare industry, including, but not limited to, healthcare reform and changes in government reimbursement policies; and the performance of the national and global economies generally. • In 2017, we announced our plans to sell a significant number of assets managed or leased by Brookdale, our remaining interest in RIDEA II, our mezzanine loan facility to Tandem, and our U.K. portfolio. If these transactions are successful, our financial leverage is projected to decrease, which could improve our access to capital on favorable terms. However, these transactions may not be completed on a timely basis or at all, which would delay or impede our deleveraging plan. If access to capital is unavailable on acceptable terms or at all, it could have a materially adverse impact on our ability to fund operations, repay or refinance our debt obligations, fund dividend payments, acquire properties and make the investments needed to grow our business. Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all, and negatively impact the market price of our securities, including our common stock. Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financing we may obtain. We may be unable to maintain our current credit ratings, and in the event that our current credit ratings deteriorate, we would likely incur higher borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments. The credit ratings of our senior unsecured debt are based on, among other things, our operating performance, liquidity and leverage ratios, overall financial position, level of indebtedness and pending or future changes in the regulatory framework applicable to our operators and our industry. Our level of indebtedness may increase and materially adversely affect our future operations. Our outstanding indebtedness as of December 31, 2017, was approximately $7.9 billion. We may incur additional indebtedness, including in connection with the development or acquisition of assets, which may be substantial. Any significant additional indebtedness would likely negatively affect the credit ratings of our debt and require us to dedicate a substantial portion of our cash flow to interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, conduct development activities, make capital expenditures and acquisitions or carry out other aspects of our business strategy. Increased indebtedness can also make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to finance or refinance our properties, contribute properties to joint ventures or sell properties as needed. Covenants in our debt instruments limit our operational flexibility, and breaches of these covenants could materially adversely affect our business, results of operations and financial condition. The terms of our current secured and unsecured debt instruments and other indebtedness that we may incur, require or will require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios, minimum tangible net worth requirements, REIT status and certain levels of debt service coverage. Our continued ability to incur additional debt and to conduct business in general is subject to compliance with these financial and other covenants, which limit our operational flexibility. For example, mortgages on our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. Covenants that limit our operational flexibility as well as defaults resulting from the breach of any of these covenants could materially adversely affect our business, results of operations and financial condition. Cash available for distribution to stockholders may be insufficient to make dividend distributions at expected levels and are made at the discretion of our Board of Directors. If cash available for distribution generated by our assets decreases as a result of our announced dispositions or otherwise, we may be unable to make dividend distributions at expected levels. Our inability to make expected distributions would likely result in a decrease in the market price of our common stock. All distributions are made at the discretion of our Board of Directors in accordance with Maryland law and depend on our earnings, our financial condition, debt and equity capital available to us, our expectations of our future capital requirements and operating performance, restrictive covenants in our financial or other contractual arrangements (including those We may be adversely affected by fluctuations in currency in our credit facility agreement), maintenance of our REIT exchange rates. qualification, restrictions under Maryland law and other factors as our Board of Directors may deem relevant from time to time. Additionally, our ability to make distributions will be adversely affected if any of the risks described herein, or other significant adverse events, occur. We have certain investments in international markets where the U.S. dollar is not the denominated currency. The ownership of investments located outside of the United States subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. A Volatility, disruption or uncertainty in the financial markets significant change in the value of the British pound sterling may impair our ability to raise capital, obtain new financing (“GBP”) may have a materially adverse effect on our financial or refinance existing obligations and fund real estate and position, debt covenant ratios, results of operations and development activities. cash flow. We may be affected by general market and economic We may attempt to manage the impact of foreign currency conditions. Increased or prolonged market disruption, exchange rate changes through the use of derivative volatility or uncertainty could materially adversely impact contracts or other methods. For example, we currently our ability to raise capital, obtain new financing or refinance utilize GBP denominated liabilities as a natural hedge our existing obligations as they mature and fund real against our GBP denominated assets. Additionally, we estate and development activities. Market volatility could executed currency swap contracts to hedge the risk related also lead to significant uncertainty in the valuation of our to a portion of the forecasted interest receipts on these investments and those of our joint ventures, which may investments. However, no amount of hedging activity can result in a substantial decrease in the value of our properties fully insulate us from the risks associated with changes in and those of our joint ventures. As a result, we may be foreign currency exchange rates, and the failure to hedge unable to recover the carrying amount of such investments effectively against foreign currency exchange rate risk, if and the associated goodwill, if any, which may require us to we choose to engage in such activities, could materially recognize impairment charges in earnings. adversely affect our results of operations and financial condition. In addition, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. Risks Related to Other Events We are subject to certain provisions of Maryland law and In addition to the restrictions on business combinations our charter relating to business combinations which may contained in the Maryland Business Combination Act, prevent a transaction that may otherwise be in the interest our charter also contains restrictions on business of our stockholders. The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities with an “interested stockholder” or an affiliate combinations. Our charter requires that, except in certain circumstances, “business combinations,” including a merger or consolidation, and certain asset transfers and issuances of securities, with a “related person,” including a beneficial owner of 10% or more of our outstanding voting stock, be approved by the affirmative vote of the holders of at least 90% of our outstanding voting stock. of an interested stockholder for five years after the most The restrictions on business combinations provided under recent date on which the interested stockholder became Maryland law and contained in our charter may delay, defer an interested stockholder, and thereafter unless specified or prevent a change of control or other transaction even if criteria are met. An interested stockholder is generally a such transaction involves a premium price for our common person owning or controlling, directly or indirectly, 10% or stock or our stockholders believe that such transaction is more of the voting power of the outstanding voting stock of otherwise in their best interests. a Maryland corporation. Unless our Board of Directors takes action to exempt us, generally or with respect to certain transactions, from this statute, the Maryland Business Combination Act will be applicable to business combinations between us and other persons. 24 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 25 PART I • changes in the credit ratings on U.S. government debt to us to pay dividends, conduct development activities, securities or default or delay in payment by the United make capital expenditures and acquisitions or carry States of its obligations; out other aspects of our business strategy. Increased • issues facing the healthcare industry, including, but not indebtedness can also make us more vulnerable to general limited to, healthcare reform and changes in government adverse economic and industry conditions and create reimbursement policies; and • the performance of the national and global economies generally. In 2017, we announced our plans to sell a significant number of assets managed or leased by Brookdale, our remaining interest in RIDEA II, our mezzanine loan facility to Tandem, as needed. competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to finance or refinance our properties, contribute properties to joint ventures or sell properties and our U.K. portfolio. If these transactions are successful, Covenants in our debt instruments limit our operational our financial leverage is projected to decrease, which could flexibility, and breaches of these covenants could improve our access to capital on favorable terms. However, materially adversely affect our business, results of these transactions may not be completed on a timely basis operations and financial condition. or at all, which would delay or impede our deleveraging plan. If access to capital is unavailable on acceptable terms or at all, it could have a materially adverse impact on our ability to fund operations, repay or refinance our debt obligations, fund dividend payments, acquire properties and make the investments needed to grow our business. The terms of our current secured and unsecured debt instruments and other indebtedness that we may incur, require or will require us to comply with a number of customary financial and other covenants, such as maintaining leverage ratios, minimum tangible net worth requirements, REIT status and certain levels of debt service Adverse changes in our credit ratings could impair our coverage. Our continued ability to incur additional debt ability to obtain additional debt and equity financing on and to conduct business in general is subject to compliance favorable terms, if at all, and negatively impact the market with these financial and other covenants, which limit our price of our securities, including our common stock. operational flexibility. For example, mortgages on our Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financing we may obtain. We may be unable to maintain our current credit ratings, and in the event that our current credit ratings deteriorate, we would likely incur higher borrowing costs, which would make it more difficult or expensive to obtain additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments. The credit ratings of our senior unsecured debt are based on, among other things, our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. Covenants that limit our operational flexibility as well as defaults resulting from the breach of any of these covenants could materially adversely affect our business, results of operations and financial condition. operating performance, liquidity and leverage ratios, overall Cash available for distribution to stockholders may be financial position, level of indebtedness and pending or insufficient to make dividend distributions at expected future changes in the regulatory framework applicable to levels and are made at the discretion of our Board our operators and our industry. of Directors. Our level of indebtedness may increase and materially If cash available for distribution generated by our assets adversely affect our future operations. Our outstanding indebtedness as of December 31, 2017, was approximately $7.9 billion. We may incur additional indebtedness, including in connection with the development or acquisition of assets, which may be substantial. Any significant additional indebtedness would likely negatively affect the credit ratings of our debt and require us to dedicate a substantial portion of our cash flow to interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available decreases as a result of our announced dispositions or otherwise, we may be unable to make dividend distributions at expected levels. Our inability to make expected distributions would likely result in a decrease in the market price of our common stock. All distributions are made at the discretion of our Board of Directors in accordance with Maryland law and depend on our earnings, our financial condition, debt and equity capital available to us, our expectations of our future capital requirements and operating performance, restrictive covenants in our financial or other contractual arrangements (including those in our credit facility agreement), maintenance of our REIT qualification, restrictions under Maryland law and other factors as our Board of Directors may deem relevant from time to time. Additionally, our ability to make distributions will be adversely affected if any of the risks described herein, or other significant adverse events, occur. Volatility, disruption or uncertainty in the financial markets may impair our ability to raise capital, obtain new financing or refinance existing obligations and fund real estate and development activities. We may be affected by general market and economic conditions. Increased or prolonged market disruption, volatility or uncertainty could materially adversely impact our ability to raise capital, obtain new financing or refinance our existing obligations as they mature and fund real estate and development activities. Market volatility could also lead to significant uncertainty in the valuation of our investments and those of our joint ventures, which may result in a substantial decrease in the value of our properties and those of our joint ventures. As a result, we may be unable to recover the carrying amount of such investments and the associated goodwill, if any, which may require us to recognize impairment charges in earnings. Risks Related to Other Events We are subject to certain provisions of Maryland law and our charter relating to business combinations which may prevent a transaction that may otherwise be in the interest of our stockholders. The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities with an “interested stockholder” or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10% or more of the voting power of the outstanding voting stock of a Maryland corporation. Unless our Board of Directors takes action to exempt us, generally or with respect to certain transactions, from this statute, the Maryland Business Combination Act will be applicable to business combinations between us and other persons. PART I We may be adversely affected by fluctuations in currency exchange rates. We have certain investments in international markets where the U.S. dollar is not the denominated currency. The ownership of investments located outside of the United States subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the British pound sterling (“GBP”) may have a materially adverse effect on our financial position, debt covenant ratios, results of operations and cash flow. We may attempt to manage the impact of foreign currency exchange rate changes through the use of derivative contracts or other methods. For example, we currently utilize GBP denominated liabilities as a natural hedge against our GBP denominated assets. Additionally, we executed currency swap contracts to hedge the risk related to a portion of the forecasted interest receipts on these investments. However, no amount of hedging activity can fully insulate us from the risks associated with changes in foreign currency exchange rates, and the failure to hedge effectively against foreign currency exchange rate risk, if we choose to engage in such activities, could materially adversely affect our results of operations and financial condition. In addition, any international currency gain recognized with respect to changes in exchange rates may not qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT. In addition to the restrictions on business combinations contained in the Maryland Business Combination Act, our charter also contains restrictions on business combinations. Our charter requires that, except in certain circumstances, “business combinations,” including a merger or consolidation, and certain asset transfers and issuances of securities, with a “related person,” including a beneficial owner of 10% or more of our outstanding voting stock, be approved by the affirmative vote of the holders of at least 90% of our outstanding voting stock. The restrictions on business combinations provided under Maryland law and contained in our charter may delay, defer or prevent a change of control or other transaction even if such transaction involves a premium price for our common stock or our stockholders believe that such transaction is otherwise in their best interests. 24 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 25 PART I Unfavorable resolution of litigation matters and disputes could have a material adverse effect on our financial condition. From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits arising out of our alleged actions or the alleged actions of our tenants and operators for which such tenants and operators have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such litigation may have a materially adverse effect on our business, results of operations and financial condition. Regardless of the outcome, litigation or other legal proceedings may result in substantial costs, disruption of our normal business operations and the diversion of management attention. We may be unable to prevail in, or achieve a favorable settlement of, any pending or future legal action against us. See Item 3—Legal Proceedings of this Annual Report on Form 10-K. Loss of our key personnel could temporarily disrupt our operations and adversely affect us. We depend on the efforts of our executive officers, and competition for these individuals is intense. Although they are covered by our Executive Severance Plan and Change in Control Plan, which provide many of the benefits typically found in executive employment agreements, none of our executive officers have employment agreements with us. The loss or limited availability of the services of any of our executive officers, or our inability to recruit and retain qualified personnel, could, at least temporarily, have a materially adverse effect on our business, results of operations and financial condition and the value of our common stock. We may experience uninsured or underinsured losses, which could result in a significant loss of the capital invested in a property, lower than expected future revenues or unanticipated expense. We maintain and regularly review the comprehensive insurance coverage on our properties with terms, conditions, limits and deductibles that we believe are adequate and appropriate given the relative risk and costs of such coverage. However, a large number of our properties are located in areas exposed to earthquake, windstorm, flood and other natural disasters. In particular, our life science portfolio is concentrated in areas known to be subject to earthquake activity. While we purchase insurance coverage for earthquake, windstorm, flood and other natural disasters that we believe is adequate in light of current industry practice and analyses prepared by outside consultants, such insurance may not fully cover such losses. For example, we incurred uninsured losses of approximately $11 million during 2017 as a result of hurricane-related property damage. These losses can result in decreased anticipated revenues from a property and the loss of all or a portion of the capital we have invested in a property. Following these events, we may remain liable for any mortgage debt or other financial obligations related to the property. The insurance market for such exposures can be very volatile, and we may be unable to purchase the limits and terms we desire on a commercially reasonable basis. In addition, there are certain exposures for which we do not purchase insurance because we do not believe it is economically feasible to do so or where there is no viable insurance market. If one of our properties experiences a loss that is uninsured or that exceeds policy coverage limits, we could lose our investment in the damaged property as well as the anticipated future cash flows from such property. If the damaged property is subject to recourse indebtedness, we could continue to be liable for the indebtedness even if the property is irreparably damaged. In addition, even if damage to our properties is covered by insurance, a disruption of business caused by a casualty event may result in loss of revenues for us. Any business interruption insurance may not fully compensate the lender or us for such loss of revenue. Environmental compliance costs and liabilities associated with our real estate-related investments may be substantial and may materially impair the value of those investments. Federal, state and local laws, ordinances and regulations may require us, as a current or previous owner of real estate, to investigate and clean up certain hazardous or toxic substances or petroleum released at a property. We may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by the third parties in connection with the contamination. The costs of cleanup and remediation could be substantial. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Although we currently carry environmental insurance on our properties in an amount that we believe is commercially reasonable and generally require our tenants and operators to indemnify us for environmental liabilities they cause, such liabilities could exceed the amount of our insurance, the financial ability of the tenant or operator to indemnify us or the value of the contaminated property. As the owner of a site, we may also be held liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. We may also experience environmental liabilities arising from conditions not known to us. The cost of defending against these claims, complying with environmental regulatory requirements, conducting PART I remediation of any contaminated property, or paying prevent the systems’ improper functioning or damage, or personal injury or other claims or fines could be substantial the improper access or disclosure of personally identifiable and could have a materially adverse effect on our business, information such as in the event of cyber-attacks. In results of operations and financial condition. addition, the pace and unpredictability of cyber threats In addition, the presence of contamination or the failure to remediate contamination may materially adversely affect our ability to use, sell or lease the property or to borrow using the property as collateral. generally quickly renders long-term implementation plans designed to address cybersecurity risks obsolete. Security breaches, including those caused by physical or electronic break-ins, computer viruses, malware, worms, attacks by hackers or foreign governments, disruptions from We rely on information technology in our operations, and unauthorized access and tampering, including through any material failure, inadequacy, interruption or security social engineering such as phishing attacks, coordinated failure of that technology could harm our business. denial-of-service attacks and similar breaches, can create We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant and lease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant and customer data, including individually identifiable information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not system disruptions, shutdowns or unauthorized disclosure of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks and intrusions have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. In addition, our technology infrastructure and information systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures. Any failure to maintain proper function, security and availability of our information systems and the data maintained in those systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations. Risk Related to Tax, including REIT-Related Risks Loss of our tax status as a REIT would substantially reduce federal income tax consequences of that qualification, in our available funds and would have materially adverse a manner that is materially adverse to our stockholders. consequences for us and the value of our common stock. Accordingly, there is no assurance that we have operated Qualification as a REIT involves the application of numerous highly technical and complex provisions of the Code, for remain qualified as a REIT. or will continue to operate in a manner so as to qualify or which there are only limited judicial and administrative If we lose our REIT status, we will face serious tax interpretations, as well as the determination of various consequences that will substantially reduce the funds factual matters and circumstances not entirely within available to make payments of principal and interest on our control. We intend to continue to operate in a the debt securities we issue and to make distributions to manner that enables us to qualify as a REIT. However, stockholders. If we fail to qualify as a REIT: our qualification and taxation as a REIT depend upon our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code. For example, to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, new legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the • we will not be allowed a deduction for distributions to stockholders in computing our taxable income; • we will be subject to corporate-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; • we could be subject to increased state and local income taxes; and • unless we are entitled to relief under relevant statutory provisions, we will be disqualified from taxation as a REIT for the four taxable years following the year during which we fail to qualify as a REIT. 26 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 27 PART I financial condition. Unfavorable resolution of litigation matters and in decreased anticipated revenues from a property and the disputes could have a material adverse effect on our loss of all or a portion of the capital we have invested in a From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits arising out of our alleged actions or the alleged actions of our tenants and operators for which such tenants and operators have agreed to indemnify, defend and hold us harmless. An unfavorable resolution of any such litigation may have a materially adverse effect on our business, results of operations and financial property. Following these events, we may remain liable for any mortgage debt or other financial obligations related to the property. The insurance market for such exposures can be very volatile, and we may be unable to purchase the limits and terms we desire on a commercially reasonable basis. In addition, there are certain exposures for which we do not purchase insurance because we do not believe it is economically feasible to do so or where there is no viable insurance market. condition. Regardless of the outcome, litigation or other If one of our properties experiences a loss that is uninsured legal proceedings may result in substantial costs, disruption or that exceeds policy coverage limits, we could lose of our normal business operations and the diversion of our investment in the damaged property as well as the management attention. We may be unable to prevail in, or anticipated future cash flows from such property. If the achieve a favorable settlement of, any pending or future damaged property is subject to recourse indebtedness, we legal action against us. See Item 3—Legal Proceedings of could continue to be liable for the indebtedness even if the this Annual Report on Form 10-K. property is irreparably damaged. Loss of our key personnel could temporarily disrupt our In addition, even if damage to our properties is covered by operations and adversely affect us. We depend on the efforts of our executive officers, and competition for these individuals is intense. Although they are covered by our Executive Severance Plan and Change in insurance, a disruption of business caused by a casualty event may result in loss of revenues for us. Any business interruption insurance may not fully compensate the lender or us for such loss of revenue. Control Plan, which provide many of the benefits typically Environmental compliance costs and liabilities associated found in executive employment agreements, none of our with our real estate-related investments may be executive officers have employment agreements with substantial and may materially impair the value of us. The loss or limited availability of the services of any those investments. of our executive officers, or our inability to recruit and retain qualified personnel, could, at least temporarily, have a materially adverse effect on our business, results of operations and financial condition and the value of our common stock. Federal, state and local laws, ordinances and regulations may require us, as a current or previous owner of real estate, to investigate and clean up certain hazardous or toxic substances or petroleum released at a property. We may be held liable to a governmental entity or to third parties We may experience uninsured or underinsured losses, for property damage and for investigation and cleanup which could result in a significant loss of the capital costs incurred by the third parties in connection with the invested in a property, lower than expected future contamination. The costs of cleanup and remediation could revenues or unanticipated expense. We maintain and regularly review the comprehensive insurance coverage on our properties with terms, conditions, limits and deductibles that we believe are be substantial. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. adequate and appropriate given the relative risk and Although we currently carry environmental insurance on costs of such coverage. However, a large number of our our properties in an amount that we believe is commercially properties are located in areas exposed to earthquake, reasonable and generally require our tenants and operators windstorm, flood and other natural disasters. In particular, to indemnify us for environmental liabilities they cause, such our life science portfolio is concentrated in areas known liabilities could exceed the amount of our insurance, the to be subject to earthquake activity. While we purchase financial ability of the tenant or operator to indemnify us or insurance coverage for earthquake, windstorm, flood and the value of the contaminated property. As the owner of a other natural disasters that we believe is adequate in light site, we may also be held liable to third parties for damages of current industry practice and analyses prepared by and injuries resulting from environmental contamination outside consultants, such insurance may not fully cover emanating from the site. We may also experience such losses. For example, we incurred uninsured losses environmental liabilities arising from conditions not known of approximately $11 million during 2017 as a result of to us. The cost of defending against these claims, complying hurricane-related property damage. These losses can result with environmental regulatory requirements, conducting remediation of any contaminated property, or paying personal injury or other claims or fines could be substantial and could have a materially adverse effect on our business, results of operations and financial condition. In addition, the presence of contamination or the failure to remediate contamination may materially adversely affect our ability to use, sell or lease the property or to borrow using the property as collateral. We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business. We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, and maintaining personal identifying information and tenant and lease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for the processing, transmission and storage of confidential tenant and customer data, including individually identifiable information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not PART I prevent the systems’ improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. In addition, the pace and unpredictability of cyber threats generally quickly renders long-term implementation plans designed to address cybersecurity risks obsolete. Security breaches, including those caused by physical or electronic break-ins, computer viruses, malware, worms, attacks by hackers or foreign governments, disruptions from unauthorized access and tampering, including through social engineering such as phishing attacks, coordinated denial-of-service attacks and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. The risk of security breaches has generally increased as the number, intensity and sophistication of attacks and intrusions have increased. In some cases, it may be difficult to anticipate or immediately detect such incidents and the damage they cause. In addition, our technology infrastructure and information systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures. Any failure to maintain proper function, security and availability of our information systems and the data maintained in those systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a materially adverse effect on our business, financial condition and results of operations. Risk Related to Tax, including REIT-Related Risks Loss of our tax status as a REIT would substantially reduce our available funds and would have materially adverse consequences for us and the value of our common stock. Qualification as a REIT involves the application of numerous highly technical and complex provisions of the Code, for which there are only limited judicial and administrative interpretations, as well as the determination of various factual matters and circumstances not entirely within our control. We intend to continue to operate in a manner that enables us to qualify as a REIT. However, our qualification and taxation as a REIT depend upon our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code. For example, to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, new legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is materially adverse to our stockholders. Accordingly, there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT. If we lose our REIT status, we will face serious tax consequences that will substantially reduce the funds available to make payments of principal and interest on the debt securities we issue and to make distributions to stockholders. If we fail to qualify as a REIT: • we will not be allowed a deduction for distributions to stockholders in computing our taxable income; • we will be subject to corporate-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates; • we could be subject to increased state and local income taxes; and • unless we are entitled to relief under relevant statutory provisions, we will be disqualified from taxation as a REIT for the four taxable years following the year during which we fail to qualify as a REIT. 26 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 27 PART I As a result of all these factors, our failure to qualify as a REIT could also impair our ability to expand our business and raise capital and could materially adversely affect the value of our common stock. The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the U.S. Internal Revenue Service (the “IRS”) and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. Revisions in federal tax laws and interpretations thereof could affect or cause us to change our investments and commitments and affect the tax considerations of an investment in us. We could have potential deferred and contingent tax liabilities from corporate acquisitions that could limit, delay or impede future sales of our properties. If, during the five-year period beginning on the date we acquire certain companies, we recognize a gain on the disposition of any property acquired, then, to the extent of the excess of (i) the fair market value of such property as of the acquisition date over (ii) our adjusted income tax basis in such property as of that date, we will be required to pay a corporate-level federal income tax on this gain at the highest regular corporate rate. There can be no assurance that these triggering dispositions will not occur, and these requirements could limit, delay or impede future sales of our properties. In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time that we acquire certain companies, in which case we will owe these taxes plus interest and penalties, if any. There are uncertainties relating to the calculation of non-REIT tax earnings and profits (“E&P”) in certain acquisitions, which may require us to distribute E&P. In order to remain qualified as a REIT, we are required to distribute to our stockholders all of the accumulated non-REIT E&P of certain companies that we acquire, prior to the close of the first taxable year in which the acquisition occurs. Failure to make such E&P distributions would result in our disqualification as a REIT. The determination of the amount to be distributed in such E&P distributions is a complex factual and legal determination. We may have less than complete information at the time we undertake our analysis, or we may interpret the applicable law differently from the IRS. We currently believe that we have satisfied the requirements relating to such E&P distributions. There are, however, substantial uncertainties relating to the determination of E&P, including the possibility that the IRS could successfully assert that the taxable income of the companies acquired should be increased, which would increase our non-REIT E&P. Moreover, an audit of the acquired company following our acquisition could result in an increase in accumulated non-REIT E&P, which could require us to pay an additional taxable distribution to our then-existing stockholders, if we qualify under rules for curing this type of default, or could result in our disqualification as a REIT. Thus, we might fail to satisfy the requirement that we distribute all of our non-REIT E&P by the close of the first taxable year in which the acquisition occurs. Moreover, although there are procedures available to cure a failure to distribute all of our E&P, we cannot now determine whether we will be able to take advantage of these procedures or the economic impact on us of doing so. Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders. The recently enacted Tax Cuts and Jobs Act (the “Act”) makes substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to “sunset” provisions, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers. The effect of these, and the many other, changes made in the Act is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of the Act will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposed with respect to the Act next year, the effect of which cannot be predicted and may be adverse to us or our stockholders. PART I Our international investments and operations may result in Our charter contains ownership limits with respect to our additional tax-related risks. common stock and other classes of capital stock. We have investments and operations in the U.K., and may Our charter contains restrictions on the ownership and further expand internationally. International expansion transfer of our common stock and preferred stock that are presents tax-related risks that are different from those intended to assist us in preserving our qualification as a we face with respect to our domestic properties and REIT. Under our charter, subject to certain exceptions, no operations. These risks include, but are not limited to: person or entity may own, actually or constructively, more • international currency gain recognized with respect to changes in exchange rates may not always qualify under the 75% gross income test or the 95% gross income than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or any class or series of our preferred stock. test that we must satisfy annually in order to qualify and Additionally, our charter has a 9.9% ownership limitation on maintain our status as a REIT; the direct or indirect ownership of our voting shares, which • challenges with respect to the repatriation of foreign may include common stock or other classes of capital stock. earnings and cash; and Our Board of Directors, in its sole discretion, may exempt • challenges of complying with foreign tax rules (including a proposed transferee from either ownership limit. The the possible revisions in tax treaties or other laws and ownership limits may delay, defer or prevent a transaction regulations, including those governing the taxation of or a change of control that might involve a premium price our international income). for our common stock or might otherwise be in the best interests of our stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We are organized to invest in income-producing healthcare- • availability of security such as letters of credit, security related facilities. In evaluating potential investments, we deposits and guarantees; consider a multitude of factors, including: • potential for capital appreciation; • location, construction quality, age, condition and design of the property; • geographic area, proximity to other healthcare facilities, type of property and demographic profile, including new competitive supply; • whether the expected risk-adjusted return exceeds the incremental cost of capital; • whether the rent or operating income provides a competitive market return to our investors; • duration, rental rates, tenant and operator quality and other attributes of in-place leases, including master • • lease structures and coverage; • current and anticipated cash flow and its adequacy to meet our operational needs; • expertise and reputation of the tenant or operator; • occupancy and demand for similar healthcare facilities in the same or nearby communities; • the mix of revenues generated at healthcare facilities between privately paid and government reimbursed; • availability of qualified operators or property managers and whether we can manage the property; • potential alternative uses of the facilities; the regulatory and reimbursement environment in which the properties operate; tax laws related to REITs; • prospects for liquidity through financing or refinancing; and • our access to and cost of capital. 28 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 29 PART I common stock. As a result of all these factors, our failure to qualify as a REIT the requirements relating to such E&P distributions. could also impair our ability to expand our business and raise There are, however, substantial uncertainties relating to capital and could materially adversely affect the value of our the determination of E&P, including the possibility that The present federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the federal income tax treatment of an investment in us. The federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the U.S. Internal Revenue Service (the “IRS”) and the U.S. Treasury Department, which results the IRS could successfully assert that the taxable income of the companies acquired should be increased, which would increase our non-REIT E&P. Moreover, an audit of the acquired company following our acquisition could result in an increase in accumulated non-REIT E&P, which could require us to pay an additional taxable distribution to our then-existing stockholders, if we qualify under rules for curing this type of default, or could result in our disqualification as a REIT. in statutory changes as well as frequent revisions to Thus, we might fail to satisfy the requirement that we regulations and interpretations. Revisions in federal tax distribute all of our non-REIT E&P by the close of the first laws and interpretations thereof could affect or cause us to taxable year in which the acquisition occurs. Moreover, change our investments and commitments and affect the although there are procedures available to cure a failure to tax considerations of an investment in us. We could have potential deferred and contingent tax liabilities from corporate acquisitions that could limit, delay distribute all of our E&P, we cannot now determine whether we will be able to take advantage of these procedures or the economic impact on us of doing so. or impede future sales of our properties. Changes to U.S. federal income tax laws could materially If, during the five-year period beginning on the date we and adversely affect us and our stockholders. acquire certain companies, we recognize a gain on the The recently enacted Tax Cuts and Jobs Act (the “Act”) disposition of any property acquired, then, to the extent makes substantial changes to the Code. Among those of the excess of (i) the fair market value of such property changes are a significant permanent reduction in the as of the acquisition date over (ii) our adjusted income tax generally applicable corporate tax rate, changes in the basis in such property as of that date, we will be required to taxation of individuals and other non-corporate taxpayers pay a corporate-level federal income tax on this gain at the that generally but not universally reduce their taxes on highest regular corporate rate. There can be no assurance a temporary basis subject to “sunset” provisions, the that these triggering dispositions will not occur, and these elimination or modification of various currently allowed requirements could limit, delay or impede future sales of deductions (including substantial limitations on the our properties. In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time that we acquire certain companies, in which case we will owe these taxes plus interest and penalties, if any. deductibility of interest and, in the case of individuals, the deduction for personal state and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary There are uncertainties relating to the calculation of income recognized by such taxpayers. The effect of these, non-REIT tax earnings and profits (“E&P”) in certain and the many other, changes made in the Act is highly acquisitions, which may require us to distribute E&P. uncertain, both in terms of their direct effect on the taxation In order to remain qualified as a REIT, we are required to distribute to our stockholders all of the accumulated non-REIT E&P of certain companies that we acquire, prior to the close of the first taxable year in which the acquisition occurs. Failure to make such E&P distributions would result in our disqualification as a REIT. The determination of the amount to be distributed in such E&P distributions is a complex factual and legal determination. We may have less than complete information at the time we undertake our analysis, or we may interpret the applicable law differently from the IRS. We currently believe that we have satisfied of an investment in our common stock and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of the Act will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. It is also likely that there will be technical corrections legislation proposed with respect to the Act next year, the effect of which cannot be predicted and may be adverse to us or our stockholders. PART I Our international investments and operations may result in additional tax-related risks. Our charter contains ownership limits with respect to our common stock and other classes of capital stock. We have investments and operations in the U.K., and may further expand internationally. International expansion presents tax-related risks that are different from those we face with respect to our domestic properties and operations. These risks include, but are not limited to: • international currency gain recognized with respect to changes in exchange rates may not always qualify under the 75% gross income test or the 95% gross income test that we must satisfy annually in order to qualify and maintain our status as a REIT; • challenges with respect to the repatriation of foreign earnings and cash; and • challenges of complying with foreign tax rules (including the possible revisions in tax treaties or other laws and regulations, including those governing the taxation of our international income). Our charter contains restrictions on the ownership and transfer of our common stock and preferred stock that are intended to assist us in preserving our qualification as a REIT. Under our charter, subject to certain exceptions, no person or entity may own, actually or constructively, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or any class or series of our preferred stock. Additionally, our charter has a 9.9% ownership limitation on the direct or indirect ownership of our voting shares, which may include common stock or other classes of capital stock. Our Board of Directors, in its sole discretion, may exempt a proposed transferee from either ownership limit. The ownership limits may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We are organized to invest in income-producing healthcare- related facilities. In evaluating potential investments, we consider a multitude of factors, including: • location, construction quality, age, condition and design of the property; • geographic area, proximity to other healthcare facilities, type of property and demographic profile, including new competitive supply; • whether the expected risk-adjusted return exceeds the incremental cost of capital; • whether the rent or operating income provides a competitive market return to our investors; • duration, rental rates, tenant and operator quality and other attributes of in-place leases, including master lease structures and coverage; • current and anticipated cash flow and its adequacy to meet our operational needs; • availability of security such as letters of credit, security deposits and guarantees; • potential for capital appreciation; • expertise and reputation of the tenant or operator; • occupancy and demand for similar healthcare facilities in • the same or nearby communities; the mix of revenues generated at healthcare facilities between privately paid and government reimbursed; • availability of qualified operators or property managers and whether we can manage the property; • potential alternative uses of the facilities; • the regulatory and reimbursement environment in which the properties operate; tax laws related to REITs; • • prospects for liquidity through financing or refinancing; and • our access to and cost of capital. 28 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 29 PART I PART I Occupancy and Annual Rent Trends The following table summarizes occupancy and average square feet of the facilities and annualized for mergers and annual rent trends for our consolidated property and DFL acquisitions for the year in which they occurred. Average investments for the years ended December 31, (average annual rent for leased properties (including DFLs) excludes occupied square feet in thousands). Average annual rent termination fees and non-cash revenue adjustments is presented as a ratio of revenues comprised of rental (i.e., straight-line rents, amortization of market lease and related revenues, tenant recoveries and income from intangibles and DFL non-cash interest). DFLs divided by the average capacity or average occupied Senior Housing Triple-Net: Average annual rent per unit Average capacity (available units) SHOP: Average annual rent per unit Average capacity (available units) Life science: Average occupancy percentage Average annual rent per square foot Average occupied square feet Medical office: Average occupancy percentage Average annual rent per square foot Average occupied square feet Other non-reportable segments: Average annual rent per bed - Hospital Average capacity (available beds) - Hospital Average annual rent per unit - U.K. Average capacity (available units) - U.K. Average annual rent per bed - SNF Average capacity (available beds) - SNF 2017 2016 2015 2014 2013 $15,352 $14,604 $14,544 $13,907 $13,361 21,536 28,455 28,777 33,917 35,932 $41,133 $42,851 $41,435 $38,017 $32,070 12,758 16,028 12,704 6,408 4,620 $ $ 96% 52 $ 98% 48 $ 97% 46 $ 93% 46 $ 92% 44 6,841 7,332 7,179 6,637 6,480 92% 28 $ 91% 28 $ 91% 28 $ 91% 28 $ 91% 27 16,674 15,697 14,677 13,136 12,767 $38,017 $39,076 $39,834 $38,756 $38,089 2,161 2,271 2,187 2,184 2,138 $ 9,097 $ 9,200 $10,048 $11,240 3,188 3,190 2,515 501 — — $10,298 $10,803 $ 8,292 $ 8,062 $ 7,537 120 426 1,047 1,022 974 Property and Direct Financing Lease Investments The following table summarizes our consolidated property and direct financing leases (“DFL”) investments as of and for the year ended December 31, 2017 (square feet and dollars in thousands): Facility Location Senior housing triple-net—real estate: California Virginia Florida Texas Washington Oregon New Jersey Other (25 States) Senior housing—DFLs(3): Other (12 States) Total Senior Housing Triple-Net SHOP: Texas Florida Colorado Illinois Maryland Other (16 States) Total SHOP Life science: California Other (3 States) Total life science Medical office: Texas California Pennsylvania Florida Other (29 States) Total medical office Other(4): Texas California Other (7 States) Other—U.K.: Other (U.K.) Other—Post-acute/skilled nursing.: Virginia Total other non-reportable segments Total properties Number of Facilities 17 10 13 16 14 13 7 64 154 27 181 21 23 6 5 6 41 102 121 10 131 67 18 4 23 142 254 4 2 8 14 61 1 76 744 Capacity (Units) 1,727 1,227 1,683 1,762 953 1,118 680 6,063 15,213 3,118 18,331 (Units) 3,640 3,234 952 1,063 590 4,265 13,744 (Sq. Ft.) 6,818 909 7,727 (Sq. Ft.) 5,867 1,031 1,059 1,329 9,169 18,455 (Beds) 1,035 111 988 2,134 (Units) 3,183 (Beds) 120 Gross Asset Value(1) Rental Revenues(2) Operating Expenses $ 416,949 273,045 258,538 218,137 190,674 162,628 144,574 1,082,775 2,747,320 $ 53,589 20,409 25,691 5,058 16,361 17,082 100 138,144 276,434 $ (3,139) — — — — (243) 3 (392) (3,771) 629,748 $ 3,377,068 37,113 $ 313,547 (48) (3,819) $ $ 518,021 436,429 203,717 203,644 176,702 680,298 $ 2,218,811 $ 135,763 135,751 46,755 42,126 33,292 131,786 $ 525,473 $ (98,929) (108,063) (27,042) (32,189) (24,341) (105,927) $(396,491) $ 3,618,619 359,157 $ 3,977,776 $ 338,668 20,148 $ 358,816 $ (74,066) (3,935) $ (78,001) $ 1,078,259 324,021 309,085 235,550 1,783,694 $ 3,730,609 $ $ 231,645 143,500 154,558 529,703 $ 135,349 35,418 31,326 31,227 244,139 $ 477,459 $ $ 35,650 19,350 28,813 83,813 $ (55,733) (18,532) (12,523) (12,317) (84,092) $(183,197) $ $ (4,489) (172) (82) (4,743) 337,179 31,798 — 16,596 $ 883,478 $14,187,742 1,235 $ 116,846 $1,792,141 — $ (4,743) $(666,251) (1) Represents gross real estate and the carrying value of DFLs. Gross real estate represents the carrying amount of real estate after adding back accumulated depreciation and amortization. Includes real estate held for sale with an aggregate gross asset value of $485 million. (2) Represent the combined amount of rental and related revenues, tenant recoveries, resident fees and services and income from DFLs. (3) Represents leased properties that are classified as DFLs. (4) Includes leased properties that are classified as DFLs. 30 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 31 PART I PART I Property and Direct Financing Lease Investments The following table summarizes our consolidated property and direct financing leases (“DFL”) investments as of and for the year ended December 31, 2017 (square feet and dollars in thousands): Facility Location Senior housing triple-net—real estate: Number of Gross Asset Rental Operating Facilities Capacity Value(1) Revenues(2) Expenses Occupancy and Annual Rent Trends The following table summarizes occupancy and average annual rent trends for our consolidated property and DFL investments for the years ended December 31, (average occupied square feet in thousands). Average annual rent is presented as a ratio of revenues comprised of rental and related revenues, tenant recoveries and income from DFLs divided by the average capacity or average occupied Senior Housing Triple-Net: Average annual rent per unit Average capacity (available units) SHOP: Average annual rent per unit Average capacity (available units) Life science: Average occupancy percentage Average annual rent per square foot Average occupied square feet Medical office: Average occupancy percentage Average annual rent per square foot Average occupied square feet Other non-reportable segments: Average annual rent per bed - Hospital Average capacity (available beds) - Hospital Average annual rent per unit - U.K. Average capacity (available units) - U.K. Average annual rent per bed - SNF Average capacity (available beds) - SNF Senior housing—DFLs(3): Other (12 States) Total Senior Housing Triple-Net California Virginia Florida Texas Washington Oregon New Jersey Other (25 States) SHOP: Texas Florida Colorado Illinois Maryland Other (16 States) Total SHOP Life science: California Other (3 States) Total life science Medical office: Texas California Pennsylvania Florida Other (29 States) Total medical office Other(4): Texas California Other (7 States) Other—U.K.: Other (U.K.) Virginia Other—Post-acute/skilled nursing.: Total other non-reportable segments Total properties 17 10 13 16 14 13 7 64 154 27 181 21 23 6 5 6 41 102 121 10 131 67 18 4 23 142 254 4 2 8 14 61 1 76 744 (Units) 1,727 1,227 1,683 1,762 953 1,118 680 6,063 15,213 3,118 18,331 (Units) 3,640 3,234 952 1,063 590 4,265 13,744 (Sq. Ft.) 6,818 909 7,727 (Sq. Ft.) 5,867 1,031 1,059 1,329 9,169 (Beds) 1,035 111 988 2,134 (Units) 3,183 (Beds) 120 $ $ $ (3,139) 416,949 273,045 258,538 218,137 190,674 162,628 144,574 1,082,775 2,747,320 53,589 20,409 25,691 5,058 16,361 17,082 100 138,144 276,434 — — — — 3 (243) (392) (3,771) 629,748 37,113 (48) $ 3,377,068 $ 313,547 $ (3,819) $ 518,021 436,429 203,717 203,644 176,702 680,298 $ 135,763 $ (98,929) 135,751 (108,063) 46,755 42,126 33,292 (27,042) (32,189) (24,341) 131,786 (105,927) $ 2,218,811 $ 525,473 $(396,491) $ 3,618,619 $ 338,668 $ (74,066) 359,157 20,148 (3,935) $ 3,977,776 $ 358,816 $ (78,001) $ 1,078,259 $ 135,349 $ (55,733) 324,021 309,085 235,550 1,783,694 35,418 31,326 31,227 244,139 (18,532) (12,523) (12,317) (84,092) $ $ 231,645 143,500 154,558 529,703 $ $ 35,650 19,350 28,813 83,813 $ (4,489) (172) (82) $ (4,743) 337,179 31,798 16,596 $ 883,478 $14,187,742 1,235 $ 116,846 $1,792,141 $ (4,743) $(666,251) — — 18,455 $ 3,730,609 $ 477,459 $(183,197) (1) Represents gross real estate and the carrying value of DFLs. Gross real estate represents the carrying amount of real estate after adding back accumulated depreciation and amortization. Includes real estate held for sale with an aggregate gross asset value of $485 million. (2) Represent the combined amount of rental and related revenues, tenant recoveries, resident fees and services and income from DFLs. (3) Represents leased properties that are classified as DFLs. (4) Includes leased properties that are classified as DFLs. square feet of the facilities and annualized for mergers and acquisitions for the year in which they occurred. Average annual rent for leased properties (including DFLs) excludes termination fees and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles and DFL non-cash interest). 2017 2016 2015 2014 2013 $15,352 21,536 $14,604 28,455 $14,544 28,777 $13,907 33,917 $13,361 35,932 $41,133 12,758 $42,851 16,028 $41,435 12,704 $38,017 6,408 $32,070 4,620 $ 96% 52 6,841 $ 98% 48 7,332 $ 97% 46 7,179 $ 93% 46 6,637 $ 92% 44 6,480 $ 92% 28 16,674 $ 91% 28 15,697 $ 91% 28 14,677 $ 91% 28 13,136 $ 91% 27 12,767 $38,017 2,161 $ 9,097 3,188 $10,298 120 $39,076 2,271 $ 9,200 3,190 $10,803 426 $39,834 2,187 $10,048 2,515 $ 8,292 1,047 $38,756 2,184 $11,240 501 $ 8,062 1,022 $38,089 2,138 — — $ 7,537 974 30 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 31 PART I Tenant Lease Expirations The following table shows tenant lease expirations, including those related to DFLs, for the next 10 years and thereafter at our consolidated properties, assuming that none of the tenants exercise any of their renewal or purchase options, unless otherwise noted below (dollars and square feet in thousands), and excludes properties in our SHOP segment and assets held for sale. See “Tenant Purchase Options” section of Note 11 to the Consolidated Financial Statements for additional information on leases subject to purchase options. Expiration Year Segment Senior housing triple-net: Properties Base rent(2) % of segment base rent Life science: Square feet Base rent(2) % of segment base rent Medical office: Square feet Base rent(2) % of segment base rent Total 2018(1) 2019 2020 2021 2022 2023 2024 2025 2026 2027 Thereafter 5 179 4 $ 304,452 $ 6,191 $ 2,238 $ 39,646 $ 10,191 $ 1,513 $ 44,926 $18,052 $ 9,618 $ 5,746 $12,090 4 100 24 11 15 13 22 — 3 6 2 6 2 5 1 3 1 7 2 457 6,900 373 $ 291,683 $15,081 $31,693 $ 19,598 $ 50,307 $22,656 $ 60,929 $ 4,618 $34,653 $ 8,991 $15,328 5 1,035 845 203 948 631 832 556 100 12 21 17 83 11 2 8 5 7 3 2,939 16,945 722 $ 389,497 $70,049 $53,422 $ 58,461 $ 39,115 $41,392 $ 17,213 $21,240 $31,625 $18,541 $14,387 4 1,926 2,280 2,172 1,548 1,670 758 809 719 100 18 11 10 15 14 5 4 5 8 92 $154,241 51 937 $ 27,829 9 1,402 $ 24,052 6 Other non-reportable segments: Properties Base rent(2) % of segment base rent 76 $ 105,051 $ 100 5 — — $ 7,594 $ — 7 1 7,977 $ 8 1 4 1,572 $13,179 $ 1 13 — 2 — $15,375 $20,619 $ — 15 20 1 — — $ — — 62 — $ 38,735 36 — Total: Base rent(2) % of total base rent $1,090,683 $91,321 $94,947 $125,682 $101,185 $78,740 $123,068 $59,285 $96,515 $33,278 $41,805 4 100 12 11 7 3 9 5 9 8 9 $244,857 23 (1) Includes month-to-month leases. (2) The most recent month’s (or subsequent month’s if acquired in the most recent month) base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and deferred revenues). See Schedule III: Real Estate and Accumulated Depreciation, included in this report, which information is incorporated by reference in this Item 2. LEGAL PROCEEDINGS ITEM 3. Except as described below, we are not aware of any legal proceedings or claims that we believe could have, individually or taken together, a material adverse effect on our financial condition, results of operations or cash flows. See “Legal Proceedings” section of Note 11 to the Consolidated Financial Statements for information regarding legal proceedings, which information is incorporated by reference in this Item 3. ITEM 4. MINE SAFETY DISCLOSURES None. 32 http://www.hcpi.com 2017 Annual Report 33 PART II 2017 Fourth Quarter Third Quarter Second Quarter First Quarter 2016(1) Fourth Quarter Third Quarter Second Quarter First Quarter ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange (“NYSE”). It has been our policy to declare quarterly dividends to common stockholders so as to comply with applicable provisions of the Code governing REITs. For the fiscal quarters indicated below are the reported high and low sales prices per share of our common stock on the NYSE and the cash dividends paid per common share: Per Share High Low Distribution $27.62 $25.09 $0.370 32.65 33.67 32.97 27.47 29.55 29.36 40.43 36.90 39.25 34.56 31.91 25.11 0.370 0.370 0.370 0.575 0.575 0.575 $38.09 $27.61 $0.370 (1) Price as originally traded. Does not give effect to the stock dividend of $6.17 per common share related to the Spin-Off (discussed below). At January 31, 2018, we had 9,384 stockholders of record, and there were 192,786 beneficial holders of our common stock. Dividends (Distributions) Distributions with respect to our common stock can be characterized for federal income tax purposes as taxable ordinary dividends, capital gain dividends, nondividend distributions or a combination thereof. Following is the characterization of our annual common stock distributions per share: Year Ended December 31, 2017 2016 2015 $1.4800 $1.5561 $2.1184 — — — 6.7089 0.0316 0.1100 $1.4800 $8.2650(1) $2.2600 Ordinary dividends Capital gain dividends Nondividend distributions (discussed below). (1) Consists of $2.095 per common share of quarterly cash dividends and $6.17 per common share of stock dividends related to the Spin-Off HCP common stockholders on October 24, 2016, the record each share of QCP common stock. Accordingly, every HCP date for the Spin-Off (the “Record Date”), received upon the common stockholder who received a Distributed Share has Spin-Off on October 31, 2016 one share of QCP common a tax cost basis of $30.85 per Distributed Share. stock for every five shares of HCP common stock they held (the “Distributed Shares”) and cash in lieu of fractional shares of QCP. For U.S. federal income tax purposes, HCP reported the fair market value of the QCP common stock distributed per each share of HCP common stock outstanding on the Record Date was $6.17, or $30.85 for On February 1, 2018, we announced that our Board of Directors declared a quarterly common stock cash dividend of $0.37 per share. The common stock dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. PART I Tenant Lease Expirations The following table shows tenant lease expirations, including feet in thousands), and excludes properties in our SHOP those related to DFLs, for the next 10 years and thereafter segment and assets held for sale. See “Tenant Purchase at our consolidated properties, assuming that none of Options” section of Note 11 to the Consolidated Financial the tenants exercise any of their renewal or purchase Statements for additional information on leases subject to options, unless otherwise noted below (dollars and square purchase options. Total 2018(1) 2019 2020 2021 2022 2023 2024 2025 2026 2027 Thereafter Expiration Year 6,900 457 832 556 948 631 1,035 83 845 203 373 937 $ 291,683 $15,081 $31,693 $ 19,598 $ 50,307 $22,656 $ 60,929 $ 4,618 $34,653 $ 8,991 $15,328 $ 27,829 % of segment base rent 100 11 7 17 8 21 12 Segment Senior housing triple-net: % of segment base rent Properties Base rent(2) Life science: Square feet Base rent(2) Medical office: Square feet Base rent(2) % of segment base rent Other non-reportable segments: Properties Base rent(2) % of segment base rent Total: 179 100 100 76 100 5 2 5 18 — — $ 304,452 $ 6,191 $ 2,238 $ 39,646 $ 10,191 $ 1,513 $ 44,926 $18,052 $ 9,618 $ 5,746 $12,090 $154,241 16,945 2,939 2,172 2,280 1,548 1,670 719 809 1,926 758 722 1,402 $ 389,497 $70,049 $53,422 $ 58,461 $ 39,115 $41,392 $ 17,213 $21,240 $31,625 $18,541 $14,387 $ 24,052 14 15 10 2 1 5 7 9 22 13 1 8 12 1 — 11 4 13 6 3 1 1 9 24 15 11 6 4 — — 15 20 2 5 2 5 5 3 8 1 9 7 2 3 5 — — $ — 4 4 5 4 — — 92 51 9 6 62 36 23 $ 105,051 $ — $ 7,594 $ 7,977 $ 1,572 $13,179 $ — $15,375 $20,619 $ — $ 38,735 Base rent(2) $1,090,683 $91,321 $94,947 $125,682 $101,185 $78,740 $123,068 $59,285 $96,515 $33,278 $41,805 $244,857 % of total base rent 100 8 7 11 3 4 (1) Includes month-to-month leases. (2) The most recent month’s (or subsequent month’s if acquired in the most recent month) base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of market lease intangibles, DFL non-cash interest and deferred revenues). reference in this Item 2. See Schedule III: Real Estate and Accumulated Depreciation, included in this report, which information is incorporated by ITEM 3. LEGAL PROCEEDINGS Except as described below, we are not aware of any See “Legal Proceedings” section of Note 11 to the legal proceedings or claims that we believe could have, Consolidated Financial Statements for information individually or taken together, a material adverse effect on regarding legal proceedings, which information is our financial condition, results of operations or cash flows. incorporated by reference in this Item 3. ITEM 4. MINE SAFETY DISCLOSURES None. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the New York Stock Exchange (“NYSE”). It has been our policy to declare quarterly dividends to common stockholders so as to comply with applicable provisions of the Code governing REITs. For the fiscal quarters indicated below are the reported high and low sales prices per share of our common stock on the NYSE and the cash dividends paid per common share: 2017 Fourth Quarter Third Quarter Second Quarter First Quarter 2016(1) Fourth Quarter Third Quarter Second Quarter First Quarter High Low Per Share Distribution $27.62 $25.09 27.47 29.55 29.36 32.65 33.67 32.97 $38.09 $27.61 34.56 31.91 25.11 40.43 36.90 39.25 $0.370 0.370 0.370 0.370 $0.370 0.575 0.575 0.575 (1) Price as originally traded. Does not give effect to the stock dividend of $6.17 per common share related to the Spin-Off (discussed below). At January 31, 2018, we had 9,384 stockholders of record, and there were 192,786 beneficial holders of our common stock. Dividends (Distributions) Distributions with respect to our common stock can be characterized for federal income tax purposes as taxable ordinary dividends, capital gain dividends, nondividend distributions or a combination thereof. Following is the characterization of our annual common stock distributions per share: Ordinary dividends Capital gain dividends Nondividend distributions Year Ended December 31, 2016 $1.5561 — 6.7089 $8.2650(1) 2015 $2.1184 0.0316 0.1100 $2.2600 2017 $1.4800 — — $1.4800 (1) Consists of $2.095 per common share of quarterly cash dividends and $6.17 per common share of stock dividends related to the Spin-Off (discussed below). HCP common stockholders on October 24, 2016, the record date for the Spin-Off (the “Record Date”), received upon the Spin-Off on October 31, 2016 one share of QCP common stock for every five shares of HCP common stock they held (the “Distributed Shares”) and cash in lieu of fractional shares of QCP. For U.S. federal income tax purposes, HCP reported the fair market value of the QCP common stock distributed per each share of HCP common stock outstanding on the Record Date was $6.17, or $30.85 for each share of QCP common stock. Accordingly, every HCP common stockholder who received a Distributed Share has a tax cost basis of $30.85 per Distributed Share. On February 1, 2018, we announced that our Board of Directors declared a quarterly common stock cash dividend of $0.37 per share. The common stock dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. 32 http://www.hcpi.com 2017 Annual Report 33 PART II PART II Recent Sales of Unregistered Securities On January 6, 2017, we issued 12,143 shares of our common stock upon the redemption of 5,283 non-managing member units of our subsidiary, HCPI/Utah, LLC. The shares of our common stock were issued in a private placement to an accredited investor pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended. We did not receive any cash proceeds from the issuance of shares of our common stock upon redemption of the non-managing member units of HCPI/Utah, LLC, although we did acquire non-managing member units of the subsidiary in exchange for the shares of common stock we issued upon redemption of the units. Issuer Purchases of Equity Securities The table below sets forth the information with respect to purchases of our common stock made by or on our behalf during the quarter ended December 31, 2017. Period Covered October 1-31, 2017 November 1-30, 2017 December 1-31, 2017 Total Total Number of Shares Purchased(1) 12,220 — 590 12,810 Average Price Paid per Share $25.37 — 26.10 25.41 Maximum Number (or Approximate Dollar Value) of Shares that May Yet be Purchased Under the Plans or Programs — — — — Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs — — — — $250 $200 $150 $100 $50 $0 Performance Graph The graph and table below compare the cumulative total of trading on December 31, 2012 and assumes quarterly return of HCP, the S&P 500 Index and the Equity REIT Index reinvestment of dividends before consideration of income of NAREIT, from January 1, 2013 to December 31, 2017. taxes. Stockholder returns over the indicated periods Total cumulative return is based on a $100 investment in should not be considered indicative of future stock prices or HCP common stock and in each of the indices at the close stockholder returns. Comparison of Five-Year Cumulative Total Return Among S&P 500, Equity REITs and HCP, Inc. Rate of Return Trend Comparison January 1, 2013–December 31, 2017 (January 1, 2013 = $100) Performance Graph Total Stockholder Return (1) Represents restricted shares withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares. The value of the shares withheld is based on the closing price of our common stock on the last trading day prior to the date the relevant transaction occurred. 01/01/13 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 HCP, Inc. FTSE NAREIT Equity REIT Index S&P 500 FTSE NAREIT Equity REIT Index S&P 500 HCP, Inc. December 31, 2013 2014 2015 2016 2017 $102.88 $131.68 $135.42 $147.35 $160.11 132.36 84.35 150.43 107.66 152.51 99.15 170.70 90.20 207.92 83.15 34 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 35 PART II Recent Sales of Unregistered Securities On January 6, 2017, we issued 12,143 shares of our common cash proceeds from the issuance of shares of our common stock upon the redemption of 5,283 non-managing member stock upon redemption of the non-managing member units units of our subsidiary, HCPI/Utah, LLC. The shares of of HCPI/Utah, LLC, although we did acquire non-managing our common stock were issued in a private placement to member units of the subsidiary in exchange for the shares of an accredited investor pursuant to Section 4(a)(2) of the common stock we issued upon redemption of the units. Securities Act of 1933, as amended. We did not receive any Issuer Purchases of Equity Securities The table below sets forth the information with respect to purchases of our common stock made by or on our behalf during the quarter ended December 31, 2017. Maximum Number (or Approximate Total Number Dollar Value) of Shares of Shares Purchased as that May Yet Part of Publicly be Purchased Total Number of Shares Average Price Announced Plans Under the Plans Purchased(1) Paid per Share or Programs or Programs 12,220 — 590 12,810 $25.37 — 26.10 25.41 — — — — — — — — Period Covered October 1-31, 2017 November 1-30, 2017 December 1-31, 2017 Total (1) Represents restricted shares withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares. The value of the shares withheld is based on the closing price of our common stock on the last trading day prior to the date the relevant transaction occurred. PART II of trading on December 31, 2012 and assumes quarterly reinvestment of dividends before consideration of income taxes. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholder returns. Performance Graph The graph and table below compare the cumulative total return of HCP, the S&P 500 Index and the Equity REIT Index of NAREIT, from January 1, 2013 to December 31, 2017. Total cumulative return is based on a $100 investment in HCP common stock and in each of the indices at the close Comparison of Five-Year Cumulative Total Return Among S&P 500, Equity REITs and HCP, Inc. Rate of Return Trend Comparison January 1, 2013–December 31, 2017 (January 1, 2013 = $100) Performance Graph Total Stockholder Return $250 $200 $150 $100 $50 $0 01/01/13 12/31/13 12/31/14 12/31/15 12/31/16 12/31/17 HCP, Inc. FTSE NAREIT Equity REIT Index S&P 500 FTSE NAREIT Equity REIT Index S&P 500 HCP, Inc. December 31, 2013 $102.88 132.36 84.35 2014 $131.68 150.43 107.66 2015 $135.42 152.51 99.15 2016 $147.35 170.70 90.20 2017 $160.11 207.92 83.15 34 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 35 PART II PART II ITEM 6. SELECTED FINANCIAL DATA Set forth below is our selected financial data as of and for each of the years in the five-year period ended December 31, (dollars in thousands, except per share data): 2017 Year Ended December 31, 2016 2015 2014 2013 Statement of operations data: Total revenues Income (loss) from continuing operations Net income (loss) applicable to common shares Basic earnings per common share Continuing operations Discontinued operations Net income (loss) attributable to common stockholders Diluted earnings per common share Continuing operations Discontinued operations Net income (loss) attributable to common stockholders Balance sheet data: Total assets Debt obligations(1) Total equity Other data: Dividends paid Dividends paid per common share(2) Funds from operations (“FFO”)(3) Diluted FFO per common share(3) FFO as adjusted(3) Diluted FFO as adjusted per common share(3) Funds available for distribution (“FAD”)(3) $ 1,848,378 $ 2,129,294 $ 1,940,489 152,668 (560,552) 374,171 626,549 422,634 413,013 $ 1,636,833 $ 1,488,786 253,526 969,103 271,315 919,796 following order: • 2017 Transaction Overview • Dividends • Inflation • Non-GAAP Financial Measure Reconciliations • Critical Accounting Policies • Recent Accounting Pronouncements 0.88 — 0.88 0.88 — 0.88 0.77 0.57 1.34 0.77 0.57 1.34 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) 0.56 1.45 2.01 0.56 1.44 2.00 0.52 1.61 2.13 0.52 1.61 2.13 14,088,461 7,880,466 5,594,938 15,759,265 9,189,495 5,941,308 21,449,849 11,069,003 9,746,317 21,331,436 9,721,269 10,997,099 20,040,310 8,626,067 10,931,134 694,955 1.480 661,113 1.41 918,402 1.95 803,720 979,542 2.095 1,119,153 2.39 1,282,390 2.74 1,215,696 1,046,638 2.260 (10,841) (0.02) 1,470,167 3.16 1,261,849 1,001,559 2.180 1,381,634 3.00 1,398,691 3.04 1,178,822 956,685 2.100 1,349,264 2.95 1,382,699 3.02 1,158,082 (1) Includes bank line of credit, term loans, senior unsecured notes, mortgage and other secured debt, and other debt. (2) Represents cash dividends. Additionally, in October 2016 we issued $6.17 of stock dividends related to the Spin-Off. (3) For a more detailed discussion and reconciliation of FFO, FFO as adjusted and FAD, see “Results of Operations” and “Non-GAAP Financial Measure Reconciliations” in Item 7. 36 http://www.hcpi.com 2017 Annual Report 37 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in this Item 7 is intended to • Results of Operations provide readers with an understanding of our financial • Liquidity and Capital Resources condition, changes in financial condition and results of • Contractual Obligations operations. We will discuss and provide our analysis in the • Off-Balance Sheet Arrangements 2017 Transaction Overview Master Transactions and Cooperation Agreement with Brookdale • We have provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and On November 1, 2017, HCP and Brookdale entered into a Master Transactions and Cooperation Agreement (the • We will sell two triple-net assets to Brookdale or its affiliates for $35 million, which we anticipate completing “MTCA”) to provide us with the ability to significantly reduce during the first half of 2018. our concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transaction”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA, our exposure to Brookdale is expected to be significantly reduced. In connection with the overall transaction pursuant to the MTCA, HCP (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between HCP and the Lessee. Under the Amended Master Lease, we have the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease. The Amended Master Lease preserves the renewal terms Also pursuant to the MTCA, HCP and Brookdale agreed to the following: • HCP, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). We completed our acquisition of the RIDEA III noncontrolling interest in December 2017 and anticipate completing our acquisition of the RIDEA I noncontrolling interest during the first half of 2018; • We have the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two and, with certain exceptions, the rents under the previously years to a maximum of 7% of gross revenues; existing triple-net leases. In addition, HCP and Brookdale • We will sell four of the RIDEA Facilities to Brookdale or agreed to the following: • We have the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple-net lease with respect to such assets will convert to a cash flow lease (under which we will bear the risks and rewards of operating the assets) with a term of two years, provided that we have the right to terminate the cash flow lease at any time during the term without penalty; its affiliates for $239 million, one of which was sold in January 2018 for $27 million. We anticipate completing the sale of the remaining three RIDEA Facilities during the first half of 2018; • A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance- PART II ITEM 6. SELECTED FINANCIAL DATA Set forth below is our selected financial data as of and for each of the years in the five-year period ended December 31, (dollars in thousands, except per share data): Statement of operations data: Total revenues Income (loss) from continuing operations Net income (loss) applicable to common shares 422,634 413,013 374,171 626,549 152,668 (560,552) 271,315 919,796 253,526 969,103 $ 1,848,378 $ 2,129,294 $ 1,940,489 $ 1,636,833 $ 1,488,786 Year Ended December 31, 2017 2016 2015 2014 2013 Basic earnings per common share Continuing operations Discontinued operations Net income (loss) attributable to common stockholders Diluted earnings per common share Continuing operations Discontinued operations Net income (loss) attributable to common stockholders Balance sheet data: Total assets Debt obligations(1) Total equity Other data: Dividends paid Dividends paid per common share(2) Funds from operations (“FFO”)(3) Diluted FFO per common share(3) FFO as adjusted(3) Diluted FFO as adjusted per common share(3) Funds available for distribution (“FAD”)(3) 0.88 — 0.88 0.88 — 0.88 0.77 0.57 1.34 0.77 0.57 1.34 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) 0.56 1.45 2.01 0.56 1.44 2.00 0.52 1.61 2.13 0.52 1.61 2.13 14,088,461 15,759,265 21,449,849 21,331,436 20,040,310 7,880,466 5,594,938 9,189,495 11,069,003 9,721,269 8,626,067 5,941,308 9,746,317 10,997,099 10,931,134 694,955 1.480 979,542 1,046,638 1,001,559 2.095 2.260 2.180 956,685 2.100 661,113 1,119,153 (10,841) 1,381,634 1,349,264 918,402 1,282,390 1,470,167 1,398,691 1,382,699 1.41 1.95 2.39 2.74 (0.02) 3.16 3.00 3.04 2.95 3.02 803,720 1,215,696 1,261,849 1,178,822 1,158,082 (1) Includes bank line of credit, term loans, senior unsecured notes, mortgage and other secured debt, and other debt. (2) Represents cash dividends. Additionally, in October 2016 we issued $6.17 of stock dividends related to the Spin-Off. (3) For a more detailed discussion and reconciliation of FFO, FFO as adjusted and FAD, see “Results of Operations” and “Non-GAAP Financial Measure Reconciliations” in Item 7. PART II ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in this Item 7 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order: • 2017 Transaction Overview • Dividends • Results of Operations • Liquidity and Capital Resources • Contractual Obligations • Off-Balance Sheet Arrangements • • Non-GAAP Financial Measure Reconciliations • Critical Accounting Policies • Recent Accounting Pronouncements Inflation 2017 Transaction Overview Master Transactions and Cooperation Agreement with Brookdale On November 1, 2017, HCP and Brookdale entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide us with the ability to significantly reduce our concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transaction”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA, our exposure to Brookdale is expected to be significantly reduced. In connection with the overall transaction pursuant to the MTCA, HCP (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between HCP and the Lessee. Under the Amended Master Lease, we have the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease. The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, HCP and Brookdale agreed to the following: • We have the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple-net lease with respect to such assets will convert to a cash flow lease (under which we will bear the risks and rewards of operating the assets) with a term of two years, provided that we have the right to terminate the cash flow lease at any time during the term without penalty; • We have provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and • We will sell two triple-net assets to Brookdale or its affiliates for $35 million, which we anticipate completing during the first half of 2018. Also pursuant to the MTCA, HCP and Brookdale agreed to the following: • HCP, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). We completed our acquisition of the RIDEA III noncontrolling interest in December 2017 and anticipate completing our acquisition of the RIDEA I noncontrolling interest during the first half of 2018; • We have the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues; • We will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million, one of which was sold in January 2018 for $27 million. We anticipate completing the sale of the remaining three RIDEA Facilities during the first half of 2018; • A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance- 36 http://www.hcpi.com 2017 Annual Report 37 PART II based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights), and two other existing facilities managed in separate RIDEA structures; and • We have the right to sell, to certain permitted transferees, our 49% ownership interest in joint ventures that own and operate a portfolio of continuing care retirement communities and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, we will have the right to initiate a sale of the CCRC portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale. See Note 3 to the Consolidated Financial Statements for additional information. RIDEA II Sale Transaction In January 2017, we completed the contribution of our ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (“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, we received combined proceeds of $480 million from the HCP/CPA JV and $242 million in loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and 40% ownership interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in us deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. The RIDEA II Investments are currently recognized and accounted for as equity method investments. On November 1, 2017, we entered into a definitive agreement with an investor group led by CPA to sell our remaining 40% ownership interest in RIDEA II. We expect the transaction to close in 2018. CPA has also agreed to refinance our $242 million loan receivables from RIDEA II within one year following the closing of the transaction. Investment Transactions During the second quarter of 2017, we acquired a 124,000 square foot campus in the Sorrento Mesa submarket of San Diego, California for $26 million. Upon acquisition, we commenced repositioning one of the buildings into class-A lab space following an office-to-lab conversion strategy. During the third quarter of 2017, we acquired a portfolio of three medical office buildings in Texas for $49 million and a life science facility in South San Francisco, California for $64 million. During the fourth quarter of 2017, we completed the following investments: • • • • In November 2017, we acquired a 90-unit SHOP facility in a suburb of Boston, Massachusetts for $45 million. HCP owns a majority interest in this facility through a joint venture with LCB Senior Living. In December 2017, we acquired a $228 million life science campus known as the Hayden Research Campus located in the Boston suburb of Lexington, Massachusetts. HCP owns a majority interest in this campus through a joint venture with King Street Properties (“King Street”). The campus includes two existing buildings totaling 400,000 square feet and was 66% leased at closing, anchored by major life science tenants including Shire US, Inc., a subsidiary of Shire plc, and Merck, Sharp and Dohme, a subsidiary of Merck and Co., Inc. Additionally, King Street is currently seeking entitlement approvals from local authorities for the joint venture to develop an additional 209,000 square feet of life science space on the campus. In December 2017, we acquired a portfolio of 11 MOBs located throughout the United States, totaling approximately 378,000 square feet, for $151 million. In December 2017, we entered into a participating debt financing arrangement with Columbia Pacific Advisors, LLC to fund the construction of 620 Terry, a $147 million, 243-unit senior living development located in Seattle. Upon expected completion in 2019, 620 Terry will be operated by Leisure Care, LLC, a leading senior housing operator, and offer a mix of independent-living, assisted-living and memory care units. We will provide up to $115 million of financing and earn 6.5% interest on the outstanding loan balance. Upon sale or refinancing, we will receive 20% of fair market value in excess of the total development cost. Disposition and Loan Repayment Transactions • During the second quarter of 2017, we repaid $250 million of maturing senior unsecured notes and paid down £51 million of our £220 million unsecured During the first quarter of 2017, we completed the following term loan (the “2015 Term Loan”). PART II disposition and loan repayment transactions: • • In January 2017, we sold four life science facilities in Salt Lake City, Utah for $76 million. In March 2017, we sold 64 senior housing triple- net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P. • In March 2017, we sold our aggregate £138.5 million par value Four Seasons senior notes (“Four Seasons Notes”) for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale as the sales price was above the previously-impaired (2015) carrying value of £41 million ($50 million). In addition, we sold our Four Seasons senior secured term loan at par plus accrued interest for £29 million ($35 million). During the second quarter of 2017, we completed the following disposition and loan repayment transactions: • In April 2017, we sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million. • In June 2017, we received £283 million ($367 million) from the repayment of our HC-One Facility. During the third quarter of 2017, we sold two senior housing triple-net facilities for $15 million. During the fourth quarter 2017, we completed the following disposition transactions: • • • In October 2017, we sold two senior housing triple-net facilities for $12 million. In November 2017, we sold a MOB for $11 million and a SHOP facility for $24 million. In December 2017, we sold three SHOP assets for $17 million and two MOBs for $3 million. Financing Activities • During the year ended December 31, 2017, we had net debt repayments of $1.4 billion primarily using proceeds from the dispositions of real estate (primarily the sale of 64 senior housing triple-net assets), the partial sale of RIDEA II, the sale of our Four Seasons Notes and the repayment of our HC-One Facility. Debt repayments during the year ended December 31, 2017 consisted of the following: • During the first quarter of 2017, we repaid our £137 million unsecured term loan (the “2012 Term Loan”) and $472 million of mortgage debt. • During the third quarter of 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment. • During the fourth quarter of 2017, we terminated our then existing bank line of credit facility (the “Facility”) and entered into a new $2.0 billion unsecured revolving line of credit facility (the “New Facility”) maturing on October 19, 2021. Borrowings under the New Facility accrue interest at LIBOR plus a margin that depends on our credit ratings (1.00% initially). We pay a facility fee on the entire revolving commitment that depends on our credit ratings (0.20% initially and as of December 31, 2017). The New Facility contains two, six-month extension options and includes a feature that allows us to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. Developments and Redevelopments The Cove Phase I and Phase II have reached 100% leased during the year ended December 31, 2017. During the year ended December 31, 2017, we added $384 million of new projects to our development and redevelopment pipelines including: • Commenced the $219 million Phase I development at Sierra Point, consisting of two buildings totaling 215,000 square feet of Class A life science and office space in South San Francisco, California, with an estimated completion in late 2019. • Commenced a $40 million redevelopment of a MOB located in the University City submarket of Philadelphia, near the University of Pennsylvania, with an estimated completion in the second quarter of 2018. • Entered into a joint venture agreement and commenced development on a 111-unit senior housing facility in Otay Ranch, California (San Diego MSA) for $31 million. Our share of the estimated total construction cost is approximately $28 million, with an estimated completion in the second half of 2018. • Commenced development on a 79-unit senior housing facility in Waldwick, New Jersey (New York MSA) for $31 million in a joint venture. Our share of the estimated total construction costs is approximately $26 million, with an estimated completion in late 2018. 38 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 39 PART II based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights), and two other existing facilities managed in separate RIDEA structures; and • We have the right to sell, to certain permitted transferees, our 49% ownership interest in joint Investment Transactions During the second quarter of 2017, we acquired a 124,000 square foot campus in the Sorrento Mesa submarket of San Diego, California for $26 million. Upon acquisition, we commenced repositioning one of the buildings into class-A lab space following an office-to-lab conversion strategy. ventures that own and operate a portfolio of continuing During the third quarter of 2017, we acquired a portfolio of care retirement communities and in which Brookdale three medical office buildings in Texas for $49 million and owns the other 51% interest (the “CCRC JV”), subject a life science facility in South San Francisco, California for to certain conditions and a right of first offer in favor of $64 million. Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first During the fourth quarter of 2017, we completed the following investments: offer and a right to terminate management agreements • In November 2017, we acquired a 90-unit SHOP facility following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, we in a suburb of Boston, Massachusetts for $45 million. HCP owns a majority interest in this facility through a will have the right to initiate a sale of the CCRC portfolio, joint venture with LCB Senior Living. subject to certain rights of first offer and first refusal in • In December 2017, we acquired a $228 million life favor of Brookdale. See Note 3 to the Consolidated Financial Statements for additional information. RIDEA II Sale Transaction In January 2017, we completed the contribution of our ownership interest in RIDEA II to an unconsolidated JV owned by HCP and an investor group led by Columbia Pacific Advisors, LLC (“CPA”) (“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, we received combined proceeds of $480 million from the HCP/CPA JV and $242 million in loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and 40% ownership interest are herein referred to as the “RIDEA II Investments”). This transaction resulted in us deconsolidating the net assets of RIDEA II and recognizing a net gain on sale of $99 million. The RIDEA II Investments are currently recognized and accounted for as equity method investments. On November 1, 2017, we entered into a definitive agreement with an investor group led by CPA to sell our remaining 40% ownership interest in RIDEA II. We expect the transaction to close in 2018. CPA has also agreed to refinance our $242 million loan receivables from RIDEA II within one year following the closing of the transaction. science campus known as the Hayden Research Campus located in the Boston suburb of Lexington, Massachusetts. HCP owns a majority interest in this campus through a joint venture with King Street Properties (“King Street”). The campus includes two existing buildings totaling 400,000 square feet and was 66% leased at closing, anchored by major life science tenants including Shire US, Inc., a subsidiary of Shire plc, and Merck, Sharp and Dohme, a subsidiary of Merck and Co., Inc. Additionally, King Street is currently seeking entitlement approvals from local authorities for the joint venture to develop an additional 209,000 square feet of life science space on the campus. • In December 2017, we acquired a portfolio of 11 MOBs located throughout the United States, totaling approximately 378,000 square feet, for $151 million. • In December 2017, we entered into a participating debt financing arrangement with Columbia Pacific Advisors, LLC to fund the construction of 620 Terry, a $147 million, 243-unit senior living development located in Seattle. Upon expected completion in 2019, 620 Terry will be operated by Leisure Care, LLC, a leading senior housing operator, and offer a mix of independent-living, assisted-living and memory care units. We will provide up to $115 million of financing and earn 6.5% interest on the outstanding loan balance. Upon sale or refinancing, we will receive 20% of fair market value in excess of the total development cost. Disposition and Loan Repayment Transactions During the first quarter of 2017, we completed the following disposition and loan repayment transactions: • • • In January 2017, we sold four life science facilities in Salt Lake City, Utah for $76 million. In March 2017, we sold 64 senior housing triple- net assets, previously under triple-net leases with Brookdale, for $1.125 billion to affiliates of Blackstone Real Estate Partners VIII, L.P. In March 2017, we sold our aggregate £138.5 million par value Four Seasons senior notes (“Four Seasons Notes”) for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale as the sales price was above the previously-impaired (2015) carrying value of £41 million ($50 million). In addition, we sold our Four Seasons senior secured term loan at par plus accrued interest for £29 million ($35 million). During the second quarter of 2017, we completed the following disposition and loan repayment transactions: • • In April 2017, we sold a land parcel in San Diego, California for $27 million and one life science building in San Diego, California for $5 million. In June 2017, we received £283 million ($367 million) from the repayment of our HC-One Facility. During the third quarter of 2017, we sold two senior housing triple-net facilities for $15 million. During the fourth quarter 2017, we completed the following disposition transactions: • • • In October 2017, we sold two senior housing triple-net facilities for $12 million. In November 2017, we sold a MOB for $11 million and a SHOP facility for $24 million. In December 2017, we sold three SHOP assets for $17 million and two MOBs for $3 million. Financing Activities • During the year ended December 31, 2017, we had net debt repayments of $1.4 billion primarily using proceeds from the dispositions of real estate (primarily the sale of 64 senior housing triple-net assets), the partial sale of RIDEA II, the sale of our Four Seasons Notes and the repayment of our HC-One Facility. Debt repayments during the year ended December 31, 2017 consisted of the following: • During the first quarter of 2017, we repaid our £137 million unsecured term loan (the “2012 Term Loan”) and $472 million of mortgage debt. PART II • During the second quarter of 2017, we repaid $250 million of maturing senior unsecured notes and paid down £51 million of our £220 million unsecured term loan (the “2015 Term Loan”). • During the third quarter of 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment. • During the fourth quarter of 2017, we terminated our then existing bank line of credit facility (the “Facility”) and entered into a new $2.0 billion unsecured revolving line of credit facility (the “New Facility”) maturing on October 19, 2021. Borrowings under the New Facility accrue interest at LIBOR plus a margin that depends on our credit ratings (1.00% initially). We pay a facility fee on the entire revolving commitment that depends on our credit ratings (0.20% initially and as of December 31, 2017). The New Facility contains two, six-month extension options and includes a feature that allows us to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. Developments and Redevelopments The Cove Phase I and Phase II have reached 100% leased during the year ended December 31, 2017. During the year ended December 31, 2017, we added $384 million of new projects to our development and redevelopment pipelines including: • Commenced the $219 million Phase I development at Sierra Point, consisting of two buildings totaling 215,000 square feet of Class A life science and office space in South San Francisco, California, with an estimated completion in late 2019. • Commenced a $40 million redevelopment of a MOB located in the University City submarket of Philadelphia, near the University of Pennsylvania, with an estimated completion in the second quarter of 2018. • Entered into a joint venture agreement and commenced development on a 111-unit senior housing facility in Otay Ranch, California (San Diego MSA) for $31 million. Our share of the estimated total construction cost is approximately $28 million, with an estimated completion in the second half of 2018. • Commenced development on a 79-unit senior housing facility in Waldwick, New Jersey (New York MSA) for $31 million in a joint venture. Our share of the estimated total construction costs is approximately $26 million, with an estimated completion in late 2018. 38 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 39 PART II PART II • Commenced $22 million of redevelopment projects at • Commenced a $16 million life science development Properties are included in SPP once they are stabilized for applicable reconciling items based on actual ownership two recently-acquired life science assets in the Sorrento Mesa submarket of San Diego, California, with an estimated completion in late 2018. expansion project in the Sorrento Mesa submarket of San Diego, California, with an estimated completion in the second half of 2019. Dividends Quarterly cash dividends paid during 2017 aggregated to $1.48 per share. On February 1, 2018, our Board of Directors declared a quarterly cash dividend of $0.37 per common share. The dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. Results of Operations We evaluate our business and allocate resources among our reportable business segments: (i) senior housing triple-net, (ii) senior housing operating portfolio (SHOP), (iii) life science and (iv) medical office. Under the medical office and life science segments, we invest through the acquisition and development of MOBs and life science facilities, which generally require a greater level of property management. Our senior housing facilities are managed utilizing triple-net leases and RIDEA structures. We have other non-reportable segments that are comprised primarily of our U.K. care homes, debt investments, unconsolidated joint ventures and hospitals. We evaluate performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) adjusted NOI (cash NOI) in each segment. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Consolidated Financial Statements). Non-GAAP Financial Measures Net Operating Income NOI and Adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 13 to the Consolidated Financial Statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non- cash interest, amortization of market lease intangibles, termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods presented to conform to the current period presentation which excludes the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid. Adjusted NOI is oftentimes referred to as “cash NOI.” During the fourth quarter of 2017, as a result of a change in how operating results are reported to our chief operating decision makers for the purpose of evaluating performance and allocating resources, we began excluding unconsolidated joint ventures from the evaluation of our segments’ operating results. Unconsolidated joint ventures are now reflected in other non-reportable segments, and as a result, excluded from NOI and Adjusted NOI. Prior period NOI and Adjusted NOI have also been recast to conform to current period presentation which excludes unconsolidated joint ventures. We use NOI and Adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and to evaluate our same property portfolio (“SPP”), as described below. We believe that net income (loss) is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect various excluded items. Further, our definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the Consolidated Financial Statements. Operating expenses generally relate to leased medical office and life science properties and SHOP facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense. Same Property Portfolio SPP NOI and Adjusted NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our consolidated portfolio of properties. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. SPP NOI for properties that undergo a change in ownership is reported based on the current ownership percentage. the full period in both comparison periods. Newly acquired percentage for the applicable periods. Our pro-rata share operating assets are generally considered stabilized at the information is prepared on a basis consistent with the earlier of lease-up (typically when the tenant(s) control(s) comparable consolidated amounts, is intended to reflect our the physical use of at least 80% of the space) or 12 months proportionate economic interest in the operating results from the acquisition date. Newly completed developments of properties in our portfolio and is calculated by applying and redevelopments are considered stabilized at the earlier our actual ownership percentage for the period. We do not of lease-up or 24 months from the date the property is control the unconsolidated joint ventures, and the pro-rata placed in service. Properties that experience a change presentations of reconciling items included in FFO do not in reporting structure, such as a transition from a triple- represent our legal claim to such items. The joint venture net lease to a RIDEA reporting structure, are considered members or partners are entitled to profit or loss allocations stabilized after 12 months in operations under a consistent and distributions of cash flows according to the joint venture reporting structure. A property is removed from SPP when it agreements, which provide for such allocations generally is classified as held for sale, sold, placed into redevelopment, according to their invested capital. experiences a casualty event that significantly impacts operations or changes its reporting structure (such as triple- net to SHOP). The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were For a reconciliation of SPP to total portfolio Adjusted NOI derived by applying our overall economic ownership and other relevant disclosures by segment, refer to our interest percentage determined when applying the equity Segment Analysis below. Funds From Operations method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may We believe FFO applicable to common shares, diluted FFO calculate their pro-rata interest differently, limiting the applicable to common shares, and diluted FFO per common usefulness as a comparative measure. Because of these share are important supplemental non-GAAP measures of limitations, the pro-rata financial information should not be operating performance for a REIT. Because the historical considered independently or as a substitute for our financial cost accounting convention used for real estate assets statements as reported under GAAP. We compensate for utilizes straight-line depreciation (except on land), such these limitations by relying primarily on our GAAP financial accounting presentation implies that the value of real estate statements, using the pro-rata financial information as assets diminishes predictably over time. Since real estate a supplement. values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue. FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute FFO in accordance with the current NAREIT FFO, as defined by the National Association of Real definition; however, other REITs may report FFO differently Estate Investment Trusts (“NAREIT”), is net income (loss) or have a different interpretation of the current NAREIT applicable to common shares (computed in accordance with definition from ours. GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other depreciation and amortization, and adjustments to compute our share of FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. For consolidated joint ventures in which we do not own 100%, we reflect our share of the equity by adjusting our FFO to remove the third party ownership share of the In addition, we present FFO before the impact of non- comparable items including, but not limited to, transaction- related items, impairments (recoveries) of non-depreciable assets, severance and related charges, prepayment costs (benefits) associated with early retirement or payment of debt, litigation costs, casualty-related charges (recoveries), foreign currency remeasurement losses (gains) and changes in tax legislation (“FFO as adjusted”). Transaction-related items include transaction expenses and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Prepayment costs (benefits) associated with early retirement of debt include the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of 40 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 41 • Commenced $22 million of redevelopment projects at • Commenced a $16 million life science development two recently-acquired life science assets in the Sorrento expansion project in the Sorrento Mesa submarket of Mesa submarket of San Diego, California, with an San Diego, California, with an estimated completion in estimated completion in late 2018. the second half of 2019. PART II Dividends Quarterly cash dividends paid during 2017 aggregated to $1.48 per share. On February 1, 2018, our Board of Directors declared a quarterly cash dividend of $0.37 per common share. The dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. Results of Operations We evaluate our business and allocate resources among our received and expenses are paid. Adjusted NOI is oftentimes reportable business segments: (i) senior housing triple-net, referred to as “cash NOI.” During the fourth quarter of 2017, (ii) senior housing operating portfolio (SHOP), (iii) life science as a result of a change in how operating results are reported and (iv) medical office. Under the medical office and life to our chief operating decision makers for the purpose of science segments, we invest through the acquisition and evaluating performance and allocating resources, we began development of MOBs and life science facilities, which excluding unconsolidated joint ventures from the evaluation generally require a greater level of property management. of our segments’ operating results. Unconsolidated Our senior housing facilities are managed utilizing joint ventures are now reflected in other non-reportable triple-net leases and RIDEA structures. We have other segments, and as a result, excluded from NOI and Adjusted non-reportable segments that are comprised primarily of NOI. Prior period NOI and Adjusted NOI have also been our U.K. care homes, debt investments, unconsolidated joint recast to conform to current period presentation which ventures and hospitals. We evaluate performance based excludes unconsolidated joint ventures. We use NOI and upon: (i) property net operating income from continuing Adjusted NOI to make decisions about resource allocations, operations (“NOI”) and (ii) adjusted NOI (cash NOI) in each to assess and compare property level performance, and to segment. The accounting policies of the segments are evaluate our same property portfolio (“SPP”), as described the same as those described in the summary of significant below. We believe that net income (loss) is the most directly accounting policies (see Note 2 to the Consolidated comparable GAAP measure to NOI. NOI should not be Financial Statements). Non-GAAP Financial Measures Net Operating Income NOI and Adjusted NOI are non-U.S. generally accepted accounting principles (“GAAP”) supplemental financial measures used to evaluate the operating performance of real estate. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 13 to the Consolidated Financial Statements. Management believes NOI provides relevant and useful information because it reflects only income and operating expense items that are incurred at the property level and presents them on an unleveraged basis. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non- cash interest, amortization of market lease intangibles, termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods presented to conform to the current period presentation which excludes the impact of deferred community fee income and expense, resulting in recognition as cash is viewed as an alternative measure of operating performance to net income (loss) as defined by GAAP since it does not reflect various excluded items. Further, our definition of NOI may not be comparable to the definition used by other REITs or real estate companies, as they may use different methodologies for calculating NOI. For a reconciliation of NOI and Adjusted NOI to net income (loss) by segment, refer to Note 13 to the Consolidated Financial Statements. Operating expenses generally relate to leased medical office and life science properties and SHOP facilities. We generally recover all or a portion of our leased medical office and life science property expenses through tenant recoveries. We present expenses as operating or general and administrative based on the underlying nature of the expense. Same Property Portfolio SPP NOI and Adjusted NOI information allows us to evaluate the performance of our property portfolio under a consistent population by eliminating changes in the composition of our consolidated portfolio of properties. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. SPP NOI for properties that undergo a change in ownership is reported based on the current ownership percentage. Properties are included in SPP once they are stabilized for the full period in both comparison periods. Newly acquired operating assets are generally considered stabilized at the earlier of lease-up (typically when the tenant(s) control(s) the physical use of at least 80% of the space) or 12 months from the acquisition date. Newly completed developments and redevelopments are considered stabilized at the earlier of lease-up or 24 months from the date the property is placed in service. Properties that experience a change in reporting structure, such as a transition from a triple- net lease to a RIDEA reporting structure, are considered stabilized after 12 months in operations under a consistent reporting structure. A property is removed from SPP when it is classified as held for sale, sold, placed into redevelopment, experiences a casualty event that significantly impacts operations or changes its reporting structure (such as triple- net to SHOP). For a reconciliation of SPP to total portfolio Adjusted NOI and other relevant disclosures by segment, refer to our Segment Analysis below. Funds From Operations We believe FFO applicable to common shares, diluted FFO applicable to common shares, and diluted FFO per common share are important supplemental non-GAAP measures of operating performance for a REIT. Because the historical cost accounting convention used for real estate assets utilizes straight-line depreciation (except on land), such accounting presentation implies that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen and fallen with market conditions, presentations of operating results for a REIT that use historical cost accounting for depreciation could be less informative. The term FFO was designed by the REIT industry to address this issue. FFO, as defined by the National Association of Real Estate Investment Trusts (“NAREIT”), is net income (loss) applicable to common shares (computed in accordance with GAAP), excluding gains or losses from sales of depreciable property, including any current and deferred taxes directly associated with sales of depreciable property, impairments of, or related to, depreciable real estate, plus real estate and other depreciation and amortization, and adjustments to compute our share of FFO and FFO as adjusted (see below) from joint ventures. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FFO for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. For consolidated joint ventures in which we do not own 100%, we reflect our share of the equity by adjusting our FFO to remove the third party ownership share of the PART II applicable reconciling items based on actual ownership percentage for the applicable periods. Our pro-rata share information is prepared on a basis consistent with the comparable consolidated amounts, is intended to reflect our proportionate economic interest in the operating results of properties in our portfolio and is calculated by applying our actual ownership percentage for the period. We do not control the unconsolidated joint ventures, and the pro-rata presentations of reconciling items included in FFO do not represent our legal claim to such items. The joint venture members or partners are entitled to profit or loss allocations and distributions of cash flows according to the joint venture agreements, which provide for such allocations generally according to their invested capital. The presentation of pro-rata information has limitations, which include, but are not limited to, the following: (i) the amounts shown on the individual line items were derived by applying our overall economic ownership interest percentage determined when applying the equity method of accounting and do not necessarily represent our legal claim to the assets and liabilities, or the revenues and expenses and (ii) other companies in our industry may calculate their pro-rata interest differently, limiting the usefulness as a comparative measure. Because of these limitations, the pro-rata financial information should not be considered independently or as a substitute for our financial statements as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP financial statements, using the pro-rata financial information as a supplement. FFO does not represent cash generated from operating activities in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to net income (loss). We compute FFO in accordance with the current NAREIT definition; however, other REITs may report FFO differently or have a different interpretation of the current NAREIT definition from ours. In addition, we present FFO before the impact of non- comparable items including, but not limited to, transaction- related items, impairments (recoveries) of non-depreciable assets, severance and related charges, prepayment costs (benefits) associated with early retirement or payment of debt, litigation costs, casualty-related charges (recoveries), foreign currency remeasurement losses (gains) and changes in tax legislation (“FFO as adjusted”). Transaction-related items include transaction expenses and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Prepayment costs (benefits) associated with early retirement of debt include the write-off of unamortized deferred financing fees, or additional costs, expenses, discounts, make-whole payments, penalties or premiums incurred as a result of 40 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 41 PART II early retirement or payment of debt. Management believes that FFO as adjusted provides a meaningful supplemental measurement of our FFO run-rate and is frequently used by analysts, investors and other interested parties in the evaluation of our performance as a REIT. At the same time that NAREIT created and defined its FFO measure for the REIT industry, it also recognized that “management of each of its member companies has the responsibility and authority to publish financial information that it regards as useful to the financial community.” We believe stockholders, potential investors and financial analysts who review our operating performance are best served by an FFO run-rate earnings measure that includes certain other adjustments to net income (loss), in addition to adjustments made to arrive at the NAREIT defined measure of FFO. FFO as adjusted is used by management in analyzing our business and the performance of our properties, and we believe it is important that stockholders, potential investors and financial analysts understand this measure used by management. We use FFO as adjusted to: (i) evaluate our performance in comparison with expected results and results of previous periods, relative to resource allocation decisions, (ii) evaluate the performance of our management, (iii) budget and forecast future results to assist in the allocation of resources, (iv) assess our performance as compared with similar real estate companies and the industry in general and (v) evaluate how a specific potential investment will impact our future results. Other REITs or real estate companies may use different methodologies for calculating an adjusted FFO measure, and accordingly, our FFO as adjusted may not be comparable to those reported by other REITs. For a reconciliation of net income (loss) to FFO and FFO as adjusted and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below. Funds Available for Distribution FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of deferred compensation expense, (ii) amortization of deferred financing costs, net, (iii) straight-line rents, (iv) amortization of acquired market lease intangibles, net, (v) non-cash interest and depreciation related to DFLs and lease incentive amortization (reduction of straight-line rents) and (vi) deferred revenues, excluding amounts amortized into rental income that are associated with tenant funded improvements owned/recognized by us and up-front cash payments made by tenants to reduce their contractual rents. Also, FAD: (i) is computed after deducting recurring capital expenditures, including leasing costs and second generation tenant and capital improvements, and (ii) includes lease restructure payments and adjustments to compute our share of FAD from our unconsolidated joint ventures and those related to CCRC non-refundable entrance fees. Certain prior period amounts in the “Non-GAAP Financial Measures Reconciliation” below for FAD have been reclassified to conform to the current period presentation. More specifically, we have combined wholly-owned and our share from unconsolidated joint ventures recurring capital expenditures, including leasing costs and second generation tenant and capital improvements (“FAD capital expenditures”) into a single line item. In addition, we have combined cash CCRC JV entrance fees with CCRC JV entrance fee amortization into a single line item, separately disclosed deferred income taxes (previously reported in “other”) and collapsed immaterial line items into ‘other’. Adjustments for joint ventures are calculated to reflect our pro-rata share of both our consolidated and unconsolidated joint ventures. We reflect our share of FAD for unconsolidated joint ventures by applying our actual ownership percentage for the period to the applicable reconciling items on an entity by entity basis. We reflect our share for consolidated joint ventures in which we do not own 100% of the equity by adjusting our FAD to remove the third party ownership share of the applicable reconciling items based on actual ownership percentage for the applicable periods (see FFO above for further disclosure regarding our use of pro-rata share information and its limitations). Other REITs or real estate companies may use different methodologies for calculating FAD, and accordingly, our FAD may not be comparable to those reported by other REITs. Although our FAD computation may not be comparable to that of other REITs, management believes FAD provides a meaningful supplemental measure of our performance and is frequently used by analysts, investors, and other interested parties in the evaluation of our performance as a REIT. We believe FAD is an alternative run-rate earnings measure that improves the understanding of our operating results among investors and makes comparisons with: (i) expected results, (ii) results of previous periods and (iii) results among REITS more meaningful. FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs as it excludes the following items which generally flow through our cash flows from operating activities: (i) adjustments for changes in working capital or the actual timing of the payment of income or expense items that are accrued in the period, (ii) transaction-related costs, (iii) litigation settlement expenses, (iv) severance-related expenses and (v) actual cash receipts from interest income recognized on loans receivable (in contrast to our FAD adjustment to exclude non-cash interest and depreciation related to our investments in direct financing leases). Furthermore, FAD is adjusted for recurring capital expenditures, which are generally not considered when determining cash flows from operations or liquidity. FAD is a non-GAAP supplemental financial measure and should not be considered as an alternative to net income (loss) determined in accordance with GAAP. For a reconciliation of net income (loss) to FAD and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below. Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 and the Year Ended December 31, 2016 to the Year Ended December 31, 2015 PART II Overview(1) 2017 and 2016 share data): The following table summarizes results for the years ended December 31, 2017 and 2016 (dollars in thousands except per Net income (loss) applicable to common shares $413,013 $ 0.88 $ 626,549 FFO FAD FFO as adjusted 661,113 918,402 803,720 1.41 1.95 1,119,153 1,282,390 1,215,696 Year Ended Year Ended December 31, 2017 December 31, 2016 Per Diluted Per Diluted Per Share Amount Share Amount Share $ 1.34 2.39 2.74 Change $(0.46) (0.98) (0.79) (1) For the reconciliation of non-GAAP financial measures, see “Non-GAAP Financial Measure Reconciliations” section below. Net income (loss) applicable to common shares (“EPS”) The decrease in EPS was partially offset by: decreased primarily as a result of the following: • a reduction in interest expense as a result of debt • a reduction in net income from discontinued operations repayments in the fourth quarter of 2016 and due to the Spin-Off of QCP on October 31, 2016; throughout 2017; • a loss on debt extinguishment in July 2017, representing • a reduction in severance and related charges primarily a premium for early payment on the repurchase of our related to the departure of our former President and senior notes; Chief Executive Officer (“CEO”) in 2016 compared to • a reduction in rental and related revenues primarily as severance and related charges primarily related to the a result of assets sold during 2017, including the sale of departure of our former Executive Vice President and 64 senior housing triple-net assets in the first quarter Chief Accounting Officer (“CAO”) in 2017; • a larger net gain on sales of real estate during 2017 • a reduction in NOI primarily related to the net impact compared to 2016, primarily related to the sale of of the Brookdale Transaction during the fourth quarter 64 senior housing triple-net assets and the partial sale of RIDEA II during 2017; • a reduction in earnings due to the partial sale and • an increase in income tax benefit primarily from real deconsolidation of RIDEA II during the first quarter estate dispositions during 2017, partially offset by an income tax expense related to the impact of tax rate • impairments related to: (i) our mezzanine loan facility to legislation during the fourth quarter of 2017; and Tandem Health Care (the “Tandem Mezzanine Loan”) • an increase in other income, net primarily related to and (ii) 11 underperforming senior housing triple-net the gain on sale of our Four Seasons investments facilities in the third quarter of 2017; during 2017. • increased litigation-related costs, including costs from securities class action litigation, and a legal settlement in 2017; quarter of 2017; and • casualty-related charges due to hurricanes in the third from FFO. FFO decreased primarily as a result of the aforementioned events impacting EPS, except for gain on sales of real estate and impairments of real estate, which are excluded • a reduction in interest income due to (i) the payoffs of FFO as adjusted decreased primarily as a result of our HC-One Facility in June 2017 and a participating the following: of 2017; of 2017; of 2017; development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. • a reduction in net income from discontinued operations due to the Spin-Off of QCP on October 31, 2016; • a reduction in rental and related revenues primarily as a result of assets sold during 2017, including the sale of 64 senior housing triple-net assets; 42 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 43 PART II PART II early retirement or payment of debt. Management believes current period presentation. More specifically, we have that FFO as adjusted provides a meaningful supplemental combined wholly-owned and our share from unconsolidated Comparison of the Year Ended December 31, 2017 to the Year Ended December 31, 2016 and the Year Ended December 31, 2016 to the Year Ended December 31, 2015 measurement of our FFO run-rate and is frequently used joint ventures recurring capital expenditures, including by analysts, investors and other interested parties in the leasing costs and second generation tenant and capital evaluation of our performance as a REIT. At the same time improvements (“FAD capital expenditures”) into a single that NAREIT created and defined its FFO measure for the line item. In addition, we have combined cash CCRC JV REIT industry, it also recognized that “management of entrance fees with CCRC JV entrance fee amortization each of its member companies has the responsibility and into a single line item, separately disclosed deferred authority to publish financial information that it regards as income taxes (previously reported in “other”) and collapsed useful to the financial community.” We believe stockholders, immaterial line items into ‘other’. Adjustments for joint potential investors and financial analysts who review our ventures are calculated to reflect our pro-rata share of both operating performance are best served by an FFO run-rate our consolidated and unconsolidated joint ventures. We earnings measure that includes certain other adjustments reflect our share of FAD for unconsolidated joint ventures by to net income (loss), in addition to adjustments made applying our actual ownership percentage for the period to to arrive at the NAREIT defined measure of FFO. FFO as the applicable reconciling items on an entity by entity basis. adjusted is used by management in analyzing our business We reflect our share for consolidated joint ventures in which and the performance of our properties, and we believe we do not own 100% of the equity by adjusting our FAD to it is important that stockholders, potential investors remove the third party ownership share of the applicable and financial analysts understand this measure used by reconciling items based on actual ownership percentage management. We use FFO as adjusted to: (i) evaluate our for the applicable periods (see FFO above for further performance in comparison with expected results and disclosure regarding our use of pro-rata share information results of previous periods, relative to resource allocation and its limitations). Other REITs or real estate companies decisions, (ii) evaluate the performance of our management, may use different methodologies for calculating FAD, and (iii) budget and forecast future results to assist in the accordingly, our FAD may not be comparable to those allocation of resources, (iv) assess our performance as reported by other REITs. Although our FAD computation compared with similar real estate companies and the may not be comparable to that of other REITs, management industry in general and (v) evaluate how a specific potential believes FAD provides a meaningful supplemental measure investment will impact our future results. Other REITs or of our performance and is frequently used by analysts, real estate companies may use different methodologies for investors, and other interested parties in the evaluation of calculating an adjusted FFO measure, and accordingly, our our performance as a REIT. We believe FAD is an alternative FFO as adjusted may not be comparable to those reported run-rate earnings measure that improves the understanding by other REITs. For a reconciliation of net income (loss) to of our operating results among investors and makes FFO and FFO as adjusted and other relevant disclosure, refer comparisons with: (i) expected results, (ii) results of previous to “Non-GAAP Financial Measures Reconciliations” below. periods and (iii) results among REITS more meaningful. Funds Available for Distribution FAD does not represent cash generated from operating activities determined in accordance with GAAP and is not FAD is defined as FFO as adjusted after excluding the impact necessarily indicative of cash available to fund cash needs as of the following: (i) amortization of deferred compensation it excludes the following items which generally flow through expense, (ii) amortization of deferred financing costs, net, our cash flows from operating activities: (i) adjustments (iii) straight-line rents, (iv) amortization of acquired market for changes in working capital or the actual timing of the lease intangibles, net, (v) non-cash interest and depreciation payment of income or expense items that are accrued related to DFLs and lease incentive amortization (reduction in the period, (ii) transaction-related costs, (iii) litigation of straight-line rents) and (vi) deferred revenues, excluding settlement expenses, (iv) severance-related expenses and amounts amortized into rental income that are associated (v) actual cash receipts from interest income recognized with tenant funded improvements owned/recognized on loans receivable (in contrast to our FAD adjustment to by us and up-front cash payments made by tenants to exclude non-cash interest and depreciation related to our reduce their contractual rents. Also, FAD: (i) is computed investments in direct financing leases). Furthermore, FAD after deducting recurring capital expenditures, including is adjusted for recurring capital expenditures, which are leasing costs and second generation tenant and capital generally not considered when determining cash flows from improvements, and (ii) includes lease restructure payments operations or liquidity. FAD is a non-GAAP supplemental and adjustments to compute our share of FAD from our financial measure and should not be considered as an unconsolidated joint ventures and those related to CCRC alternative to net income (loss) determined in accordance non-refundable entrance fees. Certain prior period amounts with GAAP. For a reconciliation of net income (loss) to FAD in the “Non-GAAP Financial Measures Reconciliation” and other relevant disclosure, refer to “Non-GAAP Financial below for FAD have been reclassified to conform to the Measures Reconciliations” below. Overview(1) 2017 and 2016 The following table summarizes results for the years ended December 31, 2017 and 2016 (dollars in thousands except per share data): Year Ended December 31, 2017 Amount Per Diluted Share Year Ended December 31, 2016 Amount Per Diluted Share Per Share Change Net income (loss) applicable to common shares $413,013 $ 0.88 $ 626,549 $ 1.34 $(0.46) FFO FFO as adjusted FAD 661,113 918,402 803,720 1.41 1.95 1,119,153 1,282,390 1,215,696 2.39 2.74 (0.98) (0.79) (1) For the reconciliation of non-GAAP financial measures, see “Non-GAAP Financial Measure Reconciliations” section below. Net income (loss) applicable to common shares (“EPS”) decreased primarily as a result of the following: • a reduction in net income from discontinued operations due to the Spin-Off of QCP on October 31, 2016; • a loss on debt extinguishment in July 2017, representing a premium for early payment on the repurchase of our senior notes; • a reduction in rental and related revenues primarily as a result of assets sold during 2017, including the sale of 64 senior housing triple-net assets in the first quarter of 2017; • a reduction in NOI primarily related to the net impact of the Brookdale Transaction during the fourth quarter of 2017; The decrease in EPS was partially offset by: • a reduction in interest expense as a result of debt repayments in the fourth quarter of 2016 and throughout 2017; • a reduction in severance and related charges primarily related to the departure of our former President and Chief Executive Officer (“CEO”) in 2016 compared to severance and related charges primarily related to the departure of our former Executive Vice President and Chief Accounting Officer (“CAO”) in 2017; • a larger net gain on sales of real estate during 2017 compared to 2016, primarily related to the sale of 64 senior housing triple-net assets and the partial sale of RIDEA II during 2017; • a reduction in earnings due to the partial sale and • an increase in income tax benefit primarily from real • • deconsolidation of RIDEA II during the first quarter of 2017; impairments related to: (i) our mezzanine loan facility to Tandem Health Care (the “Tandem Mezzanine Loan”) and (ii) 11 underperforming senior housing triple-net facilities in the third quarter of 2017; increased litigation-related costs, including costs from securities class action litigation, and a legal settlement in 2017; • casualty-related charges due to hurricanes in the third quarter of 2017; and • a reduction in interest income due to (i) the payoffs of our HC-One Facility in June 2017 and a participating development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. estate dispositions during 2017, partially offset by an income tax expense related to the impact of tax rate legislation during the fourth quarter of 2017; and • an increase in other income, net primarily related to the gain on sale of our Four Seasons investments during 2017. FFO decreased primarily as a result of the aforementioned events impacting EPS, except for gain on sales of real estate and impairments of real estate, which are excluded from FFO. FFO as adjusted decreased primarily as a result of the following: • a reduction in net income from discontinued operations due to the Spin-Off of QCP on October 31, 2016; • a reduction in rental and related revenues primarily as a result of assets sold during 2017, including the sale of 64 senior housing triple-net assets; 42 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 43 PART II • a reduction in earnings due to the partial sale and deconsolidation of RIDEA II during the first quarter of 2017; and • a reduction in interest income due to (i) the payoffs of our HC-One Facility in June 2017 and a participating development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. The decrease in FFO as adjusted was partially offset by a reduction in interest expense as a result of debt repayments in the fourth quarter of 2016 and throughout 2017. FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, (i) increased leasing costs and tenant capital improvements and (ii) decreased installment payments received from Brookdale for 2014 lease terminations that were paid over a period of three years and concluded in 2017. 2016 and 2015 The following table summarizes results for the years ended December 31, 2016 and 2015 (dollars in thousands except per share data): Year Ended December 31, 2016 Year Ended December 31, 2015 Amount $ 626,549 1,119,153 1,282,390 1,215,696 Per Diluted Share $ 1.34 2.39 2.74 Amount $ (560,552) (10,841) 1,470,167 1,261,849 Per Diluted Share $(1.21) (0.02) 3.16 Per Share Change $ 2.55 2.41 (0.42) • • increased severance-related charges during 2016 primarily related to the departure of our former CEO in July 2016; increased depreciation and amortization from our 2015 and 2016 acquisitions; and • a reduction of foreign currency remeasurement gains recognized as a result of effective hedges designated in September 2015. FFO increased primarily as a result of the aforementioned events impacting EPS, except for depreciation and amortization and gain on sales of real estate, which are excluded from FFO. FFO as adjusted decreased primarily as a result of the following: • a reduction in income from our HCRMC investments as a result of: (i) the HCRMC lease amendment effective April 1, 2015, (ii) the sale of non-strategic assets during the second half of 2015 and 2016 and (iii) a change in income recognition to a cash basis method beginning in January 2016; • decreased income from the QCP assets included in the Spin-Off; and • a reduction in interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016. Net income (loss) applicable to common shares FFO FFO as adjusted FAD EPS increased primarily as a result of the following: • • • impairment charges during 2015, not repeated in 2016; increased NOI from: (i) our 2015 and 2016 acquisitions, (ii) annual rent escalations and (iii) developments placed in service; increased gain on sales of real estate due to a higher volume of disposition activity during 2016; • a reduction in interest expense as a result of debt repayments during 2015 and 2016; and • a net termination fee expense recognized in 2015, not repeated in 2016. The increase in EPS was partially offset by following: • a reduction in income from our HCR Manor Care, Inc. (“HCRMC”) investments as a result of: (i) the HCRMC lease amendment effective April 1, 2015, (ii) the sale of non-strategic assets during the second half of 2015 and 2016, and (iii) a change in income recognition to a cash basis method beginning in January 2016; the impact from the Spin-Off of QCP resulting in: (i) increased transaction costs and (ii) loss on debt extinguishment, representing penalties on the prepayment of debt using proceeds from the Spin-Off; increased income tax expense related to our estimated exposure to state built-in gain tax; • • • a reduction in interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016; PART II The decrease in FFO as adjusted was partially offset by • decreased income from the QCP assets included in the the following: • increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and • a reduction in interest expense as a result of debt repayments during 2015 and 2016. FAD decreased primarily as a result of the following: • decreased income from our HCRMC investments as a result of the HCRMC lease amendment effective April 1, 2015 and the sale of non-strategic assets during the second half of 2015 and the first half of 2016; • decreased interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and Spin-Off; 2016; and • increased leasing costs and second generation capital expenditures. The decrease in FAD was partially offset by the following: • increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and • increased incremental interest income from the payoff of participating development loans. Segment Analysis The tables below provide selected operating information 2016, our SPP consisted of 621 properties acquired or for our SPP and total property portfolio for each of our placed in service and stabilized on or prior to January 1, reportable segments. For the year ended December 31, 2015 and that remained in operations under a consistent 2017, our SPP consists of 617 properties representing reporting structure through December 31, 2017. Our total properties acquired or placed in service and stabilized consolidated property portfolio consists of 744, 851 and on or prior to January 1, 2016 and that remained in 869 properties at December 31, 2017, 2016 and 2015, operations under a consistent reporting structure through respectively, excluding properties in the Spin-Off. December 31, 2017. For the year ended December 31, Senior Housing Triple-Net The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands except 2017 and 2016 per unit data): Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average capacity (units)(3) SPP Total Portfolio 2017 2016 Change 2017 2016 Change $249,347 $273,984 $(24,637) $313,547 $ 423,118 $ (109,571) (495) (197) (298) (3,819) (6,710) 2,891 248,852 273,787 (24,935) 309,728 416,408 (106,680) 38,760 (1,374) 40,134 17,098 (7,566) 24,664 $287,612 $272,413 $ 15,199 326,826 408,842 (82,016) (39,214) (136,429) 97,215 $287,612 $ 272,413 $ 15,199 5.6% 174 174 17,724 17,741 181 274 21,536 28,455 Average annual rent per unit $ 16,255 $ 15,366 $ 15,352 $ 14,604 (1) Represents rental and related revenues and income from DFLs. (2) From our 2016 presentation of SPP, we removed four senior housing triple-net properties that were sold, 25 senior housing triple-net properties that were transitioned to our SHOP segment and two senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as of December 31, 2016. (3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. 44 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 45 PART II • a reduction in earnings due to the partial sale and The decrease in FFO as adjusted was partially offset by a deconsolidation of RIDEA II during the first quarter of reduction in interest expense as a result of debt repayments 2017; and in the fourth quarter of 2016 and throughout 2017. • a reduction in interest income due to (i) the payoffs of our HC-One Facility in June 2017 and a participating development loan during the third quarter of 2016 and (ii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in FAD decreased primarily as a result of the aforementioned events impacting FFO as adjusted, (i) increased leasing costs and tenant capital improvements and (ii) decreased installment payments received from Brookdale for 2014 lease terminations that were paid over a period of three years and concluded in 2017. November 2016. 2016 and 2015 share data): FFO FAD FFO as adjusted The following table summarizes results for the years ended December 31, 2016 and 2015 (dollars in thousands except per Net income (loss) applicable to common shares $ 626,549 Year Ended Year Ended December 31, 2016 December 31, 2015 Per Diluted Per Diluted Per Share Amount 1,119,153 1,282,390 1,215,696 Share $ 1.34 2.39 2.74 Amount $ (560,552) (10,841) 1,470,167 1,261,849 Share $(1.21) (0.02) 3.16 Change $ 2.55 2.41 (0.42) EPS increased primarily as a result of the following: • increased severance-related charges during 2016 • • impairment charges during 2015, not repeated in 2016; increased NOI from: (i) our 2015 and 2016 acquisitions, (ii) annual rent escalations and (iii) developments placed July 2016; in service; • increased gain on sales of real estate due to a higher volume of disposition activity during 2016; • a reduction in interest expense as a result of debt primarily related to the departure of our former CEO in • increased depreciation and amortization from our 2015 and 2016 acquisitions; and • a reduction of foreign currency remeasurement gains recognized as a result of effective hedges designated in September 2015. repayments during 2015 and 2016; and FFO increased primarily as a result of the aforementioned • a net termination fee expense recognized in 2015, not events impacting EPS, except for depreciation and repeated in 2016. amortization and gain on sales of real estate, which are The increase in EPS was partially offset by following: excluded from FFO. • a reduction in income from our HCR Manor Care, Inc. (“HCRMC”) investments as a result of: (i) the HCRMC the following: FFO as adjusted decreased primarily as a result of lease amendment effective April 1, 2015, (ii) the sale of • a reduction in income from our HCRMC investments as non-strategic assets during the second half of 2015 and a result of: (i) the HCRMC lease amendment effective 2016, and (iii) a change in income recognition to a cash April 1, 2015, (ii) the sale of non-strategic assets during basis method beginning in January 2016; the second half of 2015 and 2016 and (iii) a change in • the impact from the Spin-Off of QCP resulting in: income recognition to a cash basis method beginning in (i) increased transaction costs and (ii) loss on debt January 2016; extinguishment, representing penalties on the • decreased income from the QCP assets included in the • increased income tax expense related to our estimated • a reduction in interest income from placing our Four exposure to state built-in gain tax; Seasons Notes on cost recovery status in the third • a reduction in interest income from placing our Four quarter of 2015 and loan repayments during 2015 Seasons Notes on cost recovery status in the third and 2016. quarter of 2015 and loan repayments during 2015 and 2016; The decrease in FFO as adjusted was partially offset by the following: • increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and • a reduction in interest expense as a result of debt repayments during 2015 and 2016. FAD decreased primarily as a result of the following: • decreased income from our HCRMC investments as a result of the HCRMC lease amendment effective April 1, 2015 and the sale of non-strategic assets during the second half of 2015 and the first half of 2016; Segment Analysis The tables below provide selected operating information for our SPP and total property portfolio for each of our reportable segments. For the year ended December 31, 2017, our SPP consists of 617 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2016 and that remained in operations under a consistent reporting structure through December 31, 2017. For the year ended December 31, PART II • decreased income from the QCP assets included in the Spin-Off; • decreased interest income from placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and loan repayments during 2015 and 2016; and increased leasing costs and second generation capital expenditures. • The decrease in FAD was partially offset by the following: • • increased NOI from: (i) our 2015 and 2016 consolidated acquisitions, (ii) annual rent escalations and (iii) developments placed in service; and increased incremental interest income from the payoff of participating development loans. 2016, our SPP consisted of 621 properties acquired or placed in service and stabilized on or prior to January 1, 2015 and that remained in operations under a consistent reporting structure through December 31, 2017. Our total consolidated property portfolio consists of 744, 851 and 869 properties at December 31, 2017, 2016 and 2015, respectively, excluding properties in the Spin-Off. Senior Housing Triple-Net 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands except per unit data): Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average capacity (units)(3) 2017 SPP 2016 Change 2017 2016 Change Total Portfolio $249,347 $273,984 $(24,637) $313,547 $ 423,118 $ (109,571) (495) (197) (298) (3,819) (6,710) 2,891 248,852 273,787 (24,935) 309,728 416,408 (106,680) 38,760 (1,374) 40,134 17,098 (7,566) 24,664 $287,612 $272,413 $ 15,199 326,826 408,842 (82,016) (39,214) (136,429) 97,215 $287,612 $ 272,413 $ 15,199 5.6% 174 174 17,724 17,741 181 274 21,536 28,455 prepayment of debt using proceeds from the Spin-Off; Spin-Off; and Average annual rent per unit $ 16,255 $ 15,366 $ 15,352 $ 14,604 (1) Represents rental and related revenues and income from DFLs. (2) From our 2016 presentation of SPP, we removed four senior housing triple-net properties that were sold, 25 senior housing triple-net properties that were transitioned to our SHOP segment and two senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as of December 31, 2016. (3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. 44 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 45 PART II PART II SPP NOI decreased primarily as a result of the net impact of triple-net lease terminations from the Brookdale Transaction during the fourth quarter of 2017. Additionally, Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts: SPP Adjusted NOI increased primarily as a result of the following: • annual rent escalations; and • higher cash rent received from our portfolio of assets leased to Sunrise Senior Living. • • senior housing triple-net facilities sold during 2016 and 2017; and the transfer of 42 senior housing triple-net facilities to our SHOP segment. The decrease to Total Portfolio NOI and Adjusted NOI is partially offset by (i) increased non-SPP income from five senior housing triple-net facilities acquired in the first quarter of 2016 and (ii) the aforementioned increases to SPP Adjusted NOI. 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands except per unit data): Rental revenues(1) Operating expenses NOI Non-cash adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI Adjusted NOI % change Property count(2) Average capacity (units)(3) Average annual rent per unit 2016 $302,976 (237) 302,739 (5,282) $297,457 SPP 2015 $304,442 (637) 303,805 (7,550) $296,255 205 20,269 $ 14,684 205 20,268 $ 14,645 Change $ (1,466) 400 (1,066) 2,268 $ 1,202 0.4% Total Portfolio 2016 $ 423,118 (6,710) 416,408 (7,566) 408,842 (111,385) $ 297,457 2015 $ 428,269 (3,427) 424,842 (9,716) 415,126 (118,871) $ 296,255 274 28,455 $ 14,604 295 28,777 $ 14,544 Change $ (5,151) (3,283) (8,434) 2,150 (6,284) 7,486 $ 1,202 (1) Represents rental and related revenues and income from DFLs. (2) From our 2015 presentation of SPP, we removed nine senior housing triple-net properties that were sold, 17 senior housing triple-net properties that were transitioned to a RIDEA structure in our SHOP segment and 64 senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as of December 31, 2016. (3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. SPP NOI decreased primarily as a result of lower rents in our portfolio of assets leased to Sunrise Senior Living (the “Sunrise Portfolio”). SPP adjusted NOI increased primarily as a result of annual rent escalations, partially offset by lower cash rent received from our Sunrise portfolio. • • the transition of 17 senior housing triple-net facilities to a RIDEA structure (reported in our SHOP segment); partially offset by five senior housing triple-net facilities acquired in the first quarter of 2016. Additionally, Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following Non-SPP impacts: • nine senior housing triple-net facilities sold in 2016; and The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands, except Senior Housing Operating Portfolio 2017 and 2016 per unit data): Resident fees and services $ 321,209 $ 317,361 Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(1) Average capacity (units)(2) 2017 (239,702) 81,507 32,863 SPP 2016 (202,624) 114,737 (1,297) Change $ 3,848 (37,078) (33,230) 34,160 $ 114,370 $ 113,440 $ 930 Total Portfolio 2017 2016 Change $ 525,473 $ 686,822 $(161,349) (396,491) 128,982 33,227 162,209 (47,839) (480,870) 205,952 (2,686) 203,266 (89,826) 84,379 (76,970) 35,913 (41,057) 41,987 $ 114,370 $ 113,440 $ 930 Average annual rent per unit $ 44,378 $ 43,842 48 8,128 48 8,136 0.8% 102 12,758 130 16,028 $ 41,133 $ 42,851 (1) From our 2016 presentation of SPP, we removed a SHOP property that was placed into redevelopment, two SHOP properties that were classified as held for sale and 49 SHOP properties that were deconsolidated. Our 2016 Total Portfolio property count has been adjusted to include a property classified as held for sale as of December 31, 2016. (2) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. SPP NOI decreased primarily as a result of increased Additionally, Total Portfolio NOI and Adjusted NOI operating expenses related to the management fee decreased primarily as a result of the following terminations from the Brookdale Transaction during the Non-SPP impacts: SPP Adjusted NOI increased primarily as a result of RIDEA II; partially offset by • decreased non-SPP income from our partial sale of • non-SPP income for 42 senior housing triple-net assets transferred to SHOP during the fourth quarter of 2016 and year-to-date 2017. • increased rates for resident fees and services; partially • higher expense growth and a decline in occupancy. The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands, except Resident fees and services $ 439,607 $ 419,217 2016 (311,278) 128,329 — SPP 2015 (298,648) 120,569 — Change $ 20,390 (12,630) 7,760 — $ 128,329 $ 120,569 $ 7,760 Total Portfolio 2016 2015 Change $ 686,822 $ 518,264 $ 168,558 (480,870) 205,952 (2,686) 203,266 (74,937) (371,016) 147,248 8,145 155,393 (34,824) (109,854) 58,704 (10,831) 47,873 (40,113) $ 128,329 $ 120,569 $ 7,760 Average annual rent per unit $ 44,209 $ 42,081 69 9,944 69 9,962 6.4% 130 16,028 130 12,704 $ 42,851 $ 41,435 (1) From our 2015 presentation of SPP, we removed two SHOP properties that were sold and a SHOP property that was classified as held for sale. Our 2016 and 2015 Total Portfolio property count has been adjusted to include a property classified as held for sale as of (2) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from fourth quarter of 2017. the following: offset by 2016 and 2015 per unit data): Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(1) Average capacity (units)(2) December 31, 2016 and 2015. the periods presented. 46 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 47 PART II PART II SPP NOI decreased primarily as a result of the net impact Additionally, Total Portfolio NOI and Adjusted NOI of triple-net lease terminations from the Brookdale decreased primarily as a result of the following Transaction during the fourth quarter of 2017. Non-SPP impacts: SPP Adjusted NOI increased primarily as a result of senior housing triple-net facilities sold during 2016 and the following: • annual rent escalations; and • higher cash rent received from our portfolio of assets leased to Sunrise Senior Living. • • 2017; and our SHOP segment. the transfer of 42 senior housing triple-net facilities to The decrease to Total Portfolio NOI and Adjusted NOI is partially offset by (i) increased non-SPP income from five senior housing triple-net facilities acquired in the first quarter of 2016 and (ii) the aforementioned increases to SPP Adjusted NOI. The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands except 2016 and 2015 per unit data): Rental revenues(1) Operating expenses NOI Non-cash adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI Adjusted NOI % change Property count(2) Average capacity (units)(3) Average annual rent per unit $302,976 $304,442 2016 (237) 302,739 (5,282) SPP 2015 (637) 303,805 (7,550) Change $ (1,466) 400 (1,066) 2,268 $297,457 $296,255 $ 1,202 Total Portfolio 2016 2015 $ 423,118 $ 428,269 (6,710) 416,408 (7,566) 408,842 (111,385) (3,427) 424,842 (9,716) 415,126 (118,871) Change $ (5,151) (3,283) (8,434) 2,150 (6,284) 7,486 $ 297,457 $ 296,255 $ 1,202 0.4% 205 20,269 205 20,268 $ 14,684 $ 14,645 274 28,455 295 28,777 $ 14,604 $ 14,544 (1) Represents rental and related revenues and income from DFLs. (2) From our 2015 presentation of SPP, we removed nine senior housing triple-net properties that were sold, 17 senior housing triple-net properties that were transitioned to a RIDEA structure in our SHOP segment and 64 senior housing triple-net properties that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include 64 properties classified as held for sale as (3) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from of December 31, 2016. the periods presented. SPP NOI decreased primarily as a result of lower rents in • the transition of 17 senior housing triple-net facilities our portfolio of assets leased to Sunrise Senior Living (the to a RIDEA structure (reported in our SHOP segment); “Sunrise Portfolio”). SPP adjusted NOI increased primarily as partially offset by a result of annual rent escalations, partially offset by lower • five senior housing triple-net facilities acquired in the cash rent received from our Sunrise portfolio. first quarter of 2016. Additionally, Total Portfolio NOI and adjusted NOI decreased primarily as a result of the following Non-SPP impacts: • nine senior housing triple-net facilities sold in 2016; and Senior Housing Operating Portfolio 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars in thousands, except per unit data): Resident fees and services Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(1) Average capacity (units)(2) Average annual rent per unit 2017 $ 321,209 (239,702) 81,507 32,863 $ 114,370 SPP 2016 $ 317,361 (202,624) 114,737 (1,297) $ 113,440 2017 $ 525,473 (396,491) 128,982 33,227 162,209 (47,839) $ 114,370 Total Portfolio 2016 $ 686,822 (480,870) 205,952 (2,686) 203,266 (89,826) $ 113,440 Change $(161,349) 84,379 (76,970) 35,913 (41,057) 41,987 930 $ Change $ 3,848 (37,078) (33,230) 34,160 930 $ 0.8% 48 8,128 $ 44,378 48 8,136 $ 43,842 102 12,758 $ 41,133 130 16,028 $ 42,851 (1) From our 2016 presentation of SPP, we removed a SHOP property that was placed into redevelopment, two SHOP properties that were classified as held for sale and 49 SHOP properties that were deconsolidated. Our 2016 Total Portfolio property count has been adjusted to include a property classified as held for sale as of December 31, 2016. (2) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. SPP NOI decreased primarily as a result of increased operating expenses related to the management fee terminations from the Brookdale Transaction during the fourth quarter of 2017. SPP Adjusted NOI increased primarily as a result of the following: • increased rates for resident fees and services; partially offset by • higher expense growth and a decline in occupancy. Additionally, Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following Non-SPP impacts: • decreased non-SPP income from our partial sale of RIDEA II; partially offset by • non-SPP income for 42 senior housing triple-net assets transferred to SHOP during the fourth quarter of 2016 and year-to-date 2017. 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars in thousands, except per unit data): Resident fees and services Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(1) Average capacity (units)(2) Average annual rent per unit 2016 $ 439,607 (311,278) 128,329 — $ 128,329 SPP 2015 $ 419,217 (298,648) 120,569 — $ 120,569 2016 $ 686,822 (480,870) 205,952 (2,686) 203,266 (74,937) $ 128,329 Total Portfolio 2015 $ 518,264 (371,016) 147,248 8,145 155,393 (34,824) $ 120,569 Change $ 168,558 (109,854) 58,704 (10,831) 47,873 (40,113) 7,760 $ Change $ 20,390 (12,630) 7,760 — $ 7,760 6.4% 69 9,944 $ 44,209 69 9,962 $ 42,081 130 16,028 $ 42,851 130 12,704 $ 41,435 (1) From our 2015 presentation of SPP, we removed two SHOP properties that were sold and a SHOP property that was classified as held for sale. Our 2016 and 2015 Total Portfolio property count has been adjusted to include a property classified as held for sale as of December 31, 2016 and 2015. (2) Represents average capacity as reported by the respective tenants or operators for the 12-month period and a quarter in arrears from the periods presented. 46 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 47 PART II PART II SPP NOI and adjusted NOI increased primarily as a result of increased occupancy and rates for resident fees and services. The increase in Total Portfolio NOI was partially offset by a termination fee related to our RIDEA III acquisition, which was not repeated in 2016. 2016 and 2015 thousands, except per sq. ft. data): The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP along with 2015 acquisitions, primarily our RIDEA III acquisition. Life Science 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in thousands, except per sq. ft. data): Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI 2017 $304,858 (63,612) 241,246 2,427 $243,673 SPP 2016 $292,147 (58,363) 233,784 339 $234,123 SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per occupied square foot Average annual base rent per occupied square foot 108 96.3% 6,105 108 97.7% 6,193 $ $ 50 41 $ $ 47 39 2017 $358,816 (78,001) 280,815 (4,517) 276,298 (32,625) $243,673 Total Portfolio 2016 $358,537 (72,478) 286,059 (2,954) 283,105 (48,982) $234,123 Change 279 $ (5,523) (5,244) (1,563) (6,807) 16,357 $ 9,550 Change $12,711 (5,249) 7,462 2,088 $ 9,550 4.1% 131 96.2% 6,841 128 97.5% 7,332 $ $ 52 42 $ $ 48 40 (1) Represents rental and related revenues and tenant recoveries. (2) From our 2016 presentation of SPP, we removed one life science facility that was sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI $306,317 $ 295,515 2016 (58,812) 247,505 554 SPP 2015 (58,779) 236,736 (6,366) $248,059 $ 230,370 Total Portfolio 2016 2015 $358,537 $342,984 (72,478) 286,059 (2,954) 283,105 (35,046) (70,217) 272,767 (10,128) 262,639 (32,269) $248,059 $230,370 Change $15,553 (2,261) 13,292 7,174 20,466 (2,777) $17,689 Change $10,802 (33) 10,769 6,920 $17,689 7.7% SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per occupied square foot Average annual base rent per occupied square foot 107 97.8% 6,378 107 96.8% 6,314 $ $ 48 40 $ $ 46 37 (1) Represents rental and related revenues and tenant recoveries. 128 97.5% 7,332 120 97.1% 7,179 $ $ 48 40 $ $ 46 38 (2) From our 2015 presentation of SPP, we removed four life science facilities that were sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. Our 2015 Total Portfolio property count has been adjusted to include two properties in development as of December 31, 2015. SPP NOI and Adjusted NOI increased primarily as a result of Total Portfolio NOI and adjusted NOI increased primarily the following: • mark-to-market lease renewals; • new leasing activity; and • increased occupancy. Additionally, SPP adjusted NOI increased as a result of annual rent escalations and a decline in rent abatements. as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • • • life science acquisitions in 2015 and 2016; and increased occupancy in a development placed in operation in 2016; partially offset by five life science facilities sold in 2016. SPP NOI and Adjusted NOI increased primarily as a result of the following: • • mark-to-market lease renewals; • new leasing activity; and • specific to adjusted NOI, annual rent escalations. Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following impacts to Non-SPP: • decreased income from the sale of life science facilities in 2016 and 2017; partially offset by increased income from (i) increased occupancy in portions of developments placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017. The decrease in Total Portfolio NOI and Adjusted NOI was also partially offset by the aforementioned increases to SPP. 48 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 49 PART II PART II SPP NOI and adjusted NOI increased primarily as a result The increase in Total Portfolio NOI was partially offset by a of increased occupancy and rates for resident fees termination fee related to our RIDEA III acquisition, which and services. was not repeated in 2016. 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in thousands, except per sq. ft. data): Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP along with 2015 acquisitions, primarily our RIDEA III acquisition. Life Science 2017 and 2016 thousands, except per sq. ft. data): The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI $304,858 $292,147 2017 (63,612) 241,246 2,427 SPP 2016 (58,363) 233,784 339 Change $12,711 (5,249) 7,462 2,088 $243,673 $234,123 $ 9,550 Total Portfolio 2017 2016 $358,816 $358,537 (78,001) 280,815 (4,517) 276,298 (32,625) (72,478) 286,059 (2,954) 283,105 (48,982) $243,673 $234,123 Change $ 279 (5,523) (5,244) (1,563) (6,807) 16,357 $ 9,550 SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per 4.1% 108 96.3% 6,105 108 97.7% 6,193 occupied square foot Average annual base rent per occupied square foot $ $ 50 41 $ $ 47 39 (1) Represents rental and related revenues and tenant recoveries. 131 96.2% 6,841 128 97.5% 7,332 $ $ 52 42 $ $ 48 40 (2) From our 2016 presentation of SPP, we removed one life science facility that was sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. SPP NOI and Adjusted NOI increased primarily as a result of • increased income from (i) increased occupancy in the following: • mark-to-market lease renewals; • new leasing activity; and portions of developments placed in operations in 2016 and 2017 and (ii) life science acquisitions in 2016 and 2017. • specific to adjusted NOI, annual rent escalations. The decrease in Total Portfolio NOI and Adjusted NOI was also partially offset by the aforementioned increases to SPP. Total Portfolio NOI and Adjusted NOI decreased primarily as a result of the following impacts to Non-SPP: • decreased income from the sale of life science facilities in 2016 and 2017; partially offset by 2016 $306,317 (58,812) 247,505 554 $248,059 SPP 2015 $ 295,515 (58,779) 236,736 (6,366) $ 230,370 Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per occupied square foot Average annual base rent per occupied square foot 107 97.8% 6,378 107 96.8% 6,314 $ $ 48 40 $ $ 46 37 2016 $358,537 (72,478) 286,059 (2,954) 283,105 (35,046) $248,059 Total Portfolio 2015 $342,984 (70,217) 272,767 (10,128) 262,639 (32,269) $230,370 Change $15,553 (2,261) 13,292 7,174 20,466 (2,777) $17,689 Change $10,802 (33) 10,769 6,920 $17,689 7.7% 128 97.5% 7,332 120 97.1% 7,179 $ $ 48 40 $ $ 46 38 (1) Represents rental and related revenues and tenant recoveries. (2) From our 2015 presentation of SPP, we removed four life science facilities that were sold and four life science facilities that were classified as held for sale. Our 2016 Total Portfolio property count has been adjusted to include eight properties in development and four properties classified as held for sale as of December 31, 2016. Our 2015 Total Portfolio property count has been adjusted to include two properties in development as of December 31, 2015. SPP NOI and Adjusted NOI increased primarily as a result of the following: • mark-to-market lease renewals; • new leasing activity; and increased occupancy. • Additionally, SPP adjusted NOI increased as a result of annual rent escalations and a decline in rent abatements. Total Portfolio NOI and adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • • • life science acquisitions in 2015 and 2016; and increased occupancy in a development placed in operation in 2016; partially offset by five life science facilities sold in 2016. 48 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 49 2016 and 2015 thousands, except per sq. ft. data): The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average occupancy $ 376,346 $ 367,804 2016 (141,897) 234,449 (443) SPP 2015 (138,130) 229,674 (2,379) Change $ 8,542 (3,767) 4,775 1,936 $ 234,006 $ 227,295 $ 6,711 202 91.8% 202 91.5% 3.0% Average occupied square feet 12,976 12,905 Average annual total revenues per occupied square foot Average annual base rent per occupied square foot $ $ 29 24 $ $ 28 24 (1) Represents rental and related revenues and tenant recoveries. Total Portfolio 2016 2015 $ 446,280 $ 415,351 (173,687) 272,593 (3,536) 269,057 (35,051) (162,054) 253,297 (4,933) 248,364 (21,069) $ 234,006 $ 227,295 Change $ 30,929 (11,633) 19,296 1,397 20,693 (13,982) $ 6,711 242 91.5% 231 90.7% 15,697 14,677 $ $ 28 24 $ $ 28 23 (2) From our 2015 presentation of SPP, we removed three MOBs that were sold and six MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four and five properties in development as of December 31, 2016 and December 31, 2015, respectively. SPP NOI and adjusted NOI increased primarily as a result • additional NOI from our MOB acquisitions in 2015 and of increased occupancy. Additionally, SPP adjusted NOI increased as a result of annual rent escalations. 2016; partially offset by • the sale of three MOBs. Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • increased occupancy in former redevelopment and development properties that have been placed into operations; PART II PART II Medical Office 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in thousands, except per sq. ft. data): 2017 $ 400,747 (150,329) 250,418 2,183 $ 252,601 SPP 2016 $ 392,166 (146,300) 245,866 (523) $ 245,343 Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per occupied square foot Average annual base rent per occupied square foot $ $ 212 91.9% 212 92.2% 14,224 14,303 28 24 $ $ 27 23 Change $ 31,179 (9,510) 21,669 584 22,253 (14,995) $ 7,258 Change $ 8,581 (4,029) 4,552 2,706 $ 7,258 3.0% 2017 $ 477,459 (183,197) 294,262 (2,952) 291,310 (38,709) $ 252,601 Total Portfolio 2016 $ 446,280 (173,687) 272,593 (3,536) 269,057 (23,714) $ 245,343 254 91.8% 242 91.5% 16,674 15,697 $ $ 28 24 $ $ 28 24 (1) Represents rental and related revenues and tenant recoveries. (2) From our 2016 presentation of SPP, we removed four MOBs that were sold and two MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four properties in development as of December 31, 2016. SPP NOI and Adjusted NOI increased primarily as a result of mark-to-market lease renewals and new leasing activity. Additionally, SPP Adjusted NOI increased as a result of annual rent escalations. • increased occupancy in former redevelopment and development properties that have been placed into operations; partially offset by • decreased income from the sale of seven MOBs Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • increased income from our 2016 and 2017 acquisitions; and during 2016 and 2017 and the placement of a MOB into redevelopment. 50 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 51 PART II Medical Office 2017 and 2016 The following table summarizes results at and for the years ended December 31, 2017 and 2016 (dollars and sq. ft. in thousands, except per sq. ft. data): Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average occupancy $ 400,747 $ 392,166 2017 (150,329) 250,418 2,183 SPP 2016 (146,300) 245,866 (523) Change $ 8,581 (4,029) 4,552 2,706 $ 252,601 $ 245,343 $ 7,258 212 91.9% 212 92.2% 3.0% Average occupied square feet 14,224 14,303 Average annual total revenues per occupied square foot Average annual base rent per occupied square foot $ $ 28 24 $ $ 27 23 (1) Represents rental and related revenues and tenant recoveries. Total Portfolio 2017 2016 $ 477,459 $ 446,280 (183,197) 294,262 (2,952) 291,310 (38,709) (173,687) 272,593 (3,536) 269,057 (23,714) Change $ 31,179 (9,510) 21,669 584 22,253 (14,995) $ 252,601 $ 245,343 $ 7,258 254 91.8% 242 91.5% 16,674 15,697 $ $ 28 24 $ $ 28 24 (2) From our 2016 presentation of SPP, we removed four MOBs that were sold and two MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four properties in development as of December 31, 2016. SPP NOI and Adjusted NOI increased primarily as a result • increased occupancy in former redevelopment and of mark-to-market lease renewals and new leasing activity. development properties that have been placed into Additionally, SPP Adjusted NOI increased as a result of operations; partially offset by • decreased income from the sale of seven MOBs during 2016 and 2017 and the placement of a MOB into redevelopment. annual rent escalations. Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • increased income from our 2016 and 2017 acquisitions; and PART II 2016 and 2015 The following table summarizes results at and for the years ended December 31, 2016 and 2015 (dollars and sq. ft. in thousands, except per sq. ft. data): 2016 $ 376,346 (141,897) 234,449 (443) $ 234,006 SPP 2015 $ 367,804 (138,130) 229,674 (2,379) $ 227,295 Rental revenues(1) Operating expenses NOI Adjustments to NOI Adjusted NOI Non-SPP adjusted NOI SPP adjusted NOI SPP Adjusted NOI % change Property count(2) Average occupancy Average occupied square feet Average annual total revenues per occupied square foot Average annual base rent per occupied square foot 202 91.8% 202 91.5% 12,976 12,905 $ $ 29 24 $ $ 28 24 2016 $ 446,280 (173,687) 272,593 (3,536) 269,057 (35,051) $ 234,006 Total Portfolio 2015 $ 415,351 (162,054) 253,297 (4,933) 248,364 (21,069) $ 227,295 Change $ 30,929 (11,633) 19,296 1,397 20,693 (13,982) $ 6,711 Change $ 8,542 (3,767) 4,775 1,936 $ 6,711 3.0% 242 91.5% 231 90.7% 15,697 14,677 $ $ 28 24 $ $ 28 23 (1) Represents rental and related revenues and tenant recoveries. (2) From our 2015 presentation of SPP, we removed three MOBs that were sold and six MOBs that were placed into redevelopment. Our 2016 Total Portfolio property count has been adjusted to include four and five properties in development as of December 31, 2016 and December 31, 2015, respectively. SPP NOI and adjusted NOI increased primarily as a result of increased occupancy. Additionally, SPP adjusted NOI increased as a result of annual rent escalations. Total Portfolio NOI and Adjusted NOI increased primarily as a result of the aforementioned increases to SPP and the following impacts to Non-SPP: • increased occupancy in former redevelopment and development properties that have been placed into operations; • additional NOI from our MOB acquisitions in 2015 and 2016; partially offset by the sale of three MOBs. • 50 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 51 PART II Other Income and Expense Items The following table summarizes results for the years ended December 31, 2017, 2016 and 2015 (in thousands): Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Impairments (recoveries), net Gain (loss) on sales of real estate, net Loss on debt extinguishments Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated joint ventures Total discontinued operations Noncontrolling interests’ share in earnings Year Ended December 31, 2017 $ 56,237 307,716 534,726 88,772 7,963 166,384 356,641 (54,227) 31,420 1,333 2016 $ 88,808 464,403 568,108 103,611 9,821 — 164,698 (46,020) 3,654 (4,473) 2015 $ 112,184 479,596 504,905 95,965 27,309 108,349 6,377 — 16,208 9,807 2017 vs. 2016 $ (32,571) (156,687) (33,382) (14,839) (1,858) 166,384 191,943 (8,207) 27,766 5,806 2016 vs. 2015 $ (23,376) (15,193) 63,203 7,646 (17,488) (108,349) 158,321 (46,020) (12,554) (14,280) 10,901 — (8,465) 11,360 265,755 (12,179) 6,590 (699,086) (12,817) (459) (265,755) 3,714 4,770 964,841 638 Interest income. The decrease in interest income for the year ended December 31, 2017 was primarily the result of: (i) the payoff of our HC-One Facility in June 2017, (ii) incremental interest income received during the second quarter of 2016 due to the payoff of three participating development loans, and (iii) decreased interest received from our Tandem Mezzanine Loan during the fourth quarter of 2017, partially offset by additional interest income in 2017 from our $131 million loan to Maria Mallaband in November 2016. The decrease in interest income for the year ended December 31, 2016 was primarily the result of: (i) placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and (ii) paydowns in our loan portfolio. The decrease in interest income was partially offset by additional interest income from: (i) the Four Seasons senior secured term loan purchased in the fourth quarter of 2015 and (ii) additional fundings in our loan portfolio, including our £105 million ($131 million) loan to Maria Mallaband in November 2016. Interest expense. The decrease in interest expense for the year ended December 31, 2017 was primarily the result of senior unsecured notes and mortgage debt repayments, which occurred primarily in the second half of 2016 and throughout 2017. The decrease in interest expense for the year ended December 31, 2016 was primarily the result of: (i) mortgage debt repayments during 2015 and 2016, primarily from mortgage debt secured by properties in our senior housing triple-net, life science and medical office segments, (ii) senior unsecured notes payoffs during 2015 and 2016 and higher capitalized interest. The decrease in interest expense was partially offset by: (i) senior unsecured notes issued during 2015 and (ii) increased borrowings under our Facility. Approximately 84%, 83% and 96% of our total debt, inclusive of $44 million, $46 million and $71 million of variable rate debt swapped to fixed through interest rate swaps, was fixed rate debt as of December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, our fixed rate debt and variable rate debt had weighted average interest rates of 4.19% and 2.56%, respectively. At December 31, 2016, our fixed rate debt and variable rate debt had weighted average interest rates of 4.26% and 2.23%, respectively. At December 31, 2015, our fixed rate debt and variable rate debt had weighted average interest rates of 4.68% and 1.72%, respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below. Depreciation and amortization. The decrease in depreciation and amortization expense for the year ended December 31, 2017 was primarily as a result of the sale of 64 senior housing triple-net assets and the deconsolidation of RIDEA II during the first quarter of 2017, partially offset by depreciation and amortization of assets acquired and placed in service during 2016 and 2017. The increase in depreciation and amortization expense for the year ended December 31, 2016 was primarily the result of the impact of acquisitions primarily in our SHOP and medical office segments. General and administrative expenses. The decrease in general and administrative expenses for the year ended December 31, 2017 was primarily as a result of severance and related charges primarily resulting from the departure of our former President and CEO in the third quarter of 2016 which exceeded severance and related charges primarily related to the departure of our former CAO in the third quarter of 2017. PART II The increase in general and administrative expenses for Loss on debt extinguishments. During the year ended the year ended December 31, 2016 was primarily the result December 31, 2017, we repurchased $500 million of our of: (i) higher severance-related charges primarily resulting 5.375% senior notes due 2021 and recognized a $54 million from the departure of our former President and CEO in the loss on debt extinguishment, primarily related to a premium third quarter of 2016 and (ii) higher professional fees in 2016, for early payment. partially offset by lower compensation related expenses. During the fourth quarter of 2016, using proceeds from the We expect to record severance and related charges of Spin-Off, we repaid $1.1 billion of senior unsecured notes approximately $9 million in the first quarter of 2018 related that were due to mature in January 2017 and January 2018 to the previously announced departure of our Executive and repaid $108 million of mortgage debt, incurring Chairman, effective March 1, 2018. Transaction costs. The decrease in transaction costs for aggregate loss on debt extinguishments of $46 million, primarily related to prepayment penalties. the year ended December 31, 2016 was primarily a result of Other income (expense), net. The increase in other income, lower levels of transactional activity in 2016 compared to net for the year ended December 31, 2017 was primarily as a the same period in 2015. Impairments (recoveries), net. During the year ended December 31, 2017, we recognized (i) $144 million of impairments on our Tandem Mezzanine Loan due to a variety of factors including recent operating results of the underlying collateral and events of default under the result of the £42 million ($51 million) gain on sale of our Four Seasons Notes, partially offset by $12 million of casualty- related charges due to hurricanes in the third quarter of 2017 and $13 million of increased litigation-related expenses, including costs from securities class action litigation, and a legal settlement in 2017. loan agreement (see Note 7 to the Consolidated Financial The decrease in other income, net for the year ended Statements for further information) and (ii) $23 million December 31, 2016 was primarily the result of a reduction of impairments on 11 underperforming senior housing of foreign currency remeasurement gains from remeasuring triple-net facilities. assets and liabilities denominated in GBP to U.S. dollars (“USD”) as a result of effective hedges designated in For the year ended December 31, 2016, there were no impairments recognized. September 2015. During the year ended December 31, 2015, we recognized the following impairment charges: (i) $112 million related to our investment in Four Seasons Notes and (ii) $3 million related to a MOB. The impairment charges were partially offset by a $6 million impairment recovery related to the repayment of a loan. Income tax benefit (expense). The increase in income tax benefit for the year ended December 31, 2017 was primarily the result of: (i) a $6 million income tax benefit from the partial sale of RIDEA II in 2017, (ii) a $5 million income tax benefit related to our share of operating losses from our RIDEA joint ventures, (iii) a $1 million deferred tax benefit from casualty-related charges recognized in the second half Gain (loss) on sales of real estate, net. During the year ended of 2017 and (iv) a $11 million income tax expense recognized December 31, 2017, we sold 68 senior housing triple- in 2016 associated with federal income tax and state built-in net assets for $1.152 billion, five life science facilities for gain tax for the disposition of certain real estate assets. The $81 million, five SHOP facilities for $43 million, four MOBs total tax benefit was partially offset by a $17 million income for $15 million and a 40% interest in RIDEA II and recognized tax expense related to the impact of tax rate legislation total net gain on sales of real estate of $357 million. during the fourth quarter of 2017. During the year ended December 31, 2016, we sold a portfolio of five facilities in one of our non-reportable The increase in income tax expense for the year ended December 31, 2016 was primarily the result of recognizing segments and two senior housing triple-net facilities for tax liabilities representing state built-in gain tax for the $130 million, five life science facilities for $386 million, disposition of certain real estate assets. seven senior housing triple-net facilities for $88 million, three MOBs for $20 million and three SHOP facilities for $41 million, recognizing total gain on sales of $165 million. Equity income (loss) from unconsolidated joint ventures. The decrease in equity income from unconsolidated joint ventures for the year ended December 31, 2017 was During the year ended December 31, 2015, we sold the primarily the result of income from our share of gains on following assets: (i) nine senior housing triple-net facilities sales of real estate in 2016, partially offset by income from for $60 million, resulting from Brookdale’s exercise of its our investment in RIDEA II, which was deconsolidated in the purchase option, and (ii) a MOB for $0.4 million, recognizing first quarter of 2017. total gain on sales of $6 million. 52 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 53 PART II Other Income and Expense Items The following table summarizes results for the years ended December 31, 2017, 2016 and 2015 (in thousands): Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Impairments (recoveries), net Gain (loss) on sales of real estate, net Loss on debt extinguishments Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated joint ventures Total discontinued operations Noncontrolling interests’ share in earnings Year Ended December 31, 2017 vs. 2016 vs. 2017 2016 2015 2016 2015 $ 56,237 $ 88,808 $ 112,184 $ (32,571) $ (23,376) 307,716 534,726 88,772 7,963 166,384 356,641 (54,227) 31,420 1,333 10,901 — (8,465) 464,403 568,108 103,611 9,821 — 164,698 (46,020) 3,654 (4,473) 11,360 265,755 (12,179) 479,596 504,905 95,965 27,309 108,349 6,377 — 16,208 9,807 6,590 (699,086) (12,817) (156,687) (33,382) (14,839) (1,858) 166,384 191,943 (8,207) 27,766 5,806 (459) (265,755) 3,714 (15,193) 63,203 7,646 (17,488) (108,349) 158,321 (46,020) (12,554) (14,280) 4,770 964,841 638 Interest income. The decrease in interest income for the Approximately 84%, 83% and 96% of our total debt, year ended December 31, 2017 was primarily the result inclusive of $44 million, $46 million and $71 million of variable of: (i) the payoff of our HC-One Facility in June 2017, rate debt swapped to fixed through interest rate swaps, was (ii) incremental interest income received during the second fixed rate debt as of December 31, 2017, 2016 and 2015, quarter of 2016 due to the payoff of three participating respectively. At December 31, 2017, our fixed rate debt development loans, and (iii) decreased interest received and variable rate debt had weighted average interest rates from our Tandem Mezzanine Loan during the fourth quarter of 4.19% and 2.56%, respectively. At December 31, 2016, of 2017, partially offset by additional interest income in our fixed rate debt and variable rate debt had weighted 2017 from our $131 million loan to Maria Mallaband in average interest rates of 4.26% and 2.23%, respectively. November 2016. The decrease in interest income for the year ended December 31, 2016 was primarily the result of: (i) placing our Four Seasons Notes on cost recovery status in the third quarter of 2015 and (ii) paydowns in our loan portfolio. At December 31, 2015, our fixed rate debt and variable rate debt had weighted average interest rates of 4.68% and 1.72%, respectively. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3 below. The decrease in interest income was partially offset by Depreciation and amortization. The decrease in depreciation additional interest income from: (i) the Four Seasons senior and amortization expense for the year ended December 31, secured term loan purchased in the fourth quarter of 2015 2017 was primarily as a result of the sale of 64 senior and (ii) additional fundings in our loan portfolio, including housing triple-net assets and the deconsolidation of our £105 million ($131 million) loan to Maria Mallaband in RIDEA II during the first quarter of 2017, partially offset by November 2016. Interest expense. The decrease in interest expense for the depreciation and amortization of assets acquired and placed in service during 2016 and 2017. year ended December 31, 2017 was primarily the result of The increase in depreciation and amortization expense for senior unsecured notes and mortgage debt repayments, the year ended December 31, 2016 was primarily the result which occurred primarily in the second half of 2016 and of the impact of acquisitions primarily in our SHOP and throughout 2017. medical office segments. The decrease in interest expense for the year ended General and administrative expenses. The decrease in December 31, 2016 was primarily the result of: (i) mortgage general and administrative expenses for the year ended debt repayments during 2015 and 2016, primarily from December 31, 2017 was primarily as a result of severance mortgage debt secured by properties in our senior housing and related charges primarily resulting from the departure triple-net, life science and medical office segments, (ii) of our former President and CEO in the third quarter of 2016 senior unsecured notes payoffs during 2015 and 2016 and which exceeded severance and related charges primarily higher capitalized interest. The decrease in interest expense related to the departure of our former CAO in the third was partially offset by: (i) senior unsecured notes issued quarter of 2017. during 2015 and (ii) increased borrowings under our Facility. The increase in general and administrative expenses for the year ended December 31, 2016 was primarily the result of: (i) higher severance-related charges primarily resulting from the departure of our former President and CEO in the third quarter of 2016 and (ii) higher professional fees in 2016, partially offset by lower compensation related expenses. We expect to record severance and related charges of approximately $9 million in the first quarter of 2018 related to the previously announced departure of our Executive Chairman, effective March 1, 2018. Transaction costs. The decrease in transaction costs for the year ended December 31, 2016 was primarily a result of lower levels of transactional activity in 2016 compared to the same period in 2015. Impairments (recoveries), net. During the year ended December 31, 2017, we recognized (i) $144 million of impairments on our Tandem Mezzanine Loan due to a variety of factors including recent operating results of the underlying collateral and events of default under the loan agreement (see Note 7 to the Consolidated Financial Statements for further information) and (ii) $23 million of impairments on 11 underperforming senior housing triple-net facilities. For the year ended December 31, 2016, there were no impairments recognized. During the year ended December 31, 2015, we recognized the following impairment charges: (i) $112 million related to our investment in Four Seasons Notes and (ii) $3 million related to a MOB. The impairment charges were partially offset by a $6 million impairment recovery related to the repayment of a loan. Gain (loss) on sales of real estate, net. During the year ended December 31, 2017, we sold 68 senior housing triple- net assets for $1.152 billion, five life science facilities for $81 million, five SHOP facilities for $43 million, four MOBs for $15 million and a 40% interest in RIDEA II and recognized total net gain on sales of real estate of $357 million. During the year ended December 31, 2016, we sold a portfolio of five facilities in one of our non-reportable segments and two senior housing triple-net facilities for $130 million, five life science facilities for $386 million, seven senior housing triple-net facilities for $88 million, three MOBs for $20 million and three SHOP facilities for $41 million, recognizing total gain on sales of $165 million. During the year ended December 31, 2015, we sold the following assets: (i) nine senior housing triple-net facilities for $60 million, resulting from Brookdale’s exercise of its purchase option, and (ii) a MOB for $0.4 million, recognizing total gain on sales of $6 million. PART II Loss on debt extinguishments. During the year ended December 31, 2017, we repurchased $500 million of our 5.375% senior notes due 2021 and recognized a $54 million loss on debt extinguishment, primarily related to a premium for early payment. During the fourth quarter of 2016, using proceeds from the Spin-Off, we repaid $1.1 billion of senior unsecured notes that were due to mature in January 2017 and January 2018 and repaid $108 million of mortgage debt, incurring aggregate loss on debt extinguishments of $46 million, primarily related to prepayment penalties. Other income (expense), net. The increase in other income, net for the year ended December 31, 2017 was primarily as a result of the £42 million ($51 million) gain on sale of our Four Seasons Notes, partially offset by $12 million of casualty- related charges due to hurricanes in the third quarter of 2017 and $13 million of increased litigation-related expenses, including costs from securities class action litigation, and a legal settlement in 2017. The decrease in other income, net for the year ended December 31, 2016 was primarily the result of a reduction of foreign currency remeasurement gains from remeasuring assets and liabilities denominated in GBP to U.S. dollars (“USD”) as a result of effective hedges designated in September 2015. Income tax benefit (expense). The increase in income tax benefit for the year ended December 31, 2017 was primarily the result of: (i) a $6 million income tax benefit from the partial sale of RIDEA II in 2017, (ii) a $5 million income tax benefit related to our share of operating losses from our RIDEA joint ventures, (iii) a $1 million deferred tax benefit from casualty-related charges recognized in the second half of 2017 and (iv) a $11 million income tax expense recognized in 2016 associated with federal income tax and state built-in gain tax for the disposition of certain real estate assets. The total tax benefit was partially offset by a $17 million income tax expense related to the impact of tax rate legislation during the fourth quarter of 2017. The increase in income tax expense for the year ended December 31, 2016 was primarily the result of recognizing tax liabilities representing state built-in gain tax for the disposition of certain real estate assets. Equity income (loss) from unconsolidated joint ventures. The decrease in equity income from unconsolidated joint ventures for the year ended December 31, 2017 was primarily the result of income from our share of gains on sales of real estate in 2016, partially offset by income from our investment in RIDEA II, which was deconsolidated in the first quarter of 2017. 52 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 53 PART II The increase in equity income from unconsolidated joint ventures for the year ended December 31, 2016 was primarily the result of increased income from our share of gains on sales of real estate. Total discontinued operations. Discontinued operations for the years ended December 31, 2016 and 2015 resulted in income of $266 million and loss of $699 million, respectively. Income and loss from discontinued operations primarily relates to the operations of QCP. Income from discontinued operations increased during the year ended December 31, 2016 as a result of impairment charges during 2015 not repeated in 2016. The increase in discontinued operations Liquidity and Capital Resources We anticipate that our cash flow from operations, available cash balances and cash from our various financing activities will be adequate for at least the next 12 months for purposes of: (i) funding recurring operating expenses; (ii) meeting debt service requirements, including principal payments and maturities; and (iii) satisfying our distributions to our stockholders and non-controlling interest members. Our principal investing liquidity needs for the next 12 months are to: • • fund capital expenditures, including tenant improvements and leasing costs; and fund future acquisition, transactional and development activities. We anticipate satisfying these future investing needs using one or more of the following: • • issuance of common or preferred stock; issuance of additional debt, including unsecured notes and mortgage debt; • draws on our credit facilities; and/or • sale or exchange of ownership interests in properties. was partially offset by the following: (i) a reduction in income from our HCRMC investments as a result of the HCRMC lease amendment effective April 1, 2015, the sale of non- strategic assets during the second half of 2015 and the first half of 2016, and a change in income recognition to a cash basis method beginning in January 2016, (ii) transaction costs of $87 million related to the Spin-Off and (iii) increased income tax expense related to our estimated exposure to state built-in gain tax. During the year ended December 31, 2015, we recognized impairments of $1.3 billion related to our HCRMC portfolio. There were no discontinued operations for the year ended December 31, 2017. Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as our ability to fund future acquisitions and development through the issuance of additional securities or secured debt. Credit ratings impact our ability to access capital and directly impact our cost of capital as well. For example, our revolving line of credit facility accrues interest at a rate per annum equal to LIBOR plus a margin that depends upon our credit ratings. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. As of January 31, 2018, we had a credit rating of BBB from Fitch, Baa2 from Moody’s and BBB from S&P Global on our senior unsecured debt securities. Cash Flow Summary During the fourth quarter of 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments using the full retrospective approach. See Note 2 to the Consolidated Financial Statements for additional information. The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. Cash, cash equivalents and restricted cash were $82 million, $137 million and $407 million at December 31, 2017, 2016 and 2015, respectively. The following table sets forth changes in cash flows (in thousands): Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Operating cash flow decreased $367 million between the years ended December 31, 2017 and 2016 primarily as the result of: (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in 2016 and 2017 and (ii) decreased interest received as a result of loan repayments during 2016 and 2017; partially offset by (i) 2016 and 2017 acquisitions, (ii) annual rent increases, 54 http://www.hcpi.com http://www.hcpi.com Year Ended December 31, $ 2017 847,041 1,246,257 (2,148,461) 2016 $ 1,214,131 (428,973) (1,054,265) 2015 $ 1,222,145 (1,660,365) 614,087 (iii) and decreased interest paid as a result of lower balances on our senior unsecured notes and term loans. Our cash flow from operations is dependent upon the occupancy levels of our buildings, rental rates on leases, our tenants’ performance on their lease obligations, the level of operating expenses and other factors. PART II Operating cash flow decreased $8 million between the years ended December 31, 2016 and 2015 primarily as the result of: (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in 2015 and 2016 and (ii) decreased interest Debt See Note 10 in the Consolidated Financial Statements for information about our outstanding debt. received as a result of loan repayments during 2016; partially See “2017 Transaction Overview” for further information offset by (i) 2015 and 2016 acquisitions, (ii) annual rent regarding our significant financing activities during the year increases, (iii) and decreased interest paid as a result of lower ended December 31, 2017. balances on our senior unsecured notes and term loans. The following are significant investing and financing activities for the year ended December 31, 2017: Equity • • received net proceeds of $1.8 billion from the sale of real estate, including the sale and recapitalization of RIDEA II; received net proceeds of $559 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment; • made investments of $1.1 billion primarily for the acquisition and development of real estate; • repaid $1.4 billion of debt under our 2012 Term Loan, 2015 Term Loan, senior unsecured notes and mortgage debt, partially offset by net borrowings under our bank line of credit; and • paid cash dividends on common stock of $695 million. The following are significant investing and financing activities for the year ended December 31, 2016: • made investments of $1.3 billion (development, leasing and acquisition of real estate, investments in unconsolidated joint ventures and loans, and purchases of securities) and received proceeds of $908 million primarily from real estate and DFL sales; • paid cash dividends on common stock of $980 million, which were generally funded by cash provided by our operating activities and cash on hand; and • received net proceeds of $1.7 billion from the Spin-Off of QCP, raised proceeds of $1.1 billion primarily from our net borrowings under our bank line of credit, and repaid $2.9 billion under our bank line of credit, senior unsecured notes and mortgage debt. The following are significant investing and financing activities for the year ended December 31, 2015: • made investments of $2.4 billion (development, leasing and acquisition of real estate, and investments in unconsolidated joint ventures and loans); • paid dividends on common stock of $1 billion, which were generally funded by cash provided by our operating activities and cash on hand; and • raised proceeds of $2.7 billion primarily from issuing senior unsecured notes, the term loan originated in January 2015, net borrowings under our bank line of credit, issuances of common stock and noncontrolling interest, and an additional $684 million from sales of real estate, and loan and DFL repayments; and repaid $969 million of senior unsecured notes, bank line of credit and mortgage debt. At December 31, 2017, we had 469 million shares of common stock outstanding, equity totaled $5.6 billion, and our equity securities had a market value of $12.4 billion. At December 31, 2017, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At-The-Market Program. In June 2015, we established an at- the-market program, in connection with the renewal of our Shelf Registration Statement. Under this program, we may sell shares of our common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. There was no activity during the year ended December 31, 2017 and, as of December 31, 2017, shares of our common stock having an aggregate gross sales price of $676 million were available for sale under the at-the-market program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under our program. Shelf Registration We filed a prospectus with the SEC as part of a registration statement on Form S-3ASR, using a shelf registration process. Our current shelf registration statement expires in June 2018. We expect to file a new shelf registration statement on or before such time. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants. 2017 Annual Report 55 PART II The increase in equity income from unconsolidated joint was partially offset by the following: (i) a reduction in income ventures for the year ended December 31, 2016 was from our HCRMC investments as a result of the HCRMC primarily the result of increased income from our share of lease amendment effective April 1, 2015, the sale of non- gains on sales of real estate. Total discontinued operations. Discontinued operations for the years ended December 31, 2016 and 2015 resulted in income of $266 million and loss of $699 million, respectively. Income and loss from discontinued operations primarily relates to the operations of QCP. Income from discontinued operations increased during the year ended December 31, 2016 as a result of impairment charges during 2015 not repeated in 2016. The increase in discontinued operations Liquidity and Capital Resources strategic assets during the second half of 2015 and the first half of 2016, and a change in income recognition to a cash basis method beginning in January 2016, (ii) transaction costs of $87 million related to the Spin-Off and (iii) increased income tax expense related to our estimated exposure to state built-in gain tax. During the year ended December 31, 2015, we recognized impairments of $1.3 billion related to our HCRMC portfolio. There were no discontinued operations for the year ended December 31, 2017. We anticipate that our cash flow from operations, available Access to capital markets impacts our cost of capital and cash balances and cash from our various financing activities ability to refinance maturing indebtedness, as well as our will be adequate for at least the next 12 months for purposes ability to fund future acquisitions and development through of: (i) funding recurring operating expenses; (ii) meeting the issuance of additional securities or secured debt. Credit debt service requirements, including principal payments ratings impact our ability to access capital and directly and maturities; and (iii) satisfying our distributions to our impact our cost of capital as well. For example, our revolving stockholders and non-controlling interest members. line of credit facility accrues interest at a rate per annum • • • • Our principal investing liquidity needs for the next 12 months are to: fund capital expenditures, including tenant improvements and leasing costs; and fund future acquisition, transactional and development activities. We anticipate satisfying these future investing needs using one or more of the following: issuance of common or preferred stock; issuance of additional debt, including unsecured notes and mortgage debt; • draws on our credit facilities; and/or • sale or exchange of ownership interests in properties. equal to LIBOR plus a margin that depends upon our credit ratings. We also pay a facility fee on the entire revolving commitment that depends upon our credit ratings. As of January 31, 2018, we had a credit rating of BBB from Fitch, Baa2 from Moody’s and BBB from S&P Global on our senior unsecured debt securities. Cash Flow Summary During the fourth quarter of 2017, we adopted Accounting Standards Update (“ASU”) No. 2016-18, Restricted Cash and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments using the full retrospective approach. See Note 2 to the Consolidated Financial Statements for additional information. The following summary discussion of our cash flows is based on the Consolidated Statements of Cash Flows and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below. Cash, cash equivalents and restricted cash were $82 million, $137 million and $407 million at December 31, 2017, 2016 and 2015, respectively. The following table sets forth changes in cash flows (in thousands): Net cash provided by (used in) operating activities Net cash provided by (used in) investing activities Net cash provided by (used in) financing activities Year Ended December 31, 2017 2016 2015 $ 847,041 $ 1,214,131 $ 1,222,145 1,246,257 (2,148,461) (428,973) (1,660,365) (1,054,265) 614,087 Operating cash flow decreased $367 million between (iii) and decreased interest paid as a result of lower balances the years ended December 31, 2017 and 2016 primarily on our senior unsecured notes and term loans. Our cash as the result of: (i) decreased Adjusted NOI related to flow from operations is dependent upon the occupancy the QCP Spin-Off and dispositions in 2016 and 2017 levels of our buildings, rental rates on leases, our tenants’ and (ii) decreased interest received as a result of loan performance on their lease obligations, the level of repayments during 2016 and 2017; partially offset by operating expenses and other factors. (i) 2016 and 2017 acquisitions, (ii) annual rent increases, PART II Debt See Note 10 in the Consolidated Financial Statements for information about our outstanding debt. See “2017 Transaction Overview” for further information regarding our significant financing activities during the year ended December 31, 2017. Equity At December 31, 2017, we had 469 million shares of common stock outstanding, equity totaled $5.6 billion, and our equity securities had a market value of $12.4 billion. At December 31, 2017, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”) for which we are the managing member. The DownREIT units are exchangeable for an amount of cash approximating the then-current market value of shares of our common stock or, at our option, shares of our common stock (subject to certain adjustments, such as stock splits and reclassifications). At-The-Market Program. In June 2015, we established an at- the-market program, in connection with the renewal of our Shelf Registration Statement. Under this program, we may sell shares of our common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. There was no activity during the year ended December 31, 2017 and, as of December 31, 2017, shares of our common stock having an aggregate gross sales price of $676 million were available for sale under the at-the-market program. Actual future sales will depend upon a variety of factors, including but not limited to market conditions, the trading price of our common stock and our capital needs. We have no obligation to sell the remaining shares available for sale under our program. Shelf Registration We filed a prospectus with the SEC as part of a registration statement on Form S-3ASR, using a shelf registration process. Our current shelf registration statement expires in June 2018. We expect to file a new shelf registration statement on or before such time. Under the “shelf” process, we may sell any combination of the securities described in the prospectus through one or more offerings. The securities described in the prospectus include common stock, preferred stock, depositary shares, debt securities and warrants. Operating cash flow decreased $8 million between the years ended December 31, 2016 and 2015 primarily as the result of: (i) decreased Adjusted NOI related to the QCP Spin-Off and dispositions in 2015 and 2016 and (ii) decreased interest received as a result of loan repayments during 2016; partially offset by (i) 2015 and 2016 acquisitions, (ii) annual rent increases, (iii) and decreased interest paid as a result of lower balances on our senior unsecured notes and term loans. The following are significant investing and financing activities for the year ended December 31, 2017: • • received net proceeds of $1.8 billion from the sale of real estate, including the sale and recapitalization of RIDEA II; received net proceeds of $559 million primarily from the sale of our Four Seasons investments, the repayment of our HC-One Facility, and a DFL repayment; • made investments of $1.1 billion primarily for the • acquisition and development of real estate; repaid $1.4 billion of debt under our 2012 Term Loan, 2015 Term Loan, senior unsecured notes and mortgage debt, partially offset by net borrowings under our bank line of credit; and • paid cash dividends on common stock of $695 million. The following are significant investing and financing activities for the year ended December 31, 2016: • made investments of $1.3 billion (development, leasing and acquisition of real estate, investments in unconsolidated joint ventures and loans, and purchases of securities) and received proceeds of $908 million primarily from real estate and DFL sales; • • paid cash dividends on common stock of $980 million, which were generally funded by cash provided by our operating activities and cash on hand; and received net proceeds of $1.7 billion from the Spin-Off of QCP, raised proceeds of $1.1 billion primarily from our net borrowings under our bank line of credit, and repaid $2.9 billion under our bank line of credit, senior unsecured notes and mortgage debt. The following are significant investing and financing activities for the year ended December 31, 2015: • made investments of $2.4 billion (development, leasing and acquisition of real estate, and investments in unconsolidated joint ventures and loans); • paid dividends on common stock of $1 billion, which • were generally funded by cash provided by our operating activities and cash on hand; and raised proceeds of $2.7 billion primarily from issuing senior unsecured notes, the term loan originated in January 2015, net borrowings under our bank line of credit, issuances of common stock and noncontrolling interest, and an additional $684 million from sales of real estate, and loan and DFL repayments; and repaid $969 million of senior unsecured notes, bank line of credit and mortgage debt. 54 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 55 $ 2018 2019-2020 228,674 1,250,000 7,458 — 68,828 2,228 13,434 551,684 $2,122,306 More than Five Years — $ — 3,600,000 113,619 — — — 362,219 669,389 $4,745,227 — $ — — 3,512 3,236 45,863 128,101 6,619 297,694 $485,025 2021-2022 — $1,017,076 — 1,600,000 13,978 — — 3,042 13,524 419,699 $3,067,319 Bank line of credit(2) Term loan(3) Senior unsecured notes Mortgage debt U.K. loan commitments(4) Construction loan commitments(5) Development commitments(6) Ground and other operating leases Interest(7) Total Total(1) $ 1,017,076 228,674 6,450,000 138,567 3,236 114,691 133,371 395,796 1,938,466 $10,419,877 PART II PART II Contractual Obligations The following table summarizes our material contractual payment obligations and commitments at December 31, 2017 (in thousands): Non-GAAP Financial Measure Reconciliations Funds From Operations and Funds Available for Distribution The following is a reconciliation from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO, FFO as adjusted and FAD (in thousands, except per share data): Net income (loss) applicable to common shares $ 413,013 $ 626,549 $ (560,552) $ 919,796 $ 969,103 Real estate related depreciation and amortization 534,726 572,998 510,785 459,995 429,174 Year Ended December 31, 2017 2016 2015 2014 2013 on unconsolidated joint ventures 60,058 49,043 48,188 21,303 9,891 Real estate related depreciation and amortization Real estate related depreciation and amortization on noncontrolling interests and other Other depreciation and amortization Loss (gain) on sales of real estate, net Loss (gain) on sales of real estate, net on unconsolidated joint ventures Loss (gain) on sales of real estate, net on noncontrolling interests Taxes associated with real estate dispositions(1) Impairments (recoveries) of real estate, net FFO applicable to common shares Distributions on dilutive convertible units Weighted average shares used to calculate diluted FFO per common share Impact of adjustments to FFO: Transaction-related items(2) (15,069) 9,364 (21,001) 11,919 (356,641) (164,698) (14,506) 22,223 (6,377) (8,027) 18,864 (31,298) (6,217) 14,326 (69,866) (1,430) (16,332) (15,003) — (5,498) 22,590 224 60,451 — 1,453 — 2,948 1,001 — — — — 1,481 — 1,372 661,113 1,119,153 (10,841) 1,381,634 1,349,264 — 8,732 — 13,799 13,276 468,935 471,566 462,795 464,845 461,710 Diluted FFO applicable to common shares $ 661,113 $1,127,885 $ (10,841) $1,395,433 $1,362,540 $ 62,576 $ 96,586 $ 32,932 $ (18,856) $ 6,191 — 1,446,800 35,913 6,713 27,244 Other impairments (recoveries), net(3) Severance and related charges(4) Loss on debt extinguishments(5) Litigation costs(6) Casualty-related charges (recoveries), net Foreign currency remeasurement losses (gains) Tax rate legislation impact(7) 92,900 5,000 54,227 15,637 10,964 (1,043) 17,028 16,965 46,020 3,081 — 585 — — — — — (5,437) — — — — — — — — — — — — FFO as adjusted applicable to common shares $ 918,402 $1,282,390 $1,470,167 $1,398,691 $1,382,699 Distributions on dilutive convertible units and other 6,657 12,849 13,597 13,766 13,220 Diluted FFO as adjusted applicable to common shares $ 925,059 $1,295,239 $1,483,764 $1,412,457 $1,395,919 $ 257,289 $ 163,237 $1,481,008 $ 17,057 $ 33,435 Weighted average shares used to calculate diluted FFO as adjusted per common share 473,620 473,340 469,064 464,845 461,710 FFO as adjusted applicable to common shares $ 918,402 $1,282,390 $1,470,167 $1,398,691 $1,382,699 Amortization of deferred compensation(8) Amortization of deferred financing costs Straight-line rents FAD capital expenditures(9) Lease restructure payments CCRC entrance fees(10) Deferred income taxes(11) Other FAD adjustments(12) 13,510 14,569 (23,933) (124,176) 1,470 21,385 (15,490) (2,017) 15,581 20,014 (27,560) (93,407) 16,604 21,287 (13,692) (5,521) 23,233 20,222 (38,415) (91,320) 22,657 27,895 (15,281) (157,309) 21,885 19,260 (43,857) (85,183) 9,425 11,121 (4,580) 23,327 18,541 (39,587) (75,163) — — 3,500 (147,940) (155,235) FAD applicable to common shares Distributions on dilutive convertible units 803,720 1,215,696 1,261,849 1,178,822 1,158,082 — 13,088 14,230 13,799 13,276 Diluted FAD applicable to common shares $ 803,720 $1,228,784 $1,276,079 $1,192,621 $1,171,358 (1) Excludes $94 million of other debt that represents life care bonds and demand notes that have no scheduled maturities. (2) Includes £105 million ($142 million) translated into USD. (3) Represents £169 million translated into USD. (4) Represents £2 million translated into USD for commitments to fund our U.K. loan facilities. (5) Represents commitments to finance development projects. (6) Represents construction and other commitments for developments in progress. (7) Interest on variable-rate debt is calculated using rates in effect at December 31, 2017. Off-Balance Sheet Arrangements We own interests in certain unconsolidated joint ventures as described in Note 8 to the Consolidated Financial Statements. Except in limited circumstances, our risk of loss is limited to our investment in the joint venture and any outstanding loans receivable. In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities, as described Inflation Our leases often provide for either fixed increases in base rents or indexed escalators, based on the Consumer Price Index or other measures, and/or additional rent based on increases in the tenants’ operating revenues. Most of our MOB leases require the tenant to pay a share of property operating costs such as real estate taxes, insurance and utilities. Substantially all of our senior housing, life science, under Note 11 to the Consolidated Financial Statements. Our risk of loss for these certain properties is limited to the outstanding debt balance plus penalties, if any. We have no other material off-balance sheet arrangements that we expect would materially affect our liquidity and capital resources except those described above under “Contractual Obligations”. and remaining other leases require the tenant or operator to pay all of the property operating costs or reimburse us for all such costs. We believe that inflationary increases in expenses will be offset, in part, by the tenant or operator expense reimbursements and contractual rent increases described above. 56 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 57 The following table summarizes our material contractual payment obligations and commitments at December 31, 2017 Contractual Obligations PART II (in thousands): Bank line of credit(2) Term loan(3) Senior unsecured notes Mortgage debt U.K. loan commitments(4) Construction loan commitments(5) Development commitments(6) Ground and other operating leases Interest(7) Total Total(1) 2018 2019-2020 2021-2022 $ 1,017,076 $ — $ — $1,017,076 $ 228,674 6,450,000 138,567 3,236 114,691 133,371 395,796 — — 3,512 3,236 45,863 128,101 6,619 228,674 7,458 — 68,828 2,228 13,434 1,250,000 1,600,000 3,600,000 13,978 113,619 More than Five Years — — — — — — — — 3,042 13,524 419,699 362,219 669,389 1,938,466 297,694 551,684 $10,419,877 $485,025 $2,122,306 $3,067,319 $4,745,227 (1) Excludes $94 million of other debt that represents life care bonds and demand notes that have no scheduled maturities. (2) Includes £105 million ($142 million) translated into USD. (3) Represents £169 million translated into USD. (4) Represents £2 million translated into USD for commitments to fund our U.K. loan facilities. (5) Represents commitments to finance development projects. (6) Represents construction and other commitments for developments in progress. (7) Interest on variable-rate debt is calculated using rates in effect at December 31, 2017. Off-Balance Sheet Arrangements We own interests in certain unconsolidated joint ventures under Note 11 to the Consolidated Financial Statements. as described in Note 8 to the Consolidated Financial Our risk of loss for these certain properties is limited to Statements. Except in limited circumstances, our risk of the outstanding debt balance plus penalties, if any. We loss is limited to our investment in the joint venture and any have no other material off-balance sheet arrangements outstanding loans receivable. In addition, we have certain that we expect would materially affect our liquidity and properties which serve as collateral for debt that is owed capital resources except those described above under by a previous owner of certain of our facilities, as described “Contractual Obligations”. Inflation Our leases often provide for either fixed increases in base and remaining other leases require the tenant or operator rents or indexed escalators, based on the Consumer Price to pay all of the property operating costs or reimburse us Index or other measures, and/or additional rent based on for all such costs. We believe that inflationary increases in increases in the tenants’ operating revenues. Most of our expenses will be offset, in part, by the tenant or operator MOB leases require the tenant to pay a share of property expense reimbursements and contractual rent increases operating costs such as real estate taxes, insurance and described above. utilities. Substantially all of our senior housing, life science, Non-GAAP Financial Measure Reconciliations Funds From Operations and Funds Available for Distribution The following is a reconciliation from net income (loss) applicable to common shares, the most directly comparable financial measure calculated and presented in accordance with GAAP, to FFO, FFO as adjusted and FAD (in thousands, except per share data): Year Ended December 31, PART II Net income (loss) applicable to common shares Real estate related depreciation and amortization Real estate related depreciation and amortization on unconsolidated joint ventures Real estate related depreciation and amortization on noncontrolling interests and other Other depreciation and amortization Loss (gain) on sales of real estate, net Loss (gain) on sales of real estate, net on unconsolidated joint ventures Loss (gain) on sales of real estate, net on noncontrolling interests Taxes associated with real estate dispositions(1) Impairments (recoveries) of real estate, net FFO applicable to common shares Distributions on dilutive convertible units Diluted FFO applicable to common shares Weighted average shares used to calculate diluted FFO per common share Impact of adjustments to FFO: Transaction-related items(2) Other impairments (recoveries), net(3) Severance and related charges(4) Loss on debt extinguishments(5) Litigation costs(6) Casualty-related charges (recoveries), net Foreign currency remeasurement losses (gains) Tax rate legislation impact(7) $ 62,576 92,900 5,000 54,227 15,637 10,964 (1,043) 17,028 $ 257,289 $ 918,402 FFO as adjusted applicable to common shares Distributions on dilutive convertible units and other 6,657 Diluted FFO as adjusted applicable to common shares $ 925,059 Weighted average shares used to calculate diluted FFO as adjusted per common share FFO as adjusted applicable to common shares Amortization of deferred compensation(8) Amortization of deferred financing costs Straight-line rents FAD capital expenditures(9) Lease restructure payments CCRC entrance fees(10) Deferred income taxes(11) Other FAD adjustments(12) FAD applicable to common shares Distributions on dilutive convertible units Diluted FAD applicable to common shares 473,620 $ 918,402 13,510 14,569 (23,933) (124,176) 1,470 21,385 (15,490) (2,017) 803,720 — $ 803,720 2017 $ 413,013 534,726 2016 $ 626,549 572,998 2015 2014 $ (560,552) $ 919,796 459,995 510,785 2013 $ 969,103 429,174 60,058 49,043 48,188 21,303 9,891 (15,069) 9,364 (356,641) (21,001) 11,919 (164,698) (14,506) 22,223 (6,377) (8,027) 18,864 (31,298) (6,217) 14,326 (69,866) (1,430) (16,332) (15,003) — — — (5,498) 22,590 661,113 — $ 661,113 224 60,451 — 1,119,153 8,732 $1,127,885 1,453 — 2,948 (10,841) — 1,001 — — 1,381,634 13,799 $ (10,841) $1,395,433 1,481 — 1,372 1,349,264 13,276 $1,362,540 468,935 471,566 462,795 464,845 461,710 $ $ 96,586 32,932 — 1,446,800 6,713 — — — (5,437) — $1,481,008 $1,470,167 13,597 $1,483,764 16,965 46,020 3,081 — 585 — $ 163,237 $1,282,390 12,849 $1,295,239 $ (18,856) $ 35,913 — — — — — — 17,057 $ $1,398,691 13,766 $1,412,457 6,191 — 27,244 — — — — — 33,435 $ $1,382,699 13,220 $1,395,919 473,340 $1,282,390 15,581 20,014 (27,560) (93,407) 16,604 21,287 (13,692) (5,521) 1,215,696 13,088 $1,228,784 469,064 $1,470,167 23,233 20,222 (38,415) (91,320) 22,657 27,895 (15,281) (157,309) 1,261,849 14,230 $1,276,079 464,845 $1,398,691 21,885 19,260 (43,857) (85,183) 9,425 11,121 (4,580) (147,940) 1,178,822 13,799 $1,192,621 461,710 $1,382,699 23,327 18,541 (39,587) (75,163) — — 3,500 (155,235) 1,158,082 13,276 $1,171,358 56 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 57 PART II PART II $ $ Diluted earnings per common share Depreciation and amortization Loss (gain) on sales of real estate, net Taxes associated with real estate dispositions Impairments (recoveries) of real estate, net Diluted FFO per common shares Transaction-related items(2) Other impairments (recoveries), net(3) Severance and related charges(4) Loss on debt extinguishments(5) Litigation costs(6) Casualty-related charges (recoveries), net Foreign currency remeasurement losses (gains) Tax rate legislation impact(7) Diluted FFO as adjusted per common shares $ 2017 0.88 1.25 (0.76) (0.01) 0.05 1.41 0.13 0.20 0.01 0.11 0.03 0.02 — 0.04 1.95 $ $ $ Year Ended December 31, 2016 1.34 1.30 (0.38) 0.13 — 2.39 0.20 — 0.04 0.10 0.01 — — — 2.74 $ $ $ 2015 (1.21) $ 1.22 (0.04) — 0.01 (0.02) $ 0.07 3.11 0.01 — — — (0.01) — 3.16 $ 2014 2.00 1.07 (0.07) — — 3.00 (0.04) 0.08 — — — — — — 3.04 $ $ $ 2013 2.13 0.97 (0.15) — — 2.95 0.01 — 0.06 — — — — — 3.02 (1) For the year ended December 31, 2017, represents income tax benefit associated with the disposition of real estate assets in our RIDEA II transaction. For the year ended December 31, 2016, represents income tax expense associated with the state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCRMC real estate portfolio. (2) For the year ended December 31, 2017, includes $55 million of net non-cash charges related to the right to terminate certain triple-net leases and management agreements in conjunction with the November 2017 Brookdale transaction. For the year ended December 31, 2016, primarily relates to the Spin-Off. For the year ended December 31, 2015, primarily related to acquisition and pursuit costs. For the year ended December 31, 2014, includes a net benefit from the 2014 Brookdale transaction, partially offset by acquisition and pursuit costs. For the year ended December 31, 2013, primarily relates to acquisition and pursuit costs. (3) For the year ended December 31, 2017, relates to $144 million of impairments on our Tandem Mezzanine Loan throughout 2017, net of a $51 million impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017. For the year ended December 31, 2015, include impairment charges of: (i) $1.3 billion related to our HCRMC DFL investments, (ii) $112 million related to our Four Seasons Notes and (iii) $46 million related to our equity investment in HCRMC, partially offset by an impairment recovery of $6 million related to a loan payoff. For the year ended December 31, 2014, relates to our equity investment in HCRMC. (4) For the year ended December 31, 2017, primarily relates to the departure of our former Executive Vice President and Chief Accounting Officer. For the year ended December 31, 2016, primarily relates to the departure of our former President and Chief Executive Officer. For the year ended December 31, 2015, relates to the departure of our former Executive Vice President and Chief Investment Officer. For the year ended December 31, 2013, relates to the departure of our former Chairman, CEO and President. (5) For the year ended December 31, 2017, represents the premium associated with the prepayment of $500 million of senior unsecured notes. For the year ended December 31, 2016, represents penalties of $46 million from the prepayment of $1.1 billion of senior unsecured notes and $108 million of mortgage debt using proceeds from the Spin-Off. (6) For the year ended December 31, 2017, relates to costs from securities class action litigation and a legal settlement. For the year ended application or require estimates about matters that are primary beneficiary. December 31, 2016, primarily relates to costs from securities class action litigation. See Note 3 in the Consolidated Financial Statements for additional information. (7) Represents the remeasurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act that was signed into legislation on December 22, 2017. (8) Excludes $0.7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former Executive Vice President and Chief Accounting Officer, which is included in the severance and related charges for the year ended December 31, 2017. Excludes $7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former President and Chief Executive Officer, which is included in severance and related charges for the year ended December 31, 2016. Excludes $3 million related to the acceleration of deferred compensation for restricted stock units and stock options that vested upon the departure of our former Executive Vice President and Chief Investment Officer, which is included in the severance-related charge for year ended December 31, 2015. Excludes $17 million related to the acceleration of deferred compensation for restricted stock units and options that vested upon the departure of our former CEO, which is included in severance-related charges for the year ended December 31, 2013. Includes our share of recurring capital expenditures, leasing costs, and tenant and capital improvements from unconsolidated joint ventures. (9) (10) Represents our 49% share of non-refundable entrance fees as the fees are collected by our CCRC JV, net of reserves and CCRC JV entrance fee amortization. 58 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 59 (11) Excludes $17 million of deferred tax expenses, which is included in tax rate legislation impact for the year ended December 31, 2017. Additionally, the year ended December 31, 2017, excludes $1 million of deferred tax benefit from the casualty-related charges, which is included in casualty-related charges (recoveries), net. (12) Our equity investment in HCRMC was accounted for using the equity method, which required an elimination of DFL income that is proportional to our ownership in HCRMC. Further, our share of earnings from HCRMC (equity income) increased for the corresponding elimination of related lease expense recognized at the HCRMC entity level, which we presented as a non-cash joint venture FAD adjustment. Beginning in January 2016, as a result of placing our equity investment in HCRMC on a cash basis method of accounting, we no longer eliminated our proportional ownership share of income from DFLs to equity income (loss) from unconsolidated joint ventures. See Note 5 to the Consolidated Financial Statements for additional discussion. Critical Accounting Policies The preparation of financial statements in conformity with We make judgments about which entities are VIEs based U.S. GAAP requires our management to use judgment in on an assessment of whether: (i) the equity investors the application of accounting policies, including making as a group, do not have a controlling financial interest, estimates and assumptions. We base estimates on the best (ii) the equity investment at risk is insufficient to finance information available to us at the time, our experience and that entity’s activities without additional subordinated on various other assumptions believed to be reasonable financial support, or (iii) substantially all of the entity’s under the circumstances. These estimates affect the activities involve or are performed on behalf of an equity reported amounts of assets and liabilities, disclosure of investor that holds disproportionately few voting rights. contingent assets and liabilities at the date of the financial We make judgments with respect to our level of influence statements and the reported amounts of revenue and or control over an entity and whether we are (or are not) expenses during the reporting periods. If our judgment or the primary beneficiary of a VIE. Consideration of various interpretation of the facts and circumstances relating to factors includes, but is not limited to, our ability to direct various transactions or other matters had been different, the activities that most significantly impact the entity’s it is possible that different accounting would have been economic performance, our form of ownership interest, applied, resulting in a different presentation of our our representation on the entity’s governing body, the consolidated financial statements. From time to time, we size and seniority of our investment, and our ability and re-evaluate our estimates and assumptions. In the event the rights of other investors to participate in policy making estimates or assumptions prove to be different from actual decisions, replace the manager and/or liquidate the entity, results, adjustments are made in subsequent periods to if applicable. Our ability to correctly assess our influence reflect more current estimates and assumptions about or control over an entity when determining the primary matters that are inherently uncertain. For a more detailed beneficiary of a VIE affects the presentation of these discussion of our significant accounting policies, see entities in our consolidated financial statements. When we Note 2 to the Consolidated Financial Statements. Below perform a re-analysis of the primary beneficiary at a date is a discussion of accounting policies that we consider other than at inception of the VIE, our assumptions may be critical in that they may require complex judgment in their different and may result in the identification of a different inherently uncertain. Principles of Consolidation The consolidated financial statements include the accounts of HCP, Inc., our wholly-owned subsidiaries and joint ventures that we control, through voting rights or other means. We consolidate investments in variable interest entities (“VIEs”) when we are the primary beneficiary of the VIE. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. If we determine that we are the primary beneficiary of a VIE, our consolidated financial statements include the operating results of the VIE rather than the results of our variable interest in the VIE. We require VIEs to provide us timely financial information and review the internal controls of VIEs to determine if we can rely on the financial information it provides. If a VIE has deficiencies in its internal controls over financial reporting, or does not provide us with timely financial information, it may adversely impact the quality and/or timing of our financial reporting and our internal controls over financial reporting. PART II PART II $ $ Diluted earnings per common share Depreciation and amortization Loss (gain) on sales of real estate, net Taxes associated with real estate dispositions Impairments (recoveries) of real estate, net Diluted FFO per common shares Transaction-related items(2) Other impairments (recoveries), net(3) Severance and related charges(4) Loss on debt extinguishments(5) Litigation costs(6) Casualty-related charges (recoveries), net Foreign currency remeasurement losses (gains) Tax rate legislation impact(7) Year Ended December 31, $ (1.21) $ $ $ (0.02) $ 3.00 $ 2015 1.22 (0.04) — 0.01 0.07 3.11 0.01 — — — — (0.01) 2014 2.00 1.07 (0.07) — — (0.04) 0.08 — — — — — — 2013 2.13 0.97 (0.15) — — 2.95 0.01 — 0.06 — — — — — $ $ 2017 0.88 1.25 (0.76) (0.01) 0.05 1.41 0.13 0.20 0.01 0.11 0.03 0.02 — 0.04 1.95 2016 1.34 1.30 (0.38) 0.13 — 2.39 0.20 — 0.04 0.10 0.01 — — — Diluted FFO as adjusted per common shares $ $ 2.74 $ 3.16 $ 3.04 $ 3.02 (1) For the year ended December 31, 2017, represents income tax benefit associated with the disposition of real estate assets in our RIDEA II transaction. For the year ended December 31, 2016, represents income tax expense associated with the state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCRMC real estate portfolio. (2) For the year ended December 31, 2017, includes $55 million of net non-cash charges related to the right to terminate certain triple-net leases and management agreements in conjunction with the November 2017 Brookdale transaction. For the year ended December 31, 2016, primarily relates to the Spin-Off. For the year ended December 31, 2015, primarily related to acquisition and pursuit costs. For the year ended December 31, 2014, includes a net benefit from the 2014 Brookdale transaction, partially offset by acquisition and pursuit costs. For the year ended December 31, 2013, primarily relates to acquisition and pursuit costs. (3) For the year ended December 31, 2017, relates to $144 million of impairments on our Tandem Mezzanine Loan throughout 2017, net of a $51 million impairment recovery upon the sale of our Four Seasons Notes in the first quarter of 2017. For the year ended December 31, 2015, include impairment charges of: (i) $1.3 billion related to our HCRMC DFL investments, (ii) $112 million related to our Four Seasons Notes and (iii) $46 million related to our equity investment in HCRMC, partially offset by an impairment recovery of $6 million related to a loan payoff. For the year ended December 31, 2014, relates to our equity investment in HCRMC. (4) For the year ended December 31, 2017, primarily relates to the departure of our former Executive Vice President and Chief Accounting Officer. For the year ended December 31, 2016, primarily relates to the departure of our former President and Chief Executive Officer. For the year ended December 31, 2015, relates to the departure of our former Executive Vice President and Chief Investment Officer. For the year ended December 31, 2013, relates to the departure of our former Chairman, CEO and President. (5) For the year ended December 31, 2017, represents the premium associated with the prepayment of $500 million of senior unsecured notes. For the year ended December 31, 2016, represents penalties of $46 million from the prepayment of $1.1 billion of senior unsecured notes and $108 million of mortgage debt using proceeds from the Spin-Off. (6) For the year ended December 31, 2017, relates to costs from securities class action litigation and a legal settlement. For the year ended December 31, 2016, primarily relates to costs from securities class action litigation. See Note 3 in the Consolidated Financial Statements (7) Represents the remeasurement of deferred tax assets and liabilities as a result of the Tax Cuts and Jobs Act that was signed into for additional information. legislation on December 22, 2017. (8) Excludes $0.7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former Executive Vice President and Chief Accounting Officer, which is included in the severance and related charges for the year ended December 31, 2017. Excludes $7 million related to the acceleration of deferred compensation for restricted stock units that vested upon the departure of our former President and Chief Executive Officer, which is included in severance and related charges for the year ended December 31, 2016. Excludes $3 million related to the acceleration of deferred compensation for restricted stock units and stock options that vested upon the departure of our former Executive Vice President and Chief Investment Officer, which is included in the severance-related charge for year ended December 31, 2015. Excludes $17 million related to the acceleration of deferred compensation for restricted stock units and options that vested upon the departure of our former CEO, which is included in severance-related charges (9) Includes our share of recurring capital expenditures, leasing costs, and tenant and capital improvements from unconsolidated joint ventures. (10) Represents our 49% share of non-refundable entrance fees as the fees are collected by our CCRC JV, net of reserves and CCRC JV for the year ended December 31, 2013. entrance fee amortization. (11) Excludes $17 million of deferred tax expenses, which is included in tax rate legislation impact for the year ended December 31, 2017. Additionally, the year ended December 31, 2017, excludes $1 million of deferred tax benefit from the casualty-related charges, which is included in casualty-related charges (recoveries), net. (12) Our equity investment in HCRMC was accounted for using the equity method, which required an elimination of DFL income that is proportional to our ownership in HCRMC. Further, our share of earnings from HCRMC (equity income) increased for the corresponding elimination of related lease expense recognized at the HCRMC entity level, which we presented as a non-cash joint venture FAD adjustment. Beginning in January 2016, as a result of placing our equity investment in HCRMC on a cash basis method of accounting, we no longer eliminated our proportional ownership share of income from DFLs to equity income (loss) from unconsolidated joint ventures. See Note 5 to the Consolidated Financial Statements for additional discussion. Critical Accounting Policies The preparation of financial statements in conformity with U.S. GAAP requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. For a more detailed discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain. Principles of Consolidation The consolidated financial statements include the accounts of HCP, Inc., our wholly-owned subsidiaries and joint ventures that we control, through voting rights or other means. We consolidate investments in variable interest entities (“VIEs”) when we are the primary beneficiary of the VIE. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. We make judgments about which entities are VIEs based on an assessment of whether: (i) the equity investors as a group, do not have a controlling financial interest, (ii) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, or (iii) substantially all of the entity’s activities involve or are performed on behalf of an equity investor that holds disproportionately few voting rights. We make judgments with respect to our level of influence or control over an entity and whether we are (or are not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to, our ability to direct the activities that most significantly impact the entity’s economic performance, our form of ownership interest, our representation on the entity’s governing body, the size and seniority of our investment, and our ability and the rights of other investors to participate in policy making decisions, replace the manager and/or liquidate the entity, if applicable. Our ability to correctly assess our influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. When we perform a re-analysis of the primary beneficiary at a date other than at inception of the VIE, our assumptions may be different and may result in the identification of a different primary beneficiary. If we determine that we are the primary beneficiary of a VIE, our consolidated financial statements include the operating results of the VIE rather than the results of our variable interest in the VIE. We require VIEs to provide us timely financial information and review the internal controls of VIEs to determine if we can rely on the financial information it provides. If a VIE has deficiencies in its internal controls over financial reporting, or does not provide us with timely financial information, it may adversely impact the quality and/or timing of our financial reporting and our internal controls over financial reporting. 58 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 59 PART II Revenue Recognition At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) the lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% or more of the estimated fair value of the leased asset. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a DFL. If the assumptions utilized in the above classifications assessments were different, our lease classification for accounting purposes may have been different; thus the timing and amount of our revenue recognized would have been impacted, which may be material to our consolidated financial statements. We recognize rental revenue for operating leases on a straight-line basis over the lease term when collectibility of all minimum lease payments is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of a tenant improvement is subject to significant judgment. If our assessment of the owner of the tenant improvements was different, the timing and amount of our revenue recognized would be impacted. Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. The recognition of additional rents requires us to make estimates of amounts owed and, to a certain extent, is dependent on the accuracy of the facility results reported to us. Our estimates may differ from actual results, which could be material to our consolidated financial statements. We maintain an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent receivable amounts, our assessment is based on income recoverable over the term of the lease. We exercise judgment in establishing allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements. We use the direct finance method of accounting to record income from DFLs. For leases accounted for as DFLs, the net investment in the DFL represents receivables for the sum of future minimum lease payments receivable and the estimated residual values of the leased properties, less the unamortized unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectibility of the lease payments is reasonably assured. The determination of estimated useful lives and residual values are subject to significant judgment. If these assessments were to change, the timing and amount of our revenue recognized would be impacted. Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. We recognize interest income on loans, including the amortization of discounts and premiums, using the interest method applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums, discounts and related costs are recognized as yield adjustments over the term of the related loans. If management determined that certain loans should no longer be classified as held-for- investment, the timing and amount of our interest income recognized would be impacted. Loans receivable and DFLs (collectively, “Finance Receivables”), are reviewed and assigned an internal rating of Performing, Watch List or Workout. Finance Receivables that are deemed Performing meet all present contractual obligations, and collection and timing, of all amounts owed is reasonably assured. Watch List Finance Receivables are defined as Finance Receivables that do not meet the definition of Performing or Workout. Workout Finance Receivables are defined as Finance Receivables in which we have determined, based on current information and events, PART II that: (i) it is probable we will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) we have commenced action or anticipate pursuing action in the near term to seek recovery of our investment. Real Estate We make estimates as part of our process for allocating a purchase price to the various identifiable assets of an acquisition based upon the relative fair value of each asset. The most significant components of our allocations are typically buildings as-if-vacant, land and in-place Finance Receivables are placed on nonaccrual status leases. In the case of allocating fair value to buildings and when management determines that the collectibility intangibles, our fair value estimates will affect the amount of of contractual amounts is not reasonably assured (the depreciation and amortization we record over the estimated asset will have an internal rating of either Watch List or useful life of each asset acquired. In the case of allocating Workout). Further, we perform a credit analysis to support fair value to in-place leases, we make our best estimates the tenant’s, operator’s, borrower’s and/or guarantor’s based on our evaluation of the specific characteristics of repayment capacity and the underlying collateral values. each tenant’s lease. Factors considered include estimates We use the cash basis method of accounting for Finance of carrying costs during hypothetical expected lease-up Receivables placed on nonaccrual status unless one of periods, market conditions and costs to execute similar the following conditions exist whereby we utilize the cost leases. Our assumptions affect the amount of future recovery method of accounting: (i) if we determine that it is revenue and/or depreciation and amortization expense probable that we will only recover the recorded investment that we will recognize over the remaining lease term for the in the Finance Receivable, net of associated allowances or acquired in-place leases. charge-offs (if any), or (ii) we cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting we apply payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, we return a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured. A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We consider a construction project to be considered substantially complete and available Allowances are established for Finance Receivables on an for occupancy and cease capitalization of costs upon the individual basis utilizing an estimate of probable losses, if completion of the related tenant improvements. they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon our assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. Should a Finance Receivable be deemed partially or wholly uncollectible, the uncollectible balance is charged off against the allowance in the period in which the uncollectible determination has been made. Impairment of Long-Lived Assets We assess the carrying value of our real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying amount of the real estate assets may not be recoverable, but at least annually. Recoverability of real estate assets is measured by comparing the carrying amount of the real estate assets to the respective estimated future undiscounted cash flows. The estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. In order to review our real estate assets for recoverability, we consider market conditions, as well as our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the real estate assets is not recoverable on an undiscounted 60 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 61 PART II Revenue Recognition At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) the lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% or more of the estimated fair value of the leased asset. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a DFL. We maintain an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent receivable amounts, our assessment is based on income recoverable over the term of the lease. We exercise judgment in establishing allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements. If the assumptions utilized in the above classifications We use the direct finance method of accounting to record assessments were different, our lease classification for income from DFLs. For leases accounted for as DFLs, the accounting purposes may have been different; thus the net investment in the DFL represents receivables for the timing and amount of our revenue recognized would have sum of future minimum lease payments receivable and the been impacted, which may be material to our consolidated estimated residual values of the leased properties, less financial statements. We recognize rental revenue for operating leases on a straight-line basis over the lease term when collectibility of all minimum lease payments is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant the unamortized unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectibility of the lease payments is reasonably assured. The determination of estimated useful lives and residual values are subject to significant judgment. If these assessments were to change, the timing and amount of our revenue recognized would be impacted. improvements, the tenant is not considered to have taken Loans receivable are classified as held-for-investment physical possession or have control of the leased asset until based on management’s intent and ability to hold the loans the tenant improvements are substantially complete. When for the foreseeable future or to maturity. We recognize the tenant is the owner of the tenant improvements, any interest income on loans, including the amortization of tenant improvement allowance funded is treated as a lease discounts and premiums, using the interest method applied incentive and amortized as a reduction of revenue over the on a loan-by-loan basis when collectibility of the future lease term. The determination of ownership of a tenant payments is reasonably assured. Premiums, discounts and improvement is subject to significant judgment. If our related costs are recognized as yield adjustments over the assessment of the owner of the tenant improvements was term of the related loans. If management determined that different, the timing and amount of our revenue recognized certain loans should no longer be classified as held-for- would be impacted. Certain leases provide for additional rents that are investment, the timing and amount of our interest income recognized would be impacted. contingent upon a percentage of the facility’s revenue in Loans receivable and DFLs (collectively, “Finance excess of specified base amounts or other thresholds. Such Receivables”), are reviewed and assigned an internal rating revenue is recognized when actual results reported by the of Performing, Watch List or Workout. Finance Receivables tenant, or estimates of tenant results, exceed the base that are deemed Performing meet all present contractual amount or other thresholds. The recognition of additional obligations, and collection and timing, of all amounts owed rents requires us to make estimates of amounts owed and, is reasonably assured. Watch List Finance Receivables to a certain extent, is dependent on the accuracy of the are defined as Finance Receivables that do not meet the facility results reported to us. Our estimates may differ from definition of Performing or Workout. Workout Finance actual results, which could be material to our consolidated Receivables are defined as Finance Receivables in which we financial statements. have determined, based on current information and events, that: (i) it is probable we will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) we have commenced action or anticipate pursuing action in the near term to seek recovery of our investment. Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). Further, we perform a credit analysis to support the tenant’s, operator’s, borrower’s and/or guarantor’s repayment capacity and the underlying collateral values. We use the cash basis method of accounting for Finance Receivables placed on nonaccrual status unless one of the following conditions exist whereby we utilize the cost recovery method of accounting: (i) if we determine that it is probable that we will only recover the recorded investment in the Finance Receivable, net of associated allowances or charge-offs (if any), or (ii) we cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting we apply payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, we return a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured. Allowances are established for Finance Receivables on an individual basis utilizing an estimate of probable losses, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon our assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. Should a Finance Receivable be deemed partially or wholly uncollectible, the uncollectible balance is charged off against the allowance in the period in which the uncollectible determination has been made. PART II Real Estate We make estimates as part of our process for allocating a purchase price to the various identifiable assets of an acquisition based upon the relative fair value of each asset. The most significant components of our allocations are typically buildings as-if-vacant, land and in-place leases. In the case of allocating fair value to buildings and intangibles, our fair value estimates will affect the amount of depreciation and amortization we record over the estimated useful life of each asset acquired. In the case of allocating fair value to in-place leases, we make our best estimates based on our evaluation of the specific characteristics of each tenant’s lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. Our assumptions affect the amount of future revenue and/or depreciation and amortization expense that we will recognize over the remaining lease term for the acquired in-place leases. A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We consider a construction project to be considered substantially complete and available for occupancy and cease capitalization of costs upon the completion of the related tenant improvements. Impairment of Long-Lived Assets We assess the carrying value of our real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying amount of the real estate assets may not be recoverable, but at least annually. Recoverability of real estate assets is measured by comparing the carrying amount of the real estate assets to the respective estimated future undiscounted cash flows. The estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. In order to review our real estate assets for recoverability, we consider market conditions, as well as our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the real estate assets is not recoverable on an undiscounted 60 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 61 PART II cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the real estate asset. The determination of the fair value of real estate assets involves significant judgment. This judgment is based on our analysis and estimates of fair value of real estate assets, future operating results and resulting cash flows of each real estate asset whose carrying amount may not be recoverable. Our ability to accurately predict future operating results and resulting cash flows, and estimate and allocate fair values, impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. Investments in Unconsolidated Joint Ventures The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the carrying value of the assets prior to the sale or contribution of the interests to the joint venture. We evaluate our equity method investments for impairment by first reviewing for indicators of impairment based upon the performance of the underlying real estate assets held by the joint venture. If an equity method investment shows indicators of impairment, we compare the fair value of the equity method investment to our carrying value. If we determine there is a decline in the fair value of our investment in an unconsolidated joint venture below its carrying value and it is other-than-temporary, an impairment is recorded. The determination of the fair value of investments in unconsolidated joint ventures and as to whether a deficiency in fair value is other-than-temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, severity and duration of a fair value deficiency, and other relevant factors. Capitalization rates, discount rates and credit spreads utilized in our valuation models are based upon rates that we believe to be within a reasonable range of current market rates for the respective investments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. Income Taxes As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. Adjustments to income tax expense may be required as a result of: (i) audits conducted by federal, state and local tax authorities, (ii) our ability to qualify as a REIT, (iii) the potential for built-in gain recognition, and (iv) changes in tax laws. Adjustments required in any given period are included within the income tax provision. Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various market risks, including the potential loss arising from adverse changes in interest rates and foreign currency exchange rates, specifically the GBP. We use derivative financial instruments in the normal course of business to mitigate interest rate and foreign currency risk. We do not use derivative financial instruments for speculative or trading purposes. Derivatives are recorded on the consolidated balance sheets at fair value (see Note 23 to the Consolidated Financial Statements). To illustrate the effect of movements in the interest rate and foreign currency markets, we performed a market sensitivity analysis on our hedging instruments. We applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the change in fair value. Assuming a one percentage point change in the underlying interest rate curve and foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million. PART II Interest Rate Risk At December 31, 2017, we are exposed to market risks value of our fixed rate instruments. A one percentage related to fluctuations in interest rates primarily on point increase or decrease in interest rates would change variable rate debt. As of December 31, 2017, $44 million of the fair value of our fixed rate debt by approximately our variable-rate debt was hedged by interest rate swap $332 million and $358 million, respectively, and would not transactions. The interest rate swaps are designated as cash materially impact earnings or cash flows. A one percentage flow hedges, with the objective of managing the exposure point increase or decrease in interest rates would to interest rate risk by converting the interest rates on our change the fair value of our fixed rate debt investments variable-rate debt to fixed interest rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could adversely be affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair by approximately $8 million and $9 million, respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point change in the interest rate related to our variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance as of December 31, 2017, our annual interest expense and interest income would change by approximately $12 million and $1 million, respectively. Foreign Currency Exchange Rate Risk At December 31, 2017, our exposure to foreign currencies ended December 31, 2017, including the impact of existing primarily relates to U.K. investments in leased real estate hedging arrangements, if the value of the GBP relative to the and related GBP denominated cash flows. Our foreign U.S. dollar were to increase or decrease by 10% compared currency exposure is partially mitigated through the use of to the average exchange rate during the year ended GBP denominated borrowings and foreign currency swap December 31, 2017, the increase or decrease to our cash contracts. Based solely on our operating results for the year flows would not be material. Market Risk We have investments in marketable debt securities the market value has been less than our current adjusted classified as held-to-maturity because we have the carrying value; the issuer’s financial condition, capital positive intent and ability to hold the securities to maturity. strength and near-term prospects; any recent events Held-to-maturity securities are recorded at amortized specific to that issuer and economic conditions of its cost and adjusted for the amortization of premiums and industry; and our investment horizon in relationship to an discounts through maturity. We consider a variety of anticipated near-term recovery in the market value, if any. factors in evaluating an other-than-temporary decline in At December 31, 2017, both the fair value and carrying value value, such as: the length of time and the extent to which of marketable debt securities were $19 million. 62 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 63 PART II PART II cash flow basis, we recognize an impairment charge for the below its carrying value and it is other-than-temporary, an amount by which the carrying value exceeds the fair value of impairment is recorded. The determination of the fair value the real estate asset. The determination of the fair value of real estate assets involves significant judgment. This judgment is based on our analysis and estimates of fair value of real estate assets, future operating results and resulting cash flows of each real estate asset whose carrying amount may not be recoverable. Our ability to accurately predict future operating results and resulting cash flows, and estimate and allocate fair values, impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. Investments in Unconsolidated Joint Ventures The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the carrying value of the assets prior to the sale or contribution of the interests to the joint venture. We evaluate our equity method investments for impairment by first reviewing for indicators of impairment based upon the performance of the underlying real estate assets held by the joint venture. If an equity method investment shows indicators of impairment, we compare the fair value of the equity method investment to our carrying value. If we determine there is a decline in the fair value of our investment in an unconsolidated joint venture of investments in unconsolidated joint ventures and as to whether a deficiency in fair value is other-than-temporary involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, severity and duration of a fair value deficiency, and other relevant factors. Capitalization rates, discount rates and credit spreads utilized in our valuation models are based upon rates that we believe to be within a reasonable range of current market rates for the respective investments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results. Income Taxes As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. Adjustments to income tax expense may be required as a result of: (i) audits conducted by federal, state and local tax authorities, (ii) our ability to qualify as a REIT, (iii) the potential for built-in gain recognition, and (iv) changes in tax laws. Adjustments required in any given period are included within the income tax provision. Recent Accounting Pronouncements See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various market risks, including the To illustrate the effect of movements in the interest rate potential loss arising from adverse changes in interest rates and foreign currency markets, we performed a market and foreign currency exchange rates, specifically the GBP. sensitivity analysis on our hedging instruments. We applied We use derivative financial instruments in the normal course various basis point spreads to the underlying interest rate of business to mitigate interest rate and foreign currency curves and foreign currency exchange rates of the derivative risk. We do not use derivative financial instruments for portfolio in order to determine the change in fair value. speculative or trading purposes. Derivatives are recorded Assuming a one percentage point change in the underlying on the consolidated balance sheets at fair value (see Note 23 interest rate curve and foreign currency exchange rates, to the Consolidated Financial Statements). the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million. Interest Rate Risk At December 31, 2017, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate debt. As of December 31, 2017, $44 million of our variable-rate debt was hedged by interest rate swap transactions. The interest rate swaps are designated as cash flow hedges, with the objective of managing the exposure to interest rate risk by converting the interest rates on our variable-rate debt to fixed interest rates. Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt and assets until their maturity or earlier prepayment and refinancing. If interest rates have risen at the time we seek to refinance our fixed rate debt, whether at maturity or otherwise, our future earnings and cash flows could adversely be affected by additional borrowing costs. Conversely, lower interest rates at the time of refinancing may reduce our overall borrowing costs. However, interest rate changes will affect the fair value of our fixed rate instruments. A one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt by approximately $332 million and $358 million, respectively, and would not materially impact earnings or cash flows. A one percentage point increase or decrease in interest rates would change the fair value of our fixed rate debt investments by approximately $8 million and $9 million, respectively, and would not materially impact earnings or cash flows. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not materially impact the fair value of those instruments. Assuming a one percentage point change in the interest rate related to our variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance as of December 31, 2017, our annual interest expense and interest income would change by approximately $12 million and $1 million, respectively. Foreign Currency Exchange Rate Risk At December 31, 2017, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate and related GBP denominated cash flows. Our foreign currency exposure is partially mitigated through the use of GBP denominated borrowings and foreign currency swap contracts. Based solely on our operating results for the year ended December 31, 2017, including the impact of existing hedging arrangements, if the value of the GBP relative to the U.S. dollar were to increase or decrease by 10% compared to the average exchange rate during the year ended December 31, 2017, the increase or decrease to our cash flows would not be material. Market Risk We have investments in marketable debt securities classified as held-to-maturity because we have the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are recorded at amortized cost and adjusted for the amortization of premiums and discounts through maturity. We consider a variety of factors in evaluating an other-than-temporary decline in value, such as: the length of time and the extent to which the market value has been less than our current adjusted carrying value; the issuer’s financial condition, capital strength and near-term prospects; any recent events specific to that issuer and economic conditions of its industry; and our investment horizon in relationship to an anticipated near-term recovery in the market value, if any. At December 31, 2017, both the fair value and carrying value of marketable debt securities were $19 million. 62 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 63 PART II PART II ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC HCP, Inc. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets—December 31, 2017 and 2016 Consolidated Statements of Operations—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss)—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Equity—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows—for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements 65 66 67 68 69 70 71 ACCOUNTING FIRM To the Stockholders and the Board of Directors of HCP, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle (Topic 805): Clarifying the Definition of a Business. Basis for Opinion As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for real estate acquisitions effective January 1, 2017 due to the adoption of Accounting Standards Update 2017-01, Business Combinations These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Los Angeles, California February 13, 2018 We have served as the Company’s auditor since 2010. /s/ Deloitte & Touche LLP 64 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 65 PART II HCP, Inc. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets—December 31, 2017 and 2016 Consolidated Statements of Operations—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss)—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Equity—for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows—for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements 65 66 67 68 69 70 71 PART II REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of HCP, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows, for each of the three years in the period ended December 31, 2017, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 13, 2018, expressed an unqualified opinion on the Company’s internal control over financial reporting. Change in Accounting Principle As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for real estate acquisitions effective January 1, 2017 due to the adoption of Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Los Angeles, California February 13, 2018 We have served as the Company’s auditor since 2010. /s/ Deloitte & Touche LLP 64 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 65 PART II HCP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS Real estate: Buildings and improvements Development costs and construction in progress Land Accumulated depreciation and amortization Net real estate Net investment in direct financing leases Loans receivable, net Investments in and advances to unconsolidated joint ventures Accounts receivable, net of allowance of $4,425 and $4,459, respectively Cash and cash equivalents Restricted cash Intangible assets, net Assets held for sale, net Other assets, net Total assets LIABILITIES AND EQUITY Bank line of credit Term loans Senior unsecured notes Mortgage debt Other debt Intangible liabilities, net Liabilities of assets held for sale, net Accounts payable and accrued liabilities Deferred revenue Total liabilities Commitments and contingencies Common stock, $1.00 par value: 750,000,000 shares authorized; 469,435,678 and 468,081,489 shares issued and outstanding, respectively Additional paid-in capital Cumulative dividends in excess of earnings Accumulated other comprehensive income (loss) Total stockholders’ equity Joint venture partners Non-managing member unitholders Total noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. December 31, 2017 2016 $11,239,732 447,976 1,785,865 (2,741,695) 10,731,878 714,352 313,326 800,840 40,733 55,306 26,897 410,082 417,014 578,033 $14,088,461 $ 1,017,076 228,288 6,396,451 144,486 94,165 52,579 14,031 401,738 144,709 8,493,523 $11,692,654 400,619 1,881,487 (2,648,930) 11,325,830 752,589 807,954 571,491 45,116 94,730 42,260 479,805 927,866 711,624 $15,759,265 $ 899,718 440,062 7,133,538 623,792 92,385 58,145 3,776 417,360 149,181 9,817,957 469,436 8,226,113 (3,370,520) (24,024) 5,301,005 117,045 176,888 293,933 5,594,938 $14,088,461 468,081 8,198,890 (3,089,734) (29,642) 5,547,595 214,377 179,336 393,713 5,941,308 $15,759,265 HCP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Revenues: Rental and related revenues Tenant recoveries Resident fees and services Income from direct financing leases Interest income Total revenues Costs and expenses: Interest expense Depreciation and amortization Operating General and administrative Transaction costs Impairments (recoveries), net Total costs and expenses Other income (expense): Gain (loss) on sales of real estate, net Loss on debt extinguishments Other income (expense), net Total other income (expense), net unconsolidated joint ventures Income tax benefit (expense) Income (loss) before income taxes and equity income (loss) from Equity income (loss) from unconsolidated joint ventures Income (loss) from continuing operations Discontinued operations: Income before impairments, transaction costs and income taxes Impairments, net Transaction costs Income tax benefit (expense) Total discontinued operations Net income (loss) Noncontrolling interests’ share in earnings Net income (loss) attributable to HCP, Inc. Participating securities’ share in earnings Net income (loss) applicable to common shares Basic earnings per common share: Continuing operations Discontinued operations Net income (loss) applicable to common shares Diluted earnings per common share: Continuing operations Discontinued operations Net income (loss) applicable to common shares Weighted average shares used to calculate earnings per common share: Basic Diluted See accompanying Notes to Consolidated Financial Statements. PART II 125,022 525,453 61,000 112,184 479,596 504,905 610,679 95,965 27,309 108,349 1,826,803 6,377 — 16,208 22,585 136,271 9,807 6,590 152,668 — (796) (699,086) (546,418) (12,817) (559,235) (1,317) Year Ended December 31, 2017 2016 2015 $1,071,153 $1,159,791 $ 1,116,830 1,848,378 2,129,294 1,940,489 1,771,812 1,884,342 142,496 524,275 54,217 56,237 307,716 534,726 666,251 88,772 7,963 166,384 356,641 (54,227) 31,420 333,834 410,400 1,333 10,901 422,634 — — — — — 422,634 (8,465) 414,169 (1,156) 134,280 686,835 59,580 88,808 464,403 568,108 738,399 103,611 9,821 — 164,698 (46,020) 3,654 122,332 367,284 (4,473) 11,360 374,171 (86,765) (48,181) 265,755 639,926 (12,179) 627,747 (1,198) 400,701 643,109 — (1,341,399) $ 413,013 $ 626,549 $ (560,552) $ $ $ $ 0.88 — 0.88 0.88 — 0.88 $ $ $ $ 0.77 0.57 1.34 0.77 0.57 1.34 $ $ $ $ 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) 468,759 468,935 467,195 467,403 462,795 462,795 66 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 67 PART II HCP, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share data) ASSETS Real estate: Buildings and improvements Development costs and construction in progress Land Accumulated depreciation and amortization Net real estate Net investment in direct financing leases Loans receivable, net Investments in and advances to unconsolidated joint ventures Accounts receivable, net of allowance of $4,425 and $4,459, respectively LIABILITIES AND EQUITY Cash and cash equivalents Restricted cash Intangible assets, net Assets held for sale, net Other assets, net Total assets Bank line of credit Term loans Senior unsecured notes Mortgage debt Other debt Intangible liabilities, net Liabilities of assets held for sale, net Accounts payable and accrued liabilities Deferred revenue Total liabilities Commitments and contingencies Common stock, $1.00 par value: 750,000,000 shares authorized; 469,435,678 and 468,081,489 shares issued and outstanding, respectively Additional paid-in capital Cumulative dividends in excess of earnings Accumulated other comprehensive income (loss) Total stockholders’ equity Joint venture partners Non-managing member unitholders Total noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. December 31, 2017 2016 $11,239,732 $11,692,654 447,976 1,785,865 400,619 1,881,487 (2,741,695) (2,648,930) 10,731,878 11,325,830 714,352 313,326 800,840 40,733 55,306 26,897 410,082 417,014 578,033 228,288 6,396,451 144,486 94,165 52,579 14,031 401,738 144,709 752,589 807,954 571,491 45,116 94,730 42,260 479,805 927,866 711,624 899,718 440,062 7,133,538 623,792 92,385 58,145 3,776 417,360 149,181 $14,088,461 $15,759,265 $ 1,017,076 $ 8,493,523 9,817,957 469,436 8,226,113 468,081 8,198,890 (3,370,520) (3,089,734) (24,024) (29,642) 5,301,005 5,547,595 117,045 176,888 293,933 214,377 179,336 393,713 5,594,938 5,941,308 $14,088,461 $15,759,265 HCP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) PART II Revenues: Rental and related revenues Tenant recoveries Resident fees and services Income from direct financing leases Interest income Total revenues Costs and expenses: Interest expense Depreciation and amortization Operating General and administrative Transaction costs Impairments (recoveries), net Total costs and expenses Other income (expense): Gain (loss) on sales of real estate, net Loss on debt extinguishments Other income (expense), net Total other income (expense), net Income (loss) before income taxes and equity income (loss) from unconsolidated joint ventures Income tax benefit (expense) Equity income (loss) from unconsolidated joint ventures Income (loss) from continuing operations Discontinued operations: Income before impairments, transaction costs and income taxes Impairments, net Transaction costs Income tax benefit (expense) Total discontinued operations Net income (loss) Noncontrolling interests’ share in earnings Net income (loss) attributable to HCP, Inc. Participating securities’ share in earnings Net income (loss) applicable to common shares Basic earnings per common share: Continuing operations Discontinued operations Net income (loss) applicable to common shares Diluted earnings per common share: Continuing operations Discontinued operations Net income (loss) applicable to common shares Weighted average shares used to calculate earnings per common share: Basic Diluted See accompanying Notes to Consolidated Financial Statements. Year Ended December 31, 2017 2016 2015 $1,071,153 142,496 524,275 54,217 56,237 1,848,378 $1,159,791 134,280 686,835 59,580 88,808 2,129,294 $ 1,116,830 125,022 525,453 61,000 112,184 1,940,489 307,716 534,726 666,251 88,772 7,963 166,384 1,771,812 464,403 568,108 738,399 103,611 9,821 — 1,884,342 479,596 504,905 610,679 95,965 27,309 108,349 1,826,803 6,377 — 16,208 22,585 136,271 9,807 6,590 152,668 164,698 (46,020) 3,654 122,332 367,284 (4,473) 11,360 374,171 400,701 643,109 — (1,341,399) — (796) (699,086) (546,418) (12,817) (559,235) (1,317) $ (560,552) (86,765) (48,181) 265,755 639,926 (12,179) 627,747 (1,198) $ 626,549 356,641 (54,227) 31,420 333,834 410,400 1,333 10,901 422,634 — — — — — 422,634 (8,465) 414,169 (1,156) $ 413,013 $ $ $ $ 0.88 — 0.88 0.88 — 0.88 $ $ $ $ 0.77 0.57 1.34 0.77 0.57 1.34 $ $ $ $ 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) 468,759 468,935 467,195 467,403 462,795 462,795 66 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 67 PART II PART II HCP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) HCP, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands, except per share data) Net income (loss) Other comprehensive income (loss): Change in net unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) Reclassification adjustment realized in net income (loss) Change in Supplemental Executive Retirement Plan obligation and other Foreign currency translation adjustment Total other comprehensive income (loss) Total comprehensive income (loss) Total comprehensive income (loss) attributable to noncontrolling interests Total comprehensive income (loss) attributable to HCP, Inc. See accompanying Notes to Consolidated Financial Statements. Year Ended December 31, 2017 $422,634 2016 $639,926 2015 $(546,418) (11,107) 799 64 15,862 5,618 428,252 (8,465) $419,787 3,233 707 220 (3,332) 828 640,754 (12,179) $628,575 1,894 148 121 (8,738) (6,575) (552,993) (12,817) $(565,810) Cumulative Accumulated Additional Dividends Other Total Common Stock Shares Amount Paid-In Capital In Excess Comprehensive Stockholders’ Noncontrolling of Earnings Income (Loss) Equity Interests Total Equity 459,746 $ 459,746 $11,431,987 $(1,132,541) $(23,895) $10,735,297 $ 261,802 $10,997,099 — — 5,117 (198) 823 — — 5,117 (198) 823 (559,235) (6,575) — (1,046,638) (1,046,638) — (1,046,638) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (559,235) (6,575) 182,067 (8,738) 27,587 26,127 (263) — (5,986) 627,747 828 64,177 6,093 (8,685) 3,473 22,884 (36) — 439 (663) 414,169 5,618 27,353 2,489 (4,785) 768 14,258 — — — (11,505) 12,817 (3,183) — — — — (546,418) (6,575) 178,884 (8,738) 27,587 26,127 (19,147) 151,185 (7,049) 639,926 828 64,177 — (8,685) 3,473 22,884 506 (1,300) 422,634 5,618 27,353 — (4,785) 768 14,258 (18,884) 151,185 (1,063) 12,179 (6,093) — — — — — — — — — — — — 67 (637) 8,465 (2,489) (26,311) 11,834 (26,347) 11,834 (26,129) 1,615 (58,062) (23,180) (26,129) 1,615 (58,062) (34,685) 465,488 $ 465,488 $11,647,039 $(2,738,414) $(30,470) $ 9,343,643 $ 402,674 $ 9,746,317 627,747 — 828 — 2,552 2,552 61,625 145 (237) 133 145 (237) 133 — (979,542) — (3,532,763) (979,542) (3,532,763) (979,542) — (3,532,763) 468,081 $ 468,081 $ 8,198,890 $(3,089,734) $(29,642) $ 5,547,595 $ 393,713 $ 5,941,308 475 — 414,169 5,618 1,402 1,402 25,951 78 (157) 32 78 (157) 32 (694,955) (694,955) (694,955) — — 176,950 (8,540) 26,764 26,127 (263) — (5,986) — — 5,948 (8,448) 3,340 22,884 (36) — (36) (663) — — 2,411 (4,628) 736 14,258 — — — — (11,505) — — — — — — — — — — — — — — — — — — — — — January 1, 2015 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common Dividends ($2.260 per share) Distributions to noncontrolling interest Issuances of noncontrolling interest Purchase of noncontrolling interest December 31, 2015 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Conversion of DownREIT units to common stock Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common dividends ($2.095 per share) Distribution of QCP, Inc. Distributions to noncontrolling interests Issuances of noncontrolling interests Deconsolidation of noncontrolling interests Purchase of noncontrolling interests December 31, 2016 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Conversion of DownREIT units to common stock Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common Dividends ($1.480 per share) Distributions to noncontrolling interests Issuances of noncontrolling interests Deconsolidation of noncontrolling interests Purchase of noncontrolling interests December 31, 2017 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 469,436 $ 469,436 $ 8,226,113 $(3,370,520) $(24,024) $ 5,301,005 $ 293,933 $ 5,594,938 See accompanying Notes to Consolidated Financial Statements. 68 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 69 PART II HCP, INC. (In thousands) CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Net income (loss) Other comprehensive income (loss): Change in net unrealized gains (losses) on cash flow hedges: Unrealized gains (losses) Reclassification adjustment realized in net income (loss) Change in Supplemental Executive Retirement Plan obligation and other Foreign currency translation adjustment Total other comprehensive income (loss) Total comprehensive income (loss) Year Ended December 31, 2017 2016 2015 $422,634 $639,926 $(546,418) (11,107) 799 64 15,862 5,618 428,252 (8,465) 3,233 707 220 (3,332) 828 640,754 (12,179) 1,894 148 121 (8,738) (6,575) (552,993) (12,817) Total comprehensive income (loss) attributable to noncontrolling interests Total comprehensive income (loss) attributable to HCP, Inc. $419,787 $628,575 $(565,810) See accompanying Notes to Consolidated Financial Statements. HCP, INC. CONSOLIDATED STATEMENTS OF EQUITY (In thousands, except per share data) PART II January 1, 2015 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common Dividends ($2.260 per share) Distributions to noncontrolling interest Issuances of noncontrolling interest Purchase of noncontrolling interest December 31, 2015 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Conversion of DownREIT units to common stock Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common dividends ($2.095 per share) Distribution of QCP, Inc. Distributions to noncontrolling interests Issuances of noncontrolling interests Deconsolidation of noncontrolling interests Purchase of noncontrolling interests December 31, 2016 Net income (loss) Other comprehensive income (loss) Issuance of common stock, net Conversion of DownREIT units to common stock Repurchase of common stock Exercise of stock options Amortization of deferred compensation Common Dividends ($1.480 per share) Distributions to noncontrolling interests Issuances of noncontrolling interests Deconsolidation of noncontrolling interests Purchase of noncontrolling interests December 31, 2017 Amount Additional Paid-In Capital Common Stock Shares Cumulative Dividends In Excess of Earnings 459,746 $ 459,746 $11,431,987 $(1,132,541) (559,235) — — — — — — 176,950 (8,540) 26,764 — — 5,117 (198) 823 — — 5,117 (198) 823 Accumulated Other Comprehensive Income (Loss) $(23,895) — (6,575) — — — Total Stockholders’ Equity $10,735,297 (559,235) (6,575) 182,067 (8,738) 27,587 Noncontrolling Interests Total Equity $ 261,802 $10,997,099 (546,418) (6,575) 178,884 (8,738) 27,587 12,817 — (3,183) — — — — — — 26,127 — — (1,046,638) — — 26,127 — 26,127 (1,046,638) — (1,046,638) — — — — — — (263) — (5,986) — — — 465,488 $ 465,488 $11,647,039 $(2,738,414) 627,747 — — — — 61,625 — — 2,552 — — 2,552 145 (237) 133 145 (237) 133 5,948 (8,448) 3,340 — 22,884 — — — — — — — — — — — — (3,532,763) (979,542) — — — (36) — — — — — — — (36) (663) 475 — 468,081 $ 468,081 $ 8,198,890 $(3,089,734) 414,169 — — — — 25,951 — — 1,402 — — 1,402 78 (157) 32 78 (157) 32 — — — — — — — — 2,411 (4,628) 736 14,258 — — — — — — — (694,955) — — — — — — 469,436 $ 469,436 $ 8,226,113 $(3,370,520) — (11,505) — — — — — $(30,470) — 828 — (263) — (5,986) $ 9,343,643 627,747 828 64,177 (18,884) 151,185 (1,063) (19,147) 151,185 (7,049) $ 402,674 $ 9,746,317 639,926 828 64,177 12,179 — — — — — — — — — — 6,093 (8,685) 3,473 (6,093) — — — (8,685) 3,473 22,884 — 22,884 (979,542) (3,532,763) — (979,542) — (3,532,763) (36) — (26,311) 11,834 (26,347) 11,834 — — $(29,642) — 5,618 — 439 (663) $ 5,547,595 414,169 5,618 27,353 67 (637) 506 (1,300) $ 393,713 $ 5,941,308 422,634 5,618 27,353 8,465 — — — — — — — — — 2,489 (4,785) 768 14,258 (694,955) (2,489) — — — — — (4,785) 768 14,258 (694,955) — — (26,129) 1,615 (26,129) 1,615 — — $(24,024) — (11,505) $ 5,301,005 (58,062) (23,180) (58,062) (34,685) $ 293,933 $ 5,594,938 2017 Annual Report 69 68 http://www.hcpi.com http://www.hcpi.com See accompanying Notes to Consolidated Financial Statements. PART II HCP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of real estate, in-place lease and other intangibles: Continuing operations Discontinued operations Amortization of deferred compensation Amortization of deferred financing costs Straight-line rents Loan and direct financing lease non-cash interest, net: Continuing operations Discontinued operations Equity loss (income) from unconsolidated joint ventures Distributions of earnings from unconsolidated joint ventures Loss (gain) on sales of real estate, net Lease and management fee termination loss (income), net Deferred income tax expense (benefit) Impairments (recoveries), net Loss on extinguishment of debt Casualty-related loss (recoveries), net Loss (gain) on sale of marketable securities Other non-cash items Decrease (increase) in accounts receivable and other assets, net Increase (decrease) accounts payable and accrued liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of RIDEA III, net Acquisitions of other real estate Development and redevelopment of real estate Leasing costs, tenant improvements, and recurring capital expenditures Proceeds from sales of real estate, net Contributions to unconsolidated joint ventures Distributions in excess of earnings from unconsolidated joint ventures Proceeds from the RIDEA II transaction, net Proceeds from sales/principal repayments on debt investments and direct financing leases Investments in loans receivable, direct financing leases and other Purchase of securities for debt defeasance Net cash provided by (used in) investing activities Cash flows from financing activities: Borrowings under bank line of credit, net Repayments under bank line of credit Proceeds related to QCP Spin-Off, net Issuance and borrowings of debt, excluding bank line of credit Repayments and repurchase of debt, excluding bank line of credit Payments for debt extinguishment and deferred financing costs Issuance of common stock and exercise of options Repurchase of common stock Dividends paid on common stock Issuance of noncontrolling interests Distributions to and purchase of noncontrolling interests Net cash provided by (used in) financing activities Effect of foreign exchanges on cash, cash equivalents and restricted cash Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, beginning of year Cash, cash equivalents and restricted cash, end of year Less: cash, cash equivalents and restricted cash of discontinued operations Cash, cash equivalents and restricted cash of continuing operations, end of year See accompanying Notes to Consolidated Financial Statements. 70 http://www.hcpi.com Year Ended December 31, 2017 2016 2015 $ 422,634 $ 639,926 $ (546,418) 534,726 — 14,258 14,569 (23,933) (613) — (10,901) 44,142 (356,641) 54,641 (5,523) 166,384 54,227 12,053 (50,895) (2,122) (24,782) 4,817 847,041 — (560,753) (373,479) (115,260) 1,314,325 (46,334) 37,023 462,242 558,769 (30,276) — 1,246,257 1,244,189 (1,150,596) — 5,395 (1,468,446) (51,415) 28,121 (4,785) (694,955) 1,615 (57,584) (2,148,461) 376 (54,787) 136,990 82,203 — 82,203 $ $ 568,108 4,890 22,884 20,014 (18,003) 599 — (11,360) 26,492 (164,698) — 47,195 — 46,020 — — (2,968) (6,992) 42,024 1,214,131 — (467,162) (421,322) (91,442) 647,754 (10,186) 28,366 — 231,990 (273,693) (73,278) (428,973) 1,108,417 (540,000) 1,685,172 — (2,316,774) (54,856) 67,650 (8,685) (979,542) 11,834 (27,481) (1,054,265) (1,019) (270,126) 407,116 136,990 — 136,990 $ $ $ $ 504,905 5,880 26,127 20,222 (28,859) (5,648) (90,065) (57,313) 15,111 (6,377) (1,103) — 1,449,748 — — — (11,286) (29,022) (23,757) 1,222,145 (768,413) (613,252) (281,017) (84,282) 73,149 (69,936) 30,989 — 628,049 (575,652) — (1,660,365) 98,743 (511,521) — 2,269,031 (457,845) (19,995) 206,471 (8,738) (1,046,638) 110,775 (26,196) 614,087 (1,537) 174,330 232,786 407,116 (6,058) 401,058 HCP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS PART II Note 2. Summary of Significant Accounting Policies Note 1. Business Overview HCP, Inc., an S&P 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United Use of Estimates Management is required to make estimates and assumptions in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates. Principles of Consolidation The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and variable interest entities that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. The Company is required to continually evaluate its variable interest entity (“VIE”) relationships and consolidate these entities when it is determined to be the primary beneficiary of their operations. A VIE is broadly defined as an entity where either: (i) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, (ii) substantially all of an entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (iii) the equity investors as a group lack any of the following: (a) the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of an entity, or (c) the right to receive the expected residual returns of an entity. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic States (“U.S.”). The Company acquires, develops, leases, and manages and disposes of healthcare real estate. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net, (ii) senior housing operating portfolio (“SHOP”), (iii) life science and (iv) medical office. performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but is not limited to, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the VIE manager and/or liquidate the entity. For its investments in joint ventures that are not considered to be VIEs, the Company evaluates the type of ownership rights held by the limited partner(s) that may preclude consolidation by the sole general partner or majority interest holder. The assessment of limited partners’ rights and their impact on the control of a joint venture should be made at inception of the joint venture and should be reassessed if: (i) there is a change to the terms or in the ability to exercise the limited partner rights, (ii) the sole general partner increases or decreases its ownership interest in the limited partnership, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. The Company similarly evaluates the rights of managing members of limited liability companies. Revenue Recognition At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses its terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% 2017 Annual Report 71 PART II HCP, INC. (In thousands) CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization of real estate, in-place lease and other intangibles: Continuing operations Discontinued operations Amortization of deferred compensation Amortization of deferred financing costs Straight-line rents Loan and direct financing lease non-cash interest, net: Continuing operations Discontinued operations Equity loss (income) from unconsolidated joint ventures Distributions of earnings from unconsolidated joint ventures Loss (gain) on sales of real estate, net Lease and management fee termination loss (income), net Deferred income tax expense (benefit) Impairments (recoveries), net Loss on extinguishment of debt Casualty-related loss (recoveries), net Loss (gain) on sale of marketable securities Other non-cash items Decrease (increase) in accounts receivable and other assets, net Increase (decrease) accounts payable and accrued liabilities Net cash provided by (used in) operating activities Cash flows from investing activities: Acquisition of RIDEA III, net Acquisitions of other real estate Development and redevelopment of real estate Leasing costs, tenant improvements, and recurring capital expenditures Proceeds from sales of real estate, net Contributions to unconsolidated joint ventures Distributions in excess of earnings from unconsolidated joint ventures Proceeds from the RIDEA II transaction, net Proceeds from sales/principal repayments on debt investments and direct financing leases Investments in loans receivable, direct financing leases and other Purchase of securities for debt defeasance Net cash provided by (used in) investing activities Cash flows from financing activities: Borrowings under bank line of credit, net Repayments under bank line of credit Proceeds related to QCP Spin-Off, net Issuance and borrowings of debt, excluding bank line of credit Repayments and repurchase of debt, excluding bank line of credit Payments for debt extinguishment and deferred financing costs Issuance of common stock and exercise of options Repurchase of common stock Dividends paid on common stock Issuance of noncontrolling interests Distributions to and purchase of noncontrolling interests Net cash provided by (used in) financing activities Effect of foreign exchanges on cash, cash equivalents and restricted cash Net increase (decrease) in cash, cash equivalents and restricted cash Cash, cash equivalents and restricted cash, beginning of year Cash, cash equivalents and restricted cash, end of year Less: cash, cash equivalents and restricted cash of discontinued operations Cash, cash equivalents and restricted cash of continuing operations, end of year See accompanying Notes to Consolidated Financial Statements. 70 http://www.hcpi.com Year Ended December 31, 2017 2016 2015 $ 422,634 $ 639,926 $ (546,418) 1,214,131 1,222,145 534,726 — 14,258 14,569 (23,933) (613) — (10,901) 44,142 (356,641) 54,641 (5,523) 166,384 54,227 12,053 (50,895) (2,122) (24,782) 4,817 847,041 — (560,753) (373,479) (115,260) 1,314,325 (46,334) 37,023 462,242 558,769 (30,276) — 1,246,257 1,244,189 (1,150,596) — 5,395 (51,415) 28,121 (4,785) (694,955) 1,615 (57,584) 376 (54,787) 136,990 82,203 — 82,203 568,108 4,890 22,884 20,014 (18,003) 599 — (11,360) 26,492 (164,698) 47,195 46,020 — — — — (2,968) (6,992) 42,024 — (467,162) (421,322) (91,442) 647,754 (10,186) 28,366 — 231,990 (273,693) (73,278) (428,973) 1,108,417 (540,000) 1,685,172 (54,856) 67,650 (8,685) (979,542) 11,834 (27,481) (1,019) (270,126) 407,116 136,990 — 136,990 (2,148,461) (1,054,265) $ $ $ $ $ $ 504,905 5,880 26,127 20,222 (28,859) (5,648) (90,065) (57,313) 15,111 (6,377) (1,103) 1,449,748 — — — — (11,286) (29,022) (23,757) (768,413) (613,252) (281,017) (84,282) 73,149 (69,936) 30,989 628,049 (575,652) — — (1,660,365) 98,743 (511,521) — (457,845) (19,995) 206,471 (8,738) (1,046,638) 110,775 (26,196) 614,087 (1,537) 174,330 232,786 407,116 (6,058) 401,058 (1,468,446) (2,316,774) — 2,269,031 PART II HCP, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1. Business Overview HCP, Inc., an S&P 500 company, is a Maryland corporation that is organized to qualify as a real estate investment trust (“REIT”) which, together with its consolidated entities (collectively, “HCP” or the “Company”), invests primarily in real estate serving the healthcare industry in the United States (“U.S.”). The Company acquires, develops, leases, and manages and disposes of healthcare real estate. The Company’s diverse portfolio is comprised of investments in the following reportable healthcare segments: (i) senior housing triple-net, (ii) senior housing operating portfolio (“SHOP”), (iii) life science and (iv) medical office. Note 2. Summary of Significant Accounting Policies Use of Estimates Management is required to make estimates and assumptions in the preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates. Principles of Consolidation The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and variable interest entities that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. The Company is required to continually evaluate its variable interest entity (“VIE”) relationships and consolidate these entities when it is determined to be the primary beneficiary of their operations. A VIE is broadly defined as an entity where either: (i) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support, (ii) substantially all of an entity’s activities either involve or are conducted on behalf of an investor that has disproportionately few voting rights, or (iii) the equity investors as a group lack any of the following: (a) the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance, (b) the obligation to absorb the expected losses of an entity, or (c) the right to receive the expected residual returns of an entity. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE. The Company qualitatively assesses whether it is (or is not) the primary beneficiary of a VIE. Consideration of various factors include, but is not limited to, its form of ownership interest, its representation on the VIE’s governing body, the size and seniority of its investment, its ability and the rights of other investors to participate in policy making decisions and its ability to replace the VIE manager and/or liquidate the entity. For its investments in joint ventures that are not considered to be VIEs, the Company evaluates the type of ownership rights held by the limited partner(s) that may preclude consolidation by the sole general partner or majority interest holder. The assessment of limited partners’ rights and their impact on the control of a joint venture should be made at inception of the joint venture and should be reassessed if: (i) there is a change to the terms or in the ability to exercise the limited partner rights, (ii) the sole general partner increases or decreases its ownership interest in the limited partnership, or (iii) there is an increase or decrease in the number of outstanding limited partnership interests. The Company similarly evaluates the rights of managing members of limited liability companies. Revenue Recognition At the inception of a new lease arrangement, including new leases that arise from amendments, the Company assesses its terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee prior to or shortly after the end of the lease term, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) is equal to 90% 2017 Annual Report 71 PART II or more of the excess fair value (over retained tax credits) of the leased property. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predictable and collectible, the lease arrangement is generally accounted for as a direct financing lease (“DFL”). The Company utilizes the direct finance method of accounting to record DFL income. For a lease accounted for as a DFL, the net investment in the DFL represents receivables for the sum of future minimum lease payments and the estimated residual value of the leased property, less the unamortized unearned income. Unearned income is deferred and amortized to income over the lease term to provide a constant yield when collectibility of the lease payments is reasonably assured. The Company commences recognition of rental revenue for operating lease arrangements when the tenant has taken possession or controls the physical use of a leased asset; the tenant is not considered to have taken physical possession or have control of the leased asset until the Company-owned tenant improvements are substantially completed. If a lease arrangement provides for tenant improvements, the Company determines whether the tenant improvements are owned by the tenant or the Company. When the Company is the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into income over the lease term. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Ownership of tenant improvements is determined based on various factors including, but not limited to, the following criteria: • lease stipulations of how and on what a tenant improvement allowance may be spent; • which party to the arrangement retains legal title to the tenant improvements upon lease expiration; • whether the tenant improvements are unique to the • • tenant or general purpose in nature; if the tenant improvements are expected to have significant residual value at the end of the lease term; the responsible party for construction cost overruns; and • which party constructs or directs the construction of the improvements. Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds, and only after any contingency has been removed (when the related thresholds are achieved). This may result in the recognition of rental revenue in periods subsequent to when such payments are received. Tenant recoveries subject to operating leases generally relate to the reimbursement of real estate taxes, insurance and repairs and maintenance expense. These expenses are recognized as revenue in the period they are incurred. The reimbursements of these expenses are recognized and presented gross, as the Company is generally the primary obligor and, with respect to purchasing goods and services from third party suppliers, has discretion in selecting the supplier and bears the associated credit risk. For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight line basis over the lease term when collectibility is reasonably assured. Recognizing rental income on a straight line basis results in a difference in the timing of revenue amounts from what is contractually due from tenants. If the Company determines that collectibility of straight line rents is not reasonably assured, future revenue recognition is limited to amounts contractually owed and paid, and, when appropriate, an allowance for estimated losses is established. Resident fee revenue is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care related services is recognized as services are provided and is billed monthly in arrears. Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held-for-investment are carried at amortized cost and reduced by a valuation allowance for estimated credit losses, as necessary. The Company recognizes interest income on loans, including the amortization of discounts and premiums, loan fees paid and received, using the interest method. The interest method is applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums and discounts are recognized as yield adjustments over the term of the related loans. The Company recognizes a gain on sales of real estate upon the closing of a transaction with the purchaser. Gains on real estate sold are recognized using the full accrual method when collectibility of the sales price is reasonably assured, the Company is not obligated to perform additional activities that may be considered significant, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gain on sales of real estate may be deferred in whole or in part until the requirements for gain recognition have been met. Allowance for Doubtful Accounts The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA (defined as earnings before interest, tax, and depreciation and amortization), along with other liquidity measures. The Company evaluates, on a monthly basis or immediately upon a significant change in circumstance, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company. The Company maintains an allowance for doubtful accounts for straight-line rent receivables resulting from tenants’ inability to make contractual rent and tenant recovery payments or lease defaults. For straight-line rent receivables, the Company’s assessment is based on amounts estimated to be recoverable over the lease term. PART II Further, the Company performs a credit analysis to support the tenant’s, operator’s, borrower’s and/or guarantor’s repayment capacity and the underlying collateral values. The Company uses the cash basis method of accounting for Finance Receivables placed on nonaccrual status unless one of the following conditions exist whereby it utilizes the cost recovery method of accounting: (i) if the Company determines that it is probable that it will only recover the recorded investment in the Finance Receivable, net of associated allowances or charge-offs (if any), or (ii) the Company cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting the Company applies payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, the Company returns a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured. Allowances are established for Finance Receivables on an individual basis utilizing an estimate of probable losses, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon the Company’s assessment of the lessee’s or In connection with the Company’s quarterly review borrower’s overall financial condition, economic resources, process or upon the occurrence of a significant event, payment record, the prospects for support from any loans receivable and DFLs (collectively, “Finance financially responsible guarantors and, if appropriate, the Receivables”), are reviewed and assigned an internal rating net realizable value of any collateral. These estimates of Performing, Watch List or Workout. Finance Receivables consider all available evidence, including the expected that are deemed Performing meet all present contractual future cash flows discounted at the Finance Receivable’s obligations, and collection and timing, of all amounts owed effective interest rate, fair value of collateral, general is reasonably assured. Watch List Finance Receivables economic conditions and trends, historical and industry are defined as Finance Receivables that do not meet the loss experience, and other relevant factors, as appropriate. definition of Performing or Workout. Workout Finance Should a Finance Receivable be deemed partially or wholly Receivables are defined as Finance Receivables in which the uncollectible, the uncollectible balance is charged off Company has determined, based on current information against the allowance in the period in which the uncollectible and events, that: (i) it is probable it will be unable to collect determination has been made. all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) the Company has commenced action or anticipates pursuing action in the near term to seek recovery of its investment. Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). Real Estate On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business (see “Accounting Pronouncements” section 72 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 73 PART II or more of the excess fair value (over retained tax credits) of achieved). This may result in the recognition of rental the leased property. If one of the four criteria is met and the revenue in periods subsequent to when such payments minimum lease payments are determined to be reasonably are received. predictable and collectible, the lease arrangement is generally accounted for as a direct financing lease (“DFL”). Tenant recoveries subject to operating leases generally relate to the reimbursement of real estate taxes, insurance The Company utilizes the direct finance method of and repairs and maintenance expense. These expenses are accounting to record DFL income. For a lease accounted recognized as revenue in the period they are incurred. The for as a DFL, the net investment in the DFL represents reimbursements of these expenses are recognized and receivables for the sum of future minimum lease payments presented gross, as the Company is generally the primary and the estimated residual value of the leased property, obligor and, with respect to purchasing goods and services less the unamortized unearned income. Unearned income from third party suppliers, has discretion in selecting the is deferred and amortized to income over the lease term supplier and bears the associated credit risk. to provide a constant yield when collectibility of the lease payments is reasonably assured. For operating leases with minimum scheduled rent increases, the Company recognizes income on a straight The Company commences recognition of rental revenue line basis over the lease term when collectibility is for operating lease arrangements when the tenant has reasonably assured. Recognizing rental income on a straight taken possession or controls the physical use of a leased line basis results in a difference in the timing of revenue asset; the tenant is not considered to have taken physical amounts from what is contractually due from tenants. If possession or have control of the leased asset until the the Company determines that collectibility of straight line Company-owned tenant improvements are substantially rents is not reasonably assured, future revenue recognition completed. If a lease arrangement provides for tenant is limited to amounts contractually owed and paid, and, improvements, the Company determines whether the when appropriate, an allowance for estimated losses tenant improvements are owned by the tenant or the is established. Company. When the Company is the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into income over the lease term. When the tenant is the owner of the tenant improvements, any tenant improvement allowance that is funded by the Company is treated as a lease incentive and amortized as a reduction of revenue over the lease term. Ownership of tenant improvements is determined based on various factors including, but not limited to, the following criteria: • lease stipulations of how and on what a tenant improvement allowance may be spent; • which party to the arrangement retains legal title to the tenant improvements upon lease expiration; • whether the tenant improvements are unique to the tenant or general purpose in nature; • • if the tenant improvements are expected to have significant residual value at the end of the lease term; the responsible party for construction cost overruns; and the improvements. Certain leases provide for additional rents that are contingent upon a percentage of the facility’s revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds, and only after any contingency has been removed (when the related thresholds are Resident fee revenue is recorded when services are rendered and includes resident room and care charges, community fees and other resident charges. Residency agreements are generally for a term of 30 days to one year, with resident fees billed monthly. Revenue for certain care related services is recognized as services are provided and is billed monthly in arrears. Loans receivable are classified as held-for-investment based on management’s intent and ability to hold the loans for the foreseeable future or to maturity. Loans held-for-investment are carried at amortized cost and reduced by a valuation allowance for estimated credit losses, as necessary. The Company recognizes interest income on loans, including the amortization of discounts and premiums, loan fees paid and received, using the interest method. The interest method is applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums and discounts are recognized as yield adjustments over the term of the related loans. upon the closing of a transaction with the purchaser. Gains on real estate sold are recognized using the full accrual method when collectibility of the sales price is reasonably assured, the Company is not obligated to perform additional activities that may be considered significant, the initial investment from the buyer is sufficient and other profit recognition criteria have been satisfied. Gain on sales of real estate may be deferred in whole or in part until the requirements for gain recognition have been met. • which party constructs or directs the construction of The Company recognizes a gain on sales of real estate Allowance for Doubtful Accounts The Company evaluates the liquidity and creditworthiness of its tenants, operators and borrowers on a monthly and quarterly basis. The Company’s evaluation considers industry and economic conditions, individual and portfolio property performance, credit enhancements, liquidity and other factors. The Company’s tenants, borrowers and operators furnish property, portfolio and guarantor/operator-level financial statements, among other information, on a monthly or quarterly basis; the Company utilizes this financial information to calculate the lease or debt service coverages that it uses as a primary credit quality indicator. Lease and debt service coverage information is evaluated together with other property, portfolio and operator performance information, including revenue, expense, net operating income, occupancy, rental rate, reimbursement trends, capital expenditures and EBITDA (defined as earnings before interest, tax, and depreciation and amortization), along with other liquidity measures. The Company evaluates, on a monthly basis or immediately upon a significant change in circumstance, its tenants’, operators’ and borrowers’ ability to service their obligations with the Company. The Company maintains an allowance for doubtful accounts for straight-line rent receivables resulting from tenants’ inability to make contractual rent and tenant recovery payments or lease defaults. For straight-line rent receivables, the Company’s assessment is based on amounts estimated to be recoverable over the lease term. In connection with the Company’s quarterly review process or upon the occurrence of a significant event, loans receivable and DFLs (collectively, “Finance Receivables”), are reviewed and assigned an internal rating of Performing, Watch List or Workout. Finance Receivables that are deemed Performing meet all present contractual obligations, and collection and timing, of all amounts owed is reasonably assured. Watch List Finance Receivables are defined as Finance Receivables that do not meet the definition of Performing or Workout. Workout Finance Receivables are defined as Finance Receivables in which the Company has determined, based on current information and events, that: (i) it is probable it will be unable to collect all amounts due according to the contractual terms of the agreement, (ii) the tenant, operator, or borrower is delinquent on making payments under the contractual terms of the agreement and (iii) the Company has commenced action or anticipates pursuing action in the near term to seek recovery of its investment. Finance Receivables are placed on nonaccrual status when management determines that the collectibility of contractual amounts is not reasonably assured (the asset will have an internal rating of either Watch List or Workout). PART II Further, the Company performs a credit analysis to support the tenant’s, operator’s, borrower’s and/or guarantor’s repayment capacity and the underlying collateral values. The Company uses the cash basis method of accounting for Finance Receivables placed on nonaccrual status unless one of the following conditions exist whereby it utilizes the cost recovery method of accounting: (i) if the Company determines that it is probable that it will only recover the recorded investment in the Finance Receivable, net of associated allowances or charge-offs (if any), or (ii) the Company cannot reasonably estimate the amount of an impaired Finance Receivable. For cash basis method of accounting the Company applies payments received, excluding principal paydowns, to interest income so long as that amount does not exceed the amount that would have been earned under the original contractual terms. For cost recovery method of accounting any payment received is applied to reduce the recorded investment. Generally, the Company returns a Finance Receivable to accrual status when all delinquent payments become current under the terms of the loan or lease agreements and collectibility of the remaining contractual loan or lease payments is reasonably assured. Allowances are established for Finance Receivables on an individual basis utilizing an estimate of probable losses, if they are determined to be impaired. Finance Receivables are impaired when it is deemed probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan or lease. An allowance is based upon the Company’s assessment of the lessee’s or borrower’s overall financial condition, economic resources, payment record, the prospects for support from any financially responsible guarantors and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence, including the expected future cash flows discounted at the Finance Receivable’s effective interest rate, fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors, as appropriate. Should a Finance Receivable be deemed partially or wholly uncollectible, the uncollectible balance is charged off against the allowance in the period in which the uncollectible determination has been made. Real Estate On January 1, 2017 the Company adopted Accounting Standards Update (“ASU”) No. 2017-01, Clarifying the Definition of a Business (“ASU 2017-01”) which narrows the Financial Accounting Standards Board’s (“FASB”) definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business (see “Accounting Pronouncements” section 72 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 73 PART II for complete details of the adoption of ASU 2017-01). As a result of adopting ASU 2017-01, the majority of the Company’s real estate acquisitions subsequent to January 1, 2017 are classified as asset acquisitions for which the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill is recognized, third party transaction costs are capitalized and any associated contingent consideration is recorded when the contingency is resolved. Prior to the adoption of ASU 2017-01, the majority of the Company’s real estate acquisitions were classified as business combinations and identifiable assets acquired, liabilities assumed and any associated noncontrolling interests were recorded at fair value, with any excess consideration recorded as goodwill. Transaction costs related to business combinations were expensed as incurred. The Company assesses fair value based on available market information, such as capitalization and discount rates, comparable sale transactions and relevant per square foot or unit cost information. A real estate asset’s fair value may be determined utilizing cash flow projections that incorporate appropriate discount and/or capitalization rates or other available market information. Estimates of future cash flows are based on a number of factors including historical operating results, known and anticipated trends, as well as market and economic conditions. The fair value of tangible assets of an acquired property is based on the value of the property as if it is vacant. The Company records acquired “above and below market” leases at fair value using discount rates which reflect the risks associated with the leases acquired. The amount recorded is based on the present value of the difference between (i) the contractual amounts paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each in-place lease, measured over a period equal to the remaining term of the lease for above market leases and the initial term plus the extended term for any leases with bargain renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on an evaluation of the specific characteristics of each property and the acquired tenant lease(s). Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions and expected trends. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related costs. The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the development or construction of a real estate asset. The Company capitalizes construction and development costs while substantive activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of Company-owned tenant improvements, but no later than one year from cessation of significant construction activity. Costs incurred after a project is substantially complete and ready for its intended use, or after development activities have ceased, are expensed as incurred. For redevelopment of existing operating properties, the Company capitalizes the cost for the construction and improvement incurred in connection with the redevelopment. Costs previously capitalized related to abandoned developments/redevelopments are charged to earnings. Expenditures for repairs and maintenance are expensed as incurred. The Company considers costs incurred in conjunction with re-leasing properties, including tenant improvements and lease commissions, to represent the acquisition of productive assets and, accordingly, such costs are reflected as investing activities in the Company’s consolidated statement of cash flows. The Company computes depreciation on properties using the straight-line method over the assets’ estimated useful lives. Depreciation is discontinued when a property is identified as held for sale. Buildings and improvements are depreciated over useful lives ranging up to 60 years. Market lease intangibles are amortized primarily to revenue over the remaining noncancellable lease terms and bargain renewal periods, if any. In-place lease intangibles are amortized to expense over the remaining noncancellable lease term and bargain renewal periods, if any. Impairment of Long-Lived Assets and Goodwill The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected future undiscounted cash flows to the carrying value of the real estate assets. The expected future PART II undiscounted cash flows are calculated utilizing the lowest the date of acquisition. Examples of a strategic shift include level of identifiable cash flows that are largely independent disposing of: (i) a separate major line of business, (ii) a of the cash flows of other assets and liabilities. If the carrying separate major geographic area of operations, or (iii) other value exceeds the expected future undiscounted cash flows, major parts of the Company. an impairment loss will be recognized to the extent that the carrying value of the real estate assets is greater than their fair value. If an asset is classified as held for sale, it is reported at the lower of its carrying value or fair value less costs to sell and no longer depreciated. Investments in Unconsolidated Joint Ventures Investments in entities which the Company does not consolidate, but has the ability to exercise significant During the fourth quarter of 2017, the Company adopted influence over the operating and financial policies of, are ASU 2017-04, Simplifying the Test for Goodwill Impairment reported under the equity method of accounting. Under the (“ASU 2017-04”) which eliminates step two from the goodwill impairment test, as described below (see equity method of accounting, the Company’s share of the investee’s earnings or losses is included in the Company’s “Accounting Pronouncements” section for complete details consolidated results of operations. of the adoption of ASU 2017-04). Effective October 1, 2017, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment loss for the amount by which the carrying value, including goodwill, exceeds the reporting unit’s fair value. Prior to its adoption of ASU 2017-04, if the Company determined that it was more likely than not that the fair value of a reporting unit was less than its carrying value, The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the fair value of the assets prior to the sale of interests in the joint venture. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference is generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of equity in earnings of the joint venture. the Company applied the required two-step quantitative The Company evaluates its equity method investments for approach. The quantitative procedures of the two-step approach: (i) compared the fair value of a reporting unit impairment based upon a comparison of the fair value of the equity method investment to its carrying value. When with its carrying value, including goodwill, and, if necessary, the Company determines a decline in the fair value of an (ii) compared the implied fair value of reporting unit goodwill investment in an unconsolidated joint venture below its with the carrying value as if it had been acquired in a business combination at the date of the impairment test. carrying value is other-than-temporary, an impairment is recorded. The Company recognizes gains on the sale The excess fair value of the reporting unit over the fair value of interests in joint ventures to the extent the economic of assets and liabilities, excluding goodwill, is the implied substance of the transaction is a sale. value of goodwill and was used to determine the impairment loss amount, if any. Assets Held for Sale and Discontinued Operations The Company’s fair values of its equity method investments are determined based on discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and, where applicable, any estimated debt premiums or discounts. Capitalization rates, The Company classifies a real estate property as held for discount rates and credit spreads utilized in these valuation sale when: (i) management has approved the disposal, (ii) the models are based upon assumptions that the Company property is available for sale in its present condition, (iii) an believes to be within a reasonable range of current market active program to locate a buyer has been initiated, (iv) it rates for the respective investments. is probable that the property will be disposed of within one year, (v) the property is being marketed at a reasonable price relative to its fair value, and (vi) it is unlikely that the disposal plan will significantly change or be withdrawn. A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on Share-Based Compensation Compensation expense for share-based awards granted to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their grant date fair market value. Compensation expense for awards with graded vesting schedules is generally recognized on a straight-line basis over the vesting period. Forfeitures of share-based awards are recognized as they occur. 74 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 75 PART II for complete details of the adoption of ASU 2017-01). and expected trends. In estimating costs to execute similar As a result of adopting ASU 2017-01, the majority of leases, the Company considers leasing commissions, legal the Company’s real estate acquisitions subsequent to and other related costs. January 1, 2017 are classified as asset acquisitions for which the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill is recognized, third party transaction costs are capitalized and any associated contingent consideration is recorded when the contingency is resolved. The Company capitalizes direct construction and development costs, including predevelopment costs, interest, property taxes, insurance and other costs directly related and essential to the development or construction of a real estate asset. The Company capitalizes construction and development costs while substantive activities are ongoing to prepare an asset for its intended use. The Company considers a construction project as substantially Prior to the adoption of ASU 2017-01, the majority of complete and held available for occupancy upon the the Company’s real estate acquisitions were classified as completion of Company-owned tenant improvements, business combinations and identifiable assets acquired, but no later than one year from cessation of significant liabilities assumed and any associated noncontrolling construction activity. Costs incurred after a project is interests were recorded at fair value, with any excess substantially complete and ready for its intended use, or consideration recorded as goodwill. Transaction costs after development activities have ceased, are expensed related to business combinations were expensed as incurred. For redevelopment of existing operating as incurred. properties, the Company capitalizes the cost for the construction and improvement incurred in connection with The Company assesses fair value based on available market information, such as capitalization and discount rates, the redevelopment. comparable sale transactions and relevant per square foot Costs previously capitalized related to abandoned or unit cost information. A real estate asset’s fair value developments/redevelopments are charged to earnings. may be determined utilizing cash flow projections that Expenditures for repairs and maintenance are expensed incorporate appropriate discount and/or capitalization as incurred. The Company considers costs incurred in rates or other available market information. Estimates of conjunction with re-leasing properties, including tenant future cash flows are based on a number of factors including improvements and lease commissions, to represent the historical operating results, known and anticipated trends, acquisition of productive assets and, accordingly, such as well as market and economic conditions. The fair value of costs are reflected as investing activities in the Company’s tangible assets of an acquired property is based on the value consolidated statement of cash flows. of the property as if it is vacant. The Company computes depreciation on properties using The Company records acquired “above and below market” the straight-line method over the assets’ estimated useful leases at fair value using discount rates which reflect the lives. Depreciation is discontinued when a property is risks associated with the leases acquired. The amount identified as held for sale. Buildings and improvements are recorded is based on the present value of the difference depreciated over useful lives ranging up to 60 years. Market between (i) the contractual amounts paid pursuant to each lease intangibles are amortized primarily to revenue over the in-place lease and (ii) management’s estimate of fair market remaining noncancellable lease terms and bargain renewal lease rates for each in-place lease, measured over a period periods, if any. In-place lease intangibles are amortized to equal to the remaining term of the lease for above market expense over the remaining noncancellable lease term and leases and the initial term plus the extended term for any bargain renewal periods, if any. leases with bargain renewal options. Other intangible assets acquired include amounts for in-place lease values that are based on an evaluation of the specific characteristics of each property and the acquired tenant lease(s). Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. In estimating carrying costs, the Company includes estimates of lost rents at market rates during the hypothetical expected lease-up periods, which are dependent on local market conditions Impairment of Long-Lived Assets and Goodwill The Company assesses the carrying value of real estate assets and related intangibles (“real estate assets”) when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company tests its real estate assets for impairment by comparing the sum of the expected future undiscounted cash flows to the carrying value of the real estate assets. The expected future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. If the carrying value exceeds the expected future undiscounted cash flows, an impairment loss will be recognized to the extent that the carrying value of the real estate assets is greater than their fair value. If an asset is classified as held for sale, it is reported at the lower of its carrying value or fair value less costs to sell and no longer depreciated. During the fourth quarter of 2017, the Company adopted ASU 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) which eliminates step two from the goodwill impairment test, as described below (see “Accounting Pronouncements” section for complete details of the adoption of ASU 2017-04). Effective October 1, 2017, if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company recognizes an impairment loss for the amount by which the carrying value, including goodwill, exceeds the reporting unit’s fair value. Prior to its adoption of ASU 2017-04, if the Company determined that it was more likely than not that the fair value of a reporting unit was less than its carrying value, the Company applied the required two-step quantitative approach. The quantitative procedures of the two-step approach: (i) compared the fair value of a reporting unit with its carrying value, including goodwill, and, if necessary, (ii) compared the implied fair value of reporting unit goodwill with the carrying value as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the fair value of assets and liabilities, excluding goodwill, is the implied value of goodwill and was used to determine the impairment loss amount, if any. Assets Held for Sale and Discontinued Operations The Company classifies a real estate property as held for sale when: (i) management has approved the disposal, (ii) the property is available for sale in its present condition, (iii) an active program to locate a buyer has been initiated, (iv) it is probable that the property will be disposed of within one year, (v) the property is being marketed at a reasonable price relative to its fair value, and (vi) it is unlikely that the disposal plan will significantly change or be withdrawn. A discontinued operation represents: (i) a component of an entity or group of components that has been disposed of or is classified as held for sale in a single transaction and represents a strategic shift that has or will have a major effect on the Company’s operations and financial results or (ii) an acquired business that is classified as held for sale on PART II the date of acquisition. Examples of a strategic shift include disposing of: (i) a separate major line of business, (ii) a separate major geographic area of operations, or (iii) other major parts of the Company. Investments in Unconsolidated Joint Ventures Investments in entities which the Company does not consolidate, but has the ability to exercise significant influence over the operating and financial policies of, are reported under the equity method of accounting. Under the equity method of accounting, the Company’s share of the investee’s earnings or losses is included in the Company’s consolidated results of operations. The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the fair value of the assets prior to the sale of interests in the joint venture. To the extent that the Company’s cost basis is different from the basis reflected at the joint venture level, the basis difference is generally amortized over the lives of the related assets and liabilities, and such amortization is included in the Company’s share of equity in earnings of the joint venture. The Company evaluates its equity method investments for impairment based upon a comparison of the fair value of the equity method investment to its carrying value. When the Company determines a decline in the fair value of an investment in an unconsolidated joint venture below its carrying value is other-than-temporary, an impairment is recorded. The Company recognizes gains on the sale of interests in joint ventures to the extent the economic substance of the transaction is a sale. The Company’s fair values of its equity method investments are determined based on discounted cash flow models that include all estimated cash inflows and outflows over a specified holding period and, where applicable, any estimated debt premiums or discounts. Capitalization rates, discount rates and credit spreads utilized in these valuation models are based upon assumptions that the Company believes to be within a reasonable range of current market rates for the respective investments. Share-Based Compensation Compensation expense for share-based awards granted to employees, including grants of employee stock options, are recognized in the consolidated statements of operations based on their grant date fair market value. Compensation expense for awards with graded vesting schedules is generally recognized on a straight-line basis over the vesting period. Forfeitures of share-based awards are recognized as they occur. 74 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 75 PART II Cash and Cash Equivalents and Restricted Cash Cash and cash equivalents consist of cash on hand and short-term investments with original maturities of three months or less when purchased. Restricted cash primarily consists of amounts held by mortgage lenders to provide for (i) real estate tax expenditures, tenant improvements and capital expenditures, (ii) security deposits, and (iii) net proceeds from property sales that were executed as tax-deferred dispositions. Derivatives and Hedging During its normal course of business, the Company uses certain types of derivative instruments for the purpose of managing interest rate and foreign currency risk. To qualify for hedge accounting, derivative instruments used for risk management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at inception of a qualifying cash flow hedging relationship, the underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions. The Company recognizes all derivative instruments, including embedded derivatives that are required to be bifurcated, as assets or liabilities in the consolidated balance sheets at fair value. Changes in fair value of derivative instruments that are not designated in hedging relationships or that do not meet the criteria of hedge accounting are recognized in earnings. For derivative instruments designated in qualifying cash flow hedging relationships, changes in fair value related to the effective portion of the derivative instruments are recognized in accumulated other comprehensive income (loss), whereas changes in fair value of the ineffective portion are recognized in earnings. Using certain of its British pound sterling (“GBP”) denominated debt, the Company applies net investment hedge accounting to hedge the foreign currency exposure from its net investment in GBP-functional subsidiaries. The variability of the GBP-denominated debt due to changes in the GBP to U.S. dollar (“USD”) exchange rate (“remeasurement value”) is recognized as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). If it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues its cash flow hedge accounting prospectively and records the appropriate adjustment to earnings based on the current fair value of the derivative instrument. For net investment hedge accounting, upon sale or liquidation of the hedged investment, the cumulative balance of the remeasurement value is reclassified to earnings. Income Taxes HCP, Inc. elected REIT status and believes it has always operated so as to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, HCP, Inc. will not be subject to U.S. federal income tax, provided that it continues to qualify as a REIT and makes distributions to stockholders equal to or in excess of its taxable income. In addition, the Company has formed several consolidated subsidiaries, which have elected REIT status. HCP, Inc. and its consolidated REIT subsidiaries are each subject to the REIT qualification requirements under the Code. If any REIT fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may be ineligible to qualify as a REIT for four subsequent tax years. HCP, Inc. and its consolidated REIT subsidiaries are subject to state, local and foreign income taxes in some jurisdictions, and in certain circumstances each REIT may also be subject to federal excise taxes on undistributed income. In addition, certain activities that the Company undertakes may be conducted by entities which have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs are subject to both federal and state income taxes. The Company recognizes tax penalties relating to unrecognized tax benefits as additional income tax expense. Interest relating to unrecognized tax benefits is recognized as interest expense. Capital Raising Issuance Costs Costs incurred in connection with the issuance of common shares are recorded as a reduction of additional paid-in capital. Debt issuance costs related to debt instruments excluding line of credit arrangements are deferred, recorded as a reduction of the related debt liability, and amortized to interest expense over the remaining term of the related debt liability utilizing the interest method. Debt issuance costs related to line of credit arrangements are deferred, included in other assets, and amortized to interest expense over the remaining term of the related line of credit arrangement utilizing the interest method. Penalties incurred to extinguish debt and any remaining unamortized debt issuance costs, discounts and premiums are recognized as income or expense in the consolidated statements of operations at the time of extinguishment. PART II Segment Reporting The Company’s reportable segments, based on how it evaluates its business and allocates resources, are as follows: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. During the fourth quarter of 2017, as a result of a change in how operating results are reported to the Company’s chief operating decision makers, for the purpose of evaluating performance and allocating resources, unconsolidated joint ventures are now included in other non-reportable segments. Accordingly, all prior period segment information has been recast to conform to the current period presentation. Noncontrolling Interests Arrangements with noncontrolling interest holders of the transactions. The effects of transaction gains or losses are included in other income, net in the consolidated statements of operations. Fair Value Measurement The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy: are reported as a component of equity separate from • Level 1—quoted prices for identical instruments in the Company’s equity. Net income attributable to a active markets; noncontrolling interest is included in net income on the • Level 2—quoted prices for similar instruments in consolidated statements of operations and, upon a gain active markets; quoted prices for identical or similar or loss of control, the interest purchased or sold, and any instruments in markets that are not active; and interest retained, is recorded at fair value with any gain or model-derived valuations in which significant inputs loss recognized in earnings. The Company accounts for and significant value drivers are observable in active purchases or sales of equity interests that do not result in a markets; and change in control as equity transactions. • Level 3—fair value measurements derived from The Company consolidates non-managing member limited liability companies (“DownREITs”) because it exercises valuation techniques in which one or more significant inputs or significant value drivers are unobservable. control, and the noncontrolling interests in these entities The Company measures fair value using a set of are carried at cost. The non-managing member limited standardized procedures that are outlined herein for all liability company (“LLC”) units (“DownREIT units”) are assets and liabilities which are required to be measured exchangeable for an amount of cash approximating the at fair value. When available, the Company utilizes quoted then-current market value of shares of the Company’s market prices from an independent third party source to common stock or, at the Company’s option, shares of the determine fair value and classifies such items in Level 1. Company’s common stock (subject to certain adjustments, In instances where a market price is available, but the such as stock splits and reclassifications). Upon exchange instrument is in an inactive or over-the-counter market, the of DownREIT units for the Company’s common stock, the Company consistently applies the dealer (market maker) carrying amount of the DownREIT units is reclassified to pricing estimate and classifies the asset or liability in Level 2. stockholders’ equity. Transactions Foreign Currency Translation and Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during are included in accumulated other comprehensive income (loss), a component of stockholders’ equity on the consolidated balance sheets. Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though observable. Internal fair value models and techniques used by the Company include discounted cash flow models. The Company also considers its counterparty’s and own credit risk for derivative instruments and other liabilities measured at fair value. The Company has elected the mid-market pricing expedient when determining fair value. the related period. Gains or losses resulting from translation there may be some significant inputs that are readily 76 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 77 PART II Cash and Cash Equivalents and Restricted Cash instrument. For net investment hedge accounting, upon sale or liquidation of the hedged investment, the cumulative balance of the remeasurement value is reclassified Cash and cash equivalents consist of cash on hand and to earnings. short-term investments with original maturities of three months or less when purchased. Restricted cash primarily consists of amounts held by mortgage lenders to provide for (i) real estate tax expenditures, tenant improvements and capital expenditures, (ii) security deposits, and (iii) net proceeds from property sales that were executed as tax-deferred dispositions. Derivatives and Hedging During its normal course of business, the Company uses Income Taxes HCP, Inc. elected REIT status and believes it has always operated so as to continue to qualify as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the “Code”). Accordingly, HCP, Inc. will not be subject to U.S. federal income tax, provided that it continues to qualify as a REIT and makes distributions to stockholders equal to or in excess of its taxable income. In addition, the Company has formed several consolidated subsidiaries, certain types of derivative instruments for the purpose of which have elected REIT status. HCP, Inc. and its managing interest rate and foreign currency risk. To qualify consolidated REIT subsidiaries are each subject to the REIT for hedge accounting, derivative instruments used for risk qualification requirements under the Code. If any REIT fails management purposes must effectively reduce the risk exposure that they are designed to hedge. In addition, at to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates and may be inception of a qualifying cash flow hedging relationship, the ineligible to qualify as a REIT for four subsequent tax years. underlying transaction or transactions, must be, and are expected to remain, probable of occurring in accordance with the Company’s related assertions. The Company recognizes all derivative instruments, including embedded derivatives that are required to be HCP, Inc. and its consolidated REIT subsidiaries are subject to state, local and foreign income taxes in some jurisdictions, and in certain circumstances each REIT may also be subject to federal excise taxes on undistributed income. In addition, certain activities that the Company bifurcated, as assets or liabilities in the consolidated balance undertakes may be conducted by entities which have sheets at fair value. Changes in fair value of derivative elected to be treated as taxable REIT subsidiaries (“TRSs”). instruments that are not designated in hedging relationships TRSs are subject to both federal and state income or that do not meet the criteria of hedge accounting are recognized in earnings. For derivative instruments designated in qualifying cash flow hedging relationships, taxes. The Company recognizes tax penalties relating to unrecognized tax benefits as additional income tax expense. Interest relating to unrecognized tax benefits is recognized changes in fair value related to the effective portion of the as interest expense. derivative instruments are recognized in accumulated other comprehensive income (loss), whereas changes in fair value of the ineffective portion are recognized in earnings. Using certain of its British pound sterling (“GBP”) denominated debt, the Company applies net investment hedge accounting to hedge the foreign currency exposure from its net investment in GBP-functional subsidiaries. The variability of the GBP-denominated debt due to changes in the GBP to U.S. dollar (“USD”) exchange rate (“remeasurement value”) is recognized as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). If it is determined that a derivative instrument ceases to be highly effective as a hedge, or that it is probable the underlying forecasted transaction will not occur, the Company discontinues its cash flow hedge accounting prospectively and records the appropriate adjustment to earnings based on the current fair value of the derivative Capital Raising Issuance Costs Costs incurred in connection with the issuance of common shares are recorded as a reduction of additional paid-in capital. Debt issuance costs related to debt instruments excluding line of credit arrangements are deferred, recorded as a reduction of the related debt liability, and amortized to interest expense over the remaining term of the related debt liability utilizing the interest method. Debt issuance costs related to line of credit arrangements are deferred, included in other assets, and amortized to interest expense over the remaining term of the related line of credit arrangement utilizing the interest method. Penalties incurred to extinguish debt and any remaining unamortized debt issuance costs, discounts and premiums are recognized as income or expense in the consolidated statements of operations at the time of extinguishment. Segment Reporting The Company’s reportable segments, based on how it evaluates its business and allocates resources, are as follows: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. During the fourth quarter of 2017, as a result of a change in how operating results are reported to the Company’s chief operating decision makers, for the purpose of evaluating performance and allocating resources, unconsolidated joint ventures are now included in other non-reportable segments. Accordingly, all prior period segment information has been recast to conform to the current period presentation. Noncontrolling Interests Arrangements with noncontrolling interest holders are reported as a component of equity separate from the Company’s equity. Net income attributable to a noncontrolling interest is included in net income on the consolidated statements of operations and, upon a gain or loss of control, the interest purchased or sold, and any interest retained, is recorded at fair value with any gain or loss recognized in earnings. The Company accounts for purchases or sales of equity interests that do not result in a change in control as equity transactions. The Company consolidates non-managing member limited liability companies (“DownREITs”) because it exercises control, and the noncontrolling interests in these entities are carried at cost. The non-managing member limited liability company (“LLC”) units (“DownREIT units”) are exchangeable for an amount of cash approximating the then-current market value of shares of the Company’s common stock or, at the Company’s option, shares of the Company’s common stock (subject to certain adjustments, such as stock splits and reclassifications). Upon exchange of DownREIT units for the Company’s common stock, the carrying amount of the DownREIT units is reclassified to stockholders’ equity. Foreign Currency Translation and Transactions Assets and liabilities denominated in foreign currencies that are translated into U.S. dollars use exchange rates in effect at the end of the period, and revenues and expenses denominated in foreign currencies that are translated into U.S. dollars use average rates of exchange in effect during the related period. Gains or losses resulting from translation are included in accumulated other comprehensive income (loss), a component of stockholders’ equity on the consolidated balance sheets. Gains or losses resulting from foreign currency transactions are translated into U.S. dollars at the rates of exchange prevailing at the dates PART II of the transactions. The effects of transaction gains or losses are included in other income, net in the consolidated statements of operations. Fair Value Measurement The Company measures and discloses the fair value of nonfinancial and financial assets and liabilities utilizing a hierarchy of valuation techniques based on whether the inputs to a fair value measurement are considered to be observable or unobservable in a marketplace. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. This hierarchy requires the use of observable market data when available. These inputs have created the following fair value hierarchy: • Level 1—quoted prices for identical instruments in active markets; • Level 2—quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant inputs and significant value drivers are observable in active markets; and • Level 3—fair value measurements derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. The Company measures fair value using a set of standardized procedures that are outlined herein for all assets and liabilities which are required to be measured at fair value. When available, the Company utilizes quoted market prices from an independent third party source to determine fair value and classifies such items in Level 1. In instances where a market price is available, but the instrument is in an inactive or over-the-counter market, the Company consistently applies the dealer (market maker) pricing estimate and classifies the asset or liability in Level 2. If quoted market prices or inputs are not available, fair value measurements are based upon valuation models that utilize current market or independently sourced market inputs, such as interest rates, option volatilities, credit spreads and/or market capitalization rates. Items valued using such internally-generated valuation techniques are classified according to the lowest level input that is significant to the fair value measurement. As a result, the asset or liability could be classified in either Level 2 or Level 3 even though there may be some significant inputs that are readily observable. Internal fair value models and techniques used by the Company include discounted cash flow models. The Company also considers its counterparty’s and own credit risk for derivative instruments and other liabilities measured at fair value. The Company has elected the mid-market pricing expedient when determining fair value. 76 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 77 PART II Earnings per Share Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. The Company accounts for unvested share-based payment awards that contain non-forfeitable dividend rights or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per common share is calculated by including the effect of dilutive securities. Recent Accounting Pronouncements During the year ended December 31, 2017, the Company adopted the following ASUs, each of which did not have a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption: • On January 1, 2017 the Company adopted ASU 2017- 01 which narrows the FASB’s definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an acquired input and a substantive process that together significantly contribute to the ability to create outputs. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. This ASU is to be applied prospectively and the Company expects that a majority of its real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. As a result of adopting ASU 2017-01, the majority of the Company’s real estate acquisitions subsequent to January 1, 2017 are classified as asset acquisitions for which the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill is recognized, third party transaction costs are capitalized and any associated contingent consideration is recorded when the contingency is resolved. • During the fourth quarter of 2017, the Company adopted ASU 2017-04 which eliminates the two-step approach to testing goodwill for impairment by requiring that an entity, upon concluding that it is more likely than not that the fair value of a reporting unit is less than its carrying value, recognize an impairment loss for the amount by which the carrying value, including goodwill, exceeds the reporting unit’s fair value. • During the fourth quarter of 2017, the Company adopted ASU No. 2016-18, Restricted Cash (“ASU 2016-18”) and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) (collectively, the “Cash Flow ASUs”). ASU 2016-18 requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The full retrospective approach of adoption is required for the Cash Flow ASUs and, accordingly, certain line items in the Company’s consolidated statements of cash flows have been reclassified to conform to the current period presentation. The following table illustrates changes in the Company’s cash flows as reported and as previously reported prior to the adopted the Cash Flow ASUs during the fourth quarter of 2017 (in thousands): Net cash provided by (used in): Year Ended December 31, 2016 December 31, 2015 As Reported As Previously Reported As Reported As Previously Reported Net cash provided by (used in) investing activities $ (428,973) $ (410,617) $ (1,660,365) $ (1,672,005) Net increase (decrease) in balance(1) Balance - beginning of year(1) Balance - end of year(1) Balance - continuing operations, end of year(1) (270,126) (251,770) 407,116 136,990 136,990 346,500 94,730 94,730 174,330 232,786 407,116 401,058 162,690 183,810 346,500 340,442 (1) Amounts in the As Reported column include cash and cash equivalents and restricted cash as required upon the adoption of the Cash Flow ASUs. Amounts in the As Previously Reported column reflects only cash and cash equivalents. PART II In addition to the changes in the consolidated statements of and recognition of revenue), the Company has narrowed cash flows as a result of the adoption the Cash Flow ASUs, the impacts, upon and subsequent to adoption, that certain amounts within the consolidated statements of cash the Revenue ASUs will have on its consolidated financial flows have been reclassified for prior periods to conform statements to the following: to the current period presentation. Such reclassifications primarily combined line items of similar classes of transactions and had no impact on the cash flows from operating, investing, and financing activities. • A requirement to disclose, on an ongoing basis, ancillary resident fee revenue generated from its RIDEA structures. The Company will disclose that these represent fees received for additional services provided Revenue Recognition. Between May 2014 and February 2017, to the resident on an as-needed or desired basis, which the FASB issued four ASUs changing the requirements are not included in the fees charged pursuant to the for recognizing and reporting revenue (together, herein resident lease agreement, and that they are billed referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, individually and collected one month in arrears. The Revenue from Contracts with Customers (“ASU 2014-09”), Company anticipates its ancillary resident fee revenue (ii) ASU No. 2016-08, Principal versus Agent Considerations to be immaterial. (Reporting Revenue Gross versus Net) (“ASU 2016-08”), • A requirement, upon adoption, to reassess its partial (iii) ASU No. 2016-12, Narrow-Scope Improvements and sale of RIDEA II in the first quarter of 2017 (which was Practical Expedients (“ASU 2016-12”), and (iv) ASU No. not a completed sale as of the Company’s adoption date 2017-05, Clarifying the Scope of Asset Derecognition due to an immaterial obligation related to the interest Guidance and Accounting for Partial Sales of Nonfinancial sold), and record its retained 40% equity investment at Assets (“ASU 2017-05”). ASU 2014-09 provides guidance fair value as of the sale date. The Company estimates for revenue recognition to depict the transfer of promised the fair value of its retained equity investment as of the goods or services to customers in an amount that reflects sale date to be $107 million which, upon adoption, will the consideration to which the entity expects to be entitled increase the Company’s investment to a carrying value in exchange for those goods or services. ASU 2016-08 is of $121 million. However, such carrying value exceeds intended to improve the operability and understandability fair value at the date of adoption due to an other-than- of the implementation guidance on principal versus agent temporary impairment of $30 million determined using considerations. ASU 2016-12 provides practical expedients the terms of the agreement to sell the Company’s and improvements on the previously narrow scope of remaining investment in RIDEA II (see Note 5) which ASU 2014-09. ASU 2017-05 clarifies the scope of the are considered to be Level 2 measurements within the FASB’s recently established guidance on nonfinancial asset fair value hierarchy. As such, effective January 1, 2018, derecognition and aligns the accounting for partial sales of the Company reduced this carrying value to the agreed nonfinancial assets and in-substance nonfinancial assets upon sales price of $91 million. Both the impact of the with the guidance in ASU 2014-09. In August 2015, the increase in value and the related $30 million impairment FASB issued ASU No. 2015-14, Revenue from Contracts with charge are recorded as a net adjustment to beginning Customers (Topic 606): Deferral of the Effective Date (“ASU retained earnings as of January 1, 2018 pursuant to the 2015-14”). ASU 2015-14 defers the effective date of ASU Company’s elected transition approach. 2014-09 by one year to fiscal years, and interim periods • Under ASU 2014-09, revenue recognition for real estate within, beginning after December 15, 2017. All subsequent sales is largely based on the transfer of control versus ASUs related to ASU 2014-09, including ASU 2016-08, continuing involvement under historic guidance. As a ASU 2016-12, and ASU 2017-05, assumed the deferred result, the Company generally expects that the new effective date enforced by ASU 2015-14. A reporting entity guidance will result in more transactions qualifying as may apply the amendments in the Revenue ASUs using sales of real estate and revenue being recognized at an either a modified retrospective approach, by recording a earlier date than under historical accounting guidance. cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. The Company has elected to use the modified retrospective approach for its adoption of the Revenue ASUs and will adopt with an effective date of January 1, 2018. Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to: (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar As the primary source of revenue for the Company is to requirements under current accounting guidance, generated through leasing arrangements, which are (ii) eliminate current real estate specific lease provisions excluded from the Revenue ASUs (as it relates to the timing and (iii) modify the classification criteria and accounting 78 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 79 PART II Earnings per Share Basic earnings per common share is computed by dividing net income applicable to common shares by the weighted average number of shares of common stock outstanding during the period. The Company accounts for unvested share-based payment awards that contain non-forfeitable dividend rights or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. Diluted earnings per common share is calculated by including the effect of dilutive securities. Recent Accounting Pronouncements During the year ended December 31, 2017, the Company adopted the following ASUs, each of which did not have a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption: • On January 1, 2017 the Company adopted ASU 2017- 01 which narrows the FASB’s definition of a business and provides a framework that gives entities a basis for making reasonable judgments about whether a transaction involves an asset, or a group of assets, or a business. ASU 2017-01 states that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business. If this initial test is not met, a set cannot be considered a business unless it includes an acquired input and a substantive process that together significantly contribute to the ability to create outputs. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. This ASU is to be majority of its real estate acquisitions and dispositions will be deemed asset transactions rather than business combinations. As a result of adopting ASU 2017-01, the majority of the Company’s real estate acquisitions subsequent to January 1, 2017 are classified as asset acquisitions for which the Company records identifiable assets acquired, liabilities assumed and any associated noncontrolling interests at cost on a relative fair value basis. In addition, for such asset acquisitions, no goodwill is recognized, third party transaction costs are capitalized and any associated contingent consideration is recorded when the contingency is resolved. • During the fourth quarter of 2017, the Company adopted ASU 2017-04 which eliminates the two-step approach to testing goodwill for impairment by requiring that an entity, upon concluding that it is more likely than not that the fair value of a reporting unit is less than its carrying value, recognize an impairment loss for the amount by which the carrying value, including goodwill, exceeds the reporting unit’s fair value. • During the fourth quarter of 2017, the Company adopted ASU No. 2016-18, Restricted Cash (“ASU 2016-18”) and ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”) (collectively, the “Cash Flow ASUs”). ASU 2016-18 requires an entity to reconcile and explain the period-over-period change in total cash, cash equivalents and restricted cash within its statements of cash flows and ASU 2016-15 provides guidance clarifying how certain cash receipts and cash payments should be classified. The full retrospective approach of adoption is required for the Cash Flow ASUs and, accordingly, certain line items in the Company’s consolidated statements of cash flows have been reclassified to conform to the current applied prospectively and the Company expects that a period presentation. The following table illustrates changes in the Company’s cash flows as reported and as previously reported prior to the adopted the Cash Flow ASUs during the fourth quarter of 2017 (in thousands): Net cash provided by (used in): Net increase (decrease) in balance(1) Balance - beginning of year(1) Balance - end of year(1) Balance - continuing operations, end of year(1) Year Ended December 31, 2016 December 31, 2015 As As As Previously As Previously Reported Reported Reported Reported (270,126) (251,770) 407,116 136,990 136,990 346,500 94,730 94,730 174,330 232,786 407,116 401,058 162,690 183,810 346,500 340,442 Net cash provided by (used in) investing activities $ (428,973) $ (410,617) $ (1,660,365) $ (1,672,005) (1) Amounts in the As Reported column include cash and cash equivalents and restricted cash as required upon the adoption of the Cash Flow ASUs. Amounts in the As Previously Reported column reflects only cash and cash equivalents. In addition to the changes in the consolidated statements of cash flows as a result of the adoption the Cash Flow ASUs, certain amounts within the consolidated statements of cash flows have been reclassified for prior periods to conform to the current period presentation. Such reclassifications primarily combined line items of similar classes of transactions and had no impact on the cash flows from operating, investing, and financing activities. Revenue Recognition. Between May 2014 and February 2017, the FASB issued four ASUs changing the requirements for recognizing and reporting revenue (together, herein referred to as the “Revenue ASUs”): (i) ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), (ii) ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), (iii) ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), and (iv) ASU No. 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets (“ASU 2017-05”). ASU 2014-09 provides guidance for revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2016-08 is intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations. ASU 2016-12 provides practical expedients and improvements on the previously narrow scope of ASU 2014-09. ASU 2017-05 clarifies the scope of the FASB’s recently established guidance on nonfinancial asset derecognition and aligns the accounting for partial sales of nonfinancial assets and in-substance nonfinancial assets with the guidance in ASU 2014-09. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). ASU 2015-14 defers the effective date of ASU 2014-09 by one year to fiscal years, and interim periods within, beginning after December 15, 2017. All subsequent ASUs related to ASU 2014-09, including ASU 2016-08, ASU 2016-12, and ASU 2017-05, assumed the deferred effective date enforced by ASU 2015-14. A reporting entity may apply the amendments in the Revenue ASUs using either a modified retrospective approach, by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption or full retrospective approach. The Company has elected to use the modified retrospective approach for its adoption of the Revenue ASUs and will adopt with an effective date of January 1, 2018. As the primary source of revenue for the Company is generated through leasing arrangements, which are excluded from the Revenue ASUs (as it relates to the timing PART II and recognition of revenue), the Company has narrowed the impacts, upon and subsequent to adoption, that the Revenue ASUs will have on its consolidated financial statements to the following: • A requirement to disclose, on an ongoing basis, ancillary resident fee revenue generated from its RIDEA structures. The Company will disclose that these represent fees received for additional services provided to the resident on an as-needed or desired basis, which are not included in the fees charged pursuant to the resident lease agreement, and that they are billed individually and collected one month in arrears. The Company anticipates its ancillary resident fee revenue to be immaterial. • A requirement, upon adoption, to reassess its partial sale of RIDEA II in the first quarter of 2017 (which was not a completed sale as of the Company’s adoption date due to an immaterial obligation related to the interest sold), and record its retained 40% equity investment at fair value as of the sale date. The Company estimates the fair value of its retained equity investment as of the sale date to be $107 million which, upon adoption, will increase the Company’s investment to a carrying value of $121 million. However, such carrying value exceeds fair value at the date of adoption due to an other-than- temporary impairment of $30 million determined using the terms of the agreement to sell the Company’s remaining investment in RIDEA II (see Note 5) which are considered to be Level 2 measurements within the fair value hierarchy. As such, effective January 1, 2018, the Company reduced this carrying value to the agreed upon sales price of $91 million. Both the impact of the increase in value and the related $30 million impairment charge are recorded as a net adjustment to beginning retained earnings as of January 1, 2018 pursuant to the Company’s elected transition approach. • Under ASU 2014-09, revenue recognition for real estate sales is largely based on the transfer of control versus continuing involvement under historic guidance. As a result, the Company generally expects that the new guidance will result in more transactions qualifying as sales of real estate and revenue being recognized at an earlier date than under historical accounting guidance. Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the current accounting for leases to: (i) require lessees to put most leases on their balance sheets, but continue recognizing expenses on their income statements in a manner similar to requirements under current accounting guidance, (ii) eliminate current real estate specific lease provisions and (iii) modify the classification criteria and accounting 78 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 79 PART II for sales-type leases for lessors. ASU 2016-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2018. Early adoption is permitted. The transition method required by ASU 2016-02 varies based on the specific amendment being adopted. As a result of adopting ASU 2016-02, the Company: (i) will recognize all of its significant operating leases for which it is the lessee, including corporate office leases and ground leases, on its consolidated balance sheets, (ii) will capitalize fewer legal costs related to the drafting and execution of its lease agreements, and (iii) may be required to increase its revenue and expense for the amount of real estate taxes and insurance paid by its tenants under triple-net leases. Although not yet finalized, the FASB has proposed an option for lessors to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which (i) the timing and pattern of revenue recognition are the same for the nonlease component and the related lease component and (ii) the combined single lease component would be classified as an operating lease. If finalized, the Company plans to elect this practical expedient. In addition, ASU 2016-02 provides a practical expedient that allows an entity to not reassess the following upon adoption (must be elected as a group): (i) whether an expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs. The Company plans to elect this practical expedient. The Company is still evaluating the complete impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position, results of operations and disclosures. Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 is intended to improve financial reporting by requiring timelier recognition of credit losses on loans and other financial instruments held by financial institutions and other organizations. The amendments in ASU 2016-13 eliminate the “probable” initial threshold for recognition of credit losses in current accounting guidance and, instead, reflect an entity’s current estimate of all expected credit losses over the life of the financial instrument. Previously, when credit losses were measured under current accounting guidance, an entity generally only considered past events and current conditions in measuring the incurred loss. The amendments in ASU 2016-13 broaden the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually. The use of forecasted information incorporates more timely information in the estimate of expected credit loss. ASU 2016-13 is effective for fiscal years, and interim periods within, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods within, beginning after December 15, 2018. A reporting entity is required to apply the amendments in ASU 2016-13 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Upon adoption of ASU 2016- 13, the Company is required to reassess its financing receivables, including direct finance leases and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations. The following ASUs have been issued, but not yet adopted, and the Company does not expect a material impact to its consolidated financial position, results of operations, cash flows, or disclosures upon adoption: • ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years, including interim periods within, beginning after December 15, 2018 and early adoption is permitted. For cash flow and net investment hedges existing at the date of adoption, a reporting entity must apply the amendments in ASU 2017-12 using the modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The presentation and disclosure amendments in ASU 2017-12 must be applied using a prospective approach. • ASU No. 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted as of the first interim period presented in any year following issuance. A reporting entity must apply the amendments in ASU 2016-16 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. • ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016- 01”). ASU 2016-01 is effective for fiscal years, and PART II interim periods within, beginning after December 15, recognition of changes in fair value of those investments 2017. Early adoption is permitted only for updates to during each reporting period in net income (loss). As certain disclosure requirements. A reporting entity a result, ASU 2016-01 eliminates the cost method of is required to apply the amendments in ASU 2016-01 accounting for equity securities that do not have readily using a modified retrospective approach by recording determinable fair values. Pursuant to the new guidance a cumulative-effect adjustment to equity as of the in ASU 2016-01, an entity may choose to measure equity beginning of the fiscal year of adoption. The core investments that do not have readily determinable fair principle of the amendments in ASU 2016-01 involves values at cost minus impairment, if any, plus or minus the measurement of equity investments (except those changes resulting from observable price changes accounted for under the equity method of accounting in orderly transactions for the identical or a similar or those that result in consolidation) at fair value and the investment of the same issuer. Note 3. Master Transactions and Cooperation Agreement with Brookdale (“Brookdale Transactions”) Master Transactions and Cooperation Agreement with Brookdale On November 1, 2017, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transaction”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, the Company’s exposure to Brookdale is expected to be significantly reduced. In connection with the overall transaction pursuant to the MTCA, the Company (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between the Company and the Lessee. Under the Amended Master Lease, the Company has the benefit of a guaranty from Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers. The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, the Company and Brookdale agreed to the following: • The Company has the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple- net lease with respect to such assets will convert to a cash flow lease (under which the Company will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty; • The Company has provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and • The Company will sell two triple-net assets to Brookdale or its affiliates for $35 million, which it anticipates completing during the first half of 2018. Also pursuant to the MTCA, the Company and Brookdale Brookdale of the Lessee’s obligations and, upon a change in agreed to the following: control, will have various additional protections under the MTCA and the Amended Master Lease including: • A security deposit (which increases if specified leverage thresholds are exceeded); • A termination right if certain financial covenants and net worth test are not satisfied; • Enhanced reporting requirements and related remedies; and • The right to market for sale the CCRC portfolio. • The Company, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). The Company completed its acquisition of the 80 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 81 PART II PART II for sales-type leases for lessors. ASU 2016-02 is effective use of forecasted information incorporates more timely for fiscal years, and interim periods within, beginning after information in the estimate of expected credit loss. ASU December 15, 2018. Early adoption is permitted. The 2016-13 is effective for fiscal years, and interim periods transition method required by ASU 2016-02 varies based within, beginning after December 15, 2019. Early adoption on the specific amendment being adopted. As a result of is permitted for fiscal years, and interim periods within, adopting ASU 2016-02, the Company: (i) will recognize all beginning after December 15, 2018. A reporting entity of its significant operating leases for which it is the lessee, is required to apply the amendments in ASU 2016-13 including corporate office leases and ground leases, on its using a modified retrospective approach by recording a consolidated balance sheets, (ii) will capitalize fewer legal cumulative-effect adjustment to equity as of the beginning costs related to the drafting and execution of its lease of the fiscal year of adoption. A prospective transition agreements, and (iii) may be required to increase its revenue approach is required for debt securities for which an and expense for the amount of real estate taxes and other-than-temporary impairment had been recognized insurance paid by its tenants under triple-net leases. before the effective date. Upon adoption of ASU 2016- Although not yet finalized, the FASB has proposed an option for lessors to elect a practical expedient allowing them to not separate lease and nonlease components in a contract for the purpose of revenue recognition and disclosure. This practical expedient is limited to circumstances in which (i) the timing and pattern of revenue recognition are the same for the nonlease component and the related lease component and (ii) the combined single lease component would be classified as an operating lease. If finalized, 13, the Company is required to reassess its financing receivables, including direct finance leases and loans receivable, and expects that application of ASU 2016-13 may result in the Company recognizing credit losses at an earlier date than would otherwise be recognized under current accounting guidance. The Company is evaluating the impact of the adoption of ASU 2016-13 on January 1, 2020 to its consolidated financial position and results of operations. the Company plans to elect this practical expedient. In The following ASUs have been issued, but not yet adopted, addition, ASU 2016-02 provides a practical expedient and the Company does not expect a material impact to its that allows an entity to not reassess the following upon consolidated financial position, results of operations, cash adoption (must be elected as a group): (i) whether an flows, or disclosures upon adoption: expired or existing contract contains a lease arrangement, (ii) lease classification related to expired or existing lease arrangements, or (iii) whether costs incurred on expired or existing leases qualify as initial direct costs. The Company plans to elect this practical expedient. The Company is still evaluating the complete impact of the adoption of ASU 2016-02 on January 1, 2019 to its consolidated financial position, results of operations and disclosures. • ASU No. 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). ASU 2017-12 is effective for fiscal years, including interim periods within, beginning after December 15, 2018 and early adoption is permitted. For cash flow and net investment hedges existing at the date of adoption, a reporting entity must apply the amendments in ASU 2017-12 using the modified retrospective approach Credit Losses. In June 2016, the FASB issued ASU by recording a cumulative-effect adjustment to equity No. 2016-13, Measurement of Credit Losses on Financial as of the beginning of the fiscal year of adoption. The Instruments (“ASU 2016-13”). ASU 2016-13 is intended to presentation and disclosure amendments in ASU improve financial reporting by requiring timelier recognition 2017-12 must be applied using a prospective approach. of credit losses on loans and other financial instruments • ASU No. 2016-16, Intra-Entity Transfers of Assets held by financial institutions and other organizations. The Other Than Inventory (“ASU 2016-16”). ASU 2016-16 amendments in ASU 2016-13 eliminate the “probable” is effective for fiscal years, and interim periods within, initial threshold for recognition of credit losses in current beginning after December 15, 2017. Early adoption is accounting guidance and, instead, reflect an entity’s permitted as of the first interim period presented in current estimate of all expected credit losses over the life any year following issuance. A reporting entity must of the financial instrument. Previously, when credit losses apply the amendments in ASU 2016-16 using a modified were measured under current accounting guidance, an retrospective approach by recording a cumulative-effect entity generally only considered past events and current adjustment to equity as of the beginning of the fiscal conditions in measuring the incurred loss. The amendments year of adoption. in ASU 2016-13 broaden the information that an entity must • ASU No. 2016-01, Recognition and Measurement of consider in developing its expected credit loss estimate Financial Assets and Financial Liabilities (“ASU 2016- for assets measured either collectively or individually. The 01”). ASU 2016-01 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted only for updates to certain disclosure requirements. A reporting entity is required to apply the amendments in ASU 2016-01 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The core principle of the amendments in ASU 2016-01 involves the measurement of equity investments (except those accounted for under the equity method of accounting or those that result in consolidation) at fair value and the recognition of changes in fair value of those investments during each reporting period in net income (loss). As a result, ASU 2016-01 eliminates the cost method of accounting for equity securities that do not have readily determinable fair values. Pursuant to the new guidance in ASU 2016-01, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Note 3. Master Transactions and Cooperation Agreement with Brookdale (“Brookdale Transactions”) Master Transactions and Cooperation Agreement with Brookdale On November 1, 2017, the Company and Brookdale Senior Living Inc. (“Brookdale”) entered into a Master Transactions and Cooperation Agreement (the “MTCA”) to provide the Company with the ability to significantly reduce its concentration of assets leased to and/or managed by Brookdale (the “Brookdale Transaction”). Through a series of dispositions and transitions of assets currently leased to and/or managed by Brookdale, as contemplated by the MTCA and further described below, the Company’s exposure to Brookdale is expected to be significantly reduced. In connection with the overall transaction pursuant to the MTCA, the Company (through certain of its subsidiaries), and Brookdale (through certain of its subsidiaries) (the “Lessee”) entered into an Amended and Restated Master Lease and Security Agreement (the “Amended Master Lease”), which amended and restated the then-existing triple-net leases between the parties for 78 assets (before giving effect to the contemplated sale or transition of 34 assets discussed below), which account for primarily all of the assets subject to triple-net leases between the Company and the Lessee. Under the Amended Master Lease, the Company has the benefit of a guaranty from Brookdale of the Lessee’s obligations and, upon a change in control, will have various additional protections under the MTCA and the Amended Master Lease including: • A security deposit (which increases if specified leverage thresholds are exceeded); • A termination right if certain financial covenants and net worth test are not satisfied; • Enhanced reporting requirements and related remedies; and • The right to market for sale the CCRC portfolio. Future changes in control of Brookdale are permitted pursuant to the Amended Master Lease, subject to certain conditions, including the purchaser either meeting experience requirements or retaining a majority of Brookdale’s principal officers. The Amended Master Lease preserves the renewal terms and, with certain exceptions, the rents under the previously existing triple-net leases. In addition, the Company and Brookdale agreed to the following: • The Company has the right to sell, or transition to other operators, 32 triple-net assets. If such sale or transition does not occur within one year, the triple- net lease with respect to such assets will convert to a cash flow lease (under which the Company will bear the risks and rewards of operating the assets) with a term of two years, provided that the Company has the right to terminate the cash flow lease at any time during the term without penalty; • The Company has provided an aggregate $5 million annual reduction in rent on three assets, effective January 1, 2018; and • The Company will sell two triple-net assets to Brookdale or its affiliates for $35 million, which it anticipates completing during the first half of 2018. Also pursuant to the MTCA, the Company and Brookdale agreed to the following: • The Company, which owned 90% of the interests in its RIDEA I and RIDEA III joint ventures with Brookdale at the time the MTCA was executed, agreed to purchase Brookdale’s 10% noncontrolling interest in each joint venture for an aggregate purchase price of $95 million. These joint ventures collectively own and operate 58 independent living, assisted living, memory care and/or skilled nursing facilities (the “RIDEA Facilities”). The Company completed its acquisition of the 80 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 81 PART II RIDEA III noncontrolling interest in December 2017 and anticipates completing its acquisition of the RIDEA I noncontrolling interest during the first half of 2018; • The Company has the right to sell, or transition to other managers, 36 of the RIDEA Facilities and terminate related management agreements with an affiliate of Brookdale without penalty. If the related management agreements are not terminated within one year, the base management fee (5% of gross revenues) increases by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues; • The Company will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million, one of which was sold in January 2018 for $27 million. The Company anticipates completing the sale of the remaining three RIDEA Facilities during the first half of 2018; • A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance- based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination rights), and two other existing facilities managed in separate RIDEA structures; and • The Company has the right to sell, to certain permitted transferees, its 49% ownership interest in joint ventures that own and operate a portfolio of continuing care retirement communities and in which Brookdale owns the other 51% interest (the “CCRC JV”), subject to certain conditions and a right of first offer in favor of Brookdale. Brookdale will have a corresponding right to sell its 51% interest in the CCRC JV to certain permitted transferees, subject to certain conditions, a right of first offer and a right to terminate management agreements following such sale of Brookdale’s interest, each in favor of HCP. Following a change in control of Brookdale, the Company will have the right to initiate a sale of the CCRC portfolio, subject to certain rights of first offer and first refusal in favor of Brookdale. Fair Value Measurement Techniques and Quantitative Information The Company performed a fair value assessment of each of the MTCA components that provided measurable economic benefit or detriment to the Company. Each fair value calculation is based on an income or market approach and relies on historical and forecasted EBITDAR (defined as earnings before interest, taxes, depreciation, amortization and rent) and revenue, as well as market data, including, but not limited to, a discount rate of 12%, a management fee rate of 5% of revenue, EBITDAR growth rates ranging from zero to 3%, and real estate capitalization rates ranging from 6% to 7%. All assumptions are supported by independent market data and considered to be Level 2 measurements within the fair value hierarchy. As a result of the assessment, the Company recognized a $20 million net reduction of rental and related revenues related to the right to terminate leases for 32 triple-net assets and the write-off of unamortized lease intangible assets related to those same 32 triple-net assets. Additionally, the Company recognized $35 million of operating expense related to the right to terminate management agreements for 36 SHOP assets. Note 4. Other Real Estate Property Investments 2017 Real Estate Acquisitions The following table summarizes real estate acquisitions for the year ended December 31, 2017 (in thousands): Segment SHOP Life science Medical office Consideration Assets Acquired Cash Paid $ 44,258 315,255 201,240 $ 560,753 Net Liabilities Assumed $ 797 3,524 1,104 $5,425 Real Estate $ 37,940 305,760 184,115 $527,815 Net Intangibles $ 7,115 13,019 18,229 $38,363 2016 Real Estate Acquisitions The following table summarizes real estate acquisitions for the year ended December 31, 2016 (in thousands): (1) Revenues and earnings since the acquisition dates, as well as the supplementary pro forma information, assuming these acquisitions occurred as of the beginning of the prior periods, were not material. Construction, Tenant and Other Capital Improvements The following table summarizes the Company’s expenditures for construction, tenant and other capital improvements Segment Senior housing triple-net SHOP Life science Medical office Other non-reportable segments (in thousands): Segment Senior housing triple-net SHOP Life science Medical office Other PART II Net $ 5,687 13,351 1,600 5,596 1,313 Consideration Assets Acquired(1) Cash Paid/ Net Debt Liabilities Settled Assumed Real Estate Intangibles $ 76,362 113,971 49,000 209,920 17,909 $ 1,200 76,931 4,854 — — $ 71,875 177,551 47,400 209,178 16,596 $467,162 $82,985 $522,600 $27,547 Year Ended December 31, 2017 2016 2015 $ 32,343 $ 49,109 $ 53,980 49,473 240,901 148,926 135 74,158 200,122 128,308 7,203 77,425 122,319 131,021 37 $471,778 $458,900 $384,782 Note 5. Discontinued Operations and Dispositions of Real Estate Discontinued Operations - Quality Care Properties, Inc. Quality Care Properties, Inc. On October 31, 2016, the Company completed the spin-off (the “Spin-Off”) of its subsidiary, Quality Care Properties, Inc. (“QCP”) (NYSE: QCP). The Spin-Off assets included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) DFL investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self- managed and self-administrated REIT. As a result of the Spin-Off, the operations of QCP are now classified as discontinued operations for the years ended December 31, 2016 and 2015. On October 17, 2016, subsidiaries of QCP issued rate of 8.125% per annum, payable semiannually. From October 17, 2016 until the completion of the Spin-Off, QCP (a then wholly-owned subsidiary of HCP) incurred $2 million in interest expense. In addition, immediately prior to the effectiveness of the Spin-Off, subsidiaries of QCP received $1.0 billion of proceeds from their borrowings under a senior secured term loan, bearing interest at a rate at QCP’s option of either: (i) LIBOR plus 5.25%, subject to a 1% floor or (ii) a base rate specified in the first lien credit and guaranty agreement plus 4.25%, bringing the total gross proceeds raised by QCP and its subsidiaries under those financings to $1.75 billion. In connection with the consummation of the Spin-Off, QCP and its subsidiaries transferred $1.69 billion in cash and 94 million shares of QCP common stock to HCP and certain of its other subsidiaries, and HCP and its applicable subsidiaries transferred the assets comprising $750 million in aggregate principal amount of senior secured the QCP portfolio to QCP and its subsidiaries. HCP then notes due 2023 (the “QCP Notes”), the gross proceeds of distributed substantially all of the outstanding shares of which were deposited in escrow until they were released QCP common stock to its stockholders, based on the in connection with the consummation of the Spin-Off distribution ratio of one share of QCP common stock on October 31, 2016. The QCP Notes bear interest at a for every five shares of HCP common stock held by HCP 82 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 83 RIDEA III noncontrolling interest in December 2017 and Brookdale. Brookdale will have a corresponding right to anticipates completing its acquisition of the RIDEA I sell its 51% interest in the CCRC JV to certain permitted noncontrolling interest during the first half of 2018; transferees, subject to certain conditions, a right of first • The Company has the right to sell, or transition to other offer and a right to terminate management agreements managers, 36 of the RIDEA Facilities and terminate following such sale of Brookdale’s interest, each in favor related management agreements with an affiliate of of HCP. Following a change in control of Brookdale, the Brookdale without penalty. If the related management Company will have the right to initiate a sale of the CCRC agreements are not terminated within one year, the portfolio, subject to certain rights of first offer and first base management fee (5% of gross revenues) increases refusal in favor of Brookdale. by 1% of gross revenues per year over the following two years to a maximum of 7% of gross revenues; • The Company will sell four of the RIDEA Facilities to Brookdale or its affiliates for $239 million, one of which was sold in January 2018 for $27 million. The Company anticipates completing the sale of the remaining three RIDEA Facilities during the first half of 2018; • A Brookdale affiliate continues to manage the remaining 18 RIDEA Facilities pursuant to amended and restated management agreements, which provide for extended terms on select assets, modified performance hurdles for extensions and incentive fees, and modified termination rights (including stricter performance- based termination rights, a staggered right to terminate seven agreements over a 10 year period beginning in 2021, and a right to terminate at will upon payment of a termination fee, in lieu of sale-related termination Fair Value Measurement Techniques and Quantitative Information The Company performed a fair value assessment of each of the MTCA components that provided measurable economic benefit or detriment to the Company. Each fair value calculation is based on an income or market approach and relies on historical and forecasted EBITDAR (defined as earnings before interest, taxes, depreciation, amortization and rent) and revenue, as well as market data, including, but not limited to, a discount rate of 12%, a management fee rate of 5% of revenue, EBITDAR growth rates ranging from zero to 3%, and real estate capitalization rates ranging from 6% to 7%. All assumptions are supported by independent market data and considered to be Level 2 measurements within the fair value hierarchy. rights), and two other existing facilities managed in As a result of the assessment, the Company recognized separate RIDEA structures; and a $20 million net reduction of rental and related revenues • The Company has the right to sell, to certain permitted related to the right to terminate leases for 32 triple-net transferees, its 49% ownership interest in joint ventures assets and the write-off of unamortized lease intangible that own and operate a portfolio of continuing care assets related to those same 32 triple-net assets. retirement communities and in which Brookdale owns Additionally, the Company recognized $35 million of the other 51% interest (the “CCRC JV”), subject to operating expense related to the right to terminate certain conditions and a right of first offer in favor of management agreements for 36 SHOP assets. Note 4. Other Real Estate Property Investments 2017 Real Estate Acquisitions The following table summarizes real estate acquisitions for the year ended December 31, 2017 (in thousands): Segment SHOP Life science Medical office Consideration Assets Acquired Net Cash Paid Liabilities Assumed Real Net Estate Intangibles $ 44,258 315,255 201,240 $ 560,753 $ 797 $ 37,940 3,524 1,104 305,760 184,115 $5,425 $527,815 $ 7,115 13,019 18,229 $38,363 PART II PART II 2016 Real Estate Acquisitions The following table summarizes real estate acquisitions for the year ended December 31, 2016 (in thousands): Segment Senior housing triple-net SHOP Life science Medical office Other non-reportable segments Consideration Assets Acquired(1) Cash Paid/ Debt Settled $ 76,362 113,971 49,000 209,920 17,909 $467,162 Net Liabilities Assumed $ 1,200 76,931 — 4,854 — $82,985 Real Estate $ 71,875 177,551 47,400 209,178 16,596 $522,600 Net Intangibles $ 5,687 13,351 1,600 5,596 1,313 $27,547 (1) Revenues and earnings since the acquisition dates, as well as the supplementary pro forma information, assuming these acquisitions occurred as of the beginning of the prior periods, were not material. Construction, Tenant and Other Capital Improvements The following table summarizes the Company’s expenditures for construction, tenant and other capital improvements (in thousands): Segment Senior housing triple-net SHOP Life science Medical office Other Year Ended December 31, 2017 $ 32,343 49,473 240,901 148,926 135 $471,778 2016 $ 49,109 74,158 200,122 128,308 7,203 $458,900 2015 $ 53,980 77,425 122,319 131,021 37 $384,782 Discontinued Operations - Quality Care Properties, Inc. Quality Care Properties, Inc. On October 31, 2016, the Company completed the spin-off (the “Spin-Off”) of its subsidiary, Quality Care Properties, Inc. (“QCP”) (NYSE: QCP). The Spin-Off assets included 338 properties, primarily comprised of the HCR ManorCare, Inc. (“HCRMC”) DFL investments and an equity investment in HCRMC. QCP is an independent, publicly-traded, self- managed and self-administrated REIT. As a result of the Spin-Off, the operations of QCP are now classified as discontinued operations for the years ended December 31, 2016 and 2015. Note 5. Discontinued Operations and Dispositions of Real Estate rate of 8.125% per annum, payable semiannually. From October 17, 2016 until the completion of the Spin-Off, QCP (a then wholly-owned subsidiary of HCP) incurred $2 million in interest expense. In addition, immediately prior to the effectiveness of the Spin-Off, subsidiaries of QCP received $1.0 billion of proceeds from their borrowings under a senior secured term loan, bearing interest at a rate at QCP’s option of either: (i) LIBOR plus 5.25%, subject to a 1% floor or (ii) a base rate specified in the first lien credit and guaranty agreement plus 4.25%, bringing the total gross proceeds raised by QCP and its subsidiaries under those financings to $1.75 billion. In connection with the consummation of the Spin-Off, QCP and its subsidiaries transferred $1.69 billion in cash and 94 million shares of QCP common stock to HCP and certain of its other subsidiaries, and HCP and its applicable subsidiaries transferred the assets comprising the QCP portfolio to QCP and its subsidiaries. HCP then distributed substantially all of the outstanding shares of QCP common stock to its stockholders, based on the distribution ratio of one share of QCP common stock for every five shares of HCP common stock held by HCP On October 17, 2016, subsidiaries of QCP issued $750 million in aggregate principal amount of senior secured notes due 2023 (the “QCP Notes”), the gross proceeds of which were deposited in escrow until they were released in connection with the consummation of the Spin-Off on October 31, 2016. The QCP Notes bear interest at a 82 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 83 PART II PART II stockholders as of the October 24, 2016 record date for the distribution. The Company recorded the distribution of the assets and liabilities of QCP from its consolidated balance sheet on a historical cost basis as a dividend from stockholders’ equity of $3.5 billion, and zero gain or loss was recognized. The Company primarily used the $1.69 billion proceeds of the cash distribution it received from QCP upon consummation of the Spin-Off to pay down certain of the Company’s existing debt obligations. The Company entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) with QCP in connection with the Spin-Off. The Separation and Distribution Agreement divides and allocates the assets and liabilities of the Company prior to the Spin-Off between QCP and HCP, governs the rights and obligations of the parties regarding the Spin-Off, and contains other key provisions relating to the separation of QCP’s business from HCP. 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 agreed to provide certain administrative and support services to QCP on a transitional basis for established fees. The TSA terminated on October 31, 2017. From October 31, 2016 through June 2017, HCP was the sole lender to QCP of an unsecured revolving credit facility (the “Unsecured Revolving Credit Facility”) which had a total commitment of $100 million at inception. No amounts were drawn on the Unsecured Revolving Credit Facility and the total commitment was reduced to zero at June 30, 2017. The results of discontinued operations through October 31, 2016, the Spin-Off date, are included in the consolidated results for the years ended December 31, 2016 and 2015. Summarized financial information for discontinued operations for the years ended December 31, 2016 and 2015 is as follows (in thousands): Revenues: Rental and related revenues Tenant recoveries Income from direct financing leases Total revenues Costs and expenses: Depreciation and amortization Operating General and administrative Transaction costs Impairments Other income (expense), net Income (loss) before income taxes and income from impairments of equity method investments Income tax benefit (expense) Income from equity method investment Impairments of equity method investment Total discontinued operations Year Ended December 31, 2015 2016 $ 22,971 1,233 384,752 408,956 $ 27,651 1,464 572,835 601,950 (4,892) (3,367) (67) (86,765) — 71 (5,880) (3,697) (57) — (1,295,504) 70 313,936 (48,181) — — $265,755 (703,118) (796) 50,723 (45,895) $ (699,086) During the fourth quarter of 2016, using proceeds from the Spin-Off, the Company repaid $500 million of 6.0% senior unsecured notes that were due to mature in January 2017, $600 million of 6.7% senior unsecured notes that were due to mature in January 2018 and $108 million of mortgage debt; incurring aggregate loss on debt extinguishments of $46 million. HCR ManorCare, Inc. Discontinued operations is primarily comprised of QCP’s HCRMC DFL investments and equity investment in HCRMC. During the years ended December 31, 2016 and 2015, the Company recognized DFL income of $385 million and $573 million, respectively, and received cash payments of $385 million and $483 million, respectively, from the HCRMC DFL investments. The carrying value of the HCRMC DFL investments was $5.2 billion at December 31, 2015. The following summarizes the significant transactions and impairments related to HCRMC: 2015 During the three months ended March 31, 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that were under a master lease. During the year ended December 31, 2015, the Company completed sales of 22 non-strategic HCRMC facilities for $219 million. During the year ended December 31, 2016, the Company sold an of the future lease payments effective April 1, 2015 under additional 11 facilities for $62 million, bringing the total the HCRMC Amended Master Lease discounted at the facilities sold to 33 at the time of the Spin-Off. original DFL investments’ effective lease rate. Additionally, On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the master lease (the “HCRMC Lease Amendment”) effective April 1, 2015 (the “HCRMC Amended Master Lease”). The HCRMC Lease Amendment reduced initial annual rent by a net $68 million and reset the minimum rent escalation to 3.0% for each lease year through the expiration of the initial term. The initial term was extended five years to an average of 16 years. As consideration for the rent reduction, the HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. Through December 31, 2015, HCRMC and HCP completed seven of the nine facility purchases for $184 million. Through Spin-Off, HCRMC and HCP completed the remaining two facility purchases for $91 million, bringing the nine facility purchases to an aggregate $275 million, the proceeds of which were used to settle a portion of the DRO discussed above. Company received a Deferred Rent Obligation (“DRO”) from As of September 30, 2015, the Company concluded that its the Lessee equal to an aggregate amount of $525 million. equity investment in HCRMC was other-than-temporarily As a result of the HCRMC Lease Amendment, the Company impaired and recorded an impairment charge of $27 million. recorded an impairment charge of $478 million related The impairment charge reduced the carrying amount of the to its HCRMC DFL investments. The impairment charge Company’s equity investment in HCRMC from $48 million to reduced the carrying value of the HCRMC DFL investments its fair value of $21 million. from $6.6 billion to $6.1 billion, based on the present value The fair value of the Company’s equity investment in HCRMC was based on a discounted cash flow valuation model and inputs were considered to be Level 3 measurements within the fair value hierarchy. The following is a summary of the quantitative information about fair value measurements for the impairment related to the Company’s equity ownership interest in HCRMC using a discounted cash flow valuation model: Description of Input(s) to the Valuation Range of revenue growth rates(1) Range of occupancy growth rates(1) Range of operating expense growth rates(1) Discount rate Range of earnings multiples Valuation Inputs (1.8%)-3.0% (0.8%)-0.2% (1.1%)-3.1% 15.20% 6.0x-7.0x (1) For growth rates, the value ranges provided represent the highest and lowest input utilized in the valuation model for any forecasted period. As part of the Company’s fourth quarter 2015 review decline in HCRMC’s fixed charge coverage ratio in the process, including its internal rating evaluation, it assessed fourth quarter of 2015, combined with a lower growth the collectibility of all contractual rent payments under outlook for the post-acute/skilled nursing business, the the HCRMC Amended Master Lease, as discussed below Company determined that it was probable that its HCRMC and assigned an internal rating of “Watch List” as of DFL investments were impaired. In the fourth quarter of December 31, 2015. Further, the Company placed the 2015, the Company recorded an allowance for DFL losses HCRMC DFL investments on nonaccrual status and began (impairment charge) of $817 million, reducing the carrying utilizing a cash basis method of accounting in accordance amount of its HCRMC DFL investments from $6.0 billion to with its policies (see Note 2). As a result of assigning an internal rating of “Watch List” to its HCRMC DFL investments during the quarterly review process, the Company further evaluated the carrying amount of its HCRMC DFL investments and determined that it was probable that its HCRMC DFL investments were impaired. As a result of the significant $5.2 billion. The allowance for credit losses was determined as the present value of expected future (i) in-place lease payments under the HCRMC Amended Master Lease and (ii) estimated market rate lease payments, each discounted at the original HCRMC DFL investments’ effective lease rate. Impairments related to an allowance for credit losses are included in impairments, net. 84 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 85 PART II stockholders as of the October 24, 2016 record date for of the parties regarding the Spin-Off, and contains other the distribution. The Company recorded the distribution key provisions relating to the separation of QCP’s business of the assets and liabilities of QCP from its consolidated from HCP. balance sheet on a historical cost basis as a dividend from stockholders’ equity of $3.5 billion, and zero gain or loss was recognized. The Company primarily used the $1.69 billion proceeds of the cash distribution it received from QCP upon consummation of the Spin-Off to pay down certain of the Company’s existing debt obligations. The Company entered into a Separation and Distribution Agreement (the “Separation and Distribution Agreement”) with QCP in connection with the Spin-Off. The Separation and Distribution Agreement divides and allocates the assets and liabilities of the Company prior to the Spin-Off between QCP and HCP, governs the rights and obligations 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 agreed to provide certain administrative and support services to QCP on a transitional basis for established fees. The TSA terminated on October 31, 2017. From October 31, 2016 through June 2017, HCP was the sole lender to QCP of an unsecured revolving credit facility (the “Unsecured Revolving Credit Facility”) which had a total commitment of $100 million at inception. No amounts were drawn on the Unsecured Revolving Credit Facility and the total commitment was reduced to zero at June 30, 2017. The results of discontinued operations through October 31, 2016, the Spin-Off date, are included in the consolidated results for the years ended December 31, 2016 and 2015. Summarized financial information for discontinued operations for the years ended December 31, 2016 and 2015 is as follows (in thousands): Revenues: Rental and related revenues Tenant recoveries Income from direct financing leases Total revenues Costs and expenses: Depreciation and amortization Operating General and administrative Transaction costs Impairments Other income (expense), net Income (loss) before income taxes and income from impairments of equity method investments Income tax benefit (expense) Income from equity method investment Impairments of equity method investment Total discontinued operations Year Ended December 31, 2016 2015 $ 22,971 $ 1,233 384,752 408,956 (4,892) (3,367) (67) (86,765) — 71 — — 313,936 (48,181) 27,651 1,464 572,835 601,950 (5,880) (3,697) (57) — 70 (1,295,504) (703,118) (796) 50,723 (45,895) $265,755 $ (699,086) During the fourth quarter of 2016, using proceeds from the $385 million and $483 million, respectively, from the HCRMC Spin-Off, the Company repaid $500 million of 6.0% senior DFL investments. The carrying value of the HCRMC DFL unsecured notes that were due to mature in January 2017, investments was $5.2 billion at December 31, 2015. $600 million of 6.7% senior unsecured notes that were due to mature in January 2018 and $108 million of mortgage debt; incurring aggregate loss on debt extinguishments of The following summarizes the significant transactions and impairments related to HCRMC: $46 million. HCR ManorCare, Inc. Discontinued operations is primarily comprised of QCP’s HCRMC DFL investments and equity investment in HCRMC. During the years ended December 31, 2016 and 2015, the Company recognized DFL income of $385 million and $573 million, respectively, and received cash payments of 2015 During the three months ended March 31, 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that were under a master lease. During the year ended December 31, 2015, the Company completed sales of 22 non-strategic HCRMC facilities for $219 million. During the year ended December 31, 2016, the Company sold an additional 11 facilities for $62 million, bringing the total facilities sold to 33 at the time of the Spin-Off. On March 29, 2015, certain subsidiaries of the Company entered into an amendment to the master lease (the “HCRMC Lease Amendment”) effective April 1, 2015 (the “HCRMC Amended Master Lease”). The HCRMC Lease Amendment reduced initial annual rent by a net $68 million and reset the minimum rent escalation to 3.0% for each lease year through the expiration of the initial term. The initial term was extended five years to an average of 16 years. As consideration for the rent reduction, the Company received a Deferred Rent Obligation (“DRO”) from the Lessee equal to an aggregate amount of $525 million. As a result of the HCRMC Lease Amendment, the Company recorded an impairment charge of $478 million related to its HCRMC DFL investments. The impairment charge reduced the carrying value of the HCRMC DFL investments from $6.6 billion to $6.1 billion, based on the present value PART II of the future lease payments effective April 1, 2015 under the HCRMC Amended Master Lease discounted at the original DFL investments’ effective lease rate. Additionally, HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. Through December 31, 2015, HCRMC and HCP completed seven of the nine facility purchases for $184 million. Through Spin-Off, HCRMC and HCP completed the remaining two facility purchases for $91 million, bringing the nine facility purchases to an aggregate $275 million, the proceeds of which were used to settle a portion of the DRO discussed above. As of September 30, 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $27 million. The impairment charge reduced the carrying amount of the Company’s equity investment in HCRMC from $48 million to its fair value of $21 million. The fair value of the Company’s equity investment in HCRMC was based on a discounted cash flow valuation model and inputs were considered to be Level 3 measurements within the fair value hierarchy. The following is a summary of the quantitative information about fair value measurements for the impairment related to the Company’s equity ownership interest in HCRMC using a discounted cash flow valuation model: Description of Input(s) to the Valuation Range of revenue growth rates(1) Range of occupancy growth rates(1) Range of operating expense growth rates(1) Discount rate Range of earnings multiples Valuation Inputs (1.8%)-3.0% (0.8%)-0.2% (1.1%)-3.1% 15.20% 6.0x-7.0x (1) For growth rates, the value ranges provided represent the highest and lowest input utilized in the valuation model for any forecasted period. As part of the Company’s fourth quarter 2015 review process, including its internal rating evaluation, it assessed the collectibility of all contractual rent payments under the HCRMC Amended Master Lease, as discussed below and assigned an internal rating of “Watch List” as of December 31, 2015. Further, the Company placed the HCRMC DFL investments on nonaccrual status and began utilizing a cash basis method of accounting in accordance with its policies (see Note 2). As a result of assigning an internal rating of “Watch List” to its HCRMC DFL investments during the quarterly review process, the Company further evaluated the carrying amount of its HCRMC DFL investments and determined that it was probable that its HCRMC DFL investments were impaired. As a result of the significant decline in HCRMC’s fixed charge coverage ratio in the fourth quarter of 2015, combined with a lower growth outlook for the post-acute/skilled nursing business, the Company determined that it was probable that its HCRMC DFL investments were impaired. In the fourth quarter of 2015, the Company recorded an allowance for DFL losses (impairment charge) of $817 million, reducing the carrying amount of its HCRMC DFL investments from $6.0 billion to $5.2 billion. The allowance for credit losses was determined as the present value of expected future (i) in-place lease payments under the HCRMC Amended Master Lease and (ii) estimated market rate lease payments, each discounted at the original HCRMC DFL investments’ effective lease rate. Impairments related to an allowance for credit losses are included in impairments, net. 84 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 85 PART II PART II The market rate lease payments were based on an income approach utilizing a discounted cash flow valuation model. The significant inputs to this valuation model included forecasted EBITDAR, rent coverage ratios and real estate capitalization rates and are summarized as follows (dollars in thousands): Description of Input(s) to the Valuation Range of EBITDAR Range of rent coverage ratio Range of real estate capitalization rate In December 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $19 million, reducing its carrying value to zero. Beginning in January 2016, income was recognized only if cash distributions were received from HCRMC. 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. 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. The Company satisfied the five year holding period requirement in April 2016. This legislation was not extended to certain states, which maintain a 10 year requirement. During the year ended December 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of $47 million, representing its estimated exposure to state built-in gain tax. Dispositions of Real Estate Held for Sale At December 31, 2017, four life science facilities, two senior housing triple-net facilities and six SHOP facilities were classified as held for sale, with an aggregate carrying value of $417 million, primarily comprised of real estate assets of $393 million, net of accumulated depreciation of $93 million. At December 31, 2016, 64 senior housing triple- net 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, net of accumulated depreciation of $193 million. Liabilities of assets held for sale is primarily comprised of intangible and other liabilities at both December 31, 2017 and 2016. Senior Housing DFL Valuation Inputs $75,000-$85,000 1.05x-1.15x 6.25%-7.25% Post-acute/ Skilled nursing DFL Valuation Inputs $385,000-$435,000 1.25x-1.35x 7.50%-8.50% RIDEA II Sale Transaction 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 (“CPA”) (“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 loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and 40% ownership 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 currently recognized and accounted for as equity method investments. On November 1, 2017, the Company entered into a definitive agreement with an investor group led by CPA to sell its remaining 40% ownership interest in RIDEA II for $91 million. The Company expects the transaction to close in the first half of 2018. CPA has also agreed to cause refinancing of the Company’s $242 million loan receivables from RIDEA II within one year following the close of the transaction. 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. In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with 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. Additionally, during the year ended December 31, 2017, the Company sold the following: (i) a life science land parcel in San Diego, California for $27 million, (ii) a life science building in San Diego, California for $5 million, (iii) four senior housing (iii) seven senior housing triple-net facilities for $88 million, triple-net facilities for $27 million, (iv) five SHOP facilities for (iv) three MOBs for $20 million and (v) three SHOP facilities $43 million and (v) four medical office buildings (“MOBs”) for for $41 million. $15 million, and recorded a net gain on sale of $41 million. 2016 Dispositions 2015 Dispositions During the year ended December 31, 2015, the Company During the year ended December 31, 2016, the Company sold the following: (i) nine senior housing triple-net facilities sold the following: (i) a portfolio of five post-acute/skilled for $60 million resulting from Brookdale’s exercise of its nursing facilities and two senior housing triple-net facilities purchase option received as part of a transaction with for $130 million, (ii) five life science facilities for $386 million, Brookdale in 2014, (ii) two parcels of land in its life science segment for $51 million and (iii) a MOB for $400,000. Note 6. Net Investment in Direct Financing Leases The components of net investment in DFLs consisted of the following (dollars in thousands): Minimum lease payments receivable Estimated residual value Less unearned income Net investment in direct financing leases Properties subject to direct financing leases Certain DFLs contain provisions that allow the tenants to Certain leases also permit the Company to require the elect to purchase the properties during or at the end of the tenants to purchase the properties at the end of the lease terms for the aggregate initial investment amount lease terms. plus adjustments, if any, as defined in the lease agreements. The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2017 December 31, 2017 2016 $1,062,452 $1,108,237 504,457 (852,557) 539,656 (895,304) $ 714,352 $ 752,589 29 30 Amount $ 102,983 68,204 62,781 63,175 57,762 707,547 $1,062,452 Direct Financing Lease Internal Ratings The following table summarizes the Company’s internal ratings for net investment in DFLs at December 31, 2017 (dollars Segment Senior housing triple-net Other non-reportable segments Internal Ratings Carrying Percentage of Performing Watch Workout Amount DFL Portfolio DFLs List DFLs DFLs $629,748 84,604 $714,352 88 12 100 $273,886 $355,862 84,604 — $358,490 $355,862 $— — $— Beginning September 30, 2013, the Company placed a Company re-assessed the DFL Portfolio for impairment on 14 property senior housing DFL (the “DFL Portfolio”) December 31, 2017 and determined that the DFL Portfolio on nonaccrual status and classified the DFL Portfolio on was not impaired based on its belief that: (i) it was not “Watch List” status. The Company determined that the probable that it will not collect all of the rental payments collection of all rental payments was and continues to be under the terms of the lease; and (ii) the fair value of the no longer reasonably assured; therefore, rental revenue for underlying collateral exceeded the DFL Portfolio’s carrying the DFL Portfolio has been recognized on a cash basis. The amount. The fair value of the DFL Portfolio was estimated (in thousands): Year 2018 2019 2020 2021 2022 Thereafter in thousands): 86 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 87 PART II PART II in San Diego, California for $5 million, (iii) four senior housing triple-net facilities for $27 million, (iv) five SHOP facilities for $43 million and (v) four medical office buildings (“MOBs”) for $15 million, and recorded a net gain on sale of $41 million. 2016 Dispositions During the year ended December 31, 2016, the Company sold the following: (i) a portfolio of five post-acute/skilled nursing facilities and two senior housing triple-net facilities for $130 million, (ii) five life science facilities for $386 million, (iii) seven senior housing triple-net facilities for $88 million, (iv) three MOBs for $20 million and (v) three SHOP facilities for $41 million. 2015 Dispositions During the year ended December 31, 2015, the Company sold the following: (i) nine senior housing triple-net facilities for $60 million resulting from Brookdale’s exercise of its purchase option received as part of a transaction with Brookdale in 2014, (ii) two parcels of land in its life science segment for $51 million and (iii) a MOB for $400,000. Note 6. Net Investment in Direct Financing Leases The components of net investment in DFLs consisted of the following (dollars in thousands): Minimum lease payments receivable Estimated residual value Less unearned income Net investment in direct financing leases Properties subject to direct financing leases December 31, 2017 $1,062,452 504,457 (852,557) $ 714,352 29 2016 $1,108,237 539,656 (895,304) $ 752,589 30 Certain DFLs contain provisions that allow the tenants to elect to purchase the properties during or at the end of the lease terms for the aggregate initial investment amount plus adjustments, if any, as defined in the lease agreements. Certain leases also permit the Company to require the tenants to purchase the properties at the end of the lease terms. The following table summarizes future minimum lease payments contractually due under DFLs at December 31, 2017 (in thousands): Year 2018 2019 2020 2021 2022 Thereafter Amount $ 102,983 68,204 62,781 63,175 57,762 707,547 $1,062,452 Direct Financing Lease Internal Ratings The following table summarizes the Company’s internal ratings for net investment in DFLs at December 31, 2017 (dollars in thousands): Internal Ratings The market rate lease payments were based on an income approach utilizing a discounted cash flow valuation model. The significant inputs to this valuation model included forecasted EBITDAR, rent coverage ratios and real estate capitalization rates and are summarized as follows (dollars in thousands): Description of Input(s) to the Valuation Range of EBITDAR Range of rent coverage ratio Range of real estate capitalization rate In December 2015, the Company concluded that its equity investment in HCRMC was other-than-temporarily impaired and recorded an impairment charge of $19 million, reducing its carrying value to zero. Beginning in January 2016, income was recognized only if cash distributions were received from HCRMC. 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. 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. The Company satisfied the five year holding period requirement in April 2016. This legislation was not extended to certain states, which maintain a 10 year requirement. During the year ended December 31, 2016, the Company determined that it may sell assets during the next five years and, therefore, recorded a deferred tax liability of $47 million, representing its estimated exposure to state built-in gain tax. Dispositions of Real Estate Held for Sale At December 31, 2017, four life science facilities, two senior housing triple-net facilities and six SHOP facilities were classified as held for sale, with an aggregate carrying value of $417 million, primarily comprised of real estate assets of $393 million, net of accumulated depreciation of $93 million. At December 31, 2016, 64 senior housing triple- net 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, net of accumulated depreciation of $193 million. Liabilities of assets held for sale is primarily comprised of intangible and other liabilities at both December 31, 2017 and 2016. Senior Housing Post-acute/ Skilled nursing DFL Valuation Inputs DFL Valuation Inputs $75,000-$85,000 $385,000-$435,000 1.05x-1.15x 6.25%-7.25% 1.25x-1.35x 7.50%-8.50% RIDEA II Sale Transaction 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 (“CPA”) (“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 loan receivables and retained an approximately 40% ownership interest in RIDEA II (the note receivable and 40% ownership 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 currently recognized and accounted for as equity method investments. On November 1, 2017, the Company entered into a definitive agreement with an investor group led by CPA to sell its remaining 40% ownership interest in RIDEA II for $91 million. The Company expects the transaction to close in the first half of 2018. CPA has also agreed to cause refinancing of the Company’s $242 million loan receivables from RIDEA II within one year following the close of the transaction. 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. In March 2017, the Company sold 64 senior housing triple-net assets, previously under triple-net leases with 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. Additionally, during the year ended December 31, 2017, the Company sold the following: (i) a life science land parcel in San Diego, California for $27 million, (ii) a life science building 86 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 87 Beginning September 30, 2013, the Company placed a 14 property senior housing DFL (the “DFL Portfolio”) on nonaccrual status and classified the DFL Portfolio on “Watch List” status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue for the DFL Portfolio has been recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on December 31, 2017 and determined that the DFL Portfolio was not impaired based on its belief that: (i) it was not probable that it will not collect all of the rental payments under the terms of the lease; and (ii) the fair value of the underlying collateral exceeded the DFL Portfolio’s carrying amount. The fair value of the DFL Portfolio was estimated Segment Senior housing triple-net Other non-reportable segments Carrying Amount $629,748 84,604 $714,352 Percentage of DFL Portfolio 88 12 100 Watch List DFLs $273,886 $355,862 — $358,490 $355,862 Workout DFLs $— — $— Performing DFLs 84,604 PART II PART II based on an income approach and utilizes inputs which are considered to be a Level 3 measurement within the fair value hierarchy. Inputs to this valuation model include real estate capitalization rates, industry growth rates, and operating margins, some of which influence the Company’s expectation of future cash flows from the DFL Portfolio and, accordingly, the fair value of its investment. During the years ended December 31, 2017, 2016 and 2015, the Company recognized DFL income of $13 million, $13 million and $15 million, respectively, and received cash payments of $18 million, $18 million and $20 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $356 million and $361 million at December 31, 2017 and 2016, respectively. Note 7. The following table summarizes the Company’s loans receivable (in thousands): Loans Receivable Mezzanine(1)(2) Other(3) Unamortized discounts, fees and costs(1) Allowance for loan losses 2017 Real Estate Secured $ Other Secured — $ 269,299 — 188,418 — (596) — (143,795) $188,418 $ 124,908 December 31, 2016 Real Estate Secured $ Other Secured — $615,188 — (3,593) — $196,359 $611,595 195,946 413 — Total $615,188 195,946 (3,180) — $807,954 Total $ 269,299 188,418 (596) (143,795) $ 313,326 (1) At December 31, 2016, included £282 million ($348 million) outstanding and £2 million ($3 million) of associated unamortized discounts, fees and costs both related to the HC-One Facility, which paid off in June 2017. (2) At December 31, 2017, the Company had £2 million ($3 million) remaining under its commitments to fund development projects and capital expenditures under its development projects in the United Kingdom (“U.K.”). In December 2017, the Company entered into a participating debt financing arrangement to fund a $115 million senior living development project, which remained unfunded at December 31, 2017. (3) At December 31, 2017 and 2016, included £123 million ($167 million) and £113 million ($140 million), respectively, outstanding primarily related to Maria Mallaband loans. The following table summarizes the Company’s internal ratings for loans receivable at December 31, 2017 (dollars in thousands): During the year ended December 31, 2017, the Company including default interest payments, according to the recognized $13 million in interest income related to loans contractual terms of the Mezzanine Loan. As such, as part secured by real estate. In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million). Other Secured Loans HC-One Facility of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million. The decline in fair value was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate In November 2014, the Company was the lead investor in Medicare plans in the post-acute/skilled nursing sector. The the financing for Formation Capital and Safanad’s acquisition calculation of the fair value was primarily based on an income of NHP, a company that owned nursing and residential approach and relies on forecasted EBITDAR and market care homes in the U.K. principally operated by HC-One and data, including, but not limited to, sales price per unit/bed, provided a loan facility (the “HC-One Facility”). In April 2015, rent coverage ratios, and real estate capitalization rates. All the Company converted £174 million of the HC-One valuation inputs are considered to be Level 2 measurements Facility into a sale-leaseback transaction for 36 nursing and within the fair value hierarchy. residential care homes located throughout the U.K. Through the year ended December 31, 2015, the Company received paydowns of £34 million ($52 million). On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan. Tandem Health Care Loan From July 2012 through May 2015, the Company funded, in aggregate, $257 million under a collateralized mezzanine loan facility (the “Mezzanine Loan”) to certain affiliates of Tandem Health Care (together with its affiliates, “Tandem”). The Mezzanine Loan matures in October 2018 and carries a weighted average interest rate of 11.5%. The fair value of the collateral supporting the Mezzanine Loan had included the value of an in-the-money purchase option (the “Purchase Option”) that is a term of a lease between Tandem and a lessor, which provided Tandem the right to buy the nine Leasehold Properties (as defined below) for a total of $82 million by January 4, 2018 (the “Purchase Option Expiration Date”). Additionally, on July 31, 2017, subsequent to its second quarter 2017 quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (the “Repurchase Agreement”) with the borrowers to provide an option to repay the Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”) by October 25, 2017, which date was subsequently extended to December 31, 2017 (the “Agreement Maturity Date”). As a result of entering into the Repurchase Agreement, the Company recorded an additional impairment charge and related allowance of $3 million during the quarter ended September 30, 2017 to write down the carrying value of the Mezzanine Loan to the Repayment Value and assigned the loan an internal rating of Workout. As part of the Repurchase Agreement, Tandem posted, in aggregate, $8 million of non-refundable deposits (the “Deposits”), which the Company would be entitled to retain (without any credit against the Mezzanine Loan) if Tandem failed to make interest payments on the $257 million par value of the Mezzanine Loan through the repayment date In addition to the Mezzanine Loan outstanding to the or the Agreement Maturity Date, as applicable, adjusted for Company, Tandem has outstanding to other lenders a any principal payments received. $257 million syndicated senior loan (the “Senior Loan”) that matures in July 2018. Tandem owns and operates 32 post-acute/skilled nursing facilities, in addition to operating nine leasehold interests (the “Leasehold Properties”), which, in total, represents 4,766 beds (collectively, the “Tandem Portfolio”) located primarily throughout Florida, Pennsylvania and Virginia. Tandem leases the entire Tandem Portfolio to certain affiliates of Consulate Health Care (together with its affiliates, “Consulate”) under a master lease. Consulate is facing operational and financial challenges and has failed to fully pay its contractual rent to Tandem since April 1, 2017. Tandem, which relies on contractual rent payments in order to service its interest payments to the Company under the Mezzanine Loan, failed to make its monthly interest payment thereunder on November 10, 2017. On November 17, 2017, the Company declared an event of default under the Mezzanine Loan and, as a result, the Repurchase Agreement became null and void and the Deposits were forfeited to the Company. Tandem During the quarter ended June 30, 2017, as a result of also failed to make its December 2017, January 2018 multiple events of default under Tandem’s master lease and February 2018 interest payments to the Company. with Consulate and operational struggles of Consulate, Tandem remains current on its interest payments under the the Company concluded that it was probable that it would Senior Loan. be unable to collect all interest and principal payments, (1) See Tandem Health Care Loan discussion below for additional information. Real Estate Secured Loans The following table summarizes the Company’s loans receivable secured by real estate at December 31, 2017 (dollars in thousands): Final Maturity Date Number of Loans 2018 2021 2023 1 2 1 4 Payment Terms monthly interest-only payments, accrues interest at 8.0% and secured by a senior housing facility in Pennsylvania aggregate monthly interest-only payments, accrues interest at 8.0% and 9.75% and secured by two senior housing facility in the U.K. monthly interest-only payments, accrues interest at 7.22% and secured by seven senior housing facilities in the U.K. Principal Amount(1) Carrying Amount $ 21,458 $ 21,597 22,706 24,001 142,820 $186,984 142,820 $188,418 (1) Represents future contractual principal payments to be received on loans receivable secured by real estate. 88 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 89 Investment Type Real estate secured Other secured Carrying Amount $188,418 124,908 $313,326 Percentage of Loan Portfolio 60 40 100 Performing Loans $188,418 19,908 $208,326 Workout Loans(1) — 105,000 $ — $105,000 Internal Ratings Watch List Loans $ — $ — PART II based on an income approach and utilizes inputs which the years ended December 31, 2017, 2016 and 2015, the are considered to be a Level 3 measurement within the Company recognized DFL income of $13 million, $13 million fair value hierarchy. Inputs to this valuation model include and $15 million, respectively, and received cash payments real estate capitalization rates, industry growth rates, and of $18 million, $18 million and $20 million, respectively, from operating margins, some of which influence the Company’s the DFL Portfolio. The carrying value of the DFL Portfolio expectation of future cash flows from the DFL Portfolio was $356 million and $361 million at December 31, 2017 and and, accordingly, the fair value of its investment. During 2016, respectively. Note 7. Loans Receivable The following table summarizes the Company’s loans receivable (in thousands): Mezzanine(1)(2) Other(3) Unamortized discounts, fees and costs(1) Allowance for loan losses Real Estate 2017 Other December 31, Real Estate 2016 Other Secured Secured Total Secured Secured Total $ — $ 269,299 $ 269,299 $ — $615,188 $615,188 188,418 — — (596) 188,418 195,946 (596) — (143,795) (143,795) 413 — (3,593) — — 195,946 (3,180) — $188,418 $ 124,908 $ 313,326 $196,359 $611,595 $807,954 (1) At December 31, 2016, included £282 million ($348 million) outstanding and £2 million ($3 million) of associated unamortized discounts, fees and costs both related to the HC-One Facility, which paid off in June 2017. (2) At December 31, 2017, the Company had £2 million ($3 million) remaining under its commitments to fund development projects and capital expenditures under its development projects in the United Kingdom (“U.K.”). In December 2017, the Company entered into a participating debt financing arrangement to fund a $115 million senior living development project, which remained unfunded at (3) At December 31, 2017 and 2016, included £123 million ($167 million) and £113 million ($140 million), respectively, outstanding primarily December 31, 2017. related to Maria Mallaband loans. The following table summarizes the Company’s internal ratings for loans receivable at December 31, 2017 (dollars in thousands): Investment Type Real estate secured Other secured Carrying Amount $188,418 124,908 $313,326 Percentage Internal Ratings of Loan Performing Watch List Workout Portfolio 60 40 100 Loans $188,418 19,908 $208,326 Loans Loans(1) $ — $ — — 105,000 $ — $105,000 The following table summarizes the Company’s loans receivable secured by real estate at December 31, 2017 (dollars (1) See Tandem Health Care Loan discussion below for additional information. Real Estate Secured Loans in thousands): Final Maturity Date Number of Loans Payment Terms Principal Carrying Amount(1) Amount 2018 2021 2023 monthly interest-only payments, accrues interest at 8.0% and 1 secured by a senior housing facility in Pennsylvania $ 21,458 $ 21,597 aggregate monthly interest-only payments, accrues interest at 8.0% and 9.75% and secured by two senior housing facility in monthly interest-only payments, accrues interest at 7.22% and secured by seven senior housing facilities in the U.K. the U.K. 2 1 4 22,706 24,001 142,820 142,820 $186,984 $188,418 (1) Represents future contractual principal payments to be received on loans receivable secured by real estate. During the year ended December 31, 2017, the Company recognized $13 million in interest income related to loans secured by real estate. In March 2017, the Company sold its investment in Four Seasons Health Care’s (“Four Seasons”) senior secured term loan at par plus accrued interest for £29 million ($35 million). Other Secured Loans HC-One Facility In November 2014, the Company was the lead investor in the financing for Formation Capital and Safanad’s acquisition of NHP, a company that owned nursing and residential care homes in the U.K. principally operated by HC-One and provided a loan facility (the “HC-One Facility”). In April 2015, the Company converted £174 million of the HC-One Facility into a sale-leaseback transaction for 36 nursing and residential care homes located throughout the U.K. Through the year ended December 31, 2015, the Company received paydowns of £34 million ($52 million). On June 30, 2017, the Company received £283 million ($367 million) from the repayment of its HC-One mezzanine loan. Tandem Health Care Loan From July 2012 through May 2015, the Company funded, in aggregate, $257 million under a collateralized mezzanine loan facility (the “Mezzanine Loan”) to certain affiliates of Tandem Health Care (together with its affiliates, “Tandem”). The Mezzanine Loan matures in October 2018 and carries a weighted average interest rate of 11.5%. The fair value of the collateral supporting the Mezzanine Loan had included the value of an in-the-money purchase option (the “Purchase Option”) that is a term of a lease between Tandem and a lessor, which provided Tandem the right to buy the nine Leasehold Properties (as defined below) for a total of $82 million by January 4, 2018 (the “Purchase Option Expiration Date”). In addition to the Mezzanine Loan outstanding to the Company, Tandem has outstanding to other lenders a $257 million syndicated senior loan (the “Senior Loan”) that matures in July 2018. Tandem owns and operates 32 post-acute/skilled nursing facilities, in addition to operating nine leasehold interests (the “Leasehold Properties”), which, in total, represents 4,766 beds (collectively, the “Tandem Portfolio”) located primarily throughout Florida, Pennsylvania and Virginia. Tandem leases the entire Tandem Portfolio to certain affiliates of Consulate Health Care (together with its affiliates, “Consulate”) under a master lease. During the quarter ended June 30, 2017, as a result of multiple events of default under Tandem’s master lease with Consulate and operational struggles of Consulate, the Company concluded that it was probable that it would be unable to collect all interest and principal payments, PART II including default interest payments, according to the contractual terms of the Mezzanine Loan. As such, as part of its quarterly review process, the Company recorded an impairment charge and related allowance of $57 million during the three months ended June 30, 2017, reducing the carrying value to $200 million. The decline in fair value was driven by a variety of factors, including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation of the fair value was primarily based on an income approach and relies on forecasted EBITDAR and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates. All valuation inputs are considered to be Level 2 measurements within the fair value hierarchy. Additionally, on July 31, 2017, subsequent to its second quarter 2017 quarterly review process and the aforementioned impairment, the Company entered into a binding agreement (the “Repurchase Agreement”) with the borrowers to provide an option to repay the Mezzanine Loan at a discounted value of $197 million (the “Repayment Value”) by October 25, 2017, which date was subsequently extended to December 31, 2017 (the “Agreement Maturity Date”). As a result of entering into the Repurchase Agreement, the Company recorded an additional impairment charge and related allowance of $3 million during the quarter ended September 30, 2017 to write down the carrying value of the Mezzanine Loan to the Repayment Value and assigned the loan an internal rating of Workout. As part of the Repurchase Agreement, Tandem posted, in aggregate, $8 million of non-refundable deposits (the “Deposits”), which the Company would be entitled to retain (without any credit against the Mezzanine Loan) if Tandem failed to make interest payments on the $257 million par value of the Mezzanine Loan through the repayment date or the Agreement Maturity Date, as applicable, adjusted for any principal payments received. Consulate is facing operational and financial challenges and has failed to fully pay its contractual rent to Tandem since April 1, 2017. Tandem, which relies on contractual rent payments in order to service its interest payments to the Company under the Mezzanine Loan, failed to make its monthly interest payment thereunder on November 10, 2017. On November 17, 2017, the Company declared an event of default under the Mezzanine Loan and, as a result, the Repurchase Agreement became null and void and the Deposits were forfeited to the Company. Tandem also failed to make its December 2017, January 2018 and February 2018 interest payments to the Company. Tandem remains current on its interest payments under the Senior Loan. 88 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 89 PART II Despite the Repurchase Agreement having terminated as a result of the event of default, Tandem nonetheless informed the Company that it was continuing to attempt to recapitalize so that it would be in a position to repay the Repayment Value (less the forfeited Deposits) on or prior to the Agreement Maturity Date, should the Company be willing to do so at that time. For example, during the second half of 2017, Tandem sold assets and used proceeds to pay down the Senior Loan. Despite ongoing efforts to recapitalize, Tandem was unable to: (i) repay the Mezzanine Loan at the Repayment Value prior to the Agreement Maturity Date and (ii) close on the Purchase Option by the Purchase Option Expiration Date. The Deposits were applied to reduce the Company’s recorded carrying value of the Mezzanine Loan to $189 million. As a result of the aforementioned events that occurred during the fourth quarter of 2017 and first quarter of 2018 (during the Company’s fourth quarter 2017 financial statement close process), the Company concluded that the Mezzanine Loan was impaired and recorded an impairment charge and related allowance of $84 million, reducing the carrying value of the loan to $105 million as of December 31, 2017. Aggregate impairments on the Mezzanine Loan for the year ended December 31, 2017 were $144 million. The decline in expected recoverable value of the Mezzanine Loan was primarily driven by the Company’s conclusion that the collateral supporting the Mezzanine Loan may no longer be the sole source in recovering the Company’s investment. The Company is actively evaluating and pursuing multiple alternatives, including, but not limited to: (i) selling all or a portion of the Mezzanine Loan to a third party or (ii) foreclosing on the underlying collateral. As a result, the Company utilized a discounted cash flow model to determine expected recoverability of the Mezzanine Loan. Additionally, a variety of factors further impacted the impairment analysis completed during the Company’s fourth quarter 2017 financial statement close process including recent operating results of the underlying real estate assets, as well as market and industry data, that reflect a declining trend in admissions and a continuing shift away from higher-rate Medicare plans in the post-acute/skilled nursing sector. The calculation relies on: (i) forecasted EBITDAR and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates and (ii) recent bids for a sale of the Mezzanine Loan received on February 8, 2018, which incorporate market participant required rates of return and expected hold periods. Beginning in the first quarter of 2017, the Company elected to recognize interest income on a cash basis. During the years ended December 31, 2017, 2016 and 2015, the Company recognized interest income of $23 million, $31 million and $29 million, respectively, and received cash payments of $25 million, $30 million and $29 million, respectively, from Tandem. The carrying value of the Mezzanine Loan was $105 million and $256 million at December 31, 2017 and 2016, respectively. Note 8. Investments in and Advances to Unconsolidated Joint Ventures The Company owns interests in the following entities that are accounted for under the equity method (dollars in thousands): Entity(1) CCRC JV RIDEA II Life Science JVs(2) MBK JV Development JVs(3) Medical Office JVs(4) K&Y JVs(5) Advances to unconsolidated joint ventures, net Ownership % 49 40 50 - 63 50 50 - 90 20 - 67 80 Carrying Amount December 31, 2017 $400,241 259,651 65,581 38,005 23,365 12,488 1,283 226 $800,840 2016 $439,449 — 67,879 38,909 10,459 13,438 1,342 15 $571,491 PART II HCP Ventures III, LLC and HCP Ventures IV, LLC On December 30, 2015, HCP Ventures III, LLC (“HCP distributions of $45 million, including repayment of its loan receivable. During the quarter ended December 31, 2016, HCP Ventures III sold the remaining three assets in its portfolio for $31 million, recognizing gain on sales of Ventures III”) and HCP Ventures IV, LLC sold 61 MOBs, three real estate of $5 million, of which the Company’s share hospitals and a redevelopment property for total proceeds was $1 million. As part of this sale, the Company received of $634 million, recognizing gain on sales of real estate of aggregate distributions of $8 million. $59 million, of which the Company’s share was $15 million. As part of these sales, the Company received aggregate See Note 5 for further information on the deconsolidation and pending sale of RIDEA II. Note 9. Intangibles The following table summarizes the Company’s intangible lease assets (in thousands): The following table summarizes the Company’s intangible lease liabilities (in thousands): Intangible lease assets Lease-up intangibles Above market tenant lease intangibles Below market ground lease intangibles Gross intangible lease assets Accumulated depreciation and amortization Net intangible lease assets Intangible lease liabilities Below market lease intangibles Above market ground lease intangibles Gross intangible lease liabilities Accumulated depreciation and amortization Net intangible lease liabilities Depreciation and amortization expense related to amortization of lease-up intangibles Rental and related revenues related to amortization of net below market lease liabilities Operating expense related to amortization of net below market ground lease intangibles December 31, 2017 2016 $ 645,143 $ 719,788 105,663 44,499 795,305 147,409 44,500 911,697 (385,223) (431,892) $ 410,082 $ 479,805 December 31, 2017 2016 $123,883 $ 161,595 2,329 126,212 (73,633) 2,329 163,924 (105,779) $ 52,579 $ 58,145 Year Ended December 31, 2017 2016 2015 $76,732 $84,487 $74,978 2,030 3,877 3,781 740 664 664 The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the years ended December 31, 2017, 2016 and 2015 (in thousands): (1) These entities are not consolidated because the Company does not control, through voting rights or other means, the JV. (2) Includes the following unconsolidated partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%). Includes four unconsolidated development partnerships (and the Company’s ownership percentage): (i) Vintage Park Development JV (85%); (ii) Waldwick JV (85%); (iii) Otay Ranch JV (90%); and (iv) MBK Development JV (50%). Includes three unconsolidated medical office partnerships (and the Company’s ownership percentage): HCP Ventures IV, LLC (20%); HCP Ventures III, LLC (30%); and Suburban Properties, LLC (67%). Includes three unconsolidated joint ventures. (3) (4) (5) 90 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 91 PART II PART II Despite the Repurchase Agreement having terminated investment. The Company is actively evaluating and as a result of the event of default, Tandem nonetheless pursuing multiple alternatives, including, but not limited to: informed the Company that it was continuing to attempt (i) selling all or a portion of the Mezzanine Loan to a third to recapitalize so that it would be in a position to repay the party or (ii) foreclosing on the underlying collateral. As a Repayment Value (less the forfeited Deposits) on or prior result, the Company utilized a discounted cash flow model to the Agreement Maturity Date, should the Company be to determine expected recoverability of the Mezzanine willing to do so at that time. For example, during the second Loan. Additionally, a variety of factors further impacted half of 2017, Tandem sold assets and used proceeds to the impairment analysis completed during the Company’s pay down the Senior Loan. Despite ongoing efforts to fourth quarter 2017 financial statement close process recapitalize, Tandem was unable to: (i) repay the Mezzanine including recent operating results of the underlying real Loan at the Repayment Value prior to the Agreement estate assets, as well as market and industry data, that Maturity Date and (ii) close on the Purchase Option by reflect a declining trend in admissions and a continuing the Purchase Option Expiration Date. The Deposits were shift away from higher-rate Medicare plans in the applied to reduce the Company’s recorded carrying value of post-acute/skilled nursing sector. The calculation relies on: the Mezzanine Loan to $189 million. As a result of the aforementioned events that occurred during the fourth quarter of 2017 and first quarter of 2018 (during the Company’s fourth quarter 2017 financial statement close process), the Company concluded that the Mezzanine Loan was impaired and recorded an impairment (i) forecasted EBITDAR and market data, including, but not limited to, sales price per unit/bed, rent coverage ratios, and real estate capitalization rates and (ii) recent bids for a sale of the Mezzanine Loan received on February 8, 2018, which incorporate market participant required rates of return and expected hold periods. charge and related allowance of $84 million, reducing the Beginning in the first quarter of 2017, the Company elected carrying value of the loan to $105 million as of December 31, to recognize interest income on a cash basis. During the 2017. Aggregate impairments on the Mezzanine Loan for years ended December 31, 2017, 2016 and 2015, the the year ended December 31, 2017 were $144 million. Company recognized interest income of $23 million, The decline in expected recoverable value of the Mezzanine Loan was primarily driven by the Company’s conclusion that the collateral supporting the Mezzanine Loan may no longer be the sole source in recovering the Company’s $31 million and $29 million, respectively, and received cash payments of $25 million, $30 million and $29 million, respectively, from Tandem. The carrying value of the Mezzanine Loan was $105 million and $256 million at December 31, 2017 and 2016, respectively. Note 8. Investments in and Advances to Unconsolidated Joint Ventures The Company owns interests in the following entities that are accounted for under the equity method (dollars in thousands): Entity(1) CCRC JV RIDEA II Life Science JVs(2) MBK JV Development JVs(3) Medical Office JVs(4) K&Y JVs(5) Advances to unconsolidated joint ventures, net Carrying Amount December 31, Ownership % 2017 2016 $400,241 $439,449 49 40 50 50 - 63 50 - 90 20 - 67 80 259,651 65,581 38,005 23,365 12,488 1,283 226 — 67,879 38,909 10,459 13,438 1,342 15 $800,840 $571,491 (1) These entities are not consolidated because the Company does not control, through voting rights or other means, the JV. Includes the following unconsolidated partnerships (and the Company’s ownership percentage): (i) Torrey Pines Science Center, LP (50%); (ii) Britannia Biotech Gateway, LP (55%); and (iii) LASDK, LP (63%). Includes four unconsolidated development partnerships (and the Company’s ownership percentage): (i) Vintage Park Development JV (85%); (ii) Waldwick JV (85%); (iii) Otay Ranch JV (90%); and (iv) MBK Development JV (50%). Includes three unconsolidated medical office partnerships (and the Company’s ownership percentage): HCP Ventures IV, LLC (20%); HCP (2) (3) (4) Ventures III, LLC (30%); and Suburban Properties, LLC (67%). (5) Includes three unconsolidated joint ventures. HCP Ventures III, LLC and HCP Ventures IV, LLC On December 30, 2015, HCP Ventures III, LLC (“HCP Ventures III”) and HCP Ventures IV, LLC sold 61 MOBs, three hospitals and a redevelopment property for total proceeds of $634 million, recognizing gain on sales of real estate of $59 million, of which the Company’s share was $15 million. As part of these sales, the Company received aggregate distributions of $45 million, including repayment of its loan receivable. During the quarter ended December 31, 2016, HCP Ventures III sold the remaining three assets in its portfolio for $31 million, recognizing gain on sales of real estate of $5 million, of which the Company’s share was $1 million. As part of this sale, the Company received aggregate distributions of $8 million. See Note 5 for further information on the deconsolidation and pending sale of RIDEA II. Note 9. The following table summarizes the Company’s intangible lease assets (in thousands): Intangibles Intangible lease assets Lease-up intangibles Above market tenant lease intangibles Below market ground lease intangibles Gross intangible lease assets Accumulated depreciation and amortization Net intangible lease assets The following table summarizes the Company’s intangible lease liabilities (in thousands): Intangible lease liabilities Below market lease intangibles Above market ground lease intangibles Gross intangible lease liabilities Accumulated depreciation and amortization Net intangible lease liabilities December 31, 2017 $ 645,143 105,663 44,499 795,305 (385,223) $ 410,082 2016 $ 719,788 147,409 44,500 911,697 (431,892) $ 479,805 December 31, 2017 $123,883 2,329 126,212 (73,633) $ 52,579 2016 $ 161,595 2,329 163,924 (105,779) $ 58,145 The following table sets forth amortization related to deferred leasing costs and acquisition-related intangibles for the years ended December 31, 2017, 2016 and 2015 (in thousands): Depreciation and amortization expense related to amortization of lease-up intangibles Rental and related revenues related to amortization of net below market lease liabilities Operating expense related to amortization of net below market ground lease intangibles Year Ended December 31, 2016 2017 2015 $76,732 $84,487 $74,978 2,030 3,877 3,781 740 664 664 90 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 91 PART II The following table summarizes the estimated annual amortization for each of the five succeeding fiscal years and thereafter (in thousands): The following table summarizes the Company’s senior unsecured notes payoffs for the periods presented (dollars 2018 2019 2020 2021 2022 Thereafter Rental and Related Revenues(1) $ 4,099 4,102 3,418 3,401 4,199 17,133 $36,352 $ Operating Expense(2) 763 763 759 756 756 31,782 $35,579 Depreciation and Amortization(3) $ 66,651 49,868 40,151 35,963 30,490 135,153 $358,276 (1) The amortization of net below market lease intangibles is recorded as an increase to rental and related income. (2) The amortization of net below market ground lease intangibles is recorded as an increase to operating expense. (3) The amortization of lease-up intangibles is recorded to depreciation and amortization expense. Note 10. Debt Bank Line of Credit and Term Loans On October 19, 2017, the Company executed a $2.0 billion unsecured revolving line of credit facility (the “Facility”), which matures on October 19, 2021 and contains two, six-month extension options. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at December 31, 2017, the margin on the Facility was 1.00%, and the facility fee was 0.20%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. At December 31, 2017, the Company had $1.0 billion, including £105 million ($142 million), outstanding under the Facility with a weighted average effective interest rate of 2.74%. In March 2017, the Company repaid a £137 million unsecured term loan. On June 30, 2017, the Company repaid £51 million of its four-year unsecured term loan entered into in January 2015 (the “2015 Term Loan”). Concurrently, the Company terminated its three-year interest rate swap which fixed the interest of the 2015 Term Loan and therefore, beginning June 30, 2017, the 2015 Term Loan accrued interest at a rate of GBP LIBOR plus 1.15%, subject to adjustments based on the Company’s credit ratings. At December 31, 2017 the Company had £169 million ($229 million) outstanding on the 2015 Term Loan. The 2015 Term Loan contains a one-year committed extension option. The Company has a one–time right to repay the outstanding GBP balance and re-borrow in USD with all other key terms unchanged. The Facility and 2015 Term Loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%, (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a Minimum Consolidated Tangible Net Worth of $6.5 billion at December 31, 2017. At December 31, 2017, the Company was in compliance with each of these restrictions and requirements of the Facility and 2015 Term Loan. Senior Unsecured Notes At December 31, 2017, the Company had senior unsecured notes outstanding with an aggregate principal balance of $6.45 billion. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. The Company believes it was in compliance with these covenants at December 31, 2017. in thousands): Period May 1, 2017 July 27, 2017 Year ended December 31, 2017 Year ended December 31, 2016: February 1, 2016 September 15, 2016 November 30, 2016 November 30, 2016 PART II 5.625% 5.375% 3.750% 6.300% 6.000% 6.700% Amount Coupon Rate $250,000 $500,000 $500,000 $400,000 $500,000 $600,000 During the years ended December 31, 2017 and 2016, Mortgage debt generally requires monthly principal and the Company recorded losses on debt extinguishment interest payments, is collateralized by real estate assets and related to the repurchase of senior notes of $54 million and is generally non-recourse. Mortgage debt typically restricts $46 million, respectively. There were no senior unsecured notes issuances for either of the years ended December 31, 2017 and 2016. Mortgage Debt At December 31, 2017, the Company had $139 million in aggregate principal of mortgage debt outstanding, which is secured by 16 healthcare facilities (including redevelopment properties) with a carrying value of $299 million. In March 2017, the Company paid off $472 million of transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires maintenance of insurance on the assets and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple assets and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets. The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at December 31, mortgage debt. Debt Maturities 2017 (dollars in thousands): Year 2018 2019 2020 2021 2022 — — — — Discounts, premium and debt costs, net (1) Includes £105 million translated into USD. (2) Represents £169 million translated into USD. (3) (4) maturity of six years. weighted average maturity of 20 years. Bank Line of Credit(1) Term Loan(2) Senior Unsecured Notes(3) Mortgage Debt(4) Interest Interest Amount Rate Amount Rate $ — $ — $ — —% $ — 228,674 450,000 800,000 700,000 900,000 — — — 3.95% 2.79% 5.49% 3.93% 1,017,076 3,512 3,700 3,758 11,117 2,861 —% $ —% 5.08% Total(5) 3,512 682,374 803,758 5.26% 1,728,193 —% 902,861 Thereafter — 3,600,000 4.36% 113,619 4.09% 3,713,619 1,017,076 228,674 6,450,000 138,567 7,834,317 $1,017,076 $228,288 $6,396,451 (386) (53,549) 5,919 $144,486 (48,016) $7,786,301 Interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective rate of 4.19% and a weighted average Interest rates on the mortgage debt ranged from 2.08% to 5.91% with a weighted average effective interest rate of 4.19% and a (5) Excludes $94 million of other debt that have no scheduled maturities. Other debt represents (i) $61 million of non-interest bearing life care bonds and occupancy fee deposits at certain of the Company’s senior housing facilities and (ii) $33 million of on-demand notes from the CCRC JV which bear interest at a rate of 3.6%. 92 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 93 The following table summarizes the estimated annual amortization for each of the five succeeding fiscal years and thereafter The following table summarizes the Company’s senior unsecured notes payoffs for the periods presented (dollars in thousands): PART II Period Year ended December 31, 2017 May 1, 2017 July 27, 2017 Year ended December 31, 2016: February 1, 2016 September 15, 2016 November 30, 2016 November 30, 2016 Amount Coupon Rate $250,000 $500,000 $500,000 $400,000 $500,000 $600,000 5.625% 5.375% 3.750% 6.300% 6.000% 6.700% During the years ended December 31, 2017 and 2016, the Company recorded losses on debt extinguishment related to the repurchase of senior notes of $54 million and $46 million, respectively. There were no senior unsecured notes issuances for either of the years ended December 31, 2017 and 2016. Mortgage Debt At December 31, 2017, the Company had $139 million in aggregate principal of mortgage debt outstanding, which is secured by 16 healthcare facilities (including redevelopment properties) with a carrying value of $299 million. In March 2017, the Company paid off $472 million of mortgage debt. Mortgage debt generally requires monthly principal and interest payments, is collateralized by real estate assets and is generally non-recourse. Mortgage debt typically restricts transfer of the encumbered assets, prohibits additional liens, restricts prepayment, requires payment of real estate taxes, requires maintenance of the assets in good condition, requires maintenance of insurance on the assets and includes conditions to obtain lender consent to enter into or terminate material leases. Some of the mortgage debt is also cross-collateralized by multiple assets and may require tenants or operators to maintain compliance with the applicable leases or operating agreements of such real estate assets. Debt Maturities The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at December 31, 2017 (dollars in thousands): Senior Unsecured Notes(3) Mortgage Debt(4) PART II (in thousands): 2018 2019 2020 2021 2022 Thereafter Rental and Related Operating Depreciation and Revenues(1) Expense(2) Amortization(3) $ 4,099 $ 4,102 3,418 3,401 4,199 763 763 759 756 756 17,133 $36,352 31,782 $35,579 $ 66,651 49,868 40,151 35,963 30,490 135,153 $358,276 (1) The amortization of net below market lease intangibles is recorded as an increase to rental and related income. (2) The amortization of net below market ground lease intangibles is recorded as an increase to operating expense. (3) The amortization of lease-up intangibles is recorded to depreciation and amortization expense. Note 10. Debt Bank Line of Credit and Term Loans On October 19, 2017, the Company executed a $2.0 billion unsecured revolving line of credit facility (the “Facility”), which matures on October 19, 2021 and contains two, six-month extension options. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon the Company’s credit ratings. The Company pays a facility fee on the entire revolving commitment that depends on its credit ratings. Based on the Company’s credit ratings at December 31, 2017, the margin on the Facility was 1.00%, and the facility fee was 0.20%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $750 million, subject to securing additional commitments. At December 31, 2017, the Company had $1.0 billion, including £105 million ($142 million), outstanding under the Facility with a weighted average effective interest rate of 2.74%. 2015 Term Loan. The 2015 Term Loan contains a one-year committed extension option. The Company has a one–time right to repay the outstanding GBP balance and re-borrow in USD with all other key terms unchanged. The Facility and 2015 Term Loan contain certain financial restrictions and other customary requirements, including cross-default provisions to other indebtedness. Among other things, these covenants, using terms defined in the agreements: (i) limit the ratio of Consolidated Total Indebtedness to Consolidated Total Asset Value to 60%, (ii) limit the ratio of Secured Debt to Consolidated Total Asset Value to 30%, (iii) limit the ratio of Unsecured Debt to Consolidated Unencumbered Asset Value to 60%; (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times; and (v) require a Minimum Consolidated Tangible Net Worth of $6.5 billion at December 31, 2017. At December 31, 2017, the Company was in compliance with each of these restrictions and requirements of the Facility In March 2017, the Company repaid a £137 million unsecured and 2015 Term Loan. term loan. On June 30, 2017, the Company repaid £51 million of its Senior Unsecured Notes four-year unsecured term loan entered into in January 2015 At December 31, 2017, the Company had senior unsecured (the “2015 Term Loan”). Concurrently, the Company notes outstanding with an aggregate principal balance of terminated its three-year interest rate swap which fixed the $6.45 billion. The senior unsecured notes contain certain interest of the 2015 Term Loan and therefore, beginning covenants including limitations on debt, maintenance of June 30, 2017, the 2015 Term Loan accrued interest at a unencumbered assets, cross-acceleration provisions and rate of GBP LIBOR plus 1.15%, subject to adjustments based other customary terms. The Company believes it was in on the Company’s credit ratings. At December 31, 2017 the compliance with these covenants at December 31, 2017. Company had £169 million ($229 million) outstanding on the Discounts, premium and debt costs, net — (386) $1,017,076 $228,288 (53,549) $6,396,451 5,919 $144,486 (48,016) $7,786,301 Amount — — $ 450,000 — 228,674 800,000 — — 700,000 — 1,017,076 — — 900,000 — 3,600,000 — 6,450,000 1,017,076 Total(5) 3,512 —% $ 682,374 —% 803,758 5.08% 5.26% 1,728,193 902,861 4.09% 3,713,619 7,834,317 Amount 3,512 3,700 3.95% 3,758 2.79% 11,117 5.49% 3.93% 2,861 4.36% 113,619 138,567 Includes £105 million translated into USD. (2) Represents £169 million translated into USD. (3) Year 2018 2019 2020 2021 2022 Thereafter Bank Line of Credit(1) $ Interest Rate Interest Rate Term Loan(2) 228,674 —% $ — $ —% (1) Interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective rate of 4.19% and a weighted average maturity of six years. Interest rates on the mortgage debt ranged from 2.08% to 5.91% with a weighted average effective interest rate of 4.19% and a weighted average maturity of 20 years. (4) 92 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 93 (5) Excludes $94 million of other debt that have no scheduled maturities. Other debt represents (i) $61 million of non-interest bearing life care bonds and occupancy fee deposits at certain of the Company’s senior housing facilities and (ii) $33 million of on-demand notes from the CCRC JV which bear interest at a rate of 3.6%. PART II Note 11. Commitments and Contingencies Legal Proceedings From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred. Class Action. On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCRMC, and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice in a pending suit against HCRMC arising from the False Claims Act. The plaintiff in the suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. On November 28, 2017, the Court appointed Societe Generale Securities GmbH (SGSS Germany) and the City of Birmingham Retirement and Relief Systems (Birmingham) as Co-Lead Plaintiffs in the class action. Co-Lead Plaintiffs must file a consolidated Amended Complaint by February 28, 2018. Defendants will then have until March 30, 2018 to respond to the Amended Complaint and file a motion to dismiss. The Company believes the suit to be without merit and intends to vigorously defend against it. Derivative Actions. On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al., Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action. The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. As the Subodh/Stearns action is in the early stages, defendants have not yet responded to the complaint. On April 18, 2017, the Court approved the parties’ stipulation staying the action pending further developments, including in the related securities class action litigation. The Court recently adjourned the status conference scheduled for January 10, 2018 to June 11, 2018. On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al., Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative actions. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. Defendants have not yet been served or responded to the complaint. On July 11, 2017, the Court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action. On July 21, 2017, a purported stockholder of the Company filed another derivative action, Kelley v. HCR ManorCare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in Weldon and in the California derivative actions. Like Weldon, the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. On September 25, 2017, Defendants moved to transfer the action to the Northern District of Ohio (i.e., the court where the class action and other federal derivative action are pending) or, in the alternative, to stay the action. The Court granted Defendants’ motion to transfer on November 28, 2017, and Kelley is now before Judge Helmick in the Northern District of Ohio. In a status conference on January 19, 2018 in the Kelley against Welltower, among others. In connection with action, Judge Helmick requested briefing by the parties Mr. Brinker’s hiring, the Company agreed to indemnify him in both Weldon and Kelley concerning the potential for legal fees and any losses that result from the action. On consolidation of the two actions, the appointment of November 5, 2017, Welltower, Mr. Brinker and the Company lead plaintiffs and counsel, and whether the stay should agreed to settle the lawsuit for an amount, recognized continue. Plaintiffs’ briefs will be due on February 23, 2018, during the fourth quarter of 2017, that is not material to the defendants’ opposition will be due on March 9, 2018, and Company’s financial condition, results of operations or cash plaintiffs’ reply will be due on March 23, 2018. Judge Helmick flows and file a joint dismissal of all claims and counterclaims. indicated that he would issue an order explaining and memorializing these deadlines. DownREIT LLCs PART II The Company’s Board of Directors received letters dated August 17, 2016, April 19, 2017, and April 20, 2017 from private law firms acting on behalf of clients who are purported stockholders of the Company, each asserting allegations similar to those made in the Subodh and Stearns matters discussed above. Each letter demands that the Board of Directors take action to assert the Company’s rights. The Board of Directors completed its evaluation and determined to reject the demand letters. Rejection notices were sent in December of 2017. The Company believes that the lawsuits and demands are without merit and is unable to estimate the amount of loss or range of reasonably possible losses with respect to the matters discussed above as of December 31, 2017. Welltower v. Scott M. Brinker. On May 15, 2017, Welltower, Inc. filed a complaint in the Court of Common Pleas in Lucas County, Ohio, against Scott M. Brinker, alleging that he violated his non-competition obligations to Welltower prior to and upon acceptance of an offer of employment with the Company. Mr. Brinker counterclaimed that the non-competition restrictions were unenforceable, and also asserted breach of contract and defamation counterclaims Commitments In connection with the formation of certain DownREIT LLCs, members may contribute appreciated real estate to a DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Code (“make-whole payments”). These make-whole payments include a tax gross-up provision. These indemnification agreements have expiration terms that range through 2033 on a total of 35 properties. The following table summarizes the Company’s material commitments, excluding debt servicing obligations (see Note 10) and operating leases (see disclosure below), at December 31, 2017 (in thousands): U.K. loan commitments(1) Construction loan commitments(2) Development commitments(3) Total Total 3,236 $ 114,691 133,371 $251,298 2018 3,236 $ 45,863 128,101 $177,200 2019-2020 2021-2022 Five Years More than $ — 68,828 2,228 $71,056 $ — — 3,042 $ 3,042 $ — — — $ — (1) Represents £2 million translated into USD for commitments to fund the Company’s U.K. loan facilities. (2) Represents commitments to finance development projects. (3) Represents construction and other commitments for developments in progress. 94 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 95 PART II Note 11. Commitments and Contingencies Legal Proceedings From time to time, the Company is a party to, or has a significant relationship to, legal proceedings, lawsuits and other claims. Except as described below, the Company is not aware of any legal proceedings or claims that it believes may have, individually or taken together, a material adverse effect on the Company’s financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred. Class Action. On May 9, 2016, a purported stockholder of the Company filed a putative class action complaint, Boynton Beach Firefighters’ Pension Fund v. HCP, Inc., et al., Case No. 3:16-cv-01106-JJH, in the U.S. District Court for the Northern District of Ohio against the Company, certain of its officers, HCRMC, and certain of its officers, asserting violations of the federal securities laws. The suit asserts claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and alleges that the Company made certain false or misleading statements relating to the value of and risks concerning its investment in HCRMC by allegedly failing to disclose that HCRMC had engaged in billing fraud, as alleged by the U.S. Department of Justice in a pending suit against HCRMC arising from the False Claims Act. The plaintiff in the suit demands compensatory damages (in an unspecified amount), costs and expenses (including attorneys’ fees and expert fees), and equitable, injunctive, or other relief as the Court deems just and proper. On November 28, 2017, the Court appointed Societe Generale Securities GmbH (SGSS Germany) and the City of Birmingham Retirement and Relief Systems (Birmingham) as Co-Lead Plaintiffs in the class action. Co-Lead Plaintiffs must file a consolidated Amended Complaint by February 28, 2018. Defendants will then have until March 30, 2018 to respond to the Amended Complaint and file a motion to dismiss. The Company believes the suit to be without merit and intends to vigorously defend against it. Derivative Actions. On June 16, 2016 and July 5, 2016, purported stockholders of the Company filed two derivative actions, respectively Subodh v. HCR ManorCare Inc., et al., Case No. 30-2016-00858497-CU-PT-CXC and Stearns v. HCR ManorCare, Inc., et al., Case No. 30-2016-00861646-CU-MC-CJC, in the Superior Court of California, County of Orange, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. As both derivative actions contained substantially the same allegations, they have been consolidated into a single action. The consolidated action alleges that the defendants engaged in various acts of wrongdoing, including, among other things, breaching fiduciary duties by publicly making false or misleading statements of fact regarding HCRMC’s finances and prospects, and failing to maintain adequate internal controls. As the Subodh/Stearns action is in the early stages, defendants have not yet responded to the complaint. On April 18, 2017, the Court approved the parties’ stipulation staying the action pending further developments, including in the related securities class action litigation. The Court recently adjourned the status conference scheduled for January 10, 2018 to June 11, 2018. On April 10, 2017, a purported stockholder of the Company filed a derivative action, Weldon v. Martin et al., Case No. 3:17-cv-755, in federal court in the Northern District of Ohio, Western Division, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Weldon complaint asserts similar claims to those asserted in the California derivative actions. In addition, the complaint asserts a claim under Section 14(a) of the Exchange Act, alleging that the Company made false statements in its 2016 proxy statement by not disclosing that the Company’s performance issues in 2015 were the direct result of billing fraud at HCRMC. On April 18, 2017, the Court re-assigned and transferred this action to the judge presiding over the related federal securities class action. Defendants have not yet been served or responded to the complaint. On July 11, 2017, the Court approved a stipulation by the parties to stay the case pending disposition of the motion to dismiss the class action. On July 21, 2017, a purported stockholder of the Company filed another derivative action, Kelley v. HCR ManorCare, Inc., et al., Case No. 8:17-cv-01259, in federal court in the Central District of California, against certain of the Company’s current and former directors and officers and HCRMC. The Company is named as a nominal defendant. The Kelley complaint asserts similar claims to those asserted in Weldon and in the California derivative actions. Like Weldon, the Kelley complaint also additionally alleges that the Company made false statements in its 2016 proxy statement, and asserts a claim for a violation of Section 14(a) of the Exchange Act. On September 25, 2017, Defendants moved to transfer the action to the Northern District of Ohio (i.e., the court where the class action and other federal derivative action are pending) or, in the alternative, to stay the action. The Court granted Defendants’ motion to transfer on November 28, 2017, and Kelley is now before Judge Helmick in the Northern District of Ohio. In a status conference on January 19, 2018 in the Kelley action, Judge Helmick requested briefing by the parties in both Weldon and Kelley concerning the potential consolidation of the two actions, the appointment of lead plaintiffs and counsel, and whether the stay should continue. Plaintiffs’ briefs will be due on February 23, 2018, defendants’ opposition will be due on March 9, 2018, and plaintiffs’ reply will be due on March 23, 2018. Judge Helmick indicated that he would issue an order explaining and memorializing these deadlines. The Company’s Board of Directors received letters dated August 17, 2016, April 19, 2017, and April 20, 2017 from private law firms acting on behalf of clients who are purported stockholders of the Company, each asserting allegations similar to those made in the Subodh and Stearns matters discussed above. Each letter demands that the Board of Directors take action to assert the Company’s rights. The Board of Directors completed its evaluation and determined to reject the demand letters. Rejection notices were sent in December of 2017. The Company believes that the lawsuits and demands are without merit and is unable to estimate the amount of loss or range of reasonably possible losses with respect to the matters discussed above as of December 31, 2017. Welltower v. Scott M. Brinker. On May 15, 2017, Welltower, Inc. filed a complaint in the Court of Common Pleas in Lucas County, Ohio, against Scott M. Brinker, alleging that he violated his non-competition obligations to Welltower prior to and upon acceptance of an offer of employment with the Company. Mr. Brinker counterclaimed that the non-competition restrictions were unenforceable, and also asserted breach of contract and defamation counterclaims PART II against Welltower, among others. In connection with Mr. Brinker’s hiring, the Company agreed to indemnify him for legal fees and any losses that result from the action. On November 5, 2017, Welltower, Mr. Brinker and the Company agreed to settle the lawsuit for an amount, recognized during the fourth quarter of 2017, that is not material to the Company’s financial condition, results of operations or cash flows and file a joint dismissal of all claims and counterclaims. DownREIT LLCs In connection with the formation of certain DownREIT LLCs, members may contribute appreciated real estate to a DownREIT LLC in exchange for DownREIT units. These contributions are generally tax-deferred, so that the pre-contribution gain related to the property is not taxed to the member. However, if a contributed property is later sold by the DownREIT LLC, the unamortized pre-contribution gain that exists at the date of sale is specifically allocated and taxed to the contributing members. In many of the DownREITs, the Company has entered into indemnification agreements with those members who contributed appreciated property into the DownREIT LLC. Under these indemnification agreements, if any of the appreciated real estate contributed by the members is sold by the DownREIT LLC in a taxable transaction within a specified number of years, the Company will reimburse the affected members for the federal and state income taxes associated with the pre-contribution gain that is specially allocated to the affected member under the Code (“make-whole payments”). These make-whole payments include a tax gross-up provision. These indemnification agreements have expiration terms that range through 2033 on a total of 35 properties. Commitments The following table summarizes the Company’s material commitments, excluding debt servicing obligations (see Note 10) and operating leases (see disclosure below), at December 31, 2017 (in thousands): U.K. loan commitments(1) Construction loan commitments(2) Development commitments(3) Total $ Total 3,236 114,691 133,371 $251,298 $ 2018 3,236 45,863 128,101 $177,200 $ 2019-2020 — 68,828 2,228 $71,056 2021-2022 $ — — 3,042 $ 3,042 More than Five Years $ — — — $ — (1) Represents £2 million translated into USD for commitments to fund the Company’s U.K. loan facilities. (2) Represents commitments to finance development projects. (3) Represents construction and other commitments for developments in progress. 94 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 95 PART II Credit Enhancement Guarantee At December 31, 2017, certain of the Company’s senior housing facilities serve as collateral for $83 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $356 million as of December 31, 2017. Environmental Costs The Company monitors its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company carries environmental insurance and believes that the policy terms, conditions, limitations and deductibles are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice. General Uninsured Losses The Company obtains various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental, cyber and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, the Company has a large number of properties that are exposed to earthquake, flood and windstorm occurrences for which the related insurances carry high deductibles. Tenant Purchase Options Certain leases, including DFLs contain purchase options whereby the tenant may elect to acquire the underlying real estate. Annualized base rent from leases subject to purchase options, summarized by the year the purchase options are exercisable, are as follows (dollars in thousands): Year 2018 2019 2020 2021 2022 Thereafter Annualized Base Rent(1) $ 8,534 14,702 14,201 12,402 10,459 33,964 $94,262 Number of Properties 8 2 4 6 3 22 45 (1) Represents the most recent month’s base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight- line rents, amortization of market lease intangibles, DFL non-cash and deferred revenues). Rental Expense The Company’s rental expense attributable to continuing operations was $10 million for each of the years ended December 31, 2017, 2016 and 2015. These rental expense amounts include ground rent and other leases. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. These leases have terms that are up to 99 years, excluding extension options. Future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2017 were as follows (in thousands): Year 2018 2019 2020 2021 2022 Thereafter $ Amount 6,619 6,766 6,668 6,704 6,820 362,219 $395,796 The Company evaluates its business and allocates accounting policies of the segments are the same as those resources based on its reportable business segments: described under Summary of Significant Accounting Policies (i) senior housing triple-net, (ii) SHOP, (iii) life science (see Note 2). and (iv) medical office. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties, unconsolidated joint ventures (see below), and care homes in the U.K. The During the fourth quarter of 2017, as a result of a change in how operating results are reported to the chief operating decision makers, for the purpose of evaluating performance and allocating resources, the Company began excluding 96 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 97 PART II Note 12. Equity Common Stock On February 1, 2018, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.37 per share. The common stock cash dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. During the years ended December 31, 2017, 2016 and 2015, the Company declared and paid common stock cash dividends of $1.480, $2.095 and $2.260 per share, respectively. In June 2015, the Company established an at-the-market equity offering program (“ATM Program”). Under this program, the Company may sell shares of its common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. During the year ended December 31, 2015, the Company issued 1.8 million shares of common stock at a weighted average price of $40.14 for proceeds of $73 million, net of fees and commissions of $1 million. There was no activity during the years ended December 31, 2017 and 2016. The following table summarizes the Company’s other common stock activities (shares in thousands): Year Ended December 31, 2017 983 78 32 419 157 2016 2,021 145 133 529 237 2015 2,762 104 823 409 198 December 31, 2017 2016 $ (6,955) $(22,817) (13,950) (3,119) (3,642) (3,183) $(24,024) $(29,642) Dividend Reinvestment and Stock Purchase Plan Conversion of DownREIT units Exercise of stock options Vesting of restricted stock units Repurchase of common stock Accumulated Other Comprehensive Loss The following table summarizes the Company’s accumulated other comprehensive loss (in thousands): Cumulative foreign currency translation adjustment Unrealized gains (losses) on cash flow hedges, net Supplemental Executive Retirement plan minimum liability and other Total accumulated other comprehensive loss Noncontrolling Interests On October 7, 2015, the Company issued a 49% noncontrolling interest in HCP Ventures V to an institutional capital investor for $110 million. HCP Ventures V owns a portfolio of 11 on-campus MOBs located in Texas and acquired through a sale-leaseback transaction with Memorial Hermann in June 2015. LLCs, all of which the Company is the managing member. At December 31, 2017, the carrying and market values of the four million DownREIT units were $177 million and $173 million, respectively. See Note 5 for the deconsolidation of RIDEA II and Note 19 for the supplemental schedule of non-cash financing activities. At December 31, 2017, there were four million DownREIT units (seven million shares of HCP common stock are issuable upon conversion) outstanding in five DownREIT Note 13. Segment Disclosures PART II Credit Enhancement Guarantee At December 31, 2017, certain of the Company’s senior housing facilities serve as collateral for $83 million of debt (maturing May 1, 2025) that is owed by a previous owner of the facilities. This indebtedness is guaranteed by the previous owner who has an investment grade credit rating. These senior housing facilities, which are classified as DFLs, had a carrying value of $356 million as of December 31, 2017. Environmental Costs The Company monitors its properties for the presence of hazardous or toxic substances. The Company is not aware of any environmental liability with respect to the properties that would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company carries environmental insurance and believes that the policy terms, conditions, limitations and deductibles Tenant Purchase Options are adequate and appropriate under the circumstances, given the relative risk of loss, the cost of such coverage and current industry practice. General Uninsured Losses The Company obtains various types of insurance to mitigate the impact of property, business interruption, liability, flood, windstorm, earthquake, environmental, cyber and terrorism related losses. The Company attempts to obtain appropriate policy terms, conditions, limits and deductibles considering the relative risk of loss, the cost of such coverage and current industry practice. There are, however, certain types of extraordinary losses, such as those due to acts of war or other events that may be either uninsurable or not economically insurable. In addition, the Company has a large number of properties that are exposed to earthquake, flood and windstorm occurrences for which the related insurances carry high deductibles. Certain leases, including DFLs contain purchase options whereby the tenant may elect to acquire the underlying real estate. Annualized base rent from leases subject to purchase options, summarized by the year the purchase options are exercisable, are as follows (dollars in thousands): Annualized Number of Base Rent(1) Properties $ 8,534 14,702 14,201 12,402 10,459 33,964 $94,262 8 2 4 6 3 22 45 (1) Represents the most recent month’s base rent including additional rent floors and cash income from DFLs annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight- line rents, amortization of market lease intangibles, DFL non-cash and deferred revenues). Rental Expense The Company’s rental expense attributable to continuing operations was $10 million for each of the years ended December 31, 2017, 2016 and 2015. These rental expense amounts include ground rent and other leases. Ground leases generally require fixed annual rent payments and may also include escalation clauses and renewal options. These leases have terms that are up to 99 years, excluding extension options. Future minimum lease obligations under non-cancelable ground and other operating leases as of December 31, 2017 were as Year 2018 2019 2020 2021 2022 Thereafter follows (in thousands): Year 2018 2019 2020 2021 2022 Thereafter PART II Note 12. Equity Common Stock On February 1, 2018, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.37 per share. The common stock cash dividend will be paid on March 2, 2018 to stockholders of record as of the close of business on February 15, 2018. During the years ended December 31, 2017, 2016 and 2015, the Company declared and paid common stock cash dividends of $1.480, $2.095 and $2.260 per share, respectively. In June 2015, the Company established an at-the-market equity offering program (“ATM Program”). Under this program, the Company may sell shares of its common stock from time to time having an aggregate gross sales price of up to $750 million through a consortium of banks acting as sales agents or directly to the banks acting as principals. During the year ended December 31, 2015, the Company issued 1.8 million shares of common stock at a weighted average price of $40.14 for proceeds of $73 million, net of fees and commissions of $1 million. There was no activity during the years ended December 31, 2017 and 2016. The following table summarizes the Company’s other common stock activities (shares in thousands): Dividend Reinvestment and Stock Purchase Plan Conversion of DownREIT units Exercise of stock options Vesting of restricted stock units Repurchase of common stock Year Ended December 31, 2016 2017 2,021 983 145 78 133 32 529 419 237 157 2015 2,762 104 823 409 198 Accumulated Other Comprehensive Loss The following table summarizes the Company’s accumulated other comprehensive loss (in thousands): Cumulative foreign currency translation adjustment Unrealized gains (losses) on cash flow hedges, net Supplemental Executive Retirement plan minimum liability and other Total accumulated other comprehensive loss December 31, 2017 $ (6,955) (13,950) (3,119) $(24,024) 2016 $(22,817) (3,642) (3,183) $(29,642) Noncontrolling Interests On October 7, 2015, the Company issued a 49% noncontrolling interest in HCP Ventures V to an institutional capital investor for $110 million. HCP Ventures V owns a portfolio of 11 on-campus MOBs located in Texas and acquired through a sale-leaseback transaction with Memorial Hermann in June 2015. LLCs, all of which the Company is the managing member. At December 31, 2017, the carrying and market values of the four million DownREIT units were $177 million and $173 million, respectively. See Note 5 for the deconsolidation of RIDEA II and Note 19 for the supplemental schedule of non-cash financing activities. At December 31, 2017, there were four million DownREIT units (seven million shares of HCP common stock are issuable upon conversion) outstanding in five DownREIT Note 13. Segment Disclosures The Company evaluates its business and allocates resources based on its reportable business segments: (i) senior housing triple-net, (ii) SHOP, (iii) life science and (iv) medical office. The Company has non-reportable segments that are comprised primarily of the Company’s debt investments, hospital properties, unconsolidated joint ventures (see below), and care homes in the U.K. The Amount $ 6,619 6,766 6,668 6,704 6,820 362,219 $395,796 accounting policies of the segments are the same as those described under Summary of Significant Accounting Policies (see Note 2). During the fourth quarter of 2017, as a result of a change in how operating results are reported to the chief operating decision makers, for the purpose of evaluating performance and allocating resources, the Company began excluding 96 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 97 For the year ended December 31, 2016: PART II Senior Housing Life Medical Other Corporate Non- Non- Triple-Net SHOP Science Office reportable segment Total $ 423,118 $ 686,822 $ 358,537 $ 446,280 $ 125,729 $ (6,710) (480,870) (72,478) (173,687) (4,654) 416,408 205,952 286,059 272,593 121,075 (7,566) (2,686) (2,954) (3,536) (3,022) — $2,040,486 — (738,399) — 1,302,087 (19,764) 408,842 203,266 283,105 269,057 118,053 — 1,282,323 7,566 — 2,686 — 2,954 — 3,536 — 3,022 88,808 19,764 88,808 (9,499) (29,745) (2,357) (5,895) (9,153) (407,754) (464,403) — — — (136,146) (108,806) (130,829) (161,790) (30,537) — (568,108) 48,744 675 49,042 8,333 57,904 — — — — — — — — — — — — — — — — — — — — — — — — — (103,611) (103,611) — (9,821) (9,821) — (46,020) 3,654 (4,473) 164,698 (46,020) 3,654 (4,473) — — 11,360 — — 265,755 11,360 265,755 $ 319,507 $ 68,076 $ 201,915 $ 113,241 $ 239,457 $(302,270) $ 639,926 Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Gain (loss) on sales of real estate, net Loss on debt extinguishment Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Discontinued operations Net income (loss) termination fees. (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and PART II unconsolidated joint ventures from its evaluation of its segments’ operating results. Unconsolidated joint ventures are now reflected in other non-reportable segments, and as a result, excluded from NOI and Adjusted NOI. Prior period NOI and Adjusted NOI have also been recast to conform to current period presentation, which excludes unconsolidated joint ventures. During the year ended December 31, 2017, 42 senior housing triple-net facilities were transferred to the Company’s SHOP segment. During the year ended December 31, 2016, 17 senior housing triple-net facilities were transitioned to a RIDEA structure (reported in the Company’s SHOP segment). There were no intersegment sales or transfers during the year ended December 31, 2015. The Company evaluates performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) Adjusted NOI. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level operating expenses. Adjusted NOI is calculated as NOI after eliminating the effects of straight-line rents, DFL non-cash interest, amortization of market lease intangibles, lease termination fees and the impact of deferred community fee income and expense. The adjustments to NOI and resulting Adjusted NOI for SHOP have been recast for prior periods presented to conform to the current period presentation which excludes (i) the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid and (ii) adjustments related to unconsolidated joint ventures (see above). Non-segment assets consist of assets in the Company’s other non-reportable segments (see above) and corporate non-segment assets. Corporate non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities and, if any, real estate held for sale. See Note 22 for other information regarding concentrations of credit risk. The following tables summarize information for the reportable segments (in thousands): For the year ended December 31, 2017: Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Recoveries (impairments), net Gain (loss) on sales of real estate, net Loss on debt extinguishment Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Net income (loss) SHOP Life Science Other Senior Non- Medical Housing reportable Triple-Net Office $ 116,846 $ 313,547 $ 525,473 $ 358,816 $ 477,459 (4,743) (183,197) 112,103 294,262 (4,446) (2,952) 107,657 291,310 4,446 2,952 56,237 — (4,230) (506) (29,085) (169,795) — — — — — (143,794) (396,491) 128,982 33,227 162,209 (33,227) — (7,920) (103,162) — — — (3,819) 309,728 17,098 326,826 (17,098) — (2,518) (103,820) — — (22,590) (78,001) 280,815 (4,517) 276,298 4,517 — (373) (128,864) — — — Corporate Non- segment $ Total — $1,792,141 — (666,251) — 1,125,890 38,410 — — 1,164,300 (38,410) — 56,237 — (307,716) (292,169) — (534,726) (88,772) (7,963) — (166,384) (88,772) (7,963) 280,349 — — — 17,485 — — — 45,916 — — — 9,095 — — — 3,796 — 50,895 — — (54,227) (19,475) 1,333 356,641 (54,227) 31,420 1,333 — — $ 461,149 $ 35,385 $ 197,494 $ 133,056 — — 10,901 $ 56,823 — 10,901 $(461,273) $ 422,634 (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees. 98 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 99 segments’ operating results. Unconsolidated joint ventures eliminating the effects of straight-line rents, DFL non-cash are now reflected in other non-reportable segments, and as interest, amortization of market lease intangibles, lease a result, excluded from NOI and Adjusted NOI. Prior period termination fees and the impact of deferred community fee NOI and Adjusted NOI have also been recast to conform to income and expense. The adjustments to NOI and resulting current period presentation, which excludes unconsolidated Adjusted NOI for SHOP have been recast for prior periods joint ventures. During the year ended December 31, 2017, 42 senior housing triple-net facilities were transferred to the Company’s SHOP segment. During the year ended December 31, 2016, 17 senior housing triple-net facilities presented to conform to the current period presentation which excludes (i) the impact of deferred community fee income and expense, resulting in recognition as cash is received and expenses are paid and (ii) adjustments related to unconsolidated joint ventures (see above). were transitioned to a RIDEA structure (reported in the Non-segment assets consist of assets in the Company’s Company’s SHOP segment). There were no intersegment other non-reportable segments (see above) and corporate sales or transfers during the year ended December 31, 2015. non-segment assets. Corporate non-segment assets The Company evaluates performance based upon: (i) property net operating income from continuing operations (“NOI”) and (ii) Adjusted NOI. NOI is defined as rental and related revenues, including tenant recoveries, resident fees and services, and income from DFLs, less property level consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities and, if any, real estate held for sale. See Note 22 for other information regarding concentrations of credit risk. The following tables summarize information for the reportable segments (in thousands): For the year ended December 31, 2017: Senior Housing Life Medical Non- Non- Other Corporate Triple-Net SHOP Science Office reportable segment Total $ 313,547 $ 525,473 $ 358,816 $ 477,459 $ 116,846 $ (3,819) (396,491) (78,001) (183,197) (4,743) 309,728 17,098 326,826 128,982 33,227 162,209 (17,098) (33,227) 280,815 294,262 112,103 (4,517) (2,952) (4,446) 4,517 — (373) 2,952 — (506) 4,446 56,237 276,298 291,310 107,657 — 1,164,300 — $1,792,141 — (666,251) — 1,125,890 38,410 (38,410) 56,237 — — — Depreciation and amortization (103,820) (103,162) (128,864) (169,795) (29,085) — (534,726) (2,518) (7,920) (4,230) (292,169) (307,716) Recoveries (impairments), net (22,590) — (143,794) — (166,384) 280,349 17,485 45,916 9,095 3,796 — — — — — — — — — — — — — — — (88,772) (7,963) (88,772) (7,963) 50,895 — — — (54,227) (19,475) 1,333 356,641 (54,227) 31,420 1,333 10,901 — 10,901 — — — — — — — — — — — — — — — $ 461,149 $ 35,385 $ 197,494 $ 133,056 $ 56,823 $(461,273) $ 422,634 (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense General and administrative Transaction costs Gain (loss) on sales of real estate, net Loss on debt extinguishment Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Net income (loss) termination fees. PART II unconsolidated joint ventures from its evaluation of its operating expenses. Adjusted NOI is calculated as NOI after For the year ended December 31, 2016: SHOP Life Science Senior Medical Housing Office Triple-Net $ 423,118 $ 686,822 $ 358,537 $ 446,280 (173,687) 272,593 (3,536) 269,057 3,536 — (5,895) (480,870) 205,952 (2,686) 203,266 2,686 — (29,745) (72,478) 286,059 (2,954) 283,105 2,954 — (2,357) (6,710) 416,408 (7,566) 408,842 7,566 — (9,499) (136,146) — — (108,806) — — (130,829) — — (161,790) — — Other Non- reportable $ 125,729 (4,654) 121,075 (3,022) 118,053 3,022 88,808 (9,153) (30,537) PART II Corporate Non- segment $ Total — $2,040,486 — (738,399) — 1,302,087 (19,764) — — 1,282,323 19,764 — 88,808 — (464,403) (407,754) — (103,611) (9,821) — — (568,108) (103,611) (9,821) 48,744 675 49,042 8,333 57,904 — — — — — — — — — — — (46,020) 3,654 (4,473) 164,698 (46,020) 3,654 (4,473) — — — — $ 319,507 $ 68,076 $ 201,915 $ 113,241 — — — — 11,360 — $ 239,457 — 265,755 11,360 265,755 $(302,270) $ 639,926 Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Gain (loss) on sales of real estate, net Loss on debt extinguishment Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Discontinued operations Net income (loss) (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees. 98 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 99 PART II For the year ended December 31, 2015: The following table summarizes the Company’s total assets by segment (in thousands): Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Recoveries (impairments), net Gain (loss) on sales of real estate, net Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Discontinued operations Net income (loss) $ SHOP Life Science Other Senior Non- Medical Housing reportable Office Triple-Net $ 123,437 $ 428,269 $ 518,264 $ 342,984 $ 415,351 (3,965) (162,054) 119,472 253,297 (2,356) (4,933) 117,116 248,364 2,356 4,933 112,184 — (9,745) (9,603) (28,463) (143,682) — — — — — (108,349) (371,016) 147,248 8,145 155,393 (8,145) — (31,869) (80,981) — — — (3,427) 424,842 (9,716) 415,126 9,716 — (16,899) (125,538) — — — (70,217) 272,767 (10,128) 262,639 10,128 — (2,878) (126,241) — — — Corporate Non- segment Total — $1,828,305 — (610,679) — 1,217,626 (18,988) — — 1,198,638 — 18,988 112,184 — (479,596) (408,602) — (504,905) (95,965) (27,309) — (108,349) (95,965) (27,309) 6,325 — — — — — — — — 52 — — — — — — 16,208 9,807 6,377 16,208 9,807 — — — — $ 288,730 $ 34,398 $ 143,648 $ 100,064 — — — — 6,590 — $ 91,689 — (699,086) 6,590 (699,086) $(1,204,947) $ (546,418) (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and termination fees. The following table summarizes the Company’s revenues by segment (in thousands): Segments Senior housing triple-net SHOP Life science Medical office Other non-reportable segments Total revenues Year Ended December 31, 2016 $ 423,118 686,822 358,537 446,280 214,537 $2,129,294 2017 $ 313,547 525,473 358,816 477,459 173,083 $1,848,378 2015 $ 428,269 518,264 342,984 415,351 235,621 $1,940,489 Year 2018 2019 2020 2021 2022 Thereafter 100 http://www.hcpi.com 2017 Annual Report 101 Segments Senior housing triple-net SHOP Life science Medical office Gross reportable segment assets Accumulated depreciation and amortization Net reportable segment assets Other non-reportable segment assets Assets held for sale and discontinued operations, net Other non-segment assets Total assets PART II December 31, 2017 2016 2015 $ 3,515,400 $ 3,871,720 $ 5,092,443 2,392,130 4,154,372 3,989,168 3,135,115 3,961,623 3,724,483 2,684,675 3,613,726 3,410,931 14,051,070 14,692,941 14,801,775 (2,919,278) (2,900,060) (2,704,425) 11,131,792 11,792,881 12,097,350 1,904,433 2,255,712 417,014 635,222 927,866 782,806 2,392,823 5,654,326 1,305,350 $14,088,461 $15,759,265 $21,449,849 As a result of the change in the composition of reportable during the fourth quarter of 2017 and no impairment was segments during the fourth quarter of 2017, as further recognized. At December 31, 2017, goodwill of $47 million described above, the Company allocated goodwill to was allocated to segment assets as follows: (i) senior its revised reporting units using a relative fair value housing triple-net—$21 million, (ii) SHOP—$9 million, approach. The Company completed a goodwill impairment (iii) medical office—$11 million and (iv) other—$6 million. assessment for all reporting units immediately prior to At December 31, 2016, goodwill of $42 million was the reallocation and determined that no impairment allocated to segment assets as follows: (i) senior housing existed at September 30, 2017. Additionally, the Company triple-net—$16 million, (ii) SHOP—$9 million, (iii) medical completed the required annual goodwill impairment test office—$11 million and (iv) other—$6 million. Note 14. Future Minimum Rents The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of December 31, 2017 (in thousands): Amount $1,021,212 956,092 874,617 793,058 691,352 2,807,315 $7,143,646 Note 15. Compensation Plans Stock Based Compensation On May 11, 2006, the Company’s stockholders approved the 2006 Performance Incentive Plan, which was amended and restated in 2009 (“the 2006 Plan”). On May 1, 2014, the Company’s stockholders approved the 2014 Performance Incentive Plan (“the 2014 Plan”) (collectively, “the Plans”). Following the adoption of the 2014 Plan, no new awards will be issued under the 2006 Plan. The Plans provide for the granting of stock-based compensation, including stock options, restricted stock and restricted stock units to officers, employees and directors in connection with their employment with or services provided to the Company. The maximum number of shares reserved for awards under the 2014 Plan is 33 million shares, and as of December 31, 2017, 30 million of the reserved shares under the 2014 Plan are available for future awards of which 20 million shares may be issued as restricted stock and restricted stock units. Total share-based compensation expense recognized during the years ended December 31, 2017, 2016 and 2015 was $14 million, $23 million and $26 million, respectively. The year ended December 31, 2016 includes a $7 million charge recognized in general and administrative expenses primarily resulting from the termination of the Company’s former chief executive officer (“CEO”) that was comprised of the accelerated vesting of restricted stock units in accordance with the terms of the former CEO’s employment agreement. As of December 31, 2017 and 2016, there was $20 million and $14 million, respectively, 2017 2016 3,135,115 3,961,623 3,724,483 14,692,941 (2,900,060) 11,792,881 2,255,712 927,866 782,806 2,392,130 4,154,372 3,989,168 14,051,070 (2,919,278) 11,131,792 1,904,433 417,014 635,222 2015 $ 3,515,400 $ 3,871,720 $ 5,092,443 2,684,675 3,613,726 3,410,931 14,801,775 (2,704,425) 12,097,350 2,392,823 5,654,326 1,305,350 $14,088,461 $15,759,265 $21,449,849 The following table summarizes the Company’s total assets by segment (in thousands): PART II December 31, Segments Senior housing triple-net SHOP Life science Medical office Gross reportable segment assets Accumulated depreciation and amortization Net reportable segment assets Other non-reportable segment assets Assets held for sale and discontinued operations, net Other non-segment assets Total assets Senior Housing Life Medical Other Non- Corporate Non- Triple-Net SHOP Science Office reportable segment Total $ 428,269 $ 518,264 $ 342,984 $ 415,351 $ 123,437 $ (3,427) (371,016) (70,217) (162,054) (3,965) 424,842 147,248 272,767 253,297 119,472 (9,716) 8,145 (10,128) (4,933) (2,356) — $1,828,305 — (610,679) — 1,217,626 (18,988) 415,126 155,393 248,364 117,116 — 1,198,638 (8,145) 262,639 10,128 (16,899) (125,538) (31,869) (80,981) (2,878) (9,603) (126,241) (143,682) 4,933 — 2,356 112,184 (9,745) (28,463) — (108,349) — (108,349) — — — 18,988 112,184 (408,602) (479,596) — (504,905) (95,965) (27,309) (95,965) (27,309) — 16,208 9,807 6,377 16,208 9,807 — — — — — 6,590 — — 6,590 (699,086) (699,086) — — 52 — — — — 9,716 — 6,325 — — — — — — — — — — — — — — — — — — — — — — — — — (1) Represents rental and related revenues, tenant recoveries, resident fees and services, and income from DFLs. (2) Represents straight-line rents, DFL non-cash interest, amortization of market lease intangibles, net, deferral of community fees, net and $ 288,730 $ 34,398 $ 143,648 $ 100,064 $ 91,689 $(1,204,947) $ (546,418) The following table summarizes the Company’s revenues by segment (in thousands): PART II For the year ended December 31, 2015: Segments Rental revenues(1) Operating expenses NOI Adjustments to NOI(2) Adjusted NOI Addback adjustments Interest income Interest expense Depreciation and amortization General and administrative Transaction costs Recoveries (impairments), net Gain (loss) on sales of real estate, net Other income (expense), net Income tax benefit (expense) Equity income (loss) from unconsolidated JVs Discontinued operations Net income (loss) termination fees. Segments Senior housing triple-net SHOP Life science Medical office Other non-reportable segments Total revenues Year Ended December 31, 2017 2016 2015 $ 313,547 $ 423,118 $ 428,269 525,473 358,816 477,459 173,083 686,822 358,537 446,280 214,537 518,264 342,984 415,351 235,621 $1,848,378 $2,129,294 $1,940,489 As a result of the change in the composition of reportable segments during the fourth quarter of 2017, as further described above, the Company allocated goodwill to its revised reporting units using a relative fair value approach. The Company completed a goodwill impairment assessment for all reporting units immediately prior to the reallocation and determined that no impairment existed at September 30, 2017. Additionally, the Company completed the required annual goodwill impairment test during the fourth quarter of 2017 and no impairment was recognized. At December 31, 2017, goodwill of $47 million was allocated to segment assets as follows: (i) senior housing triple-net—$21 million, (ii) SHOP—$9 million, (iii) medical office—$11 million and (iv) other—$6 million. At December 31, 2016, goodwill of $42 million was allocated to segment assets as follows: (i) senior housing triple-net—$16 million, (ii) SHOP—$9 million, (iii) medical office—$11 million and (iv) other—$6 million. Note 14. Future Minimum Rents The following table summarizes future minimum lease payments to be received, excluding operating expense reimbursements, from tenants under non-cancelable operating leases as of December 31, 2017 (in thousands): Year 2018 2019 2020 2021 2022 Thereafter Amount $1,021,212 956,092 874,617 793,058 691,352 2,807,315 $7,143,646 Note 15. Compensation Plans Stock Based Compensation On May 11, 2006, the Company’s stockholders approved the 2006 Performance Incentive Plan, which was amended and restated in 2009 (“the 2006 Plan”). On May 1, 2014, the Company’s stockholders approved the 2014 Performance Incentive Plan (“the 2014 Plan”) (collectively, “the Plans”). Following the adoption of the 2014 Plan, no new awards will be issued under the 2006 Plan. The Plans provide for the granting of stock-based compensation, including stock options, restricted stock and restricted stock units to officers, employees and directors in connection with their employment with or services provided to the Company. The maximum number of shares reserved for awards under the 2014 Plan is 33 million shares, and as of December 31, 2017, 30 million of the reserved shares under the 2014 Plan are available for future awards of which 20 million shares may be issued as restricted stock and restricted stock units. Total share-based compensation expense recognized during the years ended December 31, 2017, 2016 and 2015 was $14 million, $23 million and $26 million, respectively. The year ended December 31, 2016 includes a $7 million charge recognized in general and administrative expenses primarily resulting from the termination of the Company’s former chief executive officer (“CEO”) that was comprised of the accelerated vesting of restricted stock units in accordance with the terms of the former CEO’s employment agreement. As of December 31, 2017 and 2016, there was $20 million and $14 million, respectively, 100 http://www.hcpi.com 2017 Annual Report 101 PART II related to unvested share-based compensation arrangements granted under the Company’s incentive plans, which is expected to be recognized over a weighted average period of three years associated with future employee service. Conversion of Equity Awards at the Spin-Off Date The Plans were established with anti-dilution provisions, such that in the event of an equity restructuring of the Company (including spin-off transactions), equity awards would preserve their value post-transaction. In order to achieve an equitable modification of the existing awards following the Spin-Off, the Company converted pre-spin awards to their post-spin value, resulting in grants to remaining employees denominated solely in the Company’s common stock. The modification assumed a conversion ratio on all awards calculated as the final pre-spin closing price of the Company’s common stock divided by the five trading day average post-spin closing price (“Five Day Average Price”) of the Company’s common stock. The conversion impacted 133 participants, resulted in additional awards being granted and incremental fair value of unvested awards due to the difference between the Five Day Average Price and the pre-spin closing price on the Spin-Off date. The vesting periods were unchanged for unvested grants at the Spin-Off date. The incremental fair value of unvested awards was immaterial. Stock Options Stock options are granted with an exercise price per share equal to the closing market price of the Company’s common stock on the grant date. Stock options generally vest ratably over a three- to five-year period and have a 10-year contractual term. Vesting of certain stock options may accelerate, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. There have been no grants of stock options since 2014. Stock options outstanding and exercisable were 1.1 million at December 31, 2017, and 1.3 million and 1.2 million at December 31, 2016, respectively. Proceeds received from stock options exercised under the Plans for the years ended December 31, 2017, 2016 and 2015 were $1 million, $4 million and $28 million, respectively. Compensation expense related to stock options was immaterial for all periods presented. Restricted Stock Awards Under the Plans, restricted stock awards, including restricted stock units and performance stock units are granted subject to certain restrictions. Conditions of vesting are determined at the time of grant. Restrictions on certain awards generally lapse, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. The fair market value of restricted stock awards, both time vesting and those subject to specific performance criteria, are expensed over the period of vesting. Restricted stock units, which vest based solely upon passage of time generally vest over a period of three to six years. The fair value of restricted stock units is determined based on the closing market price of the Company's shares on the grant date. Performance stock units, which are restricted stock awards that vest dependent upon attainment of various levels of performance that equal or exceed targeted levels, generally vest in their entirety at the end of a three year performance period. The number of shares that ultimately vest can vary from 0% to 200% of target depending on the level of achievement of the performance criteria. The fair value of performance stock units is determined based on the Monte Carlo valuation model. The compensation expense recognized for all restricted stock awards is net of actual forfeitures. Upon vesting of restricted stock awards, the participant is required to pay the related tax withholding obligation. Participants can generally elect to have the Company reduce the number of common stock shares delivered to pay the employee tax withholding obligation. The value of the shares withheld is dependent on the closing market price of the Company’s common stock on the trading date prior to the relevant transaction occurring. During the years ended December 31, 2017, 2016 and 2015, the Company withheld 157,000, 237,000 and 200,000 shares, respectively, to offset tax withholding obligations with respect to the vesting of the restricted stock and performance restricted stock unit awards. Holders of restricted stock awards, including restricted stock units and performance stock units, are generally entitled to receive dividends equal to the amount that would be paid on an equivalent number of shares of common stock. The following table summarizes restricted stock award activity, including performance stock units, for the year ended December 31, 2017 (units and shares in thousands): At December 31, 2017, the weighted average remaining Subsequent events. The Company expects to record vesting period of restricted stock and performance based severance and related charges of approximately $9 million units was two years. The total fair value (at vesting) of in the first quarter of 2018 related to the departure of our restricted stock and performance based units which vested Executive Chairman, effective March 1, 2018. PART II Restricted Weighted Average Stock Grant Date Units Fair Value 962 844 (419) (248) 1,139 $37.39 33.57 35.10 35.04 33.41 In June 2015 and September 2015, the Company determined that its Four Seasons senior notes (the “Four Seasons Notes”) were other-than-temporarily impaired resulting from a continued decrease in the fair value of its investment. Although the Company did not intend to sell and did not believe it would be required to sell the Four Seasons Notes before their maturity, the Company determined that a credit loss existed resulting from several factors including: (i) deterioration in Four Seasons’ operating performance since the fourth quarter of 2014 and (ii) credit downgrades to Four Seasons received during the first half of 2015. Accordingly, the Company recorded impairment charges during the three months ended June 30, 2015 and September 30, 2015 of $42 million and $70 million, respectively, reducing the carrying value of the Four Seasons Notes at September 30, 2015 to $100 million (£66 million). The fair value of the Four Seasons Notes used to calculate the impairment charge was based on quoted market prices. However, because the Four Seasons Notes were not actively traded, these prices were considered to be Level 2 measurements within the fair value hierarchy. When calculating the fair value and determining whether a credit loss existed, the Company also evaluated Four Season’s ability to repay the Four Seasons Notes according to their contractual terms based on its estimate of future cash flows. The estimated future cash flow inputs included forecasted revenues, capital expenditures, operating expenses, care home occupancy and continued implementation of Four Seasons’ business plan which included executing on its business line segmentation and continuing to invest in its core real estate portfolio. This information was consistent with the results of the valuation Unvested at January 1, 2017 Granted Vested Forfeited Unvested at December 31, 2017 for the years ended December 31, 2017, 2016 and 2015 was $15 million, $24 million and $21 million, respectively. Note 16. Impairments Casualty-Related As a result of Hurricane Harvey and Hurricane Irma during the year ended December 31, 2017, the Company recorded an estimated $13 million of casualty-related losses, net of a small insurance recovery. The losses are comprised of $8 million of property damage and $5 million of other associated costs, including storm preparation, clean up, relocation and other costs. Of the total $13 million casualty losses incurred, $12 million was recorded in Other income (expense), net, and $1 million was recorded in equity income (loss) from unconsolidated joint ventures as it relates to casualty losses for properties owned by certain of our unconsolidated joint ventures. In addition, the Company recorded a $1 million deferred tax benefit associated with the casualty-related losses. Real Estate During the third quarter 2017, the Company determined that 11 underperforming senior housing triple-net assets that are candidates for potential future sale were impaired. Accordingly, the Company wrote-down the carrying amount of these 11 assets to their fair value, which resulted in an aggregate impairment charge of $23 million. The fair value of the assets was based on forecasted sales prices which are considered to be Level 2 measurements within the fair value hierarchy. Other See Note 7 for further information on the impairment charges related to the mezzanine loan facility to Tandem (the "Tandem Mezzanine Loan"). http://www.hcpi.com 102 http://www.hcpi.com 2017 Annual Report 103 PART II PART II related to unvested share-based compensation arrangements granted under the Company’s incentive plans, which is expected to be recognized over a weighted average period of three years associated with future employee service. Conversion of Equity Awards at the Spin-Off Date Restricted Stock Awards Under the Plans, restricted stock awards, including restricted stock units and performance stock units are granted subject to certain restrictions. Conditions of vesting are determined at the time of grant. Restrictions on certain awards generally lapse, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. The fair market value The Plans were established with anti-dilution provisions, of restricted stock awards, both time vesting and those such that in the event of an equity restructuring of the subject to specific performance criteria, are expensed over Company (including spin-off transactions), equity awards the period of vesting. Restricted stock units, which vest would preserve their value post-transaction. In order to based solely upon passage of time generally vest over a achieve an equitable modification of the existing awards period of three to six years. The fair value of restricted stock following the Spin-Off, the Company converted pre-spin units is determined based on the closing market price of the awards to their post-spin value, resulting in grants to Company's shares on the grant date. Performance stock remaining employees denominated solely in the Company’s units, which are restricted stock awards that vest dependent common stock. The modification assumed a conversion upon attainment of various levels of performance that equal ratio on all awards calculated as the final pre-spin closing or exceed targeted levels, generally vest in their entirety price of the Company’s common stock divided by the five at the end of a three year performance period. The number trading day average post-spin closing price (“Five Day of shares that ultimately vest can vary from 0% to 200% Average Price”) of the Company’s common stock. The of target depending on the level of achievement of the conversion impacted 133 participants, resulted in additional performance criteria. The fair value of performance stock awards being granted and incremental fair value of unvested units is determined based on the Monte Carlo valuation awards due to the difference between the Five Day Average model. The compensation expense recognized for all Price and the pre-spin closing price on the Spin-Off date. restricted stock awards is net of actual forfeitures. The vesting periods were unchanged for unvested grants at the Spin-Off date. The incremental fair value of unvested awards was immaterial. Stock Options Stock options are granted with an exercise price per share equal to the closing market price of the Company’s common stock on the grant date. Stock options generally vest ratably over a three- to five-year period and have a 10-year contractual term. Vesting of certain stock options may accelerate, as provided in the Plans or in the applicable award agreement, upon retirement, a change in control or other specified events. There have been no grants of stock options since 2014. Stock options outstanding and exercisable were 1.1 million at December 31, 2017, and 1.3 million and 1.2 million at December 31, 2016, respectively. Proceeds received from stock options exercised under the Plans for the years ended December 31, 2017, 2016 and 2015 were $1 million, $4 million and $28 million, respectively. Compensation expense related to stock options was immaterial for all periods presented. Upon vesting of restricted stock awards, the participant is required to pay the related tax withholding obligation. Participants can generally elect to have the Company reduce the number of common stock shares delivered to pay the employee tax withholding obligation. The value of the shares withheld is dependent on the closing market price of the Company’s common stock on the trading date prior to the relevant transaction occurring. During the years ended December 31, 2017, 2016 and 2015, the Company withheld 157,000, 237,000 and 200,000 shares, respectively, to offset tax withholding obligations with respect to the vesting of the restricted stock and performance restricted stock unit awards. Holders of restricted stock awards, including restricted stock units and performance stock units, are generally entitled to receive dividends equal to the amount that would be paid on an equivalent number of shares of common stock. The following table summarizes restricted stock award activity, including performance stock units, for the year ended December 31, 2017 (units and shares in thousands): Unvested at January 1, 2017 Granted Vested Forfeited Unvested at December 31, 2017 At December 31, 2017, the weighted average remaining vesting period of restricted stock and performance based units was two years. The total fair value (at vesting) of restricted stock and performance based units which vested for the years ended December 31, 2017, 2016 and 2015 was $15 million, $24 million and $21 million, respectively. Note 16. Impairments Casualty-Related As a result of Hurricane Harvey and Hurricane Irma during the year ended December 31, 2017, the Company recorded an estimated $13 million of casualty-related losses, net of a small insurance recovery. The losses are comprised of $8 million of property damage and $5 million of other associated costs, including storm preparation, clean up, relocation and other costs. Of the total $13 million casualty losses incurred, $12 million was recorded in Other income (expense), net, and $1 million was recorded in equity income (loss) from unconsolidated joint ventures as it relates to casualty losses for properties owned by certain of our unconsolidated joint ventures. In addition, the Company recorded a $1 million deferred tax benefit associated with the casualty-related losses. Real Estate During the third quarter 2017, the Company determined that 11 underperforming senior housing triple-net assets that are candidates for potential future sale were impaired. Accordingly, the Company wrote-down the carrying amount of these 11 assets to their fair value, which resulted in an aggregate impairment charge of $23 million. The fair value of the assets was based on forecasted sales prices which are considered to be Level 2 measurements within the fair value hierarchy. Other See Note 7 for further information on the impairment charges related to the mezzanine loan facility to Tandem (the "Tandem Mezzanine Loan"). Restricted Stock Units 962 844 (419) (248) 1,139 Weighted Average Grant Date Fair Value $37.39 33.57 35.10 35.04 33.41 Subsequent events. The Company expects to record severance and related charges of approximately $9 million in the first quarter of 2018 related to the departure of our Executive Chairman, effective March 1, 2018. In June 2015 and September 2015, the Company determined that its Four Seasons senior notes (the “Four Seasons Notes”) were other-than-temporarily impaired resulting from a continued decrease in the fair value of its investment. Although the Company did not intend to sell and did not believe it would be required to sell the Four Seasons Notes before their maturity, the Company determined that a credit loss existed resulting from several factors including: (i) deterioration in Four Seasons’ operating performance since the fourth quarter of 2014 and (ii) credit downgrades to Four Seasons received during the first half of 2015. Accordingly, the Company recorded impairment charges during the three months ended June 30, 2015 and September 30, 2015 of $42 million and $70 million, respectively, reducing the carrying value of the Four Seasons Notes at September 30, 2015 to $100 million (£66 million). The fair value of the Four Seasons Notes used to calculate the impairment charge was based on quoted market prices. However, because the Four Seasons Notes were not actively traded, these prices were considered to be Level 2 measurements within the fair value hierarchy. When calculating the fair value and determining whether a credit loss existed, the Company also evaluated Four Season’s ability to repay the Four Seasons Notes according to their contractual terms based on its estimate of future cash flows. The estimated future cash flow inputs included forecasted revenues, capital expenditures, operating expenses, care home occupancy and continued implementation of Four Seasons’ business plan which included executing on its business line segmentation and continuing to invest in its core real estate portfolio. This information was consistent with the results of the valuation 102 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 103 PART II technique used by the Company to determine if a credit loss existed and to calculate the fair value of the Four Seasons Notes during its impairment review. In March 2017, pursuant to a shift in the Company’s investment strategy, the Company sold its £138.5 million par value Four Seasons Notes for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale, recognized in other income, net, as the sales price was above the previously- impaired carrying value of £41 million ($50 million). Income Taxes Note 17. The Company has elected to be taxed as a REIT under the applicable provisions of the Code for every year beginning with the year ended December 31, 1985. The Company has also elected for certain of its subsidiaries to be treated as taxable REIT subsidiaries (“TRS” or “TRS entities”) which are subject to federal and state income taxes. All entities other than the TRS entities are collectively referred to as the “REIT” within this Note 17. Certain REIT entities are also subject to state, local and foreign income taxes. Ordinary dividends Capital gain dividends Nondividend distributions Through October 2015, the Company held a secured term loan made to Delphis Operations, L.P. (“Delphis”). In October 2015, the Company received $23 million in cash proceeds from the sale of Delphis’ collateral and recognized an impairment recovery of $6 million for the amount received in excess of the loan’s carrying value. Distributions with respect to our common stock can be characterized for federal income tax purposes as taxable ordinary dividends, capital gain dividends, nondividend distributions or a combination thereof. Following is the characterization of our annual common stock distributions per share: Year Ended December 31, 2016 2017 $1.4800 $1.5561 — — — 6.7089 2015 $2.1184 0.0316 0.1100 $1.4800 $8.2650(1) $2.2600 (1) Consists of $2.095 per common share of quarterly cash dividends and $6.17 per common share of stock dividends related to the Spin-Off State income tax expense, net of federal tax (see Note 5). HCP common stockholders on October 24, 2016, the record date for the Spin-Off (the “Record Date”), received upon the Spin-Off on October 31, 2016 one share of QCP common stock for every five shares of HCP common stock they held (the “Distributed Shares”) and cash in lieu of fractional shares of QCP. For U.S. federal income tax purposes, HCP reported the fair market value of the QCP common stock distributed per each share of HCP common stock outstanding on the Record Date was $6.17, or $30.85 for each share of QCP common stock. The TRS entities subject to tax reported losses before income taxes from continuing operations of $58 million, $9 million and $22 million for the years ended December 31, 2017, 2016 and 2015, respectively. The REIT’s losses from continuing operations before income taxes from the U.K. were $4 million, $4 million and $15 million for the years ended December 31, 2017, 2016 and 2015, respectively. The total income tax expense (benefit) from continuing operations consists of the following components (in thousands): Current Federal State Foreign Total current Deferred Federal State Foreign Total deferred PART II Year Ended December 31, 2017 2016 2015 $ 949 $ 8,525 $ 4,948 1,504 1,737 8,307 1,332 1,988 828 $ 4,190 $ 18,164 $ 7,764 $ 2,730 $(10,241) $(11,317) (5,889) (2,364) (1,401) (2,049) (1,382) (4,872) $(5,523) $(13,691) $(17,571) $(1,333) $ 4,473 $ (9,807) Year Ended December 31, 2017 2016 2015 (1,222) 1,716 632 6 1,597 17,080 (57) 6,081 1,847 647 (280) 287 — 472 (606) 1,383 2,269 (298) (368) — 443 $ (1,333) $ 4,473 $ (9,807) December 31, 2017 2016 2015 $31,691 $28,940 $19,862 10,720 8,784 3,703 229 (548) (847) (606) (753) (531) $42,092 $36,271 $22,281 Total income tax expense (benefit) On December 22, 2017, the Tax Cuts and Jobs Act was The Company’s income tax expense from discontinued signed into law. As a result of the reduced U.S. federal operations was $0, $48 million and $1 million for the years corporate tax rate, the Company recorded a tax expense of ended December 31, 2017, 2016 and 2015, respectively (see $17 million, due to a remeasurement of deferred tax assets Note 5). and liabilities, which is included in total deferred tax expense in the table above. The following table reconciles the income tax expense (benefit) from continuing operations at statutory rates to the actual income tax expense recorded (in thousands): Tax benefit at U.S. federal statutory income tax rate on income or loss subject to tax $(21,085) $ (4,581) $(12,630) Gross receipts and margin taxes Foreign rate differential Effect of permanent differences Return to provision adjustments Re-measurement of deferred tax assets and liabilities Increase (decrease) in valuation allowance Total income tax expense (benefit) Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table summarizes the significant components of the Company’s deferred tax assets and liabilities from continuing operations (in thousands): Property, primarily differences in depreciation and amortization, the basis of land, and the treatment of interest and certain costs Net operating loss carryforward Expense accruals and other Valuation allowance Net deferred tax assets http://www.hcpi.com 104 http://www.hcpi.com 2017 Annual Report 105 PART II PART II technique used by the Company to determine if a credit loss Through October 2015, the Company held a secured The total income tax expense (benefit) from continuing operations consists of the following components (in thousands): existed and to calculate the fair value of the Four Seasons term loan made to Delphis Operations, L.P. (“Delphis”). In October 2015, the Company received $23 million in cash proceeds from the sale of Delphis’ collateral and recognized an impairment recovery of $6 million for the amount received in excess of the loan’s carrying value. Notes during its impairment review. In March 2017, pursuant to a shift in the Company’s investment strategy, the Company sold its £138.5 million par value Four Seasons Notes for £83 million ($101 million). The disposition of the Four Seasons Notes generated a £42 million ($51 million) gain on sale, recognized in other income, net, as the sales price was above the previously- impaired carrying value of £41 million ($50 million). Note 17. Income Taxes The Company has elected to be taxed as a REIT under the Distributions with respect to our common stock can be applicable provisions of the Code for every year beginning characterized for federal income tax purposes as taxable with the year ended December 31, 1985. The Company has ordinary dividends, capital gain dividends, nondividend also elected for certain of its subsidiaries to be treated as distributions or a combination thereof. Following is taxable REIT subsidiaries (“TRS” or “TRS entities”) which the characterization of our annual common stock are subject to federal and state income taxes. All entities distributions per share: other than the TRS entities are collectively referred to as the “REIT” within this Note 17. Certain REIT entities are also subject to state, local and foreign income taxes. Year Ended December 31, 2017 2016 2015 $1.4800 $1.5561 $2.1184 — — — 6.7089 0.0316 0.1100 $1.4800 $8.2650(1) $2.2600 Ordinary dividends Capital gain dividends Nondividend distributions (see Note 5). (1) Consists of $2.095 per common share of quarterly cash dividends and $6.17 per common share of stock dividends related to the Spin-Off HCP common stockholders on October 24, 2016, the record The TRS entities subject to tax reported losses before date for the Spin-Off (the “Record Date”), received upon the income taxes from continuing operations of $58 million, Spin-Off on October 31, 2016 one share of QCP common $9 million and $22 million for the years ended December 31, stock for every five shares of HCP common stock they 2017, 2016 and 2015, respectively. The REIT’s losses from held (the “Distributed Shares”) and cash in lieu of fractional continuing operations before income taxes from the U.K. shares of QCP. For U.S. federal income tax purposes, were $4 million, $4 million and $15 million for the years HCP reported the fair market value of the QCP common ended December 31, 2017, 2016 and 2015, respectively. stock distributed per each share of HCP common stock outstanding on the Record Date was $6.17, or $30.85 for each share of QCP common stock. Current Federal State Foreign Total current Deferred Federal State Foreign Total deferred Total income tax expense (benefit) On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. As a result of the reduced U.S. federal corporate tax rate, the Company recorded a tax expense of $17 million, due to a remeasurement of deferred tax assets and liabilities, which is included in total deferred tax expense in the table above. Year Ended December 31, 2016 2017 2015 $ 949 1,504 1,737 $ 4,190 $ 8,525 8,307 1,332 $ 18,164 $ 4,948 1,988 828 $ 7,764 $ 2,730 (5,889) (2,364) $(10,241) $(11,317) (1,401) (1,382) (4,872) (2,049) $(5,523) $(13,691) $(17,571) $(1,333) $ 4,473 $ (9,807) The Company’s income tax expense from discontinued operations was $0, $48 million and $1 million for the years ended December 31, 2017, 2016 and 2015, respectively (see Note 5). The following table reconciles the income tax expense (benefit) from continuing operations at statutory rates to the actual income tax expense recorded (in thousands): Tax benefit at U.S. federal statutory income tax rate on income or loss subject to tax State income tax expense, net of federal tax Gross receipts and margin taxes Foreign rate differential Effect of permanent differences Return to provision adjustments Re-measurement of deferred tax assets and liabilities Increase (decrease) in valuation allowance Total income tax expense (benefit) Year Ended December 31, 2015 2016 2017 $(21,085) $ (4,581) $(12,630) (606) 6,081 1,383 1,847 2,269 647 (298) (280) (368) 287 — — 443 472 $ (9,807) $ (1,333) $ 4,473 (1,222) 1,716 632 6 1,597 17,080 (57) Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The following table summarizes the significant components of the Company’s deferred tax assets and liabilities from continuing operations (in thousands): December 31, 2017 2016 2015 Property, primarily differences in depreciation and amortization, the basis of land, and the treatment of interest and certain costs Net operating loss carryforward Expense accruals and other Valuation allowance Net deferred tax assets $31,691 $28,940 $19,862 3,703 (753) (531) $42,092 $36,271 $22,281 10,720 229 (548) 8,784 (847) (606) 104 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 105 PART II PART II Deferred tax assets and liabilities are included in other assets, net and accounts payable and accrued liabilities. At December 31, 2017 the Company had a net operating loss (“NOL”) carryforward of $42 million related to the TRS entities. These amounts can be used to offset future taxable income, if any. The NOL carryforwards begin to expire in 2033 with respect to the TRS entities. The Company records a valuation allowance against deferred tax assets in certain jurisdictions when it cannot sustain a conclusion that it is more likely than not that it can realize the deferred tax assets during the periods in which these temporary differences become deductible. The deferred tax asset valuation allowance is adequate to reduce the total deferred tax assets to an amount that the Company estimates will “more-likely-than-not” be realized. For the years ended December 31, 2017 and 2016, the tax basis of the Company’s net assets was less than the reported amounts by $1.7 billion and $2.0 billion, respectively. The difference between the reported amounts and the tax basis was primarily related to the Slough Estates USA, Inc. (“SEUSA”) acquisition, which occurred in 2007. For the year ended December 31, 2015, the tax basis of the Company’s net assets was less than the reported amounts by $6.5 billion. The difference between the reported amounts and the tax basis was primarily related to the SEUSA and HCRMC acquisitions which occurred in 2007 and 2011, respectively. Both SEUSA and HCRMC were corporations subject to federal and state income taxes. As a result of these acquisitions, the Company succeeded to the tax attributes of SEUSA and HCRMC, including the tax basis in the acquired company’s assets and liabilities. The Company files numerous U.S. federal, state and local income and franchise tax returns. With a few exceptions, the Company is no longer subject to U.S. federal, state or local tax examinations by taxing authorities for years prior to 2014. The Company is no longer subject to federal corporate-level tax on the taxable disposition of SEUSA pre-acquisition assets. Note 18. Earnings Per Common Share The following table illustrates the computation of basic and diluted earnings per share (dollars in thousands, except per share data): Numerator Net income (loss) from continuing operations Noncontrolling interests’ share in earnings Net income (loss) attributable to HCP, Inc. Less: Participating securities’ share in earnings Income (loss) from continuing operations applicable to common shares Discontinued operations Net income (loss) applicable to common shares Denominator Basic weighted average shares outstanding Dilutive potential common shares - equity awards Diluted weighted average common shares Basic earnings per common share Continuing operations Discontinued operations Net income (loss) applicable to common shares Diluted earnings per common share Continuing operations Discontinued operations Net income (loss) applicable to common shares Year Ended December 31, 2016 2017 2015 (8,465) 414,169 (1,156) 413,013 $422,634 $374,171 $ 152,668 (12,817) (12,179) 139,851 361,992 (1,317) (1,198) 138,534 360,794 (699,086) — 265,755 $413,013 $626,549 $ (560,552) 468,759 176 468,935 467,195 208 467,403 462,795 — 462,795 $ $ $ $ 0.88 $ — 0.88 $ 0.88 $ — 0.88 $ 0.77 $ 0.57 1.34 $ 0.77 $ 0.57 1.34 $ 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) Restricted stock and certain performance restricted stock For the year ended December 31, 2015, diluted loss per units are considered participating securities because share from continuing operations is calculated using the dividend payments are not forfeited even if the underlying weighted-average common shares outstanding during the award does not vest and require use of the two-class method period, as the effect of shares issuable under employee when computing basic and diluted earnings per share. compensation plans and upon DownREIT unit conversions would have been anti-dilutive. All DownREIT units and approximately 1 million stock options were anti-dilutive for all periods presented. Note 19. Supplemental Cash Flow Information The following table summarizes supplemental cash flow information (in thousands): Year Ended December 31, 2017 2016 2015 $309,111 $ 489,453 $451,615 10,045 16,937 13,727 11,108 6,959 8,798 67,425 49,999 52,511 — 3,539,584 73,278 — — — 299,297 2,908 6,622 3,388 Supplemental cash flow information: Interest paid, net of capitalized interest Income taxes paid Capitalized interest Accrued construction costs Non-cash impact of QCP Spin-Off, net Securities transferred for debt defeasance Supplemental schedule of non-cash investing and financing activities: Settlement of loans receivable as consideration for real estate acquisition Vesting of restricted stock units and conversion of non-managing member units Noncontrolling interest and other liabilities, net assumed in connection with the into common stock RIDEA III acquisition Deconsolidation of noncontrolling interest in connection with RIDEA II transaction 58,061 Noncontrolling interest issued in connection with real estate and other acquisitions Mortgages and other liabilities assumed with real estate acquisitions Foreign currency translation adjustment Unrealized gains (losses) on available-for-sale securities and derivatives — — — — 5,425 15,862 designated as cash flow hedges, net (10,315) 3,171 1,889 See discussions related to the Brookdale Transaction in Note 3 and the Spin-Off in Note 5. The following table summarizes cash, cash equivalents and restricted cash (in thousands): — — — 82,985 (3,332) 61,219 — 10,971 23,218 (8,738) December 31, 2017 $ 55,306 26,897 $ 82,203 2016 $ 94,730 42,260 $136,990 Cash and cash equivalents Restricted cash Cash, cash equivalents and restricted cash http://www.hcpi.com 106 http://www.hcpi.com 2017 Annual Report 107 PART II Deferred tax assets and liabilities are included in other For the years ended December 31, 2017 and 2016, the tax assets, net and accounts payable and accrued liabilities. basis of the Company’s net assets was less than the reported At December 31, 2017 the Company had a net operating loss (“NOL”) carryforward of $42 million related to the TRS entities. These amounts can be used to offset future taxable income, if any. The NOL carryforwards begin to expire in 2033 with respect to the TRS entities. amounts by $1.7 billion and $2.0 billion, respectively. The difference between the reported amounts and the tax basis was primarily related to the Slough Estates USA, Inc. (“SEUSA”) acquisition, which occurred in 2007. For the year ended December 31, 2015, the tax basis of the Company’s net assets was less than the reported amounts The Company records a valuation allowance against deferred by $6.5 billion. The difference between the reported amounts tax assets in certain jurisdictions when it cannot sustain a and the tax basis was primarily related to the SEUSA and conclusion that it is more likely than not that it can realize HCRMC acquisitions which occurred in 2007 and 2011, the deferred tax assets during the periods in which these respectively. Both SEUSA and HCRMC were corporations temporary differences become deductible. The deferred subject to federal and state income taxes. As a result of tax asset valuation allowance is adequate to reduce the these acquisitions, the Company succeeded to the tax total deferred tax assets to an amount that the Company attributes of SEUSA and HCRMC, including the tax basis in estimates will “more-likely-than-not” be realized. the acquired company’s assets and liabilities. The Company files numerous U.S. federal, state and local The Company is no longer subject to federal income and franchise tax returns. With a few exceptions, corporate-level tax on the taxable disposition of SEUSA the Company is no longer subject to U.S. federal, state or pre-acquisition assets. local tax examinations by taxing authorities for years prior to 2014. Note 18. Earnings Per Common Share Numerator Net income (loss) from continuing operations Noncontrolling interests’ share in earnings Net income (loss) attributable to HCP, Inc. Less: Participating securities’ share in earnings Income (loss) from continuing operations applicable to common shares Discontinued operations Net income (loss) applicable to common shares Denominator Basic weighted average shares outstanding Dilutive potential common shares - equity awards Diluted weighted average common shares Basic earnings per common share Continuing operations Discontinued operations Net income (loss) applicable to common shares Diluted earnings per common share Continuing operations Discontinued operations Net income (loss) applicable to common shares Year Ended December 31, 2017 2016 2015 $422,634 $374,171 $ 152,668 (8,465) (12,179) 414,169 361,992 (1,156) (1,198) 413,013 360,794 — 265,755 (12,817) 139,851 (1,317) 138,534 (699,086) $413,013 $626,549 $ (560,552) 468,759 467,195 462,795 176 208 — 468,935 467,403 462,795 $ $ $ $ 0.88 $ 0.77 $ — 0.57 0.88 $ 1.34 $ 0.88 $ 0.77 $ — 0.57 0.88 $ 1.34 $ 0.30 (1.51) (1.21) 0.30 (1.51) (1.21) Restricted stock and certain performance restricted stock units are considered participating securities because dividend payments are not forfeited even if the underlying award does not vest and require use of the two-class method when computing basic and diluted earnings per share. PART II For the year ended December 31, 2015, diluted loss per share from continuing operations is calculated using the weighted-average common shares outstanding during the period, as the effect of shares issuable under employee compensation plans and upon DownREIT unit conversions would have been anti-dilutive. All DownREIT units and approximately 1 million stock options were anti-dilutive for all periods presented. Note 19. Supplemental Cash Flow Information The following table summarizes supplemental cash flow information (in thousands): Supplemental cash flow information: Interest paid, net of capitalized interest Income taxes paid Capitalized interest Supplemental schedule of non-cash investing and financing activities: Accrued construction costs Non-cash impact of QCP Spin-Off, net Securities transferred for debt defeasance Settlement of loans receivable as consideration for real estate acquisition Vesting of restricted stock units and conversion of non-managing member units Year Ended December 31, 2017 2016 2015 $309,111 10,045 16,937 $ 489,453 13,727 11,108 $451,615 6,959 8,798 67,425 49,999 — 3,539,584 — 73,278 — 52,511 — — — 299,297 The following table illustrates the computation of basic and diluted earnings per share (dollars in thousands, except per share data): into common stock Noncontrolling interest and other liabilities, net assumed in connection with the RIDEA III acquisition Deconsolidation of noncontrolling interest in connection with RIDEA II transaction Noncontrolling interest issued in connection with real estate and other acquisitions Mortgages and other liabilities assumed with real estate acquisitions Foreign currency translation adjustment Unrealized gains (losses) on available-for-sale securities and derivatives designated as cash flow hedges, net 2,908 6,622 3,388 — 58,061 — 5,425 15,862 — — 61,219 — — 82,985 (3,332) 10,971 23,218 (8,738) (10,315) 3,171 1,889 See discussions related to the Brookdale Transaction in Note 3 and the Spin-Off in Note 5. The following table summarizes cash, cash equivalents and restricted cash (in thousands): Cash and cash equivalents Restricted cash Cash, cash equivalents and restricted cash December 31, 2017 $ 55,306 26,897 $ 82,203 2016 $ 94,730 42,260 $136,990 106 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 107 PART II The Company holds commercial mortgage-backed a three-year call option to acquire all the shares of the securities (“CMBS”) issued by Federal Home Loan Mortgage special purpose entity, which it can only exercise upon the Corporation (commonly referred to as Freddie MAC) occurrence of certain events. through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets. The Company provided seller financing of $10 million related to its sale of seven senior housing triple-net facilities. The financing was provided in the form of a secured five-year mezzanine loan to a “thinly capitalized” borrower created to The Company provided a £105 million ($131 million) bridge acquire the facilities. loan to Maria Mallaband Care Group Ltd. (“MMCG”) to fund the acquisition of a portfolio of care homes in the U.K. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity has been identified as a VIE because it is “thinly capitalized.” The Company retains Between 2012 and 2015, the Company funded a $257 million mezzanine loan facility to Tandem as part of a recapitalization of the Tandem Portfolio (see Note 7). Due to a decline in the fair value of the Tandem Portfolio over time, there is no longer sufficient equity at risk in Tandem and it has become a “thinly capitalized” borrower. The classification of the related assets and liabilities and their maximum loss exposure as a result of the Company’s involvement with these VIEs at December 31, 2017 are presented below (in thousands): VIE Type VIE tenants - DFLs(2) Asset/Liability Type Net investment in DFLs VIE tenants - operating leases(2) Lease intangibles, net and straight-line rent receivables CCRC OpCo RIDEA II PropCo Development JVs Tandem Health Care MMCG Loan Loan - Seller Financing Investments in unconsolidated joint ventures Investments in unconsolidated joint ventures Investments in unconsolidated joint ventures Loans Receivable, net Loans Receivable, net Loans Receivable, net CMBS and LLC investment Marketable debt and cost method investment Maximum Loss Exposure and Carrying Amount(1) $ 601,723 5,519 190,454 252,743 12,563 105,000 142,820 10,000 33,750 (1) The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest). (2) The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default. As of December 31, 2017, the Company had not provided, to further losses (e.g., cash shortfalls). See Notes 3, 6, 7 and is not required to provide, financial support through a and 8 for additional descriptions of the nature, purpose and liquidity arrangement or otherwise, to its unconsolidated operating activities of the Company’s unconsolidated VIEs VIEs, including circumstances in which it could be exposed and interests therein. PART II Note 20. Variable Interest Entities On January 1, 2016, the Company adopted ASU 2015-2 using the modified retrospective method as permitted by the ASU. As a result of the adoption, the Company identified additional assets and liabilities of certain VIEs in its consolidated total assets and total liabilities at December 31, 2015 of $543 million and $651 million, respectively. Refer to the specific VIE descriptions below for detail on which entities were classified as consolidated VIEs subsequent to the adoption of ASU 2015-2. Additionally, the Company deconsolidated three JVs and recognized $0.5 million as a cumulative-effect adjustment to cumulative dividends in excess of earnings. Unconsolidated Variable Interest Entities At December 31, 2017, the Company had investments in: (i) five unconsolidated VIE joint ventures; (ii) 48 properties leased to VIE tenants; (iii) marketable debt securities of one VIE and (iv) three loans to VIE borrowers. The Company has determined that it is not the primary beneficiary of and therefore does not consolidate these VIEs because it does not have the ability to control the activities that most significantly impact their economic performance. Except for the Company’s equity interest in the unconsolidated JVs (CCRC OpCo, RIDEA II PropCo, Vintage Park Development JV, Waldwick JV and the LLC investment discussed below), it has no formal involvement in these VIEs beyond its investments. The Company holds a 49% ownership interest in CCRC OpCo, a joint venture entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE. The equity members of CCRC OpCo “lack power” because they share certain operating rights with Brookdale, as manager of the CCRCs. The assets of CCRC OpCo primarily consist of the CCRCs that it owns and leases, resident fees receivable, notes receivable, and cash and cash equivalents; its obligations primarily consist of operating lease obligations to CCRC PropCo, debt service payments and capital expenditures for the properties, and accounts payable and expense accruals associated with the cost of its CCRCs’ operations. Assets generated by the CCRC operations (primarily rents from CCRC residents) of CCRC OpCo may only be used to settle its contractual obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities). In January 2017, as a result of the partial sale of its interest in RIDEA II, the Company concluded that it should deconsolidate RIDEA II as it is no longer the primary beneficiary of the joint venture. The HCP/CPA JV is the primary beneficiary of both RIDEA II PropCo and RIDEA II OpCo as it controls the significant activities of RIDEA II PropCo and, of the group that controls the significant activities of RIDEA II OpCo, is most closely associated to the entity. Furthermore, control over the HCP/CPA JV is shared between HCP and CPA, and as such, the Company does not consolidate the HCP/CPA JV. Subsequent to the partial sale of its interest in RIDEA II, the Company continues to hold a direct investment in RIDEA II PropCo, which has been identified as a VIE as Brookdale, the non-managing member, does not have any substantive participating rights or kick-out rights over the managing member, HCP/CPA PropCo. The assets of RIDEA II PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a combination of third-party and HCP debt (see Note 5). Assets generated by RIDEA II PropCo (primarily from RIDEA II OpCo lease payments) may only be used to settle its contractual obligations (primarily debt service payments on the third-party and HCP debt). The Company holds an 85% ownership interest in two development joint ventures (Vintage Park Development JV and Waldwick JV) (see Note 8), which have been identified as VIEs as power is shared with a member that does not have a substantive equity investment at risk. The assets of each joint venture primarily consist of an in-progress senior housing facility development project that it owns and cash and cash equivalents; its obligations primarily consist of accounts payable and expense accruals associated with the cost of its development obligations. Any assets generated by each joint venture may only be used to settle its respective contractual obligations (primarily development expenses and debt service payments). The Company holds a limited partner ownership interest in an unconsolidated LLC that has been identified as a VIE. The Company’s involvement in the entity is limited to its equity investment as a limited partner, and it does not have any substantive participating rights or kick-out rights over the general partner. The assets and liabilities of the entity primarily consist of those associated with its senior housing real estate and development activities. Any assets generated by the entity may only be used to settle its contractual obligations (primarily development expenses and debt service payments). The Company leases 48 properties to a total of seven tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing facilities to pay operating expenses, including the rent obligations under their leases. http://www.hcpi.com 108 http://www.hcpi.com 2017 Annual Report 109 PART II The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (commonly referred to as Freddie MAC) through a special purpose entity that has been identified as a VIE because it is “thinly capitalized.” The CMBS issued by the VIE are backed by mortgage debt obligations on real estate assets. The Company provided a £105 million ($131 million) bridge loan to Maria Mallaband Care Group Ltd. (“MMCG”) to fund the acquisition of a portfolio of care homes in the U.K. MMCG created a special purpose entity to acquire the portfolio and funded it entirely using the Company’s bridge loan. As such, the special purpose entity has been identified as a VIE because it is “thinly capitalized.” The Company retains a three-year call option to acquire all the shares of the special purpose entity, which it can only exercise upon the occurrence of certain events. The Company provided seller financing of $10 million related to its sale of seven senior housing triple-net facilities. The financing was provided in the form of a secured five-year mezzanine loan to a “thinly capitalized” borrower created to acquire the facilities. Between 2012 and 2015, the Company funded a $257 million mezzanine loan facility to Tandem as part of a recapitalization of the Tandem Portfolio (see Note 7). Due to a decline in the fair value of the Tandem Portfolio over time, there is no longer sufficient equity at risk in Tandem and it has become a “thinly capitalized” borrower. The classification of the related assets and liabilities and their maximum loss exposure as a result of the Company’s involvement with these VIEs at December 31, 2017 are presented below (in thousands): VIE Type VIE tenants - DFLs(2) VIE tenants - operating leases(2) CCRC OpCo RIDEA II PropCo Development JVs Tandem Health Care MMCG Loan Loan - Seller Financing CMBS and LLC investment Asset/Liability Type Net investment in DFLs Lease intangibles, net and straight-line rent receivables Investments in unconsolidated joint ventures Investments in unconsolidated joint ventures Investments in unconsolidated joint ventures Loans Receivable, net Loans Receivable, net Loans Receivable, net Marketable debt and cost method investment Maximum Loss Exposure and Carrying Amount(1) $ 601,723 5,519 190,454 252,743 12,563 105,000 142,820 10,000 33,750 (1) The Company’s maximum loss exposure represents the aggregate carrying amount of such investments (including accrued interest). (2) The Company’s maximum loss exposure may be mitigated by re-leasing the underlying properties to new tenants upon an event of default. As of December 31, 2017, the Company had not provided, and is not required to provide, financial support through a liquidity arrangement or otherwise, to its unconsolidated VIEs, including circumstances in which it could be exposed to further losses (e.g., cash shortfalls). See Notes 3, 6, 7 and 8 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein. PART II Note 20. Variable Interest Entities On January 1, 2016, the Company adopted ASU 2015-2 II OpCo as it controls the significant activities of RIDEA using the modified retrospective method as permitted II PropCo and, of the group that controls the significant by the ASU. As a result of the adoption, the Company activities of RIDEA II OpCo, is most closely associated to identified additional assets and liabilities of certain VIEs in its the entity. Furthermore, control over the HCP/CPA JV is consolidated total assets and total liabilities at December 31, shared between HCP and CPA, and as such, the Company 2015 of $543 million and $651 million, respectively. Refer does not consolidate the HCP/CPA JV. Subsequent to the to the specific VIE descriptions below for detail on which partial sale of its interest in RIDEA II, the Company continues entities were classified as consolidated VIEs subsequent to hold a direct investment in RIDEA II PropCo, which has to the adoption of ASU 2015-2. Additionally, the Company been identified as a VIE as Brookdale, the non-managing deconsolidated three JVs and recognized $0.5 million as a member, does not have any substantive participating rights cumulative-effect adjustment to cumulative dividends in or kick-out rights over the managing member, HCP/CPA excess of earnings. Unconsolidated Variable Interest Entities At December 31, 2017, the Company had investments in: (i) five unconsolidated VIE joint ventures; (ii) 48 properties leased to VIE tenants; (iii) marketable debt securities of one VIE and (iv) three loans to VIE borrowers. The Company has determined that it is not the primary beneficiary of PropCo. The assets of RIDEA II PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a combination of third-party and HCP debt (see Note 5). Assets generated by RIDEA II PropCo (primarily from RIDEA II OpCo lease payments) may only be used to settle its contractual obligations (primarily debt service payments on the third-party and HCP debt). The Company holds an 85% ownership interest in two and therefore does not consolidate these VIEs because it development joint ventures (Vintage Park Development JV does not have the ability to control the activities that most and Waldwick JV) (see Note 8), which have been identified significantly impact their economic performance. Except as VIEs as power is shared with a member that does not for the Company’s equity interest in the unconsolidated JVs have a substantive equity investment at risk. The assets of (CCRC OpCo, RIDEA II PropCo, Vintage Park Development each joint venture primarily consist of an in-progress senior JV, Waldwick JV and the LLC investment discussed housing facility development project that it owns and cash below), it has no formal involvement in these VIEs beyond and cash equivalents; its obligations primarily consist of its investments. The Company holds a 49% ownership interest in CCRC OpCo, a joint venture entity formed in August 2014 that operates senior housing properties in a RIDEA structure and has been identified as a VIE. The equity members of CCRC accounts payable and expense accruals associated with the cost of its development obligations. Any assets generated by each joint venture may only be used to settle its respective contractual obligations (primarily development expenses and debt service payments). OpCo “lack power” because they share certain operating The Company holds a limited partner ownership interest rights with Brookdale, as manager of the CCRCs. The assets in an unconsolidated LLC that has been identified as a VIE. of CCRC OpCo primarily consist of the CCRCs that it owns The Company’s involvement in the entity is limited to its and leases, resident fees receivable, notes receivable, and equity investment as a limited partner, and it does not have cash and cash equivalents; its obligations primarily consist any substantive participating rights or kick-out rights over of operating lease obligations to CCRC PropCo, debt service the general partner. The assets and liabilities of the entity payments and capital expenditures for the properties, and primarily consist of those associated with its senior housing accounts payable and expense accruals associated with real estate and development activities. Any assets generated the cost of its CCRCs’ operations. Assets generated by the by the entity may only be used to settle its contractual CCRC operations (primarily rents from CCRC residents) obligations (primarily development expenses and debt of CCRC OpCo may only be used to settle its contractual service payments). obligations (primarily from debt service payments, capital expenditures, and rental costs and operating expenses incurred to manage such facilities). In January 2017, as a result of the partial sale of its The Company leases 48 properties to a total of seven tenants that have also been identified as VIEs (“VIE tenants”). These VIE tenants are “thinly capitalized” entities that rely on the operating cash flows generated from the senior housing interest in RIDEA II, the Company concluded that it should facilities to pay operating expenses, including the rent deconsolidate RIDEA II as it is no longer the primary beneficiary of the joint venture. The HCP/CPA JV is the primary beneficiary of both RIDEA II PropCo and RIDEA obligations under their leases. 108 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 109 PART II PART II Consolidated Variable Interest Entities HCP, Inc.’s consolidated total assets and total liabilities at December 31, 2017 and December 31, 2016 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at December 31, 2017 and December 31, 2016 include VIE assets as follows (in thousands): Assets Building and Improvements Developments in Process Land Accumulated Depreciation Net Real Estate Investments in and advances to unconsolidated joint ventures Accounts Receivable, Net Cash and Cash Equivalents Restricted Cash Intangible Assets, Net Other Assets, Net Total Assets Liabilities Mortgage Debt Intangible Liabilities, Net Accounts Payable and Accrued Expenses Other Liabilities Intercompany Accounts Fixed Asset Push Down Deferred Revenue Total Liabilities December 31, 2017 2016 $2,436,414 32,285 227,162 (542,091) 2,153,770 2,231 10,242 15,861 2,619 125,475 33,749 $2,343,947 45,016 10,672 87,759 29,034 331 152,156 14,432 $ 339,400 $3,522,310 31,953 327,241 (676,276) 3,205,228 3,641 19,996 35,844 22,624 169,027 69,562 $3,525,922 520,870 8,994 120,719 — — — 23,456 $ 674,039 RIDEA I. The Company holds a 90% ownership interest in JV entities formed in September 2011 that own and operate senior housing properties in a RIDEA structure (“RIDEA I”). The Company has historically classified RIDEA I OpCo as a VIE and, as a result of the adoption of ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), also classifies RIDEA I PropCo as a VIE due to the non-managing member lacking substantive participation rights in the management of RIDEA I PropCo or kick-out rights over the managing member. The Company consolidates RIDEA I PropCo and RIDEA I OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of RIDEA I PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of RIDEA I OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to RIDEA I PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the RIDEA I structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs). HCP Ventures V, LLC. The Company holds a 51% ownership interest in and is the managing member of a JV entity formed in October 2015 that owns and leases MOBs (“HCP Ventures V”). Upon adoption of ASU 2015-02, the Company classified HCP Ventures V as a VIE due to the non- managing member lacking substantive participation rights in the management of HCP Ventures V or kick-out rights over the managing member. The Company consolidates HCP Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of HCP Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by HCP Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures). Vintage Park JV. The Company holds a 90% ownership interest in a JV entity formed in January 2015 (“Vintage Park JV”) that owns an 85% interest in an unconsolidated development VIE. Upon adoption of ASU 2015-02, the ability to control the activities that most significantly impact Company classified Vintage Park JV as a VIE due to the non- these VIEs’ economic performance. The assets of the managing member lacking substantive participation rights Hayden JV primarily consist of leased properties (net real in the management of the Vintage Park JV or kick-out rights estate), rents receivable, and cash and cash equivalents; its over the managing member. The Company consolidates obligations primarily consist of debt service payments and Vintage Park JV as the primary beneficiary because it has the capital expenditures for the properties. Assets generated ability to control the activities that most significantly impact by Hayden JV may only be used to settle its contractual the VIE’s economic performance. The assets of Vintage obligations (primarily from capital expenditures). Park JV primarily consist of an investment in the Vintage Park Development JV and cash and cash equivalents; its obligations primarily consist of funding the ongoing development of the Vintage Park Development JV. Assets generated by the Vintage Park JV may only be used to settle its contractual obligations (primarily from the funding of the Vintage Park Development JV). Consolidated Lessees. The Company leases 21 senior housing properties to lessee entities under cash flow leases through which the Company receives monthly rent equal to the residual cash flows of the properties. The lessee entities are classified as VIEs as they are “thinly capitalized” entities. The Company consolidates the lessee entities as it has the ability to control the activities that most significantly Watertown JV. The Company holds a 95% ownership impact the economic performance of the lessee entities. interest in JV entities formed in November 2017 that The lessee entities’ assets primarily consist of leasehold own and operate a senior housing property in a RIDEA interests in senior housing facilities (operating leases), structure (“Watertown JV”). Watertown PropCo is a VIE resident fees receivable, and cash and cash equivalents; as the Company and the non-managing member share in its obligations primarily consist of lease payments to the control of the entity, but substantially all of the entity’s Company and operating expenses of the senior housing activities are performed on behalf of the Company. facilities (accounts payable and accrued expenses). Assets Watertown OpCo is a VIE as the non-managing member, generated by the senior housing operations (primarily from through its equity interest, lacks substantive participation senior housing resident rents) of the may only be used to rights in the management of Watertown OpCo or kick- settle its contractual obligations (primarily from the rental out rights over the managing member. The Company costs, operating expenses incurred to manage such facilities consolidates Watertown PropCo and Watertown OpCo as and debt costs). the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of Watertown PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of Watertown OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to Watertown PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the Watertown structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs). Hayden JV. The Company holds a 99% ownership interest in a JV entity formed in December 2017 that owns and leases a life science complex (“Hayden JV”). The Hayden JV is a VIE as the members share in control of the entity, but substantially all of the entity’s activities are performed on behalf of the Company. The Company consolidates the Hayden JV as the primary beneficiary because it has the DownREITs. The Company holds a controlling ownership interest in and is the managing member of five DownREITs. Upon adoption of ASU 2015-02, the Company classified the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures). Other Consolidated Real Estate Partnerships. The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). Upon adoption of ASU 2015-02, the Company classified the Partnerships as VIEs due to the limited partners (non- managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights http://www.hcpi.com 110 http://www.hcpi.com 2017 Annual Report 111 PART II Consolidated Variable Interest Entities HCP, Inc.’s consolidated total assets and total liabilities at December 31, 2017 and December 31, 2016 include certain assets of VIEs that can only be used to settle the liabilities of the related VIE. The VIE creditors do not have recourse to HCP, Inc. Total assets at December 31, 2017 and December 31, 2016 include VIE assets as follows (in thousands): Investments in and advances to unconsolidated joint ventures Assets Building and Improvements Developments in Process Land Accumulated Depreciation Net Real Estate Accounts Receivable, Net Cash and Cash Equivalents Restricted Cash Intangible Assets, Net Other Assets, Net Total Assets Liabilities Mortgage Debt Intangible Liabilities, Net Other Liabilities Intercompany Accounts Fixed Asset Push Down Deferred Revenue Total Liabilities Accounts Payable and Accrued Expenses December 31, 2017 2016 $2,436,414 $3,522,310 32,285 227,162 (542,091) 2,153,770 2,231 10,242 15,861 2,619 125,475 33,749 45,016 10,672 87,759 29,034 331 152,156 14,432 31,953 327,241 (676,276) 3,205,228 3,641 19,996 35,844 22,624 169,027 69,562 520,870 8,994 120,719 — — — 23,456 $2,343,947 $3,525,922 $ 339,400 $ 674,039 RIDEA I. The Company holds a 90% ownership interest rents) of the RIDEA I structure may only be used to settle in JV entities formed in September 2011 that own and its contractual obligations (primarily from the rental costs, operate senior housing properties in a RIDEA structure operating expenses incurred to manage such facilities and (“RIDEA I”). The Company has historically classified RIDEA debt costs). I OpCo as a VIE and, as a result of the adoption of ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), also classifies RIDEA I PropCo as a VIE due to the non-managing member lacking substantive participation rights in the management of RIDEA I PropCo or kick-out rights over the managing member. The Company consolidates RIDEA I PropCo and RIDEA I OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of RIDEA I PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of RIDEA I OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to RIDEA I PropCo and operating HCP Ventures V, LLC. The Company holds a 51% ownership interest in and is the managing member of a JV entity formed in October 2015 that owns and leases MOBs (“HCP Ventures V”). Upon adoption of ASU 2015-02, the Company classified HCP Ventures V as a VIE due to the non- managing member lacking substantive participation rights in the management of HCP Ventures V or kick-out rights over the managing member. The Company consolidates HCP Ventures V as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of HCP Ventures V primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by HCP Ventures V may only be used to settle its contractual obligations (primarily from capital expenditures). expenses of its senior housing facilities (accounts payable Vintage Park JV. The Company holds a 90% ownership and accrued expenses). Assets generated by the senior interest in a JV entity formed in January 2015 (“Vintage housing operations (primarily from senior housing resident Park JV”) that owns an 85% interest in an unconsolidated development VIE. Upon adoption of ASU 2015-02, the Company classified Vintage Park JV as a VIE due to the non- managing member lacking substantive participation rights in the management of the Vintage Park JV or kick-out rights over the managing member. The Company consolidates Vintage Park JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIE’s economic performance. The assets of Vintage Park JV primarily consist of an investment in the Vintage Park Development JV and cash and cash equivalents; its obligations primarily consist of funding the ongoing development of the Vintage Park Development JV. Assets generated by the Vintage Park JV may only be used to settle its contractual obligations (primarily from the funding of the Vintage Park Development JV). Watertown JV. The Company holds a 95% ownership interest in JV entities formed in November 2017 that own and operate a senior housing property in a RIDEA structure (“Watertown JV”). Watertown PropCo is a VIE as the Company and the non-managing member share in control of the entity, but substantially all of the entity’s activities are performed on behalf of the Company. Watertown OpCo is a VIE as the non-managing member, through its equity interest, lacks substantive participation rights in the management of Watertown OpCo or kick- out rights over the managing member. The Company consolidates Watertown PropCo and Watertown OpCo as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of Watertown PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of notes payable to a non-VIE consolidated subsidiary of the Company. The assets of Watertown OpCo primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to Watertown PropCo and operating expenses of its senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the Watertown structure may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs). Hayden JV. The Company holds a 99% ownership interest in a JV entity formed in December 2017 that owns and leases a life science complex (“Hayden JV”). The Hayden JV is a VIE as the members share in control of the entity, but substantially all of the entity’s activities are performed on behalf of the Company. The Company consolidates the Hayden JV as the primary beneficiary because it has the PART II ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Hayden JV primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by Hayden JV may only be used to settle its contractual obligations (primarily from capital expenditures). Consolidated Lessees. The Company leases 21 senior housing properties to lessee entities under cash flow leases through which the Company receives monthly rent equal to the residual cash flows of the properties. The lessee entities are classified as VIEs as they are “thinly capitalized” entities. The Company consolidates the lessee entities as it has the ability to control the activities that most significantly impact the economic performance of the lessee entities. The lessee entities’ assets primarily consist of leasehold interests in senior housing facilities (operating leases), resident fees receivable, and cash and cash equivalents; its obligations primarily consist of lease payments to the Company and operating expenses of the senior housing facilities (accounts payable and accrued expenses). Assets generated by the senior housing operations (primarily from senior housing resident rents) of the may only be used to settle its contractual obligations (primarily from the rental costs, operating expenses incurred to manage such facilities and debt costs). DownREITs. The Company holds a controlling ownership interest in and is the managing member of five DownREITs. Upon adoption of ASU 2015-02, the Company classified the DownREITs as VIEs due to the non-managing members lacking substantive participation rights in the management of the DownREITs or kick-out rights over the managing member. The Company consolidates the DownREITs as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the DownREITs primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the DownREITs (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures). Other Consolidated Real Estate Partnerships. The Company holds a controlling ownership interest in and is the general partner (or managing member) of multiple partnerships that own and lease real estate assets (the “Partnerships”). Upon adoption of ASU 2015-02, the Company classified the Partnerships as VIEs due to the limited partners (non- managing members) lacking substantive participation rights in the management of the Partnerships or kick-out rights 110 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 111 PART II over the general partner (managing member). The Company consolidates the Partnerships as the primary beneficiary because it has the ability to control the activities that most significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures). Other consolidated VIEs. The Company made a loan to an entity that entered into a tax credit structure (“Tax Credit Subsidiary”) and a loan to an entity that made an investment in a development JV (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV as the primary beneficiary because it has the ability to control the activities that most significantly impact the VIEs’ economic performance. The assets and liabilities of the Tax Credit Subsidiary and Development JV substantially consist of a development in progress, notes receivable, prepaid expenses, notes payable, and accounts payable and accrued liabilities generated from their operating activities. Any assets generated by the operating activities of the Tax Credit Subsidiary and Development JV may only be used to settle their contractual obligations. Exchange Accommodation Titleholder. During the year ended December 31, 2017, the Company acquired a portfolio of 11 MOBs (the “acquired properties”) using a reverse like- kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a “reverse 1031 exchange”). As of December 31, 2017, the Company had not completed the reverse 1031 exchange and as such, the acquired properties remained in the possession of an Exchange Accommodation Titleholder (“EAT”). The EAT is classified as a VIE as it is a “thinly capitalized” entity. The Company consolidates the EAT because it is the primary beneficiary as it has the ability to control the activities that most significantly impact the EAT’s economic performance. The properties held by the EAT are reflected as real estate with an aggregate carrying value of $153 million as of December 31, 2017. The assets of the EAT primarily consist of a leased property (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of capital expenditures for the properties. Assets generated by the EAT may only be used to settle its contractual obligations (primarily from capital expenditures). Note 21. Fair Value Measurements Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2017 in the consolidated balance sheets are immaterial. The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands): Loans receivable, net(2) Marketable debt securities(2) Bank line of credit(2) Term loans(2) Senior unsecured notes(1) Mortgage debt(2) Other debt(2) Interest-rate swap liabilities(2) Currency swap asset(2) Cross currency swap liability(2) December 31, 2017(3) 2016(3) Carrying Value $ 313,326 18,690 1,017,076 228,288 6,396,451 144,486 94,165 2,483 — 10,968 Fair Value $ 313,242 18,690 1,017,076 228,288 6,737,825 125,984 94,165 2,483 — 10,968 Carrying Value $ 807,954 68,630 899,718 440,062 7,133,538 623,792 92,385 4,857 2,920 — Fair Value $ 807,505 68,630 899,718 440,062 7,386,149 609,374 92,385 4,857 2,920 — (1) Level 1: Fair value calculated based on quoted prices in active markets. (2) Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) or for loans receivable, net, mortgage debt, and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loans and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating. (3) During the years ended December 31, 2017 and 2016, there were no transfers of financial assets or liabilities within the fair value hierarchy. Note 22. Concentration of Credit Risk Concentrations of credit risk arise when one or more contractual obligations, including those to the Company, tenants, operators or obligors related to the Company’s to be similarly affected by changes in economic conditions. investments are engaged in similar business activities or The Company regularly monitors various segments of its activities in the same geographic region, or have similar portfolio to assess potential concentrations of credit risks. economic features that would cause their ability to meet The following tables provide information regarding the Company’s concentrations with respect to Brookdale as a tenant as of and for the periods presented: PART II Tenant Brookdale(1) Tenant Brookdale(1) Percentage of Gross Assets Total Company December 31, Senior Housing Triple-Net December 31, 2017 10 2016 17 2017 39 2016 69 Percentage of Revenues Senior Housing Total Company Revenues Triple-Net Revenues Year Ended December 31, Year Ended December 31, 2017 8 2016 12 2015 13 2017 47 2016 59 2015 58 (1) The Company’s concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the Brookdale Transaction (see Note 3). Includes revenues from 64 senior housing triple-net facilities that were classified as held for sale at December 31, 2016. Excludes senior housing facilities operated by Brookdale in the Company’s SHOP segment, as discussed below. As of December 31, 2017 and 2016, Brookdale managed or annual reports containing audited financial information and operated, in the Company’s SHOP segment, approximately quarterly reports containing unaudited financial information. 13% and 18%, respectively, of the Company’s real estate The information related to Brookdale contained or referred investments based on total assets. Because an operator to in this report has been derived from SEC filings made by manages the Company’s facilities in exchange for the Brookdale or other publicly available information, or was receipt of a management fee, the Company is not directly provided to the Company by Brookdale, and the Company exposed to the credit risk of its operators in the same has not verified this information through an independent manner or to the same extent as its triple-net tenants. As investigation or otherwise. The Company has no reason to of December 31, 2017, Brookdale provided comprehensive believe that this information is inaccurate in any material facility management and accounting services with respect respect, but the Company cannot assure the reader to 78 of the Company’s senior housing facilities and 62 of its accuracy. The Company is providing this data for SHOP facilities owned by its unconsolidated joint ventures, informational purposes only, and encourages the reader to for which the Company or joint venture pay annual obtain Brookdale’s publicly available filings, which can be management fees pursuant to long-term management found on the SEC’s website at www.sec.gov. agreements. The Company’s concentration with respect to Brookdale as an operator in its SHOP segment is expected to decrease with the completion of the Brookdale See Note 3 for further information on the reduction of concentration related to Brookdale. Transaction (see Note 3) and the sale of its remaining 40% To mitigate the credit risk of leasing properties to certain ownership interest in RIDEA II (see Note 5). Most of the management agreements have terms ranging from 10 senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios to 15 years, with three to four 5-year renewals. The base that contain cross-default terms, so that if a tenant of any management fees are 4.5% to 5.0% of gross revenues of the properties in a portfolio defaults on its obligations (as defined) generated by the RIDEA facilities. In addition, under its lease, the Company may pursue its remedies there are incentive management fees payable to Brookdale under the lease with respect to any of the properties in the if operating results of the RIDEA properties exceed pre- portfolio. Certain portfolios also contain terms whereby established EBITDAR (as defined) thresholds. Brookdale is subject to the registration and reporting requirements of the U.S. Securities and Exchange Commission (“SEC”) and is required to file with the SEC the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease. http://www.hcpi.com 112 http://www.hcpi.com 2017 Annual Report 113 PART II PART II over the general partner (managing member). The Company generated by the operating activities of the Tax Credit consolidates the Partnerships as the primary beneficiary Subsidiary and Development JV may only be used to settle because it has the ability to control the activities that most their contractual obligations. significantly impact these VIEs’ economic performance. The assets of the Partnerships primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; their obligations primarily consist of debt service payments and capital expenditures for the properties. Assets generated by the Partnerships (primarily from resident rents) may only be used to settle their contractual obligations (primarily from debt service and capital expenditures). Exchange Accommodation Titleholder. During the year ended December 31, 2017, the Company acquired a portfolio of 11 MOBs (the “acquired properties”) using a reverse like- kind exchange structure pursuant to Section 1031 of the Internal Revenue Code (a “reverse 1031 exchange”). As of December 31, 2017, the Company had not completed the reverse 1031 exchange and as such, the acquired properties remained in the possession of an Exchange Accommodation Titleholder (“EAT”). The EAT is classified as a VIE as it is a Other consolidated VIEs. The Company made a loan to an “thinly capitalized” entity. The Company consolidates the entity that entered into a tax credit structure (“Tax Credit EAT because it is the primary beneficiary as it has the ability Subsidiary”) and a loan to an entity that made an investment to control the activities that most significantly impact the in a development JV (“Development JV”) both of which are EAT’s economic performance. The properties held by the considered VIEs. The Company consolidates the Tax Credit EAT are reflected as real estate with an aggregate carrying Subsidiary and Development JV as the primary beneficiary value of $153 million as of December 31, 2017. The assets because it has the ability to control the activities that most of the EAT primarily consist of a leased property (net real significantly impact the VIEs’ economic performance. estate), rents receivable, and cash and cash equivalents; The assets and liabilities of the Tax Credit Subsidiary and its obligations primarily consist of capital expenditures for Development JV substantially consist of a development the properties. Assets generated by the EAT may only be in progress, notes receivable, prepaid expenses, notes used to settle its contractual obligations (primarily from payable, and accounts payable and accrued liabilities capital expenditures). generated from their operating activities. Any assets Note 21. Fair Value Measurements Financial assets and liabilities measured at fair value on a recurring basis at December 31, 2017 in the consolidated balance sheets are immaterial. The table below summarizes the carrying amounts and fair values of the Company’s financial instruments (in thousands): Loans receivable, net(2) Marketable debt securities(2) Bank line of credit(2) Term loans(2) Senior unsecured notes(1) Mortgage debt(2) Other debt(2) Interest-rate swap liabilities(2) Currency swap asset(2) Cross currency swap liability(2) December 31, 2017(3) 2016(3) Carrying Value Fair Value Carrying Value Fair Value $ 313,326 $ 313,242 $ 807,954 $ 807,505 18,690 1,017,076 228,288 6,396,451 144,486 94,165 2,483 — 10,968 18,690 1,017,076 228,288 6,737,825 125,984 94,165 2,483 — 10,968 7,133,538 7,386,149 68,630 899,718 440,062 623,792 92,385 4,857 2,920 — 68,630 899,718 440,062 609,374 92,385 4,857 2,920 — (1) Level 1: Fair value calculated based on quoted prices in active markets. (2) Level 2: Fair value based on (i) for marketable debt securities, quoted prices for similar or identical instruments in active or inactive markets, respectively, or (ii) or for loans receivable, net, mortgage debt, and swaps, calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets. For bank line of credit, term loans and other debt, the carrying values are a reasonable estimate of fair value because the borrowings are primarily based on market interest rates and the Company’s credit rating. (3) During the years ended December 31, 2017 and 2016, there were no transfers of financial assets or liabilities within the fair value hierarchy. Note 22. Concentration of Credit Risk Concentrations of credit risk arise when one or more tenants, operators or obligors related to the Company’s investments are engaged in similar business activities or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks. The following tables provide information regarding the Company’s concentrations with respect to Brookdale as a tenant as of and for the periods presented: Tenant Brookdale(1) Tenant Brookdale(1) Percentage of Gross Assets Total Company December 31, 2017 10 2016 17 Senior Housing Triple-Net December 31, 2017 39 2016 69 Percentage of Revenues Total Company Revenues Year Ended December 31, 2015 2016 2017 13 12 8 Senior Housing Triple-Net Revenues Year Ended December 31, 2015 2016 2017 58 59 47 (1) The Company’s concentration with respect to Brookdale as a tenant is expected to decrease with the completion of the Brookdale Transaction (see Note 3). Includes revenues from 64 senior housing triple-net facilities that were classified as held for sale at December 31, 2016. Excludes senior housing facilities operated by Brookdale in the Company’s SHOP segment, as discussed below. As of December 31, 2017 and 2016, Brookdale managed or operated, in the Company’s SHOP segment, approximately 13% and 18%, respectively, of the Company’s real estate investments based on total assets. Because an operator manages the Company’s facilities in exchange for the receipt of a management fee, the Company is not directly exposed to the credit risk of its operators in the same manner or to the same extent as its triple-net tenants. As of December 31, 2017, Brookdale provided comprehensive facility management and accounting services with respect to 78 of the Company’s senior housing facilities and 62 SHOP facilities owned by its unconsolidated joint ventures, for which the Company or joint venture pay annual management fees pursuant to long-term management agreements. The Company’s concentration with respect to Brookdale as an operator in its SHOP segment is expected to decrease with the completion of the Brookdale Transaction (see Note 3) and the sale of its remaining 40% ownership interest in RIDEA II (see Note 5). Most of the management agreements have terms ranging from 10 to 15 years, with three to four 5-year renewals. The base management fees are 4.5% to 5.0% of gross revenues (as defined) generated by the RIDEA facilities. In addition, there are incentive management fees payable to Brookdale if operating results of the RIDEA properties exceed pre- established EBITDAR (as defined) thresholds. Brookdale is subject to the registration and reporting requirements of the U.S. Securities and Exchange Commission (“SEC”) and is required to file with the SEC annual reports containing audited financial information and quarterly reports containing unaudited financial information. The information related to Brookdale contained or referred to in this report has been derived from SEC filings made by Brookdale or other publicly available information, or was provided to the Company by Brookdale, and the Company has not verified this information through an independent investigation or otherwise. The Company has no reason to believe that this information is inaccurate in any material respect, but the Company cannot assure the reader of its accuracy. The Company is providing this data for informational purposes only, and encourages the reader to obtain Brookdale’s publicly available filings, which can be found on the SEC’s website at www.sec.gov. See Note 3 for further information on the reduction of concentration related to Brookdale. To mitigate the credit risk of leasing properties to certain senior housing and post-acute/skilled nursing operators, leases with operators are often combined into portfolios that contain cross-default terms, so that if a tenant of any of the properties in a portfolio defaults on its obligations under its lease, the Company may pursue its remedies under the lease with respect to any of the properties in the portfolio. Certain portfolios also contain terms whereby the net operating profits of the properties are combined for the purpose of securing the funding of rental payments due under each lease. 112 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 113 PART II The following table provides information regarding the Company’s concentrations with respect to certain states; the information provided is presented for the gross assets and revenues that are associated with certain real estate assets as percentages of total Company’s total assets and revenues: State California Texas Percentage of Total Company Assets December 31, 2017 31 14 2016 29 14 Percentage of Total Company Revenues Year Ended December 31, 2015 2016 2017 27 26 26 16 17 17 Note 23. Derivative Financial Instruments The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of December 31, 2017 (dollars and GBP in thousands): Date Entered Interest rate: July 2005(2) Cross currency swap: April 2017(3) Maturity Date Hedge Designation Notional Pay Rate Receive Rate Fair Value(1) July 2020 Cash Flow 44,000 3.820% BMA Swap Index (2,483) February 2019 Net Investment £105,000 / $131,000 2.584% 3.750% (10,968) (1) Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets. (2) Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows. (3) Represents a cross currency swap to pay 2.584% on £105 million and receive 3.75% on $131 million through February 1, 2019, with an initial and final exchange of principals at origination and maturity at a rate of 1.251 USD/GBP. Hedges the risk of changes in the USD equivalent value of a portion of the Company’s net investment in its consolidated GBP subsidiaries’ attributable to changes in the USD/ GBP exchange rate. The Company uses derivative instruments to mitigate the effects of interest rate and foreign currency fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest and foreign currency rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes. Assuming a one percentage point shift in the underlying interest rate curve, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million. Assuming a one percentage point shift in the underlying foreign currency exchange rates, the estimated change in fair value of each of the underlying derivative instruments would not exceed $2 million. As of December 31, 2017, £150 million of the Company’s GBP-denominated borrowings under the 2015 Term Loan and a £105 million cross currency swap are designated as a hedge of a portion of the Company’s net investments in GBP-functional subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, (i) the remeasurement value of the designated £150 million GBP-denominated borrowings and (ii) the change in fair value of the £105 million cross currency swap due primarily to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The balance in accumulated other comprehensive income (loss) will be reclassified to earnings when the hedged investment is sold or substantially liquidated. PART II (50,957) (57,924) (58,702) 0.37 (0.13) (0.13) 67,530 61,300 58,661 0.37 0.12 0.12 Note 24. Selected Quarterly Financial Data (Unaudited) The following table summarizes selected quarterly information for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts): Three Months Ended 2017 March 31 $492,168 June 30 September 30 December 31 $458,928 $454,023 $443,259 Total revenues Income (loss) before income taxes and equity income from investments in unconsolidated joint ventures Net income (loss) Net income (loss) applicable to HCP, Inc. Dividends paid per common share Basic earnings per common share Diluted earnings per common share 454,746 464,177 461,145 0.37 0.98 0.97 18,874 22,101 19,383 0.37 0.04 0.04 (12,263) (5,720) (7,657) 0.37 (0.02) (0.02) The above selected quarterly financial data includes the following significant transactions: Total revenues Total discontinued operations Income (loss) before income taxes and equity income from investments in unconsolidated joint ventures Net (loss) income Net (loss) income applicable to HCP, Inc. Dividends paid per common share Basic earnings per common share Diluted earnings per common share 2017 • During the quarter ended December 31, 2017, the Company recognized $20 million net reduction of rental and related revenues and $35 million of operating expense related to the Brookdale Transaction. • During the quarter ended December 31, 2017, the Company recorded an impairment charge of $84 million related to the Tandem Mezzanine Loan. • During the quarter ended December 31, 2017, the Company recognized a tax expense of $17 million due to a re-measurement of deferred tax assets and liabilities. • During the quarter ended September 30, 2017, the Company repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment. • During the quarter ended June 30, 2017, the Company recorded an impairment charge of $57 million related to the Tandem Mezzanine Loan. • The quarter ended March 31, 2017, the Company deconsolidated the net assets of RIDEA II and recognized a net gain on sale of $99 million. Three Months Ended 2016 March 31 $520,457 68,408 June 30 September 30 December 31 $538,332 107,378 $530,555 108,215 $539,950 (18,246) 55,949 119,745 116,119 0.58 0.25 0.25 196,352 304,842 301,717 0.58 0.65 0.64 47,453 154,039 151,250 0.58 0.32 0.32 • The quarter ended March 31, 2017, the Company sold 64 senior housing triple-net assets, resulting in a net gain on sale of $170 million. • The quarter ended March 31, 2017, the Company sold its Four Seasons Notes, which generated a £42 million ($51 million) gain on sale. 2016 • The quarter ended December 31, 2016 includes the following related to the Spin-Off: (i) $46 million of loss on debt extinguishment and (ii) $58 million of transaction costs. • The quarter ended June 30, 2016 includes $120 million of gain on sales from real estate dispositions. • The quarter ended March 31, 2016 includes $53 million of income tax expense associated with state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCRMC real estate portfolio. http://www.hcpi.com 114 http://www.hcpi.com 2017 Annual Report 115 PART II State California Texas Percentage of Total Company Assets Percentage of Total Company Revenues December 31, Year Ended December 31, 2017 2016 2017 2016 2015 31 14 29 14 26 17 26 17 27 16 Date Entered Interest rate: July 2005(2) Cross currency swap: Note 23. Derivative Financial Instruments The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of December 31, 2017 (dollars and GBP in thousands): Maturity Date Hedge Designation Notional Pay Rate Receive Rate Fair Value(1) July 2020 Cash Flow 44,000 3.820% BMA Swap Index (2,483) April 2017(3) February 2019 Net Investment £105,000 / $131,000 2.584% 3.750% (10,968) (1) Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the (2) Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to consolidated balance sheets. overall changes in hedged cash flows. (3) Represents a cross currency swap to pay 2.584% on £105 million and receive 3.75% on $131 million through February 1, 2019, with an initial and final exchange of principals at origination and maturity at a rate of 1.251 USD/GBP. Hedges the risk of changes in the USD equivalent value of a portion of the Company’s net investment in its consolidated GBP subsidiaries’ attributable to changes in the USD/ GBP exchange rate. The Company uses derivative instruments to mitigate the a hedge of a portion of the Company’s net investments effects of interest rate and foreign currency fluctuations in GBP-functional subsidiaries to mitigate its exposure on specific forecasted transactions as well as recognized to fluctuations in the GBP to USD exchange rate. For financial obligations or assets. Utilizing derivative instruments that are designated and qualify as net instruments allows the Company to manage the risk of investment hedges, the variability in the foreign currency fluctuations in interest and foreign currency rates related to USD exchange rate of the instrument is recorded as to the potential impact these changes could have on future part of the cumulative translation adjustment component earnings and forecasted cash flows. The Company does of accumulated other comprehensive income (loss). not use derivative instruments for speculative or trading Accordingly, (i) the remeasurement value of the designated purposes. Assuming a one percentage point shift in the £150 million GBP-denominated borrowings and (ii) the underlying interest rate curve, the estimated change in fair change in fair value of the £105 million cross currency swap value of each of the underlying derivative instruments would due primarily to fluctuations in the GBP to USD exchange not exceed $2 million. Assuming a one percentage point rate are reported in accumulated other comprehensive shift in the underlying foreign currency exchange rates, income (loss) as the hedging relationship is considered to be the estimated change in fair value of each of the underlying effective. The balance in accumulated other comprehensive derivative instruments would not exceed $2 million. income (loss) will be reclassified to earnings when the hedged investment is sold or substantially liquidated. As of December 31, 2017, £150 million of the Company’s GBP-denominated borrowings under the 2015 Term Loan and a £105 million cross currency swap are designated as The following table provides information regarding the Company’s concentrations with respect to certain states; the information provided is presented for the gross assets and revenues that are associated with certain real estate assets as percentages of total Company’s total assets and revenues: Note 24. Selected Quarterly Financial Data (Unaudited) The following table summarizes selected quarterly information for the years ended December 31, 2017 and 2016 (in thousands, except per share amounts): PART II Total revenues Income (loss) before income taxes and equity income from investments in unconsolidated joint ventures Net income (loss) Net income (loss) applicable to HCP, Inc. Dividends paid per common share Basic earnings per common share Diluted earnings per common share Total revenues Total discontinued operations Income (loss) before income taxes and equity income from investments in unconsolidated joint ventures Net (loss) income Net (loss) income applicable to HCP, Inc. Dividends paid per common share Basic earnings per common share Diluted earnings per common share Three Months Ended 2017 March 31 $492,168 June 30 $458,928 September 30 $454,023 December 31 $443,259 454,746 464,177 461,145 0.37 0.98 0.97 18,874 22,101 19,383 0.37 0.04 0.04 (12,263) (5,720) (7,657) 0.37 (0.02) (0.02) (50,957) (57,924) (58,702) 0.37 (0.13) (0.13) Three Months Ended 2016 March 31 $520,457 68,408 June 30 $538,332 107,378 September 30 $530,555 108,215 December 31 $539,950 (18,246) 55,949 119,745 116,119 0.58 0.25 0.25 196,352 304,842 301,717 0.58 0.65 0.64 47,453 154,039 151,250 0.58 0.32 0.32 67,530 61,300 58,661 0.37 0.12 0.12 The above selected quarterly financial data includes the following significant transactions: 2017 • During the quarter ended December 31, 2017, the Company recognized $20 million net reduction of rental and related revenues and $35 million of operating expense related to the Brookdale Transaction. • During the quarter ended December 31, 2017, the Company recorded an impairment charge of $84 million related to the Tandem Mezzanine Loan. • During the quarter ended December 31, 2017, the Company recognized a tax expense of $17 million due to a re-measurement of deferred tax assets and liabilities. • During the quarter ended September 30, 2017, the Company repurchased $500 million of our 5.375% senior notes due 2021 and recorded a $54 million loss on debt extinguishment. • During the quarter ended June 30, 2017, the Company recorded an impairment charge of $57 million related to the Tandem Mezzanine Loan. • The quarter ended March 31, 2017, the Company deconsolidated the net assets of RIDEA II and recognized a net gain on sale of $99 million. • The quarter ended March 31, 2017, the Company sold 64 senior housing triple-net assets, resulting in a net gain on sale of $170 million. • The quarter ended March 31, 2017, the Company sold its Four Seasons Notes, which generated a £42 million ($51 million) gain on sale. 2016 • The quarter ended December 31, 2016 includes the following related to the Spin-Off: (i) $46 million of loss on debt extinguishment and (ii) $58 million of transaction costs. • The quarter ended June 30, 2016 includes $120 million of gain on sales from real estate dispositions. • The quarter ended March 31, 2016 includes $53 million of income tax expense associated with state built-in gain tax payable upon the disposition of specific real estate assets, of which $49 million relates to the HCRMC real estate portfolio. 114 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 115 PART II PART II Schedule II: Valuation and Qualifying Accounts Allowance Accounts(1) Additions Deductions Year Ended December 31, 2017 2016 2015 Balance at Beginning of Year $29,518 36,180 50,531 Amounts Charged Against Operations, net $144,135 1,177 3,174 Acquired Properties $— — — Uncollectible Accounts Written-off $ (2,732) (2,843) (17,209) Disposed Properties $(1,547) (4,996) (316) Balance at End of Year $169,374 29,518 36,180 (1) Includes allowance for doubtful accounts, straight-line rent reserves, and allowances for loan and direct financing lease losses and excludes discontinued operations of $818 million for the year ended December 31, 2015. Schedule III: Real Estate and Accumulated Depreciation Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried City State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed Senior housing triple-net $ — $ $ $ — $ $ 5,453 $ 5,760 $ (1,534) 0793 South San Francisco CA 1000 Greenwood Village CO 1107 Huntsville 0786 Douglas 0518 Tucson 1238 Beverly Hills 0883 Carmichael 2204 Chino Hills 0851 Citrus Heights 0790 Concord 0787 Dana Point 0798 Escondido 0791 Fremont 0788 Granada Hills 0227 Lodi 0226 Murietta 1165 Northridge 0789 Pleasant Hill 2205 Roseville 1167 Santa Rosa 0792 Ventura 0512 Denver 2144 Glastonbury 0730 Torrington 0861 Apopka 0852 Boca Raton 2467 Ft Myers 1095 Gainesville 0490 Jacksonville 1096 Jacksonville 1017 Palm Harbor 0732 Port Orange 2194 Springtree 0802 St. Augustine 1097 Tallahassee 1605 Vero Beach 1257 Vero Beach 2108 Buford 2109 Buford 2053 Canton 2165 Hartwell 2066 Lawrenceville 1241 Lilburn 2086 Newnan 1005 Oak Park 1162 Orland Park 1237 Wilmette 1105 Louisville 2115 Murray 1158 Plymouth 1249 Frederick 0281 Westminster 0546 Cape Elizabeth 0545 Saco 1258 Auburn Hills AL AZ AZ CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CO CT CT FL FL FL FL FL FL FL FL FL FL FL FL FL GA GA GA GA GA GA GA IL IL IL KY KY MA MD MD ME ME MI 307 110 2,350 9,872 4,270 3,720 1,180 6,010 1,960 5,090 2,360 2,200 732 435 6,718 2,480 3,844 3,582 3,000 2,030 2,810 3,367 1,658 166 920 4,730 2,782 1,221 3,250 1,587 1,462 2,340 1,066 830 1,331 700 2,035 562 536 401 368 581 907 1,227 3,476 2,623 1,100 1,499 288 2,434 609 768 630 80 25,000 14,340 6,270 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 5,813 703 24,037 32,590 13,846 41,183 8,367 39,601 15,946 24,253 11,672 18,257 5,453 5,729 26,309 21,333 33,527 21,113 16,586 17,379 36,021 43,610 16,046 11,001 4,816 17,532 21,827 12,226 25,936 15,616 16,774 9,898 15,874 11,627 19,039 16,234 34,993 3,604 3,142 17,888 6,337 2,669 17,340 4,202 35,259 23,154 9,373 26,252 7,400 9,027 9,158 5,251 3,524 2,363 307 110 2,350 9,872 4,270 3,720 1,180 6,010 1,960 5,090 2,360 2,200 732 435 6,752 2,480 3,844 3,627 3,000 2,030 2,810 3,367 1,658 166 920 4,730 2,782 1,221 3,250 1,587 1,462 2,340 1,066 830 1,331 700 2,035 562 536 401 368 581 907 1,227 3,476 2,623 1,100 1,513 288 2,438 609 768 630 80 9,188 — — — 24 — — — — — — — — — — — — 2,710 2,230 1,885 2,894 378 3,686 854 5,471 — — 6,170 — 500 1,177 1,447 1,288 — — 201 499 343 473 300 417 325 503 774 240 299 879 840 93 155 — 1,862 1,614 1,451 703 24,037 41,030 13,236 41,205 8,037 38,301 15,466 23,353 11,192 17,637 5,453 5,729 27,780 20,633 33,527 22,003 16,056 16,749 37,686 45,708 16,423 14,277 5,570 22,390 21,827 12,001 32,106 15,298 16,888 10,555 17,321 12,515 18,695 15,484 33,634 4,103 3,486 6,637 3,085 17,102 4,705 36,575 23,992 9,922 25,813 7,698 9,105 9,665 6,758 3,617 2,518 813 26,387 50,902 17,506 44,925 9,217 44,311 17,426 28,443 13,552 19,837 6,185 6,164 34,532 23,113 37,371 25,630 19,056 18,779 40,496 49,075 18,081 14,443 6,490 27,120 24,609 13,222 35,356 16,885 18,350 12,895 18,387 13,345 20,026 16,184 35,669 4,665 4,022 7,005 3,666 18,009 5,932 40,051 26,615 11,022 27,326 7,986 11,543 10,274 7,526 4,247 2,598 18,361 18,762 (365) (11,418) (12,043) (3,668) (4,931) (3,102) (11,877) (4,801) (7,250) (3,475) (5,475) (3,008) (3,093) (7,981) (6,405) (3,938) (6,189) (4,978) (5,200) (17,547) (12,039) (2,600) (3,947) (1,770) (7,570) (1,577) (3,375) (12,779) (4,303) (4,842) (3,299) (3,186) (4,322) (5,258) (3,097) (9,457) (788) (638) (2,366) (1,009) (654) (4,841) (933) (9,556) (6,697) (2,711) (7,379) (1,286) (2,554) (2,830) (2,544) (1,337) (928) (3,007) 2006 2005 2002 2006 2006 2014 2006 2005 2005 2005 2005 2005 1997 1997 2006 2005 2014 2006 2005 2005 2002 2006 2012 2005 2006 2006 2016 2006 2002 2006 2006 2005 2013 2005 2006 2010 2006 2012 2012 2012 2012 2012 2006 2012 2006 2006 2006 2006 2012 2006 2006 1998 2003 2003 2006 2,281 10,692 2,281 10,692 12,973 116 http://www.hcpi.com 2017 Annual Report 117 PART II Year Ended December 31, 2017 2016 2015 Schedule II: Valuation and Qualifying Accounts Allowance Accounts(1) Additions Deductions Balance at Beginning of $29,518 36,180 50,531 Amounts Charged Against $144,135 1,177 3,174 Year Operations, net Properties Written-off Properties End of Year Acquired Accounts Disposed Balance at Uncollectible $— — — $ (2,732) (2,843) (17,209) $(1,547) (4,996) (316) $169,374 29,518 36,180 (1) Includes allowance for doubtful accounts, straight-line rent reserves, and allowances for loan and direct financing lease losses and excludes discontinued operations of $818 million for the year ended December 31, 2015. Schedule III: Real Estate and Accumulated Depreciation Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) PART II Accumulated Depreciation Year Acquired/ Constructed State City Senior housing triple-net 1107 Huntsville AL 0786 Douglas AZ 0518 Tucson AZ 1238 Beverly Hills CA 0883 Carmichael CA 2204 Chino Hills CA 0851 Citrus Heights CA 0790 Concord CA 0787 Dana Point CA 0798 Escondido CA 0791 Fremont CA 0788 Granada Hills CA 0227 Lodi CA 0226 Murietta CA 1165 Northridge CA 0789 Pleasant Hill CA 2205 Roseville CA CA 1167 Santa Rosa 0793 South San Francisco CA CA 0792 Ventura 0512 Denver CO 1000 Greenwood Village CO CT 2144 Glastonbury CT 0730 Torrington FL 0861 Apopka FL 0852 Boca Raton FL 2467 Ft Myers FL 1095 Gainesville FL 0490 Jacksonville FL 1096 Jacksonville FL 1017 Palm Harbor FL 0732 Port Orange FL 2194 Springtree FL 0802 St. Augustine FL 1097 Tallahassee FL 1605 Vero Beach FL 1257 Vero Beach GA 2108 Buford GA 2109 Buford GA 2053 Canton GA 2165 Hartwell GA 2066 Lawrenceville GA 1241 Lilburn GA 2086 Newnan IL 1005 Oak Park IL 1162 Orland Park IL 1237 Wilmette KY 1105 Louisville KY 2115 Murray MA 1158 Plymouth MD 1249 Frederick MD 0281 Westminster ME 0546 Cape Elizabeth ME 0545 Saco MI 1258 Auburn Hills $ — $ — — — — — — 25,000 — 14,340 — — — — — 6,270 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 307 110 2,350 9,872 4,270 3,720 1,180 6,010 1,960 5,090 2,360 2,200 732 435 6,718 2,480 3,844 3,582 3,000 2,030 2,810 3,367 1,658 166 920 4,730 2,782 1,221 3,250 1,587 1,462 2,340 1,066 830 1,331 700 2,035 562 536 401 368 581 907 1,227 3,476 2,623 1,100 1,499 288 2,434 609 768 630 80 2,281 $ 5,813 703 24,037 32,590 13,846 41,183 8,367 39,601 15,946 24,253 11,672 18,257 5,453 5,729 26,309 21,333 33,527 21,113 16,586 17,379 36,021 43,610 16,046 11,001 4,816 17,532 21,827 12,226 25,936 15,616 16,774 9,898 15,874 11,627 19,039 16,234 34,993 3,604 3,142 17,888 6,337 2,669 17,340 4,202 35,259 23,154 9,373 26,252 7,400 9,027 9,158 5,251 3,524 2,363 10,692 $ — $ — — 9,188 — 24 — — — — — — — — 2,710 — — 2,230 — — 1,885 2,894 378 3,686 854 5,471 — — 6,170 — 500 1,177 1,447 1,288 — — 201 499 343 473 300 417 325 503 1,862 1,614 774 240 299 879 840 1,451 93 155 — 307 110 2,350 9,872 4,270 3,720 1,180 6,010 1,960 5,090 2,360 2,200 732 435 6,752 2,480 3,844 3,627 3,000 2,030 2,810 3,367 1,658 166 920 4,730 2,782 1,221 3,250 1,587 1,462 2,340 1,066 830 1,331 700 2,035 562 536 401 368 581 907 1,227 3,476 2,623 1,100 1,513 288 2,438 609 768 630 80 2,281 $ 5,453 $ 703 24,037 41,030 13,236 41,205 8,037 38,301 15,466 23,353 11,192 17,637 5,453 5,729 27,780 20,633 33,527 22,003 16,056 16,749 37,686 45,708 16,423 14,277 5,570 22,390 21,827 12,001 32,106 15,298 16,888 10,555 17,321 12,515 18,695 15,484 33,634 4,103 3,486 18,361 6,637 3,085 17,102 4,705 36,575 23,992 9,922 25,813 7,698 9,105 9,665 6,758 3,617 2,518 10,692 5,760 813 26,387 50,902 17,506 44,925 9,217 44,311 17,426 28,443 13,552 19,837 6,185 6,164 34,532 23,113 37,371 25,630 19,056 18,779 40,496 49,075 18,081 14,443 6,490 27,120 24,609 13,222 35,356 16,885 18,350 12,895 18,387 13,345 20,026 16,184 35,669 4,665 4,022 18,762 7,005 3,666 18,009 5,932 40,051 26,615 11,022 27,326 7,986 11,543 10,274 7,526 4,247 2,598 12,973 $ (1,534) (365) (11,418) (12,043) (3,668) (4,931) (3,102) (11,877) (4,801) (7,250) (3,475) (5,475) (3,008) (3,093) (7,981) (6,405) (3,938) (6,189) (4,978) (5,200) (17,547) (12,039) (2,600) (3,947) (1,770) (7,570) (1,577) (3,375) (12,779) (4,303) (4,842) (3,299) (3,186) (4,322) (5,258) (3,097) (9,457) (788) (638) (2,366) (1,009) (654) (4,841) (933) (9,556) (6,697) (2,711) (7,379) (1,286) (2,554) (2,830) (2,544) (1,337) (928) (3,007) 2006 2005 2002 2006 2006 2014 2006 2005 2005 2005 2005 2005 1997 1997 2006 2005 2014 2006 2005 2005 2002 2006 2012 2005 2006 2006 2016 2006 2002 2006 2006 2005 2013 2005 2006 2010 2006 2012 2012 2012 2012 2012 2006 2012 2006 2006 2006 2006 2012 2006 2006 1998 2003 2003 2006 116 http://www.hcpi.com 2017 Annual Report 117 Land Total(1) Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements PART II City Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed Costs Gross Amount at Which Carried 0845 North Richland Hills TX 0846 North Richland Hills TX City 0511 Austin 2075 Bedford 0844 Burleson 0848 Cedar Hill 1325 Cedar Hill 0506 Friendswood 0217 Houston 1106 Houston 2162 Portland 2116 Sherman 0847 Waxahachie 2470 Abingdon 1244 Arlington 1245 Arlington 0881 Chesapeake 1247 Falls Church 1164 Fort Belvoir 1250 Leesburg 1246 Sterling 2077 Sterling 0225 Woodbridge 1173 Bellevue 2095 College Place 1240 Edmonds 2160 Kenmore 0797 Kirkland 1251 Mercer Island 2096 Poulsbo 2102 Richland 0794 Shoreline 0795 Shoreline 2061 Vancouver 2062 Vancouver 2052 Yakima 2078 Yakima 2117 Bridgeport 2148 Sheridan TX TX TX TX TX TX TX TX TX TX TX VA VA VA VA VA VA VA VA VA VA WA WA WA WA WA WA WA WA WA WA WA WA WA WA WV WY — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,960 1,204 1,050 1,070 440 400 835 1,008 520 870 1,233 209 390 1,584 3,833 7,278 1,090 2,228 607 2,360 1,046 950 3,734 758 1,418 3,284 1,000 4,209 1,801 249 1,590 4,030 513 1,498 557 353 3,174 915 41,645 26,845 5,242 11,554 7,494 7,354 7,195 15,333 5,117 9,259 14,001 3,492 3,879 12,431 7,076 37,407 12,444 8,887 99,528 3,236 22,932 15,788 6,983 16,171 8,051 16,502 16,641 13,403 8,123 18,068 5,067 10,671 26,421 4,556 9,997 5,897 5,668 15,437 12,047 1,599 — — — — 174 454 183 — — 1,353 377 — — 882 3,185 — 677 206 1,059 385 1,459 645 701 105 638 — 581 224 135 — 42 246 192 176 27 493 1,242 2,960 1,204 1,050 1,070 440 400 835 1,020 520 870 1,233 209 390 1,584 3,833 7,278 1,090 2,228 607 2,360 1,046 950 3,737 758 1,418 3,284 1,000 4,209 1,801 249 1,590 4,030 513 1,498 557 353 3,174 915 PART II 2002 2012 2006 2006 2007 2002 1997 2006 2006 2006 2012 2012 2006 2016 2006 2006 2006 2006 2006 2006 2006 2012 1997 2006 2012 2006 2012 2005 2006 2012 2012 2005 2005 2012 2012 2012 2012 2012 2012 15,052 16,072 15,354 16,587 41,645 28,444 4,902 11,104 6,974 7,528 7,649 4,807 8,819 3,870 3,659 12,431 7,630 39,481 11,944 9,240 3,230 23,228 16,173 8,442 16,094 8,752 16,102 17,278 13,043 8,202 18,292 5,202 10,261 25,691 4,802 10,189 6,074 5,695 15,930 13,289 44,605 29,648 5,952 12,174 7,414 7,928 8,484 5,327 9,689 4,079 4,049 14,015 11,463 46,759 13,034 11,468 3,837 25,588 17,219 9,392 19,831 9,510 17,520 20,562 14,043 12,411 20,093 5,451 11,851 29,721 5,315 11,687 6,631 6,048 19,104 14,204 (19,781) (4,134) (1,420) (3,215) (1,874) (2,582) (3,306) (4,314) (1,392) (2,919) (2,520) (647) (1,059) (898) (2,248) (10,900) (3,310) (2,734) (31,972) (3,196) (6,672) (2,214) (3,516) (4,541) (1,437) (4,552) (2,406) (4,049) (2,334) (2,734) (764) (3,185) (7,898) (888) (1,477) (931) (781) (3,028) (2,149) — 11,594 11,862 11,594 108,676 120,270 $50,763 $289,180 $2,387,674 $123,120 $289,448 $2,457,872 $2,747,320 $ (641,170) MI 1248 Farmington Hills MI 1259 Sterling Heights 1235 Des Peres MO 1236 Richmond Heights MO MO 0853 St. Louis MS 2074 Oxford NC 0878 Charlotte NC 2465 Charlotte NC 2468 Franklin NC 2126 Mooresville NC 2466 Raeford NC 1254 Raleigh ND 2127 Minot NJ 1599 Cherry Hill NJ 1239 Cresskill NJ 0734 Hillsborough NJ 1242 Madison NJ 0733 Manahawkin 1231 Saddle River NJ 0245 Voorhees Township NJ NV 0796 Las Vegas NY 1252 Brooklyn NY 1256 Brooklyn NY 2174 Orchard Park OH 1386 Marietta OH 1253 Youngstown OK 2083 Oklahoma City OR 2131 Keizer OR 2152 McMinnville OR 2089 Newberg OR 2133 Portland OR 2171 Portland OR 2050 Redmond OR 2084 Roseburg OR 2134 Scappoose OR 2153 Scappoose OR 2056 Stayton OR 2058 Stayton OR 2088 Tualatin OR 2180 Windfield Village PA 1163 Haverford PA 2063 Selinsgrove RI 1973 South Kingstown RI 1975 Tiverton SC 1104 Aiken SC 1109 Columbia SC 0306 Georgetown SC 0879 Greenville SC 0305 Lancaster SC 0880 Myrtle Beach SC 0312 Rock Hill SC 1113 Rock Hill SC 0313 Sumter TN 2073 Kingsport TN 1003 Nashville TX 0843 Abilene TX 2107 Amarillo TX 1116 Arlington — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,431 — — — — — — — — — — — 2,722 1,013 1,593 4,361 1,744 2,500 2,003 710 1,373 1,082 2,538 1,304 1,191 685 2,420 4,684 1,042 3,157 921 1,784 900 1,960 8,117 5,215 726 1,069 695 2,116 551 3,203 1,889 1,615 — 1,229 1,042 353 971 48 253 — 580 — 16,461 529 — 1,390 — 3,240 — 357 — 408 — 239 — 1,090 — 84 — 900 — 203 — 695 — 196 — 1,113 — 812 — 300 — 1,315 — 2,494 — 12,119 11,500 20,664 24,232 20,343 14,140 9,559 10,774 8,489 37,617 10,230 11,532 16,047 11,042 53,927 10,042 19,909 9,927 15,625 7,629 5,816 23,627 39,052 17,735 11,435 10,444 28,007 6,454 24,909 16,855 12,030 16,087 21,921 12,090 1,258 7,116 569 8,621 6,326 9,817 108,816 9,111 12,551 25,735 14,832 7,527 3,008 12,558 2,982 10,913 2,671 4,119 2,623 8,625 16,983 2,830 26,838 12,192 939 — 1,225 368 — 231 — — — 1,684 — 489 676 2,294 501 491 179 691 612 520 — 1,057 1,079 — 668 744 1,939 — 5,381 837 169 311 809 134 17 142 19 140 375 — 12,128 237 630 651 151 131 — — — — — 322 — 322 2,524 — 582 249 1,013 1,593 4,361 1,744 2,500 2,003 710 1,373 1,082 2,538 1,304 1,191 685 2,420 4,684 1,042 3,157 921 1,784 900 1,960 8,117 5,215 726 1,069 695 2,116 551 3,203 1,889 1,615 — 1,229 1,042 353 971 48 253 — 580 16,461 529 1,390 3,240 363 412 239 1,090 84 900 203 795 196 1,113 812 300 1,315 2,540 12,418 11,181 21,271 23,915 19,853 14,371 9,159 10,774 8,489 39,302 10,230 11,681 16,723 12,785 53,406 10,066 19,468 10,152 15,640 8,149 5,426 23,577 39,197 17,735 11,898 10,842 29,946 6,454 28,796 17,692 12,199 16,398 22,731 12,223 1,275 7,258 588 8,762 6,701 9,817 116,731 9,349 12,918 25,938 14,395 7,414 3,008 12,058 2,982 10,513 2,671 4,074 2,623 8,947 18,759 2,710 27,417 11,847 13,431 12,774 25,632 25,659 22,353 16,374 9,869 12,147 9,571 41,840 11,534 12,872 17,408 15,205 58,090 11,108 22,625 11,073 17,424 9,049 7,386 31,694 44,412 18,461 12,967 11,537 32,062 7,005 31,999 19,581 13,814 16,398 23,960 13,265 1,628 8,229 636 9,015 6,701 10,397 133,192 9,878 14,308 29,178 14,758 7,826 3,247 13,148 3,066 11,413 2,874 4,869 2,819 10,060 19,571 3,010 28,732 14,387 (3,530) (3,145) (5,760) (6,701) (7,665) (2,089) (2,538) (778) (613) (5,390) (739) (3,429) (2,486) (3,685) (15,063) (3,125) (5,475) (3,191) (4,452) (3,287) (1,685) (6,701) (11,181) (2,957) (4,322) (3,113) (4,569) (938) (5,040) (2,428) (1,592) (2,069) (2,932) (1,918) (264) (1,311) (160) (1,370) (1,376) (1,424) (33,431) (1,625) (3,187) (6,242) (4,081) (2,123) (1,236) (3,341) (1,142) (2,913) (1,077) (1,313) (1,078) (1,418) (4,691) (785) (3,790) (3,472) 2006 2006 2006 2006 2006 2012 2006 2016 2016 2012 2016 2006 2012 2010 2006 2005 2006 2005 2006 1998 2005 2006 2006 2012 2007 2006 2012 2013 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2006 2012 2011 2011 2006 2006 1998 2006 1998 2006 1998 2006 1998 2012 2006 2006 2012 2006 http://www.hcpi.com 118 http://www.hcpi.com 2017 Annual Report 119 Land Total(1) Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements PART II Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried City State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed City Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition 0245 Voorhees Township NJ PART II 1248 Farmington Hills 1259 Sterling Heights 1235 Des Peres 1236 Richmond Heights MO MI MI MO MO MS NC NC NC NC NC NC ND NJ NJ NJ NJ NJ NJ NV NY NY NY OH OH OK OR OR OR OR OR OR OR OR OR OR OR OR OR PA PA RI RI SC SC SC SC SC SC SC SC SC TN TN TX TX TX 0853 St. Louis 2074 Oxford 0878 Charlotte 2465 Charlotte 2468 Franklin 2126 Mooresville 2466 Raeford 1254 Raleigh 2127 Minot 1599 Cherry Hill 1239 Cresskill 0734 Hillsborough 1242 Madison 0733 Manahawkin 1231 Saddle River 0796 Las Vegas 1252 Brooklyn 1256 Brooklyn 2174 Orchard Park 1386 Marietta 1253 Youngstown 2083 Oklahoma City 2131 Keizer 2152 McMinnville 2089 Newberg 2133 Portland 2171 Portland 2050 Redmond 2084 Roseburg 2134 Scappoose 2153 Scappoose 2056 Stayton 2058 Stayton 2088 Tualatin 2180 Windfield Village 1163 Haverford 2063 Selinsgrove 1973 South Kingstown 1975 Tiverton 1104 Aiken 1109 Columbia 0306 Georgetown 0879 Greenville 0305 Lancaster 0880 Myrtle Beach 0312 Rock Hill 1113 Rock Hill 0313 Sumter 2073 Kingsport 1003 Nashville 0843 Abilene 2107 Amarillo 1116 Arlington — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2,431 2,722 1,013 1,593 4,361 1,744 2,500 2,003 710 1,373 1,082 2,538 1,304 1,191 685 2,420 4,684 1,042 3,157 921 1,784 900 1,960 8,117 5,215 726 1,069 695 2,116 551 3,203 1,889 1,615 — 1,229 1,042 353 971 48 253 — 580 529 1,390 3,240 1,090 357 408 239 84 900 203 695 196 1,113 812 300 1,315 2,494 12,119 11,500 20,664 24,232 20,343 14,140 9,559 10,774 8,489 37,617 10,230 11,532 16,047 11,042 53,927 10,042 19,909 9,927 15,625 7,629 5,816 23,627 39,052 17,735 11,435 10,444 28,007 6,454 24,909 16,855 12,030 16,087 21,921 12,090 1,258 7,116 569 8,621 6,326 9,817 9,111 12,551 25,735 14,832 7,527 3,008 12,558 2,982 10,913 2,671 4,119 2,623 8,625 16,983 2,830 26,838 12,192 939 — 1,225 1,684 2,294 368 — 231 — — — — 489 676 501 491 179 691 612 520 — 1,057 1,079 — 668 744 1,939 — 5,381 837 169 311 809 134 17 142 19 140 375 — 237 630 651 151 131 — — — — — 322 — 322 — 582 249 2,524 1,013 1,593 4,361 1,744 2,500 2,003 710 1,373 1,082 2,538 1,304 1,191 685 2,420 4,684 1,042 3,157 921 1,784 900 1,960 8,117 5,215 726 1,069 695 2,116 551 3,203 1,889 1,615 — 1,229 1,042 353 971 48 253 — 580 529 1,390 3,240 1,090 363 412 239 84 900 203 795 196 1,113 812 300 1,315 2,540 12,418 11,181 21,271 23,915 19,853 14,371 9,159 10,774 8,489 39,302 10,230 11,681 16,723 12,785 53,406 10,066 19,468 10,152 15,640 8,149 5,426 23,577 39,197 17,735 11,898 10,842 29,946 6,454 28,796 17,692 12,199 16,398 22,731 12,223 1,275 7,258 588 8,762 6,701 9,817 9,349 12,918 25,938 14,395 7,414 3,008 12,058 2,982 10,513 2,671 4,074 2,623 8,947 18,759 2,710 27,417 11,847 13,431 12,774 25,632 25,659 22,353 16,374 9,869 12,147 9,571 41,840 11,534 12,872 17,408 15,205 58,090 11,108 22,625 11,073 17,424 9,049 7,386 31,694 44,412 18,461 12,967 11,537 32,062 7,005 31,999 19,581 13,814 16,398 23,960 13,265 1,628 8,229 636 9,015 6,701 10,397 9,878 14,308 29,178 14,758 7,826 3,247 13,148 3,066 11,413 2,874 4,869 2,819 10,060 19,571 3,010 28,732 14,387 (15,063) (11,181) (3,530) (3,145) (5,760) (6,701) (7,665) (2,089) (2,538) (778) (613) (5,390) (739) (3,429) (2,486) (3,685) (3,125) (5,475) (3,191) (4,452) (3,287) (1,685) (6,701) (2,957) (4,322) (3,113) (4,569) (938) (5,040) (2,428) (1,592) (2,069) (2,932) (1,918) (264) (1,311) (160) (1,370) (1,376) (1,424) (1,625) (3,187) (6,242) (4,081) (2,123) (1,236) (3,341) (1,142) (2,913) (1,077) (1,313) (1,078) (1,418) (4,691) (785) (3,790) (3,472) 2006 2006 2006 2006 2006 2012 2006 2016 2016 2012 2016 2006 2012 2010 2006 2005 2006 2005 2006 1998 2005 2006 2006 2012 2007 2006 2012 2013 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2006 2012 2011 2011 2006 2006 1998 2006 1998 2006 1998 2006 1998 2012 2006 2006 2012 2006 TX 0511 Austin TX 2075 Bedford TX 0844 Burleson TX 0848 Cedar Hill TX 1325 Cedar Hill TX 0506 Friendswood TX 0217 Houston 1106 Houston TX 0845 North Richland Hills TX 0846 North Richland Hills TX TX 2162 Portland TX 2116 Sherman TX 0847 Waxahachie VA 2470 Abingdon VA 1244 Arlington VA 1245 Arlington VA 0881 Chesapeake VA 1247 Falls Church VA 1164 Fort Belvoir VA 1250 Leesburg VA 1246 Sterling VA 2077 Sterling VA 0225 Woodbridge WA 1173 Bellevue WA 2095 College Place WA 1240 Edmonds WA 2160 Kenmore WA 0797 Kirkland WA 1251 Mercer Island WA 2096 Poulsbo WA 2102 Richland WA 0794 Shoreline WA 0795 Shoreline WA 2061 Vancouver WA 2062 Vancouver WA 2052 Yakima WA 2078 Yakima WV 2117 Bridgeport WY 2148 Sheridan 2,960 — 1,204 — 1,050 — 1,070 — 440 — 400 — 835 — 1,008 — 520 — 870 — 1,233 — 209 — 390 — 1,584 — 3,833 — 7,278 — 1,090 — — 2,228 — 11,594 607 — 2,360 — 1,046 — 950 — 3,734 — 758 — 1,418 — 3,284 — 1,000 — 4,209 — 1,801 — 249 — 1,590 — 4,030 — 513 — 1,498 — 557 — 353 — 3,174 — 915 — 41,645 26,845 5,242 11,554 7,494 7,354 7,195 15,333 5,117 9,259 14,001 3,492 3,879 12,431 7,076 37,407 12,444 8,887 99,528 3,236 22,932 15,788 6,983 16,171 8,051 16,502 16,641 13,403 8,123 18,068 5,067 10,671 26,421 4,556 9,997 5,897 5,668 15,437 12,047 — 1,599 — — — 174 454 183 — — 1,353 377 — — 882 3,185 — 677 11,862 206 1,059 385 1,459 645 701 105 638 — 581 224 135 — 42 246 192 176 27 493 1,242 2,960 1,204 1,050 1,070 440 400 835 1,020 520 870 1,233 209 390 1,584 3,833 7,278 1,090 2,228 11,594 607 2,360 1,046 950 3,737 758 1,418 3,284 1,000 4,209 1,801 249 1,590 4,030 513 1,498 557 353 3,174 915 41,645 28,444 4,902 11,104 6,974 7,528 7,649 15,052 4,807 8,819 15,354 3,870 3,659 12,431 7,630 39,481 11,944 9,240 108,676 3,230 23,228 16,173 8,442 16,094 8,752 16,102 17,278 13,043 8,202 18,292 5,202 10,261 25,691 4,802 10,189 6,074 5,695 15,930 13,289 44,605 29,648 5,952 12,174 7,414 7,928 8,484 16,072 5,327 9,689 16,587 4,079 4,049 14,015 11,463 46,759 13,034 11,468 120,270 3,837 25,588 17,219 9,392 19,831 9,510 17,520 20,562 14,043 12,411 20,093 5,451 11,851 29,721 5,315 11,687 6,631 6,048 19,104 14,204 (19,781) (4,134) (1,420) (3,215) (1,874) (2,582) (3,306) (4,314) (1,392) (2,919) (2,520) (647) (1,059) (898) (2,248) (10,900) (3,310) (2,734) (31,972) (3,196) (6,672) (2,214) (3,516) (4,541) (1,437) (4,552) (2,406) (4,049) (2,334) (2,734) (764) (3,185) (7,898) (888) (1,477) (931) (781) (3,028) (2,149) 2002 2012 2006 2006 2007 2002 1997 2006 2006 2006 2012 2012 2006 2016 2006 2006 2006 2006 2006 2006 2006 2012 1997 2006 2012 2006 2012 2005 2006 2012 2012 2005 2005 2012 2012 2012 2012 2012 2012 — 16,461 108,816 12,128 16,461 116,731 133,192 (33,431) $50,763 $289,180 $2,387,674 $123,120 $289,448 $2,457,872 $2,747,320 $ (641,170) 118 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 119 Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried City State 2017 Land Improvements to Acquisition Land Improvements Total(1) Depreciation Constructed PART II State City Senior housing operating portfolio 1974 Sun City 2729 Clearlake 1965 Fresno 2726 Fortuna 2728 Fortuna 2593 Irvine 2725 Palm Springs 1966 Sun City 2727 Yreka 2505 Arvada 2506 Boulder 2515 Denver 2508 Lakewood 2509 Lakewood 2603 Boca Raton 1963 Boynton Beach 1964 Boynton Beach 2602 Boynton Beach 2520 Clearwater 2604 Coconut Creek 2601 Delray Beach 2517 Ft Lauderdale 2518 Lake Worth 2592 Lantana 1968 Largo 2522 Lutz 2523 Orange City 2524 Port St Lucie 1971 Sarasota 2525 Sarasota 2526 Tamarac 2513 Venice 2527 Vero Beach 2200 Deer Park 2594 Mount Vernon 1969 Niles 1961 Olympia Fields 1952 Vernon Hills 2595 Indianapolis 2596 W Lafayette 2746 Watertown 2583 Ellicott City 2584 Hanover 2585 Laurel 2541 Olney 2586 Parkville 2587 Waldorf 2741 Lexington 2589 Albuquerque 2740 Rio Rancho 2735 Roswell 2738 Roswell 2733 Las Vegas 2743 Clifton Park 2742 Orchard Park AZ CA CA CA CA CA CA CA CA CO CO CO CO CO FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL IL IL IL IL IL IN IN MA MD MD MD MD MD MD NE NM NM NM NM NV NY NY — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 19,469 9,065 5,879 — 21,008 8,501 — — — — — — — — 2,640 354 1,730 818 1,346 8,220 1,005 2,650 565 1,788 2,424 2,311 4,384 2,296 2,415 2,550 570 1,270 2,250 2,461 850 2,867 1,669 3,520 2,920 902 912 893 3,050 1,426 970 1,140 1,048 4,172 296 3,790 4,120 4,900 1,197 813 8,828 3,607 4,513 3,895 1,580 3,854 392 474 767 1,154 618 837 667 2,257 478 33,223 4,799 31,918 3,295 11,856 14,104 5,183 22,709 9,184 29,896 36,746 18,645 60,795 37,236 17,923 31,521 5,649 4,773 2,627 16,006 6,637 43,126 13,267 26,452 64,988 15,169 9,724 10,333 29,516 16,079 16,037 20,662 17,392 2,417 15,935 32,912 29,400 45,854 7,718 10,876 29,112 31,720 25,625 13,331 33,802 29,061 20,514 8,405 9,324 13,726 7,038 8,614 14,469 11,470 11,961 2,685 306 2,117 63 176 539 619 3,863 419 1,016 674 1,995 1,988 1,523 858 3,665 2,826 1,918 1,588 2,461 1,598 2,927 1,180 377 12,399 55 894 827 6,239 1,304 924 1,647 1,342 44,534 4,340 5,884 3,832 5,999 1,084 1,324 53 1,239 867 993 158 902 650 474 253 495 1,010 997 509 4 — 2,640 354 1,730 818 1,346 8,220 1,005 2,650 565 1,788 2,424 2,311 4,384 2,296 2,415 2,550 570 1,270 2,250 2,461 850 2,867 1,669 3,520 2,920 902 912 893 3,050 1,426 970 1,140 1,048 4,229 512 3,790 4,120 4,900 1,197 813 8,828 3,607 4,513 3,895 1,580 3,854 392 474 767 1,154 618 837 667 2,257 478 35,378 4,635 33,605 3,358 10,618 14,103 5,263 26,118 6,633 30,912 37,421 20,639 62,782 38,760 17,726 34,521 8,282 4,775 3,635 15,712 6,907 45,896 14,447 26,029 76,167 16,152 10,618 11,161 35,325 17,383 16,968 22,309 18,733 44,478 19,728 38,024 32,706 51,157 8,570 11,949 29,165 32,959 26,492 14,323 33,960 29,963 21,164 6,362 9,079 14,221 7,741 9,288 10,347 11,484 11,961 38,018 4,989 35,335 4,176 11,964 22,323 6,268 28,768 7,198 32,700 39,845 22,950 67,166 41,056 20,141 37,071 8,852 6,045 5,885 18,173 7,757 48,763 16,116 29,549 79,087 17,054 11,530 12,054 38,375 18,809 17,938 23,449 19,781 48,707 20,240 41,814 36,826 56,057 9,767 12,762 37,993 36,566 31,005 18,218 35,540 33,817 21,556 6,836 9,846 15,375 8,359 10,125 11,014 13,741 12,439 (9,041) (898) (8,408) (1,582) (3,568) (3,465) (2,097) (7,323) (1,675) (2,694) (2,492) (2,519) (4,928) (2,538) (4,534) (9,003) (2,799) (1,278) (1,095) (3,933) (1,891) (4,652) (1,916) (9,790) (20,269) (1,213) (1,092) (1,252) (9,497) (1,854) (1,324) (1,838) (1,440) (2,244) (5,122) (10,772) (8,523) (13,321) (2,137) (3,023) (129) (1,280) (1,009) (709) (2,247) (1,356) (799) (1,657) (4,059) (2,259) (1,578) (1,979) (2,592) (1,926) (1,984) 2011 2012 2011 2012 2012 2006 2006 2011 2012 2015 2015 2015 2015 2015 2006 2011 2011 2003 2015 2006 2002 2015 2015 2006 2011 2015 2015 2015 2011 2015 2015 2015 2015 2014 2006 2011 2011 2011 2006 2006 2017 2016 2016 2016 2015 2016 2016 2012 1996 2012 2012 2012 2012 2012 2012 2401 Germantown TN 2516 Centerville 2512 Cincinnati 2597 Fairborn 2736 Gresham 2744 Hermiston 2739 Portland 2730 Cumberland 1959 East Providence 1960 Greenwich 2511 Johnston 2731 Smithfield 1962 Warwick 2608 Arlington 2531 Austin 2588 Beaumont 2438 Dallas 2528 Graham 2529 Grand Prairie 1955 Houston 1957 Houston 1958 Houston 2402 Houston 2606 Houston 2530 N Richland Hills 2532 San Antonio 2607 San Antonio 2533 San Marcos 1954 Sugar Land 2510 Temple 2400 Victoria 2605 Victoria 1953 Webster 2534 Wichita Falls 2582 Fredericksburg 2581 Leesburg 2514 Richmond 2737 Moses Lake 2732 Spokane 2734 Yakima 2745 Madison OH OH OH OR OR OR RI RI RI RI RI RI TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX VA VA VA WA WA WA WI 2,327 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 12,345 1,065 1,180 298 465 582 1,677 2,630 1,890 450 2,037 1,250 1,050 3,640 2,002 607 145 2,091 754 865 9,820 8,170 2,910 1,740 2,470 1,190 613 730 765 3,420 2,354 1,032 175 4,780 430 2,370 1,340 2,981 429 903 721 834 10,901 6,157 10,704 6,403 8,087 9,469 19,050 13,989 11,845 12,724 17,816 17,389 64,588 19,110 15,972 10,404 11,698 8,803 10,650 50,079 37,285 37,443 32,057 21,710 17,756 5,874 3,961 18,175 36,846 52,859 7,743 4,290 30,854 2,856 19,725 17,605 54,203 4,417 5,363 8,872 10,050 1,520 1,393 3,895 265 — 374 803 1,447 1,846 3,724 656 6,772 264 128 424 324 2,091 782 1,118 10,526 5,658 7,685 95 2,176 1,104 990 375 898 5,097 1,144 339 3,642 4,628 804 87 907 1,894 189 171 1,518 445 1,065 1,180 298 465 582 1,677 2,630 1,890 450 2,037 1,250 1,050 3,640 2,002 607 145 2,091 754 865 9,820 8,170 2,910 1,740 2,470 1,190 613 730 765 3,420 2,354 1,032 175 4,780 430 2,370 1,340 2,981 429 903 721 834 12,421 7,549 14,368 6,668 8,087 6,940 13,145 15,183 13,414 16,448 17,192 23,804 64,852 18,857 16,396 10,282 12,307 9,586 11,768 59,293 42,112 44,233 32,153 23,036 18,859 6,863 4,022 19,073 41,242 54,004 7,186 6,477 29,464 3,745 19,811 18,512 56,097 4,606 5,228 10,390 10,495 13,486 8,729 14,666 7,133 8,669 8,617 15,775 17,073 13,864 18,485 18,442 24,854 68,492 20,859 17,003 10,427 14,398 10,340 12,633 69,113 50,282 47,143 33,893 25,506 20,049 7,476 4,752 19,838 44,662 56,358 8,218 6,652 34,244 4,175 22,181 19,852 59,078 5,035 6,131 11,111 11,329 (1,643) (1,442) (3,732) (1,563) (1,400) (2,306) (4,644) (4,117) (3,796) (2,468) (4,724) (5,580) (5,393) (5,035) (1,126) (4,679) (2,074) (1,088) (1,196) (16,391) (11,285) (11,666) (2,801) (10,451) (1,659) (931) (1,391) (1,380) (11,131) (3,819) (906) (2,661) (8,264) (642) (689) (664) (3,675) (1,328) (1,073) (2,168) (1,732) $78,594 $194,278 $1,866,536 $216,811 $194,551 $2,024,260 $2,218,811 $(359,316) PART II 2015 2015 2006 2012 2013 2012 2011 2011 2011 2015 2011 2011 2015 2006 2015 1995 2015 2015 2015 2011 2011 2011 2015 2002 2015 2015 2002 2015 2011 2015 2015 1995 2011 2015 2016 2016 2015 2012 2012 2012 2012 http://www.hcpi.com 120 http://www.hcpi.com 2017 Annual Report 121 Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried City State 2017 Land Improvements to Acquisition Land Improvements Total(1) Depreciation Constructed City State Encumbrances at December 31, 2017 2516 Centerville 2512 Cincinnati 2597 Fairborn 2736 Gresham 2744 Hermiston 2739 Portland 2730 Cumberland 1959 East Providence 1960 Greenwich 2511 Johnston 2731 Smithfield 1962 Warwick 2401 Germantown 2608 Arlington 2531 Austin 2588 Beaumont 2438 Dallas 2528 Graham 2529 Grand Prairie 1955 Houston 1957 Houston 1958 Houston 2402 Houston 2606 Houston 2530 N Richland Hills 2532 San Antonio 2607 San Antonio 2533 San Marcos 1954 Sugar Land 2510 Temple 2400 Victoria 2605 Victoria 1953 Webster 2534 Wichita Falls 2582 Fredericksburg 2581 Leesburg 2514 Richmond 2737 Moses Lake 2732 Spokane 2734 Yakima 2745 Madison OH OH OH OR OR OR RI RI RI RI RI RI TN TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX VA VA VA WA WA WA WI — — — — 2,327 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 12,345 — — — — — Senior housing operating portfolio PART II 1974 Sun City 2729 Clearlake 1965 Fresno 2726 Fortuna 2728 Fortuna 2593 Irvine 1966 Sun City 2727 Yreka 2505 Arvada 2506 Boulder 2515 Denver 2725 Palm Springs 2508 Lakewood 2509 Lakewood 2603 Boca Raton 1963 Boynton Beach 1964 Boynton Beach 2602 Boynton Beach 2520 Clearwater 2604 Coconut Creek 2601 Delray Beach 2517 Ft Lauderdale 2518 Lake Worth 2592 Lantana 1968 Largo 2522 Lutz 2523 Orange City 2524 Port St Lucie 1971 Sarasota 2525 Sarasota 2526 Tamarac 2513 Venice 2527 Vero Beach 2200 Deer Park 2594 Mount Vernon 1969 Niles 1961 Olympia Fields 1952 Vernon Hills 2595 Indianapolis 2596 W Lafayette 2746 Watertown 2583 Ellicott City 2584 Hanover 2585 Laurel 2541 Olney 2586 Parkville 2587 Waldorf 2741 Lexington 2589 Albuquerque 2740 Rio Rancho 2735 Roswell 2738 Roswell 2733 Las Vegas 2743 Clifton Park 2742 Orchard Park AZ CA CA CA CA CA CA CA CA CO CO CO CO CO FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL IL IL IL IL IL IN IN MA MD MD MD MD MD MD NE NM NM NM NM NV NY NY 12,399 (20,269) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 19,469 9,065 5,879 — 21,008 8,501 2,640 354 1,730 818 1,346 8,220 1,005 2,650 565 1,788 2,424 2,311 4,384 2,296 2,415 2,550 570 1,270 2,250 2,461 850 2,867 1,669 3,520 2,920 902 912 893 3,050 1,426 970 1,140 1,048 4,172 296 3,790 4,120 4,900 1,197 813 8,828 3,607 4,513 3,895 1,580 3,854 1,154 392 474 767 618 837 667 2,257 478 33,223 4,799 31,918 3,295 11,856 14,104 5,183 22,709 9,184 29,896 36,746 18,645 60,795 37,236 17,923 31,521 5,649 4,773 2,627 16,006 6,637 43,126 13,267 26,452 64,988 15,169 9,724 10,333 29,516 16,079 16,037 20,662 17,392 2,417 15,935 32,912 29,400 45,854 7,718 10,876 29,112 31,720 25,625 13,331 33,802 29,061 20,514 8,405 9,324 13,726 7,038 8,614 14,469 11,470 11,961 2,685 306 2,117 63 176 539 619 3,863 419 1,016 674 1,995 1,988 1,523 858 3,665 2,826 1,918 1,588 2,461 1,598 2,927 1,180 377 55 894 827 6,239 1,304 924 1,647 1,342 4,340 5,884 3,832 5,999 1,084 1,324 53 1,239 867 993 158 902 650 474 253 495 997 509 4 — 1,010 44,534 2,640 354 1,730 818 1,346 8,220 1,005 2,650 565 1,788 2,424 2,311 4,384 2,296 2,415 2,550 570 1,270 2,250 2,461 850 2,867 1,669 3,520 2,920 902 912 893 3,050 1,426 970 1,140 1,048 4,229 512 3,790 4,120 4,900 1,197 813 8,828 3,607 4,513 3,895 1,580 3,854 1,154 392 474 767 618 837 667 2,257 478 35,378 4,635 33,605 3,358 10,618 14,103 5,263 26,118 6,633 30,912 37,421 20,639 62,782 38,760 17,726 34,521 8,282 4,775 3,635 15,712 6,907 45,896 14,447 26,029 76,167 16,152 10,618 11,161 35,325 17,383 16,968 22,309 18,733 44,478 19,728 38,024 32,706 51,157 8,570 11,949 29,165 32,959 26,492 14,323 33,960 29,963 21,164 6,362 9,079 14,221 7,741 9,288 10,347 11,484 11,961 38,018 4,989 35,335 4,176 11,964 22,323 6,268 28,768 7,198 32,700 39,845 22,950 67,166 41,056 20,141 37,071 8,852 6,045 5,885 18,173 7,757 48,763 16,116 29,549 79,087 17,054 11,530 12,054 38,375 18,809 17,938 23,449 19,781 48,707 20,240 41,814 36,826 56,057 9,767 12,762 37,993 36,566 31,005 18,218 35,540 33,817 21,556 6,836 9,846 15,375 8,359 10,125 11,014 13,741 12,439 (9,041) (898) (8,408) (1,582) (3,568) (3,465) (2,097) (7,323) (1,675) (2,694) (2,492) (2,519) (4,928) (2,538) (4,534) (9,003) (2,799) (1,278) (1,095) (3,933) (1,891) (4,652) (1,916) (9,790) (1,213) (1,092) (1,252) (9,497) (1,854) (1,324) (1,838) (1,440) (2,244) (5,122) (2,137) (3,023) (129) (1,280) (1,009) (709) (2,247) (1,356) (799) (1,657) (4,059) (2,259) (1,578) (1,979) (2,592) (1,926) (1,984) (10,772) (8,523) (13,321) 2011 2012 2011 2012 2012 2006 2006 2011 2012 2015 2015 2015 2015 2015 2006 2011 2011 2003 2015 2006 2002 2015 2015 2006 2011 2015 2015 2015 2011 2015 2015 2015 2015 2014 2006 2011 2011 2011 2006 2006 2017 2016 2016 2016 2015 2016 2016 2012 1996 2012 2012 2012 2012 2012 2012 Land 1,065 1,180 298 465 582 1,677 2,630 1,890 450 2,037 1,250 1,050 3,640 2,002 607 145 2,091 754 865 9,820 8,170 2,910 1,740 2,470 1,190 613 730 765 3,420 2,354 1,032 175 4,780 430 2,370 1,340 2,981 429 903 721 834 $78,594 $194,278 $1,866,536 $216,811 $194,551 $2,024,260 $2,218,811 $(359,316) 120 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 121 Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) PART II Accumulated Depreciation Year Acquired/ Constructed Initial Cost to Company Buildings and Improvements 10,901 6,157 10,704 6,403 8,087 9,469 19,050 13,989 11,845 12,724 17,816 17,389 64,588 19,110 15,972 10,404 11,698 8,803 10,650 50,079 37,285 37,443 32,057 21,710 17,756 5,874 3,961 18,175 36,846 52,859 7,743 4,290 30,854 2,856 19,725 17,605 54,203 4,417 5,363 8,872 10,050 1,520 1,393 3,895 265 — 374 803 1,447 1,846 3,724 656 6,772 264 128 424 324 2,091 782 1,118 10,526 5,658 7,685 95 2,176 1,104 990 375 898 5,097 1,144 339 3,642 4,628 804 87 907 1,894 189 171 1,518 445 1,065 1,180 298 465 582 1,677 2,630 1,890 450 2,037 1,250 1,050 3,640 2,002 607 145 2,091 754 865 9,820 8,170 2,910 1,740 2,470 1,190 613 730 765 3,420 2,354 1,032 175 4,780 430 2,370 1,340 2,981 429 903 721 834 12,421 7,549 14,368 6,668 8,087 6,940 13,145 15,183 13,414 16,448 17,192 23,804 64,852 18,857 16,396 10,282 12,307 9,586 11,768 59,293 42,112 44,233 32,153 23,036 18,859 6,863 4,022 19,073 41,242 54,004 7,186 6,477 29,464 3,745 19,811 18,512 56,097 4,606 5,228 10,390 10,495 13,486 8,729 14,666 7,133 8,669 8,617 15,775 17,073 13,864 18,485 18,442 24,854 68,492 20,859 17,003 10,427 14,398 10,340 12,633 69,113 50,282 47,143 33,893 25,506 20,049 7,476 4,752 19,838 44,662 56,358 8,218 6,652 34,244 4,175 22,181 19,852 59,078 5,035 6,131 11,111 11,329 (1,643) (1,442) (3,732) (1,563) (1,400) (2,306) (4,644) (4,117) (3,796) (2,468) (4,724) (5,580) (5,393) (5,035) (1,126) (4,679) (2,074) (1,088) (1,196) (16,391) (11,285) (11,666) (2,801) (10,451) (1,659) (931) (1,391) (1,380) (11,131) (3,819) (906) (2,661) (8,264) (642) (689) (664) (3,675) (1,328) (1,073) (2,168) (1,732) 2015 2015 2006 2012 2013 2012 2011 2011 2011 2015 2011 2011 2015 2006 2015 1995 2015 2015 2015 2011 2011 2011 2015 2002 2015 2015 2002 2015 2011 2015 2015 1995 2011 2015 2016 2016 2015 2012 2012 2012 2012 PART II City Life science 1482 Brisbane 1486 Brisbane 1487 Brisbane 1401 Hayward 1402 Hayward 1403 Hayward 1404 Hayward 1405 Hayward 1549 Hayward 1550 Hayward 1551 Hayward 1552 Hayward 1553 Hayward 1554 Hayward 1555 Hayward 1556 Hayward 1424 La Jolla 1425 La Jolla 1426 La Jolla 1427 La Jolla 1949 La Jolla 2229 La Jolla 1488 Mountain View 1489 Mountain View 1490 Mountain View 1491 Mountain View 1492 Mountain View 1493 Mountain View 1494 Mountain View 1495 Mountain View 1496 Mountain View 1497 Mountain View 1498 Mountain View 2017 Mountain View 1470 Poway 1471 Poway 1472 Poway 1473 Poway 1474 Poway 1475 Poway 1477 Poway 1478 Poway 1499 Redwood City 1500 Redwood City 1501 Redwood City 1502 Redwood City 1503 Redwood City 1504 Redwood City 1505 Redwood City 1506 Redwood City 1507 Redwood City 1508 Redwood City 1509 Redwood City 1510 Redwood City 1511 Redwood City Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land State Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried Costs Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed City State 2017 Land Improvements to Acquisition Land Improvements Total(1) Depreciation Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent Buildings and Accumulated Acquired/ CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA — 31,160 — 11,331 8,498 — 900 — 1,500 — 1,900 — 2,200 — 1,000 — 1,006 — 677 — 661 — 1,187 — 1,189 — 1,246 — 1,521 — 1,212 — 9,600 — 6,200 — 7,200 — 8,700 — 2,686 — 8,753 — 7,300 — 6,500 — 4,800 — 4,200 — 3,600 — 7,500 — 9,800 — 6,900 — — 7,000 — 14,100 7,100 — — — 5,826 — 5,978 — — 8,654 — 11,024 5,051 — — 5,655 — 25,359 6,700 — 3,400 — 2,500 — 3,600 — 3,100 — 4,800 — 5,400 — 3,000 — 6,000 — 1,900 — 2,700 — 2,700 — 2,200 — 2,600 — 1,789 — — 7,100 6,400 7,100 17,200 3,200 4,259 2,761 1,995 7,139 9,465 5,179 13,546 5,120 25,283 19,883 12,412 16,983 11,045 32,528 25,410 22,800 9,500 8,400 9,700 16,300 24,000 17,800 17,000 31,002 25,800 20,240 12,200 14,200 — 2,405 — — 2,475 14,400 5,500 4,100 4,600 5,100 17,300 15,500 3,500 14,300 12,800 11,300 10,900 12,000 9,300 20,319 20,529 6,812 1,045 3,682 4,666 1,434 7,478 3,463 5,583 4,264 1,346 7,361 1,867 6,401 3,049 8,220 152 5,493 6,177 743 6,228 1,901 1,866 442 1,249 862 2,142 203 3,245 6,364 10,111 8,101 1,117 6,048 4,253 11,906 9,148 5,522 5,697 14,835 6,145 2,564 1,220 860 954 3,300 949 826 7,503 13,559 12,120 10,476 5,395 1,828 31,160 11,331 8,498 900 1,719 1,900 2,200 1,000 1,055 710 693 1,222 1,225 1,283 1,566 1,249 9,719 6,276 7,291 8,767 2,686 8,777 7,567 6,500 4,800 4,209 3,600 7,500 9,800 6,900 7,000 14,100 7,100 — 5,826 5,978 8,654 11,024 5,051 5,655 25,359 6,700 3,407 2,506 3,607 3,107 4,818 5,418 3,006 6,018 1,912 2,712 2,712 2,212 2,612 22,103 20,529 6,812 8,145 9,863 11,512 18,634 10,678 6,409 4,954 6,227 8,094 16,791 6,133 19,889 5,216 31,414 19,958 15,961 21,859 11,458 38,732 27,044 24,666 9,942 8,998 9,835 17,842 24,203 21,045 17,332 31,487 33,901 21,255 12,542 18,453 11,906 11,553 5,522 5,697 17,310 14,400 7,177 4,563 5,024 5,801 20,582 16,431 4,115 21,178 26,347 23,409 20,840 13,501 10,561 53,263 31,860 15,310 9,045 11,582 13,412 20,834 11,678 7,464 5,664 6,920 9,316 18,016 7,416 21,455 6,465 41,133 26,234 23,252 30,626 14,144 47,509 34,611 31,166 14,742 13,207 13,435 25,342 34,003 27,945 24,332 45,587 41,001 21,255 18,368 24,431 20,560 22,577 10,573 11,352 42,669 21,100 10,584 7,069 8,631 8,908 25,400 21,849 7,121 27,196 28,259 26,121 23,552 15,713 13,173 — — — (2,705) (4,280) (2,709) (4,485) (6,391) (2,493) (3,401) (4,220) (3,385) (5,675) (2,739) (7,177) (2,098) (9,072) (5,264) (6,509) (7,302) (2,690) (3,923) (7,597) (7,030) (2,746) (2,458) (2,527) (4,942) (6,362) (6,313) (4,595) (8,280) (14,611) (4,000) (3,199) (7,951) (1,286) — — — — (3,750) (2,476) (1,508) (1,722) (1,937) (6,253) (4,246) (1,646) (4,637) (7,202) (5,871) (7,349) (3,543) (2,708) 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2011 2014 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2013 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 — 11,700 11,700 3,300 3,300 2,603 5,269 4,630 2,040 3,940 5,690 6,524 7,000 7,179 8,400 5,200 7,740 2,581 5,879 7,621 7,661 9,207 6,000 2,734 4,100 — 7,182 9,000 4,900 8,000 8,000 3,700 7,000 — 18,000 — 10,100 — 10,700 — 13,800 — 14,500 — 9,400 — 11,900 — 10,000 — 9,300 — 11,000 — 13,200 — 10,500 — 10,600 — 10,900 3,600 2,300 3,900 7,117 7,403 5,666 1,204 8,648 — 10,381 — 10,100 — 32,210 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 18,000 17,900 11,051 23,566 2,028 903 3,184 4,579 31,243 — 33,779 3,687 33,144 — 22,654 10,534 25,305 3,913 9,918 14,613 — 5,195 12,395 — 12,140 17,800 38,043 18,100 27,700 22,521 28,299 20,800 23,621 15,500 42,500 45,300 24,800 68,848 57,954 43,549 47,289 60,932 33,776 34,083 20,900 100 100 200 600 2,300 700 24,013 3,110 5,773 1,293 — 12,361 14,839 3,143 16,072 8,982 5,111 5,733 720 6,403 4,986 1,209 4,521 18 — 2,371 3,952 2,559 6,549 3,359 6,484 — 777 — 1,070 9,612 1,260 4,692 157 313 2,156 3,743 2,248 3,519 876 37,029 36,865 46,308 48 10 8 91 2,645 360 9 8,294 223 118 221 4,927 20,527 11,638 4,774 11,217 12,966 517 95,860 3,300 3,326 2,603 5,669 4,630 2,040 4,047 5,830 6,524 7,000 7,184 8,400 5,200 7,888 2,581 5,879 7,626 7,661 9,207 6,000 2,734 4,100 — 7,182 9,000 18,000 4,900 8,000 10,100 8,000 3,700 10,700 7,000 13,800 14,500 9,400 11,900 10,000 9,300 11,000 13,200 10,500 10,600 10,909 3,600 2,300 3,900 7,117 10,381 7,403 10,100 32,210 5,695 1,210 8,648 30,361 32,713 14,194 35,937 11,010 6,014 5,591 4,734 37,646 4,986 34,988 8,202 33,162 — 23,645 14,486 27,861 9,167 13,277 21,097 — 5,971 12,395 1,070 17,860 19,060 42,735 18,257 28,013 24,437 32,042 22,845 27,140 16,375 79,529 82,165 69,539 68,896 57,964 43,557 47,380 63,576 34,135 34,092 23,962 323 218 421 5,179 22,827 7,987 26,642 14,327 18,641 1,789 33,661 36,039 16,797 41,606 15,640 8,054 9,638 10,564 49,346 11,510 41,988 15,386 41,562 5,200 31,533 17,067 33,740 16,793 20,938 30,304 6,000 8,705 16,495 1,070 25,042 28,060 60,735 23,157 36,013 34,537 40,042 26,545 37,840 23,375 93,329 96,665 78,939 80,796 67,964 52,857 58,380 76,776 44,635 44,692 34,871 3,923 2,518 4,321 12,296 33,208 15,390 36,742 46,537 24,336 2,999 95,860 104,508 PART II 2007 2007 2002 2002 2006 2006 2006 2006 2007 2007 2007 2007 2007 2007 2007 2011 2011 2007 2016 2016 2016 2017 2017 2004 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2016 (8,155) (9,544) (4,623) (12,274) (6,567) (2,208) (1,769) (1,566) (12,927) — (9,021) (2,287) (8,637) — (6,279) (3,154) (7,790) (2,459) (189) (649) — — — (317) (8,032) (5,588) (10,828) (4,793) (7,288) (6,066) (7,468) (5,965) (7,606) (4,109) (19,435) (19,964) (14,428) (17,948) (15,094) (11,342) (12,371) (15,600) (8,995) (8,877) (7,082) (94) (100) (200) (2,140) (5,749) (1,479) (7,801) — (10,250) (1,456) (6,072) 1512 Redwood City 1513 Redwood City 0678 San Diego 0679 San Diego 0837 San Diego 0838 San Diego 0839 San Diego 0840 San Diego 1418 San Diego 1420 San Diego 1421 San Diego 1422 San Diego 1423 San Diego 1514 San Diego 1558 San Diego 1947 San Diego 1948 San Diego 2197 San Diego 2476 San Diego 2477 San Diego 2478 San Diego 2617 San Diego 2618 San Diego 2622 San Diego CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA 1407 South San Francisco CA 1408 South San Francisco CA 1409 South San Francisco CA 1410 South San Francisco CA 1411 South San Francisco CA 1412 South San Francisco CA 1413 South San Francisco CA 1414 South San Francisco CA 1430 South San Francisco CA 1431 South San Francisco CA 1435 South San Francisco CA 1436 South San Francisco CA 1437 South San Francisco CA 1439 South San Francisco CA 1440 South San Francisco CA 1441 South San Francisco CA 1442 South San Francisco CA 1443 South San Francisco CA 1444 South San Francisco CA 1445 South San Francisco CA 1458 South San Francisco CA 1459 South San Francisco CA 1460 South San Francisco CA 1461 South San Francisco CA 1462 South San Francisco CA 1463 South San Francisco CA 1464 South San Francisco CA 1468 South San Francisco CA 1480 South San Francisco CA 1559 South San Francisco CA 1560 South San Francisco CA 1983 South San Francisco CA http://www.hcpi.com 122 http://www.hcpi.com 2017 Annual Report 123 PART II City Life science 1482 Brisbane 1486 Brisbane 1487 Brisbane 1401 Hayward 1402 Hayward 1403 Hayward 1404 Hayward 1405 Hayward 1549 Hayward 1550 Hayward 1551 Hayward 1552 Hayward 1553 Hayward 1554 Hayward 1555 Hayward 1556 Hayward 1424 La Jolla 1425 La Jolla 1426 La Jolla 1427 La Jolla 1949 La Jolla 2229 La Jolla 1488 Mountain View 1489 Mountain View 1490 Mountain View 1491 Mountain View 1492 Mountain View 1493 Mountain View 1494 Mountain View 1495 Mountain View 1496 Mountain View 1497 Mountain View 1498 Mountain View 2017 Mountain View 1470 Poway 1471 Poway 1472 Poway 1473 Poway 1474 Poway 1475 Poway 1477 Poway 1478 Poway 1499 Redwood City 1500 Redwood City 1501 Redwood City 1502 Redwood City 1503 Redwood City 1504 Redwood City 1505 Redwood City 1506 Redwood City 1507 Redwood City 1508 Redwood City 1509 Redwood City 1510 Redwood City 1511 Redwood City CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried State 2017 Land Improvements to Acquisition Land Improvements Total(1) Depreciation Constructed City State Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) PART II Accumulated Depreciation Year Acquired/ Constructed — 31,160 — 11,331 20,319 20,529 31,160 11,331 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 8,498 900 1,500 1,900 2,200 1,000 1,006 677 661 1,187 1,189 1,246 1,521 1,212 9,600 6,200 7,200 8,700 2,686 8,753 7,300 6,500 4,800 4,200 3,600 7,500 9,800 6,900 7,000 7,100 — 5,826 5,978 8,654 5,051 5,655 6,700 3,400 2,500 3,600 3,100 4,800 5,400 3,000 6,000 1,900 2,700 2,700 2,200 2,600 1,789 — — 7,100 6,400 7,100 17,200 3,200 4,259 2,761 1,995 7,139 9,465 5,179 13,546 5,120 25,283 19,883 12,412 16,983 11,045 32,528 25,410 22,800 9,500 8,400 9,700 16,300 24,000 17,800 17,000 31,002 25,800 20,240 12,200 14,200 — — — 2,475 14,400 5,500 4,100 4,600 5,100 17,300 15,500 3,500 14,300 12,800 11,300 10,900 12,000 9,300 6,812 1,045 3,682 4,666 1,434 7,478 3,463 5,583 4,264 1,346 7,361 1,867 6,401 3,049 8,220 152 5,493 6,177 743 6,228 1,901 1,866 442 1,249 862 2,142 203 3,245 6,364 8,101 1,117 6,048 4,253 11,906 9,148 5,522 5,697 6,145 2,564 1,220 860 954 3,300 949 826 7,503 13,559 12,120 10,476 5,395 1,828 8,498 900 1,719 1,900 2,200 1,000 1,055 710 693 1,222 1,225 1,283 1,566 1,249 9,719 6,276 7,291 8,767 2,686 8,777 7,567 6,500 4,800 4,209 3,600 7,500 9,800 6,900 7,000 7,100 — 5,826 5,978 8,654 6,700 3,407 2,506 3,607 3,107 4,818 5,418 3,006 6,018 1,912 2,712 2,712 2,212 2,612 11,024 5,051 5,655 22,103 20,529 6,812 8,145 9,863 11,512 18,634 10,678 6,409 4,954 6,227 8,094 16,791 6,133 19,889 5,216 31,414 19,958 15,961 21,859 11,458 38,732 27,044 24,666 9,942 8,998 9,835 17,842 24,203 21,045 17,332 31,487 33,901 21,255 12,542 18,453 11,906 11,553 5,522 5,697 17,310 14,400 7,177 4,563 5,024 5,801 20,582 16,431 4,115 21,178 26,347 23,409 20,840 13,501 10,561 53,263 31,860 15,310 9,045 11,582 13,412 20,834 11,678 7,464 5,664 6,920 9,316 18,016 7,416 21,455 6,465 41,133 26,234 23,252 30,626 14,144 47,509 34,611 31,166 14,742 13,207 13,435 25,342 34,003 27,945 24,332 45,587 41,001 21,255 18,368 24,431 20,560 22,577 10,573 11,352 42,669 21,100 10,584 7,069 8,631 8,908 25,400 21,849 7,121 27,196 28,259 26,121 23,552 15,713 13,173 — — — (2,705) (4,280) (2,709) (4,485) (6,391) (2,493) (3,401) (4,220) (3,385) (5,675) (2,739) (7,177) (2,098) (9,072) (5,264) (6,509) (7,302) (2,690) (3,923) (7,597) (7,030) (2,746) (2,458) (2,527) (4,942) (6,362) (6,313) (4,595) (8,280) (14,611) (4,000) (3,199) (7,951) (1,286) — — — — (3,750) (2,476) (1,508) (1,722) (1,937) (6,253) (4,246) (1,646) (4,637) (7,202) (5,871) (7,349) (3,543) (2,708) 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2011 2014 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2013 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 — 14,100 10,111 14,100 — 11,024 2,405 — 25,359 14,835 25,359 CA 1512 Redwood City CA 1513 Redwood City CA 0678 San Diego CA 0679 San Diego CA 0837 San Diego CA 0838 San Diego CA 0839 San Diego CA 0840 San Diego CA 1418 San Diego CA 1420 San Diego CA 1421 San Diego CA 1422 San Diego CA 1423 San Diego CA 1514 San Diego CA 1558 San Diego CA 1947 San Diego CA 1948 San Diego CA 2197 San Diego CA 2476 San Diego CA 2477 San Diego CA 2478 San Diego CA 2617 San Diego CA 2618 San Diego 2622 San Diego CA 1407 South San Francisco CA 1408 South San Francisco CA 1409 South San Francisco CA 1410 South San Francisco CA 1411 South San Francisco CA 1412 South San Francisco CA 1413 South San Francisco CA 1414 South San Francisco CA 1430 South San Francisco CA 1431 South San Francisco CA 1435 South San Francisco CA 1436 South San Francisco CA 1437 South San Francisco CA 1439 South San Francisco CA 1440 South San Francisco CA 1441 South San Francisco CA 1442 South San Francisco CA 1443 South San Francisco CA 1444 South San Francisco CA 1445 South San Francisco CA 1458 South San Francisco CA 1459 South San Francisco CA 1460 South San Francisco CA 1461 South San Francisco CA 1462 South San Francisco CA 1463 South San Francisco CA 1464 South San Francisco CA 1468 South San Francisco CA 1480 South San Francisco CA 1559 South San Francisco CA 1560 South San Francisco CA 1983 South San Francisco CA 3,300 — 3,300 — 2,603 — 5,269 — 4,630 — 2,040 — 3,940 — — 5,690 — 11,700 6,524 — 7,000 — 7,179 — 8,400 — 5,200 — 7,740 — 2,581 — 5,879 — 7,621 — 7,661 — 9,207 — 6,000 — 2,734 — 4,100 — — — 7,182 — — 9,000 — 18,000 4,900 — — 8,000 — 10,100 8,000 — — 3,700 — 10,700 — 7,000 — 13,800 — 14,500 — 9,400 — 11,900 — 10,000 — 9,300 — 11,000 — 13,200 — 10,500 — 10,600 — 10,900 3,600 — 2,300 — 3,900 — 7,117 — — 10,381 — 7,403 — 10,100 — 32,210 5,666 — 1,204 — 8,648 — 18,000 17,900 11,051 23,566 2,028 903 3,184 4,579 31,243 — 33,779 3,687 33,144 — 22,654 10,534 25,305 3,913 9,918 14,613 — 5,195 12,395 — 12,140 17,800 38,043 18,100 27,700 22,521 28,299 20,800 23,621 15,500 42,500 45,300 24,800 68,848 57,954 43,549 47,289 60,932 33,776 34,083 20,900 100 100 200 600 2,300 700 24,013 3,110 5,773 1,293 — 12,361 14,839 3,143 16,072 8,982 5,111 5,733 720 6,403 4,986 1,209 4,521 18 — 2,371 3,952 2,559 6,549 3,359 6,484 — 777 — 1,070 9,612 1,260 4,692 157 313 2,156 3,743 2,248 3,519 876 37,029 36,865 46,308 48 10 8 91 2,645 360 9 8,294 223 118 221 4,927 20,527 11,638 4,774 11,217 12,966 517 95,860 3,300 3,326 2,603 5,669 4,630 2,040 4,047 5,830 11,700 6,524 7,000 7,184 8,400 5,200 7,888 2,581 5,879 7,626 7,661 9,207 6,000 2,734 4,100 — 7,182 9,000 18,000 4,900 8,000 10,100 8,000 3,700 10,700 7,000 13,800 14,500 9,400 11,900 10,000 9,300 11,000 13,200 10,500 10,600 10,909 3,600 2,300 3,900 7,117 10,381 7,403 10,100 32,210 5,695 1,210 8,648 30,361 32,713 14,194 35,937 11,010 6,014 5,591 4,734 37,646 4,986 34,988 8,202 33,162 — 23,645 14,486 27,861 9,167 13,277 21,097 — 5,971 12,395 1,070 17,860 19,060 42,735 18,257 28,013 24,437 32,042 22,845 27,140 16,375 79,529 82,165 69,539 68,896 57,964 43,557 47,380 63,576 34,135 34,092 23,962 323 218 421 5,179 22,827 7,987 26,642 14,327 18,641 1,789 95,860 33,661 36,039 16,797 41,606 15,640 8,054 9,638 10,564 49,346 11,510 41,988 15,386 41,562 5,200 31,533 17,067 33,740 16,793 20,938 30,304 6,000 8,705 16,495 1,070 25,042 28,060 60,735 23,157 36,013 34,537 40,042 26,545 37,840 23,375 93,329 96,665 78,939 80,796 67,964 52,857 58,380 76,776 44,635 44,692 34,871 3,923 2,518 4,321 12,296 33,208 15,390 36,742 46,537 24,336 2,999 104,508 (8,155) (9,544) (4,623) (12,274) (6,567) (2,208) (1,769) (1,566) (12,927) — (9,021) (2,287) (8,637) — (6,279) (3,154) (7,790) (2,459) (189) (649) — — (317) — (8,032) (5,588) (10,828) (4,793) (7,288) (6,066) (7,468) (5,965) (7,606) (4,109) (19,435) (19,964) (14,428) (17,948) (15,094) (11,342) (12,371) (15,600) (8,995) (8,877) (7,082) (94) (100) (200) (2,140) (5,749) (1,479) (7,801) — (10,250) (1,456) (6,072) 2007 2007 2002 2002 2006 2006 2006 2006 2007 2007 2007 2007 2007 2007 2007 2011 2011 2007 2016 2016 2016 2017 2017 2004 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2008 2008 2008 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2016 122 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 123 PART II City State 1984 South San Francisco CA 1985 South San Francisco CA 1986 South San Francisco CA 1987 South San Francisco CA 1988 South San Francisco CA 1989 South San Francisco CA 2553 South San Francisco CA 2554 South San Francisco CA 2555 South San Francisco CA 2556 South San Francisco CA 2557 South San Francisco CA 2558 South San Francisco CA 2614 South San Francisco CA 2615 South San Francisco CA 2616 South San Francisco CA 2624 South San Francisco CA TX 9999 Denton MA 2630 Lexington MA 2631 Lexington NC 2011 Durham NC 2030 Durham UT 0464 Salt Lake City UT 0465 Salt Lake City UT 0466 Salt Lake City UT 0507 Salt Lake City UT 0799 Salt Lake City UT 1593 Salt Lake City Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed Costs Gross Amount at Which Carried 7,845 — 6,708 — 6,708 — — 8,544 — 10,120 9,169 — 2,897 — 995 — 2,202 — 2,962 — 2,453 — 1,163 — 5,079 — 7,984 — 8,355 — — 25,502 — 100 — 15,966 — 10,940 448 1,920 630 125 — 280 — — $6,118 $ 880,878 6,118 — — — — — — — — — — — — — 8,691 2,754 10,776 15,108 13,063 5,925 8,584 13,495 14,121 41,293 — 48,444 139,201 6,152 5,661 6,921 6,368 14,614 4,345 14,600 23,998 $2,044,568 7,844 84,569 6,708 98,300 6,708 107,084 8,544 47,227 10,120 414 9,169 3,649 2,897 1,160 995 50 2,202 589 2,962 168 2,453 128 1,163 58 5,079 1,330 7,984 3,243 8,355 1,876 25,502 181 — 100 — 15,966 10,940 28 448 21,379 1,920 34,120 630 2,562 125 68 — 7 280 226 — 90 — — $ 1,131,979 $883,075 84,569 98,301 107,084 47,228 414 3,649 9,852 2,804 11,365 15,276 13,191 5,983 9,914 16,739 15,998 41,474 — 48,444 139,229 27,494 39,781 9,483 6,436 14,621 4,572 14,690 23,998 92,413 105,009 113,792 55,772 10,534 12,818 12,749 3,799 13,567 18,238 15,644 7,146 14,993 24,723 24,353 66,976 100 64,410 150,169 27,942 41,701 10,113 6,561 14,621 4,852 14,690 23,998 $3,094,702 $3,977,777 (1,692) (1,212) — — — — (735) (166) (675) (908) (783) (356) (3,383) (5,481) (5,598) (382) — (187) (367) (5,000) (7,054) (3,123) (2,379) (4,872) (1,694) (3,976) (5,393) $(635,314) 2017 2017 2011 2011 2011 2011 2015 2015 2015 2015 2015 2015 2007 2007 2007 2017 2016 2017 2017 2011 2012 2001 2001 2001 2002 2005 2010 PART II 2006 2016 2002 2012 2001 1999 2001 2006 2012 2012 2012 2012 2012 2012 2012 2012 2000 2003 2006 2006 1999 1997 2017 1998 2015 1997 1997 1997 1999 2003 2003 2000 2006 1999 2006 1999 2005 2006 2006 2006 2006 2005 2005 2005 2005 2017 2005 2005 2003 2000 2014 2006 2002 1999 1999 22,907 27,714 15,751 18,181 7,124 4,550 961 17,035 14,046 10,270 7,848 10,184 5,492 4,826 8,605 7,944 7,073 4,745 33,138 13,736 11,876 12,438 9,908 63,801 5,453 5,053 8,297 16,760 34,954 3,302 7,721 3,592 14,851 8,727 7,969 12,225 8,997 17,720 13,482 22,506 9,401 16,830 10,997 14,746 11,614 10,063 5,803 6,089 19,400 25,414 34,424 14,215 13,289 2,219 2,566 24,363 27,714 19,420 18,181 8,174 5,330 1,241 21,874 14,046 10,270 7,848 10,184 5,492 4,826 8,605 7,944 7,399 5,012 33,325 20,382 12,514 15,325 12,666 66,712 6,752 8,062 11,365 21,471 37,918 5,237 9,181 5,350 22,794 11,131 9,352 14,484 8,997 17,930 13,682 22,506 10,023 16,841 10,997 14,746 11,614 11,700 6,060 6,195 19,400 25,414 34,424 14,223 13,743 2,224 2,566 (6,114) (916) (5,883) (2,567) (2,857) (1,884) (351) (5,539) (3,839) (2,942) (1,871) (2,438) (1,650) (1,118) (2,140) (1,937) (3,414) (1,541) (9,716) (5,095) (5,682) (6,698) — (10,335) (649) (3,231) (5,276) (10,173) (8,524) (1,348) (3,004) (1,336) (7,274) (3,716) (2,377) (5,826) (3,157) (4,037) (3,541) (7,988) (3,494) (6,146) (4,304) (5,510) (3,760) — (2,317) (2,126) (6,614) (8,551) (1,641) (4,262) (5,213) (1,141) (1,346) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,456 3,669 — — 1,050 780 280 5,115 — — — — — — — — 215 215 — 6,151 400 2,700 2,758 2,860 1,268 2,848 2,863 4,619 2,910 1,935 1,460 1,718 7,472 2,300 1,344 2,100 — 210 200 — 493 — — — — — — — — — — — — 236 10,650 27,714 13,503 17,314 6,774 3,199 877 14,064 12,312 9,179 6,398 9,522 4,102 3,655 7,168 6,659 6,318 3,940 30,864 10,438 9,266 10,839 9,908 37,566 5,109 5,879 8,913 19,370 19,984 1,728 7,672 3,124 10,075 6,967 7,507 11,595 8,764 12,362 8,414 12,933 7,897 8,616 8,449 8,040 8,472 10,063 4,562 4,926 — 23,274 6,734 13,388 10,206 2,027 2,000 12,309 1,456 2,538 3,669 — 896 925 2,271 120 3,553 1,818 1,222 1,570 663 1,482 1,211 1,455 1,285 1,390 1,285 3,002 4,583 4,140 3,710 — 27,137 374 1,450 2,913 4,023 16,343 2,616 527 622 5,915 3,761 733 4,182 2,807 6,074 5,398 1,865 9,322 3,767 7,711 4,743 10,716 2,405 1,910 20,096 2,663 27,690 1,048 3,648 352 931 1,050 780 280 4,839 — — — — — — — — — — 326 267 187 6,646 638 2,887 2,758 2,911 1,299 3,009 3,068 4,711 2,964 1,935 1,460 1,758 7,943 2,404 1,383 2,259 — 210 200 — 622 11 — — — 257 106 — — — 8 5 — 454 City Medical office 0638 Anchorage 2572 Springdale 0520 Chandler 2040 Mesa 0468 Oro Valley 0356 Phoenix 0470 Phoenix 1066 Scottsdale 2021 Scottsdale 2022 Scottsdale 2023 Scottsdale 2024 Scottsdale 2025 Scottsdale 2026 Scottsdale 2027 Scottsdale 2028 Scottsdale 0453 Tucson 0556 Tucson 1041 Brentwood 1200 Encino 0436 Murietta 0239 Poway 2654 Riverside 0318 Sacramento 2404 Sacramento 0234 San Diego 0235 San Diego 0236 San Diego 0421 San Diego 0564 San Jose 0565 San Jose 0659 Los Gatos 1209 Sherman Oaks 0439 Valencia 1211 Valencia 0440 West Hills 0728 Aurora 1196 Aurora 1197 Aurora 1199 Denver 0808 Englewood 0809 Englewood 0810 Englewood 0811 Englewood 0812 Littleton 0813 Littleton 0570 Lone Tree 0666 Lone Tree 2233 Lone Tree 1076 Parker 0510 Thornton 0434 Atlantis 0435 Atlantis 0882 Colorado Springs AK AR AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO FL FL 2658 Highlands Ranch 1,637 — 1,637 124 http://www.hcpi.com 2017 Annual Report 125 City State 2017 Land Improvements to Acquisition Land Improvements Total(1) Depreciation Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 at December 31, Buildings and Subsequent Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried PART II 1984 South San Francisco CA 1985 South San Francisco CA 1986 South San Francisco CA 1987 South San Francisco CA 1988 South San Francisco CA 1989 South San Francisco CA 2553 South San Francisco CA 2554 South San Francisco CA 2555 South San Francisco CA 2556 South San Francisco CA 2557 South San Francisco CA 2558 South San Francisco CA 2614 South San Francisco CA 2615 South San Francisco CA 2616 South San Francisco CA 2624 South San Francisco CA 9999 Denton 2630 Lexington 2631 Lexington 2011 Durham 2030 Durham 0464 Salt Lake City 0465 Salt Lake City 0466 Salt Lake City 0507 Salt Lake City 0799 Salt Lake City 1593 Salt Lake City TX MA MA NC NC UT UT UT UT UT UT — 10,120 414 10,120 — — — — — — — — — — — — — — — — — — — — — — 7,845 6,708 6,708 8,544 9,169 2,897 995 2,202 2,962 2,453 1,163 5,079 7,984 8,355 100 448 1,920 630 125 — 280 — — — 25,502 — 15,966 — 10,940 6,118 — — — — — — 8,691 2,754 10,776 15,108 13,063 5,925 8,584 13,495 14,121 41,293 — 48,444 139,201 6,152 5,661 6,921 6,368 14,614 4,345 14,600 23,998 84,569 98,300 107,084 47,227 3,649 1,160 50 589 168 128 58 1,330 3,243 1,876 181 — 21,379 34,120 2,562 68 7 226 90 — 7,844 6,708 6,708 8,544 9,169 2,897 995 2,202 2,962 2,453 1,163 5,079 7,984 8,355 25,502 100 448 1,920 630 125 — 280 — — 84,569 98,301 107,084 47,228 92,413 105,009 113,792 414 3,649 9,852 2,804 11,365 15,276 13,191 5,983 9,914 16,739 15,998 41,474 — 27,494 39,781 9,483 6,436 14,621 4,572 14,690 23,998 55,772 10,534 12,818 12,749 3,799 13,567 18,238 15,644 7,146 14,993 24,723 24,353 66,976 100 27,942 41,701 10,113 6,561 14,621 4,852 14,690 23,998 — 15,966 28 10,940 48,444 64,410 139,229 150,169 (1,692) (1,212) — — — — (735) (166) (675) (908) (783) (356) (3,383) (5,481) (5,598) (382) — (187) (367) (5,000) (7,054) (3,123) (2,379) (4,872) (1,694) (3,976) (5,393) $6,118 $ 880,878 $2,044,568 $ 1,131,979 $883,075 $3,094,702 $3,977,777 $(635,314) Year 2017 2017 2011 2011 2011 2011 2015 2015 2015 2015 2015 2015 2007 2007 2007 2017 2016 2017 2017 2011 2012 2001 2001 2001 2002 2005 2010 City Medical office 0638 Anchorage 2572 Springdale 0520 Chandler 2040 Mesa 0468 Oro Valley 0356 Phoenix 0470 Phoenix 1066 Scottsdale 2021 Scottsdale 2022 Scottsdale 2023 Scottsdale 2024 Scottsdale 2025 Scottsdale 2026 Scottsdale 2027 Scottsdale 2028 Scottsdale 0453 Tucson 0556 Tucson 1041 Brentwood 1200 Encino 0436 Murietta 0239 Poway 2654 Riverside 0318 Sacramento 2404 Sacramento 0234 San Diego 0235 San Diego 0236 San Diego 0421 San Diego 0564 San Jose 0565 San Jose 0659 Los Gatos 1209 Sherman Oaks 0439 Valencia 1211 Valencia 0440 West Hills 0728 Aurora 1196 Aurora 1197 Aurora 0882 Colorado Springs 1199 Denver 0808 Englewood 0809 Englewood 0810 Englewood 0811 Englewood 2658 Highlands Ranch 0812 Littleton 0813 Littleton 0570 Lone Tree 0666 Lone Tree 2233 Lone Tree 1076 Parker 0510 Thornton 0434 Atlantis 0435 Atlantis Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) PART II Accumulated Depreciation Year Acquired/ Constructed AK AR AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ AZ CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CA CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO CO FL FL — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 1,456 — 3,669 — 1,050 780 280 5,115 — — — — — — — — 215 215 — 6,151 400 2,700 2,758 2,860 1,268 2,848 2,863 4,619 2,910 1,935 1,460 1,718 7,472 2,300 1,344 2,100 — 210 200 — 493 — — — — 1,637 — — — — — — 236 — — 10,650 27,714 13,503 17,314 6,774 3,199 877 14,064 12,312 9,179 6,398 9,522 4,102 3,655 7,168 6,659 6,318 3,940 30,864 10,438 9,266 10,839 9,908 37,566 5,109 5,879 8,913 19,370 19,984 1,728 7,672 3,124 10,075 6,967 7,507 11,595 8,764 12,362 8,414 12,933 7,897 8,616 8,449 8,040 8,472 10,063 4,562 4,926 — 23,274 6,734 13,388 10,206 2,027 2,000 12,309 — 2,538 896 925 2,271 120 3,553 1,818 1,222 1,570 663 1,482 1,211 1,455 1,285 1,390 1,285 3,002 4,583 4,140 3,710 — 27,137 374 1,450 2,913 4,023 16,343 2,616 527 622 5,915 3,761 733 4,182 2,807 6,074 5,398 10,716 1,865 9,322 3,767 7,711 4,743 — 2,405 1,910 20,096 2,663 27,690 1,048 3,648 352 931 1,456 — 3,669 — 1,050 780 280 4,839 — — — — — — — — 326 267 187 6,646 638 2,887 2,758 2,911 1,299 3,009 3,068 4,711 2,964 1,935 1,460 1,758 7,943 2,404 1,383 2,259 — 210 200 — 622 11 — — — 1,637 257 106 — — — 8 454 5 — 22,907 27,714 15,751 18,181 7,124 4,550 961 17,035 14,046 10,270 7,848 10,184 5,492 4,826 8,605 7,944 7,073 4,745 33,138 13,736 11,876 12,438 9,908 63,801 5,453 5,053 8,297 16,760 34,954 3,302 7,721 3,592 14,851 8,727 7,969 12,225 8,997 17,720 13,482 22,506 9,401 16,830 10,997 14,746 11,614 10,063 5,803 6,089 19,400 25,414 34,424 14,215 13,289 2,219 2,566 24,363 27,714 19,420 18,181 8,174 5,330 1,241 21,874 14,046 10,270 7,848 10,184 5,492 4,826 8,605 7,944 7,399 5,012 33,325 20,382 12,514 15,325 12,666 66,712 6,752 8,062 11,365 21,471 37,918 5,237 9,181 5,350 22,794 11,131 9,352 14,484 8,997 17,930 13,682 22,506 10,023 16,841 10,997 14,746 11,614 11,700 6,060 6,195 19,400 25,414 34,424 14,223 13,743 2,224 2,566 (6,114) (916) (5,883) (2,567) (2,857) (1,884) (351) (5,539) (3,839) (2,942) (1,871) (2,438) (1,650) (1,118) (2,140) (1,937) (3,414) (1,541) (9,716) (5,095) (5,682) (6,698) — (10,335) (649) (3,231) (5,276) (10,173) (8,524) (1,348) (3,004) (1,336) (7,274) (3,716) (2,377) (5,826) (3,157) (4,037) (3,541) (7,988) (3,494) (6,146) (4,304) (5,510) (3,760) — (2,317) (2,126) (6,614) (8,551) (1,641) (4,262) (5,213) (1,141) (1,346) 2006 2016 2002 2012 2001 1999 2001 2006 2012 2012 2012 2012 2012 2012 2012 2012 2000 2003 2006 2006 1999 1997 2017 1998 2015 1997 1997 1997 1999 2003 2003 2000 2006 1999 2006 1999 2005 2006 2006 2006 2006 2005 2005 2005 2005 2017 2005 2005 2003 2000 2014 2006 2002 1999 1999 124 http://www.hcpi.com 2017 Annual Report 125 PART II City 0602 Atlantis 0604 Englewood 0609 Kissimmee 0610 Kissimmee 0671 Kissimmee 0603 Lake Worth 0612 Margate 0613 Miami 2202 Miami 2203 Miami 1067 Milton 2577 Naples 2578 Naples 0563 Orlando 0833 Pace 0834 Pensacola 0614 Plantation 0673 Plantation 2579 Punta Gorda 0701 St. Petersburg 1210 Tampa 1058 Blue Ridge 2576 Statesboro 1065 Marion 1057 Newburgh 2039 Kansas City 2043 Overland Park 0483 Wichita 1064 Lexington 0735 Louisville 0737 Louisville 0738 Louisville 0739 Louisville 0740 Louisville 1944 Louisville 1945 Louisville 1946 Louisville 2237 Louisville 2238 Louisville 2239 Louisville 1324 Haverhill 1213 Ellicott City 0361 GlenBurnie 1052 Towson 2650 Biddeford 0240 Minneapolis 0300 Minneapolis 2032 Independence 1078 Flowood 1059 Jackson 1060 Jackson 1068 Omaha 2651 Charlotte 2655 Wilmington 2656 Wilmington 2657 Shallotte Encumbrances at December 31, 2017 State FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL GA GA IL IN KS KS KS KY KY KY KY KY KY KY KY KY KY KY KY MA MD MD MD ME MN MN MO MS MS MS NE NC NC NC NC — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Initial Cost to Company Buildings and Improvements 2,231 1,134 174 347 7,574 2,894 6,898 11,841 13,123 8,877 8,566 29,186 18,819 5,136 10,309 11,166 3,241 7,176 9,379 13,754 6,602 3,231 10,234 11,484 14,019 2,173 7,668 3,341 12,726 8,426 27,627 8,582 13,814 13,171 2,414 28,644 6,125 15,386 12,172 10,832 8,537 3,206 5,085 14,233 12,244 13,213 10,131 48,025 8,413 8,868 7,187 16,243 11,217 17,376 11,592 3,609 Land 455 170 788 481 — 1,507 1,553 4,392 — — — — — 2,144 — — 969 1,091 — — 1,967 — — 99 — 440 — 530 — 936 835 780 826 2,983 788 3,255 430 1,519 1,334 1,644 800 1,115 670 — 1,949 117 160 — — — — — 2,001 1,341 2,071 918 Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed 991 486 649 793 2,521 1,807 1,499 4,300 4,193 2,793 269 — — 6,662 3,217 478 1,595 1,979 — 8,866 6,482 228 — 775 4,265 17 366 716 1,323 5,714 6,376 5,857 1,842 4,853 — 971 152 2,941 1,660 4,947 2,191 2,692 — 3,611 — 3,095 4,653 1,220 762 122 2,189 1,309 — — — — 455 198 788 494 — 1,507 1,553 4,392 — — — — — 2,343 26 — 1,017 1,091 — — 2,194 — — 100 — 448 — 530 — 936 878 851 832 2,991 788 3,291 430 1,542 1,511 1,718 869 1,222 670 — 1,949 117 160 — — — — 17 2,001 1,341 2,071 918 2,958 1,398 721 975 8,525 4,569 8,204 14,622 17,207 11,671 8,816 29,186 18,819 10,110 11,206 11,644 4,151 8,714 9,379 21,181 10,646 3,459 10,234 12,090 18,278 2,181 8,034 3,620 13,835 11,622 32,459 12,321 14,195 16,849 2,414 29,278 6,277 18,304 13,654 15,704 9,373 4,979 5,085 15,132 12,244 15,773 13,649 49,245 9,148 8,990 9,376 17,465 11,217 17,376 11,592 3,609 3,413 1,596 1,509 1,469 8,525 6,076 9,757 19,014 17,207 11,671 8,816 29,186 18,819 12,453 11,232 11,644 5,168 9,805 9,379 21,181 12,840 3,459 10,234 12,190 18,278 2,629 8,034 4,150 13,835 12,558 33,337 13,172 15,027 19,840 3,202 32,569 6,707 19,846 15,165 17,422 10,242 6,201 5,755 15,132 14,193 15,890 13,809 49,245 9,148 8,990 9,376 17,482 13,218 18,717 13,663 4,527 (984) (522) (217) (452) (2,817) (1,962) (2,827) (5,453) (2,767) (1,607) (2,544) (903) (494) (3,982) (2,918) (3,316) (1,475) (2,579) (280) (5,713) (4,722) (934) (412) (3,723) (5,266) (369) (1,283) (1,214) (4,443) (9,574) (11,571) (7,304) (4,774) (7,188) (676) (7,073) (1,461) (2,233) (1,896) (1,762) (2,817) (2,094) (2,712) (6,086) — (8,465) (6,940) (6,371) (3,005) (2,534) (3,271) (5,270) — — — — 2000 2000 2000 2000 2000 2000 2000 2000 2014 2014 2006 2016 2016 2003 2006 2006 2000 2002 2016 2006 2006 2006 2016 2006 2006 2012 2012 2001 2006 2005 2005 2005 2005 2005 2010 2010 2010 2014 2014 2014 2007 2006 1999 2006 2017 1997 1997 2012 2006 2006 2006 2006 2017 2017 2017 2017 Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed 1,961 23,018 1,961 23,018 24,979 Costs Gross Amount at Which Carried PART II — 24,264 — 26,063 20,524 10,578 24,288 26,110 11,120 11,779 5,592 6,407 20,123 120,324 108,177 5,592 6,407 21,048 144,612 134,287 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 815 919 — 55 — 1,121 2,305 3,480 1,717 1,172 3,244 — 823 — 619 — — 925 — — — — 203 259 256 830 596 317 700 955 2,050 1,007 2,980 515 266 827 5,425 3,818 583 1,330 1,310 769 1,617 324 397 388 188 717 328 313 — 898 — 1,664 8,749 5,758 5,380 2,637 — 4,363 4,829 12,305 3,597 — 18,339 5,559 2,726 4,561 9,256 6,582 5,707 20,072 99,904 97,646 9,138 12,090 12,190 11,243 841 1,555 1,530 5,036 9,698 6,528 4,559 5,211 181 7,164 848 1,305 7,642 14,289 12,577 15,185 450 5,960 4,165 12,355 11,640 4,842 7,966 7,975 3,618 8,181 3,210 1,771 7,705 6,785 4,866 2,481 — — — 700 12 19,276 5,809 5,304 5,502 10,833 631 7,583 470 925 300 1,925 1,521 700 51 — 91 88 56 60 — 1,827 6,314 5,893 2,925 4,984 3,901 4,334 724 2,756 400 1,552 4,072 6,113 9,661 309 76 84 — 4,310 2,528 2,461 4,103 1,337 5,663 3,945 1,923 25,335 4,053 2,334 1,211 815 919 — 55 — 1,328 2,447 3,480 1,724 1,803 3,273 34 853 — 659 — — 925 — — — — 210 259 256 851 596 317 700 955 2,055 1,060 2,980 528 266 827 5,425 3,818 583 1,330 1,310 769 1,617 324 397 388 188 717 328 325 — 898 2 1,746 8,749 5,758 5,758 2,649 17,895 7,991 8,897 15,360 12,732 — 24,434 5,983 2,713 4,861 9,138 12,181 12,278 11,299 893 1,555 2,864 10,014 14,332 8,579 9,087 16,560 8,695 791 9,506 1,048 2,441 10,270 18,199 23,722 759 6,036 4,249 15,677 11,640 6,139 9,924 10,549 4,807 11,673 6,632 3,193 33,039 9,839 6,607 3,290 9,564 6,677 5,758 2,704 17,895 9,319 11,344 18,840 14,456 1,803 27,707 6,017 3,566 4,861 9,138 12,181 12,278 11,299 1,103 1,814 3,120 10,865 14,928 8,896 9,787 17,515 10,750 1,851 12,486 1,576 2,707 11,097 23,624 27,540 1,342 7,366 5,559 16,446 13,257 6,463 10,321 10,937 4,995 12,390 6,960 3,518 33,039 11,585 7,505 3,292 (11,345) — — — (1,750) (1,432) (6,235) (3,289) (3,992) (5,449) (2,176) (53) (9,610) (875) (1,105) (2,577) (3,115) (1,450) (3,180) (779) (9,466) (364) (380) (383) (435) (495) (877) (1,093) (4,011) (5,958) (3,891) (4,349) (5,510) (3,334) (427) (4,166) (334) (922) (3,912) (7,312) (9,437) (296) (231) (173) (5,592) (142) (2,117) (3,702) (3,375) (1,721) (4,090) (3,044) (1,173) (2,054) (3,861) (54,567) (2,403) (1,625) 2017 2017 2017 2005 1999 2003 2000 2000 2000 2000 2000 2004 2012 2006 1999 2006 2005 1999 2016 2014 2015 2016 2016 2016 2016 1998 2017 2000 2003 2003 2003 1994 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2016 2016 2003 2017 2000 2000 2006 2000 2000 2000 2000 2015 2000 2006 2000 2005 — 15,230 162,971 33,595 23,882 185,238 209,120 City 2647 Concord 2648 Concord 2649 Epsom 0729 Albuquerque 0348 Elko 0571 Las Vegas 0660 Las Vegas 0661 Las Vegas 0662 Las Vegas 0663 Las Vegas 0664 Las Vegas 0691 Las Vegas 2037 Mesquite 1285 Cleveland 0400 Harrison 1054 Durant 0817 Owasso 0404 Roseburg 2570 Limerick 2234 Philadelphia 2403 Philadelphia 2571 Wilkes-Barre 2573 Florence 2574 Florence 2575 Florence 0252 Clarksville 2634 Clarksville 0624 Hendersonville 0559 Hermitage 0561 Hermitage 0562 Hermitage 0154 Knoxville 0625 Nashville 0626 Nashville 0627 Nashville 0628 Nashville 0630 Nashville 0631 Nashville 0632 Nashville 0633 Nashville 0634 Nashville 0636 Nashville 2611 Allen 2612 Allen 0573 Arlington 2621 Cedar Park 0576 Conroe 0577 Conroe 0578 Conroe 0579 Conroe 0581 Corpus Christi 0600 Corpus Christi 0601 Corpus Christi 2244 Cypress 0582 Dallas 1314 Dallas 0583 Fort Worth 0805 Fort Worth NH NH NH NM NV NV NV NV NV NV NV NV NV OH OH OK OK OR PA PA PA PA SC SC SC TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX http://www.hcpi.com 126 http://www.hcpi.com 2017 Annual Report 127 PART II City 0602 Atlantis 0604 Englewood 0609 Kissimmee 0610 Kissimmee 0671 Kissimmee 0603 Lake Worth 0612 Margate 0613 Miami 2202 Miami 2203 Miami 1067 Milton 2577 Naples 2578 Naples 0563 Orlando 0833 Pace 0834 Pensacola 0614 Plantation 0673 Plantation 2579 Punta Gorda 0701 St. Petersburg 1210 Tampa 1058 Blue Ridge 2576 Statesboro 1065 Marion 1057 Newburgh 2039 Kansas City 2043 Overland Park 0483 Wichita 1064 Lexington 0735 Louisville 0737 Louisville 0738 Louisville 0739 Louisville 0740 Louisville 1944 Louisville 1945 Louisville 1946 Louisville 2237 Louisville 2238 Louisville 2239 Louisville 1324 Haverhill 1213 Ellicott City 0361 GlenBurnie 1052 Towson 2650 Biddeford 0240 Minneapolis 0300 Minneapolis 2032 Independence 1078 Flowood 1059 Jackson 1060 Jackson 1068 Omaha 2651 Charlotte 2655 Wilmington 2656 Wilmington 2657 Shallotte FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL FL GA GA IL IN KS KS KS KY KY KY KY KY KY KY KY KY KY KY KY MA MD MD MD ME MN MN MO MS MS MS NE NC NC NC NC Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed Costs Gross Amount at Which Carried — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 455 170 788 481 — 1,507 1,553 4,392 — — — — — — — — — — — 99 — 2,144 969 1,091 1,967 440 — 530 — 936 835 780 826 2,983 788 3,255 430 1,519 1,334 1,644 800 1,115 670 — 1,949 117 160 — — — — — 2,001 1,341 2,071 918 2,231 1,134 174 347 7,574 2,894 6,898 11,841 13,123 8,877 8,566 29,186 18,819 5,136 10,309 11,166 3,241 7,176 9,379 13,754 6,602 3,231 10,234 11,484 14,019 2,173 7,668 3,341 12,726 8,426 27,627 8,582 13,814 13,171 2,414 28,644 6,125 15,386 12,172 10,832 8,537 3,206 5,085 14,233 12,244 13,213 10,131 48,025 8,413 8,868 7,187 16,243 11,217 17,376 11,592 3,609 991 486 649 793 2,521 1,807 1,499 4,300 4,193 2,793 269 — — 6,662 3,217 478 1,595 1,979 — 8,866 6,482 4,265 228 — 775 17 366 716 1,323 5,714 6,376 5,857 1,842 4,853 — 971 152 2,941 1,660 4,947 2,191 2,692 3,611 — — 3,095 4,653 1,220 762 122 2,189 1,309 — — — — 455 198 788 494 — 1,507 1,553 4,392 — — — — — 26 — — — — — 2,343 1,017 1,091 2,194 100 — 448 — 530 — 936 878 851 832 2,991 788 3,291 430 1,542 1,511 1,718 869 1,222 670 — 1,949 117 160 — — — — 17 2,001 1,341 2,071 918 2,958 1,398 721 975 8,525 4,569 8,204 14,622 17,207 11,671 8,816 29,186 18,819 10,110 11,206 11,644 4,151 8,714 9,379 21,181 10,646 3,459 10,234 12,090 18,278 2,181 8,034 3,620 13,835 11,622 32,459 12,321 14,195 16,849 2,414 29,278 6,277 18,304 13,654 15,704 9,373 4,979 5,085 15,132 12,244 15,773 13,649 49,245 9,148 8,990 9,376 17,465 11,217 17,376 11,592 3,609 3,413 1,596 1,509 1,469 8,525 6,076 9,757 19,014 17,207 11,671 8,816 29,186 18,819 12,453 11,232 11,644 5,168 9,805 9,379 21,181 12,840 3,459 10,234 12,190 18,278 2,629 8,034 4,150 13,835 12,558 33,337 13,172 15,027 19,840 3,202 32,569 6,707 19,846 15,165 17,422 10,242 6,201 5,755 15,132 14,193 15,890 13,809 49,245 9,148 8,990 9,376 17,482 13,218 18,717 13,663 4,527 (984) (522) (217) (452) (2,817) (1,962) (2,827) (5,453) (2,767) (1,607) (2,544) (903) (494) (3,982) (2,918) (3,316) (1,475) (2,579) (280) (5,713) (4,722) (934) (412) (3,723) (5,266) (369) (1,283) (1,214) (4,443) (9,574) (7,304) (4,774) (7,188) (676) (7,073) (1,461) (2,233) (1,896) (1,762) (2,817) (2,094) (2,712) (6,086) — (8,465) (6,940) (6,371) (3,005) (2,534) (3,271) (5,270) — — — — (11,571) 2000 2000 2000 2000 2000 2000 2000 2000 2014 2014 2006 2016 2016 2003 2006 2006 2000 2002 2016 2006 2006 2006 2016 2006 2006 2012 2012 2001 2006 2005 2005 2005 2005 2005 2010 2010 2010 2014 2014 2014 2007 2006 1999 2006 2017 1997 1997 2012 2006 2006 2006 2006 2017 2017 2017 2017 City 2647 Concord 2648 Concord 2649 Epsom 0729 Albuquerque 0348 Elko 0571 Las Vegas 0660 Las Vegas 0661 Las Vegas 0662 Las Vegas 0663 Las Vegas 0664 Las Vegas 0691 Las Vegas 2037 Mesquite 1285 Cleveland 0400 Harrison 1054 Durant 0817 Owasso 0404 Roseburg 2570 Limerick 2234 Philadelphia 2403 Philadelphia 2571 Wilkes-Barre 2573 Florence 2574 Florence 2575 Florence 0252 Clarksville 2634 Clarksville 0624 Hendersonville 0559 Hermitage 0561 Hermitage 0562 Hermitage 0154 Knoxville 0625 Nashville 0626 Nashville 0627 Nashville 0628 Nashville 0630 Nashville 0631 Nashville 0632 Nashville 0633 Nashville 0634 Nashville 0636 Nashville 2611 Allen 2612 Allen 0573 Arlington 2621 Cedar Park 0576 Conroe 0577 Conroe 0578 Conroe 0579 Conroe 0581 Corpus Christi 0600 Corpus Christi 0601 Corpus Christi 2244 Cypress 0582 Dallas 1314 Dallas 0583 Fort Worth 0805 Fort Worth Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) PART II Accumulated Depreciation Year Acquired/ Constructed NH NH NH NM NV NV NV NV NV NV NV NV NV OH OH OK OK OR PA PA PA PA SC SC SC TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TN TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX 1,961 — 815 — 919 — — — 55 — — — 1,121 — 2,305 — 3,480 — 1,717 — 1,172 — 3,244 — — — 823 — — — 619 — — — — — — 925 — 24,264 — 26,063 — — — — — — — — 203 — 259 — 256 — 830 — 596 — 317 — 700 — 955 — 2,050 — 1,007 — 2,980 — 515 — 266 — 827 — 5,425 — 3,818 — 583 — 1,330 — 1,310 — 769 — 1,617 — 324 — 397 — 388 — 188 — 717 — 328 — 313 — — — — 1,664 — 15,230 898 — — — 23,018 8,749 5,758 5,380 2,637 — 4,363 4,829 12,305 3,597 — 18,339 5,559 2,726 4,561 9,256 6,582 5,707 20,072 99,904 97,646 9,138 12,090 12,190 11,243 841 1,555 1,530 5,036 9,698 6,528 4,559 14,289 5,211 181 7,164 848 1,305 7,642 12,577 15,185 450 5,960 4,165 12,355 11,640 4,842 7,966 7,975 3,618 8,181 3,210 1,771 7,705 6,785 162,971 4,866 2,481 — — — 700 12 19,276 5,809 5,304 5,502 10,833 631 7,583 470 925 300 1,925 1,521 700 51 20,524 10,578 — 91 88 56 60 — 1,827 6,314 5,893 2,925 4,984 3,901 4,334 724 2,756 400 1,552 4,072 6,113 9,661 309 76 84 4,310 — 2,528 2,461 4,103 1,337 5,663 3,945 1,923 25,335 4,053 33,595 2,334 1,211 1,961 815 919 — 55 — 1,328 2,447 3,480 1,724 1,803 3,273 34 853 — 659 — — 925 24,288 26,110 — — — — 210 259 256 851 596 317 700 955 2,055 1,060 2,980 528 266 827 5,425 3,818 583 1,330 1,310 769 1,617 324 397 388 188 717 328 325 — 1,746 23,882 898 2 23,018 8,749 5,758 5,758 2,649 17,895 7,991 8,897 15,360 12,732 — 24,434 5,983 2,713 4,861 11,120 5,592 6,407 20,123 120,324 108,177 9,138 12,181 12,278 11,299 893 1,555 2,864 10,014 14,332 8,579 9,087 16,560 8,695 791 9,506 1,048 2,441 10,270 18,199 23,722 759 6,036 4,249 15,677 11,640 6,139 9,924 10,549 4,807 11,673 6,632 3,193 33,039 9,839 185,238 6,607 3,290 24,979 9,564 6,677 5,758 2,704 17,895 9,319 11,344 18,840 14,456 1,803 27,707 6,017 3,566 4,861 11,779 5,592 6,407 21,048 144,612 134,287 9,138 12,181 12,278 11,299 1,103 1,814 3,120 10,865 14,928 8,896 9,787 17,515 10,750 1,851 12,486 1,576 2,707 11,097 23,624 27,540 1,342 7,366 5,559 16,446 13,257 6,463 10,321 10,937 4,995 12,390 6,960 3,518 33,039 11,585 209,120 7,505 3,292 — — — (1,750) (1,432) (6,235) (3,289) (3,992) (5,449) (2,176) (53) (9,610) (875) (1,105) (2,577) (3,115) (1,450) (3,180) (779) (9,466) (11,345) (364) (380) (383) (435) (495) (877) (1,093) (4,011) (5,958) (3,891) (4,349) (5,510) (3,334) (427) (4,166) (334) (922) (3,912) (7,312) (9,437) (296) (231) (173) (5,592) (142) (2,117) (3,702) (3,375) (1,721) (4,090) (3,044) (1,173) (2,054) (3,861) (54,567) (2,403) (1,625) 2017 2017 2017 2005 1999 2003 2000 2000 2000 2000 2000 2004 2012 2006 1999 2006 2005 1999 2016 2014 2015 2016 2016 2016 2016 1998 2017 2000 2003 2003 2003 1994 2000 2000 2000 2000 2000 2000 2000 2000 2000 2000 2016 2016 2003 2017 2000 2000 2006 2000 2000 2000 2000 2015 2000 2006 2000 2005 126 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 127 PART II City Encumbrances at December 31, 2017 State TX 0806 Fort Worth TX 2231 Fort Worth TX 2619 Fort Worth TX 2620 Fort Worth TX 1061 Granbury TX 0430 Houston TX 0446 Houston TX 0589 Houston TX 0670 Houston TX 0702 Houston TX 1044 Houston TX 2542 Houston TX 2543 Houston TX 2544 Houston TX 2545 Houston TX 2546 Houston TX 2547 Houston TX 2548 Houston TX 2549 Houston TX 0590 Irving TX 0700 Irving TX 1202 Irving TX 1207 Irving TX 2613 Kingwood TX 1062 Lancaster TX 2195 Lancaster TX 0591 Lewisville TX 0144 Longview TX 0143 Lufkin TX 0568 Mckinney TX 0569 Mckinney TX 1079 Nassau Bay 0596 N Richland Hills TX 2048 North Richland Hills TX TX 1048 Pearland TX 2232 Pearland TX 0447 Plano TX 0597 Plano TX 0672 Plano TX 1284 Plano TX 1286 Plano TX 2653 Rockwall TX 0815 San Antonio TX 0816 San Antonio TX 1591 San Antonio TX 1977 San Antonio TX 2559 Shenandoah TX 0598 Sugarland TX 0599 Texas City TX 0152 Victoria TX 2550 The Woodlands TX 2551 The Woodlands TX 2552 The Woodlands UT 1592 Bountiful UT 0169 Bountiful UT 0346 Castle Dale — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,376 — — — — — — — — — — — — Initial Cost to Company Buildings and Improvements 6,070 — 13,432 14,139 6,863 33,140 19,585 12,602 2,884 7,414 4,838 17,764 6,555 12,094 13,931 18,332 18,197 7,036 22,711 6,160 8,550 16,107 12,793 28,373 2,692 1,138 8,043 7,998 2,383 6,217 636 8,942 8,883 10,213 4,014 3,374 7,810 9,588 12,768 18,793 — 9,020 9,193 8,699 7,309 26,191 — 5,158 9,519 8,977 5,141 18,282 25,125 7,426 5,237 1,818 Land — 902 1,180 1,961 — 1,927 2,200 1,676 257 — — 304 116 312 316 408 470 313 530 828 — 1,604 1,955 3,035 172 — 561 102 338 541 — — 812 1,385 — — 1,700 1,210 1,389 2,049 3,300 788 — — — — — 1,078 — 125 115 296 374 999 276 50 City 0347 Centerville 2035 Draper 0469 Kaysville 0456 Layton 2042 Layton 0359 Ogden 0357 Orem 0371 Providence 0353 Salt Lake City 0354 Salt Lake City 0355 Salt Lake City 0467 Salt Lake City 0566 Salt Lake City 2041 Salt Lake City 2033 Sandy 0482 Stansbury 0351 Washington Terrace UT 0352 Washington Terrace UT 2034 West Jordan 2036 West Jordan 0495 West Valley City 0349 West Valley City 1208 Fairfax 2230 Fredericksburg 0572 Reston 0448 Renton 0781 Seattle 0782 Seattle 0783 Seattle 0785 Seattle 1385 Seattle 2038 Evanston UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT UT VA VA VA WA WA WA WA WA WA WY 5,088 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 547 300 — 530 371 — 180 337 240 190 220 180 509 — 867 450 — — — — 3,000 410 1,070 8,396 1,101 — — — — — — — — 1,288 10,803 4,493 7,073 10,975 1,695 8,744 3,876 779 10,732 14,792 7,541 4,044 12,326 3,513 3,201 4,573 2,692 12,021 1,383 8,266 17,463 16,710 8,570 11,902 18,724 52,703 24,382 5,625 7,293 45,027 4,601 276 183 226 1,265 412 240 2,041 618 164 2,204 2,647 2,274 2,510 335 842 1,147 2,493 1,309 264 1,522 1,002 128 10,434 — 967 3,092 15,806 12,686 1,375 6,215 3,619 222 300 — 530 389 — 180 306 282 201 220 180 3,145 509 — 1,153 529 17 15 — — 410 1,036 8,494 1,101 — — — 126 183 — — — 11,388 11,388 1,394 10,879 4,719 8,034 1,814 8,268 4,163 885 12,421 16,688 9,323 6,121 12,661 4,069 3,944 6,279 3,306 2,905 9,268 17,581 26,168 8,570 12,026 20,685 64,279 34,881 6,690 12,213 48,471 4,823 1,694 10,879 5,249 8,423 1,994 8,574 4,445 1,086 12,641 16,868 12,468 6,630 12,661 5,222 4,473 6,296 3,321 2,905 9,678 18,617 34,662 9,671 12,026 20,685 64,279 35,007 6,873 12,213 48,471 4,823 12,285 12,285 (704) (1,455) (1,786) (3,704) (1,503) (993) (4,302) (2,057) (477) (6,638) (8,675) (3,784) (2,320) (1,682) (1,245) (1,245) (3,509) (1,657) (1,604) (610) (4,567) (9,488) (8,694) (837) (4,458) (10,299) (22,985) (13,765) (6,322) (4,804) (15,524) (681) $9,011 $279,168 $ 2,785,660 $ 822,680 $295,620 $3,434,989 $3,730,609 $(924,333) PART II 1999 2012 2001 2001 2012 1999 1999 1999 1999 1999 1999 2001 2003 2012 2012 2001 1999 1999 2012 2012 2002 1999 2006 2014 2003 1999 2004 2004 2004 2004 2007 2012 Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed Costs Gross Amount at Which Carried 690 44 6 72 1,090 13,211 18,770 5,972 1,378 2,005 3,339 — — — — — — — — 2,834 3,620 1,030 1,904 212 1,119 679 2,120 715 80 2,364 8,418 1,384 3,050 2,135 4,306 13,919 6,394 4,693 2,545 2,377 — — 2,654 2,872 641 1,536 27,194 2,774 169 394 — — — 674 1,447 73 5 946 1,180 1,961 — 2,151 2,209 1,706 318 7 — 304 116 312 316 408 470 313 530 828 8 1,633 1,986 3,035 185 131 561 102 338 541 — — 812 1,400 — — 1,792 1,224 1,389 2,101 3,300 788 12 175 12 — — 1,170 — 125 115 296 374 999 363 50 6,566 — 13,437 14,211 7,882 44,381 32,783 15,878 3,659 8,410 6,481 17,764 6,555 12,094 13,931 18,332 18,197 7,036 22,711 8,600 11,154 17,007 14,617 28,584 3,733 1,686 9,727 8,270 2,423 7,876 8,174 10,116 11,487 12,150 7,326 17,293 13,329 13,176 13,984 18,958 — 9,020 11,039 10,675 7,906 27,482 27,194 7,077 9,532 9,370 5,141 18,282 25,125 8,101 6,159 1,828 6,571 946 14,617 16,172 7,882 46,532 34,992 17,584 3,977 8,417 6,481 18,068 6,671 12,406 14,247 18,740 18,667 7,349 23,241 9,428 11,162 18,640 16,603 31,619 3,918 1,817 10,288 8,372 2,761 8,417 8,174 10,116 12,299 13,550 7,326 17,293 15,121 14,400 15,373 21,059 3,300 9,808 11,051 10,850 7,918 27,482 27,194 8,247 9,532 9,495 5,256 18,578 25,499 9,100 6,522 1,878 (2,065) (12) (153) (166) (2,083) (18,994) (18,259) (5,555) (1,406) (2,880) (1,929) (1,364) (595) (1,105) (970) (2,003) (1,684) (834) (1,394) (3,351) (4,592) (5,268) (4,520) (1,161) (1,550) (387) (3,315) (4,258) (1,239) (2,842) (2,665) (3,279) (3,998) (2,613) (2,395) (713) (6,390) (4,565) (4,617) (7,525) — — (3,584) (3,770) (2,086) (6,622) (401) (2,729) (2,864) (4,846) (403) (1,235) (1,513) (1,991) (2,940) (983) 2005 2014 2017 2017 2006 1999 1999 2000 2000 2004 2006 2015 2015 2015 2015 2015 2015 2015 2015 2000 2006 2006 2006 2016 2006 2006 2000 1992 1992 2003 2003 2006 2000 2012 2006 2014 1999 2000 2002 2006 2006 2017 2006 2006 2010 2011 2016 2000 2000 1994 2015 2015 2015 2010 1995 1998 http://www.hcpi.com 128 http://www.hcpi.com 2017 Annual Report 129 Land Total(1) Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements PART II Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed City Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition PART II City 0806 Fort Worth 2231 Fort Worth 2619 Fort Worth 2620 Fort Worth 1061 Granbury 0430 Houston 0446 Houston 0589 Houston 0670 Houston 0702 Houston 1044 Houston 2542 Houston 2543 Houston 2544 Houston 2545 Houston 2546 Houston 2547 Houston 2548 Houston 2549 Houston 0590 Irving 0700 Irving 1202 Irving 1207 Irving 2613 Kingwood 1062 Lancaster 2195 Lancaster 0591 Lewisville 0144 Longview 0143 Lufkin 0568 Mckinney 0569 Mckinney 1079 Nassau Bay 0596 N Richland Hills 2048 North Richland Hills TX 1048 Pearland 2232 Pearland 0447 Plano 0597 Plano 0672 Plano 1284 Plano 1286 Plano 2653 Rockwall 0815 San Antonio 0816 San Antonio 1591 San Antonio 1977 San Antonio 2559 Shenandoah 0598 Sugarland 0599 Texas City 0152 Victoria 2550 The Woodlands 2551 The Woodlands 2552 The Woodlands 1592 Bountiful 0169 Bountiful 0346 Castle Dale TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX TX UT UT UT — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 3,376 — 902 1,180 1,961 — 1,927 2,200 1,676 257 — — 304 116 312 316 408 470 313 530 828 — 172 — 561 102 338 541 — — 1,604 1,955 3,035 812 1,385 — — 1,700 1,210 1,389 2,049 3,300 788 1,078 — — — — — — 125 115 296 374 999 276 50 6,070 — 13,432 14,139 6,863 33,140 19,585 12,602 2,884 7,414 4,838 17,764 6,555 12,094 13,931 18,332 18,197 7,036 22,711 6,160 8,550 16,107 12,793 28,373 2,692 1,138 8,043 7,998 2,383 6,217 636 8,942 8,883 10,213 4,014 3,374 7,810 9,588 12,768 18,793 26,191 — 9,020 9,193 8,699 7,309 — 5,158 9,519 8,977 5,141 18,282 25,125 7,426 5,237 1,818 690 44 6 72 1,090 13,211 18,770 5,972 1,378 2,005 3,339 — — — — — — — — 2,834 3,620 1,030 1,904 212 1,119 679 2,120 715 80 2,364 8,418 1,384 3,050 2,135 4,306 13,919 6,394 4,693 2,545 2,377 — — 2,654 2,872 641 1,536 27,194 2,774 169 394 — — — 674 1,447 73 5 946 1,180 1,961 — 2,151 2,209 1,706 318 7 — 304 116 312 316 408 470 313 530 828 8 185 131 561 102 338 541 — — 1,633 1,986 3,035 812 1,400 — — 1,792 1,224 1,389 2,101 3,300 1,170 788 12 175 12 — — — 125 115 296 374 999 363 50 6,566 — 13,437 14,211 7,882 44,381 32,783 15,878 3,659 8,410 6,481 17,764 6,555 12,094 13,931 18,332 18,197 7,036 22,711 8,600 11,154 17,007 14,617 28,584 3,733 1,686 9,727 8,270 2,423 7,876 8,174 10,116 11,487 12,150 7,326 17,293 13,329 13,176 13,984 18,958 — 9,020 11,039 10,675 7,906 27,482 27,194 7,077 9,532 9,370 5,141 18,282 25,125 8,101 6,159 1,828 6,571 946 14,617 16,172 7,882 46,532 34,992 17,584 3,977 8,417 6,481 18,068 6,671 12,406 14,247 18,740 18,667 7,349 23,241 9,428 11,162 18,640 16,603 31,619 3,918 1,817 10,288 8,372 2,761 8,417 8,174 10,116 12,299 13,550 7,326 17,293 15,121 14,400 15,373 21,059 3,300 9,808 11,051 10,850 7,918 27,482 27,194 8,247 9,532 9,495 5,256 18,578 25,499 9,100 6,522 1,878 (2,065) (12) (153) (166) (2,083) (18,994) (18,259) (5,555) (1,406) (2,880) (1,929) (1,364) (595) (1,105) (970) (2,003) (1,684) (834) (1,394) (3,351) (4,592) (5,268) (4,520) (1,161) (1,550) (387) (3,315) (4,258) (1,239) (2,842) (2,665) (3,279) (3,998) (2,613) (2,395) (713) (6,390) (4,565) (4,617) (7,525) — — (3,584) (3,770) (2,086) (6,622) (401) (2,729) (2,864) (4,846) (403) (1,235) (1,513) (1,991) (2,940) (983) 2005 2014 2017 2017 2006 1999 1999 2000 2000 2004 2006 2015 2015 2015 2015 2015 2015 2015 2015 2000 2006 2006 2006 2016 2006 2006 2000 1992 1992 2003 2003 2006 2000 2012 2006 2014 1999 2000 2002 2006 2006 2017 2006 2006 2010 2011 2016 2000 2000 1994 2015 2015 2015 2010 1995 1998 0347 Centerville UT 2035 Draper UT 0469 Kaysville UT 0456 Layton UT 2042 Layton UT 0359 Ogden UT 0357 Orem UT 0371 Providence UT 0353 Salt Lake City UT 0354 Salt Lake City UT 0355 Salt Lake City UT 0467 Salt Lake City UT 0566 Salt Lake City UT 2041 Salt Lake City UT 2033 Sandy UT UT 0482 Stansbury 0351 Washington Terrace UT 0352 Washington Terrace UT UT 2034 West Jordan UT 2036 West Jordan UT 0495 West Valley City UT 0349 West Valley City VA 1208 Fairfax VA 2230 Fredericksburg VA 0572 Reston WA 0448 Renton WA 0781 Seattle WA 0782 Seattle WA 0783 Seattle WA 0785 Seattle WA 1385 Seattle WY 2038 Evanston — 5,088 — — — — — — — — — — — — — — — — — 547 — — — — — — — — — — — — 300 — 530 371 — 180 337 240 190 220 180 3,000 509 — 867 450 — — — — 410 1,070 8,396 1,101 — — — — — — — — $9,011 $279,168 1,288 10,803 4,493 7,073 10,975 1,695 8,744 3,876 779 10,732 14,792 7,541 4,044 12,326 3,513 3,201 4,573 2,692 12,021 1,383 8,266 17,463 16,710 8,570 11,902 18,724 52,703 24,382 5,625 7,293 45,027 4,601 $ 2,785,660 276 183 226 1,265 412 240 2,041 618 164 2,204 2,647 2,274 2,510 335 842 1,147 2,493 1,309 264 1,522 1,002 128 10,434 — 967 3,092 15,806 12,686 1,375 6,215 3,619 222 300 — 530 389 — 180 306 282 201 220 180 3,145 509 — 1,153 529 17 15 — — 410 1,036 8,494 1,101 — — — 126 183 — — — $ 822,680 $295,620 1,394 10,879 4,719 8,034 11,388 1,814 8,268 4,163 885 12,421 16,688 9,323 6,121 12,661 4,069 3,944 6,279 3,306 12,285 2,905 9,268 17,581 26,168 8,570 12,026 20,685 64,279 34,881 6,690 12,213 48,471 4,823 1,694 10,879 5,249 8,423 11,388 1,994 8,574 4,445 1,086 12,641 16,868 12,468 6,630 12,661 5,222 4,473 6,296 3,321 12,285 2,905 9,678 18,617 34,662 9,671 12,026 20,685 64,279 35,007 6,873 12,213 48,471 4,823 $3,434,989 $3,730,609 (704) (1,455) (1,786) (3,704) (1,503) (993) (4,302) (2,057) (477) (6,638) (8,675) (3,784) (2,320) (1,682) (1,245) (1,245) (3,509) (1,657) (1,604) (610) (4,567) (9,488) (8,694) (837) (4,458) (10,299) (22,985) (13,765) (6,322) (4,804) (15,524) (681) $(924,333) 1999 2012 2001 2001 2012 1999 1999 1999 1999 1999 1999 2001 2003 2012 2012 2001 1999 1999 2012 2012 2002 1999 2006 2014 2003 1999 2004 2004 2004 2004 2007 2012 128 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 129 PART II VA AR AZ CA CA CO GA KS LA LA TX TX TX TX City State Other non-reportable segments Other-Hospitals 0126 Sherwood 0113 Glendale 1038 Fresno 0423 Irvine 0127 Colorado Springs 0887 Atlanta 0112 Overland Park 1383 Baton Rouge 2031 Slidell 0886 Dallas 1319 Dallas 1384 Plano 2198 Webster Other-Post-acute/skilled nursing 2469 Rural Retreat Other-United Kingdom EG 2210 Adlington EG 2211 Adlington EG 2216 Alderley Edge EG 2217 Alderley Edge EG 2340 Altrincham EG 2312 Armley EG 2313 Armley 2309 Ashton under Lyne EG EG 2206 Bangor EG 2207 Batley EG 2336 Birmingham EG 2320 Bishopbriggs EG 2323 Bonnyrigg 2335 Cardiff EG 2223 Catterick Garrison EG EG 2226 Christleton EG 2327 Croydon EG 2221 Disley EG 2227 Disley EG 2306 Dukinfield EG 2316 Dukinfield EG 2317 Dukinfield EG 2318 Dumbarton EG 2303 Eckington EG 2333 Edinburgh EG 2208 Elstead EG 2328 Forfar EG 2214 Gilroyd EG 2330 Glasgow EG 2307 Hyde EG 2324 Lewisham EG 2332 Linlithgow EG 2213 Ilkley EG 2209 Kingswood EG 2212 Kirk Hammerton EG 2310 Kirkby EG 2304 Knotty Ash EG 2322 Laindon EG 2215 Leeds EG 2326 Limehouse Encumbrances at December 31, 2017 Initial Cost to Company Buildings and Improvements Land Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) Accumulated Depreciation Year Acquired/ Constructed Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Costs Gross Amount at Which Carried at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 709 1,565 3,652 18,000 690 4,300 2,316 690 3,000 1,820 18,840 6,290 2,220 9,604 7,050 29,113 70,800 8,338 13,690 10,681 8,545 — 8,508 155,659 22,686 9,602 — 20 21,935 — — — 24 87 643 26 1,557 5,706 — 709 1,565 3,652 18,000 690 4,300 2,316 690 3,643 1,820 18,840 6,290 2,220 9,587 7,050 51,048 70,800 8,338 11,890 10,680 8,496 — 7,454 157,216 28,203 9,602 10,296 8,615 54,700 88,800 9,028 16,190 12,996 9,186 3,643 9,274 176,056 34,493 11,822 (5,723) (4,277) (16,338) (36,755) (4,960) (6,440) (6,712) (4,139) — (2,019) (48,404) (13,334) (1,850) 1989 1988 2006 1999 1989 2007 1988 2007 2012 2007 2007 2007 2013 1,876 14,720 — 1,876 14,720 16,596 (1,064) 2013 548 568 1,252 1,218 1,745 447 1,001 649 386 649 677 907 947 1,434 798 528 1,597 345 690 758 392 528 920 501 4,533 893 852 998 1,854 1,394 1,921 1,448 954 1,042 438 568 649 1,191 503 2,219 7,108 4,318 8,719 6,827 18,693 2,670 3,114 4,507 2,064 3,203 2,451 4,166 6,239 4,838 1,467 5,103 2,494 1,621 3,964 4,054 2,491 2,811 3,825 1,638 24,135 3,061 6,200 1,691 6,645 5,144 7,113 7,434 2,518 3,884 561 2,712 2,275 2,771 795 3,168 1,951 — — — — — — — — — 601 — — 744 — — 17 — — — — — — — 558 — 427 — 1,207 — 604 599 — — — — — — — 23 650 568 1,252 1,218 1,745 447 1,001 649 385 649 677 907 947 1,434 798 528 1,596 345 690 758 392 528 920 500 4,533 893 853 998 1,854 1,394 1,922 1,448 954 1,042 438 568 649 1,191 504 2,219 8,961 4,318 8,719 6,828 18,694 2,670 3,114 4,507 2,064 3,203 3,052 4,166 6,239 5,581 1,467 5,103 2,511 1,620 3,964 4,053 2,491 2,811 3,825 1,638 24,693 3,060 6,626 1,691 7,853 5,144 7,717 8,033 2,518 3,884 561 2,712 2,274 2,771 795 3,191 9,611 4,886 9,971 8,046 20,439 3,117 4,115 5,156 2,449 3,852 3,729 5,073 7,186 7,015 2,265 5,631 4,107 1,965 4,654 4,811 2,883 3,339 4,745 2,138 29,226 3,953 7,479 2,689 9,707 6,538 9,639 9,481 3,472 4,926 999 3,280 2,923 3,962 1,299 5,410 (757) (359) (656) (539) (1,218) (278) (335) (472) (213) (454) (522) (452) (644) (771) (294) (401) (296) (175) (319) (412) (236) (309) (429) (213) (2,431) (346) (746) (322) (1,136) (581) (933) (933) (403) (405) (131) (302) (270) (329) (196) (409) 2014 2014 2014 2014 2015 2015 2015 2015 2014 2014 2015 2015 2015 2015 2014 2014 2015 2014 2014 2015 2015 2015 2015 2015 2015 2014 2015 2014 2015 2015 2015 2015 2014 2014 2014 2015 2015 2015 2014 2015 City 2321 Luton 2339 Manchester 2225 N Wadebridge 2331 Paisley 2308 Prescot 2305 Prescot 2219 Ripon 2319 Sheffield 2314 Stalybridge 2315 Stalybridge 2218 Stapeley 2325 Stirling 2329 Stirling 2224 Stockton-on-Tees EG 2220 Thornton-Cleveleys EG 2228 Upper Wortley 2311 Wigan 2337 Wigan 2338 Wigan 2222 Woolmer Green 2334 Wotton under Edge EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG 3,169 15,136 6,158 3,995 1,934 2,382 906 2,705 3,608 1,887 6,491 4,929 4,041 2,086 4,566 3,366 2,660 1,820 3,788 6,062 2,490 — — — 13 — — — — — — — — — — — 16 23 — 164 1,069 1,685 298 1,232 541 636 189 745 704 555 994 907 292 913 454 717 534 474 832 636 451 646 1,109 3,169 15,136 4,238 16,821 (336) (1,004) 6,159 4,007 1,934 2,382 906 2,704 3,608 1,887 6,491 5,380 4,687 2,086 4,566 3,366 2,661 1,843 3,811 6,061 2,654 6,457 5,239 2,475 3,018 1,095 3,449 4,312 2,442 7,485 6,287 5,796 2,378 5,479 3,820 3,378 2,377 4,285 6,893 3,290 (518) (444) (248) (284) (130) (303) (380) (212) (567) (640) (673) (240) (482) (334) (366) (247) (399) (577) (378) 1,069 1,685 298 1,231 1,110 541 636 189 744 704 555 995 907 292 913 455 717 541 474 832 636 — — — — — — — — — — — — — — — — — — — — — — $ — $ 122,434 $ 641,667 $ 38,042 $ 123,171 $ 675,704 $ 798,875 $ (181,404) Total operations properties $144,486 $1,765,938 $9,726,105 $2,332,632 $1,785,865 $ 11,687,527 $ 13,473,392 $(2,741,537) Corporate and other assets — — — — 181 181 (158) Total $144,486 $1,765,938 $9,726,105 $2,332,632 $1,785,865 $ 11,687,708 $ 13,473,573 $(2,741,695) (1) Buildings and improvements are depreciated over useful lives ranging up to 60 years. (2) At December 31, 2017, the tax basis of the Company’s net real estate assets is less than the reported amounts by $900 million (unaudited). (b) A summary of activity for real estate and accumulated depreciation follows (in thousands): PART II Year 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2014 2014 2014 2015 2015 2015 2014 2015 Acquisition of real estate and development and improvements Sales and/or transfers to assets held for sale and discontinued operations Real estate: Balances at beginning of year Deconsolidation of real estate Impairments Other(1) Balances at end of year Accumulated depreciation: Balances at beginning of year Depreciation expense Deconsolidation of real estate Other(1) Balances at end of year Year ended December 31, 2017 2016 2015 $13,974,760 $14,330,257 $12,931,832 995,443 (589,391) (825,074) (37,274) (44,891) 987,135 (1,227,614) (10,306) — (104,712) 1,930,931 (473,057) — (3,118) (56,331) $13,473,573 $13,974,760 $14,330,257 $ 2,648,930 $ 2,476,015 $ 2,190,486 436,085 (115,195) (152,572) (75,553) 465,945 (239,112) (5,868) (48,050) 418,591 (86,001) — (47,061) $ 2,741,695 $ 2,648,930 $ 2,476,015 Sales and/or transfers to assets held for sale and discontinued operations (1) Represents real estate and accumulated depreciation related to fully depreciated assets written off, foreign exchange translation or where the lease classification has changed to direct financing leases. http://www.hcpi.com 130 http://www.hcpi.com 2017 Annual Report 131 Other-Post-acute/skilled nursing 1,876 14,720 1,876 14,720 16,596 (1,064) 2013 Other non-reportable segments PART II Other-Hospitals 0126 Sherwood 0113 Glendale 1038 Fresno 0423 Irvine 0127 Colorado Springs 0887 Atlanta 0112 Overland Park 1383 Baton Rouge 2031 Slidell 0886 Dallas 1319 Dallas 1384 Plano 2198 Webster 2469 Rural Retreat Other-United Kingdom 2210 Adlington 2211 Adlington 2216 Alderley Edge 2217 Alderley Edge 2340 Altrincham 2312 Armley 2313 Armley 2206 Bangor 2207 Batley 2336 Birmingham 2320 Bishopbriggs 2323 Bonnyrigg 2335 Cardiff 2226 Christleton 2327 Croydon 2221 Disley 2227 Disley 2306 Dukinfield 2316 Dukinfield 2317 Dukinfield 2318 Dumbarton 2303 Eckington 2333 Edinburgh 2208 Elstead 2328 Forfar 2214 Gilroyd 2330 Glasgow 2307 Hyde 2324 Lewisham 2332 Linlithgow 2213 Ilkley 2209 Kingswood 2310 Kirkby 2304 Knotty Ash 2322 Laindon 2215 Leeds 2326 Limehouse 2212 Kirk Hammerton 2309 Ashton under Lyne EG 2223 Catterick Garrison EG AR AZ CA CA CO GA KS LA LA TX TX TX TX VA EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG EG — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 709 1,565 3,652 18,000 690 4,300 2,316 690 3,000 1,820 18,840 6,290 2,220 548 568 1,252 1,218 1,745 447 1,001 649 386 649 677 907 947 1,434 798 528 1,597 345 690 758 392 528 920 501 893 852 998 1,854 1,394 1,921 1,448 954 1,042 438 568 649 1,191 503 2,219 9,604 7,050 29,113 70,800 8,338 13,690 10,681 8,545 — 8,508 155,659 22,686 9,602 7,108 4,318 8,719 6,827 18,693 2,670 3,114 4,507 2,064 3,203 2,451 4,166 6,239 4,838 1,467 5,103 2,494 1,621 3,964 4,054 2,491 2,811 3,825 1,638 3,061 6,200 1,691 6,645 5,144 7,113 7,434 2,518 3,884 561 2,712 2,275 2,771 795 3,168 21,935 643 26 1,557 5,706 1,951 — 20 — — — 24 87 — — — — — — — — — — — — — — — 17 — — — — — — — — — — — — — — 23 558 — 427 — — 604 599 1,207 709 1,565 3,652 18,000 690 4,300 2,316 690 3,643 1,820 18,840 6,290 2,220 650 568 1,252 1,218 1,745 447 1,001 649 385 649 677 907 947 798 528 1,596 345 690 758 392 528 920 500 893 853 998 1,854 1,394 1,922 1,448 954 1,042 438 568 649 1,191 504 2,219 601 744 1,434 157,216 176,056 18,694 20,439 (1,218) 9,587 7,050 51,048 70,800 8,338 11,890 10,680 8,496 — 7,454 28,203 9,602 8,961 4,318 8,719 6,828 2,670 3,114 4,507 2,064 3,203 3,052 4,166 6,239 5,581 1,467 5,103 2,511 1,620 3,964 4,053 2,491 2,811 3,825 1,638 3,060 6,626 1,691 7,853 5,144 7,717 8,033 2,518 3,884 561 2,712 2,274 2,771 795 3,191 10,296 8,615 54,700 88,800 9,028 16,190 12,996 9,186 3,643 9,274 34,493 11,822 9,611 4,886 9,971 8,046 3,117 4,115 5,156 2,449 3,852 3,729 5,073 7,186 7,015 2,265 5,631 4,107 1,965 4,654 4,811 2,883 3,339 4,745 2,138 3,953 7,479 2,689 9,707 6,538 9,639 9,481 3,472 4,926 999 3,280 2,923 3,962 1,299 5,410 (5,723) (4,277) (16,338) (36,755) (4,960) (6,440) (6,712) (4,139) — (2,019) (48,404) (13,334) (1,850) (757) (359) (656) (539) (278) (335) (472) (213) (454) (522) (452) (644) (771) (294) (401) (296) (175) (319) (412) (236) (309) (429) (213) (346) (746) (322) (581) (933) (933) (403) (405) (131) (302) (270) (329) (196) (409) (1,136) 4,533 24,135 4,533 24,693 29,226 (2,431) 1989 1988 2006 1999 1989 2007 1988 2007 2012 2007 2007 2007 2013 2014 2014 2014 2014 2015 2015 2015 2015 2014 2014 2015 2015 2015 2015 2014 2014 2015 2014 2014 2015 2015 2015 2015 2015 2015 2014 2015 2014 2015 2015 2015 2015 2014 2014 2014 2015 2015 2015 2014 2015 Encumbrances Initial Cost to Company Capitalized As of December 31, 2017 Year at December 31, Buildings and Subsequent to Buildings and Accumulated Acquired/ Costs Gross Amount at Which Carried City State 2017 Land Improvements Acquisition Land Improvements Total(1) Depreciation Constructed City Encumbrances at December 31, 2017 State Initial Cost to Company Buildings and Improvements 3,169 15,136 6,158 3,995 1,934 2,382 906 2,705 3,608 1,887 6,491 4,929 4,041 2,086 4,566 3,366 2,660 1,820 3,788 6,062 2,490 Land 1,069 1,685 298 1,231 541 636 189 744 704 555 995 907 1,110 292 913 455 717 541 474 832 636 Costs Capitalized Subsequent to Acquisition Gross Amount at Which Carried As of December 31, 2017 Buildings and Improvements Land Total(1) — — — 13 — — — — — — — 451 646 — — — — 16 23 — 164 1,069 1,685 298 1,232 541 636 189 745 704 555 994 907 1,109 292 913 454 717 534 474 832 636 3,169 15,136 6,159 4,007 1,934 2,382 906 2,704 3,608 1,887 6,491 5,380 4,687 2,086 4,566 3,366 2,661 1,843 3,811 6,061 2,654 4,238 16,821 6,457 5,239 2,475 3,018 1,095 3,449 4,312 2,442 7,485 6,287 5,796 2,378 5,479 3,820 3,378 2,377 4,285 6,893 3,290 — — — — — — — — — — — — — — — — — — — — — $ — $ 122,434 $144,486 $1,765,938 — $144,486 $1,765,938 — $ 641,667 $9,726,105 — $9,726,105 $ 38,042 $ 123,171 $2,332,632 $1,785,865 — $2,332,632 $1,785,865 — 675,704 $ $ 798,875 $ 11,687,527 $ 13,473,392 181 $ 11,687,708 $ 13,473,573 181 PART II Accumulated Depreciation Year Acquired/ Constructed 2015 2015 2014 2015 2015 2015 2014 2015 2015 2015 2014 2015 2015 2014 2014 2014 2015 2015 2015 2014 2015 (336) (1,004) (518) (444) (248) (284) (130) (303) (380) (212) (567) (640) (673) (240) (482) (334) (366) (247) (399) (577) (378) $ (181,404) $(2,741,537) (158) $(2,741,695) EG 2321 Luton EG 2339 Manchester EG 2225 N Wadebridge EG 2331 Paisley EG 2308 Prescot EG 2305 Prescot EG 2219 Ripon EG 2319 Sheffield EG 2314 Stalybridge EG 2315 Stalybridge EG 2218 Stapeley EG 2325 Stirling 2329 Stirling EG 2224 Stockton-on-Tees EG 2220 Thornton-Cleveleys EG EG 2228 Upper Wortley EG 2311 Wigan EG 2337 Wigan EG 2338 Wigan EG 2222 Woolmer Green 2334 Wotton under Edge EG Total operations properties Corporate and other assets Total (1) Buildings and improvements are depreciated over useful lives ranging up to 60 years. (2) At December 31, 2017, the tax basis of the Company’s net real estate assets is less than the reported amounts by $900 million (unaudited). (b) A summary of activity for real estate and accumulated depreciation follows (in thousands): Year ended December 31, 2017 2016 2015 Real estate: Balances at beginning of year Acquisition of real estate and development and improvements Sales and/or transfers to assets held for sale and discontinued operations Deconsolidation of real estate Impairments Other(1) Balances at end of year Accumulated depreciation: $13,974,760 995,443 (589,391) (825,074) (37,274) (44,891) $13,473,573 $14,330,257 987,135 (1,227,614) (10,306) — (104,712) $13,974,760 $12,931,832 1,930,931 (473,057) — (3,118) (56,331) $14,330,257 Balances at beginning of year Depreciation expense Sales and/or transfers to assets held for sale and discontinued operations Deconsolidation of real estate Other(1) Balances at end of year $ 2,648,930 436,085 (115,195) (152,572) (75,553) $ 2,741,695 $ 2,476,015 465,945 (239,112) (5,868) (48,050) $ 2,648,930 $ 2,190,486 418,591 (86,001) — (47,061) $ 2,476,015 (1) Represents real estate and accumulated depreciation related to fully depreciated assets written off, foreign exchange translation or where the lease classification has changed to direct financing leases. 130 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 131 PART II ITEM 9. None. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PART II ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective, as of December 31, 2017, at the reasonable assurance level. Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2017 to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Management's Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein. To the stockholders and the Board of Directors of HCP, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 13, 2018, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Los Angeles, California February 13, 2018 /s/ Deloitte & Touche LLP 132 http://www.hcpi.com 2017 Annual Report 133 PART II None. ITEM 9A. CONTROLS AND PROCEDURES Disclosure Controls and Procedures. We maintain disclosure Changes in Internal Control Over Financial Reporting. There controls and procedures that are designed to ensure that were no changes in our internal control over financial information required to be disclosed in our reports under reporting (as such term is defined in Rules 13a-15(f) and the Exchange Act is recorded, processed, summarized 15d-15(f) under the Exchange Act) during the fourth quarter and reported within the time periods specified in the SEC’s of 2017 to which this report relates that have materially rules and forms and that such information is accumulated affected, or are reasonably likely to materially affect, our and communicated to our management, including our internal control over financial reporting. Principal Executive Officer and Principal Financial Officer, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Management's Annual Report on Internal Control over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework As required by Rules 13a-15(b) and 15d-15(b) of the in Internal Control—Integrated Framework (2013) issued Exchange Act, we carried out an evaluation, under the by the Committee of Sponsoring Organizations of the supervision and with the participation of our management, Treadway Commission. Based on our evaluation under the including our Principal Executive Officer and Principal framework in Internal Control—Integrated Framework (2013), Financial Officer, of the effectiveness of the design and our management concluded that our internal control over operation of our disclosure controls and procedures as financial reporting was effective as of December 31, 2017. of December 31, 2017. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective, as of December 31, 2017, at the reasonable assurance level. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report, which is included herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PART II To the stockholders and the Board of Directors of HCP, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of HCP, Inc. and subsidiaries (the “Company”) as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report dated February 13, 2018, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of Accounting Standards Update 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Los Angeles, California February 13, 2018 /s/ Deloitte & Touche LLP 132 http://www.hcpi.com 2017 Annual Report 133 PART II ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE We have adopted a Code of Business Conduct and Ethics including our principal executive officer, principal financial that applies to all of our directors and employees, including officer, principal accounting officer or persons performing our Chief Executive Officer and all senior financial officers, similar functions, will be timely posted in the Investor including our principal financial officer, principal accounting Relations section of our website at www.hcpi.com. officer and controller. We have also adopted a Vendor Code of Business Conduct and Ethics applicable to our vendors and business partners. Current copies of our Code of Business Conduct and Ethics and Vendor Code of Business Conduct and Ethics are posted on our website at www.hcpi.com/codeofconduct. In addition, waivers from, and amendments to, our Code of Business Conduct and Ethics that apply to our directors and executive officers, We hereby incorporate by reference the information appearing under the captions “Proposal No. 1 Election of Directors,” “Our Executive Officers,” “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 11. EXECUTIVE COMPENSATION We hereby incorporate by reference the information under the caption “Executive Compensation” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS We hereby incorporate by reference the information under the captions “Security Ownership of Principal Stockholders, Directors and Management” and “Equity Compensation Plan Information” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We hereby incorporate by reference the information under the caption “Board of Directors and Corporate Governance” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES We hereby incorporate by reference under the caption “Audit and Non-Audit Fees” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. 134 http://www.hcpi.com 2017 Annual Report 135 PART II None. ITEM 9B. OTHER INFORMATION PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE We have adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees, including our Chief Executive Officer and all senior financial officers, including our principal financial officer, principal accounting officer and controller. We have also adopted a Vendor Code of Business Conduct and Ethics applicable to our vendors and business partners. Current copies of our Code of Business Conduct and Ethics and Vendor Code of Business Conduct and Ethics are posted on our website at www.hcpi.com/codeofconduct. In addition, waivers from, and amendments to, our Code of Business Conduct and Ethics that apply to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions, will be timely posted in the Investor Relations section of our website at www.hcpi.com. We hereby incorporate by reference the information appearing under the captions “Proposal No. 1 Election of Directors,” “Our Executive Officers,” “Board of Directors and Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 11. EXECUTIVE COMPENSATION We hereby incorporate by reference the information under the caption “Executive Compensation” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS We hereby incorporate by reference the information under the captions “Security Ownership of Principal Stockholders, Directors and Management” and “Equity Compensation Plan Information” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE We hereby incorporate by reference the information under the caption “Board of Directors and Corporate Governance” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES We hereby incorporate by reference under the caption “Audit and Non-Audit Fees” in the Registrant’s definitive proxy statement relating to its 2018 Annual Meeting of Stockholders to be held on April 26, 2018. 134 http://www.hcpi.com 2017 Annual Report 135 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) 1. Financial Statement Schedules The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets-December 31, 2017 and 2016 Consolidated Statements of Operations-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss)-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Equity-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows-for the years ended December 31, 2017, 2016 and 2015 Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data of this Annual Report on Form 10-K. 4.2.7 Seventh Supplemental Indenture dated Current Report on Form 8-K December 1, 2015 December 1, 2015, between HCP and The Bank of (File No. 001-08895) Schedule II: Valuation and Qualifying Accounts Schedule III: Real Estate and Accumulated Depreciation (a) 3. Exhibits Exhibit Number Description 2.1 3.1 3.2 4.1 4.1.1 4.2 Separation and Distribution Agreement, dated October 31, 2016, by and between HCP and Quality Care Properties, Inc. Articles of Restatement of HCP, dated June 1, 2012, as supplemented by the Articles Supplementary, dated July 31, 2017. Fifth Amended and Restated Bylaws of HCP, as amended through July 27, 2017. Indenture, dated as of September 1, 1993, between HCP and The Bank of New York, as Trustee. First Supplemental Indenture dated as of January 24, 2011, to the Indenture, dated as of September 1, 1993, by and between HCP and The Bank of New York Mellon Trust Company, N.A., as Trustee. Indenture, dated November 19, 2012, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Incorporated by reference herein Form Current Report on Form 8-K (File No. 001-08895) Date Filed October 31, 2016 Quarterly Report on Form 10-Q (File No. 001-08895) November 2, 2017 Quarterly Report on Form 10-Q (File No. 001-08895) Registration Statement on Form S-3/A (Registration No. 333-86654) November 2, 2017 May 21, 2002 Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001- 08895) January 24, 2011 4.12 Form of 4.000% Senior Notes due 2025. 4.13 Form of 4.000% Senior Notes due 2022. November 19, 2012 Compensation Plan.* 10.1 Second Amended and Restated Director Deferred Quarterly Report on Form 10-Q November 3, 2009 10.2 Non-Employee Directors Stock-for-Fees Quarterly Report on Form 10-Q August 5, 2014 Program.* 10.3 Executive Severance Plan.* Quarterly Report on Form 10-Q November 1, 2016 http://www.hcpi.com 136 http://www.hcpi.com 2017 Annual Report 137 PART IV Number Description Exhibit 4.2.1 Incorporated by reference herein Form Date Filed November 19, 2012 First Supplemental Indenture, dated November 19, Current Report on Form 8-K 2012, between HCP and The Bank of New York (File No. 001-08895) Mellon Trust Company, N.A., as trustee. 4.2.2 Second Supplemental Indenture, dated Current Report on Form 8-K November 13, 2013 4.2.3 Third Supplemental Indenture dated February 21, Current Report on Form 8-K February 24, 2014 4.2.4 Fourth Supplemental Indenture, dated August 14, Current Report on Form 8-K August 14, 2014 4.2.5 Fifth Supplemental Indenture, dated January 21, Current Report on Form 8-K January 21, 2015 November 12, 2013, between HCP and The Bank of (File No. 001-08895) New York Mellon Trust Company, N.A., as trustee. 2014, between the Company and The Bank of New (File No. 001-08895) York Mellon Trust Company, N.A., as trustee. 2014, between HCP and The Bank of New York (File No. 001-08895) Mellon Trust Company, N.A., as trustee. 2015, between HCP and The Bank of New York (File No. 001-08895) Mellon Trust Company, N.A., as trustee. between HCP and The Bank of New York Mellon (File No. 001-08895) Trust Company, N.A., as trustee. 4.2.6 Sixth Supplemental Indenture, dated May 20, 2015, Current Report on Form 8-K May 20, 2015 Form of 6.750% Senior Notes due 2041. Current Report on Form 8-K January 24, 2011 New York Mellon Trust Company, N.A., as trustee. Form of 5.375% Senior Notes due 2021. 4.3 4.4 4.5 4.6 4.7 4.8 4.9 Form of 3.75% Senior Notes due 2019. Form of 3.15% Senior Notes due 2022. Form of 2.625% Senior Notes due 2020. Form of 4.250% Senior Notes due 2023. Form of 4.20% Senior Notes due 2024. 4.10 Form of 3.875% Senior Notes due 2024. 4.11 Form of 3.400% Senior Notes due 2025. January 24, 2011 January 23, 2012 July 23, 2012 November 19, 2012 November 13, 2013 February 24, 2014 August 14, 2014 January 21, 2015 May 20, 2015 December 1, 2015 Current Report on Form 8-K (File No. 001-08895) (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) (File No. 001-08895) (File No. 001-08895) (File No. 001-08895) PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data (a) 1. Financial Statement Schedules of this Annual Report on Form 10-K. Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets-December 31, 2017 and 2016 Consolidated Statements of Operations-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Comprehensive Income (Loss)-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Equity-for the years ended December 31, 2017, 2016 and 2015 Consolidated Statements of Cash Flows-for the years ended December 31, 2017, 2016 and 2015 The following Consolidated Financial Statements are included in Part II, Item 8-Financial Statements and Supplementary Data Notes to Consolidated Financial Statements (a) 2. Financial Statement Schedules of this Annual Report on Form 10-K. Schedule II: Valuation and Qualifying Accounts Schedule III: Real Estate and Accumulated Depreciation (a) 3. Exhibits Exhibit Number Description Incorporated by reference herein Form Date Filed 2.1 Separation and Distribution Agreement, dated Current Report on Form 8-K October 31, 2016 3.1 Articles of Restatement of HCP, dated Quarterly Report on Form 10-Q November 2, 2017 October 31, 2016, by and between HCP and (File No. 001-08895) Quality Care Properties, Inc. June 1, 2012, as supplemented by the Articles (File No. 001-08895) Supplementary, dated July 31, 2017. 3.2 4.1 Fifth Amended and Restated Bylaws of HCP, as Quarterly Report on Form 10-Q November 2, 2017 amended through July 27, 2017. (File No. 001-08895) Indenture, dated as of September 1, 1993, between HCP and The Bank of New York, Registration Statement on Form S-3/A May 21, 2002 (Registration No. 333-86654) as Trustee. January 24, 2011, to the Indenture, dated as of (File No. 001-08895) September 1, 1993, by and between HCP and The Bank of New York Mellon Trust Company, N.A., as Trustee. HCP and The Bank of New York Mellon Trust (File No. 001- 08895) Company, N.A., as trustee. 4.2 Indenture, dated November 19, 2012, between Current Report on Form 8-K November 19, 2012 Exhibit Number Description 4.2.1 4.2.2 4.2.3 4.2.4 4.2.5 4.2.6 4.2.7 4.3 4.4 4.5 4.6 4.7 4.8 4.9 First Supplemental Indenture, dated November 19, 2012, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Second Supplemental Indenture, dated November 12, 2013, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Third Supplemental Indenture dated February 21, 2014, between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee. Fourth Supplemental Indenture, dated August 14, 2014, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Fifth Supplemental Indenture, dated January 21, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Sixth Supplemental Indenture, dated May 20, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Seventh Supplemental Indenture dated December 1, 2015, between HCP and The Bank of New York Mellon Trust Company, N.A., as trustee. Form of 5.375% Senior Notes due 2021. Form of 6.750% Senior Notes due 2041. Form of 3.75% Senior Notes due 2019. Form of 3.15% Senior Notes due 2022. Form of 2.625% Senior Notes due 2020. Form of 4.250% Senior Notes due 2023. Form of 4.20% Senior Notes due 2024. 4.10 Form of 3.875% Senior Notes due 2024. 4.11 Form of 3.400% Senior Notes due 2025. 4.1.1 First Supplemental Indenture dated as of Current Report on Form 8-K January 24, 2011 4.12 Form of 4.000% Senior Notes due 2025. 4.13 10.1 10.2 10.3 Form of 4.000% Senior Notes due 2022. Second Amended and Restated Director Deferred Compensation Plan.* Non-Employee Directors Stock-for-Fees Program.* Executive Severance Plan.* PART IV Incorporated by reference herein Form Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Date Filed November 19, 2012 November 13, 2013 February 24, 2014 August 14, 2014 January 21, 2015 Current Report on Form 8-K (File No. 001-08895) May 20, 2015 Current Report on Form 8-K (File No. 001-08895) December 1, 2015 Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) January 24, 2011 January 24, 2011 January 23, 2012 July 23, 2012 November 19, 2012 November 13, 2013 February 24, 2014 August 14, 2014 January 21, 2015 May 20, 2015 December 1, 2015 November 3, 2009 August 5, 2014 November 1, 2016 136 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 137 PART IV Exhibit Number Description 10.4 10.5 10.5.1 10.6 10.6.1 10.6.2 10.6.3 10.6.4 10.6.5 10.6.6 10.6.7 10.6.8 10.6.9 10.7 10.8 10.9 10.9.1 10.10 10.11 10.11.1 10.11.2 Executive Change in Control Severance Plan (as Amended and Restated as of May 6, 2016).* 2006 Performance Incentive Plan, as amended and restated.* Form of Employee 2006 Performance Incentive Plan Nonqualified Stock Option Agreement.* HCP, Inc. 2014 Performance Incentive Plan.* Form of 2014 Performance Incentive Plan Non- NEO Restricted Stock Unit Award Agreement.* Form of 2014 Performance Incentive Plan Non- NEO Option Agreement.* Form of 2014 Performance Incentive Plan CEO 3-Year LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan CEO 1-Year LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan CEO Retentive LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan NEO 3-Year LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan NEO 1-Year LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan NEO Retentive LTIP RSU Agreement.* Form of 2014 Performance Incentive Plan Non- Employee Director RSU Agreement.* Form of Directors and Officers Indemnification Agreement.* Amended and Restated Dividend Reinvestment and Stock Purchase Plan. Amended and Restated Limited Liability Company Agreement of HCPI/Utah, LLC, dated as of January 20, 1999. Amendments No. 1-9 to Amended and Restated Limited Liability Company Agreement of HCPI/ Utah, LLC, dated as of January 20, 1999.† Amended and Restated Limited Liability Company Agreement of HCPI/Utah II, LLC, dated as of August 17, 2001, as amended. Amended and Restated Limited Liability Company Agreement of HCPI/Tennessee, LLC, dated as of October 2, 2003. Amendment No. 1 to Amended and Restated Limited Liability Company Agreement of HCPI/ Tennessee, LLC, dated as of September 29, 2004. Amendment No. 2 to Amended and Restated Limited Liability Company Agreement of HCPI/ Tennessee, LLC, dated as of October 27, 2004. Incorporated by reference herein Form Quarterly Report on Form 10-Q (File No. 001 08895) Annex 2 to HCP’s Proxy Statement (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Current Report on Form 8-K (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Quarterly Report on Form 10-Q (File No. 001-08895) Annual Report on Form 10-K, as amended (File No. 001-08895) Registration Statement on Form S-3 (Registration No. 333-49746) Annual Report on Form 10-K (File No. 001- 08895) Date Filed November 1, 2016 March 10, 2009 May 1, 2012 May 6, 2014 August 5, 2014 August 5, 2014 May 5, 2015 May 5, 2015 May 5, 2015 May 5, 2015 May 5, 2015 May 5, 2015 May 5, 2015 February 12, 2008 November 13, 2000 March 29, 1999 Current Report on Form 8-K (File No. 001-08895) November 9, 2012 Quarterly Report on Form 10-Q (File No. 001- 08895) November 12, 2003 Quarterly Report on Form 10-Q (File No. 001-08895) November 8, 2004 Annual Report on Form 10-K (File No. 001-08895) March 15, 2005 Number Description Exhibit 10.11.3 Amendment No. 3 to Amended and Restated Quarterly Report on Form 10-Q Limited Liability Company Agreement of HCPI/ (File No. 001-08895) Incorporated by reference herein Form Date Filed November 1, 2005 PART IV Tennessee, LLC and New Member Joinder Agreement, dated as of October 19, 2005, by and among HCP, HCPI/Tennessee, LLC and A. Daniel Weyland. 10.11.4 Amendment No. 4 to Amended and Restated Annual Report on Form 10-K, as February 12, 2008 Limited Liability Company Agreement of HCPI/ amended (File No. 001-08895) Tennessee, LLC, effective as of January 1, 2007. 10.12 Amended and Restated Limited Liability Company Current Report on Form 8-K April 20, 2012 Agreement of HCP DR MCD, LLC, dated as of (File No. 001-08895) February 9, 2007. of June 1, 2014. 10.13 Amended and Restated Limited Liability Company Quarterly Report on Form 10-Q August 5, 2014 Agreement of HCP DR California II, LLC, dated as (File No. 001-08895) 10.14 Credit Agreement, dated October 19, 2017, Current Report on Form 8-K October 20, 2017 by and among HCP, as borrower, the lenders (File No. 001-08895) referred to therein, and Bank of America, N.A., as administrative agent. 10.15 At-the-Market Equity Offering Sales Agreement, Current Report on Form 8-K June 26, 2015 dated June 26, 2015, among HCP, J.P. Morgan (File No. 1-08895) Securities LLC, BNY Mellon Capital Markets, Citigroup Global Markets Inc., LLC, Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC and UBS Securities LLC. 10.16 Amended and Restated Master Lease and Security Agreement, dated as of November 1, 2017, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and affiliates of Brookdale, as lessee.**† 10.16.1 First Amendment to Amended and Restated Master Lease and Security Agreement, dated as of January 10, 2018, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and 21.1 23.1 31.1 affiliates of Brookdale, as lessee.† Subsidiaries of the Company.† Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.† Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).† 31.2 Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).† http://www.hcpi.com 138 http://www.hcpi.com 2017 Annual Report 139 PART IV Incorporated by reference herein Form Quarterly Report on Form 10-Q (File No. 001-08895) Date Filed November 1, 2005 Annual Report on Form 10-K, as amended (File No. 001-08895) February 12, 2008 Current Report on Form 8-K (File No. 001-08895) April 20, 2012 Quarterly Report on Form 10-Q (File No. 001-08895) August 5, 2014 Current Report on Form 8-K (File No. 001-08895) October 20, 2017 Current Report on Form 8-K (File No. 1-08895) June 26, 2015 PART IV Exhibit Number Description Incorporated by reference herein Form Date Filed Exhibit Number Description 10.4 Executive Change in Control Severance Plan (as Quarterly Report on Form 10-Q November 1, 2016 10.11.3 Amended and Restated as of May 6, 2016).* (File No. 001 08895) 10.5 2006 Performance Incentive Plan, as amended and Annex 2 to HCP’s Proxy Statement March 10, 2009 restated.* (File No. 001-08895) 10.5.1 Form of Employee 2006 Performance Incentive Quarterly Report on Form 10-Q May 1, 2012 Plan Nonqualified Stock Option Agreement.* (File No. 001-08895) 10.6 HCP, Inc. 2014 Performance Incentive Plan.* Current Report on Form 8-K (File No. 001-08895) May 6, 2014 10.6.1 Form of 2014 Performance Incentive Plan Non- Quarterly Report on Form 10-Q August 5, 2014 NEO Restricted Stock Unit Award Agreement.* (File No. 001-08895) 10.6.2 Form of 2014 Performance Incentive Plan Non- Quarterly Report on Form 10-Q August 5, 2014 NEO Option Agreement.* (File No. 001-08895) 10.6.3 Form of 2014 Performance Incentive Plan CEO Quarterly Report on Form 10-Q May 5, 2015 3-Year LTIP RSU Agreement.* (File No. 001-08895) 10.6.4 Form of 2014 Performance Incentive Plan CEO Quarterly Report on Form 10-Q May 5, 2015 1-Year LTIP RSU Agreement.* (File No. 001-08895) 10.6.5 Form of 2014 Performance Incentive Plan CEO Quarterly Report on Form 10-Q May 5, 2015 Retentive LTIP RSU Agreement.* (File No. 001-08895) 10.6.6 Form of 2014 Performance Incentive Plan NEO Quarterly Report on Form 10-Q May 5, 2015 3-Year LTIP RSU Agreement.* (File No. 001-08895) 10.6.7 Form of 2014 Performance Incentive Plan NEO Quarterly Report on Form 10-Q May 5, 2015 1-Year LTIP RSU Agreement.* (File No. 001-08895) 10.6.8 Form of 2014 Performance Incentive Plan NEO Quarterly Report on Form 10-Q May 5, 2015 Retentive LTIP RSU Agreement.* (File No. 001-08895) 10.6.9 Form of 2014 Performance Incentive Plan Non- Quarterly Report on Form 10-Q May 5, 2015 Employee Director RSU Agreement.* (File No. 001-08895) 10.7 Form of Directors and Officers Indemnification Agreement.* Annual Report on Form 10-K, as amended (File No. 001-08895) February 12, 2008 10.8 Amended and Restated Dividend Reinvestment Registration Statement on Form S-3 November 13, 2000 and Stock Purchase Plan. (Registration No. 333-49746) 10.9 Amended and Restated Limited Liability Company Annual Report on Form 10-K March 29, 1999 Agreement of HCPI/Utah, LLC, dated as of (File No. 001- 08895) January 20, 1999. 10.9.1 Amendments No. 1-9 to Amended and Restated Limited Liability Company Agreement of HCPI/ Utah, LLC, dated as of January 20, 1999.† 10.10 Amended and Restated Limited Liability Company Current Report on Form 8-K November 9, 2012 Agreement of HCPI/Utah II, LLC, dated as of (File No. 001-08895) August 17, 2001, as amended. 10.11 Amended and Restated Limited Liability Company Quarterly Report on Form 10-Q November 12, 2003 Agreement of HCPI/Tennessee, LLC, dated as of (File No. 001- 08895) October 2, 2003. 10.11.1 Amendment No. 1 to Amended and Restated Quarterly Report on Form 10-Q November 8, 2004 10.11.2 Amendment No. 2 to Amended and Restated Annual Report on Form 10-K March 15, 2005 Limited Liability Company Agreement of HCPI/ (File No. 001-08895) Tennessee, LLC, dated as of September 29, 2004. Limited Liability Company Agreement of HCPI/ (File No. 001-08895) Tennessee, LLC, dated as of October 27, 2004. 10.11.4 10.12 10.13 10.14 10.15 10.16 10.16.1 21.1 23.1 31.1 31.2 Amendment No. 3 to Amended and Restated Limited Liability Company Agreement of HCPI/ Tennessee, LLC and New Member Joinder Agreement, dated as of October 19, 2005, by and among HCP, HCPI/Tennessee, LLC and A. Daniel Weyland. Amendment No. 4 to Amended and Restated Limited Liability Company Agreement of HCPI/ Tennessee, LLC, effective as of January 1, 2007. Amended and Restated Limited Liability Company Agreement of HCP DR MCD, LLC, dated as of February 9, 2007. Amended and Restated Limited Liability Company Agreement of HCP DR California II, LLC, dated as of June 1, 2014. Credit Agreement, dated October 19, 2017, by and among HCP, as borrower, the lenders referred to therein, and Bank of America, N.A., as administrative agent. At-the-Market Equity Offering Sales Agreement, dated June 26, 2015, among HCP, J.P. Morgan Securities LLC, BNY Mellon Capital Markets, Citigroup Global Markets Inc., LLC, Credit Agricole Securities (USA) Inc., Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets, LLC and UBS Securities LLC. Amended and Restated Master Lease and Security Agreement, dated as of November 1, 2017, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and affiliates of Brookdale, as lessee.**† First Amendment to Amended and Restated Master Lease and Security Agreement, dated as of January 10, 2018, by and between subsidiaries and affiliates of HCP, as lessor, and subsidiaries and affiliates of Brookdale, as lessee.† Subsidiaries of the Company.† Consent of Independent Registered Public Accounting Firm—Deloitte & Touche LLP.† Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).† Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).† 138 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 139 32.1 32.2 101.INS 101.SCH XBRL Taxonomy Extension Schema Document.† 101.CAL XBRL Taxonomy Extension Calculation Linkbase Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.† Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.† XBRL Instance Document.† PART IV Exhibit Number Description Incorporated by reference herein Form Date Filed SIGNATURES Dated: February 13, 2018 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PART IV HCP, Inc. (Registrant) /s/ THOMAS M. HERZOG Thomas M. Herzog, President and Chief Executive Officer (Principal Executive Officer) David B. Henry /s/ BRIAN G. CARTWRIGHT Director Brian G. Cartwright /s/ CHRISTINE N. GARVEY Director Christine N. Garvey /s/ JAMES P. HOFFMANN Director James P. Hoffmann /s/ MICHAEL D. MCKEE Director Michael D. McKee /s/ PETER L. RHEIN Director Peter L. Rhein /s/ JOSEPH P. SULLIVAN Director Joseph P. Sullivan February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 Document.† 101.DEF XBRL Taxonomy Extension Definition Linkbase Document.† 101.LAB XBRL Taxonomy Extension Labels Linkbase Document.† 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.† * Management Contract or Compensatory Plan or Arrangement. ** Portions of this exhibit have been omitted pursuant to a request for confidential treatment with the SEC. *** Certain schedules or similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplemental copies of any of the omitted schedules or attachments upon request by the SEC. Filed herewith. † ITEM 16. FORM 10-K SUMMARY None. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ THOMAS M. HERZOG President and Chief Executive Officer February 13, 2018 Thomas M. Herzog (Principal Executive Officer), Director /s/ PETER A. SCOTT Executive Vice President and Chief Financial Officer February 13, 2018 Peter A. Scott (Principal Financial Officer) /s/ SHAWN G. JOHNSTON Senior Vice President and Chief Accounting Officer February 13, 2018 Shawn G. Johnston (Principal Accounting Officer) /s/ DAVID B. HENRY Chairman of the Board February 13, 2018 http://www.hcpi.com 140 http://www.hcpi.com 2017 Annual Report 141 PART IV Exhibit Number Description 32.1 Certification by Thomas M. Herzog, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.† 32.2 Certification by Peter A. Scott, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(b) and 18 U.S.C. Section 1350.† 101.INS XBRL Instance Document.† 101.SCH XBRL Taxonomy Extension Schema Document.† 101.CAL XBRL Taxonomy Extension Calculation Linkbase 101.DEF XBRL Taxonomy Extension Definition Linkbase 101.LAB XBRL Taxonomy Extension Labels Linkbase 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.† Document.† Document.† Document.† † Filed herewith. None. ITEM 16. FORM 10-K SUMMARY * Management Contract or Compensatory Plan or Arrangement. ** Portions of this exhibit have been omitted pursuant to a request for confidential treatment with the SEC. *** Certain schedules or similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplemental copies of any of the omitted schedules or attachments upon request by the SEC. Incorporated by reference herein Form Date Filed SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 13, 2018 PART IV HCP, Inc. (Registrant) /s/ THOMAS M. HERZOG Thomas M. Herzog, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ THOMAS M. HERZOG Thomas M. Herzog President and Chief Executive Officer (Principal Executive Officer), Director February 13, 2018 /s/ PETER A. SCOTT Peter A. Scott Executive Vice President and Chief Financial Officer (Principal Financial Officer) February 13, 2018 /s/ SHAWN G. JOHNSTON Shawn G. Johnston Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) February 13, 2018 /s/ DAVID B. HENRY David B. Henry /s/ BRIAN G. CARTWRIGHT Brian G. Cartwright /s/ CHRISTINE N. GARVEY Christine N. Garvey /s/ JAMES P. HOFFMANN James P. Hoffmann /s/ MICHAEL D. MCKEE Michael D. McKee /s/ PETER L. RHEIN Peter L. Rhein /s/ JOSEPH P. SULLIVAN Joseph P. Sullivan Chairman of the Board February 13, 2018 Director Director Director Director Director Director February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 February 13, 2018 140 http://www.hcpi.com http://www.hcpi.com 2017 Annual Report 141 CORPORATE HEADQUARTERS 1920 MAIN STREET, SUITE 1200 IRVINE, CA 92614 (949) 407-0700 NASHVILLE OFFICE 3000 MERIDIAN BOULEVARD, SUITE 200 FRANKLIN, TN 37067 SAN FRANCISCO OFFICE 950 TOWER LANE, SUITE 1650 FOSTER CITY, CA 94404 39 TREES PRESERVED FOR THE FUTURE 11,000,000 BTUs ENERGY NOT CONSUMED 2 LBS WATER-BORNE WASTE NOT CREATED 2,980 LBS NET GREENHOUSE GASES PREVENTED 14,752 GAL WASTEWATER FLOW SAVED 1,102 LBS SOLID WASTE NOT GENERATED This is a greener proxy statement. By producing our report in this manner, HCP reduces its impact on the environment in the ways listed above. CORPORATE HEADQUARTERS 1920 MAIN STREET, SUITE 1200 IRVINE, CA 92614 (949) 407-0700 NASHVILLE OFFICE 3000 MERIDIAN BOULEVARD, SUITE 200 FRANKLIN, TN 37067 SAN FRANCISCO OFFICE 950 TOWER LANE, SUITE 1650 FOSTER CITY, CA 94404 THIS PAGE INTENTIONALLY LEFT BLANK 39 TREES 11,000,000 2 LBS 2,980 LBS NET 14,752 GAL 1,102 LBS PRESERVED FOR BTUs ENERGY WATER-BORNE GREENHOUSE GASES WASTEWATER SOLID WASTE THE FUTURE NOT CONSUMED WASTE NOT CREATED PREVENTED FLOW SAVED NOT GENERATED This is a greener proxy statement. By producing our report in this manner, HCP reduces its impact on the environment in the ways listed above. THIS PAGE INTENTIONALLY LEFT BLANK . l y n a p m o c e y g r a w w w y b . d e r a p e r P The papers utilized in the production of this proxy statement are all certified for Forest Stewardship Council (FSC®) standards, which promote environmentally appropriate, socially beneficial and economically viable management of the world’s forests. This proxy statement was printed in a facility that uses exclusively vegetable based inks, 100% renewable wind energy and releases zero VOCs into the environment.CORPORATE HEADQUARTERS1920 MAIN STREET, SUITE 1200 IRVINE, CA 92614 NASHVILLE OFFICE3000 MERIDIAN BOULEVARD, SUITE 200 FRANKLIN, TN 37067SAN FRANCISCO OFFICE950 TOWER LANE, SUITE 1650 FOSTER CITY, CA 94404H C P 2 0 1 7 A N N U A L R E P O R T

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