10-K 1 a2218127z10-k.htm 10-K

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Form 10-K

(Mark One)    

ý

 

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

For the fiscal year ended December 31, 2013

or

o

 

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 1-08895



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.)

3760 Kilroy Airport Way, Suite 300
Long Beach, California

 

90806
(Zip Code)
(Address of principal executive offices)    

Registrant's telephone number, including area code (562) 733-5100

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Name of each exchange
on which registered

Common Stock

  New York Stock Exchange



          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes ý  No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes o  No ý

          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 ý    No o

          Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No o

          Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

          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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller
reporting company)
  Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act.) Yes o No ý

          State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter: $18.2 billion.

          As of January 31, 2014 there were 457,169,700 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the definitive Proxy Statement for the registrant's 2014 Annual Meeting of Stockholders have been incorporated by reference into Part III of this Report.

   


Table of Contents

 
   
  Page
Number
 

PART I

 

Item 1.

 

Business

    3  

Item 1A.

 

Risk Factors

    12  

Item 1B.

 

Unresolved Staff Comments

    26  

Item 2.

 

Properties

    26  

Item 3.

 

Legal Proceedings

    33  

Item 4.

 

Mine Safety Disclosures

    33  

PART II

 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    34  

Item 6.

 

Selected Financial Data

    37  

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

    38  

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

    67  

Item 8.

 

Financial Statements and Supplementary Data

    69  

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

    69  

Item 9A.

 

Controls and Procedures

    69  

Item 9B.

 

Other Information

    72  

PART III

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

    72  

Item 11.

 

Executive Compensation

    72  

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    72  

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

    72  

Item 14.

 

Principal Accountant Fees and Services

    72  

PART IV

 

Item 15.

 

Exhibits, Financial Statements and Financial Statement Schedules

    73  

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PART I

        All references in this report to "HCP," the "Company," "we," "us" or "our" mean HCP, Inc. together with its consolidated subsidiaries. Unless the context suggests otherwise, references to "HCP, Inc." mean the parent company without its subsidiaries.

ITEM 1.    Business

Business Overview

        HCP, an 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 to qualify as a self-administered real estate investment trust ("REIT"). We are headquartered in Long Beach, California, with offices in Nashville, Tennessee and San Francisco, California. We acquire, develop, lease, manage and dispose of healthcare real estate, and provide financing to healthcare providers. Our portfolio is comprised of investments in the following five healthcare segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. We make investments in our healthcare segments using the following five investment products: (i) properties under lease, (ii) debt investments, (iii) developments and redevelopments, (iv) investment management and (v) investments in senior housing operations utilizing the structure permitted by the Housing and Economic Recovery Act of 2008, which is commonly referred to as "RIDEA."

        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 following:

    Compelling demographics driving the demand for healthcare services;

    Specialized nature of healthcare real estate investing; and

    Ongoing consolidation of a fragmented healthcare real estate sector.

        Our website address is www.hcpi.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") are available on our website, free of charge, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the United States ("U.S.") Securities and Exchange Commission ("SEC").

Healthcare Industry

        Healthcare is the single largest industry in the U.S. based on Gross Domestic Product ("GDP"). According to the National Health Expenditures report by the Centers for Medicare and Medicaid Services ("CMS"): (i) national health expenditures are projected to grow 6.1% in 2014 and 5.8% in 2015; (ii) the average compounded annual growth rate for national health expenditures, over the projection period of 2015 through 2022, is anticipated to be 6.2%; and (iii) the healthcare industry is projected to represent 18.3% of U.S. GDP in 2014.

        Senior citizens are the largest consumers of healthcare services. According to CMS, on a per capita basis, the 75-year and older segment of the population spends 76% more on healthcare than the 65 to 74-year-old segment and over 200% more than the population average.

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U.S. Population Over 65 Years Old

GRAPHIC

Source: U.S. Census Bureau, the Statistical Abstract of the United States.

Business Strategy

        Our primary goal is to increase stockholder value through profitable growth, which allows us to maintain or increase dividends per share to our stockholders. Our investment strategy to achieve this goal is based on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing.

    Opportunistic Investing

        We make investment decisions that are expected to drive profitable growth and create stockholder value. We position ourselves to create and take advantage of opportunities that will allow us to meet our goals and investment criteria.

    Portfolio Diversification

        We believe in maintaining a portfolio of healthcare investments diversified by segment, geography, operator, tenant and investment product. 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 product or geographic location, the number of properties that may be leased to a single operator or tenant, or loans that may be made to a single borrower. With investments in multiple segments and investment products, we can focus on opportunities with the most attractive risk/reward profile for the portfolio as a whole. We may structure transactions as master leases, require operator or tenant insurance and indemnifications, obtain credit enhancements in the form of guarantees, letters of credit or security deposits, and take other measures to mitigate risk.

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    Conservative Financing

        We believe a conservative balance sheet is important to our ability to execute our opportunistic investing approach. We maintain a conservative balance sheet by actively managing our debt-to-equity levels and maintaining multiple sources of liquidity, such as our revolving line of credit facility (the "Facility"), access to capital markets and secured debt lenders, relationships with current and prospective institutional joint venture partners, and our ability to divest of assets. Our debt obligations are primarily fixed rate with staggered maturities, which reduces the impact of rising interest rates on our operations.

        We finance our investments based on our evaluation of available sources of funding. For short-term purposes, we may utilize the Facility or arrange for other short-term borrowings from banks or other sources. We arrange for longer-term financing by offering equity and debt securities, placing mortgage debt and obtaining capital from institutional lenders.

        We specifically incorporate by reference into this section the information set forth in Item 7, "2013 Transaction Overview," of this report.

Competition

        Investing in real estate serving the healthcare industry is highly competitive. We face competition from other REITs, investment companies, pension funds, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our objectives. Our ability to compete may also be impacted by national and local economic trends, availability of investment alternatives, availability and cost of capital, construction and renovation costs, existing laws and regulations, new legislation and population trends.

        Income from our facilities is dependent on the ability of our operators and tenants to compete with other companies on a number of different levels, including: the quality of care provided, reputation, the physical appearance of a facility, price and range of services offered, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location, the size and demographics of the population in surrounding areas, and the financial condition of our tenants and operators. Private, federal and state payment programs, as well as the effect of laws and regulations, may also have a significant influence on the profitability of our tenants and operators. For a discussion of the risks associated with competitive conditions affecting our business, see "Risk Factors" in Item 1A.

Healthcare Segments

        Senior housing.    At December 31, 2013, we had interests in 444 senior housing facilities, 20 of which are in a RIDEA structure. Excluding RIDEA properties, all of our senior housing facilities are triple-net leased to single tenants. Senior housing facilities include assisted living facilities ("ALFs"), independent living facilities ("ILFs") and continuing care retirement communities ("CCRCs"), which cater to different segments of the elderly population based upon their personal needs. Services provided by our operators or tenants in these facilities are primarily paid for by the residents directly or through private insurance and are less reliant on government reimbursement programs such as Medicaid and Medicare. Our senior housing property types are further described below:

    Assisted Living Facilities.  ALFs are licensed care facilities that provide personal care services, support and housing for those who need help with activities of daily living ("ADL"), such as bathing, eating and dressing, yet require limited medical care. The programs and services may include transportation, social activities, exercise and fitness programs, beauty or barber shop

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      access, hobby and craft activities, community excursions, meals in a dining room setting and other activities sought by residents. These facilities are often in apartment-like buildings with private residences ranging from single rooms to large apartments. Certain ALFs may offer higher levels of personal assistance for residents requiring memory care as a result of Alzheimer's disease or other forms of dementia. Levels of personal assistance are based in part on local regulations. At December 31, 2013, we had interests in 366 ALFs.

    Independent Living Facilities.  ILFs are designed to meet the needs of seniors who choose to live in an environment surrounded by their peers with services such as housekeeping, meals and activities. These residents generally do not need assistance with ADL. However, in some of our facilities, residents have the option to contract for these services. At December 31, 2013, we had interests in 64 ILFs.

    Continuing Care Retirement Communities.  CCRCs provide housing and health-related services under long-term contracts. This alternative is appealing to residents as it eliminates the need for relocating when health and medical needs change, thus allowing residents to "age in place." Some CCRCs require a substantial entry or buy-in fee, and most also charge monthly maintenance fees in exchange for a living unit, meals and some health services. CCRCs typically require the individual to be in relatively good health and independent upon entry. At December 31, 2013, we had interests in 14 CCRCs.

        Our senior housing segment accounted for approximately 36%, 33% and 30% of total revenues for the years ended December 31, 2013, 2012 and 2011, respectively. The following table provides information about our senior housing operator concentration for the year ended December 31, 2013:

Tenants/Operators
  Percentage of
Segment Revenues
  Percentage of
Total Revenues
 

HCR ManorCare, Inc. ("HCR ManorCare")

    10     28 (1)

Emeritus Corporation ("Emeritus")

    35     13  

Sunrise Senior Living Inc. ("Sunrise")(2)

    13     5  

Brookdale Senior Living, Inc. ("Brookdale")

    12     4  

(1)
Percentage of total revenues includes revenues earned from both senior housing and post-acute/skilled nursing facilities leased to HCR ManorCare.

(2)
These concentrations include properties that are leased to tenants who have entered into management contracts with Sunrise to operate the respective property on their behalf.

        Post-acute/skilled nursing.    At December 31, 2013, we had interests in 302 post-acute/skilled nursing facilities ("SNFs"). SNFs offer restorative, rehabilitative and custodial nursing care for people not requiring the more extensive and complex treatment available at hospitals. Ancillary revenues and revenues from sub-acute care services are derived from providing services to residents beyond room and board and include occupational, physical, speech, respiratory and intravenous therapy, wound care, oncology treatment, brain injury care and orthopedic therapy, as well as sales of pharmaceutical products and other services. Certain SNFs provide some of the foregoing services on an out-patient basis. Post-acute/skilled nursing services provided by our operators and tenants in these facilities are primarily paid for by private sources or through the Medicare and Medicaid programs. All of our SNFs are triple-net leased to single tenants.

        Our post-acute/skilled nursing segment accounted for approximately 29% of total revenues for each of the years ended December 31, 2013, 2012 and 2011. During the year ended December 31, 2013, HCR ManorCare, as our tenant/operator, contributed 83% of our post-acute/skilled nursing segment revenues.

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        Life science.    At December 31, 2013, we had interests in 115 life science properties, including four facilities owned by our Investment Management Platform. These properties contain laboratory and office space primarily for biotechnology, medical device and pharmaceutical companies, scientific research institutions, government agencies and other organizations involved in the life science industry. While these properties contain similar characteristics to commercial office buildings, they generally contain more advanced electrical, mechanical, and heating, ventilating, and air conditioning ("HVAC") systems. The facilities generally have specialty equipment including emergency generators, fume hoods, lab bench tops and related amenities. In many instances, life science tenants make significant investments to improve their leased space, in addition to landlord improvements, to accommodate biology, chemistry or medical device research initiatives. Life science properties are primarily configured in business park or campus settings and include multiple buildings. The business park and campus settings allow us the opportunity to provide flexible, contiguous/adjacent expansion to accommodate the growth of existing tenants. Our properties are located in well-established geographical markets known for scientific research, including San Francisco, San Diego and Salt Lake City. At December 31, 2013, 96% of our life science properties were triple-net leased (based on leased square feet).

        Our life science segment accounted for approximately 14%, 15% and 17% of total revenues for the years ended December 31, 2013, 2012 and 2011, respectively. The following table provides information about our life science tenant concentration for the year ended December 31, 2013:

Tenants
  Percentage of
Segment Revenues
  Percentage of
Total Revenues
 

Amgen, Inc. 

    18     3  

Genentech, Inc. 

    18     3  

        Medical office.    At December 31, 2013, we had interests in 272 medical office buildings ("MOBs"), including 66 facilities owned by our Investment Management Platform. These facilities typically contain physicians' offices and examination rooms, and may also include pharmacies, hospital ancillary service space and outpatient services such as diagnostic centers, rehabilitation clinics and day-surgery operating rooms. While these facilities are similar to commercial office buildings, they require additional plumbing, electrical and mechanical systems to accommodate multiple exam rooms that may require sinks in every room, and special equipment such as x-ray machines. In addition, MOBs are often built to accommodate higher structural loads for certain equipment and may contain "vaults" or other specialized construction. Our MOBs are typically multi-tenant properties leased to healthcare providers (hospitals and physician practices), with approximately 77% of our MOBs, based on square feet, located on hospital campuses and 94% are affiliated with hospital systems. At December 31, 2013, 47% of our medical office buildings were triple-net leased (based on leased square feet).

        Our medical office segment accounted for approximately 17%, 18% and 19% of total revenues for the years ended December 31, 2013, 2012 and 2011, respectively. During the year ended December 31, 2013, HCA, Inc. ("HCA"), as our tenant, contributed 14% of our medical office segment revenues.

        Hospital.    At December 31, 2013, we had interests in 20 hospitals, including four facilities owned by our Investment Management Platform. Services provided by our operators and tenants in these facilities are paid for by private sources, third-party payors (e.g., insurance and Health Maintenance Organizations or "HMOs"), or through the Medicare and Medicaid programs. Our hospital property types include acute care, long-term acute care, specialty and rehabilitation hospitals. Our hospitals are generally leased to single tenants or operators under triple-net lease structures.

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        Our hospital segment accounted for approximately 4%, 5% and 5% of total revenues for the years ended December 31, 2013, 2012 and 2011, respectively. The following table provides information about our hospital tenant/operator concentration for the year ended December 31, 2013:

Tenants/Operators
  Percentage of
Segment Revenues
  Percentage of
Total Revenues
 

HCA(1)

    17     3  

Tenet Healthcare Corporation

    32     1  

(1)
Percentage of total revenues from HCA includes revenues earned from both our medical office and hospital segments.

Investment Products

        Properties under lease.    We primarily generate revenue from properties under long-term leases. Most of our rents and other earned income from leases are received under triple-net leases or leases that provide for a substantial recovery of property operating expenses, such as real estate taxes, repairs and maintenance, property management fees, utilities and insurance. However, some of our MOB and life science facility rents are structured under gross or modified gross leases. Accordingly, for such gross or modified gross leases, we incur the property operating expenses.

        Our ability to grow income from leased properties depends, in part, on our ability to (i) increase rental income and other earned income by increasing rental rates and occupancy levels, (ii) maximize tenant recoveries and (iii) control non-recoverable operating expenses. Most of our leases include contractual annual base rent escalation clauses that are either predetermined fixed increases or are a function of an inflation index, which may include minimum and/or maximum percentage increases.

        Debt investments.    Our mezzanine loans are generally secured by a pledge of ownership interests of an entity or entities, which directly or indirectly own properties, and are subordinate to other debt, including mortgages and other mezzanine loans. Our mortgage and construction loans are typically made to healthcare providers, and healthcare real estate generally secures these loans.

        Developments and redevelopments.    We generally commit to development projects that are at least 50% pre-leased or when we believe that market conditions will support speculative construction. We work closely with our local real estate service providers, including brokerage, property management, project management and construction management companies to assist us in evaluating development proposals and completing developments. Our development and redevelopment investments are primarily in our life science and medical office segments. Redevelopments are properties that require significant capital expenditures (generally more than 25% of acquisition cost or existing basis) to renovate, achieve stabilization or to change the primary use of the property.

        Investment management.    We co-invest in real estate properties with institutional investors through joint ventures structured as partnerships or limited liability companies. We target institutional investors with long-term investment horizons who seek to benefit from our expertise in healthcare real estate. Predominantly, we retain noncontrolling interests in the joint ventures ranging from 20% to 30% and serve as the managing member. These ventures generally allow us to earn acquisition and asset management fees, and have the potential for promoted interests or incentive distributions based on performance of the joint venture.

        Our Investment Management Platform represents the following unconsolidated joint ventures: (i) HCP Ventures III, LLC, and HCP Ventures IV, LLC, which consists of MOB portfolios, and (ii) the HCP Life Science ventures. For a more detailed description of these unconsolidated joint ventures, see Note 8 to the Consolidated Financial Statements.

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        Operating properties ("RIDEA").    We may enter into contracts with healthcare operators to manage communities that are placed in a structure permitted by the Housing and Economic Recovery Act of 2008 (commonly referred to as "RIDEA"). Under the provisions of RIDEA, a REIT may lease "qualified healthcare properties" on an arm's length basis to a taxable REIT subsidiary ("TRS") if the property is operated on behalf of such subsidiary by a person who qualifies as an "eligible independent contractor." We view RIDEA as a structure primarily to be used on properties that present attractive valuation entry points and to drive growth by: (i) transitioning the asset to a new operator that can bring scale, operating efficiencies, and/or ancillary services; or (ii) investing capital to reposition the asset.

Portfolio Summary

        At December 31, 2013, we managed $21.7 billion of investments in our Owned Portfolio and Investment Management Platform. At December 31, 2013, we also owned $517 million of assets under development, redevelopment, and land held for future development.

Owned Portfolio

        As of December 31, 2013, our leases, operating properties and debt investments in our Owned Portfolio consisted of the following (square feet and dollars in thousands):

 
   
   
  Investment(3)    
   
   
 
 
  Number of
Properties(1)
   
  Total
Investment
   
  Interest
Income(5)
 
Segment
  Capacity(2)   Properties(1)   Debt   NOI(4)  

Senior housing

    444   45,582 Units   $ 7,654,129   $ 164,663   $ 7,818,792   $ 653,191   $ 11,621  

Post-acute/skilled

    302   38,566 Beds     5,755,824     427,356     6,183,180     539,320     73,595  

Life science

    111   7,080 Sq. ft.     3,439,319         3,439,319     239,923      

Medical office

    206   14,094 Sq. ft.     2,663,101         2,663,101     212,958      

Hospital

    16   2,221 Beds     592,360     18,071     610,431     68,198     943  
                               

Total

    1,079       $ 20,104,733   $ 610,090   $ 20,714,823   $ 1,713,590   $ 86,159  
                               
                               

(1)
Represents 1,059 properties under lease with an investment value of $19.3 billion and 20 operating properties under a RIDEA structure with an investment value of $768 million.

(2)
Senior housing facilities are measured in available units (e.g., studio, one or two bedroom units). Life science facilities and medical office buildings are measured in square feet. SNFs and hospitals are measured in available bed count.

(3)
Property investment represents: (i) the carrying amount of real estate and intangibles, after adding back accumulated depreciation and amortization; and (ii) the carrying amount of direct financing leases. Debt investment represents the carrying amount of mezzanine, mortgage and other secured loan investments.

(4)
Net Operating Income from Continuing Operations ("NOI") is a non-GAAP supplemental financial measure used to evaluate the operating performance of real estate properties. For the reconciliation of NOI to net income for 2013, refer to Note 14 to the Consolidated Financial Statements.

(5)
Interest income represents interest earned from our debt investments.

        See Note 14 to the Consolidated Financial Statements for additional information on our business segments.

Developments and Redevelopments

        At December 31, 2013, in addition to our investments in leased properties and debt investments, we had an aggregate investment of $517 million in assets under development, redevelopment, and land held for future development, primarily in our life science and medical office segments.

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Investment Management Platform

        As of December 31, 2013, our Investment Management Platform consisted of the following properties under lease (square feet and dollars in thousands):

Segment
  Number of
Properties
  Capacity   HCP's
Ownership
Interest
  Joint Venture
Investment(1)
  Total
Revenues
  Total
Operating
Expenses
 

Medical office

    66   3,389 Sq. ft.   20 - 30%   $ 739,493   $ 71,755   $ 31,250  

Life science

    4   278 Sq. ft.   50 - 63%     145,410     10,867     1,889  

Hospital

    4   149 Beds   20%     77,610     7,550     986  
                           

Total

    74           $ 962,513   $ 90,172   $ 34,125  
                           
                           

(1)
Represents the joint ventures' carrying amount of real estate and intangibles, after adding back accumulated depreciation and amortization.

Employees of HCP

        At December 31, 2013, we had 154 full-time employees, none of whom are subject to a collective bargaining agreement.

Government Regulation, Licensing and Enforcement

    Overview

        Our tenants and operators are typically subject to extensive and complex federal, state and local healthcare laws and regulations relating to fraud and abuse practices, government reimbursement, licensure and certificate of need and similar laws governing the operation of healthcare facilities, and we expect that the healthcare industry, in general, will continue to face increased regulation and pressure in the areas of fraud, waste and abuse, cost control, healthcare management and provision of services, among others. These regulations are wide-ranging and can subject our tenants and operators to civil, criminal and administrative sanctions. Affected tenants and operators may find it increasingly difficult to comply with this complex and evolving regulatory environment because of a relative lack of guidance in many areas as certain of our healthcare properties are subject to oversight from several government agencies and the laws may vary from one jurisdiction to another. Changes in laws and regulations and reimbursement enforcement activity and regulatory non-compliance by our tenants and operators can all have a significant effect on their operations and financial condition, which in turn may adversely impact us, as detailed below and set forth under "Risk Factors" in Item 1A.

        Based on information primarily provided by our tenants and operators, excluding our medical office segment, at December 31, 2013 we estimate that approximately 17% and 14% of the annualized base rental payments received from our tenants and operators were dependent on Medicare and Medicaid reimbursement, respectively.

        The following is a discussion of certain laws and regulations generally applicable to our operators, and in certain cases, to us.

    Fraud and Abuse Enforcement

        There are various extremely complex federal and state laws and regulations governing healthcare providers' relationships and arrangements and prohibiting fraudulent and abusive practices by such providers. These laws include (i) federal and state false claims acts, which, among other things, prohibit providers from filing false claims or making false statements to receive payment from Medicare, Medicaid or other federal or state healthcare programs, (ii) federal and state anti-kickback and

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fee-splitting statutes, including the Medicare and Medicaid anti-kickback statute, which prohibit the payment or receipt of remuneration to induce referrals or recommendations of healthcare items or services, (iii) federal and state physician self-referral laws (commonly referred to as the "Stark Law"), which generally prohibit referrals by physicians to entities with which the physician or an immediate family member has a financial relationship, (iv) the federal Civil Monetary Penalties Law, which prohibits, among other things, the knowing presentation of a false or fraudulent claim for certain healthcare services and (v) federal and state privacy laws, including the privacy and security rules contained in the Health Insurance Portability and Accountability Act of 1996, which provide for the privacy and security of personal health information. Violations of healthcare fraud and abuse laws carry civil, criminal and administrative sanctions, including punitive sanctions, monetary penalties, imprisonment, denial of Medicare and Medicaid reimbursement and potential exclusion from Medicare, Medicaid or other federal or state healthcare programs. These laws are enforced by a variety of federal, state and local agencies and can also be enforced by private litigants through, among other things, federal and state false claims acts, which allow private litigants to bring qui tam or "whistleblower" actions. Many of our operators and tenants are subject to these laws, and may become the subject of governmental enforcement actions if they fail to comply with applicable laws.

    Reimbursement

        Sources of revenue for many of our tenants and operators include, among others, governmental healthcare programs, such as the federal Medicare program and state Medicaid programs, and non-governmental payors, such as insurance carriers and HMOs. As federal and state governments focus on healthcare reform initiatives, and as the federal government and many states face significant budget deficits, efforts to reduce costs by these payors will likely continue, which may result in reduced or slower growth in reimbursement for certain services provided by some of our tenants and operators.

    Healthcare Licensure and Certificate of Need

        Certain healthcare facilities in our portfolio are subject to extensive federal, state and local licensure, certification and inspection laws and regulations. In addition, various licenses and permits are required to dispense narcotics, operate pharmacies, handle radioactive materials and operate equipment. Many states require certain healthcare providers to obtain a certificate of need, which requires prior approval for the construction, expansion and closure of certain healthcare facilities. The approval process related to state certificate of need laws may impact some of our tenants' and operators' abilities to expand or change their businesses.

    Life Science Facilities

        While certain of our life science tenants include some well-established companies, other such tenants are less established and, in some cases, may not yet have a product approved by the Food and Drug Administration, or other regulatory authorities, for commercial sale. Creating a new pharmaceutical product or medical device requires substantial investments of time and money, in part because of the extensive regulation of the healthcare industry; it also entails considerable risk of failure in demonstrating that the product is safe and effective and in gaining regulatory approval and market acceptance.

    Senior Housing Entrance Fee Communities

        Certain of our senior housing facilities are operated as entrance fee communities. Generally, an entrance fee is an upfront fee or consideration paid by a resident, a portion of which may be refundable, in exchange for some form of long-term benefit. Some of the entrance fee communities are subject to significant state regulatory oversight, including, for example, oversight of each facility's financial condition, establishment and monitoring of reserve requirements and other financial restrictions, the right of residents to cancel their contracts within a specified period of time, lien rights in favor of the residents, restrictions on change of ownership and similar matters.

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    Americans with Disabilities Act (the "ADA")

        Our properties must comply with the ADA and any similar state or local laws to the extent that such properties are "public accommodations" as defined in those statutes. The ADA may require removal of barriers to access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. To date, we have not received any notices of noncompliance with the ADA that have caused us to incur substantial capital expenditures to address ADA concerns. Should barriers to access by persons with disabilities be discovered at any of our properties, we may be directly or indirectly responsible for additional costs that may be required to make facilities ADA-compliant. Noncompliance with the ADA could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations pursuant to the ADA is an ongoing one, and we continue to assess our properties and make modifications as appropriate in this respect.

    Environmental Matters

        A wide variety of federal, state and local environmental and occupational health and safety laws and regulations affect healthcare facility operations. These complex federal and state statutes, and their enforcement, involve a myriad of regulations, many of which involve strict liability on the part of the potential offender. Some of these federal and state statutes may directly impact us. Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender, such as us, may be liable for the costs of removal or remediation of hazardous or toxic substances at, under or disposed of in connection with such property, as well as other potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). The cost of any required remediation, removal, fines or personal or property damages and the owner's or secured lender's liability therefore could exceed or impair the value of the property and/or the assets of the owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral which, in turn, could reduce our earnings. For a description of the risks associated with environmental matters, see "Risk Factors" in Item 1A of this report.

ITEM 1A.    Risk Factors

        The section below discusses the most significant risk factors that may materially adversely affect our business, results of operations and financial condition.

        As set forth below, we believe that the risks facing our company generally fall into the following categories:

    Risks related to our business; and

    Risks related to tax matters, including REIT-related risks.

Risks Related to Our Business

Volatility, disruption or uncertainty in the financial markets may impair our ability to raise capital, obtain new financing or refinance existing obligations and fund real estate and development activities.

        The global financial markets have experienced pervasive and fundamental disruptions. While these conditions have stabilized since the first quarter of 2009 and the capital markets continue to show signs of improvement, the strength and sustainability of an economic recovery is uncertain. Additional levels of market disruption, volatility or uncertainty could materially adversely impact our ability to raise capital, obtain new financing or refinance our existing obligations as they mature and fund real estate and development activities.

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        Market volatility could also lead to significant uncertainty in the valuation of our investments and those of our joint ventures, which may result in a substantial decrease in the value of our properties and those of our joint ventures. As a result, we may not be able to recover the carrying amount of such investments and the associated goodwill, if any, which may require us to recognize impairment charges in earnings.

We rely on external sources of capital to fund future capital needs, and limitations on our access to such capital could have a materially adverse effect on our ability to meet commitments as they become due or make future investments necessary to grow our business.

        We may not be able to fund all future capital needs from cash retained from operations. If we are unable to obtain enough internal capital, we may need to rely on external sources of capital (including debt and equity financing) to fulfill our capital requirements. If we cannot access these external sources of capital, we may not be able to make the investments needed to grow our business and to meet our obligations and commitments as they mature. Our access to capital depends upon a number of factors, some of which we have little or no control over, including but not limited to:

    general availability of credit and market conditions, including rising interest rates and increased borrowing cost;

    the market price of the shares of our equity securities and the credit ratings of our debt and preferred securities;

    the market's perception of our growth potential and our current and potential future earnings and cash distributions;

    our degree of financial leverage and operational flexibility;

    the financial integrity of our lenders, which might impair their ability to meet their commitments to us or their willingness to make additional loans to us, and our inability to replace the financing commitment of any such lender on favorable terms, or at all;

    the stability of the market value of our properties;

    the financial performance and general market perception of our operators, tenants and borrowers;

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

    issues facing the healthcare industry, including, but not limited to, healthcare reform and changes in government reimbursement policies.

        If our access to capital is limited by these factors or other factors, it could have a material adverse impact on our ability to fund operations, refinance our debt obligations, fund dividend payments, acquire properties and development activities.

Adverse changes in our credit ratings could impair our ability to obtain additional debt and equity financing on favorable terms, if at all, and negatively impact the market price of our securities, including our common stock.

        The credit ratings of our senior unsecured debt are based on our operating performance, liquidity and leverage ratios, overall financial position and other factors employed by the credit rating agencies in their rating analyses of us. Our credit ratings can affect the amount and type of capital we can access, as well as the terms of any financings we may obtain. There can be no assurance that we will be able to maintain our current credit ratings, and in the event that our current credit ratings deteriorate, we would likely incur higher borrowing costs and it may be more difficult or expensive to obtain

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additional financing or refinance existing obligations and commitments. Also, a downgrade in our credit ratings would trigger additional costs or other potentially negative consequences under our current and future credit facilities and debt instruments.

Our level of indebtedness may increase and materially adversely affect our future operations.

        Our outstanding indebtedness as of December 31, 2013 was approximately $8.7 billion. We may incur additional indebtedness in the future, including in connection with the development or acquisition of assets, which may be substantial. Any significant additional indebtedness could negatively affect the credit ratings of our debt and require us to dedicate a substantial portion of our cash flow to interest and principal payments due on our indebtedness. Greater demands on our cash resources may reduce funds available to us to pay dividends, conduct development activities, make capital expenditures and acquisitions, or carry out other aspects of our business strategy. Increased indebtedness can also limit our ability to adjust rapidly to changing market conditions, make us more vulnerable to general adverse economic and industry conditions and create competitive disadvantages for us compared to other companies with relatively lower debt levels. Increased future debt service obligations may limit our operational flexibility, including our ability to finance or refinance our properties, contribute properties to joint ventures or sell properties as needed.

Covenants related to our indebtedness limit our operational flexibility, and breaches of these covenants could materially adversely affect our business, results of operations and financial condition.

        Our unsecured credit facilities, unsecured debt securities and secured debt and other indebtedness that we may incur in the future, require or will require us to comply with a number of customary financial and other covenants, such as maintaining certain levels of debt service coverage and leverage ratio, tangible net worth requirements and maintaining REIT status. Our continued ability to incur additional debt and to conduct business in general is subject to compliance with these financial and other covenants, which limit our operational flexibility. For example, mortgages on our properties contain customary covenants such as those that limit or restrict our ability, without the consent of the lender, to further encumber or sell the applicable properties, or to replace the applicable tenant or operator. Breaches of certain covenants may result in defaults under the mortgages on our properties and cross-defaults under certain of our other indebtedness, even if we satisfy our payment obligations to the respective obligee. Additionally, defaults under the leases or operating agreements related to mortgaged properties, including defaults associated with the bankruptcy of the applicable tenant or operator, may result in a default under the underlying mortgage and cross-defaults under certain of our other indebtedness. Covenants that limit our operational flexibility as well as defaults under our debt instruments could materially adversely affect our business, results of operations and financial condition.

An increase in interest rates could increase interest cost on new debt, and could materially adversely impact our ability to refinance existing debt, sell assets and limit our acquisition, investment and development activities.

        If interest rates increase, so could our interest costs for any new debt. This increased cost could make the financing of any acquisition and development activity more costly. Rising interest rates could limit our ability to refinance existing debt when it matures, or cause us to pay higher interest rates upon refinancing and increase interest expense on refinanced indebtedness. In addition, an increase in interest rates could decrease the amount third parties are willing to pay for our assets, thereby limiting our ability to reposition our portfolio promptly in response to changes in economic or other conditions.

        We manage a portion of our exposure to interest rate risk by accessing debt with staggered maturities and through the use of derivative instruments, primarily interest rate swap agreements. However, no amount of hedging activity can fully insulate us from the risks associated with changes in interest rates. Swap agreements involve risk, including that counterparties may fail to honor their

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obligations under these arrangements, that these arrangements may not be effective in reducing our exposure to interest rate changes, that the amount of income we earn from hedging transactions may be limited by federal tax provisions governing REITs, and that these arrangements may cause us to pay higher interest rates on our debt obligations than would otherwise be the case. Failure to hedge effectively against interest rate risk, if we choose to engage in such activities, could adversely affect our results of operations and financial condition.

We may be adversely affected by fluctuations in currency exchange rates.

        We continue to pursue growth opportunities in international markets where the U.S. dollar is not the denominated currency. The ownership of investments located outside of the United States subjects us to risk from fluctuations in exchange rates between foreign currencies and the U.S. dollar. A significant change in the value of the foreign currency of one or more countries where we have a significant investment may have a material adverse effect on our financial position, debt covenant ratios, results of operations and cash flow.

        We may attempt to manage the impact of foreign currency exchange rate changes through the use of derivative contracts or other methods. For example, we have a £137 million GBP investment ($227 million at December 31, 2013) and maintain a £137 million unsecured GBP term loan as a natural hedge. Additionally, we executed a currency swap contract to hedge the risk related to a portion of the forecasted interest receipts on this investment. However, no amount of hedging activity can fully insulate us from the risks associated with changes in foreign currency exchange rates, and the failure to hedge effectively against foreign currency exchange rate risk, if we choose to engage in such activities, could materially adversely affect our results of operations and financial condition.

We depend on a limited number of operators and tenants that account for a large percentage of our revenues.

        During the year ended December 31, 2013, approximately 50% of our revenues were generated by our leasing or financial arrangements with the following four companies: HCR ManorCare (28%); Emeritus (13%); Sunrise (5%); and Brookdale (4%). The failure, inability or unwillingness of these operators or tenants to meet their obligations to us could materially reduce our cash flow as well as our results of operations, which could in turn reduce the amount of dividends we pay, cause our stock price to decline and have other material adverse effects on our business, results of operations and financial condition.

        In addition, any failure by these operators or tenants to effectively conduct their operations or to maintain and improve our properties could adversely affect their business reputation and their ability to attract and retain patients and residents in our properties, which could have a material adverse effect on our business, results of operations and financial condition. These operators and tenants generally have also agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses, and we cannot provide any assurance that they will have sufficient assets, income, access to financing and insurance coverage to enable it to satisfy its indemnification obligations.

Economic and other conditions that negatively affect geographic areas to which a greater percentage of our revenue is attributed could materially adversely affect our business, results of operations and financial condition.

        For the year ended December 31, 2013, approximately 41% of our revenue was derived from properties located in California (21%), Texas (11%) and Florida (9%). As a result, we are subject to increased exposure to adverse conditions affecting these regions, including downturns in the local

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economies or changes in local real estate conditions, increased competition or decreased demand, and changes in state-specific legislation, which could adversely affect our business and results of operations.

The bankruptcy, insolvency or financial deterioration of one or more of our major operators or tenants may materially adversely affect our business, results of operations and financial condition.

        We lease our properties directly to operators in most cases, and in certain other cases, we lease to third-party tenants who enter into long-term management agreements with operators to manage the properties. Although our leases, financing arrangements and other agreements with our tenants and operators generally provide us the right under specified circumstances to terminate a lease, evict an operator or tenant, or demand immediate repayment of certain obligations to us, the bankruptcy and insolvency laws afford certain rights to a party that has filed for bankruptcy or reorganization that may render certain of these remedies unenforceable, or at the least, delay our ability to pursue such remedies. For example, we cannot evict a tenant or operator solely because of its bankruptcy filing. A debtor has the right to assume, or to assume and assign to a third party, or to reject its unexpired contracts in a bankruptcy proceeding. If a debtor were to reject its leases with us, our claim against the debtor for unpaid and future rents would be limited by the statutory cap set forth in the U.S. Bankruptcy Code, which may be substantially less than the remaining rent actually owed under the lease. In addition, the inability of our tenants or operators to make payments or comply with certain other lease obligations may affect our compliance with certain covenants contained in our debt securities, credit facilities and the mortgages on the properties leased or managed by such tenants and operators. In addition, under certain conditions, defaults under the underlying mortgages may result in cross-default under our other indebtedness. Although we believe that we would be able to secure amendments under the applicable agreements in those circumstances, the bankruptcy of an applicable operator or tenant may potentially result in less favorable borrowing terms than currently available, delays in the availability of funding or other material adverse consequences. In addition, many of our facilities are leased to healthcare providers who provide long-term custodial care to the elderly; evicting such operators for failure to pay rent while the facility is occupied may be a difficult and slow process and may not be successful.

Our operators and tenants may not procure the necessary insurance to adequately insure against losses.

        Our leases generally require our tenants and operators to secure and maintain comprehensive liability and property insurance that covers us, as well as the tenants and operators. Certain losses may not be adequately insured by our tenants and operators. Should an uninsured loss or a loss in excess of insured limits occur, we could incur liability or lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenues from the property. In such an event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. We continually review the insurance maintained by our tenants and operators and believe the coverage provided to be customary for similarly situated companies in our industry. However, we cannot provide any assurances that we will continue to require the same level of insurance coverage of our tenants and operators, or that such insurance will be available at a reasonable cost in the future. Also, we cannot assure you that material uninsured losses, or losses in excess of insurance proceeds, will not occur in the future.

Our operators and tenants are faced with litigation and may experience rising liability and insurance costs.

        In some states, advocacy groups have been created to monitor the quality of care at healthcare facilities and these groups have brought litigation against the operators and tenants of such facilities. Also, in several instances, private litigation by patients has succeeded in winning large damage awards for alleged abuses. The effect of this litigation and other potential litigation may materially increase the costs incurred by our operators and tenants for monitoring and reporting quality of care compliance. In

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addition, their cost of liability and medical malpractice insurance can be significant and may increase or even not be available at a reasonable cost so long as the present healthcare litigation environment continues. Cost increases could cause our operators to be unable to make their lease or mortgage payments or fail to purchase the appropriate liability and malpractice insurance, potentially decreasing our revenues and increasing our collection and litigation costs. In addition, as a result of our ownership of healthcare facilities, we may be named as a defendant in lawsuits allegedly arising from the actions of our operators or tenants, for which claims such operators and tenants have agreed to indemnify, defend and hold us harmless from and against, but which may require unanticipated expenditures on our part.

Operators and tenants that fail to comply with the requirements of, or changes to, governmental reimbursement programs such as Medicare or Medicaid, may cease to operate or be unable to meet their financial and other contractual obligations to us.

        Certain of our operators and tenants are affected by an extremely complex set of federal, state and local laws and regulations that are subject to frequent and substantial changes (sometimes applied retroactively) resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. See "Item 1—Business—Government Regulation, Licensing and Enforcement" above. For example, to the extent that any of our operators or tenants receive a significant portion of their revenues from governmental payors, primarily Medicare and Medicaid, such revenues may be subject to:

    statutory and regulatory changes;

    retroactive rate adjustments;

    recovery of program overpayments or set-offs;

    administrative rulings;

    policy interpretations;

    payment or other delays by fiscal intermediaries or carriers;

    government funding restrictions (at a program level or with respect to specific facilities); and

    interruption or delays in payments due to any ongoing governmental investigations and audits at such property.

        In recent years, governmental payors have frozen or reduced payments to healthcare providers due to budgetary pressures. Healthcare reimbursement will likely continue to be of significant importance to federal and state authorities. We cannot make any assessment as to the ultimate timing or the effect that any future legislative reforms may have on our operators' and tenants' costs of doing business and on the amount of reimbursement by government and other third-party payors. The failure of any of our operators or tenants to comply with these laws, requirements and regulations could materially adversely affect their ability to meet their financial and contractual obligations to us.

Legislation to address federal government operations and Administration decisions affecting the Centers for Medicare and Medicaid Services could have a material adverse effect on our operators' liquidity, financial condition or results of operations.

        Enactment of the Consolidated Appropriations Act of 2014 and Congressional consideration of legislation pertaining to the federal debt ceiling, the Affordable Care Act, tax reform, and entitlement programs, including reimbursement rates for physicians, could have a material adverse effect on our operators' liquidity, financial condition or results of operations. In particular, funding for entitlement programs such as Medicare and Medicaid may result in increased costs and fees for programs such as

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Medicare Advantage Plans and reductions in reimbursements to providers; Congressional action related to the federal debt ceiling may have an impact on credit markets; tax reform may impact corporate and individual tax rates as well as impact retirement plans. Additionally, amendments to the Patient Protection and Affordable Care Act, along with the Health Care and Education Reconciliation Act of 2010 (collectively, the "Affordable Care Act"), implementation of the Affordable Care Act by the Administration, and decisions by the Centers for Medicare and Medicaid Services could impact the delivery of services and benefits under Medicare, Medicaid or Medicare Advantage Plans. Such changes could have a material adverse effect on our operators' liquidity, financial condition or results of operations, which could adversely affect their ability to satisfy their obligations to us and could have a material adverse effect on us.

Operators and tenants that fail to comply with federal, state and local licensure, certification and inspection laws and regulations may cease to operate or be unable to meet their financial and other contractual obligations to us.

        Certain of our operators and tenants are subject to extensive federal, state, local and industry-related licensure, certification and inspection laws, regulations and standards. Our operators' or tenants' failure to comply with any of these laws, regulations or standards could result in loss of accreditation, denial of reimbursement, imposition of fines, suspension or decertification from federal and state healthcare programs, loss of license or closure of the facility and/or the incurrence of considerable costs arising from an investigation or regulatory action. For example, certain of our properties may require a license, registration and/or certificate of need to operate. Failure of any operator or tenant to obtain a license, registration or certificate of need, or loss of a required license, registration or certificate of need, would prevent a facility from operating in the manner intended by such operator or tenant. Additionally, failure of our operators and tenants to generally comply with applicable laws and regulations may have an adverse effect on facilities owned by or mortgaged to us, and therefore may materially adversely impact us. See "Item 1—Business—Government Regulation, Licensing and Enforcement—Healthcare Licensure and Certificate of Need" above.

Increased competition, as well as an inability to grow revenues as originally forecast, has resulted and may further result in lower net revenues for some of our operators and tenants and may affect their ability to meet their financial and other contractual obligations to us.

        The healthcare industry is highly competitive and can become more competitive in the future. The occupancy levels at, and rental income from, our facilities is dependent on our ability and the ability of our operators and tenants to maintain and increase such levels and income and to compete with entities that have substantial capital resources. These entities compete with other operators and tenants on a number of different levels, including the quality of care provided, reputation, the physical appearance of a facility, price, the range of services offered, family preference, alternatives for healthcare delivery, the supply of competing properties, physicians, staff, referral sources, location and the size and demographics of the population in the surrounding area. Private, federal and state payment programs and the effect of laws and regulations may also have a significant influence on the profitability of the properties and their tenants. Our operators and tenants also compete with numerous other companies providing similar healthcare services or alternatives such as home health agencies, life care at home, community-based service programs, retirement communities and convalescent centers. Such competition, which is due, in part, to historical over-development in some segments in which we invest, has caused the occupancy rate of newly constructed buildings to slow and the monthly rate that many newly built and previously existing facilities were able to obtain for their services to decrease. We cannot be certain that the operators and tenants of all of our facilities will be able to achieve occupancy and rate levels that will enable them to meet all of their obligations to us. Further, many competing companies may have resources and attributes that are superior to those of our operators and tenants. Thus, our operators and tenants may encounter increased competition in the future that could

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limit their ability to maintain or attract residents or expand their businesses which could materially adversely affect their ability to meet their financial and other contractual obligations to us, potentially decreasing our revenues, impairing our assets, and increasing our collection and dispute costs.

Our tenants in the life science industry face high levels of regulation, expense and uncertainty.

        Life science tenants, particularly those involved in developing and marketing pharmaceutical products, are subject to certain unique risks, as follows:

    some of our tenants require significant outlays of funds for the research, development and clinical testing of their products and technologies. If private investors, the government or other sources of funding are unavailable to support such activities, a tenant's business may be adversely affected or fail;

    the research, development, clinical testing, manufacture and marketing of some of our tenants' products require federal, state and foreign regulatory approvals which may be costly or difficult to obtain;

    even after a life science tenant gains regulatory approval and market acceptance, the product may still present significant regulatory and liability risks, including, among others, the possible later discovery of safety concerns, competition from new products, and ultimately the expiration of patent protection for the product;

    our tenants with marketable products may be adversely affected by healthcare reform and the reimbursement policies of government or private healthcare payors; and

    our tenants may be unable to adequately protect their intellectual property under patent, copyright or trade secret laws.

        We cannot assure you that our life science tenants will be successful in their businesses. If our tenants' businesses are adversely affected, they may have difficulty making payments to us, which could materially adversely affect our business, results of operations and financial condition.

We may be unable to successfully foreclose on the collateral securing our real estate-related loans, and even if we are successful in our foreclosure efforts, we may be unable to successfully operate, occupy or reposition the underlying real estate, which may adversely affect our ability to recover our investments.

        If an operator or tenant defaults under one of our mortgages or mezzanine loans, we may have to foreclose on the loan or protect our interest by acquiring title to the collateral and thereafter making substantial improvements or repairs in order to maximize the property's investment potential. In some cases, as noted above, the collateral consists of the equity interests in an entity that directly or indirectly owns the applicable real property or interests in operating facilities and, accordingly, we may not have full recourse to assets of that entity. Operators, tenants or borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against our exercise of enforcement or other remedies and/or bring claims for lender liability in response to actions to enforce mortgage obligations. Foreclosure-related costs, high loan-to-value ratios or declines in the value of the facility may prevent us from realizing an amount equal to our mortgage or mezzanine loan upon foreclosure, and we may be required to record a valuation allowance for such losses. Even if we are able to successfully foreclose on the collateral securing our real estate-related loans, we may inherit properties for which we may be unable to expeditiously seek tenants or operators, if at all, or equity interests that we are unable to immediately resell due to limitations under the securities laws, either of which would adversely affect our ability to fully recover our investment.

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Required regulatory approvals can delay or prohibit transfers of our healthcare facilities.

        Transfers of healthcare facilities to successor tenants or operators may be subject to regulatory approvals or ratifications, including, but not limited to, change of ownership approvals under certificate of need laws and Medicare and Medicaid provider arrangements that are not required for transfers of other types of commercial operations and other types of real estate. The replacement of any tenant or operator could be delayed by the regulatory approval process of any federal, state or local government agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. If we are unable to find a suitable replacement tenant or operator upon favorable terms, or at all, we may take possession of a facility, which might expose us to successor liability, require us to indemnify subsequent operators to whom we might transfer the operating rights and licenses, or spend substantial time and funds to adapt the facility to other uses, all of which may materially adversely affect our business, results of operations, and financial condition.

Competition may make it difficult to identify and purchase, or develop, suitable healthcare facilities to grow our investment portfolio.

        We face significant competition from other REITs, investment companies, private equity and hedge fund investors, sovereign funds, healthcare operators, lenders, developers and other institutional investors, some of whom may have greater resources and lower costs of capital than we do. Increased competition makes it more challenging for us to identify and successfully capitalize on opportunities that meet our business goals and could improve the bargaining power of property owners seeking to sell, thereby impeding our investment, acquisition and development activities. If we cannot capitalize on our development pipeline, identify and purchase a sufficient quantity of healthcare facilities at favorable prices or if we are unable to finance acquisitions on commercially favorable terms, our business, results of operations and financial condition may be materially adversely affected.

We may be required to incur substantial renovation costs to make certain of our healthcare properties suitable for other operators and tenants.

        Healthcare facilities are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and at times tenant-specific. A new or replacement operator or tenant may require different features in a property, depending on that operator's or tenant's particular business. If a current operator or tenant is unable to pay rent and/or vacates a property, we may incur substantial expenditures to modify a property before we are able to secure another operator or tenant. Also, if the property needs to be renovated to accommodate multiple operators or tenants, we may incur substantial expenditures before we are able to re-lease the space. These expenditures or renovations may materially adversely affect our business, results of operations and financial condition.

We face additional risks associated with property development that can render a project less profitable or not profitable at all and, under certain circumstances, prevent completion of development activities once undertaken.

        Large-scale, ground-up development of healthcare properties presents additional risks for us, including risks that:

    a development opportunity may be abandoned after expending significant resources resulting in the loss of deposits or failure to recover expenses already incurred;

    the development and construction costs of a project may exceed original estimates due to increased interest rates and higher materials, transportation, labor, leasing or other costs, which could make the completion of the development project less profitable;

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    construction and/or permanent financing may not be available on favorable terms or at all;

    the project may not be completed on schedule as a result of a variety of factors that are beyond our control, including natural disasters, labor conditions, material shortages, regulatory hurdles, civil unrest and acts of war, which can result in increases in construction costs and debt service expenses or provide tenants or operators with the right to terminate pre-construction leases; and

    occupancy rates and rents at a newly completed property may not meet expected levels and could be insufficient to make the property profitable.

        These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of development activities once undertaken, any of which could have a material adverse effect on our business, results of operations and financial condition.

Our use of joint ventures may limit our flexibility with jointly owned investments.

        We have and may continue in the future to develop and/or acquire properties in joint ventures with other persons or entities when circumstances warrant the use of these structures. Our participation in joint ventures is subject to risks that may not be present with other methods of ownership, including:

    we could experience an impasse on certain decisions because we do not have sole decision-making authority, which could require us to expend additional resources on resolving such impasses or potential disputes, including litigation or arbitration;

    our joint venture partners could have investment goals that are not consistent with our investment objectives, including the timing, terms and strategies for any investments;

    our ability to transfer our interest in a joint venture to a third party may be restricted;

    our joint venture partners might become bankrupt, fail to fund their share of required capital contributions or fail to fulfill their obligations as a joint venture partner, which may require us to infuse our own capital into the venture on behalf of the partner despite other competing uses for such capital; and

    our joint venture partners may have competing interests in our markets that could create conflict of interest issues.

From time to time, we acquire other companies and if we are unable to successfully integrate these operations, our business, results of operations and financial condition may be materially adversely affected.

        Acquisitions require the integration of companies that have previously operated independently. Successful integration of the operations of these companies depends primarily on our ability to consolidate operations, systems, procedures, properties and personnel and to eliminate redundancies and costs. We may encounter difficulties in these integrations. Potential difficulties associated with acquisitions include the loss of key employees, the disruption of our ongoing business or that of the acquired entity, possible inconsistencies in standards, controls, procedures and policies and the assumption of unexpected liabilities, including:

    liabilities relating to the clean-up or remediation of undisclosed environmental conditions;

    unasserted claims of vendors or other persons dealing with the seller;

    liabilities, claims and litigation, whether or not incurred in the ordinary course of business, relating to periods prior to our acquisition;

    claims for indemnification by general partners, directors, officers and others indemnified by the seller; and

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    liabilities for taxes relating to periods prior to our acquisition.

        In addition, the acquired companies and their properties may fail to perform as expected, including in respect of estimated cost savings. Inaccurate assumptions regarding future rental or occupancy rates could result in overly optimistic estimates of future revenues. Similarly, we may underestimate future operating expenses or the costs necessary to bring properties up to standards established for their intended use. If we have difficulties with any of these areas, or if we later discover additional liabilities or experience unforeseen costs relating to our acquired companies, we might not achieve the economic benefits we expect from our acquisitions, and this may materially adversely affect our business, results of operations and financial condition.

From time to time we have made, and in the future we may seek to make, one or more material acquisitions, which may involve the expenditure of significant funds.

        We regularly review potential transactions in order to maximize stockholder value and believe that currently there are available a number of acquisition opportunities that would be complementary to our business, given the recent industry consolidation trend. In connection with our review of such transactions, we regularly engage in discussions with potential acquisition candidates, some of which are material. Any future acquisitions could require the issuance of securities, the incurrence of debt, assumption of contingent liabilities or incurrence of significant expenditures, any of which could materially adversely impact our business, financial condition or results of operations. In addition, the financing required for such acquisitions may not be available on commercially favorable terms or at all.

Loss of our key personnel could temporarily disrupt our operations and adversely affect us.

        We are dependent on the efforts of our executive officers, and competition for these individuals is intense. Although our chief executive officer, chief financial officer, chief investment officer and general counsel have employment agreements with us, we cannot assure you that they will remain employed with us. The loss or limited availability of the services of any of our executive officers, or our inability to recruit and retain qualified personnel in the future, could, at least temporarily, have a material adverse effect on our business, results of operations and financial condition and the value of our common stock.

Unfavorable resolution of litigation matters and disputes, could have a material adverse effect on our financial condition.

        From time to time, we are involved in legal proceedings, lawsuits and other claims. We may also be named as defendants in lawsuits allegedly arising out of our actions or the actions of our operators and tenants in which such operators and tenants have agreed to indemnify, defend and hold us harmless from and against various claims, litigation and liabilities arising in connection with their respective businesses. An unfavorable resolution of litigation may have a material adverse effect on our business, results of operations and financial condition. Regardless of its outcome, litigation may result in substantial costs and expenses and significantly divert the attention of management. There can be no assurance that we will be able to prevail in, or achieve a favorable settlement of, litigation. In addition, litigation, government proceedings or environmental matters could lead to increased costs or interruption of our normal business operations.

We may experience uninsured or underinsured losses, which could result in a significant loss of the capital we have invested in a property, decrease anticipated future revenues or cause us to incur unanticipated expense.

        We maintain comprehensive insurance coverage on our properties with terms, conditions, limits and deductibles that we believe are adequate and appropriate given the relative risk and costs of such

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coverage, and we continually review the insurance maintained by us. However, a large number of our properties are located in areas exposed to earthquake, windstorm, flood and other natural disasters and may be subject to other losses. In particular, our life science portfolio is concentrated in areas known to be subject to earthquake activity. While we purchase insurance for earthquake, windstorm, flood and other natural disasters that we believe is adequate in light of current industry practice and analyses prepared by outside consultants, there is no assurance that such insurance will fully cover such losses. These losses can decrease our anticipated revenues from a property and result in the loss of all or a portion of the capital we have invested in a property. Following these events, we may remain obligated for any mortgage debt or other financial obligations related to the property. The insurance market for such exposures can be very volatile and we may be unable to purchase the limits and terms we desire on a commercially reasonable basis in the future. In addition, there are certain exposures where insurance is not purchased as we do not believe it is economically feasible to do so or where there is no viable insurance market.

Environmental compliance costs and liabilities associated with our real estate related investments may materially impair the value of those investments.

        Under various federal, state and local laws, ordinances and regulations, as a current or previous owner of real estate, we may be required to investigate and clean up certain hazardous or toxic substances or petroleum released at a property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by the third parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. Although we (i) currently carry environmental insurance on our properties in an amount and subject to deductibles that we believe are commercially reasonable, and (ii) generally require our operators and tenants to undertake to indemnify us for environmental liabilities they cause, such liabilities could exceed the amount of our insurance, the financial ability of the tenant or operator to indemnify us or the value of the contaminated property. The presence of contamination or the failure to remediate contamination may materially adversely affect our ability to sell or lease the real estate or to borrow using the real estate as collateral. As the owner of a site, we may also be held liable to third parties for damages and injuries resulting from environmental contamination emanating from the site. Although we are generally indemnified by the current operators or tenants of our properties for contamination caused by them, these indemnities may not adequately cover all environmental costs. We may also experience environmental liabilities arising from conditions not known to us.

The impact of the comprehensive healthcare regulation enacted in 2010 on us and operators and tenants cannot accurately be predicted.

        Legislative proposals are introduced or proposed in Congress and in some state legislatures each year that would affect major changes in the healthcare system, either nationally or at the state level. Notably, in March 2010, President Obama signed into law the Affordable Care Act. The passage of the Affordable Care Act has resulted in comprehensive reform legislation that is expanding healthcare coverage to millions of currently uninsured people beginning in 2014 and that provides for significant changes to the U.S. healthcare system over the next ten years. To help fund this expansion, the Affordable Care Act outlines certain reductions in Medicare reimbursements for various healthcare providers, including long-term acute care hospitals and skilled nursing facilities, as well as certain other changes to Medicare payment methodologies. This comprehensive healthcare legislation provides for extensive future rulemaking by regulatory authorities, and also may be altered or amended. We cannot accurately predict whether any pending legislative proposals will be adopted or, if adopted, what effect, if any, these proposals would have on our operators and tenants and, thus, our business. Similarly, while we can anticipate that some of the rulemaking that will be promulgated by regulatory authorities

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will affect our operators and tenants and the manner in which they are reimbursed by the federal healthcare programs, we cannot accurately predict today the impact of those regulations on our operators and tenants and thus on our business.

        The Supreme Court's decision upholding the constitutionality of the individual mandate while striking down the provisions linking federal funding of state Medicaid programs with a federally mandated expansion of those programs has not reduced the uncertain impact that the law will have on healthcare delivery systems over the next decade. We can expect that the federal authorities will continue to implement the law, but, because of the Supreme Court's mixed ruling, the implementation will take longer than originally expected, with a commensurate increase in the period of uncertainty regarding the law's full long-term financial impact on the delivery of and payment for healthcare.

We rely on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our business.

        We rely on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes, including financial transactions and records, personal identifying information, and tenant and lease data. We purchase some of our information technology from vendors, on whom our systems depend. We rely on commercially available systems, software, tools and monitoring to provide security for processing, transmission and storage of confidential tenant and other customer information, such as individually identifiable information, including information relating to financial accounts. Although we have taken steps to protect the security of our information systems and the data maintained in those systems, it is possible that our safety and security measures will not be able to prevent the systems' improper functioning or damage, or the improper access or disclosure of personally identifiable information such as in the event of cyber-attacks. Security breaches, including physical or electronic break-ins, computer viruses, attacks by hackers and similar breaches, can create system disruptions, shutdowns or unauthorized disclosure of confidential information. Any failure to maintain proper function, security and availability of our information systems could interrupt our operations, damage our reputation, subject us to liability claims or regulatory penalties and could have a material adverse effect on our business, financial condition and results of operations.

We are subject to certain provisions of Maryland law and our charter relating to business combinations.

        The Maryland Business Combination Act provides that unless exempted, a Maryland corporation may not engage in business combinations, including a merger, consolidation, share exchange or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities with an "interested stockholder" or an affiliate of an interested stockholder for five years after the most recent date on which the interested stockholder became an interested stockholder, and thereafter unless specified criteria are met. An interested stockholder is generally a person owning or controlling, directly or indirectly, 10% or more of the voting power of the outstanding voting stock of a Maryland corporation. Unless our Board of Directors takes action to exempt us, generally or with respect to certain transactions, from this statute in the future, the Maryland Business Combination Act will be applicable to business combinations between us and other persons.

        In addition to the restrictions on business combinations contained in the Maryland Business Combination Act, our charter also contains restrictions on business combinations. Our charter requires that, except in certain circumstances, "business combinations," including a merger or consolidation, and certain asset transfers and issuances of securities, with a "related person," including a beneficial owner of 10% or more of our outstanding voting stock, be approved by the affirmative vote of the holders of at least 90% of our outstanding voting stock.

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        The restrictions on business combinations provided under Maryland law and contained in our charter may delay, defer or prevent a change of control or other transaction even if such transaction involves a premium price for our common stock or our stockholders believe that such transaction is otherwise in their best interests.

Risk Related to Tax, including REIT-Related risks

Loss of our tax status as a REIT would substantially reduce our available funds and would have material adverse consequences for us and the value of our common stock.

        Qualification as a REIT involves the application of numerous highly technical and complex provisions of the Internal Revenue Code of 1986, as amended (the "Code"), for which there are only limited judicial and administrative interpretations, as well as the determination of various factual matters and circumstances not entirely within our control. We intend to continue to operate in a manner that enables us to qualify as a REIT. However, our qualification and taxation as a REIT depend upon our ability to meet, through actual annual operating results, asset diversification, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code. For example, to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must make distributions to our stockholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. In addition, new legislation, regulations, administrative interpretations or court decisions could change the tax laws or interpretations of the tax laws regarding qualification as a REIT, or the federal income tax consequences of that qualification, in a manner that is materially adverse to our stockholders. Accordingly, there is no assurance that we have operated or will continue to operate in a manner so as to qualify or remain qualified as a REIT.

        If we lose our REIT status, we will face serious tax consequences that will substantially reduce the funds available to make payments of principal and interest on the debt securities we issue and to make distributions to stockholders. If we fail to qualify as a REIT:

    we will not be allowed a deduction for distributions to stockholders in computing our taxable income;

    we will be subject to corporate-level income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates;

    we could be subject to increased state and local income taxes; and

    unless we are entitled to relief under relevant statutory provisions, we will be disqualified from taxation as a REIT for the four taxable years following the year during which we fail to qualify as a REIT.

        As a result of all these factors, our failure to qualify as a REIT also could impair our ability to expand our business and raise capital and could materially adversely affect the value of our common stock.

We could have potential deferred and contingent tax liabilities from corporate acquisitions that could limit, delay or impede future sales of our properties.

        If, during the ten-year period beginning on the date we acquire certain companies, we recognize gain on the disposition of any property acquired, then, to the extent of the excess of (i) the fair market value of such property as of the acquisition date over (ii) our adjusted income tax basis in such property as of that date, we will be required to pay a corporate-level federal income tax on this gain at the highest regular corporate rate. There can be no assurance that these triggering dispositions will not occur, and these requirements could limit, delay or impede future sales of our properties.

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        In addition, the IRS may assert liabilities against us for corporate income taxes for taxable years prior to the time that we acquire certain companies, in which case we will owe these taxes plus interest and penalties, if any.

There are uncertainties relating to the calculation of non-REIT tax earnings and profits ("E&P") in certain acquisitions, which may require us to distribute E&P.

        In order to remain qualified as a REIT, we are required to distribute to our stockholders all of the accumulated non-REIT E&P of certain companies that we acquire, prior to the close of the first taxable year in which the acquisition occurs. Failure to make such E&P distributions would result in our disqualification as a REIT. The determination of the amount to be distributed in such E&P distributions is a complex factual and legal determination. We may have less than complete information at the time we undertake our analysis, or we may interpret the applicable law differently from the IRS. We currently believe that we have satisfied the requirements relating to such E&P distributions. There are, however, substantial uncertainties relating to the determination of E&P, including the possibility that the IRS could successfully assert that the taxable income of the companies acquired should be increased, which would increase our non-REIT E&P. Moreover, an audit of the acquired company following our acquisition could result in an increase in accumulated non-REIT E&P, which could require us to pay an additional taxable distribution to our then-existing stockholders, if we qualify under rules for curing this type of default, or could result in our disqualification as a REIT.

        Thus, we might fail to satisfy the requirement that we distribute all of our non-REIT E&P by the close of the first taxable year in which the acquisition occurs. Moreover, although there are procedures available to cure a failure to distribute all of our E&P, we cannot now determine whether we will be able to take advantage of these procedures or the economic impact on us of doing so.

Our charter contains ownership limits with respect to our common stock and other classes of capital stock.

        Our charter contains restrictions on the ownership and transfer of our common stock and preferred stock that are intended to assist us in preserving our qualification as a REIT. Under our charter, subject to certain exceptions, no person or entity may own, actually or constructively, more than 9.8% (by value or by number of shares, whichever is more restrictive) of the outstanding shares of our common stock or any class or series of our preferred stock.

        Additionally, our charter has a 9.9% ownership limitation on the direct or indirect ownership of our voting shares, which may include common stock or other classes of capital stock. Our Board of Directors, in its sole discretion, may exempt a proposed transferee from either ownership limit. The ownership limits may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or might otherwise be in the best interests of our stockholders.

ITEM 1B.    Unresolved Staff Comments

        None.

ITEM 2.    Properties

        We are organized to invest in income-producing healthcare-related facilities. In evaluating potential investments, we consider a multitude of factors, including:

    Location, construction quality, age, condition and design of the property;

    Geographic area, proximity to other healthcare facilities, type of property and demographic profile;

    Whether the expected risk-adjusted return exceeds our cost of capital;

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    Whether the rent or operating income provides a competitive market return to our investors;

    Duration, rental rates, operator and tenant quality and other attributes of in-place leases, including master lease structures;

    Current and anticipated cash flow and its adequacy to meet our operational needs;

    Availability of security such as letters of credit, security deposits and guarantees;

    Potential for capital appreciation;

    Expertise and reputation of the operator or tenant;

    Occupancy and demand for similar healthcare facilities in the same or nearby communities;

    The mix of revenues generated at healthcare facilities between privately-paid and government reimbursed;

    Availability of qualified operators or property managers and whether we can manage the property;

    Potential alternative uses of the facilities;

    The regulatory and reimbursement environment in which the properties operate;

    Tax laws related to REITs;

    Prospects for liquidity through financing or refinancing; and

    Our access to and cost of capital.

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        The following summarizes our property and direct financing lease ("DFL") investments as of and for the year ended December 31, 2013 (square feet and dollars in thousands).

Facility Location
  Number of
Facilities
  Capacity   Gross Asset
Value(1)
  Rental
Revenues(2)
  Operating
Expenses
 

Senior housing—real estate:

          (Units)                    

California

    34     3,670   $ 632,647   $ 69,314   $ 1,977  

Texas

    34     4,266     535,010     58,116      

Florida

    28     3,570     473,799     45,414      

Oregon

    31     2,430     356,955     30,030     276  

Virginia

    11     1,419     285,770     22,888     51  

Washington

    20     1,433     235,838     19,075     1  

Colorado

    7     1,069     212,622     20,069      

Illinois

    11     999     194,419     17,582      

New Jersey

    8     802     176,332     12,832     62  

Georgia

    19     1,108     162,435     12,624     3  

Other (31 States)

    128     12,271     1,821,104     176,335     1,041  
                       

    331     33,037     5,086,931     484,279     3,411  

Senior housing—RIDEA:

                               

Other (6 States)

    20     4,618     701,478     145,938     91,879  

Senior housing—DFLs(3):

   
 
   
 
   
 
   
 
   
 
 

Maryland

    13     1,089     252,037     20,603     2  

New Jersey

    8     676     189,252     14,784     121  

Illinois

    10     938     176,654     14,440      

Florida

    14     1,203     160,446     13,195     63  

Pennsylvania

    10     725     145,997     12,365      

Ohio

    11     961     141,031     11,100     25  

Other (12 States)

    27     2,335     414,767     32,090     102  
                       

    93     7,927     1,480,184     118,577     313  
                       

Total senior housing

    444     45,582   $ 7,268,593   $ 748,794   $ 95,603  
                       
                       

Post-acute/skilled nursing—real estate:

          (Beds)                    

Virginia

    9     932   $ 58,377   $ 6,853   $  

Indiana(4)

    8     873     46,964     8,326      

Ohio

    6     577     30,863     4,952     11  

Nevada

    2     303     16,363     3,050      

Colorado

    2     216     13,800     1,800      

Other (6 States)

    7     717     25,314     4,201     2,002  
                       

    34     3,618     191,681     29,182     2,013  

Post-acute/skilled nursing—DFLs(3):

                               

Pennsylvania

    43     6,916     1,235,099     116,981      

Illinois

    26     3,244     716,196     65,492      

Ohio

    44     5,005     653,493     60,958     133  

Michigan

    27     3,159     590,477     53,193      

Florida

    27     3,491     557,271     51,683     10  

Other (24 States)

    101     13,133     1,796,788     164,316     329  
                       

    268     34,948     5,549,324     512,623     472  
                       

Total post-acute/skilled nursing

    302     38,566   $ 5,741,005   $ 541,805   $ 2,485  
                       
                       

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Facility Location
  Number of
Facilities
  Capacity   Gross Asset
Value(1)
  Rental
Revenues(2)
  Operating
Expenses
 

Life science:

          (Sq. Ft.)                    

California

    100     6,326   $ 3,071,261   $ 279,378   $ 54,005  

Utah

    10     669     114,480     15,658     1,924  

Other (2 States)(4)

    1     85     38,720     1,843     1,027  
                       

Total life science

    111     7,080   $ 3,224,461   $ 296,879   $ 56,956  
                       
                       

Medical office:

          (Sq. Ft.)                    

Texas

    48     4,280   $ 686,752   $ 98,876   $ 44,851  

California

    15     871     224,462     26,301     12,349  

Utah

    28     1,292     194,044     26,780     7,842  

Colorado

    16     1,080     191,322     27,897     11,351  

Washington

    6     651     156,622     28,798     10,664  

Tennessee

    16     1,373     148,759     26,371     11,307  

Other (21 States and Mexico)(4)

    77     4,547     807,710     117,311     41,012  
                       

Total medical office

    206     14,094   $ 2,409,671   $ 352,334   $ 139,376  
                       
                       

Hospital:

          (Beds)                    

Texas

    4     906   $ 230,019   $ 17,027   $ 3,683  

California

    2     111     143,500     18,654      

Louisiana

    2     79     31,616     2,699     121  

Other (5 States)

    5     369     57,125     10,677      
                       

    13     1,465   $ 462,260   $ 49,057   $ 3,804  

Hospital—DFLs(3):

                               

Other (3 States)

    3     756     123,891     23,003     58  
                       

Total hospital

    16     2,221   $ 586,151   $ 72,060   $ 3,862  
                       
                       

Total properties

    1,079         $ 19,229,881   $ 2,011,872   $ 298,282  
                         
                         

(1)
Represents gross real estate and the carrying value of DFLs. Gross real estate represents the carrying amount of real estate after adding back accumulated depreciation and amortization.

(2)
Rental revenues represent the combined amount of rental and related revenues, tenant recoveries, resident fees and services and income from direct financing leases.

(3)
Represents leased properties that are classified as DFLs.

(4)
Includes properties with a portion that has been taken out of redevelopment and placed into service.

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        The following table summarizes occupancy and average annual rent trends for our owned portfolio for the years ended December 31, (square feet in thousands):

 
  2013   2012   2011   2010   2009  

Senior housing(1):

                               

Average annual rent per unit(2)

  $ 13,174   $ 13,140   $ 14,431   $ 12,675   $ 11,936  

Average capacity (units)(3)

    45,400     36,694     30,167     24,356     24,112  

Post-acute/skilled nursing(1):

                               

Average annual rent per bed(2)

  $ 12,218   $ 11,802   $ 12,669   $ 7,118   $ 7,063  

Average capacity (beds)(3)

    38,464     38,459     26,167     3,675     3,644  

Life science:

                               

Average occupancy percentage

    92 %   90 %   90 %   89 %   91 %

Average annual rent per square foot(2)

  $ 44   $ 45   $ 44   $ 44   $ 43  

Average occupied square feet(3)

    6,480     6,250     6,076     5,740     5,554  

Medical office:

                               

Average occupancy percentage

    91 %   91 %   91 %   91 %   91 %

Average annual rent per square foot(2)

  $ 27   $ 27   $ 27   $ 26   $ 26  

Average occupied square feet(3)

    12,767     12,147     11,721     11,437     11,431  

Hospital(1):

                               

Average annual rent per bed(2)

  $ 38,437   $ 37,679   $ 36,974   $ 36,273   $ 32,984  

Average capacity (beds)(3)

    2,175     2,087     2,084     2,064     2,041  

(1)
Senior housing includes average units of 4,620, 4,626 and 1,545 for the years ended December 31, 2013, 2012 and 2011, respectively, that are in a RIDEA structure in which resident occupancy impacts our annual revenue. The average resident occupancy for these units was 88%, 86% and 86% for the years ended December 31, 2013, 2012 and 2011, respectively. All other senior housing, post-acute/skilled nursing and hospital facilities are generally triple-net leased to single tenants, which were substantially 100% leased.

(2)
Average annual rent is presented as a ratio of revenues comprised of rental and related revenues, tenant recoveries and income from direct financing leases divided by the average capacity or average occupied square feet of the facilities and annualized for mergers and acquisitions for the year in which they occurred. Average annual rent for leased properties (including DFLs) excludes termination fees and non-cash revenue adjustments (i.e., straight-line rents, amortization of above and below market lease intangibles and DFL interest accretion). Average annual rent for properties operated under a RIDEA structure is calculated based on NOI divided by the average capacity of the facilities.

(3)
Capacity for senior housing facilities is measured in available units (e.g., studio, one or two bedroom units). Capacity for post-acute/skilled nursing and hospitals is measured in available bed count. Capacity for life science facilities and MOBs is measured in square feet. Average capacity for senior housing, post-acute/skilled nursing and hospitals is as reported by the respective tenants or operators for the twelve month period and one quarter in arrears from the periods presented.

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Development Properties

        The following table sets forth the properties owned by us in our life science, medical office and hospital segments as of December 31, 2013 that are currently under development or redevelopment (dollars and square feet in thousands):

Name of Project
  Location   Estimated
Completion
Date(1)
  Estimated
Rentable
Sq. Ft.
  Investment
To Date
  Estimated
Total
Investment
 

Life science:

                             

Durham Research Lab(2)

  Durham, NC     1Q 2014     28   $ 14,236   $ 17,072  

Ridgeview

  Poway, CA     2Q 2014     115     14,457     22,937  

Carmichael II(2)

  Durham, NC     4Q 2014     77     9,447     29,733  

1030 Massachusetts Avenue(2)

  Cambridge, MA     1Q 2015     53     26,041     29,013  

Medical office:

                             

Alaska(2)

  Anchorage, AK     1Q 2014     32     8,046     9,561  

Folsom

  Sacramento, CA     1Q 2014     92     37,005     39,251  

Bayfront(2)

  St. Petersburg, FL     4Q 2014     135     12,493     21,850  

Delta Point(2)

  Las Vegas, NV     4Q 2014     60     18,111     23,111  

Post-acute/skilled nursing:

                             

Anderson II

  Anderson, IN     1Q 2014     N/A     7,185     9,090  
                           

                  $ 147,021   $ 201,618  
                           
                           

(1)
For development projects, management's estimate of the date the core and shell structure improvements are expected to be completed. For redevelopment projects, management's estimate of the time in which major construction activity in relation to the scope of the project has been substantially completed. There are no assurances that any of these projects will be completed on schedule or within estimated amounts.

(2)
Represents a portion of the facility.

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Tenant Lease Expirations

        The following table shows tenant lease expirations, including those related to DFLs, for the next 10 years and thereafter at our leased properties, assuming that none of the tenants exercise any of their renewal options (dollars and square feet in thousands). See "Tenant Purchase Options" section of Note 12 to the Consolidated Financial Statements for additional information on leases subject to purchase options.

 
   
  Expiration Year  
Segment
  Total   2014(1)   2015   2016   2017   2018   2019   2020   2021   2022   2023   Thereafter  

Senior housing(2):

                                                                         

Properties

    424         1     14     8     37     10     43     16     3     8     284  

Base rent(3)

  $ 551,615   $   $ 214   $ 16,838   $ 10,574   $ 79,050   $ 14,884   $ 68,823   $ 18,224   $ 3,221   $ 22,991   $ 316,796  

% of segment base rent

    100             3     2     14     3     12     3     1     4     58  

Post-acute/skilled:

                                                                         

Properties

    302         1     1         2     21     5         4         268  

Base rent(3)

  $ 473,686   $   $ 462   $ 330   $   $ 1,139   $ 18,415   $ 5,513   $   $ 3,179   $   $ 444,648  

% of segment base rent

    100                         4     1         1         94  

Life science:

                                                                         

Square feet

    6,545     420     714     382     852     613     259     974     557     280     769     725  

Base rent(3)

  $ 241,193   $ 9,489   $ 24,352   $ 9,872   $ 28,901   $ 28,182   $ 7,916   $ 44,928   $ 31,633   $ 8,618   $ 32,969   $ 14,333  

% of segment base rent

    100     4     10     4     12     12     3     19     13     3     14     6  

Medical office:

                                                                         

Square feet

    12,921     2,516     1,654     1,547     1,626     1,667     903     1,113     436     553     335     571  

Base rent(3)

  $ 288,780   $ 56,917   $ 38,014   $ 34,238   $ 37,165   $ 35,904   $ 19,701   $ 23,172   $ 10,442   $ 12,831   $ 7,159   $ 13,237  

% of segment base rent

    100     20     13     12     13     12     7     8     4     4     2     5  

Hospital:

                                                                         

Properties

    17                 3         5     1     1     2         5  

Base rent(3)

  $ 66,842   $   $   $   $ 10,153   $   $ 7,194   $ 5,471   $ 1,118   $ 8,906   $   $ 34,000  

% of segment base rent

    100                 15         11     8     2     13         51  

Total:

                                                                         

Base rent(3)

  $ 1,622,116   $ 66,406   $ 63,042   $ 61,278   $ 86,793   $ 144,275   $ 68,110   $ 147,907   $ 61,417   $ 36,755   $ 63,119   $ 823,014  

% of total base rent

    100     4     4     4     5     9     4     9     4     2     4     51  

(1)
Includes month-to-month leases.

(2)
Excludes RIDEA facilities with annualized NOI of $53.3 million.

(3)
The most recent month's (or subsequent month's if acquired in the most recent month) base rent including additional rent floors and cash income from direct financing leases annualized for 12 months. Base rent does not include tenant recoveries, additional rents in excess of floors and non-cash revenue adjustments (i.e., straight-line rents, amortization of above and below market lease intangibles, DFL interest accretion and deferred revenues).

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        The following is a graphical presentation of our total tenant lease expirations (as presented above) for the next 10 years and thereafter at our leased properties, assuming that none of the tenants exercise any of their renewal options (dollars in millions):

GRAPHIC

        We specifically incorporate by reference into this section the information set forth in Schedule III: Real Estate and Accumulated Depreciation, included in this report.

ITEM 3.    Legal Proceedings

        We are involved from time-to-time in legal proceedings that arise in the ordinary course of our business, including, but not limited to commercial disputes, environmental matters, and litigation in connection with transactions including acquisitions and divestitures. We believe that such existing legal proceedings will not have a material adverse impact on our financial position or our results of operations. We record a liability when a loss is considered probable and the amount can be reasonably estimated.

        See litigation matter under the heading "Legal Proceedings" of Note 12 to the Consolidated Financial Statements for information regarding legal proceedings, which information is incorporated by reference in this Item 3.

ITEM 4.    Mine Safety Disclosures

        None.

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PART II

ITEM 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

        Our common stock is listed on the New York Stock Exchange. Set forth below for the fiscal quarters indicated are the reported high and low sales prices per share of our common stock on the New York Stock Exchange.

 
  2013   2012   2011  
 
  High   Low   High   Low   High   Low  

First Quarter

  $ 49.91   $ 45.22   $ 42.75   $ 38.72   $ 38.29   $ 35.81  

Second Quarter

    56.06     41.50     44.15     37.81     40.75     35.00  

Third Quarter

    47.45     38.93     47.75     43.59     38.23     28.76  

Fourth Quarter

    43.29     35.50     46.15     43.31     41.98     32.66  

        At January 31, 2014, we had approximately 10,516 stockholders of record and there were approximately 235,324 beneficial holders of our common stock.

    Dividends (Distributions)

        It has been our policy to declare quarterly dividends to common stockholders so as to comply with applicable provisions of the Code governing REITs. The cash dividends per share paid on common stock are set forth below:

 
  2013   2012   2011  

First Quarter

  $ 0.525   $ 0.50   $ 0.48  

Second Quarter

    0.525     0.50     0.48  

Third Quarter

    0.525     0.50     0.48  

Fourth Quarter

    0.525     0.50     0.48  
               

Total

  $ 2.10   $ 2.00   $ 1.92  
               
               

        Distributions with respect to our common stock can be characterized for federal income tax purposes as taxable ordinary dividends, capital gain dividends, nondividend distributions or a combination thereof. Following is the characterization of our annual common stock distributions per share:

 
  Year Ended December 31,  
 
  2013   2012   2011  

Ordinary dividends

  $ 1.8127   $ 1.4618   $ 0.9259  

Capital gain dividends

    0.1516     0.0495     0.2448  

Nondividend distributions

    0.1357     0.4887     0.7493  
               

  $ 2.1000   $ 2.0000   $ 1.9200  
               
               

        On January 30, 2014, we announced that our Board of Directors declared a quarterly common stock cash dividend of $0.545 per share. The annualized distribution rate per share for 2014 increased 3.8% to $2.18, compared to $2.10 for 2013. The common stock dividend will be paid on February 25, 2014 to stockholders of record as of the close of business on February 10, 2014.

        Distributions with respect to our preferred stock can be characterized for federal income tax purposes as taxable ordinary dividends, capital gain dividends, nondividend distributions or a

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combination thereof. We redeemed all of our outstanding preferred stock on April 23, 2012. Following is the characterization of our annual preferred stock distributions per share:

 
  Series E   Series F  
 
  December 31,  
 
  2012   2011   2012   2011  

Ordinary dividends

  $ 0.4383   $ 1.4335   $ 0.4292   $ 1.4038  

Capital gain dividends

    0.0148     0.3790     0.0145     0.3712  
                   

  $ 0.4531   $ 1.8125   $ 0.4437   $ 1.7750  
                   
                   

    Issuer Purchases of Equity Securities

        The table below sets forth the information with respect to purchases of our common stock made by or on our behalf during the quarter ended December 31, 2013.


ISSUER PURCHASES OF EQUITY SECURITIES

Period Covered
  Total Number
Of Shares
Purchased(1)
  Average Price
Paid Per Share
  Total Number Of Shares
Purchased As
Part Of Publicly
Announced Plans
Or Programs
  Maximum Number (Or
Approximate Dollar Value)
Of Shares That May Yet
Be Purchased Under
The Plans Or Programs
 

October 1-31, 2013

    184,375   $ 41.77          

November 1-30, 2013

    106     41.71          

December 1-31, 2013

    6,247     36.60          
                     

Total

    190,728     41.60          
                     
                     

(1)
Represents restricted shares withheld under our 2006 Performance Incentive Plan, as amended and restated (the "2006 Incentive Plan"), to offset tax withholding obligations that occur upon vesting of restricted shares. Our 2006 Incentive Plan provides that the value of the shares withheld shall be the closing price of our common stock on the date the relevant transaction occurs.

    Stock Price Performance Graph

        The graph below compares the cumulative total return of HCP, the S&P 500 Index and the Equity REIT Index of the National Association of Real Estate Investment Trusts, Inc. ("NAREIT"), from January 1, 2009 to December 31, 2013. Total cumulative return is based on a $100 investment in HCP common stock and in each of the indices on January 1, 2009 and assumes quarterly reinvestment of dividends before consideration of income taxes. Stockholder returns over the indicated periods should not be considered indicative of future stock prices or stockholder returns.

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COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN

AMONG S&P 500, EQUITY REITS AND HCP, Inc.

RATE OF RETURN TREND COMPARISON

JANUARY 1, 2009–DECEMBER 31, 2013

(JANUARY 1, 2009 = 100)

Stock Price Performance Graph Total Return

GRAPHIC

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ITEM 6.    Selected Financial Data

        Set forth below is our selected financial data as of and for each of the years in the five year period ended December 31, 2013 (dollars in thousands, except per share data):

 
  Year Ended December 31,(1)(2)  
 
  2013   2012   2011(3)   2010   2009(3)  

Income statement data:

                               

Total revenues

  $ 2,099,878   $ 1,879,970   $ 1,694,418   $ 1,224,717   $ 1,118,513  

Income from continuing operations

    910,633     801,190     536,130     303,869     87,378  

Net income applicable to common shares

    969,103     812,289     515,302     307,498     109,069  

Income from continuing operations applicable to common shares:

                               

Basic earnings per common share

    1.97     1.80     1.25     0.87     0.18  

Diluted earnings per common share

    1.97     1.80     1.25     0.87     0.18  

Net income applicable to common shares:

                               

Basic earnings per common share

    2.13     1.90     1.29     1.01     0.40  

Diluted earnings per common share

    2.13     1.90     1.29     1.00     0.40  

Balance sheet data:

                               

Total assets

    20,075,870     19,915,555     17,408,475     13,331,923     12,209,735  

Debt obligations(4)

    8,661,627     8,695,549     7,731,137     4,656,241     5,667,417  

Total equity

    10,931,134     10,753,777     9,220,622     8,146,047     5,958,609  

Other data:

                               

Dividends paid

    956,685     865,306     787,689     590,735     517,072  

Dividends paid per common share

    2.10     2.00     1.92     1.86     1.84  

(1)
Reclassification, presentation and certain computational changes have been made for the results of properties sold or held-for-sale reclassified to discontinued operations.

(2)
The following are acquisitions that had a meaningful impact on our financial position and results of operations in the years in which they closed and thereafter:

During the fourth quarter of 2012, we acquired 129 senior housing communities, from a joint venture between Emeritus Corporation and Blackstone Real Estate Partners VI, an affiliate of Blackstone (the "Blackstone JV").

On April 7, 2011, we completed our acquisition of substantially all of the real estate assets of HCR ManorCare, which includes the settlement of our HCR ManorCare debt investments discussed below.

On January 14, 2011, we acquired our partner's 65% interest in HCP Ventures II, a joint venture that owned 25 senior housing facilities, becoming the sole owner of the portfolio.

(3)
On November 9, 2011, we entered into an agreement with Ventas, Inc. ("Ventas") to settle all remaining claims relating to Ventas's litigation against HCP arising out of Ventas's 2007 acquisition of Sunrise Senior Living REIT. We paid $125 million to Ventas, which was recorded as litigation settlement expense for the year ended December 31, 2011. On September 4, 2009, a jury returned a verdict in favor of Ventas in an action brought against us. The jury awarded Ventas approximately $102 million in compensatory damages, which we recorded as a litigation provision expense during the year ended December 31, 2009.

(4)
Includes bank line of credit, bridge and term loans, senior unsecured notes, mortgage and other secured debt, and other debt.

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ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Language Regarding Forward-Looking Statements

        Statements in this Annual Report on Form 10-K that are not historical factual statements are "forward-looking statements." 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 expectations as identified by the use of words such as "may," "will," "project," "expect," "believe," "intend," "anticipate," "seek," "forecast," "plan," "estimate," "could," "would," "should" and other comparable and derivative terms or the negatives thereof. In addition, we, through our officers, from time to time, make forward-looking oral and written public statements concerning our expected future operations, strategies, securities offerings, growth and investment opportunities, dispositions, capital structure changes, budgets and other developments. Readers are cautioned that, 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. Therefore, readers should be mindful that forward-looking statements are not guarantees of future performance and that they are subject to known and unknown risks and uncertainties that are difficult to predict. As more fully set forth in Part I, Item 1A., "Risk Factors" in this report, factors that may cause our actual results to differ materially from the expectations contained in the forward-looking statements include:

    (a)
    Changes in global, national and local economic conditions, including a prolonged period of weak economic growth;

    (b)
    Volatility or uncertainty in the capital markets, including changes in the availability and cost of capital (impacted by changes in interest rates and the value of our common stock); which may adversely impact our ability to consummate transactions or reduce the earnings from potential transactions;

    (c)
    Our ability to manage our indebtedness level and changes in the terms of such indebtedness;

    (d)
    The effect on healthcare providers of recently enacted and pending Congressional legislation addressing entitlement programs and related services, including Medicare and Medicaid, which may, result in future reductions in reimbursements;

    (e)
    The ability of our operators, tenants and borrowers to conduct their respective businesses in a manner sufficient to maintain or increase their revenues and to generate sufficient income to make rent and loan payments to us and our ability to recover investments made, if applicable, in their operations;

    (f)
    The financial weakness of some operators and tenants, including potential bankruptcies and downturns in their businesses, which results in uncertainties regarding our ability to continue to realize the full benefit of such operators' and/or tenants' leases;

    (g)
    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 operators, tenants and borrowers;

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

    (i)
    Competition for tenants and borrowers, including with respect to new leases and mortgages and the renewal or rollover of existing leases;

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    (j)
    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 operator or tenant upon default;

    (k)
    Availability of suitable properties to acquire at favorable prices and the competition for the acquisition and financing of those properties;

    (l)
    The financial, legal, regulatory and reputational difficulties of significant operators of our properties;

    (m)
    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;

    (n)
    The ability to obtain financing necessary to consummate acquisitions on favorable terms;

    (o)
    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 joint venture partners' financial condition and continued cooperation; and

    (p)
    Changes in the credit ratings on U.S. government debt securities or default or delay in payment by the U.S. of its obligations.

        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 7 is intended to provide readers with an understanding of our financial condition, changes in financial condition and results of operations. We will discuss and provide our analysis in the following order:

    Executive Summary

    2013 Transaction Overview

    Dividends

    Critical Accounting Policies

    Results of Operations

    Liquidity and Capital Resources

    Non-GAAP Financial Measure—Funds from Operations

    Off-Balance Sheet Arrangements

    Contractual Obligations

    Inflation

    Recent Accounting Pronouncements

Executive Summary

        We are a self-administered REIT that, together with our unconsolidated joint ventures, invests primarily in real estate serving the healthcare industry in the U.S. We acquire, develop, lease, manage and dispose of healthcare real estate and provide financing to healthcare providers. At December 31, 2013, our portfolio of investments, including properties owned by our Investment Management Platform, consisted of interests in 1,153 facilities.

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        Our business strategy is based on three principles: (i) opportunistic investing, (ii) portfolio diversification and (iii) conservative financing. We actively redeploy capital from investments with lower return potential or shorter investment horizons into assets representing longer term investments with attractive risk-adjusted return potential. We make investments where the expected risk-adjusted return exceeds our cost of capital and strive to capitalize on our operator, tenant and other business relationships to grow our business.

        Our strategy contemplates acquiring and developing properties on terms that are favorable to us. Generally, we prefer larger, more complex private transactions that leverage our management team's experience and our infrastructure. We follow a disciplined approach to enhancing the value of our existing portfolio, including ongoing evaluation of potential disposition of properties that no longer fit our strategy.

        We primarily generate revenue by leasing healthcare properties under long-term leases with fixed and/or inflation indexed escalators. Most of our rents and other earned income from leases are received under triple-net leases or leases that provide for substantial recovery of operating expenses; however, some of our medical office and life science leases are structured as gross or modified gross leases. Operating expenses are generally related to MOBs and life science leased properties and senior housing properties managed by eligible independent contractors on our behalf ("RIDEA properties"). Accordingly, for such MOBs, life science facilities and RIDEA properties, we incur certain property operating expenses, such as real estate taxes, repairs and maintenance, property management fees, utilities, employee costs for resident care and insurance. Our growth for these assets depends, in part, on our ability to (i) increase rental income and other earned income from leases by increasing rental rates and occupancy levels; (ii) maximize tenant recoveries given underlying lease structures; and (iii) control operating and other expenses. Our operations are impacted by property specific, market specific, general economic and other conditions. At December 31, 2013, the contractual maturities in our portfolio of leased assets were 17% through 2017 (measured in dollars of expiring base rents).

        Access to capital markets impacts our cost of capital and ability to refinance maturing indebtedness, as well as to fund future acquisitions and development through the issuance of additional securities or secured debt. Access to external capital on favorable terms is critical to the success of our strategy.

2013 Transaction Overview

Investment Transactions

        During the year ended December 31, 2013, we made investments of $598 million, which included the following:

    On May 2, 2013, we acquired £121 million ($188 million) of Barchester Healthcare ("Barchester") debt investments at a discount for £109 million ($170 million). On August 23, 2013, we acquired an additional investment in this loan of £9 million ($14 million) at a discount for £5 million ($8 million). On September 6, 2013, we received £129 million ($202 million) from the par payoff of our Barchester debt investments; resulting in interest income of $24 million primarily from the unamortized discounts.

    On June 25, 2013, we funded the $102 million second tranche of our 2012 mezzanine loan facility to Tandem Health Care, an affiliate of Formation Capital, as part of the recapitalization of a post-acute/skilled nursing portfolio. The funds from the second tranche were used to repay debt senior to our loan. The loan bears interest at a fixed rate of 12% and 14% per annum for the first and second transactions, respectively. The facility will have a total term of up to 63 months from the initial closing in July 2012. The mezzanine loan facility is subordinate to $443 million of senior mortgage debt.

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    In March 2013, we acquired the four remaining senior housing facilities from our previously announced 2012 Blackstone JV Acquisition for $38 million.

    We funded $249 million to acquire a senior housing facility and marketable debt securities, and to fund construction and other capital projects, primarily in our life science, medical office and senior housing segments.

        During the year ended December 31, 2013, we sold 12 properties for $96 million. In addition, in September 2013, we exchanged a 62-bed hospital located in Greenfield, Wisconsin for a 60-bed hospital located in Webster, Texas.

Financing Activities

        During the year ended December 31, 2013, we repaid $810 million of aggregate senior unsecured and mortgage debt notes with a weighted average interest rate of 5.7%.

        On November 12, 2013, we issued $800 million of 4.25% senior unsecured notes due in 2023. The notes were priced at 99.54% of the principal amount with an effective yield-to-maturity of 4.307%; net proceeds from this offering were $789 million.

Dividends

        Quarterly dividends paid during 2013 aggregated $2.10 per share, which represents a 5% increase from 2012. On January 30, 2014, our Board of Directors declared a quarterly cash dividend of $0.545 per common share. The annualized distribution rate per share for 2014 increased 3.8% to $2.18, compared to $2.10 for 2013. The dividend will be paid on February 25, 2014 to stockholders of record as of the close of business on February 10, 2014.

Critical Accounting Policies

        The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires our management to use judgment in the application of accounting policies, including making estimates and assumptions. We base estimates on the best information available to us at the time, our experience and on various other assumptions believed to be reasonable under the circumstances. These estimates affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to various transactions or other matters had been different, it is possible that different accounting would have been applied, resulting in a different presentation of our consolidated financial statements. From time to time, we re-evaluate our estimates and assumptions. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. For a more detailed discussion of our significant accounting policies, see Note 2 to the Consolidated Financial Statements. Below is a discussion of accounting policies that we consider critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

    Principles of Consolidation

        The consolidated financial statements include the accounts of HCP, Inc., our wholly owned subsidiaries and joint ventures that we control, through voting rights or other means. We consolidate investments in variable interest entities ("VIEs") when we are the primary beneficiary of the VIE. A variable interest holder is considered to be the primary beneficiary of a VIE if it has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic

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performance and has the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to the VIE.

        We make judgments with respect to our level of influence or control of an entity and whether we are (or are not) the primary beneficiary of a VIE. Consideration of various factors includes, but is not limited to, our ability to direct the activities that most significantly impact the entity's economic performance, our form of ownership interest, our representation on the entity's governing body, the size and seniority of our investment, our ability and the rights of other investors to participate in policy making decisions, replace the manager and/or liquidate the entity, if applicable. Our ability to correctly assess our influence or control over an entity when determining the primary beneficiary of a VIE affects the presentation of these entities in our consolidated financial statements. When we perform a primary beneficiary analysis at a date other than at inception of the variable interest entity, our assumptions may be different and may result in the identification of a different primary beneficiary.

        If we determine that we are the primary beneficiary of a VIE, our consolidated financial statements would include the operating results of the VIE (either tenant or borrower) rather than the results of the variable interest in the VIE. We would require the VIE to provide us timely financial information and would review the internal control of the VIE to determine if we could rely on the financial information they provide. If the VIE has deficiencies in its internal control over financial reporting, or does not provide us with timely financial information, this may adversely impact the quality and/or timing of our financial reporting and our internal control over financial reporting.

    Revenue Recognition

        At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property's economic life, or (iv) the future minimum lease payments (excluding executory costs) are equal to 90% or more of the excess estimated fair value (over retained tax credits) of the leased building. If one of the four criteria is met and the minimum lease payments are determined to be reasonably predicable and collectible, the lease arrangement is generally accounted for as a direct financing lease. If the assumptions utilized in the above classification assessments were different, our lease classification for accounting purposes may have been different; thus the timing and amount of our revenue recognized would have been impacted, which may be material to our consolidated financial statements.

        We recognize rental revenue for operating leases on a straight-line basis over the lease term when collectibility is reasonably assured and the tenant has taken possession or controls the physical use of a leased asset. For assets acquired subject to leases, we recognize revenue upon acquisition of the asset provided the tenant has taken possession or control of the physical use of the leased asset. If the lease provides for tenant improvements, we determine whether the tenant improvements, for accounting purposes, are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the physical leased asset until the tenant improvements are substantially completed. When the tenant is the owner of the tenant improvements, any tenant improvement allowance funded is treated as a lease incentive and amortized as a reduction of revenue over the lease term. The determination of ownership of the tenant improvements is subject to significant judgment. If our assessment of the owner of the tenant improvements for accounting purposes were different, the timing and amount of our revenue recognized would be impacted.

        Certain leases provide for additional rents that are contingent upon a percentage of the facility's revenue in excess of specified base amounts or other thresholds. Such revenue is recognized when

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actual results reported by the tenant, or estimates of tenant results, exceed the base amount or other thresholds. The recognition of additional rents requires us to make estimates of amounts owed and to a certain extent are dependent on the accuracy of the facility results reported to us. Our estimates may differ from actual results, which could be material to our consolidated financial statements.

        We maintain an allowance for doubtful accounts, including an allowance for operating lease straight-line rent receivables, for estimated losses resulting from tenant defaults or the inability of tenants to make contractual rent and tenant recovery payments. We monitor the liquidity and creditworthiness of our tenants and operators on a continuous basis. This evaluation considers industry and economic conditions, property performance, credit enhancements and other factors. For straight-line rent amounts, our assessment is based on income recoverable over the term of the lease. We exercise judgment in establishing allowances and consider payment history and current credit status in developing these estimates. These estimates may differ from actual results, which could be material to our consolidated financial statements.

        We use the direct finance method of accounting to record income from DFLs. For leases accounted for as DFLs, future minimum lease payments are recorded as a receivable. For leases accounted for as DFLs, the net investment in the DFL represents receivables for the sum of minimum lease payments receivable and the estimated residual values of the leased properties, less the unearned income. Unearned income is deferred and amortized to income over the lease terms to provide a constant yield when collectibility of the lease payments is reasonably assured. Investments in DFLs are presented net of unamortized unearned income. The determination of estimated useful lives and residual values are subject to significant judgment. If these assessments for accounting purposes were to change, the timing and amount of our revenue recognized would be impacted.

        Loans receivable are classified as held-for-investment based on management's intent and ability to hold the loans for the foreseeable future or to maturity. We recognize interest income on loans, including the amortization of discounts and premiums, using the interest method applied on a loan-by-loan basis when collectibility of the future payments is reasonably assured. Premiums, discounts and related costs are recognized as yield adjustments over the term of the related loans.

        Loans and DFLs are placed on non-accrual status at such time as management determines that collectibility of contractual amounts is not reasonably assured. While on non-accrual status, loans and DFLs are either accounted for on a cash basis, in which income is recognized only upon receipt of cash, or on a cost-recovery basis, were cash receipts reduce the carrying value of the loan or DFL, based on management's judgment of collectibility.

        Allowances are established for loans and DFLs based upon an estimate of probable losses on an individual basis if they are determined to be impaired. Loans and DFLs are impaired when it is deemed probable that we will be unable to collect all amounts due on a timely basis in accordance with the contractual terms of the loan or lease. Determining the adequacy of the allowance is complex and requires significant judgment by us about the effect of matters that are inherently uncertain. The allowance is based upon our assessment of the borrower's or lessee's overall financial condition, resources and payment record; the prospects for support from any financially responsible guarantors; and, if appropriate, the net realizable value of any collateral. These estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at the loan's or DFL's effective interest rate, the fair value of collateral, general economic conditions and trends, historical and industry loss experience, and other relevant factors. While our assumptions are based in part upon historical data, our estimates may differ from actual results, which could be material to our consolidated financial statements.

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    Real Estate

        We make estimates as part of our allocation of the purchase price of acquisitions to the various components of the acquisition based upon the relative fair value of each component. The most significant components of our allocations are typically the allocation of fair value to the buildings as-if-vacant, land and in-place leases. In the case of the fair value of buildings and the allocation of value to land and other intangibles, our estimates of the values of these components will affect the amount of depreciation and amortization we record over the estimated useful life of the property acquired or the remaining lease term. In the case of the value of in-place leases, we make our best estimates based on our evaluation of the specific characteristics of each tenant's lease. Factors considered include estimates of carrying costs during hypothetical expected lease-up periods, market conditions and costs to execute similar leases. Our assumptions affect the amount of future revenue that we will recognize over the remaining lease term for the acquired in-place leases.

        A variety of costs are incurred in the development and leasing of properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The costs of land and buildings under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy and cease capitalization of costs upon the completion of the related tenant improvements.

    Impairment of Long-Lived Assets and Goodwill

        We assess the carrying value of our real estate assets and related intangibles ("real estate assets") when events or changes in circumstances indicate that the carrying amount of the real estate assets may not be recoverable. Recoverability of real estate assets is measured by comparison of the carrying amount of the real estate assets to the respective estimated future undiscounted cash flows. The estimated future undiscounted cash flows are calculated utilizing the lowest level of identifiable cash flows that are largely independent of the cash flows of other assets and liabilities. In order to review our real estate assets for recoverability, we consider market conditions, as well as our intent with respect to holding or disposing of the asset. If our analysis indicates that the carrying value of the real estate assets is not recoverable on an undiscounted cash flow basis, we recognize an impairment charge for the amount by which the carrying value exceeds the fair value of the real estate asset.

        Goodwill is tested for impairment at least annually based on certain qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Potential impairment indicators and qualitative factors include a significant decline in real estate valuations, restructuring plans, current macroeconomic conditions, state of the equity and capital markets or a significant decline in the value of our market capitalization. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, we apply the required two-step quantitative approach. The quantitative procedures of the two-step approach (i) compares the fair value of a reporting unit with its carrying amount, including goodwill and, if necessary, (ii) compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill as if it had been acquired in a business combination at the date of the impairment test. The excess fair value of the reporting unit over the fair value of assets and liabilities is the implied value of goodwill and is used to determine the amount of impairment, if any. We estimate the fair value of the assets and liabilities in the reporting unit through various valuation techniques, including applying capitalization rates to segment net operating income, quoted market values and third-party appraisals, as necessary. The fair value of the reporting unit may also include an allocation of an enterprise value premium that we estimate a third party would be willing to pay for the company.

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        The determination of the fair value of real estate assets and goodwill involves significant judgment. This judgment is based on our analysis and estimates of fair value of real estate assets and reporting units, future operating results and resulting cash flows of each real estate asset whose carrying amount may not be recoverable. Our ability to accurately predict future operating results, resulting cash flows and estimate and allocate fair values impacts the timing and recognition of impairments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.

    Investments in Unconsolidated Joint Ventures

        Investments in entities which we do not consolidate but have the ability to exercise significant influence over operating and financial policies are reported under the equity method of accounting. Under the equity method of accounting, our share of the investee's earnings or losses is included in our consolidated results of operations.

        The initial carrying value of investments in unconsolidated joint ventures is based on the amount paid to purchase the joint venture interest or the carrying value of the assets prior to the sale or contribution of the interests to the joint venture. We evaluate our equity method investments for impairment indicators based upon a comparison of the fair value of the equity method investment to our carrying value. If we determine there is a decline in the fair value of our investment in an unconsolidated joint venture below its carrying value and it is other-than-temporary, an impairment is recorded. The determination of the fair value and as to whether a deficiency in fair value is "other-than-temporary" of investments in unconsolidated joint ventures involves significant judgment. Our estimates consider all available evidence including, as appropriate, the present value of the expected future cash flows discounted at market rates, general economic conditions and trends, severity and duration of the fair value deficiency, and other relevant factors. Capitalization rates, discount rates and credit spreads utilized in our valuation models are based upon rates that we believe to be within a reasonable range of current market rates for the respective investments. While we believe our assumptions are reasonable, changes in these assumptions may have a material impact on our financial results.

    Income Taxes

        As part of the process of preparing our consolidated financial statements, significant management judgment is required to evaluate our compliance with REIT requirements. Our determinations are based on interpretation of tax laws, and our conclusions may have an impact on the income tax expense recognized. Adjustments to income tax expense may be required as a result of: (i) audits conducted by federal, state and local tax authorities, (ii) our ability to qualify as a REIT, (iii) recognition of built-in gain associated with prior tax-free acquisitions of C corporations, and (iv) changes in tax laws. Adjustments required in any given period are included within the income tax provision.

Results of Operations

        We evaluate our business and allocate resources among our five business segments: (i) senior housing, (ii) post-acute/skilled nursing, (iii) life science, (iv) medical office and (v) hospital. Under the senior housing, life science, post-acute/skilled nursing and hospital segments, we invest or co-invest primarily in single operator or tenant properties, through the acquisition and development of real estate, management of operations ("RIDEA") and by debt issued by operators in these sectors. Under the medical office segment, we invest or co-invest through the acquisition and development of MOBs that are leased under gross, modified gross or triple-net leases, generally to multiple tenants, and which generally require a greater level of property management. The accounting policies of the segments are the same as those described in the summary of significant accounting policies (see Note 2 to the Consolidated Financial Statements).

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        We use net operating income from continuing operations ("NOI") and adjusted NOI to assess and compare property level performance, including our same property portfolio ("SPP"), and to make decisions about resource allocations and to assess and compare property level performance. We believe these measures provide investors relevant and useful information because they reflect only income and operating expense items that are incurred at the property level and present them on an unleveraged basis. We believe that net income is the most directly comparable GAAP measure to NOI. NOI should not be viewed as an alternative measure of operating performance to net income as defined by GAAP since NOI excludes certain components from net income. Further, NOI may not be comparable to that of other REITs or real estate companies, as they may use different methodologies for calculating NOI. See Note 14 to the Consolidated Financial Statements for additional segment information and the relevant reconciliations from net income to NOI and adjusted NOI.

        Operating expenses are generally related to MOB and life science leased properties and senior housing properties managed by eligible independent contractors on our behalf (RIDEA properties). We generally recover all or a portion of MOB and life science expenses from the tenants (tenant recoveries). The presentation of expenses as operating or general and administrative is 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.

        Our evaluation of results of operations by each business segment includes an analysis of our SPP and our total property portfolio. SPP information allows us to evaluate the performance of our leased 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. 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.

Comparison of the Year Ended December 31, 2013 to the Year Ended December 31, 2012

        During the fourth quarter of 2012 and first quarter of 2013, we acquired a portfolio of 133 senior housing communities from the Blackstone JV (see additional information in Note 4 to the Consolidated Financial Statements). The transaction closed in two stages: (i) 129 senior housing facilities during the fourth quarter of 2012 for $1.7 billion; and (ii) four senior housing facilities during the first quarter of 2013 for $38 million. The results of operations from the acquisitions are reflected in our consolidated financial statements from those respective dates.

    Segment NOI and Adjusted NOI

        The tables below provide selected operating information for our SPP and total property portfolio for each of our five business segments. Our consolidated SPP consists of 909 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2012 and that remained in operations under a consistent reporting structure through December 31, 2013. Our consolidated total property portfolio represents 1,079 and 1,071 properties at December 31, 2013 and 2012, respectively, and excludes properties classified as discontinued operations.

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    Senior Housing

        Results are as of and for the year ended December 31, 2013 and 2012 (dollars in thousands except per unit data):

 
  SPP   Total Portfolio  
 
  2013   2012(2)   Change   2013   2012(2)   Change  

Rental revenues(1)

  $ 465,254   $ 459,058   $ 6,196   $ 602,506   $ 481,559   $ 120,947  

Resident fees and services

    146,288     139,073     7,215     146,288     139,073     7,215  
                           

Total revenues

  $ 611,542   $ 598,131   $ 13,411   $ 748,794   $ 620,632   $ 128,162  

Operating expenses

    (92,674 )   (88,575 )   (4,099 )   (95,603 )   (91,423 )   (4,180 )
                           

NOI

  $ 518,868   $ 509,556   $ 9,312   $ 653,191   $ 529,209   $ 123,982  

Straight-line rents

    (15,413 )   (25,662 )   10,249     (43,268 )   (30,406 )   (12,862 )

DFL accretion

    (14,750 )   (18,812 )   4,062     (14,750 )   (18,812 )   4,062  

Amortization of above and below market lease intangibles, net

    (1,196 )   (1,432 )   236     (681 )   (1,320 )   639  
                           

Adjusted NOI

  $ 487,509   $ 463,650   $ 23,859   $ 594,492   $ 478,671   $ 115,821  
                           
                           

Adjusted NOI % change

                5.1 %                  
                                     
                                     

Property count

    310     310           444     439        

Average capacity (units)(3)

    35,038     35,034           45,400     36,694        

Average annual rent per unit(4)

  $ 13,932   $ 13,252         $ 13,174   $ 13,140        

(1)
Represents rental and related revenues and income from DFLs.

(2)
From our past presentation of SPP for the year ended December 31, 2012, we removed two senior housing properties from SPP that were sold or classified as held for sale.

(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 operating properties under a RIDEA structure is based on NOI.

        SPP NOI and Adjusted NOI.    SPP NOI increased primarily as a result of rent increases related to new leases or leases recognized on a cash basis and increased NOI from RIDEA properties. SPP adjusted NOI improved primarily as a result of annual rent increases including increases from properties that were previously transitioned from Sunrise to other operators and increased NOI from RIDEA properties.

        Total Portfolio NOI and Adjusted NOI.    In addition to the impact of our SPP, our total portfolio NOI and adjusted NOI primarily increased as a result of our Blackstone JV Acquisition.

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    Post-Acute/Skilled Nursing

        Results are as of and for the year ended December 31, 2013 and 2012 (dollars in thousands, except per bed data):

 
  SPP   Total Portfolio  
 
  2013   2012(2)   Change   2013   2012(2)   Change  

Rental revenues(1)

  $ 541,805   $ 530,037   $ 11,768   $ 541,805   $ 530,037   $ 11,768  

Operating expenses

    (485 )   (475 )   (10 )   (2,485 )   (475 )   (2,010 )
                           

NOI

  $ 541,320   $ 529,562   $ 11,758   $ 539,320   $ 529,562   $ 9,758  

Straight-line rents

    (553 )   (724 )   171     (553 )   (724 )   171  

DFL accretion

    (71,305 )   (75,428 )   4,123     (71,305 )   (75,428 )   4,123  

Amortization of above and below market lease intangibles, net

    46     46         46     46      
                           

Adjusted NOI

  $ 469,508   $ 453,456   $ 16,052   $ 467,508   $ 453,456   $ 14,052  
                           
                           

Adjusted NOI % change

                3.5 %                  
                                     
                                     

Property count

    302     302           302     302        

Average capacity (beds)(3)

    38,464     38,459           38,464     38,459        

Average annual rent per bed

  $ 12,218   $ 11,802         $ 12,218   $ 11,802        

(1)
Represents rental and related revenues and income from DFLs.

(2)
From our past presentation of SPP for the year ended December 31, 2012, we removed 10 post-acute/skilled nursing properties from SPP that were sold or classified as held for sale.

(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 primarily increased as a result of annual rent increases.

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    Life Science

        Results are as of and for the year ended December 31, 2013 and 2012 (dollars and square feet in thousands, except per sq. ft. data):

 
  SPP   Total Portfolio  
 
  2013   2012   Change   2013   2012   Change  

Rental and related revenues

  $ 240,777   $ 240,145   $ 632   $ 251,919   $ 246,811   $ 5,108  

Tenant recoveries

    42,975     42,164     811     44,960     42,853     2,107  
                           

Total revenues

  $ 283,752   $ 282,309   $ 1,443   $ 296,879   $ 289,664   $ 7,215  

Operating expenses

    (49,636 )   (47,914 )   (1,722 )   (56,956 )   (53,173 )   (3,783 )
                           

NOI

  $ 234,116   $ 234,395   $ (279 ) $ 239,923   $ 236,491   $ 3,432  

Straight-line rents

    (11,604 )   (8,590 )   (3,014 )   (11,347 )   (9,730 )   (1,617 )

Amortization of above and below market lease intangibles, net

    112     462     (350 )   93     411     (318 )

Lease termination fees

    (194 )   (175 )   (19 )   (194 )   (175 )   (19 )
                           

Adjusted NOI

  $ 222,430   $ 226,092   $ (3,662 ) $ 228,475   $ 226,997   $ 1,478  
                           
                           

Adjusted NOI % change

                (1.6 )%                  
                                     
                                     

Property count

    102     102           111     109        

Average occupancy

    93.0 %   91.4 %         91.8 %   89.6 %      

Average occupied square feet

    6,219     6,108           6,480     6,250        

Average annual rent per occupied sq. ft. 

  $ 44   $ 45         $ 44   $ 45        

        SPP NOI and Adjusted NOI.    SPP NOI decreased primarily as a result of mark-to-market rent reductions on renewed leases. SPP adjusted NOI decreased primarily as a result of a $4 million rent payment received in February 2012 in connection with a lease amendment and mark-to-market rent reductions, partially offset by annual rent escalations.

        Total Portfolio NOI and Adjusted NOI.    In addition to the impact of our SPP, our total portfolio NOI increased primarily as a result of rents on recent development projects placed in service during 2013 and 2012.

        During the year ended December 31, 2013, 545,000 square feet of new and renewal leases commenced at an average annual base rent of $27.43 per square foot compared to 392,000 square feet of expiring and terminated leases with an average annual base rent of $32.83 per square foot.

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    Medical Office

        Results are as of and for the year ended December 31, 2013 and 2012 (dollars and square feet in thousands, except per sq. ft. data):

 
  SPP   Total Portfolio  
 
  2013   2012(1)   Change   2013   2012(1)   Change  

Rental and related revenues

  $ 265,176   $ 263,726   $ 1,450   $ 299,102   $ 283,561   $ 15,541  

Tenant recoveries

    46,719     46,615     104     53,232     49,447     3,785  
                           

Total revenues

  $ 311,895   $ 310,341   $ 1,554   $ 352,334   $ 333,008   $ 19,326  

Operating expenses

    (118,643 )   (117,901 )   (742 )   (139,376 )   (132,132 )   (7,244 )
                           

NOI

  $ 193,252   $ 192,440   $ 812   $ 212,958   $ 200,876   $ 12,082  

Straight-line rents

    (1,472 )   (4,381 )   2,909     (3,161 )   (5,258 )   2,097  

Amortization of above and below market lease intangibles, net

    510     290     220     1,037     457     580  

Lease termination fees

    (23 )   (314 )   291     (23 )   (314 )   291  
                           

Adjusted NOI

  $ 192,267   $ 188,035   $ 4,232   $ 210,811   $ 195,761   $ 15,050  
                           
                           

Adjusted NOI % change

                2.3 %                  
                                     
                                     

Property count

    181     181           206     206        

Average occupancy

    91.6 %   91.3 %         90.7 %   91.2 %      

Average occupied square feet

    11,395     11,351           12,767     12,147        

Average annual rent per occupied sq. ft. 

  $ 27   $ 27         $ 27   $ 27        

(1)
From our past presentation of SPP for the year ended December 31, 2012, we removed two MOBs that were placed into redevelopment in 2013, which no longer meet our criteria for SPP as of the date they were placed into redevelopment.

        Total Portfolio NOI and Adjusted NOI.    Total portfolio NOI and adjusted NOI increased primarily as a result of the impact of our MOB acquisitions during 2012.

        During the year ended December 31, 2013, 2.1 million square feet of new and renewal leases commenced at an average annual base rent of $21.54 per square foot compared to 2.2 million square feet of expiring and terminated leases with an average annual base rent of $22.06 per square foot.

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    Hospital

        Results are as of and for the year ended December 31, 2013 and 2012 (dollars in thousands, except per bed data):

 
  SPP   Total Portfolio  
 
  2013   2012(2)   Change   2013   2012(2)   Change  

Rental revenues(1)

  $ 64,249   $ 74,815   $ (10,566 ) $ 69,603   $ 77,872   $ (8,269 )

Tenant recoveries

    2,457     2,326     131     2,457     2,326     131  
                           

Total revenues

  $ 66,706   $ 77,141   $ (10,435 ) $ 72,060   $ 80,198   $ (8,138 )

Operating expenses

    (3,812 )   (3,506 )   (306 )   (3,862 )   (3,513 )   (349 )
                           

NOI

  $ 62,894   $ 73,635   $ (10,741 ) $ 68,198   $ 76,685   $ (8,487 )

Straight-line rents

    19,238     (554 )   19,792     18,378     (1,134 )   19,512  

Amortization of above and below market lease intangibles, net

    (6,725 )   (347 )   (6,378 )   (6,824 )   (447 )   (6,377 )
                           

Adjusted NOI

  $ 75,407   $ 72,734   $ 2,673   $ 79,752   $ 75,104   $ 4,648  
                           
                           

Adjusted NOI % change

                3.7 %                  
                                     
                                     

Property count

    14     14           16     15        

Average capacity (beds)(3)

    2,132     2,056           2,175     2,087        

Average annual rent per bed

  $ 37,151   $ 37,091         $ 38,437   $ 37,679        

(1)
Represents rental and related revenues and income from DFLs.

(2)
From our past presentation of SPP for the year ended December 31, 2012, we removed two hospitals from SPP that were sold or classified as held for sale.

(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. Certain operators in our hospital portfolio are not required under their respective leases to provide operational data.

        SPP and Total Portfolio NOI and Adjusted NOI.    SPP and total portfolio NOI primarily decreased due to a net $12 million correction of an error that reduced previously recognized straight-line rents and to increasing amortization of below market lease intangibles related to our Medical City Dallas hospital. SPP and total portfolio adjusted NOI increased due to annual rent increases, a new lease on our Plano hospital and rents on our Fresno hospital that was placed in service in January 2013.

    Other Income and Expense Items

        Interest income.    Interest income increased $62 million to $86 million for the year ended December 31, 2013. The increase was primarily the result of interest income from the repayment of our Barchester loan in September 2013 (acquired earlier in 2013 at a discount), additional interest income earned from the second tranche of our mezzanine loan facility to Tandem Health Care in June 2013 and interest earned from our Four Seasons senior unsecured notes purchased in 2012 (see Notes 10 and 7, respectively, to the Consolidated Financial Statements for additional information).

        Interest expense.    For the year ended December 31, 2013, interest expense increased $19 million to $435 million. The increase was primarily the result of increases in the average outstanding indebtedness during 2013 compared to 2012 and a decrease of capitalized interest in 2013 related to assets that were under development in our life science and medical office segments and were placed in service during 2013 and 2012. These increases were partially offset by a decrease in interest rates.

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        Our exposure to expense fluctuations related to our variable rate indebtedness is 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 7A.

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

 
  As of December 31,(1)  
 
  2013   2012  

Balance:

             

Fixed rate

  $ 8,581,889   $ 8,606,075  

Variable rate

    33,955     40,385  
           

Total

  $ 8,615,844   $ 8,646,460  
           
           

Percent of total debt:

             

Fixed rate

    99.6 %   99.5 %

Variable rate

    0.4     0.5  
           

Total

    100 %   100 %
           
           

Weighted average interest rate at end of period:

             

Fixed rate

    5.10 %   5.23 %

Variable rate

    1.13 %   1.49 %

Total weighted average rate

    5.08 %   5.22 %

(1)
Excludes $75 million and $82 million at December 31, 2013 and 2012, respectively, of other debt that represents non-interest bearing life care bonds and occupancy fee deposits at certain of our senior housing facilities, which have no scheduled maturities. At December 31, 2013, $72 million of variable-rate mortgages and £137 million ($227 million) term loan are presented as fixed-rate debt as the interest payments under such debt have been swapped (pay fixed and receive float). At December 31, 2012, $86 million of variable-rate mortgages and £137 million ($223 million) term loan are presented as fixed-rate debt as the interest payments under such debt have been swapped (pay fixed and receive float); the interest rates for swapped debt are presented at the swapped rates.

        Depreciation and amortization expense.    Depreciation and amortization expenses increased $70 million to $423 million for the year ended December 31, 2013. The increase was primarily the result of the impact of our senior housing facility and MOB acquisitions during 2012.

        General and administrative expenses.    General and administrative expenses increased $30 million to $109 million for the year ended December 31, 2013. The year ended December 31, 2013 included $27.2 million of severance-related charges resulting from the termination of our former Chairman, Chief Executive Officer and President (see Note 16 to the Consolidated Financial Statements for additional information). The year ended December 31, 2012 included $7 million related to an insurance recovery for previously incurred legal expenses.

        Impairments.    During the year ended December 31, 2013, we recognized impairments of $1 million, included in discontinued operations, as a result of the reclassification of two MOBs to held for sale (see Note 17 to the Consolidated Financial Statements for additional information). During the year ended December 31, 2012, we recognized an impairment of $8 million as a result of the planned disposition of a life science land parcel (see Note 17 to the Consolidated Financial Statements for additional information).

        Other income, net.    For the year ended December 31, 2013, other income, net increased $15 million to $18 million. The increase was primarily the result of gains from the sale of marketable equity securities during 2013 of $11 million.

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        Income taxes.    For the year ended December 31, 2013, income taxes increased by $7 million to $6 million. The increase in income taxes was primarily due to the increase in taxable income of our TRS entities during the year ended December 31, 2013.

        Equity income from unconsolidated joint ventures.    For the year ended December 31, 2013, equity income from unconsolidated joint ventures increased $10 million to $64 million. The increase was primarily the result of: (i) a one-time distribution received from a senior housing development joint venture that exceeded our investment balance and (ii) the improved operating performance from our HCR ManorCare equity investment.

        Discontinued operations.    Income from discontinued operations for the year ended December 31, 2013 was $74 million, compared to $46 million for the comparable period in 2012. The increase is primarily due to an increase in gains on real estate dispositions of $38 million, partially offset by a decline in operating income from discontinued operations of $8 million and impairment charges in discontinued operations of $1 million.

        Preferred stock dividends.    On March 22, 2012, we announced the redemption of all outstanding shares of preferred stock. On April 23, 2012, we redeemed all outstanding shares of our preferred stock and paid all accrued and unpaid dividends to the redemption date. During the year ended December 31, 2012, we incurred a redemption charge of $10 million related to the original issuance costs of the preferred stock (this charge is presented as an additional preferred stock dividend in our consolidated income statements).

Comparison of the Year Ended December 31, 2012 to the Year Ended December 31, 2011

        During the fourth quarter of 2012, we acquired 129 senior housing communities from the Blackstone JV (see additional information in Note 4 to the Consolidated Financial Statements). The results of operations from the acquisitions are reflected in our consolidated financial statements from those respective dates.

        On April 7, 2011, we completed our acquisition of substantially all of HCR ManorCare's real estate assets; additionally, we purchased a noncontrolling equity interest in the operations of HCR ManorCare. On January 14, 2011, we acquired our partner's 65% interest in HCP Ventures II that resulted in the consolidation of HCP Ventures II. On September 1, 2011, we entered into management contracts with Brookdale with respect to 21 senior living communities (these 21 communities were acquired in January 2011 as part of our purchase of HCP Ventures II). For the communities that are in a RIDEA structure, the respective resident level revenues and related operating expenses are reported in our consolidated financial statements. See additional information regarding the HCR ManorCare Acquisition, HCP Ventures II purchase and the Brookdale RIDEA transaction in Notes 3, 8 and 12, respectively, to the Consolidated Financial Statements. The results of operations from our HCR ManorCare, HCP Ventures II and properties managed under a RIDEA structure are reflected in our financial statements from those respective dates.

    Segment NOI and Adjusted NOI

        The tables below provide selected operating information for our SPP and total property portfolio for each of our five business segments. Our consolidated SPP consists of 551 properties representing properties acquired or placed in service and stabilized on or prior to January 1, 2011 and that remained in operations under a consistent reporting structure through December 31, 2012. Our consolidated total property portfolio represents 1,071 and 917 properties at December 31, 2012 and 2011, respectively, and excludes properties classified as discontinued operations.

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    Senior Housing

        Results are as of and for the year ended December 31, 2012 and 2011 (dollars in thousands except per unit data):

 
  SPP   Total Portfolio  
 
  2012   2011(2)   Change   2012   2011(2)   Change  

Rental revenues(1)

  $ 379,636   $ 377,784   $ 1,852   $ 481,559   $ 469,251   $ 12,308  

Resident fees and services

    1,054     3,542     (2,488 )   139,073     49,091     89,982  
                           

Total revenues

  $ 380,690   $ 381,326   $ (636 ) $ 620,632   $ 518,342   $ 102,290  

Operating expenses

    (613 )   (1,052 )   439     (91,423 )   (33,372 )   (58,051 )
                           

NOI

  $ 380,077   $ 380,274   $ (197 ) $ 529,209   $ 484,970   $ 44,239  

Straight-line rents

    (24,731 )   (34,556 )   9,825     (30,406 )   (34,889 )   4,483  

DFL accretion

    (6,863 )   (9,052 )   2,189     (18,812 )   (17,918 )   (894 )

Amortization of above and below market lease intangibles, net

    (1,569 )   (1,569 )       (1,320 )   (1,466 )   146  

Lease termination fees

                    1,350     (1,350 )
                           

Adjusted NOI

  $ 346,914   $ 335,097   $ 11,817   $ 478,671   $ 432,047   $ 46,624  
                           
                           

Adjusted NOI % change

                3.5 %                  
                                     
                                     

Property count

    220     220           439     310        

Average capacity (units)(3)

    25,091     24,988           36,694     30,167        

Average annual rent per unit(4)

  $ 13,850   $ 13,452         $ 13,140   $ 14,431        

(1)
Represents rental and related revenues and income from DFLs.

(2)
From our past presentation of SPP for the year ended December 31, 2011, we removed four senior housing