hcp_Current Folio

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2015.


☐	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		33-0091377
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1920 Main Street, Suite 1200

Irvine, CA 92614

(Address of principal executive offices)

(949) 407-0700

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 ☒ 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 such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer ☒		Accelerated Filer ☐

Non-accelerated Filer ☐		Smaller Reporting Company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES ☐ NO ☒

As of October 30, 2015, there were 465,042,243 shares of the registrant’s $1.00 par value common stock outstanding.

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HCP, INC.

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Equity	6

	Consolidated Statements of Cash Flows	7

	Notes to the Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	62

Item 4.	Controls and Procedures	63

PART II. OTHER INFORMATION

Item 1A.	Risk Factors	64

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	64

Item 6.	Exhibits	64

Signatures		66

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HCP, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

(Unaudited)


	September 30,		December 31,
	2015		2014
ASSETS
Real estate:
Buildings and improvements	$	12,384,413	$	10,972,973
Development costs and construction in progress		355,174		275,233
Land		2,016,606		1,889,438
Accumulated depreciation and amortization		(2,506,844)		(2,250,757)
Net real estate		12,249,349		10,886,887
Net investment in direct financing leases		6,891,030		7,280,334
Loans receivable, net		765,593		906,961
Investments in and advances to unconsolidated joint ventures		607,790		605,448
Accounts receivable, net of allowance of $3,683 and $3,785, respectively		49,994		36,339
Cash and cash equivalents		120,498		183,810
Restricted cash		65,709		48,976
Intangible assets, net		559,677		481,013
Other assets, net		883,333		940,172
Total assets(1)	$	22,192,973	$	21,369,940
LIABILITIES AND EQUITY
Bank line of credit	$	1,000,824	$	838,516
Term loans		540,784		213,610
Senior unsecured notes		8,568,729		7,626,194
Mortgage debt		939,982		984,431
Other debt		94,561		97,022
Intangible liabilities, net		73,233		84,723
Accounts payable and accrued liabilities		401,838		432,934
Deferred revenue		112,565		95,411
Total liabilities(2)		11,732,516		10,372,841
Commitments and contingencies
Common stock, $1.00 par value: 750,000,000 shares authorized; 464,441,628 and 459,746,267 shares issued and outstanding, respectively		464,442		459,746
Additional paid-in capital		11,612,246		11,431,987
Cumulative dividends in excess of earnings		(1,876,486)		(1,132,541)
Accumulated other comprehensive loss		(32,450)		(23,895)
Total stockholders’ equity		10,167,752		10,735,297
Joint venture partners		106,572		73,214
Non-managing member unitholders		186,133		188,588
Total noncontrolling interests		292,705		261,802
Total equity		10,460,457		10,997,099
Total liabilities and equity	$	22,192,973	$	21,369,940

(1)

HCP, Inc.’s consolidated total assets at September 30, 2015 and December 31, 2014 include assets of certain variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs. Total assets at September 30, 2015 include VIE assets as follows: buildings and improvements $770 million; land $125 million; accumulated depreciation and amortization $128 million; accounts receivable $15 million; cash $61 million; intangible assets, net $31 million; and other assets, net $13 million. Total assets at December 31, 2014 include VIE assets as follows: buildings and improvements $677 million; land $113 million; accumulated depreciation and amortization $111 million; accounts receivable $5 million; cash $42 million; and other assets, net $23 million. See Note 18 to the Consolidated Financial Statements for additional information.

(2)

HCP, Inc.’s consolidated total liabilities at September 30, 2015 and December 31, 2014 include certain liabilities of VIEs for which the VIE creditors do not have recourse to the Company. Total liabilities at September 30, 2015 include accounts payable and accrued liabilities $62 million and deferred revenue $16 million from VIEs. Total liabilities at December 31, 2014 include accounts payable and accrued liabilities $34 million and deferred revenue $12 million from VIEs. See Note 18 to the Consolidated Financial Statements for additional information.

See accompanying Notes to the Consolidated Financial Statements.

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HCP, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues:
Rental and related revenues	$	293,566	$	321,451	$	845,382	$	894,465
Tenant recoveries		33,084		29,323		94,356		81,867
Resident fees and services		155,290		62,213		367,141		138,205
Income from direct financing leases		155,717		165,687		478,976		495,724
Interest income		19,842		17,517		89,049		51,150
Investment management fee income		454		447		1,372		1,340
Total revenues		657,953		596,638		1,876,276		1,662,751
Costs and expenses:
Interest expense		122,157		111,275		357,569		324,755
Depreciation and amortization		134,704		122,975		369,629		343,496
Operating		173,515		99,599		441,888		254,173
General and administrative		20,534		19,479		74,152		62,034
Acquisition and pursuit costs		1,553		5,475		23,350		13,376
Impairments		69,622		—		592,921		—
Total costs and expenses		522,085		358,803		1,859,509		997,834
Other (expense) income:
Gains on sales of real estate, net of income taxes		52		—		6,377		—
Other (expense) income, net		(1,026)		3,111		11,753		5,750
Total other (expense) income, net		(974)		3,111		18,130		5,750
Income before income taxes and equity income from and impairment of unconsolidated joint ventures		134,894		240,946		34,897		670,667
Income tax benefit (expense)		1,980		(55)		6,620		(2,840)
Equity income from unconsolidated joint ventures		8,314		10,168		33,916		39,388
Impairment of investments in unconsolidated joint ventures		(27,234)		—		(27,234)		—
Income from continuing operations		117,954		251,059		48,199		707,215

Discontinued operations:
Income before gain on sales of real estate, net of income taxes		—		—		—		1,736
Gain on sales of real estate, net of income taxes		—		—		—		28,010
Total discontinued operations		—		—		—		29,746
Net income		117,954		251,059		48,199		736,961
Noncontrolling interests’ share in earnings		(2,592)		(3,405)		(8,566)		(11,311)
Net income attributable to HCP, Inc.		115,362		247,654		39,633		725,650
Participating securities’ share in earnings		(316)		(446)		(1,020)		(1,999)
Net income applicable to common shares	$	115,046	$	247,208	$	38,613	$	723,651

Basic earnings per common share:
Continuing operations	$	0.25	$	0.54	$	0.08	$	1.52
Discontinued operations		—		—		—		0.06
Net income applicable to common shares	$	0.25	$	0.54	$	0.08	$	1.58
Diluted earnings per common share:
Continuing operations	$	0.25	$	0.54	$	0.08	$	1.52
Discontinued operations		—		—		—		0.06
Net income applicable to common shares	$	0.25	$	0.54	$	0.08	$	1.58
Weighted average shares used to calculate earnings per common share:
Basic		463,337		458,799		462,039		458,119
Diluted		463,586		459,141		462,302		458,473
Dividends declared per common share	$	0.565	$	0.545	$	1.695	$	1.635

See accompanying Notes to the Consolidated Financial Statements.

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HCP, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	117,954	$	251,059	$	48,199	$	736,961

Other comprehensive loss:
Change in net unrealized losses on securities		(361)		(1)		(358)		(5)
Change in net unrealized (losses) gains on cash flow hedges:
Unrealized (losses) gains		(87)		2,521		(289)		1,829
Reclassification adjustment realized in net income		(367)		(1,409)		(19)		(766)
Change in Supplemental Executive Retirement Plan obligation		70		55		208		163
Foreign currency translation adjustment		410		(6,961)		(8,097)		(4,198)
Total other comprehensive loss		(335)		(5,795)		(8,555)		(2,977)

Total comprehensive income		117,619		245,264		39,644		733,984
Total comprehensive income attributable to noncontrolling interests		(2,592)		(3,405)		(8,566)		(11,311)
Total comprehensive income attributable to HCP, Inc.	$	115,027	$	241,859	$	31,078	$	722,673

See accompanying Notes to the Consolidated Financial Statements.

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HCP, Inc.

CONSOLIDATED STATEMENTS OF EQUITY

(In thousands, except per share data)

(Unaudited)


						Cumulative		Accumulated
				Additional		Dividends		Other		Total		Total
	Common Stock			Paid-In		In Excess		Comprehensive		Stockholders’		Noncontrolling		Total
	Shares	Amount		Capital		Of Earnings		Loss		Equity		Interests		Equity
January 1, 2015	459,746		459,746		11,431,987		(1,132,541)		(23,895)		10,735,297		261,802		10,997,099
Net income	—		—		—		39,633		—		39,633		8,566		48,199
Other comprehensive loss	—		—		—		—		(8,555)		(8,555)		—		(8,555)
Issuance of common stock, net	4,054		4,054		140,591		—		—		144,645		(2,659)		141,986
Repurchase of common stock	(178)		(178)		(7,828)		—		—		(8,006)		—		(8,006)
Exercise of stock options	820		820		26,691		—		—		27,511		—		27,511
Amortization of deferred compensation	—		—		21,068		—		—		21,068		—		21,068
Common dividends ($1.695 per share)	—		—		—		(783,578)		—		(783,578)		—		(783,578)
Distributions to noncontrolling interests	—		—		(263)		—		—		(263)		(13,444)		(13,707)
Issuance of noncontrolling interests	—		—		—		—		—		—		38,440		38,440
September 30, 2015	464,442	$	464,442	$	11,612,246	$	(1,876,486)	$	(32,450)	$	10,167,752	$	292,705	$	10,460,457


						Cumulative		Accumulated
				Additional		Dividends		Other		Total		Total
	Common Stock			Paid-In		In Excess		Comprehensive		Stockholders’		Noncontrolling		Total
	Shares	Amount		Capital		Of Earnings		Loss		Equity		Interests		Equity
January 1, 2014	456,961	$	456,961	$	11,334,041	$	(1,053,215)	$	(14,487)	$	10,723,300	$	207,834	$	10,931,134
Net income	—		—		—		725,650		—		725,650		11,311		736,961
Other comprehensive loss	—		—		—		—		(2,977)		(2,977)		—		(2,977)
Issuance of common stock, net	2,351		2,351		67,474		—		—		69,825		(73)		69,752
Repurchase of common stock	(297)		(297)		(11,302)		—		—		(11,599)		—		(11,599)
Exercise of stock options	131		131		3,176		—		—		3,307		—		3,307
Amortization of deferred compensation	—		—		16,467		—		—		16,467		—		16,467
Common dividends ($1.635 per share)	—		—		—		(750,835)		—		(750,835)		—		(750,835)
Distributions to noncontrolling interests	—		—		—		—		—		—		(11,706)		(11,706)
Issuance of noncontrolling interests	—		—		—		—		—		—		57,354		57,354
Purchase of noncontrolling interests	—		—		(13)		—		—		(13)		(1,671)		(1,684)
September 30, 2014	459,146	$	459,146	$	11,409,843	$	(1,078,400)	$	(17,464)	$	10,773,125	$	263,049	$	11,036,174

See accompanying Notes to the Consolidated Financial Statements.

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HCP, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended September 30,
	2015		2014
Cash flows from operating activities:
Net income	$	48,199	$	736,961
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of real estate, in-place lease and other intangibles		369,629		343,496
Amortization of market lease intangibles, net		(980)		(619)
Amortization of deferred compensation		21,068		16,467
Amortization of deferred financing costs, net		14,950		14,122
Straight-line rents		(24,817)		(35,082)
Loan and direct financing lease interest accretion		(71,243)		(58,271)
Deferred rental revenues		(1,496)		(420)
Equity income from unconsolidated joint ventures		(33,916)		(39,388)
Distributions of earnings from unconsolidated joint ventures		4,587		3,895
Lease termination income, net		(1,103)		(38,001)
Gain on sales of real estate		(6,377)		(28,010)
Foreign exchange and other gains, net		(7,103)		(2,143)
Impairments		620,155		—
Changes in:
Accounts receivable, net		(10,634)		(7,193)
Other assets		(1,186)		(14,345)
Accounts payable and accrued liabilities		(52,073)		(8,447)
Net cash provided by operating activities		867,660		883,022
Cash flows from investing activities:
Acquisition of RIDEA III, net		(770,325)		—
Cash used to acquire the CCRC unconsolidated joint venture interest, net		—		(370,186)
Acquisitions of other real estate		(430,336)		(467,147)
Development of real estate		(190,082)		(118,732)
Leasing costs and tenant and capital improvements		(52,371)		(44,953)
Proceeds from sales of real estate, net		19,555		36,938
Contributions to unconsolidated joint ventures		(43,242)		(2,935)
Distributions in excess of earnings from unconsolidated joint ventures		16,086		1,986
Proceeds from the sales of marketable securities		782		—
Principal repayments on loans receivable		51,491		49,503
Investments in loans receivable and other		(283,252)		(24,480)
Increase in restricted cash		(3,891)		(17,219)
Net cash used in investing activities		(1,685,585)		(957,225)
Cash flows from financing activities:
Net borrowings under bank line of credit		282,099		70,000
Repayments under bank line of credit		(102,063)		—
Borrowings under term loan		333,014		—
Issuance of senior unsecured notes		1,338,555		1,150,000
Repayments of senior unsecured notes		(400,000)		(487,000)
Issuance of mortgage and other debt		—		39,671
Repayments of mortgage and other debt		(50,187)		(202,134)
Deferred financing costs		(14,556)		(16,550)
Issuance of common stock and exercise of options		169,497		73,059
Repurchase of common stock		(8,006)		(11,599)
Dividends paid on common stock		(783,578)		(750,835)
Issuance of noncontrolling interests		4,812		4,282
Distributions to and purchase of noncontrolling interests		(13,707)		(11,719)
Net cash provided by (used in) financing activities		755,880		(142,825)
Effect of foreign exchange on cash and cash equivalents		(1,267)		3
Net decrease in cash and cash equivalents		(63,312)		(217,025)
Cash and cash equivalents, beginning of period		183,810		300,556
Cash and cash equivalents, end of period	$	120,498	$	83,531

See accompanying Notes to the Consolidated Financial Statements.

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HCP, Inc.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. Business

HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, 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 is a Maryland corporation organized in 1985 and qualifies as a self-administered real estate investment trust (“REIT”). The Company is headquartered in Irvine, California, with offices in Nashville, Los Angeles, San Francisco and London. The Company acquires, develops, leases, manages and disposes of healthcare real estate, and provides financing to healthcare providers. The Company’s diverse portfolio is comprised of investments in the following healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital.

NOTE 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Management is required to make estimates and assumptions in the preparation of financial statements in conformity with 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from management’s estimates.

The consolidated financial statements include the accounts of HCP, Inc., its wholly-owned subsidiaries, joint ventures and VIEs that it controls through voting rights or other means. Intercompany transactions and balances have been eliminated upon consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. The accompanying unaudited interim financial information should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2014 included in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”).

Recent Accounting Pronouncements

In September 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the accounting for adjustments made to provisional amounts recognized in a business combination by requiring the acquirer to (i) recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined, (ii) record, in the same period, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, and (iii) present separately or disclose the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company is evaluating the impact of the adoption of ASU 2015-16 on January 1, 2016 to its consolidated financial position or results of operations.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 simplifies the presentation of debt issuance costs and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability (consistent with debt discounts). In August 2015, the FASB issued ASU No. 2015-15, Presentation and Subsequent

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Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting) (“ASU 2015-15”). ASU 2015-15 allows debt issuance costs related to line-of-credit agreements to be presented in the balance sheet as an asset. ASU 2015-03 and ASU 2015-15 are effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. The Company plans to early adopt ASU 2015-03 and ASU 2015-15 as of December 31, 2015; the adoption is not expected to have a material impact on its consolidated financial position or results of operations.

In February 2015, the FASB issued ASU No. 2015-2, Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 requires amendments to both the VIE and voting consolidation accounting models. The amendments (i) rescind the indefinite deferral of certain aspects of accounting standards relating to consolidations and provide a permanent scope exception for registered money market funds and similar unregistered money market funds, (ii) modify (a) the identification of variable interests (fees paid to a decision maker or service provider), (b) the VIE characteristics for a limited partnership or similar entity and (c) the primary beneficiary determination under the VIE model, and (iii) eliminate the presumption within the current voting model that a general partner controls a limited partnership or similar entity. ASU 2015-02 is effective for fiscal years, and interim periods within, beginning after December 15, 2015. Early adoption is permitted. A reporting entity may apply the amendments in ASU 2015-02 using either a modified retrospective or retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company is evaluating the impact of the adoption of ASU 2015-02 on January 1, 2016 to its consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This update changes the requirements for recognizing revenue. 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. In August 2015, the FASB issued Accounting Standards Update 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 beginning after December 15, 2017. Early adoption is permitted for annual periods, and interim periods within, beginning after December 15, 2016. The Company is evaluating the impact of the adoption of ASU 2014-09 on January 1, 2018 to its consolidated financial position or results of operations.

Reclassification

Certain amounts in the Company’s consolidated financial statements have been reclassified for prior periods to conform to the current period presentation. As a result of the Company’s increasing transaction volume, “acquisition and pursuit costs” are separately presented on the consolidated statements of operations from “general and administrative expenses.”

NOTE 3. Brookdale Lease Amendments and Terminations and the Formation of Two RIDEA Joint Ventures (“Brookdale Transaction”)

On July 31, 2014, Brookdale Senior Living (“Brookdale”) completed its acquisition of Emeritus Corporation (“Emeritus”). On August 29, 2014, the Company and Brookdale completed a multiple-element transaction with three major components:

amended existing lease agreements on 153 HCP-owned senior housing communities previously leased and operated by Emeritus, that included the termination of embedded purchase options in these leases relating to 30 properties and future rent reductions;

terminated existing lease agreements on 49 HCP-owned senior housing properties previously leased and operated by Emeritus, that included the termination of embedded purchase options in these leases relating to 19 properties. At closing, the Company contributed 48 of these properties to a newly formed consolidated partnership that is operated under a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as “RIDEA”) (“RIDEA II”); the 49th property was contributed on January 1, 2015. Brookdale owns a 20% noncontrolling equity interest in RIDEA II and manages the facilities on behalf of the partnership; and

entered into new unconsolidated joint ventures that own 14 campuses of continuing care retirement communities (“CCRC”) in a RIDEA structure (collectively, the “CCRC JV”) with the Company owning a 49% equity interest and Brookdale owning a 51% equity interest. Brookdale manages these communities on behalf of this partnership.

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As a result of terminating the leases discussed above, the Company recognized a net gain of $38 million in August 2014 consisting of: (i) $108 million gain based on the fair value of the net consideration received; less (ii) $70 million to write-off the direct leasing costs and straight-line rent receivables related to the in-place leases.

NOTE 4. Real Estate Property Investments

Acquisition of Private Pay Senior Housing Portfolio (“RIDEA III”)

On June 30, 2015, the Company and Brookdale acquired a portfolio of 35 private pay senior housing communities from Chartwell Retirement Residences, including two leasehold interests, representing 5,025 units. The portfolio was acquired in a RIDEA structure (“RIDEA III”), with Brookdale owning a 10% noncontrolling interest. Brookdale has operated these communities since 2011 and continues to manage the communities under a long-term management agreement, which is cancellable under certain conditions (subject to a fee if terminated within seven years from the acquisition date). The Company paid $770 million in cash consideration, net of cash assumed, and assumed $32 million of net liabilities and $29 million of noncontrolling interests to acquire: (i) real estate with a fair value of $771 million, (ii) lease-up intangible assets with a fair value of $53 million and (iii) working capital of $7 million. As a result of the acquisition, the Company recognized a net termination fee of $8 million in rental and related revenues, which represents the termination value of the two leasehold interests. The lease-up intangible assets recognized were attributable to the value of the acquired underlying operating resident leases of the senior housing communities that were stabilized or nearly stabilized (i.e., resident occupancy above 80%). From the acquisition date to September 30, 2015, the Company recognized revenues and earnings of $47 million and $1 million, respectively, from RIDEA III. As of September 30, 2015, the purchase price allocation is preliminary and may be subject to change.

Pro Forma Results of Operations

The following unaudited pro forma consolidated results of operations assume that the RIDEA III acquisition was completed as of January 1, 2014 (in thousands, except per share amounts):



	Three Months Ended		Nine Months Ended September 30,
	September 30, 2014		2015		2014
Revenues	$	644,856	$	1,963,402	$	1,807,405
Net income		255,107		56,009		749,106
Net income applicable to HCP, Inc.		251,297		46,662		736,580
Basic earnings per common share		0.55		0.10		1.60
Diluted earnings per common share		0.55		0.10		1.60

2015 Other Acquisitions

In addition to the RIDEA III acquisition discussed above, a summary of other real estate acquisitions for the nine months ended September 30, 2015 follows (in thousands):


	Consideration							Assets Acquired(1)
	Cash Paid/			Liabilities		Noncontrolling				Net
Segment	Debt Settled			Assumed		Interest		Real Estate		Intangibles
Senior housing	$	221,023	(2)	$	8,227	$	3,885	$	209,084	$	24,051
Post-acute/skilled nursing		178,707	(2)		—		—		151,663		27,044
Medical office		377,351	(3)		12,849		—		349,649		40,551
	$	777,081		$	21,076	$	3,885	$	710,396	$	91,646

(1)

Amounts include preliminary purchase price allocations which may be subject to change.

(2)

Includes £174 million ($254 million) of the Company’s HC-One Facility (see Note 7) converted to fee ownership in a portfolio of 36 care homes located throughout the United Kingdom (“U.K.”) and includes £27 million ( $42 million) of a loan originated in May 2015 converted to fee ownership in two U.K. care homes.

(3)

Includes $225 million for a medical office building (“MOB”) portfolio acquisition completed in June 2015 and placed in HCP Ventures V, of which in October 2015 the Company issued a 49% noncontrolling interest in HCP Ventures V for $110 million (see Note 13).

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2014 Acquisitions

A summary of real estate acquisitions for the nine months ended September 30, 2014 follows (in thousands):


	Consideration								Assets Acquired
				Liabilities		Noncontrolling					Net
Segment	Cash Paid			Assumed		Interest			Real Estate		Intangibles
Senior housing	$	215,381	(1)	$	1,021	$	6,321	(2)	$	205,778	$	16,945
Life science		43,500			250		—			41,281		2,469
Medical office		208,266			463		—			186,799		21,930
	$	467,147		$	1,734	$	6,321		$	433,858	$	41,344

(1)

Includes £76 million ($129 million) translated into U.S. dollars.

(2)

Includes $5 million of non-managing member limited liability company units.

Completed Developments

During the nine months ended September 30, 2014, the Company placed in service the following: (i) two life science facilities, (ii) a MOB and (iii) a post-acute/skilled nursing facility. These completed developments represented $41 million of gross real estate on the Company’s consolidated balance sheets as of the date they were placed in service. There were no completed developments placed in service during the nine months ended September 30, 2015.

Construction, Tenant and Other Capital Improvements

A summary of the Company’s funding for construction, tenant and other capital improvements follows (in thousands):


	Nine Months Ended September 30,
Segment	2015		2014
Senior housing	$	76,640	$	23,876
Post-acute/skilled nursing		3,369		2,533
Life science		80,871		91,178
Medical office		93,012		43,773
Hospital		37		1,357
	$	253,929	$	162,717

NOTE 5. Dispositions of Real Estate and Discontinued Operations

During the nine months ended September 30, 2015, the Company sold the following: (i) nine senior housing facilities for $60 million resulting from Brookdale’s exercise of its purchase option received as part of the Brookdale Transaction, (ii) a parcel of land in its life science segment for $11 million and (iii) a MOB for $400,000.

During the nine months ended September 30, 2014, the Company sold the following: (i) two post-acute/skilled nursing facilities for $22 million, (ii) a hospital for $17 million and (iii) a MOB for $145,000.

On August 29, 2014, in conjunction with the Brookdale Transaction, the Company contributed three senior housing facilities with a carrying value of $92 million into the CCRC JV (an unconsolidated joint venture with Brookdale discussed in Notes 3 and 8). The Company recorded its investment in the CCRC JV for the contribution of these properties at their carrying value (carryover basis) and therefore did not recognize either a gain or loss upon the contribution.

The Company separately presented as discontinued operations the results of operations for all consolidated assets disposed of and all properties held for sale, if any, prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, on April 1, 2014 (the “adoption date”). The amounts included in discontinued operations, for the nine months ended September 30, 2014, represent the activity for properties sold prior to the adoption date. No properties sold subsequent to the adoption date met the new criteria for reporting discontinued operations.

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The following table summarizes operating income and gain on sales of real estate included in discontinued operations (dollars in thousands):


	Nine Months Ended
	September 30, 2014
Rental and related revenues	$	1,810

Operating expenses		54
Other expenses, net		20
Income before gain on sales of real estate, net of income taxes	$	1,736
Gain on sales of real estate, net of income taxes	$	28,010

Number of properties included in discontinued operations		3

Subsequent Disposition. On October 6, 2015, the Company sold a parcel of land in its life science segment for $40 million.

NOTE 6. Net Investment in Direct Financing Leases

Net investment in direct financing leases (“DFLs”) consisted of the following (dollars in thousands):


	September 30,		December 31,
	2015		2014
Minimum lease payments receivable	$	26,517,705	$	24,182,525
Estimated residual values		3,905,685		4,126,426
Less unearned income		(23,532,360)		(21,028,617)
Net investment in direct financing leases	$	6,891,030	$	7,280,334
Properties subject to direct financing leases		362		363

HCR ManorCare, Inc.

The Company acquired 334 post-acute, skilled nursing and assisted living facilities in its 2011 transaction with HCR ManorCare Inc. (“HCRMC”) and entered into a triple-net lease agreement (the “Master Lease”) with a subsidiary (“Lessee”) of HCRMC.

During the first quarter of 2015, the Company and HCRMC agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that are under the Master Lease. HCRMC will receive an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by HCP. The first facility sale closed on July 31, 2015. The remaining facility sales are expected to occur during the fourth quarter of 2015 and the first quarter of 2016.

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 Lease Amendment reduced initial annual rent by a net $68 million from $541 million to $473 million. Commencing on April 1, 2016, the minimum rent escalation shall be reset to 3.0% for each lease year through the expiration of the initial term of each applicable pool of facilities. Prior to the HCRMC Lease Amendment, rent payments would have increased 3.5% on April 1, 2015 and 2016 and 3.0% thereafter. The initial term was extended five years to an average of 16 years and the extension options’ aggregate terms remained the same.

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As consideration for the rent reduction, the Company received a Deferred Rent Obligation from the Lessee equal to an aggregate amount of $525 million, which was allocated into two tranches: (i) a Tranche A Deferred Rent Obligation of $275 million and (ii) a Tranche B Deferred Rent Obligation of $250 million. Until the entire Tranche A Deferred Rent Obligation is paid in full, the Lessee will make rental payments equal to 6.9% of the outstanding amount (representing $19 million) for the initial lease year (the “Tranche A Current Payment”), increased each year thereafter by 3.0%. Commencing on April 1, 2016, until the Tranche B Deferred Rent Obligation is paid in full, the outstanding principal balance of the Tranche B Deferred Rent Obligation will be increased annually by (i) 3.0% initially, (ii) 4.0% commencing on April 1, 2019, (iii) 5.0% commencing on April 1, 2020, and (iv) 6.0% commencing on April 1, 2021 and for the remainder of its term. The Deferred Rent Obligation is due and payable on the earlier of (i) certain capital or liquidity events of HCRMC, including an IPO or sale, or (ii) March 31, 2029, which is not subject to any extensions. The HCRMC Lease Amendment also imposes certain restrictions on the Lessee and HCRMC until the Deferred Rent Obligation is paid in full, including with respect to the payment of dividends and the transfer of interest in HCRMC.

Additionally, HCRMC agreed to sell, and HCP agreed to purchase, nine post-acute facilities for an aggregate purchase price of $275 million. The proceeds from the nine facilities will be used to reduce the Tranche A Deferred Rent Obligation as the purchases are consummated. The closing of the purchases of these facilities will be subject to certain customary conditions and approvals. Subsequent to September 30, 2015, HCRMC and HCP completed three of the nine facility purchases for $87 million in October 2015. The purchases of the remaining six facilities are expected to occur by the end of the first quarter of 2016. If the closing with respect to any of these facilities has not occurred by April 1, 2016, the obligation to purchase any unsold facilities will terminate. Following the purchase of a facility, the Lessee will lease such facility from the Company pursuant to the Master Lease. The nine facilities will contribute an aggregate of $19 million of annual rent (subject to escalation) under the Master Lease.

In March 2015, the Company recorded a net impairment charge of $478 million related to its DFL investments with HCRMC. 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 of the future lease payments effective April 1, 2015 under the HCRMC Lease Amendment discounted at the original DFL investments’ effective lease rate. There is no related allowance for credit losses recorded within the carrying value of the HCRMC DFL investments.

See Notes 8 and 15 for additional discussion of the Company’s equity interest in HCRMC and related September 2015 impairment charge. See Note 8 for additional discussion of the U.S. Department of Justice action related to HCRMC.

Direct Financing Lease Internal Ratings

The following table summarizes the Company’s internal ratings for DFLs at September 30, 2015 (dollars in thousands):


	Carrying		Percentage of	Internal Ratings
Segment	Amount		DFL Portfolio	Performing DFLs		Watch List DFLs		Workout DFLs
Senior housing	$	1,574,246	23	$	1,207,550	$	366,696	$	—
Post-acute/skilled nursing		5,192,893	75		5,192,893		—		—
Hospital		123,891	2		123,891		—		—
	$	6,891,030	100	$	6,524,334	$	366,696	$	—

As a result of HCRMC related events, the Company reassessed the collectability of all contractual rent payments under the amended Master Lease. The Company has concluded that the collection of the amended rent payments is reasonably assured and has assigned an internal rating of “Performing” to its HCRMC DFL investments.

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Beginning September 30, 2013, the Company placed a 14-property senior housing DFL (the “DFL Portfolio”) on non-accrual status. The Company determined that the collection of all rental payments was and continues to be no longer reasonably assured; therefore, rental revenue from the DFL Portfolio is recognized on a cash basis. The Company re-assessed the DFL Portfolio for impairment on September 30, 2015 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 based on a discounted cash flow model, the inputs to 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 three months ended September 30, 2015 and 2014, the Company recognized DFL income of $3 million and $5 million, respectively, and received cash payments of $5 million and $6 million, respectively, from the DFL Portfolio. During the nine months ended September 30, 2015 and 2014, the Company recognized DFL income of $12 million and $15 million, respectively, and received cash payments of $16 million and $18 million, respectively, from the DFL Portfolio. The carrying value of the DFL Portfolio was $367 million and $370 million at September 30, 2015 and December 31, 2014, respectively.

NOTE 7. Loans Receivable

The following table summarizes the Company’s loans receivable (in thousands):


	September 30, 2015						December 31, 2014
	Real Estate		Other				Real Estate		Other
	Secured		Secured		Total		Secured		Secured		Total
Mezzanine(1) (2)	$	—	$	696,877	$	696,877	$	—	$	799,064	$	799,064
Other(2) (3)		90,650		—		90,650		135,363		—		135,363
Unamortized discounts, fees and costs(1)		—		(8,524)		(8,524)		—		(14,056)		(14,056)
Allowance for loan losses		—		(13,410)		(13,410)		—		(13,410)		(13,410)
	$	90,650	$	674,943	$	765,593	$	135,363	$	771,598	$	906,961

(1)

At September 30, 2015, included £269 million ($408 million) outstanding and £4 million ($6 million) of associated unamortized discounts, fees and costs both related to the HC-One Facility.

(2)

At September 30, 2015, the Company had £40 million ($60 million) remaining under its commitments to fund development projects and capital expenditures under the HC-One Facility.

(3)

At September 30, 2015, the Company had $2 million remaining of commitments to fund development projects and capital expenditures under the senior housing development loan program.

Loans Receivable Internal Ratings

The following table summarizes the Company’s internal ratings for loans receivable at September 30, 2015 (dollars in thousands):


	Carrying		Percentage of	Internal Ratings
Investment Type	Amount		Loan Portfolio	Performing Loans		Watch List Loans		Workout Loans
Real estate secured	$	90,650	12	$	90,650	$	—	$	—
Other secured		674,943	88		657,956		—		16,987
	$	765,593	100	$	748,606	$	—	$	16,987

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Other Secured Loans

HC-One Facility. In November 2014, the Company was the lead investor in the financing of Formation Capital and Safanad’s acquisition of NHP, a company that, at closing, owned 273 nursing and residential care homes representing over 12,500 beds in the U.K. principally operated by HC-One. The Company provided a loan facility (the “HC-One Facility”), secured by substantially all of NHP’s assets, totaling £395 million, with £363 million ($574 million) drawn at closing. The HC-One Facility has a five-year term and was initially funded by a £355 million draw on the Company’s revolving line of credit facility that is discussed in Note 11. In February 2015, the Company increased the HC-One Facility by £108 million ($164 million) to £502 million ($795 million), in conjunction with HC-One’s acquisition of Meridian Healthcare. 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. (see Note 4). During the three and nine months ended September 30, 2015, the Company received paydowns of £29 million ($45 million). In September 2015, the Company amended and increased its commitment under the HC-One Facility by £11 million primarily for the funding of capital expenditures and a development project. As part of the amendments, the Company shortened the non-call period by 17 months and provided consent for (i) the pay down of £34 million from disposition proceeds without a prepayment premium and (ii) the spinoff of 36 properties into a separate joint venture. In return, the Company retained security over the spinoff properties for a period of two years.

Brookdale Receivable. In conjunction with the Brookdale Transaction, on August 29, 2014, the Company provided $68 million in financing to Brookdale in the form of a 7% interest-only loan secured by Brookdale’s 20% equity interest in RIDEA II. On November 3, 2014, the Company received $68 million from the early repayment of this loan. See additional information regarding the Brookdale Transaction in Note 3.

Tandem Health Care Loan. On July 31, 2012, the Company closed a mezzanine loan facility to lend up to $205 million to Tandem Health Care (“Tandem”), as part of the recapitalization of a post-acute/skilled nursing portfolio. The Company funded $100 million (the “First Tranche”) at closing and funded an additional $102 million (the “Second Tranche”) in June 2013. In May 2015, the Company increased and extended the mezzanine loan facility with Tandem to (i) fund $50 million (the “Third Tranche”) and $5 million (the “Fourth Tranche”), which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt, respectively; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period to January 2017. The loans bear interest at fixed rates of 12%, 14%, 6% and 6% per annum for the First, Second, Third and Fourth Tranches, respectively. At September 30, 2015, the facility had an outstanding balance of $256 million at an 11.5% blended interest rate and was subordinate to $382 million of senior mortgage debt.

Delphis Operations, L.P. Loan. The Company holds a senior secured term loan made to Delphis Operations, L.P. (“Delphis” or the “Borrower”) that is collateralized by assets of the Borrower. The Borrower’s collateral is comprised primarily of partnership interests in an operating surgical facility that leases a property owned by the Company. This loan is on cost recovery status and has an internal rating of “workout”. The carrying value of the loan, net of an allowance for loan losses, was $17 million at both September 30, 2015 and December 31, 2014. During the three and nine months ended September 30, 2014, the Company received cash payments from the Borrower of $0.6 million. At both September 30, 2015 and December 31, 2014, the allowance related to the Company’s senior secured term loan to Delphis was $13 million with no additional allowances recognized during the nine months ended September 30, 2015 or the year ended December 31, 2014.

Subsequent Event. In October 2015, the Company received $23 million in 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.

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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 at September 30, 2015 (dollars in thousands):


Entity(1)	Segment	Carrying Amount		Ownership%
CCRC JV(2)	senior housing	$	447,658		49
HCRMC	senior housing and post-acute/skilled nursing		21,238		9
MBK JV(3)	senior housing		26,400		50
HCP Ventures III, LLC	medical office		6,329		30
HCP Ventures IV, LLC	medical office and hospital		24,705		20
HCP Life Science(4)	life science		68,834	50	–	63
Vintage Park	senior housing		5,745		85
MBK Development JV(3)	senior housing		1,824		50
Suburban Properties, LLC	medical office		4,861		67
Advances to unconsolidated joint ventures, net			196
		$	607,790

(1)

These entities are not consolidated because the Company does not control, through voting rights or other means, the joint ventures.

(2)

Includes two unconsolidated joint ventures in a RIDEA structure (CCRC PropCo CCRC OpCo).

(3)

Includes two unconsolidated joint ventures in a RIDEA structure (PropCo and OpCo).

(4)

Includes three unconsolidated joint ventures between the Company and an institutional capital partner. HCP Life Science includes the following 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%).

Summarized combined financial information for the Company’s equity method investments follows (in thousands):


	September 30,		December 31,
	2015		2014
Real estate, net	$	4,987,309	$	5,134,587
Goodwill and other assets, net		5,238,342		4,986,310
Total assets	$	10,225,651	$	10,120,897

Capital lease obligations and debt	$	7,205,096	$	7,197,940
Accounts payable		1,139,955		1,015,912
Other partners’ capital		1,241,809		1,281,413
HCP’s capital(1)		638,791		625,632
Total liabilities and partners’ capital	$	10,225,651	$	10,120,897

(1)

The combined basis difference of the Company’s investments in these joint ventures of $31 million, as of September 30, 2015, is attributable to goodwill, real estate, capital lease obligations, deferred tax assets and lease-related net intangibles.

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Total revenues	$	1,126,797	$	1,082,110	$	3,435,943	$	3,209,039
Income (loss) from discontinued operations		2,100		2,000		(3,900)		(6,800)
Net loss		(65,819)		(702)		(77,529)		(4,826)
HCP’s share of earnings(1)		8,314		10,168		33,916		39,388
Fees earned by HCP		454		447		1,372		1,340
Distributions received by HCP		16,186		2,113		20,673		5,881

(1)

The Company’s joint venture interest in HCRMC is accounted for using the equity method and results in an ongoing elimination of DFL income proportional to HCP’s ownership in HCRMC. The elimination of the respective proportional lease expense at the HCRMC level in substance results in $14 million and $16 million of DFL income that is recharacterized to the Company’s share of earnings from HCRMC (equity income from unconsolidated joint ventures) for the three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014, $44 million and $47 million, respectively, of DFL income was recharacterized to the Company’s share of earnings from HCRMC.

CCRC JV. On August 29, 2014, as part of the Brookdale Transaction discussed in Note 3, HCP and Brookdale formed unconsolidated joint ventures that own 14 CCRC campuses in a RIDEA structure. At closing, Brookdale contributed eight of its owned campuses; the Company contributed two campuses previously leased to Brookdale valued at $162 million (carrying value of $92 million) and $370 million of cash. At closing, the CCRC JV campuses were encumbered by $569 million of mortgage debt and entrance fee obligations.

HCRMC. On April 20, 2015, the U.S. Department of Justice (“DOJ”) unsealed a previously filed complaint in the United States District Court for the Eastern District of Virginia against HCRMC and certain of its affiliates in three consolidated cases following a civil investigation arising out of three lawsuits filed by former employees of HCRMC under the qui tam provisions of the federal False Claims Act. The DOJ’s complaint in intervention is captioned United States of America, ex rel. Ribik, Carson, and Slough v. HCR ManorCare, Inc., ManorCare Inc., HCR ManorCare Services, LLC and Heartland Employment Services, LLC (Civil Action Numbers: 1:09cv13; 1:11cv1054; 1:14cv1228 (CMH/TCB)). The complaint alleges that HCRMC submitted claims to Medicare for therapy services that were not covered by the skilled nursing facility benefit, were not medically reasonable and necessary, and were not skilled in nature, and therefore not entitled to Medicare reimbursement. While this litigation is at an early stage and HCRMC has indicated that it believes the claims are unjust and it will vigorously defend against them, a significant adverse judgment against HCRMC or significant settlement obligation could impact the carrying value of the Company’s investments in HCRMC’s operations and/or DFLs investment further (see Note 6).

On October 28, 2015, the Company concluded that its 9% equity investment in HCRMC was other-than-temporarily impaired as of September 30, 2015 and recorded an impairment charge of $27 million during the three months ended September 30, 2015 (see Note 15).

MBK JVs. On March 30, 2015, the Company and MBK Senior Living (“MBK”), a subsidiary of Mitsui & Co. Ltd, formed a new RIDEA joint venture (“MBK JV”) that owns three senior housing facilities with the Company and MBK each owning a 50% equity interest. MBK manages these communities on behalf of the joint venture. The Company contributed $27 million of cash and MBK contributed the three senior housing facilities with a fair value of $126 million, which were encumbered by $78 million of mortgage debt at closing. On September 25, 2015, the Company and MBK formed a new RIDEA joint venture (“MBK Development JV”) which acquired a $3 million parcel of land for the purpose of developing a 74-unit class A senior housing facility in Santa Rosa, California. The parcel of land is located adjacent to the Oakmont Gardens independent living facility currently owned and operated by the MBK JV.

NOTE 9. Intangibles

At September 30, 2015 and December 31, 2014, gross intangible lease assets, comprised of lease-up intangibles, above market tenant lease intangibles and below market ground lease intangibles, were $948 million and $830 million, respectively. At September 30, 2015 and December 31, 2014, the accumulated amortization of intangible assets was $388 million and $349 million, respectively.

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At September 30, 2015 and December 31, 2014, gross intangible lease liabilities, comprised of below market tenant lease intangibles and above market ground lease intangibles were $204 million and $209 million, respectively. At September 30, 2015 and December 31, 2014, the accumulated amortization of intangible liabilities was $131 million and $124 million, respectively.

NOTE 10. Other Assets

A summary of the Company’s other assets follows (in thousands):


	September 30,		December 31,
	2015		2014
Straight-line rent receivables, net of allowance of $33,527 and $34,182, respectively	$	378,295	$	355,864
Marketable debt securities, net		118,019		231,442
Leasing costs and inducements, net		158,297		146,500
Deferred financing costs, net		53,750		47,592
Goodwill		50,346		50,346
Other		124,626		108,428
Total other assets	$	883,333	$	940,172

At September 30, 2015 and December 31, 2014, within other assets is a non-interest bearing receivable of $14 million and $26 million, respectively, from Brookdale payable in eight quarterly installments. At September 30, 2015 and December 31, 2014, other assets also includes loan receivables of $21 million and $15 million, respectively, from HCP Ventures IV, LLC (“HCP Ventures IV”), an unconsolidated joint venture (see Note 8) with an interest rate of 12% per annum which mature through September 2016. The loan is senior to equity distributions to the Company’s joint venture partner.

Marketable debt securities, net are classified as held-to-maturity debt securities and primarily represent senior notes issued by Elli Investments Limited (“Elli”), a company beneficially owned by funds or limited partnerships managed by Terra Firma, as part of the financing for Elli’s acquisition of Four Seasons Health Care (the “Four Seasons Notes”). The Four Seasons Notes mature in June 2020, are non-callable through June 2016 and bear interest on their par value at a fixed rate of 12.25% per annum. The Company purchased an aggregate par value of £138.5 million of the Four Seasons Notes at a discount for £136.8 million ($215 million) in June 2012, representing 79% of the total £175 million issued and outstanding Four Seasons Notes. In June 2015 and September 2015, the Company determined that the Four Seasons Notes were other-than-temporarily impaired (see Note 15).

NOTE 11. Debt

Bank Line of Credit and Term Loans

The Company’s $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on March 31, 2018 and contains a one-year extension option. 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 September 30, 2015, the margin on the Facility was 0.925%, and the facility fee was 0.15%. The Facility also includes a feature that allows the Company to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. At September 30, 2015, the Company had $1.0 billion, including £242 million ($366 million), outstanding under the Facility with a weighted average effective interest rate of 1.52%.

On January 12, 2015, the Company entered into a credit agreement with a syndicate of banks for a £220 million ($333 million at September 30, 2015) four-year unsecured term loan (the “2015 Term Loan”) that accrues interest at a rate of GBP LIBOR plus 0.975%, subject to adjustments based on the Company’s credit ratings. Proceeds from this term loan were used to repay a £220 million draw on the Facility that partially funded the November 2014 HC-One Facility (see Note 7). Concurrently, the Company entered into a three-year interest rate swap agreement that effectively fixes the interest rate of the 2015 Term Loan at 1.79% (see Note 21). The 2015 Term Loan contains a one-year committed extension option.

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The Facility and term loans 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% and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility and term loans also require a Minimum Consolidated Tangible Net Worth of $9.5 billion at September 30, 2015. At September 30, 2015, the Company was in compliance with each of these restrictions and requirements.

Senior Unsecured Notes

At September 30, 2015, the Company had senior unsecured notes outstanding with an aggregate principal balance of $8.6 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 September 30, 2015.

The following table summarizes the Company’s senior unsecured notes issuances for the periods presented (dollars in thousands):


Period	Amount		Coupon Rate			Maturity Date		Net Proceeds
Nine months ended September 30, 2015:
January 21, 2015	$	600,000		3.400	%		2025	$	591,000
May 20, 2015	$	750,000		4.000	%		2025	$	739,000
Year ended December 31, 2014:
February 21, 2014	$	350,000		4.200	%		2024	$	346,000
August 14, 2014	$	800,000		3.875	%		2024	$	792,000

The following table summarizes the Company’s senior unsecured notes payoffs for the periods presented (dollars in thousands):


Period	Amount		Coupon Rate
Nine months ended September 30, 2015:
March 1, 2015	$	200,000		6.00	%
June 8, 2015	$	200,000		7.07	%
Year ended December 31, 2014:
February 1, 2014	$	400,000		2.70	%
June 14, 2014	$	62,000		6.00	%
June 14, 2014	$	25,000		3 Month LIBOR+0.9	%

Mortgage Debt

At September 30, 2015, the Company had $940 million in aggregate principal amount of mortgage debt outstanding, which is secured by 63 healthcare facilities (including redevelopment properties) with a carrying value of $1.2 billion.

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.

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Debt Maturities

The following table summarizes the Company’s stated debt maturities and scheduled principal repayments at September 30, 2015, (in thousands):


					Senior
	Bank Line of				Unsecured		Mortgage
Year	Credit(1)		Term Loans(2)		Notes(3)		Debt(4)		Total(5)
2015 (three months)	$	—	$	—	$	—	$	7,542	$	7,542
2016		—		207,528		900,000		279,194		1,386,722
2017		—		—		750,000		581,891		1,331,891
2018		1,000,824		—		600,000		6,583		1,607,407
2019		—		333,256		450,000		2,072		785,328
Thereafter		—		—		5,900,000		63,170		5,963,170
		1,000,824		540,784		8,600,000		940,452		11,082,060
Discounts, net		—		—		(31,271)		(470)		(31,741)
	$	1,000,824	$	540,784	$	8,568,729	$	939,982	$	11,050,319

(1)

Includes £242 million ($366 million) translated into U.S. dollars.

(2)

Represents £357 million translated into U.S. dollars.

(3)

Interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective interest rate of 4.71% and a weighted average maturity of six years.

(4)

Interest rates on the mortgage debt ranged from 3.16% to 8.35% with a weighted average effective interest rate of 6.21% and a weighted average maturity of three years.

(5)

Excludes $95 million of other debt that represents Life Care Bonds and Demand Notes that have no scheduled maturities.

Other Debt

At September 30, 2015, the Company had $67 million of non-interest bearing life care bonds at two of its continuing care retirement communities and non-interest bearing occupancy fee deposits at two of its senior housing facilities, all of which are payable to certain residents of the facilities (collectively, “Life Care Bonds”). The Life Care Bonds are generally refundable to the residents upon the termination of the contract or upon the successful resale of the unit.

At September 30, 2015, the Company had $28 million of on-demand notes (“Demand Notes”) from the CCRC JV. The Demand Notes bear interest at a rate of 4.5%.

NOTE 12. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a party to legal proceedings, lawsuits and other claims that arise in the ordinary course of the Company’s business. 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 business, prospects, financial condition, results of operations or cash flows. The Company’s policy is to expense legal costs as they are incurred.

Liquidity Support Arrangement

The Company has a 20% ownership interest in an unconsolidated joint venture, HCP Ventures IV, which has $107 million of contractual secured debt obligations (“Contractual Obligations”) coming due through February 2016. In the event: (i) HCP Ventures IV is unable to refinance these Contractual Obligations with third party lenders or (ii) the equity members do not jointly agree to make additional capital contributions to repay such Contractual Obligations, the Company has committed to provide the necessary level of financial support in the form of a shortfall loan to enable HCP Ventures IV to repay such Contractual Obligations. Additionally, the Company has committed to fund, in the form of a shortfall loan, up to $24.5 million for prior and future capital expenditures of which $21 million has been funded as of September 30, 2015 and included in other assets, net. This liquidity support arrangement is permitted under the joint venture agreement between the members, and any such funding earns interest at a rate equal to 12% per annum from the date actually advanced until the date it is repaid in full (see Notes 8, 10 and 18).

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NOTE 13. Equity

Common Stock

The following table lists the common stock cash dividends declared by the Company in 2015:


		Amount		Dividend
Declaration Date	Record Date	Per Share		Payable Date
January 29	February 9	$	0.565	February 24
April 30	May 11		0.565	May 26
July 30	August 10		0.565	August 25
October 29	November 9		0.565	November 24

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 three and nine months ended September 30, 2015, the Company issued 1.25 million shares of common stock at a weighted average price of $40.58 for proceeds of $50 million, net of fees and commissions of $1 million.

The following is a summary of the Company’s other common stock activities (shares in thousands):


	Nine Months Ended September 30,
	2015	2014
Dividend Reinvestment and Stock Purchase Plan	2,345	1,775
Conversion of DownREIT units(1)	75	2
Exercise of stock options	820	131
Vesting of restricted stock units	382	575
Repurchase of common stock	178	297

(1)

Non-managing member LLC units.

Subsequent Event. During October 2015, the Company issued 589,000 shares of common stock under its ATM Program at a weighted average price of $39.20 for proceeds of $23 million, net of fees and commissions of $350,000.

Accumulated Other Comprehensive Loss

The following is a summary of the Company’s accumulated other comprehensive loss (in thousands):


	September 30,		December 31,
	2015		2014
Cumulative foreign currency translation adjustment	$	(18,844)	$	(10,747)
Unrealized losses on cash flow hedges, net		(9,932)		(9,624)
Supplemental Executive Retirement Plan minimum liability		(3,329)		(3,537)
Unrealized (losses) gains on available for sale securities		(345)		13
Total accumulated other comprehensive loss	$	(32,450)	$	(23,895)

Noncontrolling Interests

At September 30, 2015, non-managing members held an aggregate of 4 million units in five limited liability companies (“DownREITs”), for which the Company is the managing member. At September 30, 2015, the carrying and fair values of these DownREIT units were $186 million and $224 million, respectively.

See Note 17 for the supplemental schedule of non-cash financing activities.

Subsequent Event. 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 acquired through a sale-leaseback transaction with Memorial Hermann in June 2015 (see Note 4).

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NOTE 14. Segment Disclosures

The Company evaluates its business and makes resource allocations based on its five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the medical office segment, the Company invests through the acquisition and development of MOBs, which generally require a greater level of property management. Otherwise, the Company primarily invests, through the acquisition and development of real estate, in single tenant and operator properties and debt issued by tenants and operators in these sectors. The accounting policies of the segments are the same as those described in Note 2 to the Consolidated Financial Statements herein and in the Company’s 2014 Annual Report on Form 10-K filed with the SEC. There were no intersegment sales or transfers during the nine months ended September 30, 2015 and 2014. The Company evaluates performance based upon (i) property net operating income from continuing operations (“NOI”), (ii) adjusted NOI (cash NOI), and (iii) adjusted NOI plus interest income (“Portfolio Income”) of the combined investments in each segment.

Non-segment assets consist primarily of corporate assets, including cash and cash equivalents, restricted cash, accounts receivable, net, marketable equity securities, deferred financing costs and, if any, real estate held for sale. Interest expense, depreciation and amortization, and non-property specific revenues and expenses are not allocated to individual segments in evaluating the Company’s segment-level performance. See Note 19 for other information regarding concentrations of credit risk.

Summary information for the reportable segments follows (in thousands):

For the three months ended September 30, 2015:



	Senior		Post-acute/		Life		Medical
	Housing		Skilled nursing		Science		Office		Hospital		Total
Rental revenues(1)	$	131,267	$	132,650	$	86,140	$	109,915	$	22,395	$	482,367
Resident fees and services		155,290		—		—		—		—		155,290
Operating expenses		(111,167)		(531)		(17,785)		(43,432)		(600)		(173,515)
NOI		175,390		132,119		68,355		66,483		21,795		464,142
Non-cash adjustments to NOI(2)		(6,141)		(20,362)		(2,613)		(1,363)		286		(30,193)
Adjusted (cash) NOI		169,249		111,757		65,742		65,120		22,081		433,949
Interest income		2,411		17,431		—		—		—		19,842
Portfolio Income	$	171,660	$	129,188	$	65,742	$	65,120	$	22,081		453,791
Addback non-cash adjustments												30,193
Investment management fee income												454
Interest expense												(122,157)
Depreciation and amortization												(134,704)
General and administrative expenses												(20,534)
Acquisition and pursuit costs												(1,553)
Impairments												(69,622)
Gains on sales of real estate, net of income taxes												52
Other expense, net												(1,026)
Income tax benefit												1,980
Equity income in unconsolidated joint ventures												8,314
Impairment of investments in unconsolidated joint ventures												(27,234)
Net income											$	117,954

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For the three months ended September 30, 2014:



	Senior		Post-acute/		Life		Medical
	Housing		Skilled nursing		Science		Office		Hospital		Total
Rental revenues(1)	$	183,834	$	139,205	$	79,450	$	92,412	$	21,560	$	516,461
Resident fees and services		62,213		—		—		—		—		62,213
Operating expenses		(43,017)		(534)		(16,637)		(38,459)		(952)		(99,599)
NOI		203,030		138,671		62,813		53,953		20,608		479,075
Non-cash adjustments to NOI(2)		(47,518)		(16,693)		(2,091)		528		130		(65,644)
Adjusted (cash) NOI		155,512		121,978		60,722		54,481		20,738		413,431
Interest income		3,919		13,598		—		—		—		17,517
Portfolio Income	$	159,431	$	135,576	$	60,722	$	54,481	$	20,738		430,948
Addback non-cash adjustments												65,644
Investment management fee income												447
Interest expense												(111,275)
Depreciation and amortization												(122,975)
General and administrative expenses												(19,479)
Acquisition and pursuit costs												(5,475)
Other expense, net												3,111
Income tax benefit												(55)
Equity income in unconsolidated joint ventures												10,168
Net income											$	251,059

For the nine months ended September 30, 2015:



	Senior		Post-acute/		Life		Medical
	Housing		Skilled nursing		Science		Office		Hospital		Total
Rental revenues(1)	$	382,559	$	404,121	$	255,100	$	310,805	$	66,129	$	1,418,714
Resident fees and services		367,141		—		—		—		—		367,141
Operating expenses		(263,191)		(1,602)		(51,718)		(122,469)		(2,908)		(441,888)
NOI		486,509		402,519		203,382		188,336		63,221		1,343,967
Non-cash adjustments to NOI(2)		(11,316)		(57,522)		(8,433)		(4,399)		764		(80,906)
Adjusted (cash) NOI		475,193		344,997		194,949		183,937		63,985		1,263,061
Interest income		22,042		67,007		—		—		—		89,049
Portfolio Income	$	497,235	$	412,004	$	194,949	$	183,937	$	63,985		1,352,110
Addback non-cash adjustments												80,906
Investment management fee income												1,372
Interest expense												(357,569)
Depreciation and amortization												(369,629)
General and administrative expenses												(74,152)
Acquisition and pursuit costs												(23,350)
Impairments												(592,921)
Gains on sales of real estate, net of income taxes												6,377
Other income, net												11,753
Income tax benefit												6,620
Equity income in unconsolidated joint ventures												33,916
Impairment of investments in unconsolidated joint ventures												(27,234)
Net income											$	48,199

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For the nine months ended September 30, 2014:



	Senior		Post-acute/		Life		Medical
	Housing		Skilled nursing		Science		Office		Hospital		Total
Rental revenues(1)	$	485,823	$	415,533	$	233,113	$	273,215	$	64,372	$	1,472,056
Resident fees and services		138,205		—		—		—		—		138,205
Operating expenses		(92,388)		(1,599)		(46,247)		(111,140)		(2,799)		(254,173)
NOI		531,640		413,934		186,866		162,075		61,573		1,356,088
Non-cash adjustments to NOI(2)		(72,277)		(51,752)		(7,976)		(795)		301		(132,499)
Adjusted (cash) NOI		459,363		362,182		178,890		161,280		61,874		1,223,589
Interest income		10,633		40,517		—		—		—		51,150
Portfolio Income	$	469,996	$	402,699	$	178,890	$	161,280	$	61,874		1,274,739
Addback non-cash adjustments												132,499
Investment management fee income												1,340
Interest expense												(324,755)
Depreciation and amortization												(343,496)
General and administrative expenses												(62,034)
Acquisition and pursuit costs												(13,376)
Other income, net												5,750
Income tax expense												(2,840)
Equity income in unconsolidated joint ventures												39,388
Total discontinued operations												29,746
Net income											$	736,961

(1)

Represents rental and related revenues, tenant recoveries and income from DFLs.

(2)

Represents straight-line rents, DFL accretion, amortization of market lease intangibles and lease termination fees.

A summary of the Company’s total assets by segment follows (in thousands):


	September 30,		December 31,
Segment	2015		2014
Senior housing	$	9,490,110	$	8,383,345
Post-acute/skilled nursing		6,368,064		6,875,122
Life science		4,198,937		4,154,789
Medical office		3,439,970		2,988,888
Hospital		639,807		640,253
Gross segment assets		24,136,888		23,042,397
Accumulated depreciation and amortization		(2,895,184)		(2,600,072)
Net segment assets		21,241,704		20,442,325
Other non-segment assets		951,269		927,615
Total assets	$	22,192,973	$	21,369,940

At both September 30, 2015 and December 31, 2014, goodwill of $50 million was allocated to segment assets as follows: (i) senior housing—$31 million, (ii) post-acute/skilled nursing—$3 million, (iii) medical office—$11 million and (iv) hospital—$5 million.

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NOTE 15. Impairments

On October 28, 2015, the Company concluded that its 9% equity investment in HCRMC (see Note 8) was other-than-temporarily impaired as of September 30, 2015 and recorded an impairment charge of $27 million during the three months ended September 30, 2015. The impairment charge reduced the carrying amount of the Company’s investment in HCRMC from $48 million to its fair value of $21 million. The impairment determination primarily resulted from the Company’s review of recent HCRMC operating results and market and industry data which, among other factors, show a declining trend in admissions from hospitals and continuing trends in mix and length of stay driven by Medicare Advantage and other managed care plans.

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. Inputs to this valuation model include earnings multiples, discount rate, industry growth rates of revenue, operating expenses and facility occupancy, some of which influence the Company’s expectation of future cash flows from its investment in HCRMC and, accordingly, the fair value of its investment.

In June 2015 and September 2015, the Company determined that its Four Seasons Notes (see Note 10) were other-than-temporarily impaired resulting from a continued decrease in the fair value of its investment. Although the Company does not intend to sell and does not believe it will 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 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). Elli remains obligated to repay the aggregate par value at maturity and interest payments due June 15 and December 15 each year. When the remaining semi-annual interest payments are received, the Company expects to reduce the carrying value of the Four Seasons Notes during the related fiscal period.

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 are not actively traded, these prices are 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 includes 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 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 June 2015, the Company determined a MOB was impaired and recognized an impairment charge of $3 million, which reduced the carrying value of the Company’s investment to $400,000. The fair value of the MOB was based on its projected sales prices, which was considered to be a Level 2 measurement within the fair value hierarchy. In July 2015, the Company sold the MOB for $400,000 (see Note 5).

In March 2015, the Company recorded a net impairment charge of $478 million related to its DFL investments with HCRMC (see Note 6).

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NOTE 16. Earnings Per Common Share

The following table illustrates the computation of basic and diluted earnings per share (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Numerator
Income from continuing operations	$	117,954	$	251,059	$	48,199	$	707,215
Noncontrolling interests’ share in continuing operations		(2,592)		(3,405)		(8,566)		(10,134)
Income from continuing operations applicable to HCP		115,362		247,654		39,633		697,081
Participating securities’ share in continuing operations		(316)		(446)		(1,020)		(1,999)
Income from continuing operations applicable to common shares		115,046		247,208		38,613		695,082
Discontinued operations		—		—		—		29,746
Noncontrolling interests’ share in discontinued operations		—		—		—		(1,177)
Net income applicable to common shares	$	115,046	$	247,208	$	38,613	$	723,651

Denominator
Basic weighted average common shares		463,337		458,799		462,039		458,119
Dilutive potential common shares		249		342		263		354
Diluted weighted average common shares		463,586		459,141		462,302		458,473

Basic earnings per common share
Income from continuing operations	$	0.25	$	0.54	$	0.08	$	1.52
Discontinued operations		—		—		—		0.06
Net income applicable to common shares	$	0.25	$	0.54	$	0.08	$	1.58

Diluted earnings per common share
Income from continuing operations	$	0.25	$	0.54	$	0.08	$	1.52
Discontinued operations		—		—		—		0.06
Net income applicable to common shares	$	0.25	$	0.54	$	0.08	$	1.58

Restricted stock and certain of the Company’s performance restricted stock units are considered participating securities, because dividend payments are not forfeited even if the underlying award does not vest, which requires the use of the two-class method when computing basic and diluted earnings per share. Options to purchase approximately 1.2 million and 1.1 million shares of common stock that had an exercise price (including deferred compensation expense) in excess of the average closing market price of the Company’s common stock during the three months ended September 30, 2015 and 2014, respectively, were not included in the Company’s earnings per share calculations because they are anti-dilutive. Restricted stock and performance restricted stock units representing 0.3 million and 0.1 million shares of common stock during the three months ended September 30, 2015 and 2014, respectively, were not included because they are anti-dilutive. Additionally, 6 million shares issuable upon conversion of 4 million DownREIT units during the three months ended September 30, 2015 and 2014 were not included because they are anti-dilutive.

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NOTE 17. Supplemental Cash Flow Information

The following table provides supplemental cash flow information (in thousands):


	Nine Months Ended September 30,
	2015		2014
Supplemental cash flow information:
Interest paid, net of capitalized interest	$	393,095	$	359,483
Income taxes paid		4,808		4,282
Capitalized interest		5,995		8,185
Supplemental schedule of non-cash investing activities:
Accrued construction costs		46,104		28,933
Loan originated in connection with Brookdale Transaction		—		67,640
Real estate contributed to CCRC JV		—		91,603
Settlement of loans receivable as consideration for real estate acquisition		346,745		32,000
Tenant funded tenant improvements owned by HCP		17,552		—
Supplemental schedule of non-cash financing activities:
Vesting of restricted stock units		382		575
Cancellation of restricted stock		—		1
Conversion of non-managing member units into common stock		2,454		73
Noncontrolling interest issued in connection with Brookdale Transaction		—		46,751
Noncontrolling interest and other liabilities, net assumed in connection with the RIDEA III acquisition		61,219		—
Noncontrolling interest issued in connection with real estate acquisitions		3,885		6,321
Noncontrolling interest disposed in connection with real estate sales		—		1,671
Other liabilities assumed with real estate acquisitions		21,076		1,734
Unrealized (losses) gains on available-for-sale securities and derivatives designated as cash flow hedges, net		(647)		1,824

NOTE 18. Variable Interest Entities

Unconsolidated Variable Interest Entities

At September 30, 2015, the Company had investments in: (i) three unconsolidated VIE joint ventures; (ii) 48 properties leased to VIE tenants; (iii) a loan to a VIE borrower; and (iv) marketable debt securities of two VIE borrowers. The Company has determined that it is not the primary beneficiary of these VIEs. The Company 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 joint ventures (CCRC OpCo, HCP Ventures IV and Vintage Park discussed below), the Company 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, that has been identified as a VIE (see Notes 3 and 8). 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 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 the rental costs and operating expenses incurred to manage such facilities).

In the first quarter of 2015, upon the occurrence of a reconsideration event, it was determined that HCP Ventures IV is a VIE because this entity is “thinly capitalized.” The ability to control the activities that most significantly impact HCP Ventures IV’s economic performance are shared among equity members. The assets of HCP Ventures IV primarily consist of MOBs and hospitals that it owns and leases, intangible assets, straight-line rents receivable, and cash and cash equivalents; its obligations primarily consist of mortgage debt, member loans, intangible liabilities, deferred revenue, and accounts payable and accrued liabilities associated with the cost of its rental properties. Assets generated by the operations

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(primarily rental revenues) of HCP Ventures IV may only be used to settle its contractual obligations (primarily operating expenses and debt service payments).

The Company holds an 85% ownership interest in Vintage Park (see Note 8) that has been identified as a VIE. Although power is shared among equity members, one equity member does not have a substantive investment in the entity. The assets of Vintage Park primarily consist of an in-progress independent living 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 the development obligations. Any assets generated by Vintage Park 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 been identified as VIEs (“VIE tenants”) because 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.

The Company holds Four Seasons Notes (see Note 10). In the second quarter of 2015, upon the occurrence of a reconsideration event, it was determined that the issuer of the Four Seasons Notes is a VIE because this entity is “thinly capitalized” (see Note 15).

The Company holds an interest-only, senior secured term loan made to a borrower (Delphis Operations, L.P.) that has been identified as a VIE because it is a “thinly capitalized” entity (see Note 7). The loan is collateralized by all of the assets of the borrower (comprised primarily of a partnership interest in an operating surgical facility that leases a property owned by the Company).

The Company holds commercial mortgage-backed securities (“CMBS”) issued by Federal Home Loan Mortgage Corporation (“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 classification of the related assets and liabilities and their maximum loss exposure as a result of the Company’s involvement with these VIEs at September 30, 2015 are presented below (in thousands):


	Maximum Loss			Carrying
VIE Type	Exposure(1)		Asset/Liability Type	Amount
VIE tenants—DFLs	$	600,235	Net investment in DFLs	$	600,235
VIE tenants—operating leases		11,299	Lease intangibles, net and straight-line rent receivables		11,299
Four Seasons Notes		100,348	Marketable debt securities		100,348
CCRC OpCo		234,246	Investments in unconsolidated joint ventures		234,246
HCP Ventures IV		152,415	Investments in unconsolidated joint ventures		45,416
Vintage Park		5,745	Investments in unconsolidated joint ventures		5,745
Loan—senior secured		16,987	Loans receivable, net		16,987
CMBS		17,751	Marketable debt securities		17,751

(1)

The Company’s maximum loss exposure related to VIE tenants, CCRC OpCo, Vintage Park, and loans and marketable debt securities to VIE borrowers represents the aggregate carrying amount of such investments (including accrued interest). The Company’s maximum loss exposure related to HCP Ventures IV represents the aggregate carrying amount of its investments plus commitments under its support arrangement, which may be mitigated by the refinancing of HCP Ventures IV’s Contractual Obligations which it expects to occur as such debt becomes due in late 2015 and early 2016 (see Note 12).

With the exception of HCP Ventures IV, as of September 30, 2015, the Company has 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). At September 30, 2015, the Company has a loan of $21 million to HCP Ventures IV. HCP Ventures IV has $107 million of Contractual Obligations coming due through February 2016. The Company has committed to provide the necessary level of financial support, in the form of a shortfall loan, to HCP Ventures IV in the event the joint venture is (i) unable to refinance its Contractual Obligations with third party lenders or (ii) the equity members do not jointly agree to make additional capital contributions to repay its

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Contractual Obligations. See Notes 3, 6, 7, 8, 10 and 12 for additional descriptions of the nature, purpose and operating activities of the Company’s unconsolidated VIEs and interests therein.

Consolidated Variable Interest Entities

RIDEA I. The Company holds a 90% ownership interest in a joint venture entity formed in September 2011 that operates senior housing properties in a RIDEA structure (“RIDEA I OpCo”). The Company consolidates RIDEA I OpCo 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 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 a non-VIE consolidated subsidiary of the Company 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 RIDEA I OpCo may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

RIDEA II. The Company holds an 80% ownership interest in joint venture entities formed in August 2014 that own and operate senior housing properties in a RIDEA structure (“RIDEA II”). The Company consolidates RIDEA II (“SH PropCo” and “SH 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 SH PropCo primarily consist of leased properties (net real estate), rents receivable, and cash and cash equivalents; its obligations primarily consist of a note payable to a non-VIE consolidated subsidiary of the Company. The assets of SH 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 SH 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 II structure may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

RIDEA III. The Company holds a 90% ownership interest in a joint venture entity formed in June 2015 that operates senior housing properties in a RIDEA structure (“RIDEA III OpCo”). The Company consolidates RIDEA III OpCo 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 RIDEA III 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 a non-VIE consolidated subsidiary of the Company 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 RIDEA III OpCo may only be used to settle its contractual obligations (primarily from the rental costs and operating expenses incurred to manage such facilities).

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 joint venture (“Development JV”) both of which are considered VIEs. The Company consolidates the Tax Credit Subsidiary and Development JV because it is the primary beneficiary as 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 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.

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NOTE 19. 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 risks. The Company does not have significant foreign operations.

The following tables provide information regarding the Company’s concentrations with respect to certain tenants and operators; the information provided is presented for the gross assets and revenues that are associated with certain tenants and operators as percentages of their respective segment’s and total Company’s gross assets and revenues:

The following table lists the Company’s senior housing concentrations:


	Percentage of				Percentage of				Percentage of
	Gross Assets				Revenues				Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Operators	2015		2014		2015		2014		2015		2014
Brookdale(1)	28	%	36	%	21	%	32	%	24	%	40	%
HCRMC	10	%	11	%	7	%	7	%	8	%	9	%

The following table lists the Company’s post-acute/skilled nursing concentrations:


	Percentage of				Percentage of				Percentage of
	Gross Assets				Revenues				Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Operators	2015		2014		2015		2014		2015		2014
HCRMC	82	%	82	%	81	%	86	%	79	%	86	%

The following table lists the total Company concentrations:


	Percentage of				Percentage of				Percentage of
	Gross Assets				Revenues				Revenues
	September 30,		December 31,		Three Months Ended September 30,				Nine Months Ended September 30,
Operators	2015		2014		2015		2014		2015		2014
HCRMC	28	%	31	%	21	%	25	%	23	%	27	%
Brookdale(1)	12	%	13	%	9	%	13	%	10	%	15	%

(1)

On July 31, 2014, Brookdale completed its acquisition of Emeritus. These percentages of segment revenues and total revenues for the three and nine months ended September 30, 2014 are prepared on a pro forma basis to reflect the combined concentration for Brookdale and Emeritus, as if the merger had occurred as of the beginning of the period presented. On August 29, 2014, the Company and Brookdale amended or terminated all former leases with Emeritus and entered into two RIDEA joint ventures (see Notes 3 and 18). Percentages do not include senior housing facilities that Brookdale manages (is not a tenant) under a RIDEA structure.

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HCRMC’s summarized consolidated financial information follows (in millions):


	September 30,		December 31,
	2015		2014
Real estate and other property, net	$	2,641.1	$	2,934.4
Cash and cash equivalents		150.5		127.9
Goodwill, intangible and other assets, net		4,820.6		4,621.7
Total assets	$	7,612.2	$	7,684.0

Debt and financing obligations	$	6,049.3	$	6,108.3
Accounts payable, accrued liabilities and other		975.3		932.7
Total equity		587.6		643.0
Total liabilities and equity	$	7,612.2	$	7,684.0


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Revenues	$	1,009.6	$	1,026.0	$	3,091.1	$	3,101.8
Operating, general and administrative expense		(885.7)		(881.3)		(2,667.8)		(2,676.5)
Depreciation and amortization expense		(33.3)		(35.7)		(104.6)		(106.0)
Interest expense		(119.7)		(101.6)		(339.9)		(305.9)
Other income, net		2.6		0.8		7.5		5.4
Loss on disposal of assets		(76.0)		(1.4)		(76.0)		(1.4)
(Loss) income from continuing operations before income tax expense		(102.5)		6.8		(89.7)		17.4
Income taxes		(44.4)		3.1		(38.8)		7.4
(Loss) income from continuing operations		(58.1)		3.7		(50.9)		10.0
Income (loss) from discontinued operations, net of taxes		2.1		2.0		(3.9)		(6.8)
Net (loss) income	$	(56.0)	$	5.7	$	(54.8)	$	3.2

As of September 30, 2015, Brookdale provided comprehensive property management and accounting services with respect to 106 of the Company’s senior housing facilities and 14 CCRCs owned by the CCRC JV, for which the Company or joint venture pays annual management fees pursuant to long-term management agreements. Most of the management agreements have initial 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 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.

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.

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NOTE 20. Fair Value Measurements

Items Measured at Fair Value on a Recurring Basis

The following table illustrates the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2015 in the consolidated balance sheets (in thousands):


Financial Instrument(1)	Fair Value		Level 1		Level 2		Level 3
Marketable equity securities	$	1,254	$	1,254	$	—	$	—
Interest-rate swap liabilities		7,655		—		7,655		—
Currency swap assets		1,118		—		1,118		—
Warrants		43		—		—		43

(1)

Interest rate and currency swaps, as well as common stock warrant fair values, are determined based on observable and unobservable market assumptions utilizing standardized derivative pricing models.

Recognized gains and losses are recorded in other income, net on the Company’s consolidated statements of operations. In September 2015, the Company exercised $2 million of warrants classified as Level 3 within the fair value hierarchy in exchange for marketable equity securities classified as Level 1. During the nine months ended September 30, 2015, there were no other transfers of financial assets or liabilities within the fair value hierarchy.

Disclosures About Fair Value of Financial Instruments

Cash and cash equivalents, restricted cash, accounts receivable, net, and accounts payable and accrued liabilities – The carrying values are reasonable estimates of fair value because of the short-term maturities of these instruments.

Loans receivable, net and mortgage debt – The fair values are based on discounting future cash flows utilizing current market rates for loans and debt of the same type and remaining maturity.

Marketable debt securities – The fair value is based on quoted prices from inactive markets.

Marketable equity securities and senior unsecured notes – The fair values are based on quoted prices in active markets.

Warrants – The fair value is based on significant unobservable market inputs utilizing standardized derivative pricing models.

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 current credit ratings.

Interest-rate swaps – The fair value is based on observable inputs utilizing standardized pricing models that consider forward yield curves and discount rates which are observable in active and inactive markets.

Currency swaps – The fair value is based on observable inputs utilizing standardized pricing models that consider the future value of the currency exchange rates, comprised of current spot and traded forward points, and calculating a present value of the net amount using discount rates based on observable traded interest rates.

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The table below summarizes the carrying values and fair values of the Company’s financial instruments (in thousands):


	September 30, 2015				December 31, 2014
	Carrying				Carrying
	Value		Fair Value		Value		Fair Value
Loans receivable, net(2)	$	765,593	$	779,525	$	906,961	$	898,522
Marketable debt securities(2)		118,019		118,019		231,442		252,125
Marketable equity securities(1)		1,254		1,254		43		43
Warrants(3)		43		43		2,220		2,220
Bank line of credit(2)		1,000,824		1,000,824		838,516		838,516
Term loans(2)		540,784		540,784		213,610		213,610
Senior unsecured notes(1)		8,568,729		8,865,860		7,626,194		8,187,458
Mortgage debt(2)		939,982		984,286		984,431		1,025,091
Other debt(2)		94,561		94,561		97,022		97,022
Interest-rate swap assets(2)		—		—		178		178
Interest-rate swap liabilities(2)		7,655		7,655		7,663		7,663
Currency swap assets(2)		1,118		1,118		929		929

(1)

Level 1: Fair value calculated based on quoted prices in active markets.

(2)

Level 2: Fair value based on quoted prices for similar or identical instruments in active or inactive markets, respectively, or calculated utilizing standardized pricing models in which significant inputs or value drivers are observable in active markets.

(3)

Level 3: Fair value determined based on significant unobservable market inputs using standardized derivative pricing models.

NOTE 21. Derivative Financial Instruments

The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of September 30, 2015 (dollars and GBP in thousands):


			Fixed
		Hedge	Rate/Buy			Floating/Exchange	Notional/
Date Entered	Maturity Date	Designation	Amount			Rate Index	Sell Amount		Fair Value(1)
Interest rate:
July 2005(2)	July 2020	Cash Flow		3.82	%	BMA Swap Index	$	45,600	$	(6,087)
November 2008(3)	October 2016	Cash Flow		5.95	%	1 Month LIBOR+1.50%	$	25,200	$	(1,063)
July 2012(4)	June 2016	Cash Flow		1.81	%	1 Month GBP LIBOR+1.20%	£	137,000	$	(77)
January 2015(4)	October 2017	Cash Flow		1.79	%	1 Month GBP LIBOR+0.975%	£	220,000	$	(428)
Foreign currency:
July 2012(5)	June 2016	N/A	$	22,700		Buy USD/Sell GBP	£	14,500	$	835
July 2014(6)	December 2015	Cash Flow	$	1,900		Buy USD/Sell GBP	£	1,100	$	212
January 2015(7)	October 2017	Cash Flow	$	39,800		Buy USD/Sell GBP	£	26,300	$	72

(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 an interest-rate swap contract, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.

(4)

Hedges fluctuations in interest payments on variable-rate unsecured debt due to fluctuations in the underlying benchmark interest rate.

(5)

Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to a portion of the Company’s forecasted interest receipts on GBP denominated senior notes. Represents a currency swap to sell £7.2 million at a rate of 1.5695 on various dates through June 2016.

(6)

Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to the Company’s forecasted GBP denominated interest receipts on intercompany loans. Represents a currency swap to sell £0.4 million at a rate of 1.7060 on various dates through December 2015.

(7)

Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to the Company’s forecasted GBP denominated interest receipts on its HC-One Facility. Represents a currency swap to sell approximately £1.0 million monthly at a rate of 1.5149 through October 2017.

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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.

The primary risks associated with derivative instruments are market and credit risk. Market risk is defined as the potential for loss in value of a derivative instrument due to adverse changes in market prices. Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation. The Company does not obtain collateral associated with its derivative contracts, but monitors the credit standing of its counterparties on a regular basis. Should a counterparty fail to perform, the Company would incur a financial loss to the extent that the associated derivative contract was in an asset position. At September 30, 2015, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts.

On January 12, 2015, the Company entered into an interest-rate swap contract that is designated as hedging the interest payments on its GBP denominated 2015 Term Loan due to fluctuations in the underlying benchmark interest rate (see Note 11). The cash flow hedge has a notional amount of £220 million and matures in October 2017.

On January 12, 2015, the Company entered into a foreign currency swap contract to hedge the foreign currency exchange risk related to a portion of the forecasted GBP interest receipts from its HC-One Facility (see Note 7). The cash flow hedge has a fixed GBP/USD exchange rate of 1.5149 (buy approximately $1.5 million and sell £1.0 million monthly) and matures in October 2017.

On July 27, 2012, the Company entered into a foreign currency swap contract to hedge the foreign currency exchange risk related to a portion of the forecasted GBP interest receipts from a debt investment denominated in GBP. The cash flow hedge has a fixed GBP/USD exchange rate of 1.5695 (buy $11 million and sell £7 million semi-annually) and matures in June 2016. In September 2015, the Company ceased hedge accounting on this foreign currency swap contract and reclassified $0.4 million from Accumulated Other Comprehensive Loss to Other Income, net, and all future changes in fair value of the foreign currency swap contract will be recognized in earnings.

On September 29, 2015, the Company designated £260 million of its GBP-denominated borrowings under the Facility and 2012 term loan as a hedge of a portion of the Company’s net investments in its GBP-functional subsidiaries to limit exposure to fluctuations in the GBP to U.S. Dollars (“USD”) exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD of the instrument is recorded as a cumulative translation adjustment component of Accumulated Other Comprehensive Income (Loss). Accordingly, changes in value of the designated £260 million GBP-denominated borrowings due 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 of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

During the nine months ended September 30, 2015, the Company determined a portion of a cash flow hedge was ineffective and reclassified $0.4 million of unrealized gains related to this interest-rate swap contract into other income, net. The Company expects that the hedged forecasted transactions for each of the outstanding qualifying cash flow hedging relationships at September 30, 2015 remain probable of occurring, and as a result, no additional gains or losses recorded to accumulated other comprehensive loss are expected to be reclassified to earnings for any other outstanding hedges, other than those discussed above.

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To illustrate the effect of movements in the interest rate and foreign currency markets, the Company performed a market sensitivity analysis on its outstanding derivative financial instruments. The Company 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 instruments’ change in fair value. The following table summarizes the results of the analysis performed (dollars in thousands):


		Effects of Change in Interest and Foreign Currency Rates
		+50 Basis		-50 Basis		+100 Basis		-100 Basis
Date Entered	Maturity Date	Points		Points		Points		Points
Interest rate:
July 2005	July 2020	$	1,108	$	(958)	$	2,142	$	(1,992)
November 2008	October 2016		132		(131)		263		(262)
July 2012	June 2016		802		(664)		1,546		(1,386)
January 2015	October 2017		3,234		(3,650)		6,676		(7,092)
Foreign currency:
July 2012	June 2016		(123)		96		(233)		205
July 2014	December 2015		(9)		8		(17)		16
January 2015	October 2017		(226)		172		(424)		371

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Language Regarding Forward-Looking Statements

Statements in this Quarterly Report on Form 10-Q that are not historical factual statements are “forward-looking statements.” We intend to have our forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with those provisions. 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. Any such forward-looking statements reflect our current expectations and views about future events and are subject to a number of risks and uncertainties that could significantly affect the Company’s future financial condition and results of operations. While forward-looking statements reflect our good faith belief and reasonable assumptions 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 Quarterly 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 Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014, as updated by Part II, Item 1A. “Risk Factors” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, risks and uncertainties that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include, among other things:

(a)

our ability to fully evaluate HCR ManorCare, Inc.’s (“HCRMC”) ability to meet its contractual obligations under the HCRMC Lease Amendment and risks related to the impact of the United States (“U.S.”) Department of Justice lawsuit against HCRMC, including the possibility of larger than expected litigation costs, adverse results and related developments;

(b)

our reliance on a concentration of a small number of tenants and operators for a significant portion of our revenues;

(c)

the financial weakness of tenants and operators, including potential bankruptcies, significant litigation exposure and downturns in their businesses, which results in uncertainties regarding our ability to continue to realize the full benefit of such tenants’ and/or operators’ leases or loans;

(d)

the ability of our tenants and operators 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;

(e)

competition for tenants and operators, including with respect to new leases and mortgages and the renewal or rollover of existing leases;

(f)

availability of suitable properties to acquire at favorable prices and the competition for the acquisition and financing of those properties;

(g)

our ability to negotiate the same or better terms with new tenants or operators if existing leases are not renewed or we exercise our right to replace an existing tenant or operator upon default;

(h)

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;

(i)

the risk that we may not be able to achieve the benefits of investments within expected time frames or at all, or within expected cost projections;

(j)

the potential impact of future litigation matters, including the possibility of larger than expected litigation costs, adverse results and related developments;

(k)

the effect on healthcare providers of legislation addressing entitlement programs and related services, including Medicare and Medicaid, which may result in future reductions in reimbursements;

(l)

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;

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(m)

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 adversely impact our ability to fund our obligations or consummate transactions, or reduce the earnings from potential transactions;

(n)

changes in global, national and local economic conditions, and currency exchange rates;

(o)

changes in the credit ratings on U.S. government debt securities or default or delay in payment by the U.S. of its obligations;

(p)

our ability to manage our indebtedness level and changes in the terms of such indebtedness; and

(q)

the ability to maintain our qualification as a real estate investment trust (“REIT”).

Except as required by law, we undertake no, and hereby disclaim any, obligation to update any forward-looking statements, whether as a result of new information, changed circumstances or otherwise.

The information set forth in this Item 2 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:

Executive Summary

2015 Transaction Overview

Dividends

Results of Operations

Liquidity and Capital Resources

Contractual Obligations

Off-Balance Sheet Arrangements

Inflation

Non-GAAP Financial Measures Reconciliations

Critical Accounting Policies

Recent Accounting Pronouncements

Executive Summary

HCP, Inc., a Standard & Poor’s (“S&P”) 500 company, invests primarily in real estate serving the healthcare industry in the United States. We are a Maryland corporation organized in 1985 and qualify as a self-administered REIT. We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. At September 30, 2015, our portfolio of investments, including properties in our unconsolidated joint ventures, consisted of interests in 1,279 facilities.

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 business segments and geographic locations (including Europe); (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; (iii) to concentrate on longer-term escalating triple-net leases with high-quality tenants, while using RIDEA structures for properties that have higher growth potential; (iv) to maintain adequate liquidity with 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; and (v) to continue to manage our balance sheet with a targeted financial leverage of approximately 40% relative to our assets.

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We believe that our longer-term escalating triple-net leases with financially strong tenants and operators enhance the quality, stability and growth of our rental income. Further, we believe many of our existing properties hold the potential for increased future cash flows due to their high quality and desirable locations within markets where the creation of new supply is limited by the lack of available sites and the difficulty of obtaining the necessary licensing, other approvals and/or financing. 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.

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 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.

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.

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 to our multiple segments, 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.

Because our REIT qualification requires us to distribute at least 90% of our REIT taxable income (excluding net capital gains), 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 maintain a conservative balance sheet by actively managing our debt to equity levels, using long-term fixed rate debt and staggering our contractual maturities. We also utilize multiple sources of capital including equity, unsecured bonds, revolving line of credit facilities, term loans, and secured debt. We have relationships with institutional joint venture partners which have been a source of capital for our joint ventures.

We evaluate multiple sources of capital when financing our investments. For debt investments, we may utilize our revolving line of credit facility or originate bank term loans. Typically we fund long term real estate investments with common stock and long term unsecured bonds. Additionally, in connection with joint ventures, we typically utilize non-recourse mortgage debt.

2015 Transaction Overview

HCR ManorCare, Inc.

During the three months ended March 31, 2015, HCP and HCR ManorCare, Inc. (“HCRMC”) agreed to market for sale the real estate and operations associated with 50 non-strategic facilities that are under the Master Lease and Security Agreement (the “Master Lease”) for an estimated total gross sales price of approximately $350 million. HCRMC will receive an annual rent reduction under the Master Lease based on 7.75% of the net sales proceeds received by HCP. Through November 2, 2015, 12 of the facility sales have closed and the remaining facility sales are expected to occur during the fourth quarter of 2015 and the first quarter of 2016.

Additionally, in March 2015, HCP and HCRMC agreed to amend the Master Lease (the “HCRMC Lease Amendment”). Commencing April 1, 2015, HCP provided an annual net rent reduction of $68 million, which equates to initial lease year rent of $473 million, compared to $541 million that would have commenced April 1, 2015 prior to the HCRMC Lease

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Amendment. The contractual rent will increase by 3.0% annually during the initial term. In exchange, HCP will receive the following consideration:

Fee ownership in nine post-acute facilities valued at $275 million with a median age of four years, currently owned and operated by HCRMC. HCP will retain a lease receivable of equal value, earning income of $19 million annually (included in the amended initial lease year rent of $473 million above), which will be reduced as the facility purchases are completed. Following the purchase of a facility, HCRMC will lease such facility from the HCP pursuant to the Master Lease. The nine facilities will contribute an aggregate of $19 million of annual rent (subject to escalation) under the Master Lease. Through November 2, 2015, HCRMC and HCP completed four of the nine facility purchases for $99 million. The purchases of the remaining five facilities are expected to occur by the end of the first quarter of 2016, subject to customary licensing and regulatory approvals;

A second lease receivable with an initial amount of $250 million, payable by HCRMC upon the earlier of: (i) the end of the initial term of the first renewal pool under the HCRMC Lease Amendment, or (ii) certain capital or liquidity events of HCRMC, including an IPO or sale. The $250 million lease receivable amount will increase each year as follows: 3.0% in April 2016 through 2018, 4.0% in 2019, 5.0% in 2020 and 6.0% in 2021 until the end of the initial lease term; and

Extension of the initial lease term by five years, to an average of 16 years.

In March 2015, we recorded a non-cash net impairment charge of $478 million related to our direct financing lease (“DFL”) investments with HCRMC. The non-cash charge reduced the carrying value of the HCRMC DFL investments from $6.6 billion to $6.1 billion, which represented the present value of the future lease payments under the HCRMC Lease Amendment. The impairment determination resulted from discussions with HCRMC in which they expressed an increasing desire to reduce rent in consideration of potential economic trades to HCP prior to the April 1, 2015 rental increase of 3.5% under the Master Lease (without regard to the HCRMC Lease Amendment). HCRMC indicated that they sought an amendment of the Master Lease to provide financial flexibility to meet the reimbursement and competitive challenges they face in operating and growing their business, and to remove any uncertainty that could result from any further deterioration in their operating results and corresponding ability to remain in compliance with the covenants under their credit facilities.

See Note 6 to the Consolidated Financial Statements for additional discussion on the HCRMC Lease Amendment and impairment of our HCRMC direct financing lease investment and Note 8 to the Consolidated Financial Statements for additional discussion regarding the U.S. Department of Justice complaint against HCRMC, which information is incorporated by reference herein.

On October 28, 2015, we concluded that our 9% equity investment in HCRMC was other-than-temporarily impaired as of September 30, 2015 and we recorded an impairment charge of $27 million during the third quarter of 2015. The impairment charge reduced the carrying amount of our equity investment in HCRMC to $21 million. Our impairment determination primarily resulted from our review of recent HCRMC operating results and market and industry data which, among other factors, show a declining trend in admissions from hospitals and continuing trends in mix and length of stay driven by Medicare Advantage and other managed care plans. Notwithstanding these developments, HCRMC’s financial information indicates that HCRMC will continue to meet its contractual obligations to HCP under the Master Lease as we expect the lease coverage to continue to improve due to the HCRMC Lease Amendment and sale of the 50 non-strategic facilities. Therefore, we continue to believe that the collection and timing of all amounts owed by HCRMC under our Master Lease are reasonably assured.

Acquisition of Private Pay Senior Housing Portfolio

On June 30, 2015, HCP and Brookdale Senior Living, Inc. (“Brookdale”) acquired a portfolio of 35 private pay senior housing communities from Chartwell Retirement Residences, including two leasehold interests, representing 5,025 units for $847 million. The portfolio was acquired in a RIDEA structure (RIDEA III), with Brookdale owning a 10% noncontrolling interest. Brookdale has operated these communities since 2011, and continues to manage the communities under a long-term management agreement.

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The Cove Development

In February 2015, we began construction on the first phase, $177 million, of The Cove at Oyster Point (“The Cove”), a life science development in South San Francisco, California. The first phase includes two “class A” buildings totaling 253,000 square feet that are expected to be completed in the third quarter of 2016.

U.K. Investments

In February 2015, we increased our United Kingdom (“U.K.”) HC-One debt investment (“HC-One Facility”) by £108 million ($164 million) to £502 million ($795 million) in conjunction with HC-One’s acquisition of Meridian Healthcare. At closing, the HC-One Facility was secured by 303 nursing and residential care homes representing over 13,900 beds in the U.K., primarily located in England and Scotland.

In April 2015, we converted £174 million of our total £502 million HC-One Facility to fee ownership in a portfolio of 36 care homes subject to long-term triple-net leases that provide aggregate rent in the first year of £13 million. The contractual rent will increase annually by the Retail Price Index (“RPI”), with rent resets to fair market value at the end of lease years 15 and 25. The triple-net leases have initial terms of 30 years with lessee termination options at the end of lease years 15 and 25.

In May 2015, we provided a £27 million ($42 million) loan to fund Maria Mallaband Care Group’s (“Maria Mallaband”) acquisition of two care homes in the U.K. In July 2015, the loan was converted into fee ownership of the real estate at an equal value and the properties are triple-net leased to Maria Mallaband for an initial term of 15 years.

In September 2015, we amended and increased the commitment under our HC-One Facility by £11 million, primarily to fund a development project in the U.K. and other capital improvements.

Acquisitions of On-Campus Medical Office Buildings

In April 2015, we acquired a medical office building (“MOB”) in Philadelphia, Pennsylvania for $161 million. The MOB is anchored by Thomas Jefferson University Hospital, which is ranked 2nd among best hospitals in the Philadelphia metropolitan area by U.S. News and is owned by ‘A rated’ Thomas Jefferson University. The MOB contains 705,000 rentable square feet and was 85% occupied at closing.

In June 2015, we expanded our relationship with Memorial Hermann Health System (“Memorial Hermann”) through the acquisition of a portfolio of 11 on-campus MOBs located in Houston, Texas in a sale-leaseback transaction for $225 million. Memorial Hermann, an ‘A rated’ health system, is the largest not-for-profit system in Southeast Texas and maintains the largest market share at 24% in the Houston metro area. The MOB portfolio, located on four campuses, has an aggregate 1.2 million rentable square feet and is subject to triple-net master leases with 10-year initial lease terms and four 5-year renewal terms. In October 2015, we issued a 49% noncontrolling interest in this portfolio (“HCP Ventures V”) for $110 million.

In October 2015, we increased our ownership of the Nordstrom Medical Tower in Seattle, Washington to 116,800 square feet by acquiring two fully-occupied condominium units totaling 15,300 rentable square feet for $7 million.

MBK Joint Venture Transactions

In March 2015, we formed a new RIDEA joint venture (“MBK JV”) with MBK Senior Living (“MBK”), a subsidiary of Mitsui & Co. Ltd, that acquired three senior housing facilities for $126 million with HCP and MBK each owning a 50% equity interest. MBK manages these communities on behalf of this joint venture. At closing, we contributed $27 million of cash and MBK contributed the three senior housing facilities, which were encumbered by $78 million of mortgage debt. The MBK JV intends to acquire additional senior housing facilities by focusing on off-market transactions.

In September 2015, we formed a new development joint venture with MBK (“MBK Development JV”) which acquired a $3 million parcel of land for the purpose of developing a 74-unit class A senior housing facility in Santa Rosa, California. The parcel of land is located adjacent to the Oakmont Gardens independent living facility currently owned and operated by the MBK JV.

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Other Investment Transactions

In March 2015, we exercised the purchase option under our $14 million par value development loan to acquire a newly built assisted living and memory care facility in Houston, Texas for $36 million. The facility was 99% occupied at closing and was placed in a RIDEA structure with Brookdale acquiring a 10% noncontrolling interest and managing the facility.

In April 2015, we exercised the purchase option under our $33 million par value development loan to acquire a newly built assisted living and memory care facility in Germantown, Tennessee for $72 million. The facility was 93% occupied at closing and was placed in a RIDEA structure with Brookdale acquiring a 10% noncontrolling interest and managing the facility.

In May 2015, we increased and extended our mezzanine loan facility with Tandem Health Care (“Tandem”) to (i) fund an additional $55 million, which proceeds were used to repay a portion of Tandem’s existing senior and mortgage debt tranches; (ii) extend its maturity to October 2018; and (iii) extend the prepayment penalty period to January 2017. The mezzanine loan facility now totals $256 million and has an 11.5% blended coupon, or 11.9% blended yield-to-maturity.

In August 2015, we expanded our senior housing joint venture partnership with Brookdale through the CCRC JV in an add-on expansion within one of its Florida communities for $30 million, of which our contribution was $8 million.

Financing and Capital Recycling Activities

In January 2015, we issued $600 million of 3.40% senior unsecured notes due 2025. The notes were priced at 99.185% of the principal amount with a yield-to-maturity of 3.497%. Net proceeds were used to repay the entire $105 million U.S. dollar amount outstanding on our revolving credit facility at closing and $200 million of 6.00% senior unsecured notes that matured on March 1, 2015. We used the remaining proceeds to repay $200 million of 7.07% senior unsecured notes maturing in June 2015 and for general corporate purposes.

In January 2015, to economically hedge a portion of our foreign currency risk from the HC-One Facility, we completed a £220 million four-year unsecured term loan that accrues interest at GBP LIBOR plus 0.975%, subject to adjustments based on our credit ratings. Concurrently, we entered into a three-year interest rate swap agreement that fixes the rate of the term loan at 1.79%, and a foreign currency swap agreement that fixes the British pound sterling (“GBP”) into U.S. dollars (“USD”) exchange rate at 1.5149 on interest income from the HC-One Facility in excess of interest payments on the term loan. Proceeds from this term loan repaid £220 million of the GBP balance drawn on our revolving credit facility that was used to fund our HC-One Facility in November 2014.

In May 2015, we issued $750 million of 4.00% senior unsecured notes due 2025. The notes were priced at 99.126% of the principal amount with a yield-to-maturity of 4.107%. Net proceeds were used to fund a portion of our investment transactions completed to date.

In June 2015, we established an at-the-market equity offering program (“ATM 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. During the three and nine months ended September 30, 2015, the Company issued 1.25 million shares of common stock at a weighted average price of $40.58 for proceeds of $50 million, net of fees and commissions of $1 million.

In July 2015, we sold a parcel of land at The Cove for $11 million; additionally, in October 2015, we sold a parcel of land in our life science segment for $40 million.

In October 2015, we issued a 49% noncontrolling interest in HCP Ventures V to an institutional capital investor for $110 million. HCP Ventures V owns the MOB portfolio we acquired through a sale-leaseback transaction with Memorial Hermann in June 2015. We retained a 51% controlling interest in HCP Ventures V and will act as the managing member of the joint venture.

Through November 3, 2015, we received £34 million ($52 million) and $23 million in loan paydowns from asset disposition proceeds relating to our HC-One Facility and loan to Delphis Operations, L.P., respectively.

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Dividends

On October 29, 2015, we announced that our Board declared a quarterly common stock cash dividend of $0.565 per share. The common stock dividend will be paid on November 24, 2015 to stockholders of record as of the close of business on November 9, 2015.

Results of Operations

We evaluate our business and allocate resources among our business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the senior housing, post-acute/skilled nursing, life science and hospital segments, we primarily invest, through acquisition and development, in single operator or tenant properties and debt issued by operators in these sectors. Under the medical office segment, we invest, through acquisition and development, in single or multi-tenant MOBs, which generally require a greater level of property management.

Non-GAAP Financial Measures

Net Operating Income (“NOI”)

NOI and adjusted NOI are non-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 direct financing leases (“DFLs”), less property level operating expenses; NOI excludes all other financial statement amounts included in net income (loss) as presented in Note 14 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 accretion, amortization of market lease intangibles and lease termination fees. Adjusted NOI is oftentimes referred to as “cash NOI.” We use NOI and adjusted NOI to make decisions about resource allocations, to assess and compare property level performance, and evaluate our same property portfolio (“SPP”). We believe that net income (loss) is the most directly comparable U.S. generally accepted accounting principles (“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. NOI and adjusted NOI are non-GAAP supplemental financial measures; for a reconciliation of net income (loss) to NOI and adjusted NOI and other relevant disclosure, refer to Note 14 to the Consolidated Financial Statements.

Operating expenses generally relate to leased medical office and life science properties and senior housing RIDEA properties. 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. Periodically, we review the classification of expenses between categories and make revisions based on changes in the underlying nature of the expenses.

Same Property Portfolio (“SPP”)

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 portfolio of properties. We identify our SPP as stabilized properties that remained in operations and were consistently reported as leased properties or RIDEA properties for the duration of the year over year comparison periods presented, excluding assets held for sale. Accordingly, it takes a stabilized property a minimum of 12 months in operations under a consistent reporting structure to be included in our SPP. Newly acquired operating assets are generally considered stabilized at the earlier of lease up (typically when the tenant(s) controls 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. SPP NOI excludes certain non-property specific operating expenses that are allocated to each operating segment on a consolidated basis. SPP adjusted NOI excludes the effects of foreign exchange rate movements by using the average current period exchange rate to translate from GBP into USD for the comparison periods. A property is removed from our SPP when it is sold, placed into redevelopment or changes its reporting structure.

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Funds From Operations (“FFO”)

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 property, impairments of, or related to, depreciable real estate, plus real estate and DFL depreciation and amortization, and after adjustments for joint ventures. Adjustments for joint ventures are calculated to reflect FFO on the same basis. 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 severance-related charges, litigation settlement charges, preferred stock redemption charges, impairments (recoveries) of non-depreciable assets, foreign currency remeasurement losses (gains) and transaction-related items (defined below) (“FFO as adjusted”). Transaction-related items include acquisition and pursuit costs (e.g., due diligence and closing) and gains/charges incurred as a result of mergers and acquisitions and lease amendment or termination activities. Management believes that FFO as adjusted provides a meaningful supplemental measurement of our FFO run-rate. This measure is a modification of the NAREIT definition of FFO and should not be used as an alternative to net income (loss) (determined in accordance with GAAP) or NAREIT FFO. FFO and FFO as adjusted are non-GAAP supplemental financial measures; 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”)

FAD is defined as FFO as adjusted after excluding the impact of the following: (i) amortization of acquired market lease intangibles, net; (ii) amortization of deferred compensation expense; (iii) amortization of deferred financing costs, net; (iv) straight-line rents; (v) accretion 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 is: (i) 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. 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. FAD does not represent cash generated from operating activities determined in accordance with GAAP, is not necessarily indicative of cash available to fund cash needs, and should not be considered as an alternative to net income (loss) determined in accordance with GAAP. FAD is a non-GAAP supplemental financial measure; for a reconciliation of net income (loss) to FAD, as defined, and other relevant disclosure, refer to “Non-GAAP Financial Measures Reconciliations” below.

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Comparison of the Three Months Ended September 30, 2015 to the Three Months Ended September 30, 2014

On June 30, 2015 (the “Closing Date”), we completed the RIDEA III acquisition for 35 senior housing properties (see Note 4 to the Consolidated Financial Statements). We report the resident level fees and services revenues and corresponding operating expenses in our consolidated financial statements from the Closing Date. For periods subsequent to the Closing Date, we expect increases in resident fees and services revenue and operating expenses.

Overview(1)

Results for the three months ended September 30, 2015 and 2014 follow (dollars in thousands except per share data):


	Three Months Ended				Three Months Ended				Per
	September 30, 2015				September 30, 2014				Share
	Amount		Per Share		Amount		Per Share		Change
FFO	$	263,370	$	0.57	$	377,304	$	0.82	$	(0.25)
FFO as adjusted		365,800		0.79		346,278		0.75		0.04
FAD		309,946		0.67		297,709		0.65		0.02
Net income applicable to common shares		115,046		0.25		247,208		0.54		(0.29)

________________________________________

(1) For the reconciliations, see “Non-GAAP Financial Measures Reconciliations” section below.

FFO as adjusted and FAD increased $0.04 and $0.02 per share, respectively, primarily as a result of increased NOI from our 2014 and 2015 acquisitions and SPP. The increases were partially offset by the decline in income from DFLs as a result of the HCRMC Lease Amendment.

FFO and earnings per share (“EPS”) decreased $0.25 and $0.29 per share, respectively, primarily as a result of: (i) a $70 million impairment related to our investment in Four Seasons senior notes (“Four Seasons Notes”), (ii) a $27 million impairment related to our equity investment in HCRMC, (iii) foreign currency remeasurement losses of $4 million and (iv) transaction-related items of $2 million. The decreases were partially offset by: (i) the aforementioned events impacting FFO as adjusted and FAD and (ii) $38 million recognized in 2014 in net fees for terminating the leases on the 49 senior housing properties in the transaction completed with Brookdale in August 2014 (the “Brookdale Transaction”).

Segment NOI and Adjusted NOI

The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our consolidated SPP for the three months ended September 30, 2015 consists of 1,033 properties representing properties acquired or placed in service and stabilized on or prior to July 1, 2014 and that remained in operations under a consistent reporting structure through September 30, 2015. Our consolidated total property portfolio represents 1,184 and 1,103 properties at September 30, 2015 and 2014, respectively.

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Results as of and for the three months ended September 30, 2015 and 2014 (dollars and square feet in thousands except per capacity data) follows:

Senior Housing


	SPP							Total Portfolio
	Three Months Ended September 30,							Three Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	128,503	$	128,137	$	366		$	131,267	$	183,834	$	(52,567)
Resident fees and services		40,304		38,419		1,885			155,290		62,213		93,077
Total segment revenues		168,807		166,556		2,251			286,557		246,047		40,510
Operating expenses		(26,104)		(24,206)		(1,898)			(111,167)		(43,017)		(68,150)
NOI		142,703		142,350		353			175,390		203,030		(27,640)
Non-cash adjustments to NOI		(5,862)		(8,672)		2,810			(6,141)		(47,518)		41,377
Adjusted NOI	$	136,841	$	133,678	$	3,163		$	169,249	$	155,512	$	13,737
Adjusted NOI % change						2.4	%
Property count(2)		402		402					508		463
Average capacity (units)(3)		38,867		39,142					50,498		44,202
Average annual rent per unit(4)	$	14,124	$	13,719				$	13,500	$	14,154

(1)

Represents rental and related revenues and income from DFLs.

(2)

From our past presentation of SPP for the three months ended September 30, 2014, we removed 10 senior housing properties from SPP that were sold and three senior housing properties that were contributed to partnerships under a RIDEA structure, and no longer meet our criteria for SPP as of the date of contribution.

(3)

Represents average capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented.

(4)

Average annual rent per unit for RIDEA properties is based on NOI.

SPP Adjusted NOI. SPP adjusted NOI improved primarily as a result of annual rent increases.

Total Portfolio NOI. Our total portfolio NOI decreased primarily as a result of: (i) $34 million related to terminating the leases on 49 senior housing properties and converting to a RIDEA structure in the Brookdale Transaction, (ii) contributing three assets into the CCRC JV in August 2014 and (iii) the sale of nine assets in January 2015 and May 2015 as part of the Brookdale Transaction (see Notes 3 and 5 to the Consolidated Financial Statements), partially offset by the impact from our senior housing acquisitions in 2014 and 2015, primarily from our RIDEA III transaction in June 2015 (see Note 4 to the Consolidated Financial Statements), and results from our SPP.

Post-Acute/Skilled Nursing


	SPP							Total Portfolio
	Three Months Ended September 30,							Three Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	128,549	$	138,750	$	(10,201)		$	132,650	$	139,205	$	(6,555)
Operating expenses		(76)		(73)		(3)			(531)		(534)		3
NOI		128,473		138,677		(10,204)			132,119		138,671		(6,552)
Non-cash adjustments to NOI		(19,865)		(16,639)		(3,226)			(20,362)		(16,693)		(3,669)
Adjusted NOI	$	108,608	$	122,038	$	(13,430)		$	111,757	$	121,978	$	(10,221)
Adjusted NOI % change						(11.0)	%
Property count(2)		300		300					321		301
Average capacity (beds)(3)		37,981		38,222					39,363		38,400
Average annual rent per bed	$	11,445	$	12,778				$	11,410	$	12,761

(1)

Represents rental and related revenues and income from DFLs.

(2)

From our past presentation of SPP for the three months ended September 30, 2014, we removed a post-acute/skilled nursing facility from SPP that was sold.

(3)

Represents average capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented.

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NOI and Adjusted NOI. SPP and total portfolio NOI and adjusted NOI decreased primarily as a result of the HCRMC Lease Amendment. See “2015 Transaction Overview” above for further discussion on developments with HCRMC, including the September 2015 impairment related to our equity investment in HCRMC.

Life Science


	SPP									Total Portfolio
	Three Months Ended September 30,									Three Months Ended September 30,
	2015			2014			Change			2015			2014			Change
Rental and related revenues	$	67,799		$	64,357		$	3,442		$	71,304		$	66,273		$	5,031
Tenant recoveries		14,074			12,519			1,555			14,836			13,177			1,659
Total segment revenues		81,873			76,876			4,997			86,140			79,450			6,690
Operating expenses		(15,749)			(14,592)			(1,157)			(17,785)			(16,637)			(1,148)
NOI		66,124			62,284			3,840			68,355			62,813			5,542
Non-cash adjustments to NOI		(2,339)			(1,961)			(378)			(2,613)			(2,091)			(522)
Adjusted NOI	$	63,785		$	60,323		$	3,462		$	65,742		$	60,722		$	5,020
Adjusted NOI % change								5.7	%
Property count(1)		109			109						112			112
Average occupancy		97.6	%		93.6	%					97.7	%		93.7	%
Average occupied square feet		6,906			6,610						7,209			6,739
Average annual total segment revenues per occupied square foot	$	46		$	45					$	46		$	46
Average annual base rent per occupied square foot	$	38		$	38					$	38		$	38

(1)

From our past presentation of SPP for the three months ended September 30, 2014, we removed a life science facility from SPP that was placed into land held for development, which no longer meets our criteria for SPP as of the date placed into development.

SPP NOI and Adjusted NOI. 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. In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI increased primarily as a result of the impact of our life science development projects placed into service during 2014.

During the three months ended September 30, 2015, 88,000 square feet of new and renewal leases commenced at an average annual base rent of $39.85 per square foot compared to 64,000 square feet of expired and terminated leases with an average annual base rent of $41.15 per square foot.

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Medical Office


	SPP									Total Portfolio
	Three Months Ended September 30,									Three Months Ended September 30,
	2015			2014			Change			2015			2014			Change
Rental and related revenues	$	77,058		$	74,135		$	2,923		$	92,275		$	76,876		$	15,399
Tenant recoveries		15,104			14,730			374			17,640			15,536			2,104
Total segment revenues		92,162			88,865			3,297			109,915			92,412			17,503
Operating expenses		(36,195)			(35,614)			(581)			(43,432)			(38,459)			(4,973)
NOI		55,967			53,251			2,716			66,483			53,953			12,530
Non-cash adjustments to NOI		132			584			(452)			(1,363)			528			(1,891)
Adjusted NOI	$	56,099		$	53,835		$	2,264		$	65,120		$	54,481		$	10,639
Adjusted NOI % change								4.2	%
Property count(1)		206			206						227			211
Average occupancy		90.3	%		90.9	%					91.3	%		90.7	%
Average occupied square feet		12,676			12,758						15,556			13,347
Average annual total segment revenues per occupied square foot	$	29		$	28					$	28		$	28
Average annual base rent per occupied square foot	$	24		$	23					$	23		$	23

(1)

From our past presentation of SPP for the three months ended September 30, 2014, we removed a MOB from SPP that was sold.

SPP NOI and Adjusted NOI. SPP NOI and adjusted NOI increased as a result of annual rent escalations.

Total Portfolio NOI and Adjusted NOI. Our total portfolio NOI and adjusted NOI increased primarily as a result of the impact of our MOB acquisitions in the second half of 2014 and 2015.

During the three months ended September 30, 2015, 572,000 square feet of new and renewal leases commenced at an average annual base rent of $23.87 per square foot compared to 517,000 square feet of expiring and terminated leases with an average annual base rent of $23.40 per square foot. During the three months ended September 30, 2015, we disposed of 17,000 square feet with an average annual base rent of $17.50 per square foot.

Hospital


	SPP							Total Portfolio
	Three Months Ended September 30,							Three Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	21,773	$	20,937	$	836		$	21,787	$	20,950	$	837
Tenant recoveries		609		610		(1)			608		610		(2)
Total segment revenues		22,382		21,547		835			22,395		21,560		835
Operating expenses		(601)		(950)		349			(600)		(952)		352
NOI		21,781		20,597		1,184			21,795		20,608		1,187
Non-cash adjustments to NOI		288		130		158			286		130		156
Adjusted NOI	$	22,069	$	20,727	$	1,342		$	22,081	$	20,738	$	1,343
Adjusted NOI % change						6.5	%
Property count		16		16					16		16
Average capacity (beds)(2)		2,223		2,221					2,223		2,221
Average annual rent per bed	$	40,797	$	39,040				$	40,816	$	39,063

(1)

Represents rental and related revenues and income from DFLs.

(2)

Represents capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented. Certain operators in our hospital portfolio are not required under their respective leases to provide operational data.

NOI and Adjusted NOI. SPP and total portfolio NOI and adjusted NOI increased primarily as a result of the recovery of rents and operating expenses from the first half of 2015 from one of our hospitals.

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Other Income and Expense Items

Interest income

Interest income increased $2 million to $20 million for the three months ended September 30, 2015. The increase was primarily the result of: (i) our HC-One Facility funded in November 2014 and February 2015 (see Note 7 to the Consolidated Financial Statements), (ii) additional fundings under our mezzanine loan facility with Tandem in May 2015 (see Note 7 to the Consolidated Financial Statements), offset by a change in interest income recognition on our investment in the Four Seasons Notes (see Note 15 to the Consolidated Financial Statements).

Interest expense

Interest expense increased $11 million to $122 million for the three months ended September 30, 2015. The increase was primarily the result of: (i) our senior unsecured notes offerings during 2014 and 2015, (ii) increased borrowings under our line of credit facility and (iii) increased borrowings from our term loan originated in 2015. The increases in interest expense were partially offset by repayments of senior unsecured notes and mortgage debt that matured during 2014 and 2015. The increased borrowings were used to fund our investment activities and to refinance our debt maturities.

Our exposure to expense fluctuations related to our variable rate indebtedness is substantially mitigated by our interest rate swap contracts. For a more detailed discussion of our interest rate risk, see “Quantitative and Qualitative Disclosures About Market Risk” in Item 3.

The table below sets forth information with respect to our debt, excluding premiums and discounts (dollars in thousands):


	As of September 30, (1)
	2015			2014
Balance:
Fixed rate	$	10,081,236		$	9,066,872
Variable rate		1,000,824			78,500
Total	$	11,082,060		$	9,145,372
Percent of total debt:
Fixed rate		91.0	%		99.1	%
Variable rate		9.0	%		0.9	%
Total		100.0	%		100.0	%
Weighted average interest rate at end of period:
Fixed rate		4.70	%		5.05	%
Variable rate		1.52	%		1.26	%
Total		4.41	%		5.01	%

(1)

At September 30, 2015, excludes $95 million of other debt that represents non-interest bearing life care bonds and occupancy fee deposits at certain of our senior housing facilities and demand notes that have no scheduled maturities. At September 30, 2014, excludes $98 million of other debt that represents non-interest bearing life care bonds and occupancy fee deposits at certain of our senior housing facilities. At September 30, 2015 and 2014, $71 million and $72 million, respectively, of variable-rate mortgages and £357 million and £137 million ($541 million and $222 million), respectively, of term loans are presented as fixed-rate debt as the interest payments were swapped from variable to fixed (see Note 21 to the Consolidated Financial Statements).

Depreciation and amortization expense

Depreciation and amortization expense increased $12 million to $135 million for the three months ended September 30, 2015. The increase was primarily the result of the impact of our acquisitions and redevelopment projects placed in service during 2014 and 2015. The increases in depreciation and amortization expense were partially offset by additional depreciation expense recognized in the third quarter of 2014 as a result of a change in estimate of the depreciable life and residual value of certain properties.

General and administrative expenses

General and administrative expenses increased $1 million to $21 million for the three months ended September 30, 2015. The increase was primarily the result of higher compensation related expenses.

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Acquisition and pursuit costs

Acquisition and pursuit costs decreased $4 million to $2 million for the three months ended September 30, 2015. The decrease was primarily due to lower levels of transactional activity in 2015 compared to the same period in 2014 as a result of the Brookdale Transaction. Acquisition and pursuit costs were previously included in general and administrative expenses.

Impairments

During the three months ended September 30, 2015, we recognized an impairment charge of $70 million related to our investment in Four Seasons Notes (see Note 15 to the Consolidated Financial Statements).

Other (expense) income, net

Other (expense) income, net decreased $4 million to an expense of $1 million for the three months ended September 30, 2015. The decrease was primarily the result of the impact from remeasuring assets and liabilities denominated in GBP to USD.

Income tax benefit (expense)

Income taxes decreased $2 million to a benefit of $2 million for the three months ended September 30, 2015. The decrease was primarily the result of the tax benefit related to our share of losses from our RIDEA joint ventures formed as part of the Brookdale Transaction and related to our U.K. real estate investments in 2015.

Equity income from unconsolidated joint ventures

Equity income from unconsolidated joint ventures decreased $2 million to $8 million for the three months ended September 30, 2015. The decrease was primarily the result of our share of losses recognized from the CCRC JV.

Impairment of investments in unconsolidated joint ventures

During the three months ended September 30, 2015, we recognized an impairment charge of $27 million related to our equity investment in HCRMC (see Note 15 to the Consolidated Financial Statements).

Comparison of the nine months ended September 30, 2015 to the nine months ended September 30, 2014

Overview(1)

Results for the nine months ended September 30, 2015 and 2014 follow (dollars in thousands except per share data):


	Nine Months Ended				Nine Months Ended				Per
	September 30, 2015				September 30, 2014				Share
	Amount		Per Share		Amount		Per Share		Change
FFO	$	447,838	$	0.97	$	1,056,888	$	2.30	$	(1.33)
FFO as adjusted		1,095,234		2.36		1,033,763		2.25		0.11
FAD		948,257		2.05		873,855		1.90		0.15
Net income applicable to common shares		38,613		0.08		723,651		1.58		(1.50)

________________________________________

(1)

For the reconciliations, see “Non-GAAP Financial Measures Reconciliations” section below.

FFO as adjusted and FAD increased $0.11 and $0.15 per share, respectively, primarily as a result of increased NOI from our 2014 and 2015 acquisitions and SPP, and incremental interest income from the repayments of two development loans resulting from our share in the appreciation of the underlying real estate assets. The increases were partially offset by the decline in income from DFLs as a result of the HCRMC Lease Amendment.

FFO and EPS decreased $1.33 and $1.50 per share, respectively, primarily as a result of: (i) a $478 million impairment related to our DFL investments with HCRMC, (ii) $112 million of impairments related to our investment in Four Seasons Notes, (iii) transaction-related items of $29 million, (iv) a $27 million impairment related to our equity investment in

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HCRMC and (v) a severance-related charge of $7 million. The decreases were partially offset by: (i) the aforementioned events impacting FFO as adjusted and FAD (ii) $38 million recognized in 2014 in net fees for terminating the leases on the 49 senior housing properties in the Brookdale Transaction and (iii) foreign currency remeasurement gains of $5 million.

Segment NOI and Adjusted NOI

The tables below provide selected operating information for our SPP and total property portfolio for each of our business segments. Our consolidated SPP for the nine months ended September 30, 2015 consists of 1,007 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2014 and that remained in operations under a consistent reporting structure through September 30, 2015.

Results as of and for the nine months ended September 30, 2015 and 2014 (dollars and square feet in thousands except per capacity data) follows:

Senior Housing


	SPP							Total Portfolio
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	374,178	$	372,620	$	1,558		$	382,559	$	485,823	$	(103,264)
Resident fees and services		119,373		114,398		4,975			367,141		138,205		228,936
Total segment revenues		493,551		487,018		6,533			749,700		624,028		125,672
Operating expenses		(75,359)		(72,538)		(2,821)			(263,191)		(92,388)		(170,803)
NOI		418,192		414,480		3,712			486,509		531,640		(45,131)
Non-cash adjustments to NOI		(19,056)		(29,862)		10,806			(11,316)		(72,277)		60,961
Adjusted NOI	$	399,136	$	384,618	$	14,518		$	475,193	$	459,363	$	15,830
Adjusted NOI % change						3.8	%
Property count(2)		380		380					508		463
Average capacity (units)(3)		37,839		38,113					46,729		45,123
Average annual rent per unit(4)	$	14,106	$	13,497				$	13,654	$	13,654

________________________________________

(1)

Represents rental and related revenues and income from DFLs.

(2)

From our past presentation of SPP for the nine months ended September 30, 2014, we removed nine senior housing properties from SPP that were sold and three senior housing properties that were contributed to partnerships under a RIDEA structure, and no longer meet our criteria for SPP as of the date of contribution.

(3)

Represents average capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented.

(4)

Average annual rent per unit for RIDEA properties is based on NOI.

SPP Adjusted NOI. SPP adjusted NOI improved as a result of annual rent increases and improved performance from RIDEA properties.

Total Portfolio NOI. Our total portfolio NOI decreased primarily as a result of: (i) $23 million related to terminating the leases on 49 senior housing properties and converting to a RIDEA structure in the Brookdale Transaction, (ii) an $8 million net termination fee related to our RIDEA III acquisition (see Note 4 to the Consolidated Financial Statements), (iii) contributing three assets into the CCRC JV in August 2014 and (iv) the sale of nine assets in January 2015 and May 2015 as part of the Brookdale Transaction (see Notes 3 and 5 to the Consolidated Financial Statements). The decreases in NOI were partially offset by the impact from our SPP and senior housing acquisitions in 2014 and 2015 primarily from our RIDEA III transaction in June 2015 (see Note 4 to the Consolidated Financial Statements).

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Post-Acute/Skilled Nursing


	SPP							Total Portfolio
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	395,435	$	413,204	$	(17,769)		$	404,121	$	415,533	$	(11,412)
Operating expenses		(230)		(214)		(16)			(1,602)		(1,599)		(3)
NOI		395,205		412,990		(17,785)			402,519		413,934		(11,415)
Non-cash adjustments to NOI		(56,493)		(51,516)		(4,977)			(57,522)		(51,752)		(5,770)
Adjusted NOI	$	338,712	$	361,474	$	(22,762)		$	344,997	$	362,182	$	(17,185)
Adjusted NOI % change						(6.3)	%
Property count(2)		300		300					321		301
Average capacity (beds)(3)		37,981		38,222					38,904		38,481
Average annual rent per bed	$	11,897	$	12,616				$	11,877	$	12,603

________________________________________

(1)

Represents rental and related revenues and income from DFLs.

(2)

From our past presentation of SPP for the nine months ended September 30, 2014, we removed a post-acute/skilled nursing facility from SPP that was sold.

(3)

Represents average capacity as reported by the respective tenants or operators for the twelve-month period and a quarter in arrears from the periods presented.

NOI and Adjusted NOI. SPP and total portfolio NOI and adjusted NOI decreased primarily as a result of the HCRMC Lease Amendment. See 2015 Transaction Overview” above for further discussion of developments with HCRMC, including the September 2015 impairment related to our equity investment in HCRMC.

Life Science


	SPP									Total Portfolio
	Nine Months Ended September 30,									Nine Months Ended September 30,
	2015			2014			Change			2015			2014			Change
Rental and related revenues	$	197,231		$	188,660		$	8,571		$	211,411		$	196,384		$	15,027
Tenant recoveries		39,679			34,631			5,048			43,689			36,729			6,960
Total segment revenues		236,910			223,291			13,619			255,100			233,113			21,987
Operating expenses		(43,562)			(40,240)			(3,322)			(51,718)			(46,247)			(5,471)
NOI		193,348			183,051			10,297			203,382			186,866			16,516
Non-cash adjustments to NOI		(7,244)			(7,344)			100			(8,433)			(7,976)			(457)
Adjusted NOI	$	186,104		$	175,707		$	10,397		$	194,949		$	178,890		$	16,059
Adjusted NOI % change								5.9	%
Property count(1)		107			107						112			112
Average occupancy		96.9	%		92.2	%					96.8	%		92.4	%
Average occupied square feet		6,710			6,379						7,141			6,572
Average annual total revenues per occupied square foot(1)	$	46		$	45					$	46		$	46
Average annual base rent per occupied square foot	$	38		$	38					$	38		$	38

________________________________________

(1)

From our past presentation of SPP for the nine months ended September 30, 2014, we removed a life science facility from SPP that was placed into land held for development, which no longer meets our criteria for SPP as of the date placed into development.

SPP NOI and Adjusted NOI. 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.

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During the nine months ended September 30, 2015, 628,000 square feet of new and renewal leases commenced at an average annual base rent of $34.22 per square foot compared to 357,000 square feet of expired and terminated leases with an average annual base rent of $35.61 per square foot.

Medical Office


	SPP									Total Portfolio
	Nine Months Ended September 30,									Nine Months Ended September 30,
	2015			2014			Change			2015			2014			Change
Rental and related revenues	$	226,579		$	222,661		$	3,918		$	262,047		$	229,880		$	32,167
Tenant recoveries		42,568			41,914			654			48,758			43,335			5,423
Total revenues		269,147			264,575			4,572			310,805			273,215			37,590
Operating expenses		(103,960)			(102,675)			(1,285)			(122,469)			(111,140)			(11,329)
NOI		165,187			161,900			3,287			188,336			162,075			26,261
Non-cash adjustments to NOI		(1,040)			(704)			(336)			(4,399)			(795)			(3,604)
Adjusted NOI	$	164,147		$	161,196		$	2,951		$	183,937		$	161,280		$	22,657
Adjusted NOI % change								1.8	%
Property count(1)		204			204						227			211
Average occupancy		90.4	%		91.2	%					90.8	%		90.8	%
Average occupied square feet		12,548			12,665						14,502			13,046
Average annual total revenues per occupied square foot	$	28		$	28					$	28		$	28
Average annual base rent per occupied square foot	$	24		$	23					$	24		$	23

(1)

From our past presentation of SPP for the nine months ended September 30, 2014, we removed a MOB from SPP that was sold.

SPP NOI and Adjusted NOI. SPP NOI and adjusted NOI increased as a result of annual rent escalations.

Total Portfolio NOI and Adjusted NOI. Our total portfolio NOI and adjusted NOI increased primarily as a result of the impact of our MOB acquisitions in 2014 and 2015.

During the nine months ended September 30, 2015, 1.7 million square feet of new and renewal leases commenced at an average annual base rent of $24.42 per square foot compared to 1.8 million square feet of expiring and terminated leases with an average annual base rent of $24.54 per square foot. During the nine months ended September 30, 2015, we acquired 1.9 million square feet with an average annual base rent of $16.02 per square foot, including 1.2 million square feet with a triple net annual base rent of $10.74 per square foot, and disposed of 17,000 square feet with an average annual base rent of $17.50 per square foot.

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Hospital


	SPP							Total Portfolio
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2015		2014		Change			2015		2014		Change
Rental revenues(1)	$	64,182	$	62,532	$	1,650		$	64,220	$	62,569	$	1,651
Tenant recoveries		1,909		1,802		107			1,909		1,803		106
Total segment revenues		66,091		64,334		1,757			66,129		64,372		1,757
Operating expenses		(2,908)		(2,792)		(116)			(2,908)		(2,799)		(109)
NOI		63,183		61,542		1,641			63,221		61,573		1,648
Non-cash adjustments to NOI		764		302		462			764		301		463
Adjusted NOI	$	63,947	$	61,844	$	2,103		$	63,985	$	61,874	$	2,111
Adjusted NOI % change						3.4	%
Property count		16		16					16		16
Average capacity (beds)(2)		2,223		2,221					2,223		2,221
Average annual rent per bed	$	40,104	$	38,803				$	40,127	$	38,825

________________________________________

(1)

Represents rental and related revenues and income from DFLs.

(2)

NOI and Adjusted NOI. SPP and total portfolio NOI and adjusted NOI increased primarily as a result of additional rents earned in 2015 due to exceeding pre-established thresholds and annual rent escalations, partially offset by increased operating expenses.

Other Income and Expense Items

Interest income

Interest income increased $38 million to $89 million for the nine months ended September 30, 2015. The increase was primarily the result of: (i) fundings through our HC-One Facility in November 2014 and February 2015 (see Note 7 to the Consolidated Financial Statements), (ii) incremental interest income from the repayments of two development loans resulting from the appreciation of the underlying real estate assets and (iii) additional fundings under our mezzanine loan facility with Tandem in May 2015 (see Note 7 to the Consolidated Financial Statements). The increases in interest income were partially offset by a change in interest income recognition on our investment in the Four Seasons Notes (see Note 15 to the Consolidated Financial Statements).

Interest expense

Interest expense increased $33 million to $358 million for the nine months ended September 30, 2015. The increase was primarily the result of: (i) our senior unsecured notes offerings during 2014 and 2015, (ii) increased borrowings from our term loan originated in 2015, (iii) increased borrowings under our line of credit facility and (iv) lower capitalized interest. The increases in interest expense were partially offset by repayments of senior unsecured notes and mortgage debt that matured during 2014 and 2015. The increased borrowings were used to fund our investment activities and to refinance our debt maturities.

Depreciation and amortization expense

Depreciation and amortization expense increased $26 million to $370 million for the nine months ended September 30, 2015. The increase was primarily the result of the impact of our acquisitions and redevelopment projects placed in service during 2014 and 2015. The increases in depreciation and amortization expense were partially offset by additional depreciation expense recognized in 2014 as a result of a change in estimate of the depreciable life and residual value of certain properties.

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General and administrative expenses

General and administrative expenses increased $12 million to $74 million for the nine months ended September 30, 2015. The increase was primarily the result of a $7 million severance-related charge resulting from the resignation of our former Executive Vice President and Chief Investment Officer in June 2015. In addition, the increase was the result of higher compensation related expenses.

Acquisition and pursuit costs

Acquisition and pursuit costs increased $10 million to $23 million for the nine months ended September 30, 2015. The increase was primarily due to higher levels of transactional activity in 2015. Acquisition and pursuit costs were previously included in general and administrative expenses.

Impairments

During the nine months ended September 30, 2015, we recognized the following impairment charges: (i) $478 million related to our DFL investments with HCRMC, (ii) $112 million related to our investment in Four Seasons Notes and (iii) $3 million related to a MOB. See Notes 6 and 15 to the Consolidated Financial Statements.

Other (expense) income, net

Other (expense) income, net increased $6 million to $12 million for the nine months ended September 30, 2015. The increase was primarily the result of the impact from remeasuring assets and liabilities denominated in GBP to USD.

Income tax benefit (expense)

Income taxes decreased $9 million to a benefit of $7 million for the nine months ended September 30, 2015. The decrease was primarily the result of the tax benefit related to our share of operating losses from our RIDEA joint ventures formed as part of the Brookdale Transaction and related to our U.K. real estate investments in 2015.

Equity income from unconsolidated joint ventures

Equity income from unconsolidated joint ventures decreased $5 million to $34 million for the nine months ended September 30, 2015. The decrease was primarily the result of our share of losses recognized from the CCRC JV.

Impairment of investments in unconsolidated joint ventures

During the nine months ended September 30, 2015, we recognized an impairment charge of $27 million related to our equity investment in HCRMC (see Note 15 to the Consolidated Financial Statements).

Gain on sales of real estate

During the nine months ended September 30, 2015, we sold nine senior housing facilities and a MOB and recognized gains of $6 million. During the nine months ended September 30, 2014, we sold two post-acute/skilled nursing facilities, a hospital and a MOB, recognizing gains of $28 million.

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Liquidity and Capital Resources

We anticipate: (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, for the next 12 months primarily by using cash flow from operations, available cash balances and cash from our various financing activities.

Our principal investing 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.

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, as noted below, 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 October 30, 2015, we had a credit rating of BBB+ from Fitch, Baa1 from Moody’s and BBB+ from S&P on our senior unsecured debt securities.

Cash Flow Summary

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 and cash equivalents were $120 million and $184 million at September 30, 2015 and December 31, 2014, respectively, representing a decrease of $64 million. The following table sets forth changes in cash flows (in thousands):


	Nine Months Ended September 30,
	2015		2014		Change
Net cash provided by operating activities	$	867,660	$	883,022	$	(15,362)
Net cash used in investing activities		(1,685,585)		(957,225)		(728,360)
Net cash provided by (used in) financing activities		755,880		(142,825)		898,705

The decrease in operating cash flow is the result of a net paydown of working capital. 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.

The following are significant investing and financing activities for the nine months ended September 30, 2015:

made investments of $1.8 billion (development and acquisition of real estate, and investments in unconsolidated joint ventures and loans);

paid dividends on common stock of $784 million, which were generally funded by cash provided by our operating activities and cash on hand; and

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raised proceeds of $2.0 billion primarily from issuances of senior unsecured notes, the term loan originated in January 2015, our net borrowings under our bank line of credit, and issuances of common stock; and repaid $450 million of senior unsecured notes and mortgage debt.

Debt

Bank Line of Credit and Term Loan

Our $2.0 billion unsecured revolving line of credit facility (the “Facility”) matures on March 31, 2018 and contains a one-year extension option. Borrowings under the Facility accrue interest at LIBOR plus a margin that depends upon our credit ratings. We pay a facility fee on the entire revolving commitment that depends on our credit ratings. Based on our credit ratings at October 30, 2015, the margin on the Facility was 0.925%, and the facility fee was 0.15%. The Facility also includes a feature that will allow us to increase the borrowing capacity by an aggregate amount of up to $500 million, subject to securing additional commitments from existing lenders or new lending institutions. At September 30, 2015, we had $1.0 billion, including £242 million ($366 million), outstanding under the Facility with a weighted average effective interest rate of 1.52%.

On January 12, 2015, we entered into a credit agreement with a syndicate of banks for a £220 million ($333 million at September 30, 2015) four-year unsecured term loan (the “2015 Term Loan”) that accrues interest at a rate of GBP LIBOR plus 0.975%, subject to adjustments based on our credit ratings. Proceeds from this term loan were used to repay a £220 million draw on the Facility that partially funded the November 2014 HC-One Facility (see Note 7 to the Consolidated Financial Statements). Concurrently, we entered into a three-year interest rate swap agreement that effectively fixes the interest rate of the 2015 Term Loan at 1.79% (see Note 21 to the Consolidated Financial Statements). The 2015 Term Loan contains a one-year committed extension option.

The Facility and term loans 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% and (iv) require a minimum Fixed Charge Coverage ratio of 1.5 times. The Facility and term loans also require a Minimum Consolidated Tangible Net Worth of $9.5 billion at September 30, 2015. At September 30, 2015, we were in compliance with each of these restrictions and requirements.

Senior Unsecured Notes

At September 30, 2015, we had senior unsecured notes outstanding with an aggregate principal balance of $8.6 billion. Interest rates on the notes ranged from 2.79% to 6.88% with a weighted average effective interest rate of 4.71% and a weighted average maturity of six years at September 30, 2015. The senior unsecured notes contain certain covenants including limitations on debt, maintenance of unencumbered assets, cross-acceleration provisions and other customary terms. We believe we were in compliance with these covenants at September 30, 2015.

Mortgage Debt

At September 30, 2015, we had $940 million in aggregate principal amount of mortgage debt outstanding, which is secured by 63 healthcare facilities (including redevelopment properties) with a carrying value of $1.2 billion. At September 30, 2015, interest rates on the mortgage debt ranged from 3.16% to 8.35% with a weighted average effective interest rate of 6.21% and a weighted average maturity of three years.

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 and 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.

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Equity

At September 30, 2015, we had 464 million shares of common stock outstanding. At September 30, 2015, equity totaled $10.5 billion and our equity securities had a market value of $17.5 billion.

At September 30, 2015, 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 ATM 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. During the three and nine months ended September 30, 2015, we issued 1.25 million shares of common stock at a weighted average price of $40.58 for proceeds of $50 million, net of fees and commissions of $1 million. During October 2015, we issued 589,000 shares of common stock at a weighted average price of $39.20 for proceeds of $23 million, net of fees and commissions of $350,000. 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 U.S. Securities and Exchange Commission (the “SEC”) as part of a registration statement on Form S-3ASR, using a shelf registration process, which expires in June 2018. 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.

Capital Market Outlook

The capital markets have facilitated our continued growth, including our international expansion. For the 21 months ended September 30, 2015, we have raised $2.5 billion in senior unsecured notes, originated a £220 million ($333 million) four-year unsecured term loan and increased our Facility from $1.5 billion to $2.0 billion. The capital raised, in combination with available cash and borrowing capacity under our Facility, supported $2.1 billion and $1.9 billion of investments completed during the year ended December 31, 2014 and nine months ended September 30, 2015, respectively. We believe our equity and debt investors, as well as our banking relationships, will provide additional capital as we pursue new investment opportunities.

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Contractual Obligations

The following table summarizes our material contractual payment obligations and commitments at September 30, 2015 (in thousands):


			2015						More than
	Total(1)		(Three months)		2016-2017		2018-2019		Five Years
Bank line of credit(2)	$	1,000,824	$	—	$	—	$	1,000,824	$	—
Term loans(3)		540,784		—		207,528		333,256		—
Senior unsecured notes		8,600,000		—		1,650,000		1,050,000		5,900,000
Mortgage debt		940,452		7,542		861,085		8,655		63,170
Construction loan commitments(4)		62,634		18,704		43,930		—		—
Development commitments(5)		94,384		48,370		46,014		—		—
Ground and other operating leases		385,887		2,155		14,750		13,972		355,010
HCP Ventures IV support commitment		110,790		57,790		53,000		—		—
Interest(6)		2,686,146		61,067		832,257		553,628		1,239,194
Total	$	14,421,901	$	195,628	$	3,708,564	$	2,960,335	$	7,557,374

(1)

Excludes $95 million of other debt that represents Life Care Bonds and Demand Notes that have no scheduled maturities.

(2)

Includes £242 million ($366 million) translated to USD.

(3)

Represents £357 million translated to USD.

(4)

Represents commitments to finance development projects, related working capital and capital expenditures. Includes £40 million ($60 million) translated to USD.

(5)

Represents construction and other commitments for developments in progress.

(6)

Interest on variable-rate debt is calculated using rates in effect at September 30, 2015.

Off-Balance Sheet Arrangements

We own interests in certain unconsolidated joint ventures as described under 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 (see Note 18 to the Consolidated Financial Statements). In addition, we have certain properties which serve as collateral for debt that is owed by a previous owner of certain of our facilities. 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.”

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, post-acute/skilled nursing and hospital leases require the operator or tenant 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 operator or tenant expense reimbursements and contractual rent increases described above.

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Non-GAAP Financial Measures Reconciliations

Funds From Operations and Funds Available for Distribution

The following is a reconciliation from net income 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):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income applicable to common shares	$	115,046	$	247,208	$	38,613	$	723,651
Depreciation and amortization of real estate, in-place lease and other intangibles		134,704		122,975		369,629		343,496
Other depreciation and amortization		5,204		4,769		17,016		12,571
Impairments of real estate		—		—		2,948		—
Gain on sales of real estate		(52)		—		(6,377)		(28,010)
Equity income from unconsolidated joint ventures		(8,314)		(10,168)		(33,916)		(39,388)
FFO from unconsolidated joint ventures		20,530		14,571		69,322		48,683
Noncontrolling interests’ and participating securities’ share in earnings		2,908		3,851		9,586		13,310
Noncontrolling interests’ and participating securities’ share in FFO		(6,656)		(5,902)		(18,983)		(17,425)
FFO applicable to common shares		263,370		377,304		447,838		1,056,888
Distributions on dilutive convertible units		2,365		3,486		—		10,327
Diluted FFO applicable to common shares	$	265,735	$	380,790	$	447,838	$	1,067,215

Diluted FFO per common share	$	0.57	$	0.82	$	0.97	$	2.30

Weighted average shares used to calculate diluted FFO per common share		467,772		465,247		462,302		464,512

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014

Net income applicable to common shares	$	0.25	$	0.54	$	0.08	$	1.58
Depreciation and amortization of real estate, in-place lease and other intangibles		0.29		0.26		0.80		0.75
Other depreciation and amortization and impairment of real estate		0.01		0.01		0.04		0.02
Gain on sales of real estate		—		—		(0.01)		(0.06)
Joint venture and participating securities FFO adjustments		0.02		0.01		0.06		0.01
Diluted FFO applicable to common shares	$	0.57	$	0.82	$	0.97	$	2.30

Impact of adjustments to FFO:
Other impairments(1)	$	96,856	$	—	$	617,207	$	—
Transaction-related items(2)		1,538		(31,026)		28,973		(23,125)
Severance-related charge(3)		—		—		6,713		—
Foreign currency remeasurement losses (gains)		4,036		—		(5,497)		—
	$	102,430	$	(31,026)	$	647,396	$	(23,125)

FFO as adjusted applicable to common shares	$	365,800	$	346,278	$	1,095,234	$	1,033,763
Distributions on dilutive convertible units and other		3,443		3,554		10,198		10,383
Diluted FFO as adjusted applicable to common shares	$	369,243	$	349,832	$	1,105,432	$	1,044,146

Diluted FFO as adjusted per common share	$	0.79	$	0.75	$	2.36	$	2.25

Weighted average shares used to calculate diluted FFO as adjusted per common share		469,590		465,247		468,320		464,512

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
FFO as adjusted applicable to common shares	$	365,800	$	346,278	$	1,095,234	$	1,033,763
Amortization of market lease intangibles, net		(344)		(276)		(980)		(619)
Amortization of deferred compensation(4)		5,344		5,461		18,174		16,467
Amortization of deferred financing costs, net		5,224		4,648		14,950		14,122
Straight-line rents		(7,069)		(8,627)		(24,817)		(35,082)
DFL accretion(5)		(22,662)		(18,760)		(64,176)		(57,995)
Other depreciation and amortization		(5,204)		(4,769)		(17,016)		(12,571)
Deferred revenues – tenant improvement related		(746)		(456)		(2,137)		(1,673)
Deferred revenues – additional rents		254		551		641		1,253
Leasing costs and tenant and capital improvements		(23,212)		(17,044)		(50,879)		(44,502)
Lease restructure payments		6,067		4,289		16,368		4,289
Joint venture adjustments – CCRC entrance fees		8,386		3,978		22,048		3,978
Joint venture and other FAD adjustments(5)		(21,892)		(17,564)		(59,153)		(47,575)
FAD applicable to common shares	$	309,946	$	297,709	$	948,257	$	873,855
Distributions on dilutive convertible units		3,547		3,486		10,683		10,327
Diluted FAD applicable to common shares	$	313,493	$	301,195	$	958,940	$	884,182
Diluted FAD per common share	$	0.67	$	0.65	$	2.05	$	1.90
Weighted average shares used to calculate diluted FAD per common share		469,590		465,247		468,320		464,512

(1)

For the three months ended September 30, 2015, other impairments include: (i) $70 million related to our Four Seasons Notes and (ii) $27 million related to our equity investment in HCRMC. For the nine months ended September 30, 2015, other impairment include: (i) $478 million related to our DFL investments with HCRMC, (ii) $112 million related to our Four Seasons Notes and (iii) $27 million related to our equity investment in HCRMC.

(2)

The three and nine months ended September 30, 2014, include the benefit primarily from the Brookdale Transaction, consisting of:

(i) $108 million of net gains related to the terminated leases of the HCP owned 49-property portfolio; partially offset by a

(ii) $70 million charge to write-off the existing straight-line rents and intangible other assets, net related to the terminated leases of the 49-property portfolio; and (iii) $13 million in charges for direct costs.

(3)

The severance-related charge relates to the resignation of our former Executive Vice President and Chief Investment Officer.

(4)

Excludes $3 million related to the acceleration of deferred compensation for restricted stock units and stock options that vested upon the resignation of our former Executive Vice President and Chief Investment Officer, which is included in the severance-related charge for the nine months ended September 30, 2015.

(5)

Our ownership interest in HCRMC is accounted for using the equity method, which requires an ongoing elimination of DFL income that is proportional to our ownership in HCRMC. Further, our share of earnings from HCRMC (equity income) increases for the corresponding elimination of related lease expense recognized at the HCRMC entity level, which we present as a non-cash joint venture FAD adjustment.

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Critical Accounting Policies

The preparation of financial statements in conformity with GAAP requires 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. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2014 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”; our critical accounting policies have not changed during 2015.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for the impact of new accounting standards.

Item 3. 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 21 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 $8 million (see Note 21 to the Consolidated Financial Statements).

Interest Rate Risk. At September 30, 2015, we are exposed to market risks related to fluctuations in interest rates primarily on variable rate debt, which has been predominately hedged through interest rate swap contracts.

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. Conversely, changes in interest rates on variable rate debt and investments would change our future earnings and cash flows, but not significantly affect the fair value of those instruments. Assuming a one percentage point increase in the interest rate related to the variable-rate debt and variable-rate investments, and assuming no other changes in the outstanding balance as of September 30, 2015, net interest expense would increase by approximately $9 million, or $0.02 per common share on a diluted basis.

Foreign Currency Risk. At September 30, 2015, our exposure to foreign currencies primarily relates to U.K. investments in leased real estate, senior notes 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 three months ended September 30, 2015, 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

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rate during the quarter ended September 30, 2015, our cash flows would have decreased or increased, as applicable, by less than $1 million.

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 September 30, 2015, both the fair and carrying value of marketable debt securities was $118 million.

Item 4. Controls and Procedures

Evaluation of 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 Securities Exchange Act of 1934 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 Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), 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 Securities Exchange Act of 1934, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015. Based upon that evaluation, our Chief Executive Officer (Principal Executive Officer) and Chief Financial Officer (Principal Financial Officer) concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

There are no material changes to the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014, as updated by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a)

None.

(b)

None.

(c)

The table below sets forth information with respect to purchases of our common stock made by us or on our behalf or by any “affiliated purchaser,” as such term is defined in Rule 10b-18(a)(3) of the Securities Exchange Act of 1934, as amended, during the three months ended September 30, 2015.


					Maximum Number (Or
				Total Number Of Shares	Approximate Dollar Value)
		Average		(Or Units) Purchased As	Of Shares (Or Units) That
	Total Number	Price		Part Of Publicly	May Yet Be Purchased
	Of Shares	Paid Per		Announced Plans Or	Under The Plans Or
Period Covered	Purchased(1)	Share		Programs	Programs
July 1-31, 2015	318	$	38.45	—	—
August 1-31, 2015	158		39.02	—	—
September 1-30, 2015	8,064		37.05	—	—
Total	8,540		37.14	—	—

(1)

Represents restricted shares withheld under our equity incentive plans to offset tax withholding obligations that occur upon vesting of restricted shares and restricted stock units. 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 occurs.

Item 6. Exhibits

Pursuant to the rules and regulations of the SEC, we have filed certain agreements as exhibits to this Quarterly Report on Form 10-Q. These agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties were made solely for the benefit of the other parties to the applicable agreement and

were not intended to be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

may have been qualified in such agreement by disclosures that were made to the other party in connection with the negotiation of the applicable agreement;

may apply contract standards of “materiality” that are different from “materiality” under the applicable securities laws; and

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were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. The Company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this Form 10-Q not misleading.



3.1		Articles of Restatement of HCP (incorporated herein by reference to Exhibit 3.1 to HCP’s Registration Statement on Form S-3 (Registration No. 333-182824), filed July 24, 2012).

3.2		Fifth Amended and Restated Bylaws of HCP (incorporated herein by reference to Exhibit 3.1 to HCP’s Current Report on Form 8-K (File No. 1-08895), filed February 11, 2015).

10.1		Employment Agreement, effective as of September 8, 2015, between the Company and J. Justin Hutchens.*†

10.2		Amendment No. 1 to Employment Agreement, dated as of September 1, 2015, between the Company and J. Justin Hutchens.*†

10.3		Addendum #1 to Master Lease and Security Agreement, dated as of October 23, 2015, by and among the parties signatory thereto and HCR III Healthcare, LLC.*

10.4		Addendum #2 to Master Lease and Security Agreement, dated as of November 2, 2015, by and among the parties signatory thereto and HCR III Healthcare, LLC.*

31.1		Certification by Lauralee E. Martin, HCP’s Principal Executive Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).*

31.2		Certification by Timothy M. Schoen, HCP’s Principal Financial Officer, Pursuant to Securities Exchange Act Rule 13a-14(a).*

32.1		Certification by Lauralee E. Martin, 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 Timothy M. Schoen, 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 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.*

* Filed herewith.

** Furnished herewith.

† Management Contract or Compensatory Plan or Arrangement.

Table of Contents

SIGNATURES

Pursuant to the requirements 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.


Date: November 3, 2015	HCP, Inc.

	(Registrant)

	/s/ LAURALEE E. MARTIN
	Lauralee E. Martin
	President and Chief Executive Officer
	(Principal Executive Officer)


	/s/ TIMOTHY M. SCHOEN
	Timothy M. Schoen
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)


	/s/ SCOTT A. ANDERSON
	Scott A. Anderson
	Senior Vice President and
	Chief Accounting Officer
	(Principal Accounting Officer)

Ex10-1

EXHIBIT 10.1

EXECUTION VERSION

HCP, INC.
EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into effective as of September 8, 2015 (the “Effective Date”), by and between HCP, Inc. (the “Company”) and J. Justin Hutchens (“Executive”). Where the context permits, references to the Company shall include the Company and any successor of the Company.

W I T N E S S E T H:

WHEREAS, the Company and Executive mutually desire to set forth herein the terms and conditions pursuant to which Executive will serve as the Executive Vice President and Chief Investment Officer – Senior Housing and Care of the Company reporting to the Chief Executive Officer of the Company, effective as of the Effective Date.

NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements herein contained, together with other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto do hereby agree as follows:

1.SERVICES AND DUTIES. Subject to Section 2 hereof, from and after the Effective Date, Executive shall, pursuant to the terms of this Agreement, be employed by the Company as the Executive Vice President and Chief Investment Officer – Senior Housing and Care of the Company. The principal location of Executive’s employment with the Company shall be at the Company’s headquarters in Irvine, California, although Executive understands and agrees that Executive may be required to travel from time to time for business reasons. During the Term (as defined in Section 2), Executive shall be a full-time employee of the Company, shall dedicate substantially all of Executive’s working time and attention to the Company, and shall have no other employment or other business ventures which are undisclosed to the Company or which conflict with Executive’s duties under this Agreement. Executive shall have such authorities, duties and responsibilities as the Company’s chief executive officer (or his delegate) may from time to time assign to him and reasonably consistent with those customarily performed by an officer holding the position set forth above with a company having a similar size and nature of the Company. Notwithstanding the foregoing, nothing herein shall prohibit Executive from participating in trade associations or industry organizations which are related to the business of the Company or engaging in charitable, civic or political activities, so long as such interests do not materially interfere, individually or in the aggregate, with the performance of Executive’s duties hereunder. Executive agrees that he shall comply with the corporate policies of the Company as they are in effect from time to time throughout the Term (including, without limitation, the Company’s business conduct and ethics policies, as they may change from time to time).

2.TERM. Executive’s employment under the terms and conditions of this Agreement shall commence on the Effective Date. Such employment shall continue for a term of three (3) years following the Effective Date (the “Term”). Not extending the Term shall not constitute a breach of this Agreement and shall not constitute “Good Reason” for purposes of

this Agreement. Notwithstanding the above, the Term shall earlier expire immediately upon the termination of Executive’s employment pursuant to Section 5 hereof.

3.COMPENSATION.

(a) Base Compensation. The Company shall pay to Executive an initial base salary in the amount of $550,000 per annum in accordance with the regular payroll practices of the Company (the base salary as in effect from time to time, the “Base Compensation”). Payment of the Base Compensation is subject to customary employee contributions to any benefit programs in which Executive is enrolled. The Base Compensation may be increased from time to time at the Company’s sole discretion, but in no event shall the Base Compensation be reduced without Executive’s approval.

(b) Annual Cash Bonus. Executive shall receive a guaranteed cash bonus for the 2015 calendar year in the amount of $1,100,000 (the “Guaranteed Bonus”), which shall be paid no later than March 15, 2016, provided Executive is actively employed by the Company and has not provided a notice of resignation to the Company or received a notice of termination for Cause from the Company as of the date of payment. For each subsequent calendar year during the Term, Executive shall be eligible to receive an annual cash incentive award (an “Annual Bonus”), the actual amount of which bonus will be determined based on the achievement of performance criteria relating to both Executive and the Company, as determined each year in good faith by the Compensation Committee (the “Compensation Committee”) of the Board of Directors (the “Board”) of the Company (or any successor thereto). The Annual Bonus, if any, shall be paid to Executive by no later than March 15 of the year following the year to which such Annual Bonus relates, so long as Executive is actively employed by the Company and has not provided a notice of resignation to the Company or received a notice of termination for Cause from the Company as of the date of payment.

(i)As soon as practicable after the Effective Date, Executive shall be granted a one-time award of restricted stock units with a value of approximately $500,000, based on the average closing stock price on the 10 trading days immediately preceding the Effective Date, which stock grant shall vest in equal, annual tranches over three years following the date of grant, subject to Executive’s continued employment with the Company as of the applicable vesting date. The restricted stock units shall be subject to the terms and conditions of the Company’s 2014 Performance Incentive Plan (the “Plan”) and the applicable award agreement.

(ii)So long as Executive is actively employed by the Company and has not provided a notice of resignation to the Company or received a notice of termination from the Company as of the date of grant, in the first quarter of 2016 Executive shall be granted restricted stock units with an aggregate Value Upon

Grant (defined below) of approximately $600,000, which shall be allocated consistent with the vesting schedule of the 2016 long-term incentive awards granted to the other named executive officers, as determined by the Compensation Committee, subject to Executive’s continued employment with the Company as of the applicable vesting date. The restricted stock units shall be subject to the terms and conditions of the Plan and the applicable award agreements. “Value Upon Grant” means the fair market value (determined in accordance with the Plan) of the Company’s common stock on the date of the grant times the number of shares granted.

(d) Tax Withholding. All taxable compensation payable to Executive pursuant to this Agreement shall be subject to any applicable withholding taxes and such other taxes as are required under Federal law or the law of any state or governmental body to be collected with respect to compensation paid by the Company to Executive.

4.BENEFITS AND PERQUISITES.

(a) Retirement and Welfare Benefits. During the Term, Executive shall be eligible to participate in all fringe benefits, perquisites, and such other benefit plans and arrangements as are made available generally to the Company’s executive vice presidents. The benefits described herein shall be subject to the applicable terms of the applicable plans and shall be governed in all respects in accordance with the terms of such plans as from time to time in effect. Nothing in this Section 4, however, shall require the Company to maintain any benefit plan or provide any type or level of benefits to its current or former employees, including Executive.

(b) Paid Time Off. During the Term, Executive shall be entitled to accrue vacation (at a rate of not less than nineteen (19) days per full calendar year), in accordance with and subject to the Company’s vacation policies applicable to its executives generally as such policies are in effect from time to time.

(c) Relocation Expenses. The Company shall pay, or reimburse Executive for all reasonable relocation expenses, up to a maximum of $150,000, incurred by Executive for his relocation to the Orange County, California metropolitan area in accordance with the terms of the Company's relocation policy. If the Executive terminates his employment without Good Reason or is terminated by the Company for Cause prior to the end of the first twelve (12) months of the Term, the Executive shall be required to repay the Company the gross amount of any relocation expenses paid or reimbursed pursuant to this Section 4(c).

(d) Reimbursement of Expenses. The Company shall reimburse Executive for any and all expenses reasonably incurred by Executive during the Term in performing Executive’s duties hereunder, including travel, meals and accommodations, upon submission by Executive of vouchers or receipts and in compliance with such rules and policies relating thereto as the Company may from time to time adopt. Executive agrees to promptly submit and document any reimbursable

expenses in accordance with the Company’s expense reimbursement policies to facilitate the timely reimbursement of such expenses.

5.TERMINATION. Prior to the third anniversary of the Effective Date, the Term and Executive’s employment hereunder may be terminated (1) by the Company for “Cause” (as defined and determined below), effective on the date on which a written notice to such effect (a “Cause Termination Notice”) is delivered to Executive; (2) by the Company at any time without Cause, effective sixty (60) days following the date on which a written notice to such effect is delivered to Executive; (3) by Executive for “Good Reason” (as defined and determined below), in accordance with the notice, cure and termination periods set forth in the definition of such term below; or (4) by Executive at any time other than for Good Reason, effective sixty (60) days following the date on which a written notice to such effect is delivered to the Company (or its successors). In accordance with the foregoing provisions, the date upon which termination occurs shall be referred to herein as the “Termination Date.” In the event that the Company provides Executive notice of termination without Cause pursuant to clause (2) or Executive provides the Company notice of termination pursuant to clause (3) or clause (4), the Company will have the option to place the Executive on paid administrative leave during the notice period. Upon any termination of Executive’s employment hereunder, Executive shall be entitled to receive the following: (i) any accrued but unpaid Base Compensation (to be paid as provided in Section 3(a)); (ii) reimbursement for expenses incurred by Executive prior to the date of termination in accordance with Section 4(d) hereof; (iii) vested benefits, if any, to which Executive may be entitled under the Company’s employee benefit plans as of the date of termination; and (iv) any additional amounts or benefits due under any applicable plan, program, agreement or arrangement of the Company or its Affiliates (the amounts and benefits described in clauses (i) through (iv) above, collectively, the “Accrued Benefits”). Accrued Benefits under this Section 5 shall in all events be paid in accordance with the Company’s payroll procedures, expense reimbursement procedures or plan terms, as applicable, or as otherwise required in accordance with applicable law.

(a) Termination by the Company for Cause or by Executive without Good Reason. If Executive’s employment hereunder is terminated during the Term by the Company for Cause or by Executive without Good Reason, Executive shall not be entitled to any further compensation or benefits other than the Accrued Benefits.

(b) Termination by the Company without Cause or by Executive with Good Reason Prior to the Second Anniversary of the Effective Date. Subject to Section 5(f) below, if Executive’s employment hereunder is terminated prior to the second anniversary of the Effective Date (I) by the Company other than for Cause (and other than due to Executive’s death or “Disability” (as defined below)), or (II) by Executive with Good Reason, then Executive shall be entitled to (1) the Accrued Benefits and (2) subject to Executive’s execution of a general release of claims in the form attached hereto as Exhibit A (with such changes as may be reasonably required to such form to help ensure its enforceability in light of any changes in applicable law) (the “Release”) within twenty-one (21) days following the Termination Date, and the expiration of any revocation period with respect to such Release provided by applicable law, and provided that Executive

does not materially breach the restrictive covenants set forth in Section 6 hereof or in any other agreement between Executive and the Company or to which Executive is a party (collectively, the “Restrictive Covenants”) or any other ongoing obligation to which Executive is subject as of the Termination Date:

(i)an amount equal to two (2) times the sum of (x) Executive’s Base Compensation, at the rate in effect on the Termination Date and (y) the greater of (I) Executive’s annual incentive bonus paid or payable for the last fiscal year of the Company for which the Compensation Committee has determined bonuses for the Company’s executives generally prior to the Termination Date or (II) the Guaranteed Bonus, such amount to be paid in a lump sum in the month following the month in which Executive’s Separation from Service (as defined below) occurs; and

(ii)each equity-based award granted by the Company to Executive that is outstanding on the Termination Date will immediately vest as to any portion of the award that is scheduled to vest within two (2) years following the Termination Date; provided, however, that as to any such award that is subject to performance-based vesting requirements for which the applicable performance period is in progress on the Termination Date, such award shall remain outstanding until the end of such performance period and, upon a determination thereafter by the Compensation Committee as to the relevant level of performance achieved and the portion of the award eligible to vest based on such determination, Executive will be credited with two (2) years of continued service, as measured from the Termination Date, for purposes of applying any time-based vesting requirements applicable to the award. Any portion of any equity-based award granted by the Company to Executive that is not vested after giving effect to the foregoing acceleration provisions shall terminate as of the Termination Date (or, in the case of a performance-based award, as of the date of the Compensation Committee’s determination of the relevant level of performance achieved).

(c) Termination by the Company without Cause or by Executive with Good Reason During the Third Year of the Term. Subject to Section 5(f) below, if Executive’s employment hereunder is terminated after the second anniversary of the Effective Date and prior to the expiration of the Term (I) by the Company other than for Cause (and other than due to Executive’s death or Disability) or (II) by Executive with Good Reason, then Executive shall be entitled to (1) the Accrued Benefits and (2) subject to Executive’s execution of a Release within twenty-one (21) days following the Termination Date, and the expiration of any revocation period with respect to such Release provided by applicable law, and provided that Executive does not materially breach the Restrictive Covenants or any other ongoing obligation to which Executive is subject as of the Termination Date:

(i)an amount equal to (1) the remainder of Executive’s Base Compensation, at the rate in effect on the Termination Date, through the end of the Term and (2) the average of the Executive’s annual incentive bonuses for the

two consecutive fiscal years of the Company ending with the last fiscal year of the Company for which the Compensation Committee has determined bonuses for the Company’s executives generally prior to the Termination Date (or, if less, the average of Executive’s annual incentive bonuses for the entire period of his employment with the Company), such amount to be paid in a lump sum in the month following the month in which Executive’s Separation from Service occurs; and

(ii)each equity-based award granted by the Company to Executive that is outstanding on the Termination Date will immediately vest as to any portion of the award that is scheduled to vest by the end of the current calendar year; provided, however, that as to any such award that is subject to performance-based vesting requirements for which the applicable performance period is in progress on the Termination Date, such award shall remain open until the end of such performance period and, upon a determination thereafter by the Compensation Committee as to the relevant level of performance achieved and the portion of the award eligible to vest based on such determination, Executive will be credited with continued service through the end of such calendar year, as measured from the Termination Date, for purposes of applying any time-based vesting requirements applicable to the award. Any portion of any equity-based award granted by the Company to Executive that is not vested after giving effect to the foregoing acceleration provisions shall terminate as of the Termination Date (or, in the case of a performance-based award, as of the date of the Compensation Committee’s determination of the relevant level of performance achieved).

(d) Termination Due to Death or Disability. The Term and Executive’s employment hereunder shall automatically terminate upon Executive’s death or Disability. If Executive’s employment hereunder terminates due to death or Disability, then Executive shall not be entitled to any further compensation or benefits other than the Accrued Benefits.

(e) Welfare Benefit Continuation. Subject to Section 5(f) below, and subject to Executive’s execution of a Release within twenty-one (21) days following the Termination Date, and the expiration of any revocation period with respect to such Release provided by applicable law, and provided that Executive does not materially breach the Restrictive Covenants or any other ongoing obligation to which Executive is subject as of the Termination Date, in the event that Executive’s employment hereunder is terminated (i) by the Company other than for Cause (and other than due to Executive’s death or Disability) or (ii) by Executive without Good Reason, the Company shall reimburse Executive for the full amount of the Consolidated Omnibus Budget Reconciliation Act (“COBRA”) premiums incurred by Executive during the 24 month period following the date of such termination, provided that (A) Executive timely and validly elects COBRA continuation coverage; (B) such reimbursement does not result in adverse tax consequences to the Company under Section 105(h) of the Code or otherwise; and (C) such reimbursement shall immediately cease in the event that Executive

becomes eligible to participate in the health insurance plan of a subsequent employer or other service recipient (or at such time as the Company ceases to offer group medical coverage to its active executive employees or the Company is otherwise under no obligation to offer COBRA continuation coverage to Executive).

(f) Change in Control Plan. Notwithstanding the foregoing provisions, in the event that Executive would be entitled to severance benefits under the Company’s Change in Control Severance Plan, or any successor plan thereto (the “CIC Plan”), in connection with a termination of his employment described in Section 5(b), Section 5(c) or Section 5(e) above, Executive will be entitled to receive the benefits provided under the CIC Plan. In no event will Executive be entitled to receive severance benefits under both the CIC Plan and this Agreement.

In the event that any of the payments and other benefits provided under this Agreement or otherwise payable to Executive (i) constitute “parachute payments” within the meaning of Section 280G of the Code and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code (“Excise Tax”), then Executive’s payments and benefits under this Agreement or otherwise shall be payable either

(A) in full (with the Executive paying any excise taxes due), or

(B) in such lesser amount which would result in no portion of such payments or benefits being subject to the Excise Tax, whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by Executive, on an after-tax basis, of the greatest amount of payments and benefits under this Agreement or otherwise, notwithstanding that all or some portion of such payments or benefits may be taxable under Section 4999 of the Code. Any reduction in the payments and benefits required by this Section will made in the following order: (i) reduction of cash payments; (ii) reduction of accelerated vesting of equity awards other than stock options; (iii) reduction of accelerated vesting of stock options; and (iv) reduction of other benefits paid or provided to Executive.

(g) Definitions. For purposes of this Agreement:

“Affiliate” means an affiliate of the Company (or other referenced entity, as the case may be) as defined in Rule 12b-2 promulgated under Section 12 of the Securities Exchange Act of 1934, as amended.

“Cause” means the occurrence of any of the following: (i) Executive’s willful and continued failure to perform his duties with the Company (other than any such failure resulting from his or her incapacity due to physical or mental illness) after a written demand for performance is delivered to Executive by the Company, which demand specifically identifies the manner in which the Company believes that Executive has not performed his duties; (ii) Executive’s willful and continued failure to follow and comply with the policies of the

Company as in effect from time to time (other than any such failure resulting from Executive’s incapacity due to physical or mental illness) after a written demand for performance is delivered to Executive by the Company, which demand specifically identifies the manner in which the Company believes that Executive has not followed or complied with such Company policies; (iii) Executive’s willful commission of an act of fraud or dishonesty resulting in material economic or financial injury to the Company; (iv) Executive’s willful engagement in illegal conduct or gross misconduct, in each case which is materially and demonstrably injurious to the Company; (v) Executive’s breach of any provision of Section 6 of this Agreement; or (vi) Executive’s indictment for, conviction of, or a plea of guilty or nolo contendere to any felony.

For purposes of clarification, if the definition of “Cause” set forth above, and the process associated with it, differs from the definition of cause (or similar term) in any stock incentive plan or agreement of the Company or any of its Affiliates, including the Company’s incentive stock award plan or any other such plan or agreement under which a grant of restricted stock shall be made, the definition set forth above shall control.

“Disability” means that Executive (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under an accident and health plan, or disability plan, covering employees of the Company or an Affiliate of the Company.

“Good Reason” means the occurrence, without the express prior written consent of Executive, of any of the following events: (i) the failure by the Company to pay Executive any portion of Executive’s Base Compensation within ten (10) days of the date such compensation is due, (ii) the relocation of Executive’s principal location of employment, to a location outside a fifty (50) mile radius from Irvine, California, (iii) any material diminution of Executive’s duties, responsibilities or authorities hereunder, (iv) any material breach by the Company of any of its material obligations to Executive, or (v) any failure of the Company to obtain the assumption in writing of its obligations under this Agreement by any successor to all or substantially all of its business or assets within thirty (30) days after any reconstruction, amalgamation, combination, merger, consolidation, sale, liquidation, dissolution or similar transaction, unless such assumption occurs by operation of law. Notwithstanding the foregoing, “Good Reason” to terminate Executive’s employment shall not exist unless (a) a written notice has first been delivered to the Board by Executive (the “Good Reason Notice”), which Good Reason Notice (1) specifically identifies the event(s) Executive believes constitutes Good Reason and (2) provides thirty (30) days from the date of such Good Reason Notice for the Company to cure such circumstances (the “Good Reason Period”) and (b) the Company has failed to timely cure such circumstances. If the Company fails to timely cure such circumstances in accordance with the foregoing, Executive may send a notice to the Board that he is terminating his employment for Good Reason (“Good Reason Termination Notice”), in which case his employment hereunder shall thereupon be terminated for Good Reason. If any Good Reason Notice to the Board shall not have been delivered by Executive within ninety (90) days following the date

Executive becomes aware of the purported existence of a Good Reason event, or any Good Reason Termination Notice to the Board shall not have been delivered by Executive within thirty (30) days following the end of the Good Reason Period, then any purported termination of Executive’s employment relating to the applicable event shall not be a termination for Good Reason under this Agreement.

As used herein, a “Separation from Service” occurs when Executive dies, retires, or otherwise has a termination of employment with the Company that constitutes a “separation from service” within the meaning of Treasury Regulation Section 1.409A-1(h)(1), without regard to the optional alternative definitions available thereunder.

(h) Resignation as Officer or Director. Upon a termination of Executive’s employment hereunder, unless requested otherwise by the Company, Executive shall resign each position (if any) that Executive then holds as an officer of the Company or as an officer or director of any of their Affiliates.

(i) Section 409A. The intent of the parties is that payments and benefits under this Agreement shall not result in the imputation of any tax, penalty or interest pursuant to Section 409A of the Code, and accordingly, to the maximum extent permitted, this Agreement shall be construed and interpreted consistent with that intent. Notwithstanding anything contained herein to the contrary, Executive shall not be considered to have terminated employment with the Company for purposes of any payments under this Agreement which are subject to Section 409A of the Code until the Executive has incurred a “separation from service” from the Company within the meaning of Section 409A of the Code. Each amount to be paid or benefit to be provided under this Agreement shall be construed as a separate identified payment for purposes of Section 409A of the Code. Without limiting the foregoing and notwithstanding anything contained herein to the contrary, to the extent required in order to avoid the imputation of any tax, penalty or interest pursuant to Section 409A of the Code, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to this Agreement during the six-month period immediately following an Executive’s separation from service shall instead be paid on the first business day after the date that is six months following the Executive’s separation from service (or, if earlier, the Executive’s date of death). To the extent required in order to avoid the imputation of any tax, penalty or interest pursuant to Section 409A of the Code, amounts reimbursable to Executive under this Agreement shall be paid to Executive on or before the last day of the year following the year in which the expense was incurred and the amount of expenses eligible for reimbursement (and in kind benefits provided to Executive) during one year may not affect amounts reimbursable or provided in any subsequent year. The Company makes no representation that any or all of the payments described in this Agreement will be exempt from or comply with Section 409A of the Code and makes no undertaking to preclude Section 409A of the Code from applying to any such payment.

6.COVENANTS. Executive acknowledges that during the period of his employment with the Company or any Affiliate, he shall have access to the Company’s “Confidential Information” (as defined below) and will meet and develop relationships with the Company’s potential and existing suppliers, financing sources, clients, customers and employees. Accordingly, Executive agrees to the following provisions of this Section 6 (in addition to Executive’s confidentiality obligations to the Company and its subsidiaries pursuant to the Company’s policies as in effect from time to time).

(a) Noncompetition. Executive agrees that during the period of his employment with the Company, Executive shall not: (A) directly or indirectly, engage in, manage, operate, control, supervise, or participate in the management, operation, control or supervision of any business or entity which competes with (any such action individually and in the aggregate, to compete with) the Company or any of its subsidiaries (collectively, the “Company Group”) or serve as an employee, consultant or in any other capacity for such business or entity; (B) have any ownership or financial interest, directly, or indirectly, in any competitor including, without limitation, as an individual, partner, shareholder (other than as a shareholder of a publicly-owned corporation in which the Executive owns less than five percent (5%) of the outstanding shares of such corporation), officer, director, employee, principal, agent or consultant, or (C) serve as a representative of any business organization; any or all of which, without first obtaining written approval of the chief executive officer of the Company. Executive also agrees that as long as he is employed by the Company, he will not undertake the planning or organization of any business activity competitive with the Company Group.

(b) Solicitation of Employees, Etc. Executive agrees that during the period of his employment with the Company and for twelve (12) months thereafter, Executive shall not, directly or indirectly, other than in connection with carrying out his duties during the period of his employment with the Company, solicit or induce any of the employees or consultants of the Company Group (or individuals who served as employees or consultants of the Company Group at any time during the preceding nine (9) month period): (i) to terminate their employment or relationship with the Company Group, and/or (ii) to work for the Executive or any competitor of the Company Group.

(c) Solicitation of Clients, Etc. Executive agrees that during the period of his employment with the Company and for twelve (12) months thereafter, he will not use any Trade Secrets or Confidential Information (as defined below) to, directly or indirectly, solicit, take away, divert or attempt to divert, the business or patronage of any clients or customers of the Company for the purpose of providing services that materially compete with the products provided by the Company at the time of Executive’s termination. For purposes of this Agreement, “products provided by the Company” includes not only products and services which the Company then provides and/or markets or sells, but also those which it is in the process of researching and/or developing, at the time of Executive’s termination, and/or as to which, at the time of Executive’s termination, the

Company has a strategic business plan in place to research, develop and/or market at some time in the future. The restrictions on soliciting or providing services to customers of the Company apply to: (i) any customer or customer contact of the Company with whom Executive has had any business relations during his employment (whether before or after the Effective Date) with the Company; and (ii) any customer or customer contact who was a customer or customer contact of the Company on the date of Executive’s termination from the Company or during the twelve-month period prior to such termination, or who was a prospective customer or customer contact of the Company with whom the Company had actually met with, or had written or telephonic communications with, during said period(s).

(d) Disparaging Comments. Executive agrees not to make critical, negative or disparaging remarks about the Company or any of its Affiliates, including, but not limited to, comments about any of its assets, services, management, business or employment practices, and not to voluntarily aid or voluntarily assist any person in any way with respect to any third party claims pursued against the Company Group. Nothing in this Section 6(d) will prevent Executive or the Company from responding fully and accurately to any question, inquiry or request for information when required by applicable law or legal process.

(e) Confidentiality. The Company and the Executive acknowledge that:

(i)The Company’s business is highly competitive;

(ii)The essence of that portion of the Company’s business in which the Executive will be involved consists, in large degree, of trade secrets, proprietary or confidential business or financial affairs information, materials, know-how (whether or not in writing), technology, product information, personnel information regarding its employees, and intellectual property belonging to the Company and confidential and proprietary business and client relationships (all of the foregoing will be referred to collectively as “Trade Secrets”), which have been developed at great investment of time and resources by the Company Group so as to engender substantial good will of the Company, all of which are and will be the exclusive property of the Company, protected and kept secret by the Company; and

(iii)Without limiting Executive’s obligations under the foregoing, the Executive agrees that during the period of his employment with the Company and at all times thereafter, Executive shall keep secret and retain in strictest confidence and shall not use for his benefit or the benefit of others, except in connection with the business and affairs of the Company, all confidential information of and confidential matters (whether available in written, electronic form or orally) relating to (A) the Company Group’s pricing and business (including, without limitation, the strategies employed by and the actual investments of any member of the Company Group and the contemplated business strategies and/or investments of any member of the Company Group),

(B) all corporations or other business organizations in which the Company Group has or has had an investment and (C) third parties learned by Executive heretofore or hereafter directly or indirectly in connection with Executive’s employment with the Company or from the Company Group (the “Confidential Information”). In consideration of, and as a condition to, continued access to Confidential Information and without prejudice to or limitation on any other confidentiality obligation imposed by agreement or law, Executive hereby agrees to undertake to use and protect Confidential Information in accordance with restriction placed on its use or disclosure. Without limiting the foregoing, Executive shall not disclose such Confidential Information to any director, officer, partner, employee or agent of the Company Group unless in Executive’s reasonable good faith judgment, such person has a need to know such Confidential Information in furtherance of the Company Group’s business, and (except in connection with the business and affairs of the Company) Executive shall not disclose Confidential Information to anyone outside of the Company Group except with the Company’s express written consent.

(iv)Executive acknowledges that the Company’s rights in its Trade Secrets and Confidential Information would be misappropriated should the Executive use or disclose to others the Trade Secrets and/or Confidential Information outside the scope of his employment pursuant to this Agreement.

(v)Executive agrees that during the period of his employment with the Company and at all times thereafter, Executive shall not directly or indirectly, use, disseminate, or disclose, in whole or in part, any of the Company Group’s Trade Secrets to any person, firm, corporation, association, or other entity for any reason or purpose whatsoever, other than (A) in the regular and proper scope and course of Executive’s employment with Company, or (B) as required by law, provided, however, that Executive will give Company reasonable advance notice of any such disclosure or use that is required by law.

(vi)As used in this Agreement, each of the terms “Trade Secrets” and “Confidential Information” will not include any information that becomes generally known to the public or within the relevant trade or industry unless it becomes known due to Executive’s violation of this Agreement.

(f) Cooperation. Executive agrees that at all times following the termination of his employment, Executive will cooperate in all reasonable respects with the Company and its Affiliates in connection with (i) any and all existing or future litigation, actions or proceedings (whether civil, criminal, administrative, regulatory or otherwise) brought by or against the Company or any of its Affiliates, or (ii) any audit of the financial statements of the Company or any Affiliate with respect to the period of time when Executive was employed by the Company or any Affiliate, in each case to the extent the Company reasonably deems Executive’s cooperation necessary. Executive shall be reimbursed for all reasonable out-of-pocket expenses incurred by Executive as a result of such cooperation. With respect to any and all existing or future litigation, actions or

proceedings (whether civil, criminal, administrative, regulatory or otherwise) brought against Executive in connection with his employment by the Company, the Company will honor, and proceed in accordance with, its bylaws as in effect from time to time.

(g) No Limitation. Nothing contained in this Section 6 shall limit any common law or statutory obligation that Executive may have to the Company or any of its Affiliates. For purposes of all provisions of this Section 6, the “Company” refers to the Company and any incorporated or unincorporated Affiliates of the Company, including any entity which becomes Executive’s employer as a result of any reorganization or restructuring of the Company for any reason.

(h) Acknowledgement. Executive agrees and acknowledges that each restrictive covenant in this Section 6 is reasonable as to duration, terms and geographical area and that the same protects the legitimate interests of the Company and its Affiliates, imposes no undue hardship on Executive, is not injurious to the public, and that, notwithstanding any provision in this Agreement to the contrary, any violation of this restrictive covenant shall be specifically enforceable in any court of competent jurisdiction. Executive agrees and acknowledges that a portion of the compensation paid to Executive under this Agreement will be paid in consideration of the covenants contained in this Section 6, the sufficiency of which consideration is hereby acknowledged. If any provision of this Section 6 as applied to Executive or to any circumstance is adjudged by a court with jurisdiction upon short notice to be invalid or unenforceable, the same shall in no way affect any other circumstance or the validity or enforceability of any other provisions of this Section 6. If the scope of any such provision, or any part thereof, is too broad to permit enforcement of such provision to its full extent, Executive agrees that the court making such determination shall have the power to reduce the duration and/or area of such provision, and/or to delete specific words or phrases, and in its reduced form, such provision shall then be enforceable and shall be enforced. Executive agrees and acknowledges that the material breach of this Section 6 will cause irreparable injury to the Company and upon such breach of any provision of this Section 6, the Company shall be entitled to seek injunctive relief, specific performance or other equitable relief by any court with jurisdiction upon short notice; provided, however, that this shall in no way limit any other remedies which the Company may have (including, without limitation, the right to seek monetary damages). Each of the covenants in this Section 6 shall be construed as an agreement independent of any other provisions in this Agreement.

(i) Permitted Statements. Nothing in this Agreement shall restrict either party from making truthful statements (i) when required by law, subpoena, court order or the like; (ii) when requested by a governmental, regulatory, or similar body or entity; or (iii) in confidence to a professional advisor for the purpose of securing professional advice.

(j) Further Representations and Covenants. Executive represents that he is able to accept employment with the Company as its Executive Vice President and Chief Investment Officer – Senior Housing and Care and carry out the work that such position would involve without breaching any obligations owed to any current or former employer of Executive. Executive further represents and covenants that he has not removed or taken, and will not remove or take, any confidential documents or proprietary data or materials of any kind, electronic or otherwise, from any current or former employer without written authorization from such current or former employer, nor will Executive use or disclose any such confidential information in connection with his employment with the Company, nor will he solicit the employees or clients/customers of any former employer in violation of any legal or contractual obligation owed to such former employer, including but not limited to the letter agreement entered into between Executive and National Health Investors, Inc. on August 10, 2015.

7.ASSIGNMENT. This Agreement, and all of the terms and conditions hereof, shall bind the Company and its successors and assigns and shall bind Executive and Executive’s heirs, executors and administrators. Neither this Agreement, nor any of the Company’s rights or obligations hereunder, may be assigned or otherwise subject to hypothecation by Executive, and any such attempted assignment or hypothecation shall be null and void. The Company may assign the rights and delegate the obligations of the Company hereunder, in whole or in part, to any of the Company’s Affiliates or parent corporations, or to any other successor or assign in connection with the sale of all or substantially all of the Company’s assets or stock or in connection with any merger, acquisition and/or reorganization, provided the assignee assumes the obligations of the Company hereunder.

8.GENERAL.

(a) Notices. Any notices provided hereunder must be in writing and shall be deemed effective upon the earlier of one (1) business day following personal delivery (including personal delivery by telecopy or telex), or the third (3rd) business day after mailing by first class mail to the recipient at the address indicated below:

To the Company:

Chief Executive Officer
HCP, Inc.
1920 Main Street, Suite 1200
Irvine, CA 92614

To Executive:

At the address shown in the Company’s personnel records

or to such other address or to the attention of such other person as the recipient party will have specified by prior written notice to the sending party.

(b) Severability. Any provision of this Agreement which is deemed by a court of competent jurisdiction to be invalid, illegal or unenforceable in any jurisdiction shall, as to that jurisdiction and subject to this paragraph be ineffective to the extent of such invalidity, illegality or unenforceability, without affecting in any way the remaining provisions hereof in such jurisdiction or rendering that or any other provisions of this Agreement invalid, illegal, or unenforceable in any other jurisdiction. If any covenant should be deemed invalid, illegal or unenforceable by a court of competent jurisdiction because its scope is considered excessive, such covenant shall be modified so that the scope of the covenant is reduced only to the minimum extent necessary to render the modified covenant valid, legal and enforceable.

(c) Entire Agreement. This document, together with the CIC Plan and the other documents referred to herein and all restrictive covenants in any and all agreements between Executive and the Company or to which Executive is a party (the “Integrated Document”), constitutes the final, complete, and exclusive embodiment of the entire agreement and understanding between the parties related to the subject matter hereof and except as otherwise explicitly set forth in the Integrated Document, supersedes and preempts any prior or contemporaneous understandings, agreements, or representations by or between the parties, written or oral.

(d) Counterparts. This Agreement may be executed on separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same agreement. Signatures delivered by facsimile or “pdf” shall be effective for all purposes.

(e) Amendments. No amendments or other modifications to this Agreement may be made except by a writing signed by all parties. No amendment or waiver of this Agreement requires the consent of any individual, partnership, corporation or other entity not a party to this Agreement. Nothing in this Agreement, express or implied, is intended to confer upon any third person any rights or remedies under or by reason of this Agreement.

(f) Choice of Law. All questions concerning the construction, validity and interpretation of this Agreement shall be governed by the laws of the State of California without giving effect to principles of conflicts of law of such state.

(g) Survivorship. The provisions of this Agreement necessary to carry out the intention of the parties as expressed herein shall survive the termination or expiration of this Agreement.

(h) Waiver. The waiver by either party of the other party’s prompt and complete performance, or breach or violation, of any provision of this Agreement shall not operate nor be construed as a waiver of any subsequent breach or violation, and the failure by any party hereto to exercise any right or remedy which it may possess hereunder shall not operate nor be construed as a bar to the exercise of

such right or remedy by such party upon the occurrence of any subsequent breach or violation. No waiver shall be deemed to have occurred unless set forth in a writing executed by or on behalf of the waiving party. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived.

(i) Headings. The subject heading of this Agreement are for convenience and reference only and in no way define, describe, extend or limit the scope or intent of this Agreement or the intent of any provision hereof.

(j) Construction. The parties acknowledge that this Agreement is the result of arm’s-length negotiations between sophisticated parties, each afforded representation by legal counsel. Each and every provision of this Agreement shall be construed as though both parties participated equally in the drafting of the same, and any rule of construction that a document shall be construed against the drafting party shall not be applicable to this Agreement.

9.ARBITRATION.

(a) If any legally actionable dispute arises which cannot be resolved by mutual discussion between the parties, each of Executive and the Company agree to resolve that dispute by arbitration before an arbitrator experienced in employment law. Said arbitration will be conducted pursuant to the JAMS Employment Arbitration Rules and Procedures and applicable California law. The parties agree that this arbitration agreement includes any such disputes that the Company and its related entities may have against Executive, or Executive may have against the Company and/or its related entities and/or employees, arising out of or relating to Executive’s employment or its termination including any claims of discrimination or harassment in violation of applicable law and any other aspect of Executive’s compensation, training, employment, or its termination.

(b) The parties further agree that this arbitration provision is the exclusive and binding remedy for any such dispute and will be used instead of any court action, which is hereby expressly waived, except for any request by either party for temporary or preliminary injunctive relief pending arbitration in accordance with applicable law or an administrative claim with an administrative agency. THE PARTIES HEREBY WAIVE ANY RIGHTS THEY MAY HAVE TO TRIAL BY JUDGE OR JURY.

(c) The parties agree that the arbitration shall be conducted in Los Angeles County, California, unless otherwise mutually agreed.

(d) The provisions of Section 1281.8 of the California Code of Civil Procedure with respect to provisional remedies will apply to any such arbitration. In any such arbitration proceeding, any hearing must be transcribed by a certified court

reporter and the arbitrator’s decision must be set forth in writing, consistent with the law of California and supported by essential findings of fact and conclusion of law. The arbitrator may issue any remedy or award available under applicable law but may not add to, modify, change or disregard any lawful terms of this Agreement or issue an award or remedy that is contrary to the law of California. The parties further agree that each party shall pay its own costs and attorneys’ fees, if any; provided, however, the Company shall pay any costs and expenses that Employee would not otherwise have incurred if the dispute had been adjudicated in a court of law, rather than through arbitration, including the arbitrator’s fee, any administrative fee, and any filing fee in excess of the maximum court filing fee in the jurisdiction in which the arbitration is commenced. If either party prevails on a statutory claim that affords the prevailing party an award of attorneys’ fees, then the arbitrator may award reasonable attorneys’ fees to the prevailing party, consistent with applicable law.

10.REPRESENTATIONS. Each party represents and warrants that (a) such party is not subject to any contract, arrangement, agreement, policy or understanding, or to any statute, governmental rule or regulation, that in any way limits such party’s ability to enter into and fully perform such party’s obligations under this Agreement; (b) such party is not otherwise unable to enter into and fully perform such party’s obligations under this Agreement; and (c) upon the execution and delivery of this Agreement by both parties, this Agreement shall be such party’s valid and binding obligation, enforceable against such party in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally.

11.INCONSISTENCIES. In the event of any inconsistency between any provision of this Agreement and any provision of any other Company arrangement, the provisions of this Agreement shall control to the extent more favorable to Executive unless Executive otherwise agrees in a writing that expressly refers to the provision of this Agreement whose control he is waiving.

12.BENEFICIARIES/REFERENCES. Executive shall be entitled, to the extent permitted under applicable law, to select and change a beneficiary or beneficiaries to receive any compensation or benefit hereunder following Executive’s death by giving written notice thereof. In the event of Executive’s death or a judicial determination of his incompetence, references in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary, estate or other legal representative.

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IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties hereto have executed and delivered this Agreement as of the year and date first above written.

THIS AGREEMENT CONTAINS AN ARBITRATION PROVISION WHEREBY EACH PARTY AGREED TO SUBMIT DISPUTES TO BINDING ARBITRATION.

			HCP, INC.
			/s/ Lauralee E. Martin

			By:	Lauralee E. Martin President and Chief Executive Officer

			J. JUSTIN HUTCHENS

			/s/ J. Justin Hutchens

Exhibit A

FORM OF RELEASE AGREEMENT1

This Release Agreement (this “Release Agreement”) is entered into this day of 20 , by and between J. Justin Hutchens, an individual (“Executive”), and HCP, Inc., a Maryland corporation (the “Company”).

WHEREAS, Executive has been employed by the Company; and

WHEREAS, Executive’s employment by the Company has terminated and, in connection with the Employment Agreement between the Company and Executive dated August __, 201_ (the “Employment Agreement”), the Company and Executive desire to enter into this Release Agreement upon the terms set forth herein;

NOW, THEREFORE, in consideration of the covenants undertaken and the releases contained in this Release Agreement, and in consideration of the obligations of the Company (or one of its subsidiaries) to pay severance benefits (conditioned upon this Release Agreement) under and pursuant to the Employment Agreement, Executive and the Company agree as follows:

1. Release. Executive, on behalf of himself or herself, his or her descendants, dependents, heirs, executors, administrators, assigns, and successors, and each of them, hereby acknowledges full and complete satisfaction of and covenants not to sue and fully releases and discharges the Company and each of its parents, subsidiaries and affiliates, past and present, as well as its and their trustees, directors, officers, members, managers, partners, agents, attorneys, insurers, employees, stockholders, representatives, assigns, and successors, past and present, and each of them, hereinafter together and collectively referred to as the “Releasees,” with respect to and from any and all claims, wages, demands, rights, liens, agreements or contracts (written or oral), covenants, actions, suits, causes of action, obligations, debts, costs, expenses, attorneys’ fees, damages, judgments, orders and liabilities of whatever kind or nature in law, equity or otherwise, whether now known or unknown, suspected or unsuspected, and whether or not concealed or hidden (each, a “Claim”), which he or she now owns or holds or he or she has at any time heretofore owned or held or may in the future hold as against any of said Releasees (including, without limitation, any Claim arising out of or in any way connected with Executive’s service as an officer, director, employee, member or manager of any Releasee, Executive’s separation from his or her position as an officer, director, employee, manager and/or member, as applicable, of any Releasee, or any other transactions, occurrences, acts or omissions or any loss, damage or injury whatever), whether known or unknown, suspected or unsuspected, resulting from any act or omission by or on the part of said Releasees, or any of them, committed or omitted prior to the date of this Release Agreement including, without limiting the generality of the foregoing, any Claim under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of 1967, the Americans with Disabilities Act, the Family and

_______________________

1The Company may modify this form as to any individual employed outside of California.

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Medical Leave Act of 1993, the California Fair Employment and Housing Act, the California Family Rights Act, or any other federal, state or local law, regulation, or ordinance, or any Claim for severance pay, bonus, sick leave, holiday pay, vacation pay, life insurance, health or medical insurance or any other fringe benefit, workers’ compensation or disability; provided, however, that the foregoing release shall not apply to any obligation of the Company to Executive pursuant to any of the forgoing: (1) any obligation created by or arising out of the Section 5 of the Employment Agreement for which receipt or satisfaction has not been acknowledged, (2) any equity-based awards previously granted by the Company to Executive, to the extent that such awards continue after the termination of Executive’s employment with the Company in accordance with the applicable terms of such awards; (3) any right to indemnification that Executive may have pursuant to the Fourth Amended and Restated Bylaws of the Company, its corporate charter or under any written indemnification agreement with the Company (or any corresponding provision of any subsidiary or affiliate of the Company) with respect to any loss, damages or expenses (including but not limited to attorneys’ fees to the extent otherwise provided) that Executive may in the future incur with respect to his service as an employee, officer or director of the Company or any of its subsidiaries or affiliates; (4) with respect to any rights that Executive may have to insurance coverage for such losses, damages or expenses under any Company (or subsidiary or affiliate) directors and officers liability insurance policy; (5) any rights to continued medical or dental coverage that Executive may have under COBRA; (6) any rights to payment of benefits that Executive may have under a retirement plan sponsored or maintained by the Company that is intended to qualify under Section 401(a) of the Internal Revenue Code of 1986, as amended, or (7) any deferred compensation or supplemental retirement benefits that Executive may be entitled to under a nonqualified deferred compensation or supplemental retirement plan of the Company. In addition, this release does not cover any Claim that cannot be so released as a matter of applicable law. Executive acknowledges and agrees that he or she has received any and all leave and other benefits that he or she has been and is entitled to pursuant to the Family and Medical Leave Act of 1993.

2. Acknowledgment of Payment of Wages. Except for accrued vacation (which the parties agree totals approximately [ ] days of pay) and salary for the current pay period, Executive acknowledges that he/she has received all amounts owed for his or her regular and usual salary (including, but not limited to, any bonus, severance, or other wages), and usual benefits through the date of this Agreement.

3. 1542 Waiver. It is the intention of Executive in executing this Release Agreement that the same shall be effective as a bar to each and every Claim hereinabove specified. In furtherance of this intention, Executive hereby expressly waives any and all rights and benefits conferred upon him or her by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and expressly consents that this Release Agreement shall be given full force and effect according to each and all of its express terms and provisions, including those related to unknown and unsuspected Claims, if any, as well as those relating to any other Claims hereinabove specified. SECTION 1542 provides:

“A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS OR HER FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM OR HER MUST HAVE MATERIALLY AFFECTED HIS OR HER SETTLEMENT WITH THE DEBTOR.”

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Executive acknowledges that he may hereafter discover Claims or facts in addition to or different from those which Executive now knows or believes to exist with respect to the subject matter of this Release Agreement and which, if known or suspected at the time of executing this Release Agreement, may have materially affected this settlement. Nevertheless, Executive hereby waives any right, Claim or cause of action that might arise as a result of such different or additional Claims or facts. Executive acknowledges that Executive understands the significance and consequences of such release and such specific waiver of SECTION 1542.

4. ADEA Waiver. Executive expressly acknowledges and agrees that by entering into this Release Agreement, Executive is waiving any and all rights or Claims that he or she may have arising under the Age Discrimination in Employment Act of 1967, as amended (the “ADEA”), which have arisen on or before the date of execution of this Release Agreement. Executive further expressly acknowledges and agrees that:

A. In return for this Release Agreement, the Executive will receive consideration beyond that which the Executive was already entitled to receive before entering into this Release Agreement;

B. Executive is hereby advised in writing by this Release Agreement to consult with an attorney before signing this Release Agreement;

C. Executive has voluntarily chosen to enter into this Release Agreement and has not been forced or pressured in any way to sign it;

D. Executive was given a copy of this Release Agreement on [ , 20 ] and informed that he or she had [twenty one (21)/forty five (45)] days within which to consider this Release Agreement and that if he or she wished to execute this Release Agreement prior to expiration of such [21-day/45-day] period, he or she should execute the Endorsement attached hereto;

E. Executive was informed that he or she had seven (7) days following the date of execution of this Release Agreement in which to revoke this Release Agreement, and this Release Agreement will become null and void if Executive elects revocation during that time. Any revocation must be in writing and must be received by the Company during the seven-day revocation period. In the event that Executive exercises his or her right of revocation, neither the Company nor Executive will have any obligations under this Release Agreement;

F. Nothing in this Release Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this waiver under the ADEA, nor does it impose any condition precedent, penalties or costs from doing so, unless specifically authorized by federal law.2

________________________

2Whether the Executive has 21 days, 45 days, or some other period in which to consider the Release Agreement will be determined with reference to the requirements of the ADEA in order for such waiver to be valid in the circumstances. The determination referred to in the preceding sentence shall be made by the Company in its sole discretion. In any event, the Release Agreement will include the Executive’s acknowledgements and agreements set forth in clauses 4.A, 4.B, and 4.C.

A-3

5. No Transferred Claims. Executive warrants and represents that the Executive has not heretofore assigned or transferred to any person not a party to this Release Agreement any released matter or any part or portion thereof and he or she shall defend, indemnify and hold the Company and each of its affiliates harmless from and against any claim (including the payment of attorneys’ fees and costs actually incurred whether or not litigation is commenced) based on or in connection with or arising out of any such assignment or transfer made, purported or claimed.

6. Compliance with Employment Agreement. Executive warrants and represents that Executive has complied fully with his or her obligations pursuant to the Employment Agreement. Executive covenants that Executive will continue to abide by the applicable provisions of such Employment Agreement.

7. Severability. It is the desire and intent of the parties hereto that the provisions of this Release Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Release Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable under any present or future law, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Release Agreement or affecting the validity or enforceability of such provision in any other jurisdiction; furthermore, in lieu of such invalid or unenforceable provision there will be added automatically as a part of this Release Agreement, a legal, valid and enforceable provision as similar in terms to such invalid or unenforceable provision as may be possible. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Release Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

8. Counterparts. This Release Agreement may be executed in separate counterparts, each of which is deemed to be an original and all of which taken together constitute one and the same agreement.

9. Governing Law. THIS RELEASE AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH UNITED STATES FEDERAL LAW AND, TO THE EXTENT NOT PREEMPTED BY UNITED STATES FEDERAL LAW, THE LAWS OF THE STATE OF CALIFORNIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICTING PROVISION OR RULE (WHETHER OF THE STATE OF CALIFORNIA OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE LAWS OF ANY JURISDICTION OTHER THAN UNITED STATES FEDERAL LAW AND THE LAW OF THE STATE OF CALIFORNIA TO BE APPLIED. IN FURTHERANCE OF THE FOREGOING, APPLICABLE FEDERAL LAW AND, TO THE EXTENT NOT PREEMPTED BY APPLICABLE FEDERAL LAW, THE INTERNAL LAW OF THE STATE OF CALIFORNIA, WILL CONTROL THE INTERPRETATION AND CONSTRUCTION OF THIS RELEASE AGREEMENT, EVEN IF UNDER SUCH JURISDICTION’S CHOICE OF LAW OR CONFLICT OF LAW ANALYSIS, THE SUBSTANTIVE LAW OF SOME OTHER JURISDICTION WOULD ORDINARILY APPLY.

A-4

10. Amendment and Waiver. The provisions of this Release Agreement may be amended and waived only with the prior written consent of the Company and Executive, and no course of conduct or failure or delay in enforcing the provisions of this Release Agreement shall be construed as a waiver of such provisions or affect the validity, binding effect or enforceability of this Release Agreement or any provision hereof.

11. Descriptive Headings. The descriptive headings of this Release Agreement are inserted for convenience only and do not constitute a part of this Release Agreement.

12. Construction. Where specific language is used to clarify by example a general statement contained herein, such specific language shall not be deemed to modify, limit or restrict in any manner the construction of the general statement to which it relates. The language used in this Release Agreement shall be deemed to be the language chosen by the parties to express their mutual intent, and no rule of strict construction shall be applied against any party.

13. Arbitration. Any claim or controversy arising out of or relating to this Agreement shall be submitted to arbitration in accordance with the arbitration provision set forth in the Employment Agreement.

14. Nouns and Pronouns. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural and vice-versa.

15. Legal Counsel. Each party recognizes that this is a legally binding contract and acknowledges and agrees that they have had the opportunity to consult with legal counsel of their choice. Executive acknowledges and agrees that he has read and understands this Release Agreement completely, is entering into it freely and voluntarily, and has been advised to seek counsel prior to entering into this Release Agreement and he has had ample opportunity to do so.

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The undersigned have read and understand the consequences of this Release Agreement and voluntarily sign it. The undersigned declare under penalty of perjury under the laws of the State of California that the foregoing is true and correct.

EXECUTED this day of 20 , at , California.

	EXECUTIVE

	J. JUSTIN HUTCHENS
	HCP, Inc. a Maryland corporation


	By:
	Name:
	Title:

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ENDORSEMENT

I, J. Justin Hutchens, hereby acknowledge that I was given [21/45] days to consider the foregoing Release Agreement and voluntarily chose to sign the Release Agreement prior to the expiration of the [21-day/45-day] period.

I declare under penalty of perjury under the laws of the United States and the State of California that the foregoing is true and correct.

EXECUTED this [ ] day of [ 20 ], at , California.




				J. JUSTIN HUTCHENS

A-7

Ex10-2

EXHIBIT 10.2

AMENDMENT NO. 1 TO HCP, INC. EMPLOYMENT AGREEMENT

THIS AMENDMENT NO. 1 (this “Amendment”) is made as of September 1, 2015, by and between HCP, Inc. (the “Company”) and J. Justin Hutchens (“Executive”).

RECITALS

WHEREAS, the Company and Executive entered into an Employment Agreement effective on September 8, 2015 (the “Agreement”); and

WHEREAS, the Company and Executive now wish to amend the Agreement as set forth below.

NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned, intending to be legally bound hereby, agree as follows:

1.The “Effective Date” of the Agreement (as defined therein) is hereby amended to be September 1, 2015.

2.Except as expressly set forth in this Amendment, all of the provisions of the Agreement shall remain unchanged and in full force and effect. After the date hereof, any reference to the Agreement shall mean the Agreement as amended or modified hereby.

3.This Amendment may be executed on separate counterparts, any one of which need not contain signatures of more than one party, but all of which taken together will constitute one and the same agreement. Signatures delivered by facsimile or “pdf” shall be effective for all purposes.

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IN WITNESS WHEREOF AND INTENDING TO BE LEGALLY BOUND THEREBY, the parties hereto have executed and delivered this Amendment as of the year and date first above written.

	HCP, INC.

	By:	/s/ Lauralee E. Martin
		Lauralee E. Martin President and Chief Executive Officer


	J. JUSTIN HUTCHENS


	/s/ J. Justin Hutchens

Signature Page to Amendment (Hutchens)

Ex10-3

EXHIBIT 10.3

ADDENDUM #1 TO MASTER LEASE AND SECURITY AGREEMENT

This ADDENDUM #1 TO MASTER LEASE AND SECURITY AGREEMENT (this “Addendum”) is made and entered into as of October 23, 2015, by and between the parties signatory hereto, as lessors (collectively, “Lessor”) and HCR III Healthcare, LLC, as lessee (“Lessee”).

RECITALS

A.Lessor is the current “Lessor” and Lessee is the current “Lessee” pursuant to that certain Master Lease and Security Agreement dated as of April 7, 2011 (as the same may have been amended, restated or otherwise modified prior to the date hereof, the “Master Lease”). Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Master Lease.

B.Lessee’s obligations under the Master Lease are guaranteed by HCR ManorCare, Inc., a Delaware corporation, successor in interest to HCR ManorCare, LLC, a Delaware limited liability company, pursuant to that certain Guaranty of Obligations dated as of April 7, 2011 (as the same may heretofore have been or may hereafter be further amended, modified or reaffirmed from time to time in accordance with the terms thereof, the “Guaranty”).

C.Pursuant to Section 12 of that certain Tenth Amendment to Master Lease and Security Agreement, dated as of March 29, 2015 and effective as of April 1, 2015 (the “Tenth Amendment”), by and among Lessor, Lessee and Guarantor, Lessor, Lessee and Guarantor desire to add the real property more particularly described on Exhibit A attached hereto (the “Additional Facility”) to the Leased Property under the Master Lease.

AGREEMENT

NOW THEREFORE, in consideration of the foregoing Recitals and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lessor and Lessee hereby agree as follows:

1.Lessee’s Representations and Warranties. Lessee hereby represents and warrants to Lessor that the Additional Facilities Owners have delivered to Lessor the materials and documentation required pursuant to Section 12 of the Tenth Amendment and that, to Lessee’s knowledge, (i) all such materials and documentation were true, correct and complete at the time delivered and (ii) there have been no changes affecting any such materials or documentation or any information disclosed thereby, that would interfere with or materially adversely affect the consummation of the transactions contemplated hereby, that have not been previously disclosed by Lessee or Guarantor to Lessor in writing.

2.Additional Facility. The Master Lease is hereby amended to

modify the “Pool 4 Facilities” to add the Additional Facility thereto and Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, as part of the Leased Property, all of Lessor’s right, title and interest in and to the Additional Facility, including any improvements currently and to be located thereon, subject to all of the terms, conditions and provisions of the Master Lease, as it is hereby, and may be hereafter, amended, supplemented, restated or otherwise modified.

3.Additional Lessors. In connection with the Additional Facility, the Master Lease is hereby amended to add the following entities as Lessor under the Master Lease: (a) HCR Salmon Creek Property, LLC, a Delaware limited liability company, (b) HCR Wingfield Hills Property, LLC, a Delaware limited liability company, and (c) HCR Utica Ridge Property, LLC, a Delaware limited liability company.

4.Opco Sublease: Schedule 4 to the Master Lease is hereby amended to add the following operating sublease thereto:

Manor Care of Salmon Creek WA, LLC

ManorCare Health Services, LLC d/b/a ManorCare Health Services-Utica Ridge;

ManorCare Health Services, LLC d/b/a ManorCare Health Services-Wingfield Hills

5.Effect of Addendum. All references in the Master Lease to “this Lease” shall be deemed to be references to the Master Lease as amended hereby.

6.Full Force and Effect; Acknowledgement. The Master Lease, as hereby amended, shall remain and continue in full force and effect.

7.Counterparts; Facsimile or Electronically Transmitted Signatures. This Addendum may be executed in any number of counterparts, all of which shall constitute one and the same instrument. Signatures transmitted by facsimile or other electronic means may be used in place of original signatures on this Addendum, and Lessor and Lessee both intend to be bound by the signatures on the document transmitted by facsimile or such other electronic means.

[NO FURTHER TEXT ON THIS PAGE]

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed as of the day and year first written above.

“Lessor”

HCP PROPERTIES, LP, a Delaware limited partnership

By: HCP I-B Properties, LLC, a Delaware limited liability company, its General Partner

HCP WEST VIRGINIA PROPERTIES, LLC, a Delaware limited liability company

HCP PROPERTIES OF ALEXANDRIA VA, LLC, a Delaware limited liability company

HCP PROPERTIES OF ARLINGTON VA,
LLC, a Delaware limited liability company

HCP PROPERTIES OF MIDWEST CITY OK, LLC, a Delaware limited liability company

HCP PROPERTIES OF OKLAHOMA CITY (NORTHWEST), LLC, a Delaware limited liability company

HCP PROPERTIES OF OKLAHOMA CITY (SOUTHWEST), LLC, a Delaware limited liability company

HCP PROPERTIES OF TULSA OK, LLC, a Delaware limited liability company

HCP PROPERTIES-ARDEN COURTS OF ANNANDALE VA, LLC, a Delaware limited liability company

HCP PROPERTIES-CHARLESTON OF HANAHAN SC, LLC, a Delaware limited liability company

HCP PROPERTIES-COLUMBIA SC, LLC, a Delaware limited liability company

HCP PROPERTIES-FAIR OAKS OF FAIRFAX VA, LLC, a Delaware limited liability company

HCP PROPERTIES-IMPERIAL OF RICHMOND VA, LLC, a Delaware limited liability company

HCP PROPERTIES-LEXINGTON SC, LLC, a Delaware limited liability company

HCP PROPERTIES-MEDICAL CARE CENTER-LYNCHBURG VA, LLC, a Delaware limited liability company

HCP PROPERTIES-OAKMONT EAST-GREENVILLE SC, LLC, a Delaware limited liability company

HCP PROPERTIES-OAKMONT OF UNION SC, LLC, a Delaware limited liability company

HCP PROPERTIES-OAKMONT WEST-GREENVILLE SC, LLC, a Delaware limited liability company

HCP PROPERTIES-STRATFORD HALL OF RICHMOND VA, LLC, a Delaware limited liability company

HCP PROPERTIES-WEST ASHLEY-CHARLESTON SC, LLC, a Delaware limited liability company

HCP MARYLAND PROPERTIES, LLC, a Delaware limited liability company

HCR SALMON CREEK PROPERTY, LLC, a Delaware limited liability company

By:HCP West Virginia Properties, LLC, a Delaware limited liability company, its Sole Member

HCR WINGFIELD HILLS PROPERTY, LLC, a Delaware limited liability company

By:HCP West Virginia Properties, LLC, a Delaware limited liability company, its Sole Member

HCR UTICA RIDGE PROPERTY, LLC, a Delaware limited liability company

By:HCP West Virginia Properties, LLC, a Delaware limited liability company, its Sole Member

By: /s/ Darren Kowalske
Name: Darren Kowalske
Title: Senior Vice President

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed as of the day and year first written above.

“LESSEE”

HCR III HEALTHCARE, LLC, a Delaware limited liability company

By: /s/ Daniel H. Kight
Name: Daniel H. Kight
Title: VP & Treasurer

Addendum #1

CONSENT, REAFFIRMATION AND AGREEMENT OF GUARANTOR

Guarantor hereby (i) reaffirms all of its obligations under the Guaranty, (ii) consents to the foregoing Addendum and (iii) agrees that its obligations under the Guaranty shall extend to Lessee’s duties, covenants and obligations pursuant to the Master Lease, as amended or modified pursuant to the foregoing Addendum.

HCR MANORCARE, INC., a Delaware corporation

By: /s/ Matthew S. Kang
Name: Matthew S. Kang
Title: Vice President & CFO

EXHIBIT A

Legal Description of Additional Property

ManorCare Health Services-Wingfield Hills
2350 Wingfield Hills Road, Sparks, NV 89436

LEGAL DESCRIPTION

All that certain real property situate in the County of Washoe, State of Nevada, described as follows:

Parcel 2-1A of PARCEL MAP NO. 4757, according to the map thereof, filed in the office of the County Recorder of Washoe County, State of Nevada on April 25, 2007, as File No. 3524570

APN: 528-010-42

ManorCare Health Services-Utica Ridge

3800 Commerce Blvd, Davenport, IA 52807

Property Description

Parcel A:

A portion of Lot 4 in Terrace Ridge Park, 2nd Addition lying in Section 8, Township 78 North, Range 4 East of the 5th Principal Meridian, described as follows:

Beginning at the northwest corner of Lot 1 of Terrace Ridge Park, 1st Addition, thence North 01 degrees 30 minutes 17 seconds East, 263.02 feet to the south line of Outlot A of Terrace Ridge Park, 2nd Addition; thence South 88 degrees 29 minutes 43 seconds East, 111.95 feet on said line to the beginning of a curve, concave northwesterly, having a radius of 50.00 feet; thence northeasterly, 41.68 feet; on the arc of said curve, through a central angle of 47 degrees 45 minutes 58 seconds, the chord bears North 67 degrees 37 minutes 18 seconds East, a chord distance of 40.49 feet; thence North 43 degrees 44 minutes 19 seconds East, 147.86 feet to the beginning of a curve, concave northwesterly, having a radius of 50.00 feet; thence easterly, 10.79 feet, on the arc of said curve, through a central angle of 12 degrees 22 minutes 03 seconds, the chord bears North 37 degrees 33 minutes 18 seconds East, a chord distance of 10.77 feet; thence North 31 degrees 22 minutes 16 seconds East, 17.18 feet to the beginning of a curve, concave southeasterly, having a radius of 50.00 feet; thence easterly, 10.79 feet; on the arc of said curve, through a central angle of 12 degrees 22 minutes 03 seconds, the chord bears North 37 degrees 33 minutes 18 seconds East, a chord distance of 10.77 feet; thence North 43 degrees 44 minutes 19 seconds East, 286.61 feet; thence South 60 degrees 16 minutes 55 seconds East, 100.44 feet; thence South 00 degrees 06 minutes 09 seconds East, 351.38 feet to the north line of Lot 1 of Terrace Ridge Park, 2nd Addition; thence North 89 degrees 51 minutes 44 seconds West, 16.53 feet on said line; thence South 42 degrees 08 minutes 52 seconds West, 70.04 feet; thence South 00 degrees 04 minutes 43 seconds West, 216.09 feet to the northeast corner of Lot 1 of Terrace Ridge Park, 1st Addition; thence North 89 degrees 11 minutes 35 seconds West,

316.88 feet on the north line of said Lot 1, Terrace Ridge Park, 1st Addition; thence North 00 degrees 37 minutes 26 seconds East, 42.29 feet; thence North 89 degrees 34 minutes 57 seconds West, 186.36 feet to the Point of Beginning, containing 5.490 acres of land, more or less.

The entire parcel lies in the City of Davenport, County of Scott, and State of Iowa.

Also known as Lot 1, Terrace Ridge Park Fifth Addition to the City of Davenport, Scott County, Iowa.

Parcel B:

Non-exclusive easements for access, utility, drainage, and construction purposes, as

contained in the Declaration of Reciprocal Easement Covenant and Restrictions, dated March 28, 2003, recorded June 6, 2003, as Doc. No. 2003-29057.

ManorCare Health Services-Salmon Creek

2811 N.E. 139th Street, Vancouver, WA 98686

EXHIBIT ‘A’

LEGAL DESCRIPTION:

A portion of the Northeast quarter of the Northeast quarter of the Northeast quarter of Section 26, Township 3 North, Range 1 East of the Williamette Meridian, Clark County, Washington, described as follows:

BEGINNING at a point 395 feet South of the Northeast corner of the Northeast quarter of the Northeast quarter of Section 26, Township 3 North, Range 1 East of the Williamette Meridian, Clark County, Washington, measuring along the East line of Section 26 from the Northeast corner which point is the True Point of Beginning; thence North 8844’25’’ West 416 feet parallel with the North line of Section 26; thence North 141’10” East 9 feet parallel with the East line of Section 26; thence North 8844’25” West 241.11 feet to the West line of the Northeast quarter of the Northeast quarter of the Northeast quarter of Section 26; thence South 140’38” West 87 feet along the West line of the Northeast quarter of the Northeast quarter of the Northeast quarter of Section 26; thence South 8844’25” East 627.11 feet to the East line of Section 26; thence North 141’11” East 78 feet to the True Point of Beginning.

EXCEPT any portion in N.E. 29th Avenue as conveyed by Deeds recorded under Auditors File Nos. G 307980 and G 307981;

ALSO EXCEPT that portion conveyed to Clark County by deed recorded under Auditor’s File No. 4717443.

AND

Lots 1, 2 and 3 of SHORT PLAT, recorded in Book 2 of Short Plats, at Page 648, under Auditor’s File No. 9203060330, records of Clark County, Washington, being a portion of the Northeast quarter of Section 26, Township 3 North, Range 1 East of the Williamette Meridian, Clark County, Washington;

EXCEPTING THEREFROM that portion thereof conveyed to Charles F. McKay and Alice I. McKay, husband and wife, by Quit Claim Deed recorded under Auditor’s File No. 9306180154;

TOGETHER WITH an easement for ingress and egress over the North 30 feet of Lots 1 and 2 of SHORT PLAT, recorded in Book 2, Page 648, under Auditor’s File No. 9203060330 records of Clark County, Washington;

ALSO EXCEPT that portion conveyed to Clark County by deed recorded under

Auditor’s File No. 4717443.

AND

The East 200 feet of the North 208 feet of the Northeast quarter of Section 26, Township 3 North, Range 1 East of the Williamette Meridian, Clark County, Washington;

EXCEPT the North 20 feet thereof;

ALSO EXCEPT County roads;

ALSO EXCEPT that portion conveyed to Clark County by deed recorded under

Auditor’s File No. 3938864.

ALSO EXCEPT that portion conveyed to Clark County by deed recorded under

Auditor’s File No. 4717443.

Ex10-4

EXHIBIT 10.4

ADDENDUM #2 TO MASTER LEASE AND SECURITY AGREEMENT

This ADDENDUM #2 TO MASTER LEASE AND SECURITY AGREEMENT (this “Addendum”) is made and entered into as of November 2, 2015, by and between the parties signatory hereto, as lessors (collectively, “Lessor”) and HCR III Healthcare, LLC, as lessee (“Lessee”).

RECITALS

AGREEMENT

2.Additional Facility. The Master Lease is hereby amended to

3.Opco Sublease: Schedule 4 to the Master Lease is hereby amended to add the following operating sublease thereto:

Manor Care of Winter Park FL, LLC

4.Effect of Addendum. All references in the Master Lease to “this Lease” shall be deemed to be references to the Master Lease as amended hereby.

5.Full Force and Effect; Acknowledgement. The Master Lease, as hereby amended, shall remain and continue in full force and effect.

6.Counterparts; Facsimile or Electronically Transmitted Signatures. This Addendum may be executed in any number of counterparts, all of which shall constitute one and the same instrument. Signatures transmitted by facsimile or other electronic means may be used in place of original signatures on this Addendum, and Lessor and Lessee both intend to be bound by the signatures on the document transmitted by facsimile or such other electronic means.

[NO FURTHER TEXT ON THIS PAGE]

IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed as of the day and year first written above.

“LESSOR”

HCP PROPERTIES, LP, a Delaware limited
partnership

By:HCP I-B Properties, LLC, a Delaware
limited liability company, its General Partner

HCP WEST VIRGINIA PROPERTIES, LLC, a
Delaware limited liability company

HCP PROPERTIES OF ALEXANDRIA VA, LLC, a Delaware limited liability company

HCP PROPERTIES OF ARLINGTON VA, LLC, a Delaware limited liability company